Crews’s study also makes category mistakes, such as classifying time spent preparing tax forms or waiting in security lines as a “cost to GDP,” akin to costs of environmental or occupational safety regulations. In fact, there is no probative evidence that time spent in airport security reduces GDP compared to the alternative of no airport security, or that the time spent filling out tax forms reduces GDP compared to what it would be if no one bothered to file or pay taxes.
The above quote is from Richard W. Parker, “Hyping the Cost of Regulation,” The Regulatory Review, June 25, 2018. Professor Parker is a law professor at the University of Connecticut School of Law and policy director of the Center for Energy and Environment Law.
This is an excerpt from his skeptical look at how various economists–Mark W. Crain and Nicole V. Crain, and Clyde Wayne Crews–came up with an estimate that regulations costs the U.S. economy about $2 trillion annually. To put that in perspective, that’s about 10% of GDP.
I do not defend their estimate. I would want to know more before defending or criticizing it. But I do want to defend Wayne Crews from the criticism I’ve quoted above.
My defense starts by reminding you of why we use GDP. It’s a handy–and very rough–way of quantifying economic well being.
What would happen if people spent less time in lines at TSA or filling out tax forms? They would have more time to work, which means more time to create GDP. Would they work more? Probably. But they would also have more leisure.
Why is the leisure part important? Because the fact that people would use some of that time in leisure means that they would use it to create something even more valuable than GDP.
Assume for a minute that each person can choose his or her work hours. Then when you observe someone taking leisure instead of working, what do you know? You know that he/she must value that leisure more than the hourly wage he/she can earn. So, for example, if someone’s annual income is $40,000, that person’s hourly wage is approximately $20 per hour. If that person could choose to work another hour–and chooses not to–then that person’s loss from an hour in a TSA line is more than $20. (I’m ignoring–which I shouldn’t–that person’s marginal tax rate. Taking the average marginal tax rate for Americans into account–it’s about 40%–means that that person’s loss from an hour in a TSA line is more than $12.)
My point is that that person doesn’t have to use the hour to work for us to be able to conclude that the loss from being in a TSA line is substantial. The same thing with filling out tax forms. One of the potentially huge benefits from the 2017 tax reform is that many people will cut the number of hours they spend on saving data on charitably contributions and on doing their taxes by 3 to 4 hours–because they won’t bother itemizing. That gain–across a few tens of millions of households–could be substantial. Assume 20 million households no longer itemize. 20 million times 4 hours times $25 per hour = $2 billion.
Back to TSA. TSA provides little security. Assume that 10 million travelers a week spend an hour less in line (because we eliminate TSA) and that their time is worth $40/hour. (Why so high? Because the people who travel most have very high time values.) So we have 10 million times $40 times 0.5 hours = $200 million. Multiply that by 50 weeks and we have $10 billion.
My analysis depends on the assumption that people choose their own work hours. We know that for at least 70% of the 130 million people employed full time, that’s false. But how false? Not very. The number of hours worked per week is, roughly speaking, an equilibrium number that reflects the desires of the majority of the work force. Doesn’t it reflect a government’s decision to set the work week at 40 hours? Not really. When the government set it at 40 hours some decades ago, it was simply tracking, with a lag, what the market had yielded for the majority of workers.
HT2 Mark Thoma.
READER COMMENTS
Alan Goldhammer
Jul 1 2018 at 8:08am
It’s laughable to use TSA screening as an example. Anyone who is a frequent traveler can get TSA Pre-Check (and for international travel, Global Entry) that allow one to bypass the TSA lines. On our recent trip to Spain we spent no time at all in a TSA line and a simple swipe of our passport got us back into the US without having to fill out any customs reentry forms.
The tax return argument is equally specious as most Americans didn’t itemize prior to the recent legislation “reforming” the tax code. Even though the legislation is “supposed” to reduce the time needed to do our tax returns, in many cases we will still have to go through the process of logging in charitable contributions, medical expenses, etc. to make sure we have not overlooked possible deductions to reduce the tax bill. If one uses a home accounting package that links to a tax preparation software program this is pretty much a very minute investment of time. Certainly it would have been better had Congress eliminated all the current tax preferences and then we could have moved to a system of tax filing that a number of European countries have where it takes about 10-15 minutes to log on to your earnings account and double check the numbers the government has.
Jon Murphy
Jul 1 2018 at 9:06am
Alan-
That some people qualify for TSA pre-check doesn’t mean there aren’t lines. Go to any major airport. Waiting in lines is a costly activity.
As a personal aside, when I was a consultant (earning approximately $37/hr), I was denied eligibility for TSA pre-check. Never sure why, but irrelevant here. I’d be willing to bet there are many others like me.
Jon Murphy
Jul 1 2018 at 9:10am
An excellent post. I will likely assign this when discussing opportunity costs in my classes.
When discussing how something affects GDP, the benefits (ie, its effects on GDP) are discussed but not the costs (what else those resources, including time, could have been spent on).
