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I’m a bleeding heart libertarian in that I get most upset about statist policies that make life harder for disadvantaged people so that folks with more money can get undeserved goodies.

  • For instance, I despise anti-school choice leftists because they value political support from teacher unions more than they value opportunity for poor kids.
  • And I get very agitated that about the Export-Import Bank, which is a form of corporate welfare that transfers money from the general population to the rich.

Another example is occupational licensing, which occurs when politicians require newcomers to jump through expensive and/or time-consuming hoops before getting “permission” to provide a good or service. These licensing rules create unjust profits for established businesses by hindering competition, and they are especially burdensome for poor people, all of which is explained in this superb video from the Institute for Justice.

But if there’s a sliver lining to that dark cloud, it’s this image that I will add to my collection of libertarian humor. To be fair, I don’t know if it counts as purely libertarian humor, but I saw it on Reddit‘s libertarian page and it definitely makes the right points.

If you like libertarian humor, both pro and con, click here, here, and here for other examples.

P.S. Let’s close by sharing some good news on a serious topic.

Unlike the short-sighted politicians in the United States, the crowd in Australia seems a bit more level-headed on the issue of competitive corporate taxation. Here are some excerpts from a story in the U.K.-based Guardian.

The Turnbull government has given big business exactly what it wants – a substantial tax cut. It has also extended the Abbott government’s small business tax package by giving small and medium businesses more tax cuts and incentives. …“Our corporate tax rate is high by international standards and well above the average for OECD countries and those in the Asian region,” the budget papers say. “This will make Australian companies more internationally competitive in a tough global market place.” The government plans to cut the corporate tax rate significantly, from 30% to 25%. …The cut will be phased in over 10 years… The treasurer, Scott Morrison, says treasury modelling suggests the measures will grow the economy by 1% over the long term. He says they will lead to higher living standards, via increased business investment and more jobs.

I certainly don’t think “significantly” is a word to describe a modest five-percentage-point reduction in the rate, but kudos to Aussie politicians for moving in the right direction. I also like the part about “treasury modelling,” which suggests that the Australians also have a sensible approach on the issue of static scoring vs. dynamic scoring.

So perhaps now you can understand why Australia is my choice if (when?) the welfare state collapses in the United States (though I’m still of the opinion that the Swiss are the world’s most sensible people).

Let’s take a look at President Obama’s economic legacy.

The Washington Examiner opines on President Obama’s remarkable claim that he saved the world economy.

President Obama…wants to be remembered for…[being]…the savior of the American and global economies. “There are things I’m proud of,” he said, citing Obamacare, then added, “Saving the world economy from a Great Depression, that was pretty good.”

Not so fast. Looking at the economy’s anemic numbers the editors are less than impressed.

Obama will end eight years in office without presiding over a thriving economy of the sort America enjoyed in the past. It also suggests that even the mediocre growth of recent years depended on high oil prices, which have collapsed by more than half. This is the bitter fruit of creationist economics, the erroneous belief that government activity can somehow conjure new wealth and value.

The Wall Street Journal is similarly dour about Obama’s economic legacy.

When did Americans decide that 1% or 2% economic growth is acceptable, that puny wage increases are inevitable, and that we should all merely shrug and get used to the country’s diminished expectations? …the first quarter is further evidence of what has been the weakest economic expansion in the postwar era. …All of this continues the slow-or-slower pace of this entire expansion that began nearly seven years ago. Each year has had a similar GDP dip, and growth has never exceeded 2.5% (2010). The American economy hasn’t grown by more than 3% since 2005 (3.3%), the longest such stretch of malaise that we can find in the Bureau of Economic analysis tables going back to 1930. …Faster growth is possible, but it will take better policies.

In a column for Bloomberg, Narayana Kocherlakota, looks at what’s happened and compares it to what CBO projected would happen.

it’s not hard to see why many people are disappointed with the performance of the economy during Obama’s time in office. In January 2009, at the beginning of Obama’s first term, the nonpartisan Congressional Budget Office issued a 10-year forecast for the U.S. economy, including such indicators as unemployment, gross domestic product, the budget deficit, government debt and interest rates. …The unemployment rate has come closest to expectations. …Elsewhere, the story is less positive. Total income growth in the U.S. has fallen well short of expectations, in both nominal and inflation-adjusted terms. …the federal budget deficit…still much larger than the CBO forecast in 2009 — as is the ratio of government debt to GDP.

Here’s his chart.

Last, but not least, Louis Woodhill shares some numbers that capture Obama’s real legacy.

America’s elites have largely given up on growth, and are now distracting themselves with academic musings about “secular stagnation.” …assuming 2.67% RGDP growth for 2016, Obama will leave office having produced an average of 1.55% growth. This would place his presidency fourth from the bottom of the list of 39*, above only those of Herbert Hoover (-5.65%), Andrew Johnson (-0.70%) and Theodore Roosevelt (1.41%)

What makes this final comparison so damning is that Obama had the comparative good fortune to enter office in the middle of a recession. Which means, all things equal, that his numbers should look very positive.

Instead, he’s managed to compile one of the worst track records.

When I do comparisons, I like using the interactive recession/recovery site of the Minneapolis Federal Reserve, which allows users to compare every recession and recovery since the end of World War II.

Here’s how President Obama (red line) ranks on GDP growth.

As you can see, whether your starting point is the beginning of the recovery or the beginning of the recession, Obama is in last place.

He does slightly better on employment. He still has one of the worst records (again, the red line), but he does beat George W. Bush’s also-anemic performance on job creation.

By the way, some of you may be wondering why the employment data for Obama is so weak when the unemployment rate has significantly fallen.

The answer is that the unemployment rate doesn’t count people who have given up on finding a job, whereas the Minneapolis Fed data counts how many new jobs are being created.

And it’s the amount of people productively employed that matters if we want more economic output, so the Minneapolis Fed data is far more important and revealing than the official unemployment rate numbers.

Unfortunately, Obama and his team haven’t figured out (or simply don’t care) that jobs are more likely to be created when government is smaller rather than bigger.

By the way, this analysis presumably won’t be very compelling for Obama supporters because they’ll simply assert things could have been much worse without his policies.

They may even believe the President’s claim that he saved the American economy from a Great Depression.

But they overlook the fact that the economy normally bounces back quickly from a downturn. It was only during the 1930s, when Hoover and Roosevelt competed to impose bad policy, that a recession became a depression.

The bad news is that President Obama’s policies haven’t helped today’s economy, but the good news is that his policies are nowhere near as harmful as the combined statist agendas of Hoover and Roosevelt.

So if we want to learn a lesson on what works, the economy’s very strong boom under Reagan is a good case study. And if you want to go back further, the anti-Keynesian booms after World War I and World War II also teach important lessons.

P.S. President Obama is completely correct when he points out that America’s economy is generally stronger than European economies. Unfortunately, he doesn’t seem to realize what this implies.

I’ve previously argued that private property rights are a vital component of a pro-environment agenda.

Interestingly, the Washington Post sort of agrees. At least with regards to fisheries. In a recent editorial, it acknowledged that the current communal system doesn’t work.

The world’s fisheries, which feed billions of people, are in serious decline. The authors of a study released Monday in the Proceedings of the National Academy of Sciences examined 4,713 fisheries, accounting for 78 percent of the world’s annual catch, and found that only a third were in decent biological shape.

The editorial then points out that there’s an incentive to over-harvest because the oceans are communal property, which creates a “tragedy-of-the-commons” scenario.

…while the fishing industry as a whole has an interest in sustaining the fisheries that provide it profits and feed the world, individual fishermen have an incentive to take as much as they can as quickly as they can. Over time, they degrade the fisheries on which they rely, but if they want to stay in business, they have little choice.

And the editorial concludes that giving fishermen the property right to a “catch share” would create better incentives.

…governments have extremely effective policy options to eliminate this tragedy of the commons. …governments must give fishermen a stake in the overall health of their fisheries. …require fishermen to hold rights to catch a certain amount of seafood in a certain fishery, which allows governments to manage the total haul and reduces the frenzied competition to scoop up as much as possible as quickly as possible. Ideally, these “catch shares” could be bought and sold so that rights would end up with those who could fish most efficiently.

Some of the language in the editorial rubs me the wrong way, such as “require fishermen” and “allows governments to manage,” but the bottom line is that the new system would be much more akin to a genuine market based on property rights.

To understand, consider the following example. Imagine there’s a communally owned pasture and a bunch of sheep owners. Would there be any incentive for the individual shepherds to properly conserve and manage the pasture? Not really, because any grass that wasn’t eaten by their sheep would be eaten by another shepherd’s sheep. So you wind up with a system where all the shepherds have an incentive to have their sheep consume as much grass as possible as quickly as possible.

That doesn’t end well.

But what if the pasture was divided up so that each shepherd had a plot of land, along with the right to buy and sell that land? With that system, the incentive to practice good husbandry would radically change.

And that’s basically what happens when you create a property rights-based fisheries system.

And the Washington Post believes this kind of approach could be enormously beneficial.

If applied globally, modern management plans could rehabilitate the median fishery in less than a decade. By 2050, nearly every fishery on the planet would be healthy. The resulting benefits would be astonishing. Relative to business as usual, the refreshed catch would grow by an annual 16 million metric tons, and seafood stocks would rise by 619 million metric tons. Fishermen would see an annual $53 billion rise in profit, a jump of 64 percent. The world’s fisheries could feed more people, and the fishing industry could boom, too.

Wow, this is so effusive that it sounds like me describing the benefits of a flat tax.

But just like I rely on real-world evidence for my praise of the flat tax, there’s also real-world evidence for successful fisheries based on property rights.

Consider, for instance, the experience of New Zealand.

By the early 1980s, with dwindling inshore stocks and too many boats, the New Zealand fishing industry and the government realised that a new fisheries management system was needed. Measures such as moratoriums and controlled fisheries failed to work. The common warning that ‘too many boats are chasing too few fish’ was rephrased by one fisherman as, ‘too many boats chasing no fish’. Radical thinking emerged. …In October 1986, after two years of consultation and planning, the Quota Management System was introduced, with widespread industry support. …Under the quota system a sustainable total catch or harvest of fish was set. Individuals or companies were allocated the right to catch certain quantities of particular species. Quotas became like other forms of property – they could be leased, bought, sold or transferred.

And how has this system worked?

It’s been a big success.

New Zealand’s Quota Management System has been viewed internationally as successful. This is particularly in comparison with many of the world’s fisheries… New Zealand has (so far) largely avoided the significant stock collapses that have occurred in fisheries overseas. In the early 2000s the Ministry of Fisheries had records on the status of 60–70% of stocks. Of these, about 80% were at or near target levels for sustainable harvest, and the total allowable catch for some fish had even increased.

The Economist, meanwhile, has written about Iceland’s system.

Central to its policy are the individual transferable quotas given to each fishing boat for each species on the basis of her average catch of that fish over a three-year period. …Subject to certain conditions, quotas can be traded among boats. Bycatch must not be discarded. Instead it must be landed and recorded as part of that boat’s quota. If she has exhausted her quota, she must buy one from another boat… All quota changes, catches and landings are posted on the internet, enabling everybody to see what is going on. The idea is to let fishermen be guided by the market. …Iceland no longer suffers from overcapacity, and the catch per boat is increasing. …Iceland offers lessons for other countries. The essential elements of its policies are to give fishermen rights that offer a reasonable expectation of profitable long-term fishing by encouraging the conservation of stocks. The system is clear, open and fairly simple, and it is well policed. It thus enjoys the respect of fishermen.

And the contrast to the command-and-control system used by the European Union is dramatic.

This contrasts with the common fisheries policy of the EU… For years, the union has simultaneously discouraged and promoted fishing, even as stocks have declined. Overfishing has intensified and the overcapacity of the fleet a few years ago rose to the point where the number of boats was almost twice the number needed for a sustainable harvest. The EU has offered inducements to those who gave up fishing even as it provided subsidies… The EU’s fisheries policy has long been notorious for its destructiveness, epitomised by the practice it either mandates or encourages of chucking back dead fish that are not big enough or not valuable enough, or just the wrong sort. …No wonder the EU’s stocks are 88% overfished, as the European Commission itself now admits. …No minister is present to represent the taxpayer, the consumer or the environment, let alone the fish.

The key, everywhere in the world, is a system of property rights.

Europe could surely learn from Iceland, but how widely could Iceland’s policies be copied? …The solution for Europe, and for other places, lies in a policy with Icelandic features: transferable quotas for all commercial species… Property rights are nearly always crucial in this. The tragedy of the sea is the tragedy of the commons, which is that anyone with access to a common resource has an interest in over-exploiting it because if he does not, someone else will. …Most fish…live fairly close to land, which is where they can, if the political determination exists, be assigned to the ownership of people with an interest in both exploiting and preserving them for a very long time, if not eternity. That this is so has been shown by Christopher Costello, an economist at the University of California, Santa Barbara, and his colleagues, in a study of over 11,000 fisheries. In the 121 with ownership-share systems, he reported in Science last September, the rates of collapse were significantly lower than in the others.

Having “rates of collapse” suggests that the property rights-based systems don’t always work perfectly. But that fact that those rates are “significantly lower” also indicates that they are far more effective than communal fisheries in preserving fish stocks.

P.S. There’s a worrisome analogy between communal fisheries and the welfare state since both involve a tragedy of the commons. In the case of the welfare state, when too many people decide to rely on the “communal property” of government for their existence, this creates a “tipping point” because productive people at some point are either unable or unwilling to continue pulling the wagon.

P.P.S. This is a lesson that the Pilgrims learned very quickly.

P.P.P.S. Unfortunately, larger societies have a tendency to develop “goldfish governments.”

I’m a proud advocate and defender of capitalism for the simple reason that it is a system that is consistent with human freedom while also producing mass prosperity that was unimaginable for much of human history.

Jurisdictions that embrace capitalism enjoy great progress while nations that veer in the other direction suffer economic decline, as vividly demonstrated by comparisons such as the relative performance of Hong Kong and Argentina.

And, for what it’s worth, the Princess of the Levant even says capitalism is “a sexy word.”

But not everybody agrees.

A column by Greg Sargent in the Washington Post has some very depressing poll numbers.

…the Harvard Institute of Politics has released a new poll of young voters… One key finding in the poll, which surveyed over 3,000 people from ages 18-29, is that these young people see a robust role for government in guaranteeing a right to a basic standard of living, and majorities of them see a large or moderate federal role in regulating the economy and access to health care and higher education. …A narrow majority of respondents in Harvard’s poll said they did not support capitalism.

Writing for Mic, Marie Solis looks at these recent poll numbers and wonders if the real issue is whether “capitalism” is simply an unpalatable word.

A new Harvard University survey found 51% of the participants between the ages 18 and 29 said they do not support capitalism. …The university’s results echo recent findings from Republican pollster Frank Luntz, who surveyed 1,000 Americans between the ages of 18 and 26 and found that 58% of respondents believed socialism to be the “more compassionate” political system when compared to capitalism. …the results may be more indicative of a shifting connotation for the word “capitalism” itself. “The word ‘capitalism’ doesn’t mean what it used to,” he said. “You don’t hear people on the right defending their economic policies using that word anymore.”

Not so fast. I still use “that word.”

But should I? James Pethokoukis of the American Enterprise Institute is sympathetic to the notion that there’s a perception problem. He speculates that the real problem is that capitalism now has a negative connotation.

America’s millennials are hardly some fifth column of communist sympathizers. Nor are they idiots. But they are at least a bit skeptical of “capitalism.” …Yet, oddly, many of those same capitalism skeptics also hold views similar to those of any Ayn Rand-loving free marketeer. For example: Less than a third believe government should play a large role in regulating the economy, reducing income inequality, or stimulating economic growth. Likewise, just a third said they supported socialism.

I fear Pethokoukis is being too optimistic in his reading of the polling data. When you review the questions in the poll and add together those who want a “large” role for government with those who favor a “moderate” role for government, they overwhelm the advocates of laissez-faire who say government should play “little to no role.”

Though maybe I’m just being a pessimist since the folks who want a “moderate” role may think the government today already is playing a “large” role and therefore would want to reduce the size and scope of Washington (though the fact that many people actually blame deregulation for the financial crisis, notwithstanding all the evidence to the contrary, makes me think that would be a Pollyannish interpretation of the polling data).

In any event, let’s return to the issue of whether capitalism is akin to a toxic brand.

Maybe one problem here is the word “capitalism” and what it evokes in the aftermath of the Great Recession and Wall Street bailout. Maybe “capitalism” really isn’t the right word for the free enterprise system, the deep magic that has made America the richest, most powerful nation on Earth. Indeed, wherever and whenever there’s been a bit of economic freedom, amazing things have happened — from Europe in the 1800s to China and India in the late 20th century. …Maybe millennials aren’t capitalists as much as they are “innovists” or “innovationists.” They believe the same dynamic economic system that created those amazing panes of internet-connected glass in their pockets will also create a better world.

It galls me that young people blame capitalism for the financial crisis. Have they ever heard of the Federal Reserve? Or Fannie Mae and Freddie Mac?

Blaming capitalism for the recent mess is like blaming the Red Cross for tornadoes. Sounds like millennials don’t know the difference between capitalism and cronyism.

But I’m digressing again. Time to get back to the central topic. Elizabeth Nolan Brown weighs in with a column for Reason.

…this new poll finds young people torn between “capitalism” and “socialism,” with perhaps little—or, to be more charitable, an ahistorical—understanding of what either means.

I definitely agree with her than millennials are confused about what these terms mean.

But grousing about their lack of knowledge doesn’t solve the problem. But maybe we can make progress if we learn why young people think the way they do.

…words—especially big, emotionally-laden words describing controversial or complicated concepts—connote different things to different people. When pollsters probe young people further about socialism and capitalism, they tend to find that respondents don’t have clear concepts of these economic philosophies. To many millennials, “socialism” doesn’t mean a government-managed economy but something like what we have now, only with more subsidized health care, student-loan forgiveness, and mandatory paid parental leave. …”Capitalism,” meanwhile, doesn’t simply mean private, for-profit enterprise. …Capitalism is Big Banks, Wall Street, “income inequality,” greed. It’s wealthy sociopaths screwing over the little guy, Bernie Madoff, and horrifying sweatshops in China. …However incomplete or caricatured, these are the narratives of capitalism that millennials have grown up with.

She basically comes to the same conclusion as Pethokoukis.

We certainly need to consider whether and how the word can be reclaimed, or if we’re better served talking about the “market economy,” “private enterprise,” “free trade,” or “entrepreneurship.” Millennials love the word entrepreneur… Unlike anti-capitalists of yore, young people today don’t seem to see a tension between turning a profit and living righteously. …As John Della Volpe, polling director at Harvard, puts it, millennials aren’t “rejecting the concept” of capitalism. “The way in which capitalism is practiced, in the minds of young people—that’s what they’re rejecting.”

Indeed, she shares some 2014 polling data that shows there is 2-1 support for free markets, which is significantly better than the level of support for capitalism.

This analysis is persuasive. If we can convince more people to support good policy by talking about “free markets” rather than “capitalism,” then I have no objection to using a more effective phrase or word.

For what it’s worth, opponents of economic liberty such as Karl Marx were among the first to use the term “capitalist” and they obviously meant it as a slur. Which is another reasons why advocates of economic liberty shouldn’t feel obliged to use that word.

That being said, I’m not sure whether using a different word or phrase will make a big difference. I remember when Social Security reform was a big issue between 1995-2005. Proponents were repeatedly told that “private” and “privatization” were words to avoid, so we all dutifully said we were for “personal retirement accounts.”

Which was fine, but it didn’t stop leftists from using “privatization.” Moreover, polling data showed considerable support for the idea, notwithstanding demagoguery from advocates of the status quo.

Now that we’ve discussed whether “capitalism” is a bad word, let’s shift gears and look at whether “liberal” should be a good word.

Professor Daniel Klein says the word has been hijacked by statists.

Here I make a plea, addressed to conservatives and libertarians, regarding the word liberal: please do not describe leftists, progressives, social democrats, or Democrats as “liberal.” …Words have deep-seated cognates and connotations; they have character and history. …The term liberal has always had an abundance of positive connotations: generous, open-minded, tolerant, big-hearted. …to oppose “liberals” almost seems tantamount to opposing modern, open civilization.

And “liberal” originally was linked to economic liberty and free markets.

The inception of liberal as a political term should be credited to the Scottish historian William Robertson, who published a book in 1769 that uses the term repeatedly to mean principles of liberty and commercial freedom. Adam Smith…used the term repeatedly in a signal way to refer to the sort of policy he advocated, a system that gives a strong presumption to individual liberty, and hence commercial and market freedom. …The principles of Adam Smith spread throughout Europe, as did the name he used for them, “liberal.” …so “liberal” political movements were born.

But then the statists began to call themselves liberals.

At the end of the nineteenth century, and thereafter, there came a dramatic shift. Collectivism or statism was on the rise. …Especially during the period 1880 to 1940, there came great changes in the meanings of words, changes in semantics. …people started using words in new ways, and often even announced and emphasized the newness of their usage and meaning. …the statists arrogated the term liberal to themselves… The literature of the so-called New Liberals declaimed openly against individual liberty and in favor of state collectivism and socialistic reform.

Interestingly, the bastardization of “liberal” has primarily occurred in the United States and Canada.

…when we step outside North America, we see that, by and large, liberal still means liberal…read and listen to European Parliament member Daniel Hannan, who often uses liberal proudly in its original sense, and who never calls leftists “liberal,” or to read the journal of the Institute of Economic Affairs (London)—Economic Affairs: A Journal of Liberal Political Economy. …In Prague, for example, the leading freedom-oriented organization is called the Liberal Institute. Where liberal still means liberal, such as in Europe and Latin America, leftists have no reluctance in calling their imaginary bogeyman “neoliberalism.”

I can vouch for that. I’m often accused of being a “liberal” or “neo-liberal” when speaking overseas. It took a while to get used to it, but now I smile and say “yup, that’s me.”

And I’ll sometimes use “classical liberal” and “libertarian” interchangeably when speaking in the United States. But given the way the meaning of the word has changed over time, I don’t think it would make sense to the average person if I referred to myself as “liberal.”

That being said, I fully agree with Professor Klein that we shouldn’t let leftists get away with using that term to describe themselves. I prefer to describe them as “statists.”

P.S. Tom Sowell has a more controversial, but technically accurate, term to describe modern leftists.

What’s the worst loophole (properly defined) in the cluttered internal revenue code?

I think the deduction for state and local taxes is very bad policy since it enables higher tax burdens in states such as California, New Jersey, and Illinois. The exemption for municipal bond interest is another misguided provision since it makes it easier for states to finance spending with debt.

Special favors in the tax code for ethanol also deserve scorn and disdain, and I’m also not a fan of the charitable deduction or the ways in which housing gets preferential treatment.

But if I had to pick just one tax preference to repeal, it would be the so-called healthcare exclusion. This is the policy that enables employers to deduct the cost of health insurance policies they buy for their employees.

You may think that deduction is reasonable. After all, employers also can deduct the wages and salaries they pay their employees. But here’s the catch. Employees pay tax on their wages and salaries, but they don’t have to pay tax on the value of their health insurance, even though such policies obviously are a form of compensation.

Moreover, since this type of compensation is shielded from both income taxes and payroll taxes, the playing field is therefore very tilted, which generates some very perverse results.

First, some background. As part of a broader analysis of the non-taxation of fringe benefits, Scott Greenberg of the Tax Foundation explains how government has created a big incentive to take income in the form of fringe benefits rather than wages and salaries.

…eighty years ago, it was relatively uncommon to offer workers compensation other than their regular wages and salaries. In 1929, only 1.9 percent of employee pay took the form of fringe benefits. By 2014, fringe benefits had risen to 19.2 percent of worker compensation.

Here’s a chart looking at the historical data.

Greenberg says this distortion in the tax code is unfair.

…the growing trend of unreported fringe benefits is “inequitable and inefficient.” This claim is spot on. For an illustration, imagine two employees, one of whom makes a salary of $100,000, and one of whom makes a salary of $80,000 and benefits worth $20,000, which largely go unreported. Although both workers receive the same overall compensation, the first employee is subject to a significantly higher tax burden than the second, which seems plainly unfair.

Moreover, the distortion lures people into making economically foolish choices.

Furthermore, this arrangement incentivizes companies to shift more compensation towards benefits, to help employees avoid taxes. This leads to an inefficient allocation of resources, towards services that employers might not have been willing to pay for in the absence of tax incentives.

He’s correct

Writing for the Weekly Standards, Ike Brannon looks specifically at the biggest tax-free fringe benefit.

…allowing employers to provide health insurance tax-free to their workers is terrible policy, a truism that any honest economist—whether liberal, conservative, or otherwise—would agree with. …First, workers end up with more health insurance than they would ever purchase on their own (since tax-free health insurance is worth more than income that’s taxed at 30%-50%), which gives people less take-home pay to spend as they see fit. Second, more generous health insurance entails lower co-pays as well as other provisions that insulate the worker from the actual cost of their health care. As a result, people become less sensitive to prices when seeking health care, and they consume more of it—most of which does nothing to improve health outcomes, numerous studies have shown.

For further details on this unfortunate tax preference, A. Barton Hinkle looks at the evolution of the health exclusion in a column for Reason.

…the original sin of the American health-care marketplace…was committed back in World War 2, when inflation led workers to demand higher wages – which many employers could not afford to pay because of price controls. …With wages frozen, employers needed another way to compete for labor made scarce by the draft. So some began offering health coverage. The practice took root, spread, and outlasted the war. In 1949 the National Labor Relations Board ruled that health benefits counted as wages for the purpose of union negotiations. Five years later, the IRS ruled that health coverage was not taxable income. The result was a double incentive for employers to offer fatter health benefits in lieu of fatter paychecks. …The result: a skyrocketing, ultimately unsustainable increase in national outlays for health care. …In short, for decades the federal government has encouraged employers to provide gold-plated health-care plans.

Joe Antos of the American Enterprise Institute explains how the “healthcare exclusion” is bad fiscal policy, bad health policy, and bad economic policy.

If we hope to move to an efficient healthcare system that is fair to everyone, Congress will have to take on the largest subsidy in the tax code. …Premiums paid for employment-based health insurance are excluded from federal income and payroll taxes.

When describing provisions that allow people to keep more of their own money, I would prefer to say largest distortion rather than largest subsidy, but I realize I’m being pedantic. Regardless of word choice, the net effect of this preference is negative.

The tax exclusion…fuels the rapid growth of health spending, contributes to stagnating wage growth, and disadvantages low-wage workers. Because there is no limit on how much can be excluded from taxes, workers are encouraged to buy more expensive coverage than they would otherwise…makes consumers less sensitive to prices and promotes the use of medical services, including services that may not provide much value to the patient.

Let’s take a closer look at some of the problems associated with the exclusion.

The exclusion has caused a shift in compensation from taxable cash wages to greater health benefits which are not taxed. Between 1999 and 2015, the average employer contribution for family coverage nearly tripled while wage rates increased by only about half.

By the way, our leftists friends should oppose the exclusion for class-warfare reasons.

…workers in higher tax brackets benefit the most from the exclusion. The Joint Committee on Taxation found that the average savings for tax filers with incomes less than $30,000 was about $1,650 compared to about $4,580 for those with incomes over $200,000.

To deal with these negative effects, Antos proposes a modified version of the “Cadillac tax” from Obamacare combined with tax credits for consumers who purchase their own health insurance.

That’s better than the status quo, but the ideal solution is a flat tax, which would eliminate the deduction provided to employers for compensation in the form of fringe benefits.

In their book on tax reform, Professors Hall and Rabushka explain the obvious beneficial consequence of a level playing field for all forms of compensation.

The flat tax eliminates the distortion toward fringe benefits created by the fact that employers can deduct them, thereby receiving a subsidy that can be passed on to their employees. The best alternative, and one we expect your employer to select, is to offer you higher pay in exchange for lower fringes. You can then use the extra cash to buy whatever combination of benefits you desire.

This will make the healthcare marketplace much more efficient.

Here’s what I wrote about the healthcare exclusion way back in 2009, as part of a column on government-created inefficiency in the health sector.

…social engineering in the tax code created this mess. Specifically, most of us get some of our compensation in the form of health insurance policies from our employers. And because that type of income is exempt from taxation, this encourages so-called Cadillac health plans.  …our gold-plated health plans now mean we use insurance for routine medical costs. This means, of course, we have the paperwork issues discussed above, but that’s just a small part of the problem. Even more problematic, our pre-paid health care system is somewhat akin to going to an all-you-can-eat restaurant. We have an incentive to over-consume since we’ve already paid. Except this analogy is insufficient. When we go to all-you-can-eat restaurants, at least we know we’re paying a certain amount of money for an unlimited amount of food. Many Americans, by contrast, have no idea how much of their compensation is being diverted to purchase health plans. …this messed-up approach causes inefficiency and higher costs. We consumers don’t feel any need to be careful shoppers since we perceive that our health care is being paid by someone else. Should we be surprised, then, that normal market forces don’t seem to be working? (though it is worth noting that costs keep falling and quality keeps rising in the few areas – such as laser-eye surgery and cosmetic surgery – that are not covered by insurance) Imagine if auto insurance worked this way? Or homeowner’s insurance? Would it make sense to file insurance forms to get an oil change? Or to buy a new couch? That sounds crazy. The system would be needlessly bureaucratic, and costs would rise because we would act like we were spending other people’s money.  But that’s what would probably happen if government intervened in the same way it does in the health-care sector.

By the way, to make sure politicians don’t get a windfall of new revenue, the healthcare exclusion should only be repealed as part of a reform that also lowers tax rates.

Here’s a video from the Center for Freedom and Prosperity that highlights how the healthcare exclusion is a major cause of the third-party payer problem.

And if you like videos, I strongly recommend this Reason TV explanation of how simple and affordable healthcare can be in the absence of government-created third-party payer.

We can learn a lot of economic lessons from Europe.

Today, we’re going to focus on another lesson, which is that higher taxes lead to more red ink. And let’s hope Hillary Clinton is paying attention.

I’ve already made the argument, using European fiscal data to show that big increases in the tax burden over the past several decades have resulted in much higher levels of government debt.

But let’s now augment that argument by considering what’s happened in recent years.

There’s been a big fiscal crisis in Europe, which has forced governments to engage in austerity.

But the type of austerity matters. A lot.

Here’s some of what I wrote back in 2014.

…austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint). But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).

And when I claim politicians in Europe have chosen the wrong kind of austerity, that’s not hyperbole.

As of 2012, there were €9 of tax hikes for every €1 of supposed spending cuts according to one estimate. That’s even worse than some of the terrible budget deals we’ve seen in Washington.

At this point, a clever statist will accuse me of sour grapes and state that I’m simply unhappy that politicians opted for policies I don’t like.

I’ll admit to being unhappy, but my real complaint is that higher tax burdens don’t work.

And you don’t have to believe me. We have some new evidence from an international bureaucracy based in Europe.

In a working paper for the European Central Bank, Maria Grazia Attinasi and Luca Metelli crunch the numbers to determine if and when “austerity” works in Europe.

…many Euro area countries have adopted fiscal consolidation measures in an attempt to reduce fiscal imbalances…in most cases, fiscal consolidation did not result, at least in the short run, in a reduction in the debt-to-GDP ratio…calls for a more temperate approach to fiscal consolidation have increased on the ground that the drag of fiscal restraint on economic growth could lead to an increase rather than a decrease in the debt-to-GDP ratio, as such fiscal consolidation may turn out to be self-defeating. …The aim of this paper is to investigate the effects of fiscal consolidation on the general government debt-to-GDP ratio in order to assess whether and under which conditions self defeating effects are likely to materialise and whether they tend to be short-lived or more persistent over time.

Now let’s look at the results of their research.

It turns out that austerity does work, but only if it’s the right kind. The authors find that spending cuts are successful and higher tax burdens backfire.

The main finding of our analysis is that…In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level. …strategy is more likely to succeed when the consolidation strategy relies on a durable reduction of spending, whereas revenue-based consolidations do not appear to bring about a durable improvement in debt sustainability.

Unfortunately, European politicians generally have chosen the wrong approach.

This is an important policy lesson also in view of the fact that revenue-based consolidations tend to be the preferred form of austerity, at least in the short run, given also the political costs that a durable reduction in government spending entail.

Here are a few important observations from the study’s conclusion.

…the findings of our analysis are in line with those of the literature on successful consolidation, namely that the composition of fiscal consolidation matters and that a durable reduction in the debt-to-GDP ratio is more likely to be achieved if consolidation is implemented on the expenditure side, rather than on the revenue side. In particular, when fiscal consolidation is implemented via an increase in taxation, the debt-to-GDP ratio reverts back to its pre-shock level only in the long run, thus failing to generate an improvement in the debt ratio, and producing what we call a self-defeating fiscal consolidation. …fiscally stressed countries benefit from an immediate reduction in the level of debt when reducing spending.

In other words, restraining the growth of spending is the best way to reduce red ink. Heck, it’s the only way.

When debating my leftists friends, I frequently share this table showing nations that have obtained very good results with multi-year periods of spending restraint.

My examples are from all over the world and cover all sorts of economic conditions. And the results repetitively show that when you deal with the underlying problem of too much government, you automatically improve the symptom of red ink.

I then ask my statist pals to show me a similar table of data for countries that have achieved good results with higher taxes.

I’m still waiting for an answer.

Which is why the only good austerity is spending restraint.

P.S. Paul Krugman is remarkably sloppy and inaccurate when writing about austerity. Check out his errors when commenting on the United Kingdom, Germany, and Estonia.

There’s a very powerful statement, variously attributed to Alexis de Toqueville, Benjamin Franklin, or Alexander Tytler, that basically warns that democracy is doomed when people figure out they can vote themselves money.

There’s no evidence that any of them actually spoke or wrote those words, though I guess it doesn’t matter that the quote didn’t originate with someone like Franklin. What does matter is that it accurately captures something very important, which is the tendency for governments to over-tax and over-spend once people decide that it’s okay to use government coercion to take other people’s money.

But it’s still nice to be able to cite something accurate. With this in mind, I came up with my Theorem of Societal Collapse. And I think it’s actually more accurate than the vote-themselves-money quote because democracy doesn’t necessarily lead to statism. What leads to bad outcomes is democracy combined with bad values.

And a pervasive belief in redistributionism is a bad value. Heck, it’s a self-destructive value. Consider Greece. When you add together the people getting welfare and disability to the people getting pension payments to the people on the government payroll, it turns out that a majority of people in the country are riding in the wagon of government dependency.

That’s bad. But what makes the Greek situation so hopeless is that those are the same people who vote. Which means there’s very little chance of getting a government that would implement good policy.

After all, why would the recipients of other people’s money vote for politicians who support limits on redistribution?

But I’m not just blaming voters. Politicians also deserve scorn and disdain because they are the ones who often seek votes by promising to take other people’s money.

Some observers would like to believe that these politicians will use their supposed superior expertise and knowledge about public policy to make appropriate tradeoffs and prevent the system from becoming over-burdened.

But that’s somewhat naive.

Indeed, there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. Here’s a partial description from the Library of Economics and Liberty.

As James Buchanan artfully defined it, public choice is “politics without romance.” The wishful thinking it displaced presumes that participants in the political sphere aspire to promote the common good. …public officials are portrayed as benevolent “public servants” who faithfully carry out the “will of the people.” …public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests… As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics. …collective decision-making processes allow the majority to impose its preferences on the minority.

In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels.

I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food.

Indeed, public choice scholars explicitly recognize that unconstrained democracy can lead to bad results.

Public choice scholars have identified…deep…problems with democratic decision-making processes.

That’s the bad news.

The good news is that their research suggests ways to compensate for the natural tendency of ever-expanding government.

Like that founding father of the American constitutional republic, public choice recognizes that men are not angels and focuses on the importance of the institutional rules… If, for example, democratic governments institutionally are incapable of balancing the public budget, a constitutional rule that limits increases in spending and taxes to no more than the private sector’s rate of growth will be more effective.

Hmmm…., a rule that limits the government so it doesn’t grow faster than the private sector.

Sounds like an idea worth embracing.

But while I like anything that builds support for the Golden Rule, I’m not sure it’s a sufficient condition for good policy.

Simply stated, we have too many examples of nations that followed the Golden Rule for several years, only to then fall off the wagon with a new splurge of spending.

There are two ways to deal with this problem. First, make the spending restraint part of a jurisdiction’s constitution, as we see in Switzerland and Hong Kong.

Second, augment the internal constraint of a spending cap with the external constraint of tax competition. Bluntly stated, destructive tax policies will be less likely when politicians are afraid that taxpayers will move across borders.

I spoke about this topic at a recent conference in Slovakia.

I also discuss the critical role of demographic change toward the end of my speech.

P.S. America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

P.P.S. While it’s bad news to combine democracy with bad value, I want to emphasize that the problem is bad values. Most non-democratic societies have policies that are so evil and destructive (think Cuba and North Korea) that they make France seem like a beacon of economic liberty.

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