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Posts Tagged ‘Economics’

The Index of Economic Freedom is my favorite annual publication from the Heritage Foundation. It’s a rich source of information, using dozens of data sources, about economic liberty around the world.

I first wrote about the Index back in 2010 and shared the bad news that the U.S. score dropped dramatically in Obama’s first year.

Well, the new Index lets us see the net effect of Obama’s entire tenure. The worse news is that the U.S. score has dropped to 75.1 on a 0-100 scale. And the worst news is that this represents America’s lowest score in the twenty-plus years that the Index has been published.

The United States is ranked #17 in the latest Index. We’re only in the “Mostly Free” category, behind Luxembourg and the Netherlands and tied with Denmark.

The top-ranked jurisdiction, once again, is Hong Kong. And what’s really amazing is that Hong Kong actually increased it score. Indeed, all five nations in the “Free” category managed to increase overall economic freedom.

So congratulations also to Singapore, New Zealand, Switzerland, and Australia.

Here’s a map showing the entire world. The worst nations are in red, with North Korea at the very bottom, followed by Venezuela and Cuba.

By the way, Cuba jumped 4.1 points last year, so maybe Fidel’s death is the beginning of some much-needed liberalization.

For more information on the United States, here’s the breakdown of America’s score. As you can see, our worst category is “government size.” In other words, we tax too much and spend too much.

America’s best score is for “regulatory efficiency,” which helps to explain why the U.S. gets a top-10 score from the World Bank’s Doing Business.

Let’s close by comparing the United States with Hong Kong. This charts shows how our scores have changes over time, and also shows the average score for the entire world.

The biggest takeaway is that the U.S. basically is halfway between Hong Kong and the world average.

The great unknown, of course, is whether America’s score will go up or down under Trump.

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I’m glad that Donald Trump wants faster growth. The American people shouldn’t have to settle for the kind of anemic economic performance that the nation endured during the Obama years.

But does he understand the right recipe for prosperity?

That’s an open question. At times, Trump makes Obama-style arguments about the Keynesian elixir of government infrastructure spending. But at other times, he talks about lowering taxes and reducing the burden of red tape.

I don’t know what’s he’s ultimately going to decide, but, as the late Yogi Berra might say, the debate over “stimulus” is deja vu all over again. Supporters of Keynesianism (a.k.a., the economic version of a perpetual motion machine) want us to believe that government can make the country more prosperous with a borrow-and-spend agenda.

At the risk of understatement, I disagree with that free-lunch ideology. And I discussed this issue in a recent France24 appearance. I was on via satellite, so there was an awkward delay in my responses, but I hopefully made clear that real stimulus is generated by policies that make government smaller and unleash the private sector.

If you want background data on labor-force participation and younger workers, click here. And if you want more information about unions and public policy, click here.

For today, though, I want to focus on Keynesian economics and the best way to “stimulate” growth.

The question I always ask my Keynesian friends is to provide a success story. I don’t even ask for a bunch of good examples (like I provide when explaining how spending restraint yields good results). All I ask is that they show one nation, anywhere in the world, at any point in history, where the borrow-and-spend approach produced a good economy.

Simply stated, there are success stories. And the reason they don’t exist is because Keynesian economics doesn’t work.

Though the Keynesians invariably respond with the rather lame argument that their spending schemes mitigated bad outcomes. And they even assert that good outcomes would have been achieved if only there was even more spending.

All this is based, by the way, on Keynesian models that are designed to show that more spending generates growth. I’m not joking. That’s literally their idea of evidence.

Since you’re probably laughing after reading that, let’s close with a bit of explicit Keynesian-themed humor.

I’ve always thought this Scott Stantis cartoon best captures why Keynesian economics is misguided. Simply stated, it’s silly to think that the private sector is going to perform better if politicians are increasing the burden of government spending.

But I’m also amused by cartoons that expose the fact that Keynesian economics is based on the notion that you can become richer by redistributing money within an economy. Sort of like taking money out of your right pocket and putting it in your left pocket and thinking that you now have more money.

Expanding on this theme, here’s a new addition for our collection of Keynesian humor. It’s courtesy of Don Boudreaux at Cafe Hayek, and it shows the Keynesian plan to charge the economy (pun intended). You don’t need to know a lot about electricity to realize this isn’t a very practical approach.

Is this an unfair jab? Maybe, but don’t forget that Keynesians are the folks who think it’s good for growth to pay people to dig holes and then pay them to fill the holes. Or, in Krugman’s case, to hope for alien attacks. No wonder it’s so easy to mock them.

P.S. If you want to learn more about Keynesian economics, the video I narrated for the Center for Freedom and Prosperity is a good place to start.

P.P.S. And if you like Keynesian videos, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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I was recently interviewed on Fox Business Network about Trump’s policies and the economy, and the discussion jumped around from issues such as border-adjustable taxation to energy regulation.

Though the central theme of the discussion was whether Trump had good ideas for American jobs and business competitiveness.

Given my schizophrenic views on Trump, this meant I was both supportive and critical, and I hope certain people in the White House paid attention to my comment about there being no need for the “stick” of protectionism if Trump delivers on the “carrot” of tax cuts and deregulation.

For today, though, I want to elaborate on why protectionism is the wrong approach. I mentioned in the interview that the long-run outlook for manufacturing employment wasn’t very good, but that we shouldn’t blame trade. So I decided to find a chart that illustrated this point, which then gave me the idea of using a Q&A format to share several charts and tables that make very strong points about trade and protectionism.

Did you know…that manufacturing employment is falling because of productivity growth rather than trade?

The bad news (at least for certain workers) is that manufacturing employment has fallen. And it will continue to fall. But as illustrated by this chart from Professor Don Boudreaux, manufacturing output is at record highs. What’s really happening is that productivity improvements enable more to be produced while using fewer workers. And this is happening all over the world.

Did you know…that there’s a strong relationship between trade openness and national prosperity?

One of Professor Boudreaux’s students augmented one of his charts to show the link between pro-trade policies and per-capita economic output.

Did you know…that you can’t hurt importers without also hurting exporters?

Many of the major multinational firms engage in considerable cross-border trade, meaning that they are both major importers and major exporters. Here’s a very illuminating chart from the Peterson Institute of International Economics.

Did you know…that protectionism imposes enormous losses on consumers and therefore is a net job destroyer?

There has been considerable research on the results of various protectionist policies and the results shared by Mark Perry of the American Enterprise Institute inevitably show substantial economic costs, which means that the jobs that are saved (the “seen“) are more than offset by the jobs that are lost or never created (the “unseen“).

Last but not least, did you know….that economists are nearly unanimous in their recognition that trade barriers undermine prosperity?

There are plenty of jokes (many well deserved!) about economists, including the stereotype that economists can’t agree on anything. But there’s near-unanimity in the profession that protectionism is misguided.

By the way, if you have protectionist friends, ask them if they have good answer for these eight questions. And also direct them to the wise words of Walter Williams.

P.S. I wrote a few weeks ago about former President Obama’s dismal legacy. I then augmented that analysis with a more recent postscript citing Ramesh Ponnuru’s observation that Obama failed in his effort to be the left’s Reagan. Now it’s time for another worthy postscript. The Wall Street Journal reviewed the new numbers for growth in 2016 and opined on what this means for Obama’s overall record.

…growth for all of 2016 clocked in at 1.6%, the slowest since 2011 and down from 2.6% in 2015. That marks the 11th consecutive year that GDP growth failed to reach 3%, the longest period since the Bureau of Economic Analysis began reporting the figure. The fourth quarter also rings out the Obama era with an average annual growth rate of 1.8%, which is right down there with George W. Bush for the lowest among modern Presidents. Mr. Obama inherited a deep recession, but that makes the 2.1% growth average since the recession ended all the more dismaying. You have to work hard to suppress growth after a deep downturn, and Mr. Obama did that by putting income redistribution ahead of growth as a policy priority.

Amen. When you fixate on how the pie is sliced, you wind up with policies that cause the pie to be smaller.

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The famous French diplomat Charles Maurice de Talleyrand supposedly said that a weakness of the Bourbon monarchs was that they learned nothing and forgot nothing.

If so, the genetic descendants of the Bourbons are now in charge of Europe.

But before explaining why, let’s first establish that Europe is in trouble. I’ve made that point (many times) that the continent is in trouble because of statism and demographic change.

What’s far more noteworthy, though, is that even the Europeans are waking up to the fact that the continent faces a very grim future.

For instance, the bureaucrats in Brussels are pessimistic, as reported by the EU Observer.

