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Archive for the ‘Economics’ Category

Some folks on the right in Washington, generally known as reformicons (short for reform conservatives), want the Republican Party to de-emphasize marginal tax rate reductions and instead focus on providing tax relief to parents.

There are many leaders in this movement and, if you want to learn more about the tax proposals being discussed, I specifically recommend the writings of Robert Stein, James Capretta, James Pethokoukis, Ramesh Ponnuru, Yuval Levin, Charles Blahous, Jason Fichtner, and Reihan Salam (and I’m sure I’m unintentionally leaving off many other worthy contributions).

I explained last year what I like (and don’t like) about reform conservatism, but I haven’t specifically analyzed the tax agenda of the reformicons.

Time to rectify that oversight. The Wall Street Journal was kind enough to give me some space so I could share my thoughts on this topic.

I start by outlining the debate, albeit in simplified form because of space constraints.

There’s a policy debate among conservatives in Washington about the best way to cut taxes and reform the tax code. The supply-siders want to replicate the success of Reaganomics with lower marginal tax rates. But there’s also a camp who call themselves “reform conservatives” who want income tax credits or payroll tax cuts explicitly for the purpose of reducing tax liabilities for middle-class parents. The supply-siders argue that if you want to encourage more work, saving, investment and entrepreneurship, then it is a good idea to reduce marginal tax rates on productive behavior. …Those in the other camp…don’t necessarily disagree with the supply-siders. They note that it was important to lower marginal tax rates in 1980 when the top personal tax rate was a confiscatory 70%. But now that the top rate is “only” about 40%, they argue, lower tax rates won’t deliver nearly as much bang for the buck.

The reformicons are right. Dropping the top tax rate from 40 percent will help the economy, but the pro-growth effect won’t be enormous. At least not compared to what happened during the Reagan years when the top tax rate was slashed from 70 percent to 28 percent.

And, as this leftist cartoon suggests, many Republicans act as if across-the-board tax rate reductions are an elixir for every ill.

But can reformicons suggest a better way of cutting and/or reforming taxes?

I’m not convinced that their agenda of child-oriented tax relief is the right answer.

In my column, I note that many of their policies have already been implemented, yet there’s little if any evidence that these tax cuts have generated positive outcomes.

…reform conservatives say it’s time for new ideas. That’s a nice concept, but Republicans already have enacted many of their proposed policies. The child tax credit was adopted in the 1990s and expanded during the Bush years. The earned income credit also funnels a lot of money (in the form of tax relief or cash payments) to families with children, and that provision also has been significantly expanded over the years. These policies have worked, at least in the sense that households with children now face lower tax liabilities. There is little evidence, though, to suggest positive economic or social outcomes. Were families strengthened? Did the economy grow faster? Did middle-income households feel more secure?

The reformicons often argue that their tax proposals are politically more appealing.

That may be true, but that doesn’t mean they are political winners, particularly if reformicons are trying to appease the class-warfare left, which will simply argue that tax cuts targeted at families making less than, say, $100,000 will be even “fairer” if they are targeted at families making less than $50,000.

Or maybe targeted at households who pay no tax, which means more transfer spending through the tax code!

The tax-credit reformers also argue that their proposals are much less susceptible to class-warfare demagoguery that is the supply-side approach, since tax relief flows to lower- and middle-income voters. …But here’s the downside: Conservatives can bend over backward to appease the class-warfare crowd, but they can never outflank them. …Once conservatives have accepted the left’s premise that tax policy should be based on static distribution tables, they won’t have a ready answer for the left’s gambit.

But as far as I’m concerned, the real issue is how to raise take-home pay.

The reformicons want to make families more secure by reducing how much the IRS takes from their paychecks.

I certainly like the idea of boosting post-tax income, but I contend that it would be even better to focus on policies that increase pre-tax income.

The most commonly cited reason for family-based tax relief is to raise take-home pay. That’s a noble goal, but it overlooks the fact that there are two ways to raise after-tax incomes. Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income. … long-run growth will average only 2.3% over the next 75 years. If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years. This is why the right kind of tax policy is so important.

