Rand Paul’s Heroic and Vital Fight against Global Scheme to Destroy Financial Privacy

The Foreign Account Tax Compliance Act (FATCA) arguably is the worst feature of the internal revenue code. It’s an odious example of fiscal imperialism that is based on a very bad policy agenda.

But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.

Or, as I’ve argued, it would be a nascent World Tax Organization.

And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.

GATCA, by contrast, is an international pact that would impose especially heavy costs on the United States and threaten our status as the world’s biggest haven for investment.

Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.

James Jatras explains this dangerous proposal in a column for Accounting Today.

Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

The Foreign Relations Committee unfortunately has approved the GATCA Protocol.

But Rand Paul, like Horatius at the bridge protecting Rome, is throwing sand in the gears and isn’t allowing easy passage by the full Senate.

…the senator is right to insist that the OECD Protocol is dead on arrival.

Taxpayers all over the world owe him their gratitude.

In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

But she closes with the good news.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.

Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.

John Gray explains the procedural issues in a piece for Conservative Review.

Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments.  They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties.  Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.

Amen.

For those of us who want good tax policy, rejecting this pact is vital.

An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.

Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis.

For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.

But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.

I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.

He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.

The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.

He also is uncomfortable with the “war against cash.”

…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.

He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.

And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?

Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.

But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.

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Unintended Humor Alert: Leftists Try to Rationalize Venezuela’s Collapse

I feel sorry for the Venezuelan people, but I’m perversely glad that the country is collapsing.

That’s because it’s nice to have proof that Margaret Thatcher was right when she famously warned that the problem with socialism is that you eventually run out of other people’s money.

To be sure, we already had proof from Greece, France, the Soviet Union, Brazil, and many other places. But it’s still nice to have another piece of evidence that big government eventually produces very dire results.

I also confess that I’m enjoyed Venezuela’s economic decay because I get a warm feeling of Schadenfreude when watching leftists try to explain what’s happening in that formerly rich nation.

Even the New York Times feels the need to report on the mayhem in Venezuela.

The courts? Closed most days. The bureau to start a business? Same thing. The public defender’s office? That’s been converted into a food bank for government employees. Step by step, Venezuela has been shutting down. …Venezuela keeps drifting further into uncharted territory. …that is only the start of the country’s woes. Electricity and water are being rationed, and huge areas of the country have spent months with little of either. …the Mexican company that bottles Coke in the country, has even said it was halting production of sugary soft drinks because it was running out of sugar.

And why is the economy in free fall? Is it possible that the left-wing policies the NYT wants for the United States are failing when tried elsewhere?

Not according to the story. It’s the fault of external forces. Or maybe even rich people.

The growing economic crisis — fueled by low prices for oil, the country’s main export; a drought that has crippled Venezuela’s ability to generate hydroelectric power; and a long decline in manufacturing and agricultural production. …Venezuela’s government says the problems are the result of an “economic war” being waged by elites who are hoarding supplies.

Finally, in the 27th paragraph, there’s a mention that maybe, just maybe, some of the blame belongs to government.

…most economists agree that Venezuela is suffering from years of economic mismanagement, including…price controls that led many businesses to stop making products.

Hmmm…, I guess we can safely assume that “most economists” does not include Joseph Stiglitz.

Another story in the New York Times specifically examines how this mess was created. Finally, an opportunity to learn how leftist policies are a recipe for economic failure, right?

Hardly. The report starts by pointing out the obvious. Yes, the economy is a disaster.

Supermarket shelves in Venezuela are chronically bare, and power shortages are so severe that government offices are now open only two days a week. The health care system has collapsed, the crime rate is one of the world’s worst, and inflation is rapidly eroding what remains of the currency’s value.

It then addresses the question of how this happened.

And as you can see, we’re supposed to believe it’s the result of falling oil prices and drought, even though many other oil-producing jurisdictions are avoiding economic chaos and droughts in other nations normally don’t lead to societal collapse.

The price of oil, Venezuela’s only significant export, has plummeted, which means revenue could fall by 40 percent this year. The government’s huge borrowing, partly a legacy of the years when oil prices were far higher, has helped bring the crisis to a head because Venezuela now has far less money to repay its foreign debt, forcing Mr. Maduro to slash imports in order to avoid default. On top of that are the consequences of a drought, which has shriveled the country’s hydropower generation, a critical source of electricity.

Farther down the article, in the seventh paragraph (of a much shorter story), there’s a grudging admission that at least some economists blame statist policies.

…many economists say his policies of state ownership, unfettered spending, subsidies and domestic price controls are at least partly responsible for the crisis today.

Gee, how generous of the NYT to acknowledge that some people have this strange belief that big government doesn’t work.

The column also notes that price controls are causing shortages, which is a nice admission even if there’s no clear conclusion in the article that the policy is bad.

Subsidized food and fuel sold by state-run stores are priced far lower than they are really worth. This has created enormous lines of shoppers for goods that quickly sell out.

While it’s amusing the dissect the verbal gymnastics of the New York Times, it’s even more fun to observe the dour reaction of Comrade Bernie Sanders when asked about the issue.

The folks at Newsbusters have the video, and here’s the relevant transcript if your stomach’s not strong enough to actually watch the Vermont Senator on screen.

Huh, the guy’s been waxing poetic about the glories of socialism and big government his entire life, so much so that he reportedly was kicked out of a Marxist commune for being too much of a blowhard, but now he’s suddenly so “focused” on his campaign that he can’t comment on the biggest story about socialism since the fall of the Berlin Wall?!?

Yeah, right.

Too bad the reporter didn’t ask the logical follow-up question: “So what makes you think the policies that have failed in Venezuela will work in the United States?”

Heck, I would like some journalist to present Sanders with my two-part challenge for leftists and see if he can name a single successful statist jurisdiction.

Though I’m guessing Comrade Bernie would inaccurately claim Sweden or Denmark, even those two nations got rich first and then adopted big government.

P.S. Interestingly, the Washington Post does not appear to be as reflexively left wing at the NYT.

At least if these blurbs from an editorial last year are any indication.

…one of the worst crises of governance Latin America has seen in modern times. The country’s collapsing economy, soaring crime… Mr. Maduro…inherited the mess created by the late Hugo Chávez and then greatly worsened it… Venezuelans are furious about endemic shortages, triple-digit inflation and a poverty rate that exceeds that of 1999, when the Chavista movement first came to power. …That Mr. Maduro…threatens violence probably is a reflection…of the regime’s deep-seated criminality. Two of the president’s nephews are being held in New York on drug-trafficking charges, and U.S. authorities are reportedly investigating numerous other senior figures, including the current president of the National Assembly, Diosdado Cabello, who is considered the regime’s second most powerful official.

To be sure, the Post editorial doesn’t explicitly tie the wretched conditions in Venezuela to left-wing policy, but at least there’s no ambiguity about the fact that Maduro is a bad guy.

Now if we can get the Post to cease being reflexively supportive of statism in the United States, that will be real progress.

P.P.S. Since it’s Memorial Day in the United States, let’s close with a feel-good story about an immigrant achieving the American Dream.

As 2nd Lt. Alix Schoelcher Idrache stood at attention during the commencement ceremony at West Point, N.Y., on Saturday, he was overcome with emotion. Tears rolled down both cheeks, but his gloved left hand held firm on his white, gold and black “cover,” the dress headgear that Army cadets wear. The photograph of Idrache, by Army Staff Sgt. Vito T. Bryant, was published Tuesday on the Facebook page of West Point’s U.S. Military Academy, and it almost immediately went viral. …Idrache’s background: He worked his way through one of the nation’s most prestigious military schools after immigrating to the United States from Haiti, earning his citizenship and serving for two years as an enlisted soldier…Idrache wrote Tuesday on Facebook. “I am humbled and shocked at the same time. Thank you for giving me a shot at the American Dream and may God bless America, the greatest country on earth.”

P.P.P.S. And I can’t resist adding a bit of humor about Sen. Sanders and Venezuela.

Yes, socialism breeds misery, but it also generates some clever humor. More examples here, here, here, and here.

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More Hack Analysis from the IMF

The International Monetary Fund is a left-leaning bureaucracy that was set up to monitor the fixed-exchange-rate monetary system created after World War II.

Unsurprisingly, when that system broke down and the world shifted to floating exchange rates, the IMF didn’t go away. Instead, it created a new role for itself as self-styled guardian of economic stability.

Which is a bit of a joke since the international bureaucracy is most infamous for its relentless advocacy of higher taxes in economically stressed nations. So much so that I’ve labeled the IMF the Dr. Kevorkian of the world economy.

Or if that reference is a bit outdated for younger readers, let’s just say the IMF is the dumpster fire of international economics. Heck, if I was in Beijing, I would consider the bureaucracy’s recommendations for China an act of war.

To get an idea of the IMF’s ideological bias, let’s review it’s new report designed to discredit economic liberty (a.k.a., “neoliberalism” in the European sense or “classical liberalism” to Americans).

Here’s their definition.

The neoliberal agenda—a label used more by critics than by the architects of the policies— rests on two main planks. The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.

The authors describe the first plank accurately, but they mischaracterize the second plank.

At the risk of nitpicking, I would say “neoliberals” such as myself are much more direct than they imply. We want to achieve “a smaller role for the state” by reducing the burden of government spending.

Sure, we want to privatize government-controlled assets, but that’s mostly for reasons of economic efficiency rather than budgetary savings. And because we care about what actually works, we’re fans of spending caps rather than balanced budget rules.

But let’s set all that aside and get back to the report.

The IMF authors point out that governments have been moving in the right direction in recent decades.

There has been a strong and widespread global trend toward neoliberalism since the 1980s.

That sounds like good news.

And the report even includes a couple of graphs to show the trend toward free markets and limited government.

And the bureaucrats even concede that free markets and small government generate some good results.

There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.

But then the authors get to their real point. They don’t like unfettered capital flows and they don’t like so-called austerity.

However, there are aspects of the neoliberal agenda that have not delivered as expected. …removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels.

Looking at these two aspects of neoliberalism, the IMF proposes “three disquieting conclusions.”

I’m much more worried about stagnation and poverty than I am about inequality, so part of the IMF’s analysis can be dismissed.

Indeed, based on the sloppiness of previous IMF work on inequality, one might be tempted to dismiss the entire report.

But let’s look at whether the authors have a point. Are there negative economic consequences for nations that allow open capital flows and/or impose budgetary restraint?

They argue that passive financial flows (indirect investment) can be destabilizing.

Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners… Although growth benefits are uncertain, costs in terms of increased economic volatility and crisis frequency seem more evident. Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies…about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines… In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. …there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.

I certainly agree that there have been various crises in different nations, but I’m wondering whether the IMF is focusing on the symptoms rather than the underlying diseases.

What happened in the various nations, for instance, to trigger sudden capital flight? That seems to be a much more important question.

In some cases, such as Greece, the problem obviously isn’t capital flight. It’s the reckless spending by Greek politicians that created a fiscal crisis.

In other cases, such as Estonia, there was a bubble because of an overheated property market, and there’s no question the economy took a hit when that bubble popped.

But there’s a very strong case that Estonia’s open economy has generated plenty of strong growth over the years to compensate for that blip.

And it’s worth noting that criticisms of Estonia’s market-oriented policies often are based on grotesque inaccuracies, as was the case when Paul Krugman tried to blame the 2008 recession on spending cuts that occurred in 2009.

So I’m very skeptical of the IMF’s claim that capital controls are warranted. That’s the type of policy designed to insulate governments from the consequences of bad policy.

Now let’s shift to the fiscal policy issue. The IMF report correctly states that “Curbing the size of the state is another aspect of the neoliberal agenda.”

But the authors make a big (perhaps deliberate) mistake by then blaming neoliberals for adverse consequences associated with the “austerity” imposed by various governments.

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. …in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point.

The problem with this analysis is that it doesn’t differentiate between tax increases and spending cuts.

And since much of the “austerity” is the former variety rather than the latter, especially in Europe, it borders on malicious for the IMF to blame neoliberals (who want less spending) for the economic consequences of IMF-endorsed policies (mostly higher taxes).

Especially since research from the European Central Bank and International Monetary Fund (!) show that spending restraint is the pro-growth way of dealing with a fiscal crisis.

Let’s now look at what the IMF authors suggest for future policy. More taxes and spending!

…policymakers should be more open to redistribution than they are. …And fiscal consolidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups. But in some cases, the untoward distributional consequences will have to be remedied after they occur by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will themselves necessarily hurt growth is unfounded.

Wow, the last couple of sentences are remarkable. The bureaucrats want readers to believe that a bigger fiscal burden of government won’t have any adverse consequences.

That’s a spectacular level of anti-empiricism. I guess they want us to believe that nations such as France are economically stronger economy than places such as Hong Kong.

Wow.

Last but not least, here’s a final excerpt that’s worth sharing just because of these two sentences.

IMF Managing Director Christine Lagarde said the institution believed that the U.S. Congress was right to raise the country’s debt ceiling “because the point is not to contract the economy by slashing spending brutally now as recovery is picking up.”  …Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.

We’re supposed to believe the IMF is guided by evidence when the chief bureaucrat relies on Keynesian theory to make a dishonest argument. I wish that “slashing spending” was one of the options on the table when the debt limit was raised, but the fight was at the margins over how rapidly the burden of spending should climb.

But if Lagarde can make that argument with a straight face, I guess she deserves her massive tax-free compensation package.

P.S. Since IMF economists have concluded (two times!) that spending caps are the most effective fiscal rule, I really wonder whether the authors of the above study were being deliberately dishonest when they blamed advocates of lower spending for the negative impact of higher taxes.

P.P.S. I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period.

P.P.P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.P.S. Let’s close with something positive. IMF researchers last year found that decentralized government works better.

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A Visual Lesson about Economic Freedom

I’m in Marrakech where I just spoke about the importance of economic freedom and entrepreneurship.

To close out my presentation, I zipped through several slides showing how nations with pro-market policies enjoy faster long-run growth than countries burdened by statism. The obvious conclusion is that even modest improvements in economic growth, if sustained for a long period, can make a tremendous difference in living standards.

In future talks, I may start to include this fascinating map, produced by Jakub Marian, which provides an apples-to-apples comparison of local purchasing power in Europe based on the cost of living and the average level of income.

Green nations therefore have the highest living standards, followed by blue nations, all the way to the red countries, which are the poorest.

This is a very interesting data, in part because it certainly seemed at first glance to show that there is a relationship between rich nations and economic freedom.

So I went to Economic Freedom of the World (EFW) and looked at the scores for the richest 10 nations on the map (actually, richest 11 since Austria and the U.K. are tied at 149).

Of those countries, all but one of them are considered economically free and are in the top 31 out of 157 nations in the ranking.

Only Sweden isn’t in this top category, and even that nation is ranked 42 and is mostly free.

There are three takeaways from these numbers.

First, it’s worth noting that the top two nations, Switzerland and Luxembourg, are tax havens. So maybe other nations should emulate such policies. And I’m guessing Liechtenstein and Monaco would be at the very top if they were part of either the map or the EFW rankings.

Second, libertarian perfection would be nice, but the free market is capable of generating good results even if policy is merely decent. Almost all European nations have excessive taxes and spending, for instance, but they compensate with very pro-market policies in other areas.

Third, there are several European nations from the former Soviet Empire that have earned good EFW scores. If their reasonably good policies are maintained for several decades, they will catch up to – and in many cases exceed – the living standards in Western Europe.

Last but not least, here’s a map of Europe based on the Heritage Foundation’s Index of Economic Freedom, which is quite similar to EFW.

Notice that the green nations on this map largely match the green and blue nations in the Jakub Marian map. The Baltic nations are the most notable exceptions, and I’ve already predicted they will catch up to Western Europe if their pro-liberty policies are sustained.

Of course, the real role models should be Hong Kong and Singapore since those jurisdictions have more economic liberty than even Switzerland.

Actually, I’m even willing to say that France is an ideal role model. But only if nations emulate the France of 1870 rather than the France of 2016.

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The Global Warming Shakedown, Part IV

Whether they call it global warming or climate change, activists on the left are acting as if the issue is just an excuse to extort money and expand the power of government.

• In Part I, I wrote about kleptocrats exploiting the issue to shake down western governments for enormous amounts of aid money.
• In Part II, I noted how then-Secretary of State Hillary Clinton, using tens of billions of dollars from American taxpayers, wanted to bribe third-world governments into adopting anti-energy measures
• In Part III, I explained how the Kyoto Protocol encourages the destruction of jobs in western nations.

Let’s now a fourth installment on how climate change is a racket.

The Wall Street Journal reports on a legal scam concocted by left-wing activists to extort money from Exxon.

A key meeting in the new push unfolded in January behind closed doors… The session brought together about a dozen people, including Kenny Bruno, a veteran of environmental campaigns, and Bill McKibben, founder of 350.org, two activists who helped lead the successful fight to block the Keystone XL pipeline. The new campaign’s goals include “to establish in public’s mind that Exxon is a corrupt institution that has pushed humanity (and all creation) toward climate chaos and grave harm,” according to an agenda of the meeting… This new legal strategy stems in part from environmentalists’ frustration at what they see as the inadequacy of recent climate deals. Their hope is to encourage state attorneys general and the U.S. Justice Department to launch investigations and lawsuits that ultimately will change Exxon’s behavior, force it to pay big damages.

And the scam paid off, at least in the sense that a bunch of Democratic Attorneys General have launched a legal attack on the company.

