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Archive for May 5th, 2010

The blogging about Greece is too depressing, so let’s kick a couple of government bureaucracies for bone-headed stupidity. This excerpt is from a Pajamas Media story about how the Customs bureaucrats mistakenly confused BB guns for machine guns, and then turned the toys over to the BATF bureaucrats, who are now stonewalling and refusing to return the toy guns and admit the government’s mistake. I’m willing to stipulate that these toys are probably designed to look like real guns, and they probably shoot multiple BBs with one pull of the trigger, so perhaps the Customs bureaucrats made an honest mistake. But it appears that BATF bureaucrats are in CYA mode:

It was only a month ago that a bizarre story broke in the Pacific Northwest, as Customs and Border Protection (CBP) officers trumpeted their seizure of what they claimed were more than two dozen machine guns disguised as toys. The problem with the CBP claim was that the items seized were…gas blowback Airsoft rifles that shoot plastic BBs. They really were toys. But instead of admitting they can’t tell a toy gun from a real one, CBP turned these Airsoft rifles over to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), and the agency agreed that these pot-metal made, plastic BB-shooting plinkers were honest-to-God firearms. …multiple experts examined the dubious ATF claim and found that the WE Tech rifles confiscated by the CBP and slated for destruction by the ATF cannot be converted to machine guns, or any other kind of working firearm. …Customs has refused to answer questions addressed to them about the seizure, referring all claims to the ATF. As a result, Pajamas Media filed a Freedom of Information Act (FOIA) request with the ATF.. The ATF’s written response to the FOIA request was less than helpful. Instead of providing information about the WE Tech rifles seized from Airsoft Outlet Northwest at the Port of Tacoma, Washington, ATF responded with what appeared to be a clumsy bait-and-switch… Perhaps an expert in FOIA law can explain this interesting redirection to those of us less versed in the finer points of the legalities, but it would seem quite bizarre that an agency subject to FOIA requests has the authority to randomly determine that the requester really wanted something entirely different … and entirely useless. …Hope is not lost for Airsoft Outlet Northwest, however. The government recently released some of the $20,000 in inventory they’d seized, including 15 other Airsoft machine guns made by WE Tech and 20 bolt-action Airsoft guns. Perhaps with some patience — and a bit of tenacity — the ATF and Customs can finally be convinced to return these toys to their rightful owners. Getting them to admit they were laughably wrong may be an entirely different matter.

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I always appreciate a column that sounds like I could have been the author, and this editorial from the WSJ hits the mark. The IMF/EU bailout is just masking the problems of a bloated welfare state and giving politicians some breathing room to avoid making the real reforms that are needed:

It hasn’t been a week since the terms of Athens’s €110 billion ($145 billion) bailout were set, and already the reviews of this latest Greek drama are saying it’s a flop. Yesterday the euro sank to its lowest level in a year. Stock markets across Europe fell nearly 3%, and the carnage spread to Wall Street and beyond. Greek interest-rate spreads climbed higher again, and market players have turned their attention to the euro zone’s other weak sisters as everyone tries to figure out who is most likely to follow Greece down the road to national insolvency. The bailout, in other words, hasn’t stopped the much-feared contagion. If anything, it has spread it. Part of the problem lies with the bailout’s terms. The €110 billion agreed over the weekend was more than twice the €45 billion originally proposed, but it came with revised deficit projections that immediately made even the higher number look inadequate to fund Greece’s bloated state. …According to the latest official projections, Greek public debt, currently 108% of gross domestic product, will top 149% of GDP in 2013, the year that the bailout loans, in theory, come due. Assuming an average interest rate of 6% on that debt, Greece would be left paying 9% of its GDP to bondholders, 80% of whom are located abroad. Put another way, 25% of Greek tax revenue would go toward interest payments to foreign bondholders. Meanwhile, Greece’s government spending equals more than 50% of GDP and labor productivity is well below the EU average, neither of which bode well for growth going forward. …It’s time that Greece and the rest of Europe started listening to the market instead of attacking it. Greece needs a debt restructuring and wholesale reforms that reduce the state’s share of GDP and promote economic growth. As for the rest of Europe and the U.S., Greece’s predicament is a warning to stop the tax and spending binge before it leads to crisis.

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Kevin Williamson has a long-overdue piece in National Review making two essential points about supply-side economics and the Laffer Curve. First, he explains that tax cuts are not the fiscal equivalent of a perpetual motion machine. Simply stated, too many Republicans have fallen into very sloppy habits. They oftentimes fail to understand the difference between “supply-side” tax rate reductions that actually improve incentives to engage in productive behavior and social-engineering tax cuts that simply allow people to keep more money, regardless of whether they create more wealth. This does not necessarily mean the latter form of tax cuts are bad, but they definitely do not boost economic performance and generate revenue feedback. Moreover, even when GOPers are talking about supply-side tax cuts, they frequently exaggerate the positive effects by claiming that lower tax rates “pay for themselves.” I certainly think that can happen, and I give real-world examples in this video on the Laffer Curve (including Reagan’s lower tax rates on those evil rich people), but self-financing tax cuts are not common.

Williamson’s second point is that the true fiscal burden is best measured by looking at how much government is spending. I might quibble with his description of deficits as a form of deferred taxation since technically debt can be rolled over in perpetuity, but his main point is right on the mark. There is no doubt that most forms of government spending – regardless of the means of financing – harm growth by diverting money from the productive sector of the economy (technically, the economic damage occurs because capital and labor are misallocated and incentives are diminished, but let’s not get too wonky). Here are some excerpts from Williamson’s article:

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don’t get Reagan tax cuts without Tip O’Neill spending cuts. Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals. …even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing. …The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time. …t is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30 percent of the revenue losses. That’s on the high side of the current consensus, but it’s not preposterous. …The problem with magical supply-siderism is that it gives Republicans a rhetorical and intellectual framework in which to ignore spending — just keep cutting taxes, the argument goes, and somebody else will eventually have to cut spending. The results speak for themselves: Tom DeLay and Dennis Hastert and Trent Lott and Bill Frist all know how to count, but, under their leadership, Republicans spent all the money the country had and then some. …It’s really hard to create political incentives that will keep legislators from overspending. Conservatives should know this, because we’ve tried it before. The Gramm-Rudman-Hollings Act of 1985, which enacted automatic federal spending cuts if the deficit exceeded predefined targets, went through hell, high water, and the federal courts before its provisions were allowed to kick in. But when they did kick in, they worked. …In fact, Gramm-Rudman worked so well that Congress, facing real spending constraints for the first time, killed the act, replacing it with the toothless Budget Enforcement Act of 1990.

Now that we’ve chastised Republicans, it’s time to turn our attention to the Democrats. We know they are bad on spending (I often joke that Republicans expand government out of stupidity, while Democrats do it for reasons of malice), so let’s focus on their approach to Laffer Curve issues. If the GOP is guilty of being too exuberant, the Democrats and their allies at the Joint Committee on Taxation (the bureaucracy on Capitol Hill that estimates the revenue impact of tax policy changes) are guilty of deliberate blindness. The current methodology used by the JCT (with the full support of the Democrats) is to assume that changes in tax policy – regardless of magnitude – have zero impact on economic performance. If you double tax rates, the JCT assumes the economy is unaffected and people earn just as much taxable income. If you replace the IRS with a flat tax, the JCT assumes there is no effect on macroeconomic performance. Sounds unbelievable, but this video has the gory details, including when my former boss, Senator Bob Packwood was told by JCT that revenues would rise year after year even if the government imposed a 100 percent tax rate.

Interestingly, the European Central Bank just released a new study showing that there are substantial Laffer Curve affects and that lower tax rates generate large amounts of revenue feedback. In a few cases (Sweden and Denmark), the researchers even conclude that some lower tax rates would be in that rare category of self-financing tax cuts. But the key point from this ultra-establishment institution is that changes in tax rates do lead to changes in taxable income. This means it is an empirical question to determine the revenue impact. Here’s a key excerpt from the study’s conclusion:

We show that there exist robust steady state Laffer curves for labor taxes as well as capital taxes. …EU-14 countries are much closer to the slippery slopes than the US. More precisely, we find that the US can increase tax revenues by 30% by raising labor taxes but only 6% by raising capital income taxes, while the same numbers for EU-14 are 8% and 1% respectively. …We find that for the US model 32% of a labor tax cut and 51% of a capital tax cut are self-financing in the steady state. In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing. We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts.

Contrary to over-enthusiastic Republicans and deliberately-dour Democrats, the Laffer Curve/supply-side economics debate is not a binary choice between self-financing tax cuts and zero-impact tax cuts. Yes, there are examples of each, but the real debate should focus on which types of tax reforms generate the most bang for the buck. In the 1980s, the GOP seems to have the right grasp of this issue, focusing on lowering tax rates and reducing the discriminatory tax bias against saving and investment. This approach generated meaningful results. As Nobel laureate Robert Lucas wrote, “The supply side economists, if that is the right term for those whose research we have been discussing, have delivered the largest genuinely free lunch that I have seen in 25 years of this business, and I believe we would be a better society if we followed their advice.”

But identifying and advocating pro-growth tax reforms, as Williamson notes, is just part of the battle. The real test of fiscal responsibility if controlling the size of government. Republicans miserably failed at this essential task during the Bush year. If they want to do the right thing for the nation, and if they want to avert a Greek-style fiscal collapse, they should devote most of their energies to reducing the burden of government spending.

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