New Legislation on Money Laundering Doubles Down on Failure

Thanks to decades of experience and research, we now know several things about so-called anti-money laundering (AML) laws.

• They don’t reduce crime or discourage bad behavior.
• They require banks to spy on innocent people and report their transactions.
• They impose heavy costs on the financial sector and boost prices on consumers.
• They disproportionately hurt poor people and poor countries.

It’s not that the theory behind these laws is without merit. The original notion was that perhaps we could reduce crime by figuring out ways to prevent crooks from utilizing the banking system. That’s a worthy goal. But it turns out that it doesn’t work.

For all intents and purposes, AML laws are a misallocation of law-enforcement resources.

So you would think that policy makers would be endeavoring to repeal these counterproductive rules and regulations, right?

But you would be wrong. Some of them actually want to double down on failure. To be more specific, four senators have introduced a bill to make these laws more intrusive and onerous.

Senate Judiciary Committee Chairman Chuck Grassley and Ranking Member Dianne Feinstein, along with Senators John Cornyn and Sheldon Whitehouse, today introduced legislation that modernizes and strengthens criminal laws against money laundering – a critical source of funding for terrorist organizations, drug cartels and other organized crime syndicates.  The Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 updates criminal money laundering and counterfeiting statutes, and promotes transparency in the U.S. financial system.

It’s quite possible that these politicians actually think this new law will somehow reduce all the bad things they put in the bill’s title (I’m surprised they didn’t add tooth decay and cancer to the list).

But if past experience is any guide, the real-world result will be more abuse of law-abiding citizens.

Writing for the Blaze, Justin Haskins warns how the new legislation can endanger innocent people.

Four U.S. senators have proposed legislation that would significantly expand the power of the federal government to seize citizens’ money when traveling in or out of the United States. …several troubling provisions in the law could put law-abiding American citizens at risk of losing tens of thousands of dollars for doing nothing more than failing to fill out a government form. Under current federal law, travelers transporting $10,000 or more in cash or other monetary instruments are required to report those funds to U.S. Customs and Border Protection. Failure to report funds, even if unintentional, can lead to the seizure of the money and criminal or civil penalties.

That approach already produces horrible abuses of innocent people.

And imagine what will happen if this new law is enacted.

The Combating Money Laundering, Terrorist Financing and Counterfeiting Act would expand “monetary instruments” covered under current law to include “prepaid access devices, stored value cards, digital currencies, and other similar instruments.” This is particularly problematic because digital currencies, such as Bitcoin, are theoretically always transported by the owner of the digital currency account wherever he or she goes, which means digital currency owners with accounts valued at $10,000 or more must always report their funds or risk having them seized. Even more troubling is the law treats all blank checks as though they are financial instruments valued in excess of $10,000 if the checking account contains at least $10,000, which means if a traveler accidently fails to report a blank check floating around in his or her luggage, the account holder could face stiff penalties — even if there is no suspicion of criminal activity.

Some of you may be thinking that it’s okay to subject innocent people to abuse if it achieves a very important goal of stopping terrorists.

But that’s not happening. In a must-read article for Foreign Affairs, Peter Neumann points out that AML laws are grossly ineffective in the fight against Islamo-fascism.

…the war on terrorist financing has failed. Today, there are more terrorist organizations, with more money, than ever before. …Driven by the assumption that terrorism costs money, governments have for years sought to cut off terrorists’ access to the global financial system. They have introduced blacklists, frozen assets, and imposed countless regulations designed to prevent terrorist financing, costing the public and private sectors billions of dollars.

And what’s the result of all this expense?

It hasn’t stopped terrorism.

…there is no evidence that it has ever thwarted a terrorist campaign. Most attacks require very little money, and terrorists tend to use a wide range of money-transfer and fundraising methods, many of which avoid the international financial system. …Terrorist operations are cheap, and according to a 2015 study by the Norwegian Defense Research Establishment, over 90 percent of the jihadist cells in Europe between 1994 and 2013 were “self-funded,” typically through savings, welfare payments, personal loans, or the proceeds of petty crime. …many jihadists have used their own savings and welfare payments or taken out small loans; others have borrowed money from their friends or family. …Financial tools cannot stop lone attackers from driving cars into crowds.

But it has imposed major burdens on innocent parties.

…the focus on the financial sector proved ineffective; it has also harmed innocent people and businesses. To address policymakers’ demands, financial institutions have “de-risked” their portfolios, shedding investments and clients that might be linked to terrorist financing. …De-risking, moreover, has resulted in the de facto exclusion of entire countries, mostly poor ones such as Afghanistan and Somalia, from the global financial system. The bank accounts of refugees, charities that operate in regions torn apart by civil war, and even Western citizens with family links to so-called risk countries have been closed. Practically no Western bank now offers cash transfers to Somalia, for example, although 40 percent of the population depends on remittances from abroad.

And what is the author’s bottom line?

Simply stated, the current system is a failure.

Instead of continuing to look for needles in a haystack, governments should overhaul their approach to countering terrorist funding… Otherwise, they will waste time and money on a strategy that cannot deliver security for many more years to come. .. Policymakers need to acknowledge that the war on terrorist financing, as it has been conducted since 2001, has often been costly and counterproductive, harming innocent people and companies without significantly constraining terrorist groups’ ability to operate.

I agree.

Indeed, I wrote an article for Pace Law Review, published back in 2005, that made many of the same points, including a lot of attention on theoretical role of cost-benefit analysis.

Law enforcement policy should include cost/benefit analysis so that resources are best allocated to protect life, liberty, and property. This should not be a controversial proposition. Cost-benefit analysis…already is part of the public policy process. For instance, few people would think it is acceptable for a city of 10 million to have just one police officer. Yet it is also true that few would want that city to have five million police officers. In other words, there is a point where additional law enforcement expenditures – both public and private – exceed the likely benefits. Every government makes such decisions. Cost-benefit analysis applies to aggregate resource allocation choices, such as how many police officers to employ in a city, but also to how a given level of resources are utilized. In other words, since there are not unlimited resources, it makes sense to allocate those resources in ways that yield the greatest benefit. On a practical level, city officials must decide how many officers to put on each shift, how many officers to assign to different neighborhoods, and how many officers to allocate to each type of crime. The same issues apply in the war against terrorism. Officials must decide not only on the level of resources devoted to fighting terrorism, but they also must make allocation decisions between, say, human intelligence and electronic surveillance.

Now let’s shift from theory to evidence.

I argued AML laws didn’t pass the test.

…while anti-money laundering laws theoretically help the war against terror, this does not mean that they necessarily are justified by cost-benefit analysis. A…book from the Institute for International Economics…strongly supports anti-money laundering laws and advocates their expansion. But the authors admit that these laws imposed costs of $7 billion in 2003, yet they admitted that, “While the number of suspicious activity reports filed has risen rapidly in recent years…total seizures and forfeitures amount to an extremely small sum (approximately $700 million annually in the United States) when compared with the crude estimates of the total amounts laundered. Moreover, there has not been an increase in the number of federal convictions for money laundering.” The private sector bears most of the cost of anti-money laundering laws, but the authors also note that, “Budgetary costs for AML laws have tripled in the last 20 years for prevention and quadrupled for enforcement.” The key question, of course, is whether these costs are matched by concomitant benefits. The answer almost certainly is no. …the government seizes very little dirty money. There are only about 2,000 convictions for federal money laundering offenses each year, and that number falls by more than 50 percent not counting cases where money laundering was an add-on charge to another offense.

Let’s close with passages from a couple of additional articles.

First, Richard Rahn explains why all anti-money laundering laws are misguided in a very recent column for the Washington Times.

…what is even more shocking is the extent to which various government organizations monitor and, in many cases, restrict financial freedom, and seize assets without criminal conviction. …The government argues that it must collect financial data and then share it with many domestic and foreign government organizations in order to stop tax evasion, money laundering, drug dealing, other assorted criminality, and terrorist finance — all of which sounds good at first glance, until one looks at what really happens. If you think that the war on drugs has been a failure, look at the war on money laundering, tax evasion and terrorist finance for an even bigger failure. …money laundering is a crime of intent, rather than actions, in which two different people can engage in the same set of financial transactions, but if one has criminal intent he or she can be charged while the other person is home free. Such vague law is both ripe with abuse and difficult to prove. …The financial information that government agencies now routinely collect is widely shared, not only with other domestic government agencies, but increasingly with foreign governments — many of which do not protect individual liberty and other basic rights.

And here are some excerpts from a column in Reason by Elizabeth Nolan Brown.

American and British banks are monitoring customers’ contraception purchases, DVD-rental frequency, dining-out habits, and more in a misguided attempt to detect human traffickers… Their intrusive and ineffective efforts come at the behest of government agencies, who have been eager to use asset-forfeiture powers… The U.S. and U.K. banks RUSI researchers interviewed said they were happy to help law enforcement prosecute human traffickers and had little problems turning over financial records for people already arrested or under investigation. But proactively finding potential traffickers themselves proved more difficult. As RUSI explains, “the often unremarkable nature of transactions related to” human trafficking made finding criminals or victims via transaction monitoring a time-consuming and unfruitful endeavor. Yet financial institutions are boxed in by regulations that threaten to punish them severely should they participate in the flow of illegally begotten money, however unwittingly. The bind leaves banks and other financial services eager to cast as wide a net as possible, terminating relationships with “suspicious” customers, monitoring the bank accounts of people they know, or turning their records over to law enforcement rather than risk allegations of not doing enough to comply.

In other words, these laws are a costly – but ineffective – burden.

Which is what I said in this video for the Center for Freedom and Prosperity.

P.S. In closing, I should point out that statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

Even the State Department’s most recent list of vulnerable jurisdictions shows only a handful of international financial centers.

Yes, places Cayman and Bermuda are on the list, but so are countries such as Canada, China, India, Italy, Netherlands, Russia, and the United Kingdom. In other words, it’s basically a random list of jurisdictions rather than a helpful guide.

P.P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

Three Lessons from the Tax Defeat in Kansas

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Here’s some of what he wrote in his NYT column.

…there was an idea, a theory, behind the Kansas tax cuts: the claim that cutting taxes on the wealthy would produce explosive economic growth. It was a foolish theory, belied by decades of experience: remember the economic collapse that was supposed to follow the Clinton tax hikes, or the boom that was supposed to follow the Bush tax cuts? …eventually the theory’s failure was too much even for Republican legislators.

Another New York Times columnist did a victory dance as well.

The most momentous political news of the past week…was the Kansas Legislature’s decision to defy the governor and raise income taxes… Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending, except for education — and promising that those policies would unleash boundless growth. The taxes were cut, and by a lot.

Brownback’s supply-side experiment was a flop, the author argues.

The cuts came. But the growth never did. As the rest of the country was growing at rates of just above 2 percent, Kansas grew at considerably slower rates, finally hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on education… The experiment has been a disaster. …the Republican Kansas Legislature faced reality. Earlier this year it passed tax increases, which the governor vetoed. Last Tuesday, the legislators overrode the veto. Not only is it a tax increase — it’s even a progressive tax increase! …More than half of the Republicans in both houses voted for the increases.

If you read the articles, columns, and editorials in the New York Times, you’ll notice there isn’t a lot of detail on what actually happened in the Sunflower State. Lots of rhetoric, but short on details.

So let’s go to the Tax Foundation, which has a thorough review including this very helpful chart showing tax rates before the cuts, during the cuts, and what will now happen in future years (the article also notes that the new legislation repeals the exemption for small-business income).

We know that folks on the left are happy about tax cuts being reversed in Kansas. So what are conservatives and libertarians saying?

The Wall Street Journal opined on what really happened in the state.

…national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes. The reality is more prosaic—and politically cynical. …At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.

And the editorial also explains why there wasn’t much of an economic bounce when Brownback’s tax cuts were implemented, but suggests there was a bit of good news.

Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy. But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.

I concur. When I examined the data a few years ago, I also found some positive signs.

In any event, the WSJ is not overly optimistic about what this means for the state.

The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.

And Reason published an article by Ben Haller with similar conclusions.

What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front. Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year. …tax cuts do not necessarily pay for themselves. Fiscal conservatives, libertarians, …may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state’s woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.

Since Haller mentioned spending, here’s another Tax Foundation chart showing inflation-adjusted state spending in Kansas. Keep in mind that Brownback was elected in 2010. The left argued that he “slashed” spending, but that assertion obviously is empty demagoguery.

Now time for my two cents.

Looking at what happened, there are three lessons from Kansas.

1. A long-run win for tax cutters. If this is a defeat, I hope there are similar losses all over the country. If you peruse the first chart in this column, you’ll see that tax rates in 2017 and 2018 will still be significantly lower than they were when Brownback took office. In other words, the net result of his tenure will be a permanent reduction in the tax burden, just like with the Bush tax cuts. Not as much as Brownback wanted, to be sure, but leftists are grading on a very strange curve if they think they’ve won any sort of long-run victory.
2. Be realistic and prudent. It’s a good idea to under-promise and over-deliver. That’s true for substance and rhetoric.
   1. Don’t claim that tax cuts pay for themselves. That only happens in rare circumstances, usually involving taxpayers who have considerable control over the timing, level, and composition of their income. In the vast majority of cases, tax cuts reduce revenue, though generally not as much as projected once “supply-side” responses are added to the equation.
   2. Big tax cuts require some spending restraint. Since tax cuts generally will lead to less revenue, they probably won’t be durable unless there’s eventually some spending restraint (which is one of the reasons why the Bush tax cuts were partially repealed and why I’m not overly optimistic about the Trump tax plan).
   3. Tax policy matters, but so does everything else. Lower tax rates are wonderful, but there are many factors that determine a jurisdiction’s long-run prosperity. As just mentioned, spending restraint is important. But state lawmakers also should pay attention to many other issues, such as licensing, regulation, and pension reform.
3. Many Republicans are pro-tax big spenders. Most fiscal fights are really battles over the trend line of spending. Advocates of lower tax rates generally are fighting to reduce the growth of government, preferably so it expands slower than the private sector. Advocates of tax hikes, by contrast, want to enable a larger burden of government spending. What happened in Kansas shows that it’s hard to starve the beast if you’re not willing to put government on a diet.

By the way, all three points are why the GOP is having trouble in Washington.

The moral of the story? As I noted when writing about Belgium, it’s hard to have good tax policy if you don’t have good spending policy.

Red State, Blue State, Independent State, Moocher State

I don’t know if Dr. Seuss would appreciate my title, which borrows from his children’s classic.

But given how I enjoy comparative rankings, I couldn’t help myself after perusing a new study from WalletHub that ranks states on their independence (or lack thereof).

Being a policy wonk, what really caught my attention was the section on government dependency, which is based on four criteria.

As you can see, the four factors are not weighted equally. The “federally dependent states” variable is considered four times as important as any of the other variables.

That’s important, to be sure, but is it really more important (or that much more important) than the other categories?

Moreover, I’m not sure the “tax freedom day” variable is a measure of dependency. What’s really captured by this variable, given the way the tax code doesn’t tax low-income people and over-taxes high-income people, is the degree to which state have lots of rich people or poor people. But that’s not a measure of dependence (particularly if the rich people stole money instead of earning it).

But I’m quibbling. I might put together a different formula with some different variables, but WalletHub has done something very interesting.

And if we look at their 25 least-dependent states, you see a very interesting pattern. Of the 10-most independent states, only three of them are Trump-voting red states (Kansas, Nebraska, and Utah).

The other seven are blue states. And some of them – such as Illinois, New Jersey, and California – are dark blue states.

And the #11 and #12 states also were Hillary states as well.

Which raises an interesting question. Why are voters in those states in favor of big government when they don’t disproportionately benefit from handouts?

Are they culturally left-wing, putting social issues above economic issues?

Or are they motivated by some issue involving foreign policy and/or defense?

Or maybe masochistic?

Beats me.

By the way, the WalletHub email announcing the report included a very interesting factoid that may explain why Hillary lost Pennsylvania.

Pennsylvania has the lowest percentage of government workers (local, state and federal), at 10.8 percent. Alaska has the nation’s highest percentage, at 25.1 percent.

Though I can’t see those details in the actual report, which is disappointing. I’d like to see a ranking of the states based solely on the number-of-bureaucrats criteria (we have data comparing countries, for those interested).

Now let’s shift to the states that have the highest levels of dependency.

If you look at the bottom of the final image, you’ll notice that it’s a reverse of the top-10. Seven of the most-dependent states are red states that voted for Trump.

Only New Mexico, Oregon, and Maine supported Hillary (and Trump actually won one-fourth of Maine’s electoral votes).

So this raises a separate question. Are red state people voting against their interests? Should they be voting for politicians who will further expand the size and scope of government so they can get even more goodies from Uncle Sam?

For what it’s worth, a leftist actually wrote a book entitled What’s the Matter with Kansas, which examined why the people of the Sunflower State weren’t voting for statism.

Well, part of the answer may be that Kansas is one of the most independent states, so perhaps the author should have picked another example.

But even if he had selected Mississippi (#49), I suspected the answer is that low-income people don’t necessarily think that it’s morally right to steal money from other states, even if the loot is laundered through Washington.

In other words, people is those states still have social capital or cultural capital.

It’s also possible, of course, that voters in red states with lots of dependency (at least as measured by WalletHub) are instead motivated by cultural issues or foreign policy issues.

There’s even a very interesting study from Professor Alesina at Harvard, which finds that ethnically diverse jurisdictions can be more hostile to redistribution (and homogeneous societies like the Nordic nations are more supportive of a large welfare state).

And since many of the red states at the bottom of the rankings also happen to be states with large minority populations, perhaps that’s a partial explanation.

Though California has a very large minority population as well, yet it routinely votes for more redistribution.

The bottom line is that we probably can’t draw any sweeping conclusions from this data.

Though it leaves me even more convinced that the best approach is to eliminate all DC-based redistribution and let states decide how much to tax and how much to spend. In other words, federalism.

P.S. I put together my own ranking of state dependency, based on a formula involving welfare usage and poverty. Vermont was the worst state and Nevada was the best state.

P.P.S. I also shared calculations based solely on the share of eligible people who signed up for food stamps. Interestingly, Californians rank as the most self-reliant. Maybe my predictions of long-run doom for that state are a bit exaggerated.

The Nanny State, Showerheads, and the Declining Quality of Life

When I write about regulation, I usually focus on big-picture issues involving economic costs, living standards, and competitiveness.

Those are very important concerns, but the average person in American probably gets more irked by rules that impact the quality of life.

• Inferior light bulbs
• Substandard toilets
• Inadequate washing machines
• Crummy dishwashers

That’s a grim list, but it’s time to augment it.

Jeffrey Tucker of the Foundation for Economic Education explains that the government also has made showering a less pleasant experience. He starts by expressing envy about Brazilian showers.

…was shocked with delight at the shower in Brazil. …step into the shower and you have a glorious capitalist experience. Hot water, really hot, pours down on you like a mighty and unending waterfall… At least the socialists in Brazil knew better than to destroy such an essential of civilized life.

I know what he’s talking about.

I’m in a hotel (not in Brazil), and my shower this morning was a tedious experience because the water flow was so anemic.

Why would a hotel not want customers to have an enjoyable and quick shower?

The answer is government.

…here we’ve forgotten. We have long lived with regulated showers, plugged up with a stopper imposed by government controls imposed in 1992. There was no public announcement. It just happened gradually. After a few years, you couldn’t buy a decent shower head. They called it a flow restrictor and said it would increase efficiency. By efficiency, the government means “doesn’t work as well as it used to.” …You can see the evidence of the bureaucrat in your shower if you pull off the showerhead and look inside. It has all this complicated stuff inside, whereas it should just be an open hole, you know, so the water could get through. The flow stopper is mandated by the federal government.

The problem isn’t just the water coming out of the showerhead. It’s the water coming into your home.

It’s not just about the showerhead. The water pressure in our homes and apartments has been gradually getting worse for two decades, thanks to EPA mandates on state and local governments. This has meant that even with a good showerhead, the shower is not as good as it might be. It also means that less water is running through our pipes, causing lines to clog and homes to stink just slightly like the sewer. This problem is much more difficult to fix, especially because plumbers are forbidden by law from hacking your water pressure.

So why are politicians and bureaucrats imposing these rules?

Ostensibly for purposes of conservation.

…what about the need to conserve water? Well, the Department of the Interior says that domestic water use, which includes even the water you use on your lawn and flower beds, constitutes a mere 2% of the total, so this unrelenting misery spread by government regulations makes hardly a dent in the whole. In any case, what is the point of some vague sense of “conserving” when the whole purpose of modern appliances and indoor plumbing is to improve our lives and sanitation? (Free societies have a method for knowing how much of something to use or not use; it is called the signaling system of prices.)

Jeffrey is right. If there really is a water shortage (as there sometimes is in parts of the country and world), then prices are the best way of encouraging conservation.

Now let’s dig in the archives of the Wall Street Journal for a 2010 column on the showerhead issue.

Apparently bureaucrats are irked that builders and consumers used multiple showerheads to boost the quality of their daily showers.

Regulators are going after some of the luxury shower fixtures that took off in the housing boom. Many have multiple nozzles, cost thousands of dollars and emit as many as 12 gallons of water a minute. In May, the DOE stunned the plumbing-products industry when it said it would adopt a strict definition of the term “showerhead”… A 1992 federal law says a showerhead can deliver no more than 2.5 gallons per minute at a flowing water pressure of 80 pounds per square inch. For years, the term “showerhead” in federal regulations was understood by many manufacturers to mean a device that directs water onto a bather. Each nozzle in a shower was considered separate and in compliance if it delivered no more than the 2.5-gallon maximum. But in May, the DOE said a “showerhead” may incorporate “one or more sprays, nozzles or openings.” Under the new interpretation, all nozzles would count as a single showerhead and be deemed noncompliant if, taken together, they exceed the 2.5 gallons-a-minute maximum.

And here’s something that’s both amusing and depressing.

The regulations are so crazy that an entrepreneur didn’t think they were real.

Altmans Products, a U.S. unit of Grupo Helvex of Mexico City, says it got a letter from the DOE in January and has stopped selling several popular models, including the Shower Rose, which delivers 12 gallons of water a minute. Pedro Mier, the firm’s vice president, says his customers “just like to feel they’re getting a lot of water.” Until getting the DOE letter, his firm didn’t know U.S. law limited showerhead water usage, Mr. Mier says. “At first, I thought it was a scam.”

Unsurprisingly, California is “leading” the way. Here are some passages from an article in the L.A. Times from almost two years ago.

The flow of water from shower heads and bathroom faucets in California will be sharply reduced under strict new limits approved Wednesday by the state Energy Commission. Current rules, established in 1994 at the federal level, allow a maximum flow of 2.5 gallons per minute from a shower head. Effective next July, the limit will fall to 2.0 gallons per minute and will be reduced again in July 2018, to 1.8 gallons, giving California the toughest standard of any U.S. state.

Though “toughest standard” is the wrong way to describe what’s happening. It’s actually the “worst shower” of any state.

P.S. I forget the quality of shower I experienced in South Korea, but I was very impressed (see postscript) by the toilet.

The Endless Failure (but Bizarre Allure) of Socialism

Back in 2014, I wrote a column asking my leftist friends two very serious questions. And I often repeat these questions when debating proponents of bigger government.

• Can you name a nation that became rich with statist policies?
• Can you name a nation that with interventionism and big government that is out-performing a similar nation with free markets and small government?

I’ve yet to receive a good answer to either question. Many leftists point to certain European welfare states, but I debunk that claim by pointing out that those nations became rich when government was very small (about 10 percent of GDP, about one-half the size of the current Hong Kong and Singapore public sectors).

Others point to rapid growth in China, but that’s rather silly since improvements in that country’s economy are the result of partial liberalization. In any event, it’s not that difficult to have rapid growth rates when starting from a very low level. But even with a couple of decades of good growth, living standards in China are still relatively low.

So my challenge remains. I want a leftist (or anybody) to identify a successful statist nation, but I’m not holding my breath for good answers.

Yet even though the real-world evidence against big government is so strong, it’s rather baffling that many young people are drawn to that coercive ideology and disturbing that a non-trivial number of voters favor this failed form of statism.

The London-based Institute for Economic Affairs has released a video on the false allure of socialism.

I suppose a caveat might be appropriate at this stage.

Socialism has a technical definition involving government ownership of the means of production and central planning of the economy.

But most people today think socialism is big government, with business still privately owned but with lots of redistribution and intervention (I’ve argued, for instance, that even Bernie Sanders isn’t a real socialist, and that there are big differences between countries like Sweden, China, and North Korea).

For what it’s worth, that’s actually closer to the technical definition of fascism. But I guess I’m being pedantic by wanting more precision in how terms are used.

In any event, the IEA video is spot on. If you like videos debunking socialism, I have other examples here, here, and here.

Last but not least, here’s my favorite visual from the IEA video.

P.S. If you like visuals mocking socialism, I’ve amassed a very nice collection. Click here, here, here, here, here, here, here, here, here, here, here, and here for examples.

P.P.S. The good news is that socialism isn’t very popular in the United States, particularly compared to free enterprise.

Tax Competition: So Powerful that even Politicians in Left-Wing States Feel Compelled to Cut Taxes for Rich People

Whenever I debate my left-wing friends on tax policy, they routinely assert that taxes don’t matter.

• They argue that we don’t have to worry about the Laffer Curve because high tax rates don’t discourage taxable income.
• They argue that we don’t have to worry about double taxation because high tax rates don’t discourage saving and investment.
• They argue that we don’t need fundamental tax reform because tax burdens don’t have much impact on economic performance.
• They argue that we don’t have to worry about punitive marginal tax rates because such policies don’t discourage work.

It’s unclear, though, whether they really believe their own rhetoric.

After all, if taxes don’t affect economic behavior, then why are folks on the left so terrified of tax havens? Why are they so opposed to tax competition?

And why are they so anxious to defend loopholes such as the deduction for state and local taxes.

Perhaps most revealing, why do leftists sometimes cut taxes when they hold power? A story in the Wall Street Journal notes that there’s been a little-noticed wave of state tax cuts. Specifically reductions and/or eliminations of state death taxes. And many of these supply-side reforms are happening in left-wing states!

In the past three years, nine states have eliminated or lowered their estate taxes, mostly by raising exemptions. And more reductions are coming. Minnesota lawmakers recently raised the state’s estate-tax exemption to $2.1 million retroactive to January, and the exemption will rise to $2.4 million next year. Maryland will raise its $3 million exemption to $4 million next year. New Jersey’s exemption, which used to rank last at $675,000 a person, rose to $2 million a person this year. Next year, New Jersey is scheduled to eliminate its estate tax altogether, joining about a half-dozen others that have ended their estate taxes over the past decade.

This is good news for affected taxpayers, but it’s also good news for the economy.

Death taxes are not only a punitive tax on capital, but they also discourage investors, entrepreneurs, and other high-income people from earning income once they have accumulated a certain level of savings.

But let’s focus on politics rather than economics. Why are governors and state legislators finally doing something sensible? Why are they lowering tax burdens on “rich” taxpayers instead of playing their usual game of class warfare?

I’d like to claim that they’re reading Cato Institute research, or perhaps studies from other market-oriented organizations and scholars.

But it appears that tax competition deserves most of the credit.

This tax-cutting trend has been fueled by competition between the states for affluent and wealthy taxpayers. Such residents owe income taxes every year, but some are willing to move out of state to avoid death duties that come only once. Since the federal estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for inflation, state death duties have stood out.

I don’t fully agree with the above excerpt because there’s plenty of evidence that income taxes cause migration from high-tax states to zero-income-tax states.

But I agree that a state death tax can have a very large impact, particularly once a successful person has retired and has more flexibility.

Courtesy of the Tax Foundation, here are the states that still impose this destructive levy.

Though this map may soon have one less yellow state. As reported by the WSJ, politicians in the Bay State may be waking up.

In Massachusetts, some lawmakers are worried about losing residents to other states because of its estate tax, which brought in $400 million last year. They hope to raise the exemption to half the federal level and perhaps exclude the value of a residence as well. These measures stand a good chance of passage even as lawmakers are considering raising income taxes on millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz LLP in Needham, Mass., who tracks the issue for the Massachusetts Bar Association. State officials “are worried about a silent leak of people down to Florida, or even New Hampshire,” he adds.

I’m not sure the leak has been silent. There’s lots of data on the migration of productive people to lower-tax states.

But what matters is that tax competition is forcing the state legislature (which is overwhelmingly Democrat) to do the right thing, even though their normal instincts would be to squeeze upper-income taxpayers for more money.

As I’ve repeatedly written, tax competition also has a liberalizing impact on national tax policy.

Following the Reagan tax cuts and Thatcher tax cuts, politicians all over the world felt pressure to lower their tax rates on personal income. The same thing has happened with corporate tax rates, though Ireland deserves most of the credit for getting that process started.

I’ll close by recycling my video on tax competition. It focuses primarily on fiscal rivalry between nations, but the lessons equally apply to states.

P.S. For what it’s worth, South Dakota arguably is the state with the best tax policy. It’s more difficult to identify the state with the worst policy, though New Jersey, Illinois, New York, California, and Connecticut can all make a strong claim to be at the bottom.

P.P.S. Notwithstanding my snarky title, I don’t particularly care whether there are tax cuts for rich people. But I care a lot about not having tax policies that penalize the behaviors (work, saving, investment, and entrepreneurship) that produce income, jobs, and opportunity for poor and middle-income people. And if that means reforms that allow upper-income people to keep more of their money, I’m okay with that since I’m not an envious person.

The Universal Private Retirement System Is an Additional Reason to Admire Switzerland

There’s a lot to admire about Switzerland, particularly compared to its profligate neighbors.

• It has a spending cap, imposed in a landslide referendum early last decade, that has constrained the growth of government.
• It has a genuinely decentralized system with a very small central government and vigorous competition among cantons.
• There’s widespread gun ownership, and the number of guns owners keeps expanding.
• It has strong human rights laws protecting financial privacy (though unfortunately has been bullied into weakening protections for non-Swiss investors).
• It has comparatively modest tax rates and a relatively low level of redistribution.

With all these features, you won’t be surprised to learn that Switzerland is highly ranked by Human Freedom Index (#2), Economic Freedom of the World (#4), Index of Economic Freedom (#4), Global Competitiveness Report (#1), Tax Oppression Index (#1), and World Competitiveness Yearbook (#2).

Today let’s augment our list of good Swiss policies for reviewing the near-universal system of private pensions. I’ve been in Switzerland this week for a couple of speeches in Geneva, as well as interviews and meetings in Zurich and Bern.

As part of my travels around the country, I took the time to learn more about the “second pillar” of the country’s pension system.

Here’s a basic description from the Swiss government (with the help of Google translate).

The first pension funds were founded more than a hundred years ago… In 1972 the occupational pensions were included in the constitution. There it represents the second column in the three-column concept… The BVG compulsory scheme applies to all employees who are already insured in the first pillar… Pension provision in the second pillar is based on an individual savings process. This starts at 25 years. However, the condition is an annual income that exceeds the threshold (since 2015: 21’150 francs). The savings process ends with the reaching of the pension age. The accumulated savings in the individual account of the insured [are] used to finance the retirement pension.

If you want something in original English, here’s a brief description from the Swiss-American Chamber of Commerce.

The second pillar is governed by the provisions of the laws on occupational pension provision (BVG)… Employees who are paid by the same employer an annual salary exceeding CHF 21,150 are subject to compulsory insurance. The share of the salary which is subject to compulsory insurance is…between CHF 24,675 (the coordination deduction) and CHF 84,600… An employer who employs persons subject to compulsory insurance must be affiliated to a provident institution entered in the register for occupational benefit plan. The contributions into the pension scheme depend on age and include a minimum saving portion of 7% – 18% of the coordinated salary plus a risk portion. Both are equally shared between employer and employee. The benefits of the insured persons consist in the old age, invalidity and survivors pensions.

One of the interesting quirks of the system is that the mandatory contribution rate changes with age. The older you are, the more you pay.

I’m not sure that makes a lot of sense if the goal is for people to have big nest eggs when they retire, but nobody asked me. In any event, here’s a table showing the age-dependent contribution rates from an OECD description of the Swiss system.

Technically speaking, the contributions are evenly split between employees and employers, though labor economists widely agree that workers bear the real cost.

It’s also worth noting that the Swiss system is based on “defined contribution” like the Chilean and Australian private retirement systems. This means  retirement income generally is a function of how much is saved and how well it is invested.

By contrast, the Dutch private system is based on “defined benefit,” which means that workers get a pre-determined level of retirement income. As evidenced by huge shortfalls in the defined benefit regimes maintained by many public and private employers in the United States, this approach is very risky if there aren’t high levels of integrity and honesty.

Though that doesn’t seem to be a problem in the Netherlands. Speaking of the Dutch system, here’s a chart I shared back in 2014.

It was designed to laud the Netherlands, but you can see that Switzerland also had a large pool of pension assets, equal to more than 110 percent of GDP (according to OECD data, now 123 percent of GDP).

Looking at this data, ask yourself whether Switzerland (or the Netherlands, Iceland, Australia, etc) will be in a stronger position to handle the fiscal challenge of aging populations, particularly when compared to nations with virtually no private pension assets, such as France, Greece, and Japan.

The Swiss regime certainly isn’t perfect, and neither are the systems in other nations with private retirement savings. But at least those nations are in much better shape to deal with future demographic changes. Workers in Switzerland and other countries with similar systems have real assets rather than unsustainable political promises. And it’s also worth pointing out that there are macroeconomic benefits for nations that rely more on private savings rather than tax-and-transfer entitlement schemes.

In other words, the Swiss system is much better than America’s bankrupt Social Security scheme.

P.S. Back in 2011, I compared five good features of the United States to five good features of Switzerland. If retirement systems were part of that discussion, Switzerland would have enjoyed a sixth advantage.

P.P.S. Switzerland does have some warts. It is only ranked #31 in the World Bank’s Doing Business. It also has a self-destructive wealth tax. And  government spending, though modest compared to neighbors, consumes slight more than one-third of economic output.