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Archive for June, 2020

Today is Thomas Sowell’s 90th birthday. The man is a living legend.

I’ve cited his great work many times, and I definitely urge people to read what Walter Williams just wrote about his long-time friend.

And I also recommend this Mark Perry column, which contains 15 of Sowell’s most insightful quotes, as well as two videos of Sowell in action.

Sowell continues to amaze with prodigious productivity. His 56th book, Charter Schools and Their Enemies, goes on sale today.

And he summarizes some of his arguments on that issue in this recent column in the Wall Street Journal.

New York’s charter school students are predominantly black and Hispanic, and live in low-income neighborhoods. In 2019, most students in the city’s public schools failed to pass the statewide tests in mathematics and English. But most of the city’s charter school students passed in both subjects. Such charter school results undermine theories of genetic determinism, claims of cultural bias in the tests… In 2013, a higher percentage of the fifth-graders in a Harlem charter school passed the mathematics test than any other public school fifth-graders in the entire state of New York. …In a number of low-income minority communities in New York City, charter school classes and classes in traditional public schools are held in the same buildings, serving the same communities. Some of the contrasts are almost unbelievable. In 28 classes in these buildings, fewer than 10% of the students reached the “proficient” level on statewide tests. All 28 classes were in traditional public schools. All charter school classes at the same grade levels in the same buildings did better—including six grade levels where the charter school majorities reaching the “proficient” level ranged from 81% to 100%.

Sounds like great news.

But there’s a dark lining to this cloud.

Competition from charter schools is an existential threat to traditional public schools in low-income minority communities… Teachers unions and traditional public school administrators have every reason to fear charter schools. In 2019 there were more than 50,000 New York City students on waiting lists to transfer into charter schools. …Among the ways of blocking students from transferring into charter schools is preventing charter schools from getting enough classrooms to put them in. …In cities across the country, public school officials are blocking charter schools from using school buildings that have been vacant for years to prevent transfers into charter schools from taking place. …In some places, vacant school buildings have been demolished, making sure no charter schools can use them. …anti-charter-school tactics by public school officials, politicians and teachers unions call into question pious statements by them that what they are doing is “for the sake of the children.” …their actions show repeatedly that protecting their own turf from the competition of charter schools is their top priority.

This is disgusting.

Union bosses, education bureaucrats, and captive politicians are sacrificing the hopes and dreams of minority children in order to preserve their monopoly system.

Even the NAACP has chosen to put leftist ideology above the best interest of black kids.

As did Barack Obama, even though he sent his own kids to an elite private school (Elizabeth Warren also is a reprehensible hypocrite on this issue).

Here’s some data on school enrollment in New York City and the rest of the state. As you can see, most whites have escaped the NYC government system, with more than 50 percent in private schools.  For many black families, though, their only affordable option is charters, and 20 percent of black kids are benefiting from this possibility.

Sadly, expanding charters is very difficult because of teacher unions and their political allies. They benefit if they keep kids trapped in a crummy system.

Needless to say, this also explains why it is so difficult to get school choice, which is an even better option.

P.S. If you want to learn more about school choice, I recommend this video.

P.P.S. It’s uplifting to see very successful school choice systems operate in nations such as CanadaSwedenChile, and the Netherlands.

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Every so often, I’ll notice a tweet that has some remarkable characteristic.

Today, we’re going to add to this collection.

The Democratic National Committee sent out a tweet back in April that seems like it should have been issued instead by the Libertarian National Committee.

My answer to the DNC’s question is “never.” That’s why I’m a libertarian.

Even when I grudgingly acknowledge that something is a legitimate function of government, I’m never tempted to say or think that “things seem to be going smoothly.”

That’s true when looking at what happens in Washington, what happens in the states, and what happens at the local level.

Needless to say, the DNC wasn’t trying to recruit libertarians. The goal was to condemn Trump’s governing style, specifically with reference to a story about the administration’s chaotic approach to the coronavirus.

And I certainly agree that Trump gives critics plenty of ammunition.

But there are plenty of similar episodes of malfeasance and incompetence during the Obama years. And the Bush years. And in every preceding White House.

The bottom line (as suggested by my collection of “Government in Cartoons“) is that Washington at best is a clumsy oaf. And quite often is a bloated bully.

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The good news is that Joe Biden has not embraced many of Bernie Sanders’ worst tax ideas, such as imposing a wealth tax or hiking the top income tax rate to 52 percent..

The bad news is that he nonetheless is supporting a wide range of punitive tax increases.

  • Increasing the top income tax rate to 39.6 percent.
  • Imposing a 12.4 percent payroll tax on wages above $400,000.
  • Increasing the double taxation of dividends and capital gains from 23.8 percent to 43.4 percent.
  • Hiking the corporate tax rate to 28 percent.
  • Increasing taxes on American companies competing in foreign markets.

The worst news is that Nancy Pelosi, et al, may wind up enacting all these tax increases and then also add some of Crazy Bernie‘s proposals.

This won’t be good for the U.S. economy and national competitiveness.

Simply stated, some people will choose to reduce their levels of work, saving, and investment when the tax penalties on productive behavior increase. These changes give economists the information needed to calculate the “elasticity of taxable income”.

And this, in the jargon of economists, is a measure of “deadweight loss.”

But now there’s a new study published by the Federal Reserve which suggests that these losses are greater than traditionally believed.

Authored by Brendan Epstein, Ryan Nunn, Musa Orak and Elena Patel, the study looks at how best to measure the economic damage associated with higher tax rates. Here’s some of the background analysis.

The personal income tax is one of the most important instruments for raising government revenue. As a consequence, this tax is the focus of a large body of public finance research that seeks a theoretical and empirical understanding of the associated deadweight loss (DWL). …Feldstein (1999) demonstrated that, under very general conditions, the elasticity of taxable income (ETI) is a sufficient statistic for evaluating DWL. …It is well understood that, apart from rarely employed lump-sum taxes and…Pigouvian taxes, revenue-raising tax systems impose efficiency costs by distorting economic outcomes relative to those that would be obtained in the absence of taxation… ETI can potentially serve as a perfect proxy for DWL…this result is consistent with the ETI reflecting all taxpayer responses to changes in marginal tax rates, including behavioral changes (e.g., reductions in hours worked) and tax avoidance (e.g., shifting consumption toward tax-preferred goods). …a large empirical literature has provided estimates of the individual ETI, identified based on variation in tax rates and bunching at kinks in the marginal tax schedule.

And here are the new contributions from the authors.

… researchers have fairly recently come to recognize an important limitation of the finding that the ETI is a sufficient statistic for deadweight loss… we embed labor search frictions into the canonical macroeconomic model…and we show that within this framework, a host of additional information beyond the ETI is needed to infer DWL …once these empirically observable factors are controlled for, DWL can be calculated easily and in a straightforward fashion as the sum of the ETI and additional terms involving these factors. … We find that…once search frictions are introduced, …DWL can be between 7 and 38 percent higher than the ETI under a reasonable calibration.

To give you an idea of what this means, here are some of their estimates of the economic damage associated with a 1 percent increase in tax rates.

As you peruse these estimates, keep in mind that Biden wants to increase the top income tax rate by 2.6 percentage points and the payroll tax by 12.4 percentage points (and don’t forget he wants to nearly double tax rates on dividends, capital gains, and other forms of saving and investment).

Those are all bad choices with traditional estimates of deadweight loss, and they are even worse choices with the new estimates from the Fed’s study.

So what’s the bottom line?

The political impact will be that “the rich” pay more. The economic impact will be less capital formation and entrepreneurship, and those are the changes that hurt the vast majority of us who aren’t rich.

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Some people say that California is the worst-governed state (I would probably choose Illinois or New Jersey, but it’s a close race).

And if you wanted to pick the worst-governed place in California, San Francisco might be at the top of the list.

The city manages to combine horrible zoning laws with insufferable red tape (there have been efforts to ban everything from Happy Meals to…umm…foreskins).

Most disturbing of all, San Francisco now has a major problem with public defecation (not that the sewer system is anything to brag about).

In an article for City Journal, Erica Sandberg explores the latest bit of upside-down governance from The City by the Bay.

San Francisco is surreptitiously placing homeless people in luxury hotels by designating them as emergency front-line workers, a term that the broader community understands to mean doctors, nurses, and similar professionals. …the city has evoked emergency-disaster law to keep the information private. Officials refuse to notify the public about what is happening in their community and are blocking the press by withholding the list of hotels and preventing reporters from entering the properties. …obfuscation is ultimately futile. Security guards standing outside hotel entrances, where they had never been before, are clear indicators that something is amiss. An uptick in crime, drug activity, and vagrancy around the hotels is another clue.

This sounds crazy, but it gets even worse.

The Department of Public Health manages the controversial free alcohol, cigarette, and cannabis program for homeless people placed in the hotels. …A public-records investigation into the matter has revealed that, as of June 16, DPH approved $3,795.98 to buy the homeless guests vodka and beer (cigarettes have been scrapped). …concerned inside sources report destroyed rooms and rampant illegal drug use. In one hotel, guests are given needle kits and are advised to call the front desk before shooting up. …The hotels were pressured into accepting the homeless guests, though they were also eager for the chance to recoup some revenue lost to the Covid-19 lockdowns. …The city-sponsored guests also receive personal grooming, sanitary, and cleaning supplies, three delivered meals, and laundry service for clothes and linens.

Free hotel room, along with free food and laundry service? And booze and pot?

Who knew being homeless was such a good racket!

Since I’m a fiscal wonk, this is the part that captured my attention.

Rooms are rented at close to $200 per night, totaling $6,000 a month—nearly double the cost of a private one-bedroom apartment in San Francisco.

Though I shouldn’t be surprised by such profligacy. The state government’s “success story” was spending “billions of dollars” to cause homelessness to “dip by 1 percent.”

And San Francisco’s government had a different program for the homeless that cost about $700 per night. So maybe the new approach described in above article is a fiscal bargain.

By the way, it appears that taxpayers across the country are contributing to this insane policy.

Hotel owners consented to the arrangements fully aware of the potential pitfalls, having been assured that FEMA dollars would cover at least some of the damages incurred.

Good ol’ FEMA. Always ready, willing, and able to foolishly spend taxpayer money.

P.S. While San Francisco is a bit of a mess, folks in other cities (such as Seattle, Chicago, New York City, Detroit, etc) can make a legitimate claim that they have the nation’s worst local government.

P.P.S. When he crunched all the numbers, Dean Stansel of Southern Methodist University found that the Riverside-San Bernardino-Ontario metropolitan statistical area in California had the worst policy in the country (San Francisco was #38 out of the 55 MSAs with at least 1 million residents).

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In early 2019, I released this video summarizing some of the evidence for free trade.

The bad news is that I must not be very persuasive. Trump continued with protectionist policy.

The good news is that we now have more evidence against that form of government intervention.

But first, I’m going to start with a bit of theory. Here’s a chart from the Council of Foreign Relations showing the relationship between prosperity and trade balances.

And here’s the explanation, courtesy of Benn Steil and Benjamin Della Rocca.

President Trump says that America running a trade deficit means that “jobs and wealth are being given to other countries.” …this statement is logically and historically false. The left-hand figure above shows that the relationship between trade deficits and growth in the United States, going back nearly 30 years, is the opposite. Rising growth tends to increase imports through higher consumption. The imports have not meant that “jobs and wealth are being given to other countries”: they have been a sign of a strong U.S. economy.

This is spot on. As I explained in my video on the trade deficit, people in richer, faster-growing countries can afford to buy more goods and services (regardless of where they are produced) than people in countries with anemic economic performance.

Indeed, this is why (at least in the pre-coronavirus era) America’s trade deficit was expanding.

Now let’s shift to the additional evidence that has accumulated since the video was produced.

Here’s are the key findings from a study by Kyle Handley, Fariha Kamal, and Ryan Monarch, which was just published by the Federal Reserve.

Using 2016 confidential firm-trade linked data, we document the implied incidence and scope of new import tariffs. Firms that eventually faced tariff increases on their imports ac-counted for 84% of all exports and they represent 65% of manufacturing employment. For all affected firms, the implied cost is $900 per worker in new duties. To estimate the effect on U.S. export growth, we construct product-level measures of import tariff exposure of U.S. exports from the underlying firm micro data.More exposed products experienced 2 percentage point lower growth relative to products with no exposure. The decline in exports is equivalent to an ad valorem tariff on U.S. exports of almost 2% for the typical product and almost 4% for products with higher than average exposure.

Here are some results of a recent study by Stephen J. Redding, Mary Amiti, and David Weinstein.

Using data from 2018, a number of studies have found that recent U.S tariffs have been passed on entirely to U.S. importers and consumers. …Using another year of data including significant escalations in the trade war, we find that U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers. We show that the response of import values to the tariffs increases in absolute magnitude over time, consistent with the idea that it takes time for firms to reorganize supply chains.

Here’s a chart from the study showing how Trump basically tripled average trade taxes over the past couple of years.

Next we have a 2019 study authored by Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose.

We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963‐2014. Tariffs increases are associated with persistent economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation and insignificant changes to the trade balance. Output and productivity impacts are magnified when tariffs rise during expansions and when they are imposed by advanced (as opposed to developing) economies; effects are asymmetric, being larger when tariffs go up than when they fall. Results are robust to a large number of perturbations to our methodology, and hold using both macroeconomic and industry‐level data.

These charts from their study paint a damning picture.

The bottom line is that Trump’s trade policies are hurting the U.S. economy (just like China’s protectionist policies are hurting that nation’s economy).

