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Archive for the ‘Government intervention’ Category

When Donald Trump and Hillary Clinton agree on things, it’s always bad news for taxpayers.

Now they both agree that it’s somehow the federal government’s job to subsidize child care, though they’ve each concocted different ways of implementing this new form of redistribution.

The Wall Street Journal opines on this fiscally incontinent bidding war.

…both candidates [are] offering multiple subsidies for raising kids. This will end up raising prices and it won’t address the real reason parents feel squeezed: a decade of slow or no economic growth. Donald Trump on Tuesday proposed a tax deduction that would let families write off the average cost of child care for up to four children, among other ideas. Hillary Clinton has already promised to limit care expenses to 10% of income; raises for caretakers; universal pre-K; an increase in the $1,000 per child tax credit; a new program for student parents, and more.

Looking at the details, Trumps plan would exacerbate the EITC problem.

Here’s the dirty detail: Mr. Trump proposed an up to $1,200 child-care tax rebate for low-income families that would be delivered by expanding the earned-income tax credit. But the credit would inevitably phase out as income increases and disappears at $31,200. The result would be a higher inframarginal tax cliff—when people are discouraged from earning more income because they lose more in benefits than they can gain in wages. This disincentive to advancement is already steep.

He’s also proposing a new subsidy for savings accounts.

Mr. Trump also proposes savings accounts for child care to add to the tax-free destinations for retirement, health care, college and more. This new benefit, worth up to $2,000 a year, would make tax reform more difficult. The government would also match parental contributions at 50% up to $1,000 a year for low-income families. That’s a wonky way of unveiling a new $500 transfer payment.

And Trump even wants to engage in a no-win bidding war with Hillary Clinton to create a new European-style entitlement for paid maternity leave (even though, as a columnist for the New York Times even admitted, this type of scheme will backfire against women by making them less attractive to employers).

Then there’s six weeks of paid maternity leave that Mr. Trump says he would guarantee through unemployment insurance. He claims he’ll pay for this by cleaning out fraudulent payments, though this is his funding mechanism for every proposal. Mr. Trump will nonetheless lose the family bidding war with Mrs. Clinton, who wants 12 weeks of paid leave for new mothers and fathers.

The Clinton plan, meanwhile, is a predictably statist prescription for more intervention and subsidies.

And the WSJ‘s editorial correctly points out that is a recipe for ever-higher costs.

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The fact that Hillary Clinton wants bigger government is not the most shocking revelation in the world.

Her voting record as a Senator was almost identical to Bernie Sanders’.

And every single proposal in her big economic speech last month required a larger burden of government.

But it’s rather odd to find the Republican nominee being the statist Tweedledee to match the statist Tweedledum.

In an article for Commentary, Noah Rothman looks at Trump’s overall approach to fiscal policy.

Donald Trump…is a self-described Republican who has cast aside the austere facade of fiscal conservatism in favor of any and every spending proposal that crosses his transom. Promising the electorate the world in the campaign with every intention of working out the details after the election is hardly a new phenomenon, but it used to be one that Republicans rejected. Today, under Trump’s corrupting umbra, the GOP has become the party of wild assurances and cascading spending proposals with no intention of ever making good on them.

Actually, I fear the spending promises would be fulfilled if Trump got to the White House. Though I agree that Trump personally doesn’t care if they are either adopted or forgotten.

Here are just a few of the spending promises Trump has made.

Trump promised to augment the Pentagon’s budget by repealing the portions of the Budget Control Act of 2011 (aka, “Sequester”) that imposed limits on defense spending. …Trump has called for “more funding” for the Department of Veterans Affairs to augment job training, research on traumatic stress, brain injury, and suicide prevention, and to hire more service providers at VA hospitals. The Republican nominee promised a massive $500 billion public works program that you dare not call a “stimulus,” which he proudly boasted would spend more than double what Hillary Clinton has pledged to refurbish America’s infrastructure. …He has attacked as cold-hearted the idea that America’s entitlement state must be curtailed and reformed—a massive expenditure that already consumes nearly two-thirds of the nation’s annual outlays.

In other words, Trump is a big-government, Nixon-style Republican.

Which means advocates of limited government are not exactly thrilled about November.

P.S. Other Republican presidential candidates have boosted the burden of government when they took office (President George H.W. Bush and President George W. Bush are two dismal examples of this phenomenon). But they at least pretended to be vaguely in favor of smaller government during their respective campaigns. The fact that Trump doesn’t even fake it during the campaign suggests that economic policy would be very bad if he ever got to the White House.

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The War against Cash continues.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.

Now it’s time for Part IV.

Professor Larry Summers of Harvard University is President Obama’s former top economic adviser and he’s a relentless advocate of higher taxes and bigger government. If he favors an idea, it doesn’t automatically make it bad, but it’s surely a reason to be suspicious. So you won’t be surprised to learn that he wrote a column for the Washington Post applauding the move in Europe to eliminate €500 notes. Indeed, he wants to ban all large-denomination notes.

There is little if any legitimate use for 500-euro notes. Carrying out a transaction with 20 50-euro notes hardly seems burdensome, and this would represent over $1,000 in purchasing power. Twenty 200-euro notes would be almost $5,000. Who in today’s world needs cash for a legitimate $5,000 transaction? …Cash transactions of more than 3,000 euros have in fact been made illegal in Italy, while France has placed the limit at 1,000 euros. …In contrast to the absence of an important role for 500-euro notes in normal commerce, these bills have a major role facilitating illicit activity, as suggested by their nickname —“Bin Ladens.” …Estimates by the International Monetary Fund and others of total annual money laundering consistently exceed $1 trillion. High-denomination notes also have a substantial role in facilitating tax evasion and capital flight.

Who “needs cash” for transactions, he asks, but isn’t the real issue whether people should have the freedom to use cash if that’s what they prefer?

Also, in dozens of trips to Europe since the adoption of the euro, I’ve never heard anyone refer to the €500 note as a “Bin Laden,” so I suspect that’s an example of Summers trying to demonize something that he doesn’t like.

But perhaps the most important revelation from his column is that he admits there’s no evidence that crime would be stopped by his plan to restrict cash.

To be sure, it is difficult to estimate how much crime would be prevented by stopping the creation of 500-euro notes. It would surely impose some burdens on criminals and might interfere with some transactions, which is not unimportant.

Unsurprisingly, he wants to coerce other governments into restricting high-value notes.

Europe has led on a significant security issue. But its action should be seen as a beginning, not an end. As a first follow-on, the world should demand that Switzerland stop issuing 1,000-Swiss-franc notes. After Europe’s action, these will stand out as the world’s highest-denomination note by a huge margin. Switzerland has a long and unfortunate history with illicit finance. It would be tragic if it were to profit from criminal currency substitution following Europe’s bold step. …There would be a strong case for stopping the creation of notes with values greater than perhaps $50.

Summers isn’t the only academic from Harvard who is agitating to restrict cash. Prof. Kenneth Rogoff (who’s also the former Chief Economist at the IMF) recently wrote a piece for the Wall Street Journal explaining his hostility.

…paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. …There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

At the risk of bursting his balloon, cash played almost no role in the most notorious terrorist event, the 9-11 attacks. And Rogoff admits that bad guys would use easy substitutes.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards.

So he then dredges up the argument that cash facilitates tax evasion.

Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income.

I addressed these issues in Part I of this series, but I’ll simply add that the academic evidence shows that lower tax rates are the best way of boosting tax compliance (as even the IMF has admitted).

To his credit, Rogoff acknowledges that his preferred policy would reduce the rights of individuals.

Perhaps the most challenging and fundamental objection to getting rid of cash has to do with privacy—with our ability to spend anonymously. But where does one draw the line between this individual right and the government’s need to tax and regulate.

His main argument is that our rights should be reduced to give government more power. He especially wants central bankers to have more power to impose Keynesian monetary policy.

Cutting interest rates delivers quick and effective stimulus by giving consumers and businesses an incentive to borrow more. It also drives up the price of stocks and homes, which makes people feel wealthier and induces them to spend more. Countercyclical monetary policy has a long-established record, while political constraints will always interfere with timely and effective fiscal stimulus.

Yes, he’s right. Activist monetary policy does have a long-established track record. It played a key role in causing the Great Depression, the 1970s stagflation, and the recent financial crisis.

Hooray, Federal Reserve!

And Rogoff wants the arsonists at the Fed to have more power to create boom-bust cycles.

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these loses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy. Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. …if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.

Needless to say, I disagree with Rogoff and agree with Thomas Sowell that an institution that repeatedly screws up shouldn’t be given more power.

Especially since I’m concerned that the option to use bad monetary policy may actually be one of the excuses that politicians use for not fixing the problems that actually are hindering growth.

So, yes, instead of expanding their power, I want to clip the wings of the Federal Reserve and other central banks.

Now let’s consider the harm that would be caused by restricting or banning cash. Two professors from NYU Law School looked at some of the logistical issues of a shift to digital money. The echoed some of the points raised by Summers and Rogoff, but they also pointed out some downsides. Such as government being able to monitor everything we buy.

…centralization of banking under this system would also create a Leviathan with the power to monitor and control the personal finances of every citizen in the country. This is one of the chief reasons why many are loath to give up on hard currency. With digital money, the government could view any financial transaction and obtain a flow of information about personal spending that could be used against an individual in a whole host of scenarios.

It also would cause a mess because so many people around the world rely on dollars, something that’s beneficial to the U.S. Treasury and foreigners from places with untrustworthy central banks.

…a transition to digital currency might come at a large cost for the U.S. in particular, because the dollar remains the world’s de facto reserve currency. The U.S. collects enormous seigniorage revenue that accrues to the economy when the Federal Reserve prints dollars that are exported abroad in exchange for foreign goods and services. These bank notes ultimately end up in countries with less reliable central banks where locals prefer to hold U.S. currency instead of their own. Forfeiting this franchise as the world’s reserve currency might be too costly, as the U.S. currency held abroad exceeds half a trillion dollars, according to reliable estimates.

Professor Larry White of George Mason University (also a Senior Fellow at Cato) writes about what he calls “currency prohibitionists.”

The rhetoric of the anti-high-denomination gang has gotten increasingly shrill.  …Charles Goodhart in September called the European Central Bank and the Swiss National Bank “shameless” for issuing “vastly high-denomination notes,” namely the €500 and SWF 1000, “which are there to finance the drug deals.” …I have an alternative suggestion for removing $100 bills from the illegal drug trades:  Legalize the trade.  …My suggestion would reduce the demand for high-denomination currency.

Nice plug for sensible libertarian policy.

But even if one favors drug prohibition, that doesn’t mean currency prohibition will be effective.

Today’s high-denomination-currency prohibitionists, like today’s drug prohibitionists and yesterday’s alcohol prohibitionists, only think about the supply side.  But does anyone think that banning the $100 bill during Prohibition (when it had a purchasing power more than 11 times today’s, as evaluated using the CPI) and even higher denominations would have put a major dent in the rum-running business, if an army of T-Men couldn’t? …eliminating high denomination, high value notes we would make life harder” for such criminal enterprises.  No doubt.  But we would also make life harder for everyone else.  The rest of us also find high-denomination notes convenient now and again for completely legal and non-controversial purposes, like buying automobiles and carrying vacation cash compactly.  …currency prohibitionists too often regard those who defend high-denomination notes not as intellectually honest but mistaken opponents, but rather as morally suspect characters.  Larry Summers goes out of his way to smear an ECB executive from Luxembourg (who has had the temerity to ask for better evidence before accepting the case for prohibiting high-denomination notes)… The case for prohibiting large-denomination currency, to summarize, is largely based on guilt by association or on wishful thinking about the benefits of allowing greater range of action to discretionary monetary policy.

On the topic of crime and cash, an article for the WSJ debunks one of the left’s main talking points. If using cash is supposed to be a sign of criminal activity, why are the world’s two most cash-friendly nations also two of the safest and crime-free countries?

Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens… The current hoarding in Switzerland and Japan thus underscores one of many ways in which cash is a basic tool of economic liberty: It lets people shield themselves from monetary policies that would force their savings into weak economies that can’t attract sufficient spending or investment on their own. These economies need reforms that boost incentives to work and invest, not negative interest rates and cash limits that raid the bank accounts of law-abiding citizens.

A column by Sarah Jeong in Bloomberg explores some of the additional implications of cash restrictions.

…wherever information gathers and flows, two predators follow closely behind it: censorship and surveillance. The case of digital money is no exception. Where money becomes a series of signals, it can be censored; where money becomes information, it will inform on you. …the Department of Justice began to come under fire for Operation Choke Point…the means were highly dubious. …the DOJ got creative, and asked banks and payment processors to comply with government policies, and proactively police “high-risk” activity. Banks were asked to voluntarily shut down the kinds of merchant activities that government bureaucrats described as suspicious. The price of resistance was an active investigation by the Department of Justice. …Where paternalism is bluntly enforced through a bureaucratic game of telephone, unpleasant or even inhumane unintended consequences are bound to result. …the cashless society offers the government entirely new forms of coercion, surveillance, and censorship. …As paper money evaporates from our pockets and the whole country—even world—becomes enveloped by the cashless society, financial censorship could become pervasive, unbarred by any meaningful legal rights or guarantees.

Her observation on Operation Choke Point is very important since that campaign has been a chilling example of how government abuses its power in the financial sector.

Megan McArdle’s Bloomberg column touches on some additional concerns.

What’s not to like? Very little. Except, and I’m afraid it’s a rather large exception, the amount of power that this gives the government over its citizens. Consider the online gamblers who lost their money in overseas operations when the government froze their accounts. Now, what they were doing was indisputably illegal in these here United States, and I am not claiming that they were somehow deeply wronged. But consider how immense the power that was conferred upon the government by the electronic payments system; at a word, your money could simply vanish. …Unmonitored resources like cash…create a sort of cushion between ordinary people and a government with extraordinary powers. Removing that cushion leaves people who aren’t criminals vulnerable to intrusion into every remote corner of their lives. …If we want to move toward a cashless society — and apparently we do — then we also need to think seriously about limiting the ability of the government to use the payments system as an instrument to control the behavior of its citizens.

For what it’s worth, one way of getting the benefits of a cashless world without the risks is with private digital monies such as bitcoin.

Steve Forbes nails the issue.

Gaining attention these days is the idea of abolishing high denominations of the dollar and the euro. This concept graphically displays the astonishing stupidity–and intellectual bankruptcy–of today’s liberal economic policymakers and the economics profession. …The ostensible reason is to help in the fight against terrorists, bribers, drug dealers and tax evaders by making it more inconvenient for these bad guys to move around and store their ill-gotten cash. …The notion that such evildoers as the Mexican drug cartels and ISIS will be seriously disrupted by the absence of the Benjamin–”These sacks of cash are too heavy now. Let’s surrender!”–is so comical… Monetary expert Seth Lipsky pithily points out in the New York Post, “When criminals use guns, the Democrats want to take guns from law-abiding citizens. When terrorists use hundreds, the liberals want to deny the rest of us the Benjamins.”

Excellent point. Politicians should concentrate on restricting the freedom of bad guys, not ordinary citizens.

So what are the implications of the war against cash? They aren’t pretty.

The real reason for this war on cash–start with the big bills and then work your way down–is an ugly power grab by Big Government. People will have less privacy: Electronic commerce makes it easier for Big Brother to see what we’re doing, thereby making it simpler to bar activities it doesn’t like, such as purchasing salt, sugar, big bottles of soda and Big Macs.

Steve raises a good point about tracking certain purchases. Imagine the potential mischief if politicians had a mechanism to easily impose discriminatory taxes on disapproved products.

He also notes that the war on cash is motivated by a desire to more effectively implement an ineffective policy.

Policymakers in Washington, Tokyo and the EU think the reason that their economies are stagnant is that ornery people aren’t spending and investing the way they should. How to make these benighted, recalcitrant beings do what they’re supposed to do? The latest nostrum from our overlords is negative interest rates. If people have to pay fees to store their money, as they do to put their stuff in storage facilities, then, by golly, they might be more inclined to spend it.

And Steve correctly observes that bad monetary policy is now an excuse to not fix the problems that actually are contributing to economic stagnation.

Manipulating the value of money and controlling interest rates, i.e., the price of money, never works. Money measures value. It is a claim on services and is a tool for facilitating commerce and investing. The reason economies around the world are in the ditch–which is fueling anger, discontent and ugly politics–is structural, government-created barriers: unstable money, suffocating rules and too-high rates of taxation.

James Grant, in a column for the Wall Street Journal, is not impressed by the anti-cash agitprop and specifically debunks some of the arguments put forth by Rogoff. He starts with some very sensible observation that politicians should reform drug laws and tax laws rather than restricting our freedom to use cash.

Terrorists traffic in cash, Mr. Rogoff observes. So do drug dealers and tax cheats. Good, compliant citizens rarely touch the $100 bills that constitute a sizable portion of the suspiciously immense volume of greenbacks outstanding—$4,200 per capita. Get rid of them is the author’s message. Then, again, one could legalize certain narcotics to discommode the drug dealers and adopt Steve Forbes’s flat tax to fill up the Treasury. Mr. Rogoff considers neither policy option. Government control is not only his preferred position. It is the only position that seems to cross his mind.

Grant makes the (obvious-to-folks not-in-Washington) point that restricting cash to enable Keynesian monetary policy is akin to throwing good money after bad.

Mr. Rogoff lays the blame for America’s lamentable post-financial-crisis economic record not on the Obama administration’s suffocating tax and regulatory policies. The problem is rather the Fed’s inability to put its main interest rate, the federal funds rate, where it has never been before. In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. …What would you do if your bank docked you, say, 3% a year for the privilege of holding your money? Why, you might convert your deposit into $100 bills, rent a safe deposit box and count yourself a shrewd investor. Hence the shooting war against currency. …In the topsy-turvy world of Mr. Rogoff, negative rates would be the reward to impetuousness and the cost of thrift. …Never mind that, in post-crisis America, near 0% interest rates have failed to deliver the promised macroeconomic goods. Come the next crackup, Mr. Rogoff would double down—and down.

And he echoes the insights of Austrian-school scholars about how easy-money policies are the cause of problems rather than the cure.

Interest rates are prices. They impart information. They tell a business person whether or not to undertake a certain capital investment. They measure financial risk. They translate the value of future cash flows into present-day dollars. Manipulate those prices—as central banks the world over compulsively do—and you distort information, therefore perception and judgment. The ultra-low rates of recent years have distorted judgment in a bullish fashion. True, they have not, at least in America, ignited a wave of capital investment—who needs it in a comatose economy? They have rather facilitated financial investment. They have inflated projected cash flows and anesthesized perceptions of risk (witness the rock-bottom yields attached to corporate junk bonds). In so doing, they have raised the present value of financial assets. Wall Street has enjoyed a wonderful bull market. The trouble is that the Fed has become hostage to that very bull market. The higher that asset prices fly, the greater the risk of the kind of crash that impels new rounds of intervention, new cries for government spending, bigger deficits—more “stimulus.”

Let’s close with the good news is that Switzerland doesn’t seem very interested in following Europe and the United States down the primrose path of seeking to curtail monetary freedom.

Manuel Brandenberg, a lawmaker in the Swiss canton of Zug, loves cash. …That belief in bills is shared by many of his compatriots, who have a penchant for hard currency even when electronic options are available. In a country whose wealth managers flourished thanks to banking secrecy, citizens often cherish the untraceable privacy conferred by notes and coins. “Cash is property and cash is freedom,” said Brandenberg… Unlike their neighbors, the Swiss have no plans to reconsider banknote denominations — 10, 20, 50, 100 and 200 francs. Not even the highest of 1,000 francs ($1,040). …The predilection for notes and coins is evident on the streets of Zurich, where a number of stores don’t take plastic — among them Belcafe at Bellevue, a busy transport hub in the center. …Roughly 20 percent of purchases — including large sums for jewelry — were paid in cash, then-Finance Minister Eveline Widmer-Schlumpf told parliament in 2014. …“There’s no reason to change things,” said Rickli. “I don’t want the state to know who goes to what restaurant. That’s none of the government’s business.”

Thank goodness for the “sensible Swiss.” On so many issues, Switzerland is a beacon of common sense and individual freedom.

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Frederic Bastiat, the great French economist (yes, such creatures used to exist) from the 1800s, famously observed that a good economist always considers both the “seen” and “unseen” consequences of any action.

A sloppy economist looks at the recipients of government programs and declares that the economy will be stimulated by this additional money that is easily seen, whereas a good economist recognizes that the government can’t redistribute money without doing unseen damage by first taxing or borrowing it from the private sector.

A sloppy economist looks at bailouts and declares that the economy will be stronger because the inefficient firms that stay in business are easily seen, whereas a good economist recognizes that such policies imposes considerable unseen damage by promoting moral hazard and undermining the efficient allocation of labor and capital.

We now have another example to add to our list. Many European nations have “social protection” laws that are designed to shield people from the supposed harshness of capitalism. And part of this approach is so-called Employment Protection Legislation, which ostensibly protects workers by, for instance, making layoffs very difficult.

The people who don’t get laid off are seen, but what about the unseen consequences of such laws?

Well, an academic study from three French economists has some sobering findings for those who think regulation and “social protection” are good for workers.

…this study proposes an econometric investigation of the effects of the OECD Employment Protection Legislation (EPL) indicator… The originality of our paper is to study the effects of labour market regulations on capital intensity, capital quality and the share of employment by skill level using a symmetric approach for each factor using a single original large database: a country-industry panel dataset of 14 OECD countries, 18 manufacturing and market service industries, over the 20 years from 1988 to 2007.

One of the findings from the study is that “EPL” is an area where the United States historically has always had an appropriately laissez-faire approach (which also is evident from the World Bank’s data in the Doing Business Index).

Here’s a chart showing the US compared to some other major developed economies.

It’s good to see, by the way, that Denmark, Finland, and the Netherlands engaged in some meaningful reform between 1994-2006.

But let’s get back to our main topic. What actually happens when nations have high or low levels of Employment Protection Legislation?

According to the research of the French economists, high levels of rules and regulations cause employers to substitute capital for labor, with low-skilled workers suffering the most.

Our main estimation results show an EPL effect: i) positive for non-ICT physical capital intensity and the share of high-skilled employment; ii) non-significant for ICT capital intensity; and (iii) negative for R&D capital intensity and the share of low-skilled employment. These results suggest that an increase in EPL would be considered by firms to be a rise in the cost of labour, with a physical capital to labour substitution impact in favour of more non-sophisticated technologies and would be particularly detrimental to unskilled workers. Moreover, it confirms that R&D activities require labour flexibility. According to simulations based on these results, structural reforms that lowered EPL to the “lightest practice”, i.e. to the US EPL level, would have a favourable impact on R&D capital intensity and would be helpful for unskilled employment (30% and 10% increases on average, respectively). …The adoption of this US EPL level would require very largescale labour market structural reforms in some countries, such as France and Italy. So this simulation cannot be considered politically and socially realistic in a short time. But considering the favourable impact of labour market reforms on productivity and growth. …It appears that labour regulations are particularly detrimental to low-skilled employment, which is an interesting paradox as one of the main goals of labour regulations is to protect low-skilled workers. These regulations seem to frighten employers, who see them as a labour cost increase with consequently a negative impact on low-skilled employment.

There’s a lot of jargon in the above passage for those who haven’t studied economics, but the key takeaway is that employment for low-skilled workers would jump by 10 percent if other nations reduced labor-market regulations to American levels.

Though, as the authors point out, that won’t happen anytime soon in nations such as France and Italy.

Now let’s review an IMF study that looks at what happened when Germany substantially deregulated labor markets last decade.

After a decade of high unemployment and weak growth leading up to the turn of the 21th century, Germany embarked on a significant labor market overhaul. The reforms, collectively known as the Hartz reforms, were put in place in three steps between January 2003 and January 2005. They eased regulation on temporary work agencies, relaxed firing restrictions, restructured the federal employment agency, and reshaped unemployment insurance to significantly reduce benefits for the long-term unemployed and tighten job search obligations.

And when the authors say that long-term unemployment benefits were “significantly” reduced, they weren’t exaggerating.

Here’s a chart from the study showing the huge cut in subsidies for long-run joblessness.

So what were the results of the German reforms?

To put it mildly, they were a huge success.

…the unemployment rate declined steadily from a peak of almost 11 percent in 2005 to five percent at the end of 2014, the lowest level since reunification. In contrast, following the Great Recession other advanced economies — particularly in the euro area — experienced a marked and persistent increase in unemployment. The strong labor market helped Germany consolidate its public finances, as lower outlays on unemployment benefits resulted in lower spending while stronger taxes and social security contribution pushed up revenues.

Gee, what a shocker. When the government stopped being as generous to people for being unemployed, fewer people chose to be unemployed.

Which is exactly what happened in the United States when Congress finally stopped extending unemployment benefits.

And it’s also worth noting that this was also a  period of good fiscal policy in Germany, with the burden of spending rising by only 0.18 percent annually between 2003-2007.

But the main lesson of all this research is that some politicians probably have noble motives when they adopt “social protection” legislation. In the real world, however, there’s nothing “social” about laws and regulations that either discourage employers from hiring people and or discourage people from finding jobs.

P.S. Another example of “seen” vs “unseen” is how supposedly pro-feminist policies actually undermine economic opportunity for women.

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While economists are famous for their disagreements (and their incompetent forecasts), there is universal consensus in the profession that demand curves slope downward. That may be meaningless jargon to non-economists, but it simply means that people buy less of something when it becomes more expensive.

And this is why it makes no sense to impose minimum wage requirements, or to increase mandated wages where such laws already exist.

If you don’t understand this, just do a thought experiment and imagine what would happen if the minimum wage was $100 per hour. The answer is terrible unemployment, of course, which means it’s a very bad idea.

So why, then, is it okay to throw a “modest” number of people into the unemployment line with a “small” increase in the minimum wage?

Yet some politicians can’t resist pushing such policies because it makes them seem like Santa Claus to low-information voters. Vote for me, they assert, because I’ll get you a pay raise!

All of this sounds good, and it may even be the final result for some workers. But there’s overwhelming evidence that you get more unemployment when politicians boost the minimum wage.

There are no “magic boats.” In the real world, businesses only hire workers when they expect that additional employees will generate more than enough revenue to offset their costs. So when politicians artificially increase the cost of hiring workers, there will be some workers (particularly those with low skills) who become redundant.

And that’s exactly what we’re seeing in cities that have chosen to mandate higher minimum wages.

The Wall Street Journal opines on Seattle’s numbers.

Seattle’s increase last year seems to be reducing employment. That’s the finding of a new report by researchers at the University of Washington. The study compared nine months of 2015 in Seattle, where the wage is ticking up gradually and hit $13 an hour in January, with similar areas elsewhere in Washington. …The researchers found that the ordinance decreased the low-wage employment rate by about one-percentage point. …The ordinance “modestly held back” employment of low-wage earners, and hours worked “lagged behind” regional trends, on average four hours each quarter (or 19 minutes a week). Many such individuals moved to take jobs outside the city at “an elevated rate compared to historical patterns,” says the report. …None of this will surprise anyone who understands that increasing the cost of something will reduce the demand for it. Then again, that concept seems to elude both major presidential candidates, who have floated national minimum-wage increases.

By the way, it’s not just Trump and Clinton supporting this destructive policy. Mitt Romney also was on the wrong side back in 2012.

And it goes without saying that Obama has been a demagogue on the issue.

Sigh.

Let’s examine evidence from another city. Mark Perry of the American Enterprise Institute looks at what has been happening in Washington, DC.

Since the DC minimum wage increased in July 2015 to $10.50 an hour, restaurant employment in the city has increased less than 1% (and by 500 jobs), while restaurant jobs in the surrounding suburbs increased 4.2% (and by 7,300 jobs). An even more dramatic effect has taken place since the start of this year – DC restaurant jobs fell by 1,400 jobs (and by 2.7%) in the first six months of 2016 between January and July – that’s the largest loss of District food jobs during a 6-month period in 15 years. Perhaps some of those job losses were related to the $1 an hour minimum wage hike on July 1, bringing the city’s new minimum wage to $11.50 an hour. In contrast, restaurant employment outside the city grew at a 1.6% rate in the suburbs (and by 2,900 jobs) during the January to July period. …While it might take several more years to assess the full impact, the preliminary evidence so far suggests that DC’s minimum wage law is having a negative effect on staffing levels at the city’s restaurants. At the same time that suburban restaurants have increased employment levels by nearly 3,000 new positions since January, restaurants in the District have shed jobs in five out of the last six months, with a total loss of 1,400 jobs during that period (an average of nearly 8 jobs lost every day). The last time DC experienced restaurant job losses in five out of six consecutive months was 25 years ago in 1991, and the last time 1,400 jobs were lost over any six-month period was 15 years ago during the 2001 recession.

Here’s a chart looking at how restaurant employment in DC and the suburbs used to be closely correlated, but how there’s been a divergence since the city hiked the minimum wage.

As Mark noted, we’ll know even more as time passes, but the net result so far is predictably negative.

For additional background info, this video is a succinct explanation of why minimum-wage mandates are such a bad idea.

Let’s close with something rather amusing. It turns out that the State Department, during Hillary Clinton’s tenure, actually understood that higher minimum wages destroy jobs. Indeed, her people were even willing to fight against such job-killing measures.

But in Haiti rather than America, as Politifact reports.

Memos from 2008 and 2009 obtained by Wikileaks strongly suggest…that the State Department helped block the proposed minimum wage increase. The memos show that U.S. Embassy officials in Haiti clearly opposed the wage hike and met multiple times with factory owners who directly lobbied against it to the Haitian president. …media outlets assessed the cables and found, among many other revelations, that the “U.S. Embassy in Haiti worked closely with factory owners contracted by Levi’s, Hanes, and Fruit of the Loom to aggressively block a paltry minimum wage increase” for workers in apparel factories. …Deputy Chief of Mission David Lindwall put it most bluntly, when he said the minimum wage law “did not take economic reality into account but that appealed to the unemployed and underpaid masses.” …The U.S. Embassy, meanwhile, continued to lament the hike… USAID studies found that a 200 gourdes minimum wage “would make the sector economically unviable and consequently force factories to shut down.”

Hmmm…., I wonder if some of those textile companies made contributions to the Clinton Foundation?

P.S. People in Switzerland obviously understand this issue, overwhelmingly voting against a minimum-wage mandate in 2014.

P.P.S. As Walter Williams has explained, minimum wage laws are especially harmful for blacks.

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I’ve been accused of making supposedly inconsistent arguments against Hillary Clinton. Make up your mind, these critics say. Is she corrupt or is she a doctrinaire leftist?

I always respond with the simple observation that she’s both. Not that this should come as a surprise. Proponents of bigger government have long track records of expanding their bank accounts at the same time they’re expanding the burden of the public sector. This is true for radical leftists in places like Venezuela and it’s true for establishment leftists in places like America.

And it’s definitely true for Hillary Clinton. I shared lots of information about Hillary’s corruption yesterday, so let’s spend some time today detailing her statist policy agenda.

Consider her new entitlement scheme for childcare. As the Wall Street Journal opines, it’s even worse than an ordinary handout.

Hillary Clinton is methodically expanding her plans to supervise or subsidize those remaining spheres of human existence unspoiled by government. Mrs. Clinton rolled out her latest proposal…to make child care more affordable for working parents and also to raise the wages of child-care workers. The Democrat didn’t mention how she’d resolve the contradiction between her cost-increasing ideas and her cost-reducing ideas, though you can bet it will be expensive. …Her solution is for the feds to cap the share of a family’s income that goes toward care at 10%, with the rest of the tab covered by various tax benefits, direct cash payments and scholarships.

Her scheme to cap a family’s exposure so they don’t have to pay more than 10 percent may be appealing to some voters, but it is terrible economics.

Although we don’t have details on how the various handouts will work, the net effect surely will be to exacerbate a third-party payer problem that already is leading to childcare costs rising faster than the overall inflation rate.

After all, families won’t care about the cost once it rises above 10 percent of their income since Hillary says that taxpayers will pick up the tab for anything about that level.

There’s more information about government intervention in the editorial.

The auditors at the Government Accountability Office report that there are currently 45 federal programs dedicated to supporting care “from birth through age five,” spread across multiple agencies. The Agriculture Department runs a nursery division, for some reason. …Mrs. Clinton also feels that caregivers are paid “less than the value of their worth,” and she promises to increase their compensation. How? Why, another program of course. She’ll call it the Respect and Increased Salaries for Early Childhood Educators (Raise) Initiative, which she says is modelled after another one of her proposals, the Care Workers Initiative. …If families think day care and health care are “really expensive” now, wait until they have to pay for Mrs. Clinton’s government.

Just as subsidized childcare will be very expensive if Hillary gets elected, the same will be true for higher education.

But in a different way. The current system of subsidies and handouts gives money (in the form of grants and loans) to students, who then give the money to colleges and universities. This is a great deal for the schools, who have taken advantage of the programs by dramatically increasing tuition and fees, while also expanding bureaucratic empires.

Hillary’s plan will expand the subsidies for colleges and universities, but students apparently no longer will serve as the middlemen. Instead, the money will go directly from Uncle Sam to the schools.

Here’s some analysis from the Pope Center on Hillary’s new scheme.

Clinton has come out with a plan to make public colleges and universities free for families with earnings less than $125,000 annually by 2021. …“free” college…would depend on state governments going along with her scheme whereby the federal government would pay them if they cooperate by charging no tuition… Suppose a state decides to adopt Clinton’s free college plan. What would the consequences be? …That would mean at least a modest increase in enrollment, but it would come mainly from the most academically marginal students. The colleges and universities that gained in those enrollments would also find they need to increase remedial programs. …Another adverse result from making college tuition free would be that many students would devote less effort to their courses. …Federal Reserve Bank of New York economist Aysegul Sahin…studied the effort college students put into their work in a 2004 paper“The Incentive Effects of Higher Education Subsidies on Student Effort.” She concluded, “Low-tuition, high-subsidy policies cause an increase in the ratio of less highly-motivated students among the college graduates and that even highly-motivated ones respond to lower tuition by choosing to study less.”

As with much of Hillary’s agenda, we don’t have full details. I strongly suspect that colleges and universities will have a big incentive to jack up tuition and fees to take advantage of the new handout, though I suppose we have to consider the possibility (fantasy?) that the plan will somehow include safeguards to prevent that from happening.

Oh, and don’t forget all the tax hikes she’s proposing to finance bigger government.

The really sad part about all this is that her husband actually wound up being one of the most market-oriented presidents in the post-World War II era. I’ve written on this topic several times (including speculation on whether the credit actually belongs to the post-1994 GOP Congress).

Is it possible that Hillary decides to “triangulate” and move to the center if she gets to the White House?

Yes, but I’m not brimming with optimism.

The Wall Street Journal has some depressing analysis on Bill Clinton vs Hillary Clinton.

…the Obama-era Democratic Party has repudiated the Democratic Party’s Bill-era centrist agenda. They now call themselves progressives, not New Democrats… The Clinton contradiction is that she claims she’ll produce economic results like her husband did with economic policies like Mr. Obama’s.

The editorial looks at Bill Clinton’s sensible record and compares it to what Hillary is proposing.

His wife wants to nearly double the top tax rate on long-term cap gains to 43.4% from 23.8%, in the name of ending “quarterly capitalism.” That’s higher than the 40% rate under Jimmy Carter, and she’d also impose a minimum tax on millionaires and above, details to come. …Mrs. Clinton has repudiated the Trans-Pacific Trade Partnership that she had praised as Secretary of State. …She wants to extend Dodd-Frank regulation to nonbanks, and she promises to entrench Mr. Obama’s anticarbon central planning at the EPA and expand ObamaCare with price controls on new medicines. …Mrs. Clinton is proposing to impose many more such work disincentives. She’ll bestow tax credits on everything from child care to elderly care, from college tuition to businesses that share profits with workers. To the extent her new mandates for family leave, the minimum wage, overtime and “equal pay” increase the cost of labor, she’ll drive more Americans out of the workforce. Oh, and…Mrs. Clinton wants to “enhance” Social Security benefits and make Medicare available to pre-retirees.

I’ve already written about her irresponsible approach to Social Security.

And I also opined on the issue in this interview.

The bottom line is that we’re in a very deep hole and Hillary Clinton, simply for reasons of personal ambition, wants to dig the hole deeper. As I remarked in the interview, she’s akin to a Greek politician agitating for more spending in 2007.

Given all this, is anyone surprised that “French President Francois Hollande endorsed Hillary Clinton”? What’s next, a pro-Hillary campaign commercial featuring Nicolas Maduro? A direct mail piece from the ghost of Che Guevara?

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When I wrote last year about “Hillary Clinton’s Plan to Increase the Cost of College,” I explained that colleges and universities boost tuition when the government hands out more subsidies to students, so the main effect is to make higher education even more expensive.

Today, let’s look at Donald Trump’s plan to increase the cost of childcare. And this is a very easy column to write because the economic consequences of Trump’s plan to make childcare expenses deductible are the same as Hillary’s misguided plan to subsidize tuition.

Let’s start with a caveat. We don’t know a lot about Trump’s new scheme. All we know is that he said in his big speech to the Economic Club of Detroit earlier today that “My plan will also help reduce the cost of childcare by allowing parents to fully deduct the average cost of childcare spending from their taxes.”

From an economic perspective, Trump’s statement doesn’t make sense. At best, creating a big deduction for childcare expenses simply creates the illusion of lower cost because of the tax loophole.

But that’s the best-case scenario. The actual result will be to increase costs and make the tax code even more convoluted.

When income is shielded from taxation, either based on how it is earned or how it is spent, that creates an incentive for taxpayers to make economically irrational decisions solely to benefit from the special tax preference. And just as the healthcare exclusion has led to ever-higher prices and ever-greater levels of bureaucracy and inefficiency in the health sector, a deduction for childcare expenses will have similar effects in that sector of the economy. Providers will boost prices to capture much of the benefit (much as colleges have jacked up tuition to capture the value of government-provided loans and grants).

Creating a new distortion in the tax code also will have a discriminatory impact. The tax loophole will only have value for parents who use outside care for their kids. Parents who care for their own kids get nothing. Moreover, the new loophole also won’t have any value for the millions of people who don’t earn enough to have any tax liability. Yet these people will be hurt when childcare providers increase their prices to capture the value of the deduction for parents with higher levels of income.

And that will probably lead politicians to make the tax loophole “refundable,” which is a wonky way of saying that people with low levels of income will get handouts from the government (in other words, “refundable” tax breaks are actually government spending laundered through the tax code, just like much of the EITC).

So we’d almost certainly be looking at a typical example of Mitchell’s Law, where one bad policy leads to another bad policy.

And when the dust settles, government is bigger, the tax code is more convoluted, and the visible foot of government crowds out another slice of the invisible hand of the market.

Remember, bigger government and more intervention is a mistake when Republicans do it, and it’s a mistake when Democrats do it.

I want fewer favors in the tax code, not more. I want rationality to guide economic decisions, not distorting tax preferences. Most of all, I don’t want politicians to have more power over the economy. I wish Trump listened to Ben Carson when putting together a tax plan.

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Normally, leftists get upset if there’s a big industry that charges high prices, engages in lots of featherbedding, and manipulates the political system for handouts.

But for some reason, when the industry is higher education, folks like Hillary Clinton think the answer is to shower colleges and universities with ever-greater subsidies.

She says the subsidies are for students, but I point out in this interview that the real beneficiaries are the schools that simply boost tuition and fees to capture any increase in student loans.

And I also pointed out that the colleges and universities don’t even use the money wisely.

Instead, they build bureaucratic empires with ever-larger numbers of administrators while money devoted to the classroom shrinks.

Sort of a pay-more-get-less business model.

Though that only works when there are government subsidies to enable the inefficiency and bloat.

But don’t take my word for it. According to a study published by the National Bureau of Economic Research (h/t: James Pethokoukis), tuition subsidies get captured by colleges and universities.

With all factors present, net tuition increases from $6,100 to $12,559 [and] the demand shocks — which consist mostly of changes in financial aid — account for the lion’s share of the higher tuition. …These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition. In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline… Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state. The college, in turn, uses these funds to finance an increase of investment expenditures from $21,550 to $27,338… Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs. …Our model also suggests that financial aid increases tuition at the bottom of the tuition distribution more so than it does at the top.

By the way, I closed the above interview by stating that I want to make colleges and universities at least partially liable if students don’t pay back their loans because that will create a better incentive structure.

Two scholars from the American Enterprise Institute addressed this issue in an article for National Review.

Just as government-subsidized easy money fueled a real-estate bubble in the 1990s and 2000s, boosting house prices while promoting unwise borrowing and lending, today government-subsidized easy money is fueling an education bubble — boosting tuition rates and reducing students’ incentives to choose education options smartly. …Like the brokers who caused the subprime-mortgage crisis, colleges push naïve students to take on debt regardless of their ability to repay, because colleges bear no cost when graduates default. A true solution requires a new financing system where colleges retain “skin in the game.”

The authors point out that default and delinquency are very common, but they point out that this is merely a symptom of a system with screwed-up incentives.

The high delinquency rate is a symptom of a wider problem — a broken higher-education system. Colleges are paid tuition regardless of whether their alumni succeed. They face little incentive to control costs when those costs can be passed on to students who fund them with government-guaranteed loans that are available regardless of the students’ ability to repay.

It’s not just whether they have an incentive to control costs. The current approach gives them carte blanche to waste money and jack up tuition and fees.

Between 1975 and 2015, the real cost of attending a private college increased by 171 percent while the real cost of public universities rose by 150 percent. If the tuition, room and board, and other fees at a four-year private college in 1975 were projected forward to 2015, adjusting for the average inflation rate, the cost of college in 2015 would have been $16,213. Instead, the actual cost in 2015 was $43,921. A large share of rising college costs can be attributed to expanded administration, new non-educational services, athletic programs, and government regulation. Colleges have economized by switching to part-time adjunct faculty. The American Association of University Professors estimates that roughly 3 out of 4 college courses are taught by adjuncts.

Amen. This is what I mean by the pay-more-get-less business model.

The solution, of course, it to make fat and lazy college administrators have to worry that their budgets will shrink if they continue to jack up tuition while providing sub-par education.

The key to controlling costs and student-debt burdens is to require colleges themselves to have “skin in the game” so they have strong incentives not only to provide a good education, but also to safeguard the financial solvency of their graduates. …With “skin in the game,” colleges will face pressure to control unnecessary costs and limit student indebtedness. Colleges will redouble their efforts to ensure that students graduate with the skills necessary to succeed in the job market. Resources will no longer be freely available for unnecessary non-educational university spending.

The bottom line is that bad things happen when the visible foot of the government supplants the invisible hand of the market.

That’s what I basically was trying to say in the interview when I made the crack about a reverse Midas touch whenever there is government intervention.

The solution, of course, is to phase out the subsidies that have created the problem.

But (just as is the case with healthcare) that’s a challenge because of the inefficiency that is now built into the system. Consumers will be worried that tuition and fees will remain high, which will mean higher out-of-pockets costs for college.

So while I understand why politicians will be reluctant to address the issue, the longer they wait, the worse the problem will become.

P.S. This video from Learn Liberty, featuring Professor Daniel Lin, is a great (albeit depressing) introduction to the issue of how government handouts lead to higher tuition.

P.P.S. Is there a “bubble” in higher education? While government intervention and handouts definitely have enabled needlessly high tuition, I’ve explained that those high prices will probably be permanent so long as the subsidies continue.

P.P.P.S. Unsurprisingly, Paul Krugman doesn’t understand the issue.

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