In other words, our economy is under-performing and that is the greatest threat to the financial security of families.

Folks on the left say it is the fault of “secular stagnation” and that the burden of government should be further expanded, but both reformicons and supply-siders agree that we’ll get far better results by focusing on tax cuts.

But which tax cuts?

I end my column with some glass-half-full analysis. The reformicons may not be thrilled by lower income tax rates and the supply-siders may not be excited by child-oriented tax cuts, but both camps are quite sympathetic to tax reforms that address the punitive double taxation of income that is saved and invested.

While the camps disagree on lower individual income tax rates vs. child-oriented tax relief, both agree that the tax code’s bias against capital formation is very misguided. The logical compromise might be to focus on reforms that boost saving and investment, such as lowering the corporate tax rate, reducing the double taxation of dividends and capital gains, and allowing immediate expensing of business investment. These reforms would have strong supply-side effects. And since more saving and investment will lead to increased productivity, workers will enjoy higher wages, including households with children.

To be sure, some critics will say this type of tax agenda is too “business friendly,” which is an indirect way of saying that average voters may not understand how they benefit from tax reforms that don’t have a big and fast impact on their paychecks.

So maybe the right answer is to rip up the entire tax code and replace it with a simple and fair flat tax.

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What do cigarettes and capital gains have in common?

Well, they both start with the same letter, so maybe the Cookie Monster could incorporate them into his favorite song, but I’m thinking about something else. Specifically, both cigarettes and capital gains tell us something important about tax policy, the Laffer Curve, and the limits of political bullying.

In both cases, there are folks on the left who disapprove of these two “c” words and want to penalize them with high tax rates.

But it turns out that both cigarettes and capital gains are moving targets, so the politicians are grossly mistaken if they think that punitive taxation will generate a windfall of revenue.

I’ve already discussed why it’s senseless to impose high tax rates on capital gains. Simply stated, people can avoid the tax by not selling assets.

This might not be an ideal way of managing one’s investments, and it certainly isn’t good for the economy if it discourages new investment and prevents people from shifting existing investments into more productive uses, but it’s very effective as a strategy for individuals to protect against excessive taxation.

We see something quite similar with cigarettes. People can simply choose to buy fewer smokes.

Michel Kelly-Gagnon of Canada’s Montreal Economic Institute explains why higher tobacco taxes are not a guaranteed source of revenue for the political class.

Tax increases do not in each and every case lead to increases in government revenues. …When taxes on the consumption of a good are too high, you can get to a point where taxable consumption decreases and government revenues diminish rather than increase. Or at any rate, they don’t increase as much as what would be expected given the tax increase. This phenomenon constrains government’s ability to levy taxes. …There have been numerous examples in Canada of excessive taxes having a negative impact on government revenues. As shown by my colleagues Jean-François Minardi and Francis Pouliot in a study published last January ., there’s been three “Laffer moments” when it comes to tobacco tax revenues in Quebec since 1976. Whenever the level of taxation exceeded $15 per carton, the proceeds of the tobacco taxes eventually diminished. These are no isolated incidents. Laffer shows that the theory is confirmed by the experience of Cyprus, Denmark, Germany, Great Britain, Greece, Ireland, Latvia, Portugal, and Sweden.

Here’s a chart from his column showing how tax revenue has dropped in Quebec when the tax burden became too onerous.

Michel then acknowledges that some people will be happy about falling revenue because it presumably means fewer smokers.

But that’s not necessarily true.

While it is true that some people are deterred from smoking by tax increases, this is not the case of all smokers. Some avoid taxes by buying contraband cigarettes. Tax increases have no effect on the health of these smokers.

And because the tax burden is so severe, the underground economy for cigarettes is booming.

The folks at Michigan’s Mackinac Center have some remarkable and thorough estimates.

Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking. In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government. …We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives’ $5 billion estimate for 2009.

Here are the numbers for each state.

If all this evidence isn’t enough for you, I also encourage a look at the impact of higher tobacco taxes in Ireland, the United States, and Bulgaria and Romania.

Heck, even the city of Washington, DC, serves as a perverse role model on the foolishness of over-taxation.

P.S. Since this column focuses on the Laffer Curve and tobacco taxation, I would be remiss if I didn’t point out that Art Laffer recently put together a Handbook of Tobacco Taxation – Theory and Practice.

P.P.S. Art implies, at least indirectly, that policy makers should set the tax rate on tobacco at the revenue-maximizing level. That is far better than having the rate above the revenue-maximizing level, to be sure, but it rubs me the wrong way. I will repeat to my final day on earth that the growth-maximizing tax rate is far superior to the revenue-maximizing tax rate.

P.P.P.S. I’m currently in Australia for a series of speeches on fiscal policy. But as you can see from this photo, the PotL and I managed to find time to act like shameless tourists.

Tourists in Oz

P.P.P.P.S. Since I’m imitating Crocodile Dundee in the photo, I should close by noting that Paul Hogan (the actor who played Crocodile Dundee) has been harassed by the Australian tax police.

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I shared a chart back in February that shows how long it takes to double GDP based on different growth rates.

For instance, if the economy grows only 1 percent per year, it takes 70 years before the economy doubles. Think Italy or some other decrepit European welfare state.

But if the economy grows 4 percent annually, the economy doubles in less than 20 years. I’d point to Hong Kong and Singapore as examples, but they grow even faster.

The key point is that long-run growth is the key to a more prosperous society.

And that’s why the relatively weak growth of the Bush-Obama years is so troubling. Moreover, CNBC reports that some policy makers fret that the economy could be facing a period of prolonged stagnation.

Is there something seriously wrong with the economy? It’s a scary prospect, and a concern that’s gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of “secular stagnation.” And it’s a phrase that Fed watchers are likely to hear more and more in the months ahead. Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. …The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention… These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.

I agree and disagree.

I agree that something is wrong with the economy.

But I disagree with the Keynesian interpretation that the economy’s weakness is because of some mysterious malady that requires government intervention.

Indeed, the problems exist because politicians are doing too much. If we want faster growth and more jobs, we need government to get out of the way.

This Michael Ramirez cartoon is one way of thinking about the issue.

But if you want more substance, Larry Kudlow and Steve Moore have some very sound analysis, which has been reprinted at Townhall.com.

They start by looking at the present-day Keynesian view.

…today many leading economists are throwing up their arms in frustration and assuring us that 2 percent growth is really the best we can do. Barack Obama’s former chief economist Larry Summers began this chant of “secular stagnation.” It’s a pessimistic message, and it’s now being echoed by Federal Reserve vice chair, Stanley Fischer. He agrees with Summers that slow growth in “labor supply, capital investment, and productivity” is the new normal that’s “holding down growth.” …Americans seem to be buying into this dreary assessment. A new Wall Street Journal poll finds that three out of four Americans think the next generation will be worse off than this generation. So long, American Dream.

But the problem isn’t the economy. Or it wouldn’t be if it wasn’t for all the meddling.

Larry and Steve explain that the crowd in Washington deserves blame for the economy’s sub-par performance.

…secular stagnation is all wrong. It’s a cover up for mistaken economic policies that began in the Bush years and intensified during the Obama administration. It would be hard to conceive of a worse set of policy prescriptions than the ones Larry Summers and his Keynesian collaborators have conjured up. We’ve had bailouts, massive spending-stimulus plans, tax increases on “the rich,” Obamacare, rudderless monetary policy that has collapsed the dollar, the Dodd-Frank bill, anti-carbon policies, a vast expansion of the welfare state, and on and on. …The blame falls on the White House and the Fed, and the discredited Keynesian model that government spending, debt, and cheap money are the way to restore growth. …the architects of this colossal policy failure are the same people who promised they would rebuild the U.S. economy “for the long term,” as Barack Obama put it in 2009. But they’re now blaming the stagnant economy on structural problems beyond their control.

Amen.

Just look at the data from the Minneapolis Fed to see how weak the economy is today compared to previous business cycles.

Fortunately, it’s not that difficult to restore growth.

We learned in the 1960s and 1980s how fast the economy can get back on its feet when policy mistakes are reversed. …The secular-stagnation argument is just an excuse for liberal policy failures. Keynesianism should now be recognized as snake oil.

By the way, I’d add the 1990s to that list.

There were some good reasons to dislike President Clinton, but America enjoyed more economic freedom as a result of the policies implemented during his presidency.

As a fiscal policy wonk, I’m especially happy about the spending restraint of the Clinton years.

P.S. Here are some good cartoons about Obamanomics.

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With all the controversy over the failed and costly Obamacare program, it’s understandable that other entitlements aren’t getting much attention.

But that doesn’t mean there aren’t serious problems with Medicaid, Medicare, and Social Security.

Indeed, the annual Social Security Trustees Report was released a few days ago and the updated numbers for the government-run retirement program are rather sobering.

Thanks in part to sloppy journalism, many people only vaguely realize that Social Security is actuarially unsound.

In reality, the level of projected red ink is shocking. If you look at the report’s annual projections and then adjust them for inflation (so we get an idea of the size of the problem based on the value of today’s dollars), we can put together a very depressing chart.

How depressing is this chart? Well, cumulative deficits over the next 75 years will total an astounding $40 trillion. And keep in mind these are inflation-adjusted numbers. In nominal dollars, total red ink will be far more than $150 trillion.

That’s a lot of money even by Washington standards.

Just as worrisome, the trend is in the wrong direction. Last year, the cumulative inflation-adjusted shortfall was $36 trillion. The year before, the total amount of red ink was $30 trillion. And so on.

But regular readers know I’m not fixated on deficits and debt. I’m much more worried about the underlying problem of too much spending. So let’s look at the annual data showing how much payroll tax will be generated by Social Security and how much money will be paid out to beneficiaries.

As you can see, the problem is not inadequate tax revenue. Indeed, revenues will climb to record levels. The problem is that spending is projected to increase at an even faster rate.

Once again, don’t forget that these are inflation-adjusted numbers. In nominal dollars, the numbers are far bigger!

Why is the program becoming an ever-larger fiscal burden? The answer boils down to demographics. Simply stated, we will have more and more old people and fewer and fewer younger workers.

So if we do nothing, we’ll be Greece in 20 or 30 years.

That’s not a happy thought, so let’s close on a humorous note. Here’s a joke about how Social Security works, and you can enjoy some Social Security-themed cartoons here, here, and here.

P.S. I’m confident that few people will be surprised to learn that Obama’s supposed solution to this mess involves a huge tax increase.

P.P.S. The real solution is personal retirement accounts. I think Australia is the best role model, but Chile also is a big success.

P.P.S. The good news is that the American people are quite sympathetic to personal retirement accounts.

P.P.P.S. Statists try to scare people by claiming private investments are too risky, but one of my Cato colleagues showed that workers would be better off even if they retired after a stock market crash.

P.P.P.P.S. By the way, Social Security is a really bad deal for blacks and other minorities with lower-than-average life expectancies.

P.P.P.P.P.S. In the interests of fairness, I’ll admit the biggest weakness in the argument for personal accounts is that we might not be able to stop politicians from confiscating the money at some point in the future.

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I’m a long-time proponent of the flat tax for three simple reasons.

1. It replaces the discriminatory “progressive” tax with a single tax rate at the lowest possible level, thus reducing the tax penalty on productive behavior.

2. It gets rid of all forms of double taxation, such as the death tax and capital gains tax, meaning economic activity is never taxed more than one time.

3. Other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.

Some people say that these are also three reasons to favor a national sales tax.

My response is that they’re correct. In simple terms, a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point.

If you want more details, I often explain the two plans are different sides of the same coin. The only difference is that the flat tax takes of slice of your income as you earn it and the sales tax takes a slice of your income as you spend it. But neither plan has any double taxation of income that is saved and invested. And neither plan has loopholes to lure people into making economically irrational decisions.

Instead of class warfare and/or social engineering, both plans are designed to raise money is the least-damaging fashion possible.

So even though I’m mostly known for being an advocate of the flat tax, I have no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.

With this bit of background, you can understand why it caught my attention that an economics professor at the University of Georgia (Go Dawgs!) wrote a column for Forbes with the provocative title of “I Will Support The Fair Tax When Its Backers Tell The Truth”.

Professor Dorfman writes that “such a consumption tax has much to recommend it from an economic point of view” but then warns that he “cannot support the Fair Tax as long as its backers continue to make implausible claims for their proposed reform.”

So what are the implausible claims? Let’s check them out and see if his friendly criticism is warranted.

He first expresses skepticism about the claim that take-home pay will rise to the level of gross pay under a Fair Tax, particularly given the assertion that prices won’t rise.

…the odds are that your gross pay will shrink over time under the Fair Tax. …employers can offer workers lower pay because of the lower cost of living (same prices, but higher take home pay). Because workers evaluate pay offers based on the purchasing power of that pay, the same competitive forces that will lower prices after the removal of business taxes, will lead to lower pay for employees in the long run as the labor market adjusts.

I suspect Professor Dorfman’s critique is correct, but I don’t think it matters. Workers understandably care first and foremost about the purchasing power of their paycheck, and that won’t be negatively impacted.

The Professor than looks at whether the Fair Tax gets taxes the underground economy.

…let’s tackle the claim that the Fair tax will do a better job of collecting taxes on criminals, the underground economy, and those who underreport their income. The idea is that people may hide some of their income or that drug dealers and others in the underground economy do not report their income, but that everyone spends money so the Fair Tax will tax everyone. Unfortunately, this claim is not true… Retailers are just as capable of underreporting revenue and not sending in the corresponding Fair Tax as people are of underreporting their income. …The incentive to avoid such consumption taxes will only increase when the rate is four or five times what it is now. If you don’t believe consumption taxes suffer from collection problems, go ask Greece.

And he looks specifically at taxing criminal activity.

Another reason that the Fair Tax will not capture extra revenue from illegal activities is that it only switches which side of the transaction is missed by the tax system. Currently, while drug dealers may not report their income, the people who buy drugs are paying with after-tax income. Under the Fair Tax, the drug dealers will pay tax when they spend their drug profits. However, unless the drug dealer sends in the Fair Tax on their sales, the drug buyers will now avoid tax on their purchases. Under either tax system, one side of the underground transactions will be paying taxes and one will not.

I think Professor Dorfman is correct, particularly in his explanation that drug dealers and other criminals will not collect sales tax when they peddle their illicit goods.

And he’s also correct when he says that the Fair Tax won’t collect all taxes on legal products.

But that doesn’t mean the Fair Tax is somehow flawed. Indeed, it’s quite likely that the underground economy will shrink under a national sales tax since the incentive to evade tax (on legal products) is a function of the tax rate. So if we replace the punitive high-rate internal revenue code with a low-rate Fair Tax, there will be a higher level of compliance.

But not zero evasion, so Fair Tax supporters exaggerate if they make that claim.

The next point of contention is whether the IRS can be repealed under a Fair Tax.

…some agency needs to collect all the sales taxes, ensure retailers are sending in the full amount, and handle all the mechanics of the prebate. The prebate requires this federal agency to know everyone’s family size and have a bank account or other method of sending out the prebate each month. So while individuals will have less interaction with the federal tax agency, there will still be some. For retail businesses, their interactions with federal tax officials will be at least as much as now, if not more.

The Professor is right, though this may be a matter of semantics. Fair Tax people acknowledge there will be a tax collector (the legislation creates an incentive for states to be in charge of collecting the tax), but they say that the tax authority under their system will be completely different than the abusive IRS we have today.

Last but not least is the controversy over whether everyone benefits under a Fair Tax.

…while Fair Tax proponents often act like nobody loses under the Fair Tax that is simply not possible. If the Fair Tax is implemented in a revenue neutral manner (collecting the same amount of total revenue as all the taxes it replaces), and some people win then other people must lose. Poor people pay roughly no tax either way, so the Fair tax would be neutral for them. The very rich will assumedly pay less since they spend a lower percentage of their income and spend more overseas. Thus, the suspicion is that the middle class will be paying more. One other group pretty sure to pay more is the elderly. The elderly have paid income tax while earning income, and under the Fair Tax would suddenly pay high consumption taxes right when their income drops and their spending increases. In the long run, this is not a problem, but early in a Fair Tax regime, the elderly definitely are losers.

