If We’re Going to Trust Governments to Enforce Law, then Governments Should Obey Law (and Limit Law)

One of the big challenges for libertarians is that we understand “public choice theory.” In other words, we know that people attracted to government will have both the incentive and the power to do bad things, so our quandary is how to give government the authority to provide so-called public goods without sowing the seeds for an oppressive Leviathan state.

Our Founding Fathers thought they solved this problem by drafting and ratifying a constitution that placed firm limits on the power of government. Sadly, that system largely broke down in the 1930s and 1940s as the Supreme Court ceded its role of protecting economic liberty (with John Roberts a few years ago providing the icing on the cake of untrammeled government power).

That’s the bad news.

The good news is that the judicial branch has done a somewhat better job of protecting personal liberty. Indeed, with the courts leading the way on certain issues (such as whether governments can persecute people for being gay), we may even have more personal liberty than the Founders intended.

Speaking of personal liberty, one of the thorniest challenges is that we want government to fight crime, but we also want to make sure that it doesn’t have the power and authority to trample individual rights.

That’s one of the reasons the Founding Fathers gave us a Bill of Rights that protects our right to a speedy trial, protects us from double jeopardy, and gives us the right to remain silent. And the Bill of Rights also protects us by requiring governments to get judicial approval (search warrants) before snooping into out private property. And that’s the focus of today’s column.

And the case study for our discussion will be the way government is seeking to access electronic data without following proper procedures. Veronique de Rugy provides the background in her column for Reason.

The Electronic Communications Privacy Act was passed in 1986, when data storage was considerably more expensive and primitive. At the time, it was not common for data to be kept online for very long. As such, the ECPA considers emails held online by a third party for more than 180 days to be abandoned and thus open to access by law enforcement without a normal warrant. …Now that free online email hosts are commonplace and terabytes of cloud storage are available at little cost, the ECPA is a troubling anachronism. Today’s internet users expect their data to be protected from prying government eyes for as long as they choose to store it.

Amazingly, some politicians actually want to fix this problem.

There is a bill making its way through Congress that attempts to address these issues. It’s the International Communications Privacy Act. The bipartisan bill—introduced by Sens. Orrin Hatch, R-Utah, Chris Coons, D-Del., and Dean Heller, R-Nev.—…would codify into law a simple and clear standard: A warrant should always be required to access private information from a third party. The reforms in the ICPA would move us away from the current ’80s drama. It also seems that the package could even move through Congress during a contentious election season because it safeguards consumer data while also acknowledging that there must be legitimate and accessible law enforcement tools to pursue digital evidence across borders.

By the way, this has become an issue in part because the courts have intervened to slap down overzealous law enforcement in a cross-border investigation,

…the 2nd U.S. Circuit Court of Appeals rebuked the Justice Department after a three-year legal battle with Microsoft, which hosted data for an Irish citizen being pursued by U.S. authorities. The data was being kept in a server located in Ireland, yet the U.S. government insisted it had jurisdiction to demand access just because the company that held it is a subsidiary of Microsoft, an American corporation. …ECPA…provides no authority for access to data held overseas. The government officials most likely made this overreach rather than go through the mutual legal assistance treaty, or MLAT, process—which would have enabled them to work with the appropriate overseas authority—because of the fact that MLAT procedures are also cumbersome and outdated.

The Hatch-Coons-Heller legislation deals with these issues by both requiring warrants but also improving the MLAT process, which is a win-win situation. Innocent people have their rights protected and governments have a better system for investigating potential bad guys.

Which helps to explain why a coalition of taxpayer organizations and free-market groups have embraced the proposed legislation.

The bill contains provisions that would protect the privacy of American citizens, promote cross-border data flow, provide adequate tools for law enforcement, and enhance the nation’s global trade agenda. …S. 2986/H.R. 5323 would require U.S. law enforcement agencies to obtain a warrant for the content of electronic communications stored with electronic communications service providers and remote computing service providers.  The legal framework will allow authorities to obtain the electronic communications of U.S. persons, regardless of where those communications are located.  …S. 2986/H.R. 5323 reforms the MLAT process and provides greater accessibility, transparency, and accountability by requiring the attorney general to create an online docketing system for MLAT requests and publish new statistics on the number of such requests. …ICPA strikes the right balance between the legitimate needs of law enforcement and the privacy of American citizens, while enhancing international agreements.

Having looked at a specific example of how to enable effective law enforcement while also protecting civil liberties, let’s now zoom out and consider the big picture.

One of the problems in our system is that there are too many laws. Not just too many laws, but laws that are capricious and impossible to understand.

This is why Harvey Silverglate wrote Three Felonies a Day to describe how normal, law-abiding people unintentionally commit crimes (that shouldn’t be crimes).

Here’s a video interview from Reason with Mr. Silverglate.

The bottom line is that when you mix capricious and impossible-to-understand laws with capricious and vindictive bureaucrats, you get horrifying examples of government thuggery.

We can start by getting rid of drug laws, anti-money laundering laws, and civil asset forfeiture laws.

Remember, if we want to fight genuine crime, it’s a good idea to have just laws.

P.S. And if we have fewer bad and needless laws, we’ll have less police abuse.

P.P.S. To close on a humorous note, President Obama’s approach to the Bill of Rights leaves much to be desired.

P.P.P.S. In reference to the public-goods/Leviathan-state quandary discussed at the start of this column, the anarcho-capitalists say the solution is to abolish all government and to allow markets to provide public goods. I’m glad there are scholars pushing this idea (and I certainly had lots of interesting discussions about this concept while in grad school), but given what’s been happening over the past 100 years, I doubt this will be a practical option in my lifetime.

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Notwithstanding the New Left-Wing Rhetorical Strategy, Higher Taxes and Bigger Government Is Not a Recipe for Growth and Development

I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

• The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
• The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
• The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
• And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

In the past, the left agitated for higher taxes simply in hopes for having more redistribution.

And they’ve urged higher taxes because of spite and hostility against those with high incomes.

Some folks on the left also have supported higher taxes on the theory that the economy’s performance is boosted when deficits are smaller.

But now, they are advocating higher taxes (oops, excuse me, I mean they are urging “resource mobilization” to generate “stable resources” so there can be “financing for development” in order to “strengthen fiscal frameworks”) on the theory that bigger government is the way to get more growth.

You probably won’t be surprised to learn, however, that these reports from international bureaucracies never provide any evidence for this novel hypothesis. None. Zero. Zilch. Nada. The null set.

They simply assert that governments will be able to make presumably wonderful growth-generating “investments” if politicians can squeeze more money from the private sector.

And I strongly suspect that this absence of evidence is deliberate. Simply stated, international bureaucracies are willing to produce shoddy research (just look at what the IMF and OECD wrote about the relationship between growth and inequality), but there’s a limit to how far data can be tortured and manipulated.

Especially when there’s so much evidence from real scholars that economic performance is weakened when government gets bigger.

Not to mention that most sentient beings can look around the world and look at the moribund economies of nations with large governments (such as France, Italy, and Greece) and compare them with the better performance of places with smaller government (such as Hong Kong, Switzerland, and Singapore).

But if you read the aforementioned reports from the international bureaucracies, you’ll notice that some of them focus on getting more growth in poor nations.

Perhaps, some statists might argue, government is big enough in Europe, but not big enough in poorer regions such as sub-Saharan Africa.

So let’s look at the numbers. Is it true that governments in the developing world don’t have enough money to provide core public goods?

The answer is no.

But before sharing those numbers, let’s look at some historical data. A few years ago, I shared some research demonstrating that countries in North America and Western Europe became rich in the 1800s and early 1900s when the burden of government spending was very modest.

One would logically conclude from this data that today’s poor nations should copy that approach.

Yet here’s the data from the International Monetary Fund on government expenditures in various poor regions of the world. As you can see, the burden of government spending in these areas is two or three times larger than it was in America and other nations that when they made the move from agricultural poverty to middle class prosperity.

The bottom line is that small government and free markets is the recipe for growth and prosperity in all nations.

Just don’t expect international bureaucracies to share that recipe since one of the obvious conclusions is that we therefore don’t need parasitical bodies like the IMF, OECD, World Bank, and UN.

P.S. Unsurprisingly, Hillary Clinton also has adopted the mantra of higher-taxes → bigger government → more growth.

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Shocker: Paul Krugman Makes a Sensible and Accurate Observation about Tax Policy

I’m not the biggest fan of Paul Krugman in his role as a doctrinaire advocate of leftist policy (he used to be within the mainstream and occasionally point out the risks of government intervention in his former role as an academic economist).

It’s not just that he believes in big government. He also has an unfortunate habit of misinterpreting (the charitable explanation) data when advocating higher taxes and more spending.

• In 2015, he cherry-picked job numbers to make it seem as if Obama’s policies were producing good employment data.
• Earlier that year, Krugman asserted that America was outperforming Europe because our fiscal policy was more Keynesian, yet the data showed that the United States had bigger spending reductions and less red ink.
• In 2014, he asserted that a supposed “California comeback” in jobs somehow proved my analysis of a tax hike was wrong, yet only four states at the time had a higher unemployment rate than California.
• And here’s my favorite: In 2012, Krugman engaged in the policy version of time travel by blaming Estonia’s 2008 recession on spending cuts that took place in 2009.

As you can see, he’s not exactly a paragon of sound thinking and careful analysis.

But there must be a blue moon in the forecast because the New York Times columnist has an accurate criticism of Donald Trump’s tax plan.

Before sharing Krugman’s critique, here’s the position of the Trump campaign, which asserts that the World Trade Organization has rigged the rules against America by allowing nations to give rebates to exporters so that there is no value-added tax (VAT) on good and services sold to consumers in other nations.

…there is a more subtle tax problem pulling US corporations offshore. It relates to the unequal treatment of the US income tax system by the World Trade Organization (WTO). …While the US operates primarily on an income tax system, all of America’s major trading partners depend heavily on a “value-added tax” or VAT system. Under current rules, the WTO allows America’s trading partners to effectively create backdoor tariffs to block American exports and backdoor subsidies to penetrate US markets. Here’s how this exploitation works: VAT rates are typically between 15% and 25%. …Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy. At the same time, the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay. Thus, under the WTO system, American corporations suffer a “triple whammy”: foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid. The practical effect of the WTO’s unequal treatment of America’s income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions.

In the wonky jargon of public finance, VATs are said to be “border adjustable.” And here’s Krugman’s caustic observation about the above argument.

I’ve been writing about Donald Trump’s claim that Mexico’s value-added tax is an unfair trade policy, which is just really bad economics. …a VAT has the same effects as a sales tax. Now, nobody thinks that sales taxes are an unfair trade practice. …Trump wasn’t saying ignorant things off the top of his head: he was saying ignorant things fed to him by his incompetent economic advisers. …Should we be reassured that Trump wasn’t actually winging it here, just taking really bad advice? Not at all.

I don’t know whether it’s fair to criticize Trump’s economic advisers (after all, are they the ones who developed this position, or were they simply told to justify what Trump was saying?), but I certainly agree with Krugman that other nations don’t gain a trade advantage simply because they have a VAT.

Here’s some of what I wrote about this issue earlier this year.

For mercantilists worried about trade deficits, “border adjustability” is seen as a positive feature. But not only are they wrong on trade, they do not understand how a VAT works. …Under current law, American goods sold in America do not pay a VAT, but neither do German-produced goods that are sold in America. Likewise, any American-produced goods sold in Germany are hit be a VAT, but so are German-produced goods. In other words, there is a level playing field. The only difference is that German politicians seize a greater share of people’s income. So what happens if America adopts a VAT? The German government continues to tax American-produced goods in Germany, just as it taxes German-produced goods sold in Germany. …In the United States, there is a similar story. There is now a tax on imports, including imports from Germany. But there is an identical tax on domestically-produced goods. And since the playing field remains level, protectionists will be disappointed. The only winners will be politicians since they have more money to spend.

If you want more information, I also discuss the trade impact of a VAT in this video.

So, yes, Krugman is right. At least on this particular issue.

Actually, he’s even right about another part of his column, when he pointed out that if a VAT is supposedly good for competitiveness, then this should give New York (with a high sales tax) an advantage over Delaware (with no sales tax). As Krugman points out, this is absurd.

…nobody thinks that sales taxes are an unfair trade practice. New York has fairly high sales taxes; Delaware has no such tax. Does anyone think that this gives New York an unfair advantage in interstate competition?

Indeed, the answer to Krugman’s rhetorical question is that lots of people recognize that Delaware has the advantage. This is why politicians in many states (especially those with punitive sales taxes) are pushing for the so-called Marketplace Fairness Act in hopes of forcing merchants in states like Delaware to become deputy tax collectors for states like New York (this would be an odious expansion of extraterritorial tax powers for state governments).

I don’t want to get all wonky, but this fight revolves around whether consumption taxes should be levied where goods and services are sold (the origin-based approach) or whether the taxes should be collected based on where the consumer lives (the destination-based approach). High-tax governments prefer the latter because they want to make it difficult for their residents to shop where the tax burden is lower.

By the way, politicians in Europe and elsewhere impose destination-based VATs for the same reason. They don’t like tax competition. So that’s yet another reason (above and beyond the fact that they are money machines for big government) to dislike the VAT.

I suspect, incidentally, that Krugman favors destination-based consumption taxes over origin-based systems, so even though he’s right about VATs and trade, he probably compensates by being wrong on an issue that really matters.

 

 

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The Myth and Reality of Trickle-Down Economics

My buddy from grad school, Steve Horwitz, has a column for CapX that looks at the argument over “trickle-down economics.” As he points out (and as captured by the semi-clever nearby image), this is mostly a term used by leftists to imply that supporters of economic liberty want tax cuts for the “rich” based on a theory that some of those tax cuts eventually will trickle down to the less fortunate.

People who argue for tax cuts, less government spending, and more freedom for people to produce and trade what they think is valuable are often accused of supporting something called “trickle-down economics.” It’s hard to pin down exactly what that term means, but it seems to be something like the following: “those free market folks believe that if you give tax cuts or subsidies to rich people, the wealth they acquire will (somehow) ‘trickle down’ to the poor.”

But Steve points out that no economist actually uses this argument.

The problem with this term is that, as far as I know, no economist has ever used that term to describe their own views. …There’s no economic argument that claims that policies that themselves only benefit the wealthy directly will somehow “trickle down” to the poor.

So why, then, do leftists characterize tax cuts as “trickle-down economics” when no actual advocate uses that term or that argument?

There are a couple of possible answers, one of which is malicious and one of which is mistaken.

• First, they’ve latched on to a politically effective way of characterizing tax cuts, so it’s understandable that they want to continue with that approach.
• Second, their argument for Keynesian economics actually is a version of trickle-down economics since the people who get money from so-called stimulus programs spend the money, which means it gradually trickles to other people (that part is true, but Keynesians fail to understand that government can’t inject money into the economy in this fashion without first taking money out of the economy by borrowing from private capital markets). And since they believe the economy is driven by people spending money (rather than people earning money) and having it trickle to other people, maybe they assume that advocates of tax cuts believe the same thing.

In reality, of course, proponents of lower tax rates are motivated by a desire to improve incentives for people to earn additional income with more work, more saving, and more investment. That’s the basic insight of supply-side economics. It has nothing to do with how they spend (or don’t spend) their income.

With that out of the way, I want to address the part of Steve’s column where he suggested that policies which benefit one group are never helpful to other groups.

I don’t think that’s worded very well. If we lower the capital gains tax on people making more than $10 million annually, that is a policy that obviously benefits only the rich, at least when looking at direct or first-order effects.

But the impact of less double taxation should boost economic performance, even if only by a modest amount, and that will benefit everyone in society.

By the way, this works both ways. If we do something that is particularly beneficial for the poor, such as cutting back on occupational licensing requirements, that presumably doesn’t generate any direct benefit for rich people. But they will gain (as will middle-class people) as the economy becomes more productive and efficient.

Steve understands this. He closes his column by making a very similar argument about the economy-wide benefits of more economic liberty.

…allowing everyone to pursue all the opportunities they can in the marketplace, with the minimal level of taxation and regulation, will create generalized prosperity. The value of cutting taxes is not just cutting them for higher income groups, but for everyone. Letting everyone keep more of the value they create through exchange means that everyone has more incentive to create such value in the first place, whether it’s through the ownership of capital or finding new uses for one’s labor.

Now that we’ve dispensed with the silly left-wing caricature of trickle-down economics, let’s discuss how there actually is a sensible way to think about the issue.

Way back in 1996, I gave a speech in Sweden about the impact of fiscal policy on economic growth (later reprinted as a Heritage Foundation publication).

As part of my comments, I spoke about the damaging impact of the tax code’s bias against saving and investment and explained that this lowered wages because of the link between the capital stock (machinery, technology, etc) and employee compensation.

I also quoted John Shoven, a professor at Stanford University who wrote a paper back in 1990 about this topic for the American Council for Capital Formation. And here we actually have an example of an economist using “trickle-down economics” in the proper sense.

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

Amen. Capital and labor are complementary goods, which means that more of one helps make the other more valuable.

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Some Bipartisan Humor to Survive the Clinton-Trump (Clump) Debate

Since I’ve put forth plenty of bipartisan criticism of Hillary Clinton and Donald Trump (a.k.a., Tweedledee and Tweedledum), it’s time to lighten the mood with some bipartisan humor about the two major party candidates.

Glenn McCoy has an amusing (in a sad way) cartoon about Donald Trump’s assertion that he’s in great health.

And here’s a guy who came up with some very clever humor referencing Hillary’s email scandal.

Hopefully these two images will help you survive the Clinton-Trump debate.

P.S. Since I’m not feeling particularly charitable to the political class, let’s close by recycling some biting humor against the crowd in Washington, starting with this clever image.

Reminds me of this Star Wars-themed joke about Washington.

If you like mocking the political class, I have lots of other material for you to enjoy. You can read about how the men and women in DC spend their time screwing us and wasting our money. We also have some examples of what people in Montana, Louisiana, Nevada, and Wyoming think about big-spending politicians.

This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting.

Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry.

Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

P.P.P.S. One serious point. If we want to clean up corruption in Washington, more campaign finance laws won’t work. The only way to reduce corruption is to shrink the size of government.

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Anti-Economics from The Economist

When I was younger, folks in the policy community joked that BusinessWeek was the “anti-business business weekly” because its coverage of the economy was just as stale and predictably left wing as what you would find in the pages of Time or Newsweek.

Well, perhaps it’s time for The Economist to be known as the “anti-economics economic weekly.”

Writing about the stagnation that is infecting western nations, the magazine beclowns itself by regurgitating stale 1960s-style Keynesianism. The article is worthy of a fisking (i.e., a “point-by-point debunking of lies and/or idiocies”), starting with the assertion that central banks saved the world at the end of last decade.

During the financial crisis the Federal Reserve and other central banks were hailed for their actions: by slashing rates and printing money to buy bonds, they stopped a shock from becoming a depression.

I’m certainly open to the argument that the downturn would have been far worse if the banking system hadn’t been recapitalized (even if it should have happened using the “FDIC-resolution approach” rather than via corrupt bailouts), but that’s a completely separate issue from whether Keynesian monetary policy was either desirable or successful.

Regarding the latter question, just look around the world. The Fed has followed an easy-money policy. Has that resulted in a robust recovery for America? The European Central Bank (ECB) has followed the same policy. Has that worked? And the Bank of Japan (BoJ) has done the same thing. Does anyone view Japan’s economy as a success?

At least the article acknowledges that there are some skeptics of the current approach.

The central bankers say that ultra-loose monetary policy remains essential to prop up still-weak economies and hit their inflation targets. …But a growing chorus of critics frets about the effects of the low-rate world—a topsy-turvy place where savers are charged a fee, where the yields on a large fraction of rich-world government debt come with a minus sign, and where central banks matter more than markets in deciding how capital is allocated.

The Economist, as you might expect, expresses sympathy for the position of the central bankers.

