Feeds:
Posts
Comments

Archive for February, 2022

Spain is more economically backwards than most nations in Western Europe. As a public finance economist, my gut instinct is to blame bad fiscal policy.

And there’s certainly plenty of evidence for that view. After all, taxes drive a huge wedge between pre-tax income and post-tax consumption. So there is not much incentive to be a productive member of society.

But it’s important to remember that fiscal policy is just one of the ways politicians can hurt an economy.

In an article for the Foundation for Economic Education, Michael Peterson explains how labor law is stifling job creation in the Spanish economy.

Spain doesn’t suffer from a labor shortage like in the United States, but something much worse—a sclerotic labor market marked by…Employment Protection Legislation (EPL) that constrains employers from hiring and firing workers. …These figures help explain the high unemployment rates observed in Spain over the past three decades—averaging 17.3 percent compared to 7.6 percent for EU-8 countries and 5.2 percent for the U.S. …one study showed that Spain’s unemployment rate wouldn’t have been as high following the Great Recession had there been less onerous costs to firing workers in permanent jobs… In another study, researchers from the Banco de España found that the duality function of the labor market increases unemployment volatility relative to a unified employment system (like in the U.S., for instance). A similar study finds that increasing the number of workers on temporary contracts reduces the number of days they worked by 4.5 percent and their total earnings by 9 percent. …Additionally, the labor force participation rate has steadily declined in Spain since 2012—from almost 60 percent to 56.7 percent. …Spain also has one of the highest historical long-term unemployment rates among OECD nations, further reflecting the rigidities within its labor market.

Here’s the chart that accompanied the article.

If you peruse the EU’s data on unemployment, you’ll find that Greece also has very high levels of joblessness. And for largely the same reasons.

By the way, Mr. Peterson also notes that excessive tax rates play a role.

Another factor that we can’t ignore is the high social security tax on employers in Spain, which stands at 29.9 percent.

So what’s the bottom line?

The most important thing to understand is that some of the politicians who support “employment protection legislation” may genuinely think they are helping workers.

But their efforts are backfiring for reasons that should be obvious.

  • Making it more expensive to hire workers means fewer workers will be hired.
  • Making it more expensive to fire workers means fewer workers will be hired.
  • Making it more expensive to employ workers means fewer workers will be hired.

P.S. Labor law is one area where the United States is far ahead of most European nations.

P.P.S. I applaud Spaniards for coming up with clever ways of avoiding excessive taxation.

P.P.P.S. Spanish politicians balance their bad labor taxation with bad business taxation.

Read Full Post »

At the state level, we have another victory for good tax policy.

I wrote last month that Iowa might replace its discriminatory tax regime with a simple and fair flat tax.

And I pointed out that this reform would help the state jump several spots in my ranking of state tax systems.

Well, the proposed reform has been approved by the state legislature and Iowa will now have a much better (i.e., less destructive) tax system.

Here are some details of the new law, as reported by Stephen Gruber-Miller and Ian Richardson for the Des Moines Register.

Iowa will move to a 3.9% flat income tax rate under a compromise between legislative Republicans and Gov. Kim Reynolds… …It would also exempt retirement income such as 401(k)s, pensions and IRAs from state taxes… Along the way, the bill would eliminate Iowa’s progressive income tax system, where wealthier Iowans pay higher rates than lower-income Iowans. Iowa would join 10 other states with some form of flat income tax. …The new proposal would build upon a series of tax cuts that were previously set to start for Iowans in 2023, meaning multiple new tax laws would take effect during the same year. Iowa is already set to reduce the number of tax brackets from nine to four starting in 2023. …It will drop the corporate tax rate to a 5.5% flat rate over time.

I could end today’s column at this point.

After all, what happened in Iowa is a triumph for tax reform and another case study on the benefits of tax competition (just like we’ve seen in states such as Kentucky and North Carolina).

But I want to take this opportunity to address another big-picture issue.

Earlier this month, James Lynch wrote a column for the Des Moines Register on the potential impact of tax reform in the state.

He contrasted the views of both proponents and opponents.

Flattening state income tax rates and exempting retirement income would either lead to growth in businesses and jobs and increase Iowans wealth, or simply make wealthy Iowans wealthier, according to speakers at a public hearing…speakers at the Monday evening public hearing were divided between those who said a flatter tax rate would make Iowa a more attractive place for businesses to locate and expand — as well as a more attractive place for employees to live and work — and those who said the plan largely benefits the wealthy while doing little to help lower-income workers.

At the risk of sounding mushy, both supporters and critics are right.

Iowa’s tax reform will encourage more growth. And it’s also true that the rich will benefit.

But opponents are guilty of a sin of omission. That’s because tax reform will benefit lower-income and middle-class taxpayers as well.

And I think “sin of omission” is the right term. That’s because a big moral shortcoming among our friends on the left is that they are sometimes tempted to go along with policies that will hurt the less fortunate so long as they impose even greater damage on upper-income taxpayers.

P.S. Adopting a flat tax is progress, but the ultimate goal should be abolishing the state income tax.

Read Full Post »

Last year, we targeted politicians with some much-deserved satire on four occasions (here, here, here, and here).

I don’t want to fall behind that pace for 2022, so here’s our first collection for this year.

We’ll start with this cartoon strip about the criminal behavior of the folks in Washington.

Ever wonder how we get awful policies such as ethanol subsidies?

Our second item answers that question.

Our third item actually isn’t funny. It’s sad that we let politicians bribe us with our own money.

Now let’s look at the what happens when Republicans and Democrats cooperate.

Here’s the same point from a different perspective.

Per tradition, I’ve saved the best item for last.

More parents need to have this type of discussion about the birds-and-the-bees.

And when there are lots of clowns and lots of serial killers, then you wind up with entire hives of politicians.

Read Full Post »

When I compare the United States and Europe, it’s usually because I want to make the point that people on the other side of the Atlantic have lower living standards in large part because there is a more onerous fiscal burden of government.

Simply stated, America’s medium-sized welfare state doesn’t do as much damage as the large-sized welfare states in Europe.

But I also use US-vs.-Europe comparisons to make another point, namely that big welfare states mean big tax burdens for lower-income and middle-class households.

To be more specific, most of Europe’s redistribution spending is financed by high tax burdens on regular people.

Yes, European politicians impose onerous burdens on upper-income taxpayers, but there simply are not nearly enough rich people to finance big government.

So those politicians have responded by pillaging everyone else as well (onerous payroll taxes, harsh value-added taxes, high income tax rates on modest incomes, etc).

The United States takes a different approach. We also impose onerous burdens on upper-income taxpayers (as confirmed by IRS data), but we impose comparatively modest taxes on everyone else.

Indeed, the net result, as shown in the table, is that the United States actually has the most “progressive” tax system among OECD nations.

Today, let’s look at some research that makes similar points.

Three academics at the Paris School of Economics authored a study for the World Inequality Lab that uses a new database to measure redistribution and inequality.

Their main conclusion is that there are differences between the United States and Europe, but redistribution policies don’t have a big impact on inequality.

This article addresses…substantive and methodological issues by constructing distributional national accounts for twenty-six European countries from 1980 to 2017. To our knowledge, this is the first attempt at doing so. …our series are fully comparable with recently produced US distributional national accounts, allowing us to compare the dynamics of inequality and redistribution in the two regions in great detail. Two key findings emerge from the analysis of our new database. First, we show that, over the past four decades, inequality has increased in nearly all European countries as well as in Europe as a whole, both before and after taxes, but much less than in the United States. …Second, the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers. While Western and Northern European countries redistribute a larger fraction of output than the US (about 47% of national income is taxed and redistributed in Europe versus 35% in the US), the distribution of taxes and transfers does not explain the large gap between Europe and US posttax inequality levels. Quite the contrary: after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country.

What drives these results?

Simply stated, the most salient feature of European fiscal policy is that nations tax the middle class and have programs that benefit the middle class.

The United States, by contrast, focuses more on taxing the rich and giving benefits to the poor.

Look at what the study says about tax progressivity.

Figure Vb ranks European countries and the United States according to a simple measure of tax progressivity: the ratio of the total tax rate faced by the top 10% to that of the bottom 50%. The composition of bars correspond to the composition of taxes paid by the top 10%. The US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70% higher than that of the poorest half of the population. By this measure, the European country with the most progressive tax system is the United Kingdom, followed by Norway, the Czech Republic, and France. Many European countries have values close to 1 on this indicator, corresponding to relatively flat tax systems, in which top income groups face a tax rate approximately equal to that of the bottom 50%. …the US also stands out as one of the countries where the top 10% pay the largest share of their pretax income in the form of income and wealth taxes.

And here’s Figure V, which shows how the U.S. has (far and away) the most “progressive” tax system.

Again, I want to emphasize that this is not because the U.S. imposes higher taxes on the rich. The so-called progressivity of the American system is driven by the fact that there are low taxes on everyone else.

What about on the spending side of the fiscal ledger?

The study finds that the the United States has the most redistribution to lower-income people.

…the US tax-and-transfer system appears to be unequivocally more progressive. The bottom 50% in the US received a positive net transfer of 6% of national income in 2017, compared to about 4% in Western and Northern Europe and less than 3% in Eastern Europe. Meanwhile, the top 10% saw their average income decrease by 8% of national income in the US after taxes and transfers, compared to about 4% in Western and Northern Europe and 3% in Eastern Europe. …Figure VIIb represents the net transfer received by the bottom 50% in all European countries and the United States in 2017. Again, the US stands out as the country that redistributes the greatest fraction of national income to the bottom 50%.

Here’s the aforementioned Figure VII.

I’ll close by observing that there are multiple interpretations of this data. I suspect that authors want readers to conclude that there should be higher taxes and more redistribution. Both in Europe and the United States.

My big takeaway is that this research confirms why people with modest incomes in the United States have a better life than their counterparts in Europe.

Not only do they enjoy higher levels of income, but they also pay much lower tax burdens.

P.S. One other point to emphasize is that it’s wrong to fixate on inequality. In part, that’s because there’s nothing wrong with rich people getting richer (assuming they earn their money rather than getting special favors from politicians). But also because ethical people should be concerned about improving the lives of the less fortunate rather than tearing down the successful.

Read Full Post »

For most of human history, we’ve had primitive and impoverished societies based on feudalism and tribalism.

The good news is that capitalism began to emerge a couple of hundred years. The parts of the world that adopted free enterprise became incredibly rich. And there even have been meaningful improvements in living standards in the parts of the world that only partly liberalized.

But not everyone likes economic freedom. They argue for alternatives to markets.

And they’ve put forth all sorts of ideas over the past 100-plus years. Some of them utterly reprehensible, such as communism and Nazism.

Others ideas have caused immense damage, such as socialism and fascism. And others such as corporatism and the welfare state, have undermined the benefits of free markets.

The bottom line is that none of those alternatives have worked. They’ve produced stagnation at best. And, in many cases, oppression and deprivation.

Yet our friends on the left haven’t given up. Like medieval monks searching for the Holy Grail, they desperately want to find something that can replace capitalism.

