Government Inefficiency, Captured in a Headline

Way back in 2009, in the early days of writing this column, I shared an image that aptly summarizes the bad things that happen when politicians interfere with economic liberty.

The simple message is that more government is almost always the wrong answer.

• Wrong on taxes
• Wrong on money
• Wrong on trade
• Wrong on red tape
• Wrong on intervention
• Wrong on health

Today, we’re going to look at an example of how government spending is the wrong answer.

Here are some excerpts from a story in the Washington Post, but the headline tells you everything you need to know.

The offer to military veterans left unemployed by the coronavirus pandemic was tantalizing: A year of online courses courtesy of the federal government. Graduates would be set up for good jobs in high-demand fields… Schedules were disorganized and courses did not follow a set syllabus. School-provided laptops couldn’t run critical software. And during long stretches of scheduled class time, students were left without instruction… The disarray…is the most painful example of broader problems with the $386 million Veteran Rapid Retraining Assistance Program, or VRRAP. …nearly 90 schools have had their approvals yanked, according to VA officials, including several that were actively serving about 100 veterans. …only about 6,800 veterans had enrolled in the program, far fewer than the 17,250 Congress created it to serve, the agency said; just 397 had landed new jobs.

Some of you may be tempted to conclude that the program was a success since it did result in 397 jobs.

Others will conclude it was a failure since the budget was $386 million, implying each job cost taxpayers nearly $1 million.

I sympathize with the second conclusion, of course, but here are two questions that need to be answered.

1. How many of those 6,800 veterans would have landed new jobs if they didn’t participate in the program?
2. How much economic activity would have been generated if the $386 million was left in the private sector?

Suffice to say, the answers to those questions would show more jobs and more prosperity if the program was never created.

Incidentally, the story, authored by Lisa Rein and Yeganeh Torbati, includes this depressing bit of information.

The troubles with VRRAP were achingly predictable: A similar program rolled out in 2012 — the Veterans Retraining Assistance Program, or VRAP — also failed to attract students and was widely regarded as a flop.

In other words, it was already known that this specific type of program would be a flop.

Heck, there are decades of evidence that all types of government job-training programs are a failure.

So why did Congress approve this scheme?

Unfortunately, the story only tells us that this program was part of Biden’s failed $1.9 trillion stimulus boondoggle, but it does not tell us which politicians on Capitol Hill pushed the plan.

I’m sure we would find those politicians got a lot of campaign contributions from that the interest groups that financially benefited the boondoggle.

All part of Washington’s corrupt version of recycling.

P.S. Since today’s column highlighted how a headline can have a powerful message, here are some previous headlines that caught my attention.

• Least surprising headline
• Disappointingly inaccurate headline
• Insufficiently accurate headline
• Grossly dishonest headline
• Most predictable headline
• Multiple headlines that say the same thing

Biden’s Student Loan Scheme: The Party of the Rich Redistributes Money Upwards

As a general rule, some of the worst people are attracted to the wold of politics.

As such, we should never be surprised when politicians push bad policy.

But there are bad ideas…and there are really bad ideas.

At the risk of understatement, Biden’s proposed scheme to “forgive” a big chunk of student debt is spectacularly misguided.

The challenge is identifying why it’s wrong. There are so many possible answers.

Let’s review some of the ways this is bad for the United States (you get to make your choice in a poll at the end of the column).

• Redistributes from poor to rich
• Subsidizes irresponsibility and penalizes responsibility
• Abuse of power
• More red ink
• Higher tuition price
• Awful precedent

To help determine which answer is best, let’s review some recent analysis.

National Review editorialized on the topic. Here are some of the highlights.

Biden’s student-loan plan will cost about $2,000 per taxpayer. …Biden is effectively telling all the people who didn’t go to college, those who went to college but didn’t borrow money, and those who went to college and already paid off their loans that they are suckers. …Federal student loans are already issued on very favorable terms. …The order caps those eligible for loan forgiveness at $125,000 in individual income, which is approximately double the median household income and hardly excludes anyone. …the president has…abused emergency powers to pursue a reckless and senseless policy.

In her Washington Post column, Megan McArdle savages the president’s giveaway.

…the Biden administration announced that it would forgive up to $10,000 in student loan debt (up to $20,000 for Pell Grant recipients)… How many ways can a single policy be bad? This one could cost the federal government somewhere between $400 billion and $600 billion, completely unpaid for. Its legality is at best an abuse of the law to address the “national emergency” of upcoming midterm elections. …an extremely regressive policy, heaping benefits on the most affluent demographics, while leaving everyone else to pay the cost through some combination of higher taxes, lower benefits, or higher inflation and interest rates. Worst of all: What do Democrats do for an encore? …This first action will beget demands for a second and a third. …like trying to quit smoking by switching to unfiltered cigarettes. 

Honest folks on the left are equally upset about Biden’s reverse redistribution.

President Obama’s former top economic aide, Jason Furman, didn’t mince his words.

Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.

— Jason Furman (@jasonfurman) August 24, 2022

And the editors at the left-of-center Washington Post were equally scathing.

The unemployment rate for people with bachelor’s degrees and higher is just 2 percent. It’s hard to make the case that college graduates are…facing an unprecedented crisis. …canceling student loan debt is regressive. It takes money from the broader tax base, mostly made up of workers who did not go to college, to subsidize the education debt of people with valuable degrees. …Mr. Biden’s plan is also expensive — and likely inflationary. …Mr. Biden’s student loan decision will…provide a windfall for those who don’t need it — with American taxpayers footing the bill.

From a libertarian perspective, Elizabeth Nolan Brown of Reason denounced Biden’s scheme.

Biden’s basis for saying that the executive branch has the right to simply declare student loans forgiven is both egregious in its own right and troubling for the future of executive power plays. …The program amounts to a massive subsidy for middle-class Americans, as opposed to benefiting the most economically downtrodden or financially strapped. …the program “consumes resources that could be better used helping those who did not, for whatever reason, have a chance to attend college,” as economist Larry Summers put it …there are many people for whom avoiding student loan debt or paying it off promptly meant making all sorts of sacrifices. Biden’s loan forgiveness program says to them that this thrift, practicality, etc. may have been for nought.

By the way, Larry Summers was Bill Clinton’s Treasury Secretary and also head of Obama’s National Economic Council, so hardly a libertarian fellow traveler.

Here’s more of his analysis.

Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.

— Lawrence H. Summers (@LHSummers) August 22, 2022

Returning to libertarian commentary, Brad Polumbo of the Foundation for Economic Education adds his two cents.

…forcing taxpayers to pay down the roughly $1.5 trillion in government-held student debt is not a “progressive” policy by any stretch. …just one in three American adults over age 25 actually has a bachelor’s degree. …college graduates typically make 85 percent more than those with only a high school diploma and earn roughly $1 million more over a lifetime. So any government policy that forces taxpayers to pay off loans held by a relatively well-off slice of society is actually regressive… Economists Sylvain Catherine and Constantine Yannelis crunched the numbers to conclude that full student debt cancellation would be a “highly regressive policy” and award $192 billion to the top 20 percent of income earners, yet just $29 billion to the bottom 20 percent. …other research from left-leaning institutions like the Urban Institute has reached the same conclusion. So, we’re left with the simple fact that one of the Democratic Party’s top agenda items is a taxpayer-financed handout to the wealthy. 

Charles Cooke of National Review also is not impressed.

Congress has passed no rules that allow down-on-their-luck presidents to throw money at people for political gain. As of yet, Congress has given no instruction that if the president’s friends might like a little more cash, he can raid the Treasury to give it to them. Certainly, Congress has set up a loan program. But the deal there is rather simple, all told: First you borrow, and then you pay back what you borrowed. There is no mention of “forgiveness” days or of “help” or of rolling Chekhovian jubilees, and by pretending otherwise, President Biden is making a mockery of his oath to uphold the Constitution. …This isn’t a reform. It’s not even pretending to be reform. It’s a contemptuous, abusive, unbelievably expensive shot in the dark… Joe Biden and his party prefer college students to you, and they think that those students ought to be rewarded for that by being handed enormous gobs of your money. Electricians, store managers, deli workers, landscapers, waitresses, mechanics, entrepreneurs? Screw ’em.

Robby Soave of Reason also is disgusted.

Biden’s debt forgiveness plan will do nothing—absolutely nothing—to fundamentally change the incentive system that created the doom spiral in the first place. Degree-seekers will continue to borrow large amounts of money to buy useless educations; indeed, they might feel even more encouraged to do so now that this precedent has been set. Meanwhile, colleges and universities will have even less incentive to lower costs. …Forgiving student loan debt exacerbates this problem since it encourages more reckless borrowing. …It is a slap in the face to everyone who either paid down their college debt or made different educational choices to avoid accruing it. …Biden…simply engaged in a vast transfer of wealth, taking hard-earned money from those who did not fall prey to the federal government’s scam and awarding it to those who did.

So what’s the bottom line?

One obvious takeaway is that the party of the rich has provided another giveaway to their rich constituents. Think of it as the bailout version of the state-and-local tax deduction.

But I think this message might be the real moral of the story.

P.S. At the risk of influencing the poll, Biden’s student loan bailout will give colleges and universities the leeway to further increase tuition, but you need bad monetary policy to get a sustained increase in the overall price level.

P.P.S. Cast your vote.

How Government Hurts Poor People

As an economist, I can immediately think of several ways that big government is bad news for poor people.

• Redistribution programs that trap poor people in dependency and produce inter-generational poverty.
• Government schools that do an awful job of providing education to children from low-income families.
• Fiscal policies that hurt growth and lead to lower incomes and fewer job opportunities for the less fortunate.

But that’s only a partial list. Today, let’s peruse a report from a few weeks ago in the New York Times.

Authored by Robin Kaiser-Schatzlein, it shows how poor people are routinely victimized by greedy and grasping government in Alabama.

In states like Alabama, almost every interaction a person has with the criminal justice system comes with a financial cost. If you’re assigned to a pretrial program to reduce your sentence, each class attended incurs a fee. If you’re on probation, you’ll pay a fee to take your mandatory urine test. If you appear in drug court, you will face more fees, sometimes dozens of times a year. Often, you don’t even have to break the law; you’ll pay fees to pull a public record or apply for a permit. For poor people, this system is a trap… I asked almost everyone I met — gas station attendants, Starbucks baristas and grocery store clerks of all races — if they knew anyone who had been affected by court fines and fees. Many told me stories of family and friends who had. Some had themselves.

The story includes several anecdotes about people who get nailed by endless fees and charges.

Here’s just one example.

