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Posts Tagged ‘Economics’

It’s very risky to trust the promises made by politicians.

But at least there’s a potential downside when they break their word. President George H.W. Bush lost the 1992 election, for instances, after violating his read-my-lips, no-tax-hike promise.

So I think it’s useful to get politicians to explicitly commit to good policies, such as the no-tax-increase pledge.

But what about getting language in a party platform? Is that a vehicle for getting good policy, or at least is it a way of blocking bad policy?

For the most part, I don’t think party platforms bind politicians or constrain their behavior. To be sure, I’m happy when platforms embrace policies that I like, but I’m not foolish enough to think that this automatically will translate into better policy after politicians get elected.

For the most part, platforms are a way for politicians to appease the more philosophically inclined people in their parties. So the Democratic platform is generally farther to the left than Democratic politicians and the GOP platform is generally farther to the right than Republican politicians.

With these caveats taken care of, let’s review the proposals and policies in the Democratic platform (I’ll assess the Republican platform tomorrow). I’ve excerpted the items that are noteworthy and I follow each item with a brief observation.

Let’s get started.

Democrats will expand Social Security…[and] will achieve this goal by taxing some of the income of people above $250,000.

This is like stepping on the accelerator while approaching a cliff. In inflation-adjusted dollars, the program’s unfunded liability is a staggering $37 trillion, yet Hillary and her friends want even more spending. And they want to compound the damage with a huge tax increase on investors, entrepreneurs and small-business owners.

Democrats will also create an independent, national infrastructure bank.

This is a recipe for cronyism that will further expand the federal government’s role into an area that should be reserved for states, local governments, and the private sector.

Democrats will defend the Export-Import Bank.

Bernie Sanders was good on this issue, so this platform language means Hillary Clinton’s support for corporate welfare prevailed.

Democrats will provide direct federal funding for a range of local programs that will put young people to work and create new career opportunities.

Since job-training programs have a long track-record of failure, too bad they didn’t suggest repealing job-killing minimum-wage laws.

Democrats will not hesitate to use and expand existing authorities as well as empower regulators to downsize or break apart financial institutions when necessary to protect the public and safeguard financial stability, including new authorities to go after risky shadow-banking activities.

Other than pointing out that big isn’t necessarily bad, I don’t really have any policy reaction. I’m only sharing this blurb since I imagine you’ll also laugh out loud at the platform’s implicit assertion that Hillary Clinton somehow will crack down on her friends and donors at Goldman-Sachs. Yeah, I’m sure that’s high on her list. Right after putting inner-city schoolkids before the teacher unions.

We will ban golden parachutes for those taking government jobs.

Will that rule apply retroactively to Treasury Secretary Jacob Lew?

Democrats will claw back tax breaks for companies that ship jobs overseas, eliminate tax breaks for big oil and gas companies, and crack down on inversions and other methods companies use to dodge their tax responsibilities.

There are no “tax breaks” for companies that invert.

We will end deferrals so that American corporations pay United States taxes immediately on foreign profits and can no longer escape paying their fair share of U.S. taxes by stashing profits abroad.

The “fair share” should be zero for income that is earned (and therefore already subject to tax) in other nations.

We will ensure those at the top contribute to our country’s future by establishing a multimillionaire surtax to ensure millionaires and billionaires pay their fair share.

Even the IRS admits the tax system is very biased against the so-called rich.

…we will shut down the “private tax system” for those at the top, immediately close egregious loopholes like those enjoyed by hedge fund managers, restore fair taxation on multimillion dollar estates, and ensure millionaires can no longer pay a lower rate than their secretaries.

Wow, endorsing higher capital gains taxes, higher death taxes, and dishonest math in one sentence fragment.

We will work to crack down on tax evasion.

Unfortunately, they want higher compliance by expanding the power of the IRS, not by lowering tax rates.

…we will make sure that law-abiding Americans living abroad are not unfairly penalized by finding the right solutions for them to the requirements under the Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR).

This language is vacuous, but it’s nonetheless noteworthy that even the Democrats feel compelled to say bad things about one of Obama’s worst laws.

Democrats believe it is long past time to close this racial wealth gap. Disparities in wealth cannot be solved by the free market alone, but instead, the federal government must play a role in eliminating systemic barriers to wealth accumulation for different racial groups and improving opportunities for people from all racial and ethnic backgrounds to build wealth.

More vacuous language, though it’s disappointing that the platform doesn’t endorse personal retirement accounts, which would fix one of the ways minorities are hurt by government policy.

We believe that the states should be laboratories of democracy on the issue of marijuana, and those states that want to decriminalize it or provide access to medical marijuana should be able to do so.

Easily the most pro-liberty part of the Democratic platform.

Democrats will develop a national strategy, coordinated across all levels of government, to combat poverty. We will direct more federal resources to lifting up communities that have been left out and left behind.

Anyone think this will work any better than all the other failed anti-poverty schemes from Washington? I didn’t think so.

Democrats will protect proven programs like the Supplemental Nutrition Assistance Program (SNAP)—our nation’s most important anti-hunger program—that help struggling families put food on the table.

The only thing “proven” about the food stamp program is that it’s riddled with fraud and it creates dependency.

We will dramatically increase federal infrastructure funding for our cities.

It’s not the role of the federal government to pave roads and and build bridges and corrupt big-city political machines shouldn’t be offloading their responsibilities onto taxpayers in the rest of the country.

We will continue to support public funding for the National Endowment for the Arts, for the National Endowment for the Humanities, and for programs providing art and music education in primary and secondary schools.

If I want to listen to cowboy poetry, I should pay for it myself.

We believe America must be running entirely on clean energy by mid-century. We will take bold steps to slash carbon pollution.

Mostly vacuous rhetoric, but it could lead to “bold steps” to undermine prosperity.

Democrats believe that carbon dioxide, methane, and other greenhouse gases should be priced to reflect their negative externalities, and to accelerate the transition to a clean energy economy and help meet our climate goals.

You don’t have to read between the lines to recognize that “should be priced” is DC-speak for a big energy tax.

All corporations owe it to their shareholders to fully analyze and disclose the risks they face, including climate risk. Those who fail to do so should be held accountable. Democrats also respectfully request the Department of Justice to investigate allegations of corporate fraud on the part of fossil fuel companies accused of misleading shareholders and the public on the scientific reality of climate change.

This is probably the most reprehensible part of the Democratic platform. America is not a banana republic and people shouldn’t be attacked with “lawfare” for disagreeing with the political establishment.

Democrats are unified in their strong belief that every student should be able to go to college debt-free, and working families should not have to pay any tuition to go to public colleges and universities.

A plan that unambiguously will increase the cost of college.

Democrats believe that health care is a right, not a privilege, and our health care system should put people before profits. …Americans should be able to access public coverage through a public option, and those over 55 should be able to opt in to Medicare.

For those who think the Obamacare boondoggle didn’t go far enough.

Democrats will fight any attempts by Republicans in Congress to privatize, voucherize, or “phase out” Medicare as we know it. And we will oppose Republican plans to slash funding and block grant Medicaid and SNAP.

Let’s bury our heads in the sand and pretend there’s no entitlement crisis.

Democrats believe that global institutions—most prominently the United Nations—and multilateral organizations have a powerful role to play

A powerful role is not the same as a productive role or positive role. Though the United Nations is mostly feckless. The real damage is caused by the International Monetary Fund and the Organization for Economic Cooperation and Development.

I could analyze additional planks, but there’s a limit to have much statist claptrap I can endure.

If I had to give a grade to the Democratic platform, it would be “L” for leftist. Just like the Party’s nominee.

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I’m in Shenyang, China, as part of the faculty for Northeastern University’s International Economics and Management program.

My primary role is to talk about the economics of fiscal policy, explaining the impact of both taxes and spending.

But regular readers already know my views on those issues, so let’s look instead at the vaunted Chinese Miracle.

And I don’t use “vaunted” in a sarcastic sense. Ever since China began to liberalize its economy in the late 1970s, economic growth has been very impressive. I don’t necessarily believe the statistics coming from the Chinese government, but it’s unquestionably true that there’s been spectacular progress.

The great mystery, though, is whether China will continue to enjoy rapid growth. In other words, will it actually converge with the United States (right now per-capita economic output in America is more than five times higher than it is in China)? Or will China, like many other developing/transition economies, hit a ceiling and then begin to stagnate.

I don’t pretend to know the future, but I can say with great confidence that the answer depends on the actions of the Chinese government.

The good news is that economic freedom jumped dramatically starting in 1980 according to Economic Freedom of the World. Thanks to good reforms, China’s score rose by more than 50 percent, climbing from 4.0 in 1980 to more than 6.0 in just a bit over two decades.

That’s a huge improvement, and it largely explains why prosperity has expanded and there’s been a record reduction in the grinding poverty and material deprivation that characterized the country.

But the bad news is that there hasn’t been much reform in the past 15 years. China’s economic freedom score has oscillated between 6.0 and 6.4 during that period.

Indeed, there have been financial bailouts and Keynesian-style “stimulus” schemes, so it’s possible that China is now going in the wrong direction.

Before digging into the details, let’s consider the economics of growth. I’ve written before that labor and capital are the two factors of production and that economic growth is a function of more labor, more capital, or learning to use existing labor and/or capital more productively.

One way to visualize this is with a production possibility curve. This is a tool in economics that often is used to illustrate tradeoffs and opportunity costs. If Robinson Crusoe is on a deserted island, what the best way for him to allocate his time to maximize the amount of fish he can catch and the number of coconuts he can collect? Or, for an entire society, what’s the “guns-vs-butter” tradeoff?

Here’s a chart I found online that illustrates the role of capital and labor and producing output. It’s a three-dimensional chart, which is helpful since it not only shows that there’s no output in the absence of capital and labor, but it also shows that an economy with just labor or just capital also won’t have much if any output. You produce a lot, by contrast, with labor and capital are mixed together.

But that’s just the beginning.

The above chart shows the amount of output that theoretically can be produced with given amounts of labor and capital. But what if there’s bad policy in a nation? Consider the difference, for example, between China’s plateaued economic freedom score and decent economic performance compared to Hong Kong’s great economic freedom score and great economic performance.

With that in mind, contemplate this two-dimensional image. With bad policy, either the economy only produces A when it can produce B (i.e., by using existing labor and capital more productively) or it produces B when it can produce C (i.e., by expanding the amount of labor and capital).

I suspect that China’s problem is mostly that bad policy interferes with the efficient allocation of labor and capital. In other words, there’s already a lot of labor and capital being deployed, but a significant amount is misallocated because of cronyism and other forms of intervention.

Now let’s move from theory to empirical details.

Here’s a close look at China’s reforms from Professor Li Yang, Vice President of the Chinese Academy of Social Sciences.

Over the past 35 years, China has achieved extraordinary economic performance thanks to the market-oriented reforms and opening-up….The GDP per capita also reached to $6075 in 2012, up from $205 in 1980… China’s economy experiences impressive changes in favor of marketization. In fact, as far back as 1996, 81% of the production materials, and 93% of retail sales, had already been traded according to the market pricing mechanism.

And here’s a chart showing the gradual expansion of market forces in China, presumably based on whether prices are determined by markets or by central planning.

We also have two charts showing the decline in genuine socialism (i.e., government ownership of the means of production).

The first chart shows that state-owned companies are becoming an ever-smaller share of the economy.

Even more impressive, there’s been a huge decline in the share of the population employed by state-owned firms.

This is good news, and it helps to explain why China is much richer today than it was 30 years ago.

But the great unknown is whether China will experience similar strong growth for the next 30 years.

Here’s more of Professor Yang’s optimistic analysis.

Another indispensable factor explaining China’s growth miracle is constant opening-up, which is equally guided by the principle of gradualism. Regarding the space structure, the markets successively opened up from the special economic zones, economic and technological development zones, coastal economic development zones, riparian regions, inland regions, and finally the whole China; regarding the industrial structure, from the advantaged manufacturing industry, to the less advantaged agriculture and service industries. In 2001, China’s entry into the WTO can be regarded as a milestone: China’s opening up transformed from selective policy measures to widespread and deep institutional arrangements.

The liberalization of trade is particularly impressive, as shown by the following chart from the study.

Makes me wonder what Donald Trump would adjust his protectionist China-bashing if he saw (and understood) this chart.

Anyhow, here are some passages from Professor Yang’s conclusion.

…market-oriented reforms constitute the most crucial factor to support China’s growth in the future. The key here is to properly deal with the relationship between government and markets. The latter will be expected to play the fundamental role in the allocation of economic resources. …China should make more effort to improve the efficiency of investment. …the government needs to reduce its intervention in the micro-level economic activities, promote deregulation and administrative decentralization, break up monopolies, and improve the efficiency of functioning.

I agree, particularly the part about boosting the efficiency of investment.

And that can only happen if China ends cronyism by letting capital be allocated by market forces rather than political connections.

Let’s close with two items.

First, one of the other faculty with me at the University in Shenyang is Ken Schoolland. In his presentation, he noted that there’s some real federalism in China. Provinces have considerable flexibility to engage in reform.

And it shouldn’t come as any surprise that the rapid growth in China has been concentrated in the areas that have moved the fastest and farthest in the direction of free markets.

Second, some experienced observers are a bit pessimistic about future Chinese economic developments. Derek Scissors of the American Enterprise Institute explains what needs to happen to boost future prosperity.

…the economy is in the process of stagnating. The only solution is a return to market-driven, politically difficult reform. Such reform must be focused primarily on rolling back the state sector. …Expanded individual or household land ownership in rural areas would be…helpful. …More individual land rights shrink the rural state. The critical step in revitalizing the economy is to shrink the urban state, and by a considerable amount. Such changes will of course be phased in over time but the sooner they start, the sooner economic performance improves. Shrinking the urban state sector would (i) finally address excess capacity; (ii) enable capital to be much more efficiently allocated; (iii) thereby slow or halt unproductive debt accumulation; and (iv)encourage innovation by enabling more competition. …In terms of capital allocation, formal interest rate liberalization was said to be a vital step. But it cannot be while the state controls most financial assets – the incentives for collusion among sister state financials are overwhelming.

Here’s Derek’s bottom line.

Want to know when China is going to thrive again – just check if the state sector is actually shrinking.

Amen.

What he’s basically describing are the policies that would dramatically improve China’s score from Economic Freedom of the World. And if China can ever climb as high as Hong Kong, then the sky’s the limit for growth and prosperity.

P.S. There are some signs that China’s leadership recognizes that a Reagan-style agenda is needed.

P.P.S. On the other hand, if China’s government takes the IMF’s advice, then prepare for economic decline and stagnation.

P.P.P.S. The most amusing economic news in recent years was when a senior Chinese official basically explained that the welfare state in Europe makes people lazy.

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Over the years, I’ve repeatedly tied to explain why socialism is a terrible system while also explaining that we should be careful not to label people as socialists if it’s more accurate to refer to them as statists, redistributionists, cronyists, or fascists.

To help illuminate this issue, here’s a four-quadrant matrix. Free markets are on the left and state planning is on the right. And small government is on the top with redistribution is on the bottom.

So it’s a very good idea to be in the top-left quadrant, hopefully close to the corner, sort of like Hong Kong and Singapore. And it’s a big mistake to be in the bottom-right quadrant, sort of like Cuba, North Korea, and Venezuela.

Notice, by the way, that Denmark and Sweden are more free market than the United States (i.e., further to the left), but with much more redistribution (i.e., closer to the bottom). Which is exactly what you see when you look at the underlying data from Economic Freedom of the World.

Let’s augment our four quadrants by adding a couple of historical examples, which are colored red.

In the top left quadrant, we have the United States in the late 1800s, which is when we had a public sector that was significantly smaller than what Hong Kong has today. Heck, nations such as France and Sweden also had very small governments in the 1800s, which is when the western world became rich.

I also added the National Socialists from 1930s Germany. Their fascist economic system retained the veneer of private ownership, but state planning was the dominant economic model.

Moreover, it would be very illuminating to have a three-dimensional matrix in order to capture the difference between cronyism/interventionism and socialism/state planning.

Both involve government officials exercising power over the allocation of resources, of course, but cronyism/interventionism tends to be ad hoc and morally corrupt while socialism/state planning tends to be systemic and intellectually corrupt.

Though if a government engages in enough cronyism/interventionism (think Venezuela), the net result looks a lot like socialism/state planning (think North Korea).

Or maybe we should have a four-dimensional matrix so we also can distinguish between systems with nominal private property (such as fascism) and ones where the government owns the “factors of production” (such as socialism and communism).

The unfortunate reality is that there are several strains of statism, all of which are bad.

By the way, one of Hillary Clinton’s advisors, Gene Sperling, was recently asked about the difference between a socialist and a Democrat and was accused of dodging the question just like Hillary (and, I would add, Debbie Wasserman-Schultz).

“I’m not here to do general definitions,” replied Gene Sperling, a Hillary Clinton economic adviser, when asked by MSNBC: ‘What is the difference between a socialist and a Democrat?’ MSNBC’s Chris Matthews stumped Hillary Clinton with the same question several months ago.

Though, if you watch the interview, I think Gene actually gets close to the truth. He said Hillary was a “progressive” (which presumably means lots of redistribution), but nonetheless supports the market economy (as opposed to state planning).

To be sure, there are many examples of Hillary wanting to engage in interventionism, so Sperling may be right about socialism but wrong about Mrs. Clinton.

Let’s close with a video on socialism from Dennis Prager, though it applies equally to redistributionism (or any system where people can use the coercive power of government to obtain unearned goodies).

One of the most insightful parts of the video was when Dennis pointed out that excessive government weakens character. Which is just another way of pointing out that statism erodes social capital.

And I fear he’s right that regaining and restoring character is not that easy. Once people have decided that it’s morally acceptable to use the power of government to take what other people have produced, restoring an ethical society is probably like putting toothpaste back in a tube.

Which explains why I am so miserably pessimistic about the future of places such as Greece.

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If you asked a bunch of Republican politicians for their favorite fiscal policy goals, a balanced budget amendment almost certainly would be high on their list.

This is very unfortunate. Not because a balanced budget amendment is bad, per se, but mostly because it is irrelevant. There’s very little evidence that it produces good policy.

Before branding me as an apologist for big government or some sort of fiscal heretic, consider the fact that balanced budget requirements haven’t prevented states like California, Illinois, Connecticut, and New York from adopting bad policy.

Or look at France, Italy, Greece, and other EU nations that are fiscal basket cases even though there are “Maastricht rules” that basically are akin to balanced budget requirements (though the target is a deficit of 3 percent of economic output rather than zero percent of GDP).

Indeed, it’s possible that balanced budget rules contribute to bad policy since politicians can argue that they are obligated to raise taxes.

Consider what’s happening right now in Spain, as reported by Bloomberg.

Spain’s acting government targeted an extra 6 billion euros ($6.7 billion) a year from corporate tax as it tried to persuade the European Commission not to levy its first-ever fine for persistent budget breaches. …Spain is negotiating with the European Commission over a new timetable for deficit reduction, as well as trying to sidestep sanctions after missing its target for a fourth straight year. Spain is proposing to bring its budget shortfall below the European Union’s 3 percent limit in 2017 instead of this year, Guindos said.

Wow, think about what this means. Spain’s economy is very weak, yet the foolish politicians are going to impose a big tax hike on business because of anti-deficit rules.

This is why it’s far better to have spending caps so that government grows slower than the private sector. A rule that limits the annual growth of government spending is both understandable and enforceable. And such a rule directly deals with the preeminent fiscal policy problem of excessive government.

Which is why we’ve seen very good results in jurisdictions such as Switzerland and Hong Kong that have such policies.

The evidence is so strong for spending caps that even left-leaning international bureaucracies have admitted their efficacy.

I’ve already highlighted how the International Monetary Fund (twice!), the European Central Bank, and the Organization for Economic Cooperation and Development have acknowledged that spending caps are the most, if not only, effective fiscal rule.

Here are some highlights from another study by the Organization for Economic Cooperation and Development.

…the adoption of a budget balance rule complemented by an expenditure rule could suit most countries well. As shown in Table 7, the combination of the two rules responds to the two objectives. A budget balance rule encourages hitting the debt target. And, well-designed expenditure rules appear decisive in ensuring the effectiveness of a budget balance rule (Guichard et al., 2007). Carnot (2014) shows also that a binding spending rule can promote fiscal discipline while allowing for stabilisation policies. …Spending rules entail no trade-off between minimising recession risks and minimising debt uncertainties. They can boost potential growth and hence reduce the recession risk without any adverse effect on debt. Indeed, estimations show that public spending restraint is associated with higher potential growth (Fall and Fournier, 2015).

Here’s a very useful table from the report.

As you can see, expenditure rules have the most upside and the least downside.

Though it’s important to make sure a spending cap is properly designed.

Here are some of the key conclusions on Tax and Expenditure Limitations (TELs) from a study by Matt Mitchell (no relation) and Olivia Gonzalez of the Mercatus Center.

The effectiveness of TELs varies greatly depending on their design. Effective TEL formulas limit spending to the sum of inflation plus population growth. This type of formula is associated with statistically significantly less spending. TELs tend to be more effective when they require a supermajority vote to be overridden, are constitutionally codified, and automatically refund surpluses. These rules are also more effective when they limit spending rather than revenue and when they prohibit unfunded mandates on local government. Having one or more of these characteristics tends to lead to less spending. Ineffective TELs are unfortunately the most common variety. TELs that tie state spending growth to growth in private income are associated with more spending in high-income states.

In other words, assuming the goal is better fiscal policy, a spending cap should be designed so that government grows slower than the productive sector of the economy. That’s music to my ears.

And the message is resonating with many other people in Washington who care about good fiscal policy.

P.S. Hopefully this column explains why I’ve only mentioned “balanced budget amendment” eight times in nearly 4,300 columns over the past seven-plus years. And most of those mentions were incidental or dismissive.

P.P.S. Simply stated, it’s a mistake to focus on the symptom of red ink rather than the underlying disease of excessive government spending.

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The Congressional Budget Office has just released the 2016 version of its Long-Term Budget Outlook.

It’s filled with all sorts of interesting data if you’re a budget wonk (and a bit of sloppy analysis if you’re an economist).

If you’re a normal person and don’t want to wade through 118 pages, you’ll be happy to know I’ve taken on that task.

And I’ve grabbed the six most important images from the report.

First, and most important, we have a very important admission from CBO that the long-run issue of ever-rising red ink is completely the result of spending growing too fast. I’ve helpfully underlined that portion of Figure 1-2.

And if you want to know the underlying details, here’s Figure 1-4 from the report.

Once again, since I’m a thoughtful person, I’ve highlighted the most important portions. On the left side of Figure 1-4, you’ll see that the health entitlements are the main problem, growing so fast that they outpace even the rapid growth of income taxation. And on the right side, you’ll see confirmation that our fiscal challenge is the growing burden of federal spending, exacerbated by a rising tax burden.

And if you want more detail on health spending, Figure 3-3 confirms what every sensible person suspected, which is that Obamacare did not flatten the cost curve of health spending.

Medicare, Medicaid, Obamacare, and other government health entitlements are projected to consume ever-larger chunks of economic output.

Now let’s turn to the revenue side of the budget.

Figure 5-1 is important because it shows that the tax burden will automatically climb, even without any of the class-warfare tax hikes advocated by Hillary Clinton.

And what this also means is that more than 100 percent of our long-run fiscal challenge is caused by excessive government spending (and the Obama White House also has confessed this is true).

Let’s close with two additional charts.

We’ll start with Figure 8-1, which shows that things are getting worse rather than better. This year’s forecast shows a big jump in long-run red ink.

There are several reasons for this deterioration, including sub-par economic performance, failure to comply with spending caps, and adoption of new fiscal burdens.

The bottom line is that we’re becoming more like Greece at a faster pace.

Last but not least, here’s a chart that underscores why our healthcare system is such a mess.

Figure 3-1 shows that consumers directly finance only 11 percent of their health care, which is rather compelling evidence that we have a massive government-created third-party payer problem in that sector of our economy.

Yes, this is primarily a healthcare issue, especially if you look at the economic consequences, but it’s also a fiscal issue since nearly half of all health spending is by the government.

P.S. If these charts aren’t sufficiently depressing, just imagine what they will look like in four years.

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Over the years, I’ve run into oddball stories about what happens when politicians and bureaucrats get involved with matters relating to sex.

And here are two more examples. Government isn’t involved yet, but will be if statists get their way.

  • Leftists concocted a crazy theory that tax havens promote sex slavery.
  • And other leftists hypothesized that climate change promotes prostitution and AIDS.

Let’s add to our collection. We now have new evidence in favor of the Laffer Curve, thanks to Illinois politicians levying a tax on strip clubs.

Here are some excerpts from a story in the St. Louis Post-Dispatch.

…she and others…were expecting at least $1 million to be raised…the Live Adult Entertainment Facility Surcharge tax…went into effect Jan. 1, 2013, with the first monies collected in fiscal year 2014. For that fiscal year, the State Department of Revenue reported $405,996.62 in revenue; over the next two fiscal years, the amounts collected were a bit more — $501,334.85 for fiscal year 2015 and $532,271.46 for fiscal year 2016. The state’s newest ‘sin tax,’ which poses a tax on facilities that serve alcohol and that have live adult entertainment, includes topless, nude dancing and stripping. “They were expecting it to raise quite a bit of revenue,” McClanahan said of the tax on strip-club type facilities… “We anticipated it would be a greater number of clubs that would be paying and we would have anticipated about a million in revenue,” Poskin said. “So I don’t know if that if the tax that they’re paying is accurate and consistent with their gross receipts.”

The bottom line (no pun intended) is that politicians collected about half as much money as originally projected.

It’s unclear, to be sure, why the revenues didn’t materialize.

The clubs are probably engaging in a bit of avoidance and evasion, which is quite common in all areas of the economy when tax burdens increase.

And the clubs presumably are suffering from a loss of business because of the tax, which also is a common effect of higher tax burdens in all sectors of the economy.

Which gives me an excuse to make a broader point about the economy-wide implication of higher tax burdens.

Scott Sumner compares output in the U.S. and the four biggest European nations (Germany, U.K., France, and Italy), observes that per-capita tax collections in the U.S. are almost as high as they are in these other countries with far higher tax burdens, and has some must-read analysis about the very high economic cost of getting additional tax revenue.

…tax rates in the US are about 31% lower than in Europe, so there is a lot of scope for tax increases in the US. But how much revenue would those higher taxes actually collect—in the long run? This data suggests not very much. …we are in a region where disincentive effects are kicking in. GDP per person in these four countries is about 25.5% lower than in the US (PPP), so they only raise about 7.5% more revenue that we do, despite far higher tax rates. …The mistake that progressives make is to see the huge US GDP as a sort of piggy bank from which money can be raised for any policy objectives, without killing the goose that lays the golden eggs. …it’s clear that progressivism can never succeed in America. The only question is how badly it will fail.

Looking at all this data, the one important question that must be asked is how anyone could possibly think that it’s a good idea to sacrifice 25.5 percent of our income in order to give politicians 7.5 percent more tax revenue.

By the way, for those who think Scott’s conclusions are somehow illegitimate because they’re based on back-of-the-envelope calculations, check out the very detailed and rigorous analysis from the European Central Bank that found an even larger negative relationship between tax revenue and foregone economic output.

In other words, there is a Laffer Curve. When tax burdens climb, taxable income falls. Which is just another way of stating that the cost of higher taxes isn’t just that politicians take our money. They also impose lots of damage on the economy, which means we suffer from lower earnings.

So it’s a double-whammy. They tax more, we earn less.

P.S. While I don’t want politicians involved with sex, I must confess that there’s also some compelling evidence that people don’t want economists involved with sex.

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The United Kingdom is getting a lot of attention because voters just chose to leave the European Union.

I think this was the smart choice. Yes, there will be some short-run economic volatility, but the long-run benefits should make it worthwhile. Sort of like chemotherapy being painful, but still being much better than the alternative of cancer.

My main argument for Brexit was that the European Union is a sinking ship. The continent is in trouble because the bureaucrats in Brussels reflexively support centralization, bureaucratization, and harmonization. And it’s in trouble because most member governments support dirigiste policies on the national level.

Consider France. The country is so statist that even some folks from the establishment media have warned that government has too much power. Heck, even some of the people at the European Commission have complained that taxes are too high.

Perhaps most miraculously, there was even a column in the New York Times last month explaining how bad government policy is killing France’s job market.

It’s obvious that the current system isn’t working. …business owners are reluctant to hire employees, because it’s so complicated and expensive to fire them when times are bad. …times are pretty bad: France has 10 percent unemployment, roughly twice the levels in Germany and Britain. For young people, it’s around 24 percent. …While many other European countries have revamped their workplace rules, France has barely budged.

The most important thing to understand is that employers are extremely reluctant to hire full-time workers because it’s nearly impossible to fire them if they don’t do a good job or if the company hits hard times. And that translates into temporary jobs combined with lots of unemployment.

The Hollande government has proposed to tinker with this system.

The new labor bill — weakened after long negotiations — wouldn’t alter the bifurcated system, in which workers either get a permanent contract called a “contrat à durée indéterminée,” known as a C.D.I., or a short-term contract that can be renewed only once or twice. Almost all new jobs have the latter.

But even though the reforms are very timid, the French are protesting.

…it isn’t just unions that oppose the bill. So do more than 60 percent of the population, who fear the bill would strip workers of protections without fixing the problem. Young people took to the streets to oppose it, demanding C.D.I.s, too. Why are the French so wedded to a failing system? …they believe that a job is a basic right — guaranteed in the preamble to their Constitution — and that making it easier to fire people is an affront to that. Without a C.D.I., you’re considered naked before the indifferent forces of capitalism. …young protesters held a banner warning that they were the “génération précaire.”

Here’s the most amazing part of the story. The protesters think that a government-protected job is a rite of passage into adulthood. They want the “right to grow up,” even though their version of adulthood involves complete blindness to economic reality.

They were agitating for the right to grow up. …getting a permanent work contract is a rite of adulthood. Without one, it’s hard to get a mortgage or car loan, or rent an apartment. Mainstream economic arguments can’t compete. “Basic facts of economic science are completely dismissed,” said Étienne Wasmer, a labor economist at Sciences Po. “People don’t see that if you let employers take risks, they’ll hire more people.” Instead, many French people view the workplace as a zero-sum battle between workers and bosses.

The obvious answer is to dramatically reduce government intervention in labor markets. But since that’s a near impossibility in France, high levels of joblessness almost surely will continue and short-term employment contracts will be the norm for those who do manage to find work.

By the way, the system doesn’t even work that well for the workers with the government-protected positions.

Many workers here have permanent contracts that make it very hard to fire them. So some companies resort to an illegal strategy: They try to make someone so miserable, he’ll quit. “What happens next is, I’ll lose my team and my staff, and therefore I’ll have nothing to do,” the man predicted. “You still have to come to work every day, but you have no idea why.” …those lucky enough to have C.D.I.s can struggle at work. In one study, workers with C.D.I.s reported more stress than those with short-term contracts, in part because they felt trapped in their jobs. After all, where else would they get another permanent contract?

No wonder so many people in France want to work for the government. That way they can get lavish pay and benefits with very little pressure to perform.

In any case, the net result is that the French economy is stagnant. Potentially valuable labor (one of the two factors of production) is being sidelined or misallocated.

Writing for Market Watch, Diana Furchtgott-Roth shares her analysis of crazy French labor law.

…reforms are vital because the French economy is stagnant. GDP growth for the latest quarter was 0.6%. Over the past decade, growth has rarely risen above 1%. The unemployment rate is over 10% and the youth unemployment is 25%. Clearly tax and regulatory reform, including more labor flexibility, are needed to encourage employers to hire. …a French court this week ruled that Société Générale rogue trader Jérôme Kerviel, who lost $5.5 billion of the bank’s assets in 2008 and almost caused its bankruptcy, had been unfairly dismissed. Société Générale was ordered to pay Kerviel $511,000 because it decided he was dismissed “without cause.” …When employers cannot fire workers, they are less likely to hire them, leading to a sclerotic labor market and high unemployment. This is what the left-wing Hollande is trying to repair. …Some view France as a worker’s paradise where the government protects workers from abusive employers. The reality is that France is a worker’s nightmare where jobs are scarce and work ethic is prohibited by law.

Ambrose Evans-Pritchard is even more negative in his column for the U.K.-based Telegraph.

An intractable economic crisis has been eating away at the legitimacy of the French governing elites for much of this decade. This has now combined with a collapse in the credibility of the government, and mounting anger… The revolt comes as Paris battles a wave of protest against labour reform, a push that has come close to rupturing the Socialist Party. The measures were rammed through by decree to avoid a vote. Scenes of guerrilla warfare with police on French streets have been a public relations disaster… Rail workers are demanding a maximum 32-hour week. Eric Dor from the IESEG School of Management in Lille says powerful vested interests have made France almost unreformable. …Dor said the labour reforms have been watered down and are a far cry from the Hartz IV laws in Germany in 2004, which made it easier to fire workers and screw down wages.

He points out that the damage of labor-market intervention is exacerbated by a wretched tax system (I’ve written that the national sport of France is taxation rather than soccer).

France’s social model is funded by punitively high taxes on labour. The unintended effect is to create a destructive ‘tax wedge’ that makes it too costly to hire new workers. It protects incumbents but penalizes outsiders, leading to a blighted banlieu culture of mass youth unemployment. There are 360 separate taxes, with 470 tax loopholes. The labour code has tripled… Public spending is 57pc of GDP, a Nordic level without Danish or Swedish levels of labour flexibility. Unemployment is still 10.2pc even at this late stage of the global cycle.

Given the various ways that government discourages employment, is anyone surprised that the French work less than any other nation in Europe? Here’s a blurb from a report in the EU Observer.

French put in the least working hours in the EU, according to the bloc’s statistical office Eurostat. Full-time workers in France clocked up 1,646 hours of labour last year.

By the way, there’s a tiny possibility of change.

There’s an election next year and one of the candidates has a platform that sounds vaguely like he wants to be the Ronald Reagan or Margaret Thatcher of France.

Here are some of the details from a report by Reuters.

French presidential hopeful Alain Juppe, the frontrunner in opinion polls 20 years after serving as a deeply unpopular prime minister, said on Tuesday he would roll back France’s iconic 35-hour working week and scrap a wealth tax if elected next year. In the mid-1990s Juppe triggered France’s worst unrest in decades because he would not budge on pension reforms. He eventually had to drop them after weeks of strikes and protests. …”The French are being kept from working by excessive labor costs. I want to cut those costs,” Juppe told hundreds of supporters as he outlined his economic platform. …Juppe said he would raise the retirement age to 65 from 62 while cutting both taxes and state spending. Juppe said he would aim to cut public spending by 80-100 billion euros over five years and to reduce payroll taxes by 10 billion euros and corporate taxes by 11 billion euros. …Juppe also said he would cap welfare subsidies.

Amazingly, Juppe is the favorite according to the polling data.

So maybe French voters finally realize (notwithstanding the bad advice of Paul Krugman) that becoming another Greece isn’t a good idea.

P.S. My “Frexit” title simply recognizes the reality – as shown in this video – that productive people already are fleeing France. Hollande’s punitive tax policy has driven many of them to other nations. French entrepreneurs in particular have flocked to London.

P.P.S. Watch Will Smith’s reaction after being told France has a top tax rate of 75 percent.

P.P.P.S. France’s effective tax rate actually climbed to more than 100 percent, though Hollande mercifully decided that taxpayers now should never have to pay more than 80 percent of their income to government.

P.P.P.P.S. The big puzzle is why the French put up with so much statism. Polling data from both 2010 and 2013 shows strong support for smaller government, and an astounding 52 percent of French citizens said they would consider moving to the United States if they got the opportunity. So why, then, have they elected statists such as Sarkozy and Hollande?!?

P.P.P.P.P.S. In my humble opinion, the most powerful comparison is between France and Switzerland.

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