In most of the rich world inflation is below the official target. Indeed, in some ways central banks have not been bold enough. Only now, for example, has the BoJ explicitly pledged to overshoot its 2% inflation target. The Fed still seems anxious to push up rates as soon as it can.

The preceding passage is predicated on the assumption that there is a mechanistic tradeoff between inflation and unemployment (the so-called Phillips Curve), one of the core concepts of Keynesian economics. According to adherents, all-wise central bankers can push inflation up if they want lower unemployment and push inflation down if they want to cool the economy.

This idea has been debunked by real world events because inflation and unemployment simultaneously rose during the 1970s (supposedly impossible according the Keynesians) and simultaneously fell during the 1980s (also a theoretical impossibility according to advocates of the Phillips Curve).

But real-world evidence apparently can be ignored if it contradicts the left’s favorite theories.

That being said, we can set aside the issue of Keynesian monetary policy because the main thrust of the article is an embrace of Keynesian fiscal policy.

…it is time to move beyond a reliance on central banks. …economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.

As an aside, the passage about shifting recession fighting “from central banks to governments” is rather bizarre since the Fed, the ECB, and the BoJ are all government entities. Either the reporter or the editor should have rewritten that sentence so that it concluded with “shift from central banks to fiscal policy” or something like that.

In any event, The Economist has a strange perspective on this issue. It wants Keynesian fiscal policy, yet it worries about politicians using that approach to permanently expand government. And it is not impressed by the fixation on “shovel-ready” infrastructure spending.

The task today is to find a form of fiscal policy that can revive the economy in the bad times without entrenching government in the good. …infrastructure spending is not the best way to prop up weak demand. …fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.

So The Economist endorses what it refers to as “small-government Keynesianism,” though that’s simply its way of saying that additional spending increases (and gimmicky tax cuts) should occur automatically.

…there are ways to make fiscal policy less politicised and more responsive. …more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.

In the language of Keynesians, such policies are known as “automatic stabilizers,” and there already are lots of so-called means-tested programs that operate this way. When people lose their jobs, government spending on unemployment benefits automatically increases. During a weak economy, there also are automatic spending increases for programs such as Food Stamps and Medicaid.

I guess The Economist simply wants more programs that work this way, or perhaps bigger handouts for existing programs. And the magazine views this approach as “small-government Keynesianism” because the spending increases theoretically evaporate as the economy starts growing and fewer people are automatically entitled to receive benefits from the various programs.

Regardless, whoever wrote the article seems convinced that such programs help boost the economy.

When the next downturn comes, this kind of fiscal ammunition will be desperately needed. Only a small share of public spending needs to be affected for fiscal policy to be an effective recession-fighting weapon.

My reaction, for what it’s worth, is to wonder why the article doesn’t include any evidence to bolster the claim that more government spending is and “effective” way of ending recessions and boosting growth. Though I suspect the author of the article didn’t include any evidence because it’s impossible to identify any success stories for Keynesian economics.

• Did Keynesian spending boost the economy under Hoover? No.
• Did Keynesian spending boost the economy under Roosevelt? No.
• Has Keynesian spending worked in Japan at any point over the past twenty-five years? No.
• Did Keynesian spending boost the economy under Obama? No.

Indeed, Keynesian spending has an unparalleled track record of failure in the real world. Though advocates of Keynesianism have a ready-built excuse. All the above failures only occurred because the spending increases were inadequate.

But what do expect from the “perpetual motion machine” of Keynesian economics, a theory that is only successful if you assume it is successful?

I’m not surprised that politicians gravitate to this idea. After all, it tells them that their vice  of wasteful overspending is actually a virtue.

But it’s quite disappointing that journalists at an allegedly economics-oriented magazine blithely accept this strange theory.

P.S. My second-favorite story about Keynesian economics involves the sequester, which big spenders claimed would cripple the economy, yet that’s when we got the only semi-decent growth of the Obama era.

P.P.S. My favorite story about Keynesianism is when Paul Krugman was caught trying to blame a 2008 recession in Estonia on spending cuts that occurred in 2009.

P.P.P.S. Here’s my video explaining Keynesian economics.

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Hillary’s Grave-Robber Tax Hike

What’s the worst possible tax hike, the one that would do the most economic damage?

Raising income tax rates is never a good idea, and there’s powerful evidence from the 1980s about how upper-income taxpayers have considerable ability to change their behavior in response to changes in incentives.

But if you want to know the tax hikes that do the most damage, on a per-dollar raised basis, it’s probably best to focus on levies that boost double taxation of saving and investment.

The Tax Foundation ran some estimates on five different tax increases, for instance, and found that worsening depreciation rules (an arcane part of the tax code dealing with the degree to which new investment is taxed) would do the most damage, followed by a higher corporate tax rate, and then higher individual income tax rates.

But I wonder what they would have found if they also modeled the impact of a higher death tax. That levy is particularly destructive because it directly requires the liquidation of capital. The assets of investors, entrepreneurs, farmers, small business owners, and other victims take a big hit as politicians grab as much as 40 percent of what they’ve worked for during their lives.

This is bad for the economy because it directly reduces the capital stock. Sort of like harvesting apples by cutting down 40 percent of the trees in an orchard. The net result is that the economy’s ability to generate future income is undermined.

But it’s also bad for the economy because it reduces incentives for successful taxpayers to both earn and invest while they’re alive. Why bust your rear end when the government immediately will take at least 39.6 percent (actually more when you consider Medicare taxes, state taxes, and double taxation of interest, dividends, and capital gains) of your income, and then another 40 percent of what you’ve saved and invested when you kick the bucket?

Unfortunately, Hillary Clinton doesn’t seem to care about such matters. She actually just decided to double down on her destructive tax agenda by endorsing an even bigger increase in the death tax.

I’m not joking.

The editorial page of the Wall Street Journal is not exactly impressed by Hillary’s class-warfare poison.

On Thursday she decided that her proposal to raise the death tax to 45% from 40% isn’t enough and endorsed even higher levies that would apply to thousands of estates. Though she defeated Bernie Sanders in the primary, she is adopting the socialist’s death-tax rate structure. She’d tax all estates over $10 million at 50%, apply a 55% rate on estates over $50 million, and go to 65% on assets above $500 million. The 65% rate would be the highest since 1981 and is another example of how she is repudiating the more moderate policies of her husband and the Democrats of the 1990s. …the Sanders plan that Mrs. Clinton is copying did not index exemption levels for inflation. …Mrs. Clinton would also end the “step-up in basis” on stock valuations for many filers, triggering big capital gains taxes for a much broader population.

Wow, this is class warfare on steroids. And the part about this being more like Bernie Sanders than Bill Clinton hits the mark. Economic freedom actually increased in America between 1992 and 2000.

Hillary, by contrast, is a doctrinaire and reflexive statist. I’m not aware of a single position she’s taken that would reduce the burden of government.

By the way, here’s a bit of information that won’t shock anyone familiar with the greed and hypocrisy of the political class.

Hillary and her friends will largely dodge the tax, which mostly will fall on small business owners who lack the ability to create clever structures.

…most of her rich friends will set up foundations, as she and Bill Clinton have, to shelter most of their riches from the estate tax. …In any case, Mrs. Clinton is now promising total tax hikes of $1.5 trillion over a decade if elected President.

Gee, knock me over with a feather.

The Tax Foundation may not have included the death tax when it compared the harm of different tax hikes, but it has looked at how the death tax hurts the economy by discouraging capital formation and capital accumulation.

…an estate tax increase would cause economic production to be allocated away from business equipment, reducing the quantity of business equipment in the economy. …Many of the assets that fall under the estate tax, such as residential structures, commercial structures, and business equipment, enhance productivity, or gross domestic product (GDP) per hour worked. …The relationship between these assets and productivity is the focus of one of the most common models in economics, an equation called the Cobb-Douglas production function, which describes how workers and capital goods together produce economic output. Under this model, more capital increases output or income, even as the number of workers is held constant. It therefore increases GDP per hour worked, making people richer. Under such a model, reallocating economic production away from the capital goods that enhance output would reduce GDP in the long run. This is an effect that one might expect to see in a macroeconomic analysis of the estate tax.

Amen. If you want more output and higher living standards, you need to boost worker pay by increasing the quality and quantity of capital in the economy.

But politicians like Hillary

Here are the estimates of what happens to the economy with a 65 percent death tax.

So what would happen if lawmakers instead did the right thing and abolished this wretched example of double taxation?

The Tax Foundation has crunched the numbers. Here’s the impact on the overall economy.

And here’s what happens to federal revenue over the same period.

By the way, the Wall Street Journal editorial cited above did contain a bit of good news.

Congress is starting to push back against President Obama’s stealth death tax increase. Rep. Warren Davidson (R., Ohio) read our recent editorial about Treasury plans to raise taxes on minority stakes in family businesses by artificially inflating their value, and he’s drafted a bill to stop Treasury’s tax grab as a violation of the separation of powers. …A former owner of several businesses, Mr. Davidson says the U.S. economy needs owners focused on “growing assets, not structuring them for life events.” He explains that many farms in particular may carry high values but hold little cash, and so the death tax triggers land sales to pay the IRS. “The whole concept of a death tax is immoral,” Mr. Davidson says, and he’s right. The tax confiscates assets that have already been taxed once or more when first earned, and it punishes a lifetime of investment and thrift.

I wrote about this issue the other day, so I’m glad to see that there’s pushback against this Obama Administration scheme to unilaterally boost the burden of the death tax.

P.S. Politicians are not the only beneficiaries of the death tax.

 

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Trevor Noah Does a Facepalm by Accidentally Debunking the Obama-Clinton Mantra on Gun Control

I like when leftists accidentally make the case for limited government.

• The IMF, for instance, accidentally put together some solid evidence showing that a value-added tax is a money machine for bigger government.
• A story in the New York Times, meanwhile, accidentally showed that politicians will hike taxes if they’re not constrained by tax competition.
• And a statist in Illinois tried to argue that higher taxes don’t enable higher spending, but he accidentally showed that politicians raised taxes so they wouldn’t have to cut spending.
• Another report in the New York Times accidentally acknowledged that genuine private savings is the best route to obtain a secure retirement.

You can look at more examples here, but you get the point.

And now we have another item for our collection.

Sean Davis of The Federalist must believe in taking candy from babies and in exploiting the weak and defenseless. I’m jumping to this uncharacteristic conclusion because he just body-slammed a very vulnerable target. To be more specific, he mocked Trevor Noah of the Daily Show for some amazingly vapid comments that inadvertently decimated the gun-free-zone argument of Barack Obama and Hillary Clinton.

You should read the whole thing, but here are some of the more relevant portions of Sean’s article.

Trevor Noah, the host of Comedy Central’s The Daily Show, accidentally destroyed the case for gun control during his show on Wednesday night. …The target of Noah’s ire was an ice cream shop owner in a small town southeast of St. Cloud, Minnesota — the site of a mass stabbing at a mall last weekend — who put up a sign outside of his restaurant that read, “Muslims Get Out.”

Sean then does something very unfair (at least in the mind of statists). He directly transcribes part of Noah’s diatribe so we can see his argument for ourselves (he also includes the video if you click through to see the full story from The Federalist). Here’s some of what Mr. Noah said.

…what’s also strange is this man genuinely thought people who go around blowing people up would be stopped by a sign? You realize you’re talking to terrorists, not vampires. They don’t need to be invited in, alright? Or maybe he’s onto something, because if you think about it, we’ve never tried that. We’ve never actually tried to repel terrorists with signs. Yeah, maybe that’s all the airports need is a sign that says “No Terrorists,” yes? Yeah, and then guys are going to be walking going, “Oh, I was going to blow up the airport, but the rules are rules and they said I can’t come in…”

If this was a play-by-play analysis, at this point I would say that Noah taped a sign to his own back that says “kick me.”

So Sean obliges with this understated observation.

Noah probably doesn’t know it, but he just accidentally made an airtight case against gun-free zones in particular and gun control in general. He is 100 percent correct: people hell-bent on murdering as many people as possible don’t really care about silly signs or laws that tell them not to murder people. A sign that says “No Guns” will no more keep a violent jihadi from gunning down a bunch of innocent people than will a sign that says “Muslims Get Out.”

Having exposed the giant flaw in Noah’s logic (if you could call it that), Sean then buries him under a pile of examples.

…how do we know that gun-free zones, nearly always marked with signs designating them as such, don’t deter murderous psychopaths? Because mass shootings, rather than happening at gun ranges or in gun stores, keep happening in gun-free zones. …The Sandy Hook massacre? Gun-free zone. Columbine? Gun-free zone. The Aurora movie theater shooting? Gun-free zone. The shooting last year at an Oregon community college? Gun-free zone. The shooting at a movie theater in Lafayette? Gun-free zone. The attack on a military recruiting center in Chattanooga? Gun-free zone. The Ft. Hood shooting? You guessed it: gun-free zone. The San Bernardino attack? Gun-free zone. And the massacre perpetrated by an ISIS enthusiast at an Orlando night club? Gun-free zone.

Being a generous soul, Sean concludes with some helpful advice.

A sign that says “Muslims Get Out” will do absolutely nothing to prevent radical Islamists from wreaking havoc. Trevor Noah understands this. If only he would learn to apply his logic to the argument from gun controllers that all we need to end violence are a few more signs telling terrorists not to use guns.

Reminds me of lesson contained in this Chuck Asay cartoon. Or in this amusing video.

Speaking of confused leftists, here’s a poster that is especially relevant given the racial unrest in Charlotte and elsewhere.

This young lady apparently is famous for appearing in Internet memes. She also showed up in this example of gun control satire.

Since we’re making fun of statists, let’s enjoy this story from the Boston Globe about a hack politician inadvertently boosting gun sales.

Massachusetts gun dealers sold more than 2,000 military-style rifles Wednesday — nearly one-quarter of the total sold last year — after Attorney General Maura Healey moved to bar semiautomatic rifles that have been altered slightly to evade the state’s assault weapons ban. The 2,251 assault rifles snapped up in a gun-buying frenzy represented a remarkable uptick from the 132 sold Tuesday and the 51 sold Monday, before Healey announced her ban. …The run on assault rifles raised questions about whether a policy designed to keep the high-powered weapons off the streets had instead unleashed a flood of them. …said Greg Malany, owner of GFA Arms TEC in Natick, which stayed open until just before midnight Wednesday to accommodate the line of customers that snaked out the door and onto the street. “We had to turn customers away,” he said.

Wow, makes you wonder whether Healey is actually an investor in the firearms industry.

Let’s close with some good news on gun from overseas. It seems that there’s been an effort in Switzerland to discourage members of the militia from keeping guns at home. The only problem is that Swiss men don’t seem to share the anti-gun sentiments of “trade unions, churches, pacifists and centre-left parties.” Here’s some background.

All able-bodied Swiss men must do military service and have the option of keeping their army rifle at home. …Anti-gun campaigners have tried – and failed – on several occasions to ban military weapons from Swiss households. In 2011, Swiss voters rejected a controversial initiative on restricting access to firearms.

But a policy was implemented allowing men to store their guns outside their homes.

…since the beginning of 2010, members of the Swiss army have the option of storing their rifles, pistols and other weapons free of charge at arsenals or military barracks when they are not doing their military service.

So how many Swiss households took advantage of this opportunity?

As of the end of June 2016, only 789 army guns out of a total of 170,000 in circulation (0.5%) had been handed in to special military arsenals.

In other words, 99.5 percent of the militia did the equivalent of “voting with their feet” and chose to keep their weapons at home.

Now you can see why I call Switzerland the world’s most sensible nation.

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More Predatory and Corrupt Behavior by Politicians

Here’s an interesting issue to ponder. Is corruption rampant in government because the perverse incentive structure of politics turns good people into bad people?

Or do bad people naturally gravitate to government and politics because it’s the easiest (and legal, though generally immoral) way to take money from other people?

I guess this is like a chicken-and-egg question with no clear answer, though Mark Twain preferred the latter interpretation.

Though he was being too narrow. Yes, Congress if filled with people who are willing to use coercion to take money from ordinary people in order to line the pockets of their cronies, but this is also true for politicians and bureaucrats in the executive branch, as well as their counterparts at the state and local level.

Let’s look at a couple of oleaginous examples. We’ll start with a grotesque example of nepotism. Except this isn’t a routine example of daddy giving junior an undeserved job in the family company. In this case, we have Washington-style nepotism. Daddy has ransacked taxpayers to line the pockets of his daughter. The Daily Caller has the unseemly details.

More than $9 million of Department of State money has been funneled through the Peace Corps to a nonprofit foundation started and run by Secretary of State John Kerry’s daughter, documents obtained by The Daily Caller News Foundation show. The Department of State funded a Peace Corps program created by Dr. Vanessa Kerry and officials from both agencies, records show. The Peace Corps then awarded the money without competition to a nonprofit Kerry created for the program. Initially, the Peace Corps awarded Kerry’s group — now called Seed Global Health — with a three-year contract worth $2 million of State Department money on Sept. 10, 2012, documents show. Her father was then the chairman of the Senate Committee on Foreign Relations, which oversees both the Department of State and the Peace Corps. Seed secured a four-year extension in September 2015, again without competition. This time, the Peace Corps gave the nonprofit $6.4 million provided by the Department of State while John Kerry was secretary of state.

What makes this story especially outrageous is that John Kerry is a multi-multi-millionaire, having married in the Heinz family fortune.

Does he really need to pick the pockets of taxpayers to boost his daughter’s finances?

Here’s another example. The Governor of New York, Andrew Cuomo, set up an “economic development program” that predictably turned into a playground for the politically well connected (sort of a state version of the corrupt program in Washington that financed Solyndra and other money-losing schemes).

The New York Times outlines this scandal, though be prepared to shower after reading.

Federal corruption charges were announced on Thursday against two former close aides to Gov. Andrew M. Cuomo, a senior state official and six other people, in a devastating blow to the governor’s innermost circle and a repudiation of how his prized upstate economic development programs were managed. The charges against the former aides, Joseph Percoco and Todd R. Howe, and the state official, Alain Kaloyeros, were the culmination of a long-running federal investigation… The charges stemmed from “two overlapping criminal schemes involving bribery, corruption and fraud in the award of hundreds of millions of dollars in state contracts and other official state benefits,” federal prosecutors said in the complaint. Mr. Percoco, who had served as Mr. Cuomo’s executive deputy secretary, is accused of soliciting and taking more than $315,000 in bribes between 2012 and 2016 from two companies… Until January, when Mr. Percoco left the administration…, he was Mr. Cuomo’s all-purpose body man, political enforcer and shadow.

The good news is that at least some of the people in this disgusting display of cronyism may face legal consequences.

Oh, by the way, Cuomo used to be the head of the Department of Housing and Urban Development when regulations were implemented that required Fannie Mae and Freddie Mac to make more dodgy housing loans. This guy is a walking disaster area.

For the umpteenth time, the moral of the story is that the only way to reduce corruption in government is to reduce the overall amount of taxing, spending, and regulating.

Or you can magically wish that only angelic people will gravitate to the public sector. Maybe I’m a cynic, but I’ll go with the former option.

P.S. I wrote a few days ago about the IMF’s hypocrisy in attacking Trump for his views on trade taxes. The bureaucrats are right that we shouldn’t increase the tax burden on global commerce. My complaint was that sauce for the goose wasn’t sauce for the gander. Hillary’s plan to increase the tax burden on work and investment is an even bigger threat to growth, yet the IMF gives her a free pass.

Anyhow, one of the points I made is that trade taxes currently are quite low, so they presumably cause only a minor amount of damage, whereas tax rates on work and investment are relatively high, meaning that further increases would be especially debilitating to growth. I cited some research from a Spanish academic to show how trade policy has improved over time, but didn’t have specific details on trade taxation.

My buddy Bryan Riley from the Heritage Foundation has come to my rescue, sharing an article that includes this chart on historical tariff rates.

The bottom line is that trade taxes have declined by somewhere between 75 percent and 90 percent since the end of World War II. This has been a great victory for economic liberty.

Trump should be condemned for wanting to halt further progress and/or go in the wrong direction by boosting trade taxes.

But, to echo what I wrote the other day, Hillary also should be condemned for proposing a different set of tax hikes that would cause even more harm to economic liberty.

P.P.S. I wrote a column earlier this month entitled “Anatomy of a Brutal Tax Beating” to highlight how an expert at the Tax Foundation completely dismantled a silly and unlearned article by a writer for Vox.

Well, we now have an “Anatomy of a Brutal Education Beating.” Except it’s not right-on-left violence. It’s left-on-left violence. Jonathan Chait writes for New York magazine and he formerly had stints at The New Republic and The American Prospect, so he’s definitely not a libertarian type.

But he’s ethical and doesn’t have a high level of tolerance for other leftists who launch dishonest ideological attacks on charter schools. Here’s some of what he wrote while debunking an article by some guy named Charles Pierce.

Esquire’s Charles Pierce, a fervent charter critic, …does not dispute the findings that urban charters in Massachusetts provide dramatic education benefits. He simply doesn’t care. …In the sentence, Pierce goes on to assert that the cap on charters serves a vital purpose. But the Brookings study, which I doubt he’s read, shows the opposite. …The cap in Massachusetts is completely perverse, in fact. It allows more students to enroll in charters serving suburban students, where the charters do not outperform the neighborhood schools, and prevents more students from enrolling in urban charters, where the schools do exceed the traditional neighborhood schools. …Presented with evidence that certain schools are providing a clearly better education to low-income urban students, Pierce argues that education should be denied because … somebody is making money off of it. It is more important to him to stick it to the capitalists than to allow low-income, disproportionately nonwhite students to have a chance to have a better life. …What’s even more perverse about Pierce’s argument is that it is factually wrong. Charters in Massachusetts are not for-profit vehicles. State law prohibits for-profit operators from running a public charter school… The notion that charters are “companies” and an “industry” with “profits” — that is, the entire basis for Pierce’s opposition — is a figment of the imagination. …Pierce rails suspiciously against the donors to the anti-cap side. …It is strange to accuse people who are giving away their money to the cause of educating poor children of not “giv[ing] a rat’s ass about educating children in Roxbury or Mattapan”.

Wow. Chait drove over Pierce, then hit the brakes, put the car in reverse, and then drove over him again just for the fun of it.

A perfect example of the difference between a sincere person of the left and a hack who is probably just flacking for teacher unions.

P.P.P.S. I can’t resist returning to John Kerry. It’s not merely that he’s a staggeringly rich guy who nonetheless sees no problem with diverting money from taxpayers to his daughter. It’s also that he does everything possible to minimize the amount of tax that he pays. Everything possible.

P.P.P.P.S. This column focused on corrupt Democrats, but this is a bipartisan problem. Indeed, the worst offenders are probably Republicans.

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Hillary Clinton’s Plan to Create More Poverty and Dependency

Because of my disdain for the two statists that were nominated by the Republicans and Democrats, I’m trying to ignore the election. But every so often, something gets said or written that cries out for analysis.

Today is one of those days. Hillary Clinton has an editorial in the New York Times entitled “My Plan for Helping America’s Poor” and it is so filled with errors and mistakes that it requires a full fisking (i.e., a “point-by-point debunking of lies and/or idiocies”).

We’ll start with her very first sentence.

The true measure of any society is how we take care of our children.

I realize she (or the staffers who actually wrote the column) were probably trying to launch the piece with a fuzzy, feel-good line, but let’s think about what’s implied by “how we take care of our children.” It echoes one of the messages in her vapid 1996 book, It Takes a Village, in that it implies that child rearing somehow is a collective responsibility.

Hardly. This is one of those areas where social conservatives and libertarians are fully in sync. Children are raised by parents, as part of families.

To be fair, Hillary’s column then immediately refers to poor children who go to bed hungry, so presumably she is referring to the thorny challenge of how best to respond when parents (or, in these cases, there’s almost always just a mother involved) don’t do a good job of providing for kids.

…no child should ever have to grow up in poverty.

A laudable sentiment, for sure, but it’s important at this point to ask what is meant by “poverty.” If we’re talking about wretched material deprivation, what’s known as “absolute poverty,” then we have good news. Virtually nobody in the United States is in that tragic category (indeed, one of great success stories in recent decades is that fewer and fewer people around the world endure this status).

But if we’re talking about the left’s new definition of poverty (promoted by the statists at the OECD), which is measured relative to a nation’s median level of income, then you can have “poverty” even if nobody is poor.

For the sake of argument, though, let’s assume we’re using the conventional definition of poverty. Let’s look at how Mrs. Clinton intends to address this issue.

She starts by sharing some good news.

…we’re making progress, thanks to the hard work of the American people and President Obama. The global poverty rate has been cut in half in recent decades.

So far, so good. This is a cheerful development, though it has nothing to do with the American people or President Obama. Global poverty has fallen because nations such as China and India have abandoned collectivist autarky and joined the global economy.

And what about poverty in the United States?

In the United States, a new report from the Census Bureau found that there were 3.5 million fewer people living in poverty in 2015 than just a year before. Median incomes rose by 5.2 percent, the fastest growth on record. Households at all income levels saw gains, with the largest going to those struggling the most.

This is accurate, but a grossly selective use of statistics.

If Obama gets credit for the good numbers of 2015, then shouldn’t he be blamed for the bad numbers between 2009-2014? Shouldn’t it matter that there are still more people in poverty in 2015 than there were in 2008? And is it really good news that it’s taken Obama so long to finally get median income above the 2008 level, particularly when you see how fast income grew during the Reagan boom?

We then get a sentence in Hillary’s column that actually debunks her message.

Nearly 40 percent of Americans between the ages of 25 and 60 will experience a year in poverty at some point.

I don’t know if her specific numbers are accurate, but it is true that that there is a lot of mobility in the United States and that poverty doesn’t have to be a way of life.

Hillary then embraces economic growth as the best way of fighting poverty, which is clearly a true statement based on hundreds of years of evidence and experience.

…one of my top priorities will be increasing economic growth.

But then she goes off the rails by asserting that you get growth by spending (oops, I mean “investing”) lots of other people’s money.

I will…make a historic investment in good-paying jobs — jobs in infrastructure and manufacturing, technology and innovation, small businesses and clean energy.

Great, more Solyndras and cronyism.

And fewer jobs for low-skilled workers, if she gets here way, along with less opportunity for women (even according to the New York Times).

And we need to…rais[e] the minimum wage and finally guarantee… equal pay for women.

The comment about equal pay sounds noble, though I strongly suspect it is based on dodgy data and that she really favors the very dangerous idea of “comparable worth” legislation, which would lead to bureaucrats deciding the value of jobs.

Then Hillary embraces a big expansion of the worst government department.

…we also need a national commitment to create more affordable housing.

And she echoes Donald Trump’s idea of more subsidies and intervention in family life.

We need to expand access to high-quality child care and guarantee paid leave.

And, last but not least, she wants to throw good money after bad into the failed Head Start program.

…we will work to double investments in Early Head Start and make preschool available to every 4-year-old.

Wow, what a list. Now perhaps you’ll understand why I felt the need to provide a translation of her big economic speech last month.

The moral of the story, based on loads of evidence, is that making America more like Europe is not a way to help reduce poverty.

P.S. The only other time I’ve felt the need to fisk an entire article occurred in 2012 when I responded to a direct attack to my defense of low-tax jurisdictions.

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The Unsung Economic Success Story of New Zealand

When writing a few days ago about the newly updated numbers from Economic Freedom of the World, I mentioned in passing that New Zealand deserves praise “for big reforms in the right direction.”

And when I say big reforms, this isn’t exaggeration or puffery.

Back in 1975, New Zealand’s score from EFW was only 5.60. To put that in perspective, Greece’s score today is 6.93 and France is at 7.30. In other words, New Zealand was a statist basket cast 40 years ago, with a degree of economic liberty akin to where Ethiopia is today and below the scores we now see in economically unfree nations such as Ukraine and Pakistan.

But then policy began to move in the right direction, especially between 1985 and 1995, the country became a Mecca for market-oriented reforms. The net result is that New Zealand’s score dramatically improved and it is now comfortably ensconced in the top-5 for economic freedom, usually trailing only Hong Kong and Singapore.

To appreciate what’s happened in New Zealand, let’s look at excerpts from a 2004 speech by Maurice McTigue, who served in the New Zealand parliament and held several ministerial positions.

He starts with a description of the dire situation that existed prior to the big wave of reform.

New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more—or pay them bonuses—if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.

Maurice then discusses the various market-oriented reforms that took place, including spending restraint.

What’s especially impressive is that New Zealand dramatically shrank government bureaucracies.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. …if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to!

And there was lots of privatization.

…we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

Equally impressive, New Zealand got rid of all farm subsidies…and got excellent results.

…as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises—and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded.

Maurice also has a great segment on education reform, which included school choice.

But since I’m a fiscal policy wonk, I want to highlight this excerpt on the tax reforms.

We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes—capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance.

And I assume revenue also climbed because of Laffer Curve-type economic feedback. When more people hold jobs and earn higher incomes, the government gets a slice of that additional income.

Let’s wrap this up with a look at what New Zealand has done to constrain the burden of government spending. If you review my table of Golden Rule success stories, you’ll see that the nation got great results with a five-year spending freeze in the early 1990s. Government shrank substantially as a share of GDP.

Then, for many years, the spending burden was relatively stable as a share of economic output, before then climbing when the recession hit at the end of last decade.

But look at what’s happened since then. The New Zealand government has imposed genuine spending restraint, with outlays climbing by an average of 1.88 percent annually according to IMF data. And because that complies with my Golden Rule (meaning that government spending is growing slower than the private sector), the net result according to OECD data is that the burden of government spending is shrinking relative to the size of the economy’s productive sector.

P.S. For what it’s worth, the OECD and IMF use different methodologies when calculating the size of government in New Zealand (the IMF says the overall burden of spending is much smaller, closer to 30 percent of GDP). But regardless of which set of numbers is used, the trend line is still positive.

P.P.S. Speaking of statistical quirks, some readers have noticed that there are two sets of data in Economic Freedom of the World, so there are slightly different country scores when looking at chain-weighted data. There’s a boring methodological reason for this, but it doesn’t have any measurable impact when looking at trends for individual nations such as New Zealand.

P.P.P.S. Since the Kiwis in New Zealand are big rugby rivals with their cousins in Australia, one hopes New Zealand’s high score for economic freedom (3rd place) will motivate the Aussies (10th place) to engage in another wave of reform. Australia has some good polices, such as a private Social Security system, but it would become much more competitive if it lowered its punitive top income tax rate (nearly 50 percent!).

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The European Commission’s Attack on Apple and Ireland Is Really an Attack on Tax Competition

I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).

This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.

Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.

As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.

So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.

The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.

…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.

…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.

He then regurgitates the President’s plan to replace deferral with worldwide taxation.

…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.

In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.

On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.

Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.

At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.

…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.

…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.

…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.

And he adds his warning about this fight really being about tax competition versus tax harmonization.

Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.

Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.

…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.

Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.

Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.

America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”

But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.

In the long run, that leads to disaster, but politicians rarely think past the next election.

P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.

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The IMF’s Accurate – but Biased and Hypocritical – Attack on Trump

I’m not a fan of the International Monetary Fund. The bureaucracy was created in 1944 to manage and coordinate the system of fixed exchange rates created as part of the 1944 Bretton Woods agreement. But once fixed exchange rates disappeared, the over-funded bureaucracy cleverly adopted a new rationale for its existence and its main role now is to bail out insolvent nations (what that really means, of course, is that it exists to bail out big banks that foolishly lend money to profligate third-world governments).

As part of this new mission, the IMF acts like the Pied Piper of tax hikes. The bureaucrats parachute into nations, refinance and restructure the debt of those countries, and insist on a bunch of tax increases in hopes that more revenue will then be available to service the new debt.

Needless to say, this is not exactly a recipe for growth and prosperity. The private sector in these countries gets hammered with tax increases, the big banks in rich nations get indirect bailouts, and the real problem of bloated government generally is left to fester and metastasize.

This is why I’ve referred to the IMF as the Dr. Kevorkian of the global economy. But the bureaucracy is bad for other reasons. It also has decided that it should grade all nations on their economic policies and it routinely uses that self-assigned authority to recommend big tax hikes all over the world. Including lots of tax increases in the United States.

The IMF even tries to interfere with American elections. Just recently, the chief bureaucrat of the organization launched a not-too-subtle attack on Donald Trump.

Though in this case, which involved trade barriers, the IMF actually is on the right side (the bureaucracy generally has a pro-tax bias, but the one big exception is that it favors lower taxes on global trade).

Anyhow, the IMF’s Managing Director warned that additional protectionist taxes on global trade threaten the global economy. And even though she didn’t specifically mention the Republican nominee, you can see from the various headlines I’m sharing that reporters put 2 + 2 together and realized that Ms Lagarde was criticizing Trump.

And he deserves condemnation. The post-World War II shift to lower trade taxes has been a big victory for economic freedom (indeed, tariff reductions have helped offset the damage caused by increasingly bad fiscal policy over the past several decades).

Nonetheless, there is something quite unseemly about an international bureaucracy taking sides in an American election (who do they think they are, the IRS?). Especially since American taxpayers underwrite the biggest share of the IMF’s activities.

Let’s look specifically at an analysis of the IMF’s actions from the UK-based Guardian.

The managing director of the International Monetary Fund, has launched a thinly veiled attack on the anti-free-trade sentiments expressed by US presidential candidate Donald Trump… Lagarde made it clear she strongly opposed the Republican candidate’s policies, which include higher US tariffs and a barrier along the border with Mexico. …“There is a growing risk of politicians seeking office by promising to ‘get tough’ with foreign trade partners through punitive tariffs or other restrictions on trade…” She added that throughout history there had been arguments about trade. “But history clearly tells us that closing borders or increasing protectionism is not the way to go…”

By the way, while I agree with her comments on trade, her comments about a “barrier along the border with Mexico” reek of hypocrisy.

Christine Lagarde criticises his policies including plans for…a US-Mexico border wall.

Those who have visited the IMF’s lavish headquarters can confirm that there is a very heavily guarded barrier separating the IMF from the hoi polloi and peasantry of Washington.

Call me crazy, but a bureaucracy with lots of security to prevent unauthorized people from entering its building is in no position to lecture a nation for wanting security to prevent unauthorized people from crossing its borders. And I say this as someone who generally favors immigration.

But let’s set that issue aside. There’s actually a very serious sin of omission in the IMF’s analysis that needs to be addressed.

The international bureaucracy (correctly) opposes trade taxes and wants to build on the progress of recent decades by further reducing government-imposed barriers to cross-border economic activity. As noted above, this is the right position and I applaud the IMF’s defense of lower tariffs and expanded trade.

That being said, the level of protectionism has fallen significantly in the post-World War II era. In other words, trade taxes already are reasonably low. Yes, it would be better if they were even lower (ideally zero, like in Hong Kong).

My problem (or, to be more accurate, one of my problems) with the IMF is that the bureaucracy acts as if the world economy is hanging in the balance if there’s some sort of increase in the currently low tax burden on trade.

Yet what about the tax burden on behaviors that actually generate the income people use to purchase goods from other nations? Top tax rates on personal income average more than 40 percent in the developed world, dwarfing the average tariffs of trade.

And the burden on income that is saved and invested is even higher because of double taxation, which is especially destructive since all economic theories – including Marxism and socialism – agree that capital formation is a key to long-run growth and higher living standards (i.e., the ability to buy more goods, including those produced in other nations).

So here’s the question that must be asked: If it is bad to have very modest taxes on the share of people’s income that is used to buy goods produced in other nations, then why isn’t it even worse to have very onerous taxes on the productive behaviors that generate that income?

In other words, if the IMF is correct (and it is) to criticize Trump for threatening to increase the modest tax rates that are imposed on global trade, then why doesn’t the IMF criticize Hillary Clinton for threatening to increase the rather harsh tax rates that are imposed on working, saving, and investment?

Maybe Madame Lagarde’s army of flunkies and servants (one of the many perks she gets, in addition to a munificent tax-free salary) can explain that sauce for a goose is also sauce for a gander.

By the way, I can’t resist addressing one final aspect to this story. The Guardian‘s report notes that Lagarde wants to offset the supposedly harmful impact of trade by further increasing the size and scope of government.

…the solution was for governments to provide direct financial support for those with low skills through higher minimum wages, more generous welfare states, investment in education and a crackdown on tax evasion.

Wow, that’s a lot of economic illiteracy packed into one sentence fragment.

• Does she really think low-skilled people are helped by minimum-wage mandates that destroy jobs and economic opportunity?
• Does she really think low-skilled people are better off if they’re trapped into welfare dependency?
• Does she really think that government monopoly school systems will actually get better results with more funding?
• Does she really think a “crackdown” rather than lower tax rates is the best way of obtaining better compliance?

Now you understand why I refer to the IMF as the dumpster fire of global economics.

P.S. While the IMF likes to push bad policy for the United States, the bureaucracy’s proposals for China are akin to a declaration of economic warfare.

P.P.S. The IMF’s flip-flop on infrastructure spending reveals a lot about the bureaucracy’s inner workings.

P.P.P.S. While the IMF often produces sloppy and dishonest research, every so often the professional economists on the staff slip something  useful past the political types. Though my all-time-favorite bit of IMF research was the study that inadvertently showed why a value-added tax is so dangerous.

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Europe’s Next Fiscal Crisis

When I tell journalists and politicians that the European fiscal situation is worse today than it was immediately prior to the crisis, they don’t believe me. What about all the spending cuts, they ask? What about the draconian austerity? And the Troika-imposed fiscal restraint?

I tell them it’s mostly been a mirage. It turns out that “austerity” in Europe is simply another way of saying massive tax increases. National governments have boosted tax burdens substantially, but there hasn’t been much spending restraint.

This is a topic I spoke about earlier today at a conference in Prague, which was hosted by the European Conservatives and Reformers bloc of the European Parliament.

My panel’s topic was “Current Challenges to the Transatlantic Partnership” and I focused on economic stagnation and fiscal crisis.

Regarding economic stagnation, I pointed out that there’s very little growth in Europe and substandard growth in the United States.

By itself, that’s a problem but not a crisis.

The crisis (or at least what I argue is a looming crisis) is that Europe’s fiscal situation is worse today than it was when last decade’s fiscal chaos began.

To put this in concrete terms, I crunched the data for both the “eurozone” nations (those using the common currency) and for the overall European Union.

And here are the numbers showing how the burden of government spending has increased in Europe between 2007 and 2015.

At the risk of stating the obvious, there hasn’t been any overall spending restraint on the other side of the Atlantic. This is the chart I will now share with politicians and journalists (as well as anyone else) who is under the illusion that there have been big spending cuts in Europe.

But just as slow growth is a problem rather than a crisis, the same can be said about bigger government. Yes, a larger fiscal burden saps an economy’s vitality and weakens national competitiveness, but it presumably doesn’t by itself produce a crisis.

The crisis, at least if last decade is any indication, materializes when investors decide they don’t want to buy a nation’s government debt because they fear they won’t get repaid (i.e., a default). And that happens when a nation’s debt level is perceived to have reached an unsustainable level when compared to the ability of that country’s economy to generate enough output to support that debt.

And I suspect it’s just a matter of time before Europe experiences another such crisis. Here are the numbers, both for euro-using nations as well as the entire European Union, showing that government debt is substantially higher today than it was at the dawn of last decade’s meltdown.

I should point out that there’s no reason why a crisis need occur. If European governments copied Switzerland and put in place some sort of spending cap (a good one that ensures that the burden of government expanded slower than the private sector), then red ink quickly would fall and investors would be much less fearful of a default.

Unfortunately, all the pressure is in the other direction. Indeed, to the limited degree there was any spending restraint after the last crisis, it has largely evaporated.

A story in the New York Times from two years ago illustrates why the mess in Europe is so intractable.

The reporters who authored the story were correct that there was disagreement between Germany and other nations.

…many of the largest European countries are now rebelling against the German gospel of belt-tightening and demanding more radical steps to reverse their slumping fortunes.

But they naively reported that there were genuine cutbacks and they also believed the silly Keynesian argument that smaller government somehow reduces growth.

…eurozone nations buckled under to German demands to slash budget deficits and roll back public services, and then watched in dismay as unemployment rates shot into the double digits and growth collapsed.

In any event, Europe’s self-styled elite decided on a return to the types of bad policy that led to last decade’s fiscal crisis.

Now, France, Italy and the European Central Bank have coalesced into a bloc against Chancellor Angela Merkel of Germany, and they are insisting that Berlin change course. …France, which has in modern times been Germany’s indispensable partner in European crisis management, is now in near revolt, and President François Hollande has joined forces with Mr. Renzi, who has presented an expansionary 2015 budget that will cut taxes despite pressure from Brussels to meet deficit targets. Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budgetary discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on

For what it’s worth, I would have been on Merkel’s side if she was actually pushing for meaningful spending restraint.

But that was not the case. She myopically focused on fiscal balance rather than the size of government, which is bad enough since higher taxes are always the first (and second, and third, …) resort of politicians. But to make matters worse, her motives have always been suspect because of fears that she’s mostly concerned about protecting German banks that foolishly lent a lot of money to profligate governments.

Though that presumably shouldn’t be a major concern today since the European Central Bank is now buying lots of government bonds as part of 1) a foolish experiment in monetary Keynesianism, and 2) an indirect bailout of dodgy governments. Any banks with competent management will have used this opportunity to sell their holdings so the risk of sovereign defaults is borne by the general public.

But let’s set aside speculation on Merkel’s motives. All that really matters is that government in Europe is now bigger and more expensive, with lots of additional red ink. And the European Central Bank is helping to build the house of cards even higher.

This won’t end well, though I very much hope my fears are misplaced.

P.S. Anybody who wants to argue that Europe’s fiscal problems can be solved with higher taxes first needs to explain this set of charts.

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The Decline of Economic Liberty During the Bush-Obama Years

When Economic Freedom of the World is released every September, it’s like an early Christmas present. This comprehensive yearly publication is a great summary of whether nations have policies that allow people economic liberty.

I eagerly peruse this annual survey every year (here’s what I wrote in 2015 and 2014 if you’re curious about a couple of recent examples). And this year is no different.

Let’s start with the table that gets the most attention. Here’s a look at the top nations, led (as is almost always the case) by Hong Kong and Singapore. Switzerland also deserves some recognition since it has always been in the top 5.

The United States used to be a regular member of the top-5 club, but we have fallen to 16th in the rankings.

Which is just barely ahead of the supposedly socialist countries of Finland and Denmark (which actually are very market-oriented nations in every area other than fiscal policy).

I don’t show the nations in the bottom half of the rankings, but I assume nobody will be surprised to learn that Venezuela is in last place (though, to be fair, the communist hellholes of North Korea and Cuba aren’t in the rankings because of inadequate data).

One of the other great features of Economic Freedom of the World is that you can look not just how nations rank today, but also how the have changed over time.

I selected some nations of interest from Exhibit 1.4 in Chapter 1. Keep in mind, as you review this data, that you’re seeing scores every fifth year from 1970-2005 and then the annual scores beginning in 2005.

A few observations on these numbers.

• Chile’s improvement has been dramatic, even though the nation has slipped a bit since 2007.
• Australia’s jump from 1975-today also is remarkable, as is China’s improvement since it entered the rankings in 1980.
• Hong Kong has been consistently superb, though it’s troubling that its score has weakened slightly since 2008. Singapore also has a modest trend in the wrong direction.
• I didn’t know Israel was so bad back in 1980, or that New Zealand scored so low back in 1975, so kudos to both nations for big reforms in the right direction.
• I tend to give Estonia a lot of love, all of which is deserved, but it’s worth noting that its Baltic neighbors of Latvia and Lithuania also are big success stories.
• Speaking of overlooked success stories, Peru’s upward climb deserves a lot of praise.
• Switzerland isn’t overlooked (at least by me), but the praise it gets is very well deserved since it manages to be sensible while all its neighbors make mistakes.
• Last but not least, scores for the United States and Venezuela have both been falling, though thankfully we started much higher and have fallen at a much slower rate.

Now let’s take a closer look at America. The good news is that we’re in the top 20 for economic freedom. The bad news is that we used to be in the top 5.

I’ve been grousing for years that the Bush-Obama policies have eroded America’s competitiveness and undermined economic liberty.

This year, EFW has a special chapter on the United States and it confirms my analysis. Here’s a chart from that chapter showing how America’s score has declined in recent years.

And if you want some additional details, America’s score is declining first and foremost because the rule of law is eroding and property rights are less secure.

Which is a point I made last year, but EFW‘s chart is much better than my homemade version.

You can also see that protectionism has increased since 2000. And one shudders to think what will happen in this area over the next few years given the protectionist utterances of Donald Trump and Hillary Clinton (though I hope Hillary is lying and trade is an issue where she’s actually on the right side).

Heck, I’m worried about the next four years for reasons that go well beyond trade. I hope I’m wrong, but it seems that America faces a choice of a statist Tweedledee or a statist Tweedledum.

It’s almost as if the two major-party candidates have read the recipe for growth and prosperity and have decided to use it as a road map of what not to do. Sigh.

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Clinton and Trump (Clump?) vs. Taxpayers and Free Enterprise

When Donald Trump and Hillary Clinton agree on things, it’s always bad news for taxpayers.

• They both want to boost the capital gains tax rate on private equity investment.
• They both want to let the entitlement problem fester and worsen.
• They both want more federally financed pork-barrel spending on infrastructure.

Now they both agree that it’s somehow the federal government’s job to subsidize child care, though they’ve each concocted different ways of implementing this new form of redistribution.

The Wall Street Journal opines on this fiscally incontinent bidding war.

…both candidates [are] offering multiple subsidies for raising kids. This will end up raising prices and it won’t address the real reason parents feel squeezed: a decade of slow or no economic growth. Donald Trump on Tuesday proposed a tax deduction that would let families write off the average cost of child care for up to four children, among other ideas. Hillary Clinton has already promised to limit care expenses to 10% of income; raises for caretakers; universal pre-K; an increase in the $1,000 per child tax credit; a new program for student parents, and more.

Looking at the details, Trumps plan would exacerbate the EITC problem.

Here’s the dirty detail: Mr. Trump proposed an up to $1,200 child-care tax rebate for low-income families that would be delivered by expanding the earned-income tax credit. But the credit would inevitably phase out as income increases and disappears at $31,200. The result would be a higher inframarginal tax cliff—when people are discouraged from earning more income because they lose more in benefits than they can gain in wages. This disincentive to advancement is already steep.

He’s also proposing a new subsidy for savings accounts.

Mr. Trump also proposes savings accounts for child care to add to the tax-free destinations for retirement, health care, college and more. This new benefit, worth up to $2,000 a year, would make tax reform more difficult. The government would also match parental contributions at 50% up to $1,000 a year for low-income families. That’s a wonky way of unveiling a new $500 transfer payment.

And Trump even wants to engage in a no-win bidding war with Hillary Clinton to create a new European-style entitlement for paid maternity leave (even though, as a columnist for the New York Times even admitted, this type of scheme will backfire against women by making them less attractive to employers).

Then there’s six weeks of paid maternity leave that Mr. Trump says he would guarantee through unemployment insurance. He claims he’ll pay for this by cleaning out fraudulent payments, though this is his funding mechanism for every proposal. Mr. Trump will nonetheless lose the family bidding war with Mrs. Clinton, who wants 12 weeks of paid leave for new mothers and fathers.

The Clinton plan, meanwhile, is a predictably statist prescription for more intervention and subsidies.

And the WSJ‘s editorial correctly points out that is a recipe for ever-higher costs.

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The fact that Hillary Clinton wants bigger government is not the most shocking revelation in the world.

Her voting record as a Senator was almost identical to Bernie Sanders’.

And every single proposal in her big economic speech last month required a larger burden of government.

But it’s rather odd to find the Republican nominee being the statist Tweedledee to match the statist Tweedledum.

In an article for Commentary, Noah Rothman looks at Trump’s overall approach to fiscal policy.

Donald Trump…is a self-described Republican who has cast aside the austere facade of fiscal conservatism in favor of any and every spending proposal that crosses his transom. Promising the electorate the world in the campaign with every intention of working out the details after the election is hardly a new phenomenon, but it used to be one that Republicans rejected. Today, under Trump’s corrupting umbra, the GOP has become the party of wild assurances and cascading spending proposals with no intention of ever making good on them.

Actually, I fear the spending promises would be fulfilled if Trump got to the White House. Though I agree that Trump personally doesn’t care if they are either adopted or forgotten.

Here are just a few of the spending promises Trump has made.

Trump promised to augment the Pentagon’s budget by repealing the portions of the Budget Control Act of 2011 (aka, “Sequester”) that imposed limits on defense spending. …Trump has called for “more funding” for the Department of Veterans Affairs to augment job training, research on traumatic stress, brain injury, and suicide prevention, and to hire more service providers at VA hospitals. The Republican nominee promised a massive $500 billion public works program that you dare not call a “stimulus,” which he proudly boasted would spend more than double what Hillary Clinton has pledged to refurbish America’s infrastructure. …He has attacked as cold-hearted the idea that America’s entitlement state must be curtailed and reformed—a massive expenditure that already consumes nearly two-thirds of the nation’s annual outlays.

In other words, Trump is a big-government, Nixon-style Republican.

Which means advocates of limited government are not exactly thrilled about November.

P.S. Other Republican presidential candidates have boosted the burden of government when they took office (President George H.W. Bush and President George W. Bush are two dismal examples of this phenomenon). But they at least pretended to be vaguely in favor of smaller government during their respective campaigns. The fact that Trump doesn’t even fake it during the campaign suggests that economic policy would be very bad if he ever got to the White House.

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José Manuel Barroso, the European Commission, Goldman Sachs, Corruption, and Cronyism

Why did a for-profit college pay former President Bill Clinton the staggering sum of $16.5 million to serve as an “honorary chancellor for Laureate International Universities”? Was it because he had some special insight or expertise on how to improve education?

Why did Goldman Sachs pay former Secretary of State Hillary Clinton hundreds of thousands of dollars for a couple of speeches? Was it because she had valuable observations about the economy and investments?

The answer to all those questions is that companies sometimes are willing to transfer large sums of money to influential politicians because they want something in exchange.

In some cases, they want help from powerful insiders so they can use the coercive power of government to take other people’s money, which is reprehensible and disgusting. In other cases, they are seeking to guard against being victimized with high taxes and punitive regulations and so they pay “protection money” to powerful insiders in hopes of being left alone, which is unfortunate but understandable.

In either case (one moral and the other immoral), the companies are making rational decisions. Politicians have immense ability to tax, spend, and regulate, so it makes sense to get on their good side, either by giving them money directly or contributing to their campaigns.

This is a problem in the United States, of course, but it’s also a problem in Europe.

Consider the curious case of José Manuel Barroso, the recently retired President of the European Commission who was recently hired by Goldman Sachs to be “non-executive chairman of Goldman Sachs International.” According the press release from the company, he will…well, it’s not clear what his role will be or what value he will provide. All we get is fluff about his political career and a murky statement that, “He will also be an advisor to Goldman Sachs.”

So let’s look at his Wikipedia bio. Maybe we’ll find some evidence that he has great expertise on investment matters. But all we find there is that he’s been a career politician, first in Portugal and then in Brussels (where he was a bit of a laughingstock).

There’s no indication that he ever held a job in the private sector. But we do get this tidbit.

In his university days, he was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP, Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat).

That doesn’t sound like the pedigree of someone who just landed a lavishly compensated position in the supposed temple of global capitalism.

But the real story is that Barroso isn’t a communist (at least not now) and Goldman Sachs isn’t a bastion of free markets. Instead, both of them are expert practitioners of cronyism.

Indeed, the cronyism angle is so obvious in this case that the European Commission has launched an ethics probe.

Which is very upsetting to Senor Barroso. The Financial Times reported on the controversy.

José Manuel Barroso has accused the European Commission — a body he led for 10 years — of being “discriminatory” and “inconsistent” after the EU’s executive arm set up an ethics probe to examine his new role at Goldman Sachs. …Mr Barroso vigorously defended his decision to take a job as adviser with the US investment bank, which triggered a backlash across the EU. …French president François Hollande described the appointment as being “legally possible, but morally unacceptable”. …The committee will examine Mr Barroso’s contract to ascertain whether it complies with Mr Barroso’s obligation under EU law “to behave with integrity and discretion” when taking appointments or benefits after leaving office. Campaigners have argued that Mr Barroso could be stripped of his pension — worth €15,000 per month — if he is found to have violated these rules. …Other former members of the commission have gone on to take high-profile roles with big businesses, leading some to claim that Goldman Sachs has been singled out because of its role in the financial crisis.

Though it’s worth noting that Barroso is simply the latest example of a revolving door between senior euro-crats and Goldman Sachs.

The bottom line is that Barroso hasn’t behaved with integrity. But that’s true of his entire career. Taking a position with Goldman Sachs is simply a way of monetizing decades of cronyism.

P.S. Shifting back to the US version of cronyism, Kevin Williamson has a must-read analysis of the corrupt nexus of Wall Street and Washington.

P.P.S. The solution to this mess (other than Glenn Reynold’s revolving-door surtax) is to dramatically shrink the size and scope of government. When there’s less to steal, there will be fewer thieves.

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The War against Cash, Part IV

The War against Cash continues.

• In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
• In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
• In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.

Now it’s time for Part IV.

Professor Larry Summers of Harvard University is President Obama’s former top economic adviser and he’s a relentless advocate of higher taxes and bigger government. If he favors an idea, it doesn’t automatically make it bad, but it’s surely a reason to be suspicious. So you won’t be surprised to learn that he wrote a column for the Washington Post applauding the move in Europe to eliminate €500 notes. Indeed, he wants to ban all large-denomination notes.

There is little if any legitimate use for 500-euro notes. Carrying out a transaction with 20 50-euro notes hardly seems burdensome, and this would represent over $1,000 in purchasing power. Twenty 200-euro notes would be almost $5,000. Who in today’s world needs cash for a legitimate $5,000 transaction? …Cash transactions of more than 3,000 euros have in fact been made illegal in Italy, while France has placed the limit at 1,000 euros. …In contrast to the absence of an important role for 500-euro notes in normal commerce, these bills have a major role facilitating illicit activity, as suggested by their nickname —“Bin Ladens.” …Estimates by the International Monetary Fund and others of total annual money laundering consistently exceed $1 trillion. High-denomination notes also have a substantial role in facilitating tax evasion and capital flight.

Who “needs cash” for transactions, he asks, but isn’t the real issue whether people should have the freedom to use cash if that’s what they prefer?

Also, in dozens of trips to Europe since the adoption of the euro, I’ve never heard anyone refer to the €500 note as a “Bin Laden,” so I suspect that’s an example of Summers trying to demonize something that he doesn’t like.

But perhaps the most important revelation from his column is that he admits there’s no evidence that crime would be stopped by his plan to restrict cash.

To be sure, it is difficult to estimate how much crime would be prevented by stopping the creation of 500-euro notes. It would surely impose some burdens on criminals and might interfere with some transactions, which is not unimportant.

Unsurprisingly, he wants to coerce other governments into restricting high-value notes.

Europe has led on a significant security issue. But its action should be seen as a beginning, not an end. As a first follow-on, the world should demand that Switzerland stop issuing 1,000-Swiss-franc notes. After Europe’s action, these will stand out as the world’s highest-denomination note by a huge margin. Switzerland has a long and unfortunate history with illicit finance. It would be tragic if it were to profit from criminal currency substitution following Europe’s bold step. …There would be a strong case for stopping the creation of notes with values greater than perhaps $50.

Summers isn’t the only academic from Harvard who is agitating to restrict cash. Prof. Kenneth Rogoff (who’s also the former Chief Economist at the IMF) recently wrote a piece for the Wall Street Journal explaining his hostility.

…paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. …There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

At the risk of bursting his balloon, cash played almost no role in the most notorious terrorist event, the 9-11 attacks. And Rogoff admits that bad guys would use easy substitutes.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards.

So he then dredges up the argument that cash facilitates tax evasion.

Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income.

I addressed these issues in Part I of this series, but I’ll simply add that the academic evidence shows that lower tax rates are the best way of boosting tax compliance (as even the IMF has admitted).

To his credit, Rogoff acknowledges that his preferred policy would reduce the rights of individuals.

Perhaps the most challenging and fundamental objection to getting rid of cash has to do with privacy—with our ability to spend anonymously. But where does one draw the line between this individual right and the government’s need to tax and regulate.

His main argument is that our rights should be reduced to give government more power. He especially wants central bankers to have more power to impose Keynesian monetary policy.

Cutting interest rates delivers quick and effective stimulus by giving consumers and businesses an incentive to borrow more. It also drives up the price of stocks and homes, which makes people feel wealthier and induces them to spend more. Countercyclical monetary policy has a long-established record, while political constraints will always interfere with timely and effective fiscal stimulus.

Yes, he’s right. Activist monetary policy does have a long-established track record. It played a key role in causing the Great Depression, the 1970s stagflation, and the recent financial crisis.

Hooray, Federal Reserve!

And Rogoff wants the arsonists at the Fed to have more power to create boom-bust cycles.

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these loses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy. Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. …if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.

Needless to say, I disagree with Rogoff and agree with Thomas Sowell that an institution that repeatedly screws up shouldn’t be given more power.

Especially since I’m concerned that the option to use bad monetary policy may actually be one of the excuses that politicians use for not fixing the problems that actually are hindering growth.

So, yes, instead of expanding their power, I want to clip the wings of the Federal Reserve and other central banks.

Now let’s consider the harm that would be caused by restricting or banning cash. Two professors from NYU Law School looked at some of the logistical issues of a shift to digital money. The echoed some of the points raised by Summers and Rogoff, but they also pointed out some downsides. Such as government being able to monitor everything we buy.

…centralization of banking under this system would also create a Leviathan with the power to monitor and control the personal finances of every citizen in the country. This is one of the chief reasons why many are loath to give up on hard currency. With digital money, the government could view any financial transaction and obtain a flow of information about personal spending that could be used against an individual in a whole host of scenarios.

It also would cause a mess because so many people around the world rely on dollars, something that’s beneficial to the U.S. Treasury and foreigners from places with untrustworthy central banks.

…a transition to digital currency might come at a large cost for the U.S. in particular, because the dollar remains the world’s de facto reserve currency. The U.S. collects enormous seigniorage revenue that accrues to the economy when the Federal Reserve prints dollars that are exported abroad in exchange for foreign goods and services. These bank notes ultimately end up in countries with less reliable central banks where locals prefer to hold U.S. currency instead of their own. Forfeiting this franchise as the world’s reserve currency might be too costly, as the U.S. currency held abroad exceeds half a trillion dollars, according to reliable estimates.

Professor Larry White of George Mason University (also a Senior Fellow at Cato) writes about what he calls “currency prohibitionists.”

The rhetoric of the anti-high-denomination gang has gotten increasingly shrill.  …Charles Goodhart in September called the European Central Bank and the Swiss National Bank “shameless” for issuing “vastly high-denomination notes,” namely the €500 and SWF 1000, “which are there to finance the drug deals.” …I have an alternative suggestion for removing $100 bills from the illegal drug trades:  Legalize the trade.  …My suggestion would reduce the demand for high-denomination currency.

Nice plug for sensible libertarian policy.

But even if one favors drug prohibition, that doesn’t mean currency prohibition will be effective.

Today’s high-denomination-currency prohibitionists, like today’s drug prohibitionists and yesterday’s alcohol prohibitionists, only think about the supply side.  But does anyone think that banning the $100 bill during Prohibition (when it had a purchasing power more than 11 times today’s, as evaluated using the CPI) and even higher denominations would have put a major dent in the rum-running business, if an army of T-Men couldn’t? …eliminating high denomination, high value notes we would make life harder” for such criminal enterprises.  No doubt.  But we would also make life harder for everyone else.  The rest of us also find high-denomination notes convenient now and again for completely legal and non-controversial purposes, like buying automobiles and carrying vacation cash compactly.  …currency prohibitionists too often regard those who defend high-denomination notes not as intellectually honest but mistaken opponents, but rather as morally suspect characters.  Larry Summers goes out of his way to smear an ECB executive from Luxembourg (who has had the temerity to ask for better evidence before accepting the case for prohibiting high-denomination notes)… The case for prohibiting large-denomination currency, to summarize, is largely based on guilt by association or on wishful thinking about the benefits of allowing greater range of action to discretionary monetary policy.

On the topic of crime and cash, an article for the WSJ debunks one of the left’s main talking points. If using cash is supposed to be a sign of criminal activity, why are the world’s two most cash-friendly nations also two of the safest and crime-free countries?

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens… The current hoarding in Switzerland and Japan thus underscores one of many ways in which cash is a basic tool of economic liberty: It lets people shield themselves from monetary policies that would force their savings into weak economies that can’t attract sufficient spending or investment on their own. These economies need reforms that boost incentives to work and invest, not negative interest rates and cash limits that raid the bank accounts of law-abiding citizens.

A column by Sarah Jeong in Bloomberg explores some of the additional implications of cash restrictions.

…wherever information gathers and flows, two predators follow closely behind it: censorship and surveillance. The case of digital money is no exception. Where money becomes a series of signals, it can be censored; where money becomes information, it will inform on you. …the Department of Justice began to come under fire for Operation Choke Point…the means were highly dubious. …the DOJ got creative, and asked banks and payment processors to comply with government policies, and proactively police “high-risk” activity. Banks were asked to voluntarily shut down the kinds of merchant activities that government bureaucrats described as suspicious. The price of resistance was an active investigation by the Department of Justice. …Where paternalism is bluntly enforced through a bureaucratic game of telephone, unpleasant or even inhumane unintended consequences are bound to result. …the cashless society offers the government entirely new forms of coercion, surveillance, and censorship. …As paper money evaporates from our pockets and the whole country—even world—becomes enveloped by the cashless society, financial censorship could become pervasive, unbarred by any meaningful legal rights or guarantees.

Her observation on Operation Choke Point is very important since that campaign has been a chilling example of how government abuses its power in the financial sector.

Megan McArdle’s Bloomberg column touches on some additional concerns.

What’s not to like? Very little. Except, and I’m afraid it’s a rather large exception, the amount of power that this gives the government over its citizens. Consider the online gamblers who lost their money in overseas operations when the government froze their accounts. Now, what they were doing was indisputably illegal in these here United States, and I am not claiming that they were somehow deeply wronged. But consider how immense the power that was conferred upon the government by the electronic payments system; at a word, your money could simply vanish. …Unmonitored resources like cash…create a sort of cushion between ordinary people and a government with extraordinary powers. Removing that cushion leaves people who aren’t criminals vulnerable to intrusion into every remote corner of their lives. …If we want to move toward a cashless society — and apparently we do — then we also need to think seriously about limiting the ability of the government to use the payments system as an instrument to control the behavior of its citizens.

For what it’s worth, one way of getting the benefits of a cashless world without the risks is with private digital monies such as bitcoin.

Steve Forbes nails the issue.

Gaining attention these days is the idea of abolishing high denominations of the dollar and the euro. This concept graphically displays the astonishing stupidity–and intellectual bankruptcy–of today’s liberal economic policymakers and the economics profession. …The ostensible reason is to help in the fight against terrorists, bribers, drug dealers and tax evaders by making it more inconvenient for these bad guys to move around and store their ill-gotten cash. …The notion that such evildoers as the Mexican drug cartels and ISIS will be seriously disrupted by the absence of the Benjamin–”These sacks of cash are too heavy now. Let’s surrender!”–is so comical… Monetary expert Seth Lipsky pithily points out in the New York Post, “When criminals use guns, the Democrats want to take guns from law-abiding citizens. When terrorists use hundreds, the liberals want to deny the rest of us the Benjamins.”

Excellent point. Politicians should concentrate on restricting the freedom of bad guys, not ordinary citizens.

So what are the implications of the war against cash? They aren’t pretty.

The real reason for this war on cash–start with the big bills and then work your way down–is an ugly power grab by Big Government. People will have less privacy: Electronic commerce makes it easier for Big Brother to see what we’re doing, thereby making it simpler to bar activities it doesn’t like, such as purchasing salt, sugar, big bottles of soda and Big Macs.

Steve raises a good point about tracking certain purchases. Imagine the potential mischief if politicians had a mechanism to easily impose discriminatory taxes on disapproved products.

He also notes that the war on cash is motivated by a desire to more effectively implement an ineffective policy.

Policymakers in Washington, Tokyo and the EU think the reason that their economies are stagnant is that ornery people aren’t spending and investing the way they should. How to make these benighted, recalcitrant beings do what they’re supposed to do? The latest nostrum from our overlords is negative interest rates. If people have to pay fees to store their money, as they do to put their stuff in storage facilities, then, by golly, they might be more inclined to spend it.

And Steve correctly observes that bad monetary policy is now an excuse to not fix the problems that actually are contributing to economic stagnation.

Manipulating the value of money and controlling interest rates, i.e., the price of money, never works. Money measures value. It is a claim on services and is a tool for facilitating commerce and investing. The reason economies around the world are in the ditch–which is fueling anger, discontent and ugly politics–is structural, government-created barriers: unstable money, suffocating rules and too-high rates of taxation.

James Grant, in a column for the Wall Street Journal, is not impressed by the anti-cash agitprop and specifically debunks some of the arguments put forth by Rogoff. He starts with some very sensible observation that politicians should reform drug laws and tax laws rather than restricting our freedom to use cash.

Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message. Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position. It is the only position that seems to cross his mind.

Grant makes the (obvious-to-folks not-in-Washington) point that restricting cash to enable Keynesian monetary policy is akin to throwing good money after bad.

Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before. In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. …What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. …In the topsy-turvy world of Mr. Rogoff, negative rates would be the reward to impetuousness and the cost of thrift. …Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.

And he echoes the insights of Austrian-school scholars about how easy-money policies are the cause of problems rather than the cure.

Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment. The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market. The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.”

Let’s close with the good news is that Switzerland doesn’t seem very interested in following Europe and the United States down the primrose path of seeking to curtail monetary freedom.

Manuel Brandenberg, a lawmaker in the Swiss canton of Zug, loves cash. …That belief in bills is shared by many of his compatriots, who have a penchant for hard currency even when electronic options are available. In a country whose wealth managers flourished thanks to banking secrecy, citizens often cherish the untraceable privacy conferred by notes and coins. “Cash is property and cash is freedom,” said Brandenberg… Unlike their neighbors, the Swiss have no plans to reconsider banknote denominations — 10, 20, 50, 100 and 200 francs. Not even the highest of 1,000 francs ($1,040). …The predilection for notes and coins is evident on the streets of Zurich, where a number of stores don’t take plastic — among them Belcafe at Bellevue, a busy transport hub in the center. …Roughly 20 percent of purchases — including large sums for jewelry — were paid in cash, then-Finance Minister Eveline Widmer-Schlumpf told parliament in 2014. …“There’s no reason to change things,” said Rickli. “I don’t want the state to know who goes to what restaurant. That’s none of the government’s business.”

Thank goodness for the “sensible Swiss.” On so many issues, Switzerland is a beacon of common sense and individual freedom.

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Double-Dipping Bureaucrat Pulls Triple-Dipping Scam on Taxpayers

As a public finance economist, I normally focus on big-picture issues such as the economically debilitating effect of excessive government spending and punitive taxation.

But as a human being, what irks me most about big government is the way that insiders use the system to enrich themselves. I don’t like it when politicians, bureaucrats, lobbyists, contractors, cronies, and other well-connected interest groups funnel money to themselves at the expense of ordinary people.

Especially when taxpayers pay twice. They have less take-home income because of higher tax burdens and over time their pre-tax income doesn’t grow as fast because a bloated public sector reduces growth.

In other words, a lose-lose situation for regular folks.

But it’s a win-win situation for insiders. Consider, for instance, this exposé in the Daily Caller about a bureaucrat who double-dipped by getting a big paycheck from Uncle Sam an interior designer while also getting outside contracts as – you guessed it – an interior designer.

A fashionista from Beverly Hills, Calif., collected millions in interior design contracts from federal agencies by claiming to be “disadvantaged,” while simultaneously working at the Department of Veterans Affairs (VA) sending work to design companies. Ronda C. Jackson was a no-show at her VA job, colleagues said. Records show she instead spent her time running a design company that got $7 million in contracts from the VA and other government agencies since 2008, reselling them marked-up goods like five-seat tables for $17,000.

Here are some of the sordid details.

Jackson worked as a full-time federal employee at the Los Angeles VA center in fiscal years 2010 and 2011, which ran from Oct. 1, 2009 to Sept. 30, 2011. Pay records show she worked as a GS-12 level interior designer and made $80,000 each year. Colleagues said they never saw Jackson in the office. …In fiscal years 2008 through 2010, the company had $222,000 in contracts with the VA, federal records show. …she was being paid as a full-time employee for almost a whole year while also working on a contract for the same agency and at the same hospital and for the same type of work. Her job as an employee was to buy furniture for the VA, and her job as a contractor included selling it.

Wow, sort of reminds me of the bureaucrat from the National Weather Service who created a contractor position for himself.

But Ms. Jackson took it to the next level, getting a paycheck and being a contractor at the same time. How did she get away with all this?

Well, her boss set a good example of how to waste money and bilk the system.

Robert Benkeser, a high-level manager in charge of facilities, was told that Jackson appeared to have a no-show employment arrangement, but did nothing. Benkeser is the same manager who was in charge of an official vehicle fleet from which 30 of 88 cars disappeared. He fired the employee who exposed the missing cars as well as the fact that government credit cards from the same unit appeared to have been used fraudulently. Benkeser received only “counseling” for the misconduct.

Gee, I wonder if he was one of the VA bureaucrats who got a big bonuses after the agency put veterans on secret waiting lists?

But what makes Ms. Jackson special is the way she doubly double-dipped.

That’s an odd way of describing something, but somehow appropriate because she got herself classified as “disadvantaged” so that she could get contracts without the usual competitive bidding process.

A 2009 contract, in which records from USASpending.gov classify the company as HUBZone while listing its Beverly Hills address, says she was paid $72,000 for outfitting the Federal Aviation Administration with “framed artwork for CMEL guest room and main building [and] conference rooms.” The company subsequently moved to Los Angeles. Jackson charged $70,000 for an unspecified “21 [inch] freestanding unit” and $17,000 for a five-person outdoor table. Ninety-eight percent of the nearly $7 million in contracting dollars awarded to Jackson’s company came without the government weighing her offer against those of other companies.

So instead of paying twice as much as something would cost in the private sector, which is typical for government, her no-bid scams probably resulted in taxpayers paying four times as much as necessary. So she was a bureaucrat, a contractor, and disadvantaged, which we can consider a form of triple-dipping.

As the old saying goes, nice “work” if you can get it.

There’s no question that Ms. Jackson has “earned” her way into the Bureaucrat Hall of Fame. Congratulations, Ronda!

By the way, the article raises a bigger issue.

Jackson’s case underscores questions about VA’s army of 167 full-time interior designers. Nearly every VA hospital in the country has one or more.

I can understand why it might be acceptable to have one interior designer (assuming the VA stays in the business of running hospitals, which obviously shouldn’t be the case), but why 167 of them?

Oh, it’s government and we need to remember what Milton Friedman said about “other people’s money.” Forget that I even asked such a silly question.

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The Ticking Time Bomb of Medicaid

The burden of government spending is already excessive. But the numbers will get worse with the passage of time if policy is left on autopilot.

The main culprits are the so-called mandatory programs. Entitlements such as Social Security, Medicare, Food Stamps, and Obamacare that automatically dispense money to various constituencies are consuming an ever-larger chunk of the economy’s output.

And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.

So how big is the problem? Enormous if you look at the numbers from the National Association of State Budget Officers.

States increased their spending in fiscal year 2015 by the biggest margin in more than 20 years, but most of the increase was thanks to huge leaps in Medicaid spending under the first full year of the Affordable Care Act (ACA). Spending increased last fiscal year, which ended on June 30 for most states, by 7.8 percent, according to new estimates from the National Association of State Budget Officers (NASBO). It’s the biggest boost since 1992 and was thanks to a 15.1 percent increase in Medicaid spending, much of that paid for via federal Medicaid funds. Illinois, Michigan, Kentucky, Nevada and Oregon saw more than 30 percent increases in federal funding because they expanded Medicaid under the ACA. But 2015 was also a year where states were putting up more of their own money again.

Here’s the chart showing which outlay categories grew the fastest.

The article points out that spending is outpacing revenue.

On average, state revenues aren’t keeping pace with spending; NASBO estimates General Fund revenues will increase by just 3.8 percent.

Though the real problem is that spending is expanding faster than the private sector, which is the opposite of what is called for by my Golden Rule.

One of the reasons Medicaid grows so fast is that the program is split between Washington and the states, which both picking up a share of the cost. This may sound reasonable, but it creates a very perverse incentive structure since politicians at both levels can vote to expand the spending burden while only having to provide part of the cost.

The National Center for Policy Analysis explains how this system produces bad decisions.

Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. …So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers. …Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people.

But unless that kind of reform happens, the program will continue to grow and become an ever-larger fiscal burden.

Heritage Action has more details on the perverse incentives of the current system.

…the federal government promises to reimburse states for a majority of their Medicaid spending, most of which involves reimbursements to health care providers. Therefore, states collude with health care providers in the following manner: they tell providers that they will tax them (so-called “provider taxes”), bringing in more revenue to the state. The state then promises to filter that money back to those same providers in the form of higher Medicaid reimbursements. States then bill the federal government for this added cost. Because the federal government provides more than 50% of total Medicaid funding, both state governments and Medicaid providers are made better off by the arrangement, while the federal government is stuck footing a larger bill it had no part in creating.

Though I partially disagree with the assertion that the feds are blameless. After all, it was politicians in Washington who created this wretched system, including the reimbursement rules that states manipulate.

This info-graphic illustrates how the “provider fee” scam operates.

The net result of all this is a nightmare for federal taxpayers, but states also are losing out when you consider the long-run consequences. And that’s even true with the Medicaid expansions contained in Obamacare, which supposedly were going to be financed almost entirely by Uncle Sam. The Wall Street Journal reports.

…the Affordable Care Act was designed to essentially bribe states to expand their Medicaid programs: The feds offered to pay 100% of additional costs through 2016, dropping to 90% by 2020. This “free money” prompted 30 states and the District of Columbia to take the deal. Democratic activists have joined with state hospital lobbies to pressure lawmakers in the remaining 20 state capitals to follow.

But free money can be very expensive.

Consider the experience of the states that did expand Medicaid. “At least 14 states have seen new enrollments exceed their original projections, causing at least seven to increase their cost estimates for 2017,” the Associated Press reported in July. The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion… Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021. In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.

Interestingly, Obamacare is causing pro-big government states to dig even deeper fiscal holes.

The National Center for Policy Analysis has some remarkable data on this development.

States that expanded Medicaid tend to have per capita state spending that’s about 17 percent higher than non-expansion states. …In 2004, expansion states had median per capita tax collections (both state and local) of 19 percent more than non-expansion states. By 2012, this gap had widened with expansion states collecting 28 percent more taxes per capita than non-expansion states. Moreover, since 2008 expansion states have moved to increase taxes, while non-expansion states have reduced taxes slightly.

Unsurprisingly, the states that are making government bigger are experiencing slower growth.

In 2001 expansion states had real median income that was nearly 13 percent higher than non-expansion states. However, by 2013 this gap had narrowed to just over 9 percent. Expansion states have historically had slightly lower poverty rates, but the difference was only 1 percentage point by 2012 (12.9 percent vs. 13.9 percent). Non-expansion states, although slightly poorer, have lower unemployment than expansion states (6.7 percent versus 7.2 percent).

By the way, the decision by some states to reject Medicaid expansion is a huge – and underappreciated – victory over Obamacare.

Another point worth mentioning is that the program isn’t even a good deal for the poor according to Scott Atlas at the Hoover Institution. Here’s some of what he wrote for the Wall Street Journal.

Americans should be more worried than ever about Medicaid… The cost of the $500 billion program is expected to rise to $890 billion by 2024… Yet more spending doesn’t necessarily mean better care for beneficiaries… The expansion of Medicaid is one of the most misguided parts of ObamaCare… Some 55% of doctors in major metropolitan areas refuse to take new Medicaid patients… Medicaid enrollees who manage to see a doctor typically experience outcomes worse than those under private insurance. That means more in-hospital deaths, more complications from surgery, worse posttreatment survival rates, and longer hospital stays than similar patients with private insurance. A randomized study by the Oregon Health Study Group showed that having Medicaid did not significantly improve patients’ physical health compared with those without insurance.

The proverbial icing on this foul-tasting cake is the way the program enables staggering amounts of fraud and theft.

I’ve written about this before (including how foreigners are bilking the system). But here are some fresh details from the Wall Street Journal.

…one of our favorite political euphemisms is “improper payments.” That’s how Washington airbrushes away the taxpayer money that flows each year to someone who is not eligible, or to the right beneficiary in the wrong amount, or that disappears to fraud or federal accounting ineptitude. Now thanks to ObamaCare, improper payments are soaring. Last week the Health and Human Services Department published an “alert” warning that the improper payment rate for Medicaid in 2016 will likely hit 11.5%. That’s nearly double the 5.8% rate as recently as 2013… The 11.5% for 2016 is likely an underestimate given that HHS’s goal last year was 6.7% and instead scored 9.8%, which amounts to $29.1 billion. The dollar amount of improper payments in Medicaid was bound to rise because ObamaCare vastly opened eligibility. In 2015 enrollment climbed by 13.8% and one of five Americans are now covered by the program. …In recent audits of Medicaid in Arizona, Florida, Michigan and New Jersey, the GAO uncovered 50 dead people who recouped at least $9.6 million in benefits after they died; 47 providers who registered foreign addresses as their location of service in places such as Saudi Arabia; and $448 million bestowed on 199,000 beneficiaries with fake Social Security numbers—12,500 of which had never been issued by the Social Security Administration.

But as bad as all this sounds, it can get worse.

If HHS tries hard enough, maybe the department can match the failure rate for school lunches (15.7%) or the Earned Income Tax Credit (23.8%).

And Kevin Williamson of National Review adds some acidic observations.

…the criminal — and I do not use the word figuratively — administration of Medicaid by the Obama administration. …improper payments under Medicaid have become so common that they will account this year for almost 12 percent of total Medicaid spending — just shy of $140 billion. …That rate has doubled in only a few years…12 percent in improper payments isn’t an error rate — it’s a malfeasance rate. …If improper and illegal federal payments were an economy of their own, that economy would be bigger than Hungary’s… The Obama administration is not lifting a pinky to do anything about this, even though analysts such as John Hood have — for years — been arguing that it is necessary and possible to reform this mess. As the Wall Street Journal has reported, we don’t even verify that doctors billing Medicaid for services rendered are actually doctors. In many cases, we do not do much to verify that their patients actually, you know, exist. We’ve paid untold billions of dollars to “clinics” that turn out to be little more — or nothing more — than post-office boxes and prepaid cell phones. And as bad as that 12 percent rate is, some policy scholars believe that it is in fact probably worse.

Kevin observes that this system is good for the Poverty Pimps.

…the real problem with the welfare state is not the poor people receiving checks — it’s everybody in the middle, the vast array of government employees, their union allies, contractors, and third parties who earn six-, seven-, eight-, or nine-figure paydays taking their cuts of money we think we’re spending on the poor. This is an enormous criminal conspiracy against the American people and the public fisc.

You might think that fixing this fraud would be an area for bipartisan cooperation.

But the sad reality is that fraud is a feature, not a bug. Politicians like the fact that scam artists in their states and district are stealing healthcare money from taxpayers. After all, recipients of the loot can be registered voters and campaign contributors.

So what’s the best way of fixing this mess?

Will big tax hikes solve the problems? If the problem is that America isn’t enough like France, then the answer is yes.

But if the problem is that government already is too much of a burden and that it would be a good idea to at least slow down the rate at which America becomes France, then the answer is genuine entitlement reform.

And this video shows how the Medicaid program should be “block-granted” (just as welfare was reformed in the 1990s).

P.S. For all intents and purposes, block granting Medicaid is a partial repeal of Obamacare. Just in case you wanted an additional reason to support reform.

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More Items for the Libertarian Humor Collection

I have an entire page dedicated to libertarian-related humor.

Unfortunately, the majority of my collection makes fun of libertarians. So I’m always on the lookout for new items that will even up the balance.

And here’s something clever, at least for people who are familiar with both Gary Johnson’s failure to know the supposed significance of a Syrian city and the “nobody cares” scene from Jurassic Park.

Heck, it’s not that libertarian-leaning voters don’t care whether the Libertarian Party candidate is familiar with Aleppo. They probably view it is a plus that he hasn’t paid attention to a war that is none of America’s business.

Our second item builds upon the very clever libertarian version of Star Wars from Reason.

We now have Libertarian Star Trek!

Since I’m a fiscal policy wonk, I especially appreciated the part about pork-barrel spending about two minutes into the video. And if you think the point is exaggerated, click here and here for 21st-century examples.

The whole video is clever.

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Another Lesson from Bastiat: So-Called Employment Protection Legislation Is Bad News for Workers

Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

The people who don’t get laid off are seen, but what about the unseen consequences of such laws?

Well, an academic study from three French economists has some sobering findings for those who think regulation and “social protection” are good for workers.

…this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator… The originality of our paper is to study the effects of labour market regulations on capital intensity, capital quality and the share of employment by skill level using a symmetric approach for each factor using a single original large database: a country-industry panel dataset of 14 OECD countries, 18 manufacturing and market service industries, over the 20 years from 1988 to 2007.

One of the findings from the study is that “EPL” is an area where the United States historically has always had an appropriately laissez-faire approach (which also is evident from the World Bank’s data in the Doing Business Index).

Here’s a chart showing the US compared to some other major developed economies.

It’s good to see, by the way, that Denmark, Finland, and the Netherlands engaged in some meaningful reform between 1994-2006.

But let’s get back to our main topic. What actually happens when nations have high or low levels of Employment Protection Legislation?

According to the research of the French economists, high levels of rules and regulations cause employers to substitute capital for labor, with low-skilled workers suffering the most.

Our main estimation results show an EPL effect: i) positive for non-ICT physical capital intensity and the share of high-skilled employment; ii) non-significant for ICT capital intensity; and (iii) negative for R&D capital intensity and the share of low-skilled employment. These results suggest that an increase in EPL would be considered by firms to be a rise in the cost of labour, with a physical capital to labour substitution impact in favour of more non-sophisticated technologies and would be particularly detrimental to unskilled workers. Moreover, it confirms that R&D activities require labour flexibility. According to simulations based on these results, structural reforms that lowered EPL to the “lightest practice”, i.e. to the US EPL level, would have a favourable impact on R&D capital intensity and would be helpful for unskilled employment (30% and 10% increases on average, respectively). …The adoption of this US EPL level would require very largescale labour market structural reforms in some countries, such as France and Italy. So this simulation cannot be considered politically and socially realistic in a short time. But considering the favourable impact of labour market reforms on productivity and growth. …It appears that labour regulations are particularly detrimental to low-skilled employment, which is an interesting paradox as one of the main goals of labour regulations is to protect low-skilled workers. These regulations seem to frighten employers, who see them as a labour cost increase with consequently a negative impact on low-skilled employment.

There’s a lot of jargon in the above passage for those who haven’t studied economics, but the key takeaway is that employment for low-skilled workers would jump by 10 percent if other nations reduced labor-market regulations to American levels.

Though, as the authors point out, that won’t happen anytime soon in nations such as France and Italy.

Now let’s review an IMF study that looks at what happened when Germany substantially deregulated labor markets last decade.

After a decade of high unemployment and weak growth leading up to the turn of the 21th century, Germany embarked on a significant labor market overhaul. The reforms, collectively known as the Hartz reforms, were put in place in three steps between January 2003 and January 2005. They eased regulation on temporary work agencies, relaxed firing restrictions, restructured the federal employment agency, and reshaped unemployment insurance to significantly reduce benefits for the long-term unemployed and tighten job search obligations.

And when the authors say that long-term unemployment benefits were “significantly” reduced, they weren’t exaggerating.

Here’s a chart from the study showing the huge cut in subsidies for long-run joblessness.

So what were the results of the German reforms?

To put it mildly, they were a huge success.

…the unemployment rate declined steadily from a peak of almost 11 percent in 2005 to five percent at the end of 2014, the lowest level since reunification. In contrast, following the Great Recession other advanced economies — particularly in the euro area — experienced a marked and persistent increase in unemployment. The strong labor market helped Germany consolidate its public finances, as lower outlays on unemployment benefits resulted in lower spending while stronger taxes and social security contribution pushed up revenues.

Gee, what a shocker. When the government stopped being as generous to people for being unemployed, fewer people chose to be unemployed.

Which is exactly what happened in the United States when Congress finally stopped extending unemployment benefits.

And it’s also worth noting that this was also a  period of good fiscal policy in Germany, with the burden of spending rising by only 0.18 percent annually between 2003-2007.

But the main lesson of all this research is that some politicians probably have noble motives when they adopt “social protection” legislation. In the real world, however, there’s nothing “social” about laws and regulations that either discourage employers from hiring people and or discourage people from finding jobs.

P.S. Another example of “seen” vs “unseen” is how supposedly pro-feminist policies actually undermine economic opportunity for women.

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Anatomy of a Brutal Tax Beating

Based on the title of this column, you may think I’m going to write about oppressive IRS behavior or punitive tax policy.

Those are good guesses, but today’s “brutal tax beating” is about what happens when a clueless leftist writes a sophomoric column about tax policy and then gets corrected by an expert from the Tax Foundation.

The topic is the tax treatment of executive compensation, which is somewhat of a mess because part of Bill Clinton’s 1993 tax hike was a provision to bar companies from deducting executive compensation above $1 million when compiling their tax returns (which meant, for all intents and purposes, an additional back-door 35-percent tax penalty on salaries paid to CEO types). But to minimize the damaging impact of this discriminatory penalty, particularly on start-up firms, this extra tax didn’t apply to performance-based compensation such as stock options.

In a good and simple tax system, which taxes income only one time (including business income), the entire provision would be repealed.

But when Alvin Chang, a graphics reporter from Vox, wrote a column on this topic, he made the remarkable claim that somehow taxpayers are subsidizing big banks because the aforementioned penalty does not apply to performance-based compensation.

…the government doesn’t tax performance-based pay for…any…top bank executive in America. Unlike regular salaries — where the government takes out taxes to pay for Medicare, Social Security, and all other sorts of things — US tax code lets banks deduct the big bonuses they give to their executives. … The solution most Americans want is to either heavily tax CEO pay over a certain amount, or to set a strict cap on how much CEOs can make, relative to their workers. As long as this loophole is open, though, it makes sense for banks to continue paying executives these huge sums. ..for now, taxpayers are still ponying up to help make wealthy bankers even wealthier, because the US tax code encourages it.

Since Mr. Chang is a graphics reporter, you won’t be surprised that he included several images to augment his argument.

Here’s one making the case that companies should pay a 35 percent tax on performance-based pay for CEO types. Keep in mind, as you peruse this image, that recipients of performance-based pay have to declare that income on their 1040s and pay 39.6 percent individual income tax.

And here’s Chang’s look at how much money the IRS could have collected from big banks in recent years if the anti-CEO tax penalty was extended to performance-based pay.

When I look at these images, my gut reaction is to be offended that Chang equates “taxpayers” with the federal government.

So I would change the caption of the first image so it ended, “…this pile would be diverted from shareholders to politicians.”

And the caption in the second image would read, “This is the amount it saved taxpayers.”

But Chang’s argument is also flawed for much deeper reasons. Scott Greenberg of the Tax Foundation debunks his entire column. Not just debunks. Eviscerates. Destroys.

Here are some of the highlights.

…the article contains several factual errors and misleading claims about how CEOs are taxed in America. The article begins by making an incorrect claim: that the federal government does not tax performance-based CEO pay… This is simply untrue. Under the U.S. tax code, households are generally required to pay individual income taxes on the value of the stock options and bonuses that they receive…up to 39.6% on the performance-based pay… The article continues with another false assertion…it claims that CEO performance-based pay is not subject to the same Social Security and Medicare payroll taxes as “regular salaries.” In fact, all employee compensation, including CEO pay, is subject to Medicare payroll taxes, and high-income individuals actually pay a higher Medicare payroll tax rate than most other employees. …it claims that U.S. businesses are allowed to deduct CEO pay but are not allowed to deduct “regular salaries.” This is patently incorrect. Under the U.S. tax code, businesses are allowed to deduct virtually all compensation to employees. In fact, the only major exception to this rule is that businesses are only allowed to deduct $1 million in non-performance-based salaries to CEOs. This means that the U.S. tax code gives the same, if not worse, treatment to CEO compensation as “regular salaries.”

Scott also addresses the silly assertion that deductions for CEO compensation are some sort of subsidy.

You probably wouldn’t claim that taxpayers are subsidizing the restaurant worker’s salary, because the deduction for employee compensation is a regular, structural feature of the tax code. In general, businesses in the U.S. are taxed on their revenues minus their expenses, and the salary paid to the worker is a business expense like any other. The same argument applies for CEO compensation. When a business pays a CEO $155 million, it has increased its expenses and decreased its profits. The normal logic of U.S. tax law dictates that the business be allowed to deduct the CEO’s compensation from its taxable income. Then, the CEO is required to pay individual income taxes on the compensation.

The bottom line, as Scott points out, is that Bill Clinton’s provision means that CEO pay is penalized rather than subsidized.

…wages and salaries of CEOs are penalized relative to the wages and salaries of regular employees, while performance-based compensation is taxed in the same manner as regular wages and salaries. In sum, it is simply wrong to say that the federal tax code subsidizes CEO pay.

Game, set, and match. Mr. Chang should stick to graphics rather than tax policy.

And policy makers should resist tax policies based on envy and resentment since the net result is a tax code that is needless complex and pointlessly destructive.

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Debunking Inequality Myths

I shared a very amusing column last year about “a modest proposal” to reduce income inequality.

Written tongue-in-cheek by David Azerrad of the Heritage Foundation, the premise was that society could be made more “fair” by exiling – or perhaps even selling to the highest bidder – America’s richest people.

David’s piece cleverly made the point that such a policy would dramatically lower inequality, but would do nothing to boost the living standards of poor people. Indeed, when you consider all the damage that would be caused if America lost its top entrepreneurs, investors, and business owners, lower-income people obviously would suffer immense hardship as the economy shrank.

Unfortunately, there’s no evidence that Hillary Clinton read his article. Or, if she did, she obviously didn’t learn anything. Her agenda, which is echoed by almost all leftists, is endlessly higher taxes to fight the supposed scourge of inequality.

I’ve always thought inequality was the wrong target. If politicians really cared about the less fortunate, they would instead focus on growth in order the reduce poverty.

But our friends on the left apparently believe (or, if they’re familiar with historical data, they pretend to believe) that the economy is a fixed pie. So if someone in the top-1 percent, top-5 percent, top-10 percent, or top-20 percent gets more money, then the rest of us must have less money.

Heck, they don’t even understand the data that they like to cite. Writing for National Review, Thomas Sowell debunks many of the left’s most-cherished talking points about inequality.

When we hear about how much more income the top 20 percent of households make, compared with the bottom 20 percent of households, one key fact is usually left out. There are millions more people in the top 20 percent of households than in the bottom 20 percent of households. …In 2002, there were 40 million people in the bottom 20 percent of households and 69 million people in the top 20 percent. A little over half of the households in the bottom 20 percent have nobody working. You don’t usually get a lot of income for doing nothing. In 2010, there were more people working full-time in the top 5 percent of households than in the bottom 20 percent. …Household income statistics can be very misleading in other ways. …The number of people per American household has declined over the years. When you compare household incomes from a year when there were 6 people per household with a later year when there were 4 people per household, you are comparing apples and oranges. Even if income per person increased 25 percent between those two years, average household income statistics will nevertheless show a decline.  …household income statistics can show an economic decline, even when per capita income has risen.

My Cato Institute colleague, Mike Tanner, has a must-read comprehensive study on inequality that was just released today. Here are some of the parts I found especially enlightening, starting with a very important passage from his introduction.

…contrary to stereotypes, the wealthy tend to earn rather than inherit their wealth… Most rich people got that way by providing us with goods and services that improve our lives. Income mobility may be smaller than we would like, but people continue to move up and down the income ladder. Few fortunes survive for multiple generations, while the poor are still able to rise out of poverty. More important, there is little relationship between inequality and poverty. The fact that some people become wealthy does not mean that others will become poor.

Mike then spends a few pages debunking Thomas Piketty (granted, an easy target, but still a necessary task) and pointing out that some folks overstate inequality.

But more importantly, he then points out that there is still considerable income mobility in the United States. Rich people often don’t stay rich and poor people frequently don’t stay poor.

…wealth often dissipates across generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessperson rarely survives long. In many cases, as much as 70 percent has evaporated by the end of the second generation and as much as 90 percent by the end of the third. Even over the shorter term, the composition of the top 1 percent often changes dramatically. If history is any guide, roughly 56 percent of those in the top income quintile can expect to drop out of it within 20 years. …of those on the first edition of the Forbes 400 in 1982, only 34 remain on the 2014 list, and only 24 have appeared on every list. …At the same time, it remains possible for the poor to become rich, or, if not rich, at least not poor. Studies show that roughly half of those who begin in the bottom quintile move up to a higher quintile within 10 years. …And their children can expect to rise even further. One out of every five children born to parents in the bottom income quintile will reach one of the top two quintiles in adulthood.

Here’s his graph with the relevant data.

Mike also debunks that notion that poor people are poor because rich people are rich.

…it is important to note that poverty and inequality are not the same thing. Indeed, if we were to double everyone’s income tomorrow, we would do much to reduce poverty, but the gap between rich and poor would grow larger. Would this be a bad thing? …The idea that gains by one person necessarily mean losses by another reflects a zero-sum view of the economy that is simply untethered to history or economics. The economy is not fixed in size, with the only question being one of distribution. Rather, the entire pie can grow, with more resources available to all.

His study is filled with all sorts of data, but this graph may be the most important tidbit.

It shows that the poverty rate has remained relatively constant, oscillating around 14 percent, during the period when the so-called top-1 percent were generating large amounts of additional income.

Mike then spends some time agreeing that inequality can be bad if it is the result of subsidies, bailouts, protectionism, and handouts.

Amen. Rich people deserve their money if they earn it in the marketplace. But if they get rich via TARP bailouts, Ex-Im Bank subsidies, protectionist barriers, green-energy boondoggles, or some other form of cronyism, that’s reprehensible and unjustified.

Most important of all, he closes by explaining that inequality isn’t what’s important. Policy should be focused on reducing poverty, which means more economic growth.

There are…two ways to reduce inequality. One can attempt to bring the bottom up by reducing poverty, or one can bring the top down by, in effect, punishing the rich. Traditionally, we have tried to reduce inequality by taxing the rich and redistributing that money to the poor. …Despite the United States spending roughly a trillion dollars each year on antipoverty programs at all levels of government, by the official poverty measure we have done little to reduce poverty. …we are unlikely to see significant reductions in poverty without strong economic growth. Punishing the segment of society that most contributes to such growth therefore seems a poor policy for serious poverty reduction. …While inequality per se may not be a problem, poverty is. …policies designed to reduce inequality by imposing new burdens on the wealthy may perversely harm the poor by slowing economic growth and reducing job opportunities.

Exactly. The notion that we can help the poor by making America more like a high-tax European-style welfare state is laughable.

By every possible standard, the United States is out-pacing Europe in terms of jobs and growth. And what’s really remarkable is that this is happening even though Obamanomics has given us the weakest recovery since the Great Depression. Imagine how big the gap would be if we has the kind of market-oriented policies that dominated the Reagan and Clinton years!

Let’s close with a very amusing bit of data about inequality from a report in the New York Times.

The author looked at income changes in each state between 1990 and 2014 at all levels of income distribution.

By looking at the state level, we’re delineating the rich and poor within that state. Which is to say that the 90th percentile of personal income in Arkansas will not be the same as the 90th percentile of personal income in New York. This calculation helps us avoid making unfair comparisons of income between places with different costs of living.

Since I wrote just two days ago about the importance of adjusting state income data to reflect the cost of living, I obviously view this as a useful exercise.

But here’s the part that grabbed my attention. As I was reviewing the various charts for all the states, I noticed that inequality has expanded dramatically in the most infamous left-wing states. And usually not simply because rich people got richer faster than poor people got richer. In New York, Illinois, and California, rich people were the only winners.

Yet if you look at Kansas (which is the favorite whipping boy of the left because of Gov. Brownback’s big tax cuts) or the stereotypical red state of Texas, you’ll notice the lower-income and middle-income people did much better.

I guess we can use this data as additional evidence of how statist policies cause inequality.

Best of all, it was in the New York Times, so our leftist friends will have a hard time reflexively dismissing the data. It’s always good when the other side scores an “own goal.”

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The Obama Administration’s Assault on the Rule of Law

What’s the worst development in economic policy of the Obama years?

• The faux stimulus scheme?
• The Obamacare boondoggle?
• The fiscal cliff tax hike?
• The Dodd-Frank bailout bill?

Those are all good answers, but if you look at the data from Economic Freedom of the World, a major reason for the decline in America’s score is that the rule of law has eroded.

In other words, the United States is becoming a place where clear and neutral rules are being replaced by arbitrary and capricious government power. And this is not a trivial matter. Issues related to the rule of law account for 20 percent of a nation’s grade – the same level of importance as fiscal policy.

In another worrisome development, the United States only ranked #19 as of 2014 in a global ranking of how well nations maintain the rule of law.

There are several reasons why America’s ranking is going down. To cite just a few: The arbitrary rewrites of Obamacare. The Operation Chokepoint fiasco. IRS regulations that overturn existing law.

And it appears the Obama Administration wants to go out with a bang.

The Wall Street Journal opines on a new regulatory scheme from the Treasury Department to boost the death tax burden by arbitrarily inflating the value of certain assets.

…before President Obama leaves office, his Treasury Department is rushing to implement a de facto increase in the federal estate tax. Since Congress does not agree that the Internal Revenue Service should suck more cash out of family firms, Treasury Secretary Jack Lew is up to his usual tricks, trashing established interpretations of tax law to bypass the legislative branch. Not even Mr. Lew has the gall to claim he can raise the federal death-tax rate of 40% without congressional approval. So the game here is to contrive ways to expose more of the value—or imagined value—of an estate to IRS revenue collectors. Last month Mr. Lew’s Treasury announced a proposed rule to close what it calls an estate and gift tax “loophole.” Until now, the IRS permitted realistic values for portions of closely held corporations and partnerships. …consider a minority stake with limited rights in a family business. While the business as a whole may have considerable value, how much would an investor be willing to pay for a small, illiquid piece of a private business that she can’t control? The typical answer is not much. On the other hand, the investor might pay handsomely for a controlling interest. The IRS has long recognized this reality and has allowed the discounting of interests in closely held businesses to more closely reflect what they could fetch on the open market, rather than simply assigning a percentage of a firm’s overall estimated value.

In other words, Obama’s Treasury Department wants to force heirs to pay tax on what they think an asset is worth rather than what it would fetch on the open market.

This regulatory scheme – if ultimately successful – will make a bad tax even worse.

And it also will be bad for the economy.

…what seems like a reasonable interpretation to some looks like a wasted revenue opportunity to the Obama Treasury. …As always, Mr. Lew and Treasury are happy to seize more wealth from the private economy. …But voters may ask how much economic destruction is acceptable in the name of such fairness. …the tax clearly encourages people to consume now rather than invest in the future. This means lower GDP over time and fewer opportunities for the poor, some of whom might want to work for family businesses. The Tax Foundation reckons that the economy would be 0.8% larger over a decade without the estate tax.

Here’s another example.

The Obama Administration has been shaking down banks for money because of supposed misdeeds leading up the government-caused financial crisis.

The various fines may of may not be legitimate, but what’s really troubling is that a big chunk of the money is then being steered to left-wing groups. Many of which are seeking to impact the political process.

Andy Koenig of Freedom Partners has a column in the Wall Street Journal with some of the unseemly details.

The administration’s multiyear campaign against the banking industry has quietly steered money to organizations and politicians who are working to ensure liberal policy and political victories at every level of government. The conduit for this funding is the Residential Mortgage-Backed Securities Working Group, a coalition of federal and state regulators and prosecutors created in 2012 to “identify, investigate, and prosecute instances of wrongdoing” in the residential mortgage-backed securities market. In conjunction with the Justice Department, the RMBS Working Group has reached multibillion-dollar settlements with essentially every major bank in America. …Combined, the banks must divert well over $11 billion into “consumer relief,” which is supposed to benefit homeowners harmed during the Great Recession. …a substantial portion is allocated to private, nonprofit organizations drawn from a federally approved list. Some groups on the list—Catholic Charities, for instance—are relatively nonpolitical. Others—La Raza, the National Urban League, the National Community Reinvestment Coalition and more—are anything but. This is a handout to the administration’s allies. Many of these groups engage in voter registration, community organizing and lobbying on liberal policy priorities at every level of government. They also provide grants to other liberal groups not eligible for payouts under the settlements. …The settlements also give banks a financial incentive to fund these groups. Most of the deals give double credit or more against the settlement amount for every dollar in “donations.”

Needless to say, diverting money to political allies sounds like the kind of chicanery you’d find in a banana republic, not an advanced western society.

But it gets worse.

Here’s another Wall Street Journal editorial on an additional bit of regulatory/tax overreach by the Treasury Department. It deals with the Obama Administration trying to stop “inversions” by unilaterally changing the rules in ways that will hamper sensible business practices for all multinational companies.

The Treasury Secretary…wants to prevent “earnings stripping,” in which companies allegedly make loans from their overseas businesses to their U.S. subsidiaries to minimize taxes. The feds succeeded in destroying the proposed merger of Pfizer and Allergan. But we warned in April that the Treasury plan would be “ugly for everybody,” imposing new costs and paperwork burdens on companies that never had any intention of moving overseas or stripping earnings. And sure enough, from small S corps all the way to Exxon, the afflicted have been explaining how the new rules will make it more expensive and difficult to do even routine business functions like cash management. …the banks hate this rule too. By limiting their ability to move money across borders to meet customer demand and respond to market stress, it could force them to violate other regulations, or worse. A July letter from Citigroup, Bank of America and J.P. Morgan Chase to Treasury officials warned the rules could make “financial services groups more fragile in times of financial stress, thereby creating risk to the financial stability of the United States.” …If Mr. Lew were reasonable, he’d drop this misguided assault on American business and work with lawmakers to craft a corporate tax reform that ensures U.S. companies never want to leave the U.S.

A report in the New York Times highlighted some of the legal issues involved in this issue.

The U.S. Chamber of Commerce filed a lawsuit on Thursday to block new rules issued by the Obama administration that prevent American corporations from merging with foreign-based companies and moving their headquarters abroad to save on taxes. The business group, along with the Texas Association of Business, filed the lawsuit in federal court in Austin, Tex., saying the administration was overstepping its authority in issuing the rules. …“If the defendants’ rule is permitted to stand, it is not just mergers that will suffer — it is the rule of law, and the certainty and stability required for effective commerce, markets and economic growth, that are truly threatened by the defendants’ unauthorized and unlawful action,” the plaintiffs said in their filing. …“Although it might seem esoteric, this action is a clear case of federal executive branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue,” the lawsuit says.

Ugh. At least Hillary Clinton is proposing to change the law in pursuit of bad policy on inversions. Obama just waves his magic wand.

Let’s wrap up by refocusing on why the rule of law is a fundamental building block of a free society. Back in 2014, I shared a very good video from Learn Liberty about the importance of the rule of law.

That video is a compelling explanation of why it is good to have clear rules, along with limits on the arbitrary power of government officials.

Indeed, it’s probably no exaggeration to assert that rule of law is the greatest contribution of western civilization.

Here’s a movie clip (courtesy of FEE) that makes this point.

Based on the Obama Administration’s unilateral and capricious actions, maybe a new movie should be made about the rise and decline of western civilization.

P.S. On the topic of Obama and movies, here’s some humor to offset today’s dismal topic.

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From New Hampshire at the Top to New York at the Bottom, Ranking Freedom at the State Level

Proponents of liberty generally are big fans of federalism. In part, this is simply an issue of “good governance” since both voters and lawmakers at the state and local level are more likely to actually understand the real issues in communities and be able to develop policies that are more sensible.

But we also like federalism because it’s relatively easy for people to move across state and local borders and this means governments have to compete with each other, both in terms of not driving away productive people and also in terms of not attracting those who want to mooch off the government.

The obvious implication is that if we can dramatically shrink the federal government so that it only handles the few (enumerated) powers envisioned by the Founding Fathers, that would give states far more authority to determine tax burdens and the degree of redistribution, and they would presumably do a better job because they would compete with each other for jobs and investment.

This is why I’m always interested when organizations produce rankings that show the degree to which states seem inclined to adopt good policy. For instance, I routinely highlight the findings of the Tax Foundation’s State Business Tax Climate Index so I can see which states have acceptable tax policy. And the Mercatus Center’s Ranking the States by Fiscal Condition is a must-read publication to see which states follow sensible budget policy.

The latest addition to this group is the Cato Institute’s Freedom in the 50 States. It’s a comprehensive publication with lots of data and number-crunching, so wonks will have a field day digging into the details.

But if you simply want the highlights, I first looked to see which states have the best fiscal policy. Here’s the relevant table from the document and I’ve modified it to show which states have no income tax (blue stars), which ones have flat taxes (red stars), and which ones have no sales tax (black stars).

The obvious implication is that having no state income tax is probably the single most important way of controlling the fiscal burden of government.

But fiscal policy is just one variable of economic freedom. And while states obviously don’t have any leeway on monetary policy and trade policy, they have considerable powers over issues related to regulation.

And when you add these factors to the mix, you can get a measure of overall economic freedom.

If you compare these first two tables, there are some predictable similarities (New York and California score poorly while South Dakota, Tennessee, and New Hampshire do well).

But you also get some odd results. Pennsylvania, for instance, is 13th for fiscal policy, but drops to 30th for overall economic policy. I guess this means they are regulatory maniacs.

By contrast, Indiana is ranked a mediocre 26th for fiscal policy, but jumps to 11th place for overall economic policy, which presumably means a very laissez-faire approach to red tape.

Now let’s add personal freedom issues to the equation (issues such as guns, gambling, sex, education, booze, and even fireworks).

The bottom line, if you value overall liberty, is that you better be tolerant of cold weather since New Hampshire and Alaska are atop the rankings. New York is in last place by a comfortable margin.

Interestingly, if you compare the fiscal ranking with the above table for overall freedom, you’ll notice that there’s a lot of overlap. New Hampshire is first in both and New York is last, for instance.

But there are some odd anomalies. Iowa, for example is 9th for overall freedom but only 30th for fiscal freedom, a gap of 21 spots. There’s also a big difference for Kansas, which is 33rd in fiscal freedom but 16th for overall freedom.

Conversely, Texas is 10th for fiscal freedom, but drops to 28th place for overall freedom. And Alabama also has a split personality, ranking 6th for fiscal policy but 23rd for overall freedom.

Why are some states bad on fiscal policy but good on regulation and personal freedom, like Iowa and Kansas? Or, in the case of states like Alabama and Texas, the other way around?

Beats me. Maybe some southern states like controlling people’s lives so long as it doesn’t involve the power of the purse (sort of like Singapore). And maybe some farm states exploit the power of the purse, both otherwise leave people alone (sort of like the Nordic nations).

Here’s something easier to understand, a measure of which states have improved the most and deteriorated the most in the 21st century.

The bad news is that only nine states have moved in the right direction, with Oklahoma easily winning the prize for pro-liberty reforms. Honorable mention to Alaska, Maine, and Idaho.

By the way, is anybody surprised that Illinois is in last place? The dropping scores for Hawaii, New Jersey, and Connecticut also aren’t surprising.

But why have Kentucky, Nebraska, and Tennessee fallen so much?

P.S. Since we’re ranking states, here’s one final bit of information.

I wrote recently to debunk the left’s claim that California is an economic success story. My main point was to share per-capita income data from the BEA to who that California has been losing ground over the medium-term and long-term to states such as Kansas and Texas. And even in the short-term as well if you look at Census Bureau data on median household income.

But some leftists pushed back by arguing that the numbers nonetheless showed higher income levels in California. That’s certainly what we see in both the BEA and Census data, though I would argue that’s actually not relevant unless one (incorrectly) claims that California became a rich state because of big government. As i wrote in that column, “we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).”

Speaking of “how much money can buy,” let’s look at some great work from the Tax Foundation on that topic. If you have $100 of income, where will you be able to buy the best basket of goods and services. As you can see, you’re far better off in Texas or (especially) Kansas than in California.

The bottom line is that living standards in Texas and Kansas would be higher than those in California if BEA and Census numbers were adjusted for purchasing power parity (as happens when comparing living standards across nations).

Some people may want to live in California (or some other high-tax state) because of the climate or scenery. They just have to accept lower living standards caused by bigger government. Just like there are certain benefits of living in nations such as France and Italy, but you have to accept bloated government and economic stagnation as part of the package

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The Economic Misery of Cuban Communism

Communism should be remembered first and foremost for the death, brutality, and repression that occurred whenever that evil system was imposed upon a nation.

Dictators like Stalin, Mao, Pol Pot, the North Korean Kim dynasty either killed more than Hitler, or butchered higher proportions of their populations.

But let’s not forget that communism also has an awful economic legacy. The economic breakdown of the Soviet Empire. The horrid deprivation in North Korea. The giant gap that existed between West Germany and East Germany. The mass poverty in China before partial liberalization.

Today, let’s focus on how communism has severely crippled the Cuban economy.

In a column for Reason a few years ago, Steven Chapman accurately summarized the problems in that long-suffering nation.

There may yet be admirers of Cuban communism in certain precincts of Berkeley or Cambridge, but it’s hard to find them in Havana. …the average Cuban makes only about $20 a month—which is a bit spartan even if you add in free housing, food, and medical care. For that matter, the free stuff is not so easy to come by: Food shortages are frequent, the stock of adequate housing has shrunk, and hospital patients often have to bring their own sheets, food, and even medical supplies. …Roger Noriega, a researcher at the conservative American Enterprise Institute in Washington, notes that before communism arrived, Cuba “was one of the most prosperous and egalitarian societies of the Americas.” His colleague Nicholas Eberstadt has documented that pre-Castro Cuba had a high rate of literacy and a life expectancy surpassing that in Spain, Greece, and Portugal. Instead of accelerating development, Castro has hindered it. In 1980, living standards in Chile were double those in Cuba. Thanks to bold free-market reforms implemented in Chile but not Cuba, the average Chilean’s income now appears to be four times higher than the average Cuban’s. …In its latest annual report, Human Rights Watch says, “Cuba remains the one country in Latin America that represses virtually all forms of political dissent.”

The comparison between Chile and Cuba is especially apt since the pro-market reforms in the South American nation came after a coup against a Marxist government that severely weakened the Chilean economy.

Chapman points out that the standard leftist excuse for Cuban misery – the U.S. trade embargo – isn’t very legitimate.

The regime prefers to blame any problems on the Yankee imperialists, who have enforced an economic embargo for decades. In fact, its effect on the Cuban economy is modest, since Cuba trades freely with the rest of the world.

Since the U.S. accounts for nearly one-fourth of world economic output, I’m open to the hypothesis that the negative impact on Cuba is more than “modest.”

But it still would be just a partial explanation. Just remember that communist societies have always been economic basket cases even if they have unfettered ability to trade with all other nations.

Writing for the Huffington Post (hardly a pro-capitalism outfit), Terry Savage also explains that Cuba is an economic disaster.

…the economic consequences of a 50-year, totalitarian, socialistic experiment in government are obvious today. Cuba is a beautiful country filled with many friendly people, who have lived in poverty and deprivation for decades. Socialism in its purest form simply didn’t work there. I was immediately reminded of that old saying: “Capitalism is the unequal distribution of wealth – but socialism is the equal distribution of poverty.” Once-magnificent buildings are literally crumbling, plaster falling and walls and stairways falling apart, as there are no ownership incentives to maintain them – or profit potential to incent their preservation. …Every Cuban gets a ration book and an assigned “bodega” in which to purchase the low-cost, subsidized food. The one I visited looked like an empty warehouse, with little on the shelves. If the rice, beans, eggs, and cooking oil are not in stock, the shopper must return the following week. Allowed five eggs per month, the basics barely cover a starvation existence. …the economic results of their 50-year rule have been abysmal. Cuba became a protectorate of the old Soviet Union (remember the Cuban missile crisis) -and that worked until the early 1990s, when the USSR fell apart. No longer receiving aid from its protector, Cuba entered a long period now remembered as “the special times” – when Cubans were literally starving, when there was electricity only two hours per day, and people turned any patch of dirt into a garden to survive. Cubans bear the scars of that terrible time, and for many the current situation is still not that much better.

So Cuba was a basket case that was subsidized by the Soviet Union. When the Evil Empire collapsed and the subsidies ended, the basket case became a hellhole.

The good news, if we’re grading on a curve, is that Cuba has now improved to again being a basket case.

But that improvement still leaves Cuba with a lot of room for improvement. It may not be at the level of North Korea, but it’s worse than Venezuela, and that’s saying something.

My friend Michel Kelly-Gagnon of the Montreal Economic Institute echoes the horrid news about Cuba’s economy.

As anyone who has spent any amount of time in Cuba outside the tourist compounds can tell you, socialism, particularly the unsubsidized version that we have seen since the fall of the Soviet empire, has been a disaster. …The hospitals which supposedly offer free care only do so quickly and effectively to the politically connected, friends and family of staff members, and to those who pay the largest bribes… That “free” university education that many Cubans get in technical fields is rarely worth much more than what students pay for it. There are few books in the country’s schools, and those that can be found are years, if not decades old. The country’s libraries are empty… The guaranteed jobs that all Cubans have are fine, until you realize that the average salary is in the range of $20 a month. Worse, the food and other staple allotments that Cubans have long felt entitled to, have shrunk over the years. Tourists often marvel at how thin and healthy Cubans look. Sadly many of them are outright hungry.

Though Michel includes a bit of optimism in his column, pointing out that there’s been a modest bit of economic liberalization (a point that I’ve also made, even to the point of joking about whether we should trade Obama for Castro).

Communist Cuba, beset with an oppressive bureaucracy, an anachronistic cradle-to-grave welfare state, a hopelessly subpar economy, and widespread poverty, is gradually shifting to private sector solutions. Starting when Raul Castro “temporarily” took over power from his brother Fidel six years ago and culminating with the Communist party’s approval of a major package of reforms…, Cuba has taken a series of increasingly bold steps to implement free market reforms. These range from providing entrepreneurs with increased flexibility to run small businesses, and use of state agricultural lands by individual farmers, to the elimination of a variety of burdensome rules and regulations. Ironically, there is a lot that Canadians…can learn from that shift.

And there’s a lot the United States can learn, particularly our President, who is so deluded that he said there are (presumably positive) things America can learn from Cuba.

One common talking point from Cuban sympathizers is that the country has done a good job of reducing infant mortality. But, as Johan Norberg explains, that claim largely evaporates upon closer examination.

The bottom line is that communism is a system that is grossly inconsistent with both human freedom and economic liberty.

And because it squashes economic liberty (thanks to central planning, price controls, and the various other features of total statism), that ensures mass poverty.

Amazingly, there are still some leftists who want us to believe that communism would work if “good people” were in charge. I guess they don’t understand that good people, by definition, don’t want to control the lives of others.

P.S. No analysis of Cuba would be complete without noting the bizarre fetish of some leftists to wear t-shirts celebrating the homicidal racist Che Guevara. What’s next, baseball caps featuring Kim Jong-un. Computer screen savers featuring Hermann Göring? Pol Pot bobble head dolls?

There are some sick weirdos in this world to defend any form of coercive statism.

P.S. Here’s my only communist-themed joke (other than the video of Reagan’s jokes about communism).

P.P.S. At the advice of a reader, let me add one more point. Probably the most amazing indictment of communism is that living standards in Cuba when Castro took power were about even with living standards in Hong Kong. Today, the gap between the two is enormous.

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Another Episode of Drug War Lunacy

Elizabeth Barrett Browning started her famous sonnet with “How do I love thee? Let me count the ways” and then proceeded to provide lots of examples

If I had similar talent, I would produce a sonnet that began “How is the Drug War a failure? Let me count the ways” because I also could give many examples.

• The War on Drugs is unjust because it requires the government to criminalize actions when there are no victims.
• The War on Drugs is a burden on taxpayers with untold billions of dollars spent on enforcement and incarceration.
• The War on Drugs is a boon to criminals  and the underground economy.
• The War on Drugs diverts law enforcement resources from fighting crimes that have actual victims.
• The War on Drugs has been the main justification for intrusive and ineffective – yet still very costly – laws on money laundering.
• The War on Drugs is also the main justification for awful and reprehensible civil asset forfeiture laws.
• The War on Drugs also is the reason that non-drug users are grossly mistreated and even arrested.
• The War on Drugs turns otherwise law-abiding people into criminals.
• The War on Drugs is so misguided that it even resulted in the nearly unimaginable result of Clarence Thomas being on the wrong side of a Supreme Court decision and Ruth Bader Ginsburg being on the right side.

All this being said, legalizing drugs is about 99th on my list of 100 most-preferred policy reforms.

In part, this is because I’m stuffy and boring in my personal life and have never used drugs.

But I also worry about what will happen if we end drug prohibition while maintaining our bloated welfare state. The maze of handouts provided by Uncle Sam – for all intents and purposes – enables bad decisions. Would there be a significant number of people who basically drop out of society and become druggies while mooching off taxpayers?

Heck, I’m so libertarian I even worry that legalized drugs will even have bad fiscal policy effects since governments will figure out how to extract lots of tax revenue.

Though none of my concerns would prevent me from engaging in nullification if I wound up on a jury deciding a drug case.

And you’ll understand why I think we should get the government out of the business when you check out these details from a story in the Washington Post about someone whose life was turned upside down by the Drug War.

…a Florida man…was arrested when an officer mistook doughnut glaze for methamphetamine. Now Daniel Frederick Rushing is looking to sue the Orlando Police Department, which is also facing heat for its inaccurate roadside drug test.

When you read about what happened to him, you can understand why he’s unhappy.

Rushing told the Orlando Sentinel that he had been playing taxi driver for friends that day. He had just dropped off a neighbor at a hospital for a chemotherapy session and was giving another friend who worked at the 7-Eleven a ride home. But when officers saw Rushing go into the store twice without making a purchase, they grew suspicious. Officer Shelby Riggs-Hopkins followed Rushing’s car and pulled him over. …Riggs-Hopkins saw what she thought were drugs on the floorboard. “I recognized, through my 11 years of training and experience as a law enforcement officer, the substance to be some sort of narcotic,” Riggs-Hopkins wrote in the report. The officer retrieved several pieces of the white substance from the floorboard, ran a test and “received a positive indication for the presence of amphetamines.” Twice.

If this was the entire story, I would be upset. Why harass some guy if his only sin is being a drug user? He’s not hurting anyone else, so why not leave him alone?

And don’t Orlando cops have anything better to do than bust drug users? Are there really no murders, rapes, burglaries, and assaults in the city? You know, crimes that actually have victims.

But this isn’t the entire story.

As the officer placed Rushing in handcuffs and read him his rights, …“Rushing stated that the substance is sugar from a (Krispy) Kreme Donut that he ate.” …Still, Rushing was booked into jail and had to post $2,500 bail, according to court documents. He was vindicated a month later — and the meth possession charges were dropped — when the Florida Department of Law Enforcement’s chemistry section tested the substance found in his car. It detected no signs of drugs.

By the way, this wasn’t a one-time mistake.

The Washington Post column cites a related story from the New York Times that delved into the accuracy of roadside drug tests.

Data from the Florida Department of Law Enforcement lab system show that 21 percent of evidence that the police listed as methamphetamine after identifying it was not methamphetamine, and half of those false

positives were not any kind of illegal drug at all. In one notable Florida episode, Hillsborough County sheriff’s deputies produced 15 false positives for methamphetamine in the first seven months of 2014.

So the bottom line is that law enforcement resources are being misallocated, innocent people are having their lives wrecked, and government is being incompetent. That’s the holy trinity of big government.

But some people say we have to accept these awful consequences because decriminalization would lead to catastrophic results.

Not true, as Johan Norberg explains.

P.S. You may think only “crazy” libertarians favor liberalization, but there’s actually a very broad coalition of people who favor reform. Folks such as John Stossel, Gary Johnson, John McCain, Mona Charen, Pat Robertson, Cory Booker, Rick Perry, and Richard Branson.

P.P.S. For folks who don’t like having to choose between Hillary Clinton and Donald Trump, there’s a presidential candidate who has a very sensible view of the War on Drugs.

P.P.P.S. Speaking of Hillary Clinton, her understanding of the economics of drug prohibition may be even more inane and uninformed than her understanding of the economics of taxation.

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Borders Limit Freedom but Promote Liberty

Like all good libertarians, I hate waiting in government-mandated lines. Heck, you don’t even have to be a curmudgeonly libertarian to have unpleasant thoughts about the Post Office or Department of Motor Vehicles (not to mention the virtual lines that exist for people stuck on hold after calling the IRS or some other inefficient bureaucracy).

And it must be doubly irritating to wait in line to get bureaucratic approval for things that shouldn’t require any sort of government permission in the first place.

Since I have to do a bit of travel, I’m especially resentful of the lines I face for customs and immigration when I cross borders. In some cases, these restrictions can even turn “Heaven into Hell.”

My aversion to government-mandated lines is so strong that I’m a big fan of the European Union’s “Schengen Zone” that has made crossing many European borders as simple as crossing from one American state to another (and regular readers know that I’m normally very reluctant to say anything nice about the policies concocted by the crowd in Brussels).

Given all this, I was very interested to see that the leading bureaucrat of the European Commission, Jean-Claude Juncker, has said that borders are “the worst invention ever.”

Was he making a libertarian argument about the value of making it easier for people to travel and/or move? Let’s investigate. Here’s some of what was reported about Juncker’s comments in the U.K.-based Daily Mail.

EU chief Jean-Claude Juncker risked widening divisions with European leaders today by saying borders were the ‘worst invention ever’. He called for all borders across Europe to be opened, despite the chaos caused over the last year from the flood in refugees fleeing Syria and the wave of terror attacks hitting various continent’s cities. …Mr Juncker also said a stronger EU was the best way of beating the rising trend of nationalism cross Europe. In another extraordinary remark, he appeared to warn of war on the continent if the EU disintegrates as he echoed the warning from the former French president Francois Mitterrand, who said nationalism added to nationalism would end in war.

Writing for the American Enterprise Institute, Michael Barone offered a different perspective.

He starts with the observation that Juncker’s home country of Luxembourg is rich because of borders.

Juncker comes from Luxembourg, a 998-square mile country… If you look up Luxembourg in lists of world economic statistics, you’ll find it rated No. 2 in gross domestic product per capita. That’s thanks to what Juncker called politicians’ worst invention ever, borders. Luxembourg is a financial haven and headquarters of the world’s largest steel company, Arcelor Mittal. Without their borders and national laws, the 576,000 Luxembourgers wouldn’t be as affluent as they are.

Barone is correct. Luxembourg is only a very successful tax haven because it has the right to have tax laws inside its borders that are attractive relative to the tax laws that exist in adjoining nations such as France and Germany.

For those who care about foreign policy, Barone also pushes back at the notion the European Union somehow has prevented World War III.

Juncker said, “We have to fight against nationalism, we have the duty not to follow populists but to block the avenue of populists.” Such is the faith of the Eurocrats: The EU exists to prevent another war between France and Germany. Never mind that the chance of such a war has been zero since 1945, 71 years ago. …Juncker was denouncing Austria and other nations for erecting border controls to keep out Muslim refugees. Evidently he believes that World War III will somehow break out if they are kept out.

This is surely right. The people in Western Europe no longer have any interest in fighting each other. And to the extent any international organization deserves credit for that, it would be NATO (even if it no longer serves a purpose).

Let’s now shift back to the role of borders and the size and power of government.

If you want a really good libertarian-oriented explanation of why borders are valuable, let’s go back in time to 2004. Professor Andy Morriss wrote an article for The Freeman that explains borders are good for liberty because they limit the powers of governments.

Borders come from property rights and are essential to a free society…are wonderful things. Lorain and Cuyahoga counties in Ohio must compete for my family’s residence. Choosing to live where we do is related to the taxes charged by the communities where we might have lived.

The value of borders, Andy explains, is that they represent a territorial restriction on the power of government and people can cross those borders if they think governments are being too greedy and oppressive.

Investors make similar choices. …Choosing bad policies produces an exodus; choosing good policies leads to immigration of both capital and people. …the competition offered on local taxation policy and other regulatory issues is important in restraining governments from infringing liberty. …National borders are also important sources of liberty. …without borders we would not have the competition among jurisdictions that restricts attempts to abridge liberty. …Jurisdictions…compete to attract people and capital. This competition motivates governments to act to preserve liberty.

He cites the example of how Delaware became the leading jurisdiction for company formation (and also a very good tax haven for foreigners).

…states compete for corporations, with Delaware the current market leader. Delaware corporate law offers companies the combination of a mostly voluntary set of default rules and an expert decision-making body (the Court of Chancery). As a result, many corporations, large and small, choose to incorporate in Delaware, making it their legal residence. (Their actual headquarters need not be physically located there.) Corporations get a body of liberty-enhancing rules; Delaware gets tax revenue and employment in the corporate services and legal fields. That state’s position is no accident. At the beginning of the twentieth century, New Jersey was the market leader in corporate law. When New Jersey’s legislature made ill-advised changes to its corporations statute that reduced shareholder value, Delaware seized the opportunity and offered essentially the older version of New Jersey’s law.

Borders also are good, Andy explains, because they create natural experiments that allow us the compare the success of market-oriented jurisdictions with the failure of statist jurisdictions.

Statists are correct that competition among jurisdictions will make clear the costs of the policies they promote. …The former divide between East and West Berlin is a fine example of the impact of cross-border comparisons. East Germans could see the difference in outcomes between the two societies, and East Germany had to resort to increasingly costly and desperate measures to prevent its citizens from voting against communism with their feet. …Competition between the two Germanys exposed the cost of East German policies.

In an observation that could have been taken from today’s headlines, he also notes that uncompetitive governments try to prop up their inefficient welfare states by clamping down on pro-market policies in other nations.

To prevent cross-border competition from exposing the costs of their favorite policies, …special interests attempt to forestall it. …High-tax, heavy-regulatory jurisdictions in the European Union are waging just such a fight now, arguing, for example, that Ireland’s low taxes are “unfair” competition.

He’s exactly right. Which is precisely why it’s so important to block efforts to replace tax competition with tax harmonization.

Andy’s conclusion hits the nail on the head. We may not like having to wait in lines and fill out forms to cross borders, but the alternative would be worse.

Even though borders can be an excuse for reducing liberty, a world with lots of borders is nonetheless a far friendlier world for liberty than one with fewer borders. They promote competition for people and money, which tends to restrain the state from grabbing either. Borders offer chances to arbitrage regulatory restrictions, making them less effective. Without borders these constraints on the growth of the state would vanish.

Before closing, let’s look at an example of how governments are forced to dismantle bad policy because of the the jurisdictional competition that only exists because of borders. It’s from an academic study written by Jayme Lemke, a scholar from the Mercatus Center. Here are some excerpts from the abstract.

Married women in the early nineteenth century United States were not permitted to own property, enter into contracts without their husband’s permission, or stand in court as independent persons. This severely limited married women’s ability to engage in formal business ventures, collect rents, administer estates, and manage bequests through wills. By the dawn of the twentieth century, legal reform in nearly every state had removed these restrictions by extending formal legal and economic rights to married women.

Why did states grant economic liberty and property rights to women?

Was it because male legislators suddenly stopped being sexist?

Maybe that played a role, but it turns out that people moved to states that eliminated these statist restrictions and that pressured other states to also reform.

…what forces impelled legislators to undertake the costs of action? …interjurisdictional competition between states and territories in the nineteenth century was instrumental in motivating these reforms. Two conditions are necessary for interjurisdictional competition to function: (1) law-makers must hold a vested interest in attracting population to their jurisdictions, and (2) residents must be able to actively choose between the products of different jurisdictions. Using evidence from the passage of the Married Women’s Property Acts, I find that legal reforms were adopted first and in the greatest strength in those regions in which there was active interjurisdictional competition.

The moral of the story is that competition between states improved the lives of women by forcing governments to expand economic liberty.

And since even the New York Times has published columns showing that feminist-type government interventions actually hurt women, perhaps the real lesson (especially for our friends on the left) is that you help people by expanding freedom, not by expanding the burden of government.

P.S. There is a wealth of scholarly evidence that the western world became rich because of borders and jurisdictional competition.

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The NAACP’s Shameful Betrayal of Black Kids

I’ve explained many times that an economy’s wealth and output depend on the quantity and quality of labor and capital and how effectively those two factors of production are combined.

Let’s look today on the labor portion of that formula. And since I’ve already expressed my concerns about the quantity of labor that is being productively utilized, now let’s focus on the quality of labor. In other words, we’ll look at the degree to which the workforce has the skills, knowledge, and ethics to be productive.

This is why education is very important, but also why we have big reasons to be concerned in the United States. Consider, for instance, the late Andrew Coulson’s famous (and discouraging) chart. It shows that politicians routinely increase the amount of money that’s being spent (on a per-student basis, American schools get more funding than any other nation), yet student test scores are both mediocre and flat.

But that’s just part of the story. We also have the national disgrace of substandard education for minority communities.

Here’s some of what Walter Williams wrote about the scandalous failure of government schools to produce quality education for minority children.

According to the National Assessment of Educational Progress, sometimes called the Nation’s Report Card, nationally, most black 12th-graders’ test scores are either basic or below basic in reading, writing, math and science. “Below basic” is the score received when a student is unable to demonstrate even partial mastery of knowledge and skills fundamental for proficient work at his grade level. “Basic” indicates only partial mastery. Put another way, the average black 12th-grader has the academic achievement level of the average white seventh- or eighth-grader. …In terms of public policy, what to do? …Many black parents want a better education and safer schools for their children. The way to deliver on that desire is to offer parents alternatives to poorly performing and unsafe public schools. Expansion of charter schools is one way to provide choice. The problem is that charter school waiting lists number in the tens of thousands. In Philadelphia, for example, there are 22,000 families on charter school waiting lists. Charter school advocates estimate that nationally, over 1 million parents are on charter school waiting lists.

The above excerpt from Walter’s column is scandalous.

The excerpt that follows is nauseating.

The National Education Association and its political and civil rights organization handmaidens preach that we should improve, not abandon, public schools. Such a position is callous deceit, for many of them have abandoned public schools. Let’s look at it. Nationwide, about 12 percent of parents have their children enrolled in private schools. In Chicago, 44 percent of public-school teachers have their own children enrolled in private schools. In Philadelphia, it’s also 44 percent. In Baltimore, it’s 35 percent, and in San Francisco, it’s 34 percent. That ought to tell us something. …Politicians who fight against school choice behave the way teachers do. Fifty-two percent of the members of the Congressional Black Caucus who have school-age children have them enrolled in private schools.

By the way, what happens when ordinary black children have a chance to escape the government’s monopoly school system?

Thomas Sowell has opined on the amazingly positive results that occur when black children have this opportunity.

We keep hearing that “black lives matter,” but they seem to matter only when that helps politicians to get votes… What about black success? Does that matter? Apparently not so much. We have heard a lot about black students failing to meet academic standards. So you might think that it would be front-page news when…ghetto schools not only meet, but exceed, the academic standards of schools in more upscale communities. …Only 39 percent of all students in New York state schools who were tested recently scored at the “proficient” level in math, but 100 percent of the students at the Crown Heights Success Academy school scored at that level in math. Blacks and Hispanics are 90 percent of the students in the Crown Heights Success Academy. The Success Academy schools in general ranked in the top 2 percent in English and in the top 1 percent in math. …Black students in these Success Academy schools reached the “proficient” level more than twice as often as black students in the regular public schools. What makes this all the more amazing is that these charter schools are typically located in the same ghettos or barrios where other blacks or Hispanics are failing miserably on the same tests. More than that, successful charter schools are often physically housed in the very same buildings as the unsuccessful public schools.

But Prof. Sowell echoes the point Prof. Williams made about poor children being trapped in bad schools because of limits on school choice.

If black success was considered half as newsworthy as black failures, such facts would be headline news — and people who have the real interests of black and other minority students at heart would be asking, “Wow! How can we get more kids into these charter schools?” …minority parents have already taken notice. More than 43,000 families are on waiting lists to get their children into charter schools. But admission is by lottery, and far more have to be turned away than can be admitted. Why? Because the teachers’ unions are opposed to charter schools — and they give big bucks to politicians, who in turn put obstacles and restrictions on the expansion of charter schools. …If you want to understand this crazy and unconscionable situation, just follow the money and follow the votes. Black success is a threat to political empires and to a whole social vision behind those empires. That social vision has politicians like Bill de Blasio and Hillary Clinton cast in the role of rescuers and protectors of blacks.

Notwithstanding everything written up to this point, the purpose of today’s column isn’t to argue in favor of school choice.

Yes, that’s critical for the nation and vitally important for minority advancement.

But I want to focus instead on the question of why school choice hasn’t become the civil rights issue of the 21st century. And to be even more specific, I want to explore the scandalous decision by some people at the NAACP to betray black children.

The Wall Street Journal opined about this topic today.

The outfit that helped end segregation in public education now works to trap poor and minority kids in dysfunctional schools. Last month the National Association for the Advancement of Colored People introduced a resolution at its national convention in Cincinnati calling for a moratorium on charter schools… The resolution must be formally adopted at a board meeting later this year.

Here’s some very relevant data.

Some 28% of charter-school students are black, which is almost double the figure for traditional public schools. A report last year from Stanford’s Center for Research on Education Outcomes found that across 41 urban areas black students in charters gained on average 36 extra days in math learning a year and 26 in reading… Black students in poverty notched 59 more days in math. This is the definition of “advancement.” …A 2013 poll of black voters in four southern states by the Black Alliance for Educational Options found that at least 85% agreed that “government should provide parents with as many choices as possible.” …Another sign of support is the hundreds of thousands of black students nationwide who sign up for lotteries for a seat at a charter.

The conclusion is very unflattering.

The group’s real motive is following orders from its teacher-union patrons. …The National Education Association dropped $100,000 in 2014 for a partnership with the NAACP.

Jason Russell of the Washington Examiner was similarly scathing about the NAACP’s actions.

One of the few education reforms that has actually succeeded in helping African-American students get a better education is school choice, especially the growth of public charter schools. So it didn’t make much sense, to put it kindly, when the NAACP approved a resolution calling for a moratorium on new charter schools. …Jacqueline Cooper, president of the Black Alliance for Educational Options, told the Washington Examiner that…”The fact that the NAACP wants a national moratorium on charter schools, many of which offer a high-quality education to low-income and working-class black children, is inexplicable,”…Shavar Jeffries, president of Democrats for Education Reform, also criticized the NAACP in a statement. “The public charter school moratorium put forward at this year’s NAACP convention does a disservice to communities of color,” Jeffries said. …Steve Perry, founder and head of Capital Preparatory Schools,…said the national group is “out of touch even with their own chapters … This is more proof that the NAACP has been mortgaged by the teachers union and they keep paying y’all to say what they want to say.”

Since this has been a depressing topic, let’s end with an uplifting video from Reason TV about the success of various models of charter schools.

P.S. Even though I’m not partisan, I understand that coalition politics are important. Reagan, for instance, had his three-legged stool of small-government libertarians, social conservatives, and military/foreign policy hawks. All three groups were united in the belief that their respective goals could be advanced by Reagan, even if they bickered with each other about the relative importance of various issues and occasionally had fights with each other (one of my first battles in Washington was advocating for a sequester during Reagan’s second term over the objections of the hawks, a battle that was repeated back in 2013).

With this in mind (and especially since the teacher unions bring a lot of campaign money to the table), I definitely understand why Democratic politicians are willing to sacrifice the interests of black families and their children by opposing education reform. I even partially understand why the NAACP feels pressure to accommodate the demands of teacher unions (and I fully understand, from the perspective of coalition politics, why the NAACP made absurd accusations against the Tea Party).

But surely there must be a point where coalition politics has to take second place and the interests of black families should be in first place (an issue addressed in another great video from Reason).

P.P.S. Some folks on the left are willing to break ranks. Jonathan Alter wrote about charter schools for the Daily Beast. Here are some excerpts.

…the backlash against education reform among liberals who should know better has been disheartening. …the top quintile of charters—the highly effective ones run by experienced and widely-respected charter operators—not only beat traditional public schools serving students in the same demographic cohorts, they often outperform them by 20, 30, or even 50 points on many metrics.

He cites New Orleans as an example.

New Orleans is a good example of where charters, which now educate 95 percent of New Orleans public school students, are working. A decade ago, New Orleans had the worst schools in the country…The results in New Orleans are impressive. Over the last decade, graduation rates have surged from 54 percent to 73 percent, and college enrollment after graduation from 37 percent to 59 percent. (There’s also a new emphasis on helping those who attend college to complete it.) Before Katrina, 62 percent of schools were failing. Today, it’s 6 percent. The biggest beneficiaries have been African-American children, who make up 85 percent of New Orleans enrollment. The high school graduation rate nationally for black students is 59 percent. In New Orleans, it’s 65 percent, which is also much higher than the state average. Test scores are still low overall, but thousands more African-American students are taking the ACTs and doing better on them.

And even Newark.

In Newark, where 25 percent of students attend charter schools, the percentage of African-Americans choosing charters is closer to 50 percent in some grade levels. Contrary to the claim that charters succeed only by “skimming” or “creaming” the students from more stable and middle-class families, Newark’s charters enroll a higher percentage of poor students than district schools.CREDO numbers show Newark charter school students gaining the equivalent of more than five months per year in performance in reading and math—a huge advantage over their counterparts in district schools. The percentage of black students in Newark who are doing better than the state average for African-Americans has more than doubled.

I guess this means I’ll have to add Mr. Alter to my collection of honest leftists.

As for the NAACP, I can’t even imagine how the advocates of the resolution can look at themselves in the mirror.

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