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Archive for September, 2012

It’s not uncommon for there to be debate and discussion about the degree to which libertarians and social conservatives are allies and enemies.

I think they’re mostly allies, in part because there is wide and deep agreement on the principle of individual responsibility. They may focus on different ill effects, but both camps understand that big government is a threat to a virtuous and productive citizenry.

That being said, I also realize that a libertarian who thinks drug legalization is the most important issue in the world is probably not going to feel much kinship with a social conservative who focuses on spiritual treatment of drug addiction (even though I would argue they should share policy views).

I’m contemplating this topic because of a recent New York Times column by David Brooks. He is concerned that traditional conservatives (which I think would overlap with, but not be identical to, social conservatives) have lost influence in the conservative movement and Republican Party. Let’s start with this excerpt.

…the conservative movement…was a fusion of two different mentalities. On the one side, there were the economic conservatives. …there was another sort of conservative, who would be less familiar now. This was the traditional conservative, intellectual heir to Edmund Burke, Russell Kirk, Clinton Rossiter and Catholic social teaching. This sort of conservative didn’t see society as a battleground between government and the private sector. Instead, the traditionalist wanted to preserve a society that functioned as a harmonious ecosystem, in which the different layers were nestled upon each other: individual, family, company, neighborhood, religion, city government and national government. …they were intensely interested in creating the sort of social, economic and political order that would encourage people to work hard, finish school and postpone childbearing until marriage.

So far, so good. As a self-described libertarian, I like these concepts. Indeed, I support liberty in part because I think it will both enable and encourage people to experience good lives in the kind of ecosystem David describes.

But then he has a sentence that rubs me the wrong way.

Ronald Reagan embodied both sides of this fusion, and George W. Bush tried to recreate it with his compassionate conservatism.

Let me first stipulate that it’s unfair to equate “compassionate conservatism” with “big government conservatism.” That may have been the end result, but the goal – as was explained to me on several occasions – was to reform the way government did things, not to make it bigger.

But even if we accept that goal, I think Reagan and Bush represented different strains of conservatism. Reagan wanted to shrink the federal government because he viewed Washington as a threat to David’s “harmonious ecosystem.” In other words, Reagan-style conservatism is (was?) based on the notion that Washington could only make things worse, not better.

The Bush people, by contrast, had a more optimistic view of the federal government’s capabilities.

Indeed, Brooks is explicitly willing to make government bigger in hopes of achieving certain goals.

There are few people on the conservative side who’d be willing to raise taxes on the affluent to fund mobility programs for the working class. There are very few willing to use government to actively intervene in chaotic neighborhoods, even when 40 percent of American kids are born out of wedlock. There are very few Republicans who protest against a House Republican budget proposal that cuts domestic discretionary spending to absurdly low levels. The results have been unfortunate. Since they no longer speak in the language of social order, Republicans have very little to offer the less educated half of this country. …The Republican Party has abandoned half of its intellectual ammunition. It appeals to people as potential business owners, but not as parents, neighbors and citizens.

Here’s where I think he lets hope triumph over experience. What makes him think that the federal government is capable of successfully creating and operating “mobility programs”? It’s been operating dozens of such programs and they’ve all failed.

Or why does he think the federal government can reduce out-of-wedlock births when the evidence suggests that the welfare state has played a non-trivial role in enabling such misguided behavior?

Brooks also makes a ridiculous claim about what’s happened to domestic discretionary outlays. Here’s the data, adjusted for inflation, from the Historical Tables of the Budget.

Granted, David is talking about the plans in the Republican budget, not what’s actually happened. But the most the GOP wants to achieve is to put domestic discretionary spending back at 2008 levels. That’s not exactly an “absurdly low level,” particularly compared to existing post-stimulus outlays.

The more relevant question is why he thinks federal spending is associated with good results. There’s certainly no positive evidence from Obama’s stimulus. We also know the War on Poverty backfired. And entitlements are a ticking time bomb in the absence of reform.

By the way, this doesn’t negate what Brooks says about the GOP’s inability to articulate a message that resonates with (as he calls them) the “less educated half of this country.”

All I’m arguing is that results should matter. If we care about making life better for these people and we want the “harmonious ecosystem” David mentions, then we should be making government smaller rather than larger.

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I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.

The good ol’ days

But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.

Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.

Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.

Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.

Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.

Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.

The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.

P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.

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I’ve shared a very clever Chuck Asay cartoon about gun-free zones, so let’s now enjoy four posters on the topic.

Let’s begin with a good jab at one of the anti-Second Amendment groups.

But remember the serious point. If you’re a bad guy and know that a potential victim is sure to be unarmed, does that make you happy or sad?

I realize that an anti-gun zealot will respond by arguing that they want a world where the thugs and crooks also will be disarmed, but how likely is it that such people will turn in their weapons? In any event, most criminals are young men and potential victims need guns to compensate for the inability to match the physical strength of their attackers.

