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Archive for December, 2018

The government is (partially) shut down, yet I’m not happy or excited.

That’s because Washington isn’t fighting about something I care about, such as the near-shutdown over spending levels in 2011 or the shutdown over Obamacare in 2013.

Instead, the latest drama in Washington is because Trump wants money for a border wall, which is an issue that doesn’t motivate me (though I keep asking my GOP friends why they don’t propose to finance the wall by cutting back on wasteful domestic programs).

But at least this battle gives me an opportunity to augment my collection of shutdown humor.

My favorite for today comes from libertarian Reddit.

Amen. As Jay Leno joked back in 2013, the real problem is that politicians eventually figure out how to get the government going again.

Sticking with that theme, let’s enjoy excerpts from some satire by Babylon Bee earlier this year.

As the federal government faces a shutdown…, millions of Americans reported…a sense of relief washing over them like a wave of peace and serenity at the possibility of a powering-down of our volatile governing bodies. “Maybe it wouldn’t be so bad if the federal government would just close up shop and go away for a little while,” one smiling man told reporters. “They’re such a source of strife and frustration in our daily lives—we need a little peace of mind. I really hope they’ll go ahead and take a little break.” “Don’t worry about us, politicians—we’ll be fine. Just go ahead, shut her down and take as much time as you need,” he added.

So even if it’s only a partial shutdown, and even though it’s not for the reasons I would prefer, I still share the sentiment in the Babylon Bee article.

Which is a good segue to an amusing image from Imgur.

The seal in the above image should thank Hank Stanson, at least according to another article from Babylon Bee.

…local libertarian man Hank Stanson reportedly wrote a letter to Santa asking for the entire government to cease operations forever for Christmas this year. “Dear Santa, all I want for Christmas is for you to shut down the federal government permanently,” his modest request read. “All non-essential services should be shut down immediately.” …”I’ve been a very good boy this year,” he wrote, arguing his case. “I haven’t smoked any marijuana, and I haven’t shouted at any police officers that taxation is theft yet. When a prominent politician died earlier this year, I even waited a full day before blasting him on my Facebook page. So please, Santa Claus, please make this staunch liberty lover a very happy man this year.”

I’ve also been a good boy. I waited a full week after George H.W. Bush died before pointing out that he was not a good president.

On a semi-serious note, it’s worth noting that shutdowns don’t actually save any money.

Notwithstanding this bit of satire, we still have to pay taxes.

And the vast army of minions in the federal bureaucracy get paid for sitting at home.

That’s the message in another contribution from Imgur.

To be fair, I don’t actually object to bureaucrats getting paid during shutdown.

I’m much more concerned that they oftentimes work for agencies and departments that shouldn’t exist.

Which brings us to the final bit of humor for today.

This hits the nail on the head.

Every employee at the Department of Housing and Urban Development is nonessential.

The same is true for the Department of Education, Department of Agriculture, Department of Transportation, Department of Energy, and many other boxes on the federal flowchart.

P.S. I linked above to a couple of prior examples of shutdown humor. You can enjoy other editions by clicking here, here, and here.

P.P.S. People say fiscal policy is dry, but we’re actually fun-loving people. There’s also debt-limit humor and sequestration humor.

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I often write about the failure of government.

In other words, there’s lots of evidence that government spending makes things worse.

Needless to say, this puts a lot of pressure on folks who favor bigger government. They desperately want to find any type of success story so they can argue that increasing the size and scope of the public sector generates some sort of payoff.

And they got their wish. Check out the ostensibly good news in a story from the San Fransisco Chronicle.

Investing billions of dollars in affordable housing and homeless programs in recent years has apparently put the brakes on what had been a surge in California’s homeless population, causing it to dip by 1 percent this year, a federal report released Monday showed. …The report put California’s homeless population this year at 129,972, a drop of 1,560 in the number of people on the streets in 2017. …“I think San Francisco has shown that when targeted investments are made, we see reductions in homelessness here,” Kositsky said. He pointed out that family, youth and chronic veterans homelessness dropped in the city’s last full count — although the number of chronically homeless people went up.

Maybe I’m not in the Christmas spirit, but I don’t see this as a feel-good story.

