It seems like I can’t make up my mind, but my views are simple and (I like to think) very rational.
If E.U. membership will push a nation in the right direction, I’m for it.
If E.U. membership will push a nation is the wrong direction, I’m against it.
Given my interest in Europe and the European Union, I was understandably interested when I saw that Reason published a pro-con article on the topic.
Dan Hannan, a former member of the European Parliament from the U.K., argues that the E.U. was a mistake.
Unlike NAFTA or the European Free Trade Association (EFTA), the EEC was not a free trade area but a customs union, controlling all commerce on behalf of its members and artificially redirecting trade away from the rest of the world. …it was a club of nations rather than a superstate. …That changed when the Maastricht Treaty came into force in 1993. …it stopped being the EEC and became the European Union. …A big polity can prosper, but only if it behaves like a confederation of statelets. The supreme exemplar is the U.S., the only large nation that gets anywhere near the top of those GDP rankings… I’m not wild about the direction the U.S. has been taking… But the U.S. is starting from a much better place. It was designed according to Jeffersonian principles. Power was dispersed, decentralized, and democratized. The E.U., by contrast, was designed to weld nations into a supranational bloc. …Where the Declaration of Independence promises life, liberty, and the pursuit of happiness, its European equivalent, the Charter of Fundamental Rights, entitles people to “strike action,” “affordable housing,” and “free healthcare.”
Dalibor Rohac of the American Enterprise has a more optimistic assessment.
The Brussels machinery is bureaucratic and largely insulated from accountability. When it comes to new markets and new technologies, European institutions regulate first and ask questions later. The E.U. controls a sizable budget, part of it wasteful—including generous agricultural subsidies and transfer programs… Yet the E.U.’s existence is infinitely preferable to its absence. …The relevant comparison is between the E.U. and the politically plausible alternatives. Those alternatives almost certainly involve protectionism, heavy-handed industrial policy and planning, or state aid to politically connected companies… If it weren’t for the pressure of the European Commission in the late 1980s, it is fanciful to think that Italy or France would have just given up state ownership of utilities, banks, or their industrial giants. …Conversely, the United Kingdom has not become a free market paradise after leaving the European Union. Quite the opposite. …the E.U.’s “single market” is far from perfect. …it often goes hand in hand with harmonized European rules rather than with simple mutual recognition of national standards. …Has the E.U. lived up fully to the ideals of Hayekian international federalism? Of course not. But it is blindingly obvious that it has performed better than the relevant alternatives.
What’s my two cents.
I’m on Dan Hannan’s side and I think he made good points, but I would have made different arguments. My main concerns with the E.U. is that it is not only a protectionist club, but it also is far too supportive of harmonization, centralization, and bureaucratization.
Dalibor Rohac made good points, to be sure, and he is right that the E.U. has been a net plus on some issues. And he’s also right that some nations might be further to the left if the E.U. didn’t exist.
But, on net, I think it leads to more statism rather than more markets.
P.S. Here’s a description of why “mutual recognition” is a good framework for international economic relations.
P.P.P.S. Rohac is right that the U.K. has not prospered in the post-Brexit years, but leaving the E.U. was a way of creating the opportunity for a better approach. The fact that British politicians have been increasing fiscal burdens simply means that the U.K is not taking advantage of the opportunity.
Today, we’re going to look at a controversy in the province of Ontario. Here’s a tweet from David Frum about education policy in his homeland.
As the Toronto Starreports, the provincial government (akin to a state government) is imposing controls on local school boards.
The Ontario government — citing concerns in areas such as writing and math where student achievement is lagging — wants more power over school boards’ academic priorities and better training for senior leaders. …Legislation tabled Monday by Education Minister Stephen Lecce would…give the government the authority to set the direction for student achievement — given the varying results across the province — especially in the basics of reading, writing and math, and to ensure all 72 publicly funded boards provide information on that progress to parents in a transparent and timely manner… The new legislation, which will go out for consultation this spring, comes after the province had to step in to supervise and reform the Peel public school board amid allegations of systemic racism. …The province’s focus on the basics may be in response to parent concerns that boards are fixating too much on non-academic issues. …EQAO test results in math have been an ongoing concern, as have those in literacy, where roughly two-thirds of students in Grade 3 aren’t meeting the writing standard, which is equivalent to a B grade.
