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Archive for March, 2020

About three weeks ago, when the coronavirus crisis was becoming a big deal, I explained the libertarian viewpoint.

  1. Governments should focus on protecting life, liberty, and property. That includes fighting pandemics.
  2. A big sprawling federal government will be less capable and competent when responding to a real crisis.
  3. International evidence suggests greater government control of the health sector is not a good recipe for success.
  4. Domestic evidence indicates that bureaucracies such as the FDA and CDC are exacerbating the problem.

Unsurprisingly, there are still plenty of people claiming the crisis shows why libertarianism is impractical and misguided.

Henry Olsen opines for the Washington Post that the time has come to put libertarianism on the ash heap of history. But much of what he writes cries out for correction.

It is difficult to underestimate the influence of libertarian principles on Republican economic policy. Nearly every economist or economic journalist revered by the party advocates for policies that are derived from libertarian impulses. …Let people do what they want, the story goes, and they will cure poverty, bring world peace and do better at managing social discord than any centrally planned government act can ever hope to accomplish. …Pure libertarianism…is, of course, almost nonexistent in party circles… Even libertarian icons such as Sen. Rand Paul (R-Ky.) or Rep. Justin Amash (I-Mich.) publicly support much higher levels of government activity than do many of the thinkers and activists who sing their praises.

There are two huge problems with the above passages.

First, it’s nonsensical to claim that libertarians have a big influence on GOP economic policy. Just look at the mixed-to-horrible track records of Nixon, Bush I, Bush II, and Trump.

Ironically, Henry actually contradicts his own assertion by noting that libertarianism is “almost nonexistent in party circles.”

Second, what he’s really criticizing is the notion of limited government. Yes, libertarians believe in small government, but so do many conventional conservatives (remember Ronald Reagan?).

So is the notion of small government wrong? Henry argues that people want “strong government.”

Trump…grasps what they do not: People love freedom, but they love security as much or more. Time and again, people draw together in support of strong government to protect them from something fearful they cannot handle on their own. War and civil unrest are classic events that persuade people that strong mandatory measures are necessary; the current pandemic is another. …The modern social welfare state is grounded in the idea that some measure of economic security, opportunity and equality are necessary parts of a decent life. Policies designed to achieve these goals all impose on individual liberty through taxes and regulation. …a supermajority of Americans approves… They do not believe that liberty is the one true god before which all should bow. …The pandemic’s aftermath will see….conservatives…try to right this imbalance in the name of national security and general welfare, even if it means curtailing the liberty to trade. As the pandemic continues, it will be much easier for Republican voters and politicians to cast off the rose-colored libertarian glasses they have worn for far too long.

Let’s explore whether the notion of small government is inconsistent with the idea of strong government.

Writing for The Week, Bonnie Kristian explains how libertarian principles apply. Yes, government action is appropriate, but in ways that are consistent with other principles.

…pandemic-era libertarianism is emerging, and it remains distinctly libertarian. Here are the trends… Praise for the free market’s role in keeping day-to-day life functional. “That gallon jug of hand sanitizer delivered to your front door less than 48 hours after you ordered it online? It didn’t show up because Trump tweeted it into existence or because the surgeon general is driving a delivery truck around the country,” Reason‘s Eric Boehm wrote… Condemnation of counterproductive regulations and lack of transparency. Why is the United States so far behind other countries in testing for coronavirus cases? For weeks, the FDA and CDC wouldn’t let medical workers and academics move forward with COVID-19 tests they’d developed without lengthy processes of federal approval. …Rejection of corporate bailouts and price controls. Trump is exploring plans for corporate bailout loans and other economic stimuli which libertarians generally oppose. …Insistence on temporary changes. Fierce opposition to expansions of the surveillance state to fight the novel coronavirus is likely widespread among libertarians in no small part because privacy rights, once lost, are very rarely recovered. But the risk of this pandemic permanently expanding the power of the state will shape the libertarian view on every proposed solution.

These are solid principles. And very desirable.

Now let’s specifically address whether we need a “strong government.”

In a column for the National Interest, Andy Craig addresses that issue, most notably with his observation that responding to a pandemic is a legitimate exercise of government power, but also that government incompetence has worsened the crisis.

…there has been snark from some quarters about the current crisis somehow catching libertarians flat‐​footed. …Libertarianism, properly understood, encompasses certain core functions as the proper role of government. It is not the libertarian view that government should be ineffective at protecting individual rights or dysfunctionally paralyzed in the face of a massive threat to people’s lives. Government has a role to play in responding to the pandemic in much the same way it is the government’s job to prosecute murderers or defend the country from invasion. …Libertarian criticisms of bad regulations have proven especially prescient. A crucial government failure has been…inflexible and heavy‐​handed bureaucracy, which has held up tests and prevented thousands of private and academic labs from quickly increasing testing capacity. …Another example of a libertarian response to the pandemic has been the quick need to suspend many occupational licensing restrictions, such as by letting doctors practice interstate and upgrading the permissions of nurse practitioners and doctors’ assistants. Even mundane and trivial regulations…have suddenly been cast aside. Two months ago, who would have thought it an urgent concern to suspend alcohol regulations so that restaurants can serve beverages to go for home delivery by rideshare drivers?

Amen.

I’ve documented (in Part I, Part II, and Part III) how big, blundering, bureaucratic government has hindered an effective response to the crisis.

Sadly, it’s quite likely that politicians will use the crisis to expand government power.

That’s certainly consistent with what we’ve seen through history. Professor Don Boudreaux of George Mason University has a new column about the insights of Robert Higgs.

…a book that I’ve lately been pondering quite a lot: economic historian Robert Higgs’s 1987 volume, Crisis and LeviathanIn this richly documented work, Higgs convincingly shows that with each national crisis government power ratchets up. The crisis might be fully genuine or inflated or utterly mythical; it matters not. Whenever there prevails widespread belief that a crisis looms, people turn to the state for help. …additional powers granted to – or seized by – government during each crisis shrinks somewhat when the crisis passes. …But never do such additions to state power fully disappear. …the likelihood is that the ideology of the holders of power prompts them, not to keep their power in check, but to expand it. And as power expands in a ratcheting-upward way, power becomes ever-more valuable and intoxicating to possess.

In a column for the U.K.-based CapX, Helen Dale discusses the role of a limited but competent state sector as a key to classical liberalism.

…liberalism needs a strong state. Yes, state. Not strong supranational organisations like the EU or UN or IMF. …Liberalism needs a state powerful enough to collect taxes and pay for police forces, courts, prisons, and the military. Only powerful states, it emerges, can strong-arm their citizens into the rule of law: that is, a system where like cases are treated alike, contracts are enforced…the modern nation-state is the only way to produce liberal tolerance at scale. …If liberalism needs a strong state, that state must also be a constrained one for liberal forms of governance to persist. Johnson and Koyama speak of a “shackled leviathan” rather than a “despotic leviathan”; that is, powerful states require institutional constraints because without them you get modern China or, historically, Nazi Germany and the USSR.

She’s highlighted a key issue, which is how you give government power to do good things without simultaneously giving it power to do bad things (hint: a good answer is the U.S. Constitution’s limits on the scope of government, at least back in the days when the Supreme Court cared about Article 1, Section 8).

Professor Michael Munger of Duke University makes the all-important point that a bloated public sector will be less competent at doing the few things we want from government.

I see the proper domain of the state as sharply circumscribed… Given that we have a state, it must have the capacity to carry out the functions… A key part of the justification for the existence of the state is the duty to manage property rights and institutions…the state needs to have sufficient capacity to protect individual rights… the key variable is the scope of government, not its size. A relatively small government that arbitrarily sets prices, nationalizes private property, and controls the media is the archetype of the authoritarian regime, as is the case in Turkmenistan or Chad. A large government that accepts constitutional and customary limits on its domain of action can be an archetype of personal freedom, as is the case in Denmark and Sweden. …The state needs the capacity to carry out public health functions, but those powers must be effectively limited to that domain, not available to be hijacked for socialist boondoggles. To my friends on the left: If you had been responsible enough to keep government in its proper, limited role we would have plenty of resources and capacity to carry out the functions we now find lacking. …We need a state that is good at a few things, not your state which tries to do everything and fails at all of it.

There’s lots of good stuff in the above excerpt, including the fact that fiscal policy is only a small piece of the puzzle when measuring the extent of free enterprise (which is why there’s far more economic liberty in, say, Denmark compared to every single country in the developing world).

The last sentence from the excerpt tells us everything we need to know. Indeed, a version of this insight is my Seventh Theorem of Government.

The bottom line is that we definitely don’t want big government.

What’s needed is not really “strong government,” but rather limited, competent, and effective government. Think Singapore, which does a much better job of providing core public goods while spending much less money.

As I noted when correcting Henry Olsen, this is not a libertarian-only principle. It also works for small-government conservatives, an important distinction since Singapore isn’t libertarian (high scores for economic freedom are offset by weak scores for personal freedom).

And I’ll close by observing that there’s plenty of academic and empirical literature supporting this Theorem.

Robert Samuelson and Mark Steyn have made the same point.

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I wrote about “Coronavirus and Big Government” on March 22 and then followed up on March 27 with “Coronavirus and Big Government, Part II.”

Now it’s time for the third installment, and we’ll start with this hard-hitting video from Reason, which shows how red tape has hindered the development and deployment of testing in the United States.

Next, here are a bunch of stories and tweets about the deadly impact of bureaucracy and regulation.

As with the Part I and Part II, feel free to click on any of the stories for the details.

By the way, the problem of excessive government exists in other nations.

Here are two tweets about the situation in the United Kingdom.

The first one deals with having to get government approval for medical devices.

The second one deals with how politicians and bureaucrats have misallocated public health resources – similarly to some of the foolish misadventures of the FDA and CDC (and let’s not forget the World Health Organization).

I’ll close with another story from the United States.

This report from Reason is especially useful because it contains a 30-minute interview with Professor Alex Tabarrok of George Mason University. So if you liked the short video at the start of this column, you’ll definitely want to click through and watch this video.

The message here isn’t that government shouldn’t exist. As I wrote earlier this month, collective action is appropriate to protect life, liberty, and property. Needless to say, that libertarian principle applies during a pandemic.

But that doesn’t mean government should be micro-managing everything.

In normal times, excessive regulation is a costly nuisance because things cost more and take longer.

In a crisis, however, that means needless death and suffering. Which is exactly what’s happening today.

Let’s hope the folks in Washington learn from this awful experience.

P.S. Another lesson to be learned is the Seventh Theorem of Government.

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I shared an initial collection of coronavirus-themed humor last weekend.

Here’s a second round, though you’ll notice that I’m actually mocking politicians (a long-standing tradition) and simply using the coronavirus as an excuse.

Remember Andrew Yang, the guy who ran for president promising every American a monthly check (a.k.a., universal basic income)? Well, somebody has cleverly illustrated how Republicans have suddenly embraced a version of that idea.

Next, I’ve written that the so-called gender pay gap disappears once you account for differences in age, occupations, and hours worked.

Some guy decided to use that myth to seek sympathy.

As you might expect, the superb satirists at Babylon Bee have weighed in about the virus.

Here’s a recent “story” from their site.

As part of a sweeping initiative to help unclog the economic constipation caused by the coronavirus quarantine, the White House announced they are printing out fresh, crisp dollar bills for every US citizen. …The administration explained that, while it’s possible the money might help get things flowing again for people who are in need of a strong push financially, the more practical use will be for those who have run out of toilet paper: “As the economic stoppage causes the dollar’s value to take a dump, we see this as a great alternative to increasingly scarce toilet paper.” …Some remain critical of the action, saying it doesn’t go far enough. Bernie Sanders, who is adorably still in the running for the Democratic presidential nomination, stated, “This will only last us a couple of weeks. We need to print billions in crisp singles for every American if we’re truly going to wipe up this mess!”

Our next addition to the collection was sent to me by a reader who obviously appreciates the irony of Mexico (a would-be libertarian paradise) not wanting potentially infected Americans.

Lots of people are having silly fights about what to call the virus, depending on their views about China.

Here’s some humor related to that issue.

For what it’s worth, I’m skeptical about China’s claims to have eradicated the disease (just like I’m skeptical of the country’s official economic data).

I’ve saved the best for last.

Almost everyone I know, regardless of what score they get on an ideological quiz, enjoys mocking Hillary Clinton (and with good reason!).

Well, she can cure the coronavirus.

Ouch. That’s definitely worth adding to my other examples of Hillary satire.

P.S. If you prefer mocking Bill Clinton, you can enjoy my favorites by clicking herehere, here, here, here, and here.

