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Archive for the ‘Fiscal Policy’ Category

The Social Security Administration has released the 2016 Trustees Report, which shines a spotlight on the overall fiscal condition of the program.

In previous years (2012, 2013, 2014), I’ve used this opportunity to play Paul Revere. But instead of warning that the British are coming, I sound the alarm about a future fiscal crisis resulting from demographic change and poorly designed entitlement programs.

Which is what I did in this interview on Fox Business.

It wasn’t a long interview, but I had the opportunity to touch on four very important issues.

First, I explained that the Social Security Trust Fund is nothing but a pile of IOUs. It’s money the government owes itself, which means that the bonds in the Trust Fund can only be turned into real money by taking more from the private sector.

But if you don’t trust me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

In other words, the Trust Fund is like putting IOUs to yourself in a college fund. When it’s time for junior to start his freshman year, you’ll have to find the money to cash those IOUs.

Second, Social Security already is in the red and the rising burden of spending for the program will lead to huge fiscal shortfalls.

Here’s a chart, based directly on the data from Table VI.G9 of the Trustees Report, showing the annual deficit in the program based on today’s dollars.

Third, it’s grossly irresponsible for politicians such as Elizabeth Warren and Hillary Clinton to agitate for higher spending in the program.

Andrew Biggs of the American Enterprise Institute weighed in on this issue earlier this year. Here’s some of what he wrote in a column for the Wall Street Journal.

Mrs. Clinton would raise retirement payments for widows as well as provide Social Security credits for individuals who take time out of the workforce to care for a child or an infirm adult.

Andrew points out that Hillary also has expressed support for increases in the payroll tax rate and letting the government impose the tax on a greater share of income.

Mrs. Clinton…has recently spoken in favor of both approaches.

By the way, the latter option is especially dangerous for the economy, as explained in this video.

Fourth, Social Security is in bad shape, but the main long-run entitlement challenge comes from health-related programs such as Medicare, Medicaid, and Obamacare.

In other words, we need comprehensive long-run entitlement reform if we don’t want to become Greece.

P.S. For reasons that I’ve already covered, I didn’t like being called a “deficit hawk” by the host.

P.P.S. While proponents deserve credit for being serious, I think the Simpson-Bowles plan leaves a lot to be desired.

P.P.P.S. Here’s the right way to fix Social Security.

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I’ve been advocating for good tax reform for more than two decades, specifically agitating for a simple and fair flat tax.

I get excited when politicians make bold proposals, such as many of the plans GOP presidential candidates proposed over the past year or so.

But sometimes I wind up feeling deflated when there’s a lot of discussion about tax reform and the final result is a milquetoast plan that simply rearranges the deck chairs on the Titanic. For instance, back in 2014, the then-Chairman of the House Ways and Means Committee unveiled a proposal that – at best – was underwhelming. Shifts in the right direction in some parts of the plan were largely offset by shifts in the wrong direction in other parts of the plan. What really doomed the plan was a political decision that the tax code had to raise just as much money (on a static basis) as the current system and that there couldn’t be any reduction in the amount of class warfare embedded in the current system (i.e., the “distribution” of the tax burden couldn’t change).

Well, we have some good news. Led by the new Chairman of the Ways and Means Committee, Kevin Brady, House Republicans have unveiled a new plan that it far, far better. Instead of being hemmed in by self-imposed constraints of static revenue and distributional neutrality, their two guidelines were dynamic revenue neutrality and no tax increase for any income group.

With those far more sensible constraints, they were able to put together a plan that was almost entirely positive. Let’s look at the key features, keeping in mind these theoretical principles that should guide tax reform.

  1. The lowest possible tax rate – High tax rates on work and entrepreneurship make no sense if the goal is faster growth and more competitiveness.
  2. No double taxation – It is foolish to penalize capital formation (and thereby wages) by imposing extra layers of tax on income that is saved and invested.
  3. No loopholes or special preferences – The tax code shouldn’t be riddled with corrupt deductions, exemptions, exclusions, credits, and other goodies.

What’s Great

Here are the features that send a tingle up my leg (apologies to Chris Matthews).

No value-added tax – One worrisome development is that Senators Rand Paul and Ted Cruz included value-added taxes in their otherwise good tax plans. This was a horrible mistake. A value-added tax may be fine in theory, but giving politicians another source of revenue without permanently abolishing the income tax would be a tragic mistake. So when I heard that House Republicans were putting together a tax plan, I understandably was worried about the possibility of a similar mistake. I can now put my mind at rest. There’s no VAT in the plan.

Death tax repeal – Perhaps the most pure (and therefore destructive) form of double taxation is the death tax, which also is immoral since it imposes another layer of tax simply because someone dies. This egregious tax is fully repealed.

No state and local tax deduction – If it’s wrong to subsidize particular activities with special tax breaks, it’s criminally insane to use the tax code to encourage higher tax rates in states such as New York and California. So it’s excellent news that House GOPers are getting rid of the deduction for state and local taxes.

No tax bias against new investment – Another very foolish provision of the tax code is depreciation, which forces companies to pretend some of their current investment costs take place in the future. This misguided approach is replaced with expensing, which allows companies to deduct investments when they occur.

What’s Really Good

Here are the features that give me a warm and fuzzy feeling.

A 20 percent corporate tax rate – America’s corporate tax system arguably is the worst in the developed world, with a very high rate and onerous rules that make it difficult to compete in world markets. A 20 percent rate is a significant step in the right direction.

A 25 percent small business tax rate – Most businesses are not traditional corporations. Instead, they file using the individual portion of the tax code (using forms such as “Schedule C”). Lowering the tax rate on business income to 25 percent will help these Subchapter-S corporations, partnerships, and sole proprietorships.

Territorial taxation – For a wide range of reasons, including sovereignty, simplicity, and competitiveness, nations should only tax economic activity within their borders. The House GOP plan does that for business income, but apparently does not extend that proper treatment to individual capital income or individual labor income.

By shifting to this more sensibly designed system of business taxation, the Republican plan will eliminate any incentive for corporate inversions and make America a much more attractive place for multinational firms.

What’s Decent but Uninspiring

Here are the features that I like but don’t go far enough.

Slight reduction in top tax rate on work and entrepreneurship – The top tax rate is reduced to 33 percent. That’s better than the current top rate of 39.6 percent, but still significantly higher than the 28 percent top rate when Reagan left office.

Less double taxation of savings – The plan provides a 50-percent exclusion for individual capital income, which basically means that there’s double taxation of interest, dividends, and capital gains, but at only half the normal rate of tax. There’s also some expansion of tax-neutral savings accounts, which would allow some saving and investment fully protected from double taxation.

Simplification – House GOPers assert that all their proposed reforms, if enacted, would create a much simpler tax system. It wouldn’t result in a pure Hall-Rabushka-style flat tax, with a 10-line postcard for a tax return, but it would be very close. Here’s their tax return with 14 lines.

In an ideal world, there should be no double taxation of income that is saved and invested, so line 2 could disappear (in Hall-Rabushka flat tax, investment income/capital income is taxed once and only once at the business level). All savings receives back-ended IRA (Roth IRA) treatment in a pure flat tax, so there’s no need for line 3. There is a family-based allowance in a flat tax, which is akin to lines 4 and 9, but there are no deductions, so line 5 and line 6 could disappear. Likewise, there would be no redistribution laundered through the tax code, so line 10 would vanish. As would line 11 since there are no special preferences for higher education.

But I don’t want to make the perfect the enemy of the good. The postcard shown above may have four more lines than I would like, but it’s obviously far better than the current system.

What’s Bad but acceptable

Increase in the double taxation of interest – Under current law, companies can deduct the interest they pay and recipients of interest income must pay tax on those funds. This actually is correct treatment, particularly when compared to dividends, which are not deductible to companies (meaning they pay tax on those funds) while also being taxable for recipients. The House GOP plan gets rid of the deduction for interest paid. Combined with the 50 percent exclusion for individual capital income, that basically means the income is getting taxed 1-1/2 times. But that rule would apply equally for shareholders and bondholders, so that pro-debt bias in the tax code would be eliminated. And the revenue generated by disallowing any deduction for interest would be used for pro-growth reforms such as a lower corporate tax rate.

What’s Troublesome

No tax on income generated by exports and no deduction for cost of imported inputs for companies – The House GOP proposal is designed to be “border adjustable,” which basically means the goal is to have no tax on exports while levying taxes on imports. I’ve never understood why politicians think it’s a good idea to have higher taxes on what Americans consume and lower taxes on what foreigners consume. Moreover, border adjustability normally is a feature of a “destination-based” value-added tax (which, thankfully, is not part of the GOP plan), so it’s not completely clear how the tax-on-imports  portion would be achieved. If I understand correctly, there would be no deduction for the cost of foreign purchases by American firms. That’s borderline protectionist, if not over-the-line protectionist. And it’s unclear whether this approach would pass muster with the World Trade Organization.

To conclude, the GOP plan isn’t perfect, but it’s very good considering the self-imposed boundaries of dynamic revenue neutrality and favorable outcomes for all income groups.

And since those self-imposed constraints make the plan politically viable (unlike, say, the Trump plan, which is a huge tax cut but unrealistic in the absence of concomitant savings from the spending side of the budget), it’s actually possible to envision it becoming law.

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At the risk of understatement, I’m not a fan of Keynesian economics.

The disdain is even apparent in the titles of my columns.

And these are just the ones with some derivation of “Keynes” in the title. I guess subtlety isn’t one of my strong points.

That being said, there are some elements of Keynesian economics that are reasonable.

I’ve written, for instance, that reductions in government spending can be temporarily painful because labor and capital don’t get instantaneously reallocated.

And I don’t object to the notion of shifting government outlays so they take place when the economy is weak (assuming, of course, that the spending is for a sensible and constitutional purpose).

So I was very interested to see that Tyler Cowen and Alex Tabarrok of George Mason University have a new video on fiscal policy and the economy as part of their excellent series at Marginal Revolution University.

Interestingly, “Keynes” is mentioned only once, and then just in passing, even though the discussion is about discretionary Keynesian fiscal policy.

Here are my thoughts on the video.

  1. Near the beginning, Alex discusses how an economic shock can lead to a downturn as households cut back on their normal expenditures. That’s quite reasonable, but I wish there had been some acknowledgement that negative shocks are often the result of bad government policy (i.e., the mistakes that caused and/or exacerbated the recent financial crisis or the Great Depression) .
  2. There was no discussion of how government can put money into the economy without first taking the money out of the economy via taxes or borrowing (see cartoon below, or my video on the topic). One can argue, of course, that Keynesian policy leads to more consumer spending by borrowing money from credit markets and giving it to people, but doesn’t that simply lead to less investment spending? Perhaps there’s an implicit hypothesis that banks will just sit on the money in a weak economy, or maybe the assumption is that the government can artificially boost overall spending in the short run by borrowing money from overseas. Analysis of these issues, including the tradeoffs, would be valuable.
  3. Because of my concerns about government inefficiency, I enjoyed the discussion about targeting vs timeliness, but Keynesians only care about having the government somehow dump money into the economy. And they’ll use any excuse, even a terrorist attack.
  4. Tyler point out that the textbook view of Keynesian economics is that governments should run deficits when there’s a downturn and surpluses when the economy is strong, but he is understandably concerned that politicians only pay attention to the former and ignore the latter.
  5. Raising unemployment benefits is not the win-win situation implied by the conversation since academic research shows that longer periods of joblessness when people get money for not working.
  6. I’m not convinced that adjusting the payroll tax will have significant benefits. What’s the evidence that companies will make long-run hiring decisions based on short-run manipulations of the tax?
  7. The discussion at the end about fiscal rules got me thinking about how Keynesians should support a spending cap since it means spending can still climb during a recession (even if revenues fall). Of course, the tradeoff is that they would have to accept modest spending increases when the economy is strong (and revenues are surging).

Here’s an amusing cartoon strip on Keynesian stimulus from the same artist who gave us gems on the minimum wage and guaranteed income.

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

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When I was younger, my left-wing friends said conservatives unfairly attacked them for being unpatriotic and anti-American simply because they disagreed on how to deal with the Soviet Union.

Now the shoe is on the other foot.

Last decade, a Treasury Department official accused me of being disloyal to America because I defended the fiscal sovereignty of low-tax jurisdictions.

And just today, in a story in the Washington Post about the Center for Freedom and Prosperity (I’m Chairman of the Center’s Board of Directors), former Senator Carl Levin has accused me and others of “trading with the enemy” because of our work to protect and promote tax competition.

Here’s the relevant passage.

Former senator Carl Levin (D-Mich.)…said in a recent interview that the center’s activities run counter to America’s values and undermine the nation’s ability to raise revenue. “It’s like trading with the enemy,” said Levin, whose staff on a powerful panel investigating tax havens regularly faced public challenges from the center. “I consider tax havens the enemy. They’re the enemy of American taxpayers and the things we try to do with our revenues — infrastructure, roads, bridges, education, defense. They help to starve us of resources that we need for all the things we do. And this center is out there helping them to accomplish that.”

Before even getting into the issue of tax competition and tax havens and whether it’s disloyal to want limits on the power of governments, I can’t resist addressing the “starve us of resources” comment by Levin.

He was in office from 1979-2015. During that time, federal tax receipts soared from $463 billion to $3.2 trillion. Even if you only count the time the Center for Freedom and Prosperity has existed (created in late 2000), tax revenues have jumped from $2 trillion to $3.2 trillion.

At the risk of understatement, Senator Levin has never been on a fiscal diet. And he wasn’t bashful about spending all that revenue. He received an “F” rating from the National Taxpayers Union every single year starting in 1993.

Let’s now address the main implication of the Washington Post story, which is that it’s somehow wrong or improper for there to be an organization that defends tax competition and fiscal sovereignty, particularly if some of its funding comes from people in low-tax jurisdictions.

The Post offer[s] an inside look at how a little-known nonprofit, listing its address as a post office box in Alexandria, became a persistent opponent of U.S. and global efforts to regulate the offshore world. …the center met again and again with government officials and members of the offshore industry around the world… Quinlan and Mitchell launched the center in October 2000. …The center had two stated goals. Overseas, the center set out to persuade countries on the blacklist not to cooperate with the OECD, which it derided as a “global tax cartel.” In Washington, the center lobbied the Bush administration to withdraw its support for the OECD and also worked to block anti-tax haven legislation on Capitol Hill. To spread the word, the center testified before Congress, published reports and opinion pieces in leading financial publications, and drafted letters to lawmakers and administration officials. Representatives of the center crisscrossed the globe and sponsored discussions in 2000 and 2001, traveling to London, Paris, the Cayman Islands, the Bahamas, Panama, Barbados and the British Virgin Islands.

To Senator Levin and other folks on the left, I guess this is the fiscal equivalent of “trading with the enemy.”

In reality, this is a fight over whether there should be any limits on the fiscal power of governments. On one side are high-tax governments and international bureaucracies like the OECD, along with their ideological allies. They want to impose a one-size-fits-all model based on the extra-territorial double-taxation of income that is saved and invested, even if it means blacklisting and threatening low-tax jurisdictions (the so-called tax havens).

On the other side are proponents of good tax policy (including many Nobel Prize-winning economists), who believe that income should not be taxed more than one time and that the power to tax should be constrained by national borders.

And, yes, that means we sometimes side with Switzerland or Panama rather than the Treasury Department. Our patriotism is to the ideals of the Founding Fathers, not to the bad tax policy of the U.S. government.

In any event, I’m proud to say that the Center’s efforts have been semi-successful.

In May 2001, the center claimed a key victory. In a dramatic departure from the Clinton administration, Paul O’Neill, the incoming Treasury Secretary appointed by Bush, announced that the United States would back away from the reforms pushed by the OECD. …fewer than half of the nations on the OECD blacklist pledged to become more transparent in their tax systems, a victory for anti-tax forces such as the center.

Even the other side says the Center is effective.

…said Elise Bean, former staff director and chief counsel of Levin’s Homeland Security Permanent Subcommittee on Investigations, which started investigating tax havens in 2001. “They travel all around the world and they have had a tremendous impact.” …“They were very effective at painting the OECD’s work as end-times are here for tax competition, and we’re going to have European tax rates imposed upon the whole world if the OECD’s work continued,” said Will Davis, the former head of OECD public affairs in Washington.

What’s most impressive is that all this was accomplished with very little funding.

Tax returns for the center and a foundation set up in its name reported receiving at least $1.4 million in revenue from 2003 to 2010.

In other words, the Center and its affiliated Foundation managed to thwart some of the world’s biggest and most powerful governments with a very modest budget averaging about $175,000 per year. And I don’t even get compensation from the Center, even though I’m the one who almost got thrown in a Mexican jail for opposing the OECD!

So while Senator Levin had decades of experience spending other people’s money in a promiscuous fashion, I work for an organization, the Cato Institute, that is ranked as the most cost-effective major think tank, and I’m on the Board of a small non-profit that has a track record of achieving a lot with very little money.

Yet another example of why we should be thankful that tax competition makes it more difficult for politicians to extract more revenue from the economy’s productive sector.

P.S. I mentioned to the Post reporters that the world’s biggest tax haven is the United States, but that important bit of information was omitted from the article. Which is a shame since it would have given me a chance to laud Senator Rand Paul for blocking a very dangerous agreement that would undermine America’s attractive tax laws for overseas investors.

P.P.S. If politicians really want to hurt tax havens, they should adopt a flat tax. That would dramatically boost tax compliance.

P.P.P.S. All things considered, I think the reporters who put together the story were reasonably fair, though there was a bit of editorializing such as referring to one low-tax jurisdiction as a “notorious tax haven.” When they write about France, do they ever refer to it as a “notorious tax hell”?

Also, when writing about trips the Center arranged for congressional staff to low-tax jurisdictions, the article stated, “The staffers reported receiving from $900 to $2,360 for the trips”, which makes it sound as if the staffers got paid. That’s wrong. The sentence should have read, “The staffers reported that the Center’s travel and lodging expenses ranged from $900 to $2,360 for the trips.”

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The Foreign Account Tax Compliance Act (FATCA) arguably is the worst feature of the internal revenue code. It’s an odious example of fiscal imperialism that is based on a very bad policy agenda.

But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.

Or, as I’ve argued, it would be a nascent World Tax Organization.

And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.

GATCA, by contrast, is an international pact that would impose especially heavy costs on the United States and threaten our status as the world’s biggest haven for investment.

Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.

James Jatras explains this dangerous proposal in a column for Accounting Today.

Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

The Foreign Relations Committee unfortunately has approved the GATCA Protocol.

But Rand Paul, like Horatius at the bridge protecting Rome, is throwing sand in the gears and isn’t allowing easy passage by the full Senate.

…the senator is right to insist that the OECD Protocol is dead on arrival.

Taxpayers all over the world owe him their gratitude.

In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

But she closes with the good news.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.

Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.

John Gray explains the procedural issues in a piece for Conservative Review.

Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments.  They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties.  Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.

Amen.

For those of us who want good tax policy, rejecting this pact is vital.

An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.

Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis.

For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.

But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.

I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.

He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.

The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.

He also is uncomfortable with the “war against cash.”

…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.

He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.

And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?

Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.

But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.

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The International Monetary Fund is a left-leaning bureaucracy that was set up to monitor the fixed-exchange-rate monetary system created after World War II.

Unsurprisingly, when that system broke down and the world shifted to floating exchange rates, the IMF didn’t go away. Instead, it created a new role for itself as self-styled guardian of economic stability.

Which is a bit of a joke since the international bureaucracy is most infamous for its relentless advocacy of higher taxes in economically stressed nations. So much so that I’ve labeled the IMF the Dr. Kevorkian of the world economy.

Or if that reference is a bit outdated for younger readers, let’s just say the IMF is the dumpster fire of international economics. Heck, if I was in Beijing, I would consider the bureaucracy’s recommendations for China an act of war.

To get an idea of the IMF’s ideological bias, let’s review it’s new report designed to discredit economic liberty (a.k.a., “neoliberalism” in the European sense or “classical liberalism” to Americans).

Here’s their definition.

The neoliberal agenda—a label used more by critics than by the architects of the policies— rests on two main planks. The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.

The authors describe the first plank accurately, but they mischaracterize the second plank.

At the risk of nitpicking, I would say “neoliberals” such as myself are much more direct than they imply. We want to achieve “a smaller role for the state” by reducing the burden of government spending.

Sure, we want to privatize government-controlled assets, but that’s mostly for reasons of economic efficiency rather than budgetary savings. And because we care about what actually works, we’re fans of spending caps rather than balanced budget rules.

But let’s set all that aside and get back to the report.

The IMF authors point out that governments have been moving in the right direction in recent decades.

There has been a strong and widespread global trend toward neoliberalism since the 1980s.

That sounds like good news.

And the report even includes a couple of graphs to show the trend toward free markets and limited government.

And the bureaucrats even concede that free markets and small government generate some good results.

There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.

But then the authors get to their real point. They don’t like unfettered capital flows and they don’t like so-called austerity.

However, there are aspects of the neoliberal agenda that have not delivered as expected. …removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels.

Looking at these two aspects of neoliberalism, the IMF proposes “three disquieting conclusions.”

I’m much more worried about stagnation and poverty than I am about inequality, so part of the IMF’s analysis can be dismissed.

Indeed, based on the sloppiness of previous IMF work on inequality, one might be tempted to dismiss the entire report.

But let’s look at whether the authors have a point. Are there negative economic consequences for nations that allow open capital flows and/or impose budgetary restraint?

They argue that passive financial flows (indirect investment) can be destabilizing.

Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners… Although growth benefits are uncertain, costs in terms of increased economic volatility and crisis frequency seem more evident. Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies…about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines… In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. …there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.

I certainly agree that there have been various crises in different nations, but I’m wondering whether the IMF is focusing on the symptoms rather than the underlying diseases.

What happened in the various nations, for instance, to trigger sudden capital flight? That seems to be a much more important question.

In some cases, such as Greece, the problem obviously isn’t capital flight. It’s the reckless spending by Greek politicians that created a fiscal crisis.

In other cases, such as Estonia, there was a bubble because of an overheated property market, and there’s no question the economy took a hit when that bubble popped.

But there’s a very strong case that Estonia’s open economy has generated plenty of strong growth over the years to compensate for that blip.

And it’s worth noting that criticisms of Estonia’s market-oriented policies often are based on grotesque inaccuracies, as was the case when Paul Krugman tried to blame the 2008 recession on spending cuts that occurred in 2009.

So I’m very skeptical of the IMF’s claim that capital controls are warranted. That’s the type of policy designed to insulate governments from the consequences of bad policy.

Now let’s shift to the fiscal policy issue. The IMF report correctly states that “Curbing the size of the state is another aspect of the neoliberal agenda.”

But the authors make a big (perhaps deliberate) mistake by then blaming neoliberals for adverse consequences associated with the “austerity” imposed by various governments.

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. …in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point.

The problem with this analysis is that it doesn’t differentiate between tax increases and spending cuts.

And since much of the “austerity” is the former variety rather than the latter, especially in Europe, it borders on malicious for the IMF to blame neoliberals (who want less spending) for the economic consequences of IMF-endorsed policies (mostly higher taxes).

Especially since research from the European Central Bank and International Monetary Fund (!) show that spending restraint is the pro-growth way of dealing with a fiscal crisis.

Let’s now look at what the IMF authors suggest for future policy. More taxes and spending!

…policymakers should be more open to redistribution than they are. …And fiscal consolidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups. But in some cases, the untoward distributional consequences will have to be remedied after they occur by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will themselves necessarily hurt growth is unfounded.

Wow, the last couple of sentences are remarkable. The bureaucrats want readers to believe that a bigger fiscal burden of government want have any adverse consequences.

That’s a spectacular level of anti-empiricism. I guess they want us to believe that nations such as France are economically stronger economy than places such as Hong Kong.

Wow.

Last but not least, here’s a final excerpt that’s worth sharing just because of these two sentences.

IMF Managing Director Christine Lagarde said the institution believed that the U.S. Congress was right to raise the country’s debt ceiling “because the point is not to contract the economy by slashing spending brutally now as recovery is picking up.”  …Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.

We’re supposed to believe the IMF is guided by evidence when the chief bureaucrat relies on Keynesian theory to make a dishonest argument. I wish that “slashing spending” was one of the options on the table when the debt limit was raised, but the fight was at the margins over how rapidly the burden of spending should climb.

But if Lagarde can make that argument with a straight face, I guess she deserves her massive tax-free compensation package.

P.S. Since IMF economists have concluded (two times!) that spending caps are the most effective fiscal rule, I really wonder whether the authors of the above study were being deliberately dishonest when they blamed advocates of lower spending for the negative impact of higher taxes.

P.P.S. I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period.

P.P.P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.P.S. Let’s close with something positive. IMF researchers last year found that decentralized government works better.

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I wrote last year about why Puerto Rico got into fiscal trouble.

Like Greece and so many other governments, it did the opposite of Mitchell’s Golden Rule. Instead of a multi-year period of spending restraint, it allowed the budget to expand faster than the private sector for almost two decades.

As the old saying goes, that’s water under the bridge. Since we can’t un-ring the bell of excessive spending in the past, what’s the best option for the future?

The House of Representatives has approved a rescue plan that is getting mixed reviews.

Desmond Lachman of the American Enterprise Institute is supportive but not enthusiastic about the proposal.

The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem… However, …the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.

The legislation creates a board with some power to force fiscal and economic reforms.

…a seven-member oversight board…is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.

So if there’s no taxpayer money involved, why do people say the legislation is a bailout?

Because the proposal allows Puerto Rico to defer payments on existing debt and then to restructure at least some of that debt. And “restructure” is a politically correct way of saying “partial default.”

So Puerto Rico will be bailed out to the extent that it will be able to stiff bondholders to some degree.

…it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due.

Lachman views that as the least worst of the possible options, so this indirect bailout is not an argument against the legislation. At least from his perspective.

He’s more worried about the fact that much more needs to be done to restore growth on the island.

…it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

Writing for Forbes, Ryan Ellis has a much more optimistic assessment of the overall deal.

…the bill is a big win for limited government conservatives. It has no taxpayer bailout of Puerto Rico–not a single dime of taxpayer money is sent down there. …Puerto Rico will have to work their own way out of $72 billion in debt and defaults. They will be helped by an “oversight board”…modeled after the D.C. control board from the 1990s and 2000s, and their job is to approve fiscal plans and budgets, conduct audits, etc.

But Ryan acknowledges that “work their own way out of” is just another way of saying that there is likely going to be a partial default.

The oversight board…will first try to get the 18 classes of bondholders to agree to a voluntary debt restructuring with the Puerto Rican government and government sponsored enterprises. If that fails, the control board will recommend a debt restructuring plan to be enforced by a non-bankruptcy federal judge.

That being said, he’s confident that the legislation won’t be a template for profligate states such as Illinois and California.

Congress is exercising its Constitutional authority to provide all “needful and useful” laws to govern possessions, which is a separate power from the federal bankruptcy clause. There’s no risk of “contagion” to other states.

Though he agrees with Lachman that there’s very little hope for a growth spurt.

It lacks the necessary pro-growth reforms needed for Puerto Rico to get out of its decade-long depression, reverse migration back to the island, attract capital, and create jobs.

Which is why Ryan likes the ideas being pushed by Congressman McArthur of New Jersey. He’s especially fond of territorial taxation for American companies that do business on the island.

The solution is to enact the same type of international tax reform we want to do in the rest of the world–the U.S. companies pay tax in Puerto Rico, but don’t have to pay a second tax to the IRS just to bring the money home. That’s what the rest of the world does, and it’s called “territoriality.” It’s a basic principle of conservative tax reform to move from our outdated “worldwide” tax system to a “territorial” one. There is no better place to start than Puerto Rico.

That would be a good step, and it would be a nice bookend to the very good law Puerto Rico already has for high-income taxpayers from the mainland.

Other conservatives have a less sanguine view of the legislation. Here are excerpts from a coalition statement.

People, companies, states, and territories don’t just “go” broke. Willful prior activity is required. …Puerto Rico has a long history of financial mismanagement brought about by progressive politics and crony capitalism.

Amen. Puerto Rico got in trouble because of bad policy. And the bad policy wasn’t just excessive spending. There have also been grossly misguided interventions such as price controls.

So it’s quite understandable that signatories to this statement are not overly excited that Puerto Rico will have a route for partial default.

Progressive politicians, who are already seeking an indirect bailout – in the form of upending the existing legal structure to allow bankruptcy ‐‐ in the U.S. Congress, argue that a bailout or bankruptcy will help the people of Puerto Rico.

They correctly list several procedural reforms and also point out that there are some obvious policy reforms that should be undertaken.

Sensible economic reforms include allowing Puerto Rico (1) to set its own minimum wage law, including not having a minimum wage law; (2) to be exempt from U.S. overtime rules (which have just been greatly expanded by presidential fiat); and (3) to be exempt from the Jones Act, a protectionist measure that regulates U.S. shipping practices.

Sadly, the legislation is very tepid on these non-fiscal reforms.

So what’s the bottom line? Should the law get three cheers, as Ryan Ellis argues? Two cheers as Desmond Lachman prefers? Or only one cheer (or maybe no cheer), which seems to be the position of some conservative activists?

My answer depends on my mood. When I’m going through a fire-breathing-libertarian phase, I’m with the conservatives. Puerto Rico spent itself into a ditch so they should suffer the consequences.

But when I’m in my long-time-observer-of-Washington mode, I try to imagine the best possible (or least-worst possible) outcome, then I think Paul Ryan and the Republicans did a decent job.

In other words, this is like the fiscal cliff deal back in late 2012. Disappointing in many respects, but not as bad as I would have predicted.

The key question now is whether Republicans insist on putting good people on the oversight board.

And that’s not a trivial concern. I remember thinking the 2011 debt limit fight led to a decent outcome because we got sequester-enforced caps on discretionary spending (not as good as a comprehensive spending cap, but still a good step).

And we even got a sequester in early 2013. But then later that year, and last year as well, Republicans joined with Democrats to bust the spending caps.

That doesn’t bode well for any policy that requires long-run fiscal discipline. Though maybe GOPers will be tougher this time since the spending restraint will be imposed on people who don’t vote in congressional elections.

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