This story raises a quandary for libertarians.
Is it better the let the local school boards have more authority, even when they make bad decisions? Or is it better to have more sensible governance choices by the provincial government, even if it diminishes local authority?
The right answer, of course, it to ignore those two questions and instead embrace school choice. Especially since five Canadian provinces already have that sensible approach.
That way, parents who want crummy government schools can keep their kids in the current system and and parents who want quality education could choose a private school.
But if school choice is not an option, we’re back to a difficult fork in the road. Is it worth accepting more centralization to limit trendy nonsense by local school boards?
Another great policy is federalism, and that is the focus of today’s column.
Richard Rahn explained in the Washington Times some reasons why Switzerland is a role model of sensible governance.
The Swiss have developed over the last nine centuries (and particularly since their major constitutional rewrite in 1848) a system most responsive to the needs of the people, including protection of person, property and civil liberties. Most government takes place at the local level (2,172 communes) by democratic consensus. Decisions that cannot be made at the local level are then made at the canton (26 states) level, and the few remaining decisions, such as defense, trade and other treaties, are made at the federal level. At the federal level, there are seven councilors who govern the country as equals with staggered five-year terms and with the principle of collegiality — representing the major political parties. They rotate the title of “president” among them for one-year terms. This system has given the Swiss unparalleled stability and prosperity, and no cult of personality. The collective and forced-tempered decision-making has kept them from doing many of the unwise and destructive things other countries have done.
And the Economist also recognizes advantages of the Swiss approach. Here are some excerpts from an article about the business environment from last May.
Switzerland has prospered as a haven for businesses far beyond what might be expected of a small, landlocked country with few natural resources. It is home to 13 of the top 100 European firms by market capitalisation and 12 of the top 500 worldwide. What is the secret sauce of the Swiss? …a unique political model that mixes federalism and direct democracy, a weak central government, light regulation, top-notch research universities, and rivalry in education and taxation between the cantons that make up the Swiss confederation. …The Swiss have no particular affinity for their compatriots in other cantons. …But they joined together in such a way as to foster self-reliance and responsibility. …This approach makes for light regulation from the top. …Cantons run health care, welfare, education, law enforcement and fiscal policy. That allows them to compete to be attractive to businesses and their workers. Corporate taxes are low.
How low are corporate taxes?
Not as low as places such as Bermuda and the Cayman Islands, where the rate is zero.
But lower than other major nations, as illustrated by this chart that accompanied the article.
The Economist also ran an article on national comity last October.
…at the heart of Europe, one nation in one state is one of the most happily, successfully multilingual places on Earth. Switzerland, which has a population comparable in size to Hungary’s or Austria’s, has four official languages… How can a country so linguistically diverse work, and indeed be one of the richest in the world? …The key to Switzerland’s functioning is its principle of territoriality: in most of the 26 cantons, one language rules. (Three cantons are bilingual in German and French, and Graubünden is trilingual in Italian, Romansh and German.) …Switzerland is the product of fiercely independent cantons joining the confederation for mutual benefit while still considering themselves sovereign. The country must respect localism, or it would not exist. …unity and uniformity are not the same thing.
The October article specifically focused on the benefits of federalism. Sort of unity through diversity.
But notice that the the pro-growth business climate described in the May article is a consequence of federalism.
Last but not least, in a column for the Foundation for Economic Education, Corey Iacono lists some of the reasons why advocates of individual liberty should admire Switzerland.
