So who’s right, the optimists or pessimists? At the risk of sounding like a politicians, they’re both right.
If it sounds like I’m trying to have it both ways, that’s simply the reality of public policy. There are both headwinds and tailwinds impacting the labor market, which is why I talked about scales balancing in the interview.
But this is a much bigger and more serious issue. Earlier this morning, I took part in a joint Brooking Institution/American Enterprise Institute/Secretary’s Innovation Group conference on the disability insurance program.
I only had a minor role, posing question to Mark Duggan of the University of Pennsylvania and Stephen Goss of the Social Security Administration, but it was a very useful exercise because I was exposed to some sobering details about the program.
Let’s review a couple of Professor Duggan’s charts, starting with a look at how the disability rate has exploded in the past 22 years.
And here is some very disturbing data showing that much of the increase is in the areas that are most subject to abuse because of subjective judgements about “bad backs” and “depression.”
Hmmm…, I’m a bit depressed about the ever-rising burden of government. Maybe I should get a check from the government!
Joking aside, I briefly touched on this issue in a recent CNBC interview. Here’s the segment dealing with the disability program and the disturbing rise in dependency.
I’m not overly impressed by the counter-argument from Christian Weller. Does he really want us to believe that the service sector jobs of today are more disabling than the manufacturing jobs of 20-plus years ago?
This is a depressing topic, so let’s close with a couple of cartoons, starting with this gem from Chip Bok.
It’s amusing, but keep in mind that we have an unusually high joblessness rate right now, but it would be even higher if we counted the people who shifted to this other form of unemployment dependency.
And here’s a Chuck Asay cartoon that I really like because he augments my argument in the interview that it hurts the economy when you lure workers out of the job market and make them wards of the state.
Asay takes it one step farther and shows the lifeboat sinking. That’s basically what will happen if we don’t adopt the entitlement reforms that are needed to rein in the welfare state.
A reader from overseas wonders about my views on immigration, particularly amnesty.
I confess that this is one of those issues where I’m conflicted.
On the general topic of immigration, I think the United States has benefited in the past – and can benefit in the future – from newcomers. And I express that position in this interview for Fox Business News.
But the real issue, which isn’t addressed in the interview, is magnitude. I assume almost nobody wants zero immigration. On the other hand, I also assume that very few people favor totally open borders.
So where do we draw the line? I think we should welcome lots of immigration, particularly people with skills, education, and money. This is the approach that is used to varying degrees by nations such as Australia, Canada, and Switzerland, and I wrote favorably about a similar proposal by Congressman Jared Polis, a Democrat from Colorado.
And I think substantial numbers of low-skilled people who want to work also should be welcome, but I don’t think everybody in the world who wants to come to America should have that right. I haven’t met more than a tiny handful of folks who disagree with Walter Williams’ assertion that, “not…everyone on the planet had a right to live in the U.S.”
Particularly since politicians have redistribution systems that can lure people into a life of dependency. Which is presumably why Milton Friedman warned, to the dismay of some other libertarians, “You cannot simultaneously have free immigration and a welfare state.”
Even the Wall Street Journal, which is a leading voice for both increased immigration and amnesty for existing illegals, also is concerned that a growing welfare state could attract immigrants for the wrong reasons.
Speaking of amnesty, I suppose I should answer the question of how I would deal with people who are in the country illegally? And my response probably depends whether I answer with my heart or my head.
My heart tells me to give these people the benefit of the doubt. Every illegal I’ve met seems to be a good person. And I know if I lived someplace like Mexico, Somalia, or Honduras, I almost certainly would want to improve my family’s position by getting to America, legally or illegally.
On the other hand, I believe in the rule of law and I’m a bit uncomfortable rewarding those who jumped the line at the expense of those who followed the rules.
And to be perfectly honest, I also worry about the political implications of any policy that increases the number of people who – on net – will vote for redistribution. I could do without the partisan implications, but this Chuck Asay cartoon captures my concerns.
I also think that people respond to incentives. Another round of amnesty almost surely will encourage further illegal immigration. Putting myself in the position of a poor person in the developing world, I would logically conclude that it would just be a matter of time, so I would sneak across the border in order to take advantage of that future amnesty.
That doesn’t strike me as a good approach. Far better to figure out how to genuinely reform the system.
By the way, a senior staffer on Capitol Hill floated to me the idea of a new status that enables illegals to stay in the country, but bars them from citizenship unless they get in line and follow the rules. I’m definitely not familiar with the fault lines on these issues, but perhaps that could be a good compromise.
And it goes without saying that I want the strictest possible limits on access to welfare programs and other government handouts for immigrants, regardless of their status.
So, like everybody else, I want border security and some form of legalization as part of a new system that brings people to America for the right reason. See, I’m the epitome of reasonableness.
One of the great things about federalism, above and beyond the fact that it both constrains the power of governments and is faithful to the Constitution, is that is turns every state into an experiment.
I particularly enjoy comparisons between Texas and California. Michael Barone, for instance, documented how the Lone Star State is kicking the you-know-what out of the Golden State in terms of overall economic performance.
The real moral of the story, though, is that the poor are the biggest victims of Obama’s statism. They’re the ones who have been most likely to lose jobs. They’ve been the ones to suffer because of stagnant incomes.
Sort of brings to mind the old joke that leftists must really like poor people because they create more of them whenever they’re in charge.
P.P.S. To close on a serious point, California would be deteriorating even faster if it wasn’t for the fact that the state and local tax deduction basically means that the rest of the country is subsidizing the high tax rates in the not-so-Golden State. Another good argument for the flat tax.
P.P.P.S. At the bottom of this post, you’ll find a great Kevin Williamson column dismantling some sloppy anti-Texas analysis by Paul Krugman.
I often ask such people whether they are more likely to buy a Big Mac if McDonald’s raises the price by 24 percent. They say they are less likely.
I then ask them if they are more likely to buy a car if GM increases the price of a Buick by 24 percent. They say less likely, of course.
But they seem to have a blind spot when I ask them whether employers will be more likely or less likely to hire low-skilled workers when the government increases the cost of those workers by 24 percent.
I explain further in this interview for Yahoo! Finance.
The interviewer, by the way, seems to be economically illiterate.
At one point, I delicately state that one of his questions “betrays a certain lack of historical knowledge,” which is a polite way of saying “you’re either lying or you have no idea what you’re talking about.”
I’m not sure I made any progress, so feel free to suggest other ways of convincing skeptics that freedom is better than statism.
Anyway, for those who want more information, this video explains the underlying economics of the minimum wage. We also have plenty of evidence (see here and here) that unemployment rose following the most recent hike in the minimum wage.
Triggered by an appearance on Canadian TV, I asked yesterday why we should believe anti-sequester Keynesians. They want us to think that a very modest reduction in the growth of government spending will hurt the economy, yet Canada enjoyed rapid growth in the mid-1990s during a period of substantial budget restraint.
I make a similar point in this debate with Robert Reich, noting that the burden of government spending was reduced as a share of economic output during the relatively prosperous Reagan years and Clinton years.
Being a magnanimous person, I even told Robert he should take credit for the Clinton years since he was in the cabinet as Labor Secretary. Amazingly, he didn’t take me up on my offer.
Anyhow, these two charts show the stark contrast between the fiscal policy of Reagan and Clinton compared to Bush..
And there’s lots of additional information comparing the fiscal performance of various presidents here, here, and here.
For more information on Reagan and Clinton, this video has the details.
But government spending grew much slower under Reagan and Clinton than it has during the Bush-Obama years, yet I don’t think anybody would claim the economy in recent years has been more robust than it was in the 1980s and 1990s.
I also point out that we shouldn’t worry about government employees getting a slight haircut since federal bureaucrats are overcompensated. Moreover, I warn that some agencies may deliberately try to inconvenience people in an attempt to extort more tax revenue.
This example is important because the Obama White House is making the Keynesian argument that a smaller burden of government spending somehow will translate into less growth and fewer jobs.
Nobody should believe them, of course, since they used this same discredited theory to justify the so-called stimulus and all their predictions were wildly wrong.
But the failed 2009 stimulus showed the bad things that happen when government spending rises. Maybe the big spenders want us to think the relationship doesn’t hold when government gets put on a diet?
Well, here’s some data from the International Monetary Fund showing that the Canadian economy enjoyed very strong growth when policymakers imposed a near-freeze on government outlays between 1992 and 1997.
For more information on this remarkable period of fiscal restraint, as well as evidence of what happened in other nations that curtailed government spending, here’s a video with lots of additional information.
By the way, we also have a more recent example of successful budget reductions. Estonia and the other Baltic nations ignored Keynesian snake-oil when the financial crisis hit and instead imposed genuine spending cuts.
I’m normally not a fan of the media, but every so often you find examples of real journalism. Here are some powerful, well-done stories from local TV stations.
Now I can add another story to the list. A local TV station in Washington, DC (with a viewing audience of countless overpaid bureaucrats) had the courage to run a story debunking sequester hysteria.
I’m partial to this report for the obvious reason that it featured me.
But even if this story didn’t use any of my soundbites, it would still be worth sharing because it’s not often that you see a reporter explain Washington’s dishonest way of measuring “spending cuts.”
I’ve complained about that sleazy tactic while appearing with John Stossel and Judge Napolitano, but I didn’t think a regular journalist would ever expose the scam.
The latter part of the report focuses on the potential impact of sequestration on the defense budget.
I recently wrote about the pinheads at the Equal Employment Opportunity Commission, who are threatening legal action against companies that are leery about hiring people with criminal records.
Now some states and cities are making it illegal to discriminate against those that have been unemployed for a long period of time.
Unlike special legal status for ex-cons, this sounds reasonable. After all, we all would like to help the long-term unemployed break free of the chains of government dependency.
But sometimes good intentions generate undesirable effects. I explain in this Fox Business News debate that companies will do their best to avoid even interviewing the long-term unemployed if they have to worry about potential legal pitfalls whenever they make a hiring decision.
I also explain that businesses have no incentive to engage in unjustified discrimination. After all, that would imply a willingness to deliberately sacrifice profit in pursuit of some irrational bias.
And if there are two applicants who otherwise seem to have equal qualifications for a certain job, but one has been out of work for more than 12 months, it’s only logical that the employer will think that a lengthy stint of sitting on a couch does not suggest great habits.
Which is why Obama’s policy of never-ending unemployment benefits is so misguided. People get lured into long-term unemployment and there is both anecdotal evidence (check out these stories from Michigan and Ohio) and empirical evidence (here, here, and here) showing this unfortunate impact.
I’m a proponent of a pro-growth and non-corrupt tax code.
I mostly write and talk about the flat tax, though I’d be happy to instead accept a national sales tax if we could somehow get rid of the 16th Amendment and replace it with something so ironclad that even Justices such as John Roberts and Ruth Bader Ginsburg couldn’t rationalize that the income tax was constitutional.
But since there’s no chance of any good tax reform with Obama in the White House, there’s no need to squabble over the best plan. Instead, our short-term goal should be to educate voters so that we create a more favorable intellectual climate for genuine reform in 2017 and beyond.
But tax reform also means getting rid of the rat’s nest of deductions, credits, exemptions, preferences, exclusions, shelters, loopholes, and other distortions in the tax code.
Why? Because people should make decisions on how to earn income and how to spend income on the basis of what makes economic sense, not because they’re being bribed or penalized by the tax code. That’s just central planning through the back door.
And if you don’t think this is a problem, I invite you to peruse three startling images, each of which measures rising complexity over time.
Today’s Byzantine system is good for tax lawyers, accountants, and bureaucrats, but it’s bad news for America. We need to wipe the slate clean and get rid of this corrupt mess.
Let’s now take a moment to explain why the internal revenue code shouldn’t be artificially steering capital toward state and local governments at the expense of private investment.
Under current law, there’s no federal income tax imposed on interest from municipal bonds. No matter how rich you are, Uncle Sam doesn’t tax a penny of the interest you receive if you use your wealth to lend money to state and local governments.
Should the tax code steer money to Detroit politicians?
This “muni-bond exemption” has two unfortunate effects.
It makes it easier and cheaper for state and local governments to incur debt, thus encouraging more wasteful spending by cities such as Detroit and states such as California.
By making the debt of state and local governments more attractive than private business investment, the loophole undermines long-term growth by diverting capital to unproductive uses.
The politicians at the state and local level certainly understand what’s at stake. They’re lobbying to preserve this destructive tax break. Here are some excerpts from a story in the New York Times.
Mr. Firestine [of Montgomery County, MD] is on the front lines of a lobbying campaign by local and state governments, bond dealers, insurers and underwriters that is trying to pre-empt any attempt to limit or even kill the tax exemption. …At present, the federal government forgoes about $32 billion a year in taxes by exempting the interest that investors earn from municipal bonds. …The National Commission on Fiscal Responsibility and Reform, known as the Simpson-Bowles commission, has suggested taxing all municipal bond interest, not just the interest paid to people in the top bracket. …Officials of some other government groups, like the New York City Housing Development Corporation, have formed a coalition with Wall Street groups like the Bond Dealers of America to lobby on the issue. But there is the sense of an uphill battle. …Capping the tax exemption would cause high-bracket taxpayers to look for higher-yielding investments, he said, and the county would have to offer more interest to lure them back.
Based on the last sentence in the excerpt, I gather we’re supposed to think it would be bad news if we got rid of this tax preference and taxpayers shifted more of their money to private-sector investments.
Needless to say, that’s misguided. Only in the upside-down world of Washington do people think it is smart to create tax preferences that lead to more wasteful spending by state and local governments, while simultaneously imposing punitive forms of double taxation on saving and investment in the private sector.
By the way, this shouldn’t be an ideological issue. If this amazing chart is any indication, leftists who want workers to enjoy more income should be clamoring the loudest for a tax system that doesn’t tilt the playing field against capital formation.
And our economy is growing and the private sector is creating jobs.
That’s the glass-half-full way of looking at things.
But if you’re a glass-half-empty person, the news is not so cheerful. The economy is expanding and jobs are being created, but both at a slow rate.
In this interview, I share this dour perspective as I grouse about how Obama’s policies of higher taxes and bigger government are somewhat responsible for the weak job market. And I also explain that the anemic employment situation is partially to blame for low levels of saving for many households.
On the topic of the low savings rate, I should have explained that government policies undermine savings, both because of the tax code’s pro-consumption bias and because reasons to save are diminished thanks to government-provided subsidies for things such as housing, education, retirement, and health care.
In my second soundbite, I jump to a different topic. I assert that it’s a good thing that we’re going to have gridlock for the next couple of years – particularly if the alternative is the kind of damaging legislation such as the faux stimulus and Obamacare that we got in the President’s first two years.
But I do warn that permanent gridlock is not a good idea. We need genuine entitlement reform at some point in the not-so-distant future if we want to avoid becoming another Greece.
This would force – automatically and immediately – a balanced budget. More important, it would produce a meaningful reduction in the burden of government spending.
But even though that seems like a fantasy outcome for people like me from the Cato Institute, I actually don’t think libertarians, fiscal conservatives, and other advocates of smaller government should make the debt limit a do-or-die battle.
As I say in this interview on Fox Business News, the “continuing resolution” is a much better vehicle.
And if the Fed Chairman is able to rattle Wall Street and cause a big drop in the stock market, it’s quite likely that Republicans will buckle rather than run the risk of being blamed for causing a financial calamity.
But the Obama Administration has less leverage when the “CR” expires on March 27. Like the debt limit, the continuing resolution is a must-pass piece of legislation. Heck, it’s even important since it’s the only way of funding the non-entitlement portions of the federal government for the rest of the 2013 fiscal year.
This is where advocates of small government should draw a line and demand fiscal restraint. They should pass a CR, but only after eliminating some egregious waste from the federal budget.
Yes, the President can object to fiscal reforms. He can even veto such a bill. But the worst thing that happens under a stalemate is a “government shutdown.”
And not even a real shutdown. Things that actually have some value, like the military and the air traffic control system, continue operating. All that happens is that “non-essential” programs, agencies, and department are shuttered. The Department of Housing and Urban Development is a good example.
Let’s now think about leverage. Who will care more about reopening HUD and other non-essential parts of the government? The answer, quite obviously, is that bureaucrats and interest groups are the only ones who will care, and this means the pressure will be on the left.
This doesn’t mean a CR fight and potential government shutdown is free of political risk. Indeed, Newt Gingrich lost popularity as a result of that fight. But that was probably more a reflection of his political style.
In any event, a CR battle definitely has less downside risk than a debt limit battle. So if folks on Capitol Hill actually want to fight to save the country from becoming Greece, why not pick the battle that’s easier to win?
To bail out the housing sector, or to bail out Medicare? Fannie and Freddie, or GM and Chrysler?
All these examples involve huge amounts of money, and both private-sector and public-sector bailouts have perverse long-run effects, but which is worse?
And don’t forget there are lots of other bailouts in our future, as discussed on this interview for Fox Business News.
The interview took place before Christmas, but the topic is even more relevant today since the budget season is about to begin.
Most of the discussion was about government agencies and programs that may get more handouts, though bailouts for the Federal Housing Administration and the Pension Benefit Guaranty Corporation would be indirect bailouts for big business and housing.
So we’d get the worst of all worlds, more government spending and more cronyism.
Or, as they call it in Washington, a win-win situation.
He also claims that it would be “fair” to go back to Bill Clinton’s top tax rate, but anybody want to bet that Michael will now call for even higher tax rates now that Obama succeeded in pushing the top rate to 39.6 percent?
And we definitely know he doesn’t want to go back to Bill Clinton spending levels, so he wants the bad part of the 1990s but not the good part.
Michael asserts that the United States is a low-tax nation, simply because we don’t tax as much as Europe. But, given the economic stagnation and lower living standards on the other side of the Atlantic, why would anybody want to mimic those failed welfare states.
But I do agree with Michael that payroll taxes are too high (not that this is what he really thinks), though I should have echoed my January 2 post and said that those taxes should be reduced as part of genuine Social Security reform.
One point I failed to emphasize, though, is that class-warfare taxes won’t raise much revenue because of Laffer Curve effects. My comments about successful people escaping places like France and California touched on the issue, but I should have been much more explicit.
P.S. Was I right, or was I right, when I wrote that the real national title game was played on December 1? Such a tragedy that Georgia fell four yards short of the championship.
Since ‘Bama trounced Notre Dame by 28 points and edged Georgia by 4 points, I guess that means the Bulldawgs would have crushed the Irish by 24 points. Which would have been even more impressive than when we beat them 17-10 to win the 1980 national championship.
Since I’m an out-of-the-closet libertarian, it goes without saying that I’m not favorably disposed to government intervention. As far as I’m concerned, Washington’s an inherently corrupt town filled with people seeking unearned wealth.
But even if I didn’t have any underlying philosophical or moral principles, I think I would still favor small government.
Why? Because just about everything government does turns into a bloody cluster-you-know-what, so there’s also a utilitarian case for libertarianism.
I discuss the reverse Midas touch of government with John Stossel.
The theme of Stossel’s show, by the way, was looking at how good intentions lead to bad results. I actually think that’s too optimistic.
Most government intervention is driven by sordid insider scheming, not good intentions. The politicians merely pretend they have noble-sounding goals when peddling their manure to the public.
But regardless of the goals, the result is still the same.
I suppose a more interesting program would be to identify things that the government does intelligently and effectively.
Any suggestions?
P.S. According to Greek mythology, anything Midas touched turned into gold. But since the fable also says that this blessing turned into a curse, perhaps this post should have been titled the “The Midas Touch of Government” rather than “The Reverse Midas Touch of Government.” But since I’m already trying to restore the good name of Robin Hood, I’m going to leave it to others to decide how to characterize Midas.
But the more serious point is that the death tax shouldn’t exist at all, as I’ve explained for USA Today. And in this CNBC debate, I argue that it is an immoral form of double taxation.
You’ll see that Jared sneakily tries to include wealth taxes and death taxes together in order to accuse me of an inaccuracy, but the chart (click to enlarge) clearly shows that there are many jurisdictions that wisely avoid this anti-competitive levy.
The data is a few years old, but it’s clear that the United states has one of the most punitive death tax systems in the world.
P.P.S. You’ll notice that the video in this post has good quality, unlike the fuzzy resolution and discontinuous footage in clips I’ve recently shared. That’s because Cato’s expert on such things is back in the office and we’re no longer relying on my sub-par technical knowledge.
But I admit there’s lots of guessing and speculation in those sentences.
There is one thing, however, that I can say with complete confidence. We don’t need a tax increase to balance the budget. We can get rid of red ink in just 10 years simply restraining spending so that it grows by only 2.5 percent per year.
P.P.S. I was glad to have an opportunity in the interview to defend Robin Hood’s reputation. As I’ve explained, he was a Tea Party guy, helping to reclaim and return money that was taken by the tax collectors of Prince John and the Sheriff of Nottingham. Here’s another Ken Catalino cartoon that sort of makes this point.
P.P.P.S. This is my second attempt at creating a video in the absence of the Cato expert. There’s a hiccup around the 2:25 mark, but I think the picture quality is much better than my first effort.
P.P.P.P.S. If you like the red jacket, previous attempts to be on the cutting edge of fashion can be seen here and here.
Given this track record, I don’t think anybody could accuse me of being an anti-big-business activist.
But I do get very irritated when politically connected corporations use cronyism to guard their interests at the expense of other taxpayers and the overall economy.
That’s why, in this interview with Larry Kudlow on CNBC, I spend most of the time advocating for pro-growth policies, but near the end I slam corporate CEOs from the Business Roundtable for endorsing higher tax rates for small businesses.
For those who don’t follow the intricacies of business taxation, most small companies – such as sole proprietorships, partnerships, and S-corps – are taxed through the personal income tax.
So it’s a bit outrageous when corporate CEOs endorse higher personal income tax rates, knowing that their smaller competitors will get reamed.
I don’t think they’re doing it just for that purpose. As I say in the interview, it’s more a case of feeding somebody else to the sharks out of a narrow, short-term sense of self preservation.
But this also explains why I am such a strong believer in the no-tax-hike pledge. Once “revenue enhancement” is part of the discussion, taxpayers lose their sense of unity and begin to throw each other overboard.
And this isn’t just something that happens among Washington insiders. I’ve previously explained that ordinary Americans get very tempted to support class-warfare tax hikes once they realize someone is going to be raped and pillaged by Washington.
This is why, to discourage talk of tax hikes (especially by crony capitalists), I am willing to make a special exception and support an excise tax on CEO salaries. Anybody who endorses higher taxes should be first in line for the guillotine.
P.S. I apologize for the poor quality of the video. The guy at Cato who does these things is out for the holidays, and you see the suboptimal results when I dabble in technical things. And since I’m acknowledging my shortcomings, I should have said “obediently” instead of “appropriately” at the 3:44 mark.
The negative relationship between economic performance and a bloated public sector also has been confirmed by research from other places not often associated with libertarian thought, including Harvard and Sweden.
Europe suffers from a growth slowdown. The GDP growth in Europe has lagged behind the GDP growth in the US and has been far worse than the GDP growth in the NIC countries, particularly China… However, what is the reason for slow or rapid economic growth? …In many respects, the labour market plays the key role in the economy because it determines both the use of the labour input and the level of overall competitiveness of a nation. Obviously, the functioning of the labour market is not independent of the public sector. A large government is almost inevitably associated with a large tax wedge, and the functioning of the labour market appears to be critically dependent on the size of the tax wedge. It may be fair to say that the harmful consequences of a high tax wedge are exceptionally well and unambiguously documented in the literature. …On the basis of the estimates derived in this study, the following guide for growth policies appears to be warranted: …Do not over-expand the welfare state. Larger governments are associated with slower growth rates.
Gee, that sounds quite familiar. Where have we come across this notion that big government has a negative impact on growth? Sounds a lot like the Rahn Curve.
Indeed, the paper makes another point that is very consistent with the Rahn Curve.
As this simple chart illustrates, the Rahn Curve is sort of the spending equivalent of the Laffer Curve.
Except government spending is on the horizontal axis and economic performance is on the vertical axis.
The ideal outcome is for government to be kept small so that economic output is at its maximum point. The academic literature suggests that prosperity is at its peak level when the burden of government spending is about 20 percent of GDP.
I actually disagree with those numbers, and I think they are the result of data constraints. Researchers looking at the post-World War II data generally find that Hong Kong and Singapore have the maximum growth rates, and the public sector in those jurisdictions consumes about 20 percent of economic output. Nations with medium-sized governments, such as Australia and the United States, tend to grow a bit slower. And the bloated welfare states of Europe suffer from stagnation.
So it’s understandable that academics would conclude that growth is at its maximum point when government grabs 20 percent of GDP. But what would the research tell us if there were governments in the data set that consumed 15 percent of economic output? Or 10 percent, or even 5 percent?
But I’m digressing. Let’s get back to the research from the Bank of Finland. The author makes a very sensible point that even modest reductions in the burden of government can yield positive results – sort of like going from Point A to Point B on the Rahn Curve.
…a revolution is not required to generate one per cent of additional growth each year: the “welfare state” does not need to be eliminated, wages do not need to be lowered to subsistence income levels, and working hours do not need to be increased to medieval levels. In fact, in most instances, significant improvements in economic growth could be produced by simply reverting to the conditions of approximately one decade ago. …by reducing the growth of the public sector and decreasing tax rates, one may increase both the labour supply and the competitiveness of the private sector. The future development of the public sector is indeed the key aspect of determining the future development of the economy. If the public sector can be maintained in a reasonable fashion, one may manage to achieve low tax rates and low tax wedges in labour markets, and one can also avoid fiscal crises and keep the risk premia (of interest rates) low.
These findings should be read by every glum libertarian and every sad conservative. Yes, there are plenty of reasons to be pessimistic about America’s future, particularly since both the Bank for International Settlements and the Organization for Economic Cooperation and Development estimate that America’s long-run fiscal status is even worse than most of Europe’s welfare states.
All we really need to do is give the private sector some breathing room, which is the point I make in this interview with Larry Kudlow. I was talking about the regulatory burden, but my argument is equally applicable to fiscal policy.
This doesn’t exactly get us to our libertarian Nirvana, of course, so I realize that “breathing room” isn’t the most inspirational motto.
But it should help us understand that the fight isn’t over. I certainly haven’t given up.*
It’s never a good idea to display weakness during negotiations. Your opponent will sense your fear and up his demands.
That’s certainly what we’re seeing in Washington. The cartoon at this link captures the GOP’s wobbly attitude on taxes, and this interview is about the ever-increasing demands of the Obama Administration.
It’s important to define austerity correctly. To provide an analogy, we have to drink liquid to survive, but that doesn’t mean it would be a good idea to guzzle paint thinner. Likewise, we need austerity, but that shouldn’t mean higher taxes. We need to be like Estonia and tighten the belts of the public sector, not the private sector.
It’s not my job to give Republicans political advice, but I also want to expand upon the arguments I made a couple of days ago, when I wrote a post giving five policy reasons and five political reasons why the GOP shouldn’t surrender on tax increases.
A couple of readers correctly pointed out that I forgot to mention that tax increases are political poison because middle-class voters turn against the GOP once “revenue” is on the table. They are completely right, and my oversight is inexplicable since I’ve actually made that point in the past. Here’s some of what I wrote last year.
If Republicans put tax increases on the table, however, the politics get turned upside down. Instead of being united against all tax increases, voters realize somebody is going to get mugged and they have an incentive to make sure they’re not the ones who get victimized. That’s when soak-the-rich taxes become very appealing. Democrats, for all intents and purposes, can appeal to average voters by targeting the so-called rich. And even though voters will be skeptical about what Democrats really want, they don’t want to be the primary target of the political predators in Washington. Think of it this way. You’re a wildebeest running away from a pack of hyenas, but you know one member of your herd will get caught and killed. You despise hyenas, but at that critical moment, you’re main goal is wanting another member of the herd to bite the dust. This is why surrendering to tax increases put Republicans in a no-win situation. They oppose class-warfare taxes because they understand the disproportionately damaging impact of higher top income tax rates and increased double taxation of dividends and capital gains. So when GOPers get bullied into agreeing to raise taxes, they want to target less destructive sources of revenue. But that usually means…taxes that are more likely to hit the middle class. Needless to say, Democrats almost always win if there is a fight on whether to tax the middle class or to tax the rich.
I have to pat myself on the back for that passage, particularly the analogy that equates politicians with hyenas (though in the past I’ve apologized to hyenas for that unfair comparison).
Let’s close with a very good cartoon, which points out the foolishness of the media for wanting to send more money to Washington when even they understand that the town is filled with clowns and buffoons. That’s actually a very serious point, as I note about halfway through the interview included in my five-political-reasons-five-policy-reasons post.
But it’s hard to laugh when you contemplate what’s happening. Obama is bullying the GOP, and the Republicans are in the process of surrendering to his class-warfare demands.
That will lead to bad policy, but it will also result in an emasculated, compliant, and house-broken GOP for at least the next two years, and perhaps even Obama’s entire second term. So even though the fiscal cliff tax hike is bigger than what Obama’s currently demanding, the long-run policy damage of surrender almost surely will be far greater.
