Feeds:
Posts
Comments

Posts Tagged ‘Economics’

Supply-side economics is simply the common-sense notion that people respond to incentives, though some folks think this elementary observation is “voodoo economics” or “trickle-down economics.”

If you want a wonkish definition of supply-side economics, it is the application of micro-economic principles. In other words, what does “price  theory” tell us about how people will respond when a tax goes up or down.

All of which can be illustrated using supply and demand curves, for those who prefer something visual.

None of this is controversial. Indeed, left-wing economists presumably will agree with everything I just wrote.

There is disagreement, however, about magnitude of supply-side responses. Do people respond a lot or a little when tax policy changes (using economic jargon, what are the “elasticities” of behavioral response)?

And even if there was a consensus on those magnitudes, that still wouldn’t imply agreement on the proper policy since people have different views on whether the goal should be more growth or more redistribution (what economist Arthur Okun referred to as the equality-efficiency tradeoff).

For what it’s worth, this is why there is a lot of fighting about the Laffer Curve. Every left-wing economist agrees with the underlying principle of the Laffer Curve (in other words, because people can change their behavior, nobody actually thinks there is a linear relationship between tax rates and tax revenue).

But economists don’t agree on the shape of the curve. Is the revenue-maximizing rate for the personal income tax 25 percent or 75 percent? And even if people somehow agreed on the shape of the curve, that doesn’t lead to agreement on the ideal tax rate because some statists want very high rates even if the result is less revenue. And people like me only care about the growth-maximizing tax rate.

I’m giving this background for the simple reason that the policy world is lagging the economics profession. And I’m not just referring to the Joint Economic Committee’s resistance to “dynamic scoring.” My bigger complaint is that a lot of politicians still act as if there is zero insight from supply-side economics and the Laffer Curve.

In hopes of rectifying this situation, I’ve been sharing examples of supply-side-motivated tax changes that have been adopted by leftists. In other words, tax changes that were adopted specifically to alter behavior.

Here’s the list of “successful” leftist tax hikes that have crossed my desk.

Now we have another example to add to my collection, this time from a tax on plastic bags in Chicago.

Just as predicted, there is revenue feedback because people change their behavior in response to changes in tax policy.

Chicago’s effort to keep plastic and paper bags out of area landfills by imposing a 7 cents-per-bag tax is succeeding beyond officials’ wildest dreams. The bad news is that the success of the fee in dissuading shoppers from taking single-use bags means the city’s coffers are taking a steep hit. Chicago officials balanced the city’s 2017 spending plan based on an assumption that the city would earn $9.2 million this year from the tax.

But receipts will fall far short of that goal.

The city has earned just $2.4 million in the five months the tax has been in effect, said Molly Poppe, a spokeswoman for the city’s Finance Department. If bag use continues at the current pace, that means the city would net just $7.7 million from the tax for the year. …the number of plastic and paper bags Chicagoans used to haul home their groceries dropped 42 percent in the first month after the tax was imposed.

Incidentally, the Mayor claims that the tax is a success because the real goal was discouraging plastic bags rather than raising revenue.

That’s certainly a very legitimate position, but note that his policy is based on supply-side economics: The more you tax of something, the less you get of it.

My frustration is that the politicians who say we need higher taxes to discourage bad things (smoking, sugar, plastic bags, etc) oftentimes are the same ones who say that higher taxes won’t discourage good things (work, saving, investment, entrepreneurship, etc).

Needless to say, this doesn’t make sense. They are either clueless or hypocritical. But maybe if I accumulate enough example of “successful” supply-side tax hikes, they’ll finally realize it’s not a good idea to punish productive behavior.

P.S. Check out the IRS data from the 1980s on what happened to tax revenue from the rich when Reagan dropped the top tax rate from 70 percent to 28 percent. I’ve used this information in plenty of debates and I’ve never run across a statist who has a good response.

P.P.S. Here’s my video with more evidence in favor of the Laffer Curve.

P.P.P.S. I also think this polling data from certified public accountants is very persuasive. I don’t know about you, but I suspect CPAs have a much better real-world understanding of the impact of tax policy than the bureaucrats at the Joint Committee on Taxation.

Read Full Post »

Keynesian economics is fundamentally misguided because it focuses on how to encourage more spending when the real goal should be to figure out policies that result in more income.

This is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, small business income, corporate profits, etc) rather than on “gross domestic product,” which is a measure of how our national income gets allocated (consumption, investment, government, etc).

Simply stated, Keynesians put the cart before the horse. Consumption doesn’t drive growth, it’s a consequence of growth.

But let’s set all that aside because we have new evidence that Keynesian stimulus schemes aren’t even very good at artificially goosing consumption.

Three economists (from MIT and Tex A&M) have crunched the numbers and discovered that Obama’s Cash-for-Clunkers scheme back in 2009 was a failure even by Keynesian standards.

The abstract of the study tells you everything you need to know.

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

This is remarkable. At the time, the most obvious criticism of the scheme was that it would simply alter the timing of purchases.

And scholars the following year confirmed that the program didn’t have any long-run impact.

