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Archive for the ‘Cronyism’ Category

During my early years in public policy, back in the late 1980s, I repeatedly crossed swords with people who argued that Washington should have more power over the economy so that the United States could compete with Japan, which supposedly was an economic juggernaut because of “industrial policy” directed by wise and far-sighted bureaucrats at the Ministry of International Trade and Industry.

Given Japan’s subsequent multi-decade slump, it certainly seems like I was right to warn against giving American politicians the power to pick winners and losers.

But not everybody learned from that experience. In the words of Yogi Berra, “It’s deja vu all over again,” only this time we’re supposed to be terrified because the Chinese government wants to subsidize and promote certain industries as part of “Made in China 2025”.

At the risk of understatement, I’m not scared.

Yes, China has enjoyed some impressive growth since it partially liberalized its economy in the late 1900s, but it will remain far behind the United States unless – as I recently explained on CNBC – there is a new wave of free-market reforms.

Needless to say, a government initiative to favor certain industries is hardly a step in that direction.

Some Chinese policy makers even realize that it’s counterproductive to give that kind of power to politicians and bureaucrats.

Here are some excerpts from a report in the South China Morning Post.

“Made in China 2025” has been a waste of taxpayers’ money, China’s former finance minister Lou Jiwei has said…“[Made in China] 2025 has been a lot of talking but very little was done,” Lou, chairman of the National Council for Social Security Fund, said on Wednesday… “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.” …“The negative effect of [the plan] is to have wasted taxpayers’ money.” He suggested the market should have played a greater role in developing the industries that MIC2025 was designed to push. “The [resources] should have been allocated by the market; the government should give the market a decisive role,” Lou said. “Why has the government pushed so hard on this strategy? [Hi-tech industry prospects] can all change in a few years, it is too unforeseeable.”

Sounds like Mr. Lou learned from Obama’s Solyndra fiasco that cronyism doesn’t work.

But some of his colleagues still need to be educated.

Made in China 2025 (MIC2025) strategy, Beijing’s blueprint for tech supremacy. …Since the plan’s launch in 2015, the government has poured money into MIC2025 to try to turn a number of domestic industries – including artificial intelligence, pharmaceuticals and electric vehicles – into global leaders by 2025. …Lou said: “It [the strategy] should not have been done that way anyway. I was against it from the start, I did not agree very much with it.

I hope senior government officials change their minds about this harmful exercise in central planning.

Not because I’m afraid it will work, but rather because I like China and I want the country to prosper. The partial reforms from last century produced great results for China, including huge reductions in poverty.

Additional reforms could lead to mass prosperity. But that won’t happen if the Chinese government tries to control the allocation of resources.

Let’s close with a big-picture look at central planning and industrial policy, starting with the common-sense observation that there are degrees of intervention.

Here’s my back-of-the-envelope perspective. We have examples of nations, such as the Soviet Union, where the government had near-total control over the allocation of labor and capital. And I suppose Hong Kong would be the closest example of a laissez-faire jurisdiction. And then there’s everything in between.

I’ve already shared two great videos on government planning versus the market. I strongly recommend this Prager University video, narrated by Professor Burton Folsom, on the failure of government-dictated investment. And also this video narrated by Professor Russ Roberts, which shows how a decentralized market efficiently provides a bounty to consumers.

Here’s a third, which celebrates the work of the late Don Lavoie, one of my professors when I studied at George Mason University.

By the way, there is a terrible flaw in the video. The photo that appears at 1:38 shows select faculty and students in 1987. Why is that a flaw? For the simple reason that I was part of the photo but got cropped out in the video.

P.S. Some people worry that China’s industrial policy will have a negative spillover effect on the United States because American companies will lose market share to the subsidized Chinese companies. That’s a legitimate concern and American officials should use the World Trade Organization to counter mercantilist policies.

P.P.S. To my dismay, some people don’t want China to become a rich nation. I assume those people are hoping China follows the advice of the OECD and IMF.

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What’s the worst thing the government does?

That’s a difficult question to answer. I’ve argued that giving U.S. tax dollars to the OECD is the worst item in the budget, on a per-dollar-spent basis.

And I’ve expressed scathing disdain for the horrid practice of civil asset forfeiture. There are also really destructive features of the tax system, such as FATCA and the death tax.

But you could make a strong case for Fannie Mae and Freddie Mac as well.

These two government-created corporations not only reduce long-run growth by distorting the allocation of capital, they also bear considerable responsibility for last decade’s financial crisis since they played a major role in fueling the housing bubble.

The U.K.-based Economist describes America’s interventionist regime as a form of socialism.

…the mortgage system…is…largely nationalised and subject to administrative control. …America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. …The supply of mortgages in America has an air of distinctly socialist command-and-control about it. …The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat. …the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12. …the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. …There are at least 10,000 relevant pages of federal laws, regulatory orders and rule books. …In the land of the free, where home ownership is a national dream, borrowing to buy a house is a government business for which taxpayers are on the hook.

In other words, our system of housing finance is mucked up by government intervention (very much akin to the way healthcare is a mess because of government).

That’s the bad news.

The good news is that Fannie and Freddie have been in “conservatorship” every since they got a big bailout last decade. And that means the two cronyist firms are now somewhat constrained. They can’t lobby, for instance (though Republicans and Democrats still seek to expand subsidies in response to campaign cash from other housing-related lobbyists).

But the worst news is that there are people in the Trump Administration who want to go back to the bad ol’ pre-bailout days.

The Wall Street Journal opined on the issue as Trump prepared to take office. The editorial noted that the implicit government guarantee for Fannie Mae and Freddie Mac led to an explicit bailout.

Fan and Fred’s owners feasted for decades on an implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.

As part of that bailout and the subsequent “conservatorship,” Fannie and Freddie still get to operate, and they still have a big implicit subsidy that allows near-automatic profits (at least until and unless there’s another big hiccup in the housing market), but the Treasury Department gets those profits.

Needless to say, this upsets the shareholders. They bought stock so they could get a slice of the undeserved profits generated by the Fannie/Freddie cronyist business model.

They claim going back to the pre-bailout days would be a form of privatization, but the WSJ editorial correctly warns that it’s not pro-free market to allow these two government-created companies to distort housing markets with their government-granted favors, preferences, and subsidies.

…the expectation that Treasury secretary nominee Steven Mnuchin is going to revive the Beltway model of public risk and private reward. …private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them. …what they really want is to liberate for themselves the profits that flow from a duopoly backed by taxpayers. …We’re all for businesses getting out of government control—unless they’re playing with taxpayer money. Americans were told that Fannie and Freddie were safe for years before the last crisis. The right answer is to shut them down.

Amen. Not just shut them down, dump them in the Potomac River.

The Wall Street Journal then revisited the issue early last year, once again expressing concern that the Treasury Secretary wants to go back to the days of unchecked cronyism.

Fannie Mae is again going hat in hand to taxpayers… Washington should take this news as a kick in the keister to finally start winding down the mortgage giant and its busted brother, Freddie Mac . But the Trump Administration seems to be moving in the opposite direction. …The pair, now in “conservatorship,”…were left in limbo. Hedge funds bought up their shares, betting they could pressure Washington into bringing back the old business model of public risk and private reward. …Treasury Secretary Steven Mnuchin told the Senate Banking Committee: “I think it’s critical that we have a 30-year mortgage. I don’t believe that the private markets on their own could support it.” But many countries have robust housing markets and ownership rates without a 30-year mortgage guarantee. Mr. Mnuchin sounds like his predecessor, Democrat Jack Lew. Wasn’t Donald Trump elected to eliminate crony capitalism?

This issue is now heating up, with reports indicating that the Treasury Secretary is pushing to restore the moral hazard-based system that caused so much damage last decade.

The Trump administration is at war with itself over who should take the lead in the reform of the government-backed mortgage companies Fannie Mae and Freddie Mac… The battle centers on whether the Treasury Department should continue to advocate what it views as a plan for the future of the mortgage companies or cede control of those efforts to the incoming chief of the Federal Housing Financial Agency (FHFA), economist Mark Calabria.

The good news is that Trump has nominated a sensible person to head FHFA, which has some oversight authority over Fannie and Freddie.

And it’s also good news that some of the economic people at the White House understand the danger of loosening the current limits on Fannie and Freddie.

White House economic officials…are seeking to prevent a repeat of the risk-taking activities by the companies that contributed to the mortgage bubble, leading to its 2008 collapse and $200 billion government bailout. These officials, who spoke on the condition of anonymity, also say any reform must have the blessing of Calabria, a long-time libertarian economist and frequent critic of the outfit’s pre-crisis business model. ..He is also wary of returning Fannie and Freddie to their previous incarnations as private companies that have shareholders, but also receive backing from the federal government if they get in trouble as they did in 2008.

But it seems that the Treasury Department has some officials who – just like their predecessors in the Obama Administration – learned nothing from the financial crisis.

They want to give Fannie and Freddie free rein, perhaps in order to help some speculator buddies.

Treasury Secretary Steve Mnuchin and his top house advisor Craig Phillips, have so far taken the lead… In January, acting director of the Federal Housing Agency Joseph Otting privately told employees about plans…, referring to Mnuchin’s past statements on the matter… Mnuchin also has business ties with at least one of the major investors in the GSE’s stock that has benefited amid the speculation… Paulson – who has stakes in the GSE’s preferred class of stock — has also submitted a proposal… A key feature of the framework touted by Mnuchin, Phillips, Otting and Paulson is that both Fannie and Freddie would have some backing from the federal government in times of emergency while remaining public companies, a business model similar to the one the GSEs operated with before 2008.

Given the Treasury Department’s bad performance on other issues, I’m not surprised that they’re on the wrong side on this issue as well.

Tobias Peter of the American Enterprise Institute outlines the correct approach.

The GSEs, however, do very little that cannot be done – and is not already done – by the private sector. In addition, these institutions pose a significant financial risk to U.S. taxpayers. Weighing this cost against the minimal benefits makes the case that the GSEs should be eliminated. …regulators have tilted the playing field in favor of the GSEs. …GSE borrowers can thus take on more debt to offset higher prices. With inventories lower than ever, this extra debt ends up driving prices even higher, creating a vicious cycle of more debt, higher prices, greater risk and, ironically, more demand for the GSEs. What keeps the GSEs in business are the same failed housing policies that brought us the last financial crisis. The GSEs are not needed in the housing market – and they have become detrimental to the market’s long-term health. They could be eliminated… This would create space for the re-emergence of an active private mortgage-backed securities market that ensures a safer and more stable housing finance system with access for all while letting taxpayers off the hook.

Mr. Peter is correct.

Here’s a flowchart that shows what happened and the choice we now face.

At the risk of stating the obvious, real privatization is the right approach. This would mean an end to the era of special favors and subsidies.

  • No taxpayers guarantees for mortgage-backed securities
  • No special exemption from complying with SEC red tape.
  • No more special tax favors such as special exemptions.

Sadly, I’m not holding my breath for any of this to happen.

The real battle in DC is between conservatorship and fake privatization (which really should be called turbo-charged and lobbyist-fueled cronyism).

And if that’s the case, then the obvious choice is to retain the status quo.

P.S. This is a secondary issue, but it’s worth noting that Fannie and Freddie like to squander money. Here are some excerpts from a report published by the Washington Free Beacon.

Fannie Mae is charging taxpayers millions for upgrades to its new headquarters, including $250,000 for a chandelier. The inspector general for the Federal Housing Finance Agency (FHFA), which acts as a conservator for the mortgage lender, recently noted $32 million in questionable costs in an audit for Fannie Mae’s new headquarters in downtown Washington, D.C. …The inspector general reported that costs for the new headquarters have “risen dramatically,” to $171 million, up from $115 million when the consolidated headquarters was announced in 2015. …After the inspector general inquired about the chandelier, officials scrapped plans for a $150,000 “hanging key sculpture,” and $985,000 for “decorative screens” in a conference room.

The bottom line is that Fannie and Freddie, at best, undermine prosperity by diverting money from productive investment, and, at worst, they saddle the nation with financial crisis.

They should be shut down, not resuscitated.

