Feeds:
Posts
Comments

Archive for the ‘Economics’ Category

In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

Read Full Post »

Last year, I weighed in on the debate about whether companies should be operated for the benefit of owners (shareholders) or for the broader community (stakeholders).

Unsurprisingly, I sided with Milton Friedman and argued that businesses have a responsibility to maximize profits – assuming, of course, ethical behavior.

Moreover, I cited research showing how this is the approach that actually produces the maximum benefits for the rest of us (i.e., stakeholders).

But some people are not convinced by these insights.

David Gelles of the New York Times has a glowing profile of a former CEO, Hubert Joly, largely because of his apparent hostility to free markets.

Hubert Joly took over Best Buy in 2012… Since stepping down as chief executive in 2019, Mr. Joly has taken up a post teaching at Harvard Business School… In his book, on the speaking circuit and in meetings with other executives, Mr. Joly has taken up a campaign against the capitalist st atus quo. “…on the top of my F.B.I. most wanted list…is Milton Friedman, with his shareholder primacy — the excessive, obsessive focus on profits as the key thing that matters.”

Mr. Joly’s overt disdain for Friedman’s position seems noteworthy.

But it also seems hypocritical.

Why?

Because Joly did exactly what Friedman recommended. He is viewed as a successful CEO because he made changes that had the effect of making shareholders richer.

…the electronics retailer was struggling… Sales and profits were sagging, and the stock price had cratered. …Eschewing the conventional wisdom — that Best Buy should slash wages and cut costs in a bid to jack up profitability — Mr. Joly began investing in the company. He gave workers better perks… The strategy worked, and Best Buy shares soared during his tenure.

So why, then, is Mr. Joly so hostile to Friedman when he followed his approach?

Beats me, but I’m guessing he somehow thinks Friedman’s maxim means that a CEO should “slash wages” and close stores. And that sounds mean and heartless.

But Joly showed that Friedman’s maxim could be fulfilled in a different way. He figured out how to please consumers so that it was possible to expand the business and make workers better off.

Which is actually what capitalism – oops, I mean free enterprise – is all about. People getting richer over time as competition and liberty combine to raise living standards.

Sometimes that happens because a poorly run company contracts (the seemingly heartless process of creative destruction) and sometimes that happens because a well-run company expands.

P.S. There’s one more quote from Mr. Joly that I want to address. As part of his interview with the NYT, he seemingly played the role of a guilt-ridden rich guy.

“I’m on the record saying that the more taxes I pay, the happier I am.”

To be fair, he didn’t actually say that he supported tax increases, either on himself or anyone else. It’s possible that he was really saying that he likes earning more money, which then results in a higher tax bill.

But just in case he was doing some left-wing virtue signalling in favor of tax increases, I’m glad to inform him that there is a website at the Treasury Department that allows him to voluntary turn more money over to the crowd in Washington.

Somehow, I suspect he’ll be like other hypocrites on the left and fail to take advantage of that opportunity.

Read Full Post »

I critiqued Biden’s proposal for a global corporate tax cartel as part of a recent discussion with South Africa’s Free Market Foundation.

Here’s the segment where I explain why it would be bad for developing nations.

At the risk of stating the obvious, Joe Biden is pushing this policy because he wants more tax revenue to fund his misguided plan for a bigger welfare state in the United States.

And the same is true for politicians in other big nations such as France, Japan, and Germany.

So as negotiations continue and rules are decided, rest assured that those countries will look after themselves and politicians from developing nations will be lucky to get a few crumbs from the table.

This discussion gives me a good excuse to put together this list of the potential winners and losers from a global tax cartel.

Since I slapped this together in five minutes, I won’t pretend it’s comprehensive.

But it’s hopefully more complete than a simple statement that politicians are the winners and people in the private sector are the losers.

Speaking of losers, my list includes “Nations with sensible tax policy,” and that’s a good reason to share this story from the New York Times. It’s about Janet Yellen’s efforts to convince Irish politicians to sacrifice their nation’s economic advantage.

The United States is hopeful that Ireland will drop its resistance to joining the global tax agreement… The agreement, which gained the support of the Group of 20 nations on Saturday, would usher in a global minimum tax of at least 15 percent. It would also change how taxing rights were allocated, allowing countries to collect levies from large, profitable multinational firms based on where their goods and services were sold. …Ms. Yellen held high-stakes meetings in Brussels this week with Paschal Donohoe, Ireland’s finance minister… She needs Mr. Donohoe’s support because the European Union requires unanimity among its members to formally join the deal.

So you may be wondering what Ms. Yellen said? Did she have some clever and insightful argument of how Ireland would benefit (or at least not be hurt) if politicians create a global tax cartel?

Nope. The best she could come up with is that Ireland’s tax system wouldn’t be as bad as the one she wants for the United States.

Ms. Yellen told her Irish counterpart that Ireland’s economic model would not be upended if it increased its tax rate from 12.5 percent…it would still have a large gap between its rate and the 21 percent tax rate on foreign earnings that the Biden administration has proposed.

And her weak argument is even weaker when you consider that she’s already pushing for a much-higher minimum tax.

The bottom line is that Ireland has reaped enormous benefits from its decision to enact a low corporate tax rate. But if a global tax cartel is imposed, it would simply be a matter of time before that country gets relegated to being an economic backwater on the periphery of Europe.

P.S. Part of the discussion in the video was about developing nations having the right to copy the economic model (no income tax and no welfare state) that enabled North American and Western Europe to become rich in the 1800s. Sadly, I don’t think many politicians in the developing world are interested in that approach nowadays, but rich nations shouldn’t make it impossible.

Read Full Post »

Part I of this series looked at socialism’s track record of failure, while Part II pointed out that greater levels of socialism lead to greater levels of misery.

For Part III, let’s start with this video on the economics of socialism.

If the world was governed by logic, there would be no need to address this topic for a third time.

After all, the evidence is overwhelming that capitalism (oops, I mean free enterprise) does a better job than socialism.

But it seems that we don’t live in a logical world. We have too many people who have an anti-empirical belief in bigger government.

And, if the polling data is accurate, the problem seems especially acute with young people.

I’ve wondered whether sub-par government schools are part of the problem. Are they mis-educating kids?

I don’t know if that was a problem in the past, but Richard Rahn warns in the Washington Times that it will probably be a problem in the future.

Recent polls have shown rising support for socialism and an increasingly negative view of capitalism, particularly among the young.  …Most of those who say they support socialism are probably unaware that it has failed every place and time that it has been tried. …They may also not be aware that socialism relies on coercion to function… By contrast, capitalism relies on the voluntary exchange of goods and services… Last week at the NEA’s annual meeting, the delegates demanded that the union issue a study criticizing, among many things, “capitalism.” Has anyone thought through the alternatives – a system based on slavery or serfdom…? Under capitalism, investment and productive labor are allocated by individual consumer choice. …Under socialism, there is no good mechanism for meeting consumer demand; the socialist leaders decide what the people should have. There is no mechanism for creating and encouraging innovation – that is why socialist states normally only produce something new after it has already been produced in a capitalist country… So why then are the teachers’ unions advocating that capitalism be attacked, and socialism be applauded? The answer is simple, willful ignorance.

I’ve always supported school choice because I want better educational outcomes, especially for poor and minority students.

In recent months, I’ve wondered we also need school choice because of what teacher unions are doing on issues such as critical race theory and school re-openings.

Now it seems we need choice simply to protect kids from the risk of being propagandized.

P.S. Or protect kids from nonsensical forms of discipline.

Read Full Post »

I like capitalism, both because it’s moral and it delivers superior results compared to any alternative.

I even have a 2-part series (here and here) on “defending capitalism” and a 5-part series on the “case for capitalism.”

Perhaps most important, it’s a system that delivers great results if the goal is lifting people out of poverty.

Is it possible, though, that “capitalism” is a tarnished word?

That may be the case, according to new polling data from the United Kingdom.

Edward Malnick recently wrote about Frank Luntz’s research, which is finding knee-jerk hostility to the “C” word.

Dr Frank Luntz is testing public opinion in Britain to find an alternative to “capitalism”, after 170 years of use, because he fears it is becoming a “bad word”. …Capitalism itself is already a “bad word” in the US and is fast becoming so in the UK too, he says, adding: “It’s one of the key things I’m trying to figure out … does this country need an alternative to the word capitalism? I think it does. We’re about to find out.” Questions on capitalism, and voters’ approach to it, form part of a giant survey Dr Luntz has put together as part of a project for the Centre for Policy Studies (CPS) think tank, at which he has based himself for the summer.

Nick King of the Centre for Policy Studies suggests we use something other than “capitalism” when describing an agenda of limited government.

…language matters. Capitalism is unpopular. But to many of capitalism’s advocates, terms like free enterprise and open markets can be used interchangeably with it and other polling suggests these concepts are more favourably received. If a phrase is more appealing than capitalism to those who reject it as a concept, then it makes sense for those who believe in the benefits of this system to adopt the language which people more readily accept.

I’m perfectly happy to talk about “free enterprise” rather than “capitalism.”

I even wrote about making that verbal shift back in 2016, though I obviously still frequently use “capitalism” when talking about economic liberty.

But perhaps I need to be more disciplined. Especially if I want my message to be heard by young people.

Kristian Niemietz of London’s Institute of Economic Affairs has a very depressing assessment of what millennials are thinking.

Surveys show that there is a lot of truth in the cliché of the ‘woke socialist Millennial’. Younger people really do quite consistently express hostility to capitalism, and positive views of socialist alternatives of some sort. For example, around 40 per cent of Millennials claim to have a favourable opinion of socialism and a similar proportion agree with the statement that ‘communism could have worked if it had been better executed’. …67 per cent of younger people say they would like to live in a socialist economic system. Young people associate ‘socialism’ predominantly with positive terms, such as ‘workers’, ‘public’, ‘equal’ and ‘fair’. Very few associate it with ‘failure’ and virtually nobody associates it with Venezuela, the erstwhile showcase of ‘21st Century Socialism’. Capitalism, meanwhile, is predominantly associated with terms such as ‘exploitative’, ‘unfair’, ‘the rich’ and ‘corporations’. …When presented with an anti-capitalist statement, the vast majority of young people agree with it… However, when presented with a diametrically opposed pro-capitalist statement, we often find net approval for that statement too. This suggests that when young people embrace a socialist argument, this is often not a deeply-held conviction.

None of this is a surprise. I’ve written a couple of times about the foolish views of young people.

Heck, I was writing about this problem way back in 2013.