P.S. A great mystery is how some analysts understand that it’s bad to have higher taxes on trade, yet also think it’s perfectly okay to impose even bigger tax increases on work, saving, investment, and entrepreneurship. The folks at the International Monetary Fund are very guilty of this type of fiscal hypocrisy.

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I’m a long-time critic of the Federal Reserve, Fannie Mae, and Freddie Mac, but I had no idea they would produce something as bad as the 2008 financial meltdown. It’s not easy to predict the timing and severity of a crisis.

Unless we’re talking about the ticking time bomb described in this video.

In theory, of course, state politicians and their local counterparts are supposed to set aside enough money to pay the lavish future benefits they promise their bureaucrats.

Far too often, however, that doesn’t happen. And that means the governments (to be more accurate, their taxpayers) have a big “unfunded liability.”

This racket is a good deal for the bureaucrats – who get lots of pay now and lots of promised benefits in the future. And it’s a good deal for the state and local politicians who get votes and campaign contributions from the bureaucrats.

But, as explained in a new report from the American Legislative Exchange Council, it is a fiscal disaster that is going to explode at some point in the not-too-distant future.

Unfunded state pension liabilities total $4.9 trillion or $15,080 for every man, woman and child in the United States. State governments are often obligated, by contract and state constitutional law, to make these pension payments regardless of economic conditions. As these pension payments continue to grow, revenue that would have gone to essential services like public safety and education, or tax relief, goes to paying off these liabilities instead. …Most state pension plans are structured as defined-benefit plans. Under a defined-benefit plan, an employee receives a fixed payout at retirement based on the employee’s final average salary, the number of years worked and a benefit multiplier.

There are several ways to measure the degree to which a state has dug a big hole by promising big goodies to bureaucrats.

Figure 2 shows per-capita unfunded liabilities on a state-by-state basis. Tennessee is in the best shape, followed by Indiana and Wisconsin (thanks in part to former Governor Scott Walker). Alaska has the biggest fiscal hole, along with Illinois (no surprise) and Connecticut (no surprise).

It’s important to recognize, though, that some states have more income than others.

So in addition to a per-capita estimate of pension liabilities, here’s a map showing the burden as a share of each state’s economic output. Once again, Tennessee, Indiana (the #22 is a misprint), and Wisconsin rank the highest. Alaska stays at the bottom, joined by Mississippi and New Mexico.

Let’s also give credit and blame to states that are the top 10 and bottom 10 on each map.

In addition to Tennessee, Indiana, and Wisconsin, good states include Utah, Nebraska, South Dakota and Texas (honorable mention to Florida, which just missed).

Bad states are led by Alaska, with Nevada, New Mexico, Mississippi, Illinois, and Ohio also being governed by particularly short-sighted politicians.

So what’s the solution for the bad states? The ALEC report gives the answer.

Ultimately, one of the best ways to solve the pension crisis is to change the way pension plans are structured. Changing from the current defined-benefit system toward a defined-contribution system for new employees will improve the health of state pension plans by giving employees full control over their retirement savings.

By the way, it’s worth noting that blue states may have a bigger problem than red states, but this is a bipartisan mess.

In a recent column in the Wall Street Journal, Steve Malanga says there is plenty of blame to share.

The crisis in state pension systems is a result of decades of fiscal mismanagement. The problem, however, goes well beyond deeply indebted Illinois and New Jersey. Many state and municipal retirement funds have been on an unrelenting downward trajectory… This fiscal nightmare stems in part from politicians’ habit of increasing employee benefits while markets are booming, thereby squandering fund surpluses. …Politicians have consistently neglected to contribute to these systems even during good budgetary times, preferring to fund more popular programs. …Meanwhile, elected officials and pension administrators have endorsed overly optimistic economic assumptions that made their systems look affordable.

Let’s close today’s grim column with another way of measuring the problem.

Here’s a map from the Tax Foundation that shows how much money is set aside in pension programs compared to the level of benefits that bureaucrats are promised.

Looking at the data from this angle, Kentucky has the biggest hole, followed by New Jersey, Illinois (the only state to be in the bottom 10 on all three maps), and Connecticut, while the good states are led by Wisconsin, South Dakota, and Tennessee.

The bottom line is that some states have a very grim future, which is why even Warren Buffett is advising investors and entrepreneurs to steer clear of doing business in those places.

P.S. Unfortunately, you can’t avoid the massive unfunded liabilities of Social Security, Medicare, and Medicaid by moving across state lines.

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Yesterday’s column focused on the theoretical argument for tax havens.

At the risk of oversimplifying, I explained that the pressure of tax competition was necessary to prevent “stationary bandits” from saddling nations with “goldfish government.”

And I specifically explained why the left’s theory of “capital export neutrality” was only persuasive if people just paid attention to one side of the equation.

Today, let’s look at some real-world evidence to better understand the beneficial role of these international financial centers.

We’ll start with a column in the Hill by Jorge González-Gallarza.

Using as a natural experiment the terminal phase-out in 2006 of corporate tax exemptions to affiliates of U.S. companies setting shop in Puerto Rico, the research finds that scrapping the island’s status as a tax haven led U.S. companies to cut back investments and job creation in the mainland substantially. The provision in question was Section 936 of the Internal Revenue Code and it exempted Puerto Rico-based affiliates of U.S. companies from paying any corporate income tax altogether. …In 1996, President Clinton signed the Small Business Job Creation Act, spelling §936’s full phaseout by 2006. …ditching §936 appears to have raised U.S. companies’ average effective tax rate on domestic corporate income by 10 percentage points. Notably yet unsurprisingly, they responded by cutting global investment by a whopping 23 percent while balancing away from domestic projects, in Puerto Rico and the mainland alike — domestic investment fell by 38 percent, with Foreign Direct Investments’ (FDIs) share of the total growing 17.5 percent. …Employing 11 million workers in the continental US before repeal, firms taking advantage of §936 laid off a million of them, amounting to a 9.1 percent decline in payrolls.

In other words, higher taxes on business resulted in less investment and fewer jobs. Gee, what a surprise.

Hopefully, the 2017 reduction in the corporate tax rate is now offsetting some of that damage.

In an article for the Tax Foundation, Elke Asen shares some academic research on how tax havens help mitigate the destructive policies of high-tax governments.

Tax havens, or “offshore financial centers,” can be defined as small, well-governed tax jurisdictions that do not have substantial domestic economic activity and impose low or zero tax rates on foreign investors. By doing so, they attract a considerable amount of capital inflow, particularly from high-tax countries. …academic research reveals that high-tax jurisdictions may also have something to gain from tax havens. …A 2004 paper by economists Mihir Desai, C. Fritz Foley, and James Hines…found that tax havens indirectly stimulate the growth of businesses in non-haven countries located in the same region. …These findings suggest that although high-tax countries can lose tax revenue due to profit shifting, tax havens can indirectly facilitate economic growth in high-tax countries by reducing the cost of financing investment in those countries.

By the way, I cited the Desai-Foley-Hines paper in my video on “The Economic Case for Tax Havens” because it makes the key point that governments hurt their own economies when they go after low-tax jurisdictions.

Here are some excerpts from an article by Abrar Aowsaf in the Bangladesh-based Dhaka Tribune. It’s especially worth citing since it notes that tax havens are a refuge for oppressed people around the world.

A tax haven is basically a jurisdiction with low taxes, high legal security, and a high degree of protection of savers’ privacy. …The Cayman Islands, Switzerland, Singapore, Hong Kong, Cyprus, Jersey, and Bermuda — all of these jurisdictions that we recognize as tax havens are characterized by their high legal safety. Savers know that the government will not decide to take their money on a whim. …Operating in tax havens is not illegal in itself. …Singer Shakira, for example, uses tax havens to minimize her tax bills within the bounds of the law. …Another very important detail is that tax havens are a refuge for millions of citizens who have had the misfortune of being born in authoritarian and unstable countries. In many countries, the most basic human rights are not guaranteed. There also exist states where authoritarian governments arbitrarily decide who to repress or prosecute. Many investors do not seek protection just for the lower taxes, but they are also escaping political, ideological, and religious persecution. …In reality, tax havens are not to be blamed…nor do they force us to pay more taxes or harm our economies. Ireland, for example, was poorer than Spain in 1980. Today, thanks to its low taxes, it is the second richest country in the Eurozone. In order to improve general welfare, what we need are more companies, not more incompetent politicians and haphazard public spending. The problems faced by countries with economic difficulties do not come from tax havens, but from their politicians and ineffective policies.

Amen. More people need to be making “The Moral Case for Tax Havens.”

Andy Morriss, the Dean of Texas A&M’s School of Innovation, explains the vital role of these low-tax jurisdictions in bring more investment and prosperity to poor nations.

The seemingly endless debate over the role of IFCs in corporate and personal tax avoidance ignores these jurisdictions’ crucial role in providing the rule of law for international transactions. …The world’s poorest countries desperately need their economies to grow if their populations are to have better lives. For example, Africa has about 17 per cent of the world’s population but only 3 per cent of global GDP. The root causes of African nations’ underdevelopment are complex, but one critical element is that there is too little investment in their economies. …most developing countries lack the legal and regulatory infrastructure necessary to support a domestic capital market. …When multiple investors pool their investments, they need a mechanism to address the governance of their pooled investment. …By providing legal systems which offer a powerful combination of modern, efficient, well-designed laws and regulations, regulatory agencies staffed with experienced, well-credentialed experts, and court systems capable of quick, fair, and thoughtful decisions, IFCs offer alternative locations for transactions and entities. …In short, the price of investing in a developing economy is reduced.  And when the price of something falls, the amount demanded increases. That’s good for investors, it’s good for developing countries, and it’s good for the world’s poorest. …Improving the lives of the poorest around the world is going to require massive private investment in productive activities. This need cannot be met by government provided aid… Only economic growth can solve this problem. And growth requires investment… Fortunately, IFCs are helping to meet this need.

Click here if you want more information on how tax havens help the developing world.

Writing for the Bahamas-based Tribune and citing former Finance Minister James Smith, Neil Hartnell warns that the OECD’s agenda of “neo-colonialism” will cripple his nation’s economy.

The Bahamas “may devastate the economy” if it surrenders too easily to demands from high-tax European nations for a corporate income tax, a former finance minister warned yesterday. …OECD and European Union (EU) initiatives…calling for all nations to impose some form of “minimum level of” taxation on the activities of multinational entities. …Mr Smith…blasted the OECD’s European members for seemingly seeking to “recast our economy in their own image”, adding that this nation’s economic model had worked well for 50 years without income and other direct forms of taxation. …Describing the OECD and EU pressures as a form of “neo-colonialism”, Mr Smith said The Bahamas shared few economic characteristics with their members. He pointed out that this nation was suffering from high unemployment and “low wages for the majority” of Bahamians. “Conceptually the take from an income tax may devastate the economy,” he told Tribune Business.

The former Finance Minister is correct in that the OECD is trying to export its high-tax policies.

For what it’s worth, I’ve reversed the argument and pointed out that OECD nations should be copying zero-income tax jurisdictions such as the Bahamas.

So what’s the argument against tax havens?

As illustrated by this article from the International Monetary Fund, authored by Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, all the complaints revolve around the fact that some people don’t like it when governments can’t grab as much money.

Although Swiss Leaks, the Panama Papers, and recent disclosures from the offshore industry have revealed some of the intricate ways multinational firms and wealthy individuals use tax havens to escape paying their fair share, the offshore financial world remains highly opaque. …These questions are particularly important today in countries where policy initiatives aiming to curb the harmful use of tax havens abound. …a new study…finds that a stunning $12 trillion…consists of financial investment passing through empty corporate shells… These investments in empty corporate shells almost always pass through well-known tax havens. The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world’s investment in special purpose entities, which are often set up for tax reasons. …private individuals also use tax havens on a grand scale… Globally, individuals hold about $7 trillion—corresponding to roughly 10 percent of world GDP—in tax havens. …the stock of offshore wealth ranges…to about 50 percent in some oil-producing countries, such as Russia and Saudi Arabia, and in countries that have suffered instances of major financial instability, such as Argentina and Greece.

I find it interesting that even the pro-tax IMF felt obliged to acknowledge that people living in nations with bad governments are especially likely to make use of tax havens.

Though I’m not sure I fully trust the data in this chart from the article.

Because of problems such as corruption, expropriation, crime, and political persecution, I’m sure that usage of tax havens by people in nations such as China, India, Iran, Mexico, and South Africa is much greater than what we see in the chart.

Though perhaps the numbers are distorted because the authors didn’t include the United States (sadly, the policies that make the U.S. a tax haven are only available for foreigners).

P.S. American taxpayers legally can use Puerto Rico as a tax haven.

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As part of my presentation earlier this month to IES Europe, I discussed topics such as comparative economics and federalism.

I also had a chance to explain why tax havens are good for global prosperity.

Many of the points I made will be familiar to regular readers.

1. Because politicians have been worried that the “geese with the golden eggs” can escape – thanks to tax havens and tax competition – governments around the world reluctantly have lowered tax rates and reduced discriminatory taxes on saving and investment.

2. The Paris-based Organization for Economic Cooperation and Development (heavily subsidized by American taxpayers) is a bureaucracy that is controlled by high-tax governments and it seeks to undermine tax competition and tax havens by creating a global tax cartel – sort of an “OPEC for politicians.”

3. When tax competition is weakened, politicians respond by increasing tax rates.

4. There is an economic theory that is used to justify tax harmonization. It’s called “capital export neutrality” and I shared a slide in the presentation to show why CEN doesn’t make sense. Here’s a new version of the slide, which I’ve augmented to help people understand why tax havens and tax competition are good for prosperity.

The bottom line is that we should fight to protect tax havens and tax competition. The alternative is “stationary bandits” and “Goldfish Government.”

P.S. My work on this issue has been…umm…interesting, resulting in everything from a front-page attack by the Washington Post to the possibility of getting tossed in a Mexican jail.

P.S.S. This column has four videos on the issue of tax competition, and this column has five videos on the issue of tax havens.

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To the best of my recollection, it’s been several years since I shared a collection of anti-politicians jokes.

Given the odious behavior of people in government, that’s an oversight I’m going to rectify today.

Though I’m not sure if this first example is about politicians or about bureaucrats.

This next bit of humor reminds us that stereotyping is wrong…unless you’re looking at the crowd in the lower frame.

Next we have a politician who promises to be a quick learner.

Here’s an example of some Robin Hood-style redistribution we can all support.

Our next-to-last item helps to explain why Washington is now the richest region of America, even though its main output is waste, red tape, and corruption.

I’ve saved the best for last.

I’ll close with a serious point. Do bad people naturally gravitate to politics, or do the perverse incentives of politics turn good people into bad people?

Or does it even matter since the net result is the same?

P.S. I also have jokes about specific politicians, ranging from Bernie Sanders to Donald Trump (with appearances by Hillary Clinton, Barack Obama, Elizabeth Warren, and Bill Clinton).

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In recent months, governments released prisoners and announced that some laws wouldn’t be enforced because of the coronavirus. Now, with protests against police misbehavior, we’re seeing governments fail to maintain law and order.

As suggested by this excellent Reason video, these developments bolster the case against gun control.

But does this mean politicians will be more supportive of the 2nd Amendment?

The answer (at least for anyone with an IQ above room temperature) should be yes.

From an economic perspective, one major goal is to change the cost-benefit analysis for criminals. If bad guys have to worry that good guys may be armed, that significantly increases the potential cost of illegal behavior.

A well-functioning system of law enforcement can help, of course, but that’s not a description of how things work in some communities – even in normal times, much less when there’s civil unrest.

But all this evidence and analysis doesn’t seem to matter for Joe Biden. A look at his campaign website shows support for a wide range of gun-control laws from the soon-to-be Democratic nominee.

…gun violence is a public health epidemic. …In 1994, Biden – along with Senator Dianne Feinstein – secured the passage of 10-year bans on assault weapons and high-capacity magazines. As president, Joe Biden will defeat the NRA again. …As president, Biden will: …Ban the manufacture and sale of assault weapons and high-capacity magazines. …Regulate possession of existing assault weapons under the National Firearms Act. …Biden supports legislation restricting the number of firearms an individual may purchase per month to one. …End the online sale of firearms and ammunitions. …Give states incentives to set up gun licensing programs.

What’s especially discouraging is that Biden apparently hasn’t learned anything about so-called assault weapons since 1994.

In a 2019 column for Reason, Jacob Sullum dissected Biden’s incoherent views on the topic.

Joe Biden…is still proud of the ban on “assault weapons”… Biden argues that it made mass shootings less common…, citing a study reported in The Journal of Trauma and Acute Care Surgery last January. But that is not what the researchers, led by New York University epidemiologist Charles DiMaggio, actually found. …The study…looked not at the number of mass shootings, as Biden claims, but the number of mass-shooting deaths as a share of all firearm homicides. The difference in total fatalities during the period when the ban was in effect amounted to 15 fewer deaths over a decade, or 1.5 a year on average, including mass shootings that did not involve weapons covered by the ban. …The causal mechanism imagined by Biden is even harder to figure out. He describes “assault weapons” as “military-style firearms designed to fire rapidly.” But they do not fire any faster than any other semi-automatic. …Under the 1994 ban, removing “military-style” features such as folding stocks, flash suppressors, or bayonet mounts transformed forbidden “assault weapons” into legal firearms, even though the compliant models fired the same ammunition at the same rate with the same muzzle velocity as the ones targeted by the law.

I wonder if Biden understands the policy he’s advocating.

Does he think that “assault weapons” are actual machine guns, capable of firing multiple rounds with one pull on the trigger (a remarkably common misconception among gun-control advocates)?

Or, if he understands that a so-called assault weapon is just like any other gun (firing one round each time the trigger is pulled), then why would he think anything would be achieved by banning some guns and leaving others (that work the same way) legal?

Perhaps most relevant, does he even care what the evidence shows?

The bottom line is that people are “voting with their dollars” for gun ownership for the simple reason that they know it’s unwise to trust government (either to protect them from crime or to respect their rights).

But that doesn’t mean their constitutional freedoms will be secure if Biden wins the 2020 election.

P.S. The good news is that there will be widespread civil disobedience if politicians push for new gun bans.

P.P.S. Another silver lining is that we’ll get more and more clever humor mocking gun control.

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Assuming the goal is more prosperity, lawmakers who work on tax issues should be guided by the “Holy Trinity” of good policy.

  1. Low marginal tax rates on productive activity such as work and entrepreneurship.
  2. No tax bias (i.e., extra layers of tax) that penalizes saving and investment.
  3. No complicating preferences and loopholes that encourage inefficient economic choices.

Today, with these three principles as our guide, we’re going to discuss a major problem in how dividends are taxed in the United States.

Simply stated, there’s an unfair and counterproductive double tax. All you really need to know is that if a corporation earns a profit, the corporate income tax takes a chunk of the money. But that money then gets taxed again as dividend income when distributed to shareholders (the people who own the company).

So why is this a bad thing?

From an economic perspective, the extra layer of tax means that the actual tax burden on corporate income is not 21 percent (the corporate tax rate) or 23.8 percent (how dividends are taxed on the 1040 form), but a combination of the two rates. And when you include the average additional tax imposed at the state level, the real tax rate on dividends in the United States can be as high as 47.47 percent according to the OECD.

You don’t need to be a wild-eyed supply-sider to think that incentives to build businesses and create jobs are adversely affected when the government grabs nearly half of the additional income generated by corporate investment.

Keep in mind, by the way, that workers ultimately bear most of this tax since lower levels of investment translate to lower wages.

So what’s the solution?

If we want a properly designed system for taxing businesses, we know the answer. Just get rid of the extra layer of tax.

A 2015 report from the Tax Foundation explains how various types of “corporate integration” can achieve this goal.

The United States’ tax code treats corporations and their shareholders as separate taxable entities. The result is two layers of taxation on corporate income: one at the corporate level and a second at the shareholder level. This creates a high tax burden on corporate income, increasing the cost of capital. The double taxation of corporate income reduces investment and distorts business decisions. … Many developed countries have integrated their tax systems in order to mitigate or completely eliminate the double taxation of corporate income. …There are several ways to integrate the corporate tax code. Corporate income can be fully taxed at the entity level (a corporate income tax) and then tax exempt when passed to shareholders as dividend income, or corporations could be given a deduction for dividends passed to their shareholders, who pay tax on the dividend income. Alternatively, shareholders and corporations both pay tax on their income, but shareholders can be given a credit to offset taxes the corporation already paid on their behalf.

For what it’s worth, I think it would be best to get rid of the double tax by eliminating the layer of tax that is imposed on individuals.

In other words, modify the above image in this way.

Though the economic benefit would be the same if the corporate income tax was abolished and the income was taxed one time at the individual level.

I’ll close today’s column with a bit of good news.

A few years ago, the United States had a much higher burden of double taxation because the corporate tax rate was so high. Indeed, the combined tax rate on dividends was the fourth-highest in the developed world.

Today, thanks to the 2017 tax reform, the combined tax rate is “only” the tenth-highest in the developed world.

P.S. The Estonian tax system for businesses is a good role model.

P.P.S. Under Joe Biden’s tax plan, the U.S. would have the world’s-highest combined tax rate on dividends.

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When writing yesterday’s column about new competitiveness rankings from the IMD business school in Switzerland, I noticed that I have not yet written about this year’s edition of the Index of Economic Freedom.

Time to rectify that oversight.

We’ll start with a look at the nations with the most economic freedom. Interestingly, Singapore has now displaced Hong Kong as the world’s most market-friendly jurisdiction (because Hong Kong’s score declined, not because Singapore’s score increased), with New Zealand, Australia, and Switzerland rounding out the top 5.

The United States, meanwhile, isn’t even in the top 10. Instead, America dropped from #12 last year to #17 this year.

The decline is partly due to a lower score (with Trump’s protectionist policies deserving the biggest share of the blame), but mostly caused by better scores from nations such as Chile, Georgia, Estonia, and Lithuania.

What may shock people, though, is that even supposedly socialist Denmark (score of 78.3) ranks above the United States (score of 76.6). Here’s a look at U.S. and Danish scores from 1995-present.

Regular readers already know that Denmark is not a socialist nation. Indeed, it’s never been socialist. By world standards, there’s basically no history of government ownershipcentral planning, or price controls.

The most accurate way of describing Denmark is that it combines laissez-faire economics with tax-and-spend redistributionism.

Since this is a common approach among nations in that part of the world, some people even refer to this set of economic policies as the Nordic model.

So how does this approach compare to policy in the United States? The short answer, as illustrated by this table, is that America generally does better on fiscal policy, but gets lower scores when looking at almost every other type of policy.

The great irony of all this is that Bernie Sanders wants the U.S. to be more like Denmark, but he only says that because he doesn’t realize it would mean reducing the negative impact of government.

P.S. While Denmark has some awful fiscal policies (the tax burden is terrible), there are some bright spots. It has done a good job in recent years of restraining the growth of government, and it also has a partially private retirement system.

P.P.S. Not that any of these will be a surprise, but the three lowest-ranked nations in the Index of Economic Freedom are Cuba (26.9), Venezuela (25.2), and North Korea (4.2).

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When looking at which nations have the best economic policy, the best options are the Fraser Institute’s Economic Freedom of the World and the Heritage Foundation’s Index of Economic Freedom.

But I also look forward to other measures, including the annual competitiveness ranking from the Swiss-based IMD business school, which was just released this month.

We’ll start with a look at the top nations. Singapore remains the most competitive nation, while Denmark made a big jump to #2, and Switzerland climbed a notch to #3.

The United States, which was 3rd last year, dropped to #10.

Only 63 nations are part of the survey, and no sentient being should be surprised about Venezuela being in that final spot. Nor should there be much surprise that Argentina is next-to-last.

Here are some highlights from the accompanying article.

The annual rankings, now in their 32nd year, have been released unlocking a wealth of data on the performance of 63 economies across the globe. Singapore was number one for the second year in a row. In second to fifth place, in order, came: Denmark, Switzerland, the Netherlands and Hong Kong SAR. A marked pattern in this year’s results, which are an amalgam of hard data taken from 2019 and survey responses from early 2020, is the strength of smaller economies. …The number of small economies – broadly defined as such by their GDP –  in the top ten is striking. However, this is not to say that we are seeing a triumph of democracies. Singapore, Hong Kong and the UAE remain in the top ten, whilst some democracies (such as Argentina) sit at the bottom of the scale.

Here are some of the more interesting observations about specific nations.

China this year dropped to 20th position from 14th last year.

My two cents is that China is still overrated.

But I sadly concur that the trendline for Hong Kong is not overly encouraging.

While Hong Kong SAR came in at 5th, this is a far cry from 2nd which it enjoyed last year. The decline can be attributed to a decline in its economic performance, social turmoil in Hong Kong as well as the rub-on effect of the Chinese economy.

It’s worth noting that Brexit is helping the United Kingdom, which is exactly what I predicted.

The UK climbed from 23rd to 19th… One interpretation is that Brexit may have created the sentiment of a business-friendly environment in the making. The UK ranked 20th on the business efficiency measure, compared to 31st least year.

But I take no satisfaction in my predictions that Trump’s protectionism would backfire on the United States.

…For the second year in a row, the USA failed to fight back having been toppled from its number one spot last year by Singapore, and coming in at 10th …Trade wars have damaged…the USA.

In a column for Forbes, Stuart Anderson elaborates on America’s decline.

America used to be number one but not anymore, according to the 2020 rankings of the world’s most competitive economies from the Institute for Management Development (IMD) in Switzerland. The Trump administration’s trade policies are the primary reason given for why America fell from 2018, when it was ranked number one, and from 2019, when it was ranked number three. …Christos Cabolis, IMD’s chief economist and an author of the report, told Fortune that Trump’s trade policies are the main reason for the significant drop in American competitiveness. “One of the pillars of competitiveness is how open an economy is, and we measure that in different ways, from the perceptions of executives, to trade [statistics],” said Cabolis. The trade war Donald Trump initiated with China “brings some of the results we see in how the numbers of the U.S. went down,” he said.

Let’s close with a closer look at IMD’s estimates of what’s good and bad about the United States.

We get very good (though declining in this year’s ranking) scores for economic performance and infrastructure (suggesting, by the way, that we don’t need a new boondoggle package from Washington).

But we’re not quite as impressive when looking at business efficiency and we’re mediocre when measuring government efficiency.

For what it’s worth, I’m not optimistic about America’s trajectory. If Trump gets reelected, I don’t expect big developments in the policy areas where he’s good (taxes and red tape), but I wouldn’t be surprised to see new initiatives in the areas where he is bad (trade and spending).

Biden, meanwhile, has a very statist policy agenda. So if he gets elected, we have to cross our fingers that he doesn’t really believe in his Bernie-lite agenda.

