But, as I say at the beginning of this Fox Business interview, there’s a big difference between proposing a good idea and actually getting legislation approved.
But just because I’m pessimistic, that doesn’t change the fact that a lower tax burden would be good for the country.
Toward the end of the interview, I explained that the most important reason for better tax policy is not necessarily to lower taxes for families, but rather to get more prosperity.
If we can restore the kind of growth we achieved when we had more market-friendly policy in the 1980s and 1990s, that would be hugely beneficial for ordinary people.
That’s the main economic argument for Trump’s plan.
But now I’ve come across what I’ll call the emotionally gratifying argument for Trump’s tax cuts. The Bureau of National Affairsis reporting that European socialists are whining that a lower corporate tax rate in the United States will cause “a race to the bottom.”
U.S. President Donald Trump’s plans to slash corporate taxes by more than half will accelerate a “race to the bottom” and undermine global efforts to combat corporate tax evasion by multinationals, according to a second political group in the European Parliament. The Socialists and Democrats, made up of 190 European Parliament lawmakers, insisted the Trump tax reform, announced April 26, threatens the current work in the Organization for Economic Cooperation and Development and the Group of Twenty to establish a fair and efficient tax system.
As you might expect, the socialists make some nonsensical arguments.
Paul Tang—who heads the Group of the Progressive Alliance of Socialists and Democrats and leads the European Parliament negotiations on the pending EU Common Corporate Tax Base (CCTB) proposal—accused the Trump administration of pursuing a “beggar-they-neighbor policy similar to those in the 1930s.”
Huh?!? Does Mr. Tang think there were tax cuts in the 1930s?
Or is he somehow trying to equate tax cuts with protectionism? But that makes zero sense. Yes, protectionism was rampant that decade, but higher tariffs mean higher taxes on trade. That’s the opposite of tax cuts.
Mr Tang is either economically illiterate or historically illiterate. Heck, he’s a socialist, so probably both.
Meanwhile, another European parliamentarian complained that the U.S. would become more of a tax haven if Trump’s tax cut was enacted.
Sven Giegold, a European Green Party member and leading tax expert in the European Parliament, told Bloomberg BNA in a April 27 telephone interview that the Trump tax plan further cemented the U.S. as a tax haven. He added the German government must put the issue on the agenda during its current term as holder of the G-20 presidency. …The European Green Party insists the U.S. has become an international tax haven because, among other things, it has not committed to implement the OECD Common Reporting Standard and various U.S. states, including Delaware, Nevada and South Dakota, have laws that allow companies to hide beneficial owners.
He’s right and wrong.
Yes, the United States is a tax haven, but only for foreigners who passively invest in the American economy (we generally don’t tax interest and capital gains received by foreigners, and we also generally don’t share information about the indirect investments of foreigners with their home governments).
Corporate income, however, is the result of direct investment, and that income is subject to tax by the IRS.
But I suppose it’s asking too much to expect politicians to understand such nuances.
Moreover, he presumably understands adoption of Trump’s plan would put pressure on European nations to lower their corporate tax rates. Which is exactly what happened after the U.S. dropped its corporate tax rate back in the 1980s.
That is what gets them angry. And I find their angst very gratifying.
P.S. You may have noticed at the very end of the interview that I couldn’t resist interjecting a plea to reduce the burden of government spending. That’s not merely a throwaway line. When the Congressional Budget Office released its fiscal forecast earlier this year, I crunched the numbers and showed that we could balance the budget within 10 years and lower the tax burden by $3 trillion (on a static basis!) if politicians simply restrained spending so that it grew 1.96 percent per year.
P.P.S. It’s worth remembering that the “race to the bottom” is actually a race to better policy and more growth. And politicians should be comforted by the fact that this doesn’t necessarily mean less revenue.
If I had to pick my least-favorite tax loophole, the economist part of my brain would select the healthcare exclusion. After all, that special preference creates a destructive incentive for over-insurance and contributes (along with Medicare, Medicaid, Obamacare, etc) to the third-party payer crisis that is crippling America’s healthcare system.
But if I based my answer on the more visceral, instinctive portion of my brain, I would select the deduction for state and local taxes. As I’ve previously noted, that odious tax break enables higher taxes at the state and local level. Simply stated, greedy politicians in a state like California can boost tax rates and soothe anxious state taxpayers by telling them that they can use their higher payments to Sacramento as a deduction to reduce their payments to Washington.
What’s ironic about this loophole is that it’s basically a write-off for the rich. Only 30 percent of all taxpayers utilize the deduction for state and local taxes. But they’re not evenly distributed by income. Here’s a sobering table from a report by the Tax Foundation.
The beneficiaries also aren’t evenly distributed by geography.
Here’s a map from the Tax Foundation showing in dark blue that only a tiny part of the country benefits from this unfair loophole for high-income taxpayers.
As you can see from the map, the vast majority of the nation deducts less than $2,000 in state and local taxes.
But if you really want to see who benefits, don’t simply look at the dark blue sections. After all, most of those people would happily give up the state and local tax deduction in exchange for some of the other policies that are part of tax reform – particularly lower tax rates and less double taxation.
And I suspect that’s even true for the people who hugely benefit from the deduction. The biggest beneficiaries of this loophole are concentrated in a tiny handful of wealthy counties in New York, California, New Jersey, and Connecticut.
As you can see, they reap enormous advantages from the state and local tax deduction, though I suspect these same people also would benefit if tax rates were lowered and double taxation was reduced.
Regardless of who benefits and loses, there’s a more fundamental question. Should federal tax law be distorted to subsidize high tax burdens at the state and local level?
…the deduction of state taxes against federal tax liabilities creates a subsidy and an incentive for higher state taxes. California in essence is able to capture money that would be federal revenue and use it for its own ends, an option that is not practically available to low-tax (and no-income-tax) states such as Nevada and Florida. It makes sense to allow the states to compete on taxes and services, but the federal tax code biases that competition in favor of high-tax jurisdictions.
The Governor of New York, by contrast, argues that the tax code should subsidize his profligacy.
It would be “devastating on the state of New York, California, et cetera, if you didn’t allow the people of this state to deduct their state and local taxes,” Cuomo told reporters… State and local governments have been working to preserve the deduction, and they argue that doing away with the preference would hurt states and localities’ flexibility to make tax changes.
By the way, I noticed how the reporter displays bias. Instead of being honest and writing that that the loophole enables higher taxes, she writes that the loss of the preference “would hurt states and localities’ flexibility to make tax changes.”
Gee, anyone want to guess how that “flexibility” is displayed?
Though at least the reporter acknowledged that the deduction is primarily for rich people in blue states.
…the deduction…is viewed as disproportionately benefiting wealthy people. It also tends to be used in areas that lean Democratic.
And that’s confirmed by a 2016 news report from the Wall Street Journal.
Repealing the federal deduction for state and local taxes would make 23.6% of U.S. households pay an average of $2,348 more to the Internal Revenue Service for 2016. But those costs—almost $1.3 trillion over a decade—aren’t evenly spread… Ranked by the average potential tax increase, the top 13 states (including Washington, D.C.), as well as 16 of the top 17, voted twice for President Barack Obama. …And nearly one-third of the cost would be paid by residents of California and New York, two solidly Democratic states. …President Ronald Reagan tried repealing the deduction as part of the tax-code overhaul in 1986, but he was rebuffed by congressional Democrats and state officials. …Republicans argue that the break subsidizes high state taxes, because governors and legislators know they can raise income taxes on their citizens and have the federal government pick up part of the tab. …half the cost of repealing the deduction would be borne by households making $100,000 to $500,000, using a broad definition of income. Another 30% would be borne by households making more than $1 million. Under the GOP plans, residents of high-tax states wouldn’t necessarily pay more in federal taxes than they do now. They would benefit from tax-rate cuts.
Here’s one final image that underscores the unfairness of the deduction.
The Tax Policy Center has a report on the loophole for state and local taxes and they put together this chart showing that rich people are far more likely to take advantage of the deduction. And it’s worth much more for them than it is for lower-income Americans.
How much more? Well, more than 90 percent of taxpayers earning more than $1 million use the deduction and their average tax break is more than $260,000. By contrast, only a small fraction of taxpayers earning less than $50 thousand annually benefit from the deduction and they only get a tax break of about $3,800.
Yet leftists who complain about rich people manipulating the tax system usually defend this tax break.
It’s enough to make you think their real goal is bigger government.
I’ll close by calling attention to the mid-part of this interview. I shared it a couple of days ago as part of a big-picture discussion of Trump’s tax plan. But I specifically address the state and local tax deduction around 3:00 and 4:30 of the discussion.
P.S. In addition to the loophole that encourages higher taxes at the state and local level, there’s also a special tax preference that encourages higher spending at the state and local level. Sigh.
I listed six questions and mostly concluded that there wasn’t enough information to give accurate answers. In other words, if Trump was a student, he would have received an “I” for incomplete.
Now that we’re at the 100-day point, I’m tempted to say that his grade hasn’t changed.
Fiscal Policy – Trump has proposed a good tax cut, though I fear it won’t go anywhere because a sufficient number of squeamish Republicans will feign concern about deficits. That excuse wouldn’t exist if the White House and congressional GOPers were more serious about spending restraint, so there’s plenty of blame to go around. Though I’m nonetheless hopeful that the corporate tax rate will be reduced. Trump Grade: B
Trade – Trump has moved policy in the wrong direction, but I’m weirdly relieved that he’s being somewhat restrained. He decided China is not a currency manipulator and he decided that the U.S. should remain part of NAFTA. In other words, he been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is imposing new burdens on consumers and taxpayers. Trump Grade: D
Regulation – This is Trump’s best issue area. He’s rolled back some Obama-era regulations, which is a good start. And he’s made some very sensible appointments, which means there’s hope of ameliorating the statist orientation of bureaucracies such as the FDA and the FCC. Trump Grade: B
Monetary Policy – I have no idea how to assign a grade. Trump hasn’t said anything, much less done anything, on monetary policy. Trump Grade: I
Rule of Law – Trump has been aggressive with executive orders, which worries me even if I happen to agree with the underlying policy. The White House hasn’t tried to flout court decisions, however, so that’s a good sign. The appointment and confirmation of Justice Gorsuch also bodes well (assuming he doesn’t “grow in office” like Justice Roberts). Trump Grade: B
Overall, Trump’s GPA is better than I would have predicted before the election, so I’m pleasantly surprised. But there’s still a long way to go before final exams.
In this Fox Business interview, I elaborated on my concerns while also pointing out that the plan would be very good if it somehow got enacted.
We now have some preliminary numbers that illustrate why I’m concerned.
The Committee for a Responsible Federal Budget put together a quick guess about the revenue implications of Trump’s new plan. Their admittedly rough estimate is that federal revenues would be reduced by close to $6 trillion over 10 years.
Incidentally, these revenue estimates are very inaccurate because they are based on “static scoring,” which is the antiquated notion that major changes in tax policy have no impact on economic performance.
But these numbers nonetheless are useful since the Joint Committee on Taxation basically uses that approach when producing official revenue estimates that guide congressional action.
In other words, it doesn’t matter, at least for purposes of enacting legislation, that there would be substantial revenue feedback in the real world (the rich actually paid more, for instance, when Reagan dropped the top tax rate from 70 percent to 28 percent). Politicians on Capitol Hill will point to the JCT’s static numbers, gasp with feigned horror, and use higher deficits as an excuse to vote no (even though those same lawmakers generally have no problem with red ink when voting to expand the burden of government spending).
That being said, they wouldn’t necessarily have that excuse if the Trump Administration was more aggressive about trying to shrink the size and scope of the federal government. So there’s plenty of blame to go around.
Until something changes, however, I don’t think Trump’s tax cut is very realistic. So if you want my prediction on what will happen, I’m sticking to the three options I shared yesterday.
Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).
By the way, the Wall Street Journaleditorialized favorably about the plan this morning, mostly because it reflects the sensible supply-side view that it is good to have lower tax rates on productive behavior.
While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity. …Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. …The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do.
But the WSJ shares my assessment that the plan will not survive in its current form.
…the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law… Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%… Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years.
For what it’s worth, if the final result is a 15 percent or 20 percent corporate tax rate, I’ll actually be quite pleased. That reform would be very good for the economy and national competitiveness. And regardless of what JCT projects, there would be substantial revenue feedback.
But I confess that my heart’s not in it. Simply stated, I don’t think the new plan is serious.
If Trump really wanted a big tax cut, he would have a comprehensive plan to restrain the growth of government spending. He doesn’t.
If Trump genuinely wanted lower taxes, he would be aggressively pushing for genuine entitlement reform. He isn’t.
And Congress isn’t much better. At least in the absence of leadership from the White House.
It’s not merely that I’m concerned lawmakers won’t put the brakes on spending. And it’s not just that I fear they won’t enact much-needed entitlement reform. I worry they’ll actually increase the burden of federal spending. Just look what’s happening as Congress and the White House negotiate a spending bill for the remainder of the 2017 fiscal year. The pending deal would trade more defense spending for more Obamacare subsidies. Everyone wins…except taxpayers.
In this profligate environment, it’s hard to be optimistic about tax cuts.
By the way, I fully agree we would get more growth if Trump’s tax plan was enacted. But the Laffer Curve doesn’t say that all tax cuts pay for themselves with faster growth. That only happens in rather rare circumstances.
Again, I don’t lose sleep about the prospect of less money going to Washington. But you can be sure that politicians pay attention to that issue.
Which is why I’m pessimistic. I don’t think Congress is willing to approve a big tax cut.
The bottom line is that there are three possible outcomes.
Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).
I’m normally a big fan of shutting down the government and I’ve tried to convince timid lawmakers that shutdown fights can be worthwhile.
I wrote a day-by-day analysis of new reports during the big shutdown fight that took place in the Clinton years and showed that there was no downside for Republicans.
The bottom line is that nothing really bad happens when there’s a shutdown (notwithstanding petty efforts by bureaucrats) for the simple reasons that only “non-essential” parts of the bureaucracy actually get closed. In other words, a government shutdown in all cases is simply a partial shutdown.
And since I don’t favor any funding of non-essential functions, I view a partial shutdown as a good start. Indeed, while the various interest groups in DC hyperventilate about supposed disaster, I experience a feeling of joy and serenity (as illustrated by this modified cartoon, which originally was altered to show my reaction to sequestration).
These entities shouldn’t get short-run funding or long-run funding.
That’s the point I made in the second half of this recent interview on Fox Business.
I’m not the only person who likes the idea of a partial shutdown.
Writing for the Resurgent, Erick Erickson explains how a shutdown fight would be valuable.
Americans need to be reminded that the world will not end if the government shuts down. They need to be reminded to take care of themselves instead of relying on Uncle Sam’s teet. A government shutdown with the GOP in charge would be a far different thing from a government shutdown run by Democrats. President Obama tried to inflict maximum pain on the American people to force the GOP to reopen government. President Trump, instead, could take a different approach and use the experience to show Americans how out of control government has really gotten.
And Larry Kudlow had a similar message in a column for National Review back in 2015.