Once again, Professor Dorfman is making a good point (and others have made the same point about the flat tax).

My response, for what it’s worth, is that supporters of both the flat tax and national sales tax should not be bound by revenue neutrality. Especially if the revenue-estimating system is rigged to produce bad numbers. Instead, they should set the rate sufficiently low that the overwhelming majority of taxpayers are net winners.

And in the long run, everyone can be a net winner if the economy grows faster.

And that, as Professor Dorfman agrees, is the main reason for tax reform.

The Fair Tax really has much to recommend it. It is simpler than the current system. It causes fewer distortions in the daily economic decisions that people make. The main distortion it does introduce is positive: to encourage saving and discourage consumption which would make the country wealthier in the long run.

Though I would quibble with the wording of this last excerpt. I don’t think the Fair Tax creates a pro-savings distortion. Instead, it removes an anti-savings bias. Just like the flat tax.

Now let me add a friendly criticism that Professor Dorfman didn’t address.

Advocates of the Fair Tax correctly say that their proposal shouldn’t be implemented until and unless the income tax is fully repealed. But as I explain in this video, that may be an impossible undertaking.

To be blunt, I don’t trust politicians. I fear that they would gladly adopt some form of consumption tax while secretly scheming to keep the income tax.

P.S. Actually, what I really want is a very small federal government, which presumably could be financed without any broad-based tax. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed, so why concede that politicians today should have either a flat tax or Fair Tax? But that’s an issue for another day.

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Have you ever wondered why, in a hypothetical match-up, the American people would elect Ronald Reagan over Barack Obama in a landslide?

And have you ever wondered why Americans rate Reagan as the best post-WWII President and put Obama in last place?

There are probably a couple of reasons for these polling numbers, but I suspect one reason for the gap is that Reaganomics generated much better results than Obamanomics.

I’ve already made this point using data from the Minneapolis Federal Reserve Bank, but today we’re going to look at some updated information from Tom Blumer, who put together a strong indictment of Obama’s record for PJ Media.

He points out that both Reagan and Obama inherited very weak economies. But that’s where the similarity ends. Reagan pushed an agenda of free markets and small government while Obama doubled down on Bush’s statism.

The results, he explains, confirm that big government is the problem rather than solution.

Obama’s economic policy, with the help of a pliant Federal Reserve, has been built on the notion that massive deficit spending and easy money would bring the economy roaring back and “stimulate” job growth.  The former strategy was tried during the 1930s. It only succeeded in lengthening the Great Depression, as the nation’s unemployment rate never fell below 12 percent. The fact that Team Obama insisted on making the same mistakes, while at the same time unleashing the federal government’s regulatory apparatus to harass the economy’s productive participants, is enough to make reasonable people question whether this president and his administration have ever truly wanted to see a genuine recovery occur. On the other hand, five years of strong, solid and uninterrupted economic performance following a serious recession is how you create a positive economic legacy. Ronald Reagan’s post-recession economy — an economy which faced arguably greater challenges when he took office, particularly double-digit inflation and a prime interest rate of 20 percent — did just that.

Those are strong words, but I think the accompanying graphics are even more persuasive.

Here’s a chart comparing post-recession growth for both Presidents.

And here’s the data on jobs, including breakdown of private-sector employment gains.

And here are the numbers for median household income. Once again, Obama is presiding over dismal numbers, particularly when compared to the Gipper.

What’s especially ironic, as I explained back in March, is that rich people are the only ones who have experienced income gains during the Obama years.

So Obama claims that his class-warfare policy is designed to hurt the wealthy, but the rest of us are the ones actually paying the price.

Let’s look at one final chart.

These poverty numbers weren’t included in the article, but I think they’re worth sharing because you can see that both the poverty rate and the number of Americans in poverty fell once Reagan’s policies took effect in the early 1980s. Under Obama, by contrast, the best we can say is that the numbers aren’t getting worse.

