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The tax system is bad news for professional sports, with plenty of anecdotal evidence showing that athletes (and even fans) get pillaged by government.

Now we have some comprehensive academic research to augment the anecdotes.

The Wall Street Journal opined today on a new study about the impact of marginal tax rates on professional sports teams.

Erik Hembre, an economist at the University of Illinois-Chicago, looked at the question: Do tax rates affect a team’s performance? He analyzed data in professional football, basketball, baseball and hockey between 1977 and 2014. Since the mid-1990s, he writes, “a ten percentage point increase in income tax rates is associated with between a 1.9-3.0 percentage point decrease in winning percentage.” Here’s why: Professional athletes are taxed at the highest marginal rate. The average NBA player earned more than $4.8 million in 2013 and the average was $2.3 in the NFL, so athletes who play for the Minnesota Vikings earn less after taxes than do Dallas Cowboys. …The effect appears strongest in the NBA, “where moving from a high-tax state to a low-tax state has a similar effect on winning as upgrading a bench player to an All-Star.” An NBA team that fled Minnesota (top rate: 9.85%) for Florida (0%) could expect to win an additional 4.5 games a season, Mr. Hembre found.

This makes sense.

Indeed, there’s evidence from Monaco, which plays in the French soccer league, that low taxes produce better results on the playing field.

The editorial concludes with a caveat…and a political lesson.

Players make free-agent decisions for many reasons, and New York or Los Angeles can offer attractions and endorsement deals that offset their horrendous tax rates. But no one should be surprised that professional athletes respond to incentives like individuals in any industry. Perhaps this evidence will tempt governors and state lawmakers to cut rates now that they know that, along with a growing economy, they might end up with better sports teams and happier fans, also known as voters.

None of this should be a surprise. We know taxes impact the decisions of high-income, high-productivity people, everyone from entrepreneurs to inventors.

Now that we’ve looked at the impact of taxes on an industry, let’s now consider the impact of taxes on the overall economy.

Professor Ed Lazear, in an article for the University of Chicago’s Becker-Friedman Institute, makes some critical observations on the American tax code.

Starting with the system’s complexity.

In the first 20 years after the 1986 Tax Reform Act was passed, there were already about 15,000 changes to the basic law. The lack of transparency is costly: resources devoted to tax preparation and avoidance alone amount to more than 1% of GDP.

Continuing with distortions in the internal revenue code.

The tax system is full of inconsistencies, preferences, complex rules, and contradictory definitions that encourage distortionary behavior by Americans in their legitimate attempts to minimize their tax liabilities. …Additionally, there are parallel systems that are not fully integrated into one coherent tax structure. Within the income tax category, the Alternative Minimum Tax has rules that are layered on top of the basic tax rate structure, which override the tax calculation for a sizeable fraction of taxpayers. Beyond that, the payroll tax, both employer and employee contributions, are distinct from the income tax rules, but for most Americans, act as a basic income tax that is an add-on to the income taxes that they pay.

And there’s a big section on the economic harm caused by over-taxing business investment.

…growth is most affected by taxes on capital. Notorious is the high US corporate tax rate of 35% that the US imposes, which results in obvious evasive action like locating business overseas. More important, but less visible, is the actual reduction in investment that occurs because capital is taxed so heavily in the United States. The marginal dollar of investment is one that can find its home in another country as easily as in the US. When we raise taxes on capital, a German investor who might have preferred to invest in an American company simply chooses to keep that money in Germany. The easy flow of capital across borders means that lowering tax rates will encourage more capital to flow to American businesses. …if investment were untaxed altogether, the economy would grow by an additional 5% to 9%. In the short run, the easiest way to accomplish this is to allow full expensing of investment with indefinite carry-forwards. This simply means that firms can deduct the cost of investments from their tax liabilities immediately and fully. Allowing full and immediate deductibility of investment expenses removes the distortions that impede capital investment and, as a consequence, raises productivity, incomes, and GDP.

Augmented by the economic damage caused by over-taxing human capital.

Economists have estimated the human capital portion of the total capital stock in the United States as between 70% and 90%. …increasing tax rates is likely to have profound effects on occupational choice and investment in the skills that are required to be productive in high-value occupations. …The personal income tax, and especially extreme progressivity, which places high burdens on professionals, discourages entry into professional occupations. Since human capital is such an important component of all capital, it is important to avoid over-taxing individuals directly. …

He concludes by explaining why the class-warfare crowd is misguided.

Lowering capital taxation and paying close attention to the progressivity of the tax structure both benefit the rich directly. The middle- and lower-income parts of the income distribution also benefit, however. …there is a close relation between average income wage growth and productivity. Furthermore, there is a close link between GDP growth and productivity growth…unless we ensure that the economy grows, which means that productivity grows, we will not have wage growth. …the poor and rich alike did best when economic growth was robust.

This last excerpt is critical. Some of my leftist friends think the economy is fixed pie, and this leads them to think the rest of us lose money any time a rich person earns more money.

Or they are motivated by envy. In some cases, this even leads them to support policies that hurt poor people so long as rich people suffer even more.

Both these views are wrong. President John F. Kennedy was right about a rising tide lifting all boats.

And we see that in the incredible data that’s been shared by scholars such as Deirdre McCloskey and Don Boudreaux.

And since we just quoted Kennedy, let’s close with an equally appropriate quote from Winston Churchill, who famously observed that “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

And the best example of that is in the data comparing the US with Denmark and Sweden. Or the words of Margaret Thatcher.

The moral of the story is that Slovakia has the right approach on taxes while Sweden has the wrong approach. That’s true, whether you want a winning sports team or a winning economy.

What word best describes the actions of government? Would it be greed? How about thuggery? Or cronyism?

Writing for Reason, Eric Boehm has a story showing that “all of the above” may be the right answer.

At first it seems like a story about government greed.

When Mats Järlström’s wife got snagged by one of Oregon’s red light cameras in 2013, he challenged the ticket by questioning the timing of the yellow lights at intersections where cameras had been installed. Since then, his research into red light cameras has earned him attention in local and national media—in 2014, he presented his evidence on an episode of “60 Minutes”…on how too-short yellow lights were making money for the state by putting the public’s safety at risk.

Three cheers for Mr. Järlström. Just like Jay Beeber, he’s fighting against local governments that put lives at risk by using red-light cameras as a revenue-raising scam.

But then it became a story about government thuggery.

…the Oregon State Board of Examiners for Engineering and Land Surveying…threatened him. Citing state laws that make it illegal to practice engineering without a license, the board told Järlström that even calling himself an “electronics engineer” and the use of the phrase “I am an engineer” in his letter were enough to “create violations.” Apparently the threats weren’t enough, because the board follow-up in January of this year by officially fining Järlström $500 for the supposed crime of “practicing engineering without being registered.”

Gasp, imagine the horror of having unregistered engineers roaming the state! Though one imagines that the government’s real goal is to punish Järlström for threatening its red-light revenue racket.

But if you continue reading the story, it’s also about cronyism. The Board apparently wants to stifle competition, even if it means trying to prevent people from making true statements.

Järlström is…arguing that it’s unconstitutional to prevent someone from doing math without the government’s permission. …The notion that it’s somehow illegal for Järlström to call himself an engineer is absurd. He has a degree in electrical engineering from Sweden… it’s not the first time the Oregon State Board of Examiners for Engineering and Land Surveying has been overly aggressive…the state board investigated Portland City Commissioner Dan Saltzman in 2014 for publishing a campaign pamphlet that mentioned Saltzman’s background as an “environmental engineer.” Saltzman has a bachelor’s degree in environmental and civil engineering from Cornell University, a master’s degree from MIT’s School of Civil Engineering, and is a membership of the American Society of Civil Engineers

In other words, this is yet another example of how politicians and special interests use “occupational licensing” as a scam.

The politicians get to impose “fees” in exchange for letting people practice a profession.

And the interest groups get to impose barriers that limit competition.

A win-win situation, at least if you’re not a taxpayer or consumer.

Or a poor person who wants to get a job.

Some of the examples of occupational licensing would be funny if it wasn’t for the fact that people are being denied the right to engage in voluntary exchange.

Such as barriers against people who want to help deaf people communicate.

If you want to help a deaf person communicate in Wisconsin, you’ll have to get permission from the state government first. Wisconsin is one of a handful of states to require a license for sign language interpreters, and the state also issues licenses for interior designers, bartenders, and dieticians despite no clear evidence that any of those professions constitute a risk to public health in other states without similar licensing rules. …It’s hard to imagine any health and safety benefits to mandatory licensing for sign language interpreters, which is one of eight licenses highlighted in a new report from Wisconsin Institute of Law and Liberty, a conservative group. …Since 1996, the number of licensed professions in the Badger State has grown from 90 to 166—an increase of 84 percent, according to the report. Licensing cost Wisconsin more than 30,000 jobs over the last 20 years and adds an additional $1.9 billion annually in consumer costs.

Or restricting the economic liberty of dog walkers.

…according to the Colorado government, people who watch pets for money are breaking the law unless if they can get licensed as a commercial kennel—a requirement that is costly and unrealistic for people working out of their homes, often as a side job. This is not simply a case of an outdated law failing to accommodate modern technology. There are more nefarious motives—those of special interests who want to protect their profits by keeping out new competition. …it is time to add “Big Kennel” to the list of special interests that support ridiculous occupational licensing schemes.

Or trying to deny rights, as in the case of horse masseuses.

…an Arizona state licensing board finally backed down from an expensive, unnecessary mandate that nearly forced three women to give up their careers as animal masseuses. …the Arizona State Veterinary Medical Examining Board said it would no longer require animal massage practitioners, who provide therapeutic services to dogs, horses, and other animals, to obtain a veterinary license. Obtaining that license requires years of post-graduate schooling, which can cost as much as $250,000. “All I want is the freedom to do my job, and I have that now,” Celeste Kelly, one of three plaintiffs in the lawsuit, said in a statement. …the state board tried to driver her out of business by threatening her with fines and jail time if she didn’t get a veterinary license.

The good news is that there’s a growing campaign to get rid of these disgusting restrictions of voluntary exchange.

The acting head of the Federal Trade Commission is getting involved. On the right side of the issue!

Maureen K. Ohlhausen, the new acting chair of the Federal Trade Commission, thinks it’s high time that the FTC start giving more than lip service to its traditional mandate of fostering economic liberty. And the first item in her crosshairs is the burgeoning growth in occupational licenses. Over the past several decades, licensing requirements have multiplied like rabbits, she noted. Only 5 percent of the workforce needed a license in 1950, but somewhere between one-quarter and one-third of all American workers need one today. …depending on where you live, you might need a license to be an auctioneer, interior designer, makeup artist, hair braider, potato shipper, massage therapist or manicurist. “The health and safety arguments about why these occupations need to be licensed range from dubious to ridiculous,” Ohlhausen said. “I challenge anyone to explain why the state has a legitimate interest in protecting the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows.”

Hooray for Ms. Ohlhausen. She’s directing the FTC to do something productive, which is a nice change of pace for a bureaucracy that has been infamous in past years for absurd enforcement of counterproductive antitrust laws.

A column in the Wall Street Journal highlights Mississippi’s reforms.

State lawmakers in Mississippi are taking the need for reform to heart. Two weeks ago Gov. Phil Bryant signed into law H.B. 1425, which will significantly rein in licensing boards. …H.B. 1425 explicitly endorses competition and says that the state’s policy is to “use the least restrictive regulation necessary to protect consumers from present, significant and substantiated harms.” Under the law, the governor, the secretary of state, and the attorney general must review and approve all new regulations from professional licensing boards to ensure compliance with the new legal standard. This should be a model for other states. …Mississippi’s law…covers all licensing boards controlled by industry participants, spells out a pro-competition test, and requires new rules to be approved by elected officials accountable to voters. Mississippi has smartly targeted the core problem: Anticompetitive regulations harm the economy, slow job growth, and raise consumer prices.

Here’s some of the national data in the WSJ column.

Keep in mind, as you read these numbers, that poor people disproportionately suffer as a result of these regulatory barriers to work.

In the 1950s only about 1 in 20 American workers needed a license, but now roughly 1 in 4 do. This puts a real burden on the economy. A 2012 study by the Institute for Justice examined 102 low-income and middle-income occupations. The average license cost $209 and required nine months of training and one state exam. …Even the Obama administration saw the problem. A 2015 report from the White House said that licensing can “reduce employment opportunities and lower wages for excluded workers.” In 2011 three academic economists estimated that these barriers have result in 2.85 million fewer jobs nationwide, while costing consumers $203 billion a year thanks to decreased competition.

Professor Tyler Cowen explains in Time that licensing laws explain in part the worrisome decline in mobility in America.

Some of the decline in labor mobility may stem from…the growth of occupational licensure. While once only doctors and medical professionals required licenses to practice, now it is barbers, interior decorators, electricians, and yoga trainers. More and more of these licensing restrictions are added on, but few are ever taken away, in part because the already licensed established professionals lobby for the continuation of the restrictions. In such a world, it is harder to move into a new state and, without preparation and a good deal of investment, set up a new business in a licensed area.

Last but not least, we have a candidate for the Bureaucrat Hall of Fame. Elizabeth Nolan Brown explains for Reason that a paper pusher in Florida managed to use occupational licensing fees as a tool of self-enrichment.

In Palm Beach County, Florida, all topless dancers are required to register with county officials and obtain an Adult Entertainment Work Identification Card (AEIC), at the cost of $75 per year. The regulation is ridiculous for a lot of reasons, but at least applicants—many of whom are paid exclusively in cash—were able to pay the government-ID fee with cash, too, making things a little more convenient and a little less privacy-invading. But not anymore, thanks to the alleged actions of one sticky-fingered government employee. …Pedemy “diverted” at least $28,875 (and possibly an additional $3,305) from county coffers between October 2013 and mid-November 2016. The money came from both adult-entertainer fees—approximately 70 percent of which were paid in cash—and court-ordered payments intended for a crime Victims Services Fund.

At the end of the article, Ms. Brown looks at the bigger issue and asks what possible public purpose is being served by stripper licensing.

Demanding strippers be licensed in the first place is a problem… There’s no legitimate public-safety or consumer-protection element to the requirement—strip club patrons don’t care if the woman wriggling on their laps is properly permitted. Government officials have portrayed the measure as a means to stop human trafficking and the exploitation of minors, but that’s ludicrous; anyone willing to force someone else into sex or labor and circumvent much more serious rules with regard to age limits isn’t going to suddenly take pause over an occupational licensing rule they’ll have to skirt. The only ones truly affected are sex workers and adult-business owners. Not only does the regulation drive up their costs…, it gives Palm Beach regulators a database of anyone who’s ever taken their clothes off for money locally—leaving these records open to FOIA requests or hackers—and gives cops a pretense to check clubs at random to make sure there aren’t any unlicensed dancers. Those found to be dancing without a license can be arrested on a misdemeanor criminal charge.

Though I guess we shouldn’t be too surprised. If you peruse “Sex and Government,” you’ll find that politicians and bureaucrats like to stick their noses in all sorts of inappropriate places. Including the vital state interest of whether topless women should be allowed to cut hair without a license!

When contemplating the importance of good public policy, we can learn a lot from bad examples.

The answer, in no small part, is that economies suffer immensely when politicians don’t allow markets to function. An unfettered price system plays an enormously important role in allocating capital and labor to their most-valued uses (based on the preferences of consumers).

With central planning, by contrast, capital and labor are allocated based on the preferences of politicians and bureaucrats. And even if you assume those officials have good motives, there’s no way they can replicate the efficiency of private markets.

Capitalism is amazing because, in a system based on voluntary exchange, people can only make themselves richer by serving the needs of others. Consider, for instance, this excellent new video on the market for bread. We should all be profoundly appreciative of how the invisible hand of free enterprise produces such amazing results.

The good news is that we don’t have central planning in the United States. As such, we’re not in any danger of complete economic breakdown because of government intervention (our long-run danger is instead the result of a metastasizing welfare state).

But the bad news is that we have sectors of our economy where government intervention prevents the efficient operation of the price system.

And we have other sectors where government intervention causes considerable inefficiency.

And keep in mind that almost all intervention is not the result of well-meaning but misguided decisions.

It is driven by various interest groups scheming with politicians to manipulate the system in order to obtain unearned wealth.

In other words, it’s “public choice.”

Which is why it doesn’t make any sense to give politicians more power to solve supposed problems. Especially when the problems are probably the result of government intervention in the first place.

It’s like rewarding an arsonist for starting fires (also see this poster or the image at the bottom of this column).

But let’s not dwell on the negative.

The good news is that America ranks relatively high according to some important measures.

There’s not much economy-wide business regulation, at least compared to most other nations. And we also don’t have much “employment-protection” legislation, which means American workers are much more likely to have jobs.

And less regulation is an important ingredient in the recipe for growth and prosperity. And nations that do a better job of following that recipe get to enjoy higher living standards, so we are fortunate not to have made as many policy mistakes as other countries.

P.S. Since bread played a starring role in today’s video, it’s worth remembering what it taught us about antitrust laws in The Incredible Bread Machine.

A couple of weeks ago, I reviewed the four major candidates running in the French presidential election and expressed general pessimism.

This Sunday, Emmanuel Macron and Marine Le Pen will face each other in the runoff election.

That’s a rather depressing choice. Macron is a former official in the disastrous big-government Hollande Administration and Le Pen is a big-government nativist who wants to preserve the welfare state (though not for immigrants).

Like choosing between Tweedledee and Tweedledum.

Not encouraging since the country needs a Ronald Reagan or Margaret Thatcher.

A column in the Wall Street Journal explains France’s untenable position.

The deeper question is whether French voters accommodate themselves to reality or cling tighter to their economic illusions. …“The French try to erase historical experience,” Pascal Bruckner tells me. The literary journalist is one of a very few classical liberals among French public intellectuals. He says his compatriots “have forgotten the experience of 1989 and only see the bad aspects of capitalism and liberal democracy.” The tragedy of France, Mr. Bruckner says, is that the country never had a Margaret Thatcher or Gerhard Schröder to implement a dramatic pro-growth program. …it wasn’t shadowy globalists who in 1999 imposed a 35-hour workweek to make overtime labor prohibitively expensive. The law was meant to encourage firms to hire more workers, but like most efforts to subjugate markets to politics, it ended up doing more harm than good. Now it’s the main barrier to hiring in a country where the unemployment rate is stuck north of 10%. Nor was it global markets that levied a corporate tax rate of 33% (plus surcharges for larger firms), a top personal rate of 45%, and a wealth tax and other “social fees” that repelled investors and forced the country’s best and brightest to seek refuge in places like London, New York and Silicon Valley. Nor did globalization build a behemoth French bureaucracy that crowds out the private economy.

Yes, France is in a mess because of statism. Hard to argue with that.

The question is whether Macron or Le Pen will make things better or worse.

With pervasive lack of enthusiasm, I suppose Macron is the preferable choice. There’s at least a chance he’ll be a reformer. Let’s look at how some observers view him.

We’ll start with George Will, who is not overly impressed by Macron.

The French…might confer their presidency on a Gallic Barack Obama. …Emmanuel Macron, 39, is a former Paris investment banker, untainted by electoral experience, and a virtuoso of vagueness. …This self-styled centrist is a former minister for the incumbent president, Socialist François Hollande, who in a recent poll enjoyed 4 percent approval. …In 1977, France’s gross domestic product was about 60 percent larger than Britain’s; today it is smaller than Britain’s. In the interval, Britain had Margaret Thatcher, and France resisted (see above: keeping foreigners’ ideas at bay) “neoliberalism.” It would mean dismantling the heavy-handed state direction of the economy known as “dirigisme,” which is French for sclerosis. France’s unemployment rate is 10 percent, and more than twice that for the young. Public-sector spending is more than 56 percent of France’s GDP, higher than any other European nation’s. Macron promises only to nibble at statism’s ragged edges. He will not receive what he is not seeking — a specific mandate to challenge retirement at age 62 or the 35-hour workweek and the rest of France’s 3,500 pages of labor regulations that make it an ordeal to fire a worker and thus make businesses wary about hiring. Instead, he wants a more muscular European Union , which, with its democracy deficit, embodies regulatory arrogance.

Joseph Sternberg of the Wall Street Journal is a bit more optimistic.

Optimistic pundits hope the impending victory of a fresh-faced reformer signals that France’s economy at last can be fixed. But for at least the past decade, France’s problem hasn’t been a lack of understanding in the political class of what the French economy needs. Mr. Macron is not so much a radical change-agent as a photogenic tribune for a political class that is increasingly, albeit belatedly, uniting behind the need for economic overhauls. Formerly of the center left, he won Sunday’s first round on a revitalization platform different more in degree than in kind from that of the main center-right candidate, François Fillon, on matters such as government spending cuts and labor-law reform. The global case of the vapors over Ms. Le Pen obscures how remarkable this pro-reform convergence is. …Margaret Thatcher and Ronald Reagan…remade British and American politics for a generation not through the workings of their legislative programs but through their capacity to shape public opinion. They created a coalition of the optimistic…. If the Macron program is to stick, he’ll have to do the same. He isn’t off to an auspicious start. …His message to those workers—“Take the hit for the good of the country”—lacks a certain Reaganesque resonance.

A columnist for the New York Times offers the most positive spin, portraying Macron as a Reaganite reformer.

Emmanuel Macron…attributes the nation’s woes not to outsiders — European officials and immigrants — but on France’s own “sclerotic” and unsustainable welfare state. …Mr. Macron would work to slim down one of the world’s fattest welfare states, rather than build it up as Ms. Le Pen would do. Of course France has attempted welfare state reform before, without success. The latest effort came last year, when Mr. Macron was a minister in the Socialist government, and wrote the Macron laws, opening regulated industries to competition. Those plans set off mass protests, and were watered down, but Mr. Macron says there is a big difference now: Earlier governments were not elected with a mandate to downsize the welfare state, while his could be. …the case for change has grown more urgent. …Georges Clemenceau, who served twice as prime minister between 1906 and 1920, cracked that his country was very fertile: “You plant bureaucrats and taxes grow.” Over the last decade state spending has grown even more… It’s tough to say how much state spending is too much, but France has clearly fallen out of balance, and Mr. Macron is right that the trend is “no longer sustainable.” The public payroll is similarly bloated, and Mr. Macron aims to rebalance the economy by cutting 120,000 public sector jobs, streamlining the pension system and dropping state spending back to 52 percent of G.D.P. Mr. Macron leads an emerging centrist consensus that recognizes that — more than immigrants or the euro — the main obstacle retarding France’s economy is its attachment to a welfare state culture of short workweeks and generous benefits. …In recent years France’s high income taxes have been chasing artists, executives and entrepreneurs out of the country. Last year, 12,000 millionaires emigrated — the largest millionaire exodus from any country by far. Mr. Macron — who once said that stifling taxes threaten to turn France into “Cuba without the sun” — has strong support among young, professional urban voters who would prefer opportunity at home to an expat life in London.

I hope this last column is accurate.

And the chance of Macron being good are greater than zero.

After all, it was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand.

And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.

Heck, policy even moved in the right direction when Bill Clinton was in the White House in the 1990s.

So I guess we can keep our fingers cross that Macron plays a similar role in France.

By the way, I can’t resist citing Paul Krugman’s assessment. He actually thinks France is in fairly good shape.

…what’s going on. …how did things get to this point? …France gets an amazing amount of bad press — much of it coming from ideologues who insist that generous welfare states must have disastrous effects — it’s actually a fairly successful economy. …It’s true that the French over all produce about a quarter less per person then we do — but that’s mainly because they take more vacations and retire younger… France offers a social safety net beyond the wildest dreams of U.S. progressives: guaranteed high-quality health care for all, generous paid leave for new parents, universal pre-K, and much more.

That’s an interesting spin, but maybe French people would like to earn more, but don’t have the opportunity because of bad policy?

And if things are so good in France, why are so many French people escaping to other nations?

Moreover, to the extent there are problems, Krugman says the blame belongs to the supposed pro-austerity crowd in Brussels and Berlin.

Even though Brussels and Berlin were wrong again and again about the economics — even though the austerity they imposed was every bit as economically disastrous as critics warned — they continued to act as if they knew all the answers

Yet the nations that actually cut spending – such as the Baltics – have recovered strongly. It’s the big spenders in Europe who are dragging down the continent.

And since Macron’s supposed reform agenda would only reduce the burden of government spending to 52 percent of economic output (from about 57 percent today), that’s not exactly an example of vigorous budget cutting anyway.

But it would be nice to add France to my list of nations that have – for a last a couple of years – restrained the growth of the public sector.

P.S. I have a good track record in France. The candidate I “endorsed” in 2012 won the race.

One of the points I repeatedly make is that big government breeds corruption for the simple reason that politicians have more power to reward friends and punish enemies.

It’s especially nauseating when big companies learn that they can get in bed with big government in order to obtain unearned wealth with bailouts, subsidies, protectionism, and other examples of cronyism.

And these odious forms of government intervention reduce our living standards by distorting the allocation of labor and capital.

But just as crime is bad for society but good for criminals, it’s also true that cronyism is bad for the economy and good for cronies.

Two professors at the University of the Illinois decided to measure the “value” of cronyism for politically connected companies.

Gaining political access can be of significant value for corporations, particularly since governments play an increasingly prominent role in influencing firms. Governments affect economic activities not only through regulations, but also by playing the role of customers, financiers, and partners of firms in the private sector. …Therefore, gaining and maintaining access to influential policymakers can be an important source of competitive advantage… In this paper, we investigate the characteristics of firms with political access as well as the valuation effects of political access for corporations. Using a novel dataset of White House visitor logs, we identify top corporate executives of S&P 1500 firms that have face-to-face meetings with high-level federal government officials. …We match the names of visitors in the White House visitor logs to the names of corporate executives of S&P1500 firms during the period from January 2009 through December 2015. We are able to identify 2,286 meetings between corporate executives and federal government officials at the White House.

And what did they find?

That cronyism is lucrative (I deliberately chose that word rather than “profitable” because money that it legitimately earned is very honorable).

Here are some of the findings.

…we find that firms that contributed more to Obama’s presidential election campaigns are more likely to have access to the White House. We also find that firms that spend more on lobbying, firms that receive more government contracts… Second, we find that corporate executives’ meetings with White House officials are followed by significant positive cumulative abnormal returns (CARs). For example, the CAR is about 0.865% during a 51-day window surrounding the meetings (i.e., 10 days before to 40 days after the meetings). We also find that the result is driven mainly by meetings with the President and his top aides.

For those interested, here are the companies that had a lot of interaction with the Obama White House.

And here are the officials that they met with.

For what it’s worth, I would be especially suspicious of the meetings with Valerie Jarrett and the three Chiefs of Staff. Those officials are political operatives rather than policy experts, so companies meeting with them were probably looking for favors.

Interestingly, it turns out that it wasn’t a good idea for companies to “invest” a lot of time and effort into cultivating relationships with Democrats.

…we exploit the election of Donald J. Trump as the 45th President of the U.S. as a shock to political access. We find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. The economic magnitude is nontrivial as well: after controlling for various factors that are likely correlated with firms’ political activities, such as campaign contributions, lobbying expenses, and government contracts, the stocks of firms with access to the Obama administration underperform the stocks of otherwise similar firms by about 80 basis points in the three days immediately following the election.

Though I guess you can’t blame the companies. Most observers (including me) expected Hillary to win, so the firms were simply playing the odds (albeit from an amoral perspective).

By the way, there are two very important caveats to share.

  • First, we can’t universally assume that corporate executives who met with White House officials were seeking special favors. They may simply have been urging the Obama Administration not to raise taxes or impose new regulations (i.e., honorable forms of lobbying).
  • Second, we can’t assume that the bad forms of lobbying have disappeared simply because there’s a Republican in the White House. As we saw during the Bush years, the GOP is more than capable of creating opportunities for unearned wealth by expanding the size and scope government.

For what it’s worth, I fear Trump will be tempted to play favorites as well. Which is why the real message for today is that smaller government is the only way to limit the corrupt interaction of big business and big government.

This image from the libertarian page on Reddit illustrates why my leftist buddies are naive to think that a bigger government will be a weapon against cronyism.

P.S. We should learn from Estonia on how to limit cronyism.

P.P.S. To close on a humorous note, those with left-wing children may want to get them “Kronies” for their birthdays or Christmas.

Seven years ago, I wrote about the “Butterfield Effect,” which is a term used to mock clueless journalists.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Journalists are especially susceptible to silly statements when writing about the real-world impact of tax policy.

They don’t realize (or prefer not to acknowledge) that changes in tax rates alter incentives to engage in productive behavior, and this leads to changes in taxable income. Which leads to changes in tax revenue, a relationship known as the Laffer Curve.

Here are some remarkable examples of the Butterfield Effect.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

And now we can add to the collection.

Here are some excerpts from a report by a Connecticut TV station.

Connecticut’s state budget woes are compounding with collections from the state income tax collapsing, despite two high-end tax hikes in the past six years. …wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington. …It now looks like expected revenue from the final Income filing will be a whopping $450 million less than had been expected.

Reviewing the first sentence, it would be more accurate to replace “despite” with “because.”

Indeed, the story basically admits that the tax increases have backfired because some rich people are fleeing the state, while others have simply decided to earn and/or report less income.

The question is whether politicians are willing to learn any lessons so they can reverse the state’s disastrous economic decline.

But don’t hold your breath. We have an overseas example of the Laffer Curve, and one of the main lessons is that politicians are willing to sacrifice just about everything in the pursuit of power.

Here are some passages from a story in the U.K.-based Times.

The SNP is expected to fight next month’s general election on a commitment to reintroduce a 50p top rate of tax… The rate at present is 45p on any earnings over £150,000. …civil service analysis suggested that introducing a 50p top rate of tax in Scotland could cost the government up to £30 million a year, as the biggest earners could seek to avoid paying the levy by moving their money south of the border.

If you read the full report, you’ll notice that the head of the Scottish National Party previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K. when the 50 percent rate was imposed).

But now that there’s an election, she’s decided to resurrect that awful policy, presumably because a sufficient number of Scottish voters are motivated by hate and envy.

This kind of self-destructive behavior (by both politicians and voters) is one of the reasons why I’m not overly optimistic about the future of Scotland if it becomes an independent nation.

P.S. I’m not quite as pessimistic about the future of tax policy in the United States. The success of the Reagan tax cuts is a very powerful example and American voters still have a bit of a libertarian streak. I’m not expecting big tax cuts, to be sure, but at least we’re fighting in the United States over how to cut taxes rather than how to raise them.

Republicans control the House, the Senate, and the White House.

In theory, that means a long-overdue opportunity to eliminate wasteful programs and cut pork-barrel spending.

In reality, it mostly means business as usual.

Politicians in Washington just reached a deal to fund the government for the rest of the current fiscal year. As reported by the Washington Post, it’s not exactly a victory for libertarians or small-government conservatives.

Democrats are surprised by just how many concessions they extracted in the trillion-dollar deal, considering that Republicans have unified control of government. …Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. …the NIH will get a $2 billion boost — on top of the huge increase it got last year. …Planned Parenthood…will continue to receive funding at current levels. …after the deal was reached…, Chuck Schumer and Nancy Pelosi quickly put out celebratory statements. …“Overall, the compromise resembles more of an Obama administration-era budget than a Trump one,” Bloomberg reports. …Reuters: “While Republicans control the House, Senate and White House, Democrats scored … significant victories in the deal.” …Vox: “Conservatives got almost nothing they wanted.”

I guess you could call this a triumph of “public choice” over campaign rhetoric. Politicians did what’s in the best interest of politicians rather than what would be best for the nation.

I’m disappointed, as you might expect. But as I say in this interview, there are far more important battles. I’ll gladly accept a bit of pork and profligacy in the 2017 budget if that clears the decks for much-needed repeal of Obamacare and long-overdue reform of the tax code.

But here’s the catch. I don’t expect that these reforms will actually happen. Yes, the deck has been cleared, but I don’t think Republicans will take advantage of the opportunity.

The fundamental problem, which I pointed out in a different interview, is that there’s not a governing majority for smaller government. And that has some very grim implications.

Even more depressing, I point out that only Trump has the power to turn things around. Yet I see very little evidence that he, a) believes in smaller government, or b) is willing to expend any political capital to achieve smaller government.

To make matters worse, Republicans have convinced themselves that they lose the spin battle whenever there is a shutdown or some other high-stakes fiscal fight with Democrats.

For what it’s worth, I’m trying to remind Republicans that it is in their long-run political interests to do the right thing (as Reagan demonstrated). That’s why, in the first interview, I said they need to gut Obamacare and lower taxes if they want to do well in the 2018 and 2020 elections.

But don’t hold your breath waiting for the “stupid party” to behave intelligently.

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