I’m tempted to conclude that young people are simply stupid and we shouldn’t allow them to vote.

But I realize that’s not a constructive sentiment. So perhaps instead we should send them to live for a year in Greece, Argentina, or Italy. And if that doesn’t sober them up, they can spend a second year in Venezuela, North Korea, or Cuba.

Read Full Post »

Almost everybody (even, apparently, Paul Krugman) agrees that you don’t want to be on the downward-sloping part of the Laffer Curve.

That’s where higher tax rates do so much economic damage that government collects even less revenue.

But I would argue that tax increases that produce more revenue also are a bad idea.

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

That would not be a good deal, at least for those of us who aren’t D.C. insiders.

Heck, according to research from economists at the University of Chicago and Federal Reserve, there are some tax increases that would destroy even greater levels of private income for every additional dollar that politicians got to spend.

The simple way of thinking about this is that you don’t want to be at the revenue-maximizing point of the Laffer Curve.

Because the closer you get to that point, the greater the damage to the private sector compared to any revenue collected.

To help understand this key point, let’s review a new study from Spain’s central bank. Authored by Nezih Guner, Javier López-Segovia and Roberto Ramos, it investigates the impact of higher tax rates.

They first look at what happens when progressivity (τ) is increased.

In the first experiment, we…change…the entire tax schedule, so that all households below the mean labor income face lower average taxes, while those above the mean income face higher average taxes. Since…richer individuals face higher taxes, all else equal, the government collects more taxes. All else, however, is not equal since more progressive taxes lower incentives to work and save. As a result, a higher τ might result in lower, not higher, revenue. The question is where the top of the Laffer curve is. We find that the tax revenue from labor income is maximized with τ = 0 .19. The increase in tax collection is, however, very small: the tax revenue from labor income increases only by 0.82% (or about 0.28% of the GDP). The tax revenue from labor income is, however, only one part of the total tax collection. There are also taxes on capital and consumption. With τ = 0 .19, while the tax collection from labor income is maximized, the total tax collection declines by 1.55%. This happens since with a higher τ, the aggregate labor, capital and output decline significantly. Indeed, the total tax collection falls for any increase in τ, and the level of τ that maximizes total tax revenue is much lower, τ = 0 .025, than its benchmark value.

The key takeaway is that more progressivity puts Spain on the wrong (downward-sloping) side of the Laffer Curve.

Here’s Table 6, which shows big declines in output, labor supply, and investment as progressivity increases.

Here’s some of the accompanying explanation.

The upper panel of Table 6 shows that capital, effective labor and output decline monotonically with τ. Hence, as the economy moves from τ = 0 .1581 to τ = 0 .19, the government is collecting higher taxes from labor, but the aggregate labor supply and output decline. For τ higher than 0.19, the decline in labor supply dominates and tax collection from labor income is lower. …The level of τ that maximizes the total tax collection is 0.025, which implies significantly less progressive taxes than in the benchmark economy. …In the economy with τ = 0 .025, the aggregate capital, labor and output increase significantly. The steady state output, for example, is almost 11 percentage points higher than the benchmark economy. As a result, the government is able to collect higher taxes despite lowering taxes on the top earners.

The authors also put together an estimate of Spain’s Laffer Curve, with the red-dashed line showing total tax revenue.

The authors also looked at what happens if politicians simply increase top tax rates.

They found that there are scenarios that would enable the Spanish government to collect more revenue.

We find that it is possible to generate higher total tax revenue by increasing taxes on the top earners.The main message of our quantitative exercises is that…the extra revenue is not substantial. Higher progressivity has significant adverse effects on output and labor supply, which limits the room for collecting higher taxes. As a result, the only way to generate substantial revenue is with significant increases in marginal tax rates for a large group

But notice that those higher taxes would have “significant adverse effects on output and labor supply.”

Which brings us back to the earlier discussion about the desirability of causing a lot of damage to the private economy in order to give politicians a bit more money to spend.

The authors have a neutral tone, but the rest of should be able to draw the logical conclusion that higher taxes would be a big mistake for Spain.

And since the underlying economic principles apply in all nations, we also should conclude that higher taxes would be a big mistake for the United States.

P.S. We conducted a very successful experiment in the 1980s involving lower tax rates. Biden now wants to see what happens if we try the opposite approach.

Read Full Post »

I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

Read Full Post »

Last week, I shared Part I of my discussion with John Stossel about “capitalism myths.” Here’s Part II.

In the first video, we discussed three myths about free enterprise.

  • Myth #1 – Capitalists get rich by ‘taking’ money from others.
  • Myth #2 – The rich getting richer, and the poor getting poorer.
  • Myth #3 – Monopolies destroyed the free market.

Here are the final four myths.

Myth #4: Free markets create unsafe workplaces.

Proponents of government intervention often claim that greedy capitalists will skimp on safety in order to get more profits. To support their argument, they cite data on how workplace deaths have declined since the Occupational Safety and Health Administration was created.

That data is accurate, bu what they fail to mention is that workplace deaths were falling at exactly the same rate before OSHA.

This is because wealthier societies, created by capitalism, have both the capacity and desire to invest more in safety.

Myth #5: Capitalism created evil Robber Barons.

During the 1800s, the United States experienced an “industrial revolution,” and many people became enormously wealthy (though only by the standards of that era).

The anti-capitalist crowd asserted that these people were “robber barons” who profited at the expense of ordinary people.

Yet this was the era when the nation evolved from agricultural poverty to middle-class prosperity, as shown by Oxford University’s Our World in Data.

Notice how per-capita economic output grew especially fast in the last half of the 1800s when the industrial revolution was in full swing.

Myth #6: Capitalism just isn’t good for us.

This myth is based on the stereotype that capitalism is a soulless and materialistic system.

And there certainly are some people who are so myopically fixated on their personal wealth that they don’t properly enjoy the intangible benefits of family, community, and leisure.

But that’s a failing of human nature, not of markets. There surely are plenty of materialistic and soulless people, after all, who use socialism to get wealthy.

The key difference, as the great Walter Williams noted, is that you have to serve other people to get wealthy in a capitalist society, whereas you use government coercion to get rich when government controls the economy.

Myth #7: Capitalism will eliminate our jobs.

It’s certainly true that jobs are destroyed by capitalism. As noted in the video, the personal computer destroyed typewriter jobs.

This is the process of “creative destruction” and we should all recognize that it can be very bad news for people who have careers that are upended by technological change (such as candle makers when the electric light bulb was invented).

What’s special about capitalism, though, is that this process is what makes all of us richer over time.

Even the children and grandchildren of people who lost their jobs.

The bottom line, as I said to conclude the video, is that, “No other system, anywhere in the world, has ever come close to capitalism’s ability to generate mass prosperity.”

 

Read Full Post »

Politicians impose higher tax costs on tobacco because they want less smoking. And environmentalists want higher gas prices so there will be less driving.

And, as explained in this video, higher minimum wages for low-skilled labor will reduce employment.

For economists, none of this is surprising and none of this is newsworthy.

Minimum wage laws are a form of price controls, and we have centuries of evidence that bad things happen when politicians try to rig the market.

When I discuss this issue, people often respond by asserting that businesses will treat people like dirt in the absence of government intervention.

I answer them by agreeing with their premise (businesses would like to pay everyone as little as possible), but I then share this data, which shows that they’re wrong on facts. To be more specific, nearly 99 percent of workers make more than the minimum wage.

In other words, the free market leads to higher wages (which is why today’s workers earn so much more than previous generations).

And we’ll continue to enjoy economic progress, so long as politicians give the private sector enough breathing room to create more prosperity.

Which is why a mandate for higher minimum wages would be a bad idea.

Indeed, research published by the Harvard Business Review shows that the minimum wage even can be bad news for the workers who don’t lose their jobs.

Here is a description of the methodology used by the authors (Qiuping Yu, Shawn Mankad, and Masha Shunko).

…minimum wage policies…can influence firms’ behavior in a variety of complex, interrelated ways. In addition to changing employment rates, studies suggest that firms may strategically respond to minimum wage increases by changing their approaches in other areas, such as worker schedules. This can have significant implications for employee welfare… To address these challenges, we conducted a study in which we…looked at worker schedule and wage data from 2015 to 2018 for more than 5,000 employees at 45 stores in California — where the minimum wage was $9 in 2015, and has increased every year since then — and at 17 stores in Texas, where the minimum wage was $7.25 for the duration of our study. We then controlled for statewide economic and employment differences between California and Texas in order to isolate just the impact of increasing the minimum wage.

Here are some of their results.

For every $1 increase in the minimum wage, we found that the total number of workers scheduled to work each week increased by 27.7%, while the average number of hours each worker worked per week decrease by 20.8%. …which meant that the total wage compensation of an average minimum wage worker in a California store actually fell by 13.6%. This decrease in the average number of hours worked not only reduced total wages, but also impacted eligibility for benefits. We found that for every $1 increase in minimum wage, the percentage of workers working more than 20 hours per week (making them eligible for retirement benefits) decreased by 23.0%, while the percentage of workers with more than 30 hours per week (making them eligible for health care benefits) decreased by 14.9%. …our data suggests that the combination of reduced hours, eligibility for benefits, and schedule consistency that resulted from a $1 increase in the minimum wage added up to average net losses of at least $1,590 per year per employee — equivalent to 11.6% of workers’ total wage compensation.

Gee, is anybody surprised to see bad results from California?

But let’s focus on the minimum wage, not on the (formerly) Golden State.

Here’s the bottom line: I’ve explained that a higher minimum wage is theoretically bad.

And I’ve shown that it leads to higher unemployment.

But this new research is important because it shows that a higher minimum wage also backfires on the workers who don’t lose their jobs.

That’s an argument I’ve made before, but it needs to become a bigger part of the discussion.

The goal should be to help people climb the ladder of economic opportunity, which is why the minimum wage should be abolished rather than increased.

P.S. It’s disgusting that labor bosses push for a higher minimum wage to hurt low-skilled workers who compete with union members and it’s disgusting that big companies like Amazon push for a higher minimum wage to hurt small businesses that compete with them for customers

Read Full Post »

When studying the economic of taxation, one of the most important lessons is that there should be low marginal tax rates on work, saving, investment, and entrepreneurship.

That’s also the core message of this video from Prof. John Cochrane.

I wrote a primer on marginal tax rates back in 2018. I wanted to help people understand that the incentive to engage in additional productive behavior is impacted by how much people get to keep if they earn additional income.