Switzerland has the fourth-freest economy in the entire world. …the ninth-highest per capita income in the world. …The Swiss have the third-highest median household income in the world… Switzerland has the fourth-lowest level of government spending as a share of the economy among the 34 OECD countries. …The Swiss have genuine federalism and decentralized government. …The Swiss have a long history of armed neutrality…the fourth-highest gun ownership rate in the world. ..Marijuana is decriminalized. …the third-happiest country in the world. …Switzerland just might be one of the most libertarian countries in the world.
To be sure, being the “most libertarian” is not the same as being libertarian Nirvana.
As illustrated by this chart, Switzerland has done a much better job than the United States at preserving federalism, but there has been a trend toward more centralization.
And there are specific policies, such as a wealth tax, that definitely are not consistent with either libertarian principles or good tax policy.
But it’s still better than almost every other place in the world.
P.S. Given Switzerland’s relative success, I’m not surprised that there’s a movement in Sardinia to secede from Italy and become a Swiss canton.
P.P.S. More federalism and decentralization would help ease divisions in nations such as Belgium and Ukraine.
P.P.P.S. Here’s some humor about a possible red-blue divorce in the United States.
But I warned that saying no to additional tax increases was a necessary but not sufficient condition.
…the “good news” from New York is that politicians want to freeze the current (very bad) policy in place. That’s better than galloping faster in the wrong direction, of course, but a far cry from what’s needed.
Here’s some evidence for my assertion, courtesy of some new data from the Census Bureau. Like we saw last year, New York continues to lose population compared to the rest of the country.
Unsurprisingly, Illinois shows up again as a state with very high levels of out-migration as well.
John Phelan of the Center of the American Experiment put together a ranking of the states based on these annual population changes.
Obviously, people move between states for reasons other than economic policy, but it’s impossible not to notice that there’s an overall trend of red states gaining people and blue states losing people.
P.S. In the past, skeptics used to claim that state migration trends were simply a story of people moving to states with better climates. That presumably is part of the story, but notice how California (the state that arguably has the nation’s best climate) is now a net loser and routinely gets mocked for driving away jobs and people.
And I’ve specifically written that Medicaid is the entitlement program most in need of reform.
Moreover, I explained in this video that Medicaid’s split-financing model (some of the costs are paid by Washington and some of the costs are paid by states) creates a perverse incentive for politicians to make the program bigger.
The bottom line is that Medicaid needs to be fixed. That being said, not all reform proposals are created equal.
In a column for National Review, Chris Pope of the Manhattan Institute starts by correctly diagnosing the perverse incentives that make Medicaid a fiscal nightmare.
Medicaid now generally provides between $1 and $3 of federal funds for every $1 that states spend on medical services for eligible low-income beneficiaries, offering them an extraordinarily high return on investment. …states have become adept at using Medicaid to harvest federal funds. All 50 states now tax hospitals and other medical providers to inflate the matching aid they can claim from the federal government… When Medicaid caseloads decline during economic upturns, states have tended to expand benefit packages and loosen eligibility criteria — relying on Congress to provide ad hoc bailouts when expenses spike in subsequent recessions.
Amen.
I’m particularly disgusted that the system rewards states for taxing healthcare providers (who largely like the system because the taxes are less than the extra money they get from the added Medicaid spending).
But my enthusiasm for his article evaporated when he said the solution is to put Washington completely in charge.
America’s state governments are currently flush with funds and expanding their spending commitments. …This dynamic — of states overextending themselves in healthy fiscal times and then relying on national bailouts when the business cycle takes a downturn — has become characteristic of modern American federalism. …Should a future recession necessitate another round of bailouts, the federal government should assume full financial and operational responsibility by nationalizing currently split entitlement programs. Federal legislation already mandates most details of basic Medicaid benefits and eligibility, as well as providing 70 percent of funding. …Entitlements can be provided most robustly and cost-effectively if they are administered and financed nationally. As with Medicare and Social Security, this would make programs easier for Congress to control, avert the need for bailouts of states in recessions, and eliminate the ability of politicians to overextend programs by shifting costs to taxpayers outside their states.