In an article for the Daily Signal, Hans von Spakovsky explores the implications.

…we now have a new inquisition underway in America in the 21st century—something that would have seemed unimaginable not too long ago. Treating climate change as an absolute, unassailable fact, instead of what it is—an unproven, controversial scientific theory—a group of state attorneys general have announced that they will be targeting any companies that challenge the catastrophic climate change religion. …The inquisitors are threatening legal action and huge fines against anyone who declines to believe in an unproven scientific theory. Schneiderman and Kamala Harris, representing New York and California, respectively, have already launched investigations into ExxonMobil for allegedly funding research that questioned climate change.

By the way, one amusing and ironic aspect of this attempted shakedown is that some of the left-wing activists are asserting that scientists for the energy companies are smarter than the ones mooching from the government.

Writing for National Review, Rupert Darwall explains.

Was ExxonMobil better at climate science than the Intergovernmental Panel on Climate Change (IPCC)? This is the bizarre position now being adopted by climate activists such as Harvard’s Naomi Oreskes and 350.org’s Bill McKibben. As early as 1977, Exxon researchers “knew that its main product would heat up the planet disastrously,” McKibben claimed in the New Yorker last month. …Had Exxon been up-front about the dangers of global warming, we might have started to decarbonize decades ago, Oreskes argues. Instead, Exxon had behaved like tobacco companies who had “long delayed” public understanding by suppressing the truth about the deadly nature of their products.

But there’s one teensy-weensy problem with the tobacco company/oil company analogy.

Scientists were able to prove the threat to health from smoking because there is a very strong statistical relationship between smoking and lung cancer. The strength of those initial findings was further validated by passing a tough predictive test. In 1953, Richard Doll, one of the first researchers to have found the link, predicted that in 1973 there would be 25,000 lung-cancer deaths in Britain. In fact, there were 26,000. By contrast, climate models have been systematically over-forecasting temperature rises this century, demonstrating that climate scientists know much less about the climate system than they would have us believe.

Needless to say, if the models are wrong about the weather we’ve already had, why should we believe their future predictions?

And the climate alarmists certainly have a long track record of flawed pronouncements.

And suppression of inconvenient data.

By the way, just in case these legal scams don’t work, some statists want to take the threats to the next level.

In a modern-day version of the Church imprisoning Galileo, the self-styled Science Guy apparently doesn’t think much of open and honest inquiry. Here are some passages from a report in the Washington Times about Bill Nye refusing to reject jail time for skeptics.

Bill Nye “the science guy” says in a video interview released Thursday that he is open to the idea of jailing those who deviate from the climate change consensus. …“In these cases, for me, as a taxpayer and voter, the introduction of this extreme doubt about climate change is affecting my quality of life as a public citizen,” Mr. Nye said. “So I can see where people are very concerned about this, and they’re pursuing criminal investigations as well as engaging in discussions like this.”

Local governments also are joining the campaign.

Fox News reports that the City of Portland wants to censor dissenting views on global warming.

The Portland Public Schools board voted last week to ban any materials that cast doubt on climate change, the Portland Tribune reported. According to the resolution passed May 17, the school district must remove any textbooks and other materials that suggest climate change is not occurring or that says human beings are not responsible for it. …One commenter to the Portland Tribune story responded to the news, saying, “I have never seen a case for homeschooling more clearly put forward. This is further proof that public schools are not interested in education, only political indoctrination.”

Unsurprisingly, the Obama Administration is intrigued anti-science shakedown. Though at least there’s some resistance from Capitol Hill, as reported by the Washington Examiner.

Attorney General Loretta Lynch must drop all efforts to prosecute climate change skeptics or risk engaging in “prosecutorial misconduct,” a group of Senate Judiciary Committee members warned. “As you well know, initiating criminal prosecution for a private entity’s opinions on climate change is a blatant violation of the First Amendment and an abuse of power that rises to the level of prosecutorial misconduct,” five lawmakers wrote to Lynch on Wednesday. …In March, Lynch told Sen. Sheldon Whitehouse, D-R.I., that the FBI was considering whether it was possible to prosecute companies or groups that promoted climate change skepticism.

By the way, the fact that some leftists want to stifle dissent and redistribute money doesn’t mean global warming/climate change doesn’t exist.

Heck the climate never stops changing. And it may now be changing in part because of human actions.

That being said, I’m sure the right approach for dealing with climate change shouldn’t include central planning and other forms of statism.

I have a hard time accepting the policy prescriptions of people who are nutjobs.

In case you think I’m exaggerating, consider these examples.

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

Then there’s the super-nutty category.

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

So it’s understandable why sensible people reject the agenda of radical environmentalists, even if there is some man-caused global warming.

P.S. To close on an upbeat note, we have some decent environmentalist humor here, here, here, here, and here.

P.P.S. On a more serious note, other governments also have moved to criminalize dissent.

P.P.P.S. According to the political betting markets, the most likely V.P. candidate for Trump has a very shaky history on the topic of climate alarmism.

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Chile, Venezuela, and the Left’s Support of State over Prosperity

Venezuela is falling apart. Decades of bad policy have produced economic stagnation and misery.

On the other side of South America, Chile has enjoyed comparatively strong growth since reforms began in the 1980s.

Can we learn lessons by comparing these two nations?

Yes. More than five years ago, I compared three decades of data to show that pro-market Chile grew somewhat faster than mixed-economy Argentina and much faster than statist Venezuela.

Now we have some new data.

My colleague at the Cato Institute, Marian Tupy, has an article in Reason that compares Chile and Venezuela.

He starts by noting that the two nations have moved in dramatically different directions when measuring economic freedom.

Chile’s success starts in the mid-1970s, when Chile’s military government abandoned socialism and started to implement economic reforms. In 2013, Chile was the world’s 10th freest economy. Venezuela, in the meantime, declined from being the world’s 10th freest economy in 1975 to being the world’s least free economy in 2013.

Here’s a sobering chart on the changes.

Some may believe that economic freedom as merely an abstraction.

What’s more important, they argue, is results. Is a nation enjoying good economic performance, or is it stagnating?

Well, it turns out that the abstraction of economic freedom is very important if you want good performance. Here’s another chart from Marian’s article. You can see that Venezuela has stagnated while Chile has boomed.

Chile is not a perfect role model, to be sure, because of an unsavory period of military rule.

But the good news, Marian points out, is that economic liberty has led to political liberty. Whereas the opposite has happened in Venezuela.

…as the people of Chile grew richer, they started demanding more say in the running of their country. Starting in the late 1980s, the military gradually and peacefully handed power over to democratically-elected representatives. In Venezuela, the opposite has happened. As failure of socialism became more apparent, the government had to resort to ever more repressive measures in order to keep itself in power.

Here’s a chart showing the remarkable progress in Chile..as well as the deterioration of rights in Venezuela (please note that “1” means strong political rights and “7” means low or nonexistent political rights).

All this data seemingly is slam-dunk evidence for the Chilean model over the Venezuelan model.

Yet there have been a number of leftists who actually praised the statist policies of Venezuela’s authoritarian rulers. Here are some excerpts from an exposê in the Daily Caller.

Socialist Venezuelan dictator Hugo Chavez was praised throughout his life by many figures in academia, journalism and Hollywood despite his brutal regime. This praise included Salon writer David Sirota’s piece after the leader’s death, titled “Hugo Chavez’s economic miracle.” In British publication The New Statesman, a headline as Chavez was nearing death in January 2013 was “Hugo Chavez: Man against the world,” and its sub-headline read “As illness ends Hugo Chavez’s rule in Venezuela, what will his legacy be? Richard Gott argues he brought hope to a continent.” This praise of Chavez by so many who enjoyed the benefits of living in a capitalist society while looking at the economic record of the late leader, as well as what his successor President Nicolas Maduro, has come undone.

And Joe Stiglitz gushed about Venezuela’s economic performance back in 2007.

Nobel Prize winning economist and former vice-president of the World Bank, Joseph Stiglitz, praised Venezuela’s economic growth and “positive policies in health and education” during a visit to Caracas on Wednesday. “Venezuela’s economic growth has been very impressive in the last few years,” Stiglitz said during his speech at a forum on Strategies for Emerging Markets sponsored by the Bank of Venezuela. …Venezuela has taken advantage of the boom in world oil prices to implement policies that benefit its citizens and promote economic development. “Venezuelan President Hugo Chavez appears to have had success in bringing health and education to the people in the poor neighborhoods of Caracas, to those who previously saw few benefits of the countries oil wealth,” he said. In his latest book “Making Globalization Work,” Stiglitz argues that left governments such as in Venezuela, “have frequently been castigated and called ‘populist’ because they promote the distribution of benefits of education and health to the poor.” “It is not only important to have sustainable growth,” Stiglitz continued during his speech, “but to ensure the best distribution of economic growth, for the benefit of all citizens.”

Wow, this is a remarkable case of ideological blindness. Stiglitz presumably allowed his statist views to drive his analysis.

But let’s focus on one part of that excerpt. Yes, it’s very desirable for all citizens to benefit from economic growth.

But if you look at the chart from Marian’s article comparing GDP per capita in Chile and Venezuela, it’s abundantly clear which nation is producing better outcomes from average citizens.

This is a fundamental flaw of statists. By fixating on redistribution and equality, this leads them to policies that re-slice a shrinking economic pie.

The evidence from all over the world is that this is not a recipe for convergence with rich nations.

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A Semi-Acceptable Indirect Bailout for Puerto Rico?

I wrote last year about why Puerto Rico got into fiscal trouble.

Like Greece and so many other governments, it did the opposite of Mitchell’s Golden Rule. Instead of a multi-year period of spending restraint, it allowed the budget to expand faster than the private sector for almost two decades.

As the old saying goes, that’s water under the bridge. Since we can’t un-ring the bell of excessive spending in the past, what’s the best option for the future?

The House of Representatives has approved a rescue plan that is getting mixed reviews.

Desmond Lachman of the American Enterprise Institute is supportive but not enthusiastic about the proposal.

The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem… However, …the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.

The legislation creates a board with some power to force fiscal and economic reforms.

…a seven-member oversight board…is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.

So if there’s no taxpayer money involved, why do people say the legislation is a bailout?

Because the proposal allows Puerto Rico to defer payments on existing debt and then to restructure at least some of that debt. And “restructure” is a politically correct way of saying “partial default.”

So Puerto Rico will be bailed out to the extent that it will be able to stiff bondholders to some degree.

…it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due.

Lachman views that as the least worst of the possible options, so this indirect bailout is not an argument against the legislation. At least from his perspective.

He’s more worried about the fact that much more needs to be done to restore growth on the island.

…it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

Writing for Forbes, Ryan Ellis has a much more optimistic assessment of the overall deal.

…the bill is a big win for limited government conservatives. It has no taxpayer bailout of Puerto Rico–not a single dime of taxpayer money is sent down there. …Puerto Rico will have to work their own way out of $72 billion in debt and defaults. They will be helped by an “oversight board”…modeled after the D.C. control board from the 1990s and 2000s, and their job is to approve fiscal plans and budgets, conduct audits, etc.

But Ryan acknowledges that “work their own way out of” is just another way of saying that there is likely going to be a partial default.

The oversight board…will first try to get the 18 classes of bondholders to agree to a voluntary debt restructuring with the Puerto Rican government and government sponsored enterprises. If that fails, the control board will recommend a debt restructuring plan to be enforced by a non-bankruptcy federal judge.

That being said, he’s confident that the legislation won’t be a template for profligate states such as Illinois and California.

Congress is exercising its Constitutional authority to provide all “needful and useful” laws to govern possessions, which is a separate power from the federal bankruptcy clause. There’s no risk of “contagion” to other states.

Though he agrees with Lachman that there’s very little hope for a growth spurt.

It lacks the necessary pro-growth reforms needed for Puerto Rico to get out of its decade-long depression, reverse migration back to the island, attract capital, and create jobs.

Which is why Ryan likes the ideas being pushed by Congressman McArthur of New Jersey. He’s especially fond of territorial taxation for American companies that do business on the island.

The solution is to enact the same type of international tax reform we want to do in the rest of the world–the U.S. companies pay tax in Puerto Rico, but don’t have to pay a second tax to the IRS just to bring the money home. That’s what the rest of the world does, and it’s called “territoriality.” It’s a basic principle of conservative tax reform to move from our outdated “worldwide” tax system to a “territorial” one. There is no better place to start than Puerto Rico.

That would be a good step, and it would be a nice bookend to the very good law Puerto Rico already has for high-income taxpayers from the mainland.

Other conservatives have a less sanguine view of the legislation. Here are excerpts from a coalition statement.

People, companies, states, and territories don’t just “go” broke. Willful prior activity is required. …Puerto Rico has a long history of financial mismanagement brought about by progressive politics and crony capitalism.

Amen. Puerto Rico got in trouble because of bad policy. And the bad policy wasn’t just excessive spending. There have also been grossly misguided interventions such as price controls.

So it’s quite understandable that signatories to this statement are not overly excited that Puerto Rico will have a route for partial default.

Progressive politicians, who are already seeking an indirect bailout – in the form of upending the existing legal structure to allow bankruptcy ‐‐ in the U.S. Congress, argue that a bailout or bankruptcy will help the people of Puerto Rico.

They correctly list several procedural reforms and also point out that there are some obvious policy reforms that should be undertaken.

Sensible economic reforms include allowing Puerto Rico (1) to set its own minimum wage law, including not having a minimum wage law; (2) to be exempt from U.S. overtime rules (which have just been greatly expanded by presidential fiat); and (3) to be exempt from the Jones Act, a protectionist measure that regulates U.S. shipping practices.

Sadly, the legislation is very tepid on these non-fiscal reforms.

So what’s the bottom line? Should the law get three cheers, as Ryan Ellis argues? Two cheers as Desmond Lachman prefers? Or only one cheer (or maybe no cheer), which seems to be the position of some conservative activists?

My answer depends on my mood. When I’m going through a fire-breathing-libertarian phase, I’m with the conservatives. Puerto Rico spent itself into a ditch so they should suffer the consequences.

But when I’m in my long-time-observer-of-Washington mode, I try to imagine the best possible (or least-worst possible) outcome, then I think Paul Ryan and the Republicans did a decent job.

In other words, this is like the fiscal cliff deal back in late 2012. Disappointing in many respects, but not as bad as I would have predicted.

The key question now is whether Republicans insist on putting good people on the oversight board.

And that’s not a trivial concern. I remember thinking the 2011 debt limit fight led to a decent outcome because we got sequester-enforced caps on discretionary spending (not as good as a comprehensive spending cap, but still a good step).

And we even got a sequester in early 2013. But then later that year, and last year as well, Republicans joined with Democrats to bust the spending caps.

That doesn’t bode well for any policy that requires long-run fiscal discipline. Though maybe GOPers will be tougher this time since the spending restraint will be imposed on people who don’t vote in congressional elections.

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Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis

Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.

But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.

And I’ve also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman’s erroneous attack on Estonia).

Today, let’s look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.

Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

This approach has been very successful according to a report from the Associated Press.

…emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. “We didn’t raise taxes that would burden an already strained economy,” he told The Associated Press in an interview. “We found spending cuts that weren’t detrimental to economic activity.”

Cutting spending and avoiding tax hike? This is catnip for Dan Mitchell!

But did Cyprus actually cut spending, and by how much?

That’s not an easy question to answer because the two main English-language data sources don’t match.

According to the IMF data, outlays were sliced to €8.1 billion in 2014, down from a peak of €8.5 in 2011. Though the IMF indicates that those numbers are preliminary.

The European Commission database shows a bigger drop, with outlays of €7.0 billion in 2015 compared to €8.3 billion in 2011 (also an outlay spike in 2014, presumably because of a bank bailout).

The bottom line is that, while it’s unclear which numbers are most accurate, Cyprus has experienced a multi-year period of spending restraint.

And having the burden of government grow slower than the private sector always has been and always will be the best gauge of good fiscal policy.

By contrast, there’s no evidence that tax increases are a route to fiscal probity.

Indeed, the endless parade of tax hikes in Greece shows that such an approach greatly impedes economic recovery.

Though not everybody in Cyprus supports prudent policy.

Critics have accused the government of working its fiscal gymnastics on the backs of the poor — essentially chopping salaries for public sector workers. Pambis Kyritsis, head of the left-wing PEO trade union, said the government’s “neo-liberal” policies coupled with the creditors’ harsh terms have widened the chasm between the have and have-nots to huge proportions. …Georgiades turned Kyritsis argument around to reinforce his point that there shouldn’t be any let-up in the government’s reform program and fiscal discipline.

In the European context, “liberal” or “neo-liberal” means pro-market and small government (akin to “classical liberal” or “libertarian” in the United States).

Semantics aside, it will be interesting to see whether Finance Minister Georgiades is correct about maintaining spending discipline as the economy rebounds.

As the above table indicates, there are several examples of nations getting good results by limiting the growth of government spending. But there are very few examples of long-run success since very few nations have politicians with the fortitude to control outlays if the economy is growing and generating an uptick in tax revenue (which is why states like California periodically get in trouble).

This is why the best long-run answer is some sort of constitutional spending cap, similar to what exists in Switzerland or Hong Kong.

The bottom line if that spending restraint is good short-run policy and good long-run policy. Though I doubt Hillary Clinton will learn the right lesson.

P.S. Cyprus also is a reasonably good role model for how to deal with a banking crisis.