So what matters isn’t the tax on income that’s already been generated. The key variable is the marginal tax on the additional increment of income. As illustrated by the accompanying visual.

I’ve shared real-life examples of how the American tax system can result in very high marginal tax rates, especially when you include the extra layers of tax on income that is saved and invested (producing extremely high effective marginal tax rates).

For today’s column, let’s look at a real-world example from the other side of the Atlantic Ocean.

The U.K.-based Telegraph has a story illustrating how marginal tax rates often can be much higher than the official statutory tax rate.

More than a third of a million people now face paying income tax at a rate of 60pc because of government stealth tax policies… 336,000 people earned between £100,000 and £125,000 in 2018-19, the last year for which data was available. …This group is meant to pay income tax at a rate of 40pc, but risks falling foul of a costly trap which results in their earnings being subject to effective income tax rates that are far higher. The trap is sprung once someone starts to earn more than £100,000, as this is the point at which the Government begins to withdraw the £12,570 tax-free personal allowance. For every £1 earned over £100,000, the state reduces the allowance by 50p. The result is that each additional £1 of income effectively incurs 60p of income tax… Once National Insurance is factored in, the true rate is even higher.

Here’s a chart that was part of the article.

It shows that anyone earning £50,000 or above is losing at least 40 percent to the tax authorities. That statutory rate is both punitive and excessive.

But you also can see how the marginal tax rate jumps to 60 percent once taxpayers hit £100,000 on income.

At the risk of understatement, high marginal tax rates are bad news for the economy.

That’s true in the United Kingdom, the United States, and everyplace else in the world.

To use economic jargon, “deadweight losses” grow exponentially as tax rates are increased.

In regular English, this simply means that class-warfare tax policy (ever-higher tax rates on the so-called rich) causes the most economic damage. Even the left-leaning OECD agrees with this analysis.

You may be wondering why a supposedly conservative government in the United Kingdom allows such a destructive policy.

Sadly, there is no good answer. As you can see from this excerpt, Boris Johnson’s government sounds a lot like what the U.K. would have experienced if Jeremy Corbyn won the last election.

The Government said it was aware of the effect of the 60pc tax trap but said it had to take a “balanced approach”. “We want to keep taxes low to support working people to keep more of what they earn, but it’s only fair that those with the broadest shoulders bear the biggest burden as we rebuild the public finances and fund public services,” a spokesman said.

P.S. If President Biden’s tax plan is any indication, our friends on the left seem to be motivated by spite and envy, so they don’t care that high tax rates have negative consequences.

P.P.S. A wealth tax could easily result in marginal tax rates of more than 100 percent.

P.P.P.S. The politicians in Washington also believe in very high implicit tax rates on low-income people.

P.P.P.P.S. The various plans for per-child handouts would create another big spike in marginal tax rates for a large cohort of American taxpayers.

Read Full Post »

Back in 2009 and 2010, when I had less gray hair, I narrated a four-part series on the economic burden of government spending.

Here’s Part II, which discusses the theoretical reasons why big government reduces prosperity.

I provide eight examples to illustrate how and why government spending can hinder economic growth.

The last item is what I called the “stagnation cost,” which is the tendency of politicians and bureaucrats to throw good money after bad because there is no incentive to adapt.

When giving speeches, I usually refer to this as the “inertia cost.”

But, regardless of what I call it, I explain that every government program has a group of beneficiaries that are strongly motivated to keep their gravy train moving even if money is being wasted.

And since politicians like getting votes from those beneficiaries, it’s very difficult to derail programs.

In an article for National Review, Sean-Michael Pigeon offers one very plausible explanation for why this happens.

He says politicians fall victim to the fallacy of sunk costs.

…we need an understanding of government inefficiency… One reason government spending is so needlessly costly is somewhat paradoxical: The state is wasteful precisely because people are so concerned about wasting money. …This is a classic sunk-cost fallacy: Costs that can’t be recovered are “sunk,” and therefore irrelevant for future decision-making. But while this fallacy is well known in economics, sunk costs are a big deal in the practical world of politics. Nobody wants to waste money, and politicians don’t want to cause waste directly. No member of Congress wants to be publicly responsible for a half-built bridge, especially when they have to tell taxpayers they still have to foot the bill for it. …Congress’s unwillingness to cut the funding of poorly run projects is a significant reason government projects always spend too much. …Politicians are nervous about cutting ongoing projects because they don’t want to leave taxpayers empty-handed, but stomaching sunk costs is worth it. Not only is it economically sound to stop government agencies from bleeding money, but it also sets the precedent that shoddy work will be held accountable. …to save money, sometimes you have to lose money.

In other words, it would be good to stop the bleeding.

But that’s not politically easy. Mr. Pigeon has examples in his column, but he should have included California’s (supposed) high-speed rail project.

That boondoggle has been draining money from state and federal coffers for about a decade. Cost estimates have exploded (something that almost always happens with government projects), yet construction has barely started.

Yet now Biden wants to increase federal subsidies for that money pit, along with other long-distance rail schemes.

And you won’t be surprised that a big argument from supporters is that we’ve already wasted billions and billions of dollars on the project, so therefore we should continue to waste even more money (sort of like hitting yourself on the head with a hammer because it feels good when you stop).

The big-picture bottom line is that the burden of federal spending should be reduced so that politicians have less ability to waste money.

And that also means that Americans will be able to enjoy more growth and more prosperity.

The targeted bottom line is that we should get Washington out of infrastructure.

Read Full Post »

I was a big fan of (and occasional guest on) John Stossel’s TV show, and I’m now a big fan of his videos (see here, here, here, here, here, here, and here).

So it was an honor to appear in his latest video about “Capitalism Myths.”

It’s a two-part series. In this first video, we discussed three myths about free enterprise.

Myth #1 – Capitalists get rich by ‘taking’ money from others.

Since voluntary exchange, by definition, is mutually beneficial, this is a truly absurd argument. Indeed, only the most vapid politicians and pundits suggest otherwise.

The most definitive research in this area came from Professor William Nordhaus of Yale, who estimated that, “innovators are able to capture about 2.2 percent of the total social surplus from innovation.”

Translated from economic jargon, that means the rest of society gets nearly 98 percent of the value created by rich entrepreneurs.

Myth #2 – The rich getting richer, and the poor getting poorer.

This is an issue I’ve repeatedly addressed, showing how poverty was the natural state of humanity until capitalism appeared a few hundred years ago.

Now we are incomprehensibly rich by comparison. At least in market-oriented nations.

Focusing on more-recent data, I’ve shown that living standards have dramatically increased in the post-World War II era.

In the video, John and I also discussed the Census Bureau’s data showing that the middle class is shrinking, but only because more people are becoming rich.

Myth #3 – Monopolies destroyed the free market.

Supporters of government intervention commonly argue that capitalism produces monopolies, meaning big producers capture the market and exploit consumers.

This is a rather puzzling argument since monopolies almost always are the result of government favoritism.

Even if we go back to the days of the so-called Robber Barons, we find that the consumers were only exploited when politicians decided to prohibit competition.

P.S. Next week, the second video will look at four other myths about capitalism.

P.P.S. On a related note, I have a five-part series (Part IPart IIPart III, and Part IV, and Part V) on “The Case for Capitalism.”

Read Full Post »

I’ve spent several decades trying to convince people that we should have free markets and small government in order to increase national prosperity.

Indeed, I’ve even pointed out how very small increases in annual growth can lead to big improvements in living standards over just a couple of decades.

But some folks on the left are not very receptive to this argument. They genuinely (but incorrectly) seem to think the economy is a fixed pie (which also explains, at least in part, why they are so focused on redistribution).

So let’s share some hard data in hopes of getting them to understand that more prosperity is possible.

We’ll start will this chart of inflation-adjusted per-capita economic output in the United States, which comes from Oxford University’s Our World in Data.

The obvious takeaway from this data is that Americans are much richer today than they were after World War II. Adjusted for inflation, we’re now about four times richer than our grandparents.

Some of our friends on the left may be thinking these numbers are distorted, that average output has only increased because the rich have gotten so much richer.

Well, it is true that the rich have gotten richer. But it’s also true that the rest of us have become richer as well.

Which is why I shared data earlier this year showing median living standards rather than mean (average) living standards.

Folks on the left may also suspect that the post-1950 data is an anomaly. In other words, maybe I’m guilty of cherry-picking data.

That’s a common practice in the world of policy, so I don’t blame people for being suspicious.

So take a look at this chart, which I also first shared earlier this year. It shows that the increase in living standards has been even more dramatic if you look at changes since 1820.

By the way, none of these observations are new. Back in 1997, Micahel Cox and Richard Alm wrote a must-read article for the Dallas Federal Reserve Bank’s Annual Report.

Here are some of their findings.

What really matters…isn’t what something costs in money; it’s what it costs in time. Making money takes time, so when we shop, we’re really spending time. The real cost of living isn’t measured in dollars and cents but in the hours and minutes we must work to live. …A pair of stockings cost just 25¢ a century ago. This sounds wonderful until we learn that a worker of the era earned only 14.8¢ an hour. So paying for the stockings took 1 hour 41 minutes of work. Today a better pair requires only about 18 minutes of work. …In calculating our cost of living, a good place to start is with the basics—food, shelter and clothing. In terms of time on the job, the cost of a half-gallon of milk fell from 39 minutes in 1919 to 16 minutes in 1950, 10 minutes in 1975 and 7 minutes in 1997. A pound of ground beef steadily declined from 30 minutes in 1919 to 23 minutes in 1950, 11 minutes in 1975 and 6 minutes in 1997. Paying for a dozen oranges required 1 hour 8 minutes of work in 1919. Now it takes less than 10 minutes, half what it did in 1950.

These two visuals from the article are very informative.

First, look at how consumer products went from rare luxuries early in the 20th century to everyday products by the end of the century.

Equally important, these products have become cheaper and cheaper over time.

As illustrated by this second visual from the article.

All the data in the Cox-Alm article is more than 20 years old, so the numbers would be even more impressive today.

Indeed, you can see some more up-to-date data from Mark Perry, Steve Horwitz, and James Pethokoukis.

Professor Don Boudreaux put these numbers in context a few years ago in a column for the Foundation for Economic Education. Here’s some of what he wrote.

What is the minimum amount of money that you would demand in exchange for your going back to live even as John D. Rockefeller lived in 1916? …Think about it. …If you were a 1916 American billionaire you could, of course, afford prime real-estate.  You could afford a home on 5th Avenue or one overlooking the Pacific Ocean…  But when you traveled from your Manhattan digs to your west-coast palace, it would take a few days, and if you made that trip during the summer months, you’d likely not have air-conditioning in your private railroad car. …You could neither listen to radio (the first commercial radio broadcast occurred in 1920) nor watch television. …Obviously, you could not download music. …Your telephone was attached to a wall.  You could not use it to Skype. …Even the best medical care back then was horrid by today’s standards: it was much more painful and much less effective. …Antibiotics weren’t available. …Dental care wasn’t any better. …You were completely cut off from the cultural richness that globalization has spawned over the past century. …I wouldn’t be remotely tempted to quit the 2016 me so that I could be a one-billion-dollar-richer me in 1916.  This fact means that, by 1916 standards, I am today more than a billionaire.  It means, at least given my preferences, I am today materially richer than was John D. Rockefeller.

The bottom line is that we have become richer and we can continue to become richer.

But how fast things improve is partly a function of government policy. If we can impose some restraints on the size and scope of government, that will give the private sector some breathing room to grow and prosper.

In other words, we don’t need perfect policy, but it is important to at least have good policy.

Read Full Post »

During the Obama years, I shared a cartoon strip that cleverly makes the point that some people will choose not to work if they can get enough goodies from the government.

That Wizard-of-Id parody has been viewed more than 56,000 times, which suggests many readers also thought it was worth sharing.

But it obviously hasn’t been shared often enough with the crowd in Washington. Politicians have created a welfare state that penalizes work and rewards dependency.

Especially now that there are bonus payments for staying unemployed. Which makes it hard to businesses to find workers.

Our friends on the left, however, think there’s a solution to this problem.

In his column for the New York Times, David Leonhardt says there is not a labor shortage because employers can simply raise wages.

The idea that the United States suffers from a labor shortage is fast becoming conventional wisdom. But before you accept the idea, it’s worth taking a few minutes to think it through. Once you do, you may realize that the labor shortage is more myth than reality. …one of the beauties of capitalism is its mechanism for dealing with shortages. In a communist system, people must wait in long lines when there is more demand than supply for an item. That’s an actual shortage. In a capitalist economy, however, there is a ready solution. …When a company is struggling to find enough labor, it can solve the problem by offering to pay a higher price for that labor — also known as higher wages. More workers will then enter the labor market. Suddenly, the labor shortage will be no more. …Sure enough, some companies have responded to the alleged labor shortage by doing exactly this. …companies that have recently announced pay increases include Amazon, Chipotle, Costco, McDonald’s, Walmart, J.P. Morgan Chase and Sheetz convenience stores.

Leonhardt is correct that businesses can lure workers back into the job market by boosting wages. I’m glad he recognizes how the price system works.

But he completely ignores the issue of whether some jobs will simply disappear because they’re not worth the amount of money that would be required to out-compete government handouts.

That’s the key argument from the Wall Street Journal‘s editorial on the topic.

…the U.S. labor market turned in its second disappointing result in a row in May, according to Friday’s Labor Department report. That’s what happens when government pays Americans not to work. Employers created 559,000 net new jobs in the month, which sounds great until you notice that 1.5 million fewer workers in May said they were unable to work because their employer closed or lost business due to the pandemic. …The civilian labor force shrank in May by 53,000, and the number of men over age 20 who were employed fell by 8,000. …What gives? The Occam’s razor explanation is that in March the Biden Administration and Congress ladled out another mountain of cash to Americans—work not required. The extra $300 a week in enhanced jobless benefits is one problem, since millions of Americans can make more staying on the couch. …This is on top of regular jobless benefits, plus new or extended cash payments such as the $3,000 per child tax credit, additional ObamaCare subsidies, and the $1,400 checks to individuals. Again, no work required.

For all intents and purposes, politicians in DC have been undoing the great achievement of welfare reform. That 1996 law was designed to push people from idleness into employment, and it was largely successful.

But over the past couple of decades, laws like Obamacare have given people goodies without any conditionality, which has resulted in many people deciding once again that they don’t need to work.

And if Biden’s per-child handouts are made permanent, expect the problem to get even worse.

Since we started with a cartoon, let’s close with another cartoon.

This gem from Henry Payne captures the problem facing many small businesses.

Big companies have enough financial depth that they can adapt. They have considerable ability to get rid of low-skilled jobs, invest in labor-saving technologies, and even give some raises to employees they retain.

Many small businesses, however, are simply out of luck. That’s one group of victims.

The other victims are the people who get goodies from politicians. Yes, the various handouts make their lives easier in the short run, but once they get trapped in the quicksand of government dependency, it’s very difficult to escape.

P.S. Because he said some sensible things about “basic income” back in 2017, I had hoped Biden would be better on this issue. I should have known better based on his track record.

Read Full Post »

Biden campaigned for higher taxes and a bigger welfare state, so I haven’t been surprised by his misguided fiscal agenda.

That being said, I was modestly hopeful that he would move trade policy in the right direction after four years of Trump’s protectionism.

To be sure, I didn’t think he would do the right thing because of some long-hidden belief in sound economics. But I figured he might reduce trade barriers simply to do the opposite of his predecessor.

We should be so lucky. Regardless of the policy, we’ve been getting statism.

Catherine Rampell of the Washington Post is not impressed by Biden’s protectionism.

Several months after he left office, some of President Donald Trump’s most foolish economic policies remain in place: his sweeping trade restrictions. …Trump began waging a series of trade wars three years ago — not primarily with U.S. adversaries, mind you, but with friends. Among the dumbest and most self-sabotaging measures were global tariffs levied on nearly $50 billion of imported steel and aluminum. …the countries most affected by Trump’s move were our close economic and military allies, including the European Union, Canada and Japan. …Despite Trump’s claims otherwise, the cost of the tariffs was primarily passed through to American consumers and companies. Downstream firms that use steel or inputs made of steel, which employ about 80 times more workers than the steel industry does, faced higher costs. One estimate found that Trump’s steel tariffs alone cost U.S. consumers and businesses about $900,000 for every job created or saved.

Getting rid of taxes on imported steel and aluminum would be a positive step for the economy.

But the real goal should be getting rid of all Trump’s taxes on global trade. Garrett Watson from the Tax Foundation recently shared estimates of how this would benefit the American economy.

…repealing the tariffs imposed under President Trump’s administration would be one of the simplest ways policymakers could boost economic growth. …About $460 billion worth of goods were subject to the tariffs, raising prices for consumers. In fact, we estimated the tariffs were about an $80 billion annual tax increase, reducing consumer purchasing power. …According to the Tax Foundation model, repealing tariffs imposed since 2018 would raise long-run GDP by 0.1 percent, long-run incomes (gross national product) by 0.2 percent, and create about 83,000 full-time equivalent jobs. This growth would boost after-tax incomes by about 0.3 percent for people across the income spectrum, helping low-income and middle-class taxpayers. …Repealing the tariffs would be a simple option to boost growth because it can be done without congressional authorization by President Biden, and would provide timely relief to businesses and households.

The last sentence is key. Trump had lots of unilateral authority to impose bad trade policy, and Biden has lots of unilateral authority to undo bad trade policy.

The fact that he hasn’t exercised that authority makes him just as guilty of anti-market trade policy as Trump.

The next thing to watch for is whether he continues Trump’s bad policy of sabotaging the World Trade Organization.

Read Full Post »

When I debate public policy with leftists, I frequently stump them by asking for an example of a country where their ideas have worked.

They get flummoxed for the simple reason that no nation has ever become rich with big government.

There are some rich nations that have big governments, to be sure, but they all became rich in the 1800s and early 1900s, back when government was a tiny burden (and there often were no income taxes).

That’s true for the United States. And it’s true for Western Europe.

It’s also worth noting that places that have become rich in the modern era, such as Hong Kong and Singapore, have small governments and low tax burdens.

I’m making these points because Jim Tankersley of the New York Times has a thorough article on the Biden Administration’s budgetary philosophy.

And that philosophy is based on a completely different perspective. Indeed, the headline and subtitle are a very good summary of the entire article.

Here are some passages that further capture the Biden approach.

President Biden’s $6 trillion budget bets on the power of government to propel workers, families and businesses to new heights of prosperity…by redistributing income and wealth from high earners and corporations to grow the middle class. …it sets the nation on a new and higher spending path, with total federal outlays rising to $8.2 trillion by 2031… That spending represents an attempt to expand the size and scope of federal engagement in Americans’ daily lives… Mr. Biden also seeks to expand the government safety net in an effort to help Americans — particularly women of all races and men of color — work and earn more, rather than relying on corporate America to funnel higher wages to workers. …Mr. Biden is pushing what amounts to a permanent increase in the size of the federal footprint on the U.S. economy. Since 1980, annual federal spending has been, on average, about one-fifth the size of the nation’s economic output; under Mr. Biden’s plans, that would grow to close to one-fourth.

The article is definitely correct about one thing. As I wrote yesterday, Biden wants a big expansion of government spending.

But is he correct about the consequences? Will bigger government “help Americans” and allow more of them to “enjoy prosperity”?

If the evidence from Europe is any indication, adopting bigger welfare states is not a recipe for more prosperity.

For instance, OECD data on “actual individual consumption” show that people in the United States enjoy much higher living standards than their counterparts on the other side of the Atlantic Ocean.

There’s also very powerful data showing that poor Americans (those at the 20th percentile) have higher living standards than most middle-class Europeans.

There’s even data showing that very poor Americans (those at the 10th percentile) have living standards equal to most middle-class Europeans.

The bottom line is that Biden wants higher taxes and more redistribution, but that’s been a big failure in the part of the world that has tried that approach.

Not that we should be surprised. Both theory and evidence tell us that bigger government is bad for prosperity.

P.S. There’s a very sobering example of what happens when a rich nation decides to dramatically curtail economic liberty.

Read Full Post »

Back in 2013, the Tax Foundation published a report that reviewed 26 academic studies on taxes and growth.

That scholarly research produced a very clear message: The overwhelming consensus was that higher tax rates were bad news for prosperity.

Especially soak-the-rich tax increases that reduced incentives for productive activities such as work, saving, investment, and entrepreneurship.

That compilation of studies was very useful because then-President Obama was a relentless advocate of class-warfare tax policy.

And he partially succeeded with an agreement on how to deal with the so-called “fiscal cliff.”

Well, as Yogi Berra might say, it’s “deju vu all over again.” Joe Biden is in the White House and he’s proposing a wide range of tax increases.

It’s unclear whether Biden will gain approval for his proposals, but I’ve already produced a four-part series on why they are very misguided.

  • In Part I, I showed that the tax code already is biased against upper-income taxpayers.
  • In Part II, I explained how the tax hike would have Laffer-Curve implications, meaning politicians would not get a windfall of tax revenue.
  • In Part II, I pointed out that the plan would saddle America with the developed world’s highest corporate tax burden.
  • In Part IV, I shared data on the negative economic impact of higher taxes on productive behavior.

The bottom line is that the United States should not copy France by penalizing entrepreneurs, innovators, investors, and business owners.

Particularly since the rest of us are usually collateral damage when politicians try to punish successful taxpayers.

So it’s serendipity that the Tax Foundation has just updated it’s list of research with a new report looking at seven new high-level academic studies.

Here’s some of what the report says about class-warfare tax policy.

With the Biden administration proposing a variety of new taxes, it is worth revisiting the literature on how taxes impact economic growth. …we review this new evidence, again confirming our original findings: Taxes, particularly on corporate and individual income, harm economic growth. …We investigate papers in top economics journals and National Bureau of Economic Research (NBER) working papers over the past few years, considering both U.S. and international evidence. This research covers a wide variety of taxes, including income, consumption, and corporate taxation.

And here’s the table summarizing the impact of lower tax rates on economic performance, so it’s easy to infer what will happen if tax rates are increased instead.

Some of these findings may not seem very significant, such as changes in key economic indicators of 0.2%, 0.78%, or 0.3%.

But remember that even small changes in economic growth can lead to big changes in national prosperity.

P.S. In an ideal world, Washington would be working to boost living standards by adopting a flat tax. In the real world, the best-case scenario is simply avoiding policies that will make America less competitive.

Read Full Post »

When I was first learning about economics in the 1970s and 1980s, Arthur Okun’s equality-efficiency tradeoff was part of just about any discussion of public policy.

Folks on the left acknowledged that their policies would lead to less prosperity, but they argued that result was acceptable because the benefits of a more-equal society would offset the cost of reduced economic output.

Needless to say, there were vigorous debates about how much additional equality could be achieved and how much economic damage might be caused by any particular policy, but few if any economists pretended that more government was actually good for growth.

Unfortunately, that has changed. A growing number of people on the left (especially those with tax-free jobs at international bureaucracies) now claim that bigger government actually is the way to get more growth.

Here’s their theory.

This illogical hypothesis is so absurd and so anti-empirical that I now get excited when I find economists who still use Okun’s framework when analyzing various reforms.

For instance, there is a new study from the European Central Bank that looks at whether a pro-growth policy (free trade) leads to less equality.

The working paper, authored by Roland Beck, Virginia Di Nino, and Livio Stracca, specifically measures the impact of membership in so-called “globalisation clubs.”

The mounting criticisms against globalisation…have sparked a lively debate about whether the narrative of the benefits of free trade and capital flows is still intact. …In this paper, we reconsider the effects of globalisation on income and inequality studying the consequences of quasi-natural experiments like accessions to “Globalisation Clubs”.Our list of Globalisation Clubs includes the World Trade Organisation (WTO), the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), which all require their members to pursue some form of either liberal trade or investment policies or a combination of both. …The main purpose of our study is to shed light on the hypothesis that globalisation leads to an efficiency-equity trade-off which is a fundamental concern in economics dating at least back to Okun (1975). In other words, is the hypothesis that globalisation increases economic efficiency to the detriment of cohesion and equality supported by the data?

Here are the key results.

The analysis leads to three main findings. First, with the exception of financial liberalisation we find that all our “globalisation shocks” lead to a significant increase in trade openness – a prerequisite for considering them globalisation shocks in the first place. Second, the effects on per capita income are mixed; positive for WTO accessions and trade openness shocks, insignificant for OECD accessions and even negative for EU accessions and financial liberalisations. …Finally, we find little evidence that globalisation shocks lead to more inequality. The Gini coefficients (market and net) tend not to change or even to fall, and the labour share of income to be unchanged or even rise, in the wake of a globalisation shock.Taken together, our results point to mostly positive effects for countries following globalisation shocks and challenge the view that globalisation is necessarily an efficiency-equity trade-off.

I’m not surprised by these findings.

There’s no reason to think that OECD membership will lead to better policy and there are good reasons to think EU membership might push policy in the wrong direction.

The WTO, by contrast, has a good track record of trade liberalization. So these results from the study make sense.

The primary takeaway from this research is that free trade is good for prosperity. Not only does it lead to more growth, but low-income people enjoy above-average gains.

Though I would argue that free trade would be just as desirable if rich people were the ones who enjoyed above-average gains. The key point is that all groups benefit when there are reforms to shrink the size and scope of government, and we shouldn’t get worked up if some people benefit more than others.

But there’s a secondary takeaway. This European Central Bank study also is an example of methodologically sound research (i.e., recognizing that more government is not a free lunch).

P.S. While I applaud the honesty of left-leaning economists who use Okun’s framework, that doesn’t stop me from criticizing some of their crazy conclusions.

Read Full Post »

I wrote two days ago about subsidized unemployment, followed later in the day by this interview.

This controversy raises a fundamental economic issue.

I explained in the interview that employers only hire people when they expect a new worker will generate at least enough revenue to cover the cost of employment.

There’s a similar calculation on the part of individuals, as shown by this satirical cartoon strip.

People decide to take jobs when they expect the additional after-tax income they earn will compensate them for the loss of leisure and/or the unpleasantness of working.

Which is why many people are now choosing not to work since the government has increased the subsidies for idleness (a bad policy that began under Trump).

The Wall Street Journal editorialized about this issue a couple of days ago.

White House economists say there’s no “measurable” evidence that the $300 federal unemployment bonus is discouraging unemployed people from seeking work. They were rebutted by Tuesday’s Bureau of Labor Statistics’ Jolts survey, which showed a record 8.1 million job openings in March. …But these jobs often pay less than what most workers could make on unemployment. That explains why the number of job openings in many industries increased more than the number of new hires in March. …The number of workers who quit their jobs also grew by 125,000. …some quitters may be leaving their jobs because they figure they can make more unemployed for the next six months after Democrats extended the bonus into September.

Dan Henninger also opined on the issue for the WSJ. Here’s some of what he wrote.

President Biden said, “People will come back to work if they’re paid a decent wage.” But what if he’s wrong? What if his $300 unemployment insurance bonus on top of the checks sent directly to millions of people (which began during the Trump presidency) turns out to be a big, long-term mistake? …Mr. Biden and the left expect these outlays effectively to raise the minimum wage by forcing employers to compete with Uncle Sam’s money. …Ideas have consequences. By making unemployment insurance competitive with market wage rates in a pandemic, the Biden Democrats may have done long-term damage to the American work ethic. …The welfare reforms of the 1990s were based on the realization that transfer payments undermined the work ethic. The Biden-Sanders Democrats are dropping that work requirement for recipients of cash payments.

Amen.

I made similar arguments about the erosion of the work ethic last year when discussing this issue.

And this concern applies to other forms of redistribution. Including, most notably, the foolish idea of big per-child handouts.

P.S. The WSJ editorial cited above mentioned the Labor Department’s JOLT data. Those numbers are also useful if you want proof that federal bureaucrats are overpaid, and you’ll also see that the same thing is true for state and local government employees.

Read Full Post »

Good fiscal policy means low tax rates and spending restraint.

And that’s a big reason why I’m a fan of Reaganomics.

Unlike other modern presidents (including other Republicans), Reagan successfully reduced the tax burden while also limiting the burden of government spending.

President Biden wants to take the opposite approach.

A few days ago, Dan Balz of the Washington Post provided some “news analysis” about Biden’s fiscal agenda. Some of what he wrote was accurate, noting that the president wants to increase spending by an additional $6 trillion over the next 10 years.

…the scope and implications of his domestic agenda have come sharply into focus. Together they represent the most dramatic shift in federal economic and social welfare policy since Ronald Reagan was elected 40 years ago. …The politics of redistribution, which are at the heart of what Biden is proposing, could test decades of assumptions that Democrats should be afraid of being tagged as the party of big government. …Together, the already approved coronavirus relief plan, the infrastructure proposal that was unveiled a few weeks ago and the newly proposed plan to invest in social welfare programs would total roughly $6 trillion.

But Mr. Balz then decided to be either sloppy or dishonest, writing that we’ve had decades of Reagan-style policies that have squeezed domestic spending and disproportionately lowered tax burden for rich people.

Reagan’s small-government philosophy resulted in a decades-long squeeze on the federal government, especially domestic spending, and on tax policies that mainly benefited the wealthiest Americans. …Government spending on social safety-net programs has been reduced compared with previous years.

Balz is wrong, wildly wrong.

You don’t have to take my word for it. Here’s a chart, taken from an October 2020 report by the Congressional Budget Office. As you can see, people in the lowest income quintile have been the biggest winners,, with their average tax rate dropping from about 10 percent to about 2 percent..

Here’s a chart showing marginal tax rates from a January 2019 CBO report. As you can see, Reagan lowered marginal tax rates for everyone, but Balz’s assertion that the rich got the lion’s share of the benefits is hard to justify considering that people in the bottom quintile now have negative marginal tax rates.

Balz’s mistakes on tax policy are significant.

But his biggest error (or worst dishonesty) occurred when he wrote about a “decades-long squeeze” on domestic spending and asserted that “spending on social safety-net programs has been reduced.”

A quick visit to the Office of Management and Budget’s Historical Tables is all that’s needed to debunk this nonsense. Here’s a chart, based on Table 8.2, showing the inflation-adjusted growth of entitlements and domestic discretionary programs.

Call me crazy, but I’m seeing a rapid increase in domestic spending after Reagan left office.

P.S. There’s a pattern of lazy/dishonest fiscal reporting at the Washington Post.

P.P.S. I also can’t resist noting that Balz wrote how Biden wants to “invest” in social welfare programs, as if there’s some sort of positive return from creating more dependency. Reminds me of this Chuck Asay cartoon from the Obama years.

Read Full Post »

If nothing else, Biden’s big-government agenda is triggering a debate about fundamental issues, such as whether it’s a good idea to make America’s economy more like Singapore or more like Italy.

In making the case for the Italian approach of higher taxes and bigger government during his speech to Congress, President Biden exclaimed that “trickle-down economics has never worked.”

But we need to realize that Biden is using a straw-man definition. In his mind, “trickle-down economics” is giving a tax cut to rich people under the assumption that some of that cash eventually will wind up in other people’s pockets.

However, if you actually ask proponents of pro-growth tax policy what they support, they will explain that they want lower tax rates for everyone in order to reduce penalties on productive behaviors such as work, saving, investment, and entrepreneurship.

And they will be especially interested in getting rid of the tax code’s bias against saving and investment.

Why? Because every economic theory – even socialism, even Marxism – agrees that saving and investment are a key to long-run growth and rising living standards.

Which is why there’s such a strong relationship in the data between the amount of capital and workers’ wages.

Indeed, it’s almost a tautology to say that this form of “trickle-down taxation” leads to higher productivity, which leads to higher wages for workers.

As Stanford Professor John Shoven observed several decades ago:

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

In other words, everyone agrees with the “trickle-down economics” as a concept, but people disagree on other things.

So I guess it depends on how the term is defined. If it simply means tax cuts while ignoring other policies (or making those other policies worse, like we saw during the Bush years or Trump years), then you can make an argument that trickle-down economics has a mediocre track record.

But if the term is simply shorthand for a broader agenda of encouraging more saving and investment with an agenda of small government and free markets, then trickle-down economics has a great track record.

For instance, here’s a chart from the most-recent edition of Economic Freedom of the World. Nations with market-oriented economies are far more prosperous than countries with state-controlled economies.

By the way, Biden is not an honest redistributionist.

Instead of admitting that higher taxes and bigger government will lead to less economic output (and justifying that outcome by saying incomes will be more equal), Biden actually wants people to believe that bigger government somehow will lead to more prosperity.

To be fair, he’s not the only one to make this argument. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development also have claimed that there will be more prosperity if governments get more control over the economy.

I call this the “magic beans” theory of economic development.

Which is why I always ask people making this argument to cite a single example – anywhere in the world, at any point in history – of a nation that has prospered by expanding the burden of government.

In other words, I want a response to my never-answered question.

The response is always deafening silence.

To be sure, I don’t expect Joe Biden to answer the question. Or to understand economics. Heck, I don’t even expect him to care. He’s just trying to buy votes, using other people’s money.

But there are plenty of smart folks on the left, and none of them have a response to the never-answered question, either. Heck, none of them have ever given me a good reason why we should copy Europe when incomes are so much lower on that side of the Atlantic Ocean.

Read Full Post »

Way back in 2010, I shared this video explaining how “gross domestic product” and “gross domestic income” are basically the same number, but warning that the former leads to sloppy thinking (including the Keynesian myth that consumer spending drives the economy).

Since President Biden is seeking to resuscitate Keynesian Economics, let’s revisit this topic.

The first thing I want to do is to reassure skeptical readers that there’s nothing remotely controversial about my assertion that GDP and GDI are equivalent measures. It’s simply the common-sense recognition that total spending in a country is going to closely match total income.

If you really want to get into the technical weeds, the Bureau of Economic Analysis has a very detailed document showing how all the measurements fit with each other. Feel free to read that material by clicking here.

But if you don’t have the time or inclination to wade through all that material, here are two charts from the document that capture what’s important, at least for purposes of our discussion about macroeconomic policy.

First, here’s a chart showing that GDP and GDI are two ways of arriving at the same number (though never exactly identical because of statistical discrepancies).

And if you really want to be a wonk, here’s the BEA’s depiction of GDP and GDI, along with a bunch of other measures of economic output.

And if all that boring background doesn’t convince you that it’s okay to equate GDP and GDI, let’s go back to 2018 and look at a column in the Wall Street Journal by Jason Furman, who was Chairman of the Council of Economic Advisers for President Obama

…the data aren’t perfect. …GDP is not measured directly. Instead, the BEA sums up economy-wide expenditures from dozens of data sources, covering consumption, investment, government spending, net exports and more. …the underlying data are noisy and incomplete, meaning that revisions to GDP growth estimates can be large and often confusing. …Drawing on more data can cancel out some of this noise and produce a more accurate figure that requires smaller revisions. Specifically, the BEA separately gauges the size of the economy by adding up all the different sources of income, such as wages and profits. This figure is called gross domestic income, or GDI… Ultimately, GDI should be identical to GDP, since all money spent is money earned.

With all that out of the way, now let’s move to some analysis that actually is controversial (not in my mind, of course, but my left-leaning friends probably won’t agree with me).

As explained in the video, and as I wrote back in 2013, people without much knowledge about economics draw inaccurate conclusions when using data on GDP .

But don’t take my word for it. Professor Alexander William Salter of Texas Tech University described, in an article for National Review, how GDP accounting equations are mistakenly interpreted to justify more government spending.

The most egregious abuses of economics that we see today start with an accounting identity — a true statement or equation — but end with an absurd economic claim. …Here’s an example: If you’ve taken an introductory economics course, this equation is probably familiar to you: Y=C+I+G+(X-IM). In plain English: Gross Domestic Product (GDP, in this equation ‘Y’) is the sum of consumption (C), investment (I), government spending (G), and net exports (X-IM). This is the foundation of national-income accounting, and it’s true by construction. GDP is defined as the sum of these things. Nothing in this equation tells us how the economy actually works. …often it’s misused. Here’s a case from the Left: Because government expenditures enter positively into GDP, increased government spending raises GDP. Simple, right? Not so fast. …Uncle Sam spending more doesn’t increase the size of the economic pie. It just redistributes existing slices to Uncle Sam, or to whomever Uncle Sam finances. More public-sector consumption means less private-sector consumption.

That’s a look at theory.

He also applies theory to reality, most recently in a column for the Wall Street Journal about Biden’s supposed infrastructure plan.

Whether public or private, spending doesn’t cause growth. Mr. Stiglitz and his allies have it backward: Consumption is downstream from production. Growth is about increasing the supply of goods over time; you can’t spend if the goods haven’t been produced. Production grows as technology and production processes improve. Such improvement requires saving and investing rather than consuming. …all the financing in the world won’t boost productivity if it isn’t channeled correctly. More-efficient producers, not partisan spending, create economic flourishing. Though the president’s plans will consume plenty, they’ll produce only disappointment.

That last sentence is an apt summary. A bigger government means a smaller economy.

The empirical evidence shows that nations with smaller fiscal burdens economically out-perform countries with large welfare states. Simply stated, there’s an incentive for efficiency in the private sector, whereas people in Washington are governed by the perverse incentives described by “public choice” theory.

I’ll close with a relevant caveat that was mentioned in the above video. It is possible for a nation to consume more than it produces. But only if it borrows from overseas, and only at the cost of having to sacrifice future income to service the additional debt.

P.S. If you want more information, here’s my video on Keynesian Economics, and here’s my 4-part series on the economics of government spending.

P.P.S. I also wrote about GDP vs. GDI in 2017, in part to debunk some grotesquely dishonest reporting by Time.

Read Full Post »

While debunking OECD and IMF research on inequality, I explained that it’s important to distinguish between income that is earned honestly and loot that is obtained thanks to government cronyism.

That’s also the message of this video from the Hoover Institution.

In the video, David Henderson contrasts how our lives are improved when an entrepreneur develops a new product.

The entrepreneur almost surely gets richer faster than we get richer, but we all wind up better off. Indeed, there’s a clear relationship between the share of rich people in a society and overall prosperity.

And that’s a good description of what has actually happened in market-oriented nations such as the United States.

Heck, it even happened to some degree in China when there was partial reform.

By contrast, government favoritism is a recipe for inefficiency and stagnation (and since LBJ was an awful president, I like that David used him for the example of corrupt cronyism).

In a column for CapX, Andrew Lilico correctly differentiates between moral inequality and immoral inequality.

The only legitimate questions about the distribution of wealth concern whether it is truly the property of those that possess it, as opposed to having stolen or extorted it. …Wealth is property. If it has been innocently acquired, people should be able to enjoy their property without censure or the (quite incorrect) suggestion that their flourishing causes others harm.

Not only is it incorrect to suggest that one person’s flourishing causes harm to others, it is completely wrong.

As pointed out in the video, Nobel Prize-winning economist William Nordhaus calculated that entrepreneurs only capture a tiny fraction (2.2 percent) of the wealth they create for society. That means 97.8 percent for the rest of us.

And other academic scholars have produced similar results.

The bottom line is that the recipe for growth and prosperity is the same recipe for helping the less fortunate.

P.S. As you can see from his Wikipedia page, Professor Nordhaus is not a libertarian or conservative, so it should be clear he wasn’t trying to come up with a number to justify capitalism.

P.P.S. I also recommend my four-part series (see herehere, here, and here) on why we should care about poverty reduction rather than pushing for coerced equality, as well as my two-part series (here and here) on how statist policies produce the immoral type of inequality.

Read Full Post »

In this clip from a recent interview with Gunther Fehlinger, I explore the connection between two very important important economic concepts: Convergence and Wagner’s Law.

Before launching into further discussion, let’s nail down two very important definitions.

  • Convergence is the notion that poor countries should grow faster than rich countries and eventually attain a similar level of prosperity.
  • Wagner’s Law is the seemingly paradoxical observation that richer nations tend to have larger fiscal burdens than poorer nations.

These two concepts deserve elaboration because many people either fail to recognize the implications or they draw the wrong conclusions.

For instance, convergence is a sensible theory, but the rate of convergence (or divergence!) is very dependent on the degree to which nations have good policy (or bad policy).

Moreover, Wagner’s Law shows that politicians figure out how to extract more money and fund bigger government once nations become rich, but some people reverse the causality and assert that big government somehow caused nations to become rich.

The key takeaway from these observations, as I explained in the interview, is that poor nations that want convergence need to copy the policies that rich nations had when they became rich (in the interview at about 0:56, I mistakenly said “were rich” rather than “became rich”).

And I’ve written many times to show that the rich nations of the western world made the leap to industrial prosperity in the 1800s and early 1900s – at a time when they had no welfare states and very low fiscal burdens (indeed most of them didn’t have any income taxes during that period).

Which gives me another excuse to re-issue my never-answered challenge: Please show me an example, from any point in world history, of a country became rich after adopting big government.

Read Full Post »

I’ve been warning that the United States should not copy Europe’s fiscal policy, largely because living standards are significantly lower in nations with large welfare states.

That’s true if you look at average levels of consumption in different nations, but the most compelling data is the fact that lower-income people in the United States generally enjoy living standards that are equal to or even higher than those for middle-class people in most European countries.

A bigger burden of government is not just a theoretical concern. President Biden has already pushed through a $1.9 trillion spending bill that includes some temporary provisions – such as per-child handouts – that, if made permanent, could add several trillion dollars to the burden of government spending.

And the White House has signaled support for $3 trillion of additional spending for items such as infrastructure, green energy, and other boondoggles.

This doesn’t even count the cost of other schemes, such as the “public option” that would strangle private health insurance and force more people to rely on an already-costly-and-and bankrupt government program.

So what will it mean for America if our medium-sized welfare state morphs into a European-style large welfare state?

The answer to that question is rather unpleasant, at least if some new research from the Congressional Budget Office is any indication. The study, authored by Jaeger Nelson and Kerk Phillips, considers the impact on growth based on six different scenarios (based on how much the spending burden increases and what taxes are increased).

If permanent spending is financed by new or increased taxes, then those taxes influence people’s decisions about how much to work and save. Those decisions then affect how much the economy produces and businesses invest and, ultimately, how much people can consume. Different types of taxes have different economic effects. Taxes on labor income reduce after-tax wages, so they reduce the return on each additional hour worked. …Higher taxes on capital income, such as dividends and capital gains, lower the average after-tax rate of return on private wealth holdings (or the return on investment), which reduces the incentive to save and invest and leads to reductions in saving, investment, and the capital stock. …we compare the effects of raising additional revenues through three illustrative tax policies: a flat tax on labor income, a flat tax on all income (including both labor and capital income), and a progressive tax on all income. The additional revenues generated by these policies are in addition to the revenues raised by taxes that already exist and are used to finance two specific increases in government spending. The two increases in government spending are set to 5 percent and 10 percent of GDP in 2020.

Here are some of the key results, as illustrated by the chart.

The least-worst result (the blue line) is a decline in GDP of about 3 percent, and that happens if the spending burden expand by 5-percentage points of GDP and is financed by a flat tax.

The worst-worst result (dashed red line) is a staggering decline in GDP of about 10 percent, and that happens if the spending burden climbs by 10-percentage points and is financed by a progressive tax.

Here’s some additional analysis, including a description of why progressive taxes impose the most damage.

This paper shows that flat labor and flat income tax policies have similar effects on output; labor taxes reduce the labor supply more, and income taxes reduce the capital stock more. For all three policies, the decline in income contracts the tax base considerably over time. As a result, to continuously generate enough revenues to finance the increase in government spending in each year, tax rates must steadily increase over time to account for the decline in the tax base. Moreover, labor and capital taxes put upward pressure on interest rates by reducing the capital-to-labor ratio over time… The largest declines in economic activity among the financing methods considered occur with the progressive tax on all income. Those declines occur because high-productivity workers reduce their hours worked and because higher taxes on asset income reduce the incentive to save and invest relatively more than under the two flat taxes.

There’s lots of additional information in the study, but I definitely want to draw attention to Table 4 because it shows that lower-income people will suffer big reductions in living standards if there’s an increase in the burden of government spending (circled in red).

What makes these results especially remarkable is that the authors only look at the damage caused by higher taxes.

Yet we know from other research that the economy also will suffer because of the higher spending burden. This is because of the various ways that growth is reduced when resources are diverted from the productive sector to the government.

For background, here’s a video on the theoretical reasons why government spending hinders growth.

And here’s a video with some of the scholarly evidence.

P.S. The CBO study also points out that financing new spending with a value-added tax wouldn’t avert economic damage.

…by reducing the cost of time spent not working for pay relative to other goods, a consumption tax could reduce hours worked through a channel like that of a tax on labor.

For what it’s worth, even the pro-tax International Monetary Fund agrees with this observation.

P.P.S. It’s worth noting that the CBO study also shows that young people will suffer much more than older people.

…older cohorts, on average, experience smaller declines in lifetime consumption than younger cohorts

Which raises an interesting question of why millennials and Gen-Zers don’t appreciate capitalism and instead are sympathetic to the dirigiste ideology that will make their lives more difficult.

Read Full Post »

As part of a video debate last year (where I also discussed wealth taxation, poverty reduction, and the inadvisability of tax increases), I pontificated on the negative economic impact of class-warfare taxation.

To elaborate, I’m trying to help people understand why it is a mistake to impose class-warfare taxes on high-income taxpayers.

Back in 2019, I shared data from the Internal Revenue Service confirming that rich taxpayers get the vast majority of their income from business activity and investments.

And since it’s comparatively easy to control the timing, level, and composition of that income, class-warfare taxes generally backfire.

Heck, well-to-do taxpayers can simply shift all their investments into tax-free municipal bonds (that’s bad for the rest of us, by the way, since it’s better for growth if they invest in private businesses rather than buying bonds from state and local governments).

Or, they can simply buy growth stocks rather than dividend stocks because politicians (thankfully) haven’t figured out how to tax unrealized capital gains.

Some of my left-leaning readers probably think that my analysis can be ignored or dismissed because I’m a curmudgeonly libertarian.

But I’m simply recycling conventional economic thinking on these issues.

And to confirm that point, let’s review a study on taxes and growth that the International Monetary Fund published last December. Written by Khaled Abdel-Kader and Ruud de Mooij, there are passages that sound like they could have been written by yours truly.

Such as the observation that taxes hinder prosperity by reducing economic output (what economist refer to as deadweight loss).

…public finance…theories teach us some important lessons about efficient tax design. By transferring resources from the private to the public sector, taxes inescapably impose a loss on society that goes beyond the revenue generated. …deadweight loss (or excess burden) is what determines a tax distortion. Efficient tax design aims to minimize the total deadweight loss of taxes. The size of this loss depends on two main factors. First, losses are bigger the more responsive the tax base is to taxation. Second, the loss increases more than proportionately with the tax rate: adding a distortion to an already high tax rate is more harmful than adding it to a low tax rate. Two prescriptions for efficient tax policy follow: (i) it is efficient to impose taxes at a higher rate if things are in inelastic demand or supply; and (ii) it is best to tax as many things as possible to keep rates low. …empirical studies on the growth impact of taxes…generally find that income taxes are more distortive for economic growth than taxes on consumption.

There are several parts of the above passage that deserve extra attention, such as the observation about elasticity (similar to the point I made in the video about why higher tax rates on upper-income taxpayers are so destructive).

But the most important thing to understand is what the authors wrote about how “the [deadweight] loss increases more than proportionately with the tax rate.”

In other words, it’s more damaging to increase top tax rates.

This observation, which is almost certainly universally recognized in the economics profession, tells us why class-warfare taxes do the most economic damage, on a per-dollar-collected basis.

The IMF study also has worthwhile observations on different types of taxes, such as why it’s a good idea to have low income tax rates on people.

Optimal tax theory emphasizes the trade-off between equity and efficiency. …This requires balancing the revenue gain from a higher marginal top PIT rate at the initial base against the revenue loss induced by behavioral responses that a higher tax rate would induce—such as reduced labor effort, avoidance or evasion—measured by the elasticity of taxable income. …high marginal rates cause other adverse economic effects, e.g. on innovation and entrepreneurship, and thus create larger economic costs than is sometimes assumed.

Very similar to what I’ve written.

And low income tax rates on companies.

Capital income—interest, dividends and capital gains—is used for future consumption so that taxes on it correspond to a differentiated consumption tax on present versus future consumption—one that compounds if the time horizon expands. Prudent people who prefer to postpone consumption to later in life (or transfer it to their heirs) will thus be taxed more than those who do not, even though they have the same life-time earnings. This violates horizontal equity principles. Moreover, it causes a distortion by encouraging individuals to substitute future with current consumption, i.e. they reduce savings. The tax is therefore also inefficient. A classical result, formalized by Chamley (1986) and Judd (1985), is that the optimal tax on capital is zero.

Once again, very similar to what I’ve written.

Indeed, the study even asks whether there should be a corporate income tax when the same income already is subject to dividend taxation when distributed to shareholders.

…capital income taxes can be levied directly on the people that ultimately receive that income, i.e. shareholders and creditors. So: why is there a need for a CIT? It is hard to justify a CIT on efficiency grounds. As explained before, the incidence of the CIT in a small open economy falls largely on workers, not on the firm or its shareholders. Since it is more efficient to tax labor directly than indirectly, the optimal CIT is found to be zero. …CIT systems…in most countries…create two major economic distortions. First, by raising the cost of capital on equity they distort investment decisions. This hurts economic growth and adversely affects efficiency. Second, by differentiating between debt and equity, they induce a bias toward debt finance. This not only creates an additional direct welfare loss, but also threatens financial stability. Both distortions can be eliminated by…cash-flow taxes, which allow for full expensing of investment instead of deductions for tax depreciation

Also similar to what I’ve written.

And I like the fact that the study makes very sensible points about why there should not be a pro-debt bias in tax codes and why there should be “expensing” of business investment costs.

I’ll close by noting that the IMF study is not a libertarian document.

The authors are simply describing the economic costs of taxation and acknowledging the tradeoffs that exist when politicians impose various types of taxes (and the rates at which those taxes are imposed).

But that doesn’t mean the IMF is arguing for low taxes.

There are plenty of sections that make the (awful) argument that it’s okay to impose higher tax rates and sacrifice growth in order to achieve more equality.

And there are also sections that regurgitate the IMF’s anti-empirical argument that higher taxes can be good for growth if politicians wisely allocate the money so it is spent on genuine public goods.

Politicians doing what’s best for their countries rather than what’s best for themselves? Yeah, good luck with that.

Read Full Post »

There are several false narratives about economic history, involving topics ranging from the recent financial crisis to 19th-century sweatshops.

But probably the biggest falsehood, as explained in this video by Prof. Lee Ohanian, is the notion that big government saved us from the Great Depression.

The only shortcoming of Ohanian’s video is that he’s analyzing just one of President Roosevelt’s mistakes.

Yes, it is very important to explain why FDR’s corporatism was profoundly misguided, but we also should recognize that he had terrible fiscal policy as well.

Roosevelt had two competing camps of advisers on the budget, one of which wanted to borrow and spend, while the other wanted to tax and spend. Sadly, both groups enjoyed plenty of victories.

With so many policy mistakes, we shouldn’t be surprised that the economy remained mired in a depression for an entire decade.

What’s tragic is that most of that suffering could have been avoided if FDR and his appointees simply remembered how President Harding a dozen years earlier had cut taxes and spending to rescue the economy from a deep downturn.

Let’s look at some additional analysis.

Writing for CapX, Tim Worstall explains how FDR’s blundering made things worse, especially compared to what happened in the United Kingdom.

…what caused the Great Depression was a series of bad political choices… The British…government cut spending and things turned out rather better than that in the US. …the much worse American experience was a direct result of the huge expansion of government. Far from saving the US economy, Roosevelt’s various interventions actually prolonged the agony. …The Depression was over in the UK by 1934. …the American disaster toiled on rather longer. So, what were the big differences? …the UK cut state spending… FDR boosted the role of the federal government in many ways. …the National Recovery Administration, which was a disastrous attempt at managing prices. …the imposition of cartels upon both business and agriculture. This suite of ill-advised measures delayed the recovery.

The only good news is that we didn’t get a resuscitation of those policies after World War II, which meant the economy had a chance to finally recover.

So what’s the moral of the story?

As Larry Reed wrote for the Foundation for Economic Education, the Great Depression was caused by a series of foolish interventions by politicians in Washington, and we need to remember that lesson so we don’t repeat the mistakes of history.

The history of the Great Crash and subsequent Depression provides a sad litany of policy blunders in Washington. Altogether, they needlessly caused and prolonged the pain; roller coaster monetary policy, sky-high tariff hikes, massive tax increases, government-supervised destruction of foodstuffs, gold seizures, price-fixing regulations, soaring deficits and debt, special favors to organized labor that stifled investment and boosted unemployment. …myths and misconceptions about our most calamitous economic episode abound. Fortunately, recent scholarship is slowly changing that. The simplistic, error-filled assumption that free markets failed and government rescued us—once conventional “wisdom”—no longer gets by unquestioned.

For further information on the Great Depression and bad government policy, you can watch other videos here and here.

P.S. Walter Williams and Thomas Sowell both have written on the issue as well.

P.P.S. With regards to economic policy, FDR was an awful president. And he would have been even worse had he succeeded in pushing through his plan for a 100 percent top tax rate and his proposal for a so-called economic bill of rights.

Read Full Post »

Over the years, I’ve shared many amusing memes and cartoons about minimum wage laws.

But this one, based on a skit from The Eric Andre Show, may be the best of all.

Not because it’s making a different point than the others, but because what has just happened in Southern California.

Local politicians in a couple of cities recently mandated higher wages (labeled “hero pay”) for workers in grocery stores.

The immediate consequences of that legislation provide a clear-cut example of why it is so foolish for politicians to mandate levels of pay that make it unprofitable to operate a business.

Let’s look at a couple of news reports.

We’ll start with a story from the local CBS affiliate in Los Angeles. Here are some excerpts.

Kroger is closing three more of its stores in Los Angeles after the city passed a “hero pay” ordinance mandating a $5 pay bump for grocery and pharmacy workers. …“It’s never our desire to close a store, but when you factor in the increased costs of…an extra pay mandate that will cost nearly $20 million over the next 120 days, it becomes impossible to operate these three stores,” Kroger said in a statement.

The same thing is happening in nearby Long Beach.

Ralphs and Food 4 Less recently announced that they will be closing two…stores in Long Beach after Mayor Robert Garcia approved a city ordinance that would impose a $4 “hero pay” salary boost… “As a result of the City of Long Beach’s decision to pass an ordinance mandating Extra Pay for grocery workers, we have made the difficult decision to permanently close long-struggling store locations in Long Beach,” said a company spokesperson. …The permanent closures will happen on April 17 for long-struggling locations and will impact nearly 200 employees between the two locations.

What happened in Los Angeles and Long Beach is obviously a lesson in economics.

But it’s also a lesson in politics.

I’m guessing that most of the local politicians knew that they would be throwing many people into the unemployment line when they mandated “hero pay,” but they simply didn’t care.

What mattered to them is that they got headlines for “caring” when they enacted the legislation. They don’t care about the unintended (but very predictable) consequences.

Which is yet another reason we should have a very low opinion of politicians.

P.S. If you want more memes and cartoons about the minimum wage, click here, here, here, here, and here.

Read Full Post »

Two years ago, I shared a study from three scholars that investigated whether membership in the European Union (EU) is associated with better economic performance.

Before reading that study, I assumed that EU membership was bad news for rich countries with decent economic policy (hence my support for Brexit), but I figured it was a good idea for poor countries with not-so-good policy.

I may have been wrong about the latter. The authors found that “EU membership has no impact on economic growth” and that “EU entry seems to have reduced economic growth.”

Ouch.

But I’m always interested in seeing new research on this topic.

So I was delighted to read a new report published by the European Liberal Forum.* Written by Constantinos Saravakos, Emmanuel Schizas, Mara Vidali, Angela De Martiis, and Giorgio Vernoni, it also seeks to ascertain if there is a link between EU membership and economic liberty.

…this publication seeks to examine whether a trajectory towards EU membership is a driver for more economic freedom. The key research question is if European Union economic policies promote economic freedom. The answer in this question is essential…because an economic environment based on market economy has a positive relationship with several prosperity outcomes. …Taking into account the huge EU enlargement that took place since 2004, when 13 countries have accessed the Union, and the on process enlargement with several formal or informal candidates, the analysis focuses on whether the structural reforms required for a country to become a member of EU contribute to economic freedom, covering the period from 2000 to 2017. …our research considers the relationship between a country’s Economic Freedom of the World index score (and sub-index scores) and its progress along the EU accession process.

Contrary to the study I wrote about two years ago, they find that countries have benefited from membership.

…as a country approaches EU membership status, then economic freedom, as proxied by the proximity to the EFW frontier, increases by at least 0.2, and this effect is associated with the process of accession…the main channel by which EU accession might contribute positively to a candidate or member state’s economic freedom is by boosting the freedom to trade… The present study provides empirical evidence of a link between the EU accession process and the aim of promoting economic freedom.

Here’s a chart from the report, which certainly suggests that something good is happening in the European Union.

Economic freedom, on average, has increased for the 28 nations of the EU since 2000 (based on a 1-10 scale).**

But when I looked at that chart, I wondered what we were really seeing.

Most notably, I was curious what we would find if we looked at the the nations of Western Europe, the ones that used to be known as the EU-15 before the bloc was enlarged (13 new countries have joined this century, mostly from Eastern Europe).**

So I went to the same source, Economic Freedom of the World, to measure what’s happened in those countries. Lo and behold, the average level of economic liberty has declined (which didn’t surprise me since I found something similar when I crunched some data back in 2016).

This doesn’t mean we should necessarily conclude that EU membership is bad for prosperity, but I’m not optimistic.

When I talk to pro-EU friends, here are some questions I ask:

  • Would Eastern European nations have liberalized their economies without becoming part of the EU?
  • Since Western European nations wield most of the power inside the EU, is it worrisome that they are becoming more statist in their orientation?
  • What are the implications for EU nations of demographic change (aging populations and falling birthrates)?
  • Will the EU’s nascent transfer union lead to more economic liberalization or less economic liberalization?

The bottom line is that I don’t think there are encouraging answers to these questions. Which is why we can expect that Europe will continue to fall behind the United States (which makes it rather odd that President Biden wants to make the USA more like the EU).

*In Europe, liberal means pro-market “classical liberalism” rather than the entitlement-based American version.

**The United Kingdom has now escaped the EU, but it was part of the bloc during the periods being measured.

Read Full Post »

Exactly one month ago, I declared that Congresswoman Ayanna Pressley deserved an award for the “world’s most economically illiterate statement” because of her claim that “poverty is not naturally occurring.”

In reality, poverty has been the norm throughout history. As documented by Professors Deirdre McCloskey and Don Boudreaux, it was only the development of capitalism (starting a few hundred years ago in Europe) that enabled humanity to enjoy amazing and unprecedented increases in living standards.

Moreover, Ms. Pressely was trying to argue that redistribution was the proper way to address poverty, and I concluded my column by noting “that part of her statement also is wrong, according to both U.S. data and global data.”

Today, I want to debunk another preposterous assertion.

David Smith of the U.K.-based Guardian wrote a column yesterday claiming that Biden’s so-called stimulus should be celebrated since it marks an end to forty years of Reaganomics.

…he will…be on a mission to restore faith in government. Confidence in it “has been plummeting since the late 60s to what it is now”, Biden noted in his remarks last week. His legislation, called the American Rescue Plan, can correct that with the biggest expansion of the welfare state in decades. …Biden knows better than anyone what that means. When he was born, in 1942, the president was Franklin Roosevelt, architect of the New Deal… When Biden was a student at the University of Delaware, Lyndon Johnson embarked on his project of the “Great Society”… Then came Ronald Reagan and his famous quip: “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” …He described Johnson’s “Great Society” as a fundamental wrong turn and set about dismantling it. …This orthodoxy held and dominated the political centre ground. …Biden’s could hardly be more of a polar opposite. …All the more reason to enjoy his victory lap and celebrate that four decades of Reaganism and “trickle down” economics are at an end.

Some of that political analysis is reasonable. FDR’s failed New Deal did expand government, as did LBJ’s failed War on Poverty.

And it’s also true that Reagan challenged their big-government orthodoxy and was somewhat successful in reining in the welfare state (“dismantling it” is a huge exaggeration, however).

But the author’s claim that there were “four decades of Reaganism” is breathtaking nonsense.

  • George H.W. Bush expanded the burden of government.
  • George W. Bush expanded the burden of government.
  • Barack Obama expanded the burden of government.
  • Donald Trump expanded the burden of government.

That’s 24 years of statist policies after Reagan left office.

If Mr. Smith actually knew the subject matter and wanted to write an honest article, he could have made an argument about 16 years of Reaganism because we also benefited from a net reduction in the burden of government during Clinton’s eight years in office.

But the 21st century has been nothing but bad news for proponents of free markets. If you peruse Economic Freedom of the World, you’ll find that America’s level of economic freedom peaked in 2000 with a score of 8.67 (on a 1-10 scale).

Now the score for the United States has dropped to 8.22.

By the way, that’s not catastrophically bad. There’s no immediate risk of America becoming another Greece. And we’ll presumably never turn into Venezuela, no matter how hard Biden tries (it wouldn’t even happen if Vice President Harris took over).

That being said, what we’ve endured over the past two decades definitely is not Reaganism. The “Washington Consensus” is just a distant memory.

P.S. David Smith’s article is an example of sloppy journalism at a left-wing newspaper, but I’ll always have a bit of fondness for the Guardian because of the unintended compliment it bestowed upon me back in 2009.

P.P.S. For younger readers who did not experience the Reagan years, here’s my assessment of his record and here are some videos of some of his iconic remarks (and here’s a bonus video).

Read Full Post »

Older Posts »

%d bloggers like this: