The “Grabbing Hand” of Industrial Policy

If you want to understand how government really works, learn about “public choice.”

This is the common-sense theory that politicians and other people in politics often make decisions based on self interest, and it does a very good job of explaining why we get so many short-sighted and misguided policies from the crowd in Washington.

Public choice is especially insightful when compared to the naive view that politicians are mostly concerned with helping ordinary people.

The theory also tends to generate some pithy concepts, such as “stationary bandit” and “predatory government.”

Another example is “grabbing hand,” which describes how intervention usually is a vehicle for helping government rather than helping people.

Today’s column is going to be about industrial policy (the incrementalist version of central planning) as an example of this phenomenon.

Specifically, we’re going to look at a new academic study that measured the impact of government control on the performance of companies in China.

Written by Marzieh Abolhassani, Zhi Wang, and Jakob de Haan, it’s a test of whether government is a “helping hand” or “grabbing hand.”

We’ll start with their description of the study’s methodology.

…the impact of government involvement on the financial performance of listed firms in emerging economies has received scant attention. This paper examines the relationship between government control of firms and firms’ financial performance for the case of China. …we measure government control by the fraction of outstanding shares held either directly or indirectly by the government. …We classify firms as state controlled whenever the government is the shareholder with the largest number of shares held either directly or indirectly through pyramid structures.

Here are the key results.

Our empirical results suggest that firm performance is generally lower for firms where the government is the shareholder with the largest number of (direct and indirect) shares. Specifically, the return on assets, the return on equity and the market-to-book ratio are, on average, 1.3%, 2.0% and 8.2% lower for government-controlled firms. Both central and local government control is undermining firm performance. These findings provide support for the ‘grabbing hand’ theory of the government. … we make sure the estimates are not driven by differences in the size, age and leverage of the firms. Importantly, we also control for industry-region-year fixed effects, and therefore compare firms within the same industry in the same province during the same year, further enhancing the credibility of our estimates. …These results provide support for hypothesis and to theories conjecturing that management of firms controlled by the government have fewer incentives to maximize profits and shareholder value.

For those who like the wonky details, here are the key findings from their number crunching.

So what’s the bottom line?

Their conclusion tells us everything we need to know.

The results reported in this study broaden our understanding of the role of government influence on firm performance. …Our empirical results indicate that government-controlled firms have a worse financial performance than non-government-controlled firms. …These conclusions support the ‘grabbing hand’ theory proposed by Shleifer and Vishny.

So why do these results matter?

From an economic perspective, it’s further evidence that government intervention leads to a misallocation of resources. And that inevitably means living standards will be lower than they would be if markets were allowed to function.

A recent article from Foreign Affairs suggests enormous potential benefits if China ended industrial policy.

…state-owned enterprises… These inefficient behemoths control nearly $30 trillion in assets and consume roughly 80 percent of the country’s available bank credit, but they contribute only between 23 and 28 percent of GDP. …The economist Nicholas Lardy has estimated that genuine economic reforms, in particular those targeting state-owned enterprises, could boost China’s annual GDP growth by as much as two percentage points in the coming decade.

Very similar to what I’ve written, so let’s hope that China returns to the policy of economic liberalization that led to genuine progress.

I’ll close with the depressing observation that there are people in Washington who are now agitating for industrial policy in the United States.

Needless to say, there’s zero reason to think that intervention from Washington will produce results that are better than intervention from Beijing.

P.S. It doesn’t matter if Republicans are trying to pick winners or Democrats are trying to pick winners. When politicians intervene, the economy suffers, which means less prosperity for ordinary people.

The “Broken Window Fallacy” of Keynesian Economics

There’s much to dislike about Keynesian economics, most notably that it tells politicians that their vice – buying votes by spending other people’s money – is somehow a virtue.

Advocates of Keynesianism also can be very simplistic, sometimes falling victim to the “broken window fallacy” described in this short video.

Bastiat is perhaps most well-known for his insight on this fallacy.

He explained that a good economist was capable of recognizing the difference between the seen and unseen (if you want to be wonky, the difference between direct effects and indirect effects).

Sadly, there are many people today who don’t grasp this distinction.

You probably won’t be surprised to learn that Paul Krugman is in this group.

And now we have a new member of the club. In a piece for Axios, Felix Salmon reveals he still believes in this primitive form of Keynesian economics.

There’s one big non-political reason why luxury stores were targeted by looters: Their wares can now be sold for top dollar, thanks to the rise of what is often known as the “circular economy.” …Instead of stealing goods they need to live, looters are increasingly stealing the goods they can most easily sell online. …Economically speaking, looting can have positive effects. Rebuilding and restocking stores increases demand for goods and labor, especially during a pandemic when millions of workers are otherwise unemployed. …The circular economy helps to reduce waste and can efficiently keep luxury goods in the hands of those who value them most highly.

To be fair, Salmon would have been correct (though immoral) if he said looting had a positive effect on looters.

But it definitely doesn’t have a positive effect on merchants (who lose money in the short run and probably have higher insurance payments thereafter), on consumers (who are likely to pay more for products in the future), or on the overall economy (because of the unseen reductions in other types of economic activity).

Let’s wrap up with a cartoon on the topic.

P.S. If you like humor about Keynesian economics, here’s the place to start.  You’ll find additional material here, here, here, here, and here.

P.P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

P.P.P.S. To be fair to Keynes, he wrote that taxes should never exceed 25 percent.

Poor People and Minorities Are Victimized by “Predatory Cities”

One week ago, I wrote about how the welfare state creates high implicit marginal tax rates, thus making it difficult for low-income people to climb out of poverty and dependence.

But that’s not the only way that poor people are victimized by big government.

Another very serious problem is the way local and state governments impose a plethora of fees, fines and charges that can wreck the lives of the less fortunate.

In a column for the New York Times, Professor Bernadette Atahuene of the Chicago-Kent College of Law opines on the problem of greedy local governments.

I coined the term “predatory cities” to describe urban areas where public officials systematically take property from residents and transfer it to public coffers… Ferguson, Mo., is one well-known predatory city. As a 2015 Department of Justice report showed, the police in Ferguson systematically targeted African-Americans and subjected them to excessive fines and fees. …local courts issued arrest warrants for unpaid fines and fees… Minor offenses, like parking infractions, resulted in jail time… The Ferguson Police Department and courts prioritized revenue raising over public safety, transforming Ferguson into a predatory city.

Professor Atahuene cites the pernicious policies of New Orleans and Washington, D.C. (and note that asset forfeiture is one of the problems).

New Orleans is another. …Orleans Parish Criminal District Court’s primary source of funding was the fines and fees it collected. This created a structural incentive for judges to aggressively and erroneously pursue payment from those with no ability to pay, turning New Orleans into a predatory city. Washington, D.C., is yet another predatory city. While civil asset forfeiture laws allow the police to seize property that they suspect was involved in a crime, in Washington, D.C., property owners had to post bonds of up to $2,500 in order to challenge the seizure. If the owner could not raise money in time, the D.C. Police Department sold the property, and the money went into its annual budget. In a two-year period, the Police Department made $4.8 million in profit by seizing money from over 8,500 people as well as seizing 339 vehicles.

Every decent human being should get upset about the grotesque way that politicians are mistreating their residents.

Especially since poor people are being disproportionately victimized.

By the way, it appears that Professor Atahuene is not a libertarian. She wants Congress to approve a big bailout, based on the theory that state and local politicians will be less likely to engage in what I’ve called “rapacious revenue-raising tactics” if they get big buckets of money from Uncle Sam.

Needless to say, I think that would be a mistake.

But I don’t think someone needs to agree with me on everything, or even most things, if we can periodically find common ground on proposals that would improve the lives of people (not just on the need to curtail greedy local governments, but also on issues such as over-criminalization and police unions).

P.S. I wonder if there would be fewer petty fines, fees, and charges if they were levied on the ability to pay, thus making higher-income people more sensitive to the problem?

Fiscal Fantasyland

There are plenty of people on the left who write serious and substantive articles about fiscal policy. For instance, I strongly disagree with many of the policy prescriptions from the IMF and the OECD, but those international bureaucracies are reasonably rigorous with data.

Heck, they even use real data when they’re being dishonest.

Some people, though, churn out analysis that is utterly disconnected from reality. I’m even thinking of creating a Fiscal Fantasyland Club to commemorate their fact-deprived writings.

1. In a column for the Washington Post, Dana Milbank blamed the “disastrous philosophy” of “anti-government conservatism” for leaving the federal government without the resources to fight the coronavirus.
2. In an article for the Atlantic, George Packer told readers that the federal government screwed up because it has been subjected to “steady defunding” by right-wing ideologues intent on “squeezing it dry.”
3. Another columnist for the Washington Post, Dan Balz, claims that the botched response to coronavirus was caused by “underinvestment” and “hollowing out” of the federal budget.

The reason we may need a special club (akin to my collection of “Poverty Hucksters“) is that all of these writers are wildly wrong.

Even a cursory look at budget data confirms that the federal government has been getting bigger over time.

Much bigger.

As such, only someone who is completely ignorant or totally dishonest is capable of writing an article based on the notion that there have been reductions in the burden of federal spending.

If I create this club, I know who will be fourth member.

Writing for the Bulwark, Richard North Patterson argues that President Trump’s personal shortcomings are somehow connected to Reagan-type opposition to big government.

He starts with one of my favorite quotes from The Gipper and then tells us that this type of hostility to statism is no longer appropriate or desirable.

In 1986, Ronald Reagan cheerfully gibed: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Then it seemed amusing. But 34 years later, the convergence of COVID-19 and a racial conflagration makes Reagan’s quip sound myopic. …Only government can ensure the safety of our food and drugs and protect our natural environment. And government can help navigate our racial fissures, and provide the economic and public health interventions indispensable to combating a deadly pandemic.

Given that Washington’s response to the coronavirus has been spectacularly incompetent, well beyond what even libertarians would have predicted, it’s remarkable that Patterson thinks this is a moment in time when people should embrace big government.

And let’s not forget that today’s racial unrest was triggered by government misbehavior, enabled by corrupt deals between local politicians and government employee unions.

But the real problem with Patterson’s rhetoric is that he seems to assume that an argument for some government is the same as an argument for lots of government.

He’s obviously not familiar with the Rahn Curve, which is based on the insight that some government may be good for growth (assuming the outlays are for core public goods) but that lots of government (particularly when spending is for consumption and redistribution) is bad for growth.

To be fair, I understand why Patterson, who is mostly known for being a very successful novelist, isn’t familiar with the academic research on the growth-maximizing size of government.

But since he’s decided to pontificate on these issues, he should feel an obligation to know some basic data.

For instance, he’s a wealthy man and presumably has traveled the world. Hasn’t he noticed that nations with big governments don’t do a better job of providing public goods – even if we use an expansive concept of what government should be doing?

Let’s look at some more of his article.

Patterson not only rejects the notion of smaller government, he seems to embrace bigger government.

What was once a philosophical preference for limited government has degenerated into phobia. “Long before Trump,” GOP strategist Stuart Stevens observes, “the Republican Party adopted as a key article of faith that more government was bad. But somewhere along the way, it became ‘all government is bad.’ Now we are in a crisis that can be solved only by massive government intervention.” …Witnessing so much death and disturbance, one cannot but ponder how poorly Reagan’s casual nostrum has aged. Farhad Manjoo nails it: “The most comforting words I can think of now, amid so much uncertainty, chaos and confusion, are these: ‘I’m from the government, and I’m here to help.’”

There’s a lot of nonsense in those few sentences. Regarding Manjoo’s quote, I’ll simply repeat my earlier observation about how the federal government has hindered rather than helped the fight against the coronavirus.

The quote from Stuart Stevens is even stranger, at least the the latter part, because it is so completely contrary to real-world data.

While it is true that Reagan briefly reoriented Republicans and did a good job of controlling spending while he was in office, every other Republican in recent history has been a big spender.

They’ve even increased domestic spending at a faster rate than Democratic presidents.

Yet Stevens wants people to believe that’s the track record of a party that thinks “all government is bad.”

I also want to debunk the notion that there’s been a “decades-long gutting of government,” as asserted in the subtitle of Patterson’s article.

Here’s a chart that I shared back in April, which shows that federal spending has tripled since 1980 – and that’s after adjusting for inflation.

If you read Patterson’s entire article, you’ll find that he mostly focuses on President Trump’s chaotic management of the executive branch.

Since I’ve gone on TV and referred to Trump as being akin to the crazy uncle you deal with during family holidays, I’m certainly not going to argue with his criticisms of the White House’s governing style.

But surely it should be possible to criticize the president without relying on make-believe budget analysis.

P.S. I wonder if Patterson and other members of the Fiscal Fantasyland Club have been tricked into thinking that there have been budget cuts.

P.P.S. If Patterson decides to learn and use real budget data, I hope he’ll join me in criticizing Trump for being a big spender.

Absolute Economic Liberty, Relative Economic Liberty, and the Never-Answered Question

As part of my recent presentation to IES Europe, here’s what I said (and what I’ve said many times before) about the relationship between economic policy and national prosperity.

My remarks focused in part on the difference between absolute economic liberty and relative economic liberty.

• The absolute level of economic liberty is the degree to which a nation relies on markets or statism (see, for instance, the Fraser Institute’s Economic Freedom of the World).
• The relative level of economic liberty is a measure of whether one country is more market-oriented than another country (basically a measure of national competitiveness).

Understanding these two concepts explains why it is possible to criticize nations in North America and Western Europe for having too much government while also recognizing that those same nations tend to have better policies than most countries in other parts of the world.

An obvious example is Denmark. It certainly has some foolish and misguided government policies, but it is very pro-market when compared to the 90 percent of nations that have even lower levels of economic liberty (a distinction that Bernie Sanders has never grasped).

The obvious takeaway is that economic liberty matters, regardless of whether we’re looking at absolute levels or relative levels.

During my remarks, the audience got to see a two-question challenge, which asks our friends on the left to give an example of their dirigiste policies generating good economic outcomes.

But I’ve never been happy with the clunky wording of that challenge (just as I wasn’t happy with the original wording of fiscal policy’s Golden Rule).

So here’s a new version, which I’m now calling “The Never-Answered Question.”

I frequently unveil this question during debates.

And it’s quite common that my opponent will claim Sweden.

But as I noted in the above video clip, Sweden became a rich nation when government was very small. It didn’t have an income tax until 1902, and the welfare state was tiny until the 1960s. And I then explain that Sweden’s economic performance has been inversely correlated with the size and scope of government.

Unsurprisingly, the same is true for every other prosperous country in Europe and North America.

The bottom line is that my leftist friends will never successfully answer this question.

P.S. When considering the second part of The Never Answered Question, I don’t want a cherry-picked one- or two-year period. I want several decades of data, so we can be sure of a real trend. Much as I’ve done when making comparisons.

• West Germany vs. East Germany
• Czechoslovakia 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

The Unfortunate Decline of Federalism in the United States

Last week, I participated in a webinar with IES Europe. The program covered a wide range of issues, including tax competition, Social Security reform, and the recipe for national prosperity.

Here’s what I said on the topic of federalism.

To add some hard data to the discussion, let’s compare the degree of fiscal decentralization in the United States in both 1902 and 2019, based on numbers from the Census Bureau (click on Govt_Finances) and the Office of Management and Budget (click on Table 14.3).

As you can see from the chart, Washington now accounts for a much bigger share of overall government spending.

By the way, these numbers should not be misinterpreted.

There’s been no reduction in the burden of state and local government outlays. Indeed, there’s been a steady increase in such spending, even after adjusting for inflation.

But the federal government has grown far more rapidly.

Indeed, the fiscal history of the United States is a sad story about the loss of almost all constraints and limits that America’s Founders put in the Constitution in hopes of controlling the size and scope of Washington.

The bottom line is we now have much bigger government and it’s more remote because of centralization.

I mentioned Switzerland in the latter part of my answer.

Here’s the data comparing Switzerland and the United States. As you can see, Switzerland has been more successful in retaining genuine federalism.

Indeed, the two countries are mirror images, with nearly 2/3rds of government spending in the U.S. coming from Washington and nearly 2/3rds of government in Switzerland taking place a the level of cantons and municipalities.

P.S. Here’s what scholars from the Austrian School have said about federalism.

P.P.S. Here’s my two cents on federalism in the context of issues such as welfare, natural disasters, transportation, coronavirus, infrastructure, and Medicaid,

P.P.P.S. Because there’s strong evidence that decentralization produces better outcomes, I’m even willing to accept bad examples of federalism.

Joe Biden: An Incrementalist Version of Bernie Sanders

Hardly anybody noticed because the nation has been focused on protests about police misbehavior, but Joe Biden officially clinched the Democratic nomination this past week.

And he’s now comfortably ahead in the political betting markets as well as public polling.

If Biden wins in November, what does that mean for the nation’s economic policy?

According to folks on the left, a Biden presidency means bigger government and more statism.

For instance, opining for the New York Times, Jamelle Bouie applauds Biden’s leftist agenda.

…if the goal is to move America to the left…then a Biden candidacy…represents an opportunity. …If Biden goes on to win the White House, there’s real space for the pro-Sanders left to work its will on policy. …It can fulfill some of its goals under the cover of Biden’s moderation, from raising the minimum wage nationally to pushing the American health care system closer to single-payer. …Biden…is a creature of the party. He doesn’t buck the mainstream, he accommodates it. He doesn’t reject the center, he tries to claim it. …the center of the Democratic Party as far left as it’s been since before Ronald Reagan, then Biden is likely to hew to that center, not challenge it.

His colleague at the NYT, Michelle Goldberg, is similarly enthused about the prospects for bigger government under a Biden Administration.

Biden’s proposals go far beyond his call for a $15 federal minimum wage — a demand some saw as radical when Sanders pushed it four years ago. While it’s illegal for companies to fire employees for trying to organize a union, the penalties are toothless. Biden proposes to make those penalties bite and to hold executives personally liable. …should Biden become president, progressives have the opportunity to make generational gains. …To try to unite the party around him, he’s making serious progressive commitments. …he’s moving leftward. Biden recently came out for tuition-free college for students whose families earn less than $125,000. He endorsed Elizabeth Warren’s bankruptcy plan…His climate plan already went beyond any of Barack Obama’s initiatives, and he’s pledged to make it even more robust.

According to (supposedly) neutral analysts, a Biden presidency means bigger government and more statism.

In an article for Newsweek, Steve Friess discusses Biden’s shift to the left.

Being stuck running for the presidency from the basement of his home in Wilmington, Delaware, had given the former vice president a lot of time to think, he told them, and he wanted bigger ideas. Go forth, he urged his financial brain trust, and bring back the boldest, most ambitious proposals they’d ever dreamed of to reshape the U.S. economy… Biden began issuing a raft of new proposals that move his positions closer to the progressive wing of the Democratic Party, with a promise to unveil an even more transformative economic plan this summer. …It’s a yes to adding $200 a month to Social Security benefits and lowering the qualifying age for Medicare from 65 to 60. Yes to trillions in new spending, yes to new regulations on banks and industry, yes to devil-may-care deficits. …the leader he most often invokes—in interviews, in public addresses, on his podcast—is no longer Barack Obama but Franklin Delano Roosevelt. …Biden has already made a series of significant leftward policy shifts since effectively sewing up the nomination in March.

Perry Bacon, in a piece for fivethirtyeight, analyzes Biden’s statist agenda.

…if Biden is elected in November, the left may get a presidency it likes after all…if American politics is moving left, expect Biden to do the same. …Biden’s long record in public office suggests that he is fairly flexible on policy — shifting his positions to whatever is in the mainstream of the Democratic Party at a given moment. …Biden is likely to be a fairly liberal president, no matter how moderate he sounded in the primaries. …Biden’s 2020 primary platform…adopted fairly liberal policies…more liberal than his pre-campaign record suggested. The Democratic Party is more liberal now than it was when Bill Clinton took office, or even when Obama was inaugurated, and Biden’s platform reflects that shift. …Biden and his advisers are now…rolling out more liberal policy plans, speaking in increasingly populist terms and joining forces with the most progressive voices in the party. …“Joe Biden is running on the most progressive platform of any Democratic nominee in recent history. But given the pandemic, he has to look at the New Deal and Great Society traditions in the Democratic Party and go bigger,” said Waleed Shahid, the communications director for Justice Democrats, a left-wing group aligned with Ocasio-Cortez.

Writing for the Washington Post, Sean Sullivan documents Biden’s leftward drift.

Joe Biden sought to appeal to liberal supporters of Sen. Bernie Sanders on Thursday with a pair of new proposals to expand access to health care and curtail student loan debt. Biden proposed lowering the eligibility age for Medicare coverage from 65 to 60. He also came out in favor of forgiving student loan debt for people who attended public colleges and universities and some private schools and make up to $125,000 a year. …In another peace offering to liberals, Biden proposed paying for his student debt plan by repealing a provision in the recent coronavirus legislation that Congress passed and President Trump enacted. “That tax cut overwhelmingly benefits the richest Americans and is unnecessary for addressing the current COVID-19 economic relief efforts,” he wrote… Biden endorsed a bankruptcy plan put forth by Sen. Elizabeth Warren (D-Mass.), another rival who ran to his left.

And, according to more market-friendly sources, a Biden presidency means bigger government and more statism.

The Wall Street Journal editorialized about Biden’s leftist agenda.

Already Medicare is scheduled to be insolvent by 2026. …In 1970, life expectancy in the U.S. was 70.8. Now it’s about eight years longer. By lowering the age of eligibility instead, Mr. Biden would begin shifting Medicare’s focus from seniors to everybody else. Don’t worry about the funding, he insists, since the extra costs would be “financed out of general revenues.” …Mr. Biden’s new left turn on student loans is equally sharp. …Cancel all federal undergraduate tuition debt for many borrowers who went to public schools, including four-year universities. This forgiveness would be given to anyone who earns $125,000 a year or less. …How much would it cost? There’s no explanation.

Jeff Jacoby analyzed Biden in a column for the Boston Globe.

Biden…is running on a platform far more progressive — i.e., far less moderate — than any Democratic presidential nominee in history. …on issue after issue, Biden has veered sharply from Obama’s path. On health insurance, for example, Obama rejected a public option as part of the Affordable Care Act and repeatedly stressed the importance of maintaining private coverage. But Biden favors a public option open to everyone… Biden supports government-funded health care even for unauthoritzed immigrants, something Obama never came close to proposing. …No Democratic presidential nominee ever endorsed anything like the radical Green New Deal, with its price tag in the tens of trillions of dollars and its goal of eliminating the use of all fossil fuels. But Biden does. No Democratic nominee ever called for a national minimum wage of $15 an hour. But Biden does. …Sanders may not end up on the November ballot, but it will unmistakably reflect his influence. For he and his band of progressives have pushed their party to the left with such success that even the “moderate” in the race would be the most liberal Democrat ever nominated for president.

Here’s some of what Peter Suderman wrote for Reason.

Biden is a moderate compared to Sanders, but he is notably to the left of previous Democratic standard-bearers. …Biden has proposed a significant expansion of the Affordable Care Act that his campaign estimates would cost $750 billion over a decade… Biden has proposed a $1.7 trillion climate plan that is similar in scope to many candidates on his left and a $750 billion education plan… He favors an assault weapons ban and other gun control measures, a national $15 minimum wage, and a raft of subsidies, loans, and other government-granted nudges designed to promote rural economies. Has proposed $3.4 trillion worth of tax hikes—more than double what former Secretary of State Hillary Clinton proposed when she ran in 2016. …Biden’s leftward drift is thus the party’s leftward shift…, a big-government liberal, a candidate whose current incarnation was shaped and informed by progressive politics, if not wholly captured by them.

The Tax Foundation examined the former Vice President’s tax plan and the results are not encouraging.

Former Vice President Joe Biden would enact a number of policies that would raise taxes, including individual income taxes and payroll taxes, on high-income individuals with income above $400,000. …According to the Tax Foundation’s General Equilibrium Model, the Biden tax plan would reduce GDP by 1.51 percent over the long term. …The plan would shrink the capital stock by 3.23 percent and reduce the overall wage rate by 0.98 percent, leading to 585,000 fewer full-time equivalent jobs. …On a dynamic basis, we estimate that Biden’s tax plan would raise about 15 percent less revenue than on a conventional basis over the next decade. …That is because the relatively smaller economy would shrink the tax base for payroll, individual income, and business income taxes. …The plan would lead to lower after-tax income for all income levels.

Here’s a table summarizing the findings.

So what does all this mean?

At the risk of oversimplifying, Biden unquestionably would move tax policy to the left (he actually said higher taxes are patriotic, even though he engages in aggressive tax avoidance), and the same thing would happen on regulatory issues.

His spending agenda is terrible, though it’s worth noting that Democrat presidents usually don’t spend as much as Republicans (with the admirable exception of Reagan).

And, to be fair, there’s no way he could be as bad on trade as Trump.

Let’s close by looking at some hard data. Back in January, I sifted through the vote ratings prepared by the National Taxpayers Union and the Club for Growth and showed that Biden was not a Bill Clinton-style moderate.

I went back to those same sources an put together this comparison of Biden and some other well-known Democrats (scores on a 0-100 scale, with zero being statism and 100 being libertarian).

In both measures, he’s worse than Crazy Bernie!

Moreover, a lifetime average of zero from the Club for Growth is rather horrifying. His average from the National Taxpayers Union isn’t quite so bad, but the trend is in the wrong direction. Biden’s post-2000 average was less than 10, while his score for the preceding years averaged more than 23.

That being said, my two cents on this topic is that Biden is a statist, but not overly ideological.

His support for bigger government is largely a strategy of catering to the various interest groups that dominate the Democratic Party.

The good news is that he’s an incrementalist and won’t aggressively push for a horrifying FDR-style agenda if he gets to the White House.

The bad news is that he will probably allow Nancy Pelosi and other statist ideologues to dictate that kind of agenda if he wins the presidency.

P.S. My collection of Biden-oriented humor is rather sparse (see here, here, here, and here), an oversight that I’ll have to address in the near future.

Shut Down the International Monetary Fund

Do you want to understand the International Monetary Fund’s (IMF) pernicious role in the global economy?

Here’s a simple analogy that will tell you everything you need to know. Let’s say you have two friends.

• Friend A, who continuously gets in financial trouble because of compulsive gambling and alcoholism.
• Friend B, who continuously gets in financial trouble because he loses money by giving loans to Friend A.

Assuming you’re a good person, you will scold both your friends for irresponsible and imprudent behavior. And you certainly won’t aid and abet their recklessness.

But if that’s your attitude, you’ll never get a lucrative (and tax-free!) job at the IMF.

That’s because the role of the IMF is enabling bad fiscal policy by governments (i.e., Friend A) and then providing bailouts so that the institution that lend money to those governments (i.e., Friend B) are insulated from their foolish choices.

To make matters worse, the IMF usually imposes “conditionality” on bailouts so that governments – for all intents and purposes – are bribed or extorted to impose higher taxes. Sort of akin to giving Friend A (the alcoholic gambler) access to more cash.

All of which explains why we see a lather-rinse-repeat cycle of nations making the same mistakes over and over again.

It’s so predictably destructive that I was only half joking when I told an audience in El Salvador that they should ban all flights containing IMF bureaucrats.

In an article for National Review, Professor Steve Hanke explains why the IMF should be shuttered. But what makes his column especially interesting is that he digs into the history of the bureaucracy.

We learn, for instance, that the IMF supposedly existed to help countries abide by the post-WWII system of fixed exchange rates. So when that system disappeared in the early 1970s, the IMF should have gone away as well.

Established as part of the 1944 Bretton Woods agreement, the IMF was designed to be primarily responsible for extending short‐​term, subsidized credits to countries experiencing balance‐​of‐​payments problems under the post-war, international, pegged‐​exchange-rate system. In 1971, however, Richard Nixon, then U.S. president, closed the gold window, triggering the 1973 collapse of the Bretton Woods agreement and, logically, the demise of the IMF. It was then that the IMF should have been mothballed.

Like any self-interested bureaucracy, the IMF figured out new reasons to exist.

And new reasons to expand.

The oil crises of the 1970s were the first to allow the IMF to reinvent itself. Those shocks were deemed to “require” more IMF lending to facilitate, yes, balance‐​of‐​payments adjustments. …with the onset of the Mexican debt crisis, more IMF lending was “required” to contain the crisis and prevent U.S. bank failures. …Then came the collapse of the Soviet Union. What a “jobs for the boys” bonanza that was! And, the list goes on and on with every crisis providing yet another opportunity for the ineffective IMF to pump out more credit… Today, things have become so politicized that even an international organization, like the IMF, has been able to grant itself a license to meddle in what used to be none of its business… While the IMF’s protean attributes are truly breathtaking, its most recent meddling gives yet another reason to put an end to it.

Steve is right.

But let’s conclude by contemplating the biggest reason to support his conclusion.

Should we abolish the IMF because it’s repugnant that big banks and other lenders are the main beneficiaries of the bailouts?

Should we abolish the IMF because it’s disgusting that corrupt politicians in poor nations get more opportunities to impose bad policy?

Should we abolish the IMF because it’s tragic that the bureaucracy lowers global growth by enabling the misallocation of capital?

Those are all good reasons, but I think the strongest argument for abolishing the IMF is that the bureaucracy perpetuates poverty. Look at this table, also prepared by Professor Hanke, which shows the nations that have received the most bailouts.

Are any of these nations economic success stories?

Hardly.

Instead, this is primarily a list of nations that have been mired in a sad cycle of poverty thanks in part to wasteful and corrupt governments that were aided and abetted by the IMF.

The bottom line is that the people of the United States should no longer be underwriting this awful organization.

P.S. The IMF is an equal-opportunity dispenser of bad advice. Relying on incredibly shoddy analysis and zero-sum thinking, the bureaucrats are encouraging higher taxes in developed nations as well.

P.P.S. No wonder I’ve referred to the IMF as the “Dr Kevorkian of Global Economic Policy” and the “Dumpster Fire of the Global Economy.”

P.P.P.S. Though there was a brief period when the IMF was semi-sympathetic to good policy advice.

Should Government Subsidize Unemployment?

Yesterday, I shared some research showing how misguided redistribution policies lead to high implicit marginal tax rates that discourage work.

Then I was interviewed about a very tangible example of this phenomenon – jobless benefits that give people more money than they could earn by working.

I wrote about this specific issue in late April and shared the nearby chart to show how many people can get a lot more money if they simply choose not to work. Which is the economic equivalent of a marginal tax rate of more than 100 percent.

As I noted in yesterday’s interview, creating this kind of upside-down incentive system is crazy even by the bizarre standards of Washington policy.

The federal government is – for all intents and purposes – bribing people not to work. This will be especially harmful for low-income workers since steady employment is their best route for upward mobility.

Part of the interview focused on the Keynesian argument that unemployment benefits are “stimulus” because recipients will have more money to spend. This is not satire. I mentioned that Nancy Pelosi actually asserted the economy becomes stronger when people are paid not to work.

Needless to say, this simplistic argument overlooks the fact that government can’t give people goodies without taking the money out of the private economy in the first place.

Sadly, the perpetual motion machine of Keynesian economics is still part of the Congressional Budget Office’s methodology. Here are some excerpts from the CBO’s report on the issue of super-charged benefits.

CBO has examined the economic effects of extending the temporary increase of $600 per week in the benefit amount provided by unemployment programs. …CBO estimates that extending that increase for six months through January 31, 2021, would have the following effects: …Roughly five of every six recipients would receive benefits that exceeded the weekly amounts they could expect to earn from work during those six months. …The estimated effects on output and employment are the net results of two opposing factors. An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment. That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.

Since I’ve already written many times about the flaws of Keynesian theory, let’s focus on the deleterious effect of government-subsidized unemployment.

