I can understand why immigration reform is so contentious since it touches on all sorts of hot-button issues, such as jobs, politics, national identity, and the welfare state.

But I don’t understand why there’s a controversy just because Governor Walker of Wisconsin supports a specific part of the immigration system that provides easier access for foreigners who are willing to invest money and create jobs in America.

Seems like a win-win situation, but check out these excerpts from a report in the Milwaukee Journal Sentinel.

We’ll start with a description of the program.

Congress created the EB-5 program in 1990… Under the Citizenship and Immigration Services’ Immigrant Investor Program, foreigners can obtain these visas by investing $500,000 in high unemployment areas — or $1 million elsewhere — in projects generating or saving 10 jobs over two years. According to The New York Times, the federal government puts the green card applications from these foreign investors on the fast track. In general, it takes about two years to obtain legal residency through the program; other visa programs take much longer.

Not let’s get to the controversy over Governor Walker’s support.

…there’s one federal visa program you won’t hear him attack. It’s the controversial and deeply troubled immigrant investor program. The program — known as EB-5 — puts wealthy foreigners on the path to U.S. citizenship if they invest at least $500,000 in an American commercial project that will create or preserve 10 jobs. Critics have called the abuse-riddled program a “scam” that essentially sells green cards to the affluent and their families, with more than 80% of those in the program coming from China. …David North, a fellow with the conservative Center for Immigration Studies, said…the program is flawed in its premise. “I think it’s immoral, fattening and otherwise unattractive to sell visas, which is what we’re doing now,” North said.

By thew way, there are reasons to be unhappy about the EB-5 program, at least in the way it operates.

I’ve already shared examples of how political insiders are manipulating the program for cronyist purposes.

But today let’s look at the concept of whether it’s good to have an “economic citizenship” program.

And we’ll start the very relevant point that any immigration system is going to be arbitrary.

  • A lottery system is arbitrary because you get to come to America because of luck.
  • A family-reunification system is arbitrary because you get to come to America because of your genes.
  • A system based on refugee status is arbitrary because you get to come to America based on geopolitical circumstances.
  • Even an “open borders” system is arbitrary because you don’t get to come to America if you’re a terrorist, criminal, have communicable diseases, etc.

So if a system is going to be based on arbitrary factors, what’s wrong with deciding that one of the criteria is economic benefit to the United States?

Indeed, maybe I’m too myopic because of my background and training, but it seems like economic benefit should be a factor that everyone can support. After all, these won’t be people seeking handouts from the welfare system.

Consider these passages from a recent New York Times story about all the EB-5 money that’s boosting the Empire State’s economy.

Through a federal visa program known as EB-5, foreigners, more than 80 percent of them from China, are investing billions of dollars in hotels, condominiums, office towers and public/private works in the hope it will result in green cards. Twelve-hundred foreigners have poured $600 million into projects at Hudson Yards; 1,154 have invested $577 million in Pacific Park Brooklyn, the development formerly known as Atlantic Yards; and 500 have put $250 million into the Four Seasons hotel and condominium in the financial district. The list of projects involving EB-5 investments also includes the International Gem Tower on West 47th Street and the New York Wheel on Staten Island. …In the last four years, the program’s popularity has surged. In fiscal year 2010, 1,885 visas were issued. But by fiscal year 2013 that figure jumped 354 percent to 8,564, according to government data. Last year, the entire annual allotment of 10,000 visas had been claimed by August — before the end of the fiscal year in October. This year the quota was reached even earlier, on May 1.

As an aside, this program isn’t attractive to those with lots of money because of America’s punitive tax system.

“This program is not for the very rich in China, because the superwealthy do not want to pay U.S. taxes.” Instead, he said, the wealthiest Chinese prefer to have their legal residences in low tax jurisdictions like Hong Kong or Singapore, and then take advantage of 10-year tourist visas to the United States.

While I’m tempted to now explain why we should fix our bad tax system, let’s stick to the topic of immigration and delve further into the issue of whether it’s good to attract economically successful foreigners to America.

Some scholars say the answer is yes, but they think the EB-5 program is inefficient.

Here’s some of what Professor Eric Posner of the University of Chicago Law School wrote for Slate.

The program is a mess. …it’s almost impossible to figure out whether a specific investment generates jobs rather than reshuffles them from one place to another. There have also been examples of outright fraud and political cronyism. Part of the problem is a lack of documentation but the real problem is that the program is misconceived. …the price we charge for citizenship is extraordinarily low. …A shrewd investor will find an investment that pays a couple percentage points below the market rate. If he invests $500,000 in order to obtain, say, a 6 percent return rather than an 8 percent return, then the true price he pays for U.S. citizenship is $10,000 in foregone return.

So what’s the alternative?

Gary Becker, the late University of Chicago economist and Nobel laureate, once proposed that the United States should sell citizenship to foreigners for a flat fee. The EB-5 program approximates Becker’s proposal, albeit in the most inefficient way possible. Becker argued that citizenship is a scarce good just like tomatoes and hula hoops, and is thus subject to the law of supply and demand. America owns visas and should sell them to willing buyers at the market-clearing price. We would attract immigrants who are skilled enough to earn wages that would cover the fee, and we would gain again from the tax on their wages once they began work in this country. These types of immigrants—the ones who could afford the fee—would be least likely to burden the public fisc by needing welfare payments.

The Becker plan, which Posner basically supports, certainly would be simpler than the EB-5 program.

And it presumably eliminates the instances of corrupt cronyism that taint that otherwise good system.

Moreover, many of the nations with economic citizenship programs use this approach.

But here’s the downside. If you sell citizenship directly, the money goes to the government rather than to the productive sector of the economy.

That might be acceptable if it meant that the politicians reduced or eliminated some tax. But I fear the real-world impact would be to simply give the crowd in Washington more money to waste.

So perhaps the real challenge is to figure out some smarter way of operating the EB-5 program so we get even more private investment and job creation while also reducing opportunities for cronyist intervention.

P.S. If you want to enjoy some immigration-themed humor, here’s some involving Peru and Canada.

P.P.S. While I don’t like government getting more money, that shouldn’t be the only factor when grading a policy proposal. I fretted, for instance, that pot legalization in Colorado would be a mixed blessing because it would generate more tax revenue. But thanks to Colorado’s Taxpayer Bill of Rights, the politicians haven’t been able to spend all the new money, so it’s unambiguously a win-win situation.

P.P.P.S. The Princess of the Levant is in America because of the immigration lottery, so I certainly won’t be complaining too much about arbitrary systems. [correction: The PoTL has informed me that her U.S. residency is the result of her grandfather’s application and not the lottery]

The American Enterprise Institute has published a comprehensive budgetary plan entitled, “Tax and spending reform for fiscal stability and economic growth.”

Authored by Joseph Antos, Andrew G. Biggs, Alex Brill, and Alan D. Viard, all of whom I know and admire, this new document outlines a series of reforms designed to restrain the growth of government and mitigate many of the tax code’s more punitive features.

Compared to current law, the plan is a huge improvement.

But huge improvement isn’t the same as perfect, so here’s my two cents on what’s really good, what’s partially good, and what has me worried.

I’ll start with something that’s both good and bad.

According to the latest CBO estimates, federal tax revenues for 2015 will absorb 17.7 percent of GDP and spending will consume 20.4 percent of economic output. Now look at this table showing the impact of the AEI proposal. As you can see, the burden of taxes and spending will both be higher in the future than today.

That’s obviously bad. One would think a conservative organization would present a plan that shrinks the size of government!

But here’s the catch. Under current law, the burden of government is projected to climb far more rapidly, largely because of demographic changes and poorly designed entitlement programs. So if we do nothing and leave government on auto-pilot, America will be saddled with a European-sized welfare state.

From that perspective, the AEI plan actually is good since it is based on reforms that stop most – but not all – of the already-legislated expansions in the size of the public sector.

So here’s the bottom line. Compared to what I would like to see, the AEI plan is too timid. But compared to what I fear will happen, the AEI plan is reasonably bold.

Now let’s look at the specific reforms, staring with tax policy. Here’s some of what’s in the report.

The goal of our tax reform is to eliminate the income tax’s inherent bias against saving and investment and to reduce other tax distortions. To achieve this goal, the income tax system and the estate and gift taxes would be replaced by a progressive consumption tax, in the form of a Bradford X tax consisting of a…37 percent flat-rate firm-level tax on business cash flow and a graduated-rate household-level tax, with a top rate of 35 percent, on wages and fringe benefits.

At the risk of oversimplifying, the AEI folks decided that it was very important to solve the problem of double taxation and not so important to deal with the problem of a discriminatory and punitive rate structure. Which is sort of like embracing one big part of the flat tax while ignoring the other big part.

We’d have a less destructive tax code than we have now, but it wouldn’t be as good as it could be. Indeed, the plan is conceptually similar to the Rubio-Lee proposal, but with a lot more details.

