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Posts Tagged ‘Corruption’

I’m a big fan of Estonia.

According to both the Fraser Institute and the Heritage Foundation, it has considerable economic freedom.

It has a low-rate flat tax, meaning that investors, entrepreneurs, and small-business owners aren’t punished for contributing more to the nation’s economic output.

It responded to the 2008 crisis by cutting spending rather than engaging in a Keynesian spending binge (which also led to an exploding cigar for Paul Krugman).

Now I have another reason to like Estonia.

It’s a role model for how to reduce corruption by shrinking the size and scope of government.

First, some background.

Neil Abrams and Professor Steven Fish have a column in the Washington Post about the seemingly intractable problem of boosting the rule of law in developing and transition economies.

Western aid agencies and scholars agree that the rule of law is required before developing countries can reduce poverty and corruption. For decades, they have supported aid programs designed to help developing countries establish law-based states. …In a rule-of-law state, the rules apply even to the rulers, not just the ordinary folks. The rule of law is not the same as democracy. Scores of developing countries have demonstrated that establishing democracy is the easy part. The rule of law is harder to attain. From India and the Philippines to Argentina, democracy coexists with endemic corruption, and elites remain largely exempt from the rules.

They then explain that its well-nigh impossible to create the rule of law in a society that has a big government.

…our research suggests that they have the sequence backward. Before urging governments to adopt the rule of law, they must first advise reformers to take one key step: eliminating the government subsidies that sustain criminal elites and replacing the compromised bureaucrats who patronize them.

Now for the big takeaway from their column: Estonia is the role model for how this can happen.

Our research shows that a few good policies can pave the way for the rule of law. For instance, Estonia’s clean and capable state administration represents a model of post-communist success. But this was not always the case. In 1991, when communism collapsed, Estonia, like other post-Soviet countries, had almost no working institutions and a burgeoning class of economic predators, nor was Estonia economically privileged. In the early post-Soviet years, its income per capita was only 10 to 20 percent higher than that of Russia and Romania and 20 to 30 percent lower than that of Croatia, Slovakia and Hungary. But Estonian leaders acted boldly. …early Estonian governments ended practically all subsidies to state and private enterprises. …in developing countries, state subsidies almost always benefit corrupt elites more than ordinary people. This policy cut off the budding economic criminals who profit from state largesse rather than entrepreneurial aptitude — and made it possible for real entrepreneurs to thrive. Deprived of subsidies, old-guard enterprise directors and crony capitalists could not muster enough political influence to hold governments hostage.

Sadly, other nations are not copying Estonia, in part because the international bureaucracies and national agencies that dispense foreign aid don’t support policies to shrink government in recipient nations.

Unfortunately, Estonia is the exception and not the rule. That’s  not for lack of trying on the part of the West. The United States, the European Union, the World Bank, the European Bank for Reconstruction and Development and the United Nations have spent billions of dollars for the express purpose of helping countries build a rule of law. …But they’re stumbling. The Western effort assumes that the rule of law will flourish only if developing countries receive enough education, guidance, training and money. In fact, a growing body of research throws such optimism into doubt.

In other words, foreign aid – at best – is useless. And it may be harmful by financing a bigger role for recipient governments.

The authors close by emphasizing the need (assuming genuine rule of law is the goal) to prune the bureaucracy and public sector.

Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.

So what are the implications of this analysis for the United States?

Given that America now ranks below Estonia for rule of law, and given that rule of law is gradually eroding in the United States, the obvious lesson is that the public sector in America needs to shrink.

The real challenge, though, is convincing politicians to give up power.

Professor Glenn Reynolds of the University of Tennessee Law School explains in USA Today that a larger government is good for politicians because it creates opportunities for graft.

The explanation for why politicians don’t do all sorts of reasonable-sounding things usually boils down to “insufficient opportunities for graft.” And, conversely, the reason why politicians choose to do many of the things that they do is … you guessed it, sufficient opportunities for graft. That graft may come in the form of bags of cash, or shady real-estate deals, or “consulting” gigs for a brother-in-law or child, but it may also come in broader terms of political support.

Glenn notes that there’s an entire school of thought in economics that analyzes this unfortunate tendency of politicians to conspire with interest groups at the expense of taxpayers and consumers.

…there’s a whole field of economics based on this view, called “Public Choice Economics.” Nobel prize winning economist James Buchanan referred to public choice economics as “politics without romance.” Instead of being selfless civil servants motivated solely by the public good, public choice economics assumes that politicians are, like other human beings, heavily influenced by self-interest. …You pick a car because it’s the best car for you that you can afford. Politicians pick policies because they’re the best policies — for them — that they can achieve. …the entire system is designed — by politicians, naturally — to make it harder for voters to keep track of what politicians are doing. The people who have a bigger stake in things — the real estate developers or construction unions — have an incentive to keep track of things, and to influence them.

Having received my Ph.D. from George Mason University, home of the Center for the Study of Public Choice, I echo Glenn’s comments about the value of this theory.

So what’s the moral of the story?

As summarized by Professor Reynolds, bigger government means more corruption and smaller government means less corruption.

The more the government does and the more decisions that are relegated to bureaucrats, “guidance” and other forms of decisionmaking that are far from the public eye, the more freedom politicians have to pursue their own interest at the expense of the public — all while, of course, claiming to do just the opposite.

Now let’s look at some real-world examples from Washington.

By the way, I’m not writing to specifically condemn Obama and his team, even though I’m quite confident that the Chicago machine produces people who excel at unethical behavior.