And some of those folks on the left are putting big money into the effort, as reported by Steve Lohr of the New York Times.

Wages have been stagnant for most Americans for decades. Inequality has increased sharply. …Those problems…are partly byproducts of…free markets, free trade and a hands-off role for government. Its most common label is neoliberalism. …The William and Flora Hewlett Foundation and Omidyar Network announced on Wednesday that they were committing more than $41 million to economic and policy research focused on alternatives. “Neoliberalism is dead, but we haven’t developed a replacement,” said Larry Kramer, president of the Hewlett Foundation. …The Ford Foundation and the Open Society Foundations have pledged to join the initiative and make grants later this year. …many prominent economists have questioned the wisdom of leaving so many human outcomes to the whims of markets. …“Reducing inequality has to be a goal of economic progress,” said Dani Rodrik, an economist at Harvard’s Kennedy School and a leader of its project on reimagining the economy. …Mike Kubzansky, chief executive of Omidyar Network, said today’s economic challenges spanned partisan divisions. “I think there’s pretty broad agreement that the traditional set of economic ideas has passed its sell-by date,” he said.

As a quick aside, when folks on the left use “neoliberal” as a slur, they are using the word to depict capitalism or libertarianism (the “neo” indicating today’s version of classical liberalism).

And I also can’t resist pointing out that Rodrik needs to learn about the “Eighth Theorem of Government.”

But let’s focus on the main issue. The Wall Street Journal editorialized on the left’s search for an alternative to free enterprise and pointed out that the real goal is to give Washington more power and control.

The 20th-century economist Joseph Schumpeter famously wrote that capitalism sows its own destruction by creating a knowledge class who despise its success. Behold the Hewlett Foundation and Omidyar Network’s $40 million gift to the paupers at Harvard and MIT to “reimagine capitalism.” …By “reimagining capitalism,” …what these foundations really mean is putting politicians and the administrative state in charge of redistributing more of its proceeds.

Amen.

One point I’ll add is that the left’s goal may be “redistributing more,” but an unavoidable economic consequence is that the economy doesn’t produce as much.

And that’s bad news over time, even for the people who are the supposed beneficiaries.

Which is why genuinely compassionate people support capitalism, which is the only system that has a proven track record of reducing poverty.

Read Full Post »

The health care system in the United States is expensive and inefficient, and both of those problems are caused by government.

More specifically, politicians have enacted laws (everything from the tax code’s exclusion of fringe benefits to programs such as Medicare and Medicaid) that have produced a system overwhelmingly based on third-party payer.

And with so many people using (what they perceive to be) other people’s money to buy healthcare, we shouldn’t be surprised to see perverse results.

In a genuine free market, buyers and sellers directly interact. Both sides of the transaction have an incentive to get the best-possible outcome, and this process promotes efficiency and low prices.

In America’s healthcare system, however, government policies have saddled us with intermediaries that weaken, distort, or even eliminate normal market forces.

Which explains high costs and inefficiency, which is how we began this column.

To understand why third-party payer plays such a pernicious role, let’s look at a column that Dr. Ryan Neuhofel wrote for the Foundation for Economic Education.

He imagines a world where we buy food at the grocery store the same way we currently buy healthcare.

You enter the grocery store parking lot at 4:15 pm, having taken off work early because this particular store closes at 5:00 pm. This FoodMart wasn’t your personal preference based on quality, service, amenities, or price. You choose it, like all of your previous food choices, because it was included in your new food management plan’s network. …You are first greeted by a few women sitting behind a glass-enclosed desk. By greeted, I mean they ask you for your photo ID and food plan card and hand you a clipboard with a stack of forms to complete. The lobby is crowded, but you manage to find a seat… You have completed these types of forms dozens of times previously but dutifully do so again. (You still prefer 2 percent milk, don’t like more than four vegetables, and your peanut allergy is unchanged.) Forms completed, you check back in with the receptionist. After 20 minutes of waiting, she assigns you a cart, and you start to shop with your list in hand. …As you scurry up and down the aisles, you see there are no prices listed on anything, nor labels telling you what is a Bronze-Select item. …During check-out, the cashier rings up the items and asks you for a $30 copay. You are given a six-page receipt with indecipherable codes and then asked to sign a few other forms because some of your items will be billed to you later. …Several months in the future you get a bill for $276 from FoodMart. Although vaguely suspicious that you’ve been taken advantage of somehow, you are happy that you got a big discount on your $18 box of Tasty Flakes cereal.

He also imagines a world where our restaurant visits are akin to the current healthcare system.

…you are saddened to learn that Lola’s Cocina is not part of your GCGS plan. You decide to go down the street to Burrito King, which prominently displays “Proud to accept GCGS Bronze-Select members” in its window. …Upon checkout, you present the waiter your GCGS card, and you are asked to pay a $10 copay. (The billing statement weeks later reveals that the “plan discount” did reduce the initial charge from $64 to $37 and that GCGS paid Burrito King another $27 a few months later, which was applied to your deductible.) You question how a simple burrito can cost $37… Burrito King, a small restaurant, employs four cashiers out front and seven people in their business office in addition to the usual staff to cook and serve food. Their head chef, Bob, spends much of his time completing forms to justify why the Deluxe burrito you ordered included black beans instead of the standard pinto.

Dr. Neuhofel paints a dystopian vision, but can anyone doubt this is what would happen if government intervened in the food market the same way it does in the health market?

I’ve previously engaged in the same exercise, asking people to imagine what would happen if the market for homeowners insurance and auto insurance worked the same way as it does in the health sector.

Needless to say, the result would be higher costs and inefficiency.

I’ll close by pointing out that free markets work in health care when they’re allowed. Consider how we see rising quality and falling prices in the market for cosmetic surgery. Why? Because people are paying with their own money.

P.S. I strongly recommend this video from Reason.

Read Full Post »

In theory, annual awards should not be bestowed until the end of the year. But I already violated that rule when writing about “2022’s Tweet of the Year” last month (in my defense, anything that mocks Oxfam deserves favorable attention).

Given my weakness for premature proclamations, I may as well do it again.

Being a big fan of school choice, you can understand why this bit of whining and grousing from the National Education Association is my “Feel-Good Tweet of the Year.”

Oh, dear, the union bosses are upset that children are getting more options to escape government schools. My cheeks are wet with crocodile tears! So much schadenfreude.

By the way, I agree with part of the tweet. The union bosses at the NEA are correct that school choice is spreading.

Most notably, there was a huge victory for choice last year in West Virginia. But there’s also been progress in many other states.

But I can’t resist correcting two other parts of the tweet.

  • First, choice doesn’t “divert funding for public education into private hands.” Instead, it returns funding to private hands, where the money can then be used to get the best possible education for kids. Incidentally, that could mean government schools (researchers have that quality increases when government schools have to compete for students).
  • Second, it’s not voucher proponents that have been “steadily working to undermine public education.” Instead, the NEA should look in the mirror. It’s the union bosses and their political allies who have made government schools less attractive. They’ve been given record amounts of money and produced dismal educational outcomes.

P.S. As always, I can’t resist reminding people that there are successful systems of school choice in CanadaSwedenChile, and the Netherlands. In other words, it’s not a crazy idea being pushed by American libertarians.

Read Full Post »

While specific examples can be very complex, the economic analysis of regulation is, at least in theory, quite simple.

Rules and red tape impose burdens that hinder economic activity, and this leads to higher costs for businesses and consumers.

These higher costs may be justified in some cases. That’s why it’s important to have high-quality cost-benefit analysis.

But in many cases, such analysis will show that regulation doesn’t make sense.

Fortunately, some presidents have understood that too much regulation is bad for prosperity.

Consider, for instance, the excellent track record of Jimmy Carter. We’ll start with an article by Norm Singleton for RealClearMarkets.

…deregulation was a major part of Carter’s economic agenda and one of the greatest aspects of his legacy.  It’s something that Carter and Reagan had in common, not something that set them apart. Carter—and other leading progressives at the time such as Ralph Nader—understood…Regulation frequently, if not always, benefits big businesses…at the expense of small businesses and most importantly, consumers. …the Civil Aeronautics Board (CAB), set airline routes, flight, schedules, and even prices. The result was 10 airlines enjoyed a de facto government-protected 90% of the air travel market: a monopoly with extra steps. This supposedly “pro-consumer” regulatory system made flying unaffordable for many Americans. Consequently, Carter signed the Airline Deregulation Act of 1978, ending the CAB’s power to control air travel. The result was new airlines entering the market offering lower prices and expanded routes. …Carter also pushed Congress to deregulate trucking and railroads.

Here are some details on the benefits of trucking deregulation, from a study by Andrew Crain published in the Journal on Telecommunication and High Tech Law.

The ICC was given jurisdiction over trucking companies and prevented competitive entry by rarely granting new trucking permits. The development of efficient trucks should have been a great boon to shippers. …ICC regulations, however, prevented truckers from offering those benefits to consumers. Trucking companies were forced to travel set routes at set prices. …During his presidential campaign, Carter promised to pursue deregulation. …Carter was good to his word. In 1979, he appointed three deregulation proponents to the ICC, Darius B. Gaskins, Marcus Alexis and Thomas Trantum. …In July 1980, Carter signed the Motor Carrier Act, which lifted most restrictions on entry, on the goods truckers could carry, and on the routes they could travel. …Rates fell, and trucking companies multiplied.

Jeremy Lott discusses Carter’s achievement on rail deregulation in a piece for the Washington Examiner.

The same regulatory regime had been in place since the Interstate Commerce Act of 1887, which regulated railroads…with price controls and mandates…. The elected official who took the lead on changing things is the person for whom the Staggers Act is named, Democratic Rep. Harley Staggers of West Virginia, then the chairman of the House Interstate and Foreign Commerce Committee. “The good thing about the Staggers Act is that it eliminated or greatly reduced federal regulation over most railroad operations that had been slowly killing the industry over decades. Freight railroads on life support were freed from rigid price controls and service mandates and quickly began to rebound, became profitable again, and U.S. freight railroads are once again the top-performing freight rail system in the world,” Marc Scribner…told the Washington Examiner. …”Over the past 40 years, rail traffic has doubled … rail rates are down more than 40% when adjusted for inflation … and recent years have been the safest on record,” the AAR said. 

And Ian Jefferies of the Association of American Railroads, in a column for the Wall Street Journal, explained how the industry has improved with less red tape.

…there was a time when both parties could agree on the benefit of…regulatory reform. The bipartisan Staggers Rail Act of 1980, passed by a Democratic Congress and signed by President Jimmy Carter, deregulated the freight railroad industry. …Previously, railroad rates and service were set by government, and carriers were often forced to provide service on lines lacking commercial viability. …The impact on railroads was predictable and disastrous. At one point, 1 in 5 rail miles was serviced by bankrupt railroads. …deregulation was chosen over nationalization, which would have cost taxpayers billions of dollars. …the Staggers Act not only improved service along the mainline network; it helped give birth to a short-line rail industry that today operates 50,000 miles of the 140,000-mile network that spans across the United States. …Since 1980, freight railroads have poured more than $710 billion of their own funds back into their operations. Average rail rates are 43% lower today than in 1981 when adjusted for inflation. This translates into at least $10 billion in annual savings for U.S. consumers.

