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Archive for May, 2019

I periodically deal with people who generally sympathize with capitalism but nonetheless are supportive of protectionism.

In part, they incorrectly think that a “trade deficit” is a problem that must be fixed.

In other cases, they don’t understand the economic downsides of protectionism.

As I discuss the issue with them, I sometimes do a history quiz. I ask them a series of questions.

  • Why did the Union impose a blockade against the Confederacy during the Civil War?
  • Why did the British impose a blockade against the French during the Napoleonic War?
  • Why did the United States impose a blockade against Cuba during the Cold War?

In every case, the answer is the same. The blockade was imposed to weaken a country by denying it the benefit of trade. Simply stated, a nation will be poorer if it can’t take advantage of the fact that it makes more sense to import certain items.

I’ve never seen a meme that effectively captures the above principle, but Professor Don Boudreaux shared this image earlier today.

Given Trump’s promiscuous imposition of tariffs, it’s certainly timely.

And it does capture the essence of Trump’s trade policy.

Yes, he’s hurting Mexico, China, and other nations that are being hit with tariffs.

But the United States is the main victim. Tariffs are taxes on Americans who want to buy foreign goods and services. Tariffs are taxes that create inefficiencies in the American economy. Tariffs are taxes that create special advantages of cronyists at the expense of fair competition.

P.S. The little girl in the picture also is the star of a meme about Keynesian economics.

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A couple of years ago, I praised federalism in part because state and local governments would be less likely to adopt bad policy (such as higher minimum wages) if they understood that jobs and investment could simply migrate to jurisdictions that didn’t adopt bad policy.

But “less likely” isn’t the same as “never.” Some state and local politicians can’t resist the temptation to raise taxes, even though that means workers “vote with their feetfor places with lower tax burdens.

And some state and local politicians continue to mandate higher minimum wages (see here, here, here, and here), even though that means workers have fewer job opportunities.

Today, we’re going to look at some fresh evidence from Emeryville, California.

The local newspaper has an impressively detailed look at what’s happened to the town’s labor market.

Representatives from the Mills College Lokey School presented data from its recent ‘business conditions’ survey to our City Council on Tuesday. The study confirmed what restaurant owners warned when the ordinance was hastily passed in 2015. They are struggling, rapidly raising menu prices and increasingly looking to leave. …It’s getting harder to find small food service businesses that were around in 2015 when the MWO was passed. Emeryville institution Bucci’s, Commonwealth, Farley’s, Scarlet City … all gone. In fact, nearly all the brick & mortar businesses that comprised the short-lived Little City Emeryville small business advocacy group have moved, folded or sold. …The survey also identified that “the restaurant industry is clearly struggling.” Specifically, small, independent, non-franchise establishments are having the most difficulty.

Here’s some of the survey data on the negative effect.

Here’s some specific information on how restaurants have been adversely impacted.

…nearly all the new businesses that have opened have embraced the counter service model that requires fewer employees. Paradita Eatery, whose original plan was for a full service sit-down restaurant, cited Emeryville’s wage ordinance specifically for ‘pivoting’ to a counter service model. Counter service models require fewer employees to offset higher labor costs. …The only full service restaurant that has opened since the Minimum Wage was passed was 612One Asian Fusion which folded after just two years in business.

One of the reasons for the economic damage is that Emeryville has gone further and faster in the wrong direction.

The local law is more onerous than the state law and more onerous than other nearby communities.

But it’s not just workers who are suffering.

Consumers are adversely impacted as well.

One commenter, who identified herself as a resident, questioned why the survey did not include consumer data noting her dining frequency was altered by the drastic price increases she’s observed. …She noted that she used to frequent her local Doyle Street Cafe 2-3 times per month but last year went only twice. …Once franchise owner noted that the price increases they’ve been forced to pass along have ironically had the biggest impact on vulnerable communities that are more price-sensitive. “Our largest decrease in guests are folks over 50. Obviously our elderly, disabled, and folks on fixed incomes are unable increase their income to compensate for the price increases.”

Let’s close with a new video from Johan Norberg, which looks at the impact of minimum wage increases in San Diego.

P.S. If local communities are allowed to mandate minimum wages higher than the state level or federal, shouldn’t they also have the freedom to allow minimum wages that are lower than the state level or federal level?

P.P.S. A number of European nations have no mandated minimum wage. As explained in this video, that’s an approach we should copy.

P.P.P.S. If you want some minimum-wage themed humor, you can enjoy cartoons herehereherehere, and here.

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While I constantly criticize the statist policies that are imposed in California, I can understand why people want to live there.

There’s plenty of sunshine, a temperate climate, low humidity, and nice scenery.

I even realize that lots of people like San Francisco, even though it’s too chilly and too urban (and too officious and too regulatory) for my tastes.

And too expensive. Not just for me. For almost everyone.

In a column for the Washington Post, Karen Heller opines that San Francisco faces some serious problems. Here are some excerpts from her piece.

In a time of scarce consensus, everyone agrees that something has rotted in San Francisco. Conservatives have long loathed it as the axis of liberal politics and political correctness, but now progressives are carping, too. They mourn it for what has been lost, a city that long welcomed everyone and has been altered by an earthquake of wealth. …Real estate is the nation’s costliest. …a median $1.6 million for a single-family home and $3,700 monthly rent for a one-bedroom apartment. …In the shadow of such wealth, San Francisco grapples with a very visible homeless crisis of 7,500 residents, some shooting up in the parks and defecating on the sidewalks, which a 2018 United Nations report deemed “a violation of multiple human rights.” Last year, new Mayor London Breed assigned a five-person crew, dubbed the “poop patrol,” to clean streets and alleys of human feces. …“Our rich are richer. Our homeless are more desperate. Our hipsters are more pretentious,” says Solnit, who once wrote that “San Francisco is now a cruel place and a divided one.” …San Francisco has…the lowest percentage of children, 13.4 percent, of any major American city, and is home to about as many dogs as humans under the age of 18. …the African American population has withered to 5.5 percent compared to 13.4 percent a half century ago.

While Ms. Heller does a good job of describing how San Fran has become a city that’s unaffordable for anyone who’s not a rich, single, hipster, she doesn’t explain why that’s the case.

Though she does quote one resident who says it’s the fault of the free market.

“This is unregulated capitalism, unbridled capitalism, capitalism run amok. There are no guardrails,” says Salesforce founder and chairman Marc Benioff, a fourth-generation San Franciscan who in a TV interview branded his city “a train wreck.”

Is Mr. Benioff right? Has San Francisco become Hong Kong on the Bay?

Interestingly, Farhad Manjoo also wrote about the city.

But his column for the New York Times puts the blame on his fellow leftists.

…look at San Francisco… One of every 11,600 residents is a billionaire, and the annual household income necessary to buy a median-priced home now tops $320,000. Yet the streets there are a plague of garbage and needles and feces… At every level of government, our representatives, nearly all of them Democrats, prove inadequate and unresponsive to the challenges at hand. …Creating dense, economically and socially diverse urban environments ought to be a paramount goal of progressivism. …Urban areas are the most environmentally friendly way we know of housing lots of people. We can’t solve the climate crisis without vastly improving public transportation and increasing urban density. …Yet where progressives argue for openness and inclusion as a cudgel against President Trump, they abandon it on Nob Hill and in Beverly Hills.

And he argues that the solution is…gasp…capitalism!

More specifically, he says government-imposed zoning must be curtailed so the market can provide more housing.

…California lawmakers used a sketchy parliamentary maneuver to knife Senate Bill 50, an ambitious effort to undo restrictive local zoning rules and increase the supply of housing. …because the largest American cities are populated and run by Democrats — many in states under complete Democratic control — this sort of nakedly exclusionary urban restrictionism is a particular shame of the left. …This explains the opposition to SB 50, which aimed to address the housing shortage in a very straightforward way: by building more housing. The bill would have erased single-family zoning in populous areas near transit locations. …wealthy progressive Democrats are…keeping housing scarce and inaccessible…to keep people out. “We’re saying we welcome immigration, we welcome refugees, we welcome outsiders — but you’ve got to have a $2 million entrance fee to live here, otherwise you can use this part of a sidewalk for a tent,” said Brian Hanlon, president of the pro-density group California Yimby.

This is very remarkable analysis, especially since it comes from someone who is so far to the left that he actually proposed to criminalize billionaires.

By the way, I’m obviously not a fan of zoning laws, but it’s easy to understand why some people defend them.

In part, they like the fact that such laws artificially increase the value of their property. And I’m sure some of them are genuinely fond of their neighborhoods and don’t want things to change.

And I’ll even admit they have a point when they argue that changing zoning laws is a bit like breach of contract. After all, people move into a neighborhood under a certain set of rules and regulations.

But my sympathy has very narrow limits. And if you want to understand why, watch this video from the folks at Reason.

The bottom line is that the mess in San Francisco is a teachable moment. It’s helping folks on the left understand that government regulations impose very real costs.

And the fact that Farhad Manjoo is on the right side (at least on this one issue) means a teachable moment actually became a learnable moment.

P.S. San Francisco also has onerous rent control laws. So local officials not only make it difficult to build housing, they also make it difficult to make a profit on housing that’s already there. That means big windfalls for a few insiders, but scarce housing for everyone else.

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I periodically explain that a European-sized welfare state can only be financed by huge taxes on lower-income and middle-class taxpayers.

Simply stated, there aren’t enough rich people to prop up big government. Moreover, at the risk of mixing my animal metaphors, those golden geese also have a tendency to fly away if they’re being treated like fatted calves.

I have some additional evidence to share on this issue, thanks to a new report from the Tax Foundation. The research specifically looks at the tax burden on the average worker in developed nations

The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …The OECD calculates the tax burden by adding together the income tax payment, employee-side payroll tax payment, and employer-side payroll tax payment of a worker earning the average wage in a country. …Although payroll taxes are typically split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers.

The bad news for workers (and the good news for politicians) is that average workers in the advanced world loses more than one-third of their income to government.

In some cases, such as the unfortunate Spanish household I wrote about back in February, the government steals two-thirds of a worker’s income.

So which country is best for workers and which is worst?

Here’s a look at a map showing the tax burden for selected European nations.

Suffice to say, it’s not good to be dark red.

But that map doesn’t provide a complete answer.

To really determine the best and worst countries, the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it matters.

The tax burden on labor is broader than personal income taxes and payroll taxes. In many countries individuals also pay a value-added tax (VAT) on their consumption. Because a VAT diminishes the purchasing power of individual earnings, a more complete picture of the tax burden should include the VAT. Although the United States does not have a VAT, state sales taxes also work to diminish the purchasing power of earnings. Accounting for VAT rates and bases in OECD countries increased the tax burden on labor by 5 percentage-points on average in 2018.

And with that important fix, we can confidently state that the worst country for ordinary workers is Belgium, followed by Germany, Austria, France, and Italy.

The best country, assuming we’re limiting the conversation to rich countries, is Switzerland, followed by New Zealand, South Korea, Israel, and the United States.

By the way, this report just looks at the tax burden on average workers. We would also need estimates of the tax burden on things such as investment, business, and entrepreneurship to judge the overall merit (or lack thereof) of various tax regimes.

Let’s close by looking at the nations that have moved the most in the right direction and wrong direction this century.

Congratulations to Hungary, Israel, and Sweden.

I’m not surprised to see Mexico galloping in the wrong direction, though I’m disappointed that South Korea and Iceland are also deteriorating.

P.S. The bottom line is that global evidence confirms that ordinary people will be the ones paying the tab if Crazy Bernie and AOC succeed in expanding the burden of government spending in America. Though they’re not honest enough to admit it.

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One advantage of being a child of the Cold War is that I got to live through the fall of the Berlin Wall. The collapse of the Evil Empire truly was one of Reagan’s most amazing accomplishments and a moment of joy for the world.

Best of all, the war ended peacefully.

Which is a wonderful thing since I hate to think of how many lives would have been lost if things heated up.

And since it’s Memorial Day in the United States, why don’t we display some patriotism (in the proper sense) by laughing at the idiocy of the communist ideology.

We’ll start with a collection of failures (though I wish the person who created it had a better grasp of the English language).

Reminds me of this book collection.

The next item for our collection features an excellent comment from Aykhan Imranov.

I can vaguely understand how some naive youngsters can be seduced by socialism. Especially if what they have in mind is merely a pro-market Nordic welfare state.

But I’m utterly sickened that there are some people who go one step further and advocate for Marxism.

Is this their thought process?

I’ve always been nauseated by the Che Guevara death cult.

So I obviously need to share this t-shirt collection.

Though I confess I prefer the t-shirt at the end of this column.

Communism is famous, of course, for the “bad luck” of having decade after decade of food shortages supposedly caused by weather (amazing how the bad luck quickly ends when people get to grow for themselves rather than the collective).

And this means we have many opportunities for dark comedy.

Yes, it’s not nice to laugh about famine, but I confess that this bit of satire got a chuckle from me.

Hmmm…, I need to do a bit of reshelving the next time I’m in a book store.

Here’s another example with the same theme.

Though I must disagree with the premise. The communist bosses have always lived fat and happy lives. Ordinary people are the ones who starve.

But let’s not get caught up in details. If you like communism-starves-people humor, listen to Reagan’s jokes. And this prom dress satire is my all-time favorite, followed by this tweet from Marx.

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Earlier today at the Friedman Conference in Australia, I spoke on the proper design of a tax system.

My goal was to explain the problem of double taxation.

I’ve repeatedly shared a flowchart to illustrate the pervasive double taxation in the current system (my example is for the United States, but many other nations make the same mistake).

And to help explain why this is economically misguided, I developed a (hopefully) compelling visual based on how to harvest apples.

But I’ve always wondered if I was presenting the information in an accessible and understandable manner. So for today’s presentation, I decided to experiment with some different visuals.

Here’s how I illustrated the current system.

As you can see, there are several additional layers of tax on people who save and invest their after-tax income.

And I explained to the crowd that this is very foolish since every economic theory agrees that saving and investment are key to long-run growth.

Even socialism. Even Marxism. (Socialists and Marxists are foolish to think government can be in charge of allocating capital, but at least they realize that future growth requires saving and investment.)

In other words, you don’t achieve good tax policy solely by having a low tax rate.

Yes, that’

s important, but genuine tax reform also means no bias against saving and investment.

Here’s another visual. This one shows the difference between the current system and the flat tax. As you can see, all the added layers of tax on saving and investment are jettisoned under true tax reform.

By the way, there are some people who prefer a national sales tax over a flat tax.

I question the political viability of that approach, but I’ve always defended the sales tax.

Why? Because it’s conceptually identical to the flat tax.

As you can see from this next visual, the difference between the two systems is that the flat tax grabs a bit of money when income is earned and the sales tax grabs a bit of money when income is spent (either today or in the future).

Remember, the goal is to eliminate the bias against saving and investing.

To economists who specialize in public finance, this is known as shifting to a “consumption base” system.

But I’ve never liked that language. What really happens under true tax reform is that we tax income, but using the right definition.

The current system, by contrast, is known as a “comprehensive income tax” with a “Haig-Simons” tax base. But that simply means a system that taxes some forms of income over and over again.

Time for one final point.

Some people like a value-added tax because it avoids the problem of double taxation.

That’s certainly true.

But this final visual shows that adding a VAT to the current system doesn’t solve the problem. All that happens is that politicians have a new source of revenue to expand the welfare state.

If a VAT was used to replace the current tax system, that might be a very worthwhile approach.

But that’s about as likely as me playing the outfield later this year for the New York Yankees.

P.S. The VAT visual is overly simplified and it sidesteps the logistical issue of whether politicians would go for a credit-invoice VAT or a subtraction-method VAT. But the visual is correct in terms of how a VAT would interact with the current system.

P.P.S. All you need to know about the VAT is that Reagan was against it and Nixon was for it.

 

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As part of today’s sessions at the Friedman conference in Australia, I got to listen to Professor Tony Makin talk about the burden of government spending in Australia.

I want to share several of his slides since he made some very cogent points.

First, he pointed out that debt-financed government spending is bad.

But he also pointed out that tax-financed government spending is equally bad.

In other words, the fiscal burden of government is the total level of spending. How that spending is financed is a secondary concern.

I’ve made similar arguments, so perhaps this won’t be new information for regular readers.

However, Professor Makin augmented the theory with some statistical analysis.

This is how he structured his model.

And here are his results.

His numbers shouldn’t be a surprise. I narrated an entire video that listed study after study showing the same thing.

And even the OECD has, on multiple occasions, produced research showing that bigger public sectors are associated with weaker economic performance. Same thing with economists at the IMF (the political leadership at the international bureaucracies is terrible, but the economists sometimes produce solid research).

By the way, Professor Makin shared some fascinating Australia-specific data looking at spending increases (or decreases) by year. And also broke down the data by who controlled the government.

As you can see (echoing what I wrote two days ago), the supposedly left-wing Hawke and Keating governments were reasonably frugal.

John Howard, by contrast, was supposed to be a right-of-center leader. Yet he fell off the wagon after a strong start (and also set the stage for a very bad Labor government).

In recent years, the right-of-center Liberal-National coalition has done a decent job. It will interesting to see what happens when newly reelected Prime Minister Scott Morrison unveils the next budget.

My two cents (in addition to lowering the top tax rate) is that he should propose some sort of spending cap, like the ones in Switzerland and Hong Kong.

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