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Posts Tagged ‘Big Government’

When I was younger, folks in the policy community joked that BusinessWeek was the “anti-business business weekly” because its coverage of the economy was just as stale and predictably left wing as what you would find in the pages of Time or Newsweek.

Well, perhaps it’s time for The Economist to be known as the “anti-economics economic weekly.”

Writing about the stagnation that is infecting western nations, the magazine beclowns itself by regurgitating stale 1960s-style Keynesianism. The article is worthy of a fisking (i.e., a “point-by-point debunking of lies and/or idiocies”), starting with the assertion that central banks saved the world at the end of last decade.

During the financial crisis the Federal Reserve and other central banks were hailed for their actions: by slashing rates and printing money to buy bonds, they stopped a shock from becoming a depression.

I’m certainly open to the argument that the downturn would have been far worse if the banking system hadn’t been recapitalized (even if it should have happened using the “FDIC-resolution approach” rather than via corrupt bailouts), but that’s a completely separate issue from whether Keynesian monetary policy was either desirable or successful.

Regarding the latter question, just look around the world. The Fed has followed an easy-money policy. Has that resulted in a robust recovery for America? The European Central Bank (ECB) has followed the same policy. Has that worked? And the Bank of Japan (BoJ) has done the same thing. Does anyone view Japan’s economy as a success?

At least the article acknowledges that there are some skeptics of the current approach.

The central bankers say that ultra-loose monetary policy remains essential to prop up still-weak economies and hit their inflation targets. …But a growing chorus of critics frets about the effects of the low-rate world—a topsy-turvy place where savers are charged a fee, where the yields on a large fraction of rich-world government debt come with a minus sign, and where central banks matter more than markets in deciding how capital is allocated.

The Economist, as you might expect, expresses sympathy for the position of the central bankers.

In most of the rich world inflation is below the official target. Indeed, in some ways central banks have not been bold enough. Only now, for example, has the BoJ explicitly pledged to overshoot its 2% inflation target. The Fed still seems anxious to push up rates as soon as it can.

The preceding passage is predicated on the assumption that there is a mechanistic tradeoff between inflation and unemployment (the so-called Phillips Curve), one of the core concepts of Keynesian economics. According to adherents, all-wise central bankers can push inflation up if they want lower unemployment and push inflation down if they want to cool the economy.

This idea has been debunked by real world events because inflation and unemployment simultaneously rose during the 1970s (supposedly impossible according the Keynesians) and simultaneously fell during the 1980s (also a theoretical impossibility according to advocates of the Phillips Curve).

But real-world evidence apparently can be ignored if it contradicts the left’s favorite theories.

That being said, we can set aside the issue of Keynesian monetary policy because the main thrust of the article is an embrace of Keynesian fiscal policy.

…it is time to move beyond a reliance on central banks. …economies need succour now. The most urgent priority is to enlist fiscal policy. The main tool for fighting recessions has to shift from central banks to governments.

As an aside, the passage about shifting recession fighting “from central banks to governments” is rather bizarre since the Fed, the ECB, and the BoJ are all government entities. Either the reporter or the editor should have rewritten that sentence so that it concluded with “shift from central banks to fiscal policy” or something like that.

In any event, The Economist has a strange perspective on this issue. It wants Keynesian fiscal policy, yet it worries about politicians using that approach to permanently expand government. And it is not impressed by the fixation on “shovel-ready” infrastructure spending.

The task today is to find a form of fiscal policy that can revive the economy in the bad times without entrenching government in the good. …infrastructure spending is not the best way to prop up weak demand. …fiscal policy must mimic the best features of modern-day monetary policy, whereby independent central banks can act immediately to loosen or tighten as circumstances require.

So The Economist endorses what it refers to as “small-government Keynesianism,” though that’s simply its way of saying that additional spending increases (and gimmicky tax cuts) should occur automatically.

…there are ways to make fiscal policy less politicised and more responsive. …more automaticity is needed, binding some spending to changes in the economic cycle. The duration and generosity of unemployment benefits could be linked to the overall joblessness rate in the economy, for example.

In the language of Keynesians, such policies are known as “automatic stabilizers,” and there already are lots of so-called means-tested programs that operate this way. When people lose their jobs, government spending on unemployment benefits automatically increases. During a weak economy, there also are automatic spending increases for programs such as Food Stamps and Medicaid.

I guess The Economist simply wants more programs that work this way, or perhaps bigger handouts for existing programs. And the magazine views this approach as “small-government Keynesianism” because the spending increases theoretically evaporate as the economy starts growing and fewer people are automatically entitled to receive benefits from the various programs.

Regardless, whoever wrote the article seems convinced that such programs help boost the economy.

When the next downturn comes, this kind of fiscal ammunition will be desperately needed. Only a small share of public spending needs to be affected for fiscal policy to be an effective recession-fighting weapon.

My reaction, for what it’s worth, is to wonder why the article doesn’t include any evidence to bolster the claim that more government spending is and “effective” way of ending recessions and boosting growth. Though I suspect the author of the article didn’t include any evidence because it’s impossible to identify any success stories for Keynesian economics.

  • Did Keynesian spending boost the economy under Hoover? No.
  • Did Keynesian spending boost the economy under Roosevelt? No.
  • Has Keynesian spending worked in Japan at any point over the past twenty-five years? No.
  • Did Keynesian spending boost the economy under Obama? No.

Indeed, Keynesian spending has an unparalleled track record of failure in the real world. Though advocates of Keynesianism have a ready-built excuse. All the above failures only occurred because the spending increases were inadequate.

But what do expect from the “perpetual motion machine” of Keynesian economics, a theory that is only successful if you assume it is successful?

I’m not surprised that politicians gravitate to this idea. After all, it tells them that their vice  of wasteful overspending is actually a virtue.

But it’s quite disappointing that journalists at an allegedly economics-oriented magazine blithely accept this strange theory.

P.S. My second-favorite story about Keynesian economics involves the sequester, which big spenders claimed would cripple the economy, yet that’s when we got the only semi-decent growth of the Obama era.

P.P.S. My favorite story about Keynesianism is when Paul Krugman was caught trying to blame a 2008 recession in Estonia on spending cuts that occurred in 2009.

P.P.P.S. Here’s my video explaining Keynesian economics.

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Here’s an interesting issue to ponder. Is corruption rampant in government because the perverse incentive structure of politics turns good people into bad people?

Or do bad people naturally gravitate to government and politics because it’s the easiest (and legal, though generally immoral) way to take money from other people?

I guess this is like a chicken-and-egg question with no clear answer, though Mark Twain preferred the latter interpretation.

Though he was being too narrow. Yes, Congress if filled with people who are willing to use coercion to take money from ordinary people in order to line the pockets of their cronies, but this is also true for politicians and bureaucrats in the executive branch, as well as their counterparts at the state and local level.

Let’s look at a couple of oleaginous examples. We’ll start with a grotesque example of nepotism. Except this isn’t a routine example of daddy giving junior an undeserved job in the family company. In this case, we have Washington-style nepotism. Daddy has ransacked taxpayers to line the pockets of his daughter. The Daily Caller has the unseemly details.

More than $9 million of Department of State money has been funneled through the Peace Corps to a nonprofit foundation started and run by Secretary of State John Kerry’s daughter, documents obtained by The Daily Caller News Foundation show. The Department of State funded a Peace Corps program created by Dr. Vanessa Kerry and officials from both agencies, records show. The Peace Corps then awarded the money without competition to a nonprofit Kerry created for the program. Initially, the Peace Corps awarded Kerry’s group — now called Seed Global Health — with a three-year contract worth $2 million of State Department money on Sept. 10, 2012, documents show. Her father was then the chairman of the Senate Committee on Foreign Relations, which oversees both the Department of State and the Peace Corps. Seed secured a four-year extension in September 2015, again without competition. This time, the Peace Corps gave the nonprofit $6.4 million provided by the Department of State while John Kerry was secretary of state.

What makes this story especially outrageous is that John Kerry is a multi-multi-millionaire, having married in the Heinz family fortune.

Does he really need to pick the pockets of taxpayers to boost his daughter’s finances?

Here’s another example. The Governor of New York, Andrew Cuomo, set up an “economic development program” that predictably turned into a playground for the politically well connected (sort of a state version of the corrupt program in Washington that financed Solyndra and other money-losing schemes).

The New York Times outlines this scandal, though be prepared to shower after reading.

Federal corruption charges were announced on Thursday against two former close aides to Gov. Andrew M. Cuomo, a senior state official and six other people, in a devastating blow to the governor’s innermost circle and a repudiation of how his prized upstate economic development programs were managed. The charges against the former aides, Joseph Percoco and Todd R. Howe, and the state official, Alain Kaloyeros, were the culmination of a long-running federal investigation… The charges stemmed from “two overlapping criminal schemes involving bribery, corruption and fraud in the award of hundreds of millions of dollars in state contracts and other official state benefits,” federal prosecutors said in the complaint. Mr. Percoco, who had served as Mr. Cuomo’s executive deputy secretary, is accused of soliciting and taking more than $315,000 in bribes between 2012 and 2016 from two companies… Until January, when Mr. Percoco left the administration…, he was Mr. Cuomo’s all-purpose body man, political enforcer and shadow.

The good news is that at least some of the people in this disgusting display of cronyism may face legal consequences.

Oh, by the way, Cuomo used to be the head of the Department of Housing and Urban Development when regulations were implemented that required Fannie Mae and Freddie Mac to make more dodgy housing loans. This guy is a walking disaster area.

For the umpteenth time, the moral of the story is that the only way to reduce corruption in government is to reduce the overall amount of taxing, spending, and regulating.

Or you can magically wish that only angelic people will gravitate to the public sector. Maybe I’m a cynic, but I’ll go with the former option.

P.S. I wrote a few days ago about the IMF’s hypocrisy in attacking Trump for his views on trade taxes. The bureaucrats are right that we shouldn’t increase the tax burden on global commerce. My complaint was that sauce for the goose wasn’t sauce for the gander. Hillary’s plan to increase the tax burden on work and investment is an even bigger threat to growth, yet the IMF gives her a free pass.

Anyhow, one of the points I made is that trade taxes currently are quite low, so they presumably cause only a minor amount of damage, whereas tax rates on work and investment are relatively high, meaning that further increases would be especially debilitating to growth. I cited some research from a Spanish academic to show how trade policy has improved over time, but didn’t have specific details on trade taxation.

My buddy Bryan Riley from the Heritage Foundation has come to my rescue, sharing an article that includes this chart on historical tariff rates.

The bottom line is that trade taxes have declined by somewhere between 75 percent and 90 percent since the end of World War II. This has been a great victory for economic liberty.

Trump should be condemned for wanting to halt further progress and/or go in the wrong direction by boosting trade taxes.

But, to echo what I wrote the other day, Hillary also should be condemned for proposing a different set of tax hikes that would cause even more harm to economic liberty.

P.P.S. I wrote a column earlier this month entitled “Anatomy of a Brutal Tax Beating” to highlight how an expert at the Tax Foundation completely dismantled a silly and unlearned article by a writer for Vox.

Well, we now have an “Anatomy of a Brutal Education Beating.” Except it’s not right-on-left violence. It’s left-on-left violence. Jonathan Chait writes for New York magazine and he formerly had stints at The New Republic and The American Prospect, so he’s definitely not a libertarian type.

But he’s ethical and doesn’t have a high level of tolerance for other leftists who launch dishonest ideological attacks on charter schools. Here’s some of what he wrote while debunking an article by some guy named Charles Pierce.

Esquire’s Charles Pierce, a fervent charter critic, …does not dispute the findings that urban charters in Massachusetts provide dramatic education benefits. He simply doesn’t care. …In the sentence, Pierce goes on to assert that the cap on charters serves a vital purpose. But the Brookings study, which I doubt he’s read, shows the opposite. …The cap in Massachusetts is completely perverse, in fact. It allows more students to enroll in charters serving suburban students, where the charters do not outperform the neighborhood schools, and prevents more students from enrolling in urban charters, where the schools do exceed the traditional neighborhood schools. …Presented with evidence that certain schools are providing a clearly better education to low-income urban students, Pierce argues that education should be denied because … somebody is making money off of it. It is more important to him to stick it to the capitalists than to allow low-income, disproportionately nonwhite students to have a chance to have a better life. …What’s even more perverse about Pierce’s argument is that it is factually wrong. Charters in Massachusetts are not for-profit vehicles. State law prohibits for-profit operators from running a public charter school… The notion that charters are “companies” and an “industry” with “profits” — that is, the entire basis for Pierce’s opposition — is a figment of the imagination. …Pierce rails suspiciously against the donors to the anti-cap side. …It is strange to accuse people who are giving away their money to the cause of educating poor children of not “giv[ing] a rat’s ass about educating children in Roxbury or Mattapan”.

Wow. Chait drove over Pierce, then hit the brakes, put the car in reverse, and then drove over him again just for the fun of it.

A perfect example of the difference between a sincere person of the left and a hack who is probably just flacking for teacher unions.

P.P.P.S. I can’t resist returning to John Kerry. It’s not merely that he’s a staggeringly rich guy who nonetheless sees no problem with diverting money from taxpayers to his daughter. It’s also that he does everything possible to minimize the amount of tax that he pays. Everything possible.

P.P.P.P.S. This column focused on corrupt Democrats, but this is a bipartisan problem. Indeed, the worst offenders are probably Republicans.

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Because of my disdain for the two statists that were nominated by the Republicans and Democrats, I’m trying to ignore the election. But every so often, something gets said or written that cries out for analysis.

Today is one of those days. Hillary Clinton has an editorial in the New York Times entitled “My Plan for Helping America’s Poor” and it is so filled with errors and mistakes that it requires a full fisking (i.e., a “point-by-point debunking of lies and/or idiocies”).

We’ll start with her very first sentence.

The true measure of any society is how we take care of our children.

I realize she (or the staffers who actually wrote the column) were probably trying to launch the piece with a fuzzy, feel-good line, but let’s think about what’s implied by “how we take care of our children.” It echoes one of the messages in her vapid 1996 book, It Takes a Village, in that it implies that child rearing somehow is a collective responsibility.

Hardly. This is one of those areas where social conservatives and libertarians are fully in sync. Children are raised by parents, as part of families.

To be fair, Hillary’s column then immediately refers to poor children who go to bed hungry, so presumably she is referring to the thorny challenge of how best to respond when parents (or, in these cases, there’s almost always just a mother involved) don’t do a good job of providing for kids.

…no child should ever have to grow up in poverty.

A laudable sentiment, for sure, but it’s important at this point to ask what is meant by “poverty.” If we’re talking about wretched material deprivation, what’s known as “absolute poverty,” then we have good news. Virtually nobody in the United States is in that tragic category (indeed, one of great success stories in recent decades is that fewer and fewer people around the world endure this status).

But if we’re talking about the left’s new definition of poverty (promoted by the statists at the OECD), which is measured relative to a nation’s median level of income, then you can have “poverty” even if nobody is poor.

For the sake of argument, though, let’s assume we’re using the conventional definition of poverty. Let’s look at how Mrs. Clinton intends to address this issue.

She starts by sharing some good news.

…we’re making progress, thanks to the hard work of the American people and President Obama. The global poverty rate has been cut in half in recent decades.

So far, so good. This is a cheerful development, though it has nothing to do with the American people or President Obama. Global poverty has fallen because nations such as China and India have abandoned collectivist autarky and joined the global economy.

And what about poverty in the United States?

In the United States, a new report from the Census Bureau found that there were 3.5 million fewer people living in poverty in 2015 than just a year before. Median incomes rose by 5.2 percent, the fastest growth on record. Households at all income levels saw gains, with the largest going to those struggling the most.

This is accurate, but a grossly selective use of statistics.

If Obama gets credit for the good numbers of 2015, then shouldn’t he be blamed for the bad numbers between 2009-2014? Shouldn’t it matter that there are still more people in poverty in 2015 than there were in 2008? And is it really good news that it’s taken Obama so long to finally get median income above the 2008 level, particularly when you see how fast income grew during the Reagan boom?

We then get a sentence in Hillary’s column that actually debunks her message.

Nearly 40 percent of Americans between the ages of 25 and 60 will experience a year in poverty at some point.

I don’t know if her specific numbers are accurate, but it is true that that there is a lot of mobility in the United States and that poverty doesn’t have to be a way of life.

Hillary then embraces economic growth as the best way of fighting poverty, which is clearly a true statement based on hundreds of years of evidence and experience.

…one of my top priorities will be increasing economic growth.

But then she goes off the rails by asserting that you get growth by spending (oops, I mean “investing”) lots of other people’s money.

I will…make a historic investment in good-paying jobs — jobs in infrastructure and manufacturing, technology and innovation, small businesses and clean energy.

Great, more Solyndras and cronyism.

And fewer jobs for low-skilled workers, if she gets here way, along with less opportunity for women (even according to the New York Times).

And we need to…rais[e] the minimum wage and finally guarantee… equal pay for women.

The comment about equal pay sounds noble, though I strongly suspect it is based on dodgy data and that she really favors the very dangerous idea of “comparable worth” legislation, which would lead to bureaucrats deciding the value of jobs.

Then Hillary embraces a big expansion of the worst government department.

…we also need a national commitment to create more affordable housing.

And she echoes Donald Trump’s idea of more subsidies and intervention in family life.

We need to expand access to high-quality child care and guarantee paid leave.

And, last but not least, she wants to throw good money after bad into the failed Head Start program.

…we will work to double investments in Early Head Start and make preschool available to every 4-year-old.

Wow, what a list. Now perhaps you’ll understand why I felt the need to provide a translation of her big economic speech last month.

The moral of the story, based on loads of evidence, is that making America more like Europe is not a way to help reduce poverty.

P.S. The only other time I’ve felt the need to fisk an entire article occurred in 2012 when I responded to a direct attack to my defense of low-tax jurisdictions.

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I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).

This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.

Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.

As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.

So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.

The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.

…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.

…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.

He then regurgitates the President’s plan to replace deferral with worldwide taxation.

…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.

In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.

On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.

Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.

At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.

…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.

…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.

…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.

And he adds his warning about this fight really being about tax competition versus tax harmonization.

Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.

Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.

…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.

Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.

Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.

America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”

But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.

In the long run, that leads to disaster, but politicians rarely think past the next election.

P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.

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When I tell journalists and politicians that the European fiscal situation is worse today than it was immediately prior to the crisis, they don’t believe me. What about all the spending cuts, they ask? What about the draconian austerity? And the Troika-imposed fiscal restraint?

I tell them it’s mostly been a mirage. It turns out that “austerity” in Europe is simply another way of saying massive tax increases. National governments have boosted tax burdens substantially, but there hasn’t been much spending restraint.

This is a topic I spoke about earlier today at a conference in Prague, which was hosted by the European Conservatives and Reformers bloc of the European Parliament.

My panel’s topic was “Current Challenges to the Transatlantic Partnership” and I focused on economic stagnation and fiscal crisis.

Regarding economic stagnation, I pointed out that there’s very little growth in Europe and substandard growth in the United States.

By itself, that’s a problem but not a crisis.

The crisis (or at least what I argue is a looming crisis) is that Europe’s fiscal situation is worse today than it was when last decade’s fiscal chaos began.

To put this in concrete terms, I crunched the data for both the “eurozone” nations (those using the common currency) and for the overall European Union.

And here are the numbers showing how the burden of government spending has increased in Europe between 2007 and 2015.

At the risk of stating the obvious, there hasn’t been any overall spending restraint on the other side of the Atlantic. This is the chart I will now share with politicians and journalists (as well as anyone else) who is under the illusion that there have been big spending cuts in Europe.

But just as slow growth is a problem rather than a crisis, the same can be said about bigger government. Yes, a larger fiscal burden saps an economy’s vitality and weakens national competitiveness, but it presumably doesn’t by itself produce a crisis.

The crisis, at least if last decade is any indication, materializes when investors decide they don’t want to buy a nation’s government debt because they fear they won’t get repaid (i.e., a default). And that happens when a nation’s debt level is perceived to have reached an unsustainable level when compared to the ability of that country’s economy to generate enough output to support that debt.

And I suspect it’s just a matter of time before Europe experiences another such crisis. Here are the numbers, both for euro-using nations as well as the entire European Union, showing that government debt is substantially higher today than it was at the dawn of last decade’s meltdown.

I should point out that there’s no reason why a crisis need occur. If European governments copied Switzerland and put in place some sort of spending cap (a good one that ensures that the burden of government expanded slower than the private sector), then red ink quickly would fall and investors would be much less fearful of a default.

Unfortunately, all the pressure is in the other direction. Indeed, to the limited degree there was any spending restraint after the last crisis, it has largely evaporated.

A story in the New York Times from two years ago illustrates why the mess in Europe is so intractable.

The reporters who authored the story were correct that there was disagreement between Germany and other nations.

…many of the largest European countries are now rebelling against the German gospel of belt-tightening and demanding more radical steps to reverse their slumping fortunes.

But they naively reported that there were genuine cutbacks and they also believed the silly Keynesian argument that smaller government somehow reduces growth.

…eurozone nations buckled under to German demands to slash budget deficits and roll back public services, and then watched in dismay as unemployment rates shot into the double digits and growth collapsed.

In any event, Europe’s self-styled elite decided on a return to the types of bad policy that led to last decade’s fiscal crisis.

Now, France, Italy and the European Central Bank have coalesced into a bloc against Chancellor Angela Merkel of Germany, and they are insisting that Berlin change course. …France, which has in modern times been Germany’s indispensable partner in European crisis management, is now in near revolt, and President François Hollande has joined forces with Mr. Renzi, who has presented an expansionary 2015 budget that will cut taxes despite pressure from Brussels to meet deficit targets. Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budgetary discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on

For what it’s worth, I would have been on Merkel’s side if she was actually pushing for meaningful spending restraint.

But that was not the case. She myopically focused on fiscal balance rather than the size of government, which is bad enough since higher taxes are always the first (and second, and third, …) resort of politicians. But to make matters worse, her motives have always been suspect because of fears that she’s mostly concerned about protecting German banks that foolishly lent a lot of money to profligate governments.

Though that presumably shouldn’t be a major concern today since the European Central Bank is now buying lots of government bonds as part of 1) a foolish experiment in monetary Keynesianism, and 2) an indirect bailout of dodgy governments. Any banks with competent management will have used this opportunity to sell their holdings so the risk of sovereign defaults is borne by the general public.

But let’s set aside speculation on Merkel’s motives. All that really matters is that government in Europe is now bigger and more expensive, with lots of additional red ink. And the European Central Bank is helping to build the house of cards even higher.

This won’t end well, though I very much hope my fears are misplaced.

P.S. Anybody who wants to argue that Europe’s fiscal problems can be solved with higher taxes first needs to explain this set of charts.

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When Donald Trump and Hillary Clinton agree on things, it’s always bad news for taxpayers.

Now they both agree that it’s somehow the federal government’s job to subsidize child care, though they’ve each concocted different ways of implementing this new form of redistribution.

The Wall Street Journal opines on this fiscally incontinent bidding war.

…both candidates [are] offering multiple subsidies for raising kids. This will end up raising prices and it won’t address the real reason parents feel squeezed: a decade of slow or no economic growth. Donald Trump on Tuesday proposed a tax deduction that would let families write off the average cost of child care for up to four children, among other ideas. Hillary Clinton has already promised to limit care expenses to 10% of income; raises for caretakers; universal pre-K; an increase in the $1,000 per child tax credit; a new program for student parents, and more.

Looking at the details, Trumps plan would exacerbate the EITC problem.

Here’s the dirty detail: Mr. Trump proposed an up to $1,200 child-care tax rebate for low-income families that would be delivered by expanding the earned-income tax credit. But the credit would inevitably phase out as income increases and disappears at $31,200. The result would be a higher inframarginal tax cliff—when people are discouraged from earning more income because they lose more in benefits than they can gain in wages. This disincentive to advancement is already steep.

He’s also proposing a new subsidy for savings accounts.

Mr. Trump also proposes savings accounts for child care to add to the tax-free destinations for retirement, health care, college and more. This new benefit, worth up to $2,000 a year, would make tax reform more difficult. The government would also match parental contributions at 50% up to $1,000 a year for low-income families. That’s a wonky way of unveiling a new $500 transfer payment.

And Trump even wants to engage in a no-win bidding war with Hillary Clinton to create a new European-style entitlement for paid maternity leave (even though, as a columnist for the New York Times even admitted, this type of scheme will backfire against women by making them less attractive to employers).

Then there’s six weeks of paid maternity leave that Mr. Trump says he would guarantee through unemployment insurance. He claims he’ll pay for this by cleaning out fraudulent payments, though this is his funding mechanism for every proposal. Mr. Trump will nonetheless lose the family bidding war with Mrs. Clinton, who wants 12 weeks of paid leave for new mothers and fathers.

The Clinton plan, meanwhile, is a predictably statist prescription for more intervention and subsidies.

And the WSJ‘s editorial correctly points out that is a recipe for ever-higher costs.

Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.

The fact that Hillary Clinton wants bigger government is not the most shocking revelation in the world.

Her voting record as a Senator was almost identical to Bernie Sanders’.

And every single proposal in her big economic speech last month required a larger burden of government.

But it’s rather odd to find the Republican nominee being the statist Tweedledee to match the statist Tweedledum.

In an article for Commentary, Noah Rothman looks at Trump’s overall approach to fiscal policy.

Donald Trump…is a self-described Republican who has cast aside the austere facade of fiscal conservatism in favor of any and every spending proposal that crosses his transom. Promising the electorate the world in the campaign with every intention of working out the details after the election is hardly a new phenomenon, but it used to be one that Republicans rejected. Today, under Trump’s corrupting umbra, the GOP has become the party of wild assurances and cascading spending proposals with no intention of ever making good on them.

Actually, I fear the spending promises would be fulfilled if Trump got to the White House. Though I agree that Trump personally doesn’t care if they are either adopted or forgotten.

Here are just a few of the spending promises Trump has made.

Trump promised to augment the Pentagon’s budget by repealing the portions of the Budget Control Act of 2011 (aka, “Sequester”) that imposed limits on defense spending. …Trump has called for “more funding” for the Department of Veterans Affairs to augment job training, research on traumatic stress, brain injury, and suicide prevention, and to hire more service providers at VA hospitals. The Republican nominee promised a massive $500 billion public works program that you dare not call a “stimulus,” which he proudly boasted would spend more than double what Hillary Clinton has pledged to refurbish America’s infrastructure. …He has attacked as cold-hearted the idea that America’s entitlement state must be curtailed and reformed—a massive expenditure that already consumes nearly two-thirds of the nation’s annual outlays.

In other words, Trump is a big-government, Nixon-style Republican.

Which means advocates of limited government are not exactly thrilled about November.

P.S. Other Republican presidential candidates have boosted the burden of government when they took office (President George H.W. Bush and President George W. Bush are two dismal examples of this phenomenon). But they at least pretended to be vaguely in favor of smaller government during their respective campaigns. The fact that Trump doesn’t even fake it during the campaign suggests that economic policy would be very bad if he ever got to the White House.

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Why did a for-profit college pay former President Bill Clinton the staggering sum of $16.5 million to serve as an “honorary chancellor for Laureate International Universities”? Was it because he had some special insight or expertise on how to improve education?

Why did Goldman Sachs pay former Secretary of State Hillary Clinton hundreds of thousands of dollars for a couple of speeches? Was it because she had valuable observations about the economy and investments?

The answer to all those questions is that companies sometimes are willing to transfer large sums of money to influential politicians because they want something in exchange.

In some cases, they want help from powerful insiders so they can use the coercive power of government to take other people’s money, which is reprehensible and disgusting. In other cases, they are seeking to guard against being victimized with high taxes and punitive regulations and so they pay “protection money” to powerful insiders in hopes of being left alone, which is unfortunate but understandable.

In either case (one moral and the other immoral), the companies are making rational decisions. Politicians have immense ability to tax, spend, and regulate, so it makes sense to get on their good side, either by giving them money directly or contributing to their campaigns.

This is a problem in the United States, of course, but it’s also a problem in Europe.

Consider the curious case of José Manuel Barroso, the recently retired President of the European Commission who was recently hired by Goldman Sachs to be “non-executive chairman of Goldman Sachs International.” According the press release from the company, he will…well, it’s not clear what his role will be or what value he will provide. All we get is fluff about his political career and a murky statement that, “He will also be an advisor to Goldman Sachs.”

So let’s look at his Wikipedia bio. Maybe we’ll find some evidence that he has great expertise on investment matters. But all we find there is that he’s been a career politician, first in Portugal and then in Brussels (where he was a bit of a laughingstock).

There’s no indication that he ever held a job in the private sector. But we do get this tidbit.

In his university days, he was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP, Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat).

That doesn’t sound like the pedigree of someone who just landed a lavishly compensated position in the supposed temple of global capitalism.

But the real story is that Barroso isn’t a communist (at least not now) and Goldman Sachs isn’t a bastion of free markets. Instead, both of them are expert practitioners of cronyism.

Indeed, the cronyism angle is so obvious in this case that the European Commission has launched an ethics probe.

Which is very upsetting to Senor Barroso. The Financial Times reported on the controversy.

José Manuel Barroso has accused the European Commission — a body he led for 10 years — of being “discriminatory” and “inconsistent” after the EU’s executive arm set up an ethics probe to examine his new role at Goldman Sachs. …Mr Barroso vigorously defended his decision to take a job as adviser with the US investment bank, which triggered a backlash across the EU. …French president François Hollande described the appointment as being “legally possible, but morally unacceptable”. …The committee will examine Mr Barroso’s contract to ascertain whether it complies with Mr Barroso’s obligation under EU law “to behave with integrity and discretion” when taking appointments or benefits after leaving office. Campaigners have argued that Mr Barroso could be stripped of his pension — worth €15,000 per month — if he is found to have violated these rules. …Other former members of the commission have gone on to take high-profile roles with big businesses, leading some to claim that Goldman Sachs has been singled out because of its role in the financial crisis.

Though it’s worth noting that Barroso is simply the latest example of a revolving door between senior euro-crats and Goldman Sachs.

The bottom line is that Barroso hasn’t behaved with integrity. But that’s true of his entire career. Taking a position with Goldman Sachs is simply a way of monetizing decades of cronyism.

P.S. Shifting back to the US version of cronyism, Kevin Williamson has a must-read analysis of the corrupt nexus of Wall Street and Washington.

P.P.S. The solution to this mess (other than Glenn Reynold’s revolving-door surtax) is to dramatically shrink the size and scope of government. When there’s less to steal, there will be fewer thieves.

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