The author is almost surely right that a federal takeover would produce better outcomes than the current hybrid system.
But an even better option would be complete decentralization. The federal portion of Medicaid spending should be turned into “block grants,” meaning states would simply get a pile of money and they can then decide how best to provide health care to lower-income people.
Under that kind of system, we’d get innovation, with states learning from each other (and also competing with each other).
I’ll close by noting that this is not some sort of risky or untested notion. Bill Clinton’s welfare reform replaced a federal entitlement with a block grant and that was very successful.
Ideally, the federal government should be limited to the functions specified by the Founders in Article 1, Section 8, of the Constitution.
If we are to have any hope of getting back to that system, it may require two practical steps.
If Washington is operating a program, the first step may be to replace it with block grants and let state and local governments decide how to spend the money.
If Washington is providing block grants, the second step may be to phase out that funding and let state and local governments figure out if they want to pick up the cost.
To elaborate, programs that are both funded by Washington and operated by Washington not only suffer from waste (common to all government activities), but also produce the inefficiency and stagnation common to a one-size-fits-all approach.
This is why welfare reform under Bill Clinton was a good idea.
Taxpayers saved some money because the block grant was capped. But the best outcome was that states then could use their flexibility to innovate and find approaches that actually helped poor people by encouraging employment and reducing dependency.
In an ideal world, however, there should not be block grants. State and local governments should decide not only how to operate welfare programs, but also how to finance them.
To understand the problems associated with block grants, let’s look at a new study published by the National Bureau of Economic Research. Authored by Jeffrey Clemens, Philip G. Hoxie & Stan Veuger, it finds that pandemic grants were grotesquely inefficient.
We use an instrumental-variables estimator reliant on variation in congressional representation to analyze the effects of federal aid to state and local governments across all four major pieces of COVID-19 response legislation. Through September 2021, we estimate that the federal government allocated $855,000 for each state or local government job-year preserved. Our baseline confidence interval allows us to rule out estimates of less than $433,000. Our estimates of effects on aggregate income and output are centered on zero and imply modest if any spillover effects onto the broader economy.
Needless to say, it’s absurd to spend $433,000-$855,000 to save a job that pays an average of $100,000. Or less.
On net, that’s going to reduce total employment when you count the private-sector jobs that are foregone because politicians are diverting so much money from the economy’s productive sector.
And if you want to know how much money was diverted specifically for state and local governments, Figure 3 shows both Trump’s pandemic boondoggle in 2020 and Biden’s pandemic boondoggle in 2021.
In a column for the Foundation for Economic Education, Peter Jacobsen discusses the new study.
The authors find that federal aid to state and local governments to save jobs was incredibly ineffective. In fact, this program was even more inefficient than the notoriously inefficient Paycheck Protection Program (PPP). …The PPP was estimated to have cost somewhere from $169,000 to $258,000 per job each year. This program to save state and local government jobs cost in the range of $433,000 to $855,000 per job each year. This is as much as 5x more waste! …So how did the government spend more than $800,000 per job to save jobs which normally pay five figures? …a business engaging in an ineffective and wasteful policy like this would make a loss on each worker and go out of business. …government is particularly prone to generating these wasteful jobs. …Without a mechanism like profit and loss to evaluate the value of alternative options, we are left with a policy which spends nearly a million dollars to preserve a single job with a salary less than one tenth of that.
I’ll conclude with the should-be-obvious observation that politicians don’t actually care about net job creation. They care about buying votes with other people’s money.
So the state and local bureaucrats who directly benefited (by keeping their over-compensated jobs) presumably will remember and reward the politicians who supported for the boondoggles.
P.S. The rest of us also should care – and oppose spendthrift politicians, but most of us don’t pay enough attention to recognize the “unseen.”
As a libertarian, I pay attention to polling data because I want to understand where the public has sensible views and where the public has silly views.
And if public opinion is misguided, it tells me to do more work.
But I also follow public opinion research because it is helpful to find out what words and phrases are best to use.
People are more supportive of getting rid of the “death tax” than the are of getting rid of the “estate tax.”
People are more supportive of an economic system of “free enterprise” than they are of “capitalism.”
As a policy wonk, I find it strange that people will like or dislike a policy simply because different words are used.
But I pay attention because I want to figure out the most effective way of advancing economic liberty.
I’m providing all this background because the folks at the Pew Research Center have some new polling data on how Americans view government.
Some of the results are very encouraging, such as the very low level of trust in Washington.
But there’s a somewhat depressing paradox.
Most people have a low opinion of the federal government, but they still want Washington to play a big role.
As is often the case, I wonder whether voters are being asked well-designed questions.
For instance, one of the above examples is that people want a federal government that “effectively” handles threats to public health.
Perhaps it would have been more interesting and illuminating, however, if Pew had asked people whether the CDC and FDA actually are effective? Give their wretched incompetence during the pandemic, I would hope the poll would have found different results.
Likewise, most Americans wants to federal government to help people out of poverty. But what does that actually mean?
Bernie Sanders presumably would answer yes because he wants higher taxes and more redistribution, while I might answer yes because I want lower taxes and smaller government.
But I’m digressing. They key issue I want to address is the paradox of people having disdain for the federal government while still supporting government involvement.
And this brings me to this polling data about most people thinking Washington is involved in areas that should be left to state governments.
Indeed, the Pew report shows that the federal government is viewed most unfavorably and local governments get the best grades.
To me, this suggests that a “federalism” agenda could be popular.
To be sure, federalism is not a slam-dunk. After all, Pew shows that most Americans can’t identify a single area where their state governments do a good job.
For today, let’s focus on how tax competition is one of the benefits of Swiss decentralization.
More specifically, most fiscal policy (both taxes and spending) takes place at the cantonal and municipal level. And this means that the Swiss can vote with their feet if they want more government or less government.
Not surprisingly, they tend to move to lower-tax areas. In a summary for VoxEU, Isabel Martínez shares some of her research on the impact of tax cuts and tax competition in the canton of Obwalden.
…economic research has made important contributions, showing that top earners indeed relocate across borders for tax reasons. …And as relocating within a country is typically less costly than moving across national borders, top earners tend to be even more sensitive to tax differences…ample evidence exists that lowering taxes is an effective means to attract top earners… I study a tax cut by the small Swiss canton of Obwalden, located in central Switzerland. The goal explicitly was to attract high-income taxpayers… In 2006, Obwalden changed its tax code and introduced falling marginal tax rates…in 2008 the canton introduced a flat rate tax, which lowered the tax load for top earners …the reform had the intended effect: by 2016, the share of high-income taxpayers in Obwalden had grown by 0.53 percentage points relative to other cantons. This is an increase of 100% compared to Obwalden’s initial share of top earners. Net income per taxpayer had risen by 17%. …I find a large elasticity of in-migration in the five years after the reform. A 1% increase in the net-of-average-tax rate increased the inflow of top earners by up to 7.2%.
For those who like getting into the weeds, here’s a chart from her report that shows how income taxes and wealth taxes dropped from 1995 (light blue) to 2001 (dark blue) to 2006 (red) to 2008 (green).
Ms. Martinez speculates whether these lower taxes were a net positive.
…besides having more high-income earners living in the canton, how much did Obwalden really gain? …Obwalden’s total tax revenue rose over time, but personal tax revenue in other cantons rose even more in comparison. …Where does this leave us? Attracting high-skilled top earners might have positive spillovers to the local economy. …between 2005 and 2008, the number of full-time equivalent (FTE) jobs rose by 11%, compared to a 4.3% increase in all Switzerland over the same period. This is even more remarkable as the total number of FTE jobs had been constant in Obwalden between 1995 and 2005. …However, these increases may not be solely due to the personal income tax reform: in 2006, Obwalden also substantially reduced its corporate tax rates to a uniform rate of 6.6%, the lowest in the country at the time.