Michael Derchin’s column in the Wall Street Journal notes how a retiring Supreme Court Justice played a key role in deregulating air travel.

Justice Breyer, who joined the Supreme Court in 1994 and plans to retire this summer, has cited his research for the Airline Deregulation Act as among his best and most significant work. …The late Sen. Edward M. Kennedy reached out to Mr. Breyer in 1975. Kennedy…saw deregulation as key to increasing competition and making air travel more affordable. Mr. Breyer, then a professor at Harvard Law School, worked with Kennedy… The Airline Deregulation Act of 1978 passed with bipartisan support and created a free market in the commercial airline industry. Government control of fares, routes and market entry for airlines was removed, and the Civil Aeronautics Board’s regulatory powers were phased out. …Since deregulation, average domestic round-trip real airfares have plunged about 60%, to $302 from $695. Load factors—the percentage of seats filled on each flight—stood at 84% just before the pandemic, compared with 55% before deregulation. In the early 1970s, 49% of U.S. adults had flown. In 2020 the share was 87%.

Here’s a chart showing how consumers have been big winners.

So what’s the bottom line?

As Phil Gramm and Mike Solon explained last year in the Wall Street Journal, the United States is still enjoying the fruits of Jimmy Carter’s deregulatory achievements.

Far from hurting consumers, as progressive myth alleges, deregulation of the U.S. transportation system unleashed a wave of invention and innovation that reduced logistical transportation cost—the cost of moving goods as a percentage of gross domestic product—by an astonishing 50% over 40 years. Airline fares were cut in half on a per mile basis, while air cargo surged from 5.4% of all shipments to 14.5% by 2012… In this Carter-Kennedy led reform, the duty of government was to protect the consumer from harm, not to protect the producer from competition. Without the productive energy released by deregulating airlines, trucking, railroads…, the U.S. might not have found its competitive legs as its postwar dominance in manufacturing ended in the late 1970s. The benefits of deregulation to this day continue to make possible powerful innovations that remake the world.

That’s the good news.

The bad news is that Joe Biden is hardly another Jimmy Carter.

P.S. Daniel Bier, in a column for the Foundation for Economic Education, points out that Carter even deserves credit for deregulating the beer market.

Carter’s most lasting legacy is as the Great Deregulator. Carter deregulated oil, trucking, railroads, airlines, and beer. …In 1978, the USA had just 44 domestic breweries. After deregulation, creativity and innovation flourished in the above-ground economy. Today, there are 1,400 American breweries. And home brewing for personal consumption is also now legal.

If you want to know more about beer deregulation, click here. If you want to know who makes a lot of money from beer sales, click here.

P.P.S. Jimmy Carter didn’t have a good record on fiscal issues, but he was more frugal than almost every Republican president over the past six decades (with Reagan being the obvious exception).

Read Full Post »

The United States needs a constitutional spending cap, sort of like the “debt brake” that has been producing positive results in Switzerland for the past two decades.

Imposing a limit on annual spending increases would be a much-needed way of stopping politicians from saddling the nation with “Goldfish Government.”

The best-case scenario is that a spending cap is very stringent (say, limiting annual spending increases to 2 percent annually). This level of fiscal restraint reduces the burden of government spending compared to the private sector (i.e., it fulfills fiscal policy’s Golden Rule).

The avoid-harm scenario is that a spending cap prevents government from becoming a bigger burden. Given dismal long-run fiscal forecasts (a consequence of demographic change and poorly designed entitlement programs), this actually would be an impressive achievement.

There are also some auxiliary benefits of a spending cap.

A new working paper from Italy’s central bank, authored by Anna Laura Mancini and Pietro Tommasino, considers whether spending caps can mitigate the problem of dishonest budgeting by politicians.

…policy-makers have an incentive to “plan to cheat”. That is, they promise an amount of expenditures higher than what they will actually deliver, because this allows them to cater to the demands of the various groups of voters, and at the same time they present overoptimistic revenue forecasts, in order to preserve the appearance of fiscal discipline. Once the extra revenues hoped for by the government fail to materialize, budgeted investment expenditures are downsized or abandoned altogether. In this context, caps on realized spending can contribute to more realistic ex ante spending plans. Indeed, politicians have less room to inflate planned expenditures, once there is a legal ceiling in place.

The authors crunch the numbers and conclude that spending caps result in a greater level of fiscal honesty.

In this paper, we provide evidence in favour of this theoretical intuition, exploiting a unique dataset including the ex-ante budget plans as well as ex-post budget outcomes of…a rule that constrains capital expenditures in municipalities with more than 5,000 residents. …Our analysis show that the municipalities subject to the new capital-spending rule significantly reduced their over-optimism in expenditure projections… Furthermore, in the new regime revenue projections are also more accurate (less over-optimistic). …The reform reduced the forecast error concerning capital expenditures… The effects is significant both statistically and in economic terms. …the introduction of the cap on investment reduced the forecast error on investment expenditures by almost €1 mln, or 35% of the pre-reform average error.

For wonky readers, Figure 1 shows some of relevant data.

For what it’s worth, we seem to have a different problem in the United States.

Rather than exaggerate potential spending on so-called public investment, as seems to have been the case in Italy, American politicians generally low-ball cost estimates for infrastructure projects.

And then, once the projects get started, we get absurd cost overruns (with the high-speed rail project in California being an especially absurd example).

The good news is that a spending cap solves both the Italian version of the problem and the American version of the problem.

As the authors found in their research, it removes the incentive for dishonest budgeting in Italy. And, if adopted in the United States, politicians would learn that it doesn’t help to produce laughably low cost estimates if a spending cap means there is no way of financing cost overruns in the future.

P.S. There is a spending limit in Hong Kong’s constitution, and it has generated very positive results. Given China’s increasing control, it’s unclear how effective it will be in the future.

P.P.S. There’s also a spending limit in Colorado’s constitution, known as the Taxpayers Bill of Rights. It has been very successful.

P.P.P.S. Last month, I wrote about research from both the IMF and the ECB about the benefits of spending caps.

Read Full Post »

Is “austerity” a good thing?

Depends on how it is defined. Johan Norberg points out that spending restraint is the right approach.

Since I’m a fan of spending restraint, I obviously like the video.

But let’s expand on two points.

First, the definition of austerity is critical. Some fiscal policy folks (at the IMF and CBO, for instance) focus on deficits and debt. And this means they view spending restraint and tax increases as being equally desirable.

But that’s nonsense. As I’ve repeatedly explained, red ink is best viewed as a symptom. The real problem is excessive government spending.

Moreover, higher taxes usually exacerbate the spending problem since politicians can’t resist the temptation to spend at least a portion of any expected new revenue.

And since tax increases generally don’t collect as much money as politicians think they will, you can wind up with higher taxes, a bigger burden of government, and even higher levels of red ink!

Second, it doesn’t help to identify good policy if politicians think that’s a path to losing elections.

Which is why I want to highlight some new research published by the IMF.

The study, authored by Alberto Alesina, Gabriele Ciminelli, Davide Furceri, and Giorgio Saponaro, has some very encouraging results about tax increases being political poison.

Spending restraint, by contrast, is actually a political plus – at least when implemented by a right-leaning government.

Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments.

For what it’s worth, this new research is an affirmation of my Fourth Theorem of Government.

This implies that Republicans should strive to control spending when they have power.

That’s certainly what happened under Reagan, and he then was reelected with a 49-state landslide.

But other Republicans didn’t learn any lessons from Reagan’s success. Both Bushes were big spenders, as was Trump.

Read Full Post »

My friends sometimes tell me that libertarians are too extreme because we tend to make “slippery slope” arguments against government expansions.

I respond by pointing out that many slopes are very slippery. Especially when dealing with politicians and bureaucrats.

Today, we’re going to look at how some politicians want to push us down the slope as part of their war against cash.

I’ve already written about this topic four times (here, here, here, and here), but it’s time to revisit the topic because of what has just happened in Canada.

Kevin Williamson of National Review is properly disgusted by Prime Minister Trudeau’s decision to deploy financial repression against protesting truckers.

Prime Minister Trudeau has invoked, for the first time in his country’s history, Emergency Measures Act powers to shut down a domestic political protest, the so-called Freedom Convoy movement… Trudeau is not sending in the troops. He is cutting off the money. …And so he is using the Emergency Measures Act to invest himself with the unilateral power to freeze bank accounts and cancel insurance policies, without so much as a court order and with essentially no recourse for those he targets. Canadian banks and financial-services companies will be ordered to disable clients suspected of being involved in the protests. …Using financial regulation to crush freedom of speech isn’t financial regulation — it is crushing freedom of speech by abusing the powers of a government office. …financial regulators enjoy powers that no FDR — or Napoleon, or Lenin — ever dreamt of possessing. The opportunities for mischief are serious and worrisome — and so are the opportunities for tyranny. …When the laws are enforced exclusively (or with extra vigor) against political enemies, that is not law enforcement — that is political repression. …we don’t have to send men with jackboots and billy clubs to break up protests — we have very polite Canadian bankers to do that for us.

Kevin then points out that Trudeau’s despicable actions are a very good argument for cryptocurrency.

It can be no surprise, then, that people are looking for digital platforms that protect their anonymity and keep their communications slightly beyond the reach of the long arm of the state. …And it’s even less surprising that cryptocurrencies and other escape routes from the banking system increasingly appeal to people who are neither cartel bosses nor international men of mystery. In a world in which unpopular political views can cut an individual or an organization off from the financial main stream, such innovations are necessities.

Liz Wolfe wrote about Trudeau’s overreach for Reason and also pointed out that cryptocurrencies are a valuable tool against oppressive government.

Canadian Prime Minister Justin Trudeau invoked his country’s Emergencies Act of 1988 in an attempt to snuff out anti-vaccine mandate protests that have roiled Canadian domestic politics for weeks. Invoking the act allows Trudeau to broaden Terrorist Financing Act rules to bring crowdfunding platforms and payment processors under greater government scrutiny. …cryptocurrency exchanges and crowdfunding platforms must now report large and “suspicious” transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), thus allowing more government surveillance of who’s forking over money to the protesters. The government will also be using its expanded powers to allow financial institutions to freeze the corporate accounts of companies that own trucks used in the blockades, while suspending their insurance… This type of situation—one in which protesters are being freezed out by crowdfunding platforms, one in which the government is threatening to suppress demonstrations and surveil financial transactions—is precisely the use case for crypto, which may be why Canadian officials namechecked it in their Terrorist Financing announcement. …crypto’s real value lies in the fact that it’s much harder to trace back to its sender, allowing pseudonymous donors to support whichever political causes they want to…the liberatory promise of crypto lies in the fact that it can bypass these intermediaries and make transactions more discreet—something Trudeau’s lackeys surely know, and seem a bit threatened by.

Amen. I don’t understand cryptocurrency and I don’t own any, but I definitely think it’s important to have alternatives given the track record of government.

