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Archive for January, 2020

Today is Brexit Day. As of 6:00 P.M. EST (Midnight in Brussels), the United Kingdom no longer will be a member of the European Union.

This is definitely good news in the long run since the U.K. will now be somewhat insulated from inevitable economic crises caused by the European’s Union’s dirigiste economic model and grim demographic outlook.

Whether it’s also good news in the short run depends mostly on decisions in London, such as whether Prime Minister Boris Johnson and his Tory government expand economic freedom (which should be the case, but there are worrisome signs that the spending burden will increase).

But Washington and Brussels also will play a role since the U.K. wants to sign free-trade agreements. This could be a problem since the E.U. will be tempted to behave in a spiteful manner and Trump and his trade team are protectionists.

But let’s set that aside for the moment and look at the big picture.

The Wall Street Journal nicely summarized the key takeaways in yesterday’s editorial about Brexit.

The EU was founded on the notion that only an ever-deeper economic union—with an ever-closer political union close on its heels—could secure peace and prosperity… Most continental political leaders, if not their voters, still believe this. …British voters think otherwise. Their 2016 vote to leave the EU, ratified in December’s general election, was not a vote for war and poverty. …voters had the temerity to assert themselves despite resistance from a political and bureaucratic class invested in the status quo. …One feature of this new politics is how immune voters have become to economic scaremongering… Britons instead have heard European anxiety that Brexit will trigger a “race to the bottom” on economic policy. What this really means is that EU politicians are aware that a freer economy more open to commerce at home and trade outside the EU would deliver more prosperity to more people than continental social democracy. British voters may not embrace this open vision in the end, but they’ve given themselves the choice. …All of this frightens so-called good Europeans…because it’s a direct challenge to…their “European project.” Central to this worldview is a distrust of…markets… A Britain with greater political independence and deep trading ties to Europe without all the useless red tape and hopeless centralizing could be a model. …Britain’s voters in 2016, and again in 2019, chose peaceful and prosperous coexistence with their neighbors rather than mindless but relentless integration. It’s the most consequential choice any European electorate has made in at least a generation.

Amen.

Brexit is very good news (December’s election in the U.K., which ensured Brexit, was the best policy-related development of 2019).

It means more jurisdictional competition, which is good news for those of us who want some sort of restraint on government greed.

And it means less power for the E.U. bureaucracy, which has a nasty habit of trying to export bad tax policy and bad regulatory policy.

Brexit also is a victory for Nigel Farage. Here are his final remarks to the European Parliament.

Farage has been called the “most consequential political figure in a generation in Europe, perhaps the whole of the West.”

This actually may be true. Brexit almost surely happened because of Farage’s efforts.

And to achieve that goal in the face of unified establishment opposition is truly remarkable.

Speaking of establishment opposition, let’s close today with an updated version of a PG-13 song about how the British people responded to the practitioners of “Project Fear.”

P.S. You can enjoy other Farage speeches by clicking here, here, and here.

P.P.S. And you can enjoy more Brexit-themed humor by clicking here, here, and here.

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I’ve written dozens of columns explaining why it would be a terrible idea for the United States to enact a value-added tax.

But that’s not because I think consumption taxes are worse than income taxes. Indeed, sales taxes and VATs are less destructive because tax rates tend to be reasonable and there’s no double taxation of saving and investment.

My opposition is solely based on the fact that we shouldn’t give politicians an extra source of revenue to finance bigger government. That would effectively guarantee that the United States would morph into a stagnant European-style welfare state.

In other words, I’d be willing to accept a trade. Politicians get a VAT, but only if they permanently abolish the income tax.

There’s no chance of that happening in Washington, but it may happen in Nebraska, as reported by the North Platte Telegraph.

If Nebraskans can’t agree on reform…, state Sen. Steve Erdman of Bayard has a sweeping answer: …Income and property taxes in Nebraska would be abolished — and the state sales tax replaced by a “consumption tax” to fund state and local governments — if a constitutional amendment spearheaded by Erdman were approved by lawmakers and voters. …It would need “yes” votes from 30 of the 49 senators on final reading to appear on November’s general election ballot. …Nebraska’s state and local governments now collect a combined $9.5 billion annually in taxes, which would require a 10% consumption tax rate to replace, Erdman said. …If income and property taxes go away, Erdman said, all the state and local departments or agencies that enforce, set and collect them wouldn’t be needed, either.

