Rewarding a Corrupt IRS with a Bigger Budget: Another “Own Goal” by the GOP

The good thing about being nonpartisan is that I can freely criticize (or even praise) policy makers without giving any thought to whether they have an R or D after their name.

That doesn’t mean Republicans and Democrats are the same, at least with regards to rhetoric. The two big political parties in the United States ostensibly have some core beliefs. And because of that, it is sometimes very revealing to identify deviations.

Democrats supposedly believe the rich should pay higher taxes and that low-tax jurisdictions should be persecuted, yet many Democrat bigwigs utilize tax havens.

Republicans supposedly believe in smaller government, yet many of them decide to get rich by lobbying to expand the size and scope of Washington.

Democrats supposedly believe there’s a big gender pay gap, but Obama’s top economic adviser said such numbers are fake and Hillary gave higher pay to men in her office.

Let’s now add to the list.

The IRS has stonewalled and treated Congress with contempt. The bureaucrats have disregarded the law to advance Obama’s hard-left agenda. They have used their power to help Obama’s reelection campaign. And IRS employees even donate lots of money to Democrats.

Given all this, you would think Republicans would be doing everything possible to punish this rogue bureaucracy. Even if only because of self interest rather than principles.

Yet GOPers decided, as part of their capitulation on spending caps (again!), to boost the IRS’s budget. I’m not joking. The Hill has a report with the sordid details.

The spending bill…provides an increase in funding to the Internal Revenue Service, a rare win for an agency that has been on the outs with congressional Republicans. The $1.1 trillion omnibus provides an additional $290 million for the IRS, an increase of 3 percent over the last fiscal year.

What’s especially discouraging is that Congress was on track to reduce the IRS’s bloated budget.

…the outcome for the IRS in the omnibus could have been far worse. A bill advanced by the House Appropriations Committee earlier this year that would have slashed IRS funding by $838 million, while a bill passed by the Senate Appropriations Committee would have reduced funding by $470 million. Instead, the spending package gives the IRS a nearly $300 million bump.

This is yet another piece of evidence that budget deals crafted behind closed doors inevitably produce bad numbers and bad policy.

And it’s certainly another sign that Republicans truly are the Stupid Party.

Just in case you think I’m being unfair to either GOPers or the IRS, let’s look at some recent developments. Here are the best parts of an editorial on unseemly IRS behavior from the Washington Examiner.

President Obama’s IRS repeatedly los[es] hard drives loaded with data related to scandals at the agency. To lose one might be regarded as suspicious happenstance; to lose two looks like conspiracy. The most famous case is that of Lois Lerner, whose division became notorious for targeting conservative groups applying for nonprofit status. Her computer hard drive malfunctioned before that scandal broke, around the same time Congress was looking for information on a separate IRS targeting scheme aimed at conservative donors. …The newest case of IRS hard drive trouble happened last April, but came to light only this month. …the IRS has notified the Justice Department that it erased a hard drive after being ordered not to do so by a federal judge. In this case, the missing communications are those of a former IRS official named Samuel Maruca in the Large Business and International division. He is believed to have been among the senior IRS employees who made the unusual and possibly illegal decision in May 2014 to hire the outside law firm Quinn Emanuel to help conduct an audit of Microsoft Corporation.

And here’s some shocking (or maybe not so shocking) information from the Daily Caller. The IRS’s new ethics chief (wow, there’s an oxymoron) has a track record of illegally destroying records.

The new head of the Internal Revenue Service’s (IRS) ethics office once oversaw the illegal shredding of documents sought by the federal tax agency’s inspector general (IG), and allegedly retaliated on the colleague he believed snitched on him about it.

Yup, he sounds like the kind of guy who deserves a bigger budget.

Let’s close with some very good advice from the Washington Examiner.

In the nearly three years since the targeting scandal was revealed, it has become clear that it was just a symptom of a much deeper problem at the IRS — a culture that lacks accountability, rewards failure, and persecutes the innocent. …it needs a thorough housecleaning, not…bonuses.

Too bad Republicans decided the entire IRS deserved a big bonus.

P.S. From my archives, here are some examples of the bureaucrats who will benefit from a bigger IRS budget.

• 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.

P.P.P.S. And since we’re recycling some oldies but goodies, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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Why Do Hillary Clinton and Bernie Sanders Want to Undermine Jobs and Investment in America?

What’s the difference between Bernie Sanders and Hillary Clinton?

I suspect that most people would cite differences in personal ethics, but I’m a policy wonk so I actually think the leading candidates for the Democratic presidential nomination are two peas in a pod.

The only real difference is that Sanders is more open about his statist beliefs and is more anxious to adopt bad policies as quickly as possible.

But since I don’t want to become Greece, I have a hard time being impressed by politicians who bicker about the best route and best speed to get to the wrong destination.

Consider, for example, their views on corporate taxation. And let’s look specifically at the issue of how to deal with corporate inversions.

First, some background. The Wall Street Journal opines about the logical argument – and fiduciary obligation – for companies to escape America’s awful corporate tax system.

A major U.S. company merges with a foreign firm in part to avoid America’s punishing corporate tax code, and the politicians who refuse to reform the code denounce the company for trying to stay competitive. …Sigh. …Let’s try to explain one more time why it makes perfect business—and moral—sense… The U.S. federal corporate income tax rate is 35%. The Irish rate is 12.5%. …A CEO obliged to act in the best interests of shareholders cannot ignore this competitive reality.

All this makes great sense, and I’ve made similar arguments.

But what do Sanders and Clinton think? Well, the editorial skewers the two leading Democratic candidates for their vacuous demagoguery.

…none of this business logic impresses Hillary Clinton or Bernie Sanders, who helped to write the U.S. tax code as Senators but are now competing as presidential candidates to see who can demagogue more ferociously against American employers. …Neither one wants to reform the tax code to make U.S. tax rates more competitive with the rest of the world. Instead they want to raise the costs of doing business even further. Mrs. Clinton’s solution is to raise taxes on investors with higher capital-gains taxes, block inversion deals, and apply an “exit tax” to businesses that manage to escape. Mr. Sanders would go further and perform an immediate $620 billion cashectomy on U.S. companies. The Vermonter would tax the money U.S. firms have earned overseas, even though that income has already been taxed in foreign jurisdictions.

Call me crazy, but I don’t think the ideas being peddled by Clinton and Sanders will lead to more and better jobs in the United States.

Which is why, when given the chance to  write about this topic for Fortune, I suggested that it would be best to actually fix the tax code rather than blaming the victim.

Some U.S. politicians respond to these mergers with demagoguery about “economic treason,” but that’s silly. These corporate unions are basically the business version of a couple in a long-distance relationship that decides to live where the economic outlook is brighter after getting married. So instead of blaming the victims, the folks in Washington should do what’s right for the country by trying to deal with the warts that make America’s tax system so unappealing for multinational firms.

And what are those warts?

The same ones any sensible person would identify. First, America’s corporate tax rate is absurdly anti-competitive.

With a 35% levy from Washington, augmented by smaller state corporate taxes, the combined burden is more than 39%. In Europe, by contrast, the average corporate tax rate has now dropped below 24%. And the average corporate rate for Asia’s major economies is even lower.

Second, we have a peculiarly self-destructive practice of wanting to tax income earned in other countries.

…the IRS also imposes tax on income earned in other nations. Very few nations impose a system of “worldwide taxation,” mostly for the simple reason that the income already is subject to tax in the nations where it is earned.

So here’s the bottom line.

The combination of a high rate and worldwide taxation is like a one-two punch against the competitiveness of U.S.-domiciled firms, so it’s easy to understand why inversions are so attractive. They’re a very simple step to protect the interests of workers, consumers and shareholders. …Let’s hope politicians put aside class warfare and anti-business demagoguery and fix the tax system before it’s too late.

By the way, even a columnist for the New York Times agrees with me. He has a piece on the inversion issue that is not very favorable to companies, and it certainly reads like he’s in favor of governments having more money, but he can’t help but come to the right conclusion.

Ultimately, the only way inversions will stop is when the corporate tax code changes so it becomes more attractive for American companies to be American companies.

And I can’t resist closing with a great blurb from George Will’s most recent column.

Having already paid taxes on it where it was earned, the corporations sensibly resist having it taxed again by the United States’ corporate tax, the highest in the industrial world.

Amen.

Will succinctly brings together the two most important things to understand about this issue. First, the income earned by American companies in other nations already is subject to tax, and, second, companies understandably don’t want it taxed again by the world’s highest corporate tax rate.

P.S. I’ve made the serious point that Sanders isn’t really a socialist, at least based on his voting record and what he proposes today. Instead, he’s just a conventional statist with mainstream (among leftists) views about redistribution.

Yet because he calls himself a socialist, that leads to amusing moments when other Democrats are asked to identify how he’s different. I’ve already mocked Debbie Wasserman Schultz for her inability to answer that question.

Now let’s see Hillary Clinton dance and dodge. The parts worth watching are all in the first half of the video.

Too bad Chris Matthews didn’t actually press her to answer the question. Though I’m vaguely impressed that she actually knows there are such a thing as libertarians.

P.P.S. While Hillary is clueless, there’s another Clinton that actually has some semi-sensible views about corporate taxation.

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Great News, the Income Tax Is Being Abolished! (but Read the Fine Print)

There is some very good news to share. The income tax will disappear in April.

But there’s also some bad news. The income tax is only being abolished in the Caribbean nation of Antigua and Barbuda, and there’s little reason to think that America’s awful internal revenue code will disappear anytime soon.

Nonetheless, we should celebrate this development because it shows that fiscal mistakes can be reversed.

A report from Caribbean News Now has some of the highlights.

The people of Antigua and Barbuda will from April receive tax relief when the government plans to abolish personal income tax (PIT).  PIT, introduced by the now opposition United Progressive Party upon coming into office in 2004, imposes a tax of 8% on residents earning an income above $3,500 and 15% on those earning an income above $25,000. …Prime Minister Gaston Browne…noted that previous Antigua and Barbuda Labour Party administrations governed Antigua and Barbuda successfully for 27 years without personal income tax. He said that the cost of collecting PIT, the difficulty of enforcement, and its unfairness, make it sensible to remove the PIT from the books.

Wow, the Antigua and Barbuda version of the Labour Party obviously is much better than the crazed British version.

But let’s not get sidetracked. Here are some additional details from a story in the Jamaica Observer.

Prime Minister Gaston Browne yesterday announced that, effective April, personal income tax will be abolished in its entirety. …”Abolishing personal income tax is an important reform. Not only will it put more money in the pockets of the people, so that they can save or spend more for the benefit of the economy as whole, it will help to re-establish our country as one of the most competitive in the Caribbean and beyond.” …He noted that with this move, Antigua and Barbuda will be a location that is competitive and also the choice of retirees.  “Antigua and Barbuda will become a competitive location to attract the headquarters of companies and for professionals to relocate, thereby creating more jobs. Retirees will choose Antigua and Barbuda as their retirement home; Citizenship by Investment Programme (CIP) investors will invest and choose Antigua and Barbuda over our competitors,” said the prime minister. …”taxing income is destructive to investment, savings and consumption. Also, it penalises entrepreneurship.”

For a politician, Mr. Browne has a good understanding of economics. I don’t like the “money in the pockets” rhetoric because it implies a bit of Keynesianism, but everything else he said is based on solid, microeconomic observations about incentives. Very reminiscent of JFK.

And I also like his point about wanting to be a “competitive location.” Yet another example of why tax competition is such a wonderful force for good policy. It encourages governments to do the right thing even when they don’t want to.

I bet, for instance, that the good reform in Antigua and Barbuda will put an end to the suicidal talk of an income tax in the Cayman Islands.

But what about the United States? Is there any chance that good policy in the Caribbean will encourage tax reform in the United States?

Unfortunately, most politicians couldn’t find Antigua and Barbuda on a map, much less care about that nation’s fiscal policy. So I’m not holding my breath that we’ll reverse the horrid mistake that was made in 1913.

But maybe, just maybe, we can at least figure out a less corrupt and less destructive way for the politicians to grab our money.

P.S. Antigua and Barbuda is a beautiful place, but I’ve noted before that government always has the ability to turn Heaven into Hell.

P.P.S. By the way, because of our awful worldwide tax system, American citizens can’t move to Antigua and Barbuda and benefit from that nation’s good tax policy. But there is a Caribbean island where you can legally slash your tax burden.

P.P.P.S. For those who follow Caribbean tax policy, we also enjoyed a fiscal victory a few years ago when a value-added tax was rejected in the Turks and Caicos Islands.

P.P.P.P.S. On an unrelated topic, I want to augment my observations on the water crisis in Flint, Michigan, by citing some very important analysis by Reason‘s Shikha Dalmia. While a wasteful and incompetent local government caused the mess, she explains that state officials deserve some blame because they wanted to “create jobs” with an infrastructure project instead of accepting a good water deal from Detroit.

…the debacle is the result of Snyder’s efforts to stimulate the local economy—the exact opposite of the liberal line. …the then DWSD Director Susan McCormick presented two alternatives to Emergency Manager Ed Kurtz that slashed rates for Flint by nearly 50 percent, something that made Detroit far more competitive compared to the KWA deal. …Genesee County and Flint authorities saw the new water treatment as a public infrastructure project to create jobs… And neither Snyder nor his Emergency Manager Ed Kurtz nor the state treasurer Andy Dillon had the heart to say “no,” especially since to hand Flint to DWSD would have made the whole project less viable. …the Flint water crisis is the result of a Keynesian stimulus project gone wrong.

Hmmm…, statists make silly claims about terrorism being caused by climate change or inequality. Maybe I can be equally silly and now argue that stimulus schemes cause poisonous water!

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Europe’s Moral Bankruptcy

I wrote last year about the moral vacuum that exists in Europe because gun control laws in nations like France make it very difficult for Jews to protect themselves from barbaric attacks.

But the principle applies more broadly. All law-abiding people should have the human right to protect themselves.

Politicians in Denmark don’t seem to understand this principle. Or maybe the do understand the principle, but they are so morally bankrupt that don’t care. Not only do they have gun control, they even have laws against pepper spray. And they are so fanatical in their desire to turn people into sheep that the government apparently will prosecute a girl who used pepper spray to save herself from rape.

Here are some excerpts from a report in the U.K.-based Daily Mail.

A Danish teenager who was sexually assaulted near a migrant asylum centre has been told she will be prosecuted after using pepper spray to fend off her attacker. …she managed to prevent the man from attacking her further by spraying the substance at him. …However, as it is illegal to use pepper spray, the teenage girl is set to face charges.

How disgusting.

And what makes the situation especially frustrating is that the criminals and terrorists in Europe obviously don’t have any problem obtaining firearms.

So the only practical effect of gun control (or bans on pepper spray) is to make life easier for the scum of society.

And the real insult to injury is that a teenage girl who should be hailed as a hero now faces the threat of punishment. Just like the unfortunate British woman who was persecuted for using a knife to deter some thugs.

And here’s some of what the BBC reported about

Italian hospitality for the visiting Iranian President Hassan Rouhani has stretched to covering up nude statues. Italy also chose not to serve wine at official meals

Pathetic. Particularly since the Italians bent over backwards for a truly heinous regime.

Kudos to President Hollande in France, by contrast. The Daily Mail notes that he held firm.

A lunch between the French and Iranian presidents in Paris was scrapped today because France refused to remove wine from the menu.

