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Archive for April, 2012

This isn’t quite as good as my all-time favorite anti-gun control poster, but it is a powerful reminder that the Second Amendment is ultimately a check on government.

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I’ve periodically put up other gun control posters that have been very popular, and you can peruse them here, here, here, here, and here. I’ve also posted amusing images of t-shirts and bumper stickers on gun control, which can be seen here, here, and here.

A good joke can be found here, and I also recommend this Chuck Asay cartoon, as well as this example of the kind of gun Obama prefers. And some funny videos on gun control can be viewed here and here.

And if you’re looking for something more serious on the Second Amendment, you can watch some great videos here, here, and here.

If you’re in the mood for some inspiration, check out this powerpoint presentation.

Last but not least, this rumored letter-to-the-editor is worth reading, and I like to think my interview on NRA-TV is a good way to spend a few minues.

(h/t: Michelle Ray)

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There’s an old saying that insanity is doing the same thing over and over again while expecting different results. This certainly is a good description of Keynesians, who relentlessly push more government spending as some sort of magic potion for the economy – notwithstanding a record of failure.

The latest example if Larry Summers, the former economist for the Obama White House, who says Europeans need to make government bigger.

Here is some of what he writes for today’s Washington Post.

European efforts to contain crisis have fallen short. …Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive to maintaining the monetary union, restoring normal financial conditions and government access to markets, and reestablishing economic growth. The premise of European policymaking is that countries are overindebted and so unable to access markets on reasonable terms, and that the high interest rates associated with excessive debt hurt the financial system and inhibit growth. The strategy is to provide financing while insisting on austerity, in hopes that countries can rein in their excessive spending enough to restore credibility, bring down interest rates and restart economic growth.

The good news is that Summers recognizes that there has been “excessive spending.” The bad news is that he uses the wrong definition of austerity.

Many European nations seem to think higher taxes are a sign of fiscal conservatism (see this post by Veronique de Rugy for a good discussion of this confusion). Summers accepts that approach, and says that policy makers should choose a Keynesian policy instead.

Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. …Europe’s problem countries are in trouble because the financial crisis underway since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. And treating symptoms rather than underlying causes is usually a good way to make a patient worse. …The right focus for Europe is on growth; in this dimension, increased austerity is a step in the wrong direction.

There’s more good news. Summers is right in stating that Europe suffers from low growth. And I agree with him that the European version of austerity – higher taxes – is not a solution.

But, as always, there is a catch. Summers has the wrong approach on how to encourage growth. He wants Keynesian spending, and here is his defense.

 Skeptics will rightly wonder how a prescription for more spending by countries that already have trouble borrowing can be correct. The answer lies in the difference between borrowing by individuals and countries. Normally, an individual helps his creditors by borrowing less; but a person who stops borrowing to finance commuting to his job does his creditors no favor. A country’s income is determined by spending, so a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favor.

Sounds semi-reasonable. After all, everyone understands that it is important to get to their place of employment. Sometimes you spend money to make money.

But here’s the problem. Can anyone name anything in so-called stimulus schemes that actually increase a nation’s productive capacity? As we saw with Obama’s failed stimulus, lots of money gets distributed, but the main purpose seems to be buying votes and creating dependency.

What about jobs? A miserable failure.

Adding insult to injury, you probably won’t be surprised to learn that American taxpayers are supposed to pick up the lion’s share of the tab for the new spending in Europe since Summers wants the IMF to be the sugar daddy.

Going forward, the IMF and international community should condition further support not merely on individual countries’ actions but on a common European commitment to growth.

This approach is illogical, as explained in this video.

And let’s consider the historical record. Nations that have tried this type of “stimulus” have not fared well. Big spending increase under Hoover and Roosevelt failed in the 1930s. Japan tried several Keynesian packages and failed in the 1990s. Bush failed in 2008 and Obama failed in 2009.

Germany did not go with a big program of government spending, and they did better than the United States. The same is true about Canada. But the real success story is the Baltic nations. They imposed real spending restraint, not the fake austerity found in places such as the United Kingdom.

And even though it caused some short-term pain since there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice of Keynesianism and tax hikes.

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Haiti may be the poorest nation in the Americas. Cuba may have the dictator with the longest lifespan. But Venezuela arguably has the worst government.

Not the clownish dictator, Hugo Chavez, is trying to repeal the laws of economics. How’s that working out for him?

Well, here’s some of what the New York Times wrote.

By 6:30 a.m., a full hour and a half before the store would open, about two dozen people were already in line. They waited patiently, not for the latest iPhone, but for something far more basic: groceries. …Venezuela is one of the world’s top oil producers at a time of soaring energy prices, yet shortages of staples like milk, meat and toilet paper are a chronic part of life here, often turning grocery shopping into a hit or miss proposition. Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil. The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf. Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.” At the heart of the debate is President Hugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find. …many economists call it a classic case of a government causing a problem rather than solving it. Prices are set so low, they say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory. Moreover, some of the shortages are in industries, like dairy and coffee, where the government has seized private companies and is now running them, saying it is in the national interest.

Here’s a chart that I’ve used before, using international data to compare living standards in Venezuela, Argentina, and Chile since 1980. One nation (take a wild guess) has tried statism, one nation has tried a mix of statism and capitalism, and the other has tried capitalism.

And just in case you need one more reason to despise Chavez’s despotic government, the regime is copying Hitler, Stalin, Mao, and other murderous tyrants in imposing gun control.

(h/t: Greg Mankiw)

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I’m in Slovakia, where I just returned from some meetings at the annual conference of the Freedom and Solidarity Party. Unlike Republicans in the United States, these people practice what they preach about free markets and individual liberty.

Indeed, the SAS Party (which I gather must be Slovak initials for Freedom and Solidarity) is so committed to principles that it refused to join with other coalition members to support the European bailout fund.

The same cannot be said about the other supposedly right-leaning parties that were part of the government. Indeed, the Prime Minister’s party wound up supporting the bailout (even though she initially was opposed). Amazingly, these other parties thought the bailouts were such a good idea that they were willing to lose a “no-confidence” vote – paving the way for the Social Democrats to win the most recent election!

I guess the analogy is Bush and the other GOP statists supporting corrupt policies such as TARP, which helped pave the way for Obama to get elected.

In this analogy, the SAS Party is akin to the tea party, representing honest conservatives and libertarians.

By the way, there are a small handful of genuinely good political parties in the world. If we limit ourselves to ones that have legislative seats, SAS is on the list, of course, but I would also include the Reform Party in Estonia, which leads that nation’s coalition government. It’s worth noting that Estonia responded to the recent economic crisis by imposing genuine spending cuts, which helps explain why that nation’s economy has bounced back while other nations are languishing.

New Zealand’s ACT Party also deserves a mention, though they’re down to just one seat in that nation’s Parliament. Hopefully they’ll bounce back.

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I’ve occasionally commented on foolish public policy in the United Kingdom, including analysis on how the welfare state destroys lives and turns people into despicable moochers.

But if you really want to understand the horrifying absurdity of the welfare state, check out these passages from  a report in the Daily Mail.

Carl Cooper thought he was doing a public service by offering seven benefits claimants the chance to work for him. But the company boss was flabbergasted when none of them turned up on the first day. Astonishingly, not a single one even had the courtesy to tell the marketing firm boss they would not be coming in. Mr Cooper and other staff members called the new employees to ask them where they were. Initially, some refused to answer their phones  when they recognised the number calling them. When the staff finally got through, five said they would be better off staying on state benefits rather than doing the commission-based work. Four of the seven also claimed  torrential rain had put them off.

Wow. Five out of seven admitted that mooching off the taxpayers was a better way to live. What does that tell us about the over-generosity of handouts?