Republicans also get their hands dirty by steering undeserved wealth to special interests, as explained here, here, and here.

That being said, most Washington corruption today seems associated with the Democrat Party for the simple reason that Democrats control the bureaucracy.

For instance, here are some of the key points from a New York Times report.

The State Department, under Secretary Hillary Rodham Clinton, created an arrangement for her longtime aide and confidante Huma Abedin to work for private clients as a consultant while serving as a top adviser in the department. Ms. Abedin did not disclose the arrangement — or how much income she earned — on her financial report. It requires officials to make public any significant sources of income.

To be blunt, this stinks to high heaven.

…the picture that emerges from interviews and records suggests a situation where the lines were blurred between Ms. Abedin’s work in the high echelons of one of the government’s most sensitive executive departments and her role as a Clinton family insider. While continuing her work at the State Department, in the latter half of 2012, she also worked for Teneo, a strategic consulting firm, which was founded by Doug Band, a former adviser to President Bill Clinton. Teneo has advised corporate clients like Coca-Cola and MF Global, the collapsed brokerage firm run by Jon S. Corzine, a former governor of New Jersey.

The Daily Caller also has been doing some first-rate work on the cronyism and corruption inside Washington.

One of their stories, for instance, exposed the left-wing connections of the supposedly “apolitical” bureaucrat at the heart of the IRS scandal.

IRS Exempt Organizations Division director Lois G. Lerner, who has been described as “apolitical” in mainstream press coverage of the IRS scandal, is married to tax attorney Michael R. Miles, a partner at the law firm Sutherland Asbill & Brennan.

And why does that matter?

The 400-attorney firm hosted an organizing meeting at its Atlanta office for people interested in helping with voter registration for the Obama re-election campaign. …Lerner personally signed the tax-exemption approval for a shady charity run by Obama’s half-brother, after an inexplicably brief one-month application process.

Time to wrap this up.

I enjoy Mark Steyn for his biting humor, but he makes a very serious and relevant point is his latest column.

A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers.

I made a similar point, arguing that you can’t have a competent government unless it’s a small government.

But as the public sector expands, effective management becomes much harder.

And, as discussed in an interview with John Stossel, you also get corruption, mixed with incompetence and thuggery.

Let’s close by re-issuing my video explaining how big government enables pervasive corruption. It’s never been more timely and appropriate.

P.S. There are some countries with big governments that are not plagued by corruption. The Nordic nations, for instance, rank at or near the top in many economic indications, including high-quality rule of law. Though it’s worth noting that these jurisdictions scored highly in these areas before the burden of government was expanded.

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Once again, I threw myself on a proverbial grenade. Yes, that means I watched politicians last night as part of the Cato Institute’s live-tweeting about issues that were raised (or not raised) in the CNN Townhall featuring Bernie Sanders and Hillary Clinton.

Although painful, this exercise enabled me to share my thoughts on topics such as corporate inversions, Planned Parenthood, government-run healthcare, Obamanomics, and the morality (or lack thereof) of government-coerced redistribution.

But one issue I neglected was campaign finance, which was an oversight since both Sanders and Clinton made a big deal about the ostensibly corrupting mix of money and politics.

I confess that their arguments were somewhat seductive. After all, corrupt ethanol handouts and the cronyist Export-Import Bank only exist because politicians easily can raise tens of thousands of dollars by voting yes for these boondoggles.

Moreover, a law professor from the University of Minnesota made “The Conservative Case for Campaign-Finance Reform” yesterday in the New York Times. Here’s some of what Richard Painter wrote.

…big money in politics encourages big government. Campaign contributions drive spending on earmarks and other wasteful programs — bridges to nowhere, contracts for equipment the military does not need, solar energy companies that go bankrupt on the government’s dime… When politicians are dependent on campaign money from contractors and lobbyists, they’re incapable of holding spending programs to account. Campaign contributions also breed more regulation. Companies in heavily regulated industries such as banking, health care and energy are among the largest contributors. Such companies donate with the hope of winning narrowly tailored exceptions to regulations that help them and disadvantage their competitors. …conservatives…need to drive the big spenders out of the temples of our democracy.

I have no idea if Mr. Painter actually is a conservative, but he makes a superficially compelling case.

But then I remind myself of a very important point. The sun doesn’t rise because roosters crow. It’s the other way around. What Mr. Painter fails to understand is that there’s a lot of money in politics for the simple reason that government has massive powers to tax, spend, and regulate.

Politicians in Washington every year redistribute more than $4 trillion, so interest groups have an incentive to “invest” money in campaigns so they can get some of that loot. Those politicians have created a 75,000-page tax code that is a Byzantine web of special preferences, so interest groups have an incentive to “invest” money in campaigns so they get favorable treatment. And the politicians also have created a massive regulatory morass, so interest groups have an incentive to “invest” so that red tape can be used to create an unlevel playing field for their advantage.

By the way, I’m not saying that campaign contributions are improper, or even necessarily bad.

After all, political speech (and the money that makes it meaningful) is protected by the 1st Amendment. Moreover, some people give money simply for reasons of self defense. They’re not looking for handouts of favoritism, but rather are giving money in hopes that politicians will leave them alone.

Instead, I’m simply making the point that big government is what encourages unseemly and/or corrupt political contributions.

If I’m allowed to shift to a new metaphor, Sanders and Clinton make the mistake of putting the cart of campaign finance in front of the horse of big government.

There’s a great column in today’s Wall Street Journal on this topic. It’s motivated by corruption scandals in New York, but the lessons apply equally to Washington. Here’s some of what Tom Shanahan wrote.

…whenever a public official is found guilty of wrongdoing, there’s a call for new laws. Logic cannot explain the impulse. …If they’re not obeying the laws we already have, what makes anyone believe new statutes will change that? …a host of “good government” groups, such the New York Public Interest Research Group, proposed making the legislature a “full-time job” by limiting outside income.

Mr. Shanahan suspect these reforms will backfire.

That’s a major problem for limiting the size of government. An analysis of “The Length of Legislative Sessions and the Growth of Government” byMwangi S. Kimenyi and Robert D. Tollison, in a 1995 article in Rationality and Society, demonstrated that the more time Congress spent in session, the more bills were enacted, and the more expensive government grew. …A legislator with other work also has a better understanding of the economic conditions confronting the public than one who subsists on a government check. …Legislators with outside incomes are less susceptible to the pay-to-play temptation of campaign contributions. When your sole source of income is the public office you hold, the incentive is far greater to do anything necessary to get re-elected.

So here’s the bottom line is that there’s no reason to think new laws will reduce corruption. Indeed, more rules will probably lead to more sleaze since politicians will have an even greater incentive to exploit their positions of power.

The people who will get hurt, however, are the ordinary citizens who already lose out from the current system.

New York continues to suffer a net migration of citizens to other states, as people flee a growing tax burden. The last thing the state needs is a legislature working full time to spend even more taxpayer money.

By the way, I’m not under the illusion that “money in politics” is a solution. I’m simply saying that new rules about campaign finance and ethics won’t have any impact on sleaze and corruption.

Which is my message in this video from the Center for Freedom and Prosperity.

Allow me to make one final point on this issue. I think the proponents of further regulation and control in some cases have good intentions, but they are being extremely naive. Why would anybody think that politicians would approve rules unless the net effect was to increase the powers of incumbency?

Since I shared my video on the topic, I’ll close by strongly recommending that you watch this George Will video.

P.S. I warned last month that governments were engaged in a war on cash. Well, the Germans are planning a Blitzkrieg.

The German government is considering introducing a limit of 5,000 euros ($5,450) on cash transactions in an effort to combat money laundering and financing of terrorism. Deputy finance minister Michael Meister said Wednesday that…there’s “…we also have the problem of how to clear up money-laundering offenses properly” when large transactions are conducted anonymously. …Opposition Green Party lawmaker Konstantin von Notz tweeted that trying to limit cash payments “is a new fundamental attack on data protection and privacy.”

Since criminals will be modestly inconvenienced – at best – by such an initiative, it’s important to understand the real goal is easier tax collection. Indeed, I suspect Herr von Notz will change his tune once he realizes that the German government will get more money to waste if cash is restricted.

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Because I don’t like their plans for a value-added tax, some people seem to think that I am politically opposed to Rand Paul and Ted Cruz.

That’s not true. Both Senators are generally strong proponents of free markets and limited government, so the fact that they have one bad policy position shouldn’t a disqualifying characteristic.

But since I’m a policy wonk (and because I work at a non-profit think tank), it’s not my role to tell people how to vote anyhow. Instead, my niche in life is to analyze policy proposals. And if that means I say something nice about a politician who is normally bad, or something critical of a politician who is normally good, so be it.

In other words, nothing I write is because I want readers to vote for or vote against particular candidates. I write to educate and inform.

With all those caveats out of the way, let’s look at the federal government’s odious handouts for the ethanol industry, a very important issue where Rand Paul and Ted Cruz unambiguously are on the side of the angels.

My colleague Doug Bandow summarizes the issue nicely in a column for Newsweek.

Senator Ted Cruz has broken ranks to criticize farmers’ welfare. …Senator Rand Paul also rejects the conventional wisdom…the Renewable Fuel Standard, which requires blending ethanol with gasoline, operates as a huge industry subsidy. Robert Bryce of the Manhattan Institute figured the requirement cost drivers more than $10 billion since 2007. …Ethanol has only about two-thirds of the energy content of gasoline. Given the energy necessary to produce ethanol—fuel tractors, make fertilizer and distill alcohol, for instance—ethanol actually may consume more in fossil fuels than the energy it yields. The ethanol lobby claims using this inferior fuel nevertheless promotes “energy independence.” However, …the price of this energy “insurance” is wildly excessive. …”By creating an artificial energy demand for corn—40 percent of the existing supply goes for ethanol—Uncle Sam also is raising food prices. This obviously makes it harder for poor people to feed themselves, and raises costs for those seeking to help them.” Nor does ethanol welfare yield an environmental benefit, as claimed. In fact, ethanol is bad for the planet. …Ethanol is a bad deal by any standard. Whomever Iowans support for president, King Ethanol deserves a bout of regicide.

Here’s some of the Wall Street Journal’s editorial on the topic.

Mr. Cruz does deserve support in Iowa for…his…lonely opposition to the renewable fuel standard that mandates ethanol use and enriches producers in the Hawkeye State. The Senator refused to bow before King Ethanol last year, and he’s mostly held fast even though Iowa is where anti-subsidy Republicans typically go to repent. …the Texan is right that ethanol is one of America’s worst corporate-welfare cases. The mandate flows in higher profits to a handful of ethanol producers and keeps the price of corn artificially high, all other demand being equal. This raises the price of food. Al Gore and the greens once supported ethanol but gave up on it when studies showed it did nothing for the environment because of the energy expended in its production. So for those of you keeping track of this outsider feud on your establishment scorecards, mark ethanol as one for Mr. Cruz. In this case he’s standing on principle.

Not only does it raise the price of food, Washington’s mandate for ethanol use (the “renewable fuels standard”) means higher prices for motorists.

Here are the key findings on the topic from the Congressional Budget Office.

While Senators Cruz and Paul are fighting on the right side, Donald Trump is cravenly bowing to the special interests that want continued ethanol handouts. Jillian Kay Melchior explains for National Review.

One of the most destructive environmental subsidies in the United States has found an enthusiastic supporter in Donald Trump. “The EPA should ensure that biofuel . . . blend levels match the statutory level set by Congress,” he said yesterday in Iowa, adding that he was “there with you 100 percent” on continuing federal support for ethanol. …federal support for ethanol is a bum deal for Americans. Under the 2007 Independence and Security Act, Congress mandated that the United States use 36 billion gallons of biofuels, including corn ethanol and cellulosic biofuel, by 2022. And the federal government not only requires the use of ethanol; it also subsides it. Tax credits between 1978 and 2012 cost the Treasury as much as $40 billion. Moreover, numerous other federal programs, spanning multiple agencies, allot billions of dollars to ethanol in the form of grants, loan guarantees, tax credits, and other subsidies. …Ethanol-intensive fuel blends can wreak havoc on car, lawnmower, and boat engines. In fact, many vehicle manufacturers will no longer offer warranties when ethanol comprises 10 percent or more of fuel; engine erosion simply becomes too common. …perhaps it’s not surprising that Trump likes federal support of ethanol. After all, the real-estate mogul’s business model has historically hinged on using tax abatements and other subsidies to make his building projects profitable. …Trump’s support for ethanol belies his populist Main Street rhetoric. In reality, he’s just another rich, East Coast politician who would prop up special interests at the expense of the taxpayer.

The bottom line is that ethanol handouts are one of the most notoriously corrupt subsidies that are dispensed by Washington.

They also violate my Bleeding-Heart Rule by imposing costs on lower- and middle-income people to reward politically connected fat cats with deep pockets.

Policy makers who oppose ethanol deserve praise, especially when they are willing to say and do the right thing in a state (like Iowa) that has a lot of recipients of this execrable form of corporate welfare.

P.S. I will get really excited if a candidate goes to Iowa and explains that we should get rid of the entire Department of Agriculture.

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Two years ago, I wrote that Washington’s parasite class was having a very merry Christmas.

But I wasn’t mocking welfare recipients, many of whom actually deserve sympathy for getting trapped in the web of government dependency.

Instead, I was referring to the unearned wealth being accumulated by Washington’s gilded class of bureaucrats, cronyists, lobbyists, contractors, politicians, and other insiders.

To cite a truly horrifying statistic, the redistribution of money from America to Washington has made it the nation’s richest metropolitan region.

And it’s getting worse.

Let’s look at what Tim Carney just wrote in the Washington Examiner about Christmas on K Street.

It’s that magical season when Republicans and Democrats come together to look after the needs of corporate America, K Street lobbyists, and the U.S. Chamber of Commerce. …The highway measure is a huge win for industry while a loss for good governance. Far worse, however, is the…provision reviving the defunct Export-Import Bank, a corporate-welfare agency…K Street lobbied incessantly to revive Ex-Im, backed by President Obama, Hillary Clinton and nearly every Democratic lawmaker. …As a corporate cherry on top, the bill repeals a recent minor cut in federal crop insurance subsidies, a program that benefits financial firms… Congressional leaders are currently negotiating another year-end legislative package, the notorious annual tax extenders bill. …the bill will extend (at least for a short-time) green-energy subsidies: The Production Tax Credit for wind and the Investment Tax Credit for solar. …Almost all of them are crucial for some special interest and the revolving-door lobbyists they employ.

Tim points out that the feeding frenzy is bipartisan, which some people think is a measure of good policy.

Like me, though, Tim isn’t impressed when the Evil Party and the Stupid Party both conspire to produce bad policy.

As this legislation — the highway bill, the energy bill, the tax extenders, plus the omnibus spending bill—pass through both houses, expect hosannas to the “bipartisanship” and “compromise” involved. …there’s one common theme here: Corporate lobbyists win in almost every case.

But catering to the interests of K Street lobbyists is probably not a good strategy for Republicans.

Republican leaders are probably confused about why all their accomplishments and imminent accomplishments, including the highway bill, tax extenders and appropriations, haven’t dragged Congress’s approval out of the gutter—after all, everyone they talk to thinks Congress is doing a bang-up job.

Now let’s look at what Kevin Williamson recently wrote for National Review. His article is primarily about corruption in Chicago, but his observations apply just as well to how Washington operates.

Bill and Hillary Clinton, Barack Obama, Rahm Emanuel, Al Gore, and the rest of that sorry lot aren’t trying to get rich — they’re already rich, some of them wildly rich. They are building a patronage society. And building a patronage society costs a lot of money… The horrifying fact is that Barack Obama can make you a rich man — if you’re the right kind of man. If you operate a politically connected business, the government can direct the better part of $1 billion straight into your coffers… At the other end of the spectrum, a federal tormenter can be the end of your enterprise: Ask those Tea Party groups illegally targeted by Barack Obama’s IRS. Ask a voting-reform advocate who was targeted by the ATF in spite of not being in any business related to A, T, or F.

But it’s not just a case of undeserved goodies getting steered to political cronies.

Yes, that’s a problem, but the economic concern is that this type of economic model misallocates resources and leads to stagnation.

The Clintons’ game isn’t enjoying the $100 million in their checking account — it’s making use of the $44 trillion in American-owned assets as if they owned them themselves. Barack Obama doesn’t want a garage full of Rolls Royces — he wants a world in which Rolls Royce has to ask his permission before building a car or selling one.

In effect, a nation slowly but surely becomes Greece as more and more people either rely on benefits or have jobs in the bloated bureaucracies that dispense goodies.

…you cannot build a patronage society on patrons alone: You need clients. And that’s where the ever-growing public sector comes in. …There is effectively no one working at your local DMV, public school, police station, or IRS office who could earn even 80 percent of his government compensation in a private-sector job. …the really nefarious dependency agenda isn’t focused on the people who cash welfare checks, but on the people who write them, the vast bureaucracies of overpaid functionaries… Get enough of those and you have effective control over the entire economy — Chávez-style socialism without the nasty business of formal expropriation.

By the way, it’s not just libertarian types who worry about bloated government and cronyism.

Here’s an excerpt from a recent column by Robert Samuelson that succinctly captures an inherent problem with government. Writing about the reasons for diminishing productivity growth, he cites the work of Mancur Olson.

Olson revolutionized thinking about the political power of interest groups. …conventional wisdom held that large groups were more powerful than small groups in pursuing their self-interest — say, a government subsidy, tax preference or a protective tariff. …Just the opposite, Olson said in his 1965 book “The Logic of Collective Action.” With so many people in the large group, the benefits of collective action were often spread so thinly that no individual had much of an incentive to become politically active. The tendency was to “let George do it,” but George had no incentive either. By contrast, the members of smaller groups often could see the benefits of their collective action directly. They were motivated to organize and to pursue their self-interest aggressively.

Samuelson continues, elaborating on Olson’s insight about concentrated benefits and dispersed costs.

Here’s an example: A company and its workers lobby for import protection, which saves jobs and raises prices and profits. But consumers — who pay the higher prices — don’t create a counter-lobby, because it’s too much trouble and the higher prices are diluted among many individual consumers. Gains are concentrated, losses dispersed. This was Olson’s great insight, and it had broad implications, he said. In a 1982 book, “The Rise and Decline of Nations,” he argued that the proliferation of special-interest concessions could reduce a society’s economic growth. “An increase in the payoffs from lobbying . . . as compared with the payoffs from production, means more resources are devoted to politics and cartel activity and fewer resources are devoted to production,” he wrote.

The last part of the excerpt is crucial.

When we get to the point when businesses are focused on harvesting favors from Washington (such as bailouts, export subsidies, special tax preferences, etc), that is a very depressing indication of a cronyist economy rather than a capitalist economy. Of being Argentina rather than Hong Kong.

If you’re not already sufficiently depressed, my colleague Chris Edwards has a very good description of the lawmaking process. You should read the whole thing, but here are a few excerpts as a teaser.

In a romantic view of democracy, legislators act with the interests of the general public in mind. They grapple with policy issues, work toward a broad consensus, and pass legislation that has strong support. To ensure that funds are spent wisely, they frequently reevaluate existing programs and prune the low-value and harmful ones. They put citizens first and carefully limit their actions to those allowable under the U.S. Constitution. The problem with this “public interest theory of government” is that it has little real-world explanatory power. …we can better understand congressional actions by looking at incentives.

And when you look at how the process really works, you learn it is dominated by “rent seeking,” which is academic jargon for interest groups obtaining undeserved benefits via government coercion.

Members…seek federal benefits for their states because most of the costs will fall on other states. This is a major factor causing federal failure. The structure of Congress leads members to support programs that benefit their states but that are losers for the nation as a whole. …There is no built-in check—no invisible hand, as in markets—to guide members to make value-added decisions… Special-interest groups dominate policy discussions. Most witnesses to congressional hearings favor the programs being examined, and they focus on program benefits, not the costs. Most visitors to member offices on Capitol Hill are there to plead for special benefits. …Washington is teaming with lobbyists seeking special benefits—subsidies, regulations, trade protections—that come at the expense of the general public. …rent seeking is a two-way street. Jonathan Rauch of Brookings noted, “In the public’s mind, the standard model of lobbying in Washington involves special interests buying influence, in a sort of legalized bribery. In fact, the process more often involves politicians shaking down special interests.”

If you’ve read this far, you probably want to go take a shower and wash away the stench of Washington corruption.

But there’s one tiny glimmer of hope. If we can somehow figure out how to shrink the size and scope of government, we can reduce the problem. That’s the message of this video.

While we know the solution, our real challenge is that we can only shrink government by convincing politicians to change policy. Yet asking politicians to reduce government is like asking burglars to be in favor of armed homeowners.

And based on everything I wrote above, we know politicians generally have bad incentives.

But it’s not hopeless. While I certainly enjoy mocking politicians, they’re not totally immoral or even amoral people. Many of them do understand there’s a problem. Indeed, I would argue that recent votes for entitlement reform are an example of genuine patriotism – i.e., doing the right thing for the country.

So is there a potential solution?

Maybe. Let’s use an analogy from Greek mythology. Many politicians generally can’t resist the siren song of a go-along-to-get-along approach. But like Ulysses facing temptation from sirens, they recognize that this is a recipe for a bad outcome. So they realize that some sort of self-imposed constraint is desirable. And that’s why I’m somewhat hopeful that we can get them to impose binding spending caps.

We know there are successful reforms by looking at the evidence. And we know there is growing support from fiscal experts. And we even see that normally left-leaning international bureaucracies such as the OECD and IMF acknowledge that spending caps are the only effective fiscal rule.

So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap.

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Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the net result is a Byzantine tax code that imposes very harsh compliance costs on the productive sector.

According to a 2012 study from the Internal Revenue Service (IRS) and the Treasury Department, …corporations alone spent $104 billion complying with the tax code in 2012. …The cost to individuals may be even higher. According to a 2013 study by Jason Fichtner and Jacob Feldman of the Mercatus Center, Americans face nearly $1 trillion annually in hidden tax-compliance costs. …Why does tax compliance cost so much? The answer is largely that the Internal Revenue Code…is riddled with exclusions, exemptions, deductions, preferential rates, and credits.

And she also points to a solution.

Genuine reform would cut out loopholes that tilt the playing field in favor of those with political connections. It would also aim to provide lower tax rates, fewer tax brackets, and less double taxation of income that is saved and invested. Such measures would be good for growth, but they would also mean taking on the interest groups that benefit from swapping tax preferences for campaign cash.

Since I want to rip up the tax code and replace it with a simple and fair flat tax, this is music to my ears.

Of course, achieving genuine tax reform won’t be easy.

There’s the obvious political obstacle since all the groups that benefit from the current system (politicians, lobbyists, bureaucrats, cronyists, interest groups, and other insiders) will fiercely resist reform.

There’s also a policy obstacle because many people oppose loopholes in theory but they haven’t paid sufficient attention to the nuts-and-bolts details.

With that in mind, let’s set out a set of guiding principles for the elimination of tax loopholes and the creation of a neutral tax system.

1. A loophole exists when income isn’t taxed – In libertarian Nirvana, the central government is so small that there’s no need for an income tax. Until we get to that point, though, we’re stuck with the internal revenue code and the goal should be to collect revenue (hopefully a modest amount) in a way that minimizes the economic damage per dollar collected. And that means a tax code that doesn’t have loopholes, which are best defined as provisions that enable people to avoid any tax based on how they earn income or how they spend income. In a neutral system, all income is taxed one time.

2. The economy performs better without a loophole-riddled tax code – Most people understand that high tax rates are bad for growth because they penalize people for earning income. They also generally understand that double taxation of saving and investment is bad for growth because it creates a bias against capital formation. But there’s not nearly enough appreciation of the fact that loopholes in the code are bad for growth since they are a back-door form of industrial policy that exist for the purpose of incentivizing people to make decisions on the basis of tax rather than on the basis of what makes economic sense. A neutral tax system means less economic damage.

3. It’s not a loophole to protect income from double taxation or to require income to be measured correctly – The bad news is that the current system forces taxpayers to overstate their income and it also imposes multiple layers of tax on income that is saved and invested. The good news is that there are provisions in the tax code – such as IRAs, 401(k)s, deferral, bonus depreciation – that seek to mitigate these biases. These parts of the system oftentimes are needlessly complex and they frequently will alleviate penalties in a discriminatory manner, but they are not loopholes. In a neutral system, all income is taxed only one time.

4. Loopholes should be eliminated as part of a plan to lower tax rates, not in order to give politicians more money – If loopholes are a corrupt and distorting dark cloud, the silver lining to that cloud is that all the special favors in the tax code deprive the government of tax revenue. Even the most egregious of loopholes, such as ethanol, have this redeeming feature. This is why loopholes should only be eliminated as part of an overall tax reform plan that also lowers tax rates and reduces double taxation. A neutral tax system shouldn’t enable bigger government.

There are some important implications that follow from these four guiding principles.

As a practical matter, we can now identify provisions in the tax code that are clearly loopholes, such as the healthcare exclusion, the municipal bond exemption, and the state and local tax deduction (the mortgage interest deduction is misguided, but isn’t technically a loophole since one of the goals of tax reform is to give business investment the same tax-income-only-one-time treatment now reserved for residential real estate).

We also know that the capital gains tax rate isn’t a “preferential” loophole, but instead is the mitigation of a penalty that shouldn’t exist. Similarly, it’s not a loophole when companies deduct expenses when calculating income. And you’re not getting some sort of handout simply because Uncle Sam isn’t imposing double taxation on your retirement account. At the risk of repeating myself, all income should be taxed in a neutral system, but only one time.

Let’s close by looking at a few secondary – but still important – implications of a neutral tax code.

First, getting rid of loopholes won’t put a burden on poor and middle-income taxpayers for the simple reason that an overwhelming share of the benefits of these provisions go to high-income taxpayers.

I’ve already shown how the vast majority of charitable deductions are taken by those making more than $200,000 per year.

The same is true for the state and local tax deduction and the healthcare exclusion.

And the Washington Post just editorialized that the home mortgage interest deduction is a boon for rich taxpayers as well.

The mortgage interest deduction is also a significant cause of after-tax income inequality: The top 20 percent of earners get 75 percent of the benefits; the top 1 percent get 15 percent, according to the Congressional Budget Office. …Specifically, 10 metropolitan “hot spot” counties (among them Los Angeles in California and Fairfax in Virginia) with the greatest number of mortgages larger than $500,000 accounted for 45.1 percent of all such mortgages nationally. Just eight California urban and suburban counties accounted for 40 percent of the national total. Outside of such tony coastal precincts, the only big-mortgage hot spots were resort destinations such as Martha’s Vineyard, Mass., and Vail, Colo. — where many homes are vacation places, not primary residences.

To be sure, the Post is misguided in that it wants to restrict tax preferences in order to finance a larger burden of government spending.

So I’m not expecting the editors to join a coalition for pro-growth tax reform.

The second implication is that a neutral tax system means less corruption.

To cite one example, consider the oleaginous way that politicians deal with so-called tax extenders. Marc Short and Andy Koenig explain in a column they wrote for the New York Times.

Congress will soon take up the so-called tax extenders package, which has more than 50 tax breaks affecting a variety of industries and issues. …this bill mostly helps the wealthy and the well connected.

The fact that rich insiders benefit is no surprise, but what makes “tax extenders” so odious is that what began in 1988 as a supposedly one-time fix now has become a regular part of the process, a scam that gives lobbyists and politicians a way of generating fees and contributions.

The first tax-extender package…opened a door that lobbyists and lawmakers were all too willing to run through. …A 2014 analysis by Americans for Tax Fairness found that more than one out of every 10 lobbyists in Washington focused specifically on the extenders package. Given that this bill comes up about every year or two, special interests constantly have the opportunity to demand new handouts.

By the way, some of the extenders actually are good policy. They’re in the mitigation-of-penalties category I discussed above.

But those good provisions should be made permanent and the bad provisions should be jettisoned.

Unfortunately, that’s not in the interests of the politicians and lobbyists who benefit from an annual extender package, so the problem doubtlessly will fester.

Last but not least, let’s consider the moral component.

For those of us who believe in justice, it is ethically offensive that some rich and powerful taxpayer get better treatment simply because they know how to manipulate the political process.

This violates the important principle that the law should treat everyone alike. Yet another reason to have a simple and fair flat tax.

P.S. At the risk of being a nit-picker about my own writing, I should confess that a flat tax is not a purely neutral tax system. There will still be a penalty on earning income. But the penalty presumably will be modest if there is a low rate and that penalty won’t be exacerbated by penalties and loopholes that distort how people earn income and spend income.

P.P.S. Here, in one image, is all you really need to know about the economics of taxation.

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Washington is a horribly corrupt city. The tax code is riddled with special favors for politically powerful interest groups. The budget is filled with handouts and subsidies for well-connected insiders. The regulatory apparatus is a playground for cronyism.

I’ve previously explained that shrinking the size and scope of government is the most effective way of curtailing corruption. Simply stated, people won’t try to get favors and politicians won’t have the ability to sell favors if government doesn’t have power to redistribute income and dictate behavior.

To be sure, this isn’t a recipe for zero corruption. There doubtlessly was corruption in the 1700s and 1800s when Washington was just a tiny fraction of its current size. But it’s a matter of scale. A smaller government means less opportunity for mischief.

Some folks argue that campaign finance laws would be an effective way of curtailing sleaze in Washington. And there are some compelling arguments for this approach.

After all, would we have unsavory examples of corruption like the Export-Import Bank if wealthy insiders from big companies weren’t able to generate buckets of campaign cash for politicians?

But let’s be realistic. So long as politicians have the power to provide subsidies for big business, they’ll have an incentive to offer those handouts. And companies will have an incentive to seek those handouts.

Campaign finance laws might cut back on one pathway to buy and sell favors, but the incentive to cut deals will still exist. Sort of like pressing down on one part of a balloon simply causes another part of the balloon to expand.

But, you may ask, isn’t it worth taking such steps in hopes of at least creating some roadblocks to graft in Washington.

Perhaps in theory, but let’s not forget that it’s very naïve to think that politicians will enact laws that reduce their power or weaken their chances of being reelected. That’s about as likely as burglars being in favor of armed homeowners.

As such, we actually should be concerned that new laws and rules somehow would be structured to make things worse rather than better.

That’s the message of this superb video from Prager University. Narrated by George Will, the video explains why so-called campaign finance rules are not the answer (unless, of course, the question is “how can we give more power to the entrenched political class?”).

Let me add something that wasn’t addressed in the video. Incumbent politicians like the idea of limiting campaign contributions because they start each election cycle with a giant advantage. They already are well known in their states or districts. They’ve already curried favor with voters by engaging in taxpayer-financed “constituent service.” They already get themselves in front of cameras at every opportunity when there’s a ribbon cutting for a new bridge or road project. And they’ve already built relationships with the power brokers in each community.

Challengers, for all intents and purposes, need to spend a lot of money – potentially millions of dollars depending on the electorate – simply to create a level playing field. But if there are laws that limit total spending or restrict contribution amounts, it makes it a lot harder to conduct a credible campaign.

No wonder incumbent politicians so often pontificate about “getting money out of politics.” What they’re really saying is “let’s make it impossible for anybody to threaten my reelection.”

The bottom line is that limits on campaign contributions and other restrictions on political speech make elections less fair.

And they don’t solve the bigger issue of graft, corruption, and sleaze. No wonder they’re willing to impose dozens – if not hundreds – of laws governing public malfeasance and campaign finance. They know that such rules are largely ineffective because much of what happens in Washington is legalized forms of corruption.

Which brings us back to the real issue. If you want less sleaze in Washington, reduce the size and scope of the federal government.

Everything else is window dressing.

P.S. The most pervasive form of corruption in Washington (and, sadly, in many other parts of America) is the moral corruption that exists when people think it’s perfectly acceptable to steal from their neighbors so long as 51 percent of the people approve of the theft. That’s why social capital is very important.

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Yesterday, I shared several stories that exposed the festering corruption of Washington.

Today, let’s look at one issue that symbolizes the pervasive waste of Washington.

Medicare is the federal government’s one-size-fits-all health program for the elderly. Because of its poor design, it bears considerable responsibility for two massive problems.

  1. It contributes to the systemic third-party payer problem in American health care.
  2. It exacerbates America’s long-run challenge of excessive entitlement spending.

But there’s another issue. Medicare also has a very serious problem with fraud. As is so often the case with government programs, the offer of free money encourages unethical behavior.

Well, we have some good news and bad news about Medicare fraud.

As reported by the Wall Street Journal, the good news is that there is a small effort to catch fraudsters who bilk taxpayers.

Recovery audit contractors, as they are known, recouped $2.4 billion in improper payments in 2014, down from $3.7 billion in 2013 before the agency scaled back other audit activities and temporarily suspended the program… Those recoveries represent just a fraction of the total amount Medicare estimates it spends on incorrect payments. The Medicare program made $58 billion in improper payments to medical providers and health plans in 2014, according to PaymentAccuracy.gov, a federal website that tracks agencies’ estimates of waste.

But the bad news is this small program is being curtailed.

The federal Medicare agency is sharply cutting back the work of auditors that review hospital claims and seek to recoup improper payments for the government… Starting in January, the auditors will be able to review only 0.5% of the claims the agency pays to each hospital or provider every 45 days, according to an Oct. 28 letter to the contractors. That is a quarter of the prior threshold: 2% of claims. The contractors say the new directive, in what is known as a “technical direction letter,” will further limit their ability to pursue undue payments.

Readers are probably wondering why this effort is being hamstrung instead of expanded.

Well, you won’t be surprised to learn that the folks who benefit from waste want to keep the gravy train rolling.

The latest step is a sign of how the $600-billion-a-year Medicare program can struggle to effectively rein in improper payments, fraud and waste, sometimes under pressure from medical providers… The Medicare agency “is getting a lot of pressure from the provider community to scale back the [audit] program,” said Kristin Walter… Hospital representatives welcomed further restrictions on the auditors.

Sort of like burglars welcoming “further restrictions” on police officers.

Unfortunately, the interest groups benefiting from waste and fraud have allies in government.

The American Thinker has a nauseating story about the fraudulent actions of a hospital in Houston

The president of Riverside, his son, and five others were arrested on October 4 as part of a nationwide Medicare fraud sweep.  Earnest Gibson III, chief executive officer of Riverside General Hospital for 30 years, has been charged with bilking $158 million out of Medicare over the last seven years. …Friday’s arrests at Riverside came nine months after the arrest of Mohammad Khan, the hospital’s acting administrator, who pled guilty to his role in the Medicare fraud scheme…the Centers for Medicare and Medicaid Services suspended payments to Riverside.

You may be wondering why this is a nauseating story when it appears that some bad guys were nailed for screwing taxpayers.

Well, now we get to the disgusting part. A politician in Washington has been fighting to enable that bad behavior.

Sheila Jackson Lee, congresswoman for Houston’s 18th district…wrote CMS Acting Director Marilyn Tavenner requesting she reconsider the agency’s decision. …Jackson Lee…asks taxpayers who have already been bilked out of hundreds of millions of dollars to pour more money into a…hospital run by alleged crooks…while administrators and politicians rake in more dough.

Sadly, the Congresswoman’s political pressure generated results.

…a month after Jackson Lee appealed to CMS…, 70% of the hospital’s Medicare payments were restored.  CMS lifted the suspension even though federal investigators were only two months away from arresting Gibson and the others.  Jackson Lee’s intervention seems to have caused even more taxpayer monies to be directed toward a hospital brimming with corruption. …This is why Washington, D.C. is broken.  Like Jackson Lee, too many politicians think that redistributing other people’s hard-earned money into the pockets of potential felons is okay as long as they get political benefit.

By the way, it’s not just Democrats. The Daily Surge reports that some Republicans are helping providers rip off taxpayers.

…efforts to rid Medicare of waste, fraud and abuse have been stymied by the power of the hospital lobby that refuses to payback excessive payments made by Medicare and are working with friends and allies in government to ensure the improper payments are never returned to the taxpayers. …at least one GOP members, Rep. Sam Graves (R-MO) has actually introduced legislation further limiting the ability of the auditors to sniff out waste. His bill would block audits of Medicare providers unless their estimated error rate exceeded 40% of total billing. More than one third of all Medicare bills would have fraudulent before an audit could be triggered. So much for good government.

Ugh, makes me want to take a shower.

So what’s the bottom line? Unfortunately, fraud is an inherent part of government. When politicians create redistribution programs, amoral and immoral people will figure out ways to maximize their share of the loot.

In the case of Medicare, it means that providers have huge incentives to over-charge, over-diagnose, over-treat, and over-test.

After all, thanks to third-party payer, the patient doesn’t care.

That’s why I’m in favor of programs to combat fraud. And the RAC program doesn’t even cost taxpayers any money since the auditors are compensated by getting a slice of the improper payments that are recovered.

Imagine that, a policy where the incentives are to save money for taxpayers!

However, the only long-run and permanent solution is to shrink the size of government.

And that’s why it’s time to restructure Medicare. We have 50 years of evidence that the current approach doesn’t work.

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