Here’s some additional coverage from KETV.

Imagine not having to pay any property or income taxes in Nebraska, but there’s a catch you’d pay a new consumption tax on just about everything you buy, such as food and medical services, things that are not taxed right now. That is the idea behind a new constitutional resolution introduced by state Sen. Steve Erdman. …He and nine other lawmakers introduced LR300CA on Thursday. The resolution would allow voters to decide whether to replace all those taxes with a consumption tax. It is like a sales tax and would be about 10.6% on everything, including services and food. …He said under this proposal, everyone would get a payment called a prebate of about $1,000, which would offset the cost for low-income families. Erdman said it would also eliminate the need for property tax relief and the state having to offer costly tax incentives to attract businesses. “This is fixing the whole issue, everything. This is eliminating all those taxes and replacing it with a fair tax,” Erdman said. “Nothing is exempt,” Erdman said.

I have no idea if this proposal has any chance of getting approval by the legislature, but Senator Erdman’s proposal for a broad-based neutral tax (i.e., no exemptions) would make Nebraska more competitive.

Which would be a good idea considering that the state is only ranked #28 according to the Tax Foundation and is way down at #44 according to Freedom in the 50 States.

In one fell swoop, Nebraska would join the list of states that have no income tax, which is even better than the states that have flat taxes.

P.S. The switch to a consumption tax would address the revenue side of the fiscal equation. Nebraska should also fix the spending side by copying its neighbors in Colorado and adopting a TABOR-style spending cap.

P.P.S. Unlike advocates of the value-added tax, proponents of a national sales tax support full repeal of the income tax. I don’t think that’s realistic since it’s so difficult to amend the Constitution, but their hearts are in the right place.

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When the Congressional Budget Office released its Budget and Economic Outlook yesterday, almost everyone in Washington foolishly fixated on the estimate of $1 trillion-plus annual deficits.

What’s far more important – and much more worrisome – is that the burden of government spending is projected to relentlessly increase, violating the Golden Rule of fiscal policy.

More specifically, the federal budget currently is consuming 21 percent of gross domestic product, but will consume 23.4 percent of economic output in 2030 if fiscal policy is left on autopilot.

Here is a chart, based on CBO’s new data, that shows why we should be very concerned.

By the way, last year’s long-run forecast from CBO shows the problem will get even worse in the following decades, especially if there isn’t genuine entitlement reform.

We’re in trouble today because government has been growing too fast, and we’ll be in bigger trouble in the future for the same reason.

But the situation is not hopeless. The problem can be fixed with some long-overdue and much-needed spending restraint.

We don’t even need to cut spending, though that would be very desirable.

As this next chart illustrates, our budgetary problems can be solved if there’s some sort of spending cap.

The grey line shows the current projection for federal spending and the orange line shows how much tax revenue Washington expects to collect (assuming the Trump tax cut is made permanent). There’s a big gap between those two lines (the $1 trillion-plus deficits everyone else is worried about).

My contribution to the discussion is to show we can have a budget surplus by 2028 if spending only grows by 1 percent annually and we can balance the budget by 2030 if spending grows by 1.7 percent per year.

Needless to say, I’m not fixated on balancing the budget and eliminating red ink.

The real goal is to change budgetary trend lines with a spending cap so that the fiscal burden of government begins to shrink as a share of the nation’s economy.

The bottom line is that modest spending restraint (government growing at 1.7 percent annually, nearly as fast as projected inflation) would slowly but surely achieve that goal by gradually reversing the big-government policies of Bush, Obama, and Trump.

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Back in 2014, I compared Hong Kong’s amazing growth with Cuba’s pitiful stagnation and made the obvious point that free markets and limited government are the right recipe for prosperity.

Especially if you care about improving the lives of the less fortunate.

Communists claim that their ideology represents the downtrodden against the elite, yet the evidence from Cuba shows wretched material deprivation for most people.

In Hong Kong, by contrast, incomes have soared for all segments of the population.

Today, let’s update our comparison of Cuba and Hong Kong. Law & Liberty has posted a a fascinating review of Neil Monnery’s book, A Tale of Two Economies, authored by Alberto Mingardi from Italy’s Bruno Leoni Institute.

As Alberto explains, the book is about how developments in both Hong Kong and Cuba were shaped by two individuals.

How important are key individuals in shaping the success or failure of economies? …Neil Monnery’s A Tale of Two Economies is in some sense a polemic against historical determinism, at least insofar as promoting economic reforms is concerned. It stresses the importance of two single individuals, one a great man for many, one an obscure official and political unknown to the most, in shaping the destiny of their respective countries. …Ernesto “Che” Guevara and John Cowperthwaite. …Monnery insists that both of them were “deep and original thinkers.” …The key difference between the two was perhaps that Cowperthwaite had a solid education in economics… Neither the way in which Hong Kong progressed, nor Cuba’s, were thus inevitable.

I’ve written previously about the noble role of John Cowperthwaite.

Here’s what Alberto culled from the book.

Monnery points out that Hong Kong’s success happened not because Cowperthwaite and his colleague were trying “to plant an ideological flag,” but because they were “professional pragmatists.” …Then the success of relatively libertarian arrangements in Hong Kong perpetuated itself. …Cowperthwaite tested what he knew about classical economics when he “first arrived in Hong Kong, in 1945” and “was put in charge of price control.… He soon realized the problems with attempting to set prices low enough to meet consumer needs but high enough to encourage supply, and in a dynamic environment.” He opposed subsidies that he saw as “a brazen attempt to feed at the trough of government subsidies.” …Cowperthwaite is a hero to Monnery, who emphasises his competence, and even more, his integrity.

And I’ve also written about Che Guevara, but only to comment on his brutality.

It turns out he was also a lousy economic planner.

Guevara held office in a variety of capacities related to economic matters and took them seriously. In 1959, he took a three months trip to countries as different as India, Japan and Burma, to learn “how they managed their economy.” He was struck by examples of countries that succeeded in developing heavy industries and thought Cuba could do the same. …Guevara, who, once converted to Marxism, had swallowed the whole thing. Since he maintained that “the sine qua non for an economic plan is that the state controls the bulk of the means of production, and better yet, if possible, all the means of production,” he acted accordingly.

So what’s the bottom line?

Hong Kong and Cuba were roughly equal at the start of the process. Today, not so much.

To the reader of A Tale of Two Economies, it is rather obvious which lessons ought to be taken: “in the late 1950s, both economies had a GDP per capita of around $4,500 in today’s money. By 2018 Cuba had slightly more than doubled its GDP per capita to around $9,000 per person. But Hong Kong reached $64,000 per capita”—seven times Cuba’s, and even exceeding the UK’s as well.

Here’s my modest contribution to the discussion, based on the Maddison database.

P.S. Hong Kong still ranks as the world’s freest economy, though there are increasing worries about whether China will allow economic liberty in the long run.

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About 10 years ago, the Center for Freedom and Prosperity released this video to explain that America’s real fiscal problem is too much spending and that red ink is best viewed as a symptom of that problem.

I wrote a primer on this issue two years ago, but I want to revisit the topic because I’m increasingly irked when I see people – over and over again – mistakenly assume that “deficit neutrality” or “budget neutrality” is the same thing as good fiscal policy.

  • For instance, advocates of a carbon tax want to use the new revenues to finance bigger government. Their approach (at least in theory) would not increase the deficit. Regardless, that’s a plan to increase to overall burden of government, which is not sound fiscal policy.
  • Just two days ago, I noted that Mayor Buttigieg wants the federal government to spend more money on health programs and is proposing an even-greater amount of new taxes. That’s a plan to increase the overall burden of government, which is not sound fiscal policy.
  • Back in 2016, a columnist for the Washington Post argued Hillary Clinton was a fiscal conservative because her proposals for new taxes were larger than her proposals for new spending. That was a plan to increase the overall burden of government, which is not sound fiscal policy.
  • And in 2011, Bruce Bartlett argued that Obama was a “moderate conservative” because his didn’t raises taxes and spending as much as some on the left wanted him to. Regardless, he still increased the overall burden of government, which is not sound fiscal policy.

To help make this point clear, I’ve created a simple 2×2 matrix and inserted some examples for purposes of illustration.

At the risk of stating the obvious, good fiscal policy is in the top-left quadrant and bad fiscal policy is in the bottom-two quadrants.

Because of “public choice,” there are no real-world examples in the top-right quadrant. Why would politicians collect extra taxes, after all, if they weren’t planning to use the money to buy votes?

P.S. In 2012, I created a table showing the differences on fiscal policy between supply-siders, Keynesians, the IMF, and libertarians.

P.P.S. I also recommend Milton Friedman’s 2×2 matrix on spending and incentives.

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Barack Obama’s strategy during the 2008 campaign was very shrewd. His statist policy positions and doctrinaire Senate voting record (almost identical to Bernie Sanders) made him very appealing to the left, yet he also made himself acceptable to other voters with a calm and moderate demeanor (Mayor Buttigieg is trying to follow the same strategy for 2020, albeit with less success so far).

Obama’s one major “oops moment” in an otherwise very disciplined campaign occurred one month before the election when he admitted that he wanted to “spread the wealth around.”

Elizabeth Warren isn’t following Obama’s script since she’s running as an out-of-the-closet leftist, but she just experienced her own “oops moment.”

Writing for PJ Media, Megan Fox explains that Senator Elizabeth Warren inadvertently – but very clearly – acknowledged that her plan penalizes people with individual integrity and personal responsibility.

Elizabeth Warren was confronted at an Iowa town hall event by a voter who wanted to know if he could get back the money that he paid for his daughter’s college education since Warren’s running on forgiving student loan debt. “My daughter is in school,” he said. “I saved all my money just to pay… Can I have my money back?” Warren replied, “Of course not!” The man continued to push Warren for an explanation for why some people can have a free education while others have to pay. “So you’re going to pay for people who didn’t save any money and those of us who did the right thing get screwed?” he asked. …the plan is really just a bribe to current college students with debt as it does not address students who take out student loans in the future. …That’s what we would normally call a hustle.

Katherine Timpf of National Review has a first-hand account of why Sen. Warren’s scheme rubs many people the wrong way.

…this guy…is…absolutely right… When he references the sacrifices that he and his family had to make to pay for his daughter’s college, what he’s implicitly saying is that his choice to be financially responsible has cost him things that money cannot replace. …I wrote about some of the sacrifices that I myself had to make to avoid shouldering a debt that I knew I couldn’t repay. …I found out that I’d been accepted to Columbia University’s graduate school of journalism. I was absolutely thrilled by this; it had been my dream since childhood to attend this exact school… Then, I realized I’d never be able to repay the $80,000 loan I’d have to take out to attend my dream school. …I withdrew. It was a tough decision — and the consequences were even tougher. …Unless Elizabeth Warren can go back in time and put me in a Columbia classroom during the time I spent cleaning those Boston Market bathrooms, her plan wouldn’t be “fair.” Unless she can give me the hours of my life back that I spent sitting alone covered in scabies cream, her plan wouldn’t be “fair.” …Elizabeth Warren can’t “pay me back” for a loan that I decided against taking out — a decision that I’d made precisely because I did not expect that anyone else would pay it back for me. …In other words? No — I don’t think that I should have to pay for someone else making an irresponsible decision when they could have made a responsible one.

Warren’s comments are getting lots of negative attention because people now have an easy-to-understand example of how her policies reward bad behavior and punish good behavior.

  • If you save for your kid, you’re a chump.
  • If you display personal responsibility, you’re a chump.
  • If you work hard, you’re a chump.
  • If you sacrifice today for a better tomorrow, you’re a chump.
  • If you invest, you’re a chump.
  • If you think it’s your job to take care of your family, you’re a chump.

There are many reasons to oppose redistribution programs. For instance, I was on TV just last month explaining how government programs encourage debt instead of savings.

What Warren has done, though, is to remind us something more important – that these programs are especially bad because they erode societal capital. They teach people it’s okay to live off the government and that they don’t need to worry about hard work and self reliance.

And when enough people adopt that attitude and a nation reaches a “tipping point,” then you wind up with a society where too many people are riding in the wagon and not enough people are pulling the wagon.

Think Greece.

P.S. I thought the big “oops moment” for Obama in 2008 occurred when he openly argued that he wanted higher capital gains taxes even if the government didn’t collect any extra revenue because of concomitant economic damage. In other words, like many folks on the left, he was willing to impose hardship on ordinary people just to hurt people with high incomes.

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Government intervention has made a mess of health care in America. Programs such as Medicare and Medicaid, along with the tax code’s healthcare exclusion, have created a massive third-party-payer problem.

The inevitable result is systemic inefficiency and ever-rising prices.

Some politicians look at these government-created problems and want us to believe that the right solution is to have even more government.

Consider, for example, the radical Medicare-for-All scheme that is supported by “Crazy Bernie” and “Looney Liz.” That’s like driving in the wrong direction at 100 miles per hour.

It’s also a bad idea to head the wrong direction at 50 miles per hour.

In a column for the Wall Street Journal, Lanhee Chen exposes the reckless nature of the so-called public option that is supported by other candidates.

Joe Biden, Pete Buttigieg and Mike Bloomberg claim they’re proposing a moderate, less disruptive approach to health-care reform when they advocate a public option—a government policy offered as an alternative to private health insurance—in lieu of Medicare for All. Don’t believe it. …those effects are predicated on two flawed assumptions: first, that the government will negotiate hospital and provider reimbursement rates similar to Medicare’s fee schedules and far below what private insurers pay; second, that the government would charge “actuarially fair premiums,” which cover 100% of provided benefits and administrative costs.

Mr. Chen explains that politicians can’t resist buying votes by offering ever-more goodies at ever-lower costs (I made similar points in a video explaining why Obamacare would be a fiscal boondoggle).

Political pressure upended similar financing assumptions in Medicare Part B only two years after the entitlement’s creation. The Johnson administration in 1968 and then Congress in 1972 had to intervene to shield seniors from premium increases. Objections from health-care providers to low reimbursement rates have regularly led to federal spending increases in Medicare and Medicaid.

And when politicians offer more goodies at lower cost, that means someone else will have to pay.

Either taxpayers today (higher income taxes and payroll taxes) or taxpayers tomorrow (more borrowing).

If premiums can’t rise to cover program costs, or reimbursement rates are raised to ensure access to a reasonable number of providers, who’ll pay? Taxpayers… If Congress’s past behavior is a guide, a public option available to all individuals and employers would add more than $700 billion to the 10-year federal deficit. The annual deficit increase would hit $100 billion within a few years. Some 123 million people—roughly 1 in 3 Americans—would be enrolled in the public option by 2025, broadly displacing existing insurance. These estimates don’t include the costs of additional Affordable Care Act subsidies and eligibility expansions proposed by Messrs. Biden, Buttigieg and Bloomberg. …if tax increases to pay for a politically realistic public option were limited to high-income filers, the top marginal rate would have to rise from the current 37% to 73% in 2049… Congress could enact a new broad-based tax similar to Medicare’s 2.9% Hospital Insurance payroll tax. The new tax would be levied on all wage and salary income and would reach 4.8% in 2049.

Mr. Chen also reminds us that the public option would surely have a very bad effect on private insurance.

Beyond fiscal considerations, the public option would quickly displace employer-based and other private insurance. …Consumers seeking coverage would be left with fewer insurance options and higher premiums. …Longer wait times and narrower provider networks would likely follow for those enrolled in the public option, harming patients’ health and reducing consumer choice.

For those of you who like lots of numbers, I also recommend a new report from the Committee for a Responsible Federal Budget.

The folks at CRFB are a bit misguided in that they focus too much on deficits and debt when they should be mostly concerned about the size of government.

But they do reliable work and their new report, Primary Care: Estimating Leading Democratic Candidates’ Health Plans, is filled with horrifying data.

We’ll start with this table looking at the details of the plans that have been put forth by Biden, Buttigieg, Sanders, and Warren. The red numbers are new spending. The black numbers are offsets (mostly tax increases).

As you can see from the above table, Warren and Sanders are definitely in the go-rapidly-in-the-wrong-direction camp.

But that shouldn’t distract us from the fact that Biden and Buttigieg also are proposing a big expansion in the burden of government.

Here’s another graphic from the CRFB report, but I’m focusing solely on the numbers for Biden and Buttigieg so that it’s clear to see that they both want about $2 trillion of new spending over the next decade.

If you look closely at the numbers for Buttigieg in Figure 2, you’ll notice that his health plan supposedly will reduce the deficit by $415 billion over 10 years (the difference between $3.3 trillion of new spending and $2.85 trillion of cost reductions and offsets).

Does that make his plan desirable? Of course not. What he’s really proposing (and this is how CRFB should have presented the data) is $1.65 trillion of net new spending (the difference between his “new spending” and his “cost reductions” ) accompanied by $2.1 trillion of new taxes.

P.S. Most of the “cost reductions” in Buttigieg’s plan are achieved with price controls on prescription drugs. At the risk of understatement, that’s a very costly way of trying to save money.

P.P.S. And if his plan is ever enacted, don’t forget that the actual amount of “new spending” will be much higher than the estimate of “new spending.”

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