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Archive for March, 2013

Back in 2010, I wrote a post entitled “What’s the Ideal Point on the Laffer Curve?

Laffer CurveExcept I didn’t answer my own question. I simply pointed out that revenue maximization was not the ideal outcome.

I explained that policy makers instead should seek to maximize prosperity, and that this implied a much lower tax rate.

But what is that tax rate, several people have inquired?

The simple answer is that the tax rate should be set to finance the legitimate functions of government.

But that leads to an obvious follow-up question. What are those legitimate functions?

According to my anarcho-capitalist friends, there’s no need for any public sector. Even national defense and courts can be shifted to the private sector.

In that case, the “right” tax rate obviously is zero.

But what if you’re a squishy, middle-of-the-road moderate like me, and you’re willing to go along with the limited central government envisioned by America’s Founding Fathers?

That system operated very well for about 150 years and the federal government consumed, on average, only about 3 percent of economic output. Historical Burden of Federal SpendingAnd even if you include state and local governments, overall government spending was still less than 10 percent of GDP.

Moreover, for much of that time, America prospered with no income tax.

But this doesn’t mean there was no tax burden. There were excise taxes and import taxes, so if the horizontal axis of the Laffer Curve measured “Taxes as a Share of GDP,” then you would be above zero.

Or you could envision a world where those taxes were eliminated and replaced by a flat tax or national sales tax with a very low rate. Perhaps about 5 percent.

So I’m going to pick that number as my answer, even though I know that 5 percent is nothing more than a gut instinct.

For more information about the growth-maximizing size of government, watch this video on the Rahn Curve.

There are two key things to understand about my discussion of the Rahn Curve.

First, I assume in the video that the private sector can’t provide core public goods, so the discussion beginning about 0:33 will irk the anarcho-capitalists. I realize I’m making a blunt assumption, but I try to keep my videos from getting too long and I didn’t want to distract people by getting into issues such as whether things like national defense can be privatized.

Second, you’ll notice around 3:20 of the video that I explain why I think the academic research overstates the growth-maximizing size of government. Practically speaking, this seems irrelevant since the burden of government spending in almost all nations is well above 20 percent-25 percent of GDP.

But I hold out hope that we’ll be able to reform entitlements and take other steps to reduce the size and scope of government. And if that means total government spending drops to 20 percent-25 percent of GDP, I don’t want that to be the stopping point.

At the very least, we should shrink the size of the state back to 10 percent of economic output.

And if we ever get that low, then we can have a fun discussion with the anarcho-capitalists on what else we can privatize.

P.S. If a nation obeys Mitchell’s Golden Rule for a long enough period of time, government spending as a share of GDP asymptotically will approach zero. So perhaps there comes a time where my rule can be relaxed and replaced with something akin to the Swiss debt brake, which allows for the possibility of government growing at the same rate as GDP.

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Folks, the pendulum is swinging in the right direction.

PendulumIn recent weeks, I’ve shared a bunch of examples to support my hypothesis that libertarians, small-government conservatives, and classical liberals are finally making some progress.

This trend actually started with the fiscal cliff, though that was simply a smaller-than-expected defeat.

Since then, we’ve enjoyed victories on the sequester, the IMF, and dynamic scoring. I’ve also posted some evidence showing that the Tea Party has made a positive difference and specifically shared data showing that the burden of government fiscal policy has been reduced since the 2010 elections.

Well, here’s another feel-good story. A powerful Committee Chairman in the House of Representatives realizes that being pro-market is not the same as being pro-business. Hallelujah!

The Wall Street Journal reports:

During Jeb Hensarling’s first congressional bid, a man at a campaign stop in Athens, Texas, asked the Republican if he was “pro-business.” “No,” the candidate replied, drawing curious stares from local business leaders who had gathered to hear him speak, a former Hensarling aide recalled. “I’m not pro-business. I’m pro-free enterprise.” Now, more than a decade later, that distinction has Wall Street on edge. The new chairman of the House financial services committee wants to limit taxpayers’ exposure to banking, insurance and mortgage lending by unwinding government control of institutions and programs the private sector depends on, from mortgage giants Fannie Mae and Freddie Mac to flood insurance. Banks and other large financial institutions are particularly concerned because Mr. Hensarling plans to push legislation that could require them to hold significantly more capital and establish new barriers between their federally insured deposits and other activities, including trading and investment banking. …In interviews, a half-dozen industry representatives expressed some level of anxiety about Mr. Hensarling’s legislative agenda.

So, the cronyists are “on edge” and feeling “anxiety.” Gee, just breaks my heart.

And it’s not just Rep. Hensarling that is singing from the right song sheet.

Earlier this month, all 45 Senate Republicans voted for a symbolic measure aimed at banks with more than $500 billion in assets. The amendment, offered by Sens. David Vitter (R., La.) and Sherrod Brown (D., Ohio), sought to eliminate any subsidies or other advantages enjoyed by the biggest financial institutions because investors expect the government to prevent them from collapsing. …Most congressional Republicans believe the changes enacted in the wake of the 2008 financial crisis—principally in the Dodd-Frank financial reform bill—enshrined the notion that the biggest institutions are “too big to fail” because they guaranteed the government would step in to prevent the most sprawling firms from going under.

To be sure, many of these same politicians voted for TARP, so I’m not under any illusions that they’ve become committed supporters of genuine capitalism.

Putting taxpayers before Wall Street

Though Hensarling did vote the right way, so I’m confident that he understands that insolvent banks should be liquidated rather than bailed out.

Too bad folks in the Bush Administration didn’t understand this simple principle of free markets.

Here are some more details from the article about Hensarling’s commitment to economic liberty.

Mr. Hensarling has been a vocal critic of taxpayer backstops for the private sector. He voted against the Wall Street rescue package in the fall of 2008 and supported measures to ease the importation of prescription drugs. He even picked a fight with one of the largest employers in his backyard—American Airlines—by supporting initiatives to allow more long-distance flights out of Dallas’s Love Field, the home base for rival Southwest Airlines. Now, his other potential targets include: the Export-Import Bank of the U.S., which makes loans to American companies that do business overseas, and the Terrorism Risk Insurance Act, a temporary backstop created in the aftermath of 9/11 to insure construction projects. The latter measure expires at the end of 2014, unless Mr. Hensarling’s committee acts to extend it. “In every jurisdictional area that I can get my fingers on, I want to move us away from the Washington insider economy,” he said. Mr. Hensarling sharpened his free-market views when he studied economics under former Sen. Phil Gramm at Texas A&M University.

I’m especially happy to see that he wants to end the corrupt system of subsidies from the Export-Import Bank, which is a typical example of big businesses being anti-free market.

So what does all this mean? Perhaps not much in the short run, particularly with Obama in the White House and Tim Johnson of South Dakota chairing the Senate Banking Committee.

In the long run, though, this is a positive sign. Our prosperity and liberty depend on small government and free markets, so we need at least a few lawmakers who understand that there shouldn’t be any special favors for big interest groups.

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I’ve posted some horrifying examples about what happens when you put politicians and bureaucrats in charge of health care.

The story that makes every guy wince comes from Sweden, where a man wound up having his penis amputated because of government incompetence.

And I’ve shared numerous examples of substandard care from the United Kingdom, in part because I can’t resist mocking Paul Krugman.

Speaking of the U.K., here’s a story that may lure some young men into supporting government-run healthcare.

Did taxpayers get good value for their money?

…22-year-old Josie Cunningham recently was approved for breast enhancement surgery that cost more than $7,000, and paid for entirely by taxpayers, reports Opposing Views. Why? Because she told her General Practitioner that being flat-chested was causing her emotional distress. “My GP referred me for the operation because I wasn’t just flat-chested — I didn’t have any boobs whatsoever,” Cunningham said. “I could never go on holiday as I lived in terror of ever being seen in a bikini and could never set foot outside without a padded bra.” Her doctor’s prescription to counter the “emotional distress” was to enhance her breast size from a 32A to 36DD.

I’ve never heard of the website that contains this story, and I’ve never heard of Opposing Views, where it supposedly originated, so I confess to being a bit skeptical of this story.

Then again, who would have guessed that the government in the United Kingdom would provide taxpayer-financed sex trips to Amsterdam? Or that the bureaucrats at the European Commission would be able to get penile implants at public expense?

Closer to home, let’s not forget that Obamacare allows taxpayer-subsidized viagra for sex offenders! And Medicare pays for penis pumps, which creates frightening visual images.

So even if this specific story isn’t true, I have no doubt that the British government has squandered money in similar ways.

P.S. Speaking of breast augmentation, one of the few well-functioning parts of the American healthcare system is cosmetic surgery. Why? Because consumers largely pay out of pocket and, as a result, costs are restrained.

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I’m not sure why political cartoonists have been revisiting the issue of Obamacare in recent days, but I’ve been enjoying their humor.

I shared three funny cartoons a couple of days ago, adding to my collection of Obamacare humor (see here, here, here, here, here, here, here, and here).

Now let’s enjoy three more, beginning with this gem from Lisa Benson.

Obamacare Cartoon 4

Though we shouldn’t laugh at this cartoon. As we saw with both Medicaid and Medicare, entitlement programs routinely cost far more than original projections.

If you somehow think Obamacare might be different, watch this video.

Gary Varvel hits a different part of Obamacare, noting that the President’s promise of lower premiums is an utter fantasy.

Obamacare Cartoon 5

And Michael Ramirez looks at the big picture.

Obamacare Cartoon 6

I want to close with an optimistic point about the prospect of changing this terrible law.

Thanks to government programs and other forms of regulation and intervention, we had a bad healthcare system before Obamacare.

And even though it was government that was causing the system to malfunction, many people blamed the free market. And the President took advantage of that misunderstanding to push he legislation.

So now we have Obamacare, which has made the system a bit more statist.

But most people think Obamacare was much bigger than it actually was, with some actually thinking we used to have a free market!

Anyway, this flawed perception works to our advantage since it will now be possible to blame any bad news in the healthcare world on  Obamacare.

As such, I expect that Obamacare will remain unpopular.

The real question will be whether reformers will rally behind proposals to not just repeal Obamacare, but to actually restore a free market.

If you want to understand what needs to happen, I encourage you to watch two short videos, one from Reason TV and the other from the Center for Freedom and Prosperity.

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Because I’ve been sharing good news recently – which definitely is not my normal style, I joked the other day I must be on coke, in love, or rolling in money. For example:

Well, the drugs, love, and money must still be in my system because I’m going to share some more good news. Our lords and masters in Washington have taken a small step in the direction of recognizing the Laffer Curve.

Here are some details from a Politico report.

Here’s one Republican victory that went virtually unnoticed in the slew of budget votes last week: The Senate told the Congressional Budget Office it should give more credit to the economic power of tax cuts. It won’t have the force of law, but it was a big symbolic win for conservatives — because it gave them badly needed moral support in an ongoing war to get Washington’s establishment number crunchers to take their economic ideas more seriously. The amendment endorsed a model called “dynamic scoring,” which assumes that tax cuts will pay for at least part of their cost by generating more economic activity. The measure by Sen. Rob Portman (R-Ohio) called on CBO and the Joint Committee on Taxation to include “macroeconomic feedback scoring” in all future estimates of tax legislation. …Portman eked out a narrow 51-48 victory in the final series of budget votes that started around 3 a.m. on Saturday.

Just in case you missed it, this modest victory for common sense took place in the Senate. You know, the place controlled by Harry Reid of Cowboy Poetry fame.Laffer Curve

To be sure, it’s not quite time to pop open the champagne.

The vote was a symbolic victory for the think tanks and lawmakers on the right who have been fighting for years to force CBO and JCT to officially endorse the idea that people spend more and invest more when they owe the government less. …Conservatives’ ideas, including revenue-generating tax cuts and a more market-oriented health care system, can only work if tax policy changes people’s behavior — and that’s just not how CBO views the world.

I’ve been very critical of both CBO and JCT, so I’m one of the people in “think tanks” the article is talking about.

P.S. Chuck Asay has a good cartoon mocking the CBO.

P.P.S. I’ll repeat, for the umpteenth time, that we want to recognize the insights of the Laffer Curve in order to facilitate lower tax rates, not because we want to maximize revenue for the government.

P.P.P.S. Dynamic scoring is a double-edged sword. If the statists control everything, they’ll use the process to justify more spending using discredited Keynesian economics.

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Time for some well-intentioned humor targeting our political masters.

These are the men and women who spend their time screwing us and wasting our money.

We already have some examples of what people in Montana, Louisiana, Nevada, and Wyoming think about big-spending politicians.

This little girl is more blunt.

And  here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke.

And let’s not forgot to include this joke by doctors about the crowd in Washington.

So with all that as warm-up material, here’s the latest political joke to reach my inbox.

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One morning a blind bunny was hopping down the bunny trail and tripped over a large snake and fell, ‘kerplop’, right on his twitchy little nose.

‘Oh please excuse me,’ said the bunny. ‘I didn’t mean to trip over you, but I’m blind and can’t see.’

‘That’s perfectly all right,’ replied the snake. ‘To be sure, it was my fault. I didn’t mean to trip you, but I’m blind too, and I didn’t see you coming. By the way, what kind of animal are you?’

‘Well, I really don’t know,’ said the bunny. ‘I’m blind, and I’ve never seen myself. Maybe you could examine me and find out.’

So the snake felt the bunny all over, and he said, ‘Well, you’re soft, and cuddly, and you have long silky ears, and a little fluffy tail and a dear twitchy little nose. You must be a bunny rabbit!’

The bunny said, ‘I can’t thank you enough. But by the way, what kind of animal are you?’

The snake replied that he didn’t know either, and the bunny agreed to examine him, and when the bunny was finished, the snake asked, ‘Well, what kind of an animal am I?’

The bunny had felt the snake all over, and he replied, ‘You’re cold, you’re slippery, and you haven’t got any balls…  You must be a POLITICIAN’.

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By the way, while I appreciate the spirit of this joke, I must protest on behalf of reptiles everywhere.

Adam and Harriet

Adam and Harriet

My kids have had snakes for a dozen-plus years and they actually make very good, low-maintenance pets.

Here is my youngest, back in 2001, with his cuddly pet named Harriet. Sadly, Harriet went to the great snake cage in the sky a couple of years ago, but she was always a hit with the neighbors.

P.S. You can read some good Dave Barry satire about politicians here and here.

P.P.S. Here’s another good joke, but remember that we should be thankful that we don’t get all the government we pay for.

P.P.P.S. And if you want humor specifically targeting Obama, you’ll enjoy this Pope message, this Pennsylvania joke, this Reagan-Obama comparison, this Bush-Obama comparison, this sign, this video satire, and this bumper sticker.

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Sometimes I myopically focus on fiscal policy, implying that the key to prosperity is small government.

But I’ll freely admit that growth is maximized when you have small government AND free markets.

That being said, our goal should be to expand freedom, not merely to have the largest possible GDP.

Which is why the Freedom Index is a good complement to Economic Freedom of the World.

It shows, for instance, that Singapore may be ranked #2 for economic freedom, but it is only #39 when you look at all freedoms.

We also have a comprehensive ranking of economic and personal freedom for the 50 states.

Here are the full rankings from the newly released Freedom in the 50 States from the Mercatus Center, showing North Dakota as the state with the most freedom, with South Dakota (#2), Tennessee (#3), New Hampshire (#4), and Oklahoma (#5) also deserving praise for high scores.

Mercatus State Freedom Ranking

What makes Freedom in the 50 States so interesting is that you can mix and match variables based on your own preferences.

I checked the “fiscal” and “tax burden” categories, and South Dakota (no state income tax!) jumped to #1 for both of those measures.

You won’t be surprised to learn that New York is the worst state, not only overall, but also for various fiscal policy measures.

Who would have guessed, by the way, that there’s a “bachelor party” category based on laws governing alcohol, marijuana, prostitution, and fireworks. Interesting, Massachusetts is ranked #1, though I suspect most guys will still opt for #3-ranked Nevada.

P.S. I must be learning. I grew up in New York, which is #50 in the rankings of freedom in the states, and then in Connecticut, which ranks only #40. But I went to college in Georgia, which is #9 in the rankings, and I now live in the Virginia, which is #8. But I somehow doubt that I’ll ever wind up in North Dakota.

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