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Posts Tagged ‘Economics’

In this interview with Dana Loesch, I make several points about the Trump budget, including the need to reform means-tested entitlements and Obamacare (with a caveat from my Second Theorem of government), as well as some comments on foreign aid and fake budget cuts.

But those are arguments that I make all the time. Today, I want to call attention to the mid-point of the interview when I explain that President Trump is actually in a strong position to get a win, notwithstanding all the rhetoric about his budget being “dead on arrival.”

Simply stated, while he can’t force Congress to enact a bill that reforms entitlements, his veto power means he can stop Congress from appropriating more money that he wants to spend.

But if he wants to win that battle, he needs to be willing to allow a partial government shutdown.

Which he wasn’t willing to let happen when he approved a bad deal a few weeks ago to fund the government for the rest of the 2017 fiscal year.

But we have some good news. He may have learned from that mistake, at least if we take this tweet seriously.

Amen. Trump should be firm and explicitly warn Congress that he will veto any appropriations bill that spends one penny above what he requested in his budget.

And if Congress doesn’t comply, he should use his veto pen and we’ll have a partial shutdown, which basically effects the “non-essential” parts of the federal government that presumably shouldn’t be funded anyhow.

The only way Trump loses that fight is if enough Republicans join with Democrats to override his veto. But that’s unlikely since it is mostly Democrat constituencies (government bureaucrats and other recipients of taxpayer money) who feel the pinch if there’s a partial shutdown.

This is a big reason why, as we saw during the Clinton years, it’s Democrats who begin to cave so long as Republicans don’t preemptively surrender.

The bottom line is that being tough on the budget isn’t just good policy. As Ronald Reagan demonstrated, there are political rewards when you shrink the burden of government and enable faster growth.

P.S. I’m not convinced that Trump actually wants smaller government, but I hope I’m wrong. This upcoming battle will be very revealing about where he really stands.

P.P.S. And if we do have a shutdown fight, I hope it will generate some amusing political humor, such as what’s at the bottom of this post. Other examples of shutdown-related humor can be enjoyed by clicking here, hereherehere, and here.

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What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?

These are all good reasons to dramatically lower the corporate tax rate, hopefully down to the 15-percent rate in Trump’s plan, but the House proposal for a 20-percent rate wouldn’t be a bad final outcome.

But there’s a 9th reason that is very emotionally appealing to me.

  • 9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.

I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.

Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.

And the mere prospect that the United States will improve its tax system is already reverberating around the world.

The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.

The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.

A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?

That’s music to my ears!

I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.

The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.

China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”

Amen.

Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.

As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.

Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.

Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.

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President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.

My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.

For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.

That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.

  • Shutting down the wasteful National Endowment for the Arts.
  • Defunding National Public Radio and the Corporation for Public Broadcasting.
  • Terminating the scandal-plagued Community Development Block Grant program.
  • Block-granting Medicaid and reducing central government funding and control.

Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).

I hope these cuts are implemented.

In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.

The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.

In other words, there’s no substitute for free markets and small government. That recipe works wherever it’s tried.

My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reason column.

President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.

And he explains why in the article. Here’s the passage that caught my eye.

Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”

The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.

The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.

By the way, one study even found that foreign aid undermines democracy.

Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.

Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.

President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.

Heck, foreign aid keeps societies in poverty by enabling bigger government.

Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.

The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.

P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.

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When President Trump released his so-called “skinny budget” back in March (dealing with the parts of Leviathan that are annually appropriated), I applauded several of the specific recommendations.

  • Shutting down the wasteful National Endowment for the Arts.
  • Defunding National Public Radio and the Corporation for Public Broadcasting.
  • Terminating the scandal-plagued Community Development Block Grant program.

The only problem is that I didn’t sense – and still don’t see – any serious effort to push through these much-needed fiscal reforms (and the same is true for his proposed tax cut).

The bottom line is that Trump has the power to achieve the bulk of his agenda, but only if he is willing to veto pork-filled bills and force a partial government shutdown. But he’s already blinked once in this type of battle, so the spending lobbies feel confident that he can be rolled again.

But let’s set that aside. The White House is about to release the President’s full budget and there already is considerable angst about potential reforms to Medicaid. Here are some excerpts from a report in the Washington Post.

President Trump’s first major budget proposal on Tuesday will include massive cuts to Medicaid…more than $800 billion over 10 years. …Trump’s decision to include the Medicaid cuts is significant because it shows he is rejecting calls from a number of Senate Republicans not to reverse the expansion of Medicaid that President Barack Obama achieved as part of the Affordable Care Act. The House has voted to cut the Medicaid funding… The proposed changes will be a central feature of Trump’s first comprehensive budget plan…it will seek changes to entitlements — programs that are essentially on auto­pilot and don’t need annual authorization from Congress.

I have two reactions to this story.

First, the Washington Post is lying (and not for the first time). There will be no Medicaid cuts in Trump’s budget. Contrary to the headline, there aren’t “big cuts” and there won’t be any “slashing.” We won’t see the actual numbers until tomorrow, but I can state with complete certainty that the Trump Administration is merely going to propose a reduction in how fast the program’s budget increases.

Second, it’s a very good idea to slow down the growth of Medicaid spending.

Here is some background information on the program, starting with an article in The Week by Shikha Dalmia

Medicaid is arguably the civilized world’s worst health insurance program. …This joint federal and state program has historically allowed the feds to give states 50 cents for every dollar they spent on purchasing health coverage for the poor. Because of this federal largesse, Medicaid has grown astronomically, becoming the single biggest ticket item on virtually every state budget. …President Obama essentially money-bombed states into expanding it even further. He told states that Uncle Sam would pick up 100 percent of the tab for the first three years for every additional person they covered up to 138 percent of the poverty level. …Medicaid now covers almost 75 million Americans. And even before ObamaCare took effect, Medicaid paid for almost half of all births in America. …The combined annual cost of the program now exceeds half a trillion dollars (with the feds’ share at 63 percent and states’ at 37 percent) — which adds up to roughly $7,000 for every man, woman, and child covered by the program. …Several reputable studies have found that Medicaid patients experience no better health outcomes than uninsured people, and arguably even slightly worse outcomes. …ObamaCare is like a Rube Goldberg contraption. Taking it apart and reassembling it is easier said than done — even if it’s the right and smart thing to do. And if Republicans can’t figure out a way to do so, American patients and taxpayers will be the big losers.

And here are some excerpts from a Wall Street Journal editorial.

The…important goal is to change the incentives over the long term and eliminate the perverse formulas that discount the welfare of the truly needy. …A helpful revolution in Medicaid would be to end the match rate that rewards higher spending and move to block grants. States would get some fixed pot of money annually, determined by how many people are enrolled. The pots might be expensive in the early years, but states would become accountable for marginal per capita spending growth over time. Governors can be assuaged by ending Medicaid’s command-and-control regulatory model, freeing them to use new tools to control costs.

James Capretta of the American Enterprise has additional details, particularly showing how the “federal medical assistance percentage” encourages higher spending.

In 1965, the authors of Medicaid thought they were creating a program that would provide federal structure, uniformity, and some funding for the many state programs that were already providing relatively inexpensive “indigent care” services to low-income households. …Medicaid has grown into the largest health care program in the country by enrollment, with 66 million participants and with annual federal and state costs of more than $550 billion. …Medicaid spending has increased rapidly nearly every year since the program was enacted, creating significant pressure in federal and state budgets. …The Medicaid FMAP is the fundamental flaw in the program’s current design and the main reason it is so costly. States can initiate new spending in Medicaid—spending that often will boost economic activity in the state—and federal taxpayers pay for at least half the cost. At the same time, savings from state-initiated Medicaid-spending cuts are also shared with federal taxpayers. For instance, in a state where the FMAP is 60 percent, the governor and state legislators face the unattractive prospect of keeping only $1.00 of every $2.50 in Medicaid savings they can identify and implement. The other $1.50 goes to the federal treasury. Put another way, governors and state legislators are reluctant to impose $2.50 in budgetary pain for a $1.00 gain to their bottom line.

The solution to this rigged system, he explains, is block grants or per-capita caps.

The…important structural change would be the switch to some form of fixed federal funding to states. The federal government would continue to heavily support the Medicaid program, but the commitment would have a limit, which would give states a strong incentive to manage the program for efficiency and cost control. One approach would be a block grant. Under a block grant, the federal government would make fixed, aggregate payments to the states based on historical spending patterns. Cost overruns at the state level would require the state to find additional resources within the state budget. Conversely, states that were able to control costs would enjoy the full benefits of their efforts. …Under per capita caps, the federal government would establish for each state a per-person payment for each of the main eligibility categories in the Medicaid program: the elderly, the blind and disabled, nondisabled adults, and children. The federal government would then make payments to the states based on the number of Medicaid enrollees in each of these categories. The per capita payment would be based on historical spending rates for the various categories of beneficiaries in each state and, again, would be indexed to a predetermined growth rate.

By the way, I previously shared two very depressing charts from Jim’s article.

In a 2012 column for Forbes, Avik Roy explains why reform will produce good results.

People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. …there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.

Writing for the Wall Street Journal, Professor Regina Herzlinger and Dr. Richard Boxer elaborate on how a new system would work.

Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts. …Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.

Nicholas Eberstadt, in an article for Commentary, points out the Medicaid is an employment killer.

21st-century America has witnessed a dreadful collapse of work. …According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). …means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age.

And the icing on the cake is that Medicaid finances much of the opioid problem in America.

[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. …For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street. …Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.

And if we want a cherry on top of the icing, Medicaid also is a cesspool of fraud, as reported by Reason.

Every year, the Government Accountability Office (GAO) releases a report putting a dollar figure on the amount of improper payments in Medicaid. …it shows that the program…spends a substantial portion of its annual budget…On fraud, on waste, on services not rendered, not medically necessary, or incorrectly billed. Last year, for example, the GAO found that about 9.8 percent of federal Medicaid expenditures, or about $29 billion, was spent improperly. …This year, the total has risen once again. About 10.5 percent, or $36 billion, of federal spending on the program isn’t up to snuff, according to a GAO report released this morning.

On that issue, my “favorite” example of Medicaid fraud was perpetrated by Russian diplomats.

Last but not least, Charlie Katebi discusses Medicaid problems in a column for the Federalist.

Trump advisor Kellyanne Conway said Trump wants to “block-grant Medicaid to the states” to ensure “those who are closest to the people in need will be administering.” …Block grants would cap federal Medicaid funding and let states decide how to use those dollars. It would introduce flexibility and budget discipline to a program that sorely needs both. …Medicaid’s funding formula incentivizes policymakers to expand the program at the expense of core state government functions. …Medicaid’s structure also hurts its beneficiaries. …Washington bars reformers from making meaningful changes without going through a lengthy and restrictive approval process. This forces states to control costs the only way they can: paying doctors less. States have cut Medicaid’s reimbursement so low that many providers simply refuse to treat its beneficiaries. …Block grants promise to break Medicaid’s vicious cycle of rising costs and declining care. Spendthrift politicians would no longer be able to expand Medicaid and expect the federal government to foot the bill. But state-level reformers will enjoy greater authority to streamline and improve the program.

I may as well close with the video I narrated for the Center for Freedom and Prosperity.

The video was released in 2011, but nothing has changed…except that the numbers today are far worse, in part because of Obama’s Medicaid expansion.

P.S. Based on CBO’s long-run forecast, Trump also should reconsider his views on old-age entitlements and support Medicare reform and Social Security reform.

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For almost all of human history, the norm for 99 percent of the population was poverty and deprivation.

Then, starting a few hundred years ago, something amazing happened. There was a sudden explosion of prosperity. In past years, I’ve shared two videos explaining this remarkable phenomenon, which is linked to the unleashing of free markets, the rule of law, and property rights.

Now let’s look at some similar data, but for a different purpose. Here are some fascinating charts put together by Professor Max Roser of Oxford. As you can see at the top, almost everybody used to be poor. But as you look below, you’ll notice that an increasing share of the world’s population is middle class or above.

There are three takeaways from this data.

The first conclusion, as noted above, is that the world is getting richer. Hundreds of millions of people have been lifted out of extreme poverty. That’s wonderful news.

The second conclusion, as seen by the red section of the chart, is that a modest bit of reform in India and China has paid big dividends (and, given the success of Indian-Americans and Chinese-Americans, I imagine those nations could become much richer with additional market-friendly reform).

But I want to focus today on a third conclusion, which is that pro-growth policies are the best way to help the poor, not redistribution driven by a fixation on inequality.

More specifically, notice how there was a lot of inequality in the chart for 1975, particularly compared to the chart for 1800. My leftist friends, with their flawed belief that the economy is a fixed pie, would instinctively assume that Europe and the Americas somehow became comparatively rich because Asia and Africa stayed comparatively poor.

In reality, the real story is that the economies of the western world expanded because they found the recipe for growth and prosperity.

And the 2015 chart shows that the rest of the world is finally moving in that direction as well (as confirmed by long-run data from Economic Freedom of the world).

What would have happened, however, if our friends on the left had control of global policy in 1975 and imposed high tax rates in order to redistribute lots of income from rich nations to poor nations? In other words, what would have happened if they imposed on the world the policies that they try to impose in various nations?

If that had happened, the world economy would have underperformed. As Thomas Sowell has explained, such policies penalize productive behavior and subsidize unproductive behavior.

It’s possible that such policies would have reduced inequality, to be sure, but global income would have been far lower.

Fortunately, we avoided that outcome and instead enjoyed a reduction in inequality caused by better policy and growth-driven convergence.

Which is exactly the lesson for helping the less fortunate in individual nations.

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There’s an election next month in the United Kingdom, though there’s not much political suspense.

The Labour Party is led by Jeremy Corbyn, a crazed Bernie Sanders-style leftist, and British voters have no desire to become an Anglo-Saxon version of Venezuela. Or, since Corbyn’s main economic adviser actually has said all income belongs to the government and Corbyn himself has endorsed a maximum wage, maybe an Anglo-Saxon version of North Korea.

Given the Labour Party’s self-inflicted suicide, it is widely expected that the Conservative Party, led by Theresa May, will win an overwhelming victory.

But what difference will it make? Will the Tories have a mandate? Do they actually want to change policy?

Let’s start by asking whether policy should change. The good news is that the United Kingdom is ranked #10 according to Economic Freedom of the World. That means the U.K. is more market-friendly than the vast majority of nations (including the United States, I’m sad to report).

The bad news is that the U.K.’s score has been slipping throughout the 21st century. Basically, there were a lot of great reforms during the Thatcher era, but policy in recent years has been slowly deteriorating.

More worrisome is that the U.K. – like most developed nations – has a demographic problem.

In the absence of reform, the burden of government automatically will increase.

And that’s a big problem in a nation where a majority of people already are net dependents. In a column for the Telegraph, Daniel Mahoney of the Centre for Policy Studies analyzes this major threat to the U.K.

This week, the Office for National Statistics published figures showing the level of net dependency on the UK state. …The figure now stands at 50.5 per cent. In the 1980s and 1990s, this figure was just over 40 per cent – that is to say that around four in ten households received more in benefits than they paid in taxes. But this dramatically changed in the New Labour era, which left office with well over half of the population being deemed net dependent on the state. …Labour’s enormous increase in spending on public services and welfare was equally responsible for this worrying trend. Public spending grew from just 34.5 per cent of GDP in 2000 to 41% of GDP just before the financial crisis hit the UK… There has been some progress in recent years, …but levels of net dependency remain too high. Over half of households are still net dependent on the state. …It is important for the next Government to reduce dependency further.

But rather than move policy in the right direction, there’s considerable concern that Theresa May is a British version of George W. Bush.

Thatcherites are worried.

Theresa May has been warned not to abandon Margaret Thatcher’s free market economics as she prepares to reveal the most interventionist Tory manifesto for generations. …The Prime Minister has already announced an energy price cap and is expected to clamp down on executive pay and empower workers on boards in her election pitch. …cabinet ministers who served under Mrs Thatcher were scathing of the Prime Minister’s energy price cap when speaking off the record. One said it would create “incredible distortions” in the energy market, while another warned that Government cannot “force water uphill” by trying to stop free-market forces.

If you’re curious about May’s energy policy, Rupert Darwall has a helpful article in The Conservative.

For some time, politicians of all parties have been imposing policies that force up energy costs. Now they want to cut the energy bills that have been driven higher by their own policies. …the Competition and Markets Authority noted the role of decarbonisation policies in pushing up costs. “Pressure on prices is likely to grow in the future, due in part to the increasing costs imposed by climate and energy policies,” the CMA stated. …BEIS ministers have convinced themselves that there is widespread popular support for the aggressive decarbonisation policies that are making energy more expensive. They should have the courage of their convictions and acknowledge that high and rising energy bills are a consequence of the decarbonisation policies they claim are so popular. Once they’ve done that, we can have an honest debate.

Sounds like a classic example of Mitchell’s Law. Politicians pursue a policy (green energy or decarbonisation) that leads to higher prices. They then respond to the problem created by their intervention with another form of intervention (energy price caps).

All of which will cause bigger problems in the future.

But for purposes of today’s column, what matters is that this bad policy is being pushed by the leader of the (supposedly) Conservative Party.

To be sure, it’s possible that this bad policy is just a gimmicky election promise and won’t be implemented. It’s also possible that it will be implemented but will be offset by better policy in other areas.

What matters is whether the overall burden of government is expanding or receding. Maybe May will cap spending (an area where her predecessor did a good job his last few years in office). Maybe she will cut tax rates (the corporate rate already has been slashed and will be reduced to 17 percent over the next few years).

At this stage, there’s no way to predict the direction of policy. But there is reason to worry because there aren’t enough people in the U.K. making the principled case for economic liberty.

Allister Heath explains what is needed to rejuvenate his country.

Britain needs a new movement to sell free-market ideas. It is the only way that this country’s slow drift Left-wards, which began in 1997, will be halted and reversed. It’s the only way that Labour, which has reembraced Marxism under Jeremy Corbyn, and the Tories, which have fallen back in love with old fashioned economic interventionism, will ever see sense again. …Tories gave up fighting for free markets years ago, when David Cameron was elected leader…he decided…to accept all of Labour’s increases in state spending and regulation, including environmental and labour market rules…when the financial crisis struck, the Tories joined in the banker-bashing.

But it’s not just that the Tories did bad things.

They also failed to do good things.

…they didn’t fight from the bully pulpit. They didn’t stand up and explain the merits of low taxes, which boost incentives. They didn’t shout from the rooftops that we need entrepreneurs to create wealth, and that people who make money by selling their wares to the public are performing a public service. They didn’t defend privatisation. They failed to make the case for profits… They conceded too much, including the destructive idea that the private sector is less moral and less law abiding than the state sector. They deferred to egalitarians and class warriors… When the financial crisis came, the Tories didn’t explain that much of it was actually caused by misplaced government intervention, including guarantees extended to financial institutions, pro-sub prime policies in the US, moral hazard and cheap money injected into the system by over-confident central banks. …We now have Mayonomics, a continuation of this trend, and its embrace of Ed Miliband-style energy price caps and yet more interventionism.

So Allister is urging a campaign for economic liberty.

The campaign must explain why private companies that compete against one another always generate better outcomes than public sector monopolies. …All of the lessons that became part of the political conventional wisdom after the 1970s need to be relearnt and retaught, and we need a new generation of pro-free market activists to lead this struggle. It’s time for supporters of capitalism to stand up and be counted.

Sadly, the business community is unwilling to lead.

The big business lobby groups are not up to the task… With a few exceptions, they don’t support real, genuine, free-markets.

For all intents and purposes, Allister is making the argument that Britain needs to become a more ethical society. In other words, he wants a campaign to inform and educate about the value of liberty qua liberty. A belief in self reliance, work, and individual responsibility. Characteristics that could be considered part of social capital or cultural capital.

And I think he’s spot on.

I worry a lot about the erosion of social capital in America. But if the polling data is accurate, the problem is much bigger in the United Kingdom.

P.S. Brexit is a wild card in this discussion. I supported the decision to leave the European Union in large part because of my hope U.K. policy makers would feel pressure to shift policy in a more market-oriented direction.

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I’ve repeatedly argued that there are two Social Security crises. The one most people know about is the fiscal crisis. Simply stated, the program is bankrupt.

But you don’t have to believe me. Here are some excerpts from a CNBC column.

The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall. …Despite the huge numbers, there’s even a less generous way of looking at the fiscal shortfall. A projection, known as the “infinite horizon,” takes into account all the program’s future liabilities, even those beyond the 75-year period that Social Security actuaries typically use in their calculations. Under the infinite horizon, Social Security will have $32.1 trillion in unfunded liabilities by 2090, $6.3 trillion more than last year’s projection. …The Social Security Administration projects that unfunded obligations will reach $11.4 trillion by 2090. That’s up $700 billion from the $10.7 trillion the administration projected for its 2089 shortfall.

By the way, the projections cited above are based on “present value,” which is calculated by predicting how much money would have to be set aside and invested today to finance future promises.

But that’s not how budgets work. At least not for pay-as-you-go systems like Social Security.

I prefer looking at inflation-adjusted estimates of cumulative deficits. On that basis, the 75-year unfunded liability is $37 trillion. The “infinite horizon” number presumably would be even scarier.

Oh, and don’t be under the illusion that the “Trust Fund” will solve the problem. It’s nothing but a pile of IOUs.

The second crisis is that Social Security is a bad deal for workers. They have to pay an enormous amount of taxes into the program during their working years, yet the monthly benefits they are promised are far lower than they could get if they had been able to put the same money into personal retirement accounts.

An analysis in the New York Times correctly points out that some groups with low lifespans are particularly disadvantaged by Social Security.

Social Security is designed…as an equalizer between rich and poor. It is structured to give more generous retirement benefits to low-income people, given the taxes they pay during their working years. …But in reality, a large body of research shows that the rich live longer — and that the life span gap between rich and poor is growing. And that means that the progressive ideal built into the design of Social Security is, gradually, being thwarted. In some circumstances, the program can actually be regressive, offering richer benefits to those who are already affluent. …because different groups of people have different life expectancies, some groups receive more value from every dollar of payroll taxes they and their employers pay into the system. Over all, women live longer than men and African-Americans die younger than whites. … the Social Security retirement system as a whole is regressive, or more favorable to the affluent than to the poor. …the richest 1 percent of Americans gained three years of life expectancy from 2001 to 2014 alone, while the poorest had almost no gain (0.3 of a year). For anyone who believes that it’s important for the Social Security program to remain progressive, the life-span shifts have big implications that are made more acute by the program’s financial problems.

I’m not motivated by having Social Security “remain progressive,” but I fully agree that it’s bad policy to have government programs that are especially harmful for poor people.

The obvious solution to both crises is personal retirement accounts. We should copy nations elsewhere that have successfully transitioned to systems based on real savings rather than empty political promises.

But some of our friends on the left think that the answer is to make the program even worse for higher-income taxpayers, even though this doesn’t change the fact that the program is a bad deal for lower-income taxpayers. Hillary Clinton embraced this approach during last year’s campaign (as did Obama in 2008).

Moreover, many Democrats in Washington are lurching even further to the left.

In today’s Wall Street Journal, Andrew Biggs dissects their latest plan.

…congressional Democrats…have embraced an ambitious but flawed policy of expanding the program’s benefits via tax increases on all workers, including doubling payroll taxes on high earners. …today’s Democrats…would boost the initial benefits Americans receive upon retirement, and pay larger cost-of-living adjustments, or COLAs, in the years after. Over the plan’s first 10 years, Social Security benefit payments would rise by almost $1.2 trillion, according to an analysis by Social Security’s actuaries. To fund those higher benefits, the plan would increase the Social Security payroll rate from the current 12.4% to 14.8% between 2019 and 2042. The plan also would phase out the ceiling on earnings subject to the tax, currently $127,000, so that by the mid-2030s all earnings would be taxed. For low- and middle-income workers, lifetime payroll taxes would rise by nearly one-fifth from current levels. …the effective top federal marginal tax rate on earned income (inclusive of Medicare taxes and limitations on deductions) would rise from the current 44.6% to 59.4%. State income taxes could boost the total marginal rate as high as 72.7% for California residents. Under the Democrats’ Social Security plan the U.S. would have, by far, the highest top marginal tax rate in the developed world.

And higher tax rates would be bad news.

…employers who are required to pay higher Social Security taxes would reduce wages to help cover those costs. …According to a recent analysis by the Joint Committee on Taxation, lost income and Medicare taxes would offset between 12% and 21% of workers’ Social Security payroll tax increases, depending on income level. …Left-leaning economists Emmanuel Saez and Jeffrey Liebman found in a 2006 study that even modest behavioral reactions could reduce the net revenue gains from a plan like Mr. Larson’s by nearly half. Assume stronger behavioral effects (specifically, an elasticity of taxable income of 0.5), and losses to non-Social Security revenue would, in the authors’ words, “swamp any benefits from the increase in payroll tax revenue.” In other words, the Democrats’ Social Security reform could increase government deficits and debt, permanently.

To augment this research by Biggs, let’s look at an academic study that estimates how government entitlements push older people out of the labor force, which is bad for them and bad for the overall economy.

Baby Boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, Boomers must look to their own devices to rescue their retirements, namely working harder and longer. However, the incentive of Boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is Medicaid and Social Security’s complex Earnings Test and clawback of disability benefits. …We find that working longer, say an extra five years, can raise older workers’ sustainable living standards. But the impact is far smaller than suggested in the literature in large part because of high net taxation of labor earnings. We also find that many Baby Boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of our fiscal system. …we find that traditional, current-year (i.e., static) marginal tax calculations relating this year’s extra taxes to this year’s extra income are woefully off target when it comes to properly measuring the elderly’s disincentives to work. Our findings suggest that Uncle Sam is, indeed, inducing the elderly to retire.

Interestingly, there are some honest folks on the left who support personal accounts. Here’s an article on the “progressive case for privatizing Social Security in the US.”

…privatization is an underrated idea, and progressives who oppose benefit cuts should be fighting for it. …With private accounts, the system would be much more transparent. Currently, for every $1 a middle-earning couple (born in 1985) pays into Social Security, they can expect $1.01 back in benefits when they retire. That’s not a great return on investment, and it may fall in the future because Social Security isn’t on track to keep paying this level of benefits. If the government cuts benefits enough to make the program solvent they’d only get $0.80 for every $1 they pay in. …private accounts would change the conversation about entitlements. It clarifies what people expect to earn in retirement. …private accounts should appeal to those on the left who value a generous social safety net.

Amen.

Honest folks on the left should look around the world and see how personal accounts are good news, both for workers and the overall economy. Heck, just compare these two charts on the United States and Australia.

Sadly, we have too many statists who are motivated by penalizing the rich rather than helping the poor.

P.S. The United States was actually very close to genuine Social Security reform during the Bill Clinton presidency. Investor’s Business Daily opined last year on what almost happened.

The U.S. came very close to having private retirement accounts as part of a sweeping Social Security reform…under President Clinton. That surprising bit of news comes 18 years after the fact in a reminiscence by Cato Institute senior fellow Jose Pinera, who once upon a time served as Chile’s secretary of labor and social security, and who designed that country’s highly successful pension reforms in 1980. Pinera says that Clinton began thinking in earnest about privatizing part of Social Security back in 1995… According to Pinera, Clinton saw private accounts as a way to cement his presidential record as a reformer. And the model for doing so that he had in mind was from Chile, where Pinera and a group of reformers created private retirement accounts that helped fuel that nation’s decade-long growth boom. It was a rousing success. Clinton even sent his former chief of staff, Mack McLarty, to Chile in 1996 to see how private personal accounts worked. In a letter to Pinera, he talked about how impressive Chile’s program was… Three years later, in December 1998, Pinera attended a White House conference on Social Security reform. There, he outlined the simple elements of the Chilean Model… It must have struck a chord with Clinton. Just one month later, in his 1999 State of the Union address, he proposed what he called “USA accounts,”… Every American would have had a private savings account, funded by a portion of his or her payroll taxes. …But it was not to be. Clinton’s involvement in the Monica Lewinsky scandal and his subsequent impeachment for perjury and obstruction of justice derailed his plans.

Having been very involved in the Social Security debates back in the last 1990s, I can vouch for this. Clinton was remarkably sympathetic to reform and almost always gave the right answers when discussing the issue (not too surprising since he compiled a remarkably pro-market record).

Unfortunately, the Lewinsky scandal and impeachment fight poisoned the political environment for bipartisan reform. Who would have thought that a sexual dalliance could have killed an opportunity for much-needed reform. That was the most expensive you-know-what in world history.

P.P.S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

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