By the way, worries about government over-reach existed long before Trudeau decided to launch his financial assault.

Libertarian-minded people have been concerned about this issue for a long time.

Here’s some of what Larry White wrote in 2018.

Coercive anti‐​cash policies abridge the freedom and reduce the welfare of peaceful individuals who prefer to use cash. …They compromise financial privacy and enable the prosecution of victimless crimes wherever banks are required to “know their customers” and to provide transaction records to government officials. They impose an unlegislated tax on money‐​holders, and leave them no means of escape into untaxed media of exchange, whenever the central bank decides to pursue a negative interest rate policy. They harm the livelihood of small businesspeople who rely on cash sales, particularly those serving the unbanked or operating in outdoor markets, and reduce the welfare of their (mostly poor) customers by raising transaction costs.

And here are some excerpts from William Luther’s column for Reason in the same year.

The case for cash presumes that we should be free to go about our lives so long as our actions do not harm others. It maintains that governments are not entitled to the intimate details of people’s lives. …demonetization advocates hold a progressive view of government. They think that existing laws and regulations have been rationally constructed by enlightened experts… There is, of course, an alternative view of government—one that is skeptical that laws and regulations are so rationally designed. …Some of these rules…were constructed to benefit some at the expense of others… Physical currency enables one to disobey the government. …Importantly, this argument…is a case for due process and financial privacy—bedrock jurisprudential principles in the West.

I’ll close with a few comments about what Trudeau should have done. Particularly after the road blockages lasted more than one or two days.

Instead of invoking a draconian emergency law, local Canadian governments should have used regular police powers to impose fines on truckers and- if necessary – impound their vehicles.

And if any of the truckers responded with violence, they should have been arrested and prosecuted.

For what it’s worth, this is how local governments in the United States should have responded (and should respond) to protests by Antifa and Black Lives Matter. Or to protests by any right-wing group.

The bottom line is that I’m a big believer in civil disobedience, but my tolerance drops when ordinary people are harassed, inconvenienced, and intimidated.

P.S. Luther’s point about the “progressive view of government” is not just a throwaway line. He’s referring to the mindset that first appeared during the “Progressive Era” of the early 1900s, when politicians such as Teddy Roosevelt and Woodrow Wilson decided that government was a force for good (unlike America’s Founders, who gave us a Constitution based on the notion that government was a threat to liberty and needed to be restrained).

P.P.S. Returning to more practical issues, India is a another bad example of what happens when politicians push a nation down the slippery slope.

Read Full Post »

I’ve written columns about wonky economic concepts such as “deadweight loss” and “public goods.” Today’s topic is “rent seeking,” which is part of “public choice” and is described by Professor Alex Tabarrok of George Mason University.

To elaborate, here’s a video from Professor Michael Munger from Duke University.

The basic message of both videos is that “rent seeking” occurs when interest groups manipulate the political system to obtain undeserved riches.

And there are all sorts of examples of policies that exist solely because interest groups get politicians to tilt the playing field – including trade barriers, farm subsidies, occupational licensing, and bureaucrat salaries.

As pointed out in the videos, these rent-seeking policies reduce prosperity.

But what’s the origin of the term? In the modern era, it’s often associated with Gordon Tullock, one of the founders of public choice school of economic analysis.

But the term actually was coined a couple of hundred years ago by David Ricardo, as explained by Professor David Henderson of the Naval Postgraduate School.

Rent seeking” is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. …People are said to seek rents when they try to obtain benefits for themselves through the political arena. …But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo introduced the term “rent” in economics. It means the payment to a factor of production in excess of what is required to keep that factor in its present use. …What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”

To elaborate, there’s nothing wrong with rent seeking as defined by Ricardo.

But rent seeking is now associated with “privilege seeking,” which obviously is very unsavory.

Ben Casselman of FiveThirtyEight also wrote on rent seeking.

Imagine you run a barbershop and you learn that someone is planning to open a rival business down the street. What do you do? One option, of course, would be to compete the old-fashioned way by offering lower prices or better service. But the old-fashioned way is hard! Wouldn’t it be nice if you could keep your competitor from setting up shop in the first place? There’s evidence that a growing number of businesses in the U.S. are trying to do exactly that. And while that may be good for them, it’s bad for entrepreneurs, workers and the economy as a whole. …Economists call this kind of behavior “rent-seeking,” which is another way of saying “gaming the system to make more money than you’ve earned.” …There is evidence that rent-seeking, in various forms, is becoming more common in the U.S. economy. In a recent paper, economist Dean Baker argued that rent-seeking has driven much of the recent increase in income inequality. And while Baker is a liberal, conservatives are also concerned about rent-seeking, such as land-use restrictions that make it hard to build housing in high-priced coastal cities.

The bottom line is that politicians spend much of their time buying their way to reelection by providing undeserved goodies to various interest groups. You can call it rent seeking. You can call it corruption. Or you can call it politics.

But one obvious takeaway is that shrinking the size and scope of government is the only effective way of reducing rent seeking.

P.S. If you’re in the mood for more economic wonkiness, here are several videos that explain “Austrian economics” and two videos that explain the price system.

Read Full Post »

When I first wrote about the Index of Economic Freedom back in 2010, the United States was comfortably among the world’s 10-freest nations with a score of 78 out of 100.

By last year, America had dropped to #20, with a very mediocre score of 74.8.

Sadly, the United States is continuing to decline. The Heritage Foundation recently released the 2022 version of the Index and the United States is now down to #25, with an even-more-mediocre score of 72.1.

As you can see, the biggest reason for the decline is bad fiscal policy (we can assume that Biden’s so-called stimulus deserves much of the blame).

So what nations got the best scores?

Our next visual shows that Singapore has the world’s freest economy, narrowly edging out Switzerland.

Notice, though, that Singapore’s score dropped and Switzerland’s improved. So it will be interesting to see if the “sensible nation” takes the top spot next year.

Also notice that only 7 nations qualified as “Free,” meaning scores of 80 or above.

The United States is in the “Mostly Free” category, which is for nations with scores between 70 and 80.

By the way, notice that the United States trails all the Nordic nations. Indeed, Finland, Denmark, Sweden, Iceland, and Norway get scores in the upper-70s.

How is this possible when those countries have high-tax welfare states? Because they follow a very laissez-faire approach for all of their other policies (trade, regulation, monetary policy, etc).

I’ll close with a depressing look at how the United States has declined over the past two decades. I already mentioned that the U.S. gets a score of 72.1 in the 2022 version. That’s far below 81.2, which is where America was back in 2006.

P.S. The Fraser Institute’s Economic Freedom of the World shows a similar decline for the United States.

P.P.S. Taiwan is an under-appreciated success story.

P.P.P.S. New Zealand is still in the “Free” group, but it’s decline is worrisome.

P.P.P.P.S. Kudos to Estonia for climbing into the top group.

P.P.P.P.P.S. The bottom three nations are Cuba, Venezuela, and North Korea.

Read Full Post »

It is not difficult to understand the economics of taxation. Simply stated, the more you tax of something, the less you get of it.

You can show the adverse impact of taxation with supply-and-demand curves (very helpful for understanding “deadweight loss“).

But you don’t need to be an economist to grasp the essential idea that we shouldn’t impose excessive penalties on productive behavior.

This is why I endlessly argue for lower tax rates on things that are very good for society, such as work, saving, investment, and entrepreneurship. Simply stated, governments should minimize barriers to the creation of wealth and prosperity.

But what about using the tax code to punish things that are bad for society?

Consider, for instance, taxes that are designed to discourage obesity. I personally don’t think politicians and bureaucrats should try to dictate our lifestyle choices, so I’m not overly sympathetic to imposing special taxes on things like sugar.

But I also recognize that people do respond to incentives, so maybe such taxes would work.

Though it’s also possible that we might get unintended consequences, which is the message of Baylen Linnekin’s new article for Reason.

A new study is pouring cold beer on Seattle’s soda tax. …since the city I call home adopted a soda tax in 2018, residents have swapped out soda and replaced that soda with beer. Pointedly, the study says Seattle’s soda tax “induced” consumers to buy more beer. …The PLoS study, by University of Illinois-Chicago researchers Lisa M. Powell and Julien Lader, compared sales of beer in Seattle both before and since adoption of the soda tax with comparable sales in nearby Portland, Oregon, which has no soda tax. “At two-years post-tax implementation, [the] volume sold of beer in Seattle relative to Portland increased by 7%,” the authors report. Though supporters of soda taxes claim (largely without evidence) that they’re a successful tool to combat obesity, the authors of the PLoS study note that the dangers of “excess alcohol consumption [include] higher risk of motor accidents/deaths, liver cirrhosis, sexually transmitted diseases, crime and violence, and workplace accidents.” Also: obesity. …”It’s hard to overstate the abject failure of soda taxes to deliver on their promised benefits,” Reason Foundation’s Guy Bentley wrote several years ago… “Nowhere in the world, let alone the United States, have soda taxes reduced obesity.”

Here’s a link to the study for those interested.

The obvious takeaway is that imposing an anti-obesity tax may not be very effective if consumers can easily switch to a different product with some of the same characteristics (i.e., lots of calories).

And such a tax may wind up making society worse off if the original problem (obesity) isn’t solved and new problems (drunk driving, etc) are created.

So what’s the solution? Politicians presumably will look at the results of the study and argue that beer taxes also should be increased.

And then when they learn that people will drive to different cities to buy beer and soda (as happened when Philadelphia imposed such a tax), they’ll argue for statewide tax harmonization. And when that leads to cross-state shopping, they’ll push for federal harmonization.

Maybe, just maybe, they should leave people alone. In a free society, you should have the right to control your own life, even if it means making decisions that some people don’t like.

P.S. Nobody should be surprised when Seattle politicians enact bad policy.

P.P.S. Since we now know that soda taxes backfire, you also won’t be surprised to learn that marijuana taxes backfire. And tobacco taxes.

P.P.P.S. To the extent these taxes are successful, we get more evidence of the Laffer Curve. That happened in Berkeley. And it happened in Mexico.

Read Full Post »

State Tax Progress

Last year I shared a very encouraging map, which identified the many states that have been cutting tax rates.

After the November elections, I wrote a couple of encouraging columns about voters making sensible decisions when given the ability to vote for higher or lower taxes.

Later that month, I updated my five-column table showing which states have the best and worst tax systems.

And I ended the year with a look at the Tax Foundation’s State Tax Business Climate Index.

All things considered, not a bad year. At least at the state level.

Well, we may see more progress this year.

Grover Norquist of Americans for Tax Reform has a column in the Wall Street Journal about an ongoing revolution of pro-growth tax cuts at the state level.

…in the 50 states there is a dramatic increase in tax competition to provide the best government at the lowest cost. …Americans have noticed that high-tax states don’t provide better roads, education or other services. Florida (with 22 million residents) has no income tax and the state spends half as much as New York (20 million residents). New York has a top state income tax of 8.82% (soon rising to 10.9%) and was the only state to raise its personal income-tax rate during the pandemic. …state leaders have discovered that…marginal income-tax rate…reduction is enabled by spending restraint. North Carolina provided the best example of this strategy over the past seven years. …Louisiana, under the leadership of Senate Majority Leader Sharon Hewitt, has set a path to reduce its income tax every year triggers are met. These triggers could take Louisiana’s income tax to zero by 2034… Ten other states have begun the march to a zero rate.

