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Archive for the ‘Economics’ Category

I’ve written many columns about Sweden and Denmark over the past 10-plus years, and I’ve also written several times about Norway and Iceland.

But I’ve mostly neglected Finland, other than some analysis of the country’s experiment with “basic income” in 2017 and 2018.

Now, thanks to a very interesting column in the New York Times, it’s time to rectify that oversight. According to the authors, Anu Partanen and , Finland is a great place with lots of goodies provided by taxpayers.

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.”…We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous… What we’ve experienced is an increase in personal freedom. …in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care… Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families. …if we stay here, …College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year… Compared with our life in the United States, this is fantastic.

Interestingly, the authors are not clueless Bernie Sanders-style leftists.

They fully understand and appreciate that Finland (like all Nordic nations) is not a socialist country.

…surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. …In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. …What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” …in Finland, you don’t really see the kind of socialist movement…, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers. …a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates…throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

This is a very accurate assessment. Finland is more market-oriented than the United States in many categories.

Moreover, the country is ranked #21 for economic freedom out of 162 nations in Economic Freedom of the World, with a score of 7.80. That’s just .05 behind Taiwan and .09 behind Chile.

That being said, the burden of taxes and spending is rather onerous.

…after World War II, …Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. …the nation’s commitment to providing generous and universal public services…buffered and absorbed the risks and dislocations caused by capitalist innovation. …Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies. …Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do.

The column concludes by suggesting that American capitalists follow the same model.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense.

So should the United States copy Finland, as the authors suggest?

People would get lots of taxpayer-financed freebies, but there would be a heavy price. Taxes consume nearly 50 percent of an average family’s income (even higher according to some measures).

That’s compared to about 30 percent in the United States.

And there’s a very Orwellian aspect of the Finnish tax system. As the New York Times reported last year, everyone in the country has the right to know how much income you earn.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp. The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. …Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. …A large dosage of Thursday’s reporting concerned the income of minor celebrities… The country’s best-known porn star, Anssi “Mr. Lothar” Viskari, was reported to have earned 23,826 euros (about $27,000).

Given the onerous level of Finnish taxes, it’s probably safe to say that “Mr. Lothar” is getting screwed more than he’s…um….well, you get the point.

So what’s the bottom line? Should America be more like Finland? Is the country reasonably successful because of high taxes, or in spite of high taxes?

The U.S. should not mimic Finland, at least if the goal is higher living standards. Finland has some advantages over the United States (including better business taxation), but the United States has more overall economic liberty.

And that presumably helps to explain why, based on data from the Organization for economic Cooperation and Development, the average American enjoys 40 percent higher living standards than the average Finn.

But the most compelling piece of data, for those who prefer apples-to-apples comparison, is that Americans of Finnish descent produce 47 percent more than Finns in Finland.

Is Finland a relatively rich nation? Yes.

Is Finland a relatively free nation? Definitely.

Is Finland a good example of western civilization? Unquestionably.

The bottom line is that Finland seems like a great country (I’ve never visited). All I’m saying is that Americans would not be as prosperous if we had Finnish-style taxation and Finnish-style spending.

P.S. Researchers at Finland’s central bank seem to agree with my concern.

P.P.S. And Finland’s former Prime Minister understood the downside of an excessive public sector.

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Arthur Okun was a well-known left-of-center economist last century. He taught at Yale, was Chairman of the Council of Economic Advisors for President Lyndon Johnson, and also did a stint at Brookings.

In today’s column, I’m not going to blame him for any of LBJ’s mistakes (being a big spender, creating Medicare and Medicaid).

Instead, I’m going to praise Okun for his honesty. Is his book, Equality and Efficiency: The Big Trade Off, he openly acknowledged that higher taxes and bigger government – policies he often favored – hindered economic performance.

Sadly, some folks on the left today are not similarly honest.

A column in the New York Times by Jim Tankersley looks at the odd claim, put forth by Elizabeth Warren and others, that class-warfare taxes are good for growth.

Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth… Generations of economists, across much of the ideological spectrum, have long held that higher taxes reduce investment, slowing economic growth. …Ms. Warren and other leading Democrats say the opposite. …that her plans to tax the rich and spend the revenue to lift the poor and the middle class would accelerate economic growth, not impede it. …That argument tries to reframe a classic debate…by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans.

Most people, when looking at why some nations grow faster and become more prosperous, naturally recognize that there’s a trade-off.

So what’s the basis of this counter-intuitive and anti-empirical assertion from Warren, et al?

It’s partly based on their assertion that more government spending is an “investment” that will lead to more growth. In other words, politicians ostensibly will allocate new tax revenues in a productive manner.

Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth. …Ms. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. …a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.

To be fair, this isn’t a totally absurd argument.

The Rahn Curve, for instance, is predicated on the notion that some spending on core public goods is correlated with better economic performance.

It’s only when government gets too big that the Rahn Curve begins to show that spending has a negative impact on growth.

For what it’s worth, modern research says the growth-maximizing size of government is about 20 percent of economic output, though I think historical evidence indicates that number should be much lower.

But even if the correct figure is 20 percent of GDP, there’s no support for Senator Warren’s position since overall government spending currently consumes close to 40 percent of U.S. economic output.

Warren and others also make the discredited Keynesian argument about government spending somehow kick-starting growth, ostensibly because a tax-and-spend agenda will give money to poor people who are more likely to consume (in the Keynesian model, saving and investing can be a bad thing).

Democrats cite evidence that transferring money to poor and middle-class individuals would increase consumer spending…liberal economists say taxes on high-earners could spur growth even if the government did nothing with the revenue because the concentration of income and wealth is dampening consumer spending.

This argument is dependent on the notion that consumer spending drives the economy.

But that’s not the case. As I explained two years ago, consumer spending is a reflection of a strong economy, not the driver of a strong economy.

Which helps to explain why the data show that Keynesian stimulus schemes routinely fail.

Moreover, the Keynesian model only says it is good to artificially stimulate consumer spending when trying to deal with a weak economy. There’s nothing in the theory (at least as Keynes described it) that suggests it’s good to endlessly expand the public sector.

The bottom line is that there’s no meaningful theoretical or empirical support for a tax-and-spend agenda.

Which is why I think this visual very succinctly captures what Warren, Sanders, and the rest (including international bureaucracies) are proposing.

P.S. By the way, I think Tankersley’s article was quite fair. It cited arguments from both sides and had a neutral tone.

But there’s one part that rubbed me the wrong way. He implies in this section that America’s relatively modest aggregate tax burden somehow helps the left’s argument.

Fueling their argument is the fact that the United States now has one of the lowest corporate tax burdens among developed nations — a direct result of President Trump’s 2017 tax cuts. Tax revenues at all levels of government in the United States fell to 24.3 percent of the economy last year, the Organization for Economic Cooperation and Development reported on Thursday, down from 26.8 percent in 2017. America is now has the fourth lowest tax burden in all of the O.E.C.D.

Huh? How does the fact that we have lower taxes that other nations serve as “fuel” for the left?

Since living standards in the United States are considerably higher than they are in higher-taxed Europe, it’s actually “fuel” for those of us who argue against class-warfare taxation and bigger government.

Though maybe Tankersley is suggesting that America’s comparatively modest tax burden is fueling the greed of U.S. politicians who are envious of their European counterparts?

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Whenever I review a tax proposal, I automatically check whether it is consistent with the “Holy Trinity” of good policy.

  1. Low marginal tax rates on productive activity such as work and entrepreneurship.
  2. No tax bias (i.e., extra layers of tax) penalizing saving and investment.
  3. No complicating preferences and loopholes that encourage inefficient economic choices.

A good proposal satisfies one of these three principles. A great proposals satisfies all of them.

And that’s a good way of introducing today’s topic, which is about whether we should replace “depreciation” with “expensing.” Or, for those who aren’t familiar with technical tax terminology, this issue revolves around whether there should be a tax penalty on new investment.

Erica York of the Tax Foundation has a nice summary of the issue.

While tax rates matter to businesses, so too does the measure of income to which those tax rates apply. The corporate income tax is a tax on profits, normally defined as revenue minus costs. However, under the current tax code, businesses are unable to deduct the full cost of certain expenses—their capital investments—meaning the tax code is not neutral and actually increases the cost of investment. …Typically, when businesses incur capital investment costs, they must deduct them over several years according to preset depreciation schedules, instead of deducting them immediately in the year the investment occurs. …the delay in taking deductions means the present value of the write-offs (adjusted for inflation and the time value of money) is smaller than the original cost. …The delay effectively shifts the tax burden forward in time as businesses face a higher tax burden today because they cannot fully deduct their costs, and it decreases the after-tax return on the investment. …Ultimately, this means that the corporate income tax is biased against investment in capital assets to the extent that it makes the investor wait years or decades to claim the cost of machines, equipment, or factories on their tax returns.

Here’s a visual depiction of how the current system works.

The key thing to understand is that businesses are forced to overstate their income, which basically means a higher tax rate on actual income (thus violating principle #1).

Back in 2017, Adam Michel and Salim Furth wrote about this topic for the Heritage Foundation.

Here is their main argument.

The current system gives companies a partial deduction for each dollar invested in the economy. The real value of the deduction depends on the vagaries of the tax code, future inflation, and the company’s cost of borrowing. The classification of investments by type and the somewhat arbitrary assignment of the number of years over which each investment must be written off are called depreciation schedules. The imperfect design of these schedules creates unequal tax rates on investment across industries. …Adopting full expensing would reduce effective tax rates everywhere, but especially in industries disfavored under the current system. The result would be more economically efficient: The tax code would no longer be steering investment to arbitrarily favored industries. …Expensing lowers the cost of capital investments. …Both the U.S. capital stock and the demand for labor to operate and service the new investments would be permanently larger. A larger capital stock and higher labor demand would increase the number of jobs and place upward pressure on wages.

A key takeaway is that the tax bias created by the current system is a penalty on new investment (thus violating principle #2).

And the current approach of depreciation also is incredibly complicated (thus violating principle #3).

Expensing can also significantly cut compliance costs. According to IRS research, business tax compliance costs are over $100 billion per year, representing a massive waste of money and effort. Other estimates place the cost of complying with depreciation schedules alone at over $23 billion annually, or 448 million hours each year. Considering that the total compliance cost for traditional C corporations is equal to 14 percent of their taxes paid, expensing could make major inroads toward simplifying business taxpaying and lowering compliance costs.

Unsurprisingly, some politicians are on the wrong side.

Not only are they against a neutral system based on expensing, Erica York explains that they want to make the current system even more biased against new investment.

…proposals to stretch deductions over longer periods of time, such as those from Senators Warren (D-MA) and Sanders (I-VT)…would increase the cost of capital, bias the tax code against investment, and lead to less capital accumulation and lower productivity, output, and wages.

Yes, I know readers are shocked to learn that “Crazy Bernie” and “Looney Liz” want to make a bad situation even worse.

Returning to the policy discussion, the fight over depreciation vs. expensing also matters for national competitiveness.

In another study for the Tax Foundation, Amir El-Sibaie looks at how the U.S. compares to other developed nations.

Currently, the U.S. tax code only allows businesses to recover an average of 67.7 percent of a capital investment (e.g., an investment in buildings, machinery, intangibles, etc.). This is slightly higher than the Organisation for Economic Co-operation and Development’s (OECD) average capital allowance of 67.2 percent. …Since 1979, overall treatment of capital assets has worsened in the U.S., dropping from an average capital allowance of 75.8 percent in the 1980s to an average capital allowance of 67.7 percent in 2018. Capital allowances across the OECD have also declined, but by a lesser extent over the same period: 72.4 percent in the 1980s to 67.2 percent in 2018. …The countries with the best average treatment of capital assets are Estonia (100 percent), Latvia (100 percent), and Slovakia (78.2 percent). Countries with the worst treatment of capital assets are Chile (41.7 percent), the United Kingdom (45.7 percent), and Spain (54.5 percent).

The bad news is that the United States is much worse than Estonia (the gold standard for neutral business taxation).

The good news is that we’re not in last place. Here’s a comparison of the United States to the average of other developed nations.

By the way, there are folks in the United Kingdom who want to improve that nation’s next-to-last score.

Here are some excerpts from a column in CapX by Eamonn Ives.

…successive governments have…cut the headline rate of corporation tax. …That said, some of the positive effects of the cuts to corporation tax were blunted by changes to the tax code which allow businesses to write off the cost of capital expenditure… Typically, corporate tax systems let firms deduct day to day expenses – like labour and materials – right away. However, the cost of longer-term investments – such as those in machinery and industrial premises – can only be deducted in a piecemeal manner, over a set period of time. …this creates a problem for businesses, because the more a tax deduction for capital investment is spread out, the less valuable it becomes to a firm. This is not only because of inflationary effects, but also due to what economists would call the time value of money… Thankfully, however, a solution is at hand to iron out this peculiarity. ‘Full expensing’ allows firms to immediately and entirely deduct the cost of any investment they undertake from their corporation tax bill.

He cites some of the research on the topic.

A 2017 study, from Eric Ohrn, found that in parts of America, full expensing has increased investment by 17.5%, and has increased wages by 2.5%. Employment also rose, by 7.7% after five years, as did production, by 10.5%. If the same results were replicated in the UK, the average worker could stand to earn a staggering additional £700 a year. Another academic study, this time from the UK itself, found that access to more generous capital allowances for small and medium sized enterprises which were offered prior to fiscal year 2008/09 increased the investment rate by 11%.

Let’s conclude.

When I discuss this issue, I usually start by asking an audience for a definition of profit.

That part is easy. Everyone agrees that profit is the difference between cost and revenue.

To show why depreciation should be replaced by expensing, I then use the very simple example of a lemonade stand.

In the start-up year for this hypothetical lemonade stand, our entrepreneur has total costs of $25 (investment costs for the actual stand and operating costs for the lemons) and total revenue of $30. I then explain the different tax implications of expensing and depreciation.

As you can see, our budding entrepreneur faces a much higher tax burden when forced to depreciate the cost of the lemonade stand.

For all intents and purposes, depreciation mandates that businesses overstate profits.

This is unfair. And it’s also bad economic policy because some people will respond to these perverse incentives by deciding not to invest or be entrepreneurial.

To be fair, businesses eventually are allowed to deduct the full cost of investments. But this process can take as long as 39 years.

Here’s another comparison, which shows the difference over time between expensing and a five-year deprecation schedule. I’ve also made it more realistic by showing a loss in the first year.

In both examples, our entrepreneur’s five-year tax bill is $3.

But the timing of the tax matters, both because of inflation and the “time value” of money. That’s why, in a good system, there should only be a tax when there’s an actual profit.

Needless to say, good tax reform plans such as the flat tax are based on expensing rather than depreciation.

P.S. This principle applies even if businesses are investing in private jets.

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I’m a big fan of Marco Rubio. The Florida Senator has been very good on some big issues and on some small issues. And he’s willing to fight important philosophical battles.

No politician is perfect (for instance, Rubio defends sugar subsidies), so I’ve always judged them by whether – on net – they’re on the side of more freedom or more statism.

Which is the ideal framework for today’s column.

Earlier this month, Rubio wrote a column for National Review asserting it is time for “common-good capitalism.”

Pope Leo XIII wrote that the ultimate goal for any society should be to “make men better” by providing people the opportunity to attain the dignity that comes from hard work, ownership, and raising a family. …What makes this society possible is the rights of both workers and businesses, but also their obligations to each other. …In the economy Pope Leo described, workers and businesses are not competitors for their share of limited resources, but partners in an effort that strengthens the entire nation. …This…doesn’t describe the economy we actually have today. Large corporations have become vehicles for shareholders and banks to assert claims to cash flows, rather than engines of productive innovation. Over the past 40 years, the financial sector’s share of corporate profits increased from about 10 to nearly 30 percent. The share of profits sent to shareholders increased by 300 percent. This occurred while investment of those profits back into the companies’ workers — and future — dropped 20 percent. …This is what it looks like when, as Pope Francis warned, “finance overwhelms the real economy.” …Diagnosing the problem is something we should be able to achieve… Ultimately, deciding what the government should do about it must be the core question of our politics. …What we need to do is restore common-good capitalism. …our nation does not exist to serve the interests of the market; the market exists to serve our nation.

Some of this rhetoric rubs me the wrong way (and citing an economic illiterate like Pope Francis is appalling), but what really matters is whether Rubio is proposing more power for government or less power for government.

That’s hard to say because he doesn’t offer much in terms of policy.

Though I’m not overly impressed by the handful of ideas that were mentioned.

I don’t pretend to know anything about rare-earth minerals, but it’s laughable to think the Small Business Administration is a wellspring of innovation, and there’s plenty of evidence that paid parental leave is bad policy (child tax credits aren’t bad, but there are other tax policies that are far better for families).

On the other hand, Rubio also has been making the case for “full expensing,” which is a very good policy.

Since we don’t have any additional details, I don’t know whether his new agenda is a net plus or a net negative.

Kevin Williamson of National Review, by contrast, is definitely not a fan of Rubio’s approach. Here’s some of what he wrote last week.

Senator Rubio…joins the ranks of those who propose to reinvent capitalism — “common-good capitalism,” he calls it. …Senator Rubio, working from remarks originally delivered in a speech at Catholic University, references a series of popes — Leo XIII, mostly, but also Benedict and Francis — to describe (whether the senator understands this or not) the familiar moral basis of fascist economic thinking… I write this as a fellow Catholic: God defend us from these backward, primitive-minded Catholic social reformers. …power is what is at issue. Men such as Senator Rubio desire for themselves the power to overrule markets — to limit trade and property rights, enterprise and exchange — in the service of what Senator Rubio describes as the “common good.” The problems with that are…Senator Rubio does not know what the common good is and has no way of knowing. …What we need from men in government is not the quasi-metaphysical project of reinventing capitalism in the name of the “common good.” …This is not a brief for anarchism. …We need stability and predictability from a government that secures our liberty and our property in the least obtrusive way that can be managed.

And he followed up two days later with another critical column, even equating Rubio’s agenda to Elizabeth Warren’s loony proposal.

From Senator Marco Rubio and his “common-good capitalism” to Senator Elizabeth Warren and her “accountable capitalism,” politicians right and left who want politicians to have more power over private economic decisions assume a dilemma in which something called “capitalism” must be balanced against or made subordinate to something called the “common good.” This is the great forgetful stupidity of our time. …Capitalism, meaning security in one’s own property and in the right to work and to trade, is the common good… What is contemplated by Senator Rubio and Senator Warren — along with a few batty adherents of the primitive nonidea known in Catholic circles as “integralism” and everywhere else more forthrightly as “totalitarianism” — is to invert the purpose of the U.S. government. …We’re supposed to give up our property rights so that these two and their ilk can use corporate welfare to fortify their own political interests? …The “stakeholder” thesis put forward by Rubio and Warren would strip shareholders of control of their own property and use that property in the service of interests of other parties, who are not its rightful owners. …the great prosperity currently enjoyed by North Americans and Western Europeans — and, increasingly, by the rest of the world — is a product…of capitalism… It wasn’t magic. It wasn’t the cleverness of Senator Rubio or Senator Warren. It wasn’t the big ideas of Pope Francis, to the modest extent that he has any economic ideas worth identifying as such.

Oren Cass argues that Williamson is both unfair and wrong about Rubio.

Williamson believes that Rubio wants to “be . . . the bandit, taking control of other people’s property”; “strip shareholders of control of their own property,” which “is robbery”; “redefine away the property rights of millions of Americans”; “limit . . . property rights”; and “run Apple or Facebook or Ford.” …I’ve read the Rubio speech carefully and can find none of this. …Rubio’s project is to explore the vast gray expanse between the white of liberty and the black of property theft. …This is the terrain on which many of American history’s great public deliberations have unfolded, yielding policies from Hamilton’s Report on Manufactures to the “internal improvements” of the early 1800s, the tariff debates between McKinley and Bryan, Teddy Roosevelt’s trust-busting, Franklin Roosevelt’s New Deal, Kennedy’s space race, and Reagan’s import quotas. Property theft all of it, at gunpoint no less, if I understand Williamson correctly. …Someone will have to make a value judgment as to what “goods” are in fact “good” and thus worthy of providing publicly.

Cass is right that there’s a lot of space between pure capitalism and awful statism. I’ve made the same point.

But it does worry me that he favorably cites a bunch of historical policy mistakes, such as protectionism, antitrust laws, and the New Deal.

Jonah Goldberg makes the should-be-obvious point that the United States is hardly a laissez-faire paradise.

For as long as I can remember, people on the left have complained about “unfettered capitalism.” …Senator Bernie Sanders said earlier this year that “we have to talk about democratic socialism as an alternative to unfettered capitalism.” …Recently, the concern with capitalism’s unfetteredness has become bipartisan. Senators Josh Hawley and Marco Rubio have taken up the cause in a series of speeches and policy proposals. Conservative intellectuals such as Patrick Deneen and Yoram Hazony have taken dead aim at unrestrained capitalism. J. D. Vance, the author of Hillbilly Elegy, and Tucker Carlson of Fox News have suggested that economic policy is run by . . . libertarians. My response to this dismaying development is: What on earth are these people talking about? …If you think there are no restraints on the market or on economic activity, why on earth do we have the Department of Labor, HHS, HUD, FDA, EPA, OSHA, or IRS? The United States has one of the most progressive tax systems in the world (i.e., the share of taxes paid by the rich versus everyone else). If you take into account all social-welfare spending, we spend more on entitlements than plenty of rich countries. Now, if you think we don’t spend, regulate, or tax enough, fine. Make your case. If you think we should spend and tax differently, I’m right there with you. But the notion that the United States is a libertarian fantasyland is itself a fantasy.

Amen.

And this brings me to my modest contribution to this discussion.

I’ve already admitted that Rubio hasn’t provided enough details to assess whether he wants more liberty or more statism.

That being said, I’m skeptical of “common-good capitalism” in the same way I’m suspicious about “nationalist conservatism” and “reform conservatism” (and we know for a fact that “kinder-and-gentler conservatism” and “compassionate conservatism” meant more statism).

So here’s my challenge to Rubio and Cass (as well as everyone else who proposes an alternative to Reagan-style small-government conservatism). Please specifically identify how much government you want. Yes, there is a “vast gray expanse” between pure laissez-faire and pure statism, as Cass noted. But he didn’t say where in that expanse he wants America to be.

To help people respond to this challenge, here’s a chart, based on the data from Economic Freedom of the World. In that “vast gray expanse” between pure capitalism and pure statism, should policy makers try to shift America in the direction of Hong Kong? Or in the direction of Sweden, or even Greece?

The bottom line is that we need to climb the scale (i.e., have more overall economic liberty) if we want more prosperity.

That’s what will help facilitate all the things, such as good jobs and strong communities, that Senator Rubio wants for America.

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With their punitive proposals for wealth taxes, Bernie Sanders and Elizabeth Warren are leading the who-can-be-craziest debate in the Democratic Party.

But what would happen if either “Crazy Bernie” or “Looney Liz” actually had the opportunity to impose such levies?

At the risk of gross understatement, the effect won’t be pretty.

Based on what’s happened elsewhere in Europe, the Wall Street Journal opined that America’s economy would suffer.

Bernie Sanders often points to Europe as his economic model, but there’s one lesson from the Continent that he and Elizabeth Warren want to ignore. Europe has tried and mostly rejected the wealth taxes that the two presidential candidates are now promising for America. …Sweden…had a wealth tax for most of the 20th century, though its revenue never accounted for more than 0.4% of gross domestic product in the postwar era. …The relatively small Swedish tax still was enough of a burden to drive out some of the country’s brightest citizens. …In 2007 the government repealed its 1.5% tax on personal wealth over $200,000. …Germany…imposed levies of 0.5% and 0.7% on personal and corporate wealth in 1978. The rate rose to 1% in 1995, but the Federal Constitutional Court struck down the wealth tax that year, and it was effectively abolished by 1997. …The German left occasionally proposes resurrecting the old system, and in 2018 the Ifo Institute for Economic Research analyzed how that would affect the German economy. The authors’ baseline scenario suggests that long-run GDP would be 5% lower with a wealth tax, while employment would shrink 2%. …The best argument against a wealth tax is moral. It is a confiscatory tax on the assets from work, thrift and investment that have already been taxed at least once as individual or corporate income, and perhaps again as a capital gain or death tax. The European experience shows that it also fails in practice.

Karl Smith’s Bloomberg column warns that wealth taxes would undermine the entrepreneurial capitalism that has made the United States so successful.

…a wealth tax…would allow the federal government to undermine a central animating idea of American capitalism. …The U.S. probably could design a wealth tax that works. …If a country was harboring runaway billionaires, the U.S. could effectively lock it out of the international financial system. That would make it practically impossible for high-net-worth people to have control over their wealth, even if it they could keep the U.S. government from collecting it. The necessity of this type of harsh enforcement points to a much larger flaw in the wealth tax… Billionaires…accumulate wealth…it allows them to control the destiny of the enterprises they founded. A wealth tax stands in the way of this by requiring billionaires to sell off stakes in their companies to pay the tax. …One of the things that makes capitalism work is the way it makes economic resources available to those who have demonstrated an ability to deploy them effectively. It’s the upside of billionaires. …A wealth tax designed to democratize control over companies would strike directly at this strength. …a wealth tax would penalize the founders with the most dedication to their businesses. Entrepreneurs would be less likely to start businesses, in Silicon Valley or elsewhere, if they think their success will result in the loss of their ability to guide their company.

The bottom line, given the importance of “super entrepreneurs” to a nation’s economy, is that wealth taxes would do considerable long-run damage.

Andy Kessler, in a column for the Wall Street Journal, explains that wealth taxes directly harm growth by penalizing income that is saved and invested.

Even setting comical revenue projections aside, the wealth-tax idea doesn’t stand up to scrutiny. Never mind that it’s likely unconstitutional. Or that a wealth tax is triple taxation… The most preposterous part of the wealth-tax plans is their supporters’ insistence that they would be good for the economy. …a wealth tax would suck money away from productive investments. …liberals in favor of taxation always trot out the tired trope that the poor drive growth by spending their money while the rich hoard it, tossing gold coins in the air in their basement vaults. …So just tax the rich and government spending will create great jobs for the poor and middle class. This couldn’t be more wrong. As anyone with $1 billion—or $1,000—knows, people don’t stuff their mattresses with Benjamins. They invest them. …most likely…in stocks or invested directly in job-creating companies… A wealth tax takes money out of the hands of some of the most productive members of society and directs it toward the least productive uses. …existing taxes on interest, dividends and capital gains discourage the healthy savings that create jobs in the economy. These are effectively taxes on wealth—and we don’t need another one.

Professor Noah Smith leans to the left. But that doesn’t stop him, in a column for Bloomberg, from looking at what happened in France and then warning that wealth taxes have some big downsides.

Studies on the effects of taxation when rates are moderate might not be a good guide to what happens when rates are very high. Economic theories tend to make a host of simplifying assumptions that might break down under a very high-tax regime. …One way to predict the possible effects of the taxes is to look at a country that tried something similar: France, where Piketty, Saez and Zucman all hail from. …France…shows that inequality, at least to some degree, is a choice. Taxes and spending really can make a big difference. But there’s probably a limit to how much even France can do in this regard. The country has experimented with…wealth taxes…with disappointing results. France had a wealth tax from 1982 to 1986 and again from 1988 to 2017. …The wealth tax might have generated social solidarity, but as a practical matter it was a disappointment. The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium… France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax.

In other words, the much-maligned Laffer Curve is very real. When looking at total tax collections from the rich, the wealth tax resulted in less money for France’s greedy politicians.

And this chart from the column shows that French lawmakers are experts at extracting money from the private sector.

The dirty little secret, of course, is that lower-income and middle-class taxpayers are the ones being mistreated.

By the way, Professor Smith’s column also notes that President Hollande’s 75 percent tax rate on the rich also backfired.

Let’s close with a report from the Wall Street Journal about one of the grim implications of Senator Warren’s proposed tax.

Elizabeth Warren has unveiled sweeping tax proposals that would push federal tax rates on some billionaires and multimillionaires above 100%. That prospect raises questions for taxpayers and the broader economy… How might that change their behavior? And would investment and economic growth suffer? …The rate would vary according to the investor’s circumstances, any state taxes, the profitability of his investments and as-yet-unspecified policy details, but tax rates of over 100% on investment income would be typical, especially for billionaires. …After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with.

Here’s a chart from the story (which I’ve modified in red for emphasis) showing that investors would face effective tax rates of more than 100 percent unless they somehow managed to earn very high returns.

For what it’s worth, I’ve been making this same point for many years, starting in 2012.

Nonetheless, I’m glad to see it’s finally getting traction. Hopefully this will deter lawmakers from ever imposing such a catastrophically bad policy.

Remember, a tax that discourages saving and investment is a tax that results in lower wages for workers.

P.S. Switzerland has the world’s best-functioning wealth tax (basically as an alternative to other forms of double taxation), but even that levy is destructive and should be abolished.

P.P.S. Sadly, because their chief motive is envy, I don’t think my left-leaning friends can be convinced by data about economic damage.

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The hard part about being a libertarian is that there are endless opportunities to be frustrated. Especially if you’re job is trying to convince politicians to restrain the size and scope of government when that’s not in their self interest.

One of my special frustrations, though, is that many people don’t understand economic history.

Today, let’s talk about another example of bad economic history. Many people think corporations are rapacious entities that – in the absence of wise government – will create monopolies that screw workers with sweatshop conditions and screw consumers with ever-higher prices.

Much of this mythology goes back to the era of supposed “Robber Barons” in the late 1800s.

Fortunately, in a column for FEE, Professor Burton Folsom shared an excerpt from his book on the topic. He notes that there was considerable economic liberty – and considerable economic progress – during that era.

The years…from 1865 to the early 1900s, saw the U.S. encourage entrepreneurs indirectly by limiting government. Slavery was abolished and so was the income tax. Federal spending was slashed… American politicians learned from the past. They had dabbled in federal subsidies from steamships to transcontinental railroads, and those experiments dismally failed. Politicians then turned to free markets as a better strategy for economic development. The world-dominating achievements of Cornelius Vanderbilt, James J. Hill, John D. Rockefeller, and Charles Schwab validated America’s unprecedented limited government.

Yet that’s not the story you find in most history books.

Professor Folsom explores why there’s such a poor understanding and finds bias in the academy, as well as an inability to understand the difference between honest wealth and politically connected wealth.

Why is it, then, that for so many years, most historians have been teaching the opposite lesson? …most historians have preached that many, if not all, entrepreneurs were “robber barons.” They did not enrich the U.S. with their investments; instead, they bilked the public and corrupted political and economic life in America. The catalyst for this negative view of American entrepreneurs was historian Matthew Josephson, who wrote a landmark book, The Robber Barons. …Josephson began research for his book in 1932, the nadir of the Great Depression. Businessmen were a handy scapegoat for that crisis, and Josephson embraced a Marxist view that the Great Depression was perhaps the last phase in the fall of capitalism and the triumph of communism. …“I am not a complete Marxist,” Josephson insisted, “But what I took to heart for my own project was his theory of the process of industrial concentration… Josephson missed the distinction between market entrepreneurs like Vanderbilt, Hill, and Rockefeller and political entrepreneurs like Collins, Villard, and Gould. …Most of Josephson’s ire is directed toward political entrepreneurs. The subsidized Henry Villard of the Northern Pacific Railroad, with his “bad grades and high interest charges”… But it never occurs to Josephson that the subsidies government gave these railroads created the incentives. …If Josephson’s research was so sloppy, and his interpretation so biased, how did his Robber Baron view come to prevail in the writing of U.S. history? …Progressive historians had begun to dominate the writing of history and they were eager to blame a new generation of robber barons for the collapse of the American economy.

Now let’s take a closer look at two infamous companies.

We’ll begin with Standard Oil, which has a modern-day reputation of being a greedy monopolist.

Yet as David Weinberger explained for FEE, that’s an odd way of describing a company that continuously lowered prices.

In 1870, when it was in its early years, Standard Oil owned just 4 percent of the petroleum market. John D. Rockefeller, however, obsessed over improving efficiency and cutting costs. Through economies of scale and vertical integration, he vastly improved oil-refining efficiency. His business grew as a result. By 1874, his share of the petroleum market jumped to 25 percent, and by 1880 it skyrocketed to about 85 percent. Meanwhile, the price of oil plummeted from 30 cents per gallon in 1869 to eight cents in 1885. …His business was a model of free-market efficiency.

The government ultimately used antitrust laws to dismantle the company, but it’s worth noting that the courts never found any evidence of actual monopolistic behavior.

In 1911, the court declared Standard Oil a monopoly and ordered its breakup. …economist John S. McGee reviewed over 11,000 pages of trial testimony, including the charges brought by Standard Oil’s competitors. Publishing his findings in the Journal of Law and Economics, he concluded that there was “little to no evidence” of wrongdoing, adding that “Standard Oil did not use predatory price cutting to acquire or keep monopoly power.” Furthermore, and also in contradiction to monopoly theory, Standard Oil’s share of the market had declined from close to 90 percent in the late 1800s to about 65 percent at the time of the court’s ruling. …In other words, Standard Oil did precisely the opposite of what monopoly theory maintains—it reduced rather than raised prices, it increased rather than cut production, it lost rather than “controlled” market share, and it paid its employees more rather than less than its competitors—yet the theory that Standard Oil engaged in “predatory practices” and “exploited” consumers has prevailed in our history books.

Now let’s look at the United Fruit Corporation, which history tells us was a master of brutal exploitation.

Yet a new academic study by Esteban Mendez-Chacon and Diana Van Patten discovered that the workers of Costa Rica were beneficiaries (h/t: Alex Tabarrok).

These excerpts from the abstract provide a very good summary of what really happened.

The United Fruit Company (UFC)…was given a large land concession in Costa Rica — one of the so-called “Banana Republics”— from 1889 to 1984. Using administrative census data with census-block geo-references from 1973 to 2011, we implement a geographic regression discontinuity (RD) design that exploits a quasi-random assignment of land. We find that the firm had a positive and persistent effect on living standards. Regions within the UFC were 26% less likely to be poor in 1973 than nearby counterfactual locations, with only 63% of the gap closing over the following 3 decades. Company documents explain that a key concern at the time was to attract and maintain a sizable workforce, which induced the firm to invest heavily in local amenities that likely account for our result. We then build a dynamic spatial model in which a firm’s labor market power within a region depends on how mobile workers are across locations and run couterfactual exercises. The model is consistent with observable spatial frictions and the RD estimates, and shows that the firm increases aggregate welfare
by 2.9%.

Here’s a look at the data showing lower poverty rates based on proximity to company lands.

And here are other measures of well-being for populations on either side of those boundaries.

What’s especially interesting is that the benefits have remained even several decades after the company’s concession ended.

By the way, I’m not saying that the United Fruit Company was motivated by anything other than profits.

Nor am I saying that Standard Oil was guided by anything beyond making money.

What I am saying, however, is that Adam Smith was right. The pursuit of self interest (whether by companies, workers, entrepreneurs, etc) is what creates mass prosperity. And what enabled an end to child labor.

Here are two videos for those who want further background. Here’s Professor Brian Domitrovic analyzing the “Gilded Age.”

And here’s an excerpt of the great Milton Friedman discussing the so-called Robber Barons.

P.S. By today’s standards, workers didn’t have great lives in the 1800s. But it’s important to understand that what we perceive today as “sweatshop conditions” were actually a big improvement over the grinding poverty of subsistence agriculture. Similarly, working conditions in modern-era third world sweatshops seem awful, but they are an avenue of upward mobility for people who otherwise would suffer unimaginable material deprivation.

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Yesterday, I shared part of an interview that focused on Mayor Pete Buttigieg’s scheme to give more subsidies to colleges, thus transferring money from poorer taxpayers to richer taxpayers.

Here’s the other part of the interview, which revolved around a very bad idea to copy nations that impose price controls on prescription drugs.

In some sense, this is a debate on price controls, which have a long history (going all the way back to Ancient Rome) of failure.

But my comments focused primarily on the adverse consequences of Pelosi’s approach.

And if you want more details, Doug Badger explained how Pelosi’s approach would backfire in a report for the Heritage Foundation. He starts with an explanation of the legislation.

The Lower Drug Costs Now Act of 2019 (H.R. 3), introduced last week with the backing of House Speaker Nancy Pelosi, D-Calif., would double down on the failures of existing government policies that have distorted prescription drug prices and contributed to higher health care costs. …H.R. 3 would establish a system in which the U.S. government bases prices for cutting-edge drug treatments on those set by foreign governments. The measure would set an upper price limit at 1.2 times a drug’s average price in six other countries (Australia, Canada, France, Germany, Japan, and the United Kingdom). The secretary of health and human services then would seek to “negotiate” prices below that upper limit for at least 25—and as many as 250—drugs each year. …A manufacturer that declined to negotiate the price of any of its products would incur an excise tax of up to 95% of the revenues it derived from that product in the preceding year.

Doug then warns against an expansion of government power.

The bill represents an unprecedented exercise of raw government power. The federal government already imposes price curbs across a range of programs, requiring manufacturers to pay the government rebates… These provisions all are confined to federal programs, but nonetheless have distorted drug prices throughout the health sector. It’s one thing for the government to dictate the prices it pays in programs it finances. It is quite another for the government to impose a price for a product’s private sale and to extract money from a company on a long-ago settled transaction.

He then concludes by showing some of the negative consequences.

…aggressive government price-setting has damaged innovation and limited access to new treatments in all six of the countries whose price controls the bill would import. If the U.S. adopts price controls, it risks the same results here. Access to new drugs is much greater in the U.S. than in countries with price controls, in part because of having shunned price controls. …This lack of access can have damaging effects. A study by IHS Markit…concluded that Americans gained 201,700 life years as a result of faster access to new medicines. …Countries with price controls also suffer a decline in pharmaceutical research and development. In 1986, European firms led the U.S. in spending on pharmaceutical research and development by 24%. After the imposition of price control regimes, they fell behind. By 2015, they lagged the U.S. by 40%. …the president’s Council of Economic Advisers…concluded that while price controls might save money in the short term, they would cost more money in the long run. Government price-setting, it wrote, “makes better health care costlier in the future by curtailing innovation.”

As you can see, price controls have a deadly effect in the short run (the 201,700 life years).

But as I stated in the interview, the far greater cost – in terms of needless deaths – would become apparent in the long run as new drugs no longer come to market.

By the way, it’s not just me, or folks on the right, who recognize that there will be adverse consequences from price controls.

Writing for left-leaning Vox, Sarah Kliff acknowledges that there are trade-offs.

The United States is exceptional in that it does not regulate or negotiate the prices of new prescription drugs when they come onto market. …And the problems that causes are easy to see, from the high copays at the drugstore to the people who can’t afford lifesaving medications. What’s harder to see is that if we did lower drug prices, we would be making a trade-off. Lowering drug profits would make pharmaceuticals a less desirable industry for investors. And less investment in drugs would mean less research toward new and innovative cures. …In other words: Right now, the United States is subsidizing the rest of the world’s drug research by paying out really high prices. If we stopped doing that, it would likely mean fewer dollars spent on pharmaceutical research — and less progress developing new drugs for Americans and everybody else.

Here’s a chart from her article, which I’ve modified (in red) to underscore how other nations are free-riding because American consumers are picking up the tab for research and development.

By the way, I have no idea where the red lines actually belong. I’m just trying to emphasize that consumers who pay the market price (or closer to the market price) are the ones why underwrite the cost of discovering new drugs and treatments.

And Ms. Kliff definitely agrees this trade-off exists.

Every policy decision comes with trade-offs… If the United States began to price regulate drugs, medications would become cheaper. That would mean Americans have more access to drugs but could also expect a decline in research and development of new drugs. We might have fewer biotech firms starting up, or companies deciding it’s worth bringing a new drug to market. …Are we, as a country, comfortable paying higher prices for drugs to get more innovation? Or would we trade some of that innovation to make our drugs more accessible to those of all income levels?

For what it’s worth, I don’t actually think there’s much of a trade-off. I choose markets, both for the moral reason and because I want to maximize long-run health benefits for the American people.

P.S. Because pharmaceutical companies got in bed with the Obama White House to support Obamacare, some people may be tempted to say Pelosi’s legislation is what they deserve. While I fully agree that it’s despicable for big companies to get in bed with big government, please remember that the main victims of Pelosi’s legislation will be sick people who need new treatments.

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