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Archive for September, 2019

I was interviewed a couple of days ago about rival tax plans by various Democratic presidential candidates.

It’s the “Class Warfare Olympics,” and even Joe Biden is thinking about going hard left with a tax on financial transactions.

It’s not just Joe Biden’s crazy idea. Other Democratic candidates have endorsed the idea, as has Nancy Pelosi, and CNBC reports that legislation has been introduced in the House and the Senate.

House Democrats are reintroducing their proposal of a financial transaction tax on stock, bond and derivative deals, and this time they’ve signed on a key new supporter: left-wing firebrand Rep. Alexandria Ocasio-Cortez. …“This option would increase revenues by $777 billion from 2019 through 2028, according to an estimate by the staff of the Joint Committee on Taxation,” the Congressional Budget Office’s website says. …The House bill comes on the heels of its companion legislation introduced by Sen. Brian Schatz, D-Hawaii, in the other chamber. Republicans have a 53-47 majority in the Senate.

Needless to say, I’m not surprised to see that AOC is on board. I don’t think there’s a tax she doesn’t want to impose and/or increase.

By the way, I should note that she and other advocates generally are looking at more limited FTTs that would tax transactions only in financial markets, so there wouldn’t necessarily be any direct burden when we write a check or visit the ATM.

But even this more restrained FTT would be very bad news, with significant indirect costs on ordinary people.

Some analysis from the Tax Foundation highlights some of the drawbacks from this tax.

Policymakers should be wary about adopting a financial transactions tax. Like a gross receipts tax, a financial transactions tax results in tax pyramiding. The same economic activity is taxed multiple times. For example, an individual might sell a stock worth $100 to diversify her portfolio and then purchase stock in a new company with that same $100. The $100 is being taxed twice: first, when the individual sells the stock, and then again when the money is used to buy the new security. Imagine this happening thousands of times a day. …That is why this tax would generate nearly $770 billion over a decade. …Supporters, however, argue that the Wall Street Tax Act is needed, because it would reduce volatility in financial markets. It’s not clear that it would reduce volatility. In 2012, the Bank of Canada studied the issue and concluded that “little evidence is found to suggest that an FTT [financial transactions tax] would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume.” …Sweden’s imposition of a financial transactions tax in the 1980s illustrates the challenges perfectly. The country experienced a 60 percent decrease in trading volume as it moved to other markets, as well as a decrease in revenue.

Another report from the Tax Foundation notes the tax can increase volatility and cause direct and indirect revenue losses.

A financial transactions tax would distort asset markets, as types of securities traded more frequently would be taxed much more than assets traded less frequently. This distortion would lead to investors holding certain assets longer than they should in order to avoid the tax. The tax also decreases liquidity and increases transaction costs. …it will also discourage transactions between well-informed investors; furthermore, much of the research on the issue of volatility suggests that higher transaction costs correlate with more volatility, not less. Financial transactions taxes are also not surefire revenue generators. In the 1980s, Sweden imposed a financial transactions tax, and, thanks to the relative mobility of capital markets, 60 percent of trades moved to different markets. Not only did this behavior mean that the financial transactions tax raised little revenue, it also drove down revenue for the capital gains tax, ultimately lowering total government receipts.

A column in the Wall Street Journal notes that such a levy would directly and indirectly hurt ordinary people.

The proposed 0.1% tax on all financial transactions—trades in stocks, bonds, derivatives—may sound small, but it could make markets less stable and hurt small investors. …advocates overlook the breadth of smaller investors… Each day, more than $1 trillion in securities are traded in the U.S., mostly by large investment managers that represent not only wealthy investors, but also 401(k) plans, public pensions and middle-income families. …even a small tax is significant enough to affect trading strategy and raise costs. Such firms…use the minimal cost of automated, high-frequency trading to reduce the need for paid traders, generating savings for investors. …high-frequency traders provide liquidity and have reduced the gap between bid and ask rates in almost every asset class. The disruptive effect of transaction taxes is more than theoretical. The Chinese government has taxed trades since the early 1990s, and its gradual reduction of the tax on certain types of stocks offers an occasion to measure the tax’s effects. A 2014 study by University of Southern California finance professor Yongxiang Wang found that as the tax decreased, affected companies saw corresponding increases in capital investment, innovation and equity financing. …Sweden and France similarly have introduced financial-transactions taxes over the past few decades, resulting in heightened market volatility and declining liquidity, respectively. …Even at a 0.1% rate, the Joint Committee on Taxation estimates the proposed tax would raise $777 billion over 10 years—all taken out of potentially productive private investment. …financial transactions are highly mobile and easy to move to another jurisdiction. Two parties to a financial contract settled in New York can just as easily sign and enforce the contract in the Cayman Islands, for instance, avoiding the tax.

Interestingly, the Washington Post‘s editorial on the topic back in 2016 noted some significant downsides.

It’s worth noting that the United States had a 0.02 percent tax on stock trades in force during the 1920s, and the market still crashed in 1929. If the tax is too high, however, you could stamp out needed price-discovery, hedging and liquidity, thus destroying efficiency and economic growth. Oh, and you also could end up collecting no revenue, or less than you expected, as market activity dried up or fled to more lightly taxed jurisdictions overseas. For these and other reasons, in 1991 Sweden had to repeal a financial transaction tax it had imposed just seven years earlier. An analysis of financial transaction taxes, both actual and proposed, by the nonpartisan Tax Policy Center…shows rapidly diminishing returns once the tax rate exceeds a certain level; a 0.5 percent tax brings in about the same amount of revenue as a 0.1 percent rate.

For what it’s worth, I expect that the Post will do an about-face and embrace the tax as we get closer to the 2020 election.

Though I hope I’m wrong about that.

Let’s close with some excerpts from three substantive studies.

Tim Worstall, in a report for London’s Institute for Economic Affairs, analyzes the harmful effect of a proposed European-wide FTT.

The Robin Hood Tax campaign seems to think that hundreds of billions of dollars can be extracted from the financial markets without anyone really noticing very much: a rather naïve if cute idea. The European Commission is continuing its decades-long campaign to have its ‘own resources’. Under its proposal, FTT revenue would be sent to the Commission, which would thus become less dependent on national governments for its budget. This is neither unusual nor reprehensible in a bureaucracy. It is the nature of the beast that it would like to have its own money to spend without being beholden. …The first and great lesson of tax incidence is that taxes on companies are not paid by companies. …The importance of this effect is still argued over. Various reports from various people with different assumptions about capital openness and so on lead to estimates of 30-70% of corporation tax really being paid by the workers, the rest by the shareholders. One study, Atkinson and Stiglitz (1980), points to the at least theoretical possibility that the incidence on the workers’ wages can be over 100%. That is, that the employees lose in wages more than the revenue raised by the tax. So what will be the incidence of an FTT? … the incidence of the FTT will be upon workers in the form of lower wages, upon consumers of financial products in higher prices and that the incidence, the loss of income resulting from the tax, will be over 100%. The loss will be greater than the revenues raised.

here’s some research from the Committee for Capital Markets Regulation.

For over 300 years, financial transaction taxes (“FTTs”) have been proposed, discussed, and implemented in various forms across global financial markets. And for over 300 years, FTTs have been a failure wherever imposed, frequently failing to raise the promised revenues, while simultaneously damaging the efficiency of the affected markets. Recent proposals for an FTT in the United States would likely have a similar result. …FTT proponents also ignore the empirical evidence from other countries that have imposed FTTs that universally demonstrates that (i) FTTs fall far short of revenue expectations and (ii) securities markets – and by extension the real economy as well as all investors and taxpayers – are significantly harmed by FTTs due to the wide array of beneficial trading activity that is indiscriminately targeted. In fact, many of the G20 countries that have experimented with FTTs in the past, including Germany, Italy, Japan, the Netherlands, Portugal and Sweden, ultimately repealed such taxes due to the damage that they caused.

Last but not least, a study from the Center for Capital Markets Competitiveness has lots of valuable information.

Lower stock prices make it harder for growing businesses to sell stock to raise the capital they need to grow their businesses. At the same time, business borrowing costs through the corporate bond market will go up for the same reason. Lenders will require a higher pre-tax return in order to retain the same after-tax return. …This increase in the cost of capital due to higher interest rates means that businesses will have to spend more in order to raise capital, resulting in less capital investment and fewer jobs. …For example, economists for the European Union conducted a 1,223-page study on the impact of a proposed 0.10% transaction tax under consideration, the same tax rate as that proposed by Sen. Schatz. They found that such a tax would lower GDP by 1.76% while raising revenue of only 0.08% of GDP.26 In other words, the cost to the economy is far more than the revenue raised. …We can learn from U.S. history how little revenue an FTT would raise. When the last FTT was abolished, the rate was approximately 0.4% with a limit of 8 cents per share. Congress estimated that the tax would raise a mere $195 million in 1966. This represents 0.0285% of 1966’s $813 billion GDP. Applying the same percentage to today’s $21 trillion GDP yields an annual revenue of less than $6 billon—less than one-tenth of Sen. Schatz’s projections for such a tax today.

This map from the study is especially helpful.

Just as is the case for wealth taxes, governments have not had positive experiences when they impose this levy.

P.S. Speaking of wealth taxes, I did note in the above interview that those levies are presumably the most destructive because of their negative effect on saving and investment.

P.P.S. If I’m a judge in the Class Warfare Olympics, I’m giving the Gold Medal to Bernie Sanders, the Silver Medal to Elizabeth Warren, and the Bronze Medal to Kamala Harris.

P.P.P.S. As I warned in the interview, the class-warfare taxes won’t collect much revenue, especially compared to the massive spending increases the candidates are proposing. That’s why the middle class is the real target.

P.P.P.P.S. I goofed in the interview when I identified Larry Summers as Obama’s Treasury Secretary. He was Treasury Secretary for Bill Clinton and head of the National Economic Council for Barack Obama.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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I’ve created a new page to showcase various “Poverty Hucksters.”

These are people and institutions that use data about income distribution to mislead and lie about the prevalence of poverty in the United States.

This rogue’s gallery includes:

What is their dodgy tactic? Here’s how I described the methodology in 2018.

…the bureaucrats…have put together a measure of income distribution and decided that “relative poverty” exists for anyone who has less than 50 percent of the median level of disposable income.

More recently, I explained why this approach is senseless, at least if one wants to measure actual poverty

…an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline.

Now we have a new member of this ill-begotten group of hucksters.

Here’s an excerpt from an article in the latest issue of the Economist.

…international comparisons…make…America a true outlier. When assessed on poverty relative to other countries (the share of families making less than 50% of the national median income after taxes and transfers), America is among the worst-performing in the OECD club of mostly rich countries (see chart). Despite its higher level of income, that is not because it starts with a very large share of poor people before supports kick in—it is just that the safety net does not do as much work as elsewhere. On this relative-poverty scale, more than a fifth of American children remain poor after government benefits, compared with 3.6% of Finnish children.

And here’s the accompanying chart.

Needless to say, any chart that purports to show less poverty in Mexico than the United States is laughably inaccurate.

But that’s the kind of perverse outcome that is generated when using a ridiculously dishonest approach.

I suppose the Economist deserves a bit of credit. In both the article and in the chart, they acknowledge (at least for careful readers) that they’re measuring the share of the population with less than 50 percent of a society’s median income, not the share of people living in poverty.

So why, then, do they refer to the “poverty rate”?

I have no idea if the reporter is dishonest or incompetent, but I can say with certainty that the Economist has done a disservice to readers.

P.S. The Economist relied on dodgy data from the Organization for Economic Cooperation and Development. And if you read the columns about the other Poverty Hucksters, you’ll find that most of them also relied on numbers from that left-leaning, Paris-based bureaucracy. Yet another example of why the OECD is the worst international bureaucracy, at least on a per-dollar-spent basis.

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I’m a big fan of globalization, so does that make me a globalist?

That depends on what is meant by that term. If it means free trade and peaceful interaction with other nations, the answer is yes.

But if it means global governance by anti-market bureaucracies such as the United Nations, International Monetary Fund, and Organization for Economic Cooperation and Development, the answer is a resounding no.

So I have mixed feelings about this video from Dalibor Rohac of the American Enterprise Institute.

I can’t resist nit-picking on some of his points.

While I have disagreements with Dalibor, that definitely doesn’t put me in the same camp as Donald Trump.

The President is an incoherent mix. He combines odious protectionism with mostly-empty rhetoric about globalism. And he does all that without understanding issues – and, in some cases, his actions are contrary to his rhetoric.

Dan Henninger wrote about these issues two days ago for the Wall Street Journal.

He wisely warns that failures by national governments (most notably unaffordable welfare states and incompetent administrative states) are creating openings for unpalatable alternatives.

Global governance is one distressing possibility. Henninger worries about Chinese-style administrative authoritarianism.

President Trump at the United Nations this week elaborated on his long-running antagonism toward globalism. …There is merit to these concerns, but I think the critics of “globalism,” including most prominently Mr. Trump, underestimate the near-term danger of the serious difficulties appearing today in national democratic governance. Democracies maintain their legitimacy in the public’s eye only if they demonstrate a reasonable capacity to address society’s inevitably complex challenges. …it’s clear that many of the 21st century’s independent nations are having a remarkably difficult time executing their sovereign responsibilities. …Mr. Trump’s concerns about undemocratic governance by remote international bureaucracies are plausible, but the greater threat is more imminent. If the expansion of an increasingly dysfunctional administrative state inside the world’s sovereign democracies is inexorable and unreformable, the future will belong to China’s brand of administrative authoritarianism. …Elizabeth Warren and her multiple plans—heavily dependent on criminal prosecutions and intense oversight—is flirting with a milder version of this future.

Henninger is certainly correct that nations mostly get in trouble because of their own mistakes.

For instance, I’ve pointed out that the fiscal crisis in Europe should not be blamed on the euro.

That being said, global governance often creates moral hazard, which tends to exacerbate and encourage bad policy by national governments.

Let’s now look at an interesting column that John Bolton (Trump’s former National Security Advisor) wrote on global governance for the U.K.-based Times back in 2016. Here are some of the key passages.

He makes the should-be-obvious point that not all international bureaucracies are alike.

…international organisations sometimes act as if they are governments rather than associations of governments and sprout bureaucracies with pretensions beyond those of cosseted elites in national capitals. …International bodies take many different forms, and it serves no analytical purpose to treat them interchangeably. Nato, for example, is not equivalent to the United Nations. Neither is equivalent to the European Union. Each has different objectives, and different implications for constitutional and democratic sovereignty. …Nato is America’s kind of international partnership: a classic politico-military alliance of nation states. It has never purported to assume sovereign functions, and is as distant as is imaginable from the EU paradigm.

He explains that some of them – most notably the IMF – are counterproductive and should be shut down.

Proposals to reform the UN and its affiliated bodies such as the World Bank and the IMF are almost endless. The real question is whether serious, sweeping reform of these organisations…is ever possible. …In 1998, during the Asian financial crisis, the former secretaries of the Treasury William Simon and George Shultz, and Walter Wriston, a former chairman of Citibank, wrote in The Wall Street Journal: “The IMF is ineffective, unnecessary, and obsolete. We do not need another IMF, as Mr. [George] Soros recommends. Once the Asian crisis is over, we should abolish the one we have.” …We should consider privatising all the development banks… We should ask why US taxpayers are compelled to provide subsidised interest rates for loans by international development banks.

Amen.

He also opines about Brexit.

…the Brexit referendum was, above all else, a reassertion of British sovereignty, a declaration of independence from would-be rulers who, while geographically close, were remote from the peasantry they sought to rule. …The Brexit decision was deplored by British and American elites alike… It does not surprise Americans that British elites have not reconciled themselves to losing… London and Washington can fashion a new economic relationship, perhaps involving Canada, with the potential for significant economic growth. Let the EU wallow in strangling economic regulation, and the euro albatross that Britain wisely never joined.

He’s right, especially the final sentence of that excerpt.

I’ll conclude by reiterating my observation that we should distinguish between good globalization and bad globalization.

The good kind involves trade, peaceful interaction, and jurisdictional competition, all of which are consistent with sovereignty.

The bad kind of globalism involves international bureaucracies acting as supranational governments – almost always (as Nobel laureate Edward Prescott observed) with the goal of enabling and facilitating a larger burden of government.

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Moral panics in Washington are not a recipe for good policy.

That’s why the current attack on vaping (the use of e-cigarettes) is so misguided.

Policy makers want to ban and/or restrict e-cigarettes (especially flavored varieties) for two reasons.

  • Consuming e-cigarettes may cause harm to users.
  • Vaping may lure some young people into using nicotine.

Both of these concerns are reasonable, at least from a utilitarian perspective.

But if we’re taking that approach, policy makers also should be looking at the other side of the cost-benefit equation (the Food and Drug Administration sadly does a lousy job of comparing costs and benefits).

And the under-appreciated benefit of e-cigarettes is that they reduce tobacco consumption, which is far more risky.

The Wall Street Journal opined recently on this issue.

A campaign against vaping products is moving at land speed records, with the Trump Administration announcing this week it will pull flavored e-cigarettes from the market. This is becoming a political pile on, and regulators risk foreclosing one of the best opportunities in public health, which is to reduce cigarette smoking. …Vaping devices include an array of products from pens to tanks. …The point is to offer the buzz of a cigarette without the combustion of tobacco that releases carcinogens and makes smoking so dangerous. …agencies like Public Health England have said such e-cigs are 95% safer than smokes. …No one wants kids addicted to nicotine, and the question is how to balance these competing equities. It is hardly obvious that banning flavors will keep teens from vaping. …A Juul executive told Congress this summer that a result of exiting convenience stores has been other actors exploiting the vacuum by selling illegal flavor pods. Expect more such unintended consequences. And if the flavor ban doesn’t reduce the number of teen vapers, then what? The next step looks like an even broader ban, which won’t be a net positive to public health. …The question is not whether vaping is healthy—it isn’t—but whether the frenzy against e-cigarettes is moving faster than the evidence. …forgotten in the rush are the 480,000 Americans who die each year from smoking.

In addition to his attacks on the twin scourges of salt and large-sized drinks, Michael Bloomberg is a leading advocate of vaping restrictions.

Jacob Sullum of Reason explains why, if successful, his efforts will cause more death.

Former New York City Mayor Michael Bloomberg, the billionaire busybody who can be counted on to oppose individual freedom in almost every area of life, is launching a prohibition crusade against flavored e-cigarettes. …The premise of Bloomberg’s $160 million campaign, which aims to persuade “at least 20 cities and states” to “pass laws banning all flavored tobacco and e-cigarettes,” is that flavored e-liquids are obviously designed to entice “children,” because only children like them. That is demonstrably false. ..Last year, Vaping360, a site aimed at former smokers who have switched to vaping and current smokers who are thinking about it, surveyed readers about their favorite Juul pod flavors. It got more than 38,000 responses, and the top pick by far was Mango (46 percent), followed by Cool Mint (29 percent), Crème Brulée (11 percent), and Fruit Medley (8 percent). …Surveys of former smokers find that flavor variety plays an important role in the process of switching to vaping. The Food and Drug Administration has acknowledged “the role that flavors…may play in helping some smokers switch to potentially less harmful forms of nicotine delivery.” …Bloomberg has “committed nearly $1 billion to aid anti-tobacco efforts.” Now he is committing $160 million to pro-tobacco efforts, lobbying for laws that will drastically reduce the alternatives to conventional cigarettes, resulting in more smoking-related disease and death.

Robert Verbruggen also explains cost-benefit analysis in his column for National Review.

The Trump administration’s Food and Drug Administration is gearing up to ban e-cigarette flavorings besides the ones that taste like tobacco. It’s unclear if this would have any benefits for public health. …Upstart products such as e-cigarettes, which deliver nicotine without all the tar and other nasty chemicals that cigarettes contain, and are estimated to be 95 percent safer as a result. …even for minors it’s far better to vape than to puff Camels, and it’s not as if no adult enjoys, say, strawberry flavoring. Better taste is one reason to vape instead of smoke for pretty much anyone who has to decide between the two, and if e-cigs are limited to tobacco flavoring, this rule could push some people back toward traditional cigarettes. And if real cigarettes are 20 times as dangerous as e-cigs, it doesn’t take much switching to cancel out the benefit of a reduction in vaping.

But I also like his article because he points out that this is another example of the “administrative state” in action.

…this is not a decision that Congress ever should have left in the executive branch’s hands. …in 2009 Congress, in its infinite wisdom, gave the FDA the authority to regulate tobacco products — except for all the products that were already on the market. This meant that the agency would have authority over upstart products competing with cigarettes, but the rules would not apply to cigarettes themselves. ……Congress should write laws, especially laws that ban entire product categories, not turn that power over to unelected busybodies who will opt for regulation over personal freedom every single time they encounter a choice between the two.

Best of all, he makes the libertarian argument that people should enjoy liberty.

What is clear is that it will be a disaster for personal freedom… Smoking cigarettes is one of those things that we allow adults to do even though it’s obviously bad for them, causing numerous cancers and other health problems. …It’s a free country. …One does not need to be a dyed-in-the-wool libertarian to be disgusted at this affront to personal freedom and responsibility. …Adults should be free to do what they want, so long as they take responsibility for the consequences of their actions. That includes smoking. And it definitely includes the far safer alternative of vaping fruit-flavored e-juice.

Amen.

I think the utilitarian argument for vaping is strong. As this visual from an anti-cancer group in the U.K. notes, it passes a cost-benefit test for savings lives.

But utilitarianism isn’t everything.

I can’t resist also unleashing my inner libertarian as we conclude today’s column.

The bottom line is that people should be allowed to take risks. They should even be allowed to make dumb choices.

That includes drug use, sugary drinks, gambling, over-eating, smoking, voting for socialists, hang gliding, alcohol usage, and standing between a politician and a TV camera.

It’s called freedom.

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Social Security is projected to consume an ever-larger share of America’s national income, mostly thanks to an aging population.

Indeed, demographic change is why the program is bankrupt, with an inflation-adjusted cash-flow deficit of more than $42 trillion.

Yet Senator Elizabeth Warren wants to make a bad situation even worse.

In a blatant effort to buy votes, she is proposing a radical expansion in the old-age entitlement program. Here’s how USA Today describes her proposal.

Warren’s strategy would make major changes to Social Security, boosting benefits for all and imposing new taxes on high-income earners to finance them. …Under the proposal, everyone would get a $200 increase in monthly payments from Social Security, including both retirement and disability benefits. …Certain groups would see even larger increases. …In order to cover these benefits and shore up Social Security’s future finances, Warren would impose two new taxes. First, a new payroll tax would apply to wages above $250,000, with employees paying 7.4% and employers matching with 7.4% of their own. This is above the 6.2% employee rate that applies to current wages up to $132,900 in 2019, …Second, individual filers making more than $250,000 or joint filers above $400,000 would owe a heightened net investment income tax at a rate of 14.8%. …The Warren proposal breaks new ground by largely disconnecting the benefits that Social Security pays from the wages on which the program collects taxes.

In a column for the Wall Street Journal, John Cogan of the Hoover Institution explains why the proposal is so irresponsible.

It’s a strange campaign season, loaded with fantastical promises of government handouts for health care, college and even a guaranteed national income. But Sen. Elizabeth Warren ’s Social Security plan takes the cake. With trillion-dollar federal budget deficits and Social Security heading for bankruptcy, Ms. Warren proposes to give every current and future Social Security recipient an additional $2,400 a year. She plans to finance her proposal, which would cost more than $150 billion annually, with a 14.8% tax on high-income individuals. …the majority of Ms. Warren’s proposed Social Security bonanza would go to middle- and upper-income seniors. …The plan would cost taxpayers about $70,000 for each senior citizen lifted out of poverty.

Cogan also explains that Warren’s scheme upends FDR’s notion that Social Security should be an “earned benefit.”

The cornerstone of FDR’s Social Security program is its “earned right” principle, under which benefits are earned through payroll-tax contributions. …in a major break from one of FDR’s main Social Security principles, the plan provides no additional benefits in return for the new taxes. …Such a large revenue stream to fund unearned benefits, aptly called “gratuities” in FDR’s era, would put Social Security on a road to becoming a welfare program. …Ms. Warren’s proposal returns the country to an era when elected officials regularly used Social Security as a vote-buying scheme.

For all intents and purposes, Warren has put forth a more radical version of the plan introduced by Congressman John Larson, along with most of his colleagues in the House Democratic Caucus.

And that plan is plenty bad.

Andrew Biggs of the American Enterprise Institute wrote about the economic damage it would cause.

…the Social Security 2100 Act consists of more than 100% tax increases – because it not only raises payroll taxes to fund currently promised benefits, but increases benefits for all current and future retirees. …Social Security’s 12.4% payroll tax rate would rise to 14.8% while the $132,900 salary ceiling on which Social Security taxes apply would be phased out. Combined with federal income taxes, Medicare taxes and state income taxes, high-earning taxpayers could face marginal tax rates topping 60%. …Economists agree that tax increases reduce labor supply, the only disagreement being whether it’s by a little or a lot. Likewise, various research concludes that middle- and upper-income households factor Social Security into how much they’ll save for retirement on their own. If they expect higher Social Security benefits their personal saving will fall. Since higher labor supply and more saving are the most reliable routes to economic growth, the Social Security 2100 Act’s risk to the economy is obvious. …an economic model created by a team based at the University of Pennsylvania’s Wharton School…projects GDP in 2049 would be 2.0% lower than a hypothetical baseline in which the government borrowed to fund full promised Social Security benefits. The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly.

And the Wall Street Journal opined about the adverse impact of the proposal.

Among the many tax increases Democrats are now pushing is the Social Security 2100 Act sponsored by John Larson of House Ways and Means. The plan would raise average benefits by 2% and ties cost-of-living raises to a highly generous and experimental measure of inflation for the elderly known as CPI-E. The payroll tax rate for Social Security would rise steadily over two decades to 14.8% from 12.4% for all workers, and Democrats would also apply the tax to income above $400,000. …The proposal would also further tilt government spending to the elderly, who in general are doing well. …Democrats are also sneaky in the way they lift the income cap on Social Security taxes. The Social Security tax currently applies only on income up to $132,900, an amount that rises each year with inflation. But the new payroll tax on income above $400,000 isn’t indexed to inflation, which means the tax would ensnare ever more taxpayers over time. …The new 14.8% Social Security payroll-tax rate would come on top of the 37% federal income-tax rate, plus 2.9% for Medicare today (split between employer and employee), plus the 0.9% ObamaCare surcharge on income above $200,000 and 3.8% surcharge on investment income. …As lifespans increase, the U.S. needs more working seniors contributing to the economy. Yet higher Social Security benefits can induce earlier retirement if people think they don’t have to save as much. Higher marginal tax rates on Social Security benefits and income also discourage healthy seniors from working.

Now imagine those bad results and add in the economic damage from a 14.8 percentage point increase in the tax burden on saving and investment, which is the main wrinkle that Senator Warren has added.

Last but not least, using Social Security as an excuse to push higher taxes is not a new strategy. Back in 2008 when he was in the Senate and running for the White House, Barack Obama proposed a Warren-style increase in the payroll tax.

Here’s a video I narrated that year, which discusses the adverse economic effect of that type of class-warfare tax hike.

By the way, Hillary Clinton supported a similar tax increase in 2016.

Though it’s worth noting that neither Obama nor Clinton were as radical as Warren since they didn’t propose to exacerbate the tax code’s bias against saving and investment.

And don’t forget she also wants higher capital gains taxes and a punitive wealth tax.

Her overall tax agenda is unquestionably going to be very bad news for job creation and American competitiveness.

The “rich” are the primary targets of her tax hikes, but the rest of us will suffer the collateral damage.

P.S. Instead of huge tax increases, personal retirement accounts are a far better way of addressing Social Security’s long-run problem. 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.

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According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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