The column also mentions other states, such as Iowa, that hopefully will replace discriminatory regimes with simple and fair flat taxes.

Not everyone is happy about these developments.

In a column for the Washington Post, Catherine Rampell points out that some of the tax cutting was enabled by Biden’s big handouts to state governments.

Democrats in Congress have made it much easier for state-level Republicans to slash taxes this year… That’s because Democrats have shoveled a ton of federal money onto the states… Big budget surpluses have inspired the governors of Missouri, South Carolina and Iowa to propose cuts to their income tax rates. Utah’s Senate recently approved a $160 million tax cut, with its state House of Representatives expected to make the proposal even more expansive. And Mississippi is working to cut taxes on food sales and car tags — and to phase out its income tax entirely. …Even blue and purple states may jump on the traditionally conservative tax-cut bandwagon, too. …after President Biden took office, Democrats decided to go big with their stimulus bill… Democrats sent states and localities an additional $500 billion, including direct state and local covid relief grants, plus separate funding for education, transit and other programs. …many states have more cash than they know what to do with. …total state and local receipts were 26 percent higher in 2021 than they were in 2019.

Here’s the part she doesn’t like.

Republicans are taking these deficit-financed federal dollars, passing them on to constituents in the form of lower taxes and reaping the political benefits — all while being able to blame Democrats for the enormous cost they add to the federal debt. …perhaps red states reasonably assume that Democrats won’t learn their lesson — and will keep the federal dollars flowing, even if doing so hands Republicans home-state political victories.

Interestingly, congressional Democrats recognized this might be a problem.

But the anti-tax cut language they included in their handout legislation has not been effective.

Democrats did include legislative language that forbade any pandemic relief funds from being used to “either directly or indirectly” finance tax cuts. But enforcing that provision was always going to be difficult… Federal judges have already blocked Treasury from enforcing the no-tax-cut provision in at least 15 states… More litigation is pending, but these developments have emboldened Republicans, who are eager to use Democrats’ sloppy bill design against them.

All of this may be a quandary for libertarians and conservatives.

Biden’s boondoggle stimulus was bad legislation. And the same can be said for major parts of Trump’s pandemic emergency spending bills.

Yet one fortunate side effect is that state governments have had so much money that some of them have been cutting taxes.

But some of them also have been spending more money, and that won’t lead to good results.

All things considered, this really shouldn’t be a quandary. We got two bad things (more federal spending and more spending in some states) and one good thing (tax cuts in some states).

P.S. At some point, the politicians in Washington will have to restore some fiscal sanity, but I’m not holding my breath for good policy.

P.P.S. I suspect we’ll see even more interstate tax migration over the next few years. Simply stated, many people would rather live in libertarian-oriented states rather than greed-oriented states.

Read Full Post »

More than 11 years ago, the Center for Freedom and Prosperity released this video about the OECD, a Paris-based bureaucracy subsidized by American taxpayers.

As outlined in the video, there are many reasons to dislike the Organization for Economic Cooperation and Development.

As a fan of tax competition, I don’t like the OECD because the bureaucrats persecute jurisdictions with low tax burdens.

But the bureaucracy’s pro-tax harmonization campaign is a symptom of a broader problem, which is that the OECD relentlessly advocates for higher taxes.

Consider the recent publication entitled “Fighting Tax Crime – The Ten Global Principles.” As you can see, nine of those ten principles involve more power and authority for government.

Since I’m not an anarcho-capitalist, I realize some taxation is necessary (ideally only the amount needed to finance genuine public goods).

As such, I don’t necessarily condemn enforcement policies.

But I am irked by a big sin of omission. If the bureaucrats at the OECD should have added an 11th principle about modest tax rates.

Why?

Because the academic literature very clearly shows that low tax rates are correlated with better tax compliance.

And those low tax rates also are better for prosperity, which is something that should be of interest to a bureaucracy with the words “economic” and “development” as part of its name.

Heck, some OECD economists have written about these benefits of low tax rates.

But none of that now matters. The bureaucrats today are totally fixated on carrying water for the world’s uncompetitive, high-tax governments.

Which is why I’m a big fan of defunding the OECD.

P.S. I suppose we should be happy that the bureaucrats acknowledge that taxpayers should have rights.

P.P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending and expenditure limits.

Read Full Post »

The Laffer Curve is a method for illustrating the relationship between tax rates, taxable income, and tax revenue.

But it’s important to realize that there are actually lots of varieties.

The Laffer Curve for capital gains taxes, for instance, will look different than the Laffer Curve for payroll taxes. Or corporate taxes. Or marijuana taxes.

In every case, the shape of the curve will depend on what’s being taxed and the ability of affected taxpayers to alter their behavior.

And the shape of the Laffer Curve also will depend on whether one is measuring the short-run revenue impact of tax changes or the long-run impact of tax changes.

Given all these varieties, no wonder so many people, both right and left, sometimes misstate its meaning.

Let’s try to expand our understanding of the Lafffer Curve by looking at some new research.

Professor Aaron Hedlund of the University of Missouri authored a study on the Laffer Curve for the Show Me Institute.

Here’s what he wants to understand.

Empirically, recent research provides a variety of estimates for the revenue-maximizing and welfare-maximizing tax rates, but one lesson that emerges is that analyses that only take into account the response of hours worked to tax increases are bound to greatly overestimate the amount of new revenue that can be raised while underestimating the economic damage from lost GDP growth and wages. This paper examines the relationship between tax rates and revenue by taking a broader view that encompasses the responses of skill acquisition, entrepreneurship, innovation, and the labor market behavior of dual-earner families. The bottom line that emerges is that these additional margins of adjustment imply significantly lower revenue-maximizing and welfare-enhancing tax rates.

He then explains that some economists fail to look at all possible behavioral responses.

Traditionally, much of the economic analysis aimed at finding this peak rate has focused on how the income tax rate affects an individual’s willingness to work, both with regard to hours worked and the decision to enter the labor force at all. Moreover, until the recent arrival of better data, much of the academic research considered only the response of heads of households. …This assumption of tax rate insensitivity led economists Peter Diamond and Emmanuel Saez to conclude that the optimal—revenue maximizing—top income tax rate is 73%. Moreover, in an analysis that also considers the social insurance benefits of progressive taxation—specifically, the ability of redistribution to soften the blow of unexpected economic hardship—economists Fabian Kindermann and Dirk Krueger provide justification for a top rate that approaches 90%. However, both studies omit the many other margins of behavioral adjustment that accompany any significant change to tax rates.

When all behavioral responses are measured, it turns out that the revenue-maximizing rate is much lower.

In one study that accounts for the sensitivity of entrepreneurs to tax rates, increasing the progressivity of the income tax code leads to a revenue-maximizing top rate of only 33%. Furthermore, in this case revenues only increase by 5%—amounting to less than one percentage point of GDP. Another study finds even starker results when looking at the subset of superstar entrepreneurs. In an analysis that incorporates the positive spillovers of ideas and innovation on economic growth, economist Charles Jones finds that the revenue-maximizing tax rate may even be as low as 29%. Furthermore, he shows that raising the top income tax rate to 75% could reduce GDP by over 8%, which would greatly blunt the impact on revenues by shrinking the tax base.

Figure 5 from the study shows how the revenue-maximizing rate varies depending on which factors are included in the study.

My two cents on this issue is to remind readers that we don’t want to maximize revenue for politicians.

As such, I don’t care if the revenue-maximizing rate in 29 percent or 73 percent.

I want to be at the growth-maximizing rate, which is where the government only collects the amount of money that is necessary to finance genuine public goods.

Needless to say, that means tax rates (and spending burdens) far lower than today.

P.S. Tax accountants have a very good understanding of the Laffer Curve.

P.P.S. Heck, even the thugs from ISIS understand the Laffer Curve.

P.P.P.S. Sadly, it doesn’t matter if some leftists understand the Laffer Curve.

Read Full Post »

What’s the main problem in K-12 education today? Based on news reports, one might think the top challenge involves hot-button social issues such as sex education and critical race theory.

Or maybe pandemic policies such as masking, remote learning, and vaccinations.

Or the malignant role of teacher unions.

Those are real issues, of course, but surely the biggest problem must be that taxpayers are spending ever-more money and getting ever-weaker results.

Given these issues, I was interested to see that the Washington Post has a lengthy article, written by Laura Meckler, that looks at the various challenges facing government schools.

It starts with a grim assessment.

Test scores are down, and violence is up. Parents are screaming at school boards, and children are crying on the couches of social workers. Anger is rising. Patience is falling. For public schools, the numbers are all going in the wrong direction. Enrollment is down. Absenteeism is up. …Public education is facing a crisis unlike anything in decades, and it reaches into almost everything that educators do: from teaching math, to counseling anxious children, to managing the building. …Schools are on the defensive about their pandemic decision-making, their curriculums, their policies regarding race and racial equity and even the contents of their libraries.

As one might suspect, the pandemic made a bad situation worse.

Remote learning, the toll of illness and death, and disruptions to a dependable routine have left students academically behind — particularly students of color and those from poor families. Behavior problems ranging from inability to focus in class all the way to deadly gun violence have gripped campuses. …In fall 2021, 38 percent of third-graders were below grade level in reading, compared with 31 percent historically. In math, 39 percent of students were below grade level, vs. 29 percent historically. …A McKinsey & Co. study found schools with majority-Black populations were five months behind pre-pandemic levels. …Last school year, the number of students who were chronically absent — meaning they have missed more than 10 percent of school days — nearly doubled from before the pandemic.

Many parents have responded to this mess by seeking other options.

More kids are now attending charter schools or private schools, and there’s also been an explosion in home schooling.

Enrollment in traditional public schools fell to less than 49.4 million students in fall 2020, a 2.7 percent drop from a year earlier. …if the trend continues, that will mean less money for public schools as federal and state funding are both contingent on the number of students enrolled. …Some students have shifted to private or charter schools. A rising number, especially Black families, opted for home schooling. And many young children who should have been enrolling in kindergarten delayed school altogether. …charter schools, which are privately run but publicly funded, saw enrollment increase by 7 percent, or nearly 240,000 students, according to the National Alliance for Public Charter Schools. There’s also been a surge in home schooling. Private schools saw enrollment drop slightly in 2020-21 but then rebound this academic year, for a net growth of 1.7 percent over two years.

From my perspective, here’s the best part of the article.

Fueling the pressure on public schools is an ascendant school-choice movement… EdChoice, a group that promotes these programs, tallies seven states that created new school choice programs last year. …Another 15 states expanded existing programs.

Amen. School choice is the answer to our education problems – from the perspective of both students and taxpayers.

We’ve already seen a lot of progress on this issue, but more is needed. I hope more and more states copy nations such as CanadaSwedenChile, and the Netherlands and give parents the ability to opt for higher-quality private schools.

P.S. Unsurprisingly, it didn’t help when politicians created a federal Department of Education in the late 1970s. At best, it meant another layer of costly bureaucracy. At worst, it led to mandates and regulations that exacerbated the problem of ever-more spending for ever-weaker results.

P.P.S. Here’s a very amusing video about home schooling.

Read Full Post »

I’ve repeatedly heaped praise on Ronald Reagan.

I’ve also lauded Calvin Coolidge on several occasions.

And I even once extolled the virtues of Grover Cleveland.

Today, we’re going to celebrate the fiscal achievements of Warren Harding.

Most notably, as illustrated by this chart based on OMB data, he presided over a period of remarkable spending discipline.

Harding also launched very big – and very effective – reductions in tax rates.

And his agenda of less government and lower tax rates helped bring about a quick end to a massive economic downturn (unlike the big-government policies of Hoover and Roosevelt, which deepened and lengthened the Great Depression).

In an article for National Review last year, Kyle Smith praised President Harding’s economic stewardship.

In a moment of national crisis, Warren G. Harding restored the economic health of the United States. …America in 1921 was in a state of crisis, reeling from the worst recession in half a century, the most severe deflationary spiral on record… Unemployment, it is now estimated, stood somewhere between 8.7 and 11.7 percent as returning soldiers inflated the size of the working-age population. Between 1919 and August of 1921 the Dow Jones average plummeted 47 percent. Harding’s response to this emergency was largely to let the cycle play out. …The recession ended in mid-year, and boom times followed. Harding and Congress cut federal spending nearly in half, from 6.5 percent of GDP to 3.5 percent. The top tax rate came down from 73 percent to 25, and the tax base broadened. Unemployment came down to an estimated 2 to 4 percent. …Harding was a smashing success in a historically important role as the anti-Wilson: He restored a classically liberal, rights-focused, limited government, and deserves immense credit for the economic boom that kicked off in his first year and continued throughout the rest of the 1920s.

Smith’s article also praises Harding for reversing some of Woodrow Wilson’s most odious policies, such as racial discrimination and imprisoning political opponents (Wilson also had a terrible record on economic issues).

Now let’s look at some excerpts from a new article authored by Vance Ginn of the Texas Public Policy Foundation and John Hendrickson of the Iowans for Tax Relief Foundation.

President Harding assumed office in 1921 when nation was suffering an overlooked severe economic depression. Hampering growth were high income tax rates and a large national debt after WWI. …President Harding’s chief economic policy was to rein in spending, reduce tax rates, and pay down debt. Harding…understood that any meaningful cuts in taxes and debt couldn’t happen without reducing spending. …Not only was Harding successful in this first endeavor to reduce government expenditures, his efforts resulted in “over $1.5 billion less than actual expenditures for the year 1921.”  …The decade had started in depression and by 1923 the national economy was booming with low unemployment. 

By the way, the $1.5 billion-plus reduction from 1921 to 1922 may not sound like much, but it was a 30 percent reduction in the size of government (and this was back in the days when government was a relatively small burden).

That would be akin to cutting more than $1.5 trillion from this year’s federal budget.

What a great idea – perhaps even better than my other libertarian fantasy.

P.S. Thomas Sowell has praised Harding’s economic policies.

P.P.S. And I’ve applauded Bill Clinton’s economic policies. Or, to be more precise, I’ve praised the policies that were enacted during his presidency.

Read Full Post »

Three years ago, I unveiled this video to help explain that trade deficits are nothing to worry about.

The most important thing to understand from the video is that the flip side of a trade deficit is a capital surplus.

To be more specific, foreigners earn dollars by selling products to Americans. They then use those dollars to buy goods and services from American producers, or they use those dollars to invest money in the American economy.

And when foreigners choose to invest their dollars, that necessarily is accompanied by a trade deficit.

At the risk of understatement, it’s not bad that foreigners want to invest in the United States.

Why am I discussing this topic today?

Because we have final data on trade flows for 2021. Here are some excerpts from a report by Ana Swanson for the New York Times.

The U.S. trade deficit in goods soared to record levels in 2021, topping $1 trillion… The overall trade deficit in both goods and services also hit an annual record, rising 27 percent as the country’s imports far outpaced its exports, according to data released by the Commerce Department… Imports surged by $576.5 billion, or 20.5 percent, rising sharply from a slump at the onset of the pandemic, as both the quantity and the price of the foreign products that Americans purchased increased. Businesses spent heavily on equipment and machinery… Exports grew 18.5 percent, or by $394.1 billion.

The correct reaction to this story is a big yawn.

Simply stated, I don’t care if Americans bought more from foreigners than foreigners bought from Americans. Just like I don’t care that I have a trade deficit with my local grocery stores (I’m always buying food from them and they never buy anything from me!).

Here’s another sentence from the story that deserves some attention.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the ballooning trade deficit last year mostly reflected the country’s continued strong economic growth.

To elaborate, if the United States economy is growing, that means Americans can afford to buy more stuff, regardless of where those goods and services originate.

And if other places in the world are growing slower (such as Europe), that means people from those areas can’t afford to buy as much stuff that originates in the United States.

P.S. A few years ago, I criticized Trump’s trade deal with China.

At the risk of patting myself on the back, I was right. Here are a few more sentences from the NYT story.

The data also revealed the shortcomings of a trade deal that Mr. Trump signed with China in 2020. …China committed to buying an additional $200 billion worth of American goods and services above a 2017 baseline by the end of 2021. But those purchases did not materialize. …China actually bought none of the additional $200 billion of exports that the trade deal had promised. …the trade deal Mr. Trump signed in 2020 “did not address the core problems” with China’s state-led economy.

P.P.S. While it is generally a good thing when foreigners invest in the U.S. economy, that’s only true if they investing in the private sector (stocks, bonds, real estate, etc). By contrast, if foreigners are using dollars to buy government bonds, that obviously doesn’t help growth.

But the problem isn’t that foreigners are buying government debt. That’s merely a symptom of the actual problem, which is excessive spending by politicians in Washington.

The moral of the story is that free trade is desirable…and small government is desirable.

Read Full Post »

I write frequently about economic policy in California, mostly to note that bad policy by politicians is offsetting the state’s natural advantages such as climate, natural resources, and topography.

The net result is a slow-motion economic suicide, as measured by a gradual loss in competitiveness and unfavorable migration patterns.

Today, we’re going to make similar points, but we’ll use humor. Like we did in 2020.

There’s probably no better summary of the state’s misplaced priorities than this meme, which compares the laughable promises of high-speed rail with the reality of mass crime in rail yards.

What happens when a state criminalizes plastic straws and de facto decriminalizes theft?

This happens.

Strangely enough, some people don’t like paying a lot of tax to a government that squanders money and fails to provide basic services.

But if too many of them try to escape at the same time…

Maybe politicians from the Golden State should build that Berlin Wall that Walter Williams joked about.

It’s nice that Californians are allowed to escape. But it may not be so nice for other states if they bring their left-wing voting habits with them.

Last but not least, my favorite item today is this cartoon, which shows would-be entrepreneurs the best routes for economic success.

Though it isn’t really a joke, given all the businesses that have migrated.

P.S. While California is easy to mock, I think Illinois and New Jersey actually are in worse shape (and lots of people share my view about Illinois).

P.P.S. Other examples of California-themed humor can be found here, here, here, and here.

P.P.P.S. There are some crazy policies that are too much even for the crowd in Sacramento, so maybe there’s hope for the state.

Read Full Post »

Admirable politicians are extremely uncommon. You’re more likely to spot a leprechaun or see the Loch Ness Monster.

In general, the people who want to rule over us are a distasteful mix of narcissism and demagoguery.

But some elected officials are worse than others, which is why I created the Politician of the Year Award.

At the end of 2021, for instance, I bestowed this honor on the Pathetic Politician of the Year and the Reprehensible Politician of the Year.

We’re still very early in 2022, but there already are some politicians who deserve recognition for going above and beyond the call of duty.

Especially with regards to hypocrisy. Consider, for instance, the Governor of California and the Mayor of Los Angeles, both of whom ignore the mask mandates they want regular people to follow.

What’s especially laughable is when politicians concoct absurd excuses.

Liz Wolfe highlights a grotesque example in a column for Reason.

L.A. Mayor Eric Garcetti is the latest California politician to hammer home the point that the state’s pandemic rules are just for the little people. What Gov. Gavin Newsom started, and San Francisco Mayor London Breed continued, Garcetti has perfected. He even developed the ideal face-saving line: When a photo surfaced Wednesday of Garcetti, maskless, with Lakers legend Magic Johnson at a Rams game, the mayor reassured concerned citizens that he held his breath to take the photo. …Garcetti’s comically absurd response betrays either a misunderstanding of how COVID is spread or the extent to which the rules he’s imposed, but doesn’t feel the need to follow, are largely hygiene theater.

Since we’re on the issue of mask hypocrisy, let’s include Stacey Abrams, Georgia’s Democratic nominee for governor in 2018.

She’s already famous for being a sore loser. Like Trump, she refused to accept the fact that she lost her most recent election battle.

Now she’s also famous for being a mask hypocrite, thanks to a photo of her getting special treatment in a room full of masked children.

Here are some details on the controversy, as reported by Jim Geraghty for National Review.

On February 4, Stacy Abrams visited Glennwood Elementary School in Decatur, Ga.,.. She retweeted a tweet…which featured three photos of Abrams with students and faculty. Why are all the children masked, and she is not? Why is everyone masked, and Abrams is not? On what planet does that make sense? …After those on Twitter called out this insane double-standard, Abrams deleted the tweet… But deleting the tweets doesn’t eliminate the photos from the archives, and attempting to hide what happened does not change what happened. …The school welcomed a celebrity guest and chose to suspend its masking policy for her while keeping that rule in place for everyone else. If that is so self-evidently indefensible that Abrams and the school won’t even try to defend it, then why are those policies still in place? …Abrams and the school are just playing ostrich and waiting for the controversy to go away. We keep seeing this over and over and over again — Gavin Newsom, Ralph Northam, Muriel Bowser, Joe Biden, London Breed, Jamaal Bowman — officials who enact masking rules, then ditch the masks as soon as they think no one is looking and always insist that their not wearing masks is different somehow.

There are many other pandemic hypocrites. I mocked two of them in a column in September of 2020. And then skewered several more of them in a column in November of 2020.

Now that everyone has had a chance to get vaccinated, I’m trying to figure out if the double standards are absurd or elitist? Arrogant or pathetic?

But maybe we should ask politicians. After all, they’re the experts on hypocrisy.

Read Full Post »

Hard-core libertarians sometimes point out that thieves and tax bureaucracies have a lot in common. Both use the threat of force and punishment to take money from unwilling victims.

There’s a lot of truth to that comparison. I give money to the IRS every year for the same reason that I would hand over my wallet to a gun-toting criminal.

I don’t want to surrender my earnings, of course, but the consequences of non-compliance are very high.

However, I don’t rely on this comparison when debating tax policy because a clever leftist will point out that it implies anarcho-capitalism (i.e, if all taxes are theft, that means no government).

That being said, sometimes there truly is no difference between the behavior of thieves and the behavior of bureaucrats.

Jacob Sullum’s column in Reason reveals a nauseating example of theft-by-government, which involves a sheriff’s department in California brazenly stealing the revenue of legal marijuana businesses.

San Bernardino County sheriff’s deputies stopped Empyreal vans three times in November, December, and January. They seized cash during two of the stops, making off with a total of more than $1 million, which was transferred to the FBI so the Justice Department could pursue forfeiture under federal law. If the government prevails in those forfeiture proceedings, the sheriff’s department will get to keep up to 80 percent of the money under the Justice Department’s “equitable sharing” program. The earnings of state-licensed marijuana suppliers are not subject to forfeiture under California law. …Empyreal argues that the traffic stops were pretextual: ostensibly justified by minor traffic violations but actually aimed at generating revenue for the sheriff’s department. Sheriff’s Deputy Jonathan Franco claimed the November 16 stop, which resulted in the seizure of $712,000, was justified because the Empyreal van was following a tractor-trailer too closely. When the same deputies pulled over the same vehicle, driven by the same employee, on December 9, according to the lawsuit that Empyreal filed on January 14, they claimed the driver “slightly exceeded the speed limit and prematurely activated his turn signal.”

The article gets into some of the legal details, such as the armored-car company (Empyreal) trying to get a restraining order against the thieving bureaucrats.

All of which is important, I’m sure, but I can’t help but focus on the utterly venal actions of the San Bernardino County Sheriff (as well as the FBI, the Justice Department, and anyone else involved).

I understand that some people don’t like that there are legal marijuana suppliers in California. But that doesn’t mean that a local law enforcement bureaucracy has the right to engage in (quite literally) highway robbery.

So what’s the bottom line?

Because I believe in the rule of law, nobody should be subject to civil asset forfeiture (a.k.a., “policing for profit“), a reprehensible practice that allows governments to steal property without a finding of guilt.

Even real criminals shouldn’t be punished until and unless they are convicted. But it’s even more disgusting when people engaging in completely legal behavior are targeted.

P.S. Here’s an amusing example of the shoe being on the other foot.

P.P.S. It’s worth noting that the first two directors of the Justice Department’s program on asset forfeiture have since come out against the practice. Redemption is good for the soul.

Read Full Post »

A key principle of economics is convergence, which is the notion that poorer nations generally grow faster than richer nations.

For instance, battle-damaged European nations grew faster than the United States in the first few decades after World War II.

But, starting in the 1980s, that convergence stopped. And not because Europe reached American levels of prosperity. Even the nations of Western Europe never came close to U.S. levels of per-capita economic output.

Moreover, European countries then began to lose ground for the rest of the 20th century.

And that process is continuing. Here’s a recent tweet from Robin Brooks, the Chief Economist of the Institute of International Finance, which shows that the United States was growing faster than Europe before the pandemic and is now growing faster than Europe after the pandemic.

In other words, we’re seeing divergence.

Sven Larson addressed this same issue in a new article on this topic for European Conservative.

Over the 20 years from 2000 to 2019, the U.S. economy outgrew the 27-member European Union by a solid 19%, adjusted for inflation. These numbers…are quite impressive, especially considering that during President Obama’s eight years in office, annual growth in gross domestic product, GDP, never reached 3%. …From 2010 to 2019, U.S. unemployment averaged 6.3%, dropping below 3.7% in the last year before the pandemic. By contrast, the EU economy never dropped below 6.7% unemployment (in 2019) with an average of 9.5% for the entire decade. …These differences between America and Europe are significant, and should be the subject of debate in Europe: what is it that the Americans are doing that Europeans could do better? Over time, even small differences in economic growth compound into large differences in the standard of living.

Here’s his chart showing the divergence.

So why is Europe falling behind the United States when it should be growing faster because of lower living standards?

Sven has a very good explanation.

There are many candidates for explaining this difference, but there is one that stands out compared to all the others: the size of government. Between 2010 and 2019, government spending in the European Union was equal to 48.3% of GDP, on average, compared to 37.1% in the U.S. economy. …The most hard-hitting impact does not come through taxes, as conventional wisdom suggests, but through spending. …government operates under a form of central economic planning. Its outlays are not based on the mechanisms and prices of free markets: instead, its spending is governed by ideological preferences… While government spending inflicts the most damage on the economy, taxes are not insignificant. Here, again, the U.S. comes out more competitive than its European counterpart, and it is not a new problem. …For the past 20 years, European governments in general have taxed their economies 10-12 percentage points higher, as a share of GDP, than is the case in America.

Having crunched the data from Economic Freedom of the World, I think Sven is correct.

With regards to factors other than fiscal policy, European nations have just as much economic liberty (or, if you’re a glass-half-empty type, just as little economic liberty) as the United States. Heck, many of them rank above the United States when just considering factors such as trade, red tape, monetary policy, and rule of law.

Yet the United States nonetheless earns a better overall score.

Why? Because the United States does much better on fiscal policy (or, to be more accurate, doesn’t do as poorly).

P.S. Both Europe and the United States are moving in the wrong direction with regard to fiscal policy. Almost as if there’s a contest to see who can be the most profligate. Let’s call it the Keynesian Olympics. Whoever wins a gold medal is the first to suffer a fiscal crisis.

Read Full Post »

I wrote last month about a tax-and-spend proposal for single-payer healthcare in California (sort of a state version of “Medicare for All“).

I also analyzed the scheme in this discussion with Gene Tunny of Australia.

What’s remarkable, as Gene mentioned in his preface, is that the left’s push for single payer failed – even though Democrats have complete control of the Golden State, including more than three-fourths of the seats in both chambers of the state legislature.

So why didn’t those politicians hasten the state’s slow-motion economic suicide?

Almost certainly, the biggest reason is that even folks on the left have second thoughts about the enormous tax increase that would have been required.

As I noted back in 2016, big government is only fun when somebody else is picking up the tab.

Which motivates me to unveil a Thirteenth Theorem of Government.

Let’s take a closer look at what happened with single payer in California.

Here are some excerpts from a report by Sophia Bollag for the Sacramento Bee.

Efforts to create a government-run health care system for all Californians stalled Monday when the lawmaker pushing the legislation announced he didn’t have the votes in time for a key deadline. Assembly Bill 1400 aimed to create a so-called single-payer health care system in California that would essentially replace private insurance with a state-run health system. …To fund it, lawmakers would have also needed to pass a separate bill to increase taxes… The taxes Kalra proposed would also require voter approval. …Kalra said the fight for single-payer health care won’t die with AB 1400. Lawmakers could craft a different bill to implement such a system in the future. The bill’s failure represents a blow to the California Nurses Association, which had backed the bill. …This isn’t the first time a bill to create a single-payer system has died in the Assembly. The Senate advanced a similar bill in 2017, but it died in the Legislature’s lower chamber. Gov. Gavin Newsom…has said he supports single-payer health care.

Giant tax increases were the big obstacle (as was the case a few years ago).

…higher taxes are a tough sell, even in the California Legislature where Democrats hold a super-majority. …Fiscal analyses estimate the bill could cost between $314 billion and $391 billion per year if it were implemented. That would dramatically increase total state spending; California’s current budget is $262 billion. To pay for it, Kalra proposed taxing businesses 2.3% of their income after the first $2 million through a proposed amendment to the California Constitution. His proposal would also have imposed a 1.25% payroll tax on employers of 50 or more people and an additional payroll tax on wages for California residents over $49,900 per employee. The measure would have added progressive income taxes starting at .5% for people making more than $149,500, up to 2.5% for people making more than about $2.5 million per year.

By the way, the higher income tax rates mentioned in the last sentence would be in addition to California’s already-highest-in-the-nation income tax rates.

In a column for Forbes, Patrick Gleason points out that the failure of single payer in California is part of a pattern.

For progressive lawmakers and activists who want to enact a national single-payer health care system, rejection of a state-level “Medicare For All” proposal in one of the bluest states in the nation, where Democrats have sweeping control of state government, is seen as a major set back. …California isn’t the only state, let alone the only blue state, where single-payer health system legislation has crashed and burned. New York Assemblyman Richard Gottfried (D), the longest serving member of the history of the New York Assembly, has long pushed for the New York Health Act, a single-payer proposal for the Empire State. Assemblyman Gottfried’s bill was approved by the New York Assembly five times between 1992 and 2018, only to see the state senate decline to take it up. As in California, exorbitant cost projections have been the main obstacle to single-payer’s enactment. …it is single-payer champion Bernie Sanders’ state of Vermont where state-level Medicare-For-All first proved to be unworkable. More than a decade ago, Vermont state lawmakers enacted legislation to implement a single-payer system called Green Mountain Care. …Shortly after the single-payer bill was enacted in 2011, Vermont officials were confronted with the reality that “free” health care is actually pretty costly for taxpayers. Governor Shumlin and Vermont lawmakers discovered they would need to impose a new 11.5% state payroll tax and a 9.5 percentage point income tax increase to pay for the new entitlement. Together these tax increases would’ve represented a more than 150% hike in the state’s income tax.

If you want more information, I wrote about deep-blue Vermont’s disastrous (but fortunately temporary) experiment with single payer back in 2014.

The article also should have mentioned that blue-leaning Colorado voters had a chance to adopt a single-payer scheme in 2016. By a stunning margin of 80-20, they voted it down.

The bottom line is that people (sadly) are willing to use government as a tool to steal from their neighbors. But the message of the Twelfth Theorem is that they generally don’t like to steal from themselves.

P.S. Here are the other 12 Theorems of Government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.
  • The “Eighth Theorem” explains the motives of those who focus on inequality.
  • The “Ninth Theorem” explains how politics often trump principles.
  • The “Tenth Theorem” explains how politicians manufacture/exploit crises.
  • The “Eleventh Theorem” explains why big business is often anti-free market.
  • The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.

Read Full Post »

The title of this column is an exaggeration. What we’re really going to do today is explain the main things you need to know about government debt.

We’ll start with this video from Kite and Key Media, which correctly observes that entitlement programs are the main cause of red ink.

I like that the video pointed out how tax-the-rich schemes wouldn’t work, though it would have been nice if they added some information on how genuine entitlement reform could solve the problem  (as you can see here and here, I’ve also nit-picked other debt-themed videos).

Which is why I humbly think this is the best video ever produced on the topic.

As you can see, I’m not an anti-debt fanatic. It was perfectly okay, for instance, to incur debt to win World War II.

But I’m very skeptical of running up the nation’s credit card for routine pork and fake stimulus.

But my main message, which I’ve shared over and over again, is that deficits and debt are merely a symptom. The underlying disease is excessive government spending.

And that spending hurts our economy whether it is financed by taxing or borrowing (or, heaven forbid, by printing money).

Now let’s look at some recent articles on the topic.

We’ll start with Eric Boehm’s column for Reason, which explains how red ink has exploded in recent years.

America’s national debt exceeded $10 trillion for the first time ever in October 2008. By mid-September 2017 the national debt had doubled to $20 trillion. …data released by the U.S. Treasury confirmed that the national debt reached a new milestone: $30 trillion. …Entitlements like Social Security and Medicare are in dire fiscal straits and will become even more costly as the average American gets older. Even without another unexpected crisis, deficits will exceed $1 trillion annually, which means the debt will continue growing, both in real terms and as a percentage of the economy. The Congressional Budget Office estimates that the federal government will add another $12.2 trillion to the debt by 2031.

As already stated, I think the real problem is the spending and the debt is the symptom.

But it is possible, of course, that debt rises so high that investors (the people who buy government bonds) begin to lose faith that they will get repaid.

At that point, governments have to pay higher interest rates to compensate for perceived risk of default, which exacerbates the fiscal burden.

And if there’s not a credible plan to fix the problem, a country can go into a downward spiral. In other words, a debt crisis.

This is what happened to Greece. And I think it’s just a matter of time before it happens to Italy.

Heck, many European nations are vulnerable to a debt crisis. As are many developing countries. And don’t forget Japan.

Could the United States also be hit by a debt crisis? Will we reach a “tipping point” that leads to the aforementioned loss of faith?

That’s one of the possibilities mentioned in the New York Times column by Peter Coy.

It’s hard to know how much to worry about the federal debt of the United States. …Either the United States can continue to run big deficits and skate along with no harm done or it’s at risk of losing investors’ confidence and having to pay higher interest rates on its debt, which would suppress economic growth. …the huge increase in federal debt incurred during and after the past two recessions — those of 2007-09 and 2020 — has used up a lot of the “fiscal space” the United States once had. In other words, the federal government is closer to the tipping point where big increases in debt finally start to become a real problem. …any given amount of debt becomes easier to sustain as long as the growth rate of the economy (and thus the growth rate of tax revenue) is higher than the interest rate on the debt. In that scenario, interest payments gradually shrink relative to tax revenue. …but it doesn’t explain how much more the debt can grow. …Past a certain point, there’s a double whammy of more dollars of debt plus higher interest costs on each dollar. …sovereign debt crises tend to be self-fulfilling prophecies: Investors get nervous about a government’s ability to pay, so they demand higher interest rates, which raise borrowing costs and produce the bad outcome they feared. It’s a dynamic that Argentines are familiar with — and that Americans had better hope they never experience.

For what it’s worth, I think other major nations will suffer fiscal crisis before the problem becomes acute in the United States.

I realize this will make me sound uncharacteristically optimistic, but I’m keeping my fingers crossed that this will finally lead politicians to adopt a spending cap so we don’t become Argentina.

P.S. The Wall Street Journal recently editorialized on the issue of government debt and made a very important point about the difference between the $30 trillion “gross debt” and the “debt held by the public,” which is about $6 trillion lower.

…the debt really isn’t $30 trillion. About $6 trillion of that is debt the government owes to itself in Social Security and other IOUs. …The debt held by the public is some $24 trillion, which is bad enough.

As I’ve noted when writing about Social Security, the IOUs in government trust funds are not real.

They’re just bookkeeping entries, as even Bill Clinton’s budget freely admitted.

Indeed, if you want to know whether some is both honest and knowledgeable about budget matters, ask them which measure of the national debt really matters.

As you can see from this exchange of tweets, competent and careful budget people (regardless of whether they favor big government or small government) focus on “debt held by the public,” which is the term for the money government actually borrows from credit markets.

If you want to know the difference between the various types of government debt – including “unfunded liabilities” – watch this video.

P.P.S. This column explains how and when debt matters. If you’re interested in how to reduce the debt, there’s very good evidence that spending restraint is the only effective approach. Even in cases where debt is enormous.

P.P.P.S. By contrast, the evidence is very clear that higher taxes actually make debt problems worse.

Read Full Post »

Is the United States becoming more libertarian? In terms of social tolerance, there are reasons for optimism.

  • The legal harassment of drug users is declining.
  • Legal harassment of gay people has virtually disappeared.

But when looking at economic issues, there are plenty of reasons to be pessimistic.

Since my work focuses on economic policy, I don’t think the country is becoming more libertarian. Instead, I would argue we’re becoming more like Europe.

That’s not the worst possible outcome. After all, European nations rank highly in the Human Freedom Index.

But not exactly progress. And definitely not the kind of society libertarians fantasize about.

That being said, Gerard Baker of the Wall Street Journal writes that America may be on the verge of a “libertarian moment.” He starts by presenting a grim hypothesis consistent with public-choice theory.

The rising fear among American conservatives since the early days of the Covid pandemic has been that the nation would emerge from the crisis significantly less free. …Once introduced, rules almost always get more expansive, seldom more limited. Taxes levied for a temporary exigency become perpetual obligations. Government agencies built to administer some specific function are absorbed into the permanent bureaucracy.When a crisis is over, authorities may relinquish some of the powers they assumed during the emergency, but you can be sure that the government’s writ will run permanently larger than before. Wars, depressions, public-health emergencies lead to bigger government, more rules, more-onerous regulations.

He then suggests there will be a backlash.

Indeed, he thinks it has already started.

But let’s indulge a radical thought for a moment. What if the opposite is true this time? What if the ratchet slips, and rising popular hostility to arbitrary, petty, overbearing and ineffective rules induces a popular backlash? Isn’t it possible that the inconsistency, arrogance and mendacity of the people attempting to order our lives will produce the opposite of their desired outcome? …We have seen it most powerfully at the political level in Virginia… Voters explicitly rejected the attempt to make their children wards of the state, and the new Republican governor, Glenn Youngkin, is in a classic struggle with overweening bureaucrats desperate to maintain their reign of pointless mask-mandate authority. In Florida, Gov. Ron DeSantis appears to be cruising to re-election on a record of actively resisting the authoritarian demands of experts, Democrats and the media. …Perhaps the biggest cause for optimism is that this time people don’t have much cause for faith in the omnipotence of the state. …Instead of Franklin D. Roosevelt, Harry S. Truman, Dwight D. Eisenhower and Douglas MacArthur, we have Joe Biden, Kamala Harris, Anthony Fauci and Rochelle Walensky. If people of this caliber had been in charge in 1942, we might all be speaking German.

I want to believe this political backlash is the start of a libertarian moment, but I’m skeptical.

It’s good that more Americans understand that Washington is filled with venal, corrupt, and incompetent people.

But is that going to lead to pro-liberty reforms?

A few states are doing good things, most notably tax reform and school choice.

But there’s no hope in the near future for good policy from Washington.

Indeed, we’re probably going to see more bad policy. As I wrote at the start of the year, Biden’s horrible “Build Back Better” plan for bigger government is one or two votes away from enactment.

To be sure, the risk of new fiscal burdens may decline if Republicans gain control of Congress in November. But even if one assumes that those Republicans want to do something good, there’s no way they’ll have enough votes to overcome a veto from Biden.

The bottom line is that there is no chance of good policy from Washington until after the 2024 election.

And if we wind up with a typical big-government Republican in the White House, the wait for good policy will be much longer.

P.S. We got lots of pro-liberty reforms in the 1990s with Bill Clinton in the White House and Republicans controlling Congress, so divided government can be a recipe for good results. That being said, I fear Biden is more like Obama, meaning the best we’ll be able to hope for is gridlock.

Read Full Post »

Every few years (2012, 2015, 2019), I warn that easy-money policies by the Federal Reserve are misguided.

But not just because such policies eventually can lead to price inflation, which now has become a problem in the United States.

Bad monetary policy also can lead to asset inflation. In other words, bubbles. And it’s no fun when bubbles burst.

The obvious lesson to be learned is that central banks such as the Fed shouldn’t try to steer the economy with Keynesian-style monetary policy.

I’m motivated to write about this issue because the Washington Post recently invited some people to offer their ideas on how to fight inflation.

Some of the ideas were worthwhile.

Some of the ideas were bad, or even awful.

If asked to contribute, what would I have suggested?

Being a curmudgeonly libertarian, I would have channeled the spirit of Milton Friedman and pointed out that bad monetary policy by central banks is the cause of inflation. Simply stated, it is appropriate to blame central banks if there are sustained and permanent increases in the overall price level.

And the only way to fix inflation is for central banks to unwind the policy mistakes that caused the problem in the first place.

Some of the respondents did mention the need for Federal Reserve to rectify its mistakes, so I’m not the only one to think monetary policy is important.

But I’m very fixated on assigning blame where it belongs, so I would not have mentioned any other factor.

For instance, in an article just published by the Austrian Economics Center in Vienna, Robert O’Quinn and I explain that bad fiscal policy does not cause inflation.

Are we seeing higher levels of price inflation because of fiscal profligacy?  Some Republican U.S. Senators and Representatives have blamed this acceleration of price inflation on Biden’s blowout of federal spending. There are many good reasons to criticize Biden’s spending spree. It is not good for the economy to increase the burden of government spending and push for higher tax rates… But that does not necessarily mean deficit spending is inflationary. …Price inflation occurs when the supply of money exceeds the demand for money… Notably, none of the mechanisms that central banks use for monetary policy (buying and selling government securities, setting interest rates paid on reserves, loans to financial institutions, etc) have anything to do with federal spending or budget deficits.  The Fed and other central banks can maintain price stability regardless of whether governments are enacting reckless fiscal policies.

In the article, we cited Japan as an example of a country with huge levels of debt, yet prices are stable.

By contrast, prices are rising in the United States because of Keynesian monetary policies by the Federal Reserve (often with the support of politicians).

What’s causing inflation, if not budget deficits and government debt? …central banks have been pursuing an inflationary policy. But they’ve been pursuing that approach not to finance budget deficits, but instead are motivated by a Keynesian/interventionist viewpoint that it is the role of central banks to “stimulate” the economy and/or prop up the financial market with easy-money policies.

I’ll close by observing that there can be a link between bad fiscal policy and inflation.

In basket-case nations such as Venezuela, Zimbabwe, and Argentina, politicians periodically use central banks to finance some of their excessive spending.

Some governments, particularly in less-developed countries, cannot easily borrow money and they rely on their central banks to finance their budget deficits. And that is clearly inflationary.

Because of changing demographics and poorly designed entitlement programs, it’s possible that the United States and other western nations eventually may get to this point.

Heck, I speculated just a couple of days ago that the European Central Bank may be doing this with Italy.

But the United States hasn’t yet reached that “tipping point.” There are still plenty of investors willing to buy the federal government’s debt (especially since the dollar is the world’s reserve currency).

The bottom line is that we should pursue good fiscal policy because it makes sense. And we should pursue good monetary policy because it makes sense. But the two are not directly connected.

P.S. On the topic of inflation, Ronald Reagan deserves immense praise for standing firm for good policy in the 1980s.

P.P.S. On the topic of the Federal Reserve, the central bank also should be criticized for interfering with the allocation of credit. And financial repression as well.

P.P.P.S. On the topic of basket-case economies, let’s hope that the American policy makers don’t embrace “modern monetary theory.”

Read Full Post »

%d bloggers like this: