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Posts Tagged ‘Economics’

Based on a new report from the Congressional Budget Office, I wrote two weeks ago about America’s dismal long-run fiscal outlook. Simply stated, we face a Greek-style fiscal future because of changing demographics and poorly designed entitlement programs.

But I was just looking at big-picture fiscal aggregates.

And while that was discouraging, it gets downright depressing when you look behind the numbers and consider how a growing share of Americans are getting lured into government dependency.

Nicholas Eberstadt of the American Enterprise Institute has a very grim analysis on the growth of entitlement dependency in the United States.

The American welfare state today transfers over 14% of the nation’s GDP to the recipients of its many programs, and over a third of the population now accepts “need-based” benefits from the government. This is not the America that Tocqueville encountered.

It wasn’t always this way.

The article looks at the history of the welfare state in America.

 In 1961, at the start of the Kennedy Administration, total government entitlement transfers to individual recipients accounted for a little less than 5% of GDP, as opposed to 2.5% of GDP in 1931 just before the New Deal. In 1963 — the year of Kennedy’s assassination — these entitlement transfers accounted for about 6% of total personal income.

But things began to deteriorate under LBJ.

During the 1960s, …President Johnson’s “War on Poverty” (declared in 1964) and his “Great Society” pledge of the same year ushered in a new era for America, in which Washington finally commenced in earnest the construction of a massive welfare state. … Americans could claim, and obtain, an increasing trove of economic benefits from the government simply by dint of being a citizen; they were now incontestably entitled under law to some measure of transferred public bounty, thanks to our new “entitlement state.”

And guess what? Once we started rewarding dependency, more and more people decided they were entitled.

Over the half-century between 1963 and 2013, entitlement transfers were the fastest growing source of personal income in America — expanding at twice the rate for real per capita personal income from all other sources, in fact. Relentless, exponential growth of entitlement payments recast the American family budget over the course of just two generations. In 1963, these transfers accounted for less than one out of every 15 dollars of overall personal income; by 2013, they accounted for more than one dollar out of every six. The explosive growth of entitlement outlays, of course, was accompanied by a corresponding surge in the number of Americans who would routinely apply for, and accept, such government benefits.

And how many people have been lured into government dependency? A lot, and mostly because of welfare spending rather than age-related social insurance programs such as Social Security and Medicare.

…the government did not actually begin systematically tracking the demographics of America’s “program participation” until a generation ago. Such data as are available, however, depict a sea change over the past 30 years. …By 2012, the most recent year for such figures at this writing, Census Bureau estimates indicated that more than 150 million Americans, or a little more than 49% of the population, lived in households that received at least one entitlement benefit….Between 1983 and 2012, by Census Bureau estimates, the percentage of Americans “participating” in entitlement programs jumped by nearly 20 percentage points….Less than one-fifth of that 20-percentage-point jump can be attributed to increased reliance on these two “old age” programs. Overwhelmingly, the growth in claimants of entitlement benefits has stemmed from an extraordinary rise in “means-tested” entitlements.

Ugh. I’ve previously written that getting something from the government doesn’t automatically turn somebody into a moocher or a deadbeat.

Nonetheless, it can’t be good news that 49 percent of U.S. households are on the receiving end for goodies from Uncle Sam.

Here’s a table from his article that should frighten anyone who thinks work and self-reliance are worthwhile values.

There’s lot of information, so I recommend just focusing on the numbers in parentheses in the first two columns. Those show how dependency is increasing by significant amounts for many programs.

Eberstadt highlights some of the worst numbers, most notably the huge growth in food stamps and Medicaid dependency.

…the rolls of claimants receiving food stamps (a program that was officially rebranded the Supplemental Nutrition Assistance Program, or SNAP, in 2008 because of the stigma the phrase had acquired) jumped from 19 million to 51 million. By 2012 almost one American in six lived in a home enrolled in the SNAP program. The ranks of Medicaid, the means-tested national health-care program, increased by over 65 million between 1983 and 2012, and now include over one in four Americans. …Between 1983 and 2012, the number of Americans in households receiving Federal SSI more than sextupled; by 2012, over 20 million people were counted as dependents of the program.

