The Costly Impact of Obamanomics

One of the reasons I repeatedly compare market-oriented countries with statist nations is to show that even minor differences in growth, if sustained over time, can have enormous impact on living standards for ordinary people.

And that’s why we should be very worried that America’s economy is sputtering. During the 138 years between 1870 and 2008,  our economy expanded by an average of about 3 percent per year, but now it seems like 2 percent growth is the “new normal.”

That may not sound like a big difference, but it takes more than 35 years to double economic output if an economy grows 2 percent annually.

With 3 percent yearly growth, by contrast, GDP doubles in less than 25 years.

The Wall Street Journal understands that we should be worried about the recent slowdown. Citing new research from the Joint Economic Committee, the WSJ opines on the high cost of Obamanomics.

…the American economy has become a slow-growth machine. That’s the story underscored by the annual government revisions in historical GDP that accompanied the second-quarter report. The news, which most Americans have long felt in slow-growing wages, is that the worst expansion in 70 years has been even weaker than we thought. …Since the recession ended in June 2009, the economy has grown at an annual rate of about 2.1%. That’s 0.6-percentage points worse than even during the much-maligned George W. Bush expansion.

And it’s far below the economic performance America enjoyed during the more market-friendly policies of Ronald Reagan and Bill Clinton.

The WSJ compares Obama’s six-year “expansion” with the growth of the economy after six years of expansion in the 1980s and 1990s.

Real GDP growth averaged 4.6% in the first six years of the Reagan expansion, and more than 3.6% a year in the first six years of the George H.W. Bush-Bill Clinton expansion… Had the current expansion been as robust as the average expansion since 1960, GDP would be some $1.89 trillion larger today, according to Congress’s Joint Economic Committee.

Wow, nearly $1.9 trillion in foregone economic output.

No wonder median household income is lower than when Obama took office.

And no wonder employee compensation has been stagnant.

So why is the economy so moribund?

There’s no great mystery about why growth has been so slow. The natural dynamism of the U.S. economy has been swamped by waves of bad policies. Unprecedented new regulation has hamstrung finance, health care, the coal and power industries, for-profit education, and so much more. …Higher taxes—their anticipation and then the reality in 2013—slowed risk-taking and investment. Profits fell in the first quarter of 2013 thanks to the tax cliff, and growth for 2013 was a mere 1.5% after the latest revisions.

Amen. I’ve made this same point, over and over and over again.

Simply stated, prosperity and big government are not very compatible.

Now let’s close with a bit of optimism. Yes, the aggregate burden of government has increased in the United States in recent years. But we’re nonetheless the 12th-freest economy in the world. based on a comprehensive analysis of fiscal policy, regulatory policy, trade policy, monetary policy, and the rule of law.

Sure, that’s down from being the 7th-freest economy in 2008 and the 3rd-freest economy in 2001, yet we’re still ahead of Japan (#23), Sweden (#32), France (#58), Greece (#84), and China (#115).

And while the overall size and scope of government has increased in the past six years, we’ve actually enjoyed a small bit of progress in terms of reducing government spending relative to the economy’s productive sector.

So while I sometimes sound like a Cassandra about what’s been happening and where we’re heading, the good news is that we still have time to reverse course.

Our most pressing need is genuine entitlement reform, and there’s a non-trivial chance that may happen in 2017. So no need to abandon ship quite yet.

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After 50 Years, We’ve Learned Enough to Know Medicare Should Get Early Retirement

Not all birthdays are a cause for untrammeled joy. Most of us baby boomers, for instance, don’t like being reminded that we’re getting older.

And for folks who follow fiscal policy, the fact that Medicare is now 50 years old is hardly a cause for celebration. That’s because the program, as one of the three big entitlement programs, will turn American into Greece without substantial structural reform.

But it’s not just a budgetary issue.

Writing for the Wall Street Journal, Sally Pipes of the Pacific Research Institute opines that this isn’t a happy birthday for taxpayers, seniors, or the healthcare system.

The only birthday gift this middle-age government program merits is a reality check. Health insurance for senior citizens was part of LBJ’s expansion of the welfare state, all in the service of establishing a “Great Society.” Yet many beneficiaries today are struggling to secure access to high-quality care. Future beneficiaries, meanwhile, are forking over billions of dollars today to keep a program afloat that may be bankrupt when they retire.

Like many government programs, it is far more expensive than initially promised.

Medicare spending has zoomed far beyond original expectations and is now anything but sustainable. In its first year, 1966, Medicare spent $3 billion. In 1967 the House Ways and Means Committee predicted that the program would cost $12 billion by 1990. It ended up costing $110 billion that year. Last year the program cost $511 billion, and seven years from now it will double to more than $1 trillion, according to the Kaiser Family Foundation.

And like many government programs, it is riddled with waste, fraud, and abuse.

Medicare has been dogged by fraud and other improper payments—$60 billion overall in fiscal 2014, according to a recent report by the Government Accountability Office.

You can click here if you want some jaw-dropping examples of how the program squanders money.

Moreover, many doctors don’t want to treat Medicare recipients because they lose money after you included the expense of accompanying paperwork and regulations.

…nearly three in 10 seniors on Medicare struggle to find a primary-care doctor who will treat them, according to the Medicare Payment Advisory Commission. Another survey conducted by Jackson Healthcare, the health-care staffing company, found that 10% of the more than 2,000 physicians it surveyed don’t see Medicare patients at all.

So what’s the solution?

We’ve tried price controls and that doesn’t work.

Other approaches also won’t be adequate. So the only answer, Sally explains, is to shift to a form of vouchers sometimes called “premium support.”

…tweaking the eligibility age won’t be enough. If Medicare is to survive into old age, the program has to be converted from an open-ended entitlement to a system of means-tested vouchers. Under such a system, the government would give every senior a voucher based on health status, income and age. Seniors in better health and those who are wealthy would receive smaller vouchers. Sicker or needier seniors would receive larger ones. Seniors would then choose from among privately administered health plans the one that best suited their needs and budget. Insurers would have to compete for beneficiaries’ business, and providers would have to compete to get on the most popular plans. Lower prices and better-quality care would be the result.

Grace-Marie Turner of the Galen Institute and Merrill Matthews of the Institute for Policy Innovation have a similarly pessimistic perspective.

In a column for Investor’s Business Daily, they highlight some of the same problems with cost and quality, but they also add important insight about how Medicare has caused rising health care costs.

…health economist Theodore Marmor pointed out: “Hospital price increases presented the most intractable political problem for the Johnson administration. In the first year of Medicare’s operation, the average daily service charge in America’s hospitals increased by an unprecedented 21.9%. Each month the Labor Department’s consumer price survey reported further increases…”

Gee, what a surprise. With Uncle Sam picking up the tab, normal market forces were eroded and providers responded by jacking up prices.

The federal government has responded with price controls, but that’s been predictably ineffective.

Congress imposed a type of price-control mechanism in 1983 called Diagnostic Related Groups, or DRGs. And in the early 1990s, Congress tried to cut spending on physicians by creating the Resource Based Relative Value Scale. Then there was the infamous Medicare “Sustainable Growth Rate,” later dubbed the “doc fix,” which passed in 1996 to contain Medicare spending by cutting doctors’ fees. It was repealed only recently, after Congress had postponed the vote 17 times.

So what’s the bottom line?

Government involvement dramatically increases spending, followed by clampdowns on soaring prices, leading to restrictions on doctors and patients. Perhaps next time, we might try market forces rather than another failed effort at centralized government programs.

Or we can simply leave policy on autopilot and somehow have faith that Obamacare’s death panels will “solve” the problem.

P.S. Here’s the video I narrated which explains the importance of the right kind of Medicare reform.

And if you want (what I think) is a very good description of the program, it’s that Medicare charges seniors for a hamburger and gives them a hamburger, but taxpayers are getting a bill for a steak.

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The Regulatory State’s War against Modern Life

When writing about the burden of regulation, I often share big numbers about aggregate cost, job losses, time wasted, and foregone growth.

But I sometimes wonder if such data is effective in the battle for good policy.

Maybe it’s better, at least in some cases, to focus on regulations that affect quality of life for regular people. Lots of ordinary citizens, for instance, are irked that they’re now forced to use inferior light bulbs, substandard toilets, and inadequate washing machines because of regulatory silliness from Washington.

And it looks like we’ll now be forced to use dishwashers that don’t clean dishes thanks to proposed regulations that will reduce water use (which is in addition to a 2012 regulation that already restricted water use).

The Hill reports on the Nanny State’s latest salvo in the war against modern civilization.

The Association of Home Appliance Manufacturers is accusing the Department of Energy (DOE) of a politically motivated drive to increase dishwasher efficiency standards, which are so bad that they would cause consumers to re-wash dishes, erasing any efficiency gains. Rob McAver, the group’s head lobbyist, said regulators are going too far and the new rules will allow only 3.1 gallons to be used to wash each load of dishes. …They then ran standard tests with food stuck to dishes. “They found some stuff that was pretty disgusting,” McAver said. …“The poor performance that would result would totally undercut and go backwards in terms of energy and water use, because of the need for running the dishwasher again, or pre-rinsing or hand-washing, which uses a lot of water,” he said.

Great, another bone-headed step by the government that will make life less enjoyable.

I’m already one of those people who rinse my dishes before putting them in the dishwasher because I hate the idea that they won’t be fully clean afterwards.

So I can only imagine how bad it will be if this absurd example of red tape is imposed and I have to buy a new dishwasher.

I guess I’ll just keep my fingers crossed that my current dishwasher doesn’t break down.

Especially since the rules make new dishwashers more expensive.

Ernest Istook, former Republican congressman from Oklahoma, wrote in a Washington Times piece that complying with the 2012 rule, based on DOE estimates, added roughly $44 to the cost of each machine. “Now their 2015 proposal will add another $99 to the price tag, even by DOE’s own admission,” he wrote.

Julie Borowski has the right assessment. Her column for Freedom Works is from 2012, but it’s very appropriate still today.

Are you disappointed in every shower head that you purchase? Does your toilet have trouble flushing? Have you noticed that your dishes are still dirty after the dishwasher cycle is completed? …Some of us may be quick to blame the manufacturer of these home appliances. But the manufacturers are just abiding by the costly regulations by the Environmental Protection Agency (EPA) and the Department of Energy.

What’s really frustrating is that these regulations reduce the quality of life without even reducing water usage.

…it has only led to people hacking their shower heads to remove the intrusion that is blocking water flow in order to have a more relaxing shower that actually gets them clean. There is no proof that the water restrictions have actually saved water because many people just end up taking longer showers than they otherwise would.

Amen. Every so often I wind up at a hotel with restricted-flow showerheads and it’s a hassle because I probably spend twice as long in the shower.

Not to mention problems government has created elsewhere in bathrooms.

…water restrictions are also the reason that our toilets have trouble flushing. Many of us have become accustomed to flushing the toilet multiple times before the toilet bowl is clear. The 1992 Energy Policy Act states that all toilets sold in the United States use no more than 1.6 gallons of water per flush. These water restrictions are the reason why we have to use plungers far more often than we used to.

I won’t torment readers with a TMI moment, but I will say that I now routinely flush at the halfway point when seated on a toilet. And even that doesn’t necessarily preclude a third flush at the end of the process.

The only good news is that this gives me a daily reminder that government has far too much power to micro-manage our lives.

Speaking of excessive government, here’s another example of the regulatory state run amok.

Perhaps you’ve heard of the federal milk police? Well, now we’ll have the federal pizza police, as explained by The Manhattan Institute.

Pizza makers could face fines and prison time under a new Food and Drug Administration rule for failing to provide calorie counts for their billions of combinations of pizza orders. …FDA’s menu labeling rule will go into effect on December 1st, 2016… If a company does not perfectly comply with the mandate, food may be rendered “misbranded” under the Federal Food, Drug, and Cosmetic Act, a violation that carries criminal penalties. Failure to comply with the regulation could lead to government seizure of food, a maximum $1,000 fine, and a one-year prison sentence. …Revising systems under strict compliance with the regulation’s guidelines is expected to cost Domino’s $1,600 to $4,700 per restaurant annually. In general, the rule is expected to cost businesses $537 million, losses that necessarily must be passed on to consumers in the form of higher prices.

And I doubt anyone will be surprised to learn that all this coercion and red tape will have no positive effect.

Several studies on the effectiveness of calorie displays suggest the mandate will have little to no effect on the public’s choices. In one study on menu-labeling in New York City, Brian Elbel, a professor at New York University, found that only 28 percent of people who saw calorie labels said that the information influenced their choices. There was no statistically significant change in calories purchased. In another study, Lisa Harnack of the University of Minnesota examined whether knowledge about calorie counts of menu items would influence how much a person ate, even if the information did not change ordering habits. A lab study revealed that, overall, consumers did not change how much they ate after receiving information about their food’s caloric content.

Which is why, when writing about this topic last year, I predicted “If this regulation is implemented, it will have zero measurable impact on American waistlines.”

P.S. Keep in mind we already have the federal bagpipe police, the federal pond police, and the federal don’t-whistle-at-whales police.

P.P.S. As I repeatedly warn, if the answer is more government, someone’s asked a very silly question.

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Periodic Debt Limit Fights Are Messy, but May Help Prevent Long-Run Crisis

Remember the big debt limit fight of 2013? The political establishment at the time went overboard with hysterical rhetoric about potential instability in financial markets.

They warned that a failure to increase the federal government’s borrowing authority would mean default to bondholders even though the Treasury Department was collecting about 10 times as much revenue as would be needed to pay interest on the debt.

And these warnings had an effect. Congress eventually acquiesced.

I thought it was a worthwhile fight, but not everyone agrees.

The Government Accountability Office (GAO), for instance, recently released a report about that experience and they suggest that there was a negative impact on markets.

During the 2013 debt limit impasse, investors reported taking the unprecedented action of systematically avoiding certain Treasury securities—those that matured around the dates when the Department of the Treasury (Treasury) projected it would exhaust the extraordinary measures that it uses to manage federal debt when it is at the limit. …Investors told GAO that they are now prepared to take similar steps to systematically avoid certain Treasury securities during future debt limit impasses. …industry groups emphasized that even a temporary delay in payment could undermine confidence in the full faith and credit of the United States and therefore cause significant damage to markets for Treasury securities and other assets.

The GAO even produced estimates showing that the debt limit fight resulted in a slight increase in borrowing costs.

GAO’s analysis indicates that the additional borrowing costs that Treasury incurred rose rapidly in the final weeks and days leading up to the October 2013 deadline when Treasury projected it would exhaust its extraordinary measures. GAO estimated the total increased borrowing costs incurred through September 30, 2014, on securities issued by Treasury during the 2013 debt limit impasse. These estimates ranged from roughly $38 million to more than $70 million, depending on the specifications used.

I confess that these results don’t make sense since it is inconceivable to me that Treasury wouldn’t fully compensate bondholders if there was any sort of temporary default.

But GAO included some persuasive evidence that investors didn’t have total trust in the government. Here are a couple of charts looking at interest rates.

Both of them show an uptick in rates as we got closer to the date when the Treasury Department said it would run out of options.

Given this data, the GAO argues that it would be best to eviscerate the debt limit.

The bureaucrats propose three options, all of which would have the effect of enabling automatic or near-automatic increases in the federal government’s borrowing authority.

GAO identified three potential approaches to delegating borrowing authority. …Option 1: Link Action on the Debt Limit to the Budget Resolution …legislation raising the debt limit to the level envisioned in the Congressional Budget Resolution would be…deemed to have passed… Option 2: Provide the Administration with the Authority to Increase the Debt Limit, Subject to a Congressional Motion of Disapproval… Option 3: Delegating Broad Authority to the Administration to Borrow…such sums as necessary to fund implementation of the laws duly enacted by Congress and the President.

So is GAO right? Should we give Washington a credit card with no limits?

I don’t think so, but I’m obviously not very persuasive because I actually had a chance to share my views with GAO as they prepared the report.

Here are the details about GAO’s process for getting feedback from outside sources.

…we hosted a private Web forum where selected experts participated in an interactive discussion on the various policy proposals and commented on the technical feasibility and merits of each option. We selected experts to invite to the forum based on their experience with budget and debt issues in various capacities (government officials, former congressional staff, and policy researchers), as well as on their knowledge of the debt limit, as demonstrated through published articles and congressional testimony since 2011. …we received comments from 17 of the experts invited to the forum. We determined that the 17 participants represented the full range of political perspectives. We analyzed the results of the forum to identify key factors that policymakers should consider when evaluating different policy options.

Given the ground rules of this exercise, it wouldn’t be appropriate for me to share details of that interactive discussion.

But I will share some of my 2013 public testimony to the Joint Economic Committee.

Here’s some of what I told lawmakers.

I explained that Greece is now suffering through a very deep recession, with record unemployment and harsh economic conditions. I asked the Committee a rhetorical question: Wouldn’t it have been preferable if there was some sort of mechanism, say, 15 years ago that would have enabled some lawmakers to throw sand in the gears so that the government couldn’t issue any more debt? Yes, there would have been some budgetary turmoil at the time, but it would have been trivial compared to the misery the Greek people currently are enduring. I closed by drawing an analogy to the situation in Washington. We know we’re on an unsustainable path. Do we want to wait until we hit a crisis before we address the over-spending crisis? Or do we want to take prudent and modest steps today – such as genuine entitlement reform and spending caps – to ensure prosperity and long-run growth.

In other words, my argument is simply that it’s good to have debt limit fights because they create a periodic opportunity to force reforms that might avert far greater budgetary turmoil in the future.

Indeed, one of the few recent victories for fiscal responsibility was the 2011 Budget Control Act (BCA), which only was implemented because of a fight that year over the debt limit. At the time, the establishment was screaming and yelling about risky brinksmanship.

But the net result is that the BCA ultimately resulted in the sequester, which was a huge victory that contributed to much better fiscal numbers between 2009-2014.

By the way, I’m not the only one to make this argument. The case for short-term fighting today to avoid fiscal crisis in the future was advanced in greater detail by a Wall Street expert back in 2011.

P.P.S. You can enjoy some good debt limit cartoons by clicking here and here.

 

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A Supranational Eurozone Government: Bad for Europe, Really Bad for Germany

If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.

But looking to Europe might be even more accurate.

For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.

The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.

This is nonsense.

The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.

And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.

Heck, the evidence is very strong that decentralized fiscal systems lead to much better outcomes.

So why is Europe’s political elite so enamored with a fiscal union and so opposed to genuine federalism?

There’s an ideological reason and a practical reason for this bias.

The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).

The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.

In the case of Italy, both reasons probably apply. Government debt already is very high in Italy and growth is virtually nonexistent, so it’s presumably just a matter of time before the Italians will be looking for Greek-style bailouts.

But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.

The Italian finance minister…served as former chief economist of the OECD.

You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.

But here’s the man-bites-dog part of the story.

The German government also seems open to the idea, as reported by the U.K.-based Independent.

France and Germany have agreed a new plan for closer eurozone political union… The new Franco-German agreement would see closer cooperation between the 19 countries.

Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?

As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.“

But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.

The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, called for a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.

And since the German approach is disliked by the Greeks, then it can’t be all bad.

Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.

But “can’t be all bad” isn’t the same as good.

Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.

So you can see why Europe’s political elite may be even more foolish than their American counterparts.

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Highway Funding Battle Brings Out the Worst of Washington

When giving speeches outside the beltway, I sometimes urge people to be patient with Washington. Yes, we need fundamental tax reform and genuine entitlement reform, but there’s no way Congress can make those changes with Obama in the White House.

But there are some areas whether progress is possible, and people should be angry with politicians if they deliberately choose to make bad decisions.

For instance, the corrupt Export-Import Bank has expired and there’s nothing that Obama can do to restore this odious example of corporate welfare. It will only climb from the grave if Republicans on Capitol Hill decide that campaign cash from big corporations is more important than free markets.

Another example of a guaranteed victory – assuming Republicans don’t fumble the ball at the goal line – is that there’s no longer enough gas-tax revenue coming into the Highway Trust Fund to finance big, bloated, and pork-filled transportation spending bills. So if the GOP-controlled Congress simply does nothing, the federal government’s improper and excessive involvement in this sector will shrink.

Unfortunately, Republicans have no desire to achieve victory on this issue. It’s not that there’s a risk of them fumbling the ball on the goal line. By looking for ways to generate more revenue for the Trust Fund, they’re moving the ball in the other direction and trying to help the other team score a touchdown!

The good news is that Republicans backed away from awful proposals to increase the federal gas tax.

But the bad news is that they’re coming up with other ideas to transfer more of our income to Washington. Here’s a look at some of the revenue-generating schemes in the Senate transportation bill.

Since the House and Senate haven’t agreed on how to proceed, it’s unclear which – if any – of these proposals will be implemented.

But one thing that is clear is that the greed for more federal transportation spending is tempting Republicans into giving more power to the IRS.

Republicans and Democrats alike are looking to the IRS as they try to pass a highway bill by the end of the month. Approving stricter tax compliance measure is one of the few areas of agreement between the House and the Senate when it comes to paying for an extension of transportation funding. …the Senate and House are considering policy changes for the IRS ahead of the July 31 transportation deadline. …With little exception, the Senate bill uses the same provisions that were in a five-month, $8 billion extension the House passed earlier this month. The House highway bill, which would fund programs through mid-December, gets about 60 percent of its funding from tax compliance measures. …it’s…something of a shift for Republicans to trust the IRS enough to back the new tax compliance measures. House Republicans opposed similar proposals during a 2014 debate over highway funding, both because they didn’t want to give the IRS extra authority and because they wanted to hold the line on using new revenues to pay for additional spending.

Gee, isn’t it swell that Republicans have “grown in office” since last year.

But this isn’t just an issue of GOPers deciding that the DC cesspool is actually a hot tub. Part of the problem is the way Congress operates.

Simply stated, the congressional committee system generally encourages bad decisions. If you want to understand why there’s no push to scale back the role of the federal government in transportation, just look at the role of the committees in the House and Senate that are involved with the issue.

Both the authorizing committees (the ones that set the policy) and the appropriating committees (the ones that spend the money) are among the biggest advocates of generating more revenue in order to enable continued federal government involvement in transportation.

Why? For the simple reason that allocating transportation dollars is how the members of these committees raise campaign cash and buy votes. As such, it’s safe to assume that politicians don’t get on those committees with the goal of scaling back federal subsidies for the transportation sector.

And this isn’t unique to the committees that deal with transportation.

It’s also a safe bet that politicians that gravitate to the agriculture committees have a strong interest in maintaining the unseemly system of handouts and subsidies that line the pockets of Big Ag. The same is true for politicians that seek out committee slots dealing with NASA. Or foreign aid. Or military bases.

The bottom line is that even politicians who generally have sound views are most likely to make bad decisions on issues that are related to their committee assignments.

So what’s the solution?

Well, it’s unlikely that we’ll see a shift to random and/or rotating committee assignments, so the only real hope is to have some sort of overall cap on spending so that the various committees have to fight with each other over a (hopefully) shrinking pool of funds.

That’s why the Gramm-Rudman law in the 1980s was a step in the right direction. And it’s why the spending caps in today’s Budget Control Act also are a good idea.

Most important, it’s why we should have a limit on all spending, such as what’s imposed by the so-called Debt Brake in Switzerland.

Heck, even the crowd at the IMF has felt compelled to admit spending caps are the only effective fiscal tool.

Maybe, just maybe, a firm and enforceable spending cap will lead politicians in Washington to finally get the federal government out of areas such as transportation (and housing, agriculture, education, etc) where it doesn’t belong.

One can always hope.

In the meantime, since we’re on the topic of transportation decentralization, here’s a map from the Tax Foundation showing how gas taxes vary by states.

This data is useful (for instance, it shows why drivers in New York and Pennsylvania should fill up their tanks in New Jersey), but doesn’t necessarily tell us which states have the best transportation policy.

Are the gas taxes used for roads, or is some of the money siphoned off for boondoggle mass transit projects? Do the states have Project Labor Agreements and other policies that line the pockets of unions and cause needlessly high costs? Is there innovation and flexibility for greater private sector involvement in construction, maintenance, and operation?

But this is what’s good about federalism and why decentralization is so important. The states should be the laboratories of democracy. And when they have genuine responsibility for an issue, it then becomes easier to see which ones are doing a good job.

So yet another reason to shut down the Department of Transportation.

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Hillary Clinton and Bernie Sanders: Two Peas in a Statist Pod

I’ve had several reporters ask me to comment on the philosophical and policy differences between Hillary Clinton and Bernie Sanders.

I’m always happy to oblige, yet I don’t think any of them have included my comments in their stories because I always give what seems to be a very unsatisfactory response.  My standard line is that Sanders and Clinton are two peas in a statist pod.

Yes, I realize that Sanders has a more aggressive us-vs-them approach, while Hillary is calculated and cautious, but those are merely differences in rhetoric and style.

What matters is action. And if you look at the Senate voting records of Sanders and Clinton, there’s almost no difference between them (or, for that matter, between them and Obama).

Let’s look at some of their policy proposals. Here are some excerpts from a Townhall column on Sanders’ statist agenda.

According to Bernienomics, raising the minimum wage to $15 an hour would prevent greedy capitalists from exploiting their workers and paying below a “living wage.” …Sanders…is…fighting for European style “free college”…Sanders supports the Environmental Protection Agency’s CO2 emission standards, even though these will raise the costs of energy and manufacturing. Sanders also supported allowing the Federal Communications Commission to regulate the internet as public utility… Sanders wants to raise taxes on the rich as much as possible…he has stated his desire to tax the rich at more than a 50 percent income tax rate. Sanders also recently proposed a massive increase in the estate tax… Sanders believes that Social Security is the “most successful government programs in American history,” so it only makes sense that he wants to expand it. …Sanders is also a major proponent of a single-payer health care system.

In other words, a typical statist agenda.

What about Hillary? Well, she’s must more guarded in what she says, but you can get a sense for her ideological mindset by looking at her new scheme to boost the capital gains tax.

Here’s some of what Ryan Ellis wrote for Americans for Tax Reform.

Hillary Clinton today proposed the most complex and Byzantine capital gains tax rate regime in history. …Under the Clinton plan, there would be six – yes, six — capital gains tax rates for those whose total taxable income puts them in the top 39.6 percent bracket. …or taxpayers not in the 39.6 percent bracket, we already have a graduated capital gains structure on assets held longer than a year. For taxpayers in this range, the rates could be 0, 15, 18.8, 20, or 23.8 percent. …her plan actually creates 10 different tax rates on capital gains, not counting those gains taxed as ordinary income due to their shorter duration of ownership. By anyone’s definition that’s really stupid tax policy. It will only serve to distort capital markets as investors will buy and sell not based on rational market signals, but on exogenous, arbitrary tax holding period considerations.

Not to mention that higher tax rates on investment will discourage risk-taking and entrepreneurship. And let’s not forget that it’s not a smart idea, from the perspective of competitiveness, to have the world’s highest capital gains tax rate. Or to pursue policies that will depress capital formation and thus lead to lower wages.

Now let’s get back to the main question. Is there a difference between Sanders and Clinton?

One could argue that Sanders has a more robust left-wing agenda. But that doesn’t make Clinton a moderate. Indeed, I challenge anyone to identify a single position she holds that would result in smaller government or less intervention.

The bottom line, as illustrated by this cartoon prepared by Jonathan Babington-Heina, is that Sanders and Clinton only differ in how fast they want to travel in the wrong direction.

P.S. This is the second cartoon from Jonathan I’ve shared. He also put together a superb cartoon that depicts the senseless damage caused by double taxation.

P.P.S. You also can get a sense of Hillary’s leftist mindest by looking at some of the crazy things she’s said over the years.

And to be balanced, Bernie also says crazy things. Let’s close with this example of political humor I saw on Twitter.

And here’s some more Hillary humor if you still haven’t received your recommended daily allowance.

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The Willful Blindness of an IRS Sycophant

Remember Sleepless in Seattle, the 1993 romantic comedy starring Tom Hanks and Meg Ryan?

Well, there should be a remake of that film entitled Clueless in Washington. But it wouldn’t be romantic and it wouldn’t be a comedy.

Though there would be a laughable aspect to this film, because it would be about an editorial writer at the Washington Post trying to convince people to feel sorry for the IRS. Here’s some of what Stephen Stromberg wrote on Wednesday.

Congress has done some dumb things. One of the dumbest is the GOP’s penny-wise-pound-foolish campaign to defund the Internal Revenue Service. …its mindless tantrum against the IRS has produced for taxpayers: a tax season that was “by far the worst in memory,” according to the Taxpayer Advocate Service, an agency watchdog.

Before I share any more of the article, I should point out that the “Taxpayer Advocate Service” isn’t a watchdog. It should be renamed the “Government Advocate Service” since its main goal is to increase the IRS’s budget.

But I’m digressing. Let’s continue with Mr. Stromberg’s love letter to tax collectors.

The underlying problem is that Congress has asked the IRS to do a lot more, such as administering a critical piece of Obamacare, but the GOP Congress won’t give the agency the funding it needs to do its work. …But good luck convincing Republicans to fix the IRS’s entirely predictable and avoidable problems. Not when that would mean restraining the impulse to act on anti-tax orthodoxy, blind populist anger and scandal-mongering about the IRS mistreating conservatives. In fact, Republicans want to double down on their nonsense budgeting, proposing deep cuts to the IRS last month.

Oops, time for another correction.

Stromberg is cherry picking data to imply that the IRS budget has been savaged.

If you look at the long-run data, however, you’ll see that the IRS now has almost twice as much money to run its operations as it did a few decades ago.

And that’s based on inflation-adjusted dollars, so we have a very fair apples-to-apples comparison.

Stromberg also wants us to sympathize with the bureaucrats because the tax code has been made more complex.

The underlying irrationality is the same: The IRS doesn’t write the tax code or health-care law, but the agency must apply these policies and engage with people affected by them, so it is an easy scapegoat.

Part of this passage is correct, and I’ve specifically pointed out that the tax code is mind-numbingly complex and that politicians deserve an overwhelming share of the blame for this sorry state of affairs.

That being said, the IRS goes beyond the law to make the system worse, as we saw when it imposed a regulation that put foreign tax law above American tax law. And when it arbitrarily rewrote the Obamacare legislation to enable additional subsidies.

In other words, it deserves to be scapegoated.

But there’s a bigger issue, one that Stromberg never even addresses. Why should we give more money to a bureaucracy that manages to find plenty of resources to do bad things?

Never forget, after all, that this is the bureaucracy that – in an odious display of bias – interfered with the electoral process by targeting the President’s opponents.

And then awarded bonuses to itself for this corrupt behavior!

Even more outrageous, the Washington Examiner reports today that the IRS still hasn’t cleaned up its act.

A series of new revelations Wednesday and Thursday put the Internal Revenue Service back under fire for its alleged efforts to curtail…conservative nonprofits. …the Government Accountability Office uncovered evidence that holes in the tax agency’s procedure for selecting nonprofit groups to be audited could allow bias to seep into the process. …lawmakers exposed the lack of safeguards that could prevent IRS officials from going after groups with which they disagreed. Meanwhile, the conservative watchdog Judicial Watch released documents Wednesday that suggested the IRS targeted the donors of certain tax-exempt organizations.

Does this sound like a bureaucracy that deserves more of our money?

If you’re still not sure how to answer, consider the fact that the IRS also somehow has enough money in its budget to engage in the disgusting “asset forfeiture” racket.

The Wall Street Journal recently opined on this scandal.

…a pair of new horror stories show why Americans dread any interaction with the vindictive tax man. Khalid Quran owns a small business in Greenville, North Carolina. He emigrated to the U.S. in 1997, opened a convenience store near a local airport, and worked long hours to give his four children more opportunity. After nearly two decades, Mr. Quran had saved $150,000 for retirement. Then in 2014 the IRS seized his bank account because he had made withdrawals that raised red flags under “structuring” laws that require banks to report transactions of more than $10,000. Mr. Quran had made transactions below that limit.

So even though Mr. Quran did nothing illegal and even though it’s legal to make deposits of less than $10,000, the IRS stole his money.

Just like money was stolen from the Dehko family.

Here’s the other example from the WSJ.

Maryland dairy farmer Randy Sowers…had $62,936.04 seized from his bank account because of the pattern of his deposits, though the money was all legally earned. …Mr. Sowers told his story to a local newspaper…a lawyer for Mr. Sowers asked…“why he is being treated differently.” Mr. Cassella replied that the other forfeiture target “did not give an interview to the press.” So much for equal treatment under the law.

Yes, you read correctly. If you have the temerity to expose the IRS’s reprehensible actions, the government will try to punish you more severely.

Even though the only wrongdoing that ever happened was the IRS’s confiscation of money in the first place!

So let’s celebrate the fact that the IRS is being subjected to some modest but long-overdue belt-tightening.

Notwithstanding Mr. Stromberg’s column, the IRS is not a praiseworthy organization. And many of the bureaucrats at the agency deserve our disdain.

• It has thieving employees.
• It has incompetent employees.
• It has thuggish employees.
• It has brainless employees.
• It has protectionist employees.
• It has wasteful employees.
• And it has victimizing employees.

The bottom line is that IRS budget cuts show that Republicans sometimes do the right thing.

And maybe if there are continued cuts and the current tax system actually does become unenforceable at some point, maybe politicians could be convinced to replace the corrupt internal revenue code with a simple and fair flat tax.

P.S. Clueless in Washington won’t be the only remake out of DC if President Obama decides to go Hollywood after 2016. Indeed, I suspect his acting career would be more successful than mine.

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Greece’s Debt Is Sustainable

The conventional wisdom, pushed by the IMF and others, is that Greece’s economy will never recover unless there is substantial debt relief.

Translated into English, that means the Greek government should be allowed to break the contracts it made with the people and institutions that lent money to Greece. That may mean a “haircut,” which would mean lenders (often called creditors) only get back some of what they’ve been promised, or a “default,” which would mean they get none of the money they were promised.

I wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its budget.

But let’s set that issue aside and look at the specific issue of whether Greece’s debt is unsustainable. Here’s a look at Greek government debt, measured as a share of economic output.

As you can see, when the crisis started in Greece, government debt was about 100 percent of GDP.

Was Greece doomed at that point?

Well, if the situation was hopeless, then someone needs to explain why the United States didn’t collapse after World War II.

As you can see from this chart, debt climbed to more than 100 percent of economic output because of the heavy expense of defeating Nazi Germany and Imperial Japan. Yet the American economy rebounded after the war (notwithstanding dire predictions from Keynesians) and the debt burden shrank.

So maybe the more interesting issue is to look at how America reduced its debt burden after 1945, which may give us some insights into what should happen (or should have happened) in Greece.

Here’s one question to consider: Did the burden of the federal debt drop between the end of World War II and the 1970s because of big budget surpluses?

Nope. If you look at Table 7.1 of OMB’s Historical Tables, you’ll see that there was a steady increase in the amount of government debt in America after 1945. Yes, there were a few years with budget surpluses, but those surpluses were more than offset by years with budget deficits.

The reason that the national debt shrank as a share of economic output was completely the result of the economy growing faster than the debt.

Here’s an analogy. Imagine you graduate from college and you have $20,000 of credit card debt. That might be a very big burden relative to your income.

But in your 50s and (hopefully) earning a lot more money, you might have $40,000 of credit card debt, yet be in a much stronger financial position.

So the real issue for Greece (and Spain, and Japan, and the United States, etc) is not so much whether the amount of debt shrinks. It’s whether debt is constrained compared to private-sector growth.

That doesn’t require any sort of miracle. Yes, it would be nice if Greece and other nations decided to become like Hong Kong and Singapore, high-growth economies thanks to small government and non-interventionism.

But all that’s needed is a semi-sincere effort to avoid big deficits, combined with a semi-decent amount of economic growth. Which is an apt description of U.S. policy between WWII and the 1970s.

Is it unreasonable to ask Greece to follow that model?

Some may say Greece is now in a different situation because debt levels have climbed too high. Debt in the United States peaked a bit above 100 percent of GDP at the end of World War II, whereas government debt in Greece is now closer to 200 percent of GDP.

It’s certainly true that today’s debt burden in Greece is higher than America’s post-WWII debt burden. So let’s look at another example.

Government debt in the United Kingdom jumped to almost 250 percent of economic output by the end of the World War II.

Did that cause the U.K. economy to collapse? Did Britain have to default?

The answer to both questions is no.

The United Kingdom simply did what America did. It combined a semi-sincere effort to avoid big deficits with a semi-decent amount of economic growth.

And the result, as you can see from the above graph, is that debt fell sharply as a share of GDP.

In other words, Greece can fulfill its promises and pay its bills. And the recipe isn’t that difficult. Simply impose a modest bit of spending restraint and enact a modest amount of pro-growth reforms.

Unfortunately, prior bailouts have given Greece an excuse to avoid reforms. Though the IMF, ECB and European Commission (the so-called troika) have learned somewhat from those mistakes and are now making greater demands of the Greek government as a condition of another bailout.

The problem is the troika doesn’t seem to understand what’s really needed in Greece. They’re pushing for lots of tax increases, which will make it hard for Greece’s private sector to generate growth. The only good news (or, to be more accurate, less bad news) is that the troika doesn’t want as many tax hikes as the Greek government would like.

In other words, don’t be too optimistic about the long-run outcome. Which is basically what I said in this interview on Canadian TV.

The bottom line is that a rescue of the Greek economy is possible. But so long as nobody with any power wants to make the right kind of reforms, don’t hold your breath waiting for good results.

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Estonia Demonstrates that Business Taxation Can Be Simple, Fair, and Conducive to Growth

I’m very fond of Estonia, and not just because of the scenery.

Back in the early 1990s, it was the first post-communist nation to adopt a flat tax.

More recently, it showed that genuine spending cuts were the right way to respond to the 2008 crisis (notwithstanding Paul Krugman’s bizarre attempt to imply that the 2008 recession was somehow caused by 2009 spending cuts).

This doesn’t mean Estonia is perfect. It is ranked #22 by Economic Freedom of the World, which is a respectable score, but that puts them not only behind the United States (#12), but also behind Switzerland (#4), Finland (#10), the United Kingdom (#12), Ireland (#14), and Denmark (#19).

And you can see from the chart that Estonia’s overall score has dropped slightly since 2006.

But I don’t believe in making the perfect the enemy of the good. Estonia is still a reasonably good role model for reform, particularly for nations that emerged from decades of communist enslavement.

You can see how good policy makes a difference, for instance, by comparing Estonia with Croatia (#70). At the time of the breakup of the Soviet Empire, living standards in Croatia were low, but they were about twice as high as they were in Estonia. Today, though, per-capita economic output in Estonia is about $4000 higher than in Croatia.

That’s a dramatic turnaround and it shows that markets are much better for people than statism. Sort of like the lesson we learn by comparing Poland (#48) and Ukraine (#122).

Let’s now take a closer look at one of the policies that has helped Estonia prosper. The flat tax was first adopted in 1994 and the rate was 26 percent. Since then, the rate has been gradually reduced and is now 20 percent.

For some people, the most amazing aspect of the Estonian flat tax is its simplicity, as noted by Kyle Pomerleau of the Tax Foundation.

Republican Presidential hopeful Jeb Bush claimed that it only takes 5 minutes to file taxes in Estonia. This claim was confirmed by a number of reporters and tax authorities in Estonia. For those of us that do our taxes by hand, this sounds like a dream. Depending on your situation, filing your taxes can tax a significant amount of time and due to the numerous steps involved (especially if you are claiming credits) may lead some to make errors. According to the IRS, it takes an average taxpayer with no business income 8 hours to fill out their 1040 and otherwise comply with the individual income tax. Triple that for those with business income.

For those keeping score, this means Estonia is kicking America’s derriere.

But Kyle is even more impressed by other features of the Estonian system.

…that it is not the best part of the Estonian tax code. The best part of the Estonian tax code has more to do with its tax base (what it taxes) rather than how fast people can pay their taxes. Specifically, the Estonian tax code has a fully-integrated individual and corporate income tax. This means that corporate income is taxed only once either at the entity level or at the individual level.

And this means Estonia’s flat tax is far better for growth than America’s system, which suffers from pervasive and destructive double taxation.

In total, the tax rate on corporate income is 20 percent in Estonia. Compare this to the integrated tax rate on corporate profits of 56 percent in the United States. Even more, this tax system provides de facto full expensing for capital investments because the corporate tax is only levied on the cash distributed to shareholders, which is also a significant boon to investment and economic growth.

Wow. No double taxation and expensing of business investment.

There is a lot to admire about Estonia’s sensible approach to business taxation.

Particularly when compared to America’s masochistic corporate income tax, which ranks below even the Greek, Italian, and Mexican systems.

Having the world’s highest statutory corporate tax rate is part of the problem. But as Kyle pointed out, the problem is actually far worse when you calculate how the internal revenue code imposes extra layers of tax on business income.

That’s why, at a recent tax reform event at the Heritage Foundation, I tried to emphasize why it’s economically misguided to have a tax bias against saving and investment.

The bottom line is that high taxes on capital ultimately lead to lower wages for workers.

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Helpful Advice for Jeb Bush and other Candidates: Shrinking Government Is the only Effective Way to Reduce Washington Corruption

A few days ago, I had some fun by writing a tongue-in-cheek column about the world’s most misleading headlines.

Today, I want to share a strong contestant for the world’s most depressing headline.

It’s from The Hill, and it’s the lead to a story about giddy times for Washington’s lobbying community.

So why are lobbyists rolling in cash? What accounts for all the dollars flowing to the influence-peddling community?

The answer, as noted in the article, is that there’s been an end to gridlock.

Nearly all of Washington’s top lobby shops saw gains in revenue in the first half of 2015 as an uptick in activity within both Congress and the Obama administration translated to a boon for K Street. Following a period of relative stagnation in the two-year span preceding the 2014 elections, the Beltway’s biggest lobbying firms have broken through the malaise… “Corporations are a lot more optimistic about whether to invest in Washington,” said Marc Lampkin, a former aide to Speaker John Boehner (R-Ohio)… K Street’s top firm — Akin Gump Strauss Hauer & Feld — continued to bolster its advocacy revenue, earning $10.23 million in the second quarter. …“I think our success during the first half of 2015 reflects the…high degree of activity in Congress,” said Don Pongrace, head of the firm’s public law and policy practice.

In other words, an “uptick in activity” in what gives special interests an incentive to “invest in Washington.”

So the obvious lesson is that if you want to reduce lobbying in Washington, the best option is for Washington to do nothing. My personal preference is to make Congress a part-time legislature. That’s worked out quite well for Texas, so why not try it in the nation’s capital?

But if that option isn’t available, then I’m a big fan of gridlock. Simply stated, if my choices are for politicians to do nothing or to have politicians make government bigger, the answer is obvious.

Which is why I was initially very worried when I saw this headline from another story published by The Hill.

This sounds like my worst nightmare. The last thing we should want is productive politicians!

That’s sort of like having productive pickpockets.

But if you read the story, Governor Bush says he wants a lot of activity as part of an effort to shrink “the federal footprint.”

…the GOP presidential candidate said he’d announce tax and regulatory reform proposals over the “coming months,” as well as changes to entitlement programs and a replacement for ObamaCare. …”The overspending, the overreaching, the arrogance and the sheer incompetence in that city — these problems have been with us so long that they are sometimes accepted as facts of life…” Bush criticized Washington for operating on autopilot, ticking off a slew of pitches meant to push back against what he characterized as a needless expansion of the federal footprint.

And it’s true. Fixing all these problem will require lots of legislation.

• If we want a pro-growth and non-corrupt tax code, we’ll have to eviscerate the IRS with a flat tax.
• If we want to address the long-run spending crisis, we’ll need genuine entitlement reform.
• If we want to limit boondoggles and pork, we’ll need some sort of Swiss-style spending cap.
• If we want to curtail excessive regulation and red tape, we’ll need market-liberalizing rollbacks.

So while I’m generally very uneasy with the notion of a “productive” Congress, I also realize that lots of reforms will be needed to restore economic vitality.

Now let’s consider one final headline. This one is from a report in the New York Times, and it also revolves around Jeb Bush and his campaign.

And here’s some of what’s in the article.

Jeb Bush…outlined a wide-ranging plan on Monday to rein in the size of the federal government and curb the influence of lobbyists who live off it. …His proposals, modeled on his record as a budget-cutting governor, amounted to…an assault on the culture of Congress

By and large, this sounds good.

But here’s the catch. You don’t need specific anti-lobbying reforms (such as Bush’s proposed six-year ban on lobbying when Senators and Representatives leave office) if you actually are serious about reducing the size and scope of the federal government.

Reducing the power of Washington is the best way of starving DC’s special-interest community.

Indeed, it’s the only genuinely effective way. I explain in this video that laws to control corruption in Washington don’t work because they don’t address the real problem of politicians having far too much influence over the economy.

I hope you noticed the balloon analogy at the end of the video. If you don’t like Washington’s parasite class, the only way to curtail their privileged existence is with smaller government.

By the way, I don’t want to imply that all lobbying is bad. It all depends on whether lobbyists are engaged in self-defense or extortion. Here’s some of what I wrote last year.

…lobbying is not necessarily bad. If a handful of business owners want to join forces to fight against higher taxes or more regulation, I’m all in favor of that kind of lobbying. They’re fighting to be left alone. But a big chunk of the lobbying in Washington is not about being left alone. It’s about seeking undeserved benefits by using the coercive power of government.

Moreover, I also pointed out two years ago that we need to respect what the Founding Fathers envisioned.

…the First Amendment protects our rights to petition the government and to engage in political speech.

So at the risk of repeating myself, I urge people to fix the real problem of big government and not get overly distracted by the symptom of favor-swapping and corruption in Washington.

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While Greece Implodes, France Corrodes and Spain Erodes

For understandable reasons, the fiscal mess in Greece has dominated the European economic headlines.

But there are other developments that deserve attention. Amazingly, some politicians think Europe’s stagnant economy can be improved with more harmonization, more bureaucratization, and more centralization.

The EU Observer has a story about a French scheme to transform the eurozone into a supranational government.

French president Francois Hollande has called for a stronger more harmonised eurozone… “What threatens us is not too much Europe, but too little Europe,” he said in a letter published in the Journal du Dimanche. He called for a vanguard of countries that would lead the eurozone, which should have its own government, a “specific budget” and its own parliament. …French prime minister Manuel Valls Sunday said…France would prepare “concrete proposals” in the coming weeks. “We must learn the lessons and go much further,” he added, referring to the Greek crisis.

I’m not sure what lessons Monsieur Valls wants people to learn. Greece got in trouble because of big government and excessive intervention.

So why is anyone supposed to believe that adding a new layer of government is going to make Europe more prosperous?

In all likelihood, the French are pursuing this agenda for two selfish reasons.

1. A “harmonised eurozone” means that all affected nations would have to abide by the same rules, and that inevitably means taxes and regulations are set at the most onerous levels. The French think that’s a good idea because it’s a way of undermining the competitiveness of other eurozone nations.
2. A eurozone government with a “specific budget” sets the stage for more intergovernmental transfers in Europe. The French think that’s a good idea since they presumably could prop up their decrepit welfare state with money from taxpayers in nations such as Germany, Finland, and the Netherlands.

By the way,not all French politicians are totally misguided.

At least one of them is expressing more sensible ideas, as reported by the U.K.-based Telegraph.

France is “the sick man of Europe”, François Fillon, the former centre-Right prime minister, has said in an open letter to French president Francois Hollande, calling for urgent economic reforms.“The Greek tragedy shows that the threat of bankruptcy is not abstract,” according to Mr Fillon… French commentators writing about the Greek crisis in recent days have pointed out that France’s own national debt of more than €2 trillion (£1.4 trillion), amounting to 97.5 per cent of GDP, places it in the same league as Spain and other southern European countries.

By the way, the commentators who are fretting about French debt are focused on the wrong variable. The French disease is big government. High levels of debt are simply a symptom of that disease.

Moreover, I’m not sure that Monsieur Fillon is a credible spokesman for smaller government and free markets since he served during the statist tenure of President Sarkozy.

In any event, if there are any serious reformers in France, they face an uphill battle. As I’ve previously noted, many successful people and aspiring entrepreneurs have left France.

Here’s a news report on the phenomenon.

And just in case you think this is merely anecdotal data, here’s a table showing the nations that lost the most millionaires since 2000.

In the case of China and India, rich people leave because they want to establish a domicile in a developed nation.

But successful people escape France in spite of its first-world attributes.

Let’s now cross the Pyrenees and see what’s happening in Spain.

Our Keynesian friends, as well as other big spenders, are always trumpeting the value of infrastructure projects because they ostensibly pump money into an economy.

I’ve made the point that such outlays should be judged using cost-benefit analysis. Well, it appears that Spain listened to the wrong people. It got a €10,000 return on an infrastructure “investment” of €1,100,000,000.

One of Spain’s “ghost airports”—expensive projects that were virtually unused—received just one bid in a bankruptcy auction after costing about €1.1 billion ($1.2 billion) to build. The buyer’s offer: €10,000. Ciudad Real’s Central airport, about 235 kilometers south of Madrid, became a symbol of the country’s wasteful spending.

Wow, and I thought Social Security was a bad deal.

But Spanish politicians should be known for more than just misguided boondoggles.

Some of them also are working hard to make sure citizens don’t work too hard. Here’s a story from an English-language news outlet in Spain (h/t: Commentator).

Between the hours of 2pm and 5pm you will struggle to find anyone in the Valencian town of Ador; the town’s inhabitants will have taken to their beds to catch their mandatory forty winks. The town’s summer siesta tradition is so deep-rooted the mayor has enshrined his citizen’s right to an afternoon snooze in law. …Ador could be the first town in Spain to actually make taking a siesta obligatory by law. …The new rules also stipulate that children should remain indoors:

One imagines the next step will be mandatory bed checks by new bureaucrats hired for just that purpose.

Though maybe they would need special permission to take their mandatory siestas from 11:00-2:00 so they would be free to harass the rest of the population between 2:00-5:00.

In any event, we can add mandatory siestas to our list of bizarre government-granted human rights.

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To Protect Liberty, Don’t Let Governments Collect Data

I’ve written before about the tremendous success of Hong Kong. The jurisdiction routinely is ranked as being the world’s freest economy, and its fiscal policy is a role model for spending restraint.

One reason Hong Kong has prospered is that it has enjoyed a policy of benign neglect, particularly when it was a British colony prior to 1997. More specifically, the United Kingdom by happenstance appointed John Cowperthwaite to help govern the colony. And his view of governing was to leave things alone.

…while the mother country lurched in a socialist direction at home under Clement Attlee, Cowperthwaite became an advocate of what he called “positive non-interventionism” in HK.

Cowperthwaite was especially wise in realizing that collecting statistics was risky because advocates of big government would want to justify and implement intervention on the basis of data.

To Cowperthwaite, the planner’s quest for statistics was anathema. So he refused to compile them. When Friedman asked him in 1963 about the “paucity of statistics,” Cowperthwaite answered, “If I let them compute those statistics, they’ll want to use them for planning.”

This may seem to be an arcane point, but imagine how much freer we would be if Washington didn’t have access to our private information.

Consider these examples.

1. The burdensome modern income tax would be impossible if government didn’t have information on our income and assets.
2. Disgusting examples of asset forfeiture would no long occur if the government didn’t have data on our bank accounts.
3. Failed interventions such as No Child Left Behind and Common Core would be impractical if Washington didn’t have education statistics.
4. Our medical system wouldn’t be messed up by Obamacare, Medicaid, and Medicare if politicians didn’t have data about healthcare.

The list is almost endless.

And now we have another disturbing example. As the New York Post reports, the Obama Administration is engaging in an intrusive and Orwellian data-collection exercise as a precursor for central planning of the economy and manipulation of private behavior.

Unbeknown to most Americans, Obama’s racial bean counters are furiously mining data on their health, home loans, credit cards, places of work, neighborhoods, even how their kids are disciplined in school — all to document “inequalities” between minorities and whites. This Orwellian-style stockpile of statistics includes a vast and permanent network of discrimination databases.

Why are they doing all this snooping? To justify more intervention, of course.

The bureaucrats are guided by the theory of disparate impact, which is based on the absurd notion that any difference in racial statistics somehow is a sign of malignant racism.

So it doesn’t matter if there isn’t any evidence of racism. It doesn’t matter if there’s any suggestion of actual discrimination.

What matters if that a bunch of bureaucrats want power to micro-manage the economy and control our lives.

Here’s what’s happening, for instance, in housing.

…the Affirmatively Furthering Fair Housing database, which the Department of Housing and Urban Development rolled out earlier this month to racially balance the nation, ZIP code by ZIP code. It will map every US neighborhood by four racial groups — white, Asian, black or African-American, and Hispanic/Latino — and publish “geospatial data” pinpointing racial imbalances. The agency proposes using nonwhite populations of 50% or higher as the threshold for classifying segregated areas. Federally funded cities deemed overly segregated will be pressured to change their zoning laws to allow construction of more subsidized housing in affluent areas in the suburbs, and relocate inner-city minorities to those predominantly white areas.

By the way, if you think this is just hyperbole, the federal government has been using Westchester County in New York as a guinea pig based on residential housing data. With terrible results, as you can imagine.

And the Department of Housing and Urban development also has been using subsidized housing as a tool for central planning of society.

Needless to say, this is the wrong approach. Instead of letting bureaucrats in Washington act as some sort of national zoning commission, we should shut down HUD and get the federal government completely out of the housing sector.

And, more broadly, we should heed the wise words of John Cowperthwaite, who helped Hong Kong become rich by denying bureaucrats access to data.

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The Deadly Impact of “Gun-Free Zones”

I proposed an “IQ Test for Criminals and Liberals” back in 2012 which asked readers to imagine that they were thieves.

And I then asked them, as they were planning their crimes, how they would react if they knew that a particular homeowner was armed. Would they:

a. break into the house because you once heard a politician or journalist assert that gun ownership doesn’t deter crime?

b. decide after a bit of reflection about potential costs and benefits that it might be more prudent to find another house to rob?

My goal was to help well-meaning leftists understand that criminals respond to incentives. And even the really stupid ones will seek to maximize how much they can steal while minimizing the risk of bad outcomes.

And if you’re a criminal, one potential bad outcome is getting shot by an armed homeowner.

The same cost-benefit analysis applies to mass shooters. Regardless of whether these shooters are motivated by feelings of inadequacy or Islamofascist ideology, their goal is to kill as many people as possible before being stopped.

So it makes sense, from their warped perspective, to seek out “gun-free zones.”

And when these nutjobs start shooting in places where there’s very little likelihood that they’ll encounter immediate armed resistance, that means a higher body count.

Which is what happened at Fort Hood. And in Santa Barbara. And in Newtown, Connecticut. And at the Aurora movie theater. And at Virginia Tech.

And now in Chattanooga.

Here’s a photo from the recent shooting spree by Muhammad Youssef Abdulazeez. Notice the sign, right by all the bullet holes, stating that “Firearms Are Prohibited In This Facility.”

Needless to say, this sign didn’t stop the attack. It may have even encouraged the attack.

In any event, the rule did affect one group of people, as Sean Davis explained for The Federalist.

The gun-free zone sign didn’t prevent the shooter from firing a gun at completely innocent individuals within the zone. It did, however, prevent them from defending themselves.

And here’s the really depressing part of this tragedy. The military personnel targeted by the terrorist weren’t unarmed because Chattanooga had bad policy.

They were unarmed because of federal government policy. Writing for Fox News, John Lott explains this bizarre policy.

Army regulations are very clear stating that personnel cannot have firearms during their official duties.  Last year the Obama administration instituted interim rules that clearly prohibit privately owned weapons from all federally leased office and land, including recruiters’ offices. …With the exceptions of military police, military personnel are banned from having weapons on base, in federally leased buildings, or while they are carrying out official duties. For would-be terrorists among us there is an abundance of possible targets. …Allowing military personnel to at least defend themselves reduces the number of easy targets that terrorists/killers can attack.

Amen. Let members of the military have the ability to defend themselves.

And expand concealed-carry laws so that citizens also have greater ability to thwart crime and mass shootings.

P.S. I shared above a great cartoon from Chuck Asay. You can click here to see another. And these two posters make the same point quite effectively.

P.P.S. While folks on the left are one of the targets of my IQ test, not all liberals are misguided on the gun issue. As you can read here and here, there are a couple of them who put reason ahead of ideology.

P.P.P.S. It’s also encouraging to note that some lawmakers realize it’s a good idea to have more protection for schoolchildren.

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A Global Tax Cartel Will Hurt the World Economy, Particularly Developing Nations

What’s the best way to generate growth and prosperity for the developing world?

Looking at the incredible economic rise of jurisdictions such as Hong Kong and Singapore, it’s easy to answer that question. Simply put in place the rule of law, accompanied by free markets and small government.

But that answer, while unquestionably accurate, would mean less power and control for politicians and bureaucrats.

So you probably won’t be surprised to learn that when politicians and bureaucrats recently met to discuss this question, they decided that development could be best achieved with a policy of higher taxes and bigger government.

I’m not joking.

Reuters has a report on a new cartel-like agreement among governments to extract more money from the economy’s productive sector. Here are some key passages from the story.

Rich and poor countries agreed on Thursday to overhaul global finance for development, unlocking money for an ambitious agenda… The United Nations announced the deal on its website… Development experts estimate that it will cost over $3 trillion each year to finance the 17 new development goals… Central to the agreement is a framework for countries to generate more domestic tax revenues in order to finance their development agenda… Under the agreement, the UN Committee of Experts on International Cooperation in Tax Matters will be strengthened, the press release said.

Though there’s not total agreement within this crooks’ cartel. There’s a fight over which international bureaucracy will have the biggest role. Should it be the Organization for Economic Cooperation and Development, which is perceived as representing the interests of revenue-hungry politicians from the developed world?

Or should it be the United Nations, which is perceived as representing the interests of revenue-hungry politicians from the developing world?

Think of this battle as being somewhat akin to the fight between various socialist sects (Mensheviks, Trotskyites, Stalinists, etc) as the Soviet Union came to power.

Bloomberg has a story on this squabble.

Responsibility for tax standards should be moved to the UN from the Organization for Economic Co-operation and Development, a group of 34 rich countries, according to a position paper endorsed by 142 civil-society groups. …Tove Maria Ryding from the European Network on Debt and Development, [said] “Our global tax decision-making system is anything but democratic, excluding more than half of the world’s nations.”

I’m tempted to laugh about the notion that there’s anything remotely democratic about either the UN or OECD. Both international organizations are filled with unelected (and tax-free) bureaucrats.

But more importantly, it’s bad news for either organization to have any power over the global economy. Both bureaucracies want to replace tax competition with tax harmonization, precisely because of a desire to enable big expansion is the size and power of governments.

This greed for more revenue already has produced some bad policies, including an incredibly risky scheme to collect and share private financial information, as well as a global pact that could be the genesis of a world tax organization.

And there are more troubling developments.

Here are some excerpts from another Bloomberg report.

Step aside, Doctors Without Borders. …A team called Tax Inspectors Without Borders will be…established next week by the United Nations and the Organization for Economic Cooperation and Development. …Tax Inspectors Without Borders would take on projects or audits either by flying in to hold workshops…or embedding themselves full time in a tax agency for several months… “There is a lot of enthusiasm from developing countries” for this initiative, said John Christensen, the U.K.-based director of the nonprofit Tax Justice Network.

Gee, what a surprise. Politicians and bureaucrats have “a lot of enthusiasm” for policies that will increase their power and money.

But at the risk of repeating myself, the more serious point to make is that bigger government in the developing world is not a recipe for economic development.

The western world became rich when government was very small. As noted above, Hong Kong and Singapore more recently became rich with small government.

But can anyone name a country that became rich with big government?

I’ve posed that question over and over again to my leftist friends and they never have a good answer.

If we want the third world to converge with rich nations, they need to follow the policies that enabled rich nations to become rich in the first place.

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Greece, Germany, and a Real-World Version of Atlas Shrugged

I suggested a couple of months ago that the economic turmoil in Greece and Venezuela is somewhat akin to a real-life version of Atlas Shrugged.

And I’ve also used that analogy when writing about France and Detroit.

But I’m probably not doing justice to Ayn Rand’s famous novel because Atlas Shrugged is not just about an economy that collapses under the weight of too much government regulation, intervention, and control.

I probably won’t give the right description since I’m a policy wonk rather than philosopher, but Atlas Shrugged is also about the perils of self-sacrifice.

And I couldn’t help but think about that aspect of the book when I read the comments of certain Greek politicians during yesterday’s bailout vote in Athens.

If you scroll down to the 14:40 mark of this timeline from the U.K.-based Telegraph, you’ll find some remarkable comments that sound like they came straight from Ayn Rand’s book.

Greece’s ruling Syriza party has accused David Cameron of being mean over his objections to allowing British taxpayer’s money to be used to help Athens meet upcoming debt payments. …Mr Cameron’s attitude was described as cold-hearted by Nikos Xydakis, a deputy culture minister in Syriza. “Mr Cameron must explain to the European people and 11 million Greeks why he wants them to suffer a social crisis,” Mr Xydakis told The Telegraph. “This is not about politics, this is about human souls.”

Wow. I might agree that David Cameron is “mean,” but I think his cruelty is directed against British taxpayers, not Greek politicians.

But let’s stick with our main topic. Notice how the moochers in Greece are trying to use guilt as a weapon. I’m sure some Ayn Rand experts will correct me if I’m wrong, but the aforementioned comments definitely sound like passages from Atlas Shrugged.

That being said, the Germans apparently have more in common with John Galt than Jim Taggart. Here are some excerpts from a column in the New York Times by Jacob Soll, a professor from the University of Southern California. He recently attended a conference in Germany and found very little sympathy for the Greeks.

 …when the German economists spoke…, a completely different tone took over the room. Within the economic theories and numbers came a moral message: The Germans were honest dupes and the Greeks corrupt, unreliable and incompetent. …the Greeks destroyed themselves over the past four years. Now the Greeks deserved what was coming to them. …Debtors who default, they explained, would simply have to suffer…a country like Greece…did not seem to merit empathy. …When the panel split up, German attendees circled me to explain how the Greeks were robbing the Germans. They did not want to be victims anymore.

Wow, who knew the Germans were a bunch of closet Randians!

No wonder the Greek politicians decided to target David Cameron instead.

For what it’s worth, I must have some German blood in my veins because I wasn’t overly sympathetic to Greece in this interview.

I even referred (again) to “looters” and “moochers,” which are terms used in Rand’s book.

I’ll make two comments about the interview.

1. My prediction about the vote in Greece was correct. Though I wish I had been wrong because the best long-run outcome (both for the Greek people and the world’s taxpayers) is an end to bailouts.
2. I mentioned that there will be more debt-crisis dominoes at some point in the future. I hope I’m wrong, but it’s hard to be optimistic when you look at long-run fiscal estimates from the IMF, BIS, and OECD.

P.S. Lots of what happens in Washington also is disturbingly similar to scenes from Atlas Shrugged, particularly the corrupt Obamacare waiver process.

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World’s Most Misleading Headlines

When I wrote about the media, it’s generally to criticize sloppy and/or biased reporting

But maybe I need to have a new category that features misleading headlines.

For instance, here’s a report by Fox Business News that grabbed my attention because of the headline. The story is about the arrest of an IRS bureaucrat.

The main reason I was startled by the story is that it didn’t seem at all newsworthy.

To be blunt, isn’t it the job of IRS employees to use our Social Security numbers to steal our money? That’s certainly what goes through my mind as I fill out my tax return.

So why was this bureaucrat arrested?

Was it for being a slacker, I wondered? The federal government confiscates about $3.5 trillion of our money each year, after all, which means the 95,000 IRS bureaucrats generate an average haul of more than $35 million. By contrast, $326 thousand is a mere pittance.

But then I read the story and realized that the story was about a completely different kind of theft. It appears that the bureaucrat was getting in on the nationwide scam of filing false claims to get EIC handouts.

An IRS employee who worked in the agency’s St. Louis, MO., office pled guilty this week to charges of tax fraud. Demetria Brown netted $326,000 in a fraud in which she stole taxpayer identities and created fake tax returns to steal refunds. …The scheme lasted seven years from 2008 to 2001.

So my first instinct was correct. There isn’t really anything newsworthy in that story. After all, nobody should be surprised that income-redistribution programs such as the EIC attract a lot of fraud. Nobody should be surprised that an IRS bureaucrat decided to take other people’s money (above and beyond the excessive salary the rest of us paid for). And nobody should be surprised that the other bureaucrats at the IRS were so incompetent that the scam was successful for seven years.

By the way, this isn’t the first time a thieving IRS bureaucrat generated a story with a misleading headline.

Speaking of which, here’s our second example of a headline that creates a completely false impression. It’s from a story in the Toronto Star.

Needless to say, I was completely shocked at first. After all, France is the nation where the national sport is taxation. It’s the country where taxes are so onerous that even the European Commission warns about over-taxation. It’s the nation where thousands of people have to pay more than 100 percent of their income to the tax authorities. It’s the country where high taxes are equated to patriotism. And it’s the nation that pushes tax policies that are so radical than even the Obama Administration sometimes says no.

So is it true? Is France going to become a Libertopia? The Galt’s Gulch of Europe?

But then my bubble burst. It turns out the story is about a technical shift in how taxes are collected.

The government wants to shift to a system of automatic withholding, similar to that in Canada and much of the rest of the world. Employees in France currently pay taxes a year after their income is earned. Christian Eckert, France’s budget secretary, said Wednesday that the government will not double-tax workers in 2018, the year automatic withholding is to begin. So 2017 incomes could effectively be tax-free for regular salaries. Taxpayers won’t actually feel much of a difference though — they would still spend 2017 paying for the previous year.

Though this might create an interesting social science experiment.

Depending on how rigorously France decides to be with its definition of “regular salaries,” this might be an opportunity for long-suffering French taxpayers to figure out ways of delaying 2016 income until 2017 and accelerating 2018 income so it’s received in 2017.

This could be a particularly useful strategy for investors, entrepreneurs, and small business owners, all of whom (if they’re like their American counterparts) presumably have some control over the timing, level, and composition of their income.

But I suspect the French government already is contemplating ways of making sure that every possible penny is being taxed at the highest possible rate, so I won’t hold my breath.

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More Stunning Examples of Statist Hypocrisy

Our friends who believe in big government have this funny habit of self-exempting themselves from the bad policies that they impose on the rest of the population.

Statists are very opposed to so-called tax havens, for instance, because they don’t want there to be any constraints on the ability of governments to impose higher tax burdens. Yet it’s quite common to discover that these folks who want higher taxes for you and me have decided to protect their income and assets by utilizing low-tax jurisdictions.

Another example is that leftists are big advocates of one-size-fits-all, substandard government schools and they vociferously fight against school choice proposals that would help low-income families obtain better opportunities for their kids.

Yet these fans of monopoly government schools routinely make sure their children are in private schools. President Obama is the most high-profile example of this form of hypocrisy.

And so is his Secretary of Education.

The Wall Street Journal opines on this example of rank hypocrisy.

Arne Duncan…the Education Secretary continues to fight vouchers for private schools. So it’s worth noting that he has decided to send his own children to a private school in Chicago. …where tuition runs about $30,000 a year. That’s also where Barack and Michelle Obama sent their children before moving to Washington and sending Sasha and Malia to the tony Sidwell Friends. Mr. Duncan’s choice is all the more striking since he used to run the Chicago public schools.

I suppose you have to give Duncan credit for wanting good things for his kids, and he obviously had first-hand knowledge that the government schools in Chicago aren’t very good.

What’s nauseating, though, is how he doesn’t want poor families to have similar options.

He…stood aside in 2009 when Illinois Sen. Dick Durbin managed to kill the Opportunity Scholarship Program in Washington until Speaker John Boehner and the Republican Congress revived it. The Education Secretary was also a muted voice when the Obama Justice Department filed a lawsuit aimed at scuttling Louisiana’s innovative voucher program. And he was silent again when the Colorado Supreme Court recently invoked a leftover of 19th-century bigotry—its anti-Catholic Blaine amendment—to stop students from receiving vouchers for private schools.

By the way, you probably won’t be surprised to learn that another prominent Chicago leftist also has rejected government schools for his own children.

Here are some blurbs from a 2011 report in the Washington Post.

Chicago Mayor Rahm Emanuel…has decided to send his children to a private school… Emanuel…served in the White House as President Obama’s chief of staff… The decision where to send your children to school is certainly a personal one, even for public officials. But it is worth publicly noting what public officials…choose to do with their own children when given the chance.

What’s really worth publicly noting is that these politicians don’t want other families to have any escape options from failed government schools.

That’s what makes them hypocrites.

Even more important, that’s what makes them immoral. Sort of like modern-day equivalents of George Wallace, standing in the schoolhouse door to deny opportunity to the less fortunate.

And why do politicians behave so reprehensibly? For the simple reason that they want to curry favor with the unions that represent teachers.

Which makes this excerpt from a Chicago Tribune story especially remarkable. It seems that teachers from Chicago’s government schools also want better options for their own kids.

…a Thomas B. Fordham Institute study found that 39 percent of CPS teachers sent their own kids to private schools.

Sauce for the goose obviously isn’t sauce for the gander.

P.S. On the issue of government schools, I suppose we can paraphrase Winston Churchill and note that never have so many paid so much to achieve so little.

P.P.S. There’s also a strong argument that government schools are a form of child abuse because of bizarre political correctness.

P.P.P.S. Shifting from the immoral to the inane, I probably shouldn’t move to Pennsylvania. At least not if I want to keep my current license plate.

Why? Because bureaucrats in the Keystone State are on the lookout for plates with…gasp!…anti-government messages.

In addition to outright vulgarity and racism, some states prohibit messages on vanity license plates that can be viewed as “anti-government.” In Pennsylvania, for example, where five state employees in Harrisburg get to decide what’s allowed on vanity plates…“ENDFED,” a reference to libertarian-led efforts to shut down the Federal Reserve Bank, is…on the do-not-license list.

I’m not sure why expressing an opinion on monetary policy is considered vulgar or offensive.

But if that’s what Pennsylvania bureaucrats think, then I hope they don’t know about my video on the Federal Reserve. Between that and my seditious license plate, they’d probably arrest me just for simply driving through the state!

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A Five-Picture Explanation of the Greek Mess

I’ve shared lots of analysis (both serious and satirical) about the mess in Greece and I feel obliged to comment on the latest agreement for another bailout.

But how many times can I write that the Greek government spends too much money and has a punitive tax system (and a crazy regulatory regime, a bloated bureaucracy, etc)?

So let’s try a different approach and tell a story about the new bailout by using some images.

Here’s an amusing perspective on what actually happened this weekend.

I explained a few days ago that the bailouts have simultaneously enabled the delay of much-needed spending reforms while also burdening Greece with an impossible pile of debt.

But the Greek bailouts, like the TARP bailout in the United States, were beneficial to powerful insiders.

Here’s a look at how banks in various European nations have been able to reduce their exposure to Greek debt.

Sure, the banks almost surely still lost money, but they also transferred a lot of the losses to taxpayers.

To get a sense of the magnitude of handouts, here’s a chart from a Washington Post story.

And now, assuming the deal gets finalized, that pile of foolish and unsustainable debt will be even bigger.

One of the main components of the new agreement is that Greece supposedly will raise revenue by selling $50 billion of state-owned assets.

Don’t believe that number. But not because there aren’t plenty of assets to sell, but rather because the track record on privatization proceeds suggests that there is a giant gap between what Greece promises and what Greece delivers.

To understand why assets aren’t being sold, just keep in mind that most of the assets are under the control of the government in order to provide unearned benefits to different interest groups.

If you’re an overpaid unionized worker at a government-owned port, for instance, the last thing you want is to have that port sold to a private investor who presumably would want to link pay to productivity.

Here’s the best bit of humor I’ve seen about the negotiations this past weekend. It purports to show a list of demands from Germany to Greece.

While this image is funny, it’s also wrong.

Germany isn’t imposing anything on Greece. The Germans are simply stating that Greek politicians need to make some changes if they want more handouts.

Moreover, it’s quite likely that Germany will wind up being a big loser when the dust settles. Here’s some of what Gideon Rachman wrote for the U.K.-based Financial Times.

If anybody has capitulated, it is Germany. The German government has just agreed, in principle, to another multibillion-euro bailout of Greece — the third so far. In return, it has received promises of economic reform from a Greek government that makes it clear that it profoundly disagrees with everything that it has just agreed to. The Syriza government will clearly do all it can to thwart the deal it has just signed. If that is a German victory, I would hate to see a defeat.

So true.

I fear this deal will simply saddle Greece with a bigger pile of debt and set the stage for a more costly default in the future.

The title of this column is about pictures. But let’s close with some good and bad analysis about the Greek mess.

Writing for Real Clear Markets, Louis Woodhill has some of the best insight, starting with the fact that the bailout does two things.

First, this new bailout is largely just a mechanism to prevent default on past bailouts. Sort of like making a new loan to your deadbeat brother-in-law to cover what he owes you on previous loans.

…the €53.5 billion in new loans…would just be recycled to Greece’s creditors (the IMF, the EU, and the ECB) to pay the interest and principal on existing debts.

Second, it prevents the full meltdown of Greek banks.

The key point is that a bailout agreement would restore European Central Bank (ECB) “Emergency Liquidity Assistance” (ELA) to the Greek banking system. This would allow Greeks that still have deposits in Greek banks (€136.5 billion as of the end of May) to get their money out of those banks.

That’s good news if you’re a Greek depositor, but that’s about it.

In other words, those two “achievements” don’t solve the real problem of Greece trying to consume more than it produces.

Indeed, Woodhill correctly identifies a big reason to be very pessimist about the outcome of this latest agreement. Simply stated, Greek politicians (aided and abetted by the Troika) are pursuing the wrong kind of austerity.

…what is killing Greece is a lack of economic growth, and the meat of Tsipras’ bailout proposal consists of growth-killing tax hikes. The media and the economics profession have been framing the alternatives for Greece in terms of a choice between “austerity” and “stimulus.” Unfortunately for Greece, austerity has come to mean tax increases, and stimulus has come to mean using “other people’s money” (mainly that of German taxpayers) to support Greek welfare state outlays. So, if “other people” aren’t willing to fund more Greek government spending, then the only option the “experts” can imagine is to raise taxes on an economy that is already being crushed by excessive taxation.

Let’s close with the most ridiculous bit of analysis about the Greek situation. It’s from Joe Stiglitz,

Joseph Stiglitz accused Germany on Sunday of displaying a “lack of solidarity” with debt-laden Greece that has badly undermined the vision of Europe. …”Asking even more from Greece would be unconscionable. If the ECB allows Greek banks to open up and they renegotiate whatever agreement, then wounds can heal. But if they succeed in using this as a trick to get Greece out, I think the damage is going to be very very deep.”

Needless to say, I’m not sure why it’s “solidarity” for one nation to mooch in perpetuity from another nation. I suspect Stiglitz is mostly motivated by an ideological desire to redistribute from the richer Germans to the poorer Greeks,

But I’m more interested in why he isn’t showing “solidarity” to me. I’m sure both his income and his wealth are greater than mine. So if equality of outcomes is desirable, why doesn’t he put his money where his mouth is by sending me a big check?

Needless to say, I won’t be holding my breath waiting for the money. Like most leftists, Stiglitz likes to atone for his feelings of guilt by redistributing other people’s money.

And I also won’t be holding my breath waiting for a good outcome in Greece. As I wrote five-plus years ago, Greece needs the tough-love approach of no bailouts, which would mean a default but also an immediate requirement for a balanced budget.

Last but not least, I’m going to confess a possible mistake. I always thought that Margaret Thatcher was right when she warned that the problem with socialism is that you eventually run out of other people’s money. But this latest bailout of Greece shows that maybe politicians from other nations are foolish enough to provide an endless supply of other people’s money.

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Great Moments in Masochistic Government Incompetence

I’ve argued that we’ll get better government if we make it smaller. This is important because government is responsible for some things – such as national defense and protection of property rights – that are genuinely important.

Yet a bloated public sector distracts officials from effectively focusing on those things that matter.

There are some legitimate functions of government and I want those to be handled efficiently. But I worry that effective government is increasingly unlikely because politicians are so busy intervening in areas that should be left to the families, civil society, and the private sector.

This is not a novel observation. Mark Steyn humorously observed, “our government is more expensive than any government in history – and we have nothing to show for it.”

And Robert Samuelson made the same point in a more serious fashion, writing, “American government has assumed more responsibilities than can reasonably be met.”

Perhaps most important, there’s even scholarly research – including from bureaucracies such as the International Monetary Fund and European Central Bank – that confirms small government is more efficient and competent.

Now keep all this in mind as we look at an amazing example of what happens when a government is so big and bloated that it spectacularly fails in one of its core responsibilities.

Here are some excerpts from a jaw-dropping story in the U.K.-based Telegraph.

For almost two years Abdullah al Andalusi, led a double life… By night, he taught that the terror group Islamic State of Iraq and the Levant (Isil) was “no different to Western armies,” said that “kaffirs,” non-Muslims, would be “punished in hell” and claimed that the British government wanted to destroy Islam. By day, using a different name, he went to work for the same British government at the London offices of Her Majesty’s Inspectorate of Constabulary (HMIC), the official regulator of all 44 forces in England, Wales and Northern Ireland.

Yes, you read correctly. A jihadist was employed by law enforcement.

But he wasn’t a low-level cop walking a beat. He was in a high-level position with access to information about the battle against Islamic extremism!

HMIC’s staff, who number less than 150, are given privileged access to highly sensitive and classified police and intelligence information to carry out their inspections. The inspectorate’s work includes scrutinising police forces’ counter-terrorism capabilities and top-secret plans for dealing with terror attacks. It has also recently published reports on undercover policing and the use of informants. HMIC admitted that Mr al Andalusi, whose real name is Mouloud Farid, had passed a security vetting check to work as a civil servant at the inspectorate. He was subsequently promoted to executive grade, a management rank, placing him at the heart of the security establishment.

The good news is that this extremist thug was discovered and then lost his job.

Was this the result of a clever and effective counter-terrorism investigation?

Hardly. It was only dumb luck that his superiors discovered his radical activities.

He was only sacked after bosses spotted him on television defending extremist Islamic positions.

You’ll also be glad to know that British taxpayers were giving him a very generous compensation package. So much money, in fact, that it didn’t make sense for him to take up opportunities to become a full-time hater of western civilization.

…said one former colleague at the Muslim Debate Initiative, who asked to remain anonymous. …“Opportunities came along to do dawah [preaching] as a full-time job, but he was never tempted to do that because he had a stable income and pension with the civil service.”

And taxpayers also helped pay for his expensive housing.

Mr al Andalusi…lives in a subsidised £750,000 housing association flat in Westminster.

Gee, how nice that he gets to live in a nice place at the expense of others. I wonder if his subsidized housing is as nice as the taxpayer-financed housing provided to Jihadi John?

Though let’s give Mr. al Andalusi credit. At least he was employed, even if only as an over-compensated bureaucrat.

Other radical jihadists simply go on welfare so they can devote all their time to hate.

So al Andalusi doesn’t qualify to be a member of the Moocher Hall of Fame. Yes, he got subsidized housing, but we want to reserve this honor for more deserving bums.

But he does deserve membership in the Bureaucrat Hall of Fame. After all, getting a senior law enforcement job while simultaneously promoting terrorism is quite a feat.

P.S. Returning to the topic of subsidizing terrorism, the United States also has a self-destructive habit of giving handouts to radicals who oppose civilization. The Tsarnaev family was on the public teat and there have been lots of Somali terrorists sponging off America’s bizarre welfare-encouraging refugee program.

So maybe I need to update the U.S. vs. U.K. government stupidity contest to reflect the fact that both nations are so masochistic that they give handouts to their enemies.

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Haven’t the Greeks Suffered Enough?

I very rarely feel sympathy for the people of Greece. Indeed, events over the past five years have even led me to write that “I hate the Greeks.”

I also disparaged the people of Greece by stating on TV that they’ve been trying to loot and mooch their way through life.

So you can see that I generally believe in the tough-love approach.

But there comes a point when even a curmudgeon like me is going to say enough is enough and that the Greek people have suffered enough already.

And I had that experience yesterday. Check out this headline from a story in yesterday’s EU Observer.

Economic advice from the French government?!? Isn’t that a bit like asking the Chicago Cubs for suggestions on how to win the World Series?

What are the French advisers going to do, propose ways to make the government even bigger? Suggest ways of driving even more entrepreneurs out of the country?

For Heaven’s sake, this is the last thing the people of Greece need.

Sort of reminds me of a headline I saw attached to a report by Reuters a few years ago.

Geesh, the Greeks already suffered because of an invasion by people working for the German government back in the 1940s. Seems like another deployment of German bureaucrats would be adding insult to injury.

Particularly since it would create the worst of all worlds, marrying Teutonic tax efficiency (for example, taxing prostitutes with parking meters) with Greek profligacy (for example, subsidies for pedophiles).

I’m not sure where that would end, but it surely wouldn’t be a good place.

Now let’s make a more serious point about tough love and Greek suffering.

Back in early 2010, about the time the Greek fiscal crisis was becoming a big issue, I warned that a bailout would actually make things worse. I suggested it would be better to let Greece default, both because it would penalize foolish investors who lent too much money to the Greek government and because it would force Greece to live within its means.

That would have meant short-run pain, to be sure, but I think that approach would have involved the least amount of aggregate suffering.

But the political class ignored my helpful advice and instead decided that bailouts would be a better idea. But how has that worked out? The Greek economy has been moribund and the Greek people are now saddled with far more debt. Yes, some short-run pain was mitigated, but only at the cost of much more pain over the past few years (with more pain in the future).

Interestingly, the International Monetary Fund’s top economist unintentionally has confirmed my analysis. Here’s some of what Olivier Blanchard recently posted as part of an effort to defend the IMF’s choices back in 2010.

Had Greece been left on its own, it would have been simply unable to borrow. …Even if it had fully defaulted on its debt, given a primary deficit of over 10% of GDP, it would have had to cut its budget deficit by 10% of GDP from one day to the next.  These would have led to much larger adjustments and a much higher social cost.

Blanchard obviously thinks reducing government spending by 10 percent of GDP would have imposed too much “social cost,” but imagine if Greece had bitten the bullet back in 2010. Sort of like what Estonia did in 2009.

Yes, there would have been a challenging adjustment. Interest groups would have received fewer handouts. Greek bureaucrats would have lost jobs and/or had their pay reduced. Payments to vendors would have been delayed. State-run TV may have been shut down. The regulatory apparatus probably would have been cut back. And I’m sure the Greek government probably would have raised taxes as well.

Now imagine how much better off Greece would be today if it went with that approach.

We don’t have a parallel universe where we can see the results of that different approach, but consider the fact that Estonia had a deeper downturn than Greece, presumably in part because it undertook strong measures, but since that time has been Europe’s fastest-growing economy.

Greece, by contrast, has been Europe’s slowest-growing economy. Hmmm…seems like this should be part of any discussions about “social cost.”

So what lessons can we learn?

I realize there are lots of factors that determine economic performance and that it’s impossible to isolate the impact of either Estonia’s spending-cut policy or Greece’s bailout policy. But it would take a very bizarre and untenable set of assumptions to conclude that Estonia didn’t make smarter policy choices.

The only silver lining to Greece’s dark cloud is that it’s not too late to do the right thing.

P.S. Since we ended by speculating about the good results of my tough-love approach, 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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Lessons from China’s Stock Market Crash

When I first got to Washington in the mid-1980s, one of the big issues was the supposedly invincible Japanese economy. Folks on the left claimed that Japan was doing well because the government had considerable power to micro-manage the economy with industrial policy.

With the benefit of hindsight, it’s now quite apparent that was the wrong approach.

In more recent years, some on the left have praised China’s economic model. And while it’s true that the country has enjoyed strong growth, it’s far from a role model.

Here’s some of what I wrote back in 2010.

Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom – which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. …This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation.

With my skeptical view of the Chinese economic system, I figured it was just a matter of time before the nation experienced some economic hiccups.

And the recent drop in the Shanghai stock market certainly would be an example. I discussed the topic earlier this week in this Skype interview with Blaze TV.

To elaborate, there’s no precise formula for determining a nation’s prosperity. After all, economies are not machines.

But there is a strong relationship between prosperity and the level of economic freedom.

And as I explained earlier this year, China’s problem is that government is still far too big. As such, its overall ranking from Economic Freedom of the World is still very low.

And this means that the Chinese people – while much better off then they were under a pure communist system – are still not rich.

I mentioned the comparative numbers on per-capita economic output in the interview, which is something I wrote about back in 2011. And you can click here if you want the underlying figures to confirm that Americans are far more prosperous.

By the way, this is an issue where the establishment seems to have a semi-decent understanding of what’s happening, even if they don’t necessarily draw any larger lessons from the episode.

The Associated Press, for instance, has a good report on the issue. Here’s some of the story, which looks at why the the stock market seems untethered from economic fundamentals.

When China’s economy was roaring along at double digit rates in the 2000s, Chinese stocks floundered. But starting in the summer of 2014, as evidence of an economic slowdown gathered, the Shanghai Composite index climbed nearly 150 percent. …Now the Chinese stock bubble has burst and Shanghai shares are in a free fall. They’ve lost about 30 percent since peaking last month. …Prices in the stock market are supposed to reflect business realities: the health of the economy, the quality of the companies listed on stock exchanges, the comparative allure of alternative investments. But in a communist country where the government plays an oversized role in the economy, investors pay more attention to signals coming from policymakers in Beijing than to earnings reports, management shake-ups and new product announcements.

If savvy investors think it’s important to focus on what the government is doing, that’s obviously bad news.

During the booming 2000s, only politically connected firms were allowed to list on stock exchanges for the most part. Many of them were run by insiders of dubious managerial talent. The markets were dominated by inefficient state-owned companies. Investors were especially wary of investing in big government banks believed to be sinking under the weight of bad loans. Stocks went nowhere.

And when the government started to encourage a bubble, that also wasn’t a good idea.

…state media began encouraging Chinese to buy stock, even as the country’s economic outlook dimmed. The economy grew 7.4 percent last year, the slowest pace since 1990. It’s expected to decelerate further this year. But authorities allowed investors to borrow to buy ever-more shares. Unsophisticated investors — more than a third left school at the junior high level — got the message and bought enthusiastically, taking Chinese stocks to dangerous heights. Now it’s all crashing down.

I’m not sure “all crashing down” is the right conclusion.

As I said in the interview, the market doubled and now it’s down about 30 percent, so many investors are still in good shape.

That being said, I have no idea whether the market will recover, stabilize, or continue to drop.

But I do feel comfortable making a larger point about the relationship between economic freedom and long-run prosperity.

So if you want to learn lessons from East Asia, look at the strong performances of Hong Kong, Taiwan, Singapore, and South Korea, all of which provide very impressive examples of sustained growth enabled by small government and free markets.

P.S. I was greatly amused when the head of China’s sovereign wealth fund mocked the Europeans for destructive welfare state policies.

P.P.S. Click here if you want some morbid humor about China’s pseudo-communist regime.

P.P.P.S. Though I give China credit for trimming at least one of the special privileges provided to government bureaucrats.

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State Fiscal Rankings and Implications for Public Policy and the 2016 Presidential Race

There’s an old saying that states are the laboratories of democracy. But since I’m a policy wonk, I focus more on the lessons we can learn from the states about public policy.

Such as the importance of limiting the destructive nature of taxes.

Such as the economic benefits of not having an income tax.

Such as the horrible consequences of adopting an income tax.

Such as the negative effects of excessive compensation of bureaucrats.

Such as better job creation in states with less government.

But it’s always good to have more data and evidence.

So I was very interested to see that the Mercatus Center at George Mason University has a new report that ranks states based on their fiscal solvency.

Here are some of the details.

Budgetary balance is only one aspect of a state’s fiscal health, indicating that revenues are sufficient to cover a desired level of spending. But a balanced budget by itself does not mean the state is in a strong fiscal position. State spending may be large relative to the economy and thus be a drain on resources. …How can states establish healthier fiscal foundations? And how can states guard against economic shocks or identify long-term fiscal risks? Before taking policy or budgetary action, it is important to identify where states may have fiscal weaknesses. One approach to help states evaluate their ongoing fiscal performance is to use basic financial indicators that measure short- and long-run fiscal position.

Here are some of the findings.

The five dimensions (or indexes) of solvency in this study—cash, budget, long-run, service-level, and trust fund—are…combined into one overall ranking of state fiscal condition. …States with large long-term debts, large unfunded pension liabilities, and structural budgetary imbalances continue to hover near the bottom of the rankings. These states are Illinois, New Jersey, Massachusetts, Connecticut, and New York. Just as they did last year, states that depend on natural resources for revenues and that have low levels of debt and spending place at the top of the rankings. The top five states are Alaska, North Dakota, South Dakota, Nebraska, and Florida.

And here’s a map so you can see the rankings of each state. Dark green is good and yellow is bad.

I’m shocked and amazed to see California, Illinois, and New York near the bottom of the list.

Here’s the same information, but in a table so you can see the specific scores for each state.

So what should we learn from these rankings?

According to an editorial from Investor’s Business Daily, there are some very obvious lessons.

What do the most fiscally sound states have in common? Good weather? Oil? Blind luck? Or is it conservative policies such as keeping taxes low, regulations reasonable and spending under control? …There’s only one factor these fiscal winners and losers share in common. And that’s their political leanings. …if you look at the 25 best-performing states, only three could be considered reliably liberal. …There’s only one factor these fiscal winners and losers share in common. And that’s their political leanings. Of the top 10 states in the Mercatus ranking, just two — Florida and Ohio — voted for the Democratic presidential candidate in the past four elections, and just one — Montana — has a Democratic governor. Even if you look at the 25 best-performing states, only three could be considered reliably liberal.

Now let’s shift from policy lessons to political implications. There are several governors and former governors running for President.

Based on the Mercatus ranking, can we draw any conclusions about whether these candidates are in favor of taxpayers? Or do they support big government instead?

We’ll start with the current governors.

Kasich – Ohio ranks surprisingly high on the list, particularly given the Ohio governor’s expansion of Obamacare in the state. Maybe the state’s #7 ranking is due to fiscal restraint by his predecessors.

Christie – New Jersey ranks low on the list, and this isn’t a surprise. The relevant question is whether Christie can argue, based on some of the fights he’s had, that the state legislature is an insurmountable impediment to pro-growth reforms.

Jindal – The governor of Louisiana has proposed some big reforms, but the state’s #35 ranking doesn’t give him any bragging rights on fiscal policy (though the state is leading the way on education reform).

Walker – Thanks to his high-profile fight with unionized bureaucrats, Walker has a very strong reputation. But his state doesn’t rank very high, and he can’t blame the legislature because it’s GOP-controlled as well. But perhaps the low ranking is a legacy of the state’s historically left-wing orientation.

What about former governors?

Well, there’s probably not much we can say because we don’t have long-run data. There was a similar Mercatus study last year, but that obviously doesn’t help with the analysis of governors that left office years ago.

Nonetheless, here are a few observations.

Bush – I’m very suspicious of politicians who express an openness to tax hikes, and Bush is in that group. But he did govern Florida for a couple of terms and never flirted with imposing an income tax. And former governors, particularly from recent history, presumably can take some credit for Florida’s relatively high ranking.

Pataki – Since New York is one of the worst states, Pataki has guilt by implication. But he did lower a few taxes during his tenure, and you also have the same issue that exists with Christie, which is whether a governor should be blamed when the state legislature is hostile to good policy.

Perry – It’s hard to argue with the success Texas has enjoyed in recent years, and Perry (like Bush) never even hinted at the imposition of a state income tax. Though the #19 ranking shows that there are issues that should have been addressed during Perry’s several terms in office.

Huckabee – There aren’t many conclusions to draw about Arkansas and Huckabee. He’s been out of office for a while and the state is in the middle of the pack.

The bottom line is that the Mercatus study is very helpful in identifying well-governed (and not-so-well-governed) states, but the newness of the project means we can’t make any sweeping statements about governors because of limited data.

Fortunately, the Cato Institute for years has been publishing a Report Card that grades governors based on fiscal policy. So fans (or opponents) of different candidates can peruse past issues to see the degree to which governors pushed policy in the right or wrong direction.

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New Fiscal Report from European Commission Punctures Myth of “Savage” Austerity

The European Commission’s data-gathering bureaucracy, Eurostat, has just published a new report on government finances for the region.

And with Greece’s ongoing fiscal turmoil getting headlines, this Eurostat publication is worthwhile because it debunks the notion, peddled by folks like Paul Krugman, that Europe has been harmed by “savage” and “harsh” spending cuts.

Here’s some of what’s in the report.

In 2014, total general government expenditure amounted to €6 701 bn in the European Union (EU). This represented almost half (48.1%) of EU GDP in 2014… Among EU Member States, general government expenditure varied in 2014 from less than 35% of GDP in Lithuania and Romania to more than 57% in Finland, France and Denmark.

Not only is government spending consuming almost half of economic output, redistribution outlays are the biggest line item in the budgets of European nations.

…the function ‘social protection’ was by far the most important, accounting for 40.2% of total general government expenditure. The next most important areas in terms of general government expenditure were ‘health’ (14.8%)… Its weight varied across EU Member States from 28.6% of total general government expenditure in Cyprus to 44.4% in Luxembourg. Eight EU Member States devoted more than 40% of their expenditure to social protection.

At this point, some readers may be thinking that the report shows European nations have very big governments with very large welfare states, but that doesn’t prove one way or the other whether there’s been austerity.

After all, austerity supposedly measures the degree to which there have been big spending cuts, not whether government consumes a large or small share of economic output.

So let’s now look at some of the underlying annual spending data from Eurostat.

Here’s their chart showing annual levels of government spending, both for the entire European Union (EU-28) and for the nations using the euro currency (EA-19). As you can see, there haven’t been any “harsh” or “savage” cuts.

Heck, there haven’t even been “timid” and “meek” cuts. The burden of government spending keeps climbing.

None of this should come as a surprise.

I’ve shared analysis making this point from experts on European fiscal policy such as Steve Hanke, Brian Wesbury, Constantin Gurdgiev, Fredrik Erixon, and Leonid Bershidsky.

So why is there a mythology about supposed spending cuts in Europe?

There are three answers.

• First, there are lots of ignorant of mendacious people who don’t understand the numbers or don’t care about the truth. You can take a wild guess about the identity of some of these people.
• Second, while overall government spending has continuously risen in Europe, a few nations (generally the ones that were most profligate last decade) have been forced to make some non-trivial spending cuts.
• Third, some people cherry pick data on the burden of government spending relative to economic output and assert that austerity exists if government grows slower than GDP.

The people in the first category should be dismissed as cranks and ideologues.

Regarding the second category, if you look at Eurostat’s annual fiscal data, you’ll find that most EU nations since 2008 have had at least one year in which government spending declined. Indeed, the only exceptions are Belgium, France, Luxembourg, Austria, Poland, Slovakia, Finland, and Sweden.

But we’ve also had a few years of spending reductions in the United States since 2008, yet it would be silly to argue we’ve had “savage” and “harsh” cuts. The real question is whether any governments have been forced to make non-trivial reductions in the burden of spending. And if that’s defined as spending less today than they did in 2008, the only nations on that list are Greece, Latvia, and Ireland. But they’re also high on the list of countries that were most profligate in the years before 2008, so is it “austerity” if you give up drinking for a week or two after spending a week or two in an alcoholic haze? Perhaps the answer is yes, but the real problem was having a spending binge in the first place.

The third category is also worth exploring because the best way to determine if a country has responsible policy is to see whether government spending is falling as a share of economic output (i.e., are they following Mitchell’s Golden Rule). But you can’t cherry pick the data. For instance, look at this chart from Eurostat. If 2009 is used as the base year, it appears that EU nations have been frugal. But 2009 also was the year with the biggest bailouts and faux stimulus packages. So while government spending has receded a bit from the 2009 peak, the overall burden of spending today is significantly higher than it was before the 2008 crisis. Not exactly a very rigorous definition of austerity.

The bottom line is that there hasn’t been serious austerity in Europe, at least if austerity is defined as non-trivial spending cuts.

To be sure, there have been big fiscal changes in Europe. The bad news is that those changes have been big increases in income tax rates and big increases in value-added tax rates.

So if folks are looking for a good explanation of why Europe is suffering from anemic growth, that might be a place to start.

P.S. Unlike other European countries, the Baltic nations focused on genuine spending cuts rather than tax hike and their economies are doing comparatively well.

P.P.S. Even though Switzerland isn’t a member of the EU, Eurostat does include annual spending data for that nation. And it’s worth noting that spending has only grown by 2.07 percent per year since the implementation of the debt brake (which is really a spending cap). So that’s actually the best role model in Europe, as explained here by a representative from the Swiss Embassy.

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The Congressional Budget Office’s Semi-Decent Dynamic Scoring of Obamacare Repeal

I’m a long-time advocate of “dynamic scoring,” which means I want the Congressional Budget Office and Joint Committee on Taxation to inform policy makers about how fiscal policy changes can impact overall economic performance and therefore generate “feedback” effects.

I also think the traditional approach, known as “static scoring,” creates a bias for bigger government because it falsely implies that ever-higher tax rates and an ever-growing burden of government spending don’t have any adverse impact on prosperity.

There’s a famous example to show the lunacy of static scoring. Back in late 1980s, former Oregon Senator Bob Packwood asked the Joint Committee on Taxation to estimate the revenue impact of a 100 percent tax rate on income over $200,000.

When considering such a proposal, any normal person with even the tiniest amount of common sense is going to realize that successful people quickly will figure out it makes no sense to either earn or report income about that level. As such, the government won’t collect any additional revenue.

Heck, it’s not just that the government won’t collect additional revenue. Our normal person with a bit of common sense is going to take the analysis one step further and conclude that revenues will plunge, both because the government will lose the money it collected with the old income tax rates on income above $200,000 (i.e., the income that will disappear) and also because there will be all sorts of additional economic damage because of foregone work, saving, investment, and entrepreneurship.

But the JCT apparently didn’t have any bureaucrats with a shred of common sense. Because, as shown in Part II of my video series on the Laffer Curve, they predicted that such a tax would raise $104 billion in 1989, rising to $299 billion in 1993.

The good news is that both CBO and JCT are now seeking to incorporate some dynamic scoring into their fiscal estimates. Most recently, the CBO (with help from the JCT) released a report on the fiscal impact of repealing Obamacare.

Let’s look at what they did to see whether the bureaucrats did a good job.

I’ll start with something I don’t like. This new CBO estimate is fixated on the what will happen to deficit levels.

Here’s the main chart from the report. It compares what will happen to red ink if Obamacare is repealed, based on the static score (no macro feedback) and the dynamic score (with macro feedback).

There’s nothing wrong, per se, with this type of information. But making deficits the focus of the analysis is akin to thinking that the time of possession is more important than the final score in the Super Bowl.

What matters for more is what happens to the economy, which is affected by the size and structure of government. As such, here’s the most important finding from the report.

Repeal of the ACA would raise economic output…the resulting increase in GDP is projected to average about 0.7 percent over the 2021–2025 period.

There are two reasons the bureaucrats expect better economic performance if Obamacare is repealed. First, people will have more incentive to work because of a reduction in handouts.

CBO and JCT estimate that repealing the ACA would increase the supply of labor and thus increase aggregate compensation (wages, salaries, and fringe benefits) by an amount between 0.8 percent and 0.9 percent over the 2021–2025 period. …the subsidies and tax credits for health insurance that the ACA provides to some people are phased out as their income rises—creating an implicit tax on additional earnings—and those subsidies, along with expanded eligibility for Medicaid, generally make it easier for some people to work less or to stop working.

Second, the analysis also recognizes that there would be positive economic results from repealing the tax hikes in Obamacare, especially the ones that exacerbate the tax code’s bias against saving and investment.

Implementation of the ACA is also expected to shrink the capital stock, on net, over the next decade, so a repeal would increase the capital stock and output over that period. In particular, repealing the ACA would increase incentives for capital investment, both by increasing labor supply (which makes capital more productive) and by reducing tax rates on capital income. …repealing the ACA also would eliminate several taxes that reduce people’s incentives to save and invest—most notably the 3.8 percent tax on various forms of investment income for higher-income individuals and families. The resulting increase in the incentive to save and invest—relative to current law—thus would gradually boost the capital stock; consequently, output would be higher.

And here’s the most important table from the report. And it’s important for a reason that doesn’t get sufficient attention in the report, which is the fact that repeal of Obamacare will reduce the burden of spending and the burden of taxation. I’ve circled the relevant numbers in red.

Returning to something I touched on earlier, the CBO report gives inordinate attention to the fact that there’s a projected increase in red ink because the burden of spending doesn’t fall as much as the burden of taxation.

My grousing about CBO’s deficit fixation is not just cosmetic. To the extent that the report has bad analysis, it’s because of an assumption that the deficit tail wags the economic dog.

Here’s more of CBO’s analysis.

Although the macroeconomic feedback stemming from a repeal would continue to reduce deficits after 2025, the effects would shrink over time because the increase in government borrowing resulting from the larger budget deficits would reduce private investment and thus would partially offset the other positive effects that a repeal would have on economic growth. …CBO and JCT…estimate that repealing the act ultimately would increase federal deficits—even after accounting for other macroeconomic feedback. Larger deficits would leave less money for private investment (a process sometimes called crowding out), which reduces output. …The same macroeconomic effects that would generate budgetary feedback over the 2016–2025 period also would operate farther into the future. …the growing increases in federal deficits that are projected to occur if the ACA was repealed would increasingly crowd out private investment and boost interest rates. Both of those developments would reduce private investment and thus would dampen economic growth and revenues.

Some of this is reasonable, but I think CBO is very misguided about the importance of deficit effects compared to other variables.

After all, if deficits really drove the economy, that would imply we could maximize growth with 100 percent tax rates (or, if JCT has learned from its mistakes, by setting tax rates at the revenue-maximizing level).

To give you an idea of why CBO’s deficit fixation is wrong, consider the fact that its report got a glowing review from Vox’s Matt Yglesias. Matt, you may remember, recently endorsed a top tax rate of 90 percent, so if he believes A on fiscal policy, you can generally assume the right answer is B.

Here’s some of what he wrote.

Let us now praise Keith Hall. …his CBO appointment was bound up with a push by the GOP for more “dynamic scoring” of tax policy. …Yet today Hall’s CBO released its first big dynamic score of something controversial, and it’s … perfectly sensible.

Yes, parts of the report are sensible, as I wrote above.

But Matt thinks it’s sensible because it focuses on deficits, which allows his side to downplay the negative economic impact of Obamacare.

…the ACA makes it less terrible to be poor. By making it less terrible to be poor, the ACA reduces the incentive to do an extra hour or three at an unpleasant low-wage job in order to put a little more money in your pocket. CBO’s point is that when you do this, you shrink the overall size of GDP and thus the total amount of federal tax revenue. …The change…is big enough to matter economically (tens of billions of dollars a year are at stake) but not big enough to matter for the world of political talking points where the main question is does the deficit go up or down.

Yes, you read correctly. He’s celebrating the fact that people now have less incentive to be self-reliant.

Do that for enough people and you become Greece.

P.S. On a totally different topic, it’s time to brag about America having better policy than Germany. At least with regard to tank ownership.

I’ve previously written about legal tank ownership in the United States. But according to a BBC report, Germans apparently don’t have this important freedom.

The Panther tank was removed from the 78-year-old’s house in the town of Heikendorf, along with a variety of other military equipment, including a torpedo and an anti-aircraft gun, Der Tagesspiegel website reports. …the army had to be called in with modern-day tanks to haul the Panther from its cellar. It took about 20 soldiers almost nine hours to extract the tank… It seems the tank’s presence wasn’t much of a secret locally. Several German media reports mention that residents had seen the man driving it around town about 30 years ago. “He was chugging around in it during the snow catastrophe in 1978,” Mayor Alexander Orth was quoted as saying.

You know what they say: If you outlaw tanks, only outlaws will have tanks.

I’m also impressed the guy had an anti-aircraft gun. The very latest is self defense!

And a torpedo as well. Criminals would have faced resistance from the land, air, and sea.

If nothing else, he must have a big house.

One that bad guys probably avoided, at least if they passed the famous IQ test for criminals and liberals.

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Puerto Rico: Another Harsh Lesson about the Consequences of Violating Fiscal Policy’s Golden Rule

When I make speeches about fiscal policy, I oftentimes share a table showing the many nations that have made big progress by enforcing spending restraint over multi-year periods.

I then ask audiences a rhetorical question about a possible list of nations that have prospered by going in the opposite direction. Are there any success stories based on tax hikes or bigger government?

The answer is no, which is why I’ve never received a satisfactory answer to my two-part challenge, even if I limit the focus to fiscal policy.

And nobody will be surprised to learn that the fiscal crisis in Puerto Rico reinforces these lessons.

Writing for the Wall Street Journal, Daniel Hanson explains that the American territory in the Caribbean is on the verge of default.

As Puerto Rico struggles under the weight of more than $70 billion in debt, it has become popular to draw parallels with Greece.

The one theme that is common with the two jurisdictions is that their fiscal crises are the result of too much government spending.

How bad is the problem in Puerto Rico?

It’s hard to answer that question because government budgeting isn’t very transparent and the quality and clarity of the numbers that do exist leaves a lot to be desired.

But I’ve done some digging (along with my colleagues at Cato) and here’s some data that will at least illustrate the scope of the problem.

First, we have numbers from the World Bank showing inflation-adjusted (2005$) government consumption expenditures over the past few decades. As you can see, overall spending in this category increased by 100 percent between 1980 and 2013 (at a time when the population increased only 12 percent).

In other words, Puerto Rico is in trouble because it violated the Golden Rule and let government grow faster than the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, etc).

Here’s another chart and this one purports to show total outlays.

The numbers aren’t adjusted for inflation, so the increase looks more dramatic. But even if you consider the impact of a rising price level (average annual increase of about 4 percent since the mid-1980s), it’s obvious that government spending has climbed far too fast.

To be more specific, Puerto Rico has allowed the burden of government to rise much faster than population plus inflation.

A government can get away with that kind of reckless policy for a few years. But when bad policy is maintained for a long period of time, the end result is never positive.

Now that we’ve established that Puerto Rico got in trouble by violating my Golden Rule, what’s the right way of fixing the mess? Is the government responding to its fiscal crisis in a responsible manner?

Not exactly. Like Greece, it’s too beholden to interest groups, and that’s making (the right kind of) austerity difficult.

Indeed, Mr. Hanson says there haven’t been any cuts in the past few years.

In the past four years, when the fiscal crisis has been most severe, four successively larger budgets have been enacted. The budget proposed for the coming year is $235 million larger than last year’s and $713 million, or 8%, higher than four years ago. Austerity this is not.

What special interest groups standing in the way of reform?

The government workforce would be high on the list. One of the big problems in Puerto Rico is that there are far too many bureaucrats and they get paid far too much (gee, this sounds familiar).

Here are some details from Mr. Hanson’s column.

…more than two-thirds of the territory’s budget is payroll. The proposed budget…contains no plans for head-count reductions. …Median household income in Puerto Rico hovers around $20,000, according to the U.S. Census Bureau, but government workers fare much better. Public agencies pay salaries on average more than twice that amount, a 2014 report from Banco Popular shows. Salaries in the central government in San Juan are more than 90% higher than in the private sector. Even across comparable skill sets, the wage disparity persists.

In other words, life is pretty good for the people riding in the wagon, but Puerto Rico doesn’t have enough productive people to pull the wagon.

So we’re back to where we started. It’s the Greece of the Caribbean.

P.S. This column has focused on fiscal policy, but it’s important to recognize that there are many other bad policies hindering prosperity in Puerto Rico. And some of them are the result of Washington politicians rather than their counterparts in San Juan. Nicole Kaeding and Nick Zaiac have explained that the Jones Act and the minimum wage are particularly destructive to the territory’s economy.

P.P.S. At least Puerto Rico is still a good tax haven for American citizens.

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Learning Valuable Lessons from History on How to Reduce Poverty

I’ve written over and over again that the federal government’s so-called War on Poverty has been a disaster.

It’s been bad news for taxpayers, of course, but it’s also been bad news for poor people since they get trapped in dependency.

So what’s the alternative? Well, we actually can learn a lot from history.

Let’s start on the other side of the Atlantic. Professor Tyler Cowen of George Mason University has a fascinating video (which is part of a must-watch series) looking at the English debate in the 1830s on how best to deal with poverty.

Now let’s cross the ocean and look at the American experience.

Professor Thomas West of Hillsdale College has researched welfare policies in the early days of the United States.

Here are some of his key findings.

…government-funded welfare, not to mention generous private charity, has existed throughout American history. …The real difference between the Founders’ welfare policies and today’s is over how, not whether, government should help those in need.

Government was involved, but only at the local level, and assistance was a two-way street.

From the earliest colonial days, local governments took responsibility for their poor. However, able-bodied men and women generally were not supported by the taxpayers unless they worked. They would sometimes be placed in group homes that provided them with food and shelter in exchange for labor. Only those who were too young, old, weak, or sick and who had no friends or family to help them were taken care of in idleness.

Here’s more.

Welfare is kept local so that the administrators of the program will know the actual situations of the persons who ask for help. This will prevent abuses and freeloading. …A distinction between the deserving and undeserving poor is carefully observed. Able-bodied vagabonds get help, but they are required to work in institutions where they will be disciplined. Children and the disabled, on the other hand, are provided for, not lavishly but without public shame. …Poor laws to support individual cases of urgent need were not intended to go beyond a minimal safety net. Benefit levels were low.

Interestingly, Professor West writes about Benjamin Franklin’s low opinion of England’s welfare system (as it existed before the 1830s, obviously), which was much more generous.

Here’s some of what Franklin wrote, as cited by West.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I travelled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

This was not an unusual perspective.

Franklin’s understanding of the welfare paradox—that aid to the poor must be managed carefully lest it promote indolence and therefore poverty—was shared by most Americans who wrote about and administered poverty programs until the end of the 19th century. …policies were intended to help the poor in ways that did not violate the rights of taxpayers or promote irresponsible behavior.

Thomas Jefferson definitely agreed, as seen in this quote included in Professor West’s analysis.

To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.

If you remember the discussion of “indoor” and “outdoor” relief from the video about the English welfare system, you won’t be surprised to learn similar issues were present in the United States.

As the poor population grew, many concluded that “outdoor relief” was leading people to look on welfare as an entitlement and creating a class of permanent dependents. Consequently, the emphasis soon shifted to “indoor relief”—almshouses and workhouses.

Professor West also cites the strong role of private charity, which also was based on tough-love compassion.

After the Revolution and throughout the 19th century, hospitals for the poor, educational institutions, YMCAs, and Salvation Army branches were established in growing numbers all over America by public-spirited citizens. Like the public workhouses, these private charities distinguished between deserving and undeserving poor. Good character, it was thought, would enable most people to become self-sufficient. These agencies tried to build the character of their recipients through education, moral suasion, religious instruction, and work.

Now let’s see what West says about the effectiveness of the tough-love approach from America’s past with the entitlement approach used today.

If we rank poverty and welfare policies in terms of quantity of money and material goods given to people who are poor, then today’s policies are far more effective than the Founders’. Benefit levels are much higher, and far more people are eligible for support. …However, if poverty and welfare policies are judged by their effectiveness in providing for the minimal needs of the poor while dramatically reducing poverty in a society over time, then America before 1965 could be said to have had the most successful welfare policy in world history. By the same benchmark, post-1965 poverty programs have failed.

In other words, if the goal is to make people comfortable in dependency, the current system is a big success.

But if the goal is self reliance and reduced poverty, then the current system is a terrible failure.

Professor West has some great data on how a combination of long-run growth and a sensible welfare system combined to dramatically reduce destitution between the nation’s founding and the 1960s.

Two centuries ago, most Americans—at least 90 percent—were desperately poor by today’s standards. Most houses were small, ill-constructed, and poorly heated and insulated. Based on federal family income estimates, 59 percent of Americans lived in poverty as late as 1929, before the Great Depression. In 1947, the government reported that 32 percent of Americans were poor. 

This is fascinating and valuable information. At least for those of us with a wonky interest in public policy.

Back in 2010, I shared a chart based on far more limited data to show the poverty rate consistently falling after World War II.

But only up to a point. Once the federal government declared War on Poverty in the mid-1960s, we stopped making progress.

Now, based on Professor West’s data, I can create a chart going back to 1815.

I arbitrarily connected the data points with straight lines for lack of any other obvious alternative, but that’s not important. The key point of the graph is to see that the level of poverty declined dramatically before Washington got involved.

Professor West puts 2 and 2 together and gets 4.

…before the huge growth in government spending on poverty programs, poverty was declining rapidly in America. After the new programs were fully implemented, the poverty rate stopped declining.

Let’s begin to wrap up our discussion.

West points out that Benjamin Franklin’s criticisms of the English welfare system apply even more so to the mess we have in America today.

And this is a very costly mistake.

The incentive structure of the modern welfare state is similar to the one that Franklin condemned in old England, except that ours is more generous and more tolerant of single motherhood. Since 1965, when President Lyndon Johnson inaugurated the modern War on Poverty, total annual government welfare spending has grown from less than $9 billion (1.3 percent of gross domestic product) to $324 billion (5 percent of GDP) in 1993 to $927 billion (6 percent of GDP) in 2011. Between 1965 and 2013, the government spent $22 trillion (adjusted for inflation) on means-tested welfare programs—more than three times the costs of all military wars in the history of the United States. …These figures do not take into account state, county, and municipal benefits. Nor do they take into account the massive use of Social Security Disability as a de facto welfare program (as of 2005, 4.1 percent of Americans between the ages of 25 and 64 were enrolled).

We had successful welfare reform in the 1990s, to be sure, but it dealt with just one program.

The overall trend, as discussed two days ago, is ever-growing levels of dependency.

The basic problem—that government makes it affordable for women to bear and raise children without husbands while living independently in households of their own—is still there. …High benefit levels and irresponsible attitudes toward sex and marriage create a world in which many children have few or no ties to their fathers; in which mothers, increasingly unmarried, are more often abused and exploited; and in which many men join gangs and take up crime as a way of life. …The contemporary outlook on welfare has both propelled the family’s disintegration and promoted vast dependence. …antipoverty programs can easily have a corrupting effect if they are not set up in a way that promotes rather than breaks down the morality of self-restraint and self-assertion that is a necessary foundation of what Jefferson called “temperate liberty.”

I guess what we have now in America is intemperate dependence.

Hmmm, maybe the solution is to go back to the system that worked. And that means getting Washington out of the business of income redistribution.

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Alternative Currencies Such as Bitcoin Are a Valuable Insurance Policy against Feckless Government

Before getting to the main topic today, here are some excerpts from a New York Post story that patriotic American readers will appreciate.

It deals with a protest.

…the group Disarm the Police…had announced on social media that they had planned to burn the flag in protest of NYPD policies.

But the event didn’t go as planned, thanks to members of the Hallowed Sons Motorcycle Club.

One of the bikers rushed forward in a fit of rage and kicked over the grill, sending embers flying. He then doused it as members of the pro-flag crowd chanted “USA! USA!” The bikers then started trying to rough up the protesters.

Here’s where the ironic part of the story.

…anti-NYPD protesters needed New York’s Finest to save their skin from a gang of angry bikers who tried to pummel them… The protesters were shielded by the cops and escorted out of the park.

And here’s some evidence that silly government regulations (a New York City tradition) take the fun out of protesting and counter-protesting.

While it’s illegal to openly burn anything in Fort Greene Park, the self-styled anarchists managed to find a loophole in the law that allows cooking in closed barbecue grills.

A few final comments on this story.

I realize I shouldn’t care, but I’m always dumbfounded when left-wing crazies refer to themselves as anarchists. Don’t they realize that you can’t be an anarchist while simultaneously advocating for much bigger government?

Reminds me of this bit of humor from the Libertarian Party.

In any event, the supposed anarchists obviously aren’t very bright since they thought it was a good idea to get on the wrong side of a bunch of bikers.

Since this is America’s Independence Day, I can’t help but think they got what they deserved, even though in the abstract I support their right to protest and burn flags that they bought with their own money (or, more likely, with money from their parents or from the welfare office).

==========================

Now for today’s main topic.

I appreciate tax havens for many reasons, mostly having to do with the importance of having some sort of external constraint on the tendency of politicians to over-tax and over-spend.

But I also like these low-tax jurisdictions for non-tax reasons. And high on my list is that I want people to have safe havens for their money as an insurance policy against governments that are incompetent, venal, abusive and/or corrupt.

And for the same reason, I like alternative currencies such as bitcoin (click here is you want to see a short and informative primer). These “cryptocurrencies” give people a way of protecting themselves when government mis-manage or mis-use monetary and financial systems.

And we have some very compelling real-world examples of how this works.

We’ll start with Greece, where people with bitcoins still enjoy liquidity. Those using the banking system, by contrast, are in trouble because of irresponsible government policy.

Here are some excerpts from a Reuters story.

There is at least one legal way to get your euros out of Greece these days, to guard against the prospect that they might be devalued into drachmas: convert them into bitcoin. Although absolute figures are hard to come by, Greek interest has surged in the online “cryptocurrency”, which is out of the reach of monetary authorities and can be transferred at the touch of a smartphone screen. New customers depositing at least 50 euros with BTCGreece, the only Greece-based bitcoin exchange, open only to Greeks, rose by 400 percent between May and June, according to its founder Thanos Marinos, who put the number at “a few thousand”. The average deposit quadrupled to around 700 euros.

Why are people shifting to bitcoin?

One part of the answer is that bitcoins are insulated from political risk.

Using bitcoin could allow Greeks to do one of the things that capital controls were put in place this week to prevent: transfer money out of their bank accounts and, if they wish, out of the country. …the bitcoin buyers’ main aim was to shield their money against the prospect that Greece might leave the euro zone and convert all the deposits in Greek banks into a greatly devalued national currency.

And is anyone surprised that there’s interest from other failing welfare states?

Coinbase, one of the world’s biggest bitcoin wallet providers, which is not currently accessible to Greeks, said it had seen huge interest from Italy, Spain and Portugal.

And it’s just a matter of time, I suspect, before there will be interest from France, Belgium, Japan, etc.

Now let’s look at Argentina, another corrupt and dysfunctional government that has a sordid history of abusing both the monetary system and the financial system.

The New York Times in May had an in-depth report on how people in that nation have been using bitcoin to circumvent bad government policy.

His occupation is one of the world’s oldest, but it remains a conspicuous part of modern life in Argentina…to serve local residents who want to trade volatile pesos for more stable and transportable currencies like the dollar. For Castiglione, however, money-changing means converting pesos and dollars into Bitcoin, a virtual currency, and vice versa. …Castiglione joked about the corruption of Argentine politics as he peeled off five $100 bills, which he was trading for a little more than 1.5 Bitcoins, and gave them to his client. …before showing up, he had transferred the Bitcoins — in essence, digital tokens that exist only as entries in a digital ledger — from his Bitcoin address to Castiglione’s.

Why are so many people interested in bitcoin?

Because the government is debasing and manipulating the official currency in ways that indirectly steal from the citizenry.

Had the German client instead sent euros to a bank in Argentina, the musician would have been required to fill out a form to receive payment and, as a result of the country’s currency controls, sacrificed roughly 30 percent of his earnings to change his euros into pesos. Bitcoin makes it easier to move money the other way too. The day before, the owner of a small manufacturing company bought $20,000 worth of Bitcoin from Castiglione in order to get his money to the United States, where he needed to pay a vendor, a transaction far easier and less expensive than moving funds through Argentine banks.

And don’t forget that Argentina’s government is one of the nations with a track record of stealing money when it’s left in banks.

Commerce of this sort has proved useful enough to Argentines that Castiglione has made a living buying and selling Bitcoin for the last year and a half. …The money brought to Argentina using Bitcoin circumvents the onerous government restrictions on receiving money from abroad. …It makes sense that a place like Argentina would be fertile ground for a virtual currency. Inflation is constant: At the end of 2014, for example, the peso was worth 25 percent less than it was at the beginning of the year. And that adversity pales in comparison with past bouts of hyperinflation, defaults on national debts and currency revaluations. Less than half of the population use Argentine banks and credit cards. Even wealthy Argentines fear keeping their money in the country’s banks.

Bitcoin protects consumers from rapacious and feckless politicians.

…in the fall of 2012, when the Argentine government ordered PayPal to bar direct payments between Argentines, part of the government’s effort to slow the exchange of pesos into other currencies. …Argentines were using Bitcoin to circumvent the government’s restrictions. “…competition eliminates all currencies from noneffective governments,” it said… In Argentina, the banks refuse to work with Bitcoin companies like Coinbase, which isn’t surprising, given the government’s tight control over banks. This hasn’t deterred Argentines, long accustomed to changing money outside official channels.

In an ideal world, of course, there would be no need for bitcoin. At least not as a hedge against bad government policy (if a world of private monies, of course, cryptocurrencies presumably would be one of the market-based options).

But we don’t live in an ideal world. Some of us already live in nations where government financial and/or monetary policy make bitcoin a very important alternative.

And others of us live in countries where there is good reason to worry about future instability because of misguided fiscal, monetary, and economic policy. So it will be good if we have options such as bitcoin.

That doesn’t mean, to be sure, that the average person should transfer all their liquid wealth into bitcoin. Indeed, I’ve specifically stated that “I wouldn’t put my (rather inadequate) life savings in bitcoin.”

But I certainly want that option if future events warrant a change of strategy.

P.S. If you’re in a patriotic mood (and if you like the Second Amendment), then you’ll definitely enjoy this slideshow.

P.P.S. If you enjoyed the six-frame image about bitcoin owners, you’ll probably like a similar image portraying libertarians.

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A Very Depressing Look at America’s Growing Dependency Crisis

Based on a new report from the Congressional Budget Office, I wrote two weeks ago about America’s dismal long-run fiscal outlook. Simply stated, we face a Greek-style fiscal future because of changing demographics and poorly designed entitlement programs.

But I was just looking at big-picture fiscal aggregates.

And while that was discouraging, it gets downright depressing when you look behind the numbers and consider how a growing share of Americans are getting lured into government dependency.

Nicholas Eberstadt of the American Enterprise Institute has a very grim analysis on the growth of entitlement dependency in the United States.

The American welfare state today transfers over 14% of the nation’s GDP to the recipients of its many programs, and over a third of the population now accepts “need-based” benefits from the government. This is not the America that Tocqueville encountered.

It wasn’t always this way.

The article looks at the history of the welfare state in America.

 In 1961, at the start of the Kennedy Administration, total government entitlement transfers to individual recipients accounted for a little less than 5% of GDP, as opposed to 2.5% of GDP in 1931 just before the New Deal. In 1963 — the year of Kennedy’s assassination — these entitlement transfers accounted for about 6% of total personal income.

But things began to deteriorate under LBJ.

During the 1960s, …President Johnson’s “War on Poverty” (declared in 1964) and his “Great Society” pledge of the same year ushered in a new era for America, in which Washington finally commenced in earnest the construction of a massive welfare state. … Americans could claim, and obtain, an increasing trove of economic benefits from the government simply by dint of being a citizen; they were now incontestably entitled under law to some measure of transferred public bounty, thanks to our new “entitlement state.”

And guess what? Once we started rewarding dependency, more and more people decided they were entitled.

Over the half-century between 1963 and 2013, entitlement transfers were the fastest growing source of personal income in America — expanding at twice the rate for real per capita personal income from all other sources, in fact. Relentless, exponential growth of entitlement payments recast the American family budget over the course of just two generations. In 1963, these transfers accounted for less than one out of every 15 dollars of overall personal income; by 2013, they accounted for more than one dollar out of every six. The explosive growth of entitlement outlays, of course, was accompanied by a corresponding surge in the number of Americans who would routinely apply for, and accept, such government benefits.

And how many people have been lured into government dependency? A lot, and mostly because of welfare spending rather than age-related social insurance programs such as Social Security and Medicare.

…the government did not actually begin systematically tracking the demographics of America’s “program participation” until a generation ago. Such data as are available, however, depict a sea change over the past 30 years. …By 2012, the most recent year for such figures at this writing, Census Bureau estimates indicated that more than 150 million Americans, or a little more than 49% of the population, lived in households that received at least one entitlement benefit….Between 1983 and 2012, by Census Bureau estimates, the percentage of Americans “participating” in entitlement programs jumped by nearly 20 percentage points….Less than one-fifth of that 20-percentage-point jump can be attributed to increased reliance on these two “old age” programs. Overwhelmingly, the growth in claimants of entitlement benefits has stemmed from an extraordinary rise in “means-tested” entitlements.

Ugh. I’ve previously written that getting something from the government doesn’t automatically turn somebody into a moocher or a deadbeat.

Nonetheless, it can’t be good news that 49 percent of U.S. households are on the receiving end for goodies from Uncle Sam.

Here’s a table from his article that should frighten anyone who thinks work and self-reliance are worthwhile values.

There’s lot of information, so I recommend just focusing on the numbers in parentheses in the first two columns. Those show how dependency is increasing by significant amounts for many programs.

Eberstadt highlights some of the worst numbers, most notably the huge growth in food stamps and Medicaid dependency.

…the rolls of claimants receiving food stamps (a program that was officially rebranded the Supplemental Nutrition Assistance Program, or SNAP, in 2008 because of the stigma the phrase had acquired) jumped from 19 million to 51 million. By 2012 almost one American in six lived in a home enrolled in the SNAP program. The ranks of Medicaid, the means-tested national health-care program, increased by over 65 million between 1983 and 2012, and now include over one in four Americans. …Between 1983 and 2012, the number of Americans in households receiving Federal SSI more than sextupled; by 2012, over 20 million people were counted as dependents of the program.

As bad as these numbers are, the most worrisome part of the article is when Eberstadt writes about the erosion of America’s cultural capital.

Asking for, and accepting, purportedly need-based government welfare benefits has become a fact of life for a significant and still growing minority of our population: Every decade, a higher proportion of Americans appear to be habituated to the practice. … nearly half of all children under 18 years of age received means-tested benefits (or lived in homes that did). For this rising cohort of young Americans, reliance on public, need-based entitlement programs is already the norm — here and now. It risks belaboring the obvious to observe that today’s real existing American entitlement state, and the habits — including habits of mind — that it engenders, do not coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthand of “American exceptionalism.”

And the erosion of cultural capital is very difficult to reverse, thanks in large part to the welfare-aided erosion of traditional families and falling levels of work among males.

The corrosive nature of mass dependence on entitlements is evident from the nature of the pathologies so closely associated with its spread. Two of the most pernicious of them are so tightly intertwined as to be inseparable: the breakdown of the pre-existing American family structure and the dramatic decrease in participation in work among working-age men. …the rise of long-term entitlement dependence — with the concomitant “mainstreaming” of inter-generational welfare dependence — self-evidently delivers a heavy blow.

Since this has been an utterly depressing analysis so far, let’s close with a vaguely optimistic look at the future.

While it may not be easy to reverse the erosion of cultural capital, it is simple (at least in theory) to reverse bad policies.

All we need to do is enact genuine entitlement reform and devolve all means-tested redistribution spending to the states.

P.S. This is some great work by AEI, which follows on the stellar analysis that organization recently produced on income inequality. Makes me almost want to forgot that AEI put together a somewhat disappointing fiscal plan.

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Establishment Media Channels Fox Butterfield on Keynesian Policy

Back in 2010, I described the “Butterfield Effect,” which is a term used to mock clueless journalists for being blind to the real story.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Here are some of my favorite examples, all of which presumably are caused by some combination of media bias and economic ignorance.

• A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
• Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
• In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
• Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

Now we have a new example for our collection.

Here are some passages from a very strange economics report in the New York Times.

There are some problems that not even $10 trillion can solve. That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. …But it has not been able to do away with days like Monday, when fear again coursed through global financial markets.

I’m tempted to immediately ask why the reporter assumed any problem might be solved by having governments spend $10 trillion, but let’s instead ask a more specific question. Why is there unease in financial markets?

The story actually provides the answer, but the reporter apparently isn’t aware that debt is part of the problem instead of the solution.

Stifling debt loads, for instance, continue to weigh on governments around the world. …high borrowing…by…governments…is also bogging down the globally significant economies of Brazil, Turkey, Italy and China.

So if borrowing and spending doesn’t solve anything, is an easy-money policy the right approach?

…central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros… Central banks can make debt less expensive by pushing down interest rates.

The story once again sort of provides the answer about the efficacy of monetary easing and artificially low interest rates.

…they cannot slash debt levels… In fact, lower interest rates can persuade some borrowers to take on more debt. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.

This is remarkable. The reporter seems puzzled that deficit spending and easy money don’t help produce growth, even though the story includes information on how such policies retard growth. It must take willful blindness not to make this connection.

Indeed, the story in the New York Times originally was entitled, “Trillions Spent, but Crises like Greece’s Persist.”

Wow, what an example of upside-down analysis. A better title would have been “Crises like Greece’s Persist Because Trillions Spent.”

The reporter/editor/headline writer definitely deserve the Fox Butterfield prize.

Here’s another example from the story that reveals this intellectual inconsistency.

Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago.

Hmmm…, maybe the Chinese economy is growing slower because of the so-called stimulus schemes.

At some point one might think people would make the connection between economic stagnation and bad policy. But journalists seem remarkably impervious to insight.

The Economist has a story that also starts with the assumption that Keynesian policies are good. It doesn’t explicitly acknowledge the downsides of debt and easy money, but it implicitly shows the shortcomings of that approach because the story focuses on how governments have less “fiscal space” to engage in another 2008-style orgy of Keynesian monetary and fiscal policy

The analysis is misguided, but the accompanying chart is useful since it shows which nations are probably most vulnerable to a fiscal crisis.

If you’re at the top of the chart, because you have oil like Norway, or because you’re semi-sensible like South Korea, Australia, and Switzerland, that’s a good sign. But if you’re a nation like Japan, Italy, Greece, and Portugal, it’s probably just a matter of time before the chickens of excessive spending come home to roost.

P.S. Related to the Fox Butterfield effect, I’ve also suggested that there should be “some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.”

P.P.S. And in the same spirit, I’ve proposed an “own-goal effect” for “accidentally helping the other side.”

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