School Choice Spreads to Another State

When CF&P released this video back in 2010, I never would have dreamed that a whole bunch of states (West Virginia, Arizona, Iowa, Utah, Arkansas, Florida, and Indiana) would adopt school choice about a dozen years later.

So what triggered the sudden explosion of interest in better education?

Ironically, we can probably thank the teacher unions.

Union bosses used the pandemic as an excuse to extort money from taxpayers while also fighting to keep schools closed.

Moreover, because of remote education, parents got to see what their children were being taught (or were not taught) and often were not happy.

So rather than throw more money at a failing monopoly, they decided to opt for real reform. Fortunately, politicians in some states have decided to do the right thing (sometimes after a bit of electoral encouragement).

Now we can add another state to our list. Oklahoma’s governor has just signed into law a plan that provides tax credits of between $5,000-$7,500 that parents can use to select the best educational option for their kids. Here are some details from Fox News.

Oklahoma became the 7th state to enact universal school choice on Thursday. Gov. Kevin Stitt signed private and homeschool tax credits that would make school choice universally available to all families. “School choice shouldn’t be just for the rich or those who can afford it,” Stitt said. Now it’s available for every single family in the state of Oklahoma.” …Relations between teachers unions and parents have soured in recent years, particularly in response to academic slowdowns across the U.S. in the wake of COVID-19-related school closures.  Widespread calls for school choice and parental rights have emerged after states implemented lockdown measures during the coronavirus pandemic. School choice became a salient issue after the COVID-19-induced lockdowns sparked a conversation on the scope of the government’s authority and the type of content that should be taught to children from public school curricula.

This is great news for families. And taxpayers.

And not-so-great news for teacher unions.

P.S. I can’t wait to see the 2023 version of this report.

P.P.S. For my left-leaning friends, there are very successful school choice systems in Canada, Sweden, Chile, and the Netherlands.

P.P.P.S. For my right-leaning friends, getting rid of the Department of Education would be a good idea, but the battle for school choice is largely won and lost on the state and local level.

Military Spending and Economic Performance, Part II

Last year, I shared some academic research showing that less military spending led to better economic performance.

This should not come as a surprise. Every type of government spending necessarily causes harm by diverting resources from the productive sector of the economy.

The relevant question is whether there are also offsetting benefits.

In an ideal world, policymakers should engage in rational cost-benefit analysis when deciding whether to spend money, either for the Pentagon or domestic programs.

I’m writing about this issue today because the U.K.-based Economist has an article about how global events are turning the “peace dividend” turning into a “war tax.”

At the end of the cold war America’s president, George H.W. Bush, popularised the idea that cutting defence spending would boost the economy. …In the decades after the cold war, the thinking was that to spend less on armies meant to spend more on infrastructure and public services and to lower debt or taxes. Since the 1960s the world has “released” about $4trn a year of spending at current prices in this way… Now the peace dividend is turning into a “war tax”. How heavy will it be? …What of the impact on growth? Many historians argue that defence spending is a drain on the rest of the economy. Keeping a country secure has great economic value. But once you buy a missile, say, it tends to sit in storage rather than being put to productive use. During the second world war productivity growth slowed in America, as people were pulled from the fields into munitions factories and military units. Forced limits on military spending in postwar Japan and West Germany, by contrast, coincided with huge productivity improvements in both countries.

I’m glad the Economist acknowledges that government spending is a drain on the private sector.

Maybe this sensible analysis will be recycled the next time there is an article about redistribution spending.

I can’t resist sharing one additional sentence from the article.

Many credit Reagan’s decision to boost defence outlays as crucial to bankrupting the Soviet Union and winning the cold war.

That reinforces my view that the U.S. was very lucky that Reagan won the 1980 election. Not only did he restore the economy, he defeated the Evil Empire.

I’ll close by acknowledging that America’s fiscal challenge is an ever-expanding burden of domestic spending. Especially entitlements.

But that does not mean the Pentagon should get a blank check. If global threats require more military spending, that choice should be made with full awareness that economic performance will suffer.

P.S. It would be helpful if supporters of a strong military opposed some of the many ways that politicians insert waste, fraud, inefficiency, and pork in the Pentagon’s budget.

P.P.S. The U.S. experience after World War II is a good example of how lower military spending triggers more growth.

P.P.P.S. My three-part series on the economics of war can be read here, here, and here.

The Most Reprehensible School Choice Hypocrite of 2023

The case for school choice is simple and straightforward. Government schools receive record amounts of taxpayer money and do a relatively poor job of educating children.

There are many reasons for the failure of government schools, including natural government inefficiency, but the main reason is probably that the system is controlled by teacher unions.

Indeed, it’s no exaggeration to assert that the system is run for the benefit of the unions rather than the students.

But there’s one group that I dislike more than union bosses.

The most reprehensible group of people in this field are the politicians who send their own kids to private schools while fighting to deny other families the same ability.

I have previously written about some of these hypocrites, including Barack Obama (and his Secretary of Education) as well as Elizabeth Warren. Now it is time to highlight North Carolina’s despicable governor.

Here are some excerpts from a column by Kyle Morris for Fox News.

Democrat North Carolina Gov. Roy Cooper declared a “state of emergency” this week in an attempt to prevent a school choice bill from passing the state legislature, despite sending his own daughter to a private school in Raleigh. …Cooper, highlighting efforts from Republicans in the state as a “private school voucher scheme”… The comments from Cooper come after he sent at least one of his three daughters to Saint Mary’s School, an expensive private school in Raleigh… Jason Williams, executive director of the NC Faith and Freedom Coalition, was quick to call out Cooper’s remarks in a tweet. “Why doesn’t Roy Cooper want your child to have the same quality, private education his kid had?” Williams wrote. “If he believed so much in public education, why did he spend thousands for his own kid to avoid it?” …”What a hypocrite. Public schools aren’t good enough for his kids, but they are for yours,” Independent Women’s Forum senior policy analyst Kelsey Bolar blasted.

Cooper’s supposed “state of emergency” is particularly nauseating.

He was perfectly content with a system filled with schools that failed students. But the moment teacher unions felt threatened, he sprung into action with hyperbolic rhetoric.

By the way, there’s another story that reveals additional school choice hypocrites such as Joe Biden, Kamala Harris, Nancy Pelosi, Gavin Newsom, and J.B. Pritzker.

To appease teacher unions, all of those people are willing to sacrifice other people’s kids. But not their own.

Utterly despicable.

P.S. The “Tweet of the Year” for 2021 involved school choice.

P.P.S. There’s strong evidence for school choice from nations such as Canada, Sweden, Chile, and the Netherlands.

Singapore vs. Hong Kong

I have written very favorably about Hong Kong and I have also sung the praises of Singapore. But if you want to know which jurisdiction has a brighter future, it certainly seems like Singapore will be the long-run winner.

The above video is a segment from my recent interview with the Soul of Enterprise, which mostly focused on fiscal issues such the debt limit and spending caps.

I was glad, however, that we briefly detoured to a discussion of the two Asian city states.

Neither jurisdiction is perfect, of course, but both Singapore and Hong Kong have very pro-market policies by global standards.

And they both showed that it is possible to escape the “middle-income trap.”

But which one is doing the best?

According to the Maddison data shown in this chart, Singapore has vaulted ahead in the past two decades.

I included the United States for purposes of comparison. And it is remarkable how both Singapore and Hong Kong used to be very poor by comparison.

But let’s get back to the main focus of today’s column.

A recent article in the U.K.-based Economist compares Singapore and Hong Kong.

In economic dynamism, the state of the urban fabric and the vibrancy of civic life, which city comes top: Hong Kong or Singapore? Until not long ago, it was obvious…that Hong Kong won hands down. But recently the balance shifted. There is clearly no contest anymore. It is game over in favour of Singapore. …Hong Kong and Singapore, once dirt-poor, have astonishing success stories to tell. Both are hubs for international finance, trade, transport and tourism. Both have attracted the brightest professional minds. …The imposition of a draconian national-security law in 2020 marked the obvious break in Hong Kong’s trajectory. …Some 200,000 expatriates have left Hong Kong in the past three years, along with even more Hong Kongers. By contrast, in 2022 the number of foreign professionals in Singapore grew by 16%… In 1997, the year of Hong Kong’s return to China, the two cities’ GDP per person was remarkably similar ($26,376 in Singapore, $27,330 in Hong Kong). Today Singapore’s is 1.7 times higher than Hong Kong’s. Singapore’s economy has grown by one-seventh since 2017; Hong Kong’s not at all. …Singapore is at a crossroads. Hong Kong has hit a dead end.

The bottom line is that China’s takeover of Hong Kong has had a negative effect.

As I noted in the video clip, economic policy has not moved significantly in the wrong direction, but entrepreneurs and investors do not trust Beijing.

That skepticism may be warranted.

P.S. As part of my anti-convergence club, I’ve compared Hong Kong and Cuba, along with Singapore and Jamaica.

Will Biden Make Poverty Hucksterism Official Policy?

There are three troubling things about the politics of poverty.

First, I frequently grouse and complain that some folks on the left don’t actually care about helping poor people. Instead, as explained in my Eighth Theorem of Government, they simply use poor people as props so they can expand the size and scope of the welfare state.

Second, I sometimes speculate that our friends on the left are more motivated by a disdain for the rich than they are by any desire to help the less fortunate (something that Margaret Thatcher observed many decades ago).

Third, some people knowingly (or perhaps in a few cases, unknowingly) lie by asserting that income inequality is the same thing as poverty – even if it means absurd conclusions such as there being more poverty in the United States than in Mexico.

For purposes of today’s column, we’re going to focus on this third group because lying about poverty may soon become official government policy.

In a column for the Wall Street Journal, the American Enterprise Institute’s Kevin Corinth warns that the Biden Administration is thinking about turning poverty hucksterism into official government policy.

A new report from the National Academy of Sciences seeks to redefine poverty. …the report’s real purpose could be to expand the welfare state. If the Census Bureau adopts the new poverty definition, millions more Americans could automatically be made eligible for benefits—leading to at least $124 billion in additional government spending over the next decade… It would also break with more than 50 years of precedent by establishing a relative standard. People could become better off and still be classified as “poor”; poverty would decline only if income at the bottom of the distribution increases more quickly than in the middle class. …Redrawing the official poverty line would be a nakedly political move without any scientific basis that could alter the scope of the safety net overnight.

I suspect readers won’t be surprised to learn that the report was put together by a very biased panel.

The 13 authors of the recent NAS paper appear to have been selected along partisan lines: 12 of them have contributed to Democratic causes or worked for Democratic administrations.

And I also suspect that nobody will be surprised to learn that a secondary effect will be to steer more redistribution to left-wing states.

As consequential is the potential reallocation of government assistance across states. The poverty line under the Supplemental Poverty Measure is higher in states like California and New York…and lower in states like West Virginia and Mississippi.

Adding $124 billion of additional cost to the welfare state would be bad news for taxpayers.

But the worst thing about this scheme is that it would enshrine dishonesty into Washington’s welfare state.

As I wrote a few years ago, it would be “insanely dishonest.” That’s because “everyone’s income could double and the supposed rate of poverty would stay the same.” Or that “a country could execute all the rich people and the alleged rate of poverty would decline.”

And now the Biden Administration is thinking about turning this type of dishonesty into official policy (which is hardly a surprise since the Obama Administration thought this awful idea was the right approach).

P.S. For anyone who actually wants to help poor people, we already know what works.

The Debt Limit and Long-Overdue Spending Restraint

Regarding the debt ceiling, the hysterical headlines about default and an economic apocalypse are silly because the Treasury Department surely will “prioritize” if Republicans and Democrats don’t reach an agreement.

The above clip was taken from an interview last week with the Soul of Enterprise.

I wasn’t intending to write about this topic, but it’s getting a lot of attention now that the deadline is approaching.

If you want to understand the real issue, there is an excellent column in the Wall Street Journal by former Senator Phil Gramm and his long-time aide, Mike Solon.

They explain that the fight is between House Republicans, who want domestic discretionary spending to grow at a slower rate and Democrats in the Senate and White House who want it to grow at a faster rate.

Here’s some of what they wrote.

Of the $5 trillion of stimulus payments between 2020 and 2022, some $362 billion has yet to be spent. The House debt-limit bill proposes to claw back $30 billion—or some 8% of the unspent balance. Only in Mr. Biden’s White House and Mr. Schumer’s Senate Democratic Caucus could such a modest proposal be considered extreme. …The most recent CBO estimate projects that fiscal 2024 discretionary spending will clock in at $1.864 trillion—a 10% real increase from the pre-pandemic estimate. …This growth in nondefense discretionary spending is the post-pandemic bow wave that Mr. McCarthy’s debt-limit plan seeks to mitigate. Even if the House GOP’s proposed reductions in discretionary-spending growth took effect, total discretionary spending would still be 2.4% more in inflation-adjusted dollars than the CBO’s 2020 projection for fiscal 2024. …A clean debt-ceiling hike would give us more government spending, and the House GOP’s proposal would allow more private spending. Only in Washington is that a hard choice.

Needless to say, I disagree with both sides. There should be deep and genuine cuts in domestic discretionary spending.

But a slower increase is better than a faster increase. And I reckon any support for fiscal restraint by Republicans is welcome after the reckless profligacy of the Trump years.

The bottom line is that fights over the debt limit are messy, but if we actually got some good policy reforms, such battles could save us from something very bad in the future.

Is the Economy a Fixed Pie or Growing Pie?

A few days ago, I shared a clip about capitalism and big business from a recent speech in Poland. Here’s something else I said, in this case about whether free markets can produce more prosperity for everyone.

The answer, of course, is that capitalist societies have produced mass prosperity. Yes, some people have become astoundingly rich, but the rest of us became much better off as well.

In other words, Walter Williams was right.

In a free market, you only get rich by serving the needs of others.

As I mentioned in the video, many of our friends on the left instinctively reject the idea of a growing pie. They genuinely seem to think that one person’s success means another person’s failure. And this flawed thinking seems to be a big problem with young people.

So let’s revisit the data.

We’ll start with this chart from Our World in Data at Oxford University. As you can see, mass poverty was the norm until capitalism appeared on the scene a couple of hundred years ago.

What about if we look at more recent data.

Here’s another chart from the folks at Oxford, this time looking at the past 200 years. Lo and behold, we see how living standards began to skyrocket as capitalism took hold.

As you can see, living standard rose the most in nations with more economic freedom.

I’ll close with a final chart to debunk the notion that progress has somehow ground to a halt in modern times.

And since most of my readers are in the United States, we’ll look just at what’s happened in post-war America.

Some people point out that growth rates have declined the past two decades.

But that’s not an indictment of capitalism. Every president this century has expanded the size and scope of government. So it is hardly a surprise that the economy is slowing down.

The obvious lesson is that we need a return to the recipe that generates prosperity.

P.S. There is no such thing as a laissez-faire paradise. Even Switzerland has some bad policies, as does Singapore. And the United States may be capitalist compared to the average nation, but we have many bad policies today (and we had some bad policies in the past).

And when there are bad policies such as cronyism, it is possible for people to get rich dishonorably. Those are the people who do hurt the rest of us. The right response, of course, is to get rid of the bad policies, not to condemn all rich people or to condemn the system that allows all of us to enjoy mass prosperity.

P.P.S. Just as one person’s success does not mean another person’s failure, the same is true for nations.

A Spending Cap Amendment Is Far Better than a Balanced Budget Amendment

The Swiss Debt Brake and Colorado’s TABOR work because they limit spending. Balanced budget requirements, by contrast, have a weak track record.

My point in the above discussion with the Soul of Enterprise is mostly based on economics.

Our fiscal challenge in the United States is excessive government spending. And the problem is projected to worsen in coming decades because of demographic change and poorly designed entitlement programs.

So it makes sense to directly address the problem with a spending cap.

By contrast, a balanced budget amendment is merely designed to inhibit debt-financed spending. That’s a good goal, but it won’t lead to good results if politicians react by simply increasing tax-financed spending. Or if they finance spending with bad monetary policy.

As I point out in the video, balanced budget requirements and anti-deficit rules have not produced good results in American states or EU nations.

The takeaway is that good policymakers should push for spending caps for theoretical reasons and practical reasons.

P.S. I was very pleasantly surprised when the German government recently endorsed EU-wide spending caps.

P.P.S. Remarkably, there are pro-spending-cap studies from left-leaning bureaucracies such as the International Monetary Fund (here and here) and the Organization for Economic Cooperation and Development (here and here). There are also similar studies from the European Central Bank (here and here).

P.P.P.S. It should go without saying, but I’ll say it anyhow, that a spending cap should be set at a level that actually results in less government.

The World’s Best- and Worst-Governed Countries

When I want to know the nations with the best and worst policies, I peruse Economic Freedom of the World or the Index of Economic Freedom.

But what if you want to know the countries with the best and worst consequences? In that case, the best option might be Professor Steve Hanke’s annual Misery Index.

On that basis, the worst-governed country in 2022 was Zimbabwe, followed by Venezuela and Syria.

