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Posts Tagged ‘Big Government’

For three decades, I’ve been trying to convince politicians to adopt good policy. I give them theoretical reasons why it’s a good idea to have limited government. I share with them empirical evidence demonstrating the superiority of free markets over statism. And I’m probably annoyingly relentless about disseminating examples of good and bad policy from around the world (my version of “teachable moments”).

But if you want to get a politician to do the right thing, you need more than theory, data, and real-world case studies. You need to convince them – notwithstanding my Second Theorem of Government – that good policy won’t threaten their reelection.

My usual approach is to remind them that Ronald Reagan adopted a bunch of supposedly unpopular policies, yet he got reelected in a landslide because reducing the burden of government allowed the private sector to grow much faster. George H.W. Bush, by contrast, became a one-term blunder because his tax increase and other statist policies undermined the economy’s performance.

I’m hoping this argument will resonate with some of my friends who are now working in the White House. And I don’t rely on vague hints. In this clip from a recent interview, I bluntly point out that good policy is good politics because a faster-growing economy presumably will have a big impact on the 2020 election.

Here’s another clip from that same interview, where I point out that the GOP’s repeal-and-replace legislation was good news in that it got rid of a lot of the misguided taxes and spending that were part of Obamacare.

But the Republican plan did not try to fix the government-imposed third-party-payer distortions that cause health care to be so expensive and inefficient. And I pointed out at the end of this clip that Republicans would have been held responsible as the system got even more costly and bureaucratic.

Now let’s shift to fiscal policy.

Here’s a clip from an interview about Trump’s budget. I’m happy about some of the specific reductions (see here, here, and here), but I grouse that there’s no attempt to fix entitlements and I’m also unhappy that the reductions in domestic discretionary spending are used to benefit the Pentagon rather than taxpayers.

The latter half of the above interview is about the corruption that defines the Washington swamp. Yes, it’s possible that Trump could use the “bully pulpit” to push Congress in the right direction, but I wish I had more time to emphasize that shrinking the overall size of government is the only way to really “drain the swamp.”

And since we’re talking about good policy and good politics, here’s a clip from another interview.

Back when the stock market was climbing, I suggested it was a rather risky move for Trump to say higher stock values were a referendum on the benefits of his policies. After all, what goes up can go down.

The hosts acknowledge that the stock market may decline in the short run, but they seem optimistic in the long run based on what happened during the Reagan years.

But this brings me back to my original point. Yes, Reagan’s policies led to a strong stock market. His policies also produced rising levels of median household income. Moreover, the economy boomed and millions of jobs were created. These were among the reasons he was reelected in a landslide.

But these good things weren’t random. They happened because Reagan made big positive changes in policy. He tamed inflation. He slashed tax rates. He substantially reduced the burden of domestic spending. He curtailed red tape.

In other words, there was a direct connection between good policy, good economy, and good political results. Indeed, let’s enshrine this relationship in a “Fourth Theorem of Government.”

For what it’s worth, Reagan also demonstrated leadership, enacting all those pro-growth reforms over the vociferous opposition of various interest groups.

Will Trump’s reform be that bold and that brave? His proposed 15-percent corporate tax rate deserves praise, and he seems serious about restraining the regulatory state, but he will need to do a lot more if he wants to be the second coming of Ronald Reagan. Not only will he need more good policies, but he’ll also need to ditch some of the bad policies (childcare subsidies, infrastructure pork, carried-interest capital gains tax hike, etc) that would increase the burden of government.

The jury is still out, but I’m a bit pessimistic on the final verdict.

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I wrote yesterday about how the Organization for Economic Cooperation and Development (OECD) is pushing for bigger government in China. That’s a remarkable bit of economic malpractice by the Paris-based international bureaucracy, especially since China is only ranked #113 in the latest scorecard from Economic Freedom of the World. The country very much needs smaller government to become rich, yet the OECD is preaching more statism.

But nobody should be surprised. The OECD, perhaps because its membership is dominated by European welfare states, has a dismal track record of reflexive support for bigger government.

It supports higher taxes and bigger government in Asia, in Latin America, and…yes, you guessed correctly…the United States.

And here’s the latest example. In a new publication, OECD bureaucrats recommend policy changes that ostensibly will produce more growth for the United States. Basically, America should become more like France.

Income inequality has continued to widen… Public infrastructure is not keeping pace… Promote mass transit… Implement usage fees based on distance travelled…to help fund transportation… Expand federal programmes designed to improve access to fixed broadband. …Expand funding for reskilling… Require paid parental leave… Expand the Earned Income Tax Credit and raise the minimum wage.