By the way, there clearly is a role for common courtesy and diplomatic protocol. It obviously would be gratuitously rude for a nation to serve pork at a dinner for officials from Israel or any Muslim nation, just as it would inappropriate and insensitive to serve beef for an event for officials from India.

Moreover, officials from one nation should not make over-the-top demands when visiting other countries. Just as it would be wrong for French officials to demand wine at state dinners in Iran, it’s also wrong for Iranian officials to demand the absence of wine at meals in France. After all, it’s not as if they would be expected to partake.

In the grand scheme of things, though, the kerfuffle about wine and statues doesn’t matter compared to the potentially life-and-death issue of whether Europeans should be allowed to defend themselves.

That’s why Europe isn’t merely in trouble because of fiscal bankruptcy, but also because of moral bankruptcy.

P.S. While having the ability to protect your life or to guard against rape isn’t a human right in most European nations, take a look at some of the things that are “rights.”

• A committee from the Council of Europe claims there is a right to other people’s money.
• Across Europe, a satellite dish is now a human right.
• In Finland, broadband access is a basic right.
• In France, it is against the law to say your husband is under-endowed or that your wife is fat.
• There’s now an entitlement for free soccer broadcasts in Europe.
• In Italy, you have the right to…um…your testicles.

All this is amusing…in a very sad way.

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Has Keynesian Economics Finally Jumped the Shark?

If everyone has a cross to bear in life, mine is the perplexing durability of Keynesian economics.

I thought the idea was dead when Keynesians incorrectly said you couldn’t have simultaneously rising inflation and unemployment like we saw in the 1970s.

Then I thought the idea was buried even deeper when the Keynesians were wrong about simultaneously falling inflation and unemployment like we saw in the 1980s.

I also believed that the idea was discredited because Keynesian stimulus schemes didn’t work for Hoover and Roosevelt in the 1930s. They didn’t work for Japan in the 1990s. And they didn’t work for Bush or Obama in recent years.

Last but not least, I figured Keynesian economics no longer would pass the laugh test because of some very silly statements by Paul Krugman.

He stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted more recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

Wow. I guess the moral of the story is that we should destroy lots of wealth because it’s good for prosperity. Just like we should eat more cheeseburgers to lose weight.

So you can see why I’m frustrated. It seems that evidence and logic don’t matter in this debate.

But maybe this latest example of Keynesian malpractice will finally open some eyes. The International Monetary Fund recently published a study asserting that higher spending on refugees would be good for European economies.

I’m not joking. Here are some excerpts from that report.

In the short term, the macroeconomic effect from the refugee surge is likely to be a modest increase in GDP growth, reflecting the fiscal expansion associated with support to the asylum seekers… In the short term, additional public spending for the provision of first reception and support services to asylum seekers, such as housing, food, health and education, will increase aggregate demand. …Relative to the baseline, the level of GDP is lifted by about 0.05, 0.09, and 0.13 percent for 2015, 2016, and 2017, respectively (solid line in the chart below, representing the response of EU GDP as a whole). For the first year, the output impact is entirely due to the aggregate demand impact of the additional fiscal spending.

To understand the implications of what the IMF is claiming, let’s review some basic facts, all of which presumably are uncontroversial.

First, we know that economic output is the result of capital and labor being mixed together to produce goods and services.

Second, we know that growth occurs when the amount of output increases, which implies increases in the quantity and/or quality of labor and capital.

Third, we know that the influx of migrants to Europe will lead governments to divert additional resources from the private sector to finance various programs.

Now let’s think about the IMF’s assertion. The bureaucrats are basically arguing that letting governments take a bigger slice of the pie somehow is going to increase the size of the pie.

If you’re wondering how this makes sense, welcome to the club.

The only way this analysis possibly could be true is if governments finance the additional spending by borrowing from foreigners. But even that’s not really right because all that’s increasing is domestic consumption, not domestic output.

In other words, it’s like running up your credit card to live beyond your means when the real goal should be increasing your income.

But maybe you don’t want to believe me, so let’s look at some other voices.

The top economist of Germany’s Finance Ministry, Ludger Schuknecht, writes in the Financial Times about the perils of never-ending Keynesianism.

…after decades of attempts to fine-tune the economic cycle by running fiscal deficits and cutting interest rates at times of weak demand, many economies are fragile. …Government deficits and private-sector debt are at high levels in emerging markets, and many western ones too. Ageing populations are weighing on public finances. …Traders gamble on continued bailouts. …Yet this lesson goes largely unheeded; policymakers are urged to pile more debt on the existing mountain. …The work of repairing public sector balance sheets has ground to a halt almost everywhere. …Public debt in many countries is now well above 100 per cent of gross domestic product. …nations lacking resilience increasingly rely on support from others… This creates a new form of moral hazard: since countries that behave recklessly will be bailed out, they have little incentive to reform. …talk of global safety nets is futile, and focusing…on stimulus is outright frivolous.

I’m not a huge fan of German fiscal policy. Tax rates are too high and the burden of government spending is excessive. Heck, they’ve even figured out how to use parking meters to tax prostitutes!

But at least the Germans aren’t big believers in Keynesian pixie dust (and you won’t be surprised to learn Krugman goofed when trying to claim Germany was a Keynesian success story).

In any event, Schuknecht realizes that there’s a point beyond which more spending and more so-called stimulus is simply impractical.

Which is basically the main point in a column by Daniel Finkelstein in the U.K.-based Times. He’s writing about the attacks on “austerity” and is unimpressed by the financial literacy (or lack thereof) on the part of critics.

If I went to…buy a new sweater and decided not to get one because it was too expensive, would I be making an ideological statement about shopping? …Or would I just be, like, putting up with my old sweater for the time being while I saved up a bit of money? …Apparently my innocent view that it is a good idea to be able to pay for the goods you purchase makes me a small-state neo-liberal Tory free market fundamentalist. Which seems quite a complicated description for just wanting things to add up. …Between 2000 and 2006, Gordon Brown and Tony Blair engaged in a structural increase in public spending without a matching increase in taxation. You cannot do this for ever. …one thing is clear. Two plus two has to equal four. However unpopular that is.

By the way, if you read the entire piece, it’s rather obvious that Mr. Finkelstein is not a “small-state…free market fundamentalist.”

He simply understands that an ever-expanding public sector simply doesn’t work.

Which reminds me of a very wise observation by Tyler Cowen.

…at the popular level, there is a confusion between “austerity is bad” and “the consequences of running out of money are bad.”

In other words, this issue is partly about the putative value of Keynesian economics and partly about whether nations get to the point where Keynesian policy simply isn’t practical.

To cite an example, Switzerland or Hong Kong have what’s called “fiscal space” to engage in Keynesianism, while Greece and Italy don’t.

Of course, one of the reasons that Greece and Italy don’t have any flexibility is that politicians in those nations have rationalized ever-larger public sectors. And now, they’ve finally reach the point Margaret Thatcher warned about: They’ve run out of other people’s money (both in terms of what they can tax and what they can borrow).

Meanwhile, Hong Kong and Switzerland are in good shape because they generally have avoided Keynesian stimulus schemes and definitely have policies to constrain the overall size of the public sector.

For further information, here’s my video on Keynesian economics.

P.S. But if you want more cartoons about Keynesian economics, click here, here, here, and here.

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The Simple Solution to America’s Deteriorating Fiscal Outlook

The Congressional Budget Office has just released its new 10-year fiscal forecast and the numbers are getting worse.

Most people are focusing on the fact that the deficit is rising rather than falling and that annual government borrowing will again climb above $1 trillion by 2022.

This isn’t good news, of course, but it’s a mistake to focus on the symptom of red ink rather than the underlying disease of excessive spending.

So here’s the really bad news in the report.

• The burden of government spending has jumped from 20.3 percent of GDP in 2014 to 21.2 percent this year.
• By the end of the 10-year forecast, the federal government will consume 23.1 percent of the economy’s output.

In other words, the progress that was achieved between 2010 and 2014 is evaporating and America is on the path to becoming a Greek-style welfare state.

There are two obvious reasons for this dismal trend.

• Notwithstanding laughable claims from the White House, Obamacare is contributing to rising spending on healthcare entitlements.
• Republicans keep capitulating on the BCA spending caps, enabling more wasteful outlays for so-called discretionary programs.

Here’s a chart that shows what’s been happening. It shows the rolling average of annual changes in revenue and spending. With responsible fiscal policy, the red line (spending) will be close to 0% and have no upward trend.

Unfortunately, federal outlays have been moving in the wrong direction since 2014 and government spending is now growing twice as fast as inflation.

By the way, don’t forget that we’re at the very start of the looming tsunami of retiring baby boomers, so this should be the time when spending restraint is relatively easy.

Yet if you’ll allow me to mix metaphors, bipartisan profligacy is digging a deeper hole as we get closer to an entitlement cliff.

Now let’s shift to the good news. It’s actually relatively simple to solve the problem.

Here’s a chart that shows projected revenues (blue line) and various measures of how quickly the budget can be balanced with a modest bit of spending restraint.

Regular readers know I don’t fixate on fiscal balance. I’m far more concerned with reducing the burden of government spending relative to the private sector.

That being said, when you impose some restraint on the spending side of the fiscal ledger, you automatically solve the symptom of deficits.

With a spending freeze, the budget is balanced in 2020. If spending is allowed to climb 1 percent annually, the deficit disappears in 2022. And if outlays climb 2 percent annually (about the rate of inflation), the budget is balanced in 2024. And if you want to give the politicians a 10-year window, you get to balance by 2026 if spending is “only” allowed to grow 2.5 percent per year.

In other words, the solution is a spending cap.

Here’s my video on spending restraint and fiscal balance from 2010. The numbers obviously have changed, but the message is still the same because good policy never goes out of style.

Needless to say, a simple solution isn’t the same as an easy solution. The various interest groups in Washington will team up with bureaucrats, politicians, and lobbyists to resist spending restraint.

P.S. A final snow update. Since my neighbors were kind enough to help me finish my driveway yesterday, I was inspired to “pay it forward” by helping to clear an older couple’s driveway this morning (not that I was much help since another neighbor brought a tractor with a plow).

It’s amazing that these good things happen without some government authority directing things!

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Trump Is Wrong on TARP (like Romney, McCain, Bush, and the Rest of the Establishment)

Remember the odious, immoral, and corrupt TARP bailout?

Well, it’s becoming an issue in the 2016 presidential race, with some folks criticizing Donald Trump for siding with Bush and Obama on the issue.

I suppose I could make a snide observation about the absurdity of Trump being perceived as an anti-establishment candidate when he supported a policy that had unanimous support from political insiders.

But I would much rather focus on the policy implications. So when Neil Cavuto asked me to comment on Chris Christie’s rejection of bailouts, I took the opportunity to stress (once again) that it wasn’t a TARP-or-nothing choice and that there was a sensible, non-corrupt, way of dealing with failing financial firms. Simply stated, only bail out depositors and let bondholders and shareholders take the hit.

For the geeks who are reading this, you’ll recognize that the policy I’m advocating is often called the FDIC-resolution approach.

And it’s worth noting that this was used at the beginning of the financial crisis. As I pointed out in the discussion, two of the big financial institution that first got in trouble – WAMU and IndyMac – were liquidated.

But once Bush’s execrable Treasury Secretary, Hank Paulson, took control of the process, decisions were made to rescue the fat cats as well as the depositors.

The bottom line is that a lot of establishment figures, including GOPers like Dick Cheney and Mitt Romney, argue that TARP was necessary because the financial system needed to be recapitalized.

Yet that’s also what happens with the FDIC-resolution approach. The only real difference is whether financial institutions should be rescued along with depositors.

Well, my view is that capitalism without bankruptcy is like religion without hell.

P.S. The other guest in the interview made a very good point about America becoming “bailout nation.” I fully agree. To the extent that we have private profits and socialized losses, we’ll have bigger and bigger problems with moral hazard. After all, if you’re in Las Vegas and someone else is covering your losses, why not make high-risk/high-reward bets.

P.P.S. If anyone cares, my driveway is finally clear. A special thanks to the family next door. Not only were they smarter than me (as I wrote yesterday, they parked their cars near the end of their driveway), they’re also nicer than me. They came over and helped me finish when they were done!

Actually, I like to think I’d be equally thoughtful. I’ll have to look for a chance to repay their good deed.

By the way, I should add that the father next door works for a social conservative organization, which is one more piece of evidence for my view that so-cons and libertarians should be allies.

Tim Carney explains that natural alliance much better.

P.P.P.S. In hopes of convincing some of my leftist friends, I can’t resist making one final point.

When government gets to pick winners and losers, it’s highly probable that those who get the handouts, bailouts, and subsidies will be rich, powerful, and politically connected. Heck, just think of the Ex-Im Bank.

As noted by my former colleague, Will Wilkinson, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

I realize that statists won’t agree with me that it’s wrong for the federal government to redistribute from rich to poor. But I hope they’ll be on my side in fighting against redistribution from poor to rich!

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Very Timely Humor Poking Fun at Libertarians

Northern Virginia just got buried by more than two feet of snow.

This has two implications. First, I’m going to have a fun time shoveling my driveway.

Second, I’m going to add to my collection of humor that pokes fun at libertarians.

• Cartoons on libertarian ice fishing and libertarian lifeguards.
• A mosaic showing 24 types of libertarians.
• A poster showing how the world sees libertarians.
• A 23-photo montage of libertarian problems.
• The answer to the riddle of why the libertarian chicken crossed the road.
• Alleged libertarian views on fire departments can be seen here and here.
• A libertarian ambulance service.
• Dealing with a libertarian child.

And now, courtesy of a left-leaning, quasi-populist softball buddy, we have our new addition: The tyranny of government snowplows!

Now that we’ve all enjoyed a good laugh (because some of us libertarians can be very doctrinaire and dour, and thus deserve to be teased), it’s worth noting that plenty of places, such as private communities, shopping centers, etc, do rely on the private sector.

And it’s no mystery that the snow in those places is generally cleared faster and at lower cost.

That being said, most libertarian types are far more tolerant of local governments spending money on things that arguably might be public goods.

Indeed, one of our principles is that things tend to go awry (like the water scandal in Flint) when responsibility and accountability are blurred because of involvement by state government or the federal government.

So most of us will tolerate snow removal by local governments, even if we would prefer the private sector.

P.S. I also have a collection of pro-libertarian humor.

• Libertarian Jesus scolding modern statists.
• This poster about confused statists.
• The libertarian version of a sex fantasy.
• Clever libertarian videos.

P.P.S. Just in case you want to vicariously share my snow-shoveling misery, this picture will give you an idea of the size of the problem.

Though it is nice that one of the cats is helping to point the way.

And another one of the kitties seems rather fascinated by the walls of snow.

For what it’s worth, this snow definitely beats the December 2009 storm and also is heavier than the February 2010 storm.

P.P.P.S. Since I’m not as smart as my neighbor, who parked at the end of his driveway, I have hours of work ahead of me. Too bad there aren’t any criminal, unlicensed teenagers looking for work.

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Are Economists Useless, Despicable, and Loathsome People?

I spend a lot of time mocking statists, and with good reasons.

But since I’m an economist, maybe I should be careful about throwing stones.

Especially since, based on a fairly miserable track record, my profession lives in a big glass house.

So let’s take a closer look to see whether Shakespeare was wrong about which profession most deserved extermination.

We’ll start with a story from The Economist, which informs us that the IMF has a perfect record of failure when predicting recessions.

“The only function of economic forecasting is to make astrology look respectable,” John Kenneth Galbraith, an irreverent economist, once said. …The IMF publishes forecasts for 189 countries twice a year, in April and October, for the year in question and the following one. The Economist has conducted an analysis of them from 1999 to 2014… Over the period, there were 220 instances in which an economy grew in one year before shrinking in the next. In its April forecasts the IMF never once foresaw the contraction looming in the next year. …Our random-number generator correctly forecast the start of a recession 18% of the time.

I’d also add that the IMF has a near-perfect record of trying to undermine countries by recommending tax increases, but that’s a separate issue.

And I don’t mean to pick on the IMF. I’m sure that the forecasts from the Federal Reserve, the Congressional Budget Office, and private entities would show similarly dismal forecasting results.

Especially if their models are based on Keynesian theory, as shown in the cartoon in this post.

If an inability to forecast was the worst thing you could say about economists, that wouldn’t be too awful. But it seems that we also have shady ethical values.  Consider some findings from a recent academic study.

The present article analyzes the differences between economists and non‐economists with respect to observed corruption behavior… For this purpose, I analyzed real world data of relating to the 109th–111th US Congress between 2005 and 2009, including 695 representatives and senators. I show that those who hold a degree in economics are significantly more prone to corruption than ‘non‐economists’. These findings hence support the widespread, but controversial hypothesis in the ‘economist vs. non‐economist literature’ that economists lack what Frey and Meier (2004) call ‘social behavior’.

Wow, we’re “significantly more prone to corruption” because we lack “social behavior.” That doesn’t sound good.

No wonder fraudsters can easily pass themselves off as economists.

Though maybe that data simply shows that economists with bad morals go into politics, whereas those of us with good character work at places such as the Cato Institute.

Or maybe it’s just evidence that there are too many left-wing economists, as reported in another article from The Economist (though at least the profession isn’t totally dominated by statists, like in anthropology).

A survey conducted in 2003 among practitioners of six social sciences found that…left-leaning economists outnumbered right-leaning ones by three to one, compared with a ratio of 30:1 in anthropology.

In any event, if you want to argue that the world would be better off without economists, the real clincher is that we even have the ability to make sex less fun. At least indirectly, as pointed out in this Quartz article.

Does more sex make people happier? Or do happy people just do it more? A gaggle of economists and statisticians lead by Carnegie Mellon University’s George Loewenstein, a well-known behavioral economist, have done their best to find out. Their study, published in the Journal of Economic Behavior & Organization, finds that more sex doesn’t always make people happier—especially if the increase is the result of taking part in an economics experiment. …So is more sex now a bad thing? Probably not. The findings seem to indicate that “the instruction to have more sex leads to a decline in wanting for sex and in enjoyment of sex.” … at least we know conclusively whether participation in behavioral economics studies is the best way for married couples to spice things up. The answer is no.

Let’s consider the tally so far.

Economists are 100 percent wrong, they’re crooks, and they even ruin sex for other people.

Not exactly a ringing endorsement.

But as every good economist will tell you, it’s the real world that’s messed up, not our theories.

And for some economists, that’s not just a joke.

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Ted Cruz and Rand Paul Deserve Praise for their Admirable and Principled Opposition to Corrupt Ethanol Subsidies

Because I don’t like their plans for a value-added tax, some people seem to think that I am politically opposed to Rand Paul and Ted Cruz.

That’s not true. Both Senators are generally strong proponents of free markets and limited government, so the fact that they have one bad policy position shouldn’t a disqualifying characteristic.

But since I’m a policy wonk (and because I work at a non-profit think tank), it’s not my role to tell people how to vote anyhow. Instead, my niche in life is to analyze policy proposals. And if that means I say something nice about a politician who is normally bad, or something critical of a politician who is normally good, so be it.

In other words, nothing I write is because I want readers to vote for or vote against particular candidates. I write to educate and inform.

With all those caveats out of the way, let’s look at the federal government’s odious handouts for the ethanol industry, a very important issue where Rand Paul and Ted Cruz unambiguously are on the side of the angels.

My colleague Doug Bandow summarizes the issue nicely in a column for Newsweek.

Senator Ted Cruz has broken ranks to criticize farmers’ welfare. …Senator Rand Paul also rejects the conventional wisdom…the Renewable Fuel Standard, which requires blending ethanol with gasoline, operates as a huge industry subsidy. Robert Bryce of the Manhattan Institute figured the requirement cost drivers more than $10 billion since 2007. …Ethanol has only about two-thirds of the energy content of gasoline. Given the energy necessary to produce ethanol—fuel tractors, make fertilizer and distill alcohol, for instance—ethanol actually may consume more in fossil fuels than the energy it yields. The ethanol lobby claims using this inferior fuel nevertheless promotes “energy independence.” However, …the price of this energy “insurance” is wildly excessive. …”By creating an artificial energy demand for corn—40 percent of the existing supply goes for ethanol—Uncle Sam also is raising food prices. This obviously makes it harder for poor people to feed themselves, and raises costs for those seeking to help them.” Nor does ethanol welfare yield an environmental benefit, as claimed. In fact, ethanol is bad for the planet. …Ethanol is a bad deal by any standard. Whomever Iowans support for president, King Ethanol deserves a bout of regicide.

Here’s some of the Wall Street Journal’s editorial on the topic.

Mr. Cruz does deserve support in Iowa for…his…lonely opposition to the renewable fuel standard that mandates ethanol use and enriches producers in the Hawkeye State. The Senator refused to bow before King Ethanol last year, and he’s mostly held fast even though Iowa is where anti-subsidy Republicans typically go to repent. …the Texan is right that ethanol is one of America’s worst corporate-welfare cases. The mandate flows in higher profits to a handful of ethanol producers and keeps the price of corn artificially high, all other demand being equal. This raises the price of food. Al Gore and the greens once supported ethanol but gave up on it when studies showed it did nothing for the environment because of the energy expended in its production. So for those of you keeping track of this outsider feud on your establishment scorecards, mark ethanol as one for Mr. Cruz. In this case he’s standing on principle.

Not only does it raise the price of food, Washington’s mandate for ethanol use (the “renewable fuels standard”) means higher prices for motorists.

Here are the key findings on the topic from the Congressional Budget Office.

While Senators Cruz and Paul are fighting on the right side, Donald Trump is cravenly bowing to the special interests that want continued ethanol handouts. Jillian Kay Melchior explains for National Review.

One of the most destructive environmental subsidies in the United States has found an enthusiastic supporter in Donald Trump. “The EPA should ensure that biofuel . . . blend levels match the statutory level set by Congress,” he said yesterday in Iowa, adding that he was “there with you 100 percent” on continuing federal support for ethanol. …federal support for ethanol is a bum deal for Americans. Under the 2007 Independence and Security Act, Congress mandated that the United States use 36 billion gallons of biofuels, including corn ethanol and cellulosic biofuel, by 2022. And the federal government not only requires the use of ethanol; it also subsides it. Tax credits between 1978 and 2012 cost the Treasury as much as $40 billion. Moreover, numerous other federal programs, spanning multiple agencies, allot billions of dollars to ethanol in the form of grants, loan guarantees, tax credits, and other subsidies. …Ethanol-intensive fuel blends can wreak havoc on car, lawnmower, and boat engines. In fact, many vehicle manufacturers will no longer offer warranties when ethanol comprises 10 percent or more of fuel; engine erosion simply becomes too common. …perhaps it’s not surprising that Trump likes federal support of ethanol. After all, the real-estate mogul’s business model has historically hinged on using tax abatements and other subsidies to make his building projects profitable. …Trump’s support for ethanol belies his populist Main Street rhetoric. In reality, he’s just another rich, East Coast politician who would prop up special interests at the expense of the taxpayer.

The bottom line is that ethanol handouts are one of the most notoriously corrupt subsidies that are dispensed by Washington.

They also violate my Bleeding-Heart Rule by imposing costs on lower- and middle-income people to reward politically connected fat cats with deep pockets.

Policy makers who oppose ethanol deserve praise, especially when they are willing to say and do the right thing in a state (like Iowa) that has a lot of recipients of this execrable form of corporate welfare.

P.S. I will get really excited if a candidate goes to Iowa and explains that we should get rid of the entire Department of Agriculture.

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Katrina, Flint, and the Practical Case for Federalism

Remember the cluster-you-know-what in New Orleans following Hurricane Katrina? Corrupt and incompetent politicians in both the city and at the state level acted passively, assuming that Uncle Sam somehow should be responsible for dealing with the storm.

And we’ve seen similar behavior from other state and local politicians before, during, and after other natural disasters.

The obvious lesson to be learned is that the federal government shouldn’t have any responsibility for dealing with natural disasters. All that does it create a wasteful layer of bureaucracy, while also inculcating a sense of learned helplessness on the part of state and local officials who should be responsible for dealing with storms and other local crises.

In other words, the answer is federalism. State and local governments should be solely responsible for state and local issues.

But not just because of some abstract principle. There’s a very strong practical argument that you get more sensible decisions when the public sector is limited (as Mark Steyn humorously explained) and there is clear responsibility and accountability at various levels of government.

And this is why the biggest lesson from the scandal of tainted water in Flint, Michigan, is that local politicians and bureaucrats should not be able to shift the blame either to the state or federal government. Which was my main point in this interview.

To be sure, it is outrageous that state and federal bureaucrats knew about the problem and didn’t make it public, so I surely don’t object to officials in Lansing and Washington getting fired.

But I do object to the political finger pointing, with Democrats trying to blame the Republican Governor and Republicans trying to blame the Democratic President.

Nope, the problem is an incompetent local government that failed to fulfill a core responsibility.

The Wall Street Journal has the same perspective, opining that the mess in Flint is a failure of government.

…the real Flint story is a cascade of government failure, including the Environmental Protection Agency.

More specifically (and as I noted in the interview), we have a local government that became a fiefdom for a self-serving bureaucracy that was more concerned with its privileged status than in providing core government services.

…after decades of misrule: More than 40% of residents live in poverty; the population has fallen by half since the 1960s to about 100,000. Bloated pensions and retiree health care gobble up about 33 cents of every dollar in the general fund.

And the WSJ editorial also castigated the state and federal bureaucrats that wrote memos rather than warning citizens.

MDEQ and the EPA were chatting about Flint’s system as early as February. MDEQ said it wanted to test the water more before deciding on corrosion controls, though it isn’t clear that federal law allows this. …the region’s top EPA official, political appointee Susan Hedman, responded… “When the report has been revised and fully vetted by EPA management, the findings and recommendations will be shared with the City and MDEQ and MDEQ will be responsible for following up with the City.” She also noted over email that it’s “a preliminary draft” and it’d be “premature to draw any conclusions.” The EPA did not notify the public.

The lesson is that adding state and federal bureaucracy impedes effective and competent local government.

The broader lesson is that ladling on layers of bureaucracy doesn’t result in better oversight and safety. It sometimes lets agencies shirk responsibility for the basic public services like clean water that government is responsible for providing.

Here’s the bottom line.

Federalism is about getting better government by creating clear lines of responsibility and accountability in an environment that allows state and local governments to learn from each other on best practices.

The current system blurs responsibility and accountability, by contrast, while also imposing needless expense and bureaucracy. And we get Katrina and Flint with this dysfunctional approach.

So whether it’s Medicaid, education, transportation, welfare, or disasters, involvement from Washington makes things worse rather than better.

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Will the Last Productive Person in Greece Please Turn off the Lights When You Leave?

This isn’t intentional, but there’s been a European theme to this week’s posts. I wrote yesterday about economic chaos in France, and the previous day I wrote about the grim consequences of Italian statism.

Today, we’re going to look at Greece. In the past, I’ve explained that Greece is special, albeit in a bad way. But I’ve also asserted that Greece could be rejuvenated and could deal with its debt with the right reforms.

Heck, Greece could even renege on its debt and still enjoy an economic renaissance if it adopted the right policies. That’s the message of this short video narrated by Garett Jones of George Mason University

So the $64 question (actually, the $231,199,453,552 question according to the latest projection of Greek debt) is whether Greece will do the right kind of reform.

Unfortunately, it appears that all the bailouts have subsidized bad policy. Writing for National review, a journalist from Greece explains that his government is adding more and more taxes onto an overburdened private sector.

…the new austerity measures, which are often amusingly termed reforms, are for the most part tax increases — which may not be popular, but which conform to SYRIZA’s ideological creed. The new package agreed to by SYRIZA and Greece’s creditors is about 90 percent new taxes or tax increases and 10 percent reforms. The tax increases have the benefit of protecting SYRIZA’s core constituency, which is the public-sector employees. Despite the collapse of public revenue and the overall dismal economic outlook, the SYRIZA government plans to increase the salaries of public-sector employees (by as much as 8 percent) and carry on with 45,000 new hires in 2016. Meanwhile, in the private sector, SYRIZA has increased taxes on all sorts of things and is planning to double the taxation of farmers. It has increased business taxes and also demanded the pre-payment of business taxes. It has increased the VAT on almost all goods, and it is defining affluence down so as to increase income taxes for a greater number of taxpayers. And although Greece has probably the highest social-security contributions in Europe, SYRIZA is planning to increase these contributions even more, despite the fact that pensioners now outnumber those who are still employed in the private sector.

More pensioners that private-sector employees?!?

Wow, even I’m shocked by that factoid. There definitely are far more people riding in the wagon than pulling the wagon when you add up pensioners, bureaucrats, and welfare recipients.

So you can understand why Greece is almost surely doomed.

Especially when you consider that many of the people leaving Greece are the productive ones (i.e., those who normally would be pulling the wagon). Here are some passages from a story in the New York Times from last year.

From 2010 to 2013, about 218,000 Greeks emigrated, according to an estimate from the Greek statistics agency. Nearly half of them went to Germany. …Resentments against Germany — Greece’s most powerful creditor — quickly fade when it comes to the prospect of a regular paycheck. Many of those leaving Greece are highly educated professionals and scientists seeking greater opportunity and better pay. An estimated 135,000 Greeks with post-secondary degrees have left since 2010 and are working abroad, according to Lois Labrianidis, an economic geographer and official in Greece’s Economy Ministry. “We think this is human capital that is crucial for the development of the country,” Mr. Labrianidis told me recently, calling the departures a “major blow.” …While much of the attention on recent Greek emigration has focused on the highly educated, I’ve been surprised by the number of working-class Greeks I’ve met who left due to financial desperation.

But there’s one group of people who aren’t leaving.

You probably won’t be surprised to learn that they are the bureaucrats. As noted in this report from the U.K.-based Telegraph, their privileged position is zealously protected by vote-buying politicians.

The other thing most people in the area seem to agree on is that the biggest impediment to progress is the size of Greece’s public sector. The country has a population of 10 million, of which 2.5 million are pensioners, one million are government employees and two million work in the private sector. A further 1.7 million are unemployed. The rest are children or students. “So you can see why the current situation is unsustainable,” says Tryfon. “The only solution is for the public sector to be cut back. But every government since the crisis has chosen to raise taxes, while doing little to stimulate the private sector because they only want to protect votes.” “…Public sector employees and pensioners are the first to get paid and the only ones to get paid on time. We need investment into the private sector, but there is no motivation for companies to come to Greece…” a company would be nuts to invest in a politically unstable country, creaking under debt and crippled by an incredibly punitive tax regime. “What business will invest in a Greece when it takes six months to set up a company compared to Cyprus where it takes 15 minutes?” asks Dimitris Karkavitsas, an investment banker-turned-strawberry farmer. …the young engineer, says everyone who tries to make it in the private sector gets strangled. “The tax is killing us,” he says. …In the meantime, the public sector remains a massive beast.

Moreover, when you set up a company in Cyprus, there’s never a risk that you’ll be required to provide disgusting forms of DNA  as part of bureaucratic requirements.

Yet rather than be outraged by overpaid and meddlesome bureaucrats, I suspect most Greeks probably think how they can get on that gravy train. Which explains why, in an interview, I said the Greeks shouldn’t be allowed to “loot and mooch their way through life.”

Until and unless they learn that lesson, the nation is doomed to societal collapse.

P.S. Another sign of Greece’s moral and fiscal bankruptcy is that pedophiles can get disability payments.

P.P.S. To offset the grim message of today’s column, 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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French President Approaches Cliff, Steps on Accelerator

When I wrote back in 2012 that France was committing fiscal suicide, I should have guessed that President Hollande would get impatient and push for even more statism.

Sure enough, the BBC reports that France’s President has a new plan. The ostensible goal is to reduce unemployment, but the practical effect is to expand the size and scope of government.

President Francois Hollande has set out a €2bn (£1.5bn) job creation plan in an attempt to lift France out of what he called a state of “economic emergency”. Under a two-year scheme, firms with fewer than 250 staff will get subsidies if they take on a young or unemployed person for six months or more. In addition, about 500,000 vocational training schemes will be created.

Needless to say, if subsidies and handouts were the key to job creation, France already would have full employment.

In reality, real jobs are created when employers think that new employees will produce profits. But that’s a difficult hurdle in a country like France.

Though, in the interest of fairness, I should acknowledge that Hollande claims this plan will not involve a net increase in the burden of government spending.

Mr Hollande said money for the plan would come from savings in other areas of public spending. “These €2bn will be financed without any new taxes of any kind,” said President Hollande, who announced the details during an annual speech to business leaders.

Though I suspect that this claim is about as believable as Obama’s laughable assertion that government-run healthcare would lower premiums and allow people to keep their health plans.

But the strangest part of the BBC story involves Hollande’s contortions on labor market policy. See if you can decipher this passage.

The president also addressed the issue of labour market flexibility. “Regarding the rules for hiring and laying off, we need to guarantee stability and predictability to both employers and employees. There is room for simplification,” he said. “The goal is also more security for the company to hire, to adapt its workforce when economic circumstances require, but also more security for the employee in the face of change and mobility”.

I gather Hollande wants people to believe he has some sort of magic wand that will magically give companies flexibility while also guaranteeing workers stability.

Put me in the skeptical column. I would be stunned if France actually liberalized its calcified labor markets. The unions are too powerful and too shortsighted to realize that employers will always be reluctant to hire unless they know they have the ability to fire.

Besides, why would unemployed people, particularly those with low skill levels, want jobs when redistribution programs make idleness comparatively attractive?

Meanwhile, those with high skills will continue to escape the country.

So the bottom line is that France’s slow-motion economic suicide will continue. Hollande’s foolish policies simply mean the day of reckoning will come a bit sooner.

Let’s close with something that’s both revealing and amusing. One of America’s movie stars, Will Smith, had a very interesting wake-up moment on French TV.

I wonder what Mr. Smith would say if he knew that some French taxpayers actually have faced tax burdens of more than 100 percent (though Hollande, with his infinite mercy, then decided that the upper limit should be 80 percent).

P.S. My friend Veronique de Rugy (an escapee from France) warns Americans about the dangers of adopting the policies of her former country in this video.

P.P.S. Sadly, American statists have been urging European-type statism in the United States for decades. To see where that leads, check out these cartoons from Michael Ramirez, Glenn Foden, Eric Allie and Chip Bok.

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The Rise and Fall and Rise and Fall of Italy

George Santayana was certainly was right when he wrote, “Those who do not learn from history are doomed to repeat it.” Consider, for instance, the foolish American politicians who want to rejuvenate Fannie Mae and Freddie Mac and other forms of housing subsidies even though we’re still dealing with the havoc of the last government-created housing bubble.

Though when Italian politicians fail to learn to from history, do it on a bigger and bolder scale.

We’ll start by going back a couple of millennia. Larry Reed of the Foundation for Economic Education tells the story of how Ancient Rome disintegrated thanks to the welfare state.

More than 2,000 years before America’s bailouts and entitlement programs, the ancient Romans experimented with similar schemes. The Roman government rescued failing institutions, canceled personal debts, and spent huge sums on welfare programs. The result wasn’t pretty. …these expensive rob-Peter-to-pay-Paul efforts were major factors in bankrupting Roman society. They inevitably led to even more destructive interventions. Rome wasn’t built in a day, as the old saying goes — and it took a while to tear it down as well. Eventually, when the republic faded into an imperial autocracy, the emperors attempted to control the entire economy.

In reading Larry’s article, I learned about many awful politicians from ancient times.

But if I had to identify the Roman version of Barack Obama, Larry makes a persuasive case that it would be Tiberius Gracchus.

By 133 BC, the up-and-coming politician Tiberius Gracchus…passed a bill granting free tracts of state-owned farmland to the poor. Additionally, the government funded the erection of their new homes and the purchase of their farming tools. …Tiberius, incidentally, also passed Rome’s first subsidized food program, which provided discounted grain to many citizens. Initially, Romans dedicated to the ideal of self-reliance were shocked at the concept of mandated welfare, but before long, tens of thousands were receiving subsidized food, and not just the needy. Any Roman citizen who stood in the grain lines was entitled to assistance.

Sure enough, more and more Romans over time learned that it was more fun to ride in the wagon rather than pull it.

…at its peak, a third of Rome took advantage of the program. It became a hereditary privilege, passed down from parent to child. Other foodstuffs, including olive oil, pork, and salt, were regularly incorporated into the dole. The program ballooned until it was the second-largest expenditure in the imperial budget, behind the military.

So what’s the moral of this story?

Larry’s article shows that my Theorem of Societal Collapse has a long history.

The Roman experience teaches important lessons. As the 20th-century economist Howard Kershner put it, “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.” Putting one’s livelihood in the hands of vote-buying politicians compromises not just one’s personal independence, but the financial integrity of society as well. The welfare state, once begun, is difficult to reverse and never ends well. Rome fell to invaders in 476 AD, but who the real barbarians were is an open question. …Maybe the real barbarians were those Romans who had effectively committed a slow-motion financial suicide.

In any event, Italy slipped into the dark ages.

That’s the bad news.

The good news is that Italy also helped Europe recover from the dark ages. There was no unified nation at the time, but city states such as Genoa and Venice became major trading hubs.

Indeed, private money actually first evolved in the Italian city states.

Over several hundred years, modern Italy came into being, and that occurred during a period when government was constrained. Indeed, it’s worth noting that there wasn’t an income tax until the 1860s.

And Italy had less redistribution than the United States as late as 1930.

So there was a period where government was reasonably small and Italy enjoyed some degree of prosperity.

Unfortunately, once modern-era welfare-state programs were adopted, growth was negatively impacted. And now it’s disappeared entirely, as noted in an article by Alessio Terzi for Bruegel.

Italy…is the only EU member state, together with Greece, where real GDP is now below its 2000 level. …Moreover, Italy’s longstanding vulnerabilities such as its mammoth public debt – second only to Greece’s in GDP terms – …could easily derail the recovery.

Here’s a very depressing chart (if you’re Italian, or even if you merely care about Italy) showing that economic output today is lower than it was in 2000.

The only silver lining to this bad news is that the Italians presumably have less reason to be upset than the Greeks.

Sure, both nations have enjoyed zero growth in the 21st Century, but the Greeks went through an illusory period where they thought they had growth.

So it probably is even more painful to them now that they’ve taken a tumble.

By the way, Alessio’s article actually speculates that Italy may be poised for an economic rebound.

I hope that’s correct, and the article does mention a few reforms, but I’m not overly optimistic.

Check out the country’s ranking from Economic Freedom of the World.

As you can see, Italy ranks only 79 out of 152.

To be sure, that means there’s a lot of room to climb. But does anyone expect Italy to become Switzerland on the Mediterranean?

Heck, at least one Italian region is so dour about the nation’s outlook that it’s petitioning to be annexed by Switzerland!

Italy’s lowest grade in Economic Freedom of the World is for fiscal policy. And since government spending consumes a bit more than half the nation’s economic output, you can understand why there’s so little activity in the private sector.

Especially when you consider that excessive government spending results in punitive tax policy.

Here’s another reason to be pessimistic. Italy’s demographic profile is terrible. I’ve previously explained that even a nation with a medium-sized welfare state is in deep trouble if its population profile begins to resemble a cylinder rather than a pyramid.

Well, that’s happening to Italy, except it has a large welfare state rather than a medium-sized one.

So there’s not much reason for hope.

P.S. Allow me to rephrase something. I wrote above that “Italy’s demographic profile  is terrible.” That’s not actually accurate. There’s nothing a priori wrong with women deciding to have fewer children. And it’s unambiguously good news that people are living longer. What I should have written is that Italy’s long-run fiscal outlook is terrible. And the reason for that grim situation is the combination of demographics and redistribution programs.

P.P.S. As a general rule, demographics is destiny. At least in most advanced nations. The exceptions are jurisdictions such as Hong Kong and Singapore. By the way, both have aging populations and extremely low birthrates (Singapore in last place out of 224 nations and Hong Kong third from the bottom). But because they have very low levels of redistribution, both jurisdictions are well positioned to deal with changing demographics.

P.P.P.S. I can’t resist the temptation to comment about Ireland. If you look at the chart showing post-2000 growth in major European nations, notice that Ireland has enjoyed far more growth than any of the other nations. When the recession hit, many leftists chortled that this was a sign that low-tax policies were a failure. That was always a silly assertion since a housing bubble was Ireland’s biggest challenge. But now that time has passed and we see that Ireland has out-performed other nations, the lesson is that countries that get reasonably good scores in Economic Freedom of the World prosper more than nations that get lower scores. Yes, policy matters.

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Obama, Redistribution, and Jobs: Always Wrong, Never in Doubt

Let’s dig into the issue of whether the United States should become more like France.

In a 2014 study for the National Bureau of Economic Research, Stanford University’s Robert Hall wrote about America’s sub-par economic performance. His opening line was basically a preemptive refutation of Obama’s claim – made during the State-of-the-Union Address – that the economy is strong.

The years since 2007 have been a macroeconomic disaster for the United States of a magnitude unprecedented since the Great Depression.

I don’t know that I would use “disaster” to describe the economy. That word would be much more appropriate for failed welfare states such as Italy and Greece.

But Professor Hall was definitely correct that the U.S. economy has been sputtering, as illustrated by comparative business-cycle data from the Minneapolis Federal Reserve.

So what accounts for America’s anemic economy? Hall has about 50 pages of analysis, but since brevity is a virtue, let’s look at some of what he wrote in his final paragraph.

Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. …an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings and so discourage labor-force participation among beneficiaries. The bulge in program dependence…may impede output and employment growth for some years into the future.

In other words, he pointed out that a large number of people have left the labor force, which obviously isn’t good since our economy’s ability to generate output (and boost living standards) is a function of the degree to which labor and capital are being productively utilized.

And his work suggests that redistribution programs are a big reason for this drop in labor-force participation.

Now let’s look at another study from NBER, this one from 2015 that was authored by economists from the University of Pennsylvania, University of Oslo, and Stockholm University.

They examine the specific impact of unemployment insurance.

We measure the effect of unemployment benefit duration on employment. …Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. …we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

Wow, that’s a huge impact.

To be sure, I’ll be the first to admit that empirical work is imprecise. Ask five economists for an estimate and you’ll get nine answers, as the old joke goes.

Professor Hall, for instance, found a smaller impact of unemployment insurance on joblessness in his study.

But even if the actual number of people cajoled back into employment is only 500,000 rather than 1 million, that would still be profound.

Though at some point we have to ask whether it really matters whether people are being lured out of the labor force by food stamps, disability payments, unemployment insurance, Obamacare, or any of the many other redistribution programs in Washington.

What does matter is that we have a malignant welfare state that is eroding the social capital of the country. The entire apparatus should be dismantled and turned over to the states.

But not everyone agrees. You probably won’t be surprised to learn that the White House is impervious to data and evidence. Indeed, notwithstanding the evidence that the left was wildly wrong about the impact of ending extended unemployment benefits, the White House is proposing to expand the program.

Here’s some of what’s being reported by The Hill.

The president’s three-pronged plan includes wage insurance of up to $10,000 over two years, expanded unemployment insurance coverage… The plan comes on the heels of Obama’s final State of the Union address on Tuesday, in which he committed to fighting for expanded out-of-work benefits during his last year in office. …The plan would also extend benefits to part-time, low-income and intermittent workers who can’t already take advantage of the out-of-work programs. And it would mandate states provide at least 26 weeks of coverage for those looking for work.

The part about mandating that all states provide extended coverage is particularly galling.

It’s almost as if he wants to make sure that no states are allowed to adopt good policy since that would show why the President’s overall approach is wrong.

I joked in 2012 about a potential Obama campaign slogan, and I suggested an official motto for Washington back in 2014.

Perhaps we should augment those examples of satire with a version of the Gospel according to Obama: Always wrong, never in doubt.

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Ted Cruz, Rand Paul, Payroll Taxes, and the Value-Added Tax

My views on the value-added tax are very simple and straightforward.

If we completely eliminated all income-based taxes, I would be willing to accept a VAT (or even a national sales tax) as a revenue source for government.

But unless that happens, I’m unalterably opposed because it’s far too risky to give politicians two major sources of tax revenue. Just look at what happened in Europe (and Japan). Before the VAT, the burden of government spending wasn’t that much higher in Europe than it was in the United States. Once VATs were adopted, however, that enabled a vast expansion of the welfare state.

This is why I’m worried about the Rand Paul and Ted Cruz tax plans. On paper, both plans are very good, dramatically lowering income tax rates, significantly curtailing double taxation, and also abolishing the corporate income tax. But I don’t like that they both propose a VAT to help make up the difference. It’s not that I think they have bad intentions, but I worry about what happens in the future when a bad President takes office and has the ability to increase both the income tax and the value-added tax. When the dust settles, we’re France or Greece!

By contrast, if we do some type of tax reform that doesn’t include a VAT, the worst thing that could happen when that bad president takes office is that we degenerate back to the awful tax code we have today. Which would be unfortunate, but not nearly as bad as today’s income tax with a VAT on top.

Bad since I’ve already addressed this issue, let’s focus on a part of the Paul and Cruz tax plans that has received very little attention.

Both of them propose to get rid of the payroll tax, which is the part of your paycheck that goes to “FICA” and is used to help fund Social Security and Medicare.

Alan Viard of the American Enterprise Institute has a column in U.S. News & World Report that explores the implications of this repeal.

Would you like to see the FICA item on your pay stub go away and be able to keep the 7.65 percent that the payroll tax takes out of your paycheck? If so, Republican presidential candidates Rand Paul and Ted Cruz have a deal for you – each of them has proposed getting rid of the tax. The senators’ plans would also eliminate the other 7.65 percent that the government collects from your employer, which you ultimately pay in the form of lower wages.

That sounds good, right? After all, who wouldn’t like to keep 15.3 percent of their income that is now being siphoned off for entitlement programs.

But here’s the catch. As Alan explains, other revenue sources would be needed to finance those programs, particularly Social Security.

The payroll tax finances two large benefit programs – 6.2 percent goes to Social Security and 1.45 percent goes to Medicare Part A. If the payroll tax went away, we would have to find another way to pay for those benefits. Paul and Cruz would turn to a value added tax, known as a VAT. …using it to pay for Social Security would have repercussions for the program that the candidates haven’t thought through. …once the payroll tax was gone, Social Security would no longer be a self-financed program with its own funding source. Instead, it would draw on the same general revenues as other government programs.

Viard thinks there are two problems with using VAT revenue to finance Social Security.

First, it means that there’s no longer a limit on how much money can be spent on the program.

…having a separate funding source for Social Security has been good budgetary policy. It’s kept the program out of annual budget fights while controlling its long-run growth – Social Security spending is limited to what current and past payroll taxes can support.

Second, replacing the payroll tax with a VAT eliminated the existing rationale for how benefits are determined.

And that will open a potential can of worms.

…what would happen to the benefit formula if the payroll tax disappeared and Social Security was financed by general revenue from the VAT? Paul and Cruz haven’t said. …One option would be to switch to a completely different formula, maybe a flat monthly benefit for all retirees. …that would be a big step, cutting benefits for high-wage workers and posing tricky transition issues.

I imagine there are probably ways to address these issues, though they might wind up generating varying degrees of controversy.

But I’m more concerned with an issue that isn’t addressed in Viard’s article.

I worry that eliminating the payroll tax would make it far harder to modernize Social Security by creating a system of personal retirement accounts.

With the current system, it would be relatively easy to give workers an option to shift their payroll taxes into a retirement account.

If the payroll tax is replaced by a VAT, by contrast, that option no longer exists and I fear reform would be more difficult.

By the way, this is also the reason why I was less than enthused about a tax reform plan proposed by the Heritage Foundation that would have merged the payroll tax into the income tax.

Yes, I realize that genuine Social Security reform may be a long shot, but I don’t want to make that uphill climb even more difficult.

The bottom line is that I don’t want changes to payroll taxes as part of tax reform, particularly when it would only be happening to offset the adverse distributional impact of the VAT, which is a tax that shouldn’t be adopted in the first place!

Instead, let’s do the right kind of tax reform and leave the payroll tax unscathed so we’ll have the ability to do the right kind of Social Security reform.

P.S. Some of you may be wondering why Senators Paul and Cruz included payroll tax repeal in their plans when that leads to some tricky issues. The answer is simple. As I briefly noted above, it’s a distribution issue. The VAT unquestionably would impose a burden on low-income households. That would not be nice (and it also would be politically toxic), so they needed some offsetting tax cut. And since low-income households generally don’t pay any income tax because of deductions, exemptions, and credits, repealing the payroll tax was the only way to address this concern about fairness for the less fortunate.

P.P.S. Since we have a “pay-as-you-go” Social Security system, with benefits for current retirees being financed by current workers, some people inevitably ask how those benefits will be financed if younger workers get to shift their payroll taxes into personal retirement accounts. That’s what’s known as the “transition” issue, and it’s a multi-trillion-dollar challenge. But the good news (relatively speaking) is that coming up with trillions of dollars over several decades as part of a switch to personal accounts will be less of a challenge than coming up with $40 trillion (in today’s dollars) to bail out a Social Security system that is actuarially bankrupt.

P.P.P.S. It goes without saying (but I’ll say it anyhow) that class-warfare taxation is Obama’s (and Hillary’s) ostensible solution to Social Security’s shortfall.

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Two Lessons from State Tax Policy

In recent years, I’ve argued that America’s corporate tax system must be very bad if companies are not only redomiciling in places like Cayman and Bermuda, but also inverting to countries such as Canada and the United Kingdom.

Well, the same thing happens at the state level. Yes, companies (as well as entrepreneurs and investors) usually move from high-tax states to low-tax states, with zero-income tax jurisdictions like Texas reaping a windfall of new jobs.

But when a big company like General Electric announces that it will move its headquarters from Connecticut to a state like Massachusetts, that’s a damning indictment of Connecticut. After all, Massachusetts doesn’t exactly have a reputation as a low-tax refuge.

The always-superb editorial page of the Wall Street Journal looks at the big-picture implications.

Hard to believe, but Connecticut was once a low-tax haven in the Northeast. Its business climate has grown so hostile in recent years, however, that General Electric on Wednesday announced that it will move its headquarters to Boston. When Taxachusetts becomes a reprieve, Governor Dan Malloy ought to know Connecticut has a problem.

Exactly.

And what’s really amazing is that Connecticut didn’t even have an income tax as recently as 1990.

But once politicians got the power to impose that levy, the state has been in a downward spiral.

And it doesn’t appear that the decline will end anytime soon.

… last summer…Connecticut’s legislature grabbed an additional $1.3 billion in tax hikes, the fifth increase since 2011. …The state’s $40.3 billion two-year budget boosted the top marginal tax rate on individuals earning more than $500,000 to 6.99% from 6.7% and 6.5% in 2010. Mr. Malloy also extended for the second time a 20% corporate surtax that his Republican predecessor Jodi Rell had imposed in 2009. …The tax hikes have failed to cure Connecticut’s chronic budget woes.

Of course they haven’t. Raising taxes to cure an over-spending problem is like trying to douse a fire with gasoline.

But the tax-happy politicians have one achievement. They’ve managed to drive the economy into the dumps.

Since 2010 the…State has recorded zero real GDP growth, the lowest in the nation save Louisiana (-0.7%) and Maine (-0.6%). Connecticut is one of only four states (Illinois, Vermont, West Virginia) whose populations have declined since 2012.

Notwithstanding all this bad economic news, politicians in Hartford continue to spend like there’s no tomorrow.

Over the next two years spending is set to rise by $1.5 billion, including $700 million in higher personnel costs. Pension payments are soaring. Connecticut’s pension system is 48% funded, third worst in the country after Illinois and Kentucky.

Good grief, as Charlie Brown might say. The bottom line is that the productive people who are left in Connecticut should make plans to leave before it’s too late.

By the way, there are two other noteworthy observations in the WSJ‘s editorial.

First, I like the fact that General Electric has escaped the fiscal hell-hole of Connecticut, but I’m not a fan of the company because it likes to feed at the public trough.

And, indeed, it will be getting special privileges from Massachusetts.

Mr. Immelt says GE, which has been headquartered in Fairfield since 1974, selected Boston after considering…a “package of incentives” valued at as much as $145 million.

Huh, whatever happened to the quaint notion that the laws should apply equally to everyone? Why should GE enjoy one set of rules while other companies labor under a different set of rules?

I imagine Voltaire is spinning in his grave.

Second, even though Massachusetts was foolish enough to engage in favoritism for GE, the state actually isn’t as bad as its reputation.

As the WSJ explains, it has a flat tax for households and it also has been cutting its corporate rate.

Massachusetts has the lowest taxes in the Northeast outside of New Hampshire… The Tax Foundation ranks Massachusetts’s business tax climate 25th in the country, ahead of Georgia (39), Connecticut (44), Rhode Island (45) and New York (49). Massachusetts has worked to shake its high-tax image by cutting its corporate rate to 8% from 9.5% and flat income tax to 5.15% from 5.3% in 2008. In the same period, Connecticut has raised its corporate rate to 9% from 7.5% and its top income tax rate to 6.99% from 5%.

Wow, I’m embarrassed that I used to live in Connecticut.

Though, in my defense, I was a kid when my family escaped from New York and Connecticut was a zero-income tax state when that happened.

Now, though, Connecticut merely serves as a bad example.

There are two broad lessons from this episode.

1. A state that doesn’t have an income tax should never allow the adoption of that awful levy. I’m thinking specifically of the folks in the Pacific Northwest since some of the big spenders in the state of Washington are advocating for that levy. And add Wyoming and Alaska to that list since politicians in those states over-spent when energy prices were high and some of them are now pushing to impose an income tax since tax receipts from energy are no longer climbing.
2. A state with a flat tax should never allow the introduction of multiple rates. It’s remarkable that Massachusetts has a flat tax (thanks to an old provision in the state’s Constitution), but the key lesson is that the flat tax has made it difficult for leftist politicians to raise the rate since all taxpayers would be adversely impacted (this is also why it’s been difficult for big spenders in Illinois to raise tax rates). In a system with graduated rates, by contrast, it’s much easier for politicians to play the divide-and-conquer game and selectively raise some tax rate.

I’ll close with one additional observation that this story is yet another example of why federalism is good.

We get to learn the damaging impact of high taxes and excessive spending thanks to the fact that we still have some government taking place at the state and local level.

And this explains why our statist friends want centralization. If there’s a one-size-fits-all policy of high taxes and wasteful spending, it’s much harder to move across national borders than it is to move across state borders. That insulates politicians (though not fully since there are varying amounts of tax competition between nations, both for investment and people) from the consequences of their reckless behavior.

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The Value-Added Tax Should Be Political Poison for Advocates of Limited Government

It’s not my role to pick sides in political fights, but I am very interested in trying to make bad ideas radioactive so that politicians won’t be tempted to do the wrong thing.

This is why I’m a big fan of the no-tax-hike pledge. The folks in Washington salivate at the prospect of getting more of our money, but they are less likely to act on their desires if they’re scared that breaking their promises means they’ll lose the next election.

It’s also why I want the value-added tax (VAT) to become a third-rail issue. Simply stated, it would be a catastrophic mistake to give Washington an additional source of tax revenue. Especially since the European evidence shows that it’s a money machine to expand the welfare state.

Given my concerns, I was understandably distressed that two lawmakers (and presidential candidates) who normally support smaller government, Rand Paul and Ted Cruz, decided to include the VAT in their tax reform proposals.

But maybe I’ll get my wish after all. It seems that support for the VAT is becoming a big problem.

A report in the Wall Street Journal discusses this development.

The crux of the current dispute is Mr. Cruz’s business flat tax proposal. Under the plan, businesses would pay a 16% tax on their adjusted gross revenues after first subtracting payments to other businesses, but not profits or wages. Economically, that’s equivalent to a value-added tax.

It’s not just equivalent. It is a value-added tax, specifically a “subtraction-method” VAT.

Which is why Senator Cruz is vulnerable to criticism from both political rivals and advocates of small government..

“Republican candidates today try to hide their support for the value-added tax by renaming it a Business Flat Tax,” Mr. Rubio said. “But don’t be fooled. If it acts like a VAT, taxes like a VAT, and grows government like a VAT—it’s a VAT.” …Conservatives have long been dubious about value-added taxes, worrying that they might grow over time because less transparent taxes can be politically easier to increase, especially after their creators leave office.

There’s also a story in Politico about the VAT suddenly becoming a big part of the GOP nomination fight.

On Monday, Sen. Marco Rubio (R-Fla.) lobbed an opening salvo in what’s likely to become a new front of disagreement in the GOP primary race: taxes. “Believe it or not, multiple Republican candidates for president support new taxes on the American people,” Rubio said at an economic town hall in Sarasota, Florida. “Some even support imposing a new tax that generations of conservatives have fought against, called a Value Added Tax.” …Cruz has gone to great lengths to avoid calling this idea a value-added tax, or VAT—which has suspiciously European connotations—instead terming it a crisply Republican-sounding “business flat tax.” But economists widely agree it’s a VAT. …Stephen Moore defended the plan (and also another similar proposal from Sen. Rand Paul). That provoked strong responses from National Review’s Ramesh Ponnuru and the Cato Institute’s Daniel Mitchell.

There’s also been strong responses from folks who are perplexed that pro-VAT politicians are pretending that they don’t support a VAT.

Here’s how Josh Barro opened his column on this topic in the New York Times.

Like Rand Paul before him, Ted Cruz is promoting a tax plan that relies heavily on a value-added tax, or VAT. And like Mr. Paul, Mr. Cruz is not calling his VAT a VAT.

For what it’s worth, I don’t care what it’s called. I’m just worried that otherwise sensible people think it might be a good idea to give a new source of tax revenue to Washington.

Sort of like giving an alcoholic the keys to a liquor store. Or a book of matches to a pyromaniac.

Diana Furchtgott-Roth of the Manhattan Institute also is uncomfortable with the notion of giving Washington a major source of additional tax revenue.

…once the VAT is put in place, it is practically impossible to get rid of it. In countries that have it, the VAT rises over time incrementally and gives government immense power. Cruz and Paul are in favor of smaller government, but their suggested VATs would expand government clout. …parliaments, congresses, and assemblies don’t get rid of other taxes. They add the VAT on top of existing levies. …Due to their hidden nature, VATs tend to grow over time… From 1975 to the present, VAT rates have risen in the U.K. from 8% to 20%. …when imposed in 1967, Denmark’s VAT was 10%; it is now 25%… In 1968, Germany levied a 10% VAT…their VAT has risen “only” to 19%… Cruz and Paul make the VAT the centerpiece of their tax-reform plans. But America needs to move away from European policies, not towards them.

And former Congressman Chris Chocola (and former head of the Club for Growth) has similar concerns. He’s a supporter of Marco Rubio, so he obviously has a political interest in undermining other candidates in the GOP race, but what he wrote for National Review is spot on.

Liberals have dreamed of imposing a VAT for decades. Democratic leader Nancy Pelosi says that “a value-added tax plays into” her vision of tax reform. President Obama has called a VAT a “novel” idea. The Left loves that a VAT can raise enormous sums of money for the government in a hidden way. Because it’s embedded in the cost of everything we buy, Washington can increase the VAT rate and then blame businesses for the higher consumer prices they bring. …in fact, high consumption taxes are what allowed European governments to grow so large. Once countries like France realized that there was a limit to how much money they could squeeze from the income tax, they used the VAT to extract resources from a broader swath of the population.

Bartlett Cleland of the Institute for Policy Innovation adds to these arguments.

The VAT is attractive to those who…[w]ant to grow government… Whether or not those proposing such taxes are interested in expanding the scope of government is almost irrelevant, because once the tools for such expansion are in place they can be used by future politicians to grow government subtly.  Similarly, whether a tax is labeled as a VAT or not is also irrelevant if the function is the same—for example by not allowing companies to deduct wages.

Last but not least, Irwin Stelzer makes a very important observation in an article for the Weekly Standard.

The VAT would give politicians and lobbyists an entirely new tax system that could be used (just like the income tax) to swap loopholes for campaign cash.

…a VAT…will not eliminate income taxes, or the IRS, or the K Street lobbyists that thrive on writing special provisions into the code to advantage their clients at the expense of the ordinary taxpayer. It will, instead, massively multiply the number of rules-writing revenue agents and further enrich their special-privilege-seeking lobbyists.

With this in mind, he poses a hypothetical question.

…if you believe that (1) a consumption tax would completely replace all income taxes, rather than be added to our current tax code, (2) arguments on behalf of children, health advocates, safety advocates, the elderly, and others would fall on deaf political ears, and (3) the K Street crowd would quietly sublet their spaces to worthier tenants and, like the obsolete old soldiers they will have become, simply fade away, then by all means support an American value-added tax.

Stelzer offers some sage advice in his conclusion.

…lack of transparency is the politicians’ friend and makes it far easier to raise VAT rates than income tax rates. Perhaps it would be best if presidential wannabes would get on with the hard, tedious work of reforming our hideous tax code rather than adding a consumption tax to our burdens.

Speaking of which, the folks at National Review have a solution to this mess. They correctly note that a VAT would be a huge mistake.

…a key feature of Cruz’s plan: its reliance on a value-added tax. …The wage earner would pay the tax through either lower wages or higher prices or both (relative to what they would be without this new tax). …The effective tax on labor income would be much higher than the headline…rate. …It is the hidden nature of the tax that has traditionally worried conservatives. Most people would not know what their wages would have bought them if this tax were lower, or if it did not exist. …it might prove much easier for politicians— say, a liberal successor to President Cruz — to raise this tax over time… The fact that European countries use this tax to finance their swollen welfare states reinforces this fear.

So they outline a way to fix what’s wrong with the plans that contain a VAT.

…there is a way for Cruz to retain the economic and fiscal advantages of his proposal while eliminating this danger. (This road lies open for Senator Paul, too.) …let businesses deduct wages when they pay their taxes and use the income tax to make up for it. This modification would keep the effective rate of taxes on labor income the same; it would just make it transparent. …it would make it a little less likely that over time government would grow larger and larger and taxes climb higher and higher.

Let’s close with (at least to me) a very persuasive point.

I wrote two months ago that one of America’s most statist presidents, Richard Nixon, supported a VAT.

Now let’s see what one of America’s best presidents, Ronald Reagan, had to say about that levy.

…a value-added tax actually gives a government a chance to blindfold the people and grow in stature and size. …the other thing with that tax is, it’s hidden in the price of a product. And that tax can quietly be increased, and all the people know is that the price went up, and they don’t know whether the price went up because somebody got a raise, or whether the company wanted to increase profits, or whether it was government. …I think I’ve said before, taxes should hurt in the sense that people should be able to see them and know what they’re paying.

Amen.

If you need more information, here’s my video on the VAT.

P.S. If you don’t believe Irwin Stelzer’s argument that a VAT would morph into a Byzantine mess, check out this recent article from the EU Observer that’s entitled, “EU’s new VAT rules forcing thousands out of business.”

P.P.S. And if you don’t believe the VAT is a money machine for bigger government, check out this data from the IMF.

P.P.P.S. Marco Rubio is right to criticize plans that include a VAT, but that doesn’t mean his plan is free of warts. For what it’s worth, the candidate with the best plan is Ben Carson. Not that anyone’s decision should be based solely on tax policy.

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Obama’s Legacy? Dismal and Declining Labor Force Participation

I normally enjoy working for the Cato Institute since it’s a principled and effective organization.

But every so often, my job requires an unpleasant task, and watching the State-of-the-Union Address as part of Cato’s live-tweeting program counts as one my least enjoyable experiences since joining the team.

But let’s make lemonade out of lemons by looking at lessons that can be learned from Obama’s speech. The most jarring part of the evening was when Obama bragged about the American economy.

Since we’re suffering through the weakest recovery since the Great Depression, that was rather bizarre.

Moreover, being proud that we’re doing better than Europe is akin to getting a participation ribbon in a soccer league for kids.

And the chest thumping about the unemployment rate was very misplaced since that piece of data only looks good because so many Americans have given up on finding a job.

I’ve pontificated on that issue before and cited the Labor Department’s overall data, but let’s dig a little deeper to fully understand why Obama should have apologized rather than patted himself on the back.

Here’s the employment/population ratio for the prime, working-age population of those between 25 and 54 years of age.

As you can see, this ratio has improved a bit over the past five years, but it appears that there’s very little hope that the overall employment situation will ever recover to where it was before the recession.

At least not with current policies.

Here’s another way of looking at the same data. It’s labor force participation by age. The lines don’t seem that far apart, but a 3-4 percentage point decline across age groups adds up to millions of people no longer productively employed.

Last but not least, here’s another way of approaching this data.

We have a chart from the St. Louis Federal Reserve Bank showing the number of working-age people not in the labor force.

There are two takeaways from this chart.

First, it’s clear that the problem started well before Obama.

But it’s also clear that the problem has gotten much worse during his tenure.

The bottom line is that the expansion of redistribution programs has lured more and more people out of the labor force, particularly when matched by government policies that have hindered the private sector’s ability to create jobs.

So you’ll understand why I cited labor-force participation (along with stagnant household income) as Obama’s real legacy in this interview.

By the way, one of the perils of live TV is that you sometimes get curve balls. And since the Ted Cruz birther controversy is now big news, I was asked my opinion even though I don’t have the slightest competency to discuss the issue.

Sort of like the time I went on a program for the ostensible purpose of discussing trade and wound up trapped in a discussion on America’s relationship with North Korea.

My only regret from yesterday’s interview is that I wasn’t clever enough to say that I was more worried about Cruz supporting a Canadian-style tax system than I was about Cruz being born in Canada.

P.S. While I’m not happy about Cruz including a value-added tax in his reform proposal, don’t read too much into that grousing since there are warts in the other candidates’ plans as well.

With one exception.

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More Perverse (but Predictable) Economic Consequences of Obamacare

Even before it was enacted, it was obvious that Obamacare was going to have a negative economic impact.

From a fiscal policy perspective, the law was bad news because all the new spending and higher taxes increased the fiscal burden of government.

From a regulatory intervention perspective, the law was bad news because it exacerbated the third-party payer problem.

Form a jobs perspective, the law was bad news because it increased the attractiveness of government dependency compared to employment.

But those were just the slap-you-in-the-face impossible-to-overlook problems.

As Nancy Pelosi infamously noted, the law needed to pass so we could know what was in it.

And the more we learn about the contents, the more evidence we find that (as shown in this poster) that more government is never the answer.

A new empirical study by scholars at Harvard and Stanford finds that “free” goodies from the government actually have a hefty price tag.

The dependent care mandate…one of the most popular provisions of the 2010 Affordable Care Act…requires that employer-based insurance plans cover health care expenditures for workers with children 26 years old or younger. …there has been little scholarly work measuring the costs and incidence of this mandate and who pays the costs of it. In our empirical work, ….we find that workers at firms with employer-based coverage – whether or not they have dependent children – experience an annual reduction in wages of approximately $1,200. Our results imply that the marginal costs of mandated employer-based coverage expansions are not entirely borne only by the people whose coverage is expanded by the mandate.

Wow, this is worse than I thought. I assumed the pejoratively nicknamed “slacker mandate” wasn’t a big issue because the types of kids getting coverage (ages 19-26) presumably had very low health expenses.

But if average wages at affected firms are $1200 lower than they otherwise would be, that’s a big hit. Maybe Pajama Boys have physical health problems in addition to their mental health problems.

Now let’s look at another higher-than-expected cost, except this time the victims are taxpayers and other health care consumers rather than workers.

Politico has a depressing story of how people have figured out how to game the system

Obamacare customers are gaming the system, buying coverage only after they find out they’re ill and need expensive care… No one knows precisely how many might be manipulating the system, but the plans say they run up much higher medical bills and then jump ship, contributing to double-digit rate increases and financial losses. Health plans also complain some customers are exploiting a three-month “grace period” — when they can keep getting subsidized coverage even if they’ve stopped paying their share of premiums.

In other words, Obamacare is so poorly designed – thanks to subsidies, mandates, and other forms of intervention – that many people can basically wait until they’re sick before signing up.

Then they incur expenses that are covered by taxpayers and/or passed on to other healthcare consumers.

There’s also another group of victims, though I confess that part of me thinks that the insurance companies deserve to suffer since they (like Big Pharma) endorsed Obamacare.

…those trends make the risk pools skew toward sicker, costlier customers — and under Obamacare, plans can no longer deny coverage to those with expensive medical conditions. That problem has been exacerbated by the large numbers of healthier people who are choosing to stay uninsured rather than shell out money for coverage.

Yup, I experience a warm glow of schadenfreude after reading that passage. But I also know that it won’t be good for the American economy and the American people if the market for private health insurance entered an Obamacare-driven death spiral.

That being said, I also don’t want them to get any bailout cash.

In any event, if the health insurance companies have a meltdown, you could bet your last dollar that the crowd in Washington somehow will blame capitalism and say that the solution is single-payer health care (even though that system is so dysfunctional it was repealed by Bernie Sanders’ Vermont and even though that system leads to endless horrors in the United Kingdom).

P.S. In the interest of fairness, I will admit that there is a group that has benefited from Obamacare.

P.P.S. Actually, there’s another group, so we can say there are two winners from government-run healthcare.

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A Reaganesque Recipe to Reinvigorate China’s Economy?

The long-term trend in China is positive. Economic reforms beginning in the late 1970s have helped lift hundreds of millions of people out of abject poverty.

And thanks to decades of strong growth, living standards for ordinary Chinese citizens are far higher than they used to be. There’s still quite a way to go before China catches up to western nations, but the numbers keep improving.

That being said, China’s economy has hit a speed bump. The stock market’s recent performance has been less than impressive and economic growth has faltered.

Is this the beginning of the end of the Chinese miracle?

If you asked me about six months ago, I would have expressed pessimism. The government was intervening in financial markets to prop up prices, and that was after several years of failed Keynesian-style spending programs that were supposed to “stimulate” growth.

But maybe my gloom was premature.

An article in The Economist examines the new “supply-side” focus of China’s leader (h/t: Powerline).

Mr Xi has seemed to channel the late American president. He has been speaking openly for the first time of a need for “supply-side reforms”—a term echoing one made popular during Reagan’s presidency in the 1980s. It is now China’s hottest economic catchphrase (even featuring in a state-approved rap song, released on December 26th: “Reform the supply side and upgrade the economy,” goes one catchy line). …Mr Xi’s first mentions of the supply side, or gongjice, in two separate speeches in November, were not entirely a surprise. For a couple of years think-tanks affiliated with government ministries had been promoting the concept (helped by a new institute called the China Academy of New Supply-Side Economics).

Sounds encouraging, though it’s important to understand that there’s a big difference between rhetoric and reality.

Talking about “gongjice” is a good start, but are Chinese officials actually willing to reduce government’s economic footprint?

Perhaps.

Their hope is that such reforms will involve deep structural changes aimed at putting the economy on a sounder footing, rather than yet more stimulus. …Mr Xi’s aim may be to reinvigorate reforms that were endorsed by the Communist Party’s 370-member Central Committee in 2013, a year after he took over as China’s leader. They called for a “decisive” role to be given to market forces

Wow, the communists in China want free markets. Maybe there’s hope for some of America’s more statist politicians!

All kidding aside, there’s some evidence that officials in Beijing realize that the Keynesian experiment of recent years didn’t work any better than Obama’s 2009 spending binge.

Here’s more from the article.

Those who first pushed supply-side reform onto China’s political agenda want a clean break with the credit-driven past. Jia Kang, an outspoken researcher in the finance ministry who co-founded the new supply-side academy, defines the term in opposition to the short-term demand management that has often characterised China’s economic policy—the boosting of consumption and investment with the help of cheap money and dollops of government spending.The result of the old approach has been a steep rise in debt (about 250% of GDP and counting) and declining returns on investment. Supply-siders worry that it is creating a growing risk of stagnation, or even a full-blown economic crisis. Mr Jia says the government should focus instead on simplifying regulations to make labour, land and capital more productive. Making it easier for private companies to invest in sectors currently reserved for bloated state-run corporations would be a good place to start, some of his colleagues argue.

This is music to my ears.

Assuming President Xi is willing to adopt the types of reforms advocated by Mr. Jia, China’s economy will have a very bright future.

The key goal for policy makers in Beijing should be to improve China’s economic freedom score over the next 10 years by as much as it improved between 1980 and 2005.

In other words, if China adopts genuine free markets like Hong Kong and Singapore (and, to a lesser extent, Taiwan), then it will simply be a matter of time before living standards reach – and exceed – levels found in western nations.

I’ll close by outlining two challenges for Beijing.

First, entrenched interest groups will be an obstacle to pro-growth reform. In this sense, politics in China is very similar to politics in Greece, America, France, and South Africa. The sad reality is that too many people – all over the world – think it’s morally acceptable to obtain unearned wealth via the coercive power of government. Though there are reasons to be optimistic because a strong majority of Chinese people have expressed support for free markets.

Second, even if China’s leaders overcome the interest groups and adopt good long-run policy, there’s still the challenge of short-term dislocation and instability caused by so-called stimulus programs and easy-money policy from the central bank. Just like you can’t un-ring a bell, you can’t magically undo the malinvestments caused by those policies. So Beijing will need to weather a temporary economic storm at the same time it engage in long-run reform.

P.S. If you want to know a recipe for Chinese stagnation, simply look at the IMF’s recommendations.

P.P.S. Some senior Chinese officials have a very astute understanding of why welfare states don’t work.

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More Poor-to-Rich Redistribution from the Wacky World of Washington

I’ve written about how statist policies help the rich and hurt the poor.

And I’ve also pontificated on the destructive and foolish subsidies dispensed by the execrable Department of Agriculture.

Now let’s mix those two issues (though I hasten to add that this isn’t like math…two negatives don’t make a positive.

Here’s an infographic from the American Enterprise Institute showing how farm programs are a (yet another) perverse example of poor-to-rich redistribution.

I particularly like the part about 42 cents of administrative cost to give away 90 cents of other people’s money.

Actually, let me rephrase. I’m horrified and upset that we have this horrible system, so I only “like” that part of the infographic in the sense that it’s an effective way of showing the inefficiency, venality, and stupidity of government redistribution programs.

And don’t forget that if it’s bad to redistribute from rich to poor, it’s downright evil and despicable to redistribute from poor to rich.

P.S. On a different topic, I can’t resist sharing a few excerpts from a story out of Missouri.

Lobbyists who have sex with a Missouri lawmaker or a member of a lawmaker’s staff would have to disclose it to the Missouri Ethics Commission under a bill introduced Wednesday in the Missouri House. …sexual relations would have to be included on monthly lobbyist gift disclosure forms.

And you thought this cartoon was merely satirical.

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Ranking Presidents: Bill Clinton Was Closer to Ronald Reagan than Barack Obama

I wouldn’t be completely distraught to have Clinton in the White House in 2017. But before concluding that I’ve lost my mind, I’m thinking of Bill Clinton, not his far more statist (though similarly dodgy) spouse.

You’ll see what I mean below.

In a column for National Review, Deroy Murdock has some fun by pointing out that Bill Clinton just unintentionally attacked Barack Obama.

Bill Clinton…unsealed an indictment against Obama’s economy. …Hillary’s “secret weapon” told Granite State voters Monday, “I think this election is about restoring broadly shared prosperity, rebuilding the middle class, giving kids the American Dream back.”

Why is this an attack against Obama?

For the simple reason that we haven’t had “broadly shared prosperity” during the Obama years.

…a far-left Democrat has been president for the past seven years. The economic stagnation that Clinton critiqued is Obama’s. In Obama’s first or second year, Clinton might have managed to blame Baby Bush’s massive spending, red tape, and nationalizations for America’s economic woes and middle-class anxieties. But in Obama’s seventh year, this excuse has rusted. Obamanomics has narrowed prosperity, dismantled the middle class, and snatched the American Dream from America’s kids.

Deroy then compared the economic recovery America enjoyed under Reagan with the far-less-robust recovery taking place today.

In the 25 quarters since the Great Recession, Obama’s average, inflation-adjusted annual Gross Domestic Product growth has limped ahead at 2.2 percent. During Ronald Reagan’s equivalent interval, which began in the fourth quarter of 1982, such GDP growth galloped at 4.8 percent. …The total-output gap between Reagan and Obama is a whopping $10.6 trillion. …Under Reagan, private-sector jobs expanded 23.6 percent, versus the average recovery’s 17.0 percent, and 11.6 percent under Obama — less than half of Reagan’s performance. If Obama had equaled Reagan, America would enjoy some 12.9 million additional private-sector jobs. …Under Reagan, real after-tax income per person grew 3.1 percent, compared with 2.5 percent growth in an average recovery, and 1.2 percent under Obama. Had Obama delivered like Reagan, every American would have accumulated an extra $21,306 since June 2009.

All of this analysis is music to my ears and echoes some of the points I’ve made when comparing Reagan and Obama.

But I want to augment this analysis by adding Bill Clinton to the mix.

And I want to make this addition because there’s a very strong case to be made that we actually had fairly good policy during his tenure. Economic freedom increased because the one significantly bad piece of policy (the failed 1993 tax hike) was more than offset by lots of good policy.

Here’s a chart I put together showing the pro-market policies that were adopted during the Clinton years along with the one bad policy. Seems like a slam dunk.

At this point, I should acknowledge that none of this means that Bill Clinton deserves credit for the good policies. Most of the good reforms – such as 1990s spending restraint – were adopted in spite of what he wanted.

But at least he allowed those policies to go through. Unlike Obama, he was willing to be practical.

In any event, what matters is that we had better policy under Clinton than under Obama. And that’s why it’s useful to compare economic performance during those periods.

The Minneapolis Federal Reserve has a very interesting and useful webpage (at least to wonks) that allows users to compare various recoveries on the basis of GDP growth and job creation.

I’ve used this data to compare Reagan and Obama, so now let’s add the Clinton years to the mix. The following two charts from the Minneapolis Fed show the post-1981 recovery in blue, the post-1990 recovery in yellow, and the post-2007 recovery in red.

These numbers don’t match up exactly with when presidents took office, but it’s nonetheless apparent that we got the best performance under Reagan, and also that Clinton was much better than Obama.

Here’s the chart with the job numbers.

And here are the numbers for gross domestic product.

Here’s the bottom line.

Party labels don’t matter. Policy is what counts.

When the burden of government expands, like we saw with Jimmy Carter and Barack Obama on the Democrat side, but also with Richard Nixon, George H.W. Bush, and George W. Bush on the Republican side, the economy under-performs.

Similarly, when the burden of government is reduced, like we saw under Bill Clinton and Ronald Reagan, the economy enjoys relative prosperity.

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The State of Liberty in America

Okay, the title for today’s column is a bit grandiose. It implies weighty and ponderous analysis of America’s ever-growing entitlement state and potentially dour predictions about when we reach a tipping point of too much dependency.

But let’s focus on the short run, which isn’t quite so depressing. I was one of John Stossel’s guests as we looked at what happened in 2015 and gave a sober assessment of whether the United States is moving in the right direction or wrong direction.

If you don’t want to watch 30-plus minutes, here are the highlights.

I’ll start with what has me worried and/or glum.

According to the political betting markets (which I feel are more accurate than polls), Donald Trump’s chances keep increasing. I don’t feel confident, however, that he would shrink the size and scope of government if he made it to the White House. And he’s using up the oxygen of candidates who (while imperfect) seem more sincerely interested in advancing economic liberty.

I see little hope of fixing a refugee program that lures newcomers into welfare dependency (and may breed terrorism by creating a dispiriting environment of helplessness).

Speaking of which, as government gets bigger and bigger, it becomes even less competent about fulfilling legitimate responsibilities such as thwarting people who want to kill us.

Here’s what I’m happy and/or optimistic about.

People are displeased about what’s happening in Washington, and it’s healthy for there to be hostility and distrust toward government.

There’s a real opportunity for genuine entitlement reform in 2017.

American society is becoming more tolerant. As I argued on the program, I don’t care whether people approve of gays or pot smoking, but I do want to be part of a society that (unlike Iran!) doesn’t persecute or harass people for behaviors or beliefs that don’t harm others.

So some good things are happening.

Though I reserve the right to be really depressed later this year.

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Two Lessons from the Oregon Standoff: The Federal Government Is Thuggish and Owns too Much of America’s Land

When I first read about armed protesters taking over a federal building in Oregon, I thought some nutjobs were about to cause some real trouble. Was this a right-wing version of the loons from the Occupy Wall Street movement, only with guns?

Then I learned that the “federal building” was nothing more than a remote and unoccupied structure in a wildlife refuge, making this story a molehill rather than a mountain.

Now I’m learning that the ostensible nutjobs have some very genuine grievances, specifically about the way the Hammond family has been viciously mistreated by the federal government.

David French, an attorney and veteran, has a column in National Review that looks at why folks in Oregon are upset with Washington.

…what if they’re right? What if the government viciously and unjustly prosecuted a rancher family so as to drive them from their land? Then protest, including civil disobedience, would be not just understandable but moral, and maybe even necessary. …Read the court documents in the case that triggered the protest… What emerges is a picture of a federal agency that will use any means necessary, including abusing federal anti-terrorism statutes, to increase government landholdings.

Here’s his summary of the situation.

The story…begins…with the creation and expansion of the Malheur National Wildlife Refuge, a tract of federal land…The federal government has since expanded…in part by buying adjacent private land. Protesters allege that when private landowners refused to sell, the federal government got aggressive, diverting water during the 1980s into the “rising Malheur lakes.” Eventually, the lakes flooded “homes, corrals, barns, and graze-land.” Ranchers who were “broke and destroyed” then “begged” the government to buy their “useless ranches.” …the Hammonds were among the few private landowners who remained adjacent to the Refuge. …the government then began a campaign of harassment designed to force the family to sell its land, a beginning with barricaded roads and arbitrarily revoked grazing permits and culminating in an absurd anti-terrorism prosecution based largely on two “arsons” that began on private land but spread to the Refuge.

Arson sounds serious, but French explains that it’s not what city folks assume when they hear that word.

While “arsons” might sound suspicious to urban ears, anyone familiar with land management…knows that land must sometime be burned to stop the spread of invasive species and prevent or fight destructive wildfires. Indeed, the federal government frequently starts its own fires.

Here’s the part that’s most disturbing. David explains how the federal government used a sledgehammer to go after a fly.

In 2010 — almost nine years after the 2001 burn — the government filed a 19-count indictment against the Hammonds that included charges under the Federal Anti-terrorism and Effective Death Penalty Act…the Hammonds and the prosecution reached a plea agreement in which the Hammonds agreed to waive their appeal rights and accept the jury’s verdict. It was their understanding that the plea agreement would end the case. At sentencing, the trial court refused to apply the mandatory-minimum sentence, holding that five years in prison would be “grossly disproportionate to the severity of the offenses”… The federal government, however, was not content to let the matter rest. Despite the absence of any meaningful damage to federal land, the U.S. Attorney appealed the trial judge’s sentencing decision… the Ninth Circuit Court of Appeals…ruled against… The Hammonds were ordered back to prison.

And here’s his bottom line.

There’s a clear argument that the government engaged in an overzealous, vindictive prosecution here. By no stretch of the imagination were the Hammonds terrorists, yet they were prosecuted under an anti-terrorism statute. …To the outside observer, it appears the government has attempted to crush private homeowners and destroy their livelihood in a quest for even more land. If that’s the case, civil disobedience is a valuable course of action. …I sympathize with the ranchers’ fury, and I’m moved by the Hammonds’ plight. …now they’re off to prison once again — not because they had to go or because they harmed any other person but because the federal government has pursued them like a pack of wolves.

I would have said a pack of hyenas, but that’s a rhetorical difference.

What matters is that the federal government has behaved reprehensibly.

The Wall Street Journal also opined about the standoff, citing the federal government’s brutish efforts to grab private land.

…armed occupation of federal buildings is inexcusable, but so are federal land-management abuses and prosecutorial overreach. …The drama is bringing attention to legitimate grievances, especially the appalling federal treatment of the Hammond family. …The government has…been on a voracious land-and-water grab, coercing the area’s once-thriving ranchers to sell. The feds have revoked dozens of grazing permits and raised the price of the few it issues. It has mismanaged the area’s water, allowing ranchlands to flood. It has harassed landowners with regulatory actions that raise the cost of ranching, then has bought out private landowners to more than double the refuge’s size. …Many in rural Oregon view this as a government vendetta. …The ideology of “national” land has become the club to punish private landowners who are the best source of economic stability and conservation. The Bundy occupation of federal land can’t be tolerated, but the growing Western opposition to government harassment of private landowners ought to be a source of political concern.

Amen.

By the way, this doesn’t mean that the protesters automatically are right about being victimized. Yes, in some cases, federal bureaucrats are grossly mistreating folks. But in other cases, ranchers may be fleecing taxpayers because of implicit subsidies for things like grazing rights on federal land and water rights.

Moreover, according to CNN, the Bundy family (which is leading the sit-in at the wildlife refuge) has no problem mooching off taxpayers.

Ammon Bundy, a leader of the armed protesters who took over a federal building in Oregon, and his family are…not opposed to government and said that taking a six-figure loan from the Small Business Administration doesn’t conflict with his political philosophy.

But even if there are no pure good guys in this story, there is a pure solution.

And that’s to shrink the federal government’s ownership of land. As you can see from this Wikipedia map, Uncle Sam owns most of the land in America’s western states.

This makes no sense. It means potentially valuable land is locked up, which undermines the economy’s growth and efficiency.

Why not auction up a huge portion of that land so it’s in private hands where there will be proper incentives for wise stewardship (including conservation)?

And if politicians decide that some of the land should be set aside for parks, that should be the result of open and honest deliberation. Just as decisions to obtain private land (for genuine public purposes, not Kelo-style cronyism) should be legitimate and include proper compensation.

P.S. This story reminds me that I need to create a special page for “Victims of Government Thuggery” to augment the Bureaucrat Hall of Fame and Moocher Hall of Fame.

The Hammonds would be charter members.

It would also include people like Andy Johnson, Anthony Smelley, Charlie Engle, Tammy Cooper, Nancy Black, Russ Caswell, Jacques Wajsfelner, Jeff Councelller, Eric Garner, Martha Boneta, Carole Hinders, Salvatore Culosi, and James Lieto, as well as the Sierra Pacific Company and the entire Meitev family.

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The White House Swings (and Misses) on Gun Control…for the Umpteenth Time

In my analysis of the best and worst developments of 2015, I suggested that growing resistance to gun control is something we should celebrate.

Particularly since we have a President who is relentless (though fortunately ineffective) in launching ideological attacks on the Second Amendment.

Speaking of which, Obama staged a press event yesterday and announced his latest effort to make it harder for law-abiding people to protect themselves.

John Lott is the go-to person on these issues. Here’s some of what he wrote for National Review, starting with the fact that Obama (gee, what a surprise) is disregarding the law.

…current law is very clear. Only federally licensed gun dealers are required to conduct background checks, and only sellers whose “principal objective of livelihood and profit [is] the repetitive purchase and resale of firearms” are required to obtain a federal license. Anyone “who sells all or part of his personal collection of firearms” is specifically exempted from the licensing requirement. But that doesn’t matter to Obama, whose actions today will require many sellers to get a license if they sell even a single gun.

John also explains that background checks are not a panacea.

The current federal background-check system is a mess. …Hillary Clinton claimed that, “Since [the Brady Act] was passed, more than 2 million prohibited purchases have been prevented.” In reality, there were over 2 million “initial denials”… In 2010, the Department of Justice’s annual report on the National Instant Criminal Background Check System (NICS) showed that 94 percent of “initial denials” were dropped after the first internal fact check. A 2004 review by Congress found that another two percent were dropped when the cases were sent out to BATFE field offices. Many more cases were dropped during the three remaining stages of review. …If a private company’s criminal-background checks on employees failed at anything close to the same rate, they’d be sued out of business in a heartbeat.

And what about the notion of requiring sellers retain information on gun buyers?

Well, this back-door form of registration doesn’t provide seem very helpful in helping the fight against real crime.

Police can’t seem to point to a single instance in which gun registration has helped them solve a crime. During a recent deposition, D.C. police chief Cathy Lanier said she couldn’t “recall any specific instance where registration records were used to determine who committed a crime.” Police in Hawaii, Canada, and other places have made similar admissions.

Lott explains in the article that the system could be improved in ways that would make it harder for the wrong people to get guns, but he says that productive changes aren’t feasible because of the left’s real motive.

…their real aim is to reduce gun ownership, not to stop crime.

This is spot on. Indeed, I don’t trust the left of climate issues for similar reasons. What our statist friends say and what they really want are two different things.

Moreover, their proposed “solutions” don’t even solve the problems that they say they want to address.

Remember the video from last month, which featured a White House official admitting that none of Obama’s proposed policies would have stopped a single mass shooter from getting weapons, and that not a single mass shooter has been on the Administration’s no-fly list or terrorist watch list?

Well, in the words of Yogi Berra, it’s deja vu all over again. These blurbs from an Associated Press story tell us everything we need to know about the President’s latest proposals.

The gun control measures a tearful President Barack Obama announced Tuesday would not have prevented the slaughters of 20 first-graders at Sandy Hook Elementary School in Newtown, Connecticut, or 14 county workers at a holiday party in San Bernardino, California. …The shooters at Sandy Hook and San Bernardino used weapons bought by others, shielding them from background checks. In other cases, the shooters legally bought guns. …In Aurora, Colorado, and at the Navy Yard in Washington, D.C., men undergoing mental health treatment were cleared to buy weapons because federal background checks looked to criminal histories and court-ordered commitments for signs of mental illness.

Since we’re on this topic, here’s my recent interview on gun control.

As you can see, I’m doing a bit of a victory dance. It’s great that the American people won’t go along with the left, even if it means they have to engage in civil disobedience.

By the way, I goofed in discussing the poll on banning so-called assault weapons. The actual margin of opposition is six points (50-44) rather than fourteen points (54-40). Though I guess transposing a couple of numbers is trivial compared to the $16 trillion mistake I once made in an interview.

In my humble opinion, the most important point from the interview is that (as Mark Steyn explained in amusing fashion) you can’t have effective and competent government unless it’s also small government.

Let’s close with some humor. Here’s the NRA’s satirical take on Hillary Clinton trying to put together her resolutions for 2016 (h/t: Washington Examiner).

And here are some excerpts from an article from The Onion about a new gun-sharing program for the people of Chicago.

Touting the program’s convenience and affordability, Chicago officials unveiled Monday the city’s new gun-sharing service, “QuikShot,” which allows individuals to check out a loaded firearm for short periods of time. The municipal initiative, through which users can rent semiautomatic pistols, shotguns, rifles, and submachine guns at more than 250 self-service kiosks, has reportedly been designed to make firepower easily available to residents and tourists alike nearly everywhere within the city limits. …Users, however, are reportedly expected to provide their own protective Kevlar body armor.

Too bad it’s not really true.

If it was, maybe there wouldn’t be this giant gap between Chicago and Houston.

P.S. If you want common sense on guns, most cops have the right idea, as do some police chiefs.

P.P.S. And even some leftists, as you can see here, here, and here.

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With a Bold and Pure Flat Tax, Ben Carson Sets the Standard for Pro-Growth Reform

When I compared the tax reform proposals of various 2016 presidential candidates last month, Ben Carson got the best grade by a slight margin.

But I’ve now decided to boost his overall grade from a B+ to A-, or perhaps even A, because he’s finally released details and that means his grade for “specificity” jumps from a C to A-.

Here’s some of what’s been reported in the Wall Street Journal.

Republican presidential candidate Ben Carson on Monday called for imposing a 14.9% flat tax rate on income, ending taxes on capital gains and dividends and abolishing the charitable deduction and all tax credits.

By the way, the reporter goofed. Carson is proposing to end double taxation of dividends and capital gains, but all income would be taxed. What the reporter should have explained is that capital and business income would be taxed only one time.

But I’m digressing. Let’s review some additional details.

Mr. Carson’s flat tax would apply only to income above 150% of the poverty level… In some respects, Mr. Carson’s plan is similar to those of the other candidates, all of whom want to lower tax rates… But he goes farther, particularly with his willingness to rip up parts of the tax system that have been in place for a century. …In addition to eliminating the charitable deduction and investment taxation, Mr. Carson would also repeal the estate tax, the mortgage-interest deduction, the state and local tax deduction,  depreciation rules and the alternative minimum tax.

Wow, no distorting preferences for charity or housing. And no double taxation of any form, along with expensing instead of depreciation. Very impressive.

Carson has basically put forth a pure version of the plan first proposed by economists at Stanford University’s Hoover Institution.

Perhaps most important of all, Carson’s plan is a flat tax and just a flat tax. He doesn’t create any new taxes that could backfire in the future.

Here’s what the Carson campaign wrote about his flat tax compared to the plans put forth by Rand Paul and Ted Cruz.

Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes. Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT). Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.

I would have used different language, warning about the danger of a much-higher future fiscal burden because Washington would have both an income tax and a VAT, but the bottom line is that I like Carson’s plan because the worst outcome is that future politicians might eventually recreate the current income tax.

What I don’t like about the Paul and Cruz plans, by contrast, is that future politicians could much more easily turn America into France or Greece.

Here’s my video that explains why the flat tax is the best system (at least until we shrink the federal government to such a degree that we no longer need any form of broad-based taxation).

P.S. If you want to get hyper-technical, Carson’s plan may not be a pure flat tax because he would require a very small payment from everybody (akin to what Governor Bobby Jindal proposed). Though if the “de minimis” payment is a fixed amount (say $50 per adult) rather than a second rate (say 1% on the poor), then I certainly would argue it qualifies as being pure.

P.P.S. Carson still has a chance to move his overall grade to A or A+ if he makes the plan viable by proposing an equally detailed plan (presumably consisting of genuine entitlement reform and meaningful spending caps) to deal with the problem of excessive government spending.

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From England, Great Moments in Government-Run Dentistry

In 2009, Paul Krugman assured his readers that government-run healthcare was a good idea, writing that “In Britain, the government itself runs the hospitals and employs the doctors. We’ve all heard scare stories about how that works in practice; these stories are false.”

I guess one could argue that the determination of “scare stories,” like beauty, is in the eye of the beholder.

But if I was writhing in agony on a street because of a broken leg, I wouldn’t be happy with a healthcare system that told me I didn’t need an ambulance.

And if I was part of a system that rewarded hospitals for letting old people die, I might be tempted to say that was a scary system.

Moreover, I would be understandably irked if my I was stuck with a system for healthcare that treated patients with callous disregard.

But if you’re wealthy and well-connected, then perhaps you don’t think these results are scary because you know you’ll always be able to jump the queue in a government-run system and get good treatment for yourself.

In any event, it’s not just the healthcare system that’s scary on the other side of the Atlantic.

A report in the Telegraph paints a grim picture of dental care in the United Kingdom

Dental health standards are falling to “Third World” levels in parts of England because of a crisis of access to NHS treatment, more than 400 dentists claim today.In a letter to The Telegraph, a coalition of professionals from across the country argues that the system is “unfit for purpose” with millions of people seemingly going for long periods without even seeing a dentist, or ignorant of basic dental hygiene.The signatories accuse successive governments of hiding the problem behind a veil of spin and denial. They point to official figures showing large numbers of primary school children having to be admitted to hospital to be treated for serious tooth decay and other dental problems, many of which, they say, could be easily prevented.

As you might expect, the bureaucracy claims everything is just fine.

NHS England denied that there is a crisis…a spokeswoman for NHS England insisted: “These claims are wrong – more patients are getting the dental care they need, and 93 per cent of people got an NHS dental appointment when they wanted one in the last 24 months.”

But the numbers tell a different story.

NHS figures show that almost half the adult population of England (48 per cent) and a third (31 per cent) of children have not seen a dentist within two years. Crucially almost 62,500 people are admitted to hospital in England per year because of tooth decay – three quarters of them, or 46,400, children. …“The NHS dental system in England is unfit for purpose,” the dentists wrote. “Far from improving, the situation has worsened to such an extent that charity groups normally associated with providing dental care in Third World arenas now have to do so in England.

None of this sounds very good, though let’s acknowledge that the dentists in the U.K. are an interest group that presumably wants to get a bigger slice of government money.

So they presumably would have an incentive to exaggerate the downside of British dental care.

But this underscores the problem with government takeover of a sector. Instead of a system of voluntary and beneficial exchange, you suddenly have a zero-sum, third-party-payer-driven system where consumers, providers, and taxpayers suddenly have an incentive to squabble.

P.S. For other U.K. “scare stories,” see here, here, here, here, here, here, here,here, here, here, here, here, here, here, here, here, here and here.

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Brazil and Mitchell’s Theorem of Societal Collapse

I remember feeling like an outlier a few years ago when so many people were waxing rhapsodic about a glowing economic outlook for Brazil, Russia, India, China, and South Africa. These so-called BRICS nations were enjoying some decent growth at the time, but I was not optimistic about their long-run prospects because they all suffered from too much statism according to the rankings from Economic Freedom of the World.

Well, the long run has arrived, at least to some degree. All of these nations have hit some serious speed bumps.

I’ve previously written about the economic challenges now being faced by China and South Africa. Today, let’s focus on Brazil.

Here’s some very dismal but accurate analysis from an article in this week’s Economist (h/t: Tyler Cowen).

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

And why is Brazil’s economy is so much trouble?

Two words: Excessive government.

…the federal constitution of 1988… This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending. Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. …government expenditure as a share of output rose in 2015. …Taxes already consume 36% of GDP, up from a quarter in 1991.

Ugh, what a grim set of numbers. Moreover, the pension system is terrible, as we discussed a few months ago.

And here’s some additional analysis from last week’s issue, which also highlights the negative impact of too much government.

Brazil faces political and economic disaster. …Ms Rousseff and her left-wing Workers’ Party (PT) have made a bad situation much worse. During her first term, in 2011-14, she spent extravagantly and unwisely on higher pensions.. The minimum benefit is the same as the minimum wage, which has risen by nearly 90% in real terms over the past decade. Women typically retire when they are 50 and men stop work at 55, nearly a decade earlier than the average in rich countries… A typical manufacturing firm spends 2,600 hours a year complying with the country’s ungainly tax code; the Latin American average is 356. Labour laws modelled on those of Mussolini make it expensive for firms to fire even incompetent employees. ….Because it is so hard to reform, Brazil’s public sector rivals European welfare states for size but emerging ones for inefficiency. Long a drain on economic vitality, Brazil’s overbearing state is now a chief cause of the fiscal crisis.

All this sounds very grim, but I’m going to argue that it’s even worse than it sounds.

In part, the problems are similar to what is found in so many nations facing economic challenges.

First, government is growing faster than the private sector. The fact that government spending now consumes twice as much of the economy’s output today as it did back in 1988 means that politicians have been repeatedly (and vigorously!) violating my Golden Rule.

Second, there’s too much government intervention. A nation that models any of its policies on Mussolini-style fascism obviously is making a big mistake since the net result is an economy burdened by corrupt cronyism (sadly, a common problem in Latin America).

But there’s another reason to be down on Brazil, and it is far more discouraging.

Third, the social capital of the country has been eroded. Simply stated, there are too many people (as data from the 2014 election reveal) who view government as a vehicle for personal (and unearned) enrichment.

And when this third problem develops, it’s all but certain that a nation is doomed. After all, many nations have reversed bad fiscal policy. And many nations have reduced government intervention. But fixing the culture of a people is like putting toothpaste back in a tube.

Indeed, I’m going to augment my list of pithy adages. In addition to Mitchell’s Golden Rule and Mitchell’s Law, we not have Mitchell’s Theorem of Societal Collapse.

Like my other adages, I’m not pretending there’s any original insight. In this case, I’ve simply come up with a different way of saying the line attributed (erroneously, from what I can tell) to either Benjamin Franklin or Alexis de Tocqueville: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. ”

P.S. I’m worried about the degree to which America has traveled down the path toward societal decay, but I don’t think we’ve yet reached a tipping point.

P.P.S. While I’m not a fan of Brazilian economic policy, I actually defended that nation when Hillary Clinton applauded Brazil for being more statist than it actually is.

P.P.P.S. Being less statist than Hillary is not exactly something to brag about, so I will note that Brazil deserves credit for moving in the right direction on gun rights and also having some semi-honest left-wing politicians.

P.P.P.P.S. Let’s end, however, with some bad news. Recall from above that Brazil has a very statist constitution. Well, it’s always possible to make a bad thing even worse. And that’s what some Brazilian politicians are trying to do with a proposal to have government somehow create a “right to happiness.”

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Free Markets Are the Way to Create Prosperity, not Foreign Aid

There are many reasons why I’m not a big fan of the United Nations. Like other international bureaucracies, it supports statist policies (higher taxes, gun control, regulation, etc) that hinder economic development and limit human liberty by increasing the burden of government

Some people tell me that I shouldn’t be too critical because the U.N. also helps poor people with foreign aid. Indeed, the U.N. has a very active project to encourage rich nations to contribute 0.7 percent of their economic output to developing nations.

I generally respond to these (in some cases) well-meaning folks by explaining that there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.

An article in The Economist succinctly summarizes the issue. It starts with the rationale for foreign aid.

After the second world war, a new “development economics” came to dominate policymaking…, often at the urging of international institutions such as the World Bank. It argued that poor countries were victims of a vicious circle of poverty… The answer? Rich countries should provide the capital, in the form of foreign aid. …poor-country governments should plan their economies and…competition should be restricted through monopoly rights and barriers to foreign trade.

It then describes the revolutionary thinking of the late Peter Thomas Bauer, a Hungarian-born British economist who said the developing world needed economic freedom rather than handouts.

Lord Bauer set out alternative theories that, from the 1950s to the 1970s, were heresy. …Opportunities for private profit, not government plans, held the key to development. Governments had the limited though crucial role of protecting property rights, enforcing contracts, treating everybody equally before the law, minimising inflation and keeping taxes low.

Moreover, Bauer explained that foreign aid generally had a negative effect because it put resources in the hands of government, thus leveraging more statism. Which is the last thing these nations needed.

Aid politicised economies, directing money into the hands of governments rather than towards profitable business. Interest groups then fought to control this money rather than engage in productive activity. Aid increased the patronage and power of the recipient governments, which often pursued policies that stifled entrepreneurship and market forces. Indeed, aid had proved “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”

Writing for the U.K.-based Spectator, Daron Acemoglu and James Robinson explain that foreign aid has a very poor track record.

The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid.

Meanwhile, the nations getting the most handouts have remained mired in poverty.

In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. …huge aid flows appear to have done little to change the development trajectories of poor countries… Why? …economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country. …The problem is that their aspirations are blocked today…by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them.

What exactly are “extractive institutions”?

At the top of the list would be bad government policy, which creates a system in which politicians, bureaucrats, and insiders get unearned wealth via corruption and cronyism.

The authors give some powerful examples.

To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’. To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. …every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.

I’d also include the wealthy Venezuelans who have used socialism as a vehicle to enrich themselves while impoverishing ordinary people.

To be sure, we have examples of insider favoritism and undeserved wealth in rich nations, but it’s a matter of degree. Cronyism is an undesirable feature of our economy, but it’s a defining feature of nations in the developing world.

So what does all this mean?

Acemoglu and Robinson basically reach the same conclusion as Lord Bauer.

When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. …Many kleptocratic dictators such as Congo’s Mobutu Sese Seko have been propped up by foreign aid.

Now let’s shift from looking at nations where failure has been subsidized by foreign aid and instead consider the success stories of economic development. Are there any lessons we can learn?

Well, if you look at the ranking from Economic Freedom of the World, you’ll see that the formerly poor East Asian jurisdictions that are now rich also have something else in common. They rank very high or somewhat high for economic freedom

In other words, there is a recipe for growth and prosperity. Nations that restrain the size of government and allow markets to flourish enjoy growth.

Which is exactly the message of this video.

By the way, you don’t need perfection to get climb out of poverty. China still doesn’t rank very high in Economic Freedom of the World, but it has improved its position over the past few decades and that has helped lift hundreds of millions of people out of abject poverty. Same with India.

Yes, both nations are capable of much stronger growth with further improvements in policy, but it’s nonetheless good news that there’s been considerable improvement.

Let’s address one more issue that arises in the debate about foreign aid.

Professor Noah Smith of Stony Brook University, in a column for Bloomberg, debunks the myth that poverty in the developing world is a legacy of colonialism.

…the stolen-wealth theory is wrong. Oh, it’s absolutely true that colonial powers stole natural resources from the lands they conquered. …the stolen-wealth theory is wrong…because the theory doesn’t explain the global distribution of income today. …The easiest way to see this is to observe all the rich countries that never had the chance to plunder colonies. Germany, Italy, Sweden, Denmark and Japan had colonial empires for only the very briefest of moments, and their greatest eras of development came before and after those colonial episodes. Switzerland, Finland, and Austria never had colonies. And South Korea, Taiwan, Singapore and Hong Kong were themselves colonies of other powers. Yet today they are very rich. They did it not by theft, but by working hard, being creative, and having good institutions.

Amen. And notice that he also mentions the tiger economies of East Asia.

P.S. Given what I wrote the other day about the statist proclivities of the OECD, here’s an item that shouldn’t surprise anyone.

Even though South Africa already has an excessive burden of government, the Paris-based bureaucracy wants that nation to impose even higher taxes to fund even bigger government.

I’m not joking. The OECD just put out a document entitled, “How can South Africa’s tax system meet revenue raising challenges?” and here are some blurbs from the abstract.

…considerable revenues will be needed in the years ahead to expand social spending and infrastructure in order to raise growth and well-being. …there is some scope to raise further revenue, particularly through broadening the base of these taxes further. …An important additional source of revenue is environmentally related taxes.

Yup, you read correctly. The bureaucrats at the OECD want people to believe that South Africa’s main challenge is that government isn’t big enough. Heck, they actually want readers to believe that a more bloated public sector will “raise growth and well-being”.

Huh, bigger government is associated with more growth?!? I guess that’s why Singapore is so poor and Cuba is so rich.

What’s especially remarkable about the OECD’s anti-empirical approach is that fiscal policy is where South Africa get its lowest score in Economic Freedom of the World. It’s almost as if the tax-loving bureaucrats at the OECD are trying to keep that country from prospering.

And we’re subsidizing this nonsense to the tune of about $100 million per year.

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