But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.
And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.
With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).
So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.
This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.
Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.
And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.
Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.
Ron Paul has made “End the Fed” a popular slogan, but some people worry that this is a radical untested idea. In part, this is because it is human nature to fear the unknown.
But there are plenty of examples of policy reforms that used to be considered radical but are now commonplace.
Self-styled progressives used to say that air traffic control system needs to be a government monopoly, but our Canadian neighbors privatized their system and now have more safety and efficiency.
Defenders of the status quo used to claim that school choice was a radical idea, but it’s hard to defend that position since nations such as Sweden, Chile, and the Netherlands have adopted competitive systems.
This list could go on, but the pattern is always the same. People assume something has to be done by government because “that’s the way it’s always been.” Then reform begins to happen and the myth is busted.
But is money somehow different? Not according to some experts.
Why must our government make currency competition illegal? …Competition is generally good. Why not competition in currencies? Most people I interviewed scoffed at the idea. They said private currency should be illegal. But impressive thinkers disagree. In 1975, a year after he won the Nobel Prize in economics, F.A. Hayek published “Choice in Currency,”which has inspired a generation of “free banking” economists. Hayek taught us that competition not only respects individual liberty, it produces essential knowledge we cannot obtain any other way. Any central bank is limited in its access to such knowledge, and subject to political pressure, no matter how independent it’s supposed to be. “This monopoly of government, like the postal monopoly, has its origin not in any benefit it secures for the people but solely in the desire to enhance the coercive powers of government,” Hayek wrote. “I doubt whether it has ever done any good except to the rulers and their favorites. All history contradicts the belief that governments have given us a safer money than we would have had without their claiming an exclusive right to issue it.” Former Federal Reserve economist David Barker discussed this idea recently with me. “There are a lot of ways that private money might be better,” Barker said. “It might have embedded chips that would make it easier to count.” The chips would also prevent counterfeiting. There used to be private currencies. A businessman who sold iron and tin made coins that advertised his business. The Georgia Railroad Co. also produced its own currency. This became illegal in 1864 — Abraham Lincoln was a fan of central banking.
Stossel’s historical references are particularly important. As I explain in this video, many nations – including the United States – used to have competing currencies.
And if you want a thorough analysis of the Fed’s performance, I urge you to watch this George Selgin speech. Then ask yourself whether we would have been in better shape with private currencies.
Almost exactly one year ago, I did a post entitled “A Laffer Curve Tutorial” because I wanted readers to have all the arguments and data in one place (and also because it meant I wouldn’t have to track down all the videos when someone asked me for the full set).
Riders from the fiscal policy short bus
Today, I’m doing the same thing on the issue of government spending. If you watch these four videos, you will know more about the economics of government spending than 99.9 percent of the people in Washington. That’s not a big achievement, to be sure, since you’re being compared to a remedial class, but it’s nonetheless good to have a solid understanding of an issue.
You may have noticed, by the way, that this post does not include any of the videos about Keynesian economics or Obama’s stimulus. That’s an entirely different issue, perhaps best described as being a debate over whether it’s good or bad in the short run to increase the burden of government spending. The videos in this post are about the appropriate size and scope of government in the long run.
Well, it turns out that even the International Monetary Fund agrees with me. Here’s what the IMF said in its latest analysis about the Greek fiscal situation.
…further progress in reducing the deficit is going to be hard without underlying structural fiscal reforms. The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent. “One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side.
This is a simple and common-sense observation, as explained in this video.
Unfortunately, even though the IMF now recognizes reality, the same can’t be said about the Obama Administration.
The President has proposed higher tax rates in his recent budget and it seems he can’t make a speech without making a class-warfare argument for penalizing producers, investors, entrepreneurs, and small business owners.
Yet if you compare American tax rates and Greek tax rates, it seems that the IMF’s lesson also applies in the United States.
The top tax in Greece is 45 percent, which is higher than the 35 percent top rate in America. But this doesn’t count the impact of state income taxes, which add an average of about five percentage points to the burden. Or the Medicare payroll tax, which boosts the rate by another 2.9 percentage points.
So Obama’s proposed 4.6 percentage point hike in the top tax rate almost certainly would mean a higher tax burden in the United States.
But there are important cultural differences between the United States and Greece, so there’s no reason to think that the revenue-maximizing tax rates in both nations are the same (by the way, policy makers should strive for growth-maximizing tax rates, not the rates that generate the most money).
But all this analysis may miss the point. Why is the President willing to raise tax rates even if the economy suffers enough damage that the Treasury doesn’t collect any revenue? And if you’re wondering why I might ask such a crazy question, watch this video – especially beginning about the 4:30 mark.
I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.
My arguments have included:
Explaining that this onerous regulatory scheme will result in capital fleeing to other nations, needlessly harming the financial sector and putting American banks at risk.
Explaining why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable and/or repressive governments.
But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.
Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.
For more information about this wretched proposal, here’s a video I narrated on the topic.
To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.
And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.
The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.
But I also believe in being intellectually honest, so I’ll defend a politician I don’t like (even Obama) when they do the right thing or when they get attacked for the wrong reason.
In the case of Romney, some of his GOP opponents are criticizing him for job losses and/or bankruptcies at some of the companies in which he invested while in charge of Bain Capital. But I don’t need to focus on that issue, because James Pethokoukis of AEI already has done a great job of debunking that bit of anti-Romney demagoguery.
In this post, I want to focus on the issue of tax havens.
Regular readers know that I’m a big defender of these low-tax jurisdictions, for both moral and economic reasons, and I guess that reporters must know that as well because I’ve received a couple of calls from the press in recent weeks. But I suspect I”m not being called because reporters want to understand international tax policy. Instead, based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens as part of his work at Bain Capital.
As far as I can tell, none of these reporters have come out with a story. And I’m also not aware that any of Romney’s political rivals have tried to exploit the issue.
But I think it’s just a matter of time, so I want to preemptively address this issue. So let’s go back to 2007 and look at some excerpts from a story in the Los Angeles Times about the use of so-called tax havens by Romney and Bain Capital.
While in private business, Mitt Romney utilized shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides to the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners. …Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in U.S. companies. The arrangement shields foreign investors from U.S. taxes they would pay for investing in U.S. companies. …In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital’s Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans. Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer’s office in downtown Hamilton, capital of the British island territory. … Investing through what’s known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals and university endowments, from paying a 35% tax on what the Internal Revenue Service calls “unrelated business income” from domestic hedge funds that invest in debt, experts say. …Brad Malt, who controls Romney’s financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors. “This is not Mitt trying to do something strange,” he said. “This is Bain trying to raise some number of billions from investors around the world.”
There are a couple of things worth noting about these excerpts.
1. Nobody has hinted that Romney did anything illegal for the simple reason that using low-tax jurisdictions is normal, appropriate, and intelligent for any business or investor. Criticizing Romney for using tax havens would be akin to attacking me for living in Virginia, which has lower taxes than Maryland.
2. Jurisdictions such as Bermuda and the Cayman Islands are good platforms for business activity, which is no different than a state like Delaware being a good platform for business activity. Indeed, Delaware has been ranked as the world’s top tax haven by one group (though American citizens unfortunately aren’t able to benefit).
These three points are just the tip of the iceberg. Watch this video for more information about the economic benefit of tax havens.
Last but not least, here’s a prediction. I think it’s just a matter of time until Romney gets attacked for utilizing tax havens, though the press may wait until after he gets the GOP nomination.
I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.
Perhaps the most surprising revelation in the video is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.
But we don’t read much about that downturn in the history books, in large part because it ended so quickly.
The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?
One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.
But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.
So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.
…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).
The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.
The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.
… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).
This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.
The key lesson in the video is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.
Another interesting finding in the study is that the quality and structure of government matters.
Growth in government size has negative effects on economic growth, but the negative effects are three times as great in non-democratic systems as in democratic systems. …the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size.
The simple way of thinking about these results is that government spending doesn’t do as much damage in a nation such as Sweden as it does in a failed state such as Mexico.
Last but not least, the ECB study analyzes various budget process reforms. There’s a bit of jargon in this excerpt, but it basically shows that spending limits (presumably policies similar to Senator Corker’s CAP Act or Congressman Brady’s MAP Act) are far better than balanced budget rules.
…we use three indices constructed by the European Commission (overall rule index, expenditure rule index, and budget balance and debt rule index). …The former incorporates each index individually whereas the latter includes interacted terms between fiscal rules and government size proxies. Particularly under the total government expenditure and government spending specifications…we find statistically significant positive coefficients on the overall rule index and the expenditure rule index, meaning that having these fiscal numerical rules improves GDP growth for these set of EU countries.
This research is important because it shows that rules focusing on deficits and debt (such as requirements to balance the budget) are not as effective because politicians can use them as an excuse to raise taxes.
At the risk of citing myself again, the number one message from this new ECB research is that lawmakers – at the very least – need to follow Mitchell’s Golden Rule and make sure government spending grows slower than the private sector. Fortunately, that can happen, as shown in this video.
But my Golden Rule is just a minimum requirement. If politicians really want to do the right thing, they should copy the Baltic nations and implement genuine spending cuts rather than just reductions in the rate of growth in the burden of government.
About the only nice thing that can be said about this collection of bureaucrats is that they’re consistent, though I’m not sure being wrong all the time is something to brag about – especially when even cartoonists start to make fun of CBO’s flawed approach.
I’m not alone in my disdain for CBO. In a column for The Hill, Veronique de Rugy of the Mercatus Center makes two excellent points about the Congressional Budget Office: 1) the general inability of economists to predict (we’d be rich if we knew how to do that) and 2) the use of inaccurate models.
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. Whether it scores the recent healthcare bill or the cost of the Capitol Hill Visitor Center, an ambitious three-floor underground facility, the price for taxpayers always ends up larger than originally predicted. …Like many economists, its analysts suffer from a misplaced belief in their forecasting prowess. …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. …But unemployment stubbornly remained around 10 percent. What was wrong with the CBO’s numbers? …the stimulus and the ACA should serve as yet more evidence that Congress should take budget scores and economic projections with a grain of salt. 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.
Let’s now move from the general to the specific. Peter Suderman reports from Reason on new research suggesting that costs for just one provision of Obamacare may be far higher than predicted by the jokers at CBO.
The Congressional Budget Office’s official cost estimate for last year’s health care overhaul projected that the law would cost a little less than $950 billion over its first decade. About half of that cost came from the law’s Medicaid expansion, which was projected to enroll 16 million new individuals in the joint federal-state health care program for the poor and disabled. But researchers at Harvard University are now warning that policymakers should be prepared for substantial uncertainty about the true enrollment effects of the Medicaid expansion. In a paper published in the journal Health Affairs earlier this week, a team of health economists estimated that, under the law, new Medicaid enrollment could be as low as 8.5 million people, but also as high as 22.4 million people—with additional costs to match…meaning that a full decade of the Medicaid expansion alone could end up costing nearly $1 trillion—more than the entire law was supposed to cost in its first ten year out of the gate.
The article does note that it’s possible that costs also might be lower than forecast, but Peter explains why the upper-bound estimate is more likely to be accurate because the law creates perverse incentives.
Indeed, CBO’s failure to recognize that new programs will lure people into greater dependency is one of the biggest reasons that the bureaucracy routinely under-estimates the cost of new programs. This is a point I stressed in my video explaining why Obamacare will be far more costly than CBO predicted.
That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.
The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.
1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.
It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.
This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.
The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.
Sometimes during speeches, when explaining why politicians shouldn’t double tax income that is saved and invested, I ask the audience whether it would make sense to harvest apples by cutting the branches off of trees filled with ripe fruit.
In every audience (at least when I’m not talking to politicians), people instinctively understand that this would be stupid. Cutting off the branches, after all, would reduce the crop in future years. This helps them realize why it is so short-sighted to use tax policy to penalize the capital formation that generates future income.
This new video is designed to make a broader point about the greed of the political class, but you’ll see why I thought about my story about taxation and the apple tree. (warning: one F-word at the end)
Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.
Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people – including me, I’m embarrassed to admit - initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).
But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.
And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.
We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.
The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.
Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.
In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.
As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.
This stimulus video was produced last year and was designed for another jobs plan concocted by the Adminisration, but the message is still very appropriate.
Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.
But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
His numbers are flawed in two important ways.
1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.
Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.
2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).
Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).
If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.
But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.
So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.
For more information about why class-warfare taxes are misguided, this video may be helpful.
Sen. Marco Rubio (R-Fla.) and other Senate Republicans on Tuesday introduced a bill aimed at blocking pending regulations that would require banks to report to the Internal Revenue Service all interest deposits paid to nonresident aliens (NRA). Rubio, along with Texas GOP Sens. John Cornyn and Kay Bailey Hutchison, introduced S. 1506 because they believe the pending regulations have the potential to drive billions of dollars of deposits away from U.S. banks. A summary of the bill provided by Rubio’s office argues that this could leave U.S. banks undercapitalized and less able to lend in the U.S. “Simply put, this rule will cause billions of dollars in important NRA deposits to be withdrawn from American banks and invested in countries with less onerous reporting requirements,” the lawmakers state in the bill summary. “A capital flight of any magnitude will hurt the lending capacity of community banks and damage local and state economies — not to mention endanger those who invest in U.S. banks due to corruption, inflation, and violence in their home countries, particularly in nations like Mexico and Venezuela.” The summary also notes that Congress has explicitly exempted NRA deposits from taxation… Rubio’s bill is a companion bill to H.R. 2568, which was introduced by Reps. Bill Posey (R-Fla.), Francisco Canseco (R-Texas), Mario Diaz-Balart (R-Fla.), Ruben Hinojosa (D-Texas) and Gregory Meeks (D-NY).
Here’s a new video, less than 2-1/2 minutes, pointing out some of the key differences between rich nations and poor nations. Not surprisingly, small government, free markets, and sound institutions are critical.
I narrated a similar video, released more than two years ago, that makes similar points. The production values are not as high, but I had six minutes to play with, so it gave me an opportunity to elaborate on the various factors that contribute to growth. I think the videos are good complements.
This new video from the Center for Freedom and Prosperity explains why Medicaid should be shifted to the states. As I note in the title of this post, it’s good federalism policy and good fiscal policy. But the video also explains that Medicaid reform is good health policy since it creates an opportunity to deal with the third-party payer problem.
One of the key observations of the video is that Medicaid block grants would replicate the success of welfare reform. Getting rid of the federal welfare entitlement in the 1990s and shifting the program to the states was a very successful policy, saving billions of dollars for taxpayers and significantly reducing poverty. There is every reason to think ending the Medicaid entitlement will have similar positive results.
Medicaid block grants were included in Congressman Ryan’s budget, so this reform is definitely part of the current fiscal debate. Unfortunately, the Senate apparently is not going to produce any budget, and the White House also has expressed opposition. On the left, reducing dependency is sometimes seen as a bad thing, even though poor people are the biggest victims of big government.
It’s wroth noting that Medicaid reform and Medicare reform often are lumped together, but they are separate policies. Instead of block grants, Medicare reform is based on something akin to vouchers, sort of like the health system available for Members of Congress. This video from last month explains the details.
In closing, I suppose it would be worth mentioning that there are two alternatives to Medicaid and Medicare reform. The first alternative is to do nothing and allow America to become another Greece. The second alternative is to impose bureaucratic restrictions on access to health care – what is colloquially known as the death panel approach. Neither option seems terribly attractive compared to the pro-market reforms discussed above.
Michael Barone of the American Enterprise Institute goes to town on the selective, discriminatory, and politically motivated dispensation of Obamacare waivers. I particularly like how he zings the left by asking why, if Obamacare is so wonderful, so many millions of people trying to escape the President’s new scheme. But the more important message in his article is how arbitrary application undermines the rule of law.
1,372 businesses, state and local governments, labor unions and insurers, covering 3,095,593 individuals or families,…have been granted a waiver from Obamacare by Secretary of Health and Human Services Kathleen Sebelius. All of which raises another question: If Obamacare is so great, why do so many people want to get out from under it? More specifically, why are more than half of those 3,095,593 in plans run by labor unions, which were among Obamacare’s biggest political supporters? Union members are only 12 percent of all employees but have gotten 50.3 percent of Obamacare waivers. Just in April, Sebelius granted 38 waivers to restaurants, nightclubs, spas and hotels in former House Speaker Nancy Pelosi’s San Francisco congressional district. Pelosi’s office said she had nothing to do with it. On its website HHS pledges that the waiver process will be transparent. But it doesn’t list those whose requests for waivers have been denied. …One basic principle of the rule of law is that laws apply to everybody. If the sign says “No Parking,” you’re not supposed to park there even if you’re a pal of the alderman. Another principle of the rule of law is that government can’t make up new rules to help its cronies and hurt its adversaries except through due process, such as getting a legislature to pass a new law. …Punishing enemies and rewarding friends — politics Chicago style — seems to be the unifying principle that helps explain the Obamacare waivers, the NLRB action against Boeing and the IRS’ gift-tax assault on 501(c)(4) donors. They look like examples of crony capitalism, bailout favoritism and gangster government. One thing they don’t look like is the rule of law.
My contention is that this is the inevitable result of giving more power to Washington. And this gives me an excuse to reuse my video showing the link between big government and corruption.
One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.
For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.
Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.
The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.
To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.
And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.
Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.
Narrated by Hiwa Alaghebandian of the American Enterprise Institute, the mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.
Two things from the video are worth highlighting.
First, we should make sure to put most of the blame on Congress. As Ms. Alaghebandian notes, the IRS is in the unenviable position of trying to enforce Byzantine tax laws. Yes, there are examples of grotesque IRS abuse, but even the most angelic group of bureaucrats would have a hard time overseeing 70,000-plus pages of laws and regulations (by contrast, the Hong Kong flat tax, which has been in place for more than 60 years, requires less than 200 pages).
Second, we should remember that compliance costs are just the tip of the iceberg. The video also briefly mentions three other costs.
2. The budgetary burden of the IRS, which is a staggering $12.5 billion. This is the money we spend to employ an army of tax bureaucrats that is larger than the CIA and FBI combined.
The IRS issued this proposal, even though Congress repeatedly has voted not to tax this income because of an understandable desire to attract job-creating capital to the U.S. economy. In other words, the IRS is acting like a rogue bureaucracy, seeking to overturn laws enacted through the democratic process.
But that’s just the tip of the iceberg. The IRS’s interest-reporting regulation also threatens the stability of the American banking system, makes America less attractive for foreign investors, and weakens the human rights of people who live under corrupt and tyrannical governments.
This Center for Freedom and Prosperity video outlines five specific reason why the IRS regulation is bad news and should be withdrawn.
I’m not sure what upsets me most. As a believer in honest and lawful government, it is outrageous that the IRS is abusing the regulatory process to pursue an ideological agenda that is contrary to 90 years of congressional law. But I guess we shouldn’t be surprised to see this kind of policy from the IRS with Obama in the White House. After all, this Administration already is using the EPA in a dubious scheme to impose costly global warming rules even though Congress decided not to approve Obama’s misguided legislation.
As an economist, however, I worry about the impact on the U.S. banking sector and the risks for the overall economy. Foreigners invest lots of money in the American economy, more than $10 trillion according to Commerce Department data. This money boosts our financial markets and creates untold numbers of jobs. We don’t know how much of the capital will leave if the regulation is implemented, but even the loss of a couple of hundred billion dollars would be bad news considering the weak recovery and shaky financial sector.
In pushing this regulation, the IRS even disregarded rule-making procedures adopted during the Clinton Administration. But all this is explained in the video, so let’s close this post with a link to a somewhat naughty – but very appropriate – joke about the IRS.
To put it mildly, the Federal Reserve has a dismal track record. It bears significant responsibility for almost every major economic upheaval of the past 100 years, including the Great Depression, the 1970s stagflation, and the recent financial crisis. Perhaps the most damning statistic is that the dollar has lost 95 percent of its value since the central bank was created.
Notwithstanding its poor performance, the Federal Reserve seems to get more power over time. But rather than rewarding the central bank for debasing the currency and causing instability, perhaps it’s time to contemplate alternatives. This new video from the Center for Freedom and Prosperity dives into that issue, exposing the Fed’s poor track record, explaining how central banking evolved, and mentioning possible alternatives.
This video is the first installment of a multi-part series on monetary policy. Subsequent videos will examine possible alternatives to monopoly central banks, including a gold standard, free banking, and monetary rules to limit the Fed’s discretion.
One of the challenges in this field is that opponents of the Fed often are portrayed as cranks. Defenders of the status quo may not have a good defense of the Fed, but they are rather effect in marginalizing critics. Congressman Ron Paul and others are either summarily dismissed or completely ignored.
The implicit assumption in monetary circles is that there is no alternative to central banking and fiat money. Anybody who criticizes the current system therefore is a know-nothing who wants to create some sort of libertarian dystopia featuring banking panics and economic chaos.
To be fair, it certainly might be possible to create a monetary regime that is worse than the Fed. That is why the next videos in this series will offer a careful look at the costs and benefits of possible alternatives.
A new video from the Center for Freedom and Prosperity gives four reasons why big government is bad fiscal policy.
I particularly like the explanation of how government spending undermines growth by diverting labor and capital from the productive sector of the economy.
Some cynics, though, say that it is futile to make arguments for good policy. They claim that politicians make bad fiscal decisions because of short-term considerations such as vote buying and raising campaign cash and that they don’t care about the consequences. There’s a lot of truth to this “public choice” analysis, but I don’t think it explains everything. Maybe I’m an optimist, but I think we would have better fiscal policy if more lawmakers, journalists, academics, and others grasped the common-sense arguments presented in this video.
And even if the cynics are right, we are more likely to have good policy if the American people more fully understand the damaging impact of excessive government. This is because politicians almost always will do what is necessary to stay in office. So if they think the American people are upset about wasteful spending and paying close attention, the politicians will be less likely to upset voters by funneling money to special interests.
Iain Murray of the Competitive Enterprise Institute has put together a very depressing column for National Review. To put it bluntly, he exposes the true size of the federal workforce, which has 5.5 hidden employees for every official bureaucrat.
Officially, as of 2009, the federal government employed 2.8 million individuals out of a total U.S. workforce of 236 million — just over 1 percent of the workforce. …Add in uniformed military personnel, and the figure goes up to just under 4.4 million. There are also 66,000 people who work in the legislative branch and for federal courts. That makes the figure around 2 percent of the workforce. Yet even that doesn’t tell the full story. A lot of government work is done by contractors or grantees — from arms manufacturers to local charities, from environmental-advocacy groups to university researchers. …Unfortunately, we can’t ask the Office of Personnel Management (OPM) how many government contractors and grantees there are. They don’t keep such records. …Instead, we can ask Prof. Paul Light of New York University, who has estimated the size of these shadowy branches of government. As he points out, while there are many good reasons for the government to use contractors (should the feds really be in the business of making dentures for veterans, as they were until the 1950s?), the use of contracts and grants also hides the true size of government…By 2005, the federal government employed 14.6 million people: 1.9 million civil servants, 770,000 postal workers, 1.44 million uniformed service personnel, 7.6 million contractors, and 2.9 million grantees. This amounted to a ratio of five and a half “shadow” government employees for every civil servant on the federal payroll. Since 1999, the government had grown by over 4.5 million employees. Professor Light’s figures are from 2006, but there can be little doubt that the size of the federal government has increased still further since. There are those new contractors and grantees working on “stimulus” projects to add. Then there are the employees of bailed-out and partially nationalized firms: General Motors (still owned in large part by the government despite the sale of stock in November 2010), AIG, and a large number of banks. GM alone employs 300,000 people. …Even if it grew at the same rate as it did between 1999 and 2005 (a conservative assumption), that would suggest a further 4.7 million employees dependent on taxpayer funding since 2005, bringing the total true size of the federal government to just under 20 million employees.
The video below also discusses the hidden or shadow bureaucracy (albeit briefly, around the 1:00 mark). The main focus of the mini-documentary is how bureaucrats are grossly over-compensated compared to workers in the productive sector of the economy. So the overall message is that there are far too many bureaucrats and they are paid way too much.
A former Cato colleague, Will Wilkinson, made one of the most astute and powerful observations I have ever read when he wrote that, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”I thought about this statement when I read a column today by muckraking journalist Tim Carney, who discusses how former Republican Senator Bill Frist is advising his fellow GOPers to surrender and give up the fight against Obamacare. But, as Tim warns, Frist is not an impartial observer. He is getting rich (or richer, to be more accurate) by helping special interests line their pockets by taking advantage of the government’s added power over the health care sector.
If you’re a Republican, and you don’t want the media to pry into your financial conflicts of interest, there used to be a simple method: support Democratic big-government policies. The latest Republican to try this rule is Bill Frist. …as I wrote in my column last year:
Frist is a partner in a private investment firm that bets on health care companies — and on regulation…. So Frist gets rich by helping pick the health care companies that will get rich. Now he’s backing Obamacare — and winning praise for it.
Look at some of the language on Cressey & Co’s webpage. “The Cressey & Company strategy applies unique insights and experience to produce extraordinary results” [emphasis added]. What “unique insights” do you think Frist provides? Another page on the site gives us a hint: “With deep expertise in the healthcare reimbursement and regulatory environments, the Cressey & Company team has invested in almost every for-profit niche of healthcare.” Stein noted Frist’s conflicts of interest, but don’t expect the rest of the media to be as thorough — after all, last year, Frist got a free pass as did health-care lobbyist Bob Dole. Sharing the stage with Frist was Tom Daschle, a K Street consultant for many health-care companies. The venue: The Bipartisan Policy Center. That’s a clue — if you hear the word “bipartisan,” there’s a good chance everyone on the marquee is getting paid.
Tim’s work on these issues is first rate, and you should follow what he writes – but only if you have a strong stomach and low blood pressure. Why? Because if you follow his work, you will understand that the worst forms of redistribution in Washington are the ones that 1) take place behind closed doors, and 2) transfer money from ordinary people to the rich and powerful.
This is the essential point of my video linking big government to corruption, though I wasn’t as succinctly eloquent of Will Wilkinson or as exhaustively detailed as Tim Carney.
This doesn’t have the production quality of the Hayek-Keynes rap video, and it presumably won’t get as many views, but this young lady has a very clever love song for Friedrich Hayek.
The White House recently released a video, narrated by Austan Goolsbee of the Council of Economic Advisers, asserting that higher tax rates on the so-called rich would be a good idea.
Since Goolsbee’s video made so many unsubstantiated assertions and was guilty of so many sins of omission, here’s a rebuttal video, narrated by yours truly.
This new Center for Freedom and Prosperity video includes the full footage of the White House production, so viewers can decide for themselves which side is correct.
Please share this video with everyone you know. It explains the “Rahn Curve,” which is a spending version of the Laffer Curve. Named after Cato Institute’s Richard Rahn, the Curve shows that modest amounts of government spending – for core “public goods” such as rule of law and protection of property rights – is associated with better economic performance.
But when government rises above that level (as it has in all developed nations), then more government is associated with slower growth.
I only vaguely remember this debate that took place at Furman University, and I never saw this recording until it arrived in my inbox today. I invite fans of both the flat tax and FairTax to watch this debate and let me know your thoughts.
Many of my arguments, by the way, also apply to the debate on the value-added tax. Simply stated, I don’t trust politicians when they claim a VAT won’t be used to increase the overall burden of government.
But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.
But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.
Institute’s Richard Rahn, the Curve shows that modest amounts of government spending – for core “public goods” such as rule of law and protection of property rights – is associated with better economic performance.
