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Archive for February, 2010

I posted an amusing (and disappointing) graph in January showing how economists consistently failed to predict major changes in GDP. Russ Roberts of George Mason University explains in the Wall Street Journal that we should blame the practitioners of macroeconomics. They want the profession to be a hard science like physics, and some of them dream of the day when sophisticated models will make at least soft versions of central planning possible. But this is a fundamentally flawed way of thinking about economics. Professor Roberts says that the profession is more like biology because of the economy’s complex and unpredictable nature. Microeconomists, by contrast, focus on human behavior and thus are far more likely to have useful (and pro-market) insights about public policy:

The defenders of modern macroeconomics argue that if we just study the economy long enough, we’ll soon be able to model it accurately and design better policy. Soon. That reminds me of the permanent sign in the bar: Free Beer Tomorrow. We should face the evidence that we are no better today at predicting tomorrow than we were yesterday. Eighty years after the Great Depression we still argue about what caused it and why it ended. If economics is a science, it is more like biology than physics. Biologists try to understand the relationships in a complex system. That’s hard enough. But they can’t tell you what will happen with any precision to the population of a particular species of frog if rainfall goes up this year in a particular rain forest. They might not even be able to count the number of frogs right now with any exactness. We have the same problems in economics. The economy is a complex system, our data are imperfect and our models inevitably fail to account for all the interactions. The bottom line is that we should expect less of economists. Economics is a powerful tool, a lens for organizing one’s thinking about the complexity of the world around us. That should be enough. We should be honest about what we know, what we don’t know and what we may never know. Admitting that publicly is the first step toward respectability.

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Political Humor

Live by the teleprompter, die by the teleprompter.

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Pulling no punches, Mark Steyn ponders the entitlement-driven collapse of Greece and asks why politicians in America are repeating the same mistakes:

Chapter One (the introduction of unsustainable entitlements) leads eventually to Chapter Twenty (total societal collapse): The Greeks are at Chapter Seventeen or Eighteen. What’s happening in the developed world today isn’t so very hard to understand: The 20th-century Bismarckian welfare state has run out of people to stick it to. In America, the feckless, insatiable boobs in Washington, Sacramento, Albany, and elsewhere are screwing over our kids and grandkids. …By the way, you don’t have to go to Greece to experience Greek-style retirement: The Athenian “public service” of California has been metaphorically face down in the ouzo for a generation. …as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government: Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest; he’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense. …Think of Greece as California: Every year an irresponsible and corrupt bureaucracy awards itself higher pay and better benefits paid for by an ever-shrinking wealth-generating class. …The problem is there are never enough of “the rich” to fund the entitlement state, because in the end it disincentivizes everything from wealth creation to self-reliance… And in America, Obama, Pelosi, and Reid are saying we need to paddle faster to catch up with the Greeks… What could go wrong?

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A new study from the University of Michigan Law School’s Empirical Legal Studies Center finds that it is more difficult today for politicians to impose excessive financial regulation because firms can migrate to jurisdictions with more pro-market policy. The author notes tht this is less true for institutions, such as big banks, that want government protection, but laissez-faire entities such as hedge funds have substantial ability to flee bad government policy:

Jurisdictional competition spread from corporate law to its close cousin, securities law. Historically, issuers listed their stock for trading on one of the exchanges in the country where they principally did business. Improvements in communication and related technologies, however, have made possible an international market for stock exchange listings that resembles in many respects the long‐standing federal market for corporate charters in the United States. Now companies can list their shares for trading on exchanges in any number of countries; there is no longer a logical nexus between the site of a company’s headquarters and where its shares are traded. …Does that free movement of capital limit the ability of the Obama administration to reform financial regulation in the United States? …After the United States effectively raised listing standards by enacting the Sarbanes‐Oxley Act in 2002, foreign companies headed for the door. London seized the opportunity; fourteen of the top twenty initial public offerings (“IPOs”) listed on the London Stock Exchange (“LSE”) came from outside the United Kingdom in 2005 to 2008. By contrast, only four of the top twenty IPOs in New York came from outside the United States. Further, it was not only foreign companies that were leaving; United States companies left the public market in droves, headed for the greener (or at less regulated) fields of private equity, and they were not being replaced. A Grant Thornton study documented a staggering thirty‐nine percent decline in United States listings from a peak of 8,823 in 1997 to only 5,401 in 2008. …hedge funds can go elsewhere if a country tries to enmesh them in red tape. Running a hedge fund only requires an office and an Internet connection. …Debates over hedge fund regulation take place against the shadow of the threat of the flight of these financial intermediaries. And that flight has already begun. The United Kingdom raised its top tax rate to fifty percent in April. That move, along with EU restrictions on borrowing by hedge funds, already prompted a number of hedge funds to emigrate to greener pastures. …Hedge fund bankers are not happy about being treated like bankers. Unlike bankers, however, they do not have to stick around and take it. “About [twenty] percent of the hedge‐fund community could leave the [United Kingdom] in the next two or three years. The feeling among the hedge‐community is there is a better place to be.” Where is that better place? Asia. Places like Singapore are attracting hedge funds… Of course, the fact that Singapore does not tax capital gains may have had something to do with its attractiveness. …So what does global competition mean for populist retribution against the money changers? Apparently it depends on the mobility of the money changes you are talking about. Big banks need government backing to be credible with depositors and counterparties, so the bankers at those institutions are going to have to stick around and take it. Smaller institutions, like hedge funds, are much more portable, and if Western governments attempt to impose banker‐like restrictions on them, they will head elsewhere. …The forces of financial capitalism can no longer be confined within the boundaries of a single nation, so regulation is not simply a matter of mustering the requisite political will. There is no shortage of anger against the bankers in the current environment, but it can only be deployed against financial intermediaries who cannot flee the regulatory wrath. …International competition in financial services regulation now serves as a check on populist retribution, but only a partial one.

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For those of you who saw this segment of Wednesday’s show on CNBC, my co-host got quite agitated when I said I did not want America to have a substandard government-dictated healthcare system. Simon expressed doubt about my assertions, so it’s rather serendipitous that Investor’s Business Daily just editorialized about a new report (from the UK) about the failings of one British hospital system:

American health care is not British health care, at least not yet. But if Democrats get their way, this country will rush to adopt a system much like the one that is killing people in Great Britain. Democrats say that what they have planned for U.S. health care is not a copy of the British system. But a nationalized health care system, no matter how it’s tailored, will collapse like other socialist programs. Government-run health care may at times look like it works, but it is unsustainable — and deadly. Consider the British hospital trust that was the focus of a recently completed independent inquiry. According to U.K. media reports, the review found that at least 400 and as many as 1,200 patients died from 2005 to 2008 because of poor care by Mid Staffordshire National Health Service Foundation Trust, which operates two hospitals. …The inquiry also noted “serious departures from the standard of basic care which every patient is entitled to expect,” abuses of elderly patients, and the too-common presence of unwashed patients and bedding “soiled with urine and feces for considerable periods of time.” Other sanitation problems included the presence of blood, discarded needles and used dressings. These problems shouldn’t be unexpected. Last year, the media reported that up to 10,000 cancer patients were dying needlessly in the U.K. each year because their condition was diagnosed too late, according to research by the government’s director of cancer services. Also in 2009, there were reports that the health secretary ordered a probe into “claims that patients are dying due to poor care in at least 27 hospitals around the country.”

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The Taxpayers Alliance in London has an amusing video highlighting different ways the government has wasted money on global warming/climate change propaganda. Or maybe it’s only amusing because I’m American and my tax dollars weren’t being wasted on the projects in the video.

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Saw this very encouraging CNN story linked on Hotair.com. According to a new poll, a comfortable majority of Americans recognize that the federal government is an immediate threat to the rights and freedoms of ordinary people. My only quibble is that we’re way past the threat stage. Between an oppressive tax system and a dependency-creating morass of spending programs, the federal government already is undermining our liberties. Our Founding Fathers would be very disappointed to see what has happened to our nation:

A majority of Americans think the federal government poses a threat to rights of Americans, according to a new national poll. Fifty-six percent of people questioned in a CNN/Opinion Research Corporation survey released Friday say they think the federal government’s become so large and powerful that it poses an immediate threat to the rights and freedoms of ordinary citizens. …According to CNN poll numbers released Sunday, Americans overwhelmingly think that the U.S. government is broken – though the public overwhelmingly holds out hope that what’s broken can be fixed.

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Since many of the politicians want America to be more like Europe (including full government-run healthcare), it’s worth contemplating what that would mean for the economy. America today is richer than Western Europe. Indeed, per-capita living standards are about 30 percent higher in the United States – and that’s according to the statists at the Paris-based Organization for Economic Cooperation and Development (see page 6 of this report). And we have been growing faster, which presumably should not be the case according to convergence theory (see Annex Table No. 1 of this OECD database). It also seems that Europe’s economy is more likely to endure a double-dip recession. Bloomberg reports:

Europe’s economy may be coming unstuck from the global recovery as governments to the south of the region struggle to reverse budget deficits and consumers in the north pull back spending. After the 16-nation euro economy almost stagnated in the fourth quarter, data this week showed the weakness reaching into 2010. …“Europe is where we see the biggest risk of a double dip at the global level,” said Julian Callow, chief European economist at Barclays Capital in London. “Europe has been lagging and we’ve continued to see better numbers in Asia and now the U.S.” …“There are tentative signs that the U.S. economy may be pulling ahead from Europe,” Nelson said in a Feb. 23 report… “The sovereign debt crisis in Europe’s periphery reinforces drags on euro-area growth,” said Michael Saunders, an economist at Citigroup in London.

Irwin Stelzer, meanwhile, writes in the Washington Examiner about the same topic:

Europeans are comparing their close-to-zero growth rate in the last quarter of 2009 with our almost-6 percent growth. …We are growing and they are not. …Large numbers of shops in London are shuttered, students see no prospect of work when they graduate, and businessmen are groaning under rising tax burdens.

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I spoke yesterday afternoon to the Constitutional Law Quarterly 37th Annual Symposium at Hastings Law School in San Francisco.  The title of the event was “Waking from the California Dream: The Past, Present, and Future of California’s Fiscal Constitution,” and the discussion revolved around the state’s fiscal crisis.

Unsurprisingly, I was the only pro-taxpayer speaker, with the other 15 or so speakers ranging from center-left to far-left. So it was a fair fight. Not because I had some special talent, but rather because the evidence is so overwhelming that California has taxed and spent itself into a fiscal cul-de-sac. It is the Greece of America (though Illinois is providing some stiff competition for that dubious honor).

But the facts did not have much impact on the other speakers, who said that the state’s fiscal crisis exists because of Proposition 13, the supermajority tax-increase requirement, the initiative process, or some combination of the above.

I simply noted that California has very high tax rates, a bloated and expensive government bureaucracy, and one of the largest public sectors (as measured by government spending as a share of state economic output) in the country. This excellent report from the Pacific Research Institute has plenty of details.

The students who organized the conference took all the speakers to a nice dinner at the Asian Art Museum, where I did my best to rescue the ones at my table from wasted lives of statism. I suppose only time will tell whether I saved any souls.

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There doesn’t seem to be much union in the European Union. Greek politicians are wetting their pants that Germany isn’t bending over fast enough to provide bailout money, so they pulled out the Nazi card. I’m sure the Germans raped Greece during World War II, but that does not explain why German taxpayers are responsible for the fiscal incontinence of Greek politicians 60 years later. The Guardian reports:

Tens of thousands of striking Greek workers took to the streets today, some throwing stones at police, in a defiant show of protest against austerity measures aimed at averting the debt-plagued country’s economic collapse. Riot police responded with teargas when, in sporadic bursts, masked youths charged them in Athens city centre. The violence coincided with a general strike that shut down public services and closed off Greece to the outside world. For trade unions the mass show of force was a warning shot to a government struggling to satisfy its eurozone partners with policies deemed vital for the nation’s fiscal health while appeasing angry workers at home. …The protests came against a backdrop of mounting Greek hostility towards the EU, with particular venom reserved for Germany, which has pressed for harder measures to be forced on Athens. Greece’s political elite has been outraged and hurt by hard-hitting German media coverage of the debt crisis. The cover of a German magazine, Focus, which showed the Venus de Milo making a less than complimentary finger gesture under the headline “Swindlers in the eurozone” has triggered widespread fury. In an extraordinary tirade, the deputy prime minister, Theodore Pangalos, said Germany had no right to judge Greek finances after wreaking havoc on the economy during the four years that the country was under Nazi occupation in the second world war. Worse still, he said, Germany had failed to make adequate compensation. …Berlin hit back with a tart reminder that Greece had received 115m deutschmarks in compensation by 1960. “I must reject these accusations,” said Andreas Peschke, a spokesman at the German foreign ministry. Greece, he said, had also received around €33bn in aid from Germany “both bilaterally and in the context of the EU”.

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I’ve already received some reasonably positive feedback on Wednesday’s show, though I don’t think it was any better than Tuesday’s performance.

I’d be delighted to get feedback. You can watch the segments here, here, here, here, and here.

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I can’t believe I missed this stary from last October. The food Nazis in New York City have banned bake sales. This cripples fundraising for student groups, but that presumably is a small price to pay so that politicians get an opportunity for a few hollow sound bites about childhood obesity. Of course, if the politicians really want to do something about overweight kids, they could arrest the parents and destroy all televisions sets, video games, and computers in private homes. But maybe I shouldn’t give them any ideas. The New York Times has the odious details:

There shall be no cupcakes. No chocolate cake and no carrot cake. According to New York City’s latest regulations, not even zucchini bread makes the cut. …the Education Department has effectively banned most bake sales, the lucrative if not quite healthy fund-raising tool for generations of teams and clubs. The change is part of a new wellness policy that also limits what can be sold in vending machines and student-run stores, which use profits to help finance activities like pep rallies and proms. …Unsurprisingly, the rationale is getting a cool reception among students. At Fiorello H. La Guardia High School on the Upper West Side, students are used to having bake sales several times a month. Now, Yardain Amron, a sophomore basketball player, laments that his team will not be able to raise money for a new scoreboard. Another La Guardia student, Eli Salamon-Abrams, 14, said that when the soccer team held a bake sale in May, his blueberry muffins sold out in 15 minutes. He said of the ban: “I think it’s kind of pointless. I mean, why can’t we have bake sales?” The new policy also requires that vending machines, which generate millions of dollars for school sports, be supplied with snacks such as reduced-fat Baked Doritos and low-sugar granola bars. A new vending machine contract is expected to be approved on Wednesday by the Panel for Educational Policy, the school oversight board. Student stores will be able to sell only approved snacks bought from the new vendor, rather than obtain the food themselves, as they once did. …Department officials are suggesting that teams use walk-a-thons and similar activities as a way of raising money and doing something active.

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Watch it here.

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We need effective, articulate, and principled lawmakers in Washington. I don’t think many Republicans in DC understand the tax competition issue. And if they do, I doubt they could give either of these speeches.

I especially appreciate his defense of tax havens.

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I gave myself a gentleman’s C for my performance Monday. Last night’s performance was much better, at least I think.

Watch here, here, here, here, here, and here and let me know what you think.

The first three clips are the most interesting (at least to me) since we’re talking public policy. When we shift to talking about investments during the last half of the show, I don’t have any special insight, though I do manage to cause a bit of controversy in the final segment.

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This gem was linked on Instapundit. According to the UK-based Telegraph, European taxpayers are getting ripped off to the tune of about $300,000 so the European Commission can send comic books about heroic bureaucrats to schools across the continent. You can’t make this stuff up.

They are normally painted as faceless, grey Eurocrats ridiculed for endless deliberations on the bendiness of bananas or the amount of light that bulbs should give off. But now European Commission officials have had their revenge – by producing a lavish comic book portraying themselves as heroes battling to save the world. More than 300,000 copies of the glossy hardback – printed in five languages at a cost of £200,000 – are being sent to homes and schools in the UK and across the Continent. The graphic novel follows the ‘adventures’ of Zana, Max et al at the European Commission’s Humanitarian Aid Department – known as ECHO – as they struggle to secure funding for the fictional sate of Borduvia, which has been devastated by an earthquake. …The book’s heroine Zana, a feisty, beautiful aid worker whose uniform consists of a safari jacket with the European Union flag emblazoned upon it, is then dispatched to Borduvia by bearded and besuited bureaucrats to sort out the humanitarian crisis. …Zana’s mission is to write daily reports – known in the business as ‘sitreps’ – that will secure funding for its worst-hit region Kellow and the rebel-held stronghold deep in the Urgi Mountains. …The total cost of the book to print is 225,000 euros (£195,000) and is sent out for free at a further cost to the taxpayer.

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I can’t figure out how to embed the videos from the CNBC website, but you can watch me here, here, here, here, and here.

So how did I do? I felt a bit wooden in the beginning, but then got into the flow of things. My only faux pas occured when my co-host asked me a question in one of the segments, but I assumed he said my name by accident and meant the question for one of the guests. The production people said not to worry, that it was only a minor hiccup.

Regarding tonight and tomorrow night, there is no way to watch the show live online, so you’ll have to wait for the video to get posted. Unless you get CNBC World, of course.

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To follow up on the post from Saturday, here’s a column by John Lott, which makes the very sensible point that shifting resources from the productive sector of the economy to the government necessarily will cause dislocation in the short run. There also would be inefficiency in the long run, but that’s a separate issue:

…the stimulus created higher unemployment. In fact, my columns in this space predicted that during at the beginning of February 2009 that would be the case. Moving around a trillion dollars from areas where people would have spent it to areas where the government wants to spend it will move a lot of jobs away from those firms that are losing the money to those who are now favored by the government. Since people won’t instantly move from one job to another, there will be a temporary increase in unemployment.

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There’s a principled Fourth Amendment argument against anti-money laundering laws. In  this video, however, I mostly focus on the cost-benefit issue, explaining that the fight against crime will be more effective if law enforcement is not forced to look for a needle in a haystack.

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For the next three days, I’ll be guest-hosting The Kudlow Report on CNBC.

That’s the great news. The not-so-great news is that the show is pre-empted inside the United States by olympic hockey.

So I’m not sure how many people will have a chance to watch. Nonetheless, it’s quite an honor to be sitting in for Larry.

I’ll post an update later today with more information.

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The President presumably does not want to destroy jobs, but I explain in this Cato podcast that this will be the result if he succeeds in further tilting the playing field against American multinationals.

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Did Republicans lose in 2006 and 2008 because they were too far to the left or too far to the right? And which approach should they adopt if they want to regain power in 2010 and 2012? Some people think the GOP needs to be more moderate. David Frum, for instance, says Republicans need to mimic David Cameron in the United Kingdom. And at his website, Frum highlights this (rather disturbing, as I will explain below) video of Cameron making a pitch to the British people.

First, the good news about the video. It is possible that Cameron intends to do good things about education and welfare policy. Unfortunately, it’s also possible that he intends to do bad things. But we don’t know since there is nothing but rhetoric. Speaking of rhetoric, it is troubling that he also has lots of language about a “fair” society and the gap between rich and poor. This doesn’t necessarily mean he intends to push bad policy. A policy of smaller government and free markets, after all, will boost economic growth and help poor people climb the ladder. Shrinking government also will reduce the power of special interests, which will make society more fair. But it’s also possible – and perhaps more likely – that he is using this rhetoric to signal support for more redistribution.

What is most troubling, though, is that Cameron sides with government and against taxpayers whenever he gets specific about policy. About one minute into the video, he endorses the minimum wage and higher fuel subsidies. Fifteen seconds later, he wants more redistribution for food programs. The worst proposal comes around the 2:50 mark, when he endorses wage indexing instead of price indexing for the U.K.’s version of Social Security (which would be grossly irresponsible and undermine one of the best achievements of Margaret Thatcher). Last but not least, he then endorses more spending on government-run healthcare.

These proposals are all bad policy, but they’re also bad politics. If an election is decided on the basis of which party is more excited and more sincere about redistribution, that benefits left-wing parties. That doesn’t mean that a (supposedly) right-wing party will never win an election. Indeed, Gordon Brown may very well lose to Cameron later this year. But that will simply be a case of the electorate rejecting an incumbent party for doing a terrible job. There will be no mandate for better policy. Indeed, it appears that Cameron wants to be like Obama – a big-spending politicians who takes over from another big-spending politician. In the long run, this is a recipe for the Tories to be a minority party. And if Republicans follow the same approach, they also will be a minority party.

One final comment. It should go without saying that right-leaning parties should always be figuring out better ways of selling the message of liberty, freedom, prosperity, and responsibility. And they should be finding the candidates who are best able to articulate that message in an optimistic, forward-looking way to average voters. But that’s not what Cameron represents. From what I can tell, he’s Richard Nixon with a smile.

P.S. Cameron also has surrendered to the left on the global warming/climate change issue, though maybe the absence of any rhetoric in this video is an indication that he realizes the tide has turned and there is nothing to be gained electorally by imposing that particular piece of awful policy.

P.P.S. And he has refused to say that he will undo Gordon Brown’s reckless decision to raise the top tax rate from 40 percent to 50 percent.

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Howie Rich has a very good column at Townhall.com. He asks whether Republicans have learned any lessons during their time in the minority, specifically whether they recognize that bloated and wasteful spending under Republicans is just as bad as bloated and wasteful spending under Democrats:

The GOP’s new revisionist message was summed up in a billboard that appeared recently on Interstate 35 in Wyoming. “Miss me yet?” a smiling picture of former President Bush asks passing motorists. In a word? “No.” What this theory of “Republican revisionism” lacks is even a tangential basis in fact. That’s because Republicans – at least prior to the election of a Democratic Congress in 2006 and a Democratic President in 2008 – were engaged in precisely the same policies they now spend all of their time railing against. …Republicans are no strangers to massive government overreaching. For example, President Bush responded to the September 11 terrorist attacks by creating a huge new government bureaucracy… Meanwhile, he supported the unconstitutional suppression of free speech by signing so-called “campaign finance” reform, dramatically stifling the ability of the public to criticize incumbent politicians. …Bush and his cronies loved pork barrel spending, too. In 2005 – over the strenuous objections of taxpayer advocates – he signed a massive $286 billion transportation bill that included 6,371 pet projects inserted by Republican and Democratic lawmakers. …Bush and his GOP allies also fought to create new entitlement spending – including a prescription drug benefit to Medicaid that has cost taxpayers hundreds of billions of dollars. They federalized education with No Child Left Behind… Republicans are quick to forget that Bush is on the hook for a considerable portion of the unsustainable spending that is currently driving our debt even further into the stratosphere. Indeed, Bush cemented his anti-free market legacy in late 2008 with the passage of the Troubled Asset Relief Program (TARP) and tens of billions of dollars worth of automotive bailouts – additional examples of his kneejerk tendency to resolve every crisis faced by the nation with an unprecedented expansion of government power and taxpayer debt. Was Bush a better steward of your tax dollars than Obama? Yes – but that’s the problem. Getting mugged worse the second time around doesn’t absolve the first thief of his culpability.

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The Administration is arguing that last year’s $800 billion spending bill has created jobs. But since the unemployment rate is higher and the total number of Americans with jobs has fallen, the White House can only make this claim by arguing that the unemployment rate would be even higher without all the new spending. This argument is seductive to those (such as journalists) who don’t understand that government can’t dump money into the economy without first taking money out of the economy. But there are more reasons why so-called stimulus spending is bad for the economy and job creation. Writing for Investor’s Business Daily, Alan Reynolds of the Cato Institute points out that the recession lasted longer than average and that much of the spending was for programs that subsidize people for not working:

President Obama seized on the one-year anniversary of the American Recovery and Reinvestment Act (ARRA) as an opportunity to take credit for the belated and tenuous economic recovery. But the economy always recovered from recessions, long before anyone imagined that government borrowing could “create jobs.” And we didn’t used to have to wait nearly two years for signs of recovery, as we did this time. A famous 1999 study by Christina Romer, who now heads the Council of Economic Advisers, found the average length of recessions from 1887 to 1929 was only 10.3 months, with the longest lasting 16 months. …The bill was launched last year amid grandiose promises of “shovel ready” make-work projects. In reality, as the CBO explains, “five programs accounted for more than 80% of the outlays from ARRA in 2009: Medicaid, unemployment compensation, Social Security … grants to state and local governments … and student aid.” In other words, what was labeled a “stimulus” bill was actually a stimulus to government transfer payments — cash and benefits that are primarily rewards for not working, or at least not working too hard.

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There were many reasons to oppose last year’s so-called stimulus legislation, especially the fact that government is too big and it makes no sense to go even faster in the wrong direction. But perhaps one of the most compelling reason is that politicians and bureaucrats inevitably do really stupid things because the federal budget is a racket designed to funnel the maximum amount of money to powerful interest groups. Here’s a great example from a story I saw linked on Kausfiles.com. A city in New Hampshire wanted to stick its snout in the trough in order to subsidize a water treatment plant, but eventually decided to reject the money because the local government’s out-of-pocket costs would increase – primarily thanks to corrupt rules designed to line the pockets of union bosses, but also because of protectionist requirements and a mind-boggling $100,000 of paperwork expenses:

As stimulating as it might have sounded at the time, the city recently declined $2.5 million from the American Recovery and Reinvestment Act for its new water treatment plant because federal wage regulations would have forced the city to pay more for the project. …the low bidder — Penta Corporation — presented final cost of $21 million with the stimulus funds and $17.3 million without. So the city said thanks, but no thanks, to the stimulus funds. “It just didn’t make sense,” said Deputy Public Works Director David Allen. “It was going to cost us more money to take the money.” Stimulus funds mandate workers are paid using Davis-Bacon Wage Determination, which sets the pay scale for workers on federal projects and added $2.5 million to the bottom line. The “Buy American” provision would’ve added another $500,000 and Allen said there would have been significant administrative costs — upwards of $100,000 — for the city to track it the way the government requires over the course of the two-year project.

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With the VAT becoming an ever-bigger issue, I discuss the issue on CNBC. Interestingly, my opponent winds up agreeing with me.

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Here are a few interesting links to keep you informed about the fiscal crisis in Greece.

Richard Rahn has a nice comparison in the Washington Times of Poland’s good policy and Greece’s profligacy.

Reuters has a story about some new reforms in Greece, including a very Orwellian proposal to track everyone’s purchases by banning cash transactions above 1,500 euro.

And the Associated Press has a story about gas shortages because bureaucrats at the Customs office went on strike to protest a proposal by the government to give them only one (rather than two) extra month(s) of pay per year.

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Demagogues such as Senator Carl Levin, as well as many other politicians and journalists, often assert that low-tax jurisdictions are havens for dirty money and terrorist financing. From a theoretical perspective, this does not make sense. So-called tax havens have a big incentive to avoid scandal since they are much more vulnerable to reputational risk. Just imagine what would happened, after all, if the 9-11 terrorists had used a bank in the Bahamas instead of a bank in Florida. Critics of low-tax jurisdictions automatically would have assumed that the bank was complicit and the entire financial services industry in the Bahamas would have been crippled – or even destroyed. But because the terrorists used American banks (as well as banks in high-tax European nations and the Middle East), there was not a knee-jerk reaction. People understood that the bank tellers and managers had no way of knowing that the flight school students were actually lunatics.

But this does not stop the anti-tax haven smear campaign. Low-tax jurisdictions are viewed as a threat by politicians since it is much harder to impose bad tax policy in a world where tax competition is allowed to flourish. This is why tax havens are attacked whenever something bad happens. If there is a terrorist attack, blame tax havens. If there is a financial crisis, blame tax havens.

With this in mind, a new report from the University of Basel’s Institute of Governance did some real research and came up with a list of nations where there actually is a high risk of money laundering and terrorist financing. As the map below indicates, only one so-called tax haven is among the 28 countries listed, and that nation was in the lowest-risk category.

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On the one-year anniversary of Obama’s stimulus scam, I appeared on the Fox Business Network to explain why squandering $800 billion was bad for the economy.

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While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.

Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.

I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.

But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.

Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’s Roadmap plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law – even if the 2001 and 2003 tax cuts are made permanent – are expected to be about 19 percent of GDP, this solves the budet problem  (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).

The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see here, here, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.

These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.

Now let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.

The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.

What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.

Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules – and the consequences they will produce:

1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be $1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.

2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).

3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families that were dumb enough to save and invest.

I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.

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