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Leftist Arguments against Trump: Presumably Accurate, but Grotesquely Hypocritical

Having become interested in public policy because of Ronald Reagan’s message of limited government and individual liberty, I’m understandably depressed by the 2016 election.

But we can at least learn something from the process.

Robert Kagan of the Brookings Institution savages Donald Trump in a column for the Washington Post. Here’s a particularly brutal excerpt.

…what Trump offers his followers are not economic remedies — his proposals change daily. What he offers is an attitude, an aura of crude strength and machismo, a boasting disrespect for the niceties of the democratic culture that he claims, and his followers believe, has produced national weakness and incompetence. His incoherent and contradictory utterances have one thing in common: They provoke and play on feelings of resentment and disdain, intermingled with bits of fear, hatred and anger. His public discourse consists of attacking or ridiculing a wide range of “others” — Muslims, Hispanics, women, Chinese, Mexicans, Europeans, Arabs, immigrants, refugees — whom he depicts either as threats or as objects of derision.

Since I don’t know what actually motivates Trump or his voters, I have no idea whether the above passage is fair, but it is true that Trump’s policy agenda oftentimes doesn’t make sense.

But here’s the part of the column that caught my attention.

…what he has tapped into is what the founders most feared when they established the democratic republic: the popular passions unleashed, the “mobocracy.” Conservatives have been warning for decades about government suffocating liberty. But here is the other threat to liberty that Alexis de Tocqueville and the ancient philosophers warned about: that the people in a democracy, excited, angry and unconstrained, might run roughshod over even the institutions created to preserve their freedoms.

I’m tempted to send Mr. Kagan a card that says “Welcome to the Club.” Libertarians and small-government conservatives for decades have been warning against the dangers of untrammeled majoritarianism.

We revere the Constitution because we believe that our freedoms and liberties should not be decided by 51 percent of the population. We cherish the fact that our Founding Fathers put limits on the power of the federal government.

But I don’t think Kagan deserves a card because his opposition to mobocracy is very selective. Has he ever criticized the Supreme Court for acquiescing to the New Deal and abandoning its obligation to limit Washington to the enumerated powers listed in the Constitution?

Did he condemn Chief Justice John Roberts and the Supreme Court for deciding that the “power to tax” somehow gave the federal government the authority to force citizens to buy government-approved health insurance plans?

I don’t recall seeing Kagan fret about these majoritarian steps that eroded constitutional liberties, so it’s hard to take seriously his complaints now.

I’m also unimpressed by his concerns about potential abuse of power by a Trump Administration.

Trump will…have ridden to power despite the party, catapulted into the White House by a mass following devoted only to him. …In addition to all that comes from being the leader of a mass following, he would also have the immense powers of the American presidency at his command: the Justice Department, the FBI, the intelligence services, the military. Who would dare to oppose him then? …is a man like Trump, with infinitely greater power in his hands, likely to become more humble, more judicious, more generous, less vengeful than he is today, than he has been his whole life? Does vast power un-corrupt?

He raises some very legitimate concerns. I don’t trust Trump with lots of power. That being said, the hypocrisy is staggering.

Did he write any columns about Obama’s sordid misuse of the IRS to target political opponents?

Has he complained about Operation Chokepoint? Fast and Furious? NSA spying? Efforts to undermine the 1st Amendment and restrict political speech?

Why is abuse of power okay for Obama but not for Trump?

Notwithstanding Kagan’s glaring hypocrisy, his conclusion may be correct.

This is how fascism comes to America, not with jackboots and salutes…but with a television huckster, a phony billionaire, a textbook egomaniac “tapping into” popular resentments and insecurities.

Except it needs to be expanded. Because fascism already has a foothold in America.

And it might expand not just because of a “television huckster,” but also because of a corrupt former presidential spouse or an envy-riddled Vermont crank, both of whom tap into resentments and insecurities.

Indeed, Kagan’s description of Trump sounds a lot like Clinton or Sanders if you replace “Muslim” and “Mexican” with “banker” or “top 1 percent.”

Charles Cooke of National Review wonders whether Trump will lead leftists to change their minds about government power. He starts by highlighting conservative opposition to an all-powerful presidency.

…progressives tend not to buy the argument that a government that can give you everything you want is also a government that can take it all away. For the past four or five years, conservatives have offered precisely this argument, our central contention being that it is a bad idea to invest too much power in one place because one never knows who might enjoy that power next. And, for the past four or five years, these warnings have fallen on deaf, derisive, overconfident ears. …we have argued that Congress ought to reclaim much of the legal authority that it has willingly ceded to the executive, lest that executive become unresponsive or worse; that, once abandoned, constitutional limits are difficult to resuscitate; that federalism leads not just to better government but to a diminished likelihood that bad actors will be able to inflict widespread damage.

So are statists about to get religion on the issue of big government, albeit belatedly?

Time and time again, Trump has been compared to Hitler, to Mussolini, to George Wallace, and to Bull Connor. Time and time again, self-described “liberals” have recoiled at the man’s praise for internment, at his disrespect for minorities and dissenters, and at his enthusiasm for torture and for war crimes. …If one were to take literally the chatter that one hears on MSNBC and the fear that one smells in the pages of the New York Times and of the Washington Post, one would have no choice but to conclude that the progressives have joined the conservatives in worrying aloud about the wholesale abuse of power. …Having watched the rise of Trumpism — and, now, having seen the beginning of violence in its name — who out there is having second thoughts as to the wisdom of imbuing our central state with massive power? …I would genuinely love to know how many “liberals” have begun to suspect that there are some pretty meaningful downsides to the consolidation of state authority. …When Peter Beinart warns that Donald Trump is a threat to “American liberal democracy” — specifically to “the idea that there are certain rights so fundamental that even democratic majorities cannot undo them” — he is channeling the conservative case for the Founders’ settlement, and taking square aim at the Jacobin mentality that would, if permitted, remove the remaining shackles that surround and enclose the state. Does he know this?

I suspect the answer to all these questions is “no.”

There is nothing genuinely liberal about most modern leftists. They will act hysterical about the prospect of Trump holding the reins of power, but I predict they will fall silent if Hillary is in the White House.

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Notwithstanding Keynesian Fantasies, Redistribution Does Not Stimulate Growth

Back in 2010, then-House Speaker Nancy Pelosi actually claimed that paying people not to work would be good for the economy.

Wow, that’s almost as bizarre as Paul Krugman’s assertion that war is good for growth.

Professor Dorfman of the University of Georgia remembers Pelosi’s surreal moment and cites it in his column in Forbes, which debunks the Keynesian assertion that handouts create growth by giving recipients money to spend.

It is true, of course, that the people getting goodies from the government will spend that money, which also means more money for the merchants they patronize.

People who favor redistribution for other purposes often try to convince others to support them on the grounds that their favored policies will also create economic growth. …let’s review the story as told by those in favor of redistribution. When the government provides benefits to people without much income or spending power, those people will immediately go out and spend all the money they receive. This spending creates an economic multiplier effect as those who get the dollars re-spend some of them… There is nothing particularly wrong with the above story as far as it goes. Economic spending does create more spending as each person who gains income then spends some of that income somewhere else.

But there’s always been a giant hole in Keynesian logic, as Prof. Dorfman explains.

The redistribution advocates always forget to consider one part: where did the money handed out in government benefits come from? …There are three possible answers to that question: the money was raised in taxes, the money was borrowed from an American, or the money was borrowed from abroad. The fact that the money came from someplace is the key because for the government to have money to hand out it must first take it from somebody.

I would add a fourth option, which is that the government can just print the money. But we can overlook that option for the moment since only true basket cases like Venezuela go with that option. And even though we have plenty of policy problems in America, we’re fortunately a long way from having to finance the budget with a printing press.

So let’s look at Dorfman’s options. When governments tax and borrow from domestic sources, all that happens is that spending get redistributed.

If the government raised the money in taxes, then the people paying the taxes have less money to spend in the exact amount that is going to be handed out. …somebody’s spending power was reduced by the exact amount that somebody else receives. …If the money is borrowed from an American, the same thing happens. The person lending the money now either doesn’t spend the money or cannot save the money. When money is saved, banks lend it out. That borrower intends to spend the money (otherwise, why borrow?). When the money is lent to the government instead of being put in the bank, the loan and associated spending it would have created disappear.

And the same is true even when money is borrowed from foreign sources.

…the final hope for economic growth from government transfers would be if the government borrowed the money from abroad. This could work, as long as the money otherwise would not have appeared in the U.S. economy. For example, if China sells us products, they end up with dollars. The question is: if they don’t use those dollars to buy Treasury bonds, what will they do instead? The answer is that the dollars generally have to end up back in the U.S. Even if China turns those dollars into euros and buys German bonds instead, somebody else now owns those dollars and will spend them in the U.S. in some fashion (buying products, companies, or investments).

Prof. Dorfman explains that Keynesianism is merely a version of Bastiat’s broken-window fallacy.

…the claimed economic stimulus from giving money to the poor is offset by the lost spending we do not get from the original holder of the money. …this is a classic example of a famous economic principle: the broken window fallacy. In the fallacy, townspeople rejoice at the economic boost to be received when a shopkeeper must spend money to replace a broken window. What they miss is that absent the broken window, the shopkeeper would have bought something else with her money. In reality the economy is unchanged in the aggregate.

Well said, though allow me to augment that final excerpt by pointing out that the economy actually does change when income is redistributed, albeit in the wrong direction.

This is because many redistribution programs give people money, but only if they don’t work or earn only small amounts of income. And less labor in the economy means less output.

In effect, redistribution programs create very high implicit tax rates on being productive, which is why welfare programs trap people in government dependency.

Last but not least, let’s preemptively deal with a couple of Keynesian counter-arguments.

They often argue, for instance, that redistribution is good for growth because lower-income people have a higher “marginal propensity to consume.”

That’s true, but irrelevant. Even if other people are more likely to save, the money doesn’t disappear. As Prof. Dorfman explained, money that goes into the financial system is lent out to other people.

At this point, a clever Keynesian will argue that the money won’t get lent if overall economic conditions are weak. And there is some evidence this is true.

But those weak conditions generally are associated with periods when the burden of government is climbing, so the real lesson is that there’s no substitute for a policy of free markets and small government.

P.S. Here’s the video I narrated for the Center for Freedom and Prosperity about Keynesianism.

P.P.S. Advocates of Keynesian economics make some very weird arguments to justify more government spending.

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Paul Krugman Beclowns Himself…Again

I sometimes feel guilty when commenting on Paul Krugman’s work.

In part, this is because I don’t want to give him any additional attention, but mostly it’s because it’s too easy. Like shooting fish in a barrel.

His advocacy of Keynesian economics, for instance, makes him a very easy target.

And it’s always amusing to cite his words when exposing horror stories about the U.K.’s government-run healthcare system.

That being said, I feel obliged to write about Krugman when he attacks me or the Cato Institute.

• He bizarrely claimed that California’s 46th-worst job performance among states somehow was proof that I was wrong to criticize a big tax hike.
• He incorrectly asserted that Cato supported the laws and policies that were in place before the financial crisis, and compounded that mistake by arguing that the financial crisis was proof that free-market policies (which didn’t exist) don’t work.

Now he’s attacked Cato again and he looks like an even bigger fool.

Here’s some of what he wrote on May 15.

David Glasner has an interesting post about how the Cato Institute suppressed an old paper of his, refusing either to publish it or release it for publication elsewhere, not for a few months, but for decades. What Glasner may not know or recall is that Cato has a long-standing habit of trying to send inconvenient history down the memory hole.

When I first read that, I wondered why this was a bad thing. After all, should Cato be obliged to publish articles if we don’t fully agree with them?

But perhaps we had made some sort of commitment and were guilty of reneging. That certainly wouldn’t reflect well on us. So was Cato indeed guilty of spiking a paper we had promised to publish?

Nope.

On the same day that Krugman published his attack, Mr. Glasner published a correction. After emailing back and forth with the relevant person at Cato, he acknowledged that “my recollection of the events I describe was inaccurate or incomplete in several respects”  and that “Cato did not intend to suppress my paper.”

Since Krugman wrote his attack on Cato before Glasner wrote his correction, one presumably could forgive Krugman for an honest mistake. After all, surely he would immediately correct his column, right?

Nope.

On May 19, Jonathan Adler wrote about Krugman’s unseemly behavior in the Washington Post.

Krugman’s charge is false… As Glasner recounts in an update to the post that Krugman cited, the initial allegation was based upon a misunderstanding. Cato had not sought to suppress Glasner’s paper. Indeed, Cato had offered to publish it, albeit not as quickly as either Cato or Glasner had hoped. Once this was cleared up, Glasner forthrightly acknowledged the error. “Evidently, my recollection was faulty,” Glasner wrote. Krugman, however, has yet to update his post.

Wow. That doesn’t look good for Krugman.

But perhaps Adler’s comments had an impact because Krugman did add an update to his post.

In an amazing bit of chutzpah, however, he said it didn’t matter.

Glasner has retracted, saying he got his facts wrong. Unfortunate. It has no bearing on what I wrote, however.

Wow again.

I can understand that it’s no fun to admit mistakes. I’ve had to do it myself. More than once.

But you own up to errors because it’s the right thing to do.

Ethical behavior, however, is apparently not necessary if you’re Paul Krugman.

By the way, Krugman also attacked Cato in his column for supposedly trying to “pretend that they had never used the term privatization” when writing about Social Security personal accounts.

I’m not sure why this is supposed to be damning. All groups try to come up with terms and phrases that work best when trying to advocate particular policies.

Heck, I recently wrote about whether advocates of economic freedom should discard “capitalism” and talk instead about “free markets” or “free enterprise.”

So if Cato people decided to write about Social Security personal accounts instead of Social Security private accounts, the only crime we were guilty of is…gasp…marketing.

P.S. I’ve had some fun over the years by pointing out that Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

P.P.S. In addition to defending Cato, I’ve also had to explain why Krugman was being disingenuous when he attacked the Heritage Foundation.

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Three Cheers for Sweatshops, Creating Opportunity and Upward Mobility for the World’s Poor People

From a leftist perspective, making lots of money is not necessarily a bad thing. Rich Hollywood celebrities almost always get a free pass, especially if they embrace statist beliefs.

The crowd in Silicon Valley also is generally forgiven for being rich, perhaps because they donate to politicians like Bernie Sanders.

Folks on Wall Street, by contrast, apparently are the epitome of evil. Even when they support new regulations such as Dodd-Frank, that doesn’t put them in the good graces of today’s leftists. And if they run private equity funds that earn “carried interest,” that puts them in the arch-villain category.

But there are exceptions to all these rules. If you’re a gazillionaire from the entertainment industry, even if you’re a minority, you can get yourself in trouble for the ostensible crime of committing capitalism.

And that’s what is happening to Beyoncé. She is getting lots of bad press because she has a line of clothing and some of those clothes are being produced in Sri Lankan “sweatshops.”

To be sure, working 10 hours of day in a third-world clothing factory would be a horrible life for those of us lucky enough to live in advanced economies.

So we’re tempted to argue that “sweatshops” should be banned, but only because we don’t think about tradeoffs. Most important, what would happen to the Sri Lankan workers if they didn’t have this choice?

Writing for The Federalist, David Harsanyi points out that the attacks on Beyoncé are misguided.

Beyoncé is doing more to improve the lives of Sri Lankan workers than all fair-traders and finger-wagging journalists combined. …The Sun’s exposé claiming that workers at the singer’s new apparel company are nothing but “slaves” who earn 64 cents per hour so that Beyoncé’s can buy another yacht. …It’s a shame that people are still forced to live on such a pittance.

Yes, it’s a shame.

But you know what’s even worse than being a Sri Lankan worker in one of Beyoncé’s factories?

Being a Sri Lankan worker who doesn’t have one of those jobs.

A gross monthly average income of a Sri Lankan is around 8839 rupees. …For thousands of…fellow laborers, a Beyoncé job offers a higher salary.

In other words, as David explains, job creation and economic growth are the best way to boost living standards for the people of Sri Lanka, and that’s exactly what’s happening.

Beyoncé, who is running a business not a charity, is an inadvertent force of good. …salaries will rise and so will the quality of life. This competition will impel employers to increase productivity and, if Sri Lanka doesn’t revert to its old ways, the economy will grow.

By the way, that remark about not reverting to “its old ways” is not a throwaway line.

Sri Lanka does not have a free-market economy, but it’s also not nearly as statist as it used to be. So if the country wants continued growth, at the very least it needs to avoid backsliding. And what it really should do is further shrink government and liberalize the economy.

In the meantime, here’s a great video from Ben Powell about how “sweatshops” are good for workers.

By the way, Ben also has written about the history of so-called sweatshops in the United States. And the story is pretty much identical to Sri Lanka, with these factories being a route to upward advancement as America’s economy began to prosper.

As such, it would be a shame if we denied Sri Landkan workers the same route for economic growth.

P.S. Shifting to another topic, we have come bad news followed by good news from Down Under.

The Australian government, which ostensibly is right of center, proposed a new tax on migrant labor. But now that tax is being deferred, hopefully on a permanent basis.

Here are some of the details from a Reuters story.

The ruling conservative government, which is counting on the support of rural voters in the July 2 poll, will defer the tax increase and hold a review of labor force issues in rural and regional communities, Assistant Treasurer Kelly O’Dwyer said. Under the proposal, foreign travelers on working holiday visas would have paid tax of 32.5 percent on every dollar earned from July 1, when previously they paid no tax on income up to A$18,000 ($13,100), the same as locals. …Australia has encouraged backpackers to work on farms with special visas allowing them to stay for a second year if they do three months work in rural Australia.

