Last but not least, here’s something clever from Reddit‘s libertarian page.
Exactly! Having read and very much enjoyed Robin Hood in my youth, Robin Hood was a tea party activist before the tea party existed. He reclaimed the tax money of the peasants from the nobility and returned the funds to the people.
P.S. Not only was Robin Hood a potential libertarian, the same can be said about Shakespeare.
But I want to call attention to the part of the discussion that started a bit before the one-minute mark. This is the point where I expressed concern about Donald Trump’s proposed parental leave entitlement.
I’ve written about Trump’s childcare scheme, but that’s a different intervention than what we’re talking about today.
Government-mandated paid parental leave is just as misguided childcare subsidies. It may even be worse. Let’s look at some details.
The Wall Street Journal is unimpressed by Trump’s plan to expand the welfare state.
Mr. Trump’s budget would require states to provide six weeks of paid family leave for new mothers and fathers, as well as adoptive parents. States would have “broad latitude to design and finance” the benefit, which would be delivered through unemployment insurance. States would be forced to work out how much to pay parents, whether to ban a beneficiary from working during the leave, and dozens of other details. The budget says the program will cost the feds $25 billion. The cost is offset in theory by reducing waste and abuse in unemployment insurance. The left is naturally panning the plan as stingy. …Once an entitlement is codified it expands. Proponents note that underwriting the benefit requires only a tiny increase in taxes, or some other levy on businesses. But wait until Democrats double or triple the duration of the leave, which they will do as soon as they are in power. The idea that Republicans can propose a cost-effective entitlement is delusional… The left chants that every industrialized country in the world offers some form of paid family leave—even Oman!—but one reason European countries have inflexible labor markets and higher unemployment is because they make hiring more expensive.
And James Pethokoukis of the American Enterprise Institute agrees that if Republicans start the program, Democrats will expand it. But his citation of some academic research is the best part of his article.
…how could the left not be secretly thrilled? Even if Trump’s bare-bones plan doesn’t become law, it sets a sort of precedent for Republicans supporting paid leave. And should the plan pass Congress and get signed by Trump, it establishes a program that future Democratic presidents and lawmakers can expand. …A 2017 study, by UC Santa Barbara economist Jenna Stearns, of maternity leave policy in Great Britain found that…there’s a tradeoff: Expanding job protected leave benefits led to “fewer women holding management positions and other jobs with the potential for promotion.” Likewise, a 2013 study by Cornell University’s Francine Blau and Lawrence Kahn found family-friendly policies…also “leave women less likely to be considered for high-level positions. One’s evaluation of such policies must take both of these effects into account.” …In a classic 1983 paper on mandated benefits like paid leave, former Obama economist Lawrence Summers explained businesses would offset higher benefits with lower pay or hiring workers with lower potential benefit costs. You know, tradeoffs.
Amen.
And this is why even a columnist for the New York Times has pointed out that self-styled feminist policies actually are bad for women.
Whenever there’s a terrorist attack, I automatically feel a combination of anger, horror, and sadness. Like all normal people.
But it’s then just a matter of time before I also begin wonder whether we’ll learn that the dirtbag terrorist was financed by welfare.
Which is an understandable reaction since that’s now the normal pattern. Over and over and over and over and over again, we learn that taxpayers were supporting these murderous losers while they plotted and planned their mayhem.
And it’s not random. They’re actually told by hate-filled Imams to sign up for handouts. And European courts protect terrorist households that use welfare to finance death and destruction.
It’s gotten to the point where I even created a special terror wing in the Moocher Hall of Fame.
And it’s happened again. The piece of human filth who murdered 22 people at a concert in Manchester was able to finance his terrorism with handouts from the British government.
The Telegraphhas some of the odious details about tax-financed death and destruction.
Salman Abedi is understood to have received thousands of pounds in state funding in the run up to Monday’s atrocity even while he was overseas receiving bomb-making training. Police are investigating Abedi’s finances, including how he paid for frequent trips to Libya where he is thought to have been taught to make bombs at a jihadist training camp. …Abedi’s finances are a major ‘theme’ of the police inquiry amid growing alarm over the ease with which jihadists are able to manipulate Britain’s welfare and student loans system to secure financing. One former detective said jihadists were enrolling on university courses to collect the student loans “often with no intention of turning up”.
But he probably accessed other types of benefits as well, particularly since he never worked and had plenty of cash.
…the Department for Work and Pensions refused to say if Abedi had received any benefits, including housing benefit and income support worth up to £250 a week, during 2015 and 2016. …Abedi, 22, never held down a job, according to neighbours and friends, but was able to travel regularly between the UK and Libya. Abedi also had sufficient funds to buy materials for his sophisticated bomb while living in a rented house in south Manchester. Six weeks before the bombing Abedi rented a second property in a block of flats in Blackley eight miles from his home, paying £700 in cash. He had enough money to rent a third property in the centre of Manchester from where he set off with a backpack containing the bomb. Abedi also withdrew £250 in cash three days before the attack and transferred £2,500 to his younger brother Hashim in Libya
Time for another example. Remember the piece of human garbage in London who mowed down some innocent people with his car before murdering a policeman?
Khalid Masood, the radical ISIS terrorist responsible for London’s Westminster terror attack, did not have a job and was receiving government benefits before engaging in his attack. …Masood had a violent criminal history, including several knife attacks. …Terrorists receiving government welfare is a common theme discovered in many post-terror attack investigations.
Seems like Abedi and Masood should have had their own episode of “Benefits Street.”
There are also new reports on welfare-subsidized terror from continental Europe.
Governments across Europe have accidentally paid taxpayer-funded welfare benefits such as unemployment funds, disability pensions and housing allowances to Islamic State militants who have used the money to wage war in Iraq and Syria, authorities and terrorism experts say. Danish officials said this week that 29 citizens were given $100,000 in public pension benefits because they were considered too ill or disabled to work, and they then fled to Syria to fight for the radical group. …Other countries that also have paid benefits to Islamic State fighters…It took eight months before welfare authorities cut off benefits paid to a Swedish national who had joined the terror group in its Syrian stronghold Raqqa. …Authorities concluded that several of the plotters in the Brussels and Paris terror attacks that killed 162 people in 2015 and 2016 were partly financed by Belgium’s social welfare system while they planned their atrocities. …radical Islamic cleric Anjem Choudary, who was jailed for terrorist activities, urged followers to claim “jihadiseeker’s allowance” — a reference to the nation’s welfare system. His phrase echoes a manual released by the militant group in 2015. How to Survive in the West: A Mujahid Guide advises that “if you can claim extra benefits from a government, then do so.”
By the way, I don’t know whether to laugh or cry about the Belgian government’s response.
Are they reducing the welfare state? Of course not.
But you’ll be happy to know that imprisoned radicals lose access to the government teat.
Philippe de Koster, director of Belgium’s agency that fights money laundering and terrorism financing, said steps have since been taken to prevent that from happening again. For example, those convicted of terrorism can no longer receive benefits while in jail.
I’ve already written about welfare-subsidized terrorism in the Nordic nations.
Here’s another story about developments in Scandinavia.
The report examined hundreds of individuals who left to join extremist groups such as Islamic State (IS, formerly ISIS/ISIL) between 2013 and 2016. Commissioned at the request of the Financial Supervisory Authority, it has found that the majority was still receiving living allowance, child benefit, maintenance support and parental benefits while abroad, having other people handle their mail to make it look like they were still at home.
Close to every person who left Sweden to fight for terror groups in the Middle East received welfare to support themselves abroad, according to a new government report. A study of 300 Swedish citizens who fought in Syria and Iraq between 2013 and 2016 shows jihadis are getting increasingly good at getting away with welfare fraud. The individuals often use a person in Sweden to handle paperwork and create the illusion that they’re still in the country. …The most attractive option are government loans to study abroad. The loans are easy to get and thousands of dollars are paid out at once. …The Danish Security and Intelligence Service (PET) recently identified several cases of Danish citizens receiving early pension because they were deemed too sick or disabled to work. They later left the country to fight for Islamic State while the payments continue to get deposited into their accounts. …PET has tried to cut off the benefits since 2014, but current legislation doesn’t allow the payment agency to cut early pensions simply because the recipient is believed to be a terrorist.
Let’s close with something that it either astounding or depressing, or actually both. All of the examples cited above are nations with bloated welfare states. Governments in all those countries consume more than 40 percent of economic output, and more than 50 percent of GDP in some cases.
Belgium is in that latter category, yet one official actually said that it was very difficult to fight terrorism “due to the small size of the Belgian government.”
To me, this is a reminder that the natural incompetence of government becomes worse the bigger it gets.
P.S. Today’s column mocks European government for welfare-subsidized terrorism, but American readers should be careful about throwing stones in glass houses.
And the U.S. refugee program includes automatic eligibility for handouts, making it, in part, a “terrorist-funding welfare scam.”
P.P.S. I suppose a concluding caveat would be appropriate. I’m not making an argument that welfare causes terrorism. That almost would be as silly as the leftists who claim that terrorism is caused by inequality or climate change. Though I do wonder whether people who get government handouts feel a sense of self-loathing that leaves them vulnerable to jihadist ideology.
In the Dirty Harry movies, one of Clint Eastwood’s famous lines is “Go ahead, make my day.”
I’m tempted to say the same thing when I read about politicians proposing economically destructive policies. Indeed, I sometimes even relish the opportunity. I endorsed Francois Hollande back in 2012, for instance, because I was confident he would make the awful French tax system even worse, thus giving me lots of additional evidence against class-warfare policies.
Here’s a description of the proposal from Sacramento Bee.
It would cost $400 billion to remake California’s health insurance marketplace and create a publicly funded universal health care system, according to a state financial analysis released Monday. California would have to find an additional $200 billion per year, including in new tax revenues, to create a so-called “single-payer” system, the analysis by the Senate Appropriations Committee found. …Steep projected costs have derailed efforts over the past two decades to establish such a health care system in California. The cost is higher than the $180 billion in proposed general fund and special fund spending for the budget year beginning July 1. …Lara and Atkins say they are driven by the belief that health care is a human right and should be guaranteed to everyone, similar to public services like safe roads and clean drinking water. …Business groups, including the California Chamber of Commerce, have deemed the bill a “job-killer.” …“It will cost employers and taxpayers billions of dollars and result in significant loss of jobs in the state,” the Chamber of Commerce said in its opposition letter.
Yes, you read correctly. In one fell swoop, California politicians would more than double the fiscal burden of government. Without doubt, the state would take over the bottom spot in fiscal rankings (it’s already close anyhow).
Part of me hopes they do it. The economic consequences would be so catastrophic that it would serve as a powerful warning about the downside of statism.
The Wall Street Journalopines that this is a crazy idea, and wonders if California Democrats are crazy enough to enact it.
…it’s instructive, if not surprising, that Golden State Democrats are responding to the failure of ObamaCare by embracing single-payer health care. This proves the truism that the liberal solution to every government failure is always more government. …California Lieutenant Governor Gavin Newsom, the frontrunner to succeed Jerry Brown as Governor next year, is running on single-payer, which shows the idea is going mainstream. At the state Democratic convention last weekend, protesters shouted down speakers who dared to ask about paying for it. The state Senate Appropriations Committee passed a single-payer bill this week, and it has a fair chance of getting to Mr. Brown’s desk.
As the editorial implies, the state’s death will come much faster if this legislation is adopted.
A $200 billion tax hike would be equivalent to a 15% payroll tax, which would come on top of the current 15.3% federal payroll tax. …The report dryly concludes that “the state-wide economic impacts of such an overall tax increase on employment is beyond the scope of this analysis.”
California’s forecasting bureaucrats may not be willing to predict the economic fallout from this scheme, but it’s not beyond the scope of my analysis.
Ed Morrissey, in a column for The Week, explains why this proposal is bad news. He starts by observing that other states have toyed with the idea and wisely backed away.
Vermont had to abandon its attempts to impose a single-payer health-care system when its greatest champion, Gov. Peter Shumlin, discovered that it would cost far more than he had anticipated. Similarly, last year Colorado voters resoundingly rejected ColoradoCare when a study discovered that even tripling taxes wouldn’t be enough to keep up with the costs.
So what happens if single payer is enacted by a state and costs are higher than projected and revenues are lower than projected (both very safe assumptions)?
The solutions for…fiscal meltdown in a single-payer system…all unpleasant. One option would be to cut benefits of the universal coverage, and hiking co-pays to provide disincentives for using health care. …The state could raise taxes for the health-care system as deficits increased, which would amount to ironic premium hikes from a system designed to be a response to premium hikes from insurers. Another option: Reduce the payments provided to doctors, clinics, and hospitals for their services, which would almost certainly drive providers to either reduce their access or leave the state for greener pastures.
By the way, I previously wrote about how Vermont’s leftists wisely backed off single-payer and explained that this was a great example of why federalism is a good idea.
Simply stated, even left-wing politicians understand that it’s easy to move across state lines to escape extortionary fiscal policy. And that puts pressure on them to be less greedy.
Using the same reasoning, I’ve also explained why it would be good news if California seceded. People tend to be a bit more rational when it’s more obvious that they’re voting to spend their own money.
Though maybe there’s no hope for California. Let’s close by noting that some Democrat politicians in the state want to compensate for the possible repeal of the federal death tax by imposing a huge state death tax.
In a column for Forbes, Robert Wood has some of the sordid details.
California…sure does like tax increases. …The latest is a move by the Golden State to tax estates, even if the feds do not. …A bill was introduced by state Sen. Scott Wiener (D-San Francisco), asking voters to keep the estate tax after all. …if the feds repeal it, and California enacts its own estate tax replacement, will all the billionaires remain, or will high California taxes spark an exodus? It isn’t a silly question.
Of course billionaires will leave the state. And so will many millionaires. Yes, the weather and scenery are nice, but at some point rich people will do a cost-benefit analysis and decide it’s time to move.
And lots of middle-class jobs will move as well. That’s the inevitable consequence of class-warfare policy. Politicians say they’re targeting the rich, but the rest of us are the ones who suffer.
Will California politicians actually move forward with this crazy idea? Again, just as part of me hopes the state adopts single-payer, part of me hopes California imposes a confiscatory death tax. It’s useful to have examples of what not to do.
The Golden State already is in trouble. If it becomes an American version of Greece or Venezuela, bad news will become horrible news and I’ll have lots of material for future columns.
Every time I’ve gone overseas in the past six months, I’ve been peppered with questions about Donald Trump. It doesn’t matter whether my speech was about tax reform, entitlements, fiscal crisis, or tax competition, most people wanted to know what I think about The Donald.
What I find galling, though, is when I get follow-up questions – and this happens a lot, especially in Europe – asking how it is possible that the United States could somehow go from electing a wonderful visionary like Obama to electing a dangerous clown like Trump.
Since I’m not a big Trump fan, I don’t particularly care how they characterize the current president, but I’m mystified about the ongoing Obama worship in other nations. Even among folks who otherwise are sympathetic to free markets.
And my favorite factoid has been the 2013 poll showing that Reagan would have trounced Obama in a hypothetical matchup.
I especially like sharing that data since many foreigners think Reagan wasn’t a successful President. So when I share that polling data, it also gives me an opportunity to set the record straight about the success of Reaganomics.
I’m motivated to write about this topic because I’m currently in Europe and earlier today I wound up having one of these conversations in the Frankfurt Airport with a German who noticed my accent and asked me about “crazy American politics.”
I had no problem admitting that the political situation in the U.S. is somewhat surreal, so that was a bonding moment. But as the conversation progressed and I started to give my standard explanation about Obama being a dismal president and I shared the 2013 poll, my German friend didn’t believe me.
So I felt motivated to quickly go online and find some additional data to augment my argument. And I was very happy to find a Quinnipiac poll from 2014. Here are some of the highlights, as reported by USA Today.
…33% named Obama the worst president since World War II, and 28% put Bush at the bottom of post-war presidents. “Over the span of 69 years of American history and 12 presidencies, President Barack Obama finds himself with President George W. Bush at the bottom of the popularity barrel,” said Tim Malloy, assistant director of the Quinnipiac University Poll. …Ronald Reagan topped the poll as the best president since World War II, with 35%. He is followed by presidents Bill Clinton (18%) and John F. Kennedy (15%).
Yes, Ronald Reagan easily was considered the best President in the post-World War II era.
Here’s the relevant chart from the story. Kudos to the American people from giving the Gipper high scores.
And what about the bottom of the list?
Here’s the chart showing Obama edging out George W. Bush for last place.
By the way, I suspect these numbers will look much different in 50 years. I’m guessing many Republicans picked Obama simply because he was the most recent Democrat president and a lot of Democrats picked W because he was the most recent Republican President.
With the passage of time, I think Nixon and Carter deservedly will get some of those votes (and I think LBJ deserves more votes as the worst president, for what it’s worth).
The bottom line, though, is that I now have a second poll to share with foreigners.
P.S. If there’s ever a poll that isn’t limited to the post-World War II era, I would urge votes not only for Reagan, but also for Calvin Coolidge and Grover Cleveland.
But those are arguments that I make all the time. Today, I want to call attention to the mid-point of the interview when I explain that President Trump is actually in a strong position to get a win, notwithstanding all the rhetoric about his budget being “dead on arrival.”
Simply stated, while he can’t force Congress to enact a bill that reforms entitlements, his veto power means he can stop Congress from appropriating more money that he wants to spend.
But if he wants to win that battle, he needs to be willing to allow a partial government shutdown.
Which he wasn’t willing to let happen when he approved a bad deal a few weeks ago to fund the government for the rest of the 2017 fiscal year.
But we have some good news. He may have learned from that mistake, at least if we take this tweet seriously.
either elect more Republican Senators in 2018 or change the rules now to 51%. Our country needs a good "shutdown" in September to fix mess!
Amen. Trump should be firm and explicitly warn Congress that he will veto any appropriations bill that spends one penny above what he requested in his budget.
And if Congress doesn’t comply, he should use his veto pen and we’ll have a partial shutdown, which basically effects the “non-essential” parts of the federal government that presumably shouldn’t be funded anyhow.
The only way Trump loses that fight is if enough Republicans join with Democrats to override his veto. But that’s unlikely since it is mostly Democrat constituencies (government bureaucrats and other recipients of taxpayer money) who feel the pinch if there’s a partial shutdown.
This is a big reason why, as we saw during the Clinton years, it’s Democrats who begin to cave so long as Republicans don’t preemptively surrender.
The bottom line is that being tough on the budget isn’t just good policy. As Ronald Reagan demonstrated, there are political rewards when you shrink the burden of government and enable faster growth.
P.S. I’m not convinced that Trump actually wants smaller government, but I hope I’m wrong. This upcoming battle will be very revealing about where he really stands.
P.P.S. And if we do have a shutdown fight, I hope it will generate some amusing political humor, such as what’s at the bottom of this post. Other examples of shutdown-related humor can be enjoyed by clicking here, here, here, here, and here.
What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?
1. Should the rate be lowered because it’s embarrassing that America has the highest corporate tax rate in the developed world, and perhaps the entire world? That’s certainly a persuasive reason for a lower rate.
3. Should the rate be lowered so companies no longer will have a big incentive to “invert” to other countries? That’s probably a strong argument for some people, but not for me since I’ve never objected to inversions.
4. Should the rate be lowered to mitigate the anti-competitive impact of America’s worldwide tax system? Sure, that would help, but I would prefer to directly solve the problem by shifting to territorial taxation.
6. Should the rate be lowered because the corporate tax is actually a levy on workers, consumers, and shareholders? It is silly that we pretend to tax companies when the ultimate tax is paid by individuals.
7. Should the rate be lowered to reduce the bias for debt? A lower rate would mitigate that problem, though it would be better to directly solve the problem by getting rid of the double tax on dividends.
8. Should the rate be lowered to reduce the amount of money going to Washington? I’m in favor of “starving the beast,” but a lower corporate rate may not be effective because there will be considerable revenue feedback.
9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.
I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.
Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.
And the mere prospect that the United States will improve its tax system is already reverberating around the world.
The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.
The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.
A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?
I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.
The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.
China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”
Amen.
Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.
As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.
Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.
Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.
President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.
My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.
For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.
That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
Block-granting Medicaid and reducing central government funding and control.
Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).
I hope these cuts are implemented.
In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.
The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.
My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reasoncolumn.
President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.
And he explains why in the article. Here’s the passage that caught my eye.
Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”
The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.
The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.
By the way, one study even found that foreign aid undermines democracy.
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.
Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.
President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.
Heck, foreign aid keeps societies in poverty by enabling bigger government.
Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.
The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.
P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.
Here are the three most important things to understand about what the President has proposed.
First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.
Second, government spending will grow by an average of almost 3.5 percent per year over the next 10 years.
Third, because the private economy is projected to grow by an average of about 5 percent per year (in nominal terms), Trump’s budget complies with the Golden Rule of fiscal policy.
Now that we’ve established a few basic facts, let’s shift to analysis.
But for those who prefer to see the glass as half-full, here are a couple of additional takeaways from the budget.
Fourth, as I wrote yesterday, there is real Medicaid reform that will restore federalism and save money.
Fifth, domestic discretionary spending will be curtailed.
But not just curtailed. Spending in the future for this category will actually be lower if Trump’s budget is approved. In other words, a genuine rather than fake budget cut.
I’ll close with my standard caveat that it’s easy to put good ideas (or bad ideas) in a budget. The real test is whether an Administration will devote the energy necessary to move fiscal reforms through Congress.
Based on how Trump was defeated in the battle over the final spending bill for the current fiscal year, there are good reasons to be worried that good reforms in his budget won’t be implemented. Simply stated, if Trump isn’t willing to use his veto power, Congress will probably ignore his proposals.
P.S. You may have noticed that I didn’t include any discussion of deficits and debt. And I also didn’t address the Administration’s assertion that the budget will be balanced in 10 years if Trump’s budget is approved. That’s because a fixation on red ink is a distraction. What really matters is whether the burden of spending is falling relative to the private sector’s output. In other words, the entire focus should be on policies that generate spending restraint and policies that facilitate private sector growth. If those two goals are achieved, the burden of red ink is sure to fall. Whether it happens fast enough to balance the budget in 2027 is of little concern.
When President Trump released his so-called “skinny budget” back in March (dealing with the parts of Leviathan that are annually appropriated), I applauded several of the specific recommendations.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
The only problem is that I didn’t sense – and still don’t see – any serious effort to push through these much-needed fiscal reforms (and the same is true for his proposed tax cut).
The bottom line is that Trump has the power to achieve the bulk of his agenda, but only if he is willing to veto pork-filled bills and force a partial government shutdown. But he’s already blinked once in this type of battle, so the spending lobbies feel confident that he can be rolled again.
But let’s set that aside. The White House is about to release the President’s full budget and there already is considerable angst about potential reforms to Medicaid. Here are some excerpts from a report in the Washington Post.
President Trump’s first major budget proposal on Tuesday will include massive cuts to Medicaid…more than $800 billion over 10 years. …Trump’s decision to include the Medicaid cuts is significant because it shows he is rejecting calls from a number of Senate Republicans not to reverse the expansion of Medicaid that President Barack Obama achieved as part of the Affordable Care Act. The House has voted to cut the Medicaid funding… The proposed changes will be a central feature of Trump’s first comprehensive budget plan…it will seek changes to entitlements — programs that are essentially on autopilot and don’t need annual authorization from Congress.
I have two reactions to this story.
First, the Washington Post is lying (and not for the first time). There will be no Medicaid cuts in Trump’s budget. Contrary to the headline, there aren’t “big cuts” and there won’t be any “slashing.” We won’t see the actual numbers until tomorrow, but I can state with complete certainty that the Trump Administration is merely going to propose a reduction in how fast the program’s budget increases.
Second, it’s a very good idea to slow down the growth of Medicaid spending.
Here is some background information on the program, starting with an article in The Week by Shikha Dalmia
Medicaid is arguably the civilized world’s worst health insurance program. …This joint federal and state program has historically allowed the feds to give states 50 cents for every dollar they spent on purchasing health coverage for the poor. Because of this federal largesse, Medicaid has grown astronomically, becoming the single biggest ticket item on virtually every state budget. …President Obama essentially money-bombed states into expanding it even further. He told states that Uncle Sam would pick up 100 percent of the tab for the first three years for every additional person they covered up to 138 percent of the poverty level. …Medicaid now covers almost 75 million Americans. And even before ObamaCare took effect, Medicaid paid for almost half of all births in America. …The combined annual cost of the program now exceeds half a trillion dollars (with the feds’ share at 63 percent and states’ at 37 percent) — which adds up to roughly $7,000 for every man, woman, and child covered by the program. …Several reputable studies have found that Medicaid patients experience no better health outcomes than uninsured people, and arguably even slightly worse outcomes. …ObamaCare is like a Rube Goldberg contraption. Taking it apart and reassembling it is easier said than done — even if it’s the right and smart thing to do. And if Republicans can’t figure out a way to do so, American patients and taxpayers will be the big losers.
And here are some excerpts from a Wall Street Journaleditorial.
The…important goal is to change the incentives over the long term and eliminate the perverse formulas that discount the welfare of the truly needy. …A helpful revolution in Medicaid would be to end the match rate that rewards higher spending and move to block grants. States would get some fixed pot of money annually, determined by how many people are enrolled. The pots might be expensive in the early years, but states would become accountable for marginal per capita spending growth over time. Governors can be assuaged by ending Medicaid’s command-and-control regulatory model, freeing them to use new tools to control costs.
James Capretta of the American Enterprise has additional details, particularly showing how the “federal medical assistance percentage” encourages higher spending.
In 1965, the authors of Medicaid thought they were creating a program that would provide federal structure, uniformity, and some funding for the many state programs that were already providing relatively inexpensive “indigent care” services to low-income households. …Medicaid has grown into the largest health care program in the country by enrollment, with 66 million participants and with annual federal and state costs of more than $550 billion. …Medicaid spending has increased rapidly nearly every year since the program was enacted, creating significant pressure in federal and state budgets. …The Medicaid FMAP is the fundamental flaw in the program’s current design and the main reason it is so costly. States can initiate new spending in Medicaid—spending that often will boost economic activity in the state—and federal taxpayers pay for at least half the cost. At the same time, savings from state-initiated Medicaid-spending cuts are also shared with federal taxpayers. For instance, in a state where the FMAP is 60 percent, the governor and state legislators face the unattractive prospect of keeping only $1.00 of every $2.50 in Medicaid savings they can identify and implement. The other $1.50 goes to the federal treasury. Put another way, governors and state legislators are reluctant to impose $2.50 in budgetary pain for a $1.00 gain to their bottom line.
The solution to this rigged system, he explains, is block grants or per-capita caps.
The…important structural change would be the switch to some form of fixed federal funding to states. The federal government would continue to heavily support the Medicaid program, but the commitment would have a limit, which would give states a strong incentive to manage the program for efficiency and cost control. One approach would be a block grant. Under a block grant, the federal government would make fixed, aggregate payments to the states based on historical spending patterns. Cost overruns at the state level would require the state to find additional resources within the state budget. Conversely, states that were able to control costs would enjoy the full benefits of their efforts. …Under per capita caps, the federal government would establish for each state a per-person payment for each of the main eligibility categories in the Medicaid program: the elderly, the blind and disabled, nondisabled adults, and children. The federal government would then make payments to the states based on the number of Medicaid enrollees in each of these categories. The per capita payment would be based on historical spending rates for the various categories of beneficiaries in each state and, again, would be indexed to a predetermined growth rate.
In a 2012 column for Forbes, Avik Roy explains why reform will produce good results.
People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. …there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
Writing for the Wall Street Journal, Professor Regina Herzlinger and Dr. Richard Boxer elaborate on how a new system would work.
Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts. …Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.
Nicholas Eberstadt, in an article for Commentary, points out the Medicaid is an employment killer.
21st-century America has witnessed a dreadful collapse of work. …According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). …means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age.
And the icing on the cake is that Medicaid finances much of the opioid problem in America.
[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. …For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street. …Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.
And if we want a cherry on top of the icing, Medicaid also is a cesspool of fraud, as reported by Reason.
Every year, the Government Accountability Office (GAO) releases a report putting a dollar figure on the amount of improper payments in Medicaid. …it shows that the program…spends a substantial portion of its annual budget…On fraud, on waste, on services not rendered, not medically necessary, or incorrectly billed. Last year, for example, the GAO found that about 9.8 percent of federal Medicaid expenditures, or about $29 billion, was spent improperly. …This year, the total has risen once again. About 10.5 percent, or $36 billion, of federal spending on the program isn’t up to snuff, according to a GAO report released this morning.
Last but not least, Charlie Katebi discusses Medicaid problems in a column for the Federalist.
Trump advisor Kellyanne Conway said Trump wants to “block-grant Medicaid to the states” to ensure “those who are closest to the people in need will be administering.” …Block grants would cap federal Medicaid funding and let states decide how to use those dollars. It would introduce flexibility and budget discipline to a program that sorely needs both. …Medicaid’s funding formula incentivizes policymakers to expand the program at the expense of core state government functions. …Medicaid’s structure also hurts its beneficiaries. …Washington bars reformers from making meaningful changes without going through a lengthy and restrictive approval process. This forces states to control costs the only way they can: paying doctors less. States have cut Medicaid’s reimbursement so low that many providers simply refuse to treat its beneficiaries. …Block grants promise to break Medicaid’s vicious cycle of rising costs and declining care. Spendthrift politicians would no longer be able to expand Medicaid and expect the federal government to foot the bill. But state-level reformers will enjoy greater authority to streamline and improve the program.
I may as well close with the video I narrated for the Center for Freedom and Prosperity.
The video was released in 2011, but nothing has changed…except that the numbers today are far worse, in part because of Obama’s Medicaid expansion.
So it’s time to assess overall economic policy in India, which means this is an opportunity to point out that there are some positive developments in the world’s second-most populous nation.
One of my Cato colleagues, Swaminathan S. Anklesaria Aiyar, wrote an exhaustive study on India’s economy last year. The bottom line is that there’s been some progress, most of which took place in the 1990s.
India’s economic reforms over 25 years have transformed it from a low-income country to a middle-income one. But to become a high-income country, India must liberalize the economy much further.
At the risk of oversimplification, India has gone through three phases since its independence after World War II.
It began with a long period of statism and socialism.
Here are some additional excerpts from the study describing that grim period. And I’ve augmented those passages with India’s awful score from Economic Freedom of the World in 1975, when it only scored 4.33 on a 0-10 scale.
…until 1990, India was…hamstrung by a million controls, imposed in the holy name of socialism and then used by politicians to create patronage networks and line their pockets. …The public sector was supposed to gain the commanding heights of the economy. Nothing could be manufactured without an industrial license or imported without an import license, and those licenses were scarce and difficult to get. Any producers who exceeded their licensed capacity faced possible imprisonment for the sin of violating the government’s sacred plan targets. …Indian socialism reached its zenith in the 1970s, when the banks and several major industries were nationalized. The top income tax rate rose to 97.75 percent, and the wealth tax to 3.5 percent. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. Meanwhile, the population virtually doubled, meaning the absolute number of poor people doubled.
Now let’s look at some good news.
There was a small amount of reform in the 1980s, which became much more significant amount of reform in the 1990s.
In 1991 India embarked on major reforms to liberalize its economy after three decades of socialism… P. V. Narasimha Rao became prime minister in 1991. The Soviet Union was collapsing at the time, proving that more socialism could not be the solution for India’s ills. Meanwhile, Deng Xiaoping had revolutionized China with market-friendly reforms. And so Indian politicians turned in the direction of the market too. …After 1991 direct tax rates gradually came down substantially… The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent.
Notice, by the way, that lower tax rates led to more tax receipts. Yet another piece of evidence for the Laffer Curve.
Though I’m much more interested in whether people benefited, not whether politicians collected more money.
And the paper reveals that the reform era generated significant dividends.
Twenty-five years later, the outcome has been an outstanding economic success. India has gone from being a poor, slow growing country to the fastest-growing major economy in the world in 2016. …Per capita income is up from $375 per year in 1991 to $1,700 today. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country. …areas that were comprehensively liberalized saw the disappearance of corruption. Before 1991, bribes were needed for industrial licenses, import licenses, foreign exchange allotments, credit allotments, and much else. But economic reform ended industrial and import licensing, and foreign exchange became freely available. Lower import and excise duties ended most smuggling and excise tax evasion
There’s even been good news on poverty.
Now let’s shift to bad news. Simply stated, India needs a lot more reform, but it doesn’t seem to be happening.
As illustrated by this chart showing the country’s annual scores from Economic Freedom of the World, India is mired in a modern era of policy stagnation.
In other words, so much more is needed to help India become a rich nation. Yet the reform agenda has been spotty in the past two decades, or even nonexistent.
Here are some final excerpts, accompanied by India’s most-recent EFW scores.
Many old price and quantitative controls should be abolished, and yet more are being enacted. Extensive controls permeate the entire chain of agricultural inputs, outputs, and processed agricultural goods (notably sugar). New price controls have been clamped on seeds and even on royalties paid by seed companies to suppliers of technology. The tax regime is uncertain, and many cases of retrospective taxation have tarnished the investment climate. …Even as old controls have been liberalized, dozens of new regulations are issued every year relating to new areas like the environment, health and safety standards, forests, and tribal areas. As with the old controls, the new controls are issued in the name of the public good and are then used by politicians and inspectors to line their pockets. …The bureaucracy is notoriously corrupt and slow moving… Public-sector corporations remain large, wasteful, and unreformed. Government banks still control 70 percent of bank lending, have the worst record of bad loans and financial losses, and yet are such convenient cash cows for politicians that no party wants to privatize them. …To reach high-income status, India must become a much better governed country that opens markets much further.
The good news, if you compare the 1975 and 2014 EFW scores, is that India now enjoys much more freedom than it did at the peak of the socialist era.
That being said, there are 111 nations with more economic freedom, so there is a lot of room for improvement.
Let’s close with a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.
Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?
For almost all of human history, the norm for 99 percent of the population was poverty and deprivation.
Then, starting a few hundred years ago, something amazing happened. There was a sudden explosion of prosperity. In past years, I’ve shared two videos explaining this remarkable phenomenon, which is linked to the unleashing of free markets, the rule of law, and property rights.
Now let’s look at some similar data, but for a different purpose. Here are some fascinating charts put together by Professor Max Roser of Oxford. As you can see at the top, almost everybody used to be poor. But as you look below, you’ll notice that an increasing share of the world’s population is middle class or above.
There are three takeaways from this data.
The first conclusion, as noted above, is that the world is getting richer. Hundreds of millions of people have been lifted out of extreme poverty. That’s wonderful news.
The second conclusion, as seen by the red section of the chart, is that a modest bit of reform in India and China has paid big dividends (and, given the success of Indian-Americans and Chinese-Americans, I imagine those nations could become much richer with additional market-friendly reform).
But I want to focus today on a third conclusion, which is that pro-growth policies are the best way to help the poor, not redistribution driven by a fixation on inequality.
More specifically, notice how there was a lot of inequality in the chart for 1975, particularly compared to the chart for 1800. My leftist friends, with their flawed belief that the economy is a fixed pie, would instinctively assume that Europe and the Americas somehow became comparatively rich because Asia and Africa stayed comparatively poor.
In reality, the real story is that the economies of the western world expanded because they found the recipe for growth and prosperity.
And the 2015 chart shows that the rest of the world is finally moving in that direction as well (as confirmed by long-run data from Economic Freedom of the world).
What would have happened, however, if our friends on the left had control of global policy in 1975 and imposed high tax rates in order to redistribute lots of income from rich nations to poor nations? In other words, what would have happened if they imposed on the world the policies that they try to impose in various nations?
If that had happened, the world economy would have underperformed. As Thomas Sowell has explained, such policies penalize productive behavior and subsidize unproductive behavior.
It’s possible that such policies would have reduced inequality, to be sure, but global income would have been far lower.
It also makes your life very simple. Here’s a list that shows why it’s so easy to be a libertarian. You basically decide that you’re not going to tell other people what sort of decisions they’re allowed to make. I guess you could call it a “mind your own business” or a “live and let live” approach to life. I call it basic politeness.
By the way, none of this implies you have to like the decisions of other people. Libertarianism is about tolerance, not approval.
I’ve already admitted, for instance, that I don’t like drugs, gambling, and prostitution. But that doesn’t mean that I want to use government coercion to stop other people from those activities.
The bottom line is that libertarians want people to be free to make their own choices so long as they’re not infringing on the rights of others (which is why “Don’t like murder? Don’t commit one” doesn’t belong on the above list).
Now that I’ve explained why it’s easy to be libertarian, now let’s look at why it can make your life difficult.
Simply stated, if you value individual liberty, you can drive yourself crazy thinking about all the foolish and counterproductive policies imposed by governments.
To make matters worse, it’s very difficult to ignore the bad policies of government. It’s not like you can simply choose not to pay tax.
So until Liberland gets going and we have an option of a free society, this image is a good summary of why it’s difficult to be a libertarian.
It doesn’t matter whether you’re a hardcore anarcho-capitalist, classical liberal, small-government conservative, or run-of-the-mill libertarian, you’ll be coerced into something you don’t like thanks to big government.
P.S. I found both these images on Reddit‘s Libertarian page. Always a fun place to visit.
P.P.S. While we’re waiting for Liberland, the three best options for libertarians are Hong Kong, Switzerland, and New Zealand.
Nations usually don’t suffer overnight economic collapse. Indeed, Adam Smith was right about the ability of a country to survive and withstand lots of bad public policy.
But at some point, as a nation gravitates in the wrong direction on the statism spectrum, it goes from prosperity to stagnation to decline.
But Venezuela is even worse. It’s going from prosperity to stagnation to decline to collapse.
In a must-read article for the Mises Institute, José Niño explains how cronyism and redistributionism helped to sap Venezuela’s economy way before Chavez and Maduro made a bad situation far worse.
While Chávez and his successor Nicolás Maduro deserve the brunt of the blame for Venezuela’s current economic calamity, the underlying flaws of Venezuela’s political economy point to much more systemic problems. …Years of gradual economic interventionism took what was once a country bound to join the ranks of the First World to a middle-tier developing country. This steady decline eventually created an environment where a demagogue like Chávez would completely exploit for his political gain.
But it wasn’t always this way. Indeed, Venezuela at one point was market-oriented and prosperous.
From the 1910s to the 1930s, the much-maligned dictator Juan Vicente Gómez…modernized an otherwise neocolonial backwater by allowing market actors, domestic and foreign, to freely exploit newly discovered oil deposits. Venezuela would experience substantial economic growth and quickly establish itself as one of Latin America’s most prosperous countries by the 1950s. In the 1950s, General Marcos Pérez Jiménez would continue Gómez’s legacy. At this juncture, Venezuela was at its peak, with a fourth place ranking in terms of per capita GDP worldwide. …A combination of a relatively free economy, an immigration system that attracted and assimilated laborers from Italy, Portugal, and Spain, and a system of strong property rights, allowed Venezuela to experience unprecedented levels of economic development from the 1940s up until the 1970s.
But the seeds of economic decline were planted during this time.
Pérez Jiménez did introduce some elements of crony capitalism, pharaonic public works projects, and increased state involvement in “strategic industries” like the steel industry. …social democrat political leader Rómulo Betancourt would…assume the presidency from 1959 to 1964. The Fourth Republic of Venezuela — Venezuela’s longest lasting period of democratic rule, was established… Venezuela’s Fourth Republic marked the beginning of a process of creeping socialism that gradually whittled away at Venezuela’s economic and institutional foundations. …Betancourt still believed in a very activist role for the State in economic matters. Betancourt was part of a generation of intellectuals and student activists that aimed to fully nationalize Venezuela’s petroleum sector and use petroleum rents to establish a welfare state… At its core, this vision of economic organization assumed that the government must manage the economy through central planning.
And policy went further left in the 1970s. And beyond.
in 1975, …Carlos Andrés Pérez’s government nationalized the petroleum sector. The nationalization of Venezuela’s oil industry fundamentally altered the nature of the Venezuelan state. Venezuela morphed into a petrostate, in which the concept of the consent of the governed was effectively turned on its head. Instead of Venezuelans paying taxes to the government in exchange for the protection of property and similar freedoms, the Venezuelan state would play a patrimonial role by bribing its citizens with all sorts of handouts to maintain its dominion over them. …Pérez would take advantage of this state power-grab to finance a profligate welfare state and a cornucopia of social welfare programs… Venezuela’s economy became overwhelmingly politicized. …the nationalization of the petroleum industry…laid the groundwork for institutional decay that would clearly manifest itself during the 80s and 90s.
Jose’s article is a valuable contribution to the discussion.
But bad policy has caused economic decline, and bad policy has accelerated as the country has shifted from cronyism and vote buying to explicit socialism (otherwise known as entering the fourth circle of statist hell).
Let’s look at what big government has produced in Venezuela.
An article in Foreign Policy sees parallels in the collapse of the Soviet Union and the disintegration of Venezuela.
Venezuela is not the first developed country to put itself on track to fall into a catastrophic economic crisis. But it is in the relatively unusual situation of having done so while in possession of enormous oil assets. …the Soviet Union’s similar devastation in the late 1980s…may be instructive for Venezuela… The Venezuelan government, though it doesn’t claim to be full-fledged in its devotion to Marxism-Leninism, has been pursuing as absurd an economic policy mix as its Soviet predecessor. It has insisted for years on maintaining drastic price controls… the government financed the budget deficit by printing money. The inevitable result was skyrocketing inflation. …The collapse of the Maduro regime will not be pretty, but it is difficult to see how it can be avoided.
Hopefully, the collapse will happen quickly.
A thoroughly depressing story in the Wall Street Journal reveals the suffering of the country’s poor people.
Jean Pierre Planchart, a year old, has…a cry that is little more than a whimper. His ribs show through his skin. He weighs just 11 pounds. His mother, Maria Planchart, tried to feed him what she could find combing through the trash—scraps of chicken or potato. She finally took him to a hospital in Caracas, where she prays a rice-milk concoction keeps her son alive. …Her country was once Latin America’s richest, producing food for export. Venezuela now can’t grow enough to feed its own people in an economy hobbled by the nationalization of private farms, and price and currency controls. …Venezuela has the world’s highest inflation—estimated by the International Monetary Fund to reach 720% this year—making it nearly impossible for families to make ends meet. Since 2013, the economy has shrunk 27%… Hordes of people, many with children in tow, rummage through garbage… People in the countryside pick farms clean at night, stealing everything from fruits hanging on trees to pumpkins on the ground, adding to the misery of farmers hurt by shortages of seed and fertilizer. Looters target food stores. Families padlock their refrigerators. …Dr. Machado and her team of doctors are seeing a dramatic increase in emaciated infants brought to the Domingo Luciani Hospital in Caracas, where they work. …The most recent Caritas study of 800 children under the age of 5 in Yare and three other communities showed that in February nearly 11% suffered from severe acute malnutrition, which is potentially fatal…nearly a fifth of children under age 5 in those four communities suffered from chronic malnutrition. …Nearly a third of Venezuelans, 9.6 million people, eat two or fewer meals a day…four of out five in the nation are now poor.
But not everyone is suffering, reports the U.K.-based Times.
Ministers in President Maduro’s government have been accused of hypocrisy by Venezuelans struggling to feed themselves after it emerged that many children and cronies of senior officials are living abroad in luxury. …The scandal has been likened to that of the “princelings” in China — the sons and daughters of Communist Party officials who have been exposed as leading lavish capitalist lifestyles. The recent series of outings of the children of Maduro’s inner circle began with the case of Lucía Rodríguez, daughter of Jorge Rodríguez, the hard-left mayor of Caracas, and niece of Delcy Rodríguez, the foreign minister. Both politicians routinely describe the opposition in Venezuela as the “bourgeoisie”. After Ms Rodríguez began posting images of her own bourgeois life in Sydney, where she is enrolled in a media studies course at the private SAE university, she was tracked down by an opposition activist to Bondi Beach, where she was photographed surfing and sipping cocktails. …Rumours have long surrounded the suspiciously lavish lifestyles of two of the daughters of Mr Maduro’s predecessor and mentor, Hugo Chávez. María Gabriela Chávez, the late president’s elder daughter, is the deputy ambassador to the United Nations. Opposition MPs claim that she is a billionaire. She has been likened to the socialite Paris Hilton… Many families linked to the Maduro government and former officials have moved to America, despite it being denounced as the evil “imperio” by the president.
Thousands of babies died in Venezuela last year, new official data show, highlighting the tragic impact of the country’s economic crisis… The health ministry said deaths of infants under the age of one soared by 30 percent in 2016, a year when hospitals and protesters complained of severe shortages of medical supplies. Deaths of mothers linked to childbirth soared by two-thirds meanwhile, according to the data published by the ministry — the latest such figures since 2015. …The Venezuelan Medical Federation says hospitals have only three percent of the medicines and supplies that they need to operate normally.
Given these horrifying and outrageous stories, is anyone surprised that this is happening?
There has been violence and widespread looting this week in Valencia, a once bustling industrial hub two hours from the capital by road. In an incident loaded with symbolism, a group of young men destroyed a statue of the late leader Hugo Chávez… Footage shows the statue, which depicts Chávez saluting and wearing a sash, being yanked down to cheers in a public plaza before it is bashed into a sidewalk and then the road as onlookers swear at the leftist, who died in 2013… “Students destroyed this statue of Chávez. They accuse him, correctly, of destroying their future,” the opposition lawmaker Carlos Valero said about the incident… Venezuela’s opposition…now enjoys majority support… Polls show the ruling Socialists would badly lose any conventional vote due to four years of economic crisis that has led to debilitating food and medicine shortages.
Eugenio Vásquez Orellana, who was former Venezuelan President Hugo Chavez’s minister of public banking, probably shouldn’t have gone to a Venezuelan bakery in Miami, Florida. Shouts of “thief” and “rat” rang out as the crowd realized who this man was.
He should be grateful that he wasn’t tarred and feathered. Or worse.
Let’s review some additional examples of Venezuela’s misery.
The Wall Street Journalreports on the plight of low-level government security officials.
Ana, a five-year veteran of the national police, …and her colleagues use tear gas and rubber bullets against increasingly desperate protesters armed with stones, Molotov cocktails and even bags of feces. The showdowns take place in scorching heat, and she says the authorities provide her with no food, water or overtime pay. …She and many of her exhausted colleagues say they are wavering as protests enter a seventh week with no end in sight. “One day I will step aside and just walk away, blend into the city,” she said. “No average officers support this government anymore.” …loyalty…has largely given way to demoralization, exhaustion and apathy amid an economic collapse and endless protests, said eight security officers from different forces and locations… Most of them say they want only to earn a steady wage amid crippling food shortages and a decimated private sector. Others say fear of a court-martial keeps them in line.
While I feel some empathy for poorly paid cops, who are doing bad things but mostly trying to keep their jobs, I have zero sympathy for these elites who merely want to wind up on the winning side.
…as Venezuela sinks into chaos, with clashes between protesters and the police escalating, why have its powerful political and military elites stuck by President Nicolás Maduro? …Demonstrators have overwhelmed city streets, so far undeterred by a police crackdown in which hundreds have been arrested and dozens killed. The violence deepens a monthslong crisis marked by food shortages, economic collapse and Mr. Maduro’s fumbling attempts to consolidate authority. In quasi-democratic systems like Venezuela’s, such pressures have often led elites to force a change, and have provided them an excuse to do so. …splits are beginning to emerge, as a few figures in major institutions signal opposition to Mr. Maduro, hinting at growing dissatisfaction and the government’s inability to silence it. Recent actions by both elites and the government suggest they take the possibility of fracture seriously — maneuvering in a high-stakes contest… Elite fracture operates as a kind of game… Stay loyal to a failing government too long and you risk going down with it. But if you break with the government and others don’t, you’ll pay a high price for disloyalty. …Mr. Maduro can also play this game. He has enabled loyalists to profit from corruption and patronage, giving them a financial stake in the government’s survival. …Drug and food smuggling also generate revenue, including for the military. But as the economy worsens, elites compete over a smaller pie. “When elites begin to compete among themselves, usually somebody defects,” Mr. Levitsky said
Which suggests – fingers crossed – that the regime may soon collapse.
In our 2017 forecast, we predicted that Venezuela’s government would not survive the year. …nationwide protests that seemed to be reaching a critical point, and the problem has not subsided. For more than a month now, large-scale protests against the government have taken place across the country nearly every day. The death toll continues to rise as protests show no sign of stopping. …foreign intervention either in support of the government or of the opposition is not a viable way to end this crisis. …International organizations could also intervene, but they lack the capability or political will to do so. …Without foreign support, the opposition will need to rely heavily on public protests to increase pressure on the Maduro government. …So far, Maduro has resisted resignation and a negotiated exit from power, believing he can withstand the protests against him. …If the military and other security forces can no longer keep the protests in check, it will be a game changer for the Maduro government.
Shifting from news reports to opinion journalism, Kevin Williamson of National Reviewshares his thoughts.
People are starving in Venezuela. That, too, is familiar enough to students of the history of socialism. The Ukrainian language contains a neologism—holodomor—necessitated by the fact that the socialist rulers of that country used agricultural policy to murder by starvation between 2 million and 5 million people who were guilty of the crime of resisting the socialists’ agricultural policy. In the 1990s, famine killed something on the order of 10 percent of the population of North Korea, where people were reduced to cannibalism. A recent study found that the average Venezuelan has lost nearly 20 pounds in the past year as food supplies dwindle. …Hayek and his colleagues in what has become known as the Austrian school of economics, …believed that the central-planning aspirations of the socialists were not simply inefficient or unworkable but impossible to execute, even in principle… Hayek believed that efforts to impose central planning on economies were doomed to fail, and that this failure would not be met with humility but with outrage. …which leads to outright political repression, scapegoating, and violence. …there is something about socialism itself that throws up monsters.
Having endured all these depressing snippets of information (as well as the 28 horrifying headlines I shared last month), your reward is some dark humor.
In a video for Reason, Remy promotes the highly successful Venezuela Diet.
Let’s close with a different type of humor.
It’s time to mock the leftists who went on record in favor of Venezuela’s totalitarian regime.
Recent figures show that a majority of Venezuelans go to bed hungry and 15 percent of people eat garbage to survive. The country desperately lacks basic resources, such as medicine and power. …Venezuela’s problems date back to 1999, with the election of socialist president Hugo Chávez, whose mass redistribution of wealth and financial mismanagement laid the groundwork for the country’s economic collapse. …Chávez’s regime received plaudits from numerous left-wing academics, politicians, and celebrities who have now gone quiet.
Here are a few examples.
The darling of the left, retired MIT professor Noam Chomsky was a supporter of Chávez’s Venezuela and his anti-Americanism, arguing that he brought forward the “historic liberation of Latin America” proving “destructive to the rich oligarchy.”
Actor Sean Penn met with Hugo Chavez on numerous occasions, describing him as a “fascinating guy” who did “incredible things for the 80% of the people that are very poor there.”
Film director Oliver Stone was such a fan of Chávez and the rise Latin American socialism that he made a film about it, entitled South of the Border. In the film, he conducted interviews with the continent’s left-wing leaders, including Chávez, Cuba’s Raúl Castro, Argentina’s Cristina Fernández de Kirchner, and Bolivia’s Evo Morales.
Civil rights activist Jesse Jackson…said there was no evidence that Venezuela posed a threat to the United States, while praising Chávez for his “focus on foreign debt, debt relief, and free and fair trade to overcome years of structural disorder, unnecessary military spending, [and] land reform.” After Chávez’s death, Jackson also offered a prayer at his funeral while celebrating his socialist legacy.
…filmmaker Michael Moore…, after Chávez’s death, …praised him for “eliminating 75 percent of extreme poverty” while “[providing] free health and education for all.”
The leader of the British Labour Party Jeremy Corbyn, …thanked Chávez for allegedly insuring “that the poor matter and wealth can be shared,” adding he had made “massive contributions to Venezuela and the world.”
The economist Joseph Stiglitz, a recipient of a Nobel Laureate, praised Hugo Chávez’s socialist policies whilst on a visit to Caracas in 2007. Speaking at a World Economic Forum, Stiglitz said: “Venezuelan President Hugo Chavez appears to have had success in bringing health and education to the people in the poor neighbourhoods of Caracas.”
And speaking of cosseted left-wing elites, does anyone think Bernie Sanders feels remorse for his support of Venezuela’s evil government? If this interview is any indication, the answer is no.
As far as I’m concerned, no sentient human being could look at what happened in the United States in the 1980s and not agree that high tax rates on upper-income taxpayers are foolish and self-destructive.
Not only did the economy grow faster after Reagan lowered rates, but the IRS even collected more revenue (a lot more revenue) because rich people earned and reported so much additional income.
That should be a win-win for all sides, though there are some leftists who hate the rich more than they like additional revenue.
Anyhow, I raise this example because there are politicians today who think it’s a good idea to go back to the punitive tax policy that existed in the 1970s.
Hillary Clinton proposed big tax hikes in last year’s campaign. And now, as reported by the U.K.-based Times, the Labour Party across the ocean is openly embracing a soak-the-rich agenda.
Labour’s tax raid on the country’s 1.3 million highest earners could raise less than half the £4.5 billion claimed by the party, experts said last night. The policy was announced by Jeremy Corbyn as part of plans to raise £48 billion through tax increases. …At the manifesto’s heart are plans to lower the threshold for the 45p tax rate from £150,000 to £80,000 and introduce a 50p tax band for those earning more than £123,000 a year. …Labour said that the increases could raise as much as £6.4 billion to help to fund giveaways such as the scrapping of tuition fees and more cash for the NHS, schools and childcare.
Here’s a chart from the article, showing who gets directly hurt by Corbyn’s class-warfare scheme.
But here’s the amazing part of the article.
The Labour Party, which has become radically left wing under Corbyn, openly acknowledges that the Laffer Curve is real and that there will be negative revenue feedback.
Under Labour’s calculation, if no one changed their behaviour as a result of the tax changes, a future government would raise an extra £6.4 billion a year. In its spending commitments the party is assuming that the new measures would bring in about £4.5 billion.
This is remarkable. The hard-left Labour Party admits that about 30 percent of the tax increase will disappear because taxpayers will respond by earning and/or reporting less taxable income.
That’s a huge concession to the real world, which is more than Barack Obama or Hillary Clinton ever did. Welcome to the supply side, Jeremy Corbyn!
Moreover, establishment organizations such as the Institute for Fiscal Studies also incorporate the Laffer Curve in their analysis. But even more so.
They say Labour’s class-warfare tax hike would – at best – raise less than half as much as the static revenue estimate.
The IFS said that even this reduced figure looked optimistic and the changes were more likely to raise £2 billion to £3 billion — about half the amount claimed. “The amount of extra revenue these higher tax rates would raise is very uncertain,” Paul Johnson, director of the IFS, said. “What we do know is that raising tax levels on those people earning over £150,000 does not bring in additional revenues because the kind of people on these kinds of incomes are significantly more able to work around the tax system.
Now let’s compared the enlightened approach in the United Kingdom to the more primitive approach in the United States.
The official revenue-estimating body on Capitol Hill, the Joint Committee on Taxation, has only taken baby steps in the direction of dynamic scoring (which is an improvement over their old approach of static scoring, but they still have a long way to go).
Fortunately, there are some private groups who do revenue estimates, similar to the IFS in the UK.
The Committee for a Responsible Federal Budget put together this very useful table comparing how the Tax Foundation and the Tax Policy Center “scored” the Better Way Plan.
The key numbers are in the dark blue rows. As you can see, the Tax Foundation assumes about 90 percent revenue feedback while the left-leaning Tax Policy Center only projects about 22 percent revenue feedback.
Since not all tax cuts/tax increases are created equal, the 22-percent revenue feedback calculation by the Tax Policy Center does not put them to the left of the Labour Party, which assumed 30-percent revenue feedback.
Indeed, the Labour Party’s tax hike is focused on upper-income taxpayers, who do have more ability to respond when there are changes in tax policy, so a high number is appropriate. However, there are some very pro-growth provisions in the Better Way Plan, such as a lower corporate tax rate, expensing, death tax repeal, etc, so I definitely think the Tax Foundation’s projections are closer to the truth.
For policy wonks, Alan Cole of the Tax Foundation explained why their numbers tend to differ.
The bottom line is that we are slowly but surely making progress on dynamic scoring. Even folks on the left openly acknowledge that higher tax rates impose at least some damage. You know what they say about a journey of a thousand miles.
P.S. None of this changes the fact that I still don’t like the BAT, but I freely admit that the economy would grow much faster if the overall Better Way Plan was enacted.
I wrote just yesterday that it’s tough to be a libertarian because “public choice” means never-ending pressure for bigger government.
But the good part of working in public policy as a libertarian is that I never lack for topics. Simply stated, governments do so many foolish things (not just in Washington, but also overseas, as well as state governments and local governments) that I have a target-rich environment for analysis and commentary.
But sometimes there’s a personal motivation. I’m a resident of Fairfax County in Virginia, and my profligate local government levies a very onerous property tax on my house.
And what do I get in exchange? The lion’s share of the county budget goes to government schools, but that doesn’t benefit me since I found those institutions inadequate and put my kids in private schools.
The other major line item in the budget is police and fire protection. I’ve been fortunate to never need those services, but I recognize that they have value. But this still leaves the question of whether I’m overpaying or underpaying for the theoretical benefits I’m receiving.
If this story from the Washington Post is any indication, it’s the former rather than the latter.
One Fairfax County firefighter tripled his salary to more than $270,000 with overtime pay. A county police officer took home $175,000… A fire captain pocketed $163,000 in additional compensation, more than many of his colleagues make in a year. The eye-popping figures have prompted Fairfax County supervisors to review overtime pay and other compensation for employees as the county faces a budget squeeze. …more than 1,700 county employees who are not department heads earned more than $100,000 in 2016, according to county figures.
Needless to say, the unions representing these bureaucrats pushed back.
Public safety unions and officials strongly pushed back against the idea that overtime pay might be excessive, saying that some employees must work extra hours because of staffing shortages… Some were also rankled because many public safety employees have endured pay freezes in recent years and earn far less than many residents in one of the nation’s most expensive counties. “They are complaining about guys who are working overtime trying to make the median income for the jurisdiction,” said Joseph Woloszyn, president of the Fairfax County chapter of the Police Benevolent Association.
It’s certainly true that Fairfax is a rich county, driven in large part by the overpaid federal workforce, along with the various contractors, lobbyists, cronyists, and other insiders who have their snouts comfortably buried in the federal trough.
Given how all this unearned wealth distorts the local labor market, I have no problem with the idea that cops and firefighters presumably need to be paid more than the national average. After all, employers should pay what’s necessary to attract a sufficient number of qualified individuals to fill appropriate jobs.
This doesn’t mean, however, that 1,700 bureaucrats should be getting six-figure salaries. Or that police and fire departments are the right size.
Though I admit that this excerpt makes me wonder.
…the Fairfax County fire chief…said his department has been dealing with a chronic shortage of firefighters. Currently, he said, the department has 56 vacancies, forcing some to work shifts as long as 48 hours or be recalled to work each day.
…vehicle fires declined 64 percent from 1980 to 2013. Building fires fell 54 percent during that time. When they break out, sprinkler systemsalmost alwaysextinguish the flames before firefighters can turn on a hose. …as the number of fires has dropped, the ranks of firefighters have continued to grow — significantly. There arehalf as many firesas there were 30 years ago, but about50 percentmorepeople are paid to fight them. …Firefighters responded to487,500 structure firesacross the United States in 2013, which means each of the nation’s30,000 fire departmentssaw just one every 22 days, on average. And yet, taxpayers are paying more people to staff these departments 24-7. As a result, the amount of money shelled out for local fire services more than doubled from 1987 to 2011, to $44.8 billion, accounting for inflation.
For what it’s worth, I very much suspect that the numbers in Fairfax County would match the nationwide data.
So it’s likely that firefighters (and cops) in Fairfax are overpaid. But it’s even more likely that there are too many of them given the possible dangers.
P.P.S. If you think libertarians are doctrinaire and impractical about firefighting, you’ll like this picture.
P.P.P.S. If you think firefighters are overpaid, you’ll like this video.
It’s not that much fun to be a libertarian, at least if you work in public policy.
You spend your days hoping that “Public Choice” can be overcome, which means you’re laboring to fulfill Sisyphean tasks.
Trying to convince politicians and bureaucrats to voluntary give up power and control over the economy. Good luck with that.
Trying to convince voters that it’s not right use government coercion to steal other people’s money. An increasingly hard task.
Needless to say, these are not easy tasks, which is why most of my time is spent playing defense. In other words, I’m trying to prevent government from getting even bigger.
But what if there was an opportunity to wipe the slate clean and start all over? Imagine a libertarian fantasy world, where proponents of freedom decide the proper size and scope of government?
Well, that fantasy world exists, sort of. It’s called Liberland, an island in the Danube River that isn’t claimed by either Serbia or Croatia. So a group of libertarians, led by Vít Jedlička, claimed the island and announced the creation of the Free Republic of Liberland.
That’s the good news. The bad news is that neither Serbia nor Croatia recognize Vit’s claim. Indeed, Croatian police arrest people who set foot on the island, which is rather strange since Croatia says the island isn’t Croatian territory (Wikipedia has the details on Liberland’s status).
Notwithstanding these obstacles, the Liberland community is relentlessly hopeful of a good outcome. Indeed, they just held a conference to mark Liberland’s second anniversary.
And I was asked to speak about the ideal fiscal policy for this new country. Here’s my speech, which begins with a discussion of government as a “stationary bandit” and then explores some of the theoretical issues of setting up a freedom-oriented society.
Yes, I realize I’m talking about the theoretical nature of a theoretical state, but I very much enjoyed this opportunity to engage in a Walter Mitty-style dream about how Liberland might operate.
And I even had Liberland’s president as an assistant for my talk.
After spending the first part of my speech contemplating the theoretical nature of a Liberland government (or private governance), I spend the last part of the speech explaining that the public sector should be very small because there are very few genuine “public goods.”
I discussed the Rahn Curve and cited the data showing that the federal government was a very tiny burden for much of America’s history.
I also pointed out that the burden of government was similarly modest in other western nations during the 1800s and early 1900s, which was when those countries went from agricultural poverty to middle-class prosperity.
And I pointed out that taxation would be a trivial issue if Liberland came into existence and has a very small government.
For those interested in the idea of new libertarian societies, there’s “seasteading.”
Seasteading, the concept of building freer societies upon unincorporated parts of the world’s oceans, is one of those so-crazy-it-just-might-work ideas within liberty/stateless circles. Long discussed, presented, talked about, mulled over, most cranks like myself mentally pocketed the idea years ago. Compelling enough, definitely, but it seemed wishful, immediately impractical. …The concept of seasteading really begins in earnest with Patri Friedman, grandson of Nobel Laureate Milton Friedman. The third generation Friedman doesn’t shy away from his famous lineage, which also includes anarcho-capitalist philosopher father David Friedman. …Mr Friedman vowed to take theory into practice. Real world. Right now. He, along with gadfly investor Peter Thiel, founded The Seasteading Institute. …The Seasteading Institute has inked a deal with French Polynesia for a trial city off their shores. It’s happening.
…two kinds of special jurisdictions — private communities and “Special Economic Zones” — are quietly taking over functions and providing options that traditional polities cannot or will not. This gentle revolution has already brought comparative wealth and better living to millions of people… In a Special Economic Zone (SEZ), a government creates exceptions to its own rules — a select haven from the status quo that prevails elsewhere in the national territory. The goal, says the World Bank, is to create a “business environment that is intended to be more liberal from a policy perspective and more effective from an administrative perspective than that of the national territory.” …The antecedents of modern SEZs date from 166 BCE, when Roman authorities made the island of Delos a free port, exempting traders from the usual taxes in order to stimulate local commerce. …The astonishing growth in SEZs qualifies as a revolution of sorts, but not the usual, political kind. Instead of being imposed by domestic or foreign enemies, this revolution has come from within, allowed or even encouraged by existing authorities.
And here’s a video about Liberland for those interested.
Let’s close with some wonkiness by looking at some academic research about fiscal policy and the evolution of government.
Classical economists thought that the government’s role should be limited to national defense, police, and administration because government “cannot have any other rational function but the legitimate defense of individual rights” (Bastiat, 1944–5). …For classical economists, the government role should be small… The countries’ institutional frameworks, such as the U.S. Constitution, did not specify any other economic role for the state. Consequently, in the last century, public spending was minimal in a number of industrialized countries for which data for 1870 could be found… In the United States, government expenditure was about 7 percent of GDP, and, in most newly industrialized European countries of the period, such as Germany, the United Kingdom, or the Netherlands, expenditure did not exceed 10 percent of GDP. A leading French economist of the time, Paul Leroy-Beaulieu (1888), addressing the question of the proper share of taxes in the economy, suggested that a share of 5–6 percent was moderate while a share beyond 12 percent had to be considered “exorbitant” and would damage the growth prospects of an economy.
Hmmm, I though Bastiat was the only good French economist. But Monsieur Leroy-Beaulieu obviously is a very sensible person.
Now let’s look at historical estimates of tax revenue, as presented in a study from two academics published by the London School of Economics.
…it was states in Europe that were the first to permanently break cycles of gains and losses in centralized fiscal and coercive capacity and build towards the modern state system. …we divide the annual per capita central tax revenues in silver by the daily wages of unskilled workers in silver. …The daily wages of unskilled urban workers in grams of silver…are available annually for most polities and in the absence of reliable estimates for per capita income, are frequently used by economic historians as a proxy for per capita income for this period. …During the first half of the sixteenth century, annual tax revenues per capita did not exceed 5 days of unskilled urban wages in most European countries. The only exceptions were the small and highly urbanized entities such as Venice and Holland. By the end of the eighteenth century, however, …many others had reached the 10 to 15 daily wages range and annual per capita revenues of the central administration in the Dutch Republic exceeded 20 days of urban wages. It is worth noting that the middle group where annual per capita revenues reached 10 to 15 daily wages included not only the more urbanized western European countries such as England, France, Spain and Venice but also the more rural and agricultural countries in central and eastern Europe such as Austria
Here’s a chart from the study that gives an idea of the tax burden in various nations from 1500-1800.
Last but not least, we have a very detailed study about the evolution of the state from economists at George Mason University. I’ve culled some of the key passages.
Recent scholarship in both political economy and development economics has emphasized the importance of state capacity in explaining why some countries have succeeded in achieving economic development whereas others have not. This literature points to the role of state capacity in explaining the durability of institutions that are both conducive to markets and to economic growth. …This literature recognizes both that predatory behavior by states is frequently a cause of economic stagnation and that well-functioning states can provide the institutional framework necessary for sustained economic growth. … Economies governed by strong, cohesive, and constrained states are better able to overcome vested interests and avoid disastrous economic policies, while societies ruled by weak states are prone to rentseeking, corruption and civil war. State capacity, therefore, can complement market-supporting institutions in providing a conducive setting for economic development. This insight was understood by Adam Smith who noted the importance of the provision of peace, justice, and easy taxation (Smith, 1763). …Economic growth in the absence of sufficient state capacity was not self-sustaining precisely because economically successful societies attracted predators. …Greater state capacity enabled the states of western Europe to escape from this violence trap in the eighteenth and nineteenth centuries. …Well functioning markets are not only required for allocative economic efficiency, they also provide the necessary conditions for sustained economic growth over time. But markets cannot operate in an institutional vacuum. They require property rights that are well defined and enforced and rely on governance institutions that can arbitrate claims and disputes. Governance institutions do not have to be provided by a state—that is by an organization that claims a monopoly on the legitimate use of force within a circumscribed territory. Historically there are many instances of market actors developing their own governance mechanisms in the absence of state enforcement through private-order arrangements… The state is certainly not required for either impersonal trade or for the emergence of rules of behavior and the rule of law. What the historical record suggests, however, is that during the relevant centuries prior to the industrial revolution, commerce and trade came increasingly under the purview of the public-order institutions. …State capacity, as we have noted, need not promote economic growth. States with high capacity can pursue destructive economic policies. Rather the point is that state capacity can be beneficial for growth when the state is constrained by law. One of the reasons for this is that high capacity states have the ability to enforce general rules. This ability is closely linked to what social scientists typically mean by rule of law. …What enables some societies to build effective states—states that are able to provide basic public goods but which are constrained and limited in scope and scale? …The origins of modern economic growth are to be found in the expansion of market exchange and trade that gave rise to a more sophisticated and complex division of labor that rewarded innovation and to the cultural and potentially non-economic factors that helped spur innovation (Howes, 2016; McCloskey, 2016; Mokyr, 2016). The importance of the rise of high capacity states to this story is that these states helped to provide the institutional conditions that either enabled growth and innovation to take place or at least prevented their destruction through warfare or rent-seeking. The emergence of sustained economic growth in the nineteenth century was associated with strong but limited states. Twentieth century ambitions to use state power to remold societies either ended in failure or were at least partially reversed. We have focused on the recent literature linking the rise of the modern state to positive economic outcomes, but do not want to give the impression that we are neglecting how easy it is for governments to destroy economies (e.g., Shleifer and Vishny, 1998; Easterly, 2001).
The core message is that the key to prosperity is having a state strong enough and effective enough to provide rule of law, but to somehow constrain that state so that it doesn’t venture into destructive redistribution policies.
This is why competition between governments played a key role in the economic development of the western world. When governments have to worry about productive resources escaping, that forces them to focus on things that help an economy (i.e., rule of law) while minimizing the policies that hinder prosperity (i.e., high taxes and spending).
P.S. I got a nice surprise at the conference. I was made a citizens of Liberland.
P.P.S. America’s Founding Fathers dealt with the same issues that I discussed at the Liberland conference. Their solution was a constitution that explicitly limited the size and scope of the federal government. As I noted in my speech, that system worked reasonably well until the 1930s. Now we’ve gone so far in the other direction that the Supreme Court says Washington can compel us to buy things from cronyist companies.
Avoiding the same fate will be a major challenge for Liberland. Assuming, of course, it gets off the ground.
There’s an election next month in the United Kingdom, though there’s not much political suspense.
The Labour Party is led by Jeremy Corbyn, a crazed Bernie Sanders-style leftist, and British voters have no desire to become an Anglo-Saxon version of Venezuela. Or, since Corbyn’s main economic adviser actually has said all income belongs to the government and Corbyn himself has endorsed a maximum wage, maybe an Anglo-Saxon version of North Korea.
Given the Labour Party’s self-inflicted suicide, it is widely expected that the Conservative Party, led by Theresa May, will win an overwhelming victory.
But what difference will it make? Will the Tories have a mandate? Do they actually want to change policy?
Let’s start by asking whether policy should change. The good news is that the United Kingdom is ranked #10 according to Economic Freedom of the World. That means the U.K. is more market-friendly than the vast majority of nations (including the United States, I’m sad to report).
And that’s a big problem in a nation where a majority of people already are net dependents. In a column for the Telegraph, Daniel Mahoney of the Centre for Policy Studies analyzes this major threat to the U.K.
This week, the Office for National Statistics published figures showing the level of net dependency on the UK state. …The figure now stands at 50.5 per cent. In the 1980s and 1990s, this figure was just over 40 per cent – that is to say that around four in ten households received more in benefits than they paid in taxes. But this dramatically changed in the New Labour era, which left office with well over half of the population being deemed net dependent on the state. …Labour’s enormous increase in spending on public services and welfare was equally responsible for this worrying trend. Public spending grew from just 34.5 per cent of GDP in 2000 to 41% of GDP just before the financial crisis hit the UK… There has been some progress in recent years, …but levels of net dependency remain too high. Over half of households are still net dependent on the state. …It is important for the next Government to reduce dependency further.
Theresa May has been warned not to abandon Margaret Thatcher’s free market economics as she prepares to reveal the most interventionist Tory manifesto for generations. …The Prime Minister has already announced an energy price cap and is expected to clamp down on executive pay and empower workers on boards in her election pitch. …cabinet ministers who served under Mrs Thatcher were scathing of the Prime Minister’s energy price cap when speaking off the record. One said it would create “incredible distortions” in the energy market, while another warned that Government cannot “force water uphill” by trying to stop free-market forces.
If you’re curious about May’s energy policy, Rupert Darwall has a helpful article in The Conservative.
For some time, politicians of all parties have been imposing policies that force up energy costs. Now they want to cut the energy bills that have been driven higher by their own policies. …the Competition and Markets Authority noted the role of decarbonisation policies in pushing up costs. “Pressure on prices is likely to grow in the future, due in part to the increasing costs imposed by climate and energy policies,” the CMA stated. …BEIS ministers have convinced themselves that there is widespread popular support for the aggressive decarbonisation policies that are making energy more expensive. They should have the courage of their convictions and acknowledge that high and rising energy bills are a consequence of the decarbonisation policies they claim are so popular. Once they’ve done that, we can have an honest debate.
Sounds like a classic example of Mitchell’s Law. Politicians pursue a policy (green energy or decarbonisation) that leads to higher prices. They then respond to the problem created by their intervention with another form of intervention (energy price caps).
All of which will cause bigger problems in the future.
But for purposes of today’s column, what matters is that this bad policy is being pushed by the leader of the (supposedly) Conservative Party.
To be sure, it’s possible that this bad policy is just a gimmicky election promise and won’t be implemented. It’s also possible that it will be implemented but will be offset by better policy in other areas.
What matters is whether the overall burden of government is expanding or receding. Maybe May will cap spending (an area where her predecessor did a good job his last few years in office). Maybe she will cut tax rates (the corporate rate already has been slashed and will be reduced to 17 percent over the next few years).
At this stage, there’s no way to predict the direction of policy. But there is reason to worry because there aren’t enough people in the U.K. making the principled case for economic liberty.
Britain needs a new movement to sell free-market ideas. It is the only way that this country’s slow drift Left-wards, which began in 1997, will be halted and reversed. It’s the only way that Labour, which has reembraced Marxism under Jeremy Corbyn, and the Tories, which have fallen back in love with old fashioned economic interventionism, will ever see sense again. …Tories gave up fighting for free markets years ago, when David Cameron was elected leader…he decided…to accept all of Labour’s increases in state spending and regulation, including environmental and labour market rules…when the financial crisis struck, the Tories joined in the banker-bashing.
But it’s not just that the Tories did bad things.
They also failed to do good things.
…they didn’t fight from the bully pulpit. They didn’t stand up and explain the merits of low taxes, which boost incentives. They didn’t shout from the rooftops that we need entrepreneurs to create wealth, and that people who make money by selling their wares to the public are performing a public service. They didn’t defend privatisation. They failed to make the case for profits… They conceded too much, including the destructive idea that the private sector is less moral and less law abiding than the state sector. They deferred to egalitarians and class warriors… When the financial crisis came, the Tories didn’t explain that much of it was actually caused by misplaced government intervention, including guarantees extended to financial institutions, pro-sub prime policies in the US, moral hazard and cheap money injected into the system by over-confident central banks. …We now have Mayonomics, a continuation of this trend, and its embrace of Ed Miliband-style energy price caps and yet more interventionism.
So Allister is urging a campaign for economic liberty.
The campaign must explain why private companies that compete against one another always generate better outcomes than public sector monopolies. …All of the lessons that became part of the political conventional wisdom after the 1970s need to be relearnt and retaught, and we need a new generation of pro-free market activists to lead this struggle. It’s time for supporters of capitalism to stand up and be counted.
Sadly, the business community is unwilling to lead.
The big business lobby groups are not up to the task… With a few exceptions, they don’t support real, genuine, free-markets.
For all intents and purposes, Allister is making the argument that Britain needs to become a more ethical society. In other words, he wants a campaign to inform and educate about the value of liberty qua liberty. A belief in self reliance, work, and individual responsibility. Characteristics that could be considered part of social capital or cultural capital.
And I think he’s spot on.
I worry a lot about the erosion of social capital in America. But if the polling data is accurate, the problem is much bigger in the United Kingdom.
P.S. Brexit is a wild card in this discussion. I supported the decision to leave the European Union in large part because of my hope U.K. policy makers would feel pressure to shift policy in a more market-oriented direction.
The right answer is All of the Above. Politicians have ruined lives and wasted money in a futile campaign to stop people from recreational drug use.
It may be true that people who use drugs are being stupid. Or even immoral. But the key thing to understand is that it’s a victimless crime.
Actually, that’s not true, there are victims. They’re called taxpayers, who have to finance the government’s drug war. And there are secondary victims thanks to bad laws (dealing with asset forfeiture and money laundering) that only exist because of the drug war.
A report by the Justice Department Inspector General released Wednesday found that the DEA’s gargantuan amount of cash seizures often didn’t relate to any ongoing criminal investigations, and 82 percent of seizures it reviewed ended up being settled administratively—that is, without any judicial review—raising civil liberties concerns. …the Inspector General reports the DEA seized $4.15 billion in cash since 2007, accounting for 80 percent of all Justice Department cash seizures.
Here’s the jaw-dropping part of the story.
…$3.2 billion of those seizures were never connected to any criminal charges.
In other words, the government took people’s money even they weren’t charged with a crime, much less convicted of a crime.
Drug users also can be victims. Heck, sometimes people are victims even if they’re not users, as we see from this great moment in the drug war.
“They thought they had the biggest bust in Harris County,” Ross LeBeau said. “This was the bust of the year for them.” A traffic stop in early December led to the discovery of almost half a pound of what deputies believed to be methamphetamine. The deputies arrested LeBeau and sent out a press release, including a mug shot, describing the bust. According to authorities, the arrest was due to deputies finding a sock filled with what they believed to be methamphetamine. …After the arrest, LeBeau was fingerprinted and booked into a jail where he spent three days before being released. The problem came after two field tests, performed by deputies, came back positive for meth. Later a third test was conducted by the county’s forensic lab which revealed that the kitty litter was not a controlled substance. The case was later dismissed.
And more bad things like this are probably going to happen because the Justice Department now wants a more punitive approach to victimless crimes.
Attorney General Jeff Sessions ordered federal prosecutors to seek the toughest charges and maximum possible sentences available, reversing an Obama-era policy that sought to avoid mandatory minimum sentences for certain low-level drug crimes. …the overall message is clear: Federal prosecutors have the green light to go hard after any and all drug offenses. …The shift marks the first significant return by the Trump administration to the drug war policies that the Obama administration tried to moderate. In 2013, former Attorney General Eric Holder ordered federal prosecutors to avoid charging certain low-level offenders with drug charges that triggered long mandatory sentences. The federal prison population dropped for the first time in three decades in 2014, and has continued to fall since.
Some Republicans are unhappy about this return to draconian policies.
“Mandatory minimum sentences have unfairly and disproportionately incarcerated too many minorities for too long,” Sen. Rand Paul (R-KY) said in a statement. “Attorney General Sessions’ new policy will accentuate that injustice. …Sen. Mike Lee (R-UT), although he did not directly criticize Sessions, wrote in a tweet Friday morning that “to be tough on crime we have to be smart on crime. That is why criminal justice reform is a conservative issue.”
For what it’s worth, Sessions isn’t the only one who deserves blame.
While it’s easy to point the finger at Sessions, …Congress ultimately passed the laws the Justice Department is tasked with enforcing. Lawmakers in Congress had a golden window of opportunity over the past three years to revise federal sentencing laws—with bipartisan winds at their back and a friendly administration in White House—and failed miserably.
…the Office of National Drug Control Policy… Trump plans to reduce the agency’s budget by 95 percent… there are plenty of actual harm reduction advocates who would be happy to see the agency close up shop.
Though don’t get too excited.
…you know what federal agency with drug policy ramifications is not dormant? The Justice Department. …In the grand scheme of the drug war, who might occupy the ONDCP’s bully pulpit matters less than the army Sessions is building.
So don’t hold your breath waiting for better policy.
Here’s another reason why the war on pot is so absurd. As reported by the Daily Caller, people without access to marijuana are more likely to get in trouble with opioids.
Opioids continue to claim 91 lives a day across the U.S., but new research shows medical marijuana programs are drastically cutting down on rates of painkiller abuse. Research from the Journal of the American Medical Association is adding to a growing body of evidence showing states with medical marijuana programs have lower rates of opioid related overdoses. Patients who are offered pot as an alternative treatment for chronic conditions are increasingly shifting off their prescription opioids entirely, reports WLBZ. The researchers found states with medical marijuana programs in 2014 had an opioid overdose rate roughly 25 percent lower than the national average.
Last but not least, an article in Reasonexplains how greedy politicians are undermining the otherwise successful pot legalization in Colorado.
Colorado…voters legalized recreational marijuana in 2012, transforming the popular stuff from a prohibited vice to a substance that could be produced, bought and sold without the hassle of hiding dealings from the authorities and the fear of arrest for voluntary transactions. Yet the marijuana black market is still going strong over four years later, with many sellers and customers willing to take a chance on legal consequences rather than make a risk-free deal. …the driving force behind the black market…is taxes so sky high and regulations so burdensome that they make legal pot uncompetitive. “An ounce of pot on the black market can cost as little as 180 dollars,” according to PBS correspondent Rick Karr. “At the store Andy Williams owns, you have to pay around 240 dollars for an ounce. That’s partly because the price includes a 15 percent excise tax, a 10 percent marijuana tax, the state sales tax, and Denver’s marijuana sales tax.” Colorado also piles on expensive regulatory requirements to get a license.
This is not a surprise.
I wrote back in 2015 that the tax burden was excessive.
Indeed, I even wondered if legalization in Colorado was a good thing if the net result was a big pile of tax revenue that could be used to expand government.
The libertarian part of me says Colorado made the right decision, though the fiscal economist part of me definitely sees a down side.
And that down side may become an even bigger downer.
Governor John Hickenlooper wants to increase the marijuana sales tax from 10 percent from 8 percent. “It seems kind of odd that at the same time they’re trying to do something about the black and gray markets they’re going to ratchet up the taxes and drive more people to the black and gray markets,” state Sen. Pat Steadman (D-Denver) commented.
P.S. I wonder if Senator Steadman realizes he just embraced the Laffer Curve?
As I’ve written before, our fight to restrain the size and scope of government will be severely hamstrung – perhaps even mortally wounded – if the crowd in Washington ever succeeds in getting a value-added tax as a new source of revenue.
But what makes this battle especially frustrating is that there are some otherwise sensible people who are on the wrong side of the issue. I was stunned, for instance, when Rand Paul and Ted Cruz included VATs as part of their presidential tax plans.
In a column for the Washington Times, Professor Peter Morici argues for a VAT instead of the income tax.
The current system imposes terribly high rates and a myriad of special-interest credits and deductions. It requires expensive record keeping that drives taxpayers mad and complex auditing functions at the Internal Revenue Service that have proven susceptible to political abuse… The most effective reform would be to simply junk the personal and corporate income taxes in favor of a VAT. The Treasury annually collects about $2 trillion through personal and corporate taxes. This could be replaced by an 11 percent national sales tax on all private purchases and payments.
This is good in theory, but it’s a high-risk fantasy. The politicians in DC who want a VAT are not proposing to get rid of other taxes. Instead, they want the VAT in addition to income taxes.
So unless Morici has some plan to fully repeal income taxes (and to amend the Constitution to prohibit income taxes from being imposed in the future), his support for a VAT plays into the hands of those who want a new levy to finance bigger government (which is exactly what happened in Europe).
Even more troubling, he confirms my fears that the border-adjustable tax serves as a stalking horse for a VAT.
Several House Republicans, led by Ways and Means Chairman Kevin Brady, propose to do essentially this for the corporate but not the personal income tax. …This proposal has…flaws. …The answer is simple — generalize Mr. Brady’s reforms to include the personal income tax as well. Junk it and impose a VAT of 11 percent on all economic activities.
Foreign governments rely more on value-added taxes (VAT), which approximates a national sales tax. Those are rebatable on exports and applied to imports under World Trade Organization rules… This places U.S.-based businesses at a competitive disadvantage.
Now let’s look at another column with a misguided message. Writing for The Hill, Jim Carter of Emerson and former Congressman Geoff Davis argue for a VAT.
…enact a payroll tax holiday similar to the one Americans enjoyed in 2011 and 2012. Only this time the tax holiday would be permanent. …How can the government make up for the revenue lost from the payroll tax cut? One idea: eliminate the deduction that businesses get for the wages and benefits they pay their employees. …this would generate a massive $11.6 trillion in revenue over 10 years.
Call me crazy, but I get very nervous about plans that generate “massive…revenue” for Washington. Especially when the plan proposed by Carter and Davis is actually a subtraction-method VAT.
And just like Morici, they think the House Better Way Plan paves the way for that pernicious levy.
Abolishing labor deductibility also generates enough revenue to lower the tax rates on business income five percentage points below the rates envisioned by the House Republican “blueprint” for tax reform… Add the House blueprint’s other provisions…this modified House blueprint would be roughly revenue-neutral.
Moreover, Carter and Davis don’t even pretend that the income tax might be abolished. They prefer instead to go after the payroll tax, which is far less damaging.
Moreover, they want to add other statist policies to their VAT scheme.
Add President Trump’s childcare proposals and a Republican commitment to link tax reform to additional infrastructure funding, and congressional Democrats would have little excuse not to work with Republicans.
Now let’s look at a Washington Postcolumn by Alan Murray.
…in tax policy, as in health-care policy, the United States is notoriously ineffective and inefficient. As the world’s richest nation, the United States has more capacity to tax than any other country. But…we rank near the bottom of industrialized nations in our effectiveness at doing so. …Reid…devotes a chapter to the value-added tax, which he calls “the most successful taxation innovation of the last sixty years.” …it turns out to be relatively easy to enforce. …Reid quotes former Federal Reserve chairman Alan Greenspan saying a VAT is the “least worst” way to raise taxes. “It has been adopted in every major nation on earth and in most small nations as well,” he says.
Yes, you read correctly. He’s grousing that the federal government isn’t demonstrating “effectiveness” when it comes to maximizing its “capacity to tax.”
For what it’s worth, I’m grateful that America hasn’t copied Europe by trying to squeeze every possible penny from taxpayers. And I’m specifically thankful that we haven’t copied them by imposing a VAT to finance bigger government.
I was amused by this passage in Murray’s column.
Critics of Reid’s plan, of course, won’t be hard to find. …Conservatives will attack the value-added tax as a money machine that leads to bigger government.
Of course supporters of limited government will make that complaint. That’s why statists want a VAT. Heck, Murray’s column openly states that the VAT would boost America’s “capacity to tax.”
For those who favor restraints on government, the last thing we want is a government that figures out ways to extract more revenue from the economy’s productive sector.
Let’s close by citing some research published last year.
Writing for the Wall Street Journal, Professor Ed Lazear of Stanford University warns that a VAT, even if part of an otherwise attractive tax plan, almost surely will lead to an increased burden of government spending.
…keeping a value-added tax low and substituting it for other more-regressive taxes has proven almost impossible. All 34 countries in the Organization for Economic Cooperation and Development, except the U.S., have a VAT. …26 countries have higher VATs now than they did when they first instituted the tax. …The U.K., Italy and Denmark have all raised their VATs by 10 percentage points or more. The VAT, wherever it has been implemented, has been a money machine for big government.
What about the notion that VATs simply replace other taxes?
Unfortunately, that’s not the case.
…for every 1 percentage point that the VAT increases, the tax burden rises by about 0.8 of a percentage point. Were it a pure substitute tax, raising the VAT would have no effect on total taxes collected because other taxes would be reduced by a corresponding amount. Unfortunately, that hardly ever happens. …America may be headed toward a European-style VAT tax and ever-larger government.
Prof. Lazear has some additional data posted at the Hoover Institution website. Here’s a chart that should frighten every fiscally responsible person.
And don’t forget the chart I shared showing how the VAT has jumped significantly in Europe in the past few years.
To conclude, here’s my video on why the value-added tax is so dangerous to good fiscal policy.
P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here and here.
Although I gave him a good grade for his first 100 days, it’s no secret that I’m not overly optimistic about the long-term policy implications of the Trump presidency. Simply stated, I fear he’ll wind up being a big-government Republican like Bush (either one) or Nixonrather than a small-government Republican like Reagan or Coolidge.
I mention all these things because I’m about to defend the President’s extended family for the practice of “selling” American citizenship and I don’t want anyone to accuse me of being a shill for Trump.
You will get a good grasp of the controversy if you read this editorial in the New York Times. Here are the key passages.
The Kushner family…has been highlighting its White House connections to entice wealthy Chinese investors and promising them green cards in return under a special government visa program. …it’s also a scandal that Congress allows real estate developers to use the American immigration system to pad their profits. …Jared Kushner, President Trump’s son-in-law and special adviser…. His sister Nicole Meyer was in Beijing and Shanghai this past weekend seeking investors for a luxury apartment project her family is developing… Her sales pitch cited her brother and laid out how a $500,000 investment could provide a coveted path to American citizenship. …Ms. Meyer’s disturbing investor pitch was made possible by the EB-5 investor visa, which opens an express lane into the United States for those who can afford to invest nearly 10 times what the median American household earns in a year. …Under the program, investors have to put at least $1 million, and it has to lead to creation or preservation of at least 10 permanent, full-time jobs. But the minimum investment drops to $500,000 if applicants invest in rural areas or places with elevated unemployment.
I don’t agree with the tone, but this is an accurate description of the program. The EB-5 program is a part of America’s immigration system and it is explicitly designed to lure job-creating investment to the U.S. economy.
Yes, it’s poorly designed and presumably should be improved.
But the underlying concept is good. If we want more prosperity, America should join in the competition to attract economically successful migrants.
After all, many immigrant groups are unambiguously good for the American economy, increasing our per-capita GDP.
The EB-5 program creates a pathway for those people, and the Kushner family is simply showing them that investing in commercial real estate is one of their options.
I don’t understand why some people think this is a bad thing. All things being equal, I’d rather have rich immigrants than poor immigrants.
That’s why I defended Governor Scott Walker when he was attacked for wanting some of these people investing in Wisconsin. And that’s why today I’m defending the Kushners. I want America to become more prosperous.
Yet this rational policy rubs a lot of people the wrong way. Including some lawmakers.
Senators Grassley (R-IA) and Feinstein (D-CA), the Chair and Ranking Committee members of the Senate Judiciary Committee introduced bill S. 232 to terminate the EB-5 Visa Program.
Critics tend to make three arguments.
They don’t like rich people benefiting – My response is that don’t care that wealthy foreigners benefit or that wealthy American developers benefit. My goal is more growth for ordinary people, and that’s what we get with rich and/or high-skilled immigrants.
They are upset about favoritism – I agree that the current EB-5 system is too complicated and vulnerable to cronyism, but the solution is to copy the nations cited below by creating very simple rules allowing rich foreigners to move to America and make investments.
They worry about bad people getting visas – There already are fairly onerous rules designed to prevent crooks, terrorists, and other bad guys from sneaking into the U.S. by obtaining an EB-5 visa. There’s no evidence that the current system is inadequate.
To elaborate, let’s focus on the first argument dealing with economic benefits. There is considerable research showing that ordinary people benefit when high-skilled and/or high-net-worth individuals can migrate to their nations.
Here are some excerpts from a recent study by the World Bank.
The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010… A pattern is emerging in which these high‐skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia. …For recipient countries, high‐skilled immigration is often linked to clusters of technology and knowledge production that are certainly important for local economies and are plausibly important at the national level. More than half of the high‐ skilled technology workers and entrepreneurs in Silicon Valley are foreign‐born. For native workers, high‐skilled immigration means…a chance to benefit from the complementarities and agglomeration effects created by talent clusters.
And here are some additional finding from the same authors in research published by the Bank of Finland.
…many countries are launching new policies to attract high-skilled migrants. Examples include the United Kingdom’s introduction of a points-based immigration system under Tony Blair’s government and its recent programs to attract the “brightest and best” innovators and entrepreneurs. The Netherlands introduced a new “Expatcenter Procedure,” which is an entry procedure designed for “knowledge migrants.” Competing programs pop up with regular frequency—in short, the doors seem to be opening ever wider for high-skilled migrants…the four Anglo-Saxon countries that attract the highest proportions of high-skilled migrants—Canada, the United Kingdom, Australia and New Zealand—implement points-based systems to varying degrees… high-skilled migrants boost innovation and productivity outcomes. …longer time horizons tend to show greater gains.
Here’s a map from the study.
Last but not least, let’s look at two small nations that have reaped big benefits from their economic citizenship programs.
…foreigners can become citizens in less than six months in exchange for investing at least 2 million euros ($2.2 million) in Cyprus property or 2.5 million euros in government bonds or companies. Since then, the nation has issued about 2,000 passports, Finance Minister Harris Georgiades said in an interview in Nicosia last month. About half have gone to Russians, according to PricewaterhouseCoopers and other consultants who guide clients through the process. The impact has been profound, sparking about 4 billion euros of foreign investment last year — equivalent to almost a quarter of the island’s annual economic output.
Malta has earned €310 million through the sale of EU passports… Justice Minister Owen Bonnici confirmed the figure during a parliamentary debate on the small island’s budget for next year, local media reported. …more than 700 individuals have obtained passports since 2014 in exchange for property investments and cash donations to the government
One final point, as seen in data on top inventors and entrepreneurs, is that super-skilled people want to migrate to places with good tax policy.
I’ve repeatedly argued that there are two Social Security crises. The one most people know about is the fiscal crisis. Simply stated, the program is bankrupt.
But you don’t have to believe me. Here are some excerpts from a CNBCcolumn.
The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall. …Despite the huge numbers, there’s even a less generous way of looking at the fiscal shortfall. A projection, known as the “infinite horizon,” takes into account all the program’s future liabilities, even those beyond the 75-year period that Social Security actuaries typically use in their calculations. Under the infinite horizon, Social Security will have $32.1 trillion in unfunded liabilities by 2090, $6.3 trillion more than last year’s projection. …The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall.
By the way, the projections cited above are based on “present value,” which is calculated by predicting how much money would have to be set aside and invested today to finance future promises.
But that’s not how budgets work. At least not for pay-as-you-go systems like Social Security.
I prefer looking at inflation-adjusted estimates of cumulative deficits. On that basis, the 75-year unfunded liability is $37 trillion. The “infinite horizon” number presumably would be even scarier.
Oh, and don’t be under the illusion that the “Trust Fund” will solve the problem. It’s nothing but a pile of IOUs.
The second crisis is that Social Security is a bad deal for workers. They have to pay an enormous amount of taxes into the program during their working years, yet the monthly benefits they are promised are far lower than they could get if they had been able to put the same money into personal retirement accounts.
An analysis in the New York Times correctly points out that some groups with low lifespans are particularly disadvantaged by Social Security.
Social Security is designed…as an equalizer between rich and poor. It is structured to give more generous retirement benefits to low-income people, given the taxes they pay during their working years. …But in reality, a large body of research shows that the rich live longer — and that the life span gap between rich and poor is growing. And that means that the progressive ideal built into the design of Social Security is, gradually, being thwarted. In some circumstances, the program can actually be regressive, offering richer benefits to those who are already affluent. …because different groups of people have different life expectancies, some groups receive more value from every dollar of payroll taxes they and their employers pay into the system. Over all, women live longer than men and African-Americans die younger than whites. … the Social Security retirement system as a whole is regressive, or more favorable to the affluent than to the poor. …the richest 1 percent of Americans gained three years of life expectancy from 2001 to 2014 alone, while the poorest had almost no gain (0.3 of a year). For anyone who believes that it’s important for the Social Security program to remain progressive, the life-span shifts have big implications that are made more acute by the program’s financial problems.
I’m not motivated by having Social Security “remain progressive,” but I fully agree that it’s bad policy to have government programs that are especially harmful for poor people.
But some of our friends on the left think that the answer is to make the program even worse for higher-income taxpayers, even though this doesn’t change the fact that the program is a bad deal for lower-income taxpayers. Hillary Clinton embraced this approach during last year’s campaign (as did Obama in 2008).
Moreover, many Democrats in Washington are lurching even further to the left.
In today’s Wall Street Journal, Andrew Biggs dissects their latest plan.
…congressional Democrats…have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners. …today’s Democrats…would boost the initial benefits Americans receive upon retirement, and pay larger cost-of-living adjustments, or COLAs, in the years after. Over the plan’s first 10 years, Social Security benefit payments would rise by almost $1.2 trillion, according to an analysis by Social Security’s actuaries. To fund those higher benefits, the plan would increase the Social Security payroll rate from the current 12.4% to 14.8% between 2019 and 2042. The plan also would phase out the ceiling on earnings subject to the tax, currently $127,000, so that by the mid-2030s all earnings would be taxed. For low- and middle-income workers, lifetime payroll taxes would rise by nearly one-fifth from current levels. …the effective top federal marginal tax rate on earned income (inclusive of Medicare taxes and limitations on deductions) would rise from the current 44.6% to 59.4%. State income taxes could boost the total marginal rate as high as 72.7% for California residents. Under the Democrats’ Social Security plan the U.S. would have, by far, the highest top marginal tax rate in the developed world.
And higher tax rates would be bad news.
…employers who are required to pay higher Social Security taxes would reduce wages to help cover those costs. …According to a recent analysis by the Joint Committee on Taxation, lost income and Medicare taxes would offset between 12% and 21% of workers’ Social Security payroll tax increases, depending on income level. …Left-leaning economists Emmanuel Saez and Jeffrey Liebman found in a 2006 study that even modest behavioral reactions could reduce the net revenue gains from a plan like Mr. Larson’s by nearly half. Assume stronger behavioral effects (specifically, an elasticity of taxable income of 0.5), and losses to non-Social Security revenue would, in the authors’ words, “swamp any benefits from the increase in payroll tax revenue.” In other words, the Democrats’ Social Security reform could increase government deficits and debt, permanently.
To augment this research by Biggs, let’s look at an academic study that estimates how government entitlements push older people out of the labor force, which is bad for them and bad for the overall economy.
Baby Boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, Boomers must look to their own devices to rescue their retirements, namely working harder and longer. However, the incentive of Boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is Medicaid and Social Security’s complex Earnings Test and clawback of disability benefits. …We find that working longer, say an extra five years, can raise older workers’ sustainable living standards. But the impact is far smaller than suggested in the literature in large part because of high net taxation of labor earnings. We also find that many Baby Boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of our fiscal system. …we find that traditional, current-year (i.e., static) marginal tax calculations relating this year’s extra taxes to this year’s extra income are woefully off target when it comes to properly measuring the elderly’s disincentives to work. Our findings suggest that Uncle Sam is, indeed, inducing the elderly to retire.
Interestingly, there are some honest folks on the left who support personal accounts. Here’s an article on the “progressive case for privatizing Social Security in the US.”
…privatization is an underrated idea, and progressives who oppose benefit cuts should be fighting for it. …With private accounts, the system would be much more transparent. Currently, for every $1 a middle-earning couple (born in 1985) pays into Social Security, they can expect $1.01 back in benefits when they retire. That’s not a great return on investment, and it may fall in the future because Social Security isn’t on track to keep paying this level of benefits. If the government cuts benefits enough to make the program solvent they’d only get $0.80 for every $1 they pay in. …private accounts would change the conversation about entitlements. It clarifies what people expect to earn in retirement. …private accounts should appeal to those on the left who value a generous social safety net.
Amen.
Honest folks on the left should look around the world and see how personal accounts are good news, both for workers and the overall economy. Heck, just compare these two charts on the United States and Australia.
Sadly, we have too many statists who are motivated by penalizing the rich rather than helping the poor.
P.S. The United States was actually very close to genuine Social Security reform during the Bill Clinton presidency. Investor’s Business Dailyopined last year on what almost happened.
The U.S. came very close to having private retirement accounts as part of a sweeping Social Security reform…under President Clinton. That surprising bit of news comes 18 years after the fact in a reminiscence by Cato Institute senior fellow Jose Pinera, who once upon a time served as Chile’s secretary of labor and social security, and who designed that country’s highly successful pension reforms in 1980. Pinera says that Clinton began thinking in earnest about privatizing part of Social Security back in 1995… According to Pinera, Clinton saw private accounts as a way to cement his presidential record as a reformer. And the model for doing so that he had in mind was from Chile, where Pinera and a group of reformers created private retirement accounts that helped fuel that nation’s decade-long growth boom. It was a rousing success. Clinton even sent his former chief of staff, Mack McLarty, to Chile in 1996 to see how private personal accounts worked. In a letter to Pinera, he talked about how impressive Chile’s program was… Three years later, in December 1998, Pinera attended a White House conference on Social Security reform. There, he outlined the simple elements of the Chilean Model… It must have struck a chord with Clinton. Just one month later, in his 1999 State of the Union address, he proposed what he called “USA accounts,”… Every American would have had a private savings account, funded by a portion of his or her payroll taxes. …But it was not to be. Clinton’s involvement in the Monica Lewinsky scandal and his subsequent impeachment for perjury and obstruction of justice derailed his plans.
Having been very involved in the Social Security debates back in the last 1990s, I can vouch for this. Clinton was remarkably sympathetic to reform and almost always gave the right answers when discussing the issue (not too surprising since he compiled a remarkably pro-market record).
Unfortunately, the Lewinsky scandal and impeachment fight poisoned the political environment for bipartisan reform. Who would have thought that a sexual dalliance could have killed an opportunity for much-needed reform. That was the most expensive you-know-what in world history.
P.P.S. You can enjoy some Social Security cartoonshere,here, andhere. And we also havea Social Security jokeif you appreciate grim humor.
Earlier today, I gave a speech about populism and capitalism at the Free Market Road Show in Thessaloniki, Greece.
But I’m not writing about my speech (read this and this if you want to get an idea of what I said about American policy under Trump). Instead, I want to share some remarkable data from a presentation by Ewa Balcerowicz of Poland’s Center for Social and Economic Research.
She talked about “The Post Socialist Transition in Poland in a Comparative Perspective” and showed that Poland and Spain has similar living standards after World War II. But over the next 40 years, thanks to the brutal communist system imposed by the Soviet Union, Poland fell far behind.
But look what has happened over the past 25 years.
Per-capita GDP has skyrocketed in Poland and the gap between the two nations has dramatically narrowed.
So why is Poland now rising relative to Spain?
For the simple reason that public policy has moved in the right direction. Here’s the data from Economic Freedom of the World, comparing Poland’s score in 1990 and today. Poland has jumped from 3.54 to 7.42, and the nation has jumped from a dismal ranking of #104 to a respectable ranking of #40.
By the way, Spain’s score also has increased, but by a much smaller amount. And because the world has become more free, Spain’s ranking has dropped. Indeed, Spain now ranks below Poland
Which means that we shouldn’t be surprised if per-capita GDP in Poland soon jumps about Spanish levels.
And here’s a must-watch video on the relationship between good policy and better economics performance.
All of which helps to explain why I’m so disappointed in both Bush and Obama. Their statist policies have caused a drop in America’s score and relative ranking.
The tax system is bad news for professional sports, with plenty of anecdotal evidence showing that athletes (and even fans) get pillaged by government.
Now we have some comprehensive academic research to augment the anecdotes.
The Wall Street Journalopined today on a new study about the impact of marginal tax rates on professional sports teams.
Erik Hembre, an economist at the University of Illinois-Chicago, looked at the question: Do tax rates affect a team’s performance? He analyzed data in professional football, basketball, baseball and hockey between 1977 and 2014. Since the mid-1990s, he writes, “a ten percentage point increase in income tax rates is associated with between a 1.9-3.0 percentage point decrease in winning percentage.” Here’s why: Professional athletes are taxed at the highest marginal rate. The average NBA player earned more than $4.8 million in 2013 and the average was $2.3 in the NFL, so athletes who play for the Minnesota Vikings earn less after taxes than do Dallas Cowboys. …The effect appears strongest in the NBA, “where moving from a high-tax state to a low-tax state has a similar effect on winning as upgrading a bench player to an All-Star.” An NBA team that fled Minnesota (top rate: 9.85%) for Florida (0%) could expect to win an additional 4.5 games a season, Mr. Hembre found.
Indeed, there’s evidence from Monaco, which plays in the French soccer league, that low taxes produce better results on the playing field.
The editorial concludes with a caveat…and a political lesson.
Players make free-agent decisions for many reasons, and New York or Los Angeles can offer attractions and endorsement deals that offset their horrendous tax rates. But no one should be surprised that professional athletes respond to incentives like individuals in any industry. Perhaps this evidence will tempt governors and state lawmakers to cut rates now that they know that, along with a growing economy, they might end up with better sports teams and happier fans, also known as voters.
Professor Ed Lazear, in an article for the University of Chicago’s Becker-Friedman Institute, makes some critical observations on the American tax code.
Starting with the system’s complexity.
In the first 20 years after the 1986 Tax Reform Act was passed, there were already about 15,000 changes to the basic law. The lack of transparency is costly: resources devoted to tax preparation and avoidance alone amount to more than 1% of GDP.
Continuing with distortions in the internal revenue code.
The tax system is full of inconsistencies, preferences, complex rules, and contradictory definitions that encourage distortionary behavior by Americans in their legitimate attempts to minimize their tax liabilities. …Additionally, there are parallel systems that are not fully integrated into one coherent tax structure. Within the income tax category, the Alternative Minimum Tax has rules that are layered on top of the basic tax rate structure, which override the tax calculation for a sizeable fraction of taxpayers. Beyond that, the payroll tax, both employer and employee contributions, are distinct from the income tax rules, but for most Americans, act as a basic income tax that is an add-on to the income taxes that they pay.
And there’s a big section on the economic harm caused by over-taxing business investment.
…growth is most affected by taxes on capital. Notorious is the high US corporate tax rate of 35% that the US imposes, which results in obvious evasive action like locating business overseas. More important, but less visible, is the actual reduction in investment that occurs because capital is taxed so heavily in the United States. The marginal dollar of investment is one that can find its home in another country as easily as in the US. When we raise taxes on capital, a German investor who might have preferred to invest in an American company simply chooses to keep that money in Germany. The easy flow of capital across borders means that lowering tax rates will encourage more capital to flow to American businesses. …if investment were untaxed altogether, the economy would grow by an additional 5% to 9%. In the short run, the easiest way to accomplish this is to allow full expensing of investment with indefinite carry-forwards. This simply means that firms can deduct the cost of investments from their tax liabilities immediately and fully. Allowing full and immediate deductibility of investment expenses removes the distortions that impede capital investment and, as a consequence, raises productivity, incomes, and GDP.
Augmented by the economic damage caused by over-taxing human capital.
Economists have estimated the human capital portion of the total capital stock in the United States as between 70% and 90%. …increasing tax rates is likely to have profound effects on occupational choice and investment in the skills that are required to be productive in high-value occupations. …The personal income tax, and especially extreme progressivity, which places high burdens on professionals, discourages entry into professional occupations. Since human capital is such an important component of all capital, it is important to avoid over-taxing individuals directly. …
He concludes by explaining why the class-warfare crowd is misguided.
Lowering capital taxation and paying close attention to the progressivity of the tax structure both benefit the rich directly. The middle- and lower-income parts of the income distribution also benefit, however. …there is a close relation between average income wage growth and productivity. Furthermore, there is a close link between GDP growth and productivity growth…unless we ensure that the economy grows, which means that productivity grows, we will not have wage growth. …the poor and rich alike did best when economic growth was robust.
This last excerpt is critical. Some of my leftist friends think the economy is fixed pie, and this leads them to think the rest of us lose money any time a rich person earns more money.
Or they are motivated by envy. In some cases, this even leads them to support policies that hurt poor people so long as rich people suffer even more.
Both these views are wrong. President John F. Kennedy was right about a rising tide lifting all boats.
And since we just quoted Kennedy, let’s close with an equally appropriate quote from Winston Churchill, who famously observed that “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
What word best describes the actions of government? Would it be greed? How about thuggery? Or cronyism?
Writing for Reason, Eric Boehm has a story showing that “all of the above” may be the right answer.
At first it seems like a story about government greed.
When Mats Järlström’s wife got snagged by one of Oregon’s red light cameras in 2013, he challenged the ticket by questioning the timing of the yellow lights at intersections where cameras had been installed. Since then, his research into red light cameras has earned him attention in local and national media—in 2014, he presented his evidence on an episode of “60 Minutes”…on how too-short yellow lights were making money for the state by putting the public’s safety at risk.
But then it became a story about government thuggery.
…the Oregon State Board of Examiners for Engineering and Land Surveying…threatened him. Citing state laws that make it illegal to practice engineering without a license, the board told Järlström that even calling himself an “electronics engineer” and the use of the phrase “I am an engineer” in his letter were enough to “create violations.” Apparently the threats weren’t enough, because the board follow-up in January of this year by officially fining Järlström $500 for the supposed crime of “practicing engineering without being registered.”
Gasp, imagine the horror of having unregistered engineers roaming the state! Though one imagines that the government’s real goal is to punish Järlström for threatening its red-light revenue racket.
But if you continue reading the story, it’s also about cronyism. The Board apparently wants to stifle competition, even if it means trying to prevent people from making true statements.
Järlström is…arguing that it’s unconstitutional to prevent someone from doing math without the government’s permission. …The notion that it’s somehow illegal for Järlström to call himself an engineer is absurd. He has a degree in electrical engineering from Sweden… it’s not the first time the Oregon State Board of Examiners for Engineering and Land Surveying has been overly aggressive…the state board investigated Portland City Commissioner Dan Saltzman in 2014 for publishing a campaign pamphlet that mentioned Saltzman’s background as an “environmental engineer.” Saltzman has a bachelor’s degree in environmental and civil engineering from Cornell University, a master’s degree from MIT’s School of Civil Engineering, and is a membership of the American Society of Civil Engineers
In other words, this is yet another example of how politicians and special interests use “occupational licensing” as a scam.
The politicians get to impose “fees” in exchange for letting people practice a profession.
And the interest groups get to impose barriers that limit competition.
A win-win situation, at least if you’re not a taxpayer or consumer.
Some of the examples of occupational licensing would be funny if it wasn’t for the fact that people are being denied the right to engage in voluntary exchange.
If you want to help a deaf person communicate in Wisconsin, you’ll have to get permission from the state government first. Wisconsin is one of a handful of states to require a license for sign language interpreters, and the state also issues licenses for interior designers, bartenders, and dieticians despite no clear evidence that any of those professions constitute a risk to public health in other states without similar licensing rules. …It’s hard to imagine any health and safety benefits to mandatory licensing for sign language interpreters, which is one of eight licenses highlighted in a new report from Wisconsin Institute of Law and Liberty, a conservative group. …Since 1996, the number of licensed professions in the Badger State has grown from 90 to 166—an increase of 84 percent, according to the report. Licensing cost Wisconsin more than 30,000 jobs over the last 20 years and adds an additional $1.9 billion annually in consumer costs.
…according to the Colorado government, people who watch pets for money are breaking the law unless if they can get licensed as a commercial kennel—a requirement that is costly and unrealistic for people working out of their homes, often as a side job. This is not simply a case of an outdated law failing to accommodate modern technology. There are more nefarious motives—those of special interests who want to protect their profits by keeping out new competition. …it is time to add “Big Kennel” to the list of special interests that support ridiculous occupational licensing schemes.
Or trying to deny rights, as in the case of horse masseuses.
…an Arizona state licensing board finally backed down from an expensive, unnecessary mandate that nearly forced three women to give up their careers as animal masseuses. …the Arizona State Veterinary Medical Examining Board said it would no longer require animal massage practitioners, who provide therapeutic services to dogs, horses, and other animals, to obtain a veterinary license. Obtaining that license requires years of post-graduate schooling, which can cost as much as $250,000. “All I want is the freedom to do my job, and I have that now,” Celeste Kelly, one of three plaintiffs in the lawsuit, said in a statement. …the state board tried to driver her out of business by threatening her with fines and jail time if she didn’t get a veterinary license.
The good news is that there’s a growing campaign to get rid of these disgusting restrictions of voluntary exchange.
The acting head of the Federal Trade Commission is getting involved. On the right side of the issue!
Maureen K. Ohlhausen, the new acting chair of the Federal Trade Commission, thinks it’s high time that the FTC start giving more than lip service to its traditional mandate of fostering economic liberty. And the first item in her crosshairs is the burgeoning growth in occupational licenses. Over the past several decades, licensing requirements have multiplied like rabbits, she noted. Only 5 percent of the workforce needed a license in 1950, but somewhere between one-quarter and one-third of all American workers need one today. …depending on where you live, you might need a license to be an auctioneer, interior designer, makeup artist, hair braider, potato shipper, massage therapist or manicurist. “The health and safety arguments about why these occupations need to be licensed range from dubious to ridiculous,” Ohlhausen said. “I challenge anyone to explain why the state has a legitimate interest in protecting the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows.”
Hooray for Ms. Ohlhausen. She’s directing the FTC to do something productive, which is a nice change of pace for a bureaucracy that has been infamous in past years for absurd enforcement of counterproductive antitrust laws.
A column in the Wall Street Journal highlights Mississippi’s reforms.
State lawmakers in Mississippi are taking the need for reform to heart. Two weeks ago Gov. Phil Bryant signed into law H.B. 1425, which will significantly rein in licensing boards. …H.B. 1425 explicitly endorses competition and says that the state’s policy is to “use the least restrictive regulation necessary to protect consumers from present, significant and substantiated harms.” Under the law, the governor, the secretary of state, and the attorney general must review and approve all new regulations from professional licensing boards to ensure compliance with the new legal standard. This should be a model for other states. …Mississippi’s law…covers all licensing boards controlled by industry participants, spells out a pro-competition test, and requires new rules to be approved by elected officials accountable to voters. Mississippi has smartly targeted the core problem: Anticompetitive regulations harm the economy, slow job growth, and raise consumer prices.
Here’s some of the national data in the WSJ column.
Keep in mind, as you read these numbers, that poor people disproportionately suffer as a result of these regulatory barriers to work.
In the 1950s only about 1 in 20 American workers needed a license, but now roughly 1 in 4 do. This puts a real burden on the economy. A 2012 study by the Institute for Justice examined 102 low-income and middle-income occupations. The average license cost $209 and required nine months of training and one state exam. …Even the Obama administration saw the problem. A 2015 report from the White House said that licensing can “reduce employment opportunities and lower wages for excluded workers.” In 2011 three academic economists estimated that these barriers have result in 2.85 million fewer jobs nationwide, while costing consumers $203 billion a year thanks to decreased competition.
Professor Tyler Cowen explains in Time that licensing laws explain in part the worrisome decline in mobility in America.
Some of the decline in labor mobility may stem from…the growth of occupational licensure. While once only doctors and medical professionals required licenses to practice, now it is barbers, interior decorators, electricians, and yoga trainers. More and more of these licensing restrictions are added on, but few are ever taken away, in part because the already licensed established professionals lobby for the continuation of the restrictions. In such a world, it is harder to move into a new state and, without preparation and a good deal of investment, set up a new business in a licensed area.
Last but not least, we have a candidate for the Bureaucrat Hall of Fame. Elizabeth Nolan Brown explains for Reason that a paper pusher in Florida managed to use occupational licensing fees as a tool of self-enrichment.
In Palm Beach County, Florida, all topless dancers are required to register with county officials and obtain an Adult Entertainment Work Identification Card (AEIC), at the cost of $75 per year. The regulation is ridiculous for a lot of reasons, but at least applicants—many of whom are paid exclusively in cash—were able to pay the government-ID fee with cash, too, making things a little more convenient and a little less privacy-invading. But not anymore, thanks to the alleged actions of one sticky-fingered government employee. …Pedemy “diverted” at least $28,875 (and possibly an additional $3,305) from county coffers between October 2013 and mid-November 2016. The money came from both adult-entertainer fees—approximately 70 percent of which were paid in cash—and court-ordered payments intended for a crime Victims Services Fund.
At the end of the article, Ms. Brown looks at the bigger issue and asks what possible public purpose is being served by stripper licensing.
Demanding strippers be licensed in the first place is a problem… There’s no legitimate public-safety or consumer-protection element to the requirement—strip club patrons don’t care if the woman wriggling on their laps is properly permitted. Government officials have portrayed the measure as a means to stop human trafficking and the exploitation of minors, but that’s ludicrous; anyone willing to force someone else into sex or labor and circumvent much more serious rules with regard to age limits isn’t going to suddenly take pause over an occupational licensing rule they’ll have to skirt. The only ones truly affected are sex workers and adult-business owners. Not only does the regulation drive up their costs…, it gives Palm Beach regulators a database of anyone who’s ever taken their clothes off for money locally—leaving these records open to FOIA requests or hackers—and gives cops a pretense to check clubs at random to make sure there aren’t any unlicensed dancers. Those found to be dancing without a license can be arrested on a misdemeanor criminal charge.
Though I guess we shouldn’t be too surprised. If you peruse “Sex and Government,” you’ll find that politicians and bureaucrats like to stick their noses in all sorts of inappropriate places. Including the vital state interest of whether topless women should be allowed to cut hair without a license!
The answer, in no small part, is that economies suffer immensely when politicians don’t allow markets to function. An unfettered price system plays an enormously important role in allocating capital and labor to their most-valued uses (based on the preferences of consumers).
With central planning, by contrast, capital and labor are allocated based on the preferences of politicians and bureaucrats. And even if you assume those officials have good motives, there’s no way they can replicate the efficiency of private markets.
Capitalism is amazing because, in a system based on voluntary exchange, people can only make themselves richer by serving the needs of others. Consider, for instance, this excellent new video on the market for bread. We should all be profoundly appreciative of how the invisible hand of free enterprise produces such amazing results.
The good news is that we don’t have central planning in the United States. As such, we’re not in any danger of complete economic breakdown because of government intervention (our long-run danger is instead the result of a metastasizing welfare state).
But the bad news is that we have sectors of our economy where government intervention prevents the efficient operation of the price system.
Which is why it doesn’t make any sense to give politicians more power to solve supposed problems. Especially when the problems are probably the result of government intervention in the first place.
And less regulation is an important ingredient in the recipe for growth and prosperity. And nations that do a better job of following that recipe get to enjoy higher living standards, so we are fortunate not to have made as many policy mistakes as other countries.
P.S. Since bread played a starring role in today’s video, it’s worth remembering what it taught us about antitrust laws in The Incredible Bread Machine.
A couple of weeks ago, I reviewed the four major candidates running in the French presidential election and expressed general pessimism.
This Sunday, Emmanuel Macron and Marine Le Pen will face each other in the runoff election.
That’s a rather depressing choice. Macron is a former official in the disastrous big-government Hollande Administration and Le Pen is a big-government nativist who wants to preserve the welfare state (though not for immigrants).
A column in the Wall Street Journal explains France’s untenable position.
The deeper question is whether French voters accommodate themselves to reality or cling tighter to their economic illusions. …“The French try to erase historical experience,” Pascal Bruckner tells me. The literary journalist is one of a very few classical liberals among French public intellectuals. He says his compatriots “have forgotten the experience of 1989 and only see the bad aspects of capitalism and liberal democracy.” The tragedy of France, Mr. Bruckner says, is that the country never had a Margaret Thatcher or Gerhard Schröder to implement a dramatic pro-growth program. …it wasn’t shadowy globalists who in 1999 imposed a 35-hour workweek to make overtime labor prohibitively expensive. The law was meant to encourage firms to hire more workers, but like most efforts to subjugate markets to politics, it ended up doing more harm than good. Now it’s the main barrier to hiring in a country where the unemployment rate is stuck north of 10%. Nor was it global markets that levied a corporate tax rate of 33% (plus surcharges for larger firms), a top personal rate of 45%, and a wealth tax and other “social fees” that repelled investors and forced the country’s best and brightest to seek refuge in places like London, New York and Silicon Valley. Nor did globalization build a behemoth French bureaucracy that crowds out the private economy.
Yes, France is in a mess because of statism. Hard to argue with that.
The question is whether Macron or Le Pen will make things better or worse.
With pervasive lack of enthusiasm, I suppose Macron is the preferable choice. There’s at least a chance he’ll be a reformer. Let’s look at how some observers view him.
The French…might confer their presidency on a Gallic Barack Obama. …Emmanuel Macron, 39, is a former Paris investment banker, untainted by electoral experience, and a virtuoso of vagueness. …This self-styled centrist is a former minister for the incumbent president, Socialist François Hollande, who in a recent poll enjoyed 4 percent approval. …In 1977, France’s gross domestic product was about 60 percent larger than Britain’s; today it is smaller than Britain’s. In the interval, Britain had Margaret Thatcher, and France resisted (see above: keeping foreigners’ ideas at bay) “neoliberalism.” It would mean dismantling the heavy-handed state direction of the economy known as “dirigisme,” which is French for sclerosis. France’s unemployment rate is 10 percent, and more than twice that for the young. Public-sector spending is more than 56 percent of France’s GDP, higher than any other European nation’s. Macron promises only to nibble at statism’s ragged edges. He will not receive what he is not seeking — a specific mandate to challenge retirement at age 62 or the 35-hour workweek and the rest of France’s 3,500 pages of labor regulations that make it an ordeal to fire a worker and thus make businesses wary about hiring. Instead, he wants a more muscular European Union , which, with its democracy deficit, embodies regulatory arrogance.
Optimistic pundits hope the impending victory of a fresh-faced reformer signals that France’s economy at last can be fixed. But for at least the past decade, France’s problem hasn’t been a lack of understanding in the political class of what the French economy needs. Mr. Macron is not so much a radical change-agent as a photogenic tribune for a political class that is increasingly, albeit belatedly, uniting behind the need for economic overhauls. Formerly of the center left, he won Sunday’s first round on a revitalization platform different more in degree than in kind from that of the main center-right candidate, François Fillon, on matters such as government spending cuts and labor-law reform. The global case of the vapors over Ms. Le Pen obscures how remarkable this pro-reform convergence is. …Margaret Thatcher and Ronald Reagan…remade British and American politics for a generation not through the workings of their legislative programs but through their capacity to shape public opinion. They created a coalition of the optimistic…. If the Macron program is to stick, he’ll have to do the same. He isn’t off to an auspicious start. …His message to those workers—“Take the hit for the good of the country”—lacks a certain Reaganesque resonance.
Emmanuel Macron…attributes the nation’s woes not to outsiders — European officials and immigrants — but on France’s own “sclerotic” and unsustainable welfare state. …Mr. Macron would work to slim down one of the world’s fattest welfare states, rather than build it up as Ms. Le Pen would do. Of course France has attempted welfare state reform before, without success. The latest effort came last year, when Mr. Macron was a minister in the Socialist government, and wrote the Macron laws, opening regulated industries to competition. Those plans set off mass protests, and were watered down, but Mr. Macron says there is a big difference now: Earlier governments were not elected with a mandate to downsize the welfare state, while his could be. …the case for change has grown more urgent. …Georges Clemenceau, who served twice as prime minister between 1906 and 1920, cracked that his country was very fertile: “You plant bureaucrats and taxes grow.” Over the last decade state spending has grown even more… It’s tough to say how much state spending is too much, but France has clearly fallen out of balance, and Mr. Macron is right that the trend is “no longer sustainable.” The public payroll is similarly bloated, and Mr. Macron aims to rebalance the economy by cutting 120,000 public sector jobs, streamlining the pension system and dropping state spending back to 52 percent of G.D.P. Mr. Macron leads an emerging centrist consensus that recognizes that — more than immigrants or the euro — the main obstacle retarding France’s economy is its attachment to a welfare state culture of short workweeks and generous benefits. …In recent years France’s high income taxes have been chasing artists, executives and entrepreneurs out of the country. Last year, 12,000 millionaires emigrated — the largest millionaire exodus from any country by far. Mr. Macron — who once said that stifling taxes threaten to turn France into “Cuba without the sun” — has strong support among young, professional urban voters who would prefer opportunity at home to an expat life in London.
I hope this last column is accurate.
And the chance of Macron being good are greater than zero.
After all, it was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand.
And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.
Heck, policy even moved in the right direction when Bill Clinton was in the White House in the 1990s.
So I guess we can keep our fingers cross that Macron plays a similar role in France.
By the way, I can’t resist citing Paul Krugman’s assessment. He actually thinks France is in fairly good shape.
…what’s going on. …how did things get to this point? …France gets an amazing amount of bad press — much of it coming from ideologues who insist that generous welfare states must have disastrous effects — it’s actually a fairly successful economy. …It’s true that the French over all produce about a quarter less per person then we do — but that’s mainly because they take more vacations and retire younger… France offers a social safety net beyond the wildest dreams of U.S. progressives: guaranteed high-quality health care for all, generous paid leave for new parents, universal pre-K, and much more.
That’s an interesting spin, but maybe French people would like to earn more, but don’t have the opportunity because of bad policy?
Moreover, to the extent there are problems, Krugman says the blame belongs to the supposed pro-austerity crowd in Brussels and Berlin.
Even though Brussels and Berlin were wrong again and again about the economics — even though the austerity they imposed was every bit as economically disastrous as critics warned — they continued to act as if they knew all the answers
Yet the nations that actually cut spending – such as the Baltics – have recovered strongly. It’s the big spenders in Europe who are dragging down the continent.
And since Macron’s supposed reform agenda would only reduce the burden of government spending to 52 percent of economic output (from about 57 percent today), that’s not exactly an example of vigorous budget cutting anyway.
But it would be nice to add France to my list of nations that have – for a last a couple of years – restrained the growth of the public sector.
P.S. I have a good track record in France. The candidate I “endorsed” in 2012 won the race.
One of the points I repeatedly make is that big government breeds corruption for the simple reason that politicians have more power to reward friends and punish enemies.
But just as crime is bad for society but good for criminals, it’s also true that cronyism is bad for the economy and good for cronies.
Two professors at the University of the Illinois decided to measure the “value” of cronyism for politically connected companies.
Gaining political access can be of significant value for corporations, particularly since governments play an increasingly prominent role in influencing firms. Governments affect economic activities not only through regulations, but also by playing the role of customers, financiers, and partners of firms in the private sector. …Therefore, gaining and maintaining access to influential policymakers can be an important source of competitive advantage… In this paper, we investigate the characteristics of firms with political access as well as the valuation effects of political access for corporations. Using a novel dataset of White House visitor logs, we identify top corporate executives of S&P 1500 firms that have face-to-face meetings with high-level federal government officials. …We match the names of visitors in the White House visitor logs to the names of corporate executives of S&P1500 firms during the period from January 2009 through December 2015. We are able to identify 2,286 meetings between corporate executives and federal government officials at the White House.
…we find that firms that contributed more to Obama’s presidential election campaigns are more likely to have access to the White House. We also find that firms that spend more on lobbying, firms that receive more government contracts… Second, we find that corporate executives’ meetings with White House officials are followed by significant positive cumulative abnormal returns (CARs). For example, the CAR is about 0.865% during a 51-day window surrounding the meetings (i.e., 10 days before to 40 days after the meetings). We also find that the result is driven mainly by meetings with the President and his top aides.
For those interested, here are the companies that had a lot of interaction with the Obama White House.
And here are the officials that they met with.
For what it’s worth, I would be especially suspicious of the meetings with Valerie Jarrett and the three Chiefs of Staff. Those officials are political operatives rather than policy experts, so companies meeting with them were probably looking for favors.
Interestingly, it turns out that it wasn’t a good idea for companies to “invest” a lot of time and effort into cultivating relationships with Democrats.
…we exploit the election of Donald J. Trump as the 45th President of the U.S. as a shock to political access. We find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. The economic magnitude is nontrivial as well: after controlling for various factors that are likely correlated with firms’ political activities, such as campaign contributions, lobbying expenses, and government contracts, the stocks of firms with access to the Obama administration underperform the stocks of otherwise similar firms by about 80 basis points in the three days immediately following the election.
Though I guess you can’t blame the companies. Most observers (including me) expected Hillary to win, so the firms were simply playing the odds (albeit from an amoral perspective).
By the way, there are two very important caveats to share.
First, we can’t universally assume that corporate executives who met with White House officials were seeking special favors. They may simply have been urging the Obama Administration not to raise taxes or impose new regulations (i.e., honorable forms of lobbying).
Second, we can’t assume that the bad forms of lobbying have disappeared simply because there’s a Republican in the White House. As we saw during the Bush years, the GOP is more than capable of creating opportunities for unearned wealth by expanding the size and scope government.
For what it’s worth, I fear Trump will be tempted to play favorites as well. Which is why the real message for today is that smaller government is the only way to limit the corrupt interaction of big business and big government.
This image illustrates why my leftist buddies are naive to think that a bigger government will be a weapon against cronyism.
Seven years ago, I wrote about the “Butterfield Effect,” which is a term used to mock clueless journalists.
A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explainedthat crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.
Journalists are especially susceptible to silly statements when writing about the real-world impact of tax policy.
A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.
And now we can add to the collection.
Here are some excerpts from a report by a Connecticut TV station.
Connecticut’s state budget woes are compounding with collections from the state income tax collapsing, despite two high-end tax hikes in the past six years. …wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington. …It now looks like expected revenue from the final Income filing will be a whopping $450 million less than had been expected.
Reviewing the first sentence, it would be more accurate to replace “despite” with “because.”
Indeed, the story basically admits that the tax increases have backfired because some rich people are fleeing the state, while others have simply decided to earn and/or report less income.
But don’t hold your breath. We have an overseas example of the Laffer Curve, and one of the main lessons is that politicians are willing to sacrifice just about everything in the pursuit of power.
Here are some passages from a story in the U.K.-based Times.
The SNP is expected to fight next month’s general election on a commitment to reintroduce a 50p top rate of tax… The rate at present is 45p on any earnings over £150,000. …civil service analysis suggested that introducing a 50p top rate of tax in Scotland could cost the government up to £30 million a year, as the biggest earners could seek to avoid paying the levy by moving their money south of the border.
If you read the full report, you’ll notice that the head of the Scottish National Party previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K. when the 50 percent rate was imposed).
But now that there’s an election, she’s decided to resurrect that awful policy, presumably because a sufficient number of Scottish voters are motivated by hate and envy.
This kind of self-destructive behavior (by both politicians and voters) is one of the reasons why I’m not overly optimistic about the future of Scotland if it becomes an independent nation.
P.S. I’m not quite as pessimistic about the future of tax policy in the United States. The success of the Reagan tax cuts is a very powerful example and American voters still have a bit of a libertarian streak. I’m not expecting big tax cuts, to be sure, but at least we’re fighting in the United States over how to cut taxes rather than how to raise them.
Politicians in Washington just reached a deal to fund the government for the rest of the current fiscal year. As reported by the Washington Post, it’s not exactly a victory for libertarians or small-government conservatives.
Democrats are surprised by just how many concessions they extracted in the trillion-dollar deal, considering that Republicans have unified control of government. …Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. …the NIH will get a $2 billion boost — on top of the huge increase it got last year. …Planned Parenthood…will continue to receive funding at current levels. …after the deal was reached…, Chuck Schumer and Nancy Pelosi quickly put out celebratory statements. …“Overall, the compromise resembles more of an Obama administration-era budget than a Trump one,” Bloomberg reports. …Reuters: “While Republicans control the House, Senate and White House, Democrats scored … significant victories in the deal.” …Vox: “Conservatives got almost nothing they wanted.”
I guess you could call this a triumph of “public choice” over campaign rhetoric. Politicians did what’s in the best interest of politicians rather than what would be best for the nation.
I’m disappointed, as you might expect. But as I say in this interview, there are far more important battles. I’ll gladly accept a bit of pork and profligacy in the 2017 budget if that clears the decks for much-needed repeal of Obamacare and long-overdue reform of the tax code.
But here’s the catch. I don’t expect that these reforms will actually happen. Yes, the deck has been cleared, but I don’t think Republicans will take advantage of the opportunity.
The fundamental problem, which I pointed out in a different interview, is that there’s not a governing majority for smaller government. And that has some very grim implications.
Even more depressing, I point out that only Trump has the power to turn things around. Yet I see very little evidence that he, a) believes in smaller government, or b) is willing to expend any political capital to achieve smaller government.
To make matters worse, Republicans have convinced themselves that they lose the spin battle whenever there is a shutdown or some other high-stakes fiscal fight with Democrats.
For what it’s worth, I’m trying to remind Republicans that it is in their long-run political interests to do the right thing (as Reagan demonstrated). That’s why, in the first interview, I said they need to gut Obamacare and lower taxes if they want to do well in the 2018 and 2020 elections.
But don’t hold your breath waiting for the “stupid party” to behave intelligently.
…there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
The violence deepens a monthslong crisis marked by food shortages, economic collapse and Mr. Maduro’s fumbling attempts to consolidate authority. In quasi-democratic systems like Venezuela’s, such pressures have often led elites to force a change, and have provided them an excuse to do so. …splits are beginning to emerge, as a few figures in major institutions signal opposition to Mr. Maduro, hinting at growing dissatisfaction and the government’s inability to silence it. Recent actions by both elites and the government suggest they take the possibility of fracture seriously — maneuvering in a high-stakes contest… Elite fracture operates as a kind of game… Stay loyal to a failing government too long and you risk going down with it. But if you break with the government and others don’t, you’ll pay a high price for disloyalty. …Mr. Maduro can also play this game. He has enabled loyalists to profit from corruption and patronage, giving them a financial stake in the government’s survival. …Drug and food smuggling also generate revenue, including for the military. But as the economy worsens, elites compete over a smaller pie. “When elites begin to compete among themselves, usually somebody defects,” Mr. Levitsky said
The country desperately lacks basic resources, such as medicine and power. …Venezuela’s problems date back to 1999, with the election of socialist president Hugo Chávez, whose mass redistribution of wealth and financial mismanagement laid the groundwork for the country’s economic collapse. …Chávez’s regime received plaudits from numerous left-wing academics, politicians, and celebrities who have now gone quiet.
International Liberty 