While the headline of the article indicates that Obwalden’s reforms “might not be a winning strategy,” all of Ms. Martinez’s data shows good results.
Maybe the government isn’t collecting as much revenue, but that’s a good outcome from my perspective.
And the increase in jobs and income should be good news from everybody’s perspective.
By the way, tax competition is continuing to produce good results for Switzerland.
An article from SwissInfo catalogues some of the more-recent tax cuts by Swiss cantons.
In 2021, the average corporate tax rate dropped slightly from 14.9% to 14.7% in Switzerland. This is largely due to tax cuts made in three cantons… Canton Zug, home to several major companies including commodities giant Glencore, maintains the lowest corporate tax rate (11.9%) followed by the cantons of Nidwalden (12%) and Lucerne (12.2%). …The KPMG analysis found that the Swiss tax rates for high-income earners declined slightly compared to the previous year, from 33.7 to 33.5% due to the fact that 12 cantons cut tax rates for top incomes. The biggest cuts were made by the cantons of Schwyz (-1.5 percentage points), Schaffhausen (-1.0 percentage points), Thurgau and Lucerne (roughly -0.6 percentage points each). Top incomes are taxed at the lowest rates in canton Zug (22.2%).
But there are other examples of decentralized systems, with Canada also deserving plenty of praise.
Today, though, I want to write about Spain.
I had an opportunity to learn about the Spanish system while giving speeches last week in Castellon, Barcelona, and Madrid as part of the Free Market Road Show.
Let’s look at some data from Liberalismo a la madrileña, written by Diego Sánchez de la Cruz, the head of Foro Regulación Inteligente.
His book documents how pro-market reforms in the Madrid region have resulted in greater prosperity.
We’ll start with a look at the level of economic freedom in different Spanish regions. Madrid is at the top and Extremadura (bordering Portugal) is at the bottom.
Does a higher level of economic freedom produce better results, as measured by per-capita economic output?
The answer is yes. Madrid ranks first and Extremadura ranks last.
And one of Diego’s earlier publications graphed the relationship between economic freedom and per-capita output.
Definitely a strong correlation.
But what about causation? For instance, some of my left-leaning friends may wonder if there’s some other reason for the superior performance of the Madrid region. Maybe it was always the richest part of Spain and its current prosperity has nothing to do with current policy.
People always should be skeptical about data, particularly when looking at one-year snapshots.
That’s why I’m a big fan of looking at long-run trends. And this chart showing how Madrid has overtaken Catalonia helps confirm that good policy produces good results.
To elaborate, Madrid enjoyed rapid convergence over the past two decades, a period where there was lots of economic liberalization (including de jure elimination of a wealth tax and de facto abolition of a death tax).
By the way, based on current trends, Madrid and Catalonia now may become members of the anti-convergence club.
P.S. There has been some discussion of decentralizing in Australia and the United Kingdom, but no actual progress so far.
I wrote last month about a tax-and-spend proposal for single-payer healthcare in California (sort of a state version of “Medicare for All“).
I also analyzed the scheme in this discussion with Gene Tunny of Australia.
What’s remarkable, as Gene mentioned in his preface, is that the left’s push for single payer failed – even though Democrats have complete control of the Golden State, including more than three-fourths of the seats in both chambers of the state legislature.
Almost certainly, the biggest reason is that even folks on the left have second thoughts about the enormous tax increase that would have been required.
As I noted back in 2016, big government is only fun when somebody else is picking up the tab.
Which motivates me to unveil a Thirteenth Theorem of Government.
Let’s take a closer look at what happened with single payer in California.
Here are some excerpts from a report by Sophia Bollag for the Sacramento Bee.
