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Every year, the Social Security Administration issues a “Trustees Report” that summarizes the program’s financing. So every year (see 2018, 2017, 2016, 2015, etc) I cut through all the verbiage and focus the numbers that really matter.

First, here’s the data from Table VI.G9 showing annual spending and annual revenue, and the numbers are adjusted for inflation. Everything to the left of the vertical red line is historical data. Everything to the right is an estimate based on “intermediate” economic and demographic projections.

The bad news is that there’s a never-ending increase in the program’s fiscal burden.

The only good news is that country presumably will be much richer in the future, so we’ll have more income to pay all those taxes and finance all that spending.

That being said, the fiscal burden is projected to increase faster than our income, so the economic burden of Social Security will increase over time.

But there’s also a wild card to consider. Simply stated, we have more data from Table VI.G9 that shows the program has a giant, ever-expanding deficit.

Here are the grim numbers (though not quite as grim as last year when the cumulative shortfall was $43.7 trillion). Once again, everything to the left of the line is historical data and everything to the right is a projection.

The obvious takeaway is that the program is bankrupt.

Indeed, a private pension fund with these numbers would have been shut down a long time ago. And its executives would be in prison for running a Ponzi Scheme.

Politicians won’t put themselves in prison, of course, but they eventually will be forced to address Social Security’s huge shortfall. If nothing else, the so-called Trust Fund (which isn’t a real Trust Fund since it is filled with IOUs) runs out of money in 2035.

The interesting question is what sort of “solution” they choose when the crisis occurs.

Sadly, many politicians are gravitating to a plan to impose ever-higher taxes to prop up the system.

A far better approach is personal retirement accounts. I’ve written favorably about the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system. Heck, I even like the system in the Faroe Islands.

The bottom line is that there’s been a worldwide revolution in favor of private savings and the United States is falling behind.

P.S. If you have some statist friends and family who get confused by numbers, here’s a set of cartoons that shows the need for Social Security reform.

P.P.S. As I explain in this video, reform does not mean reducing benefits for current retirees, or even older workers.

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When I pontificate about trade, I often point out that protectionism is a net negative for the economy.

Yes, it is possible to erect trade barriers that benefit specific sectors and protect certain jobs, and this is the “seen” benefit.

But the “unseen” costs are always far greater.

Simply stated, protectionism inevitably results in higher prices, foregone prosperity, and economic inefficiency.

Which is exactly what was determined in new research by three economists when they investigated Trump’s trade taxes on washing machines.

We analyze several rounds of U.S. import restrictions against washing machines. Using retail price data, we estimate the price effect of these import restrictions by comparing the price changes of washers with those of other appliances. We find that in response to the 2018 tariffs on nearly all source countries, the price of washers rose by nearly 12 percent; the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount. Factoring in the effect of dryers and price increases by domestic brands, our estimates for the 2018 tariffs on washers imply a tariff elasticity of consumer prices of between 110 and 230 percent. …The result is an increase of 1.542 billion USD in consumer costs per year. …calculated duties from February 2018 to January 2019 amounted to just under 82 million USD for washing machines, and about 355,000 USD for washing machine parts. …Combining these numbers together reveals a consumer cost per job of roughly 817,000 USD annually.

Here’s a chart from the study showing how prices increased after the tax was imposed.

A report in the New York Times highlights some of the findings.

President Trump’s decision to impose tariffs on imported washing machines..is a case study in how a measure meant to help domestic factory workers can rebound on American consumers, creating unexpected costs and leaving shoppers with a sky-high bill for every factory job created. …consumers bore between 125 percent and 225 percent of the costs of the washing machine tariffs. The authors calculate that the tariffs brought in $82 million to the United States Treasury, while raising consumer prices by $1.5 billion. And while the tariffs did encourage foreign companies to shift more of their manufacturing to the United States and created about 1,800 new jobs, the researchers conclude that those came at a steep cost: about $817,000 per job. …The costs of tariffs are paid by some combination of consumers, in the form of higher prices for the products they buy, and companies, which sometimes accept lower profit margins in order to avoid losing sales when tariffs are applied. …

Not that these findings should be a surprise.

There have been numerous studies showing that protectionism is very costly.

Indeed, the NYT story cites a few of these examples.

Other studies support the idea that tariffs are an expensive way to bolster job-creation in the United States. A study by the Peterson Institute found that tire tariffs imposed by Mr. Obama cost about $900,000 per job created. A more recent one found that Mr. Trump’s steel tariffs raised prices on steel users by $650,000 for every job they supported.

By the way, I suspect all this research is incomplete because it mostly measures how consumers have to pay higher prices.

That’s a real cost, of course, but what about secondary costs? What economic activity is being lost because consumers (in the case of washing machines) no longer have $1.542 billion available for other expenditures?

I explored this issue when writing about the green-energy programs that were part of the Obama Administration’s stimulus scheme. Here’s some of that column.

You don’t measure the job impact…simply by dividing the number of jobs into the amount of money… That only gives you part of the answer. You also have to estimate how many jobs would have been created if the $19 billion (or full $38.6 billion) had been left in the private sector rather than being diverted by the heavy hand of government. …Keeping in mind that good analysis requires us to measure the “seen” and “unseen,” let’s now look at net job creation, which is where the rubber meets the road. The federal government is going to divert $38.6 billion from private capital markets for its green energy program, and the Administration claims this will lead to 60,000-65,000 jobs. However, based on the existing ratio of non-financial capital to employment, that same $38.6 billion, if left in the productive sector of the economy, would create about 240,000 jobs. In other words, for every one job “created” by the government, almost four jobs will be foregone. The Obama White House isn’t defending a program that spends a lot of money to create very few jobs. The Administration is defending a program that spends a lot of money and – as a result – reduces total jobs by perhaps 180,000.

I freely confessed in that column that these were back-of-the-envelope calculations, so perhaps the economic costs would show up as lower average wages instead.

None of that changes my point that the economy suffers because of government intervention (whether Obama-style fake stimulus or Trump-style trade taxes).

P.S. Mark Perry of the American Enterprise Institute added his two cents on this issue and shared these examples of costly protectionism.

P.P.S. I much prefer Reagan’s approach to trade (see here, here, and here).

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The International Monetary Fund is one of my least favorite international bureaucracies because the political types who run the organization routinely support bad policies such as bailouts and tax increases.

But there are professional economists at the IMF who do good work.

While writing about the mess in Argentina yesterday, for instance, I cited some very sensible research from one of the IMF’s economists.

Today, I’m going to cite two other IMF scholars. Serhan Cevik and Fedor Miryugin have produced some new research looking at the relationship between firm survival and business taxation. Here’s the basic methodology of their study.

While creative destruction—through firm entry and exit—is essential for economic progress, establishing a conducive ecosystem for firm survival is also necessary for sustainable private sector development… While corporate income taxes are expected to lower firms’ capital investment and productivity by raising the user cost of capital, distorting factor prices and reducing after-tax return on investment, taxation also provides resources for public infrastructure investments and the proper functioning of government institutions, which are key to a firm’s success. …the overall impact of taxation on firm performance depends on the relative weight of these two opposing effects, which can vary with the composition and efficiency of taxation and government spending. … In this paper, we focus on how taxation affects the survival prospects of nonfinancial firms, using hazard models and a comprehensive dataset covering over 4 million nonfinancial firms from 21 countries with a total of 21.5 million firm-year observations over the period 1995–2015. …we control for a plethora of firm characteristics, such as age, size, profitability, capital intensity, leverage and total factor productivity (TFP), as well as systematic differences across sectors and countries.

By the way, I agree that there are some core public goods that help an economy flourish. That being said, things like courts and national defense can easily be financed without any income tax.

And even with a very broad definition of public goods (i.e., to include infrastructure, education, etc), it’s possible to finance government with very low tax burdens.

But I’m digressing.

Let’s focus on the study. As you can see, the authors grabbed a lot of data from various European nations.

And they specifically measured the impact of the effective marginal tax rate on firm survival.

Unsurprisingly, higher tax burdens have a negative effect.

We find that the tax burden—measured by the firm-specific EMTR—exerts an adverse effect on companies’ survival prospects. In other words, a lower level of EMTR increases the survival probability among firms in our sample. This finding is not only statistically but also economically important and remains robust when we partition the sample into country subgroups. …digging deeper into the tax sensitivity of firm survival, we uncover a nonlinear relationship between the firm-specific EMTR and the probability of corporate failure, which implies that taxation becomes a detriment to firm survival at higher levels. With regards to the impact of other firm characteristics, we obtain results that are in line with previous research and see that survival probability differs depending on firm age and size, with older and larger firms experiencing a lower risk of failure.

For those that like statistics, here are the specific results.

Here are the real-world implications.

Reforms in tax policy and revenue administration should therefore be designed to cut the costs of compliance, facilitate entrepreneurship and innovation, and encourage alternative sources of financing by particularly addressing the corporate debt bias. In this context, the EMTR holds a special key by influencing firms’ investment decisions and the probability of survival over time, especially in capital intensive sectors of the economy. Importantly, the challenge for policymakers is not simply reducing the statutory CIT rate, but to level the playing field for all firms by rationalizing differentiated tax treatments across sectors, capital asset types and sources of financing.

There are some obvious takeaways from this research.

For what it’s worth, this IMF study basically embraces the sensible principles of business taxation that you find in a flat tax.

Too bad we can’t convince the political types who run the IMF to push the policies supported by IMF economists!

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Argentina is a sobering example of how statist policies can turn a rich nation into a poor nation.

I’m not exaggerating. After World War II, Argentina was one of the world’s 10-richest nations.

But then Juan Peron took power and initiated Argentina’s slide toward big government, which eroded the nation’s competitiveness and hampered growth.

Even the Washington Post‘s Bureau Chief shares my assessment.

Perón’s rise marked the start of the country’s long, slow slide. …big-government populism squandered Argentine’s fortunes on nationalized railroads and ports. Perón’s pro-labor policies cultivated devout working-class followers but also laid the groundwork for the conversion of his party into an entity that would mirror a corrupt union. …The country battled bouts of damaging inflation in 1955, 1962, 1966 and 1974. …in the 1980s, Argentina saw a bonanza of public-sector hiring, bloated budgets… Cristina Fernández de Kirchner, the Perónist ex-president, took the helm a decade ago, ushering in a new era of fudged financial data and populism.

Thanks to endless bouts of bad policy, the nation suffers from perpetual crisis.

…a country stuck in what has now become its natural state: crisis. As if living a deja vu, I flipped on the TV to once again hear Argentine newscasters fretting about bailouts, the diving peso and fears of default. Beggars — even more than before — panhandled on the same corner by an imposing church on Santa Fe Avenue. As others had done years before, stores advertised going-out-of-business sales. …Argentina is doomed to a repeating history of financial emergencies. You can almost set your watch to it, and, worryingly, the intervals between implosions are growing ever shorter.

If we focus on policy this century, there was plenty of bad policy under the previous Peronist-oriented Presidents.

And since government amassed so much power over the economy, nobody should be surprised by this BBC report about rampant corruption.

More than a dozen people have been arrested in Argentina after copies of notebooks were found detailing what seem to be illicit political payments. They were kept by Oscar Centeno, who was employed as a driver by a public works official and describe delivering bags of cash. The notebooks cover from 2003 to 2015, when Cristina Fernández and her late husband Néstor Kirchner were president. …She has previously said she is being politically persecuted by the current government, who want to distract people from the country’s economic problems. …the payments total around US$56m (£43m), but Judge Claudio Bonadio says the corruption network could reached up to US$160m.

The Economist reports that the current president, Mauricio Macri, is imposing his share of bad policies, including price controls.

The measures are a change of course for a president who sought to undo the effects of more than a decade of populist government. The most important one is a…revival of a price-control mechanism in force under the two Peronist presidents who preceded him, Néstor Kirchner and his wife, Cristina Fernández de Kirchner. In Mr Macri’s version, which he, like the Kirchners, calls “precios cuidados” (“curated prices”), the price of 64 consumer items, from milk to jam, will be frozen for six months (ie, until the eve of the election). An “army” of inspectors, under the direction of the production ministry, will enforce supermarkets’ adherence to the freeze.

Price controls are spectacularly misguided.

Politicians cause inflation by having the central bank create too much money. They then act as if the result rise in prices is the fault of “greedy businesses” and impose controls.

All of which never ends well (see Venezuela, for instance).

But Macri is also adopting other bad policies.

The government has also opened new credit lines for pensioners and families with children and expanded a plan to build new homes with state financing.

He obviously hopes his short-sighted policies will enable him to prevail in the upcoming elections.

And maybe he will if his main opponent is similarly bad.

But at least one candidate supports pro-market reforms.

Argentine economist José Luis Espert once described President Mauricio Macri’s political movement as “kirchnerism with good manners,”… Now a presidential candidate himself, Espert wants to make government a lot less polite. “We need to lay off approximately 1.5 million public employees,” Espert, the head of the newly-formed Libertarian party, told AQ in an exclusive interview. “What I propose is a complete U-turn.” …The economist claims that he is the only candidate who can actually turn around what he describes as “Argentina’s century-long failure, marked by economic populism.” …“We need to abandon our model of import substitution and of running budget deficits, and revise our labor laws, which are similar to those during Italian fascism. We need to have free trade and a state that can pay for itself through reasonable taxes,” added Espert, who on Feb. 2 released a book called The Complicit Society, in which he describes “the economic myths that led Argentina to decadency.”

Wouldn’t it be a great ending to the story if Argentina become another Chile?

My fingers certainly will be crossed (as they are currently for Brazil).

Ironically, even though the International Monetary Fund has subsidized bad policy in Argentina with periodic bailouts, some of the economists who work at the IMF actually understand what’s plaguing the country.

Here are some excerpts from their study, starting with a description of how big government is stifling prosperity.

Argentina’s economic fortune has been on a declining path for a long time. Argentina’s per capita output relative to that of advanced economies nearly halved over the past 50 years. …yearly labor productivity growth has been close to zero on average since 1980… Argentina’s regulatory and administrative burden on businesses is one of the heaviest among EMs… Argentina has the worst overall PMR index among 42 OECD and non-OECD countries, owing to high barriers to entrepreneurship (including complex regulatory procedures which impede firm entry/expansion, and barriers in network sectors), …high trade and other external barriers, and a significant involvement of the state in the economy, both through state-owned enterprises and price controls. …Stringent labor market regulations, such as high firing costs and restrictions on temporary employment, hamper efficient allocation of resources in the economy, discourage investment, and lead to labor underutilization and informality… High tax burden, especially on labor, have similar adverse effects on investment, labor utilization (particularly formal employment), and overall competitiveness of the economy.

Here’s a chart showing how Argentina is de-converging, which is remarkably depressing since conventional theory tells us that poor nations should be catching up with rich nations.

Here are the main findings from the study.

The main objective of this paper is to…assess the role of the reforms in boosting long-term GDP growth through their impact on (i) capital accumulation, (ii) labor utilization, and (iii) total factor productivity or efficiency. …The paper finds that structural reforms can have significant impact on long-term GDP growth through all three supply-side channels. …An ambitious reform effort, which were to improve business regulatory environment (closing half the gap with Australia and New Zealand over two decades), would add 1–1½ percent to average annual growth of GDP. Reducing trade tariffs and payroll taxes (closing half the gap with Australia and New Zealand) could each boost average annual real GDP growth by about 0.1 percent.

Keep in mind, by the way, that even small increments of sustained growth make a huge difference to a nation’s long-run prosperity.

Here’s a table showing the IMF’s suggested reforms.

I actually agree with almost everything on the list.

The only mistake is calling for aggressive anti-trust laws. Yet history teaches us that such laws wind up being tools to protect incumbent companies.

Moreover, the best way to fight monopolies is to have completely open entry to the marketplace.

But I don’t want to quibble. By IMF standards, that list of proposed policies is excellent.

P.S. Pope Francis inexplicably wants to export the failed Argentine model to the rest of the world. Not surprisingly, I think Thomas Sowell and Walter Williams have a better approach.

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What’s the biggest problem with the Federal Reserve?

The obvious answer is that the Central Bank is susceptible to Keynesian monetary policy, which results in a harmful boom-bust cycle.

For instance, the Fed’s artificially low interest rates last decade played a key role (along with deeply misguided Fannie Mae-Freddie Mac subsidies) is causing the 2008 crisis.

And let’s not forget the Fed’s role in the Great Depression.