Are we really supposed to celebrate the fact that the government spent “billions of dollars” and the net effect is that the homeless population dropped just 1 percent?

The story doesn’t contain enough details for precise measurements, but even if we assume “billions” is merely $2 billion, then it cost taxpayers close to $1.3 million to get one person off the street. For that amount of money, taxpayers could have bought each of them a mansion!

In other words, the program has been a rotten investment. Heck, it makes Social Security seem like a good deal by comparison.

To be sure, maybe the number isn’t quite so bad because we’re comparing multi-year outlays with a one-year change in the homeless population. Though maybe the number is even worse because taxpayers actually coughed up far more than $2 billion.

The bottom line is that if my friends on the left see this as an example of success, I’d hate to see their definition of failure.

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I wrote a column earlier this month about the “world’s most depressing tweet,” which came from the Census Bureau and noted that the suburbs of Washington, DC, are the richest parts of America.

To be sure, I was engaging in a bit of hyperbole since a tweet about famine, war, or genocide surely would be more depressing. Nonetheless, I think it is a very bad sign that so many undeserving people are making so much money thanks to a bloated and cronyist central government.

Today I want to share another tweet that deserves some sort of special accolade.

I thought about calling it the “world’s best-ever tweet,” but I’m going to be more restrained and simply assert that it is the best tweet about socialism and capitalism.

This is spot on.

I’ve dealt with countless leftists who claim that the failure of places such as Venezuela, Cuba, North Korea, Greece, Zimbabwe, and the Soviet Union don’t count because they weren’t “real socialism” or “real communism.”

Indeed, that’s even become a humorous theme (see here, here, and here from my collection of socialism/communism humor).

But shouldn’t we learn something from the fact that “almost socialism” invariably produces awful results?

Similarly, there has never been a society that is 100 percent capitalist. The world’s freest nations today, such as Hong Kong and Singapore, have state sectors that consume about 20 percent of economic output. Likewise, government consumed 10 percent of GDP during the height of the western world’s supposedly laissez-faire period in the 1800s.

That being said, shouldn’t we learn something from the fact that “almost capitalism” created the amazing hockey stick of human progress? Shouldn’t we learn something from the fact that “some capitalism” is capable of dramatically reducing global poverty?

P.S. If there was a prize for the most short-sighted, naive, and anti-empirical tweet, this example would win the prize.

P.P.S. And this tweet wins the prize for the best comeback. Consider it a case of tweet-on-tweet violence.

P.P.P.S. Last but not least, here’s a tweet that sums up the essential difference between libertarians and statists.

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I’m not as eloquent on the issue as Professor Daniel Lin, but I recently explained on Fox Business that government subsidies for higher education have enabled big increases in tuition, an outcome that has been good for bureaucrats and bad for students.

In effect, this is simply a story of “third-party payer,” which happens when consumers get to buy something with other people’s money.

Sellers respond by increasing prices since they know that consumers won’t care as much about price.

Indeed, this is the main problem plaguing America’s health sector.

Simply stated, government subsidies are a recipe for higher costs and inefficiency, regardless of the product or sector.

We definitely see the bad consequences in higher education. Mitch Daniels, the head of Purdue University, correctly identifies the problem of third-party payer in a column for the Washington Post.

…let’s design an economic sector guaranteed to cost too much. …we will sell a product deemed a necessity, with little or no option for the customer to avoid us altogether. Next, we will arrange to get paid for inputs, not outputs — how much we do, not how well we do it. We will make certain that actual results are difficult or impossible to measure with confidence. And we’ll layer on a pile of complex federal regulations to run up administrative costs. Then, and here’s the clincher, we will persuade the marketplace to flood our economic Eden with payments not from the user but from some third party. This will assure that the customer, insulated from true costs, will behave irrationally, often overconsuming and abandoning the consumerist judgment he practices at the grocery store or while Internet shopping. Presto! Guaranteed excessive spending, much of it staying in the pockets of the lucky producers. You say, “Oh, sure, this is American health care.” …Your answer is correct but incomplete. It worked so well in health care, we decided to repeat the formula with higher education. …by evading accountability for quality, regulating it heavily, and opening a hydrant of public subsidies in the form of government grants and loans, we have constructed another system of guaranteed overruns. It is the opposite of an accident that the only three pricing categories that have outpaced health care over recent decades are college tuition, room and board, and books.

Amen.

Daniels has done a great job controlling costs at Purdue, but I’m even more impressed that he is willing to look at the problems for our entire system of higher education (as such, I’ll forgive him for being the Budget Director during the big-spending Bush Administration).

I especially like his solution, which in part would require colleges to repay taxpayers if there are loan defaults, thus ensuring that they have some skin in the game.

…a promising movement is advancing in education to put some of the risk of lousy results — students who do not graduate or who graduate without having learned enough to earn their way in the world — on the institutions that “educated” them. It is about time. This game has been skinless far too long. …even a small degree of risk-sharing in higher education would cause significant behavior change. …Even a small charge, plus the embarrassment of its public announcement, would probably jar many schools from their complacent ruts.

By the way, some people (including Paul Krugman) claim higher tuition is caused by budget cuts. Preston Cooper shared some of his research on this issue in the Wall Street Journal.

A typical student in an American public college pays thousands of dollars more in tuition than just a decade ago. Students and parents are worried and frustrated, and many point the finger at state legislators… Hillary Clinton blamed “state disinvestment” in higher education for soaring tuition and declared her support for “free college.”While the “disinvestment” narrative is simple and appealing, it collapses under scrutiny. …Tuition goes up no matter what state legislators do. Public colleges, with state boundaries insulating them from competition, and generous federal student aid programs at their disposal, charge as much as they can get away with. Changes in state funding are largely irrelevant.

He’s right about federal aid enabling higher tuition. Academic scholars have found a very clear link.

Now let’s focus on the problem of ever-expanding bureaucracy.

David Frum points out in the Atlantic that college bureaucracies have done a marvelous job of….drum roll…advancing the interests of college bureaucracies.

One of the most famous essays on bureaucracy ever written was built upon a deceptively simple observation. Between 1914 and 1928, the number of ships in the British Navy declined by 67 percent. The ranks of officers and men shrank by 31 percent. But the number of Admiralty officials administering the shrunken force rose by 78 percent. …Here was the origin of Parkinson’s famous laws of bureaucracy, including “work expands to fill the time available” and “officials make work for each other.” …Why does college education cost so much? The Parkinson of American academia is Ralph Westfall, a professor at California Polytechnic University in Pomona. He computed in 2011 that over the 33 years from 1975 to 2008, the number of full-time faculty in the California state university system had barely increased at all: up from 11,614 to 12,019. Over the same period, the number of administrators had multiplied like little mushrooms: 3,000 had become 12,183. …with our universities. We’ve been thinking of them as institutions for teaching and learning—and wondering why we seem to be spending so much without achieving more. But if you think of them as institutions generating a perpetual cycle of employment in specialties for which there would otherwise be no demand at all? Why in that case, they are succeeding brilliantly.

George Will, in a column about political correctness and campus snowflakes, shares this factoid about bureaucracy in California’s higher-education system.

…between the 1997-1998 academic year and the Great Recession year of 2008-2009, while the University of California student population grew 33 percent and tenure-track faculty grew 25 percent, senior administrators grew 125 percent. “The ratio of senior managers to professors climbed from 1 to 2.1 to near-parity of 1 to 1.1,”

Writing for the Boston Globe, Professor Benjamin Ginsberg warned that higher tuition is feeding an ever-expanding bureaucracy

…over the last half-century, America’s universities have slowly been taken over by a burgeoning class of administrators and staffers who are less interested in training future entrepreneurs and thinkers as they are in turning institutions of learning into cash cows for a growing academic bureaucracy. …Every year, hosts of administrators and staffers are added to university payrolls, even as budget crises force schools to shrink their full-time faculties. There are armies of functionaries – vice presidents, associate vice presidents, assistant vice presidents, provosts, associate provosts, vice provosts, assistant provosts, deans, deanlets, and deanlings, each commanding staffers and assistants. In turn, the ranks of administrators have expanded at nearly twice the rate of the faculty, while administrative staffs have outgrown the academics by nearly a factor of five. No wonder college is so expensive!

Let’s close with this bit of satire from libertarian Reddit.

P.S. You won’t be surprised to learn that Hillary Clinton, when looking for solutions to a problem caused by government subsidies, recommended even more government subsidies.

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Paul Ryan’s Legacy

Most politicians are contemptible. They are shallow, grasping, insecure clowns who want to expand the size and scope of government so they have more power to dictate how the rest of us live our lives.

To make matters worse, many of them know they are doing the wrong thing, but they don’t have the moral courage to resist the corrupt, go-along-to-get-along culture of Washington.

But that doesn’t mean they’re bad people. When people ask me what motivates politicians, I sometime explain the theory of “public choice.” In other cases, I tell the simple story of the guy who is endlessly conflicted between an angel on one shoulder and a devil on the other shoulder.

And I tell them that a good politician is one who – more often than not – sides with the angel.

And that’s why, when asked to comment on the outgoing Speaker of the House, I applauded Paul Ryan. You can watch the entire interview here, but I’ve excerpted a segment that hits the two main points.

Simply stated, Ryan was instrumental in moving the ball forward on tax reform. I very much doubt we would have achieved a lower corporate tax rate or scaled back the state and local tax deduction without all the work he did during his time at the Budget Committee and Ways & Means Committee.

And while entitlement reform never happened, first because of Obama and now because of Trump, it’s nonetheless a remarkable achievement that Ryan was able to:

  • Put together budgets with genuine Medicaid and Medicare reform.
  • Get those budgets approved by the House and Senate.

By the way, I’m not being a naive cheerleader.

Ryan had plenty of bad votes, including the horribly corrupt TARP bailout. And he routinely supported many other elements of George W. Bush’s big-government agenda.

And his tax record wasn’t perfect, either. His Roadmap budget plan had some great reforms, but also included a value-added tax. More recently, he supported the border-adjustment tax (sort of a pre-VAT).

But even Saint Ronald wasn’t perfect.

P.S. My biggest sin of omission in the interview is that I didn’t mention the de facto five-year spending freeze between 2009-2014, an achievement that largely overlapped with Ryan’s tenure as Chairman of the Budget Committee.

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I have a series of columns where I explore tactical disagreements with folks who generally favor free markets and less government.

  • In Part I, I defended the flat tax, which had been criticized by Reihan Salam
  • In Part II, I explained why I thought a comprehensive fiscal package from the American Enterprise Institute was too timid.
  • In Part III, I disagreed with Jerry Taylor’s argument for a carbon tax.
  • In Part IV, I highlighted reasons why conservatives should reject a federal program for paid parental leave.

Today, we’re going to revisit the carbon tax because Josiah Neeley and William Murray of the R Street Institute have a column in the Hill that claims that levy would not finance bigger government.

…There have been numerous tax rate changes in the past 70 years, with the marginal income tax rate falling from a high of over 90 percent in the 1950s to as low as 28 percent in the late 1980s. Yet during this entire time period, federal tax revenue has stayed in a fairly narrow band when measured as a percentage of gross domestic product, never rising above 20 percent or falling much below 15 percent between 1950 and 2018. This phenomenon, which keeps federal revenues within a relatively narrow band, is known as Hauser’s law…the belief that any kind of new taxation introduces even greater government spending is based on very little actual evidence. Instead, Hauser’s law provides evidence that certain kinds of tax swaps, such as exchanging an income tax for a carbon tax, may actually increase the rate of economic growth without increasing the tax share of the overall economy.

They also claim that higher taxes don’t lead to more spending.

…demand for government spending drives tax policy, not the other way around. This conclusion has important implications for the carbon tax debate. …The relative imperviousness of the gross domestic product tax percent equilibrium since the late 1940s suggests that spending pressures drive taxes and not the other way around.

I have two responses to this analysis.

First, I very much want Hauser’s Law to be true. It would be very comforting if politicians in Washington could never seize more than 20 percent of the private sector’s output.

Sadly, that’s simply not the case. Just look at Europe, where central governments routinely extract far more than 40 percent of economic output.

All that’s required is taxes that target lower- and middle-income taxpayers. That’s happened in Europe because of harsh value-added taxes, punitive payroll taxes, onerous energy taxes, and income taxes that impose very high rates on ordinary people.

Needless to say, a carbon tax would be a step in that direction.

Second, the authors offer zero evidence that “government spending drives tax policy, not the other way around.”

By contrast, there is some persuasive data for the “starve the beast” hypothesis, which is based on the notion that higher taxes will encourage more spending.

In other words, Milton Friedman was right when he warned that “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

Though I actually don’t think this causality debate is very important. The bottom line is that higher taxes are a bad idea if they trigger higher spending, and higher taxes also are a bad idea if they merely enable higher spending.

The column in the Hill is a spin-off from a recent study published by the R Street Institute.

Let’s look at that publication to further explore this issue. It starts with the basic hypothesis that a revenue-neutral carbon tax would be desirable.

…a carbon tax…provides a source of revenue that can be put to beneficial purposes, such as funding cuts to other existing taxes. By using the revenue from a carbon tax to replace existing ones, such a revenue neutral “tax swap” would greatly reduce or eliminate the economic costs of the tax. Indeed, in some cases, even if benefits from reduced emissions are not considered, a tax swap could be a net positive for the economy. …many critics of a carbon tax are skeptical as to whether a revenue-neutral carbon tax could be enacted. Some critics go further, arguing that even if a carbon tax started out as revenue neutral, it would not remain so. …While there are no guarantees, the existing evidence suggests that a revenue-neutral carbon tax would not lead to larger government over the long term and could even shrink it.

I don’t object to the notion that a carbon tax would be theoretically desirable if it replaced a tax that did more damage per dollar collected, such as the corporate income tax.

My concern has always been such a swap is highly unlikely. Indeed, many proponents of the carbon tax are very explicit about wanting to use the revenues to create a new entitlement. That would be the worst outcome, assuming we want more growth.

And, as noted above, I don’t think Hauser’s Law would save us from higher overall taxes and a larger burden of government spending.

Interestingly, the study basically acknowledges the same thing.

…given that Hauser’s Law is not an iron law of economics, it would be imprudent to put too much weight on it when considering the effects of a tax swap.

There are a couple of other parts of the study that deserve attention, including the assertion that politicians would have a hard time using the carbon tax as a money machine.

…a carbon tax has natural limitations that preclude it from being used to generate ever-increasing amounts of tax revenue. This is because higher carbon-tax rates induce a more rapid fall in greenhouse gas emissions. This, in turn, limits the overall revenue collected from the tax. In fact, unlike revenue from income, sales or property taxes, which tends to increase over time even at a constant tax rate, revenue from a carbon tax is likely to remain stable or fall gradually as emissions decline.

Since I’m a fan of the Laffer Curve, I think this argument is very reasonable in theory.

In effect, the R Street Institute is making the same argument – excessive tax rates can reduce revenue – that Alexander Hamilton used when endorsing tariffs.

But where is the point where carbon taxes become excessive? I don’t know the answer, but I’m very worried that there would be ample leeway to collect a lot of tax revenue before getting close to the revenue-maximizing point (the Congressional Budget Office estimates that a $25-per-ton carbon tax would generate more than $1 trillion in the first ten years).

The bottom line is that I worry that a carbon tax likely would be akin to a value-added tax. Yes, there are negative feedback effects from a VAT, as I noted at the end of yesterday’s column. But that doesn’t change the fact that the revenue-generating capacity of the VAT helps to explain Europe’s bloated welfare states.

I understand how a carbon tax, in theory, might not enable bigger government. But I see no way, in reality, that politicians wouldn’t use this new levy to finance even more spending.

P.S. If you’re not already convinced that a carbon tax will mean bigger government, then all you need to know is that both the International Monetary Fund and the Organization for Economic Cooperation and Development support higher energy taxes for the United States.

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A couple of weeks ago, I used a story about a local tax issue in Washington, DC, to make an important point about how new tax increases cause more damage than previous tax increases because “deadweight losses” increase geometrically rather than arithmetically.

Simply stated, if a tax of X does Y amount of damage, then a tax of 2X will do a lot more damage than 2Y.

This is the core economic reason why even left-leaning international bureaucracies agree that class-warfare taxes are so destructive. When you take a high tax rate and make it even higher, the damage grows exponentially.

As such, I was very interested to see a new study on this topic from the World Bank. It starts by noting that higher tax rates are the wrong way to address fiscal shortfalls.

…studies have used the narrative approach for individual or multi-country analyses (in all cases, focusing solely on industrial economies, and mostly on industrial European countries). These studies find large negative tax multipliers, ranging between 2 and 5. This recent consensus pointing to large negative tax multipliers, especially in industrial European countries, naturally entails important policy prescriptions. For example, as part of a more comprehensive series of papers focusing on spending and tax multipliers, Alesina, Favero, and Giavazzi (2015) point that policies based upon spending cuts are much less costly in terms of short run output losses than tax based adjustments.

The four authors used data on value-added taxes to investigate whether higher tax rates did more damage or less damage in developing nations.

A natural question is whether large negative tax multipliers are a robust empirical regularity… In order to answer this highly relevant academic and policy question, one would ideally need to conduct a study using a more global sample including industrial and, particularly, developing countries. …This paper takes on this challenge by focusing on 51 countries (21 industrial and 30 developing) for the period 1970-2014. …we focus our efforts on building a new series for quarterly standard value-added tax rates (henceforth VAT rates). …We identify a total of 96 VAT rate changes in 35 countries (18 industrial and 17 developing).

The economists found that VAT increases did the most damage in developing nations.

…when splitting the sample into industrial European economies and the rest of countries, we find tax multipliers of 3:6 and 1:2, respectively. While the tax multiplier in industrial European economies is quite negative and statistically significant (in line with recent studies), it is about 3 times smaller (in absolute value) and borderline statistically significant for the rest of countries.

Here’s a chart showing the comparison.

Now here’s the part that merits close attention.

The study confirms that the deadweight loss of VAT hikes is higher in developed nations because the initial tax burden is higher.

Based on different types of macroeconomic models (which in turn rely on different mechanisms), the output effect of tax changes is expected to be small at low initial levels of taxation but exponentially larger when initial tax levels are high. Therefore, the distortions and disincentives imposed by taxation on economic activity are directly, and non-linearly, related to the level of tax rates. By the same token, for a given level of initial tax rates, larger tax rate changes have larger tax multipliers. …In line with theoretical distortionary and disincentive-based arguments, we find, using our novel worldwide narrative, that the effect of tax changes on output is indeed highly non-linear. Our empirical findings show that the tax multiplier is essentially zero under relatively low/moderate initial tax rate levels and more negative as the initial tax rate and the size of the change in the tax rate increase. …This evidence strongly supports distortionary and disincentive-based arguments regarding a nonlinear effect of tax rate changes on economic activity…the economy will inevitably suffer when taxes are increased at higher initial tax rate levels.

What makes these finding especially powerful is that value-added taxes are less destructive than income taxes on a per-dollar-raised basis.

So if taking a high VAT rate and making it even higher causes a disproportionate amount of economic damage, then imagine how destructive it is to increase top income tax rates.

P.S. The fact that a VAT is less destructive than an income tax is definitely not an argument for enacting a VAT. That would be akin to arguing that it would be fun to break your wrist because that wouldn’t hurt as much as the broken leg you already have.

I’ve even dealt with people who actually argue that a VAT isn’t economically destructive because it imposes the same tax on current consumption and future consumption. I agree with them that it is a good idea to avoid double taxation of saving and investment, but that doesn’t change the fact that a VAT increases the wedge between pre-tax income and post-tax consumption.

And that means less incentive to earn income in the first place.

Which is confirmed by the study.

Panels A and B in Figure 18 show the relationship between the VAT rate a and the perceived effect of taxes on incentives to work and invest, respectively, for a sample of 123 countries for the year 2014. Supporting our previous findings, the relationship is highly non-linear. While the perceived effect of taxes on the incentives to work and invest barely changes as VAT rates increase at low/moderate levels (approximately until the VAT rate reaches 14 percent), it falls rapidly for high levels of VAT rates.

Here’s the relevant chart from the report.

The moral of the story is that all tax increases are misguided, but class-warfare taxes wreak the most economic havoc.

P.S. Not everyone understands this common-sense observation. For instance, the bureaucrats at the Congressional Budget Office basically argued back in 2010 that a 100 percent tax rate was the way to maximize growth.

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