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Some types of theft are legal in America.

But there’s a catch. You can only legally steal if you work for the government. It’s a process called “civil asset forfeiture” and it enables government officials to confiscate your property even if you have not been convicted of a crime. Or even charged with a crime.

I’m not joking. This isn’t a snarky reference to the tax system. Nor am I implying that bureaucrats can figuratively steal your property. We’re talking about literal theft by the state.

And it can happen if some government official decides – without any legal proceeding – that the property somehow may have been involved in criminal activity. Or maybe just because you have the wrong skin color.

A column in the Wall Street Journal explains this grotesque injustice.

…thousands of Americans have had their assets taken without ever being charged with a crime, let alone convicted. Russ Caswell almost lost his Massachusetts motel, which had been run by his family for more than 50 years, because of 15 “drug-related incidents” there from 1994-2008, a period through which he rented out nearly 200,000 rooms. Maryland dairy farmer Randy Sowers had his entire bank account—roughly $60,000—seized by the IRS, which accused him of running afoul of reporting requirements for cash deposits. …A manager of a Christian rock band had $53,000 in cash—profits from concerts and donations intended for an orphanage in Thailand—seized in Oklahoma after being stopped for a broken taillight. All of the property in these outrageous cases was eventually returned, but only after an arduous process.

These abuses happen in large part because cops are given bad incentives.

Any property they steal from citizens can be used to pad the budgets of police bureaucracies.

Today more than 40 states and the federal government permit law-enforcement agencies to retain anywhere from 45% to 100% of forfeiture proceeds. As a result, forfeiture has practically become an industry.

And real money is involved.

…data on asset forfeiture across 14 states, including California, Texas and New York. Between 2002 and 2013, the revenue from forfeiture more than doubled, from $107 million to $250 million. Federal confiscations have risen even faster. In 1986 the Justice Department’s Assets Forfeiture Fund collected $93.7 million. In 2014 the number was $4.5 billion.

In other words, there’s a huge incentive for cops to misbehave. It’s called “policing for profit.”

Fortunately, there is a move for reform at the state level.

Since 2014 nearly 20 states and the District of Columbia have enacted laws limiting asset forfeiture or increasing transparency. Nearly 20 other states are considering similar legislation. …lawmakers in Alaska, Connecticut, North Dakota and Texas have sponsored legislation that would send confiscated proceeds directly to the general fund of the state or county. Similar measures in Arizona and Hawaii would restrict forfeiture proceeds to being used to compensate crime victims and their families. …Last fall California Gov. Jerry Brown signed a bill that, in most cases, requires a criminal conviction before any California agency can receive equitable-sharing proceeds. In January Ohio Gov. John Kasich approved legislation to ban his state’s police and prosecutors from transferring seized property to federal agencies unless its value is more than $100,000. Similar reforms have been introduced in Colorado, New Hampshire and a handful of other states.

Legislative reforms are good, though judicial action would be even better.

And, sooner or later, that may happen.

America’s best (but not quite perfect) Supreme Court Justice is justly outraged by these examples of legalized theft. First, some background.

…the U.S. Supreme Court declined to hear a case filed by a Texas woman who says that her due process rights were violated when the police seized over $200,000 in cash from her family despite the fact that no one has been convicted of any underlying crime associated with the money. Unfortunately, thanks to the state’s sweeping civil asset forfeiture laws, the authorities were permitted to take the money of this innocent woman. The Supreme Court offered no explanation today for its refusal to hear the case.

But Justice Thomas is not happy that government officials are allowed to randomly steal property.

Justice Clarence Thomas made it clear that he believes the current state of civil asset forfeiture law is fundamentally unconstitutional. “This system—where police can seize property with limited judicial oversight and retain it for their own use—has led to egregious and well-chronicled abuses,” Thomas declared. Furthermore, he wrote, the Supreme Court’s previous rulings on the matter are starkly at odds with the Constitution, which “presumably would require the Court to align its distinct doctrine governing civil forfeiture with its doctrines governing other forms of punitive state action and property deprivation.” Those other doctrines, Thomas noted, impose significant checks on the government, such as heightened standards of proof, various procedural protections, and the right to a trial by jury. Civil asset forfeiture proceedings, by contrast, offer no such constitutional safeguards for the rights of person or property.

The article continues to explain that Thomas could be signalling that the Supreme Court will address these issues in the future, even though it didn’t choose to address the case filed by the Texas woman.

Let’s hope so. It’s heartening that there’s been a bit of good news at the state level (I even wrote that reform of asset forfeiture was one of the best developments of 2015), but it would be nice if the Supreme Court ultimately decided to prohibit civil asset forfeiture altogether.

But that might be years in the future, so let’s close with a very fresh example of a good state-based reform.

The Wall Street Journal favorably opined yesterday about reforms that have been enacted in Mississippi.

…it’s worth highlighting a civil forfeiture reform backed by the ACLU that Mississippi GOP Governor Phil Bryant signed last week with bipartisan legislative support.

The editorial reminds us why asset forfeiture is wrong.

…civil forfeiture laws…allow law enforcement agencies to seize property they suspect to be related to a crime without actually having to obtain a conviction or even submit charges. Police and prosecutors can auction off the property and keep the proceeds to pad their budgets. …Perverse incentives…create a huge potential for abuse.

Here’s what Mississippi did.

Mississippi’s reforms, which were pushed by the Institute for Justice and had nearly unanimous support in the legislature, would curb the most egregious abuses. Law enforcers would have to obtain a seizure warrant within 72 hours and prosecute within 30 days, so they couldn’t take property while trying to formulate a case. Agencies would also be required to publish a description of the seized property along with its value and petitions contesting the forfeiture to an online public database. …the public will finally be able to police misconduct by law enforcement in criminal raids. That’s something even liberals can cheer.

It’s nice that there’s been reform at the state level, and the Mississippi example is quite encouraging. That’s the good news.

But the bad news is that there may not be much reason to expect progress from the White House since both President Trump and his Attorney General support these arbitrary and unfair confiscations of property.

Which is a shame since they both took oaths to protect Americans from the kind of horrible abuse that the Dehko family experienced. Or the mistreatment of Carole Hinders. Or the ransacking of Joseph Rivers. Or the brutalization of Thomas Williams.

However, if the first two directors of the Justice Department’s asset forfeiture office can change their minds and urge repeal of these unfair laws, maybe there’s hope for Trump and Sessions.

It’s time to make a very serious point, albeit with a bit of humor and sarcasm.

A couple of years ago, I shared an image of Libertarian Jesus to make the point that it’s absurd to equate compassion and virtue with government-coerced redistribution.

We all can agree – at least I hope – that it is admirable to help the less fortunate with our own time and/or money. Indeed, I’m proud that Americans are much more likely to be genuinely generous than people from other countries (and it’s also worth noting that people from conservative states are more generous than people from leftist states).

But some of our statist friends go awry when they think it’s also noble and selfless to support higher tax rates and bigger government. How is it compassionate, I ask them, to forcibly give away someone else’s money? Especially when those policies actually undermine progress in the fight against poverty!

With this in mind, here’s another great example of Libertarian Jesus (h/t: Reddit).

Amen (pun intended), I’m going to add this to my collection of libertarian humor.

But don’t overlook the serious part of the message. As Cal Thomas succinctly explained, it’s hardly a display of religious devotion when you use coercion to spend other people’s money.

This is why I’ve been critical of Pope Francis. His heart may be in the right place, but he’s misguided about the policies that actually help the less fortunate.

For what it’s worth, it would be helpful if he was guided by the moral wisdom of Walter Williams rather than the destructive statism of Juan Peron.

P.S. I’m rather amused that socialists, when looking for Christmas-themed heroes, could only identify people who practice non-coercive generosity.

P.P.S. On a separate topic, Al Gore blames climate change for Brexit.

Brexit was caused in part by climate change, former US Vice-President Al Gore has said, warning that extreme weather is creating political instability “the world will find extremely difficult to deal with”.

I’m beginning to lose track and get confused. Our statist friends have told us that climate change causes AIDS and terrorism, which are bad things. But now they’re telling us climate change caused Brexit, which is a good thing.

Maybe the real lesson is that Al Gore and his friends are crackpots.

I’m flabbergasted when people assert that America’s costly and inefficient healthcare system is proof that free markets don’t work.

In hopes of helping them understand what’s really going on, I try to explain to them that an unfettered market involves consumers and producers directly interacting with their own money in an open and competitive environment.

I then explain why that’s not a description of the U.S. system. Not even close. As I noted in Part I, consumers directly finance only 10.5 percent of their healthcare expenses. Everything else involves a third-party payer thanks to government interventions such as Medicare, Medicaid, the healthcare exclusion, the Veterans Administration, etc.

Obamacare then added another layer of intervention to the existing mess. By my rough calculations, that costly boondoggle took the country from having a system that was 68-percent controlled and dictated by government to a system where government dictates and controls 79 percent of the system.

This is very relevant because Republicans in Washington are now trying to “repeal and replace” Obamacare, but they’re confronting a very unpleasant reality. Undoing that legislation won’t create a stable, market-driven healthcare system. Instead, we’d only be back to where we were in 2010 – a system where government would still be the dominant player and market forces would be almost totally emasculated.

The only difference is that Republicans would then get blamed for everything that goes wrong in the world of healthcare rather than Obama and the Democrats (and you better believe that’s a big part of the decision-making process on Capitol Hill).

Yes, the GOP plan would save some money, which is laudable, but presumably the main goal is to have a sensible and sustainable healthcare system. And that’s not going to happen unless there’s some effort to somehow unravel the overall mess that’s been created by all the misguided government policies that have accumulated over many decades.

This isn’t a new or brilliant observation. Milton Friedman wrote about how government-controlled healthcare leads to higher costs and lower quality back in 1977, but I can’t find an online version of that article, so let’s look at what he said in a 1978 speech to the Mayo Institute.

I realize that many people won’t have 45 minutes of spare time to watch the entire video, so I’ll also provide some excerpts from a column Friedman wrote back in the early 1990s that makes the same points. He started by observing that bureaucratic systems have ever-rising costs combined with ever-declining output.

…a study by Max Gammon…comparing input and output in the British socialized hospital system…found that input had increased sharply, while output had actually fallen. He was led to enunciate what he called “the theory of bureaucratic displacement.” In his words, in “a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like `black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of `emitted production.'” …concern about the rising cost of medical care, and of proposals to do something about it — most involving a further move toward the complete socialization of medicine — reminded me of the Gammon study and led me to investigate whether his law applied to U.S. health care.

Friedman then noted how this bureaucratic rule operated in the United States after the healthcare exclusion was adopted during World War II.

Even a casual glance at figures on input and output in U.S. hospitals indicates that Gammon’s law has been in full operation for U.S. hospitals since the end of World War II… Before 1940, input and output both rose, input somewhat more than output, presumably because of the introduction of more sophisticated and expensive treatment. The cost of hospital care per resident of the U.S., adjusted for inflation, rose from 1929 to 1940 at the rate of 5% per year; the number of occupied beds, at 2.4% a year. Cost per patient day, adjusted for inflation, rose only modestly. The situation was very different after the war. From 1946 to 1989, the number of beds per 1,000 population fell by more than one-half; the occupancy rate, by one-eighth. In sharp contrast, input skyrocketed. Hospital personnel per occupied bed multiplied nearly seven-fold and cost per patient day, adjusted for inflation, an astounding 26-fold.

Friedman then explained that the adoption of Medicare and Medicaid hastened the erosion of market forces.

One major engine of these changes was the enactment of Medicare and Medicaid in 1965. A mild rise in input was turned into a meteoric rise; a mild fall in output, into a rapid decline. …The federal government’s assumption of responsibility for hospital and medical care for the elderly and the poor provided a fresh pool of money, and there was no shortage of takers. Personnel per occupied bed, which had already doubled from 1946 to 1965, more than tripled from that level after 1965. Cost per patient day, which had already more than tripled from 1946 to 1965, multiplied a further eight-fold after 1965. Growing costs, in turn, led to more regulation of hospitals, further increasing administrative expense.

Remember, Friedman wrote this article back in 1991. And the underlying problems have gotten worse since that time.

So what’s the bottom line? Friedman pointed out that the problem is too much government.

The U.S. medical system has become in large part a socialist enterprise. Why should we be any better at socialism than the Soviets?

And he explained that there’s only one genuine solution.

The inefficiency, high cost and inequitable character of our medical system can be fundamentally remedied in only one way: by moving in the other direction, toward re-privatizing medical care.

Some readers may be skeptical. Even though he cited lots of historical evidence, perhaps you’re thinking Friedman’s position is impractical.

So let’s fast forward to 2017 and look at some very concrete data assembled by Mark Perry of the American Enterprise Institute. He looks at medical costs over the past 18 years and compares what’s happened with prices for things that are covered by third-party payer (either government or government-distorted private insurance) and prices for cosmetic procedures that are financed directly by consumers.

As you can see, the relative price of health care generally declines when people are spending their own money and operating in a genuine free market. But when there’s third-party payer, relative prices rise.

Perry explains the issue very succinctly.

Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients paying 100% out-of-pocket for elective cosmetic procedures are cost-conscious, and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. Because of the price transparency and market competition that characterizes the market for cosmetic procedures, the prices of most cosmetic procedures have fallen in real terms since 1998, and some non-surgical procedures have even fallen in nominal dollars before adjusting for price changes. In all cases, cosmetic procedures have increased in price by far less than the 100.5% increase in the price of medical care services between 1998 and 2016 and the 176.6% increase in hospital services.

In other words, a free market can work in healthcare. And it gives us falling prices and transparency rather than bureaucracy and inefficiency. Maybe when they’ve exhausted all other options, Republicans will decide to give freedom a try.

P.S. If you want to get a flavor for how competition and markets generate better results, watch this Reason TV video and read these stories from Maine and North Carolina.

The annual budget for our bloated and sclerotic federal government consumes about $4 trillion of America’s economic output, yet President Trump so far has not proposed to reduce that overall spending burden by even one penny.

A few programs are targeted for cuts, to be sure, but I explained last week, that “taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.” More worrisome, I also pointed out that his budget proposal is “silent on the very important issues of tax reform and entitlement reform.”

All things considered, you would think that statists, special interest groups, and other denizens of the D.C. swamp would be happy with Trump’s timid budget.

Not exactly. There’s so much wailing and screaming about “savage” and “draconian” budget cuts, you would think the ghost of Ronald Reagan is haunting Washington.

Much of this whining is kabuki theater and political posturing as various beneficiaries (including the bureaucrats, lobbyists, contractors, and other insiders) make lots of noise as part of their never-ending campaigns to get ever-larger slices of the budget pie.

And nothing demonstrates the vapidity of this process more than the imbroglio over the Meals on Wheels program. Based on news reports, the immediate assumption is that Trump’s budget is going to starve needy seniors by ending delivery of meals.

Here’s how CNN characterized the proposal.

The preliminary outline for President Donald Trump’s 2018 budget could slash some funding for a program that provides meals for older, impoverished Americans.

“Slash”? That sounds ominous. Sounds like a cut of 40 percent, 50 percent, or 60 percent!

And a flack for Meals on Wheels added her two cents, painting a picture of doom and despair for hungry seniors.

…spokeswoman Jenny Bertolette said, “It is difficult to imagine a scenario in which they will not be significantly and negatively impacted if the President’s budget were enacted.”

Oh no, “significantly and negatively impacted” sounds brutal. How many tens of thousands of seniors will starve?

Only near the bottom of the story do we learn that this is all nonsense. All that Trump proposed, as part of his plan to shift some spending from the domestic budget to the defense budget, is to shut down a pork-riddled and scandal-plagued program at the Department of Housing Development. However, because a tiny fraction of community development block grants get used for Meals on Wheels, interest groups and leftist journalists decided to concoct a story about hungry old people.

In reality, the national office (appropriately) gets almost all its money from private donations and almost all the subsidies to the local branches are from a separate program.

About 3% of the budget for Meals on Wheels’ national office comes from government grants (84% comes from individual contributions and grants from corporations and foundations)… The Older Americans Act, as a function of the US Department of Health and Human Services, …covers 35% of the costs for the visits, safety checks and meals that the local agencies dole out to 2.4 million senior citizens, Bertolette said.

In other words, CNN engaged in what is now known as fake news, publishing a story designed to advance an agenda rather than to inform readers.

My colleague Walter Olson wrote a very apt summary for National Review.

The story that Trump’s budget would kill the Meals on Wheels program was too good to check. But it was false. …it wouldn’t have taken long for reporters to find and provide some needed context to the relationship between federal block grant programs, specifically Community Development Block Grants (CDBG), and the popular Meals on Wheels program. …From Thursday’s conversation in the press, it was easy to assume that block grant programs — CDBG and similar block grants for community services and social services — are the main source of federal funding for Meals on Wheels. Not so.

And if you want some accurate journalism, the editorial page of Investor’s Business Daily has a superb explanation.

What Trump’s budget does propose is cutting is the corruption-prone Community Development Block Grant program, run out of Housing and Urban Development. Some, but not all, state and local governments use a tiny portion of that grant money, at their own discretion, to “augment funding for Meals on Wheels,” according to the statement. …So what’s really going on? As Meals on Wheels America explained, some Community Development Block Grant money does end up going to some of the local Meals on Wheels programs. But it’s a small amount. HUD’s own website shows that just 1% of CDBG grant money goes to the broad category of “senior services.” And 0.17% goes to “food banks.” …All of this information was easily available to anyone reporting on this story, or anyone commenting on it, which would have prevented the false claims about the Meals on Wheels program from spreading in the first place. But why bother reporting facts when you can make up a story…?

The IBD editorial then shifted to what should be the real lesson from this make-believe controversy

…this fake budget-cutting story ended up revealing how programs like Meals on Wheels can survive without federal help. As soon as the story started to spread, donations began pouring into Meals on Wheels. In two days, the charity got more than $100,000 in donations — 50 times more than they’d normally receive. Clearly, individuals are ready, willing and eager to support this program once they perceive a need. Isn’t this how charity is supposed to work, with people donating their own time, money and resources to causes they feel are important, rather than sitting back and expecting the federal government to do it for them?

At the risk of being flippant, Libertarian Jesus would approve that message.

But to be more serious, IBD raises an important point that deserves some attention. Some Republicans think the appropriate response to CNN‘s demagoguery is to point out that Meals on Wheels gets the overwhelming share of its federal subsidies from the Older Americans Act rather than CDBG.

In reality, the correct lesson is that the federal government shouldn’t be subsidizing Meals on Wheels. Or any redistribution program that purports to help people on the state and local level.

There’s a constitutional argument against federal involvement. There’s a fiscal argument against federal involvement. There’s a diversity argument against federal involvement. And there’s a demographic argument against federal involvement.

But there’s also a common-sense argument against federal involvement. And that gives me an excuse to introduce my Third Theorem of Government. Simply stated, it’s a recipe for waste to launder money through Washington.

P.S. For those interested, here is the First Theorem of Government and here is the Second Theorem of Government.

P.P.S. I started today’s column by noting that Trump hasn’t proposed “even one penny” of lower spending. That’s disappointing, of course, but the news is not all bad. The President has  endorsed the Obamacare reform legislation in the House of Representatives, and while that legislation does not solve the real problem in our nation’s health sector, at least it does lower the burden of taxes and spending.

Why would the economy grow faster if we got fundamental reform such as the flat tax?

In part, because there would be one low tax rate instead of the discriminatory and punitive “progressive” system that exists today. As such, the penalty on productive behavior would be reduced.

In part, because there would be no distorting tax breaks that lure people into making decisions based on tax considerations rather than economic merit.

But we’d also enjoy more growth because there would be no more double taxation. Under a flat tax, the death tax is abolished, the capital gains tax is abolished, there’s no double taxation on savings, the second layer of tax on dividends is eliminated, and depreciation is replaced by expensing.

In the wonky jargon of public finance economists, this means we would have a “consumption-based” system, which is just another way of saying that income  would be taxed only one time. No longer would the internal revenue code discourage capital formation by imposing a higher effective tax rate on income that is saved and invested (compared to the tax rate on income that is consumed).

Indeed, this is the feature of tax reform that probably generates the most growth. As I explain in this video on capital gains taxation, all economic theories – even Marxism and socialism – agree that capital formation is a key to long-run prosperity.

The good news is that reducing double taxation is a goal of most major tax plans in Washington. Trump’s campaign plan reduced double taxation, and the House Better Way Plan reduces double taxation.

But that doesn’t mean there’s an easy path for reform. The Hill reports on some of the conflicts that may sabotage legislation this year.

The fight over a border-adjustment tax isn’t the only challenge for Republicans in their push for tax reform. …Notably, some business groups have criticized the proposal to do away with the deduction for businesses’ net interest expenses. …the blueprint does not specifically discuss how the carried interest that fund managers receive would be taxed. Under current law, carried interest is taxed as capital gains, rather than at the higher rates for ordinary income. During the presidential race, Trump repeatedly said he wanted to eliminate the carried interest tax break, and Office of Management and Budget Director Mick Mulvaney told CNN on Sunday that Trump still plans to do this. Many Democrats also want carried interest to be taxed as ordinary income.

The border-adjustment tax is probably the biggest threat to tax reform, but the debate over “carried interest” also could be a problem since Trump endorsed a higher tax burden on this type of capital gain during the campaign.

Here are some excerpts from a recent news report.

Donald Trump vowed to stick up for Main Street over Wall Street — that line helped get him elected. But the new president has already hit a roadblock, with fellow Republicans who control Congress balking at Trump’s pledge to close a loophole that allows hedge fund and private equity managers to pay lower taxes on investment management fees. …The White House declined to comment on the status of negotiations between Trump and congressional Republicans over the carried-interest provision. …U.S. Rep. Jim Himes, D-Conn., a House Financial Services Committee member and former Goldman Sachs executive, said there is chaos on the tax reform front. “That’s on the list of dozens of things where there is disagreement between the president and the Republican majority in Congress,” Himes said.

Regarding the specific debate over carried interest, I’ve already explained why I prefer current law over Trump’s proposal.

Today I want to focus on the “story behind the story.” One of my main concerns is that the fight over the tax treatment of carried interest is merely a proxy for a larger campaign to increase the tax burden on all capital gains.

For instance, the ranking Democrat on the Senate Finance Committee openly uses the issue of carried interest as a wedge to advocate a huge increase in the overall tax rate on capital gains.

Of course, when you talk about the carried interest loophole, you’re talking about capital gains. And when you talk about capital gains, you’re talking about the biggest tax shelter of all – the one hiding in plain sight. Today the capital gains tax rate is 23.8 percent. …treat[ing] income from wages and wealth the same way. In my view, that’s a formula that ought to be repeated.

The statists at the Organization for Economic Cooperation and Development also advocate higher taxes on carried interest as part of a broader campaign for higher capital gains taxes.

Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options… Examining ways to tax capital income at the personal level at slightly progressive rates, and align top capital and labour income tax rates.

It would be an overstatement to say that everyone who wants higher taxes on carried interest wants higher taxes on all forms of capital gains. But it is accurate to assert that every advocate of higher taxes on capital gains wants higher taxes on carried interest.

If they succeed, that would be a very bad result for American workers and for American competitiveness.

For those wanting more information, here’s the Center for Freedom and Prosperity’s video on carried interest.

Last but not least, wonky readers may be interested in learning that carried interest partnerships can be traced all the way back to medieval Venice.

Start-up merchants needed investors, and investors needed some incentive to finance the merchants. For the investor, there was the risk of their investment literally sailing out of the harbor never to be seen again. The Venetian government solved this problem by creating one of the first examples of a joint stock company, the “colleganza.” The colleganza was a contract between the investor and the merchant willing to do the travel. The investor put up the money to buy the goods and hire the ship, and the merchant made the trip to sell the goods and then buy new foreign goods that could then be brought back and sold to Venetians. Profits were then split between the merchant and investor according to the agreements in the contract.

Fortunately for the merchants and investors of that era, neither income taxes nor capital gains taxes existed.

P.S. Italy didn’t have any sort of permanent income tax until 1864. Indeed, most modern nations didn’t impose these punitive levies until the late 1800s and early 1900s. The United States managed to hold out until that awful dreary day in 1913. It’s worth noting that the U.S. and other nations managed to become rich and prosperous prior to the adoption of those income taxes. And it’s also worth noting that the rapid growth of the 18th century occurred when the burden of government spending was very modest and there was almost no redistribution spending.

P.P.S. Now that we have income taxes (and the bigger governments enabled by those levies), the only silver lining is that governments have compensated for bad fiscal policy with better policy in other areas.

I’ve looked at some of the grim fiscal implications of demographic changes the United States and Europe.

Now let’s look at what’s happening in Asia.

The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.

Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.

More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.

Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.

But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.

More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.

Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.

I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.

And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).

To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.

Especially automatic increases in the retirement age based on life expectancy.

One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.

Here’s a table showing the AAMs that already exist.

Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”

This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.

It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.

…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.

From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.

The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.

Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix..

For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.

But I’m nitpicking.

Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.

By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.

To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.

That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.

That idea periodically gets floated in the United States. Here’s some of what I wrote in 2011.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.

I made a related observation about this approach back in 2012.

…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

The bottom line is that the implicit message should be explicit. Other nations should copy jurisdictions such as Chile, Australia, and Hong Kong by shifting to personal retirement accounts

P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

It’s relatively easy to demonstrate how certain regulations make our lives less pleasant (inferior light bulbs, substandard toilets, inadequate washing machines, crummy dishwashers, etc).

Furthermore, it’s also simple to highlight examples of foolish and preposterous regulations.

And it’s a straightforward exercise (at least conceptually) to argue that regulations should pass some sort of cost-benefit test.

What’s not so easy, however, is getting folks to grasp the overall impact of red tape on growth and living standards. After all, most normal people don’t want to learn about wonky concepts such as the production possibilities frontier. And I also doubt there are many people who are interested in the technical challenge of how to measure the aggregate impact of thousand of rules and restrictions.

But these issues matter. A lot. According to Economic Freedom or the World, the regulatory burden is just as important as the fiscal burden when determining a nation’s competitiveness and economic outlook. Simply stated, our living standards are determined by productivity, which is determined by how wisely labor and capital are combined to generate output.

With this in mind, a new study from the European Central Bank helpfully examines the degree to which regulation hinders the efficient allocation of those factors of production.

The focus of this paper is on the…misallocation of labour and capital in eight macro-sectors (which include manufacturing and services) for five large euro-area countries (Belgium, France, Germany, Italy and Spain) during the period 2002-2012. …The paper then investigates the potential determinants of changes in input misallocation by looking at traditional structural determinants, namely restrictive product and labour market regulations. …regulations that shelter firms from competition might result in poor allocation of resources because low productive firms will keep operating instead of downsizing or exiting. Similarly, stringent labour market regulation, in the form of high hiring and firing costs, might also thwart resource allocation.

For those who are interested in such things, the study looks at what drives improvements in productivity. Is it firms becoming more efficient because of competition, or is “reallocation” as weak companies vanish and dynamic new firms emerge?

The short answer, as illustrated by the table, is that both play a role.

Here are some of the issues considered in the ECB study.

In our full empirical specification, as well as initial conditions in misallocation, …we first examine the role of two structural factors, i.e. changes in both product and labour market regulations. In the presence of high barriers to entry, unproductive firms are able to survive and therefore retain productive resources which are not shifted to the most efficient firms in a given industry (Schiantarelli 2008; Restuccia and Rogerson 2013; Andrews and Cingano 2014). Furthermore, more stringent employment regulation might prevent firms from adjusting their workforce to optimal levels, therefore hampering the efficient reallocation of workers across firms (Haltiwanger, Scarpetta and Schweizer 2014; Bartelsman, Gautier and de Wind 2011). Moreover, in the labour misallocation regressions we also include an interaction term between the changes in product and labour market regulations.

Here are their estimates of both product market regulation and labor market regulation for selected nations.

It’s good to see that there’s a slight trend toward less regulation of product markets. A few nations have modestly reduced regulation of labor markets, but the most interesting observation is that this is an area where the United States has a major advantage. Only Germany is even close to America in allowing markets to operate with a high level of freedom.

Having examined the issues covered by the study, let’s now consider the results.

All discussed capital misallocation results are robust to the inclusion of market distortions, i.e. to regulatory and credit constraints. …The general decline in PMR over the period considered dampened capital misallocation dynamics… Stricter product market regulation is found to have led to higher labour misallocation growth. But we also find that more stringent labour market regulations positively correlate with labour misallocation growth, particularly in sectors characterized by more stringent product market regulations. Thus, these results support the idea that the positive effect of the tightness of PMR on labour misallocation growth is amplified if also EPL becomes more restrictive. Seen from an inverse perspective, the gains in the allocative efficiency of labour are larger if both kinds of regulation are jointly loosened.

Here’s the bottom line.

Our results therefore suggest that in order to foster a more efficient within-sector allocation of inputs across firms structural reforms, such as those lowering entry barriers for firms, removing size-contingent regulations that prevent firms from reaching their optimal size and enhancing bankruptcy regulations that facilitate the exit of unproductive firms, would be warranted. The loosening of PMR and EPL in recent years in some countries has proven to dampen misallocation dynamics, yet there is still room for further reductions, as shown for example when comparing the level of regulation with that in the U.S.

Unfortunately, I don’t expect that this study will have any sort of impact on the debate. The people who already understand the negative impact of regulation now have more evidence about the value of unfettered markets and creative destruction.

But the politicians and interest groups won’t care. They are interested in accumulating power and obtaining unearned benefits. To the extent that they would even bother to read the study, they would conclude that they should fight extra hard to preserve the status quo since they will realize that there are fewer favors to distribute when genuine capitalism is allowed to operate.

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