Next let’s look at a poster showing the kind of instructions that statists such as Mayor Bloomberg should post in public places.

These clowns expect us to have blind faith in the ability of public authorities, but the odds of a cop being immediately available when trouble strikes are almost nonexistent.

Here’s a poster that captures the blind naiveté of anti-gun activists. I don’t think I need to add any commentary.

Last but not least, here’s a sign that all anti-gun leftists – assuming they have the courage to publicly celebrate their beliefs – should post outside their homes.

If you enjoy these posters, you can view previous editions here, hereherehere, and here.

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Even though I’m a fiscal policy economist, I often get hit with questions on other topics. This frequently happens when I’m overseas and I’m put in the position of defending every nuance of free market policy.

I don’t mind pontificating on other issues, but I get frustrated with myself for sometimes not having the specific knowledge to make the best possible case. I was recently asked, for instance, whether the private sector was capable of protecting the health and safety of workers.

I knew enough to discuss the overall cost of regulation, the amount of valuable time diverted to comply with red tape, and some of the research on regulation and job creation.

Moreover, I made the generic argument about how employers have a profit-maximizing incentive to protect the health and safety of their workforce.

But when the person asserted to me that the creation of the Occupational Safety and Health Administration (OSHA) was followed by safer workplaces, all I could do was mumble something about the sun doesn’t rise because roosters crow and that we would need hypotheticals and counterfactuals.

Fortunately, I work at the Cato Institute where there are experts about almost every policy issue, so I was able to track down some analysis about OSHA in the Cato Handbook for Congress.

This then led me to the National Safety Council, where I discovered that the person who was asking me about regulation was correct. As seen in this chart, workplace deaths have fallen significantly since OSHA was created.

There is a discontinuity in the data in 1992 because of a change in methodology, but I’ll stipulate that this doesn’t weaken in any way the argument that the creation of OSHA was followed by lower death rates in the workplace.

But it also turns out that my cop-out response about roosters and sunrises was right on the mark.

Let’s now look at the same chart, but this time we will include data going all the way back to 1933. What we find is that the workplace deaths were falling before OSHA and they continued to fall after OSHA.

Now for some caveats. This chart doesn’t prove OSHA is completely ineffective. Moreover, I”m sure there were state-based workplace regulations in effect in the pre-OSHA era, and I assume the federal government also had some health and safety regulations as well, perhaps through the Labor Department.

My argument is simply the more limited hypothesis that regulations impose considerable costs, which should be taken into account, and that businesses have a profit-maximizing incentive to promote health and safety in the workplace, which is increasingly important as society becomes richer.

So let me put the onus back on the pro-regulation crowd. Given the charts above, shouldn’t there be some sort of obligation to show that regulation has had a positive impact, particularly when costs are added to the equation.

And don’t give me a lazy argument about “even if we save just one life,” because I’ve already shown that a heavy regulatory burden can have a deadly impact.

P.S. Let’s also remember that OSHA generates some bone-headed regulatory choices, such as the crazy example recounted by Dave Barry and this nutty bit of regulatory excess uncovered by my colleague Walter Olson.

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I’m part of a just-posted online Debate Club sponsored by U.S. News & World Report which asks “Is the United States a Nation of ‘Makers and Takers?'”

My contribution to the discussion is basically a reworked version of what I wrote last week about Romney and the infamous 47 percent remark, so there’s no need to regurgitate those remarks. Suffice to say that I gave an answer of “No” because Americans don’t (yet!) share the European belief that it is government’s responsibility to provide the basics of life.

What’s interesting is that the two other participants in the debate (Phil Kerpen and Scott Winship) who are closest to my views answered “Yes,” while the three leftists sided with me and voted “No.”

But not because the leftists agreed with me on policy, or because I disagreed with Phil or Scott. I think the strange divergence is a result of me being very literal (some would say pedantic) about the question that was asked while the rest of the participants addressed the broader issue of whether there’s too much or too little means-tested redistribution.

So allow me to take a moment to elaborate on my remarks. My answer was driven by my belief that American exceptionalism – limited government, self reliance, and personal responsibility – is still real. I linked above to one poll comparing American and European attitudes, but I also invite you to review very important polling data here and here.

But I’m not under any illusions that this is a permanent feature of the U.S. political landscape. People can be lulled into dependency. Indeed, some leftists are very honest about admitting their desire to turn more and more Americans into wards of the state. Bill Clinton’s pollster wrote a book in the 1990s in which he explicitly acknowledged that part of the debate over Hillarycare was about the degree to which the middle class would have to rely on the federal government.

And a recording of Barack Obama from 1998 has recently surfaced, and it reveals both an ideological and a political desire to expand government dependency. Here’s an excerpt from the Daily Caller.

The Daily Caller has obtained a complete audio recording of the October 19, 1998 Loyola College forum on community organizing and policymaking during which a future President Barack Obama said he favored the government redistribution of wealth. …Obama also said he viewed welfare recipients and “the working poor” as “a majority coalition” that could be mobilized to help advance progressive policies and elect their champions. …The full recording reveals that Obama saw welfare recipients and the working poor in Chicago as a “majority coalition” who could be leveraged politically.“What I think will re-engage people in politics is if we’re doing significant, serious policy work around what I will label the ‘working poor,’” he said… “They are struggling. And to the extent that we are doing research figuring out what kinds of government action would successfully make their lives better, we are then putting together a potential majority coalition to move those agendas forward.”

Set aside the policy arguments here about redistribution undermining progress in the fight against poverty and making it difficult for the less fortunate to climb the economic ladder.

What’s significant is the extent to which Clinton’s pollster and Obama both explicitly talk about redistribution as a political tool. Take money from a minority (i.e., class-warfare tax policy) and give it to enough voters to create a political majority.

I hate to admit it, but the evidence from Europe shows this can be a successful political strategy.

The only downside – as shown in this parable about beer and this great Chuck Asay cartoon – is that the scam only works so long as there are people willing to get fleeced.

I once argued on TV that leftists should be careful not to be too greedy because it doesn’t make sense for parasites to kill their host animals. And Michael Barone made the same point in a more eloquent fashion.

But I think this analysis is flawed. The Greek politicians who created the welfare state were very successful in buying votes. They’re now out of office, either dead or retired with fat pensions, as the house of cards is collapsing.

So if you’re Obama or some other current-day politician (and assuming you don’t care about the future), what’s the downside of expanding the burden of government spending?

P.S. You can vote for who had the best Debate Club argument, so please don’t hesitate to click the up arrow. Presumably thanks to readers of International Liberty, I’ve prevailed in previous debates on double taxation, European fiscal policy, flat tax, Internet taxation, and Obamanomics.

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Back in 2010, I wrote about the Free State Project, which is based on the idea that libertarians should all move to New Hampshire and turn the state into a free market experiment.

I was impressed when I spoke at one of their conferences and gave them a plug, but more recently I’m running into people who are so discouraged about America’s fiscal outlook that they’re thinking of moving to some other nation.

Wealthy people seem to prefer Switzerland and the Cayman Islands, while middle-class people mostly talk about Australia and Latin America (mainly Costa Rica or Panama).

But maybe Canada is the place to go. It’s now the 5th-freest economy in the world, while the United States has dropped to 18th place.

I’m a big fan of Canada’s fiscal reforms. On several occasions, I’ve explained how Canadian lawmakers boosted economic and fiscal performance by restraining the growth of government spending.

Indeed, Canada is my main example when I explain why the United States should follow my Golden Rule of fiscal policy.

By allowing the private sector to grow faster than the government, Canada has also been able to implement big tax cuts. Heck, they even privatized their air traffic control system.

Canada’s reforms got some positive attention in today’s Wall Street Journal from Mary Anastasia O’Grady.

Former Canadian Prime Minister Paul Martin has a stern warning for the U.S. political class: Get real about the gap between federal revenues and spending, or get ready for disaster. Mr. Martin knows of what he speaks. In 1993, when he was Canada’s finance minister, his country faced a daunting fiscal crisis. …When the Liberal Party government of Prime Minister Jean Chrétien took power in October 1993, Mr. Martin was charged with pulling his nation out of the fiscal death spiral. He did it with deep cuts in federal spending over two years that amounted to 10% of the budget, excluding interest costs. Nothing was spared. Even federal transfers to the provinces to fund Canada’s sacred national health-care system got hit. The federal government also cut and block-granted money for welfare programs to the provinces, giving them almost full control over how the money would be spent. In the 1997 election, the Liberals increased their majority in parliament. The Chrétien government followed with tax cuts starting in 1998 and one of the largest tax cuts—both corporate and personal—in the history of the country in 2000. The Liberals won again in 2000.

In the U.S., by contrast, we’ve degenerated to the point where the central bank is now financing a disturbingly large share of the deficit.

 Market discipline doesn’t exist in Washington, which has the “privilege” of an accommodating central bank issuing the world’s reserve currency. The big spenders don’t need to pay attention to pesky numbers. …the Fed bought 77% of all new federal debt last year. It is doing so at rock-bottom interest rates. By holding the short-term fed-funds rate low while it buys up long-term securities, Mr. Bernanke is helping our political class ignore the real cost of rising federal indebtedness.

This doesn’t mean we’re at near-term risk of becoming another Argentina or Zimbabwe, but I definitely don’t like the trend. No wonder the Canadian dollar is now stronger than the dollar.

But that’s a separate issue. This post is mostly about fiscal policy and Canada’s outlook.

In the short run, Canada’s a good bet. Reforms have been implemented, and they happened under a left-of-center government and have been continued more recently by a right-of-center government.

We’ve had bipartisanship in the United States as well, but the wrong kind. For the past 12 years, we’ve endured big spenders from both parties. No wonder Canada now ranks higher.

In the long run, though, I’m not sure Canada’s the right choice. I joke about the cold weather, but I’m more concerned about the fact that the burden of government spending remains too high, consuming about 42 percent of economic output. And even though Canada has implemented some pension reforms, it has a government-run healthcare system that will become a greater burden on taxpayers as the population ages.

This doesn’t mean I’m optimistic about the long-run outlook in the United States. Yes, we can fix our fiscal problems if we cap the growth of spending and implement entitlement reform to address the long-run problem, but I’m not holding my breath expecting those policies.

So I’m back to my original plan of finding somebody to give me millions of dollars so I can escape to the Cayman Islands.

P.S. If you’re thinking of sending me a big check, give me some advance notice. To avoid nasty headaches with the IRS, I should go to the Cayman Islands first and then have somebody give me millions of dollars.

P.P.S. On a more serious note, here’s my video highlighting nations – including Canada – that successfully restrained government spending.

P.P.P.S. The Canadian government also deserves praise for resisting global schemes to raise taxes on the banking sector.

P.P.P.P.S. But there are bad people in Canada, such as the politician who escaped to the U.S. for surgery while leaving ordinary Canadians stuck in long waiting lines.

P.P.P.P.P.S. To close on a light note, here’s a satirical article about American leftists trying to escape to Canada after the 2010 elections.

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I’ve written many times about the dangers of a value-added tax. I obviously think it’s a bad idea as an add-on tax, but I also think it’s dangerous as a replacement tax.

Not because it’s a horrible tax from a theoretical perspective (like the flat tax and national sales tax, it’s a single-rate system with no double taxation of income that is saved and invested), but instead because I don’t trust politicians.

The VAT in Europe, for instance, almost surely played a role in enabling the huge expansion in the burden of government spending – thus helping to set the stage for the current fiscal crisis.

All these arguments also are equally relevant to the debate about imposing a carbon tax.

As with the VAT, there are features of a carbon tax that make it a less-destructive alternative when compared to other forms of taxation. The problem is that politicians wouldn’t permanently lower or eliminate any other tax, and the new revenues would be used to further expand the size and scope of the federal government.

Andy Quinlan of the Center for Freedom and Prosperity discusses the issue in a column for Forbes. Here are some key excerpts.

With the economy sputtering toward what can at best be described as a meager recovery, it seems like an obviously poor time to consider raising taxes on any form of energy. …Yet that is also precisely what an unholy coalition of big spending liberals and misguided conservative economists is proposing – to raise taxes on carbon and send the economy spiraling toward another recession. Last month, Rep. Jim McDermott (D-WA) introduced the “Managed Carbon Price Act of 2012,” a bill that would require greenhouse gas emissions to be reduced by 80% from 2005 levels over the next 42 years – ultimately leaving the United States with per capita emissions levels lower than that of Haiti today. …At the fifth annual National Clean Energy Summit held in Las Vegas last month, Senate Majority Leader Harry Reid expressed his hope of enacting a carbon tax by next year. Senate Environment and Public Works Chairman Barbara Boxer went as far as to say that she would like to see it included in a year-end budget deal. …The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending. …If the political climate was such that cap-and-trade or other big government carbon regulations were on the horizon, proffering a more economically efficient carbon tax as an alternative might not be a bad strategy from a do-the-wrong-thing-in-the-least-destructive-fashion perspective. But that is not the case. …More generally, the very idea of offering a new tax in exchange for lower rates elsewhere is flawed. Even if leftists agree to lower taxes on income to keep a new carbon tax revenue neutral, there’s nothing to stop them from raising rates in the future. On the other hand, given the love politicians have for taxes, eliminating an entire tax would be much harder. A similar logic can be seen in the experience of Europe, where less economically destructive value-added taxes did not replace income taxes, but instead helped usher in the bloated, unsustainable European welfare states which are today circling the drain.

Wow, Reid, Boxer, and McDermott. That’s like the Three Stooges of Statism.

But this isn’t a laughing matter. Politicians would love to get their greedy hands on $1.5 trillion of new tax revenue. And Quinlan points out in the article that some Republicans are sympathetic to the idea.

Keep in mind, by the way, that $1.5 trillion would be the floor, not the ceiling. As we’re seeing in Japan, politicians can’t resist boosting the rate whenever they want to spend more money.

P.S. Read this if you want to see what happens when politicians get a new source of revenue.

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