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Since trade promotes prosperity, I want increased market-driven, cross-border commerce between China and the United States.

But you can see in this CNBC interview that I’m worried about achieving that outcome given protectionism from President Trump and mercantilism from President Xi in China.

There’s never much chance to elaborate in short interviews, so here’s some additional analysis on the key points.

1. China’s economy is weak because of insufficient liberalization.

I have written about how China got great results – especially huge reductions in poverty – thanks to partial economic liberalization last century. But those reforms were just a step in the right direction. The country currently ranks only #107 according to Economic Freedom of the World, largely because so much of the economy is hampered by subsidies, regulation, protectionism, and cronyism. Sweeping pro-market reforms are needed if China’s leaders want their country to become rich.

2. Trump’s unthinking protectionism hurts both sides, but China may be more vulnerable.

I mentioned in the interview that Trump’s protectionism meant that he was harming both nations. This is what always happens with protectionism, so I wasn’t saying anything insightful. But it is quite likely that China will suffer more because its economy doesn’t have the flexibility and durability of America’s more market-oriented system.

That is one of the conclusion from a recent news report.

Policymakers in Europe have spared no effort to emphasize that there can be no winners in an escalated trade conflict between the United States and China. But a fresh study shows there are several beneficiaries. …But a study by research network EconPol Europe suggests such an assertion isn’t quite true — in fact, it isn’t true at all. The survey analyzes the impact of tariffs imposed by the US on China and the effect of China’s retaliatory tariffs. …The EconPol Europe study calculates that Chinese exporters are bearing approximately 75 percent of the costs… in Asia, Vietnam has been gaining the most from firms relocating their production away from China. Malaysia, Singapore and India have also been profiting from this development.

3. China’s cronyism presents a challenge for supporters of unilateral free trade.

I’m a supporter of unilateral free trade. America should eliminate all trade barriers, even if other nations want to hurt themselves by maintaining their restrictions. That being said, it’s not genuine free trade if another country has direct or indirect subsidies for its companies. As I noted in the interview, some economists say we shouldn’t worry since the net result is a wealth transfer from China’s taxpayers to America’s consumers. On the other hand, that approach means that some American workers and companies are being harmed. And if supporters of free markets are upset when American workers and companies are hurt by domestic cronyism, we also should be upset when the same thing happens because of foreign cronyism.

The challenge, of course, is whether you can use trade barriers to target only cronyism. I worry that such an effort would get hijacked by protectionists, though Professor Martin Feldstein makes a good argument in the Wall Street Journal that it’s the right approach.

China’s strategy is to give large government subsidies to state-owned companies and supplement their research with technology stolen from American and other Western companies. …That is the real reason why the Trump administration has threatened tariffs of 25% on $200 billion of Chinese exports to the U.S.—nearly half the total—unless Beijing reforms its policies. …The purpose of the tariffs is not to reduce the bilateral trade deficit but to counter Chinese technology theft and forced transfer. …the U.S. could impose heavier tariffs and other economic penalties in order to force China to play by the rules, ending its attempt to dominate global markets through subsidies and technology theft.

4. Trump should have used the World Trade Organization to encourage Chinese liberalization.

I wrote last year that the President would enjoy more success if he used the WTO to apply pressure on China.

It’s not just me making this claim. Here are some excerpts from a story in the Washington Post.

Pressure from Europe and Japan is amplifying the president’s vocal complaints about Chinese trade practices… “it wasn’t a Trump issue; it was a world issue,” said Jorge Guajardo, …a former Mexican ambassador to China. “Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.” …Germany and the United Kingdom joined the United States this year in tightening limits on Chinese investment. …In September, trade ministers from the United States, European Union and Japan issued a joint statement that blasted the use of subsidies in turning “state owned enterprises into national champions and setting them loose in global markets.” The statement…also rejected forced technology transfer… The United States did win E.U. and Japanese support for a complaint to the WTO alleging China has violated U.S. intellectual property rights. But rather than use the global trade body for a broader attack on China, the administration has demanded changes in the way the organization operates. To critics, the administration missed an opportunity to marshal China’s trading partners behind an across-the-board indictment of its state-led economy.

5. The imperfect Trans-Pacific Partnership was an opportunity to pressure China to reduce cronyism.

Because of my concerns about regulatory harmonization, I wasn’t grievously disappointed when the United States chose not to participate in the TPP, but I fully recognized that the pact had very positive features. Including the pressure it would have placed on China to shift toward markets and away from cronyism.

6. Additional Chinese reform is the ideal outcome, both for China and the rest of the world.

Three years ago, I wrote that China needs a Reagan-style revolution of economic liberalization. That’s still true today. The bottom line is that China’s leaders should look at the progress that was achieved last century when the economy was partially liberalized and decide that the time is ripe for the free-market version of a great leap forward. In other words, the goal should be great economic success, not modest economic success.

I’ll conclude by pointing out that I don’t want China to copy the United States, even though that would be a step in the right direction.

According to data from Economic Freedom of the World, there’s a much better role model.

Indeed, I would like the United States to copy Hong Kong as well.

The recipe for prosperity is the same all over the world. The challenge is getting politicians to do what’s best for citizens rather than what’s best for themselves.

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When I think of over-bearing governments with myopic enforcement of silly rules, I obviously think of the United States, especially the IRS, EEOC, FDA, and EPA.

And I also think of Germany, Japan, and other straight-laced societies.

But I don’t think of Canada. After all, that’s the home of Dudley Do-Right. Canadians are too nice to do dumb things!

However, I shouldn’t be basing my views on a cartoon from my childhood. It seems that Canadians are quite capable of bizarre behavior. At least when you look at their legal system.

Let’s review three additional examples.

I’ve written about some of the mistakes that American states (California and Colorado, for instance) have made when legalizing marijuana. Well, there are similar mistakes in Canada according to the Washington Post.

When the government launched Canada’s official recreational-pot market on Oct. 17, it was banking on the idea that many users would prefer to buy legally and that the black market would quickly begin to fade. …things aren’t going as expected. …a month after legalization, more than a third of Canadian cannabis users said they were still buying from their regular dealers and hadn’t even tried the legal system. Five illegal sellers in Quebec told The Washington Post their sales are slightly up.

It turns out that the legal system is a mess of harsh regulation.

In 2015, when the government first committed to legalization, many of them planned to apply to open private shops. “All of us thought, ‘Okay . . . I’m going to be able to come out of the shadows and I’m going to be able to pay taxes,’ ” David said. “As time went on, it became clear that’s not what they were after.” In Quebec and several other Canadian provinces, all cannabis stores are government-run, leaving no path to legality… said Lewis Koski, former director of the Colorado Marijuana Enforcement Division and now a consultant on legalization. “I can’t think of a state here in the U.S. that has a government-control model similar to . . . Canada’s.” Even in provinces that do allow private shops or dispensaries, including Alberta, Saskatchewan and Manitoba, small businesses face high barriers. It costs almost $5,000 just to apply for a license, and if approved, $23,000 each year thereafter in regulatory fees, with provinces often adding their own charges.

Let’s now look at a government-enforced Canadian cartel.

The maple syrup farmers of Québec have been saddled with compulsory membership to the Federation of Québec Maple Syrup Producers (FPAQ, according to the native French abbreviation) since 1990. The Federation holds monopoly rights over all maple syrup produced in the province, controlling wholesale distribution and prices. Anyone who dares to sell more than five litres of their boiled tree sap on their own farm or to local grocery stores faces a prison sentence and a fine of hundreds of thousands of dollars. …Angele Grenier and her husband, decades-long syrup farmers, have been smuggling their contraband syrup to the neighboring province of New Brunswick. In the dark of the night, they load barrels onto trucks and sneak across the province border to market freedom. For this terrible black market act of choosing their own customers and prices, Angele is one of Canada’s most wanted women. She has appealed the charges brought against her by the FPAQ, and her case is being taken up by the Supreme Court.

Maybe Canadian syrup smugglers can learn lessons from Norwegian butter smugglers?

Last but not least, the Toronto Star reports that Canadian law enforcement is capable of government thuggery.

At about 5 p.m. on May 13, 2009, Kosoian stepped on the down escalator at a subway station in Laval. She was heading to her history class at a university in downtown Montreal. Kosoian had used that same escalator almost every day for four years. She knew that at the front of the escalator, as well as at a spot halfway down, were yellow pictograms that said, “Caution … hold handrail.” She deemed the pictogram nothing more than a warning or recommendation. Besides, the H1N1 virus was making the rounds, and Kosoian considered the handrail a cesspool of microbes. …A police officer…stopped in front of Kosoian on the step below when the escalator had taken her about halfway down. The officer, Fabio Camacho, …ordered her to hold the handrail. Kosoian says she responded: “It’s my right to hold the handrail or not to hold it.” …when Kosoian reached the bottom of the escalator, Camacho and his partner, the officer who initially walked past Kosoian, grabbed her by the arms and took her to a nearby locked room that also contained a jail cell. …Camacho and his partner cuffed Kosoian’s hands behind her back and sat her in a chair. He searched her bag, found her driver’s licence and began writing her two tickets: a $100 fine for not holding the handrail, and a $320 fine for obstructing the work of a police officer.

It’s quite possible that Kosoian was being obnoxious and baiting the cops, but none of that changes the fact that not holding a handrail shouldn’t be a criminal offense.

Do cops in Canada bust into people’s houses to see if mattress tags are still attached (though perhaps only the U.S. is dumb enough to have such a rule)?

Interestingly, this episode from 2009 is now going to the Canadian Supreme Court.

The Laval police force and the transit agency…pressed for the fines to be paid, and Kosoian’s refusal triggered a municipal court hearing in May 2011. In March 2012, Judge Florent Bisson acquitted Kosoian of the tickets… Kosoian…launched a lawsuit against Camacho, the STM and the City of Laval. In August 2015, the Quebec Court dismissed it with a legal tongue lashing. …She appealed and, on Dec. 5, 2017, the Quebec Court of Appeal ruled against her in a 2-1 decision. …Kosoian and her lawyer again appealed, this time to the Supreme Court. …the Supreme Court has only granted about 10 per cent of the 500 or so requests for appeals it receives each year. So Thomas Slade, a lawyer who is not involved in the case, says he was initially surprised when the court agreed to hear Kosoian.

I’m not overflowing with sympathy for Ms. Kosoian, but there’s not much doubt that getting rid of stupid laws is the best way of avoiding this type of mess.

I’ll close with two observations. First, Americans can’t throw stones at our Canadian friends since we live in a glass house.

Second, Canada obviously needs to change some of its silly laws, but I don’t want this to be interpreted as an indictment of the entire country (notwithstanding Prime Minister Zoolander).

In recent decades, Canada has dealt with several issues (spending restraintwelfare reformcorporate tax reform, bank bailoutsregulatory budgeting, the tax treatment of saving, school choice, and privatization of air traffic control) in a very sensible fashion.

P.S. Though a Canadian politician is eligible for the hypocrite-of-the-century award.

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Since I’m a proponent of tax reform, I don’t like special favors in the tax code.

Deductions, exemptions, credits, exclusions, and other preferences are back-door forms of cronyism and government intervention.

Indeed, they basically exist to lure people into making decisions that otherwise aren’t economically rational.

These distortionary provisions help to explain why we have a hopelessly convoluted and deeply corrupt tax code of more than 75,000 pages.

And they also encourage higher tax rates as greedy politicians seek alternative sources of revenue.

This current debate over “tax extenders” is a sad illustration of why the system is such a mess.

Writing for Reason, Veronique de Rugy explains how special interests work the system.

Tax extenders are temporary and narrowly targeted tax provisions for individuals and businesses. Examples include the deductibility of mortgage-insurance premiums and tax credits for coal produced from reserves owned by Native American tribes. …These tax provisions were last authorized as part of the Bipartisan Budget Act of 2018, which retroactively extended them through the end of 2017, after which they have thus far been left to remain expired. If Congress indeed takes up extenders during the current lame-duck session, any extended provisions are likely to once again apply retroactively through the end of 2018, or perhaps longer. There are several problems with this approach to tax policy. Frequently allowing tax provisions to expire before retroactively reauthorizing them creates uncertainty that undermines any potential benefits from incentivizing particular behaviors.

To make matters more complicated, a few of the extenders are good policy because they seek to limit double taxation (a pervasive problem in the U.S. tax system).

…not all tax extenders are a problem. Some are meant to avoid or limit the double taxation of income that’s common in our tax code. Those extenders should be preserved. Yet others are straightforward giveaways to special interests. Those should be eliminated.

Veronique suggests a sensible approach.

It’s time for a new approach under which tax extenders are evaluated and debated on their individual merits. The emphasis should be on eliminating special-interest handouts or provisions that otherwise represent bad policy. Conversely, any and all worthy provisions should be made permanent features of the tax code. …The dire need to fix the federal budget, along with the dysfunctional effects from extenders, should provide the additional motivation needed to end this practice once and for all.

Needless to say, Washington is very resistant to sensible policies.

In part, that’s for the typical “public choice” reasons (i.e., special interests getting into bed with politicians to manipulate the system).

But the debate over extenders is even sleazier than that.

As Howard Gleckman explained for Forbes, lobbyists, politicians, and other insiders relish temporary provisions because they offer more than one bite at the shakedown apple.

If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act.  A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him. Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.

In other words, the temporary nature of extenders is a feature, not a bug.

This is a perfect (albeit depressing) example of how the federal government is largely a racket. It enriches insiders (as I noted a few days ago) and the rest of us bear the cost.

All of which reinforces my wish that we could rip up the tax code and replace it with a simple and fair flat tax. Not only would we get more growth, we would eliminate a major avenue for D.C. corruption.

P.S. I focused today on the perverse process, but I can’t help but single out the special tax break for electric vehicles, which unquestionably is one of the most egregious tax extenders.

EV tax credits…subsidize the wealthy at the expense of the lower and middle classes. Recent research by Dr. Wayne Winegarden of the Pacific Research Institute shows that 79 percent of EV tax credits were claimed by households with adjusted gross incomes greater than $100,000. Asking struggling Americans to subsidize the lifestyles of America’s wealthiest is perverse… Voters also shouldn’t be fooled by the promise of large environmental benefits. Modern internal combustion engines emit very little pollution compared to older models. Electric vehicles are also only as clean as the electricity that powers them, which in the United States primarily comes from fossil fuels.

I was hoping that provisions such as the EV tax credit would get wiped out as part of tax reform. Alas, it survived.

I don’t like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I especially dislike government flood insuranceSocial Security, government-run lotteries, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts. Let’s add the EV tax credit to this shameful list.

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Some departments of the federal government should be shut down because of federalism. High on that list would be the Department of Education and Department of Transportation.

Other departments should be shut down because there is simply no role for any government involvement at any level.

I usually cite the Department of Housing and Urban Development as an example, but the Department of Agriculture also should be terminated.

It’s a rat’s nest of special interest favors. I’ve previously written about inane intervention to enrich Big Dairy, Big Sugar, and Big Corn.

But I confess that I was unaware of Big Cranberry.

The Wall Street Journal opines about the nonsensical nature of cranberry intervention.

As you dip into the Thanksgiving cranberry sauce, here’s a tart story that may make you want to drain the bog. This fall the U.S. Agriculture Department gave cranberry growers its approval to dump a quarter of their 2018 crop. Tons of fruit and juice—in the ballpark of 100 million pounds—will be turned into compost, used as animal feed, donated or otherwise discarded. The goal is to prop up prices.

Needless to say, there’s nothing about propping up cranberry prices in Article 1, Section 8, of the Constitution.

This is also a common-sense issue, as the WSJ explains.

The USDA rule caps growers’ production based on their historical output, with some exemptions. Small cranberry processors aren’t covered, and neither are those that don’t have inventory left over from last year. The trouble is that this reduces everyone’s incentive to downsize… Among the many economic perversities of agricultural policy, this is merely a vignette. Still, America is growing 100 million pounds of cranberries and then throwing them away to raise prices per government order. Wouldn’t it be better—and easier—to let the market work?

By the way, Trump’s protectionism is also part of the problem.

President Trump’s trade war hasn’t helped. About a third of production usually goes overseas. But in June the European Union put a 25% tariff on U.S. cranberry-juice concentrate in retaliation for U.S. steel tariffs. A month later, China bumped its tariff on dried cranberries to 40% from 15%. Mexico and Canada also added duties.

A typical Washington cluster-you-know-what.

Though I don’t recommend thinking about it too much, lest you get indigestion.

The solution is to copy New Zealand and get rid of all agriculture handouts.

P.S. If you like Thanksgiving-themed libertarian humor, the image at the bottom of this column augments the image to your right.

P.P.S. And if you like Thanksgiving-themed videos with libertarian messages, here’s one option and here are two others.

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I want higher wages.

Indeed, that’s a big reason why I favor better tax policy. I want low rates and less double taxation so we get more entrepreneurship and investment, which then will lead to higher productivity and more compensation for workers.

With this in mind, let’s look at some good news from a story in the New York Times.

Amazon said on Tuesday that it would raise the minimum wage to $15 an hour for its United States employees, a rare acknowledgment that it was feeling squeezed by…a tight labor market. The raises apply for part-time workers and those hired through temporary agencies. …The new wages will apply to more than 250,000 Amazon employees, including those at the grocery chain Whole Foods, as well as the more than 100,000 seasonal employees it plans to hire for the holiday season.

This is an encouraging development. My support for pro-market policies is partly driven by philosophy (freedom to engage in voluntary exchange, etc), but also motivated by a desire to help people become more prosperous.

It’s too soon to say for sure, but perhaps we’re seeing evidence that last year’s tax reform is paying dividends. Of course, it’s also possible that we’re in a bubble that’s about to pop, but let’s hope that’s not the case.

In any event, there’s also some bad news in the story. Amazon’s decision may not simply be a business decision. It also might be a way of appeasing the crowd in Washington.

The company now employs about 575,000 people worldwide, up more than 50 percent in the past year…the pay of those workers has become a growing issue for activists… “I think they saw the writing on the wall…,” Senator Bernie Sanders of Vermont said in an interview after the announcement. …Mr. Sanders and labor organizers have criticized the wages and conditions of Amazon’s work force. …As recently as last month Amazon was resisting the pressure.

The most nauseating aspect of this is that Amazon’s boss issued a groveling tweet to Crazy Bernie.

Since I’ve shared the good news and bad news, now let’s look at the ugly news.

Having decided to boost wages for his workers, Bezos now want to impose higher costs on smaller companies that compete against Amazon.

The company said it would also lobby Washington to raise the federal minimum wage, which has been set at $7.25 for almost a decade.

This is a classic example of cronyism. A big company is using the coercive power of government to unfairly tilt the playing field.

The Wall Street Journal opined about this oleaginous development.

Jeff Bezos…the Amazon CEO showed he also has impeccable political timing. His decision to raise Amazon’s minimum wage to $15 an hour will buy the tech company some political insurance… Mr. Bezos also announced that Amazon will now lobby Congress to raise the national minimum wage from $7.25 an hour. If Amazon is already paying $15, it’s no competitive sweat for Mr. Bezos to look virtuous for the media and politicians.

The WSJ also commented on the implicit extortion.

Speaking of government, Amazon’s wage increase may also buy some insurance against a looming assault from Congress. Bernie Sanders, the Vermont socialist and likely presidential candidate in 2020, has introduced the Stop Bezos Act that would tax Amazon to finance government transfer payments like food stamps. …Mr. Bezos also wants to hold off the federal antitrust cops, but that may cost more than $15 an hour. Politics aside, Amazon’s wage increase wouldn’t be possible if the U.S. economy hadn’t risen out of its eight-year Obama doldrums. As always, the best way to raise living standards is faster growth, not political coercion.

Amen.

Sadly, this is not the first time Amazon has climbed into bed with politicians. It is currently seeking special handouts from state and local governments for a new headquarters complex.

P.S. If you want to understand why government-imposed mandates for higher minimum wages are misguided, there’s very powerful evidence from Seattle. Simply stated, workers lose jobs and income.

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