But now we find out that there was impact, but it was negative. Here’s the most relevant graph from the study.

It shows actual vehicle spending and estimated spending in the absence of the program.

For readers who like wonky details, here’s the explanatory text for Figure 7 from the study.

The effect of the program on cumulative new vehicle spending by CfC-eligible households is shown in Figure 7. The figure shows actual spending and estimates of counterfactual spending if there had been no CfC program. Cumulative spending under the CfC program was larger than counterfactual spending for the months immediately after the program. However, by February 1 the counterfactual expenditures becomes larger and by April has grown to be $4.0 billion more than actual expenditures under the program. It is difficult to make the case that the brief acceleration in spending justifies the loss of $4.0 billion in revenues to the auto industry, for two reasons. First, we calculate that in order to justify the estimated longer-term reduction in cumulative spending to boost spending for a few months, one would need a discount rate of 208 percent. Given the expected (and realized) duration of the recession, it seems difficult to argue in favor of such a discount rate. Second, we note that Cash for Clunkers seems especially unattractive compared to a counterfactual stimulus policy that left out the environmental component, which also would have accelerated purchases for some households without reducing longer-term spending.

By the way, the authors point out that Cash-for-Clunkers wasn’t even good environmental policy.

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

So let’s see where we stand. The program was bad fiscal policy, bad economic policy, and bad environmental policy.

The trifecta of Obamanomics. No wonder the United States suffered the weakest recovery of the post-WWII era.

P.S. David Letterman had a rather amusing cash-for-clunkers joke back in 2010.

Read Full Post »

When discussing government involvement in the health sector, I usually focus on the budgetary implications. Which makes sense since I’m a fiscal wonk and programs such as Medicare, Medicaid, and Obamacare are diverting ever-larger amounts of money from the economy’s productive sector.

I also look at the tax side of the fiscal equation and complain about how the healthcare exclusion mucks up the tax code.

Though it’s important to understand that government involvement doesn’t just cause fiscal damage. All these programs and policies contribute to the “third-party payer” problem, which exists when people make purchases with other people’s money. Such a system is a recipe for inefficiency and rising prices since consumers generally don’t care about cost and providers have no incentive to be efficient. And since government figures show that nearly 90 percent of health care expenditures are financed by someone other than the consumer, this is a major problem. One that I’ve written about many, many times.

But there’s another economic problem caused by government – price controls on insurance – that is very important. Indeed, the fights over “community rating” and “pre-existing conditions” are actually fights about whether politicians or competition should determine prices.

Simply stated, politicians want insurance companies to ignore risk when selling insurance. They want artificially low premiums for old people, so they restrict differences in premiums based on age (i.e., a community rating, enforced by a guaranteed-issue mandate), even though older people are statistically far more likely to incur health-related expenses. They also want artificially low premiums for sick people, so the crowd in Washington requires that they pay the same or similar premiums as healthy people (i.e., a pre-existing conditions mandate), even though they are statistically far more likely to incur health-related expenses.

Set aside that the entire purpose of insurance is to guard against risk. Instead, let’s focus on what happens when these types of price controls are imposed. For all intents and purposes, insurance companies are in a position where they have to over-charge young and healthy people in order to subsidize the premiums of old and sick people. That’s sounds great if you’re old and sick, but young and healthy people respond by choosing not to purchase insurance. And as fewer and fewer young and healthy people are in the system, that forces premiums ever higher. This is what is meant by a “death spiral.”

The pro-intervention crowd has a supposed solution to this problem. Just impose a mandate that requires the young and healthy people to buy insurance. Which is part of Obamacare, so there is a method to that bit of madness. But since the penalties are not sufficiently punitive (and also because the government simply isn’t very competent), the system hasn’t worked. And to make matters worse, Obamacare exacerbated the third-party payer problem, thus leading to higher costs, which ultimately leads to higher premiums, which further discourages people from buying health insurance.

So how do we solve this problem?

One of my colleagues at the Cato Institute, Michael Cannon, is a leading expert on these issues. And he’s also a leading pessimist. Here’s some of what he wrote a week ago as part of a column on the Senate bill to modify Obamacare.

ObamaCare’s “community rating” price controls are causing premiums to rise, coverage to get worse for the sick and insurance markets to collapse across the country. The Senate bill would modify those government price controls somewhat, allowing insurers to charge 64-year-olds five times what they charge 18-year-olds (as opposed to three times, under current law). But these price controls would continue to make a mess of markets and cause insurers to flee.

But he wasn’t enamored with the House proposal, either. Here are some excerpts from his analysis earlier this year of that proposal.

The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide… The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law.

Though existing law also is terrible, largely because of Obamacare. Here are passages from Michael’s column in the Hill.

ObamaCare’s core provisions are the “community rating” price controls and other regulations that (supposedly) end discrimination against patients with preexisting conditions. How badly do these government price controls fail at that task? Community rating is the reason former president Bill Clinton called ObamaCare “the craziest thing in the world” where Americans “wind up with their premiums doubled and their coverage cut in half.” Community rating is why women age 55 to 64 have seen the highest premium increases under ObamaCare. It is the principal reason ObamaCare has caused overall premiums to double in just four years. …Why? Because community rating forces insurance companies to cover the sick below cost, which simply isn’t sustainable. The only solution ObamaCare supporters offer is to keep throwing more money at the problem — which also isn’t sustainable.