Efforts to create a government-run health care system for all Californians stalled Monday when the lawmaker pushing the legislation announced he didn’t have the votes in time for a key deadline. Assembly Bill 1400 aimed to create a so-called single-payer health care system in California that would essentially replace private insurance with a state-run health system. …To fund it, lawmakers would have also needed to pass a separate bill to increase taxes… The taxes Kalra proposed would also require voter approval. …Kalra said the fight for single-payer health care won’t die with AB 1400. Lawmakers could craft a different bill to implement such a system in the future. The bill’s failure represents a blow to the California Nurses Association, which had backed the bill. …This isn’t the first time a bill to create a single-payer system has died in the Assembly. The Senate advanced a similar bill in 2017, but it died in the Legislature’s lower chamber. Gov. Gavin Newsom…has said he supports single-payer health care.
…higher taxes are a tough sell, even in the California Legislature where Democrats hold a super-majority. …Fiscal analyses estimate the bill could cost between $314 billion and $391 billion per year if it were implemented. That would dramatically increase total state spending; California’s current budget is $262 billion. To pay for it, Kalra proposed taxing businesses 2.3% of their income after the first $2 million through a proposed amendment to the California Constitution. His proposal would also have imposed a 1.25% payroll tax on employers of 50 or more people and an additional payroll tax on wages for California residents over $49,900 per employee. The measure would have added progressive income taxes starting at .5% for people making more than $149,500, up to 2.5% for people making more than about $2.5 million per year.
In a column for Forbes, Patrick Gleason points out that the failure of single payer in California is part of a pattern.
For progressive lawmakers and activists who want to enact a national single-payer health care system, rejection of a state-level “Medicare For All” proposal in one of the bluest states in the nation, where Democrats have sweeping control of state government, is seen as a major set back. …California isn’t the only state, let alone the only blue state, where single-payer health system legislation has crashed and burned. New York Assemblyman Richard Gottfried (D), the longest serving member of the history of the New York Assembly, has long pushed for the New York Health Act, a single-payer proposal for the Empire State. Assemblyman Gottfried’s bill was approved by the New York Assembly five times between 1992 and 2018, only to see the state senate decline to take it up. As in California, exorbitant cost projections have been the main obstacle to single-payer’s enactment. …it is single-payer champion Bernie Sanders’ state of Vermont where state-level Medicare-For-All first proved to be unworkable. More than a decade ago, Vermont state lawmakers enacted legislation to implement a single-payer system called Green Mountain Care. …Shortly after the single-payer bill was enacted in 2011, Vermont officials were confronted with the reality that “free” health care is actually pretty costly for taxpayers. Governor Shumlin and Vermont lawmakers discovered they would need to impose a new 11.5% state payroll tax and a 9.5 percentage point income tax increase to pay for the new entitlement. Together these tax increases would’ve represented a more than 150% hike in the state’s income tax.
If you want more information, I wrote about deep-blue Vermont’s disastrous (but fortunately temporary) experiment with single payer back in 2014.
The bottom line is that people (sadly) are willing to use government as a tool to steal from their neighbors. But the message of the Twelfth Theorem is that they generally don’t like to steal from themselves.
P.S. Here are the other 12 Theorems of Government.
The “First Theorem” explains how Washington really operates.
The “Second Theorem” explains why it is so important to block the creation of new programs.
The “Third Theorem” explains why centralized programs inevitably waste money.
The “Fourth Theorem” explains that good policy can be good politics.
The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
The “Seventh Theorem” explains how bigger governments are less competent.
The “Eighth Theorem” explains the motives of those who focus on inequality.
The “Ninth Theorem” explains how politics often trump principles.
The “Tenth Theorem” explains how politicians manufacture/exploit crises.
The “Eleventh Theorem” explains why big business is often anti-free market.
The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
As you might expect, the coverage from Fox News highlights the fact that people are leaving blue states and moving to red states.
