Principles of (Sensible) Taxation

Two weeks ago, I shared some video from a presentation to the New Economic School of Georgia (the country, not the state) as part of my “Primer on the Laffer Curve.”

Here’s that portion of that presentation that outlines the principles of sensible taxation.

Just in case you don’t want to watch me pontificate for nearly 14 minutes, here’s the slide from the presentation that most deserves attention since it captures the key principle of good tax policy.

Simply stated, the more you tax of something, the less you get of that thing.

By the way, I had an opportunity earlier this year to share some similar thoughts about the principles of sound tax policy with the United Nations’ High-Level Panel on Financial Accountability Transparency & Integrity.

Given my past interactions with fiscal people at the U.N., I’m not overflowing with optimism that the following observations with have an impact, but hope springs eternal.

The ideal fiscal environment is one that has a vibrant and productive economy that generates sufficient revenue with modest tax rates that do not needlessly penalize productive behavior. Public finance experts generally agree on the following features

• Low marginal tax rates. A tax operates by increasing the “price” of whatever is being taxed. This is most obvious in the case of some excise taxes –such as levies on tobacco –where governments explicitly seek to discourage certain behaviors. …but there should be a general consensus in favor of keeping tax rates reasonable on the behaviors –work, saving, investment, risk-taking, and entrepreneurship –that make an economy more prosperous.
• A “consumption-base.” Because of capital gains taxes, death taxes, wealth taxes, and double taxation of interest and dividends, many nations impose a disproportionately harsh tax burden on income that is saved and invested. This creates a bias against capital formation, which is problematical since every economic theory –including various forms of socialism –share the view that saving and investment are necessary for rising wages and higher living standards.
• Neutrality. Special preferences in a tax system distort the relative “prices” of how income is earned or how income is spent. Such special tax breaks encourage taxpayers to make economically inefficient choices simply to lower their tax liabilities. Moreover, loopholes, credits, deductions, exemptions, holidays, exclusions, and other preferences reduce tax receipts, thus creating pressure for higher marginal tax rates, which magnifies the adverse economic impact.
• Territoriality. This is the simple notion that governments should not tax activity outside their borders. If income is earned in Brazil, for instance, the Brazilian government should have the authority over how that income is taxed.The same should be true for all other nations.

By the way, “consumption-base” is simply the jargon used by public-finance economists when referring to a tax system that doesn’t impose double taxation (i.e., extra layers of tax on income that is saved and invested).

Here’s a flowchart I prepared showing the double taxation in the current system compared to what happens with a flat tax.

P.S. At the risk of understatement, it’s impossible to have a good tax system with a bloated public sector, which means it’s not easy to be optimistic about future fiscal policy in the United States.

The Case for Capitalism, Part III

Part I of this series featured Dan Hannan explaining how the emergence of capitalism led to mass prosperity, while Part II featured Madeline Grant explaining how competition and cooperation make markets so successful.

Today, in Part III, Andy Puzder compares capitalism with socialism.

The core theoretical argument in the video is that capitalism is based on serving the needs of consumers.

As captured by one of my favorite quotes from Professor Walter Williams, you only make yourself better off in a free market system by serving others.

In a socialist system, by contrast, the only people who get rich are the government elites who plunder the people.

I also like that the video explains that Nordic nations are not socialist. As I’ve also pointed out, there’s no government ownership, central planning, and price controls in nations such as Sweden and Denmark.

Those countries do have higher tax burdens and more costly welfare states, which is the main reason they generally rank below the United States in measures of national economic liberty.

More important, the larger fiscal burden in Scandinavia help to explain why Americans enjoy higher living standards.

Indeed, my one complaint about the above video is that it didn’t show any of the data about relative levels of prosperity.

Yes, I want people to understand that Nordic nations have market-based economies, but I also want them to understand that those countries could be significantly more prosperous with less-onerous fiscal policy.

The most powerful data in that regards comes from a Swedish researcher who put together data showing that Americans of Scandinavian descent are much richer than their counterparts who are still in Scandinavia.

So the moral of the story is not only that capitalism is better than socialism, but also that capitalist nations with medium-sized governments do better than capitalist nations with large-sized governments.

P.S. Needless to say, capitalist jurisdictions with small-sized government do best of all.

The Economic History of the 20th Century

It’s not often (actually, only once) that I share a video lasting nearly two hours. But this video – revolving around the intellectual rivalry between pro-market Hayek and pro-intervention Keynes – is an excellent summary of 20th-century economic policy.

We learn about the growth of socialism and communism during and after World War I.

This then led economists from the Austrian school – including Hayek – to explain why that approach (genuine socialism, meaning government ownership, central planning, and price controls) was doomed to failure.

But other forms of intervention and redistribution gained new adherents, especially when Keynes argued that the Great Depression was the fault of capitalism (for what it’s worth, I think the video fails to include analysis on how the New Deal actually lengthened and deepened the downturn).

Unfortunately, the Keynesian narrative dominated and the video informs us that the people of the United Kingdom voted for a socialist government when World War II ended. Which then led to the nationalization of the economy’s “commanding heights” and the enactment of the welfare state.

The United States didn’t veer as sharply to the left after the war, but there was no meaningful challenge to the the statist consensus that arose in the 1930s.

On the bright side, Germany rejected socialism by getting rid of price controls and allowing markets to flourish (the video overstated the degree to which a welfare state was imposed). But that was the exception to the rule. The world was gravitating to statism, including the developing world.

My favorite part of the video is that we learn about the creation of the Mont Pelerin Society and the emergence of Milton Friedman and the Chicago School.

That was the start of the laissez-faire counterrevolution. But it didn’t yield immediate results.

The left was in charge of economic policy from the end of the war through the 1970s in the USA and UK, regardless of which political party held power.

But bad policy sooner or later leads to bad results.

And that changed the political environment.

The latter part of the video tells the very happy story on how the sensible ideas of Hayek and Friedman eventually translated into the historic elections of Ronald Reagan and Margaret Thatcher.

If you watch the entire video, you’ll learn about how Reagan and Thatcher successfully overcame major challenges as they shifted their nations toward economic liberty (most notably, Reagan tamed inflation and Thatcher denationalized state-run companies).

And you’ll see that most of the world then followed – including the collapse of the Soviet Empire.

You even get some sympathetic quotes about capitalism from leftists such as Gordon Brown, Larry Summers, and Jeffrey Sachs at the end of the video.

So it seems like a happy ending. And capitalism indeed was the dominant force in economic policy about 20 years ago when the video was released.

Sadly, the track record of the 21st century (Bush II, Obama, and Trump) has not been overly favorable for believers in economic liberty.

America Still Needs Reaganism

I’m skeptical of “common-good capitalism” in the same way I’m suspicious about “nationalist conservatism” and “reform conservatism” (and it should go without saying that I didn’t like the “kinder-and-gentler conservatism” and “compassionate conservatism” we got from the Bushes).

Here’s what I prefer.

Whether you call it libertarianism or small-government conservatism, this is the approach I wish Republicans would follow (or Democrats, if the spirit of Grover Cleveland still exists in that party).

But there are many self-styled conservatives who disagree. They think Reagan and his successful policies are passé.

Interestingly, the desire to move beyond Reaganism comes from pro-Trump and anti-Trump outlets.

David Brooks, a never-Trumper with a column in the New York Times, thinks Reagan’s anti-government approach is misguided.

If you came of age with conservative values and around Republican politics in the 1980s and 1990s, you lived within a certain Ronald Reagan-Margaret Thatcher paradigm. It was about limiting government, spreading democracy abroad, building dynamic free markets at home and cultivating people with vigorous virtues… For decades conservatives were happy to live in that paradigm. But as years went by many came to see its limits. It was so comprehensively anti-government that it had no way to use government to solve common problems. …Only a return to the robust American nationalism of Alexander Hamilton, Henry Clay and Theodore Roosevelt would do: ambitious national projects, infrastructure, federal programs to increase social mobility. The closest National Greatness Conservatism came to influencing the party was John McCain’s 2000 presidential bid. He was defeated by a man, George W. Bush, who made his own leap, to Compassionate Conservatism. …The Reformicons tried to use government to build strong families and neighborhoods. …Most actual Republican politicians rejected all of this. They stuck, mostly through dumb inertia, to an anti-government zombie Reaganism long after Reagan was dead and even though the nation’s problems were utterly different from what they were when he was alive. …there is a posse of policy wonks and commentators supporting a new Working-Class Republicanism… But if there is one thing I’ve learned over the decades, it is never to underestimate the staying power of the dead Reagan paradigm.

Maybe I’m just an “anti-government zombie,” but my response is to ask why Brooks thinks the federal government should be in charge of state and local infrastructure.

Even more important, it would be nice if he could identify a government program that successfully promotes social mobility. There are several hundred of them, so the fact that he doesn’t offer any examples is quite revealing.

By contrast, the Reagan approach of of free markets and limited government works anywhere and everywhere it is tried. And he was right that big government is bad government.

But at least Brooks’ column reminds me to add “national greatness conservatism” to my list of failed philosophical fads.

Now let’s shift to an article from the Trump-friendly American Conservative. Rod Dreher also argues that Reaganism is no longer relevant.

Reagan nostalgia has long been a bane of contemporary conservatism, because it prevented conservatives from recognizing how much the world has changed since the 1980s and how conservatism needed to change with it to remain relevant. …by the time Trump came down that escalator, Reagan conservatism was about as relevant to the real world as FDR’s New Deal liberalism was in 1980. It is no insult to Reagan to say so. Until Trump arrived on the scene, it was difficult for right-wing dissenters from orthodox Reaganism—critics of free trade, immigration skeptics, antiwar conservatives, and others—to break free of the margins to which establishment conservatives had exiled them. …It is impossible to see the clear outlines of a post-Trump future for the Republicans, but…Reaganism—the ideology of globalized free markets, social and religious conservatism, and American military and diplomatic domination—is never coming back.

Sadly, I don’t think Dreher is correct about “New Deal liberalism” being irrelevant.

How else, after all, would someone categorize Obama’s policies? Or Biden’s platform? It’s “We shall tax and tax, and spend and spend, and elect and elect,” just as FDR advisor Harry Hopkins stated.

And Reagan’s policies are definitely still relevant, at least if the goal is to improve the well-being of the American people.

Yes, Dreher is right that “the world has changed since the 1980s,” but that doesn’t mean that good policy in 1980 is no longer good policy in 2020.

I think the problem may be that people think Reaganomics is nothing more than lower tax rates, perhaps combined with a bit of inflation fighting. And it’s definitely true that Reagan’s tax rate reductions and his restoration of sound money were wonderful achievements.*

But the Reagan economic agenda was also about spending restraint, deregulation, trade liberalization (he got the ball rolling on NAFTA and the WTO), and other pro-market reforms.

To be sure, Reagan’s policy record wasn’t perfect. But the policies he preferred were the right ones to restore American prosperity in the 1980s.

And while there are different problems today (the need for entitlement reform, for instance), the Reaganite approach of smaller government is still the only good answer.

*Let’s also remember to applaud Reagan for the policies that resulted in the unraveling of the Soviet Empire.

P.S. As explained in the Fourth Theorem of Government, pro-growth, Reagan-style policy can be smart politics.

“Stakeholder Capitalism”: When Big Business Curries Favor from Big Government

Milton Friedman was one of the the 20th century’s greatest defenders of capitalism and individual freedom.

He had marvelous insights on issues such as fiscal policy, Sweden, tax competition, and other people’s money, but one of my favorite Friedman quotes is about the role of business.

This should be non-controversial, but we need to remember that big companies are not necessarily strong proponents of free enterprise.

Yes, they like lower tax rates and a few other market-oriented policies, but many large firms are more than happy to climb into bed with big government so they can gain special advantage from subsidies, handouts, bailouts, and protectionism.

So we shouldn’t be surprised to learn that the trade association for corporate CEOs of has disavowed Friedman.

Business Roundtable is modernizing its principles on the role of a corporation. Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance that include language on the purpose of a corporation. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders. …We therefore provide the following Statement on the Purpose of a Corporation, which supersedes previous Business Roundtable statements and more accurately reflects our commitment… This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity.

You can read the new language here. There’s only one pages of text and you’ll notice that it’s a lot of vapid jargon without any measurable commitments.

Indeed, the letter is so vague that some observers think it’s irrelevant.

In a column for the Washington Post, James Copland of the Manhattan Institute points out that profit-maximizing companies already consider the interests of so-called stakeholders.

Critics and supporters of business alike have characterized the statement as a major shift away from “shareholder” capitalism toward an alternative “stakeholder” model pushed by some progressive academics and policymakers. It isn’t. The Business Roundtable’s statement unequivocally states that “the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” To be sure, it proclaims that each of the chief executives signing on shares “a fundamental commitment to all of our stakeholders” — including customers, suppliers, employees and the broader community. But that’s a truism. No business can long survive without meeting such stakeholders’ needs. …The corporate signatories do not suggest in any way weakening the fiduciary duties of the boards and managers of ordinary for-profit shareholder corporations to manage such companies’ affairs for shareholders’ benefit. …there is a big difference between saying that a for-profit shareholder corporation should be sensitive to varying constituencies’ concerns and saying that its principal purpose is something different from the traditional view. One needn’t be an expert in public-choice economics or corporate governance to understand that politicizing corporate decision-making would be inefficient.

Lucian Bebchuk and Roberto Tallarita of Harvard Law School, in a column for the Wall Street Journal, share some real-world evidence that the CEOs are engaging in empty posturing.

Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relations move. …We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. …The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. …a review of the board-approved corporate governance guidelines of the companies whose CEOs joined the statement…mostly reflect a clear “shareholder primacy” approach. …The evidence is clear: Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value.