What’s the methodology for Professor Hanke’s Index?

Here’s some of his explanation for National Review.

In the economic sphere, misery tends to flow from high inflation, steep borrowing costs, and unemployment. …Comparing countries’ metrics can tell us a lot about where in the world people are sad or happy. Hanke’s Annual Misery Index (HAMI) gives us the answers. My version of the misery index is the sum of the year-end unemployment (multiplied by two), inflation, and bank-lending rates, minus the annual percentage change in real GDP per capita. Higher readings on the first three elements are “bad” and make people more miserable. These “bads” are offset by a “good” (real GDP per capita growth).

What are the countries with the best outcomes?

The nation with the least misery is Switzerland, which also happens to be the world’s most libertarian nation (needless to say, I don’t think that’s a coincidence).

I’ll share one final excerpt from Hanke’s article. He points out that Switzerland’s spending cap is a big reason for the nation’s success.

Switzerland has the lowest HAMI score in the world. One reason for that is the Swiss debt brake. The debt brake has worked like a charm. Unlike most countries, Switzerland’s debt-to-GDP ratio has been on a downward trend in the last two decades, since it enshrined its debt brake into its constitution in a 2002 national referendum. In 2002, central-government debt stood at 29.7 percent of GDP, and by 2018 had been reduced to 18.7 percent.

I agree with him, but the real benefit of the debt brake is that it restrains spending.

The falling debt numbers should be viewed as a fringe benefit of the spending restraint.

P.S. Needless to say, other nations should adopt a Swiss-style spending cap.

The Most Half-Right Tweet of 2023

Here’s a mystery. How can the guy who wrote a few years ago that capitalism is “the most powerful tool for reducing global poverty and inequality” now decide that free markets are a bad thing?

To be technical, Branko Milanovic of the City University of New York did not say that free markets are bad. He didn’t even say that capitalism is bad. Or that classical liberalism is misguided.

But he did assert in a tweet that “neoliberalism” as an ideology has fallen apart. And since neoliberalism in most parts of the world is used as a (often hostile and denigrating) term for laissez-faire economics, he certainly seems to be condemning free enterprise.

But he did point out that communism has fallen apart, so he wins the award for the “most half-right tweet” of the year. And his prize for winning that award is that I’ve corrected his tweet.

I suppose it is possible that Milanovic is merely pointing out that support for neoliberalism/capitalism has declined.

If that’s the case, then I withdraw my criticism. He would only be guilty of careless wording.

I fear, however, that the intention is to be critical of free enterprise. In which case, I ask Milanovic to respond to my never-answered question or to counter my anti-convergence club.

Heck, I’ll be happy if he would simply indicate which direction policy should move if we want more prosperity.

Big Business vs. Free Enterprise

I explained during a recent speech in Poland that I get very upset when big companies support policies that disproportionately harm small businesses.

By the way, I have no objection to big companies simply because they are big. Or merely because they sometimes earn a lot of profit.

But, as captured by my Eleventh Theorem of Government, I don’t like big business when it gets in bed with big government.

That’s a recipe for all sorts of bad policies, and also a major source of political corruption.

For purposes of today’s column, though, let’s consider how it is a recipe for reducing competition.

We can now quantify the damage, thanks to some new research by Professor Shikhar Singla, published by Goethe University in Frankfurt.

…the total economy-wide cost of regulations since 1970 has increased by almost 1 trillion dollars, which is roughly 5% of US GDP in 2018. …there has been a massive increase in regulation since the late 1990s. …an average small firm faces an average of $9,093 per employee in our sample period compared to $5,246 for a large firm. …We find that a 100% increase in regulatory costs leads to a 1.2%, 1.4% and 1.9% increase in the number of establishments, employees and wages, respectively, for large firms, whereas it leads to 1.4%, 1.5% and 1.6% decrease in the number of establishments, employees and wages, respectively for small firms… Results on employees and wages provide evidence that an increase in regulatory costs creates a competitive advantage for large firms. Large firms get larger and small firms get smaller. …The smaller the firm, the more competitively disadvantaged it gets… Fixed costs create a competitive disadvantage for small firms. …We find that large firms oppose regulations in general. But, they push for regulations which have an adverse impact on small firms. Hence, they are willing to incur a cost that creates a competitive advantage for them.

How much of a competitive advantage?

It’s become very significant this century, as shown by Figure 10 from the study.

Policy obviously veered in the wrong direction at the end of the Clinton Administration and then (unsurprisingly) stayed bad during the Bush, Obama, and Trump years.

And policy is staying bad during the Biden years.

The Wall Street Journal editorialized on this topic in 2021. Here are some excerpts.

…what’s really going on: Old-fashioned self-interest. …Take Amazon CEO Jeff Bezos’s endorsement of a higher corporate tax rate. …Mr. Bezos knows a higher rate would hurt Amazon much less than it would other companies. …Mr. Bezos can buy some political goodwill by providing cover to Democrats on taxes, while his company will benefit on the tax subsidy side of the ledger. Big businesses also know they can afford the higher costs of new regulation that smaller competitors cannot. That helps explain Big Oil’s embrace of methane emission rules in the Obama years that hurt independent frackers, as well as putting a price on carbon now. …Or consider the rush by Big Finance to endorse environmental, social and governance investing, or ESG. …BlackRock CEO Larry Fink is an enthusiast, and guess who will benefit if Biden Administration regulators set new requirements for ESG disclosure or investing? ESG lets BlackRock charge higher investment fees than it can charge for index funds that buy the entire market. …corporations look out first and foremost for their own interests, and that often means collaborating with government for narrow purposes that aren’t always in the public interest.

This is disgusting. And it’s not the first time Bezos and Amazon have tried to hurt small businesses.

In my fantasy world, we would have separation of business and state.

In the real world, I’ll be happy if we can simply block the left’s ESG agenda so that big companies will be forced to earn money in the market rather than steal money via politics.

The Harm of Anti-Money Laundering Laws, Part I

Most people instinctively support anti-money laundering laws, but I wonder whether they would change their minds if they understood two very important facts.

• As shown repeatedly in research studies, there is no evidence that these laws actually reduce criminal activity.
• As shown in a major study from the World Bank, these laws can deprive poor people of access to banking services.

Regarding the second point, let’s look at some excerpts from a recent report in the New York Times by Tara Siegel Bernard and Ron Lieber.

There are many anecdotes about consumers losing access to banking services, but let’s look at some macro issues.

…financial institutions are obligated to alert regulators and law enforcement through a Suspicious Activity Report if there’s irregular behavior that they cannot easily explain. …if banks fail to report suspicious activity and regulators discover problematic transactions later, banks and their compliance employees are potentially on the hook for all manner of penalties. “So all their incentives are toward closing accounts,” according to an explanation of SARs on the website of the Bank Policy Institute… a median of just 4 percent of 640,000 suspicious activity reports from a sample of large banks warranted a follow-up from law enforcement, according to the research, which examined 16 million alerts.

By the way, some people may think AML laws are worthwhile because 4 percent of reports generate follow up, but that has to be balanced against the estimated $180 billion cost imposed on the private economy.

In his Washington Times column, Richard Rahn draws the should-be obvious conclusion that these laws fail a cost-benefit test and should be repealed.

Money laundering became a federal crime only in 1986… Because the law is so vague and has been subject to so much prosecutorial abuse, including its weaponization for political purposes, there have been calls for its repeal. …The real purpose of many payments between individuals and other individuals, government, or business entities is difficult to prove, which is why so few “stand-alone” money laundering convictions are made. …There is no evidence that the government’s crusade against money laundering has had any appreciable impact on drug dealing, terrorism, or government corruption. …By any objective standard and given the massive cost per conviction in contrast to the few stand-alone convictions, the war on money laundering has been a colossal failure. It has hurt the taxpayers, financial institutions, and, most importantly, Americans’ civil liberties.

Amen. Richard is right. These laws never should have been enacted.

Sadly, many politicians want to expand AML laws by abolishing cash.

P.S. I’m batting .500 in my career as a global money launderer.

P.P.S. Here’s Barack Obama’s satirical encounter with AML laws.

The Biden-Trump Plan for Middle-Class Tax Increases

What do Joe Biden and Donald Trump have in common?

Speaking earlier this year to the Mackinac Center in Michigan, I warned they both implicitly favor massive tax increases on ordinary households.

If you don’t want to spend two minutes watching the video, I explained that the burden of government spending is going to dramatically increase over the next several decades because of demographic change and poorly designed entitlement programs.

This means we will have to make a choice: Either reform entitlements or acquiesce to massive future tax increases.

And because Biden and Trump oppose entitlement reform, that means that they favor tax increases.

