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Posts Tagged ‘Big Government’

Between March 2020 and January 2021, I authored a five-part series (see here, here, here, here, and here) on how big government hindered a quick and effective response to the coronavirus pandemic.

In this discussion with Brad Polumbo, I summarize some of my key points.

While I criticized the dismal performance of the FDACDC, and WHO, I also explained that there are costs and benefits to any approach.

I largely focus on the deleterious impact of government regulation and intervention, but I mentioned in the discussion that a laissez-faire approach has potential downsides.

My argument is simply that markets, on balance, will produce better outcomes.

For instance, Brad and I discussed how government regulators at the Food and Drug Administration did something good many decades ago by prohibiting thalidomide (which led to birth defects), but we also mentioned that academic research shows that our regulatory apparatus – on net – leads to bad outcomes because of lengthy delays in life-saving and live-improving drugs.

And we shouldn’t forget that the current system makes drugs far more expensive.

There are two other parts of the interview that merit special attention.

  • First, I mention that private companies should be allowed to require “vaccine passports.” I’m not saying they should, but I believe in property rights so it’s not the role of politicians to interfere in that choice.
  • Second, politicians should have adopted a more hands-off approach to mandatory lockdowns. This is not an argument against social distancing, masking, and other prudent behaviors, but mandates were largely unnecessary (and, in the case of what stores were allowed to operate, pointlessly discriminatory).

And I should have mentioned that politicians often didn’t follow the rules that they imposed on the rest of us.

P.S. The silver lining to the pandemic’s dark cloud is that we got some clever humor (see here, here, here, here, here, here, here, here, here, and here).

P.P.S. Actually, there’s a second silver lining. There’s been a lot of progress on school choice this year, which is partly a response to the self-serving actions of the government school monopoly during the pandemic.

P.P.P.S. There may even be a third silver lining. As mentioned in the discussion, I’m slightly hopeful that politicians and bureaucrats have learned that we need to set aside regulations and red tape, at least during emergencies. Heck, maybe they’ll even apply that lesson more broadly!

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Back in 2016, I created a 2×2 matrix to illustrate the difference between redistributionism (tax Person A and give to Person B) and state planning (politicians and bureaucrats trying to steer the economy, either through direct ownership or industrial policy).

The main point of that column was to show that countries should try to be in the top-left section, where there is less redistribution and less government control.

But I also wanted to help people understand that redistributionism and socialism are not the same thing.

For instance, Sweden (in the bottom-left box) is a capitalist economy with a big welfare state, whereas China (in the top-right box) doesn’t have much redistribution but government has substantial control over economic activity.

From an American perspective, the good news is that the U.S. currently is in the top-left box.

The bad news is that President Biden wants the country in the bottom-left box. So, if we want to be technically accurate, we should not accuse him of socialism.

Instead, as Antony Davies and James Harrigan explained in a column for the Foundation for Economic Education, the real threat to the nation is “transferism.”

Socialism is state control of the means of production. …By contrast, capitalism is simply private ownership of the means of production. …more than four in ten Americans think “some form of socialism” is a good thing. But what is “some form of socialism?” A society is either socialist or it isn’t. The state either owns the means of production or it doesn’t. There is no middle ground. …It appears that what Americans really have in mind when they think about socialism is not an economic system but particular economic outcomes. …they are advocating what we should really call “transferism.” Transferism is a system in which one group of people forces a second group to pay for things that the people believe they, or some third group, should have. Transferism isn’t about controlling the means of production. It is about the forced redistribution of what’s produced.

Davies and Harrigan are correct.

Moreover, they deserve credit for predicting the future since they wrote the column in 2019!

Now let’s consider whether redistributionism (or transferism) is a good idea.

I’ve previously explained that a big welfare state causes economic damage, even if a nation otherwise is very pro-capitalist.

Consider, for instance, the remarkable data showing how Swedish-Americans and Danish-Americans generate much more prosperity than Swedes and Danes who still live in Scandinavia.

Or consider the income data showing how average Americans enjoy much higher living standards than their European counterparts (either in Nordic nations or elsewhere).

What’s worrisome is that Biden wants a much bigger welfare state and he doesn’t seem to understand that European-sized government means anemic European-style economic performance.

This is the message that Bret Stephens shared in one of his recent columns for the New York Times.

He starts by describing Biden’s agenda.

President Biden charts a course toward the largest expansion of government since Lyndon Johnson’s Great Society. After signing a $1.9 trillion Covid-19 relief bill in March and proposing a $1.5 trillion discretionary budget in April (a 16 percent increase from this year, on top of what’s likely to be at least $3 trillion in mandatory spending on programs like Medicare and Medicaid), the president wants $2.3 trillion more for infrastructure and $1.8 trillion for new social programs. That’s $7.5 trillion in discretionary spending. To put the number in perspective, we spent $4.1 trillion in inflation-adjusted dollars over nearly four years to wage and win the Second World War. What will America get for the money?

He then points out the potential consequences.

…before the U.S. takes this leap into a full-blown American social-welfare state, moderates in Congress like Senator Joe Manchin or Representative Jim Costa ought to ask: What’s the catch? …The real catch is that massive government spending has hidden costs that are difficult to capture in numbers alone. Take another look at Europe. Why does R&D spending in the European Union persistently lag that in the U.S. …Why does Europe’s tech start-up scene…so notably lag its competitors…? Perhaps…social safety nets typically come at the expense of risk-taking and economic dynamism. And why is France, which, according to the Organization for Economic Cooperation and Development, spends more on social welfare than any other nation in the developed world, such an unhappy place, with chronically high unemployment, endless labor unrest, a decades-old brain drain, rising political extremism, a wealth tax that failed and a medical system that was on the brink of collapse long before Covid struck? …Beyond the gargantuan cost, Congress should think very hard about the real catch: transforming America into a kinder, gentler place of permanent decline.

Amen.

Biden’s agenda inevitably will erode societal capital, leading to less work (because of lavish freebies such as per-child handouts) and lower levels of entrepreneurship (because of tax penalties on investment and risk-taking).

And this can lead to a tipping point, which is illustrated by my Theorem of Societal Collapse.

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While Paul Krugman sometimes misuses and misinterprets numbers for ideological reasons (see his errors regarding the United States, France, Canada, the United States, Estonia, Germany, the United States, and the United Kingdom), he isn’t oblivious to reality.

At least not totally.

He’s acknowledged, for instance, that there is a Laffer Curve and that tax rates can become so onerous that tax revenues actually decline.

Now he’s had another encounter with the real world.

In a column that was mostly a knee-jerk defense of Biden’s class-warfare tax policy, Krugman confessed yesterday that big government ultimately means big tax increases for lower-income and middle-class people.

…is trying to “build back better” by taxing only the very affluent feasible? Is it wise? …There’s a good case that the kind of society progressives want us to become, with a very strong social safety net, can’t be paid for just by taxing the rich. A country like Denmark, for example, does have a high top tax rate… But Denmark also has very high middle-class taxation, in particular a 25 percent value-added tax, effectively a national sales tax. …the fact that even the Nordic countries feel compelled to raise a lot of money from the middle class suggests that there are limits…to how much you can raise just by taxing the rich. So if you want Medicare for all, Nordic levels of support for child care and families in general, and so on, just raising taxes on the 400K-plus elite won’t get you there.

It may not happen often, but Krugman is completely correct.

European-sized government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and much higher income tax rates on middle-class taxpayers.

This chart from Brian Riedl shows that government spending already was on track to become a bigger burden for the American economy, and Biden is proposing to go even faster in the wrong direction.

The growing gap between the blue lines and red lines implies giant tax increases. At the risk of understatement, there’s no way to finance that ever-expanding government by just pillaging upper-income taxpayers.

By the way, Krugman is right about big government leading to higher taxes on ordinary people, but he’s wrong about the desirability of that outcome.

He wants us to think that big government means a “better America,” but all the economic data tells a different story. A bigger fiscal burden means much lower living standards.

P.S. If you want another example of Krugman being right on a fiscal issue, click here.

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When I debate public policy with leftists, I frequently stump them by asking for an example of a country where their ideas have worked.

They get flummoxed for the simple reason that no nation has ever become rich with big government.

There are some rich nations that have big governments, to be sure, but they all became rich in the 1800s and early 1900s, back when government was a tiny burden (and there often were no income taxes).

That’s true for the United States. And it’s true for Western Europe.

It’s also worth noting that places that have become rich in the modern era, such as Hong Kong and Singapore, have small governments and low tax burdens.

I’m making these points because Jim Tankersley of the New York Times has a thorough article on the Biden Administration’s budgetary philosophy.

And that philosophy is based on a completely different perspective. Indeed, the headline and subtitle are a very good summary of the entire article.

Here are some passages that further capture the Biden approach.

President Biden’s $6 trillion budget bets on the power of government to propel workers, families and businesses to new heights of prosperity…by redistributing income and wealth from high earners and corporations to grow the middle class. …it sets the nation on a new and higher spending path, with total federal outlays rising to $8.2 trillion by 2031… That spending represents an attempt to expand the size and scope of federal engagement in Americans’ daily lives… Mr. Biden also seeks to expand the government safety net in an effort to help Americans — particularly women of all races and men of color — work and earn more, rather than relying on corporate America to funnel higher wages to workers. …Mr. Biden is pushing what amounts to a permanent increase in the size of the federal footprint on the U.S. economy. Since 1980, annual federal spending has been, on average, about one-fifth the size of the nation’s economic output; under Mr. Biden’s plans, that would grow to close to one-fourth.

The article is definitely correct about one thing. As I wrote yesterday, Biden wants a big expansion of government spending.

But is he correct about the consequences? Will bigger government “help Americans” and allow more of them to “enjoy prosperity”?

If the evidence from Europe is any indication, adopting bigger welfare states is not a recipe for more prosperity.

For instance, OECD data on “actual individual consumption” show that people in the United States enjoy much higher living standards than their counterparts on the other side of the Atlantic Ocean.

There’s also very powerful data showing that poor Americans (those at the 20th percentile) have higher living standards than most middle-class Europeans.

There’s even data showing that very poor Americans (those at the 10th percentile) have living standards equal to most middle-class Europeans.

The bottom line is that Biden wants higher taxes and more redistribution, but that’s been a big failure in the part of the world that has tried that approach.

Not that we should be surprised. Both theory and evidence tell us that bigger government is bad for prosperity.

P.S. There’s a very sobering example of what happens when a rich nation decides to dramatically curtail economic liberty.

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There are many things to dislike about President Biden’s budget plan to expand the burden of government.

There will be ample opportunity to write about these issues in the coming weeks. For today, however, let’s identify and highlight the biggest problem.

Simply stated, Biden wants to permanently and significantly increase the burden of government spending. Here’s a chart, based on data from Table S.1 of the President’s budget, augmented by data from Table 1.3 of the Budget’s Historical Tables.

The budget had reached $4 trillion before the pandemic. It then skyrocketed for coronavirus-related spending.

But now that the emergency is receding, Biden is not going to let the burden of government fall back to prior levels. Instead, he’s proposing a $6 trillion budget for the upcoming fiscal year.

And that’s just the starting point. He wants spending to then climb rapidly – at almost twice the rate of inflation – up to $8 trillion by 2031.

By the way, this horrifying data doesn’t tell the entire story.

Biden’s budget doesn’t include some of his new spending giveaways. Brian Riedl addressed this fiscal gimmickry in a column for today’s New York Post.

…this budget does not even include additional spending and debt proposals that are coming later. …They account only for the recently-enacted “stimulus,” a massive discretionary spending hike, and the trillions in (creatively-defined) “infrastructure” spending proposed by the President over the past two months. However, during last fall’s campaign, Biden also proposed trillions in new spending for health care, Social Security, Supplemental Security Income, climate change, college aid, and other priorities. The White House has signaled that these new spending initiatives are still in the pipeline. Including these forthcoming proposals, the President would push spending and deficits far above any levels that have ever been sustained.

And don’t forget all this spending, both proposed and in the pipeline, is in addition to all the entitlement spending that is going to burden the economy over the next several decades.

Here’s one final point to underscore and emphasize the radical nature of Biden’s budget.

I’ve taken the previous chart and added a trendline showing what spending would be if Biden has simply followed the trajectory based on the actual spending levels of every President from Carter to Trump.

In other words, we’re looking at trillions of dollars of additional money being diverted from the productive sector of the economy and being put under the control of politicians and bureaucrats.

That does not bode well for American prosperity. Even the Congressional Budget Office recognizes this means lower living standards for our nation.

The bottom line is that if you adopt European-style fiscal policy, you get anemic European-style levels of income.

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Last year, I compared the economic performance of red states and blue states.

My big takeaway from that column is that we should pay attention to the data on internal migration. More specifically, there’s a reason why Americans have been moving from high-tax states to low-tax states.

Today’s let’s follow up on that discussion.

Today’s Wall Street Journal has an editorial on the gap between blue states and red states. This accompanying illustration shows that there is a clear relationship between joblessness and the degree to which states pursue big-government policies.

And here’s how the WSJ explained the big differences.

The unemployment rate in April nationwide was 6.1%, but this obscures giant variations in the states. With some exceptions, those run by Democrats such as California (8.3%) and New York (8.2%) continued to suffer significantly higher unemployment than those led by Republicans such as South Dakota (2.8%) and Montana (3.7%). It’s rare to see differences that are so stark based on party control in states. But the current partisan differences reflect different policy choices over the length and severity of pandemic lockdowns and now government benefits such as jobless insurance. Nine of the 10 states with the lowest unemployment rates are led by Republicans. The exception is Wisconsin whose Supreme Court last May invalidated Democratic Gov. Tony Evers’s lockdown. …Most states in the Midwest, South and Mountain West aren’t far off their pre-pandemic employment peaks. One obstacle to a faster recovery may be the $300 federal unemployment bonus, which many GOP governors are rejecting. Meantime, states with Democratic governments continue to reward workers for sitting on the couch. The longer that workers stay unemployed, the harder it will be to get them to return to work.

For what it’s worth, I’m more upset about the subsidized unemployment than the differences in lockdown policies, particularly because the former is more indicative of economic illiteracy.

P.S. One of the worst parts of Biden’s waste-filled stimulus plan is that it gave a big bailout for states, based on a formula that actually rewarded them for having bad numbers.

P.P.S. Click here and here if you want to peruse comprehensive measures of state economic policy.

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I’ve shared all sorts of online quizzes that supposedly can detect things such as whether you’re a pure libertarian.

Or even whether you’re a communist.

Today, courtesy of the folks at the Committee for a Responsible Budget, you can agree or disagree with 24 statements to determine your “budget personality.”

I have some quibbles about some of the wording (for instance, I couldn’t answer “neither” when asked to react to: “The government should spend more money on children than on seniors”).

But I can’t quibble with the results. Given the potential outcomes, I’m glad to be a “Minimalist” who is “in favor of smaller government.”

Though I’m disappointed that I apparently didn’t get a perfect score on “Size of Government.”

And I need to explain why I got a mediocre score on the topic of “Fiscal Responsibility.”

The budget geeks at the Committee for a Responsible Federal Budget (CRFB) have a well-deserved reputation for rigorous analysis. I regularly cite their numbers and appreciate the work that they do.

That being said, they mistakenly focus on deficits and debt when the real problem is too much government.

I agree with Milton Friedman, who wisely observed that ““I would rather have government spend one trillion dollars with a deficit of a half a trillion dollars than have government spend two trillion dollars with no deficit.”

The folks at CRFB would disagree.

Indeed, they are so fixated on red ink that they would welcome tax increases.

At the risk of understatement, that would be a very bad approach.

The evidence from Europe shows that higher taxes simply lead to higher spending. And more debt.

Indeed, Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

The bottom line is that CRFB not only has the wrong definition of “Fiscal Responsibility,” but they also support policies that would make matters worse – even from their perspective!

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The United States has a big economic advantage over Europe in part because the burden of welfare spending is lower.

This means fewer people trapped in government dependency in America. And it means a smaller tax burden in America.

But some of our friends on the left think it is bad news that the United States isn’t more like Europe.

They want more redistribution in America and they may get their wish if Congress approves Biden’s so-called American Families Plan.

The Economist has an article about Biden’s radical proposal, which would, as they correctly note, “Europeanise the American welfare state.”

President Joe Biden is proposing an ambitious reweaving of the American safety-net, which the White House says will cost $1.8trn. The American Families Plan has bits of the European welfare state that have long been missing in the country—a child allowance, paid family leave, universal pre-school, subsidised child care and free community college—but contains no reference to work requirements. …So how did Democrats go from Clintonism—which implicitly conceded the Reaganite critique that too much governmental assistance is a very bad thing—to its present-day unconcern about (even relish for) deficit-financed expansions of the safety-net?

Here are some of the specific details from the story, including discussion of Biden’s plan for per-child handouts.

This would bring America more in line with the rest of the developed world: the average government spending on benefits such as child allowances, family leave and early education is 2.1% of GDP in the OECD club of mostly rich countries. In America, it is just 0.6%. …A generous child allowance is the main anti-poverty tool in most rich countries—and also one that America lacks. One such scheme was created this year as part of the covid-19 relief bill that the president signed in March. It will pay most families $3,000 per year per child ($3,600 for young children)… The president’s plan proposes to extend these payments until 2025. Some Democrats think they should simply be made permanent.

The Wall Street Journal opined about Biden’s plan last month.

It’s more accurate to call this the plan to make the middle class dependent on government from cradle to grave. The government will tell you sometime later, after you’re hooked to the state, how it will force you to pay for it. We’d call the price tag breathtaking, but by now what’s another $2 trillion? …But the cost, while staggering, isn’t the only or even the biggest problem. The destructive part is the way the plan seeks to insinuate government cash and the rules that go with it into all of the major decisions of family life. The goal is to expand the entitlement state to make Americans rely on government and the political class for everything they don’t already provide. …This is now about mainlining benefits to middle-class families so they become addicted to government—and to the Democratic Party that has become the promoting agent of government.

I agree with the WSJ. Biden wants to create more dependency, even if that means eviscerating Bill Clinton’s very successful welfare reform.

For my contribution to this discussion, I want to make two points about the practical implications of Biden’s plan to “Europeanise” the United States.

First, it is impossible to have a European-sized government without massive tax increases. And since there aren’t enough rich people to finance big government, that inevitably means low-income and middle-class taxpayers will have to be hit with much bigger fiscal burdens. Which is exactly what has happened in Europe (and lots of honest people on the left openly admit a bigger welfare state would require similar policies in the United States).

Second, it is impossible to have a European-sized government and still maintain a big economic advantage over Europe. Higher spending and higher taxes will combine to reduce work, saving, investment, and entrepreneurship. Simply stated, European fiscal policy will lead to European economic results, and that will be very bad news for ordinary Americans since living standards are 30 percent-40 percent lower on the other side of the Atlantic Ocean.

It’s also worth noting that the United States ranks very high in societal capital, and that presumably will erode if more people are lured into government dependency.

P.S. Biden used to oppose a government-guaranteed income, correctly realizing it would undermine the work ethic.

P.P.S. The United States already faces a huge long-run challenge because of entitlement spending, so it’s remarkable – in a bad way – that Biden wants to step on the gas rather than hit the brakes.

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Government breeds corruption by giving sleazy people a way of obtaining unearned wealth. Politicians and special interests are the winners and workers, consumers, and taxpayers are the losers.

It’s easy to find examples. Simply look at tax policy, spending policy, regulatory policy, energy policy, industrial policy, agricultural policy, foreign policy, health policy, trade policy, drug policy, and bailout policy. Or anything else involving politicians and their cronies.

Hmmm…, I wonder if there’s a lesson to be learned from that list?

But just in case some people are slow learners, let’s consider some new scholarly research from the Federal Reserve.

The study, authored by Joonkyu Choi, Veronika Penciakova, and Felipe Saffie, explores whether companies that give cash to politicians are then rewarded with cash from taxpayers.

The American Recovery and Reinvestment Act (ARRA) was enacted in the midst of the Great Recession, and over one-fourth of the funds were channeled directly to firms with the primary goal of saving and creating jobs. These stimulus funds were sizable and valuable to firms, with the average grant awarded exceeding $500,000. With hundreds of thousands of dollars on the line, firms may have incentive to exert political influence… Are firms successful in influencing the allocation of stimulus spending? …This paper provides empirical answers… We find that firms’ campaign contributions to state politicians before the enactment of ARRA have a positive and significant impact on the probability of winning ARRA grants… We find that firms that contribute to winning candidates are 64 percent more likely to secure an ARRA grant and receive 10 percent larger grants. …The allocative distortion caused by political connections is sizable. Although only 6 percent of grant recipients contribute during local elections, they account for21 percent of total ARRA grants.

I feel like I need to take a shower after reading those results. Maybe I’m a political prude, but it galls me that politicians and interest groups have so much ability to fleece the rest of us.

And now you know what I refer to Washington as America’s “wretched hive of scum and villainy.”

The obvious takeaway from this research is that we’ll have less corruption if we have less government.

Which was my message in this video.

While I obviously like my video on the topic, I very much recommend this video interview with Andrew Ferguson.

P.S. Speaking of videos, here’s some satire about government corruption.

P.P.S. We shouldn’t be surprised that Obama’s so-called stimulus produced lots of corruption. The same was true with regards to Obamacare and green energy, which were his other main initiatives.

