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Archive for the ‘Welfare State’ Category

If nothing else, Alexandria Ocasio-Cortez gives me a lot to write about…and to laugh about.

I recently pontificated about her crazy idea to impose a top tax rate of 70 percent, which would reverse the very successful experiment we had in the 1980s (and presumably have a reverse effect on revenue as well).

Today, let’s look at the spending side of the fiscal equation.

AOC, as she is known, wants a dramatic increase in the burden of federal spending for her so-called “green new deal.”

Let’s examine the implications.

We’ll start with a supporter. Thomas Friedman of the New York Times has a giant carbon footprint compared to the average person, but that naturally doesn’t stop him from endorsing policies that would put AOC’s onerous burdens on the less fortunate.

Barack Obama picked up the theme and made a Green New Deal part of his 2008 platform, but the idea just never took off. So I’m excited that the new Democratic Congresswoman Alexandria Ocasio-Cortez and others have put forward their own takes on a Green New Deal… The goal is a ‘detailed national, industrial, economic mobilization plan’ to rapidly transition the country away from fossil fuels and toward clean energy, such as a solar, wind, and electric cars.” The Green New Deal that Ocasio-Cortez has laid out aspires to power the U.S. economy with 100 percent renewable energy within 12 years and calls for “a job guarantee program to assure a living wage job to every person who wants one,” “basic income programs” and “universal health care,” financed, at least in part, by higher taxes on the wealthy. …it is time for the green movement to think big and make big demands…a portion of every dollar raised by a carbon tax in a Green New Deal would be invested in two new community colleges and high-speed broadband in rural areas of every state.

Now let’s look at the implications of such policies.

But before looking at fiscal and economic considerations, let’s briefly detour to ideology.

Jonah Goldberg of National Review has some fun examining the philosophical forerunners of Ocasio-Cortez’s plan.

…the Green New Deal…is a triumph of recycling. Not of plastic bags or soda cans, but of ideas. Specifically, Franklin D. Roosevelt’s New Deal and the impulses behind it. To her credit, Ocasio-Cortez (D., N.Y.) is fairly honest about her ideological recycling. …the New Deal itself was largely about war mobilization — without war. Roosevelt campaigned for president promising to adapt Woodrow Wilson’s wartime industrial policies to fight the Great Depression. …Nearly the entire structure of the New Deal was copied from Wilson’s “war socialism.” The National Recovery Administration was modeled on the War Industries Board. The Reconstruction Finance Corporation was an update of Wilson’s War Finance Corporation. …breaking discipline was a punishable offense, which is why a tailor, Jacob Maged, was sentenced to 30 days in jail for charging too little to press a suit. …American liberalism has been recycling the same basic idea: The country needs to be unified and organized as if we are at war… The attraction stems from what John Dewey called “the social possibilities of war” — the ability to reorganize and unify society according to the schemes of planners and experts.

Gee, another New Deal. What could possibly go wrong?

Now let’s contemplate the practical implications.

We’ll start with Warren Henry’s article in the Federalist.

…the darling of democratic socialism proposed eliminating carbon emissions within 12 years. …The “Frequently Asked Questions” section accompanying her draft resolution claims it could be funded in the “same ways that we paid for the 2008 bank bailout and extended quantitative easing programs, the same ways we paid for World War II and many other wars. The Federal Reserve can extend credit to power these projects and investments, new public banks can be created (as in WWII) to extend credit and a combination of various taxation tools (including taxes on carbon and other emissions and progressive wealth taxes) can be employed.” …Ocasio-Cortez now falls back on the comforting myth that everything is affordable by soaking the rich with higher income taxes. …Ocasio-Cortez half-concedes her plan is a fantasy… For an idea of how detached Ocasio-Cortez is from reality, consider that we get only 17 percent of our energy from renewables. …even if the golden geese of capitalism were to continue laying eggs in Ocasio-Cortez’s command-and-control economy, there will not be enough to make her statist omelet. Even if Ocasio-Cortez’s fever dream were technologically feasible, the burden of funding it would land on the middle class as well as the uber-wealthy. …This is not the first time Ocasio-Cortez has tried to pass off a fairy tale as a white paper. She recently claimed the $32 trillion cost of a Medicare-for-all plan could be funded by curbing fraud at the Pentagon. Not even PolitiFact could make that math work, given that our nation has not spent $32 trillion on defense since its founding.

In an article for FEE, Jarrett Stepman looks at the economics of AOC’s plan.

It shouldn’t be a surprise that the avowed “democratic socialist” went with the predictable “tax the rich” formula in order to pay for a massive government program to combat climate change. …such a scheme would mean that her constituents in New York City would pay a max income tax rate of 82.6 percent… Perhaps New Yorkers deserve what they voted for, but does the country? …the tax hikes on the rich would be one of the least radical parts of the agenda. …moving the economy away from fossil fuels to 100 percent renewable energy will come “at a cost of about $5.2 trillion over 20 years.” …this deal would instead rely on the ruthless bludgeoning of private industry and citizens through the levers of the state. …the plan calls for direct government intervention to be its “prime driver.” …The Green New Deal doesn’t just include environmentalist proposals… Among the liberal wish list items included, the Green New Deal contains a proposal for universal health care and a basic minimum income program to make up for all the jobs lost…this will all come with an immense cost. …How do Green New Deal proponents propose to pay for this extreme growth in government? …by massively hiking taxes and then borrowing and ultimately printing money. Then it would use public banks run by unaccountable bureaucrats to carry the whole thing out. …an American version of a Soviet-style five-year plan focused on command-and-control economic solutions that have proven to fail the world over. …The agony of a collapsing Venezuela…is a stark example of how badly this can end.

Milton Ezrati’s column in the City Journal further debunks AOC’s numbers.

…specific goals…include, among other things, expanding renewable-energy sources until they provide 100 percent of the nation’s power…upgrading every residence and industrial building in the U.S. for energy efficiency…eliminating greenhouse-gas emissions for industry and agriculture; funding “massive” investments… Ocasio-Cortez adds a long list of social objectives: providing training and education for the energy transition, including “job guarantees at a living wage for everyone who wants one”; …mitigating racial, regional, and gender-based inequalities; developing universal health-care and income-support programs… there were some 136 million housing units in the United States. Upgrading each unit to high standards of energy efficiency would cost, conservatively, at least $10,000 per home, adding up to a total cost of $1.3 trillion. Doing the same for industrial structures would easily exceed that amount. The single-payer health-care part would cost another $3 trillion or more, annually. Stabilizing carbon dioxide in the atmosphere would add another $1 trillion to $2 trillion to the price tag—and all these still only account for three items on AOC’s list. …she would rely on debt, “printing money,” and government willingness to take an equity stake in some of the enterprises involved.

The bottom line is Ocasio-Cortez wants to dramatically expand the size and scope of government.

Some of her ideas would involve big increases in red tape, especially for the green parts of the Green New Deal (thus underscoring why it is rather naive for anyone to think the left would accept less regulation in exchange for a carbon tax).

But since I’m a fiscal policy person, I’m naturally concerned about what her grandiose plan would mean for the tax and spending burden.

Brian Riedl of the Manhattan Institute has used public sources to estimate the price tag. Here’s the new spending that AOC and her fellow travelers want to impose on the economy.

And below we have a menu of potential tax increases.

There are two things to realize.

  • First, even if every single one of the tax increases is adopted, it doesn’t come close to paying for AOC’s wish list for new spending.
  • Second, the big revenue sources (payroll taxes, VAT, income tax) are largely taxes on lower-income and middle-class taxpayers.

In other words, politicians talk big about screwing the rich, but the rest of us will be picking up the tab.

By the way, I can’t resist commenting on this second table. I realize Brian is merely following the tradition of budget scorekeepers at the JCT and CBO, but new revenues should not be categorized as “savings.” I would go with “grabbings” or “takings” instead.

Brian’s rhetorical sin doesn’t qualify him for the Bob Dole Award or the Charlie Brown Award, but surely there should be some consequences. Maybe we’ll create a Libertarian Re-education Camp and miscreants will be forced to listen to lectures from Dork 1, Dork 2, and Dork 3?

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Bernie Sanders is yesterday’s news.

Yes, he’s still lovable ol’ Crazy Bernie, but he’s now being overshadowed by Congresswoman Alexandria Ocasio-Cortez, another out-of-the-closet socialist who somehow thinks America should be more like Greece or Venezuela.

Brian Riedl of the Manhattan Institute opines in National Review about AOC’s proposed tax hike on the rich. He starts with a very appropriate economic observation.

A 70 percent tax bracket would raise very little (if any) revenue, while damaging the economy and sending income and jobs overseas.

He then points out that we should look at both sides of the fiscal ledger.

And the spending side of the left’s ledger is very crowded and very heavy.

…when assessing the needed tax revenues, a green-energy initiative costing $7–$10 trillion over the decade should be examined in the context of $42 trillion in additional Democratic-socialist proposals that include single-payer health care ($32 trillion), a federal jobs guarantee ($6.8 trillion), student-loan forgiveness ($1.4 trillion), free public college ($800 billion), infrastructure ($1 trillion), family leave ($270 billion), and Social Security expansion ($188 billion). …These spending promises are so stratospheric as to be incomprehensible — except to the far Left, which clings to the myth that simply taxing millionaires can finance a level of socialism that would make the Swedes start a tea-party movement.

Here’s the key part of Brian’s column.

He points out that there’s no way to finance the agenda of Democratic Socialists with class-warfare taxes. Even if the AOC tax plan is dramatically expanded.

…a 100 percent tax rate on all income over $1 million…would raise 3.8 percent of GDP — not even enough to balance the current budget, much less finance a Green New Deal. And even that figure implausibly assumes that people continue working and investing. Slightly more realistically, doubling the top 35 percent and 37 percent tax brackets, to 70 percent and 74 percent for singles earning more than $200,000 and couples earning at least $400,000, would raise roughly 1.6 percent of GDP. That figure also ignores all revenues lost to the economic effects of 85 percent marginal tax rates (when including state and payroll taxes) as well as tax avoidance and evasion. …limiting the 70 percent tax bracket to incomes over $10 million…would raise only 0.25 percent of GDP — about $50 billion annually. …$50 billion is surely too high of an estimate, because the kind of people with incomes over $10 million also have teams of accountants and tax lawyers finding every conceivable tax loophole and overseas income shift.

Everything we know about the real-world impact of tax policy tells us that these soak-the-rich taxes won’t raise much – if any – revenue for the simple reason that upper-income taxpayers will alter the timing, level, and composition of their income.

But, as Brian noted, these taxes wouldn’t come close to financing the leftist wish list even if one makes absurd assumptions that behavior doesn’t change and the economy is unaffected.

So how do European nations finance their large welfare states?

Europe finances its generous welfare states through steep value-added taxes that hit the entire population. …Increasing federal spending by 21 percent of GDP to fund Democratic socialism — even after slashing defense — would require either a 55 percent payroll tax increase, or 115 percent value-added tax, according to CBO data. Acknowledging this brutal middle-class burden would immediately end any public flirtation with “free-lunch socialism.”

This is the most important takeaway from the column.

And it’s something that I’ve noted as well. On more than one occasion.

If you want European-type handouts, you better be prepared to cough up a lot of money.

  • Onerous value-added taxes.
  • Punitive payroll taxes.
  • And income taxes that impose high rates on modest incomes.

Simply stated, there is no way to finance a European-sized welfare state without pillaging middle-class and lower-income taxpayers.

Which helps to explain why European living standards are significantly below American levels.

By the way, there one final point from Brian’s column that is worth sharing.

He explains that high tax rates in the 1950s, 1960s, and 1970s didn’t generate much revenue. Even from the rich.

A common liberal retort is that the economy survived 91 percent income-tax rates under President Eisenhower and 70 percent tax rates through the 1970s. That does not mean those policies raised much revenue. Tax exclusions and high income thresholds shielded nearly everyone from these tax rates — to the degree that the richest 1 percent of earners paid lower effective income-tax rates in the 1950s than today. In 1960, only eight taxpayers paid the 91 percent rate. Overall, today’s 8.2 percent of GDP in federal income-tax revenues exceeds that of the 1950s (7.2 percent), 1960s (7.6 percent), and 1970s (7.9 percent). Those earlier decades were not a tax-the-rich utopia.

Amen.

I made similar points back in 2017.

The bottom line is that Alexandria Ocasio-Cortez’s economic agenda cannot be justified when looking at economic data, fiscal data, and historical data.

But we can say with great confidence that ordinary people ultimately will pay the heaviest price if her proposals get enacted since her class-warfare tax hikes will be a precursor for huge tax increases on the rest of us.

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There was a book last decade by Thomas Frank, What’s the Matter with Kansas?, that asked why lower-income voters in the state didn’t vote for greater levels of redistribution.

The author claimed these voters were sidetracked by cultural issues, which may very well be part of the story. I like to think that these Kansans also were motivated by ethics and that they realized it would be wrong to use government coercion to take money from other people.

And maybe, unlike the folks at the IMF, they were not motivated by envy and they realized that high taxes and more redistribution would make them worse off over time because of the negative impact on overall prosperity.

Well, it appears that the folks in Kansas aren’t that different from people in India, Morocco, Nigeria, Mexico, and South Africa. At least that’s the takeaway from some new research that Christopher Hoy wrote about for the World Bank. Here’s the issue he investigated.

Social commentators and researchers struggle to explain why, despite growing inequality in many countries around the world,  there is often relatively limited support among poorer people for policies where they are set to benefit (such as increases in cash transfers or in the minimum wage). …Conventional theories of preferences for redistribution, such as the Meltzer-Richard Hypothesis, imply that if poor people were made aware they were relatively poorer than most other people in their country, they would become more supportive of redistribution. Yet there is little empirical evidence that evaluates this prediction. …empirical evidence is needed to understand how poorer people’s misperceptions of their relative position in the national income distribution effects their support for redistribution.

Here’s the methodology he used.

I conducted the first cross country survey experiment on preferences for redistribution in the developing world… The experiment involved over 16,000 respondents in five developing countries that make up almost 25% of the global population (India, Nigeria, Mexico, South Africa and Morocco). …To test whether informing poor people of their relative position in the national income distribution makes them more supportive of redistribution, I randomly allocate half of the respondents in each country to be told which quintile their household belongs to in the national income distribution (based upon their reported household income and the number of household members). …After the treatment they were asked if they thought the gap between the rich and poor was too large and whether the government was responsible for closing this gap.

And here are some of the results.

People tend to think they are in the middle of the income distribution, regardless of whether they are rich or poor. …poor people who perceived themselves to be in the bottom two quintiles of the distribution were between 15 to 28 percentage points more likely to prefer lower levels of inequality than poor people who perceived themselves to be in the top two quintiles. …Surprisingly, telling poor people that they are poorer than they thought makes them less concerned about the gap between the rich and poor in their country…there was no effect from the treatment on these people’s support for the government to close the gap between the rich and poor.

Here’s a chart showing how people became less sympathetic to government-coerced redistribution after learning more about their own economic status.

The author speculates on possible reasons for these results.

A plausible channel that is causing this effect is people using their own living standard as a ‘benchmark’ for what they consider acceptable for others. …people…realise two points. Firstly, there are fewer people in their country with a living standard they considered to be relatively poor than they had thought. Secondly, what they had considered to be an ‘average’ living standard (their own standard of living) is actually relatively poor compared to other people in their country. I show how both of these points would lead people to respond by being less likely to be concerned about the gap between the rich and poor in their country. …there are opposing channels through which poorer people’s preferences for redistribution respond to information about their relative position. On the one hand, poorer people may be more supportive if they are set to benefit from redistribution. However, on the other hand they may be less supportive if they are less concerned about the absolute living standard of people who are relatively poor.

These are all plausible answers.

Though I have the same questions about this research as I did about Frank’s book. Do people in these five developing nations have any level of moral aversion to redistribution and/or do they understand (at least implicitly) that a tax-and-redistribute model is a recipe for national economic decline?

Perhaps a more practical way of looking at the issue is to ask whether lower-income people care most about economic growth or economic inequality.

Many of the professional left, including the ideologues at the IMF, are fixated on the latter and they’re willing to hurt the poor if the rich suffer even greater harm (in other words, Margaret Thatcher was right about their motives).

By contrast, I strongly suspect the average lower-income person is far more interested in more prosperity for their family and far less concerned about the prosperity of the rich family on the other side of town. They presumably are unaware of the powerful Chinese data on poverty reduction and inequality, but they instinctively understand that a rising tide lifts all boats.

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When I argue with my statist friends about the proper size and scope of government, they accuse me of not wanting public services.

My typical response is to explain that I am a strong supporter of markets as the method to get high-quality roads, schools, and healthcare.

But I’m wondering whether this answer pays too much attention to the trees and doesn’t focus on the forest.

After all, the debate isn’t whether we should be Liberland or Venezuela. It’s whether government should be bigger or smaller compared to what we have now.

So the next time I tussle with my left-leaning buddies, I’m going to share this chart (based on data from the IMF’s World Economic Outlook database) and ask them why we can’t be like the fast-growing, small-government nations of Asia.

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To elaborate, not only do jurisdictions such as Hong Kong and Singapore enjoy impressive growth, they also get very high scores for infrastructure, education, and health outcomes.

In other words, these nations are role models for “public sector efficiency.”

What they don’t have, by contrast, are expensive welfare states that seem to be correlated with poor outcome for basic public services.

For all intents and purposes, I want to focus the debate on how much government is necessary to get the things people want, sort of like I did in Paris back in 2013.

I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany’s government, which consumes 45 percent of GDP. They said no. I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP. They said no. And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output… Once again, they said no.

I assume (hope) Americans also would say no given these choices. And hopefully they would say yes when asked if we should be like Hong Kong and Singapore.

P.S. If I rotated the above chart clockwise by 90 degrees we’d have a pretty good approximation of the downward-sloping portion of the Rahn Curve.

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My favorite publication every year is Economic Freedom of the World.

It’s filled with data on fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance for 162 jurisdictions, and it provides an unbiased way of gauging the degree to which they allow economic liberty.

It also allows readers to slice and dice data, which is very helpful for doing analysis.

For instance, as illustrated by this 2×2 matrix, I claimed in 2016 that nations with small fiscal burdens aren’t necessarily pro-free market (meaning they would belong in the top-right quadrant) and countries with large fiscal burdens aren’t necessarily in favor of intervention and planning (so they would belong in the lower-left quadrant).

But that matrix was speculative.

Which is why I downloaded the EFW dataset. I then removed the fiscal policy variable and created new rankings so I could see which nations relied most on unfettered markets.

As you can see, Singapore barely edges out Hong Kong for first place in this “Laissez-Faire Index,” with New Zealand in third place. In other words, the top three nations in the overall EFW rankings stay the same, though Hong Kong and Singapore trade places (in the far-right column, I compare each nation’s rank to its EFW score for overall economic liberty).

The most dramatic results are for some of the welfare states in Northern and Western Europe. Denmark jumps 12 spots to #4 and the Netherlands soars 18 spots to #5. Other nations with big increases include Finland (up 14 spots to #8), Luxembourg (the world’s freest economy as recently as 1985, moves up 14 spots to #11), Sweden (up 30 spots to #13), Norway (up 11 spots to #14), and Belgium (up 32 spots to #20).

Looking at this list, it’s easy to understand why the combination of big government and free markets is sometimes called the “Nordic Model” (defined by Wikipedia as “a comprehensive welfare state…on the economic foundations of free market capitalism”).

And Japan could be considered an honorary member since it jumps 22 spots in the Laissez-Faire Index, up to #19.

I’ve argued that such nations compensate for the damage of high taxes and big welfare states by being very market-oriented in other ways. And the EFW data supports that assertion.

Though it’s worth noting that their large fiscal burdens do have a negative impact.

P.S. Looking at other nations in the Laissez-Faire Index, Switzerland, the United Kingdom, Ireland and Canada all remain in the top 10, though the United States falls six spots to #12. Georgia, Mauritius, Taiwan, and Lithuania all drop by double-digit amounts.

P.P.S. I did a version of the Laissez-Faire Index in 2015.

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One of the more elementary observations about economics is that a nation’s prosperity is determined in part by the quantity of quality of labor and capital. These “factors of production” are combined to generate national income.

I frequently grouse that punitive tax policies discourage capital. There’s less incentive to invest, after all, if the government imposes extra layers of tax on income that is saved and invested.

Bad tax laws also discourage labor. High marginal tax rates penalize people for being productive, and this can be especially counterproductive for entrepreneurship and innovation.

Though we shouldn’t overlook how government discourages low-income people from being productively employed. Only the problem is more on the spending side of the fiscal equation.

In today’s Wall Street Journal, John Early and Phil Gramm share some depressing numbers about growing dependency in the United States.

During the 20 years before the War on Poverty was funded, the portion of the nation living in poverty had dropped to 14.7% from 32.1%. Since 1966, the first year with a significant increase in antipoverty spending, the poverty rate reported by the Census Bureau has been virtually unchanged. …Transfers targeted to low-income families increased in real dollars from an average of $3,070 per person in 1965 to $34,093 in 2016. …Transfers now constitute 84.2% of the disposable income of the poorest quintile of American households and 57.8% of the disposable income of lower-middle-income households. These payments also make up 27.5% of America’s total disposable income.

This massive expansion of redistribution has negatively impacted incentives to work.

The stated goal of the War on Poverty is not just to raise living standards, but also to make America’s poor more self-sufficient and to bring them into the mainstream of the economy. In that effort the war has been an abject failure, increasing dependency and largely severing the bottom fifth of earners from the rewards and responsibilities of work. …The expanding availability of antipoverty transfers has devastated the work effort of poor and lower-middle income families. By 1975 the lowest-earning fifth of families had 24.8% more families with a prime-work age head and no one working than did their middle-income peers. By 2015 this differential had risen to 37.1%. …The War on Poverty has increased dependency and failed in its primary effort to bring poor people into the mainstream of America’s economy and communal life. Government programs replaced deprivation with idleness, stifling human flourishing. It happened just as President Franklin Roosevelt said it would: “The lessons of history,” he said in 1935, “show conclusively that continued dependency upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fiber.”

In another WSJ column on the same topic, Peter Cove reached a similar conclusion.

America doesn’t have a worker shortage; it has a work shortage. The unemployment rate is at a 15-year low, but only 55% of Americans adults 18 to 64 have full-time jobs. Nearly 95 million people have removed themselves entirely from the job market. According to demographer Nicholas Eberstadt, the labor-force participation rate for men 25 to 54 is lower now than it was at the end of the Great Depression. The welfare state is largely to blame. …insisting on work in exchange for social benefits would succeed in reducing dependency. We have the data: Within 10 years of the 1996 reform, the number of Americans in the Temporary Assistance for Needy Families program fell 60%. But no reform is permanent. Under President Obama, federal poverty programs ballooned.

Edward Glaeser produced a similar indictment in an article for City Journal.

In 1967, 95 percent of “prime-age” men between the ages of 25 and 54 worked. During the Great Recession, though, the share of jobless prime-age males rose above 20 percent. Even today, long after the recession officially ended, more than 15 percent of such men aren’t working. …The rise of joblessness—especially among men—is the great American domestic crisis of the twenty-first century. It is a crisis of spirit more than of resources. …Proposed solutions that focus solely on providing material benefits are a false path. Well-meaning social policies—from longer unemployment insurance to more generous disability diagnoses to higher minimum wages—have only worsened the problem; the futility of joblessness won’t be solved with a welfare check. …various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. …The past decade or so has seen a resurgent progressive focus on inequality—and little concern among progressives about the downsides of discouraging work. …The decision to prioritize equality over employment is particularly puzzling, given that social scientists have repeatedly found that unemployment is the greater evil.

Why work, though, when government pays you not to work?

And that unfortunate cost-benefit analysis is being driven by ever-greater levels of dependency.

Writing for Forbes, Professor Jeffrey Dorfman echoed these findings.

…our current welfare system fails to prepare people to take care of themselves, makes poor people more financially fragile, and creates incentives to remain on welfare forever. …The first failure of government welfare programs is to favor help with current consumption while placing almost no emphasis on job training or anything else that might allow today’s poor people to become self-sufficient in the future. …It is the classic story of giving a man a fish or teaching him how to fish. Government welfare programs hand out lots of fish, but never seem to teach people how to fish for themselves. The problem is not a lack of job training programs, but rather the fact that the job training programs fail to help people. …The third flaw in the government welfare system is the way that benefits phase outs as a recipient’s income increases. …a poor family trying to escape poverty pays an effective marginal tax rate that is considerably higher than a middle class family and higher than or roughly equal to the marginal tax rate of a family in the top one percent.

I like that he also addressed problems such as implicit marginal tax rates and the failure of job-training programs.

Professor Lee Ohanian of the Hoover Institution reinforces the point that the welfare state provides lots of money in ways that stifle personal initiative.

Inequality is not an issue that policy should address. …Society, however, should care about creating economic opportunities for the lowest earners. …a family of four at the poverty level has about $22,300 per year of pre-tax income. Consumption for that same family of four on average, however, is about $44,000 per year, which means that their consumption level is about twice as high as their income. …We’re certainly providing many more resources to low-earning families today. But on the other hand, we have policies in place that either limit economic opportunities for low earners or distort the incentives for those earners to achieve prosperity.

I’ve been citing lots of articles, which might be tedious, so let’s take a break with a video about the welfare state from the American Enterprise Institute.

And if you like videos, here’s my favorite video about the adverse effects of the welfare state.

By the way, it isn’t just libertarians and conservatives who recognize the problem.

Coming from a left-of-center perspective, Catherine Rampell explains in the Washington Post how welfare programs discourage work.

…today’s social safety net discourages poor people from working, or at least from earning more money. …you might qualify for some welfare programs, such as food stamps, housing vouchers, child-care subsidies and Medicaid. But if you get a promotion, or longer hours, or a second job, or otherwise start making more, these benefits will start to evaporate — and sometimes quite abruptly. You can think about this loss of benefits as a kind of extra tax on low-income people. …Americans at or just above the poverty line typically face marginal tax rates of 34 percent. That is, for every additional dollar they earn, they keep only 66 cents. …One in 10 families with earnings close to the poverty line faces a marginal tax rate of at least 65 percent, the CBO found. …You don’t need to be a hardcore conservative to see how this system might make working longer hours, or getting a better job, less attractive than it might otherwise be.

To understand what this means, the Illinois Policy Institute calculated how poor people in the state are trapped in dependency.

The potential sum of welfare benefits can reach $47,894 annually for single-parent households and $41,237 for two-parent households. Welfare benefits will be available to some households earning as much as $74,880 annually. …A single mom has the most resources available to her family when she works full time at a wage of $8.25 to $12 an hour. Disturbingly, taking a pay increase to $18 an hour can leave her with about one-third fewer total resources (net income and government benefits). In order to make work “pay” again, she would need an hourly wage of $38 to mitigate the impact of lost benefits and higher taxes.

Agreeing that there’s a problem does not imply agreement about a solution.

Folks on the left think the solution to high implicit tax rates (i.e., the dependency trap) is to make benefits more widely available. In other words, don’t reduce handouts as income increases.

The other alternative is to make benefits less generous, which will simultaneously reduce implicit tax rates and encourage more work.

I’m sympathetic to the latter approach, but my view is that welfare programs should be designed and financed by state and local governments. We’re far more likely to see innovation as policy makers in different areas experiment with the best ways of preventing serious deprivation while also encouraging self-sufficiency.

I think we’ll find out that benefits should be lower, but maybe we’ll learn in certain cases that benefits should be expanded. But we won’t learn anything so long as there is a one-size-fits-all approach from Washington.

Let’s close with a political observation. A columnist for the New York Times is frustrated that many low-income voters are supporting Republicans because they see how their neighbors are being harmed by dependency.

Parts of the country that depend on the safety-net programs supported by Democrats are increasingly voting for Republicans who favor shredding that net. …The people in these communities who are voting Republican in larger proportions are those who are a notch or two up the economic ladder — the sheriff’s deputy, the teacher, the highway worker, the motel clerk, the gas station owner and the coal miner. And their growing allegiance to the Republicans is, in part, a reaction against what they perceive, among those below them on the economic ladder, as a growing dependency on the safety net, the most visible manifestation of downward mobility in their declining towns. …I’ve heard variations on this theme all over the country: people railing against the guy across the street who is collecting disability payments but is well enough to go fishing, the families using their food assistance to indulge in steaks.

It’s not my role to pontificate about politics, so I won’t address that part of the column. But I will say that I’ve also found that hostility to welfare is strongest among those who have first-hand knowledge of how dependency hurts people.

P.S. If you want evidence for why Washington should get out of the business of income redistribution, check out this visual depiction of the welfare state.

P.S. The Canadians can teach us some good lessons about welfare reform.

P.P.S. The Nordic nations also provide valuable lessons, at least from the don’t-do-this perspective.

P.P.P.S. Last but not least, there’s a Laffer-type relationship between welfare spending and poverty.

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Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

Today, we’re going to peruse his writings on Denmark.

Here’s some of what he wrote earlier this month.

Denmark can teach us…about the possibilities of creating a decent society. …Denmark, where tax receipts are 46 percent of GDP compared with 26 percent in the U.S., is arguably the most social-democratic country in the world. According to conservative doctrine, the combination of high taxes and aid to “takers” must really destroy incentives both to create jobs and to take them in any case. …what Denmark shows is that you can run a welfare state far more generous than we do – beyond the wildest dreams of U.S. progressives – and still have a highly successful economy. Indeed, while GDP per capita in Denmark is lower than in the U.S. – basically because of shorter work hours.

And here’s what he wrote a couple of days ago.

American politics has been dominated by a crusade against big government; Denmark has embraced an expansive government role, with public spending more than half of G.D.P. American politicians fear talk about redistribution of income from the rich to the less well-off; Denmark engages in such redistribution on a scale unimaginable here. …Conservative ideology says that Denmark’s policy choices should be disastrous, that grass should be growing in the streets of Copenhagen. …But if Denmark is a hellhole, it’s doing a very good job of hiding that fact: I was just there, and it looks awfully prosperous. …The simple fact is that life is better for most Danes than it is for their U.S. counterparts.

Interestingly, Krugman acknowledges that Denmark isn’t really socialist. Instead, it simply has a big welfare state.

But is Denmark socialist? …Denmark doesn’t at all fit the classic definition of socialism, which involves government ownership of the means of production. It is, instead, social-democratic: a market economy where the downsides of capitalism are mitigated by government action, including a very strong social safety net. …The simple fact is that there is far more misery in America than there needs to be. Every other advanced country has universal health care and a much stronger social safety net than we do.

He thinks that is a good thing, of course, and was making the same argument (using the same headline) in 2015.

…the Danes get a lot of things right, and in so doing refute just about everything U.S. conservatives say about economics. …Denmark maintains a welfare state — a set of government programs designed to provide economic security — that is beyond the wildest dreams of American liberals. …working-age families receive more than three times as much aid, as a share of G.D.P., as their U.S. counterparts. To pay for these programs, Denmark collects a lot of taxes. …Overall, Denmark’s tax take is almost half of national income, compared with 25 percent in the United States. …It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine, which insists that a system like Denmark’s would be completely unworkable.

As far as I can tell, all his numbers about Denmark are accurate, but his analysis is wrong.

He wants readers to believe that the lesson from Denmark is that there are no adverse economic consequences when nations impose a big welfare state and high taxes.

But that’s not what Danish economic history tells us. As with other Nordic nations, Denmark became a rich nation when government was relatively small and taxes were modest.

And we know from historical data that economic performance significantly weakened after the fiscal burden of government was increased.

Moreover, lawmakers are now trying to restrain government spending.

The first thing to realize is that Denmark, as are the other Nordic countries, quite free markets, apart from their welfare state transfers and high government consumption. They tend to get rather high rankings on measures of the most free economies in the World. …Protection of property rights and the integrity of the legal system are very high by international standards, as is the soundness of the monetary system… Denmark has a long tradition for free trade… Credit markets are among the less regulated internationally. During the recent financial crisis, tax payers did not have to subsidize banks, and some banks were allowed to fail. The Danish labor market is very flexible: There is no legislated minimum wage, and there are few restrictions on hiring and firing.

Here’s the part that is a must-read.

Denmark did not become a rich country recently. …Danish per capita GDP relative to other countries reached a maximum 40-60 years ago… Denmark caught up to and overtook “old Europe” in the fifties, while it narrowed its gap to the US and other Western offsprings until the early 1970s, when the process of catching up came to a hold. …At the time Denmark became rich relative to the rest of the World, it was not a welfare state. In fact, Denmark has historically been a low tax country by international standards. Until the 1960s, the Danish tax revenue to GDP ratio was at the same level as the US, and lower than the British.

Unfortunately, policy veered in the wrong direction in the late 1960s, with very adverse consequences.

The sharp divergence in the Danish tax level really occurred in the second half of the 1960s, when first a left wing coalition government and then a right wing one increased the tax to GDP ratio by some ten percentage points. …government spending was to a large extent driven by increases in tax revenue stemming from the introduction of VAT and withholding taxes on wage income. …the welfare state attracted new clients and new programs were added, the economic crisis lead to increasing unemployment… By the early 1980s the economy was in very bad shape, with high unemployment, an inflationary deflation spiral, a huge and widening government deficit.

I can’t help but call your attention to Otto’s observation about how the VAT enabled a far larger burden of government.

But let’s not get sidetracked.

This chart shows how the tax burden in Denmark diverged from the United States.

So what’s the bottom line?

Denmark first became rich, and then introduced the programs, which make up the welfare state. The huge increase in government spending has been accompanied by deep structural problems, which has made it necessary to reform the Danish economy and welfare state ever since. It can hardly be claimed that introducing the welfare state made Denmark rich; rather it was the other way around. Denmark first became rich, and then authorities began to redistribute some of the wealth.

Amen. I made the same point back in 2011.

Writing for PJ Media, Tyler O’Neil reviews the good and bad in Denmark and also echoes Otto’s analysis.

A deeper look at the history and current affairs of Denmark and the surrounding countries tells a different story, however. These countries’ benefits arguably spring from their free-market pasts, not their brief dalliance with big government. …During the early 1900s and following the Great Depression, Scandinavia’s small government and free markets fostered a culture of hard work that paid huge dividends in terms of prosperity.

Unfortunately, starting about 50 years ago, Denmark (like many other nations in the region) adopted an expensive welfare state. With bad results.

…the 1960s – 1990s expansion of welfare states actually held the Nordic countries back. After their experiment with socialistic welfare states, “Nordic citizens now have unusually high levels of sickness absence (despite being healthy societies), high youth unemployment and a poor record for integrating migrants into the labour force,” Sanandaji explains. Big government has weakened the strong culture which enabled welfare states in the first place… In 2013, roughly 240,000 people — nine percent of the potential work force — were receiving disability checks, and about 33,500 of them were under 40.

I fully agree. Denmark’s welfare state has created a problem. Simply stated, there are too many people who depend on government compared to the number of taxpayers who finance government.

I sometimes use the example of how many people are pulling the wagon compared to the number of people riding in the wagon. The Danish version uses Viking ships.

Fortunately, now there’s an effort to move back in the right direction.

Denmark now outranks even the United States as a good place to do business. …In 2013, it reduced early-retirement plans, and cut the term for unemployment benefits from four years to two. …In recent years, all the Nordic countries have decreased their corporate tax rates — each one is lower than in the United States. They also support free trade, unlike American Socialists.

Let’s look at some specific examples of how Denmark is trying to undo the damage of excessive government.

Bloomberg reported last year about the ongoing effort to reduce the nation’s fiscal burden.

When a European government raises the pension age and makes cuts to welfare programs, it’s usually because of dire finances. In Denmark’s case, it’s because of ideology. …Driving the new government’s push is a desire to finance a major round of income tax cuts. “We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society,” the government of Prime Minister Lars Lokke Rasmussen wrote in its manifesto. It’s all part of a Danish drift toward the political right… Reforms introduced by successive governments over the years have already ensured that Denmark’s expensive welfare state is sustainable for years to come, says Torben M. Andersen, a professor of economics at the University of Aarhus and a former government adviser. These include raising the retirement age to 67 years from 65 years by 2025.

Denmark is also cutting back on college subsidies.

As one of a handful of countries that offers free tuition to college students, Denmark grants students enormous freedom… But some Danes, especially older citizens already in the labor force, say the extra freedom can eliminate a crucial sense of urgency for 20-somethings to become adults. The country now deals with “eternity students” — people who stick around at college for six years or more without any plans of graduating, solely because they don’t have any financial incentive to leave. …The country has made some headway to counter eternity students. In 2015, the Danish government proposed and passed an amendment to the Study Progress Reform… Jakobsen said the amendment has definitely reduced the trend of eternity students.

Now let’s get to my contribution to this discussion.

A few years ago, I created a “statism spectrum” to show how countries differ when looking at total economic freedom (fiscal policy, trade policy, regulatory policy, monetary policy, and quality of governance).

And I pointed out that nations with onerous fiscal burdens can still rank relatively high if they have a very pro-market approach in other areas.

But I have to confess that my spectrum was a back-of-the-envelope exercise. I simply drew a line and then added six countries.

Time for some rigor. I downloaded the latest scores from the Fraser Institute’s Economic Freedom of the World and created this chart showing the relative ranking of all the countries (divided by category). As you can see, the United States and Denmark are both in the top category and they both have very similar levels of overall economic liberty.

And to put those numbers in context, here’s the same chart, but also showing France, Greece, and Venezuela.

In other words, there’s a lot to admire about Denmark. Yes, taxes are onerous and the burden of spending is still too high, but it’s nonetheless one of the most market-oriented countries in the world because of laissez-faire policies in other areas.

My bottom line is that Paul Krugman is right to praise Denmark.

My only gripe is that he likes the one thing that they’re doing wrong and overlooks all the things that make the country a relative success.

Moreover, he ignores all the recent efforts to reduce the fiscal burden of government, probably because that would require him to acknowledge that large public sectors are bad for growth.

P.S. Denmark is way ahead of the United States in its market-friendly, savings-based approach to retirement.

P.P.S. Denmark also ranks above America in protecting the right of private property.

P.P.P.S. But the United States does rank above Denmark when all policies are part of the equation, which presumably helps to explain why Americans are richer. And that also is probably why Danes in America earn a lot more than Danes in Denmark.

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