Moreover, since there are not nearly enough rich people to finance big government, this means Biden and Trump favor massive tax increases on lower-income and middle-class households.

To be fair, there are alternatives other than entitlement reform or big tax increases.

For instance, politicians could endlessly issue more debt. That might work, at least until the fiscal house of cards collapses.

Another possibility, at least with regards to Social Security, is to do nothing.

How is this an alternative? Well, David McIntosh, President of the Club for Growth, explained last month in the Wall Street Journal that the Biden-Trump position on Social Security could be a recipe for automatic benefit cuts.

Joe Biden and Donald Trump agree on one thing. “I guarantee you I will protect Social Security and Medicare without any change. Guaranteed,” Mr. Biden said in March. Mr. Trump has said: “I will do everything within my power not to touch Social Security, to leave it the way it is.” …The Biden-Trump position may sound like a pledge to protect Social Security, but it isn’t. …the Old Age and Survivors Insurance Trust Fund…will be able to issue payments to retirees only until 2034. …once the trust fund reserve is depleted, beneficiary payouts will be limited to whatever funds come in from Social Security payroll taxes. …Thus consequences of leaving Social Security “without any changes,” as promised by Biden-Trump, are dire. Ten years from now, benefit cuts of 23% will be triggered if there is no change to Social Security…the Biden-Trump strategy has been to play “beat the clock,” leaving their successors to deal with the crisis. Candidates with a record of entitlement reform like Messrs. Pence and DeSantis would do well to point out that doing nothing is the worst Social Security cut.

Technically, McIntosh is 100 percent correct. Under current law, there will be automatic benefit cuts once there no longer are any IOUs in the Social Security Trust Fund.

In reality, future politicians almost surely will change the law to continue full payments. Which is why I feel confident in stating that our real choice is between genuine entitlement reform and massive tax increases.

P.S. My collection of “honest leftists” includes many who openly admit that giant tax increases will be needed if there is no entitlement reform.

P.P.S. The agreement between Biden and Trump on entitlements should not be a surprise. They also agree on many other issues, such as nationalized infrastructure, industrial policy, government spending, and trade protectionism.

Gun Control Humor

After three editions in 2022 (here, here, and here), it’s time for the first edition of gun control humor in 2023.

We’ll start with this video from Babylon Bee.

Very clever. Reminiscent of the third item in this column from 2021.

Next we have a look at how Europeans and Americans respond to intruders.

Reminds me of this comparison of Texans and Europeans.

Our third item shows a disappointed American father.

Since gun safety is an important issue, here’s the number one rule to follow.

Last but not least, here’s a reminder about a common link between two groups of bad people.

Regarding the final item, clever people have noted that there’s not much difference between the two different groups.

P.S. For the full collection of gun control satire, click here.

The Washington Post Budget Quiz

Two years ago, I took an online budget quiz put together by the Committee for a Responsible Federal Budget.

The results said I was a “minimalist,” which makes a lot of sense.

Today, I took another budget quiz, this one put together by the Washington Post.

I’d prefer to be called a libertarian, but I won’t quibble with being a “classic conservative” since I’ll interpret that as being the same as a Reagan-style conservative (rather than a big-spending Trump-style conservative).

The quiz correctly notes that the “big tax and spend” crowd is my archnemesis. And the quiz also is right that my focus is on shrinking government rather than reducing red ink.

That being said, the quiz was far from perfect. Here are a two gripes.

• There was no option to shut down useless bureaucracies such as the Departments of Education, Energy, HUD, Agriculture, and Transportation.
• Some of the questions are worded poorly (I want to extend all the Trump tax cuts, not just the ones for those earning less than $400K).

I will also mention that you get labeled a “classic conservative”even if you vote to cut the defense budget, which does not make much sense.

P.S. Here are the shortest and longest quizzes.

P.P.S. Here’s the quiz with the strangest result.

Ranking Trade Freedom

Free trade is good and protectionism is bad.

Assuming one agrees with those common-sense observations, the Tholos Foundation’s just-released Trade Barriers Index is a great source of data about which countries are pro-trade and anti-trade.

As you can see, Singapore has the fewest trade barriers (a lower score is good), followed by New Zealand. By contrast, India is in last place with the most trade barriers, followed by Russia.

Sadly, the United States ranks a lowly 65 out of 88 countries that were included in the report.

The Index is filled with data, so it is a treasure trove for wonks.

The part I like best, which is excerpted below, notes that pro-trade nations produce a disproportionate share of global economic output.

The 88 countries in the 2023 TBI house 72 percent of the world’s population. In the freest range, those with a score reaching between 2.5 and 3.0 or lower, only 6 countries with a combined population of 207 million, or 2.6 percent of the world’s people, enjoy the most barrier-free-trade and they produce 11 percent of the world’s GDP… In the mostly-free range, with a score between 3 and 3.5, reside 395 million people or 5 percent of the world’s population in 16 countries where they produce 14 percent of world GDP. In the next range, between 3.5 and 4.0 on the TBI, 7 percent of the world’s population produces 12 percent of global GDP. In the middle range between 4.0 and 4.5, productivity gets a boost due to the inclusion of the United States; in this range 650 million people reside and produce 28 percent of GDP. Then the inefficiencies of trade restrictions start to take a large toll. In the next 4.5 to 5.0 range, nearly 2 trillion people live, 24 percent of the world’s population, but they contribute only 22 percent of GDP. Then in the 5.0 to 5.5 range, in six countries, 8 percent of the world’s people reside and they produce a dismal 3 percent of world GDP. Lastly, in the 5.5 to 6.0 range 20 percent of the world’s population reside in 2 countries, India and Russia, where they produce 5 percent of world GDP.

Let’s close with a comparison of the United States and Singapore.

In every single category, Singapore does better. But the biggest gap is in non-tariff barriers.

Needless to say, both Trump and Biden have contributed to America’s unimpressive score.

P.S. You’ll notice that trade balances are not part of the Trade Barriers Index. That’s because the authors understand trade deficits are irrelevant (or even a positive sign if a nations is attracting a lot of foreign investment).

Class Warfare and Utility Pricing

Good folks on the left (and every other part of the spectrum) push for equality of opportunity. And what’s great about that approach is that more opportunity for one person does not require less opportunity for another person.

Bad folks on the left push for equality of outcomes. And that’s unfortunate because an agenda of coerced equality (based on the notion of “positive rights“) means that one person has to suffer for another person to benefit.

Or, in really crazy circumstances, the goal is simply to deny good things for some people simply because they are not available to other people.

Or they simply want to punish success because of spite and resentment.

I wrote about an example of this last week. Here’s another example, as reported by Marc Cota-Robles and Rob Hayes for a California TV station.

Three major utility companies in California are looking to restructure customer billing, and part of that means customers could be charged based on how much money they make. Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric filed a joint proposal this week for a flat-rate charge based on income. …Under the proposal, it would cost as little as $15 a month for low-income households and up to $85 more per month for households making more than $180,000 a year. …The income-based bill proposal is part of the companies’ compliance with legislation passed by the California state government last year requiring these types of plans for utilities. …The fixed rate could start showing up on bills as soon as 2025.

The Wall Street Journal opined on this policy. As you might imagine, class-warfare pricing was not celebrated.

Climate policies are driving up California electric rates… Now Democrats plan to double down on their policy distortions by charging electric customers based on income. Democrats snuck this second progressive income tax into a budget trailer bill last year… No other investor-owned utilities in the country link electricity costs to income. …Pacific Gas & Electric floated charging customers fixed fees ranging from $15 a month for those earning less than $28,000 annually, up to $92 a month for those making $180,000 or more. …California’s electric rates have surged over the last decade to an average of 26.5 cents a kWh—more than twice as much as in neighboring states… California’s electric rates are currently both regressive and progressive. Middle- and higher-income folks subsidize discounts for lower-income customers. However, lower- and middle-income households also subsidize the affluent with solar panels and electric vehicles. …Thus they want to impose this de facto graduated income tax to light up your home. This is another form of income redistribution… The very rich will cope, but the middle class will get soaked, as they always do.

I wonder if our friends on the left will expand this approach. Maybe require McDonald’s to charge rich people more for a Big Mac? Or tell gas stations that they have to lose money when poor people fill up their tanks?

That’s a recipe for quicksand and beatings.

As captured by my Eighth Theorem of Government, it is far smarter to push policies that are designed to reduce poverty rather than reduce inequality.

The Wrong Way to Legalize Drugs

In discussions about drug legalization, skeptics worry about addiction. I think that’s a legitimate concern, but the focus is too narrow.

Yes, legalization may lead a few more people to get hooked on drugs, but we also need to pay attention to the politicians who are so addicted to tax revenue that they are enabling black markets to continue.

In other words, voters are saying legalize and politicians are engaged in a grab for money.

In an article for the Wall Street Journal, Zusha Elinson  and Jimmy Vielkind report on how New York and California have botched legalization.

The illegal marijuana trade is booming in California, seven years after the state legalized its possession, cultivation and distribution. Unlicensed sales totaled $8.1 billion last year, dwarfing legal sales of $5.4 billion… New York legalized cannabis possession in small amounts in 2021. Two years later, just five shops sell marijuana legally in New York City, while 1,400 bodegas, smoke shops and other outlets without licenses do, according to an estimate by the city sheriff. …The persistence of the illegal pot business in the face of state legalization reflects a variety of forces. …high taxes on legal sales fan the embers of illicit ones. “When you start seeing tax rates that are approaching 30 to 40 percent on products, it’s really going to be difficult to compete against the remnants of an illegal market,” said Mason Tvert… In California, the historic cannabis basket of America, many growers find it easier and more profitable to supply illegal shops or to ship their product elsewhere than to comply with licensing requirements. …Curaleaf Holdings Inc., a large, publicly held company, is shifting its focus to states where taxes and regulations are less onerous. …legal shops thought they could succeed… But they have to add a 10% city cannabis tax, a 15% state excise tax and a 9.5% sales tax not exclusive to cannabis.

California has been the poster child for bad policy on marijuana taxation, but the Empire State is trying to catch up.

J.D. Tuccille takes a closer look at New York’s mistakes in an article for Reason.

Empire State officialdom still hasn’t learned its lessons, as evidenced by the heavy regulatory hand stifling sort-of-legalized marijuana…the legislation intended to bring the booming underground market into the open was hobbled from day one. “New York’s law…is surprisingly permissive in some respects but includes high taxes and other provisions that compromise the interests of consumers,” Reason‘s Jacob Sullum warned… Last year, as taxes and regulations added up, and licenses were issued based on social justice grounds, it became increasingly obvious that the state was creating a “legal” market “so hobbled that it will offer uncompetitive prices to consumers and daunting barriers to vendors,” as I noted… Unsurprisingly, the “unlicensed and illicit sale of cannabis” has been barely challenged by tax- and rule-hampered legal-ish competitors. …New York officials might have learned from their own cigarette policies. Those so burdened tobacco with taxes and rules that they managed to (this sounds familiar!) hand the majority of the market for a legal product to illegal vendors.

I’ll add one final point, which is that the greed for tax revenue is not just a fiscal issue.

By propping up the black market, politicians are enabling greater levels of violent crime.

P.S. Portugal is a role model on drug policy.

P.P.S. Keep in mind that the War on Drugs has led to other bad policies such as anti-money laundering laws and civil asset forfeiture laws.

Three Cheers for (Capitalist) Robber Barons

Narratives matter in public policy, often in an unfortunate manner.

• People used to believe (and some still do) that the Great Depression was caused by capitalism and that President Roosevelt’s interventions rescued the economy. Those people are wrong.
• People used to believe (and some still do) that the 2008 financial crisis was caused by Wall Street “greed” and that laws such as Dodd-Frank will protect us in the future. Those people are wrong.

Another narrative is that the industrial revolution was a horrible period in American economic history that produced immense wealth for so-called robber barons while leading to suffering and deprivation for everyone else.

Today, we will look at why that is nonsense.

We’ll start with this chart from Oxford University’s Our World in Data. As you can see, per-capita GDP increased sharply in the latter part of the 19th century (the period most associated with “robber barons” and the industrial revolution.

I’m motivated to address this topic today because of an excellent column I just read in the Wall Street Journal. The authors, former Senator Phil Gramm and renowned author Amity Shlaes, start by presenting the myth.

The rise of progressivism before the turn of the 20th century was fueled by the perception that “robber barons” of industry and finance had earned their fortunes from their monopoly power that allowed them to exploit the poor and middle class. …French economist Thomas Piketty concluded that the middle class “suffered a setback during the Gilded Age.” Likewise, in the teacher’s guide to his bestselling American history textbook, Howard Zinn writes that “ordinary people who lived through the Gilded Age…experienced tremendous hardships and losses… While they got poorer, the rich were getting richer.” …the Gilded Age suffered from monopolistic exploitation, as critics claim.

They then present the facts.

…the underlying economic claims are at variance with the facts. …Between 1870 and 1900, America’s inflation-adjusted gross national product expanded by an unprecedented 233%. Though the population nearly doubled, real per capita GNP surged by 90%. Real wages of nonfarm employees grew by 53%, and life’s staples, such as food, clothing and shelter, became more plentiful and much cheaper. Food prices plummeted by 63% and the cost of textiles, fuel and home furnishings fell by 70%, 65% and 70%, respectively. …In 1892 there were 4,050 millionaires, with less than 20% having inherited their wealth. The rest created it and in the process reduced poverty, expanded general societal prosperity… That mattered little to progressives, who were so obsessed by the 4,050 millionaires that they turned a blind eye to the 66 million Americans whose economic well-being improved faster than any people who had ever lived on earth. …On average, prices in the ostensibly monopolized industries fell three times as fast as the consumer price index. …progressivism is based on a myth and fueled by envy.

However, not all robber barons were admirable. As the title to this column suggests, only the ones competing in the market were good.

Those that got rich via government favoritism, by contrast, were bad.

Rachel Chiu made this point in her 2021 column for National Review.

…not all entrepreneurs during the Gilded Age were corrupt. Market entrepreneurs were successful because they offered superior products at low prices, while political entrepreneurs relied on the government to intercede on their behalf. For example, steamboat inventor Robert Fulton developed a successful commercial service because the New York legislature granted him a 30-year monopoly on the Hudson River. Cornelius Vanderbilt, on the other hand, built his steamboat empire without government-granted privileges. …abuses associated with the Gilded Age were enabled by an unhealthy relationship between government and capital that distorted the operation of free markets. “Political entrepreneurship” must be discouraged, but entrepreneurs (in the classic sense of that word) should not.

In a 2021 article for the Mises Institute, Antonis Giannakopoulos also recognized the difference between honest wealth and dishonest wealth.

According to popular “wisdom,” people like John D. Rockefeller, Cornelius Vanderbilt, and others made profits due to immoral and unethical competition practices that granted a monopoly status to their companies. …we must first of all make a distinction between, as historian Burton Folsom says ‘”the market entrepreneur and the political one.” …The famous steamship entrepreneur Cornelius Vanderbilt had to compete with political entrepreneurs who received subsidies and special privileges from the government. …Enemies of the free market have infiltrated the minds of the public with a mix of oversimplified history and facts, and bad economics.

For more on this, I recommend videos by Burton Folsom, Milton Friedman, and Brian Domitrovic.

P.S. I can’t resist sharing some scholarly analysis of why antitrust laws were first enacted.

Senator John Sherman of Ohio was motivated to introduce an antitrust bill in late 1889 partly as a way of enacting revenge on his political rival, General and former Governor Russell Alger of Michigan, because Sherman believed that Alger personally had cost him the presidential nomination at the 1888 Republican national convention. …Sherman repeatedly brought up Alger’s relationship, which in reality was rather tenuous, with the well-known Diamond Match Company. The point of mentioning Alger was to hurt Alger’s future political career and his presidential aspirations in 1892. …this paper reinforces previous public choice literature arguing that the 1890 Sherman Act was not passed in the public interest, but instead advanced private interests.

In other words, antitrust laws were enacted for the benefit of politicians and their cronies, not for the benefit of consumers.

P.P.S. In a two-part interview with John Stossel, I gave my two cents about monopolies and robber barons.

Hope for Chile

For a few decades, Chile was very interesting for fans of free markets.

The country became famous for its system of personal retirement accounts, but there were many other reforms that liberalized the economy. Everything from free trade to privatization.

Unsurprisingly, Chile quickly became the richest nation in Latin America, surpassing countries such as Argentina and Venezuela that foolishly embraced bigger government.

But in recent years, Chile has become very interesting for fans of political drama.

• In 2019, there were big protests by the left, initially triggered by an increase in subway fares in Santiago.
• In 2020, the left enjoyed a victory as the country voted overwhelmingly in favor of writing a new constitution.
• In 2021, the left enjoyed another victory when former student activist Gabriel Boric was elected president.
• In 2022, the pendulum swung back to the right as voters overwhelmingly rejected a left-wing constitution.
• Now, in 2023, the right enjoyed another big victory in yesterday’s election for a Constitutional Council.

In a report for Bloomberg, Matthew Malinowski and Valentina Fuentes explain what just happened.

Chile’s political right dealt a crushing blow to the government of President Gabriel Boric that will undermine the young leader’s progressive agenda…right-wing candidates won 33 seats Sunday in a Constitutional Council in charge of drafting a new charter. This is above the three-fifths majority needed to push through articles at will… Left-wing contenders obtained 17 spots… A prior attempt to rewrite the charter was overwhelmingly rejected in a September referendum out of concern it went to far to the left, overhauling the foundations of Chile’s free-market economy…and weakening political checks and balances. …The election serves as a harsh reality check for Boric’s left-wing administration as it seeks to revive its progressive agenda, including plans to increase taxes on the rich.

I started today’s column by noting that Chile was interesting for fans of economic freedom and then shifted to explaining why it was an interesting country for fans of political drama.

Let’s close by revisiting the implications for economic policy.

The obvious good news is that there presumably no longer is any danger that Chile will be saddled with a leftist constitution (filled with “rights” to other people’s money).

But I’m more interested in whether yesterday’s election results indicate a rebirth in support for free enterprise.

Chile enjoyed enormous gains thanks to economic liberalization, with the poor enjoying disproportionate gains. But I worry that the nation will get caught in the “middle-income trap” without additional limits on the size and scope of government.

That won’t happen with Boric still in power, so we’ll have to see what happens in the next general election.

Latin America and Socialist Suicide

I wrote a few days ago about Latin America’s “pink tide” and how statist policies are driving away jobs and investment.

Today, let’s look at John Stossel’s interview with Gloria Alvarez about the grim future of the region.

I especially like the part about 9:00 and 21:00 when she talks about the failure of supposed right-wing governments that continue with socialism – or even make it worse (we have the same problem in the United States).

But the best part of the 25-minute video, in my humble opinion, is her explanation of why statism is seductive and liberty is not.

She uses an iceberg analogy. With socialism, people see good things above the surface but are blind to the horrible consequences beneath the water.

By comparison, the libertarian iceberg is superficially less appealing.

The small part above the water seems cold and heartless. All the good stuff is hidden underneath.

In some sense, these two images are a different way of showing what’s captured in this cartoon.

Needless to say, there’s a big difference between superficial and real. In the video, Ms. Alvarez cites Margaret Thatcher’s famous observation about the inevitable problem with socialism.

Debating the European Union

Most Americans pay little or no attention to the European Union and its various bureaucratic and political arms in Brussels.

But that’s unwise. What happens in Europe can have an impact on policy in the United States.

For instance, I have been very critical of the European Union because the bureaucrats and politicians in Brussels push for dirigiste policies such as tax harmonization and climate protectionism.

And I was a huge fan of Brexit (the United Kingdom voting to leave the E.U.).

On the other hand, I have tepidly written that E.U. membership may make sense for nations from Eastern Europe.

It seems like I can’t make up my mind, but my views are simple and (I like to think) very rational.

• If E.U. membership will push a nation in the right direction, I’m for it.
• If E.U. membership will push a nation is the wrong direction, I’m against it.

Given my interest in Europe and the European Union, I was understandably interested when I saw that Reason published a pro-con article on the topic.

Dan Hannan, a former member of the European Parliament from the U.K., argues that the E.U. was a mistake.

Unlike NAFTA or the European Free Trade Association (EFTA), the EEC was not a free trade area but a customs union, controlling all commerce on behalf of its members and artificially redirecting trade away from the rest of the world. …it was a club of nations rather than a superstate. …That changed when the Maastricht Treaty came into force in 1993. …it stopped being the EEC and became the European Union. …A big polity can prosper, but only if it behaves like a confederation of statelets. The supreme exemplar is the U.S., the only large nation that gets anywhere near the top of those GDP rankings… I’m not wild about the direction the U.S. has been taking… But the U.S. is starting from a much better place. It was designed according to Jeffersonian principles. Power was dispersed, decentralized, and democratized. The E.U., by contrast, was designed to weld nations into a supranational bloc. …Where the Declaration of Independence promises life, liberty, and the pursuit of happiness, its European equivalent, the Charter of Fundamental Rights, entitles people to “strike action,” “affordable housing,” and “free healthcare.”

Dalibor Rohac of the American Enterprise has a more optimistic assessment.

The Brussels machinery is bureaucratic and largely insulated from accountability. When it comes to new markets and new technologies, European institutions regulate first and ask questions later. The E.U. controls a sizable budget, part of it wasteful—including generous agricultural subsidies and transfer programs… Yet the E.U.’s existence is infinitely preferable to its absence. …The relevant comparison is between the E.U. and the politically plausible alternatives. Those alternatives almost certainly involve protectionism, heavy-handed industrial policy and planning, or state aid to politically connected companies… If it weren’t for the pressure of the European Commission in the late 1980s, it is fanciful to think that Italy or France would have just given up state ownership of utilities, banks, or their industrial giants. …Conversely, the United Kingdom has not become a free market paradise after leaving the European Union. Quite the opposite. …the E.U.’s “single market” is far from perfect. …it often goes hand in hand with harmonized European rules rather than with simple mutual recognition of national standards. …Has the E.U. lived up fully to the ideals of Hayekian international federalism? Of course not. But it is blindingly obvious that it has performed better than the relevant alternatives.

What’s my two cents.

I’m on Dan Hannan’s side and I think he made good points, but I would have made different arguments. My main concerns with the E.U. is that it is not only a protectionist club, but it also is far too supportive of harmonization, centralization, and bureaucratization.

Simply stated, the culture in Brussels is dirigiste and “public choice” tells us that it will get worse over time.

Dalibor Rohac made good points, to be sure, and he is right that the E.U. has been a net plus on some issues. And he’s also right that some nations might be further to the left if the E.U. didn’t exist.

But, on net, I think it leads to more statism rather than more markets.

P.S. Here’s a description of why “mutual recognition” is a good framework for international economic relations.

P.P.S. It’s good to favor globalization, but that does not imply support for global governance.

P.P.P.S. Rohac is right that the U.K. has not prospered in the post-Brexit years, but leaving the E.U. was a way of creating the opportunity for a better approach. The fact that British politicians have been increasing fiscal burdens simply means that the U.K is not taking advantage of the opportunity.

More Great News on School Choice

It this the year of school choice or the decade of school choice? The answer is yes to both. Look at the statewide school choice plans that have been recently enacted.

• West Virginia in 2021
• Arizona in 2022
• Iowa in 2023
• Utah in 2023
• Arkansas in 2023
• Florida in 2023

Now we can add Indiana to the list.

The Wall Street Journal has a celebratory editorial about the big news from the Hoosier State.

…the latest good news comes from Indiana. Hoosier lawmakers passed the state budget last week, and it expands the school voucher program so nearly all students will be eligible. …The new law raises the income cap to 400% of the free- and reduced-price lunch income level, which is now about $220,000 for a family of four. The bill also removes the other criteria for eligibility so that any family under the income limit can apply. …“We would say it’s universal,” Betsy Wiley of the Institute for Quality Education told the Indiana Capital Chronicle. Early estimates suggest only 3.5% of families with school-age children in Indiana would not be eligible for the program under the new income limit… The principle at work here is that taxpayer education money for grades K-12 should follow the child, rather than school districts.

The new law doesn’t provide school choice to every family, but I’ll take a victory that provides choice to more than 96 percent of children.

This is great news for education.

What’s especially amusing is that this progress almost certainly would not have occurred if it was not for teacher unions. They got too arrogant and their leftist agenda has now backfired.

P.S. I can’t wait to see what this map looks like next year.

More Failure for China’s Industrial Policy

It’s baffling and discouraging that some American politicians are pushing for industrial policy when it has a track record of failure.

Because of real-world political considerations, such policies inevitably get captured by crony companies looking for special favors.

That’s true in the United States, and it’s true everywhere else in the world.

And now we have even more evidence thanks to a new National Bureau of Economic Research study by Shang-Jin Wei, Jianhuan Xu, Ge Yin and Xiaobo Zhang. Here’s a description of their methodology.

In this paper, we study the consequence of a relatively mild form of government failure – bureaucrats simply being average and not omniscient – on the success or failure of an industrial policy. For example, when a firm applying for a subsidy presents a set of recent patents as proof of its innovation ability to a government committee that reviews the application, the bureaucrats in the committee can count the patents but may not be able to differentiate their quality. …We study these questions in the context of China’s largest pro-innovation industrial policy. The program is known as InnoCom and offers a large subsidy – a 10 percentage points reduction in the corporate income tax rate to successful applicant firms. A major policy change in 2008 expanded the scale of the program greatly… the 2008 policy shock has induced the initially less innovative firms – those with fewer than six patents – in the targeted industries to rush to achieve the desired level of patents for subsidy applications. In addition, a rising share of the new patents owned by them appears to be of low quality. …we study how the patent trade has changed following the 2008 policy shock. In particular, the share of patents sold to initially less innovative firms in the targeted industries exhibits the fastest growth after 2008. This is especially true for patents sold by either the firms outside the targeted industries, which are not eligible for a subsidy anyway, or by the firms in the targeted industries that already had more than six patents before the policy shock and hence do not need more to compete for a subsidy.

What did they find?

As shown in Figure 2, firms responded by having more patents, but those patents had much less value.

Indeed, 98 percent of the patents were low quality.

Even more important, the overall program has destroyed wealth, as measured by a negative net social return.

After calibrating the model to the data, we find that although the subsidy leads to an increase in the patent count by 33%, 98% of the increase is of low quality. This implies a notable decline in the average quality of the new patents. …By comparing the welfare levels in the model with and without the subsidy program, we estimate the net social return to the subsidy to be -19.7%. That is, the society would be better off without this subsidy program. …the thought experiment serves to confirm that the presence of even a mild government failure could convert an…industrial policy from success to failure.

Here’s another visual, this one showing negative rates of return regardless of assumptions of technological spillovers.

One final point that’s worth sharing.

The authors note that industrial policy also causes damage because taxes produce deadweight loss.

…because public funding is financed through distortionary taxation, it costs the society more than 1 RMB to fund 1 RMB worth of subsidy.

Some fans of industrial policy claim that China is an example of successful industrial policy, but that’s nonsense. Total nonsense. Utter nonsense. Unless there are sweeping pro-market reforms, China will continue to lag way behind the United States.

The Horrendous Tax Implications of Basic Income

In past columns on the topic of basic income, most of my attention has focused on how universal handouts would undermine the work ethic.

To be succinct, I fear that a non-trivial share of the population would exit the labor force if they received a big chunk of guaranteed money from government.

But there’s another side to the fiscal equation, which is the tax burden would be needed to finance a basic income.

Thanks to some research from Germany, we have at least one answer to that question.

But I suspect that most people won’t like the results, which were put together by a team led by Professor Frank C. Englmann of the Institute of Economics and Law (IVR) at the University of Stuttgart.

…introducing a UBI that guarantees a livelihood while eliminating social benefits (e.g., unemployment benefits, old age security, and family allowance) would considerably simplify the German social system and greatly reduce the administrative burden. However, compared with the legal status in 2021, state transfer payments would have to be greatly increased. “According to our calculations, public expenditure on a living UBI would be up to EUR 900 billion. Considerable tax increases would be necessary in order to finance this,” says Professor Frank C. Englmann of the IVR. If the state introduced a flat tax of 66.1% for all citizens, a UBI of EUR 1,000 per month for adults and EUR 500 for children could be financed. …Compared with the status quo, there would be a considerable redistribution.

I like the flat tax, but I’ve always assumed a low tax rate.

Needless to say, a flat tax of 66.1 percent would be absurdly destructive.

How many people – either in Germany or any other nation – would choose to work when faced with such punishment? Especially when instead they could sit on a couch all day and collect a basic income?

No wonder Swiss voters overwhelmingly rejected the idea in a 2016 referendum.

P.S. Joe Biden at one point understood the downsides of universal payments. Given his support for per-child handouts, he’s obviously since moved in the wrong direction.

Latin America and Fiscal Suicide

The economic policy lessons from Latin America are very clear.

There’s one unambiguous success story (at least until the past couple of years), one semi-decent success story, and then a bunch of utter failures.

What’s interesting (and tragic) is that the failures teach different lessons.

• We learn about long-run socialist suffering from Cuba.
• We learn about rapid socialist collapse from Venezuela.
• We learn about gradual socialist collapse from Argentina.

And if we pay attention to the region, we can expect more collapse.

Why? Because left-wing governments are now in charge and sensible people are moving their money where it can’t be confiscated.

In an article for Bloomberg, Ezra Fieser and Andrea Jaramillo report on people taking their money out of Latin America.

As every major country in Latin America shifts to the left…, capital is flying out of the region. Wealthy and, increasingly, middle-class investors are looking for a Plan B… People and corporations in the region’s five largest economies pulled roughly $137 billion out of their countries in 2022. That number—preliminary data from the Institute of International Finance, a group of banking institutions—is 41% higher than the 2021 figure and the most since 2010. …popular destinations include the Dominican Republic, Panama, Spain and the US. …Each time a leftist gets elected, money pours into South Florida, says Raul Henriquez, chairman of Insigneo Financial Group LLC, a wealth manager in Miami. …Often called a “pink tide,” this shift toward socialism dates to 2018, when Andrés Manuel López Obrador swept into power in Mexico. Leftists prevailed in Argentina in 2019, Chile and Peru in 2021, and Brazil and Colombia last year. “This is a historic event we’ve never before seen—the entire region has gone pink on us,” says Talbert Navia… Mauricio Cárdenas, a former Colombian finance minister, says capital flight is playing a role and could make it difficult to enact socialist policies.

If you want to know why people and/or their money are escaping, read this article from Americas Quarterly by José Antonio Ocampo, who is now Colombia’s Finance Minister.

Latin America can return, of course, to the path of growth, employment, and improvement in social conditions. But this implies a significant increase of fiscal resources… A key barrier is the generally weak level of tax revenue obtained by Latin American countries. In 2018, the average tax revenues in the region were 23.1% of GDP… One of the problems is the lack of income tax regimes with significant redistributive effects… supports the proposal for the introduction of a global minimum effective corporate tax rate of 25%. …countries should…adopt effective progressive wealth taxes on their residents.

By the way, Senor Ocampo used to be at the United Nations, where he enjoyed a tax-free salary while urging higher tax burdens on everyone else.

Also, I can’t resist pointing out that tax burdens in Latin America are already far too high. Ocampo wants a “path to growth,” but he apparently does not understand that today’s rich nations all became rich when the burden of government was very small.

Last but not least, the tax-free bureaucrats at the Organization for Economic Cooperation and Development in Paris continue to push for bad policies.

Here is some of the nonsense included in the bureaucracy’s latest Economic Outlook for the region.

…a fiscal sustainability framework focused on strengthening public revenues will be required… In the medium term, the region will have to focus on generating more progressive and greener fiscal pacts, with the aim of increasing tax collection and strengthening direct income and property revenues. …it is essential that social protection systems have funding sources that will ensure their financial sustainability. This can be achieved, in part, by increasing tax revenues… Innovative income support policies could be worth exploring to increase progressivity… A set of tax policy options are available in LAC that could help increase revenues… These include measures to…increase the progressivity of personal income taxes.

While the OECD should be condemned for pushing bad policy on poor nations, at least they deserve credit for consistency.

Nauseating Government Thuggery

It’s hard to pick the worst government policy since there are so many options.

• Death tax – The IRS penalizing saving and investment by grabbing money just because someone dies.
• Fannie Mae and Freddie Mac – Government entities that helped give us the 2008 financial crisis.
• OECD subsidies – American tax dollars flowing to a Paris-based bureaucracy that pushes for bigger government.
• Asset forfeiture – When bureaucrats steal money or property because they think a crime may have occurred.

Normally, I might argue that asset forfeiture is the worst policy. It is reprehensible that government officials seize property without ever convicting someone of a crime.

Of sometimes without even charging someone with a crime.

But there’s a version of asset forfeiture that represents an impossible level of government depravity.

Here’s what George Will wrote for the Washington Post about a state government’s mistreatment of an elderly woman.

“Minnesota nice…” expires when grasping government wants to steal your house. Just ask Geraldine Tyler, 94, the Black grandmother… In 2010, alarmed by neighborhood disorder, Tyler, retired and living alone, moved from her Minneapolis condominium to a senior living center. She neglected to pay taxes on her one-bedroom condominium, and by 2015 the $2,300 due in back taxes — combined with penalties, interest and fees — brought her liability to $15,000. The county seized and sold her property for $40,000. Tyler is not challenging the propriety of the seizure or sale, but of the county’s home equity theft. Instead of returning $25,000 to her, the government, in a common act of legalized self-dealing, kept $25,000… Such predatory forfeiture is done by a dozen states and the District of Columbia, which took a $200,000 home from a man with dementia and a $133 tax debt.

Fortunately, the Supreme Court has an opportunity to end this odious practice.

Billy Binion of Reason shared some thoughts about the legal case.

The Supreme Court…heard arguments in a consequential case. The query before the justices: Was it unconstitutional when the government seized a woman’s home over an unpaid tax bill, sold it for more than the amount of the debt, and then kept the profit? …Multiple federal courts ruled against Tyler, who is now 94 years old, prior to her case’s ascension to the Supreme Court… Christina M. Martin, a senior attorney at the Pacific Legal Foundation…said…”the county should have taken the property, sold it, paid the debts from the proceeds, and refunded the remainder to Ms. Tyler. Instead, the county took everything.” It’s a line of thinking the Court appeared receptive to.

Let’s keep our fingers crossed that the Supreme Court rules against the Minnesota bureaucrats who are trying to steal money from an old woman.

I know Clarence Thomas is skeptical of this abusive practice. Let’s hope all of the other Justices join him in voting to return Ms. Tyler’s money.

And, in a just world, hopefully they will issue a broad ruling ending all versions of “policing for profit.”

Blue-to-Red Migration, Part I

I realize it’s not nice to take pleasure in the misfortune of others, but that rule does not apply when bad things happen to greedy politicians.

As such, I greatly enjoy reading about when taxpayers “vote with their feet” by moving from high-tax jurisdictions to low-tax jurisdictions.

I enjoy when there is tax-motivated migration between nations.

And I enjoy when there is tax-motivated migration between states.

Regarding the latter version, there’s a must-read editorial in the Wall Street Journal about the ongoing exodus from fiscal hellholes such as Illinois, New York, and California.

The IRS each spring publishes data on the movement of adjusted gross income (AGI) and taxpayers across state lines from year to year. …the IRS data shows blue states are losing taxpayers and income at an increasing clip. …a net 105,000 people left Illinois in 2021, taking with them some $10.9 billion in AGI. That’s up from $8.5 billion in 2020 and $6 billion in 2019. New York’s income loss increased to $24.5 billion in 2021 from $19.5 billion in 2020 and $9 billion in 2019. California lost $29.1 billion in 2021, more than triple what it did in 2019. By contrast, the lowest tax states added some $100 billion of income during the pandemic. Zero-income-tax Florida gained $39.2 billion—up from $23.7 billion in 2020 and $17.7 billion in 2019. About $9.8 billion of the total arrived from New York, $3.9 billion from Illinois, $3.7 billion from New Jersey and $3.5 billion from California. Texas was another winner, attracting a net $10.9 billion in 2021, which follows a gain of $6.3 billion in 2020 and $4 billion in 2019. Californians represented more than half of Texas’s income gain in 2021.

Congratulations to Texas and Florida. Having no income tax is definitely a smart step.

Here is a chart that accompanied the editorial.

By the way, migration is the headline event, but it is also important to pay attention to who is migrating.

The WSJ‘s editorial notes that the people leaving high-tax states tend to be economically successful.

The IRS data shows that the taxpayers leaving Illinois and New York typically made about $30,000 to $40,000 more than those arriving. Of Illinois’s total out-migration, 28% of the leavers made between $100,000 to $200,000 and 23% made $200,000 or more. By contrast, the average return of a Florida newcomer in 2021 was about $150,000—more than double that of taxpayers who left. High earners spend more, which yields higher sales tax revenue. This helped Florida post a record $22 billion budget surplus last year. California is forecasting a $29.5 billion deficit.

In other words, the geese with the golden eggs are flying away.

The Negative Economic Effects of State Death Taxes

I’ve written many times about the harmful consequences of the federal death tax. Simply stated, it is both immoral and foolish for the IRS to grab as much as 40 percent of someone’s assets simply because they die.

That drains private capital from the economy and is a de facto heavy tax on those who save and invest (triple or quadruple taxation!).

That’s the bad news.

The worse news is that some states augment the damage with their own death taxes. Here’s a map from the Tax Foundation showing which states shoot themselves in the foot.

For those curious, the estate tax is imposed on the dead person’s assets and an inheritance tax is imposed on the the people who inherit the dead person’s assets.

In both cases, it’s bad news.

How bad?

There’s some new research from a couple of scholars examining this topic. Enrico Moretti of Berkeley and Daniel J. Wilson of the San Francisco Federal Reserve have a study published by the American Economic Journal that quantifies the impact of state death taxes on location choices.

In this paper, we contribute to the literature on the effect of state taxes on the locational choices of wealthy individuals by studying how estate taxes affect the state of residence of the American ultra-rich and the implications for tax policy. …Specifically, we estimate the effects of state-level estate taxes on the geographical location of the Forbes 400 richest Americans between 1981 and 2017. We then use the estimated tax mobility elasticity to quantify the revenue costs and benefits for each state of having an estate tax. We find that billionaires’ geographical location is highly sensitive to state estate taxes. Billionaires tend to leave states with an estate tax, especially as they get old. …On average, estate tax states lose 2.35 Forbes 400 individuals relative to non–estate tax states. …—21.4 percent of individuals who originally were in an estate tax state had moved to a non–estate tax state, while only 1.2 percent of individuals who originally were in a non–estate tax state had moved to an estate tax state. The difference is significantly more pronounced for individuals 65 or older… Overall, we conclude that billionaires’ geographical location is highly sensitive to state estate taxes. …We estimate that tax-induced mobility resulted in 23.6 fewer Forbes 400 billionaires and $80.7 billion less in Forbes 400 wealth exposed to state estate taxes.

What makes the study especially persuasive is that state death taxes suddenly no longer could be offset against federal death taxes because of a policy change in 2001.

That meant post-2001 data should look different. And that’s exactly what the authors found, as illustrated in Figure 6 of the study.

Here are some final excerpts from the conclusion.

The 2001 federal tax reform introduced stark cross-state variation in estate tax liabilities for wealthy taxpayers. Our findings indicate that the ultra-wealthy are keenly sensitive to this variation. Specifically, we find that billionaires responded strongly to geographical differences in estate taxes by increasingly moving to states without estate taxes, especially as they grew older. Our estimated elasticity implies that $80.7 billion of 2001 Forbes 400 wealth escaped estate taxation in the subsequent years due to billionaires moving away from estate tax states.

By the way, the study said that most states still wind up collecting net revenue because of death taxes.

In other words, the death tax revenue from remaining rich people is generally greater than the foregone income tax revenue because of those who left.

But I wonder if those findings would be true if the authors had been able to measure the secondary effects such as lost sales tax revenue, lost property tax revenues, and (perhaps most important) lost income tax revenue from people who did business with escaping rich people.

But, regardless of the findings, it is always immoral and wrong for politicians to impose taxes simply because someone dies.

P.S. In Australia, people changed when they died because of the death tax.

P.P.S. In France, people changed who they were because of the death tax.

P.P.P.S. In Ireland, people pretended to change their sexual orientation because of the death tax.

Spending Caps are the Fiscal Gold Standard

Earlier this month, I wrote separate columns about the spending cap in Switzerland (the “debt brake“) and the spending cap in Colorado (“TABOR“).

In this clip from my appearance on Let People Prosper, I explain those spending caps are the gold standard for fiscal rules.

It should go without saying that spending caps are good only if they actually constrain the size of government, just as speed limits in school zones are good only if they protect children from reckless drivers.

Which is why I favor spending caps that comply with my Golden Rule.

As you might suspect, politicians generally don’t want any constraint their ability to spend money (and buy votes).

But sometimes they do the right thing. Or at least propose the right thing.

In an article for the Hill, Aris Folley and Mychael Schnell explain that Republicans are offering to give Biden more borrowing authority if Biden agrees to spending caps for the “discretionary” part of the budget.

Here are the relevant excerpts.

House Republicans on Wednesday passed a bill to raise the borrowing limit and implement sweeping spending cuts… The bill would raise the debt ceiling by $1.5 trillion or through the end of next March, whichever happens first, in exchange for a wide range of Republican proposals to decrease government spending that, according to the Congressional Budget Office (CBO), amount to $4.8 trillion. The bill would cap federal funding hashed during the annual appropriations process at fiscal 2022 levels, while also limiting spending growth to 1 percent every year over the next decade.

The good news is that Republicans are talking about spending caps. This is a welcome change of pace after the profligacy of the Trump years.

The bad news is that the GOP plan presumably has very little likelihood of getting approved.

And even if Biden and Senate Democrats somehow agree to the spending cap, it only applies to discretionary spending. That’s better than nothing, but entitlements are America’s big fiscal problem.

Moreover, keep in mind that Republicans got spending caps on discretionary spending back in 2011, but those caps were then abandoned after some early success.

In other words, I’m not brimming with optimism. But let’s not make the perfect the enemy of the good. Politicians are talking about spending caps today, so maybe there’s a chance of getting real results at some point in the not-too-distant future.