Archive for February, 2016

I thought the Organization for Economic Cooperation and Development had cemented its status as the world’s worst international bureaucracy when it called for a Keynesian spending binge even though the global economy is still suffering from previous schemes for government “stimulus.”

But the International Monetary Fund is causing me to reconsider my views.

First, some background about the IMF. Almost all of the problems occur when the political appointees at the top of the organization make policy choices. That’s when you get the IMF’s version of junk science, with laughable claims about inequality and growth, bizarrely inconsistent arguments about infrastructure spending, calls for massive energy taxes,

By contrast, you do get some worthwhile research from the career economists (on issues such as spending caps, fiscal decentralization, and the Laffer Curve).

But that kind of professional analysis gets almost no attention. The IMF’s grossly overpaid (and untaxed!) Managing Director seemingly devotes all her energy to pushing and publicizing bad policies.

The Wall Street Journal reports, for instance, that the IMF is following the OECD down the primrose path of fiscal recklessness and is also urging nations to throw good money after bad with another Keynesian spending spree.

The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday. …the IMF is pushing G-20 finance ministers and central bankers meeting in Shanghai later this week to agree on bold new commitments for public spending.

Fortunately, at least one major economy seems uninterested in the IMF’s snake-oil medicine.

The IMF’s calls will face some resistance in Shanghai. Fiscal hawk Germany has been reluctant to heed long-issued calls by the U.S., the IMF and others to help boost the eurozone’s weak recovery with public spending.

Hooray for the Germans. I don’t particularly like fiscal policy in that nation, but I at least give the Germans credit for understanding at the end of the day that 2 + 2 = 4.

I’m also hoping the British government, which is being pressured by the IMF, also resists pressure to adopt Dr. Kevorkian economic policy.

The International Monetary Fund has urged the UK to ease back on austerity… IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending… The Treasury declined to comment on the IMF report. The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.” …Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.

But you’ll be happy to know the IMF doesn’t discriminate.

It balances out calls for bad policy in the developed world with calls for bad policy in other places as well. And the one constant theme is that taxes always should be increased.

I wrote last year about how the IMF wants to sabotage China’s economy with tax hikes.

Well, here are some excerpts from a Dow Jones report on the IMF proposing higher tax burdens, tax harmonization, and bigger government in the Middle East.

The head of the International Monetary Fund on Monday urged energy exporters of the Middle East to raise more taxes… “These economies need to strengthen their fiscal frameworks…by boosting non-hydrocarbon sources of revenues,” Christine Lagarde said at a finance forum in the United Arab Emirates capital. …Ms. Lagarde called on the Persian Gulf states to introduce a valued added tax, which, even at a relatively low rate, could lift gross domestic product by 2%, she said. …Ms. Lagarde, who on Friday clinched a second five-year term as the IMF’s managing director, also urged governments in the region to consider raising corporate income taxes and even prepare for personal income taxes. Income taxes in particular could prove a sensitive move in the Gulf, which in recent decades has attracted millions of workers from abroad by offering, among other things, light-touch tax regimes. Ms. Lagarde also wants to discourage “overly aggressive tax competition” among countries that allow international companies and wealthy individuals to shift their wealth to lower tax destinations.

Wow, Ms. Lagarde may be the world’s most government-centric person, putting even Bernie Sanders in her dust.

She managed, in a single speech, to argue that higher taxes “strengthen…fiscal frameworks” even though that approach eventually leads to massive fiscal instability. She also apparently claimed that a value-added tax could boost economic output, an idea so utterly absurd that I hope the reporter simply mischaracterized her comments and that instead she merely asserted that a VAT could transfer an additional 2 percent of the economy’s output into government coffers. And she even urged the imposition of income taxes, which almost certainly would be a recipe for turning thriving economies such as Dubai back into backward jurisdictions where prosperity is limited to the oil-dependent ruling class.

And it goes without saying that the IMF wants to export bad policy to every corner of the world.

The IMF chief said taxation allows governments to mobilize their revenues. She noted, however, that the process can be undermined by “overly aggressive tax competition” among countries, and companies abusing the system of international taxation. …She argued that the automatic exchange of taxpayer information among governments could make it harder for businesses to follow the scheme.

And don’t forget that the IMF oftentimes will offer countries money to implement bad policy, like when the bureaucrats bribed Albania to get rid of its flat tax.

P.S. Now perhaps you’ll understand why I was so disappointed that last year’s budget deal included a provision to expand the IMF’s authority to push bad policy around the world.

P.P.S. In other words, American taxpayers are being forced to subsidize the IMF so it can advocate higher taxes on American taxpayers! Sort of like having to buy a gun for the robber who wants to steal your money.

P.P.P.S. Though I’ll also be grateful that the IMF inadvertently and accidentally provided some very powerful data against the value-added tax.

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Long-run trends are an enormously important – yet greatly underappreciated – feature of public policy.

  • Slight differences in growth can have enormous implications for a nation’s long-run prosperity.
  • Gradual shifts in population trends may determine whether a nation faces demographic decline.
  • Modest changes in the growth of government can make the difference between budgetary stability and fiscal crisis.
  • And migration patterns can impact a jurisdiction’s viability.

Or, in the case of California, its lack of viability. Simply stated, the Golden State is committing slow-motion suicide by discouraging jobs, entrepreneurs, investors, and workers.

Let’s look at some of the data. Carson Bruno of the Hoover Institution reviews data showing that the aspirational class is escaping California.

California’s consistent net domestic out-migration should be concerning to Sacramento as it develops state policy. As the adage goes, people vote with their feet and one thing is clear, more people are choosing to leave California than come. …Between 2004 and 2015, roughly 930,000 more people left California than moved to the Golden State… The biggest beneficiaries of California’s net loss are Arizona, Texas, Nevada, Oregon, and Washington. California is bleeding working young professional families. …those in the heart of their prime working-age are moving out. Moreover, while 18-to-24 year olds (college-age individuals) make up just 1% of the net domestic out-migrants, the percentage swells to 17% for recent college graduates (25 to 39 year olds).

And here’s why these long-run migration trends matter.

…while there is a narrative that the rich are fleeing California, the real flight is among the middle-class. …the Golden State’s oppressive tax burden – California ranks 6th, nationally, in state-local tax burdens – those living in California are hit with a variety of higher bills, which cuts into their bottom line. …which leads to a less economically productive environment and less tax revenue for the state and municipalities, but a need for more social services. And when coupled with the fact that immigrants – who are helping to drive population growth in California – tend to be, on average, less affluent and educated and also are more likely to need more social services, state, county, and municipal governments could find themselves under serious administrative and financial stress. …the state’s favorable climate and natural beauty can only anchor the working young professionals for so long.

We’re concentrating today on California, but other high-tax states are making the same mistake.

Here’s some data from a recent Gallup survey.

Residents living in states with the highest aggregated state tax burden are the most likely to report they would like to leave their state if they had the opportunity. Connecticut and New Jersey lead in the percentage of residents who would like to leave… Nearly half (46%) of Connecticut and New Jersey residents say they would like to leave their state if they had the opportunity. …States with growing populations typically have strong advantages, which include growing economies and a larger tax base. Gallup data indicate that states with the highest state tax burden may be vulnerable to migration out of the state…data suggest that even moderate reductions in the tax burden in these states could alleviate residents’ desire to leave the state.

Writing for the Orange County Register, Joel Kotkin explains how statist policies have created a moribund and unequal society.

…in the Middle Ages, and throughout much of Europe, conservatism meant something very different: a focus primarily on maintaining comfortable places for the gentry… California’s new conservatism, often misleadingly called progressivism, seeks to prevent change by discouraging everything – from the construction of new job-generating infrastructure to virtually any kind of family-friendly housing. …since 2000 the state has lost a net 1.7 million domestic migrants. …California’s middle class is being hammered. …Rather than a land of opportunity, our “new” California increasingly resembles a class-bound medieval society. …California is the most unequal state when it comes to well-being… Like a medieval cleric railing against sin, Brown seems somewhat unconcerned that his beloved “coercive power of the state” is also largely responsible for California’s high electricity prices, regulation-driven spikes in home values and the highest oil prices in the continental United States. Once the beacon of opportunity, California is becoming a graveyard for middle-class aspiration, particularly among the young.

In other words, class-warfare policies have a very negative impact_ on ordinary people.

Meanwhile, returning to California, a post at the American Interest ponders some of the grim implications of bad policy.

…many of the biggest, bluest states in the country—including New York, Illinois, and Massachusetts—have also experienced major exoduses over the last five years (although these outflows have been offset, to varying degrees, by foreign immigration). These large out-migrations represent serious policy failures… The new statistics out of California are a bad omen for the future of the state’s doctrinaire blue model governance. …if families and the young continue to flee California, the population will become older and less economically dynamic, creating a shortfall in tax revenue and possibly pressuring Sacramento raise rates even higher. Meanwhile, California faces a severe pension shortfall, both at the state and local level.

Here’s a map from the Tax Foundation showing top income tax rates in each state. If you remember what Carson Bruno wrote about California’s emigrants, you’ll notice that states with no income tax (Washington, Texas, and Nevada) are among the main beneficiaries.

So the moral of the story is that states with no income taxes are winning, attracting jobs and investment. And high-tax states like California are losing.

But remember that the most important variable, at least for purposes of today’s discussion, is how these migration trends impact long-run prosperity. More jobs and investment mean a bigger tax base, which means the legitimate and proper functions of a state government can be financed with a modest tax burden.

In states such as California, by contrast, even small levels of emigration begin to erode the tax base. And if emigration is a long-run trend (as is the case in California), there’s a very serious risk of a “death spiral” as politicians respond to a shrinking tax base by imposing even higher rates, which then results in even higher levels of emigration.

Think France and Greece and you’ll understand what that means in the long run.

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With both Hillary Clinton and Bernie Sanders agitating for higher taxes (and with more than a few Republicans also favoring more revenue because they don’t want to do any heavy lifting to restrain a growing burden of government), it’s time to examine the real-world evidence on what happens when politicians actually do get their hands on more money.

Is it true, as we are constantly told by the establishment, that higher tax burdens a necessary and practical way to reduce budget deficits and lower debt levels?

This is an empirical question rather than an ideological one, and the numbers from Europe (especially when looking at the data from the advanced nations that are most similar to the US) are especially persuasive.

I examined the European fiscal data back in 2012 to see whether the big increase in tax revenue starting in the late 1960s led to more red ink or less red ink.

You won’t be surprised to learn that giving more money to politicians didn’t lead to fiscal probity. The burden of taxation climbed by about 10-percentage points of economic output over four decades, but governments spent every single penny of the additional revenue.

They actually spent more than 100 percent of the additional revenue. The average debt burden in these Western European nations jumped from 45 percent of GDP to 60 percent of GDP.

I often share this data when giving speeches since it is powerful evidence that tax increases are not a practical way of dealing with debt and deficits.

But in recent years, audiences have begun to ask why I compare numbers from the late 1960s (1965-1969) with the data from the last half of last decade (2006-2010). What would the data show, they’ve asked, if I used more up-to-date numbers.

So it’s time to re-calculate the numbers using the latest data and share some new charts about what happened in Europe. Here’s the first chart, which shows on the left that there’s been a big increase in the tax burden over the past 45 years and shows on the right average debt levels at the beginning of the period. And I ask the rhetorical question about whether higher taxes led to less red ink.

Now here’s the updated answer.

What we find is that debt levels have soared. Not just from 45 percent of GDP to 60 percent of GDP, as shown by the 2012 numbers, but now to more than 80 percent of economic output.

In other words, we can confirm that the giant increase in the tax burden over the past few decades has backfired. And we can also confirm that the big income tax hikes and increases in value-added taxes in more recent years have made matters worse rather than better.

I can’t imagine that anyone needs any additional evidence that tax increases are misguided.

But just in case, let’s look at the findings in some newly released research from the European Central Bank.

Since the start of the sovereign debt crisis, in early 2010, many Euro area countries have adopted fiscal consolidation measures in an attempt to reduce fiscal imbalances and preserve their sovereign creditworthiness. Nonetheless, in most cases, fiscal consolidation did not result.

That doesn’t sound like good news.

I wonder whether it has anything to do with the fact that “fiscal consolidation” in Europe almost always means higher taxes? And, indeed, the ECB number crunchers have confirmed that the tax-hike approach is bad news.

The aim of this paper is to investigate the effects of fiscal consolidation on the general government debt-to-GDP ratio in order to assess whether and under which conditions self-defeating effects are likely to materialise… In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level.

The two scholars at the ECB then highlight the lessons to be learned.

…strategy is more likely to succeed when the consolidation strategy relies on a durable reduction of spending, whereas revenue-based consolidations do not appear to bring about a durable improvement in debt sustainability. Moreover, delaying fiscal consolidation until financial markets pressures threaten a country’s ability to issue debt, may have a cost in terms of a less sizeable reduction in the debt-to-GDP ratio for given consolidation effort, even if it is undertaken on the spending side. This is an important policy lesson also in view of the fact that revenue-based consolidations tend to be the preferred form of austerity, at least in the short run, given also the political costs that a durable reduction in government spending entail.

In other words, the bottom line is a) that tax hikes don’t work, b) reform is harder if you wait until a crisis has begun, and c) the real challenge is convincing politicians to do the right thing when they instinctively prefer tax hikes.

P.S. It’s worth pointing out that the value-added tax has generated much of the additional tax revenue (and therefore enabled much of the added burden of government spending) in Europe.

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When I point out that Puerto Rico got in trouble by allowing the burden of government spending to grow faster than the private economy, thus violating my Golden Rule, honest leftists will admit that’s true but then challenge me on what should happen next.

That’s a very fair – and difficult – question. The amount of government debt in Puerto Rico is so large that repayment would be a big challenge. In effect, today’s taxpayers and tomorrow’s taxpayers would suffer because of the reckless choices of yesterday’s politicians.

It could be done, to be sure, just like Greece could dig its way out of debt with a sufficient degree of spending restraint.

That being said, I’m not necessarily opposed to debt relief. Whether you call it default, restructuring, or something else, debt relief would give Puerto Rico a better chance of getting back on its feet. Moreover, I’m not exactly overflowing with sympathy for investors who lent money to Puerto Rico’s profligate government. Maybe they’ll be more prudent in the future if they lose some of their money today.

But here’s my quandary (and I feel the same way about Greece): I don’t mind debt relief if it’s part of a deal that actually produces better policy.

But I’m opposed to debt relief if it simply gives an irresponsible government “fiscal space” to maintain wasteful programs and other counterproductive forms of spending.

And I see very little evidence that Puerto Rico is interested in making the needed structural reforms to alter the long-run trend of ever-rising outlays.

Nor do I see any evidence that Puerto Rican officials are pushing for much-needed reforms in areas other than fiscal policy. Where’s the big push to get exempted from the Jones Act, a union-friendly piece of legislation that significantly increases the cost of shipping goods to and from the mainland? Where are the calls to get Puerto Rico an exemption from minimum wage laws that are harmful on the mainland but devastating in a less-developed economy?

These are some of the reasons why I don’t want to reward Puerto Rico’s feckless political class by granting debt relief.

And here’s something else to add to the list. Notwithstanding 40 centuries of evidence that price controls are a form of economic malpractice, the government has decided to use coercion to prohibit voluntary transactions between consenting adults.

The excuse is the Zika virus, but the result will be failure. Here’s some of what CNN is reporting.

The government of Puerto Rico has ordered a price freeze on condoms… Any store that hikes prices to try to capitalize on people’s fears of the virus will be fined up to $10,000. Other items on the price-freeze list: insect repellent, hand sanitizer and tissues. …The price gauging [sic] ban went into effect at the end of January on mosquito repellents. Condoms were added to the list in early February… “The price freeze remains in effect until after the emergency is over,” Nery Adames, Secretary of the Department of Consumer Affairs, tells CNN.

By the way, you’ll notice that the government didn’t address the one thing it legitimately could have done to reduce condom prices.

Condoms are subject to the island’s 11.5% sales tax, one of the highest in the nation.

But let’s focus on the policy of price controls.

With his usual clarity, Professor Don Boudreaux explains the consequences of these horrid restrictions on market forces.

 The price freeze will prevent the Zika-inspired rise in the demand for condoms from calling forth an increase in the quantity of condoms supplied to satisfy that higher demand.  The resulting shortage of condoms will prompt some people to wait in queues to buy condoms, cause other people to turn to black-market suppliers, and cause yet other people simply to not use condoms during sex.  Each of these consequences reflects the reality that the price freeze, rather than keeping the cost of condoms “cheap,” will raise that cost inordinately – and, in the process, further promote the spread of Zika.

Amen. Don is spot on about the negative consequences of allowing politicians and bureaucrats to interfere with market prices.

So we have a government “solution” that actually makes a problem worse.

Just as price controls have contributed to economic misery in Venezuela.

Or caused shortages after hurricanes in the United States.

Puerto Rico needs its version of Ludwig Erhard. Instead, it’s governed by people who apparently learned economics from Hugo Chavez.

P.S. Speaking of condoms, I hope I’m not the only one who is both amused and disgusted that politicians and bureaucrats simultaneously squander money to discover men don’t like poorly-fitting condoms while also imposing regulations that prevent condom companies from offering a greater variety of sizes.

P.P.S. Though I guess those examples of government foolishness are comparatively frugal compared to the “stimulus” grant that spent $6,000 per interview to discover why some men don’t get “stimulus.”

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I try to avoid certain issues because they’re simply not that interesting. And I figure if they bore me – even though I’m a policy wonk, then they probably would be even more painful for everyone else.

But every so often, I feel compelled to address a topic simply because the alternative is to let the other side propagate destructive economic myths.

That’s why I’ve written about arcane topics such as depreciation and carried interest.

In this spirit, it’s now time to write about “Glass-Steagall,” which is the shorthand way of referring to the provision of the Banking Act of 1933 that imposed a separation between commercial banking and investment banking.

This regulatory barrier has been relaxed over the years, in part by the Financial Services Modernization Act of 1999 (often known as Gramm-Leach-Bliley).

Our friends on the left are big fans of Glass-Steagall. They think the law fixed a problem that helped cause the Great Depression and they think its partial repeal is one of the reasons for the recent financial crisis.

Bernie Sanders, for instance, has made Glass-Steagall reinstatement one of his big issues, probably in part because Hillary Clinton’s husband signed the 1999 law that eased that regulatory burden.

That may or may not be smart politics for Senator Sanders, but it is based on economic illiteracy. Let’s look at what the experts say.

Peter Wallison of the American Enterprise Institute, for instance, offers some very important insights about Glass-Steagall and the financial crisis.

The so-called “repeal” of Glass-Steagall in 1999…had absolutely nothing to do with the financial crisis. The 1999 changes in one sector of Glass-Steagall Act made only one change in existing law: it permitted affiliations between commercial banks and investment banks. But by the time of the 2008 crisis, none of the large investment banks (like Goldman Sachs, Morgan Stanley or Lehman Brothers) had affiliated with any of the large commercial banks (like Citi, JP Morgan Chase or Bank of America). Commercial banks and investment banks had remained fierce competitors with one another right up to the time of Lehman Brothers’ bankruptcy. The simplest way to think about the financial crisis is that the largest investment banks and commercial banks got into financial trouble by acquiring and holding risky mortgages or mortgage backed securities based on these risky loans. This was permitted for both of them before Glass-Steagall was “repealed,” and it was permitted afterward. In other words, if Glass-Steagall had never been touched by Congress in any way, the financial crisis would have unfolded exactly as it did in 2008.


If the leftists are right and the partial repeal of Glass-Steagall was bad and destabilizing, shouldn’t they be able to point to some real-world evidence? To any real-world evidence? To a shred of real-world evidence?

Megan McArdle, writing for Bloomberg, also is baffled by the anti-empirical emotionalism of the Glass-Steagall crowd.

…those intrepid souls who continue to fiercely agitate for the return of the Glass-Steagall financial regulations…have become a powerful force in the Democratic Party. …there is a small problem It’s very hard to think of the mechanism by which the repeal of this rule made any significant contribution to the meltdown. …The problems appeared first at Bear Stearns, and then Lehman Brothers, straight investment banks and lenders like Countrywide.

By the way, there’s a bipartisan consensus on this matter.

Catherine Rampell of the Washington Post certainly couldn’t be called a libertarian or conservative, yet she also is flummoxed by the fixation on Glass-Steagall.

the Glass-Steagall Act…’s become the left’s litmus test for whether a politician is “tough” on Wall Street. …But Glass-Steagall had nothing to do with the 2008 financial crisis. …If the repealed provisions of Glass-Steagall had still been on the books, almost none of the institutions at the epicenter of the crisis would have been covered by it. Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley were basically stand-alone investment banks. AIG was an insurance company. Fannie Mae and Freddie Mac were government-sponsored entities that bought and securitized mortgages. Washington Mutual was a traditional savings-and-loan. And so on. Glass-Steagall, or the lack thereof, is a red herring.

Steven Pearlstein of the Washington Post – another columnist who has never been accused of being in love with free markets – is similarly baffled. And for the same reasons. The facts simply don’t match the left-wing narrative.

Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left. The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there. Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender. Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

The inescapable conclusion is that Glass-Steagall had nothing to do with the financial crisis.

Instead, the main causes of the 2008 meltdown were bad government policies, such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie Mac.

But even if you’re a leftist and want to say that the crisis was caused by “greed,” the various institutions that got burned by “greed” were not giant investment bank/commercial bank conglomerates.

Let’s cover two more issues. First, my colleague Mark Calabria points out that one of the core beliefs of the left simply isn’t true. Commercial banking isn’t always a safe and boring line of business (which therefore has to be protected from the vagaries of investment banking).

…the bizarre implicit assumption behind Glass-Steagall: that somehow commercial banking is risk free.  Anyone ever hear of the savings-and-loan crisis of the late 1980s and early 1990s?  No investment banking angle there.  How about the 400+ small and medium banks that failed in the recent crisis? According to the FDIC, not one of them was brought down by proprietary trading.

Second, let’s dispel the notion that the Great Depression was caused by – or exacerbated by – the pre-Glass-Steagall mixing of commercial banking and investment banking.

Stephen Miller of the Mercatus Center debunks this myth.

The narrative justifying the Banking Act of 1933 always derived from myths that large securities dealing banks caused the banking crisis during the Great Depression. The myths hold that: (1) securities dealing banks were more unstable and contributed to the Great Depression, and (2) securities dealing banks pushed people to purchase what turned out to be low-quality assets that performed poorly during the Great Depression. However, both myths have been disproven. For instance, on the first myth, a 1986 Rutgers University study found that banks involved in securities dealing were less likely to fail. …none of the 5,000 banks that failed during the 1920s had securities dealing affiliates. From 1930 to 1933, more than 25 percent of all national banks failed, but the number of failures among those with securities dealing affiliates was less than 10 percent. On the second myth, …a 1994 study in the American Economic Review found evidence to the contrary — that the public understood this conflict of interest, which resulted in commercial banks that dealt securities prior to the Great Depression tending to underwrite high quality assets. These banks tended to do better during the Great Depression.

Oh, and by the way, the Great Depression wasn’t caused by deregulated markets. The real blame belongs to all the policy mistakes made by Herbert Hoover and Franklin Roosevelt.

So here’s the bottom line.

Glass-Steagall is a meaningless distraction, but restoration of that law nonetheless attracts support from know-nothings who have a religious-type belief that financial markets are intrinsically evil.

P.S. Financial markets are imperfect, of course, but they’re only evil when investors and institutions want private profits and socialized losses.

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James Pethokoukis of the American Enterprise Institute has an intriguing idea. Instead of a regular debate, he would like presidential candidates to respond to a handful of charts from the recent Economic Report of the President that supposedly highlight very important issues.

We’d quickly find out — I hope — who has real deep knowledge on key economic issues and challenges facing America.

I don’t always agree with Pethokoukis’ views (see here, here, and here), but he has a very good idea. He may not have picked the charts I would rank as most important, but I think 5 of the 6 charts he shared are worthy of discussion (I’m not persuaded that the one about government R&D spending has much meaning).

Let’s look at them and elaborate on why they are important.

We’ll start with the chart of labor productivity growth, which has been declining over time.

I think this is a very important chart since productivity growth is a good proxy for the growth in living standards (workers, especially in the long run, get paid on the basis of what they produce).

So what should we think about the depressing trend of declining productivity numbers?

First, some of it is unavoidable. The United States has an advanced economy and we don’t have a lot of “low-hanging fruit” to exploit. Simply stated, it’s much easier to boost labor productivity in a poor country.

Second, to the degree we want to boost labor productivity, more investment is the best option. That’s why I’m so critical of class-warfare policies that penalize capital formation. When politicians go after the “evil” and “bad” rich people who save and invest, workers wind up being victimized because there’s less saving and investment.

But this isn’t just an issue of machines, equipment, and technology. We also should consider human capital, which is why it is a horrible scandal that America spends more on education – on a per-capita basis – than any other nation, yet we get very mediocre results because of a government monopoly school system that – at least in practice – seems designed to protect the privileges of teacher unions.

The next chart looks at the number of companies entering and exiting the economy. As you can see, the number of businesses that are disappearing is relatively stable, but there’s been a disturbing decline in the rate of new-company formation.

As with the first chart, some of this may simply be an inevitable trend. In a mature economy, perhaps the rate of entrepreneurship declines?

But that’s not intuitively obvious, and I certainly haven’t seen any evidence to suggest why that should be the case.

So this chart presumably isn’t good news.

Some of the bad news is probably because of bad government policy (capital gains taxes, regulatory barriers, licensing mandates, etc) and some of it may reflect undesirable cultural trends (less entrepreneurship, more risk-aversion, more dependency).

Speaking of which, the next chart looks at the share of the workforce that is regulated by licensing laws.

This is a very disturbing trend.

Licensing rules basically act as government-created barriers to entry and they are especially harmful to poor people who often lack the time and money to jump through the hoops necessary to get some sort of government-mandated certification.

By the way, this is one area where the federal government is not the problem. These are mostly restrictions imposed by state governments.

The next chart looks at how much money is earned by the rich in each country.

I think this chart is very important, but only in the sense that any intelligent candidate should know enough to say that it’s almost completely irrelevant and misleading.

The economy is not a fixed pie. Income earned by the “rich” is not at the expense of the rest of us (assuming honest markets rather than government cronyism). It doesn’t matter if the rich are earning more money. What matters is whether there’s growth and mobility for people on the lower rungs of the economic ladder.

A good candidate should say the chart should be replaced by far more important variables, such as what’s happening to median household income.

Lastly, here’s a chart comparing construction costs with housing prices.

This data is important because you might expect there to be a close link between construction costs and home prices, yet that hasn’t been the case in recent years.

There may be perfectly reasonable explanations for the lack of a link (increased demand and/or changing demographics, for instance).

But in all likelihood, there may be some undesirable reasons for this data, such as Fannie-Freddie subsidies and restrictionist zoning policies.

As with the licensing chart, this is an area where the federal government doesn’t deserve all the blame. Bad zoning policies exist because local governments are catering to the desires of existing property owners.

By the way, while I think Pethokoukis shared some worthwhile charts, I would have augmented his list with charts on the rising burden of government spending, the tax code’s discrimination against income that is saved and invested, declining labor-force participation, changes in economic freedom, and the ever-expanding regulatory burden.

If candidates didn’t understand those charts and/or didn’t offer good solutions, they would be disqualifying themselves (at least for voters who want a better future).

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Which group has suffered the most because of Obamanomics?

That’s hard to answer. We know that the average family has less income today than when Obama took office.

If we want to narrow things down, we know that blacks have endured hardship because of a weak economy.

But you also could make a strong case that young people have been the biggest victims.

Which is why it is so discouraging that many of them support big government. Here are some depressing numbers from a Frank Luntz survey, as reported by U.S. News & World Report.

Fifty-eight percent of young people choose socialism over capitalism (33 percent) as the most compassionate system. …A plurality of 28 percent say the most pressing issue facing the country is income inequality – one of Sanders’ top themes.

I strongly suspect, by the way, that these young people (just like Hillary Clinton and Debbie Wasserman-Schultz) have no idea how to define socialism.

But that’s hardly a cause for cheer. Even if they simply think socialism is class-warfare taxation and lots of redistribution, it’s still bad news that so many of them have been seduced by the politics of hate and envy.

It’s like they’re totally oblivious to the damage that big government has caused for young people in Europe.

Their views on income inequality are similarly flawed, though perhaps slightly more understandable since millennials have suffered through a very weak economy.

But that’s what makes this polling data so puzzling. Why on earth are young people supportive of statism when they’ve been among the main victims of the weak Obama economy?!?

Writing in the Wall Street Journal, Daniel Arbess ponders the bizarre fact that so many young people support Bernie Sanders.

…voters in the millennial bracket, 18- to 34-year-olds, will for the first time equal the baby-boomer share of the electorate, at 31%. These young voters appear to be falling headlong for the Vermont senator’s plaintive narrative of economic “unfairness.”…throwaway prescriptions for redistributing income and wealth… These young voters seem not to realize that the economic policies they find so resonant are the least likely to promote the growth and the social mobility they desire.

Arbess looks at some of the data about how Obamanomics has been bad for young people.

The millennials can’t be faulted for being anxious about their economic prospects. They are coming of age in the weakest economy in generations. The underemployment rate (measuring those working a job for which they’re overqualified and underpaid) for young adults below age 30 is 60%. The overall employment-to-population ratio of 77.4% for those in the prime-of-working-life 25-54 age bracket translates into 1.5 million jobs below the 20-year average. The college graduate living in his parents’ basement and working a marginal job to service a student loan is by now an archetype of the Obama era.

He then elaborates on the self-destructive instincts of many young voters.

…Why wouldn’t young voters want “free stuff” paid for by the rich, as the Bernie Sanders and Hillary Clinton narrative promises? Because the no-free-lunch axiom is still true: Mr. Sanders’s socialized education, health care and other policies would cost up to $20 trillion, according to analysts, requiring tax collections to increase up to 47%. And have we not at least learned from the collapse and dismantling of socialism over the past quarter century that governments lack the incentives and resources to effectively allocate and manage capital in the microeconomy? …Yet millennials, who would most benefit from a real economic recovery, replacing the false one of the past several years, so far seem intent on voting against their interests.

This video is a good summary of the issue.

Given all this evidence, I’m mystified that young people are big supporters of statism.

And it’s not just what we’ve looked at today. I’ve previously shared data indicating that they are clueless on public policy issues.

At the risk of sounding like some old guy who yells “you kids get off my lawn,” maybe the solution is to raise the voting age. Or, better yet, change the rules to that you only get to vote when you have a job and pay taxes!

More seriously, the answer is more education.

P.S. The good news is that suffering through Obamacare may change the minds of some young people.

P.P.S. In any case, the polling data on guns shows that young people are not totally hopeless.

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