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Archive for August 2nd, 2010

David Ignatius has a thoroughly boring and utterly predictable establishment left-wing column in the Washington post, but it is a perfect illustration of my maxim that “Bad government policy begets bad government policy.” In this case, Ignatius wants to expand gun control in the United States in response to the foolhardy drug war in Mexico. Neither effort will succeed, at least if either society wants even a smidgen of individual liberty, but statists never seen to worry about such niceties. If one of their policies leads to a mess, that’s just an excuse for more bad policy.

Mexico is reeling from a drug-cartel insurgency that is armed mainly with weapons acquired in the United States… Naming a new ATF chief to lead the fight against illegal weapons would be a small symbolic step. But it would signal to Mexicans and Arizonans alike that the administration is mobilizing to deal with these problems — and is willing to take some political heat in the process. …”The absence of a chief has hamstrung ATF’s ability to aggressively target gun trafficking rings or corrupt firearms dealers and has demoralized its agents,” Paul Helmke, president of the Brady Campaign to Prevent Gun Violence, wrote in a June 10 letter to Obama. …The prevailing political wisdom in America, to which the Obama administration evidently subscribes, is that it’s folly to challenge the gun lobby. When Mexico’s President Felipe Calderón addressed a joint session of Congress in May, he all but pleaded with lawmakers to help stop the flow of assault weapons. His call to action produced little more than a shrug of the shoulders in Washington.

By the way, several of you have been ribbing me for calling this phenomenon Mitchell’s Law when great economists like Mises have written about this pattern. But I’m not saying that I invented the concept. I’m just trying to popularize it, much as I gave the name “Rahn Curve” to the theory about a growth-maximizing level of government. In effect, I’m trying to mimic Art Laffer. Art will freely tell anyone he meets that the concept behind the Laffer Curve existed for centuries. But he turned in into a curve and brought it to the attention of the world.

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I have a column in today’s New York Post about Obama’s plan for higher taxes next year. My main point is that higher tax rates on the so-called rich have a very negative impact on the rest of us because even small reductions in economic growth have a big impact over time. This is a reason, I explain, why middle-income people in Europe have been losing ground compared to their counterparts in the United States. This is an argument I’m still trying to develop (this video is another example), so I’d welcome feedback.

The most important indirect costs are lost economic growth and reduced competitiveness. You don’t have to be a radical supply-sider to recognize that higher tax rates — particularly steeper penalties on investors and entrepreneurs — are likely to slow economic growth. Even if growth only slows a bit, perhaps from 2.7 percent to 2.5 percent, the long-term impact can be big. After 25 years, a worker making $50,000 will make about $5,000 more a year if economic growth is at the slightly higher rate. So if this worker gets hit next year with a $1,000 tax hike, he or she understandably will be upset. In the long run, however, that worker may be hurt even more by weaker growth. …The Obama administration’s approach is to look at tax policy mainly through the prism of class warfare. This means that some of the 2001 and 2003 tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. That’s bad news for the so-called rich, but what about the rest of us? This is why the analysis about direct and indirect costs is so important. The folks at the White House presumably hope that we’ll be happy to have dodged a tax bullet because only upper-income taxpayers will face higher direct costs. But it’s the rest of us who are most likely to suffer indirect costs when higher tax rates on work, saving, investment and entrepreneurship slow economic growth. When the economy slows, that’s bad news for the middle class — and it can create genuine hardship for the working class and poor. Indeed, punitive taxation of the “rich” is one reason why middle-class people in high-tax European welfare states have lost ground in recent decades compared to Americans.

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The federal government is capable of enormous waste, which obviously is bad news, but the worst forms of government spending are those that actually leverage bad things. The old welfare system, for instance, paid people not to work and have babies out of wedlock (this still happens, but it’s not as bad as it used to be). Paying exorbitant salaries to federal bureaucrats is bad, but it’s even worse if they take their jobs seriously and promulgate new regulations and otherwise harass people in the productive sector of the economy. In a previous video on the economics of government spending, I called this the “negative multiplier” effect.

One of the worst examples of a negative multiplier effect is the $100 million that taxpayers spend each year to subsidize the Paris-based Organization for Economic Cooperation and Development. This video has the gory details.

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