Niaya Williams…began driving hours each day back and forth from her job at McDonald’s and his day care. …she started getting ticketed quite frequently. She remembers that one day, she got her first set of tickets for, among other things, not stopping long enough at a stop sign. … ticket for not having a license, a ticket about switched tags that she didn’t fully understand and a ticket because the officer said Mercury was buckled incorrectly. She recalled being given at least three tickets every time she was pulled over. …She was…arrested because of just traffic infractions and missed court dates, Mrs. Williams said. She was, in essence, guilty of little else than being too poor to pay off her fines.

Echoing what I wrote back in 2015, the author notes that this is not a problem unique to Alabama.

States found fines and fees to be an expedient source of revenue, operating under the radar as what some scholars call nontax taxes.  …A 2019 Governing magazine study of cities, towns and counties with significant revenue from fees and fines showed that nearly 600 jurisdictions relied on fines and forfeitures for more than 10 percent of their revenue and 80 relied on fines and forfeitures for over half their revenue. …“Fees are not about public safety,” said Lauren-Brooke Eisen of the Brennan Center for Justice. “They’re about raising revenue.”

Unfortunately, there is a big logical flaw in the story.

Ms. Kaiser-Schatzlein wants readers to think that Alabama is pillaging poor people because of low taxes and small government.

Alabama has one of the cruelest tax systems in the country. Taxes on most property, for example, are exceptionally low. …millions of others in the state live in the wreckage of a system starved of funding: The state has chronically underfunded schools, bad public transit, a dearth of well-paying jobs, little affordable child care and a diminishing health care system. …Most places have a simple and effective method for quickly ameliorating these problems: They raise property or income taxes. But Alabama often refuses to do so or makes it exceptionally difficult, dooming many to living standards unthinkable for a country as rich as the United States.

Too bad she didn’t do any research on this part of her story.

She could have looked at the latest edition of the Tax Foundation’s State Business Tax Climate Index and learned that Alabama actually has one of the nation’s greediest tax systems.

And if Ms. Kaiser-Schatzlein had spent a few minutes looking at data from the Census Bureau, she would have learned that Alabama is hardly a beacon of limited government.

I crunched the numbers two years ago and found that spending by state and local governments in Alabama was way above average when measured as a share of state income. And it was about average when measured on a per-capita basis.

I’ll conclude by observing that there are many states that have very low tax burdens and relatively low levels of government spending, way below Alabama. Including other southern states such as Florida and Texas, not just places like South Dakota and New Hampshire.

If such policies are a recipe for hurting the poor, why are so many Americans of all income levels migrating to those places?

Don’t Trust Economists, Part IV

When I wrote the first edition of “Don’t Trust Economists” back in 2010, the column focused on a chart showing that economists failed to predict every major economic downturn for the previous two decades.

Well, we now have some new data making the same point.

To be fair, I wouldn’t blame anybody for bad 2020 predictions. After all, the pandemic was a (hopefully!) one-time event.

But giving economists a mulligan for 2020 doesn’t change the fact that the profession has a notoriously bad track record.

Today, let’s discuss how my fellow economists are lousy forecasters.

Brian Riedl, in a new column for National Review, is not impressed by the profession’s track record.

The next time economists declare that they can project the economy’s performance far into the future, remember that the Federal Reserve recently failed to project even a current-year inflation rate within three percentage points. ..the Federal Open Market Committee (FOMC) forecasted in December 2020 that inflation (as measured by the PCE, the Fed’s preferred measure) would be 1.8 percent in 2021. …PCE inflation ended up at 5.8 percent for the year. …Then, the FOMC repeated the same error. Even as inflation tore through the 2021 economy, the committee merely nudged up its 2022 inflation projection from 1.9 to 2.6 percent. PCE inflation in 2022 may end up even higher than 2021. And it’s not just the Federal Reserve. The Congressional Budget Office’s 2021 inflation estimate was even lower than that of the Federal Reserve. …macroeconomics…is subject to significant groupthink and overconfidence in its precision, despite a poor record of understanding and projecting the economy’s performance. …economists develop models whose mathematical complexity offers an air of scientific certainty… The result is economists…who are blindsided by market crashes, housing crashes, pandemics, inflation, and rising interest rates. …celebrity economists such as Paul Krugman offer wildly inaccurate forecasts and predictions with the certainty and condescension of a scientist.

If economists really knew how to forecast the economy, they could become very wealthy.

Yet, as Peter Coy explained earlier this year in his column for the New York Times, that is not the case.

…the median annual wages of economists in May 2021 were $105,630. That’s lower than the median pay of astronomers, nuclear engineers, medical dosimetrists and theatrical and performance makeup artists. …Learning a little economics is useful for a lot of lucrative careers, from management to banking. Warren Buffett, Steven Cohen, Kenneth Griffin, Henry Kravis and Elon Musk are among the billionaires who have bachelor or master degrees in economics. The mistake is loving it so much that you get your doctorate …economists are smart. But some — not the good ones — can be blindered. They know their subspecialties well but are weak on others, such as economic history. These economists have technical expertise but not wisdom. …John Maynard Keynes failed repeatedly as an investor when he tried to use the credit cycle to predict what businesses would do.

This leads us to a column in the Wall Street Journal by Professor Alexander William Salter of Texas Tech University.

He explains that the real problem is that some economists have forgotten (or never learned) the basics of “price theory,” which is the foundation of microeconomics.

Despite the complexities of markets, economists can get at the heart of how they work by focusing on prices. This insight is so important, it gives economists’ core tool kit a name: price theory. …Yet…economists are abandoning price theory in droves. …The heights of the economics profession are increasingly inhabited by people who disdain price theory. Reliance on the economic way of thinking in solving problems is viewed as obsolete and unscientific. …The opposite is closer to the truth. Old-school economics recognized that trade-offs and constraints are everywhere. There are no free lunches. …To fix economics, economists must again insist on the primacy of price theory. The economic way of thinking is not optional. Nor is it an impediment to social science. In fact, price theory is the only thing that makes social science possible. 

At the risk of over-simplifying, a potential lesson to be learned is that we should trust (or at least listen to) microeconomists while being skeptical of macroeconomists.

P.S. While the moral of the story is that some economists make lots of mistakes because they overlook price theory, sometimes economists are explicit fraudsters.

P.P.S. Here’s an entertaining cartoon strip about economists.

P.P.P.S. I’ll close with a plug for the Austrian School of economics.

Hawaii’s Rail Boondoggle

I just returned from a trip to Hawaii, where I gave a couple of speeches about the desirability of strict annual limits on the growth of government spending.

But regular readers already have seen plenty of columns on the issue of TABOR-style spending caps, so I’m using the trip as an excuse to highlight a couple of Hawaii-specific issues.

Yesterday’s column was about the Hawaii government’s foolish decision to subsidize home building in areas vulnerable to volcanic eruptions (basically, a state version of the federal government’s bone-headed flood insurance program).

Today, let’s investigate the decision to build a rail system in Honolulu.

I’ll start with the observation that governments do a lousy job with infrastructure.

This is true with big projects. This is true with small projects. This is true with foreign projects.

And it is true with projects in the middle of the Pacific Ocean. Here are some details about Hawaii’s boondoggle, as explained by Keli’i Akina of the Grassroot Institute.

…the folks in charge of the Honolulu rail project have been relentlessly sunny in their projections. It was sold to the public on the promise that it would only cost about $4 billion, that it would be completed by 2019 and that the general excise tax surcharge associated with it would end by 2022. By the time the Federal Transit Administration got on board with an agreement to contribute $1.55 billion, the expected cost was $5.12 billion. Now, with the FTA still holding on to $744 million, the projected cost is approximately $12 billion. The last completion date we were given was 2031, and the GET surcharge has been extended to 2030. …my colleague Joe Kent at the Grassroot Institute…said the recovery plan has “overly optimistic assumptions about revenues, ridership and costs, and that this could saddle local taxpayers with unstated liabilities in the future.” He pointed out that, given its track record of ballooning budgets and delays, HART’s projections should be treated with extreme skepticism.

Reading the column, I think Hawaii taxpayers are lucky.

The inevitable cost overrun (at least so far) has “only” pushed the cost from $4 billion to $12 billion.

California taxpayers would be overjoyed at that result.

So why should non-Hawaii residents care? For the simple reason that you’re (unfortunately) paying part of the tab.

Sadly, very few people are drawing the appropriate conclusion.

The Volcanic Version of Government-Subsidized Moral Hazard

I’ve written several times about federally subsidized flood insurance, mostly to complain that it is terrible policy.

People are encouraged to build homes in low-lying areas, which then leads to needless destruction during floods.

The monetary cost is significant, but I get even more upset that responsible people are forced to finance other people’s irresponsible choices.

It’s such a bad policy that even Bernie Sanders favors reform.

And it’s such a bad policy that politicians in Hawaii decided it is worth copying. But they chose to subsidize building homes that are vulnerable to volcanic eruptions.

I’m not joking. Joe Kent of the Grassroot Institute wrote about this foolish system.

…the state originally encouraged the building of homes in this dangerous area by offering lava insurance where no private company would. …In response to the absence of private insurance, the state Legislature created the Hawaii Property Insurance Association (HPIA), whose job is to provide coverage for homes in areas that private insurance won’t touch. The law requires private insurance companies to pool their money to subsidize the expense of offering insurance in high-risk lava zones. …This resulted in a boom in the housing market below the active Kilauea volcano. …The moral hazard of this new insurance program gave a false sense of security to homebuilders in Leilani Estates.

And where, pray tell, can you find Leilani Estates?

In the most dangerous path of the most active volcano in Hawaii.

Given my libertarian sympathies, I think people should have the right to build in dangerous areas.

But I also think that they should bear the risks. Including what happened a few years ago.

…that hazard is very real for families watching their homes be engulfed by magma. What was seen as a “market failure” was really a warning sign to those building in Lava Zones 1 and 2. If the state had stayed out of the situation, probably fewer families would have built in the area, and today there might be less housing destruction.

The obvious moral of the story is that we should not have government-subsidized moral hazard.

That’s not a proper role of the federal government, and it’s not a proper role of state governments.

P.S. The same is true for subsidized terrorism insurance.

P.P.S. For more on government-created moral hazard, click here.

Energy Policy and Big-Government Tories

I don’t like big-government Republicans in the United States, so it naturally follows that I don’t like big-government Tories in the United Kingdom.

Indeed, I wrote just a few days ago about the new leadership race for the Conservative Party in the U.K. and wondered whether either of the candidates has what it takes to reverse Boris Johnson’s failed statism.

I hope one of them is the reincarnation of Margaret Thatcher (just as I’ve been waiting decades for another Ronald Reagan).

We will find out relatively quickly. The race for Prime Minister will be decided next month and I will be very interested to see whether the winner fixes two very foolish energy policies.

The Wall Street Journal has a pair of excellent editorials this month.

On August 18, the paper opined about a bone-headed policy to cap energy bills.

Britain’s ruling Conservatives have imposed some awful energy policies in recent years, but their cap on household energy bills deserves a special mention. The scheme has been an economic loser, and now it’s becoming a political loser in ways that illustrate the dangers when parties of the right play socialism lite. …The cap traces back to…when Tory Prime Minister Theresa May embarked on a campaign to position the Conservatives as a kinder, gentler party. The effort didn’t work politically. In that year’s snap election she lost the majority… But the price-cap notion lived on and she implemented it in 2019. …The cap has exacerbated economic havoc in Britain’s energy market. As global gas and other commodity prices started to rise in 2021, energy retailers found it impossible to pass to consumers the prices retailers were paying for the energy they were supplying. This has contributed to a wave of bankruptcies… Meanwhile, since it only raises prices at a lag rather than limiting them, the cap leaves households frighteningly exposed to recent movements in global gas prices… The moral: Even half-hearted energy price controls are political losers for conservative parties.

It’s worth noting that energy prices are needlessly high in part because of bad government policy.

Which brings us to the WSJ‘s August 12 editorial.

Reports this week point to spiraling costs for households and businesses this winter, pushing millions of Britons closer to poverty. It’s a steep price for climate alarmism. …Politicians are eager to dodge responsibility for this disaster, and Russia offers a convenient excuse. …But these trends are inseparable from Britain’s homegrown fixation with achieving net-zero CO2 emissions by 2050. That’s Prime Minister Boris Johnson’s worst mistake… Various green charges add £153 to the annual household bill… But other net-zero costs lurk in household energy bills and budgets. The electric grid operator spent about £3.4 billion over the past year…a cost that tends to be higher due to the unreliability of wind and solar, and that’s passed to consumers… Another imponderable is how much lower gas prices would be if Britain produced more itself. Conservative Party administrations have flirted for years with proposals for shale-gas fracking in northern England only to lose their nerve. …So much for those who say conservative parties need to adopt the left’s climate agenda to court younger voters. Net zero has turned the Tories into the party that is impoverishing Britain.

In other words, bad policy is bad politics, which is the mirror image of my contention that good policy is good politics.

We will see whether the Tories have learned that lesson.

P.S. Some otherwise sensible people in the U.S. are flirting with making the same mistake with energy policy. Perhaps the failure of such policies in the U.K. will teach them something (but I won’t hold my breath).

Summarizing the Mentality of Government in One Sentence

Back in 2014, I shared a meme with a motto that was perfect for Washington, DC.

Today, let’s do something similar. But instead of a motto specifically for America’s unsavory capital, how about one sentence that summarizes the mentality of all governments.

I used a fill-in-the-blank format because there are so many possible answers.

After all, people in government value taxes more than growth, jobs, competitiveness, and all sorts of other factors.

And one of those other factors is public health, as we can see in this report by Rachel Pannett and Julia Mio Inuma in the Washington Post.

Japanese officials, worried about shifting demographics and a sharp decline in sin tax revenue, have come up with an unusual fix for their fiscal woes: encouraging young people to drink more. …Liquor tax revenue in the fiscal 2020 year was about $8.4 billion, a plunge of more than $813 million from the previous year, according to government data. That was the largest decline in three decades — and a cause for alarm for a government facing broad fiscal challenges. …The unorthodox push by bureaucrats to “revitalize the liquor industry” has faced a backlash…on Twitter. …“As long as they can collect taxes, I guess people’s health doesn’t matter.”

When I first saw this story, I thought it was a good fit for one of my columns highlighting “Great Moments in Foreign Government.”

But the final sentence of the excerpt caught my eye and motivated me to take a different approach.

Though the story gets added to my collection of “Strange Moments in Japanese Governance”:

• Licensing regulations for coffee enemas.
• Gimmicky tax and labor policies.
• Amazingly incompetent subsidies.

Yet another reminder that you’ve asked a very strange question if more government is the answer.

Defending International Trade

As a fan of globalization – but not globalism, I endorse this new video from Reason, which punctures myths from protectionists such as Donald Trump and Bernie Sanders (and Joe Biden).

If you don’t have a spare seven minutes to watch the video, it addresses three specific points.

1. Does cross-border trade destroy manufacturing jobs?
2. Did liberalizing trade with China take American jobs?
3. Does trade make us vulnerable because of supply chains?

Plenty of good material, but I also would have challenged protectionists to provide a successful example of protectionism. Today or in the past.

Did protectionism work for Herbert Hoover – or anyone else – in the 1930s?

Did protectionism work for Juan Peron in Argentina in the 1940s and 1950s?

Is protectionism working for India’s economy in the 21st century?

Did protectionism work for Donald Trump between 2017 and 2020?

The answer is no in every single case. So it is no surprise that scholarly research (see here, here, here, here, here, here, here, here, and here) shows that free trade is a better approach if a nation wants more jobs and higher income.

But protectionists make one accurate point. While free trade increases overall employment, that does not mean every worker in every industry benefits.

In his New York Times column, Peter Coy explores this topic.

The skepticism about free markets…has gotten only stronger…only 44 percent of Republican voters…viewed free trade mainly as an opportunity for growth through increased exports. …the standard Econ 101 argument for free trade… First, assert that trade increases prosperity by allowing each country to specialize in what it’s best at. …Second, acknowledge that not everyone wins from free trade… Third, state that this problem can be easily solved: Everyone in society can be made better off if the winners share some of their gains with the losers. …In reality, the winners from trade rarely share much of their gains with the losers. The losers remain losers, and they often vote for candidates who put up tariff walls. …the free traders have failed to deliver on their promises to make free trade and open markets work for all.

A reasonably fair article, but I don’t think “free traders have failed” for reasons I explained in one of my videos from earlier this year.

If you don’t want to spend three minutes watching the video, I explain that all trade destroys jobs. And that includes trade within a nation.

It’s part of “creative destruction,” which I’ve labeled as the best and worst part of capitalism.

Millions of jobs get destroyed every year, in part because new technology, new competitors, and new innovations.

That’s bad news for many people, but it’s also the process that creates even more new jobs.

And it’s the process that has made all of us so much richer than our ancestors. And that includes the ancestors of people who lost jobs because of domestic or international trade.

P.S. Click here, here, and here for some very sound observations from America’s best post-WWII president.

The United Kingdom Needs another Margaret Thatcher

I was a big fan of Brexit (the United Kingdom voting to leave the European Union), but I’m very disappointed about the subsequent failure to create “Singapore-on-Thames.”

The above clip was my “under-reported story of the week,” as part of the most-recent episode of the Square Circle.

The main argument for Brexit was to escape the European Union, which is destined to become a “transfer union.”

To be more specific, the combination of demographic decline and fiscal decay means the bureaucrats and politicians in Brussels eventually will obtain the power to impose taxes in order to redistribute money to failed economies in places such as Italy and Greece.

Indeed, that process already is underway.

By voting for Brexit, the people of the United Kingdom can escape the sinking ship and thus will not be forced to subsidize the bad policy of other nations.

But there was a second reason to support Brexit, which was to give the U.K. the leeway to become the Singapore of Europe.

Would that be a good outcome? Assuming the goal is more prosperity, the answer unambiguously is yes.

As you can see from the chart, Singapore easily has eclipsed the major countries of Europe.

And the idea that the U.K. might copy Singapore’s pro-market policies has been a big part of the Brexit debate, with libertarians and small-government conservatives cheering the possibility and folks on the left dreading that potential outcome.

Any search engine will find thousands of stories about this topic. Here’s a tiny sampling to give readers a flavor.

Sadly, my friends on the left did not need to worry about the U.K. becoming an outpost of laissez-faire policy.

Boris Johnson won a landslide victory in 2019 by promising the “get Brexit done,” but he then proceeded to raise taxes and expand the burden of government spending.

So what’s the current state of play?

In a story for the Washington Post, William Booth writes that Brexit has been a failure.

Boris Johnson…is…the man who “got Brexit done.” So how is that going? What can be said about the post-Brexit Britain that Johnson is leaving behind? …Most people don’t think Brexit has delivered on its lofty promises… With “get Brexit done” as his slogan, Johnson led his party to a landslide election victory. …he oversaw Britain’s departure from the union with one of the hardest possible versions of Brexit… But the government has struggled to show the benefits. …it is clear that although Brexit has not sunk the British economy, it has not produced a boom, either.

But the relevant question is why there was not a boom.

The simple answer, as I noted in the above interview, is that there was no effort to create Singapore-on-Thames. Indeed, the supposedly conservative Tories, under Boris Johnson, went in the opposite direction.

And that explains why supporters of economic liberalization are not very happy. Opining for the U.K.-based Telegraph, Allister Heath is rather depressed.

Statist ideology, historical naivety, cowardice and short-termism have crippled our country. Orthodox thinking has turned out to be wrong in almost all areas that matter, from the economy to energy to planning. …The electorate noticed, kicking Labour out and voting for Brexit, but the politicians let them down. Nothing really changed… Ludwig von Mises, in his Critique of Interventionism, explains how social-democracy is an unstable middle point between capitalism and socialism. This is especially true today. All problems, even when caused by failed Left-wing policy, trigger increasingly hysterical demands for even more state action. …We have a Tory government, but the political climate is veering hard-Left.

This brings us back to what I said in the interview. Boris Johnson has been deposed as leader of the Conservative Party.

Now there’s a race between Rishi Sunak and Liz Truss to see who will be the new party leader – and thus the new Prime Minister.

Both of them claim they will move policy back in the right direction. I’m guessing Ms. Truss is the better option, but my main point in the discussion was that the United Kingdom desperately needs another Margaret Thatcher.

The Scottish Version of Great Moments in Human Rights

Redistribution is a bad idea primarily because of economics.

People getting handouts have less incentive to be productive and people paying taxes to finance that spending have less incentive to be productive.

That translates into less economic output, which means lower living standards.

But there’s another reason to be concerned about redistribution. I worry that it erodes societal capital (i.e., the traits such as work ethic, self reliance, etc, that are associated with successful societies).

What happens, for instance, when politicians convince people that have a “human right” to other people’s money?

It would be very difficult to be optimistic about a society where most people have that mindset.

This is why I’m very pessimistic that there will ever be a meaningful economic rebound in nations such as Greece and Argentina.

Simply stated, too many people thing they have a right to government-provided goodies. Which means, of course, that they think they have the right to live off the labor of others.

Let’s look at an example.

Remy Tumin reports in the New York Times that Scottish politicians have decided that there is a human right to tampons and sanitary pads.

Period products are now free to anyone in Scotland who needs them, nearly two years after the country’s Parliament approved a landmark piece of legislation. The initiative makes Scotland the first country in the world to provide free sanitary products, part of a global effort to end “period poverty”… The 2020 legislation in Scotland came on the heels of an earlier law that provided free access to tampons and sanitary pads in schools, colleges, universities and other public buildings. …People can find the nearest location with free period products through a mobile app… Seventeen states and Washington, D.C., have passed laws that require free access to period products for students.

As an economist, I’m irked that the story keeps referring to “free.”

Period products will still have a cost. All that’s happening is that taxpayers are paying instead of users.

I’m also dismayed (but not surprised) that there is no discussion about the potential impact of “third-party payer.” In all likelihood, producers will take advantage of this new entitlement by increasing prices.

But the most depressing part of the story is that this idea seems quite popular. So what comes next? Well, food is even more important to human existence, so why not make food “free” as well?

That’s a recipe for creating a nation filled with people like Obama’s Julia and Biden’s Linda.

And Margaret Thatcher warned us where that leads.

P.S. Here are some other not-so-great moments in human rights.

• In Canada, there’s now a right to be an employed alcoholic.
• Across Europe, a satellite dish is now a human right.
• The Department of Housing and Urban Development asserts there is a right to “emotional support animals” in college dorms.
• In Finland, broadband access is a basic right.
• In France, it is against the law to say your husband is under-endowed or that your wife is fat.
• There’s now an entitlement for free soccer broadcasts in Europe.
• In Italy, you have the right to…um…your testicles.
• Both the United Nations and the Obama Administration think there’s a right to taxpayer-financed birth control.
• In the United States, the elderly have the right to taxpayer-financed sex-change operations.
• There’s even a right to a “special accommodation” if you’re a pee-shy worker in America.

P.P.S. Today’s column revolves around the battle between what some call “positive” and “negative” rights and liberties.

Economics Humor

Yesterday’s column was rather depressing, focusing on the expansion of a corrupt internal revenue service.

To make matters worse, that IRS expansion is part of a larger package of new taxes and more spending.

So let’s offset that bad news with some economics humor.

Since the Biden-Manchin-Schumer legislation includes a big back-door tax increase on companies (the provision targeting “book income“), that’s a perfect segue to our first item about taxation and incentives.

The Biden-Manchin-Schumer legislation isn’t just about misguided tax increases.

It also contains lots of new spending.

Which is why this list from the Babylon Bee is very appropriate.

Next, most of the world’s major nations are dealing with rising prices.

Why?

Because central banks around the world dramatically expanded their balance sheets (i.e., created too much money).

So this definition is both timely and accurate.

Speaking of central banks, here’s a little girl pretending to be Chairman of the Federal Reserve.

Except we now have the highest inflation in 40 years, so the fire is doing even more damage.

Per tradition, I saved the best for last. I’ve written many times that being pro-capitalism is not the same as being pro-business.

Well, here’s a helpful algorithm to show the difference between genuine free enterprise and despicable cronyism.

P.S. You can enjoy previous collections of economics humor by clicking here, here, and here.

In the Case of the IRS, Bigger is Not Better

Sadly, Joe Biden’s plan for a bigger IRS is becoming reality. As you might imagine, I’m not happy.

I’m motivated to share the above video, which was part of last week’s episode of The Square Circle, because it galls me to see some writers defend huge budget increases for the internal revenue service while simultaneously overlooking very serious problems.

Such as.

• Scandals at the IRS
• Criminal behavior at the IRS
• Corruption at the IRS
• The truth about the IRS budget
• Partisan behavior at the IRS
• Embracing dishonest numbers at the IRS
• Abuses of power at the IRS

The latest example of IRS sycophancy comes from Paul Waldman of the Washington Post.

Here’s some of what he wrote.

…with the pending passage of the Inflation Reduction Act, we may finally begin to turn the tide in a war only one side has been fighting…this is something all Americans should celebrate. …The bill contains nearly $80 billion for the Internal Revenue Service… With this bill, it would be able to hire as many as 87,000 new employees…the wealthy and corporations don’t pay their fair share. …Americans don’t mind paying taxes, as long as they believe the system is fair.

It’s not just that Waldman fails to address problems at the IRS. He also is either very misinformed or very dishonest about who pays the lion’s share of income taxes.

For instance, even the IRS freely admits that upper-income taxpayers finance a hugely disproportionate chunk of the income tax burden.

And if he didn’t want to accept data the objects of his affection at the IRS he could peruse numbers from the Tax Foundation. Or rely on data from the Congressional Budget Office.

Sadly, facts don’t matter to some of our friends on the left. Too many of them seem to think government should have first claim on anything taxpayers earn, particularly if they are successful.

The bottom line if that envy and spite should not be guiding principles for taxation.

Let’s close by revisiting Waldman’s column and reviewing his assertion about “three things we should all be able to agree on.”

We need a government. …In order to have a government, we need to collect taxes. …If we’re going to collect taxes, the agency that does it should operate as efficiently and effectively as possible.

To which I respond.

1. We need a government, but not a bloated, ever-expanding leviathan.
2. We need to collect taxes, but we did just fine for more than 100 years with no income tax.
3. An efficient and effective IRS will be far more likely with a simple and honest tax system.

Needless to say, I won’t hold my breath waiting for #3 to happen.

P.S. If today’s topic is too depressing, here’s some IRS-themed humor to hopefully boost your mood.

P.P.S. Mr. Waldman is not the only IRS sycophant.

P.P.P.S. While readers will not be surprised that politicians such as Elizabeth Warren want a bigger and more intrusive IRS. But how many of them realize Trump and his team also were bad on this issue?

Mitchell’s Law and Insulin Prices

The central message of “Mitchell’s law” is certainly not something I concocted.

Economists and other policy experts have known for a couple of hundred years that politicians have a tendency to makes mistakes and then use the resulting damage as a justification for even more intervention.

I simply gave this phenomenon a name so I didn’t have to offer repeat explanations.

Over and over and over and over again.

Today we’re going to look at another example of politicians demanding more intervention to address a problem caused by previous interventions.

In an article for National Review, Michael Cannon has a very depressing explanation of how government has messed up the market for insulin.

…a proposal by congressional Democrats to mandate that private insurance companies cap out-of-pocket spending on insulin…neglects to address the way the government drives up the cost of insulin. Further intervention would make matters worse. …government makes it both unnecessarily difficult and expensive for diabetics to access this lifesaving drug. …Thanks to government, new insulin is expensive to bring to market. …The high cost of government regulation discourages the development of new insulin products, reduces the number of insulin manufacturers, and increases the prices of any products that do make it through that process… Government increases the cost of insulin by requiring diabetics to get prescriptions before purchasing many insulin products. …Canada generally allows diabetics to purchase any insulin product without a prescription. If the FDA or Congress were to remove those requirements, both the price of insulin and the ancillary costs of obtaining it would fall. …Thanks to government, most people end up with excessive insurance coverage and little awareness of how much things cost. …excessive health insurance encourages providers to increase prices because heavily insured patients care less about price increases.

I’ll augment these observations by explaining that “excessive insurance coverage” refers to how the tax code’s exclusion for fringe benefits leads both employees and employers to use health insurance as a way of not only covering large, unexpected costs, but also as a way of pre-paying for health care.

Unfortunately this pre-payment system has turned much of the health care system into an all-you-can-eat buffet, but with (the perception of) someone else paying the bill.

At the risk of understatement, this system of government-created third-party payer has produced an extraordinarily expensive and inefficient health system.

But I’m digressing. Let’s get back to the column.

So what’s the bottom line? As Cannon explains, the right answer is less government rather than more government.

Had government never intervened in the health sector, private insurance companies might already be offering more comprehensive cost-sharing for insulin than congressional Democrats propose, without driving insulin prices higher. Or perhaps insulin prices would be so low that no one would feel the need to purchase insurance that covers it. All we know for sure is that, like past government interventions, attempts by government to cap cost-sharing for insulin will have unintended consequences that make matters worse for diabetics and all consumers.

P.S. In his column, Cannon observed that, “When Congress capped cost-sharing for contraceptives at $0, prices for hormones and oral contraceptives skyrocketed.”

This is illustrated very clearly by this chart.

As you might expect, deregulation would be the way to lower the cost of birth control (just like deregulation would be the way to lower the cost of insulin).

International Bureaucracies Push for More Poverty in Latin America

Even though they ostensibly exist to promote economic growth, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) have an unfortunate track record of promoting higher taxes and bigger government.

Not that we should be surprised. IMF and OECD officials get very comfortable (and tax-free!) salaries, so they have a “public choice” incentive to reflect the wishes of the politicians who control their purse strings.

But understanding the incentives of international bureaucrats definitely does not mean we should give them a free pass when they push bad policy.

And that’s exactly what the IMF and OECD are doing in Latin America.

Consider, for instance, the new IMF report on “Tax Policy for Inclusive Growth in Latin America and the Caribbean.” The authors (Santiago Acosta-Ormaechea, Samuel Pienknagura, and Carlo Pizzinelli) apparently think those struggling nations will grow faster if there is a bigger burden of government.

…fiscal policy…is not progressive enough… This paper presents a detailed assessment of tax structures in LAC and outlines reform options to improve collection… Specific tax design features are then assessed, inspecting how the taxation of capital and labor can be improved…to both increase revenue and provide a more equitable tax structure… Evidence for LA7 countries shows that better PIT design could bring significant gains in collection and equity. … Potentially adverse growth impacts could be mitigated by providing well-targeted incentives to labor force participation of low-wage earners through an earned income tax credit… Increasing the tax burden on certain non-labor income sources (e.g., capital gains) would also raise PIT revenue and improve equity… Other untapped revenue sources should be considered more forcefully, including the taxation of immovable property, inheritance taxes, and environmental taxes.

As illustrated by Figure 1 from the report, one of the clear messages is that Latin American countries should be more like high-tax countries in Western Europe.

What the authors overlook, however, is that the (relatively) rich countries in Western Europe became rich when the burden of government was very small.

There’s never been a nation, anywhere in the world, or at any point in world history, that became rich by adopting big government.

Now let’s look at what the OECD recommends, as part of “Latin American Economic Outlook 2021: Working Together for a Better Recovery.”

The LEO 2021 provides tailored policy messages to help stakeholders take action and build forward better. …it highlights the need to learn from the pandemic and mainstream some of the social policy innovations adopted throughout the crisis to strengthen social protection systems and improve quality and accessibility of public services. …a set of tax policy options could increase revenues… there needs to be greater resource mobilisation…in most LAC countries, which in turn implies greater progressivity of the taxation system… the average tax-to-GDP ratio in the LAC region was 22.9% in 2019, considerably below the OECD average of 33.8%… Countries may need to consider additional ways of raising revenues… PIT is the principal factor behind the tax gap between LAC and the OECD, limiting not only potential revenues but also the redistributive power of the tax system… taxation of immovable property…and of individuals’ capital gains, should contribute to increasing revenues to finance the recovery and improve the progressivity of the taxation system. Other measures include wealth and inheritance taxes.

Table 1 from the report summarizes the “new social contract” that the OECD is advocating.

All you need to understand is that “strengthening social protection systems and public services” is bureaucrat-speak for more government spending and “developing fairer and stronger tax systems” is bureaucrat-speak for higher taxes and class warfare.

I’ll close by calling your attention to this video explaining the ideal fiscal policy for nations in the developing world.

But remember that fiscal policy is just one piece of the puzzle, so I also recommend this video and this video if you want a full understanding of the policies that are needed to create broadly shared prosperity.

Small Government Is Good Policy…and Good Politics

I’m a policy wonk rather than a political pundit.

But since part of my job is educating politicians, I can’t simply rely on arguments about what’s best for the country.

I also have to convince them that they can enact good policy while also keeping their jobs.

And that’s why I developed my Fourth Theorem of Government back in 2017.

The simple message is that ordinary people enjoy more income if and when politicians make wise policy choices.

And that’s a very effective strategy for winning reelection.

The obvious example is Ronald Reagan, who won a landslide in 1984 even though (or, actually, because) he aggressively fought to reduce the burden of federal spending.

But not everybody agrees with me.

In a column for the Washington Post, Henry Olsen argues that the Republican Party needs to ignore libertarian ideas and embrace activist government.

Many conservatives recognize that attracting a new, diverse, working-class voter base also entails a new, non-libertarian approach to economics. …Liberty-minded intellectuals might rail against widespread government involvement in the economy, but voters like free public education, subsidized health care and generous pensions. …voters…prefer the Scylla of tax increases to the Charybdis of entitlement cuts as aging populations put fiscal pressure on health-care and retirement programs. …The Chips package should serve as a symbol of what government will need to do to reinvigorate an economy that builds things.

I’ll make my main points about taxes and entitlements at the end of the column, but I can’t resist some editorializing on two things from the above excerpt.

First, Henry says voters like free public education. Maybe that’s true, but they seem to like the ultra-libertarian idea of school choice even better.

Second, he argues that the recently enacted Chips law is a role model. But if industrial policy was a good idea, why did Japan stagnate? Why has China’s growth slowed?

Let’s now look at more of the column.

Past Republican efforts to limit the growth of entitlement spending after GOP landslides in 1994 and 2010 backfired politically, helping to reelect presidents Bill Clinton and Barack Obama. The fact is that 63 percent of Trump voters care more about keeping Social Security benefits than preventing tax hikes, and 45 percent care more about giving seniors on Medicare what they need than about controlling program costs. …Any serious effort to retain these largely working-class voters — and attract more in the future — must come to grips with these views. …Modern conservatism needs to refine Reagan’s insights and explicitly adopt a theory of when government should act to enhance people’s lives.

My first instinct is to ask for examples of how and when government enhances people’s lives. Or to provide examples of where Reagan thought government did a good job.

That certainly does not seems to fit with Reagan’s message in this video, this video, or the second video from this collection.

Or this video!

But maybe Reagan’s own words were insincere. That seems to be what Olsen thinks since he wrote that “the conservative idol implicitly sanctioned government action if it helped people live dignified lives of their own choosing.”

So let’s forget about words and look at the track record.

What we find is that Reagan was remarkably effective in fighting big government. Indeed, what separates Reagan from every other Republican in recent history is that he successfully fought to constrain the burden of government spending.

But don’t believe me. The data from the Historical Tables of the Budget unambiguously show that Reagan was far better than any other president in the past 50-plus years.

I’ll close by questioning Olsen’s claim that voters prefer tax increases over spending restraint.

I very much suspect that is only the case if they think someone else’s taxes are being increased.

If you don’t believe me, I invite you to look at this polling data from left-wing supporters of Bernie Sanders. And if hard-left voters are not willing to pay more to finance European-sized government, what are the odds that Republican voters are willing to pay more?

Taxing Stock Buybacks: Bad for Workers and Investors

Whenever I discuss the varying types of double taxation on saving and investment (capital gains tax, dividend tax, corporate income tax, death tax, wealth tax, etc), I always emphasize that such levies discourage capital (machinery, tools, technology, etc) which leads to lower levels of productivity.

And lower levels of productivity mean less compensation for workers.

Some of my left-leaning friends dismiss this as “trickle-down economics,” but the relationship between capital and wages is a core component of every economic theory.

Even socialists and Marxists agree that investment is a key to rising wages (though they foolishly think government should be charge of making investments).

I’m providing this background because today’s column explains that politicians made a mistake when they included a tax on “stock buybacks” in the misnamed Inflation Reduction Act.

I’ve written once on this topic, mostly to explain that buybacks should be applauded. They are a way for companies to distribute profits to owners (shareholders) and have the effect of freeing up money for better investment opportunities.

Let’s look at some more recent analysis.

In a column for today’s Wall Street Journal, two Harvard Professors, Jesse Fried and Charles Wang, debunk the anti-buyback hysteria.

A 1% tax on stock buybacks is poised to become law as part of the Inflation Reduction Act just passed by the Senate. This is a victory for critics… But those critics are dead wrong. If anything, American corporations should be repurchasing more stock. Taxing buybacks will increase corporate bloat, lead to higher CEO pay, harm employees and reduce innovation in the economy. …A tax on buybacks will harm shareholders. It creates an incentive for managers to hoard cash, leading to even more corporate bloat and underused stockholder capital. Because CEO pay is tied closely to a firm’s size, this bloating will drive up executive compensation, further hurting investors. …Taxing buybacks will harm employees as well. …Our research shows that 85% of this value flows to employees below the top executive level. Increasing the tax burden will tend to lower equity pay, to the detriment of workers. …A tax that inhibits buybacks will also reduce the capital available to smaller private firms. The cash from shareholder payouts by public companies often flows to private ones, such as those backed by venture capital or private equity. These private firms account for half of nonresidential fixed investment, employ almost 70% of U.S. workers, are responsible for nearly half of business profit, and have been important generators of innovation and job growth. Bottling up cash in public companies will reduce the capital flowing to private ventures—and thus their ability to invest, innovate and hire more workers.

Professor Tyler Cowen of George Mason University makes similar points, in a very succinct manner.

This is flat out a new tax on capital, akin to a tax on dividends. …Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

Catherine Rampell of the Washington Post is far from a libertarian, but even she warned that the hostility to stock buybacks makes no sense.

You’ve probably heard some ranting recently about “stock buybacks,” the term for when a public company repurchases shares of its own stock on the open market. …Why do Democrats hate buybacks so much? …they proposed legislation to ban buybacks. They excoriated companies for returning cash to shareholders… Share buybacks themselves aren’t necessarily bad — particularly when the alternative is wasting investor money… Yelling at companies to stop their buybacks won’t cause them to increase investment… In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

The only good news to share is that the tax being enacted by Democrats is just 1 percent, so the damage will be somewhat limited (the main economic damage will be because of another provision in the legislation, the tax on “book income“).

Though I suppose we should be aware that a small tax can grow into a big tax (the original 1913 income tax had a top rate of just 7 percent and we all know that the internal revenue code has since morphed into an anti-growth monstrosity).

The bottom line is that the crowd in Washington has made a bad tax system even worse.

P.S. Since we have been discussing how taxes on capital are bad for workers, this is an opportunity to share an old cartoon from the British Liberal Party (meaning “classical liberal,” of course). The obvious message is that labor and capital are complementary factors of production.

And the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not holding my breath waiting for Washington to enact sensible tax policy.

Big Government, Big Business, and the Clowns at the Chamber of Commerce

Supporting free enterprise does not mean supporting big companies.

Why? Because as John Stossel and Tim Carney discuss, big businesses are more than willing to get into bed with big government and oppose capitalism.

The goal should be genuine consumer-driven, market-based competition. And that means that politicians should not put their thumbs on the scale in favor of specific companies or industries.

Unfortunately, that certainly has happened in countless cases.

At varying times, both Republicans and Democrats have provided special favors to Wall Street, General Motors, airlines, health insurance companies, Boeing, Big Pharma, and banks.

These odious examples help to explain why companies give money and support to politicians from both parties.

But sometimes that approach backfires. Let’s consider how the Chamber of Commerce can be blamed for the looming enactment of Biden’s horribly misnamed Inflation Reduction Act.

The Wall Street Journal opined on this issue today.

The U.S. Chamber of Commerce…bet in 2020 that supporting “centrist” House Democrats would protect against anti-business policies has been a bust. …How does that calculation look now…? Every one of the 15 voted for the $1.9 trillion spending bill in March 2020, despite Chamber opposition to sweeping jobless benefits that stoked labor shortages and stimulus checks that fed inflation. They also voted for the PRO Act, a radical pro-union rewrite of labor law. …Now comes the big moment of truth as the Schumer-Manchin tax and spend bill heads to the House… The chance of Democratic defections is slim. Despite aggressive Chamber lobbying, all 15 rolled over for the $3.5 trillion Build Back Better bill last year.

Amazingly, the Chamber bent over backwards to endorse these politicians, notwithstanding their consistent track record of support for bigger government.

Nearly all had publicly expressed support for scrapping the 2017 corporate tax reform, and for new climate, banking and healthcare regulations. The only reason most qualified for endorsements is because the Chamber altered its voting scorecard to allow extra points for “leadership” and “bipartisanship.” …It’s not too much to say that the Chamber was crucial in midwifing Speaker Nancy Pelosi’s 222-211 seat majority.

The Washington Post wrote last year about the Chamber’s controversial decision to side with Democrats.

Here are some excerpts from the story by Tory Newmyer and Aaron Gregg.

 …the Chamber has been the object of sharp attacks by leading conservatives. …The decision to endorse so many freshman Democrats, rather than give them time for their voting records to take shape, was a dramatic break from past procedure. …the conservative backlash has led to alarm even among some of the organization’s closest allies. A veteran U.S. Chamber board member, speaking on the condition of anonymity to avoid reprisal, said: “It is a legitimate question how well-thought out this strategy is. People are concerned, and they’re discussing where else they can send revenues to support free enterprise.” …Seeing Chamber-endorsed Democrats support pro-union legislation “is like the national right to life organization saying they now support some abortions,” said a former U.S. Chamber executive, who spoke on the condition of anonymity because the person feared reprisal.

If you want examples of conservative hostility, here’s a tweet from Hugh Hewitt.

The ⁦@USChamber⁩ opposes President Biden’s massive tax hikes. Too bad none of the Democrats they supported over GOP candidates last year care. The whole management team should quit or be fired. They got played. Badly. https://t.co/Cty77pXgjV

— Hugh Hewitt (@hughhewitt) April 1, 2021

And here’s a tweet from Oren Cass.

One of the major recent developments in American politics is the nasty divorce underway between the Republican Party and conservatives on one side and the Chamber of Commerce and big business on the other. What's causing the breakup? 🧵

— Oren Cass (@oren_cass) November 15, 2021

Interestingly, this is not the first time the Chamber of Commerce has sided with the left.

In a column for National Review earlier this year, Nate Hochman recounts what happened during the Hillarycare fight back in 1993.

In March 1993, the Chamber of Commerce surprised many of its allies by coming out in favor of Clinton’s plan for universal coverage with an employer mandate, reversing its earlier opposition to both proposals. …The Chamber’s attempt to curry favor with the new administration provoked a furious conservative backlash. Congressional Republicans — led by John Boehner of Ohio, then the head of the 75-member House Conservative Opportunity Society — organized a mass boycott of the Chamber, urging local and state chapters to disaffiliate in protest. The campaign was devastatingly effective: By the time the dust had settled, the Chamber had lost one-fifth of its membership.

As far as I’m concerned, any business owners who favor free enterprise should not support the Chamber of Commerce. It would be heartwarming to see the organization lose members.

But this brings me back to what I wrote at the start of today’s column. Many business owners don’t support capitalism. They prefer cronyism.

That’s particularly true for large companies, which often see big government as a way of thwarting competition from small companies (such as Amazon’s support for a higher minimum wage).

P.S. The Chamber of Commerce is not the only business association governed by fools. Yes, I’m referring to the Business Roundtable.

Government Intervention Hurts the Poor

A big argument for free enterprise over statism is that the former delivers growth while the latter leads to stagnation.

And that’s very apparent when you review decades of data.

The case for capitalism is especially powerful if you care about what’s best for the disadvantaged. As the chart from Economic Freedom of the World illustrates, poor people enjoy much higher levels of income in nations that have higher levels of economic liberty.

So why, then, do our friends on the left support bigger government?

There are several possible answers, but today let’s focus on their understandable desire to do things that seem compassionate. Particularly things that seem to offer immediate help.

I think that’s a big reason why some well-meaning leftists support a big welfare state even though there is plenty of evidence that poor people get trapped in dependency. They are so focused on doing something that ostensibly alleviates today’s problems that they do not appreciate the risk of harmful long-run consequences.

This problem is so pervasive that we need to create a new Theorem of Government.

If you want an example of this Theorem, we can look at a story in today’s New York Times.

Reporters Jeanna Smialek and Ben Casselman document how low-income people are being hurt by inflation and will probably be hurt by what will be needed to curtail inflation.

…data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation. That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signsthat poorer families are cutting back. …The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown. In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. …America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases.

The story is filled with anecdotes about poor people suffering from inflation.

And, as the above excerpts captures, it has plenty of fretting about how the less fortunate will suffer as the Federal Reserve tries to fix the mess.

But what you won’t find in the story is any acknowledgement that poor people would not be dealing with this hardship if the Federal Reserve had not made the mistake of creating too much liquidity in the first place.

Yet this is the big lesson all of us should learn.

The Federal Reserve wanted to offer short-run help to the economy, motivated in part by a desire to help poor people by propping up the economy during the pandemic.

Yet any short-run help has been swamped by subsequent negative consequences.

And this is not unique. The big lesson from the so-called War on Poverty is that poverty rates suddenly stopped declining. In other words, government tried to help, but wound up doing harm.

P.S. Here are the other 13 Theorems of Government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
• The “Seventh Theorem” explains how bigger governments are less competent.
• The “Eighth Theorem” explains the motives of those who focus on inequality.
• The “Ninth Theorem” explains how politics often trumps principles.
• The “Tenth Theorem” explains how politicians manufacture/exploit crises.
• The “Eleventh Theorem” explains why big business is often anti-free market.
• The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
• The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.

Big Government, Biden, and Big Corruption: Part II

Yesterday’s column explained that lobbyists are big winners when the size and scope of government increases.

• For instance, a bigger budget means special interests hire lobbyists to obtain ever-larger slices of pork.
• Moreover, added red tape means lobbyists get more clients seeking to manipulate the regulatory process.

And Biden’s grossly misnamed Inflation Reduction Act will make both of those problems worse, enabling more corruption.

But there’s a third problem to consider. Biden’s agenda also calls for a massive expansion of special tax privileges.

From a libertarian perspective, I like when the law allows people to keep more of their money.

As an economist, however, I don’t like when people are lured into make inefficient choices simply because of a convoluted tax system.

And, as a decent human being, I despise a process that enriches lobbyists, politicians, and other insiders. This corrupt process is succinctly captured in this flowchart put together by my former colleague Chris Edwards.

Chris’ main point is that we should be reforming and simplifying the tax code rather than dramatically expanding the budget of a corrupt Internal Revenue Service.

You can’t argue with that goal (assuming you want what’s best for the nation). Even folks on the left should agree.

The bottom line is that a complicated and convoluted tax code is great for lobbyists and a boon for corruption.

P.S. If you want to know the world’s most surprising loophole, click here.

P.P.S. Assuming loopholes are properly defined, the ideal policy is to eliminate them in tandem with enactment of lower tax rates.

Big Government, Biden, and Big Corruption: Part I

Since I went to the archives for a video yesterday, let’s do the same thing today. Here’s my 2009 video about the close link between the size of government and the level of corruption.

I’m recycling this video because President Biden and his allies in Congress are poised to enact a revised version of the “Build Back Better” plan to expand the burden of government.

The legislation has all sorts of awful provisions, such as shoveling more money at a corrupt IRS, hurting jobs with higher taxes on “book income,” price controls on prescription drugs, and green-energy pork.

But today’s column will focus on process rather than policy.

To be more specific, I want to emphasize the video’s message about bigger government leading to more corruption.

And I’m going to cite an unexpected source – a left-leaning news outlet – to make my point.

In an article for the Washington Post, Yeganeh Torbati and Jeff Stein share various examples of how Biden’s misnamed Inflation Reduction Act is fattening bank accounts of lobbyists.

As Democrats hurry to finalize $739 billion climate, health-care and tax legislation…, business lobbyists and issue advocates are…using television and newspaper ads and personal outreach to try to sway Democrats to their side before the Senate votes. Much of the fiercest lobbying has focused on the bill’s health-care provisions. …The bill also provides hundreds of billions…to fight climate change… The Zero Emission Transportation Association…is asking senators to consider extending the deadlines by a year or more… Small businesses successfully stripped higher taxes on pass-through entities, while bigger firms succeeded in keeping the corporate rate at 21 percent.

The story focuses on the battle over the legislation, so allow me to add two points.

• First, fighting over what is in the package is just the tip of the iceberg. Assuming the bill becomes law, there will then be countless opportunities for lobbyists to get rich by manipulating the regulations that will define how the law is implemented, as well as yearly opportunities for lobbyists to cash in by influencing how money is spent.
• Second, not all lobbyists are bad. If a group of people hire lobbyists to get money or favors from the government, that is obviously immoral. But if a group of people hire lobbyists in hopes of protecting themselves (i.e., they don’t want to be taxed or burdened with more red tape), that is completely legitimate.

I’ll close by reiterating a point in the video.

Whether lobbyists are on the right side or wrong side, the ideal scenario is to shrink government. For instance, a simple and fair flat tax would radically reduce the incentive for influence-peddling.

Getting rid of various needless departments (Education, Transportation, Agriculture, Energy, Housing and Urban Development, etc) also would diminish opportunities for graft and sleaze.

P.S. If you want some lobbyist-themed humor, click here and here.

The Case against Confiscatory Tax Rates, Part I

Back in 2009, I narrated a video about the downsides of class-warfare tax policy.

But if you don’t want to spend eight minutes watching the video (or 14 minutes watching this video), here’s a visual that summarizes why high tax rates discourage people from engaging in productive behavior.

The most important thing to understand is that a high marginal tax rate (i.e., the tax rate on earning more money) has a big effect on incentives to work, save, invest, and be entrepreneurial.

But how big is that effect?

Let’s review some new research from Professor Charles Jones.

The classic tradeoff in the optimal income tax literature is between redistribution and the incentive effects that determine the “size of the pie.” …However, what is in some ways the most natural effect on the size of the pie has not been adequately explored. …To the extent that top income taxation distorts…innovation, it can impact not only the income of the innovator but also the incomes of everyone else in the economy. …High incomes are a prize that partly motivates entrepreneurs to turn basic insights into a product or process that ultimately benefits consumers. High marginal tax rates deter this effort and therefore reduce innovation and overall GDP. …For example, consider raising the top marginal tax rate from 50% to 75%. …the change raises about 2.5% of GDP in revenue before the behavioral response. In the baseline calibration…, this increase in the top tax rate reduces innovation and lowers GDP per person in the long run by around 7 percent. …even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 7% decline in their incomes is not offset by the 5% increase from redistribution. In other words, raising the top marginal rate from 50% to 75% reduces social welfare…the rate that incorporates innovation and maximizes the welfare of workers is much lower: the benchmark value is just 9%.

Here’s a table from the study showing how the optimum tax rate is very low if the goal is to help workers and society rather than politicians.

If you want more evidence, there’s a never-ending supply.

But if we want to be concise, start with this list.

• Higher tax rates on the rich will reduce capital formation.
• Higher tax rates on the rich will lower economic output.
• Higher tax rates on the rich will shrink the labor supply.
• Higher tax rates on the rich will depress levels of entrepreneurship.
• Higher tax rates on the rich will lead to lower middle-class wages.
• Higher tax rates on the rich will reduce economic mobility.
• Higher tax rates on the rich will drive away superstar inventors.
• Higher tax rates on the rich will lower levels of innovation.
• Higher tax rates on the rich will lead to higher taxes for everyone else.
• Higher tax rates on the rich will encourage tax complexity.

Heck, higher tax rates can even hurt your favorite sports team.

P.S. Joe Biden wants people to think that it’s patriotic to pay more tax, though he exempts himself with clever tax planning.

The Absurdly Named Inflation Reduction Act

I don’t like shoveling more money at a corrupt IRS, hurting jobs with higher taxes on “book income,” price controls on prescription drugs, or green-energy pork.

But, as explained in this video clip, the insult added to injury is that the resuscitated “Build Back Better” is being sold as the “Inflation Reduction Act.”

If a private company said that candy bars help you lose weight or that it is okay to stick your hand under a running lawnmower, it would be dragged into court for false and/or dangerous advertising.

But when politicians make utterly dishonest claims about legislation, we have to grit our teeth and endure their lies.

The bottom line is that rising prices inevitably are a consequence of bad monetary policy.

That’s true in the United States, and that’s true elsewhere in the world.

So why, then, did Biden, Schumer, and Manchin decide to affix such an inaccurate label to their tax-and-spend package?

The answer presumably is political. Inflation is a problem for the incumbent party, so why not pretend the budget plan will somehow reduce inflation. Heck, if they could get away with it, they would probably call it the “Inflation Reduction and Cancer Elimination Act.”

But, to be fair, perhaps some of them actually believe a big-government plan will have an impact on inflation. For instance, the misguided but honest folks at the Committee for a Responsible Federal Budget released an endorsement letter from 55 supposed experts based on the assumption that higher taxes will lead to lower prices.

Here are some excerpts.

With inflation at a 40-year high…, we are writing to encourage you to pass legislation to reduce budget deficits in a manner that would help counter inflation… As President Biden has explained, “bringing down the deficit is one way to ease inflationary pressures.” …Given the current state of the economy, we believe passing deficit reduction would send an important message to the American people that their leaders are serious about tackling inflation.

There are two big problems with the letter.

First, it is based on Keynesian economics, which assumes higher prices are caused by excessive “aggregate demand” and that deficit reduction (whether from tax increases or spending restraint) can help by slowing the economy.

Yet this is the theory that also told us that it was impossible to have rising prices and rising unemployment, like we saw in the 1970s. And Keynesians also said we couldn’t have falling unemployment and falling inflation, like we enjoyed in the 1980s.

Second, even if one believes in the fairy tale of Keynesian economics, all of the alleged deficit reduction occurs in future years.

And even that is nonsense since every sentient adult knows that the massive expansion of the IRS’s budget is not going to generate a windfall of new tax revenue. And every honest person also knows that lawmakers plan on extending the new Obamacare handouts in the bill.

These tweets summarize why even Keynesians should realize the legislation is fraudulent.

And what happens to the 10-year "deficit reduction" when the new Obamacare subsidies are extended after 2 years? Bizarre that NR editorial doesn't hit this point https://t.co/3TUDkEUCyL https://t.co/R86P2rUEbG

— Mickey Kaus (@kausmickey) August 4, 2022

P.S. It is very disappointing (but perhaps not entirely surprising) that former Indiana Governor Mitch Daniels signed the CRFB letter. And it also is disappointing that a couple of people from the American Enterprise Institute added their names as well. They all deserve the Charlie Brown Award.

P.P.S. As I noted in the video, deficit spending can lead to inflation if a central bank buys government bonds in order to help finance additional government spending (the crazy Modern Monetary Theory agenda). Perhaps I am being too charitable, but I don’t think that’s the reason for the Federal Reserve’s big mistake (though I fear it may be happening with the European Central Bank).

More Evidence against the Capital Gains Tax

The capital gains tax is double taxation, and that’s a bad idea (assuming the goal is faster growth and higher wages).

Let’s consider how it discourages investment. People earn money, pay tax on that money, and then need to decide what to do with the remaining (after-tax) income.

If they save and invest, they can be hit with all sorts of additional taxes. Such as the capital gains tax.

If you want to be wonky, a capital gain occurs when an asset (like shares of stock) climbs in value between when it is purchased and when it is sold.

But stocks rise in value when the market expects a company will generate more income in the future.

Yet that income gets hit by both the corporate income tax and the personal income tax (the infamous double tax on dividends).

So a capital gains tax is a version of triple taxation.

Now that I’ve whined about capital gains taxation, let’s see what happens when a country moves in the right direction.

Professor Terry Moon, from the University of British Columbia, authored a study on the impact of a partial cut in South Korea’s capital gains tax. His abstract succinctly summarizes the results.

This paper assesses the effects of capital gains taxes on investment in the Republic of Korea (hereafter, Korea), where capital gains tax rates vary at the firm level by firm size. Following a reform in 2014, firms with a tax cut increased investment by 34 log points and issued more equity by 9 cents per dollar of lagged revenue, relative to unaffected firms. Additionally, the effects were larger for firms that appeared more cash constrained or went public after the reform. Taken together, these findings are consistent with the “traditional view” predicting that lower payout taxes spur equity-financed investment by increasing marginal returns on investment.

There are several interesting charts and graphs in the study.

But this one is particularly enlightening since we can see big positive results for the firms that were eligible for lower tax rates compared to the ones that still faced higher tax rates.

Richard Rahn wrote about capital gains taxation late last year.

Here are some excerpts from his column in the Washington Times.

Would you vote for a tax that frequently taxes people at an effective rate of 100% or more, misallocates investment, reduces economic growth and job creation, often becomes almost impossible to calculate, and in many cases reduces, rather than increases, revenue for the government? …So-called “capital gains” are price changes most often caused by inflation, which, of course, is caused by incompetent or corrupt governments. …Some countries explicitly allow for the indexing of a capital gain for inflation. Other countries have no capital gains tax at all because they recognize what a destructive tax it is. …The current maximum federal capital gains tax is 23.8%. …“Build Back Better” (BBB) bill would push the top rate to 31.8%…and…citizens of states with high state income tax rates like California, New York, and New Jersey would find themselves paying destructive rates from 43 to 45%.

Needless to say, it is a bad idea to impose a 43 percent-45 percent tax on any type of productive behavior.

But it is downright crazy to impose that type of tax on economic activity (investment) that also gets hit by other forms of tax.

Let’s close with this map from the Tax Foundation. As you can see, some European nations have punitive rates, but countries such as Belgium, Slovakia, Luxembourg, the Czech Republic, and Switzerland wisely have chosen not to impose a capital gains tax..

P.S. For more information, I invite people to watch the video I narrated on the topic. And this editorial from the Wall Street Journal also is a good summary of the issue.

P.P.S. Biden wants America to have the world’s worst capital gains tax. To learn why that’s a bad idea, click here and here.

Three Cheers for the Industrial Revolution

At the start of this interview, I cite Economic Freedom of the World and the Index of Economic Freedom to make the point that more economic liberty is correlated with more human prosperity.

For purposes of today’s column, I want to focus on the last half of the interview. I point out that a handful of nations began to escape poverty, largely back in the 1800s, when the fiscal burden of government was very small.

But that’s just a partial explanation. As Professors Donald Boudreaux and Deirdre McCloskey explained in short videos, the adoption of capitalism in a few nations enabled a stunning increase in living standards starting a couple of hundred years ago.

If you want a one-sentence summary, all you need to know is that capitalism enabled the industrial revolution and the industrial revolution triggered a huge increase in living standards.

If you prefer to see this in a visual form, here’s a compelling chart put together by Luke Muehlhauser of the Open Philanthropy Project.

And here’s some of what he wrote on his personal page.

The gains in human well-being observed since the industrial revolution are vastly larger than pre-industrial fluctuations in human well-being. No other transitions in recorded history, either positive or negative, are remotely similar in magnitude. …world GDP per capita (in 1990 international dollars) was relatively flat until the final decades of the industrial revolution, when the trajectory for this measure changed dramatically. …In general, the gains and losses in (these measures of) human well-being during the pre-industrial era are miniscule compared to the gains made during the post-industrial era, and there is a sharp upward trajectory change for all these measures shortly after 1800. …many major historical events seem to have not produced anything close to such a transformative change.

Let’s see what others have to say on this topic.

My former colleague Marian Tupy, in an article for the Foundation for Economic Education, pointed out that living through the industrial revolution was no picnic by today’s standards, but the wealth generated by free markets is what enabled environmental improvements.

It is well known that industrialization helped to pollute the environment, but that does not mean that air and water were clean before factories and mills came along! Compared to today, our ancestors had to endure horrific environmental conditions. …John Harrington invented the toilet in 1596, but bathrooms remained rare luxuries two hundred years later. Chamber pots continued to be emptied into streets, turning them into sewers. To make matters worse, even large towns continued to engage in husbandry well into the 18th century. As Fernand Braudel noted in The Structures of Everyday Life, “Pigs were reared in freedom in the streets. And the streets were so dirty and muddy that they had to be crossed on stilts.” …The situation was no better on the European mainland. …industrialization did great damage to the environment during the second half of the 19th century. But it also created wealth that allowed advanced societies to build better sanitation facilities and spurred the creation of an enlightened populace with a historically unprecedented concern over the environment and a willingness to pay for its stewardship.

Very similar to the issue of child labor.

Market-driven prosperity is what enabled children to go to school rather than being put to work.

In a column for the American Institute for Economic Research, Professor Vincent Geloso of King’s University College looked at new research about the rise of living standards as the United Kingdom went through the industrial revolution.

I began asking my own students about their assessments of the Industrial Revolution. The set of answers I obtained was roughly the same: living standards did not increase for the poor; only the rich got richer; the cities were dirty and the poor suffered from ill-health; the artisans were crowded out; the infernal machines of the Revolution dumbed down workers, etc. In other words, the imagery that seems to have seeped into popular imagination is one that resembles the Marxian version of history… As such, any new research on the topic of living standards during the Industrial Revolution is worth communicating… Two recent articles, published in the European Review of Economic History, that consider living standards in Britain (the cradle of industrialization) during the Industrial Revolution offer such a chance… The first of the two articles, authored by Luis Zegarra, made a series of modifications to the way that wages are deflated. …He made two important findings. The first is that living standards were lower than depicted in previous works of economic history. He found that living standards in London (i.e. a proxy for England) were overestimated by 40%. The second is that the increase in living standards was sustained from 1600 onwards. The second article, authored by Daniel Gallardo-Albarrán and Herman de Jong, decided to go a step further and attempted to measure welfare as broadly defined as possible. …their results…show…the increase started later but there was a pronounced sustained increase. 

P.S. Here’s a video about how industrialization dramatically improved lives in a country that used to be part of Britain.

P.P.S. And here’s another video on the link between free markets and growth.

P.P.P.S. If you want more historical information about the industrial revolution, click here and here.

Learning a Lesson about Big Government from Barbados

I realize few readers are interested in small, faraway countries. But I periodically write about nations such as Jordan, Cyprus, Latvia, Vanuatu, Panama, and Pakistan because they offer important lessons – mostly negative, but sometimes positive – about fiscal policy.

Today, let’s see what we can learn from Barbados.

That island nation in the Caribbean wound up in fiscal trouble a few years ago and Abrahm Lustgarten of the New York Times wrote a lengthy article last week about that experience.

Here’s the situation as of 2018.

Barbados was out of money. It was so broke that it was taking out new loans just to pay the interest on the old ones, even as its infrastructure was coming undone. Soon the nation would have no choice but to declare itself insolvent, instigating a battle with the dozens of banks and creditors that held its $8 billion in debt and triggering austerity measures that would spiral the island into further poverty. …Mottley, the first woman to lead Barbados, had been working…to develop a plan that would restructure the country’s soaring debts in a way that would free up money to invest in Barbados’s economy.

While the preceding excerpts are mostly to illustrate what was happening, I can’t resist two editorial comments.

• First, the right kind of austerity produces growth rather than poverty.
• Second, government spending rarely acts as productive investment.

Now let’s get back to the story.

Prime Minister Mottley’s plan involved going to the International Monetary Fund, then headed by Christine Lagarde, for a bailout.

Mottley knew that banks and investors would work with her only if Barbados were participating in a formal I.M.F. program… Mottley wanted Lagarde to endorse an economic program that would still allow her to raise salaries of civil servants, build schools and improve piping and wiring for water and power. …No one was sure how Lagarde would respond. Would she trust Mottley to spend on Barbados first? …the director’s surprising reply: She was extremely supportive of what Mottley was proposing.

Needless to say, I don’t like bailouts. And a bailout that enables more government spending seems especially foolish.

But I like to check the numbers before making sweeping pronouncements.

And while I am very skeptical of IMF bailouts, I like that the international bureaucracy has an extensive database with economic and fiscal numbers. Including fiscal data for Barbados going back to 1994.

So let’s see whether Barbados somehow was being hurt by inadequate levels of government spending.

But it turns out that total government spending today is more than four times greater than it was in 1994.

And if we look at government spending as a share of gross domestic product, we can see that government has nearly doubled in size.

To be fair to Ms. Mottley, the politicians in office from 1994-2008 were the most profligate.

But none of that changes the fact that government is far bigger today than it was in the recent past. So the notion that Barbados needs a bigger government budget is nonsense.

Sadly, the reporter did not bother to share any of these numbers. Indeed, in a story that ran more than 10,000 words, there were only 50 words that even hinted at the real problem.

…a mixture of poor management and corruption had eroded the country’s economy. …the country had developed a “dysfunctional” fiscal culture in which government agencies and departments took loans and negotiated deals without consulting the central bank, accumulating sprawling debt… The country’s response was to print more money and borrow more.

I’ll close by observing that Barbados never would have gotten into trouble if it had a Swiss-style spending cap. If government spending had been allowed to grow only 3 percent each year starting in 1994, Barbados would be enjoyed a huge budget surplus today.

P.S. Ironically, economists at the IMF have written in favor of spending caps on multiple occasions. Too bad the political hacks in charge of the bureaucracy don’t pay attention to that research.

The Depressing Reincarnation of Build Back Better

One of the best things about 2021 was the fact that Congress did not approve Joe Biden’s economically debilitating plan to raise taxes and expand the welfare state.

His so-called Build Back Better plan was a very bad mix of class-warfare tax policy and redistributionist spending policy.

But one of the worst things about 2022 may be the reincarnation of a slimmed-down version of Biden’s plan.

Simply stated, the “slimmed-down version” of a terrible piece of legislation is bad news – even if it is possible to envision something even worse.

The Wall Street Journal‘s editorial on the package illustrates why it is bad news that Senator Joe Manchin is trying to rescue Biden’s statist agenda.

As the economy slouches near recession, Majority Leader Chuck Schumer and West Virginia Sen. Joe Manchin…unveiled a tax-and-spending deal that they call the Inflation Reduction Act. Is their aim to reduce inflation by chilling business investment and the economy? …A more accurate name would be the Business Investment Reduction and Distortion Act since that will be the result of its $433 billion in climate and healthcare spending, and $615 billion in new taxes and drug price-control “savings.”

The editorial highlights four terrible provisions.

First, there’s a big tax hike on American companies, with the biggest tax hike on firms that make new investments.

…the 15% minimum tax on corporate book income…will slam businesses whose taxable income is lower than the profits on their financial statements owing to the likes of investment expensing.

For all intents and purposes, politicians would be creating a second type of corporate income tax.

Heavy compliance costs for the business community, of course, but the rest of us probably care more about the estimated loss of 218,000 jobs according to the National Association of Manufacturers.

Second, there are corrupt “green energy” provisions that will degrade America’s energy efficiency and security.

…the bill’s $369 billion in climate spending, most of which is corporate welfare. …All of this will steer private investment into green energy at the cost of reduced investment in fossil fuels. Wind and solar subsidies are already creating distortions in power markets that make the electric grid less reliable and energy more expensive. The expansion of subsidies will compound these problems.

If you want to know why this is bad, just remember Solyndra.

Third, the legislation imposes back-door price controls on the pharmaceutical industry.

The bill will require the Health and Human Services Secretary to “negotiate” Medicare prices—i.e., impose price controls—for dozens of drugs. But the $288 billion in putative savings are fanciful. Manufacturers will hedge potential future losses by launching drugs at higher prices. …The bill will also discourage investment in innovative treatments that could reduce future healthcare spending.

For those of us who value the development of new drugs to fight problems like cancer and Alzheimer’s, this is very bad news.

Fourth, a very corrupt internal revenue service is rewarded for its bad behavior.

Speculative revenue of $124 billion will also come from an $80 billion boost for the IRS. Most of this will finance more audits. The rich can afford more tax lawyers, but middle and upper-middle class Americans will be inclined to settle IRS claims, however meritless, lest they spend even more to defend themselves.

P.S. I can’t resist sharing one final bit of information.

If you peruse the Joint Committee on Taxation’s analysis of the bill, you’ll find that Joe Biden is breaking his promise not to raise taxes on people making less than $400,000 per year.

Not that anyone should be shocked. I have repeatedly explained that the big spenders need to pillage lower-income and middle-class household if they want to finance bigger government.

Gun Control Humor

Time to add to our collection of humor about gun control.

Back in 2013, I conducted a poll on the most important reason to oppose gun control. The most-common answer was to have the ability to resist government tyranny. Which is the theme of our first item.

The next bit of humor has the same message.

Our third item reminds me of my “IQ test” for criminals.

Next we have a cartoon that combines two hot-button issues.

As is my tradition, I’ve saved the best for last.

And the reason it’s the best is because it is such an accurate depiction of the thinking of our friends on the left.

P.S. Regarding the quiz I mentioned at the start of the column, I think the correct answer is that we should oppose gun control in order to have the ability to protect ourselves in case of societal breakdown.

As we saw most recently at the height of the pandemic, it is unwise to rely on government to protect us during times of crisis.

Heck, governments don’t do a good job of protecting us during times of calm.

The Simple Solution to America’s Horrific Long-Run Fiscal Crisis

Yesterday’s column analyzed some depressing data in the new long-run fiscal forecast from the Congressional Budget Office.

Simply stated, if we leave fiscal policy on auto-pilot, government spending is going to consume an ever-larger share of America’s economy. Which means some combination of more taxes, more debt, and more reckless monetary policy.

Today, let’s show how that problem can be solved.

My final chart yesterday showed that the fundamental problem is that government spending is projected to grow faster than the private economy, thus violating the “golden rule” of fiscal policy.

Here’s a revised version of that chart. I have added a bar showing how fast tax revenues are expected to grow over the next 30 years, as well as a bar showing the projection for population plus inflation.

As already stated, it’s a big problem that government spending is growing faster (an average of 4.63 percent per year) than the growth of the private economy (an average of 3.75 percent per years.

But the goal of fiscal policy should not be to maintain the bloated budget that currently exists. That would lock in all the reckless spending we got under Bush, Obama, and Trump. Not to mention the additional waste approved under Biden.

Ideally, fiscal policy should seek to reduce the burden of federal spending.

Which is why this next chart is key. It shows what would happen if the federal government adopted a TABOR-style spending cap, modeled after the very successful fiscal rule in Colorado.

If government spending can only grow as fast as inflation plus population, we avoid giant future deficits. Indeed, we eventually get budget surpluses.

But I’m not overly concerned with fiscal balance. The proper goal should be to reduce the burden of spending, regardless of how it is financed.

And a spending cap linked to population plus inflation over the next 30 years would yield impressive results. Instead of the federal government consuming more than 30 percent of the economy’s output, only 17.8 percent of GDP would be diverted by federal spending in 2052.

P.S. A spending cap also could be modeled on Switzerland’s very successful “debt brake.”

P.P.S. Some of my left-leaning friends doubtlessly will think a federal budget that consumes “only” 17.8 percent of GDP is grossly inadequate. Yet that was the size of the federal government, relative to economic output, at the end of Bill Clinton’s presidency.

America’s Horrific Long-Run Fiscal Forecast

The Congressional Budget Office has released its new long-run fiscal forecast. Like I did last year (and the year before, and the year before, etc), let’s look at some very worrisome data.

We’ll start with projections over the next three decades for taxes and spending, measured as a share of economic output (gross domestic product). As you can see, the tax burden is increasing, but the spending burden is increasing even faster.

By the way, some people think America’s main fiscal problem is the gap between the two lines. In other words, they worry about deficits and debt.

But the real problem is government spending. And that’s true whether the spending burden is financed by taxes, borrowing, or printing money.

So why is the burden of government spending projected to get larger?

As you can see from Figure 2-2, entitlement programs deserve the lion’s share of the blame. Social Security spending is expanding as a share of GDP, and health entitlements (Medicare, Medicaid, and Obamacare) are expanding even faster.

Now let’s confirm that the problem is not on the revenue side.

As you can see from Figure 2-7, taxation is expected to consume an ever-larger share of economic output in future decades. And that’s true even if the Trump tax cuts are made permanent.

Having shared three charts from CBO’s report, it’s now time for a chart that I created using CBO’s long-run data.

My chart shows that America’s main fiscal problem is that we are not abiding by fiscal policy’s Golden Rule. To be more specific, the burden of government is projected to grow faster than the economy.

So long as the burden of government is expanding faster than the private sector, that’s a recipe for higher taxes, more debt, and reckless monetary policy.

All of those options lead to the same bad outcome.