Anyone who wants to really understand this issue should read all of Michael’s work on health care issues.

But if you don’t have the time or energy for that, here’s an image that I found on Reddit‘s libertarian page. Using not-so-subtle sarcasm, it tells you everything you need to know about why price controls ultimately will kill health insurance.

P.S. None of this suggests we should feel sorry for health insurance companies. They got in bed with the previous administration and endorsed Obamacare, presumably because they figured a mandate (especially with all the subsidies) would create captive customers. Now that it’s clear that the mandate isn’t working very well and that increased Medicaid dependency accounts for almost all of the additional “insurance coverage,” they’re left with an increasingly dysfunctional system. As far as I’m concerned, they deserve to lose money. And I definitely don’t want them to get bailout money.

P.P.S. Republicans aren’t doing a very good job of unwinding the Obamacare price controls, but they deserve a bit of credit for being bolder about trying to undo the fiscal damage.

Addendum: A comment from Seb reminds me that I was so fixated on criticizing price controls that I never bothered to explain how to deal with people who have pre-existing conditions and therefore cannot get health insurance. I’m guessing the answer is “high-risk pools” where the focus of policy is directly subsidizing the relatively small slice of the population that has a problem (as opposed to price controls and other interventions that distort the market for everyone). But the main goal, from my perspective, is to have states handle the issue rather than Washington. A federalist approach, after all, is more likely to give us the innovation, diversity, and competition that produces the best approaches. States may discover, after all, that insurance doesn’t make sense and choose to directly subsidize the provision of health care for affected people. In the long run, part of the solution is to get rid of the health care exclusion in the internal revenue code as part of fundamental tax reform. If that happened, it’s less likely that health insurance would be tied to employment (and losing a job is one of the main ways people wind up without insurance).

Read Full Post »

Singapore is one of my favorite nations for the simple reason that it consistently gets very high scores from Economic Freedom of the World and the Index of Economic Freedom (as well as from Doing Business, Global Competitiveness Report, and World Competitiveness Yearbook).

I also greatly admire Singapore’s strict adherence to my Golden Rule for a 10-year period beginning in the late 1990s. Government spending actually shrank by a bit more than 1 percent per year, on average, over that decade.

This reduced the burden of government spending to just 12 percent of economic output, almost as low as it was in North America and Western Europe in the 1800s.

Unfortunately, the public sector has since crept back up to 20 percent of GDP, but that’s still very low compared to the rest of the developed world.

What’s especially attractive is that the welfare state is very small in Singapore. According to the IMF (see page 44), expenditures on “social development” are only about 8 percent of GDP, and that category includes education and health care. If you peruse Singapore budget documents, spending on “transfers” is well under 5 percent of economic output.

Either figure is far below levels of redistribution in other developed nations.

One of the reasons the welfare state is so small is that individuals are required to set aside their own money for health and retirement.

And since the burden of spending is modest, that enables Singapore to have a non-oppressive tax regime.

That’s the good news. The bad news is that a value-added tax was imposed back in the 1990s. Though the rate has stayed low (so far) and hasn’t (yet) become a money machine for big government.

Singapore is also very good in areas other than fiscal policy. It is a shining example of the benefits of open trade. It ranks very highly for rule of law. And there’s very little regulation.

Indeed, Singapore has consistently ranked #2 for economic freedom in recent decades, trailing only Hong Kong (the U.S. briefly edged out Singapore for second place after all the market-friendly reforms of the Reagan and Clinton years, but now we trail by a wide margin thanks to the statism of the Bush-Obama years).

Here’s a graph from Economic Freedom of the World showing how Singapore started at a decent point in 1970 and then had a 20-year period of improvement (most because of deregulation and better monetary policy).

As I repeatedly argue, if you want good economic results, you need good policy.

And that’s exactly the story of Singapore.

I’m currently in the country because I spoke earlier today at a conference on global investment (the audience got quite excited when I explained the effort to defund the OECD).

Walking the streets, it’s hard not to be impressed by the widespread prosperity of the jurisdiction. Sleek buildings. Fancy shops. Lots of professionals.

And ordinary people are the biggest winners. Here’s a remarkable chart from Human Progress showing per capita GDP (in $2015 inflation-adjusted dollars) in Singapore and the United States, along with the world average.

As you can see, Singapore used to be far below the United States and somewhat below the world average. Now it is one of the wealthiest places on the planet.

Singapore’s jump from poverty to prosperity is astounding.

What’s really remarkable is that the country was as poor as Jamaica back in the 1960s. But thanks to rapid economic growth, the people of Singapore enjoy very high living standards today.

The moral of the story is that ordinary people in Singapore enjoy prosperity because the government was smart enough to focus on growth and didn’t worry about inequality.

Here’s what Marian Tupy, one of my colleagues at the Cato Institute, wrote about the country’s incredible growth.

The incredible transformation of Singapore from a sleepy outpost of the British Empire to a global commercial and technological hub was partly facilitated by a very high degree of economic freedom. …As late as 1970, per person income in Singapore was 54 percent of the global average. Today it is 321 percent of the global average.

Now for the bad news.

Singapore is very pro-market, but it’s not very pro-liberty. In an article for the Foundation for Economic Education, Donovan Choy highlights some of the nation’s shortcomings.

Within libertarian circles, Singapore generally enjoys a good reputation for its economic freedom.

But it’s not Nirvana.

The Housing Development Board (HDB), the public housing arm of the state, houses more than 80% of the population in high-rise apartment homes. …Education is largely monopolized by the state from the primary school level up until the university level… Singapore suffers from a severe lack of press freedom, ranking at an alarming 151 in the World Press Freedom Index… The state also controls public broadcasting from television to radio. …Singapore is perhaps most well-known for its non-tolerance of drugs. Drug users can be jailed or housed in rehabilitation centers for up to three years and drug traffickers face the death penalty. …Singaporean males are also subject to mandatory conscription of up to two years by the age of 18, a law that has been in effect since 1967. Civil ownership of guns are outlawed in Singapore.

These are reasons why Singapore does not earn a high score in the Human Freedom Index.

But I’m an economist, so I’m still as positively impressed as I was back in 2009.

P.S. I went to the iconic Raffles Hotel to visit the iconic Long Bar and drink an iconic Singapore Sling. But my attempt to be a stereotypical tourist was derailed because that part of the hotel is being renovated. Which is probably a good outcome since I learned that the Singapore Sling is a gin-based drink, which presumably would not agree with my sensitive palate. Though I did learn that the last wild tiger in Singapore was killed at the hotel back in 1902.

P.P.S. One final policy comment: The bureaucrats at the OECD produced a report on Asian economies and argued that taxes should consume at least 25 percent of GDP to achieve prosperity, which was a remarkable assertion since the report showed that Singapore was the richest nation in the region and has a tax burden barely half that level. That’s an example of what soccer fans call an “own goal.” The OECD wasn’t just being statist, it was being incompetently statist.

Read Full Post »

When I debate my leftist friends on the minimum wage, it’s often a strange experience. When other people are listening or watching, they’ll adopt a very extreme position and basically claim that politicians have the power to dramatically boost take-home pay by simply mandating higher levels of pay. And somehow there won’t be any noticeable negative impact on employment and labor markets, even though businesses only create jobs if they expect some net profit.

But when we talk privately, they have a more nuanced argument. They’ll confess that higher minimum wages will cause some low-skilled workers to become unemployed, but then justify that outcome using either or both of these arguments.

  • Amoral utilitarianism – A large number of people will get pay raises and only a small handful will lose their jobs, and this is okay if policy is based on some notion of greatest good for the greatest number. In other words, you can’t make an omelet without breaking a few eggs.
  • Keynesian stimulus – Some people will lose their jobs, but the income gains for those who keep their jobs will boost “aggregate demand” and thus provide a boost for the economy. Sort of like they also claim giving people unemployment benefits will somehow generate more economic activity.

I’ve always rejected the first argument because I believe in the individual right of contract. The government should not prevent an employer and employee from engaging in voluntary exchange.

And I’ve always rejected the second argument because there can’t be any net “stimulus” since any additional income for workers is automatically offset by less income for employers.

So who is right?

Well, the real world just kicked advocates of higher minimum wages in the teeth. Or maybe even someplace even more painful. A new study from the National Bureau of Economic Research looks at the impact of the $11 and $13 minimum wages in the city of Seattle and finds very bad results.

Let’s start by simply citing what the local government did.

This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle’s minimum wage increases from $9.47 to $11/hour in April 2015 and to $13/hour in January 2016.

And here’s a table from the study, showing details on the minimum-wage mandate.

And what’s been happening as a result of this intervention in the labor market?

Unsurprisingly, the jump to $13 has been much more damaging that the jump to $11.

…conclusion: employment losses associated with Seattle’s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses – and total employee earnings – in the low-wage job market. …We show that the impact of Seattle’s minimum wage increase on wage levels is much smaller than the statutory increase, reflecting the fact that most affected low-wage workers were already earning more than the statutory minimum at baseline. Our estimates imply, then, that conventionally calculated elasticities are substantially underestimated. Our preferred estimates suggest that the rise from $9.47 to $11 produced disemployment effects that approximately offset wage effects, with elasticity estimates around -1. The subsequent increase to as much as $13 yielded more substantial disemployment effects, with net elasticity estimates closer to -3.

Here’s a chart from the study looking at the impact on hours worked.

If you want a healthy labor market, it’s not good to be below the line.

And here’s some of the explanatory text.

…Because the estimated magnitude of employment losses exceeds the magnitude of wage gains in the second phase-in period, we would expect a decline in total payroll for jobs paying under $13 per hour relative to baseline. Indeed, we observe this decline in first-differences when comparing “peak” calendar quarters, as shown in Table 3 above. …point estimates suggest payroll declines of 4.0% to 7.6% (averaging 5.8%) during the second phase-in period. This implies that the minimum wage increase to $13 from the baseline level of $9.47 reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis. …Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.

But the biggest takeaway from the report is that hours dropped so much that the average low-wage worker wound up with less income

The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.

Here’s the relevant chart.

Once again, it’s not good to be below the line.

This data is remarkable because it shows that higher minimum wages are a bad idea, even according to the metrics of our friends on the left.

  • The amoral utlitarianism argument doesn’t apply because it’s no longer possible to claim that income gains for those keeping jobs will more than offset income losses for those who become unemployed.
  • The Keynesian aggregate-demand argument doesn’t apply because it’s no longer possible to assert macroeconomic benefits based on the assumption of a net increase in “spending power” in the economy.

Let’s close with a couple of observations from others who have looked at the new study.

Diana Furchtgott-Roth of the Manhattan Institute (and formerly Chief Economist at the Department of Labor) highlights the most relevant findings.

Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers. …When hourly wages rose from $11 to $13 in 2016, hours of work and earnings for low-wage workers were reduced by 9 percent for the first three calendar quarters, resulting in 3.5 million fewer hours worked for each calendar quarter.  The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost. …The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more.

Some proponents of intervention and mandates may want to dismiss Diana’s analysis since of her reputation as a market-friendly scholar.

But even Ben Casselman and Kathryn Casteel of FiveThirtyEight basically reach the same conclusion.

As cities across the country pushed their minimum wages to untested heights in recent years, some economists began to ask: How high is too high? Seattle, with its highest-in-the-country minimum wage, may have hit that limit. …New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage.

I’m amused to find more evidence that left-leaning economists admit that higher minimum wages cause damage, albeit never on the record.

Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers.

I’m wondering how they can look at themselves in the mirror. It seems very immoral (in other words, beyond amoral) to publicly defend a policy that you privately admit is bad.

I understand that this type of dishonesty happens all the time in the political world (for example, some Republicans are now supporting Trump’s plans for infrastructure boondoggles and parental leave when they would have been strongly opposed if the same policies had been proposed by Obama).

But what’s the point of being a tenured academic if you can’t at least be honest?

Though maybe there’s some sort of cognitive dissonance at play, where they feel the rules of honesty don’t apply in the political world. For instance, both Paul Krugman and Larry Summers have acknowledged in their academic work that unemployment benefits lead to more unemployment. But they pretend that’s not the case when commenting on the policy debate.

But I’m digressing. Let’s close by recycling this video on minimum wages from the Center for Prosperity.

P.S. If you want some minimum-wage themed humor, you can enjoy cartoons here, here, here, here, and here.

Read Full Post »

I periodically share data showing that living standards are higher in the United States than in Europe.

My goal isn’t to be jingoistic. Instead, I’m warning readers that we won’t be as prosperous if we copy out tax-and-spend friends on the other side of the Atlantic (just like I try to draw certain conclusions when showing how many low-tax jurisdictions have higher levels of economic output than the United States).

I’m sometimes asked, though, how America can be doing better than Europe when we have more poverty.

And when I ask them why they thinks that’s the case, they will point to sources such as this study from the German-based Institute of Labor Economics. Here’s some attention-grabbing data from the report.

The United States has the highest poverty rate both overall and among households with an employed person, but it stands farther away from the other countries on its in-work poverty rate than its overall poverty rate. The contrast between the US and three other English-speaking countries — Australia, Ireland, and the United Kingdom — is particularly striking. Compared to those three nations, the United States has an overall poverty rate only a little higher but an in-work poverty rate that is much higher.

And here’s the main chart from the study, with the United States as the bottom. It appears that there twice as much poverty in the USA as there is in a stagnant economy like France.

There even appears to be more poverty in America than there is in Spain and Italy, both of which are so economically shaky that they required bailouts during the recent fiscal/financial crisis.

Sounds horrible, right?

Yes, it does sound really bad. However, it’s total nonsense. Because what you read in the excerpt and see in the graph has nothing to do with poverty.

Instead, it’s a measure of income distribution.

And, if you read carefully, the study actually admits there’s a bait-and-switch.

The…approach to measuring poverty is a “relative” one, with the poverty line set at 60 or 50 percent of the median income.

Think about what this means. A country where everyone is impoverished will have zero or close-to-zero poverty because everyone is at the median income. But as I’ve explained before, a very wealthy society can have lots of “poverty” if some people are a lot richer than others.

And since the United States is much richer than other nations, this means an American household with $35,000 of income can be poor, even though they wouldn’t count as poor if they earned that much elsewhere.

This is like grading on a rigged curve. And if you read the fine print of the IZA study, you’ll see that the “poverty” threshold for a four-person household magically jumps by $16,260.

For a household of four (two adults, two children) the difference between the official US threshold and the 60-percent-of-median threshold amounts to more than $16,000 ($24,000 versus $40,260). This means that the size of the working poor population in America according to the official poverty measure is significantly lower than the size obtained in studies using a relative threshold.

In other words, you can calculate a much higher poverty rate if you include people who aren’t poor.

By the way, since the IZA report acknowledges this bait-and-switch approach, I guess one would have to say that the study technically is honest.

But it’s still misleading because most people aren’t going to read the fine print. Instead, they’ll see the main chart showing higher “poverty” and assume that there is a much higher percentage of actual poor people in the United States.

Moreover, some people may understand that there’s a bait-and-switch and simply want to help fool additional people.

And I’m guessing that this is exactly what the authors and the IZA staff expected and wanted. And if that’s the case, then the study is deliberately misleading, even if not technically dishonest.

I’ll close by stating that I don’t mind if folks on the left want to argue that market-based societies are somehow unfair because some people are richer than others. And it’s also fine for them to argue that we should be willing sacrifice some of our national prosperity to achieve more after-the-fact equality of income.

But I’d like for them to be upfront about their agenda and not hide behind dodgy data manipulation.

P.S.When you do apples-to-apples comparisons of the United States with the best-performing economies of Europe, you find that the poor tend to be at the same level, but every other group is better off in America.

P.P.S. You probably won’t be surprised to learn that both the Obama Administration and the leftists at the OECD prefer the “relative” definition of poverty.

P.P.P.S. The problem with our statist friends, as Margaret Thatcher explained, is that some of them are so upset about inequality that they’re willing to make everyone poorer if that’s what it takes to reduce income differences.

P.P.P.P.S. Indeed, this “Swiftian” column about reducing inequality is satire, but one wonders whether statists would actually accept such an outcome.

P.P.P.P.P.S. Data from China demonstrates why our attention should be on poverty reduction rather than inequality.

Read Full Post »

My daily columns usually revolve around public policy issues such as tax reform, entitlements, and corrupt government. And while sometimes get a bit agitated about bad things in Washington, it’s because I’m a curmudgeonly libertarian, not because of some personal stake (other than being an oppressed taxpayer).

But sometimes there is a personal connection, like when I responded to the Washington Post‘s front-page attack on the Center for Freedom and Prosperity, a group that I founded.

Today, I’m writing because of a different kind of personal connection. I got my Ph.D. from George Mason University, and one of the great parts of that experience was taking a couple of classes from James Buchanan, who won the Nobel Prize shortly after I arrived on campus.

Professor Buchanan was more than an economist. He was also a social philosopher. He thought big thoughts and cared deeply about a free society. I didn’t have the opportunity to develop a close relationship with Buchanan, but I felt privileged to take his classes and also to hear his insights in various conferences and colloquia during my years on campus.

I mention this connection because a Duke professor, Nancy MacLean, has just written a book that takes some very cheap shots at Buchanan. Heck, the title makes clear her agenda: Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America. Subtle, huh?

I’ll openly admit at this point I have not read the book. I would, if somebody gave me a free copy, but I have no desire to potentially generate royalties for Ms. MacLean by spending money for a copy.

But a review in the Atlantic is a good example of why I think the book merits condemnation.

Nancy MacLean’s Democracy in Chains is part of a new wave of historiography that has been examining the southern roots of modern conservatism. …Her book includes familiar villains—principally the Koch brothers—and devotes many pages to think tanks like the Cato Institute and the Heritage Foundation, whose ideological programs are hardly a secret. But what sets Democracy in Chains apart is that it begins in the South, and emphasizes a genuinely original and very influential political thinker, the economist James M. Buchanan. …she has dug deep into her material—not just Buchanan’s voluminous, unsorted papers, but other archives, too—and she has made powerful and disturbing use of it all.

And what did she find that was so disturbing?

Brace yourself, because the giant scandal that she uncovered is that – gasp! – Buchanan was a classical liberal who believed in small government. And he consorted with other intellectuals with similar views.

The behind-the-scenes days and works of Buchanan show how much deliberation and persistence—in the face of formidable opposition—underlie the antigoverning politics ascendant today. …the University of Chicago, where Buchanan received his doctorate in 1948. During the postwar years, other faculty included Hayek and Friedman, who were shaping a new pro-market economics, part of a growing backlash against the policies of the New Deal. Hayek initiated Buchanan into the Mont Pelerin Society, the select group of intellectuals who convened periodically to talk and plot libertarian doctrine.

But here’s the disgusting part of the book, at least if the review accurately reflects the contents. MacLean does her best to imply that Buchanan somehow must be a racist. In part because of where he was born and raised.

Buchanan owed his tenacity to blood and soil and upbringing. Born in 1919 on a family farm in Tennessee.

By the way, the term “blood and soil” has very odious connotations. I don’t know if that term is used in the book. If not, then the reviewer, Sam Tanenhaus, is the one who deserves condemnation.

The book also implies that Buchanan is racist because he tried to take advantage of Virginia’s desegregation battle to push for school choice.

Buchanan played a part, MacLean writes, by teaming up with another new University of Virginia hire, G. Warren Nutter (who was later a close adviser to Barry Goldwater), on an influential paper. In it they argued that the crux of the desegregation problem was that “state run” schools had become a “monopoly,” which could be broken by privatization. If authorities sold off school buildings and equipment, and limited their own involvement in education to setting minimum standards, then all different kinds of schools might blossom.

And why is this supposed to be racist?

Because some rednecks might choose schools without black people.

…these schemes were…gave ammunition to southern policy makers looking to mount the nonracial case for maintaining Jim Crow in a new form. Friedman himself left race completely out of it. Buchanan did too at first, telling skeptical colleagues in the North that the “transcendent issue” had nothing to do with race; it came down to the question of “whether the federal government shall dictate the solutions.” But in their paper (initially a document submitted to a Virginia education commission and soon published in a Richmond newspaper), Buchanan and Nutter were more direct, stating their belief that “every individual should be free to associate with persons of his own choosing”.

In other words, we’re supposed to believe that Buchanan was racist simply because some people – in a system based on freedom of choice – might make race-based decisions.

But that’s like saying advocates of free speech are racist because some people will make racist statements or write racist books.

For what it’s worth, I wish the racist Democrats who controlled the state in the 1950s had adopted school choice. After all, the ultimate effect of their actions would have been very beneficial for black students.

That would have been delicious irony.

But I’m digressing. I wonder whether Tannenhaus is the one who is guilty of smearing rather than the author. His review, after all, notes that MacLean apparently didn’t think Buchanan’s work was motivated by race.

…race, MacLean acknowledges, was not ultimately a major issue for Buchanan.

The review then shifts to Buchanan’s main intellectual legacy, the “public choice” school of economics (first formally proposed in Calculus of Consent, co-authored with Gordon Tullock).

Governments, they argued, were being assessed in the wrong way. The error was a legacy of New Deal thinking, which glorified elected officials and career bureaucrats as disinterested servants of the public good, despite the obvious coercive effects of the programs they put into place. Why not instead see politicians and government administrators as self-interested players in the marketplace, trying to “maximize their utility”—that is, win the next election or enlarge their department’s budget? This idea turned the whole notion of a beneficent government, and of programs and policies designed more or less selflessly, into a kind of fairy tale expertly woven by politicians and their flacks. Not that politicians were evil. They were looking out for themselves, as most of us do. The difference was in the damage they did.

Sounds quite reasonable to me. And Tanenhaus even grants that the theory has some merit.

You didn’t have to accept Buchanan’s ideology to see that he had a point about the growth of government-centered clientelism—“dependency,” in the term used by a new wave of neoconservatives such as Daniel Patrick Moynihan.

But he then is very critical of Buchanan’s support for rules to constrain government.

The enemy was the public itself, expressed through the tyranny of majority rule… It wasn’t enough to elect true-believing politicians. The rules of government needed to be rewritten.

Actually, the rules don’t need “to be rewritten.” The United States already has a Constitution that was explicitly designed to protect against majoritarianism. The problem is justices who put politics first and the Constitution second.

Now let’s address a second part of the book that irked me. The author links Buchanan to Chile, which to a leftist is an automatic sign of guilt.

…in Chile, after Augusto Pinochet’s coup against the socialist Salvador Allende in 1973. A vogue for public choice had swept Pinochet’s administration. Buchanan’s books were translated, and some of his acolytes helped restructure Chile’s economy. Labor unions were banned, and social security and health care were both privatized. On a week-long visit in 1980, Buchanan gave formal lectures to “top representatives of a governing elite that melded the military and the corporate world,” MacLean reports, and he dispensed counsel in private conversations.

There’s no evidence, from what I can tell, that Buchanan endorsed or supported Pinochet’s bad record on human rights. Instead, he’s simply “guilty” of encouraging a bad government to adopt good policy.

But if providing policy advice supposedly implies support for everything a government does, then I’m guilty of supporting Russia, China, and many other regimes. Needless to say, that’s nonsense.

In any event, here’s the part that doesn’t make sense.

Buchanan said very little about his part in assisting Chile’s reformers—and he said very little, too, when the country’s economy cratered, and Pinochet at last fired the Buchananites.

The economy “cratered”? Really?

Chile has been a star performer since the market reforms on the 1980s.

Maybe MacLean and/or Tanenhaus are geographically illiterate and meant Venezuela?

Because only a blind ideologue could deny the tremendous success of Chile’s economy.

Now let’s look at some excerpts from a review in Slate written by Rebecca Onion. It starts with a major smear.

When the Supreme Court decided, in the 1954 case of Brown vs. Board of Education, that segregated public schools were unconstitutional, Tennessee-born economist James McGill Buchanan was horrified.

Again, I haven’t read the book. But I have to imagine that if the author had the slightest bit of evidence, one of the reviews would have shared it. Instead, we get nothing but assertions. Is MacLean the one who smears Buchanan, or are the reviewers guilty of asserting that the Nobel Laureate is somehow racist because he doesn’t support a big welfare state?

I don’t know, but someone is being grossly unfair.

For what it’s worth, I never caught even the slightest whiff of racism from Buchanan during my time at GMU. Which stands to reason since libertarians and classical liberals are all about individual rights and view racism as a form of collectivism.

But it is true that Buchanan was not a fan of big government.

…the libertarian thinker found comfortable homes at a series of research universities and spent his time articulating a new grand vision of American society, a country in which government would be close to nonexistent, and would have no obligation to provide education—or health care, or old-age support, or food, or housing—to anyone.

Ms. Onion’s review includes a Q&A section with the author.

Here’s some of what MacLean said, starting with a description of public choice.

He had a very different personality from somebody like Milton Friedman. …His books were really written for other scholars, not so much the general public. …His basic idea is that people had been wrong to think of political actors as concerned with the common good or the public interest, when in fact, according to Buchanan’s way of looking at things, everyone should be understood as a self-interested actor seeking their own advantage.

She then asserts – with no evidence – that public choice isn’t an accurate way of describing the world.

…there were other people who actually tested that empirically and found out that it didn’t hold, so it’s really a caricature of the political process, but it’s a caricature that’s become very, very widespread right now.

This strikes me as nonsense. Anybody who works in DC has a very jaundiced view of the political process.

We see public choice in action every day.

She also criticizes Buchanan’s work in Chile.

…he went from writing that to advising the Pinochet junta in Chile on how to craft their constitution. This document was later called a “constitution of locks and bolts,” [and was designed] to make it so that the majority couldn’t make its will felt in the political system, unless it was a huge supermajority. So yeah, it’s pretty dark.

Well, if that’s a “dark” approach, then America’s Founders were very dark as well.

MacLean also links Buchanan to Cato.

Buchanan helped with the founding of the Cato Institute and with various other intellectual enterprises that were close to Charles Koch’s heart, like this thing called the Institute for Humane Studies.

She then plays armchair psychologist and tries to guess Buchanan’s real motivation. After all, surely he couldn’t have been motivated by a belief in liberty and limited government?

I think it’s also much more about this psychology of threatened domination. People who believe it will harm their liberty for other people to have full citizenship and be able to work together to govern society. And that somehow that goes much deeper than money to me. It’s hard to find the right words for it, but it’s a whole way of being in the world and seeing others. Assuming one’s right to dominate.

In other words, if you don’t want a tax-and-transfer welfare state, that means you want to dominate others. Amazing bit of mind reading.

Or perhaps a bit of projection.

It’s folks on the left, after all, who concoct strange theories involving Koch, Cato, and other parts of a vast libertarian conspiracy.

If we really had that much power, I can assure you that government would be much smaller than it is today.

Here’s what MacLean says about Buchanan being part of the supposedly sinister Koch network.

The most important thing I want readers to take from this book is an understanding that the Koch network and all of these people are doing what they’re doing because they understand that their ideas make them a permanent minority. They cannot win if they are honest about what they’re doing.

Let’s close by sharing some very bizarre passages from a review by Genevieve Valentine for NPR.

…economist James Buchanan — an early herald of libertarianism — began to cultivate a group of like-minded thinkers with the goal of changing government. This ideology eventually reached the billionaire Charles Koch… This sixty-year campaign to make libertarianism mainstream…is at the heart of Democracy in Chains.

Here’s Ms. Valentine’s contribution to gutter politics.

…this isn’t the first time Nancy MacLean has investigated the dark side of the American conservative movement (she also wrote Behind the Mask of Chivalry: The Making of the Second Ku Klux Klan).

A collectivist-minded group like the KKK was part of the conservative movement? Is there any evidence for that slanderous assertion?

Of course not.

And besides, what would that have to do with libertarianism?

But Ms. Valentine is just warming up. Did you know that libertarians somehow are at fault for the incompetence of Flint, MI, which is governed by Democrats?

As MacLean lays out in their own words, these men developed a strategy of misinformation and lying about outcomes until they had enough power that the public couldn’t retaliate against policies libertarians knew were destructive. (Look no further than Flint, MacLean says, where the Koch-funded Mackinac Center was behind policies that led to the water crisis.)

And she repeats the crazy assertion that Chile’s shift to free markets backfired, even though the economy boomed and subsequent governments dominated by Social Democrats have left the reforms in place.

By the time we reach Buchanan’s role in the rise of Chilean strongman Augusto Pinochet (which backfired so badly on the people of Chile that Buchanan remained silent about it for the rest of his life), that’s all you need to know about who Buchanan was.

It’s also remarkable that she wants us to think there’s something sinister about Buchanan remaining “silent” about his role in Chile.

This is a man who gave dozens of speeches every year in countries all over the world, while also producing all sorts of books and scholarly articles. Does she really think he was supposed to spend his time reminiscing about a couple of speeches and meetings back in 1980?

Here’s the bottom line. Professor Buchanan is “guilty” of believing in individual liberty and favoring constraints on government. It’s perfectly fair for folks on the left to object to those views (as well as the views of other Nobel Laureates with similar outlooks).

But when they want to ascribe base motives for his views, without the slightest shred of evidence, that’s crossing the line.

P.S. You probably won’t be surprised to learn that Ms. MacLean’s book was subsidized by taxpayers. Isn’t that wonderful. Not only do we subsidize international bureaucracies that push statism, we taxpayers also subsidize hit jobs on scholars who object to statism.

Read Full Post »

Older Posts »

%d bloggers like this: