Early Evidence Doesn’t Bode Well for Finland’s Basic Income Experiment

The notion that government should automatically give everyone money – a policy known as “universal basic income” – is now getting a lot of attention.

From an economic perspective, I acknowledge that the idea should not be summarily rejected. Here’s some of what I wrote earlier this year.

…there actually is a reasonable argument that the current welfare state is so dysfunctional that it would be better to simply give everyone a check instead.

But I’m nonetheless very skeptical. Simply stated, the math doesn’t work, people would have less incentive to work, and there would be “public choice” pressures to expand the size of the checks.

So when the topic came up as part of a recent interview, I criticized the proposal and praised Swiss voters for rejecting – by an overwhelming margin – a referendum that would have created a basic income in that nation.

My reaction was probably even more hostile than normal because I don’t like it when guilt-ridden rich people try to atone for their wealth by giving away my money.

Moreover, it’s silly for Zuckerberg to use Alaska as an example because of its oil wealth and small population.

That being said, if I had more time, I would have been more nuanced and pointed out that we hopefully will learn more from some of the experiments that are happening around the world. Especially what’s happening on the other side of the north pole from Alaska.

The New York Times published an in-depth preview of Finland’s experiment late last year. Here’s a description of the problem that Finnish policymakers want to solve.

…this city has…thousands of skilled engineers in need of work. Many were laid off by Nokia… While entrepreneurs are eager to put these people to work, the rules of Finland’s generous social safety net effectively discourage this. Jobless people generally cannot earn additional income while collecting unemployment benefits or they risk losing that assistance. For laid-off workers from Nokia, simply collecting a guaranteed unemployment check often presents a better financial proposition than taking a leap with a start-up.

For anyone who has studied the impact of redistribution programs on incentives to work, this hardly comes as a surprise.

Indeed, the story has both data and anecdotes to illustrate how the Finnish welfare state is subsidizing idleness.

In the five years after suffering a job loss, a Finnish family of four that is eligible for housing assistance receives average benefits equal to 73 percent of previous wages, according to data from the Organization for Economic Cooperation and Development. That is nearly triple the level in the United States. …the social safety net…appears to be impeding the reinvigoration of the economy by discouraging unemployed people from working part time. …Mr. Saloranta has his eyes on a former Nokia employee who is masterly at developing prototypes. He only needs him part time. He could pay 2,000 euros a month (about $2,090). Yet this potential hire is bringing home more than that via his unemployment benefits. “It’s more profitable for him to just wait at home for some ideal job,” Mr. Saloranta complains.

So the Finnish government wants to see if a basic income can solve this problem.

…the Finnish government is exploring how to change that calculus, initiating an experiment in a form of social welfare: universal basic income. Early next year, the government plans to randomly select roughly 2,000 unemployed people — from white-collar coders to blue-collar construction workers. It will give them benefits automatically, absent bureaucratic hassle and minus penalties for amassing extra income. The government is eager to see what happens next. Will more people pursue jobs or start businesses? How many will stop working and squander their money on vodka? Will those liberated from the time-sucking entanglements of the unemployment system use their freedom to gain education, setting themselves up for promising new careers? …The answers — to be determined over a two-year trial — could shape social welfare policy far beyond Nordic terrain.

The results from this experiment will help answer some big questions.

…basic income confronts fundamental disagreements about human reality. If people are released from fears that — absent work — they risk finding themselves sleeping outdoors, will they devolve into freeloaders? “Some people think basic income will solve every problem under the sun, and some people think it’s from the hand of Satan and will destroy our work ethic,” says Olli Kangas, who oversees research at Kela, a Finnish government agency that administers many social welfare programs. “I’m hoping we can create some knowledge on this issue.” …Finland’s concerns are pragmatic. The government has no interest in freeing wage earners to write poetry. It is eager to generate more jobs.

As I noted above, this New York Times report was from late last year. It was a preview of Finland’s experiment.

People have been getting checks for several months. Are there any preliminary indications of the impact?

Well, the good news is that recipients apparently like getting free money. Here are some excerpts from a report by Business Insider.

…some of the 2,000 recipients are already reporting lower levels of stress. The $600 they receive each month might not be much, but it’s enough to put some people’s anxiety at ease.

But the bad news is that the handouts are giving people the flexibility to reject work.

Marjukka Turunen, head of Kela’s legal benefits unit, told Kera News. “There was this one woman who said: ‘I was afraid every time the phone would ring, that unemployment services are calling to offer me a job,'”… Scott Santens, a basic income advocate and writer…says basic income redistributes power into the middle-class — namely, to turn down unappealing jobs.

The last sentence of the excerpt is particularly worrisome. Some advocates think universal handouts are good precisely because people can work less.

It’s obviously too early to draw sweeping conclusions, especially based on a couple of anecdotes.

However, a recent column in the New York Times by two left-leaning Finns suggests that the data will not be favorable to universal handouts. The authors start with a basic explanation of the issue.

Universal basic income is generating considerable interest these days, from Bernie Sanders, who says he is “absolutely sympathetic” to the idea, to Mark Zuckerberg, Facebook’s chief executive, and other tech billionaires. The basic idea behind it is that handing out unconditional cash to all citizens, employed or not, would help reduce poverty and inequality… As a rich country in the European Union, with one of the highest rates of social spending in the world, Finland seemed like an ideal testing ground for a state-of-the-art social welfare experiment. …Kela, the national social-insurance institute, randomly selected 2,000 Finns between 25 and 58 years of age who were already getting some form of unemployment benefits. The subsidies were offered to people who had been unemployed for about one year or more, or who had less than six months of work experience.

But then they denigrate the study.

…the Finnish trial was poorly designed… The trial size was cut to one-fifth of what had originally been proposed, and is now too small to be scientifically viable. Instead of giving free money to everyone, the experiment is handing out, in effect, a form of unconditional unemployment benefits. In other words, there is nothing universal about this version of universal basic income. …The government has made no secret of the fact that its universal basic income experiment isn’t about liberating the poor or fighting inequality. Instead, the trial’s “primary goal” is “promoting employment,” the government explained in a 2016 document proposing the project to Parliament. Meaning: The project was always meant to incentivize people to accept low-paying and low-productivity jobs.

Maybe I’m reading between the lines, but it sounds like they are worried that the results ultimately will show that a basic income discourages labor supply.

Which reinforces my concerns about the entire concept.

Yes, the current system is bad for both poor people and taxpayers. But why would anyone think that we’ll get better results if we give generous handouts to everyone?

• We already know that unemployment benefits discourage people from working.
• We already know that food stamps discourage people from working.
• We already know that Obamacare discourages people from working.
• We already know that disability payments discourage people from working.

So if we replace all those handouts with one big universal handout, is there any reason to expect that somehow people will be more likely to find jobs and contribute to the economy?

Again, we need to wait another year or two before we have comprehensive data from Finland. But I’m skeptical that we’ll get a favorable outcome.

P.S. The Wizard-of-Id parody shown above contains a lot of insight about labor supply and incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.S. Since I rarely write about Finland, I should point out that it is ranked #20 for economic liberty, only four spots behind the United States (and the country is more pro-market than America when looking at non-fiscal policy factors).

P.P.P.S. On the minus side, Finland has decided that broadband access is somehow a human right. On the plus side, the country’s central bank produces good research on the burden of government spending, and its former president understood the essential flaw of Keynesian economics.

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In my Fantasies, Here’s How Donald Trump Wins on Obamacare

In the eight years of writing this column, I’ve periodically confessed to certain fantasies. But you’ll notice that these fantasies don’t involve supermodels from Victoria’s Secret (though they did make a cameo appearance in one column).

Instead, either because I’m getting old or because I’m a dorky libertarian, my fantasies involve public policy. Here are imaginary things that have caused my pulse to quicken.

• George H.W. Bush telling someone to grow up and not expect the government to be his mommy and daddy.
• The private sector replacing the government in the business of building and operating roads.
• A public sector that is so small that the income tax can be totally abolished and not replaced with anything.
• Though I paradoxically confess that I’m troubled that this no-income-tax fantasy is partially happening.
• A Texas governor mocking U.N. bureaucrats who are trying to erode American sovereignty.
• When I’m not fantasizing about no income tax, I indulge in the more modest fantasy of a flat tax.

I now have a new fantasy. It involves Donald Trump. But the fantasy doesn’t involve the size of his hands, or any other body part.

Instead, I want President Trump to use his existing power to create irresistible pressure for Obamacare repeal.

Simply stated, I’m fantasizing that this tweet becomes reality.

If a new HealthCare Bill is not approved quickly, BAILOUTS for Insurance Companies and BAILOUTS for Members of Congress will end very soon!

— Donald J. Trump (@realDonaldTrump) July 29, 2017

Michael Cannon, my prescient colleague at the Cato Institute, has been urging this approach since the beginning of the year.

Here’s some of what he wrote for National Review.

Trump…can restore the Constitution’s limits on executive power, provide relief to Americans suffering under Obamacare, and hasten repeal.

Michael has a 14-point list, but here are the ones that matter for our purposes today.

First, put pressure on Congress.

1. End Congress’s illegal Obamacare exemption. Obamacare threw members of Congress and congressional staff out of their health plans and in effect cut their pay by up to $12,000 per year. Obama ignored the law and made illegal payments to private insurance companies on behalf of members of Congress and their staff for six years — all to prevent Congress from reopening the law. Trump should announce that he will end those illegal payments immediately, and that he will veto any bill restoring the pay cut that Obamacare dealt Congress, until Congress earns that money by repealing and replacing the law. Congress shouldn’t get an exemption from Obamacare until the American people do. Democrats who actually voted for Obamacare especially should have to live under it.

Second, put pressure on insurance companies.

2. End Obamacare’s unconstitutional cost-sharing subsidies. In House v. Burwell, a federal judge ruled that the Obama administration “violate[d] the Constitution” by paying billions of dollars in “cost-sharing” subsidies to private insurance companies without a congressional appropriation. Trump should immediately drop the Obama administration’s appeal of that decision, stop the unconstitutional payments, and prevent insurers from canceling Obamacare plans until 2018.

3. End Obamacare’s illegal “reinsurance” payments. The Government Accountability Office found that the Obama administration illegally diverted additional billions of dollars in “reinsurance” payments from the Treasury to private insurance companies. Trump should immediately stop the diversion of those funds and demand that insurers repay the more than $3 billion in unlawful payments they have received.

4. Block Big Insurance’s “risk-corridor” raid on the Treasury. The Obama administration tried to circumvent a statutory cap on “risk-corridor” payments to private insurance companies by offering to settle lawsuits filed by the insurers. Trump should immediately announce that his administration will not settle but will instead vigorously defend taxpayers’ interests in all such lawsuits.

Needless to say, the combination of angst-ridden folks on Capitol Hill and angst-ridden bigwigs from insurance companies would probably be more than enough to get weak-kneed Republicans to climb on board for repeal.

Indeed, in my fantasy, Trump uses his bully pulpit (and Twitter account) to specifically pressure those callow Republicans who voted for major repeal in 2015 and then flip-flopped and voted against various (usually partial) repeal proposals earlier this month.

Various media sources certainly agree that Trump has a huge amount of leverage.

Here are excerpts from a Bloomberg story.

Ending the CSR subsidies, paid monthly to insurers, is one way that Trump could hasten Obamacare’s demise without legislation, by prompting more companies to raise premiums in the individual market or stop offering coverage. …health-care analyst Spencer Perlman at Veda Partners LLC said in a research note that there’s a 30 percent chance Trump will end CSR payments, which may “immediately destabilize the exchanges, perhaps fatally.” …Many insurers have already dropped out of Obamacare markets in the face of mounting losses, and blamed the uncertainty over the future of the cost-sharing subsidies and the individual mandate as one of the reasons behind this year’s premium increases.

The Blaze has a similar report.

President Donald Trump announced on Saturday that if Congress doesn’t act soon on health care, he could end federal “BAILOUTS” for insurance companies, which could effectively force Congress to act or else put health insurance companies in the difficult position of having to raise rates on people who can’t afford to pay them or to leave Obamacare exchanges entirely. …The “BAILOUTS” to insurance companies Trump referred to in his tweet are “cost sharing reduction” payments… If Trump were to withhold these funds from health insurance companies, it would likely result in many insurers choosing to leave the Obamacare health insurance exchanges… If health insurance companies choose to leave the insurance exchanges, which is the most likely response, it could catalyze the collapse of the Obamacare exchange system, making it more difficult for members of Congress to wait on implementing a repeal and replace bill.

And here are passages from a Wall Street Journal story.

President Donald Trump made one of his most explicit threats to cut off payments to insurance companies to force senators and lobbyists back to the bargaining table for a GOP health-care bill, and saying, for the first time, that he was also willing to cancel some of lawmakers’ health-care benefits. …Those payments have been challenged in court by House Republicans, who argue the funds were never authorized by Congress. A federal judge has sided with the House but allowed the payments to continue until the litigation concludes. Democrats have said that cutting off the payments would be tantamount to sabotaging the insurance markets… Mr. Trump’s Saturday tweet…also the first to mention that he was open to another idea proposed by conservative activists to pull lawmakers back to the task of a health-care bill: cutting off their existing health benefits. …some lawmakers contending that it is an end-run around a provision in the 2010 health law that requires members of Congress to get their health coverage like other Americans.

Keep in mind, by the way, that this isn’t just a matter of political brinksmanship. The various payments to insurance companies are either not authorized by the law, or they were authorized and Congress has declined to appropriate funds. In other words, these payments make a mockery of the rule of law. They are illegal and/or unconstitutional.

Moreover, my former Heritage colleague Mike Needham has a good explanation of how the Obama Administration preposterously decided to classify Congress as a small business in order to enable subsidies that were not part of the Obamacare legislation. Once again, throwing the rule of law overboard for political convenience (which was a pattern with the previous Administration).

So even if Trump didn’t want to get rid of Obamacare, these payments should end.

But we may as well make a policy virtue out of legal necessity by getting rid of these payments as part of a campaign to pressure Capitol Hill to do what’s right and get rid of the disastrous Obamacare legislation.

P.S. Never forget that we wouldn’t be in this mess if John Roberts had upheld his oath and ruled that Obamacare was unconstitutional.

P.P.S. From the moment he emerged on the national stage, I’ve been worried that Donald Trump would preside over an expansion in the burden of government. But if there’s a libertarian bone in his body, it becomes apparent when he tweets. Not only did he tweet a very appropriate and effective threat against Obamacare yesterday, he also tweeted a very appropriate and effective threat about a government shutdown back in May.

P.P.S. It wasn’t one of my fantasies, but here’s something from 2013 about a libertarian fantasy dealing with ammo and sex.

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Senator Chris Murphy and the All-Encompassing State

As a former Connecticut resident, I’m ashamed that my home state, which used to be a success story with no income tax, has now morphed into a high-tax welfare state that is now increasingly infamous for the outflow of productive people and taxable income.

And even though I left several decades ago, I also feel vaguely guilty that my former state produces politicians such as Senator Chris Murphy.

Most people have never heard of him since he’s never accomplished anything in Washington. Though I would argue that’s a good thing since he’s a knee-jerk statist.

But I gather that Senator Murphy no longer wants to be in the shadows. Here’s a tweet he issued yesterday that has received a lot of publicity.

Last night proved, once again, that there is no anxiety or sadness or fear you feel right now that cannot be cured by political action.

— Chris Murphy 🟧 (@ChrisMurphyCT) July 28, 2017

Wow, this is an astounding display of statolatry. The kind of statement one might expect from a functionary from a totalitarian regime.

Or maybe a line from George Orwell’s 1984. Just think of the implications:

• Are you afraid of spiders? Hey, government can help!
• Are there dandelions in your yard? Don’t worry, Big Brother to the rescue!
• Did McDonald’s forget to include a toy in your Happy Meal? Time for political action!

While his views are reprehensible, I’m actually glad Senator Murphy inadvertently revealed his statism.

If nothing else, it’s produced some clever humor. The folks at Twitchy have been sharing this tweet, which came from a parody account for a North Korean news service.

US senator Chris Murphy of Connecticut province endorses Juche Idea of Great Leader Kim Il-Sung, political action as cure for all human ills https://t.co/e0wRit5yD6

— DPRK News Service (@DPRK_News) July 28, 2017

By the way, if you’re like me and are not familiar with “Juche,” it’s apparently a North Korean twist on Marxism.

In other words, take the traditional horror of communism and then add a layer of autarky to ensure even greater misery.

And here’s another amusing take, juxtaposing Murphy’s statolatry with Reagan’s wisdom (see last video from this collection). And they even demoted him to Representative rather than Senator.

But we shouldn’t merely mock Murphy.

His views truly are reprehensible because they imply there is no element of human existence that is independent of government. The state is everything.

And if that sounds familiar, it’s probably because you know something about economics, philosophy, and history. The most evil people in world history have expressed the same sentiment.

Such as the leader of Germany’s National Socialist Workers Party.

And the first dictator of the Soviet Union.

Though if I had to pick the quote that is closest to Murphy’s, it would be this awful statement from Mussolini.

Senator Murphy obviously doesn’t share the horrid ideology of either national socialism or international socialism, so his version of statolatry is far more benign.

Sort of like this cartoon instead of gulags and concentration camps.

But I still think his views are reprehensible. We’re not children and the government is not our parents. America’s Founding Fathers strictly limited the powers of the federal government because they understood the risks of a coercive state dictating our lives. Even if it’s benign statism rather than totalitarian statism.

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Why the Private Sector Does a Better Job than the Government

When I give speeches about the economic case for small government, one of my main points is that people in the private sector (workers, investors, managers, entrepreneurs, etc) are motivated by self interest to allocate labor and capital efficiently. To be more specific, the pursuit of higher pay and greater profit will lead people to allocate resources productively.

I freely admit that people in the private sector make mistakes (most new business ventures ultimately fail, for instance), but I explain that’s part of a dynamic process in a market economy. Every success and every mistake leads to feedback, both via the price system and also via profits and losses. All of which leads to continuous changes as people – especially entrepreneurs – seek to better serve the needs and wants of consumers, since that’s how they can increase their income and wealth.

In other words, Adam Smith was right when he said that self interest encourages people to focus on making others better off.

By contrast, when politicians and bureaucrats allocate resources (either directly via spending programs, or indirectly via regulation or tax distortions), feedback mechanisms are very weak. Once politicians intervene, they never seem to care if they are generating positive results. There are plenty of examples, however, of government imposing high costs while producing no benefits. Or even producing harm.

• Increased redistribution spending is associated with a halt in the historical progress against poverty.
• More education spending has completely failed to produce better education outcomes.
• More regulation and red tape to fight money laundering has not produced reductions in criminal activity.
• Foreign aid outlays that enable larger public sectors that undermine prosperity in developing nations.

And let’s not forget that “Public Choice” teaches us that interest groups will manipulate government to obtain unearned benefits.

The main lesson from all this information is that it’s good to have small government rather than large government.

But there’s a secondary lesson about how the economic harm of government can be reduced if market forces somehow can be part of the process. And that’s why a new study from two Italian economists at the Centre for Economic and International Studies is worth sharing.

The abstract of the study is a good summary.

We empirically investigate the effect of oversight on contract outcomes in public procurement. In particular, we stress a distinction between public and private oversight: the former is a set of bureaucratic checks enacted by contracting offices, while the latter is carried out by private insurance companies whose money is at stake through so-called surety bonding. We analyze the universe of U.S. federal contracts in the period 2005-2015 and exploit an exogenous variation in the threshold for both sources of oversight, estimating their causal effects on costs and execution time. We find that: (i) public oversight negatively affects outcomes, in particular for less competent buyers; (ii) private oversight has a positive effect on outcomes by affecting both the ex-ante screening of bidders – altering the pool of winning firms – and the ex-post behavior of contractors.

In other words, normal bureaucratic waste, featherbedding, and cost overruns are less likely when the private sector does the oversight.

And here’s an excerpt from the text for those who want more details.

…we propose a distinction between public and private oversight, depending on its source. Public oversight includes all formal checks – cost certifications, pricing data transmission, production surveillance – which the contracting authorities enact during the contract awarding phase and execution. It typically involves considerable paperwork for both the buyer and the sellers. At the cost of some red tape, it is aimed at alleviating the moral hazard problem… On the other hand, private oversight involves third parties – surety companies – issuing bonds (surety bonds) to secure the buyer against unpredictable events. If the seller fails to fulfill contractual tasks, contracting authorities make claims to recover losses. A surety is then called on either to complete the public work by themselves (i.e. with their own resources or by subcontracting) or to refund the authority of the bond value. Being liable in case of unsatisfactory contract outcomes, the sureties have strong incentives both to screen bidders (ex ante) and to monitor contractors (ex post). They help mitigate the asymmetry of information between the buyer and the sellers thanks to their experience of the market – i.e. access to private information – and the screening enacted through price discrimination on premia, which directly affects offers placed by potential contractors. Hence, private oversight enhances the selection of the best contractors and provides a second tier of monitoring of contractors’ progresses.

This is encouraging. It would be nice to have smaller government, but it also would be nice to get the most bang for the buck when the government does spend money.

To be sure, there are probably many parts of government that are impervious to market forces.

But surely there are many ways to protect taxpayers by creating incentives to save money.

• For instance, on the programmatic level, we can enlist the private sector to fight rampant Medicare and Medicaid fraud by allowing private investigators to keep a slice of any recovered funds.
• And on the sectoral level, we can achieve big educational gains with school choice, thus giving schools a bottom-line incentive to attract students with better outcomes.
• Last but not least, we can rely on the competitive impact of federalism to encourage better macroeconomic policy by state and local governments.

The moral of the story, needless to say, is that the private sector does a better job than government. So let’s do what we can to unleash market forces. Be more like Hong Kong and less like Venezuela.

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A Primer on Inequality, Growth, and Fairness

In addition to his exemplary work as a Senior Fellow for the Cato Institute, Johan Norberg narrates some great videos for Free to Choose Media. Here are some that caught my eye.

• The foolish and counterproductive War on Drugs.
• A grim consequence of Cuban communism.
• The real lesson to learn from Sweden.

But my favorite video, which I shared back in January, is his concise explanation of why policy makers should focus on fighting poverty rather than reducing inequality.

I’m posting it again to set the stage for a discussion on inequality and fairness.

Now let’s dig into the main topic for today.

A study by three academics from Yale’s Department of Psychology concludes that people want fairness rather than equality.

…there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality.

My former grad school classmate Steve Horwitz wrote about the aforementioned study

…what we really care about is something other than inequality per se. We care about upward mobility, or average income overall, or how well the least well off do. …A recent study in Nature argued, with evidence, that what bothers people more than inequality per se is “unfairness.” People will accept inequality if they feel the process that produced it is fair. …when I give talks about inequality. I point out the number of Apple products visible in the room and ask them if they think the wealth Steve Jobs and other Apple founders accumulated over their lifetimes was objectionable. Is that the kind of inequality they object to? Students are usually hard-pressed to articulate why Jobs’ wealth is wrong… I also remind them that economic studies show that only about 4% of the total benefits of innovation accrue to the innovator. The rest goes to consumers.

Steve cites Nozick and Hayek to bolster his argument before then making the key point that markets produce material abundance based on genuine fairness.

As Robert Nozick argued in Anarchy, State, and Utopia: if each step in the evolution of the market is fair by itself, how can the pattern of income that emerges be unfair? …Hayek…observed in The Constitution of Liberty that if we want equality of outcomes, we will have to treat people unequally. If, however, we treat people equally, we will get unequal outcomes. Hayek’s argument was premised on the fact that human beings are not equal in our native intelligence, strength, skills, and abilities. …If people really care about fairness, then supporters of the market should be insisting on the importance of equality before the law. …Equality of outcomes requires that we treat people differently, and this will likely be perceived as unfair by many. Equality before the law corresponds better with notions of fairness even if the outcomes it produces are unequal. …If what appear to be concerns about inequality are, in fact, concerns about unfairness, we have ways of addressing them that demonstrate the power of exchange and competitive markets. Markets are more fair because they require that governments treat us all equally and that none of us have the ability to use political power to protect ourselves from the competition of the marketplace and the choices of consumers. In addition, market-based societies have been the best cure for poverty humans have ever known.

Writing for CapX, Oliver Wiseman analyzes other scholarly research on equality and fairness.

A 2012 study by behavioural economists Dan Ariely and Mike Norton generated some attention for demonstrating that Americans wanted to live in a more equal country. But more equal is not the same thing as fully equal. …if you let people choose between equal and unequal societies – and then tell them that they themselves will be assigned a level of wealth within it completely at random – most people choose inequality. And that preference is observable across the political spectrum, in different countries and at a range of ages.

But people don’t want undeserved inequality since that is the result of unfair interventions (i.e., cronyism).

This paper’s conclusions help explain much of the outcry over economic inequality in recent years. Occupy Wall Street and the very idea of the “one per cent” emerged just after the financial crisis plunged much of the world into recession, and US and British banks were handed billion-dollar bailouts to steady the ship. The anger didn’t come from the fact that bankers were so well paid. It came from the perception that they’d made that money by piling up risk rather than being particularly clever or hard-working – risk that was now being underwritten by the taxpayer. The wealth wasn’t just distributed unequally, but unfairly. The market mechanisms that most people accepted as the rules of the economic game suddenly seemed rigged. …Voters, in other words, don’t want equality – they want fairness. …As the Soviets found, true economic equality cannot be accommodated within a system that allows people tolerable levels of economic and political freedom. But fairness, by contrast, is something capitalism can – and should – deliver.

Professor Tyler Cowen of George Mason University cites some additional academic research buttressing the conclusion people don’t object to fair types of inequality.

…most Americans don’t mind inequality nearly as much as pundits and academics suggest. A recent research paper, by Graham Wright of Brandeis University, found that polled attitudes about economic inequality don’t correlate very well with the desire for government to address it. There is even partial evidence, once controls are introduced into the statistics, that talk of inequality reduces the support for doing something about it. …It’s not obvious why such counterintuitive results might be the case. One possibility is that…talk about economic inequality increases political polarization, which lowers the chance of effective action. Or that criticizing American society may cause us to feel less virtuous, which in turn may cause us to act with less virtue. …A variety of other research papers have been showing that inequality is not a major concern per se. One recent study by Matthew Weinzierl of Harvard Business School shows that most Americans are quite willing to accept economic inequality that stems from brute luck, and that they are inclined to assume that inequality is justified unless proved otherwise.

Last but not least, Anne Bradley of the Institute for Humane Studies augments this analysis by explaining the difference between ethical market-driven inequality versus unfair cronyist-caused inequality.

The question of whether income inequality is bad hinges on the institutions within that society and whether they support entrepreneurship and creativity or thuggery and exploitation. Income inequality is good when people earn their money by discovering new and better ways of doing things and, through the profit mechanism, are encouraged to bring those discoveries to ordinary people. …Rising incomes across all income groups (even if at different rates) is most often the sign of a vibrant economy where strangers are encouraged to serve each other and solve problems. Stagnant incomes suggest something else: either a rigged economy where only insiders can play, or an economy where the government controls a large portion of social resources, stalling incomes, wealth, and wellbeing.

She includes a very powerful example of why it can be much better to live in a society with high levels of (fair) inequality.

Consider the following thought experiment: knowing nothing other than the Gini index scores, would you rather live in a world with a Gini of .296 (closer to equality) or .537 (farther from equality)? Many people when asked this question choose the world of .296. These are the real Gini scores of Pakistan (.296) and Hong Kong (.537). If given the choice, I would live in Hong Kong without thinking twice. Hong Kong has a thriving economy and high incomes, and it is the world leader in economic freedom. The difference between these two countries could not be more striking. In Pakistan, there might be more income equality, but everyone is poorer. It is difficult to emerge out of poverty in Pakistan. Hong Kong provides a much richer environment where people are encouraged to start businesses, and this is the best hope for rising incomes, or income mobility.

Her example of Hong Kong and Pakistan is probably the most important takeaway from today’s column.

Simply stated, it’s better to be poor in a jurisdiction such as Hong Kong where there is strong growth and high levels of upward mobility. Indeed, I often use a similar example when giving speeches, asking audiences whether poor people are better off in Hong Kong, which has only a tiny welfare state, or better off in nations such as France and Greece, which have bloated welfare states but very little economic dynamism.

The answer is obvious. Or should be obvious, at least to everyone who wants to help the poor more than they want to punish the rich (and there are plenty in the latter camp, as Margaret Thatcher explained).

And I’m now going to add my China example to my speeches since inequality dramatically increased at the same time that there was a stupendous reduction in poverty.

Once again, the moral of the story should be obvious. Focus on growth. Yes, some rich people will get richer, but the really great news is that the poor will get richer as well. And so long as everyone is earning money through voluntary exchange rather than government coercion, that also happens to be how a fair economy operates.

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America Needs Tax Cuts and Tax Reform, but Can the GOP Deliver?

It’s depressing to see how Republicans are bungling the Obamacare issue. But it’s also understandable since it’s politically difficult to reduce handouts once people get hooked on the heroin of government dependency (a point I made even before Obamacare was enacted).

Unfortunately, I fear that the GOP might bungle the tax issue as well. I was interviewed the other day by Dana Loesch on this topic and highlighted several issues.

• High income tax rates on households are a big penalty on small businesses that pay through Schedule C of the personal income tax.
• Getting Republicans on the same page will be very difficult until the House GOP ditches the misguided border adjustment tax.
• Hong Kong shows that eliminating withholding would create a political environment conducive to limited government.

Here’s the full discussion.

What’s especially frustrating about this issue is that taxes should be reduced. A lot.

Brian Riedl of the Manhattan Institute debunks six tax myths. Here they are, followed by my two cents.

Myth #1: Long-term deficits are driven by tax cuts and falling revenues

Fact: They are driven entirely by rapid spending growth

Brian nails it. I made this same point earlier this year. Indeed, because the tax burden is projected to automatically increase over time, it is accurate to say that more than 100 percent of the long-run fiscal problem is caused by excessive spending (particularly poorly designed entitlement programs).

Myth #2: Democratic tax proposals would significantly reduce the deficit

Fact: Their most common proposals would raise little revenue

Once again, Brian is right. There are ways to significantly increase the tax burden in America, such as a value-added tax. But the class-warfare ideas that attract a lot of support on the left won’t raise much revenue because upper-income taxpayers have substantial control over the timing, level and composition of their income.

Myth #3: Taxing millionaires and corporations can balance the long-term budget

Fact: These taxes cannot cover Washington’s current commitments, much less new liberal wish lists

Since even the IRS has admitted that upper-income taxpayers finance a hugely disproportionate share of the federal government, it hardly seems fair to subject them to even more onerous penalties. Especially since the IRS data from the 1980s suggest punitive rates could lead to less revenue rather than more.

Myth #4: The U.S. income tax is more regressive than other nations

Fact: It is the most progressive in the entire OECD

There are several ways to slice the data, so one can quibble with Brian’s assertion. But when comparing taxes paid by the rich compared to taxes paid by the poor, it is true that the United States relies more on upper-income taxpayers than any other developed nation. Not because we tax the rich more, but because we tax the poor less.

Myth #5: The U.S. tax code is becoming more regressive over time

Fact: It has become increasingly progressive over the past 35 years

Brian is right. Child credits, changes in the standard deduction and personal exemptions, and the EITC have combined in recent decades to take millions of households off the tax rolls. And since the U.S. thankfully does not have a value-added tax, lower-income people are largely protected from taxation.

Myth #6: Tax rates do not matter much to economic growth

Fact: They are among the most important factors

There are many factors that determine a nation’s economic success, including trade policy, regulation, monetary policy, and rule of law, so a good tax code isn’t a guarantor of prosperity and a bad tax system doesn’t automatically mean malaise. But Brian is right that taxation has a significant impact on growth.

In the interview, I said that I had two fantasies. First, I want to junk the corrupt internal revenue code and replace it with a simple and fair flat tax.

Second, I’d ultimately like to shrink government so much that we could eliminate the income tax entirely.

Many people don’t realize that income taxes only began to plague the world about 100 years ago.

If we can somehow restore the kind of limited government envisioned by America’s Founders, the dream of no income tax could become a reality once again.

But if Republicans can’t even manage to cut taxes today, when they control both the executive and legislative branch, then neither one of my fantasies will ever become reality.

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The United States Should Copy Canada, but Only the Good Parts

Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, regulatory budgeting, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

So when I saw a column in the Atlantic, suggesting that America can learn from Canada, I was instantly intrigued.

But it turns out that the author, Jonathan Kay, was more interested in extolling the virtues of big government rather than boasting about his nation’s economic reforms.

He starts by grousing about sub-par infrastructure in America.

There hasn’t been a new major airport constructed in the United States since 1995. And the existing stock of terminals is badly in need of upgrades. Much of the surrounding road and rail infrastructure is in even worse shape (the trip from LaGuardia Airport to midtown Manhattan being particularly appalling). Washington, D.C.’s semi-functional subway system feels like a World’s Fair exhibit that someone forgot to close down. Detroit’s 90-year-old Ambassador Bridge—which carries close to $200 billion worth of goods across the Canada-U.S. border annually—has been operating beyond its engineering capacity for years.

I have little doubt that America has serious infrastructure problems, particularly in big cities (such as New York, Washington, and Detroit) where spending decisions are driven by a desire to line the pockets of unionized bureaucrats rather than to provide services to taxpayers.

But is the United States really some sort of third-world backwater compared to our northern cousins? A few years ago, I looked at data from the World Economic Forum’s Global Competitiveness Report to see how the United States was ranked for infrastructure and discovered America was in 12th place. Which was higher than Canada’s 15th-place ranking.

But maybe things have changed since 2014. So I perused the most recent rankings. Lo and behold, the United States actually jumped one spot, to #11, while Canada remained in 15th place.

I don’t want to imply that the United States has good infrastructure policy. As far as I’m concerned, increased federal involvement has caused our system to become somewhat dysfunctional.

But since Canada ranks even lower, perhaps Mr. Kay shouldn’t be throwing rocks in a glass house.

What makes his error noteworthy is that he then tries to argue that America’s supposedly inferior infrastructure is the result of inadequate taxation.

The United States is falling apart because—unlike Canada and other wealthy countries—the American public sector simply doesn’t have the funds required to keep the nation stitched together. …The Organization for Economic Co-Operation and Development (OECD), a group of 35 wealthy countries, ranks its members by overall tax burden—that is, total tax revenues at every level of government, added together and then expressed as a percentage of GDP—and in latest year for which data is available, 2014, the United States came in fourth to last. Its tax burden was 25.9 percent—substantially less than the OECD average, 34.2 percent. If the United States followed that mean OECD rate, there would be about an extra $1.5 trillion annually for governments to spend.

The obvious implication of Mr. Kay’s column is that a much bigger tax burden would lead to much better infrastructure.

Yet if that was the case, then why does the United States rank above Canada?

Heck, I also want to ask why Mr. Kay to explain why the l0w-tax outposts of Hong Kong and Singapore ranked #1 and #2 for infrastructure?

His entire column is a case study of sloppiness. He starts out with an easily falsifiable assertion about infrastructure and he then makes another easily falsifiable claim about taxes. Does the Atlantic not have any editors?

By the way, none of this is an attack on Canada. Indeed, if you look at Economic Freedom of the World, you will see that Canada has passed the United States and now has more economic liberty. Or perhaps it would be more accurate to say that America’s score dropped faster and farther than Canada’s score. In any event, Canada is now ranked #5 and the United States is #16.

In other words, there is much to admire in Canada. And much to copy.

But Mr. Kay apparently doesn’t want America to mimic pro-market reforms. Instead, he thinks the lesson to be learned is that there should be higher taxes in the United States.

Let’s look at two final excerpts from his column, starting with his observation about the joy of taxation.

It’s really quite simple: When Canadian governments need more money, they raise taxes. Canadians are not thrilled when this happens. But as Justice Oliver Wendell Holmes Jr. put it, taxes are the price paid “for civilized society.”

I can’t resist pointing out that Justice Holmes made his point about taxes and civilization back when the federal government only consumed about 5 percent of economic output. As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

And the final excerpt implies that the business community in Canada doesn’t mind taxes.

…when I recently interviewed Canadian business leaders about the challenges they perceive, the word taxes didn’t get mentioned much.

Since the federal corporate tax rate in Canada is 15 percent, far lower than the 35 percent federal corporate rate in the United States, I’m not surprised that Canada’s business leaders no longer think taxes are their biggest problem. So why doesn’t Mr. Kay argue we should copy that feature of the Canadian system?

Sigh. I joked back in 2012 that supporters of small government in the United States might want to escape to Canada because of all the market-oriented reform. These are the changes that Mr. Kay should be extolling.

P.S. I’m surprised Mr. Kay didn’t advocate that we copy Canada’s government-run health system. You know, the one that is so wonderful that a Canadian politician escaped to the U.S. for surgery while leaving ordinary Canadians stuck in long waiting lines.

P.P.S. To close on a light note, here’s a satirical article about American leftists trying to escape to Canada after the 2010 elections.

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Jeff Sessions: Wildly Wrong on Civil Asset Forfeiture

Because America’s Founding Fathers properly wanted to protect citizens from government abuse, the Constitution has several provisions (presumption of innocence, ban on warrantless searches, right to jury trial, 5th Amendment protection against self-incrimination, and other due process legal protections) to protect our liberties.

So one can only imagine how Jefferson, Madison, Mason, et al, must be rolling in their graves as they contemplate the disgusting practice of civil asset forfeiture, which basically allows agents of the government in the modern era to steal property from people who have not been convicted of any crime. I’m not joking.

Even worse, government agencies are allowed to profit from this form of theft, creating a terrible incentive for abuse.

Like certain other bad government policies that trample our rights (i.e., money-laundering laws that require banks to snoop on law-abiding customers), civil asset forfeiture is largely a result of the government’s failed War on Drugs. In other words, a classic example of one bad policy leading to other bad policies.

Widespread condemnation of civil asset forfeiture led to a tiny step in the right direction by the Obama Administration. And there have been positive reforms at the state level.

However, the Trump Administration and Justice Department are now pushing in the wrong direction.

Writing for USA Today, Professor Glenn Reynolds correctly castigates the Attorney General for his actions.

Attorney General Jeff Sessions wants to steal from you. Oh, he doesn’t call it that. He calls it “civil forfeiture.” But what it is, is theft by law enforcement. Sessions should be ashamed. If I were president, he’d be fired. Under “civil forfeiture,” law enforcement can take property from people under the legal fiction that the property itself is guilty of a crime. …It was originally sold as a tool for going after the assets of drug kingpins, but nowadays it seems to be used against a lot of ordinary Americans who just have things that law enforcement wants. …Once in America, we had a presumption of innocence. But that was inconvenient to the powers that be. The problem is pretty widespread: In 2015, The Washington Post reported that law enforcement took more stuff from people than burglars did. …Sessions is doing exactly the wrong thing by doubling down on asset seizure. The message it sends is that the feds see the rest of us as prey, not as citizens. The attorney general should be ashamed to take that position.

David French of National Review is similarly disgusted.

…civil asset forfeiture. It’s a gigantic law-enforcement scam (in 2014 the government took more money from citizens than burglars stole from crime victims), and it’s a constitutional atrocity. It’s a constitutional atrocity that Donald Trump’s Department of Justice just expanded. Yesterday, Attorney General Jeff Sessions revived an abusive program that allows state authorities to seize property and then transfer the property to the federal government to implement the forfeiture process. Once the Feds obtain forfeiture, they then share the proceeds with the seizing state agency. This allows state law enforcement to explicitly circumvent state forfeiture restrictions and profit while doing so. …civil forfeiture allows the government to deprive citizens of their property even when it doesn’t even try to prove that the citizen committed a crime. …if the last 30 years of constitutional jurisprudence have taught us anything, it’s that we can’t count on courts to protect the Constitution when the War on Drugs is at issue. Forfeiture expanded dramatically as part of the War on Drugs, and the Supreme Court has proven that it will undermine even the First Amendment when constitutional rights clash with drug-enforcement priorities.

Erick Erickson adds his condemnation in the Resurgent.

Attorney General Jeff Sessions…has decided to expand a positively unconstitutional policy that should be ruthlessly fought in courts and legislatures around the country. Jeff Sessions wants to seize the property of Americans accused of crimes even if they are never found guilty by a jury. …According to the Department of Justice’s Inspector General, the Drug Enforcement Agency alone has seized more than $3 billion from people not charged with a crime. …What is appalling here is that many states are enacting prohibitions on civil asset forfeiture, but the Attorney General wants to allow state and local law enforcement to use federal asset forfeiture laws to continue seizing property. Local law enforcement will thereby be able to get around their own states’ laws, so long as they share the spoils of their ill gotten gains with the federal government. This turns the concept of federalism on its head.

In a column for Reason, Damon Root of Reason adds his two cents.

…civil asset forfeiture is not a “lawful tool.” It is an unconstitutional abuse of government power. The Fifth Amendment forbids the government from depriving any person of life, liberty, or property without due process of law. Civil asset forfeiture turns that venerable principle on its head, allowing government agents to take what they want without the bother of bringing charges, presenting clear and convincing evidence, and obtaining a conviction in a court of law. It is the antithesis of due process. …Supreme Court Justice Clarence Thomas…recently explained in a statement respecting the denial of certiorari in the case of Leonard v. Texas, not only has civil asset forfeiture “led to egregious and well-chronicled abuses” by law enforcement agencies around the country, but the practice is fundamentally incompatible with the Constitution.

Last but not least, the editors of National Review make several important points.

Like the Democrats’ crackpot plan to revoke the Second Amendment rights of U.S. citizens who have been neither charged with nor convicted of a crime simply for having been fingered as suspicious persons by some anonymous operative in Washington, seizing an American’s property because a police officer merely suspects that he might be a drug dealer or another species of miscreant does gross violence to the basic principle of due process. No doubt many of the men and women on the terrorism watch list are genuine bad guys, and no doubt many of those who have lost their property to asset forfeiture are peddling dope. But we are a nation of laws, which means a nation of procedural justice. If the DEA or the LAPD wants to punish a drug trafficker, then let them build a case, file charges, and see the affair through to a conviction. We have no objection to seizing the property of those convicted of drug smuggling — or of crimes related to terrorism, or many other kinds of offenses. We object, as all Americans should object, to handing out these punishments in the absence of a criminal conviction. …No American should be deprived of liberty or property without due process.

Amen.

For those of us who honor the Constitution, civil asset forfeiture is a stain on the nation.

Let’s close with an amusing take on the issue. Even though he’s referred to me as insane and irrational, I think Matthew Yglesias wins the prize for the most clever tweet.

https://twitter.com/mattyglesias/status/888580073368031232

P.S. If you want to put a human face on the horror of civil asset forfeiture, check out the horrible abuse that the Dehko family experienced. Or the mistreatment of Carole Hinders. Or the ransacking of Joseph Rivers. Or the brutalization of Thomas Williams.

P.P.S. And think about the fact that the first two administrators of the federal government’s asset forfeiture program now want it to be repealed.

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Great Moments in Foreign Government

In my writings about “Great Moments in Foreign Government,” I’ve come across amazing examples of bone-headed and incompetent behavior by politicians and bureaucrats in other nations.

• The British government giving welfare to people with multiple wives.
• The German government having a jihadist working in one of its intelligence agencies.
• The Italian government appointing the wrong person for a job that shouldn’t exist.
• The Norwegian government financing friends for a mass murderer.
• The Greek government turning tourists into snoops for the tax police.
• The French government ordering trains that were too wide for railway stations.
• The Japanese government persecuting people for the horrible crime of giving unlicensed coffee enemas.
• The British government providing welfare payments for foreigners living in other countries.
• The German government spending more to administer a tax than it gets from collecting the tax.

Let’s add to this collection with three new stories about failures by foreign governments.

Our first example is from the United Kingdom, where the Times reports that spending on “sex education” actually increased teen pregnancy rates.

Teenage pregnancy rates have been reduced because of government cuts to spending on sex education and birth control for young women, according to a study that challenges conventional wisdom. The state’s efforts to teach adolescents about sex and make access to contraceptives easier may have encouraged risky behaviour rather than curbed it, the research suggests. In 1999, faced with some of the highest teenage pregnancy rates in Europe, ministers paid councils tens of millions of pounds a year to tackle the problem. Some local authorities made the morning-after pill freely available through pharmacies, while most hired teenage pregnancy “co-ordinators”, opened sexual health clinics in schools, and funded sex and relationship education (SRE) classes. The number of pregnancies, however, has fallen at a significantly faster rate since the grants were scrapped in 2010, in spite of critics’ dire prophecies to the contrary. David Paton, of the Nottingham University Business School, and Liam Wright, of the University of Sheffield, found that the decline was steepest in areas where councils slashed their teenage pregnancy budgets most aggressively. …Analysis of 149 local authorities from 2009 to 2014 adds to a body of evidence that suggests that when the government involves itself in teenagers’ sex lives it often winds up achieving the opposite of what was intended.

A government policy backfiring? Perish the thought!

Reminds me of the story about students who took driver education classes from the government in Indiana being more likely to have accidents than the students who didn’t take classes.

Our second example is from Sweden, where a local governments wants to create an entitlement for on-the-clock sex breaks.

Workers in Sweden could soon be allowed to take paid “sex breaks” during the day… A councillor in the northern town of Overtornea presented a motion asking that the area’s workers be given an hour during the day to go home and be intimate with their partners. …Muskos admitted there was no way to check whether workers would actually use the hour for its intended purpose. “You can’t guarantee that a worker doesn’t go out for a walk instead,” he said, adding that employers needed to trust their employees. …”This means that childbirth should be encouraged,” his motion states, as reported by Swedish newspaper Kuriren. …He said single people should also be allowed to take the hour to spend time improving their own well-being.

I wonder if the government will hire additional bureaucrats to monitor current bureaucrats to ensure that they are having sex on their breaks.

But what about those without spouses or significant others? Will the government pay to get them a partner? Don’t laugh, that’s something the British government already has done.

Speaking of which, we return to the United Kingdom for our third and final example. It seems lemonade cops don’t just exist in California, Georgia, and Oregon, they also patrol the mean streets of London.

A five-year-old girl selling lemonade to revellers heading to a festival in east London had her stand shut down by council officers who slapped her and her father with a £150 fine. Andre Spicer said his daughter burst into tears and told him “I’ve done a bad thing” after enforcement officers read out a lengthy legal letter before issuing him the notice. The five-year-old and Mr Spicer, a professor at City University, were given the fine for “trading without a permit” after they set up the make-shift stall near their home in Mile End. …Mr Spicer branded the enforcements officers’ decision an “over-zealous way of applying the rules,” after the pair set out to refresh festival goers heading to Lovebox in Victoria Park on Saturday. He said: “It’s not like she was trying to make a massive profit, this is just a five-year-old kid trying to sell lemonade. …Mr Spicer said he tried to tell his distraught daughter they would set up another stand to sell their homemade pop once they had a permit, but she replied: “No. It’s too scary.”

At least Canada tries to be unique. They bust kids who sell worms instead of lemonade.

But perhaps harassing kids is the best we can expect from the British government. After all, this is the place that is sometimes too incompetent to give away money. Though our cousins across the Atlantic are remarkably effective at producing pointless signs and road markings.

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Two Reasons Why Policy Stability Means Economic Decline for Italy

I’m rather pessimistic about Italy.

Simply stated, it’s economy is moribund. If you peruse the OECD’s economic database, you’ll see that both inflation-adjusted GDP and inflation-adjusted private consumption expenditure (in some ways a more accurate measure of actual quality of life) have grown by an average of just slightly over one percent annually this century.

And even though Italy’s population growth has been anemic, there are more people. And when you add a larger population to the equation, you get per-capita changes in output and living standards that are even less impressive.

But not everyone shares my dour outlook. I recently exchanged views with someone who said that Italy hasn’t increased the burden of government in recent years.

And that person is right. Sort of.

Here’s a chart showing Italy’s score from Economic Freedom of the World since the start of the 21st century. As you can see, it’s been remarkably stable.

But I have two reasons why I think policy stability is a recipe for economic decline.

First, you don’t win a race by standing still if others are moving forward. If you look closely at the above chart, you will see that Italy used to be ranked #36 in the world for economic freedom but it now ranks #69. In other words, Italy’s absolute level of economic freedom barely changed over the period, but its relative position declined significantly because other nations engaged in reforms and leapfrogged Italy in the rankings.

Second, Italy is in the middle of dramatic demographic changes that will have a huge impact on fiscal policy. People are living longer and having fewer children, but Italy’s welfare state was set up on the assumption that there would be lots of working-age taxpayers to finance old-age beneficiaries. In other words, policy stability will lead to fiscal crisis thanks to changes in the composition of the population. Think Greece, but on a bigger scale.

And when I refer to Greece on a bigger scale, I’m thinking another fiscal crisis.

Demond Lachman of the American Enterprise Institute is pessimistic about Italy and warns that high levels of red ink could cause a big mess.

We’ve got an Italian economy that is categorized by extremely high public debt. Their public debt level is now something like 132% of GDP, they’ve got a banking system that is bust, that banks have something like 18% of their loans non-performing, that is a huge amount, the economy is completely sclerotic, that the level of Italian GDP today is pretty much the same as it was some fifteen years ago. There’s been practically no growth, declining living standards… What also makes Italy very important from a global point of view is that we’re now not talking about a small country like Greece which doesn’t have that much systemic significance. We’re talking about the third largest country in the Eurozone. We’re talking about a country that has the world’s third largest sovereign bond market with something like two and a half trillion dollars of debt.

And don’t forget that these grim fiscal numbers probably mean even higher taxes on Italy’s young workers.

But those taxpayers aren’t captives. Cristina Odone, in a column for CapX, points out that young people are getting the short end of the stick.

Gerontocracy, stifling regulations and huge unemployment have hindered Italy’s prosperity for decades now. The country hailed for its economic miracle and famed for its creative and industrious entrepreneurs (at the helm, usually, of family-run businesses such as Gucci, Prada, and Ferrero) today comes second only to Greece (among EU countries) for the size of its national debt. …Italy’s unemployed youngsters, who constitute 40 per cent of under-24-year-olds, gnash their teeth at the unfairness of national life, where fossils control the levers of power while flouting their sinecures. A quarter of under-30-year-olds classify as NEETS, young people who are not in education, work or training. Contrast this with the UK, where only one in 10 under the age of 30 is in the same position. …Labour laws continue to blight young people’s prospects. …This sclerosis risks turning Italy into the sick man of Europe.

No wonder many young Italians are migrating to nations with more economic opportunity. AFP has a story on the dour outlook in Italy.

With the country struggling to kick an economic slump, some 40,000 Italians between 18 and 34 years old set out to seek greener pastures elsewhere in 2015, according to the Migrantes Foundation. “Just talking with people (in Italy) it’s clear going away might be the only solution,” said D’Elia, 26, who has spent the last five years in London, where he currently works as a barman, and intends to stay for now despite high living costs. …most of Italy’s youths are unwilling to return — and the country is seen as offering little to attract foreign graduates. …GDP is forecast to inch up just 1.3 percent this year. The jobless rate hovers at over 11 percent, well above the euro area average of 9.3 percent. Among 15 to 24-year olds it leaps to 37 percent, compared with a European average of 18.7 percent. …Sergio Mello, who set up a start-up in Hong Kong before moving to San Francisco, said Italy “does not offer a fertile environment to develop a competitive business”. …Mello says there are other problems: “The bureaucracy wastes a lot of time”, the red tape “drives you crazy”.

Unfortunately, rather than ease up on government burdens so that young people will have some hope for the future, some Italian politicians want new mandates, new spending, new taxes, and new restrictions.

I’ve previously written about new destructive tax policies that shrink the tax base. And I’ve written about wasteful new spending schemes, like a €500 “culture bonus.”

And now there’s something equally silly on the regulatory front being proposed by politicians. Here are excerpts from a report by Heat Street on the initiative.

Italy could soon become the first Western country to offer paid “menstrual leave” to female workers. …If passed, it would mandate that companies enforce a “menstrual leave” policy and offer three paid days off each month to working women who experience painful periods. …The Italian version of Marie Claire described it as “a standard-bearer of progress and social sustainability.” But the bill also has critics, including women who fear this sort of measure could backfire and end up stigmatizing them. Writing in Donna Moderna, another women’s magazine, Lorenza Pleuteri argued that if women were granted extra paid leave, employers would be even more reluctant to hire women, in a country where women already struggle to integrate the workforce. …Miriam Goi, a feminist writer, …fears that rather than breaking taboos about women’s menstrual cycle, the measure could end up perpetuating the idea that women are more emotional than men and require special treatment.

It’s unclear if this policy was actually enacted, but it’s a bad sign that it was even considered. Simply stated, making workers more expensive is not a good way to encourage more job creation. Even a columnist for the New York Times acknowledged that feminist-driven economic policies backfire against women.

The bottom line is that Italy needs sweeping reductions in the burden of the public sector. Yet the nation’s politicians are more interested in expanding the size and scope of government. Perhaps now it’s easy to understand why I fear the country may have passed the tipping point. You can be in a downward spiral even if policy doesn’t change.

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The Top-100 Libertarians

I’m in Las Vegas for FreedomFest, which is sort of like summer camp for libertarians, small-government conservatives, and others who don’t like a bloated and intrusive state.

I’ll be talking about tax reform, the sharing economy, and strategies to constrain big government.

One of the features of this 10th-anniversary meeting of FreedomFest is that the world’s top-100 libertarians will be feted. You can see the entire list at NewsMax, but here’s the top 10. A very impressive collection.

You’ll notice that Cato’s founder and former president is in the Top 10, but he’s not the only representative from the organization.

The Cato Institute is justly recognized for being a principled and effective organization.

So it’s no surprise that several of us are listed in the Top 100.

I’m honored to be on the list, though I wonder if I’m there because I’m noisy rather than competent. That being said, given the expansion of government under both Bush and Obama, I guess nobody would be on the list if it was based on achievements. We obviously need to do a better job as a movement.

Here’s a photo from a casual dinner last night that included David Boaz (#15), Richard Rahn (#61), Barbara Kolm (#64), Veronique de Rugy (#84), and Deirdre McCloskey (#87). And yours truly (#38), of course.

A rogue’s gallery of dissidents, for sure.

Let’s close with some libertarian humor, courtesy of a future Top-100 libertarian who also is in Vegas for FreedomFest.

I’ll have to add this to my collection of pro-and-con libertarian humor.

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In One Story, Everything You Need to Know about Government

Every so often, I run across a chart, cartoon, or story that captures the essence of an issue. And when that happens, I make it part of my “everything you need to know” series.

I don’t actually think those columns tell us everything we need to know, of course, but they do show something very important. At least I hope.

And now, from our (normally) semi-rational northern neighbor, I have a new example.

This story from Toronto truly is a powerful example of the difference between government action and private action.

A Toronto man who spent $550 building a set of stairs in his community park says he has no regrets, despite the city’s insistence that he should have waited for a $65,000 city project to handle the problem. …Retired mechanic Adi Astl says he took it upon himself to build the stairs after several neighbours fell down the steep path to a community garden in Tom Riley Park, in Etobicoke, Ont. Astl says his neighbours chipped in on the project, which only ended up costing $550 – a far cry from the $65,000-$150,000 price tag the city had estimated for the job. …Astl says he hired a homeless person to help him and built the eight steps in a matter of hours. …Astl says members of his gardening group have been thanking him for taking care of the project, especially after one of them broke her wrist falling down the slope last year.

There are actually two profound lessons to learn from this story.

Since I’m a fiscal wonk, the part that grabbed my attention was the $550 cost of private action compared to $65,000 for government. Or maybe $150,000. Heck, probably more considering government cost overruns.

Though we’re not actually talking about government action. God only knows how long it would have taken the bureaucracy to complete this task. So this is a story of inexpensive private action vs. costly government inaction.

But there’s another part of this story that also caught my eye. The bureaucracy is responding with spite.

The city is now threatening to tear down the stairs because they were not built to regulation standards. …City bylaw officers have taped off the stairs while officials make a decision on what to do with it. …Mayor John Tory…says that still doesn’t justify allowing private citizens to bypass city bylaws to build public structures themselves. …“We just can’t have people decide to go out to Home Depot and build a staircase in a park because that’s what they would like to have.”

But there is a silver lining. With infinite mercy, the government isn’t going to throw Mr. Astl in jail or make him pay a fine. At least not yet.

Astl has not been charged with any sort of violation.

Gee, how nice and thoughtful.

One woman has drawn the appropriate conclusion from this episode.

Area resident Dana Beamon told CTV Toronto she’s happy to have the stairs there, whether or not they are up to city standards. “We have far too much bureaucracy,” she said. “We don’t have enough self-initiative in our city, so I’m impressed.”

Which is the lesson I think everybody should take away. Private initiative works much faster – and much cheaper – than government.

P.S. Let’s also call this an example of super-federalism, or super-decentralization. Imagine how expensive it would have been for the national government in Ottawa to build the stairs? Or how long it would have taken? Probably millions of dollars and a couple of years.

Now imagine how costly and time-consuming it would have been if the Ontario provincial government was in charge? Perhaps not as bad, but still very expensive and time-consuming.

And we already know the cost (and inaction) of the city government. Reminds me of the $1 million bus stop in Arlington, VA.

But when actual users of the park take responsibility (both in terms of action and money), the stairs were built quickly and efficiently.

In other words, let’s have decentralization. But the most radical federalism is when private action replaces government.

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The Libertarian Hypocrisy Test

I’ve shared several quizzes that people can take to see whether they are libertarian, some of which are very simple and some of which are very nuanced and complex.

• The Definitive Political Orientation test.
• The Circle test.
• The Libertarian Purity test.
• The 8 Values test.
• The world’s smallest political quiz.

I’ve also shared many examples of statist hypocrisy.

• Six examples from 2014.
• Leonardo DiCaprio’s giant carbon footprint.
• John Kerry’s money in tax havens.
• Rich leftists with kids in private school while fighting school choice for poor kids.
• Celebratory leftists dodging their tax obligations.

So I guess I shouldn’t be surprised to see that someone on the left wants to play this game by combing the concept of quizzes and hypocrisy. I don’t know R.J. Eskow, but he has a quiz on a left-wing website that’s designed to ostensibly measure libertarian hypocrisy.

Though it’s hard to treat the exercise seriously since it is prefaced by some rather silly rhetoric.

Libertarian…political philosophy all but died out in the mid- to late-20th century, but was revived by billionaires and corporations that found them politically useful. …They call themselves “realists” but rely on fanciful theories… They claim that selfishness makes things better for everybody, when history shows exactly the opposite is true. …libertarianism, the political philosophy whose avatar is the late writer Ayn Rand. It was once thought that this extreme brand of libertarianism, one that celebrates greed and even brutality, had died in the early 1980s… There was a good reason for that. Randian libertarianism is an illogical, impractical, inhumane, unpopular set of Utopian ravings. …It’s only a dream. At no time or place in human history has there been a working libertarian society which provided its people with the kinds of outcomes libertarians claim it will provide.

I’m not an ideological enforcer of libertarianism, but I can say with great confidence that Randians are only a minor strain of the libertarian movement. Many of us (including me) enjoyed one or more of her books, and some of us even became libertarians as a result of reading tomes such as Atlas Shrugged, but that’s the extent of her influence.

I also find it odd that Eskow didn’t do his homework when conspiracy-mongering about the Kochs or mentioning Cato. We get almost no funds from corporations. Indeed, I’m willing to bet that major left-wing think tanks get a much higher share of their budget from businesses.

…political libertarianism suddenly had pretensions of legitimacy. This revival is Koch-fueled, not coke-fueled… Exxon Mobil and other corporate and billionaire interests are behind the Cato Institute, the other public face of libertarianism.

Though Eskow gives us a bit of credit.

…the unconventionality of their thought has led libertarians to be among this nation’s most forthright and outspoken advocates for civil liberties and against military interventions.

Gee, thanks. What a magnanimous concession!

But I’ve spent enough time on preliminaries. Let’s get to the test.

Though I have to warn you that it’s just a rhetorical test. You can’t click on answers. There’s not even an answer key where you can calculate any results.

For all intents and purposes, the test is just a series of “gotcha” questions. Eskow probably hopes that libertarians will get flustered when confronted by this collection of queries.

But I’m always up for a challenge. So I decided to give my two cents in response to each question.

Are unions, political parties, elections, and social movements like Occupy examples of “spontaneous order”—and if not, why not?

The term “spontaneous order” refers to the natural tendency of markets to produce efficient and peaceful outcomes without any sort of centralized design or command. I’m not sure how this is connected to government and politics, however. Perhaps Eskow is asking whether political pressure groups can arise without centralized design and command. If so, then I’ll say yes. But if the question is designed to imply that market forces are akin to government actions and/or political activity, I’ll say no.

Is a libertarian willing to admit that production is the result of many forces, each of which should be recognized and rewarded?

Admit it? That’s an inherent part of our approach to economics. The famous “I, Pencil” essay celebrates this principle, and this video is a modern version that captures many of the same concepts. For what it’s worth, I’m guessing Eskow thinks that the market allocation of recognition and reward is somehow deficient, so he’s making some sort of weird argument that intervention is needed.

Is our libertarian willing to acknowledge that workers who bargain for their services, individually and collectively, are also employing market forces?

Yes, we think workers should be able to use any non-coercive tactic to get the maximum pay, including joining unions. And we also recognize the right of employers to use non-coercive tactics to keep costs down. But note that I include “non-coercive” in my analysis. That’s because no employee should be forced to remain at a company that doesn’t pay enough, and no employer should be forced to hire any particular worker or deal with any particular union. Market forces should determine those choices.

Is our libertarian willing to admit that a “free market” needs regulation?

Admit it? We view the private economy in part as a giant network of mutually reinforcing regulation. But Eskow probably doesn’t understand how private regulation operates. And besides, I’m sure his question is about command-and-control government regulation. And if that’s the focus of the question, am I a hypocrite for saying yes in some circumstances, but accompanied by rigorous cost-benefit analysis?

Does our libertarian believe in democracy?

Most libertarians will avoid the hypocrite label on this question because we are not fans of “democracy.” At least, we don’t believe in democracy if that means untrammeled majoritarianism. Indeed, the U.S. Constitution was created in part to protect some minority rights from “tyranny of the majority.” The bottom line is that we believe in a democratic form of government, but one where the powers of government are tightly constrained.

Does our libertarian use wealth that wouldn’t exist without government in order to preach against the role of government?

This question is based on the novel left-wing theory that wealth belongs to government because the economy would collapse without “public goods.” This might be an effective argument against an anarcho-capitalist, but I don’t think it has any salience when dealing with ordinary libertarians who simply want the federal government to stay within the boundaries envisioned by the Founding Fathers. Small-government libertarians are willing to give government 5-10 percent on their income to finance these legitimate activities. But, yes, we will preach when the burden of government expands beyond that point.

Does our libertarian reject any and all government protection for his intellectual property?

I’ll admit this is a tough question. I’ve never written on this issue, but libertarians are split on whether governments should grant and enforce patents and copyrights. Though I suspect both camps are probably intellectually consistent, so I doubt hypocrisy is an issue.

Does our libertarian recognize that democracy is a form of marketplace?

The “public choice” school of economics was created to apply economic analysis to political action, and most libertarians would agree with that approach. So the obvious answer is that, yes, we recognize that democracy is a type of marketplace. Once again, though, I think Eskow has an ulterior agenda. He probably wants to imply that if we accept market outcomes as desirable, then we must also accept political decisions as desirable. Yet he should know, based on one of the questions above, that we’re not huge fans of majoritarianism. The key distinction, from our perspective, is that market choices don’t involve coercion.

Does our libertarian recognize that large corporations are a threat to our freedoms?

Since libertarians are first in line to object when big companies lobby for bailouts, subsidies, and protectionism, the answer is obviously yes. Libertarians opposed Dodd-Frank, unlike the big companies on Wall Street. Libertarians opposed Obamacare, unlike the big insurance companies and big pharmaceutical companies. Libertarians oppose the Export-Import Bank, unlike the cronyists at the Chamber of Commerce. We are very cognizant of the fact that businesses are sometimes the biggest enemies of the free market.

Does he think…that historical figures like King and Gandhi were “parasites”?

This question is a red herring, based on Ayn Rand’s hostility to selflessness. As I noted above, very few libertarians are hard-core Randians. We have no objection to people dedicating their lives to others. And if that means fighting for justice and against oppression, we move from “no objection” to “enthusiastic support.”

If you believe in the free market, why weren’t you willing to accept as final the judgment against libertarianism rendered decades ago in the free and unfettered marketplace of ideas?

Since we don’t have any pure laissez-faire societies, we libertarians have to admit that we still have a long way to go. But our views aren’t right or wrong based on whether they are accepted by a majority. Heck, I would argue for libertarianism in France, where I’d have several thousand opponents for every possible ally.

I’ll close today’s column by briefly expanding on this final question, especially since Eskow also made similar claims in some of the text I excerpted above.

If you look around the world, you won’t find a Libertopia or Galt’s Gulch (egads, a Rand reference!). That being said, there is a cornucopia of evidence that nations with comparatively small and non-intrusive governments are much more prosperous than countries with lots of taxes, spending, and intervention.

Yes, voters do have an unfortunate tendency to elect more bad politicians (in place likes France and Greece) than sensible politicians (in places such as Switzerland and New Zealand), but that’s not the real test. What ultimately matters is that there’s a very strong relationship between liberty and prosperity. Libertarians pass that test with flying colors.

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Bad Federalism Is Better than No Federalism

I don’t like the income tax that’s been imposed by our overlords in Washington. Indeed, I’ve speculated whether October 3 is the worst day of the year because that’s the date when the Revenue Act of 1913 was signed into law.

I don’t like state income taxes, either.

And, as discussed in this interview about Seattle from last week, I’m also not a fan of local income taxes.

From an economic perspective, I think a local income tax would be suicidally foolish for Seattle. Simply stated, this levy will drive some well-heeled people to live and work outside the city’s borders. And when revenues fall short of projections, Seattle politicians likely will compensate by increasing the tax rate and also extending the tax so it is imposed on those with more modest incomes. And that will drive more people out of the city, which will lead to an even higher rate that hits even more people.

Lather, rinse, repeat.

Though I pointed out that this grim outcome may be averted if the courts rule that Seattle doesn’t have the legal authority to impose an income tax.

But I also explained in the discussion that a genuine belief in federalism means that you should support the right of state and local governments to impose bad policy. I criticize states such as California and Illinois when they expand the burden of government. And I criticize local entities such as Hartford, Connecticut, and Fairfax County, Virginia, when they expand the burden of government.

But I don’t think that Washington should seek to prohibit bad policy. If some sub-national governments want to torment their citizens with excessive government, so be it.

There are limits, however, to this bad version of federalism. State and local governments should not be allowed to impose laws outside their borders. That’s why I’m opposed to the so-called Marketplace Fairness Act. And they shouldn’t seek federal handouts to subsidize bad policy, such as John Kasich’s whining for more Medicaid funding.

Moreover, a state or local government can’t trample basic constitutional freedoms, for instance. If Seattle goes overboard with its anti-gun policies, federal courts presumably (hopefully!) would strike down those infringements against the 2nd Amendment. Likewise, the same thing also would (should) happen if the local government tried to hinder free speech. Or discriminate on the basis on race.

By the way, it’s worth pointing out that these are all examples of the Constitution’s anti-majoritarianism (which helps to explain why the attempted smear of James Buchanan was so misguided).

The bottom line is that I generally support the rights of state and local governments to impose bad policy, so long as they respect constitutional freedoms, don’t impose extra-territorial laws, and don’t ask for handouts.

And I closed the above interview by saying it sometimes helps to have bad examples so the rest of the nation knows what to avoid. Greece and France play that role for the industrialized world. Venezuela stands alone as a symbol of failed statism in developing world. Places like Connecticut and New Jersey are poster children for failed state policy. And now Seattle can join Detroit as a case study of what not to do at the local level.

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Social Security’s Creeping Fiscal Crisis

Since it is the single-largest government program, not only in the United States but also the entire world, it’s remarkable that Social Security isn’t getting much attention from fiscal policy wonks.

Sure, Obamacare is a more newsworthy issue because of the repeal/replace fight. And yes, it’s true that Medicare and Medicaid are growing faster and eventually will consume a larger share of the economy.

But those aren’t reasons to turn a blind eye toward a program that will soon have an annual budget of $1 trillion. Especially since the tax-and-spend crowd in Washington is actually arguing that the program should be expanded. I’m not kidding.

If nothing else, the just-released Trustees Report from the Social Security Administration demands attention. As I do every year, I immediately looked at Table VI.G9, which shows the annual inflation-adjusted budgetary impact of the program.

Here’s a chart showing how the program has grown since 1970 and what is expected in the future. Remember, these are inflation-adjusted numbers, so the sharp increase in outlays over the next several decades starkly illustrates that Social Security will be grabbing ever-larger amounts of money from the economy’s productive sector.

It’s also worth noting that the program already is in the red. Social Security outlays began to exceed revenues back in 2010.

And the numbers will get more out of balance over time.

By the way, some people say that the program is in decent shape since the “Trust Fund” isn’t projected to run out of money until 2034. That’s technically true, but utterly meaningless since it is nothing but a pile of IOUs.

You don’t have to believe me. A few years ago, I quoted this passage from one of Bill Clinton’s budgets.

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

Amen.

This is why annual cash flow into and out of the program is what matters, at least if we care about the Social Security’s economic impact.

And for those who want to know about the gap between the inflow and outflow, here’s a chart showing how deficits are going to explode in coming decades. Again, keep in mind these are inflation-adjusted numbers.

That’s not a typo in the chart. The total shortfall between now and 2095 is a staggering $44.2 trillion. Yes, trillion.

Remarkably, there’s an even bigger long-run problem with Medicare and Medicaid. Which helps to explain I relentlessly push for genuine entitlement reform.

But let’s focus today on Social Security. The answer to this looming fiscal nightmare is to copy one of the many nations that have shifted to “funded” retirement systems based on real savings. I’m a big fan of the Australian approach. Chile also has a great system, and Switzerland and the Netherlands are good role models as well. Hong Kong and Singapore also rely on private savings for retirement, and both jurisdictions demonstrate that aging populations and falling birthrates aren’t necessarily a fiscal death sentence. Heck, even the Faroe Islands and Sweden have jumped on the bandwagon of private retirement accounts.

P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

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The Economic Benefits of Spending Restraint in the United Kingdom

I wrote yesterday about a very depressing development in the United Kingdom. Politicians in that country – including some supposed fiscal conservatives – are contemplating a big expansion in the burden of government spending in order to give pay hikes to the bureaucracy.

What makes this so unfortunate is that the country has been making fiscal progress. Ever since 2010, government spending has grown by an average of 1.6 percent annually. And since the private economy has expanded at a faster pace, this period of restraint has satisfied my golden rule. In other words, the public sector – though still very large – is now a smaller burden on the private sector.

This progress could be quickly reversed, though, with a new spending binge. And it would be especially foolish to throw in the towel just to give more money to government employees. Just like in the U.S., bureaucrats already are overcompensated compared to their counterparts in the productive sector of the economy.

Let’s take a closer look at whether U.K. policymakers should end “austerity” and expand the relative burden of government spending.

The Centre for Policy Studies in London has examined the issue, and this new research from CPS debunks the notion that there should be large increases in bureaucrat compensation.

But since we covered that topic yesterday, let’s focus instead on what CPS discovered when reviewing the impact of spending restraint on various economic aggregates.

…when examining OECD countries that were left with a large budget deficit in 2010 (those countries with a deficit of over 5% of GDP in 2010), it appears that there is a strong correlation between those countries that cut spending by a higher degree, on average, and countries which achieved a larger reduction in deficit, higher average growth rates, a larger fall in proportionate unemployment and marginally better wage growth (see Figures 5, 6, 7 and 8). Of course, correlation does not necessarily mean causation. However, this provides strong evidence that there is no link between austerity and lower growth, higher unemployment and weaker wage growth.

Let’s look at the charts referenced in the excerpt.

We’ll start with Figure 5, which looks at relationship between spending restraint and deficit reduction. Nobody should be surprised to see that the symptom of red ink shrinks when there’s a reduction in the underlying disease of too much government spending.

I think the most important data is contained in Figure 6, which maps the relationship between economic growth and spending restraint. As you can see, a lower burden of government spending is associated with better economic performance.

There’s also a connection between smaller government and lower joblessness, as shown in Figure 7.

Last but not least, Figure 8 shows the positive relationship between lower spending and higher wages.

As explained in the CPS report, correlation is not causation. But since these results are in sync with research from academic scholars (and even research from left-leaning bureaucracies such as the IMF, World Bank, and OECD), the only prudent conclusion is that the U.K. should not give up on fiscal responsibility.

And perhaps the real lesson is that a constitutional spending cap should be enacted whenever a consensus for good policy materializes. That way, there’s a much lower risk of backsliding when politicians get weak-kneed.

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Thanks to Feckless Tories, the United Kingdom Is Poised to Fall Off the Wagon of Fiscal Sobriety

One of my favorite charts shows how nations achieve great results when they engage in multi-year periods of spending restraint.

The most important benefit is that the burden of government shrinks relative to the private sector, but it’s also worth noting that the symptom of red ink begins to disappear when there is a serious effort to deal with the underlying disease of excessive spending.

But sharing this chart also a bittersweet experience since it shows – in almost all cases – that it is just a matter of time before politicians go back to fiscal profligacy.

This is why I’m a huge fan of a permanent spending cap, ideally as part of a nation’s constitution.  Jurisdictions that have adopted this approach, such as Hong Kong and Switzerland, have very strong long-run fiscal performance rather than just temporary blips of good policy.

At the risk of understatement, it’s increasingly obvious that the United Kingdom needs this kind of permanent structural reform.

As you can see from this chart I shared back in February, there’s been some decent spending restraint in that country ever since 2010.

Let’s augment those numbers. I pulled together the data on government spending from the OECD, the IMF, and the UK government. They all have slightly different methodologies with slightly different numbers, but they all tell the same story.

Ever since 2010, the burden of government spending has expanded by an average of about 1.6 percent annually. Spending is still growing, needless to say, but the private sector has been growing faster, so British policymakers have been satisfying my golden rule.

And because the productive sector of the economy has grown faster than government, this means that relative burden of spending has declined. Which is exactly what we see in this chart.

That’s the good news.

The bad news is that politicians are tired of being responsible. They are salivating at the prospect of a new spending binge. Even Tory politicians now want to play Santa with other people’s money.

The U.K.-based Times has some of the unpleasant details.

Ministers are pushing to delay or abandon a series of tax cuts to fund an increase in public sector pay, The Times has learnt. Philip Hammond, the chancellor, is being urged to scrap commitments to reduce corporation tax and raise the thresholds for the personal allowance and the 40 per cent income tax rate. …At a meeting of the political cabinet last week, Jeremy Hunt, the health secretary, Justine Greening, the education secretary, and Sir Patrick McLoughlin, the party chairman, are understood to have called for more money for public sector workers.

Opening the spending spigot would be a terrible mistake. Especially to finance higher pay for bureaucrats.

The Wall Street Journal recently opined on this new threat to fiscal responsibility on the other side of the Atlantic.

…the Prime Minister’s Tories now want to abandon their claim to fiscal discipline. Rather than blame a feckless campaign, wobbly Tory leaders have decided that voters are exhausted with “austerity” and government employees are happy to step in with spending demands. Those government workers and their patrons in the opposition Labour Party are demanding an end to the 1% annual pay-rise cap imposed by former Prime Minister David Cameron and Chancellor George Osborne in 2013 after several years of pay freezes.

Even worse, they want to cancel tax cuts and/or impose tax hikes to finance more money for the bureaucracy.

…cabinet grandees Boris Johnson and Michael Gove…seem willing to pay for it by reducing scheduled corporate tax-rate cuts or increasing individual taxes by reducing the threshold at which the second-highest 40% rate applies.

You won’t be surprised to learn that British bureaucrats (just like their American cousins) are not underpaid compared to workers in the economy’s productive sector.

Britain’s government workers aren’t suffering from a pay crisis compared to their peers in the private (that is, productive) economy. For most of the period since 2000, average weekly nominal earnings for public employees have exceeded the private average, according to the Office for National Statistics. And that excludes government pensions that are far more generous than what most private employees enjoy. Government workers were also shielded from the worst of the post-2008 downturn. The 1% cap amounted to steady nominal wage growth while private wages fell sharply…. Government workers were also spared the worst of the job cuts private employers imposed. …The 1% nominal pay cap mainly has given private workers an opportunity to catch up to government pay. …Voters are frustrated by an economic recovery that has largely failed to deliver inflation-adjusted earnings growth. But the solution isn’t to further stifle wage growth in the private economy by raising taxes to benefit public employees.

Tim Worstall also explains that the bureaucracy is not suffering from a lack of compensation.

We’ve just had a massive recession and thus we are indeed worse off. That’s what a recession is all about. So the question should be: are we all sharing that pain? We are not. Public sector pay has fallen by less than private. The people paying the tax have suffered more than those who eat the tax – hardly a good argument in favour of tax-eater pay rises. …It is also true, as the IFS points out, that public sector pay rose substantially in the 2000 to 2005 period. Pay rose more and then pay fell less. I simply can’t see an argument for a public sector pay rise or the lifting of that cap here.

My colleague at the Cato Institute, Ryan Bourne, is a citizen of the United Kingdom, and he points out that one of the problems is that bureaucrat pay levels are determined nationally, which makes no sense when the cost of living varies widely across the country.

….they should phase out national pay bargaining where it remains in the public sector. Previous research by Allison Wolf has shown the high cost of having national pay scales and bargaining. …Poorer regions…suffer as very high pay relative to the private sector crowds out private sector growth.

Ryan explains that Sweden successfully adopted this reform.

Sweden shows the solution. There, collective bargaining was entirely replaced by individual contracts between staff and their local public sector employer, with little fuss. If applied here, managers would then have genuine flexibility in the creation of new posts. It would liberate them to set pay to reflect more accurately local conditions, while varying wages to fulfil difficult positions.

Of course, the ideal situation would be genuine federalism, with local communities raising their own funds and then deciding how lavishly to compensate the bureaucrats they hire. The U.K. actually took a baby step in that direction years ago by giving greater autonomy to Scotland.

I’ll close with a rather depressing observation. It was only two months ago that I suggested Tories might be poised to make big policy improvements in the United Kingdom. Now it appears that they’ll be competing with the Labour Party on how to spend other people’s money. The great Margaret Thatcher is probably spinning in her grave.

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The International Monetary Fund Accidentally Provides Strong Evidence for the Laffer Curve

As a general rule, the International Monetary Fund is a statist organization. Which shouldn’t be too surprising since its key “shareholders” are the world’s major governments.

And when you realize who controls the purse strings, it’s no surprise to learn that the bureaucracy is a persistent advocate of higher tax burdens and bigger government. Especially when the IMF’s politicized and leftist (and tax-free) leadership dictates the organization’s agenda.

Which explains why I’ve referred to that bureaucracy as a “dumpster fire of the global economy” and the “Dr. Kevorkian of global economic policy.”

I always make sure to point out, however, that there are some decent economists who work for the IMF and that they occasionally are allowed to produce good research. I’ve favorably cited the bureaucracy’s work on spending caps, for instance.

But what amuses me is when the IMF tries to promote bad policy and accidentally gives me powerful evidence for good policy. That happened in 2012, for example, when it produced some very persuasive data showing that value-added taxes are money machines to finance a bigger burden of government.

Well, it’s happened again, though this time the bureaucrats inadvertently just issued some research that makes the case for the Laffer Curve and lower corporate tax rates.

Though I can assure you that wasn’t the intention. Indeed, the article was written as part of the IMF’s battle against tax competition. As you can see from these excerpts, the authors clearly seem to favor higher tax burdens on business and want to cartelize the global economy for the benefit of the political class.

…what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is…competing with one another and eroding each other’s revenues…countries end up having to…reduce much-needed public spending… All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome. …international mobility means that activities are much more responsive to taxation from a national perspective… This is especially true of the activities and incomes of multinationals. Multinationals can manipulate transfer prices and use other avoidance devices to shift their profits from high tax countries to low, and they can choose in which country to invest. But they can’t shift their profits, or their real investments, to another planet. When countries compete for corporate tax base and/or real investments they do so at the expense of others—who are doing the same.

Here’s the data that most concerns the bureaucrats, though they presumably meant to point out that corporate tax rates have fallen by 20 percentage points, not by 20 percent.

Headline corporate income tax rates have plummeted since 1980, by an average of almost 20 percent. …it is a telling sign of international tax competition at work, which closer empirical work tends to confirm.

But here’s the accidental admission that immediately caught my eye. The authors admit that lower corporate tax rates have not resulted in lower revenue.

…revenues have remained steady so far in developing countries and increased in advanced economies.

And this wasn’t a typo or sloppy writing. Here are two charts that were included with the article. The first one shows that revenues (the red line) have climbed in the industrialized world as the average corporate tax rate (the blue line) has plummeted.

This may not be as dramatic as what happened when Reagan reduced tax rates on investors, entrepreneurs, and other upper-income taxpayers in the 1980, but it’s still a very dramatic and powerful example of the Laffer Curve in action.

And even in the developing world, we see that revenues (red line) have stayed stable in spite of – or perhaps because of – huge reductions in average corporate tax rates (blue line).

These findings are not very surprising for those of us who have been arguing in favor of lower corporate tax rates.

But it’s astounding that the IMF published this data, especially as part of an article that is trying to promote higher tax burdens.

It’s as if a prosecutor in a major trial says a defendant is guilty and then spends most of the trial producing exculpatory evidence.

I have no idea how this managed to make its way through the editing process at the IMF. Wasn’t there an intern involved in the proofreading process, someone who could have warned, “Umm, guys, you’re actually giving Dan Mitchell some powerful data in favor of lower tax burdens”?

In any event, I look forward to repeatedly writing “even the IMF agrees” when pontificating in the future about the Laffer Curve and the benefits of lower corporate tax rates.

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Winning Converts for Supply-Side Economics and the Laffer Curve, One City at a Time

Supply-side economics is simply the common-sense notion that people respond to incentives, though some folks think this elementary observation is “voodoo economics” or “trickle-down economics.”

If you want a wonkish definition of supply-side economics, it is the application of micro-economic principles. In other words, what does “price  theory” tell us about how people will respond when a tax goes up or down.

All of which can be illustrated using supply and demand curves, for those who prefer something visual.

None of this is controversial. Indeed, left-wing economists presumably will agree with everything I just wrote.

There is disagreement, however, about magnitude of supply-side responses. Do people respond a lot or a little when tax policy changes (using economic jargon, what are the “elasticities” of behavioral response)?

And even if there was a consensus on those magnitudes, that still wouldn’t imply agreement on the proper policy since people have different views on whether the goal should be more growth or more redistribution (what economist Arthur Okun referred to as the equality-efficiency tradeoff).

For what it’s worth, this is why there is a lot of fighting about the Laffer Curve. Every left-wing economist agrees with the underlying principle of the Laffer Curve (in other words, because people can change their behavior, nobody actually thinks there is a linear relationship between tax rates and tax revenue).

But economists don’t agree on the shape of the curve. Is the revenue-maximizing rate for the personal income tax 25 percent or 75 percent? And even if people somehow agreed on the shape of the curve, that doesn’t lead to agreement on the ideal tax rate because some statists want very high rates even if the result is less revenue. And people like me only care about the growth-maximizing tax rate.

I’m giving this background for the simple reason that the policy world is lagging the economics profession. And I’m not just referring to the Joint Economic Committee’s resistance to “dynamic scoring.” My bigger complaint is that a lot of politicians still act as if there is zero insight from supply-side economics and the Laffer Curve.

In hopes of rectifying this situation, I’ve been sharing examples of supply-side-motivated tax changes that have been adopted by leftists. In other words, tax changes that were adopted specifically to alter behavior.

Here’s the list of “successful” leftist tax hikes that have crossed my desk.

• The big drop in soda purchases after a tax on sugary drinks was imposed in Berkeley.
• The big drop in home sales after a tax was imposed in Vancouver on purchases by foreigners.
• The big drop in tobacco sales after a big increase in D.C.’s tobacco tax.
• The big drop in soda purchases after a tax was imposed in Philadelphia.
• The big drop in sales after a tax hike on expensive homes in the United Kingdom.
• The big drop in soda consumption after a tax was imposed in Mexico.

Now we have another example to add to my collection, this time from a tax on plastic bags in Chicago.

Just as predicted, there is revenue feedback because people change their behavior in response to changes in tax policy.

Chicago’s effort to keep plastic and paper bags out of area landfills by imposing a 7 cents-per-bag tax is succeeding beyond officials’ wildest dreams. The bad news is that the success of the fee in dissuading shoppers from taking single-use bags means the city’s coffers are taking a steep hit. Chicago officials balanced the city’s 2017 spending plan based on an assumption that the city would earn $9.2 million this year from the tax.

But receipts will fall far short of that goal.

The city has earned just $2.4 million in the five months the tax has been in effect, said Molly Poppe, a spokeswoman for the city’s Finance Department. If bag use continues at the current pace, that means the city would net just $7.7 million from the tax for the year. …the number of plastic and paper bags Chicagoans used to haul home their groceries dropped 42 percent in the first month after the tax was imposed.

Incidentally, the Mayor claims that the tax is a success because the real goal was discouraging plastic bags rather than raising revenue.

That’s certainly a very legitimate position, but note that his policy is based on supply-side economics: The more you tax of something, the less you get of it.

My frustration is that the politicians who say we need higher taxes to discourage bad things (smoking, sugar, plastic bags, etc) oftentimes are the same ones who say that higher taxes won’t discourage good things (work, saving, investment, entrepreneurship, etc).

Needless to say, this doesn’t make sense. They are either clueless or hypocritical. But maybe if I accumulate enough example of “successful” supply-side tax hikes, they’ll finally realize it’s not a good idea to punish productive behavior.

P.S. Check out the IRS data from the 1980s on what happened to tax revenue from the rich when Reagan dropped the top tax rate from 70 percent to 28 percent. I’ve used this information in plenty of debates and I’ve never run across a statist who has a good response.

P.P.S. Here’s my video with more evidence in favor of the Laffer Curve.

P.P.P.S. I also think this polling data from certified public accountants is very persuasive. I don’t know about you, but I suspect CPAs have a much better real-world understanding of the impact of tax policy than the bureaucrats at the Joint Committee on Taxation.

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The World’s Demographic Crisis Is Actually a Policy Crisis

I will occasionally pontificate about a demographic crisis in the developed world, but I usually feel guilty afterwards. After all, how can it be a bad thing that we’re living longer? And what gives me the right to grouse about the number of children other families decide to have?

What I should be saying instead is that demographic changes are forcing us to recognize that we have a crisis of bad public policy. To be more specific, the entitlement state has become too large.

That’s the message I tried to get across in an interview earlier this week.

At the risk of oversimplification, I basically stated that there are two crises in the world.

The first crisis, based in the industrialized world, is that tax-and-transfer welfare states were created back when there were lots of workers and relatively few old people, and most people assumed that demographic profile would always exist.

But now that the “population pyramid” is becoming a “population cylinder” (I was talking faster than I was thinking in the interview and reversed the two concepts at one point), there aren’t going to be enough workers to finance all the redistribution programs, particularly the ones that funnel money to the elderly.

This is a big reason why nations such as Greece and Italy already are in deep trouble and why it’s just a matter of time before the fiscal crisis spreads to France and Japan (and the United States if we don’t enact genuine entitlement reform).

Here’s a table, based on World Bank data, showing the 20 jurisdictions with the lowest fertility rates. Which means, of course, the places with the fewest future taxpayers to finance redistribution.

The second crisis, based in the developing world, is that pervasive statism suffocates growth.

And while I largely agree with the late Julian Simon about people being a resource rather than liability, if a nation has a bloated and intrusive public sector that stifles the private sector, then a growing population can be a bad thing.

But it’s not the growing population that’s bad, it’s the statist policies. Here’s a list of the 20 counties with the highest fertility rates. The majority of them are ranked in the “least free” quartile according to Economic Freedom of the World. And none of them are in the “most free” quartile.

But the most important part of the interview, at least when thinking about problems in the industrialized world, is when I pointed out that nations such as Singapore don’t face a big problem.

Yes, Singapore has one of the lowest fertility rates in the world, but it also doesn’t have a pervasive tax-and-transfer welfare state. People are responsible for saving for their own retirement and healthcare. So the absence of future taxpayers isn’t a major challenge because the system doesn’t need to be propped up with tax revenue.

And the same thing is true in Hong Kong, another jurisdiction that is in good long-run shape even though the fertility rate is extremely low.

P.S. Given the demographic changes that are now occurring, many governments with big welfare states now recognize that they have a problem. Unfortunately, many of them think the solution is to artificially encourage more babies rather than entitlement reform.

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In Just Six Minutes, Everything You Need to Know about Spending Caps

Back in April, I shared a new video from the Center for Freedom and Prosperity that explained how poor nations can become rich nations by following the recipe of small government and free markets.

Now CF&P has released another video. Narrated by Yamila Feccia from Argentina, it succinctly explains – using both theory and evidence – why spending caps are the most prudent and effective way of achieving good fiscal results.

Ms. Feccia covers all the important issues, but here are five points that are worth emphasizing.

1. Demographics – Almost all developed nations have major long-run fiscal problems because welfare states will implode because of aging populations and falling birthrates (Ponzi schemes need an ever-growing number of new people to stay afloat).
2. Golden Rule – If government spending grows slower than the private sector, that reduces the relative burden of government spending (the underlying disease) and also reduces red ink (the symptom of the underlying disease).
3. Success Stories – Simply stated, spending caps work. She lists the nations that have achieved very good results with multi-year periods of spending restraint. She points out that the U.S. made a lot of fiscal progress when GOPers aggressively fought Obama. And she shares the details about the very successful constitutional spending caps in Hong Kong and Switzerland.
4. Better than Balanced Budget Amendments or Anti-Deficit Rules – The video explains why policies that try to target red ink are not very effective, mostly because tax revenues are very volatile.
5. Even International Bureaucracies Agree – Remarkably, the International Monetary Fund (twice!), the European Central Bank, and the Organization for Economic Cooperation and Development (twice!) have acknowledged that spending caps are the most, if not only, effective fiscal rule.

I touch on some of these issues in one of my chapters in the Cato Handbook for Policymakers. The entire chapter is worth reading, in my humble opinion, but I want to share an excerpt echoing Point #4 that I just shared from Ms. Feccia’s video.

There’s a very practical reason to focus on capping long-run spending rather than trying to balance the budget every year. Simply stated, the “business cycle” makes the latter very difficult. …when a recession occurs and revenues drop, a balanced-budget mandate requires politicians to make dramatic changes at a time when they are especially reluctant to either raise taxes or impose spending restraint. Then, when the economy is enjoying strong growth and producing lots of tax revenue, a balanced-budget requirement doesn’t impose much restraint on spending. All of which creates an unfortunate cycle. Politicians spend a lot of money during the good years, creating expectations of more and more money for various interest groups. When a recession occurs, the politicians suddenly have to slam on the brakes. But even if they actually cut spending, it is rarely reduced to the level it was when the economy began its upswing. Moreover, politicians often raise taxes as part of these efforts to comply with anti-deficit rules. When the recession ends and revenues begin to rise again, the process starts over—this time from a higher base of spending and with a bigger tax burden. Over the long run, these cycles create a ratchet effect, with the burden of government spending always reaching new plateaus.

It’s not that I want to belabor this point, but the bottom line is that it is very difficult to amend a country’s constitution (at least in the United States, but presumably in other nations as well).

So if there’s going to be a major campaign to put a fiscal rule in a constitution, then I think it should be one that actually achieves the goal. And whether people want to address the economically important goal of spending restraint or the symbolically important goal of fiscal balance, what should matter is that a spending cap is the effective way of getting there.

P.S. The narrator is from the soccer-mad country of Argentina, which has a big rivalry with the soccer-mad nation of Brazil. Like most Americans, I don’t quite get the appeal of that sport. That being said, I will cheer for Brazil the next time it plays against Argentina for the simple reason that it just adopted a constitutional amendment to cap government spending. If Ms. Feccia wants me to cheer for her country’s team, she needs to convince her government to do something similar.

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Elizabeth Warren other Rich Leftists Talk the Talk, but Don’t Walk the Walk

If you want to see a bunch of hypocritical leftists squirming with embarrassment, there’s a very clever video showing what happens when a bunch of pro-tax hike millionaires are asked to voluntarily pay more money to the IRS.

I’ve even debated some of these rich, pro-tax statists on TV, telling them not to make the rest of us victims of their neurotic guilt feelings.

They definitely don’t put their money where their mouths are. There is an official government webpage where people can voluntary send extra cash to Washington, but the amount of money raised doesn’t even qualify as an asterisk in the federal budget.

You probably won’t be surprised to learn that people elsewhere in the world also are not keen on the idea of deliberately giving politicians extra money to spend.

Bloomberg has a rather amusing story about the utter failure of a voluntary tax in Norway.

Eager to pay more taxes? Then look no further than Norway. …Launched in June, the initiative has received a lukewarm reception, with the equivalent of just $1,325 in extra revenue being collected so far, according to the Finance Ministry. That’s not much for a country of 5.3 million people… “The tax scheme was set up to allow those who want to pay more taxes to do so in a simple and straightforward way,” Finance Minister Siv Jensen said in an emailed comment. “If anyone thinks the tax level is too low, they now have the chance to pay more.” …Jonas Gahr Store, the wealthy Labor Party contender…, has so far refused to take up the government’s offer.

I’m not surprised that the ordinary people of Norway aren’t sending extra cash to their politicians.

After all, the country already has a costly welfare state financed by very high tax rates as well as lots of oil revenue. So why enable an even bigger burden of government?

But Mr. Store hardly seems a very ethical proponent of higher taxes if he’s not willing to lead by example.

Again, this is not very shocking. It’s a pattern among rich leftists.

The state of Massachusetts has a program for voluntary tax payments, but the Boston Globe revealed that Elizabeth Warren somehow couldn’t bring herself to cough up additional money to finance bigger government.

Elizabeth Warren acknowledged this morning that she does not pay a voluntary higher tax rate on her state income taxes, a question her campaign had previously refused to answer. …state Republicans have criticized Warren, who has earned a six-figure salary and owns assets worth millions, for her previous refusal to answer whether she pays a voluntary higher rate, calling her an “elitist hypocrite” who “lectures others about their responsibility to pay higher taxes.”

And John Kerry also decided that he wouldn’t pay extra tax to his state’s politicians.

Sen. John Kerry (D. Mass.) sailed into hot water last year when tax returns revealed that he also paid the Bay State’s lower tax rate. …perhaps he intended to pay Massachusetts’ higher rate, but his calculator slid off his yacht.

Though since Kerry uses tax havens to protect his wealth, and even keeps a yacht in a neighboring low-tax state, at least he’s consistent in his hypocrisy.

Though according to New England Public Radio, there are a few people in Massachusetts who actually do contribute extra money.

Lenox accountant William Keen said it’s his job to save his clients money, so he just assumes they want to pay their state income tax at 5.1 percent, and not the optional rate of 5.85 percent. “If somebody specifically asked to be set at the higher rate, I would do it,” Keen said Friday. “Nobody has ever even asked for that. It’s never even come up.” And very few taxpayers across Massachusetts do pay at that higher rate. According to the state Department of Revenue, on average since 2002, 1,200 people each year check the box on the tax form to voluntarily pay more. That’s contributed to just over a quarter million dollars to the state’s coffers each year — a drop in the bucket since Massachusetts has a budget of about $40 billion.

I think people who deliberately over-pay to government are very misguided, but it’s better to be naive than to be hypocritical. Like the Clintons. And Warren Buffett. Or any of the other rich leftists who want higher taxes for you and me while engaging in very aggressive tax avoidance.

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Government Fraud: A Feature, not a Bug

Why does government waste so much money? In so many ways? With such reckless abandon?

I suppose I could answer with mockery and say it’s because they have lots of experience squandering our tax dollars.

But let’s seriously contemplate that question and explore one of the reasons for waste. Simply stated, government programs are a magnet for scammers.

Let’s look at three case studies.

Example #1: Fraud is an inherent part of the big entitlement programs. Kevin Williamson has some unseemly details in an article for National Review.

…you know where there’s a lot of waste, fraud, and abuse? Social Security, Medicare, and Medicaid. …Medicare and Medicaid together account for about $1 trillion in federal spending annually, and estimates suggest that $1 out of ever $10 of that spending is fraud. Some estimates go much higher. We do not have a very good idea of exactly how extensive fraud in the system is, because the federal government has put a fair amount of effort into not knowing.

And what does that mean? How does the government try not to know?

…the government’s approach long has been backward…investigators are asking whether a certain treatment was in fact appropriate for what ails Mrs. Jones, not whether Mrs. Jones exists.

In other words, bureaucrats basically accept all claims as legitimate and simply judges from afar whether the right medical service is provided for the listed ailment.

Even if the ailment is fictional. Or the patient is fake.

As one might imagine, that kind of sloppy approach, combined with programs that dispense hundreds of billions of dollars, is a magnet for professional crooks.

It’s the work of organized crime. As Sparrow points out, when there is a criminal case filed against one of these fraud artists, then billing in a particular category — some years ago, it was HIV fusion treatments — falls off steeply, by as much as 90 percent. The implication here is that fraudulent billing may make up the majority of Medicaid and Medicare spending in some categories. …organized-crime syndicates are being permitted to use our medical entitlements to loot the Treasury, and that not very much is being done about that, which suggests the possibility — only a possibility — that there is political collusion in this at some level.

By the way, Kevin may be on to something when he speculates about collusion.

We already know about examples of politicians intervening to protect fraudsters (who, conveniently, also happen to be campaign donors).

So is it really that much of a stretch to imagine them turning a blind eye (or worse) to industrial-level fraud by criminal enterprises?

Leads me to think this cartoon makes an unnecessary distinction.

Example #2: Welfare programs also are a magnet for fraud.

Here are excerpts from a recent news report.

Another six Lakewood, New Jersey couples were charged Wednesday with welfare fraud, bringing to 26 the number of people implicated since last week in the multimillion-dollar scandal. At the heart of the charges is the allegation that they all, in one way or another, failed to report or otherwise concealed significant income that would have made them ineligible for the assistance programs in which they enrolled. In total, state and federal prosecutors have said the families collected more than $2.4 million in benefits. …They allegedly obtained nearly $400,000 in Medicaid, food and heating benefits fraudulently. …Four other couples were arrested June 26 for allegedly defrauding public assistance programs of more than $1.3 million in benefits.

Welfare fraud must have been a major pastime for residents of the town.

Hundreds of these moochers are now trying to cover their tracks in hopes of avoiding legal trouble.

The specter of more charges has shaken Lakewood. Hundreds of residents have contacted authorities seeking amnesty or help avoiding arrest, the Asbury Park Press reported on June 29. In addition to the hundreds seeking amnesty, dozens more people have contacted social service agencies to cancel their benefits or declare income

Example #3: And nobody should be surprised to learn that there’s plenty of fraud at the Pentagon.

Here’s an example that seems very representative.

The former owners of a Pittsburgh-area military supplier have been accused of defrauding the U.S. government of more than $6 million in defense contract work. …Prosecutors allege the Buckners inflated the cost of the work by falsifying invoices to make it appear as though they had spent $70 per window frame for the materials when in fact they had paid just $20 each for frames manufactured in China. The brothers are also alleged to have sold scrap aluminum collected in the manufacturing process without crediting that money to TACOM. The losses to TACOM are placed at $6,085,709 by the DOJ.

But that’s just the tip of the iceberg.

In 2014, a defense contractor responsible for providing food and water to troops in Afghanistan pleaded guilty to over-charging the U.S. government to the tune of $48 million. This week, two San Diego defense contractors pleaded guilty in a scheme that defrauded the Navy out of at least $1.4 million by over-billing for supplies that the military never ordered, the San Diego Union-Tribune reported. Similar stories have cropped up in Florida, California, Maryland, North Carolina and elsewhere in recent years, renewing calls for systemic reforms.

Maybe the reason fraud is so pervasive is that penalties are trivial or nonexistent.

A 2011 DOD report found hundreds of defense contractors that defrauded the U.S. military subsequently went on to receive more than $1.1 trillion in new Pentagon contracts between 2000 and 2010.

Shouldn’t criminal companies be barred from subsequent contracts? Shouldn’t crooked company officials be sent to prison?

Or do these things not happen because the same folks are also campaign contributors?

I don’t know the answer to these questions, but surely something is amiss.  It’s almost as if government is simply a racket for the benefit of insiders.

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The Grim History of Federal Spending Since World War II

I spend a lot of my time fretting about how federal spending is going to become an ever-larger (and unsustainable) burden in the future.

And I periodically will write about how I wish we still had the very small federal government envisioned by the Founding Fathers (and which largely existed up until the 1920s).

But I haven’t spent that much time looking at how we got to where we are today, other than in 2015 when I cited a very interesting report from the Joint Economic Committee that provided decade-by-decade data on changes in the burden of federal spending.

But I had a chance to touch on this issue in a recent interview when asked to comment on the unfortunate milestone of a $4 trillion federal budget.

Building on that discussion, here are three charts, based on numbers from table 1.3 of OMB’s historical budget data, showing what has happened to federal outlays.

This first graph shows changes in nominal spending over time. As I pointed out in the interview, it took 200 years before the crowd in Washington got spending up to $1 trillion.

But in the past three decades, it has skyrocketed to $4 trillion.

But nominal spending numbers are not the most useful data when looking at long-run changes.

After all, we’ve had lots of inflation. Simply stated, dollars today are worth a lot less than dollars in the past.

So this second chart shows inflation-adjusted federal outlays. As you can see, we have a graph that doesn’t look quite the same. It’s much easier to see the budgetary impact of World War II, for instance, and post-war spending growth isn’t quite as dramatic.

Though it’s still significant. As I noted in the interview, the burden of inflation-adjusted federal spending has doubled since 1985.

But even inflation-adjusted data doesn’t tell the real story.

The most important numbers, at least from an economic perspective, are the ones that measure the burden of federal spending relative to the size of the private economy.

And that’s what I show in this final chart measuring federal spending as a share of economic output (gross domestic product).

Now it’s very easy to see that World War II involved a massive one-time fiscal cost. But the most important data is what happened after the war. The burden of federal outlays initially dropped to 12 percent of GDP. That’s higher than it was before the war, but at least in retrospect not a bad place to be.

Unfortunately, there’s been a gradual expansion in the economic burden of the federal budget ever since.

Though if you pay close attention to the numbers, there are some interesting secondary stories. You’ll notice that the negative upward trend was reversed during the Reagan years and we continued to make progress during the Clinton years.

Unfortunately, policy then moved in the wrong direction under Bush and Obama.

Which brings me back to where I started. As bad as the numbers are today, they are likely to get worse in the future because of demographic change and poorly designed entitlement programs. So unless we have genuine entitlement reform, we will become a failed welfare state.

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Illinois Moves another Step Closer to Bankruptcy

Here’s what I wrote last month about the fiscal situation in Illinois.

Illinois is a mess. Taxes and spending already are too high, and huge unfunded liabilities point to an even darker future. Simply stated, politicians and government employee unions have created an unholy alliance to extract as much money as possible from the state’s beleaguered private sector. That’s not a surprise. Indeed, it’s easily explained by the “stationary bandit” theory of government. But while the bandit of government may be stationary, the victims are not. At least not in a nation with 50 different states.

Looking at this grim situation, the state legislature decided it had to act.

Unfortunately, the politicians in Springfield decided that action meant stepping on the accelerator while driving in the wrong direction. Democrats in the state legislature (joined by some big-government Republicans, just like in Kansas) just overrode Governor Rauner’s veto and imposed a huge tax hike on a state that already has one of the nation’s highest tax burdens.

This will hasten the state’s collapse.

Here’s what I said earlier this week about the prospect of another tax hike in the state.

I specifically want to highlight something I said about halfway through the interview about the burden of government spending in Illinois compared to regional competitors.

Here’s a chart I prepared based on data culled from the Census Bureau. As you can see, per-capita outlays are higher in Illinois than in neighboring states. In some cases, thousands of dollars higher.

Given this data, I’d like to ask the people of Illinois the same question I asked an audience in Paris when comparing France and Switzerland. What exactly are you getting for all that money?

The answer is nothing. Just like the French governments spends far more than the Swiss government without delivering better services, the Illinois government spends far more than the Indiana government without delivering better services.

Instead, the money gets diverted to the pockets of the various interest groups. In the case of Illinois, it’s almost as if the state exists to enrich a cossetted class of state and local bureaucrats.

The Wall Street Journal’s editorial earlier this week made several key points.

In Illinois, Democrats spent the long weekend coaxing Republican legislators to join their suicide pact to raise taxes to plug a $6 billion deficit… And don’t forget the $130 billion unfunded pension liability—none of which will be solved by the $5 billion tax hike. …The state legislature is controlled by public unions that refuse to compromise. …Pensions will consume about a quarter of Illinois’s general fund this year. Nearly 40% of state education dollars go toward teacher pensions, and the state paid nearly as much into the State Universities Retirement System last year as it spent on higher education. Anemic revenue and economic growth can’t keep up with entitlement spending. The state’s GDP has ticked up by a mere 0.8% annually over the last four years compared to 2% nationwide and 1.4% in the Great Lakes region. Since 2010 more than 520,000 Illinois residents on net have fled to other states.

And Jonathan Williams of the American Legislative Exchange Council also opined on the mess in Illinois.

…the focus should be on fixing the state’s big-government policy prescriptions that are killing economic growth and opportunity. It should come as no surprise that businesses and citizens continue to leave the Land of Lincoln in droves. The credit rating agencies are right to question Illinois’ ability to pay its bills, as the tax base flees to other states. …When the rosy accounting assumptions are stripped away, Illinois has a dismal 23.77 percent funding ratio, $362.6 billion in total amount of unfunded liabilities. That staggering number represents an unfunded pension liability of $28,200 for every man, woman and child in Illinois. …one might assume the state government is not bringing in enough revenue and merely needs to raise taxes. This is simply false. According to Tax Foundation’s analysis, Illinois’ taxpayers pay the 5th highest combined state-local tax burden in America. …It should come as no surprise, then, that nearly 700,000 Illinois residents left from 2006-2015… Only New York and California experienced higher levels of domestic out-migration during the same period.

The bottom line is that this latest tax hike will cause more productive people to leave the state. Politicians in the state also will have an excuse to postpone much-needed reforms of the state pension system, which is the primary threat to long-run solvency. And government, which already is too big, will become an even bigger burden.

P.S. At some point, I need to write about Indiana, a state that quietly has amassed a very good track record of fiscal prudence. Especially since it’s about to benefit from an influx of tax refugees from its neighbor to the west.

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Trump Should Learn from Maine’s Governor on How to Win a Government Shutdown Fight

Back at the end of April, President Trump got rolled in his first big budget negotiation with Congress. The deal, which provided funding for the remainder of the 2017 fiscal year, was correctly perceived as a victory for Democrats.

How could this happen, given that Democrats are the minority party in both the House and the Senate? Simply stated, Republicans were afraid that they would get blamed for a “government shutdown” if no deal was struck. So they basically unfurled the white flag and acquiesced to most of the other side’s demands.

I subsequently explained how Trump should learn from that debacle. To be succinct, he should tell Congress that he will veto any spending bills for FY2018 (which begins October 1) that exceed his budget request, even if that means a shutdown.

For what it’s worth, I don’t really expect Trump or folks in the White House to care about my advice. But I am hoping that they paid attention to what just happened in Maine. That state’s Republican Governor, Paul LePage, just prevailed in a shutdown fight with the Maine legislature.

Here are some details on what happened, as reported by CNN.

The three-day government shutdown in Maine ended early Tuesday morning after Gov. Paul LePage signed a new budget, according to a statement from his office.The shutdown had closed all non-emergency government functions, prompting protests from state employees in Augusta. …The key contention for the governor was over taxes. LePage met Monday afternoon with House Republicans and pledged to sign a budget that eliminated an increase in the lodging tax from 9 to 10.5 percent, according to the statement from the governor’s office. Once the lodging tax hike was off the table, negotiations sped up as the state House voted 147-2 and the Senate 35-0 for the new budget. “I thank legislators for doing the right thing by passing a budget that does not increase taxes on the Maine people,” said LePage in a statement.

And here are some excerpts from a local news report.

Partisan disagreements over a new two-year spending plan were finally resolved late Monday. The final budget eliminated a proposed 1.5 percent increase to Maine’s lodging tax – a hike that represented less than three-tenths of one percent of the entire $7.1 billion package but held up the process for days. …Gideon and other Democrats complained about the constantly-changing proposals being presented by House Republicans, who were acting as a proxy for LePage. Representative Ken Fredette, the House Minority Leader, insisted that his members were simply fighting back against tax hikes and making sure the governor was involved in the process. …Republicans in the Senate who, over the past several months, were able to negotiate away a three-percent income tax surcharge on high-income earners that was approved by voters last fall.

What’s particularly amazing is that Democrats in the state legislature even agreed to repeal a class-warfare tax hike (the 3-percentage point increase in the top income tax rate) that was narrowly adopted in a referendum last November.

This is a remarkable development. I had listed this referendum as one of the worst ballot initiatives of 2016 and was very disappointed when voters made the wrong choice.

So why did the state’s leftists not fight harder to preserve this awful tax?

One of the reasons they surrendered on that issue is that there was a big Laffer-Curve effect. Taxpayers with large incomes predictably decided to earn and report less income in Maine.

The moral of the story is that Maine’s Democrats were willing to give up on the surtax because they realized it wasn’t going to give them any revenue to redistribute. And unlike some DC-based leftists, they didn’t want a tax hike that resulted in less revenue.

Here are some passages from a report by the state’s Revenue Forecasting Committee.

The RFC has reduced its forecast of individual income tax receipts by $15.9 million in FY17, $40.3 million in the 2018-2019 biennium, and $43.9 million in the 2020-2021 biennium. While there was no so-called “April Surprise” to report for 2016 final payments in April, the first estimated payment for tax year 2017 was $9.3 million under budget; flat compared to a year ago. The committee had expected an increase of 25% or more in the April and June estimated payments because of the 3 percent surtax passed by the voters last November. … there is concern that high-income taxpayers impacted by the surtax may be taking some action to reduce their exposure to the surtax. The forecast accepted by the committee today assumes a reduction of approximately $250 million in taxable income by the top 1% of Maine resident tax returns and similarly situated non-resident returns. This reduction in taxable income translates into a total decrease in annual individual income tax liability of approximately $30 million; $10 million from the 3% surtax and $20 million from the regular income tax liability.

And here’s the relevant table from the appendix showing how the state had to reduce estimated income tax receipts.

But I’m getting sidetracked.

Let’s return to the lessons that Trump should learn from Governor LePage about how to win a shutdown fight.

One of the lessons is to stake out the high ground. Have the fight over something important. LePage wanted to kill the lodging tax and the referendum surtax. Since those taxes were so damaging, it was very easy for the Governor to justify his position.

Another lesson is to go on offense. Republicans in Maine explained that higher taxes would make the state less competitive. Here’s a chart they disseminated comparing the tax burden in Maine, New Hampshire, and Massachusetts.

And here’s another very powerful chart that was circulated to policy makers, showing the migration of taxpayers from high-tax states to zero-income-tax states.

Trump should do something similar. The fight later this year in DC (assuming the President is willing to fight) will be about spending levels. And leftists will be complaining about “savage” and “draconian” cuts.

So the Trump Administration should respond with charts showing that the other side is being hysterical and inaccurate since he’s merely trying to slow down the growth of government.

But the most important lesson of all is that Trump holds a veto pen. And that means he (just like Gov. LePage in Maine) controls the situation. He can veto bad budget legislation. And when the interest groups start to squeal that the spending faucet is no longer dispensing goodies because of a shutdown, he should understand that those interest groups feeling the pinch generally will be on the left. And when they complain, it is the big spenders in Congress who will feel the most pressure to capitulate in order to reopen the faucet. Moreover, the longer the government is shut down, the greater the pinch on the pro-spending lobbies.

In other words, Trump has the leverage, if he is willing to use it.

This assumes, of course, that Trump has the brains and fortitude to hold firm when the press tries to create a fake narrative about the world coming to an end, (just like they did with the sequester in 2013 and the shutdown fight that same year).

P.S. The only way Trump could lose a shutdown fight is if enough big-spending Republicans sided with Democrats to override a veto. That’s what happened in Kansas. And it may happen in Illinois. At this point, though, there’s no way that happens in Washington.

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A Horrifying Example of Government Handouts and Perverse Incentives

The welfare state is bad news for both taxpayers and recipients.

Pervasive handouts also are a mistake because they create incentives for very bad behavior.

And I’m not just talking about the incentive not to work. Welfare enables and encourages utterly horrifying examples of misbehavior.

• Such as the guy who cut off his own foot to ensure continued handouts.
• And the awful people who tried to impregnate a 12-year old to boost handouts.
• Or the various and sundry terrorists who have been subsidized with handouts.

But there’s a new example that probably would win the prize if there was a contest for the most sickening behavior enabled by governments giveaways.

People in India apparently are feeding their older relatives to tigers is order to get cash payments from the government.

I’m not joking. India Today has a story on the matter.

What if suddenly a lot of elderly folks start dying because of fatal tiger attacks? Either the tigers have targeted the old people especially or something is just not right. …Authorities surmise that people are sending older members of the family into the tiger reserve for them to become a prey. Once killed, their bodies are relocated to fields, and staged as victims of a tiger attack, so that the respective family can claim lakhs in compensation from the government.

Here are some added details from the Times of India.

Authorities suspect local families are sending older members into the forest as tiger prey, and their bodies then relocated to fields, to feign attacks and claim lakhs in compensation from the government. Villagers aren’t entitled to compensation if their kin die in the reserve. There has been a string of recent fatal tiger attacks on the elderly, with seven deaths reported in the proximity of the Mala forest range alone since February 16. …Locals, however, say family elders were willing participants in the whole affair. “They think that since they can’t get resources from the forest, this is the only way their families can escape poverty,” farmer Jarnail Singh, 60, told TOI.

And the U.K.-based Daily Mail also has a report on this bizarre situation.

Elderly relatives are being sent into tiger reserves to be killed so that families can claim compensation in a horrifying new trend in India. Younger family members appear to be targeting Pilibhit Tiger Reserve in Uttar Pradesh by sending their elders into the forest to be mauled to death before dumping their bodies in nearby fields. Villagers are not entitled to claim compensation if they die in the reserve, but if they are killed in a tiger attack outside the reserve, they can cash in on government money. …The revelation that this is a deliberate ploy to cash in on compensation money was triggered by Kalim Athar of the Wildlife Crime Control Bureau (WCCB).

Wow. I’m almost at a loss for words.

Imagine the conversation around the dinner table. “Good news, Granny, we’ve arranged an overnight trip for you to the nature preserve.”

It’s even more chilling if the old people are actually willing participants. “Son, make sure to make the scene look realistic after you move my body out of the preserve.”

In some sense, this is actually a broader story about bigger issues such as the degree to which the burden of government is reduced to enable more economic growth in India, including in rural areas. Or the proper balance between environmental stewardship and the needs of the surrounding community.

But it’s hard to focus on those big-picture issues when old people are being sacrificed to tigers to get loot from the government. Somebody – either the families or the willing old people – deserves induction in the Moocher Hall of Fame.

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The Classical Liberal Vision of “Negative Liberty” vs the Welfare State Vision of “Positive Liberty”

I like sharing topical items on the 4th of July.

• In 2010, I contemplated the challenging issue of libertarians and patriotism. My view, for what it’s worth, is captured by this t-shirt.
• In 2011, I pondered research about the partisan implications of patriotism and the 4th of July.
• In 2012, I shared an inspirational video about freedom and individualism from Ronald Reagan.
• In 2013, I discussed the proper meaning of patriotism in the aftermath of revelations about NSA snooping.
• In 2014, I decided on a humorous approach with one a Remy video about government being “up in your grill.”
• In 2015, I waded into the controversial topic of what happens when flag burning meets the modern regulatory state.
• In 2016, I looked at how government has increased the cost of celebrating Independence Day.

I actually did two columns in 2011. I also put together a satirical Declaration of Dependence for my left-wing friends. Here’s how it started.

We hold these truths to be self-evident, that all people should be made equal, that they are endowed by their government with certain unalienable Rights, that among these are jobs, healthcare and housing.

I’m definitely not in the same league as P.J. O’Rourke or Mark Steyn, but I thought I was being at least halfway funny and somewhat clever.

But Bernie Sanders must have read it and took it seriously, at least if this tweet is any indication.

Republicans talk a lot about freedom and choice. But you cannot truly be free if you can't afford health care or food or medicine.

— Bernie Sanders (@SenSanders) June 30, 2017

In other words, he’s saying you have a “right” that is predicated on other people paying for you.

When I first saw that tweet, the first thing that came to mind was the cartoon about the choice between “work hard” and “free stuff.”

Then I thought about the failure of nations that go too far down the path of redistribution, such as Greece and Venezuela.

And I wondered whether Senator Sanders actually understands what he’s saying. In other words, is he crazy, blind, or evil?

Or perhaps immoral? In his Washington Times column, Richard Rahn looked at the ethical implications.

Sen. Bernie Sanders keeps repeating that “all Americans have a right to health care” — nice applause line, but what does it mean? There is no such right mentioned in the Declaration of Independence or the Constitution. Health care is not a free good — someone has to pay for it. Ask yourself — who should pay for your health care? …Do you have the obligation to pay for someone else’s health care? If so, how much and why? …The 13th Amendment to the Constitution prohibits “involuntary servitude” and slavery. At what point does a tax on someone’s labor — where the proceeds of that tax are largely used to provide income or services to others — constitute “involuntary servitude”? …Those who think they have the right to the labor of those they revile, i.e., the “rich,” have the same mentality of the slaveholder who also thought he had the right to others’ labor.

Ultimately, this is about a conflict between the classical liberal vision of “negative liberty” and the welfare state vision of “positive liberty.”

Here’s how I explained the difference a few years ago.

Libertarians, along with many conservatives, believe in the right to be left alone and to not be molested by government. This is sometimes referred to in the literature as “negative liberty,” which is just another way of saying “the absence of coercive constraint on the individual.” Statists, by contrast, believe in “positive liberty.” This means that you have a “right” to things that the government will give you… Which means, of course, that the government has an obligation to take things from somebody else. How else, after all, will the government satisfy your supposed right to a job, education, healthcare, housing, etc.

I also should have pointed out that negative liberty doesn’t impose obligations on other people. My freedom of speech doesn’t conflict with your freedom of speech. My freedom or religion doesn’t conflict with your freedom of religion. My freedom to earn and produce doesn’t conflict with your freedom to earn and produce.

But that’s not true with so-called positive liberty. If I have a “right” to health care, that means the government will use coercion. Either indirectly by using the tax code to take money from other people, or directly as explained by Senator Rand Paul.

P.S. Before Bernie, there was FDR, who was also misguided or malicious about the supposed right to other people’s money.

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The Fraud-Riddled Obamaphone Boondoggle

Time for another trip down Memory Lane to the early years of the Obama Administration.

Two days ago, I wrote about the market-wrecking price controls in Obamacare. And yesterday, I shared a new study exposing the utter failure of Obama’s Cash-for-Clunkers scheme. Now let’s take a look at the track record of the “Obamaphone.”

Though let’s start by noting that federal subsidies for phone service existed well before Obama took office. He simply took a misguided program and made it bigger. Here’s a concise explanation of the program from a story I shared in 2014.

The Federal Communications Commission program…charges a dollar or two per line on every American’s phone bill. The revenue generated by the “Universal Service Fund fee” is then used to pay select phone companies $9.25 per month for each poor person they sign up for a free phone. …its cost doubled in five years to $1.75 billion in 2011, and in some states, the number of phones given out exceeded the total eligible population.

But since big government is a recipe for big corruption, you won’t be surprised to learn that a bigger program of phone subsidies has produced scandalous levels of waste, fraud, and abuse. The Government Accountability Office has just released a report revealing widespread incompetence and malfeasance in the “Lifeline” program. Here are some highlights from GAO’s one-page summary.

GAO found weaknesses in several areas. For example, Lifeline’s structure relies on over 2,000 Eligible Telecommunication Carriers that are Lifeline providers to implement key program functions, such as verifying subscriber eligibility. This complex internal control environment is susceptible to risk of fraud, waste, and abuse as companies may have financial incentives to enroll as many customers as possible.

Yes, you read correctly. The private companies that are mooching off this program are in charge of determining eligibility, even though they get more handouts by signing up more recipients.

As you might expect, this is a green light for massive fraud.

Based on its matching of subscriber to benefit data, GAO was unable to confirm whether about 1.2 million individuals of the 3.5 million it reviewed, or 36 percent, participated in a qualifying benefit program, such as Medicaid, as stated on their Lifeline enrollment application.

Readers are welcome to plow their way through GAO’s full 89-page report, but news reports have teased out the most important details.

Here are some excerpts from a story in the Washington Times.

The controversial “Obamaphone” program, which pays for cellphones for the poor, is rife with fraud, according to a new government report released Thursday that found more than a third of enrollees may not even be qualified. Known officially as the Lifeline Program, the phone giveaway became a symbol of government waste in the previous administration. …the program has stashed some $9 billion in assets in private bank accounts rather than with the federal treasury, further increasing risks and depriving taxpayers of the full benefit of that money. “…everything that could go wrong is going wrong,” said Mrs. McCaskill, ranking Democrat on the Senate’s chief oversight committee and who is a former state auditor in Missouri. “We’re currently letting phone companies cash a government check every month with little more than the honor system to hold them accountable, and that simply can’t continue,” she said. …More than 5,500 people were found to be enrolled for two phones, while the program was paying for nearly 6,400 phones for persons the government has listed as having died. Investigators also submitted fraudulent applications to see what would happen, and 12 of the 19 phone carriers they applied to approved a phone.

The Daily Caller’s report also highlighted the program’s rampant fraud.

A massive portion of Obamaphone recipients are receiving the benefit after lying on their applications, according to a new 90-page report from the Government Accountability Office (GAO). An undercover sting operation showed ineligible applications were approved 63 percent of the time, and a review that found that 36 to 65 percent of beneficiaries in various categories had lied in easily-detectable ways but were approved anyway. The fraud reached unheard-of proportions because the Federal Communications Commission let the task of screening for eligibility fall to phone companies that profit off of enrolling as many people as possible. …All someone has to do to apply for free cell phone service is say that they are on another welfare program, such as food stamps or disability, known as SSI. But nationwide, “only 35.5 percent of people claiming eligibility based on SSI could actually be confirmed as eligible,” the GAO found. …Special interests have aggressively employed a bootleggers-and-Baptists model, with companies who profit greasing the wheels of government with donations and influence-peddling and using poor people as props in marketing campaigns. …The wife of the CEO of TracFone, the largest beneficiary of Obamaphones, was a mega-fundraiser for former President Barack Obama. …And a Pew Research Center report found that the problem of lack of access to technology is far less than it once was, the GAO noted. The FCC’s own data shows that “millions of Lifeline-eligible households are obtaining voice service without Lifeline,” while the fraud rates show that many of the people who do sign up are wealthier than those who don’t.

Again, keep in mind that subsidized telephone service isn’t an Obama invention.

He merely built upon a bad idea that existed for decades.

But also keep in mind that the waste, fraud, and abuse in the Obamaphone program is an inherent part of big government.

There’s fraud in the Medicare program. There’s fraud in the EITC program. There’s fraud in food stamps. There’s fraud in Medicaid. There’s fraud in the disability program. There’s welfare fraud.

But I don’t want to merely pick on what are perceived to be Democrat programs.

There’s also lots of waste, fraud, and abuse at the Pentagon.

Simply stated, when you give away free money, people will do dodgy things to get some of it.

P.S. Given the pervasive parasitical corruption of Washington, nobody should be surprised to learn that plenty of Republican lobbyists are willing to shill for the Obamaphone program.

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Even by Keynesian Standards, Cash-for-Clunkers Was a Clunker

Keynesian economics is fundamentally misguided because it focuses on how to encourage more spending when the real goal should be to figure out policies that result in more income.

This is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, small business income, corporate profits, etc) rather than on “gross domestic product,” which is a measure of how our national income gets allocated (consumption, investment, government, etc).

Simply stated, Keynesians put the cart before the horse. Consumption doesn’t drive growth, it’s a consequence of growth.

But let’s set all that aside because we have new evidence that Keynesian stimulus schemes aren’t even very good at artificially goosing consumption.

Three economists (from MIT and Tex A&M) have crunched the numbers and discovered that Obama’s Cash-for-Clunkers scheme back in 2009 was a failure even by Keynesian standards.

The abstract of the study tells you everything you need to know.

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

This is remarkable. At the time, the most obvious criticism of the scheme was that it would simply alter the timing of purchases.

And scholars the following year confirmed that the program didn’t have any long-run impact.

But now we find out that there was impact, but it was negative. Here’s the most relevant graph from the study.

It shows actual vehicle spending and estimated spending in the absence of the program.

For readers who like wonky details, here’s the explanatory text for Figure 7 from the study.

The effect of the program on cumulative new vehicle spending by CfC-eligible households is shown in Figure 7. The figure shows actual spending and estimates of counterfactual spending if there had been no CfC program. Cumulative spending under the CfC program was larger than counterfactual spending for the months immediately after the program. However, by February 1 the counterfactual expenditures becomes larger and by April has grown to be $4.0 billion more than actual expenditures under the program. It is difficult to make the case that the brief acceleration in spending justifies the loss of $4.0 billion in revenues to the auto industry, for two reasons. First, we calculate that in order to justify the estimated longer-term reduction in cumulative spending to boost spending for a few months, one would need a discount rate of 208 percent. Given the expected (and realized) duration of the recession, it seems difficult to argue in favor of such a discount rate. Second, we note that Cash for Clunkers seems especially unattractive compared to a counterfactual stimulus policy that left out the environmental component, which also would have accelerated purchases for some households without reducing longer-term spending.

By the way, the authors point out that Cash-for-Clunkers wasn’t even good environmental policy.

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

So let’s see where we stand. The program was bad fiscal policy, bad economic policy, and bad environmental policy.

The trifecta of Obamanomics. No wonder the United States suffered the weakest recovery of the post-WWII era.

P.S. David Letterman had a rather amusing cash-for-clunkers joke back in 2010.

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