…sometimes you have to make a point. Send a message. Show voters what you really believe. Take a stand. …Most of the Beltway media will blame Republicans. Democrats will blame Republicans. And GOP pundits will blame Republicans. Political death, they will say. Really? …during the Reagan-O’Neill era, most of the shutdowns were budget focused. Reagan wanted less spending; the Democrats wanted more. …The Reagan-O’Neill-era shutdowns were short, and in most of them Reagan prevailed. Meanwhile, the Reagan recovery flourished, the Republicans held the Senate (until 1986), and the Gipper was reelected in a landslide in 1984. Going back to the Obamacare-related shutdown of 2013, a bit more than a year later the Republicans swept the Senate and gained an even larger majority in the House. …shutdowns are a cumbersome way to make a point. …But perhaps Republican leadership in both Houses might think of this: There are too many deals and not enough principles, beliefs, and clear messaging.
Having now provided all this evidence in favor of government shutdowns, you would think I’m excited about the possibility that there will be a partial shutdown this Saturday when a temporary funding bill expires.
Unfortunately, that’s not the case. I view shutdown as a means to an end. I want those fights to occur in hopes that there will be reforms that shrink the overall burden of government spending.
In this case, though, the shutdown fight largely revolves around President Trump’s request for money to build part of a wall between Mexico and the United States. Some people think that’s a good idea and others think it’s a bad idea, but the one thing I can say with certainty is that it’s not a money-saving idea. Even if Trump wanted to finance the wall by reducing outlays in other parts of the budget, the net result would not be smaller government.
The bottom line is that even though I almost always cheer for a government shutdown, I’ll be sitting on the sidelines for this fight.
But if Trump and congressional Republicans at some point decide to fight for much-needed spending restraint (a naive hope, I realize), then I’ll be the first to cheer if that battle leads to a shutdown.
P.S. My favorite bit of shutdown humor is at the bottom of this post, and other examples of shutdown-related humor can be enjoyed by clicking here, here, here, here, and here.
I now have another addition to that depressing list.
Just as the Minneapolis Federal Reserve has an interactive website that allows users to compare recoveries and recessions, which is very useful for comparing Reaganomics and Obamanomics, the St. Louis Federal Reserve has an interactive website that allows users to compare national and regional economic data.
And that’s the source of today’s depressing chart. It shows median inflation-adjusted household income for the entire nation and for the District of Columbia. As you can see, the nation’s capital used to be somewhat similar to the rest of the nation. But over the past 10 years, DC residents have become an economic elite, with a representative household “earning” almost $14,000 more than the national average.
By the way, I put quotation marks around “earning” in the previous sentence for a very specific reason.
There is nothing wrong with some people accumulating lots of wealth and income if their prosperity is the result of voluntary exchange.
In the case of Washington, DC, however, much of the capital’s prosperity is the result of coercive redistribution. The lavish compensation of federal bureaucrats is a direct transfer from taxpayers to a gilded class, while the various lobbyists, contractors, cronyists, politicians, and other insiders are fat and happy because of a combination of direct and indirect redistribution.
By the way, some people will be tempted to argue that rising income levels in DC are simply a result of gentrification as higher-income whites displace lower-income blacks. Yes, that is happening, but that begs the question of where the new residents are getting all their income and why the nation’s capital is an increasingly attractive place for those people to live.
The answer, in large part, is that government is a growth industry. Except it’s not an industry. It’s increasingly just a racket for insiders to get rich at the expense of everyone else.
P.S. To close on a semi-humorous note, some cartoons are funny even if the underlying message is depressing.
Though if you don’t have time for that many questions, there’s also a very simple “circle test.”
Now we have a new poll for those of us that are tempted by such things. I don’t know who put it together, but I was intrigued by the four-axis approach.
8values is, in essence, a political quiz that attempts to assign percentages for eight different political values. You will be presented by a statement, and then you will answer with your opinion on the statement, from Strongly Agree to Strongly Disagree, with each answer slightly affecting your scores. At the end of the quiz, your answers will be compared to the maximum possible for each value, thus giving you a percentage. …In addition to matching you to the eight values, the quiz also attempts to match you to a political ideology.
But before getting to results, I feel obliged to nitpick about the methodology.
Some of the questions don’t make sense. Or, to be more specific, one’s answers might be radically different depending on how the question is interpreted.
For instance, statists would probably answer “strongly agree” to this question about education, based on the assumption that government should spend more money (regardless of dismal results).
I wound up picking “neutral” because I want universal school choice, which would produce better-than-adequate education, but I also don’t like the notion that people have rights that are predicated on access to other people’s money.
I also didn’t like this question on foreign policy. I like peaceful relations with other nations, but in some cases peace is more likely if the United States is strong. In other words, Reagan’s position of “peace through strength.”
Last but not least, I also answered “neutral” to this question about surveillance. I don’t want pervasive spying by government on ordinary people (money laundering laws, for instance), but I also don’t object to effective monitoring – with proper judicial oversight – of bad people.
Anyhow, with those caveats out of the way, here are my results.
The good news is that I’m in the “Libertarian Capitalism” category. Though I’m a bit chagrined that I only got 72.4 percent on the wealth-equality axis. Though maybe equality in this case captures my support for the rule of law and my opposition to cronyism. In which case I’m happy.
I don’t have any strong reaction to my scores on the might-peace and tradition-progress axes. But I’m disappointed to only have 70 percent on the liberty-authority axis.
Several years ago, I would regularly share horror stories about innocent kids being abused by politically correct government school administrators who overreacted to anything remotely resembling a gun.
But I eventually stopped sharing these types of stories because it seemed there were so many and I felt like I was making the same points over and over again.
Time for the hiatus to end. I’ve run across a handful of stories that are so preposterous that I can’t resist revisiting the issue.
Here’s our first example. A local television station in North Carolina reports that a little girl was suspended because she pretended that a stick was a gun while playing with her friends.
A local mother is outraged after her 5-year-old daughter was suspended from school because of a stick that resembled a gun. …It started Friday when her mother got a call from the principal about a playground incident. Caitlin explained that she and her two friends were using their imaginations, playing “King and Queen.” In this case, Caitlin was the guard protecting the royals and picked up the gun to imitate shooting an intruder into the kingdom. Hoke County Schools said Caitlin posed a threat to other students when she made a shooting motion, thus violating policy 4331. …Miller says Caitlin was alienated by her friends and teachers as a result of the suspension. She hopes that the school will issue some sort of apology to her daughter.
I’m not the only one who thinks this is insane.
POLL: Should 5-year-old girl be suspended for playing with 'stick gun'? https://t.co/vQpNDwk1LZ
It’s about a very dangerous 11-year old girl who – gasp!! – . A Florida television station has the details.
A South Florida couple is outraged after they said their daughter was suspended from her middle school for using a child butter knife at lunchtime to cut a peach. …Souto’s daughter is an honor roll student at Silver Trail Middle School in Pembroke Pines. …Ronald and Andrea Souto told Local 10 News reporter Michael Seiden that their 11-year-old daughter was suspended for six days for bringing the knife to school. “This is a set of a spoon, fork and knife for toddlers — one year old,” Andrea Souto said. “It is made for children to learn how to eat properly. She’s used it since she was baby.” According to the school district, the girl violated the county’s weapon policy when she used her butter knife in the cafeteria to cut the peach. …Ronald said he hopes what happened to his daughter will bring change to the district, specifically new polices when it comes to weapons.
But this rogue child didn’t just get suspended. She may become an actual criminal.
The Soutos said they were shocked about the suspension and are now concerned that their daughter’s act of kindness could lead to criminal charges. …The Pembroke Pines Police Department said it has turned over their investigation to the State Attorney’s Office. It’s unclear whether prosecutors will file charges.
Our third story comes from a St. Louis TV station and it involves a four-year old boy who was suspended for a shell casing.
Hunter, 4, has been suspended from his preschool for bringing a shell casing from a fired bullet to school. He’d been at the preschool for about a year, she said, and now was in tears. Neither she nor Hunter’s dad knew it, but he found something he thought was pretty neat and he took it to school Tuesday to show his friends. …Hunter’s parents got a letter from the school’s director saying Hunter had been suspended for 7 days. …It turns out the casing came from a visit with Hunter’s grandpa who is a Caseyville police officer, Jackson said. …The school’s vice-president e-mailed her that he was notifying the Illinois Department of Children and Family Services (DCFS).
The last sentence is particularly chilling since DCFS bureaucrats presumably have the power to take children from their families. So imagine the horrible position of Hunter’s parents, who not only have to deal with their kid being suspended for doing nothing wrong, but also have to worry about the state kidnapping their child if some anti-gun bureaucrat woke up on the wrong side of the bed.
Our fourth and final story is courtesy of the Montgomery Advertiser in Alabama, where a teenager was expelled for a year because of a water gun.
A family is up in arms after their 16-year-old daughter was expelled from Prattville High School for having a water gun on campus. …she was banned from school property and any extra-curricular activities for the same period. …She said a male classmate handed the toy to her daughter “as a joke.” “…the second you picked it up, you know its plastic and a toy,” she said. “So we can understand the initial reaction, not knowing it wasn’t a real gun. But after the principal and school officials knew it was a water gun, things should never have progressed this far.” …The family wants any reference to the expulsion removed from Laney’s academic records, McPhillips’ letters read. …If the expulsion isn’t removed from Laney’s academic record, the family is considering filing legal action
I suppose there are two big-picture lessons to be learned.
First, it’s hard to be optimistic about the education system after reading this type of story.
If bureaucrats at government schools don’t have common sense, how can they teach reading, writing, and arithmetic?
Second, keep in mind that anti-gun statists know they can’t win the intellectual argument against private gun ownership, so they’re trying to stigmatize anything remotely connected to guns in hopes of eventually winning the political argument.
I wrote last year that Venezuela was entering the “fourth circle of statist hell.”
How else, after all, can you describe a government that is so venal and incompetent that it resorts to confiscating toys in an effort to strengthen its hold on power?
But shrugging may soon turn to shrugged. It’s hard to see how Maduro’s despotic regime can hold power much longer. Consider this collection of horrifying stories.
With inflation spiraling out of control, food and medicine supplies dwindling and violent crimes on the rise, women as young as 27 are seeking out surgeons to avoid unwanted pregnancies. A study by PLAFAM, the biggest family planning clinic in the country, estimates that about 23 percent more Venezuelan women are being sterilized today as compared to four years ago, said the clinic’s director, Enrique Abache. “The financial crisis is one of the main causes for this,” he explained. Years of government mismanagement have fueled what is now a full-blown humanitarian crisis in a country where infant mortality has almost doubled in recent years. …mothers often spend whole days searching for milk powder or diapers. Those who can’t find them are simply forced to go without.
How serious is Venezuela’s crisis? Bad enough that, in 2016, Venezuelans became the top US asylum-seekers… Venezuelan asylum claims increased by 150 per cent from 2015 to 2016.Though Venezuela does not publicly circulate emigration information, estimates suggest that between 700,000 and two million Venezuelans have emigrated since 1999. …Sometimes, from here, it can seem as though the entire population – fed up with shortages of medicine and food, with crime and with the political trajectory of the nation – wants to leave.
Julio Noguera…spends his evenings searching through the garbage for food. “I come here looking for food because if I didn’t, I’d starve to death,” Noguera said as he sorted through a pile of moldy potatoes. “With things like they are, no one helps anyone and no one gives away meals.” Across town, unemployed people converge every dusk at a trash heap on a downtown Caracas sidewalk to pick through rotten fruit and vegetables tossed out by nearby shops. They are frequently joined by small business owners, college students and pensioners — people who consider themselves middle class even though their living standards have long ago been pulverized by triple-digit inflation, food shortages and a collapsing currency. …Nearly half of Venezuelans say they can no longer afford to eat three meals a day, according to a recent poll.
cities around the country…have been hit hard by police, national guard troops and the regime’s paramilitary forces as the dictatorship of Nicolás Maduro tries to contain a wildfire of rebellion. …The government is running out of money to buy imports, and since it has crippled domestic production, privation is growing more profound. …Roving bands of government-sponsored militias terrorize civil society as they have for more than a decade. …a 16-year-old girl politely informed Mr. Maduro that students in her school often faint from hunger. …Mr. Maduro was pelted with stones as he left a military rally in Bolívar state… Meanwhile, Mr. Maduro is doubling down on centralized control of a shrinking food supply. …Those who do not support the regime can be cut off.
The thuggery will worsen according to the Washington Free Beacon:
The socialist leader of Venezuela announced in a speech to regime loyalists his plan to arm hundreds of thousands of supporters after a years-long campaign to confiscate civilian-owned guns. …The Venezuelan government justified the gun bans and confiscations by saying they were needed to combat the country’s violent crime and murder epidemic. However, statistics reported by the nonprofit Venezuelan Violence Observatory show the murder rate in Venezuela increased from 73 murders per 100,000 inhabitants the year the gun ban was instituted to 91.8 murders per 100,000 inhabitants in 2016. …As protests and unrest increase in Venezuela, Maduro’s regime has created a landscape where civilians are disarmed but his supporters are not. The latest round of mass demonstrations in the streets of Caracas have already claimed five lives.
Even zoo animals are suffering, as reported by the Miami Herald:
An apparently malnourished African elephant in a Venezuelan zoo — her ribs showing through her sagging skin — has become the latest symbol the deep economic crisis in what was once one of Latin America’s most prosperous nations. …Ruperta is suffering from diarrhea and dehydration after zoo officials only had squash to feed her for several days. According to the newspaper, when neighbors tried to bring food to the elephant over the weekend, the donations were turned away by zoo officials… in a nation where a grinding economic crisis is forcing many to skip meals and go hungry, Ruperta’s fate has touched a nerve. …Román Camacho, a local reporter who broke the story, said a whistle-blower within the park service alerted him that Ruperta had grown so hungry that she collapsed last Thursday. …Also last year, a horse at a local zoo was reportedly butchered by hungry Venezuelans.
Venezuela was once one of Latin America’s economic powerhouses… A growing number of Venezuelans are going hungry in a food shortage, and dying from treatable ailments in squalid, ill-equipped hospitals. …Until political prisoners are released, the prospects for a restoration of democratic rule are very dim. …Inflation has soared to an estimated 700 percent, while people in this oil-rich nation are left digging through piles of trash for scraps of food.
For Venezuelan exiles with money, Madrid has become a home away from home. They are increasingly turning to the Spanish capital as a place to invest as their home country falls further into economic chaos and the political mood turns more sour in U.S. havens such as Miami. The number of Venezuelans arriving in Spain rose more than 50 percent in 2015, according to the Spanish statistics office.
The monetary system is also a disaster reports the New York Times:
President Nicolás Maduro of Venezuela made a baffling announcement…, saying that his government intended to yank the 100 bolívar note from circulation… Venezuelans, who have endured months of chronic food and medicine shortages, mobbed banks and A.T.M.s in a desperate attempt to offload their stacks of the highest denomination bill, which has become so devalued it is now worth roughly 3 cents in American dollars. …the Maduro government…has spent years…imposing arbitrary currency controls that have made a once prosperous economy one of the world’s most dysfunctional. …Venezuela was expelled from the regional trade bloc Mercosur in early December.
The outflow of people is staggering according to Fox:
Along with basic food, medicine and even toilet paper, Venezuela now lacks the materials to meet to the soaring demand for new passports – making it almost impossible for those few Venezuelans with the monetary means of escaping the troubled Latin American nation to do so. While estimates of how many passport requests the socialist government received last year vary from between 1.8 million to 3 million, only 300,000 of the elusive documents were doled out. Everyday, hundreds of people line up outside the passport agency, known as Saime, in the capital of Caracas in the hopes of obtaining one. It’s an ironic, and yet sad situation, for a country that used to be one of Latin America’s wealthiest and one that was used to seeing people flock to, not away from. …Adding to the overall misery are a drastic rise in violent crime – especially in the capital city of Caracas – rolling blackouts and widespread and often times bloody protests against the government. …since Chávez took power in 1999 nearly 2 million Venezuelans have fled the country and hundreds of thousands are marking their time until they obtains the funds and the passport that will allow them to leave.
Government insiders are getting rich, as noted by the New York Post:
Venezuela is no longer a country with a government, institutions and a civil society. It’s a geographic area terrorized by a criminal enterprise that pretends to govern, with a civil society made up of two sets of people: accomplices and victims. More than 30 million of the latter. …The Hugo Chavez-led looting spree began in 2000. …More than $1 trillion has disappeared… Loving parents are putting their children up for adoption because they have nothing to feed them; the elderly are starving; patients with treatable conditions are dying in hospitals that lack basic medicine like insulin and oxygen, where vital equipment has been pilfered and emergency rooms operate without electricity. …Meanwhile, those in power can focus on what they do best: looting the country’s natural-resource wealth and manufacturing and trafficking illegal narcotics. In fact, Maduro just upped his game by appointing Tareck el-Aissami, a drug kingpin, as vice president.
Venezuela only has $10.5 billion in foreign reserves left, according to its most recent central bank data. For rest of the year, Venezuela owes roughly $7.2 billion in outstanding debt payments. In 2011, Venezuela had roughly $30 billion in reserves. In 2015, it had $20 billion. The trend can’t persist much longer, but it’s hard to know exactly when Venezuela will run completely out of cash. …The thinning reserves paint a scary financial picture as the country faces a humanitarian crisis sparked by an economic meltdown. Venezuelans are suffering massive food and medical shortages, as well as skyrocketing grocery prices. Massive government overspending, a crashing currency, mismanagement of the country’s infrastructure and corruption are all factors that have sparked extremely high inflation in Venezuela. Inflation is expected to rise 1,660% this year and 2,880% in 2018, according to the IMF.
Socialist economic policies and government corruption have destroyed a once-thriving economy sitting on the world’s largest oil reserves. …Index of Economic Freedom…looks at the economic freedom of countries throughout the world. In that period of time, Venezuela’s score has declined the most out of any country, going from 59.8 to 27.0 (on a scale of 1-100). It is now in second-to-last place, right behind Cuba and better only than North Korea. …The World Health Organization estimates that there are shortages for 75 percent of necessary medications and medical supplies such as antibiotics, vaccines, and scalpels. Blackouts resulting from a crumbling energy infrastructure are a daily occurrence. The death of newborns has become a common phenomenon… All the while, Venezuelan government officials have been using oil revenues to line their own pockets.
Venezuela, which was once Latin America’s richest country, has become an unwilling test site for how much economic and social stress a modern nation can tolerate before it descends into pure anarchy. …Venezuelans have struggled with mounting shortages of food, medicine and other consumer goods, as well as triple-digit inflation that has rendered the national currency, the bolivar, worthless. … President Nicolás Maduro, an economically illiterate former bus driver, …also closed Venezuela’s borders with Colombia and Brazil, on the theory that traders were hoarding currency in those countries. …the president is doing his best to blame the United States for the fiasco… Venezuelans no longer believe such nonsense. A survey released this month by pollster Alfredo Keller showed that only 1 percent said the United States was to blame for the country’s crisis, while 76 percent blamed Mr. Maduro and the regime founded by Hugo Chávez. …Only 19 percent said they still supported the regime.
Want to lose weight fast? …Just move to Venezuela. There, the new Socialist Diet has caused the population to lose millions of pounds in 12 months. Unwillingly, of course. …A new study of Venezuela’s stunning decline under Hugo Chavez’s socialist model…reports that the average Venezuelan lost 19 pounds in the last year. Today, the 2016 Living Conditions Survey finds, 32.5% of Venezuelans eat only once or twice a day, up from 11.3% just one year ago. And 93.3% of all people don’t earn enough to buy sufficient food. …Bring socialism to your country, and you bring misery. It’s the one thing that socialism produces an abundance of. …formerly middle-class Venezuelans scavenge for food — some even stooping to dumpster diving and eating formerly beloved pets just to stay alive — socialists allied with Maduro have changed nothing. …rule of law has been rejected for the rule of one tyrant. Children aren’t spared; they’re dying by the hundreds from curable diseases, a lack of medicine, electricity outages and no incubators for newborns.
Kevin Lara Lugo…died on his 16th birthday.He spent the day before foraging for food in an empty lot, because there was nothing to eat at home. Then in a hospital because what he found made him gravely ill.Hours later, he was dead on a gurney, which doctors rolled by his mother as she watched helplessly. She said the hospital had lacked the simplest supplies needed to save him on that day last July. … Inflation has driven office workers to abandon the cities and head to illegal pit mines in the jungle, willing to subject themselves to armed gangs and multiple bouts of malaria for the chance to earn a living. Doctors have prepared to operate on bloody tables because they did not have enough water to clean them. Psychiatric patients have had to be tied to chairs in mental hospitals because there was no medication left to treat their delusions. Hunger has driven some people to riot — and others into rickety fishing boats, fleeing Venezuela on reckless journeys by sea. But it was the story of a boy with no food, who had gone searching for wild roots to eat but ended up poisoning himself instead, that seemed to embody everything that had gone wrong in Venezuela.
A fleet of rundown Venezuelan oil tankers carrying some 4 million barrels of oil and other fuels is wallowing in the Caribbean Sea. Not because of bad weather, or mechanical problems, but because Venezuela’s state-owned oil company, Petróleos de Venezuela SA, doesn’t have the cash to get them to their final destinations. …it’s doubly bad news for Venezuela, a country in dire economic straits and full-fledged crisis, with a political impasse, looting, dangerous food and health supply shortages, and massive protests. Venezuela is massively reliant on oil exports to bankroll government services. But the cash-strapped country can’t even find the money to service the vessels that carry its exports. …Venezuela, once Latin America’s most powerful petrostate, is on the brink of collapse after decades of economic mismanagement.
More on insider corruption, exposed by the Washington Post:
Formerly a stable, sophisticated, middle-income country awash in oil wealth, Venezuela has experienced a dizzying downward spiral over the past two years. Today, Venezuela’s is arguably the world’s worst-run economy. Food shortages are pervasive, and food prices are rising fast — a deadly combination that has left millions unable to find enough to eat. …Why doesn’t the army rebel? …we have the genuinely shocking answer: Far from rebelling, Venezuela’s armed forces actively profit from their countrymen’s hunger.This year, President Nicolás Maduro granted the armed forces virtually unlimited authority over the nation’s food imports and distribution. Domestic food production is down sharply in the wake of a botched land reform program, meaning imports now account for most of the nation’s food. But putting the military in charge of this delicate domain has led to an explosion of corruption, as well-connected officers mercilessly prey on every part of the distribution chain, from the initial contracts and the foreign currency needed to fund them to storage, transportation and distribution. …A government that bills itself as radically pro-poor in fact drips with contempt for the poor.
Struggling to feed herself and her seven children, Venezuelan mother Zulay Pulgar asked a neighbor in October to take over care of her six-year-old daughter, a victim of a pummeling economic crisis. …”It’s better that she has another family than go into prostitution, drugs or die of hunger,” the 43-year-old unemployed mother said… With average wages less than the equivalent of $50 a month at black market rates, three local councils and four national welfare groups all confirmed an increase in parents handing children over to the state, charities or friends and family. …the trend highlights Venezuela’s fraying social fabric and the heavy toll that a deep recession and soaring inflation are taking on the country with the world’s largest oil reserves. …most economists pin the responsibility on socialist policies introduced by former president Hugo Chavez, which his successor Nicolas Maduro has doubled down on… Two-thirds of 1,099 households with children in Caracas, ranging across social classes, said they were not eating enough in a survey released last week by children’s’ rights group… In some cases, parents are simply abandoning their kids. Last month, a baby boy was found inside a bag in a relatively wealthy area of Caracas and a malnourished one-year-old boy was found abandoned in a cardboard box in the eastern city of Ciudad Guayana, local media reported. …There are also more cases of children begging or prostituting themselves
…new data capturing the woes of the once well-heeled South American nation is shocking: According to new results from an annual national survey, nearly three-quarters of respondents reported losing an average of 19 pounds between 2015 and 2016. …Shortages of food, medicine, and many basic items abound in what was once the richest country in South America per capita in the 20th century. Malaria is ravaging a country that was the first in the world to eliminate the disease in its populated areas. Now there’s evidence that the economic chaos is translating into a malnutrition crisis… Alejandro Velasco, a scholar of Latin American history at New York University, believes Chávez’s model of socialism…”strangled the already meager productive apparatus of Venezuela,” he explained during an interview in January. …Chávez’s spending regime also left the country acutely vulnerable to emergency. Ricardo Hausmann, director of the Center for International Development at Harvard’s Kennedy School, notes…that Chávez’s government.. “over-spent and quintupled the public foreign debt.”
Every weekday morning, a queue of several dozen forlorn people forms outside the dingy headquarters of SAIME, Venezuela’s passport agency. As shortages and violence have made life in the country less bearable, more people are applying for passports so they can go somewhere else. …As desperation rises, so does the intransigence of Venezuela’s “Bolivarian” regime, whose policies have ruined the economy and sabotaged democracy. The economy shrank by 18.6% last year, according to an estimate by the central bank, leaked this month to Reuters… Inflation was 800%. …In 2001 Venezuela was the richest country in South America; it is now among the poorest.
Venezuela is even begging at the UN according to the Associated Press:
Venezuela’s President Nicolas Maduro has asked the United Nations for “help” boosting medicine supplies as he struggles to combat crippling shortages. …acknowledging that Venezuela needs outside help is a telling sign of how far the nation sitting atop the world’s largest petroleum reserves has fallen under Maduro. …Venezuelans…have been suffering from widespread shortages and triple-digit inflation… OAS Secretary General Luis Almagro is pushing to expel Maduro’s government from the group for breaking the country’s democratic order and violating human rights. Maduro’s government disavowed a landslide loss to the opposition in legislative elections in 2015, and then suspended a recall campaign seeking to force him from office before the 2018 election.
Bloomberg notes that an oil-rich nation even has shortages of gas:
…drivers lined up at filling stations amid a worsening shortage of fuel. While Petroleos de Venezuela SA says the situation is normalizing and blamed the lines on transport delays, the opposition says the company has had to reduce costly fuel imports as it tries to preserve cash to pay its foreign debt. …As the company’s crumbling refineries fail to meet domestic demand, imports have become a financial burden because the country buys fuel abroad at market prices only to sell it for pennies per gallon at home. … “It’s unbelievable that this is happening in an oil producing country.” …The hunt for gasoline is just the latest headache for consumers after years of severe economic contraction and triple-digit inflation have produced shortages of everything from bread to antibiotics.
The Miami Herald reports the government is making it even harder for hungry people to get fed:
Facing a bread shortage that is spawning massive lines and souring the national mood, the Venezuelan government is responding this week by detaining bakers and seizing establishments. In a press release, the National Superintendent for the Defense of Socioeconomic Rights said it had charged four people and temporarily seized two bakeries as the socialist administration accused bakers of being part of a broad “economic war” aimed at destabilizing the country. …The government said bakeries are only allowed to produce French bread and white loaves, or pan canilla, with government-imported flour. …The notion that bread could become an issue in Venezuela is one more indictment of an economic system gone bust. The country boasts the world’s largest oil reserves but it has to import just about everything else. …President Nicolás Maduro launched “Plan 700” against what he called a “bread war,” ordering officials to do spot checks of bakeries nationwide.
And there’s always more bad policy, as Reuters reports:
Venezuela’s socialist President Nicolas Maduro announced on Sunday a 50 percent hike in the minimum wage and pensions, the fifth increase over the last year… “In times of economic war and mafia attacks …we must protect employment and workers’ income,” added Maduro, who has now increased the minimum wage by a cumulative 322 percent since February 2016. …critics say his incompetence, and 17 years of failed socialist policies, are behind Venezuela’s economic mess. They say the constant minimum wage hikes symbolize Maduro’s policy failures… Venezuela’s inflation hit 181 percent in 2015, according to official data, though opponents say the true figure was higher. There is no official data for 2016, but…inflation was more than 500 percent in 2016, while the economy shrank 12 percent.
Venezuelans for the first time led asylum requests to the United States as the country’s middle class fled the crashing, oil-dependent economy. Data from the U.S. government’s Citizenship and Immigration Services show that 18,155 Venezuelans submitted asylum requests last year, a 150 percent increase over 2015 and six times the level seen in 2014. …The vast majority leaving are middle-class Venezuelans who don’t qualify for refugee status reserved for those seeking to escape political persecution, according to Julio Henriquez, director of the Boston-based nonprofit Refugee Freedom Program, which has been drawing attention to the trend. “The pace at which requests are increasing is alarming,” said Henriquez, whose group obtained the still-unpublished data in a Feb. 8 meeting between U.S. officials and immigration lawyers.
And the government is engaged in more looting, MSN reports:
General Motors said it has been forced to stop operating in Venezuela on Wednesday after one of its plants was illegally seized by local authorities. The seizure, in the country’s industrial hub of Valencia, comes amid a deepening economic and political crisis that has sparked weeks of deadly street protests. …The auto giant did not provide any details about its plant being seized, other than saying it “was unexpectedly taken by authorities, preventing normal operations.” It said other assets, “such as vehicles,” had also been stripped from the site. …Venezuela’s car industry has been in freefall, hit by a lack of raw materials stemming from complex currency controls and stagnant local production, and many plants are barely producing at all. Venezuela’s government has taken over factories in the past. In 2014 the government announced the “temporary” takeover of two plants belonging to U.S. cleaning products maker Clorox Co.
Last but not least, here’s a column from the Week:
Venezuela cannot wake up from its socialist nightmare. …across the country, people are starving. Venezuela, a beautiful, oil-rich country, once one of the wealthiest nations in the Southern Hemisphere, is only sinking further into economic devastation and chaotic, corrupt authoritarianism. …Meanwhile, the economy keeps rotting. Venezuela has topped Bloomberg‘s Economic Misery Index, a benchmark whose title is self-explanatory, for three years running. The economy shrank by 18 percent last year, with unemployment at 25 percent, and inflation slated to be 750 percent this year and 2,000 percent the next…there are outbreaks of scabies, a disease easily prevented with basic hygienic practices; hospitals are running out of even basic drugs. Caracas is the murder capital of the world. Corruption has infected the country wholesale even as it has created a new class of kleptocratic oligarchs linked to the security services. …The whole of Venezuelan society is breaking down at a fundamental level. …It is truly heartbreaking. …And I blame socialism. …And now it’s Venezuelans, especially the poorest and more marginal among them, who are paying the price for this madness.
Let’s close with a video on the tragic situation in Venezuela.
I wonder if Bernie Sanders still thinks this is a system worth supporting?
P.S. I have to confess that this huge collection of 28 stories accumulated because I was dating someone who is a fervid supporter of Maduro’s government (a lovely but misguided lass), and I decided that it wouldn’t be very diplomatic for me to write about the mess in that country. Now that the relationship is over, there’s no downside if I vent my spleen on that cesspool of corruptstatism.
The last time there was a presidential election in France, I like to think my endorsement made a difference in the outcome.
Now that another election is about to take place, with a first round this Sunday and a runoff election between the top-2 candidates two week later, it’s time to once again pontificate about the political situation in France. But before looking at the major candidates, let’s consider a couple of pieces of economic data to get a sense of the enormous challenges that will have to be overcome to boost France’s anemic economy.
We’ll start with this measure of implicit pension debt (IPD) in various European nations. France, not surprisingly, has made commitments to spend money that greatly exceed the private sector’s capacity to generate tax revenue.
By the way, the accompany article notes that the numbers for France are even worse than suggested by the chart.
Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts. …According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. …And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017. …The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.
Here’s another sobering visual. France is doing a very good job of scaring off the geese that lay the golden eggs. It is losing more millionaires than any other country.
The combined message of these two visuals is that the already-enormous burden of spending in France will get worse, yet the country is chasing away the people who finance the lion’s share of the government’s budget.
Now that we’ve looked at where France is heading, let’s contemplate whether the politicians running for President will make the situation better or worse.
We’ll start with this helpful table summarizing the views of the major candidates (though the hard-left vote apparently has consolidated behind Mélenchon, so Hamon can be ignored).
What’s not captured in this table, however, is that the presidential race pits two outsiders (Mélenchon and Le Pen) against two establishment candidates (Macron and Fillon).
And this is leading to some interesting analysis. The establishment point of view is captured by Sebastian Mallaby’s column in the Washington Post. He is very opposed to Fillon, Le Pen, and Mélenchon, and also rather concerned that his preferred candidate – Emmanuel Macron – won’t make it to the runoff.
In the first round of its presidential election, to be held on Sunday, some three-quarters of the French electorate are expected to back candidates who stand variously for corruption, a 100 percent top tax rate, Islamophobia, Russophilia, Holocaust denial, the undermining of NATO and the traumatic breakup of Europe’s political and monetary union. France was once the cradle of the Western Enlightenment. Now it threatens to become a spectacle of decadent collapse.
Jean-Luc Mélenchon, the Communist-allied candidate who styles himself after Venezuela’s Hugo Chávez and promises a “citizens’ revolution.” No prizes for guessing that he’s the one who proposes a 100 percent top tax rate… Oblivious to the fact that France has taxed and regulated its way to a 25 percent youth unemployment rate and a government-debt trajectory that threatens Armageddon, he wants further cuts to the French workweek, an additional 10,000 civil servants and a shift in the retirement age from 62 to 60.
To put it in simple terms, Mélenchon is appealing to voters who think Hollande didn’t go far enough.
CNNreports that Mélenchon is even more fixated on class warfare than Bernie Sanders.
Instead of a 90 percent top tax rate, he wants to steal every penny from the supposedly evil rich.
Jean-Luc Mélenchon, who has been endorsed by the French Communist Party, says he would introduce a 100% tax on income above €400,000 ($425,000). …France already has some of the world’s highest rates of income tax, and previous attempts to push them even higher have failed. …Around 10,000 millionaires left the country in 2015, followed by 12,000 last year, according to New World Wealth.
And, like Obama, he thinks he should get to decide when someone has earned enough money.
“I believe that there is a limit to the accumulation [of wealth],” Mélenchon said in March. “If there are any who want to go abroad, well, goodbye!”
Though at least he has the courage of his convictions. He doesn’t mind if upper-income taxpayers leave. Though I wonder if he’s given any thought to who will then pay the bills?
Anyhow, the 100 percent tax is just one of many crazy ideas.
He also wants to limit pay for CEOs to 20 times the salary of their worst-paid employee. …Here’s a quick look at Mélenchon’s other economic policy proposals: Cut France’s working week to four days…More vacation days for workers…Raise minimum wage by 16%…Increase the tax on inherited wealth…100% renewable energy by 2050…No new free trade agreements…Nationalize French energy company EDF and gas provider Engie.
Now let’s shift to other candidates. I’m irked that Macron generally is portrayed as a centrist and even more irked that Le Pen is portrayed as being on the right.
Prince Michael of Liechtenstein is a very astute observer of European political and economic affairs and his analysis is more accurate. We’ll start with what he wrote about Le Pen’s support for statism.
Ms. Le Pen’s…socialist economic program will continue the ongoing destruction of the French economy, its competitiveness and public finances. …Such a scenario would, however, only accelerate a disaster that was already looming. The present government’s socialist policies, which have shied away from reform and preserved France’s oversized public sector, will eventually bear the same results.
To augment that analysis, Le Pen is considered on the right simply because of her anti-immigrant policy. But on economic policy, she is very much on the left.
Prince Michael also exposed Macron’s support for a more burdensome government.
Mr. Macron…claims that he will bring France’s budget deficit below the European benchmark of 3 percent. …The candidate’s plan…does not appear plausible in light of his intention to further increase government spending. Mr. Macron’s pronouncements indicate an adherence to the Keynesian economic policy approach at the EU level. According to him, Europe should end austerity and introduce a growth model in which additional spending – on top of the already lavish outlays planned by European Commission chief Jean-Claude Juncker – ought to be implemented. The Macron policies boil down to more state and more EU centralization. At the heart of the scheme is the creation of a European Ministry of Finance and Economy, an all-powerful body to plan and monitor the EU economy. …Macron intends to continue treating the French cancer with aspirin and transmit the disease to Germany and the rest of the EU, while demanding that they pay for France’s subsistence in the meantime.
In other words, Macron wants this cartoon to be official French policy. Yet some people actually think of him as a pro-market reformer. Wow.
Let’s conclude with these wise words from an editorial in today’s Wall Street Journal, which is very worried that the runoff may feature two pro-big government outsiders.
All four major candidates are polling at around 20%, but Mr. Mélenchon has momentum and the highest personal favorability. A Le Pen-Mélenchon finale would be a political shock to markets and perhaps to the future of the EU and eurozone. …Mr. Hollande’s Socialists have made France the sickest of Europe’s large economies, with growth of merely 1.1% in 2016, a jobless rate above 10% for most of the past five years, and youth unemployment at nearly 25%. His predecessor Nicolas Sarkozy and the Republicans talked a good reform game but never delivered. …the stage is set for candidates who appeal to nativism or a cost-free welfare state. Let’s hope a French majority steps back from the political brink.
By the way, it’s not yet time for me to make an official endorsement, though I’ll share my leanings.
I confess that I’m torn between Fillon and Mélenchon. By French standards, Fillon is apparently very pro-free market. So I should like him. He could be the Ronald Reagan or Margaret Thatcher of France.
But what if he turns out to be another Sarkozy, a big-government fraud?
If I support Mélenchon, by contrast, at least I can say with great confidence that I will be able to continue using France as an example of bad public policy. I realize that’s not an ideal outcome for the French people, but you know what they say about omelets and eggs.
In any event, I’ll wait until the runoff election before selecting a candidate.
But when I write about state governments, perhaps it would be more appropriate to warn about a Brazilian future. That’s because many American states have made unaffordable and unfunded promises to give lavish benefits to retired bureaucrats, a topic that I’ve addressed on numerous occasions.
And why does that mean a Brazilian future? Because as Greece is already suffering the inevitable consequences of a bloated welfare state, Brazil is already suffering the inevitable consequences of a pension system that treats bureaucrats as a protected and cossetted class. Here are some excerpts from a sobering report in the Wall Street Journal.
Twenty years before Michel Temer became president of Brazil, he did something millions of his compatriots do, at great cost to the country’s coffers: He retired at age 55 and started collecting a generous pension. Delaying that moment until age 65 is at the center of Mr. Temer’s proposed economic overhaul. …making that happen is seen as a make-or-break test of whether the government can get its arms around mounting economic problems like rising debt, low investment and a stubborn recession now entering its third year. New pension rules are considered central to fixing an insolvent system.
It’s easy to understand why the system is bankrupt when you read the details.
…some retirees receive pensions before age 50 and surviving spouses can receive full pensions of the deceased while still drawing their own. The generosity of Brazil’s pension system is legendary—and, economists say, troubling as the country’s fertility rate plummets and life expectancy climbs. João Mansur, a long-time state legislator in Paraná state, served as interim governor there for 39 days in 1973, a stint that qualified him to retire with a $8,000 monthly pension. …Other former public workers who retire not only reap nearly the same income they got while on the job, but also see their checks get bumped up whenever those still working in the same job category get raises. …Retirement outlays will eat up 43% of the $422-billion national budget this year. …Demographics are playing against a generous system created in great part to bridge Brazil’s infamous social gap. Official statistics say there are 11 retirees for every 100 working-age Brazilians; that will rise to 44 per 100 by 2060.
Fixing this mess won’t be easy.
Brazil’s constitution must be amended to allow its pension system to be restructured… Mr. Temer has already been forced to make a series of major compromises, including exempting state and local government employees from the overhaul. …legislators have sought to further water down Mr. Temer’s proposals, by for instance maintaining the lower retirement ages for women and dragging out the transition from the old social-security regime to the new one.
In other words, Brazilian politicians are in the same position Greek politicians were in back in 2003. There’s a catastrophically bad fiscal forecast and the only issue is whether reforms will happen before a crisis actually begins. If you really want to be pessimistic, it’s even possible that Brazil has passed the tipping point of too much government dependency.
In any event, it appears that legislators prefer to kick the pension can down the road – even though that will make the problem harder to solve. Assuming they ever want to solve it.
Which is exactly what’s happening at the state level in America.
Consider these passages from a recent Bloombergcolumn.
Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007. Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs. …unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. …Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions. …many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used.
But this looming disaster will not hit all states equally.
Here’s a map from the Tax Foundation which shows a tiny handful of states actually have funded their pensions (in other words, they may provide extravagant benefits, but at least they’ve set aside enough money to finance them). Most states, though, have big shortfalls.
The lighter the color, the bigger the financing gap.
To get a sense of the states that have a very good economic outlook, look for a combination of zero income taxes and small unfunded liabilities.
South Dakota (best tax system and negative pension liability!) gets the top marks, followed by Tennessee and Florida. Honorable mention for the state of Washington.
The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.
The bad news is that they nonetheless can’t be trusted with tax reform.
Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.
Here’s the problem. Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.
This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.
Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.
The Hill is reporting that the Trump Administration is still undecided on the BAT.
The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.
While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.
And that’s apparently under discussion.
The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.
The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.
The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.
I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.
Why? Because it’s quite likely politicians will replace it with a tax that is even worse.
This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.
Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.
…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.
The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.
Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.
From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.
With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.
And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.
P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.
My crusade against the border-adjustable tax (BAT) continues.
In a column co-authored with Veronique de Rugy of Mercatus, I explain in today’s Wall Street Journal why Republicans should drop this prospective source of new tax revenue.
…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.
Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.
Here’s what supporters claim.
Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.
Sounds persuasive, at least until you look at both sides of the equation.
When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.
Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.
Now let’s consider the flip side.
What if an American company sells to a customer in Germany? The U.S. government imposes the corporate income tax and the German government imposes a VAT. But guess what? The German competitor selling domestically is hit by the German corporate income tax and the German VAT. That’s another level playing field. This explains why economists, on the right and left, repeatedly have debunked the idea that countries use VATs to boost their exports.
Here’s the German version of the map. Once again, I note that it’s possible – depending on the structure of the US company – for American products to get hit by the German corporate income tax. But the key point of the map is to show that American-produced goods and services and German-produced goods and services are subject to the VAT.
By the way, it’s entirely possible that an American company in Germany or a German company in America may pay higher or lower taxes depending on whether there are special penalties or preferences. Those companies may also pay more or less depending on the cleverness of their tax lawyers and tax accountants.
But one thing can be said with total certainty: The absence of an American VAT does not result in a “Made-in-America” tax on American companies. Even Paul Krugman agrees that VATs don’t distort trade.
One big plus for Americans is that Washington does not impose a VAT, which would enable government to grow. This is a major reason that the U.S. economy is more vibrant than Europe’s. In Germany, the VAT raises so much tax revenue that the government consumes 44% of gross domestic product—compared with 38% in America.
And to the extent that there is a disadvantage, it’s not because of some sneaky maneuver by foreign governments. It’s because of a self-inflicted wound.
America’s top corporate income tax of 35% is the highest in the developed world. If state corporate income taxes are added, the figure hits nearly 40%, according to the Congressional Budget Office. That compares very unfavorably with other nations. Europe’s average top corporate rate is less than 19%, and the global average is less than 23%… That’s the real “Made in America Tax,” and it’s our own fault.
The column does acknowledge that BAT supporters have their hearts in the right place. They are proposing that new source of revenue to help finance a lower corporate tax rate, as well as expensing.
If Congress simply limits the growth of outlays to about 2% a year, that would create enough fiscal space to balance the budget over 10 years and adopt a $3 trillion tax cut. If Republicans want a win-win, dropping the border-adjustment tax is the way to get one.
And what if Republicans aren’t willing to restrain spending? Then maybe the sensible approach is to simply cut the corporate tax rate and declare victory.
As Ronald Reagan pointed out many years ago, Washington is a company town. But rather than being home to a firm or industry that earns money by providing value to willing consumers, the “company” is a federal government that uses a coercive tax system to provide unearned wealth to various interest groups.
And the beneficiaries of that redistribution zealously guard their privileges and pay very close attention to any developments that might threaten their access to the public trough
Federal bureaucrats are particularly concerned whenever there is talk about spending restraint. They get lavishly compensated compared to folks in the private sector, so they definitely fret whenever something might happen to derail their gravy train.
A recent segment on a local station in Washington, DC, focused on their angst, and I provided a contrary point of view.
Needless to say, my friends who work for the federal government generally don’t agree with my assessment.
Some of them have even told me that I’m off base because the federal workforce is remarkably efficient. Indeed, several of them even sent me an article from the Washington Post that claims the number of bureaucrats hasn’t changed since the late 1960s.
They claim this is evidence that the bureaucracy has become more efficient.
But they’re wrong. The official federal workforce may not have changed, but research from the Brooking Institution reveals that this statistic is illusory because of a giant shadow bureaucracy.
George Will’s latest column is about this metastasizing hidden bureaucracy.
…government has prudently become stealthy about how it becomes ever bigger. In a new Brookings paper, …government expands by indirection, using three kinds of “administrative proxies” — state and local government, for-profit businesses, and nonprofit organizations. Since 1960, the number of state and local government employees has tripled to more than 18 million, a growth driven by federal money: Between the early 1960s and early 2010s, the inflation-adjusted value of federal grants for the states increased more than tenfold. …“By conservative estimates,” DiIulio writes, “there are about 3 million state and local government workers” — about 50 percent more than the number of federal workers — “funded via federal grants and contracts.” Then there are for-profit contractors, used, DiIulio says, “by every federal department, bureau and agency.” For almost a decade, the Defense Department’s full-time equivalent of 700,000 to 800,000 civilian workers have been supplemented by the full-time equivalent of 620,000 to 770,000 for-profit contract employees. …the government spends more (about $350 billion) on defense contractors than on all official federal bureaucrats ($250 billion). Finally, “employment in the tax-exempt or independent sector more than doubled between 1977 and 2012 to more than 11 million.” Approximately a third of the revenues to nonprofits (e.g., Planned Parenthood) flow in one way or another from government.
When you add it all together, the numbers are shocking.
“If,” DiIulio calculates, “only one-fifth of the 11 million nonprofit sector employees owe their jobs to federal or intergovernmental grant, contract or fee funding, that’s 2.2 million workers” — slightly more than the official federal workforce. To which add the estimated 7.5 million for-profit contractors. Plus the conservative estimate of 3 million federally funded employees of state and local governments. To this total of more than 12 million add the approximately 2 million federal employees. This 14 million is about 10 million more than the estimated 4 million federal employees and contractors during the Eisenhower administration.
In other words, the federal budget has expanded and so have the number of people with taxpayer-financed jobs.
By the way, there’s nothing theoretically wrong with a government bureaucracy using non-profits or contractors. Assuming, of course, that both the agency and the person are doing something productive.
And that was the point I tried to make it the interview. I don’t care whether the Department of Agriculture or Department of Education is filled with official bureaucrats or shadow bureaucrats. What I do care about, however, is that they are part of an agency that should not exist.
But I’ve also noted that the real problem with organizations like the IMF is that they have bad leadership. The professional economists at international bureaucracies often produce good theoretical and empirical work. That sensible research doesn’t make much difference, though, since the actual real-world policy decisions are made by political hacks with a statist orientation.
For instance, the economists at the IMF have produced research on the benefits of smaller government and spending caps. But the political leadership at the IMF routinely ignores that sensible research and instead has a dismal track record of pushing for tax increases.
Hope springs eternal, though, so I’m going to share some new IMF research on tax policy that is very sound. It’s from the second chapter of the bureaucracy’s newest Fiscal Monitor. Here are some excerpts, starting with an explanation of why the efficient allocation of resources is so important for prosperity.
A top challenge facing policymakers today is how to raise productivity, the key driver of living standards over the long term. …The IMF’s policy agenda has therefore emphasized the need to employ all policy levers, and in particular to promote growth-friendly fiscal policies that will boost productivity and potential output. Total factor productivity (TFP) at the country level reflects the productivity of individual firms…aggregate TFP depends on firms’ individual TFP and also on how available resources (labor and capital) are allocated across firms. Indeed, the poor use of existing resources within countries—referred to here as resource misallocation—has been found to be an important source of differences in TFP levels across countries and over time. …What is resource misallocation? Simply put, it is the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor.
Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to the reallocation of factors across plants and to firm entry and exit. Similarly, Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007.
And a better tax system would enable some of that growth by creating a level playing field.
Simply stated, you want people in the private sector to make decisions based on what makes economic sense rather than because they’re taking advantage of some bizarre quirk in the tax code.
Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. …Upgrading the design of their tax systems can help countries chip away at resource misallocation by ensuring that firms’ decisions are made for business and not tax reasons. Governments can eliminate distortions that they themselves have created. …For instance, the current debt bias feature of some tax systems not only distorts financing decisions but hampers productivity as well, especially in the case of advanced economies. …Empirical evidence shows that greater tax disparity across capital asset types is associated with higher misallocation.
One of the main problems identified by the IMF experts is the tax bias for debt.
And since I wrote about this problem recently, I’m glad to see that there is widespread agreement on the economic harm that is created.
Corporate debt bias occurs when firms are allowed to deduct interest expenses, but not returns to equity, in calculating corporate tax liability. …Several options are available to eliminate the distortions arising from corporate debt bias and from tax disparities across capital asset types, including the allowance for corporate equity system and a cash flow tax. …In the simplest sense, a CFT is a tax levied on the money entering the business less the money leaving the business. A CFT entails immediate expensing of all investment expenditures (that is, 100 percent first-year depreciation allowances) and no deductibility of either interest payments or dividends. Therefore, if it is well designed and implemented, a CFT does not affect the decision to invest or the scale of investment, and it does not discriminate across sources of financing.
By the way, regular readers may notice that the IMF economists favor a cash-flow tax, which is basically how the business side of the flat tax operates. There is full expensing in that kind of system, and interest and dividends are treated equally.
But let’s not digress. There’s one other aspect of the IMF chapter that is worthy of attention. There’s explicit discussion of how high tax rates undermine tax compliance, which is music to my ears.
Several studies have shown that tax policy and tax administration affect the prevalence of informality and thus productivity. Colombia provides an interesting case study on the effect of taxation on informality. A 2012 tax reform that reduced payroll taxes was found to incentivize a shift of Colombian workers out of informal into formal employment. Leal Ordóñez (2014) finds that taxes and regulations play an important role in explaining informality in Mexico. For Brazil, Fajnzylber, Maloney, and Montes-Rojas (2011) show that tax reductions and simplification led to a significant increase in formal firms with higher levels of revenue and profits. While a higher tax burden contributes to the prevalence of informality… For 130 developing countries, a higher corporate tax rate is found to increase the prevalence of cheats among small manufacturing firms, lowering the share of sales reported for tax purposes.
In closing, I should point out that the IMF chapter is not perfect.
For instance, even though it cites research about how high tax rates reduce compliance, the chapter doesn’t push for lower rates. Instead, it endorses more power for national tax authorities. Makes me wonder if the political folks at the IMF imposed that recommendation on the folks who wrote the chapter?
The next step is convince Ms. Lagarde and the rest of the IMF’s leadership to read the chapter. They get tax-free salaries, so is it too much to ask that they stop pushing for higher taxes on the rest of us?
I wrote yesterday about the most recent OECD numbers on “Average Individual Consumption” in member nations.
There was a very clear lesson in that data about the dangers of excessive government. The United States was at the top in this measure of household living standards, not because American policies are great, but rather because huge welfare states in Europe have undermined economic vitality on the other side of the Atlantic.
Indeed, the only countries even remotely close to the United States were oil-rich Norway and the two tax havens of Switzerland and Luxembourg.
Those AIC numbers gave us an interesting snapshot of relative living standards in 2014.
But what would we discover if we looked at how that data has changed over time?
It appears that the OECD began assembling that data back in 2002. Here’s a table showing how nations rose or fell, relative to other OECD nations, since then. Based on convergence theory, one would expect to see that poorer nations enjoyed the biggest relative gains, while richer nations fell in the rankings. And that is what generally happened, but with some notable exceptions.
Here are the countries that did not conform, for either good reasons or bad reasons, to convergence theory.
We’ll start with the nations that have bragging rights.
Chile started at the very bottom compared to the rich nations of the western world, so anything other than a large increase would have been a disappointment. But the magnitude of Chile’s increase is nonetheless quite impressive and presumably a testament to pro-market reforms.
Finland was almost 7 points below the OECD average in 2002 and now is more than 2 points above the average, which is a significant jump for a nation near the middle of the pack. Maybe having sensible leaders is a good idea.
Oil-rich Norway was above average at the start of the period and even farther above average at the end of the period.
The United States was very high in 2002 and remained very high in 2014. Since that outcome violates convergence theory, that’s a non-trivial accomplishment and another piece of evidence that big governments in Europe are imposing a harsh economic cost.
Switzerland also started high and remained high. That’s presumably a reflection of good policies such as federalism and spending restraint.
Now for the nations that did not fare well.
Luxembourg suffered a large drop, some of which is understandable since the tiny tax haven was in first place back in 2002. But the magnitude of the decline – particularly compared to the United States and Switzerland – is not an encouraging sign. This may be a sign that anti-tax competition efforts by the OECD have hit the nation hard.
Greece, Spain, Ireland, and Italy all tumbled in the rankings even though – at best – they started in the middle of the pack. It will be interesting to see how these nations perform as they recover (or don’t recover, as I expect in the cases of Italy and Greece) from the European fiscal crisis.
Slovenia also went from bad to worse, which perhaps is not a big surprise since it is one of the least reform-oriented countries to emerge from the Soviet Bloc.
The United Kingdom suffered a rather large decline, almost all of which happened under the profligate Blair and Brown Labour governments. This will be another nation that will be interesting to watch in coming years, particularly because of Brexit.
France and the Netherlands also suffered, starting well above average in 2002 but falling to the mean in 2014.
If you like this kind of data on whether nations are trending in the right direction or wrong direction, I’ve also tinkered with the data from Economic Freedom of the World.
Last year, I highlighted countries that have made significant moves in the EFW rankings, including oft-overlooked success stories such as Israel and New Zealand.
One of the more surreal aspects of the 2016 campaign was watching Bernie Sanders argue that the United States should become more like a European welfare state.
Didn’t he know that America’s economy was growing faster (which is a damning indictment since growth in the U.S. was relatively anemic during the Obama years)?
Perhaps more important, didn’t he know that Americans enjoy much higher living standards than their European counterparts? Was he not aware that European nations, if they were part of America, would be considered poor states?
If you don’t believe me, here’s a chart I prepared using the “average individual consumption” data from the Organization for Economic Cooperation and Development. These are the numbers that measure the material well-being of households. As you can see, the United States is far ahead of other nations. Indeed, the only three countries that are even close are two admirable tax havens and oil-rich Norway.
What about Denmark and Sweden, the two nations that Bernie Sanders said were role models? Well, the United States could copy them, but only if we wanted our living standards to drop by more than 30 percent.
By the way, since the OECD is a left-leaning bureaucracy that is guilty of periodically rigging numbers against the United States, you can be confident that this AIC data isn’t structured to favor America.
So why does the United States have such a big advantage?
In a new study from the National Bureau of Economic Research, Professor Martin Feldstein addresses why Europe is lagging the United States.
Although the official statistics imply that the rate of growth of real GDP in the United States has declined in recent years, it has still been substantially higher than the real growth rates in Europe and the other industrial countries. The sustained higher rate of real GDP growth in the United States over a longer period of time has resulted in a substantially higher level of real GDP per capita in the United States than in other major industrial countries.
He lists 10 reasons for the growth gap. Here are the ones that are related to public policy, followed by my brief observations.
(4) Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations. In the private sector, less than seven percent of the labor force is unionized. There are virtually no state-owned enterprises. While labor laws and regulations affect working conditions and hiring rules, they are much less onerous than in Europe.
Given America’s high ranking in the World Bank’s Doing Business, this makes sense.
(6) A culture and a tax-transfer system that encourages hard work and long hours. The average employee in the United States works 1800 hours per year, substantially longer than the 1500 hours worked in France and the 1400 hours worked in Germany.
The U.S. subsidizes leisure, but not nearly as bad as Europe (think of Lazy Robert).
(7) A supply of energy that makes North America energy independent. The private ownership of land and mineral rights has facilitated a rapid development of fracking to expand the supply of oil and gas.
Apparently the United States is one of the few nations where you own minerals under your land. Good for us.
(8) A favorable regulatory environment. Although the system of government regulations needs improvement, it is less burdensome on businesses than the regulations imposed by European countries and the European Union.
Given the data from Economic Freedom of the World, I’m not sure I believe this.
(9) A smaller size of government than in other industrial countries. According to the OECD, outlays of the U.S. government at the federal, state and local levels totaled 38 percent of GDP while the corresponding figure was 44 percent in Germany, 51 percent in Italy and 57 percent in France. The higher level of government spending in other countries implies that not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. In the United States, …There is no value added tax. State income taxes vary but are generally about five percent… So Americans have a higher pre-tax reward to working and can keep a larger share of their earnings.
A smaller burden of government spending may be America’s biggest advantage. And that’s connected with our other big advantage, which is not being burdened by a government-fueling value-added tax.
(10) The U.S. has a decentralized political system in which states compete. The competition among states encourages entrepreneurship and work effort and the legal systems protect the rights of property owners and entrepreneurs. The United States political system assigns many legal rules and taxing power to the fifty individual states. The states then compete for businesses and for individual residents by their legal rules and tax regimes. Some states have no income taxes and have labor laws that limit unionization.
Notwithstanding these attractive features, Feldstein is right about more economic liberty in the United States. And that helps to explain higher living standards in America.
What makes this especially noteworthy is that convergence theory says that poorer nations should automatically catch up to richer nations. Yet Europe’s catch-up period came to halt in the 1980s and the continent has since been losing ground.
And for fans of apples-to-apples comparisons, it’s very illuminating that Americans of Scandinavian descent earn about 40 percent more than those who didn’t emigrate and still live in Scandinavia.
I’m tempted to say that statism is sort of like a cult. Proponents of socialism and other big-government ideologies have a dogmatic zeal that blinds them to reality.
For instance, no nation has ever become rich with big government. But that doesn’t stop leftists from advocating in favor of higher taxes and more coercive redistribution.
They are equally capable of rationalizing that economic misery in places such as Greece and Venezuela has nothing to do with bad policy, and you can even find a few zealots willing to defend basket cases such as Cuba and North Korea.
So long as they don’t burn me at the stake for my heretical views, I guess I won’t get too agitated by their bizarre fetish for statism.
But I will periodically mock them. And that’s the purpose of today’s column. We’ll start with this nice comparison between a capitalist grocery store and a socialist grocery store. I have no idea, by the way, if the lower image actually is a supermarket in a socialist country, but let’s not forget that a real-world version of this comparison is one of the reasons there’s no longer an Evil Empire.
But the bad news about socialism is not limited to economic deprivation for the masses.
The system also leads in many cases to totalitarianism (see this article by Marian Tupy, for example).
Which makes this set of images from Reddit‘s libertarian page both funny and sad.
As you might expect, Milton Friedman had some very pointed observations on this topic.
The really good part starts shortly before 2:00. He explains very clearly that socialism is based on force and coercion.
I’ve saved the best for last.
The PotL sent me this collections of risky temptations and it perfectly captures the attitude of many statists. No matter how many times socialism has failed, they never learn the appropriate lesson. It just hasn’t been tried by right people, they tell us. Or been imposed in the right circumstances.
So they want us to give it one more try, just like a person with no willpower will eat one more bite of chocolate.
Which is the same message you find here, here, and here.
Incidentally, this analysis not only applies to socialism, as technically defined, but it also applies to redistributionism. Which is definitely more benign, but nonetheless produces bad results.
My favorite anti-libertarian video is the one based on the notion that Somalia is a libertarian paradise. Since no libertarian has ever pointed to that country as a role model, the underlying premise is a bit silly (I’ve written something semi-favorable about Somaliland, but that’s a different place). However, that doesn’t change the fact that the video is well produced and rather amusing.
It’s now time to share another amusing video with a bad message. It’s not targeting libertarians directly, but it’s mocking an idea that’s being promoted by libertarians such as my colleague Chris Edwards. The video shows a pair of English comedians doing a mock interview back in the 1990s on privatizing the U.K.’s air traffic control system.
Putting millions of passengers at the mercy of a for-profit company? Seems laughably absurd, right?
And we may see similar progress in the United States. Remarkably, even the Washington Post is supporting this reform.
The United States can and should learn from the experience of other Western democracies… Take the prosaic but crucial function of air traffic control. In the United States, that is still a job for big government: specifically, the Federal Aviation Administration. Overseas, however, countries are turning away from this statist model. Canada spun off its system, Nav Canada, in 1996, to a private entity funded by user fees. Britain privatized in 2000. Australia and New Zealand are also part of the movement; ditto Germany and Switzerland… In all of these countries, safety and innovation have stayed the same or improved, which is not surprising.
The editorial urges something similar for America.
A new corporation, funded by charges on the system’s various users, would manage flights and implement the long-stalled modernization. The FAA would still ensure safety, a regulatory job it already does remarkably well and might do even better if it were free to focus on that exclusively. Major players in the industry would share governance of the new entity, working out their differences within its boardroom rather than through the costlier and more conflictual method of lobbying Congress, as they do now.
Wow, the Washington Post is pointing out that a leaner government with fewer responsibilities would be more effective. I hope in the future they apply that lesson on a consistent basis.
Let’s close with a reference to another bit of anti-libertarian humor. Last year, I shared an image showing a satirical box of libertarian cereal, which I freely admitted was very amusing. But I then made the obvious point that private companies have zero incentive to harm or kill their customers.
Sot the bottom line is that there are greater incentives for safety with for-profit firms than there are with governments, where it’s just about impossible to fire someone for doing a bad job.
P.S. Since I’m a fiscal wonk, I’ll confess that I also want to privatize air traffic control because I’m still irked that the FAA tried to deliberately and unnecessarily inconvenience travelers during the 2013 sequester. Sort of like the jerks at the National Park Service, who did something similar that year during the partial government shutdown (though at least we got some good humor out of that).
For folks who prefer a more quantitative approach, the Fraser Institute’s Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.
One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.
Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.
That’s a main message in this new video from the Center for Freedom and Prosperity.
Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.
Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.
As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.
And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.
And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity’s video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.
Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.
The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.
And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.
Or maybe we might have learned lessons from the never-ending mess in Iraq.
Notwithstanding those unpleasant experiences, President Trump is expanding America’s intervention in Syria with missile strikes.
This rubs me the wrong way, but let’s look at what others are writing on this issue.
One of my colleagues at the Cato Institute, Gene Healy, isn’t impressed by Trump’s intervention.
Thus far, the administration has said nothing about the legal authority for the strikes. There’s not much that can be said: they’re plainly illegal. He had neither statutory nor constitutional authority to order them. …Without statutory cover, all that’s left is an appeal to presidential power under Article II of the Constitution. But that document vests the bulk of the military powers it grants in Congress, with the aim of “clogging, rather than facilitating war,” as George Mason put it. In that framework, the president retains the power to “repel sudden attacks” against the US; but he does not have the power to launch them. …
Kevin Williamson of National Review is equally unhappy with Trump’s unilateral intervention.
As Daniel Pipes and others have persuasively argued, the United States does not have an ally in Syria. The United States does not have any national interest in the success of the ISIS-aligned coalition fighting to depose Assad. The United States does not have any interest in strengthening the position of the Assad regime and the position of his Russian and Iranian patrons. …Of course the Assad regime is murderous. It is murderous in an awfully familiar way: a Baathist despot in cahoots with jihadists using chemical weapons against a civilian population. …The Trump administration has no authorization to engage in war on Syria. Congress has not declared war or authorized the use of military force; there is no emergency to justify the president’s acting unilaterally in his role as commander in chief; there is no imminent threat to American lives or American interests — indeed, there is no real American interest at all. President Donald Trump is acting illegally, and Congress has a positive moral obligation to stop him. …All decent people feel for the Syrians. We also feel for the Ukrainians, the North Koreans, the men and women languishing in Chinese laogai, Russian gulags, and Cuban prisons. We do not go to war for the sake of sentiment. We go to war for the sake of pressing national interests that cannot be otherwise secured. There is no casus belli for knocking over the Assad government, odious as it is.
And Sean Davis of the Federalistasks 14 questions. Here are the ones that caught my attention.
…proponents of military action to depose Assad have not explained is what our clear national security interest is there, what political victory looks like, what our main risks are, and what costs we will be required to pay in order to achieve that victory. …If our nation is going to wage war, and if we are going to pay a price in dollars and in American lives as a result of that decision, we are owed answers to questions that were never adequately answered before we went into Iraq.
1) What national security interest, rather than pure humanitarian interest, is served by the use of American military power to depose Assad’s regime?
2) How will deposing Assad make America safer?
3) What does final political victory in Syria look like (be specific), and how long will it take for that political victory to be achieved? Do you consider victory to be destabilization of Assad, the removal of Assad, the creation of a stable government that can protect itself and its people without additional assistance from the United States, etc.?
6) What costs, in terms of lives (both military and civilian), dollars, and forgone options elsewhere as a result of resource deployment in Syria, will be required to achieve political victory?
8) Should explicit congressional authorization for the use of military force in Syria be required, or should the president take action without congressional approval?
10) If U.S. intervention in Syria does spark a larger war with Russia, what does political victory in that scenario look like, and what costs will it entail?
14) What lessons did you learn from America’s failure to achieve and maintain political victory following the removal of governments in Iraq and Libya, and how will you apply those lessons to a potential war in Syria?
I try to avoid commenting on foreign policy, but all of the excerpts I just shared make total sense. Nobody is claiming that America’s national interests are being threatened. Instead, the case for intervention is that Assad is a bad dictator who is doing bad things.
But if that’s the criteria for intervention, why aren’t we bombing China, Venezuela, North Korea, Saudi Arabia, and the Central African Republic?
Heck, here’s a map from Freedom House. The purple nations are “not free,” which means systematic repression of political rights and civil liberties. Syria is on the list, of course, but if having an oppressive government is what triggers U.S. intervention, there will be perpetual war.
Finally, I can’t help but call attention to a story in the New York Times that looked at many of the Republicans and Democrats who have flipped and flopped when commenting on Obama’s 2013 intervention and Trump’s 2017 intervention.
But there are some notable exceptions, particularly two of the more libertarian-leaning Republicans who actually put principle over partisanship.
And even though I admit I’m not a foreign policy expert, I sometimes play one on TV. And if you look at this interview from 2013, you’ll see that my views also have been consistent.
To pick the state with the best tax policy, the first step is to identify the ones with no income tax and then look at other variables to determine which one deserves the top ranking.
Picking the state with the worst tax policy is more difficult. There are lots of reasons to pick California, in part because it has the highest income tax rate of any state. But there are also strong arguments that New York, Illinois, and New Jersey deserve the worst rating.
The Wall Street Journalopined yesterday about Connecticut’s metamorphosis from a zero-income-tax state to a high-tax swamp.
Hard to believe, but a mere 25 years ago—a lifetime for millennials—Connecticut was a low-tax haven for Northeasterners. The state enacted an income tax in 1991 that was initially a flat 4.5% but was later made steeply progressive. In 2009 former Republican Governor Jodi Rell raised the top rate on individuals earning $500,000 or more to 6.5%, which Democratic Gov. Dannel Malloy has lifted to 6.99% (as if paying 0.01% less than 7% is a government discount). Connecticut’s top tax rate is now higher than the 5.1% flat rate in the state formerly known as Taxachusetts.
This big shift in the tax burden has led to predictably bad results.
…the tax hikes have been a disaster. A net 30,000 residents moved to other states last year. Since 2010 seven of Connecticut’s eight counties have lost population, and the hedge-fund haven of Fairfield County shrank for the first time last year. In the last five years, 27,400 Connecticut residents have moved to Florida. …More than 3,000 Connecticut residents have moved to zero income-tax New Hampshire in the last two years. While liberals wax apocalyptic about Kansas’s tax cuts, the Prairie State has welcomed 1,430 Connecticut refugees since 2011 and reversed the outflow between 2005 and 2009. Yet liberals deny that tax policies influence personal or business decisions.
The good news is that the state’s leftist politicians recognize that there’s a problem. The bad news is that they don’t want to undo the high tax rates that are causing the problems. Instead, they want to use some favoritism, cronyism, and social engineering.
Connecticut’s progressive tax experiment has hit a wall. Tens of thousands of residents are fleeing for lower tax climes, which has prompted Democrats to propose—get this—paying new college grads a thousand bucks to stick around. …proposing a tax credit averaging $1,200 for grads of Connecticut colleges who live in the state as well as those of out-of-state schools who move to the state within two years of earning their degree.
As the WSJ points out, special tax credits won’t be very effective if the job market stinks.
Yet the main reason young people are escaping is the lack of job opportunities. Since 2010 employment in Connecticut has grown at half the rate of Massachusetts and more slowly than in Rhode Island, New Jersey or Kansas.
By the way, this isn’t the first time that Connecticut’s politicians have resorted to special-interest kickbacks.
The Wall Street Journal also editorialized last year about the state’s one-off bribe to keep a hedge fund from fleeing to a state with better policy.
Last week the Governor presented Bridgewater with $5 million in grants and $17 million in low-interest, forgivable loans to renovate its headquarters in Westport along the state’s Gold Coast.
But the bit of cronyism won’t help ordinary people.
Connecticut has lost 105,000 residents to other states over the last five years while experiencing zero real economic growth. …So here is the new-old progressive governing model: Raise taxes relentlessly in the name of soaking the 1% to pay off government unions. When that drives people out of the state, subsidize the 0.1% to salvage at least some jobs and revenue. Ray Dalio gets at least some of his money back. The middle class gets you know what.
What’s particularly frustrating is that the state’s leftist governor understands the consequences of bad tax policy, even though he’s unwilling to enact the right solution.
Mr. Malloy said that other states including New York were trying to lure Bridgewater, and Connecticut couldn’t afford to lose the $150 billion fund or its 1,400 high-income employees. …The Governor’s office says Nutmeg State tax revenues could shrink by $4.9 billion over the next decade if all of Bridgewater’s employees departed. …“We see what happens in places like New Jersey when some of the wealthiest people move out of the state,” Mr. Malloy warned. This is the same Governor who has long echoed the progressive left’s claim that tax rates don’t matter. Maybe he was knocked off his horse by a vision on the road to Hartford.
This is remarkable.
Governor Malloy recognizes that tax-motivated migration is a powerful force.
Maybe there’s some unwritten rule that Connecticut has to have bad governors?
Mr. Malloy’s Republican predecessor Jodi Rell raised the top marginal tax rate to 6.5% from 5% on individuals earning more than $500,000, and Mr. Malloy raised it again to 6.99%. Hilariously, Ms. Rell said last month that she’s also moving her residence to Florida because of the “downward spiral” in Connecticut that she helped to propel.
And lots of other people are moving as well.
The death tax plays a role, as explained in a column for the Hartford Courant.
Connecticut spends beyond its means and, therefore, taxes more than it should. …they’re driving the largest taxpayers away. We’ve passed the tipping point beyond which higher taxes beget lower revenues… The wealthy, in particular, have decided in swelling numbers they won’t be caught dead — literally — in our state. Evidence strongly suggests that estate and gift taxes are the final straw. To avoid Connecticut’s estate tax, wealthy families are moving to one of the 36 states without one.
And the loss of productive people means the loss of associated economic activity.
Including tax revenue.
Where wealthy families choose to establish residency has important ramifications for Connecticut’s economy and fiscal health. The earlier these golden geese flee, the greater the cumulative loss of golden eggs in the form of income taxes, sales taxes, jobs created by their companies, philanthropic support and future generations of precious taxpayers.
The data on tax-motivated migration is staggering.
Between 2010 and 2013, the number of federal tax returns with adjusted gross incomes of $1 million or more grew only 9.5 percent here vs. 22 percent in Massachusetts, 16 percent in New York and Rhode Island, and 30 percent in Florida. Slow economic growth and ever higher taxes are both cause and effect of out-migration. …In 2008, the state Department of Revenue Services asked accountants and tax lawyers whether clients moved out of state due to the estate tax, and 53 percent of respondents said it was the principal reason. …The outflow accelerated following 2011’s historic $2.5 billion tax increase. In the following two years, Connecticut suffered a net out-migration of more than 27,000 residents who took nearly $4 billion in annual adjusted gross income elsewhere, a stunning $500,000 per household. According to the Yankee Institute, the average adjusted gross income of each person leaving tripled in the past 10 years. At an average tax rate of 6.5 percent, this represents more than $250 million in lost income tax revenue annually, which is 50 percent more than the state collected in estate and gift taxes in 2014.
By the way, just in case some of you are skeptical and think that Connecticut’s deterioration is somehow unconnected to tax policy, I’ll close with this excerpt from some academic research that calculated the nationwide impact of state tax policy differences.
We consider the complete sample of all U.S. establishments from 1977-2011 belonging to firms with at least 100 employees and having operations in at least two states. On the extensive margin, we find that a one percentage point increase (decrease) in the state corporate tax rate leads to the closing (opening) of 0.03 establishments belonging to firms organized as C corporations in the state. This corresponds to an average change in the number of establishments per C corporation of 0.4%. A similar analysis shows that a one percentage point change in the state personal tax rate a§ects the number of establishments in the state per pass-through entity by 0.2-0.3%. These effects are robust to controls for local economic conditions and heterogeneous time trends. …This lends strong support to the view that tax competition across states is economically relevant.
To be sure, the numbers cited above may not sound large.
But keep in mind that small changes, if sustained over time, grow into very big results.
P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents are engaging in civil disobedience against the state’s anti-gun policies.
I’ve been at the United Nations this week for both the 14th Session of the Committee of Experts on International Cooperation in Tax Matters as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.
As you might suspect, it would be an understatement to say this puts me in the belly of the beast (for the second time!). Sort of a modern-day version of Daniel in the Lion’s Den.
These meetings are comprised of tax collectors from various nations, along with U.N. officials who – like their tax-free counterparts at other international bureaucracies – don’t have to comply with the tax laws of those countries.
In other words, there’s nobody on the side of taxpayers and the private sector (I’m merely an observer representing “civil society”).
I could share with you the details of the discussion, but 99 percent of the discussion was boring and arcane. So instead I’ll touch on two big-picture observations.
What the United Nations gets wrong: The bureaucracy assumes that higher taxes are a recipe for economic growth and development.
I’m not joking. I wrote last year about how many of the international bureaucracies are blindly asserting that higher taxes are pro-growth because government supposedly will productively “invest” any additional revenue. And this reflexive agitation for higher fiscal burdens has been very prevalent this week in New York City. It’s unclear whether participants actually believe their own rhetoric. I’ve shared with some of the folks the empirical data showing the western world became rich in the 1800s when fiscal burdens were very modest. But I’m not expecting any miraculous breakthroughs in economic understanding.
What the United Nations fails to get right: The bureaucracy does not appreciate that low rates are the best way of boosting tax compliance.
Most of the discussions focused on how tax laws, tax treaties, and tax agreements can and should be altered to extract more money from the business community. Participants occasionally groused about tax evasion, but the real focus was on ways to curtail tax avoidance. This is noteworthy because it confirms my point that the anti-tax competition work of international bureaucracies is guided by a desire to collect more revenue rather than to improve enforcement of existing law. But I raise this issue because of a sin of omission. At no point did any of the participants acknowledge that there’s a wealth of empirical evidence showing that low tax rates are the most effective way of encouraging tax compliance.
I realize that these observations are probably not a big shock. So in hopes of saying something worthwhile, I’ll close with a few additional observations
I had no idea that people could spend so much time discussing the technicalities of taxes on international shipping. I resisted the temptation to puncture my eardrums with an ice pick.
From the moment it was announced, I warned that the OECD’s project on base erosion and profit shifting (BEPS) was designed to extract more money from the business community. The meeting convinced me that my original fears were – if possible – understated.
A not-so-subtle undercurrent in the meeting is that governments of rich nations, when there are squabbles over who gets to pillage taxpayers, are perfectly happy to stiff-arm governments from poor nations.
The representative from the U.S. government never expressed any pro-taxpayer or pro-growth sentiments, but he did express some opposition to the notion that profits of multinationals could be divvied up based on the level of GDP in various nations. I hope that meant opposition to “formula apportionment.”
Much of the discussion revolved around the taxation of multinational companies, but I was still nonetheless surprised that there was no discussion of the U.S. position as a very attractive tax haven.
The left’s goal (at least for statists from the developing world) is for the United Nations to have greater power over national tax policies, which does put the UN in conflict with the OECD, which wants to turn a multilateral convention into a pseudo-International Tax Organization.
Efforts to cut taxes and reform the tax code don’t look very promising because House Republicans have proposed a misguided border-adjustment tax and the White House seems hopelessly divided on how to proceed.
Efforts to restrain government spending haven’t gotten off the ground. A full budget is due next month, but it’s not overly encouraging that Trump’s proposed domestic cuts would be used to expand the Pentagon’s budget.
Let’s see whether we get a different story when we examine regulatory issues.
We’ll start with some good news? Well, sort of. It seems the United States has the largest and 4th-largest GDPs in the world.
You may think that makes no sense, but this is where we have to share some bad news on the regulatory burden from the Mercatus Center.
Economic growth has been reduced by an average of 0.8 percent per year from 1980 to 2012 due to regulatory accumulation. Regulations force companies to invest less in activities that enhance productivity and growth, such as research and development, as companies must divert resources into regulatory compliance and similar activities. …Compared to a scenario where regulations are held constant at levels observed in 1980, the study finds that the difference between the economy we are in and a hypothetical economy where regulatory accumulation halted in 1980 is approximately $4 trillion. …The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.
By the way, this data from Mercatus gives me an opportunity to re-emphasize the importance of even small variations in economic growth. It may not make that much difference if the economy grows 0.8 percent faster or slower in one year.
But, as just noted, a loss of 0.8 percent annual growth over 32 years has been enormously expensive to the U.S. economy.
The Competitive Enterprise Institute has a depressing array of data on America’s regulatory burden. Here’s the chart that grabbed my attention.
And here’s a video on the burden of red tape from the folks at CEI.
Who deserves the blame for this nightmare of red tape?
The previous president definitely added to the regulatory morass. The Hillreported last year on a study by the American Action Forum.
The Obama administration issues an average of 81 major rules, those with an economic impact of at least $100 million, on a yearly basis, the study found. That’s about one major rule every four to five days, or, as the American Action Forum puts it, one rule for every three days that the federal government is open. “It is a $2,294 regulatory imposition on every person in the United States,” wrote Sam Batkins, director of regulatory policy at the American Action Forum, who conducted the study.
And there was a big effort to add more red tape in Obama’s final days, as noted by Kimberly Strassel of the Wall Street Journal.
Since the election Mr. Obama has broken with all precedent by issuing rules that would be astonishing at any moment and are downright obnoxious at this point. This past week we learned of several sweeping new rules from the Interior Department and the Environmental Protection Agency, including regs on methane on public lands (cost: $2.4 billion); a new anti-coal rule related to streams ($1.2 billion) and renewable fuel standards ($1.5 billion).
As you might expect, the net cost of Obama’s regulatory excess is significant. Here’s some of what the Washington Examinerwrote during the waning days of Obama’s tenure.
According to new information from the White House, finally released after a two year wait, the total burden of federal government paperwork is more than 11.5 billion man-hours a year. That’s almost 500 million man-days, or 1.3 million man-years. More importantly, it’s 35 hours every person in the country (on average) has to spend doing federal paperwork every year, on average. …Time is money, and paperwork time alone costs the country almost $2 trillion a year, or about 11 percent of GDP.
But it’s not solely Obama’s fault. Not even close.
Both parties can be blamed for this mess, as reported by the Economist.
The call to cut red tape is now an emotive rallying cry for Republicans—more so, in the hearts of many congressmen, than slashing deficits. Deregulation will, they argue, unleash a “confident America” in which businesses thrive and wages soar, leaving economists, with their excuses for the “new normal” of low growth, red-faced. Are they right?
They may be right, but they never seem to take action when they’re in charge.
Between 1970 and 2008 the number of prescriptive words like “shall” or “must” in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year… The unyielding growth of rules, then, has persisted through Republican and Democratic administrations… The endless pile-up of regulation enrages businessmen. One in five small firms say it is their biggest problem, according to the National Federation of Independent Business.
That being said, who cares about finger pointing? What matters is that the economy is being stymied by excessive red tape.
So what can be done about this? President Trump has promised a 2-for-1 deal, saying that his Administration will wipe out two existing regulations for every new rule that gets imposed.
Susan Dudley opines on this proposal, noting that Trump hasn’t put any meat on the bones.
Like pebbles tossed in a stream, each individual regulation may do little economic harm, but eventually the pebbles accumulate and like a dam, may block economic growth and innovation. A policy of removing two regulations for every new one would provide agencies incentives to evaluate the costs and effectiveness of those accumulated regulations and determine which have outlived their usefulness. Mr. Trump’s statement doesn’t provide details on how this new policy would work.
Ms. Dudley points out, however, that other nations have achieved some success with similar-sounding approaches.
…his team could look to experiences in other countries for insights. The Netherlands, Canada, Australia and the United Kingdom have all adopted similar requirements to offset the costs of new regulations by removing or modifying existing rules of comparable or greater effect. …The Netherlands program established a net quantitative burden reduction target that reduced regulatory burdens by 20% between 2003 and 2007. It is currently on track to save €2.5 billion in regulatory burden between 2012 and 2017 by tying the introduction of new regulations “to the revision or scrapping of existing rules.” Under Canada’s “One-for-One Rule,” launched in 2012, new regulatory changes that increase administrative burdens must be offset with equal burden reductions elsewhere. Further, for each new regulation that imposes administrative burden costs, cabinet ministers must remove at least one regulation. Similarly, Australia’s policy is that “the cost burden of new regulation must be fully offset by reductions in existing regulatory burden.” The British began with a “One-in, One-out” policy, requiring any increases in the cost of regulation to be offset by deregulatory measures of at least an equivalent value. In 2013, it moved to “One-in, Two-out” (OITO) and more recently to a “One-in, Three-out” policy in an effort to cut red tape by £10 billion.
The bottom line is that progress will depend on Trump appointing good people. And on that issue, the jury is still out.
The legislative branch also could get involved.
In a column for Reason, Senator Rand Paul explained that the REINS Act could make a big difference.
…13 of the 15 longest registers in American history have been authored by the past two presidential administrations (Barack Obama owns seven of the top eight, with George W. Bush filling in most of the rest)…federal lawmakers should pass something called the REINS Act—the “Regulations from the Executive in Need of Scrutiny Act. The REINS Act would require every new regulation that costs more than $100 million to be approved by Congress. As it is now, agencies can pass those rules unilaterally. Such major rules only account for about 3 percent of annual regulations, but they are the ones that cause the most headaches for individuals and businesses. …the REINS Act did pass the House on four occasions during the Obama administration. Lack of support in the Senate and the threat of a presidential veto kept it from ever reaching Obama’s desk.
But would it make a difference if Congress had to affirm major new rules?
But,based on the hysterical opposition from the left, I’m betting the REINS Act would be very helpful.
REINS would fundamentally alter the federal government in ways that could hobble federal agencies during periods when the same party controls Congress and the White House — and absolutely cripple those agencies during periods of divided government. Many federal laws delegate authority to agencies to work out the details of how to achieve relatively broad objectives set by the law itself. …REINS, however, effectively strips agencies of much of this authority.
That sounds like good news to me. If the crazies at Think Progress are this upset about the REINS Act, it must be a step in the right direction.
Let’s close with a bit of evidence that maybe, just maybe, Republicans will move the ball in the right direction. Here are some excerpts from a Bloombergstory.
The White House estimates it will save $10 billion over 20 years by having rescinded 11 Obama-era regulations under a relatively obscure 1996 law that lets Congress fast-track repeal legislation with a simple majority. …In all, the law has been used to repeal 11 rules, with two more awaiting the president’s signature… About two dozen measures with CRA’s targeting them remain, but because the law can only be used on rules issued in the final six months of the previous administration, Congress only has only a few more weeks to use the procedure.
Before getting too excited, remember that the annual cost of regulation is about $2 trillion and the White House is bragging about actions that will reduce red tape by $10 billion over two decades. Which means annual savings of only $500 million.
Which, if my math is right, addresses 0.025 percent of the problem.
I’ll take it, but it should be viewed as just a tiny first step on a very long journey.
P.S. The Congressional Review Act was signed into law by Bill Clinton. Yet another bit of evidence that he was a surprisingly pro-market President.
P.P.S. If you want some wonky analysis of regulation, I have some detailed columns here, here, here, here, here, here, and here.
Let’s cross our fingers that these evil governments will soon lose power. But that’s only the first step. We also need to think about the policies that would enable these nations to undo the damage of pervasive socialism.
We can learn some lessons by looking at the experience of post-communist nations in Eastern Europe, which is a topic I addressed in the latest edition of The Conservative, which is the quarterly magazine published by the Alliance of Conservatives and Reformers in Europe.
I started the article with some broad observations about grim political and economic impact of communism.
Communism was an awful system for people trapped behind the Iron Curtain. The political cost was enormous. Personal rights and individual liberties were sacrificed to protect the power of the state. Human rights were abused, dissidents were imprisoned, and some were even killed. Communism also imposed huge economic costs. Collectivized agriculture, central planning, price controls, and government-run industries were among the policies that resulted in a debilitating misallocation of resources. And because labor and capital were poorly utilized, living standards lagged far behind western nations.
But good news isn’t perfect news. Nations that emerged from the Soviet Bloc are still economic laggards. And if you dig into the latest version of Economic Freedom of the World, a big problem is that post-communist nations have not been very successful in defending property rights and implementing the rule of law.
Establishing genuine capitalism, though, has been a bigger challenge. Part of the problem is policy. And to be more specific, data from the Fraser’s Institute’s Economic Freedom of the World shows that the major difference today between Western Europe and Eastern Europe (nations that were part of the Soviet Bloc) is that the former get much better scores for “Legal System and Property Rights.” Indeed, the average ranking of Western European nations is 20.6 (with 1 being the best) while the average ranking of Eastern European countries is 67.1 (Economic Freedom of the World ranks 159 jurisdictions).
Here’s a graph comparing Western European nations with Eastern European nations.
As you can see, this is an area where Western Europe leads the world. Nordic nations tend to be at the very top of the rankings (thus helping to offset bad fiscal policy in those countries), and other countries in the region also are highly ranked (though a few countries in the region, such as Italy and Greece, don’t get good scores).
Eastern European countries, by contrast, don’t do well. There’s a significant gap when looking at average scores. Indeed, only Estonia ranks in the top 25.
And bad scores in this category are akin to putting a house on a foundation of sand. Other policies may create a house that looks very nice, but it probably won’t last very long on the unstable foundation.
And speaking of other policies, post-communist nations have better fiscal policy than the countries from Western Europe. Or, to be more accurate, they have less-worse fiscal policy.
If you examine the overall ratings for “Size of Government,” Eastern European nations actually are ranked significantly better, with an average ranking of 89.2 compared to 129.2 for Western European countries. This is because tax rates tend to be lower (many former Soviet Bloc nations have flat tax regimes, for instance) and welfare states aren’t as burdensome.
As I already hinted, doing “significantly better” on fiscal policy than Western Europe does not mean Eastern Europe has good fiscal policy.
Indeed, an average ranking of 89 means that most Eastern European nations are in the bottom half of the world.
So while it’s good that some Eastern European nations have flat taxes, that’s not an economic elixir if there are very high payroll taxes, stifling value-added taxes, and onerous energy taxes.
And since the burden of government spending is extremely onerous in Western Europe, it’s hardly an impressive achievement that Eastern Europe ranks slightly higher.
Though there’s one aspect of fiscal policy where the post-communist countries are lagging their neighbors to the west.
…if you dig into the details and examine the various components that determine “Size of Government,” there’s one area where Eastern Europe lags. The numbers for “Government Enterprises and Investment” are better in Western Europe. …In other words, politicians play too large a role in the allocation of capital in former communist nations.
To put that message in blunter terms, there’s too much cronyism in Eastern Europe.
So long as politicians can directly (state-owned enterprises) or indirectly (handouts, subsidies, and bailouts) provide favors and tilt the playing field, the enriching forces of private markets will be stunted.
Which is why I shared this conclusion in my article.
The bottom line is that post-communist nations need to choose genuine capitalism if they want a brighter future for their citizens.
If you want to close with some good news, I did point out in the article that there are some bright spots in the region, especially Estonia, though Poland also has made big progress.
The real world is like a cold shower for our friends on the left. Everywhere they look, there is evidence that jurisdictions with free markets and small government outperform places with big welfare states and lots of intervention.
That’s true when comparing nations. And it’s also true when comparing states. That must be a source of endless frustration an disappointment for statists.
Speaking of disappointed statists, the real world has led to more bad news. The left-wing Mayor of Baltimore campaigned in favor of a $15 minimum wage, but then decided to veto legislation to impose that mandate. The Wall Street Journalopines on this development.
Mayor Catherine Pugh, a Democrat, has rejected a bill that would raise the city’s minimum wage to $15 an hour by 2022. She did so even though she had campaigned in favor of raising the minimum wage, which shows that economic reality can be a powerful educator. She explained her change of heart by noting that raising the rate above the $8.75 an hour minimum that prevails in the rest of Maryland would send jobs and tax revenue out of Baltimore to surrounding counties. The increase would also have raised the city’s payroll costs by $116 million over the next four years when she’s already coping with a deficit of $130 million in the education budget.
The key thing to notice is that the Mayor recognized that the real-world impact of bad legislation is that economic activity would shrink in the city and expand outside the city.
Writing for Reason, Eric Boehm also points out that the Mayor was constrained by the fact neighboring jurisdictions weren’t making the same mistake.
Pugh said the bill would not be in the best interest of Baltimore’s 76,000 unemployed workers and would drive businesses out of the city to the surrounding counties. …Indeed. Raising the minimum wage would not solve Baltimore’s economic troubles, and would likely only add to them. While support for a $15 minimum wage has become something of a litmus test for progressive politicians, the true test of any politician should be whether he or she is willing to set aside campaign trail rhetoric that flies in the face of economic reality. Signing the bill would have made progressive pols and activists happy—one Baltimore city councilman called Pugh’s decision “beyond disappointing” and a minimum wage activist group said it would remind voters of Pugh’s “broken promise”—but there’s no honor in following through on a promise to do more damage to an already struggling city’s economy. Pugh’s decision to veto a $15 minimum wage bill isn’t disappointing in the least. More politicians should learn from her example of valuing economic reality over populist rhetoric.
The Mayor’s veto is good news, though it remains to be seen whether city legislators will muster enough votes for an override.
Regardless of what happens, notice that the Mayor didn’t do the right thing because she believed in economic liberty and freedom of contract. She also didn’t do the right thing because she recognized that higher minimum wage mandates would lead to more joblessness.
Instead, she felt compelled to do the right thing because of jurisdictional competition. She was forced to acknowledge that bad policy in her city would explicitly backfire since economic activity is mobile. She had to admit that there are no magic boats.
And this underscores why federalism and decentralization are vital features of a good system. Governments are more likely to do bad things when the costs can be imposed on an entire nation (or, even better from their perspective, the entire world). But when bad policy is localized, it becomes very hard to disguise the costs of bad policy.
This is why nations such as Switzerland are so successful.
This is why researchers find decentralized systems are more efficient.
And, as today’s column illustrates, decentralization stopped the Mayor of Baltimore from a bad policy that would hurt poorly skilled workers. Just as federalism stopped Vermont politicians from imposing a destructive single-payer health system.
Entry-level jobs matter—and you don’t have to take my word for it. In a speech last week on workforce development in low-income communities, Federal Reserve Chair Janet Yellen said that “it is crucial for younger workers to establish a solid connection to employment early in their work lives.” Unfortunately, government policies are destroying entry-level jobs by giving businesses an incentive to automate at an accelerated pace. In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017. Nearly a quarter of them, 24%, said rising minimum wages. …The trend toward automation is particularly pronounced in areas where the local minimum wage is high.
Need more evidence?
By the way, even the normally left-leaning World Bank has research on the damaging impact of minimum wage mandates.
This paper uses a search-and-matching model to examine the effects of labor regulations that influence the cost of formal labor (notably minimum wages and payroll taxes) on labor market outcomes… The results indicate that these regulations, especially minimum wage policy, contribute to higher unemployment rates and constraint formalization…, especially for youth and women.
The research was about the labor market in Morocco, but the laws of supply and demand are universal.
As I’ve repeatedly stated, when you mandate that workers get paid more than what they’re worth, that’s a recipe for unemployment. And as the World Bank points out, it’s the more vulnerable members of society who pay the highest price.
In an ideal world, there should be no minimum wage mandates. But since that’s not an immediately practical goal, the best way of protecting low-skilled workers is to make sure Washington does not impose a nationwide increase. That won’t stop every state and local government from imposing destructive policies that cause unemployment, but the pressure of jurisdictional competition will
And when those bad policies do occur, that will simply give us more evidence against intervention. Which brings us back to where we started. The real world is a laboratory that shows statism is a bad idea.
P.S. In honor of Equal Pay Day, I can’t resist sharing this tidbit from the Washington Free Beacon.
Oh, you also won’t be surprised to learn that there was also a big pay gap in Hillary Clinton’s Senate office, as well as Obama’s White House. In reality, of course, the market punishes genuine discrimination and the pay gap is basically nonexistent when comparing workers with similar education, experience, and work patterns.
Whether the bill was a net plus is now moot since it didn’t have enough votes for approval. And the withdrawal of the legislation has generated a bunch of stories on whether Trump and congressional Republicans are incapable of governing.
In particular since it appears that GOPers also seem incapable of coming to agreement on how to reduce the tax burden. I commented on the dysfunctional state of affairs in this interview with Neil Cavuto.
The bottom line is that there are big divisions. There is (thankfully) a lot of opposition to the border-adjustable tax, and there’s also no agreement on whether the tax plan should be a pure tax cut or whether it should be a revenue-neutral package that finances lower tax rates by eliminating or curtailing undesirable preferences.
Jason Furman, who was the Chairman of Obama’s Council of Economic Advisers, suggest that Republican divisions won’t matter if tax reform becomes a bipartisan issue. But I’m not overly impressed by the five conditions he outlines in a column in today’s Wall Street Journal.
“Commit to revenue neutrality and distributional neutrality, as in the 1986 tax reform” – This is a poison pill, mostly because “distributional neutrality” means lawmakers would be constrained by class warfare concerns instead of focusing on how to produce growth. Indeed, this is why the plan put forth by the previous Chairman of the Ways & Means Committee was such a dud.
“Focus on business taxes only” – As I mentioned in the interview, I actually think this suggestion makes sense.
“For overseas business income, adopt something like a ‘minimum tax.'” – This is another poison pill. It’s designed to preserve worldwide taxation. Moreover, I explained last year that such schemes discriminate against nations with better tax policy.
“For domestic business income, adopt something along the lines of the House Republican proposal” – There’s not a lot of detail in the WSJ column, so it’s unclear if Furman is endorsing the notorious BAT from the House plan. He does explicitly endorse expensing over depreciation and he wants to put debt and equity on a level playing field. If that’s all he means, I agree with him.
“Incorporate into the bill a real plan for public infrastructure spending” – Since the federal government should not have any role in transportation, I’m obviously not enthusiastic about this proposal. Though if a bit of pork was the price to get an otherwise good bill through the process, I wouldn’t object too strenuously.
It’s unclear if Furman considers the five conditions a package deal. If so, there is zero chance of bipartisanship because Republicans presumably will not agree if they are bound by distributional neutrality.
But if a “business taxes only” agenda can get some Democrats on board, then there may be hope. Especially since that may make a virtue out of necessity, as I suggested in the interview.
And for those who question whether lowering the corporate tax rate is important, here’s an argument-ending chart from a recent Tax Foundation publication. Keep in mind that the U.S. corporate rate (including state levies) is 39 percent.
It’s particularly noteworthy that average corporate tax rates in Europe and Asia are about 20 percent, far lower than the tax burden imposed on companies in the United States.
The ultimate answer is to junk the entire tax code and adopt a simple and fair flat tax. The best-possible answer we may get out of dysfunctional Washington is probably a lower corporate rate.
Those are all good answers, and you could also add housing subsidies, the drug war, and lot of other example to the list of programs that enjoy lots of political support even though they produce bad results.
But I’m guessing that the activity that has the greatest level of undeserved support is government intervention for “pre-K” kids, with Head Start being the most prominent example.
I haven’t written about the failure of that particular program since 2013, which is unfortunate because two of the most compelling visuals about Head Start were released in 2014.
First, this AEI research reveals that the supposed academic consensus for the program evaporates under close examination.
Second, this table from an article in National Affairs shows that the program doesn’t produce long-run benefits.
Yet these empirical results don’t seem to influence the debate. Every year, programs such as Head Start get funded because politicians only seem to care about intentions.
And positive headlines for themselves, of course. After all, we’re supposed to believe that they care about kids because they spend other people’s money on programs with nice goals.
With this as background, now let’s zoom in on a specific example of how supposedly good intentions in this field translate into occupational restrictions that have very bad results for the less fortunate people in society.
The Washington Postreports that the city’s local government has decided that additional regulation is needed to boost the quality of programs for pre-K kids.
More than a decade after Washington, D.C., set out to create the most comprehensive public preschool system in the country, the city is directing its attention to overhauling the patchwork of programs that serve infants and toddlers. The new regulations put the District at the forefront of a national effort to improve the quality of care and education for the youngest learners. City officials want to address an academic achievement gap between children from poor and middle-class families that research shows is already evident by the age of 18 months.
And what exactly did the city government propose to achieve these nice-sounding goals?
They’ve imposed “new licensing regulations…for child-care centers” that will mandate college degrees.
The District set the minimum credential for lead teachers as an associate degree… The deadline to earn the degree is December 2020. New regulations also call for child-care center directors to earn a bachelor’s degree and for home care providers and assistant teachers to earn a CDA.
Gee, this sounds nice. Don’t we all want the best-trained staff so that we can get the best outcomes for kids?
Yes, but let’s consider costs and benefits. Especially, as noted in the article, costs that are imposed on people without a lot of money who are working at childcare centers.
…for many child-care workers, often hired with little more than a high school diploma, returning to school is a difficult, expensive proposition with questionable reward. …prospects are slim that a degree will bring a significantly higher income — a bachelor’s degree in early-childhood education yields the lowest lifetime earnings of any major.
And poor people without a lot of money who are clients of childcare centers.
Many parents in the District are maxed out, paying among the highest annual tuitions nationally, at $1,800 a month.
And taxpayers who pick up part of the cost.
…government subsidies that help fund care…and generous funding for preschool.
In other words, imposing this kind of mandate will be rather expensive, especially for lower-income Washingtonians who either work at these centers of send their children to them.
That’s the cost side of the equation. Now let’s look at the benefits.
Except there’s no real-world evidence included in the article. Instead, all we get it some theorizing.
…a 2015 report by the National Academies that says the child-care workforce has not kept pace with the science of child development and early learning. From the first days of life, learning is complex and cumulative, the report says. Infants are capable of abstract thought, forming theories about what is happening in the physical world and whom to trust. Scientists concluded that teachers need the skills and insight to offer the kinds of learning experiences that challenge them and make them feel safe. They need tools to diagnose and intervene when they see learning or emotional problems. And they need literacy skills to introduce young learners to an expansive vocabulary, exposure many children do not have at home and are not getting in day care.
Scientists say that higher education for pre-school child-care workers is a good idea. So of course D.C. is going to make it mandatory that child-care workers get associate’s degrees and completely screw over an entire class of lower-skilled workers. …The news story doesn’t engage in the question of why parents can’t decide for themselves how important it is for their child-care workers to have advanced degrees. Perhaps that’s because early education advocates might not like the answers, once the realities of the likely cost increases get factored in. …such a subsidy plan would not do much for lower-income families. And so not only would poorer families be even less able to afford child care, they’re also going to be locked out of jobs within the industry itself.
Though he does identify one group that would benefit.
To be sure, this D.C. law is a jobs program—it’s a jobs program for people who work in the field of post-secondary education itself. Nothing like using a regulatory mandate to create a demand for your educational services that might not exist otherwise. The story makes it abundantly clear that advocates for increased education of child-care workers—who, wouldn’t you know it, work in the field of education—want to spread this program well beyond D.C.’s borders.
And there’s another group of beneficiaries. The new DC regulations will be good news for childcare workers who already have college degrees. That’s because the city government is using a form of licensing to force competing workers out of the market (as Scott pointed out, the new rules “screw over…lower-skilled workers”). And that means that the college-educated workers will have more ability to extract higher salaries.
Donald Trump wants the federal government to subsidize child care. If enacted, this policy is sure to increase costs and lead to inefficiency, just as similar types of intervention have caused problems in both healthcare and higher education.
While Trump’s proposal is misguided, it hasn’t generated much surprise because politicians routinely try to buy votes with other people’s money.
I was surprised, however, when the normally market-friendly American Enterprise Institute began to publish articles starting a few years ago in support of government policies on the related issue of paid family leave. I was even more surprised when I saw that AEI teamed up with the left-leaning Brookings Institution on a joint “Project on Paid Parental Leave.”
…why, exactly, a purported conservative think-tank would like to impose a one-size-fits-all, top-down national policy upon all businesses in all states, regardless of cost, on the flimsy argument that ‘It’s a good thing.’
Aparna Mathur, AEI’s Co-Directors of the Project, has an article responding to the question of whether intervention from Washington can be considered pro-freedom or pro-market.
To her credit, she basically admits that the answer is no.
I see your point that encouraging a federal paid family leave plan goes against the idea of limited government. …we don’t think markets are the end-all solution here… If we don’t intervene, then that’s how it’s going to continue. …I also agree with your point that this will be a burden on businesses. …we have to be open to the idea that in some areas, markets fail or may under-provide a benefit. And in those cases, for the larger good of society…, we need to accept some sharing of costs.
But while she admits the policy is statist, she nonetheless justifies it because there ostensibly is a market failure.
I’m temped to explain why this is nonsense. After all, the fact that we can’t have everything we want because of scarcity and trade-offs is one of the reasons market exist, not evidence of failure.
But I don’t need to explain because one of Ms. Mathur’s colleagues already has done the job. Here’s some of what Benjamin Zycher wrote on this topic.
There are no free lunches, and the mere fact that expanded paid leave in isolation would be very nice for some or many workers says little about the unavoidable tradeoffs. Would a given worker or group of workers prefer more such leave combined with lower explicit wages, or with fewer other nonwage benefits, or with employer demands for higher productivity? …with respect to the new moms returning to work soon after giving birth: Was that not their choice? Yes, in almost all cases, and it is not clear from Mathur’s discussion precisely why such costs ought to be “shared across society.” …Whatever “socializing the costs” comes to mean, it is inevitable that the proponents of such a policy, unconcerned with the expansion of government power, will demand that businesses give something up… So much again, for the free-lunch atmospherics: Such increases in costs will reduce employment… Which brings us to the final assertion: “In some areas, markets fail or may underprovide a benefit.” Wow. What does “underprovide” mean? …there are only two basic approaches to answering that question. The first: the outcomes emerging from competitive markets, in this case the amount of paid leave employers offer to employees and the amount that employees are willing to accept as part of total compensation, including working conditions defined broadly. Mathur simply rejects that outcome as too little. The second: Political determination of the appropriate amount of paid leave, in which majorities impose their will on everyone regardless of individual preferences. Why stop at paid leave? Why not have voters determine wages, vacation policies, dress codes, and everything else? And are voters really qualified to do so?
I especially like Zycher’s final point. The notion that 51 percent of people should be able to dictate the terms of contracts to both employers and employees is offensive.
And since we’re on the topic of majoritarianism, Professor Don Boudreaux explains that favorable opinion polls for mandated parental leave are both irrelevant and misleading.
Of course that’s what the polls show – which is precisely why such polls are unreliable in cases such as this. We need take no polls to discover that people generally prefer to get benefits at a cost to them of nothing. Such ‘information’ is hardly newsworthy. …I want, for example, a brand new Mercedes-Maybach S600, but because I’m unwilling to pay the hefty price for the benefit that owning such a car would give to me, the correct conclusion is that I do not really want such a car given its cost.
In other words, Boudreaux and Zycher both agree that there’s no free lunch. Paid leave, mandated by government, necessarily imposes a cost.
And what’s really ironic about this issue is that some honest female analysts acknowledge that women will bear a lot of the cost. Simply stated, employers will provide them lower cash wages to offset the liability that is created by the government intervention.
P.P.S. While I wish Ms. Mathur’s support for intervention was just an April Fool’s joke, at least I can share some intentional humor to celebrate the day.
We know all about leftist hypocrites, and here’s another one to add to the list (h/t: Reddit).
Needless to say, I’m not expecting Michael Moore to sell one of his many homes to help the poor, either.
If you like April Fool’s Day humor, I shared some examples back in 2013.
(we generally don’t tax interest and capital gains received by foreigners, and we also generally don’t share information about the indirect investments of foreigners with their home governments).
International Liberty 