Republicans don’t have many options in this fight. But they can show some cojones and tell Obama that the only way he’ll get a tax hike is if he wants to take the nation over the cliff.
P.S. If you like the Henry Payne cartoon in this post, you can enjoy some of his other work here, here, here, here, here, here, here, and here.
The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is excessive government spending. Red ink is merely a symptom of that underlying problem.
But that’s a rhetorical gripe. My bigger concern is that politicians are prevaricating. They’re really talking about higher taxes in order to enable a bigger burden of government spending, not less red ink. I make this point in an interview on Fox Business Network.
This is the point where I often elaborate on issues raised in the interview, but let’s instead build on the discussion to look at policy and political reasons why the GOP should not surrender to Obama’s tax demands as part of fight over the fiscal cliff.
Here are the policy arguments against higher taxes.
1. There is no need for higher taxes since the budget can be balanced merely by restraining spending so that it grows 2.5 percent each year.
According to the most recent Congressional Budget Office fiscal estimate, the 2001 and 2003 tax cuts can be made permanent and red ink can be wiped out in just 10 years so long as politicians simply control the growth of federal spending so that outlays don’t grow faster than 2.5 percent each year. Other nations have shown that this type of spending restraint is very successful, while no nation has ever taxed its way to fiscal success.
2. Since the tax increases stick and the supposed spending cuts quickly evaporate, budget deals that raise taxes have a long history of failure.
Last year, in an article that was designed to browbeat Republicans for being unreasonable about tax hikes, a New York Times columnist inadvertently revealed that the only budget deal that actually led to a fiscal surplus was the 1997 agreement that lowered taxes instead of increasing them. None of the tax-hike budget deals ever resulted in a balanced budget.
3. America’s short-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
Because of large spending increases during the Bush-Obama years, the burden of federal spending has doubled in just 11 years. This is why today’s fiscal numbers look so grim. Some argue that tax revenues are below their long-run average of 18 percent of GDP, but CBO estimates show that tax collections will be above the long-run average by the end of the decade even if all the 2001 and 2003 tax cuts are made permanent. And the White House recently admitted this was true as well.
4. America’s long-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
In the absence of entitlement reform, the burden of federal spending will double, measured as a share of GDP, and the overall burden of government will exceed the levels that currently exist in every single European welfare state. Tax revenues also will climb as a share of GDP thanks to “real-bracket creep,” so there is no plausible argument that the long-run problem is inadequate revenue.
5. The European evidence shows that genuine spending cuts are the only effective way of solving a fiscal crisis.
Nations such as Italy, Greece, France, Spain, Ireland, Portugal, and the United Kingdom have imposed massive tax increases, yet their fiscal problems remain. Indeed, in some cases, these nations are in worse shape because the tax hikes contributed to anemic economic performances. Some of these countries have belatedly begun to trim their spending burdens, but generally by relying on transitory savings rather than permanent reductions in the obligations of the welfare state. The only relative success stories on the continent are Switzerland, which never got into trouble in the first place thanks to a spending cap, and the Baltic nations, which imposed genuine spending cuts when the crisis first began and now are reaping the rewards of that fiscal discipline.
And here are the political arguments against higher taxes.
1. With Republicans easily retaining control of the House of Representatives, the election was not a mandate to raise taxes.
Nobody argued that there was a mandate to raise taxes before the election, when Republicans controlled the House and Democrats controlled the White House and Senate, so how can there be a mandate to raise taxes today since the election didn’t change anything? Some assert that Obama has a mandate since he campaigned in favor of his soak-the-rich tax plan. That’s true, but House Republicans prevailed after campaigning against class-warfare taxes, so that’s a wash.
2. The GOP prevailed in the exact same tax battle back in 2010, before they controlled the House and when they had fewer seats in the Senate.
This is not the first fiscal cliff battle. The same fight took place at the end of 2010. At the time, Democrats has an overwhelming majority in the House and even stronger control of the Senate than they do today. But by holding firm and staying united, Republicans prevailed. If they lose today, when they have far more political power, it will be a damning indictment of their incompetence.
3. Acquiescing to tax hikes would set a tone of weakness for 2013 and 2014, much as the 2011 “shutdown fight” needlessly gave Obama the upper hand on fiscal battles in 2011 and 2012.
5. Integrity matters, so politicians who promised the people that they wouldn’t raise taxes should honor those commitments.
I realize that it is silly to make an argument about honor and integrity when we’re discussing the actions of politicians, but I’m old fashioned. A promise should mean something. And even if promises don’t mean anything to these guys, they should remember that voters don’t like dishonesty.
I’m not terribly hopeful that any of my advice will be followed, so let’s close this post with some gallows humor.
Washington frustrates me. The entire town is based on legalized corruption as an unworthy elite figure out new ways of accumulating unearned wealth by skimming money from the nation’s producers.
But one thing that especially irks me is the way people focus on the trees and forget about the forest. Politicians and journalists are now engaged in an inside-baseball game of analyzing every twist and turn of the fiscal cliff negotiations.
That’s all fine and well, but perhaps it would be a good idea to talk about the need to fix the real crisis of excessive spending instead of arguing about how fast we should be traveling in the wrong direction.
And let’s not delude ourselves. In the absence of real entitlement reform, the United States is doomed to repeat Europe’s mistakes.
Another month, another record unemployment rate for the economy of the 17 European Union countries that use the euro. Figures released Friday by Eurostat, the EU’s statistics office, showed that the recession in the eurozone pushed unemployment up in the currency bloc to 11.7 percent in October, the highest level since the introduction of the euro in 1999. …Eurostat found that 18.7 million people were out of work across the eurozone, an increase of 173,000 on the previous month and 2.2 million higher than the year before. The wider 27-nation EU that includes non-euro countries such as Britain and Poland had an unemployment rate of 10.7 percent in October and a total of 25.9 million out of work. …”Talk of a `lost generation’ of young people now looks like an alarming possibility,” said Andrea Broughton, principal research fellow at the Institute for Employment Studies.
In other words, we may complain about America’s miserable track record on jobs during the Obama years, but at some point in the future we may someday look back on 8 percent unemployment as good news.
Unfortunately, the crowd in Washington doesn’t want to acknowledge that the real problem is spending. And I’m particularly irked (but not surprised) that Republicans now seem willing to go along with Obama even though they won this fight back in 2010 when they didn’t control the House and had fewer seats in the Senate. Here’s what I said to one of the local DC stations.
I realize I’m sounding glum, so let’s close out this post with a couple of amusing cartoons about America’s European future.
It’s not something I should admit since I work at a think tank, which is based on the idea that substantive analysis can impact public policy, but I sometimes think humor and anecdotes are very effective in helping people understand issues.
On the topic of unemployment insurance, for instance, I wouldn’t be surprised to learn that this Michael Ramirez cartoon and this Wizard-of-Id parody have been effective in helping folks grasp the unintended consequences of excessive government benefits.
And I bet this story from Michigan and this example from Ohio will ring a bell with many people because they have some relative or buddy who also has used government benefits as an excuse to stay unemployed.
So when I went on Fox to discuss the issue, I mentioned that I had a couple of friends who goofed off instead of looking for work because they got unemployment benefits.
I appeared on CNBC yesterday to talk about the “fiscal cliff” and the potential impact on economic performance.
You won’t be surprised to learn that I’m mostly concerned with how the issue gets resolved. Yes, there is some temporary uncertainty that is probably making markets skittish, but I’m much more worried about Obama bullying the GOP into agreeing to a class-warfare deal that leads to higher tax rates on investors, entrepreneurs, and small business owners, as well as more double taxation on saving and investment.
And the long-run damage caused by a more punitive tax system is much more important than any short-run delay in investment expenditures.
Second, I’m glad I had the opportunity to explain how America’s fiscal status has deteriorated during the Bush-Obama years. One of the CNBC staff understated the magnitude of the problem by looking at just federal spending as a share of GDP and only over the past few years. I pointed out that total government spending is the right variable, and I explained that the trend line has been moving in the wrong direction since Bill Clinton left office.
In this chart, you can see the bad news using either the methodology of the Office of Management and Budget or the approach of the Organization for Economic Cooperation and Development. Since I’m not sure which approach is right, I basically split the difference when discussing the overall burden of government spending.
We need some sort of spending cap, ideally akin to the Swiss Debt Brake. But that won’t happen for at least the next four years.
But maybe, with enough pressure, we can convince politicians to comply with my Golden Rule. After 12 years of excessive spending, it’s time to let the private sector grow faster than the government.
I’ve shared BIS and OECD data showing that the United States has a bigger long-run fiscal burden than Europe.
That’s a bit of a strained comparison since “Europe” includes fiscally responsible countries such as Switzerland and Estonia, but also soon-to-be failed states such as Greece and France.
But the one common theme, as I explain in this interview for Fox Business News, is that nations get in trouble because they violate Mitchell’s Golden Rule. In other words, the burden of government spending climbs faster than the private sector’s ability to finance it.
It was almost an afterthought, but I also made a very important point about the risks of using bad monetary policy to finance government spending.
I talked a couple of days ago to Neil Cavuto about whether the Obama Administration is slightly modifying its class-warfare tax policy.
As you can see, I’m not overly fixated on the parsing of Biden’s comments since I’m against higher tax rates for anyone.
And my takeaway message from the segment is that we need some discussion on the need to reduce the burden of government spending.
But the purpose of this post isn’t to share my appearance on the Fox Business Network. While I like to think that I offer coherent analysis and occasionally can be persuasive, I’m the first to admit that this second video is far more compelling. It features an old guy who escaped from Hungary after World War II and is now worried about creeping statism in the United States.
He does have a political message at the end, but ignore those final few seconds (after all, GOPers can be just as bad as Democrats).
Please share this post so more people are exposed to his message.
P.S. Since everyone is making fun of Biden, I may as well hop on the bandwagon. Here’s a joke about our feckless Vice President, and you can see a photoshop contest about “Lunchbucket Joe” by clicking here and here.
I despise protectionism. Mostly because it is bad economic policy, but also because politicians often use protectionism as a way of diverting attention from their own failures.
So when I appeared on Neil Cavuto’s show to comment on President Obama’s criticism of “outsourcing,” I was a tad bit critical.
I think my opening comments were effective. I wanted to help viewers understand that cross-border investment is a big net plus for the American economy. Indeed, this is why I’m so critical of laws such as FATCA that discourage foreigners from making job-creating investments in the United States.
And I hope people understood the moral point I made about how it’s not our business what private citizens do with their own money, but it is our business when politicians squander taxpayer money.
But not completely happy. I should have said that the average corporate tax rate around the world is 15 to 17 percentage points below the American level, not 15 to 17 percent, but hopefully people understood the point I was trying to make.
P.S. Romney’s been engaging in some China bashing, so he also deserves some criticism.
In recent months, almost all of the media calls have been because (gasp!) Mitt Romney engaged in sound business practices and used tax havens to boost earnings while also legally minimizing the amount of money siphoned off by the buffoons in Washington.
Most recently, I got interviewed by NBC’s big station in New York City. They inexplicably seemed to think it was a big scoop that they were able to form a company in Nevis, though at least they gave me an opportunity to explain that taxpayers benefited from tax havens and tax competition.
But I don’t want to focus on my rather generic comments. Instead, I want to address the explicit assumption in the story that it is bad for Nevis (or any other jurisdiction) to have a simple and efficient process for forming companies.
Moreover, there’s an implicit assumption in the story that not only is company formation somehow a sketchy thing, but that it’s only an issue for small Caribbean islands in the “offshore” world.
Interestingly, we now have some very good evidence from three academics that the “offshore” world is much stricter about enforcing laws than the “onshore” world. Here’s what they did.
This paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers.
And here’s what they found about so-called tax havens compared to high-tax nations. As you can see, the rules are much more likely to be obeyed in the low-tax jurisdictions that are always getting smeared.
A finding that runs directly counter to the conventional wisdom is that rich countries in the Organization of Economic Cooperation and Development (OECD) are worse at enforcing the rules on corporate transparency than are poor countries (see Figure 2). For developing countries the Dodgy Shopping Count is 12, while for developed countries it is 7.8 (and tax havens are much higher at 25.2, as discussed below). The significance of this finding is that it does not seem to be particularly expensive to enforce the rules on shell companies, given that poor nations do better than rich countries. This suggests that the relatively lackluster performance in rich countries reflects a simple unwillingness to enforce the rules, rather than any incapacity. One of the biggest surprises of the project was the relative performance of rich, developed states compared with poorer, developing countries and tax havens (see Figure 3). The overwhelming policy consensus, strongly articulated in G20 communiqués and by many NGOs, is that tax havens provide strict secrecy and lax regulation, especially when it comes to shell companies. This consensus is wrong. The Dodgy Shopping Count for tax havens is 25.2, which is in fact much higher than the score for rich, developed countries at 7.8 – meaning it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries. Some of the top-ranked countries in the world are tax havens such as Jersey, the Cayman Islands and the Bahamas, while some developed countries like the United Kingdom, Australia, Canada and the United States rank near the bottom of the list. It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya.
These are remarkable findings, but now let me take a moment to explain the correct interpretation of these results. Some people will argue that this data shows that there should be harsher rules imposed on the “onshore” company formation business.
Au contraire. The goal should be to ease the regulatory burden everywhere. Simply stated, it is foolish to fight terrorism, corruption, and money laundering with costly rules that require the monitoring of countless legal actions.
From a cost-benefit perspective, law enforcement should focus on actual criminal behavior. It wouldn’t make sense, after all, to have the government spy on everyone who buys a car merely because some people use autos when committing crime.
But that’s pretty much a good description of the mentality behind rules and regulations that target the company formation business.
Mitt Romney is catching a lot of flak for his surreptitiously recorded remarks about 47 percent of voters automatically being in the Obama column because they don’t pay federal income tax and thus see themselves as beneficiaries of big government.
Not quite. I think Romney raised an important issue, but he cited the wrong statistic and drew an unwarranted conclusion.
Here’s what I said to Neil Cavuto about the controversy.
To augment on those remarks, here’s where Romney was wrong.
Yes, we have almost half of households not paying federal income tax, and I recognize that there’s a risk on an unhealthy political dynamic if people begin to think they get government for free, but those people are not necessarily looking for freebies from government. Far from it. Many of them have private sector jobs and believe in self reliance and individual responsibility. Or they’re students, retirees, or others who don’t happen to have enough income to pay taxes, but definitely don’t see themselves as wards of the state.
If Romney wanted to be more accurate, he should have cited the share of households receiving goodies from the government. That number also is approaching 50 percent and it probably is much more correlated with the group of people in the country who see the state as a means of living off their fellow citizens. But even that correlation is likely to be very imprecise since some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.
Moreover, there are some people who pay tax and don’t receive programmatic benefits, yet are part of the proverbial moocher class. Many government bureaucrats obviously would be on that list, as would some union members, trial lawyers, etc.
However, even though Romney picked the wrong statistic and overstated the implications, he indirectly stumbled on a key issue. As seen in both BIS and OECD data, the U.S. is at risk of Greek-style fiscal chaos at some point in the not-too-distant future because of a rising burden of government spending.
I have no idea what share of the population today actually is part of the dependency class that Mitt Romney inarticulately described, but I don’t think I’m going out on limb to say that it has grown during the Bush-Obama years and it will continue to expand.
But something was very different in this interview on the Fox morning show. I was asked to respond to the Obama campaign’s assertion that Barack Obama’s policies created more private-sector jobs than Ronald Reagan’s policies.
I confess that I did the interview without first checking the numbers, and may not have been overly animated since I was in Denver and had to wake up before 4:00 a.m., but I felt confident enough to joke about an intern torturing data in the bowels of the White House.
But now that I’m back at my desk and I’ve had a chance to review the numbers from the Bureau of Labor Statistics, I can now say, with full confidence, that Stephanie Cutter must be smoking crack (she’s also smoking hot, but that’s a separate discussion).
And her intern should be fired.
Here are the numbers for private sector jobs (technically “Private wage and salary workers”), looking at the first 42 months in office for both Reagan and Obama. I’m including both seasonally adjusted and raw numbers, just to show that there’s no way to slice the data to justify Ms. Cutter’s assertion.
And here’s a look at the comparative performance of Reagan and Obama, based on the percent increase in private jobs in the first 31 months.
I also looked at what would happen if agricultural and/or self-employed workers were added to the mix, but nothing changes. Reagan beats Obama with both hands tied behind his back.
And what makes these numbers even more stunning is that Obama took office in the middle of a downturn, so a lot of the job losses already had occurred. Reagan, by contrast, got hit with a recession after taking office. So even though I think that downturn can and should be blamed on Jimmy Carter, all of the job losses show up in Reagan’s column. Yet he still kicks the you-know-what out of Obama.
The lesson to draw from these numbers is that Presidents should reduce the burden of government if they want better economic performance. Saint Ronald understood this basic insight, but Barack the Destroyer somehow thinks America will be more prosperous if we mimic Europe’s welfare states.
This is the weakest job performance for any recovery since the end of World War II.
The employment-population ratio is terrible, suggesting that the lower unemployment rate is really a measure of people dropping out of the labor force.
As this simple chart illustrates, the Rahn Curve is sort of the spending equivalent of 
But I’m digressing. Let’s get back to the research from the Bank of Finland. The author makes a very sensible point that even modest reductions in the burden of government can yield positive results – sort of like going from Point A to Point B on the Rahn Curve.
I’m not terribly hopeful that any of my advice will be followed, so let’s close this post with some gallows humor.