In a column two days ago for the Wall Street Journal, Congressman James Comer of Kentucky explained how super-charged benefits have hurt his state’s economy.

Employers in Kentucky are finding it difficult to persuade employees to return to work, as nearly 40% of the state’s labor force has filed for unemployment benefits… It is clear that a system of excessive unemployment benefits has run its course. More than 60 of my colleagues in Congress plan to join me in sending a letter to House and Senate leadership to express our concerns and demand that these payments expire July 31, as the Cares Act intended. …It defies logic to extend disincentives to work when businesses are beginning to reopen. …efforts to spend the nation into oblivion and discourage Americans from working…are fundamentally opposed to the American spirit of the dignity of work. …to get back on the right track, we cannot extend the $600-a-week incentive not to return to work.

I applaud Rep. Comer.

It’s not popular to remove goodies from voters. Indeed, that’s the message of my Second Theorem of Government.

But it’s necessary if we want to restore incentives to work.

I’ll close by elaborating on the point I made in the interview about this battle being a repeat of the Obama-era fight about extended unemployment benefits.

Obama and other folks on the left said extended benefits were necessary because the unemployment rate was still high, while people like me argued that the jobless rate was still high precisely because the government was paying people not to work.

Extended benefits were finally halted in 2014, meaning we had a real-world test to see who was right. So what happened? Lo and behold, the jobless rate fell as more people went back to work.

The moral of the story, as illustrated by this satirical cartoon strip, is that people are more likely to work when the benefits of having a job and greater than the benefits of not having a job.

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 recession.

The Welfare State Penalizes the Poor with High Marginal Tax Rates

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

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

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

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

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

How pervasive is this problem?

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

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

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

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

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

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

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

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

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

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

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

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

In One Image, Everything You Need to Know about Blue State Fiscal Problems

Should high-tax states such as California and New York get a bailout?

I explained last month why that would be a mistake, in large part because bailouts would reward states for irresponsible fiscal policy (similar to my argument that countries like Austria and the Netherlands shouldn’t be bullied into providing bailouts for Italy and Spain).

And I’ve shared two videos (here and here) for those who want more information about how bailouts encourage “moral hazard.” And this is true for banks (think TARP) as well as governments.

Today, though, I want to focus on some numbers that show what’s really causing fiscal problems in some states.

Adam Michel and David Ditch of the Heritage Foundation have generated some startling data on state government finances.

Instead of waiting on a handout from Washington, states should clear the way for a more robust economic recovery by addressing their unsustainable finances. States and local government spending has increased over the recent past… After adjusting for inflation and increases in population, state and local spending (in constant 2019 dollars) has grown from $5,596 per person in 2000 to $7,268 per person in 2019. That amounts to a 30% increase in the real cost of state and local government over just two decades, even without the thousands of dollars per person the federal government sends to states and localities through a wide variety of programs. …not all states spend equally. As of 2017, Florida, Georgia, and Arizona spent about $5,800 per person on state and local governments, but New York spent more than $11,700 per person.

The most important number is the above excerpt is that there’s been a 30 percent increase in per-capita state spending after adjusting for inflation.

That’s a very worrisome trend.

But not all states are created equal. Or, to be more precise, they’re not all equally profligate. Here’s the chart that starkly illustrates why some states are in trouble.

At the risk of understatement, California and New York have not complied with the Golden Rule for fiscal policy.

Needless to say, there’s no justification for the notion that taxpayers in well-run states such as Texas and Florida should be coerced into providing bailouts for politicians in poorly run states.

And now we have a compelling visual that settles the argument.

P.S. Over the past several years, I’ve done multiple columns comparing Texas and California and also several columns comparing New York and Florida, all of which underscore that blue states have created their own problems by taxing too much and spending too much.

P.P.S. Thankfully, people can vote with their feet by moving from high-tax states to low-tax states. Let’s hope that Congress doesn’t enact a bailout so they’re forced to subsidize the states that drove them away.

Riots, Government Failure, and Gun Control

In some cities, legitimate protests about abusive and improper police behavior have degenerated into riots.

One consequence of this mayhem is that police don’t have the manpower to effectively protect households and businesses.

In same cases, as shown by this tweet, a police chief even gave a green light to looters even though taxpayers pay generous salaries to cops because they’re supposed to protect our lives and possessions.

 

This would be a good opportunity to point out how this is another sad example of government being so big and bloated that it can’t fulfill its core roles of protecting life, liberty, and property.

But I want to focus on a more narrow issue, which is why it is vital for citizens to have the right to own firearms so they can protect themselves when there are breakdowns in social order and cops can’t (or won’t) help out.

I wrote about this issue back in 2011, observing that Europeans were largely helpless during that year’s civil unrest because governments had stripped them of the right to self defense.

I also specifically compared helpless British victims of rioting to armed shopkeepers in Los Angeles who were able to protect themselves when there were riots in that city.

Today’s unrest is providing even more evidence. There are already dozens of stories about citizens protecting themselves and their businesses because law enforcement isn’t available.

Here’s one example.

What began as a peaceful protest in Cleveland on Saturday—over the death of George Floyd at the hands of a Minneapolis police officer— turned violent as the day progressed, prompting Mayor Frank Jackson to issue an 8 p.m. curfew and to request National Guard reinforcements to protect the city from rioters. Corbo’s, a tiny family-owned bakery in the city’s historic Playhouse Square district, took matters into their own hands, brandishing their firearms when rioters came calling. …rioters and looters can be seen approaching Corbo’s Bakery, taunting the owners and threatening them with iron rods and a large pylon with a heavy metal base. Three men stood in the doorway of the bakery, defending their property and exercising their Second Amendment rights. A minute later the rioters were gone, having moved on to the business next door, where they shattered a massive storefront window… Rash asks the men protecting Corbo’s whether or not they have insurance that would cover damage from the rioters. “I mean, really, is it worth having someone get shot? Are you shooting someone over an insured place? But why?” “That’s not the point,” one of the armed Corbo’s workers replied. “Well, it is the point,” Rash counters. “But what if someone accidentally got shot?” An African American bystander defended the bakers, saying, “They just trying to defend they’re sh–.” “You’re out here with guns!” Rash exclaims. “I’m on my fu–ing property,” says a baker

Thankfully, there ultimately was no violence in this encounter.

It’s also worth noting that there was no looting. Another successful example of why it’s so helpful to have private gun ownership.

I wonder if the chaos across the nation is a “learnable moment” for some people. Here’s a tweet from a psychologist in New York.

Supporters of the 2nd Amendment often point out that cops are just minutes away when trouble is seconds away. Well, Mr. Kaufman learned that sometimes the police aren’t just minutes away. They can be hours away or not available at all.

Maybe I’m being overly optimistic, but I hope he now realizes that his earlier calls for gun control were misguided. Unless, of course, he plans to defend himself with Tide pods.

I’ll close with two items. First, I’ll recycle my 2011 poll to see why (or if) people support the right to keep and bear arms. Interesting, the coronavirus (which led to the release of criminals and police announcements that some laws wouldn’t be enforced) produced an increase in the number of people (up from 14.43 percent) who answered “To protect myself and my family if we suffer a societal breakdown.”

Given what’s happening each night in our cities, I’m guessing that number will increase.

Second, I’ll also recycle this image that I shared when writing about the looting that occurred after Hurricane Sandy.

It’s amusing, but I like sharing it because it gives me an opportunity to remind people about the role of incentives.

At the risk of stating the obvious, looters are unlikely to go after this neighborhood and they’re going to be far more likely to cause mayhem in a place like New York City, where an incompetent city government basically gives crooks a free pass and there are tragic restrictions on gun ownership.

P.S. As noted above, I hope Mr. Kaufman has an epiphany. Sort of like the one that Justin Cronin experienced when he dealt with a breakdown of civil order.

If We Want Better Policing, Eliminate Qualified Immunity

Yesterday’s column focused on how police unions protect the bad apples who misbehave and therefore cause some people to resent law enforcement, especially in the minority community.

Curtailing the role of those unions would be an important step to create better bonds between the police and the citizenry.

Today’s column will explain the need to repeal or substantially curtail the doctrine of “qualified immunity,” which was created by courts to protect cops who trample on people’s rights.

It’s not a complete answer, just as fixing the union problem isn’t a complete answer. But getting rid of the doctrine at least will give citizens the opportunity to bring lawsuits when cops disregard their civil liberties. This tweet is a good summary for those who don’t have time to dig into the topic.

But hopefully you do have time to investigate this issue.

Here are excerpts from four articles about problems with qualified immunity.

This is not a new issue for libertarians and principled conservatives. Glenn Reynolds pointed out the injustice of the doctrine back in 2013 in a column for USA Today.

And David French condemned the practice in a piece for National Review in 2018.

Judges created qualified immunity, and they can end it. It’s past time to impose true accountability on public servants who violate citizens’ constitutional rights. First, some background. Since 1871, federal law has permitted Americans to file lawsuits against public officials who violate their constitutional rights. It’s a powerful tool that essentially deputizes members of the public to defend their own liberties. …However, after generations of judges have interpreted the statute, the phrase “shall be liable” has come to mean “may occasionally be liable.” …In 1982, …the law changed. In a case called Harlow v. Fitzgerald, the Supreme Court concocted the modern doctrine of qualified immunity. …As the doctrine developed, to prove that a right is clearly established, the plaintiff generally had to find and cite a remarkably similar case, with nearly identical facts, decided by a court of controlling jurisdiction. …the entire notion of “clearly established law” rests on a series of absurd, fantastical premises. Are we really to believe that a police officer doesn’t know he shouldn’t pound on the wrong door and blow away the innocent occupant unless a court said so in a case, say, five years before?

Writing for Reason, Professor Ilya Somin explains how fixing this bad bit of judge-made law could improve policing.

…there is much that can be done to curb police abuses. …The problem is not that police officers are unusually bad people. It’s that they have bad incentives, under which they are rarely held accountable for abuses. Those incentives can and should be altered. An important first step would be to get rid of the legal doctrine of “qualified immunity,” under which law enforcement officers are immune from suits for violating citizens’ constitutional rights… The Supreme Court interprets the term “clearly established” so narrowly that officers routinely get away with horrendous abuses… Qualified immunity is not required by the Constitution or even by a federal statute. It is a purely judge-made doctrine made up by the Supreme Court itself in a misguided effort to protect law enforcement officers from excessive litigation. …Both Justice Clarence Thomas, the Court’s most conservative member, and Justice Sonia Sotomayor, the most liberal, have been severely critical of qualified immunity. There is a real chance they can persuade at least three of their colleagues to take the same view. …state and local governments might respond by indemnifying police officers for the damages they have to pay in such cases. But even if that happens, it would still be a step in the right direction. Indemnification costs money that many local governments will be loathe to pay. They will therefore have an incentive to crack down on abusive officers, particularly repeat offenders who routinely force authorities to pay out large sums…

Thank goodness for Clarence Thomas. Not only is he one of the leaders in trying to address qualified immunity, he’s also a leader in the campaign to get rid of the odious practice of asset forfeiture, which effectively creates an incentive for government to steal private property.

Writing for the Bulwark, Clark Neilly adds his two cents to the discussion.

In determining the relationship between government and governed, one of the most important decisions a society can make is how accountable those who wield official power must be to those against whom that power is wielded. Congress made a clear choice in that regard when it passed the Enforcement Act of 1871, which we now call “Section 1983”… Simply put, Section 1983 creates a standard of strict liability by providing that state actors “shall be liable to the party injured” for “the deprivation of any rights.” Thus, if a police officer walks up to your house and peeks inside one of your windows without a warrant—a clear violation of your Fourth Amendment right against unreasonable searches—he is liable to you for the violation of that right. …many conservatives…abandon their stated commitment to textualism and embrace an “interpretation” of Section 1983 that is utterly divorced from its text. The vehicle for this…“living statutory interpretivism” is the Supreme Court’s qualified immunity doctrine, which judicially amends Section 1983 to provide that the standard for liability will no longer be the deprivation of “any rights”—as Congress expressly provided—but rather the deprivation of any “clearly established” rights. …the only avenue of accountability for most victims of police misconduct is a civil rights lawsuit that they themselves can initiate without the largesse of some prosecutor or citizen review board.

Last but not least, in a new column for USA Today, Patrick Jaicomo and Anya Bidwell of the Institute for Justice explain some of the legal issues.

The Supreme Court created qualified immunity in 1982. With that novel invention, the court granted all government officials immunity for violating constitutional and civil rights… Although innocuous sounding, the clearly established test is a legal obstacle nearly impossible to overcome. It requires a victim to identify an earlier decision by the Supreme Court, or a federal appeals court in the same jurisdiction holding that precisely the same conduct under the same circumstances is illegal or unconstitutional. If none exists, the official is immune. …When the Supreme Court conceived qualified immunity, it promised that the rule would not provide a “license to lawless conduct” for government officials. Plainly, it has.

And here are some examples they cite.

And let’s not forget the examples of misbehavior I’ve cited in the past (examples here, here, here, here, here, and here).

The point of this column is not to criticize or condemn cops as a group, but to highlight a bad policy that causes citizens to feel hostility against (what I assume to be) the vast majority of cops who do their jobs the right way.

If We Want Better Policing, We Need to Curtail Police Unions

Since I’m a “right libertarian” according to the political compass test, it’s no surprise that I’m generally sympathetic to cops (notwithstanding my undesired encounters).

But with important caveats.

• I want fewer foolish laws so police can concentrate on protecting life, liberty, and property.
• I favor oversight so that good cops aren’t tarnished by the behavior of bad cops.
• I want local governments to control budgets so cops aren’t pressured to generate revenue.
• I favor civil disobedience and jury nullification as safety valves to guard against bad behavior.
• I want to get rid of horrific policies such as asset forfeiture that incentivize bad behavior.

And it goes without saying that I want a range of reactions – from scorn to punishment – when individual police officers make dumb choices (examples here, here, here, here, here, and here).

But there’s one issue that I haven’t addressed, and it’s very relevant considering the civil unrest and rioting caused by George Floyd’s death in Minnesota – and that issues is the degree to which overly powerful police unions enable bad behavior.

Professor Alex Tabarrok explains how police officers who misbehave get special privileges not available to the rest of us.

…union contracts and Law Officer “Bill of Rights” give police legal privileges that regular people don’t get. In 50 cities and 13 states, for example, union contracts “restrict interrogations by limiting how long an officer can be interrogated, who can interrogate them, the types of questions that can be asked, and when an interrogation can take place.” In Virginia police officers have a right to at least a five-day delay before being interrogated. In Louisiana police officers have up to 30 days during which no questioning is allowed and they cannot be questioned for sustained periods of time or without breaks. In some cities, police officers can only be interrogated during work hours. Regular people do not get these privileges. …how do you think complainants feel knowing that the police officer they are complaining about “must be informed of the names of all complainants.” I respect and admire police officers but frankly I think this rule is dangerous. …In the United States if you are arrested–even for a misdemeanor or minor crime, even if the charges are dropped, even if you are found not guilty–you will likely be burdened with an arrest record that can increase the difficulty of getting a job, an occupational license, or housing. But even in the unlikely event that a police officer is officially reprimanded many states and cities require that such information is automatically erased after a year or two. The automatic erasure of complaints makes it difficult to identify problem officers or a pattern of abuse.

In an article for National Review, Theodore Kupfer has a searing indictment of police unions.

Public-sector employees who belong to unions are used to special treatment, and police officers, apparently, are no different. There are little or no private alternatives to the services schoolteachers, air-traffic controllers, police officers, and prison guards provide. Their unions negotiate directly with politicians, and can demand policies that benefit them — if not the taxpayers who foot the bill — because no elected official wants to risk a catastrophic strike. The result is a tacit, unsavory bargain in which politicians and civil servants join together to direct public funding and exclusive privileges to the most favored of all interest groups: politicians and civil servants. …This is a shame. Law-enforcement unions shape our criminal-justice policies for the worse and encourage irresponsible public spending to achieve their own ends. …police unions…insist that their members have special “bills of rights” that shield them from accountability for misconduct. With a voting base that traditionally respects first responders, such concessions can be a political winner for Republicans. But they also have pernicious effects which ought to worry conservatives not comfortable with increasing the power of the state at the expense of the citizenry. …Researchers at the University of Chicago have even found that allowing law-enforcement officials collective-bargaining rights increases the risk of misconduct.

Let’s look at an astounding example of how powerful police unions generate absurd results.

This tweet tells you everything you need to know.

Great moments in public employee unionism. https://t.co/vrln9wy31x

— Walter Olson 😷 (@walterolson) May 14, 2020

If you want more information about that tragic debacle, Robby Soave is a must-read writer for Reason, and here’s some of what he wrote about the reactions of law enforcement.

It’s the story of catastrophic failure at every level of law enforcement, beginning with a corrupt and incompetent sheriff’s office warned on multiple occasions about the specific threat posed by Cruz. The Broward County sheriff’s office received at least 18 tips between 2008 and 2017 concerning Cruz. A November 2017 caller described him as a “school shooter in the making.” Despite knowing that Cruz was in possession of a cache of weapons, the sheriff’s office passed the buck… On the day of the shooting, …Officer Scot Peterson, an employee of the sheriff’s office, refused to enter the school and confront Cruz, as did three Broward County Sheriff’s deputies who had arrived on scene. These were stunning indictments of Broward County Sheriff Scott Israel, a man who responded to accusations of corruption by comparing himself to Abraham Lincoln, Ghandi, and Martin Luther King. …law enforcement’s spectacular failure before, during, and after the Parkland shooting should be a more pressing topic of discussion. …many of these agencies prove themselves to be wildly incompetent for reasons ranging from arrogant leadership and individual cowardice, to toxic workplace culture and shoddy internal systems.

In other words, the problem was government, not a lack of gun control.

But I’m digressing.

Let’s close with a final observation about the perverse effect of collective bargaining for cops.

I disapprove when police unions conspire with local politicians to get excessive pay and special protections (a very common outcome for other types of government employees).

And I definitely don’t like it when cops are turned into overly aggressive deputy tax collectors because of greedy local governments.

But it’s presumably far worse for society when police officers use excessive force against citizens like George Floyd and Eric Garner because unions shield them from adverse consequences.

P.S. My limited collection of police-related humor can be found here, here, and here.

P.P.S. Here’s my two cents on how to most effectively protest for better police behavior.

P.P.P.S. And here’s my quiz to gauge everyone’s reaction to a unique form of protest.

Economic Liberty and the Constitution

In this interview from last March, I groused that the Supreme Court – largely thanks to statist Justices appointed by one of America’s worst presidents – basically decided, starting in the 1930s, that it would no longer be bound by the Constitution’s provisions that protect economic liberty.

I’m not a lawyer, much less an expert on the Constitution, but I know how to read.

The Constitution very clearly is a document to constrain rather than enable government. It was designed to produce what I’ve referred to as Madisonian constitutionalism.

When Justices ignore their responsibility to protect our rights, however, they’re basically acting like this satirical image of President Obama.

Let’s look at two very tragic legal cases from that era.

Professor John McGinnis, writing for Law & Liberty, discusses the wretched Supreme Court case that undermined the Constitution’s Contract Clause.

…the Contract Clause…was the most litigated provision of the Federal Constitution in the 19th century, but today it has become a shadow of its former self because the Court has abandoned its original meaning. …The Contract Clause provides: “No State shall… pass any… Law impairing the Obligation of Contracts.” …in The Federalist, Madison argued that the Clause was a “bulwark in favor of… private rights.” …It is designed to protect an important aspect of the rule of law: a prohibition on the government changing specific plans that autonomous individuals have made. …For the 19th and early 20th centuries, the Supreme Court was relatively faithful in interpreting the Clause. In Home Building & Loan Association v. Blaisdell, however, the Court departed from its role as a faithful agent of the Constitution. …influenced by the Depression and the growing discontent with the jurisprudence of substantive due process with which it confused the clear command of the Contract Clause, the Court upheld the law. It is true that times were hard, but as Justice George Sutherland’s dissent noted, legislation protecting debtors against creditors is passed precisely at such times, and yet such legislation was exactly the kind of evil which the Clause was designed to prohibit. The case is striking as an example of one of the most express rejections of originalism. Chief Justice Hughes stated explicitly that the Court was not bound by the original understanding of the Clause.

Writing for FEE, Professors Antony Davies and James Harrigan explain the terrible 1942 decision by the Supreme Court to remove any meaningful restriction on the power of the central government.

They start by pointing out that the 18th Amendment (imposing prohibition) was an example of how to expand the power of government in the proper way.

The Constitution creates a government of enumerated powers, which means the federal government is only authorized to do things that are specifically listed in the Constitution. And that list is relatively short. The list appears in Article One, Section Eight and enumerates the proper objects of congressional legislation.  …Consider the United States’ ill-advised flirtation with Prohibition—which was enacted almost exactly 100 years ago. Nowhere in the Article One, Section Eight powers does one see the authority to “ban the manufacture, transport, or sales of alcohol within the United States.” When Americans decided that they wanted a coast-to-coast ban on alcohol, they amended the Constitution to give the federal government this authority. Fourteen dry years later, Americans came to their senses and revoked this authority by amending the Constitution again.

Alcohol prohibition was a mistake, of course, just like today’s drug prohibition, and the American people went through the proper process of adopting the 21st Amendment (to repeal the 18th Amendment).

Davies and Harrigan then explain that it was about that time that the Supreme Court decided that it would no longer uphold the Constitution’s restrictions on the powers of the central government.

As of 1933, when the 21st Amendment was ratified, Americans still had a constitutionally limited federal government and what Justice Louis Brandeis famously called “laboratories of democracy” in the states. …But who ended up being tasked with deciding what Article One, Section Eight actually meant? Herein lies the wrinkle that enables all manner of constitutional mischief in the United States. The institution that ended up deciding what the federal government is empowered to do is itself a branch of the federal government. And it should come as no surprise that when push comes to shove, the Supreme Court routinely finds in favor of empowering the federal government.

One of the most horrifying examples of judicial failure occurred in 1942.

In 1942, the Supreme Court decided a case, Wickard v. Filburn, in which farmer Roscoe Filburn ran afoul of a federal law that limited how much wheat he was allowed to grow. …A careful reader might, and should, ask where the federal government’s right to legislate the wheat market is to be found—because the word “wheat” is nowhere to be found in the Constitution. …The Agricultural Adjustment Act of 1938 put an upper limit on how much wheat farmers were allowed to grow, which would serve to keep prices high by limiting supply. Roscoe Filburn had grown 12 more acres of wheat than the law allowed. But not only did he not sell the excess wheat outside of his home state, but he also didn’t sell it at all. He used the wheat from those 12 acres to feed his cattle. …yet the Supreme Court found (unanimously) that because Congress had the authority to regulate interstate commerce, Congress also had the authority to prohibit Filburn from growing those 12 acres of wheat for his own use. …Filburn’s non-commercial activity was, according to the Supreme Court, interstate commerce. …Filburn’s non-commercial activity was, according to the Supreme Court, interstate commerce.

And here’s the result.

A century ago, we amended the Constitution when we wanted the federal government to exercise a new authority—that of banning alcohol. Today, we allow Congress to exercise almost any authority it likes. …We have progressed so far down the path of reinterpreting the Constitution as a document that empowers government, rather than one that limits it… The sad result has been a government nearly limitless in its power.

By the way, the Obamacare case may be as odious as Wickard v. Filburn since it marked another unfortunate expansion of Washington’s ability to control our lives, in violation of the clear language in Article 1, Section 8.

Though I don’t want to be too glum. The good news is that the Supreme Court occasionally does defend economic liberty, as the Wall Street Journal recently opined.

One goal of the U.S. Constitution was to form a union that allowed interstate commerce unencumbered by state protectionism. The Supreme Court reinforced that principle on Wednesday by striking down a two-year residency requirement to get a liquor license in Tennessee. …a business lobby known as Tennessee Wine and Spirits Retailers Association argued that the 21st Amendment that repealed Prohibition also gave the states broad authority to regulate alcohol. The association knows that if people can move to a state and open up liquor stores, it means more potential competition for those who already have licenses. The law is commercial protectionism and thus violates the Constitution’s Commerce Clause, the High Court ruled in Tennessee Wine and Spirits Retailers Assn. v. Thomas. “Because Tennessee’s 2-year residency requirement for retail license applicants blatantly favors the State’s residents and has little relationship to public health and safety, it is unconstitutional,” wrote Justice Samuel Alito for a 7-2 majority… the 21st Amendment doesn’t override the rest of the Constitution’s principles. As recently as 2005 (Granholm v. Heald), the Court ruled that New York state couldn’t discriminate against out-of-state wineries.

Some judges resent any protections against government power.

In an article for Reason, Damon Root properly castigates a judge for objecting to the economic liberties guaranteed by the 14th Amendment.

Does the U.S. Constitution protect economic liberty, such as the right to work in an occupation of one’s choosing free from unreasonable government regulation? Pennsylvania Supreme Court Justice David Wecht thinks not. …in Ladd v. Real Estate Commission of the Commonwealth of Pennsylvania, Wecht faulted his colleagues in the majority for their “judicial intrusion into the realm of legislative value judgments” after that court allowed a legal challenge to proceed against a state occupational licensing scheme. “I cannot endorse a constitutional standard that encourages courts,” he declared, “to second-guess the wisdom, need, or appropriateness” of duly enacted economic regulations. …”For many years, and under the pretext of protecting ‘economic liberty’ and ‘freedom of contract,’ the Supreme Court routinely struck down laws that a majority of the Court deemed unwise or improvident,” Wecht wrote of Lochner and several related cases. …I would encourage Justice Wecht to read some more legal history. …Rep. John Bingham (R–Ohio)…served as the principal author of Section One of the 14th Amendment… As Bingham told the House of Representatives, “the provisions of the Constitution guaranteeing rights, privileges, and immunities” includes “the constitutional liberty…to work in an honest calling and contribute by your toil in some sort to the support of yourself, to the support of your fellow men, and to be secure in the enjoyment of the fruits of your toil.” …even those who opposed the passage of the 14th Amendment agreed that it was designed to protect economic liberty from overreaching state regulation… The “right to contract” was of course later secured by the Supreme Court in Lochner.

Let’s close by detouring into the world of fantasy and contemplating how we should amend the Constitution today?

Rory Magraf lists five ideas in a piece for the Foundation for Economic Education, one of which I find especially tempting.

…the conversation always gets the cerebral juices flowing for legal enthusiasts; the idea of amending the US Constitution, something done only twenty-seven times in history, is about as close as one will get to actually sitting among the Founders in Philadelphia. With that in mind, here are some ideas.

The Sixteenth Amendment to the Constitution of the United States is hereby repealed.

In short, abolish the income tax. This is usually a crowd-pleaser among libertarians and probably a handful of Republicans during an election year, but it is also a bit of a challenge, on the same level as chasing the moon. Still, it would be worthwhile to have the conversation.

Since I’m definitely not a fan of the income tax, I certainly endorse this notion.

However, I think we would need much stronger language. The key 1895 case that struck down the income tax was decided by a the narrow margin of 5-4, and that was back when Justices presumably cared more about the Constitution.

I fear that a similar case today would not lead to the right result (which is one of the reasons I’m skeptical of a national sales tax).

In any event, the federal government’s broad power to tax does not translate into a broad power to spend. At least if we care about the Constitution.

And that means much of the federal government is (or, to be more precise, should be) unconsitutional.

P.S. Here’s some of what Thomas Sowell wrote about Wickard v Filburn.

P.P.S. Here’s some of what Walter Williams wrote about the Constitution’s limits of Washington.

P.P.P.S. If you want to read more, the Constitution was designed to protect against majoritarianism and to ensure “negative liberty.”

P.P.P.P.S. Readers may also be interested in this discussion of whether libertarians should prefer Hamilton or Jefferson.

Will Biden’s Class-Warfare Tax Plan Lead to an Exodus of Job Creators?

After Barack Obama took office (and especially after he was reelected), there was a big uptick in the number of rich people who chose to emigrate from the United States.

There are many reasons wealthy people choose to move from one nation to another, but Obama’s embrace of class-warfare tax policy (including FATCA) was seen as a big factor.

Joe Biden’s tax agenda is significantly more punitive than Obama’s, so we may see something similar happen if he wins the 2020 election.

Given the economic importance of innovators, entrepreneurs, and inventors, this would be not be good news for the American economy.

The New York Times reported late last year that the United States could be shooting itself in the foot by discouraging wealthy residents.

…a different group of Americans say they are considering leaving — people of both parties who would be hit by the wealth tax… Wealthy Americans often leave high-tax states like New York and California for lower-tax ones like Florida and Texas. But renouncing citizenship is a far more permanent, costly and complicated proposition. …“America’s the most attractive destination for capital, entrepreneurs and people wanting to get a great education,” said Reaz H. Jafri, a partner and head of the immigration practice at Withers, an international law firm. “But in today’s world, when you have other economic centers of excellence — like Singapore, Switzerland and London — people don’t view the U.S. as the only place to be.” …now, the price may be right to leave. While the cost of expatriating varies depending on a person’s assets, the wealthiest are betting that if a Democrat wins…, leaving now means a lower exit tax. …The wealthy who are considering renouncing their citizenship fear a wealth tax less than the possibility that the tax on capital gains could be raised to the ordinary income tax rate, effectively doubling what a wealthy person would pay… When Eduardo Saverin, a founder of Facebook…renounced his United States citizenship shortly before the social network went public, …several estimates said that renouncing his citizenship…saved him $700 million in taxes.

The migratory habits of rich people make a difference in the global economy.

Here are some excerpts from a 2017 Bloomberg story.

Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world… Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K… As a result, the average Australian is now significantly wealthier than the average American or Briton. …Given its relatively small population, Australia also makes an appearance on a list of average wealth per person. This one is, however, dominated by small tax havens.

Here’s one of the charts from the story.

As you can see, Australia is doing very well, though the small tax havens like Monaco are world leaders.

I’m mystified, however, that the Cayman Islands isn’t listed.

But I’m digressing.

Let’s get back to our main topic. It’s worth noting that even Greece is seeking to attract rich foreigners.

The new tax law is aimed at attracting fresh revenues into the country’s state coffers – mainly from foreigners as well as Greeks who are taxed abroad – by relocating their tax domicile to Greece, as it tries to woo “high-net-worth individuals” to the Greek tax register. The non-dom model provides for revenues obtained abroad to be taxed at a flat amount… Having these foreigners stay in Greece for at least 183 days a year, as the law requires, will also entail expenditure on accommodation and everyday costs that will be added to the Greek economy. …most eligible foreigners will be able to considerably lighten their tax burden if they relocate to Greece…nevertheless, the amount of 500,000 euros’ worth of investment in Greece required of foreigners and the annual flat tax of 100,000 euros demanded (plus 20,000 euros per family member) may keep many of them away.

The system is too restrictive, but it will make the beleaguered nation an attractive destination for some rich people. After all, they don’t even have to pay a flat tax, just a flat fee.

Italy has enjoyed some success with a similar regime to entice millionaires.

Last but not least, an article published last year has some fascinating details on the where rich people move and why they move.

The world’s wealthiest people are also the most mobile. High net worth individuals (HNWIs) – persons with wealth over US$1 million – may decide to pick up and move for a number of reasons. In some cases they are attracted by jurisdictions with more favorable tax laws… Unlike the middle class, wealthy citizens have the means to pick up and leave when things start to sideways in their home country. An uptick in HNWI migration from a country can often be a signal of negative economic or societal factors influencing a country. …Time-honored locations – such as Switzerland and the Cayman Islands – continue to attract the world’s wealthy, but no country is experiencing HNWI inflows quite like Australia. …The country has a robust economy, and is perceived as being a safe place to raise a family. Even better, Australia has no inheritance tax

Here’s a map from the article.

The good news is that the United States is attracting more millionaires than it’s losing (perhaps because of the EB-5 program).

The bad news is that this ratio could flip after the election. Indeed, it may already be happening even though recent data on expatriation paints a rosy picture.

The bottom line is that the United States should be competing to attract millionaires, not repel them. Assuming, of course, politicians care about jobs and prosperity for the rest of the population.

P.S. American politicians, copying laws normally imposed by the world’s most loathsome regimes, have imposed an “exit tax” so they can grab extra cash from rich people who choose to become citizens elsewhere.

P.P.S. I’ve argued that Australia is a good place to emigrate even for those of us who aren’t rich.

Coronavirus and Gun Ownership

Back in March, I explained that the coronavirus pandemic showed why it’s so valuable for people to have the right of gun ownership.

Let’s revisit the topic and we’ll start with the bad news. As illustrated by this Reason video, Senator Elizabeth Warren wants to exploit the crisis by imposing sweeping limits on our civil liberties guaranteed by the 2nd Amendment.

The good news is that the Trump Administration has been working to make it easier for people to exercise their right to gun ownership.

Licensed gun stores can do drive-thru sales of firearms or sell them out of their parking lots, the Trump administration said…in new guidance designed to facilitate purchases without forcing buyers to enter confined establishments during the coronavirus pandemic. …The only demand is that the required records from transactions still be stored safely inside the building. …Firearms sales have been one of the flashpoints of the crisis. A number of liberal jurisdictions have deemed gun stores to be “non-essential” businesses, which makes them subject to the same shutdown orders as shopping malls, theaters and hair salons. …Lawsuits have been filed against a number of those shutdown orders, arguing they violate the Second Amendment right to keep and bear arms. Gun owners say they can’t exercise that right if they can’t purchase a firearm or ammunition. Those complaints got a boost from the Homeland Security Department, which has issued guidance deeming firearms dealers essential.

And the best news is that many Americans have responded to the coronavirus by stocking up on weapons.

Here are some excerpts from a report by the U.K.-based BBC.

With the death toll climbing every day and most of the country under some form of lockdown, many Americans seem to be turning to guns as part of their response. …The FBI conducted 3.7m background checks in March 2020, the highest total since the instant background check programme began in 1998. …Gun shops across the country report that they are unable to re-stock shelves quickly enough to cope with the rush. …According to Georgia State University law school professor Timothy Lytton, …most new gun sales are being motivated by two factors that have been spurred on by the coronavirus crisis. The first is the concern that civil society – fire, police and health services – could be severely “eroded” someday, leading to a breakdown in law and order. In such a case, a gun can be viewed as a “self-help” survival tool, he says. The second reason is concerns over so-called big government infringing on American freedoms such as gun ownership, which is enshrined in the US constitution. “Many of the public health measures, such as shelter-in-place, restricting peoples’ movements, restricting what people can buy,” Mr Lytton says, “raises fears among many groups of the potential for government takeover and tyranny.”

Here’s a tweet from March showing long lines at a gun store.

A local TV station in the state of Washington reported on the surge in gun sales.

Local firearm stores have been all but emptied out. The response we got from several gun stores in numerous counties showed how overwhelmed they are with business. Many said they barely had time to take our call and compared the demand to that of toilet paper. …We heard from several employees of local gun shops who say it’s undeniable that the massive surge is attributed to people’s fear during this time. Jason Cazes, owner of Low Price Guns in Bellevue, says three weeks ago, the boom in business hit like a ton of bricks. …Cazes found himself flooded with new customers with an urgent request. “Hey I need a hand gun, I need a shot gun. All the sudden they’re interested in having something for protection,” he said. …”It’s a lot of first time buyers,” says Cazes

A newspaper in Pittsburgh reported on the same phenomenon.

After standing in line at a Pittsburgh-area sporting goods store for more than an hour, not knowing what he would say to the sales clerk, the self-described “liberal Democrat from New York City” bought a gun. …His purchase last week occurred during a nationwide rash of firearm sales to people who had never considered gun ownership until becoming rattled by concerns about COVID-19’s impact on America’s social infrastructure. …On Wednesday at Keystone Shooting Center in Mars, Butler County, owner Ty Eggemeyer said the percentage of customers buying their first gun was “extremely high.” “Most of what’s selling is for self-defense and protection,” he said. “Mostly handguns. Our home-defense shotguns, wiped out.”

Stephen Gutowski writes for the Washington Free Beacon about the potential political implications of expanded gun ownership.

Scott Kane went 38 years without ever touching a gun. That streak would have continued had it not been for the coronavirus. In March, fearful of the harassment his wife and child experienced over their Asian ancestry, Kane found himself in a California gun shop. His March 11 purchase of a 9mm would have been the end of the story, were it not for a political standoff over shutdown orders and background checks. Now Kane, a former supporter of gun-control measures and AR-15 bans, is frustrated by the arduous process that has denied his family a sense of security. The pandemic has made the soft-spoken software engineer an unlikely Second Amendment supporter. …Kane is not alone. An influx of new gun owners has the potential to permanently alter the politics surrounding guns in the United States. …Brian, a 40-year-old Floridian, used his savings to buy a Smith & Wesson M&P Shield in March after being laid off—the experience changed his entire approach to Second Amendment issues. …Andrew, a federal contractor who, along with his wife, bought a Heckler & Koch VP9 on March 21 in Virginia, said the state’s Democrat-controlled legislature pursuing a package of gun-control laws this winter in the face of unprecedented opposition directly contributed to his purchase.

And Kira Davis, in a column for Red State, also suggests that the coronavirus has led to new-found appreciation for the 2nd Amendment of the Bill of Rights.

My friend’s father owns a gun range near me and she said he’s seen a huge amount of liberals coming in to purchase weapons in recent weeks. How does he know they’re liberals? “They’re shocked to discover they can’t just walk out of the store with a gun.” …Not only are many liberals suddenly learning to love their Second Amendment rights, many of them are finding out that the gun control narrative in this country — as repeated loudly and often by Hollywood and the mainstream media — is a complete lie. …As a gun-owner who formerly abhorred the Second Amendment, …I find this whole situation fascinating. …There are a lot of people like me out there right now — first-timers and Second Amendment haters who feel like a hypocrite for wanting a gun for protection. …now they are navigating our convoluted gun laws for themselves… As these revelations begin to spread among our liberal brethren in the state of California, will we see a shift in gun laws and support for anti-Second Amendment legislators? Only time will tell

Aaron Tao, in an article published by the Foundation for Economic Education, summarizes the case for gun ownership.

In the United States, depending where you live, police response time ranges from nine minutes to over an hour. Right now, one in five New York police officers are currently out sick due to COVID-19. Police in multiple states have announced they will no longer respond to theft, burglary, and break-ins. Given the current climate, it’s not unreasonable to assume police will take much longer to arrive, if they do at all, should someone dial 911. Furthermore, Americans need to understand there is no legal obligation for the police to protect you, which is affirmed by the Supreme Court and multiple lower courts. (See Castle Rock v. Gonzales, Warren v. District of Columbia, and Lozito v. New York City). Should the police fail to arrive or protect you when needed, you can’t even sue for neglect. …Should an even deadlier natural or man-made catastrophe take place, if the authorities haven’t been incapacitated, displaced, or destroyed completely, whatever personnel and resources are left will be prioritized to protect high-ranking government officials, their inner-circle, and critical government facilities and infrastructure. …ruling elites will be evacuated to a secure bunker in some undisclosed location while John Q. Public will be left to fend for himself. …Many Americans, especially minorities, have realized the need for self-protection in times of social upheaval and breakdown. It is unfortunate that it took a tragedy as extreme as the COVID-19 pandemic to remind people that we should never take peace, prosperity, and freedom for granted. But millions have now taken the first steps to defend themselves and their loved ones.

I don’t pretend to know whether the new surge in gun ownership will change the political landscape, but I know it’s good news when more people learn about the issue. Especially folks on the left. Not only the ones mentioned in the stories above, but also these articles that I’ve shared.

• In 2012, I shared some important observations from Jeffrey Goldberg, a left-leaning writer for The Atlantic. In his column, he basically admitted his side was wrong about gun control.
• Then, in 2013, I wrote about a column by Justin Cronin in the New York Times. He self-identified as a liberal, but explained how real-world events have led him to become a supporter of private gun ownership.
• In 2015, I shared a column by Jamelle Bouie in Slate, who addressed the left’s fixation on trying to ban so-called assault weapons and explains that such policies are meaningless.
• In 2017, Leah Libresco wrote in the Washington Post that advocates of gun control are driven by emotion rather empirical research and evidence.
• Last but not least, in 2019, Alex Kingsbury confessed in the New York Times that his long-held dream of gun confiscation was utterly impractical.

P.S. If you want some humor that combines coronavirus and guns, click here (next-to-last item), here (third item), and here (first item).

Margaret Thatcher’s Message to Washington’s Big Spenders

Margaret Thatcher was the British version of Ronald Reagan, a leader who resuscitated a nation by rolling back the size and scope of government.

She also is famous for one of the most accurate observations ever made about fiscal policy.

Her warning proved prophetic when the Soviet Bloc collapsed.

Her wise words also could be applied to what happened about a decade ago in Greece. And what’s about to happen in Italy.

But let’s not forget that the United States isn’t immune to the problem of excessive government. The Wall Street Journal has a sobering editorial on the pro-spending sentiment that dominates the nation’s capital.

…in Washington the politicians are debating how to spend another few trillion dollars in the name of virus relief. …Mrs. Pelosi’s House bill promises another $3 trillion for her various constituencies on top of the $2.7 trillion or so Congress has already spent on the pandemic. The goal is income redistribution… This political strategy may work since Republicans, as usual, are divided and defensive. …Mr. Trump…seems torn about what to support and is thinking only as far as November. This is a recipe for another deal on Democratic terms… Sooner or later the pandemic will end. The question is what kind of economy will be left. A second Cares Act would leave a legacy of vastly larger government that would mean slower growth and take years to overcome.

Yes, the spending binge will mean slower growth.

But I’m even more worried about what will happen in the future. Here are three things to keep in mind.

1. Largely because of Bush, Obama, and Trump, the federal budget has tripled since 1980 (Reagan and Clinton were comparatively frugal). Keep in mind that the increase in the accompanying chart shows the growth in spending after adjusting for inflation.
2. The burden of federal spending is projected to skyrocket in future years because of the combination of demographic changes and poorly designed entitlement programs. In other words, our fiscal outlook is grim even if politicians don’t approve an additional penny of new spending.
3. However, politicians are spending more money. A lot more.  As shown in the accompanying chart, this has caused a huge spike in per-capita outlays. And the crowd in Washington wants to make the red portion much bigger.

Given all this bad news, does Thatcher’s warning about running out “of other people’s money” apply to the United States?

As bad as the numbers are, my two cents is that the U.S. won’t suffer a fiscal crisis anytime soon. As I noted at the end of this interview, Washington can probably continue with business-as-usual fiscal policy for several more decades (Adam Smith observed that it usually takes a lot of bad policy over a long period of time to cause economic ruin).

But that doesn’t mean it’s a good idea to travel down that path.

Here’s an analogy. Smoking three packs of cigarettes a day presumably won’t kill someone within the first 10 years, but it’s definitely not a recipe for long-run health and vitality. Sooner or later, there will be consequences.

A mature and sensible people (like the Swiss) take steps to avoid the fiscal version of those bad consequences.

For what it’s worth, similar reforms have been proposed for the United States. Unfortunately, too many American politicians and consumed by self-interest and don’t think past the next election.

The Economic Future of Hong Kong

I have applauded the incredible economic success of Hong Kong, which has long been ranked as the world’s most economically free jurisdiction.

Well, given China’s recent decision to impose more controls on Hong Kong, I want to share this interview I did last October.

At the risk of patting myself on the back, I think everything I said still applies.

Especially when compared to what some others are saying. Writing for Bloomberg last October, Shirley Zhao and Bruce Einhorn seemingly want readers to think that low tax rates somehow are the cause of Hong Kong’s challenges.

Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. But widening inequality has also fueled the worst unrest the city has seen since the former British colony returned to China in 1997. …The combined net worth of the territory’s 20 richest people…is pegged at $210 billion… the city’s income inequality, as expressed in Gini coefficient, was the most for any developed economy in 2016… About 1 in 5 residents lives below the poverty line. …Lam is under pressure to soothe tensions and find ways to ease the housing crisis in the least-affordable market without rocking a tax regime that made Hong Kong Asia’s financial hub.

I disagree with much of their analysis.

As I noted in the interview, the problem with housing is caused by government ownership of land.

Moreover, I can’t resist pointing out that the assertion about 20 percent of the population living in poverty has been shown to be utter nonsense. That figure comes from “poverty hucksters” who deliberately conflate inequality with poverty (an example of the “Eighth Theorem of Government“).

And, speaking of inequality, Hong Kong historically has been a great place to be poor for the simple reason that it’s a great place to climb out of poverty.

Or, to be more precise, it’s been a great place to climb out of poverty. Whether that will still be true in the future depends on China.

I have no idea what Beijing will do, but I explained in the interview that it would be good for everyone if China took a hands-off approach to Hong Kong.

Why? This chart, based on the Maddison database, shows that Hong Kong’s rapid growth rate has slowed ever since Hong Kong was transferred from British rule to Chinese rule. Since China has wisely not interfered with Hong Kong’s pro-growth economic policy, the most logical explanation for the slowdown is that entrepreneurs and investors are worried about what may happen in the future.

Needless to say, the best way to rejuvenate rapid growth is for Beijing to somehow display a commitment to economic liberty in Hong Kong (consistent with the one-country-two-systems approach).

P.S. As I warned in the interview, the United States should not goad China into any sort of crackdown, either political or economic.

P.P.S. The best-case scenario is a Singapore-style evolution in China, meaning sweeping economic liberalization and gradual political liberalization.

P.P.P.S. The worst-case scenario is backsliding by China on previous economic liberalization, combined with unfriendly relations with the western world.

Coronavirus and the Two Americas

Earlier this month, Neil Ferguson was awarded membership in the Bureaucrat Hall of Fame after he and his mistress were caught violating lockdown rules that Ferguson – in his role as a supposed public health expert – demanded for the entire United Kingdom.

This was a stunning display of hypocrisy, perhaps even to the extent that Joe Biden or Elizabeth Warren might be shocked.

But I want to focus on a different point, which is the degree to which the coronavirus has exposed the fault line between those who are subsidized by government and those who pay for government.

In her Wall Street Journal column, Peggy Noonan opines about how the “protected” don’t have to worry about the consequences of economic shutdowns.

There is a class divide between those who are hard-line on lockdowns and those who are pushing back. We see the professionals on one side—those James Burnham called the managerial elite, and Michael Lind, in “The New Class War,” calls “the overclass”—and regular people on the other. The overclass are highly educated and exert outsize influence as managers and leaders of important institutions—hospitals, companies, statehouses. …Since the pandemic began, the overclass has been in charge—scientists, doctors, political figures, consultants—calling the shots for the average people. But personally they have less skin in the game. The National Institutes of Health scientist won’t lose his livelihood over what’s happened. Neither will the midday anchor. I’ve called this divide the protected versus the unprotected. …Here’s a generalization based on a lifetime of experience and observation. The working-class people who are pushing back have had harder lives than those now determining their fate. They haven’t had familial or economic ease. No one sent them to Yale. …they look at these scientists and reporters making their warnings about how tough it’s going to be if we lift shutdowns and they don’t think, “Oh what informed, caring observers.” They think, “You have no idea what tough is. You don’t know what painful is.”

Fareed Zakaria’s column for the Washington Post acknowledges that it is a problem when a bunch of cossetted elites make policy for everyone else.

…there is a broader distrust that we need to understand. …Social power exists in three realms — government, the economy, and the culture. …In all three, leaders tend to be urban, college-educated professionals, often with a postgraduate degree. That makes them quite distinct from much of the rest of the country. …And yet, the top echelons everywhere are filled with this “credentialed overclass.” …many non-college-educated people…see the overclass as enacting policies that are presented as good for the whole country but really mostly benefit people from the ruling class… Let’s look at the covid-19 crisis through this prism. Imagine you are an American who works with his hands — a truck driver, a construction worker, an oil rig mechanic — and you have just lost your job… You turn on the television and hear medical experts, academics, technocrats and journalists explain that we must keep the economy closed — in other words, keep you unemployed — because public health is important. All these people making the case have jobs, have maintained their standards of living… The covid-19 divide is a class divide.

Writing for USA Today, Professor Glenn Reynolds observes that the self-anointed experts are not the ones paying the price for coronavirus policies.

…it’s hard not to notice a class divide here. As with so many of America’s conflicts, the divide is between the people in the political/managerial class on the one hand and the people in the working class on the other. And as usual, the smugness and authoritarianism are pretty much all on one side. …in Los Angeles — where less than half the county is working now — radio journalist Steve Gregory asked the L.A. County Board of Supervisors whether any of them were willing to take voluntary pay cuts during this crisis. He was told by the chair that his question was “irresponsible,” which is to say embarrassing and inconvenient. (By contrast, New Zealand’s senior officials, including the prime minister, are taking a 20% pay cut.) …There really are two Americas here: Those still getting a paycheck from government, corporations or universities, and those who are unemployed, or seeing their small businesses suffer due to shutdowns. …Then there are the hypocritical gestures, like Chicago Mayor Lori Lightfoot’s illicit haircut… People don’t appreciate being lectured and condescended to and bossed around. They especially don’t appreciate being urged to sacrifice by people who make no sacrifices themselves.

I’m tempted to focus on Glenn’s point about how American politicians should follow the lead of New Zealand lawmakers and accept a pay cut as a gesture of solidarity.

Heck, all levels of bureaucracy should take a haircut. Bureaucrats already have a significant advantage in compensation compared to the private sector, and that gap surely will grow now that so many businesses have been shuttered and so many workers have been forced into unemployment.

But I want to focus on a different point, which is the inherent unfairness of the elite having consequence-free power and authority over ordinary people.

In part, it’s the point that Thomas Sowell makes in the accompanying quote.

But it goes beyond that. The problem with the “overclass” or “protected class” is that they also don’t pay any price when they’re totally right, somewhat right, or only partly right.

In other words, the people who live off the government, either directly or indirectly, have relatively comfortable lives – all financed by the people who deal with much greater levels of hardship and uncertainty.

At the risk of understatement, that’s not right.

P.S. This gap is exacerbated when government officials display thuggery rather than empathy.

The 10th and Final Edition of Coronavirus Humor

I started sharing politically-themed coronavirus humor back in March and that’s now been a tradition for nine consecutive weekends (see here, here, here, here, here, here, here, here, and here).

This will be the final edition.

We’ll start with a clever video from Kevin James. It could be entitled, Revenge of the Karens.

Next we have a helpful suggestion from the practitioners of coronavirus thuggery.

The clever folks at Babylon Bee have a story about disappointed governors.

Democrat governors across the nation have urged states to continue their lockdowns, saying if they end prematurely, their time in the limelight will be over. …said California Governor Gavin Newsom. “I can’t let this $500 hair cut go to waste. I spend thousands on hair gel alone every month. If I can’t give a press conference every night, it’s all for nothing!” Governor Andrew Cuomo of New York agreed. “We must continue this crisis as long as possible so that people will know who I am,”… A study confirmed the governors’ worst fears, showing that in states with no COVID-19 restrictions, people don’t think about the government much at all and just go about their daily lives. “We can’t let that happen,” said Michigan Governor Gretchen Whitmer.

The people who think that Bill and Hillary Clinton somehow had Jeffrey Epstein killed will like this bit of satire.

For what it’s worth, I always remind conspiracy-minded people that routine government incompetence is usually a better explanation for why things happen.

Next, we have a reminder that the climate alarmists must be very disappointed and jealous that they’ve been displaced by a crisis that actually does kill people.

I wrote recently about Florida’s economic success. Now, let’s look at another story from Babylon Bee, this one about how the Sunshine State is in trouble for its reaction to the virus.

Science says Florida should have seen skyrocketing deaths from COVID-19, but instead Florida — despite its large elderly population — has not seen anywhere near the number of problems faced by states like New York and New Jersey. This has been ruled to be in complete defiance of Science. …Washington Post columnist Jennifer Rubin… “Florida is undermining our trust in Science by not dying. We cannot tolerate this. More Floridians need to die. To die for Science.” California Governor and Science believer Gavin Newsom agreed. “Ron DeSantis is a witch! Burn him!” …There is now a movement by Science-believing Democrats to actively try to infect Floridians to try to get their death count to match projections.

As usual, I’ve saved my favorite for the end.

I’ve acknowledged that there’s much we don’t know about the virus and how to react. But I feel very confident in stating that the most bone-headed decision by politicians has been to endanger ordinary people by releasing criminals while at the same time arresting ordinary people and exposing them to the supposedly coronavirus-spreading justice system.

Which is the message of this Chip Bok cartoon.

If you find this cartoon amusing, I highlighted my favorite Bok creations as part of a contest to identify the best political cartoonist.

P.S. I wish some of the ways that politicians have reacted to the virus – such as this, this, this, and this – were satire rather than reality.

Are there Innate Differences between Right and Left (and Where Do Libertarians Fit)?

I sometimes wonder why libertarians aren’t more persuasive given that there’s so much evidence for our economic and social views.

The answer may have something to do with matters such as psychology. Let’s take a closer look at this issue, starting with a video from Johan Norberg.

Johan’s point is that the real gap is between classical liberals (i.e., libertarians) and statists.

Though most of the research and analysis is based on potential differences between conservatives and liberals, as conventionally defined.

For instance, in a column for the U.K.-based Guardian, Arlie Hochschild writes about differences in awareness on the right and left.

…what’s startling is the further finding that higher education does not improve a person’s perceptions – and sometimes even hurts it. In their survey answers, highly educated Republicans were no more accurate in their ideas about Democratic opinion than poorly educated Republicans. For Democrats, the education effect was even worse: the more educated a Democrat is, according to the study, the less he or she understands the Republican worldview. “This effect,” the report says, “is so strong that Democrats without a high school diploma are three times more accurate than those with a postgraduate degree.” …Even more than their Republican counterparts, highly educated Democrats tend to live in exclusively Democratic enclaves. The more they report “almost all my friends hold the same political views”, the worse their guesses on what Republicans think. …Although in principle more tolerant of political diversity, highly educated – and mostly urban – Democrats live, ironically, with less of it.

And here’s a tweet about educated folks on the left being more likely to live in a bubble.

Regarding the issue of how different ideologies respond to external threats (supposedly a major driver of philosophical differences), Ross Douthat analyzed how conservatives responded to coronavirus in a column for the New York Times.

…an influential body of literature has attempted to psychologize the partisan divide — to identify conservative and liberal personality types, right-wing or left-wing minds or brains… In its crudest form this literature just amounts to liberal self-congratulation, with survey questions and regression analyses deployed to “prove” with “science” that liberals are broad-minded freethinkers and conservatives are cramped authoritarians. But…Haidt argues that conservatives actually have more diverse moral intuitions than liberals, encompassing categories like purity and loyalty as well as care and fairness, and that the right-wing mind therefore sometimes understands the left-wing mind better than vice versa. …the political responses to the pandemic have put these psychological theories to a very interesting test.

He then applies this analysis to the coronavirus.

If there was ever a crisis tailored to the conservative mind-set, surely it would be this one, with the main peril being that conservatives would wildly overreact to such a trigger. …As the disease spread and the debate went mainstream, liberal opinion mostly abandoned its anti-quarantine posture and swung toward a reasonable panic, while conservative opinion divided, with a large portion of the right following the lead of Trump himself, who spent crucial weeks trying to wish the crisis away. …figures like Rush Limbaugh and Sean Hannity manifested a conservatism of tribal denial, owning the libs by minimizing the coronavirus threat. …one might say that the pandemic illustrates the power of partisan mood affiliation over any kind of deeper ideological mind-set. Or relatedly, it illustrates the ways in which under the right circumstances, people can easily swing between different moral intuitions. (This holds for liberals as well as conservatives: A good liberal will be as deferential to authority as any conservative when the authority has the right academic degrees…) …what we call “American conservatism” is probably more ideologically and psychologically heterogeneous than the conservative mind-set that social scientists aspire to measure and pin down. In particular, it includes an incredibly powerful streak of what you might call folk libertarianism… This mentality, with its reflexive Ayn Randism and its Panglossian hyper-individualism, is definitely essential to understanding part of the American right. But…I’m doubtful that it corresponds to any universal set of psychological tendencies that we could reasonably call conservative.

By the way, a new study by four social scientists, published in Nature, casts doubt on the earlier research regarding ideological differences in threat perception

About a decade ago, a study documented that conservatives have stronger physiological responses to threatening stimuli than liberals. This work launched an approach aimed at uncovering the biological roots of ideology. Despite wide-ranging scientific and popular impact, independent laboratories have not replicated the study. We conducted a pre-registered direct replication (n = 202) and conceptual replications in the United States (n = 352) and the Netherlands (n = 81). Our analyses do not support the conclusions of the original study, nor do we find evidence for broader claims regarding the effect of disgust and the existence of a physiological trait.

And another study by three social scientists in the Personality and Social Psychology Bulletin also casts doubt on the earlier research.

One consistent finding is that conservatives show higher disgust sensitivity than liberals. This finding, however, is predominantly based on assessments of disgust to specific elicitors, which confound individuals’ sensitivity and propensity to the experience of disgust with the extent to which they find specific elicitors disgusting. Across five studies, we vary specific elicitors of disgust, showing that the relations between political orientation and disgust sensitivity depend on the specific set of elicitors used. We also show that disgust sensitivity is not associated with political orientation when measured with an elicitor-unspecific scale. Taken together, our findings suggest that the differences between conservatives and liberals in disgust sensitivity are context dependent rather than a stable personality difference.

So maybe there’s not a meaningful difference between right and left with regards to matters such as disgust and threats.

But there seems to be plenty of evidence that there are differences in other areas.

Depending on political affiliation, Americans shop differently, as reported by Suzanne Kapner and Dante Chinni in the Wall Street Journal.

Consumer research data show Democrats have become more likely to wear Levi’s than their Republican counterparts. The opposite is true with Wrangler, which is now far more popular with Republicans. There is no simple explanation behind those consumer moves. Some of it is due to social and political stances companies are taking, such as Levi’s embrace of gun control. …the country is becoming more polarized along political lines, which is having an effect on brands that choose to stay out of the political fray. …Nearly 60% of 1,000 Americans surveyed by Edelman last year said they would choose, switch, avoid or boycott a brand based on its stand on societal issues. That is up from 47% in 2017.

Some of this makes sense to me. I have dramatically reduced my purchases at Dick’s, for example, because of the company’s opposition to the 2nd Amendment.

Here’s a graphic from the story. The self-selection of Fox and CNN viewers is especially noteworthy.

Folks on the right and left may even sleep differently, according to research published in the Journal of Politics by Aleksander Ksiazkiewicz at the University of Illinois.

This article proposes that chronotype (a person’s time-of-sleep preference) is a previously unidentified psychological correlate of political ideology. Chronotype may lead to political ideology through a motivated social cognitive process, ideology may shape sleep patterns through a desire to align with social norms, or ideology and chronotype may arise from common antecedents, such as genetics, socialization, or community influences. Analyses demonstrate a link between a morningness and conservatism in seven American samples and one British sample. This relationship is robust to controls for openness, conscientiousness, and demographics, including age, sex, income, and education.

Last but not least, Justin Lehmiller of the Kinsey Institute, in a column for Politico, says Republicans and Democrats have different fantasies.

I surveyed 4,175 adult Americans from all 50 states about what turns them on…one of the more intriguing things I uncovered was the political divide in our fantasy worlds. While self-identified Republicans and self-identified Democrats reported fantasizing with the same average frequency—several times per week—I found that Republicans were more likely than Democrats to fantasize about a range of activities that involve sex outside of marriage. Think things like infidelity, orgies and partner swapping… By contrast, self-identified Democrats were more likely than Republicans to fantasize about almost the entire spectrum of BDSM activities, from bondage to spanking to dominance-submission play. The largest Democrat-Republican divide on the BDSM spectrum was in masochism, which involves deriving pleasure from the experience of pain. …What connects Republicans and Democrats, I believe, is that their fantasies are at least partly driven by what they can’t have. …Interestingly, the single most commonly fantasized-about politician among both parties was the same: Sarah Palin (though Republicans were much more likely to have Palin fantasies than Democrats). Following Palin, the next most frequently mentioned politicians in Republicans’ fantasies were John F. Kennedy, Bill Clinton and Nikki Haley. While, after Palin, Democrats fantasized about Barack Obama, Bill Clinton and Hillary Clinton.

Maybe I’m strange, but I’ve never met or seen an American politician that piqued my interest.

Though I will confess to occasionally having quirky libertarian fantasies, one of which does involve sex.

Speaking of quirky, folks on the left appear to have more issues with mental health.

Among white liberals under 30, nearly half have a mental health condition, compared to 21-26 % among centrists and conservatives. H/t @ZachG932 https://t.co/iG9saHtvRR

— Eric Kaufmann (@epkaufm) April 12, 2020

Since I’ve asserted that folks on the left are “neurotic” and “guilt-ridden,” part of me agrees with these findings.

Though, to be fair, maybe they’re just more likely to visit healthcare providers.

I’ll conclude with what I will conveniently characterize as the most insightful research.

Three scholars, in an article for Current Psychology, find that libertarians are the smartest.

Previous studies consistently showed that analytic cognitive style (ACS) is negatively correlated with social conservatism, but there are mixed findings concerning its relation with economic conservatism. Most tests have relied on a unidimensional (liberal-conservative) operationalization of political orientation. Libertarians tend not only to identify themselves as conservative on this scale but also to score higher on ACS than liberals and conservatives.

Here’s the relevant chart from the study, courtesy of Rolf Degen.

Liberals can take some solace in that they score above conservatives, though there’s not much that can be said for self-identified moderates.

P.S. I started this column by noting that I want to understand how to be a more persuasive advocate for liberty. I don’t know if that will ever happen, but at least I can take comfort in that I will never be as deluded as this columnist who thinks he has discovered a way of becoming a more persuasive advocate for statism.

P.P.S. If you like this type of research, my previous columns on supposedly innate differences across ideologies can be found here, here, and here.

P.P.P.S. And here’s the research on the differences between libertarians and conservatives.

P.P.P.P.S. Here’s a humorous look at the difference between conservatives, liberals, and Texans.

The Boring but Important Topic of Carry Forwards and Net Operating Losses

In the world of tax policy, big-picture issues such as tax reform can capture the public’s attention (should we junk the IRS, instance, and adopt a flat tax?).

People also get very interested if politicians are threatening to grab more of their money.

But many tax issues are tedious and boring, even if they involve important issues.

• Depreciation vs. expensing for new business investment.
• International tax rules and the choice of worldwide taxation vs territorial taxation.
• The debate on consumption-base taxation vs. Haig-Simons taxation.

Today, we’re going to discuss another one of the sleep-inducing tax issues – how to account for business losses.

This arcane issues has been attracting a bit of attention because the big coronavirus-driven emergency package included some changes to the tax treatment of such losses (making it easier to reduce overall tax liabilities by balancing losses in some years with profits in other years).

That upset two left-leaning members of Congress, Rep. Lloyd Doggett (D-TX) and Sen. Sheldon Whitehouse (D-RI), who editorialized in USA Today about the changes.

…tucked into its 880 pages were Republican-inserted tax provisions…that..allow certain investors…to cut their tax bills by shifting losses to prior tax years. …Large corporations were also authorized to convert losses from two years before the pandemic into immediate tax refunds. Businesses with losses when the economy was growing are rewarded for poor management or adverse market conditions that had absolutely nothing to do with the pandemic. …let’s reverse the damage. We are offering legislation to unwind this massive tax giveaway, to recover the lost revenues… Giant special interest tax breaks were not needed before and certainly have no place during a pandemic.

Is this right? Did a handful of GOP politicians insert a special favor for their friends in the business community?

For what it’s worth, I’m sure the answer to both questions is yes. Politicians are a very self-interested group and I’m sure there were dozens of provisions in the legislation that qualified for that type of criticism.

I’m interested, however, in whether the provisions moved policy in the right direction or the wrong direction.

Kyle Pomerleau with the American Enterprise Institute explains why the changes were desirable.

The liberalized treatment of losses is not a bailout and does not provide special treatment of certain industries. Loss deductions are an essential part of a well-functioning income tax. Businesses typically make multi-year investments. Those investments may lose money in some years make money in other years. The ability to either carry back losses to offset previous years’ taxes or carry forward losses to offset future taxes ensures that the tax system accurately measures income. Without loss deductions, a tax system would be biased against risky investment. …In the future, lawmakers should consider permanently liberalizing the treatment of losses.

Nicole Kaeding made similar arguments for the National Taxpayers Union.

The provision at hand, a loosening of net operating loss rules, isn’t cronyism. Instead, it reflects Congress’s priority of helping affected individuals and businesses weather our economic crisis by smoothing out “lumpy” tax burdens over time. Net operating losses (NOLs) are key features of the tax code. Tax years, calendar years, and business profitability don’t always align. Net operating loss provisions help smooth profits and losses across tax years to ensure that businesses are taxed on their economic income, not an accounting byproduct. …many have argued that it made little sense for Congress to revise loss rules for 2018 and 2019, when the virus wasn’t a consideration. In the abstract, that concern makes sense but policymakers were concerned about providing immediate liquidity to firms. A 2020 NOL doesn’t help a firm until they file their 2020 tax return in 2021. But allowing carrybacks for 2018 or 2019 allows firms to access capital quickly by amending their previous returns and claiming a refund.

For what it’s worth, I addressed this topic back in 2016 because it became a controversy in that year’s presidential campaign.

I didn’t pretend to know whether Trump was doing the right thing or wrong thing with his tax returns, but I made the argument that a fair and neutral tax system should have carry-forward rules.

Indeed, the business side of the flat tax expressly includes such provisions.

For what it’s worth, households used to have the option for “income-averaging,” which basically meant they could lower their overall tax rate by spreading a spike in income over several years.

A difference between households and businesses, though, is that businesses can suffer losses, while the worst thing that happens to a household is when income drops to zero.

The bottom line is that income averaging for people would be a helpful provision in the tax code, but carry-forward rules for businesses are a necessary provision.

P.S. That last sentence assumes goal is a tax system that is designed to extract money while imposing the smallest-possible amount of damage on economic efficiency.

At the risk of stating the obvious, a simple and fair tax system is not the goal of most politicians. In public, they prefer using the tax code as a tool for class-war demagoguery, and in private, they use it as a vehicle for auctioning off special provisions to their cronies.

The Economic Consequences of Expanding Pay-as-You-Go Social Security Systems

Despite the fact that Social Security is an ever-increasing fiscal burden with a 75-year cash-flow deficit of nearly $45 trillion, many politicians in Washington have been trying to buy votes with proposals to expand the program (Barack Obama, Hillary Clinton, Bernie Sanders, Elizabeth Warren, etc).

A new working paper from the European Central Bank gives us some insights on what will happen if they succeed.

Authored by Daniel Baksa, Zsuzsa Munkacsi, and Carolin Nerlich, the study look at the long-run impact of related policies in Europe, using Germany and Slovakia as examples.

Here’s their description of the study.

In view of the adverse macroeconomic and fiscal implications of ageing, many European countries have implemented significant pension reforms… More recently, however, the reform progress has stalled, and despite an unchanged demographic outlook, several European countries reversed, or plan to do so, parts of their previously adopted pension reforms. In this paper we offer a framework that allows us to evaluate the macroeconomic and fiscal costs of pension reform reversals. …By using a general equilibrium model with overlapping generations we can account for feedback effects between changes in pension parameters, pension expenditures and macroeconomic variables. …The model is calibrated for Germany and Slovakia.

Before sharing their findings, here’s a look at how demographics are a ticking time bomb for Europe.

The yellow dots are the 2016 numbers for the old-age dependency ratio (the number of people over 65 compared to the 15-64 working-age population) and the red dots show how that ratio will deteriorate by 2070 (the numbers for the United States are similarly grim).

These bad numbers mean that Europe’s economic outlook will worsen over time.

…population ageing has adverse macroeconomic and fiscal implications. …the results show an increase in the public debt-to-GDP ratio by around 100 percentage points until 2070, compared to the initial period, for both Germany and Slovakia. Moreover, real GDP per capita is projected to decline by almost 14% in Germany and 9% in Slovakia, compared to the initial period.

But it’s possible for the numbers to get better or worse, depending on changes to public policy.

…similar to other studies we find evidence that pension reforms help to contain the adverse implications of ageing… In particular, increases in the retirement age appear to help to alleviate ageing pressures most. …we find strong evidence for the presumption that reversals of pension reforms are potentially very costly. In fact, reform reversals would not only result in higher aggregate pension expenditure and public debt-to-GDP ratios, but would in most cases also exacerbate the adverse macroeconomic impact of ageing.

Unfortunately, public policy is now trending in the wrong direction. Here’s what’s been happening in Germany and Slovakia.

Germany recently decided to cap the decline in the benefit ratio and the increase in the contribution rate until 2025 at certain levels, and is considering whether to extend this cap even until 2040. Slovakia decided to break the automatic link between changes in life expectancy and retirement age, by capping the retirement age at 64 years. …in the reversal scenario for Germany we freeze the benefit ratio at its current level of 48% and assume that the contribution rate would not exceed the threshold of 20% until 2040. With this reform reversal scenario we assume that the agreed freeze of the benefits ratio and contribution rate until 2025 will be ex-tended until 2040. In Slovakia, we assume the retirement age to stop increasing from the year 2045 onwards.

And what do they find when countries backtrack on reform?

Here’s what they estimated in Germany.

For Germany, we find that the reform reversal would imply sizeable costs (see Table 6, column “reform reversal”). Specifically, by 2070, the increase in the public debt-to-GDP ratio can be expected to be ceteris paribus almost 60 percentage points higher than under the baseline scenario, as a result of higher pension expenditures, adverse feedback effects and lower contribution rates.

For those interested, here’s Table 6, which I’ve augmented by highlighting in red the most relevant changes. Yes, the debt increases compared to the baseline, but I think it’s equally important (if not more important) to see how young people are hurt and how the burden of government spending goes up.

Now let’s see what the authors found for Slovakia.

…we quantify the fiscal costs of the reform reversal in Slovakia by comparing the debt impact under the reform reversal scenario with that under the baseline scenario. Our results show that such a reform reversal would be very costly. In fact, the increase in the public debt-to-GDP ratio would be more than 50 percentage points higher than the estimated increase of around 100 percentage points of GDP under the baseline scenario (see Table 7).

Here’s Table 7, and again I have highlighted in red the increase in debt as well as the data showing additional harm to young people and a much bigger increase in the burden of government spending.

So what do these findings mean for the United States?

Let’s explain using a homemade infographic. I’ve put four options for Social Security on a spectrum. Here’s what they mean.

• “Expand Social Security” means more taxes and spending in pay-as-you-go systems that are already costly and out of balance.
• The “Status Quo” is a typical pay-as-you-go-system (where the United States is now and where Germany and Slovakia were before their reforms).
• “Conventional Reform” means trying to stabilize a pay-as-you-go system by demanding that workers pay more while promising to give them less (what Germany and Slovakia did).
• The most market-friendly position is “Personal Retirement Accounts,” which transforms creaky pay-as-you-go systems into real individual savings.

Here’s the infographic, including arrows to indicate that some options mean more government and others mean more prosperity.

What Germany and Slovakia did was move from “Status Quo” to “Conventional Reform.” But now they’re backtracking on those reforms and shifting back to the old version of the “Status Quo.”

In other words, a move in the direction of “More Government” and the European Central Bank’s study shows such a step will have negative consequences.

In the United States, by contrast, some folks on the left want America to move from “Status Quo” to “Expand Social Security.”

Like Germany and Slovakia, we’d be moving in the wrong direction. But the damage for the U.S. presumably would be worse because we didn’t first take a step in the right direction.

P.S. If you want to learn more about the best option, Australia, Denmark, Chile, Switzerland, Hong Kong, Netherlands, Faroe Islands, and Sweden are a few of the many jurisdictions that have fully or partially shifted to systems based on real savings.

Using Coronavirus as an Excuse for More E.U. Centralization and Redistribution

I wrote earlier this month about coronavirus becoming an excuse for more bad public policy.

American politicians certainly have been pushing all sorts of proposals for bigger government, showing that they have embraced the notion that you don’t want to let a “crisis go to waste.”

But nothing that’s happening in the United States is as monumentally misguided as the effort to create a new method of centralized redistribution in the European Union.

Kai Weiss of the Vienna-based Austrian Economic Center explains what is happening in a column for CapX.

…‘never let a good crisis go to waste’ seems to have become the mantra of both the European Commission a number of national leaders. The coronavirus has become a justification for…‘more Europe’ (which tends to actually mean more EU, to the detriment of Europe). The clearest sign of this renewed Euro-fervour is the plan cooked up by Angela Merkel and Emmanuel Macron earlier this week… Seasoned Brussels observers will be shocked to learn that their proposals have very little to do with the pandemic, and everything to do with deepening the centralisation of EU power and top-down policymaking. While Germany has traditionally…opposed the idea of eurobonds or similar debt collectivisation instruments, it is now advocating for precisely those policies. A €500 billion Recovery Fund… the initial plan is for the European Commission to raise the money on the financial markets. It would subsequently be paid back by the member states and through increased “own resources” – i.e., new taxes levied directly by Brussels… The good news is that none of these policy proposals are yet set in stone. There are some big legal questions, particularly on the Recovery Fund, and national parliaments would need to agree to this expansion of Brussels’ writ. Already countries like the Netherlands, Austria, Denmark, and Sweden have voiced criticism… But for all these obstacles, the direction of travel looks alarmingly clear. The consensus among the EU’s power brokers, as with pretty much any major world event, is that the answer is ‘more Europe’. ..For Macron  Merkel and their allies, this is far too good a crisis to pass up.

A story in the New York Times has additional details, including a discussion of potential obstacles.

Ms. Merkel this week agreed to break with two longstanding taboos in German policy. Along with the French president, Emmanuel Macron, Ms. Merkel proposed a 500 billion euro fund… It would allow the transfer of funds from richer countries… And it would do so with money borrowed collectively by the European Union as a whole. …Whatever emerges from the European Commission will be followed by tough negotiations… Chancellor Sebastian Kurz of Austria has raised objections to the idea of grants rather than loans, saying that he has been in contact with the leaders of Sweden, the Netherlands and Denmark. “Our position remains unchanged,’’ he said. …opposition may also come from member states in Central and Eastern Europe. …Those countries are going to be reluctant…to see so much European aid — for which they will in the end have to help pay — skewed to southern countries that are richer than they are. …in northern countries, moves for collective debt to bail out poorer southern countries may feed far-right, anti-European populists like the Alternative for Germany or the Sweden Democrats. They are angry at the idea of subsidizing southerners who, they believe, work less hard and retire much earlier.

What’s depressing about this report is that it appears the battle will revolve around whether the €500 billion will be distributed as grants or loans.

The real fight should be whether there should be any expansion of intra-E.U. redistribution.

For what it’s worth, Germany used to oppose such ideas, especially if funded by borrowing. But Angela Merkel has decided to throw German taxpayers under the bus.

Let’s close with some analysis from Matthew Lynn of the Spectator.

Die-hard European Union federalists have plotted for it for years. …The Greeks and Italians have pleaded for it. And French presidents have made no end of grand speeches, full of references to solidarity and common visions, proposing it. The Germans have finally relented and agreed, at least in part, to share debt within the EU and the euro-zone, and bail-out the weaker members of the club. …The money will be borrowed, based on income from the EU’s future budgets, but it will in effect be guaranteed by the member states, based on the EU’s ‘capital key’. …the rescue plan is completely unfair on all the EU countries outside the euro-zone. …why should they pay for it? Poland…will still be expected to pay in five per cent (or 25bn euros (£22bn)) to bail-out of far richer Italy (Polish GDP per capital is $15,000 (£12,000) compared with $34,000 (£27,000) for Italy).

Pro-centralization politicians are claiming this fund is needed to deal with the consequences of the coronavirus, but that’s largely a smokescreen. It will take many months for this proposal to get up and running – assuming, of course, that Merkel and Macron succeed in bullying nations such as Austria and the Netherlands into submission.

By that time, even the worst-hit countries already will have absorbed temporary health-related costs.

The bottom line is that this initiative is really about the long-held desire by the left to turn the E.U. into a transfer union.

The immediate losers will be taxpayers in Germany, as well as those in Austria, Sweden, the Netherlands, Finland, and a few other nations.

But all of Europe will suffer in the long run because of an increase in the continent’s overall fiscal burden.

And keep in mind that this is just the camel’s nose under the tent. It’s just a matter of time before this supposedly limited step becomes a template for further expansions in the size and scope of government.

Yet another reason why E.U. membership is increasingly an anchor for nations that want more prosperity.

P.S. As suggested by Mr. Lynn’s column, countries in Eastern Europe should fight this scheme. After all, these countries are relatively poor (a legacy of communist enslavement) and presumably don’t want to subsidize their better-off cousins in places like Spain and Italy. But that argument also implies that they should have resisted the Greek bailout about ten years ago, yet they didn’t. Sadly, Eastern European governments acquiesce to bad ideas because their politicians are bribed with “structural adjustment funds” from the European Union.

P.P.S. The luckiest Europeans are the British. They wisely opted for Brexit so they presumably won’t be on the hook for this costly new type of E.U.-wide redistribution (indeed, my main argument for Brexit, which now appears very prescient, was that the E.U. would morph into a transfer union).

New York vs. Florida, Round #4

Politicians from New York want states to get a big bailout from Uncle Sam. I explained earlier this month that this would be a bad idea.

Simply stated, the Empire State is in big trouble because it has a bloated government, not because of the coronavirus.

Probably the strongest piece of evidence is that New York is ranked #50 for fiscal policy according to Freedom in the 50 States.

If you want to understand how New York’s politicians have created a fiscal disaster, let’s compare the Empire State to Florida, which is ranked #1.

I’ve already done that three times (Round #1, Round #2, and Round #3), so this will be Round #4.

The Wall Street Journal compared the two states in an editorial two days ago.

…let’s do the math to consider which state has managed its economy and finances better over the last decade. …Democrats in Albany are claiming to be victims of events that are out of their control. But they have increased spending by $43 billion since 2010—about $570,000 for each additional person. Florida’s budget has increased by $28 billion while its population has grown 2.7 million—a $10,400 increase per new resident. New York has a top state-and-local tax rate of 12.7%, while Florida has no income tax. Yet New York has a growing budget deficit, while Mr. Scott inherited a large deficit but built a surplus and paid down state debt. The difference is spending. …Blame New York’s cocktail of generous benefits, loose eligibility standards and waste. New York spends about twice as much per Medicaid beneficiary and six times more on nursing homes as Florida though its elderly population is 20% smaller. …The rate of private job growth in Florida has been about 60% higher than in New York from January 2010 to January 2020. Finance jobs expanded by 25% in Florida compared to 9.7% in New York. …The policy question is why taxpayers in Florida and other well-managed states should pay higher taxes to rescue an Albany political class that refuses to restrain its tax-and-spend governance. Public unions soak up an ever-larger share of tax dollars, but Albany refuses to change.

If you want further details on the difference between the two states, Chris Edwards takes a close look at the burden of government spending.

New York and Florida have similar populations of 20 million and 21 million, respectively. But governments in New York spent twice as much as governments in Florida, $348 billion compared to $177 billion. On some activities, spending in the two states is broadly similar… But in other budget areas, New York’s excess spending is striking. New York spent $69 billion on K-12 schools in 2017 compared to Florida’s $28 billion. Yet the states have about the same number of kids enrolled—2.7 million in New York and 2.8 million in Florida. New York spent $71 billion on public welfare compared to Florida’s $28 billion. Liberals say that governments provide needed resources to people truly in need. Conservatives say that generous handouts induce high demand whether people need it or not. Given that New York’s welfare costs are 2.5 times higher than Florida’s, the latter effect probably dominates. …New York governments employed 1,196,632 workers in 2017 compared to Florida’s 889,950 (measured in FTEs). …Most New York residents do not benefit from bloat in government payrolls, inefficient transit, excessive welfare, and deficit spending. To them, the high taxes are disproportionate to the government services received. That is why they are moving to better‐​managed states with lower taxes.

Here’s the accompanying chart.

And he also compares the level of bureaucracy in both states.

New York’s excess includes spending more on handouts such as welfare. Another cause of New York’s high spending is employment of more government workers and paying them more than in Florida. …New York governments employ 34 percent more workers than Florida governments. …The two states have similar K-12 school enrollments of 2.7 million in New York and 2.8 million in Florida. But New York employs 31 percent more teachers and administrators than Florida. Do the 111,000 extra staff in New York generate better school outcomes? Apparently not…study puts Florida near the top and New York in the middle on school quality. Does New York really need two times more highway workers than Florida and three times more welfare workers? …Government workers in New York make 42 percent more in wages than government workers in Florida, on average.

Here’s the accompanying chart.

The bottom line is that New York is a great place to be an over-paid bureaucrat in an over-staffed bureaucracy.

But if you’re a taxpayer, Florida is the easy winner – which may explain why so many productive people are leaving the Empire State and permanently migrating to the Sunshine State.

P.S. The same pattern exists all across the United States. Taxpayers are escaping the poorly managed states and fleeing to low-tax states. Especially ones with no income taxes.

Coronavirus, Federal Spending, and Media Innumeracy

When I write enough columns with the same underlying point, I sometimes create a special page to highlight the theme, such as the “Bureaucrat Hall of Fame” and “Poverty Hucksters.”

I may have to do something similar for people who assert that America’s response to the coronavirus has been hampered because the federal government is too small.

For instance, Dana Milbank wrote in the Washington Post last month that “anti-government conservatism…caused the current debacle with a deliberate strategy to sabotage government.”

Ironically, the nations he cited for their successful approach – Singapore, South Korea, and Taiwan – all have a much smaller burden of government spending than the United States.

Which actually supports my argument that bigger governments are less effective and competent.

But evidence doesn’t seem to matter to some journalists.

One of Milbank’s colleagues, Dan Balz, has just authored a long article that regurgitates the assertion that there’s been “underinvestment” in the federal government.

The government’s halting response to the coronavirus pandemic represents the culmination of chronic structural weaknesses, years of underinvestment and political rhetoric that has undermined the public trust… The nation is reaping the effects of decades of denigration of government and also from a steady squeeze on the resources needed to shore up the domestic parts of the executive branch. This hollowing out has been going on for years as a gridlocked Congress preferred continuing resolutions and budgetary caps… The question is whether the weaknesses and vulnerabilities exposed by the current crisis will generate a newfound interest among the nation’s elected officials — and the public — in repairing the infrastructure of government. …“We don’t want to invest in the capacity of government to get the job done,” Kettl said. …said David E. Lewis, a political science professor at Vanderbilt University…“We’re seeing a government that is suffering now from a long period of neglect that began well before this administration. And that neglect has accelerated during this administration.”

What’s especially remarkable is that the article cites the government’s lack of testing capacity as evidence of “underinvestment.”

Over these years, there have been a series of major government breakdowns that helped shake confidence in government’s competence. …The pandemic has forced another critical look at government’s competence. …more tests might have helped contain the spread. It is the case now as businesses look to reopen but cannot assure safety for workers or their communities without the widespread availability of tests, which so far does not exist.

Yet the bureaucracies with responsibility for testing – the FDA and CDC – have received big budget increases.

Was that money well spent?

Hardly. Not only have they failed in their mission, their red tape and inefficiency have hindered the private sector’s ability to develop and deploy tests.

Notwithstanding all this evidence, Balz wants readers to believe that people don’t have faith in government because of hostile rhetoric from politicians.

Marc Hetherington, a professor at the University of North Carolina, said the public conversation about government began to shift with the election of Ronald Reagan in 1980. …“What changed with Reagan and the decades since is that the conversation moves away from what government ought to do to government is incompetent to do things,” he said. …Democratic politicians have engaged in some of the same kind of thing. “Every candidate has campaigned on a bureaucracy-bashing theme,” Nabatchi said. “That message has gotten through to affect people’s confidence in government.”

The alternative explanation, needless to say, is that people don’t have confidence in the public sector because government has a long track record of mistakes and incompetence.

But I guess that’s merely my opinion.

So let’s instead close today’s column with some hard data.

Here’s a chart I shared last month while debunking an article by George Packer for the Atlantic (he claimed we have “a federal government crippled by years of…steady defunding”).

It shows that federal spending has tripled since 1980. And that’s after adjusting for inflation!

Which led me to observe that, “The bottom line is that I can’t figure out whether to be more dismayed that journalists are innumerate or that major publications apparently don’t have fact checkers.”

That same sentiment obviously applies to Dan Balz and the Washington Post.

P.S. While Balz and Milbank were guilty of avoiding numbers, the Washington Post doesn’t have a great track record when its journalists try to use numbers. In other words, maybe the problem is bias rather than innumeracy.

Coronavirus Humor

Continuing with an unfortunate tradition, here’s our eighth weekend collection of satire about the mix of public policy and coronavirus.

We’ll start with one of Remy’s Reason videos, which are always worth watching.

I wrote last year about superior education outcomes for home-schooled kids.

Apparently there are other benefits to being away from government schools.

Since we’re on the topic of education, America’s top satire site, Babylon Bee, reports that teachers in government school actually want an end to the lockdown.

Teachers at government schools have raised their concerns that the recent closure of their institutions will have a damaging effect on students. …”We must reopen as soon as possible — before they regain their ability to have independent thoughts,” said New York 4th-grade teacher Ms. Jenny Mudd. “…we have to do our part to prevent the spread of the virus, but we must also prevent the spread of unapproved ideas. There’s a balance there.” …Sure enough, studies have already shown a strong correlation between everyone being homeschooled and a concerning spike in independent thought. …a shocking increase in the ability to form thoughts and ideas not approved by the government. …said Portland kindergarten teacher Ms. Pinkerton. “Parents just don’t have the experience of stuffing kids’ heads full of a statist worldview seven hours a day like I do.”

Speaking of statist worldviews, I laughed out loud when I saw this mockery of CNN.

Another story from Babylon Bee reminds home-bound Americans that going outside makes them very bad people.

Many Americans are growing tired of the lockdown and want to once again leave their homes and go do things. As many historians note, this is similar to the attitude of genocidal maniac Adolf Hitler. …There are many photos of Hitler outside, providing ironclad proof that Hitler also liked to leave his house. It’s not certain, though, what the connection is between hateful bigotry and not wanting to be trapped in one’s own home. “We can’t know what’s motivating these people who want to get out of their houses,” said California Governor Gavin Newsom, “but is genocide next? History says yes.” In Hitler’s final days, though, he did dutifully shelter in place — living in a bunker — despite wanting to go outside, so historians note that people who actually do go outside are in fact “worse than Hitler.”

Next we have a Branco cartoon with an interesting take on the saves-lives-no-matter-the-cost argument.

Here’s some satire from our friends on the left.

Not as clever as this little collection, but still worth sharing.

The dark cloud of coronavirus does have a silver lining for fans of socialism.

As the Babylon Bee reports, fewer workers are being exploited.

The pandemic has been troublesome for many, but one group is celebrating a victory: socialists. “Capitalism is all about exploiting workers,” said Alexandria Ocasio-Cortez, a congressional representative from New York and the world’s smartest socialist. “But now there’s, like, nobody working, so they can’t exploit anyone. Take that, billionaires!” …As the capitalist engine of having people work grinds to a halt, billionaires should be hit even harder, some of them plummetting from being billionaires to being just multi-millionaires as millions and millions of Americans go unemployed. “Yay! We’re winning!” Ocasio-Cortez exclaimed. She hoped even more people would leave jobs — except for the people whose job it is to print money.

I’ve pointed out that there are inescapable real-world tradeoffs.

But here’s the one-sided algorithm that some politicians are using.

My tradition is to save the best for last.

I imagine Michigan’s governor, Gretchen Whitmer, based her approach on this very biting example of satire.

You can enjoy previous versions of coronavirus humor by clicking here, here, here, here, here, here, here, and here.

Restoring Fiscal Sanity, Post-Coronavirus

The good news is that there will be a record reduction next year in the burden of government spending. Unfortunately, the bad news is that this reduction will only occur because of gigantic spending increases this year.

In this webinar, I explain how fiscal policy is being affected by coronavirus, and then explain why a spending cap is the way to restore fiscal sanity.

You can watch the full webinar, organized by Lebanon’s Modern University for Business and Science, by clicking here.

But if you don’t want to watch the entire event, or even my 11-minute presentation, all you really need to understand is that red ink is exploding this year. Not just in the United States, but in other nations as well.

The fiscal wreckage, as illustrated in this chart I shared for the audience, is greater than the world experienced during the financial crisis/great recession.

For what it’s worth, I wish the chart specified how much of the debt is caused by additional spending and how much is caused by declining tax revenues.

It’s also worth noting that these numbers will probably deteriorate even further over the next few months. Politicians are likely to approve more handouts and subsidies. And if there’s not a rapid economic recovery (I express doubt about that outcome in my remarks), tax revenue will continue to fall far short of baseline estimates.

The sad reality is that we don’t know the full degree of the coronavirus-caused fiscal wreckage. That being said, it’s safe to assume that – sooner or later – there will be a big debate in Washington over how to reverse the damage. And in other nations as well.

In my presentation, I explained why a Swiss-style spending cap is the right approach. In other words, simply impose a limit so that government grows slower than the private economy – i.e., fiscal policy’s Golden Rule.

I’d like to be able to specifically show how a spending cap would undo the current mess, but that’s not possible because we can only make wild guesses about the full extent of the fiscal fallout.

That being said, I’ll share two pieces of evidence to show the value of a spending cap.

First, here’s an estimate I prepared earlier this year to show how America’s fiscal situation would have been much stronger today if a spending cap had been imposed back in 2000.

Needless to say, it would have been nice if the U.S. had big surpluses when the coronavirus hit.

Our second piece of evidence is the experience of the U.S., France, and the U.K. in the decades before World War I.

All three nations had enormous debt burdens as a result of previous conflicts.

And all three countries dramatically reduced debt by using the same strategy of long-run spending restraint.

The bottom line is that spending restraint has worked in the past and it can work in the future.

Unfortunately, I doubt that either Donald Trump or Joe Biden is interested in that approach.

P.S. One thing we can say for certain is that responding with tax increases almost surely will make a bad situation even worse.

The WTO Should Be Preserved, but Bilateral Free-Trade Pacts Are the Way Forward for Future Liberalization

Last year, I released this video to help explain why the World Trade Organization has been a good deal for the United States.

My argument was – and still is – very straightforward, and it’s based on two simple propositions.

1. Free trade is good because societies are more prosperous with free markets and open competition.
2. The WTO has helped nations move in that direction by reducing import taxes and other trade barriers.

This outcome is particularly beneficial for the United States since other countries tend to be more protectionist.

But not everyone agrees with this position.

President Trump is a notorious critic of the WTO, for instance, which isn’t surprising since he doesn’t understand trade.

There are also plenty of opponents on the left, which also isn’t surprising since they don’t like capitalism and competition.

What is somewhat surprising, however, is that some Republican lawmakers also have decided to oppose the WTO.

In a column last week for the New York Times, Senator Josh Hawley of Missouri actually argued that it’s time to get rid of the World Trade Organization. Here’s his argument against the Geneva-based body.

The global economic system as we know it is a relic; it requires reform, top to bottom. We should begin with one of its leading institutions, the World Trade Organization. We should abolish it. …Its mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States. …Meanwhile, the W.T.O. required American workers to compete against Chinese forced labor but did next to nothing to stop Chinese theft of American intellectual property and products. …too many jobs left America’s borders for elsewhere. As factories closed, workers suffered, from small towns to the urban core. …Enough is enough. The W.T.O. should be abolished, and along with it, the new model global economy. The quest to turn the world into a liberal order of democracies was always misguided.

And here’s what he wants as a replacement.

The only sure way to confront the single greatest threat to American security in the 21st century, Chinese imperialism, is to rebuild the U.S. economy and to build up the American worker. And that means reforming the global economic system. …The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong. …For nearly 50 years before the W.T.O.’s founding, the United States and its allies maintained a network of reciprocal trade that protected our national interests and the nation’s workers. We can do it again …It means striking trade deals that are truly mutual and truly beneficial for America and walking away when they are not. It means building a new network of trusted friends and partners to resist Chinese economic imperialism.

Since Hawley doesn’t seem to appreciate the benefits of trade, the simple approach would be to criticize him for wanting politicians and bureaucrats to have the power to interfere with voluntary exchange across borders.

Such criticism is warranted, of course, but I want to take this opportunity to make four points about how there may be hope for the future.

1. Hawley is actually endorsing the status quo. After World War II, the US took the lead in creating the General Agreement on Tariff and Trade (GATT), a multilateral system of agreements which produced successive rounds of trade liberalization. The US then took the lead in creating the WTO so there would be a system (dispute resolution) to encourage nations to comply with their GATT commitments. But the dispute resolution process is now toothless because there are no longer enough judges for the system to operate (Trump has blocked the appointment of new judges). For all intents and purposes, the world is now operating under the pre-WTO rules – which seems to be what Hawley is calling for in his column.

2. The WTO no longer is a vehicle for global trade liberalization. The WTO is a consensus-based organization, which means unanimity is required for additional GATT-style reductions in global trade barriers. But since membership has expanded to include a number of countries with a protectionist mindset (most notably India, but China and Brazil also are a problem), it’s extremely unlikely that we’ll ever see another multilateral agreement for additional tariff reductions. This doesn’t change the fact that GATT was a big past success, and it doesn’t change the fact that it would be nice if the WTO’s dispute-resolution mechanism was back in operation. It simply means that we won’t be able to build on that progress.

3. Hawley is also endorsing, practically speaking, the best path forward. Another round of multilateral trade liberalization is off the table, but that doesn’t prevent nations from moving forward with bilateral free-trade agreements (FTAs are consistent with WTO rules). Interestingly, Hawley seems to support that approach. The U.S. already has nearly 20 of these pacts and is engaged in major negotiations with the United Kingdom for a new FTA that hopefully will be a template for future FTAs with other market-friendly nations.

4. Beware of the regulatory-harmonization wolf in FTA clothes. While bilateral trade pacts are desirable, it’s important to pay attention to the fine print. The European Union wants to hijack FTAs and make them vehicles for regulatory harmonization (meaning other nations have to agree to the EU’s onerous approach to red tape). If the goal is to have more trade, more competition, and more dynamism, the United States and other pro-market countries should make “mutual recognition” the foundation of future free-trade pacts.

The bottom line is that Hawley is wrong about the WTO, but he may actually be right about the best way of achieving future trade liberalization. Assuming, of course, that he actually means what he wrote about striking new deals.

In an ideal world, needless to say, these new bilateral FTAs (or even multi-nation FTAs) should be in addition to the WTO.

P.S. An under-appreciated aspect of the WTO is that it gives nations like the US a more-effective way of pressuring China to eliminate subsidies and other trade-distorting practices.

P.P.S. I’m normally very skeptical of international organizations. But the WTO encourages globalization rather than global governance, a key distinction.