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Posts Tagged ‘Economics’

I generally focus on the profligate habits and abusive tactics of the federal government in Washington, but that doesn’t mean other levels of government are well behaved.

In a column for the Washington Post, Catherine Rampell outlines some of the reprehensible ways that state and local governments extract money from the citizenry.

Think of recent, infuriating stories on civil asset forfeiture, in which law enforcement seizes cash and other property from people who are never charged with crimes. Often the departments that do the seizing get to keep the proceeds, which leads to terrible incentives. …Onerous traffic fees and court fines — which have been blamed for long-simmering tensions in places like Ferguson, Mo. — often have a similarly mercenary motive.

She’s right to be infuriated.

Policies like asset forfeiture are disgusting ways of stealing money, particularly from the less fortunate. Indeed, it’s worth noting that the two first leaders of the Justice Department’s asset forfeiture office now say the practice should be ended because of rampant abuses.

But other revenue-raising policies also are objectionable.

…states and cities are also increasingly trying to monetize other behaviors seen as sinful or wayward, like marijuana use, strip club patronage, and gambling. Hence the explosion of state-sponsored lotteries, which prey on (mostly poor) people’s mathematical illiteracy… States have also been jockeying to expand casinos and other venues for legalized gambling, which voters seem to see as generating free money. …Then there are the expensive occupational licensure requirements for jobs that don’t seem to require state-level gatekeeping, like hair-braiding.

At this point, after reading various examples of greedy governments pillaging citizens, you may be thinking Ms. Rampell is a good libertarian.

Unfortunately, that doesn’t seem to be the case.

Her anger is misdirected. Instead of holding politicians accountable, she blames voters for their unwillingness to acquiesce to tax hikes as a way of dealing with “widespread budget crunches.”

If the political toxicity of spending and tax hikes encourages obfuscation at the federal level, it has led to far more destructive and distortionary policies at the state and local levels. Voters hate taxes and will punish any politician who threatens to raise them (or, in many cases, does not accede to cutting them). But schools, roads, police forces, garbage collection, firefighters, jails and pensions still cost money, even when you cut them back as much as voters will tolerate. So instead of raising taxes, state and municipal governments have resorted to nickel-and-diming constituents through other kinds of piecemeal, non-tax revenue raisers, an outcome that is less transparent, and likely to worsen the economy, inequality and social injustice. …It’s time to take off the fiscal blinkers and start rewarding politicians who have the courage to advocate raising revenues the old-fashioned way: through taxes.

Reward a politician for raising taxes? Isn’t that like rewarding a mosquito for taking your blood?

But I shouldn’t be snarky. After all, maybe Ms. Rampell is right and that budgets for state and local governments have been cut as much as possible.

That being said, I noticed she didn’t include any figures on the trends in spending by state and local governments.

So I went to the Office of Management and Budget’s historical tables, specifically Table 15-2 which includes state and local government expenditures. And after adjusting the data for inflation, based on the composite deflator in Table 1-3, I put together a graph to determine whether there was a “budget crunch” for state and local government.

Um…not so much.

As you can see, state and local government spending has jumped dramatically, even when looking at inflation-adjusted dollars.

Indeed, the 164 percent increase in outlays since 1980 is four times greater than the 40 percent increase in the nation’s population over the same period.

In other words, the only “budget crunch” is the one being imposed on long-suffering taxpayers by state and local politicians.

Those officials are the folks who deserve Ms. Rampell’s ire.

P.S. Since this column corrects a big oversight in a Washington Post column, I suppose this would be a good time to point out other mistakes or misstatements I’ve noticed in that newspaper.

Such as the time it asserted in a news report that Germany is “fiscally conservative.”

Or the time the newspaper claimed a 0.158 percent cut would “slash” the federal budget.

And how about the time the Post said the tiny sequester would impose a “sledgehammer of budget cuts.”

P.P.S. On the other hand, the Washington Post has produced genuinely good editorials on school choice and postal service privatization, so it isn’t all bad.

P.P.P.S. And it presumably is better than the New York Times, which has a bigger list of preposterous stories (and I’m not even counting Paul Krugman’s mistakes, some of which can be seen here, here, here, here, here, here, here, and here).

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I don’t know whether it’s because I’m a libertarian or because I’m an economist, but I get very frustrated by the issue of corporate inversions.

It galls me to hear demagogic politicians like Obama make absurd statements about “unpatriotic” corporations that re-domicile overseas when the problem is entirely the result of bad policy that penalizes U.S.-domiciled firms trying to compete in global markets.

1. The United States imposes the world’s highest corporate tax rate.

2. The United States is one of the few countries to impose “worldwide tax” on domestic firms.

3. The United States maintains very anti-competitive tax rules.

So when politicians grouse about “Benedict Arnold” companies, my reaction is to be happy that companies are taking steps to protect workers, consumers, and shareholders.

But, given what he’s done on amnesty and Obamacare, you won’t be surprised to learn that the President has unilaterally changed policy to make inversions more difficult.

That’s the bad news. The good news is that the President’s bad policy doesn’t change reality.

An editorial in the Wall Street Journal looks at the latest example of an American company getting a new address.

Ireland-based drug company Actavis on Monday announced a $66 billion agreement to buy California’s Allergan , maker of the Botox anti-wrinkle treatment. …the tax savings…could be hundreds of millions a year beginning in 2015.

The folks at the WSJ make the obvious point about bad American tax laws.

…the deal highlights how desperately U.S. tax policy needs a makeover. …As if a combined state and local corporate tax rate of 40%—the highest in the industrialized world—isn’t harsh enough, the U.S. is also one of the few countries in which the government demands to be paid even on earnings that have already been taxed in foreign jurisdictions. Given this competitive disadvantage for U.S.-based firms, it’s no coincidence that both of the suitors that have been seeking to acquire Allergan are based overseas.

And what’s really remarkable is that both the suitors used to be U.S.-based companies!

Both Actavis and Valeant used to be based in the U.S. but moved their headquarters offshore in so-called inversion transactions in which they adopted the home country of businesses they acquired. Moving offshore allows businesses to invest more in the U.S., as Actavis has already done with its recent purchase of New York’s Forest Laboratories.

But hold on a second, didn’t the Obama Administration enact rules to prevent inversions?

President Obama views such rational decisions as unpatriotic, because he wants to tax both foreign and U.S. operations. So this fall Treasury Secretary Jack Lew reinterpreted longstanding tax regulations to make it more expensive to execute such deals—a punishment for companies that didn’t exit the U.S. when they had the chance. …Mr. Lew has decided the best response to foreign tax competition is to bolt the door to prevent more corporate escapes.

But here’s the catch. The White House and Treasury Department did make it more costly for companies to re-domicile, but the Administration can’t actually prohibit cross-border mergers.

So let’s summarize the net effect.

Before the Obama Administration imposed new rules, American-based companies would acquire foreign-based companies and use that maneuver to technically re-domicile in a nation with less punitive corporate taxation. But there’s very little risk of American jobs being lost.

After the rule changes, American-based companies are the ones being acquired by their overseas competitors. This means the White House can’t argue that the change in domicile isn’t real. And it means that there’s a far higher probability of jobs going overseas.

I guess the White House thinks this is a victory.

Let’s now step back and put this issue in context. This is the educational part of today’s column.

Here are some slides from a presentation by Professor Dick Harvey at Villanova University School of Law. He presents lots of information, but here are the three slides that are probably most interesting to non-tax geeks.

First, here’s the key thing to know about inversions. They’re a do-it-yourself version of territorial taxation.

And since territorial taxation is the right policy, nobody should be upset about inversions.

Second,  here’s a look at how many inversions occur each year. As you can see, we’re in the midst of another wave.

You’ll notice that these waves roughly coincide with periods featuring corporate tax rate reductions in other nations.

So the lesson is that bad American policy is making it more and more difficult for U.S.-domiciled firms to compete in global markets.

Third, here’s a slide showing where companies are re-domiciling.

Some of my favorite places, particularly Cayman, Bermuda, Switzerland, and Hong Kong!

Now let’s zoom out even further and consider the leftist view that multinational corporations are getting away with some sort of scam because of so-called stateless income.

Sinclair Davidson, a professor at Australia’s RMIT University, writes about the issue. Here are a few excerpts from his scholarly paper.

It is commonly argued that the corporate income tax system is ‘broken’. …The latest theoretical argument suggesting that the corporate income tax base is likely to be eroded is the ‘stateless income doctrine’.

But there’s an itsy-bitsy problem with this theory, as Sinclair explains.

…there is no evidence to support the view that the corporate income tax base is being eroded. At best, the concern about the tax base is not so much that it is being eroded, but rather that multinational corporations do not pay tax in every host economy.

He also points out that companies are obeying the law, which is a point I’ve also made on this topic.

…there is little evidence of any wrongdoing by any of the three corporations that are regularly singled out for abuse. It is true that these corporations do not pay as much tax in the UK or the US as those governments would like them to pay, but they pay as much tax as is required by the laws that those governments have passed. …‘None of this required a Senate “investigation” to  discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple’s corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company’s annual US tax return adds up to a stack of paperwork more than two feet high. …These corporations are fully compliant with the tax law in the jurisdictions in which they operate.

So what’s his bottom line?

There is no such thing as ‘stateless income’, rather there is income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, ‘Why do the owners of intellectual property not locate their property in your economy?’. An implicit assumption of the stateless income doctrine is that multinational corporations maximise their value to society only when they pay tax. Of course, this is not the case. … It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate  income tax base. … So-called ‘stateless income’ is a return on intellectual property.

Amen.

Let’s close with another perspective on the issue. Stewart Dompe and Adam Smith of Johnson and Wales University in North Carolina have a column in The Freeman.

…the United States is unique in that it taxes corporations at 35 percent regardless of where the income is earned, and hence regardless of whether the corporation benefited from any public goods. Payment without benefit is simply bad business. Avoiding particularly high tax rates like those of the United States can yield significant savings for companies—and their shareholders. Charlotte-based Chiquita Brands International, for instance, hopes to save $60 million via its recent acquisition of Ireland-based Fyffes PLC. Burger King’s merger, according to analyst estimates, could cut its overall tax bill by 13 percent. …Populist themes like “economic patriotism” may appeal to voters, but such arguments are nonsensical: Firms are ultimately responsible to their shareholders. As Judge Learned Hand wrote, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” If anything, firms have a moral responsibility to minimize their taxable liabilities. The legal structure of a firm establishes the relationship between shareholders, who own the capital, and managers that make operating decisions. Executives have a fiduciary responsibility to pay the lowest tax possible because they are the stewards of their shareholders’ wealth.

I particularly like their conclusion.

This competition among legal regimes is a powerful constraint on government—and that is a good thing for all of us. America has the second-highest corporate tax rate in the world—the highest when state taxes are included. The solution to this problem lies not in closing loopholes or imitating poor Oliver pleading for more, but in offering a simpler, more competitive tax system.

They hit the nail on the head. As I argued just yesterday, we need to restrain the greed of the political class.

But the fight isn’t limited to national capitals. International bureaucracies such as the Organization for Economic Cooperation and Development also are promoting schemes to squeeze more money out of companies – which, of course, means harming workers, consumers, and shareholders.

The pro-tax crowd can concoct all sorts of theories, such as stateless income, but this assault on companies is happening because government have spent themselves into a fiscal ditch and they want taxpayers to pay the price for this profligacy.

P.S. If you read this far, you deserve a reward. You can enjoy a good Michael Ramirez cartoon about inversions by clicking here, and there are several additional cartoons included in this post.

P.P.S. But if you’re a glutton for punishment, you can watch my video on international corporate taxation instead.

P.P.P.S. One final point worth sharing is that folks who try to complain about “low tax burdens” on the foreign-source income of American multinationals need to remember that they pay a lot of tax to foreign governments.

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The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are congressional bureaucracies that wield tremendous power on Capitol Hill because of their role as fiscal scorekeepers and referees.

Unfortunately, these bureaucracies lean to the left. When CBO does economic analysis or budgetary estimates, for instance, the bureaucrats routinely make it easier for politicians to expand the burden of government spending. The accompanying cartoon puts it more bluntly.

And when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.

Here are some examples of CBO’s biased output.

The CBO – over and over again – produced reports based on Keynesian methodology to claim that Obama’s so-called stimulus was creating millions of jobs even as the unemployment rate was climbing.

CBO has produced analysis asserting that higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.

Continuing a long tradition of under-estimating the cost of entitlement programs, CBO facilitated the enactment of Obamacare with highly dubious projections.

CBO also radically underestimated the job losses that would be caused by Obamacare.

When purporting to measure loopholes in the tax code, the CBO chose to use a left-wing benchmark that assumes there should be double taxation of income that is saved and invested.

On rare occasions when CBO has supportive analysis of tax cuts, the bureaucrats rely on bad methodology.

But let’s not forget that the JCT produces equally dodgy analysis.

The JCT was wildly wrong in its estimates of what would happen to tax revenue after the 2003 tax rate reductions.

Because of the failure to properly measure the impact of tax policy on behavior, the JCT significantly overestimated the revenues from the Obamacare tax on tanning salons.

The JCT has estimated that the rich would pay more revenue with a 100 percent tax rate even though there would be no incentive to earn and report taxable income if the government confiscated every penny.

This means the JCT is more left wing than the very statist economists who think the revenue-maximizing tax rate is about 70 percent.

Unsurprisingly, the JCT also uses a flawed statist benchmark when producing estimates of so-called tax expenditures.

Though I want to be fair. Sometimes CBO and JCT produce garbage because they are instructed to put their thumbs on the scale by their political masters. The fraudulent process of redefining spending increases as spending cuts, for instance, is apparently driven by legislative mandates.

But the bottom line is that these bureaucracies, as currently structured and operated, aid and abet big government.

Regarding the CBO, Veronique de Rugy of Mercatus hit the nail on the head.

The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.

And the Wall Street Journal opines wisely about the real role of the JCT.

Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.

Amen. For all intents and purposes, the system is designed to help statists win policy battles.

No wonder only 15 percent of CPAs agree with JCT’s biased approach to revenue estimates.

So what’s the best way to deal with this mess?

Some Republicans on the Hill have nudged these bureaucracies to make their models more realistic.

That’s a helpful start, but I think the only effective long-run option is to replace the top staff with people who have a more accurate understanding of fiscal policy. Which is exactly what I said to Peter Roff, a columnist for U.S. News and World Report.

…the new congressional leadership should be looking at ways to reform the way the institution does its business – and the first place for it to start is the Congressional Budget Office. Most Americans don’t know what the CBO is, how it was created or what it does. They also don’t know how vitally important it is to the legislative process, especially where taxes, spending and entitlement reform are concerned. As Dan Mitchell, a well-respected economist with the libertarian Cato Institute, puts it in an email, the CBO “has a number-crunching role that gives the bureaucracy a lot of power to aid or hinder legislation, so it is very important for Republicans to select a director who understands the economic consequences of excessive spending and punitive tax rates.”

Heck, it’s not just “very important” to put in a good person at CBO (and JCT). As I’ve written before, it’s a test of whether the GOP has both the brains and resolve to fix a system that’s been rigged against them for decades.

So what will happen? I’m not sure, but Roll Call has a report on the behind-the-scenes discussions on Capitol Hill.

Flush from their capture of the Senate, Republicans in both chambers are reviewing more than a dozen potential candidates to succeed Douglas W. Elmendorf as director of the Congressional Budget Office after his term expires Jan. 3. …The appointment is being closely watched, with a number of Republicans pushing for CBO to change its budget scoring rules to use dynamic scoring, which would try to account for the projected impact of tax cuts and budget changes on the economy.

So who will it be? The Wall Street Journal weighs in, pointing out that CBO has been a tool for the expansion of government.

…the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use. Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. …The Tax Foundation’s Steve Entin would be an inspired pick.

I disagree with one part of the above excerpt. Steve Entin is superb, but he would be an inspired pick for the Joint Committee on Taxation, not the CBO.

But I fully agree with the WSJ’s characterization of the budget rules being used to grease the skids for bigger government.

In a column for National Review, Dustin Siggins writes that Bill Beach, my old colleague from my days at the Heritage Foundation, would be a good choice for CBO.

…few Americans may realize  that the budget process is at least as twisted as the budget itself. While one man can’t fix it all, Republicans who want to be taken seriously about budget reform should approve Bill Beach to head the Congressional Budget Office (CBO). Putting the right person in charge as Congress’s official “scorekeeper” would be an important first step in proving that the party is serious about honest, transparent, and efficient government. …CBO has several major structural problems that a new CBO director should fix.

Hmm… Entin at JCT and Beach at CBO. That might even bring a smile to my dour face.

But it doesn’t have to be those two specific people. There are lots of well-regarded policy scholars who could take on the jobs of reforming and modernizing the work of JCT and CBO.

But that will only happen if Republicans are willing to show some fortitude. And that means they need to be ready to deal with screeching from leftists who want to maintain their control of these institutions.

For example, Peter Orszag, a former CBO Director who then became Budget Director for Obama (an easy transition), wrote for Bloomberg that he’s worried GOPers won’t pick someone with his statist views.

The Congressional Budget Office should be able to celebrate its 40th anniversary this coming February with pride. …The occasion will be ruined, however, if the new Republican Congress breaks its long tradition of naming an objective economist/policy analyst as CBO director, when the position becomes vacant next year, and instead appoints a party hack.

By the way, it shows a remarkable lack of self-awareness for someone like Orszag to complain about the possibility of a “party hack” heading up CBO.

In any event, that’s just the tip of the iceberg. I fully expect we’ll also see editorials very soon from the New York Times, Washington Post, and other statist outlets about the need to preserve the “independence” of CBO and JCT.

Just keep in mind that their real goal is to maintain their side’s control over the process.

P.S. There’s another Capitol Hill bureaucracy, the Congressional Research Service, that also generates leftist fiscal policy analysis. Fortunately, the CRS doesn’t have any scorekeeper or referee role, so it doesn’t cause nearly as much trouble. Nonetheless, any bureaucracy that produces “research” about higher taxes being good for the economy needs to be abolished or completely revamped.

P.P.S. This video explains the Joint Committee on Taxation’s revenue-estimating methodology. Pay extra attention to the section beginning around the halfway point, which deals with a request my former boss made to the JCT.

P.P.P.S. If you want to see some dramatic evidence that lower tax rates don’t necessarily lead to less revenue, check out this amazing data from the 1980s.

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I don’t pretend that tax reform, by itself, will create economic Nirvana.

After all, the experts who measure economic policy and economic performance say that only about 20 percent of a nation’s prosperity is determined by fiscal policy.

Nonetheless, I’m a big fan of simple and fair tax systems such as the flat tax. Not only because I think we will get more growth, but also because I want to rein in the power of the IRS and reduce corruption in Washington.

So did the Republican wave in the mid-term elections make reform more likely?

Interestingly, the normally left-leaning Washington Post editorial page seems to have the right attitude about the issue.

There is broad agreement that the Internal Revenue Code is an unfair, inefficient mess and that the solution is to lower marginal rates and apply them to a broader base of income. A simpler code, purged of its market-distorting loopholes, would foster economic equality and economic growth, both of which the United States desperately needs.

So does the election make reform more likely?

Does the rise of a newly elected Republican Senate change that calculus? We’d say that it might… To be sure, Democrats want tax reform to raise money; Republicans want cuts. Still, a good deal of work has already been done on basic principles of a tax overhaul by Democrats and Republicans in both houses of Congress. …With a strong push from Mr. Obama, early in the new Congress, they might just be willing to finish the job their predecessors started.

I suspect the Washington Post is being far too optimistic about bipartisan compromise.

Not only would lawmakers have to overcome the big divide over whether reform should produce more revenue for Washington or less money for Washington, but there’s also a big divide on how to properly measure income.

And don’t forget that Obama (unlike the Washington Post) wants higher marginal tax rates because of his class-warfare ideology.

But maybe I’m just being a pessimist.

Scott Hodge of the Tax Foundation, for instance, also offers a semi-optimistic assessment about the possibility of reform.

One of the most obvious questions from Tuesday’s election results is: what does this mean for tax reform? I think it certainly enhances the prospects of Congress and the president reaching a grand bargain on overhauling the tax code… Starting in January 2015, expect the new chairmen of the House Ways and Means Committee and the Senate Finance Committee begin holding a series of hearings on various aspects of reforming the tax system and the numerous “off-the-shelf” options available to them—such as the Flat Tax, X-Tax, FairTax, Cash Flow Tax, and the Camp draft. …Considering the energy to reform the tax code in both the House and Senate, it is quite possible that lawmakers could deliver a comprehensive tax reform bill to President Obama’s desk in 2015.

Scott makes several other points, including the long-overdue need to reform the biased revenue-estimating methodology of the Joint Committee on Taxation.

However, he also acknowledges that President Obama very likely would veto good tax reform. So even though our economy needs a less-destructive tax code, folks shouldn’t hold their breath expecting it to happen in the next two years.

I also addressed the topic as part of a recent forum at the Heritage Foundation, and I outlined several issues that have to be addressed if there is a serious effort to pursue tax reform. Here’s my part of the presentation.

But if you don’t want to watch me pontificate for ten-plus minutes, particularly since the video quality isn’t that great, here are my key points:

1. The tax base matters. If you don’t fix the double taxation of saving and investment, you may as well not even bother.

2. Bold beats timid. This is why I think a pure flat tax actually is more realistic than a proposal, such as Lee-Rubio, that makes compromises in hopes of being more politically realistic.

3. Highlight international competitiveness. Simply stated, globalization increases the benefits of good policy and increases the costs of bad policy.

4. International bureaucracies hinder good policy. Good tax reform is based on taxing income only once and only taxing income earned inside national borders, yet the OECD wants to impose global rules based on extra-territorial double taxation.

5. Good tax reform is good health reform. The biggest genuine loophole in the tax code is for fringe benefits, and this is a big reason for the third-party-payer crisis in healthcare.

6. Fix the biased scorekeeping of the JCT. The Joint Committee on Taxation uses methodology that it farther to the left than Paul Krugman.

7. Growth trumps fairness. The left will always use class-warfare arguments against good policy and the only effective counter-argument is that economic growth benefits all taxpayers.

One final point. Folks often ask me about plans – such as the Fair Tax – that would abolish the income tax and instead collect revenue with a national sales tax.

That approach is theoretically sound, but I have some practical concerns based on my distrust of politicians.

P.S. Here’s some humorous fallout from the election. Hitler learns that Democrats lost the Senate.

Hitler parody videos have appeared many places in recent years. Here are my favorites.

The head of the National Socialist Workers Party gets a double-dose – here and here – of bad news about Obamacare.

Here’s Hitler learning about Europe being downgraded.

And here’s the Fuehrer finding out that Scott Walker prevailed in his fight against government bureaucrats in Wisconsin.

P.P.S. I shared some cartoons before the election with the theme that Obama has been bad news for the Democratic Party.

Now that the election is over, that theme is even more appropriate.  Here’s Glenn McCoy’s assessment of the change Obama delivered.

Robert Ariail has a similar perspective.

In other words, as I suggested back in 2012, lots of non-leftist people should be happy that Obama got reelected.

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Some of my left-wing friends have groused that Democrats didn’t do well in the mid-term elections because they failed to highlight America’s strong economic performance.

I’m tempted to ask “what strong economic performance?!?” After all, median household income is lower than it was when Obama took office. And labor force participation rates have plummeted.

However, my leftist buddies have a point. America’s economy does look good when compared to Europe.

But why should that be the benchmark for success?

If you look at today’s growth numbers compared to data on historical growth in the United States, you get a much different picture. Here’s some of what Doug Holtz-Eakin, former head of the Congressional Budget Office, wrote as part of a study for the National Chamber Foundation.

Over the entire postwar period from 1947 to 2013, the trend for economic growth in America was 3.3%. Unfortunately, looking at the period as a whole masks a marked deterioration in U.S. growth performance. Since 2007, the rate has downshifted to a mere 1.5%, which translates into a meager 0.7% in growth per capita in the United States. …At the current pace of growth, it will take 99 years for incomes to double. The poor U.S. growth performance is a threat to American families and their futures.

Here’s a chart from the report showing the 10-year rolling average of inflation-adjusted growth in the United States. As you can see, there was plenty of variation, but America usually enjoyed growth average a bit above 3 percent. But then, beginning about 2007/2008, that average dropped below 2 percent.

If you look at projections until 2024, you’ll notice that growth is projected to improve.

But you have to wonder if those projections will materialize.

And, even if they do, growth will only be about 2.5 percent annually, so we’ll still be enduring sub-par economic performance.

Moreover, it appears that those projections may be unrealistic. Here’s another chart from the National Chamber Foundation. It wasn’t in the study, but it’s worth including since it shows how the American economy has been routinely under-performing in recent years.

With this track record of anemic economic performance, it’s hard to have much sympathy for Democrats who thought they should be rewarded on election day. Doing better than France and Italy is not exactly a message that will resonate with voters, particularly when many people have been alive long enough to remember the good growth that America enjoyed during the Reagan and Clinton years, when policy was much more focused on small government and free markets.

But let’s set aside politics and consider the impact of growth on regular Americans rather than politicians. Holtz-Eakin explores some of the ramifications if the economy grows faster over the next decade.

Imagine that growth averages instead 3.3%—just one percentage point higher—for the next 10 years. …A full percentage point would eliminate $3 trillion in debt and slow the growth of the national debt. …Growing at a 3% rate means 1.2 million more jobs, and 1.3 million more if growth escalated to 3.5% for the next 10 years. …Three percent growth would mean another $4,200 in average incomes, while 3.5% growth would boost this an additional $4,500 to nearly $9,000. …faster economic growth would improve the future for the poor, the middle class, and the affluent alike.

By the way, it’s worth noting that faster growth leads to less debt mostly because the government collects a lot more tax revenue when people have higher incomes. And even a knee-jerk anti-taxer like me won’t complain if the IRS gets more money simply because people are more prosperous (though I reserve the right to then argue for lower tax rates).

Now let’s look at the most important question, which is to ask what policies will restore traditional American growth rates.

Doug has several suggestions, starting with entitlement reform.

The policy problem facing the United States is that spending rises above any reasonable metric of taxation for the indefinite future. ….Over the long term, the budget problem is primarily a spending problem, and correcting it requires reductions in the growth of large mandatory spending programs—entitlements like Social Security and federal health programs.

I certainly agree. Assuming, of course, that he wants good entitlement reform rather than gimmicks.

He also suggests tax reform.

The tax code is in need of dramatic improvements, including a modern international tax system, a lower corporation income tax rate, correspondingly lower rates on business income tax via so-called pass-thru entities, and broad elimination of tax preferences to preserve efficient allocation of investment… At the same time, one could improve work incentives by simplifying individual income tax rate brackets (recent proposals have suggested two brackets of 10% and 25%) and exclude a substantial portion of dividends and capital gains from taxation.

Once again, I agree. Though I reserve the right to change my mind and become a vociferous opponent if advocates decide that they wanted to finance these reforms with a value-added tax.

The study also includes suggestions for regulatory reform and other policy changes, but this post is too long already, so let’s now return to the central theme of economic growth.

Or, to be more accurate, the absence of economic growth. Because that’s the legacy of Obamanomics. We’re adopting European-style economic policies, so is it any surprise that our growth rates are declining in the direction of European-style stagnation?

And, to be fair, I’ll be the first to state that this bad trend began under Bush. Big government hinders prosperity, regardless of whether the policies are imposed by Republicans or Democrats.

Just as you get faster growth with good policy, even if those policies are implemented with a Democrat in the White House.

Simply stated, if you want better economic performance, there’s no substitute for free markets and small government.

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I’ve argued that we’ll get better government if we make it smaller.

And Mark Steyn humorously observed, “our government is more expensive than any government in history – and we have nothing to show for it.”

But can these assertions be quantified?

I had an email exchange last week with a gentleman from Texas who wanted to know if I had any research on the efficiency of government. He specifically wanted to know the “ratio of federal tax dollars collected to the actual delivery of the service.”

That was a challenge. If he simply wanted examples of government waste, I could have overloaded his inbox.

But he wanted an efficiency measure, which requires apples-to-apples comparisons to see which jurisdictions are delivering the most output (government services) compared to input (how much is spent on those services).

My one example was in the field of education, where I was ashamed to report that the United States spends more per student than any other nation, yet we get depressingly mediocre results (though that shouldn’t be a surprise for anyone who has looked at this jaw-dropping chart comparing spending and educational performance).

But his query motivated me to do some research and I found an excellent 2003 study from the European Central Bank. Authored by Antonio Afonso, Ludger Schuknecht, and Vito Tanzi, the study specifically examines the degree to which governments are providing value, and at what cost.

The objective of this paper is to provide a proxy for measuring public sector performance and efficiency. To do this we will put together a number of performance indicators in the government’s core functions. …We will set these indicators in relation to the costs of achieving them. We will, hence, derive simple performance and efficiency indicators for 1990 and 2000 for the public sectors of 23 industrialised OECD countries. …As a first step, we define 7 sub-indicators of public performance. The first four look at administrative, education, health, and public infrastructure outcomes. …The three other sub-indicators reflect the “Musgravian” tasks for government. These try to measure the outcomes of the interaction with and reactions to the market process by government. Income distribution is measured by the first of these indicators. An economic stability indicator illustrates the achievement of the stabilisation objective. The third indicator tries to assess allocative efficiency by economic performance.

Here’s a flowchart showing how they measured public sector performance.

I should explain, at this point, that I’m not a total fan of the PSP measure. Most of the indicators are fine, but some rub me the wrong way.

I think an even distribution of income is a nice theoretical concept, for instance, but I don’t think it can be mandated by government (unless the goal is to make everybody poor). Economic stability also isn’t necessarily a proper goal. I’d much rather live in a society that oscillates between 7 percent growth and -2 percent growth if the only other alternative was a society that had very stable 1 percent growth.

But enough nit-picking on my part. What did the study find when looking at public sector performance?

Indicators suggest notable but not extremely large differences in public sector performance across countries… Looking at country groups, small governments (industrialised countries with public spending below 40 % of GDP in 2000) on balance report better economic performance than big governments (public spending above 50 % of GDP) or medium sized governments (spending between 40 and 50 percent of GDP).

These are remarkable findings. Nations with small governments achieve better outcomes.

And that’s including some indicators that I don’t even think are properly defined.

But what’s most amazing if that the above findings are simply based on an examination of outputs.

So what happens if we also look at inputs so we can gauge the degree to which governments are delivering a lot of bang for the buck?

Public expenditure, expressed as a share of GDP, can be assumed to reflect the opportunity costs of achieving the public sector performance estimated in the previous section. …Public expenditures differ considerably across countries. Average total spending in the 1990s ranged from around 35 percent of GDP in the US to 64 percent of GDP in Sweden. The difference is mainly due to more or less extensive welfare programs. …we now compute indicators of Public Sector Efficiency (PSE). We weigh performance (as measured by the PSP indicators) by the amount of relevant public expenditure, PEX, that is used to achieve a given performance level.

And what did the experts discover? Here’s a chart showing the results.

There’s a lot of data, particularly if you’re looking at individual countries. But if you want the bottom-line results, look at the numbers circled in red.

As you can see, countries with small governments are far more productive and efficient.

We find significant differences in public sector efficiency across countries. Japan, Switzerland, Australia, the United States and Luxembourg show the best values for overall efficiency. Looking at country groups, “small” governments post the highest efficiency amongst industrialised countries. Differences are considerable as “small” governments on average post a 40 percent higher scores than “big” governments. …This illustrates that the size of government may be too large in many industrialised countries, with declining marginal products being rather prevalent.

The conclusion of the study makes some very important observations.

Unsurprisingly, countries with small public sectors report the “best” economic performance… Countries with small public sectors report significantly higher PSE indicators than countries with medium-sized or big public sectors. All these findings suggest diminishing marginal products of higher public spending. …Spending in big governments could be, on average, about 35 per cent lower to attain the same public sector performance.

Though I can’t help but wonder what the results would have been if Hong Kong and Singapore also were added to the mix.

After all, I don’t consider the United States to have a “small” government. Same for Japan, Switzerland, and Australia. Those are simply nations where government isn’t as big and bloated as it is in France, Italy, Sweden, and Greece.

Or imagine the results if you could measure public sector performance and public sector efficiency for the United States and other developed nations in the pre-World War I era, back when the burden of government spending averaged less than 10 percent of economic output.

I strongly suspect we got far more “bang for the buck” when government was genuinely small.

But I don’t want to make the perfect the enemy of the good, so let’s focus on the results of the study. The clear message is that big governments spend a lot more and deliver considerably less.

And that’s a very worrisome message since the burden of government is projected to increase substantially in the United States thanks to demographic changes and poorly designed entitlement programs.

So at the very least, we should do everything possible to reform those programs to keep America from becoming Greece.

And once we achieve that goal, then we can try to reduce the size and scope of government so we’re more like Hong Kong and Singapore., with only about 20 percent of GDP diverted to government.

Then, in my libertarian fantasy world, we can cut, prune, privatize, and eliminate until government once again only consumes about 10 percent of economic output.

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I’ve always objected when leftists engage in moral preening about how they supposedly are more compassionate.

Europeans statists, for instance, claim to be more compassionate because their governments have greater levels of coercive redistribution. But I ask them why they think it’s compassionate to give away other people’s money. Then I shame them by showing data on how Americans are far more generous in terms of trying to help others with their own money.

I have the same debate in America. Take the issues of unemployment benefits. My leftist friends say that compassionate people should favor extended benefits. To which I reply by asking them why it’s good to pay people to not work and assert instead that genuine compassion should be defined by policies that enable people to find jobs and become self reliant.

I raise this topic because the Pope recently made news by urging more compassion for the less fortunate, and he specifically said that raising the issue will lead some to think he’s a communist.

Here are some excerpts from a news report in the U.K.-based Independent.

In one his longest speeches as Pope, the Holy See outlined his views on a wide range of issues– from poverty and the injustices of unemployment to the need to protect the environment. …Anticipating how his letter would be received by his critics, Francis declared that “land, housing and work are increasingly unavailable to the majority’ of the world’s population,” but said “If I talk about this, some will think that the Pope is communist.” “They don’t understand that love for the poor is at the centre of the Gospel,” he said. “Demanding this isn’t unusual, it’s the social doctrine of the church.”

Several people have asked my opinion about what the Pope said.

My initial instinct was to be very critical. After all, various news reports interpreted the Pope’s statement as an attack on capitalism and an embrace of the welfare state.

But since I know that the establishment media is biased and would want to portray the Pope’s comments as being supportive of statism, I didn’t want to make any unwarranted assumptions. So I tracked down a transcript of the speech. That’s the good news. The bad news is that it’s only available (at least as of this writing) in Portuguese, Spanish, Italian, and French.

But with the help of Google Translate, I looked at what the Pope actually said. And if the translation software is accurate, I can now offer my opinion about the Pope’s views: To be succinct, I have no idea what he thinks. And if you want me to elaborate, all I can say is that he calls for lots of action to help the poor, but he doesn’t endorse government coercion to make it happen

On the other hand, he doesn’t say that government shouldn’t be involved. And the tone of the speech certainly seems left wing, but that may simply be a result of me hearing a lot of statists making similar remarks and then calling for government-coerced redistribution policies.

The bottom line, as I suggested above, is that the Pope may be wrong…or he may be right. Which seems inconsistent but accurate. After all, the Vatican sometimes has been very good on economic issues and at times very disappointing.

But I will say something definitive. If anybody, including the Pope, thinks that bigger government is the way to help the poor, they are very misguided.

I’ve already shared some powerful data to show that poverty was falling in America after World War II, but then the progress came to a halt once the federal government launched a “War on Poverty” and dramatically expanded the welfare state.

Let’s augment that data today with a specific look at what happened when the federal government decided to “help” folks in Appalachia. Here are some excerpts from a very compelling National Review column.

Appalachian whites suffer from many of the same social ills as working-class blacks: broken families, substance abuse, poor health, and high poverty. …Early anti-poverty efforts focused largely on the white population. …It was, as Ira Katznelson argued in an explosive book, a type of affirmative action — for white people. …Two federally chartered organizations — the Depression-era Tennessee Valley Authority (TVA) and Johnson’s Appalachian Regional Commission (ARC) — pumped millions of development dollars into predominantly white rural locales. …The aid came not just in the form of direct welfare payments, but also as government jobs. The country-music anthem “Song of the South” tells a familiar tale: “Papa got a job with the TVA; we bought a washing machine and then a Chevrolet.” …From 1965 until 1981, when the federal government began to scrutinize the cash flowing to Appalachia, federal appropriation to the ARC exceeded $1 billion (in today’s dollars) every single year. Even today, Congress sends about $80 million to the ARC; no other regionally focused entity spends more. As late as 2000, Appalachians received more federal money per capita than average, despite their minimal cost of living and the low number of federal employees in the region.

So has all this federal largesse helped?

Well, not exactly.

…there are now precious few jobs in Tennessee valleys and too few drivers on those wide mountain roads. If Papa bought a washing machine and then a Chevrolet, Junior is buying oxy or meth: West Virginia leads the nation in drug-overdose deaths, with Kentucky third and Tennessee eighth. …Today, the inheritors of Katznelson’s affirmative action for whites occupy the lowest rungs of the socioeconomic ladder. West Virginia, Kentucky, northern Georgia, and South Carolina all nabbed more than their fair share of federal aid, but now they are among the poorest parts of the country. …Residents of these states suffer the worst consequences. In many Appalachian counties, inhabitants can expect to live only 67 years, more than a decade less than the average American. …Alongside the grim statistics is a spiritual poverty more difficult to measure but easier to see. There’s the high-school teacher who has only once had a class without a pregnant student. …Young students in eastern Kentucky sometimes tell their teachers that they hope to “draw” when they grow up. But they’re not talking about a career as an artist; they’re talking about drawing a government check. These kids weren’t programmed like that at birth; they were taught something destructive by their communities.

There are some lessons to be learned.

…the failure of the effort gives us ample reason to question the wisdom of federally led development efforts no matter the intended beneficiaries. Government cannot create a sustainable economy, no matter how hard it tries. And traditional welfare, while defensible as a way of alleviating immediate deprivation, too often fails to place people on the road to self-sufficiency. …encouraging family stability — or at least not discouraging it through the tax code or needless incarceration — promotes upward mobility more effectively than transfer payments…if the failures of Appalachia are any guide, a narrower policy agenda might actually serve the poor — white and black alike.

Amen. If you want to help the poor, push for economic growth rather than redistribution.

There are even some honest liberals who now admit that big government promotes long-run dependency.

P.S. Since the first part of this post dealt with religion and compassion, it’s time to share Libertarian Jesus as well as the thoughts of Cal Thomas on whether Jesus was a socialist.

P.P.S. Since the last part of this post dealt with Appalachia, I guess it’s appropriate to share this redneck joke.

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