The Prudent Case for the Laffer Curve, Part I

I’ve written dozens of articles about the Laffer Curve and most of that verbiage can be summarized in these five points.

• The Laffer Curve helps to illustrate that excessive tax rates result in less taxable activity.
• All public finance economists – even those on the left – agree there is a Laffer Curve.
• The Laffer Curve does not mean tax cuts are self-financing or that tax increases lose revenue.
• Different types of taxes produce different responses, so there is more than one Laffer Curve.
• There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.

The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.

Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?

Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.

But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.

Here are some portions of that newspaper’s simplistic screed.

…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right… His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.

Almost every sentence in the above excerpt cries out for correction.

For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).

There were big deficits because of the 1980-1982 double-dip recession, and that spike in red ink mostly took place before Reagan’s tax cuts went into effect.

And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.

If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.

Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.

The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.

P.S. I can’t resist sharing one other excerpt from the editorial.

“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.

Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.

Read Full Post »

The Economic and Societal Case Against Per-Child Handouts, Part I

The worst piece of legislation in 2021 was Biden’s so-called stimulus, which added $1.9 trillion to America’s fiscal burden.

The worst provision of that legislation almost certainly was a temporary per-child entitlement of $3,000-$3,600.

Biden then wanted to make this entitlement permanent as part of his $5 trillion plan to “build back better.”

Fortunately, that boondoggle sank under its own weight and the slimmed-down (but still bad) version that ultimately was enacted earlier this year did not include any per-child handouts.

That’s the good news, at least relatively speaking.

The bad news is that Congress and the White House have renewed their push for a permanent per-child entitlement.

And, because Republicans will control the House of Representatives starting in January, they are trying to push the policy through next month.

The Wall Street Journal editorialized today about per-child handouts.

A core Democratic priority in Congress is resurrecting a $3,000 child tax credit for dependents ages six and up, with a $600 bonus for younger children. …The Internal Revenue Service is now another turnstile of the welfare state. That’s because over time Congress made more of the credit “refundable,” which means available to those who don’t owe federal income taxes. …a universal basic income for people with children. …The full Democratic allowance would cost $1.6 trillion over 10 years… Low-income voters are always assumed to support cash benefits, but 46% of those earning less than $50,000 opposed the payments. That may be because Americans understand that poverty in the U.S. is now less about material deprivation and more about idleness, addiction, mental illness and other destructive realities that can’t be cured with a bigger check.

There were many arguments against these per-child handouts (reversing Bill Clinton’s welfare reform, setting the stage for universal basic income, etc).

But those topics are not playing a big role in this debate.

Instead, the White House and Congress are engaged in a naked vote-buying scheme.

They want to create more dependency, regardless of the economic and societal consequences.

What are some of those consequences? Those are discussed in a column by Scott Hodge, which also is in today’s Wall Street Journal.

He starts with a mea culpa about his role in creating child credits and also warns about the risks of creating a system where the IRS is a dispenser of goodies rather than a tax-collection agency for almost half the population.

I was one of the inventors of the child tax credit, nearly 25 years ago—and I think it’s a bad idea. …Key elements of this plan made their way into the 1994 House Republicans’ Contract with America. Congress enacted the $500 child tax credit as part of the Taxpayer Relief Act of 1997, and it grew from there. …The Bush tax cuts in 2001 temporarily doubled the credit to $1,000… The 2017 Tax Cuts and Jobs Act doubled the credit again, to $2,000… Each expansion meant fewer households on the tax rolls. …The expanded credit…contributed significantly to increasing the number of households with little or no income-tax liability. …some 74 million tax filers—or nearly half (48.3%) of all filers in 2021—had no income tax liability. …Can we have a sustainable tax system if the number of nonpayers continues to grow?

Since I’m mostly worried about the economic consequences, here’s the part of Scott’s column that grabbed my attention.

…recent studies estimating the economic effects of the proposed expansion suggest that it would cause people to leave the workforce, reduce work effort, and lower capital investment, ultimately shrinking economic output. A recent study by economists at the University of Chicago determined that without any changes in behavior, expanding the credit would reduce child poverty by 34% and “deep” child poverty—families whose income is less than half the poverty level—by 39%. But those gains would come at a cost: the diminution of the workforce by 1.5 million people. …A new study by Congress’s Joint Committee on Taxation…determined…the policy would reduce the labor supply by 0.2% and reduce the amount of capital by 0.4%. As a result of the reduced supply of labor and capital investment, gross domestic product would shrink by 0.2%.

I’m guessing that some readers will be shrugging their shoulders because numbers such as 0.2 percent and 0.4 percent don’t sound very big.

But keep in mind that we have dozens of bad policies in Washington that have this type of effect, and their cumulative impact is very big.

And for those who like comparisons, it’s worth observing that living standards in Europe are significantly below American levels precisely because politicians in places such as Greece, France, and Italy have made even more of these mistakes.

The bottom line is that free enterprise is the best way of helping poor people, not government dependency.

Read Full Post »

America’s Looming Entitlement Crisis

Back in July, I made the case for the right kind of entitlement reform in a discussion with the folks at Live and Let Live.

Today, I want to underscore why it is important to focus on “the right kind” of reform.

On paper, you can save money with “means testing” of benefits, but that creates an indirect penalty on work, saving, and investment.

You can also, on paper, save money by imposing price controls on health care, but that policy has a long track record of failure.

At the risk of understatement, either of those approaches represents “the wrong kind” of entitlement reform. Indeed, those policies are not really reform. Instead, they are tinkering with systems that are fundamentally broken.

For what it is worth, most politicians do not support good reform or bad reform.

As predicted by “public choice,” their preferred approach is kicking the can down the road.

Which is what Greek politicians did for many years.

But they learned in Greece that ignoring a problem does not make it disappear. Instead, it is a recipe for fiscal crisis (and we will probably have to re-learn that lesson in Italy).

So my other goal today is to show why something needs to be done.

We’ll start with a look at Medicare from Brian Riedl’s chartbook.

That’s a very sobering image, so now I’ll share some very sobering words.

James Capretta of the American Enterprise Institute summarizes America’s grim fiscal future.

In 2001, the Treasury estimated the government’s net unfunded liabilities, in present value terms, at $6.5 trillion, or 61 percent of GDP, with federal debt accounting for $3.3 trillion of the measured obligations. …By 2021, the government’s net position had deteriorated to minus $29.9 trillion, or 128 percent of GDP, with federal debt accounting for $22.3 trillion of the liabilities. The government’s unfunded commitments beyond public debt had grown by $2.9 trillion over ten years. …The financial hole is actually deeper than these numbers reveal because they exclude the dramatic effects of Social Security and Medicare. …with Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP. …The problem posed by unfunded public liabilities is a relatively new one in U.S. history. It has only been over the past half century that the combination of an aging population and the modern entitlement system has pushed the federal government toward a financial crisis.

Having shared all this depressing data, I’ll now close with a couple of observations.

• First, doing nothing almost surely guarantees massive future tax increases. Including European-style levies like a value-added tax that will be very bad news for lower- income and middle-class taxpayers.
• Second, “funded liabilities” are hardly an improvement over “unfunded liabilities” since that simply means debt-financed spending becomes tax-financed spending. From the frying pan to the fire, or vice-versa.

As I said in the above video, we need the right kind of entitlement reform so that we save money and have better policy for old people and poor people.

P.S. Entitlements are a ubiquitous problem in developed nations.

Read Full Post »

Libertarian Humor

Let’s enjoy a third 2022 edition of libertarian humor (earlier versions here and here).

We’ll start with a look at horror movies adapted to a libertarian world.

Given my views on tax policy, this second item warms my heart.

Though I’m not an anarcho-capitalist, so my anti-tax arguments are not based on assertions about theft.

Our next item points out that libertarians and Republicans are not necessarily best buddies.

For our fourth item, we have an example of why homeschooling produces wiser children.

Last but not least, my favorite item comes from the 2020 vice-presidential nominee of the Libertarian Party.

To be fair, it was one of Obama’s CIA Directors who called libertarians terrorists rather than Biden, but I’m nonetheless ready to line up for free guns and money.

 

By the way, the same message was featured in one of my columns about gun control humor earlier this year.

As always, feel free to peruse my full collection of libertarian-themed humor.

Read Full Post »

The Correct Rate for a State Income Tax Is Zero

Looking at reforms at the state level, the past two years have produced very good news on education policy and tax policy.

Regarding the latter, many states have lowered tax rates and several of them have junked so-called progressive tax systems and replaced them with simple and fair flat taxes.

But I’m greedy for even bigger improvements.

I want to see some states move not just to Column 2 in my ranking of state tax policy. I want them to be in Column 1.

And that means they need to get rid of income taxes.

The good news is that some states are having that discussion.

Here are some excerpts from an Associated Press report from Mississippi, written by Michael Goldberg.

Mississippi Gov. Tate Reeves promised to push for a full elimination of the state’s income tax during the 2023 legislative session. The move would make Mississippi the 10th state with no income tax. …Mississippi’s Republican-controlled legislature passed legislation in 2022 that will eliminate the state’s 4% income tax bracket starting in 2023. In the following three years, the 5% bracket will be reduced to 4%. …Supporters of the 2022 Mississippi tax cut said it would spur economic growth and attract new residents to Mississippi. …Republican House speaker Philip Gunn has said full elimination of the state income tax is “achievable,” though he hasn’t committed to doing so in the 2023 session. …Tax-cut proposals are a direct effort to compete with states that don’t tax earnings, including Texas, Florida and Tennessee.

And here are portions of an article in National Review about Colorado, authored by Ben Murrey, which also notes that the TABOR spending limit will need to be strengthened if lawmakers are serious about getting rid of the state’s income tax.