P.S. It is possible, of course, for a nation to adopt additional bad policy and still climb in the rankings. All that’s required is for other nations to adopt an even-greater amount of bad policy. Needless to say, that’s not the ideal way to climb a few spots. Which is why we should consider absolute and relative measures of economic liberty.

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Like most libertarians, I support decentralization and federalism. Under the right circumstances, I’m even sympathetic to the idea of secession (hooray for Brexit!).

This is why I have no problem with a community based on voluntary socialism. History tells us that approach doesn’t work (largely for the reasons captured in this cartoon), but people should be free to try over and over again.

Which brings us to “CHAZ.”

For those who haven’t been following the news, protestors in Seattle (motivated in part by legitimate concerns about police misbehavior) have seized control of a neighborhood and declared it to be the “Capital Hill Autonomous Zone.”

Some people see CHAZ as an example of self-government based on a strange mix of libertarian impulses (pro-gun, for example) and leftist impulses (anti-cop, for example).

The Washington Post has a rather sympathetic report about the group, written by Gregory Scruggs.

For the past several days, Ochoa, 28, has been serving as an unarmed volunteer “sentinel,” or guard, in the protest zone. Ochoa, a self-described leftist libertarian recently furloughed from the Seattle International Film Festival, and other volunteers have been serving four-hour shifts to help to keep the peace. …Core to the zone is a vision of a self-governed community with no formal policing. Instead, volunteers, many of them avowed police abolitionists, have begun to organize their own safety force. …Volunteers say this work is a way to highlight what a city without police might look like. “We have a chance to really build something here, so I have a vested interest in defending that as a part of my community,” said Ochoa, who lives in the city’s Capitol Hill neighborhood. …Markinson describes himself as an anti-fascist, anti-racist community defense advocate. He is a gun owner… Markinson views Seattle’s ongoing experiment as part of a lineage of anarchist neighborhoods… a sentinel who gave his name as James Madison stood at the southern barricade with an AR-15 draped over his chest, as he has done on other nights. …“There are a few of us who are armed.” …a hand-painted sign approaching the barricades offers watchwords: “In a world without cops we must never again become the cops ourselves.”

If nothing else, CHAZ is anti-authority, at least if traditional city government is the definition of authority.

But is it a viable system?

Robert Tracinski, in an article for the Bulwark, discusses potential problems.

…the Capitol Hill Autonomous Zone, endearingly nicknamed CHAZ…is the product of anti-police protests in Seattle that led the mayor to order the abandonment of one of the city’s downtown police precincts, ceding a six-block area of Seattle’s downtown to the protesters, who have turned it into a kind of anarcho-socialist utopia, with free food, free music, no cops, and lots of peace and love, man. …CHAZ certainly set a record for socialist utopias when it comes to running out of food. Within the first day, they were already sending out the alarm: “The homeless people we invited took away all the food at the Capitol Hill Autonomous Zone. We need more food to keep the area operational…” I’ve checked to see whether this is parody, and as far as I can tell, it’s not. …Another area where they are well ahead of schedule for a socialist utopia is in putting up walls and establishing checkpoints with internal passports. …This leads us to the big question about the “autonomous zone”: Whose “autonomy” is it? Certainly, it’s not the autonomy of the people who actually live there, who did not invite the protesters and never had the opportunity to vote on whether they wanted to reject the protection of the Seattle PD and establish new protectors. …With leadership seemingly up for grabs, CHAZ is the scene of sporadic petty scuffles, which activists are asking people not to film because it might make them look bad. Yes, well, I’m sure the Minneapolis PD felt the same way. …My favorite description of CHAZ is from a Seattle Times article which says it has “mostly been peaceful.” That’s a favorite bit of journalistic spin. “Mostly peaceful” is how you describe something that’s violent when you don’t want the reader to draw that conclusion.

Tracinski certainly is correct that existing property owners haven’t consented to the new system.

And he’s probably correct in that the new form of authority in CHAZ may be even more arbitrary and unfair than the old system (time will tell).

But he only scratches the surface of the issue that is of greatest interest to me, which is whether CHAZ has a viable economic system.

Ideally, local businesses will be free to operate and to transact with the outside world. And if there are no taxes and nobody to enforce red tape, we might almost see an example of anarcho-capitalism.

For what it’s worth, I’m guessing Seattle bureaucrats intend to retroactively collect taxes and take other steps to make sure there is no long-run reduction in the burden of government for CHAZians.

What about in the short run? In a column for Spectator USA, Ben Sixsmith suggests that authorities should adopt a hands-off attitude and let CHAZ sink or swim.

A group of anarchists and leftists collected in Capitol Hill, known for its hipster and LGBT scenes, they have barricaded themselves into a small area and established an anarchic intentional community… Seattle’s aspiring revolutionaries had only just announced the creation of CHAZ, as a place in which progressives can live free of corporate consumerism and police violence, when a local rapper-cum-warlord named Raz Simone began stalking the place with an armed militia. …I believe that the state and federal authorities should leave them alone. If people are being raped and killed in CHAZ then the officials will have to get involved, of course, but otherwise they should be left to their own devices. …for radical leftists to establish their own territory is, frankly, refreshing. For years they have been insisting that the culture, communities, education, religious beliefs et cetera of their fellow citizens be transformed in accordance with their own idiosyncratic ideas. Everyone has had to conform with their progressive beliefs. The CHAZers? They aren’t trying to reshape America. They are trying to build a place of their own. How is that not preferable? …Of course, I think CHAZ will be an embarrassing failure. I suspect it will collapse in a heap of shortages, grievances and recriminations… If it all collapses of its own accord, then a lot of radical progressives are going to have a tough, useful lesson in the value of civilized institutions.

In other words, let’s allow CHAZ to be a test case.

If it adopts a bunch of leftist policies (which seems likely), then we’ll almost surely see another example of socialism failing, even when it’s voluntary.

Though I’m crossing my fingers that the CHAZians adopt a libertarian approach to economics.

Given that Seattle has a very left-leaning government, we then might finally get an example to disprove Jacob Leddy.

Sadly, I don’t think that will happen. The city’s crazy politicians will be more than happy to tolerate CHAZ if it’s a socialist experiment, but they’ll send in the cops if it morphs into a libertarian experiment.

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Libertarians believe in limited government for both moral reasons (government coercion is bad) and utilitarian reasons (nations with small government enjoy much higher levels of prosperity than countries with bigger governments).

But if small government is good, would no government be even better? That’s the core argument of so-called anarcho-capitalists or voluntaryists.

To understand this approach, let’s start with the video from Learn Liberty, featuring Professor Bryan Caplan of George Mason University.

And here’s a video from Reason featuring David Friedman.

You won’t be surprised to learn that I was very happy to hear him embrace jurisdictional competition toward the end of the interview (and I also agree with him that this is a reason to be skeptical about the European Union’s pro-centralization mindset).

But let’s stick with the main topic. Is anarcho-capitalism a good idea?

Defenders of the idea frequently make the point that it’s got to be better than what we have now.

Which is the message of this sarcastic meme.

But let’s take a more serious look at the topic.

At the risk of oversimplifying, there are three big questions that always get asked about how a society could exist with no government:

  • What to do about pollution?
  • What to do about crime?
  • And what to do about national defense?

David Friedman’s Machinery of Freedom is the classic tome on anarcho-capitalism.

First published in 1973, here’s what he says about pollution.

The pollution problem exists because certain things, such as the air or the ocean, are not property. Anyone who wishes to use them as garbage dumps is free to do so. If the pollution were done to something that belonged to someone, the owner would permit it only if the pollutor were willing to pay him more than the damage done. …The ideal solution is to convert unowned resources into property. One could, for instance, adopt the principle that people living along a river have a property right in the river itself and that anyone who lowers the value of the river to them by polluting it, without first getting their consent, is liable to suit. …Some things, such as air, are extraordinarily difficult to deal with in this way. …The simplest solution to such a paradox is to permit parties injured by air pollution to sue for damages—presumably in class actions, by many victims against many pollutors. I would not be able to shut down your blast furnace merely by proving that a sufficiently sensitive instrument could occasionally detect sulfur dioxide in my air. But, if the concentration were high enough to be offensive, I could sue you for the damage done. At present, pollution is ‘controlled’ by governments. … Who gets away with it depends not on real costs but on politics. If pollutors must pay for their pollution, however avoidable or unavoidable, we will rapidly find out which ones can or cannot stop polluting.

Here’s how Friedman argues that crime would be handled (by the way, there’s a 2015 book by Ed Stringham, Private Governance: Creating Order in Economic and Social Life, that takes a very rigorous look at the history and prevalence of private law).

Protection from coercion is an economic good. It is presently sold in a variety of forms—Brinks guards, locks, burglar alarms. As the effectiveness of government police declines, these market substitutes for the police, like market substitutes for the courts, become more popular. Suppose, then, that at some future time there are no government police, but instead private protection agencies. These agencies sell the service of protecting their clients against crime. Perhaps they also guarantee performance by insuring their clients against losses resulting from criminal acts. …In practice, once anarcho-capitalist institutions were well established, protection agencies would anticipate such difficulties and arrange contracts in advance. …In such a society law is produced on the market. A court supports itself by charging for the service of arbitrating disputes. Its success depends on its reputation for honesty, reliability, and promptness and on the desirability to potential customers of the particular set of laws it judges by. The immediate customers are protection agencies. But the protection agency is itself selling a product to its customers. …The most serious objection to free-market law is that plaintiff and defendant may not be able to agree on a common court. Obviously, a murderer would prefer a lenient judge. If the court were actually chosen by the disputants after the crime occurred, this might be an insuperable difficulty. Under the arrangements I have described, the court is chosen in advance by the protection agencies. There would hardly be enough murderers at any one time to support their own protective agency, one with a policy of patronizing courts that did not regard murder as a crime.

Though even Friedman is uncertain how national defense could be privatized.

National defense has traditionally been regarded, even by believers in a severely limited state, as a fundamental function of government. … the usual solution is to use government force— taxation—to make those benefited (and others) pay… national defense—defense against nations—must defend areas of national size, whether or not they contain nations. It is thus a public good, and one with a very large public. …The cost of a minimal national defense is only about $20 billion to $40 billion a year. The value to those protected is several hundred billion dollars a year. National defense is thus a public good worth about ten times what it costs; this may make it easier, although not easy, to devise some noncoercive way of financing it. … a national defense agency might raise enough money to finance national defense without taxation. Obviously, a system that depends on local agencies evolved for a different purpose or a ramshackle system financed by charity, passport sales, and threats to Hawaiian insurance companies is economically very imperfect. So is a system financed by coercion and run by government. …What will I do if, when all other functions of our government have been abolished, I conclude that there is no effective way to defend against aggressive foreign governments save by national defense financed by taxes—financed, in other words, by money taken by force from the taxpayers? In such a situation I would not try to abolish that last vestige of government. I do not like paying taxes, but I would rather pay them to Washington than to Moscow—the rates are lower. I would still regard the government as a criminal organization, but one which was, by a freak of fate, temporarily useful.

For what it’s worth, anarcho-capitalism may be moving from theory to reality.

At least in small doses.

I’ve previously written about Liberland, a tiny would-be independent entity on some unclaimed land between Serbia and Croatia.

There’s also the idea of libertarian-themed floating communities that would be independent of any government.

The U.K.-based Daily Mail wrote about the idea back in 2017.

Stunning concept images for the world’s first first floating nation have been released as part of a project bankrolled by PayPal founder Peter Thiel. The plans will see the seabound city-state, complete with a handful of hotels, homes, offices, restaurants and more, built in the Pacific Ocean off the island of Tahiti… The scheme is the creation of the nonprofit Seasteading Institute, which hopes to ‘liberate humanity from politicians’. The radical plans could see the creation of an independent nation that will float in international waters and operate within its own laws. …the fantasy looks to be coming closer to reality with companies, academics and architects from the Seasteading Institute working on a prototype… Joe Quirk, president of the Seasteading Institute, said he wants to see ‘thousands’ of rogue floating cities by 2050, each of them ‘offering different ways of governance’. …’We can create a huge diversity of governments for a huge diversity of people.’ …The Institute claims it will ‘give people the freedom to choose the government they want instead of being stuck with the government they get’. If inhabitants disagree with the city’s government, they could paddle their colony to another city, forcing governments to work to attract citizens.

It’s worth noting, though, that a seasteading community was supposed to start this year, and that deadline apparently won’t be met.

Doesn’t mean it can’t happen, or that it won’t happen, but we’re still waiting to see if it actually happens and how well it will work.

There’s also the idea of anarcho-capitalism in small pieces.

Such as private police, as happened in Sharpstown, Texas.

One thing that holds many Libertarians back from converting to free-market anarchism is the idea of the police force. Many libertarians believe that one of the few functions that the government should have is the provision of police within society. …One town, though, did privatize the police… Sharpstown, Texas, is not an actual town, but rather a community. They purchase services from S.E.A.L. Security Services, LLC, a completely private firm that provides policing services. The results have been quite astounding. Their director of operations, James Alexander, gave a rundown of the success of the firm… In the 20 months leading up to February of 2015, S.E.A.L. successfully brought crime down 61%. Alexander’s numbers have been disputed, though, by Jim Bingham, president of the Sharpstown civic association. He claims that Alexander’s numbers are unbacked, and says instead that crime (particularly burglaries) went down about 32% over two years. …The people who work for the firm are private individuals being privately funded. They are subject to the same rules and regulation that go for regular people, meaning that they cannot murder or steal. Public police, on the other hand, are able to cite “stress” as an excuse for murdering unarmed black men and steal astronomical amounts of money from citizens in DUI checkpoints and through civil asset forfeiture.