I think these two columns are accurate.

The vast majority of the CEOs who signed the Business Roundtable’s letter presumably have no intention of making unprofitable decisions solely to curry favor with the broader community.

That being said, the letter is still bad news because it basically acquiesces to the left’s misguided view that profits are somehow bad for society.

The Wall Street Journal made this point in an editorial in defense of the Friedman position.

The mucky-mucks of the Business Roundtable are tweeting in unison how “proud” they are to have abandoned the corporate purpose of serving shareholders for the more politically au courant “stakeholder” model. …media cheerleaders seem especially pleased that the CEOs have thrown the late, great economist Milton Friedman over the side. …The attempt to smear Friedman’s counsel as amoral is false. His point was that profitable businesses serve the common good better than executives who spend money on “social responsibility” but preside over business failure. The second point is Friedman’s warning that CEOs who put social responsibility above shareholders will find it redounds to their detriment. They feed the public belief that free markets and business are “wicked and immoral” and must be curbed by “external forces,” which typically means politicians.

In a column for National Review, Andrew Stuttaford also fears that the letter gives a green light to those who want more regulation by government.

The executives who retool a company’s mission to suit a particular conception of “social responsibility” are spending shareholders’ money on a moral agenda… Often repackaged as a demand that corporations be measured by the extent to which they match arbitrary and ever-tightening E (environmental), S (social), and G (governance) standards, it is now a way of corralling private enterprise without the bother of legislation. …the flourishing (and profitable) ecosystem that ESG investing has created…encompasses consultancies, advocacy organizations, “chief sustainability officers,” and many, many more rent-seekers besides. ESG is bad news for investors, but it is not a bad way of filling the wallets of those that feed off it. …In effect, therefore, many companies…will be forced to change the way they do business as they try to keep up with ever-more-stringent rules set not by democratically elected legislators but by the unaccountable, the ambitious, the greedy, and the fanatical.

Speaking of unaccountable and greedy, that’s a good description of Elizabeth Warren’s legislation to give Washington greater control of major companies.

Professor Greg Mankiw of Harvard opined about this issue last month for the New York Times.

If you open any standard economics textbook, such as one of mine, you will be told that a firm’s objective is to maximize profit. …Given the vast range of economic and political problems the world faces, this approach is often said to be too narrow. …former Vice President Joseph R. Biden Jr.,…joined in the criticism. “It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders… They have a responsibility to their workers, their community, to their country.” …In forsaking a mandate of narrow self-interest for one of broad social welfare, this approach to corporate management sounds noble, perhaps even obvious. But it is more problematic under closer scrutiny. …this approach to corporate management expects executives to be broadly competent social planners rather than narrowly focused profit maximizers. It’s unlikely that corporate executives, with their business training and limited experience, have the skills to play this role well. …One lesson of Econ 101 is that the self-interested behavior of consumers and businesses, directed by market forces and constrained by competition, can lead to desirable outcomes.

In an op-ed earlier this year for the Wall Street Journal, Vivek Ramaswamy opined that he and his fellow CEOs should not have a special role in determining economic policy.

‘Stakeholder capitalism” is…the fashionable notion that companies should serve not only their shareholders, but also other interests and society at large. …My main problem with stakeholder capitalism is that it strengthens the link between democracy and capitalism at a time when we should instead disentangle one from the other. …Managers of corporations gain their positions by maximizing profits and minimizing losses. …But these business leaders have no special standing to decide whether a minimum wage for American workers is more important than full employment, or whether minimizing society’s carbon footprint is more important than raising prices on consumer goods. …I have no special standing to legislate my morals because I am a CEO. I do, however, make the final decision about our company’s research-and-development budget. …the reason many corporate executives are speaking up in favor of stakeholder capitalism is that they think they will gain popularity at a time when it is unpopular to be perceived as a pure capitalist. …Some may argue that companies will be more successful in serving shareholders over the long run if they also serve societal interests. If that’s true, then classical capitalism should do the job, since only companies that serve society will ultimately thrive, and “stakeholder capitalism” would be superfluous.

But some CEOs can’t resist the temptation.

The Wall Street Journal opined about the social-justice posturing of one of the the CEOs who signed the Business Roundtable’s letter.

BlackRock CEO Larry Fink…has assumed a role as self-styled conscience of the business world in telling CEOs how to run their companies. …BlackRock is the world’s largest asset manager, with some $7.43 trillion in client assets. He is now threatening to vote against corporate directors and management if they don’t do what he says, and he is especially exercised about climate change. …Corporations in which BlackRock invests will also have to comply with the rules from a “Sustainability Accounting Standards Board” on issues such as labor practices and workforce diversity. …Like his friends at the Business Roundtable, Mr. Fink is big on “stakeholder” capitalism. …If he means serving employees, customers, suppliers and communities, he is merely saying what any successful company already does. But our guess is that by stakeholders Mr. Fink really means regulators and politicians. …We can’t help but wonder if Mr. Fink, after a profitable life in business, is auditioning to be Treasury Secretary.

In an article for the Foundation for Economic Education, Professor T. Norman Van Cott makes the all-important point that successful companies automatically generate benefits for people other than shareholders.

The marketplace is an arena where buyers and sellers both win. Do buyers and sellers really care about each other? …I sure am grateful that I don’t have to depend on the good-heartedness of Florida orange producers to send oranges to Indiana. It’s not that the orange producers and I aren’t well-meaning, just that oranges would not find their way to Indiana if good-heartedness were the motivation for commerce. …Microsoft provides a wonderful example…the shareholder value of Microsoft, as large as it is, surely pales in comparison to what its customers around the world gain. …Microsoft has achieved its immense shareholder value not because its customers, workers, suppliers, and communities are poorer. Indeed, nothing could be further from the truth. Its stakeholders have been enriched immeasurably by its pursuit of maximum shareholder value.

Writing for USA Today, Professor Steve Hanke is very critical of the Business Roundtable.

…the Business Roundtable launched a major attack on property rights, the bedrock of capitalism. …the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”… The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance. …The great Austrian economist Joseph Schumpeter concluded in his 1942 classic “Capitalism, Socialism and Democracy” that businessmen would “never put up a fight under the flag of their own ideals and interest.” …Schumpeter concluded that businessmen, through their ignorance and cowardice, would assist those who wished to destroy capitalism.

Megan McArdle also is skeptical. Here’s some of what she wrote for the Washington Post.

…business leaders have no right to do charity on someone else’s dime. You might admire plumbers who donate fixtures to needy families, but not if they donated the fixtures you’d purchased for your own bathroom. That is essentially what stakeholder capitalists are demanding of chief executives: Take the money and power that shareholders have entrusted to you and divert those resources to benefit someone else. …if “stakeholder capitalism” means anything, it must mean companies doing things that make shareholders at least somewhat worse off. …Corporate social responsibility…can be even less accountable than good old-fashioned shareholder capitalism. Money is relatively easy to measure: Shareholders have more of it at the end of the quarter, or they don’t, and either way you know how the boss is doing. But if the chief executive pours that cash into better-upholstered offices, more-generous fringe benefits and a slew of charitable causes, who’s to say whether the company’s goals are being met? …As Harvard health-care economist Amitabh Chandra noted on Twitter after the Business Roundtable’s announcement, “appealing to an amorphous ‘social mission’ ” has allowed nonprofit hospitals “to foil regulators, acquire their competition, and increase market power.” Beware of any proposal that might make the rest of the economy look more like the health-care sector.

Robert Samuelson’s column in the Washington Post points out that previous episodes of “corporate social responsibility” did not yield good outcomes.

…we’ve already been here. In the first decades after World War II, large U.S. corporations adopted a social and political model very much like the model recommended by the Roundtable. There was much talk of “stakeholders,” not shareholders. Companies were supposed to attend to their social responsibilities. “Capitalism” as a term went out of style… The corporate responsibility fad of the 1950s and 1960s was premised on the belief that…companies could achieve both their traditional financial goals as well as the less traditional agenda of providing higher living standards and employment security. …What we know with hindsight is that this confidence was a conceit of a moment in time. …These lessons of history have been either forgotten or ignored. But they have not gone away. Rather than heap endless new responsibilities on companies, we’d be better off having them tend to their traditional tasks — including maximizing profits.

By the way, the problem of big business rejecting capitalism isn’t limited to the CEOs of the Business Roundtable.

Writing for Project Syndicate, Klaus Schwab of the World Economic Forum (the folks who put on the Davos conference for the establishment’s high flyers) argues for a middle ground between free markets and Chinese-style cronyism.

What kind of capitalism do we want? …we have three models to choose from. The first is “shareholder capitalism,” embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximize its profits. The second model is “state capitalism,” which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China. …the third has the most to recommend it. “Stakeholder capitalism,” a model I first proposed a half-century ago, positions private corporations as trustees of society… We should seize this moment… To that end, the World Economic Forum is releasing a new “Davos Manifesto,” which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field…a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics. …Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society.

Given that per-capita living standards are much lower in China than they are in the United States, I’m baffled that Schwab thinks it’s a good idea to move halfway toward the decrepit Chinese model of cronyism and industrial policy.

Does he think that people in North America and Western Europe should only be twice as rich as people in China instead of four-to-six times richer?

Let’s wrap up. The president of the Business Roundtable just wrote a one-year anniversary review of his group’s campaign for so-called stakeholder capitalism.

It’s been a year since 181 CEOs of America’s largest companies overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return. …Companies have held to their commitments. …many Roundtable companies were making substantial investments in worker training, better wages and benefits, and support for struggling communities. They called for increases in the federal minimum wage and paid family medical leave. …In recent weeks, CEOs have made new commitments to promote racial equality and diversity in their own companies. …Far from undermining shareholders or capitalism, the many actions major corporations are taking to support all stakeholders will pay dividends… Business Roundtable CEOs reject…quick-hit, short-term capitalism. They agree with many of the nation’s largest investors that the health of both companies and capitalism depends on investments in all stakeholders.

Sounds very noble and caring, at least for the folks who don’t understand economics.

Which is why I almost laughed out loud when I saw this tweet, which is based on this article published by the Atlantic. The Roundtable is trying to curry favor with statists, but some folks on the left are smart enough to see that it’s all empty posturing.

So what’s my contribution to this debate?

Most of what I would say is captured in the excerpts above. Simply stated, it’s not a good idea to mix big business with big government.

But I will take this opportunity to unveil another one of my theorems.

P.S. Back in 2012, I criticized the Business Roundtable for embracing tax increases on small businesses, so you can see that the Eleventh Theorem of Government is way overdue.

P.P.S. You can peruse the other ten theorems of government by clicking here.

The Case for Capitalism, Part II

Yesterday, in Part I of this series, we enjoyed a video from the U.K.-based Centre for Economic Education, about how capitalism lifted the world from deprivation and oppression (also see videos by Don Boudreaux and Deirdre McCloskey).

Today, in Part II of the Case for Capitalism, here’s a video from CEE that explains how markets provide you a cup of coffee.

An obvious takeaway from the video is that consumers benefit from global markets, which hopefully helps to explain why free trade is desirable.

But there are four other messages that are even more widely applicable.

1. Capitalism is based on competition, but also should be understood as a system of cooperation.
2. Voluntary exchange means that both buyers and sellers expect to benefit from a transaction.
3. Prices should be set by unfettered markets rather than politicians, regulators, or bureaucrats.
4. Our prosperity is a result of the invisible hand (spontaneous order) rather than central planning.

In other words, the growth-producing concept of classical liberalism (as opposed to the statist version of liberalism that now exists in the United States).

All of which reminds me of this observation by Joseph Schumpeter, an influential economist from the Austrian School.

This quote isn’t as famous as what he said about creative destruction, but it deserves to be highlighted since it succinctly explains how capitalism is the system that delivers big benefits for ordinary people.

P.S. The degree to which nations enjoy convergence (or divergence) is generally a consequence of whether they allow free markets and limited government.

The Case for Capitalism, Part I

This video from Dan Hannan crams 10,000 years of human history into 5 minutes. We learn about the “stationary bandit” of government and find out how our ancestors endured pervasive oppression and misery.

But there’s a happy ending to the story. It’s called capitalism.

There are many useful insights in this video.

We learn why it was important to replace arbitrary government with the “rule of law” so that property rights could be protected and so that people wanting to buy and sell no longer had to get permission from the state.

And once capitalism was unleashed beginning a few hundred years ago, living standards dramatically improved (these videos by Don Boudreaux and Deirdre McCloskey have lots of evidence).

Hannan makes the all-important point that capitalism is the opposite of exploitation. It enriches people, but also liberates them.

And, as indicated by one of my favorite quotes from Walter Williams, it means we help ourselves by helping others.

As Hannan concludes, “the free market is the fairest and justest model yet devised.”

P.S. Not everyone has the same definition of fair and just, so I’ll simply observe that market-oriented nations always and easily out-perform state-controlled economies.

• West Germany vs. East Germany.
• Czechoslovakia vs Austria after World War II.
• Poland after the collapse of communism.
• Chile vs. Argentina vs. Venezuela
• Hong Kong vs. Cuba
• North Korea vs. South Korea
• Cuba vs. Chile
• Hong Kong vs. Argentina
• Singapore vs. Jamaica
• United States vs. Hong Kong and Singapore
• Botswana vs. other African nations

For what it’s worth, nobody on the left has ever come up with a response to my never-answered question.

Joe Biden Humor

Now that Joe Biden has been officially nominated, I should probably augment my analysis of his statist economic agenda.

But it’s also been a long time (almost nine years!) since I last shared some Biden-themed humor, so let’s make that today’s topic.

We’ll start with this campaign poster.

For what it’s worth, I think this visual would have been even better.

That being said, Biden’s propensity for unwanted touching doesn’t seem damaging, perhaps for the reason identified by America’s premiere satire site, Babylon Bee.

Medical experts were excited to announce today that Democrats have achieved herd immunity against sexual assault allegations. …”It’s amazing — the entire Democrat demographic is entirely immune,” said one researcher as he took blood samples from Joe Biden. “After conspiring with the media to squash any accusations that pop up, it seems, over time, Democrats have been able to develop a kind of herd immunity to any allegations.” Biden has been an important case study for medical experts’ work, as he can publicly sniff people’s hair and inappropriately touch many people on camera and still be entirely protected from any accusation whatsoever. His DNA is being studied for a possible breakthrough for other politicians. …Other political parties and at-risk conservatives are being advised to quarantine so as to avoid any allegations until a vaccine is discovered.

There’s more good news for Biden.

He’s been endorsed by Obama.

The Babylon Bee reported on Obama’s endorsement.

Many were worried Obama wasn’t going to endorse Biden, but he came through for the DNC establishment, telling everyone how deeply and personally Biden has touched everyone he has ever worked with. “Many leaders, um, you know, they, um, don’t rub you the right way,” Obama said. “But not Joe. Joe, see, he, um, touches everyone he comes into contact with, whether they want him to or not. …Joe’s campaign is very touching, that’s what I’m, um, here to say. So don’t let a Trump victory sneak up on us — embrace Joe Biden in 2020.”

We’ll wrap up with three more satirical images.

First, the former Vice President is prepared to defend America from foreign attacks.

The final two items target Biden’s alleged forgetfulness.

As usual, I save my favorite item for last.

P.S. You can find a few other anti-Biden jabs here, here, and here.

P.P.S. Sometimes Biden is unintentionally funny.

Time to Shut Down the Ethanol Racket

When I wrote yesterday that Trump’s overall rating on economic policy was “bad,” a few people wrote to complain.

I did acknowledge in the column that it may be too soon to give the current president a grade, but it’s not looking good. He not only has a bad record on big issues such as spending and trade, but he also is prone to cronyist policies in other areas.

Such as goodies for the coal industry.

Such as goodies for the housing lobby.

And goodies for corn growers, which is the topic of today’s column.

But we’re not going to look at traditional agriculture subsidies (which are awful in their own right). Instead we’re going to focus on government handouts that bribe corn growers and others into turning crops into fuel.

This is a policy that’s bad for taxpayers, bad for consumers, bad for the environment, and probably bad for motherhood and apple pie.

The Competitive Enterprise Institute wrote last year about this boondoggle.

President Trump has again sought changes to the Renewable Fuel Standard (RFS)… The previous reform effort granted ethanol producers and corn growers their request to raise the amount of ethanol allowed year-round in gasoline from 10 to 15 percent (E-15)… But this did not create peace. Pro-RFS forces soon demanded both E-15 and fewer small refinery waivers. Now, the administration has announced that, while it will still grant small refinery exemptions, it will reallocate the waived amounts to non-exempt refineries and thus preserve the 15 billion gallon maximum set out in the law. It will also ease the labelling requirements for gas stations selling E-15. …Lost in the debate between the biofuels industry and the petroleum industry is what the RFS means for consumers. Gasoline prices are relatively low right now, but not because of the RFS. And we are always one bad corn crop away from an ethanol-induced price spike. …The proposed changes can only add to the upward pressure on pump prices.

The year before, the Independent Institute criticized Trump’s approach.

…instead of terminating the Renewable Fuel Standard (RFS) — which mandates a sharp increase in renewable fuel consumption by 2022 — the Trump administration has doubled-down on biofuels. President Trump has said that he supports ramping up ethanol production even further by allowing gasoline containing 15 percent ethanol to be sold year-round. Doing so would expand ethanol use and encourage the EPA to ratchet that percentage up in subsequent years. …a comprehensive meta-analysis in the American Journal of Agricultural Economics found the greenhouse gas benefits of ethanol to be almost zero. For other pollutants like nitrogen oxides (NOx) and ozone, ethanol actually is worse than gasoline. Because 40 percent of the nation’s corn crop is used in the production of biofuels, ethanol production also raises food costs. As a result, consumers pay higher prices for beef, milk, poultry and pork, among other items. …Because the RFS moved corn growing to areas that require more water, more fertilizer, and more acreage, prairies and other wild-lands are disappearing, soil is eroding, groundwater is being depleted, and ocean dead zones are expanding. …If ethanol truly were a good substitute for gasoline, no E10 or E15 mandate would be necessary.

Ironically, Trump’s misguided handouts aren’t necessarily buying him any friends.

As reported by Bloomberg, one of the big recipients says it may diversify away from ethanol unless subsidies are increased.

American ethanol makers have for years been reliant on a government policy that mandates biofuel use. But industry stalwart Green Plains Inc. wants to break away from that dependence… The Omaha, Nebraska-based company has lost faith that the ethanol industry will get the support it needs from parts of the Trump administration, said Chief Executive officer Todd Becker. …“We are going to spend half a billion dollars transforming this company to be not dependent on government policy,” Becker said in an interview. The EPA is “no friend of ethanol. They’ve done everything they can to destroy the market for us. They’ve done everything they can to destroy this industry.” …The U.S. ethanol industry was born out of government support. In the 1970s, President Jimmy Carter asked agribusiness leaders to make biofuels… The industry got another boost in 2007, when the Renewable Fuels Standard expanded the mandate to blend ethanol into gasoline.

This takes chutzpah. Ethanol arguably could be the most subsidized product in the United States, yet beneficiaries say they may exit the industry without ever-increasing handouts.

I’m not sure how to react to this supposed threat.

• Should I say, “Here’s your hat, what’s your hurry”?
• Should I channel Clint Eastwood and say, “Go ahead, make my day”?
• Or should I simply say, “Don’t let the door hit you on the way out”?

The bottom line is that ethanol handout were bad policy when they were first created and they are bad policy today. These handouts are misguided when Democrats are in charge, and they’re misguided when Republicans are in charge.

I’d like Trump to switch his position because of a newfound appreciation for free enterprise, but I’ll be happy if he shifts in the right direction simply because he doesn’t appreciate greedy complaints from the ethanol industry.

P.S. Trump isn’t the only Republican who is bad on this issue. Indeed, the GOPers who support free markets – such as Rand Paul and Ted Cruz – may be in the minority of the Party.

Which Party Does Better on the Economy?

The best feature of libertarians is that we are very principled and look at everything through the lens of the non-aggression principle.

By contrast, the worst feature of politics, as explained by the Ninth Theorem of Government, is that it encourages people look at everything through the lens of partisanship.

In other words, there’s a desire to always make your team look good and the other team look bad, even if you have to torture data.

Here’s an example.

In a column for the New York Times, Michael Tomasky asserts that Democratic presidents have a much better track record on the economy than their Republican counterparts.

Mr. Biden and his party’s No. 1 job between now and Election Day: Make it clear that Democrats have been better stewards of the economy — for decades, and by far. Many people don’t believe this. …But it’s true. …the country has done better for decades under Democrats, by nearly every major economic measure. From John Kennedy through Barack Obama — 56 years during which, as it happens, we had a Democratic president for 28 years and a Republican president for 28 — we saw more than 50 million jobs created under Democrats and just 24 million jobs created under Republicans. Even the stock market has performed better under Democratic presidents. …just toting up numbers by the months each party had in power is imprecise. But there’s no better way to do it.

Any decent social scientist will quickly identify are all sorts of problems with Tomasky’s methodology.

• What about the impact of which party has full or partial control of Congress?
• Is it right to blame (or credit) presidents for what happens in their first year or two, before they’ve had a chance to enact and implement new policies?
• Should other variables be measured, such as median household income or labor force participation?

But let’s set aside these concerns, as well as others that can be listed, and accept Tomasky’s numbers. Does this mean that the economy does better when Democrats are in the White House?

That’s certainly a possible interpretation, but it’s far more accurate to say that the economy does better when a president – regardless of party – adopts good policy (or, to be more accurate, if good policy is implemented during their presidency).

I’ve previously ranked presidents based on what happened to the burden of government spending during their tenures. And one thing that stands out is that Republicans seem to be even worse than Democrats – even when looking at what happened to domestic spending (with Reagan and Johnson being the only two exceptions).

And I’ve also graded many of the modern presidents (Richard Nixon, Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, Barack Obama) based on their overall record on economics. If you peruse their performances, you’ll see there’s no obvious connection between good policy and partisan affiliation.

But I’ve never put together a best-to-worst list, so here’s my ranking of every president since Kennedy.

Let me elaborate – and also add some caveats.

For what it’s worth, I don’t think there’s good modern-quality data on JFK (or, to be more accurate, I’ve never searched for it), but I included him since he’s part of Tomasky’s analysis. That being said, he may be ranked too low. Yes, he spent too much money and implemented some bad policies, but he also lowered tax rates and pushed for free trade.

I also think it’s too early to grade Trump, but I included him since I know that will be of interest to readers. As you might imagine, I like what he’s done on taxes and red tape, but his record on other issues is bad – and getting worse. I’m especially concerned about the consequences and impact of the Fed’s easy-money policy, an approach Trump certainly supports.

Johnson and Nixon are unambiguously terrible, while Reagan is the star performer.

Clinton was surprisingly good (feel free to give the credit to Newt Gingrich if you want, but we didn’t need veto overrides to get the good policies of the 1990s).

The rest of the presidents were generally bad. I put them in reverse chronological order since I didn’t see any logical way of differentiating between them.

I can’t resist citing one more segment from Tomasky’s column.

Republican failures are not an unhappy coincidence. They’re a result of conservative governing practice. Republicans no longer fundamentally believe in the workings of government, so they don’t govern well. Their contempt for government is a result of conservative economic theory.

This is nonsense, as should be obvious from what I’ve already written. Republicans do not have a track record of “conservative governing.”

With one exception. We had relatively competent governance from the one GOP president who did have a “contempt for government” (actually, just contempt for big government).

Putting Kids Last at Government Schools

Way before we had a pandemic, I wasn’t a fan of the government school monopoly.

To paraphrase Winston Churchill, never have so many taxpayers paid so much money into a system that produced such mediocre results for so many people.

Now that we have a pandemic, the argument against government-run schools is even stronger. Simply stated the government monopoly is too politicized and too inflexible – and that means the the gap between government schools and private schools (and homeschooling) will be larger than ever.

Today, I want to show how the system is driven by bad ideology and bad incentives.

Let’s look at a recent announcement from the government schools where I live in Fairfax, VA. The bureaucrats don’t like when parents utilize private tutors because they would rather have all students fall behind than have some succeed.

Across the country, many parents are joining together to engage private tutors (who are often school teachers) to provide tutoring or home instruction for small groups of children. While there is no systematic way to track these private efforts, it’s clear that a number of “pandemic pods” or tutoring pods are being established in Fairfax County. …these instructional efforts are not supported by or in any way controlled by FCPS… While FCPS doesn’t and can’t control these private tutoring groups, we do have concerns that they may widen the gap in educational access and equity for all students.

Mike Gonzalez had the same reaction. He, too, was surprised that the bureaucrats would openly state their ideological desire for universal mediocrity.

Fairfax Co. Public Schools wants you to know it is not happy that any children are learning through pods. While FCPS "can’t control these private tutoring groups, we do have concerns that they may widen the gap in educational access and equity."
https://t.co/SPxPgtf7qA

— Mike Gonzalez (@Gundisalvus) August 10, 2020

There are similar problems in other communities surrounding Washington, DC.

In his column for the Washington Examiner, Tim Carney explains how government school bureaucracies – including where he lives in Montgomery County, Maryland – care more about preserving the flow of tax dollars than educational success for kids.

Because public schools will be offering a vastly inferior service this year (remote-only learning), the allies of public schools and their teachers’ unions worry about parents pulling their children into private schools — and so they are trying to take away some of the private schools’ advantage. …after Gov. Larry Hogan struck down a county order barring private schools, one public school teacher wrote a public Facebook post nearly admitting as much: “MCPS parents… Please keep your kids enrolled in MCPS! Loss of funding will be devastating, not only this school year, but in the years to come, when we need to try to increase funding again.” …The public school superintendent in Falls Church City, a small, wealthy municipality just outside of D.C., wrote a similar note warning against “Pandemic Flight.” …Peter Noonan..warned parents that “disenrolling from FCCPS [will] have consequences. FCCPS receives funding from the local Government, the State Government, and the Federal Government based on the numbers of students we have enrolled. If there is an exodus of students from FCCPS, the funding of our schools will decrease.” Notice what’s missing in this letter? Any suggestion that your children will learn just fine through the public schools’ online learning system. …public school administrators know that they are offering an inferior product… Sadly, rather than wanting what’s best for their students, they ask parents to do what will bring more taxpayer money for their schools.

For what it’s worth, I also think teacher unions and school bureaucrats also don’t want parents to experience even a year of private schooling or homeschooling, lest they learn that there are better long-run options for their kids.

P.S. My criticism of the government school monopoly does not in any way imply that teachers are bad people (like all professions and groups, some will be good and some will be bad). It simply means they are in a bad system. Indeed, one of the benefits of school choice is that good teachers will flourish thanks to competition and innovation.

P.P.S. Yes, we have strong evidence from some states and localities in America that school choice produces better educational outcomes. But I always remind people that there’s also global evidence from Sweden, Chile, Canada, and the Netherlands showing good results when competition replaces government education monopolies.

The Make-Believe Postal Service Panic and the Tenth Theorem of Government

Politicians and interest groups periodically fan the flames of temporary panic to push for misguided policy. We’ve already seen three big examples this century.

• The so-called PATRIOT Act was enacted in the feverish aftermath of 9-11, but many of its provisions simply added bureaucracy and gave government new/expanded powers unrelated to fighting terrorism.
• The TARP bailout allegedly was needed to save us for financial collapse, but in reality was a substitute for a policy (FDIC resolution) that would have recapitalized the banking system without bailing out Wall Street.
• Obama’s stimulus scheme had to be enacted to supposedly save the nation from another depression, but unemployment soared beyond administration projections and cronies got rich from boondoggles.

The same thing is now happening with the Postal Service, which ostensibly is on the verge of catastrophic collapse because of an expected increase in mail-in voting and sabotage by the Trump Administration.

The real story, though, is that bureaucracy has been losing money at a rapid pace for years and the only sensible solution is privatization. But that would upset the various postal unions and related interest groups, so they’ve created a make-believe crisis in hopes of getting more cash from taxpayers.

And this has nothing to do with Trump vs. Biden.

Let’s look at some rational voices on this topic, starting with this column by Charles Lane of the anti-Trump Washington Post.

Harder to account for is the progressive left’s idealization of the USPS, which began well before the uproar over new Postmaster General Louis DeJoy’s cost-cutting and its alleged impact on election mail. …when you look at what the agency actually does, a lot of it turns out to be a federally underwritten service for — profit-seeking businesses.Of the 142.6 billion pieces of mail of all kinds that the USPS handled in 2019, 53 percent was advertising material, a.k.a. junk mail, up from 48 percent in 2010. Junk mail makes up an even bigger share — 58 percent — of what individual households receive. …Companies pay a special rate, 19 cents apiece, to send these items (in bulk), as opposed to the 55 cents for a first-class stamp. …Some progressives are stuck in the pre-Internet age. Last week, Sen. Bernie Sanders (I-Vt.) said, apropos alleged mail delays: “I am not exaggerating when I say this is a life-and-death situation. The Post Office…delivers Social Security checks to seniors who rely on those benefits to survive.” He is exaggerating — a lot. Over 99 percent of all Social Security payments are sent by the more secure route of direct deposit; a 2013 law mandates it. …Crying “privatization” is the perennial scare tactic of progressives who oppose postal reform. That’s an odd one, too: Several European countries and Japan…have either fully or partially privatized their postal services. Actually, privatization is highly unlikely in the United States, given resistance from the two key lobbies — junk mailers and postal unions — that most influence Congress on this issue. …Something must be done to stem the Postal Service’s losses, which have totaled $83.1 billion since 2006, and to reduce its unfunded pension and health-care liabilities, which exceed $120 billion.

Here’s a twitter thread debunking some of the political hysteria about missing mailboxes.

Turns out the Washington Post uncovered the Great Mailbox Conspiracy ELEVEN YEARS AGO!

2009: "…half of the blue boxes in the Washington area have disappeared in the last nine years, and 200,000 nationwide have been plucked up in the last 20 years, leaving 175,000 total." pic.twitter.com/oLYV8rbEYn

— Jeryl Bier (@JerylBier) August 16, 2020

And how about this column by Nick Gillespie of the anti-Trump Reason magazine.

By now you’ve probably heard that President Donald Trump and Postmaster General Louis DeJoy “are sabotaging democracy in plain sight” through a mix of nefarious ploys, ranging from removing “blue Post Office drop boxes” to scrapping mail-sorting machines to allegedly mandating a slowdown in delivering the mail. …The truth is far less incendiary… Here’s a little bit of math that should give voters succor. In 2016, about 140 million total votes were cast in the presidential election…with “nearly 24 percent…cast using by-mail absentee voting.” …Assume, for the sake of argument, that the same number of votes will be cast this year as in 2016. Even if all voters used the mail and posted their ballots on exactly the same day, that would comprise only 30 percent of the amount of mail the USPS says it processes every single day. So if the USPS screws up delivering votes in a timely and efficient manner this fall, it won’t be because of any sinister actions by the White House. It will be because of longstanding, well-documented managerial and cultural problems… For those who are interested in the post office’s chronically bad performance and “unsustainable” situation, the Government Accountability Office (GAO) has produced a long list of studies on where the problems come from and how they might be addressed. The short version is that Congress has blocked all sorts of serious reforms to an operation that has seen a 33 percent decline in mail volume since 2006.

And here’s another twitter thread that’s worth a look.

OK so everyone has seen the "viral" photo going around of the piles of mailboxes in Wisconsin being used as evidence that Trump is sabotaging USPS. Problem is, they have been there for years: Hartford Finishing Inc. powder coats and refurbishes the old mailboxes. (1/8) pic.twitter.com/HQpAprWxoK

— Gary He (@garyhe) August 17, 2020

 

Or what about this article by Jack Shafer from (probably anti-Trump) Politico.

The USPS really is hurting finanically, and really is worried about delivering ballots on time. It’s legitimate to worry about postal delays botching the vote, if a mass of votes are cast by mail just before Election Day. But don’t extrapolate from news accounts, USPS union protestations and candidate carping… the USPS has sent letters to 46 states expressing its doubts about delivering all the ballots in time to be counted. But, as the Washingtonn Post also mentioned in its story, those letters were in the works before Trump’s new postmaster general took office. …What about those vanishing USPS mail collection boxes? As it turns out, the USPS has been culling the boxes since 2000, when their numbers peaked and 365,000 of them stood sentinel on U.S. streets. Today, their numbers have dwindled to 142,000. Why has the USPS deleted them? Because the volume of first-class has nose-dived.

So what’s actually going on?

As I noted at the beginning of this column, we’re getting scammed. The folks who benefit from the current system want to create a sense of panic so they can get a big bailout for the Postal Service.

The Wall Street Journal (which isn’t anti-Trump, but understands how Washington works) opined accurately on what’s really happening.

Mrs. Pelosi is trying to put on a political show, starring Democrats as the saviors of the post office. She says she wants to pass a bill that “prohibits the Postal Service from implementing any changes to operations or level of service it had in place on January 1.” Also in the mix may be a $25 billion cash infusion. Then Chuck Schumer will demand that the Senate come back to town for the same vote. By the way the letter-carriers union endorsed Joe Biden on the weekend.

My modest contribution to this discussion is to unveil aTenth Theorem of Government.

I’ll close with a prediction that politicians at some point in the future will manufacture a crisis (probably about deficits and debt) in order to impose a value-added tax.

P.S. Here are the nine previous 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 of Government” explains how politics often trump principles.

 

The Truth about Income Mobility

In 2018, I shared a video from Professor Russ Roberts (a.k.a., @econtalker) on the economic status of the middle class, followed by a video last year on whether the rich are the only ones earning more income.

Today, we’ll look at his video on household income and mobility.

All of his videos are models of clarity, but nonetheless they require close attention because they are filled with so much useful information.

You’ll learn that some people manipulate numbers to paint a grim picture about economic mobility in America. But when you do honest apples-to-apples comparisons, you’ll see that capitalism is capable of delivering big benefits to ordinary people so long as it has enough breathing room to function.

In other words, we’re getting richer – as I wrote last year.

And, as I pointed out in an interview on CNBC, we should care about growth and opportunity instead of fretting whether some people get richer faster than other people get richer.

I’m writing on this topic today because there’s a new report from the Brookings Institution, authored by Stephen Rose, that looks at income trends. And it’s methodologically sound because it follows the same people over time, thus allowing the all-important apples-to-apples comparisons.

…the PSID panel data follow the experiences of the same respondents year after year. Even from one year to the next, many individuals’ incomes change significantly. This is particularly true at the tails of the distribution: nearly one-third of individuals in the bottom and top income quintiles are there temporarily because of an unexpected positive or negative event (Rose 1994). Multiyear incomes are therefore more equal than single-year incomes. …Piketty and Saez…argue that middle-class incomes have been stagnating. But their cross-sectional approach does not reflect individual experiences because they are comparing “similarly-situated people” and not looking at the experiences of the same individuals over time.

And what does Professor Rose find?

He points out that there are now a lot more “upper middle class” people in America (his data are adjusted for inflation, which is another way of ensuring apples-to-apples comparisons).

…the higher income classes expanded significantly during the first period. Between 1967 and 1981, the upper middle class tripled in size (from 6% to 18%) and the MMC grew by 3 percentage points (from 47% to 50%). Offsetting these gains were a corresponding shrinkage of the lower middle class (LMC) from 31% to 20% and the poor/near-poor (PNP) from 16% to 11%. In the later period (2002 to 2016), the changes were in the same direction, but more modest. The upper middle class (UMC) grew by 4 percentage points, the size of the MMC declined by 3 points, while the shares of the LMC and PNP were largely unchanged. In previous work, I argued that the differences between the UMC and those with lower incomes were the key driver of rising inequality.

Since Brookings is a left-of-center think tank, it’s not a surprise that Rose has a somewhat negative interpretation (“rising inequality”) of this data.

But he’s actually giving us good news.

Robert Samuelson, in his column for the Washington Post, wrote about Professor Rose’s new study and put together a table based on his data.

And I’ve augmented the table with some arrows to call attention to what’s happened in the 50 years between 1967 and 2016. The bottom line that America now has fewer lower-income and middle-income people and a lot more upper-income people.

Perhaps it is true that we have more inequality today than we did in 1967, but only very twisted people (such as those who work for the IMF) would want to erase all the gains we’ve enjoyed since that time.

To be sure, all income groups could do even better with pro-growth policies such as tax reform and spending restraint. And we also could adopt policies that are especially beneficial for the less fortunate, such as school choice and licensing reform.

Sadly, the politicians who rant and rave about inequality are more interested in punishing the rich rather than helping the poor.

P.S. Margaret Thatcher debunked the left’s view of inequality in her farewell remarks to Parliament.

P.P.S. With apologies to Jonathan Swift, here’s David Azerrad’s “modest proposal” to end inequality.

Communism Humor

From an economic perspective, socialism and communism are the same. They’re both based on government ownership, central planning, and price controls.

From a political perspective, however, there’s a difference. Communism is an authoritarian form of government, while socialism can be the outcome of the democratic process.

From a humor perspective, it’s easy (and fun) to mock the economic failure of both socialism and communism, but the jokes targeting the latter often include satire about oppression.

And you’ll see some of that in today’s column, which contains new examples of humor about communism. For instance, here’s a comparison of theory and reality (just like the last image of this column).

But communists don’t always murder people.

Sometimes, as you can see in this next example, they starve people (also the point made by this brutal tweet, and also the last two images in this post).

Next, we have pictures of three things that are associated with millions of deaths.

This next example of satire reminds me of a test where you’re supposed to identify the “one of these things is not like the others.”

Now let’s look at the communist version of Cosmopolitan (they could have picked Teen Vogue, but the disgusting morons at that magazine actually are pro-communist).

Last but not least, here’s an image that’s perfect for the Antifa crowd.

And click here if you want the economic version.

P.S. My entire collection of socialism/communism humor is here. My all-time favorite communism joke is this tweet from @fathercommunism.

The Sensible Choice Solution to the School Reopening Controversy

One month ago, I wrote that expanded school choice might be a silver lining to the dark cloud of corornavirus.

This issue is getting more heated, as this Reason video explains.

When I’ve written in the past about the issue of school choice, I’ve focused on the superior educational outcomes of private schools (and homeschooling as well) compared to the subpar performance of government schools.

Let’s revisit the topic, looking specifically at the debate over whether schools should reopen.

• Some people argue that children will suffer long-term harm because of diminished educational outcomes if schools are closed.
• Others argue that there may be additional infections if schools are opened, risking the lives of children or members of their families.

At the risk of sounding like a mealy-mouthed politician, both sides are right.

Simply stated, there are potential downsides regardless of which option is selected.

And it’s quite likely that the right approach for some families will be the wrong approach for other families.

This is a very powerful argument for the kind of decentralized decision-making that is only possible with school choice.

• Some parents may want a traditional in-a-classroom experience for their children.
• Some parents may want a blended in-person/online approach for their kids.
• Some parents may want education for their kids to be entirely online.
• Some parents may want to choose homeschooling for their children.
• Some parents may want to experiment with new approaches such as pod teaching.

And the only way to satisfy these disparate desires is to break the government’s monopoly on education.

Let’s look at some recent analysis.

Writing for National Review, Cathy Ruse and Tony Perkins explain why we need alternatives to a one-size-fits-all government monopoly.

…the great American entrepreneurial spirit is awakening as parents are forced to rethink education for their children. And that is to the benefit of children and the nation. …There is no better time to make a change than right now, when public education is in chaos. Parent resource groups are forming to help families make an exit strategy and find the best education option for their children. Today, there are more options than ever. …Homeschooling continues to be a growing trend… “Hybrid homeschooling” is a new option, where children are homeschooled part of the week and learn in a more traditional school setting with other students for the rest. The most exciting new parent solution is the “pandemic pod,” a return to where families in one neighborhood or social circle hire a teacher to instruct their small group of children. …The last piece of the puzzle to set families truly free to make the best education decisions for their children is for states to set free public-education funds. …Imagine the possibilities if the primary educators of children — their parents — were given the freedom to spend that money to acquire the best education for their child. ..Let’s rethink, not rotely reopen. If there ever was a time when parent power could defeat the power and monopoly of the education elites, that time is now. Let freedom ring! 

J.D. Tuccille discussed the options, including homeschooling, in a column for Reason.

Chicago Public Schools became the latest large school district to opt for online-only lessons in the fall. …it leaves a lot of Chicago families unhappy and—like their counterparts around the country—heading for the exits, in search of options that better suit their needs now and in the future. …That leaves even many families favoring online classes as dissatisfied as those preferring in-person learning—and not just in Chicago. Across the country, there has been a surge in interest in traditional alternatives such as private schools as well as homeschooling, microschools (which essentially reimagine one-room schools for the modern world), and learning pods (in which families pool kids and resources). …the lines are blurry among the various categories of DIY education. But why shouldn’t they be blurry? Families aren’t interested in imposing rigid models on their kids; they’re trying to educate their children and adopting whatever tools and techniques get the job done. …Now, “23 percent of families who had children attending traditional public schools say they currently plan to send their children to another type of school when the lockdowns are over,” according to some admittedly unscientific polling… “Notably, 15 percent of respondents said they would choose to homeschool their children when schools reopen.”

As you might expect, the unions representing teachers from government schools have a much different perspective.

As the Wall Street Journal recently explained in an editorial, they’re using the crisis as an excuse to demand more money.

…teachers unions seem to think it’s…an opportunity…to squeeze more money from taxpayers and put their private and public charter school competition out of business. …an alliance of teachers unions and progressive groups sponsored what they called a “national day of resistance” around the country listing their demands before returning to the classroom. They include…canceling rents and mortgages, a moratorium on evictions/foreclosures, providing direct cash assistance… Moratorium on new charter or voucher programs and standardized testing…federal money to support the reopening funded by taxing billionaires and Wall Street” …If there’s a silver lining here, it’s that Americans are getting a closer look at the true, self-interested character of today’s teachers unions. …The proper political response should be to give taxpayer dollars to parents to decide where and how to educate their children. If parents want to use the money for private schools that are open, or for new forms of home instruction, they should have that right.

By the way, it’s not just that teacher unions want more money.

They also deliver an inferior product.

And a politicized product as well. Read this thread to be horrified about what is being “taught” to children trapped in government schools.

1/
This is a screenshot of people saying 2+2=5. You read that right…2+2=5.

Among them are teachers, educators, and professors who plan on teaching this stuff to your children. So let's talk about what's going on here, why they're doing this, and how we can stop it.

A thread: pic.twitter.com/3CY2IcsahY

— Wokal Distance (@wokal_distance) August 4, 2020

Let’s close with a very appropriate cartoon.

P.S. School choice doesn’t automatically mean every child will be an educational success, but evidence from Sweden, Chile, Canada, and the Netherlands shows good results when competition replaces government education monopolies.

P.P.S. Getting rid of the Department of Education would be a good idea, but the battle for school choice is largely won and lost on the state and local level.

 

Anti-Keynesian Growth after World War II

Last week, I shared some data showing how the economy enjoyed a strong recovery from recession in the early 1920s when President Warren Harding cut government spending.

(And these were genuine cuts, not the nonsense we get from today’s politicians, who claim they’ve cut spending simply because the budget increases by 5 percent rather than 7 percent.)

What happened nearly 100 years ago is very relevant today since we still have advocates of Keynesian economics who claim that more spending (especially debt-financed spending) is a recipe for more growth.

To show why this view is misguided, let’s now look at what happened in the 1940s after World War II came to an end.

In a column for today’s Wall Street Journal, Professor Richard Vedder explains that the Keynesians predicted economic disaster because of big reductions in government spending.

…many Americans assumed the end of the war would mean a resumption of the Depression, which was cut off by the World War II military buildup. In the middle of the fighting, America’s leading Keynesian economist, Alvin Hansen of Harvard, said: “When the war is over, the government cannot just disband the Army, close down munitions factories, stop building ships, and remove economic controls.” …When the sudden end of combat became apparent in late August 1945, economist Everett Hagen predicted that the unemployment rate in the first quarter of 1946 would be 14.8%.

So what actually happened?

Vedder points out that the Keynesian predictions of massive unemployment were wildly inaccurate.

Millions of military personnel did become jobless within months and defense spending plummeted, putting more out of work. In June 1946 federal employment was almost precisely 10 million less than a year earlier. Yet the sharp rise in overall unemployment didn’t occur. The total unemployment rate for 1946 was 3.9%… Perhaps most interesting for today, all this occurred as the U.S. moved from an extremely expansionary fiscal policy—with budget deficits equal to almost 25% of gross domestic product in 1944 (the equivalent of more than $5 trillion today)—to an extremely contractionary one. The U.S. by 1947 was running a budget surplus exceeding 5% of output—the equivalent of more than $1 trillion today. …This was the complete reverse of the expectation of the newly dominant Keynesian economists.

In the following chart, you can see the numbers from the Office of Management and Budget’s Historical Tables (Table 1.2), which show that fiscal policy between 1945 and 1948 was very contractionary, at least as defined by the Keynesians.

There definitely were huge spending cuts (the real kind, not the fake kind) during those years, and big deficits also became big surpluses.

Professor Vedder’s column explained that this anti-Keynesian policy didn’t produce mass unemployment.

But what about economic growth?

Well, you’ll see in the chart below the data from the Bureau of Economic Analysis for the 1945-48 period. There was a recession in 1946, which could be interpreted as evidence for Keynesianism.

But then look what happened in the next couple of years. There were more budget cuts, deficits became surpluses, and the economy enjoyed a strong rebound.

According to Keynesian theory, these two charts can’t exist. There can’t be an economic recovery when spending and deficits are falling.

Yet that’s exactly what happened after World War II (just as it happened under Harding, as Thomas Sowell observed).

Maybe, just maybe, Keynesianism is simply wrong. Maybe it’s nothing more than the economic version of a perpetual motion machine?

P.S. It’s also worth noting that huge increases in spending and debt under Hoover and Roosevelt didn’t produce good results in the 1930s.

A Primer on the Laffer Curve

Last week, I gave a presentation on the Laffer Curve to a seminar organized by the New Economic School in the nation of Georgia.

A major goal was to help students understand that you can’t figure out how changes in tax rates affect tax revenues without also figuring out how changes in tax rates affect taxable income.

As you might expect, I showed the students a visual depiction of the Laffer Curve, explaining that the government won’t collect any revenue if the tax rate is zero (the left point of the horizontal axis), but also pointing out that the government won’t collect any revenue if tax rates are 100 percent (the right point on the horizontal axis).

The curve between those two points shows how much tax is collected at various tax rates.

The upward-sloping part of the curve shows the “region of increasing revenue” (i.e., where higher tax rates produce more revenue) and the downward-sloping part of the curve shows the “region of declining revenue” (i.e., where higher tax rates produce less revenue).

I noted in my remarks that this is not a controversial concept.

Indeed, I’d wager that every economist in the world will agree.

Just in case you think I’m exaggerating, you can see in this video that even Paul Krugman agrees that there is a Laffer Curve.

Needless to say, this doesn’t mean that we agree on the shape of the Laffer Curve.

Even more important, we presumably don’t agree on the ideal point on the Laffer Curve.

I’m guessing he would want to be at the revenue-maximizing point, whereas I explained in the presentation that it’s much better to at the growth-maximizing point.

To show why this is an important distinction, I specifically cited research from two economists (one from the University of Chicago and one from the Federal Reserve) in hopes of getting students to understand that higher tax rates will destroy a lot of private income for every dollar of additional revenue that politicians will collect.

If you look at the nearby image, you’ll see that’s especially true for taxes on “capital” since households have much more control over the timing, level, and composition of business and investment income.

Maybe I’m just a wild-eyed libertarian, but I don’t think it’s a good idea to destroy lots of private income just so politicians get a bit of extra revenue to spend.

This does not mean, by the way, that the Laffer Curve is a panacea, or some sort of free lunch.

I should have shown the students this one-minute video clip of me pointing out that it’s only in rare circumstances that a tax cut generates enough additional growth (and therefore enough additional taxable income) to be self-financing.

To be sure, self-financing tax cuts do exist.

In the presentation, I shared the IRS data showing that the federal government collected fives times as much money from the rich after President Reagan reduced the top tax rate from 70 percent to 28 percent.

And I also shared the OECD data showing that industrialized nations are collecting more revenue from income taxes today, as a share of economic output, than they were back in 1980 when top tax rates on personal and corporate income were much higher.

And I also could have cited interesting results from Canada, Denmark, Hungary, Ireland, Italy, Portugal, Russia, France, and the United Kingdom.

I’ll close by recycling my three-part video series from 2008 on the Laffer Curve (assuming you’re not already tired of my voice after the 22-minute presentation at the start of today’s column).

The first video discusses the theory.

The second video looks at the evidence.

And the third video shines a spotlight on the Joint Committee on Taxation’s primitive methodology for producing revenue estimates.

The good news is that the Joint Committee on Taxation has been dragged kicking and screaming in the right direction since 2008, so the present process for estimating the revenue impact of change in tax policy is somewhat more accurate.

P.S. Here’s my response to Matt Yglesias’ supposed debunking of the Laffer Curve.

P.P.S. I used to think my friends on the left could be persuaded since they presumably don’t want tax rates to be so high that revenues decline. But it seems many of them actually are motivated by a desire to punish success rather than a desire to maximize revenue for government.

The Economic Damage of Wealth Taxation

Speculating about tax policy in 2021, with Washington potentially being controlling by Joe Biden, Chuck Schumer, and Nancy Pelosi, there are four points to consider.

1. The bad news is that Joe Biden has endorsed a wide range of punitive tax increases.
2. The good news is that Joe Biden has not endorsed a wealth tax, which is one of the most damaging ways – on a per-dollar raised basis – for Washington to collect more revenue.
3. The worse news is that the additional spending desired by Democrats is much greater than Biden’s proposed tax increases, which means there will be significant pressures for additional sources of money.
4. The worst news is that the class-warfare mentality on the left means the additional tax increases will target successful entrepreneurs, investors, innovators, and business owners – which means a wealth tax is a very real threat.

Let’s consider what would happen if this odious example of double taxation was imposed in the United States.

Two scholars from Rice University, John Diamond and George Zodrow, produced a study for the Center for Freedom and Prosperity on the economic impact of a wealth tax.

They based their analysis on the plan proposed by Senator Elizabeth Warren, which is probably the most realistic option since Biden (assuming he wins the election) presumably won’t choose the more radical plan proposed by Senator Bernie Sanders.

They have a sophisticated model of the U.S. economy. Here’s their simplified description of how a wealth tax would harm incentives for productive behavior.

The most direct effect operates through the reduction in wealth of the affected taxpayers, including the reduction in accumulated wealth over time. Although such a reduction in wealth is, for at least some proponents of the wealth tax, a desirable result, the associated reduction in investment and thus in the capital stock over time will have deleterious effects, reducing labor productivity and thus wage income as well as economic output. …A wealth tax would also affect saving by changing the relative prices of current and future consumption. In the standard life-cycle model of household saving, a wealth tax effectively increases the price of future consumption by lowering the after-tax return to saving, creating a tax bias favoring current consumption and thus reducing saving. … we should note that the apparently low tax rates under the typical wealth tax are misleading if they are compared to income tax rates imposed on capital income, and the capital income tax rates that are analogous to wealth tax rates are often in excess of 100 percent. …For example, with a 1 percent wealth tax and a Treasury bond earning 2 percent, the effective income tax rate associated with the wealth tax is 50 percent; with a 2 percent tax rate, the effective income tax rate increases to 100 percent.

And here are the empirical findings from the report.

We compare the macroeconomic effects of the policy change to the values that would have occurred in the absence of any changes — that is, under a current law long run scenario… The macroeconomic effects of the wealth tax are shown in Table 1. Because the wealth tax reduces the after-tax return to saving and investment and increases the cost of capital to firms, it reduces saving and investment and, over time, reduces the capital stock. Investment declines initially by 13.6 percent…and declines by 4.7 percent in the long run. The total capital stock declines gradually to a level 3.5 percent lower ten years after enactment and 3.7 percent lower in the long run… The smaller capital stock results in decreased labor productivity… The demand for labor falls as the capital stock declines, and the supply of labor falls as households receive larger transfer payments financed by the wealth tax revenues… Hours worked decrease initially by 1.1 percent and decline by 1.5 percent in the long run. …the initial decline in hours worked of 1.1 percent would be equivalent to a decline in employment of approximately 1.8 million jobs initially. The declines in the capital stock and labor supply imply that GDP declines as well, by 2.2 percent 5 years after enactment and by 2.7 percent in the long run.

Here’s the table mentioned in the above excerpt. At the risk of understatement, these are not favorable results.

Other detailed studies on wealth taxation also find very negative results.

The Tax Foundation’s study, authored by Huaqun Li and Karl Smith, also is worth perusing. For purposes of today’s analysis, I’ll simply share one of the tables from the report, which echoes the point about how “low” rates of wealth taxation actually result in very high tax rates on saving and investment.

The American Action Forum also released a study.

Authored by Douglas Holtz-Eakin and Gordon Gray, it’s filled with helpful information. The part that deserves the most attention is this table showing how a wealth tax on the rich results in lost wages for everyone else.

Yes, the rich definitely lose out because their net wealth decreases.

But presumably the rest of us are more concerned about the fact that lower levels of saving and investment reduce labor income for ordinary people.

The bottom line is that wealth taxes are very misguided, assuming the goal is a prosperous and competitive America.

P.S. One obvious effect of wealth taxation, which is mentioned in the study from the Center for Freedom and Prosperity, is that some rich people will become tax expatriates and move to jurisdictions (not just places such as Monaco, Bermuda, or the Cayman Islands, but any of the other 200-plus nations don’t tax wealth) where politicians don’t engage in class warfare.

A Video Primer on Austrian Economics

I went to George Mason University for my Ph.D. specifically because of my interest in both “public choice” and “Austrian theory.”

The former deals with analyzing how politicians, bureaucrats, and voters really behave (as opposed to the naive view you may have learned in a civics class), and the latter refers to a particular type of economic analysis that was developed by scholars (mostly based in Vienna) in the late 1800s and early 1900s.

I occasionally put in a plug for Austrian economics, largely because it has a lot to offer when analyzing business cycles, monetary policy, and entrepreneurship (it is generally similar to other market-friendly schools of thought when looking at other issues, such as public finance, trade, and regulation).

But I’ve never done a column explaining Austrian economics. It’s time to rectify that oversight thanks to a 7-part video series narrated by Professor Steve Horwitz.

Part I discusses the marginal revolution (which supplanted the labor theory of value) and notes that Austrians emphasize subjective value.

Analyzing behavior “on the margin” is important for good economics. It’s why, for instance, that we should focus primarily on marginal tax rates rather than average tax rates.

In Part II, Steve discusses how Ludwig von Mises showed back in 1920 that genuine socialism (rather than Nordic-style redistributionism, which didn’t even exist back then) was not feasible in part because governments have no rational way of setting prices and sensibly allocating resources.

If you want an amusing version of what you just watched, check out this video I shared last year.

In Part III, Steve elaborates on the role of knowledge, citing the important work of Friedrich Hayek on the importance of decentralization, prices, and private property.

One of the implications of this work is that central planning is not feasible.

In Part IV, Steve discusses Israel Kirzner’s work on entrepreneurship, which Austrian scholars point out is the source of innovation.

Part V is Steve’s explanation of how money evolved via spontaneous order.

The above video focuses on the origin of metallic money. It’s also worth noting that paper money was developed by the private sector.

In Part VI, Steve discusses the Austrian theory of business cycles, which focuses on how monetary policy can cause distortions that lead to booms and busts. And a key insight is that the false booms make busts inevitable.

Another insight from the above video is that the best response to a downturn is to do nothing, even though that’s not a popular answer for politicians – particularly compared to the Keynesian prescription of more spending.

In the final video, Part VII, Steve explains the Austrian view of marginal utility.

Here’s a bonus video featuring Tyler Cowen’s analysis of the Austrian theory of business cycles (the topic Steve covered in Part VI)

P.S. I shared a longer video on the Austrian theory of the business cycle back in 2013.

P.P.S. And no discussion of Austrian economics is complete without sharing Part I and Part II of the Hayek vs-Keynes rap contest.

Will America Learn from Japan’s Fiscal Decline?

Compared to most of the world, Japan is a rich country. But it’s important to understand that Japan became rich when the burden of government was very small and there was no welfare state.

Indeed, as recently as 1970, Japan’s fiscal policy was rated by Economic Freedom of the World as being better than what exists today in Hong Kong.

Unfortunately, the country has since moved in the wrong direction. Back in 2016, I shared the “most depressing chart about Japan” because it showed that the overall tax burden doubled in just 45 years.

As you might expect, that rising tax burden was accompanied by a rising burden of government spending (fueled in part by enactment of a value-added tax).

And that has not been a good combination for the Japanese economy, as Douglas Carr explains in an article for National Review.

From 1993 to 2019, the U.S. averaged 2.6 percent growth, …far ahead of Japan’s meager 0.9 percent. …What happened? Big government happened… Japanese government spending was just 17.5 percent of the country’s GDP in 1960 but has grown, as illustrated below, to 38.8 percent of GDP today. …the island nation’s growth never recovered. The theory that government spending boosts long-term growth has failed… What government spending does is crowd out investment.

Amen. Japan has become a parody of Keynesian spending.

Here’s a chart from Mr. Carr’s article, which could be entitled “the other most depressing chart about Japan.”

As you can see, the burden of government spending began to climb about 1970 and is now represents a bigger drag on their economy than what we’re enduring in the United States.

Unfortunately, the United States is soon going to follow Japan in that wrong direction according to fiscal projections from the Congressional Budget Office.

Carr warns that bigger government in America won’t work any better than big government in Japan.

Rather than a problem confined to the other side of the world, Japan’s death spiral is a pointed warning to the U.S. The U.S. and Japanese economies are on the same trajectory; Japan is simply further along the big-government, low-growth path. …The United States is at risk of entering a Japanese death spiral.

Here’s another chart from the article showing the inverse relationship between government spending and economic growth.

Moreover, the U.S. numbers may be even worse because of coronavirus-related spending and whatever new handouts that might be created after the election.

The negative relationship of government spending with growth and investment holds with adjustments for cyclical influences such as using ten-year averages or the Congressional Budget Office’s estimates of cyclically adjusted U.S. government spending. CBO data highlight how close the U.S. is to a Japanese-style death spiral. …Of course, CBO’s recent forecast was prepared before the coronavirus shock and does not incorporate spending by a new Democratic government, so this dismal outlook is likely to worsen.

So what’s the solution? Can the United States avoid a Greek-style future?

The author explains how America can be saved.

Boosting growth means restraining government. Restraining government means reengineering entitlements… Economically, it shouldn’t be too difficult to do better. We have an insolvent, low-return government-retirement program along with an insolvent retiree-health program — part of a Rube Goldberg health-care system.

He’s right. To avoid stagnation and decline, we desperately need spending restraint and genuine entitlement reform in the United States.

Sadly, Trump is on the wrong side on that issue and Biden wants to add fuel to the fire by making the programs even bigger.

P.S. Here’s another depressing chart about Japan.

P.P.S. Unsurprisingly, the OECD and IMF have been cheerleading for Japan’s fiscal decline.

P.P.P.S. Japan’s government may win the prize for the strangest regulation and the prize for the most useless government giveaway.

Being Libertarian

Back in 2018, I shared five images that capture what it means to be libertarian.

Let’s do the same thing today, except we’ll first start with a video that is interesting overall, but has some specific insights about libertarians from 5:45-7:20.

Now let’s look at our five new images.

We’ll start with the all-important point that there’s a big difference between wanting good things and thinking that government is the way to achieve good things.

Our second contribution shows the libertarian claim that they are the philosophical descendants of America’s Founders (even Alexander Hamilton).

 

It’s like they knew what they were doing. from Libertarian

Our third contribution is from Reddit’s libertarian page and it captures the movement’s laissez-faire spirit.

Next we have another reminder that government was the most dangerous entity in the 20th century (and presumably in all history).

And supposedly more government is the solution to our problems? from Libertarian

Last but not least, here’s a powerful set of images that underscores the giant difference between legality and morality.

P.S. There’s another interesting video on Jonathan Haidt’s analysis of libertarians at the end of this column. And you can read more of his analysis here.

P.P.S. You can learn more about libertarian self-identification here and here.

Evidence from Italy: Less Regulation = More Jobs and Higher Earnings

There are all sorts of regulations, some of which affect the entire economy and some of which target certain sectors. Moreover, regulations vary widely since – depending on the example – they may tell people and business what to do, how to do it, when to do it, and who to do it with.

This is why it’s probably best to think of government red tape as an obstacle course that increases the difficulty of engaging in commerce.

An expensive obstacle course.

Some new research published by Italy’s central bank gives us an opportunity to understand the consequences of red tape.

The study, authored by Lucia Rizzica, Giacomo Roma, and Gabriele Rovigatti, looked at a real-world example of product market regulation (PMR) governing retail hours in Italy.

In this paper we focus on how the regulation of shops opening hours affects the relevant market size and structure. This dimension of PMR has traditionally been a controversial issue in the policy debate, as it involves social, political, economic, and even religious considerations. …we tackle these questions empirically and estimate the effects of full deregulation in shop opening hours on the level and composition of employment and on the number of shops and their size distribution…we focus on Italy and build a novel dataset of Italian municipalities 2007-2016, including their regulatory status, and exploit the variation provided by the staggered implementation at the municipal level of a deregulation reform enacted from1998 onwards.

Here’s a visual from the study, showing the variation over time in the number of municipalities with no regulation, medium regulation, and heavy regulation.

The good news is that Italy actually got rid of rules dictating when stores could be open and this gave the economists an opportunity to measure what happened.

Our estimates show that, in the context of a general contraction of the retail sector and of the economy as a whole, deregulating shops opening hours helped lowering the decrease in both the number of workers and establishments, with an estimated positive impact of about 3% and 2%, respectively. …On top of it, individual-based estimates show that the sector’s labor force structure changed towards a higher prevalence of employees over self-employed, together with a general increase in the number of hours worked and earnings of employees, especially of those with permanent contracts. Our results are robust to a number of checks… In Table 2 we present our baseline results. In columns (1)-(2) we report the estimates of the liberalization effect on the number of workers, and in columns (3)-(4) those on the number of plants in each municipality. …the resulting estimated effect of liberalization in the newly liberalized municipalities is a 3.4% increase in the number of individuals working in the wholesale and retail sector, and a 2.1% increase in the number of shops. …Finally, we show that the reform also had a positive effect on the activity of complementary services, such as restaurants and financial services and, overall, on total employment in affected areas.

For wonky readers, here’s the table mentioned in the above excerpt.

So what’s the bottom line?

…from a policy perspective, our results provide support to the idea that a more flexible regulation of the business environment boosts economic growth… We find no evidence that this leads to a worsening of employment conditions, on the contrary permanent dependent workers enjoyed an increase in their earnings.

It’s great to see that deregulation produced more jobs and higher earnings.

But one thing that we don’t find in the study, unfortunately, is any estimate of how deregulation also benefited consumers thanks to lower prices and greater convenience.

In other words, eliminating or reducing red tape is a win-win situation for just about everybody (with the only exception being the cronyists who gain undeserved advantages because of regulation).

P.S. While I’m glad that Italy got rid of rules limiting retail hours, the country – as measured by the World Bank – still has a lot of needless red tape.

OECD Research Acknowledges Big Benefits from Federalism

Largely because of my support for jurisdictional competition, I’m a big fan of federalism.

Simply stated, our liberties are better protected when there’s decentralization since politicians are less like to over-tax and over-spend when they know potential victims of plunder have the option of moving across a border.

Indeed, I cited some academic research back in 2012 which showed that there as less economy-weakening redistribution in nations with genuine federalism (see, for instance, how Vermont politicians were forced to backtrack when they try to impose government-run healthcare).

Now let’s look at some additional scholarly evidence. A study published by the OECD, authored by Hansjörg Blöchliger, Balázs Égert and Kaja Fredriksen, investigates the impact of federalism on outcomes in developed nations.

Here are the key findings from the abstract.

This paper presents empirical research on the potential effects of fiscal decentralisation on a set of outcomes such as GDP, productivity, public investment and school performance. The results can be summarised as follows: decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels. The impact seems to be stronger for revenue decentralisation than for spending decentralisation. Decentralisation is strongly and positively associated with educational outcomes as measured by international student assessments (PISA). While educational functions can be delegated either to sub-central governments (SCG) or to schools, the results suggest that both strategies appear to be equally beneficial for educational performance. Finally, investment in physical and – especially – human capital as a share of general government spending is significantly higher in more decentralised countries.

Here’s some detail from the body of the paper about the pro-growth impact of decentralization (especially when sub-national governments are responsible for raising their own funds).

Across countries, sub-central fiscal power, as measured by revenue or spending shares, is positively associated with economic activity. Doubling sub-central tax or spending shares (e.g. increasing the ratio of sub-central to general government tax revenue from 6 to 12%) is associated with a GDP per capita increase of around 3%. …Revenue decentralisation appears to be more strongly related with income gains than spending decentralisation. This empirical finding may reflect that “true” fiscal autonomy is better captured by the sub-central revenue share, as a large part of sub-central spending may be mandated or regulated by central government. … the estimated relationship never becomes negative and is not hump-shaped, i.e. “more decentralisation always tends to be better”.

The part of “more decentralisation always tends to be better” is a good result.

But it’s also a sad result since the United States has moved in the wrong direction in recent decades.

Though we’re still less centralized than most nations, as you can see from this chart from the OECD study.

Kudos to Canada and Switzerland for leading the world in federalism.

Here are some additional details from the study. I’m especially interested to see that the authors acknowledge how jurisdictional competition helps to explain why nations with federalism perform better.

Decentralised fiscal frameworks can raise TFP through an increase in the efficiency and productivity of the public sector… Public sector productivity is influenced by competition between SCGs and inter-jurisdictional mobility. Most SCGs aim at attracting and retaining mobile production factors, in order to promote investment and economic activity. They can do so by using fiscal policy, among other instruments. Since firms are choosing their location based on where they expect the highest returns on investment, and since returns depend (partly) on public inputs, SCGs have an incentive to raise the productivity of their public sector. SCGs may also try to improve the relationship between taxation and public service levels, by lowering taxes… The more decentralised a country, the stronger these competitive forces could be. Competition and inter-jurisdictional mobility could be weakened by large intergovernmental transfer systems, in particular fiscal equalisation.

As a aside, it’s rather ironic that that the professional economists at the OECD produce rigorous studies (here’s another one) showing the benefits of jurisdictional competition while the political appointees push for anti-growth policies such as tax harmonization.

Let’s close by looking at the study’s estimates of how nations would enjoy more prosperity by shifting in the direction of decentralization.

…an assessment of what a country might gain in terms of higher GDP if it moved to the benchmark of the most decentralised country. To be more specific, the gains were calculated for each federal country if it moved tax decentralisation to the level of Canada, and for each unitary country if it moved tax decentralisation to the level of Sweden (Figure 6). Further decentralisation could potentially be associated with an average increase of GDP of around 1% to 2% for federal countries and 3% to 4% for unitary countries, with values for more centralised countries being larger.

Here’s the accompanying chart.

Since the U.S. still has some federalism, our gain isn’t very large, but nations such as Austria, Belgium, Slovakia, Ireland, Luxembourg, and the United Kingdom could get big boosts.

P.S. I didn’t focus on the findings about better educational outcomes in decentralized nations. But I can’t resist pointing out that this is an additional reason to abolish the Department of Education.

P.P.S. Here’s a video discussing how Switzerland benefits from federalism.

P.P.P.S. And here’s what scholars from the Austrian school of economics wrote about federalism.

Warren Harding’s Anti-Keynesian Solution to a Deep Economic Downturn

We did not get good policy during the economic crisis of the 1930s. Indeed, it’s quite likely that bad decisions by Herbert Hoover and Franklin Roosevelt deepened and lengthened the Great Depression.

Likewise, George Bush and Barack Obama had the wrong responses (the TARP bailout and the faux stimulus) to the economic downturn of 2008-09.

But people in government don’t always make mistakes. If we go back nearly 100 years ago, we find that Warren Harding oversaw a very rapid recovery from the deep recession that occurred at the end of Woodrow Wilson’s disastrous presidency.

In a column for the Foundation for Economic Education, Robert Murphy has a very helpful tutorial on what happened.

…the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment …the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously… If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. …the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year and was down to 2.4 percent by 1923. …the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth. …The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector.

Writing for National Review, David Harsanyi points out that there are many reasons why Warren Harding should be celebrated over Woodrow Wilson.

Wilson was one of the most despicable characters in 20^th-century American politics: a national embarrassment. The Virginian didn’t merely hold racist “views;” he re-segregated the federal civil service. He didn’t merely involve the United States in a disastrous war in Europe after promising not to do so; he threw political opponents and anti-war activists into prison. Wilson, the first president to show open contempt for the Constitution and the Founding, was a vainglorious man unworthy of honor. Fortunately, we have the perfect replacement for Wilson: Warren Harding, the most underappreciated president in American history… Harding, unlike Wilson — and most of today’s political class, for that matter — didn’t believe politics should play an outsized role in the everyday lives of citizens. …Where Wilson had expanded the federal government in historic ways, creating massive new agencies such as the War Industries Board, Harding’s shortened term did not include any big new bureaucracies… Wilson left the country in a terrible recession; Harding turned it around, becoming the last president to end a downturn by cutting taxes, and slashing spending and regulations. Harding cut spending from $6.3 billion in 1920 to $3.3 billion by 1923.

Walter Block, in an article for the Mises Institute, explains that what happened almost 100 years ago can provide a good road map if President Trump wishes to restore prosperity today (especially when compared to the disastrous policies of Hoover and Roosevelt).

…let us look back a bit at some economic history regarding recessions and depressions… The depression in 1921 was short lived—maybe not a V, but at least a very narrow U. …Happily, during the 1921 depression, the government of President Warren G. Harding did not intervene…and the entire episode was over not in a matter of weeks (the V) or years (a fattish U), but months (a narrow U). The Great Depression, which stretched from 1929–41 (a morbidly obese U) stemmed from identical causes. …But Presidents Herbert Hoover and Franklin D. Roosevelt “fixed” this by propping up heavy industries whose extent was overblown by the previous artificially lowered interest rates, in an early “too big to fail” paroxysm. The Smoot-Hawley Tariff added insult to injury, and put the kibosh on any early recovery. …I now predict the sharpest of Vs, but if and only if, all other things being equal, the Trump administration cleaves to market principles. …So, Mr. President, embrace the free enterprise system, attain a V, a very narrow and sharp one, and the prognostication for November will be significantly boosted.

Professor Block’s analysis is very sound…except for the part where he speculates that Trump will do the right thing and copy Harding.

Given Trump’s awful track record on spending, it would be more accurate to speculate that I’ll be playing in the outfield for the Yankees when they win this year’s World Series.

Suffice to say, though, that it would be great to find another Warren Harding. Here’s a chart based on OMB data showing that he actually cut spending (and we’re looking at genuine spending cuts, not the make-believe spending cuts that happen in DC when politicians boost the budget by less than previously planned).

According to fans of Keynesian economics, these spending cuts should have tanked the economy, but instead we got a boom.

P.S. By the way, something similar happened after World War II.

P.P.S. Back in 2012, I shared some insightful analysis from Thomas Sowell about Harding’s economic policy.

P.P.P.S. Harding also lowered tax rates.

The Case Against the Public Option

Even though Joe Biden has embraced a very left-wing agenda, I suspect many of the items on his wish list are designed to placate Bernie-type activists who have considerable influence in the Democratic Party.

As such, I don’t think Biden will push “Medicare for All” if he’s elected. But I fear he may support a “public option” that is less radical but still misguided.

The strongest argument in the video is that a government-created competitor to private insurance companies will be much more expensive than politicians are promising.

This is what always happens with government programs (see Medicare, Medicaid, and Obamacare) because politicians have a never-ending incentive to buy votes with other people’s money. And it will happen with any new program.

But I think the video overlooks an argument that would be even more politically effective, which is the fact that a public option would slowly but surely begin to strangle employer-based health insurance.

Simply stated, vote-buying politicians will deliberately under-price the cost of the public option. And the presence of a subsidized and under-priced government health plan will make employer-based policies less attractive over time – especially since the subsidies almost certainly will expand.

However, people generally like their employer-based health plans and presumably will be skeptical of any plan that threatens that system (and it’s probably safe to assume that health insurance companies will have an incentive to educate people about that likely outcome).

By the way, it’s not my intention to defend the employer-based system, which largely exists because of a foolish loophole in the tax code. As far as I’m concerned, that system is a convoluted and inefficient mess that has contributed to the health care system’s third-party payer crisis.

What we need is a restoration of free markets in health care.

But with the public option, the best-case scenario is that many people over time will get pushed from the top line of this image to the bottom line.

And that’s also the worst-case scenario since no problems will be fixed, but overall costs will be even higher thanks to greater government involvement.

For what it’s worth, some advocates of the public option claim it can actually save money by lowering reimbursement rates to doctors and hospitals. That could happen in theory, but exploding costs for Medicare, Medicaid, and Obamacare show that it doesn’t happen in reality.

The bottom line is that more government intervention in health care won’t solve the problems caused by existing levels of government intervention in health care (a tragic example of Mitchell’s Law). Which is why I fear that the public option ultimately would be a slow-motion version of Medicare for All.

Subsidized Unemployment and Societal Capital

In early June, I pontificated about the upside-down incentives that are created when government pays people more to be idle than they could get by working.

This is a real-world concern because the crowd in Washington earlier this year approved a $600-per-week bonus for people getting unemployment benefits.

And that resulted in many people getting far more from benefits than they could get from employment. In some cases, even twice as much.

Anyhow, that bonus expired at the end of July, which has triggered a debate on whether to renew the policy.

In her Washington Post column, Catherine Rampell argues that super-charged benefits don’t discourage employment.

State benefits, on average, cover about 40 percent of the typical worker’s lost wages…  Given the extraordinary economic crisis, federal lawmakers wanted to “top up” state benefits so that workers would get close to 100 percent of their lost wages. …So Congress passed a $600 weekly supplement because it seemed about the right amount to make the average worker whole. …a majority of unemployed workers received more in benefits than they earned in their most recent paychecks. …this prompted concerns that the benefits themselves might slow down the recovery, discouraging people from returning to work because being on the dole was too darn comfortable. …five…recent studies…concluded the…$600 federal supplement does not appear to have depressed job growth. …Yes, at some point, …fears about work disincentives may materialize, as the economy recovers and job opportunities become more plentiful. We’re nowhere near that point now.

The Wall Street Journal also opined on this topic, specifically debunking one of the studies cited by Ms. Rampell.

Most Americans understand intuitively that if people make more money by not working, fewer people will work. Then there are politicians and economists who want to pass out more money while claiming that disincentives to work are irrelevant. …a study by Yale economists…purportedly finds the $600 federal enhancement to jobless benefits hasn’t affected the incentive to work. …Yet the study excluded part-time workers and those who hadn’t been working at a business in their sample last year. In other words, the study focused on workers with more loyalty to their employers. …Notably, states with more generous unemployment benefits for low-wage workers generally have had larger declines in labor-force participation. In Kentucky the lowest-paid 25% of unemployed workers on average have made 216% of what they did working. The state’s labor-force participation has declined 4.8 percentage points since February. …If you subsidize not working, you get less work.

In this Rampell vs. WSJ debate, I’m more sympathetic to the latter.

When the big fight over extended unemployment benefits during the Obama years was finally resolved, it showed that people are significantly more likely to find jobs when they’re no longer getting paid for not working.

This doesn’t mean that it will be easy (especially in an environment where there is still uncertainty about the coronavirus), or that we shouldn’t have sympathy for people facing pressure to find jobs after losing their previous positions.

But if we want prosperity and rising living standards, there’s really no alternative.

I’ll close with another excerpt from Ms. Rampell’s column She cites an economist who found that some people went back to work even though they received less money than they were getting from the government.

Evercore ISI economist, Ernie Tedeschi, …observed that in June, around 70 percent of unemployment recipients who resumed working had been receiving more from benefits than their prior wage — yet nonetheless returned to work.

This is largely good news since it shows that America still enjoys a high degree of societal capital (work ethic, desire to earn rather than get handouts, etc).

But this underscores why we shouldn’t erode that valuable form of capital by making people feel like chumps for doing the right thing (a point I emphasized earlier this year when criticizing Elizabeth Warren’s dependency agenda).

Otherwise we wind up with the real-world version of this satirical Wizard-of-Id cartoon.

P.S. Speaking of satire, Nancy Pelosi actually argued that paying people not to work was a form of stimulus.

P.P.S. Here are a couple of anecdotes, one from Ohio and one from Michigan, about the perverse impact of excessive unemployment benefits during the last downturn.

P.P.P.S. If you want more academic literature on the relationship between government benefits and joblessness, click here and here.

P.P.P.P.S. Last but not least, prominent economists on the left (including Paul Krugman) actually agree the unemployment benefits encourage joblessness.

Greece Needs to Expand its Experiment with Supply-Side Economics

There’s a reason that Greece is almost synonymous with bad economic policy. The country has endured some terrible prime ministers, most recently Alexis Tsipras of the far-left Syriza Party.

Andreas Papandreou, however, wins the prize for doing the most damage. He dramatically expanded the burden of government spending in the 1980s (the opposite of what Reagan and Thatcher were doing that decade), thus setting the stage for Greece’s eventual fiscal collapse.

But Greek economic policy isn’t a total disaster.

Policy makers in Athens are trying a bit of supply-side tax policy, at least for a limited group of people.

The U.K.-based Times has a report on Greece’s campaign to lure foreigners with low tax rates.

“The logic is very simple: we want pensioners to relocate here,” Athina Kalyva, the Greek head of tax policy at the finance ministry, said. “We have a beautiful country, a very good climate, so why not?” “We hope that pensioners benefiting from this attractive rate will spend most of their time in Greece,” Ms Kalyva told the Observer. Ultimately, the aim is to expand the country’s tax base, she added. “That would mean investing a bit — renting or buying a home.” …The proposal goes further than other countries, however, with the flat tax rate in Greece to apply to other sources of revenue as well as pensions, according to the draft law. “The 7 per cent flat rate will apply to whatever income a person might have, be that rents or dividends as well as pensions,” said Alex Patelis, chief economic adviser to Kyriakos Mitsotakis, the prime minister. “As a reformist government, we have to try to tick all the boxes to boost the economy and change growth models.”

Here are excerpts from a Reuters report.

Greece will offer financial incentives to encourage wealthy individuals to move their tax residence to the country, part of a package of tax relief measures… Greece’s conservative government is keen to attract investments to boost the recovering economy’s growth prospects. …The so-called “non-dom” programme will offer qualified wealthy investors who opt to shift their tax residence to the country a flat tax of 100,000 euros ($110,710) on global incomes earned outside Greece annually. “The tax incentive will run for a duration of up to 15 years and will include the benefit of no inheritance tax for assets outside Greece,” a senior government official told Reuters. One of the requirements to qualify will be residing in Greece for at least 183 days per year and making an investment of at least 500,000 euros within three years. …Investments of 3 million euros will reduce the flat tax to just 25,000 euros. There will also be a grandfathering clause protecting investors from policy changes by future governments.

By the way, Greece isn’t simply offering a flat-rate tax to wealthy foreigners. It’s offering them a flat-amount tax.

In other words, because they simply pay a predetermined amount, their actual tax rate (at least for non-Greek income) shrinks as their income goes up.

And since tax rates matter, this policy is luring well-to-do foreigners to Greece.

That’s good news. I’m a big fan of cross-border tax migration, both inside countries and between countries. And I’ve specifically applauded “citizenship by investment” programs that offer favorable tax rates to foreigners who bring much-needed investment to countries wanting more growth.

But I want politicians to understand that if low tax rates are good for newcomers, those low rates also would be good for locals.

But here’s the bad news. Fiscal policy in Greece is terrible (ranked #158 for “size of government” out of 162 nations according to the latest edition of Economic Freedom of the World).

What’s especially depressing is that Greece’s score has actually declined ever since the fiscal crisis began about 10 years ago.

In other words, the country got in trouble because of too much government, and politicians responded by actually making fiscal policy worse (aided and abetted by the fiscal pyromaniacs at the IMF).

And the bottom line is that it’s impossible to have overall low tax rates with a bloated public sector – a lesson that applies in other nations, including the United States.

Libertarian-Themed Humor

Yesterday’s column mocked Congresswoman Alexandria Ocasio-Cortez and her crazy leftism (though WordPress inexplicably posted it as July 1 rather than August 1).

So today, let’s fire in the opposite direction and enjoy some libertarian-themed satire.

Our first example points out that there’s sometimes a difference between libertarians in theory and libertarians in reality (very reminiscent of this image).

I also found this next image amusing (though I can’t resist pointing out that a libertarian society would have things like traffic lights for the simple reason that the the people operating private roads would have an incentive to maintain a smooth flow of traffic).

Reminds me of the equally funny (but equally inaccurate) example of libertarian breakfast cereal.

Here’s a libertarian brain, at least according to the left-wing stereotype. Since I have an entire collection of libertarian humor, much of which involves self-mockery, I like to think my “satire recognition lobe” is reasonably well developed.

I assume there’s a reason for fedora/trilby section, but I don’t know what it is.

For what it’s worth, my anti-Venezuela and anti-tax lobes are very advanced.

Last but not least, I do have some pro-libertarian satire today.

Heck, name one thing that isn’t regulated, prohibited, or taxed.

All of which reminds me that libertarians get very frustrated when the free market gets blamed for crises that occur because of all the regulation, prohibition, and taxation that does exist (think Great Depression, 2008 financial crisis, etc).

Understanding “Public Goods”

I wrote last month about “anarcho-capitalists” who think we don’t need any government because markets can provide everything.

Most people, though, think that there are certain things (such as national defense and the rule of law) that are “public goods” because they won’t exist if they’re not provided by government.

Academics tell us, if we want to be rigorous, that there are two characteristics that define public goods.

1. They are goods that people won’t buy because they can reap the benefit without paying (economists say this means the good is “non-excludable” while normal people refer to this as the free-rider problem).
2. They are goods that can be universally shared since one person’s consumption of the good doesn’t limit another person’s consumption of the good (economists say such goods are “non-rival”).

That’s a bit wonky, so let’s consider the example of national defense.

In a world with bad countries (or, to be more accurate, a world with nations governed by bad people), there’s a risk or external aggression. Since most people wouldn’t want to be conquered – and presumably mistreated – by foreign aggressors, national defense is valuable.

But how would it be provided in the absence of government? Maybe Bill Gates and Jeff Bezos would have an incentive to cough up some cash since they have a lot of wealth to protect, but most people (including most rich people) might figure that someone else would cover the cost and they could enjoy protection for free.

This two-part series from Marginal Revolution University explains public goods, using the example of asteroid defense. Here’s an introductory video.

And here’s a follow-up version that has a bit more detail.

I’m writing about this wonky issue because the debate over public goods, at least in some quarters, also is a debate about the size of government.

Consider this image of supposed public goods.

It shows all sorts of activities where governments today play a role, but most of those things aren’t actually public goods since they can be – and sometimes are – privately provided (see examples for fire protection, money, roads, education, health, air traffic control, and parks).

In other words, as Professor Tabarrok noted in the second video, something isn’t a public good just because it’s currently being handled by government.

Indeed, let’s look at the classic example of lighthouses, which often are cited as an example of something that absolutely must be provided by government. Yet scholars have found that the private sector led the way (before being supplanted by government).

For a more prudent view of public goods, Ronald Reagan’s FY1987 budget included a set of principles to help guide whether the federal government should play a role in various areas.

Those six principles could even be boiled down to one principle: Always opt for the private sector whenever possible.

I’ll close by identifying the bureaucracies in Washington that provide genuine public goods. As you can see, much of the federal government (Department of Housing and Urban Development, Department of Education, Department of Energy, Department of Agriculture, Department of Transportation, etc) doesn’t qualify.

To be sure, I’m using a broad-brush approach with this image. Some of the bureaucracies that I crossed out do a few things that qualify as public goods (such as nuclear weapons research at the Department of Energy), and the bureaucracies that didn’t get crossed out do lots of things (such at veterans health care) that should be in the private sector.

The bottom line is that much of the federal government isn’t needed, based on what’s a genuine public good. And for much of America’s history, at least prior to the 1930s, Washington was only a tiny burden because it was only involved in a few areas, such as national defense.

Though it’s worth noting that government could – and should – be much smaller even using an expansive definition of public goods and the role of government.

Tax Increases Will Generate More Spending, More Debt, and Less Prosperity

Because of changing demographics and poorly designed entitlement programs, the burden of government spending in the United States (in the absence of genuine reform) is going to increase dramatically over the next few decades.

That bad outlook will get even worse thanks to all the coronavirus-related spending from Washington.

This is bad news for America since more of the economy’s output will be consumed by government, leaving fewer resources for the private sector. And that problem would exist even if all the spending was magically offset by trillions of dollars of unexpected tax revenue.

Many people, however, think the nation’s future fiscal problem is that politicians will borrow to finance  that new spending. I think that’s a mistaken view, since it focuses on a symptom (red ink) rather than the underlying disease (excessive spending).

But regardless of one’s views on that issue, fiscal policy is on an unsustainable path. And that means there will soon be a fight between twho different ways of addressing the nation’s grim fiscal outlook.

• Restrain the growth of government spending.
• Divert more money from taxpayers to the IRS.

Fortunately, we now have some new evidence to help guide policy.

A new study from the Mercatus Center, authored by Veronique de Rugy and Jack Salmon, examines what actually happens when politicians try to control debt with spending restraint or tax increases.

Here’s what the authors wanted to investigate.

Fiscal consolidation can take two forms: (1) adopting a debt-reduction package driven primarily by tax increases or (2) adopting a package mostly consisting of spending restraint. …What policymakers might not know is which of these two forms of consolidation tend to be more effective at reining in debt levels and which are less harmful to economic performance: tax-based (TB) fiscal consolidation or expenditure-based (EB) fiscal consolidation.

Here’s their methodology.

Our analysis focuses on large fiscal consolidations, or consolidations in which the fiscal deficit as a share of GDP improves by at least 1.5 percentage points over two years and does not decrease in either of those two years. …A successful consolidation is defined as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes places or by at least 3 percentage points two years after the adjustment. …Episodes in which the consolidation is at least 60 percent revenue increases are labeled TB, and episodes in which the consolidation is at least 60 percent spending decreases are labeled EB.

And here are their results.

…of the 45 EB episodes, more than half were successful, while of the 67 TB episodes, less than 4 in 10 were successful. …The results in table 2 show that while in unsuccessful adjustments most (74 percent) of the changes are on the revenue side, in successful adjustments most (60 percent) of the changes are on the expenditure side. In successful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by 1.50 percent. By contrast, in unsuccessful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by less than 0.35 percent. From these findings we conclude that successful fiscal adjustments are those that involve significant spending reductions with only modest increases in taxation. Unsuccessful fiscal adjustments, however, typically involve significant increases in taxation and very modest spending reductions.

Table 2 summarizes the findings.

As you can see, tax increases are the least effective way of dealing with the problem. Which makes sense when you realize that the nation’s fiscal problem is too much spending, not inadequate revenue.

In my not-so-humble opinion, I think the table I prepared back in 2014 is even more compelling.

Based on IMF data, it shows nations that imposed mutli-year spending restraint and how that fiscally prudent policy generated very good results – both in terms of reducing the spending burden and lowering red ink.

When I do debates at conferences with my left-wing friends, I almost always ask them to show me a similar table of countries that achieved good results with tax increases.

Needless to say, none of them have ever even attempted to prepare such a list.

That’s because nations that repeatedly raise taxes – as we’ve seen in Europe – wind up with more spending and more debt.

In other words, politicians pull a bait-and-switch. They claim more revenue is needed to reduce debt, but they use any additional money to buy votes.

Which is why advocates of good fiscal policy should adamantly oppose any and all tax increases.

Let’s close by looking at two more charts from the Mercatus study.

Here’s a look at how Irish politicians have mostly chose to restrain spending.

And here’s a look at how Greek politicians have mostly opted for tax increases.

It goes without saying (but I’ll say it anyhow) that the Greek approach has been very unsuccessful.

P.S. For fiscal wonks, one of the best parts of the Mercatus study is that it cites a lot of academic research on the issue of fiscal consolidation.

Scholars who have conducted research find – over and over again – that spending restraint works.

In a 1995 working paper, Alberto Alesina and Roberto Perotti observe 52 efforts to reduce debt in 20 Organisation for Economic Co-operation and Development (OECD) countries between 1960 and 1992. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes place. In successful adjustments, government spending is reduced by almost 2.2 percent of gross national product (GNP) and taxes are increased by less than 0.5 percent of GNP. For unsuccessful adjustments, government expenditure is reduced by less than 0.5 percent of GNP and taxes are increased by almost 1.3 percent of GNP. These results suggest that successful fiscal adjustments are those that cut spending and include very modest increases in taxation.

International Monetary Fund (IMF) economists John McDermott and Robert Wescott, in a 1996 paper, examine 74 episodes of fiscal adjustment in which countries attempted to address their budget gaps. The authors define a successful fiscal adjustment as a reduction of at least 3 percentage points in the ratio of gross public debt to GDP by the second year after the end of an adjustment. The authors then divide episodes of fiscal consolidation into two categories: those in which the deficit was cut primarily (by at least 60 percent) through revenue increases, and those in which it was reduced primarily (by at least 60 percent) through expenditure cuts. Of the expenditure-based episodes of fiscal consolidation, almost half were successful, while of the tax-based episodes, less than one out of six met the criteria for success.

Jürgen von Hagen and Rolf Strauch observe 65 episodes in 20 OECD countries from 1960 to 1998 and define a successful adjustment as one in which the budget balance stands at no more than 75 percent of the initial balance two years after the adjustment period. …it does find that successful consolidations consist of expenditure cuts averaging more than 1.2 percent of GDP, while expenditure cuts in unsuccessful adjustments are smaller than 0.3 percent of GDP. The opposite pattern is true for revenue-based adjustments: successful consolidations consist of increases in revenue averaging around 1.1 percent, while unsuccessful adjustments consist of revenue increases exceeding 1.9 percent.

American Enterprise Institute economists Andrew Biggs, Kevin Hassett, and Matthew Jensen examine over 100 episodes of fiscal consolidation in a 2010 study. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 4.5 percentage points three years after the first year of consolidation. Their study finds that countries that addressed their budget shortfalls through reduced spending burdens were far more likely to reduce their debt than countries whose budget-balancing strategies depended upon higher taxes. …the typical successful adjustment consists of 85 percent spending cuts and just 15 percent tax increases.

In a 1998 Brookings Institution paper, Alberto Alesina and coauthors reexamined the research on the economic effects of fiscal adjustments. Using data drawn from 19 OECD countries, the authors assess whether the composition of fiscal adjustments results in different economic outcomes… Contrary to the Keynesian view that fiscal adjustments are contractionary, the results of this study suggest that consolidation achieved primarily through spending reductions often has expansionary effects.

Another study that observes which features of fiscal adjustments are more or less likely to predict whether the fiscal adjustment is contractionary or expansionary is by Alesina and Silvia Ardagna. Using data from 20 OECD countries during 1960 to 1994, the authors label an adjustment expansionary if the average GDP growth rate in the period of adjustment and in the two years after is greater than the average value (of G7 countries) in all episodes of adjustment. …The authors conclude, “The composition of the adjustment appears as the strongest predictor of the growth effect: all the non-expansionary adjustments were tax-based and all the expansionary ones were expenditure-based.”

French economists Boris Cournède and Frédéric Gonand adopt a dynamic general equilibrium model to compare the macroeconomic impacts of four debt reduction scenarios. Results from the model suggest that TB adjustments are much more costly than spending restraint when policymakers are attempting to achieve fiscal sustainability. Annual consumption per capita would be 15 percent higher in 2050 if consolidation were achieved through spending reductions rather than broad tax increases.

In a review of every major fiscal adjustment in the OECD since 1975, Bank of England economist Ben Broadbent and Goldman Sachs economist Kevin Daly found that “decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth.”

Economists Christina and David Romer investigated the impact of tax changes on economic activity in the United States from 1945 to 2007. The authors find that an exogenous tax increase of 1 percent of GDP lowers real GDP by almost 3 percent, suggesting that TB adjustments are highly contractionary.

…the IMF released its annual World Economic Outlook in 2010 and included a study on the effects of fiscal consolidation on economic activity. The results of studying episodes of fiscal consolidation for 15 OECD countries over three decades…reveals that EB fiscal adjustments tend to have smaller contractionary effects than TB adjustments. For TB adjustments, the effect of a consolidation of 1 percent of GDP on GDP is −1.3 percent after two years, while for EB adjustments the effect is just −0.3 percent after two years and is not statistically significant. Interestingly, TB adjustments also raise unemployment levels by about 0.6 percentage points, while EB adjustments raise the unemployment rate by only 0.2 percentage points.

…a 2014 IMF study…estimates the short-term effect of fiscal consolidation on economic activity among 17 OECD countries. The authors of the IMF study find that the fall in GDP associated with EB consolidations is 0.82 percentage points smaller than the one associated with TB adjustments in the first year and 2.31 percentage points smaller in the second year after the adjustment.

Focusing on the fiscal consolidations that followed the Great Recession, Alesina and coauthors…find that EB consolidations are far less costly for economic output than TB adjustments. They also find that TB adjustments result in a cumulative contraction of 2 percent of GDP in the following three years, while EB adjustments generate very small contractions with an impact on output not significantly different from zero.

A study by the European Central Bank in 2018…finds that macroeconomic responses are largely caused by differences in the composition of the adjustment plans. The authors find large and negative multipliers for TB adjustment plans and positive, but close to zero, multipliers for EB plans. The composition of adjustment plans is found to be the largest contributor to the differences in economic performance under the two types of consolidation plans.

The bottom line is that nations enjoy success when they obey fiscal policy’s Golden Rule. Sadly, that doesn’t happen very often because politicians focus mostly on buying votes in the short run rather than increasing national prosperity in the long run.