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Archive for July, 2010

Like the swallows returning to Capistrano, the Congressional Budget Office follows a predictable pattern of endorsing policies that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions of jobs were lost. Then, during the Obamacare debate, CBO actually claimed that a giant new entitlement program would reduce deficits. Now that tax increases are the main topic (because of the looming expiration of the 2001 and 2003 tax bills), CBO has done a 180-degree turn and has published a document discussing the negative consequences of too much deficits and debt.
…persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur. …a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. …If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.
At some point, even Republicans should be smart enough to figure out that this game is rigged. Then again, the GOP controlled Congress for a dozen years and failed to reform either CBO or its counterpart on the revenue side, the Joint Committee on Taxation (which is infamous for its assumption that tax policy has no impact on overall economic performance).

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These results won’t come as a surprise to anyone who has compared long-run growth rates in Hong Kong, the United States, France, and North Korea, but there’s a new study by three economists showing that nations with better tax policy grow faster and create more jobs. There are many other factors that also determine growth, as this video explains, but punishing investors and entrepreneurs with high tax rates is never a good idea. Here’s a passage from the study’s abstract, including a specific warning about the anti-growth impact of Obama’s plan for higher taxes in 2011.
Results indicate that lower tax rates are associated with more favorable economic activity, including growth in GDP, lower unemployment, and higher savings. These findings suggest that at the micro-level, corporate managers should consider tax rates when deciding to locate or not locate business operations within a given country, especially if the goal is to locate where the economy is dynamic. At the macro-level, before making changes to tax law, policy makers should carefully consider how tax rates affect economic activity. For example, policy makers in the US Congress, at the time of this writing, are considering whether to allow the Bush tax cuts to expire in 2010. If the Congress allows that to happen, the outcome would effectively be the largest tax increase in US history.

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I don’t know whether he is a poster child for the dangers of inbreeding or a rich dolt who is seeking meaning in his life, but Prince Charles takes left-wing hypocrisy to an entirely new level. His “carbon footprint” almost surely is bigger than 99.9 percent of the world’s population, yet this pampered and clueless aristocrat thinks he was put on the earth to save the rest of us from sins such as “global warming” and “unbridled commerce.” If he gave up the throne and dedicated himself to a life of genuine self-denial, I would call him a clueless moron. Until that happens, he is best categorized as a hypocritical clueless moron.
The Prince of Wales says he believes he has been placed on Earth as future King ‘for a purpose’ – to save the world. Giving a fascinating insight into his view of his inherited wealth and influence, he said: ‘I can only somehow imagine that I find myself being born into this position for a purpose. ‘I don’t want my grandchildren or yours to come along and say to me, “Why the hell didn’t you come and do something about this? You knew what the problem was”. That is what motivates me. ‘I wanted to express something in the outer world that I feel inside… We seem to have lost that understanding of the whole of nature and the universe as a living entity.’ His impassioned comments come during a film about his belief that unbridled commerce has led to the destruction of farmland and countryside. …But the Prince has previously come under fire for hypocrisy over his eco-values. Last year he commandeered a jet belonging to the Queen’s Flight to attend the Copenhagen climate change summit, generating an estimated 6.4 tons of carbon dioxide – 5.2 tons more than if he had used a commercial plane. …Graham Smith, of the anti-monarchy group Republic, said: ‘He is under the impression he has been sent to save the world and deliver us from our sins. It’s quite delusional.

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These came in an email. I can’t vouch for their veracity, but a few of them were amusing enough to share.
 
The liberals are asking us to give Obama time. We agree . . . and wethink 25 to life would be appropriate.
–Jay Leno
 
America needs Obamacare like Nancy Pelosi needs a Halloween mask.
–Jay Leno
 
Q: Have you heard about McDonald’s’ new Obama Value Meal?
A: Order anything you like and the guy behind you has to pay for it.
–Conan O’Brien
 
Q: What does Barack Obama call lunch with a convicted felon?
A: A fund raiser.
–Jay Leno
 
Q: What’s the difference between Obama’s cabinet and a penitentiary?
A: One is filled with tax evaders, blackmailers, and threats tosociety. The other is for housing prisoners.
–David Letterman
 
Q: If Nancy Pelosi and Obama were on a boat in the middle of the ocean and it started to sink, who would be saved?
A: America!
–Jimmy Fallon
 
Q: What’s the difference between Obama and his dog, Bo?
A: Bo has papers.
–Jimmy Kimmel
 
Q: What was the most positive result of the “Cash for Clunkers”program?
A: It took 95% of the Obama bumper stickers off the road.
–David Letterman

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Writing in the Wall Street Journal, Peter Ferrara of the Institute for Policy Innovation explains that Washington budget deals don’t work because politicians never follow through on promised spending cuts. This is a very relevant argument since Obama’s so-called Deficit Reduction Commission supposedly is considering a deal featuring $3 of spending cuts for every $1 of tax increases (disturbingly reminiscent of what was promised – but never delivered – as part of the infamous 1982 TEFRA budget scam). 
Washington’s traditional approach to balancing the budget is to negotiate an agreement on a package of benefit cuts and tax increases. President Obama’s deficit commission seems likely to recommend just this strategy in December. The problem is that it never works. What happens is the tax increases get permanently adopted into law. But the spending cuts are almost never fully adopted and, even if they are, they are soon swept away in the next spendthrift budget. Then—because taxes weaken incentives to produce—the tax increases don’t raise the revenue that Congress initially projected and budgeted to spend. So the deficit reappears. In 1982, congressional Democrats promised President Ronald Reagan $3 in spending cuts for every dollar in tax increases. Reagan went to his grave waiting for those spending cuts. Then there was the budget deal in 1990, when President George H.W. Bush agreed to violate his famous campaign pledge—”Read my lips, no new taxes,” he had said in 1988—in pursuit of a balanced budget. But after the deal, the deficit increased substantially: to $290 billion in 1992 from $221 billion in 1990. 
As the excerpt indicates, Peter’s column is solid and everything he writes is correct, but it suffers from one major sin of omission. He should have exposed the dishonest practice of using “current services” or “baseline” budgeting. This is the clever Washington practice of assuming that all previously planned spending increases should go into effect and categorizing any budget that increases spending by a lower amount as a spending cut. In other words, if the hypothetical “baseline” budget increases by 7 percent, and a budget is proposed that increases spending by 4 percent, that 4 percent spending increase magically gets transformed into a 3 percent spending cut.
 
Politicians love “current services” or “baseline” budgeting for two reasons. First, it allows them to have their cake and eat it too. They can simultaneously shovel more money to interest groups while telling voters they are “cutting” spending. Second, it rigs the process in favor of bigger government. This is because lawmakers who actually propose to restrain the growth of spending can be lambasted for wanting “savage” and “draconian” budget cuts totaling “trillions of dollars” when all they’re actually proposing is to have spending grow by less than the so-called baseline. But since people in the real world use honest math rather than “current services” math, they assume that spending is being reduced next year by some large amount compared to what is being spent this year. And if the phony budget cut numbers sound too big (especially for specific programs such as Medicare or Medicaid), they sometimes conclude that it would be better to raise taxes.
 
Speaking of which, the same misleading process works on the revenue side of the budget. The politicians automatically get to keep whatever additional revenue is generated by population growth and higher incomes, which is not trivial since revenue in a typical year grows faster than nominal GDP. But when they do a budget deal featuring X dollars of tax increases for every Y dollars of spending cuts, the additional taxes are always on top of the revenue increases that already are occurring. And since the supposed spending cuts invariably are nothing more than reductions in planned increases, it should come as no surprise that the burden of spending always seems to increase.
 
Defenders of “current services” or “baseline” budgeting will respond by arguing that spending should automatically increase because of factors such as inflation and demographic change (i.e., more seniors signing up for Medicare). Indeed, they will point out that the government is legally obligated to spend more money for entitlement programs based on current law.
 
But that’s not the point. The issue is whether the American people are being presented with honest numbers. If the fans of big government want to argue that spending should increase by 7 percent for various reasons, they should openly and honestly explain what they are trying to do. And if they disagree with lawmakers who want spending to increase by 4 percent, they should be forthright and tell voters that “this proposal does not increase spending by enough because of…” and list the reasons why they want spending to grow even faster.
 
Unfortunately, deceptive budget practices in Washington are a feature, not a bug. But if you pay close attention, they are very revealing. If the President’s Deficit Reduction Commission uses “baseline” or “current services” budgeting as a benchmark for determining spending “cuts” and tax increases, that’s a good sign that the crowd in Washington wants to pull a fast one on the American people.

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Whether we’re looking at TARP bailouts, Obamacare, or tax loopholes, a common theme is that politicians implement a policy by arguing they want to help the less fortunate. When the dust settles, however, it is often the case that politically well-connected rich people are the big beneficiaries. The overall economy tends to be weaker, meanwhile, and the specific sector suffers because of resource misallocation, so poor people actually fall farther behind. A good example is rent control. The Wall Street Journal has an editorial citing the case of Bianca Jagger to illustrate how the law has become a giant rip-off that deprives landlords of their property rights while lining the pockets of the elite. Those lower on the income scale, by contrast, suffer because of a housing market crippled by government intervention.
Jetsetter and social activist Bianca Jagger has lost her legal bid to keep her knock-down-price rental at 530 Park Avenue. A New York state judge last week ordered Mick’s ex to pay $708,600 in back rent and other fines to her landlords. Ms. Jagger spent nearly 20 years in the two bedroom apartment—rent-stabilized at $4,600 a month. But then she complained about poor upkeep. The landlords in turn noted that Ms. Jagger, in the U.S. on a tourist visa, shouldn’t pay the lower rent since New York isn’t her “primary residence,” one of the criteria under rent control laws. A state appeals court sided with them in 2008 and last week another court upheld the decision and said she could be evicted. As part of the fine, the judge ruled that Ms. Jagger owes $246,468 for the “fair market use and occupancy” over the years she was in dispute with the landlords. They said the apartment would have gone on the open market for $8,800 a month. The case sums up the insanity of regulating prices in one of the world’s most competitive and dynamic real estate markets. Rent control, a “temporary” World War II-era measure that survives into this century, creates housing shortages, drives up prices for non-rent control real estate and contributes to middle class flight. As Ms. Jagger perhaps found out with her moldy apartment, artificially keeping down rents gives landlords the rational financial incentive to skimp on upkeep. Worse than that, rent control disproportionately subsidizes the affluent. A Harvard University study in the late 1980s found that rent-controlled apartments were in some of the cities best neighborhoods, that 94% of its tenants were white and roughly three-quarters were families without children.

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Reason TV gives us a taste of what to expect when the movie version of Ayn Rand’s classic is released. The two stars we see in this video are not how I pictured Dagny Taggart (wasn’t she a brunette) and Hank Reardon, but so what. I’m looking forward to the movie and I hope it does justice to the book.

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