The Depressing Reincarnation of Build Back Better

One of the best things about 2021 was the fact that Congress did not approve Joe Biden’s economically debilitating plan to raise taxes and expand the welfare state.

His so-called Build Back Better plan was a very bad mix of class-warfare tax policy and redistributionist spending policy.

But one of the worst things about 2022 may be the reincarnation of a slimmed-down version of Biden’s plan.

Simply stated, the “slimmed-down version” of a terrible piece of legislation is bad news – even if it is possible to envision something even worse.

The Wall Street Journal‘s editorial on the package illustrates why it is bad news that Senator Joe Manchin is trying to rescue Biden’s statist agenda.

As the economy slouches near recession, Majority Leader Chuck Schumer and West Virginia Sen. Joe Manchin…unveiled a tax-and-spending deal that they call the Inflation Reduction Act. Is their aim to reduce inflation by chilling business investment and the economy? …A more accurate name would be the Business Investment Reduction and Distortion Act since that will be the result of its $433 billion in climate and healthcare spending, and $615 billion in new taxes and drug price-control “savings.”

The editorial highlights four terrible provisions.

First, there’s a big tax hike on American companies, with the biggest tax hike on firms that make new investments.

…the 15% minimum tax on corporate book income…will slam businesses whose taxable income is lower than the profits on their financial statements owing to the likes of investment expensing.

For all intents and purposes, politicians would be creating a second type of corporate income tax.

Heavy compliance costs for the business community, of course, but the rest of us probably care more about the estimated loss of 218,000 jobs according to the National Association of Manufacturers.

Second, there are corrupt “green energy” provisions that will degrade America’s energy efficiency and security.

…the bill’s $369 billion in climate spending, most of which is corporate welfare. …All of this will steer private investment into green energy at the cost of reduced investment in fossil fuels. Wind and solar subsidies are already creating distortions in power markets that make the electric grid less reliable and energy more expensive. The expansion of subsidies will compound these problems.

If you want to know why this is bad, just remember Solyndra.

Third, the legislation imposes back-door price controls on the pharmaceutical industry.

The bill will require the Health and Human Services Secretary to “negotiate” Medicare prices—i.e., impose price controls—for dozens of drugs. But the $288 billion in putative savings are fanciful. Manufacturers will hedge potential future losses by launching drugs at higher prices. …The bill will also discourage investment in innovative treatments that could reduce future healthcare spending.

For those of us who value the development of new drugs to fight problems like cancer and Alzheimer’s, this is very bad news.

Fourth, a very corrupt internal revenue service is rewarded for its bad behavior.

Speculative revenue of $124 billion will also come from an $80 billion boost for the IRS. Most of this will finance more audits. The rich can afford more tax lawyers, but middle and upper-middle class Americans will be inclined to settle IRS claims, however meritless, lest they spend even more to defend themselves.

P.S. I can’t resist sharing one final bit of information.

If you peruse the Joint Committee on Taxation’s analysis of the bill, you’ll find that Joe Biden is breaking his promise not to raise taxes on people making less than $400,000 per year.

Not that anyone should be shocked. I have repeatedly explained that the big spenders need to pillage lower-income and middle-class household if they want to finance bigger government.

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Gun Control Humor

Time to add to our collection of humor about gun control.

Back in 2013, I conducted a poll on the most important reason to oppose gun control. The most-common answer was to have the ability to resist government tyranny. Which is the theme of our first item.

The next bit of humor has the same message.

Our third item reminds me of my “IQ test” for criminals.

Next we have a cartoon that combines two hot-button issues.

As is my tradition, I’ve saved the best for last.

And the reason it’s the best is because it is such an accurate depiction of the thinking of our friends on the left.

P.S. Regarding the quiz I mentioned at the start of the column, I think the correct answer is that we should oppose gun control in order to have the ability to protect ourselves in case of societal breakdown.

As we saw most recently at the height of the pandemic, it is unwise to rely on government to protect us during times of crisis.

Heck, governments don’t do a good job of protecting us during times of calm.

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The Simple Solution to America’s Horrific Long-Run Fiscal Crisis

Yesterday’s column analyzed some depressing data in the new long-run fiscal forecast from the Congressional Budget Office.

Simply stated, if we leave fiscal policy on auto-pilot, government spending is going to consume an ever-larger share of America’s economy. Which means some combination of more taxes, more debt, and more reckless monetary policy.

Today, let’s show how that problem can be solved.

My final chart yesterday showed that the fundamental problem is that government spending is projected to grow faster than the private economy, thus violating the “golden rule” of fiscal policy.

Here’s a revised version of that chart. I have added a bar showing how fast tax revenues are expected to grow over the next 30 years, as well as a bar showing the projection for population plus inflation.

As already stated, it’s a big problem that government spending is growing faster (an average of 4.63 percent per year) than the growth of the private economy (an average of 3.75 percent per years.

But the goal of fiscal policy should not be to maintain the bloated budget that currently exists. That would lock in all the reckless spending we got under Bush, Obama, and Trump. Not to mention the additional waste approved under Biden.

Ideally, fiscal policy should seek to reduce the burden of federal spending.

Which is why this next chart is key. It shows what would happen if the federal government adopted a TABOR-style spending cap, modeled after the very successful fiscal rule in Colorado.

If government spending can only grow as fast as inflation plus population, we avoid giant future deficits. Indeed, we eventually get budget surpluses.

But I’m not overly concerned with fiscal balance. The proper goal should be to reduce the burden of spending, regardless of how it is financed.

And a spending cap linked to population plus inflation over the next 30 years would yield impressive results. Instead of the federal government consuming more than 30 percent of the economy’s output, only 17.8 percent of GDP would be diverted by federal spending in 2052.

P.S. A spending cap also could be modeled on Switzerland’s very successful “debt brake.”

P.P.S. Some of my left-leaning friends doubtlessly will think a federal budget that consumes “only” 17.8 percent of GDP is grossly inadequate. Yet that was the size of the federal government, relative to economic output, at the end of Bill Clinton’s presidency.

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America’s Horrific Long-Run Fiscal Forecast

The Congressional Budget Office has released its new long-run fiscal forecast. Like I did last year (and the year before, and the year before, etc), let’s look at some very worrisome data.

We’ll start with projections over the next three decades for taxes and spending, measured as a share of economic output (gross domestic product). As you can see, the tax burden is increasing, but the spending burden is increasing even faster.

By the way, some people think America’s main fiscal problem is the gap between the two lines. In other words, they worry about deficits and debt.

But the real problem is government spending. And that’s true whether the spending burden is financed by taxes, borrowing, or printing money.

So why is the burden of government spending projected to get larger?

As you can see from Figure 2-2, entitlement programs deserve the lion’s share of the blame. Social Security spending is expanding as a share of GDP, and health entitlements (Medicare, Medicaid, and Obamacare) are expanding even faster.

Now let’s confirm that the problem is not on the revenue side.

As you can see from Figure 2-7, taxation is expected to consume an ever-larger share of economic output in future decades. And that’s true even if the Trump tax cuts are made permanent.

Having shared three charts from CBO’s report, it’s now time for a chart that I created using CBO’s long-run data.

My chart shows that America’s main fiscal problem is that we are not abiding by fiscal policy’s Golden Rule. To be more specific, the burden of government is projected to grow faster than the economy.

So long as the burden of government is expanding faster than the private sector, that’s a recipe for higher taxes, more debt, and reckless monetary policy.

All of those options lead to the same bad outcome.

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Everything You Need to Know about Federal Handouts for State and Local Governments

Ideally, the federal government should be limited to the functions specified by the Founders in Article 1, Section 8, of the Constitution.

If we are to have any hope of getting back to that system, it may require two practical steps.

1. If Washington is operating a program, the first step may be to replace it with block grants and let state and local governments decide how to spend the money.
2. If Washington is providing block grants, the second step may be to phase out that funding and let state and local governments figure out if they want to pick up the cost.

To elaborate, programs that are both funded by Washington and operated by Washington not only suffer from waste (common to all government activities), but also produce the inefficiency and stagnation common to a one-size-fits-all approach.

This is why welfare reform under Bill Clinton was a good idea.

Taxpayers saved some money because the block grant was capped. But the best outcome was that states then could use their flexibility to innovate and find approaches that actually helped poor people by encouraging employment and reducing dependency.

In an ideal world, however, there should not be block grants. State and local governments should decide not only how to operate welfare programs, but also how to finance them.

To understand the problems associated with block grants, let’s look at a new study published by the National Bureau of Economic Research. Authored by Jeffrey Clemens, Philip G. Hoxie & Stan Veuger, it finds that pandemic grants were grotesquely inefficient.

We use an instrumental-variables estimator reliant on variation in congressional representation to analyze the effects of federal aid to state and local governments across all four major pieces of COVID-19 response legislation. Through September 2021, we estimate that the federal government allocated $855,000 for each state or local government job-year preserved. Our baseline confidence interval allows us to rule out estimates of less than $433,000. Our estimates of effects on aggregate income and output are centered on zero and imply modest if any spillover effects onto the broader economy.

