Hopes and Fears for 2023

It’s not easy being a libertarian, especially when your job is to protect economic liberty. Politicians have a natural incentive to increase the size, scope, and power of government.

In almost all cases, our freedoms are best protected when politicians do nothing. Which is why, in general, I’m a fan of gridlock.

But I also realize that we’re on a very bad path (thanks to demographic change and poorly designed entitlement programs), so we need to hope and pray that lawmakers at some point affirmatively take enact reforms to restrain the burden of government spending.

But that won’t happen this year.

Instead, let’s review my hopes and fears on things that might actually happen. We’ll start with the things I hope to see.

Rejuvenated interest in spending restraint – While I don’t have any hope of actual spending discipline with Joe Biden in the White House, I will be very interested to see whether congressional Republicans go back to caring about fiscal responsibility. In my fantasy world, we see a reincarnation of interest in genuine entitlement reform. But I’ll be happy if they simply acknowledge that there’s a problem.

More school choice – More education freedom was one of the good things that happened in 2022 and I am uncharacteristically optimistic that we will see more progress in 2023. In part, this is because the evidence for choice is so strong. But it is also because Republican politicians are learning that there they may lose their jobs if they side with teacher unions over families.

The Supreme Court Ends Civil Asset Forfeiture – I mentioned this as a hope for 2022, 2021, and 2020, so maybe the fourth time is the charm. My fingers are crossed that the odious practice of “theft by government” is finally rejected by the Supreme Court (especially since America’s best Justice is very aware of the problem).

Now let’s look at the things I’m afraid will happen.

Bipartisanship – It’s possible that Republicans and Democrats cooperate to improve policy (the Clinton years, for instance), but normally bad things happen when the Evil Party and the Stupid Party agree on something. So I’m worried that the two parties will work together in 2023.

Green protectionism – I’ve written about how Europe’s politicians want to throw a monkey wrench in the global trading system by imposing protectionist barriers against products from nations that are deemed to be insufficiently green. Sadly, Biden is interested in doing the same thing and US trade law unfortunately cedes a lot of unilateral power to the president.

A Bursting Bubble in Italy – Back in 2017, I speculated that an Italian fiscal crisis could be either a good thing or bad thing depending on whether the moral-hazard-promoting folks at the IMF did a bailout. But there has not been a crisis. What I did not foresee is how the European Central Bank would break its own rules by doing an indirect bailout (basically, by buying up the new debt the Italian government has been issuing). At some point, though, bubbles burst. In this case, it won’t be pretty.

P.S. Having just survived an emotionally draining Georgia Bulldog victory over Ohio State last night, my far-and-away biggest hope for 2023 is a victory over TCU on January 9. National champions, again!

P.P.S. I’m trying to figure out my all-time biggest fail. Was it when I listed trade liberalization as a hope for 2021 (wildly wrong since Biden has been just as bad as Trump)? Or was it back in 2018 when I expressed hope that Venezuela’s socialist government might be on the verge of collapse?

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Biden Rewards Misbehavior and Encourages Future Problems by Bailing Out Union Pension Plans

Back during the TARP bailout of Wall Street, a clever person created a satirical bailout application form.

It was amusing, of course, but also made a serious point about “moral hazard,” which is what happens when government policy rewards bad behavior.

I’m in favor of risk taking, and I certainly don’t object to people earning lots of income when they make astute choices.

But it sends a terrible signal if we bail them out when they make bad choices.

That approach tells others to go overboard with speculation. After all, heads they win, tails the taxpayers lose (as illustrated by this clever cartoon).

Sadly, politicians routinely encourage moral hazard by providing bailouts and other subsidies to their cronies, campaign contributors, and political supporters (including not just Wall Street, but also auto companies, cities, health insurance companies, imprudent homeowners, Fannie Mae/Freddie Mac, and entire nations).

And now we can add union pension plans to the list. Here are some excerpts from an editorial in yesterday’s Wall Street Journal.

Democrats sold their $1.9 trillion spending bill in 2021 as Covid “relief,” but it included some $86 billion to shore up more than 200 ailing union multi-employer pension plans. The $36 billion for the Teamsters’ Central States Pension Fund is the largest tranche awarded so far, but Mr. Biden assured his labor friends on Thursday that more is on the way. …Central States last year was only 17% funded and projected to collapse in a few years. …Congress in 2014 acted to prevent this death spiral by passing bipartisan legislation that let sick plans reduce benefits and make other changes to avoid insolvency. Eighteen plans took advantage of the law, but Democrats then had second thoughts and decided to ding taxpayers instead. …Last year’s union, er, Covid relief bill lets the PBGC make lump sum payments to keep some sick 200 multi-employer plans solvent through 2051 and fully restore benefits in the 18 plans that had cuts. Notably, the law prohibits the PBGC from conditioning aid on governance reforms or funding rules. But it doesn’t forbid benefit increases. So the failings that got these plans in trouble will continue and may lead to future bailouts. Government unions with under-funded pensions in New Jersey and Illinois will surely demand one too.

Back in July, Eric Boehm of Reason warned that this was going to happen and that it would be a very bad idea.

The bailout was approved last year as part of the American Rescue Plan, the $1.9 trillion emergency spending bill…the multiemployer pension plan bailout is arguably the least defensible provision in a bill that was full of indefensible spending. …Reps. Virginia Foxx (R–N.C.) and Rick Allen (R–Ga.), respectively the top Republicans on the Education and Labor Committee and the Health, Employment, Labor, and Pensions Subcommittee, in a joint statement…added, “creates perverse incentives for further mismanagement and underfunding and leaves the taxpayer holding the bag.” …this is something of a no-brainer. Biden delivered a major win to his labor union allies, put the cost on the taxpayers’ tab, and took a victory lap for doing it. …And everyone else gets to pay for it.

That same month, Howard Adler and Alex Pollock made similar points in a column for the Wall Street Journal.

Multiemployer plans often promise beneficiaries more benefits than they can afford. Many are governed by a board of trustees with equal representation from unions and employers—a recipe for increasing benefits but not funding them. …Congress and the Biden administration wrote a blank check to political supporters under the guise of Covid relief. …The most egregious aspect of the bailout is that it made no attempt at structural reform. Plans are free to continue the practices that got them into trouble in the first place. …The PBGC’s new projected insolvency date is 2055, four years after the bailout funds end. The pension scheme is set up for failure—or another bailout—in three decades. Bailouts should be conditioned on reforms. In prior bailout legislation…Congress tried to address the causes of the failures that made a bailout necessary. But with multiemployer pension plans, lawmakers made no attempt to fix anything—they merely spent taxpayer money.

What’s most upsetting about this bailout is not the money that’s being squandered today.

It’s the fact that this bailout will make future bailouts more likely.

But future spending on additional bailouts is just part of the problem. There’s also a macro cost to the economy because the allocation of capital will be distorted.

Investors will take imprudent risks because there is a greater-than-zero chance (in some cases, probably close to 100 percent) that politicians will shift future losses on to the backs of taxpayers.

That’s not a free market. After all, capitalism without bankruptcy is like religion without hell.

P.S. I also worry the bailout of union pension plans will be a precursor to bailouts of unfunded promises for state and local bureaucrats.

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European Fiscal Policy Week, Part II: The Right Response to Italy’s Fiscal Crisis

I wrote yesterday to speculate about a possible fiscal crisis in Italy.

Today, here are my thoughts on why there should not be a bailout if/when a crisis occurs.

I have moral objections to bailouts, but let’s focus in this column on the practical impact.

And let’s start with this chart, which shows debt levels in Portugal, Italy, Greece, and Spain (the so-called PIGS) ever since the misguided bailout of Greece about a dozen years ago.

As you can see, OECD data reveals that there’s been no change in these poorly governed nations. They have continued to over-spend and accumulate ever-higher levels of debt.

This certainly seems like evidence of failure, in part because of Greece’s continued bad policy.

But I’m equally concerned about how other Mediterranean nations did not change their behavior.

So why did those nations accumulate more debt, even though they had an up-close look at Greece’s fiscal collapse?

I suspect they figured they could get bailouts, just like Greece. In other words, the IMF and others created a system corrupted by moral hazard.

Defenders of bailouts assert that Greece was forced to engage in “austerity” as a condition of getting a bailout.

I have two problems with that argument.

• First, notice how Greece’s debt has continued to go up. If that’s a success, I would hate to see an example of failure.
• Second, the main effect of the so-called austerity is a much higher tax burden and a somewhat higher spending burden.

If there’s a bailout of Italy (or any other nation), I suspect we’ll see the same thing happen. Higher taxes, higher spending, and higher debt.

I’ll close by acknowledging that there are costs to my approach. If Italy is not given a bailout, the country may have a “disorderly default,” meaning the government simply stops honoring its commitments to pay bondholders.

That is bad for individual bondholders, but it also could hurt – or even bankrupt – financial institutions that foolishly decided to buy a lot of Italian government bonds.

But there should be consequences for imprudent choices. Especially if the alternative is bailouts that misallocate global capital and encourage further bad behavior.

The bottom line is that the long-run damage of bailouts is much greater than the long-run damage of defaults.

P.S. Just like it’s a bad idea to provide bailouts to national governments, it’s also a bad idea to provide bailouts to state governments. Or banks. Or student loan recipients.

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Biden’s Student Loan Scheme: The Party of the Rich Redistributes Money Upwards

As a general rule, some of the worst people are attracted to the wold of politics.

As such, we should never be surprised when politicians push bad policy.

But there are bad ideas…and there are really bad ideas.

At the risk of understatement, Biden’s proposed scheme to “forgive” a big chunk of student debt is spectacularly misguided.

The challenge is identifying why it’s wrong. There are so many possible answers.

Let’s review some of the ways this is bad for the United States (you get to make your choice in a poll at the end of the column).

• Redistributes from poor to rich
• Subsidizes irresponsibility and penalizes responsibility
• Abuse of power
• More red ink
• Higher tuition price
• Awful precedent

To help determine which answer is best, let’s review some recent analysis.

National Review editorialized on the topic. Here are some of the highlights.

Biden’s student-loan plan will cost about $2,000 per taxpayer. …Biden is effectively telling all the people who didn’t go to college, those who went to college but didn’t borrow money, and those who went to college and already paid off their loans that they are suckers. …Federal student loans are already issued on very favorable terms. …The order caps those eligible for loan forgiveness at $125,000 in individual income, which is approximately double the median household income and hardly excludes anyone. …the president has…abused emergency powers to pursue a reckless and senseless policy.

In her Washington Post column, Megan McArdle savages the president’s giveaway.

…the Biden administration announced that it would forgive up to $10,000 in student loan debt (up to $20,000 for Pell Grant recipients)… How many ways can a single policy be bad? This one could cost the federal government somewhere between $400 billion and $600 billion, completely unpaid for. Its legality is at best an abuse of the law to address the “national emergency” of upcoming midterm elections. …an extremely regressive policy, heaping benefits on the most affluent demographics, while leaving everyone else to pay the cost through some combination of higher taxes, lower benefits, or higher inflation and interest rates. Worst of all: What do Democrats do for an encore? …This first action will beget demands for a second and a third. …like trying to quit smoking by switching to unfiltered cigarettes. 

Honest folks on the left are equally upset about Biden’s reverse redistribution.

President Obama’s former top economic aide, Jason Furman, didn’t mince his words.

Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.

— Jason Furman (@jasonfurman) August 24, 2022

And the editors at the left-of-center Washington Post were equally scathing.

The unemployment rate for people with bachelor’s degrees and higher is just 2 percent. It’s hard to make the case that college graduates are…facing an unprecedented crisis. …canceling student loan debt is regressive. It takes money from the broader tax base, mostly made up of workers who did not go to college, to subsidize the education debt of people with valuable degrees. …Mr. Biden’s plan is also expensive — and likely inflationary. …Mr. Biden’s student loan decision will…provide a windfall for those who don’t need it — with American taxpayers footing the bill.

From a libertarian perspective, Elizabeth Nolan Brown of Reason denounced Biden’s scheme.

Biden’s basis for saying that the executive branch has the right to simply declare student loans forgiven is both egregious in its own right and troubling for the future of executive power plays. …The program amounts to a massive subsidy for middle-class Americans, as opposed to benefiting the most economically downtrodden or financially strapped. …the program “consumes resources that could be better used helping those who did not, for whatever reason, have a chance to attend college,” as economist Larry Summers put it …there are many people for whom avoiding student loan debt or paying it off promptly meant making all sorts of sacrifices. Biden’s loan forgiveness program says to them that this thrift, practicality, etc. may have been for nought.

By the way, Larry Summers was Bill Clinton’s Treasury Secretary and also head of Obama’s National Economic Council, so hardly a libertarian fellow traveler.

Here’s more of his analysis.

Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.

— Lawrence H. Summers (@LHSummers) August 22, 2022

Returning to libertarian commentary, Brad Polumbo of the Foundation for Economic Education adds his two cents.

…forcing taxpayers to pay down the roughly $1.5 trillion in government-held student debt is not a “progressive” policy by any stretch. …just one in three American adults over age 25 actually has a bachelor’s degree. …college graduates typically make 85 percent more than those with only a high school diploma and earn roughly $1 million more over a lifetime. So any government policy that forces taxpayers to pay off loans held by a relatively well-off slice of society is actually regressive… Economists Sylvain Catherine and Constantine Yannelis crunched the numbers to conclude that full student debt cancellation would be a “highly regressive policy” and award $192 billion to the top 20 percent of income earners, yet just $29 billion to the bottom 20 percent. …other research from left-leaning institutions like the Urban Institute has reached the same conclusion. So, we’re left with the simple fact that one of the Democratic Party’s top agenda items is a taxpayer-financed handout to the wealthy. 

Charles Cooke of National Review also is not impressed.

Congress has passed no rules that allow down-on-their-luck presidents to throw money at people for political gain. As of yet, Congress has given no instruction that if the president’s friends might like a little more cash, he can raid the Treasury to give it to them. Certainly, Congress has set up a loan program. But the deal there is rather simple, all told: First you borrow, and then you pay back what you borrowed. There is no mention of “forgiveness” days or of “help” or of rolling Chekhovian jubilees, and by pretending otherwise, President Biden is making a mockery of his oath to uphold the Constitution. …This isn’t a reform. It’s not even pretending to be reform. It’s a contemptuous, abusive, unbelievably expensive shot in the dark… Joe Biden and his party prefer college students to you, and they think that those students ought to be rewarded for that by being handed enormous gobs of your money. Electricians, store managers, deli workers, landscapers, waitresses, mechanics, entrepreneurs? Screw ’em.

Robby Soave of Reason also is disgusted.

Biden’s debt forgiveness plan will do nothing—absolutely nothing—to fundamentally change the incentive system that created the doom spiral in the first place. Degree-seekers will continue to borrow large amounts of money to buy useless educations; indeed, they might feel even more encouraged to do so now that this precedent has been set. Meanwhile, colleges and universities will have even less incentive to lower costs. …Forgiving student loan debt exacerbates this problem since it encourages more reckless borrowing. …It is a slap in the face to everyone who either paid down their college debt or made different educational choices to avoid accruing it. …Biden…simply engaged in a vast transfer of wealth, taking hard-earned money from those who did not fall prey to the federal government’s scam and awarding it to those who did.

So what’s the bottom line?

One obvious takeaway is that the party of the rich has provided another giveaway to their rich constituents. Think of it as the bailout version of the state-and-local tax deduction.

But I think this message might be the real moral of the story.

