But some topics are so grim that’s it’s not easy to laugh about them. There’s nothing funny about the horror of Venezuela, for instance, though there are examples of dark humor from that unfortunate nation.
Another topic that doesn’t lend itself to laughs is the horrid practice of civil asset forfeiture. I’ve shared many nauseating stories about how governments literally steal property from people who have not been convicted of crimes (or, in many cases, have not even been accused of any crime).
Here’s the latest absurd example, this time from Michigan.
Nearly 400 people in Wayne County who were never charged with a crime still lost property to law enforcement agencies last year through a legal procedure called civil asset forfeiture… Altogether, there were 736 asset forfeiture proceedings in Michigan in 2017 during which someone lost property to the government despite never being charged with any crime; this happened 380 times in Wayne County. …Jarrett Skorup of the Mackinac Center for Public Policy, who co-authored a recent report on civil forfeiture, said…it’s likely that these forfeitures disproportionately affected low-income individuals, who are less able to afford an attorney or navigate the legal system to reclaim their property. Revenue obtained from forfeited property typically goes to the agency that seized the property.
Yes, you read correctly. The agency that steals the property gets to keep the money, which is why the disgusting practice of civil asset forfeiture is sometimes known as “policing for profit.”
I wrote in 2010 that Keynesian economics is like the Freddy Krueger movies. It refuses to die despite powerful evidence that you don’t help an economy by increasing the burden of government. In 2014, I wrote the theory was based on “fairy dust.” And in 2015, I said Keynesianism was akin to a perpetual motion machine.
When I discuss these issues with Keynesians, they reflexively claim that Obama would have gotten good results if only he had increased spending even faster (which is also their knee-jerk response when you point out that Keynesianism didn’t work for Hoover, didn’t work for FDR, didn’t work for Japan, etc).
This is the Wizard-of-Oz part of Keynesianism. No matter how bad it works in the real world, they always claim that it theoretically could have worked if governments simply spent more.
But how do they explain away the fact that nations that adopt the right kind of austerity get better results?
Professor Edmund Phelps of Columbia University won the Nobel Prize in economics in 2006. Here’s some of what he wrote today for the Wall Street Journal, starting with a description of the debate.
Generations of Keynesian economists have claimed that when a loss of “demand” causes output to fall and unemployment to rise, the economy does not revive by itself. Instead a “stimulus” to demand is necessary and sufficient to pull the economy back to an equilibrium level of activity. …it is widely thought that fiscal stimulus—increased public spending as well as tax cuts—helped pull employment from its depths in 2010 or so back to normal in 2017. …But is there evidence that stimulus was behind America’s recovery—or, for that matter, the recoveries in Germany, Switzerland, Sweden, Britain and Ireland? And is there evidence that the absence of stimulus—a tight rein on public spending known as “fiscal austerity”—is to blame for the lack of a full recovery in Portugal, Italy, France and Spain?
So he looked at the real-world evidence and discovered that Keynesian policy is correlated with worse outcomes.
The stimulus story suggests that, in the years after they hit bottom, the countries that adopted relatively large fiscal deficits—measured by the average increase in public debt from 2011-17 as a percentage of gross domestic product—would have a relatively speedy recovery to show for it. Did they? As the accompanying chart shows, the evidence does not support the stimulus story. Big deficits did not speed up recoveries. In fact, the relationship is negative, suggesting fiscal profligacy led to contraction and fiscal responsibility would have been better. …what about monetary stimulus—increasing the supply of money or reducing the cost of money in relation to the return on capital? We can perform a similar test: Did countries where monetary stimulus in the years after they hit bottom was relatively strong—measured by the average quantity of monetary assets purchased by the central bank from 2011-17—have relatively speedy recoveries? This is a complicated question, but preliminary explorations do not give strong support to that thesis either. …the Keynesian tool kit of fiscal and monetary stimulus is more or less ineffective.
Here’s the chart showing how so-called fiscal stimulus is not associated with economic recovery.
Don’t history and theory overwhelmingly support stimulus? Well, no. First, the history: Soldiers returning from World War II expanded the civilian labor force from 53.9 million in 1945 to 60.2 million in 1947, leading many economists to fear an unemployment crisis. Keynesians—Leon Keyserling for one—said running a peacetime fiscal deficit was needed to keep unemployment from rising. Yet as the government under President Harry S. Truman ran fiscal surpluses, the unemployment rate went down (from 3.9% in 1946 to 3.1% in 1952) and the labor-force participation rate went up (from 57.2% to 58.9%).
It’s also worth remembering that something similar happened after World War I.
Like any sensible person, I want victimless crimes to be legalized. In part because I believe in freedom, but also for utilitarian reasons.
I don’t approve of drugs and I’ve never used drugs, but I think the social harm of prohibition is greater than the social harm of legalization.
I don’t particularly like alcohol and I am almost a teetotaler, but I’m glad there’s now a consensus that the social harm of prohibition was greater than the social harm of legalization.
I don’t approve of prostitution and I’ve never consorted with a prostitute (other than the political ones in DC), but I think the social harm of prohibition is greater than the social harm of legalization.
But that definitely doesn’t mean I want government to be in charge, which is why I’m not a fan of state-sponsored lotteries.
Joe Setyon, in a column for Reason, points out that politicians are the only group that actually benefits from these schemes.
At some point in the near future, the record-high Mega Millions jackpot is going to make someone very, very rich. But as is usually the case when it comes to the lottery, the biggest winner will be the government. …there are a few things us suckers need to keep in mind about the lotto. First, the majority of lottery revenue goes back to the government. In 2015, The Atlantic estimated that 40 percent of all lottery ticket sales are allocated to state governments. …Meanwhile, some states that allow lotteries crush their competition with strict gambling regulations. In Texas, for instance, most forms of gambling are illegal. This means the government has a near-monopoly. The double standard for public and private gambling operations is obvious. Ultimately, the lottery system is a kind of regressive tax on low-income earners. “If the promised return is by far illusory—and it is—it would be hard to argue that those purchases do not constitute a tax on those who believe the state’s hype,” Fiscal Policy Institute research associate Brent Kramer wrote in 2010.
And here’s an article from CNBC that reveals the unpalatable tax consequences for the “lucky” people who happen to win a big prize.
…there’s at least one guaranteed recipient of a chunk of the loot — the IRS. …If you happen to beat the astronomical odds and hit all winning numbers in either game, be aware that the taxation of your prize starts before even reaching you. Whether you take your haul as a lump sum or as an annuity spread out over three decades, your win is reduced by a 24 percent federal tax withholding… The immediate cash option for Mega Millions is $904 million. The federal withholding would reduce that by $217 million. For the $354.3 million Powerball lump sum, it would mean $85 million getting shaved off the top. …However, that’s just the start of what you’d owe. The top income tax rate for individuals is 37 percent… That rate applies to adjusted gross income of $500,000 or more. In other words, hitting either jackpot would mean facing that top rate. …On top of the federal withholding, you’ll owe state taxes on the money unless you live where lottery wins are untaxed. …Translation: You might pay north of 45 percent altogether in taxes, depending on where you purchased the ticket and where you live.
In other words, the government pillages people when they buy tickets.
And then the government pillages the tiny fraction of people who actually win something.
As I wrote above, the only real winners are politicians.
The biggest losers, by the way, are poor people.
Arthur Brooks of the American Enterprise Institute summed up this sad state of affairs in a column for the Wall Street Journal.
Powerball—the lottery shared by 44 states, the District of Columbia and two territories—is just one of the sweepstakes run by 47 jurisdictions in the U.S. These games produce nearly $70 billion a year in government revenue and enjoy profits of about 33%—much higher than margins in the private gambling industry. Who are these lotteries’ most loyal customers? Poor people. …the poorest third of Americans buy more than half of all lotto tickets… Scholars have dug up evidence that states intentionally direct such ads at vulnerable citizens. A marketing plan for Ohio’s lottery some years back recommended scheduling campaigns to coincide with the distribution of “government benefits, payroll and Social Security payments.” …the average return from $1 spent on lottery tickets is 52 cents… After a state introduces the lotto, the bottom third of households shift about 3% of their food expenditures and 7% of their mortgage payments, rent and other bills. Effectively, the lottery works like a regressive tax. …Is there any set of policies more contradictory than pushing lotto tickets on poor people, and then signing them up for welfare programs that make them financially dependent on the government?
Here’s some additional analysis from the Wall Street Journal, this time from Holman Jenkins.
Gambling is what economists call an “inferior good”—demand is higher among those at the lower end of the income scale. As economist Sam Papenfuss argued in a 1998 paper, state-sponsored gambling became popular as a way for high-income taxpayers to recoup some of the money spent on programs for the poor. State-sponsored gambling in the form of lotteries (now in 44 states) arrived on the same antitax wave that gave us property-tax caps and other antitax measures in the 1970s and ’80s. It should not surprise anyone that Democrats, as big supporters of the welfare state, have been the biggest supporters (though by no means exclusively so) of gambling as a way to finance it.
Last but not least, here are excerpts from a column I wrote for the Washington Times more than 20 years ago.
…government-run lotteries represent bad public policy. The No. 1 objection is that they lead to more government spending. …Perhaps even more disturbing, government lotteries victimize the poor. More than any other group, lower-income residents are the ones who play the lottery, often shelling out hundreds of dollars each year in the hope of striking it rich. Yet these are precisely the people who should avoid lotteries. As an investment, lotteries are lousy, paying out only about half of what they take in. …why should state governments be running lotteries? If nothing else, lotteries show how much better consumers are treated by the free market system. Private gambling operations pay out about 90 cents for every dollar wagered (even higher for games such as blackjack), a far better deal than the miserly return provided by government-run lotteries. …This analysis applies to illegal gambling as well. Bookies traditionally allow customers to bet against the point spread for sporting events, and they make their money by applying a 10 percent charge on the money wagered by those who make losing bets.
Two decades later and I wouldn’t change a single thing I wrote.
And lotteries definitely belong on that list as well.
I’m not a paternalist. I support legal gambling and I don’t want to prohibit poor people from making (what I think) are misguided decisions.
But at least leave the gambling to the private sector so poor people will get back, on average, 90 cents of every dollar they bet.
P.S. I just had a horrifying thought. What if politicians decided to legalize prostitution because they wanted more revenue. But instead of legalizing and taxing (like they do – often to excess – with marijuana), what if they followed the lottery approach and we wound up with government-run brothels?!?
Let’s consider the case of Greece. I’ve written many times about the debilitating impact of high tax rates and wasteful spending in that nation. It has the least economic freedom of all nations in Western Europe, so it’s no surprise that it is falling further behind.
But sometimes a compelling example is the best way of helping people understand the harmful impact of big government.
We were on Filis Street — a warren of alleyways and dingy two-story houses — which has been home to Athenian brothels for most of the past century. The trade is more desperate now because of Greece’s lost decade since the 2008 financial crisis, which has left no profession unscathed. The collapsed economy and the arrival of tens of thousands of migrants have pushed even more women into prostitution — even as prices have fallen through the floor. …“I had a flower shop for 18 years — and now I’m here out of necessity, not out of joy,” said Dimitra, a middle-aged woman who lost her shop in the crisis and now works as a madam…the number of prostitutes in the city had increased by 7 percent since 2012, yet prices have dropped drastically, both for women working on the streets and in brothels. “In 2012, it would require an average of 39 euros” for a client to hire a prostitute in a brothel, Mr. Lazos said, “while in 2017 just €17 — a 56 percent decrease.”
The saddest part of the story is the commentary of the prostitutes.
“I hate sex,” Elena said. “I like the money, not the job.” Anastasia…has worked as a prostitute since she was 14. She’s now 33, and says the work is harder than ever. “People don’t have money anymore,” she said… Monica, a 30-year-old Albanian prostitute…spends six to eight hours a day trying to entice clients, but most do not stay. “They don’t have money,” she said. “They haven’t had money for the past seven years.” …Many Greek men are simply too poor to pay anymore.
I support legal prostitution, in part because the alternative of pushing these unfortunate women even further into the underground economy would be worse.
But that doesn’t change the fact that these women don’t have good lives. And the misery of democratic socialism in Greece is making their lives even sadder.
The bottom line is that I now have three awful anecdotes from Greece to help illustrate the wretched impact of big government. In addition to the price-cutting prostitutes we discussed today, let’s not forget that Greece subsidizes pedophiles and requires stool samples to set up online companies.
Needless to say, I hope we never go that far in the wrong direction.
The moral of the story is that socialism (however defined) has never worked in any form at any time in history.
Grasping and greedy governments also have an impact on football. Especially if teams play in Europe.
…the Los Angeles Chargers and Tennessee Titans traveled across the Atlantic to play a game in London’s Wembley Stadium. …Players spoke of the burdens of traveling so far to play a game, especially the team from California that had to cross eight time zones. Players also spoke out about the tax nightmare they faced when they got to the UK. …players talked ahead of time to their CPAs to determine the tax hit they’d take for the privilege of such a long road trip… Great Britain…levies high taxes on athletes who visit for an athletic match. Teams from California — the Raiders, Chargers, and Rams — already face the highest state income tax in the nation with a top rate of 13.3 percent. Of course, players also have to pay federal income tax. …To top it all off, those players who receive one of their 16 paychecks in London pay a 45 percent tax on a prorated amount based on the number of days they spend in the country. Bottom line: Players on California teams could end up paying 60 percent or more in income taxes for that game check. …For non-resident foreign athletes, HM Revenue and Customs (HMRC) reserves the right to tax not only the income they earn from competing in the match but a portion of any endorsement money they earn worldwide.
And what about the NFL players, who got hit with a 60 percent tax rate for one game?
Those players are lucky they’re not Cam Newton, who paid a 198.8 percent tax for playing in the 2016 Super Bowl.
Last year’s tax bill also impacts professional football in a negative way. The IRS has decided that sports teams don’t count as “pass-through” businesses, as noted by Accounting Today.
Two major sports franchises might soon be on the auction block following Microsoft Corp. co-founder Paul Allen’s death last week. But a recent Internal Revenue Service rule could cut the teams’ sales prices. Allen died with no heirs and a $26 billion estate, including the National Football League’s Seattle Seahawks… The teams together are worth more than $3 billion, according to the Bloomberg Billionaires Index. …the IRS said in August that team owners would be barred from the write-off — one of the biggest benefits in the law — that allows owners of pass-through entities such as partnerships and limited liability companies to deduct as much as 20 percent of their taxable income. …Arthur Hazlitt, a tax partner at O’Melveny & Myers LLP in New York who provided the tax structure and planning advice for hedge fund manager David Tepper’s acquisition of the Carolina Panthers, estimates the IRS rules could spur potential bidders to offer at least tens of millions of dollars less.
Gee, what a surprise. Higher tax burdens lower the value of income-producing assets.
Let’s close with a report from Bloomberg about some new research about the impact of taxes on team performance.
The 2017 law could put teams in states with high personal income tax rates at a disadvantage when negotiating with free agents thanks to new limits on deductions, including for state and local taxes, according to tax economist Matthias Petutschnig of the Vienna University of Economics and Business. Petutschnig’s research into team performance over more than two decades shows that National Football League franchises based in high-tax states lost more games on average during the regular season compared to teams in low or no-tax states. That’s because of the NFL’s salary cap for teams, according to Petutschnig; if they have to give certain players more money to compensate for higher taxes, it reduces how much they pay other players and lowers the team’s overall talent level. “The new tax law exacerbates my findings and makes it harder for high-tax teams to put together a high-quality roster,” Petutschnig said.
Here’s a chart from the article.
And here are more details.
A player for the Miami Dolphins or Houston Texans, where no state income taxes are levied, “was always going to come out a whole lot better than somebody playing in New York,” said Jerome Glickman, a director at accounting firm Friedman LLP who works with professional athletes. “Now, it’s worse.” …a free agent considering a California team compared to a team in Texas or Florida would need to make 10 percent to 12 percent more to compensate for his state tax bill, said NFL agent Joe Linta… the Raiders — who will eventually move to Las Vegas in no-tax Nevada — have often made the case that unequal tax rates create an uneven playing field. Quarterback Jimmy Garoppolo’s five-year $137.5 million contract with the San Francisco 49ers will mean an additional $3 million tax bill under the new tax law… Garoppolo would have saved $2 million in taxes under the new code had he instead signed with the Denver Broncos in lower-tax Colorado.
P.S. I think nations have the right to tax income earned inside their borders, so I’m not theoretically opposed to the U.K. taxing athletes who earn income on British soil. But I don’t favor punitive rates. And I don’t think the IRS should add injury to injury by then taxing the same income. That lesson even applies to royalty.
I’m in Victoria, British Columbia today to talk about trade with some young Canadians.
In doing some research about how to present the best case for free trade and against protectionism, I found some excellent commentary on why trade deficits don’t matter.
Here are some excerpts from a column by Don Boudreaux, a professor at George Mason University.
…the president’s trade policies are dreadful; they’ll reduce U.S. economic growth and diminish Americans’ spending power. …No myth about trade is more widespread than is the belief that imports reduce domestic employment. …trade is a two-way street. Non-Americans sell stuff to Americans only to acquire the dollars needed buy American exports and to invest in the U.S. — and each of these activities creates other particular jobs in America to offset those that are destroyed. …The reason trade deficits don’t reduce overall employment is that, in fact, trade deficits are not really deficits at all. Every cent that does not return to the U.S. as demand for American exports returns instead as investment in America. In economists’ lingo: the trade deficit (or, to be precise, the current-account deficit) is matched by a capital-account surplus of equal size. …Why should we be upset if foreigners continue to think highly enough of our economy to want to invest here?
And here’s some of what Greg Mankiw of Harvard wrote for the New York Times.
…the president’s overall approach to international trade is so confused. …When Mr. Trump discusses our trade relations with another nation, he often points to the bilateral trade balance — the difference between the value of our exports to that nation and the value of our imports from it. If imports exceed exports, we are running a bilateral trade deficit, which Mr. Trump interprets as a sign that we are the relationship’s losers. …consider some of the many bilateral trade deficits that I run. Whenever my family goes out to dinner, the restaurateur gets some money, and we get a meal. In economics parlance, the Mankiw family runs a trade deficit with that restaurant. But that doesn’t make us losers. …I can run persistent trade deficits with restaurants because I run trade surpluses elsewhere. Take The New York Times, for instance. It pays me more for my columns than I pay it for my subscription. That’s a bilateral trade surplus for me and a bilateral trade deficit for The Times. But nonetheless, we both gain.
I tried to incorporate these insights into my presentation, which has more than 30 slides.
Here are the ones that deal with the trade deficit, starting with some elementary observations.
I then pointed out that all of us have trade deficits in our daily lives.
Yet we understand this doesn’t hurt us.
Using trade with China as an example, I explain that money we send overseas only has value because foreigners can use it to purchase things in America.
Including investments.
And I recycled this chart from a column back in March.
For what it’s worth, understanding that a trade deficit is merely the flip side of a financial surplus is the key to recognizing that trade deficits (generally) don’t matter.
I’ll close with an important caveat.
I’m a big fan of foreign investment in the U.S. economy. Indeed, it’s one of the reasons why I’m happy America is a tax haven for citizens of other countries.
That being said, not all inbound investment is created equal. I’m delighted when foreigners buy stock and bond. I’m very happy when they make direct investments (one of the reasons I like the EB-5 visa program).
It’s not good news for our economy, though, when foreigners buy government bonds. But that’s the fault of our ever-expanding welfare state, not trade.
I’ve always assumed that the country would suffer a full-blown fiscal crisis when the next recession occurs. At that point, tax receipts will fall because of the weak economy and investors will realize that the nation no longer is able to pay its bills.
But it may happen even sooner thanks to a spat between Italy’s left-populist government and the apparatchiks at the European Commission.
Here’s what you need to know. There are (poorly designed) European budget rules, known as the Maastricht Criteria, that supposedly require that nations limit deficits to 3 percent of GDP and debt to 60 percent of GDP.
With cumulative red ink totaling more than 130 percent of GDP, Italy obviously fails the latter requirement. And this means the bureaucrats at the European Commission can veto a budget that doesn’t strive to lower debt levels.
At least that’s the theory.
In reality, the European Commission doesn’t have much direct enforcement power. So if the Italian government tells the bureaucrats in Brussels to go jump in a lake, you wind up with a standoff. As the New York Timesreports, that’s exactly what’s happened.
In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge on Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks. …the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse. But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt.
Repeating the failures of the New Deal?!? That doesn’t sound like a smart plan.
That seems well understood, at least outside of Italy.
The question for Italy, and all of Europe, is how far Italy’s government is willing to go. Will it be forced into submission by the gravity of economic reality? Or will Italian leaders convince their voters that the country’s financial health is worth risking in order to blow up a political and economic establishment that they say is stripping Italians of their sovereignty? And Brussels must decide how strict it will be. …the major pressure on Italy’s budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody’s dropped its rating for Italian bonds to one level above “junk” last week.
So now that Brussels has rejected the Italian budget plan, where do things go from here?
According to CNBC, the European Commission will launch an “Excessive Deficit Procedure” against Italy.
…a three-week negotiation period follows in which a potential agreement could be found on how to lower the deficit (essentially, Italy would have to re-submit an amended draft budget). If that’s not reached, punitive action could be taken against Italy. Lorenzo Codogno, founder and chief economist at LC Macro Advisors, told CNBC…“it’s very likely that the Commission will, without making a big fuss, will move towards making an ‘Excessive Deficit Procedure’…to put additional pressure on Italy…” Although it has the power to sanction governments whose budgets don’t comply with the EU’s fiscal rules (and has threatened to do so in the past), it has stopped short of issuing fines to other member states before. …launching one could increase the already significant antipathy between Brussels and a vociferously euroskeptic government in Italy. Against a backdrop of Brexit and rising populism, the Commission could be wary of antagonizing Italy, the third largest euro zone economy. It could also be wary of financial market nerves surrounding Italy from spreading to its neighbors… Financial markets continue to be rattled over Italy’s political plans. …This essentially means that investors grew more cautious over lending money to the Italian government.
For those who read carefully, you probably noticed that the European Commission doesn’t have any real power. As such, there’s no reason to think this standoff will end.
The populists in Rome almost certainly will move forward with their profligate budget. Bureaucrats in Brussels will complain, but to no avail.
Since I’m a nice guy, I’m going to give the bureaucrats in Brussels a much better approach. Here’s the three-sentence announcement they should make.
The European Commission recognizes that it was a mistake to centralize power in Brussels and henceforth will play no role is overseeing fiscal policy in member nations.
The European Commission (and, more importantly, the European Central Bank) henceforth will have a no-bailout policy for national governments, or for those who lend to national governments.
The European Commission henceforth advises investors to be appropriately prudent when deciding whether to lend money to any government, including the Italian government.
From an economic perspective, this is a far superior approach, mostly because it begins to unwind the “moral hazard“that undermines sound financial decision making in Europe.
To elaborate, investors can be tempted to make unwise choices if they think potential losses can be shifted to taxpayers. They see what happened with the various bailouts in Greece and that tells them it’s probably okay to continue lending money to Italy. To be sure, investors aren’t totally blind. They know there’s some risk, so the Italian government has to promise higher interest payments
But it’s highly likely that the Italian government would have to pay even higher rates if investors were convinced there would be no bailouts. Incidentally that would be a very good outcome since it would make it more costly for Italy’s politicians to continue over-spending.
In other words, a win-win situation, with less debt and more prudence (and maybe even a smaller burden of government!).
My advice seems so sensible that you’re probably wondering if there’s a catch.
There is, sort of.
When I talk to policy makers, they generally agree with everything I say, but then say my advice is impractical because Italy’s debt is so massive. They fret that a default would wipe out Italy’s banks (which imprudently have bought lots of government debt), and might even cause massive problems for banks in other nations (which, as was the case with Greece, also have foolishly purchased lots of Italian government debt).
And if banks are collapsing, that could produce major macroeconomic damage and even lead/force some nations to abandon the euro and go back to their old national currencies.
For all intents and purposes, the Greek bailout was a bank bailout. And the same would be true for an Italian bailout.
In any event, Europeans fear that bursting the “debt bubble” would be potentially catastrophic. Better to somehow browbeat the Italian government in hopes that somehow the air can slowly be released from the bubble.
With this in mind, it’s easy to understand why the bureaucrats in Brussels are pursuing their current approach.
So where do we stand?
In an ideal world, the problem will be solved because the Italian government decides to abandon its big-spending agenda and instead caps the growth of spending (as I recommended when speaking in Milan way back in 2011).
In an imperfect world, the problem is mitigated (or at least postponed) because the European Commission successfully pressures the Italian government to curtail its profligacy.
In the real world, though, I have zero faith in the first option and very little hope for the second option. Consider, for instance, the mess in Greece. For all intents and purposes, the European Commission took control of that nation’s fiscal policy almost 10 years ago. The results have not been pretty.
So this brings me back to my three-sentence prescription. Yes, it almost certainly would be messy. But it’s better to let the air out of bubbles sooner rather than later.
P.S. The so-called Basel Rules contribute to the mess in Europe by directing banks to invest in supposedly safe government debt.
P.P.P.S. Some of the people in Sardinia have the right approach. They want to secede from Italy and become part of Switzerland. The Sicilians, by contrast, have the wrong mentality.
As illustrated by this video tutorial, I’m a big advocate of the Laffer Curve.
I very much want to help policy makers understand (especially at the Joint Committee on Taxation) that there’s not a linear relationship between tax rates and tax revenue. In other words, you don’t double tax revenue by doubling tax rates.
Having worked on this issue for decades, I can state with great confidence that there are two groups that make my job difficult.
The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy.
The folks who do like pro-growth tax policy and thus claim that every tax cut will “pay for itself” because of faster growth.
Which was my message in this clip from a recent interview.
For all intents and purposes, I’m Goldilocks in the debate over the Laffer Curve. Except instead of stating that the porridge is too hot or too cold, my message is that it is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates.
In other words, some revenue feedback but not 100 percent revenue feedback.
Yes, some tax cuts do pay for themselves. But they tend to be tax cuts on people (such as investors and entrepreneurs) who have a lot of control over the timing, level, and composition of their income.
And, as I said in the interview, I think the lower corporate tax rate will have substantial supply-side effects (see here and here for evidence). This is because a business can make big changes in response to a new tax law, whereas people like you and me don’t have the same flexibility.
But I don’t want this column to be nothing but theory, so here’s a news report from Estonia on the Laffer Curve in action.
After Estonia raised its alcohol excise tax rates considerably in 2017, Estonian daily Postimees has estimated that the target of the money the alcohol excise tax would bring into state coffers could have been missed by at least EUR 40 million. …Initially, in the state budget of 2017, the ministry had been planned that proceeds from the alcohol excise tax would bring EUR 276.4 million, but last summer, it cut the forecast to EUR 237.5 million.
I guess I’ll make this story Part VII in my collection of examples designed to educate my friends on the left (here’s Part I, Part II, Part III, Part IV, Part V, and Part VI).
But there’s a much more important point I want to make.
The fact that most tax increases produce more revenue is definitely not an argument in favor of higher tax rates.
That argument is wrong in part because government already is far too large. But it’s also wrong because we should consider the health and vitality of the private sector. Here’s some of what I wrote about some academic research in 2012.
…this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue. What about capital taxation? According to the second chart, the government could increase the tax rate from about 40 percent to 70 percent before getting to the revenue-maximizing point. But that 75 percent increase in the tax rate wouldn’t generate much tax revenue, not even a 10 percent increase. So the question then becomes whether it’s good public policy to destroy a large amount of private output in exchange for a small increase in tax revenue. Once again, the loss of taxable income to the private sector would dwarf the new revenue for the political class.
The bottom line is that I don’t think it’s a good trade to reduce the private sector by any amount simply to generate more money for politicians.
It’s filled with data on fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance for 162 jurisdictions, and it provides an unbiased way of gauging the degree to which they allow economic liberty.
It also allows readers to slice and dice data, which is very helpful for doing analysis.
For instance, as illustrated by this 2×2 matrix, I claimed in 2016 that nations with small fiscal burdens aren’t necessarily pro-free market (meaning they would belong in the top-right quadrant) and countries with large fiscal burdens aren’t necessarily in favor of intervention and planning (so they would belong in the lower-left quadrant).
But that matrix was speculative.
Which is why I downloaded the EFWdataset. I then removed the fiscal policy variable and created new rankings so I could see which nations relied most on unfettered markets.
As you can see, Singapore barely edges out Hong Kong for first place in this “Laissez-Faire Index,” with New Zealand in third place. In other words, the top three nations in the overall EFW rankings stay the same, though Hong Kong and Singapore trade places (in the far-right column, I compare each nation’s rank to its EFW score for overall economic liberty).
The most dramatic results are for some of the welfare states in Northern and Western Europe. Denmark jumps 12 spots to #4 and the Netherlands soars 18 spots to #5. Other nations with big increases include Finland (up 14 spots to #8), Luxembourg (the world’s freest economy as recently as 1985, moves up 14 spots to #11), Sweden (up 30 spots to #13), Norway (up 11 spots to #14), and Belgium (up 32 spots to #20).
Looking at this list, it’s easy to understand why the combination of big government and free markets is sometimes called the “Nordic Model” (defined by Wikipedia as “a comprehensive welfare state…on the economic foundations of free market capitalism”).
And Japan could be considered an honorary member since it jumps 22 spots in the Laissez-Faire Index, up to #19.
I’ve argued that such nations compensate for the damage of high taxes and big welfare states by being very market-oriented in other ways. And the EFW data supports that assertion.
P.S. Looking at other nations in the Laissez-Faire Index, Switzerland, the United Kingdom, Ireland and Canada all remain in the top 10, though the United States falls six spots to #12. Georgia, Mauritius, Taiwan, and Lithuania all drop by double-digit amounts.
P.P.S. I did a version of the Laissez-Faire Index in 2015.
But neither is the ideal option for ordinary people who want upward mobility.
Back in 2016, I shared Census Bureau data showing that income was growing much faster for people in Texas, especially if you focus on median income (and this data doesn’t even adjust for the cost of living).
So why is Texas growing faster?
Unsurprisingly, I think part of the answer is that the burden of government is significantly greater in California.
Texas is not the freest state, but its #10 ranking is much better than California’s lowly #48 position.
If you’re wondering why Illinois isn’t at or near the bottom, keep in mind that this is a measure of overall economic freedom, not just fiscal policy.
In other words, California doesn’t just have onerous taxes and an excessive burden of government, it also has lots of red tape and intervention.
These numbers presumably help explain why Babylon Bee came up with this clever satire.
The Texas legislature has approved construction of a border wall surrounding the state in order to keep out unwanted refugees fleeing the rapidly crumbling dystopia of California. …The wall will run around the entirety of Texas, with extra security measures on the west side of the state to ensure undesirable Californian immigrants can’t make it across. …the west side will feature a 10-foot-thick concrete wall with laser turrets, barbed wire, and a moat filled with sharks to stop residents of the coastal state from slipping in undocumented and undetected. …“Far too many immigrants from California come here, take advantage of our pro-business, pro-liberty laws, and refuse to adjust to our way of life,” one Texas state rep said in an address to the assembly. “It is time for us to build a wall and make Governor Jerry Brown pay for it.”
This is the flip side of Walter Williams’ joke about California building a wall to keep taxpayers imprisoned.
But let’s return to serious analysis.
Writing for Forbes, Chuck DeVore highlights some differences between his home state and his new state.
Over the past decade, the top states by GDP growth are: North Dakota, Texas, Nebraska, Washington, and Oregon. …When using Supplemental Poverty Measure, the states with the highest poverty as averaged from 2014 to 2016, are: California (20.4%); Florida (18.8%); Louisiana (18.4%), Arizona (17.8%) and Mississippi (16.9%). The national average Supplemental Poverty rate over the last three years reported was 14.7%. Texas’ poverty rate was at the national average. …Combining two key factors, economic growth from 2007 to 2017 and the Supplemental Poverty Measure from 2014 to 2016, provides a better look at a state’s economic wellbeing.
Here’s a table from his column, which looks at growth and poverty in the nation’s five-largest states.
Texas wins for prosperity and California “wins” for poverty.
If you want more data comparing Texas and California, click here, here, and here.
P.S. Texas gets a bad score and California gets a middle-of-the-road score when looking at personal freedom, so the Lone Star State is not a libertarian paradise. If you do the same thing for international comparisons, Denmark is the world’s most libertarian nation.
Though some may consider this tragedy rather than comedy since the theme will be the potential contest between Donald Trump and Elizabeth Warren in 2020.
But some people are happy about the possible match-up. For instance, both likely candidates are a gold mine for satirists.
We’ll start with Elizabeth “Soul Woman” Warren, She claimed Indian ancestry to give herself an advantage when seeking university jobs, but this produced enough mockery that she felt compelled to get a DNA test.
Which led to some brutal mockery (h/t: Powerlineblog). Here’s the one that got the most laughs from me.
Given the choice between Trump and Hillary, it is kind of amazing that Gary Johnson did so poorly. Though the Onion has a theory about why that happened.
Makes you wonder how they will bungle (what presumably will be) an equally good opportunity in 2020.
When asked to pick the worst international bureaucracy, I generally respond as follows.
The International Monetary Fund (IMF) or Organization for Economic Cooperation and Development (OECD) should be at the top of the list. Both of those bureaucracies aggressively push statist policies designed to give governments more power over people. I have mixed feelings about which one deserves to be called the worst bureaucracy.
Next on my list are the United Nations (UN) and European Bank for Reconstruction and Development (EBRD). Many people are surprised the UN isn’t higher on the list, but I point out that the organization generally is very ineffective. Meanwhile, the EBRD is relatively unknown, but I have total disdain for its cronyist business model (basically a global version of the Export-Import Bank).
At the bottom of my list is the World Bank (WB). I don’t have knee-jerk hostility to the WB, in part because the bureaucrats historically have their hearts in the right place (reducing poverty) and even occasionally support the right policies (social security reform and regulatory relief).
Nonetheless, I was disappointed earlier this year to learn that the Trump Administration decided to give more money to the World Bank.
The Trump administration is backing a $13 billion increase in funding for the World Bank… The change…will allow the bank to increase lending to poor-country clients… The U.S. is the only country with veto power over any changes in bank structure, so funding increases cannot proceed without Washington’s support. …The shift to U.S. support for more funding at the Bank took some European governments by surprise, said Suma Chakrabarti, president of the European Bank for Reconstruction and Development, a London-based multilateral bank lending in Europe, the Middle East and North Africa. He said in an interview Thursday that the capital increase is “very good news,” since it would help efforts to reduce global poverty. …Mr. Mnuchin said he would work with Congress to secure approval for the U.S. contribution, a step that has in the past proved challenging.
Hopefully it will prove impossible rather than challenging to get approval for more funding (though I haven’t been following the issue, so maybe Republicans in Congress already have okayed an expansion).
Assuming the decision hasn’t yet been made, I have some evidence showing why the World Bank doesn’t deserve more funding.
And not merely because aid is not the route to prosperity. Consider the misguided advice that the World Bank is pushing on Romania.
The Romanian government should…consider switching the flat income tax to a progressive tax, said World Bank chief economist for Europe and Central Asia, Hans Timmer. …The World Bank representative…referred to the flat tax rate…, stating that they should think about whether this system is still appropriate. The World Bank’s advice would be to rethink the entire labor market taxation system in coordination with other countries in the region, and not just make small changes. ”We can not tell you what the solution is, but you need to analyze everything, including the single tax, and whether you’d be better off implementing a progressive tax system, meaning those who earn more pay more,” Timmer said.
This is horrible advice. The flat tax is very conducive to prosperity and Romania needs fast growth to help offset the damage caused by decades of communist enslavement.
Moreover, there are problems with corruption in Romania and the World Bank has admitted that tax complexity facilitates corruption.
Given Mr. Timmer’s misguided musings, I may need to get a new version of my cartoon about international bureaucracies. Especially since the World Bank once produced a study giving nations higher grades for having more oppressive tax systems.
If you live in Illinois or California and you’re sick and tired of high taxes and crummy government, should you have the freedom to move to a state with no income tax, such as Florida or Texas?
The answer is yes (though Walter Williams joked that leftist politicians may start putting up barbed wire fences and watch towers to keep taxpayers imprisoned).
The United States uses the EB-5 visa to attract this type of immigrant, and many other nations have similar programs.
Needless to say, politicians from uncompetitive, high-tax nations don’t like this competition for entrepreneurial talent. And neither do politicians from poorly governed nations in the developing world.
They know they’ll suffer a “brain drain” if their most productive citizens can freely move to nations with better governance.
Needless to say, they should fix their bad policies if they’re worried about people leaving.
But instead they’ve decided to attack the countries that roll out the red carpet for newcomers. And they have convinced the statists at the Organization for Economic Cooperation and Development to create a blacklist of nations with attractive “citizenship by investment” and “residence by investment” programs.
Here’s the list of countries that the OECD is condemning.
The bureaucrats at the OECD receive tax-free salaries, so it’s especially galling that one of the conditions for being on this new blacklist is if a nation offers a “low personal income tax rate.”
You may think I’m joking, but that condition is explicitly stated on the OECD site.
And the U.K.-based Guardian says something similar in its report on the OECD’s latest effort to rig global rules so governments can grab more money.
A blacklist of 21 countries whose so-called “golden passport” schemes threaten international efforts to combat tax evasion has been published by…the Organisation for Economic Cooperation and Development. The Paris-based body has raised the alarm about the fast-expanding $3bn (£2.3bn) citizenship by investment industry, which has turned nationality into a marketable commodity. …foreign nationals can become citizens of countries in which they have never lived. …concern is growing among political leaders, law enforcement and intelligence agencies that the schemes are open to abuse… After analysing residence and citizenship schemes operated by 100 countries, the OECD says it is naming those jurisdictions that attract investors by offering low personal tax rates on income from foreign financial assets, while also not requiring an individual to spend a significant amount of time in the country. …The OECD believes the ease with which the wealthiest individuals can obtain another nationality is undermining information sharing. If a UK national declares themselves as Cypriot, for example, information about their offshore bank accounts could be shared with Cyprus instead of Britain’s HM Revenue and Customs.
This blacklist is very similar to the OECD’s attack against so-called tax havens, which started about 20 years ago.
Only that time, the OECD was trying to help high-tax nations that were suffering from an exodus of capital. Now the goal is to prevent an exodus of labor.
By the way, the OECD exempted its own member nations when it launched its attack against tax havens.
So you won’t be surprised to learn that the OECD also didn’t blacklist any of its many member nations that have CBI and RBI programs. And it also let some other nations off the hook as well.
In other words, the OECD is advancing statism and being hypocritical at the same time.
P.S. To give you an idea why high-tax nations want to choke off migration of taxpayers, check out this poll showing that 52 percent of French citizens would be interested in moving to America.
I’m glad the United States is now ranked #1 in the World Economic Forum’s Global Competitiveness Report, though I point out in this interview that Trump’s performance is mostly a net wash.
I’m embarrassed to admit that I forget to mention protectionism as another area where Trump is pushing in the wrong direction.
But let’s not focus on Trump. Instead, let’s take a closer look at the new data from the World Economic Forum.
And we’ll start with a look at the top 20. You’ll see some familiar jurisdictions, places that always get good grades, such as Singapore, Switzerland, and Hong Kong.
But you’ll also notice that there are several European welfare states with very good scores.
But since good policy tends to create a good business environment, there is a connection. Nations such as Germany and the Netherlands, as well as Scandinavian countries, have big welfare states. But the damage of those policies is offset by a very laissez-faire approach to businesses. So the big companies that help put together the GCR understandably give those places good scores.
By the way, it’s also worth mentioning that the 2018 edition uses a revised methodology. And based on this new approach, the United States retroactively gets the top score for 2017 as well.
All that being said, does it matter if a nation is ranked higher rather than lower?
Based on this strong relationship between competitiveness scores and economic output, the answer is yes.
The bottom line is that there’s a very meaningful link between economic liberty and national prosperity.
Now let’s take a closer look at the scores for the United States. As you can see, our top score is mostly due to our market efficiency and innovation environment.
For what it’s worth, I don’t fully agree with the report’s methodology. But that’s mostly because I prefer to look at the degree of economic liberty rather than whether a nation is business friendly. There’s an overlap, of course, but it’s nonetheless important to distinguish between pro-market and pro-business.
In any event, here are a couple of additional findings that caught my eye.
The United States enjoys a top-10 overall score for infrastructure, including best-in-the-world rankings for road and airport connectivity. Something to keep in mind the next time politicians push for higher gas taxes because of a supposed infrastructure crisis.
The War on Drugs is a bad idea. Not because people should be using drugs, but rather because the societal harm of prohibition is much greater than the societal harm of legalization.
Moreover, even though I personally disapprove of drug use, I adhere to the libertarian principle that people should be free to do what they want (even stupid things) with their own bodies.
Today, though, let’s focus on the practical argument and look at some fascinating academic research from Evelina Gavrilova, Takuma Kamada, and Floris Zoutman (two economists and a criminologist). Here’s a summary from the abstract of their study.
We examine the effects of medical marijuana laws (MMLs) on crime. …Using data from the Uniform Crime Reports, we show that the introduction of MMLs lead to a decrease of 12.5 percent in violent crime, such as homicides, aggravated assaults and robberies in states that border Mexico. We also show that the reduction in violent crimes is strongest for counties close to the border (less than 350km)… Analysis from the Supplementary Homicide Reports data reveals that the decrease in homicides can largely be attributed to a drop in drug-law related homicides. We find evidence for spillover effects. When an inland state passes a MML, this results in a decrease in crime in the nearest border state. Our results are consistent with the theory that the introduction of MMLs reduces activity by Mexican drug trafficking organizations and their affiliated gangs in the border region. MMLs expose drug trafficking organizations (DTOs) to legitimate competition, and substantially reduce their profits in one of their most lucrative drug markets. This leads to a decrease in drug related crime in the Mexican border area. Our results indicate that decriminalization of the production and distribution of drugs may lead to a reduction in violence in markets where organized drug criminals meet licit competition.
In other words, legalize drugs and you get less violent crime.
And for those who want some of the underlying economic analysis, here’s the relevant section of the study.
Figure 2 represents the market for marijuana. For simplicity we assume that illicit and medical marijuana are perfect substitutes in consumption, such that the supply and demand of both substances can be represented in a single figure. SDTO represents the supply curve for marijuana by DTOs. S0 represents the combined supply of marijuana by DTOs and local farmers that were already active prior to the introduction of a MML. A MML allows for entry of additional local farmers and thus shifts the combined supply to the right to S1. This results in a reduction in the price of the drug, an increase in the overall quantity, and a reduction in the quantity sold by DTOs. The shaded area in the graph depicts the aggregate loss in revenues for DTOs.
Here’s the graph that shows how legalization creates significant losses for drug smugglers.
The shaded area may seem somewhat akin to the deadweight loss caused by taxation, but keep in mind that the losses to drug dealers are a plus to society while the economic losses from bad tax policy are a minus for society.
Now let’s shift from economics to bureaucracy with a story that captures the Drug War mindset (h/t: Reason).
If Illinois legalizes marijuana for recreational use, law enforcement officials fear job losses for hundreds of officers — specifically, the four-legged kind. …There are about 275 certified narcotic detection K-9s in Illinois… Because many K-9s are trained not to be social so their work won’t be affected, Larner said a number of dogs would likely have to be euthanized.
Yes, you read correctly. Defenders of the War on Drugs are threatening that they will kill their dogs if pot is legalized.
Needless to say, this is a perverse version of the Washington Monument Ploy. Quite similar to what happened several years ago in Massachusetts.
I especially like the part at the bottom, which shows the cycle that creates more violence, though it also should have shown ever-higher profits for drug dealers.
The Congressional Budget Office just released a Monthly Budget Review showing a $782 billion deficit for the 2018 fiscal year.
My recommendation is to mostly ignore data on red ink. Yes, it is possible that a country can get in trouble because of deficits and debt, but it’s far more important to look at what’s happening with government spending.
This is for two reasons.
First, spending is the most accurate way of measuring the fiscal burden of government. Regardless of whether it is financed by taxes or borrowing, spending is what requires resources to be diverted from the economy’s productive sector.
Second, the best way of predicting red ink is to look at what’s happening to spending. If the burden of government spending is growing faster than the private sector, that’s a very worrisome trend. In the long run, it leads to fiscal crisis.
With this in mind, I dug into the CBO numbers to see what’s really happening.
Lo and behold, we find that the deficit was falling rapidly when there was a de facto spending freeze between 2009 and 2014. But ever since 2014, spending has been growing more than twice the rate of inflation and the deficit is climbing.
Does tax revenue also play a role? Of course.
I’ve already explained that the Trump plan has a front-loaded tax cut, so that has an effect on short-run deficits. But I also noted that the tax cut gradually disappears because the revenue-raising provisions from last year’s legislation become more important in the long run.
In other words, America’s long-run fiscal challenge is entirely the result of a rising burden of government spending. And that’s very clear in the Congressional Budget Office numbers.
The bottom line is that America has a spending problem, not a red ink problem. Deficits and debt are symptoms, but the underlying disease is that the federal government is too big and that spending is growing too fast.
As I warn in this interview, something similar could happen if the federal government convinces other nations to reject the dollar because they no longer want to acquiesce to the extraterritorial imposition of U.S. laws.
This is a wonky issue, but the bottom line is that the United States benefits enormously because the rest of the world uses the dollar.
The best article I can recommend was published earlier this year by the Cayman Financial Review. It’s a good tutorial on the issue and it explains why the United States enjoys an “exorbitant privilege” because the dollar is the world’s reserve currency.
A reserve currency is a currency that governments hold in their foreign exchange reserves to settle international claims and intervene in foreign exchange markets. …Governments overwhelmingly choose one currency – the U.S. dollar… U.S. dollar-denominated assets comprised 63.79 percent of disclosed foreign exchange reserves… The Bank for International Settlements (BIS) reported that 88 percent of all foreign exchange transactions in 2016 involve the U.S. dollar on one side. …In 2014, 51.9 percent of international trade by value and 49.4 percent of international trade by volume of transactions were invoiced in U.S. dollars. …Major internationally traded commodities such as oil are priced in U.S. dollars. …The status of the U.S. dollar as the world’s reserve currency and the resulting foreign demand for U.S. dollars creates what French Finance Minister Valéry Giscard d’Estaing described in 1965 as an “exorbitant privilege” for the United States. …While difficult to measure, empirical studies suggest the privilege is worth about ½ percent of U.S. GDP (or roughly $100 billion) in a normal year.
And Peter Coy’s column for Bloomberg does a good job of explaining why the rest of the world is tempted to abandon the dollar.
America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. …threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. …Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are pushing back. …In March, China challenged the dollar’s dominance in the global energy markets with a yuan-denominated crude oil futures contract. …French Finance Minister Bruno Le Maire told reporters in August that he wants financing instruments that are “totally independent” of the U.S. …This disturbance in the force isn’t good news for the U.S. …As it is now, when trouble breaks out, investors flood into U.S. markets seeking refuge, oddly enough even when the U.S. itself is the source of the problem, as it was in last decade’s global financial crisis. …The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, particularly those against Iran and countries that do business with Iran. …European leaders, in response to what they perceive as an infringement on their sovereignty, are openly working on a payments system that would enable their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. …dissatisfaction with the dollar’s dominance…is only mounting. …Lew said in 2016, “the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”
Here’s some of what I said on the issue of sanctions in a different interview.
Anyhow, let’s review some additional analysis, starting with this editorial from the Wall Street Journal.
More than any recent U.S. President, Mr. Trump is willing to use economic leverage for coercive diplomacy. He’s now targeting Turkey… Turkey is vulnerable because of Mr. Erdogan’s economic mismanagement. In the runup to June elections, he blew out the fisc on entitlements and public works. …As tempting as sanctions often are, they should be used sparingly and against the right targets. They make sense against genuine rogue states like Iran and North Korea, as well as to show Vladimir Putin that there are costs… But sanctions against allies should be used only in rare cases. They would also be less risky if they weren’t piled on top of Mr. Trump’s tariff war. …If Mr. Trump is determined to use coercive economic diplomacy, including tariffs and sanctions, then the Treasury will have to be ready to deal with the collateral financial damage.
The United States is increasingly using sanctions as a form of warfare. …It’s a form of soft warfare that targets a country’s economy and its ability to transact business and safeguard its financial wealth in today’s dollar-based economy. Do you know what the result of these sanctions will be? The dollar will get crushed. Something like 80% of all international transactions take place in dollars. The global financial system rests on a dollar architecture. That includes funds transfer, clearing, payments, etc. …How long do you think the rest of the world will operate under such a risk? A risk that at any moment if you fall out of favor with the fools in Washington your entire economy and lifeline to the world’s financial system can be shut down? That is too much risk. No country and no citizen wants that risk hanging over them.
…the Trump administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. The threat is serious because US banks are the main source of dollars used in cross-border transactions. …In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. …This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. …But in an era of US unilateralism, they will want to hedge their bets. …there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. …In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals. Moreover, Trump is squandering US leverage.
And Michael Maharrey elaborates on the warning signs in a column for FEE.
…the U.S….weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick. …”enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar. …It utilizes the international payment system known as SWIFT…the Society for Worldwide Interbank Financial Telecommunication. …SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries. …China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. …even traditional U.S. allies have grown weary of American economic bullying. On Sept. 24, the E.U. announced its plans to create a special payment channel to circumvent U.S. economic sanctions… De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam.
All of the above articles could be considered the bad news.
So I’ll share one small bit of good news from Coy’s column. The one thing that may save the dollar is that there aren’t any good alternatives.
The best thing the dollar has going for it is that its challengers are weak. The euro represents a monetary union… Italy’s recent woes are only the latest challenge to the euro zone’s durability. China is another pretender to the throne. But China’s undemocratic leadership is wary of the openness to global trade and capital flows that having a widely used currency requires.
I agree. Indeed, I wrote way back in 2010 and 2011 that the euro lost a lot of credibility when the European Central Bank surrendered its independence and took part in the bailouts of Europe’s welfare states.
So why jump from the dollar to the euro, especially since Europe will be convulsed by additional fiscal crises when the next recession occurs?
That being said, the moral of today’s column is that the crowd in Washington shouldn’t be undermining the attractiveness of the dollar. Here’s a chart to give you some idea of what’s been happening.
P.S. I want to close with a point about trade deficits. It turns out that being the world’s reserve currency requires a trade deficit. That was explained in the Cayman Financial Review column.
A significant part of the U.S. current account deficit and the U.S. trade deficit (whether measured as goods and services or as goods only) is attributable to the U.S. dollar’s status as the world’s reserve currency. Even if every country in the world were to practice free trade and not to engage in any currency manipulation, the United States would still record persistent current account deficits so long as the U.S. dollar remains the world’s reserve currency.
Likewise, here’s the relevant portion from the Real Money column.
Since most of of the world’s commerce is denominated in dollars and because oil was priced in dollars, it necessitated that the rest of the world ran trade surpluses with the U.S. in order to get dollars. Therefore, our trade deficits were an expression of high demand for dollars, not vice-versa. …We never understood, or at least our policy makers never understood, that we had the better part of the deal. When the rest of the world labors for low wages to build finished goods that they send to us for our paper currency, that is a benefit to us, not a cost.
Last but not least, here are excerpts from Peter Coy’s column.
…for the U.S. to supply dollars to the rest of the world, it must run trade deficits. Trading partners stash the dollars they earn from exports in their reserve accounts instead of spending them on American goods and services. …the U.S. gets what amounts to a permanent, interest-free loan from the rest of the world when dollars are held outside the U.S. As Eichengreen points out, it costs only a few cents for the U.S. Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 worth of actual goods and services to obtain one.
I share all these excerpts to reinforce my oft-made point that there is nothing wrong with a trade deficit. Not only does it represent a financial surplus (formerly known, and still often referred to, as a capital surplus), it also reflects the benefit the U.S. enjoys from having the dollar as a reserve currency.
Politicians can interfere with the laws of supply and demand (and they do, with distressing regularity), but they can’t repeal them.
The minimum wage issue is a tragic example. If lawmakers pass a law mandating wages of $10 per hour, that is going to have a very bad effect on low-skilled workers who can only generate, say, $8 of revenue per hour.
You don’t need to be a libertarian to realize this is a problem.
Catherine Rampell leans to the left, but she warned last year in the Washington Post about the danger of “helping” workers to the unemployment line.
…the left needs to think harder about the unintended consequences of…benevolent-seeming proposals. In isolation, each of these policies has the potential to make workers more costly to hire. Cumulatively, they almost certainly do. Which means that, unless carefully designed, a lefty “pro-labor” platform might actually encourage firms to hire less labor… It’s easier, or perhaps more politically convenient, to assume that “pro-worker” policies never hurt the workers they’re intended to help. Take the proposal to raise the federal minimum wage to $15 an hour… raising wages in Seattle to $13 has produced sharp cuts in hours, leaving low-wage workers with smaller paychecks. And that’s in a high-cost city. Imagine what would happen if Congress raised the minimum wage to $15 nationwide. …Why wouldn’t you want to improve the living standards of as many people as possible? The answer: You won’t actually be helping them if making their labor much more expensive, much too quickly, results in their getting fired.
By the way, while I’m glad Ms. Rampell recognizes how big increases in the minimum wage will have an adverse impact, I think she is rather naive to believe that there are “carefully designed” options that wouldn’t be harmful.
Or does she have a cutoff point for acceptable casualties? Maybe she thinks that an increase in the minimum wage is bad if it throws 500,000 people into unemployment, but a small increase that leads to 200,000 fewer jobs is acceptable?
In any event, the voters of DC apparently didn’t read her column and they voted earlier this year to restrict the freedom of employers and employees in the restaurant sector to engage in voluntary exchange.
But then something interesting happened. Workers and owners united together and urged DC’s government to reverse the referendum.
The Wall Street Journalopined on this development.
…last week Washington, D.C.’s Democratic city councillors moved to overturn a mandatory minimum wage for tipped workers after bartenders, waiters and restaurant managers served up a lesson in economics. …The wage hike was billed as a way to give workers financial stability… But tipped workers realized the policy came with serious unintended consequences. …workers pushed for repeal. Though restaurants pay a $3.89 hourly wage to tipped workers, “we choose these jobs because we make far more than the standard minimum wage” from tips, bartender Valerie Graham told the City Council. …“Increasing the base wage for tipped workers who already make well above minimum wage threatens those who do not make tips,” such as cooks, dishwashers and table bussers, Rose’s Luxury bartender Chelsea Silber told the City Council. …Repeal requires a second council vote, but Democratic Mayor Muriel Bowser says she agrees. Congratulations on the revolt of the restaurant masses.
Let’s review another example.
There’s now a mandate for a higher minimum wage in New York. Ellie Bufkin explains some of the consequences in a column for the Federalist.
This minimum wage spike has forced several New York City businesses to shutter their doors and will claim many more victims soon. Businesses must meet the $15 wage by the end of 2018, the culmination of mandatory increment increases that began in 2016. …For many businesses, this egregious law is not just an inconvenience, it is simply unaffordable. The most recent victim is long-time staple, The Coffee Shop… In explaining his decision to close following 28 years of high-volume business, owner Charles Milite told the New York Post, “The times have changed in our industry. The rents are very high and now the minimum wage is going up and we have a huge number of employees.” …Of all affected businesses, restaurants are at the greatest risk of losing their ability to operate under the strain of crushing financial demands. They run at the highest day-to-day operational costs of any business, partly because they must employ more people to run efficiently. …Eventually, minimum wage laws and other prohibitive regulations will cause the world-renowned restaurant life in cities like New York, DC, and San Francisco to cease to exist.
For what it’s worth, I don’t think restaurants will “cease to exist” because of mandates for higher minimum wages.
But there will definitely be fewer establishments with fewer workers.
Why? Because business aren’t charities. They hire workers to increase profits, so it’s unavoidable that we get bad results when government mandates result in some workers costing more than the revenue they generate.
I’ll close by recycling this debate clip from a few years ago. I made the point that faster growth is the right way to boost wages.
And I also gave a plug for federalism. If some states want to throw low-skilled workers out of jobs, I think that will be an awful outcome. But it won’t be as bad as a nationwide scheme to increase unemployment (especially for minorities).
I periodically explain that you generally don’t get a recession by hiking taxes, adding red tape, or increasing the burden of government spending. Those policies are misguided, to be sure, but they mostly erode the economy’s long-run potential growth.
If you want to assign blame for economic downturns, the first place to look is monetary policy.
When central banks use monetary policy to keep interest rates low (“Keynesian monetary policy,” but also known as “easy money” or “quantitative easing”), that can cause economy-wide distortions, particularly because capital gets misallocated.
And this often leads to a recession when this “malinvestment” gets liquidated.
By the way, doesn’t the other guest have amazing wisdom and insight?
But let’s not digress.
Back to the main topic, I’m not the only one who is worried about easy money.
Desmond Lachman of the American Enterprise Institute is similarly concerned.
Never before have the world’s major central banks kept interest rates so low for so long as they have done over the past decade. More importantly yet, never before have these banks increased their balance sheets on anything like the scale that they have done since 2008 by their aggressive bond-buying programmes. Indeed, since 2008, the size of the combined balances sheet of the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England has increased by a mind-boggling US$10tn. …in recent years, if anything central bank monetary policy might have been overly aggressive. By causing global asset price inflation as well as the serious mispricing and misallocation of global credit, the seeds might have been sown for another Lehman-style economic and financial market crisis down the road. …the all too likely possibility that, by having overburdened monetary policy with the task of stabilizing output, advanced country governments might very well have set us up for the next global boom-bust economic cycle.
If you want the other side of the issue, the Economist is more sympathetic to monetary intervention.
And if you want a very learned explanation of the downsides of easy money, I shared some very astute observations from a British central banker back in 2015.
The bottom line is that easy money – sooner or later – backfires.
By the way, here’s a clip from earlier in the interview. Other than admitting that economists are lousy forecasters, I also warned that the economy is probably being hurt by Trump’s protectionism and his failure to control the growth of spending.
Imagine being a poor person and getting to choose your country. Which one would you select?
The answer probably depends on your goals in life. If you want to emulate “Lazy Robert” and be a moocher, you could pick Denmark. You’ll surely get more than enough money to survive.
Denmark’s also not a bad choice if you have a bit of ambition. It ranks #16 in the latest edition of Economic Freedom of the World, largely because it has a very laissez-faire approach on trade, regulation, and other non-fiscal policies. So there’s a decent chance you could climb the economic ladder.
But if you have lots of ambition and definitely want a better life for your children and grandchildren, you’d presumably pick a nation such as Singapore, which routinely gets very high grades from Economic Freedom of the World.
The last thing you would do, however, is pick a stagnant country such as Greece. Or a miserably impoverished nation such as Zimbabwe.
Unless you’re one of the buffoons at Oxfam. That “charity” just produced an inequality study that says Singapore is one of the world’s worst nations, ranking far below places where people are very poor with very bleak lives.
Here’s how Oxfam describes its report.
In 2015, the leaders of 193 governments promised to reduce inequality under Goal 10 of the Sustainable Development Goals (SDGs). Without reducing inequality, meeting SDG 1 to eliminate poverty will be impossible. In 2017, …Oxfam produced the first index to measure the commitment of governments to reduce the gap between the rich and the poor. The index is based on a new database of indicators, now covering 157 countries, which measures government action… The report recommends that all countries should develop national inequality action plans to achieve SDG 10 on reducing inequality. These plans should include delivery of universal, public and free health and education and universal social protection floors. They should be funded by increasing progressive taxation and clamping down on exemptions and tax dodging.
In other words, the study is a measure of whether nations have punitive welfare states, not whether poor people have better lives.
The assertion in the second sentence that poverty can’t be reduced without reducing inequality is especially absurd. Unless, of course, you choose a dishonest definition of poverty (which is what we get from leftist groups like the UN and OECD, not to mention the Equal Welfare Association, Germany’s Institute of Labor Economics, and the Obama Administration).
But let’s focus on Singapore. Here are some excerpts from a Reuters story on the controversy over that nation’s poor score.
Oxfam on Wednesday rejected Singapore’s defense of its low taxes after the NGO ranked the wealthy city state among the 10 worst-offending countries in fuelling inequality with its low-tax regime. Oxfam’s Commitment to Reducing Inequality (CRI) index ranked Singapore 149th of 157, below Afghanistan, Algeria, and Cambodia, and marginally higher than Haiti, Nigeria and Sierra Leone. …Oxfam’s head of inequality policy, Max Lawson, said the impact of Singapore’s tax policy went beyond its borders, serving as a tax haven for the rich and big corporations. …Singapore Social and Family Development Minister Desmond Lee said on Tuesday…“Yes, the income tax burden on Singaporeans is low. And almost half the population do not pay any income tax,”…“Yet, they benefit more than proportionately from the high quality of infrastructure and social support that the state provides,” he said. “In Oxfam’s view, Singapore’s biggest failing is our tax rates, which are not punitive enough.” Lee also said 90 percent of Singaporeans owned their homes and home ownership was 84 percent even among the poorest 10 percent of households. “No other country comes close,” he said.
Minister Lee is correct, of course.
Singapore is a great place to be poor, in part because the bottom 10 percent in Singapore would be middle class or above in many of the nation’s that get better scores from Oxfam’s ideologues. But mostly because it’s a place where it’s possible to become rich rather than remain poor.
There are some other aspects of the Oxfam study that merit attention, including the curious omission of some of the world’s most left-wing nations, such as Venezuela, Cuba, and North Korea.
In the case of North Korea, I’m willing to believe that there simply wasn’t enough reliable data. But why aren’t there scores for Cuba and Venezuela? I strongly suspect that authors deliberately omitted those two hellholes because they didn’t want to deal with the embarrassment of incredibly poor nations getting very high scores (which is what made Jeffrey Sachs’ SDG Index an easy target for mockery)
Was Oxfam worried about looking foolish, so they left prosperous Hong Kong out of the study?
That’s my guess. The last thing the left wants is for people to understand that poor nations only become rich nations with free markets and small government.
One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.
Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.
Though we shouldn’t overlook how government discourages low-income people from being productively employed. Only the problem is more on the spending side of the fiscal equation.
In today’s Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States.
During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged. …Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016. …Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.
This massive expansion of redistribution has negatively impacted incentives to work.
The stated goal of the War on Poverty is not just to raise living standards, but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work. …The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%. …The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”
In another WSJ column on the same topic, Peter Cove reached a similar conclusion.
America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. …insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.
Edward Glaeser produced a similar indictment in an article for City Journal.
In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working. …The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources. …Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check. …various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. …The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. …The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.
Why work, though, when government pays you not to work?
Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.
…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever. …The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. …The third flaw in the government welfare system is the way that benefits phase outs as a recipient’s income increases. …a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.
Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative.
Inequality is not an issue that policy should address. …Society, however, should care about creating economic opportunities for the lowest earners. …a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income. …We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.
I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.
And if you like videos, here’s my favorite video about the adverse effects of the welfare state.
By the way, it isn’t just libertarians and conservatives who recognize the problem.
Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work.
…today’s social safety net discourages poor people from working, or at least from earning more money. …you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people. …Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents. …One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. …You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.
To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency.
The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. …A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes.
Agreeing that there’s a problem does not imply agreement about a solution.
Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.
The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.
I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policy makers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.
I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.
Let’s close with a political observation. A columnist for the New York Timesis frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency.
Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net. …The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder — the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns. …I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.
It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.
P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state.
But that’s not what worries me most about the IMF.
To be sure, higher fiscal burdens undermine economic vitality, and I regularly warn that such policies will reduce an economy’s potential long-run growth rate.
That being said, tax increases generally don’t threaten macroeconomic stability.
If we’re looking at policies that can trigger short-run crises, I’m more concerned about the IMF’s bailout policies. For all intents and purposes, the IMF subsidizes “moral hazard” by reducing the perceived cost (to financial institutions) of lending money to dodgy governments and reducing the perceived costs (to governments) of incurring more debt.
Why not take more risk, after all, if you think the IMF will step in to socialize any losses? In other words, when the IMF engages in a few bailouts today, it increases the likelihood of more bailouts in the future.
That’s the bad news. The worse news is that the bureaucrats want a bigger figurative checkbook to enable even bigger future bailouts.
The good news is that the U.S. government can say no.
But will it? The U.K.-based FinancialTimes reported a few days ago that the United States might support an expansion of the IMF’s bailout capacity.
The Trump administration has left the door open for a US funding boost to the IMF, calling for a “careful evaluation” of the global lender’s finances to make sure it has enough money to rescue struggling economies. …The IMF — led by Christine Lagarde, a former French finance minister — is hoping to get its members to increase the fund’s permanent reserves… This year, the Trump administration has been among the most enthusiastic supporters of the IMF’s $57bn loan package to Argentina— its largest in history.
The IMF is set to embark on a major fundraising drive…the success of Ms Lagarde’s campaign is highly uncertain, with potentially profound consequences not only for the fund but for the global economy. …supporters of the fund say there are many possible scenarios in which it would be essential. If a recession and financial crisis were to hit in the coming years,central bankers may well struggle to find monetary remedies… a US Treasury spokesman left the door open to new possible contributions from America to the IMF. …Optimists point to a surprise decision by the Trump administration in April to support a $13bn boost to World Bank resources… there is still scepticism of the IMF among his top lieutenants at the Treasury department, including David Malpass, the undersecretary for international affairs. …Even if they were on board, economic and national security hawks at the White House who disdain multilateralism as a loss of sovereignty could be an additional obstacle, not to mention Republican lawmakers on Capitol Hill. The previous IMF quota increase, pushed by the Obama administration — which raised America’s permanent commitment to the fund to about $115bn — finally scraped through Congress in 2016, after a half-decade delay.
I was very saddened a couple of years ago when the GOP Congress agreed to expand the IMF’s bailout authority, especially since a similar effort was blocked in 2014 when Democrats still controlled the Senate.
The issue today is whether the Trump Administration will repeat that mistake.
Back in 2012, I stated that the IMF issue was a “minimum test” for Republicans. Well, the issues haven’t changed. Everything I wrote then still applies today.
I hope Trump does the right thing and rejects expanded bailout authority for the IMF for the sensible reason that it’s foolish to subsidize more borrowing by badly governed nations.
But I’m not picky. I’ll also be happy if Trump says no simply because he’s miffed that the IMF attacked him (accurately but unfairly) during the 2016 campaign and dissed his tax plan earlier this year.
I recently wrote about the Tax Foundation’s State Business Tax Climate Index, which is a snapshot of current competitiveness (New Jersey is in last place, which shouldn’t surprise anyone).
But what if we want to know which states are moving in the right direction or wrong direction?
The new edition just came out, so I immediately looked at the rankings. The nation’s best governor – by a comfortable margin – is Susana Martinez of New Mexico.
She is joined by four other governors who earned top marks.
Eight governors, including two Republicans, were in the cellar.
The report has some other data worth sharing.
Here’s a chart that shows what has happened to state spending this century. What caught my eye is the boom-bust cycle of excessive spending growth when the economy is growing (and generating lots of revenue) and cutbacks during the downturn.
I’ve been in Lebanon for the past few days, but not because I’m seeking a replacement for the Princess of the Levant.
Instead, I’m here because the Lebanese Institute for Market Studies arranged a briefing in the Parliament on the perilous state of the nation’s finances.
Lebanon is in trouble because policy makers have violated my Golden Rule by allowing spending to grow too fast. As such, even though the overall fiscal burden of government is relatively modest, red ink has climbed to about 150 percent of economic output. That’s higher than Italy today, and higher than Greek debt when that nation’s fiscal crisis occurred.
I’ve pointed out before that there’s not an automatic tipping point when a debt crisis occurs. It happens whenever investors decide that they no longer trust that a government will pay its debt.
I’m not going to predict exactly when Lebanon reaches that point, but I suspect sooner rather than later. Unless, of course, Lebanon changes direction.
And that’s exactly what I’m recommending. I made three points.
First, higher taxes are not a solution. Given the IMF’s awful track record of pushing tax hikes in the region, I repeated my standard joke about arresting any of those bureaucrats who enter the country.
Second, a rule requiring a balanced budget is not the ideal solution. Not because balanced budgets are a bad idea, but because such rules put fiscal policy at the mercy of the business cycle.
This chart showing Lebanon’s revenue makes my point. When there’s strong growth and revenues are increasing rapidly (between 2001-2004 and 2006-2009), big spending increases are possible. But when the economy is weak and revenues are flat (between 2004-2006 and 2009-2016), politicians are very resistant to fiscal discipline during a downturn.
Even the IMF and OECD agree with me that this is a big reason why anti-deficit rules don’t work.
Which leads me to my third point, which is that Lebanon should copy Hong Kong and Switzerland by adopting an annual limit on spending growth.
I didn’t specify a specific number for a spending cap. Instead, I emphasized that the key goal is to make sure spending – over time – grows slower than the private sector.
But I did show what would have happened if lawmakers had limited nominal annual spending increases to 6 percent starting in 1992 (that sounds far too high, but keep in mind that inflation averaged about 4 percent over the past 25 years).
I told the audience that they would have a budget surplus today, and also very little debt, if a spending cap had been in effect (same results would hold for America).
And I also pointed out that lawmakers could avoid boom-bust budgeting with a long-run spending cap. With a fixed limit on annual spending increases, they would not have to cut outlays during a recession, but they also would not be able to have a spending orgy during a boom.
That’s partly because I’m a policy wonk rather than political pundit, but also because many of the attacks seem justified. Indeed, his boorish behavior is one of the reasons I thought he would lose the presidential race.
Today, though, I’m going to defend Trump. Albeit only because of my disdain for the death tax.
To be more specific, the New York Times published a major hit job last week that asserted the Trump family played all sorts of games – and perhaps even broke the law – to minimize gift taxes when Trump’s father was alive and to minimize death taxes when he passed away.
The president…received at least $413 million in today’s dollars from his father’s real estate empire, much of it through tax dodges in the 1990s. President Trump participated in dubious tax schemes during the 1990s, including instances of outright fraud, that greatly increased the fortune he received from his parents… Much of this money came to Mr. Trump because he helped his parents dodge taxes. He and his siblings set up a sham corporation to disguise millions of dollars in gifts from their parents, records and interviews show. Records indicate that Mr. Trump helped his father take improper tax deductions worth millions more. He also helped formulate a strategy to undervalue his parents’ real estate holdings by hundreds of millions of dollars on tax returns, sharply reducing the tax bill when those properties were transferred to him and his siblings.
That meant less money went to Washington (hopefully helping to starve the beast).
The president’s parents, Fred and Mary Trump, transferred well over $1 billion in wealth to their children, which could have produced a tax bill of at least $550 million under the 55 percent tax rate then imposed on gifts and inheritances. The Trumps paid a total of $52.2 million, or about 5 percent, tax records show.
The article implies the Trump family broke the law, though both the IRS and state government accepted the tax return.
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children.
The correct rate for the death tax is zero, so I’m glad the Trump family did everything possible to minimize the amount of money grabbed by Washington.
I’m embarrassed that death taxes are worse in the United States than they are in Venezuela.
Sadly, not everyone shares my perspective. Some folks are even using this NYT story as an excuse to make the death tax more onerous.
Democrats are calling for changes to the estate tax following a bombshell news report detailing how the Trump family navigated the tax code to protect the family’s financial assets. …”We need to look at the estate tax and certainly the issue that is raised by this investigation about the undervaluation of assets and gifts and the use of the various devices,” Rep. Lloyd Doggett (Texas), the top Democrat on the House Ways and Means Subcommittee on Tax Policy, who called for hearings on the matter. Sen. Bob Menendez (D-N.J.) said it was time to reexamine the loopholes. …Democrats say their interest in closing the loopholes are not new.
The last sentence in that excerpt is true. Obama wanted to make the death tax worse. So did Hillary.
And I’m disgusted that there are people in the business of financial planning who support the death tax since it creates business for them.
This awful levy should be repealed. Yesterday, if possible.
P.S. I assume everyone will admit that death taxes impact incentives to build wealth, but how many people realize that death taxes change incentives on when people die?
In a recently released study, two economists for the World Bank decided to investigate the effectiveness of government spending.
Governments of developing countries typically spend resources equivalent to between 15 and 30 percent of GDP. Hence, small changes in the efficiency of public spending could have a significant impact on GDP and on the attainment of the government’s objectives. The first challenge faced by stakeholders is measuring efficiency. This paper attempts such quantification and verifies empirical regularities in the cross country-variation in the efficiency scores.
So they calculated how much different governments were spending and the results that were being achieved.
Using two different methodologies, here’s what they found for health spending and life expectancy.
The goal, of course, is to get good results (to be higher on the vertical axis) without having to spend a lot of money (in other words, try to be farther left on the horizontal axis).
And here are the numbers for education quality and education spending.
The economist then crunched all the numbers to determine the relationship between spending and outcomes.
The results may surprise some people.
Government expenditure (GOVEXP) is negatively associated with efficiency scores in education (Tables 14 a and b). This result is robust to changes in the output indicator selected. In the output efficiency case, the impact is ambiguous specially when the PISA Math and Science scores are the output indicators (Table 14 b). In health (Tables 15 a and b), the negative association is present in both input and output efficiency. In infrastructure, the expenditure variables (GOVEXP and PUBGFC10PC) are negative in the six output indicators that are used (Table 16a).23 There is a robust trade-off between size of expenditure and efficiency. …The share of public financing within the total (sum of public and private) is robustly associated with lower efficiency scores.
But here’s another surprise.
These World Bank results are not an outlier.
The European Central Bank has two separate studies (here and here) that conclude smaller government is more effective.
Back in April, I chatted with Stuart Varney about how some states were in deep trouble because they were being squeezed by having to finance huge unfunded liabilities for bureaucrats, yet they were constrained by the fact that taxpayers have the freedom to move when tax burdens become excessive.
I now have a reason to share the interview because Chris Edwards described this phenomenon of tax-driven migration in a new column for the Daily Caller.
New Jersey’s richest person, David Tepper, moved with his hedge fund business to Florida in 2016. That single move cost the state of New Jersey up to $100 million a year in lost income taxes. Yet, this year, New Jersey’s Democratic governor Phil Murphy hiked the top income tax rate from 8.97 to 10.75 percent. Murphy wanted to raise revenue, but the hike won’t do if it prompts more of the rich to leave. The top 1 percent in New Jersey pay 37 percent of the state’s income taxes. Connecticut is also losing its wealthiest residents after tax hikes by Democratic governor Dan Malloy. In recent years, the state has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion). Those folks all fled to Florida, which has no income tax or estate tax. …High taxes are driving the wealthy out of California. Ken Fisher moved Fisher Investments from California to Washington state, which also has no income tax. The billionaire said he wanted a lower-tax location for his 2,000 employees. Mark Spitznagel moved his Universal Investments from California to Florida, saying that “Florida’s business-friendly policies, which are so different from California’s, offer the perfect environment for this.” The “tax freedom exodus” will accelerate in the wake of the 2017 federal tax law. The law capped the deduction for state and local taxes, which subjected 25 million mainly higher-income households to the full tax burden imposed in high-tax states.
It’s important to ask, though, whether these moves are a trend or just random.
In a more detailed study he produced, Chris crunched that national data and found there is a relationship between tax burdens and migration patterns.
It’s not a perfect relationship, of course, since there are many factors that might lead households to move across state lines.
But tax is definitely part of the equation, especially since high-tax states no longer receive a big indirect subsidy from Uncle Sam.
A column in the Wall Street Journal explores this aspect of the issue.
…real-estate professionals say they are beginning to see early signs of an exodus to low-tax states. “I’ve seen a huge increase in the number of clients who want to purchase in Palm Beach to establish residency in Florida,” says Chris Leavitt, director of luxury sales at Douglas Elliman Real Estate in Palm Beach. …Real-estate developer David Hutchinson, president of Ketchum, Idaho-based VP Cos., is touting the tax advantages of living in Nevada on his company website… The border between California and Nevada bisects Lake Tahoe. Californians to the west can pay a state income-tax rate of up to 13.3%, while Nevada residents just 30 minutes to the east pay no state income taxes.
A Democratic political consultant warns that his party could be hurt.
With state deductions now capped at $10,000, the cost of living in states such as California and New York – where state taxes are notoriously high – is increasing substantially. This has the potential to lead both middle-class families, and even the wealthy, to begin questioning whether it is time to move to a more tax-friendly state. …In one high-profile example of the impact of high taxes, professional golfer Phil Mickelson recently slammed California’s taxes and threated to leave the state. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said. …New York Gov. Andrew Cuomo – seeking re-election this year and a potential 2020 Democratic presidential contender – recognizes the threat that tax migration may pose. “If you lose the taxpayers, you lose the revenue,” Cuomo said in December.
Though maybe it would be better for Governor Cuomo to say “lost the revenue.”
Here’s another chart from Chris Edwards’ study. The light-blue states are attracting the most new residents (i.e., taxpayers) while the bright-red states (like New York) are losing the most residents (former taxpayers).
In closing, it’s important to understand that tax-motivated migration also exists between countries.
Here are some excerpts from a column in the New York Times.
When a country begins to fall into economic and political difficulty, wealthy people are often the first to ship their money to safer havens abroad. The rich don’t always emigrate along with their money, but when they do, it is an even more telling sign of trouble. …In a global population of 15 million people each worth more than $1 million in net assets, nearly 100,000 changed their country of residence last year. …In 2017, the largest exoduses came out of Turkey (where a stunning 12 percent of the millionaire population emigrated) and Venezuela. As if on cue, the Turkish lira is now in a free fall. There were also significant migrations out of India under the tightening grip of its overzealous tax authorities… Millionaire migrations can be a positive sign for a nation’s economy. The losses for India, Russia and Turkey were gains for havens like Canada and Australia, joined lately by the United Arab Emirates. …Millionaires move money mainly out of self-interest, to find more rewarding or safer havens. There aren’t a lot of them, but they can tell us a great deal about what is going wrong — and right — in a country’s economic and political ecosystems. Leaders who create the right conditions to keep millionaires home will find that all of their residents — not just the wealthy ones — are richer for it.
I like footloose millionaires because – as discussed in the article – they act as canaries in the coal mine. When they start moving, that sends a helpful signal to the rest of us.
Which helps ordinary taxpayers like you and me since politicians generally use higher tax burden on the rich as a softening-up tactic before grabbing more money from the masses.
I don’t want to write about Trump’s new NAFTA deal (which now has the clunky acronym of USMCA), largely because not much changed since the partial deal with Mexico was unveiled.
Also, it’s hard to get too worked up about the new agreement since it largely tinkers with the status quo. And since I was a fan of NAFTA, I’m relieved Trump didn’t eviscerate that pact.
But several experts have produced very good summaries, which means I can be lazy and share their good work.
Let’s start with Jeffrey Schott of the Peterson Institute, who is underwhelmed by the revised NAFTA.
NAFTA’s benefits had always been primarily through the strengthening of economic integration of the three economies. Contrary to President Trump’s claims, the new pact moves backwards in this critical regard and imposes new restrictions that will impede regional trade and investment, stifling the potential for economic growth. On autos, the deal is innovative in a perverse way: It is the first free trade agreement (FTA) negotiated by the United States that raises rather than lowers barriers to trade and investment. It adds layer upon layer of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs—layers virtually certain to drive up costs of autos for consumers and very likely reduce US jobs in the auto sector. …these steps add up to a step backwards on trade and investment in the United States and the region as a whole that, while not as damaging as it could have been, will do little or nothing to help workers, consumers, and the economies of North America.
Veronique de Rugy of the Mercatus Center is similarly dour, though thankful that the deal isn’t as bad as Trump wanted.
…the Trump administration gave up on its worst demands, including one for a minimum of 50 percent mandatory U.S. content to benefit from the new NAFTA duty-free treatment, a ban on student visas for Chinese nationals and an every-five-year sunset clause. If the U.S. hadn’t dropped these poison pills, I doubt we would have had this new deal. Let’s all be grateful for the willingness to compromise on the part of the U.S. trade negotiators. …in spite of the tiny trade-liberalization measures in the deal, tariffs overall remain significantly higher than they were before president Trump started “negotiating.” …The auto section of the deal is not as bad as what the Trump administration had hoped for, but it is still really ugly. For automobiles to enter the U.S. duty-free from North America, at least 75 percent of their content must originate in the U.S., Mexico, and Canada, up from the current 62.5 percent. It doesn’t take a rocket scientist to understand that this requirement will increase the price that Americans pay.
Ryan Young of the Competitive Enterprise Institute piles on.
Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged. …The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive… Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. …In short, NAFTA has a new name, but it’s still NAFTA. …a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.
Simon Lester and Inu Manak grade the new deal, citing good news on agriculture and bad news on labor regulation and autos.
In terms of liberalization in the USMCA, the most important component is the liberalization of Canadian agriculture imports, such as dairy products, eggs, wheat, poultry, and wine. Dairy market access was a key concern for the United States, which has long complained about Canada’s strict supply management and quota system. …In addition, Canada agreed to give up a pricing system for certain types of milk, as well as expanding the U.S. quota for chicken, eggs, and turkey. …The labor rights provisions go further than past U.S. trade agreements. For some people on the left, this could offer a reason to support the agreement. If you are skeptical about including labor provisions in trade agreements, as we are, this is a negative aspect to the agreement. …The new rules of origin are extremely restrictive, raising costs for auto production in North America. This could lead to more production being done outside of North America, or higher costs for consumers. This is the most negative part of the new agreement.
Speaking of all the new command-and-control regulation in the USMCA, this tweet from Scott Linicome sums up one of the great ironies of the NAFTA revision.
The best part – I mean, what really drives a sane man to the brink – is that the guys who wrote the USMCA's incomprehensible industrial mandates are the same ones saying that the agreement is needed to stop "non-market economies" pic.twitter.com/vgtk6wPmzN
William Reinsch of the Center for Strategic and International Studies adds his two cents, mostly noting that we’re lucky Trump didn’t make things that much worse (a common theme from all the experts).
It is somewhat comforting to see that one of the worst things you can say about U.S.-Mexico-Canada Agreement (USMCA) is that the new trade agreement replaces a term that everyone knows and can say with an unpronounceable acronym. …the business communities in all three countries dodged a serious bullet. …no one had to swallow many of the so-called poison pills. …The fact that many of its efforts to build an economic wall around the United States did not make it to the finish line is also good news, although the Canadians and Mexicans probably deserve more credit for that than our administration does.
Let’s close with some optimism. Dalibor Rohac of the American Enterprise Institute writes for CapX that the new pact shows that Trump’s protectionist instincts can be sidetracked.
…considering the range of possible outcomes, a sigh of relief is in order. President Trump’s zero-sum view of the world and his penchant for grand gestures and publicity stunts created a real risk that NAFTA – one of the great successes of trade liberalisation around the world – would follow the fate of other agreements from which his administration decided to withdraw. Forcing higher wages and labour protection standards on a relatively poor country such as Mexico will have unintended consequences, but that is likely an acceptable price for keeping trade in North America tariff-free. …USMCA shows how President Trump’s protectionism can be constrained by other world leaders: by letting the US President score easy headline-grabbing victories, which will allow him to claim that he has ‘fixed’ previously ‘horrible’ trade deals, while leaving the substance of policies mostly unchanged.
Needless to say, this doesn’t cast Trump in a positive light.
Indeed, that’s a big reason why I favor better tax policy. I want low rates and less double taxation so we get more entrepreneurship and investment, which then will lead to higher productivity and more compensation for workers.
With this in mind, let’s look at some good news from a story in the New York Times.
Amazon said on Tuesday that it would raise the minimum wage to $15 an hour for its United States employees, a rare acknowledgment that it was feeling squeezed by…a tight labor market. The raises apply for part-time workers and those hired through temporary agencies. …The new wages will apply to more than 250,000 Amazon employees, including those at the grocery chain Whole Foods, as well as the more than 100,000 seasonal employees it plans to hire for the holiday season.
It’s too soon to say for sure, but perhaps we’re seeing evidence that last year’s tax reform is paying dividends. Of course, it’s also possible that we’re in a bubble that’s about to pop, but let’s hope that’s not the case.
In any event, there’s also some bad news in the story. Amazon’s decision may not simply be a business decision. It also might be a way of appeasing the crowd in Washington.
The company now employs about 575,000 people worldwide, up more than 50 percent in the past year…the pay of those workers has become a growing issue for activists… “I think they saw the writing on the wall…,” Senator Bernie Sanders of Vermont said in an interview after the announcement. …Mr. Sanders and labor organizers have criticized the wages and conditions of Amazon’s work force. …As recently as last month Amazon was resisting the pressure.
The most nauseating aspect of this is that Amazon’s boss issued a groveling tweet to Crazy Bernie.
Since I’ve shared the good news and bad news, now let’s look at the ugly news.
Having decided to boost wages for his workers, Bezos now want to impose higher costs on smaller companies that compete against Amazon.
The company said it would also lobby Washington to raise the federal minimum wage, which has been set at $7.25 for almost a decade.
This is a classic example of cronyism. A big company is using the coercive power of government to unfairly tilt the playing field.
The Wall Street Journalopined about this oleaginous development.
Jeff Bezos…the Amazon CEO showed he also has impeccable political timing. His decision to raise Amazon’s minimum wage to $15 an hour will buy the tech company some political insurance… Mr. Bezos also announced that Amazon will now lobby Congress to raise the national minimum wage from $7.25 an hour. If Amazon is already paying $15, it’s no competitive sweat for Mr. Bezos to look virtuous for the media and politicians.
The WSJ also commented on the implicit extortion.
Speaking of government, Amazon’s wage increase may also buy some insurance against a looming assault from Congress. Bernie Sanders, the Vermont socialist and likely presidential candidate in 2020, has introduced the Stop Bezos Act that would tax Amazon to finance government transfer payments like food stamps. …Mr. Bezos also wants to hold off the federal antitrust cops, but that may cost more than $15 an hour. Politics aside, Amazon’s wage increase wouldn’t be possible if the U.S. economy hadn’t risen out of its eight-year Obama doldrums. As always, the best way to raise living standards is faster growth, not political coercion.
Amen.
Sadly, this is not the first time Amazon has climbed into bed with politicians. It is currently seeking special handouts from state and local governments for a new headquarters complex.
P.S. If you want to understand why government-imposed mandates for higher minimum wages are misguided, there’s very powerful evidence from Seattle. Simply stated, workers lose jobs and income.
But I then shared a second chart showing that workplace deaths declined just as much before OSHA was created.
The moral of my story was quite simple. Deaths primarily fell because America become much more prosperous. And there’s a lot of evidence that wealthier is healthier.
Today, let’s look at a similar example.
A study published by the National Bureau of Economic Research looks at the impact of public health measures in the early 1900s. They start by sharing some good news.
Since the mid-19th century, mortality rates in the Western world have plummeted and life expectancy has risen dramatically. Sometimes referred to as the mortality transition, this development is widely recognized as one of the most significant in the history of human welfare (Fogel 2004). Two features characterize the mortality transition. First, it was driven by reductions in infectious diseases and diseases of infancy and childhood (Omran 2005; Costa 2015). Second, it was concentrated in urban areas.
Do government policies deserve the credit?
There’s some evidence for that hypothesis.
…recent reviews of the literature emphasize the role of public health efforts, especially those aimed at purifying the water supply. For instance, Cutler et al. (2006) argue that public health efforts drove the dramatic reductions in food- and water-borne diseases at the turn of the 20th century. Similarly, Costa (2015) argues that clean-water technologies such as filtration and chlorination were “the biggest contributor[s] to the decline in infant mortality”
To be sure, there were huge public projects in the first several decades of last century. Here’s the data on sewage treatment facilities.
And here’s some data on milk purification efforts.
And the study has data on other aspects of public health as well.
The key question is whether all these efforts were successful. The three authors decided to investigate.
Using data on 25 major American cities for the years 1900-1940, the current study revisits the causes of the urban mortality decline at the turn of the 20th century. Specifically, we conduct a statistical horse race that attempts to distinguish the effects of ambitious, often extraordinarily expensive (Costa 2015, p. 554), public health interventions aimed at controlling mortality from food-and-water-borne diseases. Following previous researchers (Troesken 2004; Cutler and Miller 2005; Beach et al. 2016; Knutsson 2018), we explore the extent to which filtering and chlorinating drinking water contributed to the decline in typhoid mortality observed during the period under study and, more generally, to the observed declines in total and infant mortality. In addition, we explore the effects several other municipal-level efforts that were, at the time, viewed as critical in the fight against typhoid and other food- and water-borne diseases (Meckel 1990; Levitt et al. 2007; Melosi 2008) but have not received nearly as much attention from modern-day researchers. These interventions include: the treatment of sewage before its discharge into lakes, rivers and streams; projects designed to deliver clean water from further afield such as aqueducts and water cribs; requirements that milk sold within city limits meet strict bacteriological standards; and requirements that milk come from tuberculin-tested cows. Because the urban mortality transition was characterized by substantial reductions in infant and childhood mortality (Omran 2005) and because exclusive breastfeeding was not the norm during the period under study (Wolf 2001, 2003), improvements in milk quality seem a particularly promising avenue to explore.
But here’s the surprising result.
They did not find much evidence that public health efforts made a difference.
…our results suggest that the building of a water filtration plant cut the typhoid mortality rate by nearly 40 percent. More generally, however, our results are not consistent with the argument that public health interventions drove the extraordinary reductions in infant and total mortality observed between 1900 and 1940. Specifically, we find that efforts to purify milk had no appreciable effect on infant mortality and no effect on mortality from non-pulmonary tuberculosis (TB), which was often transmitted through infected milk. Likewise, neither chlorinating the water supply nor constructing sewage treatment plants appears to have been effective. …Our results point to other factors such as better living conditions and improved nutrition as being responsible for the sharp decline in urban mortality at the turn of the 20th century.
Here’s the chart showing that infant mortality consistently declined, largely independent of public health efforts.
I’m not suggesting, by the way, that public health spending is bad. Nor am I asserting that it’s a waste of money.
Notwithstanding some of the jokes that target libertarians, the goal isn’t to abolish every regulation or program governing safety and health. Maybe I’m a bad libertarian, but I’d pick a city with sewage treatment over one without.
But my main point is that I don’t need to make that choice. Nobody does.
The data strongly suggests that economic growth and rising levels of prosperity are the real drivers of improved health outcomes. Market-driven prosperity is what generates the wealth needed to improve public health, whether the actual delivery takes place via public or private action.
during which someone lost property to the government despite never being charged with any crime; this happened 380 times in Wayne County. …Jarrett Skorup of the Mackinac Center for Public Policy, who co-authored a recent report on civil forfeiture, said…it’s likely that these forfeitures disproportionately affected low-income individuals, who are less able to afford an attorney or navigate the legal system to reclaim their property. Revenue obtained from forfeited property typically goes to the agency that seized the property.
International Liberty 