To be fair, not every recommendation involves bigger government.

Adopt legislation that cuts the statutory marginal corporate income tax rate…

But even that single concession to good policy is matched by proposals to squeeze more money from the private sector.

…and broaden the tax base. …Continue with measures to prevent base erosion and profit shifting.

By the way, even though European nations dominate the OECD’s membership, American taxpayers provide the largest share of funding for the OECD.

In other words, we’re paying more taxes to have a bunch of international bureaucrats urge that we get hit with even higher taxes. And to add insult to injury, OECD bureaucrats are exempt from paying taxes!

Maybe that’s why they’re so blind to the harmful impact of bad tax policy.

It’s especially discouraging that the bureaucrats are even advocating greater levels of discriminatory taxation of saving and investment. Here are some blurbs from a report in the Wall Street Journal.

The Paris-based think tank has just junked the conventional economic wisdom on tax it had been promoting for years. …“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead…,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview. …Since the 1970s economists had argued capital income should be taxed relatively lightly because it was more mobile across countries and attracting investment would boost economic growth, ultimately benefiting everyone.

Actually, the argument on not over-taxing capital income is based on the merits of a neutral tax system that doesn’t undermine growth by punishing saving and investment.

The fact that capital is “mobile across countries” was something that constrained politicians from imposing bad tax policy. In other words, tax competition promoted better (or less worse) policy.

But now that tax havens and tax competition have been weakened, politicians are pushing tax rates higher. And the OECD is cheering this destructive development.

Here are some passages from the OECD report on this topic.

…there have been calls to move away from a narrow focus on economic growth towards a greater emphasis on inclusiveness. …Inclusive economic growth…implies that the benefits of increased prosperity and productivity are shared more evenly between people… More specifically with regard to tax policy, inclusive economic growth is related to managing tradeoffs between equity and efficiency. Growth-enhancing tax reforms might come at certain costs in terms of meeting equity goals so tax design for inclusive growth requires taking into account the distributional implications of tax policies.

In other words, the OECD wants to shift away from policies that lead to a growing economic pie and instead fixate on how to re-slice and redistribute a stagnant pie.

And here’s a flowchart from the OECD report. Keep in mind that “inclusive growth” actually means less growth. I’ve helpfully put red stars next to the items that involve more transfers of money from the productive sector of the economy to the government.

That flowchart shows what the OECD wants.

But if you want a real-world example, just look at Greece, France, and Italy.

Which brings me to my final point. To be blunt, it’s crazy that American taxpayers are subsidizing a left-wing overseas bureaucracy like the OECD.

If Republicans have any brains and integrity (I realize that’s asking a lot), they should immediately pull the plug on subsidies for the Paris-based bureaucracy. Sure, it’s only about $100 million per year, but – on a per-dollar spent basis – it’s probably the most destructive spending in the entire budget.

P.S. The OECD even wants a type of World Tax Organization.

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The Organization for Economic Cooperation and Development has published a 136-page “Economic Survey” of China.

My first reaction is to wonder why the Paris-based bureaucracy needs any publication, much less such a long document, when Economic Freedom of the World already publishes an annual ranking that precisely and concisely identifies the economic strengths and weaknesses of various nations.

A review of the EFW data would quickly show that China doesn’t do a good job in any area, but that the nation’s biggest problems are a bloated public sector and a suffocating regulatory burden.

Though it’s worth noting that China’s mediocre scores today are actually a big improvement. Back in 1980, before China began to liberalize, it received a dismal score of 3.64 (on a 1-10 scale). Today’s 6.45 score isn’t great, but there’s been a big step in the right direction.

One of the most impressive changes is that the score for the trade category has jumped from 2.72 to 6.78 (i.e., moving from protectionism toward open trade is good for growth).

I cite this EFW data because part of me wonders why the OECD couldn’t be more efficient and simply put out a 5-page document that urges reforms – such as a spending cap and deregulation – that would address China’s biggest weaknesses?

To be fair, though, the number of pages isn’t what matters. It’s the quality of the analysis and advice. So let’s dig into the OECD’s China Survey and see whether it provides a road map for greater Chinese prosperity.

But before looking at recommendations, let’s start with some good news. This chart shows a dramatic reduction in poverty and it is one of the most encouraging displays of data I’ve ever seen.

Keep in mind, by the way, that China’s economic statistics may not be fully trustworthy. And it’s also worth noting that China’s rural poverty measure of CNY2300 is less than $350 per year.

Notwithstanding these caveats, it certainly appears that there’s been a radical reduction in genuine material deprivation in China. That’s a huge triumph for the partial economic liberalization we see in the EFW numbers.

Now let’s see whether the OECD is suggesting policies that will generate more positive charts in future years.

The good news is that the bureaucrats are mostly sensible on regulatory matters and state-owned enterprises (SOEs). Here are a few excerpts from the document’s executive summary.

Business creation has been made easier through the removal and unification of licenses. …Gradually remove guarantees to SOEs and other public entities to reduce contingent liabilities. …Reduce state ownership in commercially oriented…sectors. Let unviable SOEs go bankrupt, notably in sectors suffering from over-capacity.

The bad news is that the OECD wants the government to increase China’s fiscal burden. I’m not joking.

Policy reforms can greatly enhance the redistributive impact of the tax-and-transfer system. …Increase central and provincial government social assistance transfers…increase tax progressivity. Implement a broad-based nationwide recurrent tax on immovable property and consider an inheritance tax.

This is bad advice for any nation at any point, but it’s especially misguided for China because of looming demographic change.

Here’s another chart from the report. It shows a staggering four-fold increase in the share of old people relative to working-age people in the country.

This chart should be setting off alarm bells. The Chinese government should be taking steps to lower the burden of government spending and implement personal retirement accounts so there will be real savings to finance this demographic shift.

But the OECD report actually encourages less savings and more redistribution.

…rebalancing of the economy towards consumption is key. …Social infrastructure needs to be further developed…and the tax and transfer system made more progressive. …tax exemptions on interest from government bonds and savings accounts at Chinese banks could be abolished…introduction of inheritance tax.

What’s especially noteworthy is that the personal income tax in China (as is the case in almost all developing nations) only collects a trivial amount of revenue.

In 2016, PIT revenue amounted to 1.4 percent of GDP.

So why not do something bold and pro-growth, such as abolish that repugnant levy and make China a beacon for entrepreneurship and investment?

Needless to say, that’s not a recommendation you’ll find in a report from the pro-tax OECD.

And given the bureaucracy’s dismal track record, you won’t be surprised that there’s lots of rhetoric about the supposed problem of inequality, all of which is used to justify higher taxes and more redistribution.

The OECD instead should focus on growth and poverty mitigation, goals that naturally lend themselves to pro-market reforms.

Which brings me to the thing that’s always been baffling. Why doesn’t China simply copy the ultra-successful policies of Hong Kong, which has been a “special administrative region” of China for two decades?

Hong Kong has the policies – a spending cap, very little redistribution, open trade, private Social Security, etc – that China needs to become a rich nation.

If the leadership in Beijing has been wise enough to leave Hong Kong’s policies in place, why haven’t they been astute enough to apply them to the entire country?

Every so often, I think China is moving in that direction, only to then come across reasons to be pessimistic.

P.S. The OECD’s China report was predictably disappointing, but it wasn’t nearly as bad as the IMF’s report on China, which I characterized half-jokingly as a declaration of economic war.

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President Trump has released his budget blueprint. From a big picture perspective, the size of government won’t change. He’s kicking the can down the road on entitlements, which is obviously disappointing for people who can add and subtract. He does cut some domestic programs, but taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.

But I’m going to be optimistic today (the glass isn’t 9/10ths empty, it’s 1/10th full). Let’s look at the good parts of his budget.

First, some background. Redistribution is bad public policy since it simultaneously encourages inactivity and dependency among recipients and discourages activity and initiative by taxpayers.

That’s the standard argument against conventional handouts such as welfare, food stamps, Medicaid, EITC, and housing subsidies. The plethora of such programs in Washington is bad news for both taxpayers and poor people.

But there’s another type of redistribution that’s far worse, and that’s when politicians use the coercive power of government to take money from lower-income people in order to provide goodies for upper-income people.

This is why I am so unrelentingly hostile to programs like the Export-Import Bank, agriculture subsidies, so-called disaster relief, green-energy scams like Solyndra, and Fannie Mae/Freddie Mac subsidies.

Indeed, I even developed a “Bleeding Heart Rule” back in 2012 to describe how such giveaways are morally reprehensible.

Now let’s add another program to the list.

The National Endowment of the Arts is a federal program that subsidizes art, with upper-income people reaping the vast majority of the benefits.

That’s the bad news. The good news is that President Trump is proposing to defund this elitist bureaucracy.

Before explaining why the program should be abolished, let’s look at the case for federal involvement. This is how the NEA describes its mission.

The National Endowment for the Arts is an independent federal agency that funds, promotes, and strengthens the creative capacity of our communities by providing all Americans with diverse opportunities for arts participation.

That sounds noble. But are we really supposed to believe that our communities won’t have any creative capacity without some handouts from the federal government to museums and other politically connected organizations that primarily serve rich people?

And for those of us who have this old-fashioned notion that the federal government should be constrained by the Constitution, it’s also worth noting that art subsidies are not one of the enumerated powers in Article 1, Section 8.

Here is the pro-NEA argument from a column in the New York Times.

Sadly, it has become clear that the N.E.A. is, once again, under threat of being abolished… The N.E.A.’s budget is comparatively minuscule — $148 million last year, or 0.004 percent of the total federal budget — while the arts sector it supports employs millions of Americans and generates billions each year in revenue and tax dollars. …the N.E.A., founded in 1965, serves three critical functions: It promotes the arts; it distributes and stimulates funding; and it administers a program that minimizes the costs of insuring arts exhibitions through indemnity agreements backed by the government. …The grants, of course, receive the most attention, if not as much as they deserve. Thousands are distributed in all 50 states, reaching every congressional district, urban and rural, rich and poor. …They support live theater for schools; music, dance and jazz festivals; poetry and literary events; arts programs for war veterans; and, of course, museum exhibitions.

This actually makes my point. The NEA spends $148 million per year, which is just a tiny fraction of what is spent by the private sector.

In other words, we had museums, plays, music festivals, and art programs before the NEA was created and all of those activities will exist if the NEA is abolished.

All that will change is that politicians and bureaucrats won’t be doling out special grants to select institutions and insiders that have figured out how the manipulate the system.

The column also has some absurd hyperbole.

I fear that this current call to abolish the N.E.A. is the beginning of a new assault on artistic activity. Arts and cultural programming challenges, provokes and entertains; it enhances our lives. Eliminating the N.E.A. would in essence eliminate investment by the American government in the curiosity and intelligence of its citizens.

The author actually wants readers to conclude that a failure to subsidize is somehow akin to an assault on artistic creativity. Oh, and don’t forget that our curiosity and intelligence somehow will suffer.

Here’s a story about an interest group that wants to keep the gravy train on the tracks.

The heads of five Boston arts museums are pushing back against feared Trump administration cuts to the National Endowment for the Arts and the National Endowment for the Humanities. The museums’ directors say in an open letter that the agencies…help foster knowledge of the arts, create cultural exchanges, generate jobs and tourism, and educate young people. They say NEA and NEH funding has been instrumental at each of the Boston museums.

My immediate reaction is that there are lots of rich people and well-heeled companies in Boston. Surely NEA handouts can be replaced if these museum directors are remotely competent.

I’ll also take a wild guess that the directors of these five museums earn an average of more than $500,000 per year. Perhaps it’s not right for them to be using tax dollars to be part of the top 1 percent. Heck, trimming their own salaries might be an easy place for them to get some cost savings.

But enough from me. Let’s look at what some others have written about the NEA.  Let’s start with George Will’s assessment.

…attempting to abolish the NEA is a fight worth having, never mind the certain futility of the fight. …Government breeds advocacy groups that lobby it to do what it wants to do anyway — expand what it is doing. The myriad entities with financial interests in preserving the NEA cloyingly call themselves the “arts community,” a clever branding that other grasping factions should emulate… The “arts community” has its pitter-patter down pat. The rhetorical cotton candy — sugary, jargon-clotted arts gush — asserts that the arts nurture “civically valuable dispositions” and a sense of “community and connectedness.” And, of course, “diversity” and “self-esteem.” Americans supposedly suffer from a scarcity of both. …the NEA’s effects are regressive, funding programs that are…“generally enjoyed by people of higher income levels, making them a wealth transfer from poorer to wealthier.” …Americans’ voluntary contributions to arts organizations (“arts/culture/humanities” institutions reaped $17 billion in 2015) dwarf the NEA’s subventions, which would be replaced if those who actually use the organizations — many of them supported by state- and local-government arts councils — are as enthusiastic about them as they claim to be. The idea that the arts will wither away if the NEA goes away is risible.

Now let’s hear from members of the “arts community” who understand that art doesn’t require handouts.

We’ll start with Patrick Courrielche, who wrote in the Wall Street Journal about the need to free the arts from federal dependence.

The NEA, created in 1965, has become politically tainted and ill-equipped to handle today’s challenges. Mr. Trump and Congress should ax it as soon as possible. …For the American arts to flourish—and for art to reach all Americans—artists must be able to make a living from their efforts.

And a theater director from Brooklyn explains in the Federalist why the art world will be better off without the NEA.

…as Trump prepares to spike the ball and end the game by axing the NEA, there is reason to be optimistic that this decision will be very good for the arts in America. …Arts institutions, which receive the bulwark of NEA funding, are failing badly at reaching new audiences, and losing ground. This is a direct result of the perverse market incentives our nonprofit arts system creates… As the artistic director of an unsubsidized theater company in New York City for more than a decade, I had to compete in a closed marketplace, where wealthy gatekeepers and the government rather than ticket sales pay the bills. …The industry receives more free money than it did a decade ago, and has fewer attendees. That is a broken system by any estimation. …Taking away free government money for the arts won’t make art disappear. After all, art is older than government. It will force artists and arts organizations to finally come to terms with their market realities. Audiences are better than experts at deciding what art is good or important. If a piece of art is so good that nobody to wants to pay for it, maybe it isn’t all that good. …In the American tradition, vaudeville, jazz, standup comedy, and many other art forms were created and grew within the free market, free from government assistance. Under this system there was a tremendous appetite for high art among Americans… President Trump is wise to get the government out of the art game, and all of us will be better off for his decision.

Here’s another artist, writing for PJ Media, about the benefits of ending federal handouts.

For over a decade as a theatre artist, my salary was made possible by taxpayers funding the arts. …In hindsight, and after much reflection and a better understanding of economics, I am truly sorry, and ask the taxpayer to forgive my thievery. However, spilled milk can’t be put back into the bottle. That doesn’t mean that we have to keep spilling the milk, though. It’s way past time to defund and shutter the National Endowment for the Arts. … The NEA and their supporters will trot out research about how many dollars are added to local economies due to things like theatres, symphonies, and museums. Of course, as almost every person with at least half a semester of Economics under their belt is screaming, the NEA’s argument embraces the broken window fallacy. The economic stimulus felt and supposedly generated by the arts community comes at the expense of other markets. …The National Endowment for the Arts model artificially props up mostly unwanted markets by using tax dollars that get funneled through inefficient and wasteful bureaucracies. …What it does to the arts is create a marketplace that supports bad art. …Don’t misunderstand, I love art. Like, a lot. And I’m willing to pay for it, as are many other patrons of the arts. If the National Endowment for the Arts were to be defunded and shuttered, it would help clear the deck of bad art that people aren’t willing to pay the real cost for. …art does enhance life, but having your life enhanced at the expense of others is not a right. People don’t have a right to other people’s money just so they can watch a play or visit a museum. …It’s time for the National Endowment for the Art to be defunded and shuttered.

Amen.

Since I started today’s column with optimism, I’ll be balanced and end with pessimism. I very much doubt that Congress will defund the NEA bureaucracy.

In part, this is a classic example of “public choice.” The recipients of the handouts have strong incentives to mobilize and lobby to keep their goodies. Taxpayers, by contrast, mostly will be disengaged because their share of the cost is trivial.

But it gets worse. The NEA also is very clever. A Senator once told me that it was difficult to vote against the bureaucracy because the “arts community” cleverly placed the wives of major donors on local arts councils. That made it difficult to vote against the NEA, though this Senator did say that making this tough vote would be worthwhile. Yes, there would be some short-term grousing by interest groups (and donor wives) if the agency actually was shut down, but that would quickly dissipate as people saw the arts were able to survive and thrive without sucking at the federal teat.

For the sake of the nation, let’s hope most lawmakers think this way.

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As I wrote yesterday (and have pontificated about on many occasions), the main problem with America’s healthcare system is that various government interventions (Medicare, Medicaid, Obamacare, tax code’s healthcare exclusion, etc) have created a system where people – for all intents and purposes – buy healthcare with other people’s money.

And as Milton Friedman wisely observed, that approach (known as “third-party payer”) undermines normal market incentives for lower costs. Indeed, it’s a green light for ever-higher costs, which is exactly what we see in the parts of the healthcare system where government programs or insurance companies pick up most of the tab.

For what it’s worth, I’m not overflowing with confidence that the new Obamacare-replacement proposal from Republicans will have much impact on the third-party payer crisis. And it probably doesn’t solve some of the Obamacare-specific warts in the system. If you want to get depressed about those issues, read what Michael Cannon, Philip Klein, and Christopher Jacobs have written about the new GOP plan.

But healthcare in America is also a fiscal issue. And if we’re just looking at the impact of the American Health Care Act on the burden of government spending and taxes, I’m a bit more cheerful.

The Congressional Budget Office released its official score on the impact of the legislation. Here’s the excerpt that warmed my heart.

Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion. The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance. … parts of the legislation would repeal or delay many of the changes the ACA made to the Internal Revenue Code… Those with the largest budgetary effects include: • Repealing the surtax on certain high-income taxpayers’ net investment income; • Repealing the increase in the Hospital Insurance payroll tax rate for certain high-income taxpayers; • Repealing the annual fee on health insurance providers; and • Delaying when the excise tax imposed on some health insurance plans with high premiums would go into effect.

And fellow wonks will be interested in this table.

By the way, the “two cheers” in the title may be a bit too generous. After all, there should be full reform of Medicare and Medicaid. Though I suppose some of that can happen (at least Medicaid, hopefully) as part of the regular budget process.

It’s also unfortunate that Republicans are creating a new refundable tax credit (and when you see the term “refundable tax credit,” that generally is a sneaky euphemism for more government spending that is laundered through the tax code, sort of like the EITC) to replace some of the Obamacare subsidies that are being repealed.

So it’s far from ideal.

For those who want to see the glass as being half-full rather than half-empty, however, Ryan Ellis has a very upbeat assessment in a column for Forbes.

It’s a net spending cut of over $1.2 trillion and a net tax cut of nearly $900 billion over the next decade. …the score shows that the AHCA would be a large and permanent tax cut for families and employers….This should lower the tax revenue baseline considerably, perhaps even by half a percentage point of the economy.

I like starving the beast, so I agree this is a good thing.

And I also agree with Ryan that the resulting lower tax burden on dividends and capital gains is very positive. After all, double taxation is probably the most pernicious feature of the internal revenue code.

The most pro-growth tax cut in the bill is the elimination of the so-called “NIIT” or “net investment income tax.” It adds on a 3.8 percentage point surtax on savers and investors. By eliminating NIIT, the bill cuts the capital gains and dividends tax from 23.8 percent in 2017 to 20 percent in 2018 and beyond. …The contribution limit to HSAs is doubled, from nearly $7000 for families today to $14,000 starting in 2018.

But I’ll close with some sad news. If the legislation is approved, that probably means no more Obamacare-related humor. If this makes you sad, you can easily spend about 30 minutes enjoying Obamacare  cartoons, videos, and jokes by clicking here, here, here, here, here, herehere, here, here, here, here, here, here, here, here, here, here, here, here, and here.

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A couple of years ago, filled with disgust at the sleazy corruption of the federal Leviathan, I put forth a simple explanation for what happens in Washington, DC.

I call it the “First Theorem of Government,” and I think it accurately reflects the real purpose and operation of government. Except I probably should have added lobbyists and contractors. And it goes without saying (though I probably should have said it anyhow) that politicians are the main beneficiaries of this odious racket.

I think this theorem has stood the test of time. It works just as well when Republicans are in charge as it does when Democrats are in charge.

But it doesn’t describe everything.

For instance, Republicans have won landslide elections in recent years by promising that they will repeal Obamacare the moment they’re in charge. Well, now they control both Congress and the White House and their muscular rhetoric has magically transformed into anemic legislation.

This is very disappointing and perhaps I’ll share some of Michael Cannon’s work in future columns about the policy details, but today I want to focus on why GOP toughness has turned into mush.

In part, this is simply a reflection of the fact the rhetoric of politicians is always bolder than their legislation (I didn’t agree with 98 percent of what was said by Mario Cuomo, the former Governor of New York, but he was correct that “You campaign in poetry. You govern in prose.”)

But that’s just a small part of the problem. The real issue is that it’s relatively easy for GOP politicians to battle against proposed handouts and it’s very difficult to battle against existing handouts. That’s because government goodies are like a drug. Recipients quickly get hooked and they will fight much harder to preserve handouts than they will to get them in the first place.

And that’s the basic insight of the “Second Theorem of Government.”

Here’s a recent interview on FBN. The topic is the Republican reluctance to fully repeal Obamacare. I only got two soundbites, and they both occur in the first half of the discussion, but you can see why I was motivated to put forth the new theorem.

Simply stated, I’m disappointed, but I’m more resigned than agitated because this development was so sadly predictable.

And here are a couple of follow-up observations. I guess we’ll call them corollaries to the theorem.

  1. You break it, you buy it – Government intervention had screwed up the system well before Obamacare was enacted, but people now blame the 2010 law (and the Democrats who voted for it) for everything that goes wrong with healthcare. Republicans fear that all the blame will shift to them if their “Repeal and Replace” legislation is adopted.
  2. Follow the money – What’s partly driving GOP timidity is their desire not to anger many of the interest groups – such as state governments, hospitals, doctors, insurance companies, etc – who benefit from various Obamacare handouts. That’s what is motivating criticism for politicians such as Ohio’s John Kasich and Alaska’s Lisa Murkowski.
  3. Don’t throw the baby out with the bathwater – The “Cadillac Tax” is the one part of Obamacare that’s worth preserving because it will slowly cut back on the distorting tax preferences that lead to over-insurance and third-party payer. For what it’s worth, the GOP plan retains that provision, albeit postponed until 2025.
  4. The switch in time that saved…Obamacare – I’m still upset that Chief Justice John Roberts (aka, the reincarnation of the 1930s version of Justice Roberts) put politics above the Constitution by providing the decisive vote in the Supreme Court decision that upheld Obamacare. If the law had been blocked before the handouts began, we wouldn’t be in the current mess.

For these reasons (as well as other corollaries to my theorem), I’m not brimming with optimism that we’ll get real Obamacare repeal this year. Or even substantive Obamacare reform.

P.S. Now you know what I speculated many years ago that Obamacare would be a long-run victory for the left even though Democrats lost many elections because of it. I sometimes hate when I’m right.

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Once of the reasons that tax increases in Washington are such a bad idea (and one of the reasons why a value-added tax is an especially bad idea) is that the prospect of additional tax revenue kills any possibility of genuine entitlement reform. Simply stated, politicians won’t do the heavy lifting of fixing those programs if they think can use a tax hike to prop up the current system for a few more years.

However, if we don’t fix the entitlements, the United States faces a very grim fiscal future regardless of new revenue because the burden of government spending will be expanding faster than the growth of the private economy.

Indeed, tax hikes presumably will accelerate the problems by weakening economic performance, creating an even bigger gap between the growth of government spending and the growth of productive output. Sort of a double violation of my Golden Rule.

Well, the same thing is happening in Illinois.

That state is a fiscal disaster. Taxes already are high, government spending already is excessive, and promises of lavish future benefits for government bureaucrats have created a mountain of unfunded liabilities. To make matters worse, there’s a never-ending trickle of taxpayers fleeing to other states, thus making the long-run outlook even worse.

A column in today’s Wall Street Journal discusses this unfolding disaster.

…what about the state’s fiscal apocalypse, which is not only happening right now but has plunged Illinois into a bona fide financial disaster? …the state has amassed $11 billion in unpaid bills—predicted to climb to more than $27 billion by the end of 2019. Illinois is facing the worst pension crisis of any U.S. state, with unfunded obligations totaling $130 billion, according to the state’s Commission on Government Forecasting and Accountability. That amounts to about $10,000 in debt for each resident. …Illinois also had the lowest credit rating among the 50 states as of October, when Moody’s Investors Service downgraded it again… Given all this, it’s no surprise that people are leaving. In 2016 Illinois lost more residents than any other state—for the third consecutive year. A total of 37,508 people fled, leaving the state’s population at its lowest level in nearly a decade.

By the way, the net payers of tax are the ones leaving, not the net consumers of tax. And every time one of the geese with golden eggs decides to fly away, Illinois falls deeper into a hole.

I discussed this phenomenon in a column for The Hill.

…there are some very uncompetitive, high-tax states, such as Illinois, that are in deep trouble due to internal migration.Most people have focused on the overall population loss of 37,508 in Illinois, but the number that should worry state politicians is, on net, a staggering 114,144 people left for other states. Only New York (another high-tax state with a grim future) lost more people to internal migration.Of course, what really matters, at least from a fiscal perspective, is the type of person who leaves. Data from the internal revenue service shows that states like Illinois are losing people with above-average incomes. In other words, the net taxpayers are escaping.

And don’t forget that Illinois is increasingly uncompetitive compared to neighboring states.

Here’s a blurb from a Wall Street Journal editorial in January,

Nearby Kentucky passed a right-to-work law last week and Missouri is expected to take up similar legislation in coming weeks. …this would leave Illinois, a non-right-to-work state, as an island with undesirable labor laws surrounded by states including Michigan, Indiana and Wisconsin that provide more worker choice and business flexibility.

I have some theoretical problems with right-to-work laws, but the WSJ is correct that private employers tend to avoid states where unions wield a lot of power.

Also, we can’t forget that the main city in Illinois has its own set of problems.

As discussed in an article for the American Thinker, Chicago adds crime and corruption to the mix.

Chicago has become the icon of bloody violence on its streets, but corruption also is part of its misery… Chicago’s city government is known for much more than just its one-sidedness.  From Mayor Richard J. Daley’s well known rackets of yesteryear to former U.S House representative Jesse Jackson, Jr. (who just last year completed his prison sentence after having pleaded guilty to multiple federal charges including fraud, conspiracy, wire fraud, criminal forfeiture, and more), the list of Democrats committing and getting caught committing fraud, taking bribes, running scams, and other malfeasance while in office is very long. …As reported by Gazette.com, “according to Illinois corruption researchers Dick Simpson and Thomas Gradel, more than 30 Chicago aldermen have been convicted of crimes since 1973, most of them on bribery and extortion charges. “More than 1,000 public officials and businessmen in Illinois have been convicted of public corruption since 1970, including imprisoned former Gov. Rod Blagojevich. But corruption among politicians on Chicago’s premier lawmaking body has been ‘particularly persistent’, the researchers wrote in an anti-corruption report.”

Gee, what a surprise. Politicians create big government in part so they have lots of goodies to distribute, and they then use those goodies to extort money from people.

Hmmm…, where have I seen that message before?

But let’s not get distracted. We’ve now established that Illinois is a giant mess. We also know that the state can only be saved if there is both short-run spending restraint and long-run spending restraint (to deal with unaffordable benefits promised to the state’s massive bureaucracy). Though we also know that the chances of getting those necessary reforms will evaporate if tax hikes are an option.

So is anybody surprised that the state’s supposedly anti-tax governor is getting seduced/pressured into throwing taxpayers under the bus?

The Wall Street Journal opines on this development.

Illinois Governor Bruce Rauner has been trying to pull the Land of Lincoln out of economic decline…, and it’s a losing battle. After two years without a state budget, Mr. Rauner is now bending as Democrats promise to hold the budget hostage if he doesn’t sign a tax increase. In his State of the State address last week, Mr. Rauner said he was open to “consider revenue increases” in conjunction with “job-creating changes” in pursuit of a budget deal. He endorsed negotiations underway with state lawmakers to craft a “grand bargain”…the speech was greeted with derision by the state’s Springfield mafia that assumes it now has the Governor where it wants him. …The deal now being crafted in the state Senate would increase the state’s flat income-tax rate to somewhere around 5% from the current 3.75%. …Democrats are still peddling that they can tax their way out of Illinois’s economic decline, while taxpayers are picking up and heading to neighboring states.

Incidentally, there was a temporary hike in the tax to 5 percent a few years ago. How did that work out?

…the years of an elevated income tax produced one of the country’s weakest state economic recoveries, with bond-rating declines in Chicago and staggering deficits statewide. …Senate President John Cullerton said the point of the temporary hike was to pay pensions, “pay off our debt [and] to have enough money to pay the interest on that debt.” But the roughly $31 billion it generated made hardly a dent. Since 2011 the unfunded pension liability in Illinois has grown by $47 billion, even as the tax hike was mostly spent on pensions.

Here’s the bottom line. Governor Rauner made a huge mistake by stating that he would “consider revenue increases.”

Illinois, after all, is not suffering from inadequate tax collections.

Moreover, now that Rauner has waved the white flag, there’s a near-zero chance that he’ll be able to get something in exchange such as a Colorado-style spending cap or much-need constitutional reform to control pension expenditures.

Instead, higher revenues will trigger even more wasteful outlays (as leftists in the state sometimes accidentally admit).

I guess there’s still a chance he’ll do what’s best for the state and reject tax hikes, but as of now it looks like Rauner will be the next winner of the Charlie Brown Award.

Oh, and he’ll also jeopardize his own political career. Which helps to explain why the GOP is known as the “stupid party.”

P.S. I don’t think it beats my examples from Greece and Japan, but Illinois at least can compete in the dumbest-regulation contest.

P.P.S. Illinois is a terrible state for gun rights, and it even persecutes people who use guns to fight crime. The only silver lining to that dark cloud is this amusing example of left-wing social science.

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