Let’s continue.

Mr Cooper, who runs Car Smart, a marketing firm for independent car dealers in Canterbury, Kent, criticised the benefits system and said it rewarded people for doing nothing. He added: ‘I was left stunned when none of the new recruits turned up for work. They are a bunch of workshy layabouts. ‘These are people who are so morally twisted that they would rather stay on the dole than work. ‘People keep saying there are not enough jobs in the UK but the real problem is that there are not enough determined or ambitious people. ‘The benefit system is too generous and encourages the unemployed to stay unemployed and just breeds more laziness.’

But it’s even worse than Mr. Cooper realizes. He’ll still be paying these people, but in the form of taxes that then get redistributed to subsidize idleness.

You might think the moochers would lose their benefits because they chose laziness over work, but you would be wrong.

Mr Cooper said all his employees received a basic retainer of £100 a week initially and are enrolled on to the company’s commission structure, which could see earnings rise to up to £400 a week. The jobseekers who failed to turn up will not lose their benefits because the basic pay is under the minimum wage.

I found the above story via Kyle Smith, who also cites a story from the Times about a crazy proposal to have bureaucrats scrub floors and serve as human alarm clocks for the welfare class.

Town hall officials have been told to get down on their hands and knees and “clean the floors” of the homes they visit under David Cameron’s Troubled Families programme. They have also been urged to turn up at family homes at 7am if necessary to get parents out of bed and children ready for school on time. The orders were issued by the programme head, Louise Casey… “I want to see people rolling up their sleeves and getting down and cleaning the floors if that is what needs to be done. If a family needs to be shown how to heat up a pizza, show them how to do it. If it takes going round three times a week at 7am to get Mum up, then do it.”

I would have included a link to the underlying story, but the Times has the most incompetently designed website I’ve ever encountered (presumably because they want to charge, but they don’t even give you a chance to click on the story and then pay).

Anyhow, I have three quick reactions to this bit of foolishness.

1. I’d like to see the head bureaucrat, Ms. Casey, spend a month scrubbing floors and waking people up at 7:00 a.m. She strikes me as the typical leftist clown, sitting in an office enjoying a cushy and overpaid job while dreaming up absurd ideas on how to waste taxpayer money. Maybe if she gets her hands dirty by “rolling up [her] sleeves,” she’ll learn the difference between blackboard theorizing and the real world.

2. My gut reaction is that the government should cut the handouts to these dysfunctional households. For every day the welfare bums aren’t up on time to get their kids to school, they lose 10 percent of their loot. If their floors are dirty, that’s another 10 percent. If you want to change their behavior, start cutting into the budget for cigarettes and booze.

3. More realistically, we’re dealing with a problem of people who have little if any self-respect, and they pass horrible habits to their children. Kicking them off the dole might wake up some of them, but I suspect more than a few of them are past the point of no return. Society would probably be better off if their kids were put in foster homes, but I’m sure government would screw that up as well.

Stories like this leave me increasingly convinced that the only good approach is radical decentralization. Get these programs out of capital cities like Washington and London. The U.S. welfare reform was a decent start, but get responsibility to the local level. And in cities, put neighborhoods in charge. Have those small communities in charge of raising the money and spending the money.

That approach is far more likely to generate good ideas and good solutions, though I confess I’m pessimistic about anything working.

But we should figure out ways to stop inter-generational poverty and welfare. I gather it’s considered bad form to suggest mandatory birth control for welfare recipients, so has anyone proposed a different approach that might work?

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My Foreign Bathroom Adventures

I like to think I’m not particularly stupid. Indeed, a left-wing writer recently said I was “relatively intelligent.”

And even though I have a Ph.D., I also like to think I have a decent level of common sense.

But I am constantly humbled by foreign bathrooms. My most recent challenge occurred this morning in Bratislava, when I took a shower. Here’s a picture of the shower controls. Maybe it’s obvious to you how they work, but it took me a couple of minutes of random turning and twisting before I got the shower running at an appropriate temperature.

That was just the beginning of my adventure. I then realized, when my shower was finished, that I didn’t know how to turn everything off. So I spent another couple of minutes randomly fiddling with the two knobs (alternatively pelting myself with freezing or scalding water) before it stopped running.

I had a similar episode last week in Zürich. I was in my room and had to use the bathroom to recycle some diet soda. As I was standing there, doing my business, I noticed that the toilet had a couple of strange devices inside the bowl. I then noticed that the inside of the toilet lid had a couple of pictures showing how the devices would wash and then dry one’s nether regions. I didn’t think to snap a picture, but I perused the Internet and it was something like this, but had a drying nozzle as well.

It occurred to me, after I was done, that it might be dangerous to flush because water might come shooting up at me. And even if I stood to the side while flushing, I didn’t want to risk getting water all over the bathroom.

There were no written instructions, not even in German. So, after pondering the matter for a while, I realized that the safest option would be to sit down and then flush.

So with a mixture of trepidation and anticipation, I did just that. You can imagine the anti-climatic feeling I got when nothing happened. No whirring, no buzzing, no jets of water, no dryer. The toilet flushed, and that was it.

But that wasn’t the end of the matter. I’m one of those people who has to touch when I see a “Wet Paint” sign, so I was curious to experience this high-tech device.

So I spent several minutes trying to figure out how the damn thing operated. European toilets often have two flush controls, one being for light jobs and the other for heavy jobs (I’m trying to be delicate). But it didn’t matter which one I flushed.

I thought that perhaps the controls only worked if some sort of sensor could tell you were sitting down (and using the heavy-duty flush control at the same time). But that didn’t work.

So I failed in my mission. Some of you may be wondering why I didn’t ask the hotel how it worked, but I couldn’t think of a non-embarrassing way of saying, “hey, I want to try your fancy wash-and-dry toilet, so can someone come up and show me how it works?”

But I still have stops in Vienna and Kiev before returning to the United States, so perhaps I’ll get another opportunity to demonstrate by bathroom naiveté.

P.S. If you’re missing the public policy commentary you normally find on my blog, one of my goals in Slovakia is to convince the new socialist government not get to rid of the flat tax. Sadly, I think it’s a lost cause, just like in the Czech Republic (where taxpayers are getting betrayed by a supposedly right-of-center government).

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Since we recently learned Social Security is even more financially decrepit than previously estimated, let’s cheer ourselves up with a couple of cartoons.

This first one is a pretty good assessment of what’s going to happen in a few years if we don’t see reform. Think about what’s happening in Europe, if you don’t have a good imagination.

This cartoon covers the same topic, but looks at how an aging population is going to create unsustainable fiscal demands.

There are solutions, of course, but don’t hold your breath waiting for them to be implemented.

Incidentally, you may recognize the artistic style in the second cartoon. It’s by Ramirez. Here are links to some of his other cartoons that I found especially worthwhile: Here, hereherehereherehereherehere, and here.

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I’ve complained endlessly that America’s fiscal problem is too much spending, and that deficits and debt are best understood as symptoms of that underlying disease.

So I’m obviously a big fan of this new video from the folks at Learn Liberty.

I like how they use several types of measurements to show that there’s plenty of tax revenue. Indeed, the best line, near the end of the video, is when the narrator points out that higher taxes will simply exacerbate the spending problem (as I have noted).

Two final items. First, the folks from the Institute for Humane Studies have a bunch of great videos as part of the Learn Liberty series. I’ve already highlighted the one on free trade vs. protectionism, and I include eight challenging questions for those who think it is a good idea to give politicians and bureaucrats power to interfere with our freedom of exchange.

Second, the video in this post focuses solely on the math question, for lack of a better term. If you want some economic analysis of the consequences of big government, here’s a link to a post with my videos that analyze that issue.

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I’m in Monaco for the 10th forum of the Convention of Independent Financial Advisors, a Swiss-based NGO that focuses on promoting an ethical and productive environment for private investment. I moderated a couple of panels on interesting topics, including the European fiscal crisis.

Matthieu Ricard

But I want to focus on the comments of another speaker, Monsieur Matthieu Ricard, a French-born Buddhist monk. As you can see from his Wikipedia entry, he’s a very impressive individual. In addition to his other accomplishments, he serves as the French translator for the Dalai Lama.

During one of the dinners, we got into a fascinating conversation about the Buddhist concept of altruism (or at least one strain of that tradition) and Ayn Rand’s concept of selfishness, both as general ideas and as they relate to happiness.

At the risk of sounding un-libertarian, I’m siding with the monk.

Even though I’m a big fan of Ayn Rand and periodically give away copies of Atlas Shrugged to unwary young people, I’ve always been puzzled by the Randian hostility to altruism.

Yes, coercive altruism is wrong. Indeed, it’s not even altruism, particularly if you think (like Michael Gerson or Barack Obama) it’s noble or selfless to forcibly give away other people’s money.

But Rand seemed to think (and some Randians definitely think) that voluntary acts of charity and compassion are somehow wrong. In some sense, these folks take an ultra-homo economicus view that people are relentless utility maximizers based on self interest.

If this is a correct interpretation of Randianism (perhaps I should say Objectivism?), then I think it is inadequate. Yes, people want money, and almost everybody would like more money, but I’m guessing that it is non-monetary things that make people happiest.

I don’t want to sound too warm and fuzzy and ruin my image, but aren’t children, friends, family, and love the things that make the world go ’round for most of us? Yes, we also value achievement, but even that can be unrelated to pecuniary considerations.

These are amateur ramblings on my part, and I’ve probably done a poor job of describing the views of Randians and Monsieur Ricard. Moreover, I’m sure that very intelligent people have examined this issue in a much more sophisticated fashion.

For a fiscal policy wonk like me, though, this conference and this encounter forced me to give some thought to how you can be a big fan of Ayn Rand while also feeling good about holding open doors for little old ladies.

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I’ve argued, ad nauseam, that the single most important goal of fiscal policy is (or should be) to make sure the private sector grows faster than the government. This “golden rule” is the best way of enabling growth and avoiding fiscal crises, and I’ve cited nations that have made progress by restraining government spending.

But what’s the best way of actually imposing such a rule, particularly since politicians like using taxpayer money as a slush fund?

Well, the Swiss voters took matters into their own hands, as I describe in today’s Wall Street Journal.

Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.

So how does this system work?

Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

In other words, the debt brake isn’t a de jure spending cap, but it is a de facto spending cap. And capping the growth of spending (which is the underlying disease) is the best way of controlling red ink (the symptom of excessive government).

Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.

Switzerland is moving in the right direction and the United States is going in the wrong direction. The obvious lesson (to normal people) is that America should copy the Swiss. Congressman Kevin Brady has a proposal to do something similar to the debt brake.

Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America’s Prosperity Act, his bill would impose direct spending caps, but tied to “potential GDP.” …Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.

In some sense, Brady’s MAP Act is akin to Sen. Corker’s CAP Act, but the use of “potential GDP” makes the reform more sustainable because economic fluctuations don’t enable big deviations in the amount of allowable spending.

To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my oped, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”

Overcoming that obstacle is the real challenge.

P.S. A special thanks to Pierre Bessard, the President of Switzerland’s Liberales Institut. He is a superb public intellectual and his willingness to share his knowledge of the Swiss debt brake was invaluable in helping me write my column.

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The Social Security Board just released its Trustee’s Report, and it’s generated the usual hand wringing about the program’s long-term demise – much of which is perfectly appropriate for reasons I’ve already discussed.

But I’m usually unhappy about the press treatment of this issue.

Here’s some of what Stephen Ohlemacher and Ricardo Alonso-Zaldivar wrote for the Associated Press.

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians’ reluctance to take painful action to fix the huge retirement and disability program. The trust funds that support Social Security will run dry in 2033 – three years earlier than previously projected – the government said Monday. …Unless Congress acts – and forcefully – payments to millions of Americans could be cut. …Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans. Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers’ wages. It is paid by both employers and workers.

There are two flaws with what’s written in this story. One is a sin of commission, failing to expose the government’s dishonest accounting. The other is a sin of omission, analyzing the issue solely through the lens of government finances.

1. The sin of commission is that the story assumes the Social Security Trust Fund is real, when it is nothing but a collection of IOUs. When extra Social Security taxes are collected, the Treasury keeps those monies and spends them on other programs. In exchange, it engages in a bookkeeping exercise and credits the Social Security Trust Fund with some government bonds.

When one part of the government owes another part of the government some money, it is a wash. There’s no pile of assets to finance benefits. Those bonds simply represent a claim on future taxpayers.

This is why politicians can play dishonest games, such as approving a payroll tax holiday and declaring – by waving a magic wand – that this won’t affect the amount of IOUs in the Trust Fund. Just in case you think I’m joking, the AP story notes that “Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program’s finances are being made whole through increased government borrowing.”

Needless to say, that’s phoniness on top of phoniness. I guess the next step is for politicians to enact legislation adding several zeroes to all the existing IOUs. They can then declare that Social Security is solvent. Problem solved…other than the itsy-bitsy problem that there’s still no money.

2. The sin of omission in the story is that 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.

My video on Social Security reform explains that personal retirement accounts are the only way to simultaneously deal with government finances and household finances in a constructive fashion.

Sadly, neither Obama nor Romney seem interested in this type of pro-growth reform.

By the way, I don’t mean to pick on the Associated Press. The report excerpted above simply happened to be the first one I read. You ‘ll find the same myopic analysis in the Wall Street Journal and Bloomberg, to cite just two of many examples.

In closing, Social Security reform is actually the least important of the entitlement reforms. The long-term fiscal problems caused by Medicare and Medicaid are much larger. This three-part video series looks at the reforms that could address all three programs.

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Many years ago, before it became associated with foreign intervention, neo-conservatism was simply a term for former liberals who migrated to the right. It was said that they had been “mugged by reality.”

We may need a new term, perhaps “Holly-tarians,” for folks in the entertainment industry who have begun to realize the downside of excessive government. I’ve already favorably cited Clint Eastwood for his pro-flat tax views and dismissed Arnold Schwarzenegger on national TV as a de facto statist, but there are other actors who deserve some attention.

I don’t know whether Jon Lovitz is a budding Hollywood libertarian, but (in addition to being a very funny character actor) he certainly seems a bit upset with Obama’s class-warfare approach to fiscal policy.

Since I couldn’t figure out how to embed the file, click on his image and it will take you to an audio file of him ripping Obama, high taxes, and occupy poseurs. Warning, there are plenty of naughty words, including ubiquitous F-bombs.

I will make one correction to his rant. He says that middle-income people have the same deductions that are available to rich people. That’s not really true. Rich people, as I have explained before, don’t rely on wage and salary income like the rest of us. Instead, they earn capital income and business income, which opens the door to a much larger degree of tax planning.

For what it’s worth, this is why Obama’s proposed tax increases won’t raise nearly as much money as projected.

But since politicians doubtlessly will increase spending in anticipation of higher receipts, the net effect will be bigger government and more red ink. In other words, business as usual in Washington.

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Even though I favor radical reductions in the burden of government, I’ve made the point that good fiscal policy merely requires that government spending grow slower than the private sector – what I call Mitchell’s Golden Rule.

And if lawmakers simply cap the growth of spending, so that it grows by about 2 percent annually, the budget deficit disappears in a decade.

It’s even better to impose more restraint, of course, which is why I’ve said favorable things about Senator Rand Paul’s plan.

There’s also a “Penny Plan” that would reduce primary spending (non-interest spending) by 1 percent each year. As James Carter and Jason Fichtner explain, this degree of fiscal restraint would reduce the burden of government spending to about 18 percent of economic output.

Any viable solution must cut spending growth. Sen. Mike Enzi of Wyoming and Rep. Connie Mack of Florida have introduced legislation in their respective chambers to do just that. Their “Penny Plan” – recently updated to reflect the latest budget developments – calls for reducing federal spending (excluding interest payments) 1 percent a year for five years, balancing the budget in the fifth year. To maintain balance once it’s reached, Mr. Enzi and Mr. Mack would cap federal spending at 18 percent of GDP. By no small coincidence, 18 percent of GDP roughly matches the U.S. long-run average level of taxation since World War II. Is it realistic to think Congress could limit federal spending to 18 percent of GDP? Actually, there is precedent. Federal spending fell as a share of GDP for nine consecutive years before bottoming out at 18.2 percent of GDP in fiscal 2000 and 2001. The Penny Plan would return federal spending, expressed as a share of GDP, near the level achieved during the last two years of the Clinton administration.

The various interest groups that infest Washington would complain about this degree of spending discipline, but Carter and Fichtner make a good point when they say that this simply means the same size government – as a share of GDP – that we had when Bill Clinton left office.

I realize I’m getting old and my memory may not be what it used to be, but I don’t recall people starving in the streets and grannies being ejected from hospitals during the Clinton years. Am I missing something?

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President Obama imposed a big-spending faux stimulus program on the economy back in 2009, claiming that the government needed to squander about $800 billion to keep the unemployment rate from rising above 8 percent.

How did that work out? One possible description is that the so-called stimulus became a festering pile of manure. About three years have passed, and the joblessness rate hasn’t dropped below 8 percent. But the White House has been sprinkling perfume on that pile of you-know-what and claiming that the Keynesian spending binge was good policy.

But not every politician is blindly ideological like Obama. Vitor Gaspar, Portugal’s Finance Minister, is willing to admit error. Here are some relevant excerpts from a New York Times report.

Unlike Obama, willing to admit mistakes

Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired. Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes. But it didn’t turn things around, and may have made things worse.

Why does the Portuguese Finance Minister have this view? Well, for the simple reason that the economy got worse and more spending put his country in a deeper fiscal ditch.

The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. …The main fear among investors is that Portugal is going to have to ask for a second bailout from the International Monetary Fund and the European Union, which committed $103 billion of financial aid in 2011.

Maybe the big spenders in Portugal should import some of the statist bureaucrats at Congressional Budget Office. The CBO folks could then regurgitate the moving-goalposts argument that they’ve used in the United States and claim that the economy would be even weaker if the government hadn’t wasted more money.

But perhaps the Portuguese left doesn’t think that will pass the laugh test.

Amazingly, the Germans, who have a disturbing affinity for powerful government, decided against Keynesianism and that’s paid dividends for their economy.

In any event, some of us can say we were right from the beginning about this issue.

Not that being right required any keen insight. Keynesian policies failed for Hoover and Roosevelt in the 1930s. So-called stimulus policies also failed for Japan in 1990s. And Keynesian proposals failed for Bush in 2001 and 2008.

Just in case any politicians are reading this post, I’ll make a point that normally goes without saying: Borrowing money from one group of people and giving it to another group of people does not increase prosperity.

But since politicians probably aren’t capable of dealing with a substantive argument, let’s keep it simple and offer three very insightful cartoons: here, here, and here.

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With the exception of a few top-notch thinkers such as Pierre Bessard and Allister Heath, there are very few people in Europe who can intelligently analyze public policy, particularly with regard to fiscal issues.

I don’t know if Fredrik Erixon of the Brussels-based European Centre for International Political Economy is even close to being in the same league with Pierre and Allister, but he has a very good article that correctly explains that government spending and the welfare state are the real fiscal problems in Europe.

Here are some excerpts from his Bloomberg column.

When it comes to overspending on social welfare, …Europe has no angels. Even the “good” Scandinavians, and governments that appeared to be in sound fiscal shape in 2008, …were spending too much and will have to restructure. …Greece, Ireland, Portugal and Spain…are in many ways different, but they have three important characteristics in common. …government spending in those nations grew at remarkably high rates. In Greece and Spain, nominal spending by the state increased 50 percent to 55 percent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 percent; in Ireland, almost 75 percent. No other country in Western Europe came close to these rates.

This is remarkable. Someone in Europe who is focusing on the growth of government spending. He doesn’t mention that the solution is a spending cap (something akin to Mitchell’s Golden Rule), but that’s an implication of what he says. Moreover, I’m just glad that someone recognizes that the problem is spending, and that debt and deficits are best understood as symptoms of that underlying disease.

In any event, Mr. Erixon also has the right prognosis. The burden of the welfare state needs to shrink. And he seems reasonably certain that will happen.

Europe’s crisis economies will now have to radically reduce their welfare states. State spending in Spain will have to shrink by at least a quarter; Greece should count itself lucky if the cut is less than a half of the pre-crisis expenditure level. The worse news is that this is likely to be only the first round of welfare-state corrections. The next decade will usher Europe into the age of aging, when inevitably the cost of pensions will rise and providing health care for the elderly will be an even bigger cost driver. This demographic shift will be felt everywhere, including in the Nordic group of countries that has been saved from the worst effects of the sovereign-debt crisis. …Europe’s social systems will look very different 20 years from now. They will still be around, but benefit programs will be far less generous, and a greater part of social security will be organised privately. Welfare services, like health care, will be exposed to competition and, to a much greater degree, paid for out of pocket or by private insurance. The big divide in Europe won’t be between North and South or left and right. It will be between countries that diligently manage the transition away from the universal welfare state that has come to define the European social model, and countries that will be forced by events to change the hard way.

I’m not quite so optimistic. While I agree that current trends are unsustainable, I fear that the “optimistic” scenario is for governments to semi-stabilize their finances with both taxes and spending consuming about 50 percent of gross domestic product.

That’s obviously far beyond the growth-maximizing size of government, which means European nations  – on average – would be condemned to permanent economic stagnation. Some of the nations that have very laissez-faire policies in areas other than fiscal policy, such as the Nordic nations, might experience some modest growth, but that would be offset by permanent recession in nations that have both big government and lots of intervention.

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In recent years, taxpayers have been victimized by huge expansions in the burden of government spending. Among the highlights (lowlights would be a much better word):

With all that misery and failure, you would think people would be happy to learn that some government employees are trying to save money. So enjoy a laugh about this cartoon.

Sadly, the cartoon isn’t accurate, even by standards of parody. The agents were trying to save their own money by ripping off the escort. If they were using taxpayer money, they probably would have paid twice the going rate.

But it’s still funny, so enjoy. And if you appreciate political humor about Colombian hookers, check out this Bill Clinton post from a few days ago.

But if you refuse to be distracted by humor and would rather focus on reckless and wasteful spending, then you should watch this Rahn Curve video to understand the economic damage of big government.

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A good tax system (like the flat tax) does not impose extra layers of tax on income that is saved and invested.

I’ve tried to emphasize this point with a flowchart, and I’ve defended so-called trickle-down economics, which is nothing more than the common-sense notion that investment boosts wages for workers by making them more productive.

But if you doubt this relationship, just take a look at this chart posted by Steve Landsburg.

(H/T: Cafe Hayek)

That’s an amazingly powerful relationship. Wages for workers are very much tied to the amount of capital that’s invested. In other words, capitalists are the best friends of workers.

Something to think about with the President proposing big increases in the double taxation of capital gains. And something to consider since he wants America to have the highest level of dividend double taxation in the industrialized world.

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The pro-statism crowd routinely argues that we need more government. Every so often, though, one of them inadvertently stumbles on the truth. But they then refuse to draw the logical conclusion. For instance.

We now have another example to add to the list. Thomas Friedman is a columnist for the New York Times, where he specialize in ponderous columns that reflect the views of the left-wing establishment. Today, he has a column complaining about gridlock in America. Here are some key excerpts.

Does America need an Arab Spring? …has American gone from a democracy to a “vetocracy” — from a system designed to prevent anyone in government from amassing too much power to a system in which no one can aggregate enough power to make any important decisions at all? …A system with as many checks and balances built into it as ours assumes — indeed requires — a certain minimum level of cooperation on major issues between the two parties, despite ideological differences. Unfortunately…several factors are combining to paralyze our whole system.

This is remarkable, in part because he is stunningly wrong. The political class in Washington manages to spend about $4 trillion per year and churn out tens of thousands of pages of new regulation annually.

The politicians also manage to enact dozens of new laws every year, almost all of which expand the size and scope of the federal government. If that’s gridlock caused by “vetocracy,” then I shudder to think what activist government looks like.

But the part that really shocked me was that Friedman basically acknowledged that the problem is big government.

…the huge expansion of the federal government, and the increasing importance of money in politics, have hugely expanded the number of special-interest lobbies and their ability to influence and clog decision-making.

This is a facepalm moment. Friedman begins his column by complaining that our system is sclerotic and that this makes it hard for politicians to enact more laws, yet he then admits that our system is sclerotic because government is too big already. And it goes without saying (but I’ll say it anyway) that Friedman wants to make government even bigger – which is why he’s complaining about gridlock in the first place!

By the way, I can’t resist correcting some of Friedman’s sloppy analysis in the final excerpt above. He complains about role of money and special interests in politics, but he fails to connect the dots. If he did, he would understand that political money and interest groups are inevitable consequences of a bloated public sector.

As I explain in this video, big government facilitates and encourages corruption. To put it in colloquial terms, if you create a big pile of garbage in your living room, don’t be surprised when you get infested by rats and roaches.

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One of my first blog posts back in 2009 featured a column about the Social Security Administration squandering $750,000 on a “conference” at a fancy golf resort in Arizona.

This is why I’m not surprised the GSA pissed away a lot of money at a Las Vegas resort. This is what people do when they spend other people’s money. Heck, this cartoon shows it better than I can say it.

Here’s a small sampling of similar outrages.

The bureaucrats involved in all these outrages should be fired, or perhaps even charged with crimes such as malfeasance, but this cartoon reminds us that the real problem is the political class which appropriates the money that is then wasted by bureaucracies.

This cartoon was authored by Michael Ramirez, and you may know he is one of my favorites. To understand why,  see here, here, here, hereherehere, here, and here.

And this cartoon reminds us that every dollar of waste that gets publicized is just the tip of the iceberg.

I’m not familiar with Steve Breen, but he does lots of work like this, I’m sure I’ll be featuring more of his cartoons.

Thinking about all this waste, fraud, and abuse is a bit depressing, so let’s try to feel better by thinking about the ways that foreign governments squander taxpayer money, such as the UK government funding sex trips to Amsterdam, the Greek government rewarding pedophiles with disability handouts,  or the European Commission financing penile implants for senior politicians and bureaucrats.

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I’ve done a couple of posts comparing Reaganomics and Obamanomics, mostly based on data from the Minneapolis Federal Reserve on employment and economic output.

I even did a TV interview on the subject, which generated some comments on my taste in clothing, and also cited a Richard Rahn column that got Paul Krugman and Ezra Klein upset.

Some of the best evidence about high tax rates vs. low tax rates comes from inside America. Art Laffer (yes, that Art Laffer) and Steve Moore have a great column in today’s Wall Street Journal. It’s sort of Reaganomics vs. Obamanomics, looking at evidence from the states.

Barack Obama is asking Americans to gamble that the U.S. economy can be taxed into prosperity. …Mr. Obama needs a refresher course on the 1920s, 1960s, 1980s and even the 1990s, when government spending and taxes fell and employment and incomes grew rapidly. But if the president wants to see fresher evidence of how taxes matter, he can look to what’s happening in the 50 states. In our new report “Rich States, Poor States,” prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It’s like comparing Hong Kong with Greece… Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Tax rates also lead people to “vote with their feet.” Laffer and Moore look at migration patterns.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. …Illinois, Oregon and California are state practitioners of Obamanomics. All have passed soak-the-rich laws like the Buffett Rule (plus economically harmful regulations, like California’s cap-and-trade scheme), and all face big deficits because their economies continue to sink. Illinois has lost one resident every 10 minutes since hiking tax rates in January. California has 10.9% unemployment, having lost 4.8% of its jobs over the past decade. …Every time California, Illinois or New York raises taxes on millionaires, Florida, Texas and Tennessee see an influx of rich people who buy homes, start businesses and shop in the local economy.

Competition among the states is leading some states to make further improvements. Some are even trying to get rid of their income taxes.

Republican governors in Florida, Georgia, Idaho, North Dakota, South Carolina, Ohio, Tennessee, Wisconsin and even Michigan and New Jersey are cutting taxes to lure new businesses and jobs. Asked why he wants to reduce the cost of doing business in Wisconsin, Gov. Scott Walker replies: “I’ve never seen a store get more customers by raising its prices, but I’ve seen customers knock down the doors when they cut prices.” Georgia, Kansas, Missouri and Oklahoma are now racing to become America’s 10th state without an income tax.

I like the quote from Governor Walker. He seems to know what he’s talking about, so it will be interesting to see whether he survives the upcoming recall election. I guess it depends whether voters understand that big government and high tax rates is a recipe for continued decline.

Some states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of America, perhaps because the number of tax-consumers is greater than the number of tax-producers.

And even though parasites should understand it doesn’t make sense to kill their host animals, this cartoon illustrates how the welfare states lures a growing number of people to ride in the wagon. And this cartoon shows the consequences of too many moochers and not enough producers.

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I periodically get emails asking whether I support a presidential candidate. Most of these messages complain that I’ve been critical of RomneySantorumGingrich, etc, and inquire if there’s anybody I like.

As a general rule, I don’t respond because I work at a think tank and we’re not supposed to be involved in partisan politics according to IRS rules.

But I found a loophole, so the time has come for me to announce my preferred candidate for the 2012 presidential election. And I’m making this much-anticipated announcement even though I won’t be casting a vote.

I want people to select François Hollande.

Who is Mr. Hollande, you ask? Well, actually, he’s Monsieur Hollande, because I’m making an endorsement in France’s presidential election.

For those of you who follow such matters, you may be wondering why I would prefer Monsieur Hollande. After all, he is the candidate of the French Socialist Party.

Read these excerpts from today’s Wall Street Journal editorial page and you’ll begin to understand why. We’ll start with a quick glimpse at France’s dire situation.

The French head to the polls Sunday for the first round of Presidential voting, but you wouldn’t know the candidates were competing in Europe’s most important election since the start of its economic crisis. …the contenders for the Elysée Palace—including Mr. Sarkozy—are in one way or another running on fairy tales. …The French economy is in a severe, if not yet acute, crisis. …French growth has been stagnant for five years. Unit labor costs have risen steadily for more than a decade, and high unemployment has become chronic. A quarter of French youth are jobless.

Here’s what we know about the supposedly right-of-center incumbent, Nicolas Sarkozy.

Nicolas Sarkozy, the center-right incumbent, is proposing to shrink the budget deficit by raising taxes in the name of “solidarity.” On top of his already-passed hikes in corporate and personal income taxes, and his 4% surcharge on high incomes, Mr. Sarkozy also promises an “exit tax” on French citizens who move abroad, presumably to make up for the revenue that goes missing when all those new levies impel high earners to leave the country. …Mr. Sarkozy proposes reducing payroll charges paid by employers but would make up for it by increasing VAT and taxes on investment income. This assumes there will be investment income left in France once Mr. Sarkozy’s financial-transactions tax goes into effect in August.

In other words, Sarkozy is a statist. But you knew that already if you read thisthisthis,this, or this.

So what’s the alternative? Well, there isn’t one.

The President’s Socialist rival is a throwback of a different sort. François Hollande’s campaign has adopted a fiery old-left style that most had taken for dead after the Socialists’ 2007 defeat. All of Mr. Hollande’s major economic policy plans have roots in a punitive populism that would make U.S. Congressional class warriors blush. …Mr. Hollande says he’s “not dangerous” to the wealthy—he merely wants to confiscate 75% of their income over €1 million, and 45% over €150,000. He is, however, a self-avowed “enemy” of the financial industry, and he plans to impose extra penalties on oil companies and financial firms. He’d also raise the dividends tax and impose a new, higher rate of VAT on luxury goods.

The unfortunate people of France, to be blunt, are screwed no matter which candidate prevails. Government will get bigger, taxes will climb higher, jobs will be lost, and living standards will continue to stagnate.

Given this dismal outlook, though, I’d rather have the unambiguously left-wing party come out of top.

My reasoning is simple, and I’ve even decided to create a new rule to commemorate the analysis. The “Richard Nixon Disinfectant Rule” is that it’s always better to let the left-wing party win when the supposedly right-wing party has a statist candidate.

I name this rule after Nixon for the obvious reason that he was one of the worst Presidents in American history. And I’m not even counting the Watergate scandal and subsequent resignation. I’m referring to the spending, the taxes, the regulation, and the intervention.

Sarkozy, needless to say, has shown that he’s a French version of Nixon. Or Bush.

So if the French are going to be governed by a statist, it may as well be Hollande. That way, there’s at least a slight chance that the alleged right-of-center party will come to its senses and offer voters a genuine choice in the next election.

By the way, this was my mindset as a teenager when I wanted Jimmy Carter to beat Gerald Ford. I figured that was the best way of getting Ronald Reagan.

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Last year, I did a popular post on what happens if you redistribute grades in a classroom.

Someone has turned this idea into a video, starring some well-known political figures.

And if you want to see a real-world example of how students react to this idea, here’s another good video.

By the way, I can’t resist being pedantic and re-explaining that socialism is not the same as redistributionism.

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I have to give the Washington Post credit. It may have a bias for statism, but at least they have some diversity on the op-ed pages. Less than two months after E.J. Dionne wrote an embarrassing column showing he didn’t understand the difference between untrammeled majoritarianism and a constitutional republic, the Post publishes a terrific piece by George Will on the proper role of the Supreme Court.

Here’s some of what George Will wrote.

…a vast portion of life should be exempt from control by majorities. And when the political branches do not respect a capacious zone of private sovereignty, courts should police the zone’s borders. Otherwise, individuals’ self-governance of themselves is sacrificed to self-government understood merely as a prerogative of majorities. The Constitution is a companion of the Declaration of Independence and should be construed as an implementation of the Declaration’s premises, which include: Government exists not to confer rights but to “secure” preexisting rights; the fundamental rights concern the liberty of individuals, not the prerogatives of the collectivity — least of all when it acts to the detriment of individual liberty. Wilkinson cites Justice Oliver Wendell Holmes as a practitioner of admirable judicial modesty. But restraint needs a limiting principle, lest it become abdication. Holmes said: “If my fellow citizens want to go to Hell I will help them. It’s my job.” No, a judge’s job is to judge, which includes deciding whether majorities are misbehaving at the expense of individual liberty. …The Constitution is a document, one understood — as America’s greatest jurist, John Marshall, said — “chiefly from its words.” And those words are to be construed in the bright light cast by the Declaration. Wilkinson worries about judges causing “an ever-increasing displacement of democracy.” Also worrisome, however, is the displacement of liberty by democracy in the form of majorities indifferent or hostile to what the Declaration decrees — a spacious sphere of individual sovereignty.

I offered my two cents on this issue, rhetorically asking why the Founding Fathers would have bothered listing enumerated powers if the interstate commerce clause was designed to be a blank check for politicians in Washington.

But Thomas Sowell, as usual, wrote about the issue with greater eloquence and clarity.

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I’ve complained many times about the pointless nature of anti-money laundering laws. They impose very high costs and force banks to spy on their customers, but they are utterly ineffective as a weapon against criminal activity. Yet politicians and bureaucrats keep making a bad system worse, and the latest development is a silly scheme to ban $100 bills!

It also seems that poor people are the main victims of these expensive and intrusive laws. According to a new World Bank study, half of all adults do not have a bank account, with 18 percent of those people (click on nearby chart for more info) citing documentation requirements – generally imposed as part of anti-money laundering rules – as a reason for being unable to participate in the financial system.

But this understates the impact on the poor. Of those without bank accounts, 25 percent said cost was a factor, as seen in the chart below. But one of the reasons that costs are high is that banks incur regulatory expenses for every customer, in large part because of anti-money laundering requirements, and then pass those on to consumers.

Here are some of the key points in the World Bank report.

The data show that 50 percent of adults worldwide have an account at a formal financial institution… Although half of adults around the world remain unbanked, at least 35 percent of them report barriers to account use that might be addressed by public policy. …The Global Findex survey, by asking more than 70,000 adults without a formal account why they do not have one, provides insights into where policy makers might begin to make inroads in improving financial inclusion. …Documentation requirements for opening an account may exclude workers in the rural or informal sector, who are less likely to have wage slips or formal proof of domicile. …Analysis shows a significant relationship between subjective and objective measures of documentation requirements as a barrier to account use, even after accounting for GDP per capita (figure 1.14). Indeed, the Financial Action Task Force, recognizing that overly cautious Anti-Money Laundering and Terrorist Financing (AML/CFT) safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system, has emphasized the need to ensure that such safeguards also support financial inclusion.

One would hope honest leftists, who claim to care about the poor, would join with libertarians to roll back absurd anti-money laundering requirements. Heck, one would hope honest conservatives, who claim to be against pointless red tape, would join the fight as well.

Here’s the video I narrated on the general topic of money laundering laws. I think it makes very good points, but I wish this data had been available when I did the video so I could explain how low-income people are the main victims.

Last but not least, 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.

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

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I’ve said lots of nice things about Bill Clinton, noting that economic freedom increased during his tenure, in part because the burden of federal spending declined to 18.2 percent of GDP.

He also was a very colorful character who had…how shall we say this…a certain zest for life. Which is why this image that popped into my inbox is worth sharing.

Sort of the same theme as this Clinton-Schwarzenegger post.

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A few days ago, I explained why I’m a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and over-spend.

Tax havens play an important role in this liberalizing process, largely because they do not put themselves under any obligation to enforce the bad tax laws of other jurisdictions. They also use privacy laws to protect their sovereign control of what gets taxed inside their borders (this is what separates a “tax haven” from a more conventional low-tax jurisdiction). This means they are fiscal safe zones, particularly for people who want to protect their assets from the pervasive double taxation that exists in so many nations.

Not everybody agrees with my analysis (gee, what a surprise). To cite one example, the petty bureaucrats at the OECD got so agitated at me in 2009 (when I was offering advice to representatives of so-called tax havens while standing in a public lobby of a public hotel) that they threatened to have me thrown in a Mexican jail.

Now I have a new critic, though hopefully someone who would never consider thuggish tactics to suppress dissent. Ann Hollingshead writes for the Task Force on Financial Integrity and Economic Development, which (notwithstanding the name of the organization) seems to favor bigger government.

Anyhow, she wrote an article specifically criticizing my work on tax havens. So I figured it was time for a fisking, while means a point-by-point rebuttal. Here’s how she begins, and I’ll follow up her points with my responses.

Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”

No irony on my part. As I have openly stated, tax havens are a key part of tax competition, which is a necessary (though sadly not sufficient) process to restrain the greed of the political class.

Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States“could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.

Fair enough. We both recognize that the United States is a big tax haven. But we have different conclusions. I think it is unfortunate that only non-resident foreigners can benefit from these policies, while Ann wants to crack down on small low-tax jurisdictions such as Monaco, Bermuda, Liechtenstein, and the Cayman Islands, as well as big nations such as the United States. Sadly, Ann’s side has somewhat prevailed, and many of the havens have agreed to become deputy tax collectors for nations with bad tax law.

So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.

I guess I should be happy that she holds out the possibility that I’m “relatively intelligent.”

Mitchell implicitly takes the position that tax havens do enable tax evasion and this helps to lower tax rates. He argues “it is largely globalization—not ideology—that has driven [a] ‘race to the bottom’” where global top corporate tax rates now average about 27 percent, down from 67 percent in 1980. Mitchell does not only believe this has occurred, but also maintains it is a positive development. He argues tax competition drives tax policy in the “right direction” (i.e., lower tax rates), has called these developments “positive,” and has even likened policy makers to “thieves” and tax competition to home “alarm systems.”

Ann makes one minor error. Corporate tax rates have dropped from a high of about 48 percent (and are now down to less than 25 percent). Top personal tax rates, by contrast, used to be more than 67 percent (and have now dropped to about 41 percent).

Regarding these developments, I think they are very positive. And I also think that politicians are akin to thieves, though Godfrey Bloom, a British member of the European Parliament, says it with a much better accent.

Mitchell’s argument that lower tax rates are always better and that those who tax others are thieves, makes several implicit assumptions about the relationship of citizens to their government. From his line of reasoning, Mitchell either believes, on a philosophical level, that governments do not have the right to tax their citizens or, on an economic level, that lower tax rates are always better, or both.

I definitely believe that lower tax rates are better than higher tax rates.

Mitchell may believe that taxation is the equivalent of thievery—and therefore that governments do not have the right to tax their citizens, just a thief does not have the right to steal. But he is also (more than likely) not an anarchist, which is the next logical extension of this reasoning, because on a number of occasions he has advocated a flat tax.

Ann makes a good point here. I’ve already admitted, in this post featuring a funny video mocking libertarianism, that I don’t see how to privatize the justice system and national defense, so I’m not an anarcho-capitalist.

Mitchell also argues lower tax rates are universally better, so at what point does the tax rate become acceptable? Clearly he doesn’t believe the tax rate should be zero, because that would get back to the anarchism theory. And he did once offer tepid support for Herman Cain’s 9 percent rate.

Another fair point. If a 50 percent tax is confiscatory and if politicians who impose such a tax are akin to thieves, then why would a 10 percent tax be acceptable? And would politicians imposing low tax rates still be acting like crooks?

Those are tough questions. But at the risk of dodging thorny philosophical issues, I’ll claim it doesn’t really matter. Government is too big right now and taxes are too onerous and unfair. If I somehow manage to bring government down to 10 percent of GDP, as the Rahn Curve suggests if we want to maximize prosperity for the American people, then I’ll have the luxury of worrying about the moral legitimacy of a limited public sector.

Clearly there’s a disconnect. Taxation cannot both be thievery, but also acceptable at a lower level. There is no evidence that, if tax competition through tax evasion is real, it would cease to drive down tax rates at some level that has been deemed acceptable by Dan Mitchell. So at what point does the “race to the bottom” bottom out? And is that a point where the United States can still maintain services that I’m sure Mitchell doesn’t advocate giving up, like police and law courts?

If I understand this passage correctly, I disagree. Tax competition does not drive tax rates to zero. It just encourages better policy. There’s pressure to lower tax rates, and there’s pressure to reduce double taxation of income tat is saved and invested. But there’s no reason to think that tax competition and/or tax evasion forces the overall tax burden “to the bottom.”

But I would be remiss not to point out some internal inconsistencies in Mitchell’s arguments, in addition to his logical ones. While he argues tax competition through tax evasion in havens has fostered lower tax rates worldwide, he has also reckoned that “only a tiny minority” of people who keep their money in havens “are escaping onerous tax burdens.” First of all, I would be interested to see where Mitchell got that statistic because no one knows how much money is deposited in havens, let alone its origins. Such information isn’t publicly available. That’s actually the whole point. And secondly, and more importantly, I’m unclear on how such a “tiny minority” of oversees deposits could drive international tax policy to such an extent that the average corporate tax rates have dropped by more than half in thirty years.

Actually, there is considerable data about the amount of money in tax havens. The Bank for International Settlements is a good place for those who like to peruse such information.

But that’s a secondary point. Her main criticism is that I’m inconsistent when I say tax evasion is minor, so let me allow me to elaborate. Tax competition works by making politicians fearful that jobs and investment will migrate to jurisdiction with better tax law. It works just as well when people engage in legal tax planning and legal tax avoidance as it does with illegal tax evasion.

Places such as the Cayman Islands, for instance, rely on completely legal and transparent lines of business such as hedge funds and captive insurance companies. Places such as Panama have completely legal shipping registries. Places such as the British Virgin Islands specialize in completely legal company formation. Places such as the Channel Islands focus on completely legal trusts. Places such as Bermuda are known for completely legal reinsurance firms.

The “illegal” part of the offshore business does exist (at least as defined by high-tax nations), and it tends to be in the areas of private wealth management and banking. And even then, only in jurisdictions that have very strong human rights laws protecting financial privacy.

To be sure, there’s no way to precisely state how much tax evasion exists, but I can say with total certainty that the left’s claims are absurd. During the 2008 campaign, for instance, then-candidate Obama said that his anti-tax haven policies would generate $100 billion every year. When his law was enacted in 2010, that huge amount of money shrank to only $870 million per year. And even that estimate is a mirage because the President’s FATCA law is discouraging productive investment in the United States.

It is not my intention to demonize Mitchell and I hope you’ll notice that I’ve neither called him, nor implied that he is, a “careless and know-nothing hack.” I also have no interest in taking easy jabs that imply he is personally benefiting from tax evasion through havens or that he is seeking to destabilize theU.S.government by removing its ability to tax its citizens. Such attacks might generate readers, but they don’t generate thoughtful discussion and I’m much more interested in the latter than the former.

You may be wondering why she included the comment about a “careless and know-nothing hack.” It’s because I used that phrase to describe a journalist who wrote a very sloppy article. But I don’t automatically disparage those with different views. I’ll disagree with people and argue with them, but I don’t mock them if they have serious and substantive views.

I suppose I should also say, just for the record, that I fully comply with all the onerous demands imposed on me by the government. Not because I want to, but rather because I worry that my work on public policy sooner or later will attract some discriminatory and politically motivated attention from the IRS. It hasn’t happened yet, so I hope I’m being needlessly paranoid, but suffice to say that I go out of my way to even declare income that I know isn’t reported to the tax police.

So here are my questions, to anyone who will answer. 1) On what philosophical basis, if any, do governments draw the right to tax their citizens?; 2) Do citizens have a moral or philosophical right to evade taxation by using tax havens under any circumstances?; 3) If so, at what level of taxation do those citizens no longer have a moral right to evade tax?; and 4) what is the philosophical reasoning that justifies this level?

Now we’re back to the hard-to-answer questions. When is government too big and when does it impose so many demands that people are justified in evading taxation? I’m not sure, but I’ll fall back on what former Supreme Court Justice Potter Stewart said about pornography: “I know it when I see it.”

Put in context, I don’t blame people from France for evading confiscatory taxation. I don’t blame people in corrupt nations such as Mexico for evading taxation. I don’t blame people in dictatorial nations such as Venezuela for evading taxation.

But I would criticize people in Singapore,Switzerland, Hong Kong, or Estonia for dodging their tax liabilities. They are fortunate to live in nations with reasonable tax rates, low levels of corruption, and good rule of law.

Let me now circle back to the main point. In a world with vigorous tax competition, especially when augmented by the strong human rights laws of tax havens, nations will face some pressure to move their policies closer to Hong Kong and away from France. That’s something worth protecting and promoting, not something to be stamped out by high-tax nations seeking to create a tax cartel – sort of an OPEC for politicians.

Last but not least, if you haven’t yet overdosed on this topic, here’s my speech to a Capitol Hill audience on the valuable role of tax havens in the global economy.

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This is obviously a photoshop creation, sort of like this bit of Occupy humor, but let’s suspend reality and give this bum some credit for being entrepreneurial.

In the real world, though, the bum probably wouldn’t be this successful because the likely GOP nominee doesn’t offer a pro-freedom alternative.

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I think high tax rates on certain classes of citizens are immoral and discriminatory. If the government is going to collect revenue, all taxpayers should be treated equally, with something akin to a simple flat tax.

But most people don’t seem to care about having the law apply the same to all people, so I make a strictly utilitarian case for low tax rates in today’s New York Post. Here some of what I wrote.

Whether it’s through the Buffett Rule, higher income-tax rates or double taxation of dividends and capital gains, President Obama often demands that “rich” taxpayers and big corporations send more money to Washington. But…trying to get more money from upper-income taxpayers is like playing whack-a-mole. So long as tax rates are high, rich people will figure out ways to protect their income.It doesn’t take a tax genius; any rich person can make a phone call or hit a few computer keys and shift his or her investments to tax-free municipal bonds. It’s not good for the economy when capital gets diverted to help finance the excess spending of Detroit or California, but it’s an effective way of stiff-arming the IRS. Or the rich can play the green-energy scam, getting all sorts of credits to offset their tax liabilities. …Even if lawmakers abolished the various tax-code distortions, they might still be disappointed. The one sure way for rich people to lower their tax bills is by generating less income. …This isn’t some sort of modern-day revelation. Andrew Mellon, a Treasury secretary during the 1920s, noted that “the history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.”

I then provide a specific example, looking at how Reagan’s lower tax rates resulted in a lot more revenue from the rich.

Unlike the rest of us, the rich have a great ability to alter the timing, amount and composition of their income. That’s because, according to IRS data, those with more than $1 million of adjusted gross income get only 33 percent of it from wages and salaries. The super-rich (those with income above $10 million) rely on wages and salaries for only 19 percent of their income. In 1980, when the top tax rate was 70 percent, rich people (those with incomes of more than $200,000) reported about $36 billion of income; the IRS collected about $19 billion of that amount. So what happened when President Ronald Reagan lowered the top tax rate to 28 percent by 1988? Did revenue fall proportionately, to about $8 billion? Folks on the left thought that would happen, complaining that Reagan’s “tax cuts for the rich” would starve the government of revenue and give upper-income taxpayers a free ride. But if we look at the 1988 IRS data, rich people paid more than $99 billion to Uncle Sam. That is, because rich taxpayers were willing to earn and report much more income, the government collected five times as much revenue with a lower rate.

I also included above, for readers of this blog, a table with the raw numbers from the IRS. Feel free to click for a larger image and see how the “rich” responded to better tax policy.

I then close with a warning about Obama’s class warfare policy.

Obama wants to run the experiment in reverse. He hasn’t proposed to push the top tax rate up to 70 percent, thank goodness, but the combined effect of his class-warfare policies would mean a big increase in marginal tax rates. That might be good for workers in China, India or Ireland, because American jobs and investment would migrate to those places. But it’s not the right policy for the United States.

In other words, even if you’re a leftist and your main goal is giving the government more revenue, higher tax rates are a bad idea. The rich will simply figure out ways to protect their earnings while the rest of us suffer because the economy loses some of its dynamism.

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I thought I despised the IRS, but I’m just an amateur. I’m in Geneva, Switzerland, where I just finished speaking to a group of overseas Americans who have steam coming out of their ears.

These folks are livid with the tax system, thanks to awful policies such as America’s worldwide tax regime and punitive laws such as FATCA.

So let’s ease the pain with some tax humor.

Losing an arm and a leg isn’t much fun, which reminds me that some Congressman (I think) had a very good idea of shifting election day so that it coincides with tax day. Not a bad idea, given the message of the cartoon.

And if you like tax humor, I recommend this IRS pencil sharpener. And for those who don’t mind PG-13 humor, there’s a good joke about the Rabbi and the IRS agent.

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Other than my experiment dealing with corporate taxation, the first video I narrated for the Center for Freedom and Prosperity dealt with the issue of tax competition.

It was a deliberate choice because I view competition among governments as one of the few effective restraints on the greed of the political class.

Simply stated, in the absence of competitive pressure, politicians will over-tax and over-spend until the welfare state collapses of its own weight. Some of them self-destruct anyhow because sometimes politicians can’t resist myopic policy decisions even when they know the house of cards will come tumbling down. Greece is a good example, though this cartoon shows the same phenomenon in a more amusing fashion.

But if we want to save other nations from that fate, we need competition among governments so politicians have to worry that the geese with the golden eggs can fly away to nations with better policy.

This is why protecting, promoting, and preserving tax competition is my top issue. Heck, I’ve even run the risk of being thrown in a Mexican jail because of my efforts to defend the right of jurisdictions to compete with decrepit welfare states by implementing pro-growth fiscal policy.

With this as background, you won’t be surprised to learn that I’m a big fan of what Greg Mankiw wrote this weekend in the New York Times.

Here’s some of his column, beginning with the (hopefully) obvious point that competition is what drives an economy and provides benefits to consumers.

Most everyone agrees that competition is vital to a well-functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate.

He then explains that the same principle of competition can protect the interests of taxpayers just as it protects the interests of consumers.

For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet. The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

He also points out that federalism is a way of reducing the monopoly power of central governments.

Conservatives applaud such competition among governments. They are skeptical of government power, and they see competition as a check on its potential abuse. Because people and capital will flee from places where their tax dollars do not deliver commensurate value, government officials have little latitude to pursue personal agendas that are substantially adverse to any group of citizens. This logic leads naturally to the principle of federalism. Because exiting a state or locality is easier than leaving the nation, some policy options should be available to state and local governments but not to the federal government. The founding fathers were no fools.

Not surprisingly, the class-warfare crowd despises competition among governments. That’s why they want fiscal policy determined by Washington – and also why they support the pernicious efforts of international bureaucracies to cripple tax competition among nations.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.” Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals.

Mankiw’s column is worth sharing, so please send this post to friends and colleagues. I’d also recommend these powerful short statements by Dan Hannan and Godfrey Bloom, both British members of the European Parliament. And here’s another video on the topic from the Center for Freedom and Prosperity, but you get to listen to someone more appealing than me.

But if you like listening to me, for inexplicable reasons, here’s my three-part video series on the value of tax havens as part of the tax competition process.

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