Sigh, Seems like the Australian Liberal Party (which is a classical liberal party) should adopt the no-tax-hike pledge to avoid making this kind of unforced error.

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The TSA Edition of the Private Sector Does a Better Job

The Transportation Security Administration has become infamous over the years for things that it doesn’t allow on planes.

Consider these examples of the Keystone Cops in action.

• Confiscating a plastic hammer from a mentally retarded man.
• Detaining a woman for carrying breast milk.
• Hassling a woman for the unexplained red flag of having sequentially numbered checks.
• Demanding that a handicapped 4-year old boy walk through a metal detector without his leg braces.
• Putting an 8-year old cub scout on the no-fly list.
• Stopping a teenager from flying because her purse had an image of a gun.
• Seizing raygun belt buckles and Kitty Cat keychains.

But now the TSA is moving with such tortoise-like inefficiency that even the passengers without plastic hammers and kitty cat keychains aren’t getting on planes.

Our cousins across the Atlantic are amused by the TSA’s incompetence. Here are some blurbs from a story in the UK-based Telegraph.

Circus performers have been brought in to cheer up delayed passengers at San Diego International Airport, where travellers are missing flights because the Transportation Security Administration (TSA) is failing to get people through security quick enough. …San Diego isn’t the only airport gripped by TSA chaos – queues are winding around terminals across the country as the busy summer season begins. Neither is it the only airport to hire entertainment – Cincinnati/Northern Kentucky International Airport has been trying to stabilise the situation with miniature horses. Yes, horses. …The so-called “therapy unicorns” have been supplied by the Seven Oaks Miniature Therapy Horses programme in nearby Ohio. …Other airports have laid on live music and free lollipops to lighten the mood. It will take more than a lollipop to assuage American Airlines, though, which claims 6,800 of its passengers missed their flights in one week due to the delays.

Surely there must be a better response than clowns and unicorns, right?

As you might expect, the answer is less government.

…critics claim the tax-payer funded agency is inefficient and should be replaced by a private company.

Could that really be the solution?

According to a report from the BBC, some major airports are thinking of escaping from the nightmare of TSA incompetence.

The Port Authority of New Jersey and New York and the Atlanta Hartsfield-Jackson airport have both threatened to privatise their passenger screening processes.

And we already have private screeners at more than 20 airports, including major cities such as Kansas City, Orlando, Rochester, and San Francisco.

But there should be a lot more if this 2011 story from MSNBC is any indication.

“The TSA has grown too big and we’re unhappy with the way it’s doing things,” said Larry Dale, president of Orlando Sanford International Airport. “My board is sold on the fact that the free enterprise system works well and that we should go with a private company we can hold directly accountable for security and customer satisfaction.” Dale isn’t alone. Airports in Los Angeles, the Washington, D.C. metro area and Charlotte, N.C., are also considering tossing the TSA. …Rep. John Mica (R-Fla.), …chairman of the House Transportation and Infrastructure Committee, has encouraged the nation’s 200 biggest airports to opt out, calling TSA a “bloated, poorly focused and top-heavy bureaucracy.”…When TSA was created in 2001, the Aviation and Transportation Security Act mandated that the Screening Partner Program (SPP) be adopted to allow screening by private companies under federal oversight.Five airports immediately signed up in 2002 — San Francisco International, Kansas City International, Greater Rochester International, Jackson Hole and Tupelo Regional — and eleven others…have joined since then. …So far, no airport that joined SPP has opted back into the federal screening program.

Airports go with a private company because it means workforce adaptability and flexibility.

Unlike government workers, problem employees working for contract screening companies “can be removed immediately,” noted Mark VanLoh, director of aviation at Kansas City Aviation Department. The private screening company is easier to reach, he added. “Because I am a client, I usually get a return call immediately. We are all in the customer service business, so that’s a nice thing to have.” The bottom line, said McCarron of San Francisco International, is that “we feel our passengers are as safe as at any other airport. And by allowing [the private screening company] to handle the personnel management of the screening process, the TSA staff at SFO can focus its attention on security issues.”

But much more needs to happen to make air travel pleasant and safe.

“The screening partnership program may be a step in the right direction, but ultimately, it doesn’t change the fact that people at the top are idiots. The real problem is that TSA needs to be totally rebuilt,” said aviation consultant Michael Boyd, of Colorado-based Boyd Group International. “Contracting with private screening companies offers staffing flexibility and a few other advantages,” said Robert Poole, director of transportation policy for the Reason Foundation, a free market think tank, “but the system is still very centralized and run too much by TSA.”

In other words, opting into the SPP program is a step in the right direction, but not the ideal solution.

Though even this step is difficult. Experts are concerned that TSA is dragging its feet to prevent more airports from opting for private security. Here’s some of what was written earlier this year.

There’s plenty of evidence that TSA airport screeners are not effective, but worse still, the agency is rigging the system to make sure it is the only option for airport security. …the Screening Partnership Program (SPP) could enhance aviation security while also supporting increased commercial activity, which are both good for the country. …SPP is a program for privatized passenger screening, where airports can “opt out” of TSA screening by contracting with a company to provide passenger and baggage screening commensurate with TSA standards and under the oversight of the federal government.

But TSA permission is needed if airports want private screeners, and that’s a problem.

TSA’s calculus on whether to grant an SPP application is based in part on costs, and the agency does this by comparing proposed costs from contractors against TSA’s estimated costs for the same service. …Private companies are incentivized to determine real costs, as those costs become an operating budget. Propose too little and the company will not make money; propose too much and the company is uncompetitive. Meanwhile, TSA is incentivized to determine costs that outcompete a private company (to protect budget and staff)… by 2011, TSA was rejecting all requests from airports to engage SPP. …TSA is doing an end-run around the free market, leveraging their unique role as competitor and application reviewer to ensure the private sector cannot participate, and the agency then shields itself from oversight.

So the TSA bureaucracy is putting its thumb on the scale to protect its turf.

Is there a silver lining to this dark cloud? Are the TSA bureaucrats at least doing a better job with security, thus perhaps balancing out the inefficiency and high costs?

Nope.

In June 2015, it was revealed that TSA screeners failed 95% of the time during Red Team tests that secreted illicit items through security. …TSA cannot even meet the security standards that private companies must meet under SPP. Arguably, if TSA were a private company bidding for an SPP contract, they would be rejected in terms of costs and effectiveness.

So here’s the bottom line.

SPP yields cheaper and more flexible security operations and, as arguably the biggest benefit to the disgruntled traveling public, if the private sector screeners insult someone, infringe on their rights, or treat them less than fairly (as an endless amount of TSA horror stories reveal), they can be fired, immediately. It is extremely difficult to fire a government employee… TSA is failing in its airport screening mission while also prohibiting competition that could deliver better security and lower costs. It’s time to let private sector screeners take a shot at it.

Yup. In a sensible world, airports all over the nation would be opting out of the TSA and into the SPP.

Let’s close with some depressing analysis from Megan McArdle on what will probably happen instead. Here are some excerpts from her Bloomberg column.

The TSA is blaming inadequate staffing, but government bureaucrats always blame inadequate staffing, since agency headcount is generally a good proxy for “importance of the boss of said agency.” …The TSA has slowed down screening after last summer’s humiliating failure to detect almost any of the contraband in a security audit. …this is the essential logic of bureaucracy. The TSA will suffer terribly if a terrorist slips through with a bomb — or even if the auditors make it through with a fake bomb. On the other hand, what happens to them if there are long lines? Not much. They’ve got to be there for eight hours, so why should they care if we are too? This is why government agencies tend to be much more attuned to remote risks than the real and persistent costs they impose on the rest of us.

Especially when providing poor service will probably produce a bigger budget for the TSA!

…there’s not really any point in having the TSA. Which is a conversation worth having. …But in the history of the world, few indeed are the managers or bureaucrats who have said: “Yup, what we’re doing is useless, you should probably fire me and all my staff.” It’s pretty much inevitable that the TSA, having flunked its audit, is going to choose to impose huge burdens on airline passengers, rather than admit that it’s not actually doing all that much to keep us safe. I’d bet that in the next six months, the TSA will be rewarded for the longer lines by having its budget and headcount increased. …The end result of this cycle: a bigger, more expensive agency that still doesn’t do much to keep us safe.

Isn’t that typical. A bureaucracy getting rewarded for failure.

In a just world, we would take this advice from the Chicago Tribune and shut down the TSA.

But don’t hold your breath waiting for that to happen.

P.S. Check out this amazing picto-graph if you want more information about the failures of the TSA.

P.P.S. For more TSA humor, see this, this, this, this, this, and this.

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Government = Corruption = Undeserved Wealth = Insider Favoritism

In hopes of learning some lessons, let’s take a tour through the dank sewer of government, the place where malice is rewarded and malfeasance is a stepping stone to success.

Writing for the Washington Post, Professor Stephen Medvic argues that America’s political system is mostly clean.

…there is very little political corruption in the United States. …According to Transparency International’s 2015 Corruption Perceptions Index, a survey of expert opinion about the level of corruption in 167 countries, only 15 countries were judged to be cleaner than the United States. …our score of 76 (out of 100) was considerably higher than the average score of 67 in the European Union and Western Europe.

But before concluding that Mr. Medvic is a crazy crack addict, he is using a very narrow definition of corruption in the above excerpt, focusing on politicians who trade votes for under-the-table money that goes into their personal bank accounts.

Using a broader definition, there’s a different conclusion.

…corruption happens whenever there is a privileging of private interests over the public good in the policymaking process. Under this interpretation, while elected officials may not be reaping private benefit from their positions of power, they are placing the (private) interests of some subset of the public above the collective interests of the people as a whole. When a politically powerful industry gets public subsidies or a well-connected corporation receives a special tax break, it suggests to some that the system has been corrupted.

And from this perspective, corruption is rampant.

Here are six examples.

First, Veronique de Rugy of the Mercatus Center describes how a Louisiana politician (gee, what a surprise) wants to use government coercion to hinder competition in the market for contact lenses.

An estimated 40 million Americans wear contact lenses. That’s a $4 billion industry. Thanks to the heavy-handed government regulation of all things health care, contacts already cost more than they should. However, if an ongoing effort to reduce competition through government cronyism were to succeed, costs might soon rise even more. …a bill was introduced by Sen. Bill Cassidy, R-La., called the Contact Lens Consumer Health Protection Act of 2016, which would place pointless and costly new mandates on sellers and eliminate market competition. …it would require dedicated phone lines and email addresses for prescribers to communicate questions to sellers about the prescriptions the sellers need them to verify before the sellers are allowed to fill orders. …With this move, these special interests demonstrate that they would rather avoid the grind of competition, which requires that companies deliver high-quality goods at low prices to consumers. Instead, they’re trying to rig the system to force consumers into paying more for less.

Paying more for less? Maybe that should be Washington’s motto, though it’s hard to argue with the existing motto.

Second, Mike Needham of Heritage Action exposes how a shoe company cut a sleazy deal with the Obama White House.

Currently, new Army and Air Force recruits can use a one-time stipend to choose from about a dozen different shoes from multiple manufacturers. …shoe choice is exceedingly important for not only comfort, but also to prevent injury. Despite the differences that exist among the military’s roughly 250,000 new recruits every year, there is an effort afoot to force those recruits to wear shoes made by just one company. During last month’s mark up of the National Defense Authorization Act (NDAA), Massachusetts Democrat Niki Tsongas added language that would effectively force the Department of Defense (DoD) to provide only New Balance athletic shoes for new military recruits. …This alone reeks of the revolving door politics the political left is usually swift to condemn, but it gets even worse. Last month, New Balance revealed the company disengaged from the fight over the Trans-Pacific Partnership last year because it had cut a secret deal with the Obama administration. …Using the legislative process to limit choice and competition is par for the course in our corrupt political system, but doing so at the expense of America’s brave sons and daughters outrageous.

Unfortunately, wasting money is a Pentagon tradition.

Third, here’s a typical story of insider dealing in the bureaucracy.

A Department of Veterans Affairs manager who steered a $4 million contract to a relative was promoted to the second-highest position in the hospital weeks after she was caught and exposed in the national media. …The hospital evaluated 16 plots, five of which were owned by relatives of Gillis. A committee ranked them by suitability, and a non-Gillis plot was determined to be best. But in an “unusual” move, the VA selected land owned by William Gillis instead, and paid him $4.25 million. …Within three months, in June 2015, Gillis was put on a detail to serve as acting associate director, the second-highest position in the hospital, The Daily Caller News Foundation has learned. The elevation was a big promotion considering the fact that others were more senior and higher-ranked.

I suspect Gillis was one of the VA bureaucrats to also get a fat bonus despite shoddy treatment of America’s veterans.

Fourth, a former Senator is now lobbying to help H&R Block stifle competition for mom and pop tax preparers.

Former Sen. Jon Kyl (R-Ariz.) has registered to lobby on behalf of the tax preparation company H&R Block. Kyl and a colleague at his new employer, Covington & Burling, will advocate on behalf of H&R Block in favor of the “creation of minimum standards for paid tax preparers,” according to a registration form. …H&R Block has also hired another firm, Fierce Government Relations, that it is lobbying on “oversight of tax preparation” for the company. Forbes-Tate and Rock Creek Counsel also lobby for H&R Block, and the company has its own in-house lobbyists.

Yet another example of a Republican advocating bigger government to line his own pockets.

Fifth, here’s another probable example of insider dealing.

U.S. Sen. Diane Feinstein’s husband Richard Blum won the first-phase construction contract for California’s high-speed rail. …If I didn’t witness the insanity and corruption in politics every day, I wouldn’t have believed this. “The Perini-Zachary-Parsons bid was the lowest received from the five consortia participating in the bidding process, but “low” is a relative term,” the Laer Pearce, author of Crazifornia wrote. ”The firms bid $985,142,530 to build the wildly anticipated first section of high speed rail track that will tie the megopolis of Madera to the global finance center of Fresno. Do the division, and you find that the low bid came in at a mere $35 million per mile.”

Wasting money on a high-speed rail boondoggle is bad enough, but steering the contract to the spouse of a senior politician adds insult to injury.

Sixth, let’s look at how a former Obama appointee is getting rich because of regulations he oversaw while in government.

Even progressives need to make a living. …Some of them are even smart enough to do it by exploiting the regulations they pushed while in government. …Jim Shelton, the deputy secretary of education in 2013 and 2014…became “chief impact officer” at 2U, a publicly traded company that caters to public and nonprofit colleges and universities. …it’s especially notable that Mr. Shelton has joined 2U because its for-profit online business model allows it to circumvent the onerous regulation that the Department of Education promoted to punish for-profit schools during Mr. Shelton’s tenure. …This rule…has forced even the best for-profit schools to shrink enrollments. Students who have suffered the most tend to be low-income and minorities… The rule has one giant loophole. It doesn’t apply to nonprofit or public universities, and it also largely exempts community colleges. Many of these have graduation rates or loan default rates that are as bad or worse than for-profits… Which works out beautifully now for Mr. Shelton and 2U, which can work around the gainful-employment rule and still make a buck. 2U’s customers don’t have to meet the rule.

Sounds like a scene out of Atlas Shrugged, right?

So what’s the solution to all this sleaze in the Washington Favor Factory?

Returning to the column from Prof. Medvic, he seems to think that the problem is money.

The real problem is…that economic elites and business organizations have a greater impact on policy outcomes than do groups representing average citizens. …the playing field is tilted toward those with money. …the problem with money in politics is that it undermines an essential principle of democratic government.

That’s wrong. Laughably wrong.

The problem is that government has too much power. If we want to reduce sordid dealmaking (and the six examples listed above are a very tiny tip of a very large iceberg), then we need to reduce the size and scope of Washington.

Which is the message of this video.

I suppose the easy thing to do at this stage is to attack politicians for constantly expanding the size and scope of government. And I certainly have done that. A lot.

But let’s not overlook the role of culture. The crowd in Washington gets away with lots of venal behavior because an ever-larger share of the population is losing the spirit of self reliance and personal responsibility.

With that in mind, there’s very little reason for optimism once people decide that it’s okay to steal from their neighbors so long as they use government as a middleman.

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The Motto of Sanders Voters: “Socialism is fun so long as someone else is paying for it”

My favorite Margaret Thatcher moment might be when she pointed out there’s no such thing as public money, only taxpayer money.

Or perhaps when she exposed leftists for being so fixated on class warfare that they would be willing to hurt the poor if they could hurt the rich even more.

That being said, I wouldn’t be surprised if most people instead chose Thatcher’s famous line about socialism and running out of other people’s money.

Which is a great line that cleverly pinpoints the ultimate consequence of statism. Just think Greece or Venezuela.

But what can we say about starting point rather than end point? Why do people get seduced by socialism in the first place?

For part of the answer, let’s turn to the famous quote from George Bernard Shaw about how “A government which robs Peter to pay Paul can always count on the support of Paul.”

Very insightful, I hope you’ll agree.

Though it’s an observation on all governments, not just socialist regimes.

So I’m going to propose a new quote: “Socialism is fun so long as someone else is paying for it.”

And the reason I concocted that quote is because it’s a perfect description of many of the people supporting Bernie Sanders.

According to a poll conducted by Vox, they want freebies from the government so long as they aren’t the ones paying for them.

When we polled voters, we found most Sanders supporters aren’t willing to pay more than an additional $1,000 in taxes for his biggest proposals. That’s well short of how much more the average taxpayer would pay under his tax plan. …In other words, even Sanders supporters are saying they don’t want to pay as much to the federal government for health care as they are paying right now in the private sector. …The kicker for all of this? Some analysts believe Sanders’s plan will cost twice as much as his campaign estimates. …Sanders supporters are far and away the most likely to want free public college tuition. Still, 14 percent said they don’t want to pay additional taxes for it — and another half said they would only pay up to $1,000 a year…the majority of Sanders supporters in our poll (much less all voters) aren’t willing to pay enough to actually support those nationalized services.

As you can see from this chart, they want government to pick up all their medical expenses, but they’re only willing to pay $1,000 or less.

Gee, what profound and deep thinkers.

Maybe we should ask them if they also want private jets if they only have to pay $1,000. And Hollywood mansions as well.

The pie-in-the-sky fantasies of Bernie and his supporters are so extreme that even the statists at the Washington Post have editorialized against his proposals.

Mr. Sanders’s offerings to the American people are, quite simply, too good to be true, and much less feasible, politically or administratively, than he lets on. More expensive, as well. …Despite the substantial tax increases associated with Mr. Sanders’s policies, they would not be fully paid for — not even close. To the contrary, the tax hikes would be sufficient to cover just 46 percent of the spending increases, resulting in additional budget deficits of $18 trillion over 10 years. A deficit increase of that magnitude would cause an additional $3 trillion in interest payments over the same period — unless, of course, Mr. Sanders has another $18 trillion in tax increases or spending cuts up his sleeve.

The editorial writers at the Post, like so many people in Washington, make the mistake of fixating on the symptom of red ink instead of the underlying disease of excessive spending.

Would they actually favor his crazy ideas if he produced $18 trillion of additional tax hikes over the next 10 years?

Returning to the topic of whether Bernie voters actually would be willing to pay more tax, I recently appeared on Fox Business News to discuss the odd phenomenon of workers in the high-tech industry giving contributions to the anti-capitalist Senator from Vermont.

I confess that I don’t really know what would motivate someone to support Bernie Sanders, but I did share some thoughts.

• Republicans in recent decades have been big spenders, so libertarian-minded voters in Silicon Valley may have decided to base their votes on social issues.
• The high-tech industry may simply be sending “protection money” to leftist politicians, though that’s probably a motive only for senior executives.
• It’s rather ironic that the left goes after companies like WalMart and Exxon when firms like Google and Apple have much bigger profit margins.

Don’t forget, by the way, that the only difference between Bernie and Hillary is how fast we travel on the road to Greece.

P.S. Unfortunately, I haven’t accumulated much Bernie humor, though the Sandersized version of Monopoly is quite clever.

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The 2016 Award for “Politician of the Year” Goes to…

I have a collection of columns about “honest leftists” and they mostly fall into two categories.

One group is comprised of people who are willing to admit that the statist policies they generally prefer have bad effects (such as gun control encouraging crime or welfare leading to more dependency).

The other group is much more dogmatic. They get credit for honesty only because they are publicly willing to admit views that most leftists try to keep hidden (such as thinking that all our income belongs to government or celebrating the role of coercion).

I also have a separate collection of statists who are honest enough to admit that their real goal is higher taxes on the middle class (mostly by imposing a value-added tax).

Now I’ve come across something that initially seemed a good fit for one of these collections since it deals with honesty.

But it doesn’t belong in any of the categories described above. So it’s time to create a new award for “Politician of the Year,” an honor that periodically will be bestowed on the elected official who goes above and beyond the call of duty.

Based on this blurb from a Wall Street Journal editorial, I think you’ll agree that the newly elected President of the Philippines deserves to win this award for a very unusual display of honesty.

Mr. Duterte gets credit for…claiming that he never gives public funds to his mistresses.

Wow, he’s openly admitting that he has mistresses (more than one, obviously), which is uncharacteristically honest for a politician.

And he’s not even using taxpayer money to subsidize his extracurricular activities with those “friends.” Assuming that’s true, kudos to President-Elect Duterte. Maybe he can give some lessons to the crowd in Washington.

By the way, we may also have a good idea of the politician who deserves the 2017 Award.

Though we don’t actually know his name because he’s written an anonymous book on what really happens behind closed doors in Washington. The U.K.-based Daily Mail has a report on this soon-to-be-released tell-all book.

A new book threatens to blow the lid off of Congress as a federal legislator’s tell-all book lays out the worst parts of serving in the House of Representatives – saying that his main job is to raise money for re-election and that leaves little time for reading the bills he votes on. …Washington is abuzz with speculation about who may be behind it. The book…discloses that the congressman is a Democrat – but not much else. …Much of what’s in the book will come as little surprise to Americans who are cynical about the political process. ‘Fundraising is so time-consuming I seldom read any bills I vote on,’ the anonymous legislator admits. ‘I don’t even know how they’ll be implemented or what they’ll cost.’ …And on controversial bills, he says, ‘I sometimes vote “yes” on a motion and “no” on an amendment so I can claim I’m on either side of an issue.’

The book will reveal how politicians indirectly line their own pockets.

…he seemingly takes a shot at the Bill and Hillary Clinton Foundation, noting how family philanthropies can be the beneficiaries of what amounts to bribes in exchange for legislative favors. ‘Some contributions are subtle,’ he explains. ‘Donations to a member’s nonprofit foundation. Funding a member’s charitable pet project. Offsetting the costs of a member’s portrait to adorn the committee room.

And you won’t be surprised to learn that politicians are shallow, corrupt, and hypocritical.

The mystery man reserves special scorn for Sen. Harry Reid, a Nevada Democrat who serves as Senate Minority Leader. …One chapter is titled ‘Harry Reid’s a Pompous A**. …The larger picture that emerges is one of disenchantment with the political process and the professional office-holders behind it. Especially those in the Democratic Party. ‘Our party used to be a strong advocate for the working class,’ he says. ‘We still pretend to be, but we aren’t. Large corporations and public unions grease the palms of those who have the power to determine legislative winners and losers.’ ‘Most of my colleagues want to help the poor and disadvantaged. To a point,’ he adds. ‘We certainly don’t want to live among them. Or mingle with them, unless it’s for a soup kitchen photo op. … Poverty’s a great concern as long as it’s kept at a safe distance.’ …’I’m concerned my party has an activist far-left wing intolerant of center-leftists. …He cites education policy as an example: ‘I’m a strong advocate of improving our public schools. I also see the near-term value of vouchers and charter schools committed to lending a helping hand to disadvantaged kids. Especially inner-city kids.’ ‘Hell, most of us send our children to private schools and wouldn’t be caught dead sending them to public schools in places like DC.

That last section is really disgusting. Politicians will sacrifice other people’s children to appease the teacher unions, but they have the money to exercise school choice for their own kids.

So what’s the bottom line?

The mystery Democratic Congressman paints a grim picture.

‘Most of my colleagues are dishonest career politicians who revel in the power and special-interest money that’s lavished upon them,’ Atkinson recorded his mystery collaborator saying. ‘My main job is to keep my job, to get reelected. It takes precedence over everything.’ …the take-away message is one of resigned depression about how Congress sacrifices America’s future on the altar of its collective ego. ‘We spend money we don’t have and blithely mortgage the future with a wink and a nod. Screw the next generation,’ the author writes. ‘Nobody here gives a rat’s a** about the future and who’s going to pay for all this stuff we vote for. That’s the next generation’s problem. It’s all about immediate publicity, getting credit now, lookin’ good for the upcoming election.’

In other words, he’s describing what academics refer to as “public choice economics,” which is simply the common-sense observation that politicians are most interested in maximizing power and money for themselves.

P.S. If we can give a retroactive award for Politician of the Year, the winner would be the state legislator mentioned in the postscript to this column. Bribery, prison, and potential statutory rape are a potent combination.

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Everything You Wanted to Know about the Economics of Redistribution and Socialism in One Image

Incentives matter.

Sometimes that can be explained with wonky discussions of marginal tax rates or welfare traps.

But that may not be the best approach when trying to convince someone with no aptitude for economics. So what’s the best way of introducing such concepts to, say, a Bernie Sanders supporter?

You can point to the economic chaos in places such as Greece and Venezuela and explain that Margaret Thatcher was right when she warned that socialists eventually run out of other people’s money.

But that’s probably not too effective because they’ll simply point to Sweden and Denmark and you’ll have a hard time educating them that those countries became successful when government was small and that they’ve been falling behind ever since big welfare states were imposed.

So perhaps we first need to help them understand very simple notions.

That’s why, when trying to introduce basic concepts, I’ll often share clever images and cartoons.

• The Wizard-of-Id parody about work incentives.
• The philoso-raptor contemplating supply-side economics.
• Lessons about double taxation and harvesting apples.
• Showing looters are the enemy, not rich people.
• The size of the pizza is more important than how it’s sliced.

Here’s a great addition to that collection. It basically shows why redistributionism is doomed to failure because a lot of people inevitably will decide that life is easier when you’re a consumer rather than a producer.

Definitely worth sharing, I hope you’ll agree.

I view this cartoon as being very similar to the second frame of the famous riding-in-the-wagon cartoons I first posted back in 2011.

Which gives me an opportunity to end today’s column with a very serious point. When redistribution programs are first created, politicians generally argue that they make sense because a lot of people will pay very small amounts to help a handful of folks who are genuinely needy.

That sounds compassionate and affordable. And perhaps it is, but there are two reasons why programs that sound reasonable in the beginning eventually morph into modern welfare states.

1. Politicians figure out they can buy votes by making the wagon more comfortable and attractive (i.e., public choice economics).
2. A growing number of people figure out that it’s better to ride in the wagon rather than pull the wagon (i.e., erosion of social capital).

And when you combine these two factors with changing demographics, it’s easy to understand why the future is so grim for so many countries.

P.S. Here’s the Danish version of why redistributionism fails.

P.P.S. Since “keep half” was a big part of today’s image, I can’t resist sharing again this satirical lesson about fairness for a supporter of Bernie Sanders.

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Trump, Debt, Taxes, and Inflation

I have no idea whether Donald Trump believes in bigger government or smaller government. Higher taxes or lower taxes. More intervention or less. Sometimes he says things I like. Sometimes he says things that irk me.

Politicians are infamous for being cagey, but “The Donald” is an entirely different animal. Instead of using weasel words that create wiggle room, he simply makes bold statements that are impossible to reconcile.

Consider his views on government debt.

Here’s an interview with Dana Loesch of Blaze TV from earlier this week. I was in Zurich and it was past midnight, so I was a tad bit undiplomatic about Trump’s endlessly evolving views. Simply stated, it’s not a good idea to default. And it’s not a good idea to monetize debt either.

For what it’s worth, while Trump is oscillating between different position on debt, one of his top advisers is claiming that his plan will produce a multi-trillion dollar surplus.

Sigh.

The sensible approach would be for Trump to make simple points.

1. Debt is a symptom and the real problem is too much spending.
2. The solution is to follow the Golden Rule.
3. Therefore, impose a Swiss-style spending cap.

But he hasn’t asked me for advice, so I’m not holding my breath waiting for him to say the right thing.

It’s also a challenge to decipher Trump’s position on tax policy.

He actually put forth a good tax proposal, but nobody takes it seriously since he doesn’t have a concomitant plan to restrain spending.

So his campaign supposedly designated Larry Kudlow and Steve Moore to modify the plan, but then said the original proposal would stay unchanged.

This does not create a sense of confidence.

Trump also is getting pressure on his personal tax situation. He said he would release his tax return(s). Now he says he won’t. I speculated on what this implies in an essay for Time, listing five reasons why he may decide to keep his returns confidential.

The first two reasons deal with a desire for privacy and a political concern that he may appear to be less wealthy than he’s led folks to believe.

First, he may resent the idea of letting the world look at his tax returns for reasons of personal privacy, which is an understandable sentiment. …Can Trump get away with stonewalling on his returns? Perhaps. President Barack Obama refused to release his college transcript and didn’t seem to suffer any political damage. …Second, Trump’s tax return will probably show a surprisingly low level of income, and he might be concerned that such a revelation would erode the super-successful-billionaire aura that he has created.

I also suspect he’s worried that his tax return will make him look like…gasp…a tax avoider.

Third, to the degree that Trump’s return shows a lower-than-expected amount of taxable income, this will probably be because his accountants and tax lawyers have carefully plumbed the 75,000-page internal revenue code for deductions, credits, exemptions, exclusions and other preferences… Since we all seek to legally minimize our tax liabilities, that shouldn’t be a political problem. …That normally would be a persuasive answer, but voters may look askance when they learn that Trump is taking advantage of mysterious provisions dealing with things they don’t understand, like depreciation, carryforwards, foreign tax credits, muni bonds and deferral. …Fourth, for very wealthy individuals and large companies, the complexity of the tax code means there’s no way of knowing if a tax return is accurate. …Given Trump’s persona, he presumably pushes the envelope.

Last but not least, I imagine Trump has “offshore” structures.

Fifth, it’s highly likely that Trump does business with so-called tax havens. For successful investors and entrepreneurs with cross-border economic activity, this is almost obligatory because jurisdictions like the Cayman Islands have ideal combinations of quality governance and tax neutrality. …But in a political environment where the left has tried to demonize “offshore” tax planning, any revelations about BVI companies, Panama law firms, Jersey trusts and Liechtenstein accounts will be fodder for Trump’s many enemies.

Needless to say, I greatly sympathize with Trump’s desire to minimize his tax burden and I applaud his use of so-called tax havens (which are routinely utilized by wealthy Democrats).

And I even sympathize with his desire for privacy even though divulging personal financial information is now a routine obligation for politicians.

The point I should have made in my essay is that Trump would be in a stronger position if he said from the start that his tax returns are nobody else’s business.

And shifting back to policy, he’ll be in a stronger position if he picks a message and sticks to it (though ideally not the same message as Hillary Clinton).

P.S. Since I mentioned Obama’s still-secret college transcript, I may as well share this very clever mock transcript that explains a lot about his misguided approach to policy.

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Playboy’s Amusing – and Accurate – Assessment of Republicans, Democrats, and Libertarians

I will always have fond feelings for Playboy, though not for the stereotypical reason.

My appreciation for the magazine is largely based on the fact that I got a very nice honorarium from the German version back in the 1990s for writing an assessment of Bill Clinton’s likely approach to economic policy (confession: he turned out to be much better than I predicted).

Unfortunately, I’ve forgotten almost all of the German I learned in high school, so I can’t read the translated version of the article that appeared in the magazine.

Now Playboy has done something else that I appreciate, putting together a very clever matrix showing what Democrats, Republicans, Libertarians, and Greens think about various policy issues.

It’s obviously satire, but it’s very clever and effective because it does a good job of capturing stereotypes from each group (just like this poster showing 24 types of libertarians).

As you can see, the “libertarian chicken” obviously provided the answers for the third column.

In addition to mind-your-own-business Libertarians, Playboy gives us abortion-über-alles Democrats, elitist Republicans, and fuzzy-headed Greens. A bit of truth in all those caricatures.

So kudos to them for mocking all parties equally. Comedy Central probably wouldn’t be losing so many viewers if it also took this even-handed approach.

P.S. If you like libertarian-oriented humor (both pro and con), then click here and here.

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Was Reaganomics a Success?

Among Republicans and conservatives, Ronald Reagan is widely revered as a great President.

From their perspective, he was the candidate who actually made America great again.

Fans of the Gipper tell us the economy rebounded, inflation was tamed, incomes rose, unemployment fell, and the Evil Empire was defeated. What’s not to love?

That’s an impressive list of accomplishments, but is it accurate? Did Reagan and his policies produce good results, or has history created a misleading perspective (just as people for many decades credited Franklin Roosevelt for ending the Great Depression when we now know that FDR’s policies actually lengthened and deepened the downturn)?

Some libertarians are skeptics, arguing that Reagan’s rhetoric about reining in big government was much better than his actual record.

So let’s look at what actually happened in the 1980s.

The place to start, if we want neutral and unbiased data, is Economic Freedom of the World. Annual data for the 1980s isn’t available, but the every-five-year data allows us to see that economic liberty did increase between 1980 and 1990.

By the way, a couple of caveats would be helpful at this point. Reagan entered office in January 1981 and left office in January 1989, so there’s not a perfect overlap between the EFW data and the Reagan years. Also, the EFW data measures changes in a nation’s economic liberty and it silent on whether a president (or the legislative branch) deserves credit or blame.

Now let’s look at the specific components to see the potential impact of Reaganomics on important variables such as fiscal policy, rule of law and property rights, trade policy, regulatory policy, and monetary policy.

I’ve created a table from the data on page 188 of the latest Economic Freedom of the World. As you can see, there was a substantial improvement in fiscal policy, a modest improvement in monetary policy, no change in regulation, no change in rule of law and property rights, and a small drop in trade.

And if you then dig into the EFW excel file and look at the specific variables that are used to create these five scores, you’ll get more details.

On fiscal policy, for instance, there was a modest improvement in the “government consumption” score but a huge jump in the “top marginal tax rate” score. All of which makes sense because the burden of government spending (measured as a share of GDP) fell slightly during the Reagan years while the top tax rate dropped dramatically from 70 percent t0 28 percent.

Monetary policy improved for the obvious reason that the big drop in inflation meant a big increase in the “inflation” score. And the trade score dipped mostly because of an erosion in score for “tariffs.”

Now for my subjective assessment. I think Reagan was even better than shown by the EFW data. Here are three reasons.

1. The overall burden of government spending only fell by a small amount, but that number masks the fact that domestic spending was reduced significantly as a share of GDP during the Reagan years. That decrease was somewhat offset by a buildup of defense spending, but you can argue that the subsequent collapse of the Soviet Union meant this was a rare instance of government outlays actually generating a positive rate of return.
2. Reagan’s approach to monetary policy rarely gets the credit it deserves. By supporting a tough anti-inflation policy, he made it possible for the Federal Reserve to restore price stability. It’s very rare for a politician to allow some short-run pain (especially political pain) to achieve long-run gain for the country. And, to be fair, some of the credit goes to Jimmy Carter (though he also deserves blame for letting the inflation genie out of the bottle in the first place).
3. On trade policy, Reagan’s legacy is much better than indicated by the EFW scores. During his tenure, the NAFTA and GATT/WTO trade liberalization negotiations began and gained considerable steam. Yes, the implementation occurred later (with both the first President Bush and President Clinton deserving credit for following through), but we never would have reached that stage without Reagan’s vision of expanded trade and rejection of the protectionist philosophy.

Last but not least, let’s look at what Reagan’s policies meant for ordinary people. Did more economic liberty lead to better lives?

The answer is yes. The poisonous hidden tax of inflation largely disappeared. The unemployment rate fell. Labor force participation increased (in marked contrast with Obama). And there was a big increase in income for average Americans (again, in sharp contrast with Obama).

No wonder, when presented with a hypothetical matchup, the American people said they would elect Reagan over Obama in a landslide.

P.S. Critics of Reaganomics, including some on the right, inevitably raise the issue of deficits and debt and assert that Reagan failed. I think red ink is the wrong measure, but even for those who fixate on that variable, it’s worth noting that deficits were relatively small by the time Reagan left office and the Congressional Budget Office predicted they would continue falling if his policies were maintained. Moreover, the 1980-1982 double-dip recession was the reason red ink expanded so much during the early Reagan years, and that was primarily the inevitable consequence of the reckless monetary policy of the 1970s.

P.P.S. For Reagan humor, click here, here, and here.

P.P.P.S. If you want to be inspired, click here and here to see two short clips of Reagan in action. And at the bottom of this post, there’s a great video of Reagan embracing libertarianism.

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The Necessary and Valuable Economic Role of Tax Havens

Economists certainly don’t speak with one voice, but there’s a general consensus on two principles of public finance that will lead to a more competitive and prosperous economy.

• Lower tax rates are more conducive to work and entrepreneurship than higher tax rates.
• Reducing the tax bias against capital formation will improve growth by increasing saving and investment.

To be sure, some left-leaning economists will say that high tax rates and more double taxation are nonetheless okay because they believe there is an “equity vs. efficiency” tradeoff and they are willing to sacrifice some prosperity in hopes of achieving more equality.

I disagree, mostly because there’s compelling evidence that the left’s approach ultimately leads to less income for the poor, but this is a fair and honest debate. Both sides agree that lower rates and less double taxation will produce more growth (though they’ll disagree on how much growth) and both sides agree that a low-tax/faster-growth economy will produce more inequality (though they’ll disagree on whether the goal is to reduce inequality or reduce poverty).

Since I’m on the low-tax/faster-growth side of the debate, this is one of the reasons why I’m a big fan of tax competition and tax havens.

Simply stated, when politicians have to worry that jobs and investment can cross borders, they are less likely to impose higher tax rates and punitive levels of double taxation. Interestingly, even the statist bureaucrats at the Organization for Economic Cooperation and Development (who, ironically, get tax-free salaries) agree with me, writing that tax havens “may hamper the application of progressive tax rates.” They think that’s a bad thing, of course, but we both agree that tax competition means lower rates.

And look at what has happened to tax rates in the past few years. Now that politicians have undermined tax competition and weakened tax havens, tax rates are climbing.

So I was very surprised to see some economists signed a letter saying that so-called tax havens “serve no useful economic purpose.” Here are some excerpts.

The existence of tax havens does not add to overall global wealth or well-being; they serve no useful economic purpose. …these jurisdictions…increase inequality…and undermine…countries’ ability to collect their fair share of taxes. …There is no economic justification for allowing the continuation of tax havens.

You probably won’t be surprised by some of the economists who signed the letter. Thomas Piketty was on the list, which is hardly a surprise. Along with Jeffrey Sachs, who also has a track record of favoring more statism. Another predictable signatory is Olivier Blanchard, the former top economist at the pro-tax International Monetary Fund.

The only surprise was that Angus Deaton, the most recent recipient of the Nobel Prize for economics, signed the letter.

But if that’s an effective “appeal to authority,” there’s a far bigger list of Nobel Prize winners who recognize the economic consensus outlined above and who understand a one-size-fits-all approach would undermine progress.

In other words, there is a very strong “economic purpose” and “economic justification” for tax havens and tax competition.

Simply stated, they curtail the greed of the political class.

Philip Booth of the Institute of Economic Affairs in London opined on this issue. Here’s some of what he wrote for City A.M.

…the statement that tax havens “have no useful purpose” is demonstrably wrong and most of the other claims in the letter are incredible. Offshore centres allow companies and investment funds to operate internationally without having to abide by several different sets of rules and, often, pay more tax than ought to be due. …Investors who use tax havens can avoid being taxed twice on their investments and can avoid being taxed at a higher rate than that which prevails in the country in which they live, but they do not avoid all tax. …tax havens also allow the honest to shelter their money from corrupt and oppressive politicians. …one of the advantages of tax havens is that they help hold governments to account. They make it possible for businesses to avoid the worst excesses of government largesse and crazy tax systems – including the 39 per cent US corporation tax rate. They have other functions too: it is simply wrong to say that they have no useful purpose. It is also wrong to argue that, if only corrupt governments had more tax revenue, their people would be better served.

Amen. I especially like his final point in that excerpt, which is similar to Marian Tupy’s explanation that tax planning and tax havens are good for Africa’s growth.

Last but not least, Philip makes a key point about whether tax havens are bad because they are sometimes utilized by bad people.

…burglars operate where there is property. However, we would not abolish property because of burglars. We should not abolish tax havens either.

When talking to reporters, politicians, and others, I make a similar point, arguing that we shouldn’t ban cars simply because they are sometimes used as getaway vehicles from bank robberies.

The bottom line, as Professor Booth notes, is that we need tax havens and tax competition if we want reasonable fiscal systems.

But this isn’t simply an issue of wanting better tax policy in order to achieve more prosperity. In part because of demographic changes, tax havens and tax competition are necessary if we want to discourage politicians from creating “goldfish government” by taxing and spending nations into economic ruin.

P.S. Here’s my video on the economic case for tax havens.

 

P.P.S. Let’s not forget that the Paris-based Organization for Economic Cooperation and Development is the international bureaucracy most active in the fight to destroy tax competition. The is especially outrageous because American tax dollars subsidize the OECD.

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Can Greece Tax its Way to Prosperity?

In my presentations about how to deal with budgetary deterioration and fiscal crisis, I often share with audiences a list of nations that have achieved very positive results with spending restraint.

The middle column shows how these countries limited the growth of government spending for multi-year periods.

The next column of numbers reveals how multi-year spending restraint leads to significant reductions in the amount of economic output that is diverted to the government.

And when you address the underlying problem of excessive government spending, you automatically ameliorate the symptom of red ink, as shown in the final column of numbers.

At this point, I usually ask the audience whether they’ve ever seen a similar table that purports to show nations that have obtained similarly good results with tax increases.

The answer is no, of course, though it’s not really a fair question to people who don’t study fiscal policy.

More important, I ask the same question when I have debates with my statist friends from left-wing organizations. They generally try to change the subject. Some of them bluster about “fairness.” And a few of them think Sweden is an acceptable answer until I point out that it became rich when government was small but began to lose ground once a large welfare state was imposed beginning in the 1960s (as explained in this video).

But Sweden wouldn’t be a good answer even if its economy hadn’t slowed down. That’s because the question is how to climb out of a fiscal hole. In which case Sweden actually provides evidence for my position!

To understand why tax increases aren’t the right way to deal with a fiscal mess, let’s look at Greece. From the moment the crisis began, Greek politicians started raising taxes. And they haven’t stopped, with many of the tax hikes being cheered by international bureaucracies.

This is a never-ending story.

With new chapters being written all the time. Here’s a report from Reuters on the latest “reform” package from Greece. As you might suspect, it’s basically a bunch of tax hikes. Here’s what the politicians approved on social insurance taxes.

Sets social security contributions at 20 percent of employees’ net monthly income – with 13.3 percent burdening employers and 6.7 percent employees. Reforms the social security contribution base from notional to actual incomes for the self-employed, including farmers and lawyers, forcing them to make a contribution to pension funds which is phased in over a five-year period to 20 percent of their income.

There are also income tax increases.

Lowers the income tax-free threshold, or personal allowance, to an average of around 8,800 euros a year from around 9,500; makes income bands narrower, increases tax coefficients. Lowest tax band is now 22 percent on a gross income of 20,000 a year compared to 22 percent for 25,000 euros which existed previously. The upper tax band, of 45 percent, is now imposed on gross incomes exceeding 40,000 as opposed to 42 percent on income above 42,000 under the previous arrangement. Includes EU farming subsidies on taxable income.

And there are further income tax hikes as part of the “solidarity” levy, which is basically another income tax.

Solidarity Levy…on net incomes ranges from the lowest 2.2 percent on incomes from 12,000 to 20,000 a year, to 5.0 percent up to 30,000, and 6.5 percent up to 40,000. The highest band is 10 percent on incomes above 220,000. By comparison, the highest band in that category was 8.0 percent before the new reform was pushed through, on earnings exceeding half a million euros.

And there also will be more double taxation.

Dividends Tax: Increases to 15 percent from 10 percent.

You would think this big package of tax hikes might satisfy the crowd in Athens for a year or two.

But that would be a very bad assumption. Amazingly, the politicians in Greece already are looking for additional victims, as reported by ABC News.

Already, a new bill is being prepared, calling for higher taxes on a range of products, from tobacco to beer to broadband Internet connections. This bill is expected to pass later in the month.

And they’re not exactly apologetic about their tax-aholic actions.

Prime Minister Alexis Tsipras and his ministers defended their plans, saying…that taxes were better than spending cuts. …Labor Minister George Katrougalos, who introduced the bill, said that…the bill’s provisions showed the way forward for social policy in a Europe dominated by pro-market “neoliberals.”

Sadly, Mr. Katrougalos may be correct. I won’t be surprised if the rest of Europe follows Greece off the cliff.

Though he’s smoking crack if he thinks the rest of the continent is dominated by neoliberals (i.e., classical liberals or libertarians).

Not that we’ve established that Greece has been trying to solve its fiscal mess with tax hikes, let’s look at the results.

Has debt been reduced? Hardly, though to be fair it seems to have stabilized.

In any event, we haven’t seen the big reductions in debt that are associated with spending restraint

And what about the economy? Here, the news is uniformly grim, doubtlessly in large part because of all the tax hikes.

It’s rather ironic this chart is based on periodic IMF forecasts since that bureaucracy is infamous for advocating endless tax hikes.

One wonders if the IMF bureaucrats will eventually learn some lessons?

I’m not holding my breath, just like I’m not optimistic that Greek politicians will address the real problem in their country of excessive dependency caused by a bloated public sector.

But maybe the rest of us (other than Hillary and Bernie) can learn what not to do.

P.S. For more information, here’s my five-picture explanation of the Greek mess.

P.P.S. And if you want to know why I’m so dour about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies?

P.P.P.S. To offset the grim message of today’s column, let’s close with my collection of 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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Private Investment Leads to Progress, Government Investment Results in Cronyism

According to Economic Freedom of the World, there are five major factors that determine a nation’s economic performance.

Here’s the recipe for growth and prosperity.

• Rule of law and property rights.
• Small government.
• Stable monetary policy.
• Reasonable regulatory policy.
• Free trade.

This great publication is the first thing I check when I want to see whether a country leans in the direction of markets or whether it is burdened by a lot of statism. And it allows for meaningful comparisons between nations since it relies on global data sources.

But not all economic variables have good data sources that allow apples-to-apples comparisons. It’s very difficult to measure the degree to which various governments interfere with the price system by imposing controls (either minimum or maximum price limits).

Identifying the degree of cronyism in an economy also is a challenge since there are not reliable numbers for the degree to which politicians in various nations provide favors for particular firms or sectors.

So I was very interested when I saw that the Economist has put together a ranking that shows the degree to which a nation’s billionaires either earn their wealth via markets or cheat their way to wealth via cronyism.

It obviously doesn’t cover nearly as many nations as Economic Freedom of the World, but perhaps the folks at the Economist have come up with a methodology that eventually will allow a specific measure of cronyism in the future.

The article explains how the rankings were derived.

…for the past 20 years, from Malaysia to Mexico, crony capitalists—individuals who earn their riches thanks to their chumminess with government—have had a golden era. Worldwide, the worth of billionaires in crony industries soared by 385% between 2004 and 2014, to $2 trillion. The Economist’s crony-capitalism index tries to measure the extent of this graft for a number of important countries. Industries that have a lot of interaction with the state are vulnerable to crony capitalism (a full list of industries is provided in the table below). These activities are often legal but always unfair (Donald Trump, a casino and property tycoon, earns the 104th spot in our individual crony ranking). …Germany is cleanest, where just a sliver of the country’s billionaires derives their wealth from crony sectors. Russia fares worst in our index: wealth from the country’s crony sectors amounts to 18% of its GDP.

I’m glad to have these new numbers, but I’m not completely sold on the methodology used by the Economist.

Is all banking and finance really cronyism? That seems a bit of a stretch. While there are some indications that Warren Buffett is now a cronyist, I’m not aware of any evidence suggesting he used government connections to become rich in the first place.

And what about energy and chemicals? That description may apply to some rich people in the U.S. and elsewhere, but there are plenty of examples (the Koch brothers) of billionaires in this sector that have earned their wealth.

And speaking of wealth, why did the article compare wealth (which is a stock) and GDP (which is a flow)? I realize the Economist needed some sort of benchmark, but they chose an approach that has dubious methodological value.

All that being said, I suspect that the countries near the top of that list have a genuine problem with cronyism and the ones near the bottom do a better job of letting market forces operate.

So congratulations to Germany and South Korea and boos for Russia and Malaysia.

And a bit of applause for the United States. We have some egregious forms of cronyism that benefit the undeserving rich, but most American billionaires apparently earn their money.

Now let’s zoom out and look at the historical case against cronyism with this superb video from Prager University.

The bottom line is that scams like Solyndra are the modern version of what many railroads did in the 1800s.

I didn’t realize, though, that Uncle Sam also squandered money trying to invent the airplane.

P.S. You can enjoy other great videos from Prager University by clicking here, here, here, here, here, and here.

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Milton Friedman, Adam Smith, and Other People’s Money

From an economic perspective, too much government spending is harmful to economic performance because politicians and bureaucrats don’t have very good incentives to spend money wisely.

More specifically, labor and capital will be misallocated because people in government generally are guided by political motivations.

By contrast, there’s a bottom-line incentive in the private sector to use resources wisely. This generates the most prosperity for society because the only way to earn income in a free market is to produce goods and services that other people value.

That’s sort of a macro perspective.

From a micro perspective, when government allocates money, you can only make yourself better off by taking from others. In a market economy, you make yourself better off by serving others.

In other words,enlightened self interest (you can even call it “greed” if you prefer) is channeled productively in a free market system, as Adam Smith observed several hundred years ago.

Now let’s look at a visual perspective, as illustrated by this image I saw on Reddit‘s libertarian page.

Whoever put this together was quite clever to highlight the fact that people in the private sector generally buy in the top-left quadrant while people in government generally buy in the bottom-right quadrant.

And if you want to see the late Milton Friedman discuss this concept, here’s a video for your viewing pleasure.

I’ll simply add a few observations. One of the reasons I often compare market-oriented nations and government-oriented nations is to highlight how countries are more likely to become prosperous when most resources are allocated by private decisions rather than political decisions.

In other words, South Korea out-performs North Korea because its economy is largely driven by decisions in quadrant 1.

Just like Chile out-performs Argentina and Argentina out-performs Venezuela for the same reason.

P.S. This video on profit, narrated by Walter Williams, is a good addition to the insight of Smith and Friedman.

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Hypocrisy Update: Leftists Want the Peasants (but not Themselves) to Endure Big Government

I wrote last month about Secretary of State John Kerry being a giant hypocrite because he’s been a critic of so-called tax havens, yet he and his family benefits immensely from investments in various low-tax jurisdictions.

But perhaps that’s something that Obama requires when selecting people for that position. It turns out that Kerry’s predecessor also utilized tax havens.

Earlier this year, the New York Post editorialized about Hillary Clinton’s attack against tax havens, which they found to be absurd since the Clinton family benefits significantly from places such as the Cayman Islands.

Hillary Clinton last week lunged into her most flagrant fit of hypocrisy yet. …she took new aim at the rich — including their use of tax dodges. She told MSNBC: “We can go after some of these schemes … the kind of…routing income through the Bahamas or the Cayman Islands or wherever.” Huh. …the Clintons’ family wealth has grown big-time thanks to firms with significant holdings in places like . . . the Caymans. As The Daily Caller notes, Bill Clinton spent years as a partner in his (now-ex-) buddy Ron Burkle’s investment fund Yucaipa Global — registered in the Cayman Islands. …It’s a family thing: Chelsea Clinton’s hubby, Marc Mezvinsky, is a partner in a hedge fund with multiple holdings incorporated in the Cayman Islands.

This isn’t to criticize Cayman, by the way. It’s one of the best jurisdictions in the world if you want high levels of honest governance and very sensible tax and regulatory policies.

But shouldn’t politicians practice what they preach? So why aren’t Kerry and Clinton instead investing in France or Greece to show their support for high tax burdens?

By the way, the editorial also cited the Clinton family’s house, which is owned by a trust to help dodge the death tax, something that I also called attention to back in 2014.

Let’s shift from taxes to the environment. Writing for Real Clear Politics, Ed Conard takes aim at the moral preening of Leonardo DiCaprio.

Time Magazine released its list of the top 100 Most Influential People and placed Leonardo DiCaprio on the cover of its magazine for the personal example he sets on climate change. How Ironic! …According to the leaked Sony documents for example, DiCaprio took six private roundtrip flights from Los Angeles to New York over a 6-week period and, a private jet to the 2014 World Economic Forum in Davos Switzerland. Pictures of him vacationing on big yachts… What hypocrisy! He enjoys the very luxuries that he admonishes others not to indulge.

Oh, wait, he buys carbon offsets, the modern version of purchasing an indulgence.

But Mr. Conard is not very impressed by that bit of moral preening.

So who really paid for DiCaprio’s grossly polluting ways? The rest of the world of course, not DiCaprio. …A person’s consumption is their true cost to the rest of society, not their income, nor their unspent wealth. Does the tax DiCaprio imposes on himself for polluting the world reduce his polluting consumption? Hardly! In fact, it encourages more of it. …DiCaprio, and others like him, buy carbon offsets to sooth their guilt—guilt they never needed to incur in the first place. …they sooth their guilt by voting to spend someone else’s income helping others. They think they have done a good deed when they have really done nothing at all.

I’m not sure I agree that carbon is pollution, and I also don’t like referring to consumption as a cost, but he’s right on the money about DiCaprio being a fraud or a phony (something that Michelle Fields exposed in a recent interview).

Let’s now shift back to taxes.

When I was in Montreal last year for a conference on tax competition, one of the highlights was hearing Governor Sam Brownback talk about his pro-growth tax policy. My least favorite part of the conference, by contrast, was hearing Margaret Hodge, a politician from the United Kingdom, pontificate about the evils of tax avoidance.

And the reason that was such an unpleasant experience is that she’s a glaring hypocrite. Here are some excerpts from a report published by the International Business Times.

Labour’s Margaret Hodge was, according to The Times, among the beneficiaries in 2011 of the winding-up of a Liechtenstein trust that held shares in the private steel-trading business set up by her father. The Times reports that just under 96,000 Stemcor shares handed to Hodge in 2011 came from the tiny principality, which is renowned for low tax rates. Three quarters of the shares in the family’s Liechtenstein trust had previously been held in Panama, which Ms Hodge described last month as “one of the most secretive jurisdictions” with “the least protection anywhere in the world against money laundering”.

Let’s close by identifying one more hypocritical “champagne socialist” from the United Kingdom, as reported by the U.K.-based Telegraph.

Dame Vivienne is now accused of hypocrisy over tax avoidance allegations that put her in direct conflict with one of the Green Party’s main policies. The most recent company accounts show Dame Vivienne’s main UK business is paying £2 million a year to an offshore company set up in Luxembourg for the right to use her name on her own fashion label. Tax experts have described the arrangement as “tax avoidance” that cheats the UK Treasury out of about £500,000 a year. The model is similar to one used by Starbucks, the coffee chain, which found itself at the centre of a protest over its use of Luxembourg to reduce its tax bill in the UK. …One City accountant, who studied the accounts of Vivienne Westwood Ltd, said: “This has to be tax avoidance. Why else would you make these payments to a company in Luxembourg? It makes the Green Party hypocrites for taking her money and Westwood a hypocrite for backing a party with policies she does not appear to endorse.”

So we can add Ms. Hodge and Ms. Vivienne to the list of American leftists who also utilize tax havens to minimize their tax burdens.

And all of the people above, as well as those above, will be charter members of the Statist Hall of Fame whenever I get around to setting up that page.

• The Paris-based Organization for Economic Cooperation and Development, which advocates higher tax for everyone else while providing gold-plated tax-free salaries and benefits to its own employees.
• The leftist political types who say tax havens are bad and immoral while simultaneously utilizing these low-tax jurisdictions to protect and grow their own wealth.
• The politicians and congressional staffers who decided to coerce others into Obamacare while seeking special exemptions for themselves.
• The rich leftists who advocate higher taxes for other people even though they refuse to send more of their own money to Washington.
• Prince Charles of the United Kingdom, who preaches coerced sacrifice for ordinary people even though his “carbon footprint” would be in the top 1 percent.
• The statists who fight against school choice for poor families while sending their own kids to pricey private schools for the elite.
• George Soros for supporting regulation for you and me, but not for himself.
• The Canadian politician who supports government-run healthcare for his constituents but comes to America for private treatment when he’s sick.

And there are a lot more that deserve to be mocked for their statist hypocrisy.

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Taxing Lessons from Europe for Hillary Clinton (a Supposed Fiscal Conservative)

I wrote yesterday about the Obama Administration’s head-in-the-sand approach regarding the anti-competitive nature of America’s corporate tax system (though maybe fiddling while Rome burns is a better metaphor).

Fortunately, some nations have more sensible policy makers. Even in Europe, which might come as a surprise to the pair of class warriors battling for the Democratic nomination.

Consider, for instance, what’s happening in Norway.

Norway will cut the corporate income tax rate to 23 percent from the current 27 percent by 2018…the country’s political parties announced on Wednesday. The basic personal tax rate will also be cut to 23 percent from 27 percent. …As part of the deal, further reductions in the company tax rate will be considered in the future. The compromise included…a small cut in Norway’s wealth tax.

What’s most remarkable about this story from Scandinavia is not that there’s a tax cut, though that surely would be a shock to Bernie Sanders’s mythological view of the Nordic nations.

I think it’s even more noteworthy that Norway already has a far lower corporate tax rate than the United States, yet the government is implementing a further reduction.

And Croatia also is poised to move policy in the right direction.

The reports from government circles that, as part of the tax reform, it could abolish the highest income tax rate of 40 percent have been welcomed by many observers. …“We support such a move. Croatia has a huge ‘brain drain’ of highly educated people, and they fall into the category of those whose salaries are covered by the 40 percent tax rate. Therefore, this decision would contribute to such people remaining in Croatia”, said Bernard Jakelić, the deputy director of the Croatian Employers’ Association. …Former Finance Minister Boris Lalovac (SDP) agreed that the abolition of the tax bracket would be a step in the right direction. …“Croatia is the only country in the region which has such a high rate of income tax. None of the countries in the region have income tax rates higher than 25 percent, and many countries have a flat tax. Its abolition would simplify the tax system and contribute to the reduction of the shadow economy. After all, the taxation of income at a rate of 25 percent is enough”, said Lalovac.

I especially like that the former finance minister makes both an argument based on tax competition and an argument based on the moral principle that there should be a limit on how much government should tax.

Maybe GOPer some day will be smart enough to include a moral component when seeking better tax policy. Especially if they learn that it’s politically persuasive.

So where can voters find a candidate who might implement such reforms in the United State?

Catherine Rampell of the Washington Post suggests that there is a “fiscally conservative” option already available.

Suppose you’re a hardcore fiscal conservative. …All you care about is getting the nation’s fiscal house in order. …the candidate you should vote for might surprise you. …the most fiscally conservative presidential contender left standing is…

Drum roll, please.

…Hillary Clinton.

No, it isn’t April Fool’s Day.

Ms. Rampell wants us to believe that Hillary Clinton is fiscally conservative because her agenda of much bigger government is matched by proposals for much higher taxes.

I’m not joking. Here’s what Rampell wrote.

Here’s the bottom line for the nation’s bottom line: Clinton’s spending increases and other proposals that cost money have a total price tag of about $1.8 trillion over the next decade. But her offsets, which come mostly from tax hikes, would save an estimated $1.9 trillion over that same period… Maybe when (if) voters start to notice this, Clinton will finally receive the praise she’s been due, from arithmetic fans and fiscal conservatives alike.

I suppose this is the point where I should explain that good fiscal policy is defined by a modest-sized government and a tax code that is designed to raise revenue in a relatively non-destructive fashion, not by whether lots of wasteful spending is okay if accompanied by lots of destructive tax hikes (i.e., a fixation on fiscal balance).

But I’ve made that point many times before, so instead I’ll merely observe that Ms. Rampell is either shockingly uninformed or (more likely) she thinks that she has some really stupid right-leaning readers who can be easily tricked into voting for Clinton.

And since we’re focusing on Mrs. Clinton’s ideological bona fides, ask yourself whether Ira Stoll of the New York Sun was describing a “fiscally conservative” candidate last December.

Call it Hillary’s Reichsfluchtsteuer. The former secretary of state and senator from New York, Hillary Clinton, reportedly will announce on Wednesday plans to impose an “exit tax” on companies that move their headquarters out of America or merge with foreign firms to escape America’s unreasonably high corporate taxes. …the Reichsfluchtsteuer, or Reich flight tax, was a 25% levy imposed originally…by the pre-Hitler, centrist government of Heinrich Brüning… Not exactly something to try to emulate. …As I pointed out back in 2012, the Universal Declaration of Human Rights, a product of the United Nations, says, “Everyone has the right to leave any country, including his own” and “No one shall be arbitrarily deprived of his property.” …it is unjust to force people or companies to stay where they do not want to be. …In 1963, at the Berlin Wall, President Kennedy said, “Freedom has many difficulties and democracy is not perfect, but we have never had to put a wall up to keep our people in, to prevent them from leaving us.” Hillary Clinton’s exit tax would do exactly what Kennedy said we’ve never had to do: set up a virtual wall, in the form of a tax, to prevent companies from leaving America.

There’s something rather odious about a politician who wants to extort money from taxpayers as a price for re-domiciling. As a general rule, only very evil regimes levy such taxes.

Speaking of unsavory regimes, let’s play a fill-in-the-blank game. Here’s the first sentence from a recent Associated Press story.

___________ is looking to increase revenue from taxation.

Is the answer Hillary Clinton? That’s a good answer, but not correct in this case. What about Bernie Sanders of Barack Obama? Once again, smart guesses but not accurate for this story.

Give up? Well, here’s your answer.

The Islamic State extremist group is looking to increase revenue from taxation.

I share this item because this it reminded me of the time I gave a speech about reforming the welfare state and a leftist in the audience basically accused me of being a racist because the KKK also didn’t like the welfare state. The fact that I urged reform in part because poor people are hurt by such programs apparently didn’t matter to my accuser.

That being said, if we accept his logic, I guess this means we can accuse Hillary Clinton, Bernie Sanders, and Barack Obama of being in favor of Islamic terrorism because they share a goal with the Islamic State crazies.

Sigh. Needless to say, Hillary isn’t a radical Islamist. Just like Obama isn’t a communist simply because he was endorsed last election by the former head of the U.S. Communist Party.

I just wish folks on the left were equally prudent about avoiding absurd guilt-by-association charges.

P.S. Bruce Bartlett also claimed (presumably for the same disingenuous reason) that Obama is a conservative because of his proposed tax hikes, so Ms. Rampell is not alone.

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The “Race to the Bottom” and Global Minimum Corporate Taxes

Imagine if you had the chance to play basketball against a superstar from the NBA like Stephen Curry.

No matter how hard you practiced beforehand, you surely would lose.

For most people, that would be fine. We would console ourselves with the knowledge that we tried our best and relish he fact that we even got the chance to be on the same court as a professional player.

But some people would want to cheat to make things “equal” and “fair.” So they would say that the NBA player should have to play blindfolded, or while wearing high-heeled shoes.

And perhaps they could impose enough restrictions on the NBA player that they could prevail in a contest.

But most of us wouldn’t feel good about “winning” that kind of battle. We would be ashamed that our “victory” only occurred because we curtailed the talents of our opponent.

Now let’s think about this unseemly tactic in the context of corporate taxation and international competitiveness.

The United States has the highest corporate tax rate in the industrialized world, combined with having the most onerous “worldwide” tax system among all developed nations.

This greatly undermines the ability of U.S.-domiciled companies to compete in world markets and it’s the main reason why so many companies feel the need to engage in inversions.

So how does the Obama Administration want to address these problems? What’s their plan to reform the system to that American-based firms can better compete with companies from other countries?

Unfortunately, there’s no desire to make the tax code more competitive. Instead, the Obama Administration wants to change the laws to make it less attractive to do business in other nations. Sort of the tax version of hobbling the NBA basketball player in the above example.

Here are some of the details from the Treasury Department’s legislative wish list.

The Administration proposes to supplement the existing subpart F regime with a per-country minimum tax on the foreign earnings of entities taxed as domestic C corporations (U.S. corporations) and their CFCs. …Under the proposal, the foreign earnings of a CFC or branch or from the performance of services would be subject to current U.S. taxation at a rate (not below zero) of 19 percent less 85 percent of the per-country foreign effective tax rate (the residual minimum tax rate). …The minimum tax would be imposed on current foreign earnings regardless of whether they are repatriated to the United States.

There’s a lot of jargon in those passages, and even more if you click on the underlying link.

So let’s augment by excerpting some of the remarks, at a recent Brookings Institution event, by the Treasury Department’s Deputy Assistant Secretary for International Tax Affairs. Robert Stack was pushing the President’s agenda, which would undermine American companies by making it difficult for them to benefit from good tax policy in other jurisdictions.

He actually argued, for instance, that business tax reform should be “more than a cry to join the race to the bottom.”

In other words, he doesn’t (or, to be more accurate, his boss doesn’t) want to fix what’s wrong with the American tax code.

So he doesn’t seem to care that other nations are achieving good results with lower corporate tax rates.

I do not buy into the notion that the U.S. must willy-nilly do what everyone else is doing.

And he also criticizes the policy of “deferral,” which is a provision of the tax code that enables American-based companies to delay the second layer of tax that the IRS imposes on income that is earned (and already subject to tax) in other jurisdictions.

I don’t think it’s open to debate that the ability of US multinationals to defer income has been a dramatic contributor to global tax instability.

He doesn’t really explain why it is destabilizing for companies to protect themselves against a second layer of tax that shouldn’t exist.

But he does acknowledge that there are big supply-side responses to high tax rates.

…large disparity in income tax rates…will inevitably drive behavior.

Too bad he doesn’t draw the obvious lesson about the benefits of low tax rates.

Anyhow, here’s what he says about the President’s tax scheme.

The President’s global minimum tax proposal…permits tax-free repatriation of amounts earned in countries taxed at rates above the global minimum rate. …the global minimum tax plan also takes the benefit out of shifting income into low and no-tax jurisdictions by requiring that the multinational pay to the US the difference between the tax haven rate and the U.S. rate.

The bottom line is that American companies would be taxed by the IRS for doing business in low-tax jurisdictions such as Ireland, Hong Kong, Switzerland, and Bermuda.

But if they do business in high-tax nations such as France, there’s no extra layer of tax.

The bottom line is that the U.S. tax code would be used to encourage bad policy in other countries.

Though Mr. Stack sees that as a feature rather than a bug, based on the preposterous assertion that other counties will grow faster if the burden of government spending is increased.

…the global minimum tax concept has an added benefit as well…protecting developing and low-income countries…so they can mobilize the necessary resources to grow their economies.

And he seems to think that support from the IMF is a good thing rather than (given that bureaucracy’s statist orientation) a sign of bad policy.

At a recent IMF symposium, the minimum tax was identified as something that could be of great help.

The bottom line is that the White House and the Treasury Department are fixated at hobbling competitors by encouraging higher tax rates around the world and making sure that American-based companies are penalized with an extra layer of tax if they do business in low-tax jurisdictions

For what it’s worth, the right approach, both ethically and economically, is for American policy makers to focus on fixing what’s wrong with the American tax system.

P.S. When I debunked Jeffrey Sachs on the “race to the bottom,” I showed that lower tax rates do not mean lower tax revenue.

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A Government-Provided “Basic Income” Would Be a Recipe for Bigger Government and More Dependency

One of the more interesting policy debates, both in America and around the world, is whether convoluted and counterproductive welfare states should be scrapped and replaced with a “basic income” payment from the government.

Finland is experimenting with the concept.

Authorities in Finland are considering giving every citizen a tax-free payout of €800 (£576) each month. Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income. …the basic income is intended to encourage more people back to work. At present, many unemployed people would be worse off if they took on low-paid temporary jobs due to loss of welfare payments.

This idea has been, or will be, tried in a few places.

…previous experiments where a basic income has been successfully trialed. The Canadian town of Dauphin experimented with a basic income guarantee in the 1970s and the results – both social and economic – were largely positive. …The Dutch city of Utrecht is also planning to introduce a basic income, albeit solely for welfare recipients. From next month more than 250 unemployed residents of the city will be given a monthly sum to live on, with researchers monitoring the outcome to determine what effect it has on employment.

In a column for City Journal, Guy Sorman has a positive assessment of the Finnish plan.

…each citizen will be free to use the money as he or she sees fit. The idea is that people are responsible for their actions. If someone decides to spend their €800 on vodka, that is their decision, and has nothing to do with the government. In return for the UBI, however, the public accepts the elimination of most welfare services. Currently, the Finnish government offers a variety of income-based assistance programs for everything from housing to children’s education to property insulation. Axing these programs should free up enough public resources to finance the UBI. The bureaucracy that currently governs welfare payments will disappear. …The Left is cheered by the socialistic idea of government-assistance-for-all. The Right looks forward to the unprecedented drop in bureaucratic control over citizens… The Finnish government is expecting the negative income tax to have a beneficial effect on employment and growth.

Though apparently the scheme will have a limited rollout.

Finland’s trial of a basic income model is set to start in 2017 and will involve a payment of 550 euros to those selected to participate.

And those selected will be a limited group.

…the full, unconditional basic income proposal would be too expensive. Instead the trial will target people already in receipt of benefits and offer a basic income at the same level to replace them. …People would then be able to take on new work without losing their social security payments, which could remove one of the disincentives to employment. People with income-linked unemployment benefits, which are higher than the state-provided basic unemployment benefit, would continue to receive them. …The trial will focus on individuals aged 25 to 63 with low incomes as that group will provide the best data on whether or not the basic income increases employment.

Here’s more reporting about the potential Dutch experiment.

…in Utrecht, one of the largest cities in the Netherlands, and 19 other Dutch municipalities, a tentative step… “We don’t call it a basic income in Utrecht because people have an idea about it – that it is just free money and people will sit at home and watch TV,” said Heleen de Boer, a Green councillor in that city, which is half an hour south of Amsterdam. Nevertheless, the municipalities are, in the words of de Boer, taking a “small step” towards a basic income for all by allowing small groups of benefit claimants to be paid £660 a month – and keep any earnings they make from work on top of that. Their monthly pay will not be means-tested. They will instead have the security of that cash every month, and the option to decide whether they want to add to that by finding work. …The motivation behind the experiment in Utrecht, according to Nienke Horst, a senior policy adviser to the municipality’s Liberal Democrat leadership, is for claimants to avoid the “poverty trap” – the fact that if they earn, they will lose benefits, and potentially be worse off.

The concept is also gaining traction in New Zealand.

Leader of the opposition Andrew Little said his Labour party was considering the idea as part of proposals to combat the “possibility of higher structural unemployment”. …Mr Little confirmed his party would debate the idea at its conference on employment at the end of March. He said significant changes to way people worked were “unavoidable” and “we expect that in the future world of work there will be at least a portion of the workforce that will rapidly move in and out of work”.

You’ll have noticed that some of the arguments for basic income seem very reasonable. Improve incentives to work and reduce bureaucracy.

Indeed, this is why the idea has support among some sensible people. I cited some of them in my article back in 2013, but there are several more.

Sam Bowman explains his support for the concept in a column for the London-based Adam Smith Institute.

For me, it’s about improving the capitalism we already have. …it would be an improvement, for three main reasons.

His first reason is that some people would benefit from more money, though I’m not sure this has anything to do with “improving capitalism.”

Our existing welfare system is designed for a world where finding a job would be enough to give most people a tolerable standard of living. But in-work poverty is an increasing problem…a basic income would reorient the whole system towards helping people who don’t have enough money, irrespective of why that is.

His second reason is that it would be good to streamline the welfare state.

Our existing welfare system has built up a large amount of unnecessary complexity that could be streamlined. …benefits are fundamentally about giving money to people who do not have enough of it. Housing benefit, the pension credit, jobseeker’s allowance, income support and tax credits all do this. …Reducing complexity is valuable but not the only, or indeed the main, appeal of the basic income.

And his third reason is that a basic income could be matched with other reforms that would boost economic performance.

Many other policies that would increase total wealth are not very progressive…doing these things ends up making lower earners pay more tax than we would like. …An easy way to correct that would be to redistribute the overall wealth gain to those poor natives so that they too are made better off in the short run as well as the long run.

Writing for National Review, Iain Murray adds his sympathetic analysis.

Anyone who wants some creature comforts, which most of poor do…would be encouraged to work rather than the reverse. …Most people will use money to make their lives better. Indeed, there is some evidence that most poor people suddenly presented with what amounts to capital will become capitalists. This is surely a good thing. …The lack of a welfare bureaucracy will also encourage charity and mutual aid for the really hard cases.

Though he does recognize that there are “two big, and possibly irresolvable, caveats.”

…unless we were to find some way of exempting this from the political process, politicians would…turn it into a UBI plus extra, targeted, welfare system.  …it still relies on robbing Peter to pay Paul, even if Peter gets some of the money back.

Now let’s shift back from theory to the real world. Switzerland is poised to vote early next month on a referendum that would provide a rather generous government-guaranteed income every month.

Switzerland will become the first country in the world to vote on the introduction of unconditional income at the national level. But it has not won much support from traditional politicians, even those on the left. …The federal government estimates the cost of the proposal at 208 billion francs a year. Around 153 billion taxes would have to be levied from taxes, while 55 billion francs would be transferred from social insurance and social assistance spending.

Why is the cost so expensive? Because, as explained in another article, the referendum would provide “a basic income of about 2,500 francs ($2,600) a month.”

Which may explain why it appears the traditionally sensible Swiss voters almost certainly will vote against the scheme by an overwhelming margin.

Seventy-two percent were against establishing the unconditional stipend, which the initiators say would “enable the entire population have a decent existence and participate in public life,” the survey found. Just 24 percent support it, while 4 percent were still undecided, had voting been conducted this month. “Support for the ‘no’-camp is expected to increase as the campaign progresses,” pollster gfs.bern said in its survey for broadcaster SRG published on Friday. “This indicates a clear rejection on the day of the ballot.” The basic income vote will take place on June 5.

For what it’s worth, I’m at a conference in Switzerland, where I spoke earlier today on this topic as part of a panel that included my colleague Michael Tanner, along with former Labor Secretary Robert Reich and Swiss Professor Reiner Eichenberger.

I urged the audience to oppose the referendum because of what I called a nope-hope-dope argument.

1. The “nope” part is my rejection of the belief on the left that technology will destroy jobs. We’ve had major changes in the economy, leading first to big losses in agricultural jobs and then significant losses in manufacturing jobs. But those changes didn’t lead to less employment. Instead, those jobs were lost as part of changes that made all of us much wealthier. So while I have no idea what will happen in the future, I have considerable faith that market forces will create productive options for people.
2. The “hope” part is my admiration of the private initiatives that are taking place and my semi-support for the local experiments that are taking place. I want poor people to have more money and I want them to have hope. And these experiments by private charities and local governments may teach us useful things that help us reform the very inefficient welfare states operated by central governments.
3. And the “dope” part of my presentation was my description of the people who think that we would get good results with a basic income scheme operated by central governments. Simply stated, I fear that such a proposal would be too generous, thus reducing over time incentives to work (perfectly captured by this Wizard-of-Id parody). I also fear it would require economically destructive tax rates, either explicitly to fund a basic income for everyone, or implicitly because it would be phased out like the EITC and therefore drive a larger wedge between pre-tax income and post-tax consumption for a huge number of taxpayers.

Here, for posterity, is a photo of the panelists.

I did mention, by the way, that it would be very interesting to see an individual Swiss canton conduct an experiment, replacing all current redistribution schemes with a basic income.

And since the supporters of the referendum tweeted that statement, I’ll interpret that as a sign that I’m a consensus builder!

But I have to confess that the organizers of the conference probably should have cast me aside and instead invited Professor David Henderson of the Naval Postgraduate School.

In a new article for the Independent Institute, he looks the real-world numbers for the United States and throws very cold water on the idea of the basic income guarantee. Here’s an excerpt of his calculation of the fiscal cost of such a scheme.

The annual BIG expenditure for U.S. citizens, then, would be approximately $2.068 trillion. This expenditure estimate does not include any expenditure for administering the program or for monitoring for fraud. In other words, it is a minimum estimate. …Assume, as Zwolinski advocates, that such a program would displace all 126 federal antipoverty programs and all state and local government antipoverty programs. …Notice what would happen. A $2.068 trillion program would replace programs whose total expenditures in 2012 were $952 billion. Even rounding up the $952 billion to $1 trillion, the program that Zwolinski advocates is more than twice as costly in budgetary terms as current antipoverty programs. …How would Zwolinski fund this major increase in federal spending? …he would need to have the federal government increase taxes from their estimated $2.993 trillion to $4.361 trillion, an increase of 45.7 percent.

Those fiscal costs could be reduced with a clawback mechanism (i.e., means testing the basic income grant), but that would require very high implicit marginal tax rates.

Zwolinski suggests a way around the huge tax increases that I have laid out: the way proposed by Charles Murray in his book In Our Hands: A Plan to Replace the Welfare State (2006). That method is to tax $5,000 of the $10,000 grant with a 20-percentage-point increase in the marginal tax rate on people who make $25,000 or more. At the $50,000 income level, $5,000 of the grant would be paid back. This method does reduce the amount of other taxation required, but, of course, it increases marginal tax rates over a range of incomes by 20 percentage points. …This increase would be a substantial disincentive to work and a substantial incentive to make money in the underground economy.

And he also cites what I fear would be an enormous problem, which is that we couldn’t trust politicians to keep the basic income grant at a modest level, and we also couldn’t trust them to permanently eliminate other redistribution problems.

…there is another major problem: the “public-choice” problem. …those who advocate further government programs…must show that there is a high probability that such government programs will not grow further. …in the case of a BIG, they must show that there is a high probability that a scaled-down BIG really would replace all of the existing programs for the poor and near poor. This is hard to do because the various interest groups that favor the existing programs will not sit back: they will fight to keep some or all of those programs. Zwolinski…writes that if the BIG “were implemented via a constitutional amendment, many of the public choice considerations could be reduced, I think, to an acceptable level.”11 Yet, as Randy Barnett (2004) and Robert Levy and William Mellor (2008) show, even strict constitutional limits on federal government power have yielded to the U.S. president, Congress, and the courts.

Think of this as presenting the same challenge presented by a national sales tax or value-added tax. There are good arguments for those proposals, but the most powerful objection is that politicians can’t be trusted to permanently eliminate or reduce existing income taxes.

So if a basic income isn’t the answer, what should we do?

I agree with the scholars from the Austrian School that decentralization is the right approach. We already did that for basic welfare payments during the Clinton years, and we should do it for all other forms of income redistribution, perhaps starting with food stamps and Medicaid.

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Libertarian Humor for a Dismal Topic

I’m a bleeding heart libertarian in that I get most upset about statist policies that make life harder for disadvantaged people so that folks with more money can get undeserved goodies.

• For instance, I despise anti-school choice leftists because they value political support from teacher unions more than they value opportunity for poor kids.
• And I get very agitated that about the Export-Import Bank, which is a form of corporate welfare that transfers money from the general population to the rich.

Another example is occupational licensing, which occurs when politicians require newcomers to jump through expensive and/or time-consuming hoops before getting “permission” to provide a good or service. These licensing rules create unjust profits for established businesses by hindering competition, and they are especially burdensome for poor people, all of which is explained in this superb video from the Institute for Justice.

But if there’s a sliver lining to that dark cloud, it’s this image that I will add to my collection of libertarian humor. To be fair, I don’t know if it counts as purely libertarian humor, but I saw it on Reddit‘s libertarian page and it definitely makes the right points.

If you like libertarian humor, both pro and con, click here, here, and here for other examples.

P.S. Let’s close by sharing some good news on a serious topic.

Unlike the short-sighted politicians in the United States, the crowd in Australia seems a bit more level-headed on the issue of competitive corporate taxation. Here are some excerpts from a story in the U.K.-based Guardian.

The Turnbull government has given big business exactly what it wants – a substantial tax cut. It has also extended the Abbott government’s small business tax package by giving small and medium businesses more tax cuts and incentives. …“Our corporate tax rate is high by international standards and well above the average for OECD countries and those in the Asian region,” the budget papers say. “This will make Australian companies more internationally competitive in a tough global market place.” The government plans to cut the corporate tax rate significantly, from 30% to 25%. …The cut will be phased in over 10 years… The treasurer, Scott Morrison, says treasury modelling suggests the measures will grow the economy by 1% over the long term. He says they will lead to higher living standards, via increased business investment and more jobs.

I certainly don’t think “significantly” is a word to describe a modest five-percentage-point reduction in the rate, but kudos to Aussie politicians for moving in the right direction. I also like the part about “treasury modelling,” which suggests that the Australians also have a sensible approach on the issue of static scoring vs. dynamic scoring.

So perhaps now you can understand why Australia is my choice if (when?) the welfare state collapses in the United States (though I’m still of the opinion that the Swiss are the world’s most sensible people).

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Obama’s Miserable Economic Legacy

Let’s take a look at President Obama’s economic legacy.

The Washington Examiner opines on President Obama’s remarkable claim that he saved the world economy.

President Obama…wants to be remembered for…[being]…the savior of the American and global economies. “There are things I’m proud of,” he said, citing Obamacare, then added, “Saving the world economy from a Great Depression, that was pretty good.”

Not so fast. Looking at the economy’s anemic numbers the editors are less than impressed.

Obama will end eight years in office without presiding over a thriving economy of the sort America enjoyed in the past. It also suggests that even the mediocre growth of recent years depended on high oil prices, which have collapsed by more than half. This is the bitter fruit of creationist economics, the erroneous belief that government activity can somehow conjure new wealth and value.

The Wall Street Journal is similarly dour about Obama’s economic legacy.

When did Americans decide that 1% or 2% economic growth is acceptable, that puny wage increases are inevitable, and that we should all merely shrug and get used to the country’s diminished expectations? …the first quarter is further evidence of what has been the weakest economic expansion in the postwar era. …All of this continues the slow-or-slower pace of this entire expansion that began nearly seven years ago. Each year has had a similar GDP dip, and growth has never exceeded 2.5% (2010). The American economy hasn’t grown by more than 3% since 2005 (3.3%), the longest such stretch of malaise that we can find in the Bureau of Economic analysis tables going back to 1930. …Faster growth is possible, but it will take better policies.

In a column for Bloomberg, Narayana Kocherlakota, looks at what’s happened and compares it to what CBO projected would happen.

it’s not hard to see why many people are disappointed with the performance of the economy during Obama’s time in office. In January 2009, at the beginning of Obama’s first term, the nonpartisan Congressional Budget Office issued a 10-year forecast for the U.S. economy, including such indicators as unemployment, gross domestic product, the budget deficit, government debt and interest rates. …The unemployment rate has come closest to expectations. …Elsewhere, the story is less positive. Total income growth in the U.S. has fallen well short of expectations, in both nominal and inflation-adjusted terms. …the federal budget deficit…still much larger than the CBO forecast in 2009 — as is the ratio of government debt to GDP.

Here’s his chart.

Last, but not least, Louis Woodhill shares some numbers that capture Obama’s real legacy.

America’s elites have largely given up on growth, and are now distracting themselves with academic musings about “secular stagnation.” …assuming 2.67% RGDP growth for 2016, Obama will leave office having produced an average of 1.55% growth. This would place his presidency fourth from the bottom of the list of 39*, above only those of Herbert Hoover (-5.65%), Andrew Johnson (-0.70%) and Theodore Roosevelt (1.41%)

What makes this final comparison so damning is that Obama had the comparative good fortune to enter office in the middle of a recession. Which means, all things equal, that his numbers should look very positive.

Instead, he’s managed to compile one of the worst track records.

When I do comparisons, I like using the interactive recession/recovery site of the Minneapolis Federal Reserve, which allows users to compare every recession and recovery since the end of World War II.

Here’s how President Obama (red line) ranks on GDP growth.

As you can see, whether your starting point is the beginning of the recovery or the beginning of the recession, Obama is in last place.

He does slightly better on employment. He still has one of the worst records (again, the red line), but he does beat George W. Bush’s also-anemic performance on job creation.

By the way, some of you may be wondering why the employment data for Obama is so weak when the unemployment rate has significantly fallen.

The answer is that the unemployment rate doesn’t count people who have given up on finding a job, whereas the Minneapolis Fed data counts how many new jobs are being created.

And it’s the amount of people productively employed that matters if we want more economic output, so the Minneapolis Fed data is far more important and revealing than the official unemployment rate numbers.

Unfortunately, Obama and his team haven’t figured out (or simply don’t care) that jobs are more likely to be created when government is smaller rather than bigger.

By the way, this analysis presumably won’t be very compelling for Obama supporters because they’ll simply assert things could have been much worse without his policies.

They may even believe the President’s claim that he saved the American economy from a Great Depression.

But they overlook the fact that the economy normally bounces back quickly from a downturn. It was only during the 1930s, when Hoover and Roosevelt competed to impose bad policy, that a recession became a depression.

The bad news is that President Obama’s policies haven’t helped today’s economy, but the good news is that his policies are nowhere near as harmful as the combined statist agendas of Hoover and Roosevelt.

So if we want to learn a lesson on what works, the economy’s very strong boom under Reagan is a good case study. And if you want to go back further, the anti-Keynesian booms after World War I and World War II also teach important lessons.

P.S. President Obama is completely correct when he points out that America’s economy is generally stronger than European economies. Unfortunately, he doesn’t seem to realize what this implies.

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