When an interviewer recently asked Colorado’s Democratic governor Jared Polis what the state’s income-tax rate should be, he answered without hesitation: “It should be zero.” …The effort to chisel away at the income tax has already gained steam in the state. Last year, voters reduced the tax with Proposition 116 — a ballot initiative that brought the rate from 4.63 percent to 4.55 percent. …Eliminating the tax would provide an enormous direct windfall to Colorado households. …every reduction in income tax will allow Coloradans to keep more of every dollar they earn, and it invites more jobs and opportunities for residents. …To eliminate the income tax entirely, the state would probably need to begin lowering the revenue limit along with the rate reductions in the future. …these two reforms would put the state on a road to zero.

By the way, Colorado voters once again just cut the state’s flat tax in a referendum earlier this month.

Would Mississippi and Colorado be doing the right thing if they joined the zero-income-tax club?

Yes. I cited some evidence on this issue about 10 years ago.

Here’s some updated analysis from Chris Edwards.

The nine states without an individual income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. …What they have in common is providing needed state‐​local services to their residents without complex, anti‐​freedom, and anti‐​growth individual income taxes. Most of the nine run leaner and more efficient governments than most other states. They only partly make up for the income tax revenue gap with other revenues. In terms of overall tax burdens, eight of the nine states are toward the bottom of the 50 states and Washington is in the middle. …Total taxes in the seven states average 8.1 percent of income. The average in the 40 other states is 9.6 percent. Thus, the lack of individual income tax restrains the overall tax burden. …Repealing state individual income taxes is a good goal. …Residents get the state‐​local services they need, but at lower cost. 

Here’s the chart that accompanied Chris’ article. He separates Alaska and Wyoming because they get so much money from energy taxes and are not realistic role models for other states.

The bottom line is that states without an income tax tend to have smaller government.

This is especially true for Florida, Tennessee, South Dakota, and New Hampshire. And Texas may join those states now that it has strengthened its spending cap.

One should-be-obvious conclusion from this data is that states with no income taxes should not make the mistake of adopting that punitive levy. Unless, of course, they want to repeat Connecticut’s unhappy experience.

Read Full Post »

A Real-World Example of Why Jury Nullification Should Be Applauded

Most people I know try to avoid serving on a jury, but I might enjoy the experience if I had the opportunity to engage in “jury nullification.”

For those not familiar, jury nullification occurs when jurors decide that a defendant is “not guilty” simply because they don’t agree with the underlying law.

In my case, I would never vote to convict someone charged with victimless crimes such as drug possession, gun ownership, or prostitution.

Or the supposed crime of using common sense when raising a child.

That’s apparently now a criminal offense in Waco, TX, as documented by Lenore Skenazy for Reason.

Heather Wallace’s oldest son, 8-year-old Aiden, was driving his two brothers crazy in the car as they all returned from karate one afternoon in October 2021. Wallace asked Aiden to walk the rest of the way home—half a mile in quiet, suburban Waco, Texas—so that he could calm down. For this she was arrested, handcuffed, and thrown in jail. She was charged with endangering a child, a felony carrying a mandatory minimum of two years in prison. …She is finally able to speak out after completing a six-month pretrial diversion program to get the charges dropped. But her arrest remains on the books—easily searchable by employers—which is disastrous for someone with a Bachelor’s degree in education. …A woman one block away had called the cops to report a boy walking outside alone. That lady had actually asked Aiden where he lived, verified that it was just down the street, and proceeded to call nonetheless. …Child services had the family agree to a safety plan, which meant Wallace and her husband could not be alone with their kids for even a second. Their mothers—the children’s grandmothers—had to visit and trade off overnight stays in order to guarantee the parents were constantly supervised. …if she went to trial and lost, she faced a minimum of two years behind bars and a maximum of 20. So she took the plea deal.

As you can see from the above excerpts, in this case there was no chance for a jury to engage in nullification.

The possibility of being locked up for a minimum of two years led the mother to cut a deal.

I can understand her choice, but if there’s another episode like this in the future and a parent resists a plea deal, I would very much hope that a Waco jury would do the right thing and immediately come back with a not-guilty verdict.

I’ll close by inviting readers to choose the worst person from this incident.

• Was it the Karen who called the cops in the first place?
• Was it the cop who arrested the mother?
• Was it the local prosecutor who did not immediately drop charges?

All three deserve to be tarred and feathered. Figuratively speaking, of course.

Events like this remind me that every decent human being should be a libertarian.

P.S. On a related issue, civil disobedience against unjust laws also should be applauded.

Read Full Post »

Thanksgiving, Property Rights, and Redistribution

I normally share this video from Reason every Thanksgiving.

But this year I’m going to recycle instead a video from John Stossel.

The moral of the story is that societies based on collectivism do not succeed.

People don’t work hard when the rewards of their labor go to others. Even in small communities, that approach does not work.

By contrast, they have a much greater incentive to be productive when the benefits accrue to themselves and their families.

In a nutshell, redistributionism does not work. This is why the original Plymouth Colony was failing. And it’s why places such as Cuba today are so miserably poor.

This is a lesson to keep in mind when people on the left or right try to tell you that bigger government is a good idea.

Let’s conclude with some Thanksgiving-themed humor about libertarians.

There  are lots of jokes about a Trump-loving uncle causing discord over turkey, but libertarians have similar abilities.

They even relish the opportunity.

Two more items for our collection.

P.S. This column from the archives shows how politicians might ruin Thanksgiving.

Read Full Post »

The Most Economically Free State Is…?

According to the Fraser Institute’s Economic Freedom of the World, New Hampshire was the most economically free state in America in 2017, 2018, and 2019.

But the state famous for “Live Free or Die” has now been replaced by the Sunshine State.

The most-recent edition, which is based on 2020 data, informs us that Florida now enjoys more economic liberty than any other state.

New Hampshire still is ranked very high, coming in at #2, followed by South Dakota at #3. Texas and Tennessee are tied for #4.

What’s the one thing they all have in common? No state income tax.

Meanwhile, the report also highlights the states that (predictably) dominate the bottom of the rankings.

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. …In the United States, the most economically free state was Florida at 7.94, followed by New Hampshire at 7.84, South Dakota at 7.75, and Texas and Tennessee at 7.66. (Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was again New York at 4.25, following California at 4.59, Hawaii at 4.65, Vermont at 4.70, and Oregon at 4.92. For the first time, we have made a preliminary attempt to include the US territory of Puerto Rico in the US subnational index. It came in with a score of 2.04. The next lowest score was more than twice as high.

Here are the full rankings at the subnational level (i.e., measuring the policies that are under the control of state lawmakers).

For the first time, the report assesses Puerto Rico. Hardly a surprise to see where it ranks.

The report also has an “all-government” ranking, which includes the effect of both national and subnational governments.

On that basis, New Hampshire is in first place.

The all-government index includes…comparisons among Canadian, Mexican, and US subnational jurisdictions that take into account national policies affecting all jurisdictions within each country. …The top jurisdiction is New Hampshire at 8.10, followed by Florida (8.05), Utah (8.03), and then Idaho and South Carolina, tied for fourth (8.02).

The all-government scores allow comparison of all the state and provinces in the US, Canada, and Mexico.

The one clear takeaway is that Mexico desperately needs pro-market reforms.

I’ll close by observing that almost every US state ranks above every Canadian province.

But that wasn’t always the case. Which shows that Justin Trudeau is pushing Canada in the wrong direction even faster than American politicians are pushing the US in the wrong direction.

Read Full Post »

The Global Warming Shakedown, Part V

Whether they call it global warming or climate change, activists on the left act as if the issue is just an excuse to extort money and expand the power of government.

• In Part I, I wrote about kleptocrats exploiting the issue to shake down western governments for enormous amounts of aid money.
• In Part II, I noted how then-Secretary of State Hillary Clinton, using tens of billions of dollars from American taxpayers, wanted to bribe third-world governments into adopting anti-energy measures
• In Part III, I explained how the Kyoto Protocol encourages the destruction of jobs in western nations.
• In Part IV, I warned that environmental extremists were using government coercion to line their pockets and stifle dissent.

Now we have a fifth installment in the series.

Here are the details, based on a report in the New York Times by Brad Plumer, Max Bearak, Lisa Friedman and Jenny Gross.

Diplomats from nearly 200 countries concluded two weeks of climate talks on Sunday by agreeing to establish a fund that would help poor, vulnerable countries… The decision on payments for loss and damage caused by global warming represented a breakthrough… the United States and other wealthy countries had long blocked the idea… Developing nations — largely from Asia, Africa, Latin America, the Caribbean and South Pacific — fought first to place the debate over a loss and damage fund on the formal agenda of the two-week summit. And then they were relentless in their pressure campaign.

The agreement is the bad news.

The good news is that having some bureaucrats sign an agreement does not automatically mean American tax dollars will wind up in the pockets of corrupt government officials overseas.

…major hurdles remain. There is no guarantee that wealthy countries will deposit money into the fund. …And while American diplomats agreed to a fund, money must be appropriated by Congress. …With Republicans set to take over the House in January, the prospects of Congress approving an entirely new pot of money for loss and damage appear dim. “Sending U.S. taxpayer dollars to a U.N. sponsored green slush fund is completely misguided,” said Senator John Barrasso, Republican of Wyoming. “The Biden administration should focus on lowering spending at home, not shipping money to the U.N.

At the risk of understatement, I agree with Sen. Barrasso.

The Wall Street Journal opined against the proposed wealth transfer.

The use of climate policy to soak Americans keeps getting worse, and the United Nation’s climate conference in Egypt ended this weekend with agreement on a new fund to pay reparations to poor countries. Welcome to the latest climate shakedown. …Details about the reparations fund—such as which countries will pay, how much, and which countries will benefit—will be fleshed out over the next year. Biden officials claim the agreement doesn’t create new liabilities for Americans. But the U.S. and Europe are conceding the principle… American taxpayers are being asked to pay because the U.S. industrialized first and then lifted billions of people out of poverty via investment and trade. …Countries might also shake down U.S. fossil-fuel producers in their own courts. Climate reparations will merely serve as another form of global income redistribution.

There’s one other issue worth mentioning.

As Andrew Follett explains for National Review, China’s getting a sweet deal.

…it is a total shakedown. A major beneficiary of the deal is China, despite the fact that it has much higher emissions than the United States. …That’s because “the United Nations currently classifies China as a developing country. Even though it is now the world’s biggest emitter of greenhouse gasses as well as the second-largest economy,” according to the New York Times. “China has fiercely resisted being treated as a developed nation in global climate talks,” and it makes sense why. …American taxpayers will be forced to directly or indirectly fund Communist China. …Despite emitting far less than our international rival.

For what it’s worth, it seems that major western nations want to make sure the new fund does not provide direct handouts to China.

But so long as China gets to self-classify as a developing nation, any expansion of climate schemes will enhance its competitive advantage over the United States and other western nations.

This does not seem to be a smart approach.

P.S. I’m a great fan of nature, but our friends on the left seem a bit extreme.

• Environmentalists assert that you’re racist if you oppose their agenda.
• Some environmentalists don’t believe in bathing.
• How about the environmentalists who sterilize themselves to avoid carbon-producing children?
• Or consider the environmentalists who produce/use hand-cranked vibrators to reduce their carbon footprint.
• There are also environmentalist who claim that climate change causes AIDS.
• Or that it causes terrorism.
• And environmentalists put together a ranking implying that Cuba is better than the United States.
• Environmentalists want to start wars.

Maybe now you understand why I don’t trust these people to set economic policy.

Read Full Post »

Central Bankers Dodging Blame

The great Milton Friedman repeatedly explained that rising prices are an inevitable consequence of easy-money policies by central banks.

That’s a lesson everyone should have learned about 50 years ago when the Federal Reserve unleashed the inflation in the 1960s and 1970s (also blame Lyndon Johnson and Richard Nixon for appointing the wrong people).

And we should have learned another lesson when the Fed (with strong support from Ronald Reagan) then put the inflation genie back in the bottle in the 1980s.

But today’s central bankers must have been very bad students.

Writing for National Review, E.J. Antoni explains that we are once again bearing the inevitable cost of bad monetary policy.

…central banks are allowing interest rates to rise in an effort to belatedly respond to a crisis they helped cause. …the global economic downturn has been baked into the cake for months. …central banks around the world laid the groundwork for economic pain when they decided to finance trillions of dollars in unfunded government spending in 2020. As those central banks continued — and in some cases accelerated — their excessive money creation throughout 2021 and into 2022, a global downturn became inevitable. …History shows that high levels of inflation almost always lead to recession …once inflation became apparent central bankers persisted with their earlier course, feeding inflation, rather than starving it. If they had acted earlier, far less drastic treatment would now be required. …there is no way around the harsh reality that the bill is coming due for the last two years of monetary malfeasance.

Well said. Easy-money policy is like having six drinks at the bar. The consequences – rising prices, financial bubbles, and recessions – are akin to the hangover.

However, while I agree with the above article, I don’t agree with the title. It should be changed to: “Economies Can’t Avoid the Consequences of Central Bank Actions.”

Why the new title?

For the simple reason that central bankers are actually very capable of dodging responsibility for their mistakes.

For instance, has anyone heard the head of the Federal Reserve, Jerome Powell, apologize for dumping $4 trillion of liquidity into the economy in 2020 and 2021, thus creating today’s big price increases in the United States?

A more glaring example comes from the United Kingdom, where the former Governor of the Bank of England wants to blame Brexit. I’m not joking. Here are some excerpts from a Bloomberg story.

Former Bank of England Governor Mark Carney pointed to Brexit as a key reason why the UK central bank is now having to hike interest rates in its struggle to contain inflation. Alongside rising energy prices and a tight labor market, Britain’s exit from the European Union added to the economic headwinds for the UK, according to Carney. “In the UK, unfortunately, we’ve also had in the near term the impact of Brexit, which has slowed the pace at which the economy can grow,” Carney said in an interview with BBC Radio 4’s “Today” program on Friday. …“The economy’s capacity would go down for a period of time because of Brexit, that would add to inflationary pressure, and we would have a situation, which is the situation we have today, where the Bank of England has to raise interest rates despite the fact the economy is going into recession.”

This is galling.

Brexit did not cause inflation. The finger of blame should be pointed at the Bank of England.

Like the Fed, the BoE dramatically expanded its balance sheet starting in the spring of 2020.

And, like the Fed (and the European Central Bank), it maintained an easy-money policy for the remainder of the year and throughout 2021 – even after it became very clear that the pandemic was not going to cause an economic crisis.

To be fair, Carney left the Bank of England in early 2020, so it’s possible he might not have made the same mistake as Andrew Bailey, who took his place.

But Carney blaming Brexit shows that, if nothing else, he is willing to prevaricate to protect the BoE’s reputation.

What makes his analysis so absurd is that he almost surely would have made the same claims regardless of what happened after Brexit.

• Boris Johnson delivered Brexit, but then proceeded to enact bad policies such as higher taxes and more spending. The economy weakened and Carney says this is why the BoE is being forced to raise interest rates.
• But if Johnson had enacted good policy (the Singapore-on-Thames scenario), the economy would be performing much better. In that case, Carney doubtlessly would have claimed interest rates needed to rise because of overheating.

In reality, of course, interest rates are going up because the BoE is trying to undo its easy-money mistake.

Too bad Carney isn’t man enough to admit what’s really happening. Maybe a woman would be more honest.

P.S. The current Governor of the BoE, Bailey, also likes shifting blame since he wants people to think that Liz Truss’ proposed tax cuts were responsible for financial market instability – even though his easy-money policies are the real culprit.

Read Full Post »

Hoover, FDR, Taxes, and the Great Depression

The 1930s arguably was America’s worst decade for economic policy and economic results.

Herbert Hoover and Franklin Roosevelt both increased the burden of government and the net result was a decade-long depression.

The insult to injury was that some people then blamed free enterprise. Indeed, there are still people who think government actually saved the economy.

Sort of like applauding an arsonist after a fire is extinguished.

Whenever I deal with people who harbor these illusions, I ask them a series of questions, none of which have good answers (at least if the goal if to maintain the illusion).

• Was it the fault of capitalism that the Fed pursued bad monetary policy?
• Was it the fault of capitalism that Hoover imposed protectionism?
• Was it the fault of capitalism that Hoover and FDR expanded intervention?
• Was it the fault of capitalism that Hoover and FDR increased spending?

Today, let’s look at the role of tax policy in the 1930s. Chris Edwards wrote on this topic last week, citing a new book by Art Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield.

Here are some excerpts from Chris’ article.

Many economists would point to monetary policy mistakes for causing the initial slide into the Great Depression. …But Laffer and coauthors argue that the “chief cause of the Great Depression was taxation.” That is a bold claim because policymakers made many mistakes during the 1930s. …Let’s explore the major tax increases of the 1930s… Herbert Hoover signed the first two laws listed here and Franklin Roosevelt the others.

• Smoot‐​Hawley Tariff Act of 1930.
• Revenue Act of 1932.
• Gold Confiscation.
• Agricultural Adjustment Act.
• National Industrial Recovery Act.
• Alcohol.
• Revenue Act of 1934.
• Revenue Act of 1935.
• Social Security Act of 1935.
• Revenue Act of 1936.
• Revenue Act of 1937.
• Revenue Act of 1938.

State and local governments jacked up taxes during the 1930s. …high earners responded strongly to the income tax increases of the 1930s… the reported incomes of high earners got slugged in the early 1930s and remained low the rest of the decade. This suggests major economic damage. …Despite these taxpayer responses to higher tax rates, …governments did manage to squeeze substantially more money out of the public during the 1930s. Tax revenues as a percentage of GDP rose from 10.3 percent in 1929, to 15.4 percent in 1933, and then to 16.6 percent in 1940. Meanwhile, government spending soared from 9.9 percent of GDP in 1929 to 18.0 percent in 1932, and then remained near the higher level the rest of the decade.

Here’s a chart that accompanied the article showing the aggregate increases in the fiscal burden of government.

You’ll notice that aggregate tax revenues increased by about 60 percent during the 1930s.

Yet tax rates increased by a far greater amount. There’s a lesson to be learned, as I explained last year, about the Laffer Curve.

P.S. Our friends on the left like class-warfare tax increases because they hurt the rich, but they don’t seem to care that everyone else suffers collateral damage.

Read Full Post »

Can Argentina Be Rescued, Part I?

I’ve written many times about terrible economic policy in Argentina, most recently two days ago while in that benighted country for a conference on fiscal policy.

Now that I’m heading back to the United States, I’m contemplating whether it is realistic to imagine an economic turnaround for Argentina.

We’ll start with some good news. Argentina has miserably low scores in Economic Freedom of the World and the Index of Economic Freedom.

So it would not be that difficult for economic policy to improve.

But the bad news is that Argentina needs to go way beyond incremental reform. The country has dropped precipitously since Peronism began after World War II. Rejuvenating the economy will require radical Chilean-style reform.

Given the current government’s statist orientation (and given the timidity of the opposition), there’s very little short-run hope.

But I am vaguely hopeful that things may get better. More specifically, Argentina almost surely will suffer a major collapse at some point in the future.

When that happens, the only option will be liberalization. Simply stated, politicians no longer will have any ability to pillage the private sector (sort of like the Soviet Union and Eastern Europe when communism collapsed).

Naomi Klein views this scenario as “disaster capitalism,” but it’s the only hope for Argentina.

But there’s a catch. Politicians in Buenos Aires will only be forced to reform if they don’t get another bailout from the International Monetary Fund.

Unfortunately, there are (according to Professor Steve Hanke) 22 reasons to expect the IMF to do the wrong thing.

The bureaucrats at that international bureaucracy have a terrible track record of rewarding Argentina when it gets in fiscal trouble.

Not just Argentina, by the way.

The IMF’s bureaucrats seem to think “moral hazard” is a good thing rather than a bad thing.

I wrote just last month that Italy is getting closer and closer to a fiscal crisis and I warned that the IMF may intervene to prop up that country’s bad policy. And when other European countries get in trouble, IMF bureaucrats will probably try to make a bad situation even worse with further bailouts.

And don’t forget what already happened in Greece (and almost surely will happen again).

The bottom line is that the IMF needs to be shut down (or at least cut off from US backing) if we want nations to do the right thing after taxing and spending themselves into a fiscal crisis.

P.S. If the US ever gets in deep trouble, at least the IMF won’t have the ability to do a bailout.

Read Full Post »

Federally Subsidized State Profligacy

I was going to write about Argentina again today, following up on yesterday’s column.

But the National Association of State Budget Officers has released a new report about spending in the 50 states.

This is an opportunity to see how all the pandemic spending by Washington has encouraged bad fiscal policy at the sub-national level.

To be succinct, the answer is “a lot.”

Figure 1 shows that all the grants and handouts enabled reckless policy. For all 50 states, the burden of spending climbed 24.7 percent between 2020 and 2022.

But not all states are created equal.

So I went to Table 1 of the report to see how much spending increased in various states.

Here are some of the highlights. Special applause for Georgia (home of my beloved Bulldawgs!), which actually reduced the spending burden over the past two years. And honorary mention to North Carolina, which is further enhancing its reputation for sensible fiscal policy.

Colorado also was one of the best states, doubtlessly thanks to TABOR. And New Hampshire also deserves further plaudits for relative frugality.

The big states of Texas and Florida increased spending by less than the 24.7 percent average. As did New York, surprisingly.

I’m sure nobody is surprised to see such bad results from New Jersey and California. And Illinois deserves some sort of Booby Prize for its recklessness.

P.S. I’ll close by shifting to a different topic. As you can see from Figure 5, Medicaid (the government’s health entitlement for poor people) is consuming ever-larger shares of state budgets (and the federal budget).

Medicaid reform (block granting the program) is a very good idea to fix budget problems at the state level and to fix budget problems in Washington. And reduce fraud as well.

Read Full Post »

Cry for Argentina

When I write about Argentina, I normally have bad things to say.

• The world’s worst-performing economy over the past 100 years.
• A nation victimized by a version of modern monetary theory.
• An example of how big government erodes societal capital.
• A case study of bad policy causing a decline in living standards.

Today, for only the second time, I’m going to say something positive about Argentina. At least in a back-handed way.

I’m currently in Buenos Aires for a conference. And because Argentinian monetary policy is even worse than U.S. monetary policy, the dollar is very strong and I’m able to enjoy great steak dinners for about $15.

Unfortunately, my gain is Argentina’s loss.

In a column for the Wall Street Journal, Dave Seminara discusses that nation’s long-run decline.

Argentina was one of the world’s seven richest countries at the turn of the last century thanks to its agricultural abundance. “People used to say someone is as rich as an Argentine.” …But bad governance has taken a heavy toll. More than a third of Argentines live in poverty and tens of thousands of small businesses closed during the pandemic. …nearly every young person…is plotting an escape to Europe or North America. …Argentina ranks 126th in the World Bank’s ease of doing business index and 96th on Transparency International’s corruption perception index, behind developing countries like Ethiopia, Tanzania and Kosovo. A bloated public sector weighs down Latin America’s third-largest economy. Roughly half the country either works for the government or depends on it for social welfare benefits. …The left’s mistakes in Argentina…profligate social spending, high taxes, and too many restrictions on commerce—are eerily similar to the priorities of the American left.

The most important passage in the above excerpts is that “Roughly half the country either works for the government or depends on it for social welfare benefits.”

How can you save a country when such a high percentage of the population has a direct incentive to vote for more government?

But it’s possible the outlook is even worse if you compared private sector workers to government bureaucrats.

Writing for National Review, Antonella Marty is very dismayed by Argentina’s trajectory.

Argentina’s annual inflation rate now exceeds 70 percent — a 30-year high. Its monthly inflation (just under 8 percent) is comparable to the U.S.’s annual inflation… Argentina is starting to resemble Venezuela — and no country wants to resemble Venezuela. How did things get this bad? The answer is actually quite simple: a big government that loves printing money. For decades, government intervention in Argentina’s economy has ballooned to such an extent that the state basically dictates the overwhelming majority of private-sector activity either directly or indirectly. The public sector’s meddling is notorious, crowding out the entrepreneurship, innovation, and job creation that keeps markets free and healthy. While Argentina’s population exceeds 45 million people, only about six million Argentines are employed in the private sector, while 55 percent of the country’s registered workers are employed by the government.

I don’t know which factoid is more depressing. Is it that “only about six million Argentines are employed in the private sector” or is it that “55 percent of the country’s registered workers are employed by the government”?

For what it’s worth, I assume “registered workers” does not include people in the underground economy. And because taxes and red tape are such a nightmare in Argentina, a lot of economic activity has been forced into the shadows.

But that does not change the fact that the country has a far-too-heavy burden of government. Politicians have turned a rich country into a basket case. And the situation seems to get worse every year, even when supposedly right-leaning governments occasionally get elected.

P.S. There’s an interesting debate whether Woodrow Wilson or Franklin Roosevelt was the worst president in U.S. history. In Argentina, there’s no ambiguity.

Read Full Post »

Republican Warfare, Part IV: Will the GOP Get Serious about Spending?

Last week, I explained that “supply siders” need to be ardent advocates of spending restraint. After all, there is no chance of good tax policy in the future if the burden of federal spending continues to expand.

I also wrote about “national conservatives” and pointed out that their opposition to entitlement reform means they implicitly embrace massive tax increases.

The bottom line is that the United States has a built-in spending crisis. Democrats are not serious about addressing the problem. So if Republicans bail as well, the nation is doomed to become a decrepit, European-style welfare state.

What does that mean? Nothing good, at least for people in the productive sector of the economy.

• Lower living standards and less growth
• Big tax burdens on lower-income people

In an article for National Review, Philip Klein speculates whether there is any appetite for spending restraint, even among self-described conservatives.

For much of the history of the American conservative movement, limiting the size and scope of government has stood as one of its central goals. …In 2022, such messages were barely anywhere to be found on the campaign trail…conservatives have largely moved on from making the case for reducing the size and power of Washington. In some cases, this shift has been passive. …It has become popular in some circles on the right to mock “zombie Reaganism” and insist that while it may have made sense back in the 1980s to argue for smaller government, such a message is now outdated. …the argument that the battle to limit government has already been lost also neglects to recognize that things could always get worse. That is, even though the federal government has gone through extraordinary growth since the New Deal, it would have grown even larger had there been no conservative movement to push back. One need only look at Europe, where conservative parties long ago made their peace with the welfare state, to see how government agencies have crowded out civil society… There is no way in which a nation with…a ballooning welfare state will be an accommodating place for conservatives in the long run, no matter how much some may fantasize about seizing the dragon and precisely aiming its fire at their enemies during the relatively brief windows in which Republicans have power. Conservatives…should not abandon the fight for limited government.

At the risk of understatement, I fully agree.

I wrote two days ago and also the previous week to make the case for spending restraint.

Those are easy columns to write since it is the same argument I’ve been making my entire life. But what is depressing now is that there is opposition from Republicans as well as Democrats.

Maybe they should all be forced to watch my video series on the economics of government spending.

Read Full Post »

Biden’s Very Bad Trumpian Trade Policy

At the start of 2021, shortly before Biden was inaugurated, I expressed hope that he would reverse Trump’s self-destructive protectionism.

Alas, I’ve been disappointed.

On trade issues, Biden has been just about as bad as his predecessor, (he’s also been as bad as Trump with regards to spending, but that’s a topic for another day).

The Wall Street Journal editorialized last month about this unfortunate similarity. Here are some of the highlights…or lowlights would be a better term since the net result of protectionism is to hurt taxpayers and consumer.

President Biden has rolled back some of Donald Trump’s destructive tariffs, but not enough, and they’re still doing economic harm. New analyses of Mr. Trump’s Section 232 steel and aluminum tariffs show how consumers and manufacturers are still paying for the border taxes that benefit only a few companies. A study by Harbor Aluminum for the Beer Institute finds that the 10% tariff on imported aluminum cost U.S. beverage manufacturers $1.7 billion from March 2018 through August 2022. About 93% of the $1.7 billion has been pocketed by domestic aluminum producers and smelters in the U.S. and Canada. …By raising the cost of production, tariffs constrain manufacturers, who cut jobs and pass costs to consumers. …Repealing the Trump Section 232 tariffs could reduce prices at the margin. The longer they stay in place the more they deserve to be called the Biden-Trump tariffs.

Since the above column mentioned the Section 232 tariffs, this would be an opportune moment to cite the Tax Foundation’s research on the topic.

…economists have reached…negative conclusions regarding the impacts of the recent Section 232 tariffs on the economy. Lydia Cox and Kadee Russ, using an estimate derived from a Federal Reserve Board paper, calculated that the Section 232 tariffs reduced manufacturing employment by about 75,000 jobs. Kyle Handley and other economists looked at the impacts of the import tariffs on export growth in the U.S. and found that companies exposed to the Section 232 tariffs experienced reduced export growth. This occurred because the cost of their inputs rose due to the tariffs, which hindered firms’ ability to increase their exports. For each 1 percent increase in the tariffs on steel and aluminum, export growth fell by 0.11 percent. …The aluminum tariffs in particular have disproportionately harmed certain industries. …Ford and General Motors estimated that the tariffs cost them about $1 billion each the first year they were in effect—roughly $700 per vehicle produced.

And here’s the Tax Foundation’s estimate of how the economy would benefit if these taxes on trade were repealed.

Since I’ve been criticizing Biden for being a protectionist, I’ll close by speculating whether Republicans have learned from Trump’s protectionist mistakes.

Here are some excerpts from a column in the Wall Street Journal by former Congressman Jeb Hensarling.

Numerous studies have shown that almost all the costs of tariffs initiated under the Trump administration were paid by American consumers and businesses. …According to the American Action Forum, Mr. Trump’s tariffs combined have increased consumer costs by approximately $51 billion a year. …Republicans love to talk about “draining the swamp” in Washington. But the tariffs imposed by the Trump administration empowered hundreds of bureaucrats at the Commerce Department and the Office of the U.S. Trade Representative to grant waivers under what can at best be described as an opaque process with discretionary standards. …A schedule of tariffs doesn’t drain the swamp. It fills it with well-connected lawyers and lobbyists who know how to work the system.

The bottom line is that protectionism does not work if Republicans do it, and protectionism does not work if Democrats do it.

Both parties should have learned from Hoover’s horrible mistake.

P.S. A big problem is that politicians genuinely don’t understand that a “trade deficit” is automatically and necessarily offset by a capital surplus. Helping them to understand this fact is key to renewing support for free trade.

Read Full Post »

Augmenting the Case for Spending Restraint

I explained last week that excessive government spending is responsible for about 97 percent of America’s fiscal deterioration in the 21st century.

I followed that column with two post-election pieces that explained how huge tax increases will be inevitable if there is no effort to deal with the spending problem.

Simply stated, lawmakers need to copy the fiscal restraint of the Reagan years and Clinton years.

Why? To help people enjoy better lives thanks to faster growth and more opportunity.

In the Wall Street Journal, Andy Kessler explains that smaller government is the recipe for more growth.

Winston Churchill…said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” The U.S. should heed that advice… economic growth is going to come from efficient supply chains and productivity in manufacturing in the U.S. Tax and spending cuts are the cure. …Republicans must resist the urge to subsidize higher energy costs and instead help slay inflation and bring back a strong, productive economy.

Let’s look at some new academic research bolstering Kessler’s argument.

Megha Jain Aishwarya Nagpal, and Abhay Jain published a study last year in the South Asia Journal of Macroeconomics and Public Finance.

The key findings deal with the Armey-Rahn Curve and can be found in the abstract.

The current study attempts to examine the linkage between government (public) spending and economic growth in the broader framework of selected South Asian Nations (SANs), BRICS and other emerging nations by using two sets of empirical modelling over the period 2007–2016 by using inverted U-shaped hypothesis, propounded by Armey curve (1995). …The key findings signify the existence of an inverted U-shaped relationship for the selected data set of emerging nations and, therefore, support the Armey curve hypothesis. The projected threshold (tipping) levels (as a percentage of GDP) are 24.31% for the government total expenditures (GTotExp), 12.92% for consumption spending (GConExp) and 7.11% for investment spending (GInvExp). It has been observed that a rise in the public spending (size) resulted in a substantial…decrease…in the growth rate when the public spending was…after…the optimal threshold level, indicating a non-monotonic association.

For what it’s worth, I think the study is wrong and that the growth-maximizing level of government spending is much lower than 24.3 percent of economic output.

But since total government spending in the United States now consumes about 40 percent of GDP, at least we can all agree that there will be more prosperity if America’s fiscal burden is dramatically reduced.

If we ever bring the spending burden back down to 24.3 percent of economic output, we can then figure out whether the ultimate goal is even lower (as it was for much of America’s history).

There is one point from the study that merits further attention. The authors estimated not only the growth-maximizing level of total spending, but also how much the government should spend on “consumption” and “investment” outlays (an issue I addressed last month).

Here’s a chart from the study showing that consumption outlays should be less than 13 percent of economic output.

P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.

P.P.S. Ironically, the case for smaller government is bolstered by research from normally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.

Read Full Post »

The Tragic Triumph of Big-Government Conservatism in the United Kingdom

In the past couple of months, I’ve repeatedly addressed the fiscal and economic mess in the United Kingdom.

Today, we’re going to zoom out and identify the main cause of all the problems.

If you look at the annual budget numbers published by the Treasury Department in the United Kingdom, the first thing to notice is that there was a big surge of spending for the pandemic.

One can certainly argue that pandemic-related spending was necessary to deal with a one-time emergency.

Indeed, the same thing happened in the United States.

This second chart, however, shows the real problem with fiscal policy in the United Kingdom. Politicians have used the one-time emergency has an excuse to impose a permanent increase in the country’s spending burden.

This is an indictment of former Prime Minister Boris Johnson’s profligacy.

Johnson was then replaced by the short-lived Liz Truss, who proposed lower taxes but offered no plan to restrain spending.

And now the new Prime Minister, Rishi Sunak, seems committed to an ongoing policy of higher taxes to finance permanently larger government.

In an article for Reuters, William Schomberg reports that the Chancellor of the Exchequer (akin to the U.S. Treasury Secretary) apparently thinks higher taxes are needed to save the economy.

British finance minister Jeremy Hunt said he will have to raise taxes in next week’s budget plan in order to fix the public finances and soften a potentially long recession… “This is going to be a big moment of choice for the country and we will put people ahead of ideology,” Hunt told the Sunday Times in an interview. …Hunt and Sunak are trying to prepare their Conservative Party for the tax increases which could reignite tensions in the party… Hunt was also considering a multi-billion-pound package of support to shield pensioners and benefit claimants from higher power bills, the newspaper said.

At the risk of understatement, Jeremy Hunt knows nothing about economics. Or history.

I wish a reporter would ask him to name a single country, at any point in world history, that achieved more prosperity by raising taxes and increasing the burden of government spending.

I’ll close with a couple of additional observation.

• The U.K.’s version of the Federal Reserve, the Bank of England, deserves the lion’s share of the blame for the nation’s shaky financial markets.
• The Sunak-Hunt approach of bigger government inevitably will mean slower growth and less prosperity for the people of the United Kingdom.

P.S. I never thought I would be reminiscing fondly about the fiscal policies of David Cameron and Theresa May.

P.P.S. But Margaret Thatcher is still the gold standard for responsible U.K. fiscal policy.

Read Full Post »

Gun Control Humor

I only have two columns this year about gun control humor and it’s already November, so it’s time to pick up the pace.

Our first item today is from the Onion and my leftist friends will appreciate the jab at Texas.

Way back in 2009, I shared some humor about math education in government schools.

Here’s math education for supporters of the 2nd Amendment.

I’ve already shared one example of humor about whether the 2nd Amendment applies to modern weapons.

Our next item takes the other approach.

Our fourth item illustrates the lunacy of gun-free zones.

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

A leftist asked a Texan for advice on self defense, but didn’t understand the terminology.

P.S. If you want more humor about guns and Texans, click here, here, and here.

Read Full Post »

Republican Warfare, Part III: National Conservatism and Massive Tax Increases

In yesterday’s column, I explained Republicans are not credible advocates of lower tax rates if they don’t also push for spending restraint.

And, as I explained to the Adam Smith Institute, they will be de facto advocates of higher taxes if they embrace the wrong version of national conservatism.

To understand why I’m concerned, look at the most-recent edition of the Congressional Budget Office’s long-run fiscal forecast.

It shows that the burden of government spending is going to substantially increase over the next three decades – largely due to the unchecked growth of entitlement programs such as Medicare and Medicaid.

Failure to control spending will mean two bad things – either huge tax increases or staggering levels of debt. Probably both.

And if politicians add more spending (as Biden has already done), then those long-run trend lines will get even worse.

My concern is that some national conservatives are unwilling to confront this problem and/or they support policies to make matters worse.

But first, in the interest of fairness, bigger government is not an inherent part of the national conservatism platform. At least based on the statement of principles published by The American Conservative.

That document, signed by the key advocates of national conservatism, lists 10 concepts, most of which are good from a libertarian perspective and only one of which is overtly troubling.

1. National independence (I cheer for anyone opposed to global governance)
2. Rejection of imperialism and globalism (they’re opposed to the bad form of globalism)
3. National government (very akin to “state capacity libertarianism“)
4. God and public religion (not a role for government, but they’re not pushing bad ideas)
5. The rule of law (good idea)
6. Free enterprise (they have a few unnecessary caveats)
7. Public research (I’m skeptical of this one)
8. Family and children (not a role for government, but they’re not pushing bad ideas)
9. Immigration (I’m more sympathetic than they are, but agree on the importance of assimilation)
10. Race (they want neutrality rather than preferences)

Unfortunately, some national conservatives go beyond this statement of principles and push for bigger government.

• Such as industrial policy.
• Such as per-child handouts.

But don’t believe me. Bill McGurn of the Wall Street Journal makes similar points.

Mr. Cass’s movement insists (rightly) that purely economic and material measures are limited. But whenever they move beyond rhetoric to specifics, their preferred solutions almost always turn out to be economic interventions, from child tax credits to industrial policy. …Even a cursory glance at the record of the past half-century shows government often doing the most harm to people precisely when it is trying to help them. Federal efforts to promote homeownership ended up encouraging banks to lend people more than they could afford and feeding a housing bubble. Federal college loans helped drive up tuition while leaving Americans $1.6 trillion in debt. As we ought to have learned from the Great Society, well-intentioned government policies can do immense damage to families and communities. Unfortunately, when it comes to getting the toothpaste back in the tube, government has shown much less success.

The bottom line is that national conservatives always seem to advocate bigger government when they develop or endorse specific policies.

And, to the best of my knowledge, none of them have put forth any agenda to deal with the spending problem that already exists.

That’s an agenda that guarantees future tax increases. And, for what it’s worth, one of the advocates already has embraced a tax-the-rich agenda to help finance the national conservative agenda.

If Republicans go down that path, it won’t end well (just as it didn’t end well when they embraced other fads such as compassionate conservatism, kinder-and-gentler conservatism, common-good capitalism, reform conservatism, etc).

As I’ve previously noted, there no alternative to Reaganism.

Read Full Post »

Republican Warfare, Part II: Supply-Side Economics and Government Spending

As part of a recent discussion at the Adam Smith Institute in London, I explained why advocates of sensible taxation in the U.S. and U.K. need to be serious about controlling government spending.

At the risk of stating the obvious, it will be almost impossible to achieve better tax policy if the spending burden continues to increase and we enter an era of endless deficits and debt.

We presumably won’t get needed policy reforms from the Democratic Party (the era of JFK is long gone, and Bill Clinton’s moderate approach also is a distant memory).

But what about Republicans?

In part I of this series, I argued that Trump’s big-government populism was bad politics as well as bad policy.

But I was not arguing for establishment Republicans such as Bush or Romney.

Instead, I think the GOP needs to return to the era of Reagan-style libertarianism.

That means some things that Trumpies want, such as lower tax rates, but it also means genuine spending restraint. Which we didn’t get during the Trump years.

In part II, let’s contemplate whether this is a realistic hope, at least once we get past the Biden years.

If history is any guide, the answer is yes. Here’s another video, from more than 10 years ago, that shows the fiscal discipline the nation enjoyed under both Reagan and Clinton.

If you want more recent evidence, we also had a five-year spending freeze after the so-called Tea Party Republicans took power in 2010.

What about today? Can Republicans sober up and once again become fiscal hawks, morphing into good supply-siders who want better tax policy and spending restraint?

Or are they the bad supply-siders, meaning they spout rhetoric about tax cuts but don’t take the tough steps (such as entitlement reform) that are needed to make lower tax rates realistic?

I’ll close with a very depressing observation. The current fiscal situation is bad, but remember that things will get much worse because of demographic changes such as population aging.

Those who oppose entitlement reform necessarily are embracing huge tax increases and perpetual economic stagnation. Not to mention handing more power to Democrats.

There is no alternative.

Read Full Post »

Republican Warfare, Part I: The Trump Problem

I’ve never been a fan of Donald Trump, though my criticism has always focused on his support for bad policies such as wasteful spending, foolish protectionism, and corrupt cronyism.

Today I’m going to change hats and pretend to be a political pundit so I can offer some unsolicited advice to my Republican friends.

If they like to win elections, they need to realize that Donald Trump is bad news.

Yes, he beat a very unpopular Hillary Clinton in 2016, but every subsequent election has produced Republican disappointment.

• The 2018 midterm elections.
• The 2020 presidential election.
• The 2022 midterm elections.

What should most upset the GOP is that Trump has given Democrats control of the Senate twice. First, by depressing Republican turnout in the two Georgia runoff contests with his sore-loser routine about stolen elections in the 2020 cycle. Second, by convincing Republican voters to nominate inferior candidates in the 2022 cycle.

But the fault is not entirely with Trump.

As illustrated by this cartoon, a significant share of Republican voters like Trump and this gives him enormous power over the GOP.

The interesting question to answer is why many rank-and-file Republicans feel so loyal to Trump – even though he often supported bad policies and has helped Democrats gain power in Washington.

I actually answered that question early last year. Here’s some of that column.

One thing that surprised me over the past four yeas is that I found strong support for Trump from grassroots conservative Republicans. Yes, they didn’t like his fiscal profligacy and they mostly didn’t like his protectionism, but they did like the fact that he was a “fighter,” unlike so many (but not all) Republican politicians who get cozy with the DC establishment. They also figured he was worth supporting because he was so reviled by the establishment media (i.e., the enemy of my enemy is my friend).

I think that analysis still applies, but let’s dig deeper. Another problem is that Republican voters think anti-Trump GOP politicians must be bad (closet Democrats, or something like that).

That may be true in some cases, with Mitt Romney being an obvious example.

But that binary analysis – the Trump camp vs the every-other-Republican camp – is woefully inadequate.

I think it’s more accurate (though obviously simplified) to look at the Republican Party as having three camps. And here’s a Venn diagram with my amateur depiction of what unites and divides them.

I’m sure many of you already know my conclusion, which is that the Republican Party should opt for Reaganism.

That’s the approach that reflects good policy and good politics.

I’ve written many times why it is good policy, so I’ll conclude by elaborating on why it is good politics.

Simply stated, Trump voters don’t trust establishment Republicans. They view them as proponents of things they don’t like such as bailouts, globalism, and amnesty.

And establishment Republicans obviously don’t like Trump and Trumpie candidates, even if only for stylistic reasons.

Reaganism, by contrast, can unite all the factions. And when I say Reaganism, I’m not just talking about tax cuts. What we need is the full market-friendly Reagan agenda of spending restraint, deregulation, trade expansion, and sound money.

Read Full Post »

The Six Most Important Ballot Initiatives of 2022

Most election watchers are focused on whether Republicans will take control of the House and/or the Senate in today’s midterm election in the United States.

That’s an interesting topic, and I’ll close today’s column with my predictions, but I’m going to continue my long-standing tradition (2010, 2012, 2016, 2018, 2019, 2020, 2021) of highlighting the year’s most important initiatives and referendums.

1. Regular readers already know that the class-warfare initiative in Massachusetts is at the top of my list. The left-controlled state legislature has placed an initiative on the ballot to replace the state’s 5 percent flat tax with a class-warfare system with a top rate of 9 percent. The Wall Street Journal recently warned, “A proposed millionaire tax would accelerate the exodus of wealth to New Hampshire and Florida” and National Review added that “The Bay State’s economic future is on the ballot.”

2. It has not attracted much attention, but my sentimental favorite is Proposition 132 in Arizona, which would strengthen the state’s constitution by requiring a 3/5ths vote to approve any ballot initiative to increase the tax burden. This would augment the 2/3rds supermajority that already exists for legislatively enacted tax increases.

3. Speaking of taxes, I can’t imagine that anyone is surprised to learn that there’s an initiative to (further) increase California’s top tax rate. The Tax Foundation explained that, “California Proposition 30 would create a 1.75 percentage point surtax on income above $2 million, which would bring the top marginal rate to 15.05 percent. (Separately, the scheduled uncapping of a 1.1 percent payroll tax in 2024, combined with the passage of Proposition 30, would yield a 16.15 percent top rate on wage income.)” This is so extreme that I’m predicting even California’s crazy voters will vote no.

4. Sticking to taxes, there’s a referendum in Colorado, Proposition 121, to lower the state’s flat tax. The Tax Foundation summarizes what’s at stake: “Colorado Proposition 121 would reduce the state’s flat statutory income tax rate from 4.55 percent to 4.4 percent, effective retroactively for tax year 2022.” Not a huge reduction, but a welcome step in the right direction.

5. For those who follow labor issues, there are two initiatives that merit attention. In Illinois, Amendment 1 would further empower and entrench the power of government bureaucrats. As noted by the Illinois Policy Institute, “Amendment 1 would allow government unions to pass their most unpopular demands at the bargaining table, and voters would have no way to hold them accountable.” By contrast, Tennessee voters will get to vote on whether to enshrine “right-to-work” in the state’s constitution.

6. Last but not least, voters in a couple of California communities will have the opportunity to demonstrate whether they understand economics. To be more specific, an article in Reason explains, “The most sweeping rent control initiative up for a vote next Tuesday is Measure H in Pasadena, California. It would cap rent increases at 75 percent of inflation as measured by the Consumer Price Index…A handful of other California cities have ballot initiatives that would tighten pre-existing rent caps.”

P.S. My predictions for Congress (which occasionally are accurate) are for Republicans to take the Senate by a 52-48 margin and the House by a 246-189 margin.

Read Full Post »

Is Biden a Socialist?

As explained in my three-part series (here, here, and here), socialism is a poisonous ideology. With poisonous results.

It is morally corrupt, elevating government over the individual and the family.

And it is economically nonsensical since it punishes success and subsidizes sloth.

But not every leftist is a socialist (and you can argue that not every socialist is a leftist).

So how should we classify Joe Biden?

As reported by Alex Gangitano for the Hill, the president asserted that only “idiots” thought he was a socialist.

President Biden on Saturday said people holding signs calling him a socialist were idiots…he said in remarks at Jones Elementary in Joliet, Ill…“I love those signs when I came in — socialism. Give me a break, what idiots,” the president added. …The Illinois stop is another on a list of typically blue strongholds the president is visiting in the days before Election Day on Tuesday. He also traveled to New Mexico and California this week and will make stops in New York on Sunday and Maryland on Monday.

If you read the entire article, at no point does Biden explain why the signs were wrong. Or idiotic. Instead, he did his usual political routine, attacking Republicans for wanting to make changes to Social Security and Medicare (I wish!).

Since Biden dodged the issue, let’s look at whether the critics are right.

Is the president a socialist?

The answer depends on who is answering. For economists, socialism has a very specific definition. It does not simply mean big government.

Socialists are people who want government ownership, central planning, and price controls. Sort of like Cuba, North Korea, or the former Soviet Union.

At the risk of sounding like a softie, I don’t think Biden qualifies if we use this strict definition. Just like I didn’t think Obama was a genuine socialist when I addressed accusations against him back in 2010.

Though maybe it’s fair to say Biden leans in that direction.

• He wants the government to own and control things, like the postal service and the Social Security system. But so do most Republicans.
• He likes industrial policy so that government can tilt the playing field in favor of political contributors. But so do many Republicans.
• He likes price controls, at least indirectly, for items such as prescription drugs. But so do some Republicans.

I’ll close by acknowledging that many people – including self-described democratic socialists – don’t use the technical definition of socialist.

Indeed, most people probably think socialism is just a way of describing a system with high tax rates and lots of redistribution. Sort of like Sweden or Denmark.

I think they’re wrong, but Biden definitely would qualify as a socialist based on that casual definition.

Read Full Post »

America’s Fiscal Problem Is Excessive Government Spending

I don’t spend much time worrying about why the United States has a big budget deficit. I’m much more concerned about the fact that the federal government is too big and that it is spending too much.

Moreover, there’s plenty of evidence that we can quickly get rid of deficits with some long-overdue spending restraint. In other words, deal with the underlying disease of excessive government and the symptom of red ink goes away.

But since many people focus first and foremost on fiscal balance, let’s take a look at why budget surpluses at the turn of the century have turned into big budget deficits.

I’m motivated to address this issue because of this chart from Brian Riedl’s impressive collection. It shows spending increases are responsible for 97.5 percent of the shift.

Some of you may be wondering if the chart is accurate. I can easily imagine my friends on the left exclaiming, “What about the Bush tax cuts and the Trump tax cuts?!?”

Those tax cuts did happen, but they were mostly offset by Obama’s “fiscal cliff” tax increase and real bracket creep (the tax burden tends to increase over time since even small increases in economic growth will push households into higher tax brackets).

So the net result of all these factors is that there has been a very small reduction (0.2 percentage points) in tax revenue as a share of economic output.

Others of you may be wondering if the spending numbers may be exaggerated because of pandemic-related spending.

That is a fair question since the crowd in Washington used the opportunity to spend a couple of trillion dollars. But the silver lining to that dark cloud is that it was almost entirely one-time spending that took place in 2020 and 2021 (for what it’s worth, budget experts have mocked Biden’s claim of deficit reduction this year since it is simply a result of expiring emergency outlays).

There is some one-time spending in 2022. As noted in the chart, Biden’s reckless student loan bailout is a big chuck of the increase in “other mandatory spending.”

As such, I suppose I should say that higher spending is “only” responsible for 96.8 percent of today’s higher deficits, not 97.5 percent.

The bottom line is that all 21st-century presidents (and Congresses) have been big spenders.

P.S. According to the long-run forecast from the Congressional Budget Office, a bad situation will get even worse over the next 30 years. And more than 100 percent of that future decline will be the result of excessive spending (something that’s been true for many years).

Read Full Post »

Socialism/Communism Humor

I’ve shared many columns featuring communism humor and even more columns filled with socialism humor.

Today, let’s look at crossover humor. Each of these five items applies equally to both of those collectivist ideologies.

The worst person in world history makes an appearance in our first item.

Our next item mocks leftists in general.

For our third item, I agree that there’s a difference between Marxism and so-called democratic socialism, but the cat correctly notes there’s a huge difference between free enterprise and cronyism.

Let’s return to the problem that our leftist friends have with the real world.

Here’s Homer Simpson getting ready to thrash both socialism and communism.

Last but not least, our final item notes that the dictators (and their progeny) live fat and happy lives while ordinary people suffer immensely under communism and socialism.

With a body count of 100 million, communism definitely killed a lot of people. Whether they were “friends” is a separate question.

P.S. To close with a serious comment, socialism is an economic system based on misguided policies such as government ownership, central planning, and price controls. Communism is a political system based on dictatorship and oppression.

By definition, every communist is a socialist. But not every socialist is a communist (especially not today’s so-called democratic socialists who are really just class-warfare redistributionists rather than real socialists).

Read Full Post »

TABOR Is America’s Fiscal “Gold Standard”

If Republicans do as well as expected in next Tuesday’s mid-term elections, especially with regard to gubernatorial and state legislative contests, I expect that more states will enact and expand on school choice in 2023.

That will be great news for families.

But I also want great news for taxpayers, and that’s why I’m hoping that we also will see progress on fiscal policy. To be more specific, I want to see more states copy Colorado’s very successful spending cap.

Known as the Taxpayer Bill of Rights (TABOR), it basically limits the growth of annual tax revenue to the growth of population-plus-inflation. Any revenue above that amount automatically must be returned to taxpayers.

And since the state also has a balanced-budget requirement, that means spending can only increase as fast as population-plus-inflation as well. A very simple concept.

Has TABOR been successful? Has it produced better fiscal policy and more economic prosperity?

The answer is yes. In a column for National Review, Jonathan Williams and Nick Stark say it is the “gold standard” for state fiscal policy.

TABOR is a state constitutional amendment that limits the amount of revenue Colorado lawmakers can retain and spend to a reasonable formula of population plus inflation growth. If the state government collects more tax revenue than TABOR allows, the money is returned to taxpayers as a refund. Just this year, Colorado taxpayers will receive nearly $4 billion in TABOR refund checks. If any government in Colorado intends to spend surplus revenue, increase taxes or fees, or increase debt, it must submit the proposed measure to the ballot and win the approval of a majority of voters. …Following the low-tax-plus-limited-government formula, Colorado developed into one of the most competitive business climates in the nation in the years following TABOR’s adoption. During the past three decades, Colorado has been one of the most competitive and fastest-growing economies in the nation. …Even in the face of this tremendous economic-success story, the tax-and-spend crowd have spent a tremendous amount of resources trying to demonize TABOR, often attempting to find work-arounds or suing to have TABOR declared unconstitutional. Why? In short, because it is an effective limit on the growth of government, and it restricts the wild spending increases that fund their constituencies — who generally favor big government. …Other states trying to implement meaningful checks and balances on the inexorable government-growth machine…should follow Colorado’s example.

Courtesy of Jon Caldera, here’s some of Colorado’s fiscal history, which began with a flat tax in the 1980s and then culminated with TABOR in the 1990s.

Colorado used to have a progressive income tax where people and companies would pay a higher tax rate the more money they earned. Thanks to the Independence Institute…and…economist Barry Poulson, the legislature was convinced to switch from the progressive tax to a flat one in the mid-1980s. Poulson urged that the new tax rate be 4.5% so that it would bring in the same amount of revenue as the system it was replacing. …So, of course, the legislature set the new rate at 5% to create a fine windfall, which it did. Even so, the flat income tax did what it was predicted to do. It lit the engine of Colorado’s economy. When productive people and their companies are looking to locate, they are attracted to states with low and stable tax policy. The flat tax began the Colorado boom. That boom resulted in massive tax receipts to the state. So much so that the legislature quickly felt the growing pressure of a tax rebellion. …So, we then passed the Taxpayer’s Bill of Rights in 1992. The combination of our flat tax and TABOR attracted more and more businesses and jobs to Colorado. So much so that in the late 1990s the state had to refund some $3.2 billion of surplus tax revenue to taxpayers. …The combination of our flat-rate income tax and TABOR has made for a sustainable gold rush which has turned Colorado into one of the most economically vibrant states in the country with one of the lowest unemployment rates.

I’ll close by explaining why folks on the left also should support TABOR-style spending caps.

Part of the reason is that they should care about future generations.

Part of the reason is that they should care about economic growth.

But another reason is that it may be politically beneficial. Check out these excerpts from a column in the Denver Post by Scott Gessler.

TABOR requires a vote of the people to raise taxes, incur debt, or spend excess government funds. Practically, it makes all three much harder. So Democrats hate TABOR. …conservatives love TABOR. They rarely support tax increases or additional borrowing, and for them TABOR imposes fiscal discipline and forces government to live within its means. And Colorado has avoided the ongoing fiscal crises that have plagued other states like Illinois or California. Plus, it’s hard to argue against the public’s right to vote on taxes and debt. …But what about Republicans? They’re the ones who have paid the political price. …Today, voters can oppose Republicans and support Democrats, with little fear taxes will go up. …So expect the continued irony, as Democrats attack TABOR with a unified voice, while Republicans usually support it, yet lose political strength.

Since I care about policy rather than partisanship, I hope lots of Democrats read this article and then embrace spending caps. If they don’t want to copy Colorado, they can opt for the Swiss version of a spending cap. So long as they choose something real, it will work.

That would be bad for Republicans, but good for prosperity.

P.S. Colorado is now a blue-leaning state, but voters in 2019 rejected an effort by the pro-spending lobbies to eviscerate TABOR.

Read Full Post »

The IMF, the Laffer Curve, and Supply-Side Economics

The Laffer Curve is a very straightforward concept.

It graphically illustrates why politicians are wrong if they think you can double tax revenue by doubling tax rates (or that revenues will drop by 50 percent if tax rates are cut in half).

Simply stated, you also have to look at what happens to taxable income.

In cases where taxpayers have a lot of control over the timing, level, and composition of their income, changes in tax rates may cause big changes in taxable income (or “tax base” in the jargon of economists).

None of this should be controversial. Even Paul Krugman agrees that the Laffer Curve exists.

Today, we are going to see that the pro-tax International Monetary Fund also admits there is a Laffer Curve.

Indeed, a new study authored by David Amaglobeli, Valerio Crispolti, and Xuguang Simon Sheng openly states that politicians should be very cognizant of the fact that some tax policy changes can have a big effect on the “tax base.”

This paper investigates the potential revenue impact of different tax policy changes using the Tax Policy Reform Database (TPRD)… Revenue responses to tax policy changes depend on many factors… However, one of most important factors is the nature of the tax policy change itself. For example, while a tax rate cut will directly lower revenue intake, it could also encourage more economic activity, hence expand the tax base. Estimating the revenue response to a tax policy change, therefore, requires granular information on the nature of this change, including on the tax instrument used (e.g., VAT or personal income tax), the type of change adopted (e.g., tax base, tax rate), and its timing and size.

Here are some of the findings.

We assess the impact of tax policy changes on tax revenues using Jordà (2005)’s local projections method. Our baseline results are based on tax shocks identified in the year when a tax change is announced. Our main empirical findings suggest that the revenue yield of tax policy changes varies significantly across taxes and types of changes, with tax rate changes generally having a more transitory revenue impact than tax base changes for most taxes. Specifically, base broadening changes in PIT, CIT, EXE, and PRO have on average a more significant and long-lasting impact on tax collection than rate changes. At the same time, rate hikes have relatively more significant effects on taxes in the case of VAT and SSC measures.

Most notably, the report finds tax increases hurt prosperity, especially higher marginal tax rates.

Gechert and Groß (2019) conclude that measures to broaden the tax base are less harmful to economic growth than tax hikes. Dabla-Norris and Lima (2018) find that during fiscal consolidations, tax base-broadening measures lead to smaller output and employment declines compared to measures to increase tax rates.

And we learn that it is very foolish to raise corporate tax rates.

Mertens and Ravn (2013) find that…increases in CIT are approximately revenue neutral for the United States. …Announcements of CIT increases are associated with a somewhat transitory rise in tax collection, suggesting that companies have quickly adapted their business to reduce the tax burden.

For wonky readers, here’s a chart from the study. Note how, in many cases, there’s not much difference in revenue between tax increases (blue line) and tax cuts (red lines).

P.S. One big takeaway is that there is not a single Laffer Curve. There are multiple Laffer Curves depending on the tax that’s being changed and the ability of taxpayers to change their behavior.

P.P.S. A less-obvious takeaway is that class-warfare taxes cause the most economic damage, meaning the most harm to ordinary people.

P.P.P.S. You can call it the “Khaldun Curve” if you prefer.

P.P.P.P.S. I have trouble deciding what evidence is most powerful, the views of CPAs or the data from the OECD?

Read Full Post »

Astounding Example of White House Chutzpah

While Donald Trump issued some inanely illiterate tweets to promote protectionism, Joe Biden has made a fool of himself with tweets on a wider range of issues.

• Jaw-dropping economic illiteracy about gas prices.
• Using make-believe numbers to promote class warfare.
• Adding to the debt while claiming to do the opposite.
• Once again using make-believe numbers on taxation.

The easy response to all this nonsense is to jump on the Biden-is-a-befuddled-old-man bandwagon.

That may be good for a few laughs, and I’m a big fan of political humor (even when it targets my side).

But the more accurate assessment is that Biden is a politician and he’s doing what comes naturally to politicians – which is to spin, lie, dissemble, and prevaricate.

And if you think I’m being too critical, we have a new tweet from the White House that breaks all records for chutzpah.

I don’t know what’s most galling about this tweet.

• Is it that the White House is taking credit for Social Security’s automatic COLAs (cost of living adjustments) even though that’s been part of the law for 50 years?
• Is is that the White House is trying to make it seem like good news that we’ve had very high inflation, which is the only reason why the COLAs are so large?

In either case, the only thing Biden actually did was to preside over a period of rising prices (which, in the interest of fairness, is mostly not his fault).

I’ll close with the observation that I would be happy if politicians basically did nothing other than make false claims of “leadership.” It’s when they start enacting new laws that things usually get worse (and that’s definitely been true during the Biden years).

P.S. We’ve also seen brassy tweets from the campaign arm for Democratic members of the House of Representatives.

Read Full Post »

Japan’s Failed Experiment in Industrial Policy

I’ve expressed opposition numerous times to so-called industrial policy because I don’t want politicians and bureaucrats to provide special favors to certain businesses or industries at the expense of everyone else.

That’s a practice known as cronyism, and it is absurd to think that selfish, election-focused politicians somehow correctly identify and subsidize the technologies of tomorrow.

But there are still people who think government should try to steer the economy – including some supposed conservatives.

Let’s remind ourselves why this is a bad idea. Samuel Gregg of the American Institute for Economic Research has a new article about the topic for National Review.

…several polling outfits have indicated an uptick in the number of Americans who say they are disillusioned with capitalism and willing to consider socialism as an alternative. This, however, isn’t the most immediate threat to American capitalism. …It is best labeled “corporatism.” …Examples of full-blown corporatism include distinctly authoritarian regimes such as Mussolini’s Italy, Dollfuss’s Austria, and Franco’s Spain until the mid 1950s. …Following World War II, corporatism took on milder expressions. …whatever the form, corporatism creates serious political and economic problems. Even soft versions of corporatism provide established companies with political mechanisms to advance their interests over those of consumers, taxpayers, and new entrepreneurs… This undermines the ability of businesses to make necessary but often difficult changes. The chances of a business’s becoming complacent and disappearing, along with the jobs it provides, thus multiply. …The expansive versions of stakeholder capitalism favored by progressives and woke capitalists are almost indistinguishable from corporatism. …World Economic Forum chairman Klaus Schwab, for instance, wants a trinity of governments, businesses, and NGOs working together to pursue political goals that are always of the progressive variety. …Not every corporatist is a fascist, but every fascist is a corporatist. Authoritarian economics isn’t just economically foolish. It is also an affront to human liberty and dignity.

Writing in August for Reason, Michael Farren documented the failure of industrial policy.

The once-beleaguered CHIPS Act…reflect a cross-party shift toward embracing industrial policy—the idea that the government should jump into the economy with both feet and have fun getting wet. Facetiousness aside, the neoliberal era from the late 1970s through the 1990s—when economic thinking carried more political sway and resulted in massive deregulation of airlines, railroads, and interstate trucking and the privatization of the internet—is far behind us. …Whether it’s encouragement via subsidies or constraint via regulation, using the government to guide the economy is akin to thinking that just a little bit of cyanide won’t hurt. …Compounding the problem is that people, not some agnostic supercomputer, determine which industries and companies are considered worthy of a boost. Humans are subject to influence and pressure, turning industrial policy into a contest of who can secure the most government favoritism… Lastly, industrial policy motivates “unproductive entrepreneurship.” Some of the best and brightest minds inevitably withdraw from productive activities premised on voluntary exchange, and instead use their skills to find autocratic mechanisms to extract political payoffs… The crystal balls policy makers peer into are easily clouded by charlatans, and we all lose when they win.

For those who want real-world evidence, the unhappy experience of Japan is very enlightening. Adam Thierer wrote last year about the failure of industrial policy in that nation.

American pundits and policymakers are today raising a litany of complaints about Chinese industrial policies, trade practices, industrial espionage and military expansion. …In each case, however, it is easy to find identical fears that were raised about Japan a generation ago. …In 1949, the Japanese government created the Ministry of International Trade and Industry (MITI) to work with other government bodies (especially the Bank of Japan) to devise plans for industrial sectors in which they hoped to make advances. …By the late 1970s, however, U.S. officials and market analysts came to view MITI with a combination of reverence and revulsion, believing that it had concocted an industrial policy cocktail that was fueling Japan’s success at the expense of American companies and interests. …Just as Japan phobia was reaching its zenith in the early 1990s, Japan’s fortunes began taking a turn for the worse. The Japanese stock market crashed… The Nikkei Index peaked at 38,915.87 on Dec. 29, 1989, then began a dramatic fall. It has never reached that level since. …Japan suffered a brutal economic downturn that became known as the Lost Decade, which really lasted almost two decades. Microeconomic planning failures—including many missteps by MITI—were also becoming evident during this time. MITI had made a variety of industrial policy bets that were originally feared by U.S. pundits, only to become embarrassing failures a few years after inception. …by the late 1990s many scholars came to view most Japanese industrial policy initiatives as a costly bust. Marcus Noland of the Peterson Institute for International Economics noted in a 2007 study of Japanese industrial policy efforts, “Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. …Perhaps most notable in this regard was the Japanese government’s own admission that the MITI model had not worked as well as planned. A 2000 report by the Policy Research Institute within Japan’s Ministry of Finance concluded that “the Japanese model was not the source of Japanese competitiveness but the cause of our failure.”

Writing for Forbes, Stuart Anderson also debunks the notion that industrial policy helped Japan.

…it appears each generation must relearn the lessons of the past as today governments in China, Europe and the United States support industrial policy. Policymakers are convinced that government planning will make national economies better than market forces. “Industrial policy in Japan was not responsible for the country’s economic achievements in the post-war era or the international performance of leading sectors, including autos and electrical machinery,” according to a new study by economist Richard Beason for the National Foundation for American Policy. …He found Japanese industrial policy from 1955 to 1990 did not improve growth rates by sector, provide greater efficiency through economies of scale or result in improved productivity growth or “competitiveness.” …To conduct the research, Beason examined four measures of industrial policy used by the Japanese government during the 1955-1990 period: 1) subsidized government loans to industry, 2) subsidies, 3) tariff protection and 4) tax relief. …“Industrial policy tools generally also had no positive and significant impact on productivity growth (“competitiveness”) for the various sub-periods from 1955 to 1990. …Beason notes that policymakers in Japan abandoned industrial policy, viewing the policies costly, unsuccessful.

Sadly, many American politicians now want to copy those unsuccessful policies.

Will that make the United States as bad as today’s China? Or the former Soviet Union?

Fortunately not. Today’s industrial policy is cronyism, not full-fledged central planning. But it is nonetheless a bad idea to move in the wrong direction.

P.S. Both in the past and today, industrial policy is very vulnerable to corruption.

Read Full Post »