P.S. At the risk of influencing the poll, Biden’s student loan bailout will give colleges and universities the leeway to further increase tuition, but you need bad monetary policy to get a sustained increase in the overall price level.

P.P.S. Cast your vote.

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IMF Bailouts and Moral Hazard

One of the (many) unfortunate tendencies of politicians is that they focus on the short run (i.e., their upcoming reelection battles).

Why is this unfortunate? Because there are some policy changes that may be costly in the short run, but they are nonetheless very worthwhile because they generate big long-run benefits.

• Shifting to a system of personal retirement accounts means trillions of dollars of near-term “transition costs” in order to protect current retirees and older workers, but reform will solve the program’s long-term $40 trillion-plus unfunded liability.
• Messy fights over the debt limit create (almost certainly exaggerated) concerns about potential default, but that potential cost would be trivial compared to the long-run benefits of figuring out how to limit the growing burden of federal spending.
• When bad monetary policy causes a financial bubble or housing bubble, shifting to good monetary policy presumably will lead to short-run pain as markets adjust, but that’s far better than producing a 2008-style crisis by letting the bubble(s) expand further.

I offer the above examples because similar short-run and long-run tradeoffs exist when looking at what happens when the International Monetary Fund provides bailouts for profligate governments.

The Economist has an article that perfectly illustrates the IMF’s pernicious role.

The year was 1958. …Argentina turned to the fund for its first “standby arrangement”, a line of credit accompanied by a plan to stabilise the economy. …Sixty years later, in June 2018, Argentina was back for its 21st arrangement: a $50bn loan, later increased to $57bn, backed by the government’s promises to cut the budget deficit and strengthen the central bank in the hope of quelling inflation and stabilising the peso. The loan was the largest in the imf’s history. …Despite its size, the rescue failed to save Argentina from default and despair. …Foreign capital kept retreating, the peso kept falling and inflation kept rising. The evaluation speculates that the size of the imf’s loan may even have been “self-defeating”, eroding confidence rather than inspiring it.

Just in case you missed it, the article mentions that Argentina has received 21 different bailouts since 1958, which works out to be one bailout every three years (Professor Steve Hanke counts 22 bailouts, for what it’s worth).

In probably every case, IMF bureaucrats presumably thought a bailout was a way of minimizing economic pain (and they probably thought the same thing for dozens of bailouts provided to Haiti, Colombia, Peru, Honduras, Philippines, etc).

But what actually has happened is that politicians – in Argentina and elsewhere – have learned that it’s okay to pursue bad policy because there’s always another bailout.

In other words, IMF policy is a glaring example of “moral hazard.” By shielding politicians from the consequences of bad policy, the bureaucracy is actually encouraging those politicians to engage in additional bad policy.

To be blunt, the IMF is the arsonist rather than the firefighter.

The article in the Economist included this observation.

Conservative critics think the fund has been seduced by its dance partner, wasting public money in a futile battle.

My right-leaning friends are correct, but their criticisms are too mild.

It’s not just that the IMF is wasting money. It’s dampening growth by pushing policies that misallocate capital.

It’s not just that the IMF is engaging in a futile battle. It’s making problems far worse by enabling ever-more government.

Here’s what should have happened to Argentina in 1958 (and what should have happened in 2018, and what should happen when there’s pressure for yet another bailout).

• The investors who buy Argentinian government bonds should learn that lending to dodgy governments is a risky practice.
• The politicians in Argentina who spend excessively should learn that there’s a tipping point when they can no longer borrow.
• The interest groups in Argentina should learn that parasites also suffer when they kill their host animal by being too greedy.
• The voters in Argentina should learn that there are serious adverse consequences when you elect “Peronist” politicians.

Sadly, none of these lessons get learned so long as the IMF is standing by to provide never-ending bailouts.

So instead of some short-run pain, which is then offset by better long-run policy, we get bailouts that mask short-run pain and encourage more long-run damage.

The moral of the story? Shut down the IMF.

The sad reality? The IMF is getting more power.

P.S. To add injury to injury, the IMF usually insists that governments raise taxes in exchange for getting bailed out.

P.P.S. To be fair, the IMF recommends tax increases even in the years when bailouts aren’t needed, so at least the bureaucrats have a consistent (albeit nutty) message.

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The IMF Should Be Eliminated, not Expanded

I’m not a fan of the International Monetary Fund (IMF).

Since I work mostly on fiscal issues, I don’t like the fact that the bureaucracy is an avid cheerleader for ever-higher taxes (which is disgustingly hypocritical since IMF employees get lavish, tax-free salaries).

But the biggest problem with the IMF is that it promotes “moral hazard.” More specifically, it provides bailouts for irresponsible governments and for those who foolishly lend to those governments.

The net result is that bad behavior is rewarded, which is a recipe for more bad behavior.

All of which explains why some nations (and their foolish lenders) have received dozens of bailouts.

Oh, and let’s not forget that these endless bailouts also lead to a misallocation of capital, thus reducing global growth.

In an article for the New York Times, Patricia Cohen reports on discussions to expand the IMF’s powers.

Once narrowly viewed as a financial watchdog and a first responder to countries in financial crises, the I.M.F. has more recently helped manage two of the biggest risks to the worldwide economy: the extreme inequality and climate change. …long-held beliefs like the single-minded focus on how much an economy grows, without regard to problems like inequality and environmental damage, are widely considered outdated. And the preferred cocktail for helping debt-ridden nations that was popular in the 1990s and early 2000s — austerity, privatization of government services and deregulation — has lost favor in many circles as punitive and often counterproductive.

There’s a lot to dislike about the above excerpts.

Starting with the article’s title, since it would be more accurate to say that the IMF’s bailout policies encourage fires.

Multiple fires.

Looking at the text, the part about “extreme inequality” is nonsensical, both because the IMF hasn’t done anything to “manage” the issue, other than to advocate for class-warfare taxes.

Moreover, there’s no support for the empty assertion that inequality is a “risk” to the world economy (sensible people point out that the real problem is poverty, not inequality).

Ms. Cohen also asserts that the “preferred cocktail” of  pro-market policies (known as the Washington Consensus) has “lost favor,” which certainly is accurate.

But she offers another empty – and inaccurate – assertion by writing that it was “counterproductive.”

Here are some additional excerpts.

The debate about the role of the I.M.F. was bubbling before the appointment of Ms. Georgieva… But she has embraced an expanded role for the agency. …she stepped up her predecessors’ attention to the widening inequality and made climate change a priority, calling for an end to all fossil fuel subsidies, for a tax on carbon and for significant investment in green technology. …Sustainable debt replaced austerity as the catchword. …The I.M.F. opposed the hard line taken by some Wall Street creditors in 2020 toward Argentina, emphasizing instead the need to protect “society’s most vulnerable” and to forgive debt that exceeds a country’s ability to repay.

The last thing the world needs is “an expanded role” for the IMF.

It’s especially troubling to read that the bureaucrats want dodgy governments to have more leeway to spend money (that’s the real meaning of “sustainable debt”).

And if the folks at the IMF are actually concerned about “society’s most vulnerable” in poorly run nations such as Argentina, they would be demanding that the country copy the very successful poverty-reducing policies in neighboring Chile.

Needless to say, that’s not what’s happening.

The article does acknowledge that not everyone is happy with the IMF’s statist agenda.

Some stakeholders…object to what’s perceived as a progressive tilt. …Ms. Georgieva’s activist climate agenda has…run afoul of Republicans in Congress… So has her advocacy for a minimum global corporate tax.

It would be nice, though, if Ms. Cohen had made the article more balanced by quoting some of the critics.

The bottom line, as I wrote last year, is that the world would be better off if the IMF was eliminated.

Simply stated, we don’t need an international bureaucracy that actually argues it’s okay to hurt the poor so long as the rich are hurt by a greater amount.

P.S. The political leadership of the IMF is hopelessly bad, as is the bureaucracy’s policy agenda. That being said, there are many good economists who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any impact on the decisions of the organization’s top bureaucrats.

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State and Local Governments Should Not Get a Bailout – either from Congress or the Federal Reserve

For years, public finance experts have been warning about fiscally irresponsibility by state and local governments.

Many of those governments have been spending too much money and making overly expensive promises to interest groups such as government employees. Combined with the fact that these jurisdictions are driving away taxpayers, this leaves them vulnerable to potential crisis if the economy falters.

Which, of course, is exactly what happened with the coronavirus.

As is so often the case, Washington responded in an imprudent manner. As part of multi-trillion dollar emergency legislation (the CARES Act), Congress directly funneled hundreds of billions of dollars to state and local governments.

That legislation also gave the nation’s central bank, the Federal Reserve, the authority to steer money to those same governments.

Notwithstanding all this generosity, state and local politicians are now asking for even more money. In part, this is a fight over the provisions of a potential new “stimulus” bill from Congress.

But it’s also a battle over the fate of the Federal Reserve’s ability to interfere with the allocation of capital by directing money to state and local governments.

In a report for the New York Times, Jeanna Smialek and Alan Rappeport explain what’s happening.

A political fight is brewing over whether to extend critical programs that the Federal Reserve rolled out to help keep credit flowing to…municipalities amid the pandemic-induced recession. …Those programs expire on Dec. 31, and it is unclear whether the Trump administration will agree to extend them. The Federal Reserve chair, Jerome H. Powell, and Treasury secretary, Steven Mnuchin, must together decide whether they will continue the programs — including one that buys state and local bonds, another purchasing corporate debt and another that makes loans to small and medium-size businesses. …Mnuchin…has signaled that he would favor ending the one that buys municipal bonds. And he is under growing pressure from Republicans to allow all five of the Treasury-backed programs to sunset. …The financial terms for buying state and local debt…are not generous enough to compete in a market functioning well… Their main purpose has been to reassure investors that the central bank is there as a last-ditch option if conditions worsen.

However, economic conditions have dramatically improved since the coronavirus first hit, so there’s no longer any argument that financial markets are dealing with crisis conditions.

But that doesn’t seem to matter to politicians who want to subsidize bad fiscal policy at the state and local level.

Some Democrats had begun eyeing the municipal program as a backup option in the event that state and local government relief proved hard to pass through Congress. While the program’s terms are unattractive now, they could in theory be sweetened under a Biden administration Treasury Department. …If a coronavirus vaccine is rolled out in the coming weeks, the Treasury Department may be less inclined to extend the programs. Mr. Trump could also block a reauthorization by pressuring Mr. Mnuchin, leaving Mr. Biden with fewer economic stimulus tools at his disposal. …state and local governments are facing budget shortfalls, albeit smaller ones than some had initially projected.

Nick Timiraos reports on the issue for the Wall Street Journal.

Divisions over their future are being amplified by partisan gridlock in Congress over whether to provide more economic stimulus. Democrats, looking ahead to President-elect Joe Biden’s inauguration in January, see the programs as a potential tool to deliver more aid if Congress doesn’t act, while some Republicans are worried about relying on central bank lending powers as a substitute for congressional spending decisions. …A decision not to renew the programs…could also deprive some…governments of access to low-cost credit if market conditions worsen. …If the Trump administration decides not to extend the programs, Mr. Biden’s Treasury Department could determine whether to reactivate them in some fashion after the new administration takes office Jan. 20.

The bottom line is that a Biden Administration likely will be able to give states and localities a bailout, even if Congress doesn’t approve a new “stimulus,” and even if the Trump Administration doesn’t extend the Federal Reserve’s authority. But at least the incoming Biden people would have to jump through a few hoops.

Which is very unfortunate since it will reward the jurisdictions that behaved recklessly. A classic example of “moral hazard.”

I’ll close with this critical bit of data from Chris Edwards. As you can see, state and local governments actually have profited from the coronavirus since they got far more money from the CARES Act than they lost because of diminished tax revenue.

P.S. For what it’s worth, the Federal Reserve has always had the ability to steer money to state and local governments, both as part of normal monetary policy operation and because of its vast emergency powers. The good news is that it has not gone down that path.

And the best way to make sure it doesn’t go down that path in the future is to eliminate or restrict such powers. Private markets, which reflect the preferences of consumers, should determine the allocation of capital. We don’t want to copy the mistakes of China and have government making those choices.

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Another Embrace of Dirigisme and Centralization by the European Union

In its early days, the European Union increased economic liberty since it largely existed as a free-trade pact for member nations.

Unfortunately, it has subsequently shifted to a more statist approach, with countries like France and Germany pushing for ever-increasing levels of harmonization, bureaucratization, and centralization.

Indeed, the E.U. has just taken a big step in the wrong direction. Notwithstanding very clear language in the Treaty on the Functioning of the European Union, politicians from member countries just approved a big bailout for some of the bloc’s most poorly governed nations.

The Washington Post, in a report by Michael Birnbaum, Quentin Ariès, and Loveday Morris, has the details of the redistribution plan.

European leaders on Tuesday morning agreed to a vast spending plan to rescue the economies of coronavirus-hit countries…The negotiations had been bogged down by the objections of a handful of rich, northern countries on the scope of the fund and the strings attached to it. But…they hammered out a compromise. …The final agreement earmarks $859 billion in loans and grants to largely be spent over the next four years. …The main disagreement between the leaders of a handful of self-dubbed “frugal” countries — the Netherlands, Sweden, Austria, Denmark and Finland — and their peers was about how much money to ship to hard-hit countries such as Italy and Spain and how much oversight donor countries ought to have over how the funds are spent. …The others didn’t, offering a vision that would be a small step closer to a federal European Union…some analysts dubbed it Europe’s “Hamiltonian moment” — a burst of centralization that would forever hand more power to Brussels. “It’s an upgrading of supranational institutions’ role and power. It’s really upgrading them in a very significant way,” said Rosa Balfour, the director of the Brussels office of the Carnegie Endowment for International Peace, a think tank. …Italy, Spain and Poland would be the biggest beneficiaries of the plan.

I can’t resist the observation that both the first sentence and the headline are examples of either explicit or implicit media bias. Fair and knowledgeable reporters would have added words such as “supposed” or “alleged” rather than naively accepting the spin from Brussels that a bailout would “rescue the economies” of recipient nations.

But let’s set that aside and focus on the policy problem, which is that the agreement expands the size and scope of government in countries that already are suffering from statist policies.

Even worse, the new pact means more power for Brussels, thus opening the door for much greater levels of European-wide redistribution.

Some call this Europe’s Hamiltonian moment, in reference to the deal to have the federal government in the United States assume the debts that states incurred during the Revolutionary War, but that’s nonsense. The new agreement is akin to the proposals to have Uncle Sam provide bailouts of poorly governed states such as California, New Jersey, and Illinois.

The Dutch took the lead in fighting the E.U.’s new scheme, but ultimately capitulated.

Dutch leaders and their allies said countries such as Italy and Spain are to blame for pre-pandemic economic difficulties that left them struggling to pay their way out of the current crisis. They said they do not want to send money to those countries if they have no guarantees of economic reform in return. The Netherlands wants “truly enforcing reforms in exchange for loans,” Dutch Prime Minister Mark Rutte said Monday. “And if loans still have to become subsidies, then these reforms must really be enforceable” by allowing E.U. leaders to have oversight, he said.

The Dutch made very sound arguments. The E.U. scheme will reward nations with bad policy.

Here’s a look at the average level of economic liberty for the countries that resisted the bailout compared to the average for the three nations that will get the biggest shares of bailout money.

For what it’s worth, it’s a mistake to provide bailouts, especially if there are no strings attached to force recipients to fix bad policies.

But an ever-bigger problem, as noted in the excerpt above, is that the agreement could set the stage for a “burst of centralization that would forever hand more power to Brussels.”

P.S. British voters were very wise to approve “Brexit” so they won’t have to pay for this foolish scheme.

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No Bailout for California

I’ve already written that state governments shouldn’t get a bailout from Washington.

Today, let’s specifically focus on California, a beautiful state that – as explained in this video – is being ruined by an even-worse-than-average collection of politicians.

This video was produced in 2018, so it goes without saying that California is in even worse shape today, in part because of a coronavirus-caused economic downturn.

But the Golden State also is in trouble because the politicians in Sacramento have been spending like drunken sailors (with apologies to drunken sailors for that unfair comparison).

That’s only part of the problem. California also imposes onerous taxes, an approach that is causing a steady exodus of households and business to states with better policy.

And when you consider other policies, the net result is that the Golden State is ranked only #48 out of 50 for overall economic freedom.

Should this bad track record be rewarded?

Writing yesterday in the Wall Street Journal, Gerald Parsky is willing to give a bailout if strings are attached.

California is facing a $54 billion budget deficit… To help address the shortfall, Gov. Gavin Newsom wants billions of federal dollars. Not so fast. Any bailout should come with strings attached. Washington should tie assistance to tax reform… California’s finances are too dependent on the personal income tax, which is the most volatile form of taxation. California’s revenues from personal income taxes amount to about 67% of all state revenues (up from 11% in 1950). Moreover, less than 1% of taxpayers contribute more than 50% of the tax revenue. The result is that when the economy softens and people earn less—or move out of the state—tax revenue plunges. …A survey of California residents showed that 53% of them are considering leaving.

Here’s Mr. Parsky’s specific proposal.

…these developments underscore the need for dramatic tax reform. …the California Legislature created a bipartisan commission, which I chaired… The commission recommended that California reduce its dependence on the personal income tax by…dropping the top rate from 9.3% to 6.5% and reducing or eliminating many deductions. The commission also recommended eliminating the corporate and sales-and-use taxes, replacing them with a broad new “business net receipts tax.” …A few years later, Gov. Jerry Brown and state policy makers did the opposite…they put forward a statewide initiative that raised the top marginal rate to 13.3%, thus making state revenues even more dependent on a volatile tax and California’s income-tax rate the highest in the nation. …there is an opportunity for the Trump administration to link any federal assistance to an overhaul of the way California taxes its residents.

For all intents and purposes, the author wants to extort California into adopting better (or less-worse) tax policy.

And if Trump (being a big spender) decided to bail out the states, it would be good to attach requirements so that there would be a silver lining to that dark cloud.

But here’s a better approach: Tell the politicians in Sacramento that they caused the mess and it’s their responsibility to fix it. Taxpayers elsewhere in America shouldn’t have to cough up cash to keep California from committing suicide.

Especially since it would simply be a matter of time before the Golden State’s politicians reneged on the deal and re-imposed class-warfare tax policy.

The bottom line, as illustrated by this cartoon from Michael Ramirez, is that California is on a downward trajectory and I don’t see any feasible way of reversing the trend.

P.S. Ramirez has a comfortable lead (as of today) in the best-political-cartoonist contest.

P.P.S. Paul Krugman attacked me a few years ago for being pessimistic about California. He was wrong then and he’s even more wrong today.

P.P.P.S. Some leftists in California have advocated for secession. I wonder if they still have that view.

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Shut Down the International Monetary Fund

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

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

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

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

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

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

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

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

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

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

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

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

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

And new reasons to expand.

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

Steve is right.

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

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

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

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

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

Are any of these nations economic success stories?

Hardly.

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

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

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

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

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

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Using Coronavirus as an Excuse for More E.U. Centralization and Redistribution

I wrote earlier this month about coronavirus becoming an excuse for more bad public policy.

American politicians certainly have been pushing all sorts of proposals for bigger government, showing that they have embraced the notion that you don’t want to let a “crisis go to waste.”

But nothing that’s happening in the United States is as monumentally misguided as the effort to create a new method of centralized redistribution in the European Union.

Kai Weiss of the Vienna-based Austrian Economic Center explains what is happening in a column for CapX.

…‘never let a good crisis go to waste’ seems to have become the mantra of both the European Commission a number of national leaders. The coronavirus has become a justification for…‘more Europe’ (which tends to actually mean more EU, to the detriment of Europe). The clearest sign of this renewed Euro-fervour is the plan cooked up by Angela Merkel and Emmanuel Macron earlier this week… Seasoned Brussels observers will be shocked to learn that their proposals have very little to do with the pandemic, and everything to do with deepening the centralisation of EU power and top-down policymaking. While Germany has traditionally…opposed the idea of eurobonds or similar debt collectivisation instruments, it is now advocating for precisely those policies. A €500 billion Recovery Fund… the initial plan is for the European Commission to raise the money on the financial markets. It would subsequently be paid back by the member states and through increased “own resources” – i.e., new taxes levied directly by Brussels… The good news is that none of these policy proposals are yet set in stone. There are some big legal questions, particularly on the Recovery Fund, and national parliaments would need to agree to this expansion of Brussels’ writ. Already countries like the Netherlands, Austria, Denmark, and Sweden have voiced criticism… But for all these obstacles, the direction of travel looks alarmingly clear. The consensus among the EU’s power brokers, as with pretty much any major world event, is that the answer is ‘more Europe’. ..For Macron  Merkel and their allies, this is far too good a crisis to pass up.

A story in the New York Times has additional details, including a discussion of potential obstacles.

Ms. Merkel this week agreed to break with two longstanding taboos in German policy. Along with the French president, Emmanuel Macron, Ms. Merkel proposed a 500 billion euro fund… It would allow the transfer of funds from richer countries… And it would do so with money borrowed collectively by the European Union as a whole. …Whatever emerges from the European Commission will be followed by tough negotiations… Chancellor Sebastian Kurz of Austria has raised objections to the idea of grants rather than loans, saying that he has been in contact with the leaders of Sweden, the Netherlands and Denmark. “Our position remains unchanged,’’ he said. …opposition may also come from member states in Central and Eastern Europe. …Those countries are going to be reluctant…to see so much European aid — for which they will in the end have to help pay — skewed to southern countries that are richer than they are. …in northern countries, moves for collective debt to bail out poorer southern countries may feed far-right, anti-European populists like the Alternative for Germany or the Sweden Democrats. They are angry at the idea of subsidizing southerners who, they believe, work less hard and retire much earlier.

What’s depressing about this report is that it appears the battle will revolve around whether the €500 billion will be distributed as grants or loans.

The real fight should be whether there should be any expansion of intra-E.U. redistribution.

For what it’s worth, Germany used to oppose such ideas, especially if funded by borrowing. But Angela Merkel has decided to throw German taxpayers under the bus.

Let’s close with some analysis from Matthew Lynn of the Spectator.

Die-hard European Union federalists have plotted for it for years. …The Greeks and Italians have pleaded for it. And French presidents have made no end of grand speeches, full of references to solidarity and common visions, proposing it. The Germans have finally relented and agreed, at least in part, to share debt within the EU and the euro-zone, and bail-out the weaker members of the club. …The money will be borrowed, based on income from the EU’s future budgets, but it will in effect be guaranteed by the member states, based on the EU’s ‘capital key’. …the rescue plan is completely unfair on all the EU countries outside the euro-zone. …why should they pay for it? Poland…will still be expected to pay in five per cent (or 25bn euros (£22bn)) to bail-out of far richer Italy (Polish GDP per capital is $15,000 (£12,000) compared with $34,000 (£27,000) for Italy).

Pro-centralization politicians are claiming this fund is needed to deal with the consequences of the coronavirus, but that’s largely a smokescreen. It will take many months for this proposal to get up and running – assuming, of course, that Merkel and Macron succeed in bullying nations such as Austria and the Netherlands into submission.

By that time, even the worst-hit countries already will have absorbed temporary health-related costs.

The bottom line is that this initiative is really about the long-held desire by the left to turn the E.U. into a transfer union.

The immediate losers will be taxpayers in Germany, as well as those in Austria, Sweden, the Netherlands, Finland, and a few other nations.

But all of Europe will suffer in the long run because of an increase in the continent’s overall fiscal burden.

And keep in mind that this is just the camel’s nose under the tent. It’s just a matter of time before this supposedly limited step becomes a template for further expansions in the size and scope of government.

Yet another reason why E.U. membership is increasingly an anchor for nations that want more prosperity.

P.S. As suggested by Mr. Lynn’s column, countries in Eastern Europe should fight this scheme. After all, these countries are relatively poor (a legacy of communist enslavement) and presumably don’t want to subsidize their better-off cousins in places like Spain and Italy. But that argument also implies that they should have resisted the Greek bailout about ten years ago, yet they didn’t. Sadly, Eastern European governments acquiesce to bad ideas because their politicians are bribed with “structural adjustment funds” from the European Union.

P.P.S. The luckiest Europeans are the British. They wisely opted for Brexit so they presumably won’t be on the hook for this costly new type of E.U.-wide redistribution (indeed, my main argument for Brexit, which now appears very prescient, was that the E.U. would morph into a transfer union).

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Coronavirus and the States: Spending Restraint, Bailouts, Default, or Bankruptcy?

A Supreme Court Justice pointed out in 1932 that “a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Well, we’ve had several experiments in higher taxes and higher spending, and they don’t work.

States with heavier fiscal burdens are accumulating ever-higher levels of debt (especially unfunded liabilities) while also causing an ever-greater exodus of taxpayers to other states.

In the long run, this is a recipe for fiscal crisis since it’s hard to give away lots of money if there aren’t enough taxpayers to finance that profligacy (as illustrated by this set of cartoons).

Well, with the help of the coronavirus, the long run may have arrived.

But the pandemic only exposed a problem that already existed.

Mitch Daniels, the former governor of Indiana, wrote two years ago in the Washington Post that poorly manged states like Connecticut shouldn’t be bailed out by taxpayers in better-run states.

…several of today’s 50 states have descended into unmanageable public indebtedness. …in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen. Each profligate state is facing its own budgetary perdition for different reasons, but most share common factors. The explosion of Medicaid spending, even before Obamacare, has devoured state funds… In parallel, public pensions of sometimes grotesque levels guarantee that the fiscal strangulation will soon get much worse. In California, some retired lifeguards are receiving more than $90,000 per year. A retired university president in Oregon received $76,000 per month — and no, that’s not a typo. These are the modern-day welfare queens… More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them.

In a remarkably prescient passage, Daniels speculates about a future emergency that will lead to pressure for a federal bailout.

Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece and maybe a larger, “too big to fail” partner such as Illinois as Italy. Adding up the number of federal legislators from the 15 or 20 fiscally weakest states, one can count something close to half the votes in the House.

Which brings us to the current situation.

The crowd in Washington has already funneled several hundred billion dollars to state and local governments.

But politicians like Governor Cuomo in New York and Governor Pritzker in Illinois view all that money as an appetizer and now they want the fiscal equivalent of an all-you-can-eat buffet.

The editors of the Wall Street Journal are not sympathetic to these fiscal pyromaniacs.

The question to ask is why taxpayers in Appleton and Sarasota should rescue politicians and unions in Albany and Springfield? …states like New York were already in trouble from their own mismanagement. …take Illinois, where Gov. J.B. Pritzker…raised taxes in 2019 and wants to make the state’s current flat tax progressive… Yet he and the unions who own the state house have blocked pension or spending reforms. They’ve long bet on a federal bailout, and they see Covid-19 as their main chance. …President Trump has signaled he’s open to a state bailout because, well, he’s open to anything these days. But Senate Majority Leader Mitch McConnell caused a stir…when he said states should consider bankruptcy rather than get a bailout. …Mr. McConnell’s larger point is that states shouldn’t get more no-strings cash. Private companies that borrow from the Fed and Treasury have to meet stiff conditions, including limits on compensation, and the same should apply to state governments. Bailout conditions should include cuts in nonessential spending, immediate and permanent reductions in public pension benefits.

Kevin Williamson explains in National Review that the problem is a pre-existing penchant for over-spending and vote-buying.

Bailing out the Illinois state pension system is the worst idea from a week in which we were discussing the health benefits of mainlining Lysol. Irresponsible state and local governments are attempting to exploit the fear and disruption of the coronavirus epidemic to push off the consequences of their decades of reckless and culpably dishonest policies onto the federal government. … One of the largest problems facing state and local governments, from Illinois to Oklahoma and from Los Angeles to Dallas, is “unfunded liabilities,” meaning the differences between the promises governments have made to their employees and the money they have set aside to pay for those things. …Government workers are a powerful political constituency — they run California — and they want the same thing everybody else does: more. …If Washington were to dump a few billion dollars into the lap of the feckless cartwheeling goobers who run Illinois, the underlying problem of chronic underfunding of future pension liabilities would remain, and Illinois would be right back where it is today in a year or two. A bailout would not solve the problem — it would keep the problem from being solved.

Adam Michel of the Heritage Foundation explains how bailouts create the wrong incentives.

The prospect of federal tax dollars creates an incentive for state legislatures to both expand existing programs beyond sustainable levels, and to simultaneously underfund those programs in hopes of further federal support. …One example is how states often delay needed infrastructure projects (for which funds are locally available) in hopes of one day receiving federal funds to cover the project costs. …An unrestricted bailout of the states could be highly unequal, forcing taxpayers in well-run states to subsidize those who have systematically underfunded their pensions and rainy day funds, or those states who have particularly volatile revenue systems. …Federal aid tends to expand state budgets and make them less resilient during future crises. Simply moving state funding to the federal government does little more than redistribute local costs to federal taxpayers across all 50 states.

Senator Rick Scott of Florida opines for the Wall Street Journal that taxpayers in his state shouldn’t pick up the tab for New York’s profligate politicians.

…one thing we absolutely shouldn’t do is shield states from the consequences of their own bad budgetary decisions over the past few decades. …Democrats’ true aim: using federal taxpayer dollars to bail out poorly run states—typically, states controlled by Democrats. …Florida is well-positioned to address the coming shortfall in revenue without a bailout. The state may need to make some choices, which is what grown-ups do in tough economic times. And if we need to borrow a small amount in the short term to get us through this economic crisis, that borrowing will be cheaper thanks to our AAA bond rating and the reduction in state debt. New York Gov. Andrew Cuomo said it was “irresponsible” and “reckless” not to bail out states like his, a state with two million fewer people than Florida and a budget almost double the size of ours.

Well stated. Any comparison of Florida and New York shows the benefit of limited government.

Jonathan Williams and Lee Schalk of the American Legislative Exchange Council, opining for the Hill, argue against a bailout.

A growing chorus of governors is calling on Congress to “bail out” state governments. …Their plea comes on the heels of the $2 trillion CARES Act, which included a general $150 billion COVID-19 relief fund, a $30 billion education costs fund, a $45 billion disaster relief fund and more for state and local governments. …History suggests that federal bailouts…incentivize future fiscal irresponsibility and create a moral hazard problem. Bailouts reward fiscally reckless states at the expense of fiscally responsible ones. Academic research from the Mercatus Center at George Mason University shows that federal bailouts could even lead to higher state level taxes. According to their research, every dollar of federal aid to states drives state taxes higher by 33 to 42 cents. …State and local governments do not lack revenue. They lack spending restraint. Over the past 40 years, after fully accounting for increases in population and inflation, state and local direct general spending has grown by 88 percent.

The last sentence in the excerpt is key. State politicians have been violating fiscal policy’s Golden Rule by letting spending grow too fast.

What’s needed is TABOR-style spending restraint, as Williams pointed out in a 2015 speech.

So if a bailout is the wrong solution, what’s the right solution? There are three potential options.

Ramesh Ponnuru writes that states should have a process for declaring bankruptcy.

Some states have made exorbitant promises to their employees over the years without providing adequate funding. They made up the difference, on paper, by projecting unrealistically high returns on pension investments. The Federal Reserve, applying a better projection of returns, estimates that pensions are underfunded by $4 trillion. McConnell is right to think that it would be unfair to make Florida’s teachers and firefighters pay for benefits for their counterparts in Illinois, and unwise to create an incentive for further irresponsibility by state officials. …Federal law currently makes no provision for states to re-organize their commitments through bankruptcy proceedings. Creating one would not keep the coronavirus from crushing state budgets. It could, however, prevent, or at least limit, future federal bailouts for state mismanagement of pensions.

His colleague at National Review, Kevin Williamson, has a different perspective. His article argues that default is better than a Washington-dictated process for bankruptcy.

The several states are not administrative subdivisions of the federal government. They are powers in their own right, superseded by the U.S. government only in certain matters that involve more than one state: Washington can declare war or write immigration law, but it cannot tell Austin how to run the Texas Rangers or Sacramento how to prioritize its finances. Because bankruptcy law is federal law, putting states into bankruptcy reorganization would upend our basic constitutional arrangement, making state governments answerable to federal bankruptcy judges and, behind them, to Congress. …Sovereigns don’t go bankrupt. Sovereigns default. And that is what is likely to happen with the pension crisis, at least as far as states’ creditors are concerned. It is what should happen. …we should not use the coronavirus as an excuse to federalize the consequences of culpably irresponsible and fundamentally dishonest governance at the state and local level. …If we want debt markets to work, then investors have to pay the price for bad investments. (Lending money to an organization run by Bill de Blasio is a bad decision.) Making creditors take a painful haircut creates incentives to discourage such willy-nilly lending and profligate spending in the future. …Government debt should in this respect be treated like any other debt — and we should change the law to strip municipal bonds of their tax-free status, which creates a subsidy for debt.

And Andrew Biggs of the American Enterprise Institute argues in the Wall Street Journal that – if a bailout is offered – it should be accompanied by strict conditions.

Congress may want to offer assistance, but it should come with strict conditions: Any state looking for a pension handout must either live by the stricter accounting rules federal law imposes on private pension plans or freeze its pension and shift all employees to defined-contribution retirement plans. Private-sector plans must assume more-conservative investment returns than public-sector plans and address unfunded liabilities more rapidly. As a result, private pensions today have set aside more than twice as much funding per dollar of promised future benefits than have state and local pensions. …Freezing a pension doesn’t make its unfunded liabilities go away. But it caps existing liabilities while shifting employees to plans in which the government’s funding obligation is clearly defined and can’t be evaded using actuarial or accounting tricks.

Of these options, a conditional bailout is not a good idea, even though it is the best way of doing the wrong thing.

Either bankruptcy or default would be a much better choice, and I lean in the direction of default (the same view I have when contemplating Europe’s failing welfare states).

But the right option is to avoid getting in trouble in the first place.

And that means low taxes, spending restraint, and other market-friendly policies.

I’ll simply note that the states most anxious for bailouts are near the bottom in rankings of small government and economic liberty.

If Washington provides a bailout, that’s a reward for statism and irresponsibility (sort of like foreign aid subsidizing bad policy overseas).

P.S. One month ago, I wrote that the worst coronavirus-related proposal would be restoring the federal tax deduction for state and local tax payments.

I still think that is a terrible idea, of course, but a big bailout from Washington would be even worse.

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Coronavirus and the Risky Mix of Bailouts, Big Business, and Big Government

Since government officials have imposed severe restrictions on economic activity, I’m sympathetic to the notion that businesses should be compensated.

But, as I warn in this CNBC interview, I have major concerns about big government and big business getting in bed together.

As is so often the case with interviews on live TV, there are many issues that didn’t get appropriate attention (either because there was too little time or because I failed to address a key point).

• A major risk of bailouts is that politicians will insist on having a say in how companies operate. Indeed, that’s what Christian Weller was calling for in the final part of the interview. I should have pointed out the huge economic downside of having government in the boardroom.
• There’s a rationale for short-run emergency legislation, but we should be very concerned that self-interested politicians and power-hungry bureaucracies will use the coronavirus crisis as an excuse to permanently expand their power and control over the economy’s productive sector.

P.S. I usually try to avoid making predictions (economists are lousy forecasters), but I feel confident in asserting that my friends on the left – once the coronavirus crisis has ended – will be complaining about big businesses having too much power.

I’m not against large companies, per se. But I don’t want bigger firms to gain an advantage over small companies by getting in bed with government.

If we want fair and honest competition, we need separation of business and state. No bailouts, no cronyism, no subsidies, and no favoritism.

That’s the part folks on the left don’t understand.

P.S. If you want more information on the economic damage caused by bailouts, watch this video and this video.

P.P.S. Speaking of videos, here’s some satire about the toys that politicians get for their children.

P.P.P.S. I wish this was satire, but American taxpayers are helping to underwrite cronyism in other countries.

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Protecting Airlines and Other Companies from Government Control

Most economic downturns are caused by misguided government policy, which leads to predictable battles over how to address the fallout as well as battles over how to avoid the same mistakes in the future.

Today’s crisis is different. It’s more akin to a natural disaster. But it’s not a one-off event like a big hurricane or earthquake. It’s an ongoing pandemic, which is having a terrible impact on many sectors of the economy. And if it lasts a long time, the consequences will be catastrophic depression rather than ordinary recession (which is why it is reasonable to contemplate the economic and health tradeoffs of re-opening the economy).

To deal with the immediate consequences of this crisis, Washington has responded by approving a mutli-trillion dollar relief package. And I won’t be surprised if politicians come back with another huge package.

Since responding to a pandemic is a legitimate function of government, I don’t have a principled objection to emergency legislation (for wonky readers, there’s an interesting debate in libertarian circles about whether government assistance – even bailouts – can be justified because government has ordered a shutdown of economic activity, which can be viewed as a “regulatory taking“).

That being said, I worry that self-interested politicians will use the crisis as an excuse to shovel goodies to their friends and cronies.

And I also want to minimize the danger that politicians will use the crisis as a reason to permanently expand the size and scope of government.

I’ve already written about how the crowd in Washington is exploiting the crisis with regards to three different issues.

• Paid sick leave
• Stock buybacks
• State and local tax loophole

Today, let’s consider a potential downside of providing assistance to companies. We’ll focus on airlines, but the lessons apply to any businesses that get government assistance.

A Bloomberg report explains why this issue, in general, is controversial.

…the administration may consider asking for an equity stake in corporations that want coronavirus aid from taxpayers. …Against that, there’s the potential for political risk. During the financial crisis, some Republicans decried a tilt toward European-style socialism. The current crisis coincides with the — albeit fading — candidacy of Bernie Sanders, and his democratic socialist platform. …“This is a very big slippery slope because the ownership of private capital by government is not traditionally consistent with capitalism,” said Kevin Caron, portfolio manager for Washington Crossing.

The Wall Street Journal‘s editorial on this issue focuses on the airline industry and makes some very important points.

America’s beleaguered passenger airlines are allocated roughly $50 billion in the coronavirus relief bill… The idea is simply to freeze the staff list for six months, at which point the pandemic might have receded and air travel recovered. In exchange, Congress has authorized the Treasury Secretary, at his sole discretion, to “receive warrants, options, preferred stock, debt securities, notes, or other financial instruments” that constitute “appropriate compensation to the Federal Government.” …The desire to get something for the taxpayer’s buck is understandable, but there’s a real risk here of a long-term nationalization. …Washington should have no role in directing the business of a private company, and Treasury Secretary Steven Mnuchin perhaps would agree. What if his successor turns out to be Treasury Secretary Elizabeth Warren? …Helping the airlines weather a 100-year pandemic might be, arguably, within the government’s job description. Owning them isn’t.

The bad news is that are no good options.

It’s not a good idea to simply give taxpayer money to airlines. And it’s also not a good outcome for airlines to go bankrupt, perhaps leading to a total shutdown rather than a reorganization.

Some outcomes, however, are worse than others. And having government as a major shareholder is the option with the greatest long-run risk. Simply stated, it’s a recipe for cronyism and industrial policy.

Based on what’s already happened on issues such as energy and trade, I don’t trust President Trump and his team to have a hands-off attitude. What will happen, as we approach the November election, if the White House thinks it can win a key state by forcing a company (either an airline or any other affected firm) to increase jobs and/or pay?

Or, if you happen to trust Trump, what happens if Joe Biden wins in November and – as the Wall Street Journal warned – a dogmatic interventionist like Elizabeth Warren becomes Treasury Secretary.

She already has a very bad track record on issues of corporate governance. Do you want her to have the power that comes with being a major shareholder?

For all intents and purposes, this is why I unveiled the Fifth Theorem of Government last September.

I’ll close with some troubling observations about where we may be heading.

1. The technical definition of fascism (at least with regards to its economic policy) is nominal private ownership of business but government control.
2. The technical definition of socialism is outright government ownership and control of business (along with other policies such as central planning and price controls).

Which raises the depressing issue of how much government ownership is required to get to #1 and how much additional government ownership is required to get to #2.

Could it be that Bernie Sanders may be the real winner, regardless of who is in the White House next year?

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European Fiscal Crisis, Round 2?

I’m not an optimist about Europe’s economic future.

Most nations have excessive welfare states and punitive taxes, which is hardly good news. You then have to consider demographic trends such as aging populations (i.e., more people relying on government) and falling birthrates (i.e., fewer future taxpayers).

That’s a very grim combination.

Indeed, this is a big reason why I favored Brexit. Yes, it was largely about escaping an increasingly dirigiste European bureaucracy in Brussels, but it was also about not being chained to a continent with a dismal long-run outlook.

More than one year ago, before there were any concerns about a coronavirus-instigated economic crisis, Vijay Victor, an economist from Szent Istvan University in Hungary, expressed concern about Europe’s fiscal future in a column for the Foundation for Economic Education.

The debt crisis in the Eurozone is getting no better, even in the wake of the new year. The five countries in the Eurozone with the highest debt-to-GDP ratio in the third quarter of 2018 were Greece, Italy, Portugal, Belgium, and Spain. The total debt of Greece is around 182.2 percent of its GDP and that of Italy is 133 percent… Dawdling economic growth coupled with low-yield investment options are dragging these indebted economies toward insolvency… Unemployment rates, for example, are still very high in most of these highly indebted European economies. Despite the recurrent monetary assistance and policy support, job creation is weak, which might imply that the debt financing is channelized in a nonproductive direction.

By the way, I can’t resist taking this opportunity to remind people that debt is a problem, but it also should be viewed as a symptom of en even-bigger problem, which is an excessive burden of government spending.

A bloated welfare state is a drag on economic performance, whether it’s financed by borrowing or taxes.

Though nations that try to finance big government with red ink eventually spend their way into crisis (as defined by potential default).

And we may be reaching that point.

Desmond Lachman of the American Enterprise has authored a very grim assessment, focusing primarily on Italy, for the National Interest.

Today, with Italy at the epicenter of the world coronavirus epidemic, it would seem to be only a matter of time before the durability of the Euro is again tested by another full-blown Italian sovereign debt crisis. …even before the coronavirus epidemic struck its economy was weak while its public finances and banking system were in a state of poor health. After having experienced virtually no economic growth over the past decade, the Italian economy again entered into a recession by end-2019. At the same time, at 135 percent its public debt to GDP ratio was higher than it was in 2012 while its banks’ balance sheets remained clogged with non-performing loans and Italian government bonds. …the coronavirus epidemic will seriously damage both Italy’s public finances and its banking system…by throwing the country into its deepest economic recession in the post-war period. That in turn is bound to cause Italy’s budget deficit to balloon and its banking system’s non-performing loans to skyrocket as more of its households and companies file for bankruptcy. …all too likely that the Italian economy will shrink by at least 10 percent in 2020.

All this matters because the people and institutions that purchase government debt may decide that Italy’s outlook is so grim that they will be very reluctant to buy the country’s bonds (i.e., they’ll be very hesitant about lending money to the Italian government because of a concern that they won’t get paid back).

This means that the Italian government will have to pay much higher interest rates in order to compensate lenders for the risk of a potential default.

So what are the implications? Will Italy default, or will there be some sort of bailout?

If the latter, Lachman predicts it will be huge.

One way to gauge the amount of public money that might be needed to prop up Italy is to consider that over the past decade it took around US$300 billion in official support to keep Greece in the Euro. Given that the Italian economy is around ten times the size of that of Greece, this would suggest that Italy might very well need around $3 trillion in official support to keep Italy in the Euro. …Meanwhile, Italy’s US$4 trillion banking system could very well need at least US$1 trillion in official support to counter the capital flight and the spike in non-performing loans that are all too likely to occur in the event of a deep Italian recession.

For what it’s worth, Lachman thinks a bailout would be desirable.

I disagree. Default is a better choice because it will discipline the Italian government (it would mean an overnight balanced budget requirement since nobody will lend money to the government) and also discipline foolish lenders who thought Italian politicians were a good bet.

Simply stated, we should minimize moral hazard.

I also think it’s worth noting that Italy isn’t the only government at risk of fiscal crisis. Here’s the OECD data for major nations, including a few non-European examples.

Japan wins the prize for the most red ink, though this doesn’t mean Japan is most vulnerable to a default, at least in the short run.

A fiscal crisis is driven by investor sentiment (i.e., when will people and institutions decide they no longer trust a government to pay back loans). And that depends on a range of factors, including trust.

The bottom line is that investors trust the Japanese government and they don’t trust the Italian government.

That being said, I think all of the PIGS (Portugal, Italy, Greece, and Spain) are very vulnerable.

And politicians in Ireland, Belgium, and France should be nervous as well.

I’ll close by sharing some calculations, based on the aforementioned OECD data, showing which nations used last decade’s economic recovery to improve their balance sheets.

Congratulations to Germany and Switzerland for fiscal responsibility, and mild applause for the Netherlands and Sweden.

I’ve highlighted (in red) the nations that were most reckless.

Though keep in mind that you want to look at both the trend for debt (far-right column) and the existing level of debt (the next-to-far-right column). So I’m not overly worried about Australia. Debt is still comparatively low, even though it almost doubled last decade.

But all of the PIGS are in trouble.

So if economic conditions deteriorate in Europe, the fallout could be significant.

P.S. The United Kingdom, like Japan, benefits from a high level of trust – presumably in part because the country paid off enormous debts from the Napoleonic wars and World War II. That being said, the numbers for the U.K. are worrisome, which hopefully will lead to a renewed commitment to spending restraint by Boris Johnson’s government.

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The TARP Bailout Was the Wrong Response to a Government-Caused Meltdown

Ten days ago, I shared an interview in which I pointed out that President George W. Bush acquiesced to a flawed narrative about the 2008 financial crisis.

Bush and his team basically accepted the assertion of interventionists that it was the fault of “Wall Street greed,” when the crisis actually was caused by bad monetary policy from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac.

(For what it’s worth, I don’t disagree that folks on Wall Street were greedy, but they were also greedy in the 1990s, 1980s, and other decades. The crisis was caused because foolish government policies made bad decisions profitable in the 2000s.)

The reason I’m raising this issue is because the Washington Post editorialized this morning in favor of the TARP bailout.

…support for TARP should be considered a basic demonstration of political maturity and pragmatism… Some relevant historical context: The outgoing Bush administration and the Democrats who controlled both houses of Congress had few good options for dealing with a once-in-a-century global financial collapse. As experts from the Federal Reserve and Treasury Department told the politicians, however, one sure way to turn the worst recession since the Great Depression into, well, another Great Depression, would have been to let the banking sector collapse and take millions of American households down with it. …TARP…was actually a major policy success.

Nope, that’s not true.

Tim Carney of the Washington Examiner wisely wrote about this issue a couple of years ago.

Under the guise of saving the U.S. economy, a bipartisan gang of powerful men decided to save a few failed or faltering banks. They posited a false dichotomy between “doing nothing” about the credit crisis rollicking markets, and saving the big banks. …The stated reasons for government intervention were…to prevent a disorderly fire sale of financial assets, which could cause a total market collapse… There are ways that government can do that without making it a point to save the banks. Bankruptcy often involves winding down failed firms in a manner that minimizes the losses taken by creditors and counterparties. It can be structured so as to prevent a disorderly liquidation.

Amen.

Tim hit the nail on the head when he pointed out that it wasn’t a TARP-or-nothing choice.

Lawmakers could have recapitalized the financial system using the “FDIC-resolution” approach, which basically means putting bankrupt financial institutions into receivership.

Depositors and investors are protected with this approach, even if it means taxpayers are picking up the tab.

What really matters, though, it that the poorly run institutions get shut down. The senior executives lose their jobs, and shareholders and bondholders are subject to losses. Which is exactly what should happen. After all, capitalism without bankruptcy is like religion without hell.

So why didn’t lawmakers adopt the FDIC-resolution approach?

They don’t have ignorance as an excuse. I spent a lot of time talking to policy makers at the time, both in the Bush Administration and on Capitol Hill. I begged and pleaded for them to reject a bailout and instead go with FDIC-resolution.

Sadly, I was ignored, and I think the reason was corruption. Tim elaborated on this hypothesis in his column.

You could call it cronyism if you want. After all, Ben Bernanke and Tim Geithner have both cashed out to financial institutions. Barack Obama fundraiser Warren Buffett made billions off his investment in Goldman Sachs based on his informed assumption the taxpayers would bail Goldman out. …Geithner and crew could have reduced the moral hazard and moral outrage of TARP had they wound down Citigroup. But Geithner wanted Citigroup to keep existing. It was pinstripe protectionism. …At nearly every turn, the bailout barons acted mostly to save the failed or wounded banks rather than to focus narrowly on preserving economic stability. …An economic system where the big guys are never allowed to fail precisely because they are big is not a just system. When you look at the revolving door actions of these guys—Rubin, Geithner, Bernanke, Orszag, and all the others—the unfairness is more obvious.

Kevin Williamson also wrote about how corruption was the dominant factor.

The bottom line is that narratives are important. Unfortunately, too many people accept the establishment’s flawed narrative about TARP – and plenty of Republicans have aided and abetted this false view.

The right lesson is that bailouts are bad economic policy and immoral as well.

P.S. I wrote about this issue for USA Today in both 2010 and 2012.

P.P.S. The only silver lining to the dark cloud of TARP (and the related European fiscal crisis) is that we got this humorous glossary.

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The Trump-Obama Approach on Fannie Mae and Freddie Mac Will Lead to Future Financial Instability

The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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The Predictably Perverse Impact of Greek Bailouts

There are many reasons to oppose the various bailouts of the Greek government. Here are my two main reasons.

1. I don’t like rewarding investors who make imprudent decisions, and it really galls me to bail out the (mostly) rich people who bought Greek bonds.
2. I don’t like rewarding politicians who make imprudent decisions, and it really galls me since bailouts encourage additional imprudent behavior.

Let’s focus today on the second point.

Here’s Greece’s score for the “Size of Government” component from Economic Freedom of the World. As you can see, bailouts have actually subsidized a decline in fiscal responsibility.

And it’s worth pointing out that Greek politicians have been doing a bad job in other areas.

The burden of red tape has been, and remains, stifling.

Greece ranks at the top in difficulty in setting up and running a business among 75 countries, according to the Global Business Complexity Index for 2019. The difficulty in starting an enterprise in Greece is mainly due to a labyrinth bureaucracy, frequent changes in legislation, differences in taxation and VAT rates in regions and unpredictable treatment of businesses by authorities. Indonesia, Brazil, the United Arab Emirates, Bolivia, and Slovakia follow Greece in the first six places. The easiest state to start and run a business is in the Cayman Islands.

Here are the rankings. Keep in mind that “01” is the worst score and “76” is the best score (kudos to the Cayman Islands for being the most entrepreneur-friendly).

Interestingly, voters ousted a left-wing government earlier this year.

And Bloomberg reports that Greece’s new right-of-center government intends to reduce the burden of government.

Mitsotakis presented his four-year economic agenda in his first plenary speech to parliament since winning national elections on July 7. …The premier’s priority is a reform of Greece’s complex tax system to create a more pro-business environment, necessary for attracting investment to boost the economy’s recovery. Mitsotakis wants to make good on election pledges to alleviate the tax burden for crisis-weary Greeks, specifically for the middle classes who were targeted the most by the previous administration. …Mitsotakis said he will introduce legislation…to reduce the so-called Enfia property tax by as much as 30%, according to the value of properties. …The government plans to reduce the corporate tax rate to 20% in two phases. The first step, in September, will cut the rate to 24% from 28% in 2019 and to 20% in 2020. The tax on dividend payments will be slashed by half to 5%… Also planned is the privatization of Hellenic Petroleum SA and the sale of a 30% stake in Athens Airport.

Indeed, a columnist for the New York Times frets that the new government is hard right.

New Democracy…seems to be a right-wing party… And Mr. Mitsotakis, who promised to unite the country, is following divisive and polarizing policies. …You don’t have to search far for evidence. …Three crucial regulatory agencies — protecting the country’s finances, work force and environment — have been effectively dissolved as part of a bill, recently passed by Parliament, to restructure government. …Domna Michailidou, the vice minister of labor, personifies the cabinet’s ideological agenda. In 2017, she openly praised cuts in wages as “necessary” for the sake of competitiveness. …Greece finished its third and last bailout program last August, but remains shellshocked after nearly a decade of austerity. Official unemployment is at 18 percent; youth unemployment scores a staggering 40 percent. …None of New Democracy’s vaunted policies — to cut corporation taxes and privatize industry in an effort to stimulate economic growth and create “new jobs” — are likely to address the country’s problems. They may well do the opposite.

Some of this sounds good, but I’ll have to see concrete results before I become a believer.

Most supposed right-of-center governments are either very inconsistent (think Trump) or generally bad (think Macri or Sarkozy).

I just focus on results.

Speaking of which this chart, based on the OECD’s fiscal database, shows what happened to revenue (left side) and spending (right side) between 2007 and 2018.

As you can see on the right side, the burden of spending has actually increased.  That’s not my idea of austerity.

The big change that stands out over the past 10 years, though, is that the burden of taxation has jumped. A lot.

In other words taxpayers have been forced to tighten their belts but politicians haven’t tightened government’s belt.

The moral of the story is that tax increases always make a bad fiscal situation worse. Greece has proved that over and over and over again.

P.S. I guess bad results should be expected in a nation where bureaucrats demand stool samples before you can set up an online company. Another sign of Greece’s moral and fiscal bankruptcy is that pedophiles can get disability payments.

P.P.S. To offset the grim message of today’s column, let’s also enjoy some Greek-related humor. This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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Pakistan: A Case Study of IMF Malfeasance

I’ve labeled the International Monetary Fund as the “dumpster fire” of the world economy.

I’ve also called the bureaucracy the “Dr. Kevorkian” of international economic policy, though that reference many not mean anything to younger readers.

My main complaint is that the IMF is always urging – or even extorting – nations to impose higher tax burdens.

Let’s look at a fresh example of this odious practice.

According to a Reuters report, IMF-supported tax increases are provoking economic strife in Pakistan.

Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund… Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund. …Prime Minister Imran Khan’s government..is having to impose tough austerity measures having been forced to turn to the IMF for Pakistan’s 13th bailout since the late 1980s. …Under the IMF bailout, signed this month, Pakistan is under heavy pressure to boost its tax revenues.

I’m not surprised the private sector is protesting against IMF-instigated tax hikes.

We see similar stories from all over the world.

But what really grabbed my attention was the reference to 13 bailouts. Good grief, you would think the IMF bureaucrats would learn after five or six attempts that they shouldn’t throw good money after bad.

That being said, I wondered if the IMF was pushing for big tax hikes because they had demanded – and received – big spending cuts in exchange for the previous 12 bailouts.

So I went to the IMF’s World Economic Outlook Database to peruse the numbers…and I discovered that the IMF’s repeated bailouts actually led to big increases in the burden of spending.

The IMF’s numbers, which go back to 1993, show that outlays have tripled. And that’s after adjusting for inflation!

Looking closely at the chart, I suppose one could argue that Pakistan was semi-responsible up until the turn of the century. Yes, the spending burden increased, but at a relatively mild rate.

But the brakes definitely came off this century. Enabled by endless bailouts from the IMF, Pakistan’s politicians definitely aren’t complying with my Golden Rule.

I’ll close with one final point.

The IMF types, as well as others on the left, actually want people to believe that Pakistan should have a bigger burden of government spending.

According to this novel theory, the public sector in the country, which currently consumes more than 20 percent of GDP, is too small to finance the “investments” that are needed to enable more prosperity.

Yet if this theory is accurate, why is Pakistan’s economy stagnant when there are prosperous jurisdictions with smaller spending burdens, such as Hong Kong, Singapore, and Taiwan?

And if the theory is accurate, why did the United States and Western Europe become rich in the 1800s, back when governments only consumed about 10 percent of economic output?

This video tells you everything you need to know.

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The Bigger the IMF, the Greater the Risk of Profligacy, Debt, and Crisis

I’m not a big fan of the International Monetary Fund and I regularly criticize the international bureaucracy for its relentless advocacy in favor of higher taxes.

But that’s not what worries me most about the IMF.

To be sure, higher fiscal burdens undermine economic vitality, and I regularly warn that such policies will reduce an economy’s potential long-run growth rate.

That being said, tax increases generally don’t threaten macroeconomic stability.

If we’re looking at policies that can trigger short-run crises, I’m more concerned about the IMF’s bailout policies. For all intents and purposes, the IMF subsidizes “moral hazard” by reducing the perceived cost (to financial institutions) of lending money to dodgy governments and reducing the perceived costs (to governments) of incurring more debt.

Why not take more risk, after all, if you think the IMF will step in to socialize any losses? In other words, when the IMF engages in a few bailouts today, it increases the likelihood of more bailouts in the future.

That’s the bad news. The worse news is that the bureaucrats want a bigger figurative checkbook to enable even bigger future bailouts.

The good news is that the U.S. government can say no.

But will it? The U.K.-based Financial Times reported a few days ago that the United States might support an expansion of the IMF’s bailout capacity.

The Trump administration has left the door open for a US funding boost to the IMF, calling for a “careful evaluation” of the global lender’s finances to make sure it has enough money to rescue struggling economies. …The IMF — led by Christine Lagarde, a former French finance minister — is hoping to get its members to increase the fund’s permanent reserves… This year, the Trump administration has been among the most enthusiastic supporters of the IMF’s $57bn loan package to Argentina— its largest in history.

The next day, the FT augmented its coverage.

The IMF is set to embark on a major fundraising drive…the success of Ms Lagarde’s campaign is highly uncertain, with potentially profound consequences not only for the fund but for the global economy. …supporters of the fund say there are many possible scenarios in which it would be essential. If a recession and financial crisis were to hit in the coming years,central bankers may well struggle to find monetary remedies… a US Treasury spokesman left the door open to new possible contributions from America to the IMF. …Optimists point to a surprise decision by the Trump administration in April to support a $13bn boost to World Bank resources… there is still scepticism of the IMF among his top lieutenants at the Treasury department, including David Malpass, the undersecretary for international affairs. …Even if they were on board, economic and national security hawks at the White House who disdain multilateralism as a loss of sovereignty could be an additional obstacle, not to mention Republican lawmakers on Capitol Hill. The previous IMF quota increase, pushed by the Obama administration — which raised America’s permanent commitment to the fund to about $115bn — finally scraped through Congress in 2016, after a half-decade delay.

I was very saddened a couple of years ago when the GOP Congress agreed to expand the IMF’s bailout authority, especially since a similar effort was blocked in 2014 when Democrats still controlled the Senate.

The issue today is whether the Trump Administration will repeat that mistake.

Back in 2012, I stated that the IMF issue was a “minimum test” for Republicans. Well, the issues haven’t changed. Everything I wrote then still applies today.

I hope Trump does the right thing and rejects expanded bailout authority for the IMF for the sensible reason that it’s foolish to subsidize more borrowing by badly governed nations.

But I’m not picky. I’ll also be happy if Trump says no simply because he’s miffed that the IMF attacked him (accurately but unfairly) during the 2016 campaign and dissed his tax plan earlier this year.

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Ranking Presidents on Economic Policy: The Dismal Record of George W. Bush

Back in 2013, I did an assessment of economic policy changes that occurred during the Clinton Administration.

The bottom line was that the overall burden of government declined by a semi-significant amount. Which presumably helps to explain why the economy enjoyed good growth and job creation in the 1990s, especially in the last half of the decade when most of the pro-growth reforms were enacted.

The chart I prepared has been very helpful when speaking to audiences about what actually happened during the Clinton years, so I decided to do the same thing for other presidents.

A week ago, I put together my summary of economic policy changes during the Nixon years. At the risk of understatement, it was a very grim era for free markets.

A few days ago, I followed up with a look at overall economic policy during the Reagan years. That was a much better era, at least for those of us who favor economic liberty over statism.

Now it’s time to look at the record of George W. Bush. It’s not a pretty picture.

I think the TARP bailout was the low point of the Bush years, though he also deserves criticism for big spending hikes (especially the rapid rise of domestic spending), additional red tape, special-interest trade taxes, and more centralization of education.

On the plus side, there was a good tax cut in 2003 (the 2001 version was mostly Keynesian and thus didn’t help growth), as well as some targeted trade liberalization. Unfortunately, those good reforms were swamped by bad policy.

As has been the case for other presidents, my calculations are based solely on policy changes. Presidents don’t get credit or blame for policies they endorsed or opposed. So when fans of President Bush tell me he was better on policy than his record indicates, I shrug my shoulders (just like I don’t particularly care when Republicans on Capitol Hill tell me that Clinton’s good record was because of the post-1994 GOP Congress).

I simply want to show where policy improved and where it deteriorated when various presidents were in office. Other people can argue about the degree to which those presidents deserve credit or blame.

In the case of Bush, for what it’s worth, I think he does deserve blame. None of the bad laws I listed were enacted over his veto.

Incidentally, I was torn by how to handle monetary policy. The artificially low interest rates of the mid-2000s contributed to the housing bubble and subsequent financial meltdown. Should I have blamed Bush for that because of his Federal Reserve appointments?

On a related note, the affordable lending mandates of Fannie Mae and Freddie Mac were made more onerous during the Bush years, thus exacerbating perverse incentives in the financial sector to make unwise loans. Was that Bush’s fault, or were those regulations unavoidable because of legislation that was enacted before Bush became President?

Ultimately, I decided to omit any reference to the Fed, as well as Fannie and Freddie. But I double-weighted TARP, both because it was awful economic policy and because that was a way of partially dinging Bush for his acquiescence to bad monetary and housing policy.

If there’s a lesson to learn from this analysis of Bush policy, it is that party labels don’t necessarily have any meaning. The economy suffers just as much if a Republican expands the burden of government as it does when the same thing happens under a Democrat.

P.S. I haven’t decided whether to replicate this exercise for pre-World War II presidents. If I do, Calvin Coolidge and Grover Cleveland presumably would look very good.

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Big Government: Puerto Rico’s Man-Made Disaster

Puerto Rico is getting lots of attention because Hurricane Maria caused a tremendous amount of economic damage.

That leads to an important discussion about the role of government – particularly the federal government – when there is a natural disaster (and a secondary discussion about the silly Keynesian argument that disasters are good for prosperity).

But let’s focus today on a man-made disaster. Puerto Rico is the Greece of America, and it was a fiscal mess well before the hurricane hit. Indeed, there’s already been partial-bailout legislation from Washington.

The Wall Street Journal opined wisely on the topic, starting with the observation that we shouldn’t feel too much sympathy for investors who purchased bonds from the island’s profligate government.

…they knew what they were getting into. Lenders piled into Puerto Rican bonds that paid high yields that are “triple tax-exempt”—they can’t be taxed by federal, state or local governments in the U.S. Yet lenders also knew that the Puerto Rican government was heading toward a debt crisis. The economy has been contracting for a decade, and the commonwealth has $48 billion in unfunded pensions on top of $72 billion in bond debt. Creditors bet that the high yield was worth the political risk, but the music was bound to stop. One lesson of the last decade that creditors don’t want to learn, even after Detroit and Greece, is that sovereign debt to lousy governments is high risk. The abrogation of debt contracts that will now take place is regrettable, but there is a price for betting on politicians.

It would be a nice lesson if investors learned not to trust governments, especially the ones most prone to destructive statist policies.

But that doesn’t address the underlying problem of how to generate growth in Puerto Rico. The answer, needless to say, is free markets and small government.

…the territory will have to grow faster. This is where bankruptcy alone is inadequate. Puerto Rico will have to cut taxes on investment, rationalize welfare programs that deter working, and pare back labor protections that make France look like Hong Kong. If Mr. Rossello won’t do it, then the control board will have to. Puerto Rico will continue to flounder even with reduced debt if labor participation remains stuck at 40% and unemployment is in the double digits.

Unfortunately, the government has been doubling down on bad policy.

Investor’s Business Daily delves deeper into the issue of how big government is strangling prosperity.

The key is to create the correct incentives for the island’s people to encourage — rather than discourage — their policymakers to implement necessary and difficult reforms. This is particularly true with regard to pension reform. …Emphasis should instead be put on the many necessary changes to Puerto Rican labor laws, welfare programs and business and tax regulations which could spur more private sector business and job creation, encourage more people to work, and allow economic growth to resume. …Changes to U.S. laws and regulations discouraging labor force participation in Puerto Rico, such as the high minimum wage and easier eligibility for Social Security disability benefits for Spanish speakers, would also help greatly. And most importantly, Puerto Rico’s lingering pension crisis must be solved, both because of its fiscal significance and because it illustrates the lack of political courage and imagination by the government and the oversight board. …economic activity in Puerto Rico is now so severely depressed by a heavy government presence.

And even the most establishment-leaning Economist noted that government dependency is a major problem.

The island is distinguished by its poverty and joblessness, which are far worse than in any of the 50 states. The territory’s economy, moreover, has fallen further behind the national one over the past three decades. Bad government—not just locally, but also federally—is largely to blame. …Puerto Rico’s annual income per person was around $12,000 in 2004, less than half that of Mississippi, the poorest state. More than 48% of the island’s people live below the federally defined poverty line.

Why is income so low and why is there so much poverty?

Simply stated, idleness is being heavily subsidized. The welfare state reduces labor supply on the mainland. And the same thing happens in Puerto Rico.

Half the working-age men in Puerto Rico do not work. …Many things have gone wrong. Most important, however, is that the United States government assumed too big a role in the Puerto Rican economy, and its largesse enabled the commonwealth’s government to do the same. …the island’s economy is now lost in a thicket of bad incentives…an oversized welfare state…transfers…make up more than 20% of the island’s personal income. These federal handouts…by Puerto Rican economic standards, they are huge. And the more a man or woman earns through paid work, the more they decrease. …federal disability allowances are much higher than the United States average as a share of wages and pension income. Unsurprisingly, therefore, one in six working-age men in Puerto Rico are claiming disability benefits. …For many people, …the money that can be earned through federal transfers and a little informal work is more than the market wage—and requires much less effort.

In other words, Puerto Rico is just another layer of evidence on the well-established link between government and poverty.

And when people do have jobs, all too often they are employed by a bloated and inefficient government bureaucracy.

Puerto Rico’s bloated government… Around 30% of the territory’s jobs are in the public sector. Among other things, a big and coddled bureaucracy undermines Puerto Rico’s educational achievements…nearly half those on the education department’s payroll are not teachers; quality has fallen because of low accountability and mismanagement. …As he walked through Aguadilla’s town hall recently, Mr Méndez…says, is that “All they want to do is find security only. They have no ambition…Everybody wants to work for the government.” Manuel Reyes, of the Puerto Rico Manufacturers Association, also sees little hope that the government’s role will shrink.

It’s almost as if Puerto Rico is a perfect storm (no pun intended) of bad policy.

The solution is – or should be – obvious. And it’s the same one I suggested for Greece. Allow the government to default on existing debt, but only in exchange for pro-market reforms such as a long-run spending cap, privatization, a freeze on the size and compensation of the island’s bloated bureaucracy, and elimination of destructive regulation.

For all intents and purposes, Puerto Rico should become the Hong Kong of America. The island does have substantial autonomy and local policymakers have demonstrated that they sometimes are willing to do the right thing (they made Puerto Rico a legal tax haven for U.S. citizens). Now it’s time to make a great leap forward.

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Greece and the Folly of Trying to Solve an Overspending Problem with Tax Increases

I’ve put forth lots of arguments against tax increases, mostly focusing on why higher tax rates will depress growth and encourage more government spending.

Today, let’s look at a practical, real-world example.

I wrote a column for The Hill looking at why Greece is a fiscal and economic train wreck. I have lots of interesting background and history in the article, including the fact that Greece got into the mess by overspending and also explaining that politicians like Merkel only got involved because they wanted to bail out their domestic banks that foolishly lent lots of money to the Greek government.

But the most newsworthy part of my column was to expose the fact that “austerity” hasn’t worked in Greece because the private sector has been suffocated by giant tax hikes.

…the troika…imposed the wrong kind of fiscal reforms. …what mostly happened is that Greek politicians dramatically increased the nation’s already punitive tax burden. The Organization for Economic Cooperation and Development’s fiscal database tells a very ugly story. …on the eve of the crisis, the tax burden in Greece totaled 38.9 percent of GDP. This year, taxes are projected to reach 52.0 percent of economic output. Every major tax in Greece has been dramatically increased, including personal income taxes, corporate income taxes, value-added taxes, and property taxes. It’s been a taxpalooza… What’s happened on the spending side of the fiscal ledger? Have there been “savage” and “draconian” budget cuts? …there have been some cuts, but the burden of government spending is still a heavy weight on the Greek economy. Outlays totaled 54.1 percent of GDP in 2009 and now government is consuming 52.2 percent of economic output.

For what it’s worth, the spending numbers would look better if the economy was stronger. In other words, Greece’s performance wouldn’t be so dismal if GDP was growing rather than shrinking.

And that’s why tax increases are so misguided. They give politicians an excuse to avoid much-needed spending cuts while also hindering growth, investment and job creation.

Let’s close by reviewing Greece’s performance according to Economic Freedom of the World. The overall score for Greece has dropped slightly since 2009, but the real story is that the nation’s fiscal score has dramatically worsened, falling from 5.61 to 4.66 on a 0-10 scale. In other words, during a period of time in which Greece was supposed to sober up and become more fiscally responsible, the politicians engaged in an orgy of tax hikes and Greece went from a failing grade for fiscal policy to a miserably failing grade.

Here’s a the relevant graph from the EFW website. As you can see, the score has been dropping for a decade, not just since 2009.

This is remarkable result. Greek politicians should have been pushing the nation’s fiscal score to at least 7 out of 10, if not 8 out of 10. Instead, the score has gone in the wrong direction because of tax increases.

Though I don’t expect Hillary and Bernie to learn the right lesson.

P.S. For more information, here’s my five-picture explanation of the Greek mess.

P.P.S. And if you want to know why I’m so dour about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies?

P.P.P.S. Let’s close by recycling my collection of Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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Odious and Corrupt Obamacare Bailouts

At the risk of understatement, Obamacare is a mess.

It’s been bad for taxpayers, bad for consumers, and bad for healthcare.

It’s even been bad for some of the special interest groups that backed the legislation. The big insurance companies supported the law, for instance, because they thought it would be good to have the government force people to buy their products.

And these corrupt firms even got a provision in the law promising bailouts from taxpayers if the Obamacare system didn’t work.

Given the miserable track record of the public sector, that was probably a crafty move.

But the companies mistakenly assumed their sleazy pact with Obama, Pelosi, and Reid was permanent. Fortunately, their Faustian bargain appears to be backfiring.

Senator Marco Rubio has led the fight to stop bailouts for the big insurance companies.

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

Six years after being signed into law, ObamaCare is a costly and unsustainable disaster. …ObamaCare is also bringing out corporate America’s worst crony-capitalist impulses. The health-insurance lobby has teamed up with trial lawyers to sue the federal government—through individual lawsuits and a $5 billion class action—for not following through on a sweetheart bailout deal buried in the law. This provision of ObamaCare would have required taxpayers to bail out insurers.

But in a rare victory for taxpayers, the Florida Senator got the law changed to restrict bailouts.

My conservative colleagues and I sounded the alarm about the likelihood of a taxpayer-funded bailout of health insurers (and were mocked as Chicken Littles for it). …When it came time to pass a spending bill at the end of 2014, we succeeded in making it the law of the land that the ObamaCare bailout program could not cost taxpayers a single cent—which ended up saving taxpayers $2.5 billion. In December of last year, we came back and repeated the feat. Now I am urging leaders in both the House and Senate to make this a priority and stop the bailout a third time.

As you might imagine, there’s a counterattack by the corrupt insurance companies that conspired with the White House to impose Obamacare on the nation.

…the health-insurance companies are suing to try to get their bailout…professional attorneys from the Congressional Research Service…said that the administration’s practice of making other payments to insurers under the ObamaCare reinsurance program “would appear to be in conflict with the plain text” of the law. …Health insurers can hire all the high-paid trial lawyers they want, but they will run into a constitutional buzz saw: America’s founding document grants Congress the power of the purse… Health-insurance companies need to wake up to the reality that this…money they are fighting for, and that the Obama administration is trying to weasel a way to somehow give them, belongs to taxpayers. Taxpayers get to decide—through me and others in Congress—whether to bail them out. And the people have spoken: No, we will not bail out health insurance companies for ObamaCare’s failures.

Amen to Senator Rubio.

Let’s hope Congress continues to oppose bailouts, and let’s also hope the White House isn’t successful in somehow giving our money to the big insurance companies.

Speaking of which, here’s what Investor’s Business Daily wrote about the bailout controversy.

Right when you think Washington can’t get any worse, it does. That much was evident at a recent U.S. House of Representatives committee hearing into the Obama administration’s bailout of private health insurance companies. It’s a textbook case of government officials ignoring federal law to put special interests before the interests of American taxpayers and families.

Here’s how the mess was created…and how the Obama White House chose to respond.

Thanks to the Affordable Care Act’s labyrinthine mandates, health insurance companies have collectively lost billions of dollars on the exchanges, leading to an increasing number of them limiting their participation in or exiting the exchanges altogether. As a result, many insurers have demanded larger subsidy payments. …responding to insurance industry demands — in November the Obama administration promised to “explore other sources of funding” for payments to insurers. Yet rather than work with Congress, the administration flouted the law entirely — and in this case, that means using tax dollars to bail out insurers left on the exchanges. CMS simply decided to ignore the law.

Unfortunately, ordinary people don’t have that option.

They simply pay more to get less.

Meanwhile, Americans rightly wonder who’s looking out for them. Premiums have actually risen faster in the five years after passage of the Affordable Care Act than in the five years before, while deductibles average nearly $3,000 for the most popular exchange plans.

Isn’t that typical.

Big government makes life worse for the average person while the special interests get special deals.

Speaking of special deals, let’s look at another Obamacare rescue for a privileged group.

Bob Moffit of the Heritage Foundation explains the contortions needed to keep health insurance subsidies flowing to Capitol Hill.

…one scandal is truly bipartisan: How key administration and congressional officials connived to create, under cover of the Affordable Care Act, also known as Obamacare, special health insurance subsidies for members of Congress.

Here’s the background.

Rushing to enact the giant Obamacare bill in March 2010, Congress voted itself out of its own employer-sponsored health insurance coverage—the Federal Employees Health Benefits Program. …But in pulling out of the Federal Employees Health Benefits Program, they also cut themselves off from their employer-based insurance contributions.

Subjecting themselves and their staff to Obamacare may have been smart politics, if only to avoid the charge of hypocrisy, but that created a different problem.

Obamacare’s insurance subsidies for ordinary Americans are generous, but capped by income. No one with an annual income over $47,080 gets a subsidy. That’s well below typical Capitol Hill salaries. Members of Congress make $174,000 annually, and many on their staff have impressive, upper-middle-class paychecks. …Realizing what they had done, congressional leaders sought desperately to get fatter taxpayer subsidies in the Obamacare exchange system. …The standard excuse was that, without a special “sweetener,” a Capitol Hill “brain drain” would ensue; the best and brightest would flee to the private sector to get more affordable employment-based coverage.

Gee, it would have been a shame if the people who have screwed up public policy had to get jobs in the private sector (or, more likely, the parasitic lobbying sector).

But the law oftentimes is not an obstacle when the Obama White House wants something to happen.

…at a July 31 closed-door meeting with Senate Democrats, President Barack Obama had promised he would “fix” the mess they made of their health coverage. So, on Aug. 7, 2013, just as Congress was getting out of town for the August recess, the Office of Personnel Management ruled that members of Congress and staff enrolled in the exchange program would get Federal Employees Health Benefits Program subsidies, even though they were no longer in the program.

But how exactly did the White House evade the law?

…the Office of Personnel Management declared that Congress and staff were eligible to enroll in the Washington, D.C., “SHOP” Exchange, a health insurance exchange reserved for small businesses with fewer than 50 employees. The exchange offers special insurance subsidies to participating small businesses. The problem was, of course, that Congress is not a “small business,” at least under any clinically sane definition of the term, and no section of the Affordable Care Act provided for any congressional exemption from the ban on large employer participation in the SHOP exchanges.

By the way, as a former staffer on Capitol Hill, I do have some sympathy for the lower-level folks who didn’t create the Obamacare mess and would suddenly be in a position of having to pay all their health costs out of pocket if the law was obeyed.

But that’s not a reason to engage in legal chicanery.

As part of tax and entitlement reform, by all means let’s shift to a system where we address the third-party payer crisis by having most health care expenses directly financed by consumers (reserving insurance for large, unpredictable expenses). That new system should include all people, including politicians and their staff.

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A Semi-Acceptable Indirect Bailout for Puerto Rico?

I wrote last year about why Puerto Rico got into fiscal trouble.

Like Greece and so many other governments, it did the opposite of Mitchell’s Golden Rule. Instead of a multi-year period of spending restraint, it allowed the budget to expand faster than the private sector for almost two decades.

As the old saying goes, that’s water under the bridge. Since we can’t un-ring the bell of excessive spending in the past, what’s the best option for the future?

The House of Representatives has approved a rescue plan that is getting mixed reviews.

Desmond Lachman of the American Enterprise Institute is supportive but not enthusiastic about the proposal.

The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem… However, …the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.

The legislation creates a board with some power to force fiscal and economic reforms.

…a seven-member oversight board…is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.

So if there’s no taxpayer money involved, why do people say the legislation is a bailout?

Because the proposal allows Puerto Rico to defer payments on existing debt and then to restructure at least some of that debt. And “restructure” is a politically correct way of saying “partial default.”

So Puerto Rico will be bailed out to the extent that it will be able to stiff bondholders to some degree.

…it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due.

Lachman views that as the least worst of the possible options, so this indirect bailout is not an argument against the legislation. At least from his perspective.

He’s more worried about the fact that much more needs to be done to restore growth on the island.

…it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

Writing for Forbes, Ryan Ellis has a much more optimistic assessment of the overall deal.

…the bill is a big win for limited government conservatives. It has no taxpayer bailout of Puerto Rico–not a single dime of taxpayer money is sent down there. …Puerto Rico will have to work their own way out of $72 billion in debt and defaults. They will be helped by an “oversight board”…modeled after the D.C. control board from the 1990s and 2000s, and their job is to approve fiscal plans and budgets, conduct audits, etc.

But Ryan acknowledges that “work their own way out of” is just another way of saying that there is likely going to be a partial default.

The oversight board…will first try to get the 18 classes of bondholders to agree to a voluntary debt restructuring with the Puerto Rican government and government sponsored enterprises. If that fails, the control board will recommend a debt restructuring plan to be enforced by a non-bankruptcy federal judge.

That being said, he’s confident that the legislation won’t be a template for profligate states such as Illinois and California.

Congress is exercising its Constitutional authority to provide all “needful and useful” laws to govern possessions, which is a separate power from the federal bankruptcy clause. There’s no risk of “contagion” to other states.

Though he agrees with Lachman that there’s very little hope for a growth spurt.

It lacks the necessary pro-growth reforms needed for Puerto Rico to get out of its decade-long depression, reverse migration back to the island, attract capital, and create jobs.

Which is why Ryan likes the ideas being pushed by Congressman McArthur of New Jersey. He’s especially fond of territorial taxation for American companies that do business on the island.

The solution is to enact the same type of international tax reform we want to do in the rest of the world–the U.S. companies pay tax in Puerto Rico, but don’t have to pay a second tax to the IRS just to bring the money home. That’s what the rest of the world does, and it’s called “territoriality.” It’s a basic principle of conservative tax reform to move from our outdated “worldwide” tax system to a “territorial” one. There is no better place to start than Puerto Rico.

That would be a good step, and it would be a nice bookend to the very good law Puerto Rico already has for high-income taxpayers from the mainland.

Other conservatives have a less sanguine view of the legislation. Here are excerpts from a coalition statement.

People, companies, states, and territories don’t just “go” broke. Willful prior activity is required. …Puerto Rico has a long history of financial mismanagement brought about by progressive politics and crony capitalism.

Amen. Puerto Rico got in trouble because of bad policy. And the bad policy wasn’t just excessive spending. There have also been grossly misguided interventions such as price controls.

So it’s quite understandable that signatories to this statement are not overly excited that Puerto Rico will have a route for partial default.

Progressive politicians, who are already seeking an indirect bailout – in the form of upending the existing legal structure to allow bankruptcy ‐‐ in the U.S. Congress, argue that a bailout or bankruptcy will help the people of Puerto Rico.

They correctly list several procedural reforms and also point out that there are some obvious policy reforms that should be undertaken.

Sensible economic reforms include allowing Puerto Rico (1) to set its own minimum wage law, including not having a minimum wage law; (2) to be exempt from U.S. overtime rules (which have just been greatly expanded by presidential fiat); and (3) to be exempt from the Jones Act, a protectionist measure that regulates U.S. shipping practices.

Sadly, the legislation is very tepid on these non-fiscal reforms.

So what’s the bottom line? Should the law get three cheers, as Ryan Ellis argues? Two cheers as Desmond Lachman prefers? Or only one cheer (or maybe no cheer), which seems to be the position of some conservative activists?

My answer depends on my mood. When I’m going through a fire-breathing-libertarian phase, I’m with the conservatives. Puerto Rico spent itself into a ditch so they should suffer the consequences.

But when I’m in my long-time-observer-of-Washington mode, I try to imagine the best possible (or least-worst possible) outcome, then I think Paul Ryan and the Republicans did a decent job.

In other words, this is like the fiscal cliff deal back in late 2012. Disappointing in many respects, but not as bad as I would have predicted.

The key question now is whether Republicans insist on putting good people on the oversight board.

And that’s not a trivial concern. I remember thinking the 2011 debt limit fight led to a decent outcome because we got sequester-enforced caps on discretionary spending (not as good as a comprehensive spending cap, but still a good step).

And we even got a sequester in early 2013. But then later that year, and last year as well, Republicans joined with Democrats to bust the spending caps.

That doesn’t bode well for any policy that requires long-run fiscal discipline. Though maybe GOPers will be tougher this time since the spending restraint will be imposed on people who don’t vote in congressional elections.

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Debt, Bubbles, and Reckless Government

As a general rule, I’m not overly concerned about debt, even when looking at government red ink.

I don’t like deficit and debt, to be sure, but government borrowing should be seen as the symptom. The real problem is excessive government spending.

This is one of the reasons I’m not a fan of a balanced budget amendment, Based on the experiences of American states and European countries, I fear politicians in Washington would use any deficit-limiting requirement as an excuse to raise taxes.

I much prefer spending caps, such as those found in Hong Kong, Switzerland, and Colorado. If you cure the disease of excessive government, you automatically ameliorate the symptom of too much borrowing.

That being said, the fiscal chaos plaguing European welfare states is proof that there is a point when a spending problem can also become a debt problem. Simply stated, the people and institutions that buy government bonds at some point will decide that they no longer trust a government’s ability to repay because the public sector is too big and the economy is too weak.

And even though the European fiscal crisis no longer is dominating the headlines, I fear this is just the calm before the storm.

For instance, the data in a report from Citi about the looming Social Security-style crisis are downright scary.

…the total value of unfunded or underfunded government pension liabilities for twenty OECD countries is a staggering $78 trillion, or almost double the $44 trillion published national debt number.

And the accompanying chart is rather appropriate since it portrays this giant pile of future spending promises as an iceberg.

And when you look at projections for ever-rising spending (and therefore big increases in red ink) in America, it’s easy to see why I’m such a strong advocate of genuine entitlement reform.

But it’s also important to realize that government policies also can encourage excessive debt in the private sector.

Before digging into the issue, let’s first make clear that debt is not necessarily bad. Households often borrow to buy big-ticket items like homes, cars, and education. And businesses borrow all the time to finance expansion and job creation.

But if there’s too much borrowing, particularly when encouraged by misguided government policies, then households and businesses are very vulnerable if there’s some sort of economic disruption and they no longer have enough income to finance debt payments. This is when debt becomes excessive.

Yet this is what the crowd in Washington is encouraging.

Writing for the Wall Street Journal, George Melloan warns that misguided “stimulus” and “QE” policies have created a debt bubble.

…while Mr. Bernanke and Ms. Yellen were trying to prevent deflation, the federal government was engineering its cause, excessive debt. And the Fed abetted the process by purchasing trillions of dollars of government paper, aka quantitative easing. Near-zero interest rates also have encouraged consumers and business to releverage. Cars are now financed with low or no-interest five-year loans. With the 2008 housing debacle forgotten, easier mortgage terms have made a comeback. Corporations also couldn’t let cheap money go to waste, so they have piled up debts to buy back their own stock. Such “investment” produces no economic growth, but it has to be paid back nonetheless. Amid the Great Recession, many worried that the entire economy of the U.S., or even the world, would be “deleveraged.” Instead, we have a new world-wide debt bubble.

The numbers he shares are sobering.

Global debt of all types grew by $57 trillion from 2007 to 2014 to a total of $199 trillion, the McKinsey Global Institute reported in February last year. That’s 286% of global GDP compared with 269% in 2007. The current ratio is above 300%.

Professor Noah Smith writes in Bloomberg about research showing that debt-fueled bubbles are especially worrisome.

…since debt bubbles damage the financial system, they endanger the economy more than equity bubbles, which transmit their losses directly to households. Financial institutions lend people money, and if people can’t pay it back — because the value of their house has gone down — it could cause bank failures. …Economists Oscar Jorda, Moritz Schularick, and Alan Taylor recently did a historical study of asset price crashes, and they found that, in fact, debt seems to matter a lot. …To make a long story short, they look at what happened to the economy of each country after each large drop in asset prices. …bubbles make recessions longer, and credit worsens the effect. …the message is clear: Bubbles and debt are a dangerous combination.

To elaborate, equity and bubbles aren’t a good combination, but there’s far less damage when an equity bubble pops because the only person who is directly hurt is the person who owns the asset (such as shares of a stock). But when a debt bubble pops, the person who owes the money is hurt, along with the person (or institution) to whom the money is owed.

Desmond Lachman of the American Enterprise Institute adds his two cents to the issue.

…the world is presently drowning in debt. Indeed, as a result of the world’s major central banks for many years having encouraged markets to take on more risk by expanding their own balance sheets in an unprecedented manner, the level of overall public and private sector indebtedness in the global economy is very much higher today than it was in 2008 at the start of the Great Economic Recession. Particularly troublesome is the very high level of corporate debt in the emerging market economies and the still very high public sector debt levels in the European economic periphery. …the Federal Reserve’s past policies of aggressive quantitative easing have set up the stage for considerable global financial market turbulence. They have done so by artificially boosting asset prices and by encouraging borrowing at artificially low interest rates that do not reflect the likelihood of the borrower eventually defaulting on the loan.

In other words, artificially low interest rates are distorting economic decisions by making something (debt) seem cheaper than it really is. Sort of financial market version of the government-caused third-party payer problem in health care and higher education.

And Holman Jenkins of the Wall Street Journal makes the very important point that debt is encouraged by bailouts and subsidies.

Big banks aren’t automatically bad or badly managed because they are big, but it’s hard to believe big banks would exist without an explicit and implicit government safety net underneath them. …None of this has changed since Dodd-Frank, none of it is likely to change. …we know where the crisis will come from and how it will be transmitted to the financial system. The Richmond Fed’s “bailout barometer” shows that, since the 2008 crisis, 61% of all liabilities in the U.S. financial system are now implicitly or explicitly guaranteed by government, up from 45% in 1999. …Six years after a crisis caused by excessive borrowing, McKinsey estimates that even visible global debt has increased by $57 trillion, while in the U.S., Europe, Japan and China growth to pay back these liabilities has been slowing or absent.

The bottom line is that government spending programs directly cause debt, but we should be just as worried about the private debt that is being encouraged and subsidized by other misguided government policies.

And surely we shouldn’t forget to include the pernicious role of the tax code, which further tilts the playing field in favor or debt.

P.S. Let’s briefly divert to another issue. I wrote last Christmas that President Obama may have given the American people a present.

But the Washington Examiner reports that gift has turned into a lump of coal.

The Department of Justice announced this week that it is resuming its Equitable Sharing program…that allows state and local police to get around tough state laws that limit how much property can be taken from citizens without being charged with wrongdoing, let alone convicted of a crime. …money-hungry police departments can exploit these lax federal rules about confiscating people’s property. The feds like this because they get a cut of the loot. …there is no presumption of innocence. …civil forfeitures by the feds amounted to $4.5 billion in 2014, which is more than the $3.9 billion that all of America’s burglars stole that year. It’s hard to imagine more compelling evidence of gross wrong.

Wow, so the government steals more money than burglars. I guess I’m not surprised.

But if you really want to get upset, check out real-world examples of asset forfeiture by clicking here, here, here, here, and here.

Thankfully, some states are seeking to curtail this evil practice.

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Dodd-Frank: A Wall Street-Supported Law Imposing Heavy Costs, Enabling Future Bailouts

Politicians specialize in bad policy, but they go overboard during election years.

It’s especially galling to hear Bernie Sanders and Hillary Clinton compete to see who can make the most inane comments about the financial sector.

This is why I felt compelled last month to explain why the recent financial crisis had nothing to do with the absence of “Glass-Steagall” regulations.

Today, I want to address Dodd-Frank, the legislation that was imposed immediately after the crisis by President Obama and the Democrat-controlled Congress.

I’m tempted to focus on the fact that the big boys on Wall Street, such as Goldman-Sachs, supported the law. It’s galling, after all, to hear politicians claim Dodd-Frank was anti-Wall Street legislation.

But there are more important points to consider, including the fact that the law doesn’t prevent or preclude bailouts.

Writing for today’s Wall Street Journal, Emily Kapur and John Taylor identify key problems with the Dodd-Frank bailout legislation.

Sen. Sanders and others on both sides of the aisle have a point. The 2010 Dodd-Frank financial law, which was supposed to end too big to fail, has not. Dodd-Frank gave the Federal Deposit Insurance Corp. authority to take over and oversee the reorganization of so-called systemically important financial institutions whose failure could pose a risk to the economy. But no one can be sure the FDIC will follow its resolution strategy… Neel Kashkari, now president of the Federal Reserve Bank of Minneapolis, says government officials are once again likely to bail out big banks and their creditors.

Most important, they propose a new Chapter 14 of the bankruptcy code so that insolvent institutions – regardless of their size – are liquidated.

The solution is not to break up the banks or turn them into public utilities. Instead, we should do what Dodd-Frank failed to do: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code… Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. …the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations. …Other reforms, such as higher capital requirements, may yet be needed to reduce risk and lessen the chance of financial failure. But that is no reason to wait on bankruptcy reform. A bill along the lines of the chapter 14 that we advocate passed the House Judiciary Committee on Feb. 11. Two versions await action in the Senate. Let’s end too big to fail, once and for all.

Amen. When big institutions go under, shareholders and bondholders should be the ones to bear the costs, not taxpayers.

Unfortunately, unless a new Chapter 14 of the bankruptcy code is created, it’s quite likely that regulators and politicians will simply opt for more TARP-style bailouts if big firms get in trouble.

So Dodd-Frank didn’t really do the one thing that was necessary.

But it did do a lot of things that make the system more costly and clunky.

Hester Pierce of the Mercatus Center explains that Dodd-Frank expanded regulation based on the theory that regulators can understand and plan the financial sector.

Dodd-Frank—built on the premise that markets fail, but regulators do not—places great faith in regulators to identify and stop problems before they develop into a crisis. …Dodd-Frank, despite language to the contrary, keeps the door open for future bailouts. …Dodd-Frank includes many provisions that are not related to financial stability, but fails to deal with key problems made evident by the crisis. …Dodd-Frank’s drafters chose to leave many key decisions to regulators. The contours of systemic risk, for example, were left to regulators to define. Moreover, because the prevailing narrative of the crisis focused on market failure, Dodd-Frank expanded regulators’ authority to shape the financial system. In addition to their substantial rule-writing responsibilities, under Dodd-Frank regulators now play a central role in monitoring, planning, and managing the financial markets.

Most worrisome, Hester notes that Dodd-Frank has provisions that benefit the big firms and may make them more likely to get bailouts.

Dodd-Frank gives FSOC broad powers to designate nonbank financial institutions and financial market utilities (such as derivatives clearinghouses) systemically important. …Designated firms are likely to be perceived as the firms the government is likely to rescue… Dodd-Frank was supposed to mark the end of taxpayer bailouts of financial firms. This pledge is undermined in several ways by the statute’s other provisions and the regulatory-centric approach that cuts across the whole statute. …The pressure on regulators to conduct bailouts is likely to be particularly strong with respect to systemically important institutions. …Regulatory failure played an important role in the last crisis by concentrating resources in the housing sector, encouraging reliance on credit-rating agencies, and driving financial institutions to concentrate their holdings in mortgage-backed securities. Dodd-Frank gives regulators more authority and broad discretion to shape the financial sector and the firms operating within it. When the regulators fail at this ambitious mission, they will again face internal and external pressure to cover those failures with a taxpayer-funded bailout.

Two other Mercatus experts, Patrick McLaughlin and Oliver Sherouse, show that regulators were among the biggest beneficiaries of the law. The law has led to a massive explosion in red tape.

The statute, which itself was 848 pages long, directed dozens of regulatory agencies to revise or create new regulations addressing the financial system in the United States. Those agencies responded with hundreds of new rules that will govern financial markets, on a scale that vastly exceeds any previous regulation of financial markets, and dwarfs the regulations that accompanied all other legislation enacted during the Obama administration. …Dodd-Frank…is associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions. In fact, it is associated with more new restrictions than all other laws passed during the Obama administration put together.

Here’s a rather sobering chart from the report.

Amazingly, the red tape generated by Dodd-Frank is roughly equal to all the regulation generated by every other law that’s been imposed during the Obama years.

Including the notoriously Byzantine Obamacare legislation.

All these new rules actually create a competitive advantage for big financial institutions.

Peter Wallison of the American Enterprise Institute has a must-read study on how Dodd-Frank imposes disproportionately heavy costs on small banks and small businesses.

…the reason for the slow recovery is the Dodd-Frank Act, enacted in 2010, which placed heavy regulatory costs and new restrictive lending standards on small banks. This in turn reduced the ability of these banks to finance small businesses, particularly the start-up businesses which are the engine of employment and economic growth. Large businesses have not been subject to the same restrictions because they have access to the capital markets, and their growth has been in line with prior recoveries. …recoveries after financial crises tend to be sharper than other recoveries, not slower as some have suggested. It is likely that, without the repeal or substantial reform of Dodd-Frank, the U.S. economy will continue to grow only slowly into the future. ……whatever regulatory costs are imposed on banking organizations— whether they be $2 trillion banks like JPMorgan Chase, $50 billion banks or $50 million banks— the larger the bank the more easily it will be able to adjust to these costs.

What’s especially frustrating is that the law was imposed because of a fundamental misunderstanding of what caused the crisis.

…the incoming administration of Barack Obama and the Democratic supermajority in Congress blamed the crisis on insufficient regulation of the private financial sector. This narrative, although factually unsupported, gave rise to the Dodd-Frank Act, which imposed significant new regulation on the US financial system but did virtually nothing to reform the government policies that gave rise to the financial crisis. …In developing and adopting the Dodd-Frank Act, Congress and the administration did not appear to be concerned about placing additional regulatory costs on the financial system.

Here’s the bottom line. Regulation is no replacement for market discipline.

And bankruptcy needs to be part of that discipline. After all, capitalism without bankruptcy is like religion without hell.

P.S. To give you an idea of how unserious politicians are, the Dodd-Frank law didn’t end bailouts, but it did create new racial and sexual quotas. So I guess we can take comfort in the fact that the bureaucracy will reflect all of America the next time they rip off taxpayers.

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Trump Is Wrong on TARP (like Romney, McCain, Bush, and the Rest of the Establishment)

Remember the odious, immoral, and corrupt TARP bailout?

Well, it’s becoming an issue in the 2016 presidential race, with some folks criticizing Donald Trump for siding with Bush and Obama on the issue.

I suppose I could make a snide observation about the absurdity of Trump being perceived as an anti-establishment candidate when he supported a policy that had unanimous support from political insiders.

But I would much rather focus on the policy implications. So when Neil Cavuto asked me to comment on Chris Christie’s rejection of bailouts, I took the opportunity to stress (once again) that it wasn’t a TARP-or-nothing choice and that there was a sensible, non-corrupt, way of dealing with failing financial firms. Simply stated, only bail out depositors and let bondholders and shareholders take the hit.

For the geeks who are reading this, you’ll recognize that the policy I’m advocating is often called the FDIC-resolution approach.

And it’s worth noting that this was used at the beginning of the financial crisis. As I pointed out in the discussion, two of the big financial institution that first got in trouble – WAMU and IndyMac – were liquidated.

But once Bush’s execrable Treasury Secretary, Hank Paulson, took control of the process, decisions were made to rescue the fat cats as well as the depositors.

The bottom line is that a lot of establishment figures, including GOPers like Dick Cheney and Mitt Romney, argue that TARP was necessary because the financial system needed to be recapitalized.

Yet that’s also what happens with the FDIC-resolution approach. The only real difference is whether financial institutions should be rescued along with depositors.

Well, my view is that capitalism without bankruptcy is like religion without hell.

P.S. The other guest in the interview made a very good point about America becoming “bailout nation.” I fully agree. To the extent that we have private profits and socialized losses, we’ll have bigger and bigger problems with moral hazard. After all, if you’re in Las Vegas and someone else is covering your losses, why not make high-risk/high-reward bets.

P.P.S. If anyone cares, my driveway is finally clear. A special thanks to the family next door. Not only were they smarter than me (as I wrote yesterday, they parked their cars near the end of their driveway), they’re also nicer than me. They came over and helped me finish when they were done!

Actually, I like to think I’d be equally thoughtful. I’ll have to look for a chance to repay their good deed.

By the way, I should add that the father next door works for a social conservative organization, which is one more piece of evidence for my view that so-cons and libertarians should be allies.

Tim Carney explains that natural alliance much better.

P.P.P.S. In hopes of convincing some of my leftist friends, I can’t resist making one final point.

When government gets to pick winners and losers, it’s highly probable that those who get the handouts, bailouts, and subsidies will be rich, powerful, and politically connected. Heck, just think of the Ex-Im Bank.

As noted by my former colleague, Will Wilkinson, “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.”

I realize that statists won’t agree with me that it’s wrong for the federal government to redistribute from rich to poor. But I hope they’ll be on my side in fighting against redistribution from poor to rich!

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Some Victims of Obamacare Deserve to Suffer

Shortly after Obamacare was enacted, I started writing about groups victimized by the law. But after highlighting how children, low-income workers, and retirees were disadvantaged by government-run healthcare, I soon realized that I wasn’t saying anything new or different.

Heck, Obamacare has been such a disaster that lots of people have been writing lots of good articles about the law’s failure and how various segments of the population are being unjustly harmed.

So I chose a different approach. I decided to identify groups that deserve to suffer because of the law. Or at least to highlight slices of the population that are not very deserving of sympathy.

Some politicians and staffers of Capitol Hill, for instance, are very upset about the prospect of being subjected to the law that they inflicted on the rest of the country. Gee, my heart breaks for them.

The bureaucrats at the IRS are agitated about the possibility of living under Obamacare, even though the IRS got new powers as a result of the law. How sad, cry me a river.

Professors at Harvard University, including many who supported Obamacare, are now upset that the law is hurting them. Oh, the inhumanity!

Now we have another group to add to this list. And this group is definitely in the deserve-to-suffer category.

That’s because we’re going to look at the big insurance companies that supported Obamacare, but now are squealing because the law isn’t working and they’re not getting the bailouts they were promised.

Here are some excerpts from a column by the irreplaceable Tim Carney of the Washington Examiner.

Until recently, the insurance giants saw Obamacare as a cash cow. They are now finding the law’s insurance marketplaces to be sickly quagmires causing billions in losses. …United Healthcare, the nation’s largest insurer, last week announced it was suffering huge losses in the exchanges. …The company forecast $700 million in losses on the exchanges. Fellow insurance giant Aetna also said it expected to lose money on the exchanges, and other insurers said enrollment was lower than they expected.

This seems like a feel-good story, very appropriate for the holidays. After all, companies that get in bed with big government deserve bad consequences.

But hold on to your wallet.

…Obamacare insiders — the wealthy and powerful operatives who alternate between top government jobs and top industry jobs — are hustling to find more bailout money for insurers. Republicans, if they are able to hold their ground in the face of lobbyist pressure, can block the bailout of Obamacare and its corporate clientele. …Obamacare included…a three-year safety net for insurers who do much worse than expected, paid for by an extra tax on insurers who do much better. The Centers for Medicare & Medicaid Services (CMS) had announced in October that insurers losses for 2014 entitled them to $2.87 billion in bailout payments… The problem is that super-profitable insurers did not pay nearly that much into the bailout fund.

This means there will be a fight in Washington. The Obama White House wants to bail out its corporate cronies. But there’s not enough money in the bailout fund.

And, thanks to Senator Rubio of Florida, the government can’t write checks out of thin air.

In late 2014, Sen. Marco Rubio, R-Fla., inserted into the so-called Cromnibus spending bill a provision that prohibited CMS from paying out more in risk corridor payments than it takes in. Profitable insurers — not taxpayers — must subsidize their less profitable peers.

Unfortunately, the Obama Administration oftentimes doesn’t care what the law says.

CMS announced last week that the government was going to find a way to pay the insurers their full bailout, anyway. …CMS also declared the unfunded portion of Obamacare’s initial promised insurer bailout was nevertheless an “obligation of the United States Government for which full payment is required,” even though at least under the current appropriation law it is illegal.

Tim outlines the incestuous relationship between Big Insurance and the Obama White House, all of which makes for nauseating reading.

But here’s the part that matters for public policy.

Rubio’s provision…expires along with the current government funding law on December 11. The Obamacare insiders, led by Slavitt and Tavenner, will fight to free up their bailouts and put the taxpayers on the hook for their losses caused by the law they supported.

In other words, we’re about to see – as part of upcoming appropriations legislation – if Republicans have the intelligence and fortitude to retain Rubio’s anti-bailout provision.

This should be a slam-dunk issue. After all, the American people presumably will not favor bailouts for corrupt health insurance corporations.

Especially since Obamacare is still very unpopular.

But what if Obama says “boo” and threatens to veto spending legislation if it doesn’t give him carte blanche bailout authority? Will GOPers be so scared of a partial government shutdown that they instantly surrender?

After all, when there was a shutdown fight in 2013, Republicans suffered a horrible defeat in the 2014 mid-term elections. Right? Isn’t that what happened?

Oh…wait…never mind.

P.S. Let’s not forget that there is one very tiny segment of America that has unambiguously benefited from Obamacare.

P.P.S. If you have any friends who work for the corrupt health insurance companies that are worried about a potential loss of bailout money, you can cheer them up this Christmas season with some great – and very appropriate – action figure toys.

P.P.P.S. Since we’re closing with sarcasm, here’s the federal government’s universal bailout application form.

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China Apparently Didn’t Learn any Lessons from the TARP Bailout or the Greek Bailout

Is the third time the charm, at least for bailouts?

First, we had the TARP bailout in the United States, and that turned out to be a corrupt mess.

Second, we had the Greek bailout, which has squandered hundreds of billions of euros to prop up a welfare state.

Now we have a third big bailout, with China seeking to stabilize that nation’s faltering stock market. So anybody want to guess how this will work out?

To put it mildly, the Wall Street Journal does not have a favorable opinion of this financial market intervention.

Beijing…officials pumped public money into the market. It hasn’t worked; the Shanghai Composite Index closed Thursday at 3661, 29% below its June peak. …Peking University economist Christopher Balding has added up the bailout and stimulus measures announced since the market panic started in late June. They total $1.3 trillion, or more than 10% of GDP.

So why is this a bad thing?

For two reasons, as the WSJ explains. First, it’s an unjustified wealth transfer. Second, it creates an economic environment contaminated by moral hazard.

Investors who bought when the market was already frothy are getting a chance to exit with some of their profits intact. But Chinese who don’t own stocks are justified in asking why they must subsidize their fellow citizens’ poor decisions. Mr. Balding’s spreadsheet shows that the market-rescue measures represent a huge transfer of wealth to investors who should have been prepared to shoulder the risks when they bought shares. The failed bailout reinforces the expectation that Beijing will attempt to manage the financial markets in the future. This moral hazard means the volatility will continue, along with the costs of future bailouts.

You won’t be surprised to learn that I share the Wall Street Journal’s skepticism. In a recent interview with Neil Cavuto, I said the Chinese government (like just about all governments) is too focused on short-run pain avoidance.

In other words, by trying to prop up markets in the short run, I think the Chinese government will cause a far greater amount of economic pain in the long run.

Two other points from the interview deserve highlighting.

1. China’s economy needs more economic liberalization (as opposed to the snake oil being peddled by the IMF) if it hopes to become a first-world nation. While there’s been a lot of progress since the wretched deprivation and poverty of Mao’s era, China is still way behind the United States and other nations with more capitalistic systems. Hong Kong, Singapore, and Taiwan are appropriate role models.
2. Whenever folks on the left point to a “success story” that ostensibly proves big government and central planning are more successful that capitalism, it’s just a matter of time before they’re proven wrong. Some of them were delusional enough to think the Soviet Union was economically successful (see bottom of this post) and events proved them wrong. As I pointed out in the interview, some of them thought Japan’s model of central planning was the ticket for prosperity and events proved them wrong. More recently, some of them have argued that China’s state-driven economy was a role model and they’re now being shown to be wrong.

P.S. Let’s close with some economic humor.

Fans of old-time comedy are probably familiar with the famous who’s-on-first exchange between Abbott and Costello.

Well, here’s a modern version of that exchange that showed up in my mailbox yesterday, only it deals with joblessness. I won’t strain credibility by asserting it’s as funny as the original sketch, but it does indirectly highlight the fact that we should focus primarily on labor force participation since that measure how many people are producing wealth for the nation.

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good Subject. Terrible times. It’s 5.6%.

COSTELLO: That many people are out of work?

ABBOTT: No, that’s 23%.

COSTELLO: You just said 5.6%.

ABBOTT: 5.6% unemployed.

COSTELLO: Right, 5.6% out of work.

ABBOTT: No, that’s 23%.

COSTELLO: Okay, so it’s 23% unemployed.

ABBOTT: No, that’s 5.6%.

COSTELLO: Wait a minute! Is it 5.6% or 23%?

ABBOTT: 5.6% are unemployed. 23% are out of work.

COSTELLO: If you are out of work, you are unemployed.

ABBOTT: No, Congress said you can’t count the “out of work” as the unemployed. You have to look for work to be unemployed.

COSTELLO: But they are out of work!

ABBOTT: No, you miss his point.

COSTELLO: What point?

ABBOTT: Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But ALL of them are out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking; and if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you’re off the unemployment rolls, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment rate just goes down because you don’t look for work?

ABBOTT: Absolutely it goes down. That’s how it gets to 5.6%. Otherwise it would be 23%.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.

ABBOTT: Now you’re thinking like an economist.

COSTELLO: I don’t even know what the hell I just said!

ABBOTT: Now you’re thinking like a politician.

P.P.S. While economists deservedly get mocked, we’re not totally useless. We occasionally show a bit of cleverness.

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