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Motivated in part by a sensible desire for free trade, six nations from Western Europe signed the Treaty of Rome in 1957, thus creating the European Economic Community (EEC). Sort of a European version of the North American Free Trade Agreement (now known as USMCA).

Some supporters of the EEC also were motivated by a desire for some form of political unification and their efforts eventually led to the 1992 Maastricht Treaty, which created the European Union – along with increased powers for a Brussels-based bureaucracy (the European Commission).

There are significant reasons to think that this evolution – from a Europe based on free trade and mutual recognition to a Europe based on supranational governance – was an unfortunate development.

Back in 2015, I warned that this system would “morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.”

A few years earlier, when many of Europe’s welfare states were dealing with a fiscal crisis, I specifically explained why it would be a very bad idea to have “eurobonds,” which would mean – for all intents and purposes – that reasonably well governed nations such as Germany and Sweden would be co-signing loans for poorly governed countries such as Italy and Greece.

Well, this bad idea has resurfaced. Politicians from several European nations are using the coronavirus as an excuse (“never let a crisis go to waste“) to push for a so-called common debt instrument.

Here are the relevant parts of the letter.

…we need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States, thus ensuring stable long term financing… The case for such a common instrument is strong, since we are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all. And we are collectively accountable for an effective and united European response. This common debt instrument should have sufficient size and long maturity to be fully efficient… The funds collected will be targeted to finance in all Member States the necessary investments in the healthcare system and temporary policies to protect our economies and social model.

Lots of aspirational language, of course, but no flowery words change the fact that “collectively accountable” means European-wide debt and “social model” means welfare state.

I wrote last year that globalization is good whereas global governance is bad. Well, this is the European version.

The Wall Street Journal opined against the concept. Here’s some background information.

Bad crises tend to produce worse policy… We speak of proposals for “corona bonds,” an idea floated as a fiscal solution to Europe’s deepening pandemic. Italian Prime Minister Giuseppe Conte launched the effort, and French President Emmanuel Macron this week joined Mr. Conte and seven other leaders in backing such a bond issue for health-care expenditures and economic recovery. Some 400 economists have joined the chorus. …The bonds would be backed collectively by member governments. The proceeds could be allocated to members such as Italy that otherwise couldn’t borrow from private markets. …Calls for euro bonds last hit a crescendo during the debt crises of 2010-12, when they were pitched to fund bailouts of Greece and others. But the idea has never gone anywhere because it would transform the eurozone into something voters didn’t approve when the currency was created in the 1990s.

And here’s the editorial’s explanation of why eurobonds would be a very bad idea.

Europeans were promised the euro would not become an excuse or vehicle for large fiscal transfers between member states. …Proponents say corona bonds are a special case due to the unfolding economic emergency. But the Italian government that now can’t finance its own recovery was also one of the worst fiscal offenders before Covid-19… Claims that the corona bond would be temporary aren’t credible because European elites have wanted such a facility for years… Voters can assume that if they get these bonds in a crisis, they’ll be stuck with this facility forever. …euro bonds would create profound governance problems. …With corona bonds, German and Dutch taxpayers for the first time are being asked to write a blank check to Italy and perhaps others.

Amen.

Once the camel’s nose is under the tent, it would simply be a matter of time before eurobonds would become a vehicle for bigger government in general and more country-to-country transfers in particular.

Hopefully this terrible idea will be blocked by nations such as Germany, Sweden, and the Netherlands (this satirical video will give you an idea of the tension between the European nations that foot the bills and the ones looking for handouts).

Some advocates for eurobonds say there’s nothing to worry about since the European Commission and related pan-European bureaucracies currently don’t spend much money, at least when measured as a share of overall economic output.

Which is why I sometimes warn my European friends that the United States is an example of why they should be vigilant.

For much of American history, the central government in Washington was very small, as envisioned by the Founders. But beginning with the so-called Progressive Era and then dramatically accelerating under the failed policies of Hoover and Roosevelt, the federal government has expanded dramatically in both size and scope.

The lesson to be learned is that more centralization is a very bad idea, particularly if that centralized form of government gains fiscal power.

That’s especially true for Europe since the burden of government spending at the national level already is excessive. Eurobonds would exacerbate the damage by creating a new European-wide method of spending money.

P.S. While eurobonds are a very bad idea, it would be even worse (akin to the U.S. approving the 16th Amendment) if the European Union somehow got the authority to directly impose taxes.

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Five days ago, I wrote “Coronavirus and Big Government” to highlight how sloth-like bureaucracy and stifling red tape deserve much of the blame for America’s slow response to the crisis.

And I started that column by sharing four points from a previous column on “Government, Coronavirus, and Libertarianism.” I’ll start today’s column by repeating the final observation.

4. The federal government has hindered an effective response to the coronavirus.

Here’s a video from John Stossel documenting the federal government’s clumsy incompetence.

And here are a bunch of stories and tweets that provide additional elaboration.

Feel free to click on the underlying stories if you want to get even angrier about the deadly impact of big government.

The silver lining to all the bad news is that politicians and bureaucrats have been relaxing regulatory barriers.

But will they learn the right lesson and permanently repeal government-created barriers that hinder the provision of health care?

Is it true, as Robert Tracinski wrote for the Bulwark, that “We’re All Libertarians now”?

This talking point has since been taken up by others in a more technically accurate form: there are no libertarians in a pandemic. The idea is that when a crisis hits, everyone suddenly realizes how much they need Big Government. This is a bizarre argument to make about a virus that got a foothold partly because of the corrupt and tyrannical policies of a communist government in China. The outbreak is currently at its worst in Italy, where socialized medicine has not turned out to be a panacea. And it was allowed to get out of control in America because the feds imposed an incompetent government monopoly on COVID-19 testing, blocking the use of better and faster tests developed by private companies. …There has been a surge of emergency deregulation to lift artificial barriers that prevent people from solving problems. …the loosening of federal controls on the private development of diagnostic testing, after the disastrous attempt to centralize it all at the CDC. We’re also seeing the suspension of restrictive licensing requirements on doctors and nurses to allow them to work across state lines, so they can go where the shortages are worst. There has also been a whole series of waivers on restrictions on the transportation and serving of food and beverages in order to help restaurants stay in business and feed their customers by offering curb-side service.

Needless to say, I hope Tracinski is right.

But I worry that the net result of this crisis is that we’ll have more red tape and the CDC and FDA will have bigger budgets.

If you think I’m being too pessimistic, just remember that the Department of Veterans Affairs was rewarded with more money after letting veterans die on secret waiting lists, the IRS was rewarded with more money after persecuting Tea Party groups to help Obama’s political prospects, and the education monopoly endlessly gets rewarded with more money even though student outcomes stagnate or deteriorate.

All as predicted by the First Theorem of Government.

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I’m not an optimist about Europe’s economic future.

Most nations have excessive welfare states and punitive taxes, which is hardly good news. You then have to consider demographic trends such as aging populations (i.e., more people relying on government) and falling birthrates (i.e., fewer future taxpayers).

That’s a very grim combination.

Indeed, this is a big reason why I favored Brexit. Yes, it was largely about escaping an increasingly dirigiste European bureaucracy in Brussels, but it was also about not being chained to a continent with a dismal long-run outlook.

More than one year ago, before there were any concerns about a coronavirus-instigated economic crisis, Vijay Victor, an economist from Szent Istvan University in Hungary, expressed concern about Europe’s fiscal future in a column for the Foundation for Economic Education.

The debt crisis in the Eurozone is getting no better, even in the wake of the new year. The five countries in the Eurozone with the highest debt-to-GDP ratio in the third quarter of 2018 were Greece, Italy, Portugal, Belgium, and Spain. The total debt of Greece is around 182.2 percent of its GDP and that of Italy is 133 percent… Dawdling economic growth coupled with low-yield investment options are dragging these indebted economies toward insolvency… Unemployment rates, for example, are still very high in most of these highly indebted European economies. Despite the recurrent monetary assistance and policy support, job creation is weak, which might imply that the debt financing is channelized in a nonproductive direction.

By the way, I can’t resist taking this opportunity to remind people that debt is a problem, but it also should be viewed as a symptom of en even-bigger problem, which is an excessive burden of government spending.

A bloated welfare state is a drag on economic performance, whether it’s financed by borrowing or taxes.

Though nations that try to finance big government with red ink eventually spend their way into crisis (as defined by potential default).

And we may be reaching that point.

Desmond Lachman of the American Enterprise has authored a very grim assessment, focusing primarily on Italy, for the National Interest.

Today, with Italy at the epicenter of the world coronavirus epidemic, it would seem to be only a matter of time before the durability of the Euro is again tested by another full-blown Italian sovereign debt crisis. …even before the coronavirus epidemic struck its economy was weak while its public finances and banking system were in a state of poor health. After having experienced virtually no economic growth over the past decade, the Italian economy again entered into a recession by end-2019. At the same time, at 135 percent its public debt to GDP ratio was higher than it was in 2012 while its banks’ balance sheets remained clogged with non-performing loans and Italian government bonds. …the coronavirus epidemic will seriously damage both Italy’s public finances and its banking system…by throwing the country into its deepest economic recession in the post-war period. That in turn is bound to cause Italy’s budget deficit to balloon and its banking system’s non-performing loans to skyrocket as more of its households and companies file for bankruptcy. …all too likely that the Italian economy will shrink by at least 10 percent in 2020.

All this matters because the people and institutions that purchase government debt may decide that Italy’s outlook is so grim that they will be very reluctant to buy the country’s bonds (i.e., they’ll be very hesitant about lending money to the Italian government because of a concern that they won’t get paid back).

This means that the Italian government will have to pay much higher interest rates in order to compensate lenders for the risk of a potential default.

So what are the implications? Will Italy default, or will there be some sort of bailout?

If the latter, Lachman predicts it will be huge.

One way to gauge the amount of public money that might be needed to prop up Italy is to consider that over the past decade it took around US$300 billion in official support to keep Greece in the Euro. Given that the Italian economy is around ten times the size of that of Greece, this would suggest that Italy might very well need around $3 trillion in official support to keep Italy in the Euro. …Meanwhile, Italy’s US$4 trillion banking system could very well need at least US$1 trillion in official support to counter the capital flight and the spike in non-performing loans that are all too likely to occur in the event of a deep Italian recession.

For what it’s worth, Lachman thinks a bailout would be desirable.

I disagree. Default is a better choice because it will discipline the Italian government (it would mean an overnight balanced budget requirement since nobody will lend money to the government) and also discipline foolish lenders who thought Italian politicians were a good bet.

Simply stated, we should minimize moral hazard.

I also think it’s worth noting that Italy isn’t the only government at risk of fiscal crisis. Here’s the OECD data for major nations, including a few non-European examples.

Japan wins the prize for the most red ink, though this doesn’t mean Japan is most vulnerable to a default, at least in the short run.

A fiscal crisis is driven by investor sentiment (i.e., when will people and institutions decide they no longer trust a government to pay back loans). And that depends on a range of factors, including trust.

The bottom line is that investors trust the Japanese government and they don’t trust the Italian government.

That being said, I think all of the PIGS (Portugal, Italy, Greece, and Spain) are very vulnerable.

And politicians in Ireland, Belgium, and France should be nervous as well.

I’ll close by sharing some calculations, based on the aforementioned OECD data, showing which nations used last decade’s economic recovery to improve their balance sheets.

Congratulations to Germany and Switzerland for fiscal responsibility, and mild applause for the Netherlands and Sweden.

I’ve highlighted (in red) the nations that were most reckless.

Though keep in mind that you want to look at both the trend for debt (far-right column) and the existing level of debt (the next-to-far-right column). So I’m not overly worried about Australia. Debt is still comparatively low, even though it almost doubled last decade.

But all of the PIGS are in trouble.

So if economic conditions deteriorate in Europe, the fallout could be significant.

P.S. The United Kingdom, like Japan, benefits from a high level of trust – presumably in part because the country paid off enormous debts from the Napoleonic wars and World War II. That being said, the numbers for the U.K. are worrisome, which hopefully will lead to a renewed commitment to spending restraint by Boris Johnson’s government.

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Back in 2013, I joked that “you get bipartisanship when the Stupid Party and the Evil Party both agree on something.”

That generally means bad outcomes, with the TARP bailout being a prime illustration.

We now have another example since many Republicans and Democrats want to restrict – or even ban – companies from buying shares from owners (i.e., company shareholders).

Known as stock buybacks, these share purchases should be viewed as an innocuous way of distributing profits.

But you’ll see below that many politicians think they be able to dictate how private businesses operate.

First, let’s look at some excerpts from the Tax Foundation’s very useful primer on the issue.

It’s important to understand why stock buybacks occur and the economic role they play. The new tax law lowered the corporate income tax rate… A lower rate also means that corporations will receive larger profits than anticipated on investments they made in the past—it should be expected that companies would share at least some of this unexpected increase in cash with their shareholders. …Stock buybacks are complements to investment, not substitutes for it. Research shows that stock buybacks do not deprive firms of capital that they would otherwise invest, and further, that stock buybacks can facilitate long-term investment by redirecting funds from lower growth firms to higher growth firms. …Limiting the ability of a corporation to return value to shareholders—value which was created by productive investments made in the past—will not improve economic conditions.

Many experts from the worlds of finance, business, and public policy have tried to explain why stock buybacks should not be viewed as controversial.

In a column for the Wall Street Journal, for instance, Donald Luskin and Chris Hynes explain why it’s a bad idea to curtail buybacks.

Sen. Elizabeth Warren would require, among other things, that to receive aid…companies receiving aid be permanently barred from executing share buybacks, even after the aid is repaid. This is an opportunistic mutation of the left’s longstanding claim that buybacks are a uniquely evil form of predatory capitalism. In reality, buybacks create benefits for shareholders large and small… Shareholders must receive a dividend when it’s declared and pay taxes on it. In a share buyback, investors who want cash can sell some shares and pay taxes. If they don’t want cash, they can choose to hold on to their shares. …Some opponents of buybacks…argue that they waste company cash that ought to be reinvested in plant and equipment. But not every company is in growth mode, and even those that are might have more cash than growth ideas. …Paying money out to shareholders frees them to reinvest in new companies with big growth ideas. This is the best way to promote growth for the economy as a whole.

The Washington Post is not exactly a hotbed of libertarian thinking, so it’s noteworthy that its editorial warned that politicians shouldn’t be dictating private business choices.

the practice by which public corporations use spare cash to buy back their own stock has turned into a policy flash point for both Democrats and Republicans. The basic allegation is that profits devoted to stock buybacks…are profits not plowed back into new plants, equipment or higher wages. …Contrary to the concerns about diverting investment funds, U.S. nonresidential investment and job creation have been rising for most of the past decade. When shareholders get cash for their stocks, the money doesn’t disappear; it flows through the economy, often as productive investment elsewhere. …Perhaps a tax change would accomplish something — though companies would still have an incentive to give spare cash back to shareholders as long as there is no clearly superior investment alternative. Critics of stock buybacks are saying, in effect, that elected officials or regulators may know better than companies themselves what should be done with extra cash.

Writing for the Foundation for Economic Education, Ethan Lamb points out why Senator Cory Booker doesn’t understand the economics of buybacks.

Senator Cory Booker…reintroduced the “Workers Dividend Act,” which would mandate corporations match every dollar spent on buybacks with compensation toward employees. …this bill presupposes that stock buybacks are inherently bad for society. …Booker doesn’t understand the function of stock buybacks. …Buybacks are just another mechanism, like dividends, to return money to shareholders. …Booker and company will also argue that stock buybacks come at the expense of investment, whether it be in the form of wages or capital expenditures. …none of that is true. …stock buybacks are a brilliant example of the free-market system offering a win-win to both parties. In other words, when the corporation purchases its own stock, the money from that exchange has to go somewhere. Presumably, the investor that just received the money would re-invest in another company that would be more inclined to use that money on investments in labor, R&D, or capital.

The editors of the Wall Street Journal warned about the risks of government intervention.

Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. …Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. …Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. …Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. …A recent report from Mr. Rubio floats the idea of raising tax rates on buybacks. …For example: “An increased tax rate on repurchases might raise revenue to finance other incentives for capital investment.” In other words, Mr. Rubio wants politicians to have more leverage to direct how businesses deploy their capital. This would produce less investment, not more, with corresponding damage to workers and federal revenue.

Jon Hartley, in an article for National Review, debunks the notion that there’s some sort of special tax favoritism for buybacks.

Marco Rubio’s plan to tax stock buybacks in the hopes of spurring investment…is heavily flawed for multiple reasons. …the senator seems to be operating under the incorrect belief that buybacks are tax-advantaged, when in fact buybacks are already taxed in the form of capital-gains taxes. Since 2003, when the dividend-tax rate was lowered to remove the tax advantage then afforded buybacks, the tax rates on qualified dividends and long-term capital gains have been the same. …let’s take a hypothetical example: Say an investor bought a stock at $100 and over the period of a year, the stock price appreciated by 10 percent to $110 after the company increased its profits and paid corporate taxes (at today’s 21 percent rate) on its earnings. If the company pays a $2 dividend at the end of the year and the investor sells the stock at $108 (ex-dividend), the investor pays the 23.8 percent dividend tax on the $2 dividend received and 23.8 percent on the $8 capital gain. If the company buys back some of its stock at $110 instead of paying a dividend and the investor sells his shares at $110, the investor pays the long-term capital-gains tax of 23.8 percent on the $10 he made. …Now, let’s imagine that Senator Rubio’s legislation is passed and a tax on buybacks goes into effect. …A transaction that was previously subject to two layers of taxation (corporate and capital-gains taxes) is suddenly subject to three layers of taxation (corporate taxes, capital-gains taxes, and buyback taxes), yielding a higher overall tax bill.

Ted Frank, writing for the Washington Examiner, adds further analysis.

Sen. Josh Hawley, a Missouri Republican, proposed banning buybacks as one of a series of conditions of government relief. Anyone making blanket condemnations of stock buybacks is either confused or otherwise fundamentally unserious — and proposing counterproductive policies that will slow the recovery. …It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately. …Proposals to ban buybacks are effectively proposals to demand corporations hold such huge stockpiles of cash, depriving shareholders of investment choices. Such proposals will backfire by slowing down the economic recovery when money that could be invested is instead held in corporate bank accounts, doing nothing.

I want to close by sharing two additional columns that argue against restrictions on stock buybacks, but also suggest that there may be some desirable reforms that might – as a side effect – lead to fewer buybacks.

Clifford Asness recently opined for the Wall Street Journal about buybacks and investment, echoing many of the points included in the above excerpts.

Share buybacks are when a company purchases its own common shares on the open market. After a buyback, a company is left with less cash and fewer shares outstanding. Buybacks, along with ordinary dividends, are one of the main ways companies return cash to investors—the ultimate objective of any investment. So why have buybacks become the subject of vitriolic criticism? …The lead accusation against buybacks is that they “starve investment.” …Related to the claims of starving investment, some argue that today’s buybacks are a form of “self-liquidation” in which companies are systematically shrinking away. This ignores that…the net cash outflow from share buybacks has been more than replaced by cash inflow due to new borrowing (think of this as a debt-for-equity swap). Despite buybacks, on net companies have been raising money, not liquidating. …Buybacks…facilitate a movement of capital from companies that don’t need it to those that do. That’s how markets are supposed to work.

But he then notes that the tax code’s bias for debt could be a problem.

…there are some possible problems with buybacks. If taken to excess far beyond today’s levels and financed with debt, they could lead to too much leverage.

Noah Smith explains for Bloomberg that banning stock buybacks is the wrong response to the wrong question.

Stock buybacks are a fraught and confusing issue. …A number of politicians have decried this practice, and sought restrictions or a ban. …Many observers are mystified by this animosity. …share repurchases are like dividends — a way to return money to shareholders. When companies don’t have any way to invest their money profitably, they might as well give the money back to investors.

But he then suggests other government policy mistakes that could be artificially boosting the level of buybacks.

…many of the concerns people have with buybacks probably could be better addressed by reforming other parts of the corporate system. If executive short-termism is the problem, stock- and option-based compensation should be discouraged. If debt is the problem, tax corporate borrowing more heavily. …instead of attacking buybacks, reformers should focus on fixing other parts of corporate America.

Since I just wrote about the tax code being biased in favor of debt, I obviously am very sympathetic to tax reforms that would put debt and equity on a level-playing field.

Noah Smith raised the issue of whether stock- and option-based compensation arrangements for company executives are artificially encouraging buybacks.

Well, my modest contribution to this discussion is to explain that such compensation packages became more prevalent after Bill Clinton’s failed 1993 tax hike imposed a significant indirect tax increase on corporate salaries of more than $1 million. That tax hike, however, did not apply to performance-based compensation, such as measures tied to a stock’s performance.

So what we’re really looking at are a couple of example’s of Mitchell’s Law in action.

Politicians adopt bad policies (favoritism for debt in the tax code and higher taxes on regular salaries), which lead to unintended consequences (more stock buybacks), which then gives politicians an excuse to further expand the size and scope of the federal government (restrictions and bans on buybacks).

Lather, rinse, repeat.

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