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Archive for the ‘Federalism’ Category

The famous French diplomat Charles Maurice de Talleyrand supposedly said that a weakness of the Bourbon monarchs was that they learned nothing and forgot nothing.

If so, the genetic descendants of the Bourbons are now in charge of Europe.

But before explaining why, let’s first establish that Europe is in trouble. I’ve made that point (many times) that the continent is in trouble because of statism and demographic change.

What’s far more noteworthy, though, is that even the Europeans are waking up to the fact that the continent faces a very grim future.

For instance, the bureaucrats in Brussels are pessimistic, as reported by the EU Observer.

…the report warns of a longer term risk for the EU economy. “As expectations of low growth ahead affect investment today, there is potential for a vicious circle,” the commission’s director general for economic and financial affairs writes in the report’s foreword. “In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), ” Marco Buti writes.

The people of Europe share that grim assessment.

Pew has some very sobering data on angst across the continent.

Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013.

Here’s the relevant chart.

Establishment-oriented voices in the United States also agree that the outlook is rather dismal.

Writing in the Washington Post, Sebastian Mallaby offers a grim assessment of Europe’s future.

…since 2008…, the 28 countries in the European Union managed combined growth of just 4 percent. And in the subset consisting of the eurozone minus Germany, output actually fell. …most of the Mediterranean periphery has suffered a lost decade. …The unemployment rate in the euro area stands at 9.8 percent, more than double the U.S. rate. Unemployment among Europe’s youth is even more appalling: In Greece, Spain, France, Croatia, Italy, Cyprus and Portugal, more than 1 in 4 workers under 25 are jobless.

The bottom line is that there’s widespread consensus that Europe is a mess and that things will probably get worse unless there are big changes.

But the key question, as always, is whether the changes are positive or negative. And this is why I started with a reference to the Bourbon kings. European leaders today also are infamous for learning nothing and forgetting nothing.

Indeed, the proponents of bad policy want to double down on the mistakes of bigger government and more centralization.

The International Monetary Fund (aka, the “Dr. Kevorkian” or “dumpster fire” of the global economy), led by France’s Christine Lagarde, actually is urging a new form of redistribution in Europe.

The International Monetary Fund called on Thursday for the creation of a fund…in the euro zone… Managing Director Christine Lagarde said… “countries would be pooling budgetary resources in a common pot which could be used for projects and certain operations”

Lagarde says the new fund should have strings attached, so that nations could access the loot if they complied with the EU’s budget rules, and also if they use the money for structural reform.

That sounds prudent, but only until you look at the fine print.

The current budget rules are misguided and are more likely to encourage tax hikes rather than spending restraint. And while many European nations need good structural reform, that’s not what the IMF has in mind.

Lagarde told a news conference the new fund could pay for projects related to migration, refugees, security, energy and climate change.

Instead, it appears that this is just a scheme to transfer money from countries such as Germany and Estonia that have restrained spending in recent years.

Germany, Estonia and Luxembourg are the only EU countries that have posted budget surpluses since 2014. Lagarde said the pooling of budgetary resources could put these surpluses to good use.

Sigh.

But the problem goes way beyond an international bureaucracy led by someone from Europe. This is the mentality that is deeply embedded in most European policymakers.

Simply stated, the people who helped create the European mess by pushing for bigger government and more centralization agree that the time if right for…you guessed it…bigger government and more centralization. Here’s an excerpt from a report by the Delors Institute.

…a true economic and monetary union still needs to be built. It will have to be based on significant risk sharing and sovereignty sharing within a coherent and legitimate framework of supranational economic governance. This third building block includes turning the ESM into a fully-fledged European Monetary Fund.

The bureaucrats in Brussels predictably agree that they should get more power, as noted in a story from the EU Observer.

The EU should raise its own taxes and use Brexit as an opportunity to push for the idea, a report by a group of top officials says. …”The Union must mobilise common resources to find common solutions to common problems,” says the document, seen by EUobserver. …The paper also proposes a EU-level corporate income tax that would be combined with a common consolidated corporate tax base… Other proposals include a bank levy, a financial transaction tax, or a European VAT that would top national VATs. …The new budget EU commissioner Guenther Oettinger said that the report was “of great quality”.

And the senior politicians in Brussels are also beating the drum for added centralization.

…divergence creates fragility… Progress must happen…towards a genuine Economic Union…towards a Fiscal Union…need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions…some degree of public risk sharing…including a ‘social protection floor’…a shared sense of purpose among all Member States

Wow. I don’t know if I’ve ever read something so wildly wrong. As Nassim Nicholas Taleb has sagely observed, it is centralization and harmonization that creates systemic risk.

And all this talk about “common resources” and “public risk sharing” is simply the governmental version of co-signing a loan for the deadbeat family alcoholic.

Yet Europe’s ideologues can’t resist their lemming-like march in the wrong direction.

What makes this especially odd is that there is so much evidence that Europe originally became rich for the opposite reason.

It was decentralization and jurisdictional competition that enabled prosperity.

Matt Ridley, writing for the UK-based Times, drives this point home.

…the leading theory among economic historians for why Europe after 1400 became the wealthiest and most innovative continent is political fragmentation. Precisely because it was not unified, Europe became a laboratory for different ways of governing, enabling the discovery of regimes that allowed free markets and invention to flourish, first in northern Italy and some parts of Germany, then the low countries, then Britain. By contrast, China’s unity under one ruler prevented such experimentation. …Baron Montesquieu…remarked, Europe’s “many medium-sized states” had incubated “a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce”. …David Hume…mused…Europe is the continent “most broken by seas, rivers, and mountains” and so “the divisions into small states are favourable to learning, by stopping the progress of authority as well as that of power”. …the idea has gained almost universal agreement among historians that a disunited Europe, while frequently wracked by war, was also prone to innovation and liberty — thanks to the ability of innovators and skilled craftsmen to cross borders in search of more congenial regimes.

But now Europe has swung completely in the other direction.

The European Commission’s obsession with harmonisation prevents the very pattern of experimentation that encourages innovation. Whereas the states system positively encouraged governments to be moderate in political, religious and fiscal terms or lose their talent, the commission detests jurisdictional competition, in taxes and regulations. The larger the empire, the less brake there is on governmental excess.

Ralph Raico echoes these insights in an article for the Foundation for Economic Education.

In seeking to answer the question why the industrial breakthrough occurred first in western Europe, …what was it that permitted private enterprise to flourish? …Europe’s radical decentralization… In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions. …Instead of experiencing the hegemony of a universal empire, Europe developed into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other political entities. Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator”.

In other words, the “stationary bandit” couldn’t steal as much and that gave the private sector the breathing room that’s necessary for growth.

But today’s politicians in Europe want to strengthen the ability of governments to seize more money and power.

That strategy may work in the short run, but bailouts, redistribution, easy money, and statism are not a good long-run strategy.

So perhaps it’s appropriate that we conclude with a warning. As reported in a column for the UK-based Telegraph, one of the architects of the euro fears that bailouts are crippling the continent-wide currency.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned. “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist… Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “…Market discipline is done away with by ECB interventions. …The no bailout clause is violated every day,” he said… Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.

For what it’s worth, I fully agree that Greece should have been cut loose.

But European politicians and bureaucrats, driven by an ideological belief in centralization (and a desire to bail out their big banks), instead decided to undermine the euro by creating a bigger mess in Greece and sending a very bad signal about bailouts to other welfare states.

And keep in mind that the fuse is still burning on the European fiscal crisis.

As the old saying goes, this won’t end well.

P.S. While my prognosis for Europe is relatively bleak, there were some hopeful signs in the aforementioned Pew data.

First, Europeans at some level understand that government is simply too big. Indeed, they recognize that economic growth is far more likely to occur if fiscal burdens are reduced rather than increased.

Second, they also realize that the euro, while weakened and flawed, is a better option than restoring national currencies, which would give their governments the power to finance bigger government by printing money.

P.P.S. I can’t resist sharing one final bit of polling data from Pew. I’m amused that every nation sees itself as the most compassionate (though if you look at real data, all European nations lag the USA in real compassion). Meanwhile, the prize for self-doubt (or perhaps self-awareness?) goes to the Italians, who labeled themselves as least trustworthy. The schizophrenia prize goes to the Poles, who simultaneously view the Germans as the most trustworthy and least trustworthy.

Oh, and there’s probably some lesson to be learned from Germany dominating the data for being most trustworthy and least compassionate.

Maybe this poll should be added to my European humor collection.

P.P.P.S. Given the sorry state of Europe, now perhaps skeptics will understand why Brexit was the only good option for Brits.

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Which state gets the biggest share of its budget from the federal government?

Nope, not even close. As a matter of fact, those two jurisdictions are among the 10-least dependent states.

And if you’re guessing that the answer is New York, New Jersey, Maryland, Connecticut, or some other “blue state,” that would be wrong as well.

Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!

So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?

That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.

State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.

In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps.  So if you compared this map with a map of poverty rates, there would be a noticeable overlap.

Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.

Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.

This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).

P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.

P.P.S. And it’s definitely worth noting that the federal government deserves the overwhelming share of the blame for rising levels of dependency in the United States.

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While I have great fondness for some of the visuals I’ve created over the years (especially “two wagons” and “apple harvesting“), I confess that none of my creations have ever been as clear and convincing as the iconic graph on education spending and education outcomes created by the late Andrew Coulson.

I can’t imagine anyone looking at his chart and not immediately realizing that you don’t get better results by pouring more money into the government’s education monopoly.

But the edu-crat lobby acts as if evidence doesn’t matter. At the national level, the state level, and the local level, the drumbeat is the same: Give us more money if you care about kids.

So let’s build on Coulson’s chart to show why teachers’ unions and other special interests are wrong.

Gerard Robinson of the American Enterprise Institute and Professor Benjamin Scafidi from Kennesaw State University take a close look at this issue.

…education is important to the economic and social well-being of our nation, which is why it is the No. 1 line item in 41 state budgets. …Schools need extra money to help struggling students, or so goes the long-standing thinking of traditional education reformers who believe a lack of resources – teachers, counselors, social workers, technology, books, school supplies – is the problem. …a look back at the progress we’ve made under reformers’ traditional response to fixing low-performing schools – simply showering them with more money – makes it clear that this approach has been a costly failure.

And when the authors say it’s been a “costly failure,” they’re not exaggerating.

Since World War II, inflation-adjusted spending per student in American public schools has increased by 663 percent. Where did all of that money go? One place it went was to hire more personnel. Between 1950 and 2009, American public schools experienced a 96 percent increase in student population. During that time, public schools increased their staff by 386 percent – four times the increase in students. The number of teachers increased by 252 percent, over 2.5 times the increase in students. The number of administrators and other staff increased by over seven times the increase in students. …This staffing surge still exists today. From 1992 to 2014 – the most recent year of available data – American public schools saw a 19 percent increase in their student population and a staffing increase of 36 percent. This decades-long staffing surge in American public schools has been tremendously expensive for taxpayers, yet it has not led to significant changes in student achievement. For example, public school national math scores have been flat (and national reading scores declined slightly) for 17-year-olds since 1992.

By the way, the failure of government schools doesn’t affect everyone equally.

Parents with economic resources (such as high-profile politicians) can either send their kids to private schools or move to communities where government schools still maintain some standards.

But for lower-income households, their options are very limited.

Minorities disproportionately suffer, as explained by Juan Williams in the Wall Street Journal.

While 40% of white Americans age 25-29 held bachelor’s degrees in 2013, that distinction belonged to only 15% of Hispanics, and 20% of blacks. …The root of this problem: Millions of black and Hispanic students in U.S. schools simply aren’t taught to read well enough to flourish academically.  …according to a March report by Child Trends, based on 2015 data from the National Assessment of Educational Progress (NAEP), only 21% of Hispanic fourth-grade students were deemed “proficient” in reading. This is bad news. A fourth-grader’s reading level is a key indicator of whether he or she will graduate from high school. The situation is worse for African-Americans: A mere 18% were considered “proficient” in reading by fourth grade.

But Juan points out that the problems aren’t confined to minority communities. The United States has a national education problem.

The problem isn’t limited to minority students. Only 46% of white fourth-graders—and 35% of fourth-graders of all races—were judged “proficient” in reading in 2015. In general, American students are outperformed by students abroad. According to the most recent Program for International Student Assessment, a series of math, science and reading tests given to 15-year-olds around the world, the U.S. placed 17th among the 34 Organization for Economic Cooperation and Development countries in reading.

This is very grim news, especially when you consider that the United States spends more on education – on a per-pupil basis – than any other country.

Here’s a table confirming Juan’s argument. It lacks the simple clarity of Andrew Coulson’s graph, but if you look at these numbers, it’s difficult to reach any conclusion other than we spend a lot in America and get very mediocre results.

Juan concludes his column with a plea for diversity, innovation, and competition.

For black and Hispanic students falling behind at an early age, their best hope is for every state, no matter its minority-student poverty rate, to take full responsibility for all students who aren’t making the grade—and get those students help now. That means adopting an attitude of urgency when it comes to saving a child’s education. Specifically, it requires cities and states to push past any union rules that protect underperforming schools and bad teachers. Urgency also means increasing options for parents, from magnet to charter schools. Embracing competition among schools is essential to heading off complacency based on a few positive signs. American K-12 education is in trouble, especially for minority children, and its continuing neglect is a scandal.

He’s right, but he should focus his ire on his leftist friends and colleagues. They’re the ones (including the NAACP!) standing in the proverbial schoolhouse door and blocking the right kind of education reform.

P.S. This is a depressing post, so let’s close with a bit of humor showing the evolution of math lessons in government schools.

P.P.S. If you want some unintentional humor, the New York Times thinks that education spending has been reduced.

P.P.P.S. Shifting to a different topic, another great visual (which also happens to be the most popular item I’ve ever shared on International Liberty) is the simple image properly defining the enemies of liberty and progress.

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Learning from the tremendous success of welfare reform during the Clinton Administration, the entire Washington-based welfare state should be junked.

It’s a complicated and costly mess that traps poor people in dependency while ripping off taxpayers and creating very comfortable lives for “poverty pimps.”

It would be much simpler (and more effective) to simply take all the money that’s now being spent on these programs and send it to the states as part of a “block grant” and let them figure out how best to help poor people without some of the negative consequences caused by the current plethora of programs.

I’ve previously written about how this would be a very desirable reform of Medicaid. Today, let’s build upon some previous analysis and explain why it would be good to get Washington out of the business of Food Stamps.

Let’s start with the fact that the program subsidizes purchases that have nothing to do with avoiding genuine hunger and deprivation. Indeed, as documented in a story in The Federalist, Food Stamps subsidize a considerable amount of unhealthy food.

New data from the U.S. Department of Agriculture reveals food stamp recipients spent more money on sweetened beverages than they did on fruits, vegetables, bread, cereal, or milk. The USDA analyzed transactional data from a leading grocery store in 2011 and found that Supplemental Nutritional Assistance Program (SNAP) households spent a greater percentage of money on unhealthier foods than those who didn’t use taxpayer funds to pay for their groceries. …The recent USDA study only looked at data from one grocery store retailer. It did not examine how SNAP funds were spent at convenience stores, which presumably would have significantly increased the amount of unhealthy foods purchased with taxpayer dollars.

Here are some of the details.

…The second largest expenditure for SNAP households was sweetened beverages, whereas the second largest expenditure for non-SNAP households was vegetables. …SNAP households spent 7.2 percent of their money on vegetables, while non-SNAP households spent 9.1 percent of their grocery money on this category of food. When comparing fruit purchases, the gap widens slightly: SNAP households spent 4.7 percent on fruits, and non-SNAP households spent an averages of 7.2 percent in the same category.

Here’s the comparison of purchases from those with food stamps and those using their own money.

As one might suspect, the problem has gotten worse during the profligate Bush-Obama era.

During President Obama’s tenure, the numbers and percentages of Americans using taxpayer’s money to buy their groceries has drastically increased. SNAP participation has increased 78 percent in the past ten years and remains near its all-time high… Food stamp usage also dramatically increased during President George W. Bush’s tenure… That’s because Bush signed a dramatic expansion of food welfare inside a farm bill. This expansion, among other things, made it easier to sign up and made non-citizens eligible to use U.S. taxpayers’ funds to fund grocery excursions.

By the way, I think poor people (indeed, all people) should be able to eat anything they want. That being said, there’s something perverse about subsidizing and encouraging unhealthy patterns.

Particularly when obesity is one of the biggest health problems in low-income communities.

The program also has always had major problems with fraud, as illustrated by a recent scandal in Florida.

The U.S. Attorney for the Southern District of Florida announced the largest food stamp fraud bust in U.S. history Wednesday afternoon. …500 people had their identities stolen in Palm Beach County to be used to get fake Electronic Benefit Transfer cards which were then exchanged for cash… Federal charges were filed against 22 retail store owners or operators in connection with schemes to illegally redeem food stamp benefits for cash, the Justice Department said. Indictments allege the retailers received more than $13 million in federal payments.

Even millionaires bilk the system.

A Geauga County millionaire—who comes from royalty—has been indicted on charges he illegally received food stamps and medicaid assistance. Ali Pascal Mahvi is facing four felony counts which could put him behind bars for more than four years if convicted. …Meyer informed Mahvi of the indictment at Mahvi’s 8,000 square foot home. …Prosecutors say Mahvi defrauded Medicaid out of $45,000 and about $8,400 in food stamps. Mahvi, who is the son of an Iranian prince, estimates his worth at about $120 million. His $800,000 home features five bedrooms and five bathrooms, an in-ground swimming pool, and stable with horses. Mahvi, who says he owns 70 percent of a resort in St. Lucia, says he’s played by the rules.

And some scammers become millionaires from the other end of the system.

Convenience store owner Vida Ofori Causey out of Worcester, Mass. was charged in federal court Monday after pleading guilty to $3.6 million worth of food stamp fraud. …“Causey purchased the benefits at a discounted value of approximately fifty cents for every SNAP dollar,” a press release from Department of Justice stated. “By so doing, Causey caused the USDA to electronically deposit into a bank account controlled by her the full face value of the SNAP benefits fraudulently obtained.” As a result, recipients had cash on hand to buy restricted items. The restricted items could include alcohol, cigarettes and even drugs.

Stories like this reinforce the argument that states should be in charge of the program, if for no other reason than there will be fiscal pressure not to waste so much money.

Moreover, there’s considerable evidence that states are more sensible in their approach. I’ve already written about good reforms in Maine and Wisconsin. Well, the Daily Caller has encouraging news that the good news in those states is part of a national trend.

The number of people receiving food stamps has declined sharply due in part to the reinstatement of work requirements earlier this year, according to a report Wednesday. …“Caseloads fell sharply in April, especially in states reinstating a three-month time limit for unemployed childless adults without disabilities, new Agriculture Department data show,” CBPP detailed in its report. “The data, covering the first month in which most of the roughly 20 states that imposed the time limit in January began cutting people off.” The USDA has required food stamp work requirements since an overhaul of the program in 1996. Able-bodied adults without children are required to work at least 20 hours a week or else lose their benefits after three months. …Work requirements have now been restored in a total of 40 states compared to 44 states this past June that had either a waiver or a partial waiver.

And let’s look specifically at some positive developments in Kansas.

…before Kansas instituted a work requirement, 93 percent of food stamp recipients were in poverty, with 84 percent in severe poverty. Few of the food stamp recipients claimed any income. Only 21 percent were working at all, and two-fifths of those working were working fewer than 20 hours per week. Once work requirements were established, thousands of food stamp recipients moved into the workforce, promoting income gains and a decrease in poverty. Forty percent of the individuals who left the food stamp ranks found employment within three months, and about 60 percent found employment within a year. They saw an average income increase of 127 percent. Half of those who left the rolls and are working have earnings above the poverty level. Even many of those who stayed on food stamps saw their income increase significantly. …Furthermore, with the implementation of the work requirement in Kansas, the caseload dropped by 75 percent. Previously, Kansas was spending $5.5 million per month on food stamp benefits for able-bodied adults; it now spends $1.2 million.

P.S. In the long run, the block grant should be phased out so the federal government isn’t involved at all in the business of income redistribution. If we care about the limits on federal power in Article 1, Section 8, then states should be responsible for choosing how much to raise in addition to choosing how to spend.

P.P.S. Just in case you think fraud and waste is a rare problem in the program, here are some other examples.

With stories like this, I’m surprised my head didn’t explode during this debate I did on Larry Kudlow’s show.

P.P.P.S. While I periodically mock California, folks in the Golden State deserve praise for being the least likely to use Food Stamps. Their neighbors in Oregon, by contrast, are very proficient at mooching.

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The concept of secession (part of a jurisdiction breaking away to become independent) has a bad reputation in the United States because it is linked to the reprehensible institution of slavery.

But, as Walter Williams has explained, secession today may be an effective way of protecting liberty from ever-expanding centralized government.

And I’ve favorably written about secessionist movements in Sardinia, Scotland, and Belgium, largely because the historical data shows that better policy is more likely when there are many jurisdictions competing with each other.

So it was with considerable interest that I saw an article in Fortune about a secessionist movement in California.

“Calexit” didn’t start with Donald Trump, but his victory on Election Day certainly sparked more interest in the idea. A play on “Brexit,” it’s the new name for the prospect of California seceding from the U.S. The movement…seems to have gained steam in the past six months, thanks in part to the U.K.’s recent Brexit vote and Donald Trump being elected president. …The group’s goal is to hold a referendum in 2018 that, if passed, would transition California into its own independent country. …the movement has even grabbed the attention of some potential Silicon Valley bankrollers.

I like this idea, though I’m not sure it’s good for California since the state faces very serious long-run challenges.

Though this is one of the reasons I like secession. As an independent nation, California no longer would have any hope of getting a bailout from Washington, so the politicians in Sacramento might start behaving more responsibly.

And there are examples of secession in the modern world, such as Slovakia and the Czech Republic emerging from Czechoslovakia. That was a very tranquil divorce, unlike what happened in the former Yugoslavia.

As is so often the case, we can learn a lot from Switzerland. There is a right of secession, albeit dependent on a nationwide vote of approval. Municipalities also can vote to switch cantons, as happened in 1996 when Vellerat left Bern and became part of Jura. By the way, villages in Liechtenstein have the unilateral right to secede from the rest of the nation (though that seems highly unlikely since it is the second-richest nation in the world).

Notwithstanding these good role models, the secessionist movement in California presumably won’t get very far.

But maybe full-blown secession isn’t necessary. If Californians don’t like what’s happening in Washington (or, for that matter, if Texans aren’t happy with the antics in DC), that should be an argument for genuine and comprehensive federalism.

In other words, get rid of the one-size-fits-all policies emanating from the central government and allow states to decide the size and scope of government.

California can decide to do crazy things (such as regulate babysitters and give bureaucrats too much pay) and Texas can choose to do sane things (such as no income tax), but neither state could dictate policy for the entire nation.

This also happens to be the system envisioned by America’s Founding Fathers.

Think of federalism as a live-and-let-live system. New York doesn’t have to become North Dakota and Illinois doesn’t have to become Alabama. Red states can be red and blue states can be blue. And we can add all the other colors in the rainbow as well. Let a thousand flowers bloom, and all that.

And consider how well federalism works in Switzerland, a nation that doesn’t have a single language, culture, or religion.

Now, perhaps, you’ll understand why I even suggested federalism as a solution to the mess in Ukraine.

P.S. If California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.S. Here’s an interesting historical footnote. There’s a small part of Germany that is entirely surrounded by Switzerland. This enclave wanted to become part of Switzerland many decades ago, but there was no right of secession notwithstanding overwhelming sentiment for a shift of nationality.

A whopping 96 percent of the inhabitants voted for annexation by Switzerland. The people had spoken loud and clear, but their voices were ignored. As the Swiss were unable to offer Germany any suitable territory in exchange, the deal was off. Büsingen would remain, somewhat reluctantly, German.

Since Germany is a reasonably well-run nation, I guess we shouldn’t feel too sorry for the people of Büsingen (unlike, say, the residents of Menton and Roquebrune in France, who used to be part of a tax haven but now are part of a tax hell).

P.P.P.S. Let’s close with some additional election-related humor.

Here’s some satire from the twitter account of the fake North Korean News Service.

And here’s another Hitler parody to add to our collection.

And here’s Michelle Obama feeling sad about what’s about to happen.

P.P.P.P.S. We also have some unintentional humor. When Trump prevailed, Paul Krugman couldn’t resist making a prediction of economic doom.

Since markets have since climbed to record highs, Krugman’s forecasting ability may be even worse than all the hacks who predicted Brexit would result in economic calamity for the United Kingdom.

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The burden of government spending is already excessive. But the numbers will get worse with the passage of time if policy is left on autopilot.

The main culprits are the so-called mandatory programs. Entitlements such as Social Security, Medicare, Food Stamps, and Obamacare that automatically dispense money to various constituencies are consuming an ever-larger chunk of the economy’s output.

And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.

So how big is the problem? Enormous if you look at the numbers from the National Association of State Budget Officers.

States increased their spending in fiscal year 2015 by the biggest margin in more than 20 years, but most of the increase was thanks to huge leaps in Medicaid spending under the first full year of the Affordable Care Act (ACA). Spending increased last fiscal year, which ended on June 30 for most states, by 7.8 percent, according to new estimates from the National Association of State Budget Officers (NASBO). It’s the biggest boost since 1992 and was thanks to a 15.1 percent increase in Medicaid spending, much of that paid for via federal Medicaid funds. Illinois, Michigan, Kentucky, Nevada and Oregon saw more than 30 percent increases in federal funding because they expanded Medicaid under the ACA. But 2015 was also a year where states were putting up more of their own money again.

Here’s the chart showing which outlay categories grew the fastest.

The article points out that spending is outpacing revenue.

On average, state revenues aren’t keeping pace with spending; NASBO estimates General Fund revenues will increase by just 3.8 percent.

Though the real problem is that spending is expanding faster than the private sector, which is the opposite of what is called for by my Golden Rule.

One of the reasons Medicaid grows so fast is that the program is split between Washington and the states, which both picking up a share of the cost. This may sound reasonable, but it creates a very perverse incentive structure since politicians at both levels can vote to expand the spending burden while only having to provide part of the cost.

The National Center for Policy Analysis explains how this system produces bad decisions.

Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. …So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers. …Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people.

But unless that kind of reform happens, the program will continue to grow and become an ever-larger fiscal burden.

Heritage Action has more details on the perverse incentives of the current system.

…the federal government promises to reimburse states for a majority of their Medicaid spending, most of which involves reimbursements to health care providers. Therefore, states collude with health care providers in the following manner: they tell providers that they will tax them (so-called “provider taxes”), bringing in more revenue to the state. The state then promises to filter that money back to those same providers in the form of higher Medicaid reimbursements. States then bill the federal government for this added cost. Because the federal government provides more than 50% of total Medicaid funding, both state governments and Medicaid providers are made better off by the arrangement, while the federal government is stuck footing a larger bill it had no part in creating.

Though I partially disagree with the assertion that the feds are blameless. After all, it was politicians in Washington who created this wretched system, including the reimbursement rules that states manipulate.

This info-graphic illustrates how the “provider fee” scam operates.

The net result of all this is a nightmare for federal taxpayers, but states also are losing out when you consider the long-run consequences. And that’s even true with the Medicaid expansions contained in Obamacare, which supposedly were going to be financed almost entirely by Uncle Sam. The Wall Street Journal reports.

…the Affordable Care Act was designed to essentially bribe states to expand their Medicaid programs: The feds offered to pay 100% of additional costs through 2016, dropping to 90% by 2020. This “free money” prompted 30 states and the District of Columbia to take the deal. Democratic activists have joined with state hospital lobbies to pressure lawmakers in the remaining 20 state capitals to follow.

But free money can be very expensive.

Consider the experience of the states that did expand Medicaid. “At least 14 states have seen new enrollments exceed their original projections, causing at least seven to increase their cost estimates for 2017,” the Associated Press reported in July. The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion… Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021. In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.

Interestingly, Obamacare is causing pro-big government states to dig even deeper fiscal holes.

The National Center for Policy Analysis has some remarkable data on this development.

States that expanded Medicaid tend to have per capita state spending that’s about 17 percent higher than non-expansion states. …In 2004, expansion states had median per capita tax collections (both state and local) of 19 percent more than non-expansion states. By 2012, this gap had widened with expansion states collecting 28 percent more taxes per capita than non-expansion states. Moreover, since 2008 expansion states have moved to increase taxes, while non-expansion states have reduced taxes slightly.

Unsurprisingly, the states that are making government bigger are experiencing slower growth.

In 2001 expansion states had real median income that was nearly 13 percent higher than non-expansion states. However, by 2013 this gap had narrowed to just over 9 percent. Expansion states have historically had slightly lower poverty rates, but the difference was only 1 percentage point by 2012 (12.9 percent vs. 13.9 percent). Non-expansion states, although slightly poorer, have lower unemployment than expansion states (6.7 percent versus 7.2 percent).

By the way, the decision by some states to reject Medicaid expansion is a huge – and underappreciated – victory over Obamacare.

Another point worth mentioning is that the program isn’t even a good deal for the poor according to Scott Atlas at the Hoover Institution. Here’s some of what he wrote for the Wall Street Journal.

Americans should be more worried than ever about Medicaid… The cost of the $500 billion program is expected to rise to $890 billion by 2024… Yet more spending doesn’t necessarily mean better care for beneficiaries… The expansion of Medicaid is one of the most misguided parts of ObamaCare… Some 55% of doctors in major metropolitan areas refuse to take new Medicaid patients… Medicaid enrollees who manage to see a doctor typically experience outcomes worse than those under private insurance. That means more in-hospital deaths, more complications from surgery, worse posttreatment survival rates, and longer hospital stays than similar patients with private insurance. A randomized study by the Oregon Health Study Group showed that having Medicaid did not significantly improve patients’ physical health compared with those without insurance.

The proverbial icing on this foul-tasting cake is the way the program enables staggering amounts of fraud and theft.

I’ve written about this before (including how foreigners are bilking the system). But here are some fresh details from the Wall Street Journal.

…one of our favorite political euphemisms is “improper payments.” That’s how Washington airbrushes away the taxpayer money that flows each year to someone who is not eligible, or to the right beneficiary in the wrong amount, or that disappears to fraud or federal accounting ineptitude. Now thanks to ObamaCare, improper payments are soaring. Last week the Health and Human Services Department published an “alert” warning that the improper payment rate for Medicaid in 2016 will likely hit 11.5%. That’s nearly double the 5.8% rate as recently as 2013… The 11.5% for 2016 is likely an underestimate given that HHS’s goal last year was 6.7% and instead scored 9.8%, which amounts to $29.1 billion. The dollar amount of improper payments in Medicaid was bound to rise because ObamaCare vastly opened eligibility. In 2015 enrollment climbed by 13.8% and one of five Americans are now covered by the program. …In recent audits of Medicaid in Arizona, Florida, Michigan and New Jersey, the GAO uncovered 50 dead people who recouped at least $9.6 million in benefits after they died; 47 providers who registered foreign addresses as their location of service in places such as Saudi Arabia; and $448 million bestowed on 199,000 beneficiaries with fake Social Security numbers—12,500 of which had never been issued by the Social Security Administration.

But as bad as all this sounds, it can get worse.

If HHS tries hard enough, maybe the department can match the failure rate for school lunches (15.7%) or the Earned Income Tax Credit (23.8%).

And Kevin Williamson of National Review adds some acidic observations.

…the criminal — and I do not use the word figuratively — administration of Medicaid by the Obama administration. …improper payments under Medicaid have become so common that they will account this year for almost 12 percent of total Medicaid spending — just shy of $140 billion. …That rate has doubled in only a few years…12 percent in improper payments isn’t an error rate — it’s a malfeasance rate. …If improper and illegal federal payments were an economy of their own, that economy would be bigger than Hungary’s… The Obama administration is not lifting a pinky to do anything about this, even though analysts such as John Hood have — for years — been arguing that it is necessary and possible to reform this mess. As the Wall Street Journal has reported, we don’t even verify that doctors billing Medicaid for services rendered are actually doctors. In many cases, we do not do much to verify that their patients actually, you know, exist. We’ve paid untold billions of dollars to “clinics” that turn out to be little more — or nothing more — than post-office boxes and prepaid cell phones. And as bad as that 12 percent rate is, some policy scholars believe that it is in fact probably worse.

Kevin observes that this system is good for the Poverty Pimps.

…the real problem with the welfare state is not the poor people receiving checks — it’s everybody in the middle, the vast array of government employees, their union allies, contractors, and third parties who earn six-, seven-, eight-, or nine-figure paydays taking their cuts of money we think we’re spending on the poor. This is an enormous criminal conspiracy against the American people and the public fisc.

You might think that fixing this fraud would be an area for bipartisan cooperation.

But the sad reality is that fraud is a feature, not a bug. Politicians like the fact that scam artists in their states and district are stealing healthcare money from taxpayers. After all, recipients of the loot can be registered voters and campaign contributors.

So what’s the best way of fixing this mess?

Will big tax hikes solve the problems? If the problem is that America isn’t enough like France, then the answer is yes.

But if the problem is that government already is too much of a burden and that it would be a good idea to at least slow down the rate at which America becomes France, then the answer is genuine entitlement reform.

And this video shows how the Medicaid program should be “block-granted” (just as welfare was reformed in the 1990s).

P.S. For all intents and purposes, block granting Medicaid is a partial repeal of Obamacare. Just in case you wanted an additional reason to support reform.

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Programs about the improbable success of Chile and Estonia already have aired on nationwide TV, and those were joined last weekend by a show about the “sensible nation” of Switzerland.

Here’s the 28-minute program.

When I first watched the program, I was slightly irked that there was very little discussion of the role of fiscal policy and the importance of spending restraint and competitive tax rates.

Moreover, there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb results.

Indeed, Switzerland is the only nation from Europe or North America that gets high scores from Economic Freedom of the World for both fiscal policy and rule of law (a notable achievement since Wagner’s Law tells us that it is very difficult to stop government from expanding once the private sector generates a lot of wealth that can be redistributed).

But I confess I’m biased about the importance of tax and spending issues.

And as I thought about what I had seen, I realized that the program’s focus on federalism and decentralization made sense.

Yes, Switzerland has a modest-sized government. And, yes, the debt brake has been a huge success. But those good outcomes are in part the result of a system where most government still takes place at the local (commune) or state (canton) level.

In other words, Switzerland generally still has the type of system America’s Founding Fathers envisioned, with a small central government.

I’ve already pointed out that the level of redistribution in Switzerland is relatively low because of its decentralized model.

But there’s another feature of federalism that’s worth celebrating. As Nassim Nicholas Taleb (of “Black Swan” fame) has pointed out, decentralized systems are much more stable and successful since there’s far less risk of a mistaken policy being imposed on a one-size-fits-all basis.

And countless scholars, including many Nobel Prize recipients, have explained that small, competing nations were a key reason why Europe became a rich continent in the first place.

Sadly, most Europeans have forgotten this lesson and have created the EU superstate in Brussels (which helps to explain why I’m delighted that the United Kingdom voted to escape that sinking ship).

So the moral of the story, from both the video about Switzerland and from all the other evidence in the world, is that federalism is good policy.

Let’s close with an interesting example of Swiss federalism in action. The canton of Zug is known for being a low-tax haven in a country famous for having a reasonable tax regime. Well, the town of Zug is on the cutting edge of digital money.

…the town council has hopes Zug’s trend as a financial tech hub continues  — having embraced the new identity with this legislative move. …As the pilot program is first implemented it will initially allow payments up to 200 Francs, and possibly introducing the ability to pay larger amounts later in the future. …analysis will ultimately determine whether or not the town council will continue allowing Bitcoin payments for municipal services. …Bitcoiners will be taking notice of this small town, and it already has the added benefit of being located in Switzerland  —  which is known for its business friendly environment and relatively small regulatory burden. …In fact, Switzerland’s business environment and relatively free-market economy even helped to convince the Bitcoin wallet and exchange, Xapo, to relocate to Switzerland last year. …the town of Zug itself also provides its citizens with a relatively hands-off approach to the local economy. The Swiss town of  Zug showcases one of the lowest tax rates in the world. This combination of a hands-off approach by the government and large tax benefits has made the small town into a successful economic hub where global trade flourishes.

Wow, this says a lot about the quality of governance in Switzerland that a nation that doesn’t need Bitcoin (unlike, say, Greece or Argentina) nonetheless welcomes it as a competing currency.

Yet another reason why Switzerland is one of the world’s best nations.

P.S. Today’s column is about Switzerland, but I can’t resist pointing out that Hong Kong and Singapore both score highly for rule of law and small government. And Chile deserves honorable mention as well. For what it’s worth, the Princess of the Levant’s home country of Lebanon apparently has the world’s small fiscal burden, but the low score for rule of law suggests that the real story is that the government is simply too incompetent to collect and redistribute money.

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