Today, though, let’s focus on a narrower topic.

As Norbert Michel explains for the Heritage Foundation, the central bank is trying to expand its power in the financial system.

…one of the “potential actions” the Fed Board is considering is to develop its very own real-time settlement system. This approach makes many private sector actors anxious because no private company wants to compete with the feds. …Since its inception, the Fed has been heavily involved in the U.S. payments system. And one can easily argue that the system has lagged behind precisely because the Fed has been too involved. …The Fed also effectively took over the check-clearing business even though the economic case for such a move was highly suspect. Private firms were doing fine. In fact, there is a long history of the Fed usurping the private market.

Here are some details on the Fed’s most-recent power grab.

…the government is once again angling to take over a function that private firms are already providing. The Clearinghouse, a private association owned by 25 large banks, launched its own system—Real-Time Payments (RTP)—in November 2017. …the private sector is better than the government at providing more goods and services to more people. In the private sector, competitive forces and the need to satisfy customers create constant pressure to innovate and improve. Government entities are wholly insulated from these pressures. The government should not provide a good or service unless there is some sort of clear market failure, where the private sector has failed to provide it. This type of failure clearly does not exist in the payments industry.

Norbert is right. Competition is the way to get better outcomes for consumers.

As such, it’s rather absurd to think a government-operated monopoly will produce good results (look, for instance, at its cronyist behavior during the financial crisis).

Now let’s zoom out and consider the big picture.

Richard Rahn has a column in the Washington Times that raises questions about the Fed’s role in a modern economy.

Is there a need for the Fed? …The Fed has an extensive history of policy mistakes, (too long to even summarize here). The problem has been the assumption that the Fed had better information and tools than it had. At times, it was expected to “lean against the wind” as if it had information not available to the market — or smarter people. In Hayekian terms, it suffered from “the pretense of knowledge.” At this point, it may be beyond fixing. Several very knowledgeable economists who have held high-level positions at the Fed, including regional bank presidents, have begun discussions about setting up a new commission to rethink the whole idea of a Fed and its activities. The structure that now exists is a jerry-built concoction that has been assembled in bits and pieces for more than a century — and increasingly appears to be past its expiration date.

I’ve written about the need to clip the Fed’s wings, but Richard’s column suggests even bolder action is needed.

Larry White and John Stossel also have questioned the role and power of the Federal Reserve.

In any event, one thing that should be clear is that the Fed hasn’t used its existing powers either wisely or effectively.

Thomas Sowell is right. Don’t reward a bureaucracy’s poor performance by giving it even more power.

P.S. Here’s a video I narrated on the Fed and central banking.

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There are two things everyone should understand about the federal budget.

Sadly, the politicians in Washington generally aren’t interested in sensible fiscal policy. They have a “public choice” incentive to spend more money in hopes of buying more votes.

Congressman Chip Roy, a freshman from Texas, is one of the few lawmakers who objects to the spend-like-there’s-no-tomorrow mentality in Washington.

Here’s some of what he wrote for the Hill.

…both parties appear to have reached a consensus on one major issue: busting spending caps is their solution to disagreements over spending. …Members of my party would be happy to agree with Democrats’ demands to spend outside our means, so long as they get all the money they want for defense. …The truth is Washington is all about power rather than solving the problem. It’s politically easier for Republicans to press for defense spending and Democrats to push for non-defense spending… Years of out-of-control spending and poor decision making is catching up with us.

He specifically wants to maintain the spending caps that apply to annually appropriated outlays.

Instead of wringing our hands and finding political convenient reasons to spend outside our means, Congress should stick to the caps. Doing so will force us – Republicans and Democrats – to sit at the table and negotiate—a lost art in Washington… allowing an across-the-board sequester to kick-in is more responsible than what Congress appears on track to do. …we must act now to do our job. We must stick to the budget caps.

He’s right about the desirability of a sequester.

Indeed, the sequester that took place in 2013 was the biggest victory for fiscal discipline during Obama’s presidency.

Sadly, politicians since then have been jumping through all sorts of hoops to avoid a second sequester. And the Democrats in the House of Representatives are proposing to bust the spending caps once again.

Here’s a chart prepared by Republicans on the House Budget Committee.

By the way, I’m not citing material from Republicans because they deserve praise.

So even though House Democrats are now proposing something that’s “absurdly terrible,” Republicans don’t have much credibility on the issue.

I’ll close with an observation about Greece’s fiscal tragedy.

There was no single decision that caused that country’s economic crisis. Instead, it was hundreds of short-sighted choices to spend more on Program A, Initiative B, Plan C, and Project D, along with every kind of tax increase under the sun.

And when some people warned that the fiscal orgy eventually would produce bad consequences, they were dismissed or ignored.

Sadly, American is heading down the same path. We know the solution, but politicians are more interested in buying votes than doing what’s right for America.

That includes the President. Trump has the power to force a sequester. All he has to do is veto any spending bill that busts the caps. But don’t hold your breath waiting for that to happen.

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Every Thanksgiving, I share the story of how the Pilgrims nearly starved to death because of their experiment with collectivized agriculture.

Once the settlers shifted to a system based on private ownership, however, their problems disappeared.

The obvious moral of the story is that incentives matter. Socialist systems encourage slackers (see this cartoon strip) and market systems encourage productivity.

A column by X in the Wall Street Journal tells a similar story about China.

It’s actually the story of an important anniversary.

The People’s Republic of China turns 70 in October and will celebrate with flag-waving and fireworks. …2019 also marks the anniversary of the result of a smaller, quieter but just as defiant protest—one that will receive little attention in or out of China, even though it launched the economic reforms that kick-started the country’s rise.

Here’s the background.

After taking power in 1949, China’s Communist Party had effectively abolished private land ownership, grouping farms into “people’s communes” subservient to the state. By 1978 villages were crippled by quotas that seized most of what they grew for redistribution. …there was no food. Xiaogang’s farmers dug up roots, boiled poplar leaves with salt, and ground roasted tree bark into flour. Families left their thatched-roof homes and took to the road to beg.

By the way, the Chinese system of collective farms was an example of hardcore socialism – i.e., government ownership and control.

So it’s hardly a surprise that it produced awful results. Including mass starvation.

But desperate times were the motivation for desperate measures.

…a farmer named Yan Hongchang summoned the heads of the village’s desperate families to a clandestine meeting. On paper torn from a child’s school workbook, the farmers wrote a 79-word pledge to divide the commune’s land into family plots, submit the required quota of corn to the state, and keep the rest for themselves.

And what happened?

Incentives and property rights worked. Spectacularly.

…farmers…reported a grain yield of 66 metric tons. This single harvest equaled the village’s total output between 1955 and 1970—but for once the figure was not exaggerated. In fact, villagers underreported their actual yield by a third, fearing officials would not believe their record haul.

And the really good news is that the successful experiment in Xiaogang led to market-based reform for the entire nation.

The grass-roots experiment did spread. In Beijing, three years after Mao Zedong’s death, Deng Xiaoping urged the Chinese to ignore political dogma and instead “seek truth from facts.” Now came news that dissenting farmers were actually growing food. This year marks the 40th anniversary of Deng’s decision to scrap collective farming. In its place came one of the country’s most popular reforms, the Household Contract Responsibility System, or chengbao, which allows families to farm their own allocation of land and sell most of the harvest at unregulated prices.

Indeed, China now celebrates Xiaogang’s rebellious shift to markets.

Xiaogang village is a “red tourism” attraction, albeit the only one whose “patriotic education base” (museum) celebrates local defiance of government policy. Its exhibition hall displays a copy of the farmers’ pledge—the original was lost years ago—and floor-to-ceiling photographs of its signatories. The men are lauded as heroes, and Xiaogang celebrated with a slogan: “The origin of our nation’s economic rise!”

Maybe future historians will look upon the events in Xiaogang the same way some people look at 1356 in Europe?

In any event, what began forty years ago already has yielded great results for the people of China. Grinding poverty has virtually disappeared.

To be sure, China still needs a lot of reform. It’s only ranked #107 according the latest edition of Economic Freedom of the World.

But if some good reform yielded some good results, just imagine how much prosperity China could enjoy with a lot of good reform?

P.S. Just as the village of X helped to rescue China from hardcore socialism, there’s a grocery store in Texas that played a role in rescuing Russia’s economy.

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