One final point, I imagine that some leftists will argue that Mr. Blumer is being unfair by looking only at Reagan’s post-1982-recession numbers.

That’s a fair point…but only if you think that the recession was caused by Reagan’s policies. Like most economists, I disagree with that accusation. The recession almost certainly was an unavoidable consequences of inflationary monetary policy in the 1970s.

Indeed, Reagan deserves special praise for his willingness to endure short-term pain in order to address that problem and set the stage for future prosperity. Obama, by contrast, wants continued money printing by the Fed in hopes that easy money can cure problems caused by easy money.

As you might imagine, I’m skeptical about that approach.

P.S. Here’s some snarky humor comparing the Gipper with Obama. And if you liked the story of what happens when you try socialism in the classroom, you’ll also enjoy this video of Reagan schooling Obama.

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When major changes occur, especially if they’re bad, people generally will try to understand what happened so they can avoid similar bad events in the future.

This is why, when we’re looking at major economic events, it’s critical to realize that narratives matter.

For instance, generation after generation of American students were taught that the Great Depression was the fault of capitalism run amok. But we now have lots of evidence that bad government policy caused the Great Depression and that the downturn was made more severe and longer lasting thanks to further policy mistakes by Hoover and Roosevelt.

The history textbooks are probably still wrong, but at least there’s a chance that interested students (and non-students) will come across more accurate explanations of what happened in the 1930s.

More recently, the same thing happened after the financial crisis. The statists immediately tried to convince people that the 2008 mess was a consequence of “Wall Street greed” and “deregulation.”

Fortunately, many experts were available to point out that the real problem was bad government policy, specifically easy money from the Fed and the corrupt system of subsidies from Fannie Mae and Freddie Mac.

So hopefully future history books won’t be as wrong about the financial crisis as they were about the Great Depression.

I raise these examples because I want to address another historical inaccuracy.

Let’s go back about 100 years ago to the s0-called “progressive era.” The conventional story is that this was a period when politicians reined in some of the excesses of big business. And if it wasn’t for that beneficial government intervention, we’d all still be oppressed peasants working in sweatshops.

There’s just one small problem with this narrative. It’s utter nonsense.

Let’s look specifically at the issue of sweatshops. Writing for the Independent Institute, Ben Powell looks at the history of sweatshops and whether workers were being mistreated.

He starts with a bit of history.

Sweatshops are an important stage in the process of economic development. As Jeffery Sachs puts it, “[S]weatshops are the first rung on the ladder out of  extreme poverty”. …Working conditions have been harsh and standards of living low throughout most of human history. …Prior to the Industrial Revolution,  textile production was decentralized to the homes of many rural families or artisans, and output was limited to what could be produced on the  spinning wheel and hand loom. …Yarn spinning was mechanized in 1767 with the invention of the spinning jenny, and water power was harnessed shortly  thereafter. With these inventions and steam power later, large-scale textile factories that are similar to today’s sweatshops emerged. The conditions in these  early sweatshops were worse than those in many Third World sweatshops today. In some factories, workers toiled for sixteen hours a day, six days per week.

Then he looks at what actually happened in Great Britain, which is where sweatshops began.

Yet workers flocked to the mills. …sweatshop workers…were attracted by the opportunity to earn higher wages than they could elsewhere. In fact, economist Ludwig von Mises defended the factory system of the Industrial Revolution,…writing, “The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless more than these paupers could earn in any other field open to them.” …Mises’s argument is supported by historical evidence. Economist Joel Mokyr reports that workers earned a wage premium of 15 to 30 percent by working in the factories compared with other alternatives. The transformation of Great Britain during this time was dramatic. As economist and historian Donald McCloskey describes it, “In the 80 years or so after 1780 the population of Britain nearly tripled, the towns of Liverpool and Manchester became gigantic cities, the average income of the population more than doubled… Peter Lindert and Jeffery  Williamson similarly find impressive gains in the standard of living between 1781 and 1851. Farm labor’s standard of living went up more than 60 percent,  blue-collar workers’ standard increased more than 86 percent, and overall workers’ standard increased more than 140 percent. Along with this increase in  the standard of living came a decrease in the share of women and children working beginning sometime between 1815 and 1820.

Ben then looks at the American experience. Once again, he finds that sweatshops allowed workers to earn more income than they could by staying on the farm.

And this was part of a process that enabled the United States to become much richer over time.

…workers flocked to the mills. At first, in the cities north of Boston it was mainly rural women and girls who left the farm to populate the early textile mills.  During the 1830s in Lowell, a woman could earn $12 to $14 a month (in 1830s dollars) and after paying $5 for room and board in a company boarding house  would have the rest left over for clothing, leisure, and savings. It wasn’t uncommon for women to return home to the farm after a year with $25 to $50 in a  bank account. This was far more money than they could have earned on the farm and often more disposable cash than their fathers had. …much like in Great Britain, living standards improved over time. In 1820, before the Industrial Revolution, annual per capita income in the United States stood at a little  more than $2,000. By 1850, it had grown by 50 percent to more than $3,000 and then doubled again by 1900 to more than $6,600. Along with the rise in  incomes came improvements in working conditions and greater consumption.

Eventually, of course, the sweatshops disappeared. But Ben explains that it was because of higher living standards rather than government intervention.

Sweatshops are eliminated mainly through the process of industrialization that raises a country’s income. The increased income comes from increased  worker productivity, which raises the upper bound of compensation. The increased productivity isn’t just in one firm, but in many firms and industries, and  thus workers’ next-best alternatives improve, raising the lower bound of compensation. As the economy grows, the competitive process pushes wages up.  Because health, safety, leisure, and so on are normal goods, workers demand more of their compensation on these margins as their total compensation increases. The result is the eventual disappearance of sweatshops.

Now let’s look at the broader issue of whether the “progressive era” was bad news for big business.

The answer is yes and no. Politicians imposed lots of legislation that was bad for the free market, but the crony capitalists of that era were big supporters of intervention.

Tim Carney elaborates in a column for the Washington Examiner.

Every American knows the fable of the Progressive Era and that “trust buster” Teddy Roosevelt wielding the big stick of federal power to battle the greedy corporations. We would be better off if more people knew the work of the man who dismantled this myth: historian Gabriel Kolko… His thesis: “The dominant fact of American political life” in the Progressive Period “was that big business led the struggle for the federal regulation of the economy.”

Here’s what really happened.

Many corporate titans in the early 20th Century, buying into the pervasive hubris of the day, believed that a state-managed economy was the inevitable end of a rational society—the conclusion of what Standard Oil’s top lobbyist Samuel Dodd called the “march of civilization.” Competition, in their eyes, was destructive redundancy. “Competition is industrial war,” James Logan of the U.S. Envelope Company wrote in 1901. “Ignorant, unrestricted competition carried to its logical conclusion means death to some of the combatants and injury for all.”  Steel baron Andrew Carnegie constantly strove to turn the steel industry into a cartel and keep prices high. Competition, however, always had a way pulling prices down. As Carnegie wrote in 1908, “It always comes back to me that Government control, and that alone, will properly solve the problem.” Kolko also showed how the socialists welcomed corporate-state collusion to advance monopoly as part of “progress.”

And, as Tim explains, it’s still happening today.

This has its echoes in contemporary progressive politics… When conservatives challenged Obamacare’s individual mandate, the White House had the backing of the insurance industry and the hospital lobby. After Obama won at the Supreme Court, liberal Bill Scher wrote in the New York Times that progressive victories historically flow from the Left’s alliances with Big Business. …Liberal scholar William Galston at the Brookings Institution explains the economics at play. “Corporations have sizeable cash flows and access to credit markets, which gives them a cushion against adversity and added costs,” he wrote in 2013, explaining why the big guys often welcome regulation.

In other words, big business often is the enemy of genuine capitalism and free markets.

Not only did the big companies, including insurance and pharmaceuticals, support Obamacare.

They’re now supporting the corrupt Import-Export Bank.

And they’re perfectly happy to support higher taxes, at least when the rest of us are being victimized.

They also supported the sleazy TARP bailout.

The moral of the story is not just the big business can be just as bad as big labor. The real moral of the story is captured by this poster.

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