This is a very appealing idea, especially given the serious problems we’re seeing with government-operated police departments.

Let’s close with some anarcho-capitalist humor (yes, that is a genre). We’ll start with a Hitler parody about seasteading.

Here’s an example of anarcho-capitalist humor from Reddit’s libertarian page.

Here’s a related example from Reddit.

Last but not least, we have an explanation of taxation and consent.

In the interests of balance, here’s a meme making fun of anarcho-capitalists.

And I’ll close with a takeoff on the old song, There’s no business like show business.

A couple of the above memes are based on the notion that taxation is based on coercion, or even theft.

To be fair, recognizing that taxation is coercive doesn’t make someone an anarcho-capitalist.

My two cents is that taxation is coercive, but I’m nonetheless a traditional limited-government libertarian. I’d like to believe that that the anarcho-capitalists are correct, but I haven’t been convinced.

That being said, I believe in a big tent. As far as I’m concerned, let’s all agree to get rid of the 90 percent of government that we all recognize is counterproductive. Once we get to that stage, then we can squabble over how much of the rest to eliminate.

P.S. Though the said reality is that we’ll almost surely instead spend the rest of our lives fighting to keep government from grabbing ever-more control over the economy and its output.

P.P.S. If you want to see where you rank, there are several online tests and quizzes.

For what it’s worth, the Political Sextant Quiz says I am close to being an anarcho-capitalist, though my closest match is minarchism.

And if you’re willing to answer 64 questions, I very much recommend Bryan Caplan’s Libertarian Purity Test. The good news is that I got a 94. The bad news is that the top score (which definitely would qualify someone as an anarcho-capitalist) is 160.

P.P.P.S. If you enjoyed the Hitler parody above (and it’s always a good idea to mock genocidal socialists), here are other examples.

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As indicated by one of my columns last week, I’m a big believer in federalism.

Indeed, I’ve even proposed that Washington shouldn’t operate any social programs. No food stamps. No Medicaid. No redistribution programs of any kind.

Such programs, to the extent they should exist, should be handled by state and local governments.

The welfare reform legislation under Bill Clinton is an example of how to move in the right direction. A top-down program from Washington was turned into a block grant, and then state and local governments got the freedom to choose policies that might actually help the poor become self-sufficient instead of being trapped in dependency.

Not pure libertarianism, of course, but still an example of progress. And we got good results.

Given this track record, I was very interested to see a column in today’s New York Times by Ezekial Emanuel and Rahm Emanuel on the topic of federal-state fiscal relations.

Medicaid and unemployment insurance…need permanent institutional reform and modernization. …the next stimulus package…should then be…a…federal-state Grand Bargain would solve festering problems in health care and unemployment assistance Years of political experience show that no matter how imperative and sensible, a policy’s chances of success are diminished unless it delivers political benefits. This bargain would create a victory for both parties.

This sounds intriguing. And potentially even desirable.

There’s no question, after all, that the current Medicaid system desperately needs reform. And the unemployment program also is a mess, luring people into joblessness.

So what exactly are the Emanuel brothers proposing? What is the “Grand Bargain” that offers benefits for both sides?

Sadly, it turns out that their bipartisan rhetoric is just an excuse for bigger government.

The bargain, which we call American Modernization Initiative…the federal government to assume the costs and administration of Medicaid and unemployment insurance, the states would have to agree to use freed up resources — a quarter of a trillion dollars per year — to invest in education and infrastructure. …The Grand Bargain is not only good policy, but good politics. …Governors would no longer be responsible for large programs… With the American Modernization Initiative, the constant, bitter battles over cutting state programs to fund growing Medicaid costs will disappear.

Yes, you read correctly. Their idea of a “bargain” is that the federal government agrees to spend more money so that that state governments will then have the ability to spend more money.

Even Republicans aren’t stupid enough to go along with that kind of deal.

So I’ll propose an alternative.

According to Chris Edwards, there are now nearly 1,400 programs involving some sort of link or overlap between the federal government and state governments.

The biggest of these programs is Medicaid, accounting for 56 percent of the overall spending.

So why not give the states a choice: They either take full responsibility for Medicaid – including the financing after some transition period. Or they take responsibility for the other 1,385 programs (probably more by now) programs – assuming, again, they are responsible for the financing after a transition period.

Regardless of their choice, the end result would be a system where there’s a reasonably significant shift toward federalism. And perhaps we would add a bit of clarity to the blurry line that currently sets the boundary between what’s Washington’s job and what’s the role of state governments.

And maybe, just maybe, there wouldn’t be as much wasteful leakage as we have now.

P.S. For what it’s worth, there’s strong academic evidence that decentralized governments produce better outcomes.

P.P.S. Federalism doesn’t only apply to income-redistribution programs. We also should eliminate any role for Washington in areas like education and transportation.

P.P.P.S. Here’s the data on the history of redistribution spending in developed nations.

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Assuming the Democrats also win the Senate along with the White House, we may be poised to take a big leap in the direction of bigger government and more statism (which is why I explained a Clinton victory in 2016 would not have been the worst possible outcome).

As such, we may as well enjoy some laughs about our potential socialist future.

We’ll start with a creative reinterpretation of a scene from King of the Hill.

Looks like we’ll have to figure out other ways of rescuing young people from socialism.

Here’s a clever tweet from @ClassicLiberal.

Having visited Moscow shortly after the collapse of the Soviet Union, I can assure you that socialist economies do a terrible job of producing goods that consumers actually value.

I’ve written many times about people on the left not understanding the real definition of socialism (government ownershipcentral planning, and price controls), so this next meme appealed to me.

And it also will appeal to me left-leaning friends since it shows that some folks on the right also don’t understand that the debate over socialism is not the same as the debate over redistributionism.

Last but not least, here’s the humorous version of my full-socialism-vs-full-stomachs column.

Very similar to the last memes in this column and this column.

Though, given what’s happening in Venezuela, we probably shouldn’t laugh.

P.S. For more examples of socialism humor, here’s a link to my collection.

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If you want to understand how government really works, learn about “public choice.”

This is the common-sense theory that politicians and other people in politics often make decisions based on self interest, and it does a very good job of explaining why we get so many short-sighted and misguided policies from the crowd in Washington.

Public choice is especially insightful when compared to the naive view that politicians are mostly concerned with helping ordinary people.

The theory also tends to generate some pithy concepts, such as “stationary bandit” and “predatory government.”

Another example is “grabbing hand,” which describes how intervention usually is a vehicle for helping government rather than helping people.

Today’s column is going to be about industrial policy (the incrementalist version of central planning) as an example of this phenomenon.

Specifically, we’re going to look at a new academic study that measured the impact of government control on the performance of companies in China.

Written by Marzieh Abolhassani, Zhi Wang, and Jakob de Haan, it’s a test of whether government is a “helping hand” or “grabbing hand.”

We’ll start with their description of the study’s methodology.

…the impact of government involvement on the financial performance of listed firms in emerging economies has received scant attention. This paper examines the relationship between government control of firms and firms’ financial performance for the case of China. …we measure government control by the fraction of outstanding shares held either directly or indirectly by the government. …We classify firms as state controlled whenever the government is the shareholder with the largest number of shares held either directly or indirectly through pyramid structures.

Here are the key results.

Our empirical results suggest that firm performance is generally lower for firms where the government is the shareholder with the largest number of (direct and indirect) shares. Specifically, the return on assets, the return on equity and the market-to-book ratio are, on average, 1.3%, 2.0% and 8.2% lower for government-controlled firms. Both central and local government control is undermining firm performance. These findings provide support for the ‘grabbing hand’ theory of the government. … we make sure the estimates are not driven by differences in the size, age and leverage of the firms. Importantly, we also control for industry-region-year fixed effects, and therefore compare firms within the same industry in the same province during the same year, further enhancing the credibility of our estimates. …These results provide support for hypothesis and to theories conjecturing that management of firms controlled by the government have fewer incentives to maximize profits and shareholder value.

For those who like the wonky details, here are the key findings from their number crunching.

So what’s the bottom line?

Their conclusion tells us everything we need to know.

The results reported in this study broaden our understanding of the role of government influence on firm performance. …Our empirical results indicate that government-controlled firms have a worse financial performance than non-government-controlled firms. …These conclusions support the ‘grabbing hand’ theory proposed by Shleifer and Vishny.

So why do these results matter?

From an economic perspective, it’s further evidence that government intervention leads to a misallocation of resources. And that inevitably means living standards will be lower than they would be if markets were allowed to function.

A recent article from Foreign Affairs suggests enormous potential benefits if China ended industrial policy.

…state-owned enterprises… These inefficient behemoths control nearly $30 trillion in assets and consume roughly 80 percent of the country’s available bank credit, but they contribute only between 23 and 28 percent of GDP. …The economist Nicholas Lardy has estimated that genuine economic reforms, in particular those targeting state-owned enterprises, could boost China’s annual GDP growth by as much as two percentage points in the coming decade.

Very similar to what I’ve written, so let’s hope that China returns to the policy of economic liberalization that led to genuine progress.

I’ll close with the depressing observation that there are people in Washington who are now agitating for industrial policy in the United States.

Needless to say, there’s zero reason to think that intervention from Washington will produce results that are better than intervention from Beijing.

P.S. It doesn’t matter if Republicans are trying to pick winners or Democrats are trying to pick winners. When politicians intervene, the economy suffers, which means less prosperity for ordinary people.

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There’s much to dislike about Keynesian economics, most notably that it tells politicians that their vice – buying votes by spending other people’s money – is somehow a virtue.

Advocates of Keynesianism also can be very simplistic, sometimes falling victim to the “broken window fallacy” described in this short video.

Bastiat is perhaps most well-known for his insight on this fallacy.

He explained that a good economist was capable of recognizing the difference between the seen and unseen (if you want to be wonky, the difference between direct effects and indirect effects).

Sadly, there are many people today who don’t grasp this distinction.

You probably won’t be surprised to learn that Paul Krugman is in this group.

And now we have a new member of the club. In a piece for Axios, Felix Salmon reveals he still believes in this primitive form of Keynesian economics.

There’s one big non-political reason why luxury stores were targeted by looters: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live, looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

To be fair, Salmon would have been correct (though immoral) if he said looting had a positive effect on looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).

Let’s wrap up with a cartoon on the topic.

P.S. If you like humor about Keynesian economics, here’s the place to start.  You’ll find additional material herehere, here, here, and here.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. To be fair to Keynes, he wrote that taxes should never exceed 25 percent.

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One week ago, I wrote about how the welfare state creates high implicit marginal tax rates, thus making it difficult for low-income people to climb out of poverty and dependence.

But that’s not the only way that poor people are victimized by big government.

Another very serious problem is the way local and state governments impose a plethora of fees, fines and charges that can wreck the lives of the less fortunate.

In a column for the New York Times, Professor Bernadette Atahuene of the Chicago-Kent College of Law opines on the problem of greedy local governments.

I coined the term “predatory cities” to describe urban areas where public officials systematically take property from residents and transfer it to public coffers… Ferguson, Mo., is one well-known predatory city. As a 2015 Department of Justice report showed, the police in Ferguson systematically targeted African-Americans and subjected them to excessive fines and fees. …local courts issued arrest warrants for unpaid fines and fees… Minor offenses, like parking infractions, resulted in jail time… The Ferguson Police Department and courts prioritized revenue raising over public safety, transforming Ferguson into a predatory city.

Professor Atahuene cites the pernicious policies of New Orleans and Washington, D.C. (and note that asset forfeiture is one of the problems).

New Orleans is another. …Orleans Parish Criminal District Court’s primary source of funding was the fines and fees it collected. This created a structural incentive for judges to aggressively and erroneously pursue payment from those with no ability to pay, turning New Orleans into a predatory city. Washington, D.C., is yet another predatory city. While civil asset forfeiture laws allow the police to seize property that they suspect was involved in a crime, in Washington, D.C., property owners had to post bonds of up to $2,500 in order to challenge the seizure. If the owner could not raise money in time, the D.C. Police Department sold the property, and the money went into its annual budget. In a two-year period, the Police Department made $4.8 million in profit by seizing money from over 8,500 people as well as seizing 339 vehicles.

Every decent human being should get upset about the grotesque way that politicians are mistreating their residents.

Especially since poor people are being disproportionately victimized.

By the way, it appears that Professor Atahuene is not a libertarian. She wants Congress to approve a big bailout, based on the theory that state and local politicians will be less likely to engage in what I’ve called “rapacious revenue-raising tactics” if they get big buckets of money from Uncle Sam.

Needless to say, I think that would be a mistake.

But I don’t think someone needs to agree with me on everything, or even most things, if we can periodically find common ground on proposals that would improve the lives of people (not just on the need to curtail greedy local governments, but also on issues such as over-criminalization and police unions).

P.S. I wonder if there would be fewer petty fines, fees, and charges if they were levied on the ability to pay, thus making higher-income people more sensitive to the problem?

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There are plenty of people on the left who write serious and substantive articles about fiscal policy. For instance, I strongly disagree with many of the policy prescriptions from the IMF and the OECD, but those international bureaucracies are reasonably rigorous with data.

Heck, they even use real data when they’re being dishonest.

Some people, though, churn out analysis that is utterly disconnected from reality. I’m even thinking of creating a Fiscal Fantasyland Club to commemorate their fact-deprived writings.

  1. In a column for the Washington Post, Dana Milbank blamed the “disastrous philosophy” of “anti-government conservatism” for leaving the federal government without the resources to fight the coronavirus.
  2. In an article for the Atlantic, George Packer told readers that the federal government screwed up because it has been subjected to “steady defunding” by right-wing ideologues intent on “squeezing it dry.”
  3. Another columnist for the Washington Post, Dan Balz, claims that the botched response to coronavirus was caused by “underinvestment” and “hollowing out” of the federal budget.

The reason we may need a special club (akin to my collection of “Poverty Hucksters“) is that all of these writers are wildly wrong.

Even a cursory look at budget data confirms that the federal government has been getting bigger over time.

Much bigger.

As such, only someone who is completely ignorant or totally dishonest is capable of writing an article based on the notion that there have been reductions in the burden of federal spending.

If I create this club, I know who will be fourth member.

Writing for the Bulwark, Richard North Patterson argues that President Trump’s personal shortcomings are somehow connected to Reagan-type opposition to big government.

He starts with one of my favorite quotes from The Gipper and then tells us that this type of hostility to statism is no longer appropriate or desirable.

In 1986, Ronald Reagan cheerfully gibed: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Then it seemed amusing. But 34 years later, the convergence of COVID-19 and a racial conflagration makes Reagan’s quip sound myopic. …Only government can ensure the safety of our food and drugs and protect our natural environment. And government can help navigate our racial fissures, and provide the economic and public health interventions indispensable to combating a deadly pandemic.

Given that Washington’s response to the coronavirus has been spectacularly incompetent, well beyond what even libertarians would have predicted, it’s remarkable that Patterson thinks this is a moment in time when people should embrace big government.

And let’s not forget that today’s racial unrest was triggered by government misbehavior, enabled by corrupt deals between local politicians and government employee unions.

But the real problem with Patterson’s rhetoric is that he seems to assume that an argument for some government is the same as an argument for lots of government.

He’s obviously not familiar with the Rahn Curve, which is based on the insight that some government may be good for growth (assuming the outlays are for core public goods) but that lots of government (particularly when spending is for consumption and redistribution) is bad for growth.

To be fair, I understand why Patterson, who is mostly known for being a very successful novelist, isn’t familiar with the academic research on the growth-maximizing size of government.

But since he’s decided to pontificate on these issues, he should feel an obligation to know some basic data.

For instance, he’s a wealthy man and presumably has traveled the world. Hasn’t he noticed that nations with big governments don’t do a better job of providing public goods – even if we use an expansive concept of what government should be doing?

Let’s look at some more of his article.

Patterson not only rejects the notion of smaller government, he seems to embrace bigger government.

What was once a philosophical preference for limited government has degenerated into phobia. “Long before Trump,” GOP strategist Stuart Stevens observes, “the Republican Party adopted as a key article of faith that more government was bad. But somewhere along the way, it became ‘all government is bad.’ Now we are in a crisis that can be solved only by massive government intervention.” …Witnessing so much death and disturbance, one cannot but ponder how poorly Reagan’s casual nostrum has aged. Farhad Manjoo nails it: “The most comforting words I can think of now, amid so much uncertainty, chaos and confusion, are these: ‘I’m from the government, and I’m here to help.’”

There’s a lot of nonsense in those few sentences. Regarding Manjoo’s quote, I’ll simply repeat my earlier observation about how the federal government has hindered rather than helped the fight against the coronavirus.

The quote from Stuart Stevens is even stranger, at least the the latter part, because it is so completely contrary to real-world data.

While it is true that Reagan briefly reoriented Republicans and did a good job of controlling spending while he was in office, every other Republican in recent history has been a big spender.

They’ve even increased domestic spending at a faster rate than Democratic presidents.

Yet Stevens wants people to believe that’s the track record of a party that thinks “all government is bad.”

I also want to debunk the notion that there’s been a “decades-long gutting of government,” as asserted in the subtitle of Patterson’s article.

Here’s a chart that I shared back in April, which shows that federal spending has tripled since 1980 – and that’s after adjusting for inflation.

If you read Patterson’s entire article, you’ll find that he mostly focuses on President Trump’s chaotic management of the executive branch.

Since I’ve gone on TV and referred to Trump as being akin to the crazy uncle you deal with during family holidays, I’m certainly not going to argue with his criticisms of the White House’s governing style.

But surely it should be possible to criticize the president without relying on make-believe budget analysis.

P.S. I wonder if Patterson and other members of the Fiscal Fantasyland Club have been tricked into thinking that there have been budget cuts.

P.P.S. If Patterson decides to learn and use real budget data, I hope he’ll join me in criticizing Trump for being a big spender.

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As part of my recent presentation to IES Europe, here’s what I said (and what I’ve said many times before) about the relationship between economic policy and national prosperity.

My remarks focused in part on the difference between absolute economic liberty and relative economic liberty.

  • The absolute level of economic liberty is the degree to which a nation relies on markets or statism (see, for instance, the Fraser Institute’s Economic Freedom of the World).
  • The relative level of economic liberty is a measure of whether one country is more market-oriented than another country (basically a measure of national competitiveness).

Understanding these two concepts explains why it is possible to criticize nations in North America and Western Europe for having too much government while also recognizing that those same nations tend to have better policies than most countries in other parts of the world.

An obvious example is Denmark. It certainly has some foolish and misguided government policies, but it is very pro-market when compared to the 90 percent of nations that have even lower levels of economic liberty (a distinction that Bernie Sanders has never grasped).

The obvious takeaway is that economic liberty matters, regardless of whether we’re looking at absolute levels or relative levels.

During my remarks, the audience got to see a two-question challenge, which asks our friends on the left to give an example of their dirigiste policies generating good economic outcomes.

But I’ve never been happy with the clunky wording of that challenge (just as I wasn’t happy with the original wording of fiscal policy’s Golden Rule).

So here’s a new version, which I’m now calling “The Never-Answered Question.”

I frequently unveil this question during debates.

And it’s quite common that my opponent will claim Sweden.

But as I noted in the above video clip, Sweden became a rich nation when government was very small. It didn’t have an income tax until 1902, and the welfare state was tiny until the 1960s. And I then explain that Sweden’s economic performance has been inversely correlated with the size and scope of government.

Unsurprisingly, the same is true for every other prosperous country in Europe and North America.

The bottom line is that my leftist friends will never successfully answer this question.

P.S. When considering the second part of The Never Answered Question, I don’t want a cherry-picked one- or two-year period. I want several decades of data, so we can be sure of a real trend. Much as I’ve done when making comparisons.

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Last week, I participated in a webinar with IES Europe. The program covered a wide range of issues, including tax competition, Social Security reform, and the recipe for national prosperity.

Here’s what I said on the topic of federalism.

To add some hard data to the discussion, let’s compare the degree of fiscal decentralization in the United States in both 1902 and 2019, based on numbers from the Census Bureau (click on Govt_Finances) and the Office of Management and Budget (click on Table 14.3).

As you can see from the chart, Washington now accounts for a much bigger share of overall government spending.

By the way, these numbers should not be misinterpreted.

There’s been no reduction in the burden of state and local government outlays. Indeed, there’s been a steady increase in such spending, even after adjusting for inflation.

But the federal government has grown far more rapidly.

Indeed, the fiscal history of the United States is a sad story about the loss of almost all constraints and limits that America’s Founders put in the Constitution in hopes of controlling the size and scope of Washington.

The bottom line is we now have much bigger government and it’s more remote because of centralization.

I mentioned Switzerland in the latter part of my answer.

Here’s the data comparing Switzerland and the United States. As you can see, Switzerland has been more successful in retaining genuine federalism.

Indeed, the two countries are mirror images, with nearly 2/3rds of government spending in the U.S. coming from Washington and nearly 2/3rds of government in Switzerland taking place a the level of cantons and municipalities.

P.S. Here’s what scholars from the Austrian School have said about federalism.

P.P.S. Here’s my two cents on federalism in the context of issues such as welfare, natural disasters, transportation, coronavirus, infrastructure, and Medicaid,

P.P.P.S. Because there’s strong evidence that decentralization produces better outcomes, I’m even willing to accept bad examples of federalism.

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Hardly anybody noticed because the nation has been focused on protests about police misbehavior, but Joe Biden officially clinched the Democratic nomination this past week.

And he’s now comfortably ahead in the political betting markets as well as public polling.

If Biden wins in November, what does that mean for the nation’s economic policy?

According to folks on the left, a Biden presidency means bigger government and more statism.

For instance, opining for the New York Times, Jamelle Bouie applauds Biden’s leftist agenda.

…if the goal is to move America to the left…then a Biden candidacy…represents an opportunity. …If Biden goes on to win the White House, there’s real space for the pro-Sanders left to work its will on policy. …It can fulfill some of its goals under the cover of Biden’s moderation, from raising the minimum wage nationally to pushing the American health care system closer to single-payer. …Biden…is a creature of the party. He doesn’t buck the mainstream, he accommodates it. He doesn’t reject the center, he tries to claim it. …the center of the Democratic Party as far left as it’s been since before Ronald Reagan, then Biden is likely to hew to that center, not challenge it.

His colleague at the NYT, Michelle Goldberg, is similarly enthused about the prospects for bigger government under a Biden Administration.

Biden’s proposals go far beyond his call for a $15 federal minimum wage — a demand some saw as radical when Sanders pushed it four years ago. While it’s illegal for companies to fire employees for trying to organize a union, the penalties are toothless. Biden proposes to make those penalties bite and to hold executives personally liable. …should Biden become president, progressives have the opportunity to make generational gains. …To try to unite the party around him, he’s making serious progressive commitments. …he’s moving leftward. Biden recently came out for tuition-free college for students whose families earn less than $125,000. He endorsed Elizabeth Warren’s bankruptcy plan…His climate plan already went beyond any of Barack Obama’s initiatives, and he’s pledged to make it even more robust.

According to (supposedly) neutral analysts, a Biden presidency means bigger government and more statism.

In an article for Newsweek, Steve Friess discusses Biden’s shift to the left.

Being stuck running for the presidency from the basement of his home in Wilmington, Delaware, had given the former vice president a lot of time to think, he told them, and he wanted bigger ideas. Go forth, he urged his financial brain trust, and bring back the boldest, most ambitious proposals they’d ever dreamed of to reshape the U.S. economy… Biden began issuing a raft of new proposals that move his positions closer to the progressive wing of the Democratic Party, with a promise to unveil an even more transformative economic plan this summer. …It’s a yes to adding $200 a month to Social Security benefits and lowering the qualifying age for Medicare from 65 to 60. Yes to trillions in new spending, yes to new regulations on banks and industry, yes to devil-may-care deficits. …the leader he most often invokes—in interviews, in public addresses, on his podcast—is no longer Barack Obama but Franklin Delano Roosevelt. …Biden has already made a series of significant leftward policy shifts since effectively sewing up the nomination in March.

Perry Bacon, in a piece for fivethirtyeight, analyzes Biden’s statist agenda.

…if Biden is elected in November, the left may get a presidency it likes after all…if American politics is moving left, expect Biden to do the same. …Biden’s long record in public office suggests that he is fairly flexible on policy — shifting his positions to whatever is in the mainstream of the Democratic Party at a given moment. …Biden is likely to be a fairly liberal president, no matter how moderate he sounded in the primaries. …Biden’s 2020 primary platform…adopted fairly liberal policies…more liberal than his pre-campaign record suggested. The Democratic Party is more liberal now than it was when Bill Clinton took office, or even when Obama was inaugurated, and Biden’s platform reflects that shift. …Biden and his advisers are now…rolling out more liberal policy plans, speaking in increasingly populist terms and joining forces with the most progressive voices in the party. …“Joe Biden is running on the most progressive platform of any Democratic nominee in recent history. But given the pandemic, he has to look at the New Deal and Great Society traditions in the Democratic Party and go bigger,” said Waleed Shahid, the communications director for Justice Democrats, a left-wing group aligned with Ocasio-Cortez.

Writing for the Washington Post, Sean Sullivan documents Biden’s leftward drift.

Joe Biden sought to appeal to liberal supporters of Sen. Bernie Sanders on Thursday with a pair of new proposals to expand access to health care and curtail student loan debt. Biden proposed lowering the eligibility age for Medicare coverage from 65 to 60. He also came out in favor of forgiving student loan debt for people who attended public colleges and universities and some private schools and make up to $125,000 a year. …In another peace offering to liberals, Biden proposed paying for his student debt plan by repealing a provision in the recent coronavirus legislation that Congress passed and President Trump enacted. “That tax cut overwhelmingly benefits the richest Americans and is unnecessary for addressing the current COVID-19 economic relief efforts,” he wrote… Biden endorsed a bankruptcy plan put forth by Sen. Elizabeth Warren (D-Mass.), another rival who ran to his left.

And, according to more market-friendly sources, a Biden presidency means bigger government and more statism.

The Wall Street Journal editorialized about Biden’s leftist agenda.

Already Medicare is scheduled to be insolvent by 2026. …In 1970, life expectancy in the U.S. was 70.8. Now it’s about eight years longer. By lowering the age of eligibility instead, Mr. Biden would begin shifting Medicare’s focus from seniors to everybody else. Don’t worry about the funding, he insists, since the extra costs would be “financed out of general revenues.” …Mr. Biden’s new left turn on student loans is equally sharp. …Cancel all federal undergraduate tuition debt for many borrowers who went to public schools, including four-year universities. This forgiveness would be given to anyone who earns $125,000 a year or less. …How much would it cost? There’s no explanation.

Jeff Jacoby analyzed Biden in a column for the Boston Globe.

Biden…is running on a platform far more progressive — i.e., far less moderate — than any Democratic presidential nominee in history. …on issue after issue, Biden has veered sharply from Obama’s path. On health insurance, for example, Obama rejected a public option as part of the Affordable Care Act and repeatedly stressed the importance of maintaining private coverage. But Biden favors a public option open to everyone… Biden supports government-funded health care even for unauthoritzed immigrants, something Obama never came close to proposing. …No Democratic presidential nominee ever endorsed anything like the radical Green New Deal, with its price tag in the tens of trillions of dollars and its goal of eliminating the use of all fossil fuels. But Biden does. No Democratic nominee ever called for a national minimum wage of $15 an hour. But Biden does. …Sanders may not end up on the November ballot, but it will unmistakably reflect his influence. For he and his band of progressives have pushed their party to the left with such success that even the “moderate” in the race would be the most liberal Democrat ever nominated for president.

Here’s some of what Peter Suderman wrote for Reason.

Biden is a moderate compared to Sanders, but he is notably to the left of previous Democratic standard-bearers. …Biden has proposed a significant expansion of the Affordable Care Act that his campaign estimates would cost $750 billion over a decade… Biden has proposed a $1.7 trillion climate plan that is similar in scope to many candidates on his left and a $750 billion education plan… He favors an assault weapons ban and other gun control measures, a national $15 minimum wage, and a raft of subsidies, loans, and other government-granted nudges designed to promote rural economies. Has proposed $3.4 trillion worth of tax hikes—more than double what former Secretary of State Hillary Clinton proposed when she ran in 2016. …Biden’s leftward drift is thus the party’s leftward shift…, a big-government liberal, a candidate whose current incarnation was shaped and informed by progressive politics, if not wholly captured by them.

The Tax Foundation examined the former Vice President’s tax plan and the results are not encouraging.

Former Vice President Joe Biden would enact a number of policies that would raise taxes, including individual income taxes and payroll taxes, on high-income individuals with income above $400,000. …According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.51 percent over the long term. …The plan would shrink the capital stock by 3.23 percent and reduce the overall wage rate by 0.98 percent, leading to 585,000 fewer full-time equivalent jobs. …On a dynamic basis, we estimate that Biden’s tax plan would raise about 15 percent less revenue than on a conventional basis over the next decade. …That is because the relatively smaller economy would shrink the tax base for payroll, individual income, and business income taxes. …The plan would lead to lower after-tax income for all income levels.

Here’s a table summarizing the findings.

So what does all this mean?

At the risk of oversimplifying, Biden unquestionably would move tax policy to the left (he actually said higher taxes are patriotic, even though he engages in aggressive tax avoidance), and the same thing would happen on regulatory issues.

His spending agenda is terrible, though it’s worth noting that Democrat presidents usually don’t spend as much as Republicans (with the admirable exception of Reagan).

And, to be fair, there’s no way he could be as bad on trade as Trump.

Let’s close by looking at some hard data. Back in January, I sifted through the vote ratings prepared by the National Taxpayers Union and the Club for Growth and showed that Biden was not a Bill Clinton-style moderate.

I went back to those same sources an put together this comparison of Biden and some other well-known Democrats (scores on a 0-100 scale, with zero being statism and 100 being libertarian).

In both measures, he’s worse than Crazy Bernie!

Moreover, a lifetime average of zero from the Club for Growth is rather horrifying. His average from the National Taxpayers Union isn’t quite so bad, but the trend is in the wrong direction. Biden’s post-2000 average was less than 10, while his score for the preceding years averaged more than 23.

That being said, my two cents on this topic is that Biden is a statist, but not overly ideological.

His support for bigger government is largely a strategy of catering to the various interest groups that dominate the Democratic Party.

The good news is that he’s an incrementalist and won’t aggressively push for a horrifying FDR-style agenda if he gets to the White House.

The bad news is that he will probably allow Nancy Pelosi and other statist ideologues to dictate that kind of agenda if he wins the presidency.

P.S. My collection of Biden-oriented humor is rather sparse (see here, here, here, and here), an oversight that I’ll have to address in the near future.

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Do you want to understand the International Monetary Fund’s (IMF) pernicious role in the global economy?

Here’s a simple analogy that will tell you everything you need to know. Let’s say you have two friends.

  • Friend A, who continuously gets in financial trouble because of compulsive gambling and alcoholism.
  • Friend B, who continuously gets in financial trouble because he loses money by giving loans to Friend A.

Assuming you’re a good person, you will scold both your friends for irresponsible and imprudent behavior. And you certainly won’t aid and abet their recklessness.

But if that’s your attitude, you’ll never get a lucrative (and tax-free!) job at the IMF.

That’s because the role of the IMF is enabling bad fiscal policy by governments (i.e., Friend A) and then providing bailouts so that the institution that lend money to those governments (i.e., Friend B) are insulated from their foolish choices.

To make matters worse, the IMF usually imposes “conditionality” on bailouts so that governments – for all intents and purposes – are bribed or extorted to impose higher taxes. Sort of akin to giving Friend A (the alcoholic gambler) access to more cash.

All of which explains why we see a lather-rinse-repeat cycle of nations making the same mistakes over and over again.

It’s so predictably destructive that I was only half joking when I told an audience in El Salvador that they should ban all flights containing IMF bureaucrats.

In an article for National Review, Professor Steve Hanke explains why the IMF should be shuttered. But what makes his column especially interesting is that he digs into the history of the bureaucracy.

We learn, for instance, that the IMF supposedly existed to help countries abide by the post-WWII system of fixed exchange rates. So when that system disappeared in the early 1970s, the IMF should have gone away as well.

Established as part of the 1944 Bretton Woods agreement, the IMF was designed to be primarily responsible for extending short‐​term, subsidized credits to countries experiencing balance‐​of‐​payments problems under the post-war, international, pegged‐​exchange-rate system. In 1971, however, Richard Nixon, then U.S. president, closed the gold window, triggering the 1973 collapse of the Bretton Woods agreement and, logically, the demise of the IMF. It was then that the IMF should have been mothballed.

Like any self-interested bureaucracy, the IMF figured out new reasons to exist.

And new reasons to expand.

The oil crises of the 1970s were the first to allow the IMF to reinvent itself. Those shocks were deemed to “require” more IMF lending to facilitate, yes, balance‐​of‐​payments adjustments. …with the onset of the Mexican debt crisis, more IMF lending was “required” to contain the crisis and prevent U.S. bank failures. …Then came the collapse of the Soviet Union. What a “jobs for the boys” bonanza that was! And, the list goes on and on with every crisis providing yet another opportunity for the ineffective IMF to pump out more credit… Today, things have become so politicized that even an international organization, like the IMF, has been able to grant itself a license to meddle in what used to be none of its business… While the IMF’s protean attributes are truly breathtaking, its most recent meddling gives yet another reason to put an end to it.

Steve is right.

But let’s conclude by contemplating the biggest reason to support his conclusion.

Should we abolish the IMF because it’s repugnant that big banks and other lenders are the main beneficiaries of the bailouts?

Should we abolish the IMF because it’s disgusting that corrupt politicians in poor nations get more opportunities to impose bad policy?

Should we abolish the IMF because it’s tragic that the bureaucracy lowers global growth by enabling the misallocation of capital?

Those are all good reasons, but I think the strongest argument for abolishing the IMF is that the bureaucracy perpetuates poverty. Look at this table, also prepared by Professor Hanke, which shows the nations that have received the most bailouts.

Are any of these nations economic success stories?

Hardly.

Instead, this is primarily a list of nations that have been mired in a sad cycle of poverty thanks in part to wasteful and corrupt governments that were aided and abetted by the IMF.

The bottom line is that the people of the United States should no longer be underwriting this awful organization.

P.S. The IMF is an equal-opportunity dispenser of bad advice. Relying on incredibly shoddy analysis and zero-sum thinking, the bureaucrats are encouraging higher taxes in developed nations as well.

P.P.S. No wonder I’ve referred to the IMF as the “Dr Kevorkian of Global Economic Policy” and the “Dumpster Fire of the Global Economy.”

P.P.P.S. Though there was a brief period when the IMF was semi-sympathetic to good policy advice.

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Yesterday, I shared some research showing how misguided redistribution policies lead to high implicit marginal tax rates that discourage work.

Then I was interviewed about a very tangible example of this phenomenon – jobless benefits that give people more money than they could earn by working.

I wrote about this specific issue in late April and shared the nearby chart to show how many people can get a lot more money if they simply choose not to work. Which is the economic equivalent of a marginal tax rate of more than 100 percent.

As I noted in yesterday’s interview, creating this kind of upside-down incentive system is crazy even by the bizarre standards of Washington policy.

The federal government is – for all intents and purposes – bribing people not to work. This will be especially harmful for low-income workers since steady employment is their best route for upward mobility.

Part of the interview focused on the Keynesian argument that unemployment benefits are “stimulus” because recipients will have more money to spend. This is not satire. I mentioned that Nancy Pelosi actually asserted the economy becomes stronger when people are paid not to work.

Needless to say, this simplistic argument overlooks the fact that government can’t give people goodies without taking the money out of the private economy in the first place.

Sadly, the perpetual motion machine of Keynesian economics is still part of the Congressional Budget Office’s methodology. Here are some excerpts from the CBO’s report on the issue of super-charged benefits.

CBO has examined the economic effects of extending the temporary increase of $600 per week in the benefit amount provided by unemployment programs. …CBO estimates that extending that increase for six months through January 31, 2021, would have the following effects: …Roughly five of every six recipients would receive benefits that exceeded the weekly amounts they could expect to earn from work during those six months. …The estimated effects on output and employment are the net results of two opposing factors. An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment. That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.

Since I’ve already written many times about the flaws of Keynesian theory, let’s focus on the deleterious effect of government-subsidized unemployment.

In a column two days ago for the Wall Street Journal, Congressman James Comer of Kentucky explained how super-charged benefits have hurt his state’s economy.

Employers in Kentucky are finding it difficult to persuade employees to return to work, as nearly 40% of the state’s labor force has filed for unemployment benefits… It is clear that a system of excessive unemployment benefits has run its course. More than 60 of my colleagues in Congress plan to join me in sending a letter to House and Senate leadership to express our concerns and demand that these payments expire July 31, as the Cares Act intended. …It defies logic to extend disincentives to work when businesses are beginning to reopen. …efforts to spend the nation into oblivion and discourage Americans from working…are fundamentally opposed to the American spirit of the dignity of work. …to get back on the right track, we cannot extend the $600-a-week incentive not to return to work.

I applaud Rep. Comer.

It’s not popular to remove goodies from voters. Indeed, that’s the message of my Second Theorem of Government.

But it’s necessary if we want to restore incentives to work.

I’ll close by elaborating on the point I made in the interview about this battle being a repeat of the Obama-era fight about extended unemployment benefits.

Obama and other folks on the left said extended benefits were necessary because the unemployment rate was still high, while people like me argued that the jobless rate was still high precisely because the government was paying people not to work.

Extended benefits were finally halted in 2014, meaning we had a real-world test to see who was right. So what happened? Lo and behold, the jobless rate fell as more people went back to work.

The moral of the story, as illustrated by this satirical cartoon strip, is that people are more likely to work when the benefits of having a job and greater than the benefits of not having a job.

P.S. Here are a couple of anecdotes, one from Ohio and one from Michigan, about the perverse impact of excessive unemployment benefits during the last recession.

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Back in 2016, I shared an image that showed how the welfare state punishes both the poor and rich.

Rich people are hurt for the obvious reason. They get hit with the highest statutory tax rates, and also bear the brunt of the double taxation (the extra layers of tax on saving and investment resulting from capital gains taxes, double taxes on dividends, death taxes, etc).

But I also pointed out that the poor are penalized because they get trapped in dependency.

In large part, this is because they face bad incentives when they work and try to become self sufficient. Not only do they get hit by federal and state taxes, but they also can lose access to various redistribution programs. And the combination of those two factors can produce very high implicit marginal tax rates.

I cited an astounding example of this phenomenon in 2012, showing that a single mother in Pennsylvania would be better off earning $29,000 rather than $57,000. In other words, her implicit marginal tax rate on an extra $28,000 would be 100 percent (thus fulfilling FDR’s odious dream, albeit against a different set of victims).

How pervasive is this problem?

A new study published by the National Bureau of Economic Research gives us the answer. Authored by David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Elias Ilin, and Victor Ye, it estimates implicit marginal tax rates for various segments of the population.

A plethora of federal and state tax and benefit policies jointly determine Americans’ incentives to work. …complex and often arcane provisions that condition tax payments and benefit receipts on labor income, asset income, total income, and the level of assets. …The myriad features of our fiscal system raise this paper’s central questions: What are the typical levels of marginal net tax rates facing Americans of different ages and resource levels, taking the entire federal and state fiscal system into account? …How much does one’s choice of the state in which to live impact one’s incentive to work? …We address these questions by running 2016 Survey-of-Consumer-Finances (SCF) data through The Fiscal Analyzer (TFA).

The five economists discovered that lower-income people are often hit by very high marginal tax rates on work (τL).

Our main findings, which focus on the fiscal consequences of SCF household heads earning $1,000 more in our base year – 2018, are striking. One in four low-wage workers face lifetime marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. …marginal net lifetime tax rates are generally higher for those in the lowest quintile than for those in the middle three quintiles… The potential poverty trap arising under our fiscal system is highlighted by the 75th τL-percentile values for the bottom quintiles. Moving from the youngest to the oldest cohorts, these values are 67.4 percent, 75.9 percent, 69.3 percent, 76.5 percent, 74.4 percent, and 73.9 percent. Hence, one in four of our poorest households, regardless of age, make between two and three times as much for the government than they make for themselves in earning an extra $1,000.

This graph from the study shows how poor people can even face marginal tax rates of more than 100 percent (which I’ve highlighted in red). The vertical axis is the tax rate and the horizontal axis is household prosperity.

Subjecting poor people to very high implicit tax rates is horrible economic policy, just like it’s horrible policy to hit any other group of people with high marginal tax rates.

Simply stated, when people are punished for engaging in productive economic behavior, they respond by reducing their work, their saving, their investment, and their entrepreneurship.

Interestingly, some states are better (or less worse) than others.

One’s choice of state in which to live can dramatically affect marginal net tax rates. Across all cohorts, the typical bottom-quintile household can lower its remaining lifetime marginal net tax rate by 99.7 percentage points by switching states! …The typical household can raise its total remaining lifetime spending by 8.1 percent by moving from a high-tax to a low-tax state, holding its human wealth, housing expenses, and other characteristics fixed. …To illustrate how τL varies from state to state, we calculate the median τL for households in the 30-39 age cohort in the lowest resource quintile in each state. …Figure 11 shows the cross-state variation in median lifetime marginal tax rates. …median rates varies between a low of 38.8 percent in South Carolina and a high of 55.0 percent in Connecticut. Clearly, where people live can matter a lot for their incentives to work.

Here’s a map showing the marginal tax rate on people in the bottom 20 percent. The obvious takeaway is that you don’t want to be a poor person in Connecticut, Minnesota, or Illinois.

For what it’s worth, tax rates are still too high in the best states (South Carolina, Texas, Indiana, and South Dakota).

The bottom line is that the welfare state is bad news for both taxpayers and recipients. All of which may help to explain why the poverty rate stopped falling once the government declared a “War on Poverty.”

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Should high-tax states such as California and New York get a bailout?

I explained last month why that would be a mistake, in large part because bailouts would reward states for irresponsible fiscal policy (similar to my argument that countries like Austria and the Netherlands shouldn’t be bullied into providing bailouts for Italy and Spain).

And I’ve shared two videos (here and here) for those who want more information about how bailouts encourage “moral hazard.” And this is true for banks (think TARP) as well as governments.

Today, though, I want to focus on some numbers that show what’s really causing fiscal problems in some states.

Adam Michel and David Ditch of the Heritage Foundation have generated some startling data on state government finances.

Instead of waiting on a handout from Washington, states should clear the way for a more robust economic recovery by addressing their unsustainable finances. States and local government spending has increased over the recent past… After adjusting for inflation and increases in population, state and local spending (in constant 2019 dollars) has grown from $5,596 per person in 2000 to $7,268 per person in 2019. That amounts to a 30% increase in the real cost of state and local government over just two decades, even without the thousands of dollars per person the federal government sends to states and localities through a wide variety of programs. …not all states spend equally. As of 2017, Florida, Georgia, and Arizona spent about $5,800 per person on state and local governments, but New York spent more than $11,700 per person.

The most important number is the above excerpt is that there’s been a 30 percent increase in per-capita state spending after adjusting for inflation.

That’s a very worrisome trend.

But not all states are created equal. Or, to be more precise, they’re not all equally profligate. Here’s the chart that starkly illustrates why some states are in trouble.

At the risk of understatement, California and New York have not complied with the Golden Rule for fiscal policy.

Needless to say, there’s no justification for the notion that taxpayers in well-run states such as Texas and Florida should be coerced into providing bailouts for politicians in poorly run states.

And now we have a compelling visual that settles the argument.

P.S. Over the past several years, I’ve done multiple columns comparing Texas and California and also several columns comparing New York and Florida, all of which underscore that blue states have created their own problems by taxing too much and spending too much.

P.P.S. Thankfully, people can vote with their feet by moving from high-tax states to low-tax states. Let’s hope that Congress doesn’t enact a bailout so they’re forced to subsidize the states that drove them away.

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In some cities, legitimate protests about abusive and improper police behavior have degenerated into riots.

One consequence of this mayhem is that police don’t have the manpower to effectively protect households and businesses.

In same cases, as shown by this tweet, a police chief even gave a green light to looters even though taxpayers pay generous salaries to cops because they’re supposed to protect our lives and possessions.

 

This would be a good opportunity to point out how this is another sad example of government being so big and bloated that it can’t fulfill its core roles of protecting life, liberty, and property.

But I want to focus on a more narrow issue, which is why it is vital for citizens to have the right to own firearms so they can protect themselves when there are breakdowns in social order and cops can’t (or won’t) help out.

I wrote about this issue back in 2011, observing that Europeans were largely helpless during that year’s civil unrest because governments had stripped them of the right to self defense.

I also specifically compared helpless British victims of rioting to armed shopkeepers in Los Angeles who were able to protect themselves when there were riots in that city.

Today’s unrest is providing even more evidence. There are already dozens of stories about citizens protecting themselves and their businesses because law enforcement isn’t available.

Here’s one example.

What began as a peaceful protest in Cleveland on Saturday—over the death of George Floyd at the hands of a Minneapolis police officer— turned violent as the day progressed, prompting Mayor Frank Jackson to issue an 8 p.m. curfew and to request National Guard reinforcements to protect the city from rioters. Corbo’s, a tiny family-owned bakery in the city’s historic Playhouse Square district, took matters into their own hands, brandishing their firearms when rioters came calling. …rioters and looters can be seen approaching Corbo’s Bakery, taunting the owners and threatening them with iron rods and a large pylon with a heavy metal base. Three men stood in the doorway of the bakery, defending their property and exercising their Second Amendment rights. A minute later the rioters were gone, having moved on to the business next door, where they shattered a massive storefront window… Rash asks the men protecting Corbo’s whether or not they have insurance that would cover damage from the rioters. “I mean, really, is it worth having someone get shot? Are you shooting someone over an insured place? But why?” “That’s not the point,” one of the armed Corbo’s workers replied. “Well, it is the point,” Rash counters. “But what if someone accidentally got shot?” An African American bystander defended the bakers, saying, “They just trying to defend they’re sh–.” “You’re out here with guns!” Rash exclaims. “I’m on my fu–ing property,” says a baker

Thankfully, there ultimately was no violence in this encounter.

It’s also worth noting that there was no looting. Another successful example of why it’s so helpful to have private gun ownership.

I wonder if the chaos across the nation is a “learnable moment” for some people. Here’s a tweet from a psychologist in New York.

Supporters of the 2nd Amendment often point out that cops are just minutes away when trouble is seconds away. Well, Mr. Kaufman learned that sometimes the police aren’t just minutes away. They can be hours away or not available at all.

Maybe I’m being overly optimistic, but I hope he now realizes that his earlier calls for gun control were misguided. Unless, of course, he plans to defend himself with Tide pods.

I’ll close with two items. First, I’ll recycle my 2011 poll to see why (or if) people support the right to keep and bear arms. Interesting, the coronavirus (which led to the release of criminals and police announcements that some laws wouldn’t be enforced) produced an increase in the number of people (up from 14.43 percent) who answered “To protect myself and my family if we suffer a societal breakdown.”

Given what’s happening each night in our cities, I’m guessing that number will increase.

Second, I’ll also recycle this image that I shared when writing about the looting that occurred after Hurricane Sandy.

It’s amusing, but I like sharing it because it gives me an opportunity to remind people about the role of incentives.

At the risk of stating the obvious, looters are unlikely to go after this neighborhood and they’re going to be far more likely to cause mayhem in a place like New York City, where an incompetent city government basically gives crooks a free pass and there are tragic restrictions on gun ownership.

P.S. As noted above, I hope Mr. Kaufman has an epiphany. Sort of like the one that Justin Cronin experienced when he dealt with a breakdown of civil order.

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Yesterday’s column focused on how police unions protect the bad apples who misbehave and therefore cause some people to resent law enforcement, especially in the minority community.

Curtailing the role of those unions would be an important step to create better bonds between the police and the citizenry.

Today’s column will explain the need to repeal or substantially curtail the doctrine of “qualified immunity,” which was created by courts to protect cops who trample on people’s rights.

It’s not a complete answer, just as fixing the union problem isn’t a complete answer. But getting rid of the doctrine at least will give citizens the opportunity to bring lawsuits when cops disregard their civil liberties. This tweet is a good summary for those who don’t have time to dig into the topic.

But hopefully you do have time to investigate this issue.

Here are excerpts from four articles about problems with qualified immunity.

This is not a new issue for libertarians and principled conservatives. Glenn Reynolds pointed out the injustice of the doctrine back in 2013 in a column for USA Today.

And David French condemned the practice in a piece for National Review in 2018.

Judges created qualified immunity, and they can end it. It’s past time to impose true accountability on public servants who violate citizens’ constitutional rights. First, some background. Since 1871, federal law has permitted Americans to file lawsuits against public officials who violate their constitutional rights. It’s a powerful tool that essentially deputizes members of the public to defend their own liberties. …However, after generations of judges have interpreted the statute, the phrase “shall be liable” has come to mean “may occasionally be liable.” …In 1982, …the law changed. In a case called Harlow v. Fitzgerald, the Supreme Court concocted the modern doctrine of qualified immunity. …As the doctrine developed, to prove that a right is clearly established, the plaintiff generally had to find and cite a remarkably similar case, with nearly identical facts, decided by a court of controlling jurisdiction. …the entire notion of “clearly established law” rests on a series of absurd, fantastical premises. Are we really to believe that a police officer doesn’t know he shouldn’t pound on the wrong door and blow away the innocent occupant unless a court said so in a case, say, five years before?

Writing for Reason, Professor Ilya Somin explains how fixing this bad bit of judge-made law could improve policing.

…there is much that can be done to curb police abuses. …The problem is not that police officers are unusually bad people. It’s that they have bad incentives, under which they are rarely held accountable for abuses. Those incentives can and should be altered. An important first step would be to get rid of the legal doctrine of “qualified immunity,” under which law enforcement officers are immune from suits for violating citizens’ constitutional rights… The Supreme Court interprets the term “clearly established” so narrowly that officers routinely get away with horrendous abuses… Qualified immunity is not required by the Constitution or even by a federal statute. It is a purely judge-made doctrine made up by the Supreme Court itself in a misguided effort to protect law enforcement officers from excessive litigation. …Both Justice Clarence Thomas, the Court’s most conservative member, and Justice Sonia Sotomayor, the most liberal, have been severely critical of qualified immunity. There is a real chance they can persuade at least three of their colleagues to take the same view. …state and local governments might respond by indemnifying police officers for the damages they have to pay in such cases. But even if that happens, it would still be a step in the right direction. Indemnification costs money that many local governments will be loathe to pay. They will therefore have an incentive to crack down on abusive officers, particularly repeat offenders who routinely force authorities to pay out large sums…

Thank goodness for Clarence Thomas. Not only is he one of the leaders in trying to address qualified immunity, he’s also a leader in the campaign to get rid of the odious practice of asset forfeiture, which effectively creates an incentive for government to steal private property.

Writing for the Bulwark, Clark Neilly adds his two cents to the discussion.

In determining the relationship between government and governed, one of the most important decisions a society can make is how accountable those who wield official power must be to those against whom that power is wielded. Congress made a clear choice in that regard when it passed the Enforcement Act of 1871, which we now call “Section 1983”… Simply put, Section 1983 creates a standard of strict liability by providing that state actors “shall be liable to the party injured” for “the deprivation of any rights.” Thus, if a police officer walks up to your house and peeks inside one of your windows without a warrant—a clear violation of your Fourth Amendment right against unreasonable searches—he is liable to you for the violation of that right. …many conservatives…abandon their stated commitment to textualism and embrace an “interpretation” of Section 1983 that is utterly divorced from its text. The vehicle for this…“living statutory interpretivism” is the Supreme Court’s qualified immunity doctrine, which judicially amends Section 1983 to provide that the standard for liability will no longer be the deprivation of “any rights”—as Congress expressly provided—but rather the deprivation of any “clearly established” rights. …the only avenue of accountability for most victims of police misconduct is a civil rights lawsuit that they themselves can initiate without the largesse of some prosecutor or citizen review board.

Last but not least, in a new column for USA Today, Patrick Jaicomo and Anya Bidwell of the Institute for Justice explain some of the legal issues.

The Supreme Court created qualified immunity in 1982. With that novel invention, the court granted all government officials immunity for violating constitutional and civil rights… Although innocuous sounding, the clearly established test is a legal obstacle nearly impossible to overcome. It requires a victim to identify an earlier decision by the Supreme Court, or a federal appeals court in the same jurisdiction holding that precisely the same conduct under the same circumstances is illegal or unconstitutional. If none exists, the official is immune. …When the Supreme Court conceived qualified immunity, it promised that the rule would not provide a “license to lawless conduct” for government officials. Plainly, it has.

And here are some examples they cite.

And let’s not forget the examples of misbehavior I’ve cited in the past (examples hereherehereherehere, and here).

The point of this column is not to criticize or condemn cops as a group, but to highlight a bad policy that causes citizens to feel hostility against (what I assume to be) the vast majority of cops who do their jobs the right way.

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