Assessing the Biden Economy

According to polling data, President Biden is not getting good grades for economic policy.

Part of that is because of inflation, though I’ve repeatedly pointed out that the blame belongs with the Federal Reserve rather than Biden. And the big mistake from the Fed took place before Biden even took office.

Unfortunately, the President is not trying to make things better. His appointments to the Fed suggest he doesn’t understand the need for good monetary policy.

And all of his major legislative initiatives (the so-called stimulus, the misnamed Inflation Reduction Act, the pork-filled infrastructure legislation, and the cronyist handouts to the semiconductor industry) have increased the size and scope of government.

For what it’s worth, I think Biden’s big challenge – both politically and economically – is that Americans are losing ground. Simply stated, prices are increasing faster than incomes.

But that isn’t stopping the Administration from trying to turn a sow’s ear into a silk purse.

Alan Rappeport of the New York Times reported a few days ago that the Biden’s Treasury Secretary, Janet Yellen, is claiming that Bdenomics is a big success.

…the Biden administration is pivoting to recast its stewardship of the U.S. economy as a singular achievement. …The case was reinforced on Thursday by Treasury Secretary Janet L. Yellen… Ms. Yellen said the legislation that Mr. Biden signed this year to promote infrastructure investment, expand the domestic semiconductor industry and support the transition to electric vehicles represented what she called “modern supply-side economics.” …After months of being on the defensive in the face of criticism from Republicans who say Democrats fueled inflation by overstimulating the economy, the Biden administration is fully embracing the fruits of initiatives such as the $1.9 trillion American Rescue Plan of 2021.

The editors at the Wall Street Journal are not impressed.

Janet Yellen…tenure as Treasury Secretary hasn’t enhanced her reputation. …the White House is rolling her out in election season to portray the U.S. economy as a Valhalla of growth, fairness and optimism. …If you’re in a green business the White House likes, you’re in clover. If not, you’ll endure the costs of more regulation and taxes. In the Biden era, big government and big business are in political business together. …Ms. Yellen’s whoppers, …including a claim that “the causes of inflation are largely global.” …U.S. inflation has been substantially home-grown. …The Federal Reserve kept the money spigots open for too long, in part to finance the borrowing needed for all of the spending. …Ms. Yellen is also at pains to stress how much fairer the economy is since Mr. Biden took office… She fails to mention that the U.S. economy contracted by about 1% of GDP in the first six months of this year, even as real wages were falling. Real average hourly earnings declined 3% over the 12 months through July, and average weekly earnings by 3.6%. They’ve fallen 4.2% since Mr. Biden took office.

Meanwhile, the latest inflation data has not strengthened Biden’s case.

Jim Tankersley of the New York Times wrote about the issue yesterday.

Hotter-than-expected inflation in August was unwelcome news for President Biden, who has sought to defuse Republican attacks over rising prices in the run-up to November’s midterm elections. …Mr. Biden has claimed progress in the fight against inflation, including with the signing last month of an energy, health care and tax bill that Democrats called the Inflation Reduction Act. …But polls continue to show inflation is hurting Mr. Biden and his party… Mr. Biden threw a belated celebration at the White House on Tuesday to mark his signing of the Inflation Reduction Act. …But the country’s economic reality remains more muddled, as the inflation report underscored. Food prices are continuing to spike, straining lower-income families in particular. …Most importantly — and perhaps most damaging for Mr. Biden and Democrats — Americans’ wages have struggled to keep pace with fast-rising prices, an uncomfortable truth for a president who promised to make real wage gains a centerpiece of his economic program.

Let’s close with this chart, which shows what has happened to inflation-adjusted weekly earnings since Biden took office.

Yes, there was one recent month with good data, but that doesn’t seem like a big cause for celebration.

P.S. Paul Krugman’s defense of Bidenomics is just as weak as Janet Yellen’s (and his criticisms of good presidents are equally weak).

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Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatcher triggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said. The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

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Deconstructing Biden’s Corporate Tax Cartel, Part II

Yesterday’s column explained why Biden’s proposed global cartel for corporate taxation was a bad idea.

In this clip from a recent panel hosted by the Austrian Economics Center in Vienna, I speculated on whether the plan would become reality.

I encourage you to watch the 4-minute video, but all you really need to know is that there are lots of obstacles to a cartel. Most notably, countries with pro-growth business tax regimes (such as Ireland, Estonia, and Switzerland in Europe) have big incentives to say no.

And if legislation is required in the United States, I assume that won’t be an easy sell, at least for GOP members.

But, as I warn in the video, the other side has hundreds of bureaucrats at the OECD and various finance ministries and treasury departments. And these taxpayer-financed mandarins have both the time and patience to chip away until they achieve their goals.

So it is critical that economists such as myself do a good job of educating policy makers about the adverse consequences of a tax cartel.

Which is why people should read this column by Veronique de Rugy of the Mercatus Center. Here are some key excerpts.

For several decades now, politicians around the world have tried to curtail tax competition to make it easier for them to increase the tax burdens on their citizens without them fleeing to other lower-tax jurisdictions. The best way to achieve their goal is to create a global high-tax cartel. …It’s no mystery why politicians don’t like tax competition. …The ability to shift residences and operations from country to country puts pressure on governments to keep taxes on income, investment, and wealth lower than politicians would like. Politicians in each country fear that raising taxes will prompt high-income earners and capital to move away. …Academic research shows that the imposition of higher corporate taxes is a highly destructive way to collect revenue because it lowers investment and, in turn, workers’ wages. It also increases consumer prices. Also, let’s face it, no nation has ever become wealthier and better through higher taxes and wealth redistribution.

This column for Prof. Bruce Yandle also is very informative. Here’s some of what he wrote.

It was with a feeling of deep disappointment…that I read Treasury Secretary Janet Yellen is…pushing to form an international cartel of governments that would implement a minimum corporate income tax rate across borders. …Efforts to cartelize taxation among nations will…, all else equal, lead to a higher-cost world economy. …Instead of searching high and low for ways to raise costs in the hope that more federal revenue and spending will follow, we should hope that our national leaders work harder to find better, more efficient ways to govern and serve the people. Doing so will give more people a much better chance at prosperity.

Amen. Tax harmonization was most accurately described by a former member of the European Parliament, who said it was a “thieves’ cartel.”

P.S. One of the worst aspects of the proposed tax cartel is that it will make it more difficult for poor countries to use good policy to improve living standards for their people.

P.P.S. Click here for my primer on tax competition.

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Deconstructing Biden’s Corporate Tax Cartel, Part I

When governments have to compete with each other, we get lower tax rates. That’s good for taxpayers and good for growth.

But politicians hate limits on their taxing power, which is why Biden has proposed a global tax cartel. Here are some of my remarks made yesterday on this topic.

If you don’t have time to watch the video, here are the key points I made when asked about the impact of Biden’s scheme.

• The tax cartel is a naked grab for more revenue.
• Higher taxes on businesses arguably are the worst way to collect more tax revenue. Indeed, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.
• The global minimum tax will lead to a couple of additional bad consequences. 1) The 15 percent rate will be increased, and 2) Cartels will be created for other taxes.

I was then asked about whether there are better ways of generating revenue, particularly by having economic policies that lead to more growth.

This presumably was an opportunity for me to pontificate about the Laffer Curve, but I decided to make a more fundamental point about how politicians should not have more money.

• The burden of government spending already is excessive.
• The Rahn Curve shows that spending levels should be reduced.
• More taxes will lead to more spending.

I closed my remarks by pointing out that the world enjoyed an era of falling tax rates, which began when Reagan and Thatcher slashed tax rates about 40 years ago.

The average top personal tax rate in the developed world dropped from nearly 70 percent to just a bit over 40 percent.

The average corporate tax rate in industrialized nations dropped from nearly 50 percent to less than 25 percent.

Other nations didn’t copy the U.S. and U.K. because politicians were reading my boring articles about marginal tax rates. Instead, they only did the right thing because they were worried about losing jobs and investment.

One point I forgot to make (particularly in response to the second question) is that I should have explained that tax revenues as a share of GDP did not fall when tax rates were reduced.

Indeed, OECD data shows that tax revenues on income and profits (as a share of GDP) actually have risen during the period of falling tax rates.

The bottom line is that we need tax competition to protect us from “stationary bandits” who would produce “goldfish government.”

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Biden and the OECD Pushing “Global Minimum Tax” to Increase Business Tax Burdens

For the past couple of decades, I’ve been warning (over and over and over and over again) that politicians want to curtail tax competition so that it will be easier for them to increase tax burdens.

They’ve even been using an international bureaucracy – the Paris-based Organization for Economic Cooperation and Development – in an effort to create a global high-tax cartel. Sort of an “OPEC for politicians.”

All of which would lead to “goldfish government.” Though “predatory government” also would be an accurate term.

The Obama Administration did not have a good track record on this issue, and neither did the Trump Administration.

Now the Biden Administration wants to be even worse. Especially if Treasury Secretary Janet Yellen continues to play a major role.

Here are some excerpts from a story in today’s Washington Post by Jeff Stein.

Treasury Secretary Janet Yellen is working with her counterparts worldwide to forge an agreement on a global minimum tax on multinational corporations, as the White House looks for revenue… A key source of new revenue probably will be corporate taxes… Biden has said he would aim to raise potentially hundreds of billions more in revenue from big businesses. …tax experts…say raising the rate could damage U.S. competitiveness. …Yellen is working…through an effort at the Organization for Economic Cooperation and Development in which more than 140 countries are participating. The goal is for countries to agree in principle to a minimum corporate tax rate… “A global minimum tax could stop the destructive global race to the bottom…,” Yellen told U.S. senators during her confirmation process. …The impact of the falling international tax rate has hit the United States as well, constraining lawmakers’ ambitions to approve new domestic programs.

Needless to say, any type of tax harmonization is a bad idea, and it is an especially bad idea to impose a minimum rate on a tax that does so much economic damage.

Here are four points that deserve attention.

1. Higher corporate tax burdens will be bad news for workers, consumers, and investors.
2. Regarding the so-called race to the bottom, even the IMF and OECD have admitted that lower corporate tax rates have not led to lower corporate tax revenue.
3. Once politicians impose a global agreement for a minimum corporate tax rate, they will then start increasing the rate.
4. Politicians also will then seek agreements for minimum tax rates on personal income, capital gains, and dividends.

I also want to cite one more passage from the article because it shows why the business community will probably lose this battle.

The U.S. Chamber of Commerce says it supports a “multilateral” approach to the problem but is “extremely concerned”.

I don’t mean to be impolite, but the lobbyists at the Chamber of Commerce must be morons to support the OECD’s multilateral approach. It was obvious from the beginning that the goal was to grab more revenue from companies.

I’m tempted to say the companies that belong to the Chamber of Commerce deserve to pay higher taxes, but the rest of us would suffer collateral damage. Instead, maybe we can come up with a special personal tax on business lobbyists and the CEOs that hire them?

Let’s wrap this up. The Wall Street Journal opined on the issue this morning.

As you might expect, the editors have a jaundiced view.

Handing out money is always popular, especially when there appear to be no costs. Enjoy the moment because the costs will soon arrive in the form of tax increases. Treasury Secretary Janet Yellen put that looming prospect on the table… The Treasury Secretary is also floating a global minimum tax on corporations, which would reduce the tax competition among countries that is a rare discipline on political tax appetites.

Amen. The WSJ understands that tax competition is a vital and necessary constraint on the greed of politicians.

P.S. Even OECD economists have acknowledged that tax competition helps to curtail excessive government.

P.P.S. Though an occasional bit of good research does not change the fact that the OECD is a counterproductive international bureaucracy that advocates for statist policy.

P.P.P.S. To add insult to injury, American taxpayers finance the biggest portion of the OECD’s budget.

P.P.P.P.S. To add insult upon insult, OECD bureaucrats get tax-free salaries while pushing for higher taxes on everyone else.

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Three Positive Signs from the New Chair of the Federal Reserve

Like John Stossel and Thomas Sowell, I’m not a big fan of the Federal Reserve.

It’s not just that I’m a libertarian who fantasizes about the denationalization of money.

I also think the Fed hasn’t done a good job, even by its own metrics. There’s very little doubt, for instance, that easy-money policies last decade played a major role in creating the housing bubble and causing the financial crisis.

Yes, Fannie Mae and Freddie Mac played a big role, but it was the Fed that provided the excess liquidity that the GSEs used to subsidize the subprime lending orgy.

But I’m not writing today about possible alternatives to the Fed or big-picture issues dealing with monetary policy.

Instead, I want to highlight three rather positive signs about the Janet Yellen, the new Chair of the Fed’s Board of Governors.

1. Unlike a normal political animal and typical bureaucratic empire builder, she didn’t assert powers that she doesn’t have. She was asked at a congressional hearing about bitcoin and she forthrightly stated that the Federal Reserve has no legislative authority to mess with the online currency.

The Federal Reserve has no authority to supervise or regulate Bitcoin, chair Janet Yellen told Congress on Thursday. …On Wednesday, Manchin wrote to the Fed, Treasury and other regulators warning that the currency was “disruptive to our economy” and calling for its regulation. “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway,” said Yellen.

This is very refreshing. A government official who is willing to be bound by the rule of law.

President Obama, by contrast, is now infamous for his radical and unilateral rewrites of his failed healthcare law.

Eighteen of them for those keeping count at home.

But it’s not just Obamacare.

Because of my interest in tax competition, fiscal sovereignty, and financial privacy, I’m upset that his Treasury Department pushed through a regulation that overturns – rather than enforces – laws about protecting American banks from tax inquiries by foreign governments.

But let’s not wander into other issues. Today’s post is about positive signs from Janet Yellen.

2. And here’s another one.

The Fed Chair poured cold water on the left’s fantasy view that higher minimum wage mandates don’t kill jobs.

The new Federal Reserve chairman, Janet Yellen, seemed to offer some support for the CBO’s recent conclusion that increasing the minimum wage to $10.10 an hour, as President Obama and Senate Democrats propose, would cost a significant number of jobs. The CBO projected that the proposal would mean 500,000 fewer jobs by the end of 2016, a conclusion the White House took issue with. Yellen said the CBO “is as qualified as anyone to evaluate the literature” about the employment effects of the minimum wage (some of which argues there would be little to no jobs losses, and some of which suggests there would be significant job losses), and that she “wouldn’t want to argue with their assessment.”

In the cautious-speak world of Fed officials, this is a very strong statement.

Congratulations to Yellen for putting intellectual honesty above partisan loyalty.

3. Most important of all, Yellen also affirmed that she plans on continuing the “taper,” which is the buzzword for winding down the Fed’s easy-money policy.

…she reiterated that it would take a “significant change” to the economy’s prospects for the Fed to put plans to wind down its bond-buying program on hold. …After more than five years of ultra easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps towards a more normal footing. It trimmed its bond buying by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve. Yellen reiterated her concerns about possible asset price bubbles, and suggested the Fed would move to a more qualitative description of when it plans to finally raise rates. …Yellen acknowledged that such low borrowing costs “can give rise to behavior that poses threats to financial stability.”

And she even acknowledged that easy money can cause bubbles.

A refreshing change from some previous Fed Governors.

Now let’s give a caveat. None of this suggests Yellen is a closet libertarian.

She is perceived as being on the left of the spectrum, and it’s worth noting that many hardcore statists in the Democratic Party urged her selection over Larry Summers because he was (incorrectly) seen as somehow being too moderate.

Moreover, I suspect she will say many things in the coming years that will add to my collection of gray hair.

All that being said, I’m glad Obama picked her over Summers. By all accounts, Yellen is honest and will focus her attention on monetary policy.

Summers, by contrast, is a far more political animal and would have used the position of Fed Chair to aggressively push for more statism in areas outside of monetary policy.

P.S. Private financial institutions also played a role in the housing bubble and financial crisis, which is why those entities should have been allowed to go bankrupt instead of benefiting from the corrupt TARP bailout.

P.P.S. Since this post mentions bitcoin and since I sometimes get asked about the online currency, I’ll take this opportunity to say that I hope that it is ultimately successful so that we have alternatives to government monetary monopolies. That being said, I wouldn’t put my (rather inadequate) life savings in bitcoin.

P.P.P.S. If you want an amusing video mocking the Fed, here’s the famous “Ben Bernank” video. And if you want a serious takedown of the Fed, here’s George Selgin’s scholarly but accessible analysis.

P.P.P.P.S. On a completely unrelated topic, if you’re a fan of “House of Cards,” I invite you to pay close attention at about the 30:00 mark of Episode 5, Season 2. If you don’t blink, you may notice an unexpected cameo appearance. Maybe this person has a future acting career if he ever succeeds in restoring limited government and needs to find something new to occupy his time. After all, if President Obama has a future on the silver screen, why not others?

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