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Archive for the ‘Redistribution’ Category

Let’s look today at one of main arguments for Biden’s tax-and-spend agenda.

A column in the New York Times, authored by Spencer Bokat-Lindell, suggests that the United States needs to increase government spending on child care to “shrink the gap” with other nations.

The main evidence for this proposition is a chart showing the United States at the bottom.

The obvious goal is to convince readers that the United States is doing something wrong.

And that comes across in the text of the article.

If you’re active on social media there’s a decent chance you came across this chart…about how much less the U.S. government spends on young children’s care than other rich countries. The infrastructure and family plan that President Biden proposed and that’s now being negotiated in Congress is an attempt to shrink the gap through four key policies: a federal paid family and medical leave program, an extension of the child tax credit (in the form of a monthly payment) that debuted this year, subsidized day care, and universal pre-K.

But why is it bad to be at the bottom of this list when all the nations above the U.S. have lower living standards?

I’ve repeatedly made the point that we don’t want to “catch up” to nations that have lower levels of prosperity.

But maybe this isn’t just about living standards.

The article also suggests that childcare subsidies are needed to avert demographic decline.

…Why does the United States have such an exceptional approach to family and child care benefits…? European and Latin American countries began enacting these policies…the end of World War II accelerated the process, particularly in Europe… “Part of it had to do with fears of demographic decline…the need to recover from those years and to ensure that there was a strong work force going forward,” Siegel told the BBC.

For what it’s worth, I agree that demographic decline is a major issue.

Falling birth rates and increased life expectancy are a very worrisome combination for government budgets.

Which leads to the hypothesis that childcare subsidies can help deal with this problem by enabling higher levels of fertility.

That’s theoretically possible, I’ll admit, but we certainly don’t see it in the data. Here’s the chart from the New York Times, which I’ve augmented by showing fertility rates.

As you can see, the United States has a higher fertility rate than almost every other nation on the list, which certainly suggests that childcare subsidies are not an effective way of encouraging more babies.

Moreover, U.S. fertility of 1.71 is higher than the OECD average of 1.61.

And when you compare the United States to peer nations (“OECD rich nations” and “EU-15 nations”), the fertility gap is even larger, 1.71 to 1.52.

One moral of the story is that government handouts are not an effective way of increasing fertility.

And the other moral of the story is that it’s not a good idea to copy nations that are economically weaker.

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A couple of days ago, I shared the most-recent data about “actual individual consumption” in nations that are part of the Organization for Economic Cooperation and Development.

My goal was to emphasize my oft-stated point about people in the United States enjoying higher living standards – in large part because European nations are saddled with a bigger fiscal burden of government.

President Biden, however, wants to make the United States more like Europe.

What’s happening this week in Congress may determine whether he succeeds.

Since I’m policy wonk rather than a political pundit, I don’t pretend to have any great insight on matters such as vote counting.

But I feel compelled to warn that adoption of Biden’s plan would have a negative economic impact.

And I’m not the only one raising alarm bells.

Professor Greg Mankiw of Harvard opined for the New York Times about Biden’s fiscal plan. He starts be noting that Biden’s plan is affordable.

President Biden and many congressional Democrats aim to expand the size and scope of government substantially. …People of all ages are in line to get something… If there is a common theme, it is that when you need a helping hand, the government will be there for you. …Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction. Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes.

But affordable is not the same as sensible.

He points out that a bigger government will mean a smaller economy.

The costs of an expanded welfare state…extend beyond those reported in the budget. There are also broader economic effects. Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” …As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink. …Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom. …In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones.

And less prosperous economies mean lower living standards, as honest folks on the left (such as Okun) openly admit.

That’s bad news for everyone, including lower-income people who theoretically are supposed to benefit from the various new and expanded redistribution programs in Biden’s fiscal plan.

Yes, they may get money from government in their pockets in the short run, but even a small reduction in economic growth will lead to larger income losses in the long run.

The bottom line is that the American experiment has been successful. Why put it at risk by copying nations that aren’t as successful.

After all, you don’t want to “catch up” to countries that are lagging.

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Ten days ago, I shared some data and evidence illustrating how redistribution programs result in high implicit tax rates and thus discourage low-income people from climbing the economic ladder.

Simply stated, why work harder or work more when an additional dollar of income only leads to a net benefit of 10 cents or 20 cents? Or why work harder or work more when you can actually wind up being worse off?

Or why work at all if the governments provides enough goodies?

But don’t ask such questions if you’re in the same room as Helaine Olen of the Washington Post. She is very upset that some people think welfare payments discourage work.

It’s a dangerous myth, this idea that government help causes some people to just loaf off. It’s also untrue. Reminder: Before the pandemic, most working-age people receiving benefits like food stamps worked. They just didn’t earn enough money. …the temporary child tax credit signed into law this year by President Biden demonstrates the opposite. It is an extraordinary success. Almost 90 percent of families with children under age 18 are eligible to receive a monthly check from the federal government through the end of the year. …Many other developed nations offer almost all residents a child allowance of some sort.

If you read the entire column, you’ll notice that she provides very little evidence, particularly considering her very bold assertion that a negative link between redistribution and labor supply is “a dangerous myth.”

Yet we know from the experience of welfare reform in the 1990s that work requirements did boost labor supply.

And don’t forget about the very recent evidence that turbo-charged unemployment benefits encouraged more joblessness.

We also have evidence from overseas showing that there’s a negative relationship between handouts and idleness.

Including research from the Netherlands and the Nordic nations such as Denmark. And the same is true in Canada. And the United Kingdom.

Ms. Olen seems primarily motivated by her support for permanent per-child handouts, as President Biden has proposed.

And she wants us to believe that everyone will continue to work, even if they can get $3000-plus for each kid, along with all the other goodies that are provided by Uncle Sam (often topped up by state governments).

For what it’s worth, I think she admits her real agenda toward the end of her column.

…an argument can be made that the children of the irresponsible deserve more support from us, not less. Children can’t push their parents to get with the work-and-education program. As a result, you’re not “helping” children if you insist on financially punishing their parents for not making an “effort.” …human infrastructure matters too.

In other words, Ms. Olen seems to share Rep. Ocasio-Cortez’s view that money should be given to people “unwilling to work.”

Which is how some of our friends actually view the world. They think there is a right to other people’s money. Which is why they support big handouts, including so-called basic income.

The bottom line is that Biden’s per-child handouts and other expansions of the welfare state clearly would make work less attractive for some people.

Not all people, of course, because it takes time to erode societal capital.

But why would we want a society where a growing number of people think it’s okay to live off of others?

P.S. There is scholarly research that redistribution programs lure older people out of the workforce.

P.P.S. There is also scholarly research showing redistribution programs discourage households from building wealth.

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Yesterday’s column was a completely serious look at five graphs and tables that show why Biden’s tax plan is misguided.

Today, we’re going to make the same point with satire. And we’ll only need two images.

First, here’s a look at what happens when politicians create never-ending handouts financed by ever-higher taxes on an ever-smaller group of rich taxpayers.

In the past, I’ve referred to this as “Greece-ification” and Biden’s fiscal plan definitely qualifies.

It’s also a different way of looking at the second cartoon from this depiction of how a welfare state evolves over time.

This Chuck Asay cartoon makes the same point.

Second, here’s a cartoon that nicely captures why I think Biden’s agenda will erode the nation’s societal capital.

The same theme as this excellent cartoon.

While amusing, there’s a very serious point to be made. Politicians already have created a system that rewards people for doing nothing while punishing them for creating wealth.

Those policies hinder American prosperity (as honest folks on the left acknowledge), but we can survive with slower growth. What really worries me is that we may eventually reach a tipping point of too many people riding in the wagon (and out-voting the people who pull the wagon).

Simply stated, we don’t want America to become another Greece.

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More than 10 years ago, I wrote about President Obama’s disingenuous strategy of pretending that spending increases were tax cuts.

Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead. This bit of legerdemain is made possible…by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax. This is hardly a trivial issue. …the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate.

Indeed, the IRS is now the biggest redistribution agency in the world, in charge of giving away a massive amount of money.

Far more than is spent on traditional welfare (what used to be called aid to families with dependent children and was reclassified as temporary aid to needy families), as illustrated by the chart.

The so-called earned income tax credit is the biggest redistribution program, though there’s also a large amount of spending on child credits.

And the cost of the so-called child credits is going to explode if President Biden’s plan for per-child handouts is approved.

Matt Weidinger of the American Enterprise Institute opined on Biden’s version of political alchemy.

Democrats are fond of saying their massive $3.5 trillion spending bill includes significant “tax cuts.” They are referring to the effects of continuing the expanded child tax credit… President Biden said it was “one of the largest-ever single tax cuts for families with children.” …The facts say otherwise. …Such payments to those who do not owe federal income taxes are known as “refundable” credits, or in budget terms “outlays” — the same as benefits provided under welfare, Medicaid, food stamps, and similar spending programs. The outlay portions of these tax credits are not “tax cuts” for the simple reason that the payments exceed any taxes the recipient owed in the first place. Put another way, it is impossible to “cut taxes” if you do not owe taxes.

And here’s the relevant table from the Joint Committee on Taxation.

By the way, note how the spending estimates decline after 2025.

This is a budget gimmick. To make Biden’s expansion of the welfare state seem less extravagant, supporters designed the proposal so the expanded per-child handouts disappear in 2026.

But they openly argue that they will be extended because of the assumption that many Americans will get hooked on “free” money from Washington.

P.S. I’m not a fan of child credits, even for families that pay taxes. Simply stated, there are other types of tax cuts that will do a much better job of boosting after-tax family income.

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The welfare state and the so-called war on poverty has been very bad news for taxpayers.

But it’s also very bad news for poor people, in part because various redistribution programs can lure them out of the productive economy and into total dependency on government (and this will become an even bigger problem if Biden’s per-child handouts are approved).

But it’s also bad news because redistribution programs can result in very high implicit tax rates for low-income people who try to improve their lives by climbing the economic ladder.

I shared an example back in 2012, which showed how a single mother in Pennsylvania would be worse off with $57,000 of income instead of $29,000.

In other words, she would be dealing with a de facto marginal tax rate of more than 100 percent.

If you want to understand how this happens, Professors Craig Richardson and Richard McKenzie wrote about this topic in an article for The Library of Economics and Liberty.

…by expanding public assistance programs, the President’s plan will unavoidably impose a higher, hidden tax rate—known as an “implicit marginal income tax rate” (which we shorten to implicit tax rate)—on low-wage workers who receive welfare benefits. Those workers will pay an implicit tax rate because many welfare benefits are reduced as earnings rise. Ironically, the poorest Americans often pay implicit tax rates that are far higher than the IRS’s explicit marginal income-tax rates imposed on the country’s highest income earners. …Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.

The authors cite a real-world example.

…consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year). Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. …In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.

Here’s a table showing those results.

If you want more evidence, check out Chart 7 from this column and Figure 8 from this column.

And the same problem exists in other nations as well.

P.S. Obamacare may have lured as many as 2 million people into full dependency.

P.P.S. I already mentioned how Biden’s per-child handouts could lure many more into full dependency, but “basic income” could be far worse.

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Washington is filled with dishonest and self-serving analysis. Much of that shoddy output is driven by privileged groups seeking bailouts, subsidies, protectionism, or a tilted playing field.

But that’s not the only type of dishonest and self-serving you find in Washington.

Let’s take the example of President Biden’s proposal to gut welfare reform with per-child handouts.

The micro-economic problem with that policy is that it reduces incentives to work – as illustrated by this Wizard-of-Id parody or this cartoon about socialism.

The macro-economic problem with that policy is that it’s part of a radical expansion in the burden of government that will make the U.S. more like Europe.

For today’s topic, though, I want to call attention to a recent report by the Democratic staff of the Joint Economic Committee. It relies on the sloppiest and most disingenuous analysis imaginable.

To recycle a term from 2015, let’s call it primitive Keynesianism.

Here’s the relevant excerpt.

The Treasury Department released information on how much money went to each state, which allows us to estimate the impact of the newly expanded CTC on local economies. Using an estimated multiplier of 1.25—or how much additional spending each $1 in CTC payments will generate, as people use their funds to buy goods and services that in turn generate income for other people and businesses—implies that the expanded CTC will generate nearly $19.3 billion in spending in local economies each month. This increased economic activity is a boon to local businesses, creating jobs in communities across the United States.

You’ll notice an astounding omission.

Nowhere in the JEC “report” is there any acknowledgement that politicians can’t “inject” money into local economies without first taxing or borrowing the money from the private sector.

Honest Keynesians acknowledge that there’s no magic money tree. They know the government can’t put money in our right pocket without first removing from our left pocket.

So they make arguments about things such as the “marginal propensity to consume.”

I disagree with that argument, but at least the folks making that case are being ethical.

The JEC report, by contrast, is utter garbage.

But I guess we shouldn’t be surprised. They’re trying to sell very bad policy, so the staff have no choice but to produce nonsensical “research.”

P.S. Arthur Okun would be very disappointed.

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Joe Biden wants to dramatically expand the welfare state (more than $5 trillion of new spending over the next 10 years).

In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.

In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.

As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.

But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.

At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.

Others share my concern about the impact of Biden’s plan.

Matt Weidinger dissects per-child handouts in an article for National Review.

This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?

David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.

Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.

By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.

I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.

Biden’s plan has only 29 percent support (versus 43 percent opposition).

I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).

The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.

P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.

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Over the past couple of years, one of the most disturbing – and also revealing – things to happen in Washington is when Congresswoman Alexandria Ocasio-Cortez proposed giving more money to people “unwilling to work.”

As discussed in this interview, the left seems to want more dependency.

This is a very unfortunate development. Just four years ago, Joe Biden rejected no-strings-handouts such as “basic income.”

But now he’s proposing a massive expansion of the welfare state, including huge per-child handouts that effectively would repeal Bill Clinton’s very successful welfare reform.

The obvious takeaway is that many politicians in Washington want to create a society where government dependency is normal and desirable.

That may be a good vote-buying strategy, but it has horrible consequences. Both morally and economically.

Let’s address one of the specific issues from the interview.

Regarding bonus unemployment benefits. I warned that we should be careful about over-interpreting short-run data. And that’s especially true because the states providing extra payments for joblessness are generally the states that also had the most onerous lockdown policies during the pandemic.

So, if unemployment is dropping in a state, is it because extra benefits have been cancelled, or is it a result of relaxed lockdown policies? Or is it something else, like lower tax rates?

One obvious way of trying to answer these questions is to ask people why they’re not working.

Here are the results of a recent poll, as reported by Λxios.

About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday. …U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons. … Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021. Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits.

So our friends on the left tell us that bigger handouts have no adverse economic consequences while the people getting the payments openly admit that they aren’t working because they can live off the taxpayers.

I know which group I believe.

P.S. Both this Wizard-of-Id parody and this cartoon do a great job of showing the economics of incentives.

P.P.S. Since the interview also included some discussion of basic income, here’s a recent study showing how those universal handouts would cripple work incentives.

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When I first looked at the issue of “basic income,” back in 2013, my gut reaction was deep skepticism.

That’s because I feared many people would drop out of the labor force if they could live off government handouts (as illustrated by this Wizard-of-Id parody).

It’s true that the current amalgamation of welfare programs also discourages work and creates dependency, but a government-provided basic income could make a bad situation worse.

Especially if politicians didn’t get rid of other redistribution programs (a very realistic concern).

That being said, what’s the evidence, either pro or con?

There was an experiment in Finland, which poured cold water on the concept.

And now we have some U.S.-focused research. Four economists from the University of Chicago (Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky) investigated this topic in a new study from the National Bureau of Economic Research.

Here’s a description of their methodology, which used lottery winnings as a proxy for the effect of government handouts.

How do Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income? Economists and policymakers are keenly interested in this question. the earnings responses to such shocks are important…to assess the effects of public policy such as…universal basic income. However, giving a credible answer to this question has proven difficult. …We analyze a wide range of individual and household responses to lottery winnings and explore the economic implications of these responses for a number of key questions. …our analyses are based on a population-level panel data set which is constructed by combining the universe of worker tax records with third-party-reported lottery winnings. 

And here are some of their results.

We find that Americans respond to an exogenous increase in household wealth by significantly reducing their employment and labor earnings. For an extra 100 dollars in wealth, households reduce their annual earnings by approximately 2.3 dollars on average. …the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents.

At the risk of understatement, this data should be the death knell for this bad idea.

Especially when you consider the impact of the higher tax rates that would be necessary to fund the basic income.

As illustrated by Figure 5.1 from the study, tax-financed handouts would be bad news for America’s economy.

P.S. Swiss voters overwhelmingly rejected a referendum for basic income back in 2016 (perhaps my speech in Switzerland convinced a few people?).

P.P.S. Interestingly, Joe Biden expressed skepticism about the idea back in 2017, but he obviously has had a change of heart, given his current support for big, per-child handouts.

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Back in 2016, I created a 2×2 matrix to illustrate the difference between redistributionism (tax Person A and give to Person B) and state planning (politicians and bureaucrats trying to steer the economy, either through direct ownership or industrial policy).

The main point of that column was to show that countries should try to be in the top-left section, where there is less redistribution and less government control.

But I also wanted to help people understand that redistributionism and socialism are not the same thing.

For instance, Sweden (in the bottom-left box) is a capitalist economy with a big welfare state, whereas China (in the top-right box) doesn’t have much redistribution but government has substantial control over economic activity.

From an American perspective, the good news is that the U.S. currently is in the top-left box.

The bad news is that President Biden wants the country in the bottom-left box. So, if we want to be technically accurate, we should not accuse him of socialism.

Instead, as Antony Davies and James Harrigan explained in a column for the Foundation for Economic Education, the real threat to the nation is “transferism.”

Socialism is state control of the means of production. …By contrast, capitalism is simply private ownership of the means of production. …more than four in ten Americans think “some form of socialism” is a good thing. But what is “some form of socialism?” A society is either socialist or it isn’t. The state either owns the means of production or it doesn’t. There is no middle ground. …It appears that what Americans really have in mind when they think about socialism is not an economic system but particular economic outcomes. …they are advocating what we should really call “transferism.” Transferism is a system in which one group of people forces a second group to pay for things that the people believe they, or some third group, should have. Transferism isn’t about controlling the means of production. It is about the forced redistribution of what’s produced.

Davies and Harrigan are correct.

Moreover, they deserve credit for predicting the future since they wrote the column in 2019!

Now let’s consider whether redistributionism (or transferism) is a good idea.

I’ve previously explained that a big welfare state causes economic damage, even if a nation otherwise is very pro-capitalist.

Consider, for instance, the remarkable data showing how Swedish-Americans and Danish-Americans generate much more prosperity than Swedes and Danes who still live in Scandinavia.

Or consider the income data showing how average Americans enjoy much higher living standards than their European counterparts (either in Nordic nations or elsewhere).

What’s worrisome is that Biden wants a much bigger welfare state and he doesn’t seem to understand that European-sized government means anemic European-style economic performance.

This is the message that Bret Stephens shared in one of his recent columns for the New York Times.

He starts by describing Biden’s agenda.

President Biden charts a course toward the largest expansion of government since Lyndon Johnson’s Great Society. After signing a $1.9 trillion Covid-19 relief bill in March and proposing a $1.5 trillion discretionary budget in April (a 16 percent increase from this year, on top of what’s likely to be at least $3 trillion in mandatory spending on programs like Medicare and Medicaid), the president wants $2.3 trillion more for infrastructure and $1.8 trillion for new social programs. That’s $7.5 trillion in discretionary spending. To put the number in perspective, we spent $4.1 trillion in inflation-adjusted dollars over nearly four years to wage and win the Second World War. What will America get for the money?

He then points out the potential consequences.

…before the U.S. takes this leap into a full-blown American social-welfare state, moderates in Congress like Senator Joe Manchin or Representative Jim Costa ought to ask: What’s the catch? …The real catch is that massive government spending has hidden costs that are difficult to capture in numbers alone. Take another look at Europe. Why does R&D spending in the European Union persistently lag that in the U.S. …Why does Europe’s tech start-up scene…so notably lag its competitors…? Perhaps…social safety nets typically come at the expense of risk-taking and economic dynamism. And why is France, which, according to the Organization for Economic Cooperation and Development, spends more on social welfare than any other nation in the developed world, such an unhappy place, with chronically high unemployment, endless labor unrest, a decades-old brain drain, rising political extremism, a wealth tax that failed and a medical system that was on the brink of collapse long before Covid struck? …Beyond the gargantuan cost, Congress should think very hard about the real catch: transforming America into a kinder, gentler place of permanent decline.

Amen.

Biden’s agenda inevitably will erode societal capital, leading to less work (because of lavish freebies such as per-child handouts) and lower levels of entrepreneurship (because of tax penalties on investment and risk-taking).

And this can lead to a tipping point, which is illustrated by my Theorem of Societal Collapse.

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The United States has a big economic advantage over Europe in part because the burden of welfare spending is lower.

This means fewer people trapped in government dependency in America. And it means a smaller tax burden in America.

But some of our friends on the left think it is bad news that the United States isn’t more like Europe.

They want more redistribution in America and they may get their wish if Congress approves Biden’s so-called American Families Plan.

The Economist has an article about Biden’s radical proposal, which would, as they correctly note, “Europeanise the American welfare state.”

President Joe Biden is proposing an ambitious reweaving of the American safety-net, which the White House says will cost $1.8trn. The American Families Plan has bits of the European welfare state that have long been missing in the country—a child allowance, paid family leave, universal pre-school, subsidised child care and free community college—but contains no reference to work requirements. …So how did Democrats go from Clintonism—which implicitly conceded the Reaganite critique that too much governmental assistance is a very bad thing—to its present-day unconcern about (even relish for) deficit-financed expansions of the safety-net?

Here are some of the specific details from the story, including discussion of Biden’s plan for per-child handouts.

This would bring America more in line with the rest of the developed world: the average government spending on benefits such as child allowances, family leave and early education is 2.1% of GDP in the OECD club of mostly rich countries. In America, it is just 0.6%. …A generous child allowance is the main anti-poverty tool in most rich countries—and also one that America lacks. One such scheme was created this year as part of the covid-19 relief bill that the president signed in March. It will pay most families $3,000 per year per child ($3,600 for young children)… The president’s plan proposes to extend these payments until 2025. Some Democrats think they should simply be made permanent.

The Wall Street Journal opined about Biden’s plan last month.

It’s more accurate to call this the plan to make the middle class dependent on government from cradle to grave. The government will tell you sometime later, after you’re hooked to the state, how it will force you to pay for it. We’d call the price tag breathtaking, but by now what’s another $2 trillion? …But the cost, while staggering, isn’t the only or even the biggest problem. The destructive part is the way the plan seeks to insinuate government cash and the rules that go with it into all of the major decisions of family life. The goal is to expand the entitlement state to make Americans rely on government and the political class for everything they don’t already provide. …This is now about mainlining benefits to middle-class families so they become addicted to government—and to the Democratic Party that has become the promoting agent of government.

I agree with the WSJ. Biden wants to create more dependency, even if that means eviscerating Bill Clinton’s very successful welfare reform.

For my contribution to this discussion, I want to make two points about the practical implications of Biden’s plan to “Europeanise” the United States.

First, it is impossible to have a European-sized government without massive tax increases. And since there aren’t enough rich people to finance big government, that inevitably means low-income and middle-class taxpayers will have to be hit with much bigger fiscal burdens. Which is exactly what has happened in Europe (and lots of honest people on the left openly admit a bigger welfare state would require similar policies in the United States).

Second, it is impossible to have a European-sized government and still maintain a big economic advantage over Europe. Higher spending and higher taxes will combine to reduce work, saving, investment, and entrepreneurship. Simply stated, European fiscal policy will lead to European economic results, and that will be very bad news for ordinary Americans since living standards are 30 percent-40 percent lower on the other side of the Atlantic Ocean.

It’s also worth noting that the United States ranks very high in societal capital, and that presumably will erode if more people are lured into government dependency.

P.S. Biden used to oppose a government-guaranteed income, correctly realizing it would undermine the work ethic.

P.P.S. The United States already faces a huge long-run challenge because of entitlement spending, so it’s remarkable – in a bad way – that Biden wants to step on the gas rather than hit the brakes.

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There are all sorts of long-running battles in the economics profession, perhaps most notably the never-ending dispute about Keynesian economics.

Another contentious issues is the degree to which society should accept less growth in order to achieve more equality, with Arthur Okun – author of Equality and Efficiency: The Big Tradeoff – being the most famous advocate for prioritizing equity.

I don’t agree with Okun, but I applaud him for honesty. Unlike many modern politicians, as well as most international bureaucracies (and even the occasional journalist), he didn’t pretend that big government was a free lunch.

Let’s take a closer look at this issue in today’s column.

We’ll start by perusing a working paper, published by Spain’s central bank, that explores the optimal tax rate for that nation. The author, Dario Serrano-Puente, concludes that society will be better off if tax rates are increased.

Many modern governments implement a redistributive fiscal policy, where personal income is taxed at an increasingly higher rate, while transfers tend to target the poorest households.In Spain there is an intense debate about…so-called “fiscal justice”, which is putting on the table a tax rate increase for the high-income earners… once the theoretical framework is defined, a bunch of potential progressivity reforms are assessed… Then a Benthamite social planner, who takes into account all households in the economy by putting the same weight on each of them, discerns the optimal progressivity reform. The findings suggest that aggregate social welfare is maximized when the level of progressivity of the Spanish personal income tax is increased to some extent. More precisely,in the optimally reformed scenario (setting the optimal level of progressivity), welfare gains are equivalent to an average increase of 3.08% of consumption.

I have a fundamental problem with the notion of government acting as a “Benthamite social planner,” but I don’t want to address that issue today.

Instead, I want to applaud Senor Serrano-Puente because he openly acknowledges that higher tax rates and more redistribution will lead to less growth.

Here’s some of what he wrote about that tradeoff.

For each reformed economy evaluated in the progressivity gridτ={0.00, …,0.50}, the main macroeconomic aggregates are calculated. …the evolution of these magnitudes on progressivity is depicted in Figure 4. Broadly speaking, it is clear that aggregate capital and output are decreasing in progressivity in a (almost) linear pathway, with the drop in capital being more pronounced than in output. …aggregate consumption and aggregate labor are also decreasing in progressivity.

Here’s a look at the aforementioned Figure 4, and it is easy to see that the economy suffers as progressivity increases.

Kudos, again, to the author for acknowledging the tradeoff between equity and efficiency. But applauding the author for honesty is not the same as applauding the author’s judgement.

Simply stated, he is trying to justify a policy that will hurt poor people in the long run. That’s because even small differences in growth can have a big effect over time.

Let’s illustrate how this works with a chart showing the life-time earnings of a hypothetical low-income Spaniard.

  • The orange line shows how much money the workers gets if he starts with an extra 3.08 percent of income thanks to higher taxes and additional redistribution, but the economy grows 2.0 percent per year.
  • The blue line shows income for the same worker, which starts at a lower level because tax rates have not been increased to fund additional redistribution, but the economy grows 2.2 percent per year..

As you can see, that low-income worker is a net beneficiary of bigger government for about 10 years. But as time goes on, the worker would be far better off with smaller government and faster growth.

Different assumptions will lead to different results, of course. My goal is simply to help readers understand two things.

P.S. To illustrate the high cost of big government, let’s shift from hypothetical examples to real-world data. Most relevant, OECD data shows that the average low-income person in the United States is better off than the average middle-class person in Spain.

P.P.S. The study cited above considers what happens if Spanish politicians raise taxes on the rich. That would be a mistake, as illustrated by the chart, but let’s not forget that Spanish politicians also over-tax low-income people.

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I have three types of humor I periodically share.

  1. Libertarian Humor
  2. Gun Control Humor
  3. Socialism/Communism Humor

Today, we’re going to venture into “consolation humor.” At least that’s the best term I can think of for the following two memes, both of which show what happens when leftists suddenly grasp reality.

In our first example, a woman learns that envy actually is a negative personality trait.

Maybe she’ll also learn at some point that spending other people’s money isn’t compassion (another person needs to learn that lesson as well).

In our second example, a young woman is bereft after learning that there isn’t a magic money tree to finance never-ending goodies from government.

Maybe she should watch this video as part of her therapy?

P.S. This great cartoon from Chuck Asay shows what happens when people don’t learn about scarcity.

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Here are four things to understand about poverty and dependency.

Now let’s add a fifth item.

  • The United States adopted welfare reform in the mid-1990s.

Today’s column examines whether this was a bad development or good development.

We’ll start with a harsh critic.

In his column for the New York Times, Charles Blow wants Democrats to repeal Clinton’s welfare reform.

Clinton’s record, particularly with respect to Black and brown Americans and the poor, was marked by catastrophic miscalculation. …the welfare reform bill, …Clinton promised would “end welfare as we know it.” One of its central provisions was block-grant assistance to the states. …the Center for Budget and Policy Priorities pointed out in 2020, the block grant to states “has been set at $16.5 billion each year since 1996; as a result, its real value has fallen by almost 40 percent due to inflation.” …With the passage of the “American Rescue Plan,” the Democrats, alone, took another major step away from the mistakes of the Clinton legacy by increasing aid to families with children and to workers.

Reading the column, it seems like blacks must have suffered immensely because of the 40 percent reduction in the block grant.

But now let’s consider whether welfare reform was a good thing.

According to the data, the answer is yes. This chart, based on the Census Bureau’s data (specifically Table B-5), shows that the poverty rate for African Americans has declined since welfare reform was enacted.

To be sure, one could argue that the post-welfare reform decline was simply a continuation of a positive trend. But that doesn’t change the fact that there’s certainly no evidence that the 1996 legislation led to bad results.

Moreover, research from the Brookings Institution makes a persuasive case that welfare reform deserves credit for some of the post-1996 progress.

Why? Because it sent a message – both practically and rhetorically – that permanent dependence on Uncle Sam was a bad thing. As a result, more people entered the workforce and poverty dropped.

That seems like a result that should be celebrated.

Unfortunately, Biden’s so-called American Rescue Plan contains big per-child handouts that are not dependent on being in the workforce.

The only silver lining to that dark cloud is that the handouts are only for 2021.

But the pro-redistribution crowd already is clamoring to make that provision a permanent giveaway. To paraphrase Bill Clinton, they want to “restore welfare as we knew it.”

P.S. Based on what I’ve read in his columns, Charles Blow is a hard-core leftist on economic issues. But he’s semi-reasonable on gun rights, so that’s one point in his favor.

P.P.S. Welfare reform is just one example of the good policies that were enacted during the Clinton years.

P.P.P.S. We can learn lessons about welfare and dependency by looking at data from Europe and Canada.

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Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.

That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.

But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.

And a low-income person in America is better off than the average European.

When I see numbers like this (and lots of other data I have shared over the years, all of which tells the same story), I have two reactions.

  • First, I want to laugh at anyone who thinks Europeans have a better distribution of income.
  • Second, I want to scream at anyone who things we should copy the European economic policy.

But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.

And there’s plenty of support for this risky concept from both Democrats and Republicans.

On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.

And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.

…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.

As you might expect, folks on the left are very excited about expanding the welfare state.

Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).

Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.

A child allowance would send unconditional cash benefits to nearly all families on a per-child basis.Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.

Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.

When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.

So is there a real danger that per-child handouts will become law?

The obvious answer is yes since they are included in Biden’s faux stimulus.

But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).

Robert VerBruggen has some polling data on this topic.

Here’s how he characterized the results.

So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.

This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.

But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.

P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.

P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.

P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.

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My series on poverty and inequality (see here, here, and here) focuses on why we should try to help the poor rather than hurt the rich.

We’ll continue with that theme in Part IV, which begins with this video by Russ Roberts of Stanford University’s Hoover Institution.

Russ makes some great points throughout the video about the importance of creating the conditions for upward mobility.

Here are some of the main takeaways.

  1. The rich are getting richer and the poor are getting richer as well.
  2. Cronyism is bad, especially when it winds up subsidizing the rich.
  3. We should focus on reducing poverty rather than fixating on inequality.

Regarding that final point, my favorite part is when he said that, “Focusing on inequality as something inherently bad can blind us to the problems of poverty. Inequality and poverty aren’t the same thing.  …I’m much more concerned about those at the bottom who are left behind.”

In effect, he was stating his version of the Eighth Theorem of Government. At least the first half of it (he’s probably too nice to impugn the motives of those who focus on inequality).

I also like the fact that he points out the need to get rid of licensing.

And he repeatedly argues that we need to improve the quality of education, though I wish he had explicitly stated that this means we have to replace the government’s failed education monopoly with a choice-based system.

But no need to nit-pick. The video is great, as are his other videos that I have shared over the years (see here, here, here, and here).

P.S. For those who have trouble believing that the poor, middle class, and rich can all simultaneously enjoy rising incomes, click here, here, and here for evidence.

P.P.S. I also think this data from China is very powerful.

P.P.P.S. The people who fixate on inequality favor policies that would make the United States more like Europe, so it’s worth noting that lower-income people in America are usually better off than middle-class people on the other side of the Atlantic.

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My late friend Walter Williams was a first-rate economist, an important public intellectual, and a truly great American. He also was an amazing communicator, with an unparalleled ability to make important points in a succinct and easy-to-understand manner.

My favorite Walter quote is about how capitalism enabled positive-sum wealth creation.

Today, though, I want to share Walter’s quote about the simple rules for life that basically eliminate poverty.

Sadly, the current welfare state undermines those rules and instead lures many people into self-destructive behaviors. Choices that are bad for them and bad for society.

  • Have kids out of wedlock? No problem, Uncle Sam will take care of you with a plethora of handouts.
  • Watch TV on the sofa all day rather than work? No problem, Washington will provide you with benefits.

As an economist, I’m especially concerned that redistribution programs discourage employment. That’s bad for the economy. Even more important, it’s very bad for people who get trapped in lives of dependency.

Oh, and let’s not forget that the welfare state also is a big burden on taxpayers.

The reason for highlighting these problems is that Senator Mitt Romney has unveiled a plan (the “Family Security Act”) to have the federal government provide universal child allowances.

The good news is that his plan will mitigate some of the problems with the current system. The bad news is that his proposal will exacerbate other problems.

Here are some excerpts from the Senator’s summary of the proposal.

The Family Security Act would provide a monthly cash benefit for families, amounting to $350 a month for each young child, and $250 a month for each school-aged child. …Promoting marriage; Providing equal treatment for both working and stay-at-home parents; and Reforming and consolidating outmoded federal programs, including by fully paying for the new proposal….a new national commitment to American families by modernizing and streamlining antiquated federal policies into a monthly cash benefit. …The bill consolidates overlapping and often duplicative federal policies into direct support for families. …deficit-neutral.

That description sounds nice, and the proposal would be beneficial in some ways.

Most notably, there would not be high implicit marginal tax rates on work (a big problem in the current system) since people would get the child allowances regardless of employment status.

But there are some serious drawbacks to the plan. Here are four things that cause concern.

First, it increases the burden of government.

Senator Romney (as well as proponents of the plan such as the Niskanen Center) highlight the fact that the plan is “deficit neutral.” But that doesn’t tell us whether the plan increases or reduces the size and scope of the federal government.

Unfortunately, if you take a close look at the Senator’s summary, it’s clear the proposal would be a net increase in the burden of spending.

Here’s the relevant table, which ostensibly shows Romney’s new spending along with the “spending offsets” that make the plan deficit neutral.

For what it’s worth, I’m disappointed that the Senator (his staff?) chose to be dishonest. Three of the “spending offsets” are actually measures that would increase tax revenue (circled in red).

And when you fix that dodgy bit of accounting, Romney’s plan would add more than $45 billion per year to America’s fiscal burden.

Second, why would anyone think it’s a good idea to copy Europe?

According to an article from HuffPost, “The U.S. is one of the only developed countries that doesn’t pay parents a child benefit or child allowance. Romney’s proposal shows there is bipartisan support for the policy.”

This is an accurate observation, but it’s hardly persuasive. Yes, European nations generally send people money simply because they have children.

But why on earth would we want to copy nations where living standards are far below American levels? Heck, poor people in America tend to be more prosperous than middle-class people in Europe.

By the way, some like Romney’s plan because they think it will boost marriage rates and fertility rates (i.e., lure people into having more children). Seems like that might be theoretically true, but the data show that European birth rates are very low, significantly below American levels.

In other words, don’t hold your breath waiting for more marriages and more children.

Third, it undermines federalism by giving Washington a bigger role rather than smaller role.

I’ve argued that the so-called War on Poverty has been very bad news. We have a Byzantine system of handouts that require an army of bureaucrats to administer dozens of handouts that subsidize bad behavior.

It’s created dependency and the data show it actually has had a negative impact on the trend of poverty reduction and self sufficiency (same thing has happened in other nations as well).

The right approach is to get Washington out of the business of income redistribution. We’re far more likely to get good outcomes if we let states decide (and learn from each other on) how best to reduce poverty.

Fourth, it is akin to a “basic income” that may have a very corrosive impact on societal capital.

I was very opposed to Andrew Yang’s plan to provide universal handouts, in large part because I feared it would undermine personal independence, the work ethic, the spirit of self reliance, and other traits that are critical for a successful society. And I also didn’t trust (for good reason) Yang’s claim that his scheme would replace other redistribution programs.

Well, Romney’s proposal is like a starter version of a basic income, but with the handouts based on the number of children.

I fear this will enable some people to decide they can drop out of the labor force.

Scott Winship of the American Enterprise Institute shares my concerns.

The Romney proposal would take us back to the bad old days in key ways, and policymakers are playing Russian roulette with low-income families’ wellbeing. …some people (including future people) who would choose single parenthood or non-work except that the current safety net makes it unaffordable would be able to afford these choices under child allowances. For them, child allowances are allowances for behavior that would be expected to hurt their own long-term prospects and, more importantly, the wellbeing of their children.

I’ll conclude by observing that Romney’s plan is nowhere near as bad as Congresswoman Ocasio-Cortez’s scheme for universal handouts.

But that’s hardly the test for good legislation. For those who prefer smaller government, less dependency, and less centralization, Romney’s plan is bad news.

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As illustrated by my recent three-part series (here, here, and here), I care about helping the poor rather then hurting the rich.

More broadly, I want a bigger economic pie so that everyone can have a larger slice. And I don’t particularly care if some people get richer faster than other people get richer (assuming they are earning money honestly and not relying on government favoritism).

In other words, it doesn’t bother me if someone like Bill Gates is getting richer faster than I’m getting richer, so long as there’s an economic environment that gives both of us a chance to prosper based on how much value we are providing to others.

But some folks are fixated on how the pie is sliced.

For instance, the Peterson Institute for International Economics recently tweeted that there is too much inequality in the United States (compared to Europe) and that something should be done to “fix” this supposed problem.

This type of data irks me because some people will assume that rising levels of income for the rich somehow imply falling levels of income for everyone else.

That may be true in nations with despotic socialist governments, such as Cuba, North Korea, and Venezuela, where the ruling class lines it pockets at the expense of the general population.

However, let’s focus on the United States and Europe, since the Peterson Institute wants readers to think that politicians in Washington should “fix” the distribution of income in America so that we resemble our friends on the other side of the Atlantic Ocean.

But first we must answer two very important questions: Are the non-rich in the United States suffering because rich people are doing well? And are the non-rich in Europe better off than the non-rich in America?

Earlier today, I answered those questions with three tweets.

I started with this tweet pointing out that average living standards are far higher in the United States than they are in Europe.

I then shared this tweet pointing out that the bottom 10 percent of people in America would be middle class compared to their counterparts in Europe.

I then concluded with this tweet showing that the bottom 20 percent of people in the United States have incomes higher than the average income in most European countries.

The moral of this story is that ordinary people are better off in America.

And that’s almost certainly because there’s generally more economic freedom in the United States – including lower tax burdens and less enervating redistribution.

P.S. While the Peterson Institute is very misguided on the tradeoff between inequality and growth, it is quite good on trade-related issues (see here, here, here, here, here, here, and here).

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Back in 2017, I compared the welfare state vision of “positive rights” with the classical liberal vision of “negative rights.”

To elaborate, here’s a video from Learn Liberty that compares these visions.

For what it’s worth, I don’t like the terms “positive rights” and “negative rights” for the simple reason that an uninformed person understandably might conclude that “positive” is good and “negative” is bad.

Needless to say, I don’t think it’s good for people to think they have a right to other people’s money.

That’s why I prefer Professor Skoble’s use of the terms “liberties” and “entitlements,” which we also find in this slide from Professor Imran Ahmad Sajid of the University of Pakistan.

As you might expect, there are plenty of politicians who try to buy votes with an agenda of “positive rights.” Bernie Sanders, for instance, constantly argued that people have a “right” to all sorts of goodies.

But he wasn’t the first to make the case for unlimited entitlements.

Franklin Roosevelt was one of America’s worst presidents, in part because his policies deepened and lengthened the Great Depression. But also because he pushed the idea that people have the right to get all sorts of taxpayer-financed handouts.

Let’s see what some other people have to say about this topic.

In his National Review column, Kevin Williamson looks at the logical fallacy of positive rights.

Positive rights run into some pretty obvious problems if you think about them for a minute, which is why so much of our political discourse is dedicated to moralistic thundering specifically designed to prevent such thinking. Consider, in the American context, the notion that health care is a right. Declaring a right in a scarce good such as health care is intellectually void, because moral declarations about rights do not change material facts. If you have five children and three apples and then declare that every child has a right to an apple of his own, then you have five children and three apples and some meaningless posturing — i.e., nothing in reality has changed, and you have added only rhetoric instead of adding apples. In the United States, we have so many doctors, so many hospitals and clinics, so many MRI machines, etc. This imposes real constraints on the provision of health care. If my doctor works 40 hours a week, does my right to health care mean that a judge can order him to work extra hours to accommodate my rights? For free? If I have a right to health care, how can a clinic or a physician charge me for exercising my right? If doctors and hospitals have rights of their own — for example, property rights in their labor and facilities — how is it that my rights supersede those rights?

And here’s what he says about “negative rights.”

A negative right is a right to not be constrained. The right to free speech, for example, implies only non-interference. The right to freedom of the press doesn’t mean the government has to give you a press. The good of negative freedom is, in the economic sense, not rivalrous — your exercise of free speech doesn’t leave less freedom of speech out there for others to enjoy

And Larry Reed opines on the issue for the Foundation for Economic Education.

America is a nation founded on the notion of rights. …Despite the centrality of rights in American history, it’s readily apparent today that Americans are of widely different views on what a right is, how many we have, where rights come from, or why we have any in the first place. …if you need something, does that mean you have a right to it? If I require a kidney, do I have a right to one of yours? Is a right something that can or should be granted or denied by majority vote?

He helpfully provides a list of negative rights (a.k.a., liberties).

And he argues that positive rights (a.k.a., entitlements) are not real rights.

The bottom line, he explains, is that so-called positive rights impose obligations on other people.

Indeed, they can only be provided by coercion.

The first list comprises what are often called both “natural rights” and “negative rights”—natural because they derive from our essential nature as unique, sensate individuals and negative because they don’t impose obligations on others beyond a commitment to not violate them. The items in the second are called “positive rights” because others must give them to you or be coerced into doing so if they decline. …while I believe neither you nor I have a right to any of those disparate things in the second list, I hasten to add that we certainly have the right to seek them, to create them, to receive them as gifts from willing benefactors, or to trade for them. We just don’t have a right to compel anyone to give them to us or pay for them.

There’s not much I can add to this issue, given the wisdom contained in the video and in the articles by Williamson and Reed.

So I’ll close with the should-be-obvious point that a system based on entitlements only works if there are enough people pulling the wagon to support all the people riding in the wagon.

But that kind of society contains the seeds of its own downfall (think Greece or Venezuela) because it subsidizes dependency and penalizes production.

Which means, as Margaret Thatcher warned us, that positive rights can’t be provided when politicians run out of other people’s money.

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There’s a lot of speculation that we’re in the midst of a political realignment, with Democrats becoming the party of the rich and the Republicans becoming the party of the working class.

I don’t pretend to know whether this realignment is happening or what form it will take, but there is plenty of evidence that Democrats are focusing on policies that disproportionately benefit those with high incomes.

And those policies often are at the expense of ordinary people, which is an especially repugnant form of redistribution.

Their efforts to restore the state-and-local tax deduction are an obvious example, but they also favor other tax breaks that are utilized overwhelmingly by rich people.

They also favor big subsidies for higher education, which mostly benefit kids from well-to-do families (and well-paid college bureaucrats).

And now they want to provide another windfall for the college crowd.

Jonah Goldberg opines on this perverse form of redistribution in a column for the New York Post.

…a coalition of 236 progressive groups led by teachers unions called on Biden to cancel student debt on his first days in office. Biden himself has already urged Congress to cancel $10,000 as part of a pandemic relief package. Sens. Bernie Sanders and Elizabeth Warren have called for even greater debt forgiveness. Sanders’ plan would cost an estimated $1.6 trillion dollars. …Most Americans, especially most poor Americans, don’t have student debt, because most didn’t go to college in the first place. Moreover, most people who did go to college have no or very little student debt. …only 6 percent of borrowers owe more than $100,000. Virtually all of them borrowed so much because they attended graduate school. …do they deserve help more than truck drivers, mechanics or short-order cooks? One reason teachers unions — a huge source of donations and political organizing for the Democratic Party — want loan forgiveness is that teachers and administrators can boost their pay by going back to school to get advanced degrees. Other municipal and federal workers — another major constituency for Democrats — have similar rules. Using the pandemic as an excuse to reward workers who are far less likely to lose their jobs and more likely to find new employment if they do, seems awfully self-serving.

Writing last year for the Washington Examiner, Brad Polumbo argues for the principle of individual responsibility.

College is way too expensive, but nonetheless, most young people who are buried in student loans or struggling to pay off their debt only have themselves to blame. The average student is now graduating with $30,000 in debt…the median monthly payment is just $222. If you can’t afford that, as a college graduate, it’s probably your own fault. …If you chose to major in gender studies, French, or anything similarly impractical, it’s your own fault that you’re stuck with a lower starting salary and might struggle to make payments. That’s unfortunate, but it’s no justification for shirking your responsibility to pay back what you owe or asking taxpayers to bear the burden of your mistakes. …people who find themselves buried in hundreds of thousands in student loan debt have their own decisions to blame. …They chose expensive dream schools… To bail them out at taxpayer expense is to punish people who made responsible decisions and encourage recklessness from future generations. …to the millions of borrowers who’ve made terrible decisions, don’t ask for a bailout — it’s your own damn fault.

Some of you may be thinking that Polumbo’s argument made sense last year, but we’re now struggling with coronavirus-caused economic turmoil and perhaps debt forgiveness would help the economy.

But that’s not the case according to the number crunchers at the Committee for a Responsible Federal Budget. They show that loan forgiveness isn’t “stimulus” even if one uses discredited Keynesian analysis.

…loan forgiveness…is the not the equivalent of sending $1.5 trillion of cash to households. …because borrowers often pay back their loans over 10, 15, or even 30 years, debt cancellation will increase their available cash by only a fraction of the total loan forgiveness. …Not only would loan cancellation provide relatively little spendable cash to households, but the cash it does offer would be poorly targeted from a stimulus perspective. …The majority of those most affected by the current economic crisis likely have little or no student debt. Over 70 percent of current unemployed workers do not have a bachelor’s degree, including 43 percent who did not attend college at all. …Indeed, about two-fifths of all student debt is held by households with graduate degrees. 

So if loan forgiveness isn’t the answer, are there any desirable policies?

Mike Riggs, writing for Reason, explains we need less government rather than more government.

…subsidies have…driven up the cost of education at a rate multiple times higher than inflation. …The most libertarian policy preference in my view is two-pronged: get the federal government out of the lending and guaranteeing game, and make student loan debt reasonably dischargeable in bankruptcy. These two policies would realign the incentives of colleges, lenders, and students to bring down prices and saddle fewer potential students with loans they are unlikely to repay.

Amen.

I don’t like loan forgiveness, but I do sympathize with many indebted students because when Uncle Sam started dispensing grants and loans, colleges and universities responded with dramatic tuition increases and then used the money to create fat, waste, and inefficiency.

Let’s end this column with some satire.

First, the geniuses at Babylon Bee produced this gem, which could be based on Jonah Goldberg’s column.

One local plumbing contractor, Sam Caughorn, is really looking forward to paying the tab on his neighbor’s $89,000 gender studies degree. …According to studies, there are millions of white girls working at coffee shops across the country while struggling under the crushing student debt they acquired by irresponsibly obtaining college degrees that gave them no marketable job skills. Benevolent politicians have proposed transferring all the wealth from trade workers and minority business owners to help indebted white girls with their student loans so they can still afford their daily latte and cat food expenses. Local gender studies major Amber White is looking forward to having all her debt forgiven, thanks in part to the contributions of plumbers like Sam Caughorn. …According to sources, Sam Caughorn owns a successful business he started right after high school. He also has 5 kids, a nice house, and serves as a deacon at his church. “I guess I can spare some change for poor disadvantaged girls like Amber,” he said. 

Second, here’s a cartoon that could be based on the column I cited from Brad Polumbo.

P.S. The way federal intervention has screwed up higher education is very similar to the way federal intervention has also made the health sector expensive and inefficient.

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I’m a voracious consumer of publications that rank economic liberty and national competitiveness. Simply stated, these apples-to-apples rankings tell us which countries have policies that are friendly to growth (and thus the places that will enjoy rising living standards).

I’m also very interested in “societal capital,” which is the degree to which the people of a nation believe in values such as self reliance, work, individual initiative, and personal responsibility.

In some sense, societal capital may be more important for a nation’s long-run prosperity than how it scores in any particular index.

That’s because it’s probably just a matter of time before a country with low levels of societal capital winds up adopting bad policy.

That being said, other than occasional examples of cross-country polling data, I’ve never seen a good way of ranking nations based on societal capital.

But that’s now changed, thanks to a new report called the Global Index of Economic Mentality.

In an article for National Review, Professor Steve Hanke of Johns Hopkins University summarizes the key findings.

GIEM scores measure the public’s embrace of the idea of economic freedom. A high GIEM score indicates that citizens in a particular country support the idea that their government should not play a major role in directing or regulating economic activity or in redistributing income. Citizens of high-scoring countries typically back an institutional framework that prioritizes private initiative, free competition, and personal responsibility — in short, a system of free enterprise. …The GIEM study found that countries that embrace a free-market mentality have more efficient economic institutions and higher per capita GDP than those who support socialist, interventionist mentalities.

New Zealand is in first place and United States is in fourth place.

New Zealand comes out on top with the highest score on the inaugural Global Index of Economic Mentality, followed by the Czech Republic, Sweden, the United States, and Denmark. This year’s lowest scorer is Bosnia, preceded by Bangladesh, Myanmar, Montenegro, and Azerbaijan.

There’s some very bad news for Chile, which may explain why people in that nation just voted to potentially replace the constitution which has delivered unimaginable prosperity.

Rather surprisingly, Chile is the lowest GIEM scorer in Latin America, even a notch below Argentina, and 64th overall. These data suggest that while the Chicago Boys…accomplished innumerable free-market reforms — reforms that have led to a great improvement in prosperity and the second-highest GDP per capita of any country in South America — they have failed to convince the Chilean public of the benefits of the free-market system that has lifted them out of poverty.

And there’s bad news for the United States because young people have very worrisome views.

If we look at country-by-country demographics, there is not much difference between the economic mentality of those over 40 years old and under 40 years old for most countries. But there are notable exceptions. The countries with the most significant difference in economic mentality between the two age groups are the United States, New Zealand, and Australia. In these countries, the younger generations possess a significantly weaker attachment to free-market ideas than do older generations, with the U.S. as the most extreme case. It makes one wonder what brand of economics is being peddled in high schools and universities in the United States.

For what it’s worth, if only young people were counted, America would rank #14 rather than #4. Not horrible, but definitely a shift in the wrong direction.

Let’s close by looking at some data from a PowerPoint presentation about this new index.

First we have the methodology.

Second, here are the scores for the 74 nations.

Last but not least, here’s the U.S. score compared to the average score in other regions.

As you can see, Americans have very good attitudes about preferring markets and disliking redistribution, but we score quite poorly on the issue of personal responsibility.

P.S. I’m not surprised to see good scores for the Nordic nations, and it’s also good to see high scores for Georgia and Estonia, though I’m somewhat shocked that Switzerland is in the middle of the pack. But I’m not surprised to see poor scores for China and Italy.

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Joe Biden has a very misguided economic agenda. I’m especially disturbed by his class-warfare tax agenda, which will be bad news for American workers and American competitiveness.

The good news, as I wrote earlier this year, is that he probably isn’t serious about some of his worst ideas.

Biden is a statist, but not overly ideological. His support for bigger government is largely a strategy of catering to the various interest groups that dominate the Democratic Party. The good news is that he’s an incrementalist and won’t aggressively push for a horrifying FDR-style agenda if he gets to the White House.

But what if Joe Biden’s health deteriorates and Kamala Harris – sooner or later – winds up in charge?

That’s rather troubling since her agenda was far to the left of Biden’s when they were competing for the Democratic nomination.

And it doesn’t appear that being Biden’s choice for Vice President has led her to moderate her views. Consider this campaign ad, where she openly asserted that “equitable treatment means we all end up at the same place.”

The notion that we should strive for equality of outcomes rather than equality of opportunity is horrifying.

For all intents and purposes, Harris has embraced a harsh version of redistributionism where everyone above average is punished and everyone below average is rewarded.

This goes way beyond a safety net and it’s definitely a recipe for economic misery since people on both sides of the equation have less incentive to be productive.

I’m not the only one to be taken aback by Harris’ dogmatic leftism.

Robby Soave, writing for Reason, is very critical of her radical outlook.

Harris gives voice to a leftist-progressive narrative about the importance of equity—equal outcomes—rather than mere equality before the law. …Harris contrasted equal treatment—all people getting the same thing—with equitable treatment, which means “we all end up at the same place.” …This may seem like a trivial difference, but when it comes to public policy, the difference matters. A government should be obligated to treat all citizens equally, giving them the same access to civil rights and liberties like voting, marriage, religious freedom, and gun ownership. …A mandate to foster equity, though, would give the government power to violate these rights in order to achieve identical social results for all people. 

And, in a column for National Review, Brad Polumbo expresses similar reservations about her views.

Whether she embraces the label “socialist” or not, Harris’s stated agenda and Senate record both reveal her to be positioned a long way to the left on matters of economic policy. From health care to the environment to housing, Harris thinks the answer to almost every problem we face is simply more government and more taxpayer money — raising taxes and further indebting future generations in the process. …Harris…supports an astounding $40 trillion in new spending over the next decade. In a sign of just how far left the Democratic Party has shifted on economics, Harris backs more than 20 times as much spending as Hillary Clinton proposed in 2016. …And this is not just a matter of spending. During her failed presidential campaign, Harris supported a federal-government takeover of health care… The senator jumped on the “Green New Deal” bandwagon as well. She co-sponsored the Green New Deal resolution in the Senate that called for a “new national, social, industrial, and economic mobilization on a scale not seen since World War II and the New Deal era.” …she supports enacting price controls on housing across the country. …The left-wing group Progressive Punch analyzed Harris’s voting record and found that she is the fourth-most liberal senator, more liberal even than Massachusetts senator Elizabeth Warren. Similarly, the nonpartisan organization GovTrack.us deemed Harris the furthest-left member of the Senate for the 2019 legislative year. (Spoiler alert: If your voting record is to the left of Bernie Sanders, you might be a socialist.)

To be fair, Harris is simply a politician, so we have no idea what she really believes. Her hard-left agenda might simply be her way of appealing to Democratic voters, much as Republicans who run for president suddenly decide they support big tax cuts and sweeping tax reform.

But whether she’s sincere or insincere, it’s troubling that she actually says it’s the role of government to make sure we all “end up at the same place.”

Let’s close with a video clip from Milton Friedman. At the risk of understatement, he has a different perspective than Ms. Harris.

Since we highlighted Harris’ key quote, let’s also highlight the key quote from Friedman.

Amen.

P.S. It appears Republicans will hold the Senate, which presumably (hopefully?) means that any radical proposals would be dead on arrival, regardless of whether they’re proposed by Biden or Harris.

P.P.S. Harris may win the prize for the most economically illiterate proposal of the 2020 campaign.

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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Back in 2017, the Center for Freedom and Prosperity released this video, which shows that free markets and small government are the best recipe for poor nations that want to become rich nations.

The CF&P video was motivated in part by a need to debunk international bureaucracies such as the OECD and IMF, which abandoned the “Washington Consensus” for economic liberalization and instead have been making the odd argument that prosperity can be achieved with higher taxes and a bigger burden of government spending.

Needless to say, neither of these international organizations has bothered to explain how such dirigiste policies produce more growth.

But the politicians who fund and control such bureaucracies doubtlessly appreciate the message.

You probably won’t be surprised that the United Nations also is on the wrong side of this issue.

A recent report from the New York City-based group regurgitates the anti-market viewpoint.

The argument that pro-market policies automatically benefit the poor is likewise at odds with the evidence. Traditional pro-growth polices, such as lower corporate tax rates, labor ‘reforms,’ deregulation, austerity-driven cuts to services, and privatization can have devastating effects on the well-being of poor people and the state’s capacity to reduce poverty. …There are various ways to reduce extreme inequality, but redistribution is an essential element. …Significant redistribution is indispensable. …Fair and equitable taxation can lay the foundations for a society that respects and promotes well-being for all. …Low tax revenue has hobbled the capacity of governments to undertake redistributive policies. …The time has come to take social protection seriously.

For those who don’t follow these issues closely, “social protection” is the buzz phrase to describe an ever-bigger welfare state.

As you might imagine, the report doesn’t provide any evidence to justify the assertion that higher taxes and bigger government will lead to less poverty and deprivation.

Which is an excuse to recycle my “never-answered question” since I’m still waiting for someone to show me a nation that became rich with the types of statist policy that the U.N. has embraced.

The most remarkable part of the report is buried toward the end. The United Nations actually argues that the poor will be better off if there is less economic growth.

A ‘pro-poor’ growth scenario necessitates a far smaller increase in global GDP and eradicates poverty much sooner. If every country reduced its Gini index by 1 percent per year, it would have a larger impact on global poverty than increasing each country’s annual growth one percentage point above current forecasts.

This is bad math, bad logic, and terrible economics.

And it assumes politicians can deftly re-slice a shrinking pie so that poor somehow get more than they have now (while ignoring Thomas Sowell’s sage warning that wealth can only be redistributed one time).

I’d like the United Nations (or any person or group) to show me a single example – at any point in world history – where less growth has improved conditions for poor people.

For what it’s worth, I can show lots of evidence that growth is the best recipe for helping the less fortunate, even though folks on the left may not be happy since rich people also benefit from economic growth.

I can’t resist pointing out one additional passage from the report. And this one was on the first page.

Poverty is a political choice.

In reality, poverty is the normal state of human existence (an observation that Tim Worstall also made in his CapX column criticizing the U.N. report).

What’s unusual – as explained in videos by Don Boudreaux and Deirdre McCloskey – is that parts of the world became rich beginning a couple of hundred years ago thanks to a new approach called capitalism.

(Though I suppose those five words from the U.N. report can be viewed as accurate. After all, governments perpetuate poverty by failing to copy the good policies of places such as Hong Kong and Singapore. But that’s not what the report means. Instead, we’re supposed to believe that politicians are allowing poverty by not choosing big government.)

P.S. If there was a contest for worst analysis from an international bureaucracy, I still think the IMF deserves to win since it has explicitly embraced the crazy notion that it’s okay to hurt the poor so long as the rich are hurt even more.

P.P.S. Indeed, the report I’m writing about today isn’t even the U.N.’s worst publication. That “honor” belongs to the 2018 report that blatantly lied about the prevalence of poverty in the United States.

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Back in 2016, I shared an image that showed how the welfare state punishes both the poor and rich.

Rich people are hurt for the obvious reason. They get hit with the highest statutory tax rates, and also bear the brunt of the double taxation (the extra layers of tax on saving and investment resulting from capital gains taxes, double taxes on dividends, death taxes, etc).

But I also pointed out that the poor are penalized because they get trapped in dependency.

In large part, this is because they face bad incentives when they work and try to become self sufficient. Not only do they get hit by federal and state taxes, but they also can lose access to various redistribution programs. And the combination of those two factors can produce very high implicit marginal tax rates.

I cited an astounding example of this phenomenon in 2012, showing that a single mother in Pennsylvania would be better off earning $29,000 rather than $57,000. In other words, her implicit marginal tax rate on an extra $28,000 would be 100 percent (thus fulfilling FDR’s odious dream, albeit against a different set of victims).

How pervasive is this problem?

A new study published by the National Bureau of Economic Research gives us the answer. Authored by David Altig, Alan J. Auerbach, Laurence J. Kotlikoff, Elias Ilin, and Victor Ye, it estimates implicit marginal tax rates for various segments of the population.

A plethora of federal and state tax and benefit policies jointly determine Americans’ incentives to work. …complex and often arcane provisions that condition tax payments and benefit receipts on labor income, asset income, total income, and the level of assets. …The myriad features of our fiscal system raise this paper’s central questions: What are the typical levels of marginal net tax rates facing Americans of different ages and resource levels, taking the entire federal and state fiscal system into account? …How much does one’s choice of the state in which to live impact one’s incentive to work? …We address these questions by running 2016 Survey-of-Consumer-Finances (SCF) data through The Fiscal Analyzer (TFA).

The five economists discovered that lower-income people are often hit by very high marginal tax rates on work (τL).

Our main findings, which focus on the fiscal consequences of SCF household heads earning $1,000 more in our base year – 2018, are striking. One in four low-wage workers face lifetime marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. …marginal net lifetime tax rates are generally higher for those in the lowest quintile than for those in the middle three quintiles… The potential poverty trap arising under our fiscal system is highlighted by the 75th τL-percentile values for the bottom quintiles. Moving from the youngest to the oldest cohorts, these values are 67.4 percent, 75.9 percent, 69.3 percent, 76.5 percent, 74.4 percent, and 73.9 percent. Hence, one in four of our poorest households, regardless of age, make between two and three times as much for the government than they make for themselves in earning an extra $1,000.

This graph from the study shows how poor people can even face marginal tax rates of more than 100 percent (which I’ve highlighted in red). The vertical axis is the tax rate and the horizontal axis is household prosperity.

Subjecting poor people to very high implicit tax rates is horrible economic policy, just like it’s horrible policy to hit any other group of people with high marginal tax rates.

Simply stated, when people are punished for engaging in productive economic behavior, they respond by reducing their work, their saving, their investment, and their entrepreneurship.

Interestingly, some states are better (or less worse) than others.

One’s choice of state in which to live can dramatically affect marginal net tax rates. Across all cohorts, the typical bottom-quintile household can lower its remaining lifetime marginal net tax rate by 99.7 percentage points by switching states! …The typical household can raise its total remaining lifetime spending by 8.1 percent by moving from a high-tax to a low-tax state, holding its human wealth, housing expenses, and other characteristics fixed. …To illustrate how τL varies from state to state, we calculate the median τL for households in the 30-39 age cohort in the lowest resource quintile in each state. …Figure 11 shows the cross-state variation in median lifetime marginal tax rates. …median rates varies between a low of 38.8 percent in South Carolina and a high of 55.0 percent in Connecticut. Clearly, where people live can matter a lot for their incentives to work.

Here’s a map showing the marginal tax rate on people in the bottom 20 percent. The obvious takeaway is that you don’t want to be a poor person in Connecticut, Minnesota, or Illinois.

For what it’s worth, tax rates are still too high in the best states (South Carolina, Texas, Indiana, and South Dakota).

The bottom line is that the welfare state is bad news for both taxpayers and recipients. All of which may help to explain why the poverty rate stopped falling once the government declared a “War on Poverty.”

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Back in 2013, I talked to the BBC about Pope Francis and his bizarre hostility to free enterprise.

Sadly, it doesn’t appear that the Pope took my advice (though I think it’s amusing that at least someone in the Vatican is paying attention).

There’s a wealth of evidence that markets are the best way of helping the poor. But the Pope wants more government.

Moreover, there’s also plenty of data showing that higher tax rates and more spending hurt the poor. Yet the Pope wants more government.

And there’s lots of research on capitalism and upward mobility for the less fortunate. Nonetheless, the Pope wants more government.

For instance, he’s once again advertising his ignorance about economics, development, and fiscal policy.

Pope Francis blasted the practice of tax cuts for the rich as part of a “structure of sin” and lamented the fact that “billions of dollars” end up in “tax haven accounts” instead of funding “healthcare and education.” Speaking at the seminar set up by the Pontifical Academy for Social Sciences  the Pope criticized “the richest people” for receiving “repeated tax cuts” in the name of “investment and development.” These “tax haven accounts” impede “the possibility of the dignified and sustained development of all social agents,” claims the Pope.  He added that “the poor increase around us” as poverty is rising around the world. This poverty can be ended if the wealthiest gave more.

Wow. Sounds more like Bernie Sanders or Alexandria Ocasio-Cortez rather than a religious leader.

Libertarian Jesus must be very disappointed.

In an attempt to add some rigorous analysis to the discussion, Professors Antony Davies and James Harrigan wrote a column for the Foundation for Economic Education on capitalism and its role in global poverty reduction.

Galileo ran afoul of the Inquisition in 1633 when he was found “vehemently suspect of heresy.” …One might think that being this profoundly wrong about something well outside the realm of theology would cause the magisterium, and the pope specifically, to tread very carefully even 386 years later. But one would be wrong. Because here comes Pope Francis yet again, offering economic opinions from the bulliest of pulpits about something he understands no better than a garden-variety college freshman. …According to the pontiff, “the logic of the market” keeps people hungry. But “the market” has no logic. The market isn’t a thing, let alone a sentient thing. “The market” is the sum total of individual interactions among billions of people. …Whenever a trade occurs, both sides are better off for having made it. We know this because if they weren’t, the trade wouldn’t occur. …Not surprisingly to anyone but perhaps Pope Francis, some of the first financial speculation in which humans ever engaged involved food. Financial speculation and its more evolved cousins, options and futures contracts, evolved precisely as a means to fight hunger. …speculators took some of the risk of price fluctuations off the backs of farmers, and this made it possible for farmers to plant more food.

Davies and Harrigan inject some hard data into the debate.

If these arguments are too esoteric for Francis, there is also overwhelming evidence. Economic freedom measures the degree to which a country’s government permits and supports the very sorts of markets against which Francis rails. …If we list societies according to their economic freedom, the same pattern emerges again and again and again. Whether comparing countries, states, or cities, societies that are more economically free exhibit better social and economic outcomes than those that are less economically free. …even Francis should be able to see it quite clearly from his Vatican perch. …Extreme poverty rates for the half of countries that are less economically free are around seven times the extreme poverty rates for the half of countries that are more economically free.

Here’s one of the charts from their column.

As you can see, the state-controlled economies on the left have much higher levels of poverty than the market-driven economies on the right.

They also share some economic history.

…if the world around Francis doesn’t provide enough compelling evidence, the world prior to Francis certainly does. At the turn of the 18th century, around 95 percent of humans lived in extreme poverty. That was at the advent of the Industrial Revolution and of capitalism. …the extreme poverty rate fell from 95 percent to below ten percent. With the flourishing of capitalism, the extreme poverty rate fell tenfold at the same time that the number of humans grew tenfold.

Amen. Videos by Deirdre McCloskey and by Don Boudreaux confirm how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

By contrast, there’s not a single example of a nation that became rich and reduced poverty with big government.

P.S. Mauritius is a good test case of why Pope Francis is wrong. Very wrong.

P.P.S. To learn more about why Pope Francis is off base, I also recommend the wise words of Thomas Sowell and Walter Williams.

P.P.P.S. To be fair, there was plenty of bad economics in the Vatican before Francis became Pope. And also some sound thinking.

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Barack Obama’s strategy during the 2008 campaign was very shrewd. His statist policy positions and doctrinaire Senate voting record (almost identical to Bernie Sanders) made him very appealing to the left, yet he also made himself acceptable to other voters with a calm and moderate demeanor (Mayor Buttigieg is trying to follow the same strategy for 2020, albeit with less success so far).

Obama’s one major “oops moment” in an otherwise very disciplined campaign occurred one month before the election when he admitted that he wanted to “spread the wealth around.”

Elizabeth Warren isn’t following Obama’s script since she’s running as an out-of-the-closet leftist, but she just experienced her own “oops moment.”

Writing for PJ Media, Megan Fox explains that Senator Elizabeth Warren inadvertently – but very clearly – acknowledged that her plan penalizes people with individual integrity and personal responsibility.

Elizabeth Warren was confronted at an Iowa town hall event by a voter who wanted to know if he could get back the money that he paid for his daughter’s college education since Warren’s running on forgiving student loan debt. “My daughter is in school,” he said. “I saved all my money just to pay… Can I have my money back?” Warren replied, “Of course not!” The man continued to push Warren for an explanation for why some people can have a free education while others have to pay. “So you’re going to pay for people who didn’t save any money and those of us who did the right thing get screwed?” he asked. …the plan is really just a bribe to current college students with debt as it does not address students who take out student loans in the future. …That’s what we would normally call a hustle.

Katherine Timpf of National Review has a first-hand account of why Sen. Warren’s scheme rubs many people the wrong way.

…this guy…is…absolutely right… When he references the sacrifices that he and his family had to make to pay for his daughter’s college, what he’s implicitly saying is that his choice to be financially responsible has cost him things that money cannot replace. …I wrote about some of the sacrifices that I myself had to make to avoid shouldering a debt that I knew I couldn’t repay. …I found out that I’d been accepted to Columbia University’s graduate school of journalism. I was absolutely thrilled by this; it had been my dream since childhood to attend this exact school… Then, I realized I’d never be able to repay the $80,000 loan I’d have to take out to attend my dream school. …I withdrew. It was a tough decision — and the consequences were even tougher. …Unless Elizabeth Warren can go back in time and put me in a Columbia classroom during the time I spent cleaning those Boston Market bathrooms, her plan wouldn’t be “fair.” Unless she can give me the hours of my life back that I spent sitting alone covered in scabies cream, her plan wouldn’t be “fair.” …Elizabeth Warren can’t “pay me back” for a loan that I decided against taking out — a decision that I’d made precisely because I did not expect that anyone else would pay it back for me. …In other words? No — I don’t think that I should have to pay for someone else making an irresponsible decision when they could have made a responsible one.

Warren’s comments are getting lots of negative attention because people now have an easy-to-understand example of how her policies reward bad behavior and punish good behavior.

  • If you save for your kid, you’re a chump.
  • If you display personal responsibility, you’re a chump.
  • If you work hard, you’re a chump.
  • If you sacrifice today for a better tomorrow, you’re a chump.
  • If you invest, you’re a chump.
  • If you think it’s your job to take care of your family, you’re a chump.

There are many reasons to oppose redistribution programs. For instance, I was on TV just last month explaining how government programs encourage debt instead of savings.

What Warren has done, though, is to remind us something more important – that these programs are especially bad because they erode societal capital. They teach people it’s okay to live off the government and that they don’t need to worry about hard work and self reliance.

And when enough people adopt that attitude and a nation reaches a “tipping point,” then you wind up with a society where too many people are riding in the wagon and not enough people are pulling the wagon.

Think Greece.

P.S. I thought the big “oops moment” for Obama in 2008 occurred when he openly argued that he wanted higher capital gains taxes even if the government didn’t collect any extra revenue because of concomitant economic damage. In other words, like many folks on the left, he was willing to impose hardship on ordinary people just to hurt people with high incomes.

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I generally identify three big problems with the tax code.

But it may be time to include another item. Politicians have learned how to use “refundability” as a tool to redistribute income through the tax system.

A “refundable” provision gives money to selected people who file tax returns, even if they don’t pay any tax.

In other words, refundability isn’t the same as over-paying your taxes and then getting your money back after filing a tax return.

Nor is it like a traditional tax preference, where you can lower your tax bill if you do something politicians like – such as having a mortgage or contributing to charity.

With refundability, you get money even if your tax liability is zero.

For instance, the “earned income tax credit” is now the federal government’s fastest-growing redistribution program and 88 percent of the money is actually spending rather than a tax break.

Writing about this issue back in 2010, I referred to refundability as a form of political alchemy. Politicians can increase spending but pretend they are cutting taxes.

And it’s a bipartisan problem. Republicans utilize this gimmick and Democrats utilize this gimmick.

The most-recent example is a proposal by Senators Mitt Romney (R-UT) and Michael Bennet (D-CO), and I’ve highlighted the relevant portions of their press release.

Create a New Young Child Tax Credit: Create a new tax credit of $2,500 per child for children up to age six. The first $1,500 would be fully refundable, meaning that every taxpayer receives that amount regardless of income (up to the current law phase-out levels of $200,000 for individuals and $400,000 for couples). The next $1,000 would phase in at a 15 percent rate beginning at the first dollar of income, and begin phasing down at current law income thresholds. Reform Existing Child Tax Credit: Make critical reforms to a key measure that provides a $2,000 credit per child for children from age six up to age 17, including eliminating the current $1,400 cap on refundability, making the first $1,000 per child fully refundable regardless of income up to the phase-out threshold, and making the next $1,000 per child phase-in at a 15 percent rate starting at the first dollar income.

To make matters worse, Romney and Bennet want to finance this additional redistribution spending by imposing capital gains taxes on the assets of dead people.

So more spending financed by higher taxes. Perhaps now people will understand why I was so hostile to Romney when he was running for President in 2012.

I’ll close with a comment about political honesty and transparency.

If Senators Romney and Bennet proposed to have the government send checks to people for having kids, I wouldn’t support that idea. But I would give them credit for introducing an honest proposal for more redistribution.

But they instead chose to mask their agenda by laundering additional redistribution through the tax code.

The bottom line is that we already have record amounts of redistribution in America. And refundable provisions of the internal revenue code are the fastest-growing type of redistribution.

Adding to the problem is not a good idea.

P.S. Unsurprisingly, as is so often the case with redistribution programs, there’s rampant fraud with the EITC and other refundable tax provisions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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