As bad as these numbers are, the most worrisome part of the article is when Eberstadt writes about the erosion of America’s cultural capital.

Asking for, and accepting, purportedly need-based government welfare benefits has become a fact of life for a significant and still growing minority of our population: Every decade, a higher proportion of Americans appear to be habituated to the practice. … nearly half of all children under 18 years of age received means-tested benefits (or lived in homes that did). For this rising cohort of young Americans, reliance on public, need-based entitlement programs is already the norm — here and now. It risks belaboring the obvious to observe that today’s real existing American entitlement state, and the habits — including habits of mind — that it engenders, do not coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthand of “American exceptionalism.”

And the erosion of cultural capital is very difficult to reverse, thanks in large part to the welfare-aided erosion of traditional families and falling levels of work among males.

The corrosive nature of mass dependence on entitlements is evident from the nature of the pathologies so closely associated with its spread. Two of the most pernicious of them are so tightly intertwined as to be inseparable: the breakdown of the pre-existing American family structure and the dramatic decrease in participation in work among working-age men. …the rise of long-term entitlement dependence — with the concomitant “mainstreaming” of inter-generational welfare dependence — self-evidently delivers a heavy blow.

Since this has been an utterly depressing analysis so far, let’s close with a vaguely optimistic look at the future.

While it may not be easy to reverse the erosion of cultural capital, it is simple (at least in theory) to reverse bad policies.

All we need to do is enact genuine entitlement reform and devolve all means-tested redistribution spending to the states.

P.S. This is some great work by AEI, which follows on the stellar analysis that organization recently produced on income inequality. Makes me almost want to forgot that AEI put together a somewhat disappointing fiscal plan.

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Back in 2010, I described the “Butterfield Effect,” which is a term used to mock clueless journalists for being blind to the real story.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Here are some of my favorite examples, all of which presumably are caused by some combination of media bias and economic ignorance.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

Now we have a new example for our collection.

Here are some passages from a very strange economics report in the New York Times.

There are some problems that not even $10 trillion can solve. That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. …But it has not been able to do away with days like Monday, when fear again coursed through global financial markets.

I’m tempted to immediately ask why the reporter assumed any problem might be solved by having governments spend $10 trillion, but let’s instead ask a more specific question. Why is there unease in financial markets?

The story actually provides the answer, but the reporter apparently isn’t aware that debt is part of the problem instead of the solution.

Stifling debt loads, for instance, continue to weigh on governments around the world. …high borrowing…by…governments…is also bogging down the globally significant economies of Brazil, Turkey, Italy and China.

So if borrowing and spending doesn’t solve anything, is an easy-money policy the right approach?

…central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros… Central banks can make debt less expensive by pushing down interest rates.

The story once again sort of provides the answer about the efficacy of monetary easing and artificially low interest rates.

…they cannot slash debt levels… In fact, lower interest rates can persuade some borrowers to take on more debt. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.

This is remarkable. The reporter seems puzzled that deficit spending and easy money don’t help produce growth, even though the story includes information on how such policies retard growth. It must take willful blindness not to make this connection.

Indeed, the story in the New York Times originally was entitled, “Trillions Spent, but Crises like Greece’s Persist.”

Wow, what an example of upside-down analysis. A better title would have been “Crises like Greece’s Persist Because Trillions Spent.”

The reporter/editor/headline writer definitely deserve the Fox Butterfield prize.

Here’s another example from the story that reveals this intellectual inconsistency.

Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago.

Hmmm…, maybe the Chinese economy is growing slower because of the so-called stimulus schemes.

At some point one might think people would make the connection between economic stagnation and bad policy. But journalists seem remarkably impervious to insight.

The Economist has a story that also starts with the assumption that Keynesian policies are good. It doesn’t explicitly acknowledge the downsides of debt and easy money, but it implicitly shows the shortcomings of that approach because the story focuses on how governments have less “fiscal space” to engage in another 2008-style orgy of Keynesian monetary and fiscal policy

The analysis is misguided, but the accompanying chart is useful since it shows which nations are probably most vulnerable to a fiscal crisis.

If you’re at the top of the chart, because you have oil like Norway, or because you’re semi-sensible like South Korea, Australia, and Switzerland, that’s a good sign. But if you’re a nation like Japan, Italy, Greece, and Portugal, it’s probably just a matter of time before the chickens of excessive spending come home to roost.

P.S. Related to the Fox Butterfield effect, I’ve also suggested that there should be “some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.”

P.P.S. And in the same spirit, I’ve proposed an “own-goal effect” for “accidentally helping the other side.”

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Advocates of economic liberty, free market, and small government haven’t enjoyed many victories in the 21st Century.

Government got bigger and more expensive during Bush’s reign, starting in his first year with the No Bureaucrat Left Behind legislation and then ending in his final year with the odious TARP bailout.

Then Obama came to office, promising “hope and change,” but then proceeded to act like Bush on steroids, giving us the faux stimulus his first year and then the Obamacare boondoggle his second year.

But there have been a few victories since 2010.

The sequester unquestionably was Obama’s biggest defeat, and that policy helped contribute (along with debt limit fights and shutdown battles) to a much-needed five-year slowdown in federal spending between 2009 and 2014.

That’s certainly not a permanent victory, particularly since our long-run fiscal crisis will still be enormous in the absence of genuine entitlement reform.

But better to have some short-run spending restraint than none at all.

And since we’re looking at victories, we have something new to celebrate. Today (July 1) is the first day in decades that America is freed from a very misguided form of corporate welfare known as the Export-Import Bank.

This bit of cronyism was created to give undeserved wealth to big companies by guaranteeing some of their sales to foreign customers, and I argued in 2012 and earlier this year that shutting down the Ex-Im Bank was a test of seriousness for the GOP..

They sort of passed the test. The Ex-Im Bank needed to be authorized by midnight on June 30 to stay in operation and that didn’t happen.

However, this victory also isn’t permanent. Cronyists in the business community plan to push for re-authorization later this year, so it’s still an open question on who will prevail. Particularly since there are some GOPers who like big business more than free markets.

But at least for today, we can enjoy this image from the Ex-Im Bank’s website.

For more information why the Ex-Im Bank should not be re-authorized and instead should be permanently shut down, here are some excerpts from a column by Veronique de Rugy of Mercatus.

Ex-Im Bank puts millions of consumers, firms and workers at a disadvantage. As such, closing it down is an important first step in the battle against the unhealthy marriage between the government and corporate America. …Over 60 percent of the bank’s financing aids 10 giant beneficiaries, like Caterpillar, Bechtel, and General Electric. On the foreign side, the cheap loans go to state-owned companies like Pemex, the Mexican government’s oil and gas giant, or Air Emirates, the airline of the wealthy United Arab Emirates. …More than 98 percent of all U.S. exports occur with no Ex-Im Bank subsidies at all. And considering who the beneficiaries of Ex-Im on the domestic and foreign sides are, there’s no chance that all Ex-Im supported exports will disappear.

And let’s not forget the costs imposed on the rest of the economy thanks to this bit of corporate welfare.

Economists have shown that while export subsidies boost the profits of the recipients, it tends to have a negative impact on economy as a whole by shifting capital, economic growth, jobs and profits from unsubsidized firms to subsidized ones. …victims are taxpayers who now bear the risk for $140 billion in liabilities. These victims are consumers who pay higher prices for the purchase of subsidized goods. These victims are unsubsidized firms competing with subsidized ones. They not only pay higher financing costs but also lose out when private capital flows to politically privileged firms regardless of the merits of their projects. Some are even victimized multiple times: first as taxpayers, then as consumers, then as competitors, and finally as borrowers.

Speaking of economic costs, you definitely should click here and watch a video by another Mercatus expert of why the Ex-Im Bank undermines economic efficiency.

Like Veronique, Tim Carney of the Washington Examiner is one of the unsung heroes in the fight against the Ex-Im Bank. Here’s some of his column from yesterday.

The Export-Import Bank is down. …Legally, Ex-Im’s officers, employees and board members must cease their typical work of subsidizing Boeing, J.P. Morgan and Chinese state-owned enterprises. Instead, under the law that authorized it, Ex-Im is allowed to exist only “for purposes of orderly liquidation, including the administration of its assets and the collection of any obligations held by the bank.” …This week’s knockdown of Ex-Im should be seen in exactly this light: It is an early and visible victory for the GOP’s free-market forces over the forces of K Street, which for so long held a monopoly on the party.

I should also point out that some of my colleagues at the Cato Institute have been working hard for years to explain why the Ex-Im Bank should be abolished. Kudos also to Heritage Action for fighting against this corrupt cronyist institution.

Last but not least, here’s a video Nick narrated last year on why the Ex-Im Bank should not be re-authorized. I like how he starts with a clip of Obama the candidate citing it as wasteful corporate welfare. Now that he’s in power, though, he’s decided the cesspool of DC corruption is really a hot tub.

P.S. Speaking of leftist phonies, Elizabeth Warren likes to portray herself as a scourge of big business, yet she’s a supporter of continued handouts for corporate fatcats. A fake populist, and a fake Indian.

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Folks on the left sometimes act as if the Nordic nations somehow prove that big government isn’t an impediment to prosperity.

As I’ve pointed out before, they obviously don’t spend much time looking at the data.

So let’s give them a reminder. Here are the rankings from Economic Freedom of the World. I’ve inserted red arrows to draw attention to the Nordic nations. As you can see, every single one of them is in the top quartile, meaning that they aren’t big-government jurisdictions by world standards.

Moreover, Finland ranks above the United States. Denmark is higher than Estonia, which is often cited a free-market success story. And all of them rank ahead of Slovakia, which also is known for pro-growth reforms.

To be sure, this doesn’t mean the Nordic nations are libertarian paradises. Far from it.

Government is far too big in those countries, just as it is far too big in the United States, Switzerland, New Zealand, Canada, and other nations in the top quartile.

Which is tragic since the burden of government spending in North America and Western Europe used to be just a fraction of current levels – even in nations such as Sweden.

The way I’ve described the Nordic nations is that they have bloated and costly welfare states but compensate for that bad policy by being very free market in other policy areas.

But you don’t need to believe me. Nima Sanandaji has just written an excellent new monograph for the Institute of Economic Affairs in London. Entitled Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-Way Socialism, Nima’s work explains how the Nordic nations became rich during an era of small government and free markets, how they then veered in the wrong direction, but are now trying to restore more economic freedom.

Here are some key excerpts, starting with some much-needed economic history.

Scandinavia’s success story predated the welfare state. …As late as 1960, tax revenues in the Nordic nations ranged between 25 per cent of GDP in Denmark to 32 per cent in Norway – similar to other developed countries. …Scandinavia’s more equal societies also developed well before the welfare states expanded. Income inequality reduced dramatically during the last three decades of the 19th century and during the first half of the 20th century. Indeed, most of the shift towards greater equality happened before the introduction of a large public sector and high taxes. …The phenomenal national income growth in the Nordic nations occurred before the rise of large welfare states. The rise in living standards was made possible when cultures based on social cohesion, high levels of trust and strong work ethics were combined with free markets and low taxes….the Nordic success story reinforces the idea that business-friendly and small-government-oriented policies can promote growth.

Here’s a chart from the book showing remarkable growth for Sweden and Denmark in the pre-welfare state era.

Nima has extra details about his home country of Sweden.

In the hundred years following the market liberalisation of the late 19th century and the onset of industrialisation, Sweden experienced phenomenal economic growth (Maddison 1982). Famous Swedish companies such as IKEA, Volvo, Tetra Pak, H&M, Ericsson and Alfa Laval were all founded during this period, and were aided by business-friendly economic policies and low taxes.

Unfortunately, Nordic nations veered to the left in the late 1960s and early 1970s. And, not surprisingly, that’s when growth began to deteriorate.

The third-way radical social democratic era in Scandinavia, much admired by the left, only lasted from the early 1970s to the early 1990s. The rate of business formation during the third-way era was dreadful.
Again, he has additional details about Sweden.
Sweden’s wealth creation slowed down following the transition to a high tax burden and a large public sector. …As late as 1975 Sweden was ranked as the 4th richest nation in the world according to OECD measures….the policy shift that occurred dramatically slowed down the growth rate. Sweden dropped to 13th place in the mid 1990s. …It is interesting that the left rarely discusses this calamitous Swedish growth performance from 1970 to 2000.

The good news is that Nordic nations have begun to shift back toward market-oriented policies. Some of them have reduced the burden of government spending. All of them have lowered tax rates, particularly on business and investment income. And there have even been some welfare reforms.

…there has been a tentative return to free markets. In education in Sweden, parental choice has been promoted. There has also been reform to pensions systems, sickness benefits and labour market regulations

But there’s no question that the welfare state and its concomitant tax burden are still the biggest problem in the region. Which  is why it is critical that Nordic nations maintain pro-market policies on regulation, trade, monetary policy, rule of law and property rights.

Scandinavian countries have compensated for a large public sector by increasing economic liberty in other areas. During recent decades, Nordic nations have implemented major market liberalisations to compensate for the growth-inhibiting effects of taxes and labour market policies.

Let’s close with what I consider to be the strongest evidence from Nima’s publication. He shows that Scandinavians who emigrated to America are considerably richer than their counterparts who stayed put.

Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated. …the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219. …Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 percent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.

In other words, when you do apples to apples comparisons, either of peoples or nations, you find that smaller government and free markets lead to more prosperity.

That’s the real lesson from the Nordic nations.

P.S. Just in case readers think I’m being too favorable to the Nordic nations, rest assured that I’m very critical of the bad policies in these nations.

Just look at what I’ve written, for instance, about Sweden’s healthcare system or Denmark’s dependency problem.

But I will give praise when any nation, from any part of the world, takes steps in the right direction.

And I do distinguish between the big-government/free-market systems you find in Nordic nations and the big-government/crony-intervention systems you find in countries like France and Greece.

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Explaining why statists are wrong about policy is a necessary part of what I do, but it sometimes can get a bit predictable. So I’ve decided to periodically pick fights with people who generally are on the right side.

By the way, I’m definitely not talking about Republicans, who oftentimes are among the most worst people in Washington.

I’m talking about friendly fights with other policy wonks.

My first friendly fight featured my complaints about an anti-flat tax column by Reihan Salam of National Review, mostly because I think he got some economic analysis wrong even though I largely agreed with his political analysis.

My second friendly fight featured my grousing about the fiscal plan put forth by the American Enterprise Institute, which openly proposed that the tax burden should increase to enable a larger burden of government spending.

Time for a third fight. My former Cato colleague Jerry Taylor is now head of the Niskanen Center. He wrote a paper in March making “The Conservative Case for a Carbon Tax.” Here’s some of what he wrote.

…conservatives should say “yes” to a revenue-neutral carbon tax …so long as the tax displaces EPA regulation of greenhouse gas emissions and eliminates a host of tax preferences provided to green energy producers. If federal and state governments are going to act to reduce greenhouse gas emissions, better that they do so at the least economic cost possible. A carbon tax…promises to do that by leaving the decision about where, when, and how to reduce greenhouse gas emissions to market actors (via price signals) rather than to regulators (via administrative orders). A carbon tax would also produce revenue that can be used to provide offsetting tax cuts. …Suggestions have been made to use those revenues to offset cuts in the corporate income tax, the capital gain s tax, personal income taxes, payroll taxes, and sales taxes. If the carbon tax is less economically harmful than the tax it displaces, a revenue neutral carbon tax is worth embracing even if we leave aside the environmental benefits. …Morris calculates that her carbon tax would bring in about $88 billion in the first year,rising to $200 billion a year after 20 years

Everything Jerry wrote is theoretically reasonable, particularly since he is proposing a carbon tax as a replacement for counterproductive regulation and he also says the tax revenue can be used to lower other tax burdens.

But theoretically reasonable is not the same as practical policy or good policy. What if politicians pull a bait and switch, imposing a carbon tax but then not following through on the deal?

Jerry addresses these concerns.

Many conservatives resist carbon taxes because they believe that increases in federal revenues will increase the size of government. But virtually every proposed carbon tax put on the political table includes offsetting tax cuts to ensure revenue neutrality. Revenue neutral carbon taxes will not increase the size of the federal treasury. …The true definition of government’s size is not how many dollars the treasury extracts from the economy. It is best measured by how many resources are reallocated as a consequence of government. To the extent that carbon taxes are more efficient than command-and-control regulation at achieving the aims of greenhouse gas emission constraint, a carbon tax would serve to decrease the size of government relative to the status quo.

Those are fair points, and I particularly agree that fiscal policy is an incomplete measure of the burden of government.

So Jerry is right that a particular regulation might be more damaging that a particular tax.

Jerry continues to address concerns on the right about a carbon tax.

Many conservatives have argued that no matter how compelling the case for a carbon tax might be, it will be rendered intolerable by the time it emerges from the legislature. Politics, not economics, will dictate the tax rate. Exceptions and favors for politically popular industries will litter the code. And despite promises to the contrary, the inefficient regulations will never die. Economist Tom Tietenberg of Colby College examined the literature pertaining to the 15 major pollution tax and fee programs instituted worldwide and found that while concerns about the translating economic theory into political practice are not baseless, they are overstated.

I find Jerry to be less persuasive on this front. I’m not sure foreign evidence tells us much, in part because almost all other nations have parliamentary forms of government where the party in power, by definition, exercises both executive and legislative control in a system of strong party discipline.

Our separation-of-powers system, by contrast, necessarily requires consensus among Senators, Representatives, and the White House, further complicated by the necessity of moving legislation through committees. All of this results in the kinds of compromises and horse trading that can take clean theoretical concepts and turn them into Byzantine reality.

Heck, just consider the internal revenue code, which has become a nightmare of complexity.

But that’s not my main concern with Jerry’s proposed carbon tax.

My real objection is that I have zero trust that Washington won’t use the new tax as a tool for expanding the size and cost of government.

This isn’t just idle speculation or misplaced paranoia. The crowd in Washington is salivating for a new source of revenue. The Wall Street Journal opines on this development, citing the soon-to-be leader of Senate Democrats.

Chuck Schumer is…already planning for 2017…predicting that the political class might join hands and pass a carbon tax. “…many of our Republican friends will say we’ve been starving the government for revenues,” Mr. Schumer told an environmental event on Capitol Hill according to the Politico website, “but many of them will not be for raising [income tax] rates.” So Republicans and Democrats will both be hunting for revenues and “you might get a compromise” over a new carbon tax, he added.

The editors at the WSJ are not sold on this idea, to put it mildly.

It’s amusing that Sen. Schumer thinks a federal government that spends nearly $4 trillion and 21% of national output a year is “starving” for anything. …Our view of a carbon tax is that it might be acceptable as part of a tax reform that eliminated—entirely—some current revenue source such as the payroll or corporate income tax. But we don’t expect to live long enough to see that day. A slippery compromise would trade a new carbon tax for a reduction in some tax rates, but the politicians would soon return to raising those rates again. The U.S. would be left with the current tax burden plus the new carbon tax—and a permanently larger government.

The folks at the WSJ hit the nail on the head. More spending is the most realistic outcome if politicians get a new tax, whether it’s an energy tax, a value-added tax, a wealth tax, or a financial transactions tax.

And Jerry actually confirms my fears. Just yesterday, he posted some comments on the Wall Street Journal’s editorial, and what he wrote perfectly captures why advocates of smaller government are so resistant to a carbon tax.

He went from advocating a revenue-neutral (and regulation-eliminating) carbon tax in March to now saying it’s okay to have a net increase in the tax burden!

…there is a very strong, conservative case for doing exactly what Sen. Schumer proposed this week (if the revenues are used to reduce the deficit, as Sen. Schumer implied, rather than to fund more spending).

And keep in mind that Sen. Schumer doubtlessly intends to spend every penny (and more) that is generated by this new tax, so the real-world outcome would be even worse.

By the way, Jerry then ventures into the world of fiscal policy, asserting that there’s no hope of fiscal restraint and that Republicans should simply figure out ways to increase the tax burden.

This may be unpopular with Republicans at the moment, but sooner or later, bills must be paid. And there’s no chance whatsoever that those bills are going to be paid by savings gained from budget cuts alone. If a carbon tax is not going to provide the necessary revenues, then what do Republicans propose as a source of revenue in its stead?

Wow, there’s a lot wrong in those three sentences.

But I’ll just focus on a few points.

But you don’t have to believe me. Just read what leftists have said they want to do with the money from a new energy tax.

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When debating and discussing the 2008 financial crisis, there are two big questions. And the answers to these questions are important because the wrong “narrative” could lead to decades of bad policy (much as a mistaken narrative about the Great Depression enabled bad policy in subsequent decades).

  1. What caused the crisis to occur?
  2. What should policy makers have done?

In a new video for Prager University, Nicole Gelinas of the Manhattan Institute succinctly and effectively provides very valuable information to help answer these questions. Particularly if you want to understand how the government promoted bad behavior by banks and created the conditions for a crisis.

Here are some further thoughts on the issues raised in the video.

Deregulation didn’t cause the financial crisis – Nicole explained that banks got in trouble because of poor incentives created by previous bailouts, not because of supposed deregulation. As she mentioned, their “risk models” were distorted by assumptions that some financial institutions were “too big to fail.”

But that’s only part of the story. It’s also important to recognize that easy-money policies last decade created too much liquidity and that corrupt subsidies and preferences for Fannie Mae and Freddie Mac steered much of that excess liquidity into the housing sector. These policies helped to create the bubble, and many financial institutions became insolvent when that bubble burst.

TARP wasn’t necessary to avert a meltdown – Because the video focused on how the “too big to fail” policy created bad incentives, there wasn’t much attention to the topic of what should have happened once big institutions became insolvent. Defenders of TARP argued that the bailout was necessary to “unfreeze” financial markets and prevent an economic meltdown.

But here’s the key thing to understand. The purpose of TARP was to bail out big financial institutions, which also meant protecting big investors who bought bonds from those institutions. And while TARP did mitigate the panic, it also rewarded bad choices by those big players. As I’ve explained before, using the “FDIC-resolution” approach also would have averted the panic. In short, instead of bailing out shareholders and bondholders, it would have been better to bail out depositors and wind down the insolvent institutions.

Bailouts encourage very bad behavior – There’s a saying that capitalism without bankruptcy is like religion without hell, which is simply a clever way of pointing out that you need both profit and loss in order for people in the economy to have the right set of incentives. Bailouts, however, screw up this incentive structure by allowing private profits while simultaneously socializing the losses. This creates what’s known as moral hazard.

I’ve often used a simple analogy when speaking about government-created moral hazard. How would you respond if I asked you to “invest” by giving me some money for a gambling trip to Las Vegas, but I explained that I would keep the money from all winning bets, while financing all losing bets from your funds? Assuming your IQ is at least room temperature, you would say no. But our federal government, when dealing with the financial sector, has said yes.

Good policy yields short-run pain but long-run gain – In my humble opinion, Nicole’s most valuable insight is when she explained the long-run negative consequences of the bailouts of Continental Illinois in 1984 and Long-Term Capital Management in 1998. There was less short-run pain (i.e., financial instability) because of these bailouts, but the avoidance of short-run pain meant much more long-run pain (i.e., the 2008 crisis).

Indeed, this “short termism” is a pervasive problem in government. Politicians often argue that a good policy is unfeasible because it would cause dislocation to interest groups that have become addicted to subsidies. In some cases, they’re right about short-run costs. A flat tax, for instance, might cause temporary dislocation for some sectors such as housing and employer-provide health insurance. But the long-run gains would be far greater – assuming politicians can be convinced to look past the next election cycle.

Let’s close by re-emphasizing a point I made at the beginning. Narratives matter.

For decades, the left got away with the absurd statement that the Great Depression “proved” that capitalism was unstable and destructive. Fortunately, research in recent decades has helped more and more people realize that this is an upside-down interpretation. Instead, bad government policy caused the depression and then additional bad policy during the New Deal made the depression longer and deeper.

Now we have something similar. Leftists very much want people to think that the financial crisis was a case of capitalism run amok. They’ve had some success with this false narrative. But the good news is that proponents of good policy immediately began explaining the destructive role of bad government policy. And if Nicole’s video is any indication, that effort to prevent a false narrative is continuing.

P.S. The Dodd-Frank bill was a response to the financial crisis, but it almost certainly made matters worse. Here’s what Nicole wrote about that legislation.

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I detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts approach.

And for the past five years, events have confirmed – over and over again – that this was the right approach.

So you can understand how frustrating it is to comment again on this issue.

But sometimes the policy proposals from national governments and international bureaucracies are so blindly insane that I feel compelled to restate obvious points.

Consider what is happening now. The various members of the Troika (the International Monetary Fund, the European Commission, and the European Central Bank) are pressuring Greece to make reforms in exchange for additional subsidies, handouts, and bailouts.

But since the Greek government is run by lunatics, the net result of “reforms” is more and more bad policy. To be blunt, the Troika crowd is subsidizing and encouraging a process that is resulting in suicidal tax hikes in Greece.

Here are some excerpts from a story in the EU Observer.

Greece edged closer to a last-ditch agreement with her eurozone creditors on Monday (22 June), after Alexis Tsipras’ government promised to raise an extra €8 billion over the next two years. Under the proposal submitted to eurozone ministers, the Greek government would raise just under €2.7 billion in extra revenue this year, followed by a further €5.2 billion in 2016. …Tsipras’ government has proposed to raise €645 million over the next two years by increasing health contributions to 5 percent. …As expected, the remaining proposals are almost exclusively based around new tax increases, the most significant of which is a new 12 percent levy on all corporate profits over €500,000, which the Greek government expects to bring in €1.35 billion in extra revenue. …together with €100 million per year from a new TV advertisements tax. It also wants to widen the scope of a so-called ‘luxury’ tax to cover private swimming pools, planes and boats.

Here’s a look at the breakdown of the new deal, which I got off Twitter from a pro-liberty Greek citizen (i.e., an endangered species).

So the latest deal is 93 percent tax hikes and 7 percent spending cuts. And I’m sure those so-called spending cuts are probably make-believe reductions in previously planned increases instead of genuine reductions.

That’s so imbalanced that it makes President George H.W. Bush’s disastrous 1990 tax-hike deal seem good by comparison.

And just in case you wonder whether there’s no fat in the Greek budget, consider this shocking sentence from the EU Observer story.

Public spending on pensions currently amounts to 16 percent of Greece’s GDP.

To give you an idea of how crazy that number is, Social Security outlays in the United States consume “only” 4.9 percent of GDP.

And don’t forget the Greeks also squander money on a bloated bureaucracy and a preposterous regulatory regime (click here and here to see I’m actually understating the problem).

Yet rather than change any of these anti-growth policies, the government wants more and more revenue to prop up a bloated government.

The bottom line is that Greek politicians and interest groups are trying to impose an upside-down version of my Golden Rule.

But while my Rule says that the private sector should grow faster than the government, their version is that the tax burden should grow faster than the private sector.

Needless to say, that’s an approach that is guaranteed to produce economic ruin.

Productive people leave the country or operate in the underground economy. And many others decide that it’s far more comfortable to climb into the wagon of government dependency.

The situation is utterly ludicrous, as explained by George Will.

…a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras…thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them.

But George sees a silver lining to the dark cloud of Greece’s economic illiteracy.

Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” …This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.  …It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money.

I fully agree with this final point. Just like it’s good to have positive examples (think Hong Kong, Switzerland, Texas, or Singapore), it’s also good to have bad examples (such as France, Italy, California, and Illinois).

Though it’s unclear whether politicians even care about learning any lessons.

P.S. Don’t forget that some American politicians want America to be more like Greece, as illustrated by this Henry Payne cartoon.

P.P.S. Also keep in mind that Greece is just the tip of the iceberg. Other European welfare states are making the same mistakes and will soon suffer similar fates.

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