P.P.P.S. In the future, I’m sure we’ll see studies finding lots of corruption in Biden’s recent “stimulus” plan.

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One week ago, I shared five images that capture the essence of government.

Today, we have another collection, starting with a reminder of, in the words of Ronald Reagan, the most terrifying words in the English language.

Next, we have warning signs about all sorts of things, but not about the the biggest threat we face.

Our third item captures what happens over time as a small government becomes medium-sized government and then evolves into big government.

Here’s a succinct explanation of how government and organized crime are similar (though here’s a cartoon reminding us how they are different).

Here’s my favorite, though given the spending proclivities of many Republicans, it should simply read “politicians promising everything for ‘free’.”

You get the same message from this Glenn McCoy cartoon and this Michael Ramirez cartoon.

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I wrote two days ago about subsidized unemployment, followed later in the day by this interview.

This controversy raises a fundamental economic issue.

I explained in the interview that employers only hire people when they expect a new worker will generate at least enough revenue to cover the cost of employment.

There’s a similar calculation on the part of individuals, as shown by this satirical cartoon strip.

People decide to take jobs when they expect the additional after-tax income they earn will compensate them for the loss of leisure and/or the unpleasantness of working.

Which is why many people are now choosing not to work since the government has increased the subsidies for idleness (a bad policy that began under Trump).

The Wall Street Journal editorialized about this issue a couple of days ago.

White House economists say there’s no “measurable” evidence that the $300 federal unemployment bonus is discouraging unemployed people from seeking work. They were rebutted by Tuesday’s Bureau of Labor Statistics’ Jolts survey, which showed a record 8.1 million job openings in March. …But these jobs often pay less than what most workers could make on unemployment. That explains why the number of job openings in many industries increased more than the number of new hires in March. …The number of workers who quit their jobs also grew by 125,000. …some quitters may be leaving their jobs because they figure they can make more unemployed for the next six months after Democrats extended the bonus into September.

Dan Henninger also opined on the issue for the WSJ. Here’s some of what he wrote.

President Biden said, “People will come back to work if they’re paid a decent wage.” But what if he’s wrong? What if his $300 unemployment insurance bonus on top of the checks sent directly to millions of people (which began during the Trump presidency) turns out to be a big, long-term mistake? …Mr. Biden and the left expect these outlays effectively to raise the minimum wage by forcing employers to compete with Uncle Sam’s money. …Ideas have consequences. By making unemployment insurance competitive with market wage rates in a pandemic, the Biden Democrats may have done long-term damage to the American work ethic. …The welfare reforms of the 1990s were based on the realization that transfer payments undermined the work ethic. The Biden-Sanders Democrats are dropping that work requirement for recipients of cash payments.

Amen.

I made similar arguments about the erosion of the work ethic last year when discussing this issue.

And this concern applies to other forms of redistribution. Including, most notably, the foolish idea of big per-child handouts.

P.S. The WSJ editorial cited above mentioned the Labor Department’s JOLT data. Those numbers are also useful if you want proof that federal bureaucrats are overpaid, and you’ll also see that the same thing is true for state and local government employees.

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As a wonk, I prefer serious criticisms of government that focus on excessive spending, punitive tax rates, and pointless red tape.

But since I’ve never grown up, I also appreciate humor that mocks government.

So let’s enjoy a new collection of memes that target our overlords in Washington (these also apply to the politicians and bureaucrats in other national capitals, as well as those in state capitals and local government).

We’ll start with this four-frame summary of government.

For our second item, we have a cartoon that shows how government creates a big wedge between gross pay and take-home pay.

Needless to say, workers have less incentive to be productive in this system, which is why I often write boring columns about “deadweight loss.”

Next we have some of the warning signs of an abusive relationship, and some clever person added a bit of wisdom underneath.

At first, I thought this was an exaggeration, but then I realized it wasn’t difficult to think of a program or government activity that matches all 15 categories.

Our fourth item will make most sense to geology majors, but the rest of us can certainly understand the message in the final frame.

Indeed. Reminds me of Reagan’s 9-word warning.

Last but not least, my favorite item in today’s collection points out the eerie similarity between online scammers and political scammers.

The moral of the story is that you’ve asked a very weird question if government is the answer.

Makes you wonder if the “ancaps” actually have the right approach.

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My approach during the Trump years was very simple.

Other people, however, muted their views on policy because of their partisan or personal feelings about Trump.

I was very disappointed, for instance, that some Republicans abandoned (or at least downplayed) their support for free trade to accommodate Trump’s illiteracy on that issue.

But those people look like pillars of stability and principle compared to the folks who decided to completely switch their views.

Max Boot, for instance, is a former adviser on foreign policy to Republicans such as John McCain and Marco Rubio, who has decided that being anti-Trump means he should now act like a cheerleader for high taxes and big government.

Here’s some of what he wrote in a column for today’s Washington Post.

Republicans accuse President Biden of pursuing a radical agenda that will turn the United States into a failed socialist state. …It’s true that Biden is proposing a considerable amount of new spending… But those investments won’t turn us into North Korea, Cuba, Venezuela or the Soviet Union — all countries with government ownership of industry. …with proposals such as federally subsidized child care, elder care, family leave and pre-K education — financed with modest tax increases on corporations and wealthy individuals — Biden is merely moving us a bit closer to the kinds of government services that other wealthy, industrialized democracies already take for granted. …That’s far from radical. It’s simply sensible.

Part of the above excerpt makes sense. Biden is not proposing socialism, at least if we use the technical definition.

And he’s also correct that Biden isn’t trying to turn us into North Korea, Cuba, Venezuela, or the Soviet Union.

But he does think it’s good that Biden wants to copy Europe’s high-tax welfare states.

…by most indexes we are an embarrassing international laggard. …the United States spends nearly twice as much on health care as a percentage of gross domestic product than do other wealthy countries… The United States is also alone among OECD nations in not having universal paid family leave. …Our level of income inequality is now closer to that of developing countries in Africa and Latin American than to our European allies. …it’s possible to combine a vibrant free market with generous social welfare spending. In fact, that’s the right formula for a more satisfied and stable society. In the OECD quality-of-life rankings — which include everything from housing to work-life balance — the United States ranks an unimpressive 10th.

Mr. Boot seem to think that it’s bad news that the United States ranks 10th out of 37 nations in the OECD’s so-called Better Life Index.

I wonder if he understands, however, that this index has serious methodological flaws – such as countries getting better scores if they have bigger subsidies that encourage unemployment? Or countries getting better scores if they have high tax rates that discourage labor supply?

But the real problem is that Boot seems oblivious to most important data, which shows that Americans enjoy far more prosperity than Europeans.

And he could have learned that with a few more clicks on the OECD’s website. He could have found the data on average individual consumption and discovered the huge gap between U.S. prosperity and European mediocrity.

The obvious takeaway is that big government causes deadweight loss and hinders growth (as honest folks on the left have always acknowledged).

P.S. I can’t resist nit-picking four other points in Boot’s column.

  1. As show by this Chuck Asay cartoon, you don’t magically make government spending productive simply be calling it an “investment.”
  2. Like beauty, the interpretation of “modest” may be in the eye of the beholder, but it certainly seems like “massive” is a better description of Biden’s proposed tax hikes.
  3. It’s worth noting that Europe became a relatively prosperous part of the world before governments adopted punitive income taxes and created big welfare states.
  4. America’s excessive spending on health is caused by third-party payer, which is caused by excessive government intervention.

P.P.S. I’ve wondered whether the OECD (subsidized by American taxpayers!) deliberately used dodgy measures when compiling the Better Life Index in part because of a desire to make the U.S. look bad compared to the European welfare states that dominate the organization’s membership? That certainly seems to have been the case when the OECD put together a staggeringly dishonest measure of poverty that made the U.S. seem like it had more destitution than poor countries such as Greece, Portugal, and Turkey.

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There are all sorts of long-running battles in the economics profession, perhaps most notably the never-ending dispute about Keynesian economics.

Another contentious issues is the degree to which society should accept less growth in order to achieve more equality, with Arthur Okun – author of Equality and Efficiency: The Big Tradeoff – being the most famous advocate for prioritizing equity.

I don’t agree with Okun, but I applaud him for honesty. Unlike many modern politicians, as well as most international bureaucracies (and even the occasional journalist), he didn’t pretend that big government was a free lunch.

Let’s take a closer look at this issue in today’s column.

We’ll start by perusing a working paper, published by Spain’s central bank, that explores the optimal tax rate for that nation. The author, Dario Serrano-Puente, concludes that society will be better off if tax rates are increased.

Many modern governments implement a redistributive fiscal policy, where personal income is taxed at an increasingly higher rate, while transfers tend to target the poorest households.In Spain there is an intense debate about…so-called “fiscal justice”, which is putting on the table a tax rate increase for the high-income earners… once the theoretical framework is defined, a bunch of potential progressivity reforms are assessed… Then a Benthamite social planner, who takes into account all households in the economy by putting the same weight on each of them, discerns the optimal progressivity reform. The findings suggest that aggregate social welfare is maximized when the level of progressivity of the Spanish personal income tax is increased to some extent. More precisely,in the optimally reformed scenario (setting the optimal level of progressivity), welfare gains are equivalent to an average increase of 3.08% of consumption.

I have a fundamental problem with the notion of government acting as a “Benthamite social planner,” but I don’t want to address that issue today.

Instead, I want to applaud Senor Serrano-Puente because he openly acknowledges that higher tax rates and more redistribution will lead to less growth.

Here’s some of what he wrote about that tradeoff.

For each reformed economy evaluated in the progressivity gridτ={0.00, …,0.50}, the main macroeconomic aggregates are calculated. …the evolution of these magnitudes on progressivity is depicted in Figure 4. Broadly speaking, it is clear that aggregate capital and output are decreasing in progressivity in a (almost) linear pathway, with the drop in capital being more pronounced than in output. …aggregate consumption and aggregate labor are also decreasing in progressivity.

Here’s a look at the aforementioned Figure 4, and it is easy to see that the economy suffers as progressivity increases.

Kudos, again, to the author for acknowledging the tradeoff between equity and efficiency. But applauding the author for honesty is not the same as applauding the author’s judgement.

Simply stated, he is trying to justify a policy that will hurt poor people in the long run. That’s because even small differences in growth can have a big effect over time.

Let’s illustrate how this works with a chart showing the life-time earnings of a hypothetical low-income Spaniard.

  • The orange line shows how much money the workers gets if he starts with an extra 3.08 percent of income thanks to higher taxes and additional redistribution, but the economy grows 2.0 percent per year.
  • The blue line shows income for the same worker, which starts at a lower level because tax rates have not been increased to fund additional redistribution, but the economy grows 2.2 percent per year..

As you can see, that low-income worker is a net beneficiary of bigger government for about 10 years. But as time goes on, the worker would be far better off with smaller government and faster growth.

Different assumptions will lead to different results, of course. My goal is simply to help readers understand two things.

P.S. To illustrate the high cost of big government, let’s shift from hypothetical examples to real-world data. Most relevant, OECD data shows that the average low-income person in the United States is better off than the average middle-class person in Spain.

P.P.S. The study cited above considers what happens if Spanish politicians raise taxes on the rich. That would be a mistake, as illustrated by the chart, but let’s not forget that Spanish politicians also over-tax low-income people.

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We can learn a lot by looking at economic history.

It’s instructive to note, for instance, that the United States evolved from agricultural poverty to middle-class prosperity in the 1800s – during a time when the burden of government spending was trivially small.

Federal spending that century, on average, consumed less than 5 percent of the country’s economic output, meaning we had a public sector far smaller that what is found today in supposedly small-government jurisdictions such as Hong Kong and Singapore.

There’s a lesson to be gleaned from America’s rise to prosperity, in my humble opinion, as well as from similar experiences in Western Europe.

But not everybody sees history the same way. Earlier this month, David Brooks opined in the New York Times in favor of Biden’s spending binge.

Given his long-standing opposition to libertarianism/small-government conservatism, that’s not a big surprise. But what is noteworthy is that he argued Biden’s statism is part of the American tradition.

What is the quintessential American act? It is the leap of faith. …The early days of the Biden administration are nothing if not a daring leap. …What is this thing, Bidenomics? …democracy needs to remind the world that it, too, can solve big problems. Democracy needs to stand up and show that we are still the future. …Cecilia Rouse, the chair of Biden’s Council of Economic Advisers, …said…“the private sector…is not best suited to deliver certain public goods like work force training and infrastructure investment,” she told me. “These are places where there is market failure, which creates a role for government.” …Some people say this is like the New Deal. I’d say this is an updated, monster-size version of “the American System,” the 19th-century education and infrastructure investments inspired by Alexander Hamilton, championed by Henry Clay and then advanced by the early Republicans, like Abraham Lincoln. That was an unabashedly nationalist project, made by a youthful country, using an energetic government to secure two great goals: economic dynamism and national unity.

The column concludes that we have to make this leap to deal with a threat from China.

Sometimes you take a risk to shoot forward. The Chinese are convinced they own the future. It’s worth taking this shot to prove them wrong.

But Mr. Brooks is wrong. We’re not taking a daring leap into the unknown with Biden’s agenda.

We’re copying Western Europe.

And that means we have lots of data showing what that means for our future. Unfortunately, it means Americans will enjoy less income and suffer from lower living standards.

At the risk of understatement, that doesn’t seem like a good idea.

P.S. I also can’t resist pointing out that there are several small points in Brooks’ column that cry out for correction, such as the anti-empirical assertions that government job training is a good idea or that government intervention in the 1800s produced good results.

P.P.S. I’m also baffled that so many people view China as a successful economic model when living standards in that nation are only about one-fifth of American levels.

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There’s a growing controversy about whether the various coronavirus-lockdown rules should be relaxed for people who have been vaccinated (as opposed to being relaxed for hypocritical politicians).

And if those restrictions are relaxed, vaccinated people presumably will need some sort of proof, like a “vaccine passport.”

Many people understandably are hesitant about this concept, particularly if government is involved. After all, we have many examples of seemingly innocuous ideas becoming nightmarish mistakes (such as adopting the income tax).

And the last thing any of us would want (I hope!) is something that could devolve into an authoritarian, Chinese-style system for monitoring and controlling private life.

But what if government isn’t involved? What if private businesses decide that customers are only allowed if they prove they’ve been vaccinated?

From a libertarian perspective, guided by core principles such as property rights and freedom of association, that should be totally acceptable.

And that’s true even if we think the owners of the businesses are making silly choices. After all, it’s their property.

Some conservatives, however, either don’t understand libertarian principles or they’re willing to abandon those principles for political convenience.

For instance, Will Wilkinson observes that many Republicans are forgetting the libertarian principle of freedom of association.

Conservatives have been freaking out about the mere possibility of vaccine passports… The idea is that the ability to credibly prove vaccination status will speed the restoration of normal social and economic life. This works by allowing businesses, schools, sports leagues, etc. to discriminate against those who haven’t been vaccinated. …one of the bright lines dividing American liberals and conservatives concerns the limits of freedom of association. Conservatives, and especially those with a libertarian streak, are far more likely to be absolutists about the right to exclude anyone from your property, business, or private club or association for any reason. …If the Civil Rights Act is problematic because it infringes on freedom of association, the permissibility of discriminating against customers who might carry a fatal infection is a total no-brainer. Right? Ha! …there is no actual principle at work here. Conservatives are consistent only in their opportunistic incoherence.

Moreover, in his column for the Atlantic, David Frum notes that the GOP is hypocritically abandoning its support for property rights.

Whether vaccine passports ever will exist remains highly uncertain. A lot of questions remain about the technology required—and about whether the concept makes any business sense. …For now, then, the discussion about vaccine passports remains theoretical—which makes the discussion all the more impassioned and embittered. DeSantis and others are loudly advertising that with COVID-19, …their version of freedom puts greater priority on right-wing cultural folkways than on rights of property and ownership. …To appease those cultural blocs, Republican politicians must be willing to sacrifice everything, including what used to be the party’s foundational principles. …to avoid contradicting the delusions of anti-vaccine paranoiacs, property rights must give way, freedom to operate a business must yield. …with COVID-19, …the new post-Trump message from the post-Trump GOP is: Private property is socialism; state expropriation is freedom. It’s a strange doctrine for a party supposedly committed to liberty and the Constitution, but here we are.

I think it’s fair to say that neither Wilkinson nor Frum are libertarians, or even conservatives, but I also think they are correct in pointing out that there is a lot of hypocrisy and incoherence.

That being said, I am glad that there’s lots of resistance to the idea of vaccine passports. Why? Because if businesses impose such rules and there’s no pushback, that probably increases the likelihood that politicians will try something similar.

And that’s where libertarians should be drawing the line, as Professor Don Boudreaux has noted.

After all, if a business does something we don’t like, we are free to patronize competitors. But if government does something we don’t like, there’s the horrible choice of obey or go to jail (or get a fake passport on the black market).

For what it’s worth, I hope this becomes a moot point. After all, once everybody who wants to get vaccinated has been vaccinated, there’s no plausible argument for maintaining any more restrictions on normal life.

P.S. But if it does become a real issue, it will probably generate new jokes, cartoons, and memes, all of which will require me to expand my collection of coronavirus-themed humor.

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The International Monetary Fund’s dogmatic support for higher taxes and bigger government makes it “the dumpster fire of the global economy.”

Wherever IMF bureaucrats go, it seems they push for high-tax policies that will weaken growth.

Call me crazy, but I’m baffled that the IMF seems to think nations will grow faster and be more prosperous if politicians seize more money from the economy’s productive sector.

Unfortunately, the IMF has been especially active in recent months..

In a column for the U.K.-based Guardian, Larry Elliott writes about the IMF using the pandemic as an excuse to push for higher taxes.

…the IMF called for domestic and international tax changes that would boost the money available to expand public services, make welfare states more generous… “To help meet pandemic-related financing needs, policymakers could consider a temporary Covid-19 recovery contribution, levied on high incomes or wealth,” the fiscal monitor said. …Paolo Mauro, the deputy director of the IMF’s fiscal affairs department, said there had been an “erosion” of the taxes paid by those at the top of the income scale, with the pandemic offering a chance to claw some of the money back. “Governments could consider higher taxes on property, capital gains and inheritance,” he said. “One specific option would be a Covid-19 recovery contribution – a surcharge on personal tax or corporate income tax.”

Mr. Mauro, like most IMF bureaucrats, is at “the top of the income scale,” but he doesn’t have to worry that he’ll be adversely impact if politicians seek to “claw some of the money back.”

Why? Because IMF officials get tax-free salaries (just like their counterparts at other international bureaucracies).

Writing for the IMF’s blog, Mr. Mauro is joined by David Amaglobeli and Vitor Gaspar in supporting higher taxes on other people.

Breaking the cycle of inequality requires both predistributive and redistributive policies. …The COVID-19 crisis has demonstrated the vital importance of a good social safety net that can be quickly activated to provide lifelines to struggling families. …Enhancing access to basic public services will require additional resources, which can be mobilized, depending on country circumstances, by strengthening overall tax capacity. Many countries could rely more on property and inheritance taxes.  Countries could also raise tax progressivity as some governments have room to increase top marginal personal income tax rates… Moreover, governments could consider levying temporary COVID-19 recovery contributions as supplements to personal income taxes for high-income households.

Needless to say, the IMF is way off base in fixating on inequality instead of trying to reduce poverty.

Meanwhile, Brian Cheung reports for Yahoo Finance about the IMF’s cheerleading for a global tax cartel.

The International Monetary Fund (IMF) says it backs a U.S. proposal for a global minimum corporate tax. IMF Chief Economist Gita Gopinath said that the fund has been calling for international cooperation on tax policy “for a long time,” adding that different corporate tax rates around the world have fueled tax shifting and avoidance. “That reduces the revenues that governments collect to do the needed social and economic spending,” Gopinath told Yahoo Finance Tuesday. “We’re very much in support of having this kind of global minimum corporate tax.” …Gopinath also backed Yellen’s push forward on an aggressive infrastructure bill… As the IMF continues to encourage countries with fiscal room to continue spending through the recovery, its chief economist said investment into infrastructure is one way to boost economic activity.

Based on the above stories we can put together a list of the tax increases embraced by the IMF, all justified by what I call “fairy dust” economics.

  • Higher income tax rates.
  • Higher property taxes.
  • More double taxation of saving/investment.
  • Higher death taxes.
  • Wealth taxes.
  • Global tax cartel.
  • Higher consumption taxes.

And don’t forget the IMF is a long-time supporter of big energy taxes.

All supported by bureaucrats who are exempt from paying tax on their own very-comfortable salaries.

P.S. I feel sorry for two groups of people. First, I have great sympathy for taxpayers in nations that follow the IMF’s poisonous advice. Second, I feel sorry for the economists and other professionals at the IMF (who often produce highquality research). They must wince with embarrassment every time garbage recommendations are issued by the political types in charge of the bureaucracy.

P.P.S. But since they’re actually competent, they will easily find new work if we shut down the IMF to protect the world economy.

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I get asked why I frequently criticize Republicans.

My response is easy. I care about results rather than rhetoric. And while GOP politicians often pay lip service to the principles of limited government, they usually increase spending even faster than Democrats.

Indeed, Republicans are even worse than Democrats when measuring the growth of domestic spending!

This is bad news because it means the burden of government expands when Republicans are in charge.

And, as Gary Abernathy points out in a column for the Washington Post, Republicans then don’t have the moral authority to complain when Democrats engage in spending binges.

President Biden is proposing another $3 trillion in spending… There are objections, but none that can be taken seriously. …Republicans had lost their standing as the party of fiscal responsibility when most of them succumbed to the political virus of covid fever and rubber-stamped around $4 trillion in “covid relief,”… With Trump out and Biden in, Republicans suddenly pretended that their 2020 spending spree happened in some alternate universe. But the GOP’s united opposition to Biden’s $1.9 trillion package won’t wash off the stench of the hypocrisy. …I noted a year ago that we had crossed the Rubicon, that our longtime flirtation with socialism had become a permanent relationship. Congratulations, Bernie Sanders. The GOP won’t become irrelevant because of its association with Trump, as some predict. It will diminish because it is bizarrely opposing now that which it helped make palatable just last year. Fiscal responsibility is dead, and Republicans helped bury it. Put the shovels away, there’s no digging it up now.

For what it’s worth, I hope genuine fiscal responsibility isn’t dead.

Maybe it’s been hibernating ever since Reagan left office (like Pepperidge Farm, I’m old enough to remember those wonderful years).

Subsequent Republican presidents liked to copy Reagan’s rhetoric, but they definitely didn’t copy his policies.

  • Spending restraint was hibernating during the presidency of George H.W. Bush.
  • Spending restraint also was hibernating during the presidency of George W. Bush.
  • And spending restraint was hibernating during the presidency of Donald Trump.

I’m not the only one to notice GOP hypocrisy.

Here are some excerpts from a 2019 column in the Washington Post by Fareed Zakaria.

In what Republicans used to call the core of their agenda — limited government — Trump has been profoundly unconservative. …Trump has now added more than $88 billion in taxes in the form of tariffs, according to the right-leaning Tax Foundation. (Despite what the president says, tariffs are taxes on foreign goods paid by U.S. consumers.) This has had the effect of reducing gross domestic product and denting the wages of Americans. …For decades, conservatives including Margaret Thatcher and Ronald Reagan preached to the world the virtues of free trade. But perhaps even more, they believed in the idea that governments should not pick winners and losers in the economy… Yet the Trump administration…behaved like a Central Planning Agency, granting exemptions on tariffs to favored companies and industries, while refusing them to others. …In true Soviet style, lobbyists, lawyers and corporate executives now line up to petition government officials for these treasured waivers, which are granted in an opaque process… On the core issue that used to define the GOP — economics — the party’s agenda today is state planning and crony capitalism.

Zakaria is right about Republicans going along with most of Trump’s bad policies (as illustrated by this cartoon strip).*

The bottom line is that Republicans would be much more effective arguing against Biden’s spending orgy had they also argued for spending restraint when Trump was in the White House.

P.S. It will be interesting to see what happens in the near future. Will the GOP be a small-government Reagan party or a big-government Trump party?

Or maybe it will go back to being a Nixon-type party, which would mean bigger government but without mean tweets. And there are plenty of options.

If they make the wrong choice (anything other than Reaganism), Margaret Thatcher has already warned us about the consequences.

*To be fair, Republicans also went along with Trump’s good policies. It’s just unfortunate that spending restraint wasn’t one of them.

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I’ve authored a five-part series about coronavirus and the failure of big government (hereherehere, here, and here), as well as columns specifically highlighting the failures of the FDA, CDC, and WHO bureaucracies.

Today, let’s look at how free enterprise came to the rescue when government barriers were reduced. Starting with this video.

To elaborate on this message, millions of lives are now being saved because pharmaceutical companies have produced multiple vaccines.

I even got my first shot yesterday before leaving town for a softball tournament.

Will this save my life? I like to think I’m reasonably healthy and would have survived if I caught the virus, but I’m very happy to now put that possibility in the rear-view mirror.

So I’m feeling very happy that I live in a nation where private companies, in their pursuit of profits, have had a big incentive to produce vaccines.

Yes, I realize the government dumped a bunch of taxpayer money into vaccine production, so I don’t want to pretend Uncle Sam played no role. But I also have great faith that the profit motive would have led to vaccines being developed regardless.

And we would have had the vaccines even sooner if the FDA was even better about getting out of the way.

Allysia Finley celebrated capitalism’s key role in a recent column for the Wall Street Journal. Here’s some of what she wrote about the decades of research and investment that enabled pharmaceutical companies to deliver miracles for humanity.

Large corporations are political villains, derided on the left and right. Yet the main, and perhaps only, reason the Covid-19 scourge is easing is vaccines developed by Big Pharma. …There are…lessons for those who think capitalism is merely about rapacious profit. “We would never be in the position where we are today if we had not invested billions of dollars over decades so that we could respond,” Mr. Gorsky, 60, says in an interview… J&J’s vaccine is the third to obtain FDA approval, but preliminary results from trials on AstraZeneca and Novavax suggest they are also highly effective. All these Covid-19 vaccines use innovative technologies that have been developed and tested over decades on other diseases. …The Pfizer-BioNTech and Moderna vaccines inject the virus’s genetic code via mRNA… It seems like an incredible stroke of luck and science that we have so many Covid-19 vaccines so soon. But it’s more than that. Credit years of research and investment by drug makers… “I think this is a golden moment, not only for Johnson & Johnson, but the biopharmaceutical industry,” he says. “We fundamentally believe that having a market-based, innovation-based, biopharmaceutical as well as a medical-technology environment, is critical long term to produce the best overall outcomes for healthcare.”

There are a couple of big lessons for today.

The first lesson, as shown in the video, is that we can save lives by permanently reducing bureaucratic red tape at bureaucracies such as the Food and Drug Administration.

The second lesson is that we should celebrate the profit motive. The desire to make a buck is what drives companies to produce goods and services that make our lives better.

And one takeaway of that second lesson is that we should reject short-sighted policies such as European-style price controls on drug companies. Such an approach would undermine our ability to deal with future pandemics and also reduce the likelihood of new and improved treatments for things such as cancer, dementia, and heart disease.

P.S. I like pharmaceutical companies when they are being honest participants in a free market. I don’t like them when they get in bed with big government.

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I’ve been warning that the United States should not copy Europe’s fiscal policy, largely because living standards are significantly lower in nations with large welfare states.

That’s true if you look at average levels of consumption in different nations, but the most compelling data is the fact that lower-income people in the United States generally enjoy living standards that are equal to or even higher than those for middle-class people in most European countries.

A bigger burden of government is not just a theoretical concern. President Biden has already pushed through a $1.9 trillion spending bill that includes some temporary provisions – such as per-child handouts – that, if made permanent, could add several trillion dollars to the burden of government spending.

And the White House has signaled support for $3 trillion of additional spending for items such as infrastructure, green energy, and other boondoggles.

This doesn’t even count the cost of other schemes, such as the “public option” that would strangle private health insurance and force more people to rely on an already-costly-and-and bankrupt government program.

So what will it mean for America if our medium-sized welfare state morphs into a European-style large welfare state?

The answer to that question is rather unpleasant, at least if some new research from the Congressional Budget Office is any indication. The study, authored by Jaeger Nelson and Kerk Phillips, considers the impact on growth based on six different scenarios (based on how much the spending burden increases and what taxes are increased).

If permanent spending is financed by new or increased taxes, then those taxes influence people’s decisions about how much to work and save. Those decisions then affect how much the economy produces and businesses invest and, ultimately, how much people can consume. Different types of taxes have different economic effects. Taxes on labor income reduce after-tax wages, so they reduce the return on each additional hour worked. …Higher taxes on capital income, such as dividends and capital gains, lower the average after-tax rate of return on private wealth holdings (or the return on investment), which reduces the incentive to save and invest and leads to reductions in saving, investment, and the capital stock. …we compare the effects of raising additional revenues through three illustrative tax policies: a flat tax on labor income, a flat tax on all income (including both labor and capital income), and a progressive tax on all income. The additional revenues generated by these policies are in addition to the revenues raised by taxes that already exist and are used to finance two specific increases in government spending. The two increases in government spending are set to 5 percent and 10 percent of GDP in 2020.

Here are some of the key results, as illustrated by the chart.

The least-worst result (the blue line) is a decline in GDP of about 3 percent, and that happens if the spending burden expand by 5-percentage points of GDP and is financed by a flat tax.

The worst-worst result (dashed red line) is a staggering decline in GDP of about 10 percent, and that happens if the spending burden climbs by 10-percentage points and is financed by a progressive tax.

Here’s some additional analysis, including a description of why progressive taxes impose the most damage.

This paper shows that flat labor and flat income tax policies have similar effects on output; labor taxes reduce the labor supply more, and income taxes reduce the capital stock more. For all three policies, the decline in income contracts the tax base considerably over time. As a result, to continuously generate enough revenues to finance the increase in government spending in each year, tax rates must steadily increase over time to account for the decline in the tax base. Moreover, labor and capital taxes put upward pressure on interest rates by reducing the capital-to-labor ratio over time… The largest declines in economic activity among the financing methods considered occur with the progressive tax on all income. Those declines occur because high-productivity workers reduce their hours worked and because higher taxes on asset income reduce the incentive to save and invest relatively more than under the two flat taxes.

There’s lots of additional information in the study, but I definitely want to draw attention to Table 4 because it shows that lower-income people will suffer big reductions in living standards if there’s an increase in the burden of government spending (circled in red).

What makes these results especially remarkable is that the authors only look at the damage caused by higher taxes.

Yet we know from other research that the economy also will suffer because of the higher spending burden. This is because of the various ways that growth is reduced when resources are diverted from the productive sector to the government.

For background, here’s a video on the theoretical reasons why government spending hinders growth.

And here’s a video with some of the scholarly evidence.

P.S. The CBO study also points out that financing new spending with a value-added tax wouldn’t avert economic damage.

…by reducing the cost of time spent not working for pay relative to other goods, a consumption tax could reduce hours worked through a channel like that of a tax on labor.

For what it’s worth, even the pro-tax International Monetary Fund agrees with this observation.

P.P.S. It’s worth noting that the CBO study also shows that young people will suffer much more than older people.

…older cohorts, on average, experience smaller declines in lifetime consumption than younger cohorts

Which raises an interesting question of why millennials and Gen-Zers don’t appreciate capitalism and instead are sympathetic to the dirigiste ideology that will make their lives more difficult.

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Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.

That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.

But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.

And a low-income person in America is better off than the average European.

When I see numbers like this (and lots of other data I have shared over the years, all of which tells the same story), I have two reactions.

  • First, I want to laugh at anyone who thinks Europeans have a better distribution of income.
  • Second, I want to scream at anyone who things we should copy the European economic policy.

But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.

And there’s plenty of support for this risky concept from both Democrats and Republicans.

On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.

And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.

…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.

As you might expect, folks on the left are very excited about expanding the welfare state.

Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).

Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.

A child allowance would send unconditional cash benefits to nearly all families on a per-child basis.Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.

Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.

When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.

So is there a real danger that per-child handouts will become law?

The obvious answer is yes since they are included in Biden’s faux stimulus.

But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).

Robert VerBruggen has some polling data on this topic.

Here’s how he characterized the results.

So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.

This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.

But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.

P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.

P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.

P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.

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We have decades of real-world experience with Keynesian economics. The results are not pretty.

It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.

  • They were wrong about growth after World War II (and would have been wrong, if they were around at the time, about growth when Harding slashed spending in the early 1920s).
  • They were wrong about Thatcher in the 1980s.
  • They were wrong about Reagan in the 1980s.
  • They were wrong about Canada in the 1990s.
  • They were wrong after the sequester in 2013.
  • They were wrong about unemployment benefits in 2020.

This story needs to be told, again and again, especially since we’re now going to have another real-world test case thanks to President Biden’s so-called American Rescue Plan.

I just wrote a column on Biden’s proposal for the Foundation for Economic Education, and it is co-authored by Robert O’Quinn, who most recently served as the Chief Economist at the Department of Labor.

We started by pointing out that Biden is basically copying Trump’s big-spending approach, but with a different justification (Keynesianism instead of coronavirus).

Mr. Biden is bringing a new twist to the profligacy. Instead of trying to justify the new spending by saying it is needed to compensate households and businesses for government-mandated lockdowns, he is making the Keynesian argument that the new spending is a way of stimulating the economy. The same approach was used when he was Vice President, of course, but did not yield positive results. …Mr. Biden and his team apparently think the anemic results were a consequence of not spending enough money. Hence, the huge $1.9 trillion price tag for his plan. Will his approach work? …We can learn about economic recovery today by reviewing what happened during the Great Recession earlier this century and what happened at the end of World War II.

We explain the causes of the previous recession and point out that Obama’s so-called stimulus didn’t work.

…the Great Recession…was the result of an unsustainable housing bubble caused by overly accommodative monetary policy from the Federal Reserve and misguided housing policies. …it took years to clean up the mess from the bursting of the housing bubble. Households slowly rebuilt their savings and cleaned up their balance sheets. …Banks had to work out problem loans and rebuild their capital… Obama’s stimulus did not drive that healing process and spending more money would have done little to accelerate it.

And we also point out that the economy recovered very quickly after World War II, even though the Keynesians predicted disaster in the absence of a giant new package such as Truman’s 21-Point Program (his version of FDR’s horrible vision of an entitlement society).

Keynesians feared that demobilization would throw the US economy into a deep depression as federal spending was reduced. Paul Samuelson even wrote in 1943 that a failure to come up with alternative forms of government spending would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” …President Harry Truman proposed “a 21-Point Program for the Reconversion Period” shortly after the war ended. But his plan, which was basically a reprise of Franklin Roosevelt’s New Deal, was largely ignored by Congress. Did the economy collapse, as the Keynesians feared? Hardly. …Spared a repeat of FDR’s interventionism, the economy enjoyed strong growth. One of the big tailwinds for growth is that the forced savings accumulated during the war years allowed consumers to go on a peacetime buying binge.

That last sentence in the above excerpt is key because 2021 is a lot like 1945. Back then, households had lots of money in the bank (wartime rationing and controls meant there wasn’t much to buy), which helped trigger the post-war boom.

Something similar is about to happen, as we explain in the column.

The current economic conditions are somewhat reminiscent of the ones that existed after World War II. The limited ability to spend money during the pandemic has helped boost the personal saving rate…  In aggregate terms, personal saving soared from $1.2 trillion in 2019 to $2.9 trillion in 2020. …pent-up demand funded with more than $1 trillion in excess savings will resuscitate…GDP.

So what does all this mean? Well, the good news is that 2021 is going to be a very good year for the economy. That’s already baked into the cake.

The bad news is that Biden is taking advantage of the current political situation to increase the burden of government spending.

…the economy prospered after World War II despite (or perhaps because of) the failure of Mr. Truman’s 21-point proposal. President Biden’s team is either unaware of this history, or they simply do not care. Perhaps they simply want to take advantage of the current environment to reward key constituencies. Or they may be trying to resuscitate the tattered reputation of Keynesian economics by spending a bunch of money so they can take credit for an economic recovery that is already destined to happen.

Since I gave the good news and bad news, I’ll close with the worse news.

There’s every reason to expect very strong growth in 2021, but Biden’s spending binge means that future growth won’t be as robust

  • Especially since the economy also is saddled with lots of wasteful spending by Bush, Obama, and Trump.
  • And especially if Biden is able to push through his agenda of higher taxes on work, saving, and investment.

The bottom line is that the United States is becoming more like Europe and the economic data tells us that means less prosperity and lower living standards.

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I periodically write about the importance of long-run growth and about the importance of convergence (whether poorer countries are catching up with richer countries, as suggested by theory).

This is because such data, especially over decades, teaches us very important lessons about the policies that are most likely to generate prosperity.

I’m revisiting these issues today because John Cochrane, a Senior Fellow at the Hoover Institution and a former professor of economics at the University of Chicago, recently wrote a column that contains a must-see chart showing how some of the major European nations have been losing ground to the United States over the past several decades.

The main thing to understand is that European nations were catching up to the United States after World War II, which is what one would expect.

But that trend came to a halt about 40 years ago and now these nations are suffering divergence instead of enjoying convergence.

Here’s some of Cochrane’s analysis.

…the US is 54% better off than the UK.. France…50% less than US. …the US is 96% better off than Italy. …And it’s been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy… Once noticeably better off than the UK, and contending with France, Italy’s GDP per capita is now lower than it was in 2000. GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it’s getting worse.

What’s most remarkable, as I wrote about back in 2014, is that the gap between the United States and Europe is “getting worse.”

Cochrane wonders if this is evidence against the European Union’s free-trade rules.

This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world’s biggest free trade zone really is a striking fact to gnaw on. Sure, other things are not held constant. Perhaps what should have been the world’s biggest free trade zone became the world’s biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, “it would have been even worse” is a hard argument to make.

For what it’s worth, I don’t think it’s “a hard argument to make”. I’ve pointed out – over and over again – that Europe’s reasonably good policies in some areas are more than offset by really bad fiscal policy.

Think of the different types of economic policy as classes for a student. If a kid flunks one class, that’s going to produce a sub-par grade point average even if there was good marks in all the other classes.

That’s what has happened on the other side of the Atlantic Ocean. Europe is suffering the consequences of a stifling tax burden and an onerous burden of government spending.

Besides, I suspect some of the benefits of free trade inside the European Union are offset by the damage of the E.U.’s protectionist barriers against trade with the rest of the world.

P.S. Some people may wonder why Germany was not included in Cochrane’s chart. I assume that’s because the reunification of West Germany and East Germany about 30 years ago creates a massive discontinuity in the data. For those interested, Germany is slightly better off than France and the U.K., according to the Maddison data, but still lagging well behind the United States.

P.P.S. Speaking of Germany, the divergence between East Germany and West Germany teaches an obvious lesson.

P.P.P.S. I don’t think it’s a coincidence that America started out-performing Europe after Reaganomics was implemented.

P.P.P.P.S One obvious takeaway from Cochrane’s data (though not obvious to President Biden) is that the United States should not be copying Europe. Unless, of course, one wants ordinary Americans to be much poorer.

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What nation serves as the most powerful example of how statism can wreck an economy and impoverish people?

Those are all good choices, but perhaps Argentina is the best example (or should we say worst example?).

If you go back 100 years, Argentina was one of the world’s richest nations. And, as recently as the late 1940s, it still ranked in the top 10 for per-capita economic output.

But then the nation veered to the left. Whether you call it Peronism or democratic socialism, there was a huge increase in the size and scope of government.

As you might expect, the results were terrible. Argentina since then has been the world’s worst-performing economy.

But things can always get worse.

In an article for National Review, Antonella Marty points out that President Fernandez is doing his part to continue the awful pattern of statism-generated crises in Argentina.

…it was already challenging for Argentines to maintain businesses and overcome the endless regulations and bureaucratic hurdles that comprise everyday life…the government of Alberto Fernández and Cristina Fernández de Kirchner has made matters worse… In brief: …The Argentine economy has been in recession since 2018. …Argentina ranks 126th in the World Bank’s Doing Business index, between Paraguay and Iran. It takes about five months to open a business in Argentina. …Argentina has public debt approaching 90 percent of GDP. …Argentina has one of the highest inflation rates in the world: 36.6 percent over the past year. Every month, wages steadily decline, and every 10 or 12 years, like clockwork, the Argentine peso crashes, diminishing household savings. …Argentine debt still trades at a steep discount, because investors rightfully recognize the dim prospects for a government that limits the creation of wealth through aggressive taxation, price controls, currency regulation, and skyrocketing levels of public spending. Argentina still does not realize the problem that has trapped us in a cycle of repeated crises for decades: the government. …The “solutions” invoked by left-wing Peronists — the progeny of the populist 20th-century president Juan Perón — always involve increased state intervention in the economy. Alberto Fernández has done nothing different. …As always, Argentina cannot solve the problem of big government with more government.

Perhaps the worst policy under Fernandez is the new wealth tax.

In an article for the Washington Post, Diego Laje and Anthony Faiola look at Argentina’s embrace of this destructive levy.

At least as far back as the 1940s, …class conflict has lingered just below the surface of this chronically indebted South American state. To dig itself out of a gaping fiscal hole made worse by the pandemic, Argentina is issuing a clarion call now echoing around the globe: Make the rich pay. …So why not, proponents argue, foist the cost of the epic global recession caused by the pandemic onto those who can most afford it? …Argentina, saddled with crippling debt exacerbated by the pandemic, adopted a one-time special levy on the rich in December, demanding up to 3.5 percent of the total net worth of citizens who hold at least $3.4 million of assets. …Argentina is turning to its wealthiest citizens after having lost the faith of foreign investors, and with little other means to plug financial holes. …fearful Argentines hoarded U.S. dollars, and the government, as it so often has in the past, turned to the printing press to make ends meet. Now Argentina is seeking another major bailout from the IMF… In recent months, Walmart, Latam Airlines, Uber Eats, Norwegian Airlines and Nike have reduced operations in Argentina or left the country. …Argentina crashed from its place at the top of the global wealth chain long ago, in a succession of economic crises, dictatorships and bruising political battles between the ruralistas and the Peronistas. 

The reporters don’t make the obvious connection between Peronist policies and the economy’s decline, but at least readers learn that Argentina hasn’t been doing well.

And the authors deserve credit for acknowledging that there are serious concerns about how wealth taxes can undermine prosperity.

But wealth taxes are notoriously tricky to get right, and they have a history of deeply negative side effects that can seriously undermine their intent. In France, for instance, a long-standing wealth tax, repealed in 2018, was blamed for an increase in tax dodging and the flight of thousands of the country’s richest citizens. …A decade ago, 12 of the world’s most-developed countries had wealth taxes on the books. The number has fallen to three.

I’m tempted to say the big takeaway from today’s column is that wealth taxes are a bad idea.

That’s true, of course, but the bigger lesson we should absorb is that a rich nation can become a poor nation.

Simply stated, if a government imposes enough bad policies – as has been the case in Argentina – then it’s just a matter of time before it declines relative to nations with sensible policies.

Perhaps there’s a lesson there for Joe Biden?

P.S. I sometimes fantasize that Argentina can experience a Chilean-style economic revitalization, but that seems very unlikely since even supposedly right-wing politicians pursue statist policies.

P.P.S. Though there is a small sliver of libertarianism in Argentina.

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To begin the seventh edition of our series comparing policy in Texas and California (previous entries in March 2010, February 2013, April 2013, October 2018, June 2019, and December 2020), here’s a video from Prager University.

There will be a lot of information in today’s column, so if you’re pressed for time, here are three sentences that tell you what you need to know.

California has all sorts of natural advantages over Texas, especially endless sunshine and beautiful topography.

Texas has better government policy than California, most notably in areas such as taxation and regulation.

Since people are moving from the Golden State to the Lone Star State, public policy seems to matter more than natural beauty.

Now let’s look at a bunch of evidence to support those three sentences.

We’ll start with an article by Joel Kotkin of Chapman University.

If one were to explore the most blessed places on earth, California, my home for a half century, would surely be up there. …its salubrious climate, spectacular scenery, vast natural resources… President Biden recently suggested that he wants to “make America California again”. Yet…he should consider whether the California model may be better seen as a cautionary tale than a roadmap to a better future… California now suffers the highest cost-adjusted poverty rate in the country, and the widest gap between middle and upper-middle income earners. …the state has slowly morphed into a low wage economy. Over the past decade, 80% of the state’s jobs have paid under the median wage — half of which are paid less than $40,000…minorities do better today outside of California, enjoying far higher adjusted incomes and rates of homeownership in places like Atlanta and Dallas than in San Francisco and Los Angeles. Almost one-third of Hispanics, the state’s largest ethnic group, subsist below the poverty line, compared with 21% outside the state. …progressive…policies have not brought about greater racial harmony, enhanced upward mobility and widely based economic growth.

Next we have some business news from the San Francisco Chronicle.

Business leaders fear tech giant Oracle’s recent announcement that it is leaving the Bay Area for Austin, Texas, will lead to more exits unless some fundamental political and economic changes are made to keep the region attractive and competitive. “This is something that we have been warning people about for several years. California is not business friendly, we should be honest about it,” said Kenneth Rosen, chairman of the UC Berkeley Fisher Center for Real Estate and Urban Economics. Bay Area Council President Jim Wunderman said… “From consulting companies to tax lawyers to bankers and commercial real estate firms, every person I talk with who provides services to big Bay Area corporations are telling me that their clients are strategizing about leaving…” Charles Schwab, McKesson and Hewlett Packard Enterprise have all exited the high-cost, high-tax, high-regulation Bay Area for a less-expensive, less-regulated and business-friendlier political climate. All of them rode off to Texas. …the pace of the departures appears to be increasing. …A recent online survey of 2,325 California residents, taken between Nov. 4 and Nov. 23 by the Public Policy Institute of California, found 26% of residents have seriously considered moving out of state and that 58% say that the American Dream is harder to achieve in California than elsewhere.

Are California politicians trying to make things better, in hopes of stopping out-migration to places such as Texas?

Not according to this column by Hank Adler in the Wall Street Journal.

California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade… Assembly Bill 2088 proposes calculating the wealth tax based on current world-wide net worth each Dec. 31. For part-year and temporary residents, the tax would be proportionate based on their number of days in California. The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state. …The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. …the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. …As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.

The late (and great) Walter Williams actually joked back in 2012 that California might set up East German-style border checkpoints. Let’s hope satire doesn’t become reality.

But what isn’t satire is that people are fleeing the state (along with other poorly governed jurisdictions).

Simply state, the blue state model of high taxes and big government is not working (just as it isn’t working in countries with high taxes and big government).

Interestingly, even the New York Times recognizes that there is a problem in the state that used to be a role model for folks on the left.

Opining for that outlet at the start of the month, Brett Stephens raised concerns about the Golden State.

…today’s Democratic leaders might look to the very Democratic state of California as a model for America’s future. You remember California: People used to want to move there, start businesses, raise families, live their American dream. These days, not so much. Between July 2019 and July 2020, more people — 135,400 to be precise — left the state than moved in… No. 1 destination: Texas, followed by Arizona, Nevada and Washington. Three of those states have no state income tax.

California, by contrast, has very high taxes. Not just an onerous income tax, but high taxes across the board.

Californians also pay some of the nation’s highest sales tax rates (8.66 percent) and corporate tax rates (8.84 percent), as well as the highest taxes on gasoline (63 cents on a gallon as of January, as compared with 20 cents in Texas).

Sadly, these high taxes don’t translate into good services from government.

The state ranks 21st in the country in terms of spending per public school pupil, but 27th in its K-12 educational outcomes. It ties Oregon for third place among states in terms of its per capita homeless rate. Infrastructure? As of 2019, the state had an estimated $70 billion in deferred maintenance backlog. Debt? The state’s unfunded pension liabilities in 2019 ran north of $1.1 trillion, …or $81,300 per household.

Makes you wonder whether the rest of the nation should copy that model?

Democrats hold both U.S. Senate seats, 42 of its 53 seats in the House, have lopsided majorities in the State Assembly and Senate, run nearly every big city and have controlled the governor’s mansion for a decade. If ever there was a perfect laboratory for liberal governance, this is it. So how do you explain these results? …If California is a vision of the sort of future the Biden administration wants for Americans, expect Americans to demur.

Some might be tempted to dismiss Stephens’ column because he is considered the token conservative at the New York Times.

But Ezra Klein also acknowledges that California has a problem, and nobody will accuse him of being on the right side of the spectrum.

Here’s some of what he wrote in his column earlier this month for the New York Times.

I love California. I was born and raised in Orange County. I was educated in the state’s public schools and graduated from the University of California system… But for that very reason, our failures of governance worry me. California has the highest poverty rate in the nation, when you factor in housing costs, and vies for the top spot in income inequality, too. …but there’s a reason 130,000 more people leave than enter each year. California is dominated by Democrats, but many of the people Democrats claim to care about most can’t afford to live there. …California, as the biggest state in the nation, and one where Democrats hold total control of the government, carries a special burden. If progressivism cannot work here, why should the country believe it can work anywhere else?

Kudos to Klein for admitting problems on his side (just like I praise the few GOPers who criticized Trump’s big-government policies).

But his column definitely had some quirky parts, such as when he wrote that, “There are bright spots in recent years…a deeply progressive plan to tax the wealthy.”

That’s actually a big reason for the state’s decline, not a “bright spot.”

I’m not the only one to recognize the limitations of his column.

Kevin Williamson wrote an entire rebuttal for National Review.

Who but Ezra Klein could survey the wreck left-wing Democrats have made of California and conclude that the state’s problem is its excessive conservatism? …Klein the rhetorician anticipates objections on this front and writes that he is not speaking of “the political conservatism that privatizes Medicare, but the temperamental conservatism that” — see if this formulation sounds at all familiar — “stands athwart change and yells ‘Stop!’” …California progressives have progressive policies and progressive power, and they like it that way. That is the substance of their conservatism. …Klein and others of his ilk like to present themselves as dispassionate pragmatists, enlightened empiricists who only want to do “what works.” …Klein mocks San Francisco for renaming schools (Begone, Abraham Lincoln!) while it has no plan to reopen them, but he cannot quite see that these are two aspects of a single phenomenon. …Klein…must eventually understand that the troubles he identifies in California are baked into the progressive cake. …That has real-world consequences, currently on display in California to such a spectacular degree that even Ezra Klein is able dimly to perceive them. Maybe he’ll learn something.

I especially appreciate this passage since it excoriates rich leftists for putting teacher unions ahead of disadvantaged children.

Intentions do not matter very much, and mere stated intentions matter even less. Klein is blind to that, which is why he is able to write, as though there were something unusual on display: “For all the city’s vaunted progressivism, [San Francisco] has some of the highest private school enrollment numbers in the country.” Rich progressives have always been in favor of school choice and private schools — for themselves. They only oppose choice for poor people, whose interests must for political reasons be subordinated to those of the public-sector unions from which Democrats in cities such as San Francisco derive their power.

Let’s conclude with some levity.

Here’s a meme that contemplates whether California emigrants bring bad voting habits with them.

Though that’s apparently more of a problem in Colorado rather than in Texas.

And here’s some clever humor from Genesius Times.

P.S. My favorite California-themed humor (not counting the state’s elected officials) can be found here, hereherehere, and here.

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The 21st century has been bad news for proponents of limited government. Bush was a big spender, Obama was a big spender, Trump was a big spender, and now Biden also wants to buy votes with other people’s money.

That’s the bad news.

The good news is that there is still a simple solution to America’s fiscal problems. According to the just-released Budget and Economic Outlook from the Congressional Budget Office, tax revenues will grow by an average of 4.2 percent over the next decade. So we can make progress, as illustrated by this chart, if there’s some sort of spending cap so that outlays grow at a slower pace.

The ideal fiscal goal should be reducing the size of government, ideally down to the level envisioned by America’s Founders.

But even if we have more modest aspirations (avoiding future tax increases, avoiding a future debt crisis), it’s worth noting how modest spending restraint generates powerful results in a short period of time. And the figures in the chart assume the spending restraint doesn’t even start until the 2023 fiscal year.

The main takeaway is that the budget could be balanced by 2031 if spending grows by 1.5 percent per year.

But progress is possible so long as the cap limits spending so that it grows by less than 4.2 percent annually. The greater the restraint, of course, the quicker the progress.

In other words, there’s no need to capitulate to tax increases (which, in any event, almost certainly would make a bad situation worse).

P.S. The solution to our fiscal problem is simple, but that doesn’t mean it will be easy. Long-run spending restraint inevitably will require genuine reform to deal with the entitlement crisis. Given the insights of “public choice” theory, it will be a challenge to find politicians willing to save the nation.

P.P.S. Here are real-world examples of nations that made rapid progress with spending restraint.

P.P.P.S. Switzerland and Hong Kong (as well as Colorado) have constitutional spending caps, which would be the ideal approach.

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Two years ago, I explained that socialism is an economic failure, regardless of how it is defined.

In today’s follow-up column, let’s start with an excellent video from John Stossel.

Before addressing the three myths mentioned in the video, it’s worth noting that there’s a technical definition of socialism based on policies such as government ownershipcentral planning, and price controls, and a casual definition of socialism based on policies such as punitive tax rateswelfare state, and intervention.

I don’t like any of those policies, but they are not identical.

That’s why I came up with this flowchart to help illustrate the different strains of leftism (just as, on the other side of the spectrum, Trumpism is not the same as Reaganism is not the same as libertarianism).

Now that we’ve covered definitions, let’s dig into Stossel’s video. He makes three main points.

  1. Socialist policies don’t work any better if imposed by governments that are democratically elected. Simply stated, big government doesn’t magically have good consequences simply because a politician received 51 percent of the vote in an election.
  2. Scandinavian nations are not socialist. I’ve addressed this issue several times and noted that countries such as Sweden and Denmark have costly welfare states, but they are based on private property and rely on private markets to allocate resources.
  3. Socialism has a lot in common with fascism. Stossel could have pointed out that Hitler was the head of the National Socialist Workers Party, but he focused on the less inflammatory argument that socialism and fascism both rely on government control of the economy.

By the way, Stossel also narrated an earlier video on this same topic that addressed two other topics.

First, he countered the argument that we can’t learn anything from the failure of nations such as the Soviet Union and Cuba because they did not have not “real socialism.” My two cents on that topic is to challenge socialists (or anyone else on the left) to answer this question.

Second, he addressed the specific argument that Venezuela can’t teach us anything because its collapse has nothing to do with socialism. The New York Times may want people to think Venezuela’s failure is due to factors such as low oil prices, but the real reason is that economic liberty has been extinguished.

The bottom line is that socialism doesn’t work. Regardless of how it’s defined, it’s both immoral and a recipe for economic decline.

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The economic disintegration of Venezuela is a powerful example how socialism fails. Even in a nation with massive oil wealth.

This video from Reason tells the tragic story.

I think long-run data is especially valuable when assessing a nation’s economic performance.

And Venezuela definitely looks terrible when looking at decades of data on per-capita economic output.

Especially when compared to a pro-market nations such as Chile.

Not that we should be surprised. This is what we find anytime capitalist-oriented counties are compared with statism-oriented countries.

And there are many other case studies.

But let’s re-focus on the problems of Venezuela. In one of her Wall Street Journal columns, Mary Anastasia O’Grady analyzes the government-caused crisis. She starts by describing what happened.

Efforts to guarantee outcomes are at odds with what it means to live in a free society where equality under the law is the guiding principle. …Hugo Chávez…promised to make everyone in his country equally well-off. The concept sold in a nation that believed it was infinitely rich because it was swimming in oil. …stick it to the haves. When he did, they packed their bags and left. …it is the flight of the knowledge worker that has done the most harm to the nation. …The Bolivarian revolution’s earliest large-scale assault on know-how came during a lockout at the monopoly oil company Petróleos de Venezuela (PdVSA) in December 2002. …the regime used it to purge at least 18,000 PdVSA and related-company employees, gutting the industry of most of its experienced personnel. By replacing fired workers with political loyalists, Chávez believed he was protecting his golden goose. …In 2009 the regime expropriated Venezuelan companies that served the oil industry.

And she concludes by describing the consequences.

as long as oil prices were high, the costs of such recklessness was hidden. The party ended when prices tanked in 2014, government revenues dropped precipitously, and central bank money-printing led to a mega-devaluation of the bolivar. …another wave of oil engineers—this time led by a younger generation—went abroad to work. In the years that followed, more oil technicians threw in the towel on life in Venezuela. This vicious circle of declining revenue and human-capital flight has brought the once-mighty Venezuelan petroleum powerhouse to a standstill. 

In other words, exactly as depicted in the video at the start of this column.

No wonder Venezuelans are eating their pets.

Or joining gangs simply as a strategy to get food.

The bottom line is that socialism doesn’t work. Even in a country that has massive reserves of oil.

Sooner or later, the attempt to achieve coerced equality will mean that too many people are on the dole and too few people are producing. Which brings to mind Margaret Thatcher’s famous observation.

P.S. The New York Times actually wrote a big story about Venezuela’s collapse and somehow never mentioned socialism.

P.P.S. Here are four other videos about the impact of socialism in Venezuela.

P.P.P.S. The situation has become so dire that even some socialists are disavowing Venezuela.

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If asked to describe French economic policy, rational people will use phrases such as “big government” and “high taxes.” Or perhaps “dirigisme” and “bureaucracy.”

And they would be correct.

Here’s a chart from the OECD, showing spending burdens for major European nations. In a continent that’s known for big welfare states and costly government, France (highlighted in red) easily ranks as the worst of the worst.

France also ranks as the worst of the worst when looking just at spending on social welfare programs.

Indeed, it’s probably just a matter of time before the country becomes another Greece.

But none of these facts matter to Rokhaya Diallo, a French journalist who thinks her nation’s government is too small.

I’m not joking. She actually wrote a column for the Washington Post asserting that France’s response to the corornavirus has been hampered by fiscal austerity.

…the government has failed multiple times at handling the crisis… It was a shock for citizens to discover that France — the world’s seventh largest economy, widely praised for its remarkable health system — could end up struggling to cover the basic needs of its hospitals. But was it a total surprise? Not really. …President Emmanuel Macron…policies…favored the richest fringes of the population while abandoning workers who did not earn enough to cover their necessities. …Under Macron, more than $3 billion (2.6 billion euros) has been cut from public hospitals in 2018 and 2019 — far more than under his predecessor. And it took the pandemic to ensure there were no further cuts to this vital infrastructure. …a politician who claimed he intended to govern a “start-up nation” and thereby support a neoliberal agenda. …For the past two decades, French public services have been damaged by austerity rules… The major health crisis has exposed the serious damages caused by the neoliberal turn implemented in France. At a moment when effective public services are needed more than ever before, austerity is a threat not only to the social stability but also the well-being of the population.

Wow. I’m reminded of the official from Belgium (3rd-biggest fiscal burden in the above chart) who complained a few years ago about “the small size of the Belgian government.”

These people must live in an alternative universe where facts don’t matter.

By the way, if Ms. Diallo is actually interested in “the well-being of the population,” I wonder what she thinks of the OECD data that shows that people in the bottom 10 percent in the United States are better off than the average middle class person in France?

Given that the United States, with its medium-sized government, does so much better than France, with its large-sized government, how can she reconcile those numbers with her dogmatic view that society will be better off if government is even bigger?

Needless to say, I’m not holding my breath expecting her to address these issues.

But the people of France have noticed something is wrong. Many of them would flee to the United States if they had the opportunity.

P.S. Regarding the title of Ms. Diallo’s column, neoliberal is the term used in Europe for classical liberals – i.e., advocates of small government and individual liberty.

P.P.S. The current president of France, Emmanuel Macron, has expressed some sympathy for market-oriented reforms, which may explain Ms. Diallo’s hostility (but does not justify her inaccuracy).

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I have relentlessly criticized Republicans in recent years for being profligate big spenders.

But I have some good news. The GOP is finding religion and is once again fretting about big government.

The bad news is that many of them are total hypocrites.

The only reason that they’re now beating their chests about fiscal responsibility is that there’s now a Democrat in the White House pushing for big government rather than a Republican in the White House pushing for big government.

Talking a few days ago with Politifact, I remarked on the GOP’s battlefield conversion.

“The very narrow Democratic majorities in the House and Senate will make big policy changes difficult for Biden,” said Daniel Mitchell, a conservative economist with decades of experience in Washington. “Republicans were big spenders under Trump, but they’ll dust off their fiscal conservatism rhetoric with Biden in the White House. …”There will be unanimous, or near-unanimous, GOP opposition to the tax increases,” Mitchell said. That could make passage difficult.

I’m not the only one to notice Republicans change their spots when Democrats are in charge.

In her Washington Post column, Catherine Rampell also notes their hypocrisy.

It’s almost like clockwork. As soon as a Democrat enters the White House, Republicans pretend to care about deficits again. …And so Republicans laid the groundwork for blocking the Biden administration’s request for more covid-19 fiscal relief, on the grounds that further spending is not merely unnecessary but also irresponsible. …These foul-weather fiscal hawks neglect to mention, …before the coronavirus pandemic — the Republican-controlled Senate passed and President Donald Trump signed spending bills that added…$2 trillion to deficits.

If Ms. Rampell’s column focused solely on Republicans behaving inconsistently, I would fully applaud.

Unfortunately, she also used the opportunity to make some assertions that deserve some pushback. Beginning with what she said about the 2017 tax reform.

…the GOP’s prized 2017 tax cuts added nearly $2 trillion to deficits.

It is true that the legislation is a short-run tax cut, but there’s no long-run revenue reduction because many of the provisions expire at the end of 2025.

And, as Brian Riedl made clear in this chart, the tax cuts only play a tiny role even if all the provisions ultimately are made permanent.

Ms. Rampell then makes a Keynesian argument that more spending would be stimulative.

…the U.S. economy actually needs more federal spending, and President Biden has proposed a $1.9 trillion plan… Republicans objecting to Biden’s proposal…seem to be writing off the need for more relief entirely, at least now that a Democrat is president.

Is she right about Republican hypocrisy? Yes.

Is she right that bigger government produces growth? No.

If Biden and the Democrats were simply arguing that some level of handouts are needed and justified to compensate for government-mandated shutdowns, I wouldn’t be happy, but I also wouldn’t complain.

But I do object to the mechanistic argument that government can magically produce prosperity by borrowing money from the economy’s left pocket and putting it in the economy’s right pocket.

At best, the borrow-and-spend approach only produces a transitory bump in consumption, but does nothing for real problem of inadequate income (which is why we should focus on GDI rather than GDP).

She also engages in a bit of historical revisionism about Obama’s failed stimulus from 2009.

This is, not coincidentally, almost exactly what they did about a decade ago. …Republicans suddenly demanded to turn off fiscal (and monetary) spigots once Barack Obama was elected.

In reality, Republicans didn’t control either the House or Senate in Obama’s first two years. He was able to adopt his so-called stimulus. And the economy was stagnant.

Republicans did win the House at the end of 2010 and were somewhat successful in controlling spending for the next few years. And that’s when the economy did better.

Just like it did better during the Reagan and Clinton years when there was spending restraint.

To put this discussion in the proper context, I’ll close with another chart from Brian Riedl. The long-run problem we face is not red ink. Deficits and debt are merely the symptom of the real problem of excessive government spending.

P.S. I wish Politicifact had identified me as a libertarian. I’m only willing to be called a conservative if that means Reaganism, but I worry it now means Trumpism.

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