Greek Government’s Moral Bankruptcy on Soviet Terror Generates Strong Response from Estonia

I like the Baltic nations, as illustrated by what I wrote last year.

I’m a big fan of…Estonia, Latvia, and Lithuania. These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies. One key to their relative success is tax policy. All three nations have flat taxes. And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

No wonder the Baltic nations are doing a good job of achieving economic convergence.

I’ve specifically praised Estonia on several occasions.

Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD. …Estonia…may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman.

Indeed, I strongly recommend this TV program that explored the country’s improbable success. And here’s some data showing that Estonia is leading the Baltics in convergence.

Now I have a new reason to admire Estonia. Having experienced the brutality of both fascism and communism, they have little tolerance for those who make excuses for totalitarianism. And the issue has become newsworthy since Greece decided to boycott a ceremony to remember the victims of communism and fascism.

Estonian Minister of Justice Urmas Reinsalu responded to his Greek counterpart, Stavros Kontonis following the uproar caused by the decision by Greece to not participate in the recent European Day of Remembrance for Victims of Stalinism and Nazism in Estonia.

The letter sent by Reinsalu is a masterpiece of moral clarity. He unambiguously condemns all ideologies that are contrary to free societies. Let’s look at some excerpts.

Our values are human rights, democracy and the rule of law, to which I see no alternative. This is why I am opposed to any ideology or any political movement that negates these values or which treads upon them once it has assumed power. In this regard there is no difference between Nazism, Fascism or Communism.

Amen. That’s basically what I wrote just a few days ago.

Reinsalu points out that free societies (sometimes called liberal democracies, with “liberal” used in the “classical liberal” sense) don’t oppress people, which is inherent with fascist and communist regimes.

Condemnation of crimes against humanity must be particularly important for us as ministers of justice whose task it is to uphold law and justice. …Every person, irrespective of his or her skin colour, national or ethnic origin, occupation or socio-economic status, has the right to live in dignity within the framework of a democratic state based on the rule of law. All dictatorships – be they Nazi, Fascist or Communist – have robbed millions of their own citizens but also citizens of conquered states and subjugated peoples.

The Estonian Justice Minister refers to the bitter experience of his nation.

Unlike Greece, Estonia has the experience of living under two occupations, under two totalitarian dictatorships. …In light of the experience of my country and people, I strongly dispute your claim that Communism also had positive aspects. ……in 1949, …the communist regime deported nearly 2 percent of the population of Estonia only because they as individual farmers refused to go along with the Communist agricultural experiment and join a collective farm. This was in addition to the tens of thousands who had already been imprisoned in the Gulag prison camps or deported and exiled earlier. Thousands more would follow, taken into prison up to mid-1950.

He points out that communism is incompatible with freedom.

…it is not possible to build freedom, democracy and the rule of law on the foundation of Communist ideology. …this has been attempted… This has always culminated in economic disaster and the gradual destruction of the rule of law…there are also countries and peoples for whom the price of a lesson in Communism has been millions of human lives.

The bottom line, he writes, is that all forms of totalitarianism should be summarily rejected.

…we must condemn all attempts or actions that incite others to destroy peoples or societal groups…there is no need to differentiate. It makes no difference to a victim if he is murdered in the name of a better future for the Aryan race or because he belongs to a social class that has no place in a Communist society. We must remember all of the victims of all totalitarian and authoritarian dictatorships.

Kudos for Minister Reinsalu. He doesn’t shrink from telling the truth about communism and other forms of dictatorship.

None of this should be interpreted to mean that western societies are perfect. Heck, I spend most of my time criticizing bad policy in the United States and other western nations. But there’s no moral equivalence.

Here’s Reinsalu’s entire letter, which contains additional points.

I’ll close by elaborating on one of his points. Reinsalu wrote about the miserable track record of communism and made some powerful points.

But I think he was too diplomatic. He should have highlighted the jaw-dropping body count of communist regimes.

He did mention some of the horrid policies of the Soviet Union (perhaps more than 60 million victims), but he also could have listed the incomprehensible misery that communism caused in places such as Cuba, Cambodia, and North Korea. Or China back in the Mao era.

That being said, his letter is a very powerful indictment of the moral bankruptcy of his Greek counterpart (which perhaps isn’t a surprise given the ideology of the Syriza government).

And it’s also an indictment of all of the apologists for communist tyranny.

P.S. Poland is another country that experienced the dual brutality of fascism and communism. So it shouldn’t be surprise that Poles share the same moral clarity as Estonians.

Perhaps this is why Poland has done a reasonably good job of undoing bad Soviet policies.

P.P.S. While I’m a fan of nations such as Estonia and Poland, they need further market-based reforms to compensate for demographic decline.

Read Full Post »

Disagreeing with Liberal Socialism, Despising Marxist Socialism

I wrote last week about evil of totalitarian ideologies such as communism and fascism and pointed out that both antifa and Nazis should be treated with complete disdain and ostracism.

And that led me to find common ground with my left-of-center friends, even though I don’t like many of their policies.

I don’t like redistribution…programs are financed with taxes and that the internal revenue code is enforced by coercion…if you catch me in a cranky mood, I’ll be like the stereotypical libertarian at Thanksgiving dinner and wax poetic about what’s wrong with the system. That being said, I much prefer the coercion found in western democracies compared to the totalitarian versions of coercion found in many other parts of the world. At least we have the rule of law, which limits (however imperfectly) capricious abuse by government officials. …our Constitution still protects many personal liberties, things that can’t be taken for granted in some places. Moreover, there is only a trivially small risk of getting abused by the state in western nations because you have unpopular views. And there’s little danger of persecution by government (at least nowadays) based on factors such as race and religion. This is what makes liberal democracy a good form of government (with “liberal” in this case being a reference to classical liberalism rather than the modern version). Unfortunately, there are some people in America that don’t believe in these principles.

Now let’s look at an aspect of this issue from a left-of-center perspective.

Writing for the New Republic, John Judis analyzes the different types of socialism. He starts with some personal history of his time as a socialist activist.

In the early 1970s, I was a founding member of the New American Movement, a socialist group… Five years later, I was finished with…socialist organizing. …nobody seemed to know how socialism—which meant, to me, democratic ownership and control of the “means of production”—would actually work… Would it mean total nationalization of the economy? …wouldn’t that put too much political power in the state? The realization that a nationalized economy might also be profoundly inefficient, and disastrously slow to keep up with global markets, only surfaced later with the Soviet Union’s collapse. But even then, by the mid-1970s, I was wondering what being a socialist really meant in the United States.

He then notes that socialism has made a comeback, at least if some opinion polls (but not others) and the campaign of Bernie Sanders are any indication.

…much to my surprise, socialism is making a comeback. The key event has been the campaign of self-identified democratic socialist Bernie Sanders, who almost won the Democratic nomination and is now reputedly the most popular politician in America. Several opinion polls have also found that young people now think favorably of socialism and ill of capitalism… For the first time since the ‘60s, socialism looks like a politics with a future in the United States.

But Judis notes that it’s unclear what socialism means.

The old nostrums about ownership and control of the means of production simply don’t resonate in 2017. …In the 2016 campaign, however, Sanders began to define a socialism that could grow… I think there is an important place for the kind of democratic socialism that Sanders espoused.

He says there are many flavors of socialism, but ultimately puts them in two camps.

There is no scientific definition of socialism… It’s a political tradition with many different flavors—Marxist, Christian, social-democratic, Fabian, Owenite, Leninist, Maoist. In looking at the choices facing American socialists now, …a choice between a socialism rooted in Marx’s apocalyptical promise of revolution, or the abolition of capitalism and a socialism that works more gradually toward the incorporation of public power and economic equality within capitalism. One could be called “Marxist socialism” and the other “social democratic”—or, to borrow from John Maynard Keynes, “liberal socialism.”

And “liberal socialism” basically means capitalism combined with European-style redistributionism.

In Western Europe, …socialists were forced to define their objectives more clearly. And what has emerged is a liberal conception of socialism. …social democracy has probably reached its acme in the Nordic countries, where the left has ruled governments for most of last half-century. …That’s not Marx’s vision of socialism, or even Debs’s. In Europe, workers have significant say in what companies do. They don’t control or own them. Private property endures. …private capital is given leave to gain profits through higher productivity, even if that results in layoffs and bankruptcies. But the government is able to extract a large share of the economic surplus that these firms create in order to fund a full-blown welfare state.

Which means “liberal socialism” is, well, liberalism (the modern version, i.e., statism, though Thomas Sowell has a more unflattering term to describe it).

By the standards of Marxist socialism, this kind of social democracy appears to be nothing more than an attenuated form of capitalism. …But…As the Soviet experiment with blanket nationalization showed, it can’t adjust to the rapid changes in industry created by the introduction of automation and information technology. …the market is a better indicator of prices than government planning. …the older Marxist model of socialism may not even be compatible with popular democracy. …What’s the difference between this kind of socialist politics and garden-variety liberalism? Not much. …American socialists need to do what the Europeans did after World War II and bid goodbye to the Marxist vision of democratic control and ownership of the means of production. They need to recognize that what is necessary now—and also conceivable—is not to abolish capitalism, but to create socialism within it.

For what it’s worth, the leftists I know are believers in “liberal democracy,” which is good, and they also are believers in “liberal socialism,” which is good, at least when compared to “Marxist socialism.” Sort of like comparing Barack Obama and Hillary Clinton to Nicolás Maduro and Kim Jong Un.

I disagree with Obama and Clinton, of course, and I would argue that what they want is bad compared to small-government capitalism.

But I utterly despise the totalitarian regimes in Venezuela and North Korea.

Let’s conclude by highlighting a key difference between “liberal socialists” and supporters of small government. My leftist friends are content to allow capitalism so long as they can impose high taxes on “economic surplus” to finance lots of redistribution.

They think that such policies don’t cause significant economic harm. I try to explain to them that punishing success and subsidizing dependency is not a good recipe for long-run prosperity. And I also tell them that demographic changes make their policies very unsustainable.

But at least these decent people on the left are not totalitarians. So when I look at this amusing image from Reddit‘s libertarian page, I agree that everyone who supports big government is a collectivist of sorts. But “Social Democracy” (assuming that’s akin to “liberal socialism”) is not really the same creature as the other forms of collectivism (assuming “social justice” is akin to antifa).

Which is why this image is more accurate.

The bottom line is that Nordic-style big government is misguided, but state-über-alles totalitarianism is irredeemably horrible.

Read Full Post »

Because of Unresolved Issues such as Carried Interest and Revenue Neutrality, Will GOP Tax Reform Effort Become a Cluster-You-Know-What like Obamacare Repeal?

While I realize there’s zero hope of ripping up America’s awful tax code and getting a simple and fair flat tax, I’m nonetheless hopeful that there will be some meaningful incremental changes as part of the current effort to achieve some sort of tax reform.

A package that lowers the corporate rate, replaces depreciation with expensing, and ends the death tax would be very good for growth, and those good reforms could be at least partially financed by eliminating the state and local tax deduction and curtailing business interest deductions so that debt and equity are on a level playing field.

All that sounds good, and a package like this should be feasible since Republicans control both Congress and the White House (especially now that the BAT is off the table), but I warn in this interview that there are lots of big obstacles that could cause tax reform to become a disaster akin to the Obamacare repeal effort.

Here’s my list of conflicts that need to be solved in order to get some sort of plan through Congress and on to the President’s desk.

• Carried interest – Trump wants to impose a higher capital gains tax on a specific type of investment, but this irks many congressional GOPers who have long understood that any capital gains tax is a form of double taxation and should be abolished. The issue apparently has some symbolic importance to the President and it could become a major stumbling block if he digs in his heels.
• Tax cut or revenue neutrality – Budget rules basically require that tax cuts expire after 10 years. To avoid this outcome (which would undermine the pro-growth impact of any reforms), many lawmakers want a revenue-neutral package that could be permanent. But that means coming up with tax increases to offset tax cuts. That’s okay if undesirable tax preferences are being eliminated to produce more revenue, but defenders of those loopholes will then lobby against the plan.
• Big business vs small business – Everyone agrees that America’s high corporate tax rate is bad news for competitiveness and should be reduced. The vast majority of small businesses, however, pay taxes through “Schedule C” of the individual income tax, so they want lower personal rates to match lower corporate rates. That’s a good idea, of course, but would have major revenue implications and complicate the effort to achieve revenue neutrality.
• Budget balance – Republicans have long claimed that a major goal is balancing the budget within 10 years. That’s certainly achievable with a modest amount of spending restraint. And it’s even relatively simple to have a big tax cut and still achieve balance in 10 years with a bit of extra spending discipline. That’s the good news. The bad news is that there’s very little appetite for spending restraint in the White House or Capitol Hill, and this may hinder passage of a tax plan.
• Middle class tax relief – The main focus of the tax plan is boosting growth and competitiveness by reducing the burden on businesses and investment. That’s laudable, but critics will say “the rich” will get most of the tax relief. And even though the rich already pay most of the taxes and even though the rest of us will benefit from faster growth, Republicans are sensitive to that line of attack. So they will want to include some sort of provision designed for the middle class, but that will have major revenue implications and complicate the effort to achieve revenue neutrality.

There’s another complicating factor. At the risk of understatement, President Trump generates controversy. And this means he doesn’t have much power to use the bully pulpit.

Though I point out in this interview that this doesn’t necessarily cripple tax reform since the President’s most important role is to simply sign the legislation.

Before the 2016 election, I was somewhat optimistic about tax reform.

A few months ago, I was very pessimistic.

I now think something will happen, if for no other reason than Republicans desperately want to achieve something after botching Obamacare repeal.

Read Full Post »

Personal Accounts Are the Best Way to Ensure Safe and Secure Retirement Income

Most people understand that there’s a Social Security crisis, but they only know half the story.

The part of the crisis they grasp is that the program is basically bankrupt, though I doubt many of them realize that the long-run shortfall is a staggering $44 trillion.

The part of the crisis that generally is overlooked is that the program is a lousy deal for workers. They pay record amounts of tax into the system in exchange for a shaky promise of a modest monthly check. For all intents and purposes, they are being charged for a steak, but they’re getting a hamburger (with Medicare, by contrast, people are charged for a hamburger and they receive a hamburger but taxpayers pay for a steak that nobody gets).

For groups with lower-than-average life expectancy, such as poor people and minorities, Social Security is even worse. They pay into the system throughout their working lives, but then they don’t live long enough to collect a decent amount of benefits.

I narrated a video that was partly focused on how people could have more retirement income if we shifted to a system of personal retirement accounts, but this video from Learn Liberty directly addresses this issue.

By the way, I have one minor complaint with this excellent video. Social Security is not forced savings. There’s no money set aside. Yes, there’s a “trust fund,” but it contains nothing but IOUs. And if you don’t believe me, see what the Clinton Administration wrote back in 1999.

It would be more accurate to say the system is a pay-as-you-go, tax-and-transfer entitlement.

But I’m digressing, so let’s focus on some potential good news. Americans actually have a pretty good track record of saving for their own retirement. Indeed, total pension assets (measured as a share of economic output) in the United States rival those of nations that have mandatory private retirement systems.

So it presumably shouldn’t be that difficult to transition to a private retirement system in America.

Which was a key takeaway from a column in the Wall Street Journal last week by Andrew Biggs of the American Enterprise Institute. He starts with a pessimistic observation on how major politicians have addressed the crisis.

During last year’s presidential campaign, the candidates promised not to cut Social Security benefits (Donald Trump) and even to increase them (Hillary Clinton). …the Trump administration should reconsider its pledge not to cut Social Security benefits. The program is 25% underfunded over the long term, the Congressional Budget Office projects.

But the good news is that many Americans already are saving for retirement, so it wouldn’t be disruptive to extend personal retirement accounts to the entire population.

…private plans such as 401(k)s have allowed more people than ever to save for retirement…61% of workers… Contributions to private plans have…risen from an average 5.8% of wages in 1975 to 8% in 2014. …in 1984 only 23% of households received benefits from private retirement plans. By 2007 that had risen to 45%. Moreover, during the same period the benefits that the median household received from private plans rose by 141% above inflation, versus only 25% for Social Security benefits.

This is a system that should be expanded, with a prudent transition from a bankrupt Social Security system to a safer and more lucrative system of personal retirement accounts.

And that would be a much better outcome than what the current system will give us.

…Scandinavian-level tax rates or multi-trillion dollar unfunded entitlement liabilities.

P.S. Responding to those who worry about stock market downturns and the implications for retirement income, my colleague Mike Tanner showed that even people retiring after the 2008 crash would have been better off with personal 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.

Read Full Post »

Teaching Economics to Texans: Three Cheers (and Three Videos) for Price Gouging

I generally use Texas as a good example when discussing public policy. Particularly compared to places such as California.

I like the sensible attitude about guns, but the absence of an income tax is particularly admirable when considering economic issues, and I confess to being greatly amused when I read about jobs and investment escaping high-tax states like California and moving to the Lone Star State.

But being more pro-market than California is a low bar to clear. And I’ve written that government is too big in Texas.

And now, because of Hurricane Harvey, I have another reason to criticize the state.

Texas has a law against “price gouging,” which means politicians there (just like the politicians in places like Venezuela) think they should get to determine what’s a fair price rather than allow (gasp!) a free market.

The state’s Republican Attorney General is even highlighting his state’s support for this perverse example of price controls.

>Price gouging by Texas merchants in the path of Hurricane Harvey has drawn the attention of Texas Attorney General Ken Paxton, who said Saturday that his office is looking into such cases. …”We’ll be dealing with those people as we find them,” he said. …Paxton issued a warning about price gouging Friday as the hurricane approached the Texas coast. Texas law prohibits businesses from charging exorbitant prices for gasoline, food, water, clothing and lodging during declared disasters.

Paxton is right about Texas law, but he is threatening to enforce a terrible policy.

To help explain why Texas law is bad and why the Attorney General is misguided, here’s a video from John Stossel on so-called price gouging.

It’s disgusting that Mississippi arrested John. The guy should have received a medal for putting his money at risk to serve others.

To augment Stossel’s analysis, here’s a video from Learn Liberty that explains why politicians shouldn’t interfere with the price system.

And here’s Walter Williams discussing the role of “windfall profits” and how high returns encourage the reallocation of resources in ways that benefit consumers.

The bottom line on this issue is that buyers understandably want low prices, particularly in emergency situations.

But that makes no economic sense. However, since buyers generally outnumber sellers, politicians will always have an incentive to demagogue on the issue.

I’m not surprised when we get economic illiteracy from certain politicians. Nonetheless, it’s very disappointing when Texas lawmakers sink to that level. I hope Mr. Paxton at least is feeling guilty.

P.S. But I’ll close on an upbeat note by sharing my collection of Texas-themed humor: Here, here, here, and here.

Read Full Post »

Limiting Taxpayer-Financed Vacations and Political Junkets

When I write about politicians in their role as politicians (rather than their policy prescriptions), it’s usually to mock them for venality, corruption, immorality, sleaze, incompetence, or hypocrisy.

Today, I want to plead with them to exercise self-restraint. Some folks may have seen the stories about President Trump using up the Secret Service budget because of all his vacation trips to his various resorts.

There’s nothing illegal about his actions, but I wish Trump (as well as his predecessors and successors) would sometimes pause and think about whether they’re squandering other people’s money.

But since it’s highly unrealistic to expect politicians to have empathy for taxpayers, maybe we need some reforms. Here’s some of what I wrote in a column for Fortune.

…the Secret Service is way over budget because of President Donald Trump’s frequent vacations… It’s easy to zing Trump for being a hypocrite, as he previously complained about the cost and duration of President Barack Obama’s vacations. …But let’s look at this issue from the perspective of taxpayers. Every time the president hops on Air Force One for a weekend getaway at one of his resorts, that involves a major shift of manpower by the Secret Service, along with major outlays for travel, lodging, and other costs. …it’s time to consider some sensible reforms that could limit the agency’s burden on taxpayers.

I came up with a couple of ideas, which could be implemented by attaching conditions to the spending bills that fund the White House and the Secret Service.

…Congress should put an annual limit on expenditures for unofficial White House travel. …the average American gets 10 paid vacation days a year. …Presidents are not average, of course, so they should get taxpayer-financed protection for around four weeks of vacation. Any more than that would still have a Secret Service detail, but the president would have to pick up the incremental expenses… There should also be similar restrictions for the presidential family, especially with regard to overseas business trips. If Trump’s children feel it is necessary to go overseas to sign a deal, then the company at the very least should pay half the cost for Secret Service protection.

In other words, if the President wants to go to one of his golf clubs every weekend, he would always have full protection from the Secret Service, but he would pay for the added expense. It could come from his own pocket, or from his campaign coffers.

I don’t care, so long as there’s a limit on how much taxpayer are hit.

But what if Trump takes more official trips? Wouldn’t that require more money for the Secret Service?

That’s possible, but I also suggested in the article another way to save money that wouldn’t sacrifice security.

Another reasonable reform would be to…protect taxpayers by limiting the number of other administration staffers that go on junkets. …cut in half the number of political advisors, speechwriters, and flunkies that have turned White House trips into costly boondoggles.

The bottom line is that presidential junkets shouldn’t turn into an excuse to have hundreds of non-Secret Service staffers tagging along at high cost.

And I stressed in the article that I’m not picking on Trump.

They would be permanent reforms to address the systemic problem of wasteful spending and administrative bloat in Washington. This problem existed before the current president. And in the absence of reform, it will be an issue with future administrations.

To emphasize this point, here are some excerpts from a 2014 article from the U.K.-based Guardian (h/t: Mark Steyn) about the excesses of one of Obama’s European trips.

President Barack Obama’s visit on Tuesday will strain the city like never before with €10m ($10.4m, £8.4m) of Belgian money being spent to cover his 24 hours in the country. The president will arrive on Tuesday night with a 900-strong entourage, including 45 vehicles and three cargo planes.

The article didn’t say how many of the 900 staffers were Secret Service agents, but I’m guessing maybe 200 or 300. Heck, even if it was 400 or 500, why did taxpayers have to pick up the tab for another 400 or 500 (or more) staffers who weren’t there for security-related reasons?

Yes, presidents need to have staff to conduct business, but we live in a world with advanced communications technology.

I’m a former congressional staffer, and I’ve had lots of friends work for various administrations, so I understand that a nice overseas trip can be fun for people who otherwise toil in obscurity.

But as the risk of being a curmudgeon, I don’t want taxpayers to foot the bill. I want there to be a mentality of frugality. And if politicians won’t adopt that mentality (and they almost certainly won’t, as shown by this example), then it would be nice to attach some strings to limit their excesses.

P.S. I grouse about goodies for American politicians, but I’d probably be even more upset if I was a taxpayer in Europe.

Read Full Post »

Can President Macron Save France?

Back in April, I looked at the candidates running for the French presidency and half-jokingly wondered which one would win the right to preside over the country’s decline.

But once the field was winnowed to two candidates, Emmanuel Macron and Marine Le Pen, I wrote that voters should pick the socialist over the socialist. My title was sarcastic, but I was making a serious point that Marine Le Pen had a very statist platform, whereas I cited evidence that Macron had some sensible proposals.

Mr. Macron aims to rebalance the economy by cutting 120,000 public sector jobs, streamlining the pension system and dropping state spending back to 52 percent of G.D.P. Mr. Macron leads an emerging centrist consensus that recognizes that…the main obstacle retarding France’s economy is its attachment to a welfare state culture of…generous benefits. …Mr. Macron…once said that stifling taxes threaten to turn France into “Cuba without the sun”.

Indeed, in addition to the reforms listed in the Macron has proposed to lower France’s corporate tax rate to 25 percent, and he also want to liberalize labor markets.

All of which seems rather surreal. After all, Macron was a minister in the failed socialist government of Francois Hollande, so who would have thought that we would be the one to lead an effort to shrink the burden of government?

Yet consider the fiscal agenda President Macron is pushing.

France’s 2018 budget will focus on cutting taxes to boost economic activity as the government seeks to cement its support among the business community, Prime Minister Edouard Philippe said. …Philippe told RTL Radio on Wednesday he wants to lower levies that “hurt the competitiveness of our country.” Government ministries this week received letters setting out their spending limits for 2018. President Emmanuel Macron is seeking cuts of 20 billion euros ($23 billion) and tax reductions of 11 billion euros next year… “We have to get out of the spiral of public spending,” government spokesman Christophe Castaner said in a separate interview on France Inter. “France has been addicted to ever increasing spending, paid for by taxes.”

Wow. I wish the Republicans in Washington were as sensible as these French socialists (actually, since they created a new party, it would be more accurate to say they are former socialists).

But there is precedent for this kind of surprise. It was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand. And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.

That’s the good news.

The bad news is that French voters may have buyer’s regret.

The Wall Street Journal recently opined on this topic.

…the question isn’t whether Emmanuel Macron can save France. The question is whether France can save itself. Voters have the best chance in a generation to revive an economy in decline, yet they seem to quail at the critical moment. …voters are having second thoughts about economic reform. Mr. Macron’s approval started falling in July after he announced plans to cut housing benefits—by €5 a month for each recipient. Feminists are in arms over his plan to reduce the government’s women’s-rights budget to €20 million ($23.6 million) from €30 million. That’s before he gets to the labor reforms that will dominate the autumn.

Shifting from the editorial page, the WSJ has a report on the growing opposition to reform.

As Emmanuel Macron sets out to shake up France’s rigid labor market, the young president is losing the public support he may need to weather protests by the country’s powerful unions. …Mr. Macron will have to tread carefully in rolling out his labor reforms in September. For months, the 39-year-old president has been in talks with powerful labor unions in a bid to contain planned street protests. Now the prospect is growing that the ranks of those demonstrations could swell with students, retirees and other segments of French society… Mr. Macron’s government wants to make it easier for French firms to hire and fire workers. …The hard-left General Confederation of Labor, France’s most militant union, is already calling for strikes and demonstrations.

It’s not surprising, of course, to see opposition from those seeking to protect their privileges.

Though it theoretically shouldn’t matter since Macron’s party has a huge majority in the French Assembly.

That being said, politicians do have a habit of buckling when faced with voter unrest.

And Macron is committing some unforced errors, as reported by the U.K.-based Telegraph.

Emmanuel Macron spent €26,000 (£24,000) on makeup during his first three months as president of France, it has emerged. …Le Point reported that his personal makeup artist – referred to only as Natacha M – put in two bills, one for €10,000 and another for €16,000.The Elysee Palace defended the high fee saying: “We called in a contracter as a matter of urgency”. The same makeup artist also applied foundation to Mr Macron during his presidential campaign. Aides said that spending on makeup would be “significantly reduced”. …Le Point put the overall figure for Mr Hollande’s makeup at €30,000 per quarter. Nicolas Sarkozy, meanwhile, paid a whopping €8,000 per month for his, according to Vanity Fair.

Since it appears that these costs are borne by taxpayers, this is all rather depressing.

Macron, however, at least can claim that he’s not the most frivolous with other people’s money. Monsieur Hollande won the prize for waste when you add his hairdresser to the equation.

…all these sums pale into comparison with the £99,000 Mr Hollande paid his personal barber. The huge amount sparked accusations of “shampoo Socialism”. …The hairdresser, Olivier Benhamou, was hired to work at the Elysée Palace in 2012 for the duration of Mr Hollande’s five-year term.  Mr Benhamou also reportedly enjoyed a housing allowance and family benefits.

As I wrote about this last year and suggested that this narcissistic waste made Hollande eligible to win the “Politician of the Year” contest.

But let’s shift back to the serious issue of economic liberalization.

To be blunt, France’s economy is suffocating from statism. I’m not even sure what’s the biggest problem.

• Is it bloated public sector that consumes more than half of the economy’s output?
• Is it a tax system that is so onerous that households sometimes pay more than 100 percent of their income to government?
• Is it cossetted bureaucrats, symbolized by the functionary with a car and driver who nonetheless still racked up giant taxi expenses?
• Is it class-warfare policies that target the rich but wind up hurting the middle class?

The answer is “all of the above,” with is why France desperately needs pro-market reform.

We’ll learn later this year whether Macron can save his country.

P.S. The story that tells you everything you need to know about France was the poll last decade revealing that more than half the population would flee to America if they had the opportunity.

P.P.S. If it wasn’t for France, we never would have had the opportunity to enjoy this very clever and amusing Scott Stantis cartoon.

P.P.P.S. Or watch this rather revealing Will Smith interview about French taxation.

Read Full Post »

To Fight Cronyism, Let’s Have Separation of Business and State

In my 30-plus years in Washington, I’ve lived through some very bad pieces of legislation.

• George H.W. Bush’s betrayal of his “read my lips” promise with the 1990s tax increase.
• Bill Clinton’s 1993 tax hike, which OMB admitted 18 months later was a failure.
• All sorts of bad policies under George W. Bush, starting with the no-bureaucrat-left-behind education bill.
• A blizzard of bad policy in Obama’s first two years, including the fake stimulus, Dodd-Frank, and Obamacare.

But the most depressing experience was probably the TARP bailout. In part, it was depressing because bad government policy created the conditions for the crisis, so it was frustrating to see the crowd in Washington blame capitalism (in effect, a repeat of what happened in the 1930s).

Far more depressing, however, was the policy response. Thanks largely to the influence of Treasury Secretary Hank Paulson, the Bush Administration decided to bail out the big firms on Wall Street rather than use “FDIC resolution,” which would have bailed out depositors but at least shut down big institutions that were insolvent.

In other words, TARP was pure cronyism. Wall Street firms had “invested” in Washington by giving lots of contributions to politicians and TARP was their payoff.

With this background, you’ll understand why I asserted in this interview that the dissolution of two business advisory councils is the silver lining to the black cloud of Charlottesville.

Since that was just one segment of a longer interview and I didn’t get a chance to elaborate, here are some excerpts from an article in Harvard Business Review by Robert Litan and Ian Hathaway about the connection between anemic productivity numbers (which I wrote about last week) and cronyism.

Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work. In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors. Most people think of entrepreneurship as being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living. Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.

That’s the theory.

What about evidence? Well, Obamacare could be considered a case study since it basically was a giveaway to big pharmaceutical firms and big health insurance companies.

But the authors look at the issue more broadly to see if there is an economy-wide problem.

Do we…see a rise in unproductive entrepreneurship, as Baumol theorized? …James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.

This is very depressing.

I don’t want companies to do well because the CEOs cozy up to politicians. If entrepreneurs and corporations are going to be rolling in money, I want that to happen because they are providing valued goods and services to consumers.

I wrote about Bessen’s research last year. It’s very unsettling to think that companies make more money because of political connections than they do from research and development.

There are two reasons this is troubling.

First, it means slower growth because government intervention is undermining the efficient allocation of labor and capital that occurs with productive entrepreneurship.

Second, cronyism is very corrosive because people equate business with capitalism, so their support for capitalism declines when they see companies getting special favors.

I wish ordinary people understood that big business and free enterprise are not the same thing.

Though I fully understand their disdain for certain big companies. Consider the way a select handful of big companies use the Export-Import Bank to obtain undeserved profits. How about the way big agri-businesses rip off consumers with the ethanol scam. Don’t forget H&R Block is trying to get the IRS to drive competitors out of the market. Big Sugar also gets a sweet deal by investing in politicians. Another example is the way major electronics firms enriched themselves by getting Washington to ban incandescent light bulbs. Needless to say, we can’t overlook Obama’s corrupt green-energy programs that fattened the wallets of well-connected donors. And General Motors became Government Motors thanks to politicians fleecing ordinary Americans.

The bottom line is that it’s time to save capitalism from the rent seekers in the business community.

Read Full Post »

Peas in a Pod: Nazi = Antifa = Collectivist = Fascist = Communist

At the risk of making myself unpopular with some of my fellow libertarians, not all forms of government coercion are created equal.

I don’t like redistribution in the United States. I recognize that such programs are financed with taxes and that the internal revenue code is enforced by coercion (if you don’t believe me, see what happens when you choose not to comply with our supposedly voluntary system). And if you catch me in a cranky mood, I’ll be like the stereotypical libertarian at Thanksgiving dinner and wax poetic about what’s wrong with the system.

That being said, I much prefer the coercion found in western democracies compared to the totalitarian versions of coercion found in many other parts of the world.

At least we have the rule of law, which limits (however imperfectly) capricious abuse by government officials. That’s not the case in many countries. Our courts also are generally independent and our Constitution still protects many personal liberties, things that can’t be taken for granted in some places.

Moreover, there is only a trivially small risk of getting abused by the state in western nations because you have unpopular views. And there’s little danger of persecution by government (at least nowadays) based on factors such as race and religion.

This is what makes liberal democracy a good form of government (with “liberal” in this case being a reference to classical liberalism rather than the modern version).

Unfortunately, there are some people in America that don’t believe in these principles. They call themselves all sorts of names, from white nationalist to antifa, but they share the common bond of totalitarianism.

J.D. Tuccille has an article for Reason that elaborates on this link.

Take a side? You bet. …advocates of a free, open, and liberal society are a side—the correct side—and the left-wing and right-wing thugs battling in the streets are nothing more than rival siblings from a dysfunctional illiberal family.

Losers who march with Nazi flags unquestionably deserve scorn. They represent a totalitarian ideology that subjugates individual rights to state power.

And Tuccille is rightly critical of Trump for giving even a shred of aid and comfort to such people.

But that doesn’t mean the counter-protestors (or, to be more accurate, a subsection of them) are praiseworthy. Indeed, some of them are similarly violent and evil. Tuccille lists some of the totalitarian efforts by folks on the hard left.

In June, James Hodgkinson opened fire on Republican members of Congress gathered for a baseball practice. …the supporter of Occupy Wall Street and former Bernie Sanders volunteer sent six people, including Rep. Steve Scalise (R-LA), to the hospital… Before that, left-wing protesters violently shut down a Middlebury College speech by Charles Murray, injuring Professor Alison Stanger in the process, rioted over a speech by professional provocateur Milo Yiannopoulos, and forced the cancellation of a Republican parade in Portland, Oregon, with promises that “the police cannot stop us from shutting down roads.” They boast of their contempt for free speech.

He closes with a rejection of the “whataboutism” argument, which is being used by some to suppress criticism of the violent left.

…for those of us already calling out the violent bigots flaunting Nazi imagery, it’s not whataboutism to point out that an alleged alternative isn’t actually an alternative at all—it’s just another version of the same thing. …There’s no reason to favor one illiberal force over another when our country has a long history based on much different, and much better, political principles. …Despite our many differences over specific policies, most Americans have traditionally supported the side of liberty, tolerance, free speech, and peaceful political change, within broad parameters. That side is in opposition to the violent, authoritarian thugs of the right and of the left.

Here’s an Imgur image from Reddit’s libertarian page that sums up my thinking.

In the interests of accuracy, I am partly sympathetic to the folks involved with Black Lives Matter. I get very upset when I read about low-income minorities suffering because politicians at the local level use cops to generate revenue rather than to protect against bad guys.

And maybe some of the other groups happen to be on the right side of some random issues (for all I know, maybe Nazis and commies oppose Trump’s foolish choice to expand U.S. intervention in Afghanistan).

But as a general rule, what animates the groups in the above photo is that they want to impose – even by violence – some form of totalitarian government. Yes, they may hate each other, but only in the sense that two street gangs may be vicious rivals because they each want control over some turf.

Here’s a video that examines the preposterous (and presumably politically motivated) assertion that there’s some sort of common ground between Nazis are liberty-oriented groups such as the Tea Party.

Let’s look at an example at the common link between socialism and fascism. The Library of Economics and Liberty has a very insightful article on Mussolini’s hostility to capitalism.

Consider some of the components of fascist economics: central planning, heavy state subsidies, protectionism (high tariffs), steep levels of nationalization, rampant cronyism, large deficits, high government spending, bank and industry bailouts, overlapping bureaucracy, massive social welfare programs, crushing national debt, bouts of inflation and “a highly regulated, multiclass, integrated national economic structure.” …Benito Mussolini identified his economic policies with “state capitalism”—the exact phrase that Vladimir Lenin used to usher in his New Economic Policy (NEP). …Lenin’s revised Marxism culminated in “socialist-lite” policies that helped inspire Mussolini to craft his own Italian-style fascism with a right-wing socialist twist. Thus, one could argue that Lenin’s politics were the first modern-day version of fascism and state-corporatism. Economist Ludwig von Mises, who fled the Nazi conquest of Europe, contended that the “economic program of Italian Fascism did not differ from the program of British Guild Socialism as propagated by the most eminent British and European socialists.”

Want more proof? Well, let’s look at what Mussolini actually wrote.

Interestingly, Mussolini found much of John Maynard Keynes’s economic theories consistent with fascism, writing: “Fascism entirely agrees with Mr. Maynard Keynes… In fact, Mr. Keynes’ excellent little book, The End of Laissez-Faire (l926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud.” …In his “Doctrine of Fascism,” Mussolini wrote: “The Fascist conception of life accepts the individual only in so far as his interests coincide with the State. . . . Fascism reasserts the rights of the state. If classical liberalism spells individualism, Fascism spells government.” …In May 1934, …Mussolini declared, “Three-fourths of [the] Italian economy, industrial and agricultural, is in the hands of the state.”

To be fair, it is possible to believe in lots of statism without being a totalitarian. For example, there are true-believing socialists in western nations who believe in confiscatory taxation, nationalization of industry, and all sorts of other wildly misguided policies. But, to their credit, they accept election results and don’t believe in killing, or even assaulting, their political opponents.

The bottom line is that well-meaning people from the right, left, and center should be united in their defense of liberal democracy.

On a practical level, there are a couple of implications.

It would be good if people on the right and left argued within the bounds of decency. Yes, I’ll call my opponents big-government statists and they’ll call me a heartless capitalist. I’ll say they’re trying to create dependency for political advantage and they’ll say I’m a tool of the Koch brothers. That’s normal fun and games.

But we should reserve our really negative rhetoric for the thugs who genuinely favor totalitarianism. And the two big political parties should be especially vigilant about disowning and criticizing the groups that are perceived as being indirectly on their side. As such, Republicans should condemn Nazis and like-minded groups. And Democrats should condemn antifa and like-minded groups.

As for the rest of us, we should try to be like Daryl Davis and Matthew Stevenson.

P.S. Since I believe in freedom and the rule of law, I don’t think totalitarian-minded groups should be randomly persecuted. If some nutty leftists want to set up a commune based on “from each according to ability, to each according to needs,” that’s fine with me so long as they aren’t trying to oppress others. Similarly, if some dumb rednecks decide to set up an Aryan compound in some isolated forest, that’s none of my business so long as they don’t try to infringe upon the rights of other. We can and should criticize such people, of course, but don’t arrest them for having warped hearts.

Read Full Post »

Why Is the Trump Administration AWOL on the IRS?

Whether I like what’s happening (getting rid of Operation Choke Point) or don’t like what’s happening (expanding civil asset forfeiture), it appears that the Justice Department under Attorney General Jeff Sessions is willing to make decisions.

With one very puzzling exception.

No steps have been taken to reverse the Obama-era policy of stonewalling to hide evidence of IRS scandals. Everything seems to be on auto-pilot.

The Wall Street Journal opined about the issue today and is justifiably frustrated.

The Obama Justice Department dismissed the IRS political targeting scandal as no big deal, and the Trump Administration hasn’t been any better. …These are basic questions of political accountability, even if the IRS has stonewalled since 2013. President Obama continued to spin that the targeting was the result of some “boneheaded” IRS line officers in Cincinnati who didn’t understand tax law. Yet Congressional investigations have uncovered clear evidence that the targeting was ordered and directed out of Washington. Former director of Exempt Organizations Lois Lerner was at the center of that Washington effort, but the IRS allowed her to retire with benefits. She invoked the Fifth Amendment before Congress. One of her principal deputies, Holly Paz, has submitted to a deposition in separate litigation, but the judge has sealed her testimony after she claimed she faced threats. The Acting Commissioner of the IRS at the time, Stephen Miller, stepped down in the wake of the scandal, but as far as anyone outside the IRS knows, no other IRS employee has been held to account. Even if the culprits were “rogue employees,” as the IRS claims, the public deserves to know what happened. …The Trump Administration also has a duty to provide some answers. The Justice Department and IRS have continued to resist the lawsuits as doggedly as they did in the Obama era. Attorney General Jeff Sessions can change that… Seven years is too long to wait for answers over abuses of the government’s taxing power.

This is spot on. It’s outrageous that the Obama Administration weaponized and politicized the IRS. But it’s also absurdly incompetent that the Trump Administration isn’t cleaning up the mess.

I understand why the bureaucrats at the Justice Department instinctively (and probably ideologically) want to protect their counterparts at the IRS. But, as the WSJ stated, there’s no reason why Attorney General Sessions isn’t using his authority to change policy.

The President’s failure to fire the ethically tainted IRS Commissioner is a troubling sign that the problem isn’t limited to the Justice Department.

One of Republicans’ least favorite Obama administration officials remains in his position: IRS Commissioner John Koskinen. Some Republicans lawmakers have asked President Trump to ask for Koskinen’s resignation. The commissioner’s term expires in November, but he has said he would step aside sooner if asked by the president. …Koskinen to lead the IRS in 2013, not long after it was revealed that the agency had subjected Tea Party groups’ applications for tax-exempt status to extra scrutiny and delays. …Many Republicans accuse Koskinen of impeding congressional investigations into the political-targeting scandal. They argue that he made false and misleading statements under oath and didn’t comply with a subpoena. During the last months of Obama’s presidency, some House Republicans pushed for a vote on Koskinen’s impeachment… Since Trump has taken office, there have been calls from GOP lawmakers for Koskinen to step down. Days after Trump’s inauguration, Republican Study Committee (RSC) Chairman Mark Walker (R-N.C.) and more than 50 other lawmakers sent a letter urging Trump to fire Koskinen “in the most expedient manner practicable.” …It’s unclear why Trump hasn’t ousted Koskinen or if he plans to do so in the future.

Very disappointing. I’m not a fan of conspiracy theories, but this almost leads me to wonder whether Koskinen has some damaging information on Trump.

Incidentally, the Justice Department may be dragging its feet and the White House may have cold feet, but the Treasury Department is overtly on the wrong side. And the problem starts at the top, resulting in praise for the Treasury Secretary from the pro-IRS forces at the New York Times.

President Trump’s Treasury secretary, Steven Mnuchin, knows that investing in the Internal Revenue Service yields significant returns… And he’s right: Every dollar spent on the agency returns $4 in revenue for the federal government, and as much as $10 when invested in enforcement activities. …At his confirmation hearings in January, Mr. Mnuchin bemoaned the cuts to the I.R.S. budget over the last seven years. The agency “is under-resourced to perform its duties,” he said, adding that further cuts “will indeed hamper our ability to collect revenue.” He also acknowledged that money spent on the I.R.S. is a good investment: “To the extent that we add resources, we can collect more money.” …his faith in the I.R.S. work force prompted one of his congressional interrogators to call it “refreshing” to hear someone “praise the employees at the Treasury Department.”

Yet should we give more money to a bureaucracy that has a big enough budget to finance this kind of reprehensible behavior?

The Internal Revenue Service has seized millions of dollars in cash from individuals and businesses that obtained the money legally, according to a new Treasury Department inspector general’s report. …individuals and businesses are required to report all bank deposits greater than $10,000 to federal authorities. Intentionally splitting up large sums of cash into sub-$10,000 amounts to avoid that reporting requirement is known as “structuring” and is illegal under the federal Bank Secrecy Act. But many business owners engaged in perfectly legal activities may be unaware of the law. Others are covered by insurance policies that don’t cover cash losses greater than $10,000. Still others simply want to avoid extra paperwork, and keep their deposits less than $10,000 on the advice of bank employees or colleagues. …The reporting requirements were enacted to detect serious criminal activity, such as drug dealing and terrorism.

I’m very skeptical that these intrusive anti-money laundering laws are successful by any metric, but I’m nauseated that the main effect is to give IRS bureaucrats carte blanche to steal money from law-abiding people.

The IRS pursued hundreds of cases from 2012 to 2015 on suspicion of structuring, but with no indications of connections to any criminal activity. Simply depositing cash in sums of less than $10,000 was all that it took to arouse agents’ suspicions, leading to the eventual seizure and forfeiture of millions of dollars in cash from people not otherwise suspected of criminal activity. The IG took a random sample of 278 IRS forfeiture actions in cases where structuring was the primary basis for seizure. The report found that in 91 percent of those cases, the individuals and business had obtained their money legally.

But here’s the part that’s most outrageous.

Innocent people weren’t the byproducts of a campaign to get bad guys. They were the targets.

…the report found that the pattern of seizures — targeting businesses that had obtained their money legally — was deliberate. “One of the reasons why legal source cases were pursued was that the Department of Justice had encouraged task forces to engage in ‘quick hits,’ where property was more quickly seized and more quickly resolved through negotiation, rather than pursuing cases with other criminal activity (such as drug trafficking and money laundering), which are more time-consuming,” according to the news release. In most cases, the report found, agents followed a protocol of “seize first, ask questions later.” Agents only questioned individuals and business owners after they had already seized their money.

In any event, the Trump Administration’s failure to deal with the problem seems to have emboldened the tax collection agency.

Despite promises to Congress, the Internal Revenue Service has yet to take advantage of a red-flag alert system designed to prevent it  from rehiring past employees with blots on their records, a watchdog found. …the Treasury Inspector General for Tax Administration found that more than 200 of 2,000-plus former employees “whom the IRS rehired between January 2015 and March 2016 had been previously terminated or separated from the tax agency while under investigation,” according to a report released on Thursday.

And keep in mind that IRS bureaucrats awarded themselves big bonuses in response to the scandal.

By the way, the problem isn’t limited to the executive branch.

Republicans in 2015 (after they had control of both the House and Senate!) decided that the best response to IRS scandals was to increase the agency’s budget. I’m not joking (and I’m also not happy). At the risk of being redundant, only the Stupid Party could be that stupid.

I sarcastically wrote four years ago that we should be thankful that Obama reminded the American people that the IRS isn’t trustworthy. Little did I realize that Republicans would fumble a golden opportunity to deal with the mess once they got power.

P.S. I’ve certainly done my part to explain why the IRS bureaucracy deserves scorn.

• It has thieving employees.
• It has incompetent employees.
• It has thuggish employees.
• It has brainless employees.
• It has protectionist employees.
• It has wasteful employees.
• And it has victimizing employees.

P.P.S. I don’t want to end on a sour note, so here’s more examples of IRS humor from my archives, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

Read Full Post »

Time to Celebrate America’s Enormous Capital Surplus with the Rest of the World

What’s the worst government statistic, based on whether it distracts from sound thinking and encourages bad policy?

Well, I definitely think gross domestic income is a better measure than gross domestic product if we want insights on growth, so I’m not a big fan of GDP data.

I’m even less enthused about the Gini Coefficient because measures of inequality lead some people to mistakenly think of the economy as a fixed pie, or to falsely think that lots of income for a rich person somehow implies less income for the rest of us. And that then encourages some people to focus on redistribution (i.e., change how the pie is sliced) when it will be far better for the poor if policy makers focus on growth (i.e., expand the size of the pie).

But if you want to know the most unfortunate piece of economic data, I actually gave the answer to this question last year.

…the worst government statistic is the “trade deficit.”This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And we’re not talking chump change. Foreigners are “voting with their dollars” by making huge investments in the American economy.

According the Commerce Department data, the value of these investments is now well above $10 trillion. Yes, that trillion with a “t.”

That’s something we should celebrate. But you don’t have to believe me.

Let’s see what other have to say, starting with Professor Walter Williams.

There cannot be a trade deficit in a true economic sense. Let’s examine this. I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer. My grocer buys more from his wholesaler than his wholesaler buys from him. But there is really no trade imbalance, whether my grocer is down the street, in Canada or, God forbid, in China. Here is what happens: When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls by $100. For my grocer, it is the opposite. His goods account falls by $100, but his capital account rises by $100. Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance. That is true whether we are talking about domestic trade or we are talking about foreign trade.

Of course, it’s not surprising that a scholar like Walter Williams is on the right side and puts forth sound arguments.

But it is a bit of a shock when an elected official does the same thing. So I was very impressed when I saw this column in the Washington Post from Senator James Lankford of Oklahoma.

…the administration has…emphasized its desire to reduce the trade deficit… This is a faulty assumption but one that has unfortunately found its way into mainstream political dialogue. Trade deficits are not always bad for U.S. workers and consumers.

Senator Lankford points out a very important reason why Americans buy more from Mexicans than vice-versa.

For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that.

But the Oklahoma lawmakers also echoes what others have said about capital flows.

Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. …this foreign cash…is a positive for our economy. When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy. It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers.

Michael Strain of the American Enterprise Institute adds to the discussion.

Foreigners purchase U.S. stocks, bonds and currency. Foreigners invest directly in the United States… Generally speaking, this is good. It is a vote of confidence in the United States economy and, in some sense, in our nation as a whole. …we should think of foreign investment as increasing wages and economic growth by making workers and firms more productive.

But if President Trump succeeds in limiting the ability of Americans to buy from foreign producers, he will also limit the ability of foreigners to invest in America’s economic future.

…when the president and his administration attack the trade deficit, they are attacking foreign investment in the United States. …when we import capital from abroad, we run a trade deficit. Trade deficits and capital flows from abroad go hand in hand. …If the president wants to significantly reduce the trade deficit, he also wants to significantly reduce inflows of foreign capital. Waging a war on the trade deficit is waging a war on foreign investment.

Here’s what Kevin Williamson wrote about this topic for National Review.

…investing in the United States…is a very attractive proposition, which is…the main reason why we have trade deficits. Trade deficits are partly a question of consumer preference…but they are not mainly a question of consumer preference. They are mainly a question of investor preference — and investors prefer the United States, which is why there is almost twice as much foreign direct investment in the United States as in China, even though China’s economy has grown at a much faster rate over the past 20 years. …When Walmart orders $1 million worth of flip-flops from a Chinese concern, those Chinese gentlemen receive 1 million delicious U.S. dollars, which they are very happy and grateful to have. But what can you do with U.S. dollars? You can buy stuff from U.S. companies or you can buy assets from sellers who take U.S. dollars, which ultimately means U.S.-based investments. …But it isn’t only the Chinese. The Japanese, the British, the Germans and the other Europeans, the Canadians, the Mexicans, and practically everybody else in the world with a little bit of coin to invest likes to buy American assets. And why wouldn’t they? The American economy is the most wondrous thing human beings have ever managed to do… Trade deficits don’t happen because the wily Japanese juke us on trade policy. They happen because intelligent people holding a fistful of dollars very often decide to forgo the consumption of American consumer goods in order to invest in American assets. In economics terms, what this means is that the trade deficit is a mirror image of the capital surplus.

By the way, there are two ways that foreigners invest in the American economy.

Most of their money is for “passive” or “indirect” investments, which is simply a way of saying that they buy lots of stocks and bonds.

Those investments are very important for our economy. As I wrote just a few days ago, investment is what leads to productivity growth, and that’s how we earn higher wages and get higher living standards.

But foreigners also engage in “direct” investments, such as BMW building a factory in South Carolina. Mark Perry of the American Enterprise Institute points out that this also is a recipe for lots of job creation.

Since I’ve shared a lot of information on why a capital surplus is good, I supposed I should share some information explaining why protectionism is bad.

We’ll start with a column from the Wall Street Journal that looks at the impact of protectionist policies in Brazil and Argentina.

For decades, South America’s two largest economies have tried to shield their workers from global trade, largely through high tariffs and regulations that promote domestic production over imports. The World Bank ranks Argentina and Brazil among the world’s most closed big economies. …These protectionist policies have…come at a huge cost to consumers, who now pay higher prices, and to taxpayers, who underwrite the subsidies. …air conditioners and other products are…sold for two to three times the market price of other countries. The cost to Argentina’s taxpayers of these jobs is steep: up to $72,000 per factory worker a year… But for ordinary Argentines, the products’ price tag can be hefty. An unlocked Samsung J7 smartphone sells for $240 in the U.S. but costs nearly $500 in Buenos Aires. …Brazil’s long history of protectionism bred complacency… Consider Brazil’s auto industry, until recently one of the world’s 10 largest. Shielded for decades by high tariffs, it has devolved into a peddler of rinky-dink hatchbacks… And for Brazilian consumers, cars are far pricier: A new Volkswagen Gol Comfortline lists in Brazil at $15,231—nearly twice as much as in Mexico, which has low tariffs and an efficient car industry.

George Will looks at the cost of similar (but thankfully mostly in the past) policies in the United States.

…there are more than 45 million Americans in poverty, “stretching every dollar they have.” The apparel industry employs 135,000 Americans. Can one really justify tariffs that increase the price of clothing for the 45 million in order to save some of the 135,000 low-wage jobs? …A three-year, 15 percent tariff enabled domestic producers to raise their prices, thereby raising the costs of many American manufacturers. By one estimate, each U.S. job “saved” cost $550,000 as the average bolt-nut-screw worker was earning $23,000 annually. …Ronald Reagan imposed “voluntary restraints” on Japanese automobile exports, thereby creating 44,100 U.S. jobs. But the cost to consumers was $8.5 billion in higher prices, or $193,000 per job created, six times the average annual pay of a U.S. autoworker. And there were job losses in sectors of the economy into which the $8.5 billion of consumer spending could not flow. …In 2012, Barack Obama boasted that “over a thousand Americans are working today because we stopped a surge in Chinese tires.” But this cost about $900,000 per job, paid by American purchasers of vehicles and tires. And the Peterson Institute for International Economics says that this money taken from consumers reduced their spending on other retail goods, bringing the net job loss from the job-saving tire tariffs to around 2,500.

Let’s close with some good news.

Here’s a poll showing that Americans are increasingly supportive of trade.

I don’t know why the numbers have improved so much since 2008, but I’m happy with the outcome.

And one of the big reasons I’m happy is that the global shift to more open trade has been very beneficial to the global economy.

Indeed, expanded openness to trade in the post-World War II era has helped offset the damage caused by a bigger fiscal burden.

And more trade has been very good for the poor, as Deirdre McCloskey explains in this video.

I’ll close by recycling my column that challenges protectionists with eight questions. I wrote that column also six years ago and I still haven’t received any good answers.

Read Full Post »

The Much-Deserved End of Obama’s Operation Choke Point

Trump has been President for more than 200 days and those of us who want more economic liberty don’t have many reasons to be happy.

Obamacare hasn’t been repealed, the tax code hasn’t been reformed, and wasteful spending hasn’t been cut.

The only glimmer of hope is that Trump has eased up on the regulatory burden. More should be happening, of course, but we are seeing some small steps in the right direction.

Let’s share one positive development.

Professor Tony Lima of California State University opined back in January in the Wall Street Journal that Trump could unilaterally boost growth by ending a reprehensible policy known as “Operation Choke Point.”

…the Trump administration could shut down Operation Choke Point. This program, enforced by the Federal Deposit Insurance Corp., targets “risky” banking customers and pressures banks to deny them credit. It’s unnecessary: If these industries are really risky, banks would not want their business. The real purpose of Operation Choke Point is to target industries that are out of favor…, among them: Coin dealers, money-transfer networks and payday lenders. Sales of ammunition and firearms (Second Amendment, anyone?) and fireworks (legal in some states). …Other legal goods and services such as surveillance equipment, telemarketing, tobacco and dating services. …Denying credit hampers an industry’s growth. Eliminating Operation Choke Point would encourage growth. It costs nothing. And someday it may reduce enforcement spending.

And Professor Charles Calomiris from Columbia University echoed those views a few weeks later.

Imagine you have a thriving business and one morning you get a call from your banker explaining that he can no longer service your accounts. …That’s what happened to many business owners as the result of an Obama administration policy called Operation Choke Point. In 2011 the Federal Deposit Insurance Corp. warned banks of heightened regulatory risks from doing business with certain merchants. A total of 30 undesirable merchant categories were affected…the FDIC explained that banks with such clients were putting themselves at risk of “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.” Other FDIC regulatory guidelines pointed to difficulties banks with high “reputation risk” could have receiving approval for acquisitions.

Keep in mind, by the way, that Congress didn’t pass a law mandating discrimination against and harassment of these merchants.

The Washington bureaucracy, along with ideologues in the Obama Administration, simply decided to impose an onerous new policy.

In effect, the paper pushers were telling financial institutions “nice business, shame if anything happened to it.”

But at least when mobsters engage in that kind of a shakedown, there’s no illusion about what’s happening.

Professor Calomiris explained that this regulatory initiative of the Obama Administration made no sense economically.

It is rather comical that regulators would use the excuse of regulatory risk management to punish banks. Banks are in the business of gauging risk and have every incentive to avoid customer relationships that could hurt their reputation. Regulators, on the other hand, have shown themselves unwilling or unable to acknowledge risk, the most obvious example being the subprime mortgage crisis in 2008.

And he also explained why Operation Choke Point was such a reprehensible violation of the rule of law.

The FDIC’s regulators never engaged in formal rule-making or announced penalties for banks serving undesirable clients. Such rule-making likely would have been defeated in congressional debate or under the Administrative Procedures Act. Instead, regulators chose to rely on informal decrees called “guidance.” …Financial regulators find regulatory guidance particularly expedient because it spares them the burden of soliciting comments, holding hearings, defining violations, setting forth procedures for ascertaining violations, and defining penalties for ignoring the guidance. Regulators prefer this veil of secrecy because it maximizes their discretionary power and places the unpredictable and discriminatory costs on banks and their customers.

Well, we have some good news.

The Trump Administration has just reversed this terrible Obama policy. Politico has some of the details.

The Justice Department has committed to ending a controversial Obama-era program that discourages banks from doing business with a range of companies, from payday lenders to gun retailers. The move hands a big victory to Republican lawmakers who charged that the initiative — dubbed “Operation Choke Point” — was hurting legitimate businesses. …House Judiciary Chairman Bob Goodlatte…and House Financial Services Chairman Jeb Hensarling (R-Texas), along with Reps. Tom Marino (R-Pa.), Blaine Luetkemeyer (R-Mo.) and Darrell Issa (R-Calif.) praised the department in a joint statement. “We applaud the Trump Justice Department for decisively ending Operation Choke Point,” they said. “The Obama Administration created this ill-advised program to suffocate legitimate businesses to which it was ideologically opposed by intimidating financial institutions into denying banking services to those businesses.”

And Eric Boehm of Reason is pleased by this development.

A financial dragnet that ensnared porn stars, gun dealers, payday lenders, and other politically disfavored small businesses has been shut down. Operation Choke Point launched in 2012… It quickly morphed into a questionably constitutional attack on a wide range of entrepreneurs who found their assets frozen or their bank accounts closed because they were considered “high-risk” for fraud. …Assistant Attorney General Stephen Boyd called Operation Choke Point “a misguided initiative” and confirmed that DOJ was closing those investigations… “Law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,” Boyd wrote. …The repudiation of Operation Choke Point is a welcome development, says Walter Olson, a senior fellow at the libertarian Cato Institute.

I shared a video last year that explained Operation Choke Point in just one minute. But that just scratched the surface, so here’s a video from Reason that explains in greater detail why Operation Choke Point was so repulsive.

Kudos to the Trump Administration for reversing this awful policy.

But hopefully this is just the first step. Regulators are still squeezing financial institutions in an attempt to discourage them from doing business with low-tax jurisdictions. This policy of “de-risking” exists even though so-called tax havens generally have tighter laws against dirty money than the United States.

Trump should put an end to that misguided policy.

Ultimately, what’s really needed is a complete rethink of money-laundering laws and regulations.

• They don’t reduce crime or discourage bad behavior.
• They require banks to spy on innocent people and report their transactions.
• They impose heavy costs on the financial sector and boost prices on consumers.
• They disproportionately hurt poor people and poor countries.

Amazingly, some politicians actually want to make these laws even worse. Ideally, Trump will move completely in the other direction.

P.S. While it’s good that Trump has reversed Operation Choke Point, his Administration has moved in the wrong direction on civil forfeiture policy. One step forward and one step backwards is not a recipe for more growth and prosperity.

Read Full Post »

Right, Left, Facts, and Values

Since my job is to proselytize on behalf of economic liberty, I’m always trying to figure out what motivates people. To be blunt, I’ll hopefully be more effective if I understand how they decide what policies to support. That’s a challenge when dealing with my friends on the left since some of them seem to be motivated by envy.

Unsurprisingly, there are people on the other side who also contemplate how to convert their opponents.

Harvard Professor Maximilian Kasy wrote a column for the Washington Post that advises folks on the left how they can be more effective when arguing with folks on the right. He starts with an assertion that conservatives are basically impervious to facts.

Worries about…our “post-factual era” impeding political debate in our society have become commonplace. Liberals…are often astonished at the seeming indifference of their opponents toward facts and toward the likely consequences of political decisions. …A common, though apparently ineffective, response to this frustration is to double down by discussing more facts.

This is a remarkable assertion. I’m a libertarian rather than a conservative, so I don’t feel personally insulted. That being said, conservatives generally are my allies on economic issues and I’ve never found them to be oblivious or indifferent to facts (I’m speaking about policy wonks, not politicians, who often are untethered from reality regardless of their ideology).

So let’s see how Mr. Kasy justifies his claim about conservatives. Here’s more of what he wrote.

…maybe the issue is not conservatives’ ignorance of facts, but rather a fundamental difference of values. Taking this point of view seems essential for effective communication across the political divide.

I basically agree that differences in values play a big role, so I’m sort of okay with that part of his analysis (I’ll return to this issue in the conclusion).

But my alarm bells started ringing at this next passage.

Much normative (or value-based) reasoning by liberals (and mainstream economists) is about the consequences of political actions for the welfare of individuals. Statements about the desirability of policies are based on trading off the consequences for different individuals. If good outcomes result from a policy without many negative consequences, then the policy is a good one.

Huh? Since when are liberals (and he’s talking about today’s statists, not the classical liberals of yesteryear) and mainstream economists on the same side?

Though I admit it’s hard to argue about the rule he proposes for policy. He’s basically saying that a change is desirable if “good outcomes” are more prevalent than “negative consequences.”

That’s probably too utilitarian for me, but I suspect most people might agree with that approach.

But he makes a giant and unsubstantiated leap by then claiming it would be wrong to repeal a supposedly good policy like Obamacare.

When Sen. Kamala D. Harris (D-Calif.) remarked on the Affordable Care Act this spring, for example, she said, “…we’re talking about something that would deny those in need with the relief and the help that they need, that they want and deserve…” In other words, if a policy will harm the welfare of individuals in need, it’s a bad policy.

Huh? What happened to his utilitarian formula about “good outcomes” vs “negative consequences”? Sure, some additional people have health insurance coverage, but is he blind to rising premiums, job losses, higher taxes, loss of plans and loss of doctors, dumping people into Medicaid, and other downsides of Obamacare?

If facts are important, shouldn’t he be weighing the costs and benefits?

In other words, Kasy must be in some sort of cocoon if he thinks the Obamacare fight is between Republicans motivated only by values and Democrats motivated by helping individuals.

His analysis of the death tax is similarly off base.

…consider the example of bequest taxes, labeled “estate taxes” by liberals and “death taxes” by conservatives. A liberal might invoke various empirical facts…our empiricist liberal might conclude that bequest taxes are an effective policy instrument, providing public revenue and promoting equality of opportunity. The conservative addressee of these facts might now just shrug her shoulders and say “no thanks.” Our conservative likely believes that everyone has the right to keep the fruits of her labor, and free contracts of exchange between any two parties are nobody else’s business. …Taxing bequests thus means punishing moral behavior, the exact opposite of what the government should do.

Once again, Kasy is deluding himself. Conservatives do think the death tax is morally wrong, so he’s right about that, but they also have very compelling arguments about the levy’s negative economic impact. Simply stated, the death tax exacerbates the tax code’s bias against capital formation and results in all sorts of economically inefficient tax avoidance behavior (with Bill and Hillary Clinton being classic examples).

His column concludes with some suggestions of how folks on the left can be more persuasive. He basically says they should appeal to conservatives with values-based arguments such as these.

We should evaluate the policy based on its effect on individuals, and assign a higher weight to the majority of less wealthy people. …nobody can be said to consume only the products of their own labor. We rely on social institutions including markets and governments to provide us with all the goods we consume, and absent a theory of just prices (which present day conservatives don’t have) there is no sense in which we are entitled to specific terms of exchange.

I’m not the ideal person to speak for conservatives, but I don’t think those arguments will win many converts.

Regarding his first suggestion, Kasy’s problem is that he apparently assumes that people on the right don’t care about the poor. Maybe I’m reading between the lines, but he seems to  think conservatives will automatically favor lots of redistribution if he can convince that it’s good to help the poor.

I think it’s much more accurate to assume that plenty of conservatives have thought about how to help the poor, but they’ve concluded that the welfare state is injurious and that it is more effective to focus on policies such as school choice, economic growth, and occupational licensing.

Indeed, I hope most conservatives would agree with my Bleeding Heart Rule.

And his second idea is even stranger because economic conservatives have a theory of just prices. It’s whatever emerges from competitive markets.

Let’s close with a column by Alberto Mingardi of the Bruno Leoni Institute in Italy. Published by the Foundation for Economic Education, the piece is relevant to today’s topic since it looks at why an unfortunate number of intellectuals are opposed to economic liberty.

…some have replied that the main reason is resentment (intellectuals expect more recognition from the market society than they actually get); some have pointed out that self-interest drives the phenomenon (intellectuals preach government controls and regulation because they’ll be the controllers and regulators); some have taken the charitable view that intellectuals do not understand what the market really is about (as they cherish “projects” and the market is instead an unplanned order).

Alberto then shares Milton Friedman’s answer.

I think a major reason why intellectuals tend to move towards collectivism is that the collectivist answer is a simple one. If there’s something wrong pass a law and do something about it. If there’s something wrong it’s because of some no-good bum, some devil, evil and wicked – that’s a very simple story to tell. You don’t have to be very smart to write it and you don’t have to be very smart to accept it.

My two cents, based on plenty of conversations with well-meaning folks on the left, is that there’s actually a lot of agreement of some big-picture values. We all want less poverty and more prosperity. In other words, I think most people have similar good intentions (I’m obviously excluding communists, Nazis, and others who believe in totalitarianism).

But similar good intentions doesn’t translate into agreement on policy because of secondary values. Especially differences in whether we view “equality of outcomes” as an appropriate goal for government. Some on the left openly are willing to sacrifice growth to achieve more equality (Margaret Thatcher even claimed that they would be willing to hurt the poor if the rich suffered even more). Folks on the right, by contrast, are much more focused on helping the poor with growth rather than redistribution.

Read Full Post »

Investment, Productivity, Wages, and Economic Prosperity

Here’s a simple and fundamental question: What is economic growth?

And here’s a simple answer: It’s when there’s more national income.

That’s seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

• More people.
• More output per hour, also known as increased productivity.

This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

…one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

I then point out that we have a problem.

…when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

But I also share suggestions for policy reforms that would lead to higher productivity.

…tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

The column explains why it’s foolish to impose tax penalties on income that is saved and invested. Policies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

Seems like the lesson should be obvious.

P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

Read Full Post »

The Federal Government Should Get Out of Infrastructure

I’ve called for the abolition of the Department of Transportation. On more than one occasion.

So I was very excited to see this new video about infrastructure from Johan Norberg.

Very well put. As Johan says (channeling Bastiat), we should remember that jobs are destroyed when money is taken out of the private sector to build infrastructure.

So it behooves us to make sure that any new project isn’t a boondoggle and instead will increase the economy’s productive capacity.

Which is why we should strive for decentralization and shrink Washington’s footprint. If a state or local government is paying for its own projects, presumably it’ll have a greater incentive to avoid wasteful pork. When the federal government pays, by contrast, that’s a recipe for waste.

Veronique de Rugy explains the issue in a column for Reason. She starts with some economic analysis.

Economists have long recognized that roads, bridges, airports, and canals are the conduits through which goods are exchanged, and as such, infrastructure can play a productive role in economic growth. But not all infrastructure spending is equal. Ample literature shows, in fact, that it’s a particularly bad vehicle for stimulus and does not, in practice, boost short-term jobs or economic growth. …Publicly funded infrastructure projects often aren’t good investments in the long term, either. Most spending orchestrated by the federal government suffers from terrible incentives that lead to malinvestment—resources wasted in inefficient ways and on low-priority efforts. Projects get approved for political reasons and are either totally unnecessary or harmed by cost overruns and corruption.

And she concludes by arguing for market forces rather than federal involvement.

[Trump] should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive. User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks. …If Trump wants the United States to have “world-class” infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.

Writing for U.S. News & World Report, Tracy Miller similarly argues that decentralization is the best approach.

Highways as well as public transportation are currently funded with money from the federal Highway Trust Fund, and by state and local governments. …Money from the fund has strings attached that raise costs and limit state and local governments’ ability to choose which projects have priority. These strings include prevailing wage laws, which require contractors receiving federal money to pay unionized wages even if they could attract qualified workers willing to work for less. High-profile projects chosen by politically powerful congressmen can easily take priority over projects that would generate greater benefits for their constituents. From an administrative standpoint, it would not be very difficult to reduce or eliminate the federal government’s role in highway and transit funding. Instead of gas taxes going to the federal government before being returned to the states, as is presently the case, each state could collect all taxes on fuel sold within its borders and decide how best to spend it. This would make it possible to downsize the U.S. Department of Transportation, saving taxpayers billions of dollars.

He explains why reform will lead to better – and cheaper – transportation.

Local governments – with greater awareness of the local needs of metropolitan areas, small towns or rural areas – can do a better job of funding and managing roads, highways and public transportation that serve primarily local residents. State governments or private firms, meanwhile, can best manage interstate and other major highways that cater mostly to long-distance travelers, especially if they could cover expenses with user fees. …Many drivers object to the idea of paying tolls for the use of currently “free” interstate highways, whether they are managed by private firms or state governments. But highways aren’t free – the costs are hidden within our fuel taxes. If mileage-based user fees are applied to all highways and set at the correct levels, they can become a much more efficient (and ultimately cheaper) replacement for fuel taxes.

Professor Edward Glaeser of Harvard summarizes the issue nicely in an article for CNBC.

Our current system of federal funding for transportation means that taxpayers in New York fund highways in Montana and drivers in Utah pay for New York’s airports. If President Trump wants to seriously improve American infrastructure spending, he should champion a new federalism for transportation, in which infrastructure is funded by states, localities and especially the users themselves. …The best decisions are made when decision-makers bear the costs and reap the benefits. When companies invest, they agonize about whether future customers will pay enough to cover the production costs. …Having lived through Boston’s Big Dig, I am well aware of how the promise of federal funding skews local decision-making. Local leaders stop asking themselves whether the benefits cover the costs because it’s somebody else’s nickel. …Detroit would have never built its absurd People Mover Monorail without federal encouragement and funding.

He elaborates on some of the implications for different types of infrastructure.

If new automotive infrastructure is meant to be self-financing, then the decision to build is a straightforward business investment and there is little need for large-scale federal funding. …The beneficiaries of metro systems are the businesses and commuters within a state. They could be funded with local property or sales taxes. My favorite metro funding model is in Hong Kong, where the city’s private mass transit system funds itself by building high-rises atop new train stops. …More federal funding for dysfunctional airports just perpetuates the status quo. They would be far healthier if they were split apart from the larger agency and allowed to operate, compete and charge higher landing fees, either as independent self-funding public airports, as in the U.K., or as private entities.

Amen. I’m not surprised to see Hong Kong as a role model. And I’ve already written about the U.K.’s success with privatization.

Speaking of privatization, a column in the Wall Street Journal points out that this is the way to improve airports in America.

Why do American passengers pay so much to get so little? Because their airports, by global standards, are terribly managed. Cities from London to Buenos Aires have sold or leased their airports to private companies. To make a profit, these firms must hold down costs while enticing customers with lots of flights, competitive fares and appealing terminals. The firm that manages London’s Heathrow, currently eighth in the international ranking, was so intent on attracting passengers that it built a nonstop express train to the city’s center. It’s also seeking to add another runway, as is the rival firm running Gatwick Airport. American airports are typically run by politicians in conjunction with the dominant airlines, which help finance the terminals in return for long-term leases on gates and facilities. The airlines use their control to keep out competitors; the politicians use their share of the revenue to reward unionized airport workers. No one puts the passenger first.

The author cites the San Juan airport as an example of what can happen under privatization.

If you want to see how much better American airports could be, take a plane to Puerto Rico. Until four years ago, the main airport in San Juan was run, and neglected, by an unwieldy bureaucracy, the Puerto Rico Ports Authority. The terminal was a confusing jumble of dim corridors. On rainy days, the ceilings leaked; on hot days, the air conditioning faltered. The stores were tacky and the restaurants greasy spoons, often rented at bargain rates to politicians’ friends or relatives. …Airlines switched operations to other Caribbean hubs. In 2013 the Ports Authority leased the airport for 40 years to Aerostar, a partnership operating airports in Cancún and other Mexican cities. The new managers agreed to make capital improvements, reduce landing fees and pay the Ports Authority $1.2 billion—half up-front. The result, three years later, is an airport nobody would call Third World. The redesigned concourses are sleek and airy, and revenue from new retail and restaurants has doubled. …Airlines no longer control the gates, but they’re reaping other benefits. “We’re paying lower fees for a much better airport,” says Michael Luciano, who runs Delta’s operations in San Juan. “Almost every area has been renovated. You go into any restroom, and it’s bright and clean—things like that are really important to our customers.” Passenger volume has been growing 4% annually, well above the industry average.

I can personally vouch for this. Because of all my travel in the Caribbean, I’ve used the San Juan airport extensively over the years, including just last week for the Liberty International conference.

The difference between today’s airport and the dump that used to exist is like the difference between night and day.

By the way, let’s also dismiss the notion that there’s some sort of infrastructure crisis.

I’ve already shared data from the World Economic Forum’s Global Competitiveness Report, which shows that the United States actually ranks relatively high compared to other nations.

And I’ve also shared solid numbers making the same point from Chris Edwards, one of my colleagues at the Cato Institute. Michael Sargent of the Heritage Foundation has a tweet that nicely shows that there isn’t a crisis.

Oh, and let’s also consider the example of Japan, which thought infrastructure spending was some sort of economic elixir. That didn’t work so well, as pointed out by the Wall Street Journal.

The U.S. economy isn’t growing at merely 2% because of potholes or airports… The prime illustration is Japan, which since the 1980s has tried to build its way out of stagnation. The country now boasts perhaps the world’s most spectacular suspension bridges, maglev trains, elevated highways and man-made islands, but the cost was trillions of yen of debt (now 230% of GDP) and no better growth. Nor could a monorail save Detroit. Projects make economic sense only to the extent they clear rigorous cost-benefit tests.

And if you want to know the infrastructure that is least likely to pass a cost-benefit test, just look at mass transit.

A good place to start is the Wall Street Journal‘s recent editorial on a subway line in New York City.

New York City opened a new subway line—about a century after the project was proposed and merely decades after ground-breaking in 1972…by far the most expensive train track in the history of the world. The story is an example of what not to do… This first phase of the new line—amounting to 1.6 miles in a single neighborhood, with three new stations and a renovated stop—cost some $4.451 billion. …The next leg of the Second Avenue subway, which would extend the train 29 blocks north into Harlem starting in 2020, is projected to cost an astonishing $6 billion, and that is surely an underestimate.

Gabriel Roth, writing for the Washington Examiner, has the right idea.

…abolish the subsidies. The federal government forces road users to spend some $10 billion a year on non-road assets of little or no benefit to them. Those payments are not only wasteful in themselves; they also encourage states and local governments to squander money on mass transit, whose costs users are not prepared to cover — not even the operating costs. If local communities consider such expenditures important, they should pay for them themselves.

By the way, just to show my libertarian bona fides, I think decentralization is just part of the answer. In my fantasy world, the private sector plays a bigger role.

And the good news, as I wrote back in 2014, is that my fantasy is reality in some instances.

Here’s another example from Hawaii.

Their livelihood was being threatened, and they were tired of waiting for government help, so business owners and residents on Hawaii’s Kauai island pulled together and completed a $4 million repair job to a state park — for free. …The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen. …So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23. And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in. “We can wait around for the state or federal government to make this move, or we can go out and do our part,” Slack said. “Just like everyone’s sitting around waiting for a stimulus check, we were waiting for this but decided we couldn’t wait anymore.” …”We shouldn’t have to do this, but when it gets to a state level, it just gets so bureaucratic, something that took us eight days would have taken them years,” said Troy Martin of Martin Steel, who donated machinery and steel for the repairs. “So we got together — the community — and we got it done.”

Reminds me of the guy who built some stairs at a park for $550 because the Toronto government was taking too long and planned to spend $65,000 to do the same thing.

And here’s another case study from Portland.

Portland Anarchist Road Care (PARC) is a community collaboration of skilled workers who volunteer their services to fix the damaged roads around Portland, Oregon. Citing concerns about governmental bureaucracy, the current political climate, a lack of funds and a seeming lack of care, the members of PARC decided to take things into their own very capable hands.

I have no idea whether these people are libertarian-minded anarcho-capitalists or deeply confused left-wing nihilist anarchists, but kudos to them for steeping up and doing a job cheaply and efficiently. The very opposite of what we expect from government.

P.S. Since Nazis are in the news and since I’m writing about infrastructure, here are some blurbs from an academic study on how Germany’s National Socialists used autobahn outlays to generate political support.

The idea that political support can effectively be bought has a long lineage – from the days of the Roman emperors to modern democracies, `bread and circus’ have been used to boost the popularity of politicians. A large literature in economics argues more generally that political support can be ‘bought’. …In this paper, we analyze the political benefits of building the worldʹs first nationwide highway network in Germany after 1933 – one of the canonical cases of government infrastructure investment. We show that building the Autobahn was highly effective in reducing opposition to the Hitler regime. …What accounts for the Autobahn’s success in winning “hearts and minds”? We discuss the economic and transport benefits. In the aggregate, these have been shown to be minimal (Ritschl 1998; Vahrenkamp 2010). …we argue that the motorways…increased support because they could be exploited by propaganda as powerful symbols of competent, energetic government. …Our results suggest that infrastructure spending can indeed create electoral support for a nascent dictatorship – it can win the “hearts and minds” of the populace. In the case of Germany, direct economic benefits of pork‐barrel spending in affected districts may have played a role.

Seems that politicians, whether motivated by evil or run-of-the-mill ambition, love spending other people’s money to build political support. Is it any wonder that we hold them in such low esteem?

P.P.S. Fans of “public choice” doubtlessly will be amused by the IMF’s 2014 flip-flop on infrastructure.

Read Full Post »

Because Protecting the Environment Is Important, Capitalism Should Play a Bigger Role

Over the years, I’ve had fun mocking the silly extremism of the environmental movement.

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

That being said, protecting the environment is a worthy and important goal.

And that’s why some of us want to give the private sector a bigger role.

John Stossel, for instance, has a must-watch video on how capitalism can save endangered rhinos.

Professor Philip Booth expands on the lesson in the video and urges broad application of market forces to preserve the environment.

Especially well-enforced property rights.

…what is needed for better husbandry of ecological resources is more widespread and deeper establishment of property rights together with their enforcement. The cause of environmentalism is often associated with the Left. This is despite the fact that some of the worst environmental outcomes in the history of our planet have been associated with Communist governments. …a great deal of serious work has been produced by those who believe in market or community-based solutions to environmental problems, and a relatively small role for government. For example, Ronald Coase and Elinor Ostrom are two Nobel Prize winners in economics who have made profound contributions to our understanding of how markets and communities can promote environmental conservation. Indeed, the intellectual and moral high ground when it comes to environmentalism ought to be taken by those who believe in private property, strong community institutions and a free economy.

Philip explains why private ownership produces conservation.

If things are owned, they will tend to be looked after. The owner of a lake will not fish it to near extinction (or even over-fish the lake to a small degree) because the breeding potential of the fish would be reduced.

He then explains the downside of public ownership.

On the other hand, if the lake is not owned by anybody, or if it is owned by the government and fishing is unregulated, the lake will be fished to extinction because nobody has any benefit from holding back. Local businesses may well also pollute the lake if there are no well-defined ownership rights. The much-cited work here is Hardin’s Tragedy of the Commons (1968), though, in fact, Hardin was simply referring back to a pamphlet by William Forster Lloyd which was written in 1833. In that pamphlet, a situation was described whereby common land was open to grazing by all. The land would then be over-grazed because a person would get the benefit of putting additional cattle on the land without the cost that arises from over-grazing which would be shared by all users.

He points out that one advantage of Brexit is that the U.K. can implement a fisheries system based on property rights.

Now that fishing policy has been repatriated, the UK should establish property rights in sea fisheries. Few would seriously question private property when it comes to the land. For example, it is rare these days to find people who would suggest that farms should be nationalised or collectivised or returned to an unregulated commons where anybody can graze their animals without restriction. It would be understood that this would lead to chaos, inefficiency and environmental catastrophe.

And since we have real-world evidence that fisheries based on property rights are very successful, hopefully the U.K. government will implement this reform.

So what’s the bottom line on capitalism and the environment?

If we want sustainable environmental outcomes, the answer almost never lies with government control, but with the establishment and enforcement of property rights over environmental resources. This provides the incentive to nurture and conserve. Where the government does intervene it should try to mimic markets. When it comes to the environment, misguided government intervention can lead to conflict and poor environmental outcomes. The best thing the government can do is put its own house in order and ensure that property rights are enforced through proper policing and courts systems. That is certainly the experience of forested areas in South America.

Let’s close by noting one other reason to give the market a bigger role. Simply stated, environmentalists seem to have no sense of cost-benefit analysis. Instead, we get bizarre policies that seem motivated primarily by virtue signalling.

• The environmentalist-driven war on high-quality light bulbs.
• The environmentalist-driven rule against working toilets.
• The environmentalist-driven prohibition against washing machines that actually clean.
• The environmentalist-driven campaign to eliminate effective showerheads.
• The environmentalist-driven pointless recycling mandates.

And don’t forget green energy programs, which impose heavy costs on consumers and also are a combination of virtue signalling and cronyism.

No wonder many of us don’t trust the left on global warming, even if we recognize it may be a real issue.

P.S. There is at least one employee at the Environmental Protection Agency who deserves serious consideration for the Bureaucrat Hall of Fame.

Read Full Post »

Republicans Embrace Bad Economics and Bad Policy

To be blunt, Republicans are heading in the wrong direction on fiscal policy. They have full control of the executive and legislative branches, but instead of using their power to promote Reaganomics, it looks like we’re getting a reincarnation of the big-government Bush years.

As Yogi Berra might have said, “it’s deja vu all over again.”

Let’s look at the evidence. According to the Hill, the Keynesian virus has infected GOP thinking on tax cuts.

Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.

That is nonsense. Just as giving people a check and calling it “stimulus” didn’t help the economy under Obama, giving people a check and calling it a tax cut won’t help the economy under Trump.

Tax cuts boost growth when they reduce the marginal tax rate on productive behavior such as work, saving, investment, or entrepreneurship. When that happens, people have an incentive to generate more income. And that leads to more national income, a.k.a., economic growth.

Borrowing money from the economy’s left pocket and then stuffing checks (oops, I mean retroactive tax cuts) in the economy’s right pocket, by contrast, simply reallocates national income.

Indeed, this is one of the reasons why the economy didn’t get much benefit from the 2001 Bush tax cut, especially when compared to the growth-oriented 2003 tax cut. Unfortunately, Republicans haven’t learned that lesson.

Republicans have taken steps in the past to ensure that taxpayers directly felt the benefits of tax cuts. As part of the 2001 tax cuts enacted by President George W. Bush, taxpayers received rebate checks.

The article does include some analysis from people who understand that retroactive tax cuts aren’t economically beneficial.

…there are also drawbacks to making tax changes retroactive. …such changes would add to the cost of the bill, but would not be an effective way to encourage new spending and investments. “It has all of the costs of the tax cuts but none of the economic benefits,” said Committee for a Responsible Federal Budget President Maya MacGuineas, who added that “you don’t make investments in the rear-view mirror.”

I’m not always on the same side as Maya, but she’s right on this issue. You can’t encourage people to generate more income in the past. If you want more growth, you have to reduce marginal tax rates on future activity.

By the way, I’m not arguing that there is no political benefit to retroactive tax cuts. If Republicans simply stated that they were going to send rebate checks to curry favor with voters, I’d roll my eyes and shrug my shoulders.

But when they make Keynesian arguments to justify such a policy, I can’t help but get upset about the economic illiteracy.

Speaking of bad economic policy, GOPers also are pursuing bad spending policy.

Politico has a report on a potential budget deal where everyone wins…except taxpayers.

The White House is pushing a deal on Capitol Hill to head off a government shutdown that would lift strict spending caps long opposed by Democrats in exchange for money for President Donald Trump’s border wall with Mexico, multiple sources said.

So much for Trump’s promise to get tough on the budget, even if it meant a shutdown.

Instead, the back-room negotiations are leading to more spending for all interest groups.

Marc Short, the White House’s director of legislative affairs, …also lobbied for a big budget increase for the Pentagon, another priority for Trump. …The White House is offering Democrats more funding for their own pet projects.

The only good news is that Democrats are so upset about the symbolism of the fence that they may not go for the deal.

Democrats show no sign of yielding on the issue. They have already blocked the project once.

Unfortunately, I expect this is just posturing. When the dust settles, I expect the desire for more spending (from both parties) will produce a deal that is bad news. At least for those of us who don’t want America to become Greece (any faster than already scheduled).

Republican and Democratic congressional aides have predicted for months that both sides will come together on a spending agreement to raise spending caps for the Pentagon as well as for nondefense domestic programs.

So let’s check our scorecard. On the tax side of the equation, we’ll hopefully still get some good policy, such as a lower corporate tax rate, but it probably will be accompanied by some gimmicky Keynesian policy.

On the spending side of the equation, it appears my fears about Trump may have been correct and he’s going to be a typical big-government Republican.

It’s possible, of course, that I’m being needlessly pessimistic and we’ll get the kinds of policies I fantasized about in early 2016. But I wouldn’t bet money on a positive outcome.

Read Full Post »

Great Moments in State Government

When I write about the actions of state governments, it’s usually to highlight a specific bad policy. As you can imagine, states like California, Connecticut, Illinois, New York, and New Jersey give me a never-ending amount of material.

But I frequently run across things that are happening in the states that don’t really merit an entire column, but they nonetheless are worthy of attention since they symbolize the venality and incompetence of politicians.

So I’ve decided that it’s time for a series on “great moments in state government” to augment my already well-developed series on “great moments in local government.”

Let’s start by looking at a truly bizarre example of occupational licensing from Tennessee.

A decade ago, Martha Stowe founded True Equine, an equine-services company, a few miles south of Nashville, Tenn., in Williamson County. After earning a certificate in equine myofascial release, a massage technique that releases tension and pain in a horse’s body, Martha soon acquired a large clientele. …In April 2016, however, Stowe’s well-established business was upended when she received a threatening letter from the Board of Veterinary Medical Examiners, a board within Tennessee’s Department of Health. Only licensed veterinarians are permitted to massage horses, the board’s attorney explained, and if Stowe continued to practice myofascial release, she could be fined up to $500 and receive a six-month jail sentence. …The board also sent the letter to fellow Williamson County resident Laurie Wheeler, a professional jazz musician and licensed massage therapist who, like Stowe, is certified in equine myofascial release. …Upon receiving the veterinary board’s letter, Wheeler was stunned — after all, she was certified, and not only that, she had never even accepted money for her services. But, she says, the government threatened to “fine me and put me in jail for voluntarily working on animals.” For Wheeler, helping horses is more than a volunteer position or an occupation; it’s a call to duty.

But there is some good news.

A pro-market think tank is helping the women fight back.

Both women disregarded the veterinary board’s warnings and subsequently looked to the Beacon Center of Tennessee, a free-market think tank, for legal representation. According to Braden Boucek, director of litigation for the Beacon Center, the board’s decision to allow only licensed veterinarians to massage horses is a violation of the U.S. Constitution’s equal-protection clause. Moreover, because the Constitution protects private property, which in turn protects the right to acquire property and the right to earn a living, the board’s decision violates the 14th Amendment. …Threatening to jail an individual for massaging a horse is absurd. These women aren’t giving medical advice to owners, or surgically operating on horses, or doing anything that only a licensed veterinarian could do. Remember, this kind of massage is not even taught in veterinary school. Under Tennessee’s logic, why shouldn’t massage therapists who practice exclusively on people be required to hold a medical degree? The veterinary board ought to take the necessary steps to begin updating this illogical statute. If it doesn’t, it will need to explain in court why it’s permissible to deprive Stowe and Wheeler of their fundamental constitutional rights.

Amen. I admire Tennessee for not having an income tax. It’s time, though, for the Volunteer State to extend economic freedom to horse masseurs.

Now let’s shift to Wisconsin, where we have another example of cronyism.

State lawmakers may be brave when it comes to curtailing special privileges for government employees, but they like special protections for private industry.

Wisconsin state regulators…[are]…banning state grocery stores from selling one of the Emerald Isle’s most popular (and tasty) products: Kerrygold butter. Never mind that Wisconsinites have been buying Kerrygold for years with no problems. Or that it remains legal in the 49 other states. Badger State bureaucrats, trying to protect the state dairy industry, are suddenly enforcing a 1970 law that requires all butter sold in the state to go through a complicated evaluation by a state panel. This is the same state that once banned margarine because it was a competitive threat to local dairies. …as a result of the ban, Kerrygold-loving Wisconsinites have been forced to make butter runs across the state border, bringing back suitcases stuffed with the import. In Ireland, meanwhile, the ban is leading to headlines such as this in the Irish Mirror: “Shopkeepers in Wisconsin could face JAIL if they sell Kerrygold butter.”

Maybe butter consumers in Wisconsin can fly to Norway and learn how to get around misguided policies that make butter a black-market commodity.

Remember, if you outlaw butter, only outlaws will have butter.

Now let’s look at some onerous government intervention in my state of Virginia. And this one is personal since I don’t like the hassle of annual vehicle inspections.

…my annual Virginia motor vehicle safety inspection was due in a month. I knew my car wouldn’t pass and that I wouldn’t be allowed to stay on the road with that light on. Never mind that the light has nothing to do with the safe operation of the vehicle. And also never mind that in a 2015 study the Government Accountability Office “examined the effect of inspection programs on crash rates related to vehicle component failure, but showed no clear influence.” AAA Public Affairs Vice President Mike Wright said, “Nobody can prove with any degree of certainty that spending the money, suffering the inconvenience of getting your vehicle inspected, actually produces desired results.” …Virginia has a personal vehicle safety program overseen by the state police that cannot be shown to enhance public safety. The people who perform inspections are often the same people who fix any identified deficiencies. …A government program that requires the purchase of a good or service in return for a nonexistent public benefit is illiberal and anti-consumer. Two-thirds of states see no need to impose the burden of annual personal vehicle safety inspections on their citizens; Virginia should end its inspection requirement.

For what it’s worth, the People’s Republic of the District of Columbia doesn’t have this requirement. Kind of embarrassing that Virginia is more interventionist.

Our final example come from Illinois, where a local newspaper has a superb editorial on a sordid example of wasteful sleaze in the state budget.

Let’s eliminate the Illinois Arts Council Agency from the state budget. They must have taken lessons on government efficiency from our local townships, spending $1 million on staff and overhead in 2016 to hand out $834,900 in grants. The council is chaired by Shirley Madigan, who has been in that position since 1983. Funny, her husband, Mike, has been Illinois House Speaker since then, too. …guess who gets the money? Their well-heeled friends. Madigan’s alma mater received $95,100, another board member’s employer received $165,650 and yet another board member’s pet opera company received $503,000. Surprise! …Illinois Gov. Bruce Rauner has an opportunity to let someone else be a matron of the arts and appoint a majority of board members dedicated to either eliminating the council or at least making it a transparent organization that helps local artists rather than makes your taxes a minor revenue source for well-connected, large arts institutions.

Needless to say, the first option (eliminating the council) is the superior choice, just like we should shut down the National Endowment for the Arts in D.C.

But let’s set that aside. I’m still scratching my head about a bureaucracy that spends $1 million to give away $834.9 thousand. Though that’s actually efficient if you compare it with the German tax that resulted in €30 euros of government expense for every €1 collected.

To conclude, there’s a common thread in these four stories. In each case, politicians at the state level have policies to enable unearned wealth to flow to the pockets of their friends and allies.

In other words, the First Theorem of Government doesn’t just apply to what’s happening in Washington.

P.S. I’ve only had a few previous “great moments” for state governments. One from Florida involved a felony arrest of some luckless guy who was simply trying to impress his girlfriend by releasing some balloons, and the other from Virginia involved three misdemeanors for the horrid crime of rescuing a wounded deer.

Read Full Post »

Some Uplifting News about Race in America

The racist march in Charlottesville, VA, was awful news. The vehicular murder of a woman by one of the racists is even worse news.

The good news is that almost everyone in the nation is united in condemning the marchers.

I especially like what Senator Ben Sasse said about how America isn’t an ethnic identity, but rather a nation of ideals.

It’s also good news is that the free market punishes racism. That’s because people who make decisions based on irrational hatred are less efficient and productive and therefore lose market share.

Indeed, here’s the abstract of an encouraging study on that topic.

Economic theory has long maintained that employers pay a price for engaging in racial discrimination. According to Gary Becker’s seminal work on this topic and the rich literature that followed, racial preferences unrelated to productivity are costly and, in a competitive market, should drive discriminatory employers out of business. …This research pairs an experimental audit study of racial discrimination in employment with an employer database capturing information on establishment survival, examining the relationship between observed discrimination and firm longevity. Results suggest that employers who engage in hiring discrimination are less likely to remain in business six years later.

Indeed, another academic study showed that racist managers result in a less-productive workforce.

Examining the performance of cashiers in a French grocery store chain, we find that manager bias negatively affects minority job performance. In the stores studied, cashiers work with different managers on different days and their schedules are determined quasi-randomly. When minority cashiers, but not majority cashiers, are scheduled to work with managers who are biased (as determined by an Implicit Association Test), they are absent more often, spend less time at work, scan items more slowly, and take more time between customers. Manager bias has consequences for the average performance of minority workers: while on average minority and majority workers perform equivalently, on days where managers are unbiased, minorities perform significantly better than do majority workers. This appears to be because biased managers interact less with minorities, leading minorities to exert less effort.

Writing for Capitalism, Richard Ebeling explains how markets punish racism.

…one of the most important aspects of the free market is precisely that it tempers irrational action. The market ultimately rewards producers by one test and only one test: can a producer deliver the desired goods and services more cheaply and with better quality than another producer who is competing for the same consumer business? Any employer who fails to judge the usefulness of the resources he can buy or hire — including labor — according to the standards of cost and quality efficiency will run the risk of losing business he otherwise could gain. The market, therefore, penalizes those who judge prospective employees on the basis of their race rather than on the talents and expertise they could contribute to the production of a commodity desired by the consuming public. Why? Because the profit motive acts as an incentive for some businessmen to set aside their racial prejudices for the sake of maximizing their net revenues. And, over time, this puts pressure on an increasing number of prospective employers to do the same — if they are to avoid losing out to their market rivals. …The free market…is the great destroyer of racial prejudices and the great liberator of the individual from the bondage of racial barriers.

But let’s move beyond academic analysis.

Given the horrid events in Charlottesville, I want to share some uplifting stories, sort of like the heartwarming story from Ferguson, MO, that I wrote about in 2014.

I have four examples of racial progress from both blacks and whites

Here’s an example from the New York Times of how people should think and behave.

What the black state trooper saw was a civilian in distress. Yes, this was a white man, attending a white supremacist rally in front of the South Carolina State House. And yes, he was wearing a black T-shirt emblazoned with a swastika. But the trooper concentrated only on this: an older civilian, spent on the granite steps. Overcome, it appeared, by an unforgiving July sun… The trooper motioned for help from the Columbia fire chief, who is also black. Then, with a firm grip, he began walking the wilted white man up the steps toward the air-conditioned oasis of the State House. …The meaning of this image — of a black officer helping a white supremacist, both in uniform — depends on the beholder. You might see a refreshing coda to the Confederate flag controversy… But what does the trooper see? His name is Leroy Smith, and he happens to be the director of the South Carolina Department of Public Safety. …Mr. Smith said he was taken aback by the worldwide attention but hoped the image would help society move past the recent spasms of hate and violence… Asked why he thinks the photo has had such resonance, he gave a simple answer: Love. “I think that’s the greatest thing in the world — love,” said the burly, soft-spoken trooper, who is just shy of 50. “And that’s why so many people were moved by it.”

I have to imagine that Mr. Smith experienced more than enough racism as he grew up.

Yet not only did he become a successful professional, he developed an attitude that should inspire people of every color.

Here’s a story that’s also amazing. It’s about a black guy who has a mission of saving Klan members.

When someone Daryl Davis has befriended leaves the Ku Klux Klan, he often gives Davis the robe he wore as a member of that group. Over the years, Davis, by his own account, has amassed dozens of these retired jerseys of hate. …Davis goes to Klan rallies. He has invited Klansmen to his home and visited them. He calls some of them “friend” even as they call him inferior. In one moving segment, the film recounts how Davis met the daughters of an incarcerated Klan member at the airport and drove them to the prison so that they could visit their father. Eventually the family noticed that none of the man’s Klan colleagues were serving or loving them as much as Davis was. Their ideology of hate collapsed in the face of undeserved compassion. …Part of what makes him so effective at talking to the Klan is that he has read every book he can find on the subject. He asks questions. He gathers information. He listens. …“I never set out to convert anyone,” he says in the film. Through a mix of diplomacy and Socratic questioning, he will sometimes see a racist begin to think about his ideology rather than simply proclaim it. Eventually, “they end up converting themselves.” …Davis believes we will be better and stronger and healthier and happier together as one nation than as a segregated one. …Ornstein asks Davis what he is feeling as he watches a video profile of former racists who have left the Klan. What Davis says next was both profound and powerful, a message of hope to a nation… “These are my fellow Americans.”

Wow. I hope some day to be half as good a person as Mr. Davis.

The Washington Post has a heartwarming story about a kid who was raised to be racist and ultimately discarded that poisonous form of collectivism.

Derek Black was already hosting his own radio show. He had launched a white nationalist website for children…He was not only a leader of racial politics but also a product of them. His father, Don Black, had created Stormfront, the Internet’s first and largest white nationalist site, with 300,000 users and counting. His mother, Chloe, had once been married to David Duke, one of the country’s most infamous racial zealots, and Duke had become Derek’s godfather. They had raised Derek at the forefront of the movement, and some white nationalists had begun calling him “the heir.”

Then he went to college.

Derek finished high school… He decided he wanted to study medieval European history, so he applied to New College of Florida, a top-ranked liberal arts school with a strong history program. …New College was in Sarasota, three hours across the state, and it was the first time Derek had lived away from home. …He watched zombie movies with students from his dorm, a group that included a Peruvian immigrant and an Orthodox Jew.Maybe they were usurpers, as his father had said, but Derek also kind of liked them, and gradually he went from keeping his convictions quiet to actively disguising them.

But then he was outed.

He left after one semester to study abroad in Germany, because he wanted to learn the language. He kept in touch with New College partly through a student message board, known as the forum, whose updates were automatically sent to his email. One night in April 2011, Derek noticed a message posted to all students at 1:56 a.m. It was written by someone Derek didn’t know — an upperclassman who had been researching terrorist groups online when he stumbled across a familiar face. “Have you seen this man?” the message read, and beneath those words was a picture that was unmistakable. The red hair. The cowboy hat. “Derek black: white supremacist, radio host…new college student???” the post read. “How do we as a community respond?”By the time Derek returned to campus for the next semester, more than a thousand responses had been written to that post. …He returned to Sarasota, applied for permission to live outside of required student housing and rented a room a few miles away.A few of his friends from the previous year emailed to say they felt betrayed, and strangers sometimes flipped him off from a safe distance on campus.

  Here’s the part of the story that’s really great.

One of Derek’s acquaintances from that first semester decided he might have an idea. He started reading Stormfront and listening to Derek’s radio show. Then, in late September, he sent Derek a text message. “What are you doing Friday night?” he wrote. …Matthew had spent a few weeks debating whether it was a good idea. He and Derek had lived near each other in the dorm, but they hadn’t spoken since Derek was exposed on the forum. Matthew, who almost always wore a yarmulke, had experienced enough anti-Semitism in his life to be familiar with the KKK, David Duke and Stormfront. He went back and read some of Derek’s posts on the site from 2007 and 2008: “Jews are NOT white.” “Jews worm their way into power over our society.” “They must go.” Matthew decided his best chance to affect Derek’s thinking was not to ignore him or confront him, but simply to include him. “Maybe he’d never spent time with a Jewish person before,” Matthew remembered thinking.

And here’s what happened, thanks in large part to Matthew Stevenson.

It’s a long excerpt, but very much worth reading.

Nobody mentioned white nationalism or the forum, out of respect for Matthew. Derek was quiet and polite, and he came back the next week and then the next, until after a few months, nobody felt all that threatened… On the rare occasions when Derek directed conversation during those dinners, it was about the particulars of Arabic grammar, or marine aquatics, or the roots of Christianity in medieval times. He came across as smart and curious, and mostly he listened. He heard a Peruvian immigrant tell stories about attending a high school that was 90 percent Hispanic. He asked Matthew about his opinions on Israel and Palestine. They were both still wary of each other: Derek wondered whether Matthew was trying to get him drunk so he would say offensive things that would appear on the forum; Matthew wondered whether Derek was trying to cultivate a Jewish friend to protect himself against charges of anti-Semitism. But they also liked each other, and they started playing pool at a bar near campus. Some members of the Shabbat group gradually began to ask Derek about his views, and he occasionally clarified them in conversations and emails throughout 2011 and 2012. …Derek was becoming more and more confused about exactly what he believed. Sometimes he looked through posts on Stormfront, hoping to reaffirm his ideology, but now the message threads about Obama’s birth certificate or DNA tests for citizenship just seemed bizarre and conspiratorial. He stopped posting on Stormfront. He began inventing excuses to get out of his radio show, leaving his father alone on the air each morning to explain why Derek wouldn’t be calling in. …“Get out of this,” one of his Shabbat friends emailed a few weeks after Derek’s graduation in May 2013, urging Derek to publicly disavow white nationalism. “Get out before it ruins some part of your future more than it already irreparably has.” Derek stayed near campus to housesit for a professor after graduation, and he began to consider making a public statement. He knew he no longer believed in white nationalism, and he had made plans to distance himself from his past by changing part of his name and moving across the country for graduate school. His instinct was to slip away quietly, but his advocacy had always been public — a legacy of radio shows, Internet posts, TV appearances, and an annual conference on racial tactics.

But Derek decided he needed a public break.

He took out his computer and began writing a statement. “A large section of the community I grew up in believes strongly in white nationalism, and members of my family whom I respect greatly, particularly my father, have long been resolute advocates for that cause. I was not prepared to risk driving a wedge in those relationships. “After a great deal of thought since then, I have resolved that it is in the best interests of everyone involved to be honest about my slow but steady disaffiliation from white nationalism. I can’t support a movement that tells me I can’t be a friend to whomever I wish or that other people’s races require me to think of them in a certain way or be suspicious at their advancements. “The things I have said as well as my actions have been harmful to people of color, people of Jewish descent, activists striving for opportunity and fairness for all. I am sorry for the damage done.”

If you read the whole story, you’ll get fascinating details on how Derek’s family dealt with his epiphany.

You’ll also learned that he became a Hillary voter, which is disappointing since he should have become a libertarian.

But that’s a minor detail. The main thing is that he cast aside the collectivism of racism and group-think.

Here’s another story about a white guy that did the right thing.

Ten years after getting a tattoo, the expression on a stranger’s face changed a man’s heart and mind about his tattoo. …A man, who declined KVUE’s request for an interview, recently called Texas Bob’s asking Barr for a cover up. “He’s got an old tattoo of a skull with a rebel flag bandana around his head,” he said. An expression on a woman’s face changed his heart. “An older black lady saw him and saw the tattoo and her expression changed as she saw it,” Barr said. “That seemed like it just broke his heart a little bit and he decided that day that it was time to do something about it.” Barr blacked out the rebel flag bandana on the man’s tattoo. “He seemed like a little weight had been lifted from him,” Barr said.

By the way, it’s very possible that the guy didn’t have any racist motive when he first got the tattoo. He may simply have been from the south and didn’t think beyond that. Or maybe he just thought it was cool, or edgy.

But it is heartwarming that he changed his mind – not because he was forced to – but because he saw that it hurt someone else’s feelings. That’s a very good type of empathy.

And this isn’t a one-off story, at least if this report from the Washington Post is any indication.

Randy Stiles learned the hard way: Having a Confederate flag tattoo that reads “Southern Pride” with a noose hanging off it isn’t a path to success. “A lot of public ridicule came from it,” Stiles, 25, said this month as he waited to get the flag on his right forearm removed. “I’ve got to get it gone.” Eliminating a tattoo like that takes hours under the needle and usually costs as much as $500. But Southside Tattoo in Brooklyn Park, Md., is removing the hate for free, covering up racist and gang-related tattoos as part of its mission.

I realize that these stories are just anecdotes, but I suspect that 90 percent-plus of Americans have the right aspirations when it comes to race.

Professor Glenn Reynolds wrote about this positive sentiment back in 2015.

…if you leave the politicians, the pundits and the crazies aside, ordinary Americans are behaving quite differently. Maybe we should be paying more attention to that bit of good news. And maybe so should the politicians and pundits. After the Charleston shooting, citizens of South Carolina, both black and white, joined hands, and more than 15,000 of them marched in a show of love and friendship. …20,000 people show up for a multiracial “All Lives Matter” march in Birmingham, Ala. It could be the largest such march there since MLK. Glenn Beck and Chuck Norris were there, but that’s not all. …“Alveda King, a niece of civil rights activist the Rev. Martin Luther King Jr., marched in the front row. Bishop Jim Lowe, pastor of the predominantly black Guiding Light Church in Birmingham, co-organized the march with Beck and marched with him at the front. As a child, Lowe attended Sixteenth Street Baptist Church, where the march started, a headquarters church for the civil rights movement in Birmingham. Lowe and his sisters were in the church when a KKK bomb blew up the church and killed four little girls on Sept. 15, 1963.” …Once again the national news media, noted Washington Post blogger David Weigel, “was largely absent.” No time for positivity where race is concerned, I guess. Meanwhile, in Houston, more than a thousand people of all races gathered at an impromptu memorial for murdered Sheriff’s Deputy Darren Goforth. As station KHOU reported, “Those gathered lit candles and gave hugs, hoping to turn the murder from hate to healing.” From hate to healing: That’s what’s bubbling up from the American people, even as our political leadership sows division. Which will win out? That depends on what we all do next, doesn’t it? The American people have a strong spirit of egalitarianism and kindness, one that shows over and over again. But our political class sees more gain in promoting hatred and division. Who will win? If we’re lucky, our “leaders” will follow the people on this.

Incidentally, we obviously have some problems still to solve in America, but we should be proud of how far we’ve come.

Especially compared to the rest of the world, as illustrated by this map.

Courtesy of the American Enterprise Institute, here’s some more evidence of societal progress.

Opinions about interracial dating and marriage on a personal level have…evolved significantly. In 1971, 48 percent nationally said they would not approve of their own children dating someone of another race, while 28 percent said they would approve. In 2014, nearly eight in ten Americans said it wouldn’t matter at all if someone in their family was going to marry someone of another race. Nine percent said they would be happy about it, while 11 percent said they would be unhappy. Today, a majority of whites (54 percent) say they would neither favor nor oppose a close relative marrying a black person. Blacks are slightly less ambivalent, with 42 percent of them giving that response about a close relative marrying a white person. Fifty-two percent favor the idea compared to 30 percent of whites. Along with these changes in public opinion, interracial marriage is also becoming more common in the United States. Pew Research Center analysis of the 2013 American Community Survey found that 6.3 percent of all marriages that year were between people of different races, compared to less than 1 percent in 1970.

And progress isn’t just about attitudes.

Thomas Edsall of the New York Times wrote an encouraging column about economic progress among African-Americans.

…the black upper middle class is ascending the economic ladder at a faster rate than its white counterpart. … William Julius Wilson, a sociologist at Harvard and the author of “The Truly Disadvantaged,”…wrote…”One of the most significant changes in recent decades is the remarkable gains in income among more affluent blacks. When we adjust for inflation to 2014 dollars, the percentage of black Americans earning at least $75,000 more than doubled from 1970 to 2014, to 21 percent. Those making $100,000 or more almost quadrupled to 13 percent (in contrast white Americans saw a less striking increase, from 11 to 26 percent).” In an NBER paper issued in November 2016, Patrick Bayer, an economist at Duke, and Kerwin Charles, a professor of public policy at the University of Chicago, published comparable findings, reporting that “higher quantile black men have experienced substantial gains in both relative earnings levels and their positional rank in the white earnings distribution.”

Jason Riley of the Wall Street Journal also opined about black progress.

During a period of legal discrimination and violent hostility to their advancement, blacks managed to make unprecedented gains that have never been repeated. Black poverty fell to 47% from 87% between 1940 and 1960—before the implementation of Great Society programs that receive so much credit for poverty reduction. The percentage of black white-collar workers quadrupled between 1940 and 1970—before the implementation of affirmative-action policies that supposedly produced today’s black middle class. In New York City, the earnings of black workers tripled between 1940 and 1950, and over the next decade the city saw a 55% increase in the number of black lawyers, a 56% increase in the number of black doctors and a 125% increase in the number of black teachers.

Let’s hope all this progress continues.

In part, this means public policy reforms such as school choice and welfare reform. Another part of the answer is for government to simply get out of the way since even policies designed to help minorities can backfire.

But mostly this is a question of individual morality. We should all try to be like Daryl Davis and the rest of the people in the above stories.

Read Full Post »

The Bizarre Allure of Socialism, Part II

Back in June, I wrote about the bizarre allure of socialism and said that advocates (who generally don’t even know what socialism really means) were some of the most anti-empirical people in the world.

…even though the real-world evidence against big government is so strong, it’s rather baffling that many young people are drawn to that coercive ideology and disturbing that a non-trivial number of voters favor this failed form of statism. …Socialism has a technical definition involving government ownership of the means of production and central planning of the economy. But most people today think socialism is big government, with business still privately owned but with lots of redistribution and intervention (I’ve argued, for instance, that even Bernie Sanders isn’t a real socialist, and that there are big differences between countries like Sweden, China, and North Korea). For what it’s worth, that’s actually closer to the technical definition of fascism.

Now let’s update that column.

It seems that the cancer of socialism is spreading, at least if this story in The Week is any indication.

Things are looking up for the Democratic Socialists of America. With a membership of 25,000, it is now the largest socialist group in America since the Second World War. And last weekend in Chicago, it held its largest convention, by a considerable margin, in its history. …Membership has more than tripled in a year, gaining a large boost from the candidacy of Bernie Sanders… That sharp surge in new recruits — most of whom are fairly young — has created a fairly stark age bifurcation among members. Somewhat akin to Sanders campaign, there is an old guard of people who have been carrying the left-wing torch for years, and a recent surge of new members…most of the major proposals were adopted with large majorities. Among other things, delegates voted to…endorse the Boycott, Divestment, and Sanctions movement (directed at ending the Israeli occupation of the West Bank and Gaza), …and to endorse Medicare for all as a major priority.

I’m guessing that the bifurcated conference meant a handful of old people who are genuine socialists and a bunch of young people who think socialism is just a bunch of government-coerced redistribution and intervention.

Both groups, however, deserve scorn for favoring a system that elevates the state over individuals. That approach is grossly immoral.

Not to mention that it’s never worked. Nobody has ever provided a good answer to my two-part challenge.

There is no example of a successful socialist nation anywhere in the world. Cuba? No. North Korea? No. The Soviet Empire? Don’t make me laugh. Venezuela? You must be joking.

Denmark or Sweden? Umm…, they’re not socialist, though their economies have been hurt by excessive redistribution. Greece? Give me a break.

I could continue, but no sense beating a dead horse.

Let’s close with a bit of humor. A friend in Australia sent me this clever image. I gather it’s a parody of an actual left-wing gathering Down Under. Regardless, I found it rather amusing.

P.S. If you like visuals mocking socialism, I’ve amassed a very nice collection. Click here, here, here, here, here, here, here, here, here, here, here, and here for examples.

Read Full Post »

Debt Limit Should Be an Opportunity rather than a Crisis

There are some charming traditions, like the swallows returning every year to the Mission of San Juan Capistrano.

But other traditions are far less impressive, most notably the make-believe hysteria that occurs every time the federal government approaches its “debt limit.”

High-level government officials will publicly fret that a failure to increase the limit will produce an unprecedented calamity because the Treasury Department will be forced to default on U.S. government debt, thus triggering a global panic.

And this triggers anxiety in predictable quarters.

A story in USA Today is representative of the sky-is-falling mentality.

Congress will confront a potentially devastating financial crisis in September as lawmakers scramble to…prevent the nation from defaulting on its debt for the first time in history. …The debt limit, set by Congress, is the legal amount the U.S. Treasury can borrow to pay the government’s existing bills, including Social Security and Medicare benefits, military salaries, tax refunds, interest on the national debt, and other obligations. The government has never defaulted on its debt before, and no one knows for sure what the impact would be. However, economists warn that it could plunge the U.S. back into recession and spark a global economic crisis.

Paul Krugman is predictably hysterical about the prospect.

The odds of a self-inflicted US debt crisis now look pretty good: hard-line Republicans are eager to hold the economy hostage… So it looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt. How bad will that be? The truth is that we don’t know.. Until now, US debt has played a special role in the world economy, because it is — or was — the ultimate safe asset, the thing people can use to secure transactions with no questions about it retaining its value. …Taking away that role could be very nasty.

Even some establishment voices are fanning the flames, including Maya MacGuineas of the Committee for a Responsible Federal Budget.

Our economic standing is too sterling and the global economy too important to imperil over the disagreements of American domestic politics — as fundamental as they may be. It is the height of recklessness — a view held for decades reflected in the fact that raising the debt ceiling was once a mundane piece of housekeeping that garnered no attention. It was practically automatic.

And Professor Edward Kleinbard of the University of Southern California also thinks the apocalypse is nigh.

Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling. This will cost the Treasury tens of billions of dollars every year for decades to come in higher interest charges and probably trigger a severe recession. …almost all economists and policy makers agree on the enormous fiscal, economic and reputational costs of default. That’s why, in the past, we’ve always managed to avoid it.

Sounds ominous, right?

And I agree that it would be very bad news if the U.S. government didn’t pay all interest and principal to bondholders, as scheduled.

But here’s the good news. The odds of that happening are about the same as the odds of me being the keynote speaker at the next convention of the Socialist Party.

As I’ve said over the years in television interviews, at press conferences, and in congressional testimony (on more than one occasion), there won’t be a default for the simple reason that the federal government collects far more money than needed to pay all bondholders without any delay.

And nothing has happened to the budget numbers to change that analysis.

Here are the latest CBO projections on major budget aggregates. I’ve circled total tax receipts for the next three years, as well as annual net interest payments. As you can see, the Treasury will be collecting more than 10 times as much revenue as needed to fulfill obligations to the folks who have lent money to Uncle Sam.

By the way, some of you may be thinking I’m a cranky libertarian who is blind to the danger of default.

Well, I am a libertarian, and I do get cranky about the various shenanigans in Washington, so let me engage in what’s known as an “appeal to authority.”

Here’s what the Congressional Budget Office said in its recent report on the debt limit.

When Would the Extraordinary Measures and Cash Run Out, and What Would Happen Then? If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. …That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both.

In other words, the government can choose to pay interest on the debt and defer other bills. As I’ve repeatedly said in all my public pronouncements, a default will occur only if an administration wants it to occur.

But that’s not going to happen. Just as Obama’s various Treasury Secretaries would have “prioritized” payments to bondholders, Trump’s Treasury Secretary will do the same thing if push comes to shove.

Some budget experts on the left know this is true so they try to blur the issue by stating that it is “default” to postpone payment on any type of government spending. Here’s some of what Kleinbard wrote in his column.

…some conservative policy makers besides Mr. Mulvaney have convinced themselves that crashing into the debt ceiling won’t be a big deal because the government can “prioritize” its bill payments, so that interest on Treasury debt will be paid on a current basis, while other bills sit unpaid. Understanding the false allure of prioritization requires a little background. …there are profound doubts as to whether the Treasury could even implement prioritization, beyond ring fencing interest payments, because its payment systems are designed to pay all claims as they are due, regardless of their origin. More important, prioritization is default by another name. The consequences are the same, regardless of which i.o.u.s Treasury chooses to dishonor. All valid claims against the United States are backed by the credit of the United States… The deliberate nonpayment of billions of dollars of uncontested claims every month thus constitutes default, even if the Treasury is paying some of its other debts.

The last sentence in the above excerpt is bunk. Postponing or deferring bills is not good budget policy. It’s basically what happens in poorly governed places like Greece and Illinois. But it’s not default. There wouldn’t be any risk to financial markets if the Treasury Department was late in disbursing farm subsidy checks or Medicaid reimbursements.

Let’s close by indulging one of my fantasies. If Donald Trump wanted to force good policy from Congress, he could threaten to veto any debt limit that wasn’t accompanied by something desirable such as a spending cap or entitlement reform. The politicians on Capitol Hill would balk of course, but Trump could shrug his shoulders and start “prioritization” once the debt limit was reached. So long as all bondholders received promised payments, there would be no danger to financial markets. By contrast, however, the various interest groups feeding at the federal trough would begin to squeal once their checks started slowing down. At some point, Congress would be forced to capitulate.

In other words, Trump has the capacity to score a big victory on the debt limit, just like he has the unilateral ability to score a big victory on Obamacare repeal and/or the 2018 spending bills.

I’m not holding my breath for this to happen, but it’s nice to dream. Especially since a big fight over the debt limit today (if successful) could save us from something far worse in the future.

Read Full Post »

The Sad Decline of Economic Literacy at the New York Times

Every so often, I mock the New York Times for biased or sloppy analysis.

• Claiming Medicaid cuts in a piece that shows rising outlays for the program.
• Asserting that government schools are “starved of funding” when taxpayer subsidies actually have skyrocketed.
• Claiming that budget-cutting austerity nations are doing worse than “stimulus” nations, but getting the numbers backwards.
• Writing that the sequester will mean “deep automatic spending cuts” when the budget actually will climb by $2.4 trillion.
• Claiming that Italy is more prosperous than the United States and that there is less poverty.
• Asserting that U.S. multinationals pay little tax on foreign-source income, but forgetting to include the taxes paid to foreign governments.

Now there’s a new column by David Leonhardt that cries out for correction.

He’s very upset that upper-income people are enjoying higher incomes over time.

A…team of inequality researchers…has been getting some attention recently for a chart… It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality. …the very affluent, and only the very affluent, have received significant raises in recent decades. This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. …only very affluent families — those in roughly the top 1/40th of the income distribution — have received…large raises. …The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

And here’s the chart that ostensibly shows that the economy is broken.

And what is the solution for this alleged problem? Class-warfare taxation and bigger government, of course.

…there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population. Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

Whenever I see this type of data, I’m automatically suspicious for two reasons.

1. The people at various income levels in 1980 aren’t the same as the people at those income levels in 2014. In other words, there is considerable income mobility, with some high-income people falling to the middle of the pack, or even below, and some low-income people climbing the middle of the income distribution, or even higher. At the very least, this type of chart exaggerates the degree to which “the rich are getting richer.”
2. Moreover, rich people getting rich doesn’t imply that poor people are losing income. This chart shows that all income percentiles generally enjoy more income with each passing year, so it isn’t grossly misleading like the charts that incorrectly imply income gains for the rich are at the expense of the poor. Nonetheless, a reader won’t have any way of knowing that more inequality and poverty reduction can go hand in hand.

But I think this chart from the New York Times inadvertently shows something very interesting.

As shown in the excerpt above, Mr. Leonhardt wants us to look at this data and support bigger government and class warfare.

Yet look at the annual data. The chart above has the numbers for 1980 and 2014. To the right, I’ve put together the numbers for 1987, 1996, and 2004.

One obvious conclusion is that prosperity (as shown by rising income levels) was much more broadly and equally shared in the 1980s and 1990s, back when the economy was moving in the direction of free markets and smaller government under both Reagan and Clinton.

But look at what happened last decade, and what’s been happening this decade. Government has been expanding (as measured by falling scores from Economic Freedom of the World).

And that’s the period, thanks to Bush-Obama statism, when lower-income people began to lag and income gains were mostly concentrated at the top of the income redistribution.

As the very least, this certainly suggests that Leonhardt’s policy agenda is misguided. Assuming, of course, the goal is to enable more prosperity for the less fortunate.

I’ll add another point. I suspect that big income gains for the rich in recent years are the result of easy-money policies from the Federal Reserve, which have – at least in part – pushed up the value of financial assets.

The bottom line is that Leonhardt seems motivated by ideology, so he bends the data in hopes of justifying his leftist agenda.

What makes this sad is that the New York Times used to be far more sensible.

Back in 1982, shortly after the Professors Hall and Rabushka unveiled their plan for a flat tax, here’s what the New York Times opined.

Who can defend a tax code so complicated that even the most educated family needs a professional to decide how much it owes? …President Reagan’s tax package will eventually roll back rates to the level of the late 1970’s, but it will not simplify the code or rid it of provisions that penalize hard work and reward unproductive investment. …the income base that is taxed has been so eroded by exceptions and preferences that the rates on what is left to tax must be kept high. Thus, the tax on an extra dollar of income for a typical family earning $20,000 is 28 percent and progressively higher for the more affluent. …The most dramatic fresh start, without changing the total amount collected, would be a flat-rate tax levied on a greatly broadened income base. Senator Helms of North Carolina would rid the law of virtually every tax preference and tax all income at about 12 percent. Representative Panetta of Cali-fornia would retain a few preferences and tax at a flat 19 percent. Either approach would greatly improve the efficiency of the system, simplifying calculations and increasing the incentive to earn.

And here’s what the editors wrote about Governor Jerry Brown’s modified flat tax in 199s. They started by praising the core principles of the flat tax.

Taking Jerry Brown seriously means taking his flat tax proposal seriously. Needlessly, he’s made that hard to do. By being careless, the former California Governor has bent a good idea out of shape. …Mr. Brown’s basic idea — creating a simplified code that encourages saving — is exactly right. …The present tax code is riddled with wasteful contradictions and complexity. For example, profit from corporate investment is taxed twice — when earned by the corporation and again when distributed to shareholders. That powerfully discourages savings and investment — the exact opposite of what the economy needs to grow. The remedy is, in a word, integration, meshing personal and corporate codes so that the brunt of taxes falls on consumption, not saving. …there is a reform that achieves all these objectives. Robert Hall and Alvin Rabushka, economists at the Hoover Institution, have proposed an integrated code that applies a single rate to both personal and corporate income. Their plan wipes away most deductions and exemptions, permitting a low tax rate of 19 percent. …Under the Hall-Rabushka plan, individuals would pay taxes on earnings and corporations would pay tax on interest, dividends and profits. That way, every dollar of income would be taxed once and only once.

And they rightly criticized Governor Brown for violating those principles.

Jerry Brown borrowed some of the elements of Hall-Rabushka. He too would eliminate wasteful exemptions, adopt a single rate and favor saving by exempting corporate investment. But at that point, he turns glib. He would impose on corporations a value-added tax, similar to a national sales tax. That eliminates the elegant symmetry of Hall-Rabushka. Indirectly, Mr. Brown’s variation would tax some income twice — which is why his supposed 13 percent rate would collect revenue equal to about 20 percent of total income.

Wow, this isn’t what I would write, but it’s within shouting distance.

The editors back then understood the importance of low marginal tax rates and they recognized that double taxation is a bad thing.

Now check out what the New York Times believes today about tax reform.

First and foremost, the editors want more money taken from the productive economy to expand the D.C. swamp.

Real reform would honestly confront the fact that in the next decade we will need roughly $4.5 trillion more revenue than currently projected to meet our existing commitment…. Even more would be needed if the government were to make greater investments.

And even though class-warfare taxation is unlikely to generate much revenue, the editors want both higher tax rates and more double taxation.

…it would make sense to increase the top rates on them and eliminate a break on income from investments. …the richest 1 percent pay 33 percent of their total income in taxes; if rates were changed so they paid 40 percent, it would generate $170 billion of revenue in the first year.

The editors want to take one of the most anti-competitive features of the current system and make it even worse.

It would also be a good idea to scale back accelerated depreciation allowances that let businesses write off investments faster than assets actually wear out. Speedy write-offs for luxuries like corporate jets could be eliminated altogether.

They also want to further undermine the ability of U.S. companies to compete on a level playing field in foreign markets.

…they should agree to close…the ability of corporations to defer tax on profits earned abroad.

In a display of knee-jerk statism, the editors also want new tax burdens to finance an ever-larger burden of government. Such as an energy tax.

New forms of taxation are also needed. Even prominent Republicans like James Baker III, George Shultz and Henry Paulson Jr. support a carbon tax imposed on emissions to reduce greenhouse gases. …revenue generated by carbon taxes could be used for other purposes as well, including investments in renewable energy and public transportation.

And a tax on financial transactions.

Revenue can also be raised by imposing a tax on the trading of stocks, bonds and derivatives. …Estimates show that a financial transaction tax of even 0.01 percent per trade ($10 on a $100,000 trade) could raise $185 billion over 10 years, enough to finance prekindergarten for 3- and 4-year olds, with money left over.

But the granddaddy of new taxes would be the value-added tax, a money machine for bigger government.

A value-added tax would be akin to a national sales tax, but harder to evade than traditional sales taxes and thus an efficient revenue raiser.

I’m genuinely curious whether there is any type of tax increase the NYT wouldn’t support.

But that’s not really the point of this column. The real lesson is that it’s sad that the editors have gone from being rationally left to being ideologically left.

P.S. I confess that I especially enjoy when the New York Times inadvertently publishes pieces that show the benefits of free markets and personal liberty.

• Accidentally showing the superiority of funded private retirement systems.
• Revealing how feminist policies backfire against women.
• Unintentionally showing the folly of gun control.

Which is sort of what happened with Leonhardt’s data, which shows more broadly shared prosperity when economic liberty was increasing.

Read Full Post »

New Zealand’s Road Map for Sweeping Pro-Market Reform

I wrote last September that New Zealand is the unsung success story of the world.

No, it doesn’t rank above Hong Kong and Singapore, which routinely rank as the two jurisdictions with the most economic liberty.

But it deserves praise for rising so far and fast considering how the country was mired in statist misery just three decades ago. That’s the story of this great video, narrated by Johan Norberg, from Free to Choose Media. It’s runs 56 minutes, but it’s very much worth your time.

But just in case you don’t have a spare hour to watch the full video, I can tell you that it explains how New Zealand made a radical shift to free markets in key areas such as agriculture, trade, fisheries, and industry.

I wrote about New Zealand’s shift to a property rights-based fisheries system, which is a remarkable success. But I’m even more impressed that the country, which has a very significant agricultural sector, decided to eliminate all subsidies. I fantasize about similar reforms in the United States.

To give you an idea of New Zealand’s overall deregulatory success, it is now ranked first in the World Bank’s Doing Business.

As a fiscal policy wonk, my one complaint is that the video doesn’t give much attention to tax and budget policy.

Which is an unfortunate oversight because there’s a very positive story to tell. In the early 1990s, the government basically imposed a nominal spending freeze. And during that five-year period, the burden of government spending fell by more than 10-percentage points of GDP.

And because policy makers dealt with the underlying disease of too much spending, that also meant eliminating the symptom of red ink. In other words, a big deficit became a big surplus.

The same thing also has been happening this decade. Outlays have been increasing by an average of less than 2 percent annually. And because this complies with my Golden Rule, that means a shrinking burden of spending.

And there’s also a good story to tell about tax policy. The top income tax rate has been slashed from 66 percent to 33 percent, and the capital gains tax has been abolished.

Let’s close by highlighting what should be the main lesson of the video, namely that any country can rescue itself from economic decline.

As I watched, the first thing that occurred to me is that New Zealand’s reforms are – or at least should be – a road map for Greece to follow.

The Fraser Institute’s Economic Freedom of the World shows the history of economic liberty in the two nations, and you can see that they used to be very similar – in a bad way – back in the 1970s. They began to diverge between 1975 and 1985, mostly because policy got even worse in Greece. Then both adopted better policy started in 1985, but New Zealand went much farther in the right direction.

Policy has been generally stable in both nations this century. That’s acceptable for New Zealand, but it’s basically a recipe for continued misery in Greece.

But the good news is that Greece can simply copy New Zealand to get the same good results.

P.S. Remember when Gary Johnson caught grief for being unable to list any admirable foreign leaders. I defended him by pointing out that there are not any obvious choices in office today, but I did mention that Roger Douglas and Ruth Richardson – both prominently featured in the above video – would be on list if it included former politicians.

P.P.S. New Zealand ranks #3 for total human freedom, trailing only Hong Kong and Switzerland.

Read Full Post »

Does Trump Deserve Credit for Surging Stock Prices?

I’m rather frustrated about the lack of real results from the Republicans in Washington.

• They haven’t repealed some or all of Obamacare despite seven years of promises.
• They haven’t lowered taxes or reformed the tax code.
• They did a business-as-usual budget deal earlier this year.

Yet Trump and some GOPers want to take credit for a rising stock market, as if that is some sort of positive reaction to their non-accomplishments.

As you can see from this interview, I don’t completely reject this hypothesis. After all, stock values are a reflection of the market’s expectations of future after-tax profits. So if investors think that good reforms – such as a lower corporate tax rate – are going to happen, then it makes sense that the value of financial assets will increase.

By the way, I can’t resist commenting on the claim from the Economic Policy Institute that the stock market is a “meaningless indicator” that has nothing to do with the well-being of workers.

That’s nonsense. Assuming we’re looking at genuine and durable increases in stock values (rather than a bubble), that’s a reflection of a growing economy, which translates into more income for workers.

In the language of economists, capital and labor are complimentary goods. More of one increases the value of the other. Which is why I told the folks at Politifact that it’s good for workers in the long run when financial assets become more valuable since that presumably means more investment.

Dan Mitchell, a scholar at the libertarian Cato Institute, agreed that “capital and labor compete for shares of income in the short run.” Over the long term, however, “there is no trade-off between corporate profits and labor income,” he said.

But let’s focus on the bigger issue of whether Trump deserves any credit for the stock market’s performance.

Ira Stoll, writing for the New York Sun, shares some very appropriate caveats.

The stock market, in other words, is like a lot of things: politicians want to take credit for it when news is good, but absolve themselves of responsibility when news is bad. One might hope for a more consistent perspective from journalists or from independent research organizations. Imagine, say, an election-day to election-day presidential job-performance dashboard that included data on measures such as stock market performance, the value of the dollar, job creation, unemployment, labor force participation, and real GDP growth. It can indeed be hard to isolate a president’s influence on all these things from other variables, such as, say, the composition of Congress. Should Mr. Obama or President Clinton get credit for the stock market booms in their terms? Or should the Republican Congresses under which they occurred? How does one accurately account for the period between the election and inauguration, when stock market gains may reflect anticipated improvements, but growth results measure existing budgets and policies?

Having given lots of reasons to be cautious, Stoll nonetheless thinks investors are buoyed by the pro-growth parts of Trump’s agenda.

…steps Mr. Trump takes — reducing regulation or slowing the growth of it, reducing corporate income tax rates, allowing more energy exploration — will outweigh any negatives. In other words, there’s a decent case that Mr. Trump does deserve at least some credit for the stock market gains.

I don’t have any objection to this analysis.

Though allow me to add another caveat to the list. As I explained when discussing the same topic back in March (see final interview) and indirectly suggested in the above interview, Trump is playing a risky game.

What if the stock market is artificially inflated because of the Fed’s easy-money policy? If that’s the case, there almost certainly will be a correction and stock values will drop.

This won’t be Trump’s fault, but he’ll then be very vulnerable when opponents argue that he should be blamed. As the old saying goes, live by the sword, die by the sword.

In my humble opinion, politicians (at least the ones who support good policy on net, and I still don’t know whether Trump is in this category) should argue for good policy because that will lead to higher per-capita income over time.

And they also should say, in the interests of accuracy, that it generally takes time to see good results.

Consider the lesson of the Reagan years. The first couple of years were a bit bumpy, both because some of Reagan’s good reforms – particularly the tax cuts – were slowly phased in and because some short-run pain was inevitable as inflation was brought under control (an overlooked and very beneficial achievement). But once his policies kicked in, the economic results were very positive.

Read Full Post »

The European Welfare State Means a Stifling Burden for Middle-Class Taxpayers

According to leftists like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.

They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).

But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.

Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.

And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.

Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.

Here’s a chart the WSJ included with the editorial.

As you can see, high payroll taxes and the value-added tax are a very costly combination.

And the rest of Europe is similar to Germany.

…Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.

Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.

Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).

The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.

According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).

But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.

Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.

Sternberg makes the same point in his column.

Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.

Exactly.

There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.

And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.

P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.

P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.

Read Full Post »

Egregious Media Dishonesty Overshadows Important Economic Observation

While it’s quite clear that the establishment media leans to the left, I don’t get too agitated about bias. Though every so often I can’t resist the temptation to comment when I come across egregious examples on issues such as poverty, guns, Greece, jobs, taxes, and education.

The bias extends to politics, of course, though the only time I felt compelled to comment was when ABC News rushed to imply that the Tea Party somehow was connected to a mass shooting in Colorado.

Well, I now feel compelled to comment again. But this example goes beyond bias and should be characterized as blatant and disgusting dishonesty. The hacks at Time took a quote from Charles Koch and then used selective editing to completely misrepresent what he actually said.

In a just world, the person who engaged in this bit of mendacity would lose his or her job and never again work in journalism. But I would hold my breath waiting for that to happen.

But let’s set aside the issue of media bias and dishonesty.

I want to highlight what Mr. Koch said about GDP. He expressed skepticism of that measure because it doesn’t distinguish between good expenditures and bad expenditures.

That’s one of the reasons why I prefer gross domestic income instead of gross domestic product. In simple terms, GDI measures how our national income is generated and GDP measures how it is allocated.

As the Bureau of Economic Analysis explains, the two numbers are basically different sides of the same coin.

In national economic accounting, GDP and GDI are conceptually equal. GDP measures overall economic activity by final expenditures, and GDI measures it by the incomes generated from producing GDP. In practice, GDP and GDI differ because they are constructed using different sources of information. …when one looks at annual data – where the timing differences are less important, the correlation between GDP and GDI is 0.97.

That correlation shouldn’t be a surprise. Indeed, over a longer period of time, the two numbers should be identical.

Both go up when the economy is doing well, and both go down when there is a recession.

But I want to make a more subtle point.

The reason I like GDI over GDP is because one the former is more likely to lead people to support good policy while the latter is more likely to lead people in the direction of bad policy.

Here’s some of what I wrote on the topic back in 2013.

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub. Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable? The same principle is true – or should be true – for a country. That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income. …We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

And, on a related note, you can back to 2009 for a column I wrote explaining that consumer spending is a reflection of a strong economy, not the cause of a  strong economy.

And this video ties everything together by debunking the Keynesian argument that politicians should focus on goosing consumer spending.

Read Full Post »

France, Yachts, and the Real Victims of Class-Warfare Taxation

Remember John Kerry, the former Secretary of State and Massachusetts Senator, the guy who routinely advocated higher taxes but then made sure to protect his own wealth? Not only did he protect much of his fortune in so-called tax havens, he even went through the trouble of domiciling his yacht outside of his home state to minimize his tax burden.

I didn’t object to Kerry’s tax avoidance, but I was irked by his hypocrisy. If taxes are supposed to be so wonderful, shouldn’t he have led by example?

At the risk of understatement, folks on the left are not very good about practicing what they preach.

But let’s not dwell on John Kerry. Instead, let’s focus on other yacht owners so we can learn an important lesson about tax policy.

And, as is so often the case, France is an example of the policies to avoid.

Where have all the superyachts gone? That is the question that locals and business owners in the south of France are asking this summer. And the answer appears to be: Italy, Greece, Turkey, and Spain. …While the ongoing presence of €10 cups of coffee and €1000 bottles of Champagne might serve to reassure the casual observer that the region is still as attractive to the sun-loving super-rich as it ever was, appearances can be deceptive. Talk to locals involved in the multibillion-euro yachting sector—and in the south of France that’s nearly everyone, in some trickle-down shape or form, as yachting is by some measures the biggest earner in the region after hotels and wine—and you detect a sinking feeling. …More and more yachting money is draining away…washing up in other European countries such as Spain, Italy, Greece, and Turkey.

Having once paid the equivalent of $11 for a diet coke in Monaco, I can confirm that it is a painfully expensive region.

But let’s focus on the more important issue: Why are the big yachts staying away from the French Riviera?

Apparently they’re avoiding France for the same reason that entrepreneurs are avoiding France. The tax burden is excessive.

The core reason for the superyacht exodus is financial; France has tightened…tax regulations for the captains and crew members of yachts who officially reside in France, and often have families on the mainland, but traditionally have evaded all tax by claiming they were earning their salary offshore. The country has also taken a hard line on imposing 20 percent VAT on yacht fuel sales, which often used to be dodged. Given that a typical fill can be around €100,000, it is understandable that many captains are simply sailing around the corner.

I don’t share this story because I feel sorry for wealthy people.

Instead, the real lesson to be learned is that when politicians aim at the rich, it’s the rest of us that get victimized.

Ordinary workers, whether at marinas or on board the yachts, are the ones who are losing out.

Revenue at the iconic marina in Saint-Tropez has…fallen by 30 percent since the beginning of the year, while Toulon, a less glamorous destination, has suffered a 40 percent decline. …They stated that refueling a 42-meter yacht in Italy (instead of France) “gives a saving of nearly €21,000 a week because of the difference in tax.” Sales by the four largest marine fuel vendors has fallen by 50 percent this summer, the letter said, adding that French “yachties”—an inexperienced 19-year-old deckhand makes around €2,000 per month and a good Captain can command €300,000—were being laid off in droves, as, due to the new tax rules, national insurance, health and other compulsory contributions which boat owners pay for crew members have increased from 15 to 55 percent of their wages. The letter stated that “the additional cost of maintaining a seven-person crew in France is €300,000 (£268,000) a year.”

All of this is – or should have been – totally predictable.

French tax authorities should have learned from what happened a few years ago in Italy.

Or from what happened in France a few decades ago.

…the French have been down this avenue before. “It happened in France about 30 years ago, so people moved their boats to Italy… Yachting is huge revenue earner for the region. …we contribute huge sums in social security alone. “But the bigger issue is that people holidaying on yachts here go ashore and spend money—and a lot of it.” Says Heslin: “The possibility of this happening if taxes and fees were increased has actually been talked about for the last two years, and everyone warned what would happen. “But this where the French government so often goes wrong, this attitude of, ‘Well, we are France, people will always come here.’” This time, it appears, they have called it wrong. Edmiston says, “Yachting is very important to local economy, but if people are not made to feel welcome here, there are plenty of other places where they will be.”

Incidentally, we have similar examples of counterproductive class warfare in the United States. Florida politicians shot themselves in the foot a number of years ago with high taxes on yachts.

And the luxury tax on yachts, which was part of President George H.W. Bush’s disastrous tax-hike deal in 1990, hurt middle-class boat builders much more than upper-income boat buyers.

But let’s zoom out and make a broader point about public finance and tax policy.

Harsh taxes on yachts backfire because the people being targeted have considerable ability to escape the tax by simply choosing to buy yachts, staff yachts, and sail yachts where taxes aren’t so onerous.

Let’s now apply this insight to something far more important than yachts.

Investment is a key for long-run growth and higher living standards. All economic theories – even Marxism ans socialism – agree that capital formation is necessary to increase productivity and thus boost wages.

Yet people don’t have to save and invest. They can choose to immediately enjoy their earnings, especially if there are harsh taxes on income that is saved and invested.

Or they can choose to (mis)allocate capital in ways that make sense from a tax perspective, but might not be very beneficial for the economy.

And upper-income taxpayers have a lot of latitude over how much of their money is saved and invested, as well as how it is saved and invested.

So when politicians impose high taxes on income that is saved and invested, they can expect big supply-side responses, just as there are big responses when they impose punitive taxes on yachts.

But here’s the bottom line. When they over-tax yachts, the damage isn’t that great. Yes, some local workers are out of jobs, but that tends to be offset by more job creation in other jurisdictions that now have more business from big boats.

Over-taxing saving and investment, by contrast, can permanently lower a nation’s prosperity by reducing capital formation. And to the extent that this policy is imposed on the entire world (which is basically what the OECD is seeking), then there’s no additional growth in other jurisdictions to offset the suffering caused by bad tax policy in one jurisdiction.

Read Full Post »

Capitalist Reforms Boosting Baltic Prosperity

I’m a fan of the Baltic nations in part because they were among the first to adopt flat tax systems after the collapse of the Soviet empire. But tax reform was just the beginning. Estonia, Latvia, and Lithuania have liberalized across the board as part of their efforts to become prosperous.

Economic Freedom of the World is always the first place to check when you want to understand whether countries have good policy. And the dataset for the Baltic nations does show that all three nations are in the top quartile, with Lithuania and Estonia cracking the top 20.

So are these market-oriented policies paying dividends? Has the shift in the direction of free markets and limited government resulted in more prosperity?

The short answer is yes. The European Central Bank has released some very interesting analysis on the economic performance of these countries.

The Baltic States have been able to maintain an impressive rate of convergence towards the average EU per capita income over the past 20 years. …these three countries have each pursued a strongly free-market and pro-business economic agenda… The three countries are different in many ways, but share a number of key features: very high levels of trade and financial openness and very high labour mobility; high economic flexibility with wage bargaining mainly at firm level; relatively good institutional framework conditions; and low levels of public debt.

And this has translated into strong growth, which has resulted in higher incomes.

The Baltic States are among the few euro area countries (along with Slovakia) in which real GDP per capita in purchasing power standard (PPS) terms has shown substantial convergence towards the EU average over the last 20 years. While in 1995 their average per capita income (in PPS) stood at only around 28% of the EU15 average, in 2015 it reached 66.5% (see Chart A).

Here’s the chart showing how quickly the Baltic countries are catching up to Western Europe.

The ECB report also measured how fast the Baltic nations have grown compared to theory.

The long-term convergence performance of the Baltic States has exceeded what would have been expected based on their initial income level.

And here’s the chart showing how they have over-performed.

The ECB study says that the Baltic countries have been especially good about replacing cronyism with the rule of law.

One of the possible reasons for the fairly strong convergence performance of the Baltic States is the strong improvement in institutional quality in these countries… The Worldwide Governance Indicators of the World Bank, which is a composite indicator of institutional quality, suggests that institutional quality has improved markedly in the Baltic States – especially in Estonia – over the recent decades.

I agree. Indeed, I’ve written that Estonia is a good role model, having reduced corruption by limiting the power of politicians and bureaucrats.

The report also credits the three countries with rapid rebounds from the financial crisis, which is a point I made back in 2011.

While the crisis hit the Baltic States hard, the adjustment of imbalances was very fast. The rapid adjustment in fiscal balances and private sector balance sheets implied that the Baltic States could avoid the accumulation of a large debt overhang. In addition, the fast reduction in unemployment helped to decrease the risk of hysteresis, thus avoiding lasting consequences for potential growth. …The external adjustment of the Baltic States was facilitated by painful but effective internal devaluation. …This relatively fast adjustment in the Baltic States was facilitated in part by a strong initial rebound in employment growth, supported by an adjustment in labour costs.

I also think genuine spending cuts helped produce the quick economic rebound.

Though the report does warn that there are not guarantees that the Baltic countries will fully converge with Western Europe.

International experience suggests that countries that reach a middle income level, like the Baltic States, tend to find it difficult to converge further and achieve a high income level. A World Bank study suggests that out of 101 middle-income economies in 1960, only 13 had become high-income economies by 2008.

This is a good point. As I explained two years ago, full convergence is very difficult. North America and Western Europe became rich in part because of very small public sectors in the 1800s and early 1900s. Indeed, there was virtually no welfare state until the 1930s and the level of redistribution was comparatively small until the 1960s.

Unfortunately, this is one area where the Baltic nations are weak. Yes, the burden of government spending may be modest compared to other EU countries, but the public sector nonetheless consumes more than 35 percent of GDP. And even though these nations have flat taxes, they also have stifling payroll taxes and government-fueling value-added taxes.

Another problem (not just in the Baltic region, but all through Eastern Europe) is that the demographic outlook is unfriendly, which means that the welfare state automatically will become a bigger burden over time.

If the Baltic countries want genuine convergence (or if they want to surpass Western Europe), that will require additional reform, particularly efforts to reduce the burden of government spending to the levels found in Hong Kong and Singapore.

Unfortunately, it’s more likely that policy will move in the other direction. There are constant efforts to repeal the flat tax systems in the Baltic countries. And efforts by the European Commission to harmonize business taxation ultimately may undermine the pro-growth approach to business taxation in the region as well.

P.S. For those who want an in-depth look at a Baltic nation, I recommend this video about Estonia. And if you want some amusement, check out how Paul Krugman wanted people to believe that Estonia’s 2008 recession was caused by 2009 spending cuts.

Read Full Post »

Should Central America Listen to the WSJ and Copy Hong Kong, or Listen to the OECD and Copy Greece?

The great thing about the Economic Freedom of the World is that it’s like the Swiss Army Knife of global policy. No matter where you are or what issue you’re dealing with, EFW will offer insight about how to generate more prosperity.

Since today’s focus is Central America, let’s look at the EFW data.

As you can see, it’s a mixed bag. Some nations are in the top quartile, such as Costa Rica, Guatemala, and Panama, though none of them get high absolute scores. Mexico, by contrast, has a lot of statism and is ranked only #88, which means it is in the third quartile. And Belize is a miserable #122 and stuck in the bottom quartile (where Cuba also would be if that backwards country would be ranked if it produced adequate statistics).

One of the great challenges for development in central America (as well as other parts of the developing world) is figuring out how to get poor and middle-income nations to make the jump to the next level.

Mary Anastasia O’Grady of the Wall Street Journal has a column on how to get more growth in Central America. She focuses on Guatemala, but what she writes is applicable for all neighboring countries.

…faster economic growth is part of what’s needed for the region… To succeed, it will have to break with the State Department’s conventional wisdom that underdevelopment is caused by a paucity of taxes and regulation. It will also have to climb down from its view that trade is a zero-sum game. Policy makers might start by reading a new report on micro, small and medium-sized businesses in Guatemala by the Kirzner Center for Entrepreneurship at Francisco Marroquin University in Guatemala City. It measures—by way of household surveys in 179 municipalities and interviews with industry experts—“attitudes, activities and aspirations of the entrepreneur.” …the GEM study ranks Guatemala No. 1 for its positive view of entrepreneurship as a career choice. Guatemala also ranks high (No. 9) for the percentage of the population engaged in new businesses, defined as less than 3½ years old. And it ranks 12th in terms of the percentage of the population who “are latent entrepreneurs and who intend to start a business within three years.”

She explains that Guatemalan entrepreneurship is hampered by excessive taxation and regulation.

Yet Guatemalan eagerness to run a business has not translated into prosperity for the nation… The country ranks a lowly 59th in entrepreneurs’ expectations that they will create six or more jobs in five years. It also sinks to near the bottom of the pack (62nd) in creating business-service companies. …The World Bank’s 2017 “Doing Business” survey provides many clues about why the informal economy is so large. Guatemala ranks 88th out of 190 countries world-wide for ease of running an enterprise, but in key categories that make up the index it performs much worse. The survey finds that it takes 256 hours to comply with the tax code. The total tax take is 35.2% of profits. It takes almost 20 days to start a legal enterprise and costs 24% of per capita income. To enforce a contract it takes more than 1,400 days and costs more than 26% of the claim.

The good news is that we know the answers that will generate prosperity. The bad news is that Guatemala gets a lot of bad advice.

The obvious solution is an overhaul of the tax, regulatory and legal systems in order to increase economic freedom. A lower tax rate and a simpler code would give companies an incentive to operate legally, thereby broadening the base and improving access to credit. Instead the Guatemalan authorities—encouraged by the State Department and the International Monetary Fund—spend their resources trying to impose a complex, costly system in an economy of mostly informal businesses with a much-smaller number of legal, productive entrepreneurs. Recently the United Nations International Commission against Impunity in Guatemala recommended a new tax to fight “impunity.” This is no way to attract capital or raise revenue.

Speaking of bad advice, let’s now contrast the sensible recommendations of Ms. O’Grady to the knee-jerk statism of the Organization for Economic Cooperation and Development. In a new report on Costa Rica’s tax system, the OECD urged ever-higher fiscal burdens for the country. Including destructive class warfare.

Costa Rica’s tax revenues are…insufficient to finance the country’s current spending needs. …In addition to raising more tax revenue…, Costa Rica needs to…enhance the redistributive role of its tax system. …the role of the personal income tax (PIT) should be strengthened as it currently raises little revenue and does not contribute to reducing inequality. …Collecting greater revenues from the PIT, by lowering the income threshold above which PIT has to be paid as well as by introducing additional PIT brackets and gradually raising the top PIT rate, could contribute to reducing income inequality.

But the OECD doesn’t merely want to hurt successful taxpayers.

The bureaucracy is proposing other taxes that target everyone in the country. Including a pernicious value-added tax.

Costa Rica does not have a modern VAT system in place. …Costa Rica’s priority should be to introduce a well-designed and broad-based VAT system…to be able to generate additional revenues… There is scope to improve the environmental effectiveness of tax policy while also increasing revenue.

So why is the OECD so dogmatically in favor of higher taxes in Costa Rica?

Are revenues less than 5 percent of GDP, indicating that the country is unable to finance genuine public goods such as rule of law?

Is the government so starved of revenue that Costa Rico can’t replicate the formula – a public sector consuming about 10 percent of economic output – that enabled the western world to become rich?

Of course not. The report openly acknowledges that the Costa Rican tax system already consumes more than 23 percent of GDP.

The obvious conclusion if that the burden of government in Costa Rica should be downsized. And that’s true whether you think that the growth-maximizing size of government, based on the experience of the western world, is 5 percent-10 percent of GDP. Or whether you limit yourself to modern data and think the growth-maximizing size of government, based on Hong Kong and Singapore, is 15 percent-20 percent of economic output.

Here’s another amazing part of the report, as in amazingly bad and clueless.

The OECD actually admits that rising levels of government debt are the result of spending increases.

…significant increases in expenditures have not been matched by increases in tax revenues. …Between 2008 and 2013, overall government spending increased as a result of higher public sector remuneration as well as higher government transfers to finance public sector social programmes.

What’s particularly discouraging, as you just read, is that the higher spending wasn’t even in areas, such as infrastructure, where there might arguably be a potential for some long-run economic benefit.

Instead, the government has been squandering money on bureaucrat compensation and the welfare state.

Here’s another remarkable admission in the OECD report.

The high tax burden is a key driver of the informal economy in Costa Rica. The IMF estimated the size of the informal economy in Costa Rica at approximately 42% of GDP in the early 2000s… Past work from the IMF showed that rigidities in the labor market and the high tax burden were the most important drivers of informality.

Yet does the OECD reach the logical conclusion that Costa Rica needs deregulation and lower tax rates? Of course not.

The Paris-based bureaucrats instead want measures to somehow force workers into the tax net.

Bringing more taxpayers within the formal economy should be a key priority. …the tax burden in Costa Rica is borne by a small number of taxpayers. This puts a limit on the amount of tax revenue that can be raised…and puts a limit to the impact of the tax system in reducing inequality.

Ironically, the OECD report actually includes a table showing why the IMF is right in this instance. As you can see, social insurance taxes create an enormous wedge between what it costs to employ a worker and how much after-tax income a worker receives.

In other words, the large size of the underground economy is a predictable consequence of high tax rates.

Let’s conclude with the sad observation that the OECD’s bad advice for Costa Rica is not an anomaly. International bureaucracies are routinely urging higher tax burdens.

Indeed, I joked a few years ago in El Salvador that the nation’s air force should shoot down any planes with IMF bureaucrats in order to protect the country from bad economic advice.

Read Full Post »

Envy, Fairness, Redistribution, Compassion, and Morality

I confess that I’m never sure how best to persuade and educate people about the value of limited government.

• Is it best to make a moral and philosophical case against state coercion?
• Or is it best to make a practical case that a free society produces greater prosperity?

Regular readers presumably will put me in the second camp since most of my columns involve data and evidence on the superior outcomes associated with markets compared to statism.

That being said, I actually don’t think we will prevail until and unless we can convince people that it is ethically wrong to use government power to dictate and control the lives of other people.

So I’m always trying to figure out what motivates people and how they decide what policies to support.

With this in mind, I was very interested to see that nine scholars from five continents (North America, South America, Europe, Asia, and Australia), representing six countries (Canada, United States, Argentina, Netherlands, Israel, and Australia) and four disciplines (psychology, criminology, economics, and anthropology), produced a major study on what motivates support for redistribution.

Why do people support economic redistribution? …By economic redistribution, we mean the modification of a distribution of resources across a population as the result of a political process. …it is worthwhile to understand how distributive policies are mapped into and refracted through our evolved psychological mechanisms.

The study explain how human evolution may impact our attitudes, a topic that I addressed back in 2010.

The human mind has been organized by natural selection to respond to evolutionarily recurrent challenges and opportunities pertaining to the social distribution of resources, as well as other social interactions. …For example, it was hypothesized that modern welfare activates the evolved forager risk-pooling psychology — a psychology that causes humans to be more motivated to share when individual productivity is subject to chance-driven interruptions, and less motivated to share when they think they are being exploited by low-effort free riders. Ancestrally, sharing resources that came in unsynchronized, high-variance, large packages (e.g., large game) allowed individuals to buffer each other’s shortfalls at low additional cost.

Here’s how the authors structured their research.

…we propose that the mind perceives modern redistribution as an ancestral game or scene featuring three notional players: the needy other, the better-off other, and the actor herself. …we use the existence of individual differences in compassion, self-interest, and envy as a research tool for investigating the joint contribution of these motivational systems to forming attitudes about redistribution.

And here’s how they conducted their research.

We conducted 13 studies with 6,024 participants in four countries to test the hypothesis that compassion, envy, and self-interest jointly predict support for redistribution. Participants completed instruments measuring their (i) support for redistribution; (ii) dispositional compassion; (iii) dispositional envy; (iv) expected personal gain or loss from redistribution (our measure of self-interest); (v) political party identification; (vi) aid given personally to the poor; (vii) wealthy-harming preferences; (viii) endorsement of pro-cedural fairness; (ix) endorsement of distributional fairness; (x) age; (xi) gender; and (xii) socioeconomic status (SES).

Now let’s look at some of the findings, starting with the fact that personal compassion is not associated with support for coerced redistribution. Indeed, advocates of government redistribution tend to be less generous (a point that I’ve previously noted).

Consider personally aiding the poor—as distinct from supporting state-enacted redistribution. Participants in the United States, India, and the United Kingdom (studies 1a–c) were asked whether they had given money, food, or other material resources of their own to the poor during the last 12 mo; 74–90% of the participants had. …dispositional compassion was the only reliable predictor of giving aid to the poor. A unit increase in dispositional compassion is associated with 161%, 361%, and 96% increased odds of having given aid to the poor in the United States, India, and the United Kingdom. …Interestingly, support for government redistribution was not a unique predictor of personally aiding the poor in the regressions… Support for government redistribution is not aiding the needy writ large—in the United States, data from the General Social Survey indicate that support for redistribution is associated with lower charitable contributions to religious and nonreligious causes (61). Unlike supporting redistribution, aiding the needy is predicted by compassion alone.

But here’s the most shocking part of the results.

The people motivated by envy are often interested in hurting those above them than they are in helping those below them.

…consider envy. Participants in the United States, India, and the United Kingdom (studies 1a–c) were given two hypothetical scenarios and asked to indicate their preferred one. In one scenario, the wealthy pay an additional 10% in taxes, and the poor receive an additional sum of money. In the other scenario, the wealthy pay an additional 50% in taxes (i.e., a tax increment five times greater than in the first scenario), and the poor receive (only) one-half the additional amount that they receive in the first scenario. That is, higher taxes paid by the wealthy yielded relatively less money for the poor, and vice versa… Fourteen percent to 18% of the American, Indian, and British participants indicated a preference for the scenario featuring a higher tax rate for the wealthy even though it produced less money to help the poor (SI Appendix, Table S3). We regressed this wealthy-harming preference simultaneously on support for redistribution… Dispositional envy was the only reliable predictor. A unit increase in envy is associated with 23%, 47%, and 43% greater odds of preferring the wealthy-harming scenario in the United States, India, and the United Kingdom.

This is astounding, in a very bad way.

It means that there really are people who are willing to deprive poor people so long as they can hurt rich people.

Even though I have shared polling data echoing these findings, I still have a hard time accepting that some people think like that.

But the data in this study seem to confirm Margaret Thatcher’s observation about what really motivates the left.

The authors have a more neutral way of saying this. They simply point out that compassion and envy can lead to very different results.

Compassion and envy motivate the attainment of different ends. Compassion, but not envy, predicts personally helping the poor. Envy, but not compassion, predicts a desire to tax the wealthy even when that costs the poor.

Since we’re on the topic or morality, markets, and statism, my colleague Ryan Bourne wrote an interesting column for CapX looking at research on what type of system brings out the best in people.

It turns out that markets promote cooperation and trust.

…experimental work of Herbert Gintis, who has analysed the behaviours of 15 tribal societies from around the world, including “hunter-gatherers, horticulturalists, nomadic herders, and small-scale sedentary farmers — in Africa, Latin America, and Asia.” Playing a host of economic games, Gintis found that societies exposed to voluntary exchange through markets were more highly motivated by non-financial fairness considerations than those which were not. “The notion that the market economy makes people greedy, selfish, and amoral is simply fallacious,” Gintis concluded. …Gintis again summarises, “movements for religious and lifestyle tolerance, gender equality, and democracy have flourished and triumphed in societies governed by market exchange, and nowhere else.”

Whereas greater government control and intervention produce a zero-sum mentality and cheating.

…we might expect greed, cheating and intolerance to be more prevalent in societies where individuals can only fulfil selfish desires by taking from, overpowering or using dominant political or hierarchical positions to rule over and extort from others. Markets actually encourage collaboration and exchange between parties that might otherwise not interact. This interdependency discourages violence and builds trust and tolerance. …In a 2014 paper, economists tested Berlin residents’ willingness to cheat in a simple game involving rolling die, whereby self-reported scores could lead to small monetary pay-offs. Participants presented passports and ID cards to the researchers, which allowed them to assess their backgrounds. The results were clear: participants from an East German family background were far more likely to cheat than those from the West. What is more, the “longer individuals were exposed to socialism, the more likely they were to cheat.”

All of which brings me back to where I started.

How do you persuade people to favor liberty if they are somehow wired to have a zero-sum view of the world and they think that goal of public policy is to tear down the rich, even if that hurts the poor?

Though the internal inconsistency of the previous sentence maybe points to the problem. If the poor and the rich are both hurt by a policy (or if both benefit from a policy), then the world clearly isn’t zero-sum. And we now from voluminous evidence, of course, that the world isn’t that way.

But how to convince people, other than making the same arguments over and over again?

P.S. Jonah Goldberg and Dennis Prager both have videos with some insight on this issue.

Read Full Post »