The First World War and the Costly Burden of Obamanomics

What does World War I have to do with Obamanomics?

There’s no real connection, of course, but it did give me an opportunity to present a good analogy. At a conference in London last week, I was discussing with some folks the state of the American economy and the role of public policy.

I was trying to explain what’s happened in the past few years, describing the avalanche of bad policy last decade, culminating with the faux stimulus in 2009 and the enactment of Obamacare in 2010.

I then said that Obama’s efforts to impose further statism have been largely stymied, particularly after the Tea Party election of 2010. There have been lots of skirmishes in recent years, to be sure, with Obama winning a few (such as the recent imposition of “net neutrality” regulations on the Internet) but also losing a few (such as spending restraint caused by policies like the sequester).

But the fact that Obama hasn’t been able to make additional “progress” is not really a victory. It’s simply a stalemate.

And that’s where the World War I analogy fits. As I was trying to get across my point, it occurred to me that it’s vaguely like World War I.

When the war started, the Germans gained considerable ground, overrunning much of Belgium and a lot of territory in northwestern France. That’s akin to Obama’s victories in 2009-2010.

But then the period of trench warfare began and neither side made much progress. And that’s a good description of what’s been happening in recent years in Washington.

This is a good news-bad news situation. To continue with my analogy, the good news is that Obama isn’t conquering more territory. The bad news is that we aren’t pushing Obama back into Germany and reclaiming territory.

And so long as we’re in this stalemate, it’s unlikely that we’ll enjoy robust economic growth. And that’s our topic for today.

In my actual speech, I dusted off my charts based on Minneapolis Fed data, and updated them to compare today’s weak recovery with what’s happened during previous business cycles. And I specifically focused on a comparison of the very strong growth of the Reagan years with the lackluster growth of the Obama years.

But it’s a pity that my speech wasn’t one week later, because I’ve just seen some really good contributions on the same topic from economists Robert Higgs and John Taylor.

Writing for the Independent Institute, Higgs looks at what’s been happening with a key measure of our prosperity.

Arguably the best single, currently available measure of the entire public’s payoff from economic activity is real disposable income per capita. This is the average amount per annum that Americans receive in exchange for the use of their labor and other input services, after taxes, corrected for changes in the purchasing power of the dollar. …this measure of economic well-being has scarcely increased at all since 2007.

Higgs also prepared a table to make it easier to compare performance of this important variable during various business cycles.

As you can see, the current “recovery” has been dismal compared to previous periods.

And here’s his analysis of why we’re suffering from sub-par growth.

These figures demonstrate that even though the rate of increase has varied substantially in the past, it has never remained so low as it has been in recent years. Even during the decade of so-called stagflation from the early 1970s to the early 1980s, real disposable income per capita grew more than twice as fast as it has grown in the past seven years. In the past, recessions were always followed by relatively brisk growth during the first several years of the ensuing recovery. Such has not been the case this time. Nor do forecasters anticipate any such surge of growth in the future. Might it be that the state’s burdens loaded onto the private producers of wealth—taxes, regulations, uncertainties, intrusions of all sorts, including demands for elaborate reports, asset seizures, and threats of felony prosecution for completely innocent and harmless actions—have finally become the “last straw” for these long-suffering camels? …the current situation is clear enough. The U.S. economy, though not yet completely stagnant, has made little headway for more than seven years, and there is little reason to foresee any great change in this regard.

Returning to my analogy, Higgs is basically saying that we’ll be mired in trench warfare for the foreseeable future.

Not exactly a rosy projection.

Now let’s look at the analysis of Professor John Taylor of Stanford University. He starts by walking through a timeline of the current “recovery.”

At the time of the first anniversary of current recovery in 2010, it showed clear signs of weakness compared to the recovery from the recessions in the early 1980s and from all other deep recessions in American history.  …By the recovery’s second anniversary in 2011, it was weak for long enough that I called it “a recovery in name only, so weak as to be nonexistent.” …By the recovery’s third anniversary in 2012, it was now the worst recovery from a deep recession in American history. …By the recovery’s fourth anniversary in 2013, few disputed any more that it was unusually weak and disappointing.  …By the recovery’s fifth anniversary, we were so far away from the recession that linking the terrible performance to the recession became increasing far-fetched.

Professor Taylor has a couple of charts of his own that bolster his argument.

Here’s a comparison of quarterly growth during the Obama recovery and Reagan recovery.

If you’re keeping score, Reagan’s economy out-performed Obama’s economy (often by a very wide margin) in 19 out of 22 quarters.

If this was a boxing match, it would have been stopped long ago.

Taylor also looks at the performance of the labor market during the Obama recovery and Reagan recovery.

Once again, there’s no comparison. During the Reagan years more people were working and adding to the productive capacity of the nation.

During the Obama years, by contrast, the most optimistic assessment is that we’re treading water.

Here’s more of his analysis about the ongoing stagnation.

With the recovery now approaching its sixth anniversary, there is more optimism that we are finally coming out the excruciating slow growth. There is also some wishful thinking that the drop of people out of the labor force—which has made the unemployment rate come down—is due to demographic factors not the slow growth itself. And we are not as bad as Europe. But as these charts show there is still not much in this recovery to write home about. Growth over the four quarters of 2014 looks to average only 2.2% compared with 4.4% in the corresponding quarters of the 1980s recovery. And as of January 2015 the employment-to-population ratio is still lower than at the start of the recovery.

So what’s the bottom line?

To be blunt, you can’t make America more like Europe and then be surprised that our economy isn’t firing on all cylinders.

Returning to our analogy, we need to defeat the enemy of statism and reclaim our lost territory.

But that won’t happen until 2017 at the earliest. And it’s possible it will never happen, particularly if we don’t implement genuine entitlement reform.

P.S. The bad news is that we’re becoming more like Europe. The good news is that we’re not there yet. Our overall burden of government has expanded, but we still have considerably more economic liberty than the average European nation. And that helps to explain why our recovery (even though anemic by American standards) is far more impressive than what’s been happening across the Atlantic.

P.P.S. Based on insightful analysis from Thomas Sowell, John Mackey, and Ronald Reagan, it may have been more accurate (albeit snarky and inappropriate) to have used a World War II example, with Obama’s first two years being akin to the Nazi blitzkrieg and the conquest of France, and recent years being akin to the period between the Battle of Britain and D-Day.

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The Laffer Curve, Tax Progressivity, and Government Revenue: What’s the Higher Priority for Leftists, Raising Revenue or Punishing Success?

On the issue of so-called progressive taxation, our left-wing friends have conflicting goals. Some of them want to maximize tax revenue in order to finance ever-bigger government.

But others are much more motivated by a desire to punish success. They want high tax rates on the “rich” even if the government collects less revenue.

Some of them simply pretend there isn’t a conflict, as you might imagine. They childishly assert that the Laffer Curve doesn’t exist and that upper-income taxpayers are fiscal pinatas, capable of generating never-ending amounts of tax revenue.

But more rational leftists admit that the Laffer Curve is real. They may argue that the revenue-maximizing rate is up around 70 percent, which is grossly inconsistent with the evidence from the 1980s, but at least they understand that successful taxpayers can and do respond when tax rates increase.

So the question for grown-up leftists is simple: What’s the answer if they have to choose between collecting more revenue and punishing the rich with class-warfare taxation?

And here’s some new research looking at this tradeoff. Authored by economists from the University of Oslo in Norway, École polytechnique de Lausanne in France, and the University of Pennsylvania, they look at “Tax progressivity and the government’s ability to collect additional tax revenue.”

The recent massive expansion of public debt around the world during the Great Recession raises the question how much debt a government can maximally service by raising the level of taxes. Or, to phrase this classic public finance question differently, how much additional tax revenue can the government generate by increasing income taxes?

And since they’re part of the real world (unlike, say, the Joint Committee on Taxation or the Obama Administration), they recognize that higher tax rates impose costs on the economy that lead to feedback effects on tax revenue.

Our research (Holter et al. 2014) investigates how tax progressivity and household heterogeneity impacts the Laffer curve. We argue that a more progressive labour income tax schedule significantly reduces the maximal amount of tax revenues a government can raise…under progressive taxes heterogeneous workers will face different average and marginal tax rates. …the answer to our question is closely connected to the individual (and then properly aggregated) response of labour supply to taxes. The microeconometric literature, as surveyed e.g. by Keane (2011), has found that both the intensive and extensive margins of labour supply (the latter especially for women), life-cycle considerations, and human capital accumulation are important determinants of these individual responses. …households make a consumption–savings choice and decide on whether or not to participate in the labour market (the extensive margin), how many hours to work conditional on participation (the intensive margin), and thus how much labour market experience to accumulate (which in turn partially determines future earnings capacities).

The above passage has a bit of economic jargon, but it’s simply saying that taxpayers respond to incentives.

They also provide estimates of tax progressivity for various developed nations. They’re only looking at the personal income tax, so these numbers don’t include, for instance, the heavy burden of the value-added tax on low-income people in Europe.

The good news (at least relatively speaking) is that the American income tax is not as punitive as it is in many other nations.

But the key thing to consider, at least in the context of this new research, is the degree to which so-called progressivity comes with a high price.

Here is some additional analysis from their research.

Why does the degree of tax progressivity matter for the government’s ability to generate labour income tax revenues…? changes in tax progressivity typically affects hours worked…increasing tax progressivity induces differential income and substitution effects on the workers in different parts of the earnings distribution. …a more progressive tax system may disproportionately reduce labour supply for high earners and lead to a reduction in tax revenue. …more progressive taxes will reduce the incentives for young agents to accumulate labour market experience and become high (and thus more highly taxed) earners.

Now let’s look at some of the results.

Remarkably, they find that the best way of maximizing revenue is to minimize the economic damage of the tax system. And that means…drum roll, please…a flat tax.

For its current choice of progressivity (the green line), the US can sustain a debt burden of about 330% of its benchmark GDP, by increasing the average tax rate to about 42%. Thus, according to our findings the US is currently still nowhere close to its maximally sustainable debt levels…we also observe that larger public debt can be sustained with a less progressive tax system. Converting to a flat tax system (the black line) increases the maximum sustainable debt to more than 350% of benchmark GDP, whereas adopting Danish tax progressivity lowers it to less than 250% of benchmark GDP.

Here are a couple of charts from their study, both of which underscore that punitive tax rates are very counterproductive, assuming the goal is to either maximize revenue or to sustain a larger public sector.

Notice that if you want to punish “the rich” and impose Danish-type levels of progressivity (the dashed line), you’ll get less revenue and won’t be able to sustain as much debt.

Now let’s shift from discussing intellectual quandaries for the left and talk about challenges for believers in limited government.

We like a flat tax because it treats people equally and it raises revenue in a relatively non-destructive manner.

But because it is an “efficient” form of taxation, it’s also an “efficient” way to generate revenues to finance bigger government.

Indeed, this was one of the findings in a 1998 study by Professors Gary Becker and Casey Mulligan.

So does this mean that instead of supporting a flat tax, we should a loophole-riddled system based on high tax rates solely because that system will be so inefficient that it won’t generate revenue?

Of course not. At the risk of stating the obvious, this is why my work on fundamental tax reform is intertwined with my work on constitutional and legal mechanisms to limit the size and scope of government.

And it’s also why Obama’s class-warfare approach is so perversely destructive. If you think I’m exaggerating, watch this video – especially beginning about the 4:30 mark.

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The State Department’s Refugee Program Shouldn’t be a Terrorist-Funding Welfare Scam

While immigration is a very contentious issue for the politicians in Washington, there’s actually some level of agreement among people in the real world.

Almost everybody agrees that it would be foolish and short-sighted not to allow some immigration, particularly from young, educated people with valuable skills.

Similarly, there is widespread agreement that you can’t have completely open borders, particularly for those who are unlikely to be net contributors to the economy.

So the real debate (and this is where there is a lot of room for disagreement) is who gets to come to America and under what conditions.

I don’t raise this issue because I have any wise words – much less proposed solutions – on the overall issue of immigration.

Instead, let’s look at the profoundly perverse way that the federal government is using the refugee program to expand the problem of dependency.

Here are some excerpts from a disturbing story in the Washington Times.

The State Department has helped to relocate tens of thousands of refugees from the war-torn African nation of Somalia to Minnesota, where they can take advantage of some of America’s most generous welfare and charity programs. …Most of Minnesota’s Somali population started off as legal refugees through a program administered by the U.S. State Department through the Bureau of Population, Refugees, and Migration. Minnesota was selected among the nation’s states for relocation primarily because of its robust entitlement offerings.

Gee, isn’t that wonderful. We’re bringing people into the country and settling them where they can get the largest amount of handouts.

And apparently that’s Minnesota, the France of America.

“Minnesota is exceptional in many ways but it’s the closest thing in the United States to a true social democratic state,” said Ahmed Samatar, a professor of international studies at Macalester College, in St. Paul. “That translates into the way Somali refugees have been received here they’ve been given a secure environment, housing, education, health care, perhaps even some minimum income to sustain them until they can stand on their own feet. That’s all provided by Minnesota,” said Mr. Samatar, who has tracked the State Department’s refugee program. Outside Alaska, Minnesota spends more per low-income person on public welfare than any other state in the U.S., according to a report by the Center for the American Experiment, a think tank located in Minneapolis. The report found Minnesota outspent its average peer state in welfare subsidies by nearly $4,000.

Oh, just in case you’re thinking that maybe the situation isn’t so bad because at least private charities are involved, it turns out that those organizations are simply contractors for the government.

…the…charitable organizations operating within the state with which the State Department contracts …In addition to its generous welfare subsidies, Minnesota also has a number of charitable organizations that contract with the State Department like Lutheran Social Services, Catholic Charities, and World Relief Minnesota.

In other words, taxpayers are getting hit twice, once for official welfare payments and once for coerced “charity” laundered through groups jostling for space at the public trough.

At this point, you may be wondering whether all this spending is having a desirable effect?

As taxpayers, are we getting value for our money?

Yes, but only if you define dependency and unemployment as valuable.

Even though Minnesota has a good job market, that doesn’t seem to have translated into jobs for the Somali refugees. Minnesota’s state demographer’s office reports that only 41 percent of Somali men are working and 54 percent of Somali women are employed, meaning many may rely on the state’s handouts to survive, and are more susceptible to extremists pull. “It seems safe to assume that if they’re not working, then they’re likely receiving public welfare benefits,” said Peter Nelson, director of public policy at the Center of the American Experiment.

Amazingly, the left-wing governor of the state has doubled down on failure, expanding handouts.

Gov. Mark Dayton has expanded the state’s entitlement programs, although he remains mum on the state’s expense at doing so.

Though, to be fair, maybe he doesn’t care because Uncle Sam is the sugar daddy, picking up a big part of the tab.

“The state of Minnesota receives funding through the federal Department of Health and Human Services, Office of Refugee Resettlement to promote the successful resettlement and integration of refugees in Minnesota,” said a spokeswoman at the state’s Department of Human Services. …Minnesotans have also welcomed them onto their entitlement rolls, with the state’s cash assistance and food stamp programs, skyrocketing in recent years. The number of Somali adults and children who participated in the Minnesota’s family cash assistance program jumped 34 percent from 2008 to 2013, according to the state’s statistics. Likewise, Minnesota’s food assistance participation increased 98 percent, to 17,300 adults and children, which does not include U.S.-born Somalis, in the same timeframe.

At this point, you’re probably very upset. At least if you’re a taxpayer.

After all, haven’t we learned from painful experience that redistribution subsidizes poverty?

But I’ve saved the “best” for last.

…the effort is having the unintended consequence of creating an enclave of immigrants with high unemployment that is both stressing the state’s safety net and creating a rich pool of potential recruiting targets for Islamist terror groups. This population is…being targeted by Islamist terror organizations like the Islamic State and al-Shabab, a Somalia-based group with links to al Qaeda, according to U.S. officials. Among Minnesota-based Somali-Americans, American converts to Islam or Somali refugees, there have been numerous convictions for various levels of collaboration with Islamist terror groups, plus reports of fighting with al-Shabab or other Islamist groups.

Yup, tax dollars for terrorists.

It seems that these bums want a little excitement in their lives.

So they’re joining al-Shabab.

Since 2008, as many as 40 men from Minneapolis have joined Islamist groups after being pulled in by jihadists through social media, federal officials say. Last year, an American youth named Douglas McAuthur McCain died in Syria fighting for the Islamic State. Mr. McCain was recruited in Minnesota, where he lived. In 2009, another Minnesota youth, Troy Kastigar posted a recruiting video for al-Shabab before he was killed fighting for the terrorist group in Somalia. Kastigar and McCain are thought to have been friends. That same year a Somali man who left Minneapolis joined al-Shabab and blew himself up in a suicide bombing at an Ethiopian consulate in Somalia, killing 24 people.

Just like the Tsarnaev brothers. Just like the deadbeat scrounger from Australia, the nutjob moocher from the United Kingdom, and the wacko sponge in France.

So now let’s circle back to our main question. Why is the federal government bringing people into the country, luring them into dependency, and subsidizing terrorism?

Leftists sometimes like to tell us that “Government is simply the name for the things we do together.”

Well, “we” do some really stupid stuff when we act “together” through government.

Instead of a misguided refugee program that steers dodgy people into dependency, why not – with a condition of no handouts or dependency – open the door to Chinese engineers? Romanian software experts? Or Indian scientists? How about Nigerian businessmen? Maybe French doctors?

But I guess people who would assimilate and contribute to our economy aren’t as attractive as welfare recipients who despise our culture.

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Shut Down the Department of Education, End Federal Government Involvement and Intervention

To save the nation from a future Greek-style fiscal meltdown, we should reform entitlements.

But as part of the effort to restore limited, constitutional government, we also should shut down various departments that deal with issues that shouldn’t be handled by the central government.

I’ve already identified some low-hanging fruit.

Get rid of the Department of Housing and Urban Development.

Shut down the Department of Agriculture.

Eliminate the Department of Transportation.

We need to add the Department of Education to the list. And maybe even make it one of the first targets.

Increasing federal involvement and intervention, after all, is associated with more spending and more bureaucracy, but NOT better educational outcomes.

Politicians in Washington periodically try to “reform” the status quo, but rearranging the deck chairs on the Titanic never works. And that’s true whether you look at the results of GOP plans, like Bush’s no-bureaucrat-left-behind scheme, or Democratic plans, like Obama’s Common Core.

The good news, as explained by the Washington Examiner, is that Congress is finally considering legislation that would reduce the federal government’s footprint.

There are some good things about this bill, which will serve as the reauthorization of former President George W. Bush’s No Child Left Behind law. Importantly, the bill removes the Education Department’s ability to bludgeon states into adopting the controversial Common Core standards. The legislative language specifically forbids both direct and indirect attempts “to influence, incentivize, or coerce” states’ decisions. …The Student Success Act is therefore a step in the right direction, because it returns educational decisions to their rightful place — the state (or local) level. It is also positive in that it eliminates nearly 70 Department of Education programs, replacing them with more flexible grants to the states.

But the bad news is that the legislation doesn’t go nearly far enough. Federal involvement is a gaping wound caused by a compound fracture, while the so-called Student Success Act is a band-aid.

…as a vehicle for moving the federal government away from micromanaging schools that should fall entirely under state and local control, the bill is disappointing. …the recent explosion of federal spending and federal control in education over the last few decades has failed to produce any significant improvement in outcomes. Reading and math proficiency have hardly budged. …the federal government’s still-modest financial contribution to primary and secondary education has come with strings that give Washington an inordinate say over state education policy. …The Student Success Act…leaves federal spending on primary and secondary education at the elevated levels of the Bush era. It also fails to provide states with an opt-out.

To be sure, there’s no realistic way of making significant progress with Obama in the White House.

But the long-run battle will never be won unless reform-minded lawmakers make the principled case. Here’s the bottom line.

Education is one area where the federal government has long resisted accepting the evidence or heeding its constitutional limitations. …Republicans should be looking forward to a post-Obama opportunity to do it for real — to end federal experimentation and meddling in primary and secondary education and letting states set their own policies.

Amen.

But now let’s acknowledge that ending federal involvement and intervention should be just the first step on a long journey.

State governments are capable of wasting money and getting poor results.

Local governments also have shown that they can be similarly profligate and ineffective.

Indeed, when you add together total federal/state/local spending and then look at the actual results (whether kids are getting educated), the United States does an embarrassingly bad job.

The ultimate answer is to end the government education monopoly and shift to a system based on choice and competition.

Fortunately, we already have strong evidence that such an approach yields superior outcomes.

To be sure, school choice doesn’t automatically mean every child will be an educational success, but evidence from Sweden, Chile, and the Netherlands shows good results after breaking up state-run education monopolies.

P.S. Let’s close with a bit of humor showing the evolution of math lessons in government schools.

P.P.S. If you want some unintentional humor, the New York Times thinks that government education spending has been reduced.

P.P.P.S. And you’ll also be amused (and outraged and disgusted) by the truly bizarre examples of political correctness in government schools.

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The Joy of Welfare-Funded Holiday Trips to Bali and Dubai

Since I’m in the United Kingdom, it’s appropriate to announce that another Briton has been elected to the Moocher Hall of Fame.

Ms. Kay Bird deserves this “honor” because it takes a very reprehensible entitlement mentality to brag about taking a global holiday with welfare cash.

And we’re talking about a global holiday that appears to be far more extravagant than the foreign trips enjoyed by Natalija, another member of the Moocher Hall of Fame.

Here are some of the jaw-dropping details from a report in the U.K.-based Daily Mail.

A single mother on benefits has admitted spending £3,000 of taxpayers’ cash on a dream round-the-world trip to far flung destinations with her 10-month-old baby daughter. ...she still receives more than £8,500 a year in child benefit, income support and tax credits as it is considered that she has a low income. …she visited places such as Australia, Bali and Dubai. Miss Bird says she could work but chooses not to… She said: ‘No, I don’t need the money as such and I didn’t need to go travelling either but I wanted to so I did. ‘If someone’s offering you free money and telling you to take it, you’d have to be a fool not to – that’s all I did. …‘I don’t feel guilty and I don’t regret it. It started off just as a ­holiday to Athens, then things started to fall into place.

Let’s think through her statement about “free money.” Is she really so clueless that she doesn’t realize that her handouts are only possible because other people are actually working and producing?

She says “I don’t feel guilty,” which is remarkable because I doubt taxpayers who financed her jaunt have ever been to Dubai and Bali.

‘Each time some more money landed in my account, I booked something. ‘I started booking flights and accommodation in Europe in October and was booking something with every payment until a few days before I went.’ …She also visited Athens, Istanbul, Dubai, Colombo in Sri Lanka, Kuala Lumpur, Jakarta, Bali and Darwin before returning home via Amsterdam. In total, she spent four months worth of her benefits cash on the trip, paying for 13 flights, travel visas, accommodation and spending money. Her benefits continued to be paid into her bank account while she was away and she returned to the UK just before the five-week travel limit imposed on people claiming Jobseekers’ Allowance.

I have to confess that I’m mystified how someone who chooses not to work can get a handout called “jobseekers’ allowance.” I wonder if MHoF members Danny and Gina are benefiting from the same scam?

In any event, the bureaucrats seem more concerned with enabling welfare fraud than in protecting the interests of taxpayers.

She added: ‘I went to the job centre and told them I wanted to go travelling and they told me there was a five-week limit. I came home just within those five weeks so my benefits didn’t get cut off.’ …she was claiming £90 a week income support, £90 a month child benefit and £230 a month in tax credits. She said: ‘I told them I wanted to register back in the country and they told me I was already eligible for Jobseekers’ Allowance. ‘Then a couple of weeks later they said I could switch to income support which meant I didn’t even have to apply for jobs. ‘Then I was told I could get tax credits, too. I was really shocked at how generous it was but I wasn’t going to turn it down.’

I’m sure British taxpayers will be delighted to learn that Ms. Bird is already planning her next welfare-financed overseas holiday.

Now she says she is planning her next luxury trip for herself and daughter which will be to New Zealand. …She explained: ‘I’m not your regular single mum on benefits who spends it all in McDonald’s and never leaves the town they were born in. ‘I’m changing the image of what it is to be a benefits mum and proving that if you do it the right way, you can have ­anything you want. …’Of course people are negative and many people get very jealous. ‘But I had only been out of Europe once before I went on benefits and now I’ve had the chance to see some incredible things from tropical beaches to the ­skyscrapers of Dubai. ‘I never would have been able to afford it without benefits.’

Gee, doesn’t that warm your heart. She’s a trailblazer, showing other deadbeats how you can live like a jet-setter with other people paying the bills!

Yes, Ms. Bird definitely deserves to be in the Moocher Hal of Fame.

P.S. Since we’re talking about reprehensible welfare moochers, let’s shift from the U.K. to Australia.

It appears that there are lots of Aussie Muslims who want to join the “Terror Wing” of the Moocher Hall of Fame.

Here are some excerpts in a story from the Aussie-based Daily Telegraph.

A federal investigation into the welfare status of Australian foreign fighters, prompted last year by revelations in The Telegraph, shows 96 per cent had been on welfare benefits when they fled to the Middle East. Most had continued to collect payments from Australian taxpayers while training with Islamic State to become terrorists intent on wanting to kill Australians. The investigation has captured the records of 57 Australians who left the country before October last year to fight with the Islamic State. Of that number 55 have been confirmed to have been on welfare payments.

Wow, 96 percent of the identified terrorists who came from Australia were subsidized by taxpayers.

And there are more welfare-fueled terrorists on the way, perhaps recruited by Abdul, who’s been sponging off Australian taxpayers for about two decades.

Since then, an estimated 50 more Australians have ­illegally travelled to the Middle East to join IS, with most believed to have been claiming some form of benefit. A subsequent audit of this group confirmed that most had been at one time in ­receipt of benefits such as Newstart, sickness, youth and carer’s allowances, as well as the Disability Support Pension.

So let’s summarize. Able-bodied young men who are healthy enough to join a fight in the Middle East somehow were somehow so helpless that they needed welfare handouts to survive in Australia.

In reality, of course, these low-life deadbeats surely were capable of working, but they doubtlessly thought it was wonderful that the people they hate were subsidizing their sloth.

All the more reason why policymakers in all nations should reduce the size of the welfare state.

But it’s equally important to decentralize so that local and regional governments are responsible for redistribution programs. Under such an approach, I suspect we’d be far more likely to see the imposition of standards to preclude mooching by able-bodied adults, whether they’re run-of-the-mill moochers or terrorists-in-training.

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In the Case of Asset Forfeiture, the Moral Case against Big Government Is even more Compelling than the Economic Case

Earlier today, I gave a speech to some folks at London’s Institute of Economic Affairs about the failure of global financial regulation.

I touched on some predictable themes:

The absence of cost/benefit analysis for regulatory initiatives.

The failure of anti-money laundering laws and their harmful impact on the poor.

How one-size-fits-all Basel rules led to imprudent risk and misallocation of capital.

How anti-tax competition schemes impose high costs on the financial system (which get passed on to financial consumers).

One thing I noticed, though, is that I didn’t get overly passionate when discussing these topics. I didn’t even get that worked up when talking about the OECD’s dangerous plan to create something akin to a World Tax Organization.

But I did get rather agitated when talking about how money-laundering rules and regulations have led to disgusting and reprehensible examples of so-called civil asset forfeiture.

This happens when a government decides to steal the property of citizens simply because they think it may have been involved in illegal activity.

Politicians and bureaucrats often use the failed Drug War as their rationale, but the activity doesn’t actually have to be illegal. I specifically cited the horrific example of the government stealing $35,000 from some folks in Michigan for no other reason than money from the family grocery business was generally deposited in amounts under $10,000.

I’m sure such government actions have a negative economic impact, but this is a case where the moral argument should take precedence.

Simply stated, all decent and humane people should stand united against thuggery by government.

And in an example of serendipity, after finishing my speech, I turned on my computer and came across more evidence against civil asset forfeiture.

Here are some truly disturbing passages from a report in the Detroit Free Press that showed up in my Twitter feed.

Thomas Williams was alone that November morning in 2013 when police raided his rural St. Joseph County home, wearing black masks, camouflage and holding guns at their sides. They broke down his front door with a battering ram. “We think you’re dealing marijuana,” they told Williams, a 72-year-old, retired carpenter and cancer patient who is disabled and carries a medical marijuana card. When he protested, they handcuffed him and left him on the living room floor as they ransacked his home, emptying drawers, rummaging through closets and surveying his grow room, where he was nourishing his 12 personal marijuana plants as allowed by law.

All this sounds horrible – and it is, but it gets worse.

They did not charge Williams with a crime… Instead, they took his Dodge Journey, $11,000 in cash from his home, his television, his cell phone, his shotgun and are attempting to take his Colon Township home. And they plan to keep the proceeds, auctioning off the property and putting the cash in police coffers. More than a year later, he is still fighting to get his belongings back and to hang on to his house. “I want to ask them, ‘Why? Why me?’ I gave them no reason to do this to me,” said Williams, who says he also suffers from glaucoma, a damaged disc in his back, and COPD, a lung disorder. “I’m out here minding my own business, and just wanted to be left alone.”

Why him? Well, one local attorney has a good idea of what’s really happening.

“It’s straight up theft,” said Williams’ Kalamazoo attorney, Dan Grow. “The forfeiture penalty does not match the crime. It’s absurd. …A lot of my practice is made up of these kinds of cases — middle-aged, middle-income people who have never been in trouble before. It’s all about the money.”

Just to be clear, Mr. Grow is emphasizing the utterly perverse incentive structure that exists when cops are allowed to steal money from citizens and use it to pad their own budget.

This system needs to be reformed.

And the second bit of serendipity is that a new report from the Institute for Justice showed up in my inbox. It explains why civil asset forfeiture should be abolished. And while the report focuses on the venal actions of the IRS, this reform should apply to all government agencies at all levels of government.

Civil forfeiture is the government’s power to take property suspected of involvement in a crime. Unlike criminal forfeiture, no one needs to be convicted of—or even a charged with—a crime for the government to take the property. Lax civil forfeiture standards enable the IRS to “seize first and ask questions later,” taking money without serious investigation and forcing owners into a long and difficult legal battle to try to stop the forfeiture. Any money forfeited is then used to fund further law enforcement efforts, giving agencies like the IRS an incentive to seize.

Here’s how IJ suggests that this type of abuse can be halted.

The surest way to prevent innocent people from losing money unjustly would be to end civil forfeiture and replace it with criminal forfeiture. Short of that, removing the financial incentive to seize, raising the standard of proof to forfeit and enacting other procedural reforms would help protect people from losing their bank accounts when the government has little or no proof of criminal wrongdoing.

While the Institute for Justice does great work, I don’t think they should have opened the door to halfway reforms.

Heck, even the two people who helped start up the Justice Department’s asset forfeiture program now say it should be abolished.

P.S. The Princess of the Levant is also in London, so I’m being forced to engage in tourist activities.

We took a ride on the London Eye, which wasn’t cheap but offers very good views of Big Ben, the House of Commons, Westminster Abbey, and other historic sites.

As far as I’m concerned, though, London is too cold and dreary. The only good tourism involves a warm beach in the Caribbean.

P.P.S. To close on a humorous note, here’s some anti-gun control humor with a rather pointed message.

Definitely worth adding to my collection.

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The Empirical Case for a Much Smaller Public Sector

As a fiscal policy economist who believes in individual liberty and personal responsibility, I have two goals.

1. Replace the corrupt and punitive internal revenue code with a simple and fair flat tax that raises necessary revenue in the least-destructive and least-intrusive manner possible.

2. Shrink the size of the federal government so that it only funds the core public goods, such as national defense and rule of law, envisioned by America’s Founding Fathers.

Needless to say, I haven’t been doing a great job. The tax code seems to get worse every year, and even though we’ve made some progress in recent years on spending, the long-run outlook is still very grim because there’s hasn’t been genuine entitlement reform.

But I continue with my Sisyphean task. And part of my efforts include educating people about the Rahn Curve, which is sort of the spending version of the Laffer Curve. it shows the non-linear relationship between the size of government and economic performance.

Simply stated, some government spending presumably enables growth by creating the conditions (such as rule of law and property rights) for commerce.

But as politicians learn to buy votes and enhance their power by engaging in redistribution, then government spending is associated with weaker economic performance because of perverse incentives and widespread misallocation of resources.

I’ve even shared a number of videos on the topic.

The video I narrated explaining the basics of the Rahn Curve, which was produced by the Center for Freedom and Prosperity.

A video from the Fraser Institute in Canada that reviews the evidence about the growth-maximizing size of government.

A video from the Centre for Policy Studies in the United Kingdom that explores the relationship between prosperity and the size of the public sector.

Even a video on the Rahn Curve from a critic who seems to think that I’m a closeted apologist for big government.

Now we have another video to add to the collection.

Narrated by Svetla Kostadinova of Bulgaria’s Institute for Market Economics, it discusses research from a few years ago about the “optimal size of government.”

If you want to read the research study that is cited in the video, click here. The article was written by Dimitar Chobanov and Adriana Mladenova of the IME

The evidence indicates that the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is no greater than 25% of GDP (at a 95% confidence level) based on data from the OECD countries. In addition, the evidence indicates that the optimum level of government consumption on final goods and services as a share of GDP is 10.4% based on a panel data of 81 countries. However, due to model and data limitations, it is probable that the results are biased upwards, and the “true” optimum government level is even smaller than the existing empirical study indicates.

Two points in that excerpt are worth additional attention.

First, they understand that not all forms of government spending have equal effects.

Spending on core public goods (rule of law, courts, etc) generally are associated with better economic performance.

Spending on physical and human capital (infrastructure and education) can be productive, though governments often do a poor job based on a money-to-outcomes basis.

Most government spending, though, is for transfers and consumption, and these are areas where the economic effects are overwhelmingly negative.

So kudos to the Bulgarians for recognizing that it’s particularly important to restrain some types of outlays.

The other point that merits additional emphasis is that the growth-maximizing size of government is probably far lower than 25 percent of economic output.

Here’s what they wrote, citing yours truly.

…the results from the above mentioned models should not be taken as the “true” optimal level of government due to limitations of the models, and lack of data as already discussed. As Dan Mitchell commented, government spending was about 10% of GDP in the West from the end of the Napoleonic wars to World War I. And we do not have any data to think that growth would have been higher if government was doubled or tripled. However, what the empirical results do show is that the government spending should be much less than is the average of most countries at the moment. Thus, we can confidentially say the optimum size of general government is no bigger than 25% but is likely to be considerably smaller because of the above-mentioned reasons.

And here’s their version of the Rahn Curve, though I’m not a big fan since it seems to imply that government should consume about one-third of economic output.

I much prefer the curve to show the growth-maximizing level under 20 percent of GDP.

Though I often use a dashed line to emphasize that we don’t really know the actual peak because there unfortunately are no developed nations with modest-sized public sectors.

Even Singapore and Hong Kong have governments that consume about 20 percent of economic output.

But maybe if I someday achieve my goal, we’ll have better data.

And maybe some day I’ll go back to college and play quarterback for my beloved Georgia Bulldogs.

P.S. Since I shared one video, I can’t resist also including this snippet featuring Ronald Reagan talking about libertarianism.

What impresses me most about this clip is not that Reagan endorses libertarianism.

Instead, notice how he also explains the link between modern statism and fascism.

He had a much greater depth of knowledge than even supporters realize. Which also can be seen in this clip of Reagan explaining why the Keynesians were wrong about a return to Depression after World War II.

And click here if you simply want to enjoy some classic Reagan clips. For what it’s worth, this clip from his first inauguration is my favorite.

Given my man crush on the Gipper, you also won’t be surprised to learn that this is the most encouraging poll I’ve ever seen.

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Amazing Chutzpah – and Cluelessness – from the Obama Administration

While I normally focus on jaw-dropping examples of hypocrisy by politicians, I realize that our beloved leaders also can be absurdly brazen in their exaggerations, deceptions, and prevarications.

But sometimes you can’t help but be shocked by their chutzpah.

Sort of like the time back in 2010 that a Greek politician issued an ultimatum that his country should get a giant bailout without taking the necessary steps to rein in bureaucratic bloat.

But nothing compares with Obama’s recent claim that his opponents are trying to “bamboozle” voters.

President Obama, in a fiery speech to Democrats Friday, accused Republicans of trying to “bamboozle folks,” saying their policies on middle-class issues did not reflect their lofty talk about helping ordinary Americans. …Obama went on to lambast Republicans for their opposition to his healthcare law… “Their grand predictions of doom and gloom and death panels haven’t come true,” Obama told the roomful of Democrats. “The sky hasn’t fallen. Chicken Little is quiet.”

Given the ongoing series of Obamacare disasters, I think there’s a strong case to be made that the American people have suffered some doom and gloom.

But I’m more amazed that the President, while defending his health plan, actually had the gall to accuse others of trying to “bamboozle.”

This from the President who prevaricated when he said people could keep their doctor.

This from the President who dissembled when he said health policies would be $2500 cheaper.

This from the President who lied when he said people could keep their health plans.

This from the President who took liberties with the truth when asserting that a new entitlement would be fiscally responsible.

I could continue, but you get the point. Virtually every claim he made about Obamacare has turned out to be a falsehood, yet he wants to accuse others of bamboozling. Amazing.

Now let’s shift to another example of the Obama Administration doing something really amazing. I wouldn’t put this in the hypocrisy category of the chutzpah category.

I’m not sure if there are words that suffice, so let’s just look at this tweet from an official State Department twitter account. It’s criticizing ISIS for raising taxes on cell phone service.

I’m sure ISIS deserves lots of criticism for many things. And I certainly don’t object to nailing them for tax hikes.

But what’s astounding is that the Obama bureaucrats didn’t bother to do the slightest bit of research. Had they done their homework, they would have realized they were throwing boulders in a glass house.

As anyone with a cell phone bill knows, phone taxes in America are significantly higher than what ISIS is charging (1000 Syrian Pounds every two months breaks down to about $2.75 per month). In fact, cell phone taxes in America make up 17 percent of monthly bills on average, while in some states it totals as high as 34 percent—charges which can easily run ten times ISIS’ monthly fee.

Heck, let’s set aside the example of cell phone taxes and look at the big picture. The American people are pillaged by higher taxes over and over again and we also get crappy government in exchange.

So if paying taxes for “poor service” makes a government illegitimate, I guess that means the State Department thinks the President should resign.

Gee, who knew that there were rabid libertarians working for this Administration.

P.S. There have been other “libertarian moments from Obama and his people, however insincere.

We have a president who thinks the government shouldn’t confiscate more than 20 percent of a company’s income, but he only gives that advice when he’s in Ghana.

And the same president says it’s time to “let the market work on its own,” but he only says that when talking about China’s economy.

We have more evidence that the President understands the dangers of class-warfare taxation and burdensome government spending. At least when he’s not talking about American fiscal policy.

And the President even applauds foreign voters on occasion when they reject big government.

If only we could get him to have this attitude inside America’s borders.

 

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Green Energy, Corruption, Reform Conservatism, and the Size of Government

Remember Solyndra, the festering symbol of green-energy corruption that resulted in hundreds of millions of dollars of taxpayer money being flushed down the toilet?

And that was just one example. Based on the ratio of energy produced compared to insider enrichment, the entire green-energy racket is a sleazy boondoggle.

For taxpayers, this is a lose-lose situation. They pay to line the pockets of green donors, and they also suffer as government intervention diverts resources in ways that reduce jobs and economic output.

But look at the bright side. Every so often, some of the insider crooks get caught with their hands in the cookie jar.

In a column for the Washington Examiner, the invaluable Tim Carney highlights some of the insider sleaze that led to the resignation of Oregon’s Democratic Governor.

When a love affair begins with shared dreams of solar panels and fantasies of switchgrass, it shouldn’t surprise us that it leads to tears, resignation and federal investigations. Such is the love story of Oregon’s former governor John Kitzhaber and his fiancée, Cylvia Hayes.

Yup, it appears that Ms. Hayes cashed in on her relationship with the governor.

Hayes…described herself as a “policy adviser to Gov. John Kitzhaber on the issue of clean energy and economic development.” Hayes simultaneously ran a consulting firm called 3E Strategies….Demos was pushing governments to use a new measure of the economy — the Genuine Progress Indicator — in place of Gross Domestic Product. They hired Hayes to aid in this push. Soon, Kitzhaber adopted GPI as a new measure for state policies.

Sounds like pay-to-play, which is so typical of government.

But the GPI scam is just the tip of the iceberg.

…federal investigators are looking into Hayes’s work for companies that profited from Kitzhaber’s green policies. …Green energy deserves more scrutiny than the average industry, because so many of its technologies, being unprofitable and inefficient, depend on government subsidies for their very survival. One Hayes client was a California-based company called Waste to Energy Group. Hayes picked up Waste to Energy as a client in 2011 — after becoming first lady — as the company sought a contract for converting landfill gas into energy. …Mary Rowinski, a governor’s office employee, worked for Hayes. Hayes used Rowinski to set up her meetings with Waste to Energy. …Federal investigators probing the Hayes and Kitzhaber case are also seeking state agency contacts with the Oregon Business Council. The Business Council is a corporate lobby group, and a client of Hayes. …The important lesson is that the more you intertwine business and government, the more opportunities you create for cronyism. And green energy is fertile ground for such problems.

Tim’s lesson is spot on.

When you get big government, you get big corruption.

So how do we reduce sleaze in the political system.

Jay Cost, writing for the 2017 Project, urges an aggressive focus on fighting corruption.

…an anticorruption agenda should be integral to reform conservatism. First, reform conservatism is self-consciously oriented to the middle class, and political corruption works against the interests of the middle class. Usually the product of connections between interests and politicians, it favors the well-connected. The typical insurance agent, bakery owner, or office manager lacks such contacts. Second, an anticorruption agenda challenges the liberal belief that ever more government is good for the middle class. The left wishes to cast itself as defender of middle America and conservatives as champions of the elite. A full-throated attack on cronyism in the distribution of public favors would help conservatives fend off this accusation.

And he recognizes that “legal” corruption is just as big of a problem – perhaps even bigger – than “illegal” corruption.

…there is another form of corruption, an “honest” kind. Politicians see an opportunity to use their public authority to favor some private interest—be it the lobby for some commercial group, a wealthy donor, maybe themselves—and they take it. Often, no law is broken, but the public trust is nevertheless violated. James Madison understood corruption from this perspective—as including but not limited to illegal and venal activity.

So what’s the solution to the legal and illegal sleaze in Washington?

Cost seems to recognize that big government has enabled more corruption.

The legislative power has expanded most in three areas not prominently considered by the Founders: the promotion of economic development, the regulation of the economy, and the provision of social welfare benefits. For Congress, developing the national economy has long meant pork barrel politics. Members love to send money back to the district for improvements to rivers and harbors, for roads, railroads, airports, and so on. They want defense spending similarly distributed. The tax code is another place where Congress, in the name of economic growth, favors special interests. …And on top of this, a vast array of corporate welfare programs, like the Export-Import Bank, pay off various groups.

But he seems to think big government is now inevitable, and perhaps even desirable.

…one of the premises of the new reform conservatism is an acknowledgment that the federal government has a legitimate and potentially beneficial role to play in economic development, health care, education, and so on.

So his proposed reforms are rather tepid.

One goal should be to make it harder for members of Congress to cut deals with special interests. …Committee and subcommittee chairs should be required to obey stricter rules concerning conflicts of interest. They should not be allowed to accept money from interest groups with business before their committees. …the temporary lobbying ban on former members of Congress, now two years, should be extended and its loopholes closed. …Given the highly technical work that senior legislative staffers perform, they are grossly underpaid compared with their private counterparts. …The most skilled staffers should be paid appropriately… Similarly, Congress should increase the size of staffs—perhaps substantially.

Having worked on Capitol Hill, I have to say that I’m underwhelmed by these proposals.

More regulations, more staff, and higher pay are not going to change the culture of Washington.

I’m not sure if Mr. Cost sees himself as a reform conservative, or whether he’s merely offering advice to the so-called reformicons. In any event, his proposals symbolize what’s good and bad about reform conservatism: A recognition that government is causing problems, but solutions that are sometimes too tepid to actually solve problems.

The bottom line is that you can’t fix the corruption problems caused by big government unless you’re actually willing to get rid of big government.

P.S. If it’s true that misery loves company, then we can take solace in the fact that other nations have wasteful and corrupt green energy programs.

P.P.S. In keeping with our tradition, let’s close with a link to some amusing material about green-energy boondoggles.

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The African Version of Free Markets vs. Statism

Several months ago, I put forth a two-question challenge for our left-wing friends.

Since they relentlessly insist that we can have bigger government, higher taxes, more regulation, and added intervention without any negative impact on economic performance, I asked them to identify a single country that became rich following their policies.

And because I’m such a nice guy, I even gave them an extra option. If they couldn’t find a nation that become prosperous with statist policies, they also could successfully respond to my challenge by picking out a big-government jurisdiction that is out-performing a similar country with free markets and small government.

So what’s been the response? Zip. Nada. Zilch. Nothing.

Not that we should be surprised. After all, the rich nations of the western world all became prosperous back in the 1800s and early 1900s when the burden of government was tiny, smaller even than the public sector in Hong Kong today.

And what about the second part of the challenge? Well, our leftist friends have no answers to that query either.

But our side has lots of counter-examples. I’ve put together several comparisons of relatively pro-market jurisdictions and relatively statist jurisdictions. And when making these comparisons, I’ve used several decades of data to avoid the risk of misleading results caused by cherry-picking favorable or unfavorable years.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

In every single case, the places with smaller government and free markets generate much stronger economic performance. And that translates into higher living standards.

Now we’re going to add to our list of comparisons, and we’re going to travel to Africa.

Botswana is one of the most pro-market nations in sub-Saharan Africa. It’s still a long way from being Hong Kong, but you can see from the Economic Freedom of the World data that it’s been a steady performer, averaging more than 7 out of 10 this century.

Indeed, only Rwanda ranks higher for economic freedom in the region, but that’s the result of pro-growth reforms in the past few years, so we’ll have to wait a while (assuming the reforms are durable) before having useful data.

And speaking of comparisons, let’s now look at what’s happened to per-capita GDP in Botswana as well as the data for the countries in the region that get the worst scores from Economic Freedom of the World.

As you can see, Botswana (the thick blue line) used to be among the very poorest nations in the region, but over time its per-capita economic output has easily surpassed the countries that have followed statist policies.

These numbers are adjusted for inflation, so the key takeaway is that per-capita economic output is now almost 10 times higher in Botswana than it was in the mid-1960s.

Most of the other nations, by contrast, have suffered from declining real incomes. In other words, the price of statism is very high, particularly for the less fortunate in society.

But there is a sliver of good news (in addition to the Botswana data). If you look carefully, you’ll see that the overall numbers for Africa (thin blue line) have noticeably improved since the late 1990s. Which underscores the importance of promoting business investment in the region, as explained recently by Marian Tupy.

For more information on Botswana, here’s a video put together by Ed Frank (who’s also a very good softball player).

P.S. I rarely comment on foreign policy, but I confess that my jaw dropped when I saw that an Obama Administration official said that a jobs program was key to defeating ISIS.

I thought about recycling some of the evidence showing that government efforts to create jobs are a miserable failure, but then I saw two cartoons that are too funny not to share.

Our first contribution is from Glenn McCoy.

And here’s a gem from Michael Ramirez.

You can see why Ramirez won the political cartoonist contest.

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The Outcome of the Fiscal Fight in Greece and Implications for Spain, Italy, Ireland, Portugal, France, Belgium, Etc

There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention.

That seems like a rather strange negotiating position. Sort of like a bank robber holding a gun to his own head and saying he’ll shoot himself if the teller doesn’t hand over money.

At first glance, it seems the Greeks are bluffing. Or being suicidally self-destructive.

And maybe they are posturing and/or being deluded, but there are two reasons why the Greeks are not totally insane.

1. The rest of Europe does not want a Greek default.

There’s a famous saying, attributed to J. Paul Getty, that applies to the Greek fiscal fight. Simply stated, there are lots of people and institutions that own Greek government bonds and they are afraid that their investments will lose value if Greece decides to fully or partially renege on its debts (which is an implicit part of Greece’s negotiating position).

So while Greece would suffer if it defaulted, there would be collateral damage for the rest of Europe. In other words, the hypothetical bank robber has a grenade rather than a gun. And while the robber won’t fare well if he pulls the pin, lots of other people may get injured by shrapnel.

And to make matters more interesting, previous bailouts of Greece have created a rather novel situation in that taxpayers are now the indirect owners of a lot of Greek government debt. As you can see from the pie chart, European taxpayers have the most exposure, but American taxpayers also are on the hook because the IMF has participated in the bailouts.

The situation is Greece is akin to a bankruptcy negotiation. The folks holding Greek government debt are trying to figure out the best strategy for minimizing their losses, much as the creditors of a faltering business will calculate the best way of extracting their funds. If they press too hard, the business may go bust and they get very little (analogous to a Greek default). But if they are too gentle, they miss out on a chance of getting a greater share of the money they’re owed.

2. Centralization is the secular religion of the European elite and they want Greece in the euro.

The bureaucrats at the European Commission and the leaders of many European nations are emotionally and ideologically invested in the notion of “ever closer union” for Europe. Their ultimate goal is for the European Union to be a single nation, like the United States. In this analogy, the euro currency is akin to the American dollar.

There’s a general perception that a default would force the Greek government to pull out of the euro and re-create its own currency. And for the European elite who are committed to “ever closer union,” this would be perceived as a major setback. As such, they are willing to bend over backwards to accommodate Greece’s new government.

Given the somewhat blurry battle lines between Greece and its creditors, what’s the best outcome for advocates of limited government and individual liberty?

That’s a frustrating question to answer, particularly since the right approach would have been to reject any bailouts back when the crisis first started.

Without access to other people’s money, the Greek government would have been forced to rein in the nation’s bloated public sector. To be sure, the Greek government may also have defaulted, but that would have taught investors a valuable lesson about lending money to profligate governments.

And it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is today.

But there’s no point in crying about spilt milk. We can’t erase the mistakes of the past, so what’s the best approach today?

Actually, the right answer hasn’t changed.

And just as there are two reasons why the Greek government is being at least somewhat clever in playing hardball, there are two reasons why the rest of the world should tell them no more bailouts.

1. Don’t throw good money after bad.

To follow up on the wisdom of J. Paul Getty, let’s now share a statement commonly attributed to either Will Rogers or Warren Buffett. I don’t know which one (if either) deserves credit, but there’s a lot of wisdom in the advice to stop digging if you find yourself in a hole. And Greece, like many other nations, has spent its way into a deep fiscal hole.

There is a solution for the Greek mess. Politicians need to cut spending over a sustained period of time while also liberalizing the economy to create growth. And, to be fair, some of that has been happening over the past five years. But the pace has been too slow, particularly for pro-growth reforms.

But this also explains why bailouts are so misguided. Politicians generally don’t do the right thing until and unless they’ve exhausted all other options. So if the Greek government thinks it has additional access to money from other nations, that will give the politicians an excuse to postpone and/or weaken necessary reforms.

2. Saying “No” to Greece will send a powerful message to other failing European welfare states.

Now let’s get to the real issue. What happens to Greece will have a big impact on the behavior of other European governments that also are drifting toward bankruptcy.

Here’s a chart showing the European nations with debt burdens in excess of 100 percent of economic output based on OECD data. Because of bad demographics and poor decisions by their politicians, every one of these nations is likely to endure a Greek-style fiscal crisis in the near future.

And keep in mind that these figures understate the magnitude of the problem. If you include unfunded liabilities, the debt levels are far higher.

So the obvious concern is how do you convince the politicians and voters in these nations that they better reform to avoid future fiscal chaos? How do you help them understand, as Mark Steyn sagely observed way back in 2010, that “The 20th-century Bismarckian welfare state has run out of people to stick it to.“

Well, if you give additional bailouts to Greece, you send precisely the wrong message to the Italians, French, etc. In effect, you’re telling them that there’s a new group of taxpayers from other nations who will pick up the tab.

That means more debt, bigger government, and a deeper crisis when the house of cards collapses.

P.S. Five years ago, I created a somewhat-tongue-in-cheek 10-step prediction for the Greek crisis and stated at the time that we were at Step 5. Well, it appears my satire is slowly becoming reality. We’re now at Step 7.

P.P.S. Four years ago, I put together a bunch of predictions about Greece. You can judge for yourself, but I think I was quite accurate.

P.P.P.S. A big problem in Greece is the erosion of social capital, as personified by Olga the Moocher. At some point, as I bluntly warned in an interview, the Greeks need to learn there’s no Santa Claus.

P.P.P.P.S. The regulatory burden in Greece is a nightmare, but some examples of red tape are almost beyond belief.

P.P.P.P.P.S. The fiscal burden in Greece is a nightmare, but some examples pf wasteful spending are almost beyond belief.

P.P.P.P.P.P.S. Since we once again have examined a very depressing topic, let’s continue with our tradition of ending with a bit of humor. Click here and here for some very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing. If you like funny videos, click here and here. Last but not least, here’s some very un-PC humor about Greece and the rest of Europe.

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Another Cluster-You-Know-What from the World of Government-Run Healthcare

In the grand scheme of things, the most important development in health policy is the pending Supreme Court case revolving around whether subsidies can be provided to people obtaining health insurance from the federal exchange, even though the law explicitly says handouts are only available to people getting policies via state exchanges.

If the Court rules correctly (unlike, ahem, the last time the Justices dealt with Obamacare), it will then be very important that congressional reformers use the resulting mess to unwind as much of the law as possible.

That will be a challenge because statists already are arguing that the “only” solution is to re-write the law so that subsidies are also available via the federal government. For what it’s worth, my colleague Michael Cannon outlines the right strategy in Cato’s newly released Policy Priorities for the 114th Congress.

But let’s set aside that issue because we have a great opportunity to review another example of how government-run healthcare is a miserable failure.

Our topic for today is government-dictated electronic health records (EHRs). Dr. Jeffrey Singer is on the front lines of this issue. As a physician in Arizona, he deals with the real-world impact of this particular mandate.

And he’s so unhappy that he wrote a column on the topic for the Wall Street Journal.

Starting this year, physicians like myself who treat Medicare patients must adopt electronic health records, known as EHRs, which are digital versions of a patient’s paper charts. …I am an unwilling participant in this program. In my experience, EHRs harm patients more than they help.

By way of background, he explains that EHRs were part of Obama’s failed “stimulus” legislation and they were imposed on the theory that supposed experts could then use the resulting data to make the system more efficient and effective.

The federal government mandated in the 2009 stimulus bill that all medical providers that accept Medicare adopt the records by 2015. Bureaucrats and politicians argued that EHRs would facilitate “evidence-based medicine,” thereby improving the quality of care for patients.

But Dr. Singer says the real-world impact is to make medical care less effective and more expensive.

Electronic health records are contributing to two major problems: lower quality of care and higher costs. The former is evident in the attention-dividing nature of electronic health records. They force me to physically turn my attention away from patients and toward a computer screen—a shift from individual care to IT compliance. …The problem is so widespread that the American Medical Association—a prominent supporter of the electronic-health-record program—felt compelled to defend EHRs in a 2013 report, implying that any negative experiences were the fault of bedside manner rather than the program. Apparently our poor bedside manner is a national crisis, judging by how my fellow physicians feel about the EHR program. A 2014 survey by the industry group Medical Economics discovered that 67% of doctors are “dissatisfied with [EHR] functionality.” Three of four physicians said electronic health records “do not save them time,” according to Deloitte. Doctors reported spending—or more accurately, wasting—an average of 48 minutes each day dealing with this system.

Here’s what he wrote about costs.

The Deloitte survey also found that three of four physicians think electronic health records “increase costs.” There are three reasons. First, physicians can no longer see as many patients as they once did. Doctors must then charge higher prices for the fewer patients they see. This is also true for EHRs’ high implementation costs—the second culprit. A November report from the Agency for Healthcare Research and Quality found that the average five-physician primary-care practice would spend $162,000 to implement the system, followed by $85,000 in first-year maintenance costs. Like any business, physicians pass these costs along to their customers—patients. Then there’s the third cause: Small private practices often find it difficult to pay such sums, so they increasingly turn to hospitals for relief. In recent years, hospitals have purchased swaths of independent and physician-owned practices, which accounted for two-thirds of medical practices a decade ago but only half today. Two studies in the Journal of the American Medical Association and one in Health Affairs published in 2014 found that, in the words of the latter, this “vertical integration” leads to “higher hospital prices and spending.”

Last but not least, Dr. Singer explains that electronic health records don’t reduce errors or increase efficiency, notwithstanding the claims of advocates.

The EHR system assumes that the patient in front of me is the “average patient.” When I’m in the treatment room, I must fill out a template to demonstrate to the federal government that I made “meaningful use” of the system. This rigidity inhibits my ability to tailor my questions and treatment to my patient’s actual medical needs. It promotes tunnel vision in which physicians become so focused on complying with the EHR work sheet that they surrender a degree of critical thinking and medical investigation. Not surprisingly, a recent study in Perspectives in Health Information Management found that electronic health records encourage errors that can “endanger patient safety or decrease the quality of care.” America saw a real-life example during the recent Ebola crisis, when “patient zero” in Dallas, Thomas Eric Duncan, received a delayed diagnosis due in part to problems with EHRs.

Wow, not exactly an uplifting read.

Indeed, Dr. Singer’s perspective is so depressing that I hope he’s at least partially wrong. Maybe after a couple of years, and with a bit of luck, doctors will adapt and we’ll get some benefits in exchange for the $20 billion-plus of taxpayer money that has been plowed into this project (not to mention all the time and expense imposed on the medical profession).

But the big-picture lesson to be learned is that planners, politicians, and bureaucrats in Washington should not be in charge of the healthcare system.

Which brings us to the real challenge of how to put the toothpaste back in the tube.

Government intervention is so pervasive in the healthcare sector that – with a few rare exceptions – normal market forces have been crippled.

As such, we have a system that produces higher and higher costs accompanied by ever-rising levels of inefficiency.

Amazingly, the statists then argue that more government is the only solution to this government-caused mess. Sort of Mitchell’s Law on steroids.

But that path leads to single-payer healthcare, and the horror stories from the U.K. should be enough to show any sensible person that’s a bad outcome.

The only real solution is to restore a free market. That means not only repealing Obamacare, but also addressing all the other programs and policies which have caused the third-party payer crisis.

P.S. Just like yesterday, I want to finish a grim column with something uplifting.

Here’s a sign that will irk statists driving through one part of Pennsylvania.

Now take the IQ test for criminals and liberals and decide whether this means more crime or less crime.

If you’re having trouble with the answer, here’s a hint from Chuck Asay.

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America’s Anti-Competitive and Anti-Comity International Tax System, Part II

Last September, I wrote that America’s business tax system is a nightmare that simultaneously undermines the competitiveness of American companies while also causing lots of irritation in other nations.

Both of those bad things happen because politicians in Washington think the IRS should be able to tax income that is earned (and already subject to tax) in other countries. This approach, known as “worldwide taxation,” is contrary to good tax policy.

Indeed, all good tax reform plans, such as the flat tax, are based on “territorial taxation,” which is the common-sense principle that governments should only tax activity inside national borders.

Given the self-inflicted wound of worldwide taxation, particularly when combined with the world’s highest corporate tax rate, it’s easy to understand why some companies engage in “inversions” and become foreign-domiciled firms. Simply stated, that’s their best option if they care about the best interests of their workers, customers, and shareholders.

Well, the same problem exists for households. And it exists for the same reason. The United States also imposes “worldwide taxation” on individual taxpayers. But it’s even worse, because there are specific laws, such as the infamous Foreign Account Tax Compliance Act, that impose absurdly high costs on Americans with cross-border economic activity, particularly those who live and work in other nations.

And just as our senselessly punitive corporate tax system drives corporations to re-domicile, the same is true for the personal tax code. As CNN reports, record numbers of Americans are officially giving up their citizenship.

The number of Americans choosing to give up their passports hit a record 3,415 last year, up 14% from 2013, and 15 times more than in 2008, when only 231 people renounced their citizenship. Experts say the recent surge is coming from expats who no longer want to deal with complicated tax paperwork, a burden that has only gotten worse in recent years. Unlike most countries, the U.S. taxes all citizens on income, no matter where it is earned or where they live. The mountain of paperwork can be so complicated that expats are often forced to fork over high fees to hire an accountant… “More and more are considering renouncing,” said Vincenzo Villamena of Online Taxman, an accountant who specializes in expat taxes. “There are a lot of uncertainties about FATCA…I don’t think we’ve seen the full effect that FATCA can have on people’s lives.” As both expats and financial institutions rush to understand the new law, some banks have chosen to kick out their Americans clients rather than comply. If a bank mistakenly fails to report accounts held by Americans outside the U.S. — even checking and savings accounts — they can face steep penalties.

Here’s a chart from the CNN article.

As you can see, there was a pause in 2012, perhaps because people were waiting to see what happened in the election.

But ever since, the number of people escaping U.S. citizenship has jumped dramatically.

To better understand how bad tax law is hurting people with U.S. passports, let’s look at the plight of Americans in Canada, as reported by the Vancouver Sun.

…many Ameri-Canadians are feeling rising anger, fear and even hatred toward their powerful country of origin. …The U.S. is the only major country to tax based on citizenship, not residency. …open displays of American pride in Canada are becoming even less likely as Ameri-Canadians seek shelter from the long reach of FATCA. …In addition, the flow of Americans leaving the U.S. for Canada more than doubled in the decade up until 2011, according to Statistics Canada. …Now — with FATCA causing investigators to scour the globe to hunt down more than seven million broadly defined “U.S. persons” it claims should be paying taxes to Uncle Sam — even more people in Canada with U.S. connections are finding another reason to bury their American identities.

Now let’s be even more focused and look at the impact on a single Englishman who happens to be the Mayor of London.

Johnson was characteristically forthright, describing FATCA as “outrageous”, and a “terrible doctrine of taxation.” Born in New York and having never given up his US citizenship, the London mayor cannot escape the clutches of FATCA, which requires that foreign financial institutions report the financial information of Americans. Those affected include many so-called “accidental Americans” like Johnson… What has seemingly brought FATCA to the front of Boris’s mind is the sale of his UK home, on which he is liable to pay tax in America. …What it does do – because of its host of serious, unintended, adverse consequences – is brand Americans, and accidental Americans choosing to live or work overseas, as financial pariahs. …Similarly, American businesses working in international markets are now often branded with a leprosy-like status. Clearly, this can only be detrimental to the country’s global competitiveness, and could, in turn, hit American jobs and the long-term growth of the economy. Questions should be asked about the imperialist characteristics of FATCA. Governments and foreign financial institutions have been coerced into complying with its expensive, burdensome, privacy-infringing, sovereignty-violating regulations by the US – or they have to face heavy penalties and the prospect of being effectively frozen out of US markets. And all this to “recover” an estimated $1bn (£637m) per year, which is enough, according to reports, to run the federal government for less than two hours.

As you can see, FATCA is a major problem.

And not just for specific taxpayers. The law is also bad for economic growth since it throws sand in the gears of global commerce.

Here are some excerpts from another news report, which includes some of my thoughts on the FATCA issue.

Critics say the FATCA has gone too far, is too draconian and is imposing an undue hardship on Americans living overseas. So says Dan Mitchell of the Cato Institute, a libertarian think tank in Washington. He says the law is “causing lots of headaches and heartaches around the world, not only for foreign financial institutions but also for overseas Americans, who are now being treated as Pyrrhus because financial institutions view them as too costly to service.” The U.S. is one of the few countries that tax its citizen on the basis of nationality, not residency. And faced with a larger tax bill, thousands of Americans living overseas would rather give up their passports then pay a new tax to Uncle Sam. The Taxpayer Advocate’s Office of the IRS has reported that the FATCA “has the potential to be burdensome, overly broad and detrimental to taxpayer rights.” Mitchell says, “An American living and working in some other country is required to not only pay tax to that country where they live but also file a tax return to the U.S. No other civilized country does that.”

By the way, I didn’t say that the law was causing overseas Americans to be treated as “Pyrrhus.” I said they were being viewed as “pariahs.” But that’s the risk you take when doing oral interviews.

Returning to matters of substance, you’ll also be happy to know that FATCA is making people more vulnerable to identity theft. It’s gotten so bad that even the IRS was forced to issue an official warning.

The Internal Revenue Service today issued a fraud alert for international financial institutions complying with the Foreign Account Tax Compliance Act (FATCA). Scam artists posing as the IRS have fraudulently solicited financial institutions seeking account holder identity and financial account information. …These fraudulent solicitations are known as “phishing” scams. These types of scams are typically carried out through the use of unsolicited emails and/or websites that pose as legitimate contacts in order to deceptively obtain personal or financial information. Financial institutions or their representatives that suspect they are the subject of a “phishing” scam should report the matter to the Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484, or through TIGTA’s secure website. Any suspicious emails that contain attachments or links in the message should not be opened.

Gee, nice of them to be so concerned about potential victims.

Though perhaps it would be better if we didn’t have intrusive laws in the first place.

The law is even so destructive that the Associated Press reported that it might be used as a weapon against the Russians!

As the United States attempts to punish Russia for its actions in Ukraine, the Treasury Department is deploying an economic weapon that could prove more costly than sanctions: the Internal Revenue Service. This summer, the U.S. plans to start using a new law that will make it more expensive for Russian banks to do business in America. “It’s a huge deal,” says Mark E. Matthews, a former IRS deputy commissioner. “It would throw enormous uncertainty into the Russian banking community.” …beginning in July, U.S. banks will be required to start withholding a 30 percent tax on certain payments to financial institutions in other countries — unless those foreign banks have agreements in place… But after Russia annexed Crimea and was seen as stoking separatist movements in eastern Ukraine, the Treasury Department quietly suspended negotiations in March. With the July 1 deadline approaching, Russian banks are now concerned that the price of investing in the United States is about to go up. …For Russia, the penalties could be more damaging to its economy than U.S. sanctions, said Brian L. Zimbler, managing partner of the Moscow office of Morgan Lewis, an international law firm. …The 2010 law is known as FATCA.

So what’s the bottom line?

As you can see, America’s worldwide tax system is bad policy, and it’s a nightmare for millions of innocent people thanks to ill-considered laws such as FATCA.

What’s really remarkable – in a bad way – is the complete lack of proportionality.

Back during the 2008 campaign, Obama claimed that laws like FATCA would generate $100 billion per year. From the perspective of tax collectors, that amount of money may have justified an onerous law.

But when the dust settled, the revenue estimators predicted that FATCA would bring in less than $1 billion per year.

In other words, the amount of money the IRS will collect is dwarfed by the damage to the overall economy and the harm to millions of taxpayers. Not to mention all the negative feelings against America that have been generated by this absurd law.

Yet very few politicians are willing to fight FATCA because they’re afraid that their opponents will engage in demagoguery and accuse them of being in favor of tax evasion. Senator Rand Paul is an admirable exception.

P.S. Since this has been such a depressing discussion, here is some good IRS humor to lighten the mood.

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Should Government Regulators Make the Internet More Like the Post Office or DMV?

The Internet has made all of our lives better, in part because there’s been an accidental policy of benign neglect from Washington.

But that’s about to change.

Even though our economy already is burdened by record amounts of regulation and red tape, the FCC is pushing forward with a plan to turn the Internet into a moss-covered public utility.

This almost leaves me at a loss for words. It’s truly remarkable – in a bad way – that the bureaucrats at the Federal Communications Commission think that the Internet can be improved by a big dose of 1930s-era regulation and control.

My Cato colleague, Jim Harper, summarized the issue last month.

Do you want your Internet service provider to operate like the water company or the electric company?… the FCC has sought for years now to regulate broadband Internet service providers…like it used to regulate AT&T, with government mandated terms of service if not tariffs and price controls. This doesn’t fit the technical environment of the Internet, which allows for diverse business models. Companies that experiment with network management, pricing, internal subsidy, and so on can find the configurations that serve widely varying consumers and their differing Internet needs the best.

But the FCC apparently doesn’t like innovation, diversity, and experimentation and instead wants to impose centralized rules. And to justify its power grab, FCC regulators are reclassifying the Internet as “telecommunications carriers” rather than an “information service.”

Title II, which applies to “telecommunications carriers,” allows common carrier regulation of the type the FCC is trying to impose….This is so it can have more control over the business decisions made by Internet service providers. …”Net neutrality” is a good engineering principle, but it shouldn’t be a legal mandate. Technology and markets surpassed any need for command-and-control regulation in this area long ago. But regulators don’t give up power without a fight.

But maybe mockery is the best way to win this issue.

Here’s a new video from the folks at Protect Internet Freedom (the some people who put together the second video in this post).

If you’ve ever been at hold at the Department of Motor Vehicles or some other bureaucracy, this may cause uncomfortable and painful flashbacks.

And here’s another video, put together by Senator Cruz’s office.

Very well done, just like the humor Cruz’s office has deployed against Obamacare.

And speaking of humor, here are some new cartoons on the topic.

Though this next cartoon is my favorite because it so effectively captures my feelings.

The Internet has been a huge success, so why on earth would anybody think it will be better if a bunch of regulators can second-guess the free market?!?

If you want more cartoons on Internet regulation, here’s a collection that I shared last year.

P.S. Shifting to another topic, here’s a story that belongs in the category of “great moments in lobbying.”

Here are some excerpts from a story published by the Raleigh News and Observer.

Sex between lobbyists and government officials who are covered under North Carolina’s ethics laws does not constitute a gift that must be listed in disclosure reports, the State Ethics Commission said Friday. …The opinion was in a response to an inquiry from the Secretary of State’s lobbying compliance director, Joal H. Broun, in a letter on Dec. 15. …Broun’s request also wanted to know if that activity falls within the definition of “goodwill lobbying,” which is an indirect attempt to influence legislation or executive action, such as the building of relationships, according to state law, and is also considered lobbying.

I’m sure there are some serious points to be made, but I confess that my immediate reaction was to think about this cartoon.

Whether any “goodwill” is being created is a topic for another day.

That being said, you’ll be happy to know that actually procuring hookers is against the rules.

However, providing a prostitute to a legislator or other covered official would constitute a gift or item of value and would have to be reported on disclosure forms – which, of course, would also be evidence of a crime, the opinion says.

The good news is that this rule, if properly enforced, will protect a vulnerable group people from being morally corrupted.

But enough about the need to protect prostitutes from being contaminated by close proximity to politicians.

I want to close on a serious point. As I wrote the other day, the best way to reduce lobbying is to reduce the size and scope of government.

P.P.S. Actually, hookers and politicians have something in common.

P.P.P.S. If you liked my quip about protecting prostitutes from politicians, you’ll appreciate this Craig Ferguson joke.

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A Libertarian Valentine’s Day Message for Venezuela

Last year, I shared some libertarian humor relating to Valentine’s Day.

This year, we’re going to be a bit more on the wonky side.

Using roses as an example, we’re going to explore how the invisible hand of the market produces amazing results.

Here’s a great new video from Marginal Revolution University. Narrated by Professor Alex Tabarrok of George Mason University’s economics department, it explains how consumers have amazing access to millions of roses even though (actually because) there’s no agency or department in charge of Valentine’s Day.

And here’s a related video from MRU elaborating on the role of the price system.

The moral of the story in these videos is that a free and unfettered market is far and away the best method of allocating resources.

And the flip side of that lesson is that you get very bad results when politicians replace the invisible hand of the market with the visible foot of government.

Here’s some of what I wrote, for instance, when discussing proposals to give politicians power over wage levels.

…what’s really at stake is whether we want resources to be allocated by market forces instead of political edicts. This should be a no-brainer. If we look at the failure of central planning in the Soviet Union and elsewhere, a fundamental problem was that government officials – even assuming intelligence and good intentions – did not have the knowledge needed to make decisions on prices. And in the absence of a functioning price system, resources get misallocated and growth suffers. So you can imagine the potential damage of giving politicians, bureaucrats, and courts the ability to act as central planners for the wage system.

And here are some excerpts from a post about the damaging impact of subsidies to higher education.

Interfering with the price system is an especially pernicious form of intervention. When functioning properly, prices enable the wants and needs of consumers to be properly channeled to producers and suppliers in a way that promotes prosperity and efficiency. Unfortunately, governments hinder this system with all sorts of misguided policies such as subsidies and price controls. One of the worst manifestations of this type of intervention is the system of third-party payer, which occurs when government policies artificially reduce the perceived prices of goods and services.

And I could cite lots of other examples on issues such as the minimum wage, health care, housing, and agriculture.

Simply stated, you get all sorts of perverse results when politicians interfere with prices.

And that means lower living standards over time as the economy operates less efficiently.

Especially if a government really goes overboard and tries to regulate and control the entire economy rather than “just” interfere with a few sectors. Let’s look at the case of Venezuela. I’ve already written about how first Chavez and now Maduro have turned that nation into an economic hellhole.

It’s so bad that even the establishment media are taking notice.

Here are some passages from Matt O’Brien’s Wonkblog column in the Washington Post.

Venezuela…has the largest oil reserves in the world. It should be rich. But it isn’t, and it’s getting even poorer now, because of economic mismanagement on a world-historical scale. The problem is simple: Venezuela’s government thinks it can have an economy by just pretending it does. That it can print as much money as it wants without stoking inflation by just saying it won’t. And that it can end shortages just by kicking people out of line. It’s a triumph of magical thinking that’s not much of one when it turns grocery-shopping into a days-long ordeal that may or may not actually turn up things like food or toilet paper.

The government is trying to paper over its incompetence by printing money.

…the Bolivarian regime is to blame. The trouble is that while it has tried to help the poor, which is commendable, it has also spent much more than it can afford, which is not. Indeed, Venezuela’s government is running a 14 percent of gross domestic product deficit right now, a fiscal hole so big that there’s only one way to fill it: the printing press. But…paying people with newly printed money only makes that money lose value, and prices go parabolic. It’s no wonder then that Venezuela’s inflation rate is officially 64 percent, is really something like 179 percent, and could get up to 1,000 percent, according to Bank of America, if Venezuela doesn’t change its byzantine currency controls. Venezuela’s government, in other words, is playing whac-a-mole with economic reality.

And there’s also a pervasive system of price controls.

Venezuela’s government wants to wish away the inflation it’s created, so it tells stores what prices they’re allowed to sell at. These bureaucrat-approved prices, however, are too low to be profitable, which is why the government has to give companies subsidies to make them worthwhile. Now when these price controls work, the result is shortages, and when they don’t, it’s even worse ones. …it’s not profitable for the unsubsidized companies to stock their shelves, and not profitable enough for the subsidized ones to do so, either.

In the ultimate triumph of big government, Venezuela is even imposing controls on rationing!

…shortages, which had already hit 30 percent of all goods before the central bank stopped keeping track last year, have gone from being a fact of life to the fact of life. …People have lined up for days to try to buy whatever they can, which isn’t much, from grocery stores that are even more empty than usual. The government has been forced to send the military in to these supermarkets to maintain some semblance of order, before it came up with an innovative new strategy for shortening the lines: kicking people out of them. Now they’re rationing spots in line, based on the last digit of people’s national ID cards.

But you won’t be surprised to learn that all the problems are the fault of the private sector.

It’s a man-made tragedy, and the men who made it won’t fix it. Maduro, for his part, blames the shortages on the “parasitic” private sector.

It goes without saying, of course, that Maduro and the rest of the political elite avoid the consequences of bad economic policy. They all enjoy luxurious lifestyles, financed at the expense of ordinary Venezuelans. Moreover, I’m sure that Maduro and his cronies all have big bank accounts in New York or London.

So I can understand why they like the current system.

I’m genuinely mystified, though, why there are still people who think statism is better than capitalism.

I guess it’s mostly naiveté, a triumph of good intentions over real-world results.

Even though most of these leftists presumably would go crazy if they had to live without the products made possible by capitalism.

Just as portrayed in this video. And this satirical image.

Those of us who reside in the real world, by contrast, already understand the difference between capitalism and statism.

P.S. Venezuela is an economic basket case, but that apparently means it ranks higher than the United States on the “happy planet index” put together by some clueless statists.

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Two Big Fiscal Lessons from Colorado’s Pot Legalization

Regular readers know that I don’t approve of drug use, but that I also favor legalization because the Drug War has been a costly and ineffective failure.

(And it’s led to horrible policies such as intrusive money-laundering laws and Orwellian asset-forfeiture laws).

So I was happy when folks in Colorado voted to decriminalize marijuana use, even if part of me didn’t like the idea that politicians would gain a new source of tax revenue.

If nothing else, what’s happening in Colorado (and Washington state) will be an interesting social experiment.

And even though we only have a modest bit of data, I’m going to be bold and assert that we can already learn two lessons from what’s happened.

1. Politicians are so greedy that they set taxes too high.

In the real world, there’s this thing called the Laffer Curve. And what it shows is that excessive tax rates don’t generate big piles of tax revenue because people change their behavior.

I’ve made this point before when dealing with personal income tax rates, corporate tax rates, capital gains taxes, and tobacco taxes.

Simply stated, the political class is so anxious to get more of our money that they impose punitive tax rates that fail to generate the desired amount of revenue.

And it’s also true with taxes on marijuana.

But don’t believe me. Let’s look at some news sources about what’s happened in Colorado.

Here are some excerpts from a Daily Beast report.

According to the Colorado Department of Revenue, the state collected $44 million in taxes from recreational marijuana in 2014, $25 million less than predicted.  …why did recreational marijuana sales in Colorado fall short? …Coloradoans bought less recreational marijuana than they could have… Looking at the taxes on cannabis in the state, it’s not hard to see why. Pot taxes in Colorado are steep. In Denver, for example, an eighth of cannabis can come with four taxes: an excise tax, regular sales tax, special sales tax (for pot retailers), and a special city tax. That equals a markup of roughly 30 percent. …many pot aficionados looked at the numbers and decided to stick with their medical marijuana programs or their other dealers.

Here’s some similar analysis from a New York Times article.

Colorado’s tax results underscore a big conflict facing public officials considering marijuana legalization. Taxes should be kept low if the goal is to eliminate pot’s black market. …Colorado has also shown that pot-smokers don’t necessarily line up to leave the tax-free black market and pay hefty taxes. If medical pot is untaxed, or if pot can be grown at home and given away as in Colorado, the black market persists.

And here are some passages from the Mic’s analysis.

David Huff…from Aurora, told the AP that the state’s taxes on marijuana, which increase the price of pot by 30 percent or more, are too, um, high. “I don’t care if they write me a check, or refund it in my taxes, or just give me a free joint next time I come in. The taxes are too high, and they should give it back,” Huff said. …only 60 percent of Coloradans obtained their marijuana through a legal exchange in 2014. Some buyers are using the state’s legal medical marijuana, which is untaxed, as a source for green, while others take advantage of Amendment 64’s provision allowing the personal use of as many as six marijuana plants. The products of those plants have flooded the black market, depriving Colorado of more taxable pot.

The bottom line is that politicians better figure out how to limit their greed if they truly want the legal market to function properly.

2. A spending cap ensures that new revenue won’t finance bigger government.

I’m a big fan of restraining the growth of government. Needless to say, this means I don’t like giving politicians new sources of revenue.

That’s my view on all of the proposals for new revenue that are percolating in the corridors of power, including energy taxes, financial taxes, value-added taxes, and wealth taxes.

But if there’s actually some sort of binding limit on the growth of government, then politicians can’t use new revenue to finance a more bloated public sector.

And thanks to the nation’s best expenditure limit, that’s the case in Colorado.

Here’s what Mic wrote on the topic.

Colorado’s state constitution limits how much tax money the state treasury can receive before having to return it to taxpayers. The provision, known as the Taxpayer Bill of Rights, or TABOR… Since Colorado’s economy has been growing as a faster rate than expected, the state underestimated its total revenue, which means Centennial State residents may soon get a cut of the estimated $50 million in taxes collected from the sale of recreational marijuana during its first year of legalization. …TABOR, passed in 1992, dictates that Colorado can’t spend revenue made from taxation if those revenues grow faster than the rate of inflation and population growth. That money, known as a TABOR bonus, must be refunded to taxpayers unless voters approve a revenue change. This amendment has netted Colorado taxpayers about $3.3 billion since 1992.

Let’s return to the Daily Beast story.

In a state with one of the strictest tax and expenditure limitations in the country, Colorado operates under a Taxpayer Bill of Rights called TABOR. According to the bill, refunds are to be considered when state tax revenues don’t match up to the state estimates. This year, owing to a slight rise in the economy, the overall revenue was higher.

Though you won’t be surprised to learn that politicians want to figure out a way of spending the money. Check out these passages from the aforementioned piece in the New York Times.

Colorado will likely have to return to voters to ask to keep the pot tax money. That’s because of a 1992 amendment to the state constitution that restricts government spending. The amendment requires new voter-approved taxes, such as the pot taxes, to be refunded if overall state tax collections rise faster than permitted. Lawmakers from both parties are expected to vote this spring on a proposed ballot measure asking Coloradans to let the state keep pot taxes.

So both Republicans and Democrats will join hands in an effort to spend the money.

Gee, knock me over with a feather. What a surprise!

But let’s not focus on whether politicians want more of our money. Let’s learn from TABOR.

What it teaches us is that you get better policy when you limit the growth of government spending. And the closest thing we have to TABOR at the national level is the Swiss Debt Brake.

It’s worked very well in Switzerland because it puts the focus on the underlying problem of too much government. Notwithstanding the name, it limits the annual growth of spending, not the growth of debt.

The moral of the story is that when you address the real problem of too much spending, you automatically address the symptom of red ink.

And politicians presumably won’t have much incentive to impose higher taxes if they can’t use the money to buy votes with bigger government, so it’s a win-win situation!

P.S. Though there are some who favor higher taxes solely for reasons of spite and envy.

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Big Government and Corruption Are Inextricably Intertwined

When I write about the “inbred corruption of Washington” or “Washington’s culture of corruption,” I’m not merely taking pot-shots at the political elite.

I’m trying to make a very serious point about the way in which big government enables immoral behavior by both elected officials and various interest groups.

Heck, in many ways, government has morphed into a racket designed to enrich the lobbyists, insiders, contractors, bureaucrats, and politicians.

They play, we pay.

Jay Cost of the Weekly Standard has an entire new book on this topic and he highlights how big government-enabled corruption harms the middle class in a column for National Review.

A comprehensive strategy to boost the middle class has to include an aggressive assault on political corruption. Every year, the government wastes an obscene amount of money through corrupt public policies.

He makes the key point that corruption isn’t just about illegal behavior in Washington.

If we think of corruption merely as illegal activity, we’re defining it too narrowly. …the better way to understand it is as James Madison might have. In Federalist 10, he worried about the “violence of faction,” which he defined as a group “united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.” This is all too common in public policy. From farm subsidies to Medicare, regulatory policy to the tax code, and highway spending to corporate welfare, our government does violence to the public interest by rewarding the interest groups that lobby it aggressively.

Cost then explains that this corruption-fueled expansion of government is very damaging for the middle class.

…corruption is a loser for the middle class. Middle-class Americans do not have the money to pay for lobbyists to make sure they are getting a piece of the action. They don’t usually contribute to political candidates, and when they do, it is typically for a presidential candidate whose ideas they think are sound. They do not subsidize the otherwise obscure subcommittee chairman with oversight on a critical policy. And, of course, they cannot offer politicians seven-figure employment opportunities for post-government life. And yet the middle class foots the bill. Average Americans pay higher taxes to subsidize this misbehavior… But beyond  that, corruption distorts the economy and limits the nation’s potential for growth. For instance, any time Congress creates a tax loophole, it shifts the flow of capital from some otherwise productive outlet to the tax-preferred end. And this is true not just of tax policy; any dollar spent by the government corruptly is a dollar better spent somewhere else. There are, in other words, substantial opportunity costs to be paid, mostly by the middle class.

While I definitely agree with the thrust of Cost’s analysis, I might quibble with the last part of this excerpt.

To be sure, I agree that the middle class foots the majority of the overall bill, but I actually wonder whether the poor suffer the most. At least on an individual basis. After all, the people on the bottom rungs of the economic ladder presumably have the most to lose if growth is sluggish or non-existent.

Which also explains why I get so upset about Obama’s class-warfare policies. High tax rates facilitate corruption and it’s the less fortunate who wind up suffering.

But enough nit-picking and digressing.

Cost’s column is right on the mark, particularly his point about properly defining corruption to capture what’s immoral as well as what’s illegal.

That’s one of the main points I made in this video from the Center for Freedom and Prosperity.

Now let’s take this analysis, both from Cost’s article and my video, and apply it to Obama’s new budget.

Professor Jeffrey Dorfman, an economist at the University of Georgia, has a column for Real Clear Markets entitled, “Obama’s Budget Is All About Whom You Know.”

He starts by citing some examples of how Obama wants government to manipulate our choices.

President Obama wants to control everyone’s behavior using the federal government as both his carrot and stick. …the President is in favor of both parents working and either strangers or government employees raising children as much as possible. …The President proposed nothing to help people save for college or to make it more affordable in any manner other than a government handout. …All of these higher education policies suggest government is your friend and personal responsibility is a bad idea.

Dorfman doesn’t explicitly state that this micro-management by big government is corrupt, but what he’s describing fits in perfectly with Cost’s analysis about average people suffering as D.C. insiders keep expanding government and getting more power over our lives.

If you put this all together, the President is clearly stating that increasing government dependence is a priority. People are offered more financial assistance through the government so as to build support for larger government. …President Obama is only interested in helping some Americans, in rewarding the Americans who behave the way he thinks they should. He believes that the government, that he, should have the power to pick winners and losers. His vision is not one in which everyone wins, rather it is one where those he favors gain at the expense of those he seeks to punish for either their success or their actions. …government is now taking sides.

Needless to say, when government is taking sides and picking winners and losers, that is a process that inevitably and necessarily favors the politically well-connected insiders.

That’s good news for Washington parasite class (and their children), but it’s not good for America.

P.S. Some folks in Louisiana have a pretty good suggestion for dealing with political corruption.

P.P.S. By the way, you don’t solve the problem of government-facilitated corruption by restricting the 1st Amendment rights of people to petition their government and participate in the political process.

P.P.P.S. While this column focuses mostly on the immoral corruption of Washington rather than the illegal variety, there’s also plenty of the latter form of corruption in programs such as Medicare, Medicaid, welfare, job training, food stamps, disability, etc.

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Why “Dynamic Scoring” Is far more Accurate than “Static Scoring” when Measuring the Impact of Fiscal Policy Changes

I’ve written several times about the importance of appointing sensible people to head the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT). Heck, making reforms to these Capitol Hill bureaucracies is a basic competency test for Republicans.

That’s because CBO and JCT are the official scorekeepers when politicians consider changes in fiscal policy and it has a big (and bad) impact if they rely on outdated methods and bad analysis.

The CBO, for instance, puts together economic analysis and baseline forecasts of revenue and spending, while also estimating what will happen if there are changes to spending programs. Seems like a straightforward task, but what if the bureaucrats assume that government spending “stimulates” the economy and they fail to measure the harmful impact of diverting resources from the productive sector of the economy to Washington?

The JCT, by contrast, prepares estimates of what will happen to revenue if politicians make various changes in tax policy. Sounds like a simple task, but what if the bureaucrats make the ridiculous assumption that tax policy has no measurable impact on jobs, growth, or competitiveness, which leads to the preposterous conclusion that you maximize revenue with 100 percent tax rates?

Writing for Investor’s Business Daily, former Treasury Department officials Ernie Christian and Gary Robbins explain why the controversy over these topics – sometimes referred to as “static scoring” vs “dynamic scoring” – is so important.

It is Economics 101 that many federal taxes, regulations and spending programs create powerful incentives for people not to work, save, invest or otherwise efficiently perform the functions essential to their own well-being. These government-induced changes in behavior set off a chain reaction of macroeconomic effects that impair GDP growth, kill jobs, lower incomes and restrict upward mobility, especially among lower- and middle-income families. …Such measurements are de rigueur among credible academic and private-sector researchers who seek to determine the true size of the tax and regulatory burden on the economy and the true value of government spending, taking into account the economic damage it often causes.

But not all supposed experts look at these second-order or indirect effects of government policy.

And what’s amazing is that the official scorekeepers in Washington are the ones who refuse to recognize the real-world impact of changes in government policy.

These indirect costs of government, in particular or in total, have not been calculated and disclosed in the Budget of the United States or in analyses by the Congressional Budget Office. The result of this deliberate omission by Washington has been to understate many costs of government, often by more than 100%, and grossly overstate its benefits. …It is on this foundation of disinformation that the highly disrespected, overly expensive and too often destructive federal government in Washington has been built.

Christian and Robbins look specifically at the direct and indirect costs of the income tax.

The income tax is a two-part tax, one acknowledged and one deliberately concealed. First, almost $2 trillion of income tax is collected by the IRS for government to spend for presumably beneficial purposes. Then there is the tax-induced economic damage, a stealth tax, indirectly picked from people’s pockets in the form of fewer jobs and lower incomes. This stealth tax is $3.2 trillion each year. …economists often refer to the stealth tax as a deadweight loss. …When the $2 trillion of income tax taken directly out of the economy by the IRS is added to the $3.2 trillion of indirect economic cost, the total private-sector cost of the income tax is $5.2 trillion — and the government has only $2 trillion of income tax revenues to spend in trying to repair the damage.

By the way, I must disagree with the last part of this excerpt.

Government doesn’t “repair the damage” of high taxes when it spends money. Most of the time, it exacerbates the damage of high taxes by spending money in ways that further weaken the economy.

Let’s now get back to the part of the editorial that I like. Ernie and Gary make the very important point that some taxes do more damage than others.

…when the IRS collects a dollar of income tax from corporations, the damage to the overall economy is about $4. Similarly, a dollar of tax on capital gains sets off a ripple effect that does about $6 of damage. Poison pills such as capitalizing (instead of expensing) the job-creating cost of machinery and equipment, taxing dividends, double-taxing personal saving and imposing high tax rates result in stealth taxes ranging from $3 to $8 per dollar of revenues. …Low tax rates do less damage to economic growth per dollar of revenues raised and are preferable to high tax rates, which have the opposite effect.

Here’s a chart based on their analysis.

I’m not overly fixated on their specific estimates. Even good economists, after all, have a hard time making accurate forecasts and correctly isolating the impact of discrete policies on overall economic performance. Moreover, it’s very difficult to factor in the economic impact of America’s tax-haven policies for foreign investors, which help offset the damage of high tax burdens on American citizens.

But Christian and Robbins are completely correct about certain taxes doing more damage than other taxes.

And the lesson they teach us is that the tax bias against saving and investment is extremely destructive.

And the less fortunate are particularly disadvantaged when bad methodology at CBO and JCT perpetuates bad policy.

…it is self-defeating and harmful to require that tax reforms always be revenue neutral in a near-term static sense. Imagine a tax reform that initially costs the IRS $1. Through economic growth, it promptly increases taxable income and well-offness by $2.50. At an average tax rate of 20%, the reform-induced $2.50 increase in taxable income at the outset recoups only 50 cents of the initial $1 cost to the IRS, thereby leaving the IRS 50 cents short in the near term. But who in the White House or Congress would refuse to make mostly lower and middle-income families $2.50 better off at a cost of only 50 cents to Washington’s already overflowing coffers?

The final sentence of the excerpt hits the nail on the head.

I’ve previously cited academic research and expert analysis to show that it is pointlessly punitive to raise tax rates if the damage to the private sector is several times greater than the additional revenue collected by government.

Yet there are plenty of examples of this type of short-sighted analysis, such as Obama’s proposal to expand the Social Security payroll tax (see the 6:43-7:41 section of this video)

And if you like videos, I have a three-part series on the Laffer Curve which is part of this post offering a lesson from the 1980s for Barack Obama.

The bottom line is that we’ll continue to get bad analysis and bad numbers if Republicans aren’t smart enough to clean house at CBO and JCT.

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If We Care about the Less Fortunate, Focus on Growth Rather than Redistribution

Last week, I shared a TV interview about Obama’s budget, but much of the discussion was routine and didn’t warrant special attention.

But there was one small part of the interview, dealing with the silly claim that America became a rich nation because of socialism, that got me all agitated.

Well, to quote the great Yogi Berra, it’s deja vu all over again. Here’s an interview I did with CNBC about labor unrest. As you might expect, I made the standard libertarian argument that it’s not the job of government to pick sides when labor and management have squabbles.

That’s a point I’ve made before (here, here, here, here, here, and here), so there’s no need to elaborate on that issue.

But if you pay attention at the 3:00 mark of the video, you’ll notice that the discussion shifts to income inequality. And this is what got me agitated. I’m completely baffled that some people think that redistribution is more important than growth.

As I point out in the interview, nobody wins in the long run if you have a stagnant economy and politicians are fixated on re-slicing a shrinking pie.

The goal of everyone – including unions and leftist politicians – should be growth. If we get robust growth, that will mean tight labor markets, and that’s a big cause of rising wages.

But here’s my hypothesis to explain why statists don’t support good policies. Simply stated, I think they hate the rich more than they like the poor.

That sounds like a rather bold claim, but is there any other explanation for why they reject the types of tax policies (such as lower corporate rates, reduced double taxation, and expensing) that will increase investment, thus boosting productivity and wages?

Heck, look at this chart showing the relationship between capital formation and labor compensation.

Any decent person, after looking at the link between capital and wages, should be clamoring for the flat tax.

Yet Obama wants to move the tax code in the opposite direction!

I confess that I have no idea if this is because of malice or ignorance, but I do know that no nation has ever generated faster growth with class warfare.

I realize I’m ranting, but the more I think about this topic, the more upset I get. Politicians and their allies are making life harder for workers, and I hope I never stop being outraged when that happens.

P.S. On a totally separate subject, here’s a good joke forwarded to me by a friend this morning. It definitely belongs in my collection of gun control humor.

A state trooper in Kansas made a traffic stop of an elderly lady for speeding on U.S. 166 just East of Sedan, KS. He asked for her driver’s license, registration, and proof of insurance. The lady took out the required information and handed it to him.

In with the cards, he was somewhat surprised (due to her advanced age) to see she had a concealed carry permit. He looked at her and asked if she had a weapon in her possession at this time. She responded that she indeed had a .45 automatic in her glove box.

Something, body language, or the way she said it, made him want to ask if she had any other firearms. She did admit to also having a 9mm Glock in her center console. Now he had to ask one more time if that was all. She responded once again that she did have just one more, a .38 special in her purse.

He then asked her “Ma’am, you sure carry a lot of guns. What are you so afraid of?”

She looked him right in the eye and said, “Not a damn thing!”

You can enjoy other examples of gun control humor by clicking here, here, here, here, here, and here.

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Should Unelected D.C. Bureaucrats Turn the Internet into a Government-Regulated Public Utility?

I suspect that most Americans, if asked to list the biggest economic success story in the United States over the past few decades, would list high tech and the Internet.

And that would be a good answer. For those of us with a good bit of gray hair, it’s sometimes remarkable to think how much different the world is today with laptops, tablets, smart phones, and all sorts of other gadgets.

Gadgets with huge value, by the way. Ask yourself the question in this video. How much money would you need to give up the Internet for the rest of your life?

But if every dark cloud has a silver lining, then I guess silver clouds must have dark linings. And you won’t be surprised to learn that the dark lining for the Internet and high tech is big government.

More specifically, the Federal Communications Commission (FCC) wants to use a law from the 1930s as an excuse to seize authority to micro-manage this (at least so far) vibrant sector of our economy.

In a column for the Wall Street Journal, Gordon Crovitz writes about this regulatory power grab in Washington that could stifle the “permissionless innovation” of the Internet.

Last week Washington abandoned open innovation when the chairman of the Federal Communications Commission yielded to President Obama ’s demands and moved to regulate the freewheeling Internet under the same laws that applied to the Ma Bell monopoly.

So what does that mean?

Until now, anyone could launch new websites, apps and mobile devices without having to lobby a regulator for permission. That was thanks to a Clinton-era bipartisan consensus that the Internet shouldn’t be treated as a public utility. Congress and the White House under both parties kept the FCC from applying the hoary regulations that micromanaged the phone system, which would have frozen innovation online. Last week’s announcement from FCC Chairman Tom Wheeler rejects 20 years of open innovation by submitting the Internet to Title II of the Communications Act of 1934. Once Mr. Wheeler and the commission’s Democratic majority vote this month to apply Title II, the regulations will give them staggering control. Any Internet “charges” and “practices” that the bureaucrats find “unjust or unreasonable is declared to be unlawful.”

And it will open the door to cronyism as already-established companies and well-connected insiders work the system for their own advantage.

This is an open invitation to entrenched companies challenged by new technologies. The Internet has been a source of creative destruction, upending industries from music, movies and newspapers to retail, travel and banking. History teaches that companies threatened by competition will hire as many lawyers as necessary to get regulators to protect them.

And when I wrote the door will be open, it will be wide open.

In 2005, the U.S. Supreme Court warned that if the FCC treated the Internet as a telecommunications service, it “would subject to mandatory common carrier regulation all information service providers that use telecommunications as an input to provide information service to the public”—in other words, almost all websites and apps would be subject to regulation. …once regulators get power, they use it. And if there is any forbearance, there will be litigation from companies seeking to burden their competitors with regulation.

Here are some videos that help put the debate in context.

Let’s start with this Reason TV interview.

Next we have a humorous portrayal of Internet usage in a bureaucrat-governed world.

Sort of reminds me of this Obamacare OB/GYN video.

Last but not least, here’s a dry but very informative explanation of the “net neutrality” issue.

But perhaps all you need is this cartoon, which is from a bigger collection that can be enjoyed here.

Think about the big picture. Is there a sector of the economy that has become more efficient and inexpensive because of government?

Health care? Nope.

Higher education? Nope.

Banking? Nope.

Charity? Nope.

Manufacturing? Nope.

I could continue, but you get the idea.

P.S. If you want more bad news, the Obama White House wants to cede some authority over the Internet to the Keystone Cops at the United Nations.

P.P.S. And since we’re sharing bad news about the Internet, don’t forget that some politicians want a government-empowering, privacy-destroying scheme to let state politicians impose taxes on online sales that take place outside their borders.

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The Repellant and Arrogant Statism of Global Warming Fanatics

I’m a firm believer in climate change. Heck, there have been several ice ages and warming periods, so it’s obvious that temperatures shift over time.

And while I’m not particularly qualified to assess such matters, I’m also willing to believe that human activity has an effect on climate.

Moreover, even though I much prefer warm weather, I’m also open to the idea that global warming might be a bad thing that requires some action.

But here’s the catch. I don’t trust radical environmentalists. Simply stated, too many of these people are nuts.

• Environmentalists assert that you’re racist if you oppose their agenda.
• Some environmentalists don’t believe in bathing.
• How about the environmentalists who sterilize themselves to avoid carbon-producing children?
• Or consider the environmentalists who produce/use hand-cranked vibrators to reduce their carbon footprint.
• There are also environmentalist who claim that climate change causes AIDS.
• And environmentalists put together a ranking implying that Cuba is better than the United States.

Then there’s the super-nutty category.

• The environmentalists who choose death to lower their carbon footprints.

But you know what’s even worse than a nutty environmentalist?

What terrifies me far more are the very serious, very connected, and very powerful non-nutty environmentalists who hold positions of real power. These folks are filled with arrogance and hubris and they have immense power to cause damage.

If you think I’m exaggerating, here’s some of what was contained in a release from the United Nations Regional Information Centre for Western Europe.

By the way, remember that these excerpts are not the unhinged speculation of some crazy conservative or libertarian. These are actually the words – and stated intentions – of the U.N. bureaucracy. They want central planning on steroids.

Christiana Figueres, the Executive Secretary of UNFCCC,  warns that the fight against climate change is a process and that the necessary transformation of the world economy will not be decided at one conference or in one agreement. …”This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time to change the economic development model that has been reigning for at least 150 years, since the industrial revolution. That will not happen overnight and it will not happen at a single conference on climate change, be it COP 15, 21, 40 – you choose the number. It just does not occur like that. It is a process, because of the depth of the transformation.”

Wow. These people want to “intentionally…change the economic development model” that has produced unimagined prosperity.

And they want to replace it with central planning by people who have never demonstrated any ability to generate wealth.

I’m not joking. If you look at Ms. Figueres’ Wikipedia page, you’ll see that she has even less experience in the private sector than President Obama.

Yup, just exactly the kind of pampered (and tax-free) global bureaucrat who should have the power to treat the global economy as some sort of Lego set.

Thomas Sowell has made the very important observation that there’s a giant difference between intelligence and wisdom and Ms. Figueres is a perfect example.

To give you an idea of her cloistered and narrow mindset, she was quoted by Bloomberg as expressing admiration for China’s totalitarian regime over America’s democratic system merely because it ostensibly produces the policies she prefers.

China, the top emitter of greenhouse gases, is also the country that’s “doing it right” when it comes to addressing global warming, the United Nations’ chief climate official said. …China is also able to implement policies because its political system avoids some of the legislative hurdles seen in countries including the U.S., Figueres said. …The political divide in the U.S. Congress has slowed efforts to pass climate legislation and is “very detrimental” to the fight against global warming, she said.

And the icing on the cake, needless to say, is that China’s environment is a catastrophe compared to the much cleaner air and water that exist in the United States!

Though you won’t be surprised to learn that Ms. Figueres is a great admirer of President Obama, even if he does represent a backwards democracy.

The climate chief even held up President Obama as a shining example of steps countries can take to tackle global warming.

Reminds me of a saying about birds of a feather, though I’m not sure how a bird with two left wings can get off the ground.

And don’t even get me started on all the exaggeration and hyperbole that is generated by the radical environmentalists. Though this Jim McKee cartoon is too good not to share.

P.S. Environmentalists are also grotesque hypocrites, as you can see here and here.

P.P.S. But to close on an upbeat note, we have some decent environmental humor here, here, here, and here.

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The Global Private Social Security Revolution

Last month, I posted “the cartoon argument” for Social Security reform.

My main goal, as an American, is to achieve this important reform in the United States.

And I’ve tried to bolster the argument by citing lots of hard data, including the fact that “funded” accounts already exist in nations such as Australia, Chile, Sweden, and the Netherlands.

In this spirit, I wrote an article for the most recent issue of Cayman Financial Review, and I looked at the issue from a global perspective. I first explained that demographics are destiny.

It is widely believe that aging populations and falling birth rates represent one of biggest global challenges for long-term economic stability. How can a nation prosper, after all, if there are more and more old people over time and fewer and fewer workers? Don’t these demographic changes put every-growing fiscal burdens on a shrinking workforce to support the elderly, leading to crippling tax burdens and/or enormous levels of debt? In most cases, there are no good answers to those questions. So it is quite likely that many nations will face serious economic and fiscal challenge… Here are some charts showing the age profile of the world’s population in both 1990 and 2100. As you can see, demographic changes are turning population pyramids into population cylinders. …virtually every industrialized nation is undergoing demographic changes that will produce some very painful fiscal consequences.

But not all nations are in trouble.

…there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. And other nations, including Sweden, Australia, Switzerland, and the Netherlands, have much smaller long-run challenges than other industrialized countries with similar demographic profiles.

Why are these jurisdictions in stronger shape?

Simply stated, they have personal retirement accounts.

Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze. Whether they rely on occupational pensions, individual accounts, or even central provident funds, the common characteristic is that workers automatically set aside a portion of current income so it can be invested in some sort of retirement vehicle. Over several decades, this results in the accumulation of a substantial nest egg that then is used to provide retirement income.

And there are now about 30 nations that have implemented this critical reform…though that number unfortunately is dwarfed by the number of countries that haven’t modernized their tax-and-transfer schemes.

For advocates of funded pension systems, there is good news and bad news. The good news is that there has been a dramatic increase in jurisdictions that have adopted some form of private retirement system. …the bad news is that mandatory private retirement systems still only cover a small fraction of the world’s workers. The vast majority of workers with retirement plans are compelled to participate in pay-as-you-go government schemes.

Unsurprisingly, I explain why personal retirement accounts are much better for the overall economy.

Economists have been concerned about a triple-whammy caused by traditional tax-and-transfer retirement schemes. First, payroll taxes and other levies discourage labor supply during peak working years. Second, the promise of retirement benefits undermines a very significant incentive to save. Third, the provision of retirement benefits discourages labor supply once a worker reaches retirement age. …Systems based on private savings, by contrast, have very little economic downside. Workers are compelled to save and invest some portion of their income, but all of that money will be correctly seen as deferred compensation. …Perhaps equally important, second-pillar systems boost national savings, which means more funds available to finance productive private-sector investment.

Though I bluntly admit that there will be a significant transition cost.

The…common critique of mandatory retirement savings is that…if younger workers are allowed to shift their payroll taxes into personal accounts, policy makers would need to find lots of money over several decades (trillions of dollars in the American example) to fulfill promises made to existing retirees as well as workers that are too old to get much benefit from personal accounts. This critique is completely accurate. …But here’s the catch. While trillions of dollars are needed to finance the transition to a system of personal accounts, it’s also true that trillions of dollars are needed to bail out the current system. …The real question is figuring out the best way to climb out of that hole. From a long-term fiscal and economic perspective, personal accounts are the more attractive option.

To elaborate, it’s better to somehow find $5 trillion over several decades to finance the shift to personal retirement accounts than it is to somehow find $30 trillion over a longer period of time to bail out the current system.

For more information on personal accounts, you can click here for my video on the topic.

And to learn about Obama’s supposed solution, watch (with horror) this video.

P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

P.P.S. While I’m a very strong advocate of personal retirement accounts (my Ph.D. dissertation was about Australia’s very good system), I’ll be the first to admit that it’s even more important to modernize Medicare and Medicaid.

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Comparative City Data Debunks Notion that more Spending Is Key to Better Education or Lower Crime Rates

For both moral reasons and economic reasons, we should have small government.

But even a curmudgeonly libertarian like me also thinks it’s important to have effective and efficient government.

Fortunately, there’s no contradiction between these views. Indeed, academic researchers have found that nations with smaller government also have more efficient government. With Singapore being a very powerful example.

This is why I periodically share data looking at how much governments spend compared to how much they deliver.

Though this can be a depressing exercise because – to cite one example – no government in the world spends more on education than the United States, yet we get very sub-par results.

But what if we compare cities inside the United States on this basis? Are there big differences in how much some local governments spend and the results they get?

The answer is yes, emphatically so.

Here are some excerpts from an article in The Atlantic on which local governments do reasonably well – and very poorly – in terms of education outcomes on a per-dollar-spent basis.

…education spending isn’t inherently bad—what matters is the result. Some school districts get lots in return for the amount of money they spend. …the online financial resource WalletHub has crunched the numbers on school spending at 90 of the most-populated cities across the country, revealing which ones are getting the most—and least—bang for their buck. To arrive at the findings, WalletHub divided each city’s aggregate test scores in fourth- and eighth-grade reading and math by its total per-capita education spending. The researchers then adjusted those figures for various socioeconomic factors, such as the poverty rate and percentage of households that don’t speak English as their first language.

Here are the 10 cities that purportedly do the best job on a per-dollar-spent basis.

And here are the cities that do the worst job.

I guess I’m not overly surprised that cities in California and New York generally rank at the bottom.

Though I wonder whether the results would look significantly different if education spending was measured on a per-pupil basis. That would seem a relevant distinction.

But here’s the key takeaway. Some cities spend two to three times as much per capita on education, yet they actually deliver worse outcomes!

Something all of us should remember next time some politician, whether Obama or some local hack, whines about the “need” for more money for schools.

Now let’s look at how wisely – or ineptly – local governments spend money on crime prevention.

Here’s some of WalletHub’s analysis.

With tax season approaching, WalletHub assessed how efficiently the 110 most populated U.S. cities spend taxpayer dollars on police protection. We did so by calculating each city’s ROI on police spending based on crime rates and per-capita expenditures on police forces after normalizing the data by poverty rate, unemployment rate and median household income. …note that “Adjusted ROI Rank” reflects the results of our analysis after controlling for the three economic factors, whereas “Unadjusted ROI Rank” reflects the results before normalizing the data by the same factors.

So which cities get decent bang for the buck?

And here are the 10 cities that get the least value compared to resources devoted to crime prevention.

Gee, what a surprise to see New York City (once again) at the bottom of the list. And I can only imagine how the city will rank after a few years of Bill de Blasio.

And what’s the story with Long Beach, CA?!? Why are they among the worst on both lists?

Anyhow, kudos to WalletHub for producing both these comparisons. This is good factual data that enables people to see whether their city is being competent or wasteful.

Specifically, why are taxpayers in places such as St. Louis and Orlando spending three or four times as much, on a per-capita basis, as taxpayers in cities such as Lincoln and Louisville?

P.S. Returning to the big picture, we’re more likely to have competent and effective government if it is limited in size and scope. Or, as Mark Steyn humorously observed, “our government is more expensive than any government in history – and we have nothing to show for it.”

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Bill Maher’s Astonishing Economic Illiteracy

Back in 2013, I actually wrote something vaguely nice about HBO’s Bill Maher. Or at least I expressed approval for a point he made about the limits of class-warfare taxation.

It’s now time to compensate for that action.

Check out this interview. It’s about Obama’s new tax-and-spend budget, but pay particular attention at the 5:15 mark of the video and you’ll hear Maher asserting that “socialism” deserves the credit for the development of a thriving middle class in America.

Wow. Maher’s comments are astonishingly illiterate.

As I remarked in the interview, the United States (like other western nations) had a tiny public sector during the period when it transitioned from agricultural poverty to middle-class prosperity.

Federal spending averaged only about 3 percent of economic output, and overall government spending (including state and local governments) was only about 10 percent of GDP.

If that was socialism, then sign me up!

This isn’t to say we have laissez-faire paradise in the 1800s and early 1900s. Some of the so-called Robber Barons were cronyists who used government favoritism to line their pockets. Monetary policy oftentimes was a mess because of government regulation and control of banks. Tariffs were very onerous. And Jim Crow laws were an odious example of government power being used to oppress an entire class of citizens and hamper their ability to participate in the market economy.

But the one thing we didn’t have back then was socialism, whether you use the right definition (government ownership of the means of production) or the sloppy definition (a redistributive welfare state).

Sigh.

Enough on that topic. The bulk of the interview, of course, focused on Obama’s budget. I got in my main point, which is that we need to focus on restraining the growth of government spending.

So rather than recycle my thoughts, let’s cite comments by two wise observers.

Here’s how Dan Henninger of the Wall Street Journal described the President’s plan.

The president’s annual budget reminds the Beltway tribes of what they do—tax the country, distribute revenues to their allies, and euphemize it as a budget. With his 2015 budget, Barack Obama at last makes clear his presidency’s reason for being: to establish an empire of taxation. …In six years, the Obama Democrats have abandoned any belief in the idea that the private sector is the primary cause of American prosperity. Instead, they seem to see the private sector as a kind of tax sump-pump, a dumb machine whose only purpose is tax flow. …That is the empire of taxation. It is an isolated system, based in Washington, which allocates what it exacts from the private sector.

And here’s some of what George Will wrote about the poisonous spiral of more government leading to more stagnation leading to more demands for more government.

The progressive project of maximizing the number of people dependent on government is also aided by the acid of insecurity that grows rapidly when the economy does not. Anxious and disappointed people are susceptible to progressives’ blandishments about the political allocation of wealth and opportunity — “free” this and that. By making slow growth normal, iatrogenic government serves the progressive program of defining economic failure down.

I fully agree. Not only the points about the weakness of the Obama “recovery,” but also the concerns about more and more people being lured into government dependency, which sabotages American exceptionalism.

Jerry Holbert has a nice summary of the President’s worldview.

Hmmm…I think we’ve seen this bookstore before.

Though I’m surprised Obama is bothering to shop when he can just go to the library for his favorite books.

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A Perfect Example of How Tax Competition Constrains Greedy Government

I’m a relentless (probably to the point of being annoying) proponent of tax competition among jurisdictions.

It’s one of the reasons why I favor tax havens and federalism. Simply stated, politicians are less likely to do bad things when they know economic activity can escape to places with better policy.

And I’m more than happy to pontificate on the theories that support my position. But every so often it helps to have a powerful real-world example.

Our example today deals with the fact that the United Kingdom has a very punitive tax on air passengers, but the U.K. government also is devolving some powers to regions such as Scotland. And this bit of decentralization is already generating some pressure for tax reductions.

Here are excerpts from a story in Scotland’s Herald.

The UK government’s decision to devolve control of Air Passenger Duty (APD) to Holyrood means that a family of four could eventually be saving as much as £388 for a one-way journey to long-haul destinations. The promise to hand the Scottish Government control of APD is part of the UK government’s devolution package… The Scottish Government last week said it would halve the rate within the next Parliament and abolish completely “when the public finances allow”.

That sounds like good news for travelers, but some folks aren’t happy.

…airports as well as tourism bodies south of the border are up in arms, fearing that it will create an uneven playing field for the aviation sector as passengers in the catchment areas of airports such as Newcastle, Manchester and Liverpool will simply drive across the border to rival airports in Scotland to avoid potentially huge APD costs. Newcastle airport’s planning director Graeme Mason told the Sunday Herald that Scotland cutting or scrapping the passenger levy would create an unfair “cross-border market distortion” that would fester unless the UK government matches any reduction in APD south of the border.

Notice the Orwellian distortion of language from Mr. Mason. We’re supposed to view lower taxes as a “cross-border market distortion.”

But what he (and others) refer to as a “distortion” is actually the healthy process of competition.

Just as the I-Phone was a “distortion” for the Blackberry, but very good news for consumers. Just as the personal computer was a “distortion” for the typewriter industry, but very good news for consumers.

Countries, just like companies, should suffer when they don’t provide good value in exchange for people’s hard-earned money.

Here’s more from the story, including the fact that English airports in the long run will probably benefit because the government will now feel pressure to lower the tax burden on air travel.

…anyone travelling long-haul could potentially save themselves hundreds of pounds. The saving could be enough, for example, to undermine direct flights between Newcastle and New York that are set to launch in the May. But in Scotland, the decision to devolve APD to Holyrood has been greeted with delight by airports, the tourist industry and businesses which have campaigned both before and since the independence referendum to get rid of the tax. And many of those behind the campaign say that airports in England will eventually benefit from the abolition of the tax in Scotland, as this increases pressure on the UK government to follow suit.

Here’s some real-world evidence of tax competition promoting better policy on travel taxes.

After introducing a form of APD in 2008 the Dutch government scrapped the tax within a year after Dutch residents started travelling in their droves to airports in neighbouring Germany to avoid the tax. Belgium, Denmark, Malta and Norway have also scrapped flight taxes for similar reasons. That leaves the UK as one of only five countries in Europe to levy a passenger departure tax (the others being Austria, France, Germany and Italy) but the UK tax is, on average, five times higher than those other countries and is thought to be the highest in the world… In 2011 the UK government was forced to slash APD on long-haul flights in Northern Ireland, to stem the flow of passengers travelling south to Dublin to take advantage of the Republic of Ireland’s low and now abolished tax on flights.

By the way, the story also reminds us about how dangerous it is to give a government a new source of revenue.

Air Passenger Duty (APD) was introduced by John Major’s UK Conservative government in 1994. It was originally payable at just £5 for one-way domestic and European flights and £10 elsewhere but it has become a nice little earner for successive governments who have steadily increased the levy to the point that it is now the highest tax of its kind anywhere in the world. Long-haul flights in the cheapest economy class are now charged between £67 and £94 per flight, depending on the distance travelled. Other classes of travel, including so-called premium economy class, are charged between £138 and £194 per long-haul flight while anyone travelling in a small plane is charged between £276 and £388 per flight.

Jut keep all this data in mind the next time someone tells you we should let politicians impose a VAT, an energy tax, or a financial tax.

Since we’re on the topic of tax competition, let’s look at the tennis world to see how taxes drive behavior.

In her column for the Wall Street Journal, Allysia Finley explains that top tennis players respond to fiscal incentives.

…tennis players respond to economic incentives and often act as strategically off the court as on. For the past three years Spain’s Rafael Nadal…has bowed out of England’s annual Queen’s Club tournament, traditionally a Wimbledon warm-up, because the U.K. charges foreign athletes a prorated tax on their world-wide income (including endorsements). The more tournaments he plays in Britain, the more he owes Her Majesty’s Government.

Heck, those U.K. tax laws on worldwide income are so powerful (in a bad way) that they even chased away the world’s fastest man.

So what nations offer a more hospitable environment?

Two of my favorite places, Monaco and Switzerland, are high on the list.

The top five French players on the men’s circuit— Jo-Wilfried Tsonga, Gael Monfils, Gilles Simon, Julien Benneteau and Richard Gasquet, as well as Germany’s Philipp Kohlschreiber, all claim residence in Switzerland, ostensibly to avoid paying their home countries’ punitive 45% top personal income-tax rates (not including surcharges or social-security contributions). …the most popular haven for tennis players is the principality of Monaco, which doesn’t tax foreigners’ world-wide income. …Swedish tennis legends Bjorn Borg and Mats Wilander escaped to Monte Carlo during their primes in the 1970s and ’80s to dodge their home country’s 90% top marginal rate, which has since fallen to 57%. …Today, Monaco is the putative home of many of the world’s top-ranked men and women players. They include Serbia’s Novak Djokovic (1), the Czech Republic’s Petra Kvitova (4), Tomas Berdych (7) and Lucie Safarova (16); Canada’s Milos Raonic (8); Denmark’s Caroline Wozniacki (8); Bulgaria’s Grigor Dimitrov (11); and Ukraine’s Alexandr Dolgopolov (23). Players who hail from former communist countries are especially keen, it seems, on keeping their hard-earned money.

Even inside the United States, we see the benefits of tax competition.

Florida is one of the big winners and California is a big loser.

The U.S. has its own Monaco: no-income-tax Florida. It’s no coincidence that America’s top-ranked players Serena (1) and Venus Williams (18) and John Isner (21), as well as Russia’s Maria Sharapova (2) and Japan’s Kei Nishikori (5) live in the Sunshine State. So do twins Mike and Bob Bryan, who have won 16 Grand Slam doubles titles. Like the Williamses, they come from California, where the 13.3% state income-tax rate is the nation’s highest.

Indeed, it’s not just tennis players. Golfers like Tiger Woods have Florida residency. And those that remain in California are plotting their escapes.

Even soccer players become supply-side economists!

So whether it’s taxpayers escaping from France or from New Jersey, tax competition is a wonderful and necessary restraint on the greed of politicians.

P.S. I’ve shared horror stories of anti-gun political correctness in schools.

Well, the Princess of the Levant just sent me this bit of humor.

For more gun control humor, click here.

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Hoisting Obama on His Own Try-Something-New Petard

My Cato Institute colleague Michael Tanner has produced some first-rate substantive research on issues.

He produced a study showing that personal retirement accounts would have been a better deal than Social Security even for people who retired at the depth of the financial crisis and stock-market collapse.

He authored another study showing that overly generous welfare systems in most states make productive work relatively unattractive compared to government dependency.

And I’ve also cited his analysis and commentary on issues such as Obamacare and obesity.

Today, I want to cite him for the simple reason that I admire his cleverness.

For those of us who suffered through President Obama’s State of the Union address, you may recall that the President proposed a thawing of America’s relationship with Cuba on the basis that if something “doesn’t work for 50 years, it’s time to try something new.”

Since I’m not a foreign policy person, I didn’t pay close attention to that passage.

But perhaps I should have been more attentive. It turns out that Obama created a big opening.

Writing for National Review, Tanner decided to hoist Obama on his own petard.

During his State of the Union address last week, President Obama defended his Cuba policy by pointing out, “When what you’re doing doesn’t work for 50 years, it’s time to try something new.” As it happens, I agree with the president on Cuba. But it seems to me that his advice should be applied to a number of other issues as well

Mike starts with the ill-fated War on Poverty.

Lyndon Johnson declared war on poverty in January 1964, just three years after the start of the Cuban embargo. Since then we’ve spent more than $20 trillion fighting poverty. Last year alone, federal and state governments spent just under $1 trillion to fund 126 separate anti-poverty programs. Yet, using the conventional Census Bureau poverty measure, we’ve done nothing to reduce the poverty rate. …And, whatever success we’ve achieved in making material poverty less uncomfortable, we’ve done little to help the poor become independent and self-supporting.

He then points out the utter failure of the War on Drugs.

The War on Drugs has been going on even longer than the War on Poverty, with a similar lack of success. …in the last ten years alone we have spent some $500 billion fighting this “war,” and arrested more than 16 million Americans for drug offenses. The vast majority of arrests have been for simple possession, not sale or other drug crimes. While filling our prisons with nonviolent offenders, destabilizing countries like Mexico and Colombia, wrecking our own inner cities, and making the cartels rich, the drug war has failed to reduce either violence or drug use.

Mike also reminds us that we’ve had five decades-plus of government-run healthcare.

…we’ve suffered from government-run health care in this country for more than 50 years as well. Medicare and Medicaid started in 1965. Others would point out that we are still suffering the consequences of the IRS decision in 1953 to make employer-provided insurance tax-free, while individually purchased insurance has to be paid for with after-tax dollars. No matter how you want to measure the starting point, the government now pays for roughly 52 percent of U.S. health-care spending, and indirectly subsidizes another 37 percent. The result has been steadily rising health-care costs, a dysfunctional insurance market, and a growing shortage of physicians. …a study out of Oregon suggests that being on Medicaid provides no better health outcomes than being uninsured. Meanwhile, Medicare is running up more than $47.6 trillion in unfunded liabilities. And let us not forget the VA system and its problems.

And his article merely scratches the surface.

One could go on and on. Fannie and Freddie? Social Security and its almost $25 trillion in unfunded liabilities? Stimulus spending? Green energy? We won’t even mention the National Weather Service’s apparent inability to accurately predict snowstorms. If we are looking for lessons to learn from the last 50 years, here is one: Bigger government has not brought us more security, more freedom, or more prosperity. Yet, President Obama still sees the answer to every problem, no matter how small, as more government, no matter how big. …President Obama not only seems unable to learn from history, but apparently doesn’t even listen to his own speeches. If big government hasn’t worked for 50 years, 100 years, or for that matter pretty much the whole of human history, maybe it’s time to try something else.

The final sentence in that passage is not just a throw-away line.

I have my own two-question challenge for leftists, which is basically a request that they identify a nation – of any size and at any time – that has prospered with big government.

Mike does something similar. He basically points out that big government has an unbroken track record of failure, and not just for the past 50 years.

I suppose the question to ask is whether any big-government program can be considered a success? In other words, what has any government done well, once it goes beyond the provision of core public goods such as enforcing contracts, protecting property rights, and upholding the rule of law?

To be fair, there are some nations, such as Switzerland, that have enjoyed very long periods of monetary stability and peace. And jurisdictions such as Hong Kong and Singapore have experienced decades of prosperity and tranquility.

In all of those jurisdictions, I think government is too big, but they are considered small-government by modern-world standards.

In any event, the point I’m making is that some governments seem semi-competent, but there also seems to be a relationship between the size and scope of government and the failure of government.

It will be interesting to read the comments.

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Four Big Takeaways from Obama’s New Budget…and the Challenges for the GOP

The President today released his budget for fiscal year 2016, a document that also shows what will happen to taxes, spending, and red ink over the next 10 years if the White House’s budget is adopted.

Here are the four things that deserve critical attention.

1. Obama proposes to have spending grow by an average of about 5.4 percent per year over the next five years and more than 5 percent annually over the next 10 years, well more than twice as fast as projected inflation.

Though it oftentimes doesn’t get sufficient attention, the change in government spending is the most important number (or set of numbers) in any budget. If the burden of spending is rising, regardless of whether that increase is financed by taxes or borrowing, more resources will be diverted from the economy’s productive sector.

In President Obama’s budget, he wants government spending in FY 2016 to be $3,999.5 billion, an astounding increase of 9.4 percent over the Congressional Budget Office’s estimate of $3,656 billion of spending in the current fiscal year (the President is proposing additional spending for FY 2015, so the annual increase between 2015-2016 in his budget is “only” 6.4 percent).

Even more troubling, he wants government spending to climb by more than twice as fast as inflation in future years. And most worrisome of all, he wants government to grow faster than the private sector, which means that the burden of government spending will climb as a share of GDP, both over the next five years and the next 10 years.

The challenge for the GOP: In part because spending rose so much in 2009, but also in part because Congress waged important fiscal battles over debt limits, shutdowns, and sequestration, there was a de facto spending freeze between 2009 and 2014. Unfortunately, spending is climbing by at least twice the rate of inflation in 2015, and Obama wants additional big increases in the future. It will be very revealing to see whether Republican control of both the House and Senate means policy moves back in the direction of spending restraint.

2. The President wants to renege on the 2011 debt limit agreement by busting the spending caps.

With great fanfare in 2011, the White House and Congress agreed to boost the debt limit, but only because both parties agreed on some modest caps to control the growth rate of discretionary spending.

But these spending caps don’t allow outlays to rise as fast as the President would prefer, so he is explicitly seeking to eviscerate the caps and allow bigger increases. These spending hikes would enable for defense spending and more domestic spending.

The challenge for the GOP: The spending caps and sequestration represent President Obama’s most stinging defeat on fiscal policy, so it’s hardly a surprise that he wants to gut any restraint on his ability to spend. This presumably should be a slam-dunk victory for Republicans since they can simply refuse to change the law. But there are some GOPers who want more defense spending, and even some who want more domestic spending. Indeed, the pro-spending caucus in the Republican Party was one of the reasons why the spending caps were already weakened two years ago.

3. The White House’s new budget wants a new tax on American companies competing in world markets.

The good news is that the President no longer is proposing to get rid of “deferral,” a policy from past budgets that would have resulted in a 35 percent tax on profits earned by American multinationals in other nations (and already subject to tax by the governments of those other nations). The bad news is that he instead wants to tax all previously accumulated foreign-source income at 14 percent and then tax all future foreign-source income at 19 percent.

To make matters worse, he wants to use this new pot of money to finance expanded federal involvement and interference in transportation and infrastructure.

The challenge for the GOP: Some Republicans favor more transportation spending from Washington and some companies may be tempted to acquiesce to some sort of deal, particularly if it only applies to accumulations of prior-year foreign-source income. Advocates of good policy in Congress should not enable a bigger federal role in transportation. Indeed, the only good policy is to phase out federal involvement and eliminate the federal gas tax.

4. President Obama wants class-warfare based increases in the death tax and the capital gains tax.

In addition to many other tax hikes in his budget, the President wants to boost the capital gains tax rate to 28 percent and he also wants to expand the impact of the death tax by eliminating a policy that acknowledges the actual value of assets when they are received by children and other heirs.

Since there shouldn’t be any double taxation of income that is saved and invested, both the death tax and capital gains tax should be abolished. Needless to say, increasing either tax would have a negative impact on the American economy.

The challenge for the GOP: Hopefully this policy will be deemed “dead on arrival.” Republicans presumably should be united in their opposition to class-warfare tax increases.

P.S. This Steve Breen cartoon is a pretty apt summary of the Obama budget (and one that will be added to my bloated government collection).

Particularly when augmented by this Jerry Holbert gem.

P.P.S. Here’s the fiscal policy we should emulate.

P.P.P.S. Here’s the fiscal policy mistake we should avoid.

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Bringing Growth to the Developing World: The Role of Tax Havens and the Size of Government

If nothing else, our leftist friends deserve credit for chutzpah.

All around the world, we see concrete evidence that big government leads to stagnation and decay, yet statists repeatedly argue that further expansions in taxes and spending will be good for growth.

During Obama’s recent state-of-the-union address, he pushed for class warfare policies to finance bigger government, claiming such policies would be an “investment” in the future.

But it’s not just Obama. Hillary Clinton, on several occasions (see here, here, here, and here), has explicitly argued that higher tax rates and bigger government are good for growth.

The statists at the Paris-based Organization for Economic Cooperation and Development (financed with our tax dollars) actually argue that higher taxes and more spending will somehow enable more prosperity, both in the developing world and in the industrialized world.

And some left-wing “charities” are getting in on this scam. Oxfam, for instance, now argues that higher tax rates and bigger government are necessary for growth and development in poor nations. And Christian Aid makes the same dodgy argument.

The Oxfam/Christian Aid argument is especially perverse.

If they actually think that bloated public sectors are the key to faster growth in the developing world, shouldn’t they provide at least one example of a jurisdiction that has become rich following that approach?

Let’s examine this issue more closely.

Here are some excerpts from a column in the most recent issue of Cayman Financial Review. Written by the Cato Institute’s Marian Tupy, it looks at the challenge of boosting prosperity in sub-Saharan Africa.

Marian starts with some good news. The 21st Century, at least so far, has seen genuine progress.

Real gross domestic product has been ticking along at an average annual rate of 4.8 percent, while per capita income has grown by roughly 40 percent. …The benefits to ordinary people have been impressive. The share of Africans living on less than $1.25 per day fell from 56 percent in 1990 to 48 percent in 2010. …If the current trend continues, Africa’s poverty rate will fall to 24 percent by 2030. In addition, per-capita caloric intake has increased from 2,150 kcal in 1990 to 2,430 kcal in 2013. …Moreover, between 1990 and 2012, the percentage of the population with access to clean drinking water increased from 48 percent to 64 percent. Many African countries have also seen dramatic falls in infant and child mortality. Over the last decade, for example, child mortality in Senegal, Rwanda, Uganda, Ghana, and Kenya declined at a rate exceeding 6 percent per year.

This is very good news.

And foreign investment deserves some of the credit. When western multinationals enter a nation, they play a vital role in creating (relatively) high-paying and building a nation’s capital stock.

Particularly since the overall economic and policy climate in many sub-Saharan nations is very dismal.

As you can see from the accompanying map, based on the Fraser Institute’s Economic Freedom of the World, most nations in the region are either in the most economically repressed category (red) or the next-t0-last category (yellow).

In either case, these countries obviously have far too much taxes, spending, regulation, and intervention.

Needless to say, these policies make it difficult for local businesses and entrepreneurs to succeed, which means the jobs and prosperity made possible by foreign investment are absolutely vital.

But Marian warns that this progress could come to a halt if African nations fall victim to class-warfare proposals that seek to demonize multinational firms as part of a push to expand tax collections.

…future growth could be at risk if economic conditions on the continent deteriorate.  And that may happen if policy makers decide to adopt a more hostile approach to entrepreneurs and investors. Specifically, African governments are urged to take a stance against so-called tax havens, which are alleged to deprive the former of significant chunks of tax revenue. …Oxfam, a British charity, has argued that…tax maneuvering by multinational companies is entrenching poverty and weakening developing countries’ economies. According to Oxfam, “Developing countries lose an estimated $100 billion to $160 billion annually to corporate tax dodging.” As such, Oxfam has urged the G20 to rewrite international tax laws so that “developing countries are not taken advantage of by the rich.”

The problem with this ideology, as Marian explains, is that foreign companies won’t have nearly as much incentive to create jobs and growth in Africa if tax policy becomes more onerous.

Africa has one of the world’s riskiest business environments. Government accountability and transparency are low. The rule of law and protection of property rights are weak. Corruption is high. In a sense, low taxes compensate domestic and foreign investors for shortcomings of the business environment that are more difficult to address: a low tax rate can be legislated overnight, but corruption-free bureaucracy takes generations to accomplish. What’s true for corporations is also true for individuals. Many wealthy Africans continue to work and create wealth in the difficult African business environment in part because they know that at least a portion of their wealth is safe from inflation and predation.

But the most important part of Marian’s article is the section where he debunks the notion that bigger government somehow leads to more prosperity.

…the argument in favor of higher tax revenues assumes that government spending is an efficient driver of economic growth. This is a common misperception in the West, which is now being applied, with potentially disastrous consequences, to the developing world. In America, for example, Hillary Clinton has argued that more revenue improves economic development and the “rich people … [who] do not contribute [jeopardize]… the growth of their own countries.” She has urged “the wealthy across the Americas to pay their ‘fair share’ of taxes in order to eliminate poverty and promote economic opportunity for all.” Is the former Secretary of State correct? Are developing nations suffering from inadequate levels of public spending? Is there a need for more revenue to finance bigger government so that national economies can grow faster?

Marian looks at the actual data.

And he makes the absolutely essential point that western nations became rich when government was very small and there was virtually no redistribution.

According to the International Monetary Fund, government outlays consume, on average, about 27 percent of economic output in sub-Saharan nations….the burden of government spending averaged only about 10 percent of economic output in North America and Western Europe through the late 1800s and early 1900s – the period when the nations in these regions enjoyed huge increases in living standards and evolved from agricultural poverty to middle-class prosperity. If the goal is to have African nations copy the successful growth spurts of western nations (keeping in mind that per-capita economic output today in sub-Saharan Africa is roughly equal to per-capita GDP levels in Western nations in the late 1800s), then the latter’s experience implies that high levels of government spending are not necessary. Indeed, too much spending presumably hinders growth by leading to the misallocation of labor and capital. Moreover, it should be pointed out that the United States and other currently rich countries also had no income taxes when they made their big improvements in economic status.

In other words, the best recipe for African prosperity is the one that worked for the western world.

Sub-Saharan Africa needs small government and free markets.

And, yes, there is a role for government in providing the rule of law and other core public goods, but African nations already collect more than enough revenue to finance these legitimate roles.

Here’s the bottom line.

Of course, not all government spending is bad for growth. Upholding the rule of law and protecting property rights costs money, but helps growth. Historically, African governments have been at their weakest when providing for these “night watchman” functions of the state. And their economies suffered as a result. Were African governments to focus on a set of narrow, clearly defined goals, they would find plenty of revenue to finance their accomplishment – without having to resort to punitive tax policies that are likely to undermine Africa’s long term economic prospects.

P.S. Since today’s topic dealt with tax havens, that’s my excuse to share this interview with the folks at the Mises Institute. I wax poetic about why tax havens are a liberalizing force in the global economy, while also touching on issues such as double taxation, corporate inversions, financial privacy, and FATCA.

For more information, here’s my video series on tax competition and tax havens.

P.P.S. On a completely separate topic, I’ve often made the point that the “Obama recovery” is very anemic.

Well, here’s some new evidence from the Wall Street Journal.

Wow, less than half the growth we got under Reaganomics.

Seems like a good opportunity for me to reissue my two-part challenge to the left. To date, not a single statist has successfully responded.

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