…the report warns of a longer term risk for the EU economy. “As expectations of low growth ahead affect investment today, there is potential for a vicious circle,” the commission’s director general for economic and financial affairs writes in the report’s foreword. “In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), ” Marco Buti writes.

The people of Europe share that grim assessment.

Pew has some very sobering data on angst across the continent.

Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013.

Here’s the relevant chart.

Establishment-oriented voices in the United States also agree that the outlook is rather dismal.

Writing in the Washington Post, Sebastian Mallaby offers a grim assessment of Europe’s future.

…since 2008…, the 28 countries in the European Union managed combined growth of just 4 percent. And in the subset consisting of the eurozone minus Germany, output actually fell. …most of the Mediterranean periphery has suffered a lost decade. …The unemployment rate in the euro area stands at 9.8 percent, more than double the U.S. rate. Unemployment among Europe’s youth is even more appalling: In Greece, Spain, France, Croatia, Italy, Cyprus and Portugal, more than 1 in 4 workers under 25 are jobless.

The bottom line is that there’s widespread consensus that Europe is a mess and that things will probably get worse unless there are big changes.

But the key question, as always, is whether the changes are positive or negative. And this is why I started with a reference to the Bourbon kings. European leaders today also are infamous for learning nothing and forgetting nothing.

Indeed, the proponents of bad policy want to double down on the mistakes of bigger government and more centralization.

The International Monetary Fund (aka, the “Dr. Kevorkian” or “dumpster fire” of the global economy), led by France’s Christine Lagarde, actually is urging a new form of redistribution in Europe.

The International Monetary Fund called on Thursday for the creation of a fund…in the euro zone… Managing Director Christine Lagarde said… “countries would be pooling budgetary resources in a common pot which could be used for projects and certain operations”

Lagarde says the new fund should have strings attached, so that nations could access the loot if they complied with the EU’s budget rules, and also if they use the money for structural reform.

That sounds prudent, but only until you look at the fine print.

The current budget rules are misguided and are more likely to encourage tax hikes rather than spending restraint. And while many European nations need good structural reform, that’s not what the IMF has in mind.

Lagarde told a news conference the new fund could pay for projects related to migration, refugees, security, energy and climate change.

Instead, it appears that this is just a scheme to transfer money from countries such as Germany and Estonia that have restrained spending in recent years.

Germany, Estonia and Luxembourg are the only EU countries that have posted budget surpluses since 2014. Lagarde said the pooling of budgetary resources could put these surpluses to good use.

Sigh.

But the problem goes way beyond an international bureaucracy led by someone from Europe. This is the mentality that is deeply embedded in most European policymakers.

Simply stated, the people who helped create the European mess by pushing for bigger government and more centralization agree that the time if right for…you guessed it…bigger government and more centralization. Here’s an excerpt from a report by the Delors Institute.

…a true economic and monetary union still needs to be built. It will have to be based on significant risk sharing and sovereignty sharing within a coherent and legitimate framework of supranational economic governance. This third building block includes turning the ESM into a fully-fledged European Monetary Fund.

The bureaucrats in Brussels predictably agree that they should get more power, as noted in a story from the EU Observer.

The EU should raise its own taxes and use Brexit as an opportunity to push for the idea, a report by a group of top officials says. …”The Union must mobilise common resources to find common solutions to common problems,” says the document, seen by EUobserver. …The paper also proposes a EU-level corporate income tax that would be combined with a common consolidated corporate tax base… Other proposals include a bank levy, a financial transaction tax, or a European VAT that would top national VATs. …The new budget EU commissioner Guenther Oettinger said that the report was “of great quality”.

And the senior politicians in Brussels are also beating the drum for added centralization.

…divergence creates fragility… Progress must happen…towards a genuine Economic Union…towards a Fiscal Union…need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions…some degree of public risk sharing…including a ‘social protection floor’…a shared sense of purpose among all Member States

Wow. I don’t know if I’ve ever read something so wildly wrong. As Nassim Nicholas Taleb has sagely observed, it is centralization and harmonization that creates systemic risk.

And all this talk about “common resources” and “public risk sharing” is simply the governmental version of co-signing a loan for the deadbeat family alcoholic.

Yet Europe’s ideologues can’t resist their lemming-like march in the wrong direction.

What makes this especially odd is that there is so much evidence that Europe originally became rich for the opposite reason.

It was decentralization and jurisdictional competition that enabled prosperity.

Matt Ridley, writing for the UK-based Times, drives this point home.

…the leading theory among economic historians for why Europe after 1400 became the wealthiest and most innovative continent is political fragmentation. Precisely because it was not unified, Europe became a laboratory for different ways of governing, enabling the discovery of regimes that allowed free markets and invention to flourish, first in northern Italy and some parts of Germany, then the low countries, then Britain. By contrast, China’s unity under one ruler prevented such experimentation. …Baron Montesquieu…remarked, Europe’s “many medium-sized states” had incubated “a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce”. …David Hume…mused…Europe is the continent “most broken by seas, rivers, and mountains” and so “the divisions into small states are favourable to learning, by stopping the progress of authority as well as that of power”. …the idea has gained almost universal agreement among historians that a disunited Europe, while frequently wracked by war, was also prone to innovation and liberty — thanks to the ability of innovators and skilled craftsmen to cross borders in search of more congenial regimes.

But now Europe has swung completely in the other direction.

The European Commission’s obsession with harmonisation prevents the very pattern of experimentation that encourages innovation. Whereas the states system positively encouraged governments to be moderate in political, religious and fiscal terms or lose their talent, the commission detests jurisdictional competition, in taxes and regulations. The larger the empire, the less brake there is on governmental excess.

Ralph Raico echoes these insights in an article for the Foundation for Economic Education.

In seeking to answer the question why the industrial breakthrough occurred first in western Europe, …what was it that permitted private enterprise to flourish? …Europe’s radical decentralization… In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions. …Instead of experiencing the hegemony of a universal empire, Europe developed into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other political entities. Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator”.

In other words, the “stationary bandit” couldn’t steal as much and that gave the private sector the breathing room that’s necessary for growth.

But today’s politicians in Europe want to strengthen the ability of governments to seize more money and power.

That strategy may work in the short run, but bailouts, redistribution, easy money, and statism are not a good long-run strategy.

So perhaps it’s appropriate that we conclude with a warning. As reported in a column for the UK-based Telegraph, one of the architects of the euro fears that bailouts are crippling the continent-wide currency.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned. “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist… Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “…Market discipline is done away with by ECB interventions. …The no bailout clause is violated every day,” he said… Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.

For what it’s worth, I fully agree that Greece should have been cut loose.

But European politicians and bureaucrats, driven by an ideological belief in centralization (and a desire to bail out their big banks), instead decided to undermine the euro by creating a bigger mess in Greece and sending a very bad signal about bailouts to other welfare states.

And keep in mind that the fuse is still burning on the European fiscal crisis.

As the old saying goes, this won’t end well.

P.S. While my prognosis for Europe is relatively bleak, there were some hopeful signs in the aforementioned Pew data.

First, Europeans at some level understand that government is simply too big. Indeed, they recognize that economic growth is far more likely to occur if fiscal burdens are reduced rather than increased.

Second, they also realize that the euro, while weakened and flawed, is a better option than restoring national currencies, which would give their governments the power to finance bigger government by printing money.

P.P.S. I can’t resist sharing one final bit of polling data from Pew. I’m amused that every nation sees itself as the most compassionate (though if you look at real data, all European nations lag the USA in real compassion). Meanwhile, the prize for self-doubt (or perhaps self-awareness?) goes to the Italians, who labeled themselves as least trustworthy. The schizophrenia prize goes to the Poles, who simultaneously view the Germans as the most trustworthy and least trustworthy.

Oh, and there’s probably some lesson to be learned from Germany dominating the data for being most trustworthy and least compassionate.

Maybe this poll should be added to my European humor collection.

P.P.P.S. Given the sorry state of Europe, now perhaps skeptics will understand why Brexit was the only good option for Brits.

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Red tape is a huge burden on the American economy, with even an Obama Administration bureaucracy acknowledging that costs far exceed supposed benefits.

And the problem gets worse every year.

If I had to pick the worst example of foolish regulation, there would be lots of absurd examples from the federal government, and the crazy bureaucrats at the Equal Employment Opportunity Commission probably would be at the top of the list.

But the worst regulations, at least if measured by the harm to lower-income Americans, probably are imposed by state governments. Yes, I’m talking about the scourge of occupational licensing.

A report published by The American Interest elaborates on this problem.

…it’s important that policymakers don’t lose sight of more subtle ways the government has distorted the economy to favor the politically connected. One example: Onerous occupational licensing laws that force people to undergo thousands of hours of often redundant and gratuitous training to perform jobs like auctioneering, tree trimming, and hair styling. …licensing laws are the result of higher-skilled professionals seeking to protect their market share at the consumers’ expense. …This not just a minor concern for a few key industries; it is a weight dragging down the entire economy, raising prices while blocking access to less-skilled trades. The Obama administration has already recommended that states look at ways to loosen these requirements.

Yes, you read correctly. This is an issue where the Obama Administration was basically on the right side.

I’m not joking. Here are excerpts from a White House statement last year.

Today nearly one-quarter of all U.S. workers need a government license to do their jobs. The prevalence of occupational licensing has risen from less than 5 percent in the early 1950s with the majority of the growth coming from an increase in the number of professions that require a license rather than composition in the workforce. …the current system often requires unnecessary training, lengthy delays, or high fees. This can in turn artificially create higher costs for consumers and prohibit skilled American workers like florists or hairdressers from entering jobs in which they could otherwise excel.

Senator Mike Lee of Utah is a strong advocate of curtailing these protectionist regulations and allowing capitalism to flourish. Using teeth-whitening services as an example, he explained the downside of government-enforced cartels in an article for Forbes.

Should only dentists be allowed to whiten people’s teeth? …This may sound like a silly question… Keep in mind that the Food and Drug Administration already regulates teeth-whitening products for safety and that virtually no one has ever been injured by someone administering these products. But in a number of states throughout the country, dentists began losing teeth-whitening customers to non-dentists who had set up kiosks in shopping malls and were charging less money for the same teeth-whitening services. These upset dentists then went to their state dental-licensing boards and urged those boards to add teeth whitening to the definition of “the practice of dentistry.” These state boards complied… The results were unemployed teeth whiteners, more expensive teeth whitening, and higher profits for the dentists. …An organized cartel (the dentists)…used the threat of government punishment to enforce their monopoly.

Unfortunately, Senator Lee explains, this is a problem that goes way beyond teeth whitening.

…when the deeper question of occupational licensing is applied to the broader economy, it turns out that there are millions of jobs and hundreds of billions of dollars at stake. …dentists are not the only professionals using government power to harm consumers and line their pockets. A 2013 study found that 25% of today’s workforce is in an occupation licensed by a state entity, up from just 5% in 1950. And the number of licensed professionals is not growing because everyone is suddenly becoming a doctor or a lawyer. Instead, it is the number of professions requiring licenses that is growing. Security guards, florists, barbers, massage therapists, interior decorators, manicurists, hair stylists, personal trainers, tree trimmers and auctioneers work in just some of the many, many professions that state legislatures have seen fit to cartelize.

But do consumers get some sort of benefit as a result of all this red tape?

Nope.

According to a study by University of Minnesota Professor Morris Kleiner, “Occupational licensing has either no impact or even a negative impact on the quality of services provided to customers by members of the regulated occupation.” Occupational licensing has grown not because consumers demanded it, but because lobbyists recognized a business opportunity where they could use government power to get rich at the public’s expense. …Consumers end up paying $200 billion in higher costs annually, prospective professionals lose an estimated three million jobs, and millions more Americans find it harder to live where they want due to licensing requirements.

By the way, the barriers to mobility are a major problem. A professor at Yale Law School crunched the numbers and found that occupational licensing has undermined the great America tradition of moving where the jobs are.

Here are some details from the abstract of the study.

Rates of inter-state mobility, by most estimates, have been falling for decades. Even research that does not find a general decline finds that inter-state mobility rates are low among disadvantaged groups and are not increasing despite a growing connection between moving and economic opportunity. …governments, mostly at the state and local levels, have created a huge number of legal barriers to inter-state mobility. Land-use laws and occupational licensing regimes limit entry into local and state labor markets.

In an article for Reason, Ronald Bailey highlights some of the key findings from the scholarly study.

From the end of World War II through the 1980s, the Census Bureau reports, about 20 percent of Americans changed their residences annually, with more than 3 percent moving to a different state each year. Now more are staying home. In November, the Census Bureau reported that Americans were moving at historically low rates: Only 11.2 percent moved in 2015, and just 1.5 percent moved to a different state. …Yale law professor David Schleicher blames bad public policy. …Schleicher identifies and analyzes the policies that limit people’s ability to enter job-rich markets and exit job-poor ones. …Why? First, lots of job-rich areas have erected barriers that keep job-seekers from other regions out. The two biggest barriers are land use and occupational licensing restrictions. …Schleicher notes that more than 1,100 occupations require licensing in at least one state, but fewer than 60 are regulated in all states. A 2015 White House report on occupational licensing found that “interstate migration rates for workers in the most licensed occupations are lower by an amount equal to nearly 15 percent of the average migration rate compared to those in the least licensed occupations.”

Let’s close by putting this in practical terms.

Imagine you don’t have a lot of education. And you definitely don’t have out-of-state licenses that are necessary for dozens of professions.

Are you going to move where there are more jobs?

Several decades ago, the answer likely was yes. Now, the incentive for mobility has been curtailed thanks to licensing laws that are really nothing more than regulatory protectionism.

Such laws should be repealed, or struck down by the courts as illegal restraints on trade.

P.S. Here’s some dark libertarian humor on this topic.

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I was sitting directly under a television in a Caribbean airport yesterday when Trump got inaugurated, so I inadvertently heard his speech.

The bad news is that Trump didn’t say much about liberty or the Constitution. And, unlike Reagan, he certainly didn’t have much to say about shrinking the size and scope of Washington.

On the other hand, he excoriated Washington insiders for lining their pockets at the expense of the overall nation. And if he’s serious about curtailing sleaze in DC, the only solution is smaller government.

But is that what Trump really believes? Does he intend to move policy in the right direction?

Well, as I’ve already confessed, I don’t know what to expect. The biggest wild card, at least for fiscal policy, is whether he’ll be serious about the problem of government spending. Especially entitlements.

I’ve been advising the Trump people that he needs some genuine spending restraint (or even some semi-serious spending restraint) if he actually wants to enact his big tax cut and have it be durable. And I’ve also been reminding them that Reagan’s 1984 landslide was in part a reward for having implemented policies that triggered strong growth.

However, I gave that same advice to Bush’s people last decade and they didn’t listen, so I’m not overflowing with optimism that I’ll have more luck this time around.

But hope springs eternal, so I’m starting the Trump era with my fingers crossed that we’ll get some good reform and good results. I talk about these issues in this interview with Dana Loesch.

If I can elaborate on a couple of points from the interview, I am especially interested to see whether Republicans can actually deliver a big reduction in the corporate tax rate. Trump wants 15 percent, which would be great. House Republicans have proposed 20 percent, which also would be a big shift in the right direction.

But there are a lot of details to be addressed before a big fiscal package can be approved, including whether Trump will do something to control spending and also how he will deal with the controversial provision on border adjustability in the House plan.

Regarding employment, I mentioned that we have the good news of a lower unemployment rate combined with the bad news of too many people out of the labor force.

I shared my views on this issue for a story in USA Today.

The share of Americans working or looking for jobs is near historic lows. About 10 million prime-age men aren’t in the labor force — a lingering casualty of the Great Recession. Wage increases were stagnant at about 2% for most of the 7 ½-year-old recovery. “Several million people are not earning income, not producing,” says Dan Mitchell, senior fellow at the conservative Cato Institute. “I don’t think it’s good for the economy and it’s not good for those people.” Mitchell at least partly blames the substantial increase in the disability and food stamp rolls during and after the recession, which he says encouraged some Americans to remain idle. “We’ve expanded the welfare state,” he says.

At the risk of stating the obvious, fewer people work when you increase the benefits of not working.

Last but not least, I will confess a sin of omission. Dana mentioned the uptick in consumer spending over the holidays. That’s an important economic indicator, to be sure, but I should have taken the opportunity to explain that consumer spending and consumer sentiments are symptoms of an improving economy rather than causes of an improving economy. The focus of policy should be on how to produce higher incomes, not on how existing income is allocated.

P.S. Speaking of sins of omission, I missed an important point earlier this month in my column on Obama’s legacy. Fortunately, Ramesh Ponnuru of National Review picked up the ball with the very important point that Obama utterly failed in his desire to be a Reagan-type transformational President.

Obama…wanted to be the liberal Reagan, or rather the liberal anti-Reagan: the person who pulled American politics back to the left a generation after Reagan pulled it to the right. …the Obama project has failed. He did manage to pull his own party to the left. …On criminal justice, on entitlements, on immigration, on abortion, on religious liberty, Democrats staked out positions and adopted rhetoric that were much less moderate than they had previously been. …The Democratic strategy of the Obama years has left the party locked out of power in the White House, the Senate, and the House… At no point in Obama’s presidency did his political success make Republicans consider assimilating some of his views into their philosophy, as Bill Clinton had done with Reaganism. Republicans are even less likely to make such an adjustment now. …it is clear enough already that Obama is no Reagan.

Which gives me another opportunity to call attention to the best poll of the past eight years.

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Time for a boring and wonky discussion about taxes, capital formation, and growth.

We’ll start with the uncontroversial proposition that saving and investment is a key driver of long-run growth. Simply stated, employees can produce more (and therefore earn more) when they work with better machines, equipment, and technology (i.e., the stock of capital).

But if we want to enjoy the higher incomes that are made possible by a larger and more productive capital stock, somebody has to save and invest. And that means they have to sacrifice current consumption. The good news is that some people are willing to forego current consumption if they think that saving and investment will enable them to have higher levels of future consumption. In other words, if they make wise investments, it’s a win-win situation since society is better off and they are better off.

And these investment decisions help drive financial markets.

Now let’s focus specifically on long-run investments. If you have some serious money to invest, one of your main goals is to find professionals who hopefully can identify profitable opportunities. You want these people, sometimes called “fund managers,” to wisely allocate your money so that it will grow in value. And in some cases, you try to encourage good long-run investments by telling fund managers that if your investments increase in value (i.e., earn a capital gain), they get to keep a share of that added wealth.

In the world of “private equity” and “venture capital,” that share of the added wealth that goes to fund managers is known as “carried interest.” And as a Bloomberg article notes, it has played a big role in some of America’s great business success stories.

Venture capitalists…helped transform novel business ideas into some of the world’s most valuable companies, including Apple, Alphabet Inc., Amazon.com Inc., Facebook Inc., and Microsoft Corp. According to a 2015 study by Stanford University, 43 percent of public U.S. companies founded since 1979 had raised venture cash.

An article from the National Center for Policy Analysis has some additional data on the key role of investors who are willing to take long-run risks.

…up to 25 percent of pre-initial public offering (preIPO) startup funding comes from private equity or venture capital backers. Increasing the tax burden on these entities would damage a valuable access-to-capital pipeline for some startups — particularly in the energy, technology and biotech sectors where large up-front investments could be required.

The obvious conclusion is that we should be happy that there are people willing to put their money in long-run investments and that we should not be envious if they make good choices and therefore earn capital gains. And most people (other than the hard-core left) presumably will agree that people who take big risks should be able to earn big rewards.

That consensus breaks down, however, when you add taxes to the equation.

There’s the big-picture debate about whether there should be “double taxation” of income that is saved and invested. There are two schools of thought.

  • On one side, you have proponents of “consumption-base” taxation, and they favor reforms such as the flat tax that eliminate the tax code’s bias against saving and investment. These people want to eliminate double taxation because a bigger capital stock will mean a more prosperous economy. Advocates of this approach generally believe in equality of opportunity.
  • On the other side, you have advocates of the “Haig-Simons” or “comprehensive income tax” approach, which is based on the notion that extra layers of tax should be imposed on income that is saved an invested. These people want double taxation because it is consistent with their views of fairness. Advocates of this approach generally believe in equality of outcomes.

In the United States, we’ve historically dealt with that debate by cutting the baby in half. We have double taxation of capital gains and dividends, but usually at modest rates. We have double taxation of interest, but we allow some protection of savings if people put money in IRAs and 401(k)s.

But the debate never ends. And one manifestation of that ongoing fight is the battle over how to tax carried interest.

Folks on the left want to treat carried interest as “ordinary income,” which simply means that they want regular tax rates to apply so that there’s full double taxation rather than partial double taxation.

So who supports such an idea? To quote Claude Rains in Casablanca, it’s the usual suspects. Strident leftists in Congress and their ideological allies are pushing this version of a capital gains tax hike.

Rep. Sander Levin (D-Mich.), Sen. Tammy Baldwin (D-Wis.) and a group of millionaires made a push on Wednesday for consideration of legislation to close the carried-interest tax “loophole.” “We have to eliminate this loophole to make that sure everyone is paying their fair share and especially so that we can invest in an economy that creates jobs and lifts working American wages,” Baldwin said during a news conference on Capitol Hill. …The carried interest tax break is “the most egregious example of tax unfairness,” said Morris Pearl, chair of the Patriotic Millionaires — a group of 200 Americans with annual incomes of at least $1 million and/or assets of at least $5 million.

Folks on the right, by contrast, don’t think there should be any double taxation. And that means they obviously don’t favor an increase in the double taxation on certain types of capital gains. And that included carried interest, which they point out is not some sort of “loophole.” As Cliff Asness has explained, the treatment of carried interest is “consistent with the way employee-incentive stock options and professional partnerships are taxed.

But this isn’t just a left-right issue. Some so-called populists want higher capital gains taxes on carried interest, including the President-Elect of the United States. Kevin Williamson of National Review is not impressed.

Trump doesn’t understand how our economy works. …The big, ugly, stupid tax hike he’s planning is on Silicon Valley and its imitators around the country, the economic ecosystem of startup companies and the venture capitalists who put up the cash to turn their big ideas into viable products, dopey computer games, social-media annoyances, and companies that employ hundreds of thousands of people at very high wages. Which is to say, he wants to punish the part of the U.S. economy that works, for the crime of working. The so-called carried-interest loophole, which isn’t a loophole, drives progressives batty.

Kevin points out how carried interest works in the real world.

If you’re the cash-strapped startup, you go to venture capitalists; if you’re the established business, you go to a private-equity group. In both cases, the deal looks pretty similar: You get cash to do what you need to do, and the investor, rather than lending you money at a high interest rate, takes a piece of your company as recompense (for distressed companies being reorganized by private-equity firms, that’s usually 100 percent of the firm) on the theory that this will be worth more — preferably much more – than the money they put into your business. Eventually, the investor sells its stake in the company and pays the capital-gains tax on its capital gain.

And he doesn’t hold Trump in high regard.

Donald Trump does not understand this, because he isn’t a real businessman — he’s a Potemkin businessman, a New York City real-estate heir with his name on a lot of buildings he doesn’t own and didn’t build and whose real business is peddling celebrity and its by-products. He’s a lot more like Paris Hilton than he is like Henry Ford or Steve Jobs. Miss Hilton sells perfumes and the promise of glamour, Trump sells ugly neckties and the promise of glamour.

In her syndicated column, Veronique de Rugy explains why Republicans shouldn’t make common cause with the class-warfare crowd.

Trump…has seemingly swallowed a key assumption of the left. During the campaign, Trump and Hillary Clinton both pledged to raise taxes on carried interest. …sensing an opening, Senate Minority Leader Chuck Schumer recently indicated that he’d be willing to work with Trump on the issue. Of course he would. Democrats have been trying for years to raise taxes on capital. In fact, they see the reduced rate on all capital gains as a loophole. Their goal is to treat all capital gains as ordinary income because they want higher tax burdens overall. …Republicans need to remember that the left’s goal is not fairness but higher taxes. Treating carried interest as ordinary income for tax purposes would simply be the first step toward higher taxes on capital in general. That would be bad for economic growth and for our wallets.

Chuck Devore of the Texas Public Policy Foundation also has a sensible take on the economics of this issue.

…If the investment professional sees his marginal tax rate on capital gains from carried interest almost double, from 23.8 percent to 43.4 percent, he’ll change his behavior and charge more for his services. Pension funds and colleges will get less… Increasing taxes on investment success would mean less investment and consequently, fewer jobs, less innovation, and less prosperity. According to the Tax Foundation, the U.S. already levies the 6th-highest capital gains taxes among the 34 developed nations of the Organization for Economic Co-operation and Development… Generating capital gains means that money was used efficiently, benefiting not just the professional investment manager, but savers and the world. Losing money, on the other hand, is nothing to celebrate.

I agree.

The carried interest right is really a proxy for the bigger issue of whether there should be increased double taxation of capital gains. Which would be the exact opposite of what should happen if we want America to be more competitive and prosperous.

For more background on the issue of carried interest, this video from the Center for Freedom and Prosperity is very succinct and informative.

And if you want more info on the overall issue of capital gains taxation, I’m quite partial to my video on the topic.

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