Depressing Polling Data

Here are some of America’s main economic problems.

• Painful inflation caused by bad monetary policy by the government.
• Excessive spending and debt caused by bad fiscal policy by the government.
• Rising prices and waste caused by bad health policy by the government.
• Inflexibility and inefficiency caused by bad regulatory policy by the government.

And that’s just a partial list. I’m not asserting that markets produce perfect results. Indeed, markets are a never-ending process of creative destruction.

But what I am stating is that intervention by politicians and bureaucrats almost always leads to bad outcomes.

So you can imagine my angst and disappointment at this recent polling data from Echelon Insights. A plurality thinks the government should “do more.”

I’m tempted to speculate whether 47 percent of Americans are morons.

But let’s take the high road and simply dig into the numbers. Whenever I see polling data, I always check whether the question is properly worded.

Is there any bias? Does the question make sense?

Sadly, I think the above question is relatively straightforward. If the poll has asked a stand-alone question about whether the government should do more, that might have been ambiguous.

After all, the government theoretically could “do more” by reforming entitlements, shutting down useless federal departments, and replacing the corrupt internal revenue code with a flat tax.

But when the poll also gives people the option of answering that the government is doing “too many things,” then it is quite clear that “do more” means bigger government.

In other words, 47 percent of people are…well, let’s just say confused.

Hopefully last year’s Gallup poll is more accurate.

P.S. I can’t resist sharing one other result from the Echelon Insight poll.

Here’s an example of a poll question generating good results (people want more energy production and a smaller burden of government spending), but for illogical reasons.

The problem with this question is that rising prices are caused by bad monetary policy and the only cure is to change monetary policy.

Yet respondents were not given that option.

They may not have given the right answer if the question was worded better, but they never got the chance (I also made this point when looking at different polling data two months ago).

P.P.S. I obviously like this polling data on a spending cap.

P.P.P.S. And I was shocked by this poll about the world’s most pro-capitalist nation.

P.P.P.P.S. For sentimental reasons, I very much approve of this poll.

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Help the World’s Poor with International Trade

I support free trade for selfish reasons. I want my life to be better and I want my country to be richer.

But I also support free trade for selfless reasons. I want other people in other countries to be richer as well.

And rejecting protectionism usually is a way to achieve both my selfish and selfless goals.

But not always. Let’s look at some new evidence about the selfless benefits of open trade and globalization.

In an article for VoxEU, Maksym Chepeliev, Maryla Maliszewska, Israel Osorio Rodarte, Maria Filipa Seara e Pereira, and Dominique van der Mensbrugghe summarize their new research on global value chains.

The authors look at the economic consequences if some or all companies are told they have to rely solely on domestic suppliers (“reshoring”) compared to a world where they engage in cross-border trade.

As you can can see from this chart, you get bad results from some protectionism (reshoring leading economies) or more protectionism (reshoring all economies). Liberalization, by contrast, leads to good results.

Here’s some of what they wrote about their results.

A possible reshoring of production by the leading economies and China would have a negative impact in most regions, with real income decreasing by 1.5% worldwide. A localised world takes the biggest toll on developing countries with the Middle East and North Africa, Rest of East Asia and Pacific, and Europe and Central Asian regions being hit the most severely (Figure 1). However, countries subsidising domestic production would also be worse off as reshoring decreases trade and income, limits the variety of products available to producers and consumers, and increases prices.

If you look closely at Figure 1, you will notice that the United States and other rich nations suffer relatively small income losses from protectionism.

So this is a case where the selfish argument for free trade does not play a big role.

But the selfless argument is very strong. The authors point out that poor nations are the ones that reap big rewards with expanded trade.

Or suffer big losses in a world with more protectionism.

Under the ‘Reshoring all’ scenario, 51.8 million additional people would fall into extreme poverty by 2030, the equivalent to a 0.6% increase in the global extreme poverty headcount ratio. …The ‘GVC-friendly’ scenario, on the other hand, could lift 21.5 million people from extreme poverty by 2030. …In addition, we find that 56.2 million would graduate to global middle-class status, measured as individuals with a per capita consumption of more than PPP $10.00 a day.

Figure 4 shows that protectionism produces more extreme poverty while expanded trade saves people from that awful fate.

Let’s close with two simple observations.

• First, free trade is a way for those of us in rich countries to help improve the lives of people in poor countries. Foreign aid, by contrast, has a long track record of failure since it mostly lines the pockets of the political elite and often actually subsidizes bad policy.
• Second, some people argue that there are geopolitical reasons to restrict trade with misbehaving nations such as Russia and China. That certainly may be true (not my area of expertise), but such restrictions should be imposed only if the geopolitical benefits exceed the economic costs.

Also, any discussion about trade is incomplete without an acknowledgement that not everyone benefits in the short run from changing patterns of trade.

But that’s true whether the trade is between countries or within countries.

We should acknowledge that new competitors, new technologies, and new products are part of “creative destruction,” which can cause pain for some people in the short run.

The key thing to understand, however, is that this is the process that makes societies far more prosperous in the long run. Moreover, when politicians interfere, they will cause more pain for more people in both the short run and the long run.

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State Capacity and American (Mis-) Governance

Everyone likes the idea of “state capacity,” at least when it means competent, honest government rather than dysfunctional, corrupt government.

But the consensus disappears when some folks argue that you achieve this goal by making government bigger.

It’s especially disappointing when international bureaucracies such as the OECD and IMF argue that poor countries somehow can become richer by imposing higher taxes and increasing the burden of government spending.

At the risk of understatement, that’s nonsense.

But this is not just an issue in developing nations.

In his New York Times column, Ezra Klein worries that his fellow leftists do not pay enough attention to what he perceives to be insufficient state capacity in the United States.

He starts by citing one of Biden’s top economists.

You can’t transform the economy without first transforming the government. …Brian Deese, the director of Biden’s National Economic Council, gave an important speech on the need for “a modern American industrial strategy.” …For decades, the idea has been disreputable, even among Democrats. You don’t want government “picking winners and losers,” as the adage goes. …But societies have richer, more complex goals. …So I won’t say markets failed. We failed. …Deese, in his speech to the Economic Club of New York., declared the debate over: “The question should move from ‘Why should we pursue an industrial strategy?’ to ‘How do we pursue one successfully?’”

He then describes how government fails.

…we need a liberalism that builds. Scratch the failures of modern Democratic governance, particularly in blue states, and you’ll typically find that the market didn’t provide what we needed, and government either didn’t step in, or made the problem worse through neglect or overregulation. …At the national level, much can be blamed on Republican obstruction and the filibuster. But that’s not always true in New York or California or Oregon. It is too slow and too costly to build even where Republicans are weak — perhaps especially where they are weak. …What we have is a government that is extremely good at making building difficult.

And he gives examples of government failure.

The Transit Costs Project tracks the price tags on rail projects in different countries. …the United States is notable for how much we spend and how little we get. It costs about $538 million to build a kilometer of rail here. Germany builds a kilometer of rail for $287 million. Canada gets it done for $254 million. Japan clocks in at $170 million. …The problem isn’t government. It’s our government. …When a government can’t…build the sign-up portal to its new health insurance plan or construct the high-speed rail it’s already spent billions of dollars on, that’s a failure of state capacity.

Klein quotes Nicholas Bagley, a law professor at the University of Michigan, about the “adversary legalism” that makes government slow and inefficient in the United States.

…a way that America differs from peer countries… “Inflexible procedural rules are a hallmark of the American state,” he writes. “The ubiquity of court challenges, the artificial rigors of notice-and-comment rule-making, zealous environmental review, pre-enforcement review of agency rules, picayune legal rules governing hiring and procurement, nationwide court injunctions — the list goes on and on.”

Klein concludes by stating that his side needs to focus not just on ideas, but also on how to reform government so that those ideas can be implemented.

When I go looking for ideas on how to build state capacity on the left, I don’t find much. …health, climate and education plans depend, crucially, on a state capable of designing and executing policy effectively. This is true at the federal level, and it is even truer, and harder, at the state and local level. So this is what I have become certain of: Democrats spend too much time and energy imagining the policies that a capable government could execute and not nearly enough time imagining how to make a government capable of executing them.

In the column, Klein does not offer any concrete solutions, but he does acknowledge that cutting back on “adversary legalism” will cause divisions on the left.

Which sound potentially amusing, but it’s important to acknowledge that libertarians are not united on this topic, either.

Though I’m very skeptical.

As I noted two years ago, my view of state capacity libertarianism is the same as my view of national conservatism. And compassionate conservatism, kinder-and-gentler conservatism, common-good capitalism, and reform conservatism as well.

Before I embrace any trendy new idea, someone needs to show me the tiniest shred of evidence that further reducing economic liberty can lead to more prosperity.

I suppose that’s possible, just as it’s possible I might be playing for the Yankees in the World Series later this year. But neither of those outcomes is likely for those of us who care about real-world evidence.

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If You Want Your Team to Win, Support Lower Taxes

Back in 2018, I shared some academic research on the relationship between state tax rates and the performance of professional football teams.

The main takeaway is that teams based in high-tax states did not win as many games, on average, as teams based in low-tax states.

So if you want your favorite team to win, support better tax policy.

Though there are no guarantees. A team from high-tax California just won the Super Bowl, so it goes without saying that taxes are not the only factor that determines team success.

But it presumably means that teams in states like California and New York have to overcome a built-in disadvantage.

Let’s take a look at some new research on this issue. Professor Erik Hembre of the University of Illinois at Chicago authored a study that’s been published by International Tax and Public Finance.

Here’s the question he wanted to answer.

Do higher state income taxes harm firms? …This paper examines the state income tax burden in a unique market, professional sports, where teams—the capital in question—are highly immobile and players—the labor—are highly mobile to test whether higher state income tax hinders team performance. Anecdotal evidence suggests higher state income taxes disadvantage professional sports teams. Across the four major US sports leagues, of the forty-nine franchises with long championship droughts, only four are from states that do not have an income tax, while twenty are from the highest taxed states.

Here’s his methodology, which takes advantage of the fact that free agency gave players new-found ability to play where they could keep more of their earnings.

To test the link between state income taxes and team performance, this paper analyzes team performance in the four major US professional sports leagues: the National Basketball Association (NBA), the National Football League (NFL), the National Hockey League (NHL), and Major League Baseball (MLB). To address concerns that the association between team performance and income tax rates may be coincidental, I examine how the tax rate effect changed with the adoption of free agency. Achieving free agency has been a milestone for players’ associations, paramount both for increasing player mobility across teams and for forcing teams to compete for player services without restrictions.

Since athletes respond to incentives (just like entrepreneurs, inventors, and scientists), we should not be surprised that Prof. Hembre found that teams in lower-tax states now enjoy more success.

I compare the link between tax rates and team winning percentage before and after the introduction of free agency in each league using within-team variation in top state marginal income tax rates. Prior to free agency, there was a small positive association between income tax rates and winning. After the introduction of free agency, changes in state income tax rates significantly influence team performance. Each percentage point increase in the top marginal income tax rate is associated with a 0.70 percentage point decrease in win percentage. The tax rate effect on team performance is robust to a variety of specifications, such as controlling for sales and property taxes or alternative tax rate measures. Changing the outcome measure to be championships or finals appearances also yields similar results. The estimated effect size is non-trivial. The main analysis effect size of − 0.70 means that a one standard deviation increase in tax rate will result in 2.05 fewer wins over an 82 game season. …Figure 3 presents the annual point estimates (훽2) and 95% confidence intervals of the income tax rate effects between 1980 and 2017. …in all 9 years prior to any league having free agency, there was a positive income tax effect estimate. This relationship changed shortly after the introduction of free agency and since 1990 the annual income tax effect has remained negative.

Here’s the aforementioned Figure 3 for my wonky readers.

As a fan of better tax policy, I like Prof. Hembre’s findings.

As a fan of the New York Yankees, I don’t like his findings

P.S. Here’s one final tidbit that will appeal to fans of the Raiders.

Considering an extreme case, the recent relocation of the Oakland Raiders from a high income tax state (California) to a no income tax state (Nevada) projects a winning percentage increase of 8.6 percentage points or about 1 game per NFL season

P.P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But he has since migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.P.S. Needless to say, these principles also apply in other nations.

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A Lesson from the Texas School Shooting

I support the the right to keep and bear arms. That said, the horrific school shooting in Texas almost leads me to wish that guns did not exist. Here’s some of what I said as part of a recent episode of The Square Circle.

My main argument during the program is that gun control simply does not work. Such laws might deter law-abiding people from owning guns, but bad people – especially the nutjobs – obviously don’t care about breaking rules.

It is true that nationwide guns bans and gun confiscation might make it harder for these evil people to obtain firearms, but watch this video from Reason (or look at this polling data) if you actually think that’s a practical approach.

Some people argue that it would be better to allow teachers and other school staff to possess weapons.

That would be better than nothing, but who knows if that would have a measurable impact.

Other people say the problem is mental health and/or societal decay.

I’m sure those are factors as well, but pointing out problems is not the same as devising solutions.

Though maybe there is a way we can strengthen “red flag laws” while also guarding against abuse. I’m skeptical, but would like to be proven wrong.

For purposes of today’s column, I want to focus on what appears to be negligent behavior by the cops in Texas. Here are some excerpts from a report by the New York Times.

The grief of families in Uvalde, Texas, was compounded by anger and frustration on Thursday as police leaders struggled to answer questions about the horrific hour it took to halt a gunman who opened fire on students and teachers inside Robb Elementary School. …Parents had massed outside the school on Tuesday as gunfire erupted inside, urging the police who were holding them at bay to go in and stop the carnage. …An armed Uvalde school district officer, who had been nearby, responded…the gunman began firing at the windows and entered the building. The officer did not open fire. …the gunman…went through an unlocked door at 11:40 a.m…and began shooting inside. Police officers, including the school district officer, went into the school minutes later. By the time officers reported that the gunman had been killed around 1 p.m., he had shot dead 19 students and two teachers.

We don’t yet know how quickly this dirtbag killed the kids, but a delay of more than one hour obviously gave him plenty of time.

During that terrifying time — well over an hour — parents of students who were trapped in the school gathered outside the building… Some were physically restrained by the police in a scene that witnesses described as disorder bordering on mayhem. …“Parents were crying and some were fighting verbally with the police and screaming that they wanted their children,” Marcela Cabralez, a pastor, said. Miguel Palacios, a small-business owner, said frantic parents were so upset that at one point they tried to take down the school’s chain-link fence. “The parents were on one side of the fence, the Border Patrol and police were on the other side of the fence, and they were trying to tear it open,” he said. Some of the parents implored the heavily armed police officers at the chaotic scene to storm the school. Others, including those who were off-duty members of law enforcement, went inside themselves to try to find their own children. “There were plenty of men out there armed to the teeth that could have gone in faster,” said Javier Cazares, 43, who arrived at the school on Tuesday as the attack was taking place. He said he could hear gunfire; his daughter, Jacklyn, was inside.

Sadly, the cops in Uvalde either lacked modern training or they disregarded that training.

…questions remained about the decision by the police at the scene to await the arrival of specially trained officers from the Border Patrol to finally storm through the classroom door roughly an hour after officers had first pulled back. …Officers are now trained to disable an active shooter as quickly as possible, before rescuing victims and without waiting for a tactical team or special equipment to arrive.

As I said in the interview, I would not want to charge into a classroom and face hostile gunfire. But if I signed up to be a cop, I would understand that periodic bravery was part of my employment contract.

If I then failed to act, I would live in shame for the rest of my life and would not argue about getting fired and losing my pension.

P.S. When writing on gun-related issues, I always like to share what some honest folks on the left have written.

• In 2012, I shared some important observations from Jeffrey Goldberg, a left-leaning writer for The Atlantic. In his column, he basically admitted his side was wrong about gun control.
• Then, in 2013, I wrote about a column by Justin Cronin in the New York Times. He self-identified as a liberal, but explained how real-world events have led him to become a supporter of private gun ownership.
• In 2015, I shared a column by Jamelle Bouie in Slate, who addressed the left’s fixation on trying to ban so-called assault weapons and explains that such policies are meaningless.
• In 2017, Leah Libresco wrote in the Washington Post that advocates of gun control are driven by emotion rather empirical research and evidence.
• Last but not least, in 2019, Alex Kingsbury confessed in the New York Times that his long-held dream of gun confiscation was utterly impractical.

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How to Solve America’s Worsening Fiscal Mess

America’s fiscal future is very grim, largely because of an ever-expanding burden of entitlement spending.

To see the magnitude of the problem, let’s peruse the Budget and Economic Outlook, which was released yesterday by the Congressional Budget Office has some.

Most people are focusing on how deficits are going to climb from $1 trillion to $2 trillion-plus over the next 10 years.

That’s not good news, but we should be far more worried about the fact that the burden of government spending is growing faster than the private economy. As a result, government will be consuming an ever-larger share of national output.

The budget wonks who (mistakenly) focus on red ink say the problem is so serious that we need higher taxes.

They look at this chart, which is based on CBO’s baseline forecast (what will happen if taxes and spending are left on autopilot), and assert we have no choice but to raise taxes.

They point out that the annual deficit in 2032 will be almost $2.3 trillion and that it’s impossible cut spending by that much.

Needless to say, it would be a near-impossible political undertaking to cut $2.3 trillion in one year (though it would fulfill libertarian fantasies).

But what if, instead of kicking the can down the road, policymakers imposed some sort of overall spending cap to avoid a giant deficit in 10 year.

This second chart displays that scenario. I took CBO’s baseline (autopilot) numbers and assumed that spending could only increase by 1.4 percent annually starting in 2024.

As you can see, that modest bit of fiscal discipline completely eliminates the project $2.3 trillion annual deficit in 2032.

In other words, there is no need for any tax increase.

Especially since politicians almost certainly would respond to the expectation of additional revenue by increasing spending above the baseline (as would happen with Joe Biden’s so-called Build Back Better scheme).

I’ll close by noting that there’s no need to fixate on whether the budget is balanced by 2032. What matters is trend lines.

It’s not good for government to grow faster than the private economy in the long run. And it’s not good for deficits and debt to climb as a share of economic output in the long run.

Both of those outcomes can be avoided if we have some sort of spending cap so that outlays grow slower than the private sector.

The stricter the cap, the quicker the progress.

• I prefer actual cuts (a requirement to reduce nominal spending each year).
• I would be happy with a hard freeze (like we had for a few years after the Tea Party revolt).
• As noted above, a 1.4 percent spending cap balances the budget by 2032.
• But we would make progress, albeit slow progress, even if the spending cap allowed the budget to grow by 2.0 percent of 2.5 percent per year.

P.S. I start the spending cap in 2024 because spending is not projected to grow by very much between 2022 and 2023. That’s not because today’s politicians are being responsible, however. It’s simply a result of one-time pandemic emergency spending coming to an end. But since that one-time spending has a big impact on short-run numbers, I delayed the spending cap for one year.

P.P.S. The blue revenue line has a kink in 2025 because the baseline forecast assumes that many of the Trump tax cuts expire that year. If those tax cuts are extended or made permanent, revenues would be about $400 billion lower in 2032. As such, balancing the budget by that year would require a spending cap that allows annual outlays to increase by less than 0.9 percent per year.

P.P.P.S. President Biden is bragging that the deficit is falling this year, but that’s only because the one-time pandemic spending is coming to an end.

P.P.P.P.S. A spending cap is a simple solution, but it would not be an easy solution. In the long-run, it would require genuine entitlement reform.

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The IMF’s Tax-Free Bureaucrats Target Bulgaria

I’m not a fan of the International Monetary Fund, in part because the international bureaucracy is infamous for pressuring nations to impose higher taxes.

The bureaucrats at the IMF have even claimed that higher taxes somehow will produce more economic growth.

Even worse, the IMF has argued for class-warfare taxes that do the most economic damage, even using the twisted rationale that it is okay to hurt the poor so long as the rich suffer even greater losses.

To be fair, there are some good fiscal economists at the IMF (even with regards to tax policy), but the political types who run the bureaucracy almost always ignore their research.

Instead, the bureaucracy highlights second-rate analysis in pursuit of bad policy.

The latest example if that the IMF is pressuring Bulgaria to replace its flat tax with a system based on discriminatory rates.

Fiscal policy needs to be flexible given the large uncertainty, but some changes are already advisable in the mid-year budget revision. …Room to address long-term social and investment needs could be significantly increased by…Reviewing the tax system to increase revenue and redistribution . A reform of the low flat personal income tax rate could help create fiscal space and reduce inequalities.

By the way, just in case it’s not obvious, “social and investment needs” is bureaucrat-speak for more redistribution spending.

Some of you may be wondering whether a new system is needed because the flat tax caused a big drop in revenue.

But as you can see from this chart, income tax revenues continued to grow after the flat tax was approved in 2008.

I’ll close by noting that Bulgaria is ranked #36 in the latest edition of Economic Freedom of the World, which is a good but not great score.

But it gets its lowest score for “size of government,” which is the measure for fiscal policy. The flat income tax is a positive, of course, but that policy is offset by low scores for other features of fiscal policy (payroll tax, redistribution, etc).

So the bottom line is that the IMF wants to get rid of the good part of Bulgaria’s fiscal policy and drive its overall score even lower.

P.S. I also disapprove of the IMF because it subsidizes and encourages debt and instability with endless bailouts.

P.P.S. And I am disgusted that IMF bureaucrats get tax-free salaries while advocating for higher taxes for everyone else.

P.P.P.S. The IMF has a reprehensible track record of bullying nations in Eastern Europe. Though, to be fair, they also push for bad tax policy in big and powerful nations. And in weak and poor nations.

P.P.P.P.S. Here’s my solution to the IMF problem.

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The European Central Bank: Subsidizing Profligacy, Creating Bubbles

Earlier this year, I pointed out that President Biden should not be blamed for rising prices.

There has been inflation, of course, but the Federal Reserve deserves the blame. More specifically, America’s central bank responded to the coronavirus pandemic by dumping a lot of money into the economy beginning in early 2020.

Nearly a year before Biden took office.

The Federal Reserve is not the only central bank to make this mistake.

Here’s the balance sheet for the Eurosystem (the European Central Bank and the various national central banks that are in charge of the euro currency). As you can see, there’s also been a dramatic increase in liquidity on the other side of the Atlantic Ocean.

Why should American readers care about what’s happening with the euro?

In part, this is simply a lesson about the downsides of bad monetary policy. For years, I’ve been explaining that politicians like easy-money policies because they create “sugar highs” for an economy.

That’s the good news.

The bad news is that false booms almost always are followed by real busts.

But this is more than a lesson about monetary policy. What’s happened with the euro may have created the conditions for another European fiscal crisis (for background on Europe’s previous fiscal crisis, click here, here, and here).

In an article for Project Syndicate, Willem Buiter warns that the European Central Bank sacrificed sensible monetary policy by buying up the debt of profligate governments.

…major central banks have engaged in aggressive low-interest-rate and asset-purchase policies to support their governments’ expansionary fiscal policies, even though they knew such policies were likely to run counter to their price-stability mandates and were not necessary to preserve financial stability. The “fiscal capture” interpretation is particularly convincing for the ECB, which must deal with several sovereigns that are facing debt-sustainability issues. Greece, Italy, Portugal, and Spain are all fiscally fragile. And France, Belgium, and Cyprus could also face sovereign-funding problems when the next cyclical downturn hits.

Mr. Buiter shares some sobering data.

All told, the Eurosystem’s holdings of public-sector securities under the PEPP at the end of March 2022 amounted to more than €1.6 trillion ($1.7 trillion), or 13.4% of 2021 eurozone GDP, and cumulative net purchases of Greek sovereign debt under the PEPP were €38.5 billion (21.1% of Greece’s 2021 GDP). For Portugal, Italy, and Spain, the corresponding GDP shares of net PEPP purchases were 16.4%, 16%, and 15.7%, respectively. The Eurosystem’s Public Sector Purchase Program (PSPP) also made net purchases of investment-grade sovereign debt. From November 2019 until the end of March 2022, these totaled €503.6 billion, or 4.1% of eurozone GDP. In total, the Eurosystem bought more than 120% of net eurozone sovereign debt issuances in 2020 and 2021.

Other experts also fear Europe’s central bank has created more risk.

Two weeks ago, Desmond Lachman of the American Enterprise Institute expressed concern that Italy had become dependent on the ECB.

…the European Central Bank (ECB) is signaling that soon it will be turning off its monetary policy spigot to fight the inflation beast. Over the past two years, that spigot has flooded the European economy with around $4 trillion in liquidity through an unprecedented pace of government bond buying. The end to ECB money printing could come as a particular shock to the Italian economy, which has grown accustomed to having the ECB scoop up all of its government’s debt issuance as part of its Pandemic Emergency Purchase Program. …the country’s economy has stalled, its budget deficit has ballooned, and its public debt has skyrocketed to 150 percent of GDP. …Italy has had the dubious distinction of being a country whose per capita income has actually declined over the past 20 years. …All of this is of considerable importance to the world economic outlook. In 2010, the Greek sovereign debt crisis shook world financial markets. Now that the global economy is already slowing, the last thing that it needs is a sovereign debt crisis in Italy, a country whose economy is some 10 times the size of Greece’s.

Mr. Lachman also warned about this in April.

Over the past two years, the ECB’s bond-buying programs have kept countries in the eurozone’s periphery, including most notably Italy, afloat. In particular, under its €1.85 trillion ($2 trillion) pandemic emergency purchase program, the ECB has bought most of these countries’ government-debt issuance. That has saved them from having to face the test of the markets.

And he said the same thing in March.

The ECB engaged in a large-scale bond-buying program over the past two years…, as did the U.S. Federal Reserve. The size of the ECB’s balance sheet increased by a staggering four trillion euros (equivalent to $4.4 billion), including €1.85 trillion under its Pandemic Emergency Purchasing Program. …The ECB’s massive bond buying activity has been successful in keeping countries in the eurozone’s periphery afloat despite the marked deterioration in their public finances in the wake of the pandemic.

Let’s conclude with several observations.

• First, many European countries are at risk because politicians, year after year, have spent too much money (Italy is just the tip of the iceberg).
• Second, the ECB has enabled much of that spending by buying a lot of the government debt issued by Europe’s profligate nations.
• Third, there’s now a bubble thanks to the combination of bad fiscal policy by national governments and bad monetary policy by the ECB.
• Fourth, some economic misery is unavoidable, but the damage can be limited if governments impose Swiss-style spending caps.
• Fifth, the political elite in Europe do not want spending restraint and instead prefer very bad policies such as “debt mutualization.”

So if politicians won’t adopt good policies and their bad policies won’t work, what’s going to happen?

At some point, national governments will probably default.

That’s an unpleasant outcome, but at least it will stop the bleeding.

Unlike bailouts and easy money, which exacerbate the underlying problems.

P.S. For what it is worth, I do not think a common currency is necessarily a bad idea. That being said, I wonder if the euro can survive Europe’s awful politicians.

P.P.S. While I think Mr. Buiter’s article in Project Syndicate was very reasonable, I’ve had good reason to criticize some of his past analysis.

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Biden’s Nonsensical Class-Warfare Tweet

Trump had some economically illiterate tweets about trade during his presidency, including the infamous one about being “Tariff Man.”

I think Joe Biden must be feeling envious that Trump got so much attention, so he has issued a tweet showing that he also suffers from economic illiteracy.

Or maybe Biden’s problem is dishonesty because his tweet is based on a make-believe number about the the average tax rate paid by billionaires.

For what it’s worth, this isn’t the first time that Biden has issued a tweet based on fake numbers.

In the previous instance, he deliberately confused the distinction between the financial concept of book income and and cash-flow concept of taxable income.

What accounts for his most recent error?

Reporting for the Wall Street Journal, Richard Rubin and Rachel Louise Ensign explain how the Biden Administration concocted this number.

What do the wealthy pay in federal taxes? On paper, the top marginal income-tax rate is 37% on ordinary income and 23.8% on capital gains. Government estimates put high-income filers’ average rates in the mid-20s. A new Biden administration analysis, however, pegs the average tax rate for the 400 wealthiest households at 8.2% from 2010 to 2018. …It’s far below traditional estimates from government number crunchers… Recent estimates of a broader group of rich people from the Congressional Budget Office, Treasury Department and the Joint Committee on Taxation fall between 23% and 26%.

So how does the Biden Administration get a number that is radically different than other sources?

By artificially inflating the income of rich people by asserting that changes in wealth should count as income.

White House…economists Greg Leiserson and Danny Yagan..include increases in unrealized capital gains. That is the change in the value of assets, including stocks, that haven’t been sold. …Conventional analyses and the current income-tax law don’t include unrealized gains.

At the risk of making a wonky point, “conventional analysis” and “income-tax law” don’t include unrealized capital gains as income because, well, changes in net worth are not income.

And the fact that some folks on the left want to tax people on unrealized capital gains doesn’t change that reality.

To understand why that would be wretched policy, let’s cite examples that apply to those of us who, sadly, are not billionaires.

• Imagine filing your taxes next year and having to pay more money to the IRS simply because Zillow estimated that your house rose in value.
• Imagine that you’re filling out your 1040 form next year and you have to pay more money to the IRS  simply because your IRA or 401(k) rose in value.

Both of these examples sound absurd because they would be absurd. And if a policy is absurd and unfair for regular people, it’s also absurd and unfair for rich people.

Since I’m a fiscal wonk, I’ll close by making the point that the Biden Administration wants to take a bad tax (capital gains tax) and make it worse (by taxing paper gains in addition to actual gains).

The net result is that we would have a backdoor wealth tax – a approach that is so anti-growth that even most European governments have repealed those levies.

But since Joe Biden is motivated by class warfare (see here, here, here, and here), he apparently doesn’t care about the economic consequences.

P.S. Biden once claimed that it is “patriotic” to pay higher taxes, but he then played Benedict Arnold with his own tax return.

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A Helpful Correction for the New York Times

For years, I’ve been explaining that students have been hurt rather than helped by government programs to allegedly make higher education more affordable.

How can this be true?

For the simple reason that colleges and universities dramatically boosted tuition in response to all the government subsidies.

Did students somehow benefit?

Hardly. In addition to much higher tuition and fees, the higher-education sector became more bloated, with much more bureaucracy and much lighter workloads.

So the people working for colleges and universities were big beneficiaries.

Students, by contrast, got put on a backwards treadmill featuring more loans, higher tuition, and more debt.

Given this background, I was interested to see a column in the New York Times describing how students at Bennett College (and elsewhere) have been disadvantaged by the current system.

Here’s the headline from the piece, which was written by Tressie McMillan Cottom.

While I certainly sympathize with students who are now trapped in this system, I was left unsatisfied by both the above headline and the actual details of Ms. Cottom’s column.

Why?

Because there was a lot of discussion about the consequences of the current system but zero recognition that government is the reason colleges and universities are now so expensive and bureaucratic.

So I decided to make a modest correction to the headline.

Ms. Cottom thinks the answer is student loan forgiveness, which simply means other people pick up the tab.

That’s a perverse form of redistribution since people who went to college have higher earnings than the general population.

I don’t like redistribution in general, but redistributing form poor to rich is particularly perverse.

But even I might be willing to embrace loan forgiveness if something was being do to solve the underlying problem of the government-caused tuition spiral.

Needless to say, that’s not part of the discussion in Washington.

P.S. The underlying economic problem is “third-party payer.” It’s wreaked havoc with America’s health sector and it’s have the same pernicious effect on higher education.

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Bureaucrat Humor

Last September was my most-recent contribution of bureaucrat-themed humor.

Let’s add to the collection today.

Our first item perfectly illustrates what happens when bureaucrats pay taxes.

Our second item begins with a reference to a British politician, but you don’t need to know Jacob Rees-Mogg to appreciate the anti-bureaucrat satire.

Next, we have a bureaucrat who was careless when asking a genie to grant his wishes.

Here’s my favorite item, and it’s supported by research.

My all-time favorite example of anti-bureaucrat satire is this video, though this top-10 list from David Letterman is a close second.

P.S. Since we’re making fun of bureaucrats, here’s a good jab at the Post Office from Jimmy Kimmel and a clever one-liner from Craig Ferguson. And to see how government operates, we have the Fable of the Ant. But this Pearls before Swine cartoon strip is very clever. Also, here’s a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

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Trade, Jobs, and Wages

I’m a knee-jerk supporter of free trade, which simply means I don’t think politicians and bureaucrats should be able to interfere with my freedom to buy good and services from people who happen to live in other nations.

But my support for free trade is not just based on ideology. I also cite data on how trade taxes and other restrictions make nations poorer.

Simply stated, trade barriers (like other forms of government intervention) make an economy less efficient.

And the negative effects go beyond overall economic output. Researchers also find job losses, lower productivity, and increased inequality.

Today, let’s look at some new research on this topic. The IMF earlier this year released a new working paper authored by Kim Beaton, Valerie Cerra, and Metodij Hadzi-Vaskov.

Here are the main results.

…firms in countries and industries experiencing greater competition from imports reduce employment slightly. …Even so, the low elasticity of employment growth to imports indicates a limited adverse impact. …Contrary to popular belief and anti-globalization sentiment, import competition is associated with higher average wage growth across the global sample of firms…, driven by the EMDEs… Taking employment and wages together, import growth in an industry leads to a rise in the wage bill of domestic firms in the same industry. Thus, while import competition generates some job dislocations, the overall impact on earnings of workers in the same industry is positive.

Here’s a chart that was included with the study.

One unexpected finding from the study is that rich nations are more likely to enjoy job gains.

The job loss associated with import competition appears to be dominated by the behavior of firms in emerging and developing economies… In contrast, the import shock provides a statistically significant positive boost to firms’ employment in advanced economies.

And here’s a finding that should not surprise anyone.

…we find relatively positive outcomes of import competition on exposed firms, including higher sales, profits, wage growth, and investment. Moreover, the import shock to exposed firms, and the ensuing employment changes, do not take place in isolation. Import growth often goes hand in hand with export growth, which spurs job creation.

But I didn’t like everything I found in the paper. In some circumstances, trade reduces inequality, but by hurting those with high incomes rather than helping those with low incomes.

Our results also show that firms experiencing higher imports shocks are those with higher average wage levels. Thus, to the extent that employment growth is lower in these more exposed firms, it could lead to lower inequality.

For some of our friends on the left, this is a good outcome. Crazy.

Fortunately, trade generally helps everyone, so this quirky result is an exception rather than the rule.

The bottom line is that free trade is an overall winner for the economy. Does that mean that everyone benefits in short run? Of course not.

Jobs always get destroyed when there’s competition. And that’s true whether the competition comes from inside a country or outside a country.

The goal, of course, is to have a vibrant economy that regularly produces plenty of new jobs to offset any job losses.

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Least Surprising Headline of All Time

Government spending, almost by definition, is wasteful. But it’s worth distinguishing between two types of waste.

1. Money that is spent properly but inefficiently.
2. Money that is diverted by crooks and scammers.

Today, we’re going to focus on the second type of waste.

I’ve previously written about widespread fraud affecting programs such as Medicare, Medicaid, food stamps, welfare, disability, and the earned income credit.

Now let’s augment our previous analysis exposing how coronavirus-related spending has been a windfall for criminals.

We’ll start with a report from the Washington Post , authored by Tony Romm and Yeganeh Torbati. It contains a headline that begins with a quote that could apply to just about anything the government does.

Testifying at a little-noticed congressional hearing this spring, a top watchdog for the Labor Department estimated there could have been “at least” $163 billion in unemployment-related “overpayments,” a projection that includes wrongly paid sums as well as “significant” benefits obtained by malicious actors. …In many cases, the criminals stole the unemployment funds using real Americans’ personal information. They bombarded states with applications filed in the names of actual workers or people in prison — sometimes to such a degree that, in the case of Maryland, fraudulent claims came to outnumber real requests for help..

You won’t be surprised to learn that some bureaucrats did not want to stop the fraud.

Some of the malicious actors potentially even avoided detection, at least for a time, after the Labor Department refused to supply information needed to assist federal fraud investigations.

And you also won’t be surprised to learn that some states allowed far more fraud than other states.

In California, state officials acknowledged in October 2021 that they may have paid out more than $20 billion in undeserved unemployment payments to criminals. That included at least $810 million that had been wrongly paid to applicants whose information matched the names of people in prison.

The Wall Street Journal also opined on the topic of wasteful covid-related spending, but its editorial focused on the $1.9 trillion boondoggle that was pushed through by Biden.

…what happened to the $1.9 trillion for Covid Democrats passed last March? Most went to transfer payments, including child tax credits, enhanced unemployment benefits and stimulus checks. About a quarter subsidized state and local budgets and schools. Democrats appropriated a mere $80 billion for public health, only $16 billion of which was available for vaccines and therapies. …Democrats skimped on vaccine and therapies in order to ladle benefits to their political constituencies.

The bottom line is that Biden used the pandemic as an excuse to squander $1.9 trillion, even though at most only $80 billion of the money was for anything that was even vaguely related to vaccines and treatments.

From an economic perspective, that legislation was a spectacular failure.

I wonder whether we’ll ever learn how much of the remaining $1.82 trillion was wasted?

I’m guessing the answer is $1.82 trillion, but we won’t know how much was lost to run-of-the-mill waste and how much was lost to outright fraud.

P.S. Don’t forget that all government spending, even the small fraction that is spent wisely and efficiently, imposes economic costs. For more information, click here, here, here, here, here, and here.

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In Defense of Bill Clinton

More than 10 years ago, I narrated this video showing how the United States benefited from spending restraint under both Ronald Reagan and Bill Clinton. Since today’s topic is Clinton’s policies, pay attention starting about 4:00.

If you don’t have time to watch the video, I hope you will at least pay attention to this chart, which appeared near the end (about 6:00).

It shows what happened to domestic spending (entitlements plus discretionary) as a share of economic output during the Reagan years, the Clinton years, and the 2001-2010 period under Bush and Obama.

Reagan was the runaway champion, but it’s worth noting that the burden of domestic spending also declined during the Clinton years.

But it wasn’t just that Bill Clinton was good on spending. Good things happened in the 1990s in other areas as well, especially trade.

In a column for the Wall Street Journal, Bill Galston defends Clinton’s “neoliberal” record.

… critics often mark the Clinton administration as the moment when establishment Democrats capitulated to the ideology of the unfettered market. Poor and working-class Americans paid the price, they charge… The historical record tells a different story. …During eight years of the Clinton administration, annual real growth in gross domestic product averaged a robust 3.8% while inflation was restrained, averaging 2.6%. Payrolls increased by 22.9 million… Unemployment fell from 7.3% in January 1993 to…4.2% at the end of President Clinton’s second term. Adjusted for inflation, real median household income rose by 13.9%. …During the administration, federal spending as a share of GDP fell from 21.2% to 17.5%… What about the poor? The poverty rate declined during the Clinton administration by nearly one quarter, from 15.1% to 11.3%, near its historic low. And it declined even faster among minorities—by 8.1 percentage points for Hispanics and 10.9 points for blacks. …In sum, during the heyday of neoliberalism, Americans weren’t forced to choose between high growth and low inflation or between aggregate growth and fairness for the poor, working class and minorities.

Why did we get these good results?

Because overall economic freedom increased during the Clinton years. And when the burden of government is reduced, that creates more opportunity for upward advancement for everyone in society.

By the way, I’m not arguing in today’s column that Bill Clinton deserves all the credit. There’s little doubt that the Republican landslide in 1994 played a big role in many of the subsequent pro-market reforms (such as welfare reform, the 1997 tax cut, etc).

But I will say that Bill Clinton at least was amenable to pro-market compromises, which is not what we saw during the Obama years (and I doubt we will see a shift to the center from Biden if Republicans win Congress this November).

P.S. Republicans were able to impose some fiscal discipline on Obama after the Tea Party landslide of 2010

P.P.S. For those who want more details, click here for a detailed examination of the fiscal policy performance of various modern presidents.

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Bigger Government Means Less Prosperity

When I first started writing this daily column, the Congressional Budget Office was infamous for dodgy economics.

• In the short run, CBO believed in the very simplistic Keynesian notion that a bigger burden of government spending somehow stimulated the economy. The bureaucracy was infamous for reflexively claiming that job losses were actually job gains.
• In the long run, CBO believed in the very simplistic notion that budget deficits were the main determinant of economic performance. The bureaucracy even produced reports that implied you could maximize growth with 100 percent tax rates.

That was the bad news.

The good news is that CBO is more of a mainstream organization today.

It’s far from being libertarian, to be sure, but it no longer seems to have the left-leaning bias that plagued the bureaucracy in the past (it had gotten so bad that I advised Republicans not to cite CBO numbers even when they seemed helpful to the cause of less government).

For instance, I grudgingly acknowledged a few years ago that CBO was better (but still not good) when analyzing potential repeal of Obamacare.

And I was actually impressed last year when CBO published a report showing that a bigger burden of government spending would reduce growth.

And now we have another report that reaches similar conclusions.

The new study, released last month, considers what would happen if lawmakers decided to control red ink by either raising taxes of by restraining spending.

A perpetually rising debt-to-GDP ratio is unsustainable over the long term because financing deficits and servicing the debt would consume an ever-growing proportion of the nation’s income. In this report, CBO analyzes the effects of measures that policymakers could take to prevent debt as a percentage of GDP from continuing to climb. Policymakers could restrain the growth of spending, raise revenues, or pursue some combination of those two approaches. …or this analysis, CBO examined two simplified policies. The first would raise federal tax rates on different types of income proportionally. The second would cut spending for certain government benefit programs—mostly for Social Security, Medicare, and Medicaid. Under each of the two stylized policy options, debt as a percentage of GDP would be fully stabilized 10 years after the changes were implemented.

By the way, I would have greatly preferred if CBO estimated the impact of genuine entitlement reforms.

Trimming spending for existing programs is better than nothing, of course, but the goal should be to achieve both structural reforms and budgetary savings.

But I’m digressing. Let’s get back to what was actually in the report. Here’s what CBO projects if policy makers choose to raise taxes.

…the higher tax rates that would be required if implementation of the policy was delayed would reduce after-tax wages, which would discourage work and lower the aggregate supply of labor. Those reductions in capital stock and the labor supply would cause GDP to be lower… As a result, GDP would be 0.9 percent lower in 2051 if implementation of the policy was delayed by 5 years and 2.6 percent lower if it was delayed by 10 years.

And here’s what happens if they decide to trim benefits.

…a drop in benefits would reduce people’s income and induce some people to work more to, at least partially, maintain their standard of living, thereby increasing the aggregate labor supply. …a drop in expected future retirement benefits would induce workers to save more before they retired, and that increased saving would, in turn, increase the aggregate capital stock.

Figure 3 from the report allows readers to compare how the different options affect the economy’s output.

In other words, we get lower living standards if taxes go up and higher living standards if spending is restrained.

How big is the difference? As you can see, the tax increase options (light green) cause significant long-run reductions in gross domestic product.

Trimming benefits by contrast (the dark green lines) actually lead to a slight increase in economic output.

The report accurately explains why the two policy choices produce such different results.

…GDP would be lower after an increase in income tax rates than it would be after cuts in benefit payments… Whereas benefit cuts strengthen people’s incentives to work and save, tax increases weaken those incentives and thus reduce the capital stock, the labor supply, and output.

In other words, it’s not a good idea to copy nations such as France, Italy, and Greece.

Which is a good description of Biden’s so-called plan to Build Back Better.

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Baby Formula and Big Government

While I definitely criticized the Food and Drug Administration for its many mistakes during the pandemic, I only made passing reference to that bureaucracy when referencing the shortage of baby formula during the concluding portion of a recent program.

And even that mention was not negative.

I was vaguely aware that the FDA had temporarily shut down a factory in Michigan because of concerns about bacteria in formula. And even a curmudgeonly libertarian like me did not view that as being a bad thing.

So I basically assumed that the severe shortages depicted in this map were mostly the result of bad luck.

But I should have known that bad government policy also played a big role.

The above map comes from an article for Reason by Jonathan Alder. Here’s some of what he wrote.

…if you’re having a hard time finding infant formula, you can thank Uncle Sam. …a combination of arguably well-intentioned policies have combined to magnify the effects of the Abbott recall and prevent American consumers from having access to alternative supplies. These include tariffs and quotas on infant formula imports, Food and Drug Administration regulations, and other government policies that both constrain imports and reduce the incentive for foreign producers in countries like Canada to invest in production that could help serve the American market. …There are steps the government could take to ease the shortage, such as removing or temporarily suspending FDA rules that bar the importation of infant formula from countries. …Infant formula that is perfectly safe and that is produced in accordance with European standards that are at least as stringent as US health and safety requirements, cannot be imported because the FDA has not reviewed and approved what is printed on the package, which is a costly and time-consuming process for producers.

The Wall Street Journal opined on the topic as well.

By now you’ve heard that some 40% of the nation’s baby formula is out of stock… This should never happen in America. How did it? Here’s the government part of the story you won’t hear from the political class. …the market is so concentrated is tariffs up to 17.5% on imports, which protect domestic producers from foreign competition. Non-trade barriers such as FDA labeling and ingredient requirements also limit imports even during shortages. …the Trump Administration sought to protect domestic producers by imposing quotas and tariffs on Canadian imports in the USMCA trade deal. …America’s baby-formula shortage illustrates how bigger government can make big business bigger, thereby limiting competition and choice.

Jon Miltimore, writing for the Foundation for Economic Education, further criticized government policy in this area.

…the government itself is primarily responsible for the baby formula shortage. …the New York Times…reported in March 2021, “baby formula is one of the most tightly regulated food products in the US, with the Food and Drug Administration (FDA) dictating the nutrients and vitamins, and setting strict rules about how formula is produced, packaged, and labeled.” …many American parents buy “unapproved” European formula even though…it’s technically against the law. …On this black(ish) market, it turns out Americans are willing to pay big bucks for European formula. …At times, these nefarious black market imports have resulted in high profile busts, like in April 2021 when US Customs and Border Protection agents in Philadelphia seized 588 cases of baby formula (value: $30,000) that violated the FDA’s “import safety regulations.” Some may contend that the FDA is simply keeping Americans and their babies safe—which is no doubt what regulators want you to believe—but this overlooks an inconvenient fact: despite the FDA’s efforts, Americans are consuming vast amounts of black market baby formula, and the children are doing just fine.

Robby Soave also addressed the issue for Reason.

U.S. officials could have made such shortages less likely by approving baby formula that is widely available in Europe, but per usual, the Food and Drug Administration (FDA) has other priorities. The agency has a long history of taking forever—years and years and years—to approve foods and medications that European officials have already decided are perfectly safe for human consumption. …This is yet another in a long line of failures: Both the FDA and the Centers for Disease Control and Prevention (CDC) screwed up the early approval process for COVID-19 testing. …The FDA should really stop erecting regulatory hurdles that make it harder for working-class parents to feed their families.

I don’t know if the FDA has been over-zealous in closing the Abbott plant in Michigan, so I won’t comment on that issue.

But I do know that imposing trade taxes on imports of baby formula is a bad idea.

And I know it’s also a bad idea to deny Americans the freedom to buy European-produced baby formula, especially since FDA bureaucrats simply don’t like certain labels.

Indeed, I’ll close by making the key point that we should have “mutual recognition” policies with other advanced nations. In other words, we should start with the default assumption that consumers have the right to buy goods from countries such as Japan, Netherlands, Australia, and the United Kingdom.

This type of “good globalism” should be part of well-designed free-trade agreements with peer countries.

P.S. Mutual recognition also allows for regulatory diversity, which reduces systemic risk.

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Plastic Surgery and Third-Party Payer

Most people would say high prices are the biggest problem with health care in the United States. But high prices should be viewed as the symptom of the real problem, which is “third-party payer.”

And what is third-party payer?

It’s the fact that consumers purchase health care with other people’s money. And we should blame government intervention.

To be more specific, the vast majority of purchases are financed by government programs such as Medicare and Medicaid, or by insurance policies that are subsidized by the tax code’s healthcare exclusion.

And that means people have very little reason to care about the cost of care – creating a recipe for higher costs and inefficiency.

Mark Perry of the American Enterprise Institute explains the problem.

One of the reasons that the costs of medical care services in the US have increased more than twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage of health care costs are paid out-of-pocket by consumers. …Consumers of health care have significantly reduced incentives to monitor prices and be cost-conscious buyers of medical and hospital services when they pay less than $1 themselves out of every $10 spent, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t paying out-of-pocket and aren’t price sensitive.

Some people wonder whether there’s something about the health sector that automatically and inevitably causes higher prices.

But that’s not true. Mark has a table showing that cosmetic surgery costs have not increased faster than inflation.

And what makes cosmetic surgery different than other types of medical procedures?

As Mark explains, people directly pay for things like tummy tucks and breast augmentation.

Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients typically paying 100% out-of-pocket for elective aesthetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. …the prices of most cosmetic procedures have fallen in real terms since 1998, and some non-surgical procedures have even fallen in nominal dollars… In all cases, cosmetic procedures have increased in price by far less than the 132% increase in the price of medical care services between 1998 and 2021 and the 230% increase in prices for hospital services.

If you want videos on the topic, here’s a Dutch expert explaining the issue. I also recommend this clever cartoon video that explains third-party payer and this video from the Center for Freedom and Prosperity. And this Reason video on how costs are lower when actual markets operate.

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Despicable Marx and Disgusting Marxism

Early last year, I shared a video explaining that Karl Marx was a despicable human being. Today, let’s look at a video that further examines him and his hideous ideology.

This raises an interesting question of picking the most offensive feature of Marxism.

1. The totalitarian brutality in nations that (so far) have murdered and starved 100 million people?
2. The economic illiteracy of a system that has anywhere and everywhere produced misery and poverty?
3. The moral abomination of an ideology that assumes individuals are abjectly subservient to the state?

The the video above is from the Ayn Rand-inspired Atlas Society, I suspect they might emphasize answer #3.

And that certainly is correct, but the best answer is “all of the above.”

I’ll close with the observation that Marx was a bad person, but he’s not nearly as bad as modern-day Marxists.

That’s because Marx was guilty of coming up with a bad theory. Today’s Marxists, by contrast, not only believe in that bad theory, but they hold to those noxious views in spite of 100 years of evidence that communism is a failure of practice.

Though maybe today’s Marxists are simply big fans of very strict diets?

P.S. To see the difference between a good person and a bad person, here’s a comparison of Marx with another person from central Europe.

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Don’t Sweat the Trade Deficit

When the Commerce Department announced in February that the United States had a record trade deficit for 2021, I shared this video to help make the point that those trade numbers were that year’s “least important economic news.”

The main thing to understand is that a trade deficit is simply the flip side of an investment surplus.

When Americans use dollars to buy goods from other nations, those dollars are only valuable to foreigners because they can use them to buy things from America.

In many cases, they buy American goods and services. But they also use many of those dollars to invest in the U.S. economy.

That’s generally a positive thing. It’s a vote of confidence about America’s economic future.

Jeff Jacoby of the Boston Globe shares my viewpoint. He recently opined on this issue, echoing the important insight about the link between trade flows and investment flows.

The US trade deficit hit an all-time high in March, widening to nearly $110 billion as the nation imported considerably more goods than it exported. That can’t be good, right? Actually, it’s fine. …It’s not an indication of actual economic weakness. …Quite the contrary: All things being equal, imports are usually evidence of economic vitality and success. …The dollars Americans spend on imports aren’t “lost.” They are exchanged for desirable and affordable goods, services, parts, and commodities that strengthen Americans’ economy while elevating their US lifestyle. Better still, those dollars then come back to the United States, where they are used to invest in American assets or buy American exports, creating even more value and putting even more Americans to work. …a trade “deficit” isn’t a debt we owe. It is an accounting entry that tells us how much more we were enriched by foreigners than they were by us. ..the US economy has some real problems. Happily, the trade deficit isn’t one of them. Imports are good. And more imports? They’re good too.

This does not mean, however, that everyone is a winner.

As I explain in this video, jobs are destroyed when there is trade between nations. But I also point out that jobs are destroyed by trade inside a nation’s borders.

That’s bad news for workers in sectors that are dying (such as typewriter makers after personal computers hit the market).

What’s important is whether the new jobs that are created exceed the number of jobs that are lost.

This is what is called “creative destruction.” It’s painful, but it is why we are much richer today than we were in the past.

The good news is that this usually happens…at least if politicians resist the temptation to over-tax, over-spend, and over-regulate.

The bottom line is that free trade is much better for long-run prosperity than protectionism.

Unless, of course, you think it’s a good idea to copy the policies of Herbert Hoover.

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The Value-Added Tax Leads to Higher Income Tax Burdens

As part of my (reality-based) opposition to a value-added tax, I testified to the Ways & Means Committee back in 2011.

My primary argument against the VAT is that it would enable a bigger burden of government spending.

I frequently share this chart, for instance, that shows that the nations in Western Europe were quite similar to the United States back in the 1960s, with government budgets that consumed about 30 percent of economic output.

That was before they enacted VATs.

But once European politicians got that new source of revenue, the spending burden diverged, with the welfare state becoming a much larger burden in Western Europe than in the United States.

In other words, the VAT was a money machine for big government.

That argument is just as accurate today as it was back in 2011.

For today’s column, however, I want to focus on what I said in the last minute of my testimony (beginning about 4:00).

I pointed out that VAT supporters are wrong when they claim that adoption of this new tax would enable reductions in the income tax.

And if you peruse my written testimony, you’ll see that I included several charts showing how tax burdens changed between 1965 and 2008. In every case, I showed that European politicians actually increased the burden of income taxes after they enacted their VATs.

Is that still true?

Of course.

Here’s an updated version of the chart showing that the overall tax burden dramatically increased after VATs were imposed.

In the United States, by contrast, the overall tax burden only increased during this time period from 23.6 percent of GDP to 25 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the overall tax burden jumped by more than 13 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on income and profits.

As you can see, European governments definitely did not use VAT revenues to lower other taxes.

In the United States, by contrast, the tax burden on income and profits only increased during this time period from 11.3 percent of GDP to 11.6 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the tax burden on income and profits jumped by nearly 5 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on corporations (this chart is especially important because there are very naive people in the business community who think that they can avoid higher taxes on their companies if they surrender to a VAT).

As you can see, governments in Europe have been grabbing more money from corporations since VATs were imposed.

In the United States, by contrast, the tax burden on corporations actually decreased during this time period from 3.9 percent of GDP to 1.3 percent of GDP.

By every possible measure, the value-added tax is a big mistake (as even the IMF inadvertently shows).

Unless, of course, politicians first get rid of the income tax – including repealing the 16th Amendment and replacing it with an ironclad prohibition against any future income tax.

But that’s about as likely as me playing the outfield for the New York Yankees in this year’s World Series.

P.S. I mentioned at the very end of my testimony that we did not have clear evidence from other nations that subsequently adopted VATs. In the case of Japan, we now do have data showing how the VAT is financing bigger government.

P.P.S. Some VAT advocates actually claim the levy is good for growth. That’s a nonsensical claim. VATs drive a wedge between pre-tax income and post-tax consumption. What they really mean to say is that VATs don’t do as much damage, on a per-dollar-raised basis, as conventional income taxes (with punitive rates and double taxation).

P.P.P.S. You can enjoy some good anti-VAT cartoons here, here, and here.

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Switzerland, Decentralization, and Tax Competition

There are many reasons to admire Switzerland.

• The nation’s very effective spending cap.
• The nation’s libertarian-leaning governance.
• The nation’s system of private pensions.
• The nation’s genuine decentralization.
• The nation’s support for gun rights.
• The nation’s high public sector efficiency.

For today, let’s focus on how tax competition is one of the benefits of Swiss decentralization.

More specifically, most fiscal policy (both taxes and spending) takes place at the cantonal and municipal level. And this means that the Swiss can vote with their feet if they want more government or less government.

Not surprisingly, they tend to move to lower-tax areas. In a summary for VoxEU, Isabel Martínez shares some of her research on the impact of tax cuts and tax competition in the canton of Obwalden.

…economic research has made important contributions, showing that top earners indeed relocate across borders for tax reasons. …And as relocating within a country is typically less costly than moving across national borders, top earners tend to be even more sensitive to tax differences…ample evidence exists that lowering taxes is an effective means to attract top earners… I study a tax cut by the small Swiss canton of Obwalden, located in central Switzerland. The goal explicitly was to attract high-income taxpayers… In 2006, Obwalden changed its tax code and introduced falling marginal tax rates…in 2008 the canton introduced a flat rate tax, which lowered the tax load for top earners …the reform had the intended effect: by 2016, the share of high-income taxpayers in Obwalden had grown by 0.53 percentage points relative to other cantons. This is an increase of 100% compared to Obwalden’s initial share of top earners. Net income per taxpayer had risen by 17%. …I find a large elasticity of in-migration in the five years after the reform. A 1% increase in the net-of-average-tax rate increased the inflow of top earners by up to 7.2%.

For those who like getting into the weeds, here’s a chart from her report that shows how income taxes and wealth taxes dropped from 1995 (light blue) to 2001 (dark blue) to 2006 (red) to 2008 (green).

Ms. Martinez speculates whether these lower taxes were a net positive.

…besides having more high-income earners living in the canton, how much did Obwalden really gain? …Obwalden’s total tax revenue rose over time, but personal tax revenue in other cantons rose even more in comparison. …Where does this leave us? Attracting high-skilled top earners might have positive spillovers to the local economy. …between 2005 and 2008, the number of full-time equivalent (FTE) jobs rose by 11%, compared to a 4.3% increase in all Switzerland over the same period. This is even more remarkable as the total number of FTE jobs had been constant in Obwalden between 1995 and 2005. …However, these increases may not be solely due to the personal income tax reform: in 2006, Obwalden also substantially reduced its corporate tax rates to a uniform rate of 6.6%, the lowest in the country at the time.

While the headline of the article indicates that Obwalden’s reforms “might not be a winning strategy,” all of Ms. Martinez’s data shows good results.

Maybe the government isn’t collecting as much revenue, but that’s a good outcome from my perspective.

And the increase in jobs and income should be good news from everybody’s perspective.

By the way, tax competition is continuing to produce good results for Switzerland.

An article from SwissInfo catalogues some of the more-recent tax cuts by Swiss cantons.

In 2021, the average corporate tax rate dropped slightly from 14.9% to 14.7% in Switzerland. This is largely due to tax cuts made in three cantons… Canton Zug, home to several major companies including commodities giant Glencore, maintains the lowest corporate tax rate (11.9%) followed by the cantons of Nidwalden (12%) and Lucerne (12.2%). …The KPMG analysis found that the Swiss tax rates for high-income earners declined slightly compared to the previous year, from 33.7 to 33.5% due to the fact that 12 cantons cut tax rates for top incomes. The biggest cuts were made by the cantons of Schwyz (-1.5 percentage points), Schaffhausen (-1.0 percentage points), Thurgau and Lucerne (roughly -0.6 percentage points each). Top incomes are taxed at the lowest rates in canton Zug (22.2%).

P.S. There is some federalism in the United States and this means many Americans also can vote with their feet and benefit as various states lower tax rates and embrace tax reform.

P.P.S. For more data on the benefits of decentralization, click here, here, here, and here.

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Americans Voting with their Feet against Statism

Federalism is very desirable because it allows different parts of the country to make different decisions, and this helps to teach us about what works. And what doesn’t.

It also means Americans can “vote with their feet” by migrating across local borders and state borders.

This happens a lot, as illustrated by this map from the Census Bureau.

While this map is fascinating, it also can be deceiving because some counties have very few people and others have millions of people.

It appears that internal migration might be a wash for states such as California and New York, for instance, since parts of both states are both green and purple.

If you look at a state-level migration map, however, you’ll find that both states lost population.

Why? Because big losses in some heavily populated cities (circled in red above) easily outweighed population gains in rural counties.

So why are people leaving some places? Are there lessons to be learned?

One obvious takeaway is that Americans are fleeing states governed by the left, as Kerry McDonald explains for the Foundation for Economic Education.

US Census Bureau data released in December showed that restrictive states such as California, Illinois, New York, and Massachusetts lost population between July 2020 and July 2021, while states with less-restrictive virus policies like Texas, Arizona, and Florida gained population during that time. …Fight or flight is a tough choice for families, but at least it’s a choice that Americans can enjoy thanks to federalism and the ability to vote with our feet.

And Americans are fleeing localities governed by the left, as Michael Barone explains in the Washington Examiner.

…the biggest losses, in both population and percentage loss, came in four of the nation’s six largest metropolitan areas: San Francisco/San Jose (-2.6 percent), New York (-1.8 percent), Chicago (-1.1 percent) and Los Angeles/Riverside (-0.8 percent). Each of the first three, in just 15 months from April 2020 to July 2021, lost a population that equaled 20 percent of their total population gain in the 20 years between 2000 and 2020. …it’s also noteworthy, and probably more permanent, that people with modest educations and incomes have fled far beyond the exurbs. …the nation’s population growth and its economic dynamism had been concentrated disproportionately in the exurbs, which typically have reasonable tax rates and development-friendly regulations. …the self-harm that liberal and progressive politicians have inflicted…voters even in New York, Chicago, Los Angeles, and San Francisco are recoiling.

The moral of the story is that voters sometimes make the mistake of voting for tax-and-spend politicians, but at least they have enough sense to then escape the places being harmed by statist policies.

P.S. Switzerland in the gold standard for federalism in the world, but Canada also deserves favorable attention. And I recently learned that there’s real federalism in Spain.

P.P.S. Sadly, federalism has declined in the United States.

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The Correct Way to Rebuild Ukraine

Even though foreign aid is not an effective way of promoting prosperity, Ukraine’s government almost surely will be showered with money when the war is over.

To make these handouts helpful rather than harmful, aid should be conditional.

These remarks are from the Q&A section of a panel discussion in London, hosted last month by the Ayn Rand Centre, as part of the Free Market Road Show.

I was giving a spur-of-the-moment response to a question, so I want to take this opportunity to augment my answer with some hard data.

Let’s assume that American politicians do the right thing (yes, I realize that’s unrealistic) and they tell Ukraine’s politicians after the war that they can have billions of dollars to rebuild their economy, but only if they get rid of the statist policies that have been holding back the nation’s development ever since the collapse of the Soviet Empire.

As I noted in the video, this doesn’t have to be complicated. Ukraine can simply copy some of the better laws that exist in other nations.

And to make it very simple, we can even tell them they can choose from the policies of nations that are part of the European Union, which is an entity that Ukraine almost surely will want to join.

If we insist on that requirement, Ukraine instantly would become the world’s 3rd-freest country.

All of this is based on data from the Fraser Institute’s Economic Freedom of the World (by the way, apologies for mistakenly stating in the video that Ukraine was ranked #122).

P.S. Some policies are easier to copy than others. Simply copying Danish laws on property rights, for instance, would not automatically create the Danish political culture that makes corruption so rare. That being said, shrinking the size and scope of Ukraine’s government will dramatically reduce opportunities for corruption.

P.P.S. Regular readers won’t be surprised to see that Denmark leads in two of the five categories.

P.P.P.S. When Putin is finally forced from power, everything I wrote above also will apply to Russia.

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Plenty of Fat and Waste to Cut at the United Nations, Part II

Compared to international bureaucracies such as the IMF and OECD, the United Nations has very little power to impose bad policy.

But that does not mean it should be immune from criticism. There’s an anti-market ideology at the UN and I have specifically condemned the bureaucrats for sloppy and misguided work on taxes (here and here), poverty (here and here), and guns (here and here).

Needless to say, there’s also a lot of waste and corruption at the UN.

I wrote about that topic back in 2017, so let’s take a follow-up look at how our tax money is being spent.

Let’s start with a just-released report in the New York Times. Written by David Fahrenthold and Farnaz Fassihi, it is a depressing snapshot of how money is squandered by insiders at the bureaucracy.

At the United Nations, two officials had a problem. The little-known agency they ran found itself with an extra $61 million, and they didn’t know what to do with it. Then they met a man at a party. Now, they have $25 million less. …experienced diplomats entrusted tens of millions of dollars…to a British businessman after meeting him at the party. They also gave his daughter $3 million to produce a pop song, a video game and a website promoting awareness of environmental threats… Things did not go well. …U.N. auditors said the man’s businesses defaulted on more than $22 million in loans — all money meant to aid the developing world…diplomats and former U.N. officials say the tale also demonstrates what critics say is a serious problem with the U.N.: a culture of impunity among some top leaders, who wield huge budgets with little outside oversight. …The top official at the Office for Project Services, Grete Faremo of Norway, remains in her post.

Some of the previous scandals at the UN have involved more than money.

Kathryn Snowdon’s 2018 report in the Huffington Post is very disturbing.

Charity workers from 15 international aid organisations have been implicated in a sex-for-food scandal at refugee camps in west Africa, according to a new leaked report… The 84-page document…identified more than 40 aid organisations “whose workers are alleged to be in sexually exploitative relationships with refugee children”. …Researchers spoke to 1,500 people, and said claims against 67 people were passed to senior UNHCR officials, but…none were prosecuted.

Some readers may wonder if the UN’s failures are the result of inadequate funding.

Hardly. As explained in National Review by Brett Schaefer, the bureaucracy is adept at playing games to ensure it always has plenty of cash.

Between 1960 and 2016, there have only been two times when an initially approved U.N. regular budget was lower than the preceding budget. …the U.N. General Assembly approved a $285 million (5 percent) cut in the two-year regular UN budget for 2018-2019, U.N. watchers took notice, but cautioned that…the U.N. adjusts its two-year budget at the mid-point to account for new expenditures and expenses. …Not only did the “cut” announced by the U.S. Mission to the United Nations…disappear, but the regular budget is actually $130 million higher than the final budget for 2016-2017. …this outcome is typical. …In 2012, the Obama administration bragged that the agreed-upon budget was “the first U.N. regular budget since 1998 – and only the second in the last 50 years – that has gone down in comparison to the previous budget’s actual expense.” The 2012 budget, however, also ended up being significantly higher than the initial budget after mid-biennium additions.

Here’s a chart from the article showing overall spending on the left axis, along with the additional spending that sneaks in during the mid-point of the budget cycle.

Brett explains there is a tiny bit of good news.

…the U.N. regular budget will shift to an annual budget starting in 2020. …This change will help, but will not cure the fundamental problem.

I confess, by the way, that I have no idea if that change actually happened.

But I feel confident in predicting that the UN’s budget has gone up rather than down.

Last but not least, even Richard Haass of the Council on Foreign Relations concedes the United Nations has a dubious track record. Here are some passages from his 2020 article published by Project Syndicate.

The United Nations has fallen far short of its goals to “maintain international peace and security,” “develop friendly relations among nations’’ and “achieve international cooperation in solving international problems.” …The UN Security Council, the most important component of the UN system, has made itself largely irrelevant. …The organization’s own shortcomings haven’t helped: a spoils system that puts too many people in important positions for reasons other than competence, lack of accountability, and hypocrisy (such as when countries that ignore human rights sit on a UN body meant to uphold them).

I’ll close with the observation that I’ve met plenty of nice and sincere people when participating in programs at the United Nations.

But the understanding of economic policy at the UN is utterly abysmal. Until and unless that statist mindset is eliminated, giving more money to the bureaucracy would be rewarding the pursuit of bad policy.

P.S. Maybe international bureaucrats would have a better understanding of economic policy if they weren’t exempt from the income tax.

P.P.S. The United Nations almost surely wastes the talents of some very capable people.

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Debunking Biden’s Absurd “Cut the Deficit” Claim

After almost 16 months in office, what is President Biden’s track record on fiscal policy?

The good news is that his big tax-and-spend plan to “build back better” has not been approved by Congress (and fingers crossed that it stays that way).

The bad news is that he has done other things, such as getting a fake stimulus though Congress, as well as a so-called infrastructure package.

The Committee for a Responsible Federal Budget put together an estimate of his major initiatives.

By the way, the CRFB folks fixate on how these initiative impact the deficit. What we really should be concerned about is how much money is being spent.

But let’s set that aside and focus instead on a jaw-dropping claim from the White House.

Even though all of his major initiatives have increased red ink, he is patting himself on the back for lower deficits.

For what it is worth, Biden’s claim is semi-accurate. It is true that budget deficits are temporarily falling.

But not because of him. Instead, red ink is falling because there was massive, one-time, multi-trillion dollar emergency spending for the COVID pandemic in 2020. That spending began to wind down in 2021 and it has mostly dissipated this year, so of course deficits have fallen.

For Biden to take credit for this drop would be akin to Truman taking credit for the big drop in red ink after World War II ended.

Eric Boehm of Reason wrote a column that debunks Biden’s ludicrous claim.

…this year’s budget deficit is forecasted to be the third or fourth-largest in American history—but President Joe Biden claims…his administration is overseeing a period of fiscal austerity. …Here are some words that actually tumbled out of the president’s mouth at a press conference… “We’re on track to cut the federal deficit by another $1.5 trillion by the end of this fiscal year. …on top of us having a $350 billion drop in the deficit last year, my first year as president,” Biden continued. …Those facts, however, exclude a few key details. …Biden took office the year after the budget deficit hit previously unimaginable highs due to a completely unprecedented spending binge triggered by a once-in-a-generation public health disaster. …if you look at the actual budgetary baselines published by the Congressional Budget Office—that is, the ongoing amount of annual federal spending absent any emergency stimulus bills like the ones passed on several occasions during the height of the pandemic—Biden has overseen a noticeable increase in the deficit above the pre-pandemic baseline. According to the Committee for a Responsible Federal Budget, a fiscal watchdog group that advocates for lower deficits, Biden’s policies have added about $2.5 trillion to the deficit over the next 10 years.

Brian Riedl is now with the Manhattan Institute, but we used to work together earlier this century at the Heritage Foundation. One of his admirable traits is that he hasn’t lost the ability to be outraged.

That comes through in his tweet about Biden’s supposed accomplishment.

By the way, I’m not making a partisan point. I have no doubt Trump would have done the same thing.

After all, politicians are probably the least ethical people in the nation. And Washington brings out the worst of the worst.

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Blame the Federal Reserve

Back in 2015, I explained to Neil Cavuto that easy money creates the conditions for a boom-bust cycle.

It’s now 2022 and my argument is even more relevant.

That’s because the Federal Reserve panicked at the start of the pandemic and dumped a massive amount of money into the economy (technically, the Fed increased its balance sheet by purchasing trillions of dollars of government bonds).

As the late, great Milton Friedman taught us, this easy-money, low-interest-rate approach produced the rising prices that are now plaguing the nation.

But that’s only part of the bad news.

The other bad news is that easy-money policy sets the stage for future hard times. In other words, the Fed causes a boom-bust cycle.

Desmond Lachman of the American Enterprise Institute explains how and why the Federal Reserve has put the country in a bad situation.

Better late than never. Today, the Federal Reserve finally took decisive monetary policy action to regain control over inflation that has been largely of its own making. …The Fed’s abrupt policy U-turn is good news in that it reduces the likelihood that we will return to the inflation of the 1970s. However, this does not mean that we will avoid paying a heavy price for the Fed’s past policy mistakes in lost output and employment. …One might well ask what the Fed was thinking last year when it kept interest rates at their zero lower bound and when it let the money supply balloon at its fastest pace in over fifty years at a time especially when the economy was recovering strongly… One might also ask what the Fed thought when it continued to buy $120 billion a month in Treasury bonds and mortgage-backed securities throughout most of last year when the equity and the housing markets were on fire?

The relevant question, he explains, is whether we have a hard landing…or a harder landing.

If the Fed sticks to its program of meaningful interest rate hikes and balance sheet reduction over the remainder of this year, there would seem to be an excellent chance that we do not return to the inflation of the 1970s. However, there is reason to doubt that the Fed will succeed in pushing the inflation genie to the bottle without precipitating a nasty economic recession. One reason for doubting that the Fed will succeed in engineering a soft economic landing is that there is no precedent for the Fed has done so when it has allowed itself to fall as far behind the inflation curve as it has done today. …there is a real risk that higher interest rates might be the trigger that bursts today’s asset and credit market bubbles. Should that indeed happen, we could be in for a tough landing. Milton Friedman was fond of saying that there is no such thing as a free lunch. This is a lesson that the Fed might soon relearn as last year’s economic party gives way to a painful economic slump.

Let’s hope we have a proverbial “soft landing,” but I’m not holding my breath.

Especially with Biden pursuing other bad policies (FWIW, I don’t blame him for today’s price spikes).

P.S. As explained in this video from the Fraser Institute, Friedrich Hayek understood a long time ago that feel-good government intervention leads to a feel-bad economic hangover.

P.P.S. Here’s my video on the Federal Reserve, which also explains that there might be a good alternative.

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D.C. Politicians Are Pushing Industrial Policy

Politicians in Washington very much like the idea of industrial policy.

Steve Forbes, however, warns that legislation to expand cronyism would be a very bad idea.

As Steve notes, politicians foolishly claim we need our own version of industrial policy so we can compete with China’s industrial policy.

But China is suffering in part because of that form of intervention.

So why on earth do American politicians think we should copy the policies of a nation where living standards are only a fraction of U.S. levels?

The bad news, as James Pethokoukis recently observed for the American Enterprise Institute, is that this pork-barrel legislation may soon get through Congress.

…during President Biden’s State of the Union address…he said it was “so important” for Congress to pass something called the “Bipartisan Innovation Act.” To the best of just about anyone’s knowledge, no such legislation existed. Save the “senior moment” wisecracks. Biden was breaking out a new name for a couple of bills making their way through the House and Senate. …few Americans have ever heard of the House’s America Competes Act or the Senate’s U.S. Innovation and Competition Act, despite their huge price tags. But they might want to get up to speed, ASAP. …there’s the substance of the bills themselves, …the parts that seem intent on mimicking top-down Chinese industrial policy, such as the funding for semiconductor manufacturing and efforts to create “Regional Technology and Innovation Hubs” across America.

So what will happen if politicians approved this example of cronyism?

The easy answer is that we will have more politicization of the economy. And that’s not a good outcome.

The Wall Street Journal opined on this legislation last year.

Competition with China will define the coming decades, and Congress wants to get into the game. Alas…the Senate’s nearly 1,500-page Innovation and Competition Act that won’t help innovation or competitiveness. …the bill’s bipartisan support has less to do with China than with its typical Congressional spending blowout and parochial politics. …political strings…always attach to industrial policy. Companies left to their own devices will allocate capital to its most productive use, but government subsidies will steer investment where politics directs. …Many Republicans support the bill because they believe the U.S. needs to mimic Beijing’s directed capital to defeat Beijing. But the U.S. strength has always been its capitalist system, which encourages private investment and innovation through market competition, strong intellectual property rights, and, yes, profits. That’s how the U.S. transcended Japan’s challenge in the 1980s and 1990s. …China’s strategy has long been to subsidize inefficient state-owned enterprises and national champions like Huawei, which has hamstrung smaller potential competitors. …The China challenge requires a better response than the U.S. has mustered to date. But the industrial policy of this bill will waste taxpayer money and divert private capital to less efficient purposes. America can’t out-compete China by imitating it.

Veronique de Rugy also addressed this issue last year.

Here are excerpts from her National Review column.

Industrial policy looks great on paper. The government simply has to identify an industry that needs support, prop it up with subsidies, loans, tax breaks, or protect it from foreign competition with tariffs and other trade regulations, and we will be on our way to fixing many of our problems. …the winners picked by the government may not all turn out to be the champions we hope they will become. …And yet, we continue to believe that somehow, this time, industrial policy will work better. You even hear conservatives make arguments like, “It works in China, so we have to do the same.” It’s as if some people are convinced that the problems that have plagued past and current central-planning efforts in the U.S. government don’t exist in China. But the truth is that China’s successes may not look as good relative to the U.S. if you look closely at the data and facts.

Veronique is right. China is not a role model

Just like the Soviet Union was not a role model.

Just like Japan of the 1980s was not a role model.

Industrial policy has always been a failure, anywhere and everywhere, whether done on a big scale (central planning) or a small scale (business subsidies).

Free markets are the right answer. Though I guess it is not much fun being a politician if your role is to simply leave people alone.

P.S. In his article, Pethokoukis expresses sympathy for having the government fund basic research instead of picking winners and losers. I think he is far too optimistic about getting good results with government-financed research and development.

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Is It Time to Resuscitate the National Sales Tax?

About 14 years ago, I narrated this video about the flat tax and national sales tax (sometimes referred to as a “Fair Tax”).

I used the video as an opportunity to explain that both plans effectively rip up the current internal revenue code. And both would solve the major problems that plague today’s income tax.

• No more punitive tax rates on productive behavior.
• No more double taxation of saving and investment
• No more corrupt, complex, and inefficient loopholes.

As I stated in the video, the only big difference between a flat tax and national sales tax is the collection point.

A flat tax is collected as income is earned. A sales tax, or Fair Tax, is collected as income is spent.

But the economic benefits of both plans are identical because the core features of both plans are identical.

Sadly, big-picture tax reform no longer is a major issue. Proponents of good policy are mostly focused today on stopping plans that would make a bad tax code even worse.

But maybe it is time to think about going on offense.

In a column for the New York Sun, John Childs makes the case for replacing the current mess with the national sales tax.

There is a better way — replace the entire income tax monstrosity with a national consumption tax, i.e. a national sales tax. Let Walmart and Amazon be the tax collectors. Odds are they will be vastly more efficient than the IRS, which at this point can’t even return the phone calls of bewildered taxpayers. All retailers already perform sales tax collection services for state governments. So it is hardly a leap of faith to ask them to do it for the Feds. …This would be bad news for tax lawyers and accountants. As some of the brightest minds in the country now devote themselves to crafting fiendishly clever tax avoidance schemes, though, imagine what an unexpected dividend would flow from redirecting all of that creativity to productive activities.

I agree that a national sales tax would be much better than the current system.

That’s why I’ve promoted the idea on many occasions.

But always with the very big caveat that I mentioned in the video, which is that any sort of direct consumption tax (sales tax, Fair Tax, value-added tax) has to be a total replacement for the income tax.

However, that’s just one must-have requirement. Since politicians are untrustworthy, we also should not allow a direct consumption tax until and unless the 16th Amendment is repealed and replaced with a new amendment that unambiguously prohibits any future Congress from reinstating an income tax.

The bad news is that I don’t think either of these requirements will be met. And this is why I am more focused on supporting the flat tax.

After all, the worst thing that happens with a flat tax is that future politicians reinstate the current system.

But the worst thing that happens with a national sales tax is that future politicians have a new source of revenue to fuel bigger government (sort of what happened in Europe when value-added taxes financed a major expansion in the burden of government spending).

P.S. The same principles apply at the state level. Policymakers should use consumption taxes to help finance the repeal of income taxes.

P.P.S. A Fair Tax (or any form of national sales tax) will reduce the underground economy, but not by a greater amount than the flat tax.

P.P.P.S. Here are very succinct explanations of major tax reforms proposals.

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Say No to Biden’s Global Tax Cartel

A few months ago, I reiterated my opposition to Biden’s proposed corporate tax cartel as part of a longer discussion with Australia’s Gene Tunny.

The main takeaway is that the proposed “minimum global tax” is an agreement by politicians for the benefit of politicians.

As I stated in the discussion. companies do not bear the burden of corporate taxes. Those costs are borne by workers, consumers, and shareholders.

Sadly, those costs will increase if the agreement is finalized. Politicians openly admit they are pushing this cartel to undermine jurisdictional tax competition.

At the risk of stating the obvious, their plan is to give themselves more leeway to increase tax rates.

I’m sharing the above interview and rehashing some of these basic arguments because Barack Obama’s former top economist, Jason Furman, has a column in today’s Wall Street Journal.

Here’s some of what he wrote in favor of the scheme.

Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in. …The arguments for…fixing Mr. Trump’s reforms were already strong, but the global agreement secured by Ms. Yellen makes them much stronger. In particular, the global agreement removes the main objection to more aggressively taxing overseas income because other countries have all agreed to adopt similar systems. The concerns that U.S. companies would be less competitive or would try to avoid U.S. taxes by incorporating overseas are considerably smaller than they would otherwise be. …The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and…relatively minimal in only establishing a 15% rate floor.

Notice that Mr. Furman openly acknowledges that the goal is to create a cartel so that politicians will feel less constrained by the liberalizing force of tax competition.

For what it’s worth, I think Professor Bruce Gilley had better analysis in his column, which appeared in the WSJ earlier this year..

World leaders announced a new global corporate minimum tax to great fanfare last year. …The contorted language of the guidance, as well as political foot-dragging in several countries, makes clear that the ballyhooed global tax plan would be a great and expensive flop. Better to let this hydra-headed monster die. The agreement was always a tax grab. …Europe wanted to raise revenue by taxing U.S. companies. The Biden administration has cheered the agreement along with familiar claims that big companies should “pay their fair share.” …Digital multinationals like Amazon, Google, Airbnb and Meta are the target. …the agreement…seeks to establish a 15% minimum global tax rate for international companies… The only plausible way the tax leads to more revenue for the U.S. is if it is used as a cover to raise corporate taxes here, which was perhaps why the Biden administration joined. …According to an International Monetary Fund study, 45% to 75% of the burden of corporate taxes is recouped through lower employee wages.

The bottom line is that the proposal for a global minimum tax is being sold as a way to go after big business and rich shareholders, but ordinary people will be the biggest victims.

We will pay more for products because as the higher taxes filter through the economy and we will have less disposable income because of a diminished job market.

P.S. I have written several times about the utterly fraudulent argument that supposedly profitable companies do not pay corporate taxes.

So this is a good opportunity to share this part of Professor Gilley’s column, which notes that companies are (currently) required to keep two different sets of books (which demagogues then deliberately mix up to advance their false claims).

Public companies already have to keep two sets of books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would require multinationals to keep a third set of books to avoid being the target of tax raids by, say, France. The agreement would create many new jobs for accountants and lawyers.

Needless to say, requiring companies to keep a third set of books is a remarkably bad idea.

P.P.S. Here’s a primer on corporate taxation.

P.P.P.S. The bureaucrats at the OECD are big advocates of a global minimum tax. I wonder whether they are so pro-tax because they get tax-free salaries and thus are protected from the awful policies they pursue?

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Cancelling Student Loans: More Poor-to-Rich Redistribution from the Left

It is very common for politicians to cause a problem with government intervention and then use the problem as an excuse for even bigger government.

I call this the lather-rinse-repeat cycle of government failure.

And the current controversy over student loan forgiveness is a perfect example.

• Politicians decided to subsidize student loans.
• Colleges and universities predictably responded by increasing tuition so they could grab this additional money.
• Politicians are now responding to the government-created crisis by pushing loan forgiveness.

I could write a column about how this will make a bad situation worse. Heck, I already have written that column. Several times.

But I want to focus today on a different aspect of this issue.

Biden on his allies in Congress are pushing a policy that will redistribute money from lower-income people to higher-income people.

Let’s look at some of the findings of a new study by Professor Sylvain Catherine at the University of Pennsylvania and Professor Constantine Yannelis at the University of Chicago.

…on average, those who graduate with a post-secondary degree earn more than those who do not, so student debt forgiveness plans, by definition, are geared toward higher-wage earners. Further, many holders of high loan balances completed graduate and professional degrees and thus earn even higher incomes. …universal debt forgiveness policies would disproportionately benefit high earners. …universal and capped forgiveness policies are highly regressive, with the vast majority of benefits accruing to high-income individuals.

Peter Suderman of Reason is unimpressed by this backwards form of redistribution.

The single largest source of student loan debt is MBA programs, as Brookings Institution Senior Fellow Adam Looney has noted, and MBA grads average more than $73,000 in earnings their first year out of school. “The five degrees responsible for the most student debt are: MBA, JD, BA in business, BS in nursing, and MD,” Looney wrote in 2020. “That’s one reason why the top 20 percent of earners owe 35 percent of the debt, and why most debt is owed by well-educated individuals.” Technically, it’s true that well-paid professional school graduates fall into the category of “working people.” But..what Biden appears to be considering, is a massive program of government aid that would disproportionately benefit doctors, lawyers, well-paid medical specialists, and comfortably salaried individuals with advanced business degrees. …a trillion-dollar bailout for the upper-middle class.

This is disgusting and reprehensible.

I don’t think it is a proper role of the federal government to redistribute money. But it is especially grotesque and misguided when politicians use the coercive power of government to shift resources from lower-income Americans to higher-income Americans.

For what it is worth, there already are many policies and programs in Washington that – on net – shift money from the poor to the rich.

• Export-Import Bank
• Agriculture subsidies
• National Endowment for the Arts
• Deduction for mortgage interest
• Tax exemption for municipal bonds

I will close by observing that there has also been a vigorous effort from our friends on the left to restore an unlimited deduction for state and local taxes.

It’s almost as if it is okay to have policies that benefit rich people, so long as they mostly live in blue states.

P.S. It is possible to design loan forgiveness to reduce the level of poor-to-rich redistribution. The aforementioned study by Professors Catherine and Yannelis includes data showing how various income deciles will (or will not) benefit depending on different types of forgiveness rules.

P.P.S. However, any type of loan forgiveness exacerbates the original problem, which is how politicians have enabled and subsidized ever-higher tuition rates.

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