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Archive for September, 2017

The most common arguments for reducing the 35 percent federal tax on corporate income usually revolve around the fact that having the developed world’s highest tax rate on business undermines competitiveness and reduces investment in America.

And all of that is true. But we should never lose sight of the fact that the corporate income tax is merely a collection device. Businesses may pay the tax, but the real burden is borne by people.

  • Shareholders (investors) receive lower dividends.
  • Consumers pay more for goods and services.
  • Workers receive lower levels of compensation.

Politicians don’t really care about investors since some shareholders are rich, but they definitely pay lip service to the notion that they are on the side of consumers and workers.

So I think this new study from German scholars is worth sharing because it measures the effect of corporate taxation on wages. Here are some of the highlights.

In this paper, we revisit the question of the incidence of corporate taxes on wages both theoretically and empirically. …we exploit the specific institutional setting of the German local business tax (LBT) to identify the corporate tax incidence on wages. …we test the theoretical predictions using administrative panel data on German municipalities from 1993 to 2012. Germany is well suited to test our theoretical model for several reasons. First, we have substantial tax variation at the local level. From 1993 to 2012, on average 12.4% of municipalities adjusted their LBT rates per year. Eventually, we exploit 17,999 tax changes in 10,001 municipalities between 1993 to 2012 for identification. …Moreover, the municipal autonomy in setting tax rates allows us to treat municipalities as many small open economies within the highly integrated German national economy – with substantial mobility of capital, labor and goods across municipal borders.

And here are the key results. There’s a good bit of economic jargon, so the main takeaway is that 43 percent of the corporate tax is borne by workers.

For our baseline estimate, we focus on firms that are liable to the LBT. Figure 2 depicts the results. Pre-reform trends are flat and not statistically different from zero. After a change in the municipal business tax rate in period 0 (indicated by the vertical red line), real wages start to decline and are 0.047 log points below the pre-reform year five years after the reform. The coefficient corresponds to a wage elasticity with respect to the LBT rate of 0.14. …this central estimate implies that a 1-euro increase in the tax bill leads to a 0.56-euro decrease in the wage bill. …we have to rely on estimates from the literature to quantify the total incidence on labor. If we assume a marginal deadweight loss of corporate taxation of 29% as suggested by Devereux et al. (2014), 43% of the total tax burden is borne by workers. This finding is comparable to other studies analyzing the corporate tax incidence on wages (Arulampalam et al., 2012; Liu and Altshuler, 2013; Su´arez Serrato and Zidar, 2014). …We find that part of the tax burden is borne by low-skilled workers. …the view that the corporate income tax primarily falls on firm owners is rejected by our analysis.

For what it’s worth, I use a different approach when trying to explain the impact of the corporate income tax.

I state that shareholders pay 100 percent of the corporate income tax when looking at the direct (or first-order) effect.

However, since shareholders respond to this tax by investing less money in businesses, that means productivity won’t grow as fast, and this translates into lower wages for workers (compared to how fast they would have grown if the tax was lower or didn’t exist). This is the indirect (or second-order) effect of corporate taxation, and it’s akin to the “deadweight loss” discussed in the aforementioned study.

And this is also the approach that can be used to calculate the damage to consumers.

For today, though, the moral of the story is very simple. A high corporate tax rate is bad for growth and competitiveness, but one of the main effects is that workers wind up earning less income. So when the class-warfare crowd takes aim at “rich corporations,” there’s a lot of collateral damage on ordinary people.

P.S. For more information, here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. There’s lots of evidence – including some from leftist international bureaucracies – that a lower corporate tax rate won’t mean less tax revenue.

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The world’s best welfare state arguably is Finland.

Yes, the burden of government spending is enormous and the tax system is stifling, but the nation gets extremely high scores for rule of law and human liberty. Moreover, it is one of the world’s most laissez-faire economies when looking at areas other than fiscal policy.

Indeed, depending on who is doing the measuring, Finland ranks either slightly above or slightly below the United States when grading overall policy.

Yet even the best welfare state faces a grim future because of demographic change. Simply stated, redistribution programs only work if there is a sufficiently large supply of new taxpayers to finance promised handouts.

And that supply is running dry in Finland. Bloomberg reports that policymakers in that nation are waking up to the fact that there won’t be enough future taxpayers to finance the country’s extravagant welfare state.

Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state, since they endanger its long-term survival. …the Aktia Bank chief economist said in a telephone interview in Helsinki. “We have a large public sector and the system needs taxpayers in the future.” …According to the OECD, Finland already has the lowest ratio of youths to the working-age population in the Nordics. …And it also has the highest rate of old-age dependency in the region. …The situation is only likely to get worse, according to OECD projections.

Here are a couple of charts showing dramatic demographic changes in Nordic nations. The first chart shows the ratio of children to working-age adults.

And the second charts shows the population of old people (i.e., those most likely to receive money from the government) compared to the number of working-age adults.

As you can see, the numbers are grim now (green bar) but will get far worse by the middle of the century (the red and black bars) because the small number of children today translates into a small number of working-age adults in the future.

To be blunt, these numbers suggest that it’s just a matter of time before the fiscal crisis in Southern Europe spreads to Scandinavia.

Heck, it’s going to spread everywhere: Western Europe, Eastern Europe, Asia, the developing world, Japan and the United States.

Though it’s important to understand that demographic changes don’t necessarily trigger fiscal and economic problems. Hong Kong and Singapore have extremely low fertility rates, yet they don’t face big problems since they are not burdened by western-style welfare states.

By the way, the article also reveals that Finland’s government isn’t very effective at boosting birthrates, something that we already knew based on the failure of pro-natalist government schemes in nations such as Italy, Spain, Denmark, and Japan.

Though I’m amused that the reporter apparently thinks government handouts are a pro-parent policy and believes that more of the same will somehow have a positive effect.

Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years. …the fertility rate should equal two per woman, Schauman says. It was projected at 1.57 in 2016, according to Statistics Finland. That’s a surprisingly low level, given the efforts made by the state to support parenthood. …Finland’s famous baby-boxes. Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot. …Offering generous parental leave…doesn’t seem to be working either. …The government has been working with employers and trade unions to boost gender equality by making parental leave more flexible and the benefits system simpler.

Sigh, a bit of research would have shown that welfare states actually have a negative impact on fertility.

The bottom line is that entitlement reform is the only plausible way for Finland to solve this major economic threat.

P.S. Since the nation’s central bank has published research on the negative impact of excessive government spending, there are some Finns who understand what should be done.

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Earlier this year, I pointed out that Trump and Republicans could learn a valuable lesson from Maine Governor Paul LePage on how to win a government shutdown.

Today, let’s look at a lesson from North Carolina on how to design and implement pro-growth tax policy.

In today’s Wall Street Journal, Senator Thom Tillis from the Tarheel State explains what happened when he helped enact a flat tax as Speaker of the State House.

In 2013, when I was speaker of the state House, North Carolina passed a serious tax-reform package. It was based on three simple principles: simplify the tax code, lower rates, and broaden the base. We replaced the progressive rate schedule for the personal income tax with a flat rate of 5.499%. That was a tax-rate cut for everyone, since the lowest bracket previously was 6%. We also increased the standard deduction for all tax filers and repealed the death tax. We lowered the 6.9% corporate income tax to 6% in 2014 and 5% in 2015. …North Carolina’s corporate tax fell to 3% in 2017 and is on track for 2.5% in 2019. We paid for this tax relief by expanding the tax base, closing loopholes, paring down spending, reducing the cost of entitlement programs, and eliminating “refundable” earned-income tax credits for people who pay no taxes.

Wow, good tax policy enabled by spending restraint. Exactly what I’ve been recommending for Washington.

Have these reforms generated good results?  The Senator says yes.

More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing.

What about tax revenue? Has the state government been starved of revenue?

Nope.

…a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses.

Senator Tillis didn’t have specific details on tax collections in his column. I got suspicious that he might be hiding some unflattering numbers, so I went to the Census Bureau’s database on state government finances. But it turns out the Senator is guilty of underselling his state’s reform. Tax revenue has actually grown faster in the Tarheel State, compared the average of all other states (many of which have imposed big tax hikes).

Another example of the Laffer Curve in action.

And here’s a chart from North Carolina’s Office of State Budget and Management. As you can see, revenues are rising rather than falling.

By the way, I’m guessing that the small drop in 2014 and the big increase in 2015 were caused by taxpayers delaying income to take advantage of the new, friendlier tax system. We saw the same thing in the early 1980s when some taxpayer deferred income because of the multi-year phase-in of the Reagan tax cuts.

But I’m digressing. Let’s get back to North Carolina.

Here’s what the Tax Foundation wrote earlier this year.

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

And in a column for Forbes, Patrick Gleason was even more effusive.

…the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. …This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. …It’s remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation).

Most importantly, state lawmakers put the brakes on spending, thus making the tax reforms more political and economically durable and successful.

Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.

Last but not least, I can’t resist sharing this 2016 editorial from the Charlotte Observer. If nothing else, the headline is an amusing reminder that journalists have a hard time understanding that higher tax rates don’t necessarily mean more revenue and that lower tax rates don’t automatically lead to less revenue.

A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money. We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. …Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year. …the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.

Though the opinion writers in Charlotte shouldn’t feel too bad. Their counterparts at the Washington Post and Wall Street Journal have made the same mistake. As did a Connecticut TV station.

P.S. My leftist friends doubtlessly will cite Kansas as a counter-example to North Carolina. According the narrative, tax cuts failed and were repealed by a Republican legislature. I did a thorough analysis of what happened in the Sunflower State earlier this year. I pointed out that tax cuts are hard to sustain without some degree of spending restraint, but also noted that the net effect of Brownback’s tenure is a permanent reduction in the tax burden. If that’s a win for the left, I hope for similar losses in Washington. It’s also worth comparing income growth in Kansas, California, and Texas if you want to figure out what tax policies are good for ordinary people.

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I argued last year that leftists should be nice to rich people because upper-income taxpayers finance the vast majority of the American welfare state according to government data.

Needless to say, my comment about being “nice” was somewhat sarcastic. But I was making a serious point about the United States having a very “progressive” fiscal system. The top-20 percent basically pay for government and those in the bottom half are net recipients of that involuntary largesse.

I also pointed out a huge difference between the United States and Europe. Governments on the other side of the Atlantic impose much higher burdens on lower-income and middle-class taxpayers.

Here’s some of what I wrote.

…the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue). The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers. Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly higher than in the United States.

So do this mean European politician don’t like ordinary people?

I could make a snarky comment about the attitudes of the political elite, but I’ll resist that temptation and instead point out that taxes in Europe are much higher for the simple reason that government is much bigger and that means some segment of the population has to surrender more of its income.

But here’s the $64,000 question that we want to investigate today: Why are European governments pillaging lower-income and middle-class taxpayers instead of going after the “evil rich” and “greedy corporations”?

Part of the answer is that there aren’t enough rich people to finance big government. But the most important factor is the Laffer Curve. Politicians can impose higher tax rates on upper-income taxpayers and companies, but that doesn’t necessarily translate into higher revenue. Simply stated, well-to-do taxpayers have considerable ability to earn less income and/or report less income when tax burdens increase, and they do the opposite when tax burdens decrease.

That’s true in the United States, and it’s true in European countries such as Sweden, France, Russia, Denmark, and the United Kingdom.

So even if politicians want to fleece upper-income taxpayers, that’s not a successful method of generating a lot of revenue.

Which is why a shift from a medium-sized welfare state (such as what exists in the United States) to a large-sized welfare state (common in Europe) means huge tax increases on ordinary taxpayers.

I’ve made this point before, but now I have some additional evidence thanks to a new report from the Organization for Economic Cooperation and Development. The Paris-based bureaucracy is probably my least-favorite international organization because of its advocacy for statism, but it collects and publishes lots of useful statistics about fiscal policy in the industrialized world.

And here are three charts from the new study that tell a very persuasive story (and a depressing story for ordinary taxpayers).

First, we can see how the average tax burden has increased substantially over the past 50 years.

And who is paying all that additional money to politicians?

As you can see from this second chart, income tax revenues have become a less-important source of revenue over time while social insurance taxes (mostly paid by lower-income and middle-class taxpayers) have become a more-important source of revenue.

The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time (and if we looked just at European governments that are part of the OECD, the numbers are even more depressing).

Now let’s put this data in context.

The United States now has a medium-sized welfare state financed mostly by upper-income taxpayers.

But because of dramatic demographic changes, we are doomed to have a large-sized welfare state. At least that’s what will happen if we don’t reform entitlement programs.

And if we leave policy on auto-pilot and there’s a substantial increase in the burden of government spending, it’s simply a matter of time before politicians figure out new ways of taking more money from lower-income and middle-class taxpayers.

Yes, they may also impose higher rates on “rich” taxpayers, but that will be mostly for symbolic purposes since those levies won’t generate substantial revenue.

Last but not least, don’t forget that European fiscal burdens will mean anemic European economic performance.

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Most economic policy debates are predictable. Folks on the left urge higher taxes and bigger government while folks on the right advocate lower taxes and smaller government (thanks to “public choice” incentives, many supposedly pro-market politicians don’t follow through on those principles once they’re in office, but that’s a separate issue).

The normal dividing line between right and left disappears, however, when looking at whether the welfare state should be replaced by a “universal basic income” that would provide money to every legal resident of a nation.

There are some compelling arguments in favor of such an idea. Some leftists like the notion of income security for everybody. Some on the right like the fact that there would be no need for massive bureaucracies to oversee the dozens of income redistribution programs that currently exist. And since everyone automatically would get a check, regardless of income, lower-income people seeking a better life no longer would face very high implicit tax rates as they replaced handouts with income.

But there are plenty of libertarians and small-government conservatives who are skeptical. I’m in this group because of my concern that the net result would be bigger government and I don’t trust that the rest of the welfare state would be abolished. Moreover, I worry that universal handouts would erode the work ethic and exacerbate the dependency problem.

And I have an ally of the other side of the ideological spectrum.

Former Vice President Joe Biden…will push back against “Universal Basic Income,”… UBI is a check to every American adult, but Biden thinks that it’s the job that is important, not just the income. In a blog post…timed to the launch of the Joe Biden Institute at the University of Delaware, Biden will quote his father telling him how a job is “about your dignity. It’s about your self-respect. It’s about your place in your community.”

I often don’t agree with Biden, but he’s right on this issue.

Having a job, earning a paycheck, and being self-sufficient are valuable forms of societal or cultural capital.

By contrast, a nation that trades the work ethic for universal handouts is taking a very risky gamble.

Let’s look at what’s been written on this topic.

In an article for the Week, Damon Linker explores the importance of work and the downside of dependency.

…a UBI would not address (and would actually intensify) the worst consequences of joblessness, which are not economic but rather psychological or spiritual. …a person who falls out of the workforce permanently will be prone to depression and other forms of psychological and spiritual degradation. When we say that an employee “earns a living,” it’s not merely a synonym for “receives a regular lump sum of money.” The element of deserving (“earns”) is crucial. …a job can be and often is a significant (even the primary) source of a person’s sense of self-worth. …A job gives a person purpose, a reason to get up in the morning, to engage with the world and interact with fellow citizens in a common endeavor, however modest. And at the end of the week or the month, there’s the satisfaction of having earned, through one’s own efforts, the income that will enable oneself and one’s family to continue to survive and hopefully even thrive.

Dan Nidess, in a column for the Wall Street Journal, opines about the downsides of universal handouts.

At the heart of a functioning democratic society is a social contract built on the independence and equality of individuals. Casually accepting the mass unemployment of a large part of the country and viewing those people as burdens would undermine this social contract, as millions of Americans become dependent on the government and the taxpaying elite. It would also create a structural division of society that would destroy any pretense of equality. …UBI would also weaken American democracy. How long before the well-educated, technocratic elites come to believe the unemployed underclass should no longer have the right to vote? Will the “useless class” react with gratitude for the handout and admiration for the increasingly divergent culture and values of the “productive class”? If Donald Trump’s election, and the elites’ reactions, are any indication, the opposite is likelier. …In the same Harvard commencement speech in which Mr. Zuckerberg called for a basic income, he also spent significant time talking about the need for purpose. But purpose can’t be manufactured, nor can it be given out alongside a government subsidy. It comes from having deep-seated responsibility—to yourself, your family and society as a whole.

An article in the American Interest echoes this point.

…work, for most people, isn’t just a means of making money—it is a source of dignity and meaning and a central part of the social compact. Simply opting for accelerated creative destruction while deliberately warehousing the part of the population that cannot participate might work as a theoretical exercise, but it does not mesh with the wants and desires and aspirations of human beings. Communities subsisting on UBIs will not be happy or healthy; the spectacle of free public redistribution without any work requirement will breed resentment and distrust.

Writing for National Review, Oren Cass discusses some negative implications of a basic income.

…even if it could work, it should be rejected on principle. A UBI would redefine the relationship between individuals, families, communities, and the state by giving government the role of provider. It would make work optional and render self-reliance moot. An underclass dependent on government handouts would no longer be one of society’s greatest challenges but instead would be recast as one of its proudest achievements. Universal basic income is a logical successor to the worst public policies and social movements of the past 50 years. These have taken hold not just through massive government spending but through fundamental cultural changes that have absolved people of responsibility for themselves and one another, supported destructive conduct while discouraging work, and thereby eroded the foundational institutions of family and community that give shape to society. …Those who work to provide for themselves and their families know they are playing a critical and worthwhile role, which imbues the work with meaning no matter how unfulfilling the particular task may be. As the term “breadwinner” suggests, the abstractions of a market economy do not obscure the way essentials are earned. A UBI would undermine all this: Work by definition would become optional, and consumption would become an entitlement disconnected from production. Stripped of its essential role as the way to earn a living, work would instead be an activity one engaged in by choice, for enjoyment, or to afford nicer things. …Work gives not only meaning but also structure and stability to life. It provides both socialization and a source of social capital. It helps establish for the next generation virtues such as responsibility, perseverance, and industriousness. …there is simply no substitute for stepping onto the first rung. A UBI might provide the same income as such a job, but it can offer none of the experience, skills, or socialization.

Tyler Cowen expresses reservations in his Bloomberg column.

I used to think that it might be a good idea for the federal government to guarantee everyone a universal basic income, to combat income inequality, slow wage growth, advancing automation and fragmented welfare programs. Now I’m more skeptical. …I see merit in tying welfare to work as a symbolic commitment to certain American ideals. It’s as if we are putting up a big sign saying, “America is about coming here to work and get ahead!” Over time, that changes the mix of immigrants the U.S. attracts and shapes the culture for the better. I wonder whether this cultural and symbolic commitment to work might do greater humanitarian good than a transfer policy that is on the surface more generous. …It’s fair to ask whether a universal income guarantee would be affordable, but my doubts run deeper than that. If two able-bodied people live next door to each other, and one works and the other chooses to live off universal basic income checks, albeit at a lower standard of living, I wonder if this disparity can last. One neighbor feels like she is paying for the other, and indeed she is.

In a piece for the City Journal, Aaron Renn also comments on the impact of a basic income on national character. He starts by observing that guaranteed incomes haven’t produced good outcomes for Indian tribes.

…consider the poor results from annual per-capita payments of casino revenues to American Indian tribes (not discussed in the book). Some tribes enjoy a very high “basic income”—sometimes as high as $100,000 per year— in the form of these payments. But as the Economist reports, “as payment grows more Native Americans have stopped working and fallen into a drug and alcohol abuse lifestyle that has carried them back into poverty.”

And he fears the results would be equally bad for the overall population.

Another major problem with the basic-income thesis is that its intrinsic vision of society is morally problematic, even perverse: individuals are entitled to a share of social prosperity but have no obligation to contribute anything to it. In the authors’ vision, it is perfectly acceptable for able-bodied young men to collect a perpetual income while living in mom’s basement or a small apartment and doing nothing but play video games and watch Internet porn.

Jared Dillian also looks at the issue of idleness in a column for Bloomberg.

I do not like the idea of a universal basic income. Its advocates fundamentally misunderstand human nature. What they do not realize about human beings is that for the vast majority of them, a subsistence level of income is enough — and those advocates are blind to the corrosive effects that widespread idleness would have on society. If you give people money for doing nothing, they will probably do nothing. …A huge controlled experiment on basic income has already been run — in Saudi Arabia, where most of the population enjoys the dividends of the country’s oil wealth. Saudi Arabia has found that idleness leads to more political extremism, not less. We have a smaller version of that controlled experiment here in the U.S. — for example, the able-bodied workers who have obtained Social Security Disability Insurance payments and are willing to stay at home for a piddling amount of money. …the overarching principle is that people need work that is worthwhile, for practical and psychological reasons. If we hand out cash to anyone who can fog a mirror, I figure we are about two generations away from revolution.

By the way, it’s not just American Indians and Saudi Arabians that are getting bad results with universal handouts.

Finland has been conducting an experiment and the early results don’t look promising.

The bottom line is that our current welfare system is a dysfunctional mess. It’s bad for taxpayers and recipients.

Replacing it with a basic income probably would make the system simpler, but at a potentially very high cost in terms of cultural capital.

That’s why I view federalism as a much better approach. Get Washington out of the redistribution racket and allow states to compete and innovate as they find ways to help the less fortunate without trapping them in dependency.

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Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics. Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

I’m always stunned when sentient adults make this kind of statement.

Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

Jeff Jacoby explains why this is poisonous economic analysis.

Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

By the way, I don’t think any Keynesians actually want disasters to happen.

They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

But let’s not get sidetracked.

For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

…Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

I’ll close by augmenting theory and academic analysis with some real-world observations. Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

Though they always have an excuse. The government should have spent more, they tell us.

P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Back in 2015, I mocked Venezuelan socialism because it led to shortages of just about every product. Including toilet paper.

But maybe that doesn’t matter. After all, if people don’t have anything to eat, they probably don’t have much need to visit the bathroom.

The Washington Post reports that farmers are producing less and less food because of government intervention, even though the nation is filled with hungry people.

Venezuela, whose economy operates on its own special plane of dysfunction. At a time of empty supermarkets and spreading hunger, the country’s farms are producing less and less, not more, making the caloric deficit even worse. Drive around the countryside outside the capital, Caracas, and there’s everything a farmer needs: fertile land, water, sunshine and gasoline at 4 cents a gallon, cheapest in the world. Yet somehow families here are just as scrawny-looking as the city-dwelling Venezuelans waiting in bread lines or picking through garbage for scraps. …“Last year I had 200,000 hens,” said Saulo Escobar, who runs a poultry and hog farm here in the state of Aragua, an hour outside Caracas. “Now I have 70,000.” Several of his cavernous henhouses sit empty because, Escobar said, he can’t afford to buy more chicks or feed. Government price controls have made his business unprofitable…the country is facing a dietary calamity. With medicines scarce and malnutrition cases soaring, more than 11,000 babies died last year, sending the infant mortality rate up 30 percent, according to Venezuela’s Health Ministry. …Child hunger in parts of Venezuela is a “humanitarian crisis,” according to a new report by the Catholic relief organization Caritas, which found 11.4 percent of children under age 5 suffering from moderate to severe malnutrition… In a recent survey of 6,500 Venezuelan families by the country’s leading universities, three-quarters of adults said they lost weight in 2016 — an average of 19 pounds. This collective emaciation is referred to dryly here as “the Maduro diet,” but it’s a level of hunger almost unheard-of… Venezuela’s disaster is man-made, economists point out — the result of farm nationalizations, currency distortions and a government takeover of food distribution. …The price controls have become a powerful disincentive in rural Venezuela. “There are no profits, so we produce at a loss,” said one dairy farmer.

Here’s where we get to the economics lesson. When producers aren’t allowed to profit, they don’t produce.

And when we’re looking at the production of food, that means hungry people.

Even the left-wing Guardian in the U.K. has noticed.

Hunger is gnawing at Venezuela, where a government that claims to rule for the poorest has left most of its 31 million people short of food, many desperately so. …Adriana Velásquez gets ready for work, heading out into an uncertain darkness as she has done since hunger forced her into the only job she could find at 14. She was introduced to her brothel madam by a friend more than two years ago after her mother, a single parent, was fired and the two ran out of food. “It was really hard, but we were going to bed without eating,” said the teenager, whose name has been changed to protect her. …Venezuela’s crisis has deepened, the number of women working at the brothel has doubled, and their ages have dropped. “I was the youngest when I started. Now there are girls who are 12 or 13. Almost all of us are there because of the crisis, because of hunger.” She earns 400,000 bolivares a month, around four times the minimum wage, but at a time of hyperinflation that is now worth about $30, barely enough to feed herself, her mother and a new baby brother.

This is truly sad.

Our leftist friends like to concoct far-fetched theories of how prostitution is enabled by everything from low taxes to global warming.

In the real world, however, socialism drives teenage girls (or even younger) to work in brothels.

That’s such a depressing thought that let’s shift the topic back to hunger and toilet paper.

Especially since Venezuela’s dictator is bragging that the nation’s toilet paper shortage has been solved!

This is definitely a dark version of satire.

But Venezuela is such a mess that it’s hard to know where to draw the line between mockery and reality.

For instance, here’s another “benefit” of limited food. If you don’t eat, it’s not as necessary to brush your teeth.

And is the socialist paradise of Venezuela, that makes a virtue out of necessity since – surprise – there’s a shortage of toothpaste.

The Washington Post has the grim details.

Ana Margarita Rangel…spends everything she earns to fend off hunger. Her shoes are tattered and torn, but she cannot afford new ones. A tube of toothpaste costs half a week’s wages. “I’ve always loved brushing my teeth before going to sleep. I mean, that’s the rule, right?” said Rangel, …“Now I have to choose,” she said. “So I do it only in the mornings.” …The government sets price caps on some basic food items, such as pasta, rice and flour. …those items can usually be obtained only by standing in lines for hours or by signing up to receive a subsidized monthly grocery box from the government… Since 2014, the proportion of Venezuelan families in poverty has soared from 48 percent to 82 percent… Fifty-two percent of families live in extreme poverty, according to the survey, and about 31 percent survive on two meals per day at most.

Isn’t socialism wonderful! You have the luxury of choosing between two meals a day, or one meal a day plus toothpaste!

By the way, the central planners have a plan.

Though it won’t make Bugs Bunny happy.

Rabbit is now on the menu! Here are some excerpts from a CNN report.

Let them eat rabbits. That was basically the message from President Nicolas Maduro to Venezuelans starving and struggling through severe food shortages… The Venezuelan leaders…recommend that people raise rabbits at home as a source of food. …The agriculture minister argued that rabbits easily reproduce and are a source of protein. He also recommended citizens consider raising and growing other animals and vegetables at home. It’s just the latest attempt to try and solve the food shortage problem. The government forces citizens to pick up groceries on certain days of the week depending on social security numbers.

Gee, isn’t this wonderful. The government cripples markets so they can’t function and then advocates people live like medieval peasants.

Maybe there should be price controls on clothing, along with having the government in charge of distribution. That will wreck that market as well, so people can make their own clothes out of rabbit pelts.

I wonder whether a certain American lawmaker is rethinking his praise of Venezuelan economic policy?

Based on what he said as recently as last year, the answer is no.

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