Fred Foldvary
Jul 1 2018 at 9:14am
“the time spent filling out tax forms reduces GDP compared to what it would be if no one bothered to file or pay taxes.”
The more relevant comparison is filling out tax forms versus being sent a monthly tax bill and just paying it.
Robert EV
Jul 1 2018 at 1:30pm
To my mind at least part of the value of leisure time is not just the enjoyment from leisure, but the mental unwinding due to switching to a novel task (and most work, no matter how complex, can only be so novel).
It’s hypothetically possible in my mind that, for most people, doing one’s taxes is a novel enough task that there’s still a psychological benefit, even if that benefit isn’t as great as true leisure time, and that this benefit needs to be accounted for.
This doesn’t even include the presumably rare individuals who genuinely enjoy doing their taxes. I know I get a very minor perk from knowing a refund is coming (akin to the boost one gets from fantasizing when playing the lottery).
nobody.really
Jul 1 2018 at 5:34pm
Henderson critiques Parker’s statement here:
I don’t fault Henderson’s argument, but it is unclear to me that his argument addresses Parker’s statement. Perhaps Parker’s statement addresses cost/benefit analysis.
That is, in calculating how much airport security affects GDP, we’d want to evaluate GDP under our current circumstance with lots of time spent in TSA lines to the GDP of a world with no TSA lines–and perhaps more airplane skyjacking/explosions. Likewise, to calculate how much filing out tax forms affects GDP, we’d want to evaluate GDP under or current circumstances to GDP in a hypothetical world in which no one filled out tax forms or paid taxes, and presumably there were no revenues for things like police or national security. This is a different discussion than Henderson is addressing.
David Henderson
Jul 1 2018 at 6:05pm
Good point. I was cutting corners. My reading of the evidence is that TSA costs lives on net by moving people from short-haul airplane trips to cars. If even 10% of people who decide not to do the short-haul trip decide instead to drive, the number of deaths rises. But I see why you wouldn’t have picked that up from the brief way I stated the issue. Re taxes, I was making an implicit comparison that I should have made explicit: a flatter tax with fewer deductions that would raise the same amount of revenue and cost less time. Indeed, I did hint at that with my discussion of the 2017 tax reform.
nobody.really
Jul 2 2018 at 11:20am
Ok, I see we’re actually engaging in a cost/benefit analysis; good.
TSA delays may cause the number of people driving from Chicago to St. Louis to increase by 10% — relative to a world without airport security? I could imagine that even if skyjackers caused relatively few deaths, the FEAR of skyjackers might prompt many more people to opt for driving rather than flying, resulting in more deaths.
TSA has been criticized as mere “security theater.” And FDR’s bank holiday could be criticized as “financial security theater.” But if these exercises motivated changes in real behavior (greater willingness to trust our lives to airlines, and our money to banks), it’s all the same for purposes of economic analysis.
I’m generally in favor of 1986-style tax reform, with flatter taxes and fewer deductions, all else being equal. (Ironically, our current tax system results in only a third of taxpayers preparing their own taxes, with the majority relying on commercial services—which likely creates a boost in our GDP. That’s a measure of the weakness of relying on the GDP, rather than a weakness of the argument you propound.)
Curiously, economist David Bradford, one of the 1986 architects, later proposed replacing the income tax with an X Tax, a progressive form of consumption tax.
Thomas Sewell
Jul 3 2018 at 6:43pm
The choice isn’t between the TSA and having skyjackers.
A better choice is between no TSA delays (with no skyjackers) and TSA delays (with the same number of skyjackers).
The evidence just isn’t there that the TSA actually prevents skyjackers (compared to alternatives). What evidence there is (percentage of dangerous objects which pass TSA screening in tests, percentage of actual terrorists who are caught by the TSA vs. by someone else) indicates that the TSA at best doesn’t make the dangers of flying too much worse by creating a large stopped group of people as a new terrorism target.
In the security industry, the TSA is literally a joke. Compare the TSA to any of the many non-TSA airports, then get back to us on how security costs are inevitable if we want to stop skyjackers. The skyjackers were all stopped already with reinforced cockpit doors, random air marshals and passengers who refuse to cooperate with anyone who wants to take them prisoner because they know expect that to mean their death anyway.
Mike in Annapolis
Jul 2 2018 at 3:29pm
As regards taxes, some folks at a recent Tax Policy Institute (Brookings/Urban) suggested a shift from roughly 50% standard deduction to over 80%. If true, the Taxpayer Burden (official IRS-speak) would be pretty significant : 50M households x $200 (based upon IRS internal research) = $10B. Plus the change in Taxpayer Morale (another weird IRS term) – less gaming the system. That’s a big driver behind the current crash effort to built the ‘simplified 1040’ – once enshrined, the citizens would rise up against any attempt to roll it back.
This was not fully understood in the drafting of the la., but is probably a good thing.
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