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Archive for April, 2012

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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