Not that I’m happy with all those additional details.

To address environmental externalities in a more cost-effective and market-based manner, energy subsidies, tax credits, and regulations would be replaced by a modest carbon tax. The gasoline tax would be increased to cover highway-related costs.

I’m very nervous about giving Washington a new source of revenue. And while I’m open (in theory) to the argument that a carbon tax would be a better (less worse) approach than what we have now, I’m not sure it’s wise to trust that politicians won’t pull a bait and switch and burden us with both a costly energy tax and new forms of regulatory intervention.

And I definitely don’t like the idea of a higher gas tax. The federal government should be out of the transportation business.

There are also other features that irk me, including the continuation of some loopholes and the expansion of redistribution through the tax code.

Child and dependent care expenses could be deducted… A 15 percent refundable credit for charitable contributions… A 15 percent refundable credit for mortgage interest… A refundable credit for health insurance…the EITC for childless workers would be doubled relative to current law.

Though I should also point out that the new tax system proposed by AEI would be territorial, which would be a big step in the right direction. And it’s also important to note that the X tax has full expensing, which solves the bias against investment in a depreciation-based system.

But now let’s look at the most worrisome feature of the plan. It explicitly says that Washington should get more money.

… we also cannot address the imbalance simply by cutting spending… The tax proposals presented in this plan raise necessary revenues… Over time, tax revenue would gradually rise as a share of GDP… The upward path of tax revenue is necessary to finance the upward path of federal spending.

This is very counterproductive. But I don’t want to regurgitate my ideological anti-tax arguments (click here if that’s what you want). Let’s look at this issue from a strictly practical perspective.

I’ve reluctantly admitted that there are potential tax-hike deals that I would accept, at least in theory.

But those deals will never happen. In the real world, once the potential for additional revenue exists, the appetite for genuine spending restraint quickly evaporates. Just look at the evidence from Europe about the long-run relationship between taxes and debt and you’ll see that more revenue simply enables more spending.

Speaking of which, now let’s shift to the outlay side of the fiscal ledger.

We’ll start with Social Security, where the AEI folks are proposing to turn Social Security from a substandard social insurance program, which is bad, to a flat benefit, which might even be worse since it involves a shift to a system that is even more focused on redistribution.

The minimum benefit would be implemented immediately, increasing benefits for about one third of retirees, while benefits for middle- and high-earning individuals would be scaled down to the wage-indexed poverty level between now and 2050.

Yes, the system they propose is more fiscally sustainable for government, but what about the fact that most workers are paying record amounts of payroll tax in exchange for a miserly monthly payment?

This is why the right answer is personal retirement accounts.

The failure to embrace personal accounts may be the most disappointing feature of the AEI plan. And I wouldn’t be surprised if the authors veered in this unfortunate direction because they put the cart of debt reduction ahead of the horse of good policy.

To elaborate, a big challenge for real Social Security reform is the “transition cost” of financing promised benefits to current retirees and older workers when younger workers are allowed to shift their payroll taxes to personal accounts. Dealing with this challenge presumably means more borrowing over the next few decades, but it would give us a much better system in the long run. But this approach generally isn’t an attractive option for folks who fixate on near-term government debt.

That being said, there are spending reforms in the proposal that are very appealing.

The AEI plan basically endorses the good Medicare and Medicaid reforms that have been part of recent GOP budgets. And since those two programs are the biggest drivers of our long-run spending crisis, this is very important.

With regards to discretionary spending, the program maintains sequester/Budget Control Act spending levels for domestic programs, which is far too much since we should be abolishing departments such as HUD, Agriculture, Transportation, Education, etc.

But since Congress presumably would spend even more, the AEI plan could be considered a step in the right direction.

Finally, the AEI plan calls for military spending to consume 3.8 percent of economic output in perpetuity. National defense is one of the few legitimate functions of the federal government, but that doesn’t mean the Pentagon should get a blank check, particularly since big chunks of that check get used for dubious purposes. But I’ll let the foreign policy and defense crowd fight that issue since it’s not my area of expertise.

P.S. The Heritage Foundation also has thrown in the towel on personal retirement accounts and embraced a basic universal flat benefit.

P.P.S. On a completely different topic, here’s a fascinating chart that’s being shared on Twitter.

As you can see, the United States is an exception that proves the rule. I don’t know that there are any policy implications, but I can’t help but wonder whether America’s greater belief in self-reliance is linked to the tendency of religious people to believe in individual ethics and moral behavior.

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

The rate is as low as possible, to minimize penalties on productive behavior.

There’s no double taxation, so no more bias against saving and investment.

And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

…the Hall-Rabushka tax would be highly regressive, in part because high-income households tend to consume less of their income than lower-income households and because investment income would not be taxed (or rather double-taxed).

This is a very schizophrenic passage since he makes a claim of regressivity even though he acknowledged that the flat tax has effective progressivity just a few sentences earlier.

And since he admits that the flat tax actually does tax income that is saved and invested (but only one time rather than over and over again, as can happen in the current system), it’s puzzling why he says the system is “highly regressive.”

If he simply said the flat tax was far less progressive (i.e., less discriminatory) than the current system, that would have been fine.

Here’s the next passage that rubbed me the wrong way.

…there is some dispute over whether ending the double taxation of savings would yield significant growth dividends. Chris William Sanchirico of Penn Law School takes a skeptical view in a review of the academic research on the subject, in part because cutting capital-income taxation as part of a revenue-neutral reform would require offsetting increases in labor-income taxation, which would dampen long-term economic growth in their own right.

I’m not even sure where to start. First, Reihan seems to dismiss the role of dynamic scoring in enabling low tax rates on labor. Second, he cites just one professor about growth effects and overlooks the overwhelming evidence from other perspectives. And third, he says the flat tax would be revenue neutral, when virtually every plan that’s been proposed combines tax reform with a tax cut.

On a somewhat more positive note, Reihan then suggests that lawmakers instead embrace “universal savings accounts” as an alternative to sweeping tax reform.

Instead of campaigning for a flat tax, GOP candidates ought to consider backing Universal Savings Accounts (USAs)… The main difference between USAs and Roth IRAs is that “withdrawals could be made at any time for any reason,” a change that would make the accounts far more attractive to far more people. …Unlike a wholesale shift to consumption taxation, USAs with a contribution limit are a modest step in the same general direction, which future reformers can build on.

I have no objection to incremental reform to reduce double taxation, and I’ve previously written about the attractiveness of USAs, so it sounds like we’re on the same page. And if you get rid of all double taxation and keep rates about where they are now, you get the Rubio-Lee tax plan, which I’ve also argued is a positive reform.

But then he closes with an endorsement of more redistribution through the tax code.

Republicans should put Earned Income Tax Credit expansion and other measures to improve work incentives for low-income households at the heart of their tax-reform agenda.

I want to improve work incentives, but it’s important to realize that the EIC is “refundable,” which is simply an inside-the-beltway term for spending that is laundered through the tax code. In other words, the government isn’t refunding taxes to people. It’s giving money to people who don’t owe taxes.

As an economist, I definitely think it’s better to pay people to work instead of subsidizing them for not working. But we also need to understand that this additional spending has two negative tax implications.

  1. When politicians spend more money, that either increases pressure for tax increases or it makes tax cuts more difficult to achieve.
  2. The EIC is supposed to boost labor force participation, but the evidence is mixed on this point, and any possible benefit with regards to the number of people working may be offset by reductions in actual hours worked because the phase out of the EIC’s wage subsidy is akin to a steep increase in marginal tax rates on additional labor supply.

In any event, I don’t want the federal government in the business of redistributing income. We’ll get much better results, both for poor people and taxpayers, if state and local government compete and innovate to figure out the best ways of ending dependency.

The rest of Reihan’s column is more focused on political obstacles to the flat tax. Since I’ve expressed pessimism on getting a flat tax in my lifetime, I can’t really argue too strenuously with those points.

In closing, I used “friendly fight” in the title of this post for a reason. I don’t get the sense that Mr. Salam is opposed to good policy. Indeed, I would be very surprised if he preferred the current convoluted system over the flat tax.

But if there was a spectrum with “prudence” and “caution” on one side and “bold” and “aggressive” on the other side, I suspect we wouldn’t be on the same side. And since it’s good for there to be both types of people in any movement, that’s a good thing.

P.S. I got a special treat this morning. I was at Reagan Airport for a flight to Detroit at the same time as a bunch of America’s World War II vets arrived on an Honor Flight to visit the WWII Memorial.

Here’s my rather pathetic attempt to get a photo of one of the vets being greeted.

Since I’ll never be in demand as a photographer, you should watch this video to learn more about this great private initiative to honor World War II veterans.

President Obama recently took part in a poverty panel at Georgetown University. By D.C. standards, it was ideologically balanced since there were three statists against one conservative (I’ve dealt with that kind of “balance” when dealing with the media, as you can see here and here).

You won’t be surprised to learn that the President basically regurgitated the standard inside-the-beltway argument that caring for the poor means you have to support bigger government and more redistribution.

Many observers were unimpressed. Here’s some of what Bill McGurn wrote for the Wall Street Journal.

The unifying progressive contention here is the assertion that America isn’t “investing” enough in the poor—by which is meant the government isn’t spending enough. …President Obama…went on to declare it will be next to impossible to find “common ground” on poverty until his critics accept his spending argument.

I think this argument is nonsense. We’re spending record amounts of money on means-tested, anti-poverty programs, yet the poverty rate hasn’t come down since the “War on Poverty” started.

Indeed, you can make a very persuasive case that government intervention has backfired since the poverty rate was falling before the federal government got involved. Yet now that Washington is paying people to be poor, progress has ground to a halt.

In his column, though, McGurn pointed out that it’s also important to look at how money is spent.

…it’s simply false to say that Republicans won’t make the public “investments” needed to help the poor. In New York in the 1990s, for example, Republican Mayor Rudy Giuliani not only invested in the police but sent them into the areas where they were most needed—primarily poor and minority neighborhoods. In too many other Democratic cities, by contrast, mayors in effect cede whole neighborhoods to the thugs and gangs. Republicans are also willing to spend on education. What they are not willing to do is dump ever more dollars down the same rathole of big-city public school systems that function more as jobs programs for city bureaucrats and members of the teachers unions.

And he challenged the view of some GOPers that government spending will promote stable families.

…it would similarly be good for Republicans to address the hard implications of their own message. If, for example, broken families are indeed driving modern American poverty, is the only answer despair—or praying for some miracle? And if you believe the government can’t help but bungle something as basic as food stamps, shouldn’t you bring this same skepticism to a “conservative” program that enlists the government to, say, discourage divorce or promote chastity?

I certainly agree with that point. President Bush’s program to encourage marriage certainly wasn’t a success.

But let’s focus on the present. Here’s some of what Thomas Sowell said about Obama’s performance. As you can see, he was not impressed with the President’s abuse of the English language.

One of the ways of fighting poverty, [the President] proposed, was to “ask from society’s lottery winners” that they make a “modest investment” in government programs to help the poor. …But the federal government does not just “ask” for money. It takes the money it wants in taxes, usually before the people who have earned it see their paychecks. …It seizes what it wants by force. If you don’t pay up, it can take not only your paycheck, it can seize your bank account, put a lien on your home and/or put you in federal prison. So please don’t insult our intelligence by talking piously about “asking.”

And Sowell closes his column by raising the fundamental question of whether it makes sense to let government consume a greater share of economic output.

The fact that most of the rhetorical ploys used by Barack Obama and other redistributionists will not stand up under scrutiny means very little politically. After all, how many people who come out of our schools and colleges today are capable of critical scrutiny? When all else fails, redistributionists can say, as Obama did at Georgetown University, that “coldhearted, free-market capitalist types” are people who “pretty much have more than you’ll ever be able to use and your family will ever be able to use,” so they should let the government take that extra money to help the poor. …The real question is whether the investment of wealth is likely to be done better by those who created that wealth in the first place or by politicians. The track record of politicians hardly suggests that turning ever more of a nation’s wealth over to them is likely to turn out well.

Amen. The academic evidence is very strong that nations with large public sectors suffer from economic anemia.

And since the poor are most dependent on growth to get a good foothold on the economic ladder, Prof. Sowell surely is right when he states that it’s better to leave resources in the productive sector of the economy. Moreover, he’s explained in the past that the welfare state certainly doesn’t help the poor.

P.S. Since today’s column ended with a discussion about whether government should be bigger or smaller, it’s appropriate to share this bit of humor concocted by the Princess of the Levant.

If you’re a new reader and don’t get the joke, Richard is famous for the Rahn Curve, though I think he overstates the growth-maximizing size of government. As such, I argue that we need to impose my (not nearly as famous) Golden Rule of spending restraint.

P.P.S. Shifting back to the topic of poverty and redistribution, we should all be very concerned that the Obama White is trying to manipulate the definition of poverty in order to justify ever-larger amounts of redistribution and dependency. And you won’t be surprised to learn that the OECD supports this dishonest and misleading initiative.

P.P.P.S. Here’s an image that accurately summarizes the left’s misguided view of redistribution.

I almost feel sorry for my leftist friends. Whenever there’s a story about a crazed shooter, they invariably speculate that it’s someone affiliated with the Tea Party. So they must be sad when it turns out to be a random nut or in some cases a leftist.

Similarly, when the news broke a few days ago about the Amtrak derailment, they instantly decided that the crash was the result of inadequate handouts from Washington. So imagine how forlorn they must be since it turns out the bureaucrat in charge of the train was traveling at about twice the appropriate speed.

But let’s set aside the tender feelings of our statist buddies and look to see whether there are any policy lessons to learn from the recent Amtrak tragedy.

Writing for National Review, Kevin Williamson makes a key point that Amtrak, like other parts of government, is first and foremost focused on maximizing the amount of money that can be extracted from taxpayers.

…everything from the stimulus bill to regular appropriations has spent billions of dollars on Amtrak, and Amtrak still failed to install the speed-control system that was supposed to be completed this year — a system that the NTSB and others believe would have prevented this accident. So, the “investments” in safety systems have produced no safety system. Where does Amtrak spend its money? Almost every dime of ticket revenue is spent on personnel — salaries, benefits, bonuses, etc.  Amtrak can’t be bothered to finish up a safety system on time. But did Amtrak CEO Joseph Boardman ever miss a nickel of his $350,000-a-year salary? No. Did Amtrak fail to pay employee bonuses? No—in fact, it paid bonuses to people who weren’t even eligible for them, and then refused to rescind them once it was pointed out that they were unauthorized. So Amtrak took care of Amtrak’s priorities, just like every other government agency. But Amtrak’s priorities are not its customers’ priorities.

In other words, the culture at Amtrak is to maximize goodies from government, not to maximize profits, which is the culture at a real company.

And the beneficiaries are the overpaid bureaucrats who operate Amtrak, as well as the insiders (like Joe Biden’s son) who get special appointments to Amtrak’s board of directors.

So what, then, is the solution?

As explained by Jeffrey Dorfman, an economics professor at the University of Georgia, it’s time to wean Amtrak from the public teat.

…within two days liberal politicians had seized on the occasion to demand larger subsidies for Amtrak. In fact, the events of last week show the precise opposite-Amtrak should not receive a larger subsidy, but rather should be sold off and privatized. Currently, Amtrak receives more than $1 billion in funding from Congress although it still manages to lose money. …This leads to the question of why Americans taxpayers should subsidize a rail service that only somewhere around one or two percent of Americans actually use. The clear and obvious answer is that they should not be. While Democratic leaders are calling for more federal funding, the problem is not a lack of subsidies but instead that Amtrak’s leadership is divided between serving its customers and serving the political benefactors who provide it with about $1.4 billion per year. If Amtrak was privatized, it could focus solely on serving its customers. If those customers were concerned with safety, then Amtrak would prioritize safety improvements because that would be a necessary step to staying in business.

Moreover, Amtrak would have the incentive to behave rationally if it wasn’t sponging off taxpayers.

If sold for a fairly low valuation for a railroad, Amtrak would sell for around $6.5 to $7 billion. …the federal government would save the $1.4 billion each year that it has been providing to Amtrak. After privatization, Amtrak will know that federal government subsidies are not available to it and will focus on serving its customers and turning a profit. That may mean that some routes are discontinued or continue operating with fewer scheduled trains. At the same time, some routes, such as those in the northeast corridor, may see an increase in the quality and frequency of service as Amtrak responds to the level of consumer demand in the free market.

Notwithstanding the recent accident, trains actually are very safe. And in the absence of government meddling, a private rail company would have the right incentives to produce the correct amount of investments in safety.

Train travel is already ten times safer than driving in terms of deaths per mile traveled. It is possible that riders do not want to pay more for train tickets in exchange for safety improvements. After all, Amtrak is actually ahead of many private railroads in installing the positive train control safety systems. However, if riders demand it, a private, profit-oriented railroad will provide it.

P.S. Here’s a personal story to give you a sense of Amtrak’s misguided culture.

P.P.S. The good news, for what it’s worth, is that Amtrak is a bargain for taxpayers compared to the rail boondoggle taking place in California. And I guess we should be happy that we don’t have the Chinese version of Amtrak.

P.P.P.S. Don’t carry a lot of cash if you’re a young black male and riding Amtrak.

Since I’m an advocate of smaller government, you might imagine I’m perpetually depressed. After all, I work in Washington where I’m vastly outnumbered by people who specialize in looting and mooching. At times, I feel like a missionary in a house of ill repute.

But I always look for the silver lining when there’s a dark cloud overhead. So while it’s true that government squanders our money and violates our rights, at least we sometimes get some semi-amusing stories about sheer incompetence and staggering stupidity.

Like Detroit spending $32 to issue $30 parking tickets.

The State Department buying friends.

Or Georgia’s drug warriors raiding a house because of okra plants.

FEMA house guidelines that make houses less safe in hurricanes.

Federal rules that prevent school bake sales.

Bureaucrats defecating in hallways.

Yes, I realize I also should be outraged about these examples. But I can’t help being amused as well.

So let’s add to our collection of bizarre, foolish, and wasteful behavior by government.

Here are some passages from a Washington Post exposé on mismanagement and waste at the federal department that is infamous for secret waiting lists that resulted in denied health care (and in some cases needless deaths) for America’s veterans.

The Department of Veterans Affairs has been spending at least $6 billion a year in violation of federal contracting rules to pay for medical care and supplies, wasting taxpayer money and putting veterans at risk, according to an internal memo written by the agency’s senior official for procurement. In a 35-page document addressed to VA Secretary Robert McDonald, the official accuses other agency leaders of “gross mismanagement” and making a “mockery” of federal acquisition laws that require competitive bidding and proper contracts. Jan R. Frye, deputy assistant secretary for acquisition and logistics, describes a culture of “lawlessness and chaos” at the Veterans Health Administration.

I confess that it’s hard to find anything amusing about this story, but I’m worried that I might go crazy if I simply focus on how a bureaucracy gets more and more money every year, yet also manages to waste money with no negative consequences.

Or maybe I just enjoy the fact that I have a new reason to mock a wasteful government department (sorry to be redundant).

Here’s an example of spending that is so silly that it’s okay for all of us to laugh. Enjoy this blurb on how tax dollars are being wasted by the foreign aid bureaucracy.

American taxpayers might come down with a case of the blues when they hear about how the State Department is spending their tax dollars. According to ForeignAssistance.gov, India has requested $88,439,000 in U.S. foreign aid for the year 2015, but the State Department plans to spend additional funds on diplomacy: music diplomacy. The U.S. Mission to India is offering a $100,000 grant opportunity titled “Strengthening US-India Relations Through Jazz.” Eligible applicants include public and private universities as well as non-profit organizations. …Another grant available to universities and non-profit groups is for a “Visual Exhibit on Indian Faith and Traditions in America.” For $75,000, U.S. taxpayers will fund a “photographic exhibit that showcases both the ways that Indian-Americans practice their faith traditions in the United States, and the ways that Indian faith traditions have been adopted by American communities.” According to the offering, “The images will capture the diversity of the Indian-American community, so that a broad range of religious traditions are depicted.

These numbers are small compared to, say, the malfeasance and waste at the Department of Veterans Affairs. But that doesn’t mean we shouldn’t get upset in addition to being amused.

Think about it from this perspective. The amounts being wasted in this example are equal to the entire federal tax burden for several American families.

Do any of us think it’s okay to confiscate so much of their income and then have it squandered so pointlessly and irresponsibly?

Besides, the foreign aid bureaucracy is also capable of wasting huge amounts of money.

But remember that the federal government doesn’t have a monopoly on foolish and stupid behavior.

Here’s another example of inane government behavior. And you won’t be surprised that it took place in California because, as Reason reports, it involved a raid against an establishment serving probiotic tea.

Last Friday, an undercover officer from the state’s Alcohol Beverage Control (ABC) “infiltrated the temple,” Vice reports, “clearing the way for a 9 PM incursion by five officers.” What manner of crazy bootlegged hooch were the agents there to confiscate? Kombucha. Blueberry kombucha. For the uninitiated, kombucha is a type of carbonated, probiotic tea, popular among hipsters and health foodies. It’s made by mixing regular tea, sugar, and a “symbiotic culture of bacteria and yeast” known as the “mother” and letting the whole business ferment for a few days. The end result is a somewhat vinegar-like beverage that’s packed with good bacteria (à la yogurt) and ever-so-slightly alcoholic….But because the tea contains slightly above 0.5 percent alcohol, it requires a special license to sell say ABC agents, who cited a Full Circle rep for misdemeanor selling alcohol without a license.

Reminds me of the story about the federal milk police at the FDA. Or the federal bagpipe police at our borders.

Don’t these bureaucrats have anything better to do with their time (and our money)?!?

P.S. How could I forget all the examples of insane anti-gun political correctness in government schools?

P.P.S. Or the examples of unconstrained stupidity at the TSA?

P.P.P.S. And the odd collection of “human rights” that governments have created.

There’s an old saying that you shouldn’t bite the hand that feeds you. Unfortunately, politicians in Washington don’t follow that advice.

Let me explain. All economic theories – even Marxism and socialism – agree that capital formation is a necessary condition for long-run growth and higher wages.

The Marxists and the socialists are misguided in thinking that government has the capacity to be in charge of saving and investing, but at least they recognize that you have to set aside some of today’s income to finance tomorrow’s growth. And they even understand that capital formation leads to more productivity and higher wages.

The politicians, however, act as if they don’t understand the importance of saving and investment. Or, based on the policies we get from Washington, maybe they simply don’t care about the well-being of workers, savers, and investors.

Which is a very short-sighted attitude since capital formation leads to a bigger tax base (i.e., more income that they can tax), which is something they presumably should care about!

I’m pondering this conundrum because of a thought-provoking column. Writing for the Wall Street Journal, Thomas Duesterberg and Donald Norman explore the very important question of why corporations are in very strong shape while investment is lagging.

Corporate profits and cash flow are strong, cash on the books of American firms is at record highs… Yet capital investment, which is one of the main pillars of growing productivity and rising living standards, is historically weak. …In 2014, real gross domestic product was 8.7% above the level it reached just before the onset of the great recession in late 2007, …yet gross private investment was just 3.9% higher. Private investment net of depreciation—an even better measure of keeping up production and innovation capacity—was $524 billion in 2013 (the last year for which we have good data), compared with $860 billion in 2006.

Why is this a problem?

For the simple reason that less investment means lower productivity. And lower productivity translates into stagnant wages.

Bureau of Labor Statistics data show that labor productivity grew at an average rate of just 1.5% a year between 2005 and 2014, and by 0.7% a year since 2011. These numbers compare poorly with the average annual growth rates of 3.3% between 1948 and 1973, and 3.2% between 1996 and 2004.

So why has investment been weak?

You shouldn’t be surprised to learn that bad government policy is at the top of the list. Having the world’s highest corporate tax rate obviously doesn’t help.

…one clear factor—noted by many economic analysts—is corporate tax rates, including effective tax rates. These rates can sway decisions about where companies locate new production or research facilities.

Mindless regulation and red tape also puts a costly burden on the economy’s productive sector.

Regulation is also a growing burden. For example, a 2012 study by NERA Economic Consulting notes that the number of major regulations in the manufacturing sector has grown at the compound annual rate of 7.6% since 1998, compared with only 2.2% average annual growth in GDP. …in the World Economic Forum’s annual “Global Competitiveness Report.” …in the category for “burden of government regulation” the latest report ranks the U.S. 82nd of 144.

America also is falling behind in trade.

More than 400 regional free trade agreements have come into effect since 1995, but the United States is party to just two of these and to 10 smaller-scale bilateral agreements. Europe has 38 separate FTAs, and Mexico has added Europe and all of Latin America to its arsenal, which is one reason cited by Audi recently in locating its newest plant there instead of in the U.S.

Last but not least, the overall policy environment in Washington is creating “regime uncertainty.”

A number of studies—including one at Stanford led by Nicholas Bloom and Scott Baker, and at the University of Chicago led by Steven Davis—have employed sophisticated models to chart what is seen as a secular trend in growth of uncertainty that is tied to growth in government regulation, spending, taxes…major shifts in monetary policy probably also contribute to uncertainty.

In other words, investment is lagging both because of the bad policies that have been imposed and because of the expectation/fear that there will be additional burdens coming from Washington.

So we shouldn’t be surprised that corporations are sitting on record piles of cash. Simply stated, it doesn’t make much sense to invest if there’s little hope of future profits.

And don’t be surprised that banks also are sitting on record piles of cash for the same reason.

When I share this kind of information with some of my leftist friends, I frequently get a visceral response about how they won’t shed any tears just because there are fewer profitable opportunities for “fatcat investors” and “rich corporations.”

That reaction doesn’t bother me, at least in the sense that I never lose sleep about the financial health of Warren Buffett or General Electric.

But then I ask my statist friends whether we should be concerned about the “collateral damage” that occurs when lower levels of investment result in less productivity growth, which translates into stagnant wages for ordinary Americans.

Here’s the bottom line. If you punish investors, you also punish workers. This is why, as Walter Williams has explained, the class-warfare mentality is so destructive.


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