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I certainly don’t intend to do this for everyone who has made it to the White House, but I have produced big-picture economic assessments of several presidents.

Today, let’s go back farther in history and take a look at Woodrow Wilson.

At the risk of understatement, he did a very bad job. Indeed, it’s quite likely that he ranks as America’s worst president, at least when judging economic policy. His mistakes were either huge or disgusting.

Creating the income tax – The internal revenue code began when Wilson signed into law an income tax on October 3, 1913. The initial tax wasn’t overly onerous – with a top rate of just 7 percent – but it predictably evolved into the punitive levy that currently plagues America.

Creating the Federal Reserve – You don’t have to be a libertarian-minded advocate of competitive currencies to conclude that the central bank – also signed into law by Wilson in 1913 – has caused immense damage with its erratic, boom-bust approach to monetary policy.

Segregating the federal government – Wilson was a reprehensible racist. To make matters worse, he turned that personal moral failing into a big policy mistake by overseeing rampant (and costly) discrimination and segregation in the federal government.

Those are just the highlights – though lowlights would be a more accurate word to describe Wilson’s policies.

The Encyclopedia Britannica has a description of some additional forms of intervention imposed during his tenure.

…he took up and pushed through Congress the Progressive-sponsored Federal Trade Commission Act of 1914. It established an agency—the Federal Trade Commission (FTC)—with sweeping authority. …because his own political thinking had been moving toward a more advanced Progressive position—Wilson struck out upon a new political course in 1916. He began by appointing Louis D. Brandeis, the leading critic of big business and finance, to the Supreme Court. Then in quick succession he obtained passage of a rural-credits measure to supply cheap long-term credit to farmers; anti-child-labour and federal workmen’s-compensation legislation; the Adamson Act, establishing the eight-hour day for interstate railroad workers; and measures for federal aid to education and highway construction.

Lawrence Reed of the Foundation for Economic Education put together a damning indictment of Wilson.

1913…was a disastrous year that we’re still paying a hefty, annual price for… Wilson, arguably the worst president…ordered the segregation of all departments within the executive branch and appointed ardent segregationists to high positions. …He locked up political dissidents right and left as he trampled on the Constitution’s guarantees of speech, assembly, and press freedoms. His wartime economic controls were hideously stupid and counterproductive. …the 16th Amendment to the Constitution was…Strongly supported by Wilson… Subsequent legislation set the top rate at a mere 7 percent. …When Wilson left office eight years later, the top rate was more than ten times higher. …Wilson’s signature enshrined into law the Federal Reserve Act, creating a central bank and more economic mischief than any other federal initiative or institution in the last 100 years. …In American history, 1913 should go down as a year that will live in infamy.

It’s also worth noting that Wilson was a believer in global governance, which adds to his awful legacy.

In a review of a biography about Wilson for the Claremont Review of Books, David Goldman mentions that unpalatable feature of his presidency.

So utterly utopian was Wilson’s vision that it is unfair to characterize the internationalism of Bill Clinton or George W. Bush as “Wilsonian.” Clinton and Bush threw America’s weight around after the collapse of the Soviet Union, but they did not propose—as Wilson did—to replace America’s sovereign decision-making with a global council. …He wanted to compromise American sovereignty and most of the Senate did not. …Wilson would have liked to impose a legal obligation from a foreign body upon the United States, but could not say so openly. …His obsession was the creation of a supranational agency able to dictate policy to national governments, an obsession that grew out of his lifelong hostility to the American political system… To make sense of his grand overreach in 1919, historians will need to give more attention to his rancor at the U.S. Constitution… The constitution in Wilson’s reading had become a relic of a bygone era. He proposed to jettison this putatively archaic document in favor of a government less burdened by checks and balances. …The same utilitarian criteria that Wilson applied to the Constitution guided his judgment about capitalism and socialism. …As economists Clifford Thies and Gary Pecquet have observed, “Wilson believed that the difference between socialism and democracy was a matter of means rather than ends.” …He eschewed mass expropriation of industry only because he thought it inefficient. …Although Wilson’s dudgeon came from the Deep South, his Progressivism came from Princeton and the Social Gospel.

Wilson’s hostility to the Constitution was part of the so-called progressive era. Unlike America’s Founders, proponents of this approach viewed the federal government as a positive force rather than something to be constrained.

The idea that government or “the community,” has “an absolute right to determine its own destiny and that of its members” is a progressive one. The difference between the Founders’ and progressive’s visions can be summarized this way: The Founders believed citizens could best pursue happiness if government was limited to protecting the life, liberty, and property of individuals. …Unlike the framers of the Constitution, progressives believed that…“communities” have rights, those rights are more important than the personal liberty of any one individual in that community. …they believed…government-sponsored programs and policies as well as economic redistribution of goods from the rich to the poor. …Wilson, who served as president from 1913-1919, advocated what we today call the living Constitution, or the idea that its interpretation should adapt to the times. …Wilson oversaw the implementation of progressive policies such as the introduction of the income tax and the creation of the Federal Reserve System to attempt to manage the economy.

Bre Payton, in an article for the Federalist, opined about Wilson and the changes during the progressive era.

…to understand The New Deal and how American life and government  changed in the twentieth century and beyond, it is vital to understand the Progressive Era… FDR cited progressive-minded presidents Theodore Roosevelt and Woodrow Wilson as his intellectual inspirations. …Progressives believed restricting government to only protecting citizens’ life, liberty, and ability to pursue happiness was simplistic. …Thus people should not fear the ever-expanding role of government… Wilson went on to say that modern European thinkers had declared that men were defined not by their individuality, but by their society. And one’s rights come from government.

Hostility to the Constitution and limited government was just one problem with the progressives.

Their views of minorities also were very troubling.

In a column for National Review, Paul Rahe documented not only Wilson’s racism, but also his use of government power to harm the economic prospects for black Americans.

Wilson, our first professorial president, was…the very model of a modern Progressive…he shared the conviction, dominant among his brethren, that African-Americans were racially inferior to whites. …Prior to the segregation of the civil service in 1913, appointments had been made solely on merit as indicated by the candidate’s performance on the civil-service examination. Thereafter, racial discrimination became the norm. …The existing work force was segregated. Many African-Americans were dismissed. …Jim Crow had not been the norm before 1890, even in the deep South. …it became the norm there only when it received sanction from the racist Progressives in the North. …For similar reasons, Wilson was hostile to the constitutional provisions intended as a guarantee of limited government. The separation of powers, the balances and checks, and the distribution of authority between nation and state distinguishing the American constitution he regarded as an obstacle.

This article from the New Republic covers the same ground, starting with his time as head of Princeton University, but from a left-wing perspective.

Wilson not only refused to admit any black students, he erased the earlier admissions of black students from the university’s history.Elected president in 1912, …Wilson appeared to be the quintessential Progressive Era leader. …the progressive ideology of the era was in many ways quite racist. …it quickly became known that the Wilson administration was instituting a major modification in the treatment of black workers throughout the federal government from what had been the case under postwar presidents. …the Civil Service began demanding photographs to accompany employment applications for the first time. It was widely understood that the only purpose of this requirement was to weed out black applicants. …He insisted that the segregation policy was for the comfort and best interests of both blacks and whites.

There’s more bad news about Wilson.

In a column for the Washington Post, Michael Beschloss, a presidential historian, writes about his authoritarianism as well as his racism.

His most disgraceful flaw was his racism. …Wilson especially stood out in his white supremacy. He was not a man of his time but a throwback. …Wilson, who preened as a civil libertarian, persuaded Congress to pass the Espionage Act, giving him extraordinary power to retaliate against Americans who opposed him and his wartime behavior. That same law today enables presidents to harass their political adversaries. Wilson’s Justice Department also convicted almost a thousand people for using “disloyal, profane, scurrilous or abusive language” against the government, the military or the flag. Wilson is an excellent example of how presidents can exploit wars to increase authoritarian power and restrict freedom.

All things considered, definitely one of America’s worst chief executives.

This tweet is an apt summary of Wilson’s presidency.

For readers who are interested in the quirks of history, Lawrence Reed of the Foundation for Economic Education bemoans the fact that an untimely death in 1899 probably led to the unfortunate election of Wilson.

Garret Augustus Hobart—known to his friends as “Gus”—was America’s 24th vice president. He served under William McKinley for two years and eight months until his death in office in November 1899 at the age of 55. With Hobart’s untimely passing, President William McKinley had to find a new running mate for the election of 1900. That man turned out to be Theodore Roosevelt, who became president upon McKinley’s assassination only six months into his second term. …Teddy…enter the presidential race in 1912 as a third-party nominee. That split the Republican vote and handed the presidency to Democrat Woodrow Wilson. Wilson won with just 42% of the popular tally and went on to become arguably the very worst of our 45 chief executives. …I greatly lament the sad fact that Gus Hobart wasn’t around to run again with McKinley in 1900. If he had lived, he instead of Teddy would have become our 26th President when McKinley died. And if there had been no Teddy Roosevelt presidency, there might never have been a philandering, racist, “progressive” Wilson in the White House to royally screw up the country with an income tax, a Federal Reserve, entry into World War I, and other mischievous adventures in statism.

In keeping with my traditional practice, here’s a visual depiction of the good and bad policies of the Wilson Administration.

And although it’s hard to measure, Wilson belongs in the presidential Hall of Shame because his administration was a turning point in America’s tragic evolution from Madisonian constitutionalism to modern statism.

For instance, Wilson almost surely paved the way for FDR’s ill-fated New Deal.

P.S. Now readers will hopefully understand why I wrote that Obama (who largely had a forgettable legacy) wasn’t nearly as bad at Wilson.

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I don’t know whether I’ll live 3 more years or 30 more years.

But I’m increasingly convinced that my “Never-Answered Question” will still be unanswered when I kick the bucket.

One of the reasons for my confidence is that folks on the left have remarkably shoddy arguments on economic issues.

For instance, in a column for the New York Times, Mehrsa Baradaran condemns the “neoliberal” revolution in the United States.

A law professor from the University of California, Irvine, Ms. Baradaran is unhappy that this modern version of classical liberalism resulted in more economic freedom.

…an ideological coup quietly transformed our society over the last 50 years… The roots of this intellectual takeover can be traced to a backlash against socialism… Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, decrying governments who chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — …leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization.

Since I’m a big fan of Prof. Hayek, I like this part of Professor Baradaran’s column.

And it is true that the United States became more “neoliberal” during the Reagan and Clinton years (though it’s definitely a huge exaggeration to think that pro-market ideas were dominant in “universities, law schools, legislatures and courts”).

Indeed, the entire world moved in the direction of free markets during the last two decades of the 20th century, thanks is part to the “Washington Consensus” for more economic liberty.

Ms. Baradaran, however, does not approve of these developments.

And she specifically doesn’t like some of the folks on Wall Street.

The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic. Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. …In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation.

I have no idea whether there’s any validity to the specific estimate of 1.3 million job losses as a result of private equity investors over the past 10 years (an average of 130,000 jobs per year).

But it certainly is true that lots of jobs are lost every year as a result of “creative destruction.” Indeed, 130,000 jobs are just a tiny fraction of the total losses.

Here’s a chart taken directly from the Bureau of Labor Statistics showing that more than 10 million jobs are lost – on average – every single year.

That’s the bad news.

The good news is that average job gains have been even higher over the past decade, averaging more than 12 million per year.

Call me crazy, but this seems like a ringing endorsement of “neoliberalism.” Especially when you consider that Americans enjoy much higher living standards than their counterparts in European nations with bigger burdens of government.

There are two additional excerpts from her column that merit some attention.

First, she regurgitates the myth that the 2008 financial crisis was caused by free markets and deregulation.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. …Faith in market magic was so entrenched that even the 2008 financial crisis did not fully expose the myth: We witnessed the federal government pick up all the risks that markets could not manage and Congress and the Federal Reserve save the banking sector ostensibly on behalf of the people. Neoliberal deregulation was premised on the theory that the invisible hand of the market would discipline risky banks without the need for government oversight.

At the risk of understatement, the Federal Reserve, along with Fannie Mae and Freddie Mac, deserve the lion’s share of the blame.

Also, she closes her column by embracing genuine socialism (i.e., government owning and operating parts of the economy).

Federal or state agencies can provide essential services like banking, health care, internet access, transportation and housing at cost through a public option. …we can move beyond the myths of neoliberalism…we should choose flourishing communities over profits.

At the risk of understatement, I don’t want more of our economy to be like the Post Office or DMV. I prefer private businesses, which face pressure to please consumers, rather than government-run businesses, which care mostly about pleasing politicians.

And I also think Ms. Baradaran needs a lesson from Walter Williams so she learns that profits make flourishing communities possible.

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In an interview with an economic organization from India last month, I discussed many of the economic issues associated with coronavirus (fiscal fallout, excess regulation, subsidized unemployment, etc).

But I want to highlight this short clip since I had an opportunity to explain how the “New Deal” made the Great Depression deeper and longer.

For newcomers to this issue, “New Deal” is the term used to describe the various policies to expand the size and scope of the federal government adopted by President Franklin Delano Roosevelt (a.k.a., FDR) during the 1930s.

And I’ve previously cited many experts to show that his policies undermined prosperity. Indeed, one of my main complaints is that he doubled down on many of the bad policies adopted by his predecessor, Herbert Hoover.

Let’s revisit the issue today by seeing what some other scholars have written about the New Deal. Let’s start with some analysis from Robert Higgs, a highly regarded economic historian.

…as many observers claimed at the time, the New Deal did prolong the depression. …FDR and Congress, especially during the congressional sessions of 1933 and 1935, embraced interventionist policies on a wide front. With its bewildering, incoherent mass of new expenditures, taxes, subsidies, regulations, and direct government participation in productive activities, the New Deal created so much confusion, fear, uncertainty, and hostility among businessmen and investors that private investment, and hence overall private economic activity, never recovered enough to restore the high levels of production and employment enjoyed in the 1920s. …the American economy between 1930 and 1940 failed to add anything to its capital stock: net private investment for that eleven-year period totaled minus $3.1 billion. Without capital accumulation, no economy can grow. …If demagoguery were a powerful means of creating prosperity, then FDR might have lifted the country out of the depression in short order. But in 1939, ten years after its onset and six years after the commencement of the New Deal, 9.5 million persons, or 17.2 percent of the labor force, remained officially unemployed.

Writing for the American Institute for Economic Research, Professor Vincent Geloso also finds that FDR’s New Deal hurt rather than helped.

…let us state clearly what is at stake: did the New Deal halt the slump or did it prolong the Great Depression? …The issue that macroeconomists tend to consider is whether the rebound was fast enough to return to the trendline. …The…figure below shows the observed GDP per capita between 1929 and 1939 expressed as the ratio of what GDP per capita would have been like had it continued at the trend of growth between 1865 and 1929. On that graph, a ratio of 1 implies that actual GDP is equal to what the trend line predicts. …As can be seen, by 1939, the United States was nowhere near the trendline. …Most of the economic historians who have written on the topic agree that the recovery was weak by all standards and paled in comparison with what was observed elsewhere. …there is also a wide level of agreement that other policies lengthened the depression. The one to receive the most flak from economic historians is the National Industrial Recovery Act (NIRA). …In essence, it constituted a piece of legislation that encouraged cartelization. By definition, this would reduce output and increase prices. As such, it is often accused of having delayed recovery. …other sets of policies (such as the Agricultural Adjustment Act, the National Labor Relations Act and the National Industrial Recovery Act)…were very probably counterproductive.

Here’s one of the charts from his article, which shows that the economy never recovered lost output during the 1930s.

In a column for CapX, Professor Philip Booth adds some interesting evidence on how the United Kingdom adopted a smarter approach in the 1930s.

…the UK had a relatively good Great Depression by international standards. There was an extremely conservative fiscal policy (much more so than during the so-called austerity after 2008) and yet the economy bounced back. In the period 1930-1933, the average public sector deficit was just 1.1% of GDP. And there were only two years of negative GDP growth (1930 and 1931). By 1938, GDP growth had been sufficiently rapid, that the country had returned to trend national income as if the Great Depression had never happened. …In the UK, we had a stable regulatory environment, a liberalised market for land for building purposes and fiscal austerity. …though Roosevelt is often regarded as the great saviour, he is nothing of the sort. …taking the period 1929-1939 as a whole, real GDP growth was only 1% per annum. There was no return to trend national income levels. …unemployment in the US was much higher than in the UK. For the economy to be operating at those levels of unemployment for so long requires some very bad policies. …Arbitrary regulation damaged business and created “policy uncertainty” and top marginal tax rates were raised.

For what it’s worth, I also think it’s worth comparing what happened in the 1930s with the genuine economic recovery from the deep recession in 1920-21.

Or, look at how the economy boomed after World War II even though the Keynesians predicted the economy would fall back into depression without a massive expansion of domestic spending.

Nonetheless, as illustrated by this cartoon, some people still want to blame capitalism for problems caused by government.

P.S. FDR not only wanted a 100-percent tax rate, he actually tried to impose it without legislative approval.

P.P.S. FDR also wanted an “Economic Bill of Rights” that would have created a far-reaching entitlements to other people’s money.

P.P.P.S. This video summarizes the awful policies of Hoover and FDR.

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In early 2019, I released this video summarizing some of the evidence for free trade.

The bad news is that I must not be very persuasive. Trump continued with protectionist policy.

The good news is that we now have more evidence against that form of government intervention.

But first, I’m going to start with a bit of theory. Here’s a chart from the Council of Foreign Relations showing the relationship between prosperity and trade balances.

And here’s the explanation, courtesy of Benn Steil and Benjamin Della Rocca.

President Trump says that America running a trade deficit means that “jobs and wealth are being given to other countries.” …this statement is logically and historically false. The left-hand figure above shows that the relationship between trade deficits and growth in the United States, going back nearly 30 years, is the opposite. Rising growth tends to increase imports through higher consumption. The imports have not meant that “jobs and wealth are being given to other countries”: they have been a sign of a strong U.S. economy.

This is spot on. As I explained in my video on the trade deficit, people in richer, faster-growing countries can afford to buy more goods and services (regardless of where they are produced) than people in countries with anemic economic performance.

Indeed, this is why (at least in the pre-coronavirus era) America’s trade deficit was expanding.

Now let’s shift to the additional evidence that has accumulated since the video was produced.

Here’s are the key findings from a study by Kyle Handley, Fariha Kamal, and Ryan Monarch, which was just published by the Federal Reserve.

Using 2016 confidential firm-trade linked data, we document the implied incidence and scope of new import tariffs. Firms that eventually faced tariff increases on their imports ac-counted for 84% of all exports and they represent 65% of manufacturing employment. For all affected firms, the implied cost is $900 per worker in new duties. To estimate the effect on U.S. export growth, we construct product-level measures of import tariff exposure of U.S. exports from the underlying firm micro data.More exposed products experienced 2 percentage point lower growth relative to products with no exposure. The decline in exports is equivalent to an ad valorem tariff on U.S. exports of almost 2% for the typical product and almost 4% for products with higher than average exposure.

Here are some results of a recent study by Stephen J. Redding, Mary Amiti, and David Weinstein.

Using data from 2018, a number of studies have found that recent U.S tariffs have been passed on entirely to U.S. importers and consumers. …Using another year of data including significant escalations in the trade war, we find that U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers. We show that the response of import values to the tariffs increases in absolute magnitude over time, consistent with the idea that it takes time for firms to reorganize supply chains.

Here’s a chart from the study showing how Trump basically tripled average trade taxes over the past couple of years.

Next we have a 2019 study authored by Davide Furceri, Swarnali A. Hannan, Jonathan D. Ostry, and Andrew K. Rose.

We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963‐2014. Tariffs increases are associated with persistent economically and statistically significant declines in domestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciation and insignificant changes to the trade balance. Output and productivity impacts are magnified when tariffs rise during expansions and when they are imposed by advanced (as opposed to developing) economies; effects are asymmetric, being larger when tariffs go up than when they fall. Results are robust to a large number of perturbations to our methodology, and hold using both macroeconomic and industry‐level data.

These charts from their study paint a damning picture.

The bottom line is that Trump’s trade policies are hurting the U.S. economy (just like China’s protectionist policies are hurting that nation’s economy).

P.S. A great mystery is how some analysts understand that it’s bad to have higher taxes on trade, yet also think it’s perfectly okay to impose even bigger tax increases on work, saving, investment, and entrepreneurship. The folks at the International Monetary Fund are very guilty of this type of fiscal hypocrisy.

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Yesterday’s column focused on the theoretical argument for tax havens.

At the risk of oversimplifying, I explained that the pressure of tax competition was necessary to prevent “stationary bandits” from saddling nations with “goldfish government.”

And I specifically explained why the left’s theory of “capital export neutrality” was only persuasive if people just paid attention to one side of the equation.

Today, let’s look at some real-world evidence to better understand the beneficial role of these international financial centers.

We’ll start with a column in the Hill by Jorge González-Gallarza.

Using as a natural experiment the terminal phase-out in 2006 of corporate tax exemptions to affiliates of U.S. companies setting shop in Puerto Rico, the research finds that scrapping the island’s status as a tax haven led U.S. companies to cut back investments and job creation in the mainland substantially. The provision in question was Section 936 of the Internal Revenue Code and it exempted Puerto Rico-based affiliates of U.S. companies from paying any corporate income tax altogether. …In 1996, President Clinton signed the Small Business Job Creation Act, spelling §936’s full phaseout by 2006. …ditching §936 appears to have raised U.S. companies’ average effective tax rate on domestic corporate income by 10 percentage points. Notably yet unsurprisingly, they responded by cutting global investment by a whopping 23 percent while balancing away from domestic projects, in Puerto Rico and the mainland alike — domestic investment fell by 38 percent, with Foreign Direct Investments’ (FDIs) share of the total growing 17.5 percent. …Employing 11 million workers in the continental US before repeal, firms taking advantage of §936 laid off a million of them, amounting to a 9.1 percent decline in payrolls.

In other words, higher taxes on business resulted in less investment and fewer jobs. Gee, what a surprise.

Hopefully, the 2017 reduction in the corporate tax rate is now offsetting some of that damage.

In an article for the Tax Foundation, Elke Asen shares some academic research on how tax havens help mitigate the destructive policies of high-tax governments.

Tax havens, or “offshore financial centers,” can be defined as small, well-governed tax jurisdictions that do not have substantial domestic economic activity and impose low or zero tax rates on foreign investors. By doing so, they attract a considerable amount of capital inflow, particularly from high-tax countries. …academic research reveals that high-tax jurisdictions may also have something to gain from tax havens. …A 2004 paper by economists Mihir Desai, C. Fritz Foley, and James Hines…found that tax havens indirectly stimulate the growth of businesses in non-haven countries located in the same region. …These findings suggest that although high-tax countries can lose tax revenue due to profit shifting, tax havens can indirectly facilitate economic growth in high-tax countries by reducing the cost of financing investment in those countries.

By the way, I cited the Desai-Foley-Hines paper in my video on “The Economic Case for Tax Havens” because it makes the key point that governments hurt their own economies when they go after low-tax jurisdictions.

Here are some excerpts from an article by Abrar Aowsaf in the Bangladesh-based Dhaka Tribune. It’s especially worth citing since it notes that tax havens are a refuge for oppressed people around the world.

A tax haven is basically a jurisdiction with low taxes, high legal security, and a high degree of protection of savers’ privacy. …The Cayman Islands, Switzerland, Singapore, Hong Kong, Cyprus, Jersey, and Bermuda — all of these jurisdictions that we recognize as tax havens are characterized by their high legal safety. Savers know that the government will not decide to take their money on a whim. …Operating in tax havens is not illegal in itself. …Singer Shakira, for example, uses tax havens to minimize her tax bills within the bounds of the law. …Another very important detail is that tax havens are a refuge for millions of citizens who have had the misfortune of being born in authoritarian and unstable countries. In many countries, the most basic human rights are not guaranteed. There also exist states where authoritarian governments arbitrarily decide who to repress or prosecute. Many investors do not seek protection just for the lower taxes, but they are also escaping political, ideological, and religious persecution. …In reality, tax havens are not to be blamed…nor do they force us to pay more taxes or harm our economies. Ireland, for example, was poorer than Spain in 1980. Today, thanks to its low taxes, it is the second richest country in the Eurozone. In order to improve general welfare, what we need are more companies, not more incompetent politicians and haphazard public spending. The problems faced by countries with economic difficulties do not come from tax havens, but from their politicians and ineffective policies.

Amen. More people need to be making “The Moral Case for Tax Havens.”

Andy Morriss, the Dean of Texas A&M’s School of Innovation, explains the vital role of these low-tax jurisdictions in bring more investment and prosperity to poor nations.

The seemingly endless debate over the role of IFCs in corporate and personal tax avoidance ignores these jurisdictions’ crucial role in providing the rule of law for international transactions. …The world’s poorest countries desperately need their economies to grow if their populations are to have better lives. For example, Africa has about 17 per cent of the world’s population but only 3 per cent of global GDP. The root causes of African nations’ underdevelopment are complex, but one critical element is that there is too little investment in their economies. …most developing countries lack the legal and regulatory infrastructure necessary to support a domestic capital market. …When multiple investors pool their investments, they need a mechanism to address the governance of their pooled investment. …By providing legal systems which offer a powerful combination of modern, efficient, well-designed laws and regulations, regulatory agencies staffed with experienced, well-credentialed experts, and court systems capable of quick, fair, and thoughtful decisions, IFCs offer alternative locations for transactions and entities. …In short, the price of investing in a developing economy is reduced.  And when the price of something falls, the amount demanded increases. That’s good for investors, it’s good for developing countries, and it’s good for the world’s poorest. …Improving the lives of the poorest around the world is going to require massive private investment in productive activities. This need cannot be met by government provided aid… Only economic growth can solve this problem. And growth requires investment… Fortunately, IFCs are helping to meet this need.

Click here if you want more information on how tax havens help the developing world.

Writing for the Bahamas-based Tribune and citing former Finance Minister James Smith, Neil Hartnell warns that the OECD’s agenda of “neo-colonialism” will cripple his nation’s economy.

The Bahamas “may devastate the economy” if it surrenders too easily to demands from high-tax European nations for a corporate income tax, a former finance minister warned yesterday. …OECD and European Union (EU) initiatives…calling for all nations to impose some form of “minimum level of” taxation on the activities of multinational entities. …Mr Smith…blasted the OECD’s European members for seemingly seeking to “recast our economy in their own image”, adding that this nation’s economic model had worked well for 50 years without income and other direct forms of taxation. …Describing the OECD and EU pressures as a form of “neo-colonialism”, Mr Smith said The Bahamas shared few economic characteristics with their members. He pointed out that this nation was suffering from high unemployment and “low wages for the majority” of Bahamians. “Conceptually the take from an income tax may devastate the economy,” he told Tribune Business.

The former Finance Minister is correct in that the OECD is trying to export its high-tax policies.

For what it’s worth, I’ve reversed the argument and pointed out that OECD nations should be copying zero-income tax jurisdictions such as the Bahamas.

So what’s the argument against tax havens?

As illustrated by this article from the International Monetary Fund, authored by Jannick Damgaard, Thomas Elkjaer, and Niels Johannesen, all the complaints revolve around the fact that some people don’t like it when governments can’t grab as much money.

Although Swiss Leaks, the Panama Papers, and recent disclosures from the offshore industry have revealed some of the intricate ways multinational firms and wealthy individuals use tax havens to escape paying their fair share, the offshore financial world remains highly opaque. …These questions are particularly important today in countries where policy initiatives aiming to curb the harmful use of tax havens abound. …a new study…finds that a stunning $12 trillion…consists of financial investment passing through empty corporate shells… These investments in empty corporate shells almost always pass through well-known tax havens. The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world’s investment in special purpose entities, which are often set up for tax reasons. …private individuals also use tax havens on a grand scale… Globally, individuals hold about $7 trillion—corresponding to roughly 10 percent of world GDP—in tax havens. …the stock of offshore wealth ranges…to about 50 percent in some oil-producing countries, such as Russia and Saudi Arabia, and in countries that have suffered instances of major financial instability, such as Argentina and Greece.

I find it interesting that even the pro-tax IMF felt obliged to acknowledge that people living in nations with bad governments are especially likely to make use of tax havens.

Though I’m not sure I fully trust the data in this chart from the article.

Because of problems such as corruption, expropriation, crime, and political persecution, I’m sure that usage of tax havens by people in nations such as China, India, Iran, Mexico, and South Africa is much greater than what we see in the chart.

Though perhaps the numbers are distorted because the authors didn’t include the United States (sadly, the policies that make the U.S. a tax haven are only available for foreigners).

P.S. American taxpayers legally can use Puerto Rico as a tax haven.

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As part of my presentation earlier this month to IES Europe, I discussed topics such as comparative economics and federalism.

I also had a chance to explain why tax havens are good for global prosperity.

Many of the points I made will be familiar to regular readers.

1. Because politicians have been worried that the “geese with the golden eggs” can escape – thanks to tax havens and tax competition – governments around the world reluctantly have lowered tax rates and reduced discriminatory taxes on saving and investment.

2. The Paris-based Organization for Economic Cooperation and Development (heavily subsidized by American taxpayers) is a bureaucracy that is controlled by high-tax governments and it seeks to undermine tax competition and tax havens by creating a global tax cartel – sort of an “OPEC for politicians.”

3. When tax competition is weakened, politicians respond by increasing tax rates.

4. There is an economic theory that is used to justify tax harmonization. It’s called “capital export neutrality” and I shared a slide in the presentation to show why CEN doesn’t make sense. Here’s a new version of the slide, which I’ve augmented to help people understand why tax havens and tax competition are good for prosperity.

The bottom line is that we should fight to protect tax havens and tax competition. The alternative is “stationary bandits” and “Goldfish Government.”

P.S. My work on this issue has been…umm…interesting, resulting in everything from a front-page attack by the Washington Post to the possibility of getting tossed in a Mexican jail.

P.S.S. This column has four videos on the issue of tax competition, and this column has five videos on the issue of tax havens.

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When writing yesterday’s column about new competitiveness rankings from the IMD business school in Switzerland, I noticed that I have not yet written about this year’s edition of the Index of Economic Freedom.

Time to rectify that oversight.

We’ll start with a look at the nations with the most economic freedom. Interestingly, Singapore has now displaced Hong Kong as the world’s most market-friendly jurisdiction (because Hong Kong’s score declined, not because Singapore’s score increased), with New Zealand, Australia, and Switzerland rounding out the top 5.

The United States, meanwhile, isn’t even in the top 10. Instead, America dropped from #12 last year to #17 this year.

The decline is partly due to a lower score (with Trump’s protectionist policies deserving the biggest share of the blame), but mostly caused by better scores from nations such as Chile, Georgia, Estonia, and Lithuania.

What may shock people, though, is that even supposedly socialist Denmark (score of 78.3) ranks above the United States (score of 76.6). Here’s a look at U.S. and Danish scores from 1995-present.

Regular readers already know that Denmark is not a socialist nation. Indeed, it’s never been socialist. By world standards, there’s basically no history of government ownershipcentral planning, or price controls.

The most accurate way of describing Denmark is that it combines laissez-faire economics with tax-and-spend redistributionism.

Since this is a common approach among nations in that part of the world, some people even refer to this set of economic policies as the Nordic model.

So how does this approach compare to policy in the United States? The short answer, as illustrated by this table, is that America generally does better on fiscal policy, but gets lower scores when looking at almost every other type of policy.

The great irony of all this is that Bernie Sanders wants the U.S. to be more like Denmark, but he only says that because he doesn’t realize it would mean reducing the negative impact of government.

P.S. While Denmark has some awful fiscal policies (the tax burden is terrible), there are some bright spots. It has done a good job in recent years of restraining the growth of government, and it also has a partially private retirement system.

P.P.S. Not that any of these will be a surprise, but the three lowest-ranked nations in the Index of Economic Freedom are Cuba (26.9), Venezuela (25.2), and North Korea (4.2).

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If you want to understand how government really works, learn about “public choice.”

This is the common-sense theory that politicians and other people in politics often make decisions based on self interest, and it does a very good job of explaining why we get so many short-sighted and misguided policies from the crowd in Washington.

Public choice is especially insightful when compared to the naive view that politicians are mostly concerned with helping ordinary people.

The theory also tends to generate some pithy concepts, such as “stationary bandit” and “predatory government.”

Another example is “grabbing hand,” which describes how intervention usually is a vehicle for helping government rather than helping people.

Today’s column is going to be about industrial policy (the incrementalist version of central planning) as an example of this phenomenon.

Specifically, we’re going to look at a new academic study that measured the impact of government control on the performance of companies in China.

Written by Marzieh Abolhassani, Zhi Wang, and Jakob de Haan, it’s a test of whether government is a “helping hand” or “grabbing hand.”

We’ll start with their description of the study’s methodology.

…the impact of government involvement on the financial performance of listed firms in emerging economies has received scant attention. This paper examines the relationship between government control of firms and firms’ financial performance for the case of China. …we measure government control by the fraction of outstanding shares held either directly or indirectly by the government. …We classify firms as state controlled whenever the government is the shareholder with the largest number of shares held either directly or indirectly through pyramid structures.

Here are the key results.

Our empirical results suggest that firm performance is generally lower for firms where the government is the shareholder with the largest number of (direct and indirect) shares. Specifically, the return on assets, the return on equity and the market-to-book ratio are, on average, 1.3%, 2.0% and 8.2% lower for government-controlled firms. Both central and local government control is undermining firm performance. These findings provide support for the ‘grabbing hand’ theory of the government. … we make sure the estimates are not driven by differences in the size, age and leverage of the firms. Importantly, we also control for industry-region-year fixed effects, and therefore compare firms within the same industry in the same province during the same year, further enhancing the credibility of our estimates. …These results provide support for hypothesis and to theories conjecturing that management of firms controlled by the government have fewer incentives to maximize profits and shareholder value.

For those who like the wonky details, here are the key findings from their number crunching.

So what’s the bottom line?

Their conclusion tells us everything we need to know.

The results reported in this study broaden our understanding of the role of government influence on firm performance. …Our empirical results indicate that government-controlled firms have a worse financial performance than non-government-controlled firms. …These conclusions support the ‘grabbing hand’ theory proposed by Shleifer and Vishny.

So why do these results matter?

From an economic perspective, it’s further evidence that government intervention leads to a misallocation of resources. And that inevitably means living standards will be lower than they would be if markets were allowed to function.

A recent article from Foreign Affairs suggests enormous potential benefits if China ended industrial policy.

…state-owned enterprises… These inefficient behemoths control nearly $30 trillion in assets and consume roughly 80 percent of the country’s available bank credit, but they contribute only between 23 and 28 percent of GDP. …The economist Nicholas Lardy has estimated that genuine economic reforms, in particular those targeting state-owned enterprises, could boost China’s annual GDP growth by as much as two percentage points in the coming decade.

Very similar to what I’ve written, so let’s hope that China returns to the policy of economic liberalization that led to genuine progress.

I’ll close with the depressing observation that there are people in Washington who are now agitating for industrial policy in the United States.

Needless to say, there’s zero reason to think that intervention from Washington will produce results that are better than intervention from Beijing.

P.S. It doesn’t matter if Republicans are trying to pick winners or Democrats are trying to pick winners. When politicians intervene, the economy suffers, which means less prosperity for ordinary people.

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There’s much to dislike about Keynesian economics, most notably that it tells politicians that their vice – buying votes by spending other people’s money – is somehow a virtue.

Advocates of Keynesianism also can be very simplistic, sometimes falling victim to the “broken window fallacy” described in this short video.

Bastiat is perhaps most well-known for his insight on this fallacy.

He explained that a good economist was capable of recognizing the difference between the seen and unseen (if you want to be wonky, the difference between direct effects and indirect effects).

Sadly, there are many people today who don’t grasp this distinction.

You probably won’t be surprised to learn that Paul Krugman is in this group.

And now we have a new member of the club. In a piece for Axios, Felix Salmon reveals he still believes in this primitive form of Keynesian economics.

There’s one big non-political reason why luxury stores were targeted by looters: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live, looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

To be fair, Salmon would have been correct (though immoral) if he said looting had a positive effect on looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).

Let’s wrap up with a cartoon on the topic.

P.S. If you like humor about Keynesian economics, here’s the place to start.  You’ll find additional material herehere, here, here, and here.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. To be fair to Keynes, he wrote that taxes should never exceed 25 percent.

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As part of my recent presentation to IES Europe, here’s what I said (and what I’ve said many times before) about the relationship between economic policy and national prosperity.

My remarks focused in part on the difference between absolute economic liberty and relative economic liberty.

  • The absolute level of economic liberty is the degree to which a nation relies on markets or statism (see, for instance, the Fraser Institute’s Economic Freedom of the World).
  • The relative level of economic liberty is a measure of whether one country is more market-oriented than another country (basically a measure of national competitiveness).

Understanding these two concepts explains why it is possible to criticize nations in North America and Western Europe for having too much government while also recognizing that those same nations tend to have better policies than most countries in other parts of the world.

An obvious example is Denmark. It certainly has some foolish and misguided government policies, but it is very pro-market when compared to the 90 percent of nations that have even lower levels of economic liberty (a distinction that Bernie Sanders has never grasped).

The obvious takeaway is that economic liberty matters, regardless of whether we’re looking at absolute levels or relative levels.

During my remarks, the audience got to see a two-question challenge, which asks our friends on the left to give an example of their dirigiste policies generating good economic outcomes.

But I’ve never been happy with the clunky wording of that challenge (just as I wasn’t happy with the original wording of fiscal policy’s Golden Rule).

So here’s a new version, which I’m now calling “The Never-Answered Question.”

I frequently unveil this question during debates.

And it’s quite common that my opponent will claim Sweden.

But as I noted in the above video clip, Sweden became a rich nation when government was very small. It didn’t have an income tax until 1902, and the welfare state was tiny until the 1960s. And I then explain that Sweden’s economic performance has been inversely correlated with the size and scope of government.

Unsurprisingly, the same is true for every other prosperous country in Europe and North America.

The bottom line is that my leftist friends will never successfully answer this question.

P.S. When considering the second part of The Never Answered Question, I don’t want a cherry-picked one- or two-year period. I want several decades of data, so we can be sure of a real trend. Much as I’ve done when making comparisons.

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Yesterday, I shared some research showing how misguided redistribution policies lead to high implicit marginal tax rates that discourage work.

Then I was interviewed about a very tangible example of this phenomenon – jobless benefits that give people more money than they could earn by working.

I wrote about this specific issue in late April and shared the nearby chart to show how many people can get a lot more money if they simply choose not to work. Which is the economic equivalent of a marginal tax rate of more than 100 percent.

As I noted in yesterday’s interview, creating this kind of upside-down incentive system is crazy even by the bizarre standards of Washington policy.

The federal government is – for all intents and purposes – bribing people not to work. This will be especially harmful for low-income workers since steady employment is their best route for upward mobility.

Part of the interview focused on the Keynesian argument that unemployment benefits are “stimulus” because recipients will have more money to spend. This is not satire. I mentioned that Nancy Pelosi actually asserted the economy becomes stronger when people are paid not to work.

Needless to say, this simplistic argument overlooks the fact that government can’t give people goodies without taking the money out of the private economy in the first place.

Sadly, the perpetual motion machine of Keynesian economics is still part of the Congressional Budget Office’s methodology. Here are some excerpts from the CBO’s report on the issue of super-charged benefits.

CBO has examined the economic effects of extending the temporary increase of $600 per week in the benefit amount provided by unemployment programs. …CBO estimates that extending that increase for six months through January 31, 2021, would have the following effects: …Roughly five of every six recipients would receive benefits that exceeded the weekly amounts they could expect to earn from work during those six months. …The estimated effects on output and employment are the net results of two opposing factors. An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment. That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.

Since I’ve already written many times about the flaws of Keynesian theory, let’s focus on the deleterious effect of government-subsidized unemployment.

In a column two days ago for the Wall Street Journal, Congressman James Comer of Kentucky explained how super-charged benefits have hurt his state’s economy.

Employers in Kentucky are finding it difficult to persuade employees to return to work, as nearly 40% of the state’s labor force has filed for unemployment benefits… It is clear that a system of excessive unemployment benefits has run its course. More than 60 of my colleagues in Congress plan to join me in sending a letter to House and Senate leadership to express our concerns and demand that these payments expire July 31, as the Cares Act intended. …It defies logic to extend disincentives to work when businesses are beginning to reopen. …efforts to spend the nation into oblivion and discourage Americans from working…are fundamentally opposed to the American spirit of the dignity of work. …to get back on the right track, we cannot extend the $600-a-week incentive not to return to work.

I applaud Rep. Comer.

It’s not popular to remove goodies from voters. Indeed, that’s the message of my Second Theorem of Government.

But it’s necessary if we want to restore incentives to work.

I’ll close by elaborating on the point I made in the interview about this battle being a repeat of the Obama-era fight about extended unemployment benefits.

Obama and other folks on the left said extended benefits were necessary because the unemployment rate was still high, while people like me argued that the jobless rate was still high precisely because the government was paying people not to work.

Extended benefits were finally halted in 2014, meaning we had a real-world test to see who was right. So what happened? Lo and behold, the jobless rate fell as more people went back to work.

The moral of the story, as illustrated by this satirical cartoon strip, is that people are more likely to work when the benefits of having a job and greater than the benefits of not having a job.

P.S. Here are a couple of anecdotes, one from Ohio and one from Michigan, about the perverse impact of excessive unemployment benefits during the last recession.

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In this interview from last March, I groused that the Supreme Court – largely thanks to statist Justices appointed by one of America’s worst presidents – basically decided, starting in the 1930s, that it would no longer be bound by the Constitution’s provisions that protect economic liberty.

I’m not a lawyer, much less an expert on the Constitution, but I know how to read.

The Constitution very clearly is a document to constrain rather than enable government. It was designed to produce what I’ve referred to as Madisonian constitutionalism.

When Justices ignore their responsibility to protect our rights, however, they’re basically acting like this satirical image of President Obama.

Let’s look at two very tragic legal cases from that era.

Professor John McGinnis, writing for Law & Liberty, discusses the wretched Supreme Court case that undermined the Constitution’s Contract Clause.

…the Contract Clause…was the most litigated provision of the Federal Constitution in the 19th century, but today it has become a shadow of its former self because the Court has abandoned its original meaning. …The Contract Clause provides: “No State shall… pass any… Law impairing the Obligation of Contracts.” …in The Federalist, Madison argued that the Clause was a “bulwark in favor of… private rights.” …It is designed to protect an important aspect of the rule of law: a prohibition on the government changing specific plans that autonomous individuals have made. …For the 19th and early 20th centuries, the Supreme Court was relatively faithful in interpreting the Clause. In Home Building & Loan Association v. Blaisdell, however, the Court departed from its role as a faithful agent of the Constitution. …influenced by the Depression and the growing discontent with the jurisprudence of substantive due process with which it confused the clear command of the Contract Clause, the Court upheld the law. It is true that times were hard, but as Justice George Sutherland’s dissent noted, legislation protecting debtors against creditors is passed precisely at such times, and yet such legislation was exactly the kind of evil which the Clause was designed to prohibit. The case is striking as an example of one of the most express rejections of originalism. Chief Justice Hughes stated explicitly that the Court was not bound by the original understanding of the Clause.

Writing for FEE, Professors Antony Davies and James Harrigan explain the terrible 1942 decision by the Supreme Court to remove any meaningful restriction on the power of the central government.

They start by pointing out that the 18th Amendment (imposing prohibition) was an example of how to expand the power of government in the proper way.

The Constitution creates a government of enumerated powers, which means the federal government is only authorized to do things that are specifically listed in the Constitution. And that list is relatively short. The list appears in Article One, Section Eight and enumerates the proper objects of congressional legislation.  …Consider the United States’ ill-advised flirtation with Prohibition—which was enacted almost exactly 100 years ago. Nowhere in the Article One, Section Eight powers does one see the authority to “ban the manufacture, transport, or sales of alcohol within the United States.” When Americans decided that they wanted a coast-to-coast ban on alcohol, they amended the Constitution to give the federal government this authority. Fourteen dry years later, Americans came to their senses and revoked this authority by amending the Constitution again.

Alcohol prohibition was a mistake, of course, just like today’s drug prohibition, and the American people went through the proper process of adopting the 21st Amendment (to repeal the 18th Amendment).

Davies and Harrigan then explain that it was about that time that the Supreme Court decided that it would no longer uphold the Constitution’s restrictions on the powers of the central government.

As of 1933, when the 21st Amendment was ratified, Americans still had a constitutionally limited federal government and what Justice Louis Brandeis famously called “laboratories of democracy” in the states. …But who ended up being tasked with deciding what Article One, Section Eight actually meant? Herein lies the wrinkle that enables all manner of constitutional mischief in the United States. The institution that ended up deciding what the federal government is empowered to do is itself a branch of the federal government. And it should come as no surprise that when push comes to shove, the Supreme Court routinely finds in favor of empowering the federal government.

One of the most horrifying examples of judicial failure occurred in 1942.

In 1942, the Supreme Court decided a case, Wickard v. Filburn, in which farmer Roscoe Filburn ran afoul of a federal law that limited how much wheat he was allowed to grow. …A careful reader might, and should, ask where the federal government’s right to legislate the wheat market is to be found—because the word “wheat” is nowhere to be found in the Constitution. …The Agricultural Adjustment Act of 1938 put an upper limit on how much wheat farmers were allowed to grow, which would serve to keep prices high by limiting supply. Roscoe Filburn had grown 12 more acres of wheat than the law allowed. But not only did he not sell the excess wheat outside of his home state, but he also didn’t sell it at all. He used the wheat from those 12 acres to feed his cattle. …yet the Supreme Court found (unanimously) that because Congress had the authority to regulate interstate commerce, Congress also had the authority to prohibit Filburn from growing those 12 acres of wheat for his own use. …Filburn’s non-commercial activity was, according to the Supreme Court, interstate commerce. …Filburn’s non-commercial activity was, according to the Supreme Court, interstate commerce.

And here’s the result.

A century ago, we amended the Constitution when we wanted the federal government to exercise a new authority—that of banning alcohol. Today, we allow Congress to exercise almost any authority it likes. …We have progressed so far down the path of reinterpreting the Constitution as a document that empowers government, rather than one that limits it… The sad result has been a government nearly limitless in its power.

By the way, the Obamacare case may be as odious as Wickard v. Filburn since it marked another unfortunate expansion of Washington’s ability to control our lives, in violation of the clear language in Article 1, Section 8.

Though I don’t want to be too glum. The good news is that the Supreme Court occasionally does defend economic liberty, as the Wall Street Journal recently opined.

One goal of the U.S. Constitution was to form a union that allowed interstate commerce unencumbered by state protectionism. The Supreme Court reinforced that principle on Wednesday by striking down a two-year residency requirement to get a liquor license in Tennessee. …a business lobby known as Tennessee Wine and Spirits Retailers Association argued that the 21st Amendment that repealed Prohibition also gave the states broad authority to regulate alcohol. The association knows that if people can move to a state and open up liquor stores, it means more potential competition for those who already have licenses. The law is commercial protectionism and thus violates the Constitution’s Commerce Clause, the High Court ruled in Tennessee Wine and Spirits Retailers Assn. v. Thomas. “Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional,” wrote Justice Samuel Alito for a 7-2 majority… the 21st Amendment doesn’t override the rest of the Constitution’s principles. As recently as 2005 (Granholm v. Heald), the Court ruled that New York state couldn’t discriminate against out-of-state wineries.

Some judges resent any protections against government power.

In an article for Reason, Damon Root properly castigates a judge for objecting to the economic liberties guaranteed by the 14th Amendment.

Does the U.S. Constitution protect economic liberty, such as the right to work in an occupation of one’s choosing free from unreasonable government regulation? Pennsylvania Supreme Court Justice David Wecht thinks not. …in Ladd v. Real Estate Commission of the Commonwealth of Pennsylvania, Wecht faulted his colleagues in the majority for their “judicial intrusion into the realm of legislative value judgments” after that court allowed a legal challenge to proceed against a state occupational licensing scheme. “I cannot endorse a constitutional standard that encourages courts,” he declared, “to second-guess the wisdom, need, or appropriateness” of duly enacted economic regulations. …”For many years, and under the pretext of protecting ‘economic liberty’ and ‘freedom of contract,’ the Supreme Court routinely struck down laws that a majority of the Court deemed unwise or improvident,” Wecht wrote of Lochner and several related cases. …I would encourage Justice Wecht to read some more legal history. …Rep. John Bingham (R–Ohio)…served as the principal author of Section One of the 14th Amendment… As Bingham told the House of Representatives, “the provisions of the Constitution guaranteeing rights, privileges, and immunities” includes “the constitutional liberty…to work in an honest calling and contribute by your toil in some sort to the support of yourself, to the support of your fellow men, and to be secure in the enjoyment of the fruits of your toil.” …even those who opposed the passage of the 14th Amendment agreed that it was designed to protect economic liberty from overreaching state regulation… The “right to contract” was of course later secured by the Supreme Court in Lochner.

Let’s close by detouring into the world of fantasy and contemplating how we should amend the Constitution today?

Rory Magraf lists five ideas in a piece for the Foundation for Economic Education, one of which I find especially tempting.

…the conversation always gets the cerebral juices flowing for legal enthusiasts; the idea of amending the US Constitution, something done only twenty-seven times in history, is about as close as one will get to actually sitting among the Founders in Philadelphia. With that in mind, here are some ideas.

The Sixteenth Amendment to the Constitution of the United States is hereby repealed.

In short, abolish the income tax. This is usually a crowd-pleaser among libertarians and probably a handful of Republicans during an election year, but it is also a bit of a challenge, on the same level as chasing the moon. Still, it would be worthwhile to have the conversation.

Since I’m definitely not a fan of the income tax, I certainly endorse this notion.

However, I think we would need much stronger language. The key 1895 case that struck down the income tax was decided by a the narrow margin of 5-4, and that was back when Justices presumably cared more about the Constitution.

I fear that a similar case today would not lead to the right result (which is one of the reasons I’m skeptical of a national sales tax).

In any event, the federal government’s broad power to tax does not translate into a broad power to spend. At least if we care about the Constitution.

And that means much of the federal government is (or, to be more precise, should be) unconsitutional.

P.S. Here’s some of what Thomas Sowell wrote about Wickard v Filburn.

P.P.S. Here’s some of what Walter Williams wrote about the Constitution’s limits of Washington.

P.P.P.S. If you want to read more, the Constitution was designed to protect against majoritarianism and to ensure “negative liberty.”

P.P.P.P.S. Readers may also be interested in this discussion of whether libertarians should prefer Hamilton or Jefferson.

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I have applauded the incredible economic success of Hong Kong, which has long been ranked as the world’s most economically free jurisdiction.

Well, given China’s recent decision to impose more controls on Hong Kong, I want to share this interview I did last October.

At the risk of patting myself on the back, I think everything I said still applies.

Especially when compared to what some others are saying. Writing for Bloomberg last October, Shirley Zhao and Bruce Einhorn seemingly want readers to think that low tax rates somehow are the cause of Hong Kong’s challenges.

Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. But widening inequality has also fueled the worst unrest the city has seen since the former British colony returned to China in 1997. …The combined net worth of the territory’s 20 richest people…is pegged at $210 billion… the city’s income inequality, as expressed in Gini coefficient, was the most for any developed economy in 2016… About 1 in 5 residents lives below the poverty line. …Lam is under pressure to soothe tensions and find ways to ease the housing crisis in the least-affordable market without rocking a tax regime that made Hong Kong Asia’s financial hub.

I disagree with much of their analysis.

As I noted in the interview, the problem with housing is caused by government ownership of land.

Moreover, I can’t resist pointing out that the assertion about 20 percent of the population living in poverty has been shown to be utter nonsense. That figure comes from “poverty hucksters” who deliberately conflate inequality with poverty (an example of the “Eighth Theorem of Government“).

And, speaking of inequality, Hong Kong historically has been a great place to be poor for the simple reason that it’s a great place to climb out of poverty.

Or, to be more precise, it’s been a great place to climb out of poverty. Whether that will still be true in the future depends on China.

I have no idea what Beijing will do, but I explained in the interview that it would be good for everyone if China took a hands-off approach to Hong Kong.

Why? This chart, based on the Maddison database, shows that Hong Kong’s rapid growth rate has slowed ever since Hong Kong was transferred from British rule to Chinese rule. Since China has wisely not interfered with Hong Kong’s pro-growth economic policy, the most logical explanation for the slowdown is that entrepreneurs and investors are worried about what may happen in the future.

Needless to say, the best way to rejuvenate rapid growth is for Beijing to somehow display a commitment to economic liberty in Hong Kong (consistent with the one-country-two-systems approach).

P.S. As I warned in the interview, the United States should not goad China into any sort of crackdown, either political or economic.

P.P.S. The best-case scenario is a Singapore-style evolution in China, meaning sweeping economic liberalization and gradual political liberalization.

P.P.P.S. The worst-case scenario is backsliding by China on previous economic liberalization, combined with unfriendly relations with the western world.

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Last year, I released this video to help explain why the World Trade Organization has been a good deal for the United States.

My argument was – and still is – very straightforward, and it’s based on two simple propositions.

  1. Free trade is good because societies are more prosperous with free markets and open competition.
  2. The WTO has helped nations move in that direction by reducing import taxes and other trade barriers.

This outcome is particularly beneficial for the United States since other countries tend to be more protectionist.

But not everyone agrees with this position.

President Trump is a notorious critic of the WTO, for instance, which isn’t surprising since he doesn’t understand trade.

There are also plenty of opponents on the left, which also isn’t surprising since they don’t like capitalism and competition.

What is somewhat surprising, however, is that some Republican lawmakers also have decided to oppose the WTO.

In a column last week for the New York Times, Senator Josh Hawley of Missouri actually argued that it’s time to get rid of the World Trade Organization. Here’s his argument against the Geneva-based body.

The global economic system as we know it is a relic; it requires reform, top to bottom. We should begin with one of its leading institutions, the World Trade Organization. We should abolish it. …Its mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States. …Meanwhile, the W.T.O. required American workers to compete against Chinese forced labor but did next to nothing to stop Chinese theft of American intellectual property and products. …too many jobs left America’s borders for elsewhere. As factories closed, workers suffered, from small towns to the urban core. …Enough is enough. The W.T.O. should be abolished, and along with it, the new model global economy. The quest to turn the world into a liberal order of democracies was always misguided.

And here’s what he wants as a replacement.

The only sure way to confront the single greatest threat to American security in the 21st century, Chinese imperialism, is to rebuild the U.S. economy and to build up the American worker. And that means reforming the global economic system. …The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong. …For nearly 50 years before the W.T.O.’s founding, the United States and its allies maintained a network of reciprocal trade that protected our national interests and the nation’s workers. We can do it again …It means striking trade deals that are truly mutual and truly beneficial for America and walking away when they are not. It means building a new network of trusted friends and partners to resist Chinese economic imperialism.

Since Hawley doesn’t seem to appreciate the benefits of trade, the simple approach would be to criticize him for wanting politicians and bureaucrats to have the power to interfere with voluntary exchange across borders.

Such criticism is warranted, of course, but I want to take this opportunity to make four points about how there may be hope for the future.

1. Hawley is actually endorsing the status quo. After World War II, the US took the lead in creating the General Agreement on Tariff and Trade (GATT), a multilateral system of agreements which produced successive rounds of trade liberalization. The US then took the lead in creating the WTO so there would be a system (dispute resolution) to encourage nations to comply with their GATT commitments. But the dispute resolution process is now toothless because there are no longer enough judges for the system to operate (Trump has blocked the appointment of new judges). For all intents and purposes, the world is now operating under the pre-WTO rules – which seems to be what Hawley is calling for in his column.

2. The WTO no longer is a vehicle for global trade liberalization. The WTO is a consensus-based organization, which means unanimity is required for additional GATT-style reductions in global trade barriers. But since membership has expanded to include a number of countries with a protectionist mindset (most notably India, but China and Brazil also are a problem), it’s extremely unlikely that we’ll ever see another multilateral agreement for additional tariff reductions. This doesn’t change the fact that GATT was a big past success, and it doesn’t change the fact that it would be nice if the WTO’s dispute-resolution mechanism was back in operation. It simply means that we won’t be able to build on that progress.

3. Hawley is also endorsing, practically speaking, the best path forward. Another round of multilateral trade liberalization is off the table, but that doesn’t prevent nations from moving forward with bilateral free-trade agreements (FTAs are consistent with WTO rules). Interestingly, Hawley seems to support that approach. The U.S. already has nearly 20 of these pacts and is engaged in major negotiations with the United Kingdom for a new FTA that hopefully will be a template for future FTAs with other market-friendly nations.

4. Beware of the regulatory-harmonization wolf in FTA clothes. While bilateral trade pacts are desirable, it’s important to pay attention to the fine print. The European Union wants to hijack FTAs and make them vehicles for regulatory harmonization (meaning other nations have to agree to the EU’s onerous approach to red tape). If the goal is to have more trade, more competition, and more dynamism, the United States and other pro-market countries should make “mutual recognition” the foundation of future free-trade pacts.

The bottom line is that Hawley is wrong about the WTO, but he may actually be right about the best way of achieving future trade liberalization. Assuming, of course, that he actually means what he wrote about striking new deals.

In an ideal world, needless to say, these new bilateral FTAs (or even multi-nation FTAs) should be in addition to the WTO.

P.S. An under-appreciated aspect of the WTO is that it gives nations like the US a more-effective way of pressuring China to eliminate subsidies and other trade-distorting practices.

P.P.S. I’m normally very skeptical of international organizations. But the WTO encourages globalization rather than global governance, a key distinction.

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I’ve explained the economics of taxation, which is based on the common-sense notion that you get less productive economic activity when taxes drive a bigger wedge between pre-tax income and post-tax consumption.

Simply stated, the more you tax of something, the less you get of it, and this applies to taxes on labor and taxes on capital.

Today, let’s examine some empirical evidence. I’ve done that before (see here, here, here, here, here, here, here, here, and here), but it’s always good to expand the collection.

Three Italian professors, in a new working paper for the Centre for Economic and International Studies, investigated the relationship between taxes and growth.

We’ll start with a description of the methodology.

In this paper, we revisit a traditional issue in the empirics of growth and economic policy: whether taxation has long-lasting effects on real GDP dynamics. …we focus on the impact that taxes may have on the rates of physical and human capital accumulation. …our main departure from the existing literature is the use of a semi-parametric technique, which allows for countries’ unobserved heterogeneity in the input effects on per capita GDP. …we test our model, using a sample of 21 OECD countries over the period 1965-2010.

Here are the key findings.

Our main finding is that taxation negatively affect per capita GDP growth rates, both directly and indirectly, via physical and human capital saving rates. …Our cross-country analysis makes a clear point on this, at least for our sample of OECD countries: on average, tax cuts produce a beneficial impact on GDP dynamics but of modest size. In our baseline specification, a cut by 10% in personal income tax rate generates an change in the real per capita GDP growth rate of +1% while a cut by 10% in corporate income tax rate increases the rate of growth of real per capita GDP by 0.9%. …The main message of our empirical exercise is that, across various samples and specifications, taxes are harmful for growth.

These are very strong results.

Though I find it very interesting that the authors say they are “of modest size.”

I guess that depends on expectations and perspective. I’ll simply repeat the point I made two years ago about the importance of even small increases in the long-run growth rate.

The bottom line is that future Americans would enjoy significantly greater prosperity with better tax policy.

That’s a desirable outcome at any point in time, and it’s even more important today as we consider how to recover from the economic wreckage caused by the coronavirus.

Interestingly, the study ends with some interesting estimates on the impact of lower tax rates on labor and capital.

Table 10 reports the results of a “what if”exercise, in which we compute the change in GDP growth rate generated by a ceteris paribus cut by 10 % in τw and τk.

And here is the aforementioned Table 10 (“τw” is the tax rate on labor and “τk” is the tax rate on capital).

There are two big takeaways from this research.

First, it’s further evidence that Trump’s tax reform, which lowered the corporate tax rate from 35 percent to 21 percent, was a very good step for the American economy.

Second, it’s further evidence that it’s a big mistake for Biden and other folks on the left to push for higher tax rates, including big increases in tax rates on personal income.

P.S. Just in case those last two sentences sound overly favorable to Trump, I’ll remind people that reckless spending increases – sooner or later – will lead to punitive tax increases. In other words, if Biden wins and there are big tax hikes, Trump will deserve some of the blame (just as Bush’s irresponsible policies set the stage for some of Obama’s irresponsible policies).

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Like many supporters of individual liberty, I’m an anti-majoritarian. I don’t want my freedom to be at the mercy of 51 percent of the population. For all intents and purposes, I want the Supreme Court to protect the country from democracy.

So, based solely on the title, I was automatically disposed to like 10% Less Democracy, a book authored by Professor Garett Jones of George Mason University.

But Garett’s book isn’t a manifesto about the American Constitution and its (sadly neglected) provisions designed to protect economic liberty. It doesn’t even mention my favorite part, Article 1, Section 8, which lists the few and limited powers of the central government.

Instead, his book focuses on a different topic. He’s arguing that we will get better outcomes if ordinary people have less influence on public policy.

And he’s not subtle about that point. The full title of his book is 10% Less Democracy: Why you should trust elites a little more and the masses a little less.

All of a sudden, I was less instinctively favorable to the book.

Simply stated, there are too many cases where the elite tends to be on the wrong side.

When someone says we should trust the elite, I envision people like Mitt Romney and Michael Bloomberg deciding everything from how much tax we pay to what food we’re allowed to eat.

To be sure, people like that would produce a much better outcome when compared to having a lunatic like Bernie Sanders in charge of the government, but I’d like to have a government filled with people who are more likely to leave me alone, such as Calvin Coolidge, Grover Cleveland, and Ronald Reagan.

But you’re not supposed to judge a book by its cover. And that means you shouldn’t judge it by its subtitle, either.

So I took the bold step of actually reading the book (unlike, for instance, when I wrote about Nancy MacLean’s smear job against James Buchanan).

And I liked it. A lot. It’s well written, avoids needless jargon (you don’t need to be a trained economist to understand his points), and touches on many important issues.

And Garett does a great job of dispassionately providing evidence. So even when he made points that rubbed me the wrong way, I was forced to wonder whether I was thinking with my heart rather than my head.

Here’s a small sampling of why you should buy – and read – the book.

In Chapter 1, you’ll learn that there’s very little evidence that democracies produce better economic results, but you will learn that they’re less likely to produce famine and mass killings.

In Chapter 2, you’ll learn how Congress is a “favor factory” and read Garett’s hypothesis that politicians will be more likely to support good policies such as free trade if they have longer terms.

In Chapter 3, you’ll learn that independent central banks work better (yes, feel free to criticize the Federal Reserve, but nations such as Argentina show it’s always possible to get worse outcomes).

In Chapter 4, you’ll learn from state evidence that independent judges also generate better results, at least when compared to judges that are directly elected by voters.

In Chapter 5, you’ll learn that not all voters are created equal.

In Chapter 6, you’ll learn that public policy might improve if bondholders had a bigger say in government policy, an insight from Alexander Hamilton.

In Chapter 7, you’ll learn some “public choice” insights about getting things done in Washington (whether that’s a good idea is an entirely different discussion).

In Chapter 8, you’ll learn that joining the anti-democratic European Union is the right choice for some nations, but also that the United Kingdom had good reasons for Brexit.

In Chapter 9, you’ll learn how Singapore is a huge success story with “50% less democracy.”

Garett concludes with some analysis on how to get the right amount of democracy.

His basic hypothesis is that we have too much input from the masses and he even put together his own version of the Laffer Curve to show that we would get better outcomes with less democracy.

By the way, I can’t resist pointing out that you want to be at the peak of Garett’s Laffer Curve.

With the original Laffer Curve, however, that’s not the right outcome.

P.S. Garett’s book does suffer from one sin of omission. I would have appreciated a chapter on the anomaly of Switzerland. It’s a very successful, very well-governed nation, yet it has an extremely high level of not just democracy, but direct democracy. Voters directly decide all sorts of major policy issues.

Is Switzerland an exception to the rule? Are Swiss people simply more rational than their neighbors? Does the country’s federalism-based model lead to better choices? It would be fascinating to get Garett’s insights.

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Remember the “jobless recovery” of the Obama years?

Part of the problem was that President Obama kept extending unemployment benefits, which subsidized joblessness, as even Paul Krugman and Larry Summers had warned.

The good news was that Congress eventually said no in 2014 (actually one of the three best things to happen that year).

After that happened, the labor market improved.

But politicians apparently didn’t learn anything. As part of emergency coronavirus legislation, they turbo-charged unemployment benefits.

The Wall Street Journal‘s editorial from yesterday has a good summary.

Much of the harm from the coronavirus is unavoidable, but it would be nice if politicians didn’t compound the damage by ignoring the laws of economics. The worst blunder so far on that score is the $600 increase in federal jobless benefits… Why would anyone take a pay cut to go back to work? …Employees say they’ll take the unemployment check for as long as they can make more money by not working. …This does not mean these workers are lazy. Workers are making rational decisions based on the economic incentives the political class has created. …The question now is whether the Trump Administration will learn from its negotiating mistake. Democrats will try to extend the $600 for another few months, and then a few more after that, as they describe anyone who disagrees as heartless.

Tim Kane, in a piece for the Hill, explains why this doesn’t make sense.

The UI system is a case study in perverse incentives in the best of times, but the four-month “fix” in the Coronavirus Aid, Relief, and Economic Security Act (CARES) makes it far worse. …Existing UI provides a government payment to each worker who is involuntarily laid off, in essence paying people not to work. The amount varies slightly according to state-based formulas. But UI checks are generally set to replace 50 percent of the individual’s wages until they find a new job. …Pandemic UI jacks up the replacement rate with a supplemental $600 per unemployed worker for the next four months. That’s roughly an extra $2,400 each month that will go to you only if you are unemployed. …Now that the CARES Act is the law of the land, any American with an annual salary of $62,000 has no financial incentive to work, certainly not until August. …the federal government is going to pay non-working Americans way more than working Americans.

In a column for Bloomberg, Conor Sen explores the implications.

It’s also important to be mindful of how, once the economy is growing again, a $600 weekly benefit can distort the labor market. That works out to the equivalent of $15 an hour for a 40-hour work week, a level that substantially exceeds the minimum wage in most states. When restaurants are open for business again, they are likely to complain if they can’t hire dishwashers who understand that it’s not worth giving up unemployment benefits. One step to winding down the program might be reducing the benefit over time in response to labor-market conditions and monitoring the impact that’s having on workers accepting jobs.

Sam Hammond, writing for National Review, opines on the potential human cost.

…the new Pandemic Unemployment Assistance program…will…add an extra $600 per week to the base benefit (equal to half the state’s regular unemployment benefit) for up to four months. …This $600 per week add-on — equivalent to a $15-per-hour full-time income — means that many workers will soon be eligible to receive more in unemployment compensation than they would make on the job. …It should go without saying that no government in history has ever designed an unemployment-insurance program quite like this — one that virtually anyone can qualify for, and with benefits on par with the median weekly earnings of full-time workers. …a worst-case scenario is easy to imagine…once quarantines begin to lift, a fraction of Pandemic UI recipients will choose to stay on “extended benefits”… Temporary unemployment will become structural, and a jobless recovery will drag out for decades.

Veronique de Rugy of the Mercatus Center cites some of the academic literature.

The unintended consequences and moral hazard of UI during normal times and normal recessions are well known. Put briefly, generous UI benefits create an incentive for workers to delay looking for jobs until the expiration of the benefit. In 2010, Harvard University economist Robert Barro estimated that the Great Recession expansions in UI benefits raised the US unemployment rate by about 2.7 percentage points. …In addition, economists Lawrence F. Katz and Bruce D. Meyer observe that workers receiving unemployment benefits were likely to postpone their job searches until their benefits expired. This finding was confirmed by many other studies, including one by economist Alan Krueger,  who wrote in 2008 that “job search increases sharply in the weeks prior to benefit exhaustion.”

And she points out that there is a better approach.

…an old policy proposal that should receive new attention—a proposal that by design encourages people to go back to work as quickly as they can… Personal unemployment insurance savings accounts (PISAs) are designed to maintain a financial incentive to return to work as soon as possible. These accounts are individually owned by workers who, during spells of unemployment, can make orderly withdrawals to partially compensate for the loss to their income but can keep and build the balance during their regular times of employment. …This form of UI is not a mere theoretical proposition. The experience of Chile is worth noting, but other countries such as Austria and Colombia have adopted similar plans.

Making a related point, Congressman Justin Amash points out that it would be less harmful to simply give people money rather than giving them money on the condition that they don’t work.

By the way, a study from the Bank for International Settlements, published well before coronavirus became an issue, notes other negative effects of unemployment benefits.

Many countries provide unemployment insurance (UI) to reduce individuals’ income risk and to moderate fluctuations in the economy. However, to the extent that these policies are successful, they would be expected to reduce precautionary savings and hence bank deposits–households’ main saving instrument. In this paper, we study this reduced incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that, when UI benefits become more generous, bank deposits fall. Since deposits are the main stable funding source for banks, this fall in deposits squeezes bank commercial lending, which in turn reduces corporate investment.

Just another chapter in the government’s book on how to discourage savings.

Let’s close with some real world illustrations of how Washington’s approach is backfiring.

A story from National Public Radio shows how workers respond logically to perverse incentives.

…the extra money can create some awkward situations. Some businesses that want to keep their doors open say it’s hard to do so when employees can make more money by staying home. “We basically have this situation where it would be a logical choice for a lot of people to be unemployed,” said Sky Marietta, who opened a coffee shop along with her husband, Geoff, last year in Harlan, Ky. …The shop had been up and running for only a few months when the coronavirus hit. …Marietta was determined to stay open. …But even though she had customers, Marietta reluctantly decided to close the coffee shop just over a week ago. “The very people we hired have now asked us to be laid off,” Marietta wrote… “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.” …the $10 to $15 an hour they’d make serving coffee is no match for the new jobless benefits.

Maxim Lott also wrote about another tragic example.

An additional $600 per week in unemployment benefits…causing concern that some workers could be in a position to actually make more money by leaving their jobs. . …That angers some essential workers on the front lines on the crisis. “I can tell you as a worker who barely makes over minimum wage, at $12 an hour, the whole thing is complete BS,” Otis Mitchell Jr., who works in West Virginia transporting hospital patients to get medical tests, told Fox News. Mitchell Jr. added that he has unemployed friends who already are getting the extra $600, and that “I prefer to work, but sadly I’d make more staying home.” …generous payments are…scheduled to last for four months, ending July 31.

A report from CNBC also found perverse consequences.

Jamie Black-Lewis felt like she won the lottery after getting two forgivable loans through the Paycheck Protection Program. …When Black-Lewis convened a virtual employee meeting to explain her good fortune, she expected jubilation and relief that paychecks would resume in full even though the staff — primarily hourly employees — couldn’t work. She got a different reaction. “It was a firestorm of hatred about the situation,” Black-Lewis said. …The anger came from employees who’d determined they’d make more money by collecting unemployment benefits than their normal paychecks. …“I couldn’t believe it,” she added. “On what planet am I competing with unemployment?”

If you want to see why people are choosing unemployment, here’s a chart from the CNBC story. Using examples from three states, it shows the normal generosity of unemployment benefits on the left and the new approach on the right.

Needless to say, it’s economic malpractice to make unemployment more attractive than jobs paying $20-$30 per hour.

It’s the real-world version of this satirical Wizard-of-Id cartoon.

P.S. Speaking of satire, Nancy Pelosi actually argued that paying people not to work was a form of stimulus.

P.P.S. Here are a couple of anecdotes, one from Ohio and one from Michigan, about the perverse impact of excessive unemployment benefits during the last downturn.

P.P.P.S. If you want more academic literature on the relationship between government benefits and joblessness, click here and here.

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The folks who don’t want to let a crisis go to waste have been very busy in the era of coronavirus, pushing an ever-expanding menu of bad ideas.

Now we have another bad idea to add to the list.

A professor from Yale Law School, Daniel Markovits, argues in a column in the New York Times that the virus is a great excuse to impose a wealth tax.

Our extraordinary battle against the pandemic should draw on the immense reserves that the most privileged among us have accumulated over decades of abundance. To achieve this goal, America should institute a wealth tax. …the relief effort should be funded through a one-time wealth tax imposed on the richest Americans… An exemption for the first $2.5 million of household wealth would exclude the bottom 95 percent from paying any tax at all and leave the top 5 percent with total taxable wealth of roughly $40 trillion. A 5 percent tax on the richest 5 percent of households could thus raise up to $2 trillion. …this one-time wealth tax…appeal ought to cross partisan lines. …A wealth tax would fund the relief effort in a way that gives meaning to shared sacrifice in the face of a universal threat.

My initial suggestion for Professor Markovits is the same one I put forth for Bill Gates. He should lead by example and donate a big chunk of his income, as well as the bulk of his savings and investments, to the IRS.

As an Ivy League professor, I’m sure he’s comfortably positioned as a member of the infamous “top 1 percent” of taxpayers, so he can be a guinea pig for his idea. To make things easy, the government has a website for him to use.

But let’s set aside snark and focus on the economic consequences. This issue deserves serious attention, not only because it is a threat in the United States, but also because it’s becoming an issue in other nations.

Such as Argentina.

Argentine Economy Minister Martin Guzman has backed the idea of a wealth tax on the country’s rich…to…find money to help cope with the Covid-19 pandemic. The tax would affect 11,000 people with fortunes of at least $2 million, Guzman said… He spoke in an interview with journalist Horacio Verbitsky, published on the website El Cohete a la Luna. President Alberto Fernandez, in a separate interview, spoke of the need for wealth redistribution.

And South Africa.

The South African government will consider a proposal for a one-off wealth tax during an economic recovery planning meeting… Such a tax could assist Africa’s most industrialized economy as it bounces back from the coronavirus outbreak and a five-week lockdown that is scheduled to be lifted on 30 April. The proposal comes from a group of economists, led by former South African National Treasury budget chief Michael Sachs.

The big problem with all of these proposals is that they ignore the crippling economic impact of wealth taxation.

The important thing to understand is that such taxes impose very punitive implicit tax rates on saving and investment. As seen in the accompanying chart, the actual tax rate depends on how well affected taxpayers are investing their money.

And it doesn’t take extreme assumptions to see that many taxpayers will face implicit tax rates of more than 100 percent!

And since all economic theories – even foolish ones such as socialism – agree that saving and investment are vitally important if we want higher living standards, any sort of wealth tax is a big mistake.

Actually, that’s an understatement.

In a normal economy, a wealth tax is a big mistake. But we’re now dealing with the very painful economic fallout from the coronavirus.

We will have a desperate need for lots of private capital if we want to restore prosperity as fast as possible, which is why imposing a wealth tax nowadays (in addition to other forms of double taxation that already exist) would be a catastrophic blunder.

And if the class-warfare crowd succeeds in their campaign to punish the rich, poor people will suffer the most.

P.S. Some people argue that a one-time wealth tax, similar to what Prof. Markovitz proposes and what South Africa is considering, wouldn’t have adverse economic effects because it penalizes productive behavior in the past (and there’s no way for people to reduce work, saving, and investment that already took place). But as I explained when debunking IMF arguments for a one-time wealth tax, this assertion is flawed because a) people will adjust their behavior when such a tax is discussed, b) people won’t trust it is a one-time tax, and c) the money will be used to finance a larger burden of government spending.

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One year ago, I shared this video to explain why a “trade deficit” doesn’t matter, in large part because it is simply a result of foreigners wanting to invest in America’s economy with some of the dollars they earn.

We also have a trade deficit, I pointed out, because we’re richer than most other nations. Simply stated, we can afford to buy more from people in other nations than they can afford to buy from us.

Indeed, I pointed out that the trade deficit increased in Trump’s first few years in office because better tax policy and better regulatory policy increased America’s economic performance relative to other countries.

This is why, as a general rule, it’s actually a sign of economic strength to have a so-called trade deficit.

The flip side of this observation is that trade deficits will decline if the economy is weak.

And that seems to be happening today. Christine McDaniel of the Mercatus Center, writing for the Hill, notes that the trade deficit is now falling for that unfortunate reason.

The Trump administration’s dream of reducing the trade deficit is finally coming true. …for the first two months of 2020, the U.S. trade deficit dropped to $113.5 billion. That’s down from $130.4 billion over the same period last year, a 13 percent decrease. …Needless to say, …we import less. Today, we are importing less because Americans are consuming less during an economic shut down. …We are probably on track to shrink the trade deficit even more this year. …Consumer confidence declined sharply in March, which reflects consumer sentiment — that is, their overall desire to go out and buy things, including imports. …The irony is that the pandemic is fulfilling one of his campaign promises. Nobody is treating it like good news — but this dream coming true just highlights why the metric is so flawed.

To emphasize Ms. McDaniel’s point, let’s look at the long-run data on America’s trade balance.

Here are the annual numbers from the Bureau of Economic Analysis, measured as a share of economic output.

As you can see, our last trade surplus was during the 1970s, when America was suffering from stagflation, and the trade deficit since then has always declined when there’s been a recession.

By the way, you can also see how the trade deficit increased during the Reagan years and the Clinton years. The obvious lesson is that pro-market policies make us richer, and that means we buy more and attract more investment.

That’s good outcome, even if the so-called trade deficit climbs.

The bottom line is that if we want to reduce our trade deficit (and also, by definition, reduce our capital surplus), we should adopt the Bernie Sanders agenda. We won’t be rich enough to buy much from foreigners, and people in other nations won’t be so willing to invest in America’s economy.

Maybe I’m crazy, but that seems like a bad outcome.

P.S. Trade balances also can be affected by other factors, such as shifts in monetary policy and the economic performance of major trading partners.

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Exactly one month ago, I wrote “A Primer on Price Gouging” to explain why government-mandated price controls are an unwise response when prices for certain goods climb after a disaster.

Here’s a video from Johan Norberg on the topic.

And here’s Professor Michael Munger from Duke University on the same issue.

Those are both excellent presentations.

In a column for the Nashville Business Journal, Professor Daniel Smith explains in written form why laws against price gouging inevitably backfire.

High prices in the wake of a disaster or in the face of uncertainty often spark consumer outrage and calls for stricter price-gouging laws. Such measures, however, would actually harm consumers searching for necessities in emergencies. …in the face of uncertainty, such as the coronavirus, it is instinctive for consumers to stock up on goods, such as water, toilet paper, and nonperishable food. Stores need some way to discourage consumers from hoarding or wasting necessities as well as to encourage the increased manufacture and delivery of necessities to the affected area. Higher prices, driven by the increase in demand for these goods, naturally incentivize both of these important functions. …higher price encourages consumers outside of the affected area to also economize on their purchases. The increased demand for building materials for rebuilding New Orleans after Hurricane Katrina drove building material prices up across the nation, leading unaffected consumers to delay less essential building or remodeling projects. …Higher prices also encourage the manufacture and delivery of necessities to the affected area. …higher market prices, by increasing the supply of necessary goods, is the driving force that will ultimately push the price back down. …there is always concern for providing for low-income residents. But the empty shelves created by price gouging laws do little to help them.

It’s worth pointing out, incidentally, that workers can engage in “price gouging” as well.

This tweet from Mark Perry cites a story about nurses being able to earn much more money if they agree to work in New York City.

For what it’s worth, I fully support those nurses extracting much higher pay. They’re going into the medical equivalent of a war zone.

And that’s a good outcome for society. Allowing prices (whether for goods or labor) to rise and fall in response to market conditions ensures that resources go where they have the most value.

Sadly, many politicians in Washington either don’t know or don’t care about the harmful impact of intervention.

Indeed, the House of Representatives wants to demonize so-called price gougers, as reported by Billy Billion of Reason.

When it comes to the federal government’s coronavirus response, there is much room for self-criticism. But that won’t come from the House’s new select oversight committee, announced by Speaker Nancy Pelosi (D–Calif.)… House Majority Whip Jim Clyburn (D–S.C.), telling CNN’s Jake Tapper that the committee will instead focus on things like “price gouging” and “profiteering.” …In other words, if Clyburn’s description is to be taken at face value, lawmakers will scapegoat private businesses, as opposed to delving into the list of ways the government has failed the American public. …The South Carolina representative said the House will…punish those that set high prices on essential goods, though he didn’t say how this would work in practice.

What’s really galling about the actions of Pelosi, Clyburn, and other politicians is that they’re insulated from the policies they impose on the rest of us.

They have voted themselves generous pensions, so they they don’t have to worry about a bankrupt Social Security system.

They have voted themselves lavish fringe benefits, so they don’t have to worry about dealing with the Obamacare disaster.

And they doubtlessly have arranged to be first in line for goods and services if there are shortages caused by anti-gouging laws.

Maybe, just maybe, they’re part of the problem rather than part of the solution.

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I’ve shared plenty of jokes about how America is getting a trial run of life under socialism thanks to the coronavirus.

But, as discussed in this interview, there are some very serious issues relating to economic policy during a pandemic.

I started the interview by stating that we’re in uncharted territory. And I openly acknowledge I’m not an expert on epidemiology in general or the coronavirus in particular. (And neither are the politicians and pundits who dominate Washington, even if they pretend otherwise.)

Which is why, in this list of four takeaways from the interview, I start with the need for more information.

1. Testing is key – We desperately need to get the economy going again, but that’s not going to happen until we know the extent of the disease. Without that information, I suspect it won’t matter whether politicians officially lift the lockdowns. Many individuals won’t go back to work because of concerns about personal safety and many businesses won’t reopen because of concerns about things such as liability and profitability.

2. The FDA and CDC have failed – As I stated in the interview (and as I’ve repeatedly stated in my columns), the Washington bureaucracies have hindered an effective and rapid response to the coronavirus. We need to get rid of the rules and red tape that prevent the private sector from responding to the demand for tests.

3. Be concerned about a long-run expansion in the burden government – I’m extremely worried about the coronavirus being the pretext for a permanent expansion in Washington’s power over the private sector.

A column in today’s Wall Street Journal by former Senator Phil Gramm, along with Mike Solon, echoes my fears.

…even in a time of bitter partisanship, consensus can almost always be found in a crisis to spend a large sum of taxpayer money. …politicians and interest groups have…sought to use the crisis to expand permanently government spending and the role government plays in the aftermath. …Based on the massive programs already adopted and the decision to use the Fed as a crisis lender, the role of government in post-coronavirus America will be significantly expanded. …the capacity of private businesses and banks to lead the recovery could be smothered. …The government would direct the recovery and the Fed would allocate credit. Is that a future most Americans want to fight for?

4. An extended economic shutdown is bad for health outcomes – I wrote about this issue last month, explaining that a weak economy leads to adverse consequences for health and longevity.

Andrew Sullivan succinctly captured this painful tradeoff in his column for New York.

There are costs to this collective exercise in empathy and compassion. You contemplate the rising chances of a long and devastating global depression. You look ahead to months and months more of quarantine, empty streets, crippled businesses, shrinking retirement savings, and rising poverty. And you realize that our choice for life over wealth is a little more complicated. There will come a point at which we will have to risk some lives to reopen and save the economy. …in principle, at some point, there will be a crossover moment when quarantine and lockdown cease to have the net-positive impact they are now having.

If you want more information, click on any of these stories and tweets and you’ll learn more about why there is a very legitimate concern.

Let’s close with excerpts from a column by Tim Worstall for the U.K.-based CapX.

…there are no solutions, only trade-offs. There are costs to everything just as there are benefits and the task is to balance them… This is not to make the mistake of claiming that money, share prices and asset values outweigh lives. Rather, it’s to point that GDP is the sum of economic activity, production, incomes and consumption. If that falls 15% that means we are are all significantly poorer – and that poverty will kill people as surely as the virus is doing. …It’s also why the NHS limits access to treatments to those which cost less than £30,000 (or £50,000 for some diseases) per quality adjusted life year gained. …healthcare is something society spends more of its income upon as incomes rise. Naturally, a richer country will spend a higher portion of GDP on health care than a poorer one. …The optimal point is to balance spending on maintaining human life, while avoiding the damage to those same lives caused by a slump in economic activity. …The aim now is to…minimise overall deaths from all causes. To my mind, a six month shutdown risks missing that target by tipping the world into a depression that is more damaging than the disease itself.

Tim is right.

If politicians impose too many restrictions on the economy, we can lose more lives in the long run.

Which is why this Venn Diagram accurately shows where I am. And hopefully where everyone is.

P.S. This lesson about tradeoffs applies to all types of government policy, not just the coronavirus (cleverly captured in the Remy video at the end of this column).

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As explained in this short video, a spending cap limits how fast a government’s budget can grow each year.

That’s a very sensible approach, sort of like having a speed limit in a school zone, and even left-leaning international bureaucracies have concluded it’s the best fiscal rule.

That being said, not all spending caps are created equal. A fiscal rule that allows continuous increases in the burden of government spending is akin to an excessive speed limit on the road in front of an elementary school.

At a minimum, a spending cap should keep the spending burden constant (relative to the economy’s productive sector). Even better, a spending cap should fulfill the Golden Rule of fiscal policy by slowly but surely reducing the size of government.

Let’s learn from a real-world example.

Ben Wilterdink, a Visiting Fellow with the Alaska Policy Forum, explains for readers of the Peninsula Clarion that the state has a spending cap, but one that is set too high.

Alaska is in the midst of a perfect fiscal storm. …Even before the present crisis, our state faced large budget deficits and tough decisions about how to make ends meet. …That’s why adopting a functional limit on the growth in state spending is essential for long-term economic success. …a functional limit in the growth of state spending decreases the temptation to dramatically increase spending when economic times are good, creating new budget expectations that are difficult to maintain during inevitable economic downturns… Technically, Alaska already has a constitutional spending cap in place, but the formula used renders it basically meaningless. …While Alaskans can’t retroactively adopt a meaningful spending limit, we can ensure that those economic benefits are captured going forward.

So why is a spending cap now an important issue?

Because the state relies overwhelmingly on energy taxes, which are very cyclical, and the drop in oil prices is putting pressure on state finances.

This isn’t an overnight phenomenon. Here’s some of what Henry Olsen wrote last year for the Washington Post.

Alaskans have long financed their state government without paying for it themselves. Alaska has no personal income tax and no statewide sales or property tax. Instead, the state uses taxes and royalties on oil and gas producers to fund the overwhelming share of its government. …Alaska Gov. Mike Dunleavy (R) told his constituents that the gravy train is over. Oil prices and production have been down for many years… Dunleavy showed the leadership that many conservatives contend is lacking in Washington and proposed slashing state spending by nearly 25 percent. Those cuts are real, not some phony accounting scheme against “projected” spending. …Dunleavy’s budget is forcing Alaskans to decide how much government they want and how much they are willing to pay for it.

The bad news is that Alaskans may decide they want more government. Indeed, Olsen suggests in his column that this may be the outcome.

That might even lead politicians in the state to do something really unfortunate, such as adopting a state income tax.

The key thing to understand, however, is that the state would not be in this position if it had the kind of meaningful spending cap that Ben Wilterdink discussed in his column.

I wrote about Alaska’s fiscal policy back in 2015 and shared a very depressing chart showing that the burden of state spending tripled in the eight-year period between 2005 and 2013.

Just imagine, though, if spending during that period only grew at the rate of population plus inflation. The state would be in a very strong fiscal position today instead of dealing with a big mess (that’s also the case for the federal government, which also deals with revenue fluctuations).

So what’s the bottom line? Here’s another excerpt from Wilterdink’s column, noting that Colorado’s spending cap is a good role model.

…the most effective is Colorado’s Taxpayer Bill of Rights (TABOR), which constitutionally limits spending growth to the rate of inflation plus estimated population growth. The stable budget and tax climate created by TABOR has served Coloradans remarkably well. Over the past decade, Colorado’s gross state product (GSP) has grown by 45.5%, personal income has grown by 59.5%, and non-farm payroll employment has grown by 15.8%.

Amen. Colorado’s TABOR policy is a common-sense policy with a strong track record. And Colorado voters, most recently last November, routinely reject proposals to bust the state’s spending cap. So it’s an economic success and a political success.

P.S. If Alaska (or any other jurisdiction) wants global examples of successful spending caps, Switzerland and Hong Kong are good role models.

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The current crisis teaches us that excessive regulation and bureaucratic sloth can have deadly consequences.

Here’s John Stossel’s video with another lesson, explaining that we need more capitalism rather than more government.

This seems like a no-brainer, especially given the wretched economic performance of countries where the government owns or controls the means of production.

But not everyone agrees. The appropriately named Paris Marx wants government to have more power, making the case for nationalization of Amazon in an article for Jacobin.

The government needs to…respond to the needs of people across the country as the pandemic situation deteriorates. The response should be to nationalize Amazon and integrate it with the USPS. …Nationalizing the company would also allow Amazon workers to get covered by the same union as postal workers… Amazon isn’t just an online e-commerce marketplace. …Amazon Web Services (AWS) is a cloud computing platform…the cloud should be placed under public ownership. Taking control of AWS would allow the government to…ensure the cloud platform is serving the public good… We have a rare opportunity to fundamentally alter the economy to serve the needs of people instead of private profit, and it’s time to seize it.

Call me crazy, but if the government takes over Amazon and merges it with the Postal Service, I’m guessing that what emerges will have the inefficiency of the latter rather than the nimbleness of the former.

Just imagine a giant Department of Motor Vehicles (or, on a related note, the government’s track record on teaching kids to drive).

Which is why the U.K.-based Economist warned back in 2017 about the dangers of government-run companies.

Expanded state ownership is a poor way to cure economic ailments. For much of the 20th century, economists were open to a bit of dirigisme. …But in the 1970s economists came to see state ownership as a costly fix to such problems. Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance. Firms with the backing of the state are less vulnerable to competition; as they lumber on they hoard resources that could be better used elsewhere. …economists saw in the productivity slowdown of the 1970s evidence that an overreaching state was throttling economic dynamism. …State-owned firms pose risks beyond that to dynamism. Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful. As state control over the economy grows, political connections become a surer route to business success than entrepreneurialism.

The good news is that very few politicians are supporting explicit nationalization.

The bad news is that there’s plenty of support for intermediate steps involving cronyism, industrial policy, and various types of direct and indirect subsidies.

Including in the legislation recently approved in Washington (not that anyone should be surprised).

Professor Amit Seru from Stanford and Professor Luigi Zingales from the University of Chicago warn, in a column for the Wall Street Journal, that the U.S. has take a dangerous step on the road to central planning.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money… This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private. …The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

In other words, the U.S. is moving in the wrong direction on my “Industrial Policy Spectrum.”

The key unanswered question is whether the government’s new powers will be temporary or permanent.

There’s a legitimate argument for some form of intervention while the crisis in ongoing. But what happens once things go back to normal? Will politicians allow the “creative destruction” of capitalism, or will they use their expanded power to permanently interfere with market forces?

If they choose the latter, there will be less long-run prosperity.

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Starting with a column about government-subsidized debt and ending yesterday with a column about why government shouldn’t own airlines, I’ve written about coronavirus-related issues for 14 straight days. And since that’s the topic now dominating the national discussion, I expect many more coronavirus-themed columns will be forthcoming.

But I’m going to make a detour to normalcy today and write about the person who is probably America’s second-worst president in terms of economic policy.

No, I’m not talking about Barack Obama or George W. Bush.  Or even Herbert Hoover.

That’s a list of bad presidents, to be sure, but none of them are in the same league as Franklin Delano Roosevelt.

As I’ve explained before, FDR deserves scorn for doubling down on Hoover’s awful policies of higher taxes, increased spending, and more intervention – thus keeping the economy mired in misery all through the 1930s.

Amazingly, some people applaud his performance. Including some self-described conservatives.

Conrad Black, in an article for American Greatness, actually wants readers to think of FDR as a conservative.

My motive is…to correct the widespread misperception of Roosevelt as a socialist and somehow the person responsible for the present leviathan-state. …Roosevelt wanted to make America safe for wealthy people like himself. …he wanted a contented working-class and agrarian class, as he thought equitable in a rich country, and the only assurance against social instability. …retroactive quarterbacks have never suggested any serious alternatives to what Roosevelt did and no significant part of his domestic legislation has been seriously altered… When it comes to long-term social and economic policy, Roosevelt gets a solid B-plus. …Roosevelt acknowledged that the New Deal would, and did, make many mistakes, but it saved the country.

Saved the country?!? According to academic experts, the New Deal lengthened and deepened the downturn.

Why? Because FDR adopted so many bad policies. For instance, increased the top tax rate to 79 percent (and fortunately failed in his effort to impose a 100 percent tax rate). He cartelized the economy based on fascist economic principles. And he doubled the burden of federal spending in just eight years.

I’ll discuss more about FDR’s policy mistakes at the end of this column, but I also want to address his upside-down view of freedom.

He wanted to replace the Founding Fathers’ vision of “negative liberty” (the right to be left alone) with the redistributionst concept of “positive liberty” (the right to get handouts).

Here’s one of his speeches, which I first shared back in 2011.

I’m not the only one to find this point of view to be repugnant.

Here’s some of what James Bovard wrote last year, in a column for the Foundation for Economic Education.

Franklin Roosevelt did more than any other modern president to corrupt Americans’ understanding of freedom. …his 1941 “Four Freedoms” speech…declared: “The third [freedom] is freedom from want . . . everywhere in the world. The fourth is freedom from fear . . . anywhere in the world.” Proclaiming a goal of freedom from fear meant that government should fill the role in daily life previously filled by God and religion. Politicians are the biggest fearmongers, and “freedom from fear” would justify seizing new power in response to every bogus federal alarm. …Three years later, …Roosevelt called for a “Second Bill of Rights” and asserted that “True individual freedom can’t exist without economic security.” And security, according to FDR, included “the right to a useful and remunerative job,” a “decent home,” “good health,” and “good education.” Thus, if…someone was in bad health, then that person would be considered as having been deprived of his freedom, and somehow it would be the government’s fault. Freedom thus required boundless control over health care.

Amen.

There is no “right” to other people’s earnings.

Let’s now return to FDR’s specific policies.

My contribution to this discussion is a back-of-the-envelope assessment of the policies adopted while he was in office. As you can see, there were many anti-growth policies (and the policies that did the most damage get the biggest bars).

Trade was the only area where he consistently pushed policy in the right direction.

P.S. According to presidential scholars such as Al Felzenberg, President Roosevelt didn’t have firm views on economics and his administration was characterized by haphazard shifts in policy depending on which group of advisors (the reflationists, corporatists, Keynesians, anti-trust zealots, etc) were most influential.

P.P.S. FDR’s Treasury Secretary admitted the failure of the New Deal in 1939, telling a congressional committee that “We are spending more than we have ever spent before and it does not work… I say after eight years of this administration we have just as much unemployment as when we started…and an enormous debt, to boot.”

P.P.P.S. I wrote above that FDR is “probably America’s second-worst president.” I’m hesitant to give a definitive answer, in part because Nixon was so terrible. More important, the wretched track record of Woodrow Wilson (creator of the income tax and Federal Reserve, as well as an odious racist) suggests he may deserve the prize for being the worst of the worst.

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The crowd in Washington has responded to the coronavirus crisis with an orgy of borrowing and spending.

The good news is that the legislation isn’t based on the failed notion of Keynesian economics (i.e., the belief that you get more prosperity when the government borrows money from the economy’s left pocket and then puts it in the economy’s right pocket).

Instead, it is vaguely based on the idea of government acting as an insurer for unforeseen loss of income.

Not ideal from a libertarian perspective, of course, but we can at least hope it might be somewhat successful in easing temporary hardship and averting bankruptcies of otherwise viable businesses.

The bad news is that the legislation is filled with corrupt handouts and favors for the friends and cronies of politicians. Simply stated, they have not “let a crisis go to waste.”

The worst news, however, is that politicians have plenty of additional ideas for how to exploit the crisis.

An especially awful idea for so-called stimulus comes from House Speaker Nancy Pelosi, who wants to restore (retroactively!) the full federal deduction for state and local tax payments.

Pelosi suggested that reversing the tax law’s $10,000 cap on the state and local tax (SALT) deduction… The cap on the SALT deduction has been strongly disliked by politicians in high-tax, Democratic-leaning states such as New York, New Jersey and California… But most Republicans support the SALT deduction cap, arguing that it helps to prevent the tax code from subsidizing higher state taxes.

I’ve written many times on this issue and explained why curtailing that deduction (which basically existed to subsidize the profligacy of high-tax states) was one of the best features of the 2017 tax reform.

Needless to say, it would be a horrible mistake to reverse that much-needed change.

The Wall Street Journal agrees, opining on Pelosi’s proposal to subsidize high tax states.

Democrats are far from finished using the crisis to try to force through partisan priorities they couldn’t pass in normal times. Mrs. Pelosi is now hinting the price for further economic relief may include expanding a regressive tax deduction for high-earners in states run by Democrats. …In the 2017 tax reform, Republicans limited the state and local tax deduction to $10,000. …Democrats have been trying to repeal the SALT cap since tax reform passed. …Blowing up the state and local tax deduction would…also make it easier for poorly governed states to rely on soaking their high earners through capital-gains and income taxes, because the federal deduction would ease the burden. …Mrs. Pelosi’s remarks underscore the potential for further political mischief and long-term damage as the government intervenes… When Democrats next complain that Republicans want to cut taxes “for the rich,” remember that Mrs. Pelosi wants to cut them too—but mainly for the progressive rich in Democratic states.

Maya MacGuineas of the Committee for a Responsible Federal Budget also denounced the idea.

This is not the time to load up emergency packages with giveaways that waste billions of taxpayer dollars… Weakening or eliminating the SALT cap would be regressive, expensive, poorly targeted, and precisely the kind of political giveaway that compromises the credibility of emergency spending. …Retroactively repealing the SALT caps for the last two years would mean sending a check of $100,000 to the household making over $1 million per year, and less than $100 for the average household making less than $100,000 per year. …During this crisis, the Committee implores special interest lobbyists to stand down and lawmakers to put self-serving politics aside.

By the way, I care about whether a change in tax policy will make the country more prosperous in the long run and don’t fixate on whether the change helps or hurts any particular income group. So Maya’s point about the rich getting almost all the benefits is not what motivates me to oppose Pelosi’s proposal.

That being said, it is remarkable that she is pushing a change that overwhelmingly benefits the very richest people in the nation.

The obvious message is that it’s okay to help the rich when a) those rich people live in places such as California, and b) helping the rich also makes it easier for states to impose bad fiscal policy.

Which is why she was pushing her bad idea before the coronavirus ever became an issue. Indeed, House Democrats even passed legislation in 2019 to restore the loophole.

Professor John McGinnis of Northwestern University Law School wrote early last year why the deduction was misguided and why the provision to restrict the deduction was the best provision of the 2017 tax law.

…the best feature of the Trump tax cuts was the $10,000 cap on the deductibility of state and local taxes. It advanced one of the Constitution’s most important structures for good government—competitive federalism. Deductibility of state taxes deadens that competition, because it allows states to slough off some of the costs of taxation to citizens in other states. Moreover, it allows states to avoid accountability for the taxes they impose. Given high federal tax rates in some brackets, high income tax payers end up paying only about sixty percent of the actual tax imposed. The federal government and thereby other tax payers effectively pick up the rest of the tab. …the ceiling makes some taxpayers pay more, but its dynamic effect is to make it less likely that state and local taxes, particularly highly visible state income taxes, will be raised and more likely that they will be cut.

For what it’s worth, I think the lower corporate tax rate was the best provision of the 2017 reform, but McGinnis makes a strong case.

Perhaps the best evidence for this change comes from the behavior of politicians from high-tax states.

Here are some excerpts from a Wall Street Journal editorial from early last year.

New York Gov. Andrew Cuomo…is blaming the state’s $2.3 billion budget shortfall on a political party that doesn’t run the place. He says the state is suffering from declining tax receipts because the GOP Congress as part of tax reform in 2017 limited the state-and-local tax deduction to $10,000. …the once unlimited deduction allowed those in high tax climes to mitigate the pain of state taxes. It amounted to a subsidy for progressive policies. …The real problem is New York’s punitive tax rates, which Mr. Cuomo and his party could fix. “People are mobile,” Mr. Cuomo said this week. “And they will go to a better tax environment. That is not a hypothesis. That is a fact.” Maybe Mr. Cuomo should stay in Albany and do something about that reality.

Amen.

The federal tax code should not subsidize politicians from high-tax states. Nor should it subsidize rich people who live in high-tax states.

If Governor Cuomo is worried about rich people moving to Florida (and he should be), he should lower tax rates and make government more efficient.

I’ll close with the observation that the state and local tax deduction created the fiscal version of a third-party payer problem. It reduced the perceived cost of state and local government, which made it easier for politicians to increase taxes (much as government subsidies for healthcare and higher education have made it easier for hospitals and colleges to increase prices).

P.S. Speaking of fake stimulus, there’s also plenty of discussion on Capitol Hill (especially given Trump’s weakness on the issue) about squandering a couple of trillion dollars on infrastructure, even though such spending a) should not be financed at the federal level, b) would not have any immediate impact on jobs, and c) would be a vehicle for giveaways such as mass transit boondoggles.

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In the past couple of weeks, we’ve discussed a bunch of coronavirus-related issues, ranging from big-picture topics such as the proper role of government and the catastrophic downsides of excessive bureaucracy to more-focused topics such as how gun control puts families at risk, why laws against “price gouging” are misguided, and how government-encouraged debt makes the economy more vulnerable.

The crisis even led me to unveil a new theorem. And I also shared some amusing cartoons in hopes of lightening the mood.

The latest chapter in the coronavirus saga is that people are beginning to question how much economic damage we should be willing to accept in order to get the disease under control.

Public health experts argue that isolation and lockdown are critical if we we to “flatten the curve” so that new cases don’t overwhelm the ability of the system to treat patients (thus resulting in unpalatable forms of triage, with older and sicker patients set aside to die so that limited resources can be utilized to save others).

But if the economy is put on hold for several months, the economic damage will be catastrophic. At some point, policy makers won’t have any choice but to relax restrictions on people and businesses.

So how do we assess the costs and benefits of various options?

Eline van den Broek-Altenburg and Adam Atherly, both from the College of Medicine at the University of Vermont, explain the necessary tradeoffs.

While a growing number of people are starting to understand the message of the intuitive picture of “Flattening The Curve”, some health economists are starting to wonder how flat the curve should actually be for the benefits to exceed the costs. …how does the economic cost of the flattening fit into the discussion? …we use publicly available data to calculate the cost effectiveness of the flattening the curve. …When considering the value of a healthcare intervention to inform decision-making, benefits are usually measured in terms of life years gained, with the life years adjusted for the “quality” of the life (using standard formulas) to create a “Quality Adjusted Life Year” or QALY. …interventions in younger populations will typically yield more QALYs than interventions in older populations: because younger people have longer life expectancy. …Heath systems then compare the QALYs gained to the cost and calculate a cost per QALY gained. In the United States, interventions that cost less than $100,000 per QALY gained are often considered “cost effective,” although the precise number is somewhat controversial.

What you just read is the theoretical framework.

The authors then apply the model to the current situation.

…is the current “stay at home” and social isolation-policy, with school closed and businesses shuttered, cost effective using the standard health economics framework? …The years of life-gains are relatively straightforward. …statistics on the people who died of COVID19 in China and Italy are the best source of currently available data. …The average 80-year old in the United States has a life expectancy of about 9 years, suggesting that on average, a death averted will “buy” 9 extra years of life. …If we use diabetes as a reasonable proxy for the many chronic diseases, we would adjust the 9 years down to 7.8 years or QALYs. In other words: the average loss per person of quality-adjusted life years is 7.8. …This implies the pandemic, if unchecked, will lead to a loss of between 1.56 million and 13.26 million QALYs. …What, then, is the cost of the intervention of social distancing? One easy estimate would be to use the cost of the current stimulus bill before congress — 1 trillion dollars. This is likely an underestimate of the true cost, but is a reasonable starting place. …the cost per QALY gained from the current approach to be somewhere between approximately $75,000 and $650,000.

So what’s the bottom line?

Here’s a graphic they prepared.

And here’s their explanation.

…the key variable is the expected number of deaths. A pandemic that is likely to lead to 1.7 million deaths can justify the enormous public costs. However, if the pandemic is in the lower end of the predicted range, then the public funds would have been more valuable if spent elsewhere. …Some claim it is impossible or even unethical in times of a crisis, to think about cost when lives are involved. But in a world of finite resources, it’s necessary to make choices. Why not use a framework that has been defended by governments and scientists for decades?

Richard Rahn, former Chief Economist for the U.S. Chamber of Commerce, is very explicit about the downsides of an economic shutdown for future generations.

Some government officials, politicians and commentators keep saying words to the effect, “we need to spend whatever it takes to stop the coronavirus deaths.” They, of course, do not literally mean the government should spend an infinite amount of money to save a life — because, if they did, we would not let people drive more than five miles an hour in order to save more than 35,000 Americans who die on the roadways each year. …What is missing in this discussion is what American taxpayers and workers in terms of job losses should spend to save each life… Such calculations are necessary for insurance companies to price their products correctly, and for all of those government agencies involved in health and safety to determine both the proper form and degree of regulation. …If we learn that a 35-year-old MD has unexpectedly passed away, we are likely to feel far worse about the tragedy than if we hear her 90-year-old grandfather has died.

That’s Richard’s conceptual framework.

Here are his calculations.

Let’s assume that the low-cost measures will result in 50,000 more deaths (which is almost certainly on the very high-side given the experience of other countries). If we value the average death at…$2,000,000 figure… (which is high, because of the advanced age of most of the coronavirus victims), then policies that cost taxpayers, and the hit to GDP, more than $100 billion are counterproductive. Even if you assume that my figures are off by a magnitude of three, the mitigation policies should not cost more than $300 billion — not trillions.

Jeffrey Polet, a political scientist at Hope College, also explores the adverse consequences of an economic lockdown.

A panicking public will produce bad consequences, and we are already seeing its destructive effects on our economy. …While the elderly and infirm are the most vulnerable populations, small businesses, low wage laborers, and less healthy social institutions are the most likely to succumb to the economic consequences of the reaction to the virus. …The result will be, as we already see, a call for more government programs to aid those made destitute by the government’s reactions. …collective overreacting has profound social, economic, and political effects. …Good leadership neither overreacts nor under-reacts but reacts sensibly. …Calling something a “pandemic” excites public fear, even if the majority of the population is unlikely to be either directly or indirectly harmed. …For many people in this country, the prospect of losing their business or their job is far more frightening and harmful than the prospect of getting infected with the virus. An already insolvent government is hardly in a position to get this economy up and running, particularly if its policies create massive economic dislocations. …One of the appeals of utilitarianism is that it actually provides a functioning calculus, however imperfect in implementation.

I’ll close with the observation that I want to err on the side of public health in the short run, though I confess I’m not even sure what that means in terms of public policy since we not only need to agree on how much a life is worth (an unpleasant number to consider), but also get a handle on how many lives might be at risk (a very speculative number).

The goal of today’s column is simply to point out that the tradeoffs are real and to applaud the people who have the honesty to write about the issue.

In the long run, we should all appreciate the overlooked point that there is no tradeoff between health outcomes and economic outcomes.

That’s because wealthier societies are healthier societies. Here are a couple of chart from an article I wrote for the Journal of Regulation and Social Costs way back in 1992.

I’ve written about this correlation many times, both as a general concept, and also when addressing specific topics such as the adverse impact of President Obama’s anti-growth policies (and I cited one of Obama’s top economic appointees, Cass Sunstein, who explicitly agrees about the link between health and wealth).

P.S. There’s a very amusing Remy video about health-and-wealth tradeoffs at the end of this column.

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After Hitler’s National Socialists were defeated in World War II, the allies imposed price controls on the German economy for the ostensible purposes of fighting inflation and preventing “price gouging.”

That policy led to massive shortages, black markets, and hoarding. Fortunately, as described in this video, a very clever economist abolished those controls, thus setting the stage for Germany’s post-war economic miracle.

The lesson to be learned is that politicians should let markets determine prices. Price controls of any kind, as indicated by the cartoon, will cause people to withhold goods, services, and/or labor from the marketplace.

Unfortunately, many people overlook that lesson when there’s some sort of disaster.

In a column for Bloomberg, Scott Duke Kominers asserts that sellers should not be allowed to increase prices when there’s a sudden increase in demand.

One might think that steep prices for disinfectant in the middle of an epidemic are just markets at work — a way of getting scarce goods to the people who value them the most. I’m sure that’s what price gougers tell themselves. …But that’s not the right way to think about disinfectant at this particular moment. …if you can pay $87 for a bottle of Purell instead of the usual $2 that probably doesn’t mean you’re more concerned about the risk of infection than your neighbor; it just means that you have more disposable income. Thus buying low-priced disinfectant and selling it at steep markups effectively transfers disinfectant supplies from lower-income people to wealthier ones. …in situations such as this it may be best for society to force prices below market-clearing levels in order to make sure everyone has access; that’s exactly what laws prohibiting price gouging attempt to do. …There’s a serious consequence to keeping the price low, of course: we end up with rationing, since there’s not enough to go around. But that hits everyone — rich or poor — more or less equally.

Politicians obviously like this argument. Most states have laws against “price gouging.”

That may be smart politics, but it’s bad economics.

J.D. Tuccille of Reason explains why such laws are misguided.

…as common as accusations of “price gouging” are, the term has no fixed meaning. Asked when rising prices cross the line to become criminal, New York Attorney General Letitia James told NPR, “there’s no definitive answer to that question, but you know it when you see it.” …Someincluding Alabama, Florida, and Maineforbid selling at an “unconscionable” price. Idaho and Texas ban sales at an “exorbitant or excessive price.” And New York splits the difference with restrictions on “unconscionably excessive price” increases during an emergency… Laws can’t change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply. Those rising prices tell…manufacturers and distributors that they should increase production, and where they should send the goodsif they’re allowed to. …Sure enough, GOJO industries is “operating around the clock” to produce hand sanitizer, 3M has “ramped up production” of respirators, and many other companies are responding to the messages they’re getting from the market. Allowed time, goods will get to where they’re needed, and prices will drop as supply meets demand. …Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain. Crises like the COVID-19 pandemic come and go, but “price-gouging” laws demonstrate that intrusive politicians are a recurring plague.

Art Carden, an economics professor at Samford University, shows why anti-gouging laws backfire on consumers.

You’ve seen the pictures on your social media feeds: Empty shelves across America. Panic-buying. Hoarding. …this is exactly what the supply-and-demand model we teach in introductory economics courses predicts when we actively prevent the free market from functioning. The shelves are…empty because…governments aren’t letting prices change to reflect new market conditions. …“price gougers”…get tarred as villains while it’s actually the politicians who are making the problem worse by interfering with prices. …the fact remains that we get a lot more hand sanitizer, toilet paper, and other supplies when we make room for people who are just in it for the money. You may not like their motivations, but they’re doing something your state’s governor and attorney general aren’t doing. Namely, they’re getting valuable emergency supplies into your hands.

Veronique de Rugy of the Mercatus Center warns about adverse consequences in her syndicated column.

It’s normal for people to stock up on supplies during crises. The immediate results are empty store shelves, soon followed by higher prices. When this happens, politicians around the globe demand an end to the price hikes. …such heavy-handed intervention is a mistake… If prices are kept artificially low, there’s little incentive for shoppers not to buy as much as they can. …The fact is there’s no better means of slowing the rising demand — and, especially, reducing excessive hoarding — than allowing the very price hikes that governments are trying to prevent. But price hikes have another important advantage: They create the necessary incentives for entrepreneurs to shift resources toward activities that increase the supply of these goods. The higher prices encourage higher levels of production for goods like masks and hand sanitizers, which then increases supply. …When governments prevent price hikes, they unwittingly create shortages of vital supplies. …Aren’t we better off when products are actually on the shelves and available for purchase, even if only at higher prices? When no such products are to be found, except by the politically and socially connected, ordinary citizens lose out.

John Hirschauer’s piece in National Review cites some academic research on this topic.

The unintended consequences of price controls have been confirmed…in empirical literature. Take, for instance, the study published by three scholars in the Journal of Competition Law and Economics who examined the merits of proposed price-control laws in the wake of Hurricanes Katrina and Rita. …The researchers reviewed the historical data on gasoline price hikes and found that “price increases were due to the normal operation of supply and demand and not price manipulation.” Upon reviewing the body of gasoline price-control studies, the group found that “neither consumers nor the economy benefit [from price controls], because the apparent monetary savings to consumers are transformed into costs of waiting or other forms of nonmarket rationing that exceed the monetary savings.” Through econometric analysis, they estimated that the “economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases” if the federal government had instituted price controls.

The only thing I’ll add to this discussion is that people are sympathetic to anti-gouging laws because of a belief in social equality. We think that everyone – rich and poor – should be treated equally during a disaster.

And in some cases, such as a group of people stranded on a lifeboat, that’s the right approach. Nobody would argue that scarce supplies (limited emergency provisions of fresh water and food) belong to the person with the biggest bank account .

But the economy isn’t a lifeboat. As explained in the above excerpts, it’s possible to get more provisions with the right incentives. Higher prices will encourage entrepreneurs to produce more scarce supplies (in this case, everything from toilet paper and hand sanitizer to respirators and ventilators).

So what’s the bottom line? Price gouging is no fun if you need to buy supplies in an emergency. But a free market is better than the alternative of government controls that lead to shortages, black markets, and hoarding.

I’ll close with this cartoon, which Art Carden included at the end of his AIER column.

And I’ll also add this joke that Mark Perry shared on twitter.

P.S. This video explains why the price system is so important and these three videos explain why anti-gouging laws backfire because they hinder the price system.

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The coronavirus is a genuine threat to prosperity, at least in the short run, in large part because it is causing a contraction in global trade.

The silver lining to that dark cloud is that President Trump may learn that trade is actually good rather than bad.

But dark clouds also can have dark linings, at least when the crowd in Washington decides it’s time for another dose of Keynesian economics.

  • Fiscal Keynesianism – the government borrows money from credit markets and politicians then redistribute the funds in hopes that recipients will spend more.
  • Monetary Keynesianism – the government creates more money in hopes that lower interest rates will stimulate borrowing and recipients will spend more.

Critics warn, correctly, that Keynesian policies are misguided. More spending is a consequence of economic growth, not the trigger for economic growth.

But the “bad penny” of Keynesian economics keeps reappearing because it gives politicians an excuse to buy votes.

The Wall Street Journal opined this morning about the risks of more Keynesian monetary stimulus.

The Federal Reserve has become the default doctor for whatever ails the U.S. economy, and on Tuesday the financial physician applied what it hopes will be monetary balm for the economic damage from the coronavirus. …The theory behind the rate cut appears to be that aggressive action is the best way to send a strong message of economic insurance. …Count us skeptical. …Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves. …The Fed’s great mistake after 9/11 was that it kept rates at or near 1% for far too long even after the 2003 tax cut had the economy humming. The seeds of the housing boom and bust were sown.

And the editorial also warned about more Keynesian fiscal stimulus.

Even if a temporary tax cuts is the vehicle used to dump money into the economy.

This being an election year, the political class is also starting to demand more fiscal “stimulus.” …If Mr. Trump falls for that, he’d be embracing Joe Bidenomics. We tried the temporary payroll-tax cut idea in the slow growth Obama era, reducing the worker portion of the levy to 4.2% from 6.2% of salary. It took effect in January 2011, but the unemployment rate stayed above 9% for most of the rest of that year. Temporary tax cuts put more money in peoples’ pockets and can give a short-term lift to the GDP statistics. But the growth effect quickly vanishes because it doesn’t permanently change the incentive to save and invest.

Excellent points.

Permanent supply-side tax cuts encourage more prosperity, not temporary Keynesian-style tax cuts.

Given the political division in Washington, it’s unclear whether politicians will agree on how to pursue fiscal Keynesianism.

But that doesn’t mean we can rest easy. Trump is a fan of Keynesian monetary policy and the Federal Reserve is susceptible to political pressure.

Just don’t expect good results from monetary tinkering. George Melloan wrote about the ineffectiveness of monetary stimulus last year, well before coronavirus became an issue.

The most recent promoters of monetary “stimulus” were Barack Obama and the Fed chairmen who served during his presidency, Ben Bernanke and Janet Yellen. …the Obama-era chairmen tried to stimulate growth “by keeping its policy rate at zero for six-and-a-half years into the economic recovery and more than quadrupled the size of the Fed’s balance sheet.” And what do we have to show for it? After the 2009 slump, economic growth from 2010-17 averaged 2.2%, well below the 3% historical average, despite the Fed’s drastic measures. Low interest rates certainly stimulate borrowing, but that isn’t the same as economic growth. Indeed it can often restrain growth. …Congress got the idea that credit somehow comes free of charge. So now the likes of Elizabeth Warren and Bernie Sanders think there is no limit to how much Uncle Sam can borrow. Easy money not only expands debt-service costs but also encourages malinvestment. …when Donald Trump hammers on the Fed for lower rates, …he is embarked on a fool’s errand.

Since the Federal Reserve has already slashed interest rates, that Keynesian horse already has left the barn.

That being said, don’t expect positive results. Keynesian economics has a very poor track record (if fiscal Keynesianism and monetary Keynesianism were a recipe for success, Japan would be booming).

So let’s hope politicians don’t put a saddle on the Keynesian fiscal horse as well.

If Trump really feels he has to do something, I ranked his options last summer.

The bottom line is that good short-run policy is also good long-run policy.

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Early last year, I shared a video explaining that trade deficits generally don’t matter. I even suggested trade deficits might be a sign of economic strength because foreigners who earned dollars were anxious to invest them in the American economy.

I’m recycling this video to make a point about trade and the economy for both Trump supporters and Trump critics.

For Trump supporters, I want them to understand that the trade deficit has increased under his policies. The data from the latest Commerce Department report show that the yearly trade deficit has increased from about $500 billion at the end of the Obama years to a bit over $600 billion during the Trump years.

And the reason I’m making this point is that I want Trump supporters to realize that they shouldn’t be upset about trade balances. Indeed, they should be happy because there’s a strong argument that the trade deficit is increasing in large part because Trump’s pro-growth tax reform and regulatory reform and making America more attractive for foreign investors.

For Trump critics, I want them to understand the same point, though from a different perspective. Many of them have been (correctly) critical of Trump’s protectionism. And they’ve been happy to point out that his taxes on foreign goods haven’t reduced the trade deficit.

But I would like them to contemplate why the economy has continued to grow. Hopefully, they will realize that pro-market policies in other areas are offsetting the damage of protectionism and therefore be more supportive of capitalism.

The Wall Street Journal opined on this topic last year.

President Trump can take a bow that his tax reform and deregulation are working as intended. …The trade deficit grew… This is not bad economic news. Imports grew faster than exports as the U.S. economy accelerated and much of the world slowed. The dollar grew stronger as capital flowed into the U.S., and the trade deficit grew to offset the larger capital inflows as it must by definition under the national income accounts. …a larger trade deficit is a benign byproduct of a healthier American economy. Supply-side policies revived animal spirits and gave the economy a second wind. …The best way to respond to a trade deficit is to ignore it.

From a left-of-center perspective, Fareed Zakaria made the same point in a recent column for the Washington Post.

Trump campaigned relentlessly on the notion that America’s economy was being ruined by large trade deficits. …He promised on the campaign trail in June 2016, “You will see a drop like you’ve never seen before.”In reality, the trade deficit has risen substantially under Trump. …when the United States has grown robustly, its trade deficit has tended to rise. If you want to achieve a sharp decline in the trade deficit, it’s easy — just trigger a recession. …while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). …The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, “the trade deficit should be something to brag about rather than denounce.” …Trump’s trade policy has been an enormously costly exercise, forcing Americans to pay tens of billions in taxes on imported goods, then using tens of billions of dollars in taxpayer funds to compensate farmers for lost income (because of retaliatory tariffs)… All to solve a problem that isn’t really a problem.

Veronique de Rugy of the Mercatus Center, writing for Reason, summarizes the issue.

President Donald Trump hates the trade deficit. …If elected, he promised, he would “end our chronic trade deficits.” …free traders…explained, a country’s trade balance is determined overwhelmingly by factors such as the U.S dollar serving as a reserve currency, the ratio of savings to investment opportunities at home and abroad, and the relative attractiveness of that country’s investment climate. As long as the United States is growing and remains an attractive place to invest, we Americans will continue to run trade deficits with the rest of the world. …They want these dollars, in part, to buy American exports. …More important, and often overlooked: Foreigners want dollars also to invest in America’s powerful economy. …the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as “job-generating foreign investment surpluses for a better America.” It is thus no surprise that as the American economy grew, the trade deficit also grew.

I’ll close with a chart that’s in the video because it reinforces the three columns cited above.

As you can see, the link between the trade deficit and an investment surplus isn’t just a theoretical construct. It’s an accounting identity.

The bottom line is that people on both sides of the political debate should ignore the trade deficit and instead focus on the tried-and-true recipe for generating prosperity.

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Back in 2014, I compared Hong Kong’s amazing growth with Cuba’s pitiful stagnation and made the obvious point that free markets and limited government are the right recipe for prosperity.

Especially if you care about improving the lives of the less fortunate.

Communists claim that their ideology represents the downtrodden against the elite, yet the evidence from Cuba shows wretched material deprivation for most people.

In Hong Kong, by contrast, incomes have soared for all segments of the population.

Today, let’s update our comparison of Cuba and Hong Kong. Law & Liberty has posted a a fascinating review of Neil Monnery’s book, A Tale of Two Economies, authored by Alberto Mingardi from Italy’s Bruno Leoni Institute.

As Alberto explains, the book is about how developments in both Hong Kong and Cuba were shaped by two individuals.

How important are key individuals in shaping the success or failure of economies? …Neil Monnery’s A Tale of Two Economies is in some sense a polemic against historical determinism, at least insofar as promoting economic reforms is concerned. It stresses the importance of two single individuals, one a great man for many, one an obscure official and political unknown to the most, in shaping the destiny of their respective countries. …Ernesto “Che” Guevara and John Cowperthwaite. …Monnery insists that both of them were “deep and original thinkers.” …The key difference between the two was perhaps that Cowperthwaite had a solid education in economics… Neither the way in which Hong Kong progressed, nor Cuba’s, were thus inevitable.

I’ve written previously about the noble role of John Cowperthwaite.

Here’s what Alberto culled from the book.

Monnery points out that Hong Kong’s success happened not because Cowperthwaite and his colleague were trying “to plant an ideological flag,” but because they were “professional pragmatists.” …Then the success of relatively libertarian arrangements in Hong Kong perpetuated itself. …Cowperthwaite tested what he knew about classical economics when he “first arrived in Hong Kong, in 1945” and “was put in charge of price control.… He soon realized the problems with attempting to set prices low enough to meet consumer needs but high enough to encourage supply, and in a dynamic environment.” He opposed subsidies that he saw as “a brazen attempt to feed at the trough of government subsidies.” …Cowperthwaite is a hero to Monnery, who emphasises his competence, and even more, his integrity.

And I’ve also written about Che Guevara, but only to comment on his brutality.

It turns out he was also a lousy economic planner.

Guevara held office in a variety of capacities related to economic matters and took them seriously. In 1959, he took a three months trip to countries as different as India, Japan and Burma, to learn “how they managed their economy.” He was struck by examples of countries that succeeded in developing heavy industries and thought Cuba could do the same. …Guevara, who, once converted to Marxism, had swallowed the whole thing. Since he maintained that “the sine qua non for an economic plan is that the state controls the bulk of the means of production, and better yet, if possible, all the means of production,” he acted accordingly.

So what’s the bottom line?

Hong Kong and Cuba were roughly equal at the start of the process. Today, not so much.

To the reader of A Tale of Two Economies, it is rather obvious which lessons ought to be taken: “in the late 1950s, both economies had a GDP per capita of around $4,500 in today’s money. By 2018 Cuba had slightly more than doubled its GDP per capita to around $9,000 per person. But Hong Kong reached $64,000 per capita”—seven times Cuba’s, and even exceeding the UK’s as well.

Here’s my modest contribution to the discussion, based on the Maddison database.

P.S. Hong Kong still ranks as the world’s freest economy, though there are increasing worries about whether China will allow economic liberty in the long run.

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