Government, Coronavirus, and Libertarianism, Part II

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 Leviathan. In 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.

• From the European Central Bank.
• From the World Bank.
• Another study from the European Central Bank.
• From WalletHub.

Robert Samuelson and Mark Steyn have made the same point.

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Coronavirus and Big Government, Part III

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.

The FDA just waived their usual demanding face-mask regulatory standards!

Awesome, let's get making masks:https://t.co/TaBXdNyUK5

— Robert Wiblin (@robertwiblin) March 27, 2020

FDA greenlights COVID-19 point-of-care test that can return results in as little as 5 minutes https://t.co/8ZYWdbr0Oz by @AnjKhem pic.twitter.com/QPBOUgtFDb

— Yahoo Finance (@YahooFinance) March 29, 2020

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.

To everyone making 3D printed ventilator parts in the UK – there is good news from the regulators!

You can apply for approval to supply a non-compliant medical device on humanitarian grounds during the #COVID19 pandemic. Decision made in 48 hours.https://t.co/vjlYtVYRGe

— Hugh Harvey (@DrHughHarvey) March 25, 2020

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).

"Only a tiny fraction of the £4 billion spent on public health in England goes towards the prevention of infectious disease. Far more is spent hassling people about their lifestyles." https://t.co/smMMnAjJOU

— Matt Ridley (@mattwridley) March 29, 2020

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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More Coronavirus Humor

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 here, here, here, here, here, and here.

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Eurobonds: A Further Threat to the Long-Run Viability of the European Union

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.

Letter from @emmanuelmacron @antoniocostapm et al to @eucopresident on the need for Common Debt Issuance. Note the absence to references to the ESM instruments… pic.twitter.com/69kLToQrxG

— Shahin Vallée (@Shahinvallee) March 25, 2020

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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Coronavirus and Big Government, Part II

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.

Good. Another regulation we never needed bites the dust. https://t.co/Ytmy6p7mPi

— Alex Tabarrok (@ATabarrok) March 26, 2020

Wondered why it's been so hard to ramp up production of surgical masks and respirators? Why haven't private companies flooded into the market to meet peak demand?

Because they are regulated medical devices & new versions require FDA approval which can take months to obtain. 1/

— Paul Matzko (@PMatzko) March 25, 2020

Distiller trying to switch over to producing hand sanitizer must poison the hand sanitizer or be taxed as if it were producing an alcoholic beverage. https://t.co/HI4801oL0o

— Alex Tabarrok (@ATabarrok) March 25, 2020

No, this is not why we have more coronavirus cases. We have more cases because the FDA and the CDC–both of which are regarded as world class regulators from whom other countries take their lead–were too slow off the mark in establishing a testing regime. https://t.co/KL78iecoBw

— Megan McArdle (@asymmetricinfo) March 26, 2020

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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European Fiscal Crisis, Round 2?

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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Washington’s Counterproductive Attack on Stock Buybacks

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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The Temporary Tradeoff Between Health Outcomes and Economic Outcomes

In the past couple of weeks, we’ve discussed a bunch of coronavirus-related issues, ranging from big-picture topics such as the proper role of government and the catastrophic downsides of excessive bureaucracy to more-focused topics such as how gun control puts families at risk, why laws against “price gouging” are misguided, and how government-encouraged debt makes the economy more vulnerable.

The crisis even led me to unveil a new theorem. And I also shared some amusing cartoons in hopes of lightening the mood.

The latest chapter in the coronavirus saga is that people are beginning to question how much economic damage we should be willing to accept in order to get the disease under control.

Public health experts argue that isolation and lockdown are critical if we we to “flatten the curve” so that new cases don’t overwhelm the ability of the system to treat patients (thus resulting in unpalatable forms of triage, with older and sicker patients set aside to die so that limited resources can be utilized to save others).

But if the economy is put on hold for several months, the economic damage will be catastrophic. At some point, policy makers won’t have any choice but to relax restrictions on people and businesses.

So how do we assess the costs and benefits of various options?

Eline van den Broek-Altenburg and Adam Atherly, both from the College of Medicine at the University of Vermont, explain the necessary tradeoffs.

While a growing number of people are starting to understand the message of the intuitive picture of “Flattening The Curve”, some health economists are starting to wonder how flat the curve should actually be for the benefits to exceed the costs. …how does the economic cost of the flattening fit into the discussion? …we use publicly available data to calculate the cost effectiveness of the flattening the curve. …When considering the value of a healthcare intervention to inform decision-making, benefits are usually measured in terms of life years gained, with the life years adjusted for the “quality” of the life (using standard formulas) to create a “Quality Adjusted Life Year” or QALY. …interventions in younger populations will typically yield more QALYs than interventions in older populations: because younger people have longer life expectancy. …Heath systems then compare the QALYs gained to the cost and calculate a cost per QALY gained. In the United States, interventions that cost less than $100,000 per QALY gained are often considered “cost effective,” although the precise number is somewhat controversial.

What you just read is the theoretical framework.

The authors then apply the model to the current situation.

…is the current “stay at home” and social isolation-policy, with school closed and businesses shuttered, cost effective using the standard health economics framework? …The years of life-gains are relatively straightforward. …statistics on the people who died of COVID19 in China and Italy are the best source of currently available data. …The average 80-year old in the United States has a life expectancy of about 9 years, suggesting that on average, a death averted will “buy” 9 extra years of life. …If we use diabetes as a reasonable proxy for the many chronic diseases, we would adjust the 9 years down to 7.8 years or QALYs. In other words: the average loss per person of quality-adjusted life years is 7.8. …This implies the pandemic, if unchecked, will lead to a loss of between 1.56 million and 13.26 million QALYs. …What, then, is the cost of the intervention of social distancing? One easy estimate would be to use the cost of the current stimulus bill before congress — 1 trillion dollars. This is likely an underestimate of the true cost, but is a reasonable starting place. …the cost per QALY gained from the current approach to be somewhere between approximately $75,000 and $650,000.

So what’s the bottom line?

Here’s a graphic they prepared.

And here’s their explanation.

…the key variable is the expected number of deaths. A pandemic that is likely to lead to 1.7 million deaths can justify the enormous public costs. However, if the pandemic is in the lower end of the predicted range, then the public funds would have been more valuable if spent elsewhere. …Some claim it is impossible or even unethical in times of a crisis, to think about cost when lives are involved. But in a world of finite resources, it’s necessary to make choices. Why not use a framework that has been defended by governments and scientists for decades?

Richard Rahn, former Chief Economist for the U.S. Chamber of Commerce, is very explicit about the downsides of an economic shutdown for future generations.

Some government officials, politicians and commentators keep saying words to the effect, “we need to spend whatever it takes to stop the coronavirus deaths.” They, of course, do not literally mean the government should spend an infinite amount of money to save a life — because, if they did, we would not let people drive more than five miles an hour in order to save more than 35,000 Americans who die on the roadways each year. …What is missing in this discussion is what American taxpayers and workers in terms of job losses should spend to save each life… Such calculations are necessary for insurance companies to price their products correctly, and for all of those government agencies involved in health and safety to determine both the proper form and degree of regulation. …If we learn that a 35-year-old MD has unexpectedly passed away, we are likely to feel far worse about the tragedy than if we hear her 90-year-old grandfather has died.

That’s Richard’s conceptual framework.

Here are his calculations.

Let’s assume that the low-cost measures will result in 50,000 more deaths (which is almost certainly on the very high-side given the experience of other countries). If we value the average death at…$2,000,000 figure… (which is high, because of the advanced age of most of the coronavirus victims), then policies that cost taxpayers, and the hit to GDP, more than $100 billion are counterproductive. Even if you assume that my figures are off by a magnitude of three, the mitigation policies should not cost more than $300 billion — not trillions.

Jeffrey Polet, a political scientist at Hope College, also explores the adverse consequences of an economic lockdown.

A panicking public will produce bad consequences, and we are already seeing its destructive effects on our economy. …While the elderly and infirm are the most vulnerable populations, small businesses, low wage laborers, and less healthy social institutions are the most likely to succumb to the economic consequences of the reaction to the virus. …The result will be, as we already see, a call for more government programs to aid those made destitute by the government’s reactions. …collective overreacting has profound social, economic, and political effects. …Good leadership neither overreacts nor under-reacts but reacts sensibly. …Calling something a “pandemic” excites public fear, even if the majority of the population is unlikely to be either directly or indirectly harmed. …For many people in this country, the prospect of losing their business or their job is far more frightening and harmful than the prospect of getting infected with the virus. An already insolvent government is hardly in a position to get this economy up and running, particularly if its policies create massive economic dislocations. …One of the appeals of utilitarianism is that it actually provides a functioning calculus, however imperfect in implementation.

I’ll close with the observation that I want to err on the side of public health in the short run, though I confess I’m not even sure what that means in terms of public policy since we not only need to agree on how much a life is worth (an unpleasant number to consider), but also get a handle on how many lives might be at risk (a very speculative number).

The goal of today’s column is simply to point out that the tradeoffs are real and to applaud the people who have the honesty to write about the issue.

In the long run, we should all appreciate the overlooked point that there is no tradeoff between health outcomes and economic outcomes.

That’s because wealthier societies are healthier societies. Here are a couple of chart from an article I wrote for the Journal of Regulation and Social Costs way back in 1992.

I’ve written about this correlation many times, both as a general concept, and also when addressing specific topics such as the adverse impact of President Obama’s anti-growth policies (and I cited one of Obama’s top economic appointees, Cass Sunstein, who explicitly agrees about the link between health and wealth).

P.S. There’s a very amusing Remy video about health-and-wealth tradeoffs at the end of this column.

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Coronavirus and the Seventh Theorem of Government

I wrote yesterday how cumbersome bureaucracies and foolish regulations have hindered an effective response to the coronavirus.

This isn’t because governments are run by bad people. Some of them probably are that way, of course, but the real problem is that politicians and bureaucrats are dealing with a perverse incentive system.

They’re largely motivated by power, money, publicity, staffing, and votes.

And that leads to some very unfortunate outcomes, as Betsy McCaughey explained in her syndicated column.

Landing in the hospital on a ventilator is bad. But worse is being told you can’t have one. …learning that the state’s stockpile of medical equipment had 16,000 fewer ventilators than New Yorkers would need in a severe pandemic, Gov. Andrew Cuomo came to a fork in the road in 2015. He could have chosen to buy more ventilators. Instead, he asked his health commissioner, Howard Zucker to assemble a task force and draft rules for rationing the ventilators they already had. …Cuomo could have purchased the additional 16,000 needed ventilators for $36,000 apiece or a total of $576 million in 2015. It’s a lot of money but less than the $750 million he threw away on a boondoggle “Buffalo Billion” solar panel factory.

For what it’s worth, I’m not blaming Governor Cuomo for a failure to buy more ventilators.

In the same situation, I also may have decided that it wasn’t wise to spend $576 million for an event that most people thought was very unlikely.

But I am blaming him for supporting ever-bigger government in New York and getting ever-more involved in things that aren’t legitimate functions of a state government.

That applies to the solar factory mentioned in the article, and it also applies to other vote-buying schemes such as mass transit boondoggles, expanded rent control, and anti-gun snitch lines.

And when he expands the size and scope of state government, he increases the likelihood that there won’t be the energy, expertise, or resources to address problems where government should play a role.

Such as dealing with a pandemic.

Which motivates me to unveil a Seventh Theorem of Government.

In addition to the example of Cuomo and ventilators, there’s also a story from Belgium that underscores how bloated governments are less capable.

But I’ll close by noting the Seventh Theorem is not driven by anecdotes. There’s plenty of academic evidence showing that smaller governments are more competent.

P.S. As suggested by proponents of “state capacity libertarianism,” there is a possible exception to the Seventh Theorem.

Some of the world’s poorest nations have small public sectors – at least according to official measurements. It’s certainly possible, at least in theory, that such countries would benefit if they had larger governments that were capable of providing core public goods.

Indeed, international bureaucracies commonly argue that these countries should increase their tax burdens to provide “financing for development.”

However, the real problem in such nations is rampant corruption, low societal capital, and inadequate rule of law. Which is why it’s not a good idea to generate more money for politicians in those countries.

P.P.S. Here are my other theorems of government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.

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Coronavirus and Big Government

When the current health crisis heated up, I wrote a column on “Government, Coronavirus, and Libertarianism” and made four simple points.

1. Libertarians believe government should protect life, liberty, and property
2. Libertarians correctly warn that a big sprawling federal government means it is less capable of handling the few things it should be doing
3. Other government-run health systems have not done a good job
4. The federal government has hindered an effective response to the coronavirus.

Today, I want to elaborate on point #4 by highlighting an avalanche of reports on how bureaucracy and red tape have been endangering our health.

Readers are welcome to click on some or all of the stories and tweets to learn more about how we’re at risk because of clumsy and inefficient government. Though if you’re pressed for time, this first story is the one to read.

And here are many more reports that confirm how government has largely been the source of problems rather than a solution.

"Where other nations are expediting these deliveries, trusting proven suppliers in their claims that they simply want to get their goods to those who need it… the FDA has resorted to its favorite fetish: bureaucratic lethargy." https://t.co/kdiy9Rssub

— Tom Rogan (@TomRtweets) March 20, 2020

This is sad, but all too predictable. "Stockpiles of masks, hand sanitizer, and other supplies," @TomRtweets reports, "are sitting in warehouses waiting for FDA inspectors to get around to them."https://t.co/pELgHvUSzw

— Philip Wegmann (@PhilipWegmann) March 20, 2020

Shitshow USA: "CDC botched its own test development. It sent testing kits to state public-health labs with a nonfunctioning ingredient. And by then, the virus was already spreading. It was already spreading as the [FDA] held up independent labs that had made their own tests…" https://t.co/ZLO2hysWxL

— Amy Alkon (@amyalkon) March 21, 2020

It’s been maddening to watch coronavirus testing get strangled in red tape from the FDA & CDC pic.twitter.com/ZGhfD8ki2E

— Alec 🌐 (@AlecStapp) March 14, 2020

The risk calculus part is important. Up until this point, the cost of biomedical delay was invisible and deniable.

But what FDA's CDRH division did in terms of delaying EUAs for lab tests has now very publicly cost us trillions of dollars and likely many American lives.

— Balaji S. Srinivasan (@balajis) March 15, 2020

For what it’s worth, the stories I shared above are just a small sampling. I could have shared dozens of additional reports.

But rather than beat a dead horse, let’s focus on the key takeaway from this tragedy. David Harsanyi of National Review nicely summarizes the lessons we should be learning.

…the coronavirus crisis has only strengthened my belief in limited-government conservatism — classical liberalism, libertarianism, whatever you want to call it. Years of government spending and expanding regulation have done nothing to make us safer during this emergency; in fact, our profligate spending during years of prosperity has probably constrained our ability to borrow now. …government does far too much of what it shouldn’t, and is far too incompetent at doing what it should. The CDC, an agency specifically created to prevent the spread of dangerous communicable diseases, has failed. Almost everyone would agree that its core mission should be under the bailiwick of government. Yet, for the past 40 years, its mission kept expanding as it spent billions of dollars and tons of manpower worrying about how much salt you put on your steaks and imploring you to do more jumping jacks. …The CDC — and other federal agencies such as the FDA — haven’t just moved too slowly in tapping the expertise of our academic and private sectors to fight COVID-19; they’ve actively impeded such private efforts. …The CDC didn’t merely botch the creation of a COVID-19 test, it failed to turn to private companies that could have created a test faster and better. …I’d simply like government to do much less much better.

David’s final sentence about a government that does less and does it better deserves to be emphasized. Observers ranging from Mark Steyn to Robert Samuelson have pointed out that the federal government is more likely to do a good job if it focuses on core responsibilities. And there’s plenty of academic evidence in support of this position, though this anecdote from Belgium may be even more persuasive.

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Coronavirus Humor

I’ve addressed the public-policy implications of the coronavirus, both in general and looking at a couple of specific issues.

Now it’s time for some Gallows Humor about the disease.

We’ll start with this item that’s related to Wednesday’s column about gun ownership and the potential breakdown of civil order.

For what it’s worth, there’s been a significant increase in the percentage of people citing societal breakdown as a reason to support the 2nd Amendment.

I wrote last year about how more than 2 million children are being home-schooled.

That number has skyrocketed with schools being closed, which is giving libertarians an opportunity to pass on important messages to their kids.

I should probably add this to my collection of libertarian humor.

And if you like humor about home-schooling, you’ll enjoy this video.

Next we have a clever meme that a reader sent to me.

This is only the second time that Greta has appeared on this site, which is surprising.

I wrote about potential economic-policy responses to the coronavirus earlier this week.

Here’s a meme about Republicans and Democrats dealing with cognitive dissonance.

Speaking of cognitive dissonance, a lefty friend sent me this very clever bit of Trump-Bernie humor.

Left-leaning readers will also appreciate this and this.

Let’s close with two items that belong in my collection of socialism/communism humor.

It seems we have a second reason to close colleges.

I favor a different approach if we want to cure young people of their infatuation with socialism, but any port in a storm.

Last but not least, there’s a very good solution if you’re running out of toilet paper.

I’m sure Karl won’t mind (though some people at the European Commission will be offended).

If there’s a shortage of this option, I also recommend all ghost-written books from politicians as well as Thomas Piketty’s error–riddled screed, Capital in the 21st Century.

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Economic Lessons from Coronavirus: Government-Subsidized Private Debt Creates Macro Vulnerability

There will be many lessons that we hopefully learn from the current crisis, most notably that it’s foolish to give so much regulatory power to sloth-like bureaucracies such as the FDA and CDC.

Today, I want to focus on a longer-run lesson, which is how tax policy (a bias for debt over equity) and monetary policy (artificially low interest rates) encourage excessive private debt.

Are current debt levels excessive? Let’s look at some excerpts from a column in the Washington Post, which was written by David Lynch last November – before coronavirus started wreaking havoc with the economy.

Little more than a decade after consumers binged on inexpensive mortgages that helped bring on a global financial crisis, a new debt surge — this time by major corporations — threatens to unleash fresh turmoil. A decade of historically low interest rates has allowed companies to sell record amounts of bonds to investors, sending total U.S. corporate debt to nearly $10 trillion… Some of America’s best-known companies…have splurged on borrowed cash. This year, the weakest firms have accounted for most of the growth and are increasingly using debt for “financial risk-taking,”… “We are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion,” said Emre Tiftik, a debt specialist at the Institute of International Finance, an industry association. …The root cause of the debt boom is the decision by the Federal Reserve and other key central banks to cut interest rates to zero in the wake of the financial crisis and to hold them at historic lows for years.

Needless to say, Emre Tiftik didn’t know last November what would “trigger the explosion.”

Now we have coronavirus, and George Melloan explained a few days ago in the Wall Street Journal that the “unexploded bomb” has detonated.

The Covid-19 pandemic…will do further damage to the global economy… The danger is heightened by the heavy load of debt American corporations have piled up as they have taken advantage of low-cost borrowing. …Cheap credit brought on the heavy overload of corporate debt. The Federal Reserve has responded to the virus by—what else?—making credit even cheaper, cutting its fed funds lending rate all the way to 0%-0.25% on Sunday. …Rate cuts in response to crises are programmed into the Fed’s software. There is no compelling evidence that they are a solution or even a remedy. …the low interest rates of the past decade have ballooned all forms of debt: government, consumer, corporate. Corporate debt, the most worrisome type at the moment, stands at about $10 trillion and has made a steady climb to 47% of gross domestic product, a record level… But even cheap borrowing and securitized debt obligations have to be paid back. It becomes harder to make payments when a global health crisis is killing sales and your company is bleeding red ink. …the increased political bias toward easy money remains a problem. The Federal Reserve Act of 1913 was political from the day Woodrow Wilson signed it. It has gotten more political ever since, increasingly becoming an instrument for robbing the poor—savers and pensioners—and giving to often profligate borrowers.

Melloan’s final points deserve emphasis. There are good reasons to reconsider the Federal Reserve, and we definitely should be angry about the perverse redistribution enabled by Fed policies.

But let’s keep our focus on the topic of government-encouraged debt and how it contributes to economic instability.

It’s not just an issue of bad monetary policy. We also have a tax code that encourages companies to disproportionately utilize debt.

But the 2017 tax bill addressed that flaw, as Reihan Salam explained two years ago in an article for National Review.

…one of the TCJA’s good points…limits that the legislation places on corporate interest deductibility, which…could change the way companies in the United States do business and make the U.S. economy more stable. …By stipulating that companies cannot use the interest deduction to reduce their earnings by more than 30 percent, the law made taking on debt somewhat less attractive compared to seeking financing by offering equity to investors. …equity is more flexible in times of crisis than debt, which means that problems are less likely to spiral out of control.

That’s the good news (along with the lower corporate rate and restriction on deductibility of state and local taxes).

The bad news is that the 2017 law only partially addressed the bias for debt over equity. Companies still have a tax-driven incentive to prefer borrowing.

Here’s the Tax Foundation’s depiction of how the pre-TCJA system worked, which I’ve altered to show how the new system operates.

I’ll close with the observation that there’s nothing necessarily wrong with private debt. Families borrow to buy homes, for instance, and companies borrow for reasons such as financing research and building factories.

But debt only makes sense if it’s based on market-driven factors (i.e., will borrowing enable future benefits and will there be enough cash to make payments). And that includes planning for what happens if there’s a recession and income falls.

Unfortunately, government intervention has distorted market signals and the result is excessive debt. And now the economic damage of the coronavirus will be even higher because more companies will become insolvent.

P.S. Even the International Monetary Fund is on the correct side about the downsides of tax-driven debt.

P.P.S. In addition to eliminating the bias for debt over equity, it also would be a very good idea to get rid of the bias for current consumption over future consumption (i.e., double taxation).

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The Bernie Sanders Paradox

While it’s good news for the country that Bernie Sanders has faded in the polls, there’s a dark lining to that silver cloud.

For all his faults, Crazy Bernie at least was open and honest about his desire for socialism (unlike certain other candidates, who have hard-left platforms, but nonetheless are characterized as moderates).

But openness and honesty are not the same as common sense.

Consider, for instance, Crazy Bernie’s oft-stated assertion that we can afford big government because the United States is the richest nation in the history of the world.

There are two problems with what Bernie is saying.

First, we’re not actually the world’s richest nation.

Countries such as Monaco, Luxembourg, Liechtenstein, Singapore, and Switzerland rank above us, whether we’re measuring per-capita annual income or per-capita net wealth.

To be fair, that doesn’t change the fact that the United States is a very prosperous nation. Especially compared to most other western countries.

But that brings us to main point of today’s column.

Second, America is very prosperous because we haven’t followed Bernie’s recipe for bigger government.

That’s true today and it’s been true in the past. Compared to other nations, the U.S. historically has enjoyed very high scores for economic liberty.

Crazy Bernie and his supporters will argue that none of this matters. They’ll simply assert that the United States is a rich nation and therefore politicians should impose higher tax rates and fund bigger government.

But this ignores the fact that rich nations that adopt big government slowly but surely cease to be rich nations.

In other words, there’s a very challenging paradox for people like Bernie Sanders. They want a wealthy society so there’s lots of loot to redistribute, but their policies make it harder for societies to create wealth.

The bottom line is that there’s no such thing as a free lunch. Even the nations that try to minimize the damage of big government, such as Denmark and Sweden, suffer gradual decline.

Which helps to explain why none of my friends on the left have ever been able to successfully answer my two-question challenge.

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Pandemics, Civil Order, and Gun Control

About 10 years ago, when Europe was in the midst of fiscal crisis, advocates for welfare spending rioted in some nations.

Given the continent’s grim long-run outlook, that got me thinking about the potential for a future breakdown of civil order and I wrote that it was tragic that most people in Europe didn’t have the right to own guns for self-protection.

Which led to this interview with NRA TV.

Today, the big concern is coronavirus rather than a future collapse of the welfare state

But it does raise the same issue of how to protect yourself and your family if there’s a breakdown or erosion of civil order.

I don’t think that’s imminent, but these headlines are somewhat worrisome.

We’ll start with an example from CNN that’s relatively benign.

But we then learn that the changes involve lack of enforcement and releasing crooks.

From MSN.

From Syracuse.com.

From the Fort Worth Star-Telegram.

From NBC.

I’ve saved the best headline for last.

Call me crazy, but I don’t think crooks are likely to comply with such a request. After all, they wouldn’t be committing crimes if they were civic minded.

Which is why, when I read these types of stories, it reinforces my belief in the 2nd Amendment.

I want to protect people’s civil liberties for all sorts of reasons, and self-protection in extraordinary circumstances surely belongs on that list.

So the moral of the story is that what’s happening now is another strong argument against gun control.

Let’s close with this poll, which I originally shared back in 2013. I’ll be curious whether there will an increase in the percentage of people (14.43 percent as of this morning) citing “societal breakdown.”

P.S. Here’s a column from someone on the left who became a gun-rights supporter after dealing with the chaos caused by a natural disaster.

P.S.S. And let’s not forget the Korean merchants who defended their lives and property during the L.A. riots.

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A Primer on “Price Gouging”

After Hitler’s National Socialists were defeated in World War II, the allies imposed price controls on the German economy for the ostensible purposes of fighting inflation and preventing “price gouging.”

That policy led to massive shortages, black markets, and hoarding. Fortunately, as described in this video, a very clever economist abolished those controls, thus setting the stage for Germany’s post-war economic miracle.

The lesson to be learned is that politicians should let markets determine prices. Price controls of any kind, as indicated by the cartoon, will cause people to withhold goods, services, and/or labor from the marketplace.

Unfortunately, many people overlook that lesson when there’s some sort of disaster.

In a column for Bloomberg, Scott Duke Kominers asserts that sellers should not be allowed to increase prices when there’s a sudden increase in demand.

One might think that steep prices for disinfectant in the middle of an epidemic are just markets at work — a way of getting scarce goods to the people who value them the most. I’m sure that’s what price gougers tell themselves. …But that’s not the right way to think about disinfectant at this particular moment. …if you can pay $87 for a bottle of Purell instead of the usual $2 that probably doesn’t mean you’re more concerned about the risk of infection than your neighbor; it just means that you have more disposable income. Thus buying low-priced disinfectant and selling it at steep markups effectively transfers disinfectant supplies from lower-income people to wealthier ones. …in situations such as this it may be best for society to force prices below market-clearing levels in order to make sure everyone has access; that’s exactly what laws prohibiting price gouging attempt to do. …There’s a serious consequence to keeping the price low, of course: we end up with rationing, since there’s not enough to go around. But that hits everyone — rich or poor — more or less equally.

Politicians obviously like this argument. Most states have laws against “price gouging.”

That may be smart politics, but it’s bad economics.

J.D. Tuccille of Reason explains why such laws are misguided.

…as common as accusations of “price gouging” are, the term has no fixed meaning. Asked when rising prices cross the line to become criminal, New York Attorney General Letitia James told NPR, “there’s no definitive answer to that question, but you know it when you see it.” …Some—including Alabama, Florida, and Maine—forbid selling at an “unconscionable” price. Idaho and Texas ban sales at an “exorbitant or excessive price.” And New York splits the difference with restrictions on “unconscionably excessive price” increases during an emergency… Laws can’t change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply. Those rising prices tell…manufacturers and distributors that they should increase production, and where they should send the goods—if they’re allowed to. …Sure enough, GOJO industries is “operating around the clock” to produce hand sanitizer, 3M has “ramped up production” of respirators, and many other companies are responding to the messages they’re getting from the market. Allowed time, goods will get to where they’re needed, and prices will drop as supply meets demand. …Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain. Crises like the COVID-19 pandemic come and go, but “price-gouging” laws demonstrate that intrusive politicians are a recurring plague.

Art Carden, an economics professor at Samford University, shows why anti-gouging laws backfire on consumers.

You’ve seen the pictures on your social media feeds: Empty shelves across America. Panic-buying. Hoarding. …this is exactly what the supply-and-demand model we teach in introductory economics courses predicts when we actively prevent the free market from functioning. The shelves are…empty because…governments aren’t letting prices change to reflect new market conditions. …“price gougers”…get tarred as villains while it’s actually the politicians who are making the problem worse by interfering with prices. …the fact remains that we get a lot more hand sanitizer, toilet paper, and other supplies when we make room for people who are just in it for the money. You may not like their motivations, but they’re doing something your state’s governor and attorney general aren’t doing. Namely, they’re getting valuable emergency supplies into your hands.

Veronique de Rugy of the Mercatus Center warns about adverse consequences in her syndicated column.

It’s normal for people to stock up on supplies during crises. The immediate results are empty store shelves, soon followed by higher prices. When this happens, politicians around the globe demand an end to the price hikes. …such heavy-handed intervention is a mistake… If prices are kept artificially low, there’s little incentive for shoppers not to buy as much as they can. …The fact is there’s no better means of slowing the rising demand — and, especially, reducing excessive hoarding — than allowing the very price hikes that governments are trying to prevent. But price hikes have another important advantage: They create the necessary incentives for entrepreneurs to shift resources toward activities that increase the supply of these goods. The higher prices encourage higher levels of production for goods like masks and hand sanitizers, which then increases supply. …When governments prevent price hikes, they unwittingly create shortages of vital supplies. …Aren’t we better off when products are actually on the shelves and available for purchase, even if only at higher prices? When no such products are to be found, except by the politically and socially connected, ordinary citizens lose out.

John Hirschauer’s piece in National Review cites some academic research on this topic.

The unintended consequences of price controls have been confirmed…in empirical literature. Take, for instance, the study published by three scholars in the Journal of Competition Law and Economics who examined the merits of proposed price-control laws in the wake of Hurricanes Katrina and Rita. …The researchers reviewed the historical data on gasoline price hikes and found that “price increases were due to the normal operation of supply and demand and not price manipulation.” Upon reviewing the body of gasoline price-control studies, the group found that “neither consumers nor the economy benefit [from price controls], because the apparent monetary savings to consumers are transformed into costs of waiting or other forms of nonmarket rationing that exceed the monetary savings.” Through econometric analysis, they estimated that the “economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases” if the federal government had instituted price controls.

The only thing I’ll add to this discussion is that people are sympathetic to anti-gouging laws because of a belief in social equality. We think that everyone – rich and poor – should be treated equally during a disaster.

And in some cases, such as a group of people stranded on a lifeboat, that’s the right approach. Nobody would argue that scarce supplies (limited emergency provisions of fresh water and food) belong to the person with the biggest bank account .

But the economy isn’t a lifeboat. As explained in the above excerpts, it’s possible to get more provisions with the right incentives. Higher prices will encourage entrepreneurs to produce more scarce supplies (in this case, everything from toilet paper and hand sanitizer to respirators and ventilators).

So what’s the bottom line? Price gouging is no fun if you need to buy supplies in an emergency. But a free market is better than the alternative of government controls that lead to shortages, black markets, and hoarding.

I’ll close with this cartoon, which Art Carden included at the end of his AIER column.

And I’ll also add this joke that Mark Perry shared on twitter.

P.S. This video explains why the price system is so important and these three videos explain why anti-gouging laws backfire because they hinder the price system.

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Debating the Best Economic Policy Response to Coronavirus

I wrote last week about the libertarian response to the coronavirus crisis and made four simple points.

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 is not a good recipe for success.
4. Domestic evidence indicates that bureaucracies such as the FDA and CDC are exacerbating the problem.

That column led to an invitation, from the folks at Pairagraph, to participate in a debate with Jason Furman, a Harvard professor who served as Chairman of President Obama’s Council of Economic Advisers.

Here are some excerpts from Jason’s opening statement.

Dan, you wrote a thoughtful piece the other day on a “Libertarian Perspective on the Coronavirus Response.” …But, I would also hope you would support me…in supporting a temporary increase in the share of Medicaid costs paid by the federal government. …health treatment is essential, and extra money…will help hospitals expand capacity as needed. After the pandemic is over we can take more time to debate the cost-benefit of this public funding for a low-income entitlement.

He then lists these four fiscal proposals.

Here’s some of what I wrote in my opening response.

Regarding potential steps to boost the economy, …conventional remedies may not be effective in the current environment. I don’t think my preferred policies (lower tax rates, for instance) will have much impact when people and businesses are focused on curtailing the spread of the virus. And I also don’t think Keynesian policies will be effective… That being said, we are facing a black-swan environment. …there is enormous pressure for Washington to do something.

What about Jason’s four proposals?

I agree on his first suggestion, but not on the mechanism.

…more health infrastructure would be very helpful. Which is why I want the private sector to take the lead. We’ll get faster results at lower cost.

As you might guess from what I wrote two days ago about paid sick leave, I’m very skeptical about program expansions.

I don’t want politicians to exploit a crisis to impose their long-standing policy preferences – especially when taxpayers, consumers, and workers will be burdened with long-run costs.

However, I’m open to his other two proposals.

I don’t think universal payments and/or business loans will prevent short-term economic harm. But if the federal government is going to do something, then payments and loans at least address a real problem (temporary loss of income) with a plausible action (temporary provision of cash).

Though I do warn that these ideas will have adverse unintended consequences.

In an ideal world, firms would guard against black-swan events by having business interruption insurance and households would similarly protect themselves by setting aside funds in savings accounts. Those prudent steps will be less likely in a world where people expect government intervention.

Our submissions are limited to 500 words, so neither of us had much opportunity to share details (there will be a second round, so the debate isn’t over yet).

Even with that limit, I made sure to mention Crisis and Leviathan, Robert Higgs’ must-read book about the unfortunate history of politicians using crises as an excuse to seize more power and control over the private economy.

That’s because my biggest fear is that this temporary crisis will lead to permanent expansions in the size and scope of government.

Libertarians don’t fear the “slippery slope” because we’re paranoid. We fear it because we understand the perverse incentive structure of politicians.

I don’t know whether we’ll become Greece or Venezuela if we tumble down that slope. But I know it will lead to a bad outcome.

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Coronavirus Lessons from Europe

I wrote recently how government regulation and bureaucratic inefficiency are hindering an effective response to coronavirus in the United States.

And I also wrote yesterday about one foolish response from Washington to the crisis.

But what about developments in other nations? Are there lessons to be learned?

Henry Olsen, writing in the Washington Post, contemplates how Italy is very vulnerable because of stagnation, dependency, and debt.

Italy…has essentially shuttered its economy to fight its enormous health crisis. …Effectively, millions of Italians are out of work. These actions would shock any economy. But Italy’s economy is already weak, and has been for decades. Its gross domestic product has barely grown over the past 20 years. Its unemployment rate, at 9.8 percent, is one of the highest in Europe. Worse still, Italy is one of the most heavily indebted nations in the world. Government debt stood at 138 percent of GDP before this crisis hit… Italy’s economic crisis will ultimately put serious pressure on the euro. …If Italy’s economic hit weakens its banks sufficiently, the European Central Bank could be forced to step in with a large bailout. …Italians would likely face years of depression and stagnation… Italy’s economic lockdown is sending clear warning signs that a fiscal meltdown is coming.

Henry also speculates in the column that Italy’s current left-populist government will be replaced by a right-populist government. Furthermore, he thinks this could lead to the country abandoning the euro (the currency shared by many European nations) and going back to a national currency.

For what it’s worth, that would be a mistake.

A major problem in Italy is that populist politicians want people to believe the fairy tale that it’s possible to consume more than you produce.

That currently happens in Italy when politicians borrow money and spend it.

If the country gets rid of the euro and goes back to the lira, politicians will also be able to print money and spend it.

In other words, Italy’s populist politicians would have another way of undermining prosperity.

(I’m not a big fan of the European Central Bank’s easy-money policies, but it’s always possible to go from bad to worse.)

Meanwhile, Joseph Sternberg of the Wall Street Journal opines about lessons that can be learned from Europe about government-run healthcare.

Scientists around the world have worked overtime to get a handle on Covid-19, yet one great unknown remains. We still don’t know for sure whether this is only a medical crisis, or also a medical system crisis. …Doctors in Italy know what to do to treat severe cases, such as using ventilators in intensive-care units. But hospitals lack the beds and equipment for the influx of patients and Italy doesn’t have enough doctors even to make the attempt. Ill patients languish in hospital corridors for want of beds, recovering patients are rushed out the door as quickly as possible, and exhausted (and sometimes sick) doctors and nurses can’t even muster the energy to throw up their hands in despair. …U.K. policy makers understand what such analyses portend—because underinvestment in Britain’s creaking health-care system is even worse. …As a result, British authorities…are desperate to hold off on a mass outbreak until the socialized National Health Service has recovered from its chronic winter crisis. …the NHS…already falls to pieces every year with the normal ebb and flow of cold-weather ailments. Each winter crisis becomes a bit more acute, and this year was no exception. As of December, only 80% of emergency-room patients were treated within four hours of arrival, down from 84% in the depths of the previous two winters.

Interestingly, not all European nations are created equal.

…the U.K. and Italy are significantly more dependent on direct government financing of health-care than is France or Germany. Government accounted for 79% of total health-care spending in the U.K. in 2017, according to Eurostat, and 74% in Italy. Germany and France both rely on compulsory insurance schemes with varying degrees of subsidy and government meddling, but outright government expenditure amounts to only 6% of total health spending in Germany and 5% in France. …politicians already have made decisions that may seal a country’s coronavirus fate…the important choices may have already come in the guise of technocratic health spending and investment decisions made largely out of public view over many years. How lucky do Europeans feel?

The moral of the story is that coronavirus vulnerability may be worse in nations where government has the most control over healthcare.

Since the disease is a “black swan” (i.e., an unexpected big event), we should be cautious about drawing too many policy conclusions. After all, any nation with a severe coronavirus outbreak is going to face major problems.

That being said, it may be worth noting that Germany and France have an approach that’s more akin to Obamacare while the system in Italy and the United Kingdom is more akin to Medicare for All.

Either policy is greatly inferior to the free market, but it does raise the question of whether it’s a good idea to jump from a frying pan into a fire.

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The Adverse Unintended Consequences of Paid Sick Leave

Back in 2008, the soon-to-be Chief of Staff for President Obama infamously stated that, “You never want a serious crisis to go to waste.”

Sure enough, the Obama Administration – elected in the aftermath of the financial crisis – quickly rammed through a so-called stimulus, followed by Obamacare and Dodd-Frank.

Now it’s happening again. Politicians are trying to exploit the coronavirus by pushing a proposal to expand government by enacting paid sick leave.

Veronique de Rugy and Don Boudreaux of George Mason University’s Mercatus Center explain the downsides of such a new mandate in National Review.

It’s one thing to support temporary provision of sick leave paid for by the government when we face a public-health crisis. …But it would be deeply misguided to use COVID-19 as an excuse for a permanent policy change. …If Congress rushes through a universal paid-leave plan, …many employers will reduce their privately supplied coverage in response. Such crowding-out is what has already happened in states where paid-family-leave programs were adopted, with many companies…now requiring employees to first tap all the available taxpayer-provided benefits, which in turn has produced larger-than-expected budgetary costs for state governments. …Obliging companies to permanently provide paid sick leave to workers who don’t currently have it would impose eventual reductions on their take-home pay. The provision of such benefits isn’t costless. We can be sure that in the long run — after the coronavirus fades from the headlines — mandated paid leave would inflict a pricey and permanent toll on workers who would prefer to receive more of their compensation as take-home pay and less as paid leave. …This negative effect would exist even if leave benefits were paid for through the government and financed with a payroll tax split between employers and employees, as they would be in the Family and Medical Insurance Leave (FAMILY) Act also proposed by DeLauro and Murray… Unfortunately, the requirement that part of the tax be paid by employers is a legalistic formality: Economics dictates that the cost of this part of the tax, too, will over time fall on workers in the form of lower wages. …coronavirus is a serious problem… We must not further enfeeble American workers by using it as an excuse to enact permanent government mandates and entitlements that risk unleashing unintended negative consequences.

Here are some excerpts from a Wall Street Journal column on the same topic from Aaron Yelowitz and Michael Saltsman.

Democrats in Congress have a cure for the coronavirus crisis: a nationwide paid sick-leave mandate. …Ms. Murray and Ms. DeLauro began advocating such a policy in 2004 and have clearly internalized Rahm Emanuel’s immortal political advice that “you never want a serious crisis to go to waste.” …San Francisco was the first locality to require paid sick leave, starting in 2007. The law brought modest benefits and significant costs. A 2011 study by the Institute for Women’s Policy Research found nearly 30% of the lowest-wage earners reported layoffs or reduced hours… Connecticut’s sick-leave policy was the focus of a 2016 study…, which found a “sizeable decrease in labor demand” as a consequence of the mandate. …The coronavirus’s domestic arrival in these two states complicates Ms. Murray’s promise that a paid-leave mandate could “prevent” its spread. …Why didn’t paid-leave regimes in California and Washington prevent the spread of the disease, as Ms. Murray imagines? According to Johns Hopkins researchers, it takes five days on average for coronavirus symptoms to present. …The relative benefits and consequences of paid sick leave must be considered carefully. Using a pandemic to justify its swift enactment would result in ineffective policy that may hurt the workers it’s meant to help.

The bottom line, as I’ve explained before, is that employers don’t create jobs out of a sense of charity.

They hire workers because of an expectation that the revenue generated by those people will exceed the cost of employing them.

So when politicians enact laws to create new goodies, there will be “unintended consequences” that are bad for workers.

They’ll get less take-home pay, either because of higher taxes or higher costs (a point inadvertently acknowledged by a columnist for the New York Times).

Sadly, I don’t expect economic arguments to have much impact on vote-seeking politicians. Especially when they can exploit a crisis.

Which is a sad pattern in American history, as documented by Robert Higgs in his classic book, Crisis and Leviathan.

It’s what they did during the Great Depression. It’s what they did after 9-11. It’s what they did after the financial crisis. It’s what they’re doing today.

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The TARP Bailout Was the Wrong Response to a Government-Caused Meltdown

Ten days ago, I shared an interview in which I pointed out that President George W. Bush acquiesced to a flawed narrative about the 2008 financial crisis.

Bush and his team basically accepted the assertion of interventionists that it was the fault of “Wall Street greed,” when the crisis actually was caused by bad monetary policy from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac.

(For what it’s worth, I don’t disagree that folks on Wall Street were greedy, but they were also greedy in the 1990s, 1980s, and other decades. The crisis was caused because foolish government policies made bad decisions profitable in the 2000s.)

The reason I’m raising this issue is because the Washington Post editorialized this morning in favor of the TARP bailout.

…support for TARP should be considered a basic demonstration of political maturity and pragmatism… Some relevant historical context: The outgoing Bush administration and the Democrats who controlled both houses of Congress had few good options for dealing with a once-in-a-century global financial collapse. As experts from the Federal Reserve and Treasury Department told the politicians, however, one sure way to turn the worst recession since the Great Depression into, well, another Great Depression, would have been to let the banking sector collapse and take millions of American households down with it. …TARP…was actually a major policy success.

Nope, that’s not true.

Tim Carney of the Washington Examiner wisely wrote about this issue a couple of years ago.

Under the guise of saving the U.S. economy, a bipartisan gang of powerful men decided to save a few failed or faltering banks. They posited a false dichotomy between “doing nothing” about the credit crisis rollicking markets, and saving the big banks. …The stated reasons for government intervention were…to prevent a disorderly fire sale of financial assets, which could cause a total market collapse… There are ways that government can do that without making it a point to save the banks. Bankruptcy often involves winding down failed firms in a manner that minimizes the losses taken by creditors and counterparties. It can be structured so as to prevent a disorderly liquidation.

Amen.

Tim hit the nail on the head when he pointed out that it wasn’t a TARP-or-nothing choice.

Lawmakers could have recapitalized the financial system using the “FDIC-resolution” approach, which basically means putting bankrupt financial institutions into receivership.

Depositors and investors are protected with this approach, even if it means taxpayers are picking up the tab.

What really matters, though, it that the poorly run institutions get shut down. The senior executives lose their jobs, and shareholders and bondholders are subject to losses. Which is exactly what should happen. After all, capitalism without bankruptcy is like religion without hell.

So why didn’t lawmakers adopt the FDIC-resolution approach?

They don’t have ignorance as an excuse. I spent a lot of time talking to policy makers at the time, both in the Bush Administration and on Capitol Hill. I begged and pleaded for them to reject a bailout and instead go with FDIC-resolution.

Sadly, I was ignored, and I think the reason was corruption. Tim elaborated on this hypothesis in his column.

You could call it cronyism if you want. After all, Ben Bernanke and Tim Geithner have both cashed out to financial institutions. Barack Obama fundraiser Warren Buffett made billions off his investment in Goldman Sachs based on his informed assumption the taxpayers would bail Goldman out. …Geithner and crew could have reduced the moral hazard and moral outrage of TARP had they wound down Citigroup. But Geithner wanted Citigroup to keep existing. It was pinstripe protectionism. …At nearly every turn, the bailout barons acted mostly to save the failed or wounded banks rather than to focus narrowly on preserving economic stability. …An economic system where the big guys are never allowed to fail precisely because they are big is not a just system. When you look at the revolving door actions of these guys—Rubin, Geithner, Bernanke, Orszag, and all the others—the unfairness is more obvious.

Kevin Williamson also wrote about how corruption was the dominant factor.

The bottom line is that narratives are important. Unfortunately, too many people accept the establishment’s flawed narrative about TARP – and plenty of Republicans have aided and abetted this false view.

The right lesson is that bailouts are bad economic policy and immoral as well.

P.S. I wrote about this issue for USA Today in both 2010 and 2012.

P.P.S. The only silver lining to the dark cloud of TARP (and the related European fiscal crisis) is that we got this humorous glossary.

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Government, Coronavirus, and Libertarianism

Some folks are using the coronavirus crisis to say that libertarianism is an inadequate approach to governance.

Noah Smith got the ball rolling with a snarky tweet.

Libertarians: Government sucks, let's hollow out the civil service

*Pandemic comes, hollowed-out civil service is unable to respond effectively*

Libertarians: See, told you government sucks

— Noah Smith 🐇 (@Noahpinion) March 8, 2020

Since total government spending is at an all-time high and since even left-leaning fact checkers have debunked the assertion that public health bureaucracies have been reduced, Smith’s core claim is grossly inaccurate.

But what about the underlying assumption that a large government is necessary?

Farhad Manjoo of the New York Times hopes the crisis will usher in a new era of big government as everyone realizes the supposed benefits of collectivism.

Overnight, workplaces across the country were transformed into Scandinavian Edens of flexibility. Can’t make it to the office because your kid has to unexpectedly stay home from school? Last week, it sucked to be you. This week: What are you even doing asking? Go home, be with your kid! …Then politicians got into the act. The Trump administration…is now singing the praises of universal sick pay. …it’s almost funny: Everyone’s a socialist in a pandemic. …There may be a silver lining here: What if the virus forces Americans and their elected representatives to recognize the strength of a collectivist ethos?

Is Mr. Manjoo right? Just like there are supposedly no atheists in foxholes, are there no libertarians in a pandemic?

Here are four basic points to show why this is wrong.

1. Libertarians believe government should protect life, liberty, and property

A core tenet of libertarianism is that government should exist to protect against threats to the aforementioned core liberties. That presumably includes a role in responding to pandemics.

Yes, libertarians will appropriately worry that government will botch its response (see below, for instance), and we’ll also worry that government will use a crisis to accumulate new powers (the “ratchet effect” mentioned in this column).

But it’s silly to argue that a pandemic is evidence that libertarianism is impractical. As silly as arguing in the 1980s that you couldn’t be a libertarian and still favor a defense capacity to resist the Soviet Union.

To be sure, there are anarcho-capitalists who don’t believe in any government. Whether that’s a good idea involves an entirely separate set of arguments about how private governance associations would respond to a pandemic, which could be an interesting topic for some future column.

2. Libertarians correctly warn that a big sprawling federal government means it is less capable of handling the few things it should be doing

I’ve repeatedly explained, most recently this past January, that the federal government is more likely to do a good job if it focuses on core responsibilities (such as the ones assigned in the Constitution).

And observers ranging from Mark Steyn to Robert Samuelson have made the same point.

There’s plenty of academic evidence in support of this position, though this anecdote from Belgium may be even more persuasive.

3. Other government-run health systems have not done a good job

The virus originated in China, where government controls the healthcare system. It’s also spread most significantly in nations such as Iran and Italy, where government also plays a dominant role in health care.

By the way, since I don’t believe in demagoguery, I don’t necessarily blame those governments. I’m sure bad luck plays a big role in the spread of the disease.

Though this set of tweets from a guy in England is a damning indictment of that nation’s government-run system.

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

We’ll start with excerpts from an article by Ronald Bailey, who writes about science for Reason.

…officials at the Food and Drug Administration (FDA) and the Centers for Disease Control and Prevention (CDC) stymied private and academic development of diagnostic tests that might have provided an early warning and a head start on controlling the epidemic that is now spreading across the country. …the CDC required that public health officials could only use the diagnostic test designed by the agency. That test released on February 5 turned out to be badly flawed. The CDC’s insistence on a top-down centralized testing regime greatly slowed down the process of disease detection as the infection rate was accelerating. …On February 29, the FDA finally agreed to unleash America’s vibrant biotech companies and academic labs by allowing them to develop and deploy new tests for the coronavirus that causes COVID-19.

The New York Times has a depressing report about government red tape has prevented quick action.

Here’s the main takeaway.

…existing regulations and red tape — sometimes designed to protect privacy and health — have impeded the rapid rollout of testing nationally, while other countries ramped up much earlier and faster. Faced with a public health emergency on a scale potentially not seen in a century, the United States has not responded nimbly.

And here are some of the relevant details.

The Association of Public Health Laboratories made what it called an “extraordinary and rare request” of Dr. Stephen Hahn, the commissioner of the F.D.A., asking him to use his discretion to allow state and local public health laboratories to create their own tests for the virus. …Dr. Hahn responded two days later, saying in a letter that “false diagnostic test results can lead to significant adverse public health consequences” and that the laboratories were welcome to submit their own tests for emergency authorization. But the approval process for laboratory-developed tests was proving onerous. Private and university clinical laboratories, which typically have the latitude to develop their own tests, were frustrated about the speed of the F.D.A. as they prepared applications for emergency approvals from the agency for their coronavirus tests. Dr. Alex Greninger, an assistant professor at the University of Washington Medical Center in Seattle, said he became exasperated in mid-February as he communicated with the F.D.A. over getting his application ready to begin testing. “This virus is faster than the F.D.A.,” he said, adding that at one point the agency required him to submit materials through the mail in addition to over email. New tests typically require validation — running the test on known positive samples from a patient or a copy of the virus genome. The F.D.A.’s process called for five.

Fortunately, some folks in Seattle were willing to disobey federal bureaucracies at the start of the crisis.

In Seattle, Dr. Helen Chu, an infectious disease expert who was part of an ongoing flu-monitoring effort, the Seattle Flu Study, asked permission to test their trove of collected flu swabs for coronavirus. State health officials joined Chu in asking the CDC and Food and Drug Administration… The CDC and FDA said no. “We felt like we were sitting, waiting for the pandemic to emerge,” Chu told the Times. “We could help. We couldn’t do anything.” They held off for a couple of weeks, but on Feb. 25, Chu and her colleagues “began performing coronavirus tests, without government approval,” …Later that day, the CDC and FDA told Chu and her colleagues to stop testing, then partially relented, and the lab found several more cases. On Monday night, they were ordered to stop testing again. …the Times notes. “The scientists said they believe that they will find evidence that the virus was infecting people even earlier, and that they could have alerted authorities sooner if they had been allowed to test.”

And an article in the Atlantic reveals how bureaucracy and regulation have been hindering an effective response.

…the CDC sets the parameters for state and local public-health staff regarding who should be tested. The agency’s guidelines were very strict for weeks, focusing on returning international travelers. Even as they have been loosened in the past few days, there are persistent reports that people—including a sick nurse who had cared for a coronavirus patient—have not been able to get tested. …A week ago, the FDA eased some regulations on the types of coronavirus tests that can be used. This means that testing capacity will increase, but not overnight. …Soon private laboratories such as LabCorp and Quest Diagnostics will begin testing people…each lab must have the FDA’s permission to operate, under an Emergency Use Authorization, a new FDA policy allows labs to immediately begin testing people, and requires that they submit their paperwork to the agency within the next 15 days. …more than a week after the country’s first case of community transmission, the most significant finding about the coronavirus’s spread in the United States has come from an independent genetic study, not from field data collected by the government.

Last but not least, a column in the New York Post summarizes the impact of federal regulation.

Overregulation of diagnostic testing has played a major role in this delay. …Test protocols using the polymerase chain reaction (PCR) were publicly available shortly after Chinese researchers published (or described) the sequence of the virus in mid-January. The World Health Organization (WHO) used a freely available German procedure to create a test kit, shipping 250,000 tests to 159 laboratories worldwide. …CDC testing criteria have precluded recognizing community spread because of requirements stipulating recent travel to China or exposure to an infected person. Adherence to these guidelines delayed testing in the first probable case of community transmission… The FDA has not allowed the experienced and highly skilled professionals at public-health, academic and commercial laboratories to set up their own laboratory developed tests (LDTs), and no manufactured test kits have been authorized for sale in the US. In Europe, several companies, at least one US-based, have regulatory approval to sell test kits there.

The bottom line is that libertarians have no theoretical objection to a federal role in fighting pandemics, but we’re not very confident that we’ll get effective policies from the bloated bureaucracies in Washington.

After all, let’s not forget that the the CDC has a long track record of waste when it does get more money. And the FDA also is infamous for undermining health with excessive bureaucracy, as well as silly – and even dangerous – policies.

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Singapore Is a Role Model for Prosperity

Brexit was a battle over whether the United Kingdom would:

1. Be a component part of the European Union
2. Be a self-governing democracy

Now that British voters have chosen the second option, there’s a secondary debate about what path to choose.

Many Brexit supporters hope that the United Kingdom will use its newly restored independence to chart a more laissez-faire path, including lower taxes and less red tape.

Critics fret that this approach would mean the U.K. becoming a European version of Singapore.

My former colleague Marian Tupy explains for CapX that this would be a very desirable outcome.

Earlier this month Guy Verhofstadt, the Belgian MEP…, tweeted that…”We will never accept ‘Singapore by the North Sea’!” What exactly is wrong with being Singapore? …Back in 1755 Adam Smith observed that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice” – that certainly holds true for Singapore, which has become one of the world’s most prosperous countries by following Smith’s formula… In the last few decades, Singapore’s economy grew at a faster pace than that of the UK and the EU… Singapore’s GDP per capita, which amounted to 72 percent of the EU’s GDP per capita in 1950, amounted to 219 percent of the EU’s GDP per capita in 2019. …Life expectancy at birth is the best proximate measure of the overall health of the population. …life expectancy in Singapore trailed the EU and UK in 1960. In 2017, Singaporeans lived, on average, longer than Europeans.

Marian is right.

Singapore is an amazing example of a nation that broke through the middle-income trap, as I noted back in 2014 and 2017.

I’m particularly fond of the country because of the very modest burden of government spending. This chart, based on numbers in the IMF’s world economic outlook database, shows that the public sector consumes less than 20 percent of the economy’s output.

To put the above chart in context, government spending in the United States consume nearly 40 percent of GDP in the United States and more than half of economic output in some European nations.

Why does this matter?

Because good public policy is a recipe for more prosperity (and Singapore is very good in areas other than fiscal policy as well).

Building on Marian’s analysis, I’ve used the Maddison database to to see how Singapore compares to the United States, the United Kingdom (the former colonial master), and Malaysia (it was part of Malaysia until 1965).

This isn’t just convergence. Singapore caught up with the U.K., then caught up to the U.S.A., and now has a comfortable advantage.

Seems like a good model for the U.K. to follow. Though Hong Kong also is a very good option (though it’s unclear if that will be true in the future).

P.S. To be sure, Singapore is not a libertarian paradise. There are some strict laws governing private behavior, including the death penalty for certain drug offenses and a ban on the import and sale of chewing gum. More worrisome (given my focus on economic policy) is that officials have contemplated class-warfare tax policies.

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Paternalism in the European Union

I’m not a big fan of paternalism because of my libertarian belief that people should be free to govern their own lives.

That’s true even if they make choices that I think are foolish.

Needless to say, many politicians don’t share this laissez-faire perspective.

But not all governments are equally intrusive. Epicenter has released a new version of the Nanny State Index, allowing us to see which EU nations have the most onerous rules governing private behavior.

The Index has been charting the slide towards coercive paternalism since 2016 and there is little good news to report this year. Once again, Finland tops the league table but although it maintains a strong lead, other countries are closing the gap. …Whether it is food, drink, vaping or smoking, the lifestyle regulators have the wind in their sails… In general, the story is one of a constantly expanding nanny state raising prices and trampling freedom. The blame lies overwhelmingly with domestic governments, not with the European Union. Although the EU has made the situation worse with its counter-productive policies on tobacco and e-cigarettes, it cannot be held responsible for regressive taxation, draconian smoking bans and excessive regulation of alcohol and food. The gulf between the more liberal countries at the bottom of the Index and the more heavy-handed countries at the top shows how much latitude member states have. Treating your citizens like children is, by and large, a domestic policy choice.

As you can see from this table, Finland is the worst, followed by two of the (otherwise sensible) Baltic nations.

Meanwhile, Germany gets the best score, followed by Czech Republic and Slovakia.

The report’s author, Christopher Snowdon of London’s Institute of Economic Affairs, observes that nanny-state policies don’t even achieve their putative goal of longer lifespans.

Insofar as ‘public health’ campaigners acknowledge the damage done by their policies, they argue that it is more than offset by the benefit to health – the ends justify the means. But there is little evidence that countries with more paternalistic policies enjoy greater health or longevity. As Figure 1 shows below, there is no correlation whatsoever between Nanny State Index scores and life expectancy.

Here’s the chart showing the lack of a relationship between paternalism and longevity.

By contrast, there is a correlation between economic prosperity and life expectancy.

…there is a strong, statistically significant relationship between health and wealth. Figure 4 shows the relationship between life expectancy and economic prosperity as measured by per capita GDP. This suggests that pursuing economic growth would bring much greater benefits to health than coercive efforts to control personal behaviour with bans and taxes.

Here’s the chart from the study showing the relationship between the two variables.

The obvious takeaway is that European governments should focus on policies that expand economic liberty if they truly care about the well-being of their citizens.

P.S. What about the United States? I’m not sure where we would rank in the Nanny State Index. Though we do have some indication of which states have a more laissez-faire attitude. When I wrote about Freedom in the 50 States back in 2013, I noted that Massachusetts ranked #1 in the “bachelor party” category (based on issues such as booze, hookers, fireworks, and drugs). That category doesn’t exist int he most-recent edition, but Nebraska ranks #1 in the “victimless crimes” category.

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Capitalism and Morality

Since libertarians are motivated by the non-aggression principle, it’s easy to understand why they support the capitalist system of voluntary exchange rather than alternative systems based on government coercion.

But there are some who think markets are immoral, and that’s the topic of this book and this related video.

Virgil Henry Storr and Ginny Seung Choi are the authors of Do Markets Corrupt Our Morals, and the Mercatus Center explains the book’s core message.

…people in market societies are wealthier, healthier, happier and better connected than those in societies where markets are more restricted. More provocatively, they explain that successful markets require and produce virtuous participants. Markets serve as moral spaces that both rely on and reward their participants for being virtuous. Rather than harming individuals morally, the market is an arena where individuals are encouraged to be their best moral selves.

And Professor Michael Munger from Duke University explores the implications in his review.

The useful thing about this book…is that it considers a more dynamic problem than the classical literature on the morality of markets. …doesn’t “commodification” and the pursuit of gain for its own sake distort, and ultimately corrupt, the human impulses of altruism and mutual aid on which society depends? …Their answer is “perhaps, but not necessarily.” And, compared to other actual systems that might be used to organize large scale human activity, they argue that markets are actually more likely to nurture moral spaces in which people can find ways to cooperate and help each other.

He identifies the main arguments about the putative shortcomings of markets.

…there are three central charges commonly leveled against the morality of markets. One is the claim that markets exploit workers and turn them into brutes; the second is that the commodification of things and the use of prices to direct allocation decisions corrupts the moral sense humans naturally possess and would otherwise use to motivate cooperation; and the third is that a common consequence of markets, extreme inequality, is corrosive to collective institutions of community and democracy.

And here’s Munger’s summary of the answers to those three questions.

Markets, in the Storr and Choi view, actually improve the lives of workers, rather than making them brutes. …it quickly becomes cheaper to “pay” workers with better and more comfortable conditions, safer working spaces, and more interesting activities…higher pay and the improvements in access to desirable consumer products that come with a market economy mean that workers have leisure time and the resources to enjoy it.

…commodification and division of labor foster a dramatic increase in scope and variety of new communities for humans to join and be part of. Further, the relation among workers in a firm, or the relation between a seller and a repeat customer, create new and important “moral spaces” in which the importance of character and personal familiarity produce both legitimately warm comradery and an increase in the efficiency of contracts and cooperation because of improvements in trust and personal commitment.

…market systems can in fact be associated with high levels of inequality, but it appears that increased inequality may often be the price a society pays for reducing poverty, a trade-off that very poor citizens are likely to embrace. Further, Storr and Choi show that (a) market societies generally have lower inequality than non-market societies, and (b) market societies show a great deal more social mobility, or a capacity for the very poor to become much more wealthy than their parents, than non-market systems.

In other words, markets generate higher income, better lives, and upward mobility.

Not a bad result.

My two cents on this debate is to expand on Munger’s point about capitalism when “compared to other actual systems.” In my humble option, this is what really matters.

Yes, markets can be cold and impersonal. And, yes, “creative destruction” is no fun when you’re part of the “destruction” (even if it results in your children and grandchildren living better lives).

But if our goal is prosperity, there’s no alternative that comes close.

Especially since every alternative empowers politicians and their cronies. Indeed, my readings on this topic reminded me of this passage in Atlas Shrugged when one of the anti-market interventionists said it was time to replace the “aristocracy of money” and one of the book’s good guys noted that this meant an “aristocracy of pull.”

And when an economy is based on political influence and power, P.J. O’Rourke warns that there’s an inevitable consequence.

P.S. Here’s David Burton’s bullet-point comparison of the morality of capitalism and socialism.

P.P.S. And Walter Williams has a great video on the morality of markets.

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Communism Humor

In recent weeks, I’ve mocked socialism, both as a general concept and as the ideology of Crazy Bernie.

Today, let’s focus on communism, which is socialism’s authoritarian cousin.

We’ll start with an unusual article from Babylon Bee, a must-read satire site. There’s nothing but a headline and an image.

Though this story is only partly satire.

Given the staggering death toll of communism (a body count somewhere between the Spanish Flu and the Black Death), it is far deadlier than the coronavirus.

Readers in the boomer demographic doubtlessly remember the Beatles. After the band broke up, John Lennon had several solo hits, including Imagine, which became an anthem for some leftists in part because it included the line, “Imagine no possessions.”

The clever folks at Babylon Bee have revised the lyrics in the interests of accuracy.

Have you ever tried to imagine living in a perfect world ruled by communism, but previously only received the information from catchy folk songs which praise the system? Well, lucky for you, it is now easier than ever to understand what a full-blown communist utopia actually looks like. …”Imagine” has been rereleased with more realistic lyrics to reflect the harsh realities of communism. Lennon, long dead—though not by way of communism, since he was blessed to live in a capitalist country—would be proud of the change… While the classic folk song does do a fantastic job of laying out the basics of communism—no religion, no possessions, no food—it never invites the listener to imagine all the people in their true form, which is dead—usually by firing squad, but often by way of starvation as well.

Here are some of the updated lyrics.

Since we just traveled back to the 1970s, let stay in that decade by sharing a sketch from Monty Python.

Last but not least, here’s the utopian vision of communism (embraced by 36% of millennials) compared to the grim reality of communism.

P.S. Apologists for Marxism routinely try to dodge accountability by claiming all the real-world examples “weren’t real communism.” Which creates additional opportunities for satire.

P.P.S. Like modern leftists who talk one way and live another way, John Lennon did not put his money where his mouth was. He preached leftism while enjoying a life of luxury thanks to personal earnings of several hundred million dollars.

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A Lesson from Illinois: Higher Taxes Perpetuate Bad Policy and Exacerbate Fiscal Decline

Last year, I said the nation’s most important referendum was the proposal to emasculate Colorado’s Taxpayer Bill of Rights (I was delighted when voters said no to the pro-spending lobbies and preserved TABOR).

This year’s most important referendum is taking place in November in Illinois, where pro-spending lobbies are very anxious to repeal the state’s flat tax.

If they succeed, the steady flow of taxpayers out of Illinois will become a torrent.

That’s because the flat tax is the only semi-decent feature of the state’s fiscal policy. If it goes, there won’t be any hope.

My buddy from the Illinois Policy Institute, Orphe Divounguy, has a column in today’s Wall Street Journal about the dismal fiscal and economic outlook in the Land of Lincoln.

Long the economic hub of the Midwest, Illinois has lost more than 850,000 residents to other states during the past decade. The state has been shrinking for six consecutive years and suffered the largest raw population decline of any state in the 2010s. …Growing government debt and a crushing tax burden are depressing economic growth. State spending is up, but personal-income growth is lagging. Since 2000, Illinois’s per capita personal income growth has been 21% lower than the national average. …ratings firms are paying attention. Illinois’s credit rating is one notch above junk. …Illinois’s public pension payments already consume nearly a third of the state budget, yet the unfunded liability—which the state currently pegs at $137 billion, though others put the figure much higher—continues to rise. …Since 2000, Illinois has increased pension spending by more than 500%.

Orphe then points out that politicians in the state have been raising taxes with depressing regularity.

Needless to say, that never seems to solve the problem (a point I recently made when looking at fiscal policy in Washington).

Illinois has a culture of trying—and failing—to tax its way out of its problems. In 2011 then-Gov. Pat Quinn approved a temporary tax hike aimed at making a dent in the state’s $8 billion in unpaid bills. By 2014, Illinois still had a $6.6 billion bill backlog, and lawmakers were calling for families and businesses to give up more money. Another permanent income-tax increase came in 2017, but again more taxes failed to solve Illinois’s problems. The problems, in fact, got worse. In his freshman year, Gov. J.B. Pritzker signed into law 20 new taxes and fees totaling nearly $4.6 billion, including a doubling of the gasoline tax. Now Mr. Pritzker wants a progressive income tax he claims will really solve the issue.

The bottom line is that politicians in Illinois want ever-increasing taxes to finance ever-increasing pensions for state and local bureaucrats.

This cartoon from Eric Allie nicely summarizes the attitude of the state’s corrupt political class.

To be sure, there are plenty of states that have big fiscal holes because politicians have showered bureaucrats with overly generous compensation packages.

What presumably makes Illinois unique, Orphe explains, is that retired government workers get annual adjustments that are much greater than inflation.

Which means that there’s a simple and fair solution.

Illinois taxpayers can save $50 billion over 25 years, and dollars can be freed to support their eroding public services. Policy makers can finally shrink Illinois’s pension liability by reducing the main driver of its growth: the cost-of-living adjustment, or COLA. Currently, the COLA doesn’t reflect any actual cost-of-living increase, since it isn’t pegged to inflation. By simply replacing the existing guaranteed 3% compounding postretirement raise with a true COLA pegged to inflation, among other modest changes, Illinois can save $2.4 billion in the first year alone. No current retiree would see a decrease in his pension check. Current workers would preserve their core benefit.

P.S. I don’t know how long this policy has existed. If it’s a long-standing policy, Illinois bureaucrats actually were net losers in the pre-Reagan era when the U.S. suffered from high inflation.

P.P.S. The ultimate solution is to shift bureaucrats to “defined contribution” retirement plans, akin to the IRAs and 401(K)s that exist in the private sector.

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Is Panama a Good Option for People Seeking a Better Future?

I’ve been in Panama with some friends for the past two weeks, in part to enjoy warm sunshine.

But I’m also here because I wanted to research possible options in case the United States somehow wound up with a hard-core leftist in the White House.

With “Crazy Bernie” fading and “Looney Liz” out of the race, that no longer appears to be an immediate threat.

That being said, America’s grim long-run fiscal outlook, combined with the other factors such as young people’s senseless support of socialism, suggests that it may just be a matter of time before the U.S. morphs into a stagnant, European-style welfare state.

(And don’t forget that Joe Biden is actually farther to the left than Barack Obama and Hillary Clinton.)

So let’s investigate whether Panama is a good option, not just for Americans, but also for people from other nations as well.

The place to start is the Fraser Institute’s Economic Freedom of the World. Based on their comprehensive rankings of economic liberty, Panama gets a 7.66 on a 0-10 scale, which places it at #31 out of 162 nations.

That puts the country comfortably in the top quartile of “most free” jurisdictions. Moreover, it is the second-freest nation in Latin America, trailing only Chile (#13).

Here’s how Panama does when looking at specific components of economic policy.

• The good news is that the country gets a solid score for fiscal policy (#19) and excellent scores for monetary policy (#8) and trade (#5).
• The not-so-good news is that Panama has a middling score for rule of law and property rights (#80) and a weak score for regulation (#95).

These scores are only a snapshot for the most-current year, so it’s also worth noting that Panama has been very stable.

For the past couple of decades, its score has ranged between a low of 7.27 and a high of 7.88. Going back further in time, it’s even been ranked in the top 10 a couple of times.

In other words, Panama has not been susceptible to wild policy swings. Or Venezuelan-style foolishness.

To be sure, the politicians in Panama are prone to populist measures, but bad policies are adopted for vote-buying reasons (i.e., public choice) rather than ideology. Indeed, there is not a successful left-wing party in the country.

Because Panama gets good-but-not-great scores for economic liberty, you won’t be surprised to learn that the people of Panama enjoy decent-but-not-great living standards.

According to World Bank calculations, Panama qualifies as a “high income” nation, but that category is very broad (basically $14,000 and up). For perspective, per-capita income in Panama is only about one-fourth of U.S. levels.

And, notwithstanding convergence theory, that gap probably won’t shrink much in the near future since the United States currently has significantly more economic liberty (ranked #6 compared to #31).

But this column is for people who fear that America’s score may tumble in the future because of a frightening development (perhaps a President AOC?).

Here’s a few final thoughts to consider.

• Panama’s currency (from the country’s inception) is the dollar.
• There is a large community of expats already in Panama, including thousands of Americans.
• The government has done a good job of managing the Panama Canal.
• The nation is making slow but steady progress on problem areas such as infrastructure.
• Crime and personal security are not major concerns.
• The tax burden is very reasonable, particularly for people with non-Panamanian income.

The bottom line is that Panama is a good place for foreigners. The government has a welcoming attitude so long as immigrants are self-sufficient. And you don’t need to be rich to live a nice life in Panama.

P.S. In the past, I’ve suggested that Australia is the best long-run option if the United States suffers a Greek-style economic decline. That’s still true, especially since the Aussies have a mostly private Social Security system. Switzerland is always a good option, along with the Cayman Islands, especially for people with more assets (everyone should keep in mind that those jurisdictions may not be ideal if the the U.S. and most of Europe are in decline and American readers should remember the IRS’s odious exit tax).

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Bernie Has Faded, but Socialism Is Still a Threat

I would like to think that the election results from Super Tuesday signify a rejection of the evil and destructive ideology of socialism. After all, despite promising the most handouts, Bernie Sanders was defeated in most states and quickly went from being the front-runner to a long-shot candidate.

This chart shows how political betting markets have dramatically changed in the past couple of days. Crazy Bernie (in green) has collapsed with Biden (in blue) has skyrocketed.

Moreover, the other explicitly hard-left major candidate, Elizabeth Warren, saw her support collapse even earlier.

Daniel Henninger of the Wall Street Journal opined today on the implications of this week’s political earthquake.

Before the voting began Tuesday it was conventional wisdom…that something called progressivism was on the march in the U.S., sweeping aside decades if not centuries of belief, history and tradition with a new agenda of wokeness, identity politics and socialism. …Guess what? The voters still get the last word. …Progressives, however much they dominate the culture, keep losing big, competitive elections. …Joe Biden, hardly a commanding presence, is a proxy for Democratic voters’ pragmatism and their doubts about Mr. Sanders, socialism and the American left.

By the way, it’s not just that Crazy Bernie got trounced.

As reported by the New York Times, many hard-left congressional candidates also are being rejected.

Ms. Ocasio-Cortez previously suggested that Democrats who were not sufficiently loyal to an emergent brand of progressive politics should have others like her run against them in a primary. She is now suggesting that, exit polling be damned, Mr. Biden’s latest string of successes is because of the strong-arming of corporate lobbyists, something Mr. Sanders has underscored by repeatedly calling Mr. Biden the establishment candidate. But the results speak for themselves. Ms. Ocasio-Cortez threw her weight behind Cristina Tzintzún Ramirez in her Senate primary campaign in Texas to defeat the Democratic Senatorial Campaign Committee’s chosen candidate, M.J. Hegar. Ms. Hegar ended up easily outpacing a crowded Democratic field.

All of this is very encouraging, but I’m still worried.

There are three reasons why I’m not brimming with optimism.

First, as explained by Annie Lowrey for the Atlantic, a non-trivial number of young people are enamored with the evil ideology of socialism.

A striking generational divide has emerged. Older people still see socialism and communism as dangerous, authoritarian political systems, whereas younger people are more likely to see them as economic systems, and to care far less one way or another. For millions of potential voters, the Red Scare is no longer so scary. …The simple passage of time explains a lot. Millions of Millennials and Gen Zers were never exposed to the threats of the Soviet Union; they did not live through the fall of the Berlin Wall… A recent poll conducted by the Victims of Communism Memorial Foundation showed that 36 percent of Millennials have a favorable opinion of communism, as do a quarter of Gen Zers. Roughly half of the members of those two generations have a favorable view of socialism and thinks the government should act as an employer of last resort. One in five Millennials thinks the Communist Manifesto better “guarantees freedom and equality” than the Declaration of Independence and thinks society would be better off if the government abolished private property.

I’ve shared plenty of additional data to confirm this worrisome trend.

Second, older Democrats may not embrace the socialist label, but they have shifted in that direction.

I previously wrote about how even prominent folks on the left agree that Joe Biden is far to the left of both Barack Obama and Hillary Clinton.

This graphic from the New York Times illustrates how the rest of the Democratic establishment (as measured by party platforms) has also veered toward statism.

For what it’s worth, the “Median party” line shows the average position of the world’s other political parties, so the takeaway is that America’s Democrats (and the U.K.’s Labour Party) are now further to the left than some of the world’s socialist parties.

Third, while the Republican Party hasn’t moved to the left based on its platforms, I fear that the GOP isn’t motivated today by a Reagan-style belief in limited government and individual liberty.

It’s not just that Trump is a big spender (and a protectionist). Every major Republican in the post-Reagan era has expanded the burden of government and rejected the principles of classical liberalism.

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Coronavirus, Easy Money, and the “Bad Penny” of Keynesian Economics

The coronavirus is a genuine threat to prosperity, at least in the short run, in large part because it is causing a contraction in global trade.

The silver lining to that dark cloud is that President Trump may learn that trade is actually good rather than bad.

But dark clouds also can have dark linings, at least when the crowd in Washington decides it’s time for another dose of Keynesian economics.

• Fiscal Keynesianism – the government borrows money from credit markets and politicians then redistribute the funds in hopes that recipients will spend more.
• Monetary Keynesianism – the government creates more money in hopes that lower interest rates will stimulate borrowing and recipients will spend more.

Critics warn, correctly, that Keynesian policies are misguided. More spending is a consequence of economic growth, not the trigger for economic growth.

But the “bad penny” of Keynesian economics keeps reappearing because it gives politicians an excuse to buy votes.

The Wall Street Journal opined this morning about the risks of more Keynesian monetary stimulus.

The Federal Reserve has become the default doctor for whatever ails the U.S. economy, and on Tuesday the financial physician applied what it hopes will be monetary balm for the economic damage from the coronavirus. …The theory behind the rate cut appears to be that aggressive action is the best way to send a strong message of economic insurance. …Count us skeptical. …Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves. …The Fed’s great mistake after 9/11 was that it kept rates at or near 1% for far too long even after the 2003 tax cut had the economy humming. The seeds of the housing boom and bust were sown.

And the editorial also warned about more Keynesian fiscal stimulus.

Even if a temporary tax cuts is the vehicle used to dump money into the economy.

This being an election year, the political class is also starting to demand more fiscal “stimulus.” …If Mr. Trump falls for that, he’d be embracing Joe Bidenomics. We tried the temporary payroll-tax cut idea in the slow growth Obama era, reducing the worker portion of the levy to 4.2% from 6.2% of salary. It took effect in January 2011, but the unemployment rate stayed above 9% for most of the rest of that year. Temporary tax cuts put more money in peoples’ pockets and can give a short-term lift to the GDP statistics. But the growth effect quickly vanishes because it doesn’t permanently change the incentive to save and invest.

Excellent points.

Permanent supply-side tax cuts encourage more prosperity, not temporary Keynesian-style tax cuts.

Given the political division in Washington, it’s unclear whether politicians will agree on how to pursue fiscal Keynesianism.

But that doesn’t mean we can rest easy. Trump is a fan of Keynesian monetary policy and the Federal Reserve is susceptible to political pressure.

Just don’t expect good results from monetary tinkering. George Melloan wrote about the ineffectiveness of monetary stimulus last year, well before coronavirus became an issue.

The most recent promoters of monetary “stimulus” were Barack Obama and the Fed chairmen who served during his presidency, Ben Bernanke and Janet Yellen. …the Obama-era chairmen tried to stimulate growth “by keeping its policy rate at zero for six-and-a-half years into the economic recovery and more than quadrupled the size of the Fed’s balance sheet.” And what do we have to show for it? After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures. Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. …Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow. Easy money not only expands debt-service costs but also encourages malinvestment. …when Donald Trump hammers on the Fed for lower rates, …he is embarked on a fool’s errand.

Since the Federal Reserve has already slashed interest rates, that Keynesian horse already has left the barn.

That being said, don’t expect positive results. Keynesian economics has a very poor track record (if fiscal Keynesianism and monetary Keynesianism were a recipe for success, Japan would be booming).

So let’s hope politicians don’t put a saddle on the Keynesian fiscal horse as well.

If Trump really feels he has to do something, I ranked his options last summer.

The bottom line is that good short-run policy is also good long-run policy.

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Trump and the Politics of Coronavirus

Notwithstanding dalliances in other fields, I’m a policy wonk.

But I will pontificate (often incorrectly) on politics when asked, which is what happened in this interview about the electoral impact of the coronavirus.

My basic point is that Trump is much better than the average Republican about “controlling the narrative.”

In other words, he doesn’t allow the media to frame issues in a way that is adverse to his interests.

Given Trump’s Jekyll-Hyde approach to economic policy, I have mixed feelings about his Jedi-like ability.

But I will point out why narratives are so important in public policy.

• History books are filled with inaccurate and nonsensical stories about the Great Depression being caused by capitalism and being cured by FDR’s New Deal. In reality, statism deserves the blame. Bad policy by Hoover helped start the Depression and bad policy by FDR helped extend the Depression.
• More recently, people have been subjected to an erroneous story that capitalism and greed caused the 2008 financial crisis. As I mentioned in the interview, that’s grotesquely inaccurate. The crisis was caused by easy-money policy by the Federal Reserve and misguided subsidies from Fannie Mae and Freddie Mac.

Since I’ve shifted to my comfort zone of public policy, I’ll also say something about trade.

One of the big risks from the coronavirus is that it will weaken global trade. Which led me to mention in the interview that hopefully Trump might learn from this growing crisis that expanded trade is good for prosperity.

Though I admit I’m not very optimistic given his mercantilist perspective.

P.S. Textbook discussions of “robber barons” and “sweatshops” are other examples of how bad narratives lead to distorted history.

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The Inevitability of Bureaucratic Bloat

I’m not a big fan of bureaucracy, mostly because government employees are overpaid and they often work for departments and agencies that shouldn’t exist.

Today, motivated by “public choice” insights about self-interested behavior, I want to make an important point about how bureaucracies operate.

We’ll review two articles about completely disconnected issues. But they both make the same point about ever-expanding bureaucracy.

First, the Economist has an article about central banks, specifically looking at how they employ thousands of bureaucrats. What makes the numbers so remarkable, at least in most of Europe, is that they no longer have currencies to manage.

Central bankers around the world have long pondered why productivity growth is slowing. …But might central banks themselves, with their armies of employees, be part of the problem? …many central banks in Europe look flabby. Although the euro area’s 19 national central banks have ceded many of their monetary-policymaking responsibilities to the European Central Bank (ECB)—they no longer set monetary policy by themselves, for instance—they still retain thousands of employees… the Banque de France and the Bundesbank each employ more than 10,000 people… The Bank of Italy employs 6,700. All told, the ECB and the euro zone’s national central banks boast a headcount of nearly 50,000. …The Board of Governors in Washington, DC, where most policy decisions are made, had about 3,000 staff at last count. When the Fed’s 12 regional reserve banks are included, the number rises to more than 20,000.

I actually wrote about this issue back in 2009 and mentioned the still-relevant caveat that some central banks have roles beyond monetary policy, such as bank supervision.

That being said, this chart suggests that there’s plenty of fat to cut.

What I would like to see is a comparison of staffing levels for countries that use the euro, both before and after they outsourced monetary policy the European Central Bank.

I would be shocked if there was a decline in the number of bureaucrats, even though monetary policy presumably is the primary reason central banks exist.

By the way, there’s a sentence in the article that cries out for correction.

Although central banks have become more important since the global financial crisis, it is not clear why they need quite so many regional staff.

It would be far more accurate if the sentence was modified to read: “…have become more of a threat to macroeconomic stability since the global financial crisis that they helped to create.”

But I’m digressing.

Let’s now look at the next article about bureaucracy.

John Lehman, a former Secretary of the Navy, recently opined in the Wall Street Journal about bureaucratic bloat at the National Security Council.

The problems that plague the NSC trace to before its founding in 1947. The White House has long sought to centralize decision-making to overcome the political jockeying that often takes place within the national-security establishment. …The NSC was established in the 1947 National Security Act, which named the members of the council: president, vice president and secretaries of state and defense. …under President Nixon…, Mr. Kissinger grew the council to include one deputy, 32 policy professionals and 60 administrators. …the NSC has only continued to expand. By the end of the Obama administration, 34 policy professionals supported by 60 administrators had exploded to three deputies, more than 400 policy professionals and 1,300 administrators. The council lost the ability to make fast decisions informed by the best intelligence. The NSC became one more layer in the wedding cake of government agencies.

Wow.

A bureaucracy that didn’t exist until 1947 and didn’t even have a boss until 1953 then grows to almost 100 people about 20 years later.

And then 1700 bureaucrats by the Obama Administration.

Needless to say, I’m sure that the growth of the NSC bureaucracy wasn’t accompanied by staffing reductions at the Department of State, Department of Defense, or any other related box on the ever-expanding federal flowchart.

Whenever I read stories like the two cited above, I can’t help but remember what Mark Steyn wrote almost ten years ago.

London administered the vast sprawling fractious tribal dump of Sudan with about 200 British civil servants for what, with hindsight, was the least-worst two-thirds of a century in that country’s existence. These days I doubt 200 civil servants would be enough for the average branch office of the Federal Department of Community Organizer Grant Applications. Abroad as at home, the United States urgently needs to start learning how to do more with less.

As always, Steyn is very clever. But there’s a very serious underlying point. Is there any evidence that additional bureaucracy has produced better decision making?

Either in the field of central banking, national security, or in any other area where more and more bureaucrats exercise more and more control over our lives?

Maybe there is such evidence, but I haven’t seen it. Instead, I see research showing how bureaucracy stifles growth, creates waste, promotes inefficiency, crowds out private jobs, delivers bad outcomes, acts in a self-serving fashion, and bankrupts governments.

P.S. The best example of bureaucrat humor is this video.

P.P.S. If you want more, we have a joke about an Indian training for a government job, a slide show on how bureaucracies operate, a cartoon strip on bureaucratic incentives, a story on what would happen if Noah tried to build an Ark today, a top-10 list of ways to tell if you work for the government, a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

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