Needless to say, it’s absurd to spend $433,000-$855,000 to save a job that pays an average of $100,000. Or less.

On net, that’s going to reduce total employment when you count the private-sector jobs that are foregone because politicians are diverting so much money from the economy’s productive sector.

And if you want to know how much money was diverted specifically for state and local governments, Figure 3 shows both Trump’s pandemic boondoggle in 2020 and Biden’s pandemic boondoggle in 2021.

In a column for the Foundation for Economic Education, Peter Jacobsen discusses the new study.

The authors find that federal aid to state and local governments to save jobs was incredibly ineffective. In fact, this program was even more inefficient than the notoriously inefficient Paycheck Protection Program (PPP). …The PPP was estimated to have cost somewhere from $169,000 to $258,000 per job each year. This program to save state and local government jobs cost in the range of $433,000 to $855,000 per job each year. This is as much as 5x more waste! …So how did the government spend more than $800,000 per job to save jobs which normally pay five figures? …a business engaging in an ineffective and wasteful policy like this would make a loss on each worker and go out of business. …government is particularly prone to generating these wasteful jobs. …Without a mechanism like profit and loss to evaluate the value of alternative options, we are left with a policy which spends nearly a million dollars to preserve a single job with a salary less than one tenth of that.

I’ll conclude with the should-be-obvious observation that politicians don’t actually care about net job creation. They care about buying votes with other people’s money.

So the state and local bureaucrats who directly benefited (by keeping their over-compensated jobs) presumably will remember and reward the politicians who supported for the boondoggles.

P.S. The rest of us also should care – and oppose spendthrift politicians, but most of us don’t pay enough attention to recognize the “unseen.”

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Evidence for Lower Corporate Tax Rates, Part III

To begin Part III of this series (here’s Part I and Part II), let’s dig into the archives for this video I narrated back in 2007.

At the risk of patting myself on the back, all of the points hold up very well. Indeed, the past 15 years have produced more evidence that my main arguments were correct.

• Lower corporate rates reduce double taxation
• Lower corporate rates reduce taxes on people
• Lower corporate rates boost worker income
• Lower corporate rates boost competitiveness
• Lower corporate rates generate revenue feedback

The good news is that all these arguments helped produce a tax bill that dropped America’s federal corporate tax rate by 14 percentage points, from 35 percent to 21 percent.

The bad news is that Biden and most Democrats in Congress want to raise the corporate rate.

In a column for CapX, Professor Tyler Goodspeed explains why higher corporate tax rates are a bad idea. He’s writing about what’s happening in the United Kingdom, but his arguments equally apply in the United States.

…the more you tax something, the less of it you get. …plans to raise Corporation Tax and end relief on new plant and machinery will result in less business investment – and steep costs for households. …Treasury’s current plans to raise the corporate income tax rate to 25% and end a temporary 130% ‘super-deduction’ for new investment in qualifying plant and machinery would lower UK investment by nearly 8%, and reduce the size of the UK economy by more than 2%, compared to making the current rules permanent. …because the economic costs of corporate taxation are ultimately borne both by shareholders and workers, raising the rate to 25% would permanently lower average household wages by £2,500. …the macroeconomic effects of raising the Corporation Tax rate to 25% would alone offset 40% of the static revenue gain over a 10-year period, and as much as 90% over the long run.

To bolster his argument for good policy on that side of the Atlantic Ocean, he then explains that America’s lower corporate tax rate has been a big success.

Critics of corporate tax reform should look to the recent experience of the United States… At the time, I predicted that these changes would raise business investment in new plant and equipment by 9%, and raise average household earnings by $4,000 in real, inflation-adjusted terms. …By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Investment by corporate businesses specifically was up even more, rising to 14.2% above its pre-2017 trend in real, inflation-adjusted terms. Meanwhile, in 2018 and 2019 real median household income in the United States rose by $5,000 – a bigger increase in just two years than in the entire 20 preceding years combined. …What about corporate income tax revenues? …corporate tax revenue as a share of the US economy was substantially higher than projected, at 1.7% versus 1.4%.

If you want more evidence about what happened to corporate tax revenue in America after the Trump tax reform, click here.

Another victory for the Laffer Curve.

Not that we should be surprised. Even pro-tax bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have found that lower corporate rates produce substantial revenue feedback.

So let’s hope neither the United States nor the United Kingdom make the mistake of undoing progress.

P.S. The specter of a higher corporate tax in the United Kingdom is especially bizarre. Voters chose Brexit in part to give the nation a chance to break free of the European Union’s dirigiste approach. But instead of adopting pro-growth policies (the Singapore-on-Thames approach), former Prime Minister Boris Johnson opted to increase the burden of taxes and spending. Hopefully the Conservative Party will return to Thatcherism with a new Prime Minister (and hopefully American Republicans will return to Reaganism!).

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In One Chart, Everything You Need to Know about China

I’m obviously exaggerating when I write an “everything you need to know” column.

But I use that kind of title when sharing a story that highlights some sort of fundamental truth.

And one of my long-standing observations is that China’s economy is not nearly as strong as some people think. Which is why I’m sharing this chart from a recent Bloomberg report about China.

At the risk of understating, it’s good news if rich people want to migrate to your country and it’s bad news if they want to leave your country.

It’s easy to understand why rich people want to leave Russia. Putin is making the country an international pariah.

But look at China, which has the world’s second-largest number of high-net-worth emigrants.

The Bloomberg report, authored by Lisa Du, Amanda Wang, Zheng Li, elaborates on the exodus.

The big question now hanging over China’s rich is whether President Xi Jinping’s government will let them leave. …immigration lawyers say moving has become more difficult in recent months as passport processing times have increased and documentation requirements have become more onerous. Shifting large sums of money out of China has also become harder… That’s setting the stage for a fresh bout of tension between wealthy Chinese and the ruling Communist Party, which was already strained amid President Xi Jinping’s populist campaign for “common prosperity.”

As far as I’m concerned, the underlying issue is that China has been drifting back to authoritarian statism under President Xi

The fact that people and money have been escaping is a symptom of that problem.

Here are some more details.

The potential departures of people and capital are “a definite cost to the Chinese economy,” said Nick Thomas, an associate professor at the City University of Hong Kong… In another sign of the national mood, a recent note from Shanghai-based billionaire Huang Yimeng announcing to employees that he plans to move his family out of China went viral on social media. …Still, “there are lots of institutional barriers” to leaving China, said Jennifer Hsu, a research fellow at the Lowy Institute think tank in Sydney, Australia… Would-be emigrants also need to get savvier at moving money out of China. Citizens are only allowed to convert $50,000-worth of yuan into foreign currency each year. In the past, wealthier people have found ways around the rule, but some of those options are dwindling.

The bottom line is that the Chinese government presumably can make it more difficult for people to escape.

But that does not solve the underlying problem.

At the risk of oversimplifying is that China was horrendously poor under Mao’s doctrinaire socialism, but then enjoyed some growth after partially liberalizing its economy beginning in the last 1970s/early 1980s..

But there has not been any meaningful pro-market reform in the past 15-20 years and now China is losing ground.

No wonder successful people want to escape.

P.S. Encouraged by bad advice by the OECD and IMF, China has been pursuing bad policy in recent years.

P.P.S. Instead of threatening to invade Taiwan, Xi should by copying its small-government policies (or the pro-market policies of the other Asian Tigers).

P.P.P.S. Given China’s increased influence, I’m also not surprised that many successful people are now escaping Hong Kong.

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A Flunking Grade for the Department of Education

Whether I’m debating the quality of government schools or the funding of government schools, I routinely share this chart from the late Andrew Coulson.

There are two obvious takeaways from this data.

1. Taxpayers have been shelling out ever-larger amounts of money.
2. All that money has produced no improvement in student test scores.

Those two takeaways should lead any rational person to conclude that dramatic changes are needed.

Probably the biggest change is school choice. And the good news is that more and more states are moving in the right direction on this issue.

But there’s another potential big change. As illustrated by this tweet (and this story), a former Secretary of the Department of Education thinks it is time to abolish her former bureaucracy.

Unfortunately, we are not seeing any progress on this goal. The bureaucracy’s budget grew dramatically under Trump. And it’s getting even more bloated under Biden.

But maybe there’s hope. Congressman Tom Massie, a libertarian-leaning Republican from Kentucky, has legislation to get the federal government out of education. Here’s some of his office’s press release on the topic.

Representative Thomas Massie…has introduced H.R. 899, a bill to abolish the federal Department of Education. The bill, which is one sentence long, states, “The Department of Education shall terminate on December 31, 2022.” …said Massie. “States and local communities are best positioned to shape curricula that meet the needs of their students. Schools should be accountable. Parents have the right to choose the most appropriate educational opportunity for their children, including home school, public school, or private school.” The Department of Education began operating in 1980. On September 24, 1981, in his Address to the Nation on the Program for Economic Recovery, President Ronald Reagan said, “…we propose to dismantle two Cabinet Departments, Energy and Education. …There’s only one way to shrink the size and cost of big government, and that is by eliminating agencies that are not needed and are getting in the way of a solution. …education is the principal responsibility of local school systems, teachers, parents, citizen boards, and State governments. By eliminating the Department of Education less than 2 years after it was created, we cannot only reduce the budget but ensure that local needs and preferences, rather than the wishes of Washington, determine the education of our children.”

In a column for the Foundation for Economic Education, Patrick Carroll applauds Congressman Massie, along with his cosponsors who have embraced genuine reform.

Though it may be tempting to think Massie and his supporters just don’t care about education, this is certainly not the case. If anything, they are pushing to end the federal Department of Education precisely because they care about educational outcomes. In their view, the Department is at best not helping and, at worst, may actually be part of the problem. …Massie is echoing sentiments expressed by President Ronald Reagan in 1981, who advocated dismantling the Department of Education even though it had just begun operating in 1980. …Education needs vary from student to student, so educational decisions need to be made as close to the individual student as possible. Federal organizations simply can’t account for the diverse array of educational contexts, which means their one-size-fits-all findings and recommendations will be poorly suited for many classrooms.

Amen.

From the moment it was created by Jimmy Carter, the Department of Education has failed to generate any positive outcome.

By that metric, it has something in common with the Department of Energy, Department of Agriculture, Department of Transportation, Department of Housing and Urban Development, and almost every bureaucracy in Washington.

P.S. As one might expect, Bush’s No Child Left Behind and Obama’s Common Core were both expensive failures.

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Evidence for Lower Corporate Tax Rates, Part II

Adding to already voluminous research in the area (including studies from Australia, Canada, Germany, and the United Kingdom), I wrote yesterday about a new study showing that lower corporate tax rates produce more economic growth.

Not that these results should be a surprise.

Anyone with a basic understanding of economics realizes that taxes discourage the activity that is being taxed (something politicians understand when they discuss levies on tobacco).

And the higher the tax, the greater the damage.

Today, let’s revisit the 2017 Trump tax cuts, particularly the reduction in the corporate tax rate.

The International Monetary Fund has published new research on the issue, looking specifically at the impact of cross-border investment. Here are some excerpts from the study, which was written by Thornton Matheson, Alexander Klemm, Laura Power, and Thomas Brosy.

The 2017 Tax Cuts and Jobs Act (TCJA) sharply reduced effective corporate income tax rates on equity-financed US investment. This paper examines the reform’s impact on US inbound foreign direct investment (FDI) and investment in property, plant and equipment (PPE) by foreign-owned US companies. …We find that both PPE investment and FDI financed with retained earnings responded positively to the TCJA reform, but FDI financed with new equity or debt did not. …the increase in PPE investment after TCJA was driven by general economic growth. In regressions of FDI financed with retained earnings, however, tax coefficients were robust to inclusion of macroeconomic controls. As the literature predicts, EATRs have a greater impact on cross-border investment than EMTRs.

These results are interesting, but not overwhelming.

So why am I citing this research?

Because of the following chart, which shows two very important and very desirable results of the 2017 tax bill.

• First, we see lower average tax rates and lower marginal tax rates for the three types of business financing on the right.
• Second, we can see from “EMTR debt finance” on the left that the legislation significantly reduced the tax code’s bias for debt.

Here’s the chart, with the blue bars representing pre-2017 tax rates and the orange bars showing today’s tax rates.

The bottom line is that the 2017 law moved tax policy in the right direction. In a big way.

We got lower rates and moved closer to neutrality.

And I say that as someone who has no problem criticizing some of the other policies we got during that era.

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Evidence for Lower Corporate Tax Rates, Part I

Here is the argument why corporate tax rates should be as low as possible.

• High corporate tax rates discourage investment.
• Less investment reduces worker productivity.
• Lower rates of productivity result in lower wages.

In an ideal world, there would be no corporate income tax (or any income tax).

But I’ll gladly accept any movement in the right direction, which is why the reduction in the corporate tax rate was the crown jewel of Trump’s 2017 tax plan.

The bad news is that Biden wants to undo much of that progress.

Today, let’s look at some new academic evidence on the issue. A new study from the National Bureau of Economic Research, authored by Professors James Cloyne, Joseba Martinez, Haroon Mumtaz, and Paolo Surico, finds that lower corporate rates are especially beneficial for long-run prosperity.

We use…post-WWII U.S. data on output, taxes, productivity and R&D spending to estimate the dynamic effects of income tax changes…and focus on personal and corporate income tax changes separately. …In Figure 1, we present our first set of main results. The figure contains two columns. On the left, we show the IRFs to a reduction in the average corporate tax rate. On the right, we show the results for a reduction in the average personal tax rate. …The first row in Figure 1 reveals that, following a shock to corporate and personal income taxes, the average tax rates decline temporarily. …The second row in Figure 1 shows the impulse response functions for the percentage response of real GDP. … Looking at the first column it is clear that, despite the transitory nature of the corporate tax reduction, there are very persistent effects on real GDP, whose short-run increase of 0.5% persists throughout the ten year period shown in the figure. In other words, the corporate income tax cut has disappeared after 5 years, but the effect on the level of economic activity is still sizable and significant after 8 years. …A similar picture emerges for productivity, as shown in the third row of Figure 1. Both tax rate cuts boost productivity on impact, with the size of the initial response to a personal income tax cut being much larger than for a cut to corporate taxes. On the other hand, the effects of corporate tax cuts grow over time and remain significant even after 10 years.

Here’s the aforementioned Figure 1 from their research.

I’ll conclude by noting that permanent tax cuts are much better than temporary tax cuts.

But if taxes are being cut, regardless of duration, the goal should be to get the most bang for the buck. And there’s plenty of evidence (from the United States, Australia, Canada, Germany, and the United Kingdom) that lowering corporate tax rates is a smart place to start.

P.S. It’s unfortunate that Biden wants a higher corporate tax burden in the United States. It’s even more disturbing that he wants a global tax cartel so the entire world has to follow in his footsteps. But he apparently does not understand the topic.

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More Evidence Against Basic Income

Some people argue the government should give everyone a “basic income.”

The problem with that approach (and the problem with other types of redistribution) is that some people will choose not to work if they can simply rely on handouts from the government.

That’s not good for the overall economy because total output is determined by the quality and quantity of labor and capital being utilized.

Some supporters of basic income claim that basic income would not discourage work.

They point out that giving the handouts to everyone would solve the problem that exists with most forms of redistribution, which is punitive, implicit marginal tax rates if recipients try to become self-sufficient.

It would be great to solve that problem, but I’m skeptical that basic income would be a net positive.

Let’s review some new evidence about no-strings handouts. Allysia Finley of the Wall Street Journal summarized the key findings of some new academic research.

Did pandemic stimulus payments harm lower-income Americans? That’s the implication of a new study by social scientists at Harvard and the University of Exeter. Liberals argue that no-strings-attached handouts encourage better financial decisions and healthier lifestyles. …The Harvard study put this hypothesis to the test and found the opposite.During a randomized trial conducted from July 2020 to May 2021, researchers assigned 2,073 low-income participants to receive a one-time unconditional cash transfer of either $500 or $2,000. Another 3,170 people with similar financial, demographic and socioeconomic characteristics served as a control group. …The top-line result: Handouts increased spending for a few weeks—on average $26 a day in the $500 group and $82 a day in the $2,000 group—but had no observable positive effect on any individual outcome. …Handout recipients fared worse on most survey outcomes. They reported less earned income and liquidity, lower work performance and satisfaction, more financial stress, …and anxiety than the control group.

The main takeaway is that redistribution does not work. It’s bad for taxpayers and it is bad for recipients.

But I fear our friends on the left will not learn any lessons.

These findings contradicted the predictions of 477 social scientists and policy makers the researchers surveyed. That’s not surprising. Most liberal academics and politicians believe government handouts are the solution to all problems. If transfer payments were a ticket to the middle class, the War on Poverty would have succeeded long ago. …It’s no surprise that people who received a large percentage of their monthly income for doing nothing were less motivated to work and less satisfied with their work.

Very true. The so-called War on Poverty certainly showed government is capable of redistributing money.

But it has not produced good results, at least if one values economic independence and self-sufficiency for the less fortunate.

P.S. Ms. Finley’s column also mentioned another study that found a negative link between food stamps and diet quality.

…the study isn’t a one-off in documenting a link between transfer payments and worse outcomes. A 2018 study in the Journal of the American Medical Association examined the diet quality of food-stamp beneficiaries from 2003 to 2014, a period in which average benefits increased more than 50%. Similar low-income people who didn’t get food stamps ate more healthily than those who did. The non-food-stamp group consumed significantly fewer sugar-sweetened beverages, and their diets improved more over time.

P.P.S. Finland experimented with basic income and decided it did not work, while Swiss voters overwhelmingly rejected a scheme for universal handouts in their country.

P.P.P.S. Joe Biden expressed skepticism about basic income back in 2017, but that did not stop him from proposing per-child handouts after taking office.

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The Case for Entitlement Reform

If Joe Biden’s bungled economic policy is any indication, the GOP may wind up controlling Washington in the not-too-distant future.

If so, I hope Republicans rekindle their interest in the kind of genuine entitlement reform discussed in this interview.

But I’m not sure whether to be optimistic or pessimistic.

On the plus side, the GOP supported pro-growth entitlement reform during the Obama years.

On the minus side, the party largely punted on the issue once Trump took over.

To be sure, punting is the easy route from a “public choice” perspective. Politicians like offering freebies to voters and many voters like getting handouts.

However, that approach means America’s economy is weakened by an ever-growing burden of federal spending and eventually is plunged into fiscal crisis.

And that’s based on the programs that already exist. Joe Biden wants to expand the welfare state with even more entitlements!

The Wall Street Journal editorialized about the downside of making America more like Europe last October.

The result of…expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense. That’s the lesson from Europe’s cradle-to-grave welfare states… Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

Amen. I’ve repeatedly warned that a European-sized welfare state would mean European-sized taxes on lower-income and middle-class Americans.

And what’s remarkable (and discouraging) is that some politicians in the U.S. want to expand entitlements even though many European governments now realize they made big mistakes and need to scale back.

The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. …Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017… Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms.

For what it’s worth, I’m happy about these reforms, but I fear many European nations are in the too-little-too-late category.

Why? Because the demographic outlook is deteriorating faster than reform is happening. In other words, most of them are probably destined to suffer Greek-style fiscal crises.

But if (or when) that happens, maybe American politicians will finally wake up and realize we need good reforms to prevent Social Security, Medicare, and Medicaid from causing a similar collapse on this side of the Atlantic Ocean..

Hopefully that epiphany will take place before it is too late for the United States.

P.S. For those who are interested in the history of fiscal policy, John Cogan of the Hoover Institution wrote about pre-20th-century entitlements earlier this year.

Here are excerpts from his column in the Wall Street Journal.

The history of U.S. entitlements is a 230-year record of continuous expansion… The first major entitlement, Revolutionary War disability benefits, was initially restricted to members of the Continental Army and Navy who were injured in battle and survivors of those killed in wartime. Eligibility was then expanded, first to state militia soldiers, then to veterans whose disabilities were unrelated to wartime service, and eventually to virtually all people who served during the war regardless of disability. Civil War disability pensions followed the same…process, except on a far grander scale. Pensions were initially confined to U.S servicemen who suffered wartime injuries and survivors of those killed in battle. Eventually they were extended to virtually all union Civil War veterans regardless of disability. …Congress followed the same liberalizing process with 20th-century entitlements.

If this excerpt doesn’t satisfy your curiosity, here’s Cogan discussing the topic for 46 minutes.

P.P.S. Not all entitlement reform is created equal.

P.P.P.S. Here an informative chart if you want to know whether to blame defense spending or entitlement spending.

P.P.P.P.S. I always argue in favor of a Swiss-style spending cap, which presumably would force politicians to address America’s entitlement problem.

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Wealth Taxation and Economic Suicide

The people of Chile elected a Bernie Sanders-style leftist last December and one of his crazy ideas is a wealth tax. In a discussion with Axel Kaiser, I explain why this destructive levy is misguided.

A wealth tax would be bad news in Chile. It also would be bad news in the United States.

Indeed, there is no country in the world where it wouldn’t be bad news (including Switzerland).

As I noted in the above video clip, an annual tax on wealth is economically akin to a tax on saving and investment.

And the effective tax rate can be confiscatory. Especially when you consider the impact of other taxes, such as dividend taxes, capital gains taxes, and income taxes (and don’t forget the corporate income tax and death tax!).

The chart shows that the severity of the tax varies depending on the rate of wealth tax and the change in the value of a taxpayer’s assets.

And it only includes the impact of the wealth tax and personal income tax.

Yet even with that limitation, it is still very easy to wind up with effective tax rates of more than 100 percent.

You don’t need to be a wild-eyed supply-sider to conclude this will undermine growth by discouraging people from saving and investing.

Daniel Savickas of the Taxpayer Protection Alliance wrote about this unfair and punitive levy earlier this year.

Here are excerpts from his column for Real Clear Markets.

A wealth tax means it would no longer be worthwhile for many to invest in the economy. People invest with the hopes of making money on that investment and accept they will have to pay a percentage on gains once it’s sold off. However, with repeated taxes in the interim just for holding the stock, many investments cease making financial sense. As a result, many startup companies will end up losing access to capital at a critical time. A wealth tax will end up punishing small businesses more so than the super wealthy. …The economy has taken a beating lately and – given recent inflationary trends – does not seem to be getting a break any time soon. Policymakers should be focusing on how to alleviate those pains. A wealth tax would go after the people who take risks and invest their money in our companies and our jobs. This approach would never be helpful, but is especially harmful at a time like this.

The bottom line is that a wealth tax would be very bad news. It would weaken the United States economy. And it would have an even worse impact on Chile’s economy (particularly when combined with Boric’s other bad policies).

P.S. There’s definitely not a libertarian argument for a wealth tax, and I also have explained why there is not a conservative argument for this invasive levy.

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Deregulate Birth Control

There are all sorts of reasons to dislike the Food & Drug Administration.

Based on the number of lives lost, the bureaucracy’s foot-dragging on drug approval would be at the top of the list.

Though the FDA’s inefficiencies also resulted in many needless deaths during the pandemic.

And let’s not overlook the other areas where the FDA has a pernicious impact.

But I’m a big believer in redemption. So I’m very hopeful that the bureaucrats will soon do something smart and allow women to purchase birth control pills without first getting a prescription.

One of the reasons I’m hopeful is that some of our friends on the left have sensible views on this issue.

The Washington Post, for instance, recently editorialized in favor of at least partial deregulation.

Paris-based HRA Pharma announced last week that it has applied to the FDA for approval to switch Opill…to over-the-counter use. If approved, it would be the first time Americans would have access to oral contraceptives without the need to obtain a prescription from a health professional. Another pill manufacturer, Cadence Health, has been discussing with the FDA switching its progesterone-estrogen combination to over-the-counter sales in hopes of also submitting an application. …The requirement for a prescription can create barriers for women who don’t have easy access to a health-care provider because of cost, lack of transportation or child care, and privacy and confidentiality concerns. Making the pill available without a prescription could be particularly helpful to women in rural, poor and marginalized communities. Oral contraceptives…are available over the counter in more than 100 countries, and clinical trials have shown them to be safe and reliable. …Major medical organizations, including the American Medical Association and the American College of Obstetricians and Gynecologists, have voiced their support for making birth control pills available without prescription. …it is important that the FDA make this matter a priority.

Needless to say, libertarian-minded people are on the right side as well.

Brad Polumbo of the Foundation for Economic Education wrote in favor of reducing government intervention.

…whatever one believes about abortion, the timing of a new debate on birth control policy within the Food and Drug Administration (FDA) couldn’t be more important. The FDA just received a request from a contraceptive company seeking authorization to sell its birth control pills over-the-counter—without a prescription, as is required nationwide under current laws. …the downsides of government mandates requiring a prescription are significant. For one thing, it makes birth control harder to access for people without health insurance or the time/resources to obtain professional medical care. It also adds significantly to the cost of birth control by introducing middlemen and additional steps. …Studies have shown that, in absence of a required doctor consultation, women are able to self-screen and determine if they meet any of the conditions where one shouldn’t take hormonal birth control. …Dozens of other countries don’t require a prescription for birth control, including Mexico, Portugal, India, Greece, and Brazil. …it’s a matter of who gets to decide. Can women weigh the risks and benefits of a medication and decide for themselves? Or should that decision be made for them by supposedly benevolent bureaucrats and the nanny state?

Brad answers his own question, stating that “the answer is clear” and that the FDA should “get out of the way.”

Amen. Indeed, “get out of the way” should be our attitude about almost every action by politicians and bureaucrats.

I’ll close by making the should-be-obvious point that a belief in deregulated birth control is not the same as a belief in subsidized birth control. Especially when such policies are a recipe for higher costs and corrupt cronyism.

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Taxation 101

I’ve written a few columns that explain tax principles, but this video from the Tax Foundation may be the best place to start if you have friends or colleagues who need to learn the basics.

As part of the article that accompanies the video, the Tax Foundation explains that not all taxes are created equal. In other words, some taxes impose more damage than other taxes.

And this chart from the article is a nice summary of the three types of tax, along with the potential damage caused by varying ways of collecting tax.

As a general rule, this chart is totally accurate.

Corporate income taxes, gross receipts taxes (mentioned here), and wealth taxes do a lot of economic damage on a per-dollar-collected basis.

But I want to add a caveat to the first column.

As currently designed, there’s no question that the personal income tax and the corporate income tax are very bad taxes.

But it is possible to dramatically reduce the damage imposed by those levies. For instance, the personal income tax could be largely defanged if the current system was repealed and replaced by a simple and fair flat tax.

Likewise, it’s possible to reform the corporate income tax (full expensing, territoriality, no double tax on dividends, etc) so that it does comparatively little damage.

By the way, I’m sure the experts at the Tax Foundation would agree with these observations, so I’m augmenting rather than criticizing.

And since I’m doing some augmenting, another observation is that the first two taxes on the bottom row generally are very similar, at least with regard to their economic impact (and also similar to a properly designed individual income tax).

Here’s some of what I wrote in a column back in 2012.

…anything that expands the “tax wedge” between pre-tax income and post-tax consumption is going to impose similar levels of economic harm. Here’s a simple example. If I earn $100, does it matter to me if the government takes $25 as I earn that income (either with a payroll tax or income tax) or as I spend that income (either with a sales tax or value-added tax)? Is there any reason that my incentives to earn and produce will be altered by shifting from one approach to the other?

I explain that the answer is no. My incentive to earn income is affected by my ability to use income to enjoy consumption. But if taxes take a big bite, I’ll have less reason to be productive, regardless of how politicians collect the tax.

For what it is worth, I’ve used Belgium as an example to explain why shifting from payroll taxes to sales taxes, or vice-versa, is not a recipe for greater prosperity.

P.S. Those who want more advanced primers on taxes and growth should click here and here.

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Save Lives by Slapping Down the FDA’s War on Vaping

There are many reasons to have disdain for the Food and Drug Administration (pandemic failures, baby formula shortage, delayed drug approval, human cruelty, etc) and this video gives you another.

If you don’t want have time to watch the video, all you really need to know is that there is a lot of scientific evidence showing that vaping is far safer than smoking.

And “far safer” is an understatement.

So if the goal is reducing risk and helping people live longer, giving smokers the option of switching to e-cigarettes and other vaping products should be a no-brainer.

But an absence of brains seems to be a major qualification for some bureaucrats. The FDA is actually trying to criminalize vaping.

I’m not joking. In a column for Reason, Veronique de Rugy bluntly explains the horrific consequences.

There’s something terrifying about a government so powerful that it can shut down your business overnight without even bothering to offer substantive arguments. Yet that’s what U.S. Food and Drug Administration bureaucrats just did to the e-cigarette company Juul. …Most of the…victims will be cigarette smokers. …the FDA has ordered all Juul e-cigarette products off the market even though its own decision features this remarkable admission: “…the FDA has not received clinical information to suggest an immediate hazard associated with the use of the JUUL device or JUULpods.” In other words, neither Juul’s effectiveness in turning smokers away from more dangerous products nor its success at getting some smokers to quit altogether is, for the FDA, sufficient evidence of the product’s benefit to public health. …the FDA all but guarantees that smokers will smoke more cigarettes, turn to less-established products or even go to the black market to get their nicotine fixes. …The FDA’s war…will…likely claim hundreds of thousands of adults who continue to inhale tar from cigarettes thanks to the agency’s refusal to allow safer, but also appealing, alternatives.

There is a sliver of good news. A court has temporarily blocked the FDA’s deadly decision.

But it is unclear whether that will lead to a permanent victory for better policy.

So what’s the bottom line?

Proponents of a ban fixate on the risk that vaping can be a gateway to nicotine use. And maybe even a gateway for smoking. And they are especially concerned about teenagers getting hooked.

These are legitimate concerns. But cost-benefit analysis shows that those risks are outweighed by the risks of people consuming cigarettes when vaping is not an option.

Many years ago, I wrote at article for the Journal of Regulation and Social Cost to explain how many government policies are indirectly deadly. With its war against vaping, the government is being more direct.

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Biden’s Main Economic (Political) Problem

There has been plenty of bad economic news for Joe Biden, most notably rising levels of inflation.

He also is being criticized for his tax-and-spend fiscal agenda. And mocked for his assertions about red ink.

But I think his main problem is this chart, courtesy of the Atlantic‘s Derek Thompson, which shows that prices are rising faster than earnings for the average American

The bottom line is that people don’t like inflation, but they probably would not be nearly as upset if their income was rising at least as quickly as prices.

But that’s not happening. And this means the average family is enduring a pay cut, when measured in actual purchasing power.

I shared a version of these numbers back in March as part of a six-part series on Biden’s economic mistakes (the other five columns can be found here, here, here, here, and here).

That data also shows that inflation is rising faster than earnings. And that’s true even if fringe benefits are included.

What’s ironic about this data is that Joe Biden doesn’t deserve blame for the outbreak of inflation. Today’s rising prices are a consequence of mistakes by the Federal Reserve that took place before Biden was in the White House.

Though Biden’s subsequent appointments to the Fed suggest he either does not understand the problem of inflation or doesn’t care. So it’s not as if he deserves much sympathy.

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Biden’s Deficit Malarkey

Back in May, I pointed out that it is absurd for Joe Biden to claim credit for lower deficits. This Reason video elaborates, noting that red ink is (temporarily) falling solely because the orgy of pandemic spending is ending.

Serious budget people, regardless of their ideology, know this is true.

Almost everything Biden has done since taking office has expanded the burden of government.

For instance, he pushed through a so-called stimulus scheme, followed by a boondoggle-filled infrastructure plan.

Both of which are captured in this chart from Brian Riedl.

By the way, it would be better if the chart focused on how the spending burden has increased. After all, deficits should be viewed as the symptom. The real disease is excessive government.

That being said, either type of chart would look far worse if Biden had been able to convince Congress to approve $trillions of additional spending as part of his “build back better” proposal.

One final point is that Biden also has added to the fiscal burden of government with the pen-and-phone approach.

The Congressional Budget Office estimates that Biden has added $532 billion of extra spending via executive orders and other unilateral decisions.

P.S. I have no doubt Trump and many other politicians of both parties also would be taking credit for falling deficits if they were in Biden’s position. After all, politicians are probably the least ethical people in the nation. And Washington brings out the worst of the worst.

P.P.S. There is a risk that a slimmed-down version of Biden’s “build back better” plan is being resuscitated. That would be bad news for the economy. Not as bad as the original version, to be sure, but it’s crazy to enact anti-growth proposals with the economy teetering on the edge of recession (especially since some of the specific provisions are so misguided).

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Inflation Is Caused by Bad Government Policy

Milton Friedman wisely observed that inflation is always the result of bad monetary policy by central banks. And I echoed that point last month in remarks to the European Resource Bank meeting in Stockholm.

This topic deserves more attention, particularly given the depressing inflation numbers just released this morning by the Bureau of Labor Statistics.

Some of our friends on the left want to downplay these bad numbers. In large part, they are motivated by a desire to shield President Biden from political damage. And I sympathize with them since Biden was not in the White House when the Federal Reserve decided to dump lots of liquidity into the U.S. economy.

Here’s a chart showing the Federal Reserve’s balance sheet over the past decade. It’s easy to see the Fed’s panicked response to the pandemic in early 2020.

But I don’t sympathize with folks who claim that inflation is just something random.

Some of them want to blame Putin. Or the pandemic. Or “corporate greed.” Or maybe even space aliens.

I also wonder about this tweet from Ian Bremmer. He points out that inflation is showing up everywhere, regardless of which political party (or coalition) is running a government.

But I can’t tell what he means by his final line (“wild guess it’s not the govt”).

Is he saying that we should focus on the actions of central banks, not the partisan composition of a nation’s government? If so, I agree.

Or is he saying that we should not blame any part of government? If so, I completely disagree.

Central banks may have varying levels of day-to-day independence, but they are government entities. They were created by politicians and run by people appointed by politicians.

And inflation is happening in many nations because various central banks all made similar mistakes.

For instance, Bremmer mentions Germany and Italy. Those are euro countries and you can see that the European Central Bank made the same mistake as the Fed. It panicked at the start of the pandemic and then never fixed its mistake.

Bremmer also mentioned the United Kingdom. Well, here’s the balance sheet data from the Bank of England.

Once again, you can see a big spike in the amount of liquidity created when the BoE expanded its balance sheet.

And, just as was the case with the Fed and the ECB, the BoE did not fix its mistake once it became apparent than the pandemic was not going to cause a global economic collapse.

P.S. I suggested in the video that the ECB is partly motivated by a desire to prop up decrepit welfare states in nations such as Italy and Greece. This is a point I’ve been warning about for many, many years.

P.P.S. While Biden is not to blame for the outbreak of inflation, it’s also true that he is not part of the solution and has not used his appointment power to push the Fed in a more sensible direction.

P.P.P.S. If you have the time and interest, here’s a 40-minute video explaining the Federal Reserve’s track record of bad monetary policy.

P.P.P.P.S. If you’re constrained for time, I recommend this five-minute video on alternatives to the Federal Reserve and this six-minute video on how people can protect themselves from bad monetary policy.

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Which Nation Will Be the Next to Go Bankrupt?

Last month, I shared a chart from a study published by the European Central Bank.

It showed which European nations were in the unfortunate position of facing big future spending increases (the vertical axis) combined with already-high levels of government debt (the horizontal axis).

The bottom line is that Italy, Portugal, France and Belgium face a very difficult fiscal future.

And Estonia (at least relatively speaking) is in the best shape.

Today we are going to augment those ECB numbers by looking at some data from the OECD’s recent report on Estonia.

Here’s a chart showing how the burden of government spending is going to increase in various nations between now and 2060.

Slovakia, Spain, Norway, and the Czech Republic have the biggest problem.

Lithuania is in the best shape, surprisingly followed by Greece (I assume because that nation already hit rock bottom, not because of good policy).

I also highlight the United States, which will have to face the challenge of above-average spending increases.

But if you want to know which nation will be the next to suffer fiscal collapse, you also need to know whether (or the degree to which) it has the capacity – or “fiscal space” – to endure a bigger burden of government spending.

James Capretta addressed that topic in an article for the Bulwark.

Which governments have exercised budgetary restraint in recent years, even while confronting sequential global crises? Which have been more profligate? And what do the differences portend for their differing abilities to handle an era when servicing debt may be more expensive than it has been in many years? …Accuracy…requires assessing both assets and liabilities. …The Organization for Economic Cooperation and Development…’s most comprehensive measure of fiscal resilience is the “financial net worth” of the reporting countries, which includes the main sources of accumulated liabilities (especially public debt) along with financial assets owned by governments.

And here’s a chart showing how developed nations (with the exception of oil-rich Norway) have been spending themselves into a fiscal ditch.

Here are some of Capretta’s observations.

Among the twenty-seven OECD countries that reported data every year from 1995 to 2020, the average deterioration in their net financial position, weighted by population size, was equal to 48 percent of GDP. …Several countries stand out for the steepness of their declines. Japan’s net financial position was -20 percent of GDP in 1995, and in 2020 it was -129 percent of GDP—in other words, in just 25 years it worsened by over 100 percent of the country’s annual GDP. Similarly, the United Kingdom experienced a serious deterioration, with a net financial position in 2020 equal to -109 percent of GDP. In 1995, it was -26 percent. …France, Greece, Italy, and Spain are regularly criticized for their uneven approaches to fiscal discipline. The OECD data showing a substantial deterioration of their net financial positions over the last quarter century provides more evidence that each of these countries needs to take further steps to lower the risk of a fiscal crisis in future years.

The United States obviously is not in good shape, though I think the OECD’s methodology is imperfect.

Yes, America will have to deal with a fiscal crisis if we don’t figure out a way of controlling spending, but I suspect many other countries will reach that point before the U.S. (with Italy quite likely being the next to go belly up).

P.S. At the risk of repeating advice from previous columns, genuine entitlement reform is the only solution to America’s long-run spending problem, ideally enforced by a Swiss-style, TABOR-style spending cap.

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Argentina: Another Nation Victimized by Modern Monetary Theory

It’s not as bad as Cuba, North Korea, or Venezuela, but Argentina (as illustrated by this video) is a case study of how statism can ruin an economy.

The most important takeaway from the video is that Argentina used to be one of the world’s richest nations.

Even as recently as the late 1940s, Argentina was in the top 10 for per-capita economic output.

But it’s been downhill ever since.

If you want to blame just one politician, the clear choice would be Juan Peron. But he’s been followed by plenty of other statists. Even the supposed conservatives in Argentina seem to be fans of big government.

The net result is that the people of Argentina keep losing ground relative to their peers in other nations.

To some degree, Argentina is an example of why “modern monetary theory” is a bad idea. Simply stated, it’s not a good idea to finance big government via inflation.

Not that we need another example. Sri Lanka’s economic collapse already taught us the same lesson.

But Argentina’s wretched politicians seem determined to make a bad situation worse. In her column for the Wall Street Journal, Mary Anastasia O’Grady opines about the nutty ideas of the current Minister of the Economy, Silvina Batakis.

Ms. Batakis’s resume isn’t reassuring. She’s a former minister of the economy for the province of Buenos Aires (2011-15) who left her successor with empty coffers and forced him to turn to the federal government for emergency help to pay the salaries of public employees. …In a 2019 tweet, Ms. Batakis advised that to “combat” poverty requires “a state that plans and intervenes.” Worry has quickly spread that Ms. Batakis will abandon even mild attempts to end the fiscal profligacy and money printing that has generated inflation now running at more than 60% a year, and accelerating.

So what comes next?

…another round of hyperinflation driven by government “experts” who believe in modern monetary theory—which posits that printing money to pay bills doesn’t have to cause inflation if tax rates are high enough.

No wonder the Argentinian peso has lost so much of its value.

So what’s the bottom line? Well, I asked in 2019 whether the country could break free of “economy-sapping statist governance.”

Given the country’s dependency culture, the answer almost certainly is no.

P.S. The last minute of the above video warns that Democrats have a policy agenda that will make America more like Argentina. That’s true, but the profligate spending of Bush I, Bush II, and Trump suggests most Republicans are not any better. They may even be worse.

P.P.S. Argentina’s politicians are not the only villains. The IMF also deserves to be castigated for enabling and subsidizing the nation’s bad policy.

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Attract the Best and the Brightest with Low Tax Rates

I’ve written many times about the importance of low tax rates, specifically low marginal tax rates on productive activity such as work, saving, investment, and entrepreneurship.

And I’ve explained that it is especially beneficial to have low tax burdens to attract people who play a big role in boosting economic growth.

• Entrepreneurs
• Inventors
• Innovators

The bottom line is that everyone should want their state or their country to be a magnet for the best and brightest.

Having more highly successful people is a great shortcut for boosting everyone’s income.

Today, we’re going to look at more evidence on this topic. In a working paper for the Harvard Business School, Sari Pekkala Kerr, Çağlar Özden, William Kerr, and Christopher Parsons examine the migratory patterns of highly skilled workers.

Highly skilled workers play a central and starring role in today’s knowledge economy. Talented individuals make exceptional direct contributions—including breakthrough innovations and scientific discoveries… The exceptional rise in the number of high-skilled migrants to OECD countries is the result of several forces, including increased efforts to attract them by policymakers as they recognize the central role of human capital in economic growth… For example, immigrants account for some 57 percent of scientists residing in Switzerland, 45 percent in Australia, and 38 percent in the United States (Franzoni et al. 2012). In the United States, 27 percent of all physicians and surgeons and over 35 percent of current medical residents were foreign born in 2010. …the global migration rate of inventors in 2000 stood at 8.6 percent, at least 50 percent greater in share terms than the average for high-skilled workers as a whole.

In the contest to attract skilled migrants, some nations do a better jobs than others.

…among OECD destinations, the distribution of talent remains skewed. Four Anglo-Saxon countries—the United States, the United Kingdom, Canada and Australia—constitute the destination for nearly 70 percent of high-skilled migrants (to the OECD) in 2010. The United States alone has historically hosted close to half of all high-skilled migrants to the OECD and one-third of high-skilled migrants worldwide.

Here’s a chart looking specifically at inventors.

So why do some nations get disproportionate numbers of skilled migrants.

As you might suspect, these highly productive people want to earn more money. And keep more money.

The core theoretical framework for studying human capital flows dates back to at least John Hicks (1932), who noted that “differences in net economic advantages, chiefly differences in wages, are the main causes of migration.” …the United States has a very wide earnings distribution and low tax levels and progressivity, especially compared to most source countries, including many high-income European countries. As a result, we can see why the United States would attract more high-skilled migrants, relative to low-skilled migrants and relative to other high-income countries.

Notice, by the way, that low-tax Singapore and low-tax Switzerland also are big winners in the above chart. Indeed, they may be ahead of the United States after adjusting for population.

The obvious takeaway is that the United States should not throw away its competitive advantage. Yet another reason to reject Joe Biden’s class-warfare fiscal agenda.

 

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The OECD’s Despicably Dishonest Campaign for Redistribution

The past two days have featured columns about Estonia, with the first one focusing on the nation’s impressive rebound after decades of communist enslavement and the second one criticizing the Organization for Economic Cooperation and Development (OECD) for suggesting tax-and-spend policies that would undermine the country’s prosperity.

Both columns used data from a recent OECD report. Today, I’m going to write a third column using data from that report, but I won’t be focusing on Estonia. Instead, I want to address the OECD’s ongoing efforts to promote redistribution by lying about poverty.

Here’s a chart that ostensibly shows poverty rates in various member nations.

Any sentient person should immediately recognize that the chart is garbage. Notice, for instance, that that United States supposedly has the second-highest poverty rate among OECD nations.

Yet does any rational person actually think poverty is a bigger problem in America than it is in Mexico or Turkey? Or Italy, Hungary, or Greece?

Of course not. Heck, poor people in the United States often have incomes that are equal to or higher than average incomes in other nations.

So what’s going on?

Well, if you read the fine print, you’ll find that the chart doesn’t actually measure poverty. At all.

Instead, it’s a measure of income distribution. The OECD’s bureaucrats have decided that anybody who makes less than 60 percent of a nation’s average income is poor.

This is an absurd approach.

Heck, the OECD’s dishonest approach would show that there’s almost no poverty in the world’s poorest nations, such as North Korea, Haiti, Cuba, and Congo. After all, if almost everyone is equally destitute, then almost nobody will be below 60 percent of the median.

Here’s another example that exposes the OECD’s scam. Imagine that everyone in the United Sates suddenly had three times as much income as today. That would seem like great news, especially for lower-income Americans. Yet based on the OECD’s dishonest approach, the poverty rate would not change.

So why is the OECD publishing nonsensical and dishonest numbers?

I answered that question back in 2012.

The main thing to understand, though, is that this new approach is part of an ideological campaign to promote bigger government and more redistribution. Which is very much consistent with the OECD’s overall agenda.

The fact that this type of agenda hurts poor people doesn’t seem to bother our friends on the left. So long as rich people are hurt even more, that’s a good thing from their perspective.

Remember, they are motivated by equality of outcomes.

Good people, by contrast, seek policies that enable poor people to improve their lives (as captured by the Eighth Theorem of Government).

P.S. Here’s my collection of other hucksters that peddle dishonest poverty data.

P.P.S. Here’s a story from Sweden about what happens when the ideology of equality produces very bizarre outcomes.

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OECD Bureaucrats Advocate Statist Policies that Would Weaken Estonia

I wrote yesterday about how pro-market policies in Estonia are helping that nation catch up (converge) with other European nations.

Indeed, Estonia arguably is the most successful country to emerge from the economic wreckage of Soviet socialism.

Above-average growth has been especially beneficial for the less fortunate (and socialism meant a lot of people were in this category).

As you can see from the chart I shared yesterday, the share of people suffering from serious poverty has plummeted.

Based on this data, one might think that Estonia would win universal praise from right and left. The former would applaud the pro-market policies and the latter would applaud how so many people have been lifted out of poverty.

Unfortunately, the bureaucrats at the Organization for Economic Cooperation and Development (OECD) don’t seem to be happy about Estonia’s economic renaissance.

And what’s really remarkable is that the data I cited yesterday came from an OECD report. Yet that same report advocates policies that would be harmful to that nation’s economy.

For instance, the report notes (accurately) that demographic changes are going to create fiscal pressure in Estonia, but the OECD bureaucrats then state that the problem is insufficient tax revenue.

To make matters worse, the bureaucrats from the OECD want the Estonian government to weaken or reverse some of the country’s best policies.

Such as the top-ranked business tax system and the pro-growth flat tax.

There are other recommendations in the OECD report that would hurt Estonia’s economy, such as a higher minimum wage and more regulation of labor markets (an area where Estonia already has problems).

To be fair, the report does suggest lower tax rates for low-wage workers, so not every recommendation is anti-growth.

But one good suggestion doesn’t excuse a dozen proposals to increase the burden of government. This report on Estonia is further evidence that the OECD arguably is the world’s worst bureaucracy (which is quite an achievement considering the many shortcomings of the IMF).

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Lessons from Estonia’s Market-Driven Convergence

I’ve written many times that convergence (or lack thereof) is the way to assess a nation’s economic policy.

Based on this metric, Estonia deserves praise. Here’s a chart from a recent OECD report, which shows Estonia (and other countries to emerge from the wreckage of communism) converging with the world’s rich nations.

Why is per-capita output converging? What has made Estonia an “improbable success“?

Part of the answer surely must be that Estonia (like other Baltic nations) has reasonably good public policy.

According to the latest edition of Economic Freedom of the World, Estonia ranks #13 (out of 165 nations).

Some of my friends on the left will grudgingly admit that capitalism leads to higher per-capita output, but they always fret that it is only because the rich get richer.

But here’s a chart from the OECD report showing that poverty has been dramatically reduced ever since Estonia made the shift from socialism to free enterprise.

To understand more about the country’s achievements, here are some excerpts from a column by Luis Pablo de la Horra for the Foundation for Economic Education.

…in recent decades we have seen that the right policies can significantly speed up economic development. Estonia is a paradigmatic example of this. …On Aug. 20, 1991, Estonia gained its independence after 51 years under the yoke of communism. …From day one, the new government committed to undertaking market-oriented reforms that laid the foundations for a successful transition from socialism to capitalism. The political agenda included monetary reform, the creation of a free-trade zone, a balanced budget, the privatization of state-owned companies, and the introduction of a flat-rate income tax. …When compared to the other former Soviet Republics, Estonia’s progress is even more astonishing. In terms of PPP-adjusted income, Estonia ranks first ahead of countries such as Russia… Estonia is the living example that human progress is closely linked to economic freedom.

Since I’m a fiscal policy wonk, I’m especially impressed by Estonia’s flat tax, as well as the fact that there is no double taxation on corporate income.

Here’s a chart from the OECD report showing that Estonia is tied for having the best system (as defined by the lowest tax burden).

As an aside, the tax burden on corporate income in the United States is higher than the average. That’s not good. But what’s really bad is that we would be the worst in the world if Biden’s tax plan gets enacted.

But I’m digressing. Let’s put the focus back on Estonia, because I want to close on a worrisome note.

To be blunt, the burden of government spending already is excessive in the country. And it is going to get worse because Estonia faces a demographic crisis (like other Baltic nations specifically and Eastern European countries generally).

Will Estonia undertake the entitlement reforms needed to preemptively address this looming problem? I’m not overly optimistic, particularly since the OECD is pushing in the wrong direction (which will be the topic of a follow-up column).

P.S. One of Paul Krugman’s more infamous mistakes occurred when he implied that Estonia’s 2008 recession was caused by spending cuts (real ones!) that took place in 2009.

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How Should the Constitution Be Changed?

John Stossel has added to his collection of great videos. His latest releases asks whether the Constitution should be amended.

If you watch carefully, you’ll see that I made an appearance toward the end.

My clip lasts only about five seconds, but I used that short segment to say that the main goal should be enforcing the Constitution as currently written.

Note that I didn’t say as currently enforced.

That’s because the Supreme Court, starting in the 1930s and culminating with the horrid Wickard v. Filburn case in 1942, largely abandoned its responsibility to limit the powers of Washington.

Time to rectify that mistake.

To be more specific, I want the Supreme Court to limit the powers of Congress to the “enumerated powers” listed in Article 1, Section 8 of the Constitution.

That one step would dramatically shrink the federal government. No Department of Education., No welfare state. No Department of Agriculture. No redistribution. No Department of Housing and Urban Development.

I won’t be holding my breath waiting for this to happen, but Mr. Stossel was asking what we wanted, not what we expected.

Heck, I should have called for repeal of the 16th Amendment, so we also could enjoy the experience of living in a nation without an income tax.

Before concluding, I should take this opportunity to give some commentary regarding some of the ideas other people suggested in the video.

• Balanced budget amendment – It would be much better to have a Colorado-style spending cap. There is a lot of evidence that spending caps work. That is not the case, however, with rules that seek to limit deficits.
• Term limits – I don’t like career politicians, so kicking them out of office after a dozen years is a good idea. Though maybe this satirical idea for just two terms would be even better.
• Gift clause – I’m not familiar with the “gift clause” provision in some state constitutions, which was mentioned by Christina Sandefur. But it would be great if politicians no longer could provide special subsidies to their cronies.

P.S. I mentioned the horrid Wickard V. Filburn case. The Obamacare decision may be even worse.

P.P.S. As Walter Williams noted, maybe we need another president like Grover Cleveland.

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Biden’s Dumbest-Ever Tweet?

I’ve been wondering about Biden’s stupidest-ever tweet. Was it the one about corporate taxes, the one about class warfare, or the one about the deficit?

The answer may be “none of the above.”

That’s because this tweet about gas prices now may be in first place. I’ve highlighted the most absurd parts.

What’s sad is that Biden may not even know his tweet was laughably wrong.

If we had some decent reporters at the White House, they would ask if he really thinks gas station have the power to set prices. And if Biden said yes, I can only imagine how amusing it would be to ask a follow-up question about why they didn’t use that magical power to raise prices before Biden got elected.

The Wall Street Journal editorialized about Biden’s clueless tweet.

President Biden’s…tweet over the weekend ordering gas stations to lower prices betrayed a willful ignorance about the private economy. …It’s embarrassing for the leader of the free world to sound like he’s channeling Hugo Chávez. A Chinese state media flack praised Mr. Biden’s tweet: “Now US President finally realized that capitalism is all about exploitation. He didn’t believe this before.” Or maybe he did, and nobody wanted to believe it. …The President’s economic ignorance isn’t a one-off. In recent months he has accused oil and gas companies of price gouging and demanded that they increase production even while his Administration threatens to put them out of business.

Kevin Williamson of National Review was similarly dumbfounded by Biden’s statement.

President Biden has been dunning U.S. gas stations to lower their prices in order to help him solve his main immediate political problem. His misunderstanding of how the gasoline business works…paints a portrait of a man out of touch. …contrary to what the Biden brain trust seems to think, wholesale gasoline prices do not move in lockstep with crude oil prices. And retail gasoline prices do not move in lockstep with wholesale gasoline prices. …As anybody who has ever sold anything for a living can tell you, you don’t get to set your own margin. The market does that for you. …The urge to blame retailers for the results of inflationary fiscal policies — and destructive energy policies — in Washington is ugly, demagogic, and, given Biden’s creepy history, maybe even a little bit racist.

I don’t know if Biden is clueless or a demagogue.

But the net result is the same. We are governed by idiots.

P.S. My attack on Biden is not partisan. On the issue of trade, some of Trump’s tweets displayed jaw-dropping stupidity and ignorance.

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What Americans Celebrate on July 4

One of America’s best presidents, Calvin Coolidge, had a great explanation of Independence Day. But this video from Kite and Key also is worth watching.

There is a lot of material covered in the video.

For instance, the main takeaway is that the United States is uniquely individualistic, which I view as a very valuable form of societal capital (another great president shared that perspective).

Compared to most other nations, we still believe in self-reliance and individual responsibility.

Indeed, there’s even evidence that the people with those values were most likely to emigrate to the United States.

And our superior level of societal capital is related to our lower burden of government, which is related to our higher living standards.

There are other points from the video that merit attention.

We’re told that Americans work more hours than people in other developed nations. That’s generally true, though it almost certainly has something to do with the heavier tax burden on labor in Europe.

Now I’m going to quibble with a few of the points in the video.

We’re told, for instance, that Americans enjoy higher income but don’t get goodies from the government such as paid parental leave.

What should have been noted, though, is that we’re richer in part because we don’t have such programs.

Likewise, the U.S. is probably the leader in developing new drugs and medical technologies in part because we don’t have government-run health care (though, given the pervasive role of Medicare, Medicaid, and the healthcare exclusion, it’s not clear whether the U.S. actually has a more market-oriented health system than many European nations).

The video points out that Americans have low voting rates. But why is that a bad thing? I like the idea of having government playing such a small role in people’s lives that many of them figure it’s not important to vote.

Maybe that’s the reason that voting rates are so low in Switzerland, which arguably is the world’s best-governed (meaning least-governed) country.

Last but not least, the video points out that the United States spends less than other nations on redistribution, relative to economic output. That’s true. But because per-capita economic output is much higher in America, per-person spending by government often is depressingly high. If you doubt me, check out these numbers for health and education.

P.S. Since it is Independence Day, this t-shirt is a reminder of the proper definition of patriotism.

P.P.S. I don’t want my left-leaning friends to feel neglected on this special day, so here’s a Declaration of Dependence to make them feel comfortable. Speaking of Dependence Day, here’s some satire from Babylon Bee.

P.P.P.S. And here’s something for my Republican friends.

P.P.P.S. A few years ago, I noted that red tape makes it more expensive to celebrate Independence Day.

The bad news is that inflation is now adding to the burdens caused by government.

Gee, thanks Federal Reserve.

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Western Europe, Wagner’s Law, and Economic Growth

In this clip from an interview with Chile’s Axel Kaiser, I discuss “Wagner’s Law” and the lessons to be learned from fiscal policy in Western Europe.

If you don’t want to watch the video, my discussion can be summarized in three sentences.

• Yes, welfare states in Western Europe are comparatively rich by world standards.
• But those  countries became rich when they had relatively small governments.
• Adopting high taxes and big welfare states has since stunted their economic growth.

And here’s a fourth sentence that I should have mentioned.

• They compensate for bad fiscal policy by having laissez-faire policies in other areas.

I expect that some people won’t accept my argument without some supporting evidence, so I’m going to share some charts.

We’ll start with this chart from Our World in Data. As you can see, nations in Western Europe has almost no welfare states prior to World War II. And it wasn’t until the 1960s and 1970s that big welfare states began to exist.

In other words, all the economic growth and industrial development that occurred in the 1800s and early 1900s took place when the fiscal burden of government was very small.

And if you want to see more charts to confirm this data, click here, here, and here.

Next we have a chart showing how the burden of government spending in the United States and Western Europe used to be similar, but then began to diverge after value-added taxes were adopted in the late 1960s and early 1970s.

Last but not least, let’s consider whether the expansion of the welfare state in Western Europe had negative economic consequences.

The answer is yes. This chart, prepared by Prof. Leszek Balcerowicz (former head of Poland’s central bank) shows that Western Europe was rapidly converging with the United States, but then began to lose ground after big welfare states were imposed (and also after improvements in American economic policy under Presidents Reagan and Clinton).

And if you want to see more charts to confirm this data, click here, here, here, and here.

P.S. Since I added a fourth sentence above, explaining that many European nation have good policies in other areas to compensate for bad fiscal policy, here’s a chart I prepared in 2018 showing how many European nations score very highly for economic freedom once fiscal policy is removed from the equation.

To see overall rankings of economic liberty, you can peruse the data from Economic Freedom of the World and the Index of Economic Freedom.

The bottom line is that Western European nations (with notable exceptions such as Italy, France, and Greece) get good scores, but would be far stronger if they had better fiscal policy.

And that’s the lesson that developing nations should learn.

P.P.S. As part of the interview, Axel and I also talked about California’s grim economic outlook.

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Celebrating Progress on School Choice

I wrote earlier this week about school choice in Arizona, but this is such great news that it merits more attention. Indeed, I made it my “underreported story” in this week’s edition of the Square Circle.

What excites me is that school choice will lead to better educational outcomes.

We already have lots of evidence for this proposition, which our friends on the left falsely blame of “cream skimming.”

The good news about Arizona is that it will become impossible to make that silly argument when all children are eligible.

What’s really amazing is that opponents of school choice basically admit that private schools do a better job.

Consider this column for Salon by Kathryn Joyce. All the critics basically acknowledge that parents are going to abandon government schools now that they have a choice.

In practice, the law will now give parents who opt out of public schools a debit card for roughly $7,000 per child that can be used to pay for private school tuition, but also for much more: for religious schools, homeschool expenses, tutoring, online classes, education supplies and fees associated with “microschools,” in which small groups of parents pool resources to hire teachers. …Democratic politicians and public education advocates described the law as the potential “nail in the coffin” for public schools in Arizona…by steadily draining funds away from public education. …the money to cover children who leave public schools in coming years will be deducted from public school budgets. …”I think we’re witnessing the dismantling of public education in our state,” said Lewis.

I’m also excited because Arizona lawmakers didn’t try to dictate how the new system will work.

Why is that good news? Well, Max Eden of the American Enterprise Institute writes that Arizona’s program will encourage educational entrepreneurship.

…the Arizona Legislature passed the most expansive school choice initiative in America: the Arizona Empowerment Scholarship Account program. ESAs are the purest version of school choice. …Arizona’s ESA program would give about $6,500 directly to any family that decides a public school isn’t quite the right fit for their child. …the most significant consequence may come from a sector that essentially didn’t exist just a few years ago: “pods” or “microschools.” …If a teacher were to advertise and attract a dozen students, she stands to draw nearly $80,000… More importantly, her students will get far more specialized attention, likely suffer through far fewer distractions, and are less likely to fall behind or slip through the cracks. …The beautiful thing about Arizona’s ESA program is that it can eliminate any mismatch between what parents want for their child’s education and what they can get. Arizona now funds students, not systems. For many independent-minded parents, the idea of taking their child’s education directly into their own hands and partnering with other families to form small educational communities will be deeply attractive.

The bottom line is that there is not a system that is ideal for every kid. Some will thrive in a traditional school setting. Others will benefit from microschooling. And some will do best with homeschooling.

Let a thousand flowers bloom!

P.S. More than 10 years ago, I was very hopeful that states such as Colorado and Pennsylvania would lead the school choice revolution. But that was back when there were a significant number of Republican legislators who wanted to appease teacher unions. Fortunately, Republican voters have learned to punish politicians who put union bosses above children.

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