Feeds:
Posts
Comments

Archive for the ‘Fiscal Policy’ Category

The International Monetary Fund isn’t my least-favorite international bureaucracy. That special honor belongs to the Organization for Economic Cooperation and Development, largely because of its efforts to undermine tax competition and protect the interests of the political class (it also tried to have me arrested, but I don’t hold that against them).

But the IMF deserves its share of disdain. It’s the Doctor Kevorkian of global economic policy, regularly advocating higher taxes and easy money even though that’s never been a recipe for national prosperity.

And it turns out that the IMF also is schizophrenic. The international bureaucracy’s latest big idea, garnering an entire chapter in the October World Economic Outlook, is that governments should spend more on infrastructure.

Barack Obama’s former chief economist supports the IMF scheme. Here some of what he wrote for the Washington Post.

…the IMF advocates substantially increased public infrastructure investment, and not just in the United States but in much of the world. It further asserts that under circumstances of high unemployment, like those prevailing in much of the industrialized world, the stimulative impact will be greater if this investment is paid for by borrowing… Why does the IMF reach these conclusions? …the infrastructure investment actually makes it possible to reduce burdens on future generations. …the IMF finds that a dollar of investment increases output by nearly $3. …in a time of economic shortfall and inadequate public investment, there is a free lunch to be had — a way that government can strengthen the economy and its own financial position.

Wow, That’s a rather aggressive claim. Governments spend $1 and the economy grows by $3.

Is Summers being accurate? What does the IMF study actually say?

It makes two big points.

The first point, which is reflected in the Summers oped, is that infrastructure spending can boost growth.

The study finds that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity. In a sample of advanced economies, an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase… In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise… In other words, public infrastructure investment could pay for itself if done correctly.

But Summers neglected to give much attention to the caveats in the IMF study.

…the report cautions against just increasing infrastructure investment on any project. …The output effects are also bigger in countries with a high degree of public investment efficiency, where additional public investment spending is not wasted and is allocated to projects with high rates of return. …a key priority in economies with relatively low efficiency of public investment should be to raise the quality of infrastructure investment by improving the public investment process through, among others, better project appraisal, selection, execution, and rigorous cost-benefit analysis.

Perhaps the most important caveat, though, is that the study uses a “novel empirical strategy” to generate its results. That should raise a few alarm bells.

So is this why the IMF is schizophrenic?

Nope. Not even close.

If you want evidence of IMF schizophrenia, compare what you read above with the results from a study released by the IMF in August.

And this study focused on low-income countries, where you might expect to find the best results when looking at the impact of infrastructure spending.

So what did the author find?

On average the evidence shows only a weak positive association between investment spending and growth and only in the same year, as lagged impacts are not significant. Furthermore, there is little evidence of long term positive impacts. …The fact that the positive association is largely instantaneous argues for the importance of either reverse causality, as capital spending tends to be cut in slumps and increased in booms… In fact a slump in growth rather than a boom has followed many public capital drives of the past. Case studies indicate that public investment drives tend eventually to be financed by borrowing and have been plagued by poor analytics at the time investment projects were chosen, incentive problems and interest-group-infested investment choices. These observations suggest that the current public investment drives will be more likely to succeed if governments do not behave as in the past.

Wow. Not only is the short-run effect a mirage based on causality, but the long-run impact is negative.

But the real clincher is the conclusion that “public investment” is productive only “if governments do not behave as in the past.”

In other words, we have to assume that politicians, interest groups, and bureaucrats will suddenly stop acting like politicians, interest groups, and bureaucrats.

Yeah, good luck with that.

But it’s not just a cranky libertarian like me who thinks it is foolish to expect good behavior from government.

Charles Lane, an editorial writer who focuses on economic issues for the left-leaning Washington Post, is similarly skeptical.

Writing about the IMF’s October pro-infrastructure study, he thinks it relies on sketchy assumptions.

The story is told of three professors — a chemist, a physicist and an economist — who find themselves shipwrecked with a large supply of canned food but no way to open the cans. The chemist proposes a solvent made from native plant oils. The physicist suggests climbing a tree to just the right height, then dropping the cans on some rocks below. “Guys, you’re making this too hard,” the economist interjects. “Assume we have a can opener.” Keep that old chestnut in mind as you evaluate the International Monetary Fund’s latest recommendation… A careful reading of the IMF report, however, reveals that this happy scenario hinges on at least two big “ifs.”

The first “if” deals with the Keynesian argument that government spending “stimulates” growth, which I don’t think merits serious consideration.

But feel free to click here, here, here, and here if you want to learn more about that issues.

So let’s instead focus on the second “if.”

The second, and more crucial, “if” is the IMF report’s acknowledgment that stimulative effects of infrastructure investment vary according to the efficiency with which borrowed dollars are spent: “If the efficiency of the public investment process is relatively low — so that project selection and execution are poor and only a fraction of the amount invested is converted into productive public capital stock — increased public investment leads to more limited long-term output gains.” That’s a huge caveat. Long-term costs and benefits of major infrastructure projects are devilishly difficult to measure precisely and always have been. …Today we have “bridges to nowhere,” as well as major projects plagued by cost overruns and delays all over the world — and not necessarily in places you think of as corrupt. Germany’s still unfinished Berlin Brandenburg airport is five years behind schedule and billions of dollars over budget, to name one example. Bent Flyvbjerg of Oxford’s Said Business School studied 258 major projects in 20 nations over 70 years and found average cost overruns of 44.7 percent for rail, 33.8 percent for bridges and tunnels and 20.4 percent for roads.

Amen. Governments are notorious for cost overruns and boondoggle spending.

It happens in the United States and it happens overseas.

It’s an inherent part of government, as Lane acknowledges.

In short, an essential condition for the IMF concept’s success — optimally efficient investment — is both difficult to define and, to the extent it can be defined, highly unrealistic. As Flyvbjerg explains, cost overruns and delays are normal, not exceptional, because of perverse incentives — specifically, project promoters have an interest in overstating benefits and understating risks. The better they can make the project look on paper, the more likely their plans are to get approved; yet, once approved, economic and logistical realities kick in, and costs start to mount. Flyvbjerg calls this tendency “survival of the unfittest.” …Governments that invest in infrastructure on the assumption it will pay for itself may find out that they’ve gone a bridge too far.

Or bridge to nowhere, for those who remember the infamous GOP earmark from last decade that would have spent millions of dollars to connect a sparsely inhabited Alaska island with the mainland – even though it already had a very satisfactory ferry service.

Let’s close with two observations.

First, why did the IMF flip-flop in such a short period of time? It does seem bizarre for a bureaucracy to publish an anti-infrastructure spending study in August and then put out a pro-infrastructure spending study two months later.

I don’t know the inside story on this schizophrenic behavior, but I assume that the August study was the result of a long-standing research project by one of the IMF’s professional economists (the IMF publishes dozens of such studies every year). By contrast, I’m guessing the October study was pushed by the political bosses at the IMF, who in turn were responding to pressure from member governments that wanted some sort of justification for more boondoggle spending.

In other words, the first study was apolitical and the second study wasn’t.

Not that this is unusual. I suspect many of the economists working at international bureaucracies are very competent. So when they’re allowed to do honest research, they produce results that pour cold water on big government. Indeed, that even happens at the OECD.

But when the political appointees get involved, they put their thumbs on the scale in order to generate results that will please the governments that underwrite their budgets.

My second observation is that there’s nothing necessarily wrong with the IMF’s theoretical assertions in the August study. Infrastructure spending can be useful and productive.

It’s an empirical question to decide whether a new road will be a net plus or a net minus. Or a new airport runway. Or subway system. Or port facilities.

My view, for what it’s worth, is that we’re far more likely to get the right answers to these empirical questions if infrastructure spending is handled by state and local governments. Or even the private sector.

Read Full Post »

Europe is in deep trouble.

That’s an oversimplification, of course, since there are a handful of nations that seem to be moving in the right direction (or at least not moving rapidly in the wrong direction).

But notwithstanding those exceptions, Europe in general is suffering from economic stagnation caused by a bloated public sector. Barring dramatic change, another fiscal crisis is a virtual certainty.

A key problem is that Europe’s politicians suffer from fiscal incontinency. They can’t resist spending other people’s money, regardless of all the evidence that excessive government spending is suffocating the productive sector of the economy.

Yet some of them cling to the discredited Keynesian notion that government spending “stimulates” economic performance. Writing for the Wall Street Journal, Brian Wesbury explains why European politicians are wrong.

We need less government, not more, and yet governments are engaged in deficit spending like they did in the 1970s. It didn’t work then to boost growth, and it isn’t working now. Euro area government spending was 49.8% of GDP in 2013 versus 46.7% in 2006. In other words, euro area governments have co-opted an additional 3.1% of GDP (roughly €300 billion) compared with before the crisis—about the size of the Austrian economy. France spent 57.1% of GDP in 2013 versus 56.7% in 2009, at the peak of the crisis. This is the opposite of austerity—but the French economy hasn’t grown in more than six months. It is no wonder S&P downgraded its debt rating. Italy, at 50.6% of GDP, is spending more than the euro area average but is contracting faster.

Brian isn’t the first person to make this observation.

Constantin Gurdgiev, Fredrik Erixon, and Leonid Bershidsky also have pointed out the ever-increasing burden of government in Europe.

And I can’t count how many times I’ve also explained that Europe’s problem is too much government.

The problem with all this government spending, as Brian points out, is that politicians don’t allocate resources very intelligently. So the net result is that labor and capital are misallocated and we get less economic output.

Every economy can be divided into two parts: private and public sectors. The larger the slice taken by the government, the smaller the slice left over for the private sector, which means fewer jobs and a lower standard of living. If government were more productive than private business this wouldn’t be true, but government is not.

Let’s be thankful, by the way, that the United States isn’t as far down the wrong road as Europe.

And this is why America’s economy is doing better.

The U.S. is growing faster than Europe not because…our government is relatively smaller. Federal, state and local expenditures in the U.S. were 36.5% of GDP in 2013. This is too high, but because it is less than Europe, the U.S. has a larger and more vibrant private sector.

Ironically, even President Obama agrees that the U.S. economy is superior, though he (predictably) is incapable of putting 2 and 2 together and reaching the right conclusion.

My Cato colleague Steve Hanke (using the correct definition of austerity) also has weighed in on the topic of European fiscal policy.

Here’s some of what he wrote for the Huffington Post.

The leading political lights in Europe — Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. …But, with Greece’s public expenditures at 58.5 percent of GDP, and Italy’s and France’s at 50.6 percent and 57.1 percent of GDP, respectively — one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding.

Here’s Professor Hanke’s table. As you can see, the burden of government spending is far above growth-maximizing levels.

That’s a very depressing table, particularly when you realize that government used to be very small in Europe. Indeed, the welfare state basically didn’t exist prior to World War II.

P.S. Shifting to another issue, it’s not exactly a secret that I have little respect for politicians.

But some of our “leaders” are worse than others. Maryland’s outgoing governor is largely known for making his state inhospitable for investors, entrepreneurs, and small business owners.

Notwithstanding his miserable record, he thinks of himself as a potential presidential candidate. And one of his ideas is that wireless access to the Internet is a human right.

I’m not joking. Here’s what Charles Cooke wrote for National Review.

Maryland’s governor Martin O’Malley — a man so lacking in redeeming qualities that a majority in his own state hopes he doesn’t run for president – is attempting to carve out a new constituency: young people with no understanding of political philosophy. …“WiFi is a human right”? Hey, why not? Sure, Anglo-American societies have traditionally regarded “rights” as checks on the power of the state. But if we’re going to invert the most successful philosophy in American history to appease a few terminally stupid millennials in Starbucks, let’s think big

This definitely belongs in my great-moments-in-human-rights collection.

Here are previous winners of that booby prize.

Read Full Post »

I’ve had ample reason to praise Hong Kong’s economic policy.

Most recently, it was ranked (once again) as the world’s freest economy.

And I’ve shown that this makes a difference by comparing Hong Kong’s economic performance to the comparatively lackluster (or weak) performance of economies in the United States, Argentina, and France.

But perhaps the most encouraging thing about Hong Kong is that the nation’s top officials genuinely seem to understand the importance of small government.

Here are some excerpts from a recent speech delivered by Hong Kong’s Financial Secretary. He brags about small government and low tax rates!

Hong Kong has a simple tax system built on low tax rates. Our maximum salaries tax rate is 15 per cent and the profits tax rate a flat 16.5 per cent. Few companies and individuals would find it worth the risk to evade taxes at this low level. And that helps keep our compliance and enforcement costs low. Keeping our government small is at the heart of our fiscal principles. Leaving most of the community’s income and wealth in the hands of individuals and businesses gives the private sector greater flexibility and efficiency in making investment decisions and optimises the returns for the community. This helps to foster a business environment conducive to growth and competitiveness. It also encourages productivity and labour participation. Our annual recurrent government expenditure has remained steady over the past five years, at 13 per cent of GDP. …we have not responded irresponsibly to…populist calls by introducing social policies that increase government spending disproportionally. …The fact that our total government expenditure on social welfare has remained at less than 3 per cent of our GDP over the past five years speaks volumes about the precision, as well as the effectiveness, of these measures.

And he specifically mentions the importance of controlling the growth of government, which is the core message of Mitchell’s Golden Rule.

Our commitment to small government demands strong fiscal discipline….It is my responsibility to keep expenditure growth commensurate with growth in our GDP.

Is that just empty rhetoric?

Hardly. Here’s Article 107 from the Basic Law, which is “the constitutional document” for Hong Kong

The most important part of Article 107, needless to say, is that part of keeping budgetary growth “commensurate with the growth rate of its gross domestic product.”

The folks in Hong Kong don’t want to wind up like Europe.

Last year, I set up a Working Group on Long-term Fiscal Planning to conduct a fiscal sustainability health check. We did it because we are keenly aware of Hong Kong’s low fertility rate and ageing population, not unlike many advanced economies. And that can pose challenges to public finance in the longer term. A series of expenditure-control measures, including a 2 per cent efficiency enhancement over the next three financial years, has been rolled out.

And, speaking of Europe, he says the statist governments from that continent should clean up their own messes before criticizing Hong Kong for being responsible.

I would hope that some of those governments in Europe, those that have accused Hong Kong of being a tax haven, would look at the way they conduct their own fiscal policies. I believe they could learn a lesson from us about the virtues of small government.

Just in case you think this speech is somehow an anomaly, let’s now look at some slides from a separate presentation by different Hong Kong officials.

Here’s one that warmed my heart. The Hong Kong official is bragging about the low-tax regime, which features a flat tax of 15 percent!

But what’s even more impressive is that Hong Kong has a very small burden of government spending.

And government officials brag about small government.

By the way, you’ll also notice that there’s virtually no red ink in Hong Kong, largely because the government focuses on controlling the disease of excessive spending.

Why is government small?

In large part, as you see from the next slide, because there is almost no redistribution spending.

Indeed, officials actually brag that fewer and fewer people are riding in the wagon of dependency.

Can you imagine American lawmakers with this kind of good sense?

None of this means that Hong Kong doesn’t have any challenges.

There are protests about a lack of democracy. There’s an aging population. And there’s the uncertainty of China.

But at least for now, Hong Kong is a tribute to the success of free markets and small government.

Read Full Post »

Back in 2010, I shared some wise words from Walter Williams and Theodore Dalrymple about how society can become unstable when people figure they can “vote themselves money.”

On a related note, I shared the famous “riding in the wagon” cartoons in 2011 and the “Danish party boat” image in 2014. Both of these posts highlighted the danger that exists when societies reach a tipping point, which occurs when too many people vote themselves into dependency and expect (and vote) for never-ending handouts.

Indeed, this is why I’m very pessimistic about the future of welfare states such as Greece.

And, depending what happens in an upcoming run-off election, I probably won’t be very optimistic about Brazil.

Investor’s Business Daily has shared some fascinating – and disturbing – data from that country’s recent election.

A Brazilian economist has shown a near-exact correlation between last Sunday’s presidential election voting choices and each state’s welfare ratios. Sure enough, handouts are the lifeblood of the left. …Neves won 34% of the vote, Rousseff took 42% and green party candidate Marina Silva took about 20% — and on Thursday, Silva endorsed Neves, making it a contest of free-market ideas vs. big-government statism. But what’s even more telling is an old story — shown in an infographic by popular Brazilian economist Ricardo Amorim. …Amorim showed a near-exact correlation among Brazil’s states’ welfare dependency and their votes for leftist Workers Party incumbent Rousseff. Virtually every state that went for Rousseff has at least 25% of the population dependent on Brazil’s Bolsa Familia welfare program of cash for single mothers… States with less than 25% of the population on Bolsa Familia overwhelmingly went for Neves and his policies of growth. …Fact is, the left cannot survive without a vast class of dependents. And once in, dependents have difficulty getting out.So Brazil’s election may come down to a question of whether it wants to be a an economic powerhouse — or a handout republic.

Here’s the map from IBD showing the close link between votes for the left-wing candidate and the extent of welfare dependency.

It’s not a 100 percent overlap, but the relationship is very strong.

Sort of like the maps I shared on language and voting in Ukraine.

That being said, I’m a policy wonk who wants economic liberty, not a political hack with partisan motives. So let’s look at the implications of growing dependency.

As IBD explains, the greatest risk is that people get trapped in dependency. We see that in advanced nations like the United States and United Kingdom (and the Nordic nations) so is it any surprise that it’s also a problem in a developing country like Brazil (or South Africa)?

Problem is, “some experts warn that a wide majority cannot get out of this dependence relationship with the government,” as the U.K. Guardian put it. And whether it’s best for a country that aspires to become a global economic powerhouse to have a quarter of the population — 50 million people — dependent on welfare and producing nothing is questionable.

I especially appreciate the last part of this excerpt. Economic output is a function of how capital and labor are productively utilized.

In other words, a welfare state imposes a human cost and an economic cost.

Now let’s consider possible implications for the United States. A few years ago, I put together a “Moocher Index” to show which states had the highest percentage of non-poor households receiving some form of redistribution.

Do the moocher states vote for leftists? Well, it we use the 2012 presidential election as a guidepost, 7 of the top 10 moocher states voted for Obama.  That suggests that there is a relationship.

But if you look at the states with the lowest levels of dependency, they were evenly split, with 5 for Obama and 5 for Romney. So perhaps there aren’t any big lessons for America, though Obama’s margins in Ohio, Florida, Virginia, Colorado, and Nevada were relatively small.

For what it’s worth, I’m far more worried about these economic numbers, not the aforementioned political numbers.

P.S. I probably shouldn’t assume that a leftist victory automatically means more statism in Brazil. After all, keep in mind that we got more economic freedom during the Clinton years and bigger government during the Bush years. Moreover, it was a left-leaning Brazilian president who had the wisdom to acknowledge that you can’t redistribute unless someone first produces.

P.P.S. At least one honest leftist admits there is a heavy cost to government dependency.

P.P.P.S. If you live in a nation that already has passed the tipping point of too much dependency and you want to live more freely, you can always escape. As reported by the U.K.-based Independent.

Up to 2.5 million French people now live abroad, and more are bidding “au revoir” each year. …the “lifeblood” of France are leaving because of “the impression that it’s impossible to succeed”… There is “an anti-work mentality, absurd fiscal pressure, a lack of promotion prospects, and the burden of debt hanging over future generations,” he told Le Figaro. …while the figure of 2.5 million expatriates is “not enormous”, what is more troubling is the increase of about 2 per cent each year. “Young people feel stuck, and they want interesting jobs. Businessmen say the labour code is complex and they’re taxed even before they start working. Pensioners can also pay less tax abroad,” she says. France’s unemployment rate is hovering around 10 per cent. As for high-earners, almost 600 people subject to a wealth tax on assets of more than €800,000 (£630,000) left France in 2012, 20 per cent more than the previous year.

The good news is that some people escape. The bad news is that the political environment becomes even worse for those remaining.

P.P.P.P.S. And don’t forget that the Obama campaign celebrated dependency during the 2012 campaign.

Read Full Post »

I’m not a big fan of international bureaucracies.

Regular readers know that the Organization for Economic Cooperation and Development is the worst institution from my perspective, followed by the International Monetary Fund.

Some folks ask why the United Nations isn’t higher on the list?

My answer is simple. The UN has a very statist orientation and it routinely advocates bad policy, but it is too incompetent to do much damage.

The OECD and IMF, by contrast, have some capacity to undermine global growth by encouraging more statism.

That being said, the UN occasionally does something that is so obnoxious that I can’t resist commenting. Especially since my tax dollars pay a big share of that bureaucracy’s bloated budget.

What has me irked is that the United Nations Conference on Trade and Development just released its annual Trade and Development Report.

You would think an institution that focuses on trade and development would be advocating free markets and small government.

But UNCTAD takes the opposite approach.

Here’s how the bureaucrats frame the issue in the report. Keep in mind that “market liberalism” is their term for free markets (in other words, classical liberalism).

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago. …the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. …the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

But not only does UNCTAD utilize class-warfare rhetoric, they also try to support their ideological agenda with historical illiteracy.

I’ve pointed out that the western world became rich when government was very small and markets were liberated.

But the statists at the UN want us to think that big government deserves the credit.

None of today’s developed countries depended on market forces for their structural transformation and its attendant higher levels of employment, productivity and per capita incomes. Rather, they adopted country-specific measures to manage those forces, harnessing their creative side to build productive capacities and provide opportunities for dynamic firms and entrepreneurs, while guiding them in a more socially desired direction. They also used different forms of government action to mitigate the destructive tendencies of those same market forces. This approach of managing the market, not idolizing it, was repeated by the most rapidly growing emerging market economies − from the small social democratic economies of Northern Europe to the giant economies of East Asia − in the decades following the end of the Second World War.

Wow. They even want us to think big government deserves the credit for prosperity in Hong Kong and Singapore.

So you know the bureaucrats are either very stupid or very dishonest. I suspect the latter, but it doesn’t matter. All we need to know is that they are willing to make very preposterous claims to advance their agenda.

And what is their agenda? Well, a major theme is that politicians in developing nations need “policy space” to enable bigger government.

For instance, UNCTAD doesn’t like free trade but does like industrial policy (aka, crony capitalism).

Policy space is…reduced by free trade agreements… Along with the proliferation of trade agreements and their expansion into trade-related areas, there has been a global revival of interest in industrial policy.

But a big focus of the report is that tax competition is a threat to the “policy space” of politicians.

Fiscal space goes hand in hand with policy space. …strengthening government revenues is key. …This…allows for higher growth-enhancing public spending… The need for reclaiming and expanding fiscal space faces particular challenges in an increasingly globalizing economy. …A major problem is that globalization has affected the ability of governments to mobilize domestic revenues. …the increased mobility of capital and its greater use of fiscal havens have considerably altered the conditions for taxing income − both personal and corporate − and wealth. The dominant agenda of market liberalism has led to a globalized economy that encourages tax competition among countries, at times pushing them to a “race to the bottom”.

Gasp, how horrible! Politicians don’t have as much “policy space” to impose punitive taxes.

That’s the best advertisement for tax competition I’ve ever read, even if it is unintentional.

So what do the UN bureaucrats want to solve this supposed problem? Simple, just destroy financial privacy and fiscal sovereignty so that politicians have carte blanche to expand taxes.

…a number of developments aimed at improving transparency and exchange of information for tax purposes have taken place. They include a declaration by G20 leaders to promote information sharing… an OECD Action Plan on base erosion and Profit Shifting (BEPS), increased monitoring by several national tax authorities…and numerous bilateral tax treaties (BTTs) and tax information exchange agreements (TIEAs). …these initiatives are steps in the right direction.

With BEPS, indiscriminate information sharing, and more power for national tax police, UNCTAD has put together a trifecta of bad policies.

And to add insult to injury, all the bureaucrats at the UN get tax-free salaries while they concoct schemes to enable higher taxes on the rest of us.

Geesh, no wonder I sometimes have perverse fantasies about them.

And I’m very grateful that Senator Rand Paul is leading the fight against their evil ideas.

P.S. On a more pleasant topic, the “Beltway Bandits” just played in the softball world series in Las Vegas. We competed in the 55+ grouping and finished with three wins and two losses.

Not bad, but not good enough to win any trophies. But we got to play in replica Major League stadiums, which was a fun experience.

I can now say I’ve hit home runs in Dodger Stadium and Wrigley Field, and also doubled off the Green Monster at Fenway. Sounds impressive so long as nobody asks any follow-up questions!

IMAG0135

P.P.S. Here’s something else that I found amusing.

Bill Clinton not only understands the inversion issue, but he’s also willing to publicly explain why Obama is wrong.

During an interview with CNBC on Tuesday, former President Bill Clinton called to cut corporate taxes and give companies a break on money stashed overseas, dinging President Barack Obama’s latest effort to combat corporate tax-dodging. When asked what should be done about corporate inversion transactions, Clinton responded with a host of GOP talking points about the tax burden on big business. “America has to face the fact that we have not reformed our corporate tax laws,” Clinton told CNBC, according to a transcript. “We have the highest overall corporate tax rates in the world. And we are now the only OECD country that also taxes overseas earnings on the difference between what the companies pay overseas and what they pay in America.”

But I guess we shouldn’t be surprised. This isn’t the first time he’s had sensible things to say on the issue of corporate taxation.

Read Full Post »

My colleagues Chris Edwards and Nicole Kaeding have just released the biennual Fiscal Policy Report Card on America’s Governors from the Cato Institute.

The Report Card is one of the Cato Institute’s most impressive publications since developments on the state level help illustrate the relationship between good fiscal policy and economic performance.

The top scores were earned by Pat McCrory of North Carolina and Sam Brownback of Kansas. Both have taken steps to significantly reduce marginal tax rates and restrain the burden of state government spending in their states.

Here are all the scores. Paul LePage of Maine and Mike Pence of Indiana also earned high marks, while the governors of Minnesota, Oregon, Delaware, Washington, Illinois, Massachusetts, Colorado, and Calfornia all received failing grades.

Here some of what Chris and Nicole wrote for National Review about the results of their research .

Let’s start with the good news.

Pat McCrory of North Carolina signed a bill replacing individual-income-tax rates of 6.0, 7.0, and 7.75 percent with a single rate of 5.75 percent. He also cut the corporate-tax rate from 6.9 to 5.0 percent and repealed the estate tax. Sam Brownback of Kansas approved a plan in 2012 replacing three individual-income-tax rates with two and cutting the top rate from 6.45 to 4.9 percent. The reform also increased the standard deduction and reduced taxes on small businesses. Brownback cut income-tax rates further in 2013.

Now for the not-so-good news.

…all eight governors earning an “F” were Democrats. …Jerry Brown of California and Pat Quinn of Illinois, for example, earned “F” grades for their large tax hikes.

If you look at the data on state spending, Governor Brownback of Kansas and Governor Bentley of Alabama both got high scores of 85, largely because per-capita spending fell during their tenure.

Governor Kasich of Ohio did the worst job on spending (why am I not surprised), getting a low score of 16 (Governor Abercrombie of Hawaii and Governor Hickenlooper of Colorado were the next lowest, both “earning” a score of 22).

Interestingly, the left is very anxious to undermine the achievements of America’s best governors.

I’ve previously defended the pro-growth reforms to unemployment insurance adopted by Governor McCrory of North Carolina.

And now let me take this opportunity to defend Governor Brownback of Kansas.

The New York Times is desperately hoping he loses his reelection bid since that might dissuade other state policy makers from enacting good reforms.

Mr. Brownback’s proudly conservative policies have turned out to be so divisive and his tax cuts have generated such a drop in state revenue that they have caused even many Republicans to revolt. …it is unsurprising that many Kansas Republicans have turned on Mr. Brownback. This is a state that once had a tradition of centrist Republicans, like former Senator Bob Dole… More than 100 current and former Republican elected officials have endorsed Mr. Davis.

The Wall Street Journal, however, points out that the anti-Brownback GOPers are largely sore losers.

…many of the “Republicans” on the list are in fact independents who long ago defected from the GOP. …six state Senators whom tea-party groups ousted in 2012 for obstructing tax and government reforms are supporting Mr. Davis.

What really matters, though, is that Governor Brownback’s reforms are designed to rejuvenate a state economy that has lagged its neighbors.

Here are some details from another WSJ editorial.

By liberal accounts Kansas is experiencing a major fiscal and economic meltdown like well, you know, Illinois. …But some early economic indicators suggest they may be producing modest positive effects. The danger is that a coalition of Democrats and big-spending Republicans will pull out the rug before the benefits fully materialize.

What are those benefits?

Well, it’s still early, but the preliminary results are positive.

Kansas has long trailed its neighbors in private job and economic growth. …All of Kansas’s surrounding states save Nebraska had lower top tax rates, and most also had lower unemployment. …Since the tax cuts took effect, the gap in job creation between Kansas and neighboring states has shrunk. Kansas’s rate of private job growth between January 2013 and June 2014 averaged 167% of that in Nebraska, 105% of Iowa and 61% in Oklahoma. That compares to 61%, 85% and 42%, respectively, between 2004 and 2012. While Kansas added jobs at a slower pace than Missouri this year, its private economy grew more than twice as fast as its eastern neighbor last year.

Statists are grousing about lower-than-expected revenues, but their command of the facts leaves something to be desired.

Tax-reform critics complain that revenues (as expected) declined this year and that receipts were $235 million—or about 4%—below the state’s estimate last year. However, predicting revenues was particularly challenging this year because federal tax changes encouraged investors to shift income to 2012 from 2013. Revenues missed the mark in numerous states including Iowa ($185 million; 3%), Missouri ($308 million; 4%) and Oklahoma ($283 million; 5%).

And here’s some analysis from Reason.

While The New York Times denounces as “ruinous” the Kansas tax cut, it is sitting in a state, New York, with a top rate of 8.82 percent. If all the government spending paid for by those high taxes were the panacea that the Times claims it is, you might expect New York to have a lower unemployment than Kansas. But check the numbers, and Kansas’s seasonally adjusted unemployment rate for June was a low 4.9 percent, while New York’s was 6.6 percent. “Ruinous,” indeed.

Given the high stakes, it will be very interesting to see whether Brownback is reelected next month.

Same with Scott Walker of Wisconsin (who, by the way, earned a B), who got national attention for his efforts to rein in the privileged position of state bureaucrats and Pat Quinn of Illinois (who got an F), who attracted a lot of attention for his destructive tax hikes.

Read Full Post »

What’s the relationship between the Rahn Curve and the Laffer Curve?

For the uninitiated, the Rahn Curve is the common-sense notion that some government is helpful for prosperous markets but too much government is harmful to economic performance.

Even libertarians, for instance, will acknowledge that spending on core “public goods” such as police protection and courts (assuming, of course, low levels of corruption) can enable the smooth functioning of markets.

Some even argue that government spending on human capital and physical capital can facilitate economic activity. For what it’s worth, I think that the government’s track record in those areas leaves a lot to be desired, so I’d prefer to give the private sector a greater role in areas such as education and highways.

The big problem, though, is that most government spending is for programs that are often categorized as “transfers” and “consumption.” And these are outlays that clearly are associated with weaker economic performance.

This is why small-government economies such as Hong Kong and Singapore tend to grow faster than the medium-government economies such as the United States and Australia. And it also explains why growth is even slower is big-government economies such as France and Italy.

The Laffer Curve, for those who don’t remember, is the common-sense depiction of the relationship between tax rates and tax revenue.

The essential insight is that taxable income is not fixed (regardless of the Joint Committee on Taxation’s flawed methodology).

When tax rates are low, people will earn and report lots of income, but when tax rates are high, taxpayers figure out ways of reducing the amount of taxable income they earn and report to government.

This is why, for instance, the rich paid much more to the IRS after Reagan lower the top tax rate from 70 percent to 28 percent.

So why am I giving a refresher course on the Rahn Curve and Laffer Curve?

Because I’ve been asked on many occasions whether there is a relationship between the two concepts and I’ve never had a good answer.

But I’m happy to call attention to the good work of other folks, so here’s a very well done depiction of the relationship between the two curves (though in this case the Rahn Curve is called the Armey Curve).

I should hasten to add, by the way, that I don’t agree with the specific numbers.

I think the revenue-maximizing rate is well below 45 percent and I think the growth-maximizing rate is well below 30 percent.

But the image above is spot on in that it shows that a nation should not be at the revenue-maximizing point of the Laffer Curve.

Since I’m obviously a big fan of the Rahn Curve and I also like drawing lessons from cross-country comparisons, here’s a video on that topic from the Center for Freedom and Prosperity.

Well done, though I might quibble on two points, though the first is just the meaningless observation that the male boxer is not 6′-6″ and 250 lbs.

My real complaint (and this will sound familiar) is that I’m uneasy with the implication around the 1:45 mark that growth is maximized when government spending consumes 25 percent of economic output.

This implies, for instance, that government in the United States was far too small in the 1800s and early 1900s when the overall burden of government spending was about 10 percent of GDP.

But I suppose I’m being pedantic. Outlays at the national, state, and local level in America now consume more than 38 percent of economic output according to the IMF and we’re heading in the wrong direction because of demographic changes and poorly designed entitlement programs.

So if we can stop government from getting bigger and instead bring it back down to 25 percent of GDP, even I will admit that’s a huge accomplishment.

Libertarian Nirvana would be nice, but I’m more concerned at this point about simply saving the nation from becoming Greece.

P.S. I’ve shared numerous columns from Walter Williams and he is one of America’s best advocates of individual liberty and economic freedom.

Now there’s a documentary celebrating his life and accomplishments. Here’s a video preview.

Given Walter’s accomplishments, you won’t be surprised to learn that there’s another video documentary about his life.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,471 other followers

%d bloggers like this: