An Example of Government Theft and Thuggery, or an Example of Drug War Lunacy?

Politicians and bureaucrats are very creative in their pursuit of bad policy.

In some case, I’m not even sure how to classify their actions.

When the government squandered $224,000-plus for research on condom sizes, for instance, I thought that story easily could be classified as wasteful spending. But then I discovered the research was related to the fact that the government limits the types of condoms that manufacturers can offer, so maybe this was an example of mindless over-regulation.

Now I’m facing another quandary about how to classify a story. I’m not sure to add the following nightmare to my ever-growing list of theft-by-government stories, or whether it belongs in my collection of stupid-drug-war stories.

Here’s some background from a report in Reason by Jacob Sullum. It’s about a robbery at an airport.

When he visited relatives in Cincinnati the winter before last, Charles Clarke, a 24-year-old college student, took with him $11,000 that he had saved from wages, financial aid, and family gifts because he did not want to lose it. He did not count on the armed robbers at the airport, who took every last cent as he was about to board a flight back to Orlando in February 2014.

So did Mr. Clarke call the cops to report the theft?

Well, not exactly.

…the thieves were cops, who justified confiscating Clarke’s life savings by claiming his luggage and cash smelled like pot.

But the cops didn’t arrest Mr. Clarke for possession of marijuana (they didn’t find any). Nor did they charge him with having smoked marijuana (I guess even cops realize that would be a pointless waste of resources).

However, they did take his money on the very tenuous (and completely unproven) proposition that it may have been connected with a drug deal.

Even more amazing, the burden of proof is now on Mr. Clarke to prove his money is innocent, so the presumption of innocence granted by the Constitution doesn’t apply!

More than a year later, Clarke is still trying to get his money back… But the federal prosecutors who are pursuing forfeiture of Clarke’s money do not have to prove he was a drug dealer. …the government keeps the cash based on “probable cause that it was proceeds of drug trafficking or was intended to be used in an illegal drug transaction,” and the burden is on Clarke to recover it.

Why is this happening?

Well, I’ve written many times that incentives matter. That’s true for taxpayers and it’s true for bureaucrats.

And true for cops as well.

…the number of seizures by police at the Cincinnati/Northern Kentucky International Airport exploded from a couple dozen a year in the late 1990s to nearly 100, totaling $2 million, in 2013. By pursuing forfeiture under federal law through the Justice Department’s Equitable Sharing Program, the airport cops can keep up to 80 percent of the loot while letting the feds do most of the work.

Yup, this is what’s called “policing for profit.”

This is so outrageous that even some folks who like big government are on Mr. Clarke’s side. Here are some excerpts from a report published by Vox.

Under federal and state laws that allow what’s called “civil forfeiture,” law enforcement officers can seize someone’s property without proving the person was guilty of a crime; they just need probable cause to believe the assets are being used as part of criminal activity, typically drug trafficking. Police can then absorb the value of this property — be it cash, cars, guns, or something else — as profit: either through state programs, or under a federal program known as Equitable Sharing that lets local and state police get up to 80 percent of the value of what they seize as money for their departments. So police can not only seize people’s property without proving involvement in a crime, but they have a financial incentive to do so.

Not only is there no presumption of innocence, the government actually puts the money on trial rather than the person.

In typical criminal cases, the government has to prove beyond a reasonable doubt that someone is guilty of a crime. But in civil forfeiture cases, the government only has to show that it’s more likely than not that the property was intended to buy drugs or obtained from selling drugs. The bar is so low in part because it’s the property itself on trial, not the person whose property was taken — and due process rights cover people, not property. So in Clarke’s situation, the case is literally called United States of America v. $11,000.00 in United States Currency. (No, this is not a joke.)

The Vox report also looks at the perverse incentives created by this system.

…under the federal program, 13 different law enforcement agencies from Ohio and Kentucky are seeking a cut of Clarke’s $11,000 — even though 11 of those agencies weren’t involved in the seizure. The competition should show how lucrative these kind of seizures are in the eyes of law enforcement: they’re an opportunity to turn a costly counter-narcotics operation into a profitable venture for the law enforcement agencies involved (or even not, in Clarke’s case).

And here’s a look at how different states approach the issue.

The darker the state, the bigger the incentive for law enforcement agencies to steal money.

There’s also good evidence that these venal laws target minorities.

A bulk of forfeiture cases also appear to disproportionately afflict minorities. Clarke, who’s black, said he felt like he was racially profiled. Of the 400 federal court cases reviewed by the Post in which people challenged a seizure and got some money back, most of the victims were black, Hispanic, or another racial minority.

This is a good opportunity to say something about race relations.

I don’t have any tolerance for racial grievance mongers like Jesse Jackson or Al Sharpton, and I don’t automatically assume racism when a black man like Eric Garner dies because of an interaction with cops.

But I do have great sympathy for law-abiding African-Americans who have to deal getting hassled for “driving while black.”

Not to mention “riding trains while black.”

And as we see from Mr. Clarke’s plight, we also have to include “flying while black.”

By the way, I’m not arguing that profiling is always illegitimate. As Walter Williams has explained, it’s sometimes just common sense.

But if profiling – or even the perception of profiling – causes resentment, then doesn’t it make sense to make sure it isn’t being used promiscuously? Shouldn’t it be reserved for situations where law enforcement is seeking to protect life, liberty, or property? Needless to say, civil asset forfeiture and the drug war are definitely not good reasons to utilize a tool with societal downsides.

P.S. Let’s shift to a different topic. I realize it might be a bit unseemly to do a victory dance in the end zone, but every so often it’s worth noting that folks on the left are spectacularly wrong in their analysis.

I wrote, for instance, about Paul Krugman’s argument that the American economy would benefit from a housing bubble. Gee, that didn’t turn out so well.

Here’s another example that’s been circulating on Twitter. It’s a snapshot on the famous economics textbook authored by Paul Samuelson. Like Krugman, Samuelson won a Nobel Prize, so he presumably had a very high IQ.

Yet just as the Soviet Union was about to collapse, he actually believed that the communist economy was thriving.

Just goes to show you that Thomas Sowell was very insightful when he wrote that intelligence and wisdom are not the same thing.

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Economic Lessons from the Nordic Countries

Folks on the left sometimes act as if the Nordic nations somehow prove that big government isn’t an impediment to prosperity.

As I’ve pointed out before, they obviously don’t spend much time looking at the data.

So let’s give them a reminder. Here are the rankings from Economic Freedom of the World. I’ve inserted red arrows to draw attention to the Nordic nations. As you can see, every single one of them is in the top quartile, meaning that they aren’t big-government jurisdictions by world standards.

Moreover, Finland ranks above the United States. Denmark is higher than Estonia, which is often cited a free-market success story. And all of them rank ahead of Slovakia, which also is known for pro-growth reforms.

To be sure, this doesn’t mean the Nordic nations are libertarian paradises. Far from it.

Government is far too big in those countries, just as it is far too big in the United States, Switzerland, New Zealand, Canada, and other nations in the top quartile.

Which is tragic since the burden of government spending in North America and Western Europe used to be just a fraction of current levels – even in nations such as Sweden.

The way I’ve described the Nordic nations is that they have bloated and costly welfare states but compensate for that bad policy by being very free market in other policy areas.

But you don’t need to believe me. Nima Sanandaji has just written an excellent new monograph for the Institute of Economic Affairs in London. Entitled Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima’s work explains how the Nordic nations became rich during an era of small government and free markets, how they then veered in the wrong direction, but are now trying to restore more economic freedom.

Here are some key excerpts, starting with some much-needed economic history.

Scandinavia’s success story predated the welfare state. …As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. …Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes. …The phenomenal national income growth in the Nordic nations occurred before the rise of large welfare states. The rise in living standards was made possible when cultures based on social cohesion, high levels of trust and strong work ethics were combined with free markets and low taxes….the Nordic success story reinforces the idea that business-friendly and small-government-oriented policies can promote growth.

Here’s a chart from the book showing remarkable growth for Sweden and Denmark in the pre-welfare state era.

Nima has extra details about his home country of Sweden.

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes.

Unfortunately, Nordic nations veered to the left in the late 1960s and early 1970s. And, not surprisingly, that’s when growth began to deteriorate.

The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful.

Again, he has additional details about Sweden.

Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. …As late as 1975 Sweden was ranked as the 4th richest nation in the world according to OECD measures….the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mid 1990s. …It is interesting that the left rarely discusses this calamitous Swedish growth performance from 1970 to 2000.

The good news is that Nordic nations have begun to shift back toward market-oriented policies. Some of them have reduced the burden of government spending. All of them have lowered tax rates, particularly on business and investment income. And there have even been some welfare reforms.

…there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations

But there’s no question that the welfare state and its concomitant tax burden are still the biggest problem in the region. Which  is why it is critical that Nordic nations maintain pro-market policies on regulation, trade, monetary policy, rule of law and property rights.

Scandinavian countries have compensated for a large public sector by increasing economic liberty in other areas. During recent decades, Nordic nations have implemented major market liberalisations to compensate for the growth-inhibiting effects of taxes and labour market policies.

Let’s close with what I consider to be the strongest evidence from Nima’s publication. He shows that Scandinavians who emigrated to America are considerably richer than their counterparts who stayed put.

Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. …the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219. …Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 percent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.

In other words, when you do apples to apples comparisons, either of peoples or nations, you find that smaller government and free markets lead to more prosperity.

That’s the real lesson from the Nordic nations.

P.S. Just in case readers think I’m being too favorable to the Nordic nations, rest assured that I’m very critical of the bad policies in these nations.

Just look at what I’ve written, for instance, about Sweden’s healthcare system or Denmark’s dependency problem.

But I will give praise when any nation, from any part of the world, takes steps in the right direction.

And I do distinguish between the big-government/free-market systems you find in Nordic nations and the big-government/crony-intervention systems you find in countries like France and Greece.

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Polygamy, Gay Marriage, and the Role of Government

Since I’m a bit old-fashioned, I think polygamy is rather weird.

And it would also be a practical nightmare. Thinking about it from a guy’s perspective, imagine having to remember multiple birthdays and anniversaries?

Not to mention dealing with a more complicated approval process if you want to get permission to join another softball league or take an out-of-town trip!

To be fair, polygamy could also mean one wife and multiple husbands, but what woman would want to subject herself to that burden?!?

She wouldn’t even know who to blame if she found the toilet seat in the up position.

But let’s look at the issue from a more serious perspective, especially because of the Supreme Court’s recent decision on gay marriage.

In a column for Politico, Fredrik deBoer argues that polygamists should also be allowed to marry.

Welcome to the exciting new world of the slippery slope. Following on the rejection of interracial marriage bans in the 20th Century, the Supreme Court decision clearly shows that marriage should be a broadly applicable right… Where does the next advance come? The answer is going to make nearly everyone uncomfortable: Now that we’ve defined that love and devotion and family isn’t driven by gender alone, why should it be limited to just two individuals? The most natural advance next for marriage lies in legalized polygamy.

Yes, he’s serious.

…the moral reasoning behind society’s rejection of polygamy remains just as uncomfortable and legally weak as same-sex marriage opposition was until recently. …If my liberal friends recognize the legitimacy of free people who choose to form romantic partnerships with multiple partners, how can they deny them the right to the legal protections marriage affords? Polyamory is a fact. People are living in group relationships today. The question is not whether they will continue on in those relationships. The question is whether we will grant to them the same basic recognition we grant to other adults: that love makes marriage, and that the right to marry is exactly that, a right. …the notion that procreation and child-rearing are the natural justification for marriage has been dealt a terminal injury.

He makes a very good point that polygamous relationships exist, regardless of whether they’re legally recognized.

But should they get some form of legal recognition? Mr. deBoer says yes, and asserts that polygamists should be allowed to marry, while being careful to argue that the slippery slope should be limited.

…mutually-informed consent explains exactly why we must permit polygamy and must oppose bestiality and child marriage. Animals are incapable of voicing consent; children are incapable of understanding what it means to consent. In contrast, consenting adults who all knowingly and willfully decide to enter into a joint marriage contract, free of coercion, should be permitted to do so, according to basic principles of personal liberty.

And here’s his bottom line.

…many progressives would recognize, when pushed in this way, that the case against polygamy is incredibly flimsy, almost entirely lacking in rational basis and animated by purely irrational fears and prejudice. …The course then, is clear: to look beyond political convenience and conservative intransigence, and begin to make the case for extending legal marriage rights to more loving and committed adults. It’s time.

But maybe “it’s time” for a different approach, and not merely because the marriage penalty might be enormous in a polygamous marriage.

Before looking at an alternative to government-sanctioned marriage for polygamists, let’s ask ourselves a weighty philosophical question. Is it possible for good things to happen for the wrong reason?

Consider what’s happening in Alabama, where the state senate has voted to abolish government-granted marriage licenses.

In Alabama, resistance to same-sex marriage continues.  …we have legislation making its way through the house right now that could get rid of the entire institution of marriage as we know it in Alabama. Right now, if you want to get married you go to the courthouse and the probate judge gives you a marriage license. Attorney Jake Watson explains, “[SB377] does away with that and requires parties to enter into a contract and file it at the courthouse, as I understand it.” …The bill passed the Senate by a vote of 22-3. It’s now in the House.

The politicians presumably took this step because they don’t want gay marriage rather than because of libertarian principles.

But isn’t this the ideal outcome, even if the motivating force is hostility to gay couples? After all, why should the government have any role in sanctioning a marriage? In think that’s the right question whether we’re talking traditional marriage, gay marriage, or polygamous marriage.

Wouldn’t it be interesting if Alabama showed up the path forward, albeit unintentionally?

Sort of reminds me of how the Democratic Party in Virginia had a campaign of “massive resistance” to school integration during the civil rights era. Motivated by racism, the state government even flirted with a voucher system.

That’s odious, but imagine if vouchers had been put in place 50-60 years ago for a bad reason and had developed today into a model for better schools at lower cost? One that was especially advantageous to minority students! The old-time segregationists would be rolling in their graves.

Returning to the marriage issue, it’s also worth noting that there are additional benefits to getting government out of the marriage business. Churches would not face any pressure to alter their beliefs. Baptists could stick to traditional marriage, Unitarians could allow gay marriage, and Mormons (if they wanted to be retro) could allow polygamy.

Heck, maybe we could even allow statists to somehow marry government. Elizabeth Warren and the IRS would make a great couple!

And once we solve all those issues, all that remains is convincing people that they should find bakers and photographers without using coercion.

P.S. If the government was out of the business of marriage, that would eliminate an excuse for wasteful and ineffective pro-marriage spending by governments.

P.P.S. For those who appreciate humor, there are good gay marriage one-liners among the rest of the jokes you can peruse here, here, and here.

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Fiscal Fights with Friends, Part III: Why a Carbon Tax Will Enable Bigger Government rather than Better Policy

Explaining why statists are wrong about policy is a necessary part of what I do, but it sometimes can get a bit predictable. So I’ve decided to periodically pick fights with people who generally are on the right side.

By the way, I’m definitely not talking about Republicans, who oftentimes are among the most worst people in Washington.

I’m talking about friendly fights with other policy wonks.

My first friendly fight featured my complaints about an anti-flat tax column by Reihan Salam of National Review, mostly because I think he got some economic analysis wrong even though I largely agreed with his political analysis.

My second friendly fight featured my grousing about the fiscal plan put forth by the American Enterprise Institute, which openly proposed that the tax burden should increase to enable a larger burden of government spending.

Time for a third fight. My former Cato colleague Jerry Taylor is now head of the Niskanen Center. He wrote a paper in March making “The Conservative Case for a Carbon Tax.” Here’s some of what he wrote.

…conservatives should say “yes” to a revenue-neutral carbon tax …so long as the tax displaces EPA regulation of greenhouse gas emissions and eliminates a host of tax preferences provided to green energy producers. If federal and state governments are going to act to reduce greenhouse gas emissions, better that they do so at the least economic cost possible. A carbon tax…promises to do that by leaving the decision about where, when, and how to reduce greenhouse gas emissions to market actors (via price signals) rather than to regulators (via administrative orders). A carbon tax would also produce revenue that can be used to provide offsetting tax cuts. …Suggestions have been made to use those revenues to offset cuts in the corporate income tax, the capital gain s tax, personal income taxes, payroll taxes, and sales taxes. If the carbon tax is less economically harmful than the tax it displaces, a revenue neutral carbon tax is worth embracing even if we leave aside the environmental benefits. …Morris calculates that her carbon tax would bring in about $88 billion in the first year,rising to $200 billion a year after 20 years

Everything Jerry wrote is theoretically reasonable, particularly since he is proposing a carbon tax as a replacement for counterproductive regulation and he also says the tax revenue can be used to lower other tax burdens.

But theoretically reasonable is not the same as practical policy or good policy. What if politicians pull a bait and switch, imposing a carbon tax but then not following through on the deal?

Jerry addresses these concerns.

Many conservatives resist carbon taxes because they believe that increases in federal revenues will increase the size of government. But virtually every proposed carbon tax put on the political table includes offsetting tax cuts to ensure revenue neutrality. Revenue neutral carbon taxes will not increase the size of the federal treasury. …The true definition of government’s size is not how many dollars the treasury extracts from the economy. It is best measured by how many resources are reallocated as a consequence of government. To the extent that carbon taxes are more efficient than command-and-control regulation at achieving the aims of greenhouse gas emission constraint, a carbon tax would serve to decrease the size of government relative to the status quo.

Those are fair points, and I particularly agree that fiscal policy is an incomplete measure of the burden of government.

So Jerry is right that a particular regulation might be more damaging that a particular tax.

Jerry continues to address concerns on the right about a carbon tax.

Many conservatives have argued that no matter how compelling the case for a carbon tax might be, it will be rendered intolerable by the time it emerges from the legislature. Politics, not economics, will dictate the tax rate. Exceptions and favors for politically popular industries will litter the code. And despite promises to the contrary, the inefficient regulations will never die. Economist Tom Tietenberg of Colby College examined the literature pertaining to the 15 major pollution tax and fee programs instituted worldwide and found that while concerns about the translating economic theory into political practice are not baseless, they are overstated.

I find Jerry to be less persuasive on this front. I’m not sure foreign evidence tells us much, in part because almost all other nations have parliamentary forms of government where the party in power, by definition, exercises both executive and legislative control in a system of strong party discipline.

Our separation-of-powers system, by contrast, necessarily requires consensus among Senators, Representatives, and the White House, further complicated by the necessity of moving legislation through committees. All of this results in the kinds of compromises and horse trading that can take clean theoretical concepts and turn them into Byzantine reality.

Heck, just consider the internal revenue code, which has become a nightmare of complexity.

But that’s not my main concern with Jerry’s proposed carbon tax.

My real objection is that I have zero trust that Washington won’t use the new tax as a tool for expanding the size and cost of government.

This isn’t just idle speculation or misplaced paranoia. The crowd in Washington is salivating for a new source of revenue. The Wall Street Journal opines on this development, citing the soon-to-be leader of Senate Democrats.

Chuck Schumer is…already planning for 2017…predicting that the political class might join hands and pass a carbon tax. “…many of our Republican friends will say we’ve been starving the government for revenues,” Mr. Schumer told an environmental event on Capitol Hill according to the Politico website, “but many of them will not be for raising [income tax] rates.” So Republicans and Democrats will both be hunting for revenues and “you might get a compromise” over a new carbon tax, he added.

The editors at the WSJ are not sold on this idea, to put it mildly.

It’s amusing that Sen. Schumer thinks a federal government that spends nearly $4 trillion and 21% of national output a year is “starving” for anything. …Our view of a carbon tax is that it might be acceptable as part of a tax reform that eliminated—entirely—some current revenue source such as the payroll or corporate income tax. But we don’t expect to live long enough to see that day. A slippery compromise would trade a new carbon tax for a reduction in some tax rates, but the politicians would soon return to raising those rates again. The U.S. would be left with the current tax burden plus the new carbon tax—and a permanently larger government.

The folks at the WSJ hit the nail on the head. More spending is the most realistic outcome if politicians get a new tax, whether it’s an energy tax, a value-added tax, a wealth tax, or a financial transactions tax.

And Jerry actually confirms my fears. Just yesterday, he posted some comments on the Wall Street Journal’s editorial, and what he wrote perfectly captures why advocates of smaller government are so resistant to a carbon tax.

He went from advocating a revenue-neutral (and regulation-eliminating) carbon tax in March to now saying it’s okay to have a net increase in the tax burden!

…there is a very strong, conservative case for doing exactly what Sen. Schumer proposed this week (if the revenues are used to reduce the deficit, as Sen. Schumer implied, rather than to fund more spending).

And keep in mind that Sen. Schumer doubtlessly intends to spend every penny (and more) that is generated by this new tax, so the real-world outcome would be even worse.

By the way, Jerry then ventures into the world of fiscal policy, asserting that there’s no hope of fiscal restraint and that Republicans should simply figure out ways to increase the tax burden.

This may be unpopular with Republicans at the moment, but sooner or later, bills must be paid. And there’s no chance whatsoever that those bills are going to be paid by savings gained from budget cuts alone. If a carbon tax is not going to provide the necessary revenues, then what do Republicans propose as a source of revenue in its stead?

Wow, there’s a lot wrong in those three sentences.

But I’ll just focus on a few points.

• It’s actually very easy to balance the budget with modest spending restraint.
• Republicans have approved no-tax-hike budgets that balance for five consecutive years.
• If you want real-world evidence, we made huge progress with a spending freeze between 2009 and 2014 and also enjoyed big gains because of spending restraint between 1994 and 1998.
• Academic research confirms that higher taxes “feed the beast” by enabling bigger government.
• The evidence from Europe shows that new taxes get used for new spending, not deficit reduction.

But you don’t have to believe me. Just read what leftists have said they want to do with the money from a new energy tax.

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Obamacare and the Odious Anti-Constitutionalism of Chief Justice John Roberts

I feel compelled to comment on the Supreme Court’s latest Obamacare decision, though I could sum up my reaction with one word: disgust.

• I’m disgusted that we had politicians who decided in 2009 and 2010 to further screw up the healthcare system with Obamacare.
• I’m disgusted the IRS then decided to arbitrarily change the law in order to provide subsidies to people getting insurance through the federal exchange, even though the law explicitly says those handouts were only supposed to go to those getting policies through state exchanges (as the oily Jonathan Gruber openly admitted).
• I’m disgusted that the lawyers at the Justice Department and the Office of White House Counsel didn’t have the integrity to say that handouts could only be given to people using state exchanges.
• But most of all, I’m disgusted that the Supreme Court once again has decided to put politics above the Constitution.

In theory, the courts play a valuable role in America’s separation-of-powers system. They supposedly protect our freedoms from majoritarianism. And they ostensibly preserve our system of checks and balances by preventing other branches of the federal government from exceeding their powers.

To be sure, the courts – including and especially the Supreme Court – have not done a good job in some areas. Ever since the 1930s, for instance, they’ve completely failed to limit the federal government to the enumerated powers in Article 1, Section 8, of the Constitution.

The Supreme Court’s first Obamacare decision back in 2012 then took that negligence to a higher level.

Now we have a second Obamacare decision. And this one may be even more outrageous because the Supreme Court decided to act as a pseudo-legislature by arbitrarily re-writing Obamacare.

Here’s what George Will wrote about the decision.

The most durable damage from Thursday’s decision is not the perpetuation of the ACA, which can be undone by what created it — legislative action. The paramount injury is the court’s embrace of a duty to ratify and even facilitate lawless discretion exercised by administrative agencies and the executive branch generally. …The decision also resulted from Chief Justice John G. Roberts Jr.’s embrace of the doctrine that courts, owing vast deference to the purposes of the political branches, are obligated to do whatever is required to make a law efficient, regardless of how the law is written. What Roberts does by way of, to be polite, creative construing (Justice Antonin Scalia, dissenting, calls it “somersaults of statutory interpretation”) is legislating, not judging. …Thursday’s decision demonstrates how easily, indeed inevitably, judicial deference becomes judicial dereliction, with anticonstitutional consequences. We are, says William R. Maurer of the Institute for Justice, becoming “a country in which all the branches of government work in tandem to achieve policy outcomes, instead of checking one another to protect individual rights.

Here’s the bottom line, from Will’s perspective.

The Roberts Doctrine facilitates what has been for a century progressivism’s central objective, the overthrow of the Constitution’s architecture. The separation of powers impedes progressivism by preventing government from wielding uninhibited power.

Here’s how my Cato colleagues reacted, starting with Michael Cannon, our healthcare expert whose heroic efforts at least got the case to the Supreme Court.

…the Supreme Court allowed itself to be intimidated. …the Court rewrote ObamaCare to save it—again. In doing so, the Court has sent a dangerous message to future administrations… The Court today validated President Obama’s massive power grab, allowing him to tax, borrow, and spend $700 billion that no Congress ever authorized. This establishes a precedent that could let any president modify, amend, or suspend any enacted law at his or her whim.

Now let’s look at the responses of two of Cato’s constitutional scholars. Roger Pilon is less than impressed, explaining that the Roberts’ decision is a bizarre combination of improper deference and imprudent activism.

With Chief Justice Roberts’s opinion for the Court, therefore, we have a perverse blend of the opposing positions of the judicial restraint and activist schools that reigned a few decades ago. To a fault, the Court today is deferential to the political branches, much as conservatives in the mold of Alexander Bickel and Robert Bork urged, against the activism of the Warren and Burger Courts. But its deference manifests itself in the liberal activism of a Justice Brennan, rewriting the law to save Congress from itself. As Scalia writes, “the Court forgets that ours is a government of laws and not of men.”

And Ilya Shapiro also unloads on this horrible decision.

Chief Justice Roberts…admits, as he did three years ago in the individual-mandate case, that those challenging the administration are correct on the law. Nevertheless, again as he did before, Roberts contorts himself to eviscerate that “natural meaning” and rewrite Congress’s inartfully concocted scheme, this time such that “exchange established by the state” means “any old exchange.” Scalia rightly calls this novel interpretation “absurd.” …as Justice Scalia put it, “normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.” …like three years ago, we have a horrendous bit of word play that violates all applicable canons of statutory interpretation to preserve the operation of a unpopular program that has done untold damage to the economy and health care system.

Now I’ll add my two cents, at least above and beyond expressing disgust. But I won’t comment on the legal issues since that’s not my area of expertise.

Instead I’ll have a semi-optimistic spin. I wrote in 2013 that we should be optimistic about repealing Obamacare and fixing the government-caused dysfunctionalism (I don’t think that’s a word, but it nonetheless seems appropriate) of our healthcare system.

This latest decision from the Supreme Court, while disappointing, doesn’t change a single word of what I wrote two years ago.

P.S. Since today’s topic (other than my conclusion) was very depressing, let’s close by looking at something cheerful.

I’ve commented before that America has a big advantage over Europe because of a greater belief in self-reliance and a greater suspicion of big government.

Well, now we have further evidence. Here’s some polling data from AEI’s most recent Political Report. As you can see, there’s a much stronger belief in self-sufficiency in the United States than there is in either Germany or Italy.

Polling data like this is yet another sign of America’s superior social capital.

And so long as Americans continue to value freedom over dependency, then there’s a chance of fixing the mess in Washington. Not just Obamacare, but the entire decrepit welfare state.

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New Video Shows Bailouts Are a Recipe for Moral Hazard and Cronyism

When debating and discussing the 2008 financial crisis, there are two big questions. And the answers to these questions are important because the wrong “narrative” could lead to decades of bad policy (much as a mistaken narrative about the Great Depression enabled bad policy in subsequent decades).

1. What caused the crisis to occur?
2. What should policy makers have done?

In a new video for Prager University, Nicole Gelinas of the Manhattan Institute succinctly and effectively provides very valuable information to help answer these questions. Particularly if you want to understand how the government promoted bad behavior by banks and created the conditions for a crisis.

Here are some further thoughts on the issues raised in the video.

Deregulation didn’t cause the financial crisis – Nicole explained that banks got in trouble because of poor incentives created by previous bailouts, not because of supposed deregulation. As she mentioned, their “risk models” were distorted by assumptions that some financial institutions were “too big to fail.”

But that’s only part of the story. It’s also important to recognize that easy-money policies last decade created too much liquidity and that corrupt subsidies and preferences for Fannie Mae and Freddie Mac steered much of that excess liquidity into the housing sector. These policies helped to create the bubble, and many financial institutions became insolvent when that bubble burst.

TARP wasn’t necessary to avert a meltdown – Because the video focused on how the “too big to fail” policy created bad incentives, there wasn’t much attention to the topic of what should have happened once big institutions became insolvent. Defenders of TARP argued that the bailout was necessary to “unfreeze” financial markets and prevent an economic meltdown.

But here’s the key thing to understand. The purpose of TARP was to bail out big financial institutions, which also meant protecting big investors who bought bonds from those institutions. And while TARP did mitigate the panic, it also rewarded bad choices by those big players. As I’ve explained before, using the “FDIC-resolution” approach also would have averted the panic. In short, instead of bailing out shareholders and bondholders, it would have been better to bail out depositors and wind down the insolvent institutions.

Bailouts encourage very bad behavior – There’s a saying that capitalism without bankruptcy is like religion without hell, which is simply a clever way of pointing out that you need both profit and loss in order for people in the economy to have the right set of incentives. Bailouts, however, screw up this incentive structure by allowing private profits while simultaneously socializing the losses. This creates what’s known as moral hazard.

I’ve often used a simple analogy when speaking about government-created moral hazard. How would you respond if I asked you to “invest” by giving me some money for a gambling trip to Las Vegas, but I explained that I would keep the money from all winning bets, while financing all losing bets from your funds? Assuming your IQ is at least room temperature, you would say no. But our federal government, when dealing with the financial sector, has said yes.

Good policy yields short-run pain but long-run gain – In my humble opinion, Nicole’s most valuable insight is when she explained the long-run negative consequences of the bailouts of Continental Illinois in 1984 and Long-Term Capital Management in 1998. There was less short-run pain (i.e., financial instability) because of these bailouts, but the avoidance of short-run pain meant much more long-run pain (i.e., the 2008 crisis).

Indeed, this “short termism” is a pervasive problem in government. Politicians often argue that a good policy is unfeasible because it would cause dislocation to interest groups that have become addicted to subsidies. In some cases, they’re right about short-run costs. A flat tax, for instance, might cause temporary dislocation for some sectors such as housing and employer-provide health insurance. But the long-run gains would be far greater – assuming politicians can be convinced to look past the next election cycle.

Let’s close by re-emphasizing a point I made at the beginning. Narratives matter.

For decades, the left got away with the absurd statement that the Great Depression “proved” that capitalism was unstable and destructive. Fortunately, research in recent decades has helped more and more people realize that this is an upside-down interpretation. Instead, bad government policy caused the depression and then additional bad policy during the New Deal made the depression longer and deeper.

Now we have something similar. Leftists very much want people to think that the financial crisis was a case of capitalism run amok. They’ve had some success with this false narrative. But the good news is that proponents of good policy immediately began explaining the destructive role of bad government policy. And if Nicole’s video is any indication, that effort to prevent a false narrative is continuing.

P.S. The Dodd-Frank bill was a response to the financial crisis, but it almost certainly made matters worse. Here’s what Nicole wrote about that legislation.

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Great Moments in Government-Run Healthcare (but Don’t Tell Krugman)

When I criticize government-run healthcare, I normally focus on programs and interventions that distort and damage the American health sector.

So I’ve written a lot on the failures of Medicaid, Medicare, and Obamacare, as well as the counterproductive effects of the tax code’s healthcare exclusion.

But if some government is bad for the health sector, then lots of government must be even worse.

And that’s exactly what we find when we peruse stories about the British National Health Service.

Here are some excerpts from a remarkable story in the U.K.-based Independent.

A London man whose leg was broken after thieves stole his bike was forced to take an Uber taxi to the hospital after he was told that his injury “wasn’t serious enough” to warrant an ambulance. …Suffering from a broken leg and lying on the ground in agony, he called 999, only for the person on the other end to tell him to call the 111 non-emergency number as his injury wasn’t sufficiently serious for an ambulance. Eventually, three police officers picked him up and drove him home. He then had to book an Uber taxi to take him to the hospital.

Though maybe this is an example of karma.

“That is the most disappointing thing. At the time I was incredulous. I’m always a defender of the NHS but I want to know why they didn’t listen to my call properly.”

Sort of like when a defender of the IRS experiences an audit.

So how does the government defend the fact that it ignored a man with a broken leg?

In a statement to the Standard, the LAS said: “From the information given us, the patient was concious and alert and had no immediately life-threatening injuries…”

Gee, how comforting. If you’re about to die, they’ll send an ambulance. But not for anything less than that.

I guess the National Health Service sets policy based on scenes from Monty Python movies. If you just have a “flesh wound,” you’re out of luck.

Some readers may be wondering if this is an isolated example of incompetence that shouldn’t be used to indict the British system.

That’s a fair point. Indeed, there are doubtlessly similar example of malpractice in the United States (particularly with Medicare and Medicaid) and other jurisdictions where government doesn’t run the entire healthcare system.

So let’s shift to a story in the U.K.-based Telegraph that is a searing critique of the overall track record of nationalized health care.

NHS delays diagnosing and treating cancer are costing up to 10,000 lives a year, experts have warned. …Britain has one of the lowest cancer survival rates in Western Europe.  Nice said too many GPs are “guessing” whether symptoms could mean cancer, with late diagnosis responsible for thousands of deaths. … Britain is eighth from bottom in league tables comparing cancer survival in 35 Western nations, latest research shows, on a par with Poland and Estonia. …Each year, the UK has around 10,000 more cancer deaths which could have been prevented, compared with similar countries in Europe.

Hmmm…, I guess I was right in my spat with a British television host.

The (potentially) good news is that there is an effort to address this terrible track record.

For the first time, GPs will be issued with checklists of symptoms to help them spot the disease, in a bid to prevent at least half of the needless deaths. …Roger Goss, from Patient Concern, said he was surprised that doctors needed to be given such advice.  “I would be quite worried if GPs don’t know the basics of common cancers and what to look out for,” he said.  He also said that in too many areas, family doctors were under pressure to reduce the number of patients referred for tests, in order to save money.

The last sentence in the excerpt is worrisome. One of the big problems with government-run healthcare is that everybody is playing with other people’s money, and healthcare providers don’t have much incentive to be efficient or to cater to the needs of patients.

Which is, unfortunately, quite similar to the problems we have in the United States thanks to pervasive government intervention, which has caused a huge third-party-payer problem.

So I’m not overly optimistic that a new set of guidelines is going to have much effect on the quality of care on the other side of the Atlantic.

Oh, I almost forgot. Why does the title of this column include the parenthetical statement about not telling Paul Krugman about these examples of horrible results in the U.K.’s government-run healthcare system?

For the simple reason that we don’t want to burst his bubble. Krugman assured us back in 2009 that government-run healthcare was a good idea, writing that “In Britain, the government itself runs the hospitals and employs the doctors. We’ve all heard scare stories about how that works in practice; these stories are false.”

So I guess these horror stories we just reviewed are just a figment of someone’s imagination.

And I guess we have to also conclude that all the other horror stories we’ve previously shared (see here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here and here) also must be false.

P.S. We also have some horror stories about government-run healthcare in Sweden.

• A man who had his penis amputated because he was first misdiagnosed and then forced to wait five months for a follow-up examination.
• Another man was forced to stitch up his own leg after a lengthy wait for medical treatment – and he then had to deal with insult added to injury when the bureaucrats reported him violating rules.
• And another man with no legs was denied a motorized wheelchair because the government ruled that he didn’t necessarily have a permanent condition.

P.P.S. Though I should point out that there are good things about Sweden.

Heck, there are also good things to say about the United Kingdom.

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Why the !*%# Is the Rest of the World Subsidizing Suicidal Fiscal Policy in Greece?!?

I detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts approach.

And for the past five years, events have confirmed – over and over again – that this was the right approach.

So you can understand how frustrating it is to comment again on this issue.

But sometimes the policy proposals from national governments and international bureaucracies are so blindly insane that I feel compelled to restate obvious points.

Consider what is happening now. The various members of the Troika (the International Monetary Fund, the European Commission, and the European Central Bank) are pressuring Greece to make reforms in exchange for additional subsidies, handouts, and bailouts.

But since the Greek government is run by lunatics, the net result of “reforms” is more and more bad policy. To be blunt, the Troika crowd is subsidizing and encouraging a process that is resulting in suicidal tax hikes in Greece.

Here are some excerpts from a story in the EU Observer.

Greece edged closer to a last-ditch agreement with her eurozone creditors on Monday (22 June), after Alexis Tsipras’ government promised to raise an extra €8 billion over the next two years. Under the proposal submitted to eurozone ministers, the Greek government would raise just under €2.7 billion in extra revenue this year, followed by a further €5.2 billion in 2016. …Tsipras’ government has proposed to raise €645 million over the next two years by increasing health contributions to 5 percent. …As expected, the remaining proposals are almost exclusively based around new tax increases, the most significant of which is a new 12 percent levy on all corporate profits over €500,000, which the Greek government expects to bring in €1.35 billion in extra revenue. …together with €100 million per year from a new TV advertisements tax. It also wants to widen the scope of a so-called ‘luxury’ tax to cover private swimming pools, planes and boats.

Here’s a look at the breakdown of the new deal, which I got off Twitter from a pro-liberty Greek citizen (i.e., an endangered species).

So the latest deal is 93 percent tax hikes and 7 percent spending cuts. And I’m sure those so-called spending cuts are probably make-believe reductions in previously planned increases instead of genuine reductions.

That’s so imbalanced that it makes President George H.W. Bush’s disastrous 1990 tax-hike deal seem good by comparison.

And just in case you wonder whether there’s no fat in the Greek budget, consider this shocking sentence from the EU Observer story.

Public spending on pensions currently amounts to 16 percent of Greece’s GDP.

To give you an idea of how crazy that number is, Social Security outlays in the United States consume “only” 4.9 percent of GDP.

And don’t forget the Greeks also squander money on a bloated bureaucracy and a preposterous regulatory regime (click here and here to see I’m actually understating the problem).

Yet rather than change any of these anti-growth policies, the government wants more and more revenue to prop up a bloated government.

The bottom line is that Greek politicians and interest groups are trying to impose an upside-down version of my Golden Rule.

But while my Rule says that the private sector should grow faster than the government, their version is that the tax burden should grow faster than the private sector.

Needless to say, that’s an approach that is guaranteed to produce economic ruin.

Productive people leave the country or operate in the underground economy. And many others decide that it’s far more comfortable to climb into the wagon of government dependency.

The situation is utterly ludicrous, as explained by George Will.

…a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras…thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them.

But George sees a silver lining to the dark cloud of Greece’s economic illiteracy.

Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” …This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.  …It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money.

I fully agree with this final point. Just like it’s good to have positive examples (think Hong Kong, Switzerland, Texas, or Singapore), it’s also good to have bad examples (such as France, Italy, California, and Illinois).

Though it’s unclear whether politicians even care about learning any lessons.

P.S. Don’t forget that some American politicians want America to be more like Greece, as illustrated by this Henry Payne cartoon.

P.P.S. Also keep in mind that Greece is just the tip of the iceberg. Other European welfare states are making the same mistakes and will soon suffer similar fates.

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Deconstructing the European Union’s Convoluted New Attack on “Tax Havens”

Europe is suffering from economic stagnation caused in part by excessive fiscal burdens.

So what are European policy makers doing to address this problem?

If you think the answer might have something to do with a shift to responsible fiscal policy, you obviously have no familiarity with Europe’s political elite. But if you have paid attention to their behavior, you won’t be surprised to learn that they’re lashing out at jurisdictions with better policy.

Here are a few blurbs from a story in the Economic Times.

The European Union published its first list of international tax havens on Wednesday… “We are today publishing the top 30 non-cooperative jurisdictions consisting of those countries or territories that feature on at least 10 member states’ blacklists,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference. 

This is a misguided exercise for several reasons, but here are the ones that merit some discussion.

1. I can’t resist starting with a philosophical point. Low-tax jurisdictions and so-called tax havens should be emulated rather than persecuted. Their modest fiscal burdens are strongly correlated with high levels of prosperity. It’s high-tax nations that should be blacklisted and shamed for their destructive policies.

2. This new EU blacklist is particularly nonsensical because there’s no rational (even from a leftist perspective) methodology. Jurisdictions get added to the blacklist if 10 or more EU nations don’t like their tax laws. Some nations, as cited in official EU documents, even use “the level of taxation for blacklisting purposes.”

3. As has always been the case with anti-tax competition campaigns, the entire exercise reeks of hypocrisy. Big European nations such as Luxembourg and Switzerland were left off the blacklist, and the United States also was omitted (though the EU figured it was okay to pick on the U.S. Virgin Islands for inexplicable reasons).

By the way, I’m not the only person to notice the hypocrisy. Here are some excerpts from a report in the U.K.-based Guardian.

A blacklist of the world’s 30 worst-offending tax havens, published on Wednesday by the European commission, includes the tiny Polynesian island of Niue, where 1,400 people live in semi-subsistence — but does not include Luxembourg, the EU’s wealthy tax avoidance hub. …the new register does not include countries such as the Netherlands, Ireland.

And Radio New Zealand made a similar point it its report.

Anthony van Fossen, an adjunct research fellow at Australia’s Griffith University, says the list seems to be picking on smaller, easy-to-target tax havens and ignoring major ones like Singapore, Switzerland and Luxembourg. “The list is very strange in that some major havens are ignored, particularly the havens in the European Union itself, and many minor havens, including some in the Pacific Islands are highlighted.”

The more one investigates this new EU project, the more irrational it appears.

Some of the larger and more sensible European nations, including Sweden, Germany, Denmark, and the United Kingdom, didn’t even participate. Or, if they did, they decided that every jurisdiction in the world has “tax good governance.”

But other nations put together incomprehensible lists, featuring some well-known low-tax jurisdictions, but also places that have never before been considered “tax havens.” Is Botswana really a hiding spot for French taxpayers? Do Finnish taxpayers actually protect their money in Tajikistan? Is Bolivia actually a haven for the Portuguese? Do the Belgians put their funds in St. Barthelemy, which is part of France? And do Greeks put their money in Bosnia?!?

As you can see from this map, the Greeks also listed nations such as Saudi Arabia and Paraguay. No wonder the nation is such a mess. It’s governed by brain-dead government officials.

I’ve saved the best evidence for the end. If you really want to grasp the level of irrationality in the EU blacklist, it’s even been criticized by the tax-loving (but not tax-paying) bureaucrats at the OECD. Here are some details from a report out of Cayman.

‘As the OECD and the Global Forum we would like to confirm that the only agreeable assessment of countries as regards their cooperation is made by the Global Forum and that a number of countries identified in the EU exercise are either fully or largely compliant and have committed to AEOI, sometimes even as early adopters’, the email states. …‘We have already expressed our concerns (to the EU Commission) and stand ready to further clarify to the media the position of the affected jurisdictions with regard to their compliance with the Global Forum standards’, Mr Saint-Amans and Ms Bhatia wrote.

Needless to say, being compliant with the OECD is nothing to celebrate. It means a jurisdiction has been bullied into surrendering its fiscal sovereignty and agreeing to serve as a deputy tax collector for high-tax governments.

But having taken that unfortunate step, it makes no sense for these low-tax jurisdictions to now be persecuted by the EU.

P.S. Let’s add to our collection of libertarian humor (see here and here for prior examples).

This image targets the Libertarian Party, but I’ve certainly dealt many times with folks that assert that all libertarians should “grow up” and accept big government.

For what it’s worth, if growing up means acquiescing to disgusting government overreach, I prefer to remain a child.

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Regarding Research on Inequality, AEI > IMF

When I wrote the other day that the Organization for Economic Cooperation and Development was the worst international bureaucracy, I must have caused some envy at the International Monetary Fund.

One can imagine the tax-free bureaucrats from the IMF, lounging at their lavish headquarters, muttering “Mitchell obviously hasn’t paid enough attention to our work.”

And they may be right. The IMF has published some new research on inequality and growth that merits our attention. I hoped it would be a good contribution to the discussion, but I was disappointed (albeit not overly surprised) to see that the authors put ideology over analysis.

Widening income inequality is the defining challenge of our time. …Equality, like fairness, is an important value.

Needless to say, they never explain why inequality is a more important challenge than anemic growth.

Moreover, they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.

And they certainly don’t define “fairness” in an adequate fashion.

But let’s not get hung up on the rhetoric. The most newsworthy part of the study is that these IMF bureaucrats produced numbers ostensibly showing that growth improves if more income goes to those at the bottom 20 percent.

…we find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

And this correlation leads them to make a very bold assertion.

…there does not need to be a stark efficiency-equity tradeoff. Redistribution through the tax and transfer system is found to be positively related to growth for most countries.

Followed by some policy suggestions for more class-warfare tax policy to finance additional redistribution.

…the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation… In addition, reducing tax expenditures that benefit high-income groups most and removing tax relief—such as reduced taxation of capital gains, stock options, and carried interest—would increase equity.

Those are some bold leaps in logic that the authors make. And we’ll look at some new, high-quality research on the efficiency-equity tradeoff below, but first let’s consider the IMF’s supposed empirical findings on growth and income.

Several questions spring to mind:

• Did they cherry pick the data? Why look at the relationship between growth and income gains in the previous five years rather than one year, three years, or ten years?
• Why do they assume the correlation they found in the five-year data somehow implies causation for future growth? Roosters crow before the sun comes up, after all, but they don’t cause sunrises.
• Was there any attempt to look at other hypotheses? One thing that instantly came to my mind was the possibility that recessions often are preceded by easy-money policies that create asset bubbles. And since those asset bubbles tend to artificially enrich savers and investors with higher incomes, perhaps that explains the correlation in the IMF’s data.
• Perhaps most important, why assume that faster income growth for the bottom 20 percent automatically means there should be more redistribution through the tax and transfer system? Maybe that income growth is the natural – and desirable – outcome of good Hong Kong-type policies?

There are all sorts of other questions that could and should be asked, but let’s now shift to the IMF’s bold assertion that their ostensible correlation somehow proves that there’s no tradeoff between growth (efficiency) and redistribution (equity).

Kevin Hassett of the American Enterprise Institute investigated the degree to which Arthur Okun was right about a tradeoff between growth and redistribution.

Forty years ago, the economist Arthur Okun wrote a seminal book with a self-explanatory title: Equality and Efficiency: The Big Tradeoff.  …Okun’s tradeoff seems to be forgotten by many on the left, who advocate expanded government spending at every turn… What is needed is some kind of controlled experiment.. When the financial crisis began, countries varied tremendously in the extent to which they redistributed income. Some, such as Ireland and Sweden, redistributed a lot; others, such as the U.S. and Switzerland, not so much. Now, seven years later, some countries have recovered smartly. Others have not. If we go back and sort countries by how much they redistributed before the crisis, how does the growth experience compare? …The vertical axis plots how much redistribution there was in each country in 2008. The horizontal axis plots the rate of per capita national-income growth that each country averaged during the four years between 2008 and 2012. In some sense, then, the chart asks the question, “To what extent does variation in the size of the welfare state in 2008 explain variation in how economies recovered from the crisis between 2008 and 2012?” …As one can see in the chart, …the data show a clear pattern: the heavy redistributors have done much worse.

And here’s Kevin’s chart, and it clearly shows the redistribution-oriented nations had relatively slow growth (the top left of the chart).

The bottom line is that Kevin’s hypothesis and data are much more compelling that the junky analysis from the IMF.

But you don’t need to be an expert in economic jargon or statistical analysis to reach that conclusion.

Just look around the globe. The real-world evidence is so strong that only an international bureaucrat could miss it. The nations that follow the IMF’s advice, with lots of redistribution and class-warfare taxation, are the ones that languish.

After all, Greece, Italy, and France are not exactly role models.

While jurisdictions such as Hong Kong and Singapore routinely set the standard for growth.

And nations with medium-sized welfare states, such as Switzerland, Australia, and the United States, tend to fall in the middle. We out-perform Europe’s big-government economies, but we lag behind the small-government economies.

Let’s close by looking at some additional findings from the IMF study.

I was actually surprised to see that the bureaucrats admitted that inequality (more properly defined as some people getting richer faster than others get richer) was the natural result of positive economic developments.

We find that less-regulated labor markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years.

So why, then, is “inequality” a “defining challenge”?

Needless to say, the IMF never gives us a good answer.

I also was struck by this passage from the IMF study.

Figure 18 indicates that rising pre-tax income concentration at the top of the distribution in many advanced economies has also coincided with declining top marginal tax rates (from 59 percent in 1980 to 30 percent in 2009).

And here is the chart, which the IMF would like you to believe is evidence that lower tax rates have contributed to inequality (even though the bureaucrats already admitted that natural forces have led some to get richer faster than others).

Yet this chart simply shows that supply-siders were right. Reagan, Kemp, and other tax cutters argued that lower tax rates would lead rich people to earn – and declare – more taxable income.

And that’s exactly what happened!

Heck, I’ve already shared incredibly powerful data from the IRS on this occurring during the 1980s in the United States, so it’s no surprise it happened in other nations as well.

But I don’t want to be reflexively critical of the IMF. The study did have some useful data.

And there was even one very good recommendation for helping the poor by cutting back on misguided anti-money laundering laws.

Country experiences also suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion.

Since I’ve written that anti-money laundering laws are ineffective at fighting crime while putting costly burdens on those with low incomes, I’m glad to see the IMF has reached the same conclusion.

And here’s a chart from the IMF study showing how poor people are less likely to have accounts at financial institutions.

By the way, the World Bank has produced some very good research on how the poor are hurt by inane anti-money laundering rules.

So kudos to some international bureaucracies for at least being sensible on that issue.

But speaking of international bureaucracies, I started this column by joking about the contest to see which one produced the worst research with the worst recommendations.

And while the IMF’s new inequality study definitely deserves to be mocked, I must say that it’s not nearly as bad as the drivel that was published by the OECD.

So our friends in Paris can rest on their laurels, confident that they do the best job of squandering American tax dollars.

P.S. Since I pointed out that the IMF inadvertently ratified one of the key tenets of supply-side economics, let’s remember that the IMF also confirmed one of the key reasons to oppose a value-added tax.

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Will Denmark Become a Shining Example of Mitchell’s Golden Rule?

I suggested earlier this year that Denmark’s ratio of private sector workers compared with government dependents produced the world’s most depressing Powerpoint slide.

It’s hard to be optimistic, after all, if a nation has an ever-growing number of people riding in the wagon (or the “party boat“) and a stagnant population of productive people.

But I don’t want to be overly pessimistic. Denmark may have a big welfare state and a punitive tax system (I’ve joked that birthers should accuse Obama of being born there rather than Kenya), but it is very pro-market in other policy areas.

Indeed, it beats the United States in 3 out of the 5 major categories in the Fraser Institute’s Economic Freedom of the World Index.

And while the United States has a higher overall score – ranked #12 compared to #19, Denmark had more overall economic freedom than the United States as recently as 2010 and 2011.

With this introduction, you’re probably guessing that I plan on saying something nice about the Danes. And you’d be right. It turns out that our Nordic friends are slowly but surely adopting my Golden Rule of spending restraint.

Look at this data on government spending from the IMF’s database. As you can see, the burden of spending has been climbing at a much slower rate in recent years, and the forecast shows even more frugality in the near future.

Perhaps most important, the modest fiscal discipline that began in 2009 is paying big dividends.

Government spending that year consumed nearly 58 percent of Denmark’s economic output. Now, the burden of spending is “only” 53 percent of GDP.

Still astronomically high, to be sure, but heading in the right direction. And if Denmark maintains the spending restraint projected by the IMF, the burden of spending will drop to less than 51 percent of GDP in 2017.

And that may actually happen. Just a few days ago, Denmark’s left-wing government was voted out of office and the new center-right government is promising tighter control of the purse strings.

I would like to think I played a very tiny role in this development. My friend Mads Lundby Hansen from Denmark’s free-market think tank (CEPOS) took part in a debate before the election and promoted the Golden Rule.

Here’s a picture from his Facebook page.

Unfortunately, even though I would like to think I played a role, Mads burst my bubble by informing me that the Golden Rule “wasn’t an issue in the election.”

But I don’t care if politicians are overtly cognizant of the Golden Rule. And I certainly don’t care if they know my name. I just want good policy.

So the moment the burden of government spending drops below 50 percent of GDP in Denmark, I’m going to declare victory in the battle.

Though I won’t declare victory in the war until we shrink government to its growth-maximizing level.

P.S. Denmark’s most famous welfare recipient is “Lazy Robert,” who was honored for his lack of contribution to society by being selected to the Moocher Hall of Fame.

P.P.S. One important lesson from Denmark is that a nation can somewhat successfully endure bad fiscal policy by being hyper-free market in other policy fields.

P.P.P.S. Another Nordic nation, Sweden, already enjoyed a big improvement in fiscal policy thanks to a multi-year period of spending restraint.

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America’s Greek Fiscal Future

Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Well, here’s a chart from CBO’s slideshow presentation. I’ve added some red arrows to draw attention to the most worrisome numbers.

As you can see, entitlement programs are the big problem, especially Social Security, Medicare, Medicaid, and Obamacare.

Even CBO agrees.

…spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created by the Affordable Care Act—would rise sharply, to 14.2 percent of GDP by 2040, if current law remained generally unchanged. That percentage would be more than twice the 6.5 percent average seen over the past 50 years.

By the way, while it’s bad news that the overall burden of federal spending is expected to rise to more than 25 percent of GDP by 2040, I worry that the real number will be worse.

After all, the forecast assumes that other spending will drop by 2.2 percent of GDP between 2015 and 2040. Yet is it really realistic to think that politicians won’t increase – much less hold steady – the amount that’s being spent on non-health welfare programs and discretionary programs?

Another key takeaway from the report is that it is preposterous to argue (like Obama’s former economic adviser) that our long-run fiscal problems are caused by inadequate tax revenue.

Indeed, tax revenues are projected to rise significantly over the next 25 years.

Federal revenues would also increase relative to GDP under current law… Revenues would equal 19.4 percent of GDP by 2040, CBO projects, which would be higher than the 50-year average of 17.4 percent.

Here’s another slide from the CBO. I’ve added a red arrow to show that the increase in taxation is due to a climbing income tax burden.

These CBO numbers are grim, but they could be considered the “rosy scenario.”

The Committee for a Responsible Federal Budget (CRFB) produced their own analysis of the long-run fiscal outlook.

Like the CBO, CRFB is too fixated on deficits and debt, but their report does have some additional projections of government spending.

Here’s the key table from the CRFB report. Not only do they show the CBO numbers  for 2065 and 2090 under the baseline scenario, they also pull out CBO’s “alternative fiscal scenario” projections, which are based on more pessimistic (some would say more realistic) assumptions.

As you can see from my red arrows, federal spending will consume one-third of our economy’s output based on the “extended baseline scenario” as we get close to the end of the century. So if you add state and local spending to the mix, the overall burden of spending will be higher than it is in Greece today.

But if you really want to get depressed, look at the “alternative fiscal scenario.” The burden of federal spending soars to more than 50 percent of output. So when you add state and local government spending, the overall burden would be higher than what currently exists in any of Europe’s welfare states.

In other words, America is destined to become Greece.

Unless, of course, politicians can be convinced to follow my Golden Rule and exercise some much-needed spending restraint.

This would require genuine entitlement reform and discipline in other parts of the budget, steps that would not be popular from the perspective of Washington insiders.

Which is why we need some sort of external tool that mandates spending restraint, such as an American version of Switzerland’s Debt Brake (which you can learn more about by watching a presentation from a representative of the Swiss Embassy).

Heck, even the IMF agrees that spending caps are the only feasible solution.

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Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures – including presidential candidates – are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

That being said, it’s not perfect. Here are three things I don’t like.

1. The Social Security payroll tax already is a flat tax, so it’s unclear why it should be wrapped into reform of the income tax, particularly if that change complicates the possibility of shifting to a system of personal retirement accounts.
2. There would still be some double taxation of dividends, capital gains, and interest, though the destructive impact of that policy would be mitigated because of the low 14.5 percent rate.
3. The earned-income credit (a spending program embedded in the tax code) should be eliminated as part of a plan to shift all means-tested programs back to the states.

But it’s important not to make the perfect the enemy of the good, particularly since the debate in Washington so often is about bad ideas and worse ideas.

So the aforementioned three complaints don’t cause me much heartburn.

But there’s another part of the Paul plan that does give me gastro-intestinal discomfort. Here’s a final excerpt from his column.

I would also apply this uniform 14.5% business-activity tax on all companies…. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.

You may be wondering why this passage is worrisome. After all, it’s great news that the very high corporate tax rate is being replaced by a low-rate system. Replacing depreciation with expensing also is a huge step in the right direction.

So what’s not to like?

The answer is that Senator Paul’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT).

In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax.

But theoretical appeal isn’t the same as real-world impact.

Simply stated, the VAT is a money machine for big government.

• The VAT helped finance the giant expansion of the welfare state in Europe.
• And the VAT is now being used to enable ever-bigger government in Japan.
• Heck, even the IMF has provided evidence (albeit inadvertently) that the VAT is a money machine.

All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.

Indeed, this is why I was critical of Herman Cain’s 9-9-9 plan four years ago.

It’s why I’ve been leery of Congressman Paul Ryan’s otherwise very admirable Roadmap plan.

And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.

These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control.

Particularly when there are safer ways of achieving the same objectives.

Here’s some of what I wrote last year on this exact topic.

…the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.

Lower the corporate tax rate.

Replace depreciation with expensing.

Replace worldwide taxation with territorial taxation.

So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.

There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.

To wrap things up, there’s no doubt that Senator Paul has a very good proposal. And I know his heart is in the right place.

But watch this video to understand why his proposal has a very big wart that needs to be excised.

For what it’s worth, I’m mystified why pro-growth policy makers don’t simply latch onto an unadulterated flat tax.

That plan has all the good features needed for tax reform without any of the dangers associated with a VAT.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

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Is Switzerland the World’s Most Sensible Country?

I’m in Geneva, Switzerland, where I just gave a speech about how international bureaucracies such as the OECD are seeking to undermine tax competition in hopes that the welfare state can be propped up for a few more years with ever-higher taxes.

But regular readers already know my views on these issues, so instead I want to focus today on a referendum that just took place a couple of days ago in this Alpine nation.

That referendum has convinced me that I was wrong when I wrote a few years ago that there were five reasons (government-constraining federalism, pro-gun culture, etc) to put Switzerland above the United States.

I’m not convinced there’s a 6th reason. Simply stated, the Swiss have to be the most sensible people in the world.

Here are some excerpts from an English-language report published by Swiss Info.

An attempt to federalise Switzerland’s inheritance tax system and redistribute wealth by taxing legacies worth more than CHF2 million ($2.15 million) has been rejected by Swiss voters… On Sunday, 71% of voters and all 26 Swiss cantons rejected the proposal. …Two-thirds of the revenue from this new tax, projected at CHF3 billion a year, would have been credited to the nation’s old age pension fund.

Yes, you read correctly. The Swiss left thought they could lure voters into supporting a tax hike based on a discriminatory tax on a tiny segment of the population.

But an overwhelming share of Swiss voters rejected this class-warfare scheme. Here’s a map of the results. But instead of liberal blue states and conservative red states that are found in the United States, Switzerland has nothing but conservative brown cantons.

The German-speaking cantons voted no. The French-speaking cantons voted no. And the Italian-speaking canton voted no.

It’s almost enough to make one feel sorry for Swiss statists.

…the political left has continued its losing streak at the ballot box. In the past two years voters have rejected pay caps within companies, the introduction of a nationwide minimum wage and a plan to scrap lump sum taxation for rich foreigners. …Supporters of the plan countered that the overall tax burden in Switzerland is still one of the lowest in Europe.

Though I have to wonder if Swiss leftists are extraordinarily stupid.

Did they really think that complaining about low taxes was the way to win an election?!?

I can just imagine what went through the minds of ordinary Swiss voters: “hmm…we’re richer than our high-tax neighbors and we’re growing faster than our high-tax neighbors…should we copy them or maintain the policies that have worked?”

Opponents had a more compelling argument.

Several politicians and media described the tax as a “KMU Killer”, referring to the German abbreviation for small and medium-sized businesses, which employ more than three-quarters of the Swiss workforce. Businesses said it would have been an effective double tax on income since firms already pay tax on earnings. …Switzerland’s cabinet, both houses of parliament and all 26 cantons had recommended voters reject the proposal, as did the main business lobbies.

Needless to say, I appreciate the argument about double taxation. That’s the obvious economic argument against the death tax.

But what makes Switzerland remarkable is the last part of the excerpt. It appears that the entire Swiss political establishment, as well as the entire business community, understand that it would be crazy to kill the low-tax goose that lays the golden economic eggs.

But ultimately, you have to give credit to the Swiss people. As mentioned in the article, they keep rejected statist proposals.

Here are a few I’ve written about.

• In 2010, nearly 60 percent of the electorate rejected a class-warfare income tax proposal.
• Last year, Swiss voters overwhelmingly killed a minimum-wage mandate.
• Later in the year, the voters of Switzerland rejected single-payer healthcare by a landslide margin.

Needless to say, my favorite Swiss referendum took place back in 2001, when 85 percent of voters imposed a spending cap on the central government. As explained in this video, this system has been remarkably effective at limiting the growth of government.

P.S. Oregon voters and California voters, by contrast, are far less discerning than their Swiss counterparts.

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Another Proud Member of the Bureaucrat Hall of Fame

Unlike some libertarians, I have patriotic feelings for my country. I want the United States to be the best in everything.

So it’s with some chagrin that I realized that the last two honorees selected for the Bureaucrat Hall of Fame came from overseas.

This included the man from India who earned his spot by not showing up for work – ever – for nearly a quarter of a century.

We also selected the woman from France who had a government-provided car and driver but still managed to bill taxpayers for almost $150 of taxi fares per day.

Given my jingoistic feelings, I’m worried that American bureaucrats are losing ground to their foreign counterparts. It would be a national embarrassment, after all, if our pencil pushers got a reputation for being slackers about slacking off.

So I’m very proud to announce that the newest member of the Bureaucrat Hall of Fame is a red-white-and-blue American.

The Washington Post reports on his truly amazing – and nauseating – scheme to bilk taxpayer to the hilt. Here’s the basic description of what happened.

A senior National Weather Service official helped write the job description and set the salary for his own post-retirement consulting post– then came back to the office doing the same job with a $43,200 raise, the agency’s watchdog found.

Hey, maybe I can do the same thing at Cato. I’ll propose a new position for a Senior Fellow in Recreational Studies. But since I’m modest, I’ll only suggest that this new slot only pay $35,000 more than what I’m now getting. And then I’ll…

Oh, never mind. I momentarily forgot that the Cato Institute isn’t the federal government. Our managers actually care about spending money wisely.

But that’s obviously not the case in Washington, as we can see from these additional excerpts.

The deputy chief financial officer also demanded that he be paid a $50,000 housing allowance near Weather Service headquarters in downtown Silver Spring in violation of government rules for contractors, one of numerous improprieties in a revolving-door deal sealed with full knowledge of senior agency leaders.

Yes, you read correctly. This scheming parasite latched onto the public teat with full knowledge and approval of his superiors.

And in less than two years, he scammed nearly half-a-million dollars from America’s taxpayers.

With his consulting job and housing allowance in place, P. Donald Jiron retired from the Weather Service in early May 2010, then returned to work as a consultant the next day, while collecting his government pension, investigators said. By the time he was fired 21 months later, the government had paid him another $471,875.34.

A taxpayer-provided pension plus a new taxpayer-provided salary. That’s double dipping without even having to get a new desk! Kudos to P. Donald.

You may be thinking – or hoping – that this is an isolated case of waste, fraud, and abuse.

But the Inspector General report reveals this is just the tip of a very sordid iceberg.

His procurement of his own post-retirement job appears to be commonplace throughout the National Oceanic and Atmospheric Administration, the Weather Service’s parent agency.

This story also has a nepotism angle. I guess we can modify the old saying: The family that mooches together, stays together.

Jiron also broke other rules, investigators found. He used his position as a contractor and former senior official to pressure Weather Service staff to give his daughter a job, skirting federal hiring rules that require competition.

Amazingly, he apparently wasn’t successful in his nepotism scheme. Which almost led me to deny him membership.

But the housing allowance he scammed was enough to push him over the top.

So here’s the bottom line. We have government positions that shouldn’t exist. We then pay the people in these positions far more than they could earn in the private sector.

And we have government managers who turn a blind eye (or worse) when these bureaucrats figure out ways to double-dip, triple-dip, and otherwise pillage taxpayers.

Hey, nice work if you can get it.

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Even More Evidence that the OECD Is the Worst International Bureaucracy

What’s the worst international bureaucracy?

• There’s certainly a strong argument the International Monetary Fund deserves that award. I’ve even referred to the IMF as the Dr. Kevorkian of the world economy.
• The United Nations also could claim the award since it wastes lots of money and routinely promotes bad policy across the globe.
• Let’s not forget the World Bank, which has a long track record of subsidizing bigger government and even produced a “report card” that promoted higher taxes.
• And if I lived on the other side of the Atlantic, I’d be sorely tempted to list the European Commission, which is a clown car of bureaucracy and statism.

But I think the Paris-based Organization for Economic Cooperation and Development has them all beat, particularly if we grade on a per-dollar-spent basis.

Just consider the OECD’s work on inequality. The bureaucrats recently published a study that claimed inequality somehow undermined growth.

In a column for the Wall Street Journal, Matthew Schoenfeld of Dreihaus Capital Management explains why the study is deeply flawed. He starts with a summary of what the OECD would like folks to believe.

The Organization for Economic Cooperation and Development recently published a report, “In It Together: Why Less Inequality Benefits All,” that claimed rising income inequality from 1990-2010 depressed cumulative growth across its member countries by 4.7%. The OECD’s suggested solution: government-led redistribution, funded via tax increases on “wealthier individuals” and “multinational corporations.”

But Schoenfeld explains the OECD’s research is riddled with misleading use of statistics.

From 2011-13, according to the World Bank, the five most unequal countries grew nearly five times faster (3.9% cumulative annual average) than the others (0.84%). By using a 2010 cutoff, the OECD has skewed its findings. Consider Greece. From 1999-2012, its Gini coefficient “improved” by 6% to .34 from .36—more than any other OECD country. …Greece’s redistributive social transfer spending also grew most quickly among OECD peers from 2000-12. But Greece’s economy has shrunk by more than 20% since 2010.

Here’s another example.

…the income-tax rate is a subpar proxy for redistribution policy. …A more representative proxy for redistribution is government expenditure as a percentage of GDP, which encompasses all government spending on the provision of goods, services, subsidies, and social benefits. From 1995-2012, OECD member countries that increased government expenditures as a percentage of GDP grew 30% slower than member countries that trimmed government expenditure as a percentage of the economy over that span—average annual growth of 1.9% compared with 2.5%.

Gee, who would have guessed that bigger government leads to less growth? I’m shocked, shocked.

And who would have guessed that the OECD produces research with dodgy numbers? Knock me over with a feather!

Though I must say that the sloppiness in this inequality study is trivial compared to the junk-riddled methodology of the OECD’s poverty study, which actually purported to show that there’s more deprivation in America than there is in poor nations such as Greece, Turkey, and Portugal.

Which gives me an opening to highlight what I wrote about this OECD study. I suggested that “the bureaucracy’s ‘research’ now is more akin to talking points from the Obama White House” and highlighted some utterly preposterous conclusions of the study.

We’re supposed to believe that Spain, France, and Ireland have enjoyed better growth. I guess France’s stagnation is just a figment of our collective imaginations. And those bailouts for Spain and Ireland must have been a bad dream or something like that.

Some folks may question whether the OECD is really a leftist bureaucracy. Or at least they may wonder whether I go overboard in my criticisms.

For what it’s worth, I do give the crowd in Paris some praise when good research is produced.

But imagine that the OECD is a student who gets a B on one test and fails every other exam. At some point, isn’t it safe to assume we have a remedial pupil?

And here’s some very strong proof. It turns out that the OECD is even further to the left than the Obama Administration.

I’m not joking. Check out these excerpts from an item in Politico’s Morning Tax.

…the U.S. is definitely not on the same page as its allies. The split was apparent at last week’s OECD conference in Washington to discuss the Base Erosion and Profit Shifting (BEPS) plan… Robert Stack, deputy assistant secretary for international affairs at Treasury, suggested that the OECD’s Base Erosion and Profit Shifting (BEPS) project was being driven less by a desire for sound policy than by foreign countries’ domestic politics and a desire for more revenue.

I wrote just last week that the BEPS plan is a naked revenue grab by high-tax nations and I find it remarkable that a senior official at the Obama Treasury Department agrees with me.

P.S. This isn’t the first time the Obama Administration has been to the right of the OECD.

P.P.S. Speaking of remedial students, I wrote back in 2011 that ending the flow of American tax dollars to the OECD (the biggest share of the bureaucracy’s budget comes from the United States) should be a test of whether Republicans are serious about cutting back on wasteful government spending.

At what point do I change the GOP grade from “incomplete” to “F”?

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Leftist Narrative on Inequality Is Debunked by Academic Evidence

The proper view on inequality is that it doesn’t matter.

That assumes, of course, that people are earning their income honestly rather than via government-enabled cronyism.

To elaborate, some people will become rich in a system of honest and competitive markets, but that’s not at the expense of the poor. Indeed, the talents and skills of top investors and entrepreneurs generally make life better for the rest of us.

So if we want to help the poor, we shouldn’t attack the rich. Instead, we should pursue policies that will allow faster growth. That benefits everyone, particularly those on the bottom of the economic ladder (though there also are some specific policies that are disproportionately helpful to the less fortunate, such as school choice).

Unfortunately, there are many leftists who genuinely seem to think the economy is a fixed pie. And they seem impervious to all the evidence that free markets and small government are the way to achieve broadly shared growth.

In hopes of reaching these folks, let’s look at some recent academic evidence on inequality. We’ll start with some new research from scholars at Harvard, University of Pennsylvania, Bank of France, University College London, and the Center for Economic Policy and Research.

They found that top incomes rose because of innovation, which is noteworthy since every rational person should welcome the prosperity fueled by innovation.

In this paper we use cross-state panel data to show a positive and significant correlation between various measures of innovativeness and top income inequality in the United States over the past decades. …this correlation (partly) reflects a causality from innovativeness to top income inequality, and the effect is significant: for example, when measured by the number of patent per capita, innovativeness accounts on average across US states for around 17% of the total increase in the top 1% income share between 1975 and 2010. …from cross-section regressions performed at the commuting zone (CZ) level, we find that: (i) innovativeness is positively correlated with upward social mobility; (ii) the positive correlation between innovativeness and social mobility, is driven mainly by entrant innovators and less so by incumbent innovators, and it is dampened in states with higher lobbying intensity. Overall, our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction.

I particularly like that these scholars found that lobbying leads to less innovation, which presumably is a proxy for the degree of government intervention (there’s no need to lobby – on the good side or bad side of an issue – if government doesn’t have power to interfere with market outcomes).

Sticking with the main issue of inequality, we also have a recent study from a couple of German academics.

Here are the key results.

This paper offers a comprehensive econometric investigation of the impact of income inequality… Using survey data from all thirty-four OECD countries over a period of almost thirty years, …there is evidence that a more unequal income distribution strengthens the work ethic of the population. Thus, income inequality seems to generate work incentives not only via the pecuniary reward of work but also through the symbolic reward it receives.

Gee, what a shocker. If people are allowed to enjoy the rewards that accrue from serving the needs of others in the marketplace, they’ll have more incentive to be productive.

That sounds like a good system, particularly compared to places where success is penalized.

Now let’s consider some caveats. While these studies have results that I like, I confess that a certain skepticism is warranted with this kind of research.

Measures of inequality don’t really tell us anything unless we know why there are differences in income.

In jurisdictions such as Hong Kong and Singapore, there may be a significant amount of income inequality simply because some people are getting richer faster than other people are getting richer.

That’s a nice problem to have, though it’s important to understand that inequality doesn’t drive growth. It’s simply an outcome of growth.

But in cronyist jurisdictions such as Argentina or Greece, there may be lots of inequality because corrupt insiders are using their connections to obtain unearned and undeserved wealth. And that means labor and capital are being misallocated, which is bad for ordinary people.

Once again, inequality is a result of policy, but in these cases, the inequality is bad because it’s the consequence of misguided intervention.

The bottom line is that policy makers should focus on growth rather than inequality. At least if their goal is to help poor people enjoy higher living standards.

P.S. Fans of Jonathan Swift will enjoy this “modest proposal” to reduce inequality.

P.P.S. Fans of honest research will be horrified by the OECD’s tortured attempt to show that inequality is associated with weaker performance.

P.P.P.S. If Margaret Thatcher is right, leftists are motivated more by hatred for the rich than by love for the poor.

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Why it Matters that the United States Is (Supposed to Be) a Republic, not a Democracy

If you want to go to a Presbyterian church instead of a Baptist church, should the government be able to interfere with that choice? Even if, for some bizarre reason, 95 percent of the population doesn’t like Presbyterians?

If you want to march up and down the sidewalk in front of City Hall with a sign that says the Mayor is an idiot, should the government be able to throw you in jail? Even if 95 percent of the population somehow has decided the Mayor is a genius?

Most Americans instinctively understand that the answer to all these question is no. Not just no, a big emphatic NO!

That’s because certain rights are guaranteed by our Constitution, regardless of whether an overwhelming majority of our fellow citizens feel otherwise.

And that’s what makes us a republic rather than a democracy.

But the bad news is that many of our rights in the Constitution no longer are protected.

For instance, Article I, Section 8, specifically enumerates (what are supposed to be) the very limited powers of Congress.

Our Founding Fathers thought it was okay for Congress to have the power to create courts, to coin money, to fund an army, and to have the authority to do a few other things.

But here are some things that are not on that list of enumerated powers (and certainly not included in the list of presidential powers either):

• Department of Agriculture
• Department of Housing and Urban Development
• Department of Education
• Department of Transportation
• Social Security
• Medicare
• Medicaid
• Food Stamps
• Obamacare
• Transportation Security Administration
• TARP
• Export-Import Bank

And the list could go on for several pages. The point is that the entire modern Washington-based welfare state, with all its redistribution and so-called social insurance, is inconsistent with the limited-government republic created by America’s Founders.

These programs exist today because the Supreme Court put ideology above the Constitution during the New Deal and, at least in the economic sphere, turned the nation from a constitutional republic into a democracy based on unconstrained majoritarianism.

Here’s some of Walter Williams wrote on the topic.

Like the founders of our nation, I find democracy and majority rule a contemptible form of government. …James Madison, in Federalist Paper No. 10, said that in a pure democracy, “there is nothing to check the inducement to sacrifice the weaker party or the obnoxious individual.” …John Adams said, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet that did not commit suicide.” …The word “democracy” appears nowhere in the two most fundamental documents of our nation — the Declaration of Independence and the U.S. Constitution. …the Constitution’s First Amendment doesn’t say Congress shall grant us freedom of speech, the press and religion. It says, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press…” …In a democracy, the majority rules either directly or through its elected representatives. …Laws do not represent reason. They represent force. The restraint is upon the individual instead of government. Unlike that envisioned under a republican form of government, rights are seen as privileges and permissions that are granted by government and can be rescinded by government. …ask yourself how many decisions in your life would you like to be made democratically. How about what car you drive, where you live, whom you marry, whether you have turkey or ham for Thanksgiving dinner?

And click here for a video that explains in greater detail why majoritarianism is a bad idea.

But perhaps these cartoons will make it even easier to understand why 51 percent of the population shouldn’t be allowed to rape and pillage 49 percent of the population.

We’ll start with this depiction of modern elections, which was featured on a friend’s Facebook page.

And here’s one that I’ve shared before.

It highlights the dangers of majoritarianism, particularly if you happen to be a minority.

P.S. George Will has explained that the Supreme Court’s job is to protect Americans from democracy.

P.P.S. Here’s more analysis of the issue from Walter Williams.

P.P.P.S. Some leftists are totally oblivious about America’s system of government.

P.P.P.P.S. Though Republicans also don’t really understand what the Constitution requires.

P.P.P.P.P.S. Looking at the mess in the Middle East, I’ve argued we would be in much better shape if we promoted liberty instead of democracy.

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Europe: Doubling Down on Statism

One would think that Europeans might finally be realizing that an ever-growing welfare state and an ever-rising tax burden are a form of economic suicide.

The most obvious bit of evidence is to look at what’s happening in Greece. Simply stated, public policy for too long has punished workers and producers while rewarding looters and moochers. The result is economic collapse, bailouts, and the destruction of cultural capital.

But Greece is just the tip of the iceberg. Many other European nations are heading in the same direction and it shows up in the economic data. Living standards are already considerably lower than they are in the United States. Yet instead of the “convergence” that’s assumed in conventional economic theory, the Europeans are falling further behind instead of catching up.

There are some officials sounding the alarm.

In a column for the Brussels Times, Philippe Legrain, the former economic adviser to the President of the European Commission, has a glum assessment of the European Union.

In 2007, the EU accounted for 31 per cent of the world economy, measured at market prices. This year, it will account for only 22 per cent, according to the International Monetary Fund (IMF). Eight years ago, the EU’s economy was a fifth bigger than the US’s; this year it is set to be smaller than America’s. …Continued economic decline seems inevitable.

But it seems that the folks who recognize that there is a problem are greatly out-numbered by those who want to make the problem worse.

For instance, one would think that any sentient adult would understand that the overall burden of government spending in Europe is a problem, particularly outlays for redistribution programs that undermine incentives for productive behavior.

Yet, as reported by the EU Observer, some statists at the European Commission want to mandate the amounts of redistribution in member nations.

The European Commission is to push for minimum standards on social protection across member states… Employment commissioner Marianne Thyssen Tuesday (9 June) said she wants to see minimum unemployment benefits, a minimum income, access to child care, and access to basic health care in all 28 countries. …The commission will look into whether “enough people are covered in member states when they have an unemployment problem; how long are they protected. What is the level of the unemployment benefit in comparison with the former wage they earned,” said Thyssen. …”The aim is to have an upper convergence…”

This is a horrible idea. It’s basically designed to impose a rule that forces nations to be more like France and Greece.

Instead of competition, innovation, and diversity, Europe would move even further in the direction of one-size-fits-all centralization.

Though I give her credit for admitting that the purpose of harmonization is to force more spending, what she calls “upper convergence.” So we can add Ms. Thyssen to our list of honest statists.

And speaking of centralization, some politicians want to go beyond mandates and harmonization and also have EU-wide taxes and spending.

Here are some of the details from a report in the U.K.-based Guardian.

German and French politicians are calling for a…eurozone treasury equipped with a eurozone finance chief, single budget, tax-raising powers, pooled debt liabilities, a common monetary fund, and separate organisation and representation within the European parliament. …They call for the setting up of “an embryo euro area budget”, “a fiscal capacity over and above national budgets”, and harmonised corporate taxes across the bloc. The eurozone would be able to borrow on the markets against its budget, which would be financed from a kind of Tobin tax on financial transactions and also from part of the revenue from the new business tax regime.

By the way, this initiative to impose another layer of taxes and spending in Europe isn’t being advocated by irrelevant back-bench politicians. It’s being pushed by Germany’s Vice Chancellor and France’s Economy Minister!

Thankfully, not everyone in Europe is economically insane. Syed Kamall, a member of the European Parliament form the U.K.’s Conservative Party, is unimpressed with this vision of greater centralization, harmonization, and bureaucratization.

Here’s some of what he wrote in a column for the EU Observer.

The socialist dream that these two politicians propose would soon turn into a nightmare not just for the Eurozone, but for the entire EU. …Their socialist vision of harmonised taxation and more social policies sounds utopian on paper but it fails to accept a basic fact: that Europe is not the world, and Europe cannot close itself off from the world. …After several decades of centralisation in the EU, we have seen the results: …a failure to keep up with growing economic competitiveness in many parts of the world. …Specific proposals such as harmonised corporate taxes are nothing new from the socialists, but they would reduce European competitiveness. …With greater harmonisation Europe’s tax rate would only be as low as the highest-taxing member. …

Syed’s point about Europe not being the world is especially relevant because the damage of one-size-fits-all centralization manifests itself much faster when jobs and capital can simply migrate to other jurisdictions.

And while the Europeans are trying to undermine the competitiveness of other nations with various tax harmonization schemes, that’s not going to arrest Europe’s decline.

Simply stated, Europe is imposing bad policy internally at a much faster rate than it can impose bad policy externally.

P.S. Let’s close with some humor sent to me by the Princess of the Levant.

It features the libertarian character from Parks and Recreation.

And I even found the YouTube clip of this scene.

Which is definitely worth watching because of how Swanson explains the tax system.

I particularly like the part about the capital gains tax. It’s a good way of illustrating double taxation.

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The X-Rated Version of Great Moments in Tax Avoidance

They say economists are boring people. Today, though, I’m going to break the stereotype by writing about the fascinating intersection of sex and public policy.

Okay, maybe it’s only the sex part that’s interesting, but we’re going to look at a couple of examples of how excessive government can take the fun out of anything.

In other words, we’re going to add to our “sin tax” collection.

• California bureaucrats regulating participants in porn films, as humorously described by Mark Steyn.
• The World Bank paying poor young women so they don’t take up with sugar daddies.
• Obamacare being so costly that some young women are looking for sugar daddies.
• British taxpayers financing sex trips to Amsterdam.
• A ruling from the U.S. Tax Court that money spent on sex change operations is deductible.
• The law in Hawaii allows cops to have sex with prostitutes.
• In Germany, by contrast, prostitutes have to use parking meters to pay tax.
• Pakistani officials use transsexuals to encourage tax payments.
• But in Colorado, you can get busted (no pun intended) for cutting hair while topless, but not because you’re bare-chested.
• And in Spain, porn has a lower tax rate than the theatre.

Now let’s get to our new additions.

Here are some of the details from a story in the U.K.-based Telegraph.

A brothel in Austria is offering free sex to its customers – as a tax protest. Pascha brothel in the city of Salzburg is advertising a “Summer Special”. “We’re not paying any more tax!” says an announcement on the brothel’s website. “From now on: Free entry! Free drinks! Free sex!” The brothel’s owner, Hermann Müller, is paying the prostitutes out of his own pocket as a protest against what he says are unfair taxes.

Gee, this sounds a lot more intriguing than throwing tea in Boston Harbor.

And a lot more popular.

“…we’ve already had to send hundreds of customers away because we had a full house,” Mr Müller told Austria’s Kronen Zeitung newspaper.

The brother owner doesn’t like the fact that government seems to make more money off prostitution than he does.

The German-born Mr Müller runs a chain of brothels… “In the past decade alone I’ve paid nearly €5m in taxes in Salzburg alone,” he said. “And they want more and more…” He complained that tax officials check up on the brothel’s business every 14 days.

Maybe Mr.  should move to Nevada. That state, for unknown reasons (perhaps politicians are big customers?), has a loophole in the sales tax for prostitution services.

And maybe the women also should move since Nevada doesn’t have a state income tax.

Under Austrian law prostitutes must be self-employed – so they will still be liable for their own taxes.

By the way, we have similar issues in the United States.

As reported by the New York Law Journal, it seems government tax collectors like to insert themselves (no pun intended) between consenting adults.

Pole dance routines by exotic dancers in an Albany-area juice bar are an expression of artistic merit, but the private couch dances performed for individual patrons are not, a state tax department administrative law judge has ruled. The distinction drawn by ALJ Joseph Pinto Jr. is an important one for the outcome of the state Division of Taxation’s latest attempt to collect sales taxes from the Nite Moves club on couch dances. Auditors contend that the club and its proprietors owe the state just under $530,000 in unpaid taxes on the private dances and on cover charges for the period.

The strip club wanted to take advantage of the sales tax exemption for art.

The same club challenged its tax bill for 2002-05, also on grounds it was due the exemption for artistic performances on First Amendment grounds.

But the Judge decided that pole dances qualify, but not lap dances.

Pinto rejected the claim of Nite Moves’ owners that the couch dances, being artistic in nature, fall under the same state sales tax exemption… He cited the testimony presented by several dance experts about the artistic merit of the pole routines.

The Judge’s decision seems to track the outcome of a similar case involving the Hustler Club in New York City, so government officials in the Empire State are obviously on top (no pun intended) of these issues.

And even though bureaucrats have a reputation for being lazy, some of them are willing to go above and beyond the call of duty to make sure the tax laws are enforced.

He cited the testimony of the supervisor of the Nite Moves audit who said the “private dance was essentially a full body rub” and far different than the pole dances the supervisor observed in his 10 to 15 visits to the club.

Hmmm…, I wonder whether “the supervisor” has a wife and whether she thought 10 to 15 visits were really necessary?

Let’s close by making a serious point. Prostitutes and “exotic dancers” presumably don’t have easy lives. And maybe we should even have some sympathy for their customers, who presumably would prefer not to have to pay women for their company.

So why, then, impose extra-high taxes on the sex industry?

Though maybe we should look at the bright side. At least hookers and strippers aren’t savers and investors.

Those are the people who get hit hardest by the tax system, though I’ve never understood why financing tomorrow’s growth is a sinful activity that should be discouraged.

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Does “Freedom” Mean an Entitlement to Other People’s Money?

Maybe the warm weather is affecting my judgement, but I’m finding myself in the odd position of admiring some folks on the left for their honesty.

A few days ago, for instance, I (sort of) applauded Matthew Yglesias for openly admitting that punitive tax rates would put us on the downward-sloping portion of the Laffer Curve.

He still favors such a policy, which is very bizarre, but at least his approach is much more honest than other statists who want us to believe that very high tax rates generate more revenue.

Today, I’m going to indirectly give kudos to another leftist.

Writing for the Washington Post, Katrina vanden Heuvel openly argues that the meaning of freedom should be changed. Here’s some of her argument, and we’ll start with her reasonably fair description of how freedom currently is interpreted.

For conservatives, freedom is centered in markets, free from government interference. …Government is the threat; the best thing it can do is to get out of the way. …freedom entails privatization, deregulation, limiting government’s reach and capacity.

Needless to say, I agree with this definition. After all, isn’t freedom just another way of saying “the absence of coercive constraint on the individual”?

Heck, this is why I’m a libertarian. Sure, I like the fact that liberty produces more prosperity, but my main goal it to eliminate needless government coercion.

But I’m digressing. Let’s get back to her column. She complains that folks on the left have acquiesced to this traditional conception of freedom.

Democrats chose to tack to these conservative winds. Bill Clinton’s New Democrats echoed the themes rather than challenge them. “The era of big government is over,” he told Americans, while celebrating “ending welfare as we know it,” deregulation of Wall Street… Obama chose consciously not to challenge the conservative limits on what freedom means.

Then she gets to her main argument. She wants Hillary Clinton to lead an effort to redefine the meaning of freedom.

This is Hillary Clinton’s historic opportunity. …She would do a great service for the country — and for her own political prospects — by offering a far more expansive American view of what freedom requires, and what threatens it. …expanding freedom from want by lifting the floor under workers, insuring every child a healthy start, providing free public education from pre-k to college, rebuilding the United States and putting people to work… Will she favor fair taxes on the rich and corporations to rebuild the United States and put people to work? Will she make the case for vital public investments — in new energy, in infrastructure, in education and training — that have been starved for too long? Will she call for breaking up banks…? Will she favor expanding social security…? …to offer Americans a bolder conception of freedom…and set up the debate that America must decide.

Needless to say, I strongly disagree with such policies. How can “freedom” be based on having entitlements to other people’s money?!?

Heck, it’s almost like slavery since it presupposes that a “right” to live off the labor of others. But that’s not technically true since presumably there wouldn’t be any requirement to work. So what would really happen in such a society is that people would conclude it’s better to ride in the wagon of government dependency, as illustrated by these cartoons.

Which means, sooner or later, a Greek-style collapse because a shrinking population of producers can’t keep pace with an ever-expanding population of moochers and looters.

Nonetheless, I give Ms. vanden Heuvel credit for acknowledging that her preferred policies are contrary to the traditional definition of freedom.

To be sure, I’d admire her even more if she simply admitted that she favors government coercion over freedom. That would be true honesty, but I can understand that folks on the left would prefer to change the meaning of words rather than admit what their agenda really implies.

P.S. Some of you may recognize that the issues discussed above are basically a rehash of the debate between advocates of “negative liberty” and supporters of “positive liberty.” The former is focused on protecting people from the predations of government while the latter is about somehow guaranteeing goodies from the government.

P.P.S. As mentioned in Ms. vanden Heuvel’s column, today’s effort to redefine freedom is similar to the so-called economic bill of rights peddled in the 1940s by FDR.

 

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What Greece Needs (but Don’t Hold Your Breath, in Part Because of Bad Advice from the Obama Administration)

I wrote in May 2011 that the situation in Greece was hopeless because nobody with power and/or influence wanted the right policy.

So I wasn’t bashful about patting myself on the back later that year when it quickly became obvious that bailouts weren’t working.

Ever since then, I’ve tried to ignore the debacle, though I periodically succumb to temptation and highlight the wasteful stupidity of the Greek government.

• Statism is so pervasive that Greece almost makes other European nations look like laissez-faire paradises by comparison.
• The country is a bureaucratic and regulatory nightmare.
• That destroys the dreams of entrepreneurs.
• With a costly Big Bird-style government-run media operation.
• And a never-ending array of new tax burdens.
• Bizarrely, Greece subsidizes pedophiles and requires…um…stool samples to set up online companies.
• But the most bizarre news of all is that the Greek government gets policy advice from people like Paul Krugman and Joseph Stiglitz.

Having shared all sorts of bad news, I now feel obliged to point out that the situation isn’t hopeless.

Just last year, I explained that the right reforms could rescue Greece. And just in case you think I’m laughably naive, others have the same view.

Writing for the U.K.-based Telegraph, Ivan Mikloš, and Dalibor Roháč explain how Greece can enjoy and economic renaissance.

Greeks have to stop seeing themselves as victims… True, Greece’s international partners need to bear their share of responsibility for the economic catastrophe that has been unfolding in the country. However, it is not its creditors that are holding Greece back – rather, it is the lack of domestic leadership and ownership of economic reforms.

And what gives Mikloš and Roháč the credibility to make this assertion?

Simple, they’re from Slovakia and that nation faced a bigger mess after the collapse of the Soviet Empire and the peaceful breakup of Czechoslovakia.

As Slovaks, we have learned a fair bit about these matters. Once home to much of Czechoslovakia’s heavy industry – exporting arms and heavy machinery to the former Soviet bloc – Slovakia bore a disproportionate share of the costs incurred by the transition from communism in the early 1990s. …At the time of the country’s break-up, in 1992, the per capita income in Slovakia, expressed in purchasing power parity, was merely 62 per cent of that in the Czech Republic.The years that followed were not happy. The lingering sense of victimhood fostered nationalism and authoritarianism, as well as cronyism and corruption… By the time of the parliamentary election of 1998, Slovakia was on the brink of a financial meltdown.

But the election didn’t result in victory of crazed leftists, as we see with Syriza’s takeover in Greece.

Instead, the Slovak people elected reformers who decided to reduce the size and scope of the public sector.

The new government, formed by a coalition of pro-Western parties, restructured the banking sector, brought the public deficit under control… The parliamentary election of 2002 opened a unique window of opportunity. Slovakia’s novel tax reforms, spearheaded by domestic reformers under the auspices of Prime Minister Mikuláš Dzurinda, were seen by the IMF at the time as far too radical. However, the new, simpler, and leaner tax system, alongside other structural reforms, incentivized investment and turned Slovakia, nicknamed the “Tatra Tiger”, into the fastest-growing economy in the EU.

And a handful of other EU nations have followed the right path.

In 2008, instead of devaluing its currency – as recommended by the IMF – Latvia slashed public spending, cutting the salaries of civil servants by 26 per cent. The economy rebounded quickly to a growth rate of 5 per cent in 2011.

Here’s the bottom line.

Today, Slovakia’s per capita income rivals that of the Czech Republic. Together with Poland and the Baltic states, these countries have been catching up with their advanced Western European counterparts.

And the lesson for Greece should be clear, both politically and economically.

The purpose of economic reforms should not be to please the Troika, but to restore durable, shared prosperity. Deep, domestically led reforms need not be a form of political suicide, either. In 2006, after eight years of deep – and sometimes painful – reforms, Slovakia’s leading reformist party recorded its best electoral result in history. Similarly, many of the radical reformers in the Baltic states did well in subsequent elections. And a Greek leader who turns his country into a “Mediterranean Tiger” will most certainly not go down in infamy.

Unfortunately, the slim odds of good policy being adopted in Greece are partly the fault of the United States.

Or, to be more accurate, the Obama Administration is being very unhelpful by urging bailouts instead of reform.

Here’s some of what is being reported by the U.K.-based Guardian.

The Greek television channel, citing a senior German official, described the US treasury secretary, Jack Lew, imploring his German counterpart Wolfgang Schäuble to “support Greece” only to be told: “Give €50bn euro yourself to save Greece.” Mega’s Berlin-based correspondent told the station that the US official then said nothing “because, as is always the case according to German officials when it comes to the issue of money, the Americans never say anything”.

I’m not a big fan of Wolfgang Schäuble. The German Finance Minister is a strident opponent of tax competition, and some of his bad ideas are cited in the CF&P study that I wrote about yesterday.

But I greatly appreciate the fact that he basically told Obama’s corrupt Treasury Secretary to go jump in a lake.

And I’m also happy that Congress has done the right thing so that Obama and his team don’t have leeway to bail out Greece either directly or indirectly.

P.S. Since we ended on some good news, let’s also enjoy some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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OECD Scheme to Boost Taxes on Business Sector Will Hurt Economy and Enable Bigger Government

Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.

I was focused on the danger to individuals, but it’s also risky to let governments obtain more data from businesses.

Remarkably, even the World Bank acknowledges the downside of giving more information to governments.

Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.

Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. …The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.

And here are some additional details from the full report.

…disclosure has important costs in allowing exposure to government expropriation… We show that accounting information disclosure can be detrimental to firm development… Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. …once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. …Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. …The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.

Yet this doesn’t seem to bother advocates of bigger government.

Indeed, they’re using a Paris-based international bureaucracy to push a “base erosion and profit shifting” initiative designed to produce global rules that would give governments far greater access to business data.

Their goal is to extract more money openly with tax policy rather than surreptitiously with bribes, but the net effect will be just as bad for the global economy.

A new study from the Center for Freedom and Prosperity has the disturbing details.

Under direction of the G20, the Organization for Economic Cooperation and Development (OECD) began two years ago a major initiative on “base erosion and profit shifting” (BEPS). …Through the BEPS project, the OECD is continuing its war against tax competition.

For all intents and purposes, politicians from high-tax nations are using the G20 and OECD to undermine the liberalizing force of tax competition.

They want to rewrite international tax policy to prop up nations with uncompetitive tax systems.

[BEPS] would…lead to an overall higher tax environment as politicians freed from the pressures of global tax competition inevitably raise rates to levels last seen in the early 1980s, when reforms by Reagan and Thatcher sparked a global reduction in corporate tax rates that has continued to this day. Through tax competition, the average corporate tax rate of OECD nations declined from almost 50% in 1981 to 25% in 2015. …The [BEPS] Action Plan…considers the benefits of tax competition to be the real problem, explaining that “there is a reduction of the overall tax paid by all parties involved as a whole.” The prospect of there being less money to be spent by politicians is perceived as a problem to be solved.

Even though there’s no evidence of a problem, even from the perspective of revenue-hungry politicians.

The OECD’s BEPS Report itself undercuts the argument that there is a pressing need for a global response when it acknowledges that “revenues from corporate income taxes as a share of GDP have increased over time.” Likewise, the Action Plan admits when discussing hybrid mismatch that “it may be difficult to determine which country has in fact lost tax revenue.”

So BEPS isn’t a response to the nonexistent problem of falling revenue. Instead, the real goal is to make it easier to impose higher tax rates and change other rules to raise additional revenue.

Even if the required policies have very troubling implications. As part of this new campaign against tax competition, here’s some of what the OECD is seeking.

Proposed recommendations for transfer-pricing documentation and country-by-country reporting, for instance, feature broad reporting requirements that go far beyond what is required for purposes of tax collection. …Information contained in the local and master files are particularly vulnerable, since it would take a breach in only a single jurisdiction for it to be exposed. The OECD makes assurances for the confidentiality of these reports, but they are empty promises. Such government assurances of privacy protection are contradicted by experience and the long history of leaks of taxpayer information. In the United States alone tax data has frequently been exposed thanks to inadequate safeguards, or even released by officials to attack political opponents. …Even without malicious intent, governments are ill equipped to protect sensitive information from outside access. …As poor as the United States has proven at protecting privacy, there are likely to be nations even more vulnerable. Through the master file and other reporting mechanisms, BEPS will demand of corporations propriety information and other sensitive data that they have every right to keep private.

Requiring more information is just one part of BEPS.

There are many other elements, all of which are designed to facilitate higher tax burdens. Indeed, the Wall Street Journal warned that, “this is an attempt to limit corporate global tax competition and take more cash out of the private economy.”

But as bad as BEPS is now, the study from the Center for Freedom and Prosperity explains it will get worse over time.

Of particular relevance for understanding the BEPS initiative is the pattern demonstrated by the OECD during the course of this campaign. After each recommendation was widely adopted – typically under duress in the case of low-tax jurisdictions – the OECD immediately pushed a new requirement that was more radical and invasive than the last. First was a call to adopt a certain number of Tax Information Exchange Agreements and a standard of information exchange upon request, then a peer-review process whereby tax policies are judged according to the standards of high-tax welfare states. Then, after years of meetings and costly compliance efforts, the old standard for information exchange upon request was replaced with a call for global automatic exchange.

The OECD’s strategy of moving the goalposts is worth noting because the BEPS project almost certainly will evolve in ways that enable ever-higher tax burdens.

I predicted back in 2013 that the end result will be “global formula apportionment,” a system that would enable dramatically higher tax burdens on the business community.

And I’m sticking with that prediction, in part because that’s what would be in the interests of politicians from high-tax nations. If national governments were able to tax on the basis of what companies sold inside their borders, regardless of how much income actually was being earned, there would be very little competitive pressure to keep tax rates reasonable.

Politicians could push corporate tax rates back up to 50 percent, or even higher.

The folks on the left certainly would like that kind of system. Here are some excerpts from a CNN story.

It’s time for a complete overhaul of the global tax system to ensure each company pays their fair share, says Nobel laureate Joseph Stiglitz. …”Multinational corporations act and therefore should be taxed as single and unified firms. It is time for our [political] leaders to be bold,” Stiglitz said. …Stiglitz said that creating a new worldwide tax system is realistic, but all nations would have to work together to agree rules and close loopholes. The group of economists said in a statement that it was critical to “curb tax competition to prevent a race to the bottom.” Developed nations should take the first step by agreeing on a minimum rate of corporate tax, possibly under the auspices of the Organisation for Economic Cooperation and Development. …The economists also suggest establishing an intergovernmental tax body within the United Nations that would combat abusive tax practices.

The bottom line is that politicians and statist interest groups both want to extract more money from the productive sector of the economy.

And OECD bureaucrats have been assigned the task of crafting rules to undermine tax competition so that companies can’t escape those higher burdens.

Developing new rules is actually the easy part. The hard part is when the bureaucrats try to rationalize how higher tax rates and bigger government are somehow good for the global economy.

Particularly since economists who work at the OECD have written that lower tax rates and tax competition result in better economic performance.

P.S. To add insult to injury, American taxpayers provide the biggest share of the OECD’s budget. This means that our tax dollars are being used to generate policies that will result in higher tax burdens. Which is why I’ve argued, on a per-dollar-spent basis, that subsidies to the OECD are the most destructively wasteful part of the federal budget.

P.P.S. And to add insult upon insult, OECD bureaucrats get tax-free salaries, so they are insulated from the negative effects of policies they’re trying to impose on the rest of the world.

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Honest Leftist Admits Desire for Spite-Driven Tax Policy

Every so often, I’ll assert that some statists are so consumed by envy and spite that they favor high tax rates on the “rich” even if the net effect (because of diminished economic output) is less revenue for government.

In other words, they deliberately and openly want to be on the right side (which is definitely the wrong side) of the Laffer Curve.

Critics sometimes accuse me of misrepresenting the left’s ideology, to which I respond by pointing to a poll of left-wing voters who strongly favored soak-the-rich tax hikes even if there was no extra tax collected.

But now I have an even better example.

Writing for Vox, Matthew Yglesias openly argues that we should be on the downward-sloping portion of the Laffer Curve. Just in case you think I’m exaggerating, “the case for confiscatory taxation” is part of the title for his article.

Here’s some of what he wrote.

Maybe at least some taxes should be really high. Maybe even really really high. So high as to useless for revenue-raising purposes — but powerful for achieving other ends. We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. …But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.

The tobacco tax analogy is very appropriate.

Indeed, one of my favorite arguments is to point out that we have high taxes on cigarettes precisely because politicians want to discourage smoking.

As a good libertarian, I then point out that government shouldn’t be trying to control our private lives, but my bigger point is that the economic arguments about taxes and smoking are the same as those involving taxes on work, saving, investment.

Needless to say, I want people to understand that high tax rates are a penalty, and it’s particularly foolish to impose penalties on productive behavior.

But not according to Matt. He specifically argues for ultra-high tax rates as a “deterrence” to high levels of income.

If we take seriously the idea that endlessly growing inequality can have a cancerous effect on our democracy, we should consider it for top incomes as well. …apply the same principle of taxation-as-deterrence to very high levels of income. …Imagine a world in which we…imposed a 90 percent marginal tax rate on salaries above $10 million. This seems unlikely to raise substantial amounts of revenue.

I suppose we should give him credit for admitting that high tax rates won’t generate revenue. Which means he’s more honest than some of his fellow statists who want us to believe confiscatory tax rates will produce more money.

But honesty isn’t the same as wisdom.

Let’s look at the economic consequences. Yglesias does admit that there might be some behavioral effects because upper-income taxpayers will be discouraged from earning and reporting income.

Maybe…we really would see a reduction of effort, or at least a relaxation of the intensity with which the performers pursue money. But would that be so bad? Imagine the very best hedge fund managers and law firm partners became inclined to quit the field a bit sooner and devote their time to hobbies. What would we lose, as a society? …some would presumably just move to Switzerland or the Cayman Islands to avoid taxes. That would be a real hit to local economies, but hardly a disaster. …Very high taxation of labor income would mean fewer huge compensation packages, not more revenue. Precisely as Laffer pointed out decades ago, imposing a 90 percent tax rate on something is not really a way to tax it at all — it’s a way to make sure it doesn’t happen.

While I suppose it’s good that Yglesias admits that high tax rates have behavioral effects, he clearly underestimates the damaging impact of such a policy.

He presumably doesn’t understand that rich people earn very large shares of their income from business and investment sources. As such, they have considerable ability to alter the timing, level, and composition of their earnings.

But my biggest problem with Yglesias’ proposals is that he seems to believe in the fixed-pie fallacy that public policy doesn’t have any meaningful impact of economic performance. This leads him to conclude that it’s okay to rape and pillage the “rich” since that will simply mean more income and wealth is available for the rest of us.

That’s utter nonsense. The economy is not a fixed pie and there is overwhelming evidence that nations with better policy grow faster and create more prosperity.

In other words, confiscatory taxation will have a negative effect on everyone, not just upper-income taxpayers.

There will be less saving and investment, which translates into lower wages and salaries for ordinary workers.

And as we saw in France, high tax rates drive out highly productive people, and we have good evidence that “super-entrepreneurs” and inventors are quite sensitive to tax policy.

To be fair, I imagine that Yglesias would try to argue that these negative effects are somehow offset by benefits that somehow materialize when there’s more equality of income.

But the only study I’ve seen that tries to make a connection between growth and equality was from the OECD and that report was justly ridiculed for horrible methodology (not to mention that it’s hard to take serious a study that lists France, Spain, and Ireland as success stories).

P.S. This is my favorite bit of real-world evidence showing why there should be low tax rates on the rich (in addition, of course, to low tax rates on the rest of us).

P.P.S. And don’t forget that leftists generally view higher taxes on the rich as a precursor to higher taxes on the rest of the population.

P.P.P.S. In the interests of full disclosure, Yglesias says I’m insane and irrational.

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Does Obama Have a Positive Economic Legacy?

I’m not a big fan of Obamanomics. We’re going through the weakest recovery since the Great Depression. Income and wages have been stagnant, particularly when compared to previous expansions. And while the unemployment rate has finally come down, that’s in part a consequence of people dropping out of the labor force.

The net result is that our nation’s output is far lower than it would be if economic performance had simply matched the average for previous business cycles. And that translates into foregone income for American households.

Yet the President seems to think that he deserves applause for his economic legacy. Here are some excerpts from an AP story in the Oregonian.

President Barack Obama is not shy about defining his achievements and casting them in the most positive light…on Monday Obama offered a rare glimpse at how he wants history to judge his presidency, letting the “L” word cross his lips as he touted the U.S. economic recovery… “Obviously there are things that I’ve been proud of,” he said. He first cited the economic crisis he faced upon assuming office in 2009. “It was hard, but we ended up avoiding a terrible depression,” he said.

You won’t be surprised to learn that I have a different perspective. I was on CNN earlier this week and expressed my disappointment with the President’s policies and their impact on the nation.

To be fair, I’m focusing in the interview on the strength (or lack thereof) of the recovery. Obama, by contrast, wants credit for the fact that the 2008 recession didn’t turn into a depression.

Needless to say, there aren’t alternative universes where we can see what would have happened if Obama didn’t get to the White House. And it probably wouldn’t matter even if there were alternative universes since neither McCain nor Romney had a substantially different vision anyhow.

But here’s why I think it’s absurd for Obama to take credit for avoiding a depression. Simply stated, it takes a lot of mistakes, on a sustained basis, to produce a depression.

And that’s precisely what we got from Presidents Hoover and Roosevelt. Thanks to protectionist policies, higher tax rates, a bigger burden of government spending, and massive intervention in markets, a normal downturn was magnified and extended to last an entire decade.

So I suppose we could give Obama credit for not being as bad as Hoover and Roosevelt, but that’s an extreme case of damning with faint praise. And even faint praise is probably unwarranted since Obama wanted more statism and was stopped by the 2010 election.

The bottom line is that Obama wants people – based on zero evidence – to believe a depression would have occurred naturally in the absence of his policies.

The more realistic assessment is that Obama’s policies have been a net negative for the economy. But as I remarked in the interview, I’m not making a partisan argument. Bush’s policies also were a net negative.

By comparison, you can look at Reagan and Clinton for examples of Presidents who increased economic freedom during their reigns.

P.S. Since today’s topic is the economy, here’s a grim reminder of one of the reasons why growth has been relatively anemic.

The folks at Mercatus have put together a pictograph on the regulatory burden.

Something to keep in mind when considering the degree to which red tape is constraining growth and entrepreneurship.

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A Quandary on Taxes and Guns for Libertarians and Small-Government Conservatives

If you’re a libertarian or a small-government conservative, it’s quite likely you believe both these statements.

1. Instead of picking winners and losers with special preferences and penalties, the tax code should be simple and fair, treating all economic activity similarly.
2. Anything that reduces revenue to government is a good thing, and it’s especially good if the net result is to improve public safety by expanding gun ownership.

But what happens if these two statements are in conflict?

This isn’t a hypothetical question. As reported by Politico, there’s legislation in Louisiana to have a special three-day “tax holiday” on purchases of selected products, including guns and ammo.

Louisiana’s state legislature decided Tuesday to eliminate a tax holiday for hurricane equipment and school supplies, but keep one for guns and other hunting tools. In a 7-2 vote, the Louisiana Senate’s Committee on Revenue and Fiscal Affairs decided that for a three-day weekend at the beginning of September the state would eliminate its sales tax on firearms, ammunition, knives and ATVs. …Ultimately, three Democrats voted with four of their Republican colleagues to keep the tax holiday for hunting while eliminating the other two.

Is this a good idea?

I’m conflicted. As a fan of the flat tax, I obviously don’t want government to micro-manage the economy with back-door industrial policy in the tax code. And I’ve also written that tax holidays are a less-than-ideal way of reducing taxes. So this suggests that I’m against the Louisiana proposal.

But on the other hand, I’m an advocate of “starve the beast,” which means I support policies that will shrink the amount of revenue controlled by politicians. And I also strongly support the Second Amendment and want safer communities, so I like the idea of expanded gun ownership.

So how would I have vote if (Heaven forbid!) I was a Louisiana legislator?

I guess I would vote yes. Based on the limited information in the article, the proposal is a pure tax cut. So while I don’t like loopholes, I’ve also stated that I only want to eliminate such preferences if all the revenue was used to lower tax rates.

So the bottom line is that I would oppose the policy if the holiday was financed by an increase in the overall sales tax rate (similarly, I would support getting rid of the holiday as part of a proposal to lower the overall sales tax rate). But since such tradeoffs don’t apply, I would grudgingly offer my support (especially since I know the plan would offend anti-gun statists such as Michael Bloomberg).

P.S. We’ll add this post to my collection of libertarian quandaries.

P.P.S. Since we have a gun-related topic, I can’t resist sharing this example of pro-Second Amendment propaganda.

By the way, if you disagree with the message in this image, please take this IQ test for criminals and liberals and reconsider your views.

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If You Want Real “Social Justice,” Support Free Markets and Small Government

Since almost everybody wants a society that is just, that presumably means we all favor “social justice.”

But in the American political system, the phrase has been adopted by those who favor bigger government and more intervention. Sort of the way “solidarity” and “social” are code words for statism in Europe.

Leftists think that this phrase gives them the moral high ground, but shouldn’t we judge “social justice” by outcomes rather than intentions?

Is statism really compassionate if it actually winds up lining the pockets of wealthy insiders?

Is statism really compassionate when it gives people an excuse to be stingy, as we see in Europe?

Is statism really compassionate when it means less long-run growth and lower living standards for ordinary people?

The answers to those questions probably depend on one’s definition of a just society.

For those fixated on equality, it appears that they are willing to accept more deprivation and hardship if everyone is equally poor. Which is the sentiment expressed in this clever image.

Supporters of liberty, by contrast, want less government because they don’t mind if some people get richer faster than other people get richer.

You won’t (or at least shouldn’t) be surprised that John Stossel is in the latter category. Writing for Reason, he debunks the notion that “social justice” is either social or justice. Instead, he explains that it’s just a new term for a defective product.

Protestors demand “social justice.” …But there’s nothing “just” about the leftist protesters’ claimed solution: more big government.

He points out that Venezuela supposedly is a role model for social justice, yet ordinary people are impoverished.

Oliver Stone, Sean Penn and Harry Belafonte praised Venezuela’s Hugo Chavez for his socialist revolution. Chavez then proceeded to destroy much of his country. …Only socialism could take an oil-rich nation and turn it into one where people wait in line for hours for survival rations.

Stossel correctly explains that genuine social justice is achieved with free markets.

Without the free market setting prices and allocating resources, all the cries of “justice” in the world don’t help anyone. You can’t eat justice. You can’t use it as toilet paper. …Socialists say capitalists just want to make a quick buck, but it’s government that can’t plan for the long haul. …Calling it “social justice” doesn’t make it work. …Markets, in which individuals, not just rulers, have property rights, give people options. Businesses have an incentive to serve as many people as possible, regardless of gender or ethnic group. They also have an incentive to be nice—customers are more likely to trade with people who treat them fairly. Everyone gets to choose his own path. That’s what I call justice.

Of course, I’m not holding my breath waiting for statists to agree with me or John Stossel.

That’s because, as Jonah Goldberg explains in this Prager University video, “social justice” is a catch-all term for the left’s agenda. And that agenda means more power for government and less freedom for individuals.

I particularly like how Jonah explains how statists are the ones that want to impose their values on others.

P.S. If you enjoyed this video, you’ll also like other Prager University videos, including ones on profits, the Laffer Curve, and the Great Depression.

P.P.S. I wrote last month to mock Senator Bernie Sanders for being a hopeless statist, but I also said he was a “faux socialist.”

George Will has the same jaded assessment.

Is it obligatory to take seriously his pose of being…a “socialist”? It gives excitable Democratic activists a frisson of naughtiness to pretend… In olden days, socialism meant something robust — government ownership of the means of production, distribution and exchange. Then, voters and reality being resistant to such socialism, the idea was diluted to mean just government ownership of an economy’s “commanding heights,” principally heavy industries, coal mines, railroads, etc.

But you’d have a hard time finding people who still believe that nonsense, even in the diluted form. In Europe, for instance, Social Democrats have morphed into conventional statists.

Today, “socialism,” at least in Western Europe where the term is still part of the political lexicon, is the thin gruel of “social democracy.” This means three things — heavy government regulation of commercial activities, government provision of a “social safety net” and redistribution of wealth through progressive taxation and entitlement programs. …Sanders, who thinks European social democracies are exemplary, evidently thinks America should be more like Greece.

And Thomas Sowell has the best (and most hard-hitting) way of describing the ideology of modern-day statists.

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The Denny Hastert Scandal: When Bad Things Happen to Bad People for the Wrong Reasons

I don’t like former House Speaker Dennis Hastert. But not because of any personal interactions. I don’t think I’ve every even been in the same room as him, much less ever met him.

But I know that he did nothing to restrain the reckless expansion of government when he had power during the Bush years. Indeed, he fought against those who tried to throw sand in the gears.

So I’ll admit a certain Schadenfreude now that he’s in legal trouble. But I’m also irked. He’s being charged with something that shouldn’t be a crime, while getting (at least so far) a free pass for the bad things that he has done.

As is so often the case, Tim Carney has the right perspective. Here’s some of what he wrote for the Washington Examiner.

If the the stories that have leaked in the media are true, the true sin Hastert committed is unspeakable, but possibly unprosecutable. There is one aspect of the Hastert scandal, however, that reflects a problem that is more troubling than “structuring” bank withdrawals… How in the world could a school-teacher-turned lawmaker afford to pay, reportedly, $3.5 million in hush money?

Tim answers his own question, citing the government’s corrupt ban on incandescent light bulbs.

Hastert monetized his public service into a lucrative lobbying career — largely by increasing government. One telling episode begins in May 2007. Hastert at that time was a chief cosponsor of the “light bulb ban,” the law that effectively outlawed the traditional incandescent bulb, forcing consumers to buy more expensive fluorescent bulbs and LEDs. …in March 2008, Hastert joined Polybrite “as a strategic advisor,” according to a company press release. A year later, after he had joined K Street lobbying firm Dickstein Shapiro, Hastert officially registered as a lobbyist for Polybrite… Hastert’s first lobbying work for Polybrite…was his job to try to get stimulus money for Polybrite.

Hmmm… I wonder is Polybrite was part of the $27 bulb stimulus scandal?

But nanny-state light bulbs are just the tip of the iceberg. Here’s another example.

Ethanol subsidies were another Hastert special. In the first three months of 2015, the ethanol industry lobby group, Fuels America, paid Dickstein Shapiro $60,000 for ethanol-mandate lobbying by Hastert and another lobbyist. All the House members Hastert had rewarded with committee assignments, earmarks and co-sponsorships were now taking phone calls from their former commander on behalf of green-tinted subsidy sucklers. This is part of how Washington turned a school teacher into a millionaire.

In other words, Hastert is a poster child (along with Harry Reid, Bob Dole, and countless others) for the proposition that Washington is basically a giant scam operated for the benefit of insiders who get rich by taking money from earners and producers and giving it to those with political connections.

Which is my message in this video from the Center for Freedom and Prosperity.

But now let’s return to the main topic. Hastert wasn’t charged with being a sleazy insider who used connections to pillage money from taxpayers and steer it to corrupt clients.

Instead, he’s being charged with violating “money laundering” laws that shouldn’t even exist. Here’s some of what Warren Coats (a colleague on the Editorial Board of the Cayman Financial Review) wrote on this topic.

Mr. Hastert is being charged with violating our Anti Money Laundering (AML) laws. These laws allow arresting and convicting people for moving money (as Mr. Hastert was doing) that the government thinks was the proceeds of crime (not the case with Mr. Hastert, his crime was failing to report what he planned to with his money), when they are not able to prove that there was a crime in the first place. As far as I know, paying a blackmailer (which is what Mr. Hastert apparently did) is not a crime, though demanding and receiving such money is. The United States has pushed such legislation and the new bureaucracies needed to enforce it all over the world at the cost of billions and billions of dollars (that could have been used for poverty reduction or other more pressing things) with very little if any benefit to show for it. Charging Dennis Hastert with AML violations is a rare exception. Wow, what a benefit for such intrusions into our private lives. I consider AML laws more than a costly waste of money. They are another expansion of the arbitrary power of governments that can be used for good or ill with limited oversight.

For more information, here’s the video I narrated on why it’s inefficient and intrusive to require banks to spy on their customers.

I suppose the bottom line is that Dennis Hastert is a bad person who did bad things, so he deserves some payback. And that’s exactly what he’s getting.

But I can’t help but wish he was punished for the right reason.

P.S. Like most fans of the New York Yankees, I’m not a big fan of the irrelevant quasi-Major League team on Long Island.

But I confess my allegiances are just an accident of birth, family, and geography.

However, I now have a policy reason to dislike the Mets.

The New York Mets have become the first sports team to join the nationwide anti-gun campaign, aligning with celebrities like Piers Morgan and Chicago Mayor Rahm Emanuel to back today’s National Gun Violence Awareness Day. Sponsored by the Michael Bloomberg-backed Everytown for Gun Safety, people with some 200 organizations are wearing orange to draw attention to the issue. According to the group, the Mets even dressed in orange to show their support.

It’s both amazing and disappointing that there were no real Americans on the team who refused to participate in this attack on the Constitution.

To offset this bad news, here’s some anti-gun control humor to brighten your day.

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How Big Is America’s Dependency Problem?

Back during the 2012 presidential campaign, I criticized the view that America was divided between “makers” and “takers.”

But not because I disagreed with the notion that people trapped in government dependency have an unfortunate self-interest in supporting politicians who want a bigger welfare state. Indeed, I’ve explicitly warned that some statist politicians explicitly want to create more dependency to advance their power.

That being said, it’s important to understand the depth of the problem. It’s not accurate, as I’ve written, to assume that people who don’t pay tax are part of the moocher class.

…those people are not necessarily looking for freebies from government. Far from it. Many of them have private sector jobs and believe in self reliance and individual responsibility. Or they’re students, retirees, or others who don’t happen to have enough income to pay taxes, but definitely don’t see themselves as wards of the state.

Moreover, it’s not even accurate to say that households receiving benefits from the government are part of the dependency class.

…the share of households receiving goodies from the government...is approaching 50 percent and it probably is much more correlated with the group of people in the country who see the state as a means of living off their fellow citizens. But even that correlation is likely to be very imprecise since some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.

If we really want to understand the depth of America’s dependency problem, it’s much better to look at the share of the population that gets money from anti-poverty programs.

The Census Bureau has just released a report looking at the share of the population receiving “means-tested” benefits, which is the term for programs targeting low-income recipients. Here are some of the highlights (or lowlights) from the accompanying release.

Approximately 52.2 million (or 21.3 percent) people in the U.S. participated in major means-tested government assistance programs each month in 2012, according to a U.S. Census Bureau report released today. Participation rates were highest for Medicaid (15.3 percent) and the Supplemental Nutrition Assistance Program, formerly known as the food stamp program (13.4 percent). The average monthly participation rate in major means-tested programs increased from 18.6 percent in 2009 to 20.9 percent in 2011. …The largest share of participants (43.0 percent) in any of the public assistance programs stayed in the programs between 37 and 48 months.

Perhaps more worrisome are the details on how some segments of the population are more likely to be trapped in government dependency.

In an average month, 39.2 percent of children received some type of means-tested benefit, compared with 16.6 percent of people age 18 to 64 and 12.6 percent of people 65 and older. …At 41.6 percent, blacks were more likely to participate in government assistance programs in an average month. …At 50 percent, people in female-householder families had the highest rates of participation in major means-tested programs.

Though perhaps “trapped” is too strong a word. As you can see from this table, less than 50 percent of recipients appear to be long-term dependents.

Looking at all this data, my conclusion is that we’re not in any immediate danger of hitting a “tipping point” of too much dependency. To be sure, the trends are not favorable, thanks to politicians like Obama, but 21 percent of the population receiving means-tested benefits is not nearly as bad as 47 percent.

Though it appears that the Census Bureau doesn’t count the “earned income credit” in its calculations. That’s an odd omission since it is a means-tested spending program (operated through the tax code). So the problem presumably is worse than what is stated in the report, but I’m assuming that there’s a big overlap between EIC recipients and those already counted by the Census Bureau. which means that the share of households getting money from Uncle Sam is still significantly less than 30 percent.

But that doesn’t mean we shouldn’t be worried. Indeed, the welfare state should be radically changed because we care about both taxpayers and poor people.

Writing for The Federalist, Robert Tracinski explores specific policies that would restrain and reduce the welfare state.

He lists seven ideas, which I’ve shared below (in very abbreviated form) followed by my two cents.

1) Repeal ObamaCare – If we want to roll back the welfare state, we will never have any better opportunity to start than by repealing ObamaCare—a program that is relatively new, has never been popular, and is in a slow process of imploding.

My response: Fully agree.

2) Health Savings Accounts – Scrapping ObamaCare would be a natural opportunity for Republicans to propose their own free-market health-care reforms. The centerpiece of that alternative should be Health Savings Accounts, which make it easier for individuals to save money in tax-free accounts which they can use for medical expenses.

My response: Not my preferred option. HSAs are a big improvement over the current system and presumably would help with the third-party payer problem, but fixing healthcare requires far bigger changes to Medicare, Medicaid, and the tax code’s fringe benefit loophole. And if you make those changes, HSAs wouldn’t really matter.

3) Means-test Social Security – Social Security is already a bad deal for the middle class, since the benefits are already skewed in such a way that they are equivalent to a tiny return, between 1 and 2 percent annually, on what might have been a private investment. By contrast, long-term returns on the stock market are about 7 percent annually. And in order to make Social Security sustainable, it will have to become a much worse deal.

My response: Also not my preferred option. Too many otherwise sensible people are giving up on personal retirement accounts.

4) Restart economic growth – the United States has slipped into the Obama rate of growth, a permanent state of semi-stagnation. We’ve been through market crashes and recessions before, but usually after a year or two of pain, we get a strong burst of growth to make up for it. …This low rate of growth makes the burden of the welfare state greater, because we can no longer grow our way out from under its expenses. …If we’re going to expect people to be more self-reliant, they must also have a sense of economic hope.

My response: Hard to argue with this suggestion, or the description of the problem.

5) Re-reform welfare – …the Obama administration has used the recession to gut the welfare reform of the 1990s, extending unemployment benefits and loosening work requirements. …the administration has used the state for the opposite purpose: to push people from self-reliance into dependence.

My response: Also hard to argue with this suggestion. It’s very worrisome how leftists are operating behind the scenes to push more dependency.

6) Save the cities – …the centers of economic inequality and racial conflict—the key issues on which Democrats always campaign—are places that are the sole property of Democrats, owned and run by them for about as long as anyone can remember. …If we want less class and racial conflict, if we want more people moving up into the middle class and no longer feeling the need for government support, if we want to compete for the vote in what are now deep centers of political support for the left—then we need to start targeting the cities for basic reforms that will improve the quality of life there and bring back the middle class.

My response: A very accurate description of the problem, but I suspect advocates of limited government won’t gain control of policy in big cities, so it might be better to first focus on rhetorical efforts to explain how statism leads to bad results.

7) Federalism – This is not a foolproof solution, because we’ll still occasionally get local handouts… But the general idea is that we can let New York and California set up more generous welfare states—if they want to pay for them. And they should let the hinterland scale back welfare. Then the states can compete to see whose approach is more successful and how many people vote with their feet for the small government model.

My response: Bingo!! This is far and away the right answer and it’s got plenty of intellectual firepower behind it.

America isn’t Europe, either in terms of policy or attitudes. But I worry that we’re heading that direction.

The Census Bureau gives us the data and Robert Tracinski has given us some good answers.

But will the solutions be implemented before too many people are riding in the wagon of government dependency? Because once you reach that point, there’s probably little hope.

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The State of Washington Should Learn a Very Important Lesson from Connecticut about the Dangers of an Income Tax

Every so often, I get asked why I’m so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in particular.

In part, my hostility is an ideological reflex When pressed, though, I’ll confess that there are situations – in theory – where more taxes might be acceptable.

But there’s a giant gap between theory and reality. In the real world, I can’t think of a single instance in which higher taxes led to a fiscally responsible outcome.

That’s true on the national level. And it’s also true at the state level.

Speaking of which, the Wall Street Journal is – to put it mildly – not very happy at the tax-aholic behavior of Connecticut politicians. Here’s some of what was in a recent editorial.

The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too. That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again… Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes. But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.

In other words, higher taxes in recent years have been used to fund more spending.

And now the politicians are hoping to play the same trick another time.

Apparently they don’t care that they’ve turned the Nutmeg State into a New England version of Illinois.

…the state grew a scant 0.9% in 2013, the last year state data are available. That was tied for tenth worst in the U.S. The state’s average compounded annual growth for the last four years is 0.42%. Slow growth means less tax revenue but spending never slows down. Some “40% of the state budget goes to government employee compensation and benefits, including payroll, state pensions, teacher pensions and current and retiree health care,” says Carol Platt Liebau, president of the Hartford-based Yankee Institute. …The Tax Foundation ranks Connecticut as one of the 10 worst states to do business. The state finished last in Gallup’s Job Creation Index in 2014 and now ties with Rhode Island for the worst job creation in the index since 2008.

What’s particularly discouraging is that Connecticut didn’t even have an income tax twenty-five years ago. But once the politicians got a new source of revenue, it’s been one tax hike after another.

Not too many years ago Connecticut was a tax refuge for New York City workers, but since it imposed an income tax in 1991 the rate has kept climbing, as it always does.

There are a couple of lessons from the disaster in Connecticut.

First and foremost, never give politicians a new source of revenue, which has very important implications for the debate in Washington, DC, about a value-added tax.

Unless, of course, you want to enable a bigger burden of government.

And for the states that don’t already have an income tax, the lesson is very clear. Under no circumstances should you allow your politicians to follow Connecticut on the path to fiscal perfidy.

Yet that’s exactly what may be happening in America’s northwest corner. As reported by the Seattle Times, there’s a plan percolating to create an income tax in the state of Washington. It’s being sold as a revenue swap.

State Treasurer Jim McIntire has a “grand bargain” in mind on tax reform and he wants to bend your ear. …the McIntire plan would institute a 5 percent personal-income tax with some exemptions, eliminate the state property tax and reduce business taxes. The plan would raise billions of dollars… The proposal also would lower the state sales tax to 5.5 percent from 6.5 percent.

But taxpayers should be very suspicious, particularly since politicians are talking about the need for more “investment,” which is a common rhetorical trick used by politicians who want to squander more money.

“It is mathematically impossible for us to sustain an adequate investment in education on a shrinking tax base,” he said.

And when you read the fine print, it turns out that the politicians (and the interest groups in the government bureaucracy) want a lot more additional money from taxpayers.

…the plan would raise $7 billion in state revenue but would lower local levies by $3 billion, for an overall increase of about $4 billion.

Advocates of the new tax would prefer to avoid any discussion of big-picture principles.

“We need to have less of an ideological conversation about this,” he said in a news conference.

And their desire to avoid a philosophical discussion is understandable. After all, the big spenders didn’t fare so well the last time voters had a chance to vote on whether the state should impose an income tax.

Voters may not welcome McIntire’s argument, either. In 2010, a proposed income tax on high earners failed by a nearly 30-point margin.

The voters in Washington were very wise back in 2010, so let’s hope they haven’t lost their skepticism about the revenue plans of politicians over the past few years.

There’s every reason to suspect, after all, that the adoption of an income tax would be just as disastrous for the Evergreen State as it was for the Nutmeg State.

To close, I want to share some great advice that was presented by the always sound Professor Richard Vedder. I was at a conference a few years ago where he was also one of the speakers. Asked to comment on whether the Lone Star State should have an income tax, he threw his hands in the air and cried out with passion that, “Texas should give the Alamo to Osama bin Laden before allowing an income tax.”

So if I’m ever asked to speak in Seattle on fiscal policy, I’m going to steal Richard’s approach and and warn that “The state of Washington should give the Space Needle to North Korea before allowing an income tax.”

I doubt I’ll capture Professor Vedder’s rhetorical flair, but there won’t be any doubt that I’ll be 100-percent serious about the dangers of a state income tax.

And what about my home state of Connecticut?

Well, I don’t know of any big landmarks that they could have traded to avoid an income tax. About the only “good” thing to say is that New York’s tax system is probably even worse.

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