Between 2020 and 2021, the country has seen the lowest population growth since its founding, at only a 0.1% increase, but the biggest declines have occurred in Washington, D.C., and Democrat-led states, according to a report Tuesday by the Census Bureau. …New York with a 1.6% decline, Illinois with a 0.9% decline, and Hawaii and California that both saw a 0.7% decline. Meanwhile, the states that saw the biggest increase in population growth were Republican-run states, starting with Idaho at a 2.9% increase, followed by Utah with 1.7%, Montana with 1.7%, Arizona with 1.4% and South Carolina with 1.2%. …Florida and Texas, each saw a population growth of 1%.
Citing a different report, he Wall Street Journalopined a few days ago about the implications of migration for Illinois.
The Land of Lincoln is one of only three states, including West Virginia and Mississippi, to have lost population since 2010. But its population over age 55 has grown as Baby Boomers have aged. …Illinois is losing young people while Florida is gaining them. State development specialist Zach Kennedy notes that “the U.S. population actually grew in the prime working age, young adult age cohorts, 25 to 29, 30 to 34 and 35 to 39 year olds.” Illinois was among the few states to see a decline in these age cohorts. …“Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? …a shrinking population of prime-age working people and children means a smaller tax base will have to support growing retirement liabilities. Folks who stick around will have to pay higher and higher taxes. …each Illinois household on average is on the hook for $110,000 in government-worker retirement debt, up from $90,000 in 2019. …The per-household pension burdens in Iowa and Wisconsin were $3,500 and $3,200, respectively. Both states have gained young people. State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.
The most important sentence in the preceding excerpt points out that “Folks who stick around will have to pay higher and higher taxes.”
But since I don’t expect the current crowd in Washington has any interest in getting rid of the Department of Transportation, perhaps we should have a more modest goal of eliminating subsidies for mass transit.
After all, there’s no reason why taxpayers across the nation should be subsidizing the cost of railway, bus, and subway travel in a handful of cities.
Getting rid of these handouts would save a decent chunk of money. Here’s a chart from Downsizing Government, which shows the history of pre-pandemic spending by the Federal Transit Administration.
But that chart is now out of date since politicians have used the pandemic as an excuse to dramatically increase the burden of federal spending. Including big handouts for mass transit.
And now they want to raid taxpayers for more transit money as part of a spending spree on infrastructure.
The Wall Street Journaleditorialized about this topic a couple of days ago.
Democrats are accusing Republicans of holding up the Senate infrastructure deal over funding for mass transit. Here’s what’s really going on: Republicans have bowed to most Democratic demands. But now Democrats are also insisting that they acquiesce to spending ever more to rescue broken rail and bus systems in big liberal cities. Mass transit typically receives $13 billion in federal funds each year, and Congress provided an additional $70 billion for urban transit last year in the myriad pandemic spending bills. That’s more than six times the normal transit budget and more than the annual operating and capital spending of every transit agency in the U.S. combined. …But most mass transit systems face a larger structural budget problem that pre-dated the pandemic: Ballooning operating costs from generous labor contracts and pension payments, which are siphoning off money from system improvements and repairs. Many systems have also been losing riders due to lousy service… So Democrats want Republicans to bail out those cities and their public unions. Republicans have agreed to a $48.5 billion supplemental appropriation for mass transit in the deal. But in addition Democrats are demanding that 20% of transportation spending from the highway trust fund—financed by gas tax revenues—go toward transit.
This is throwing good money after bad.
In a column for the Foundation for Economic Education back in 2019, Hans Bader explained that mass transit in an inefficient money pit.
Mass transit is largely a failure and continues to decline despite growing subsidies to many mass transit systems. Light rail systems are white elephants. …South Korea is abolishing its celebrated high-speed rail line from its capital, Seoul, to a nearby major city because it can’t cover even the marginal costs of keeping the trains running. Most people who ride trains don’t need maximum possible speed, and most of those who do will still take the plane to reach distant destinations. …most Japanese don’t take the bullet train either; they take buses because the bullet train is too expensive. Bullet trains do interfere with freight lines, so Japanese freight lines carry much less cargo than in the United States, where railroads—rather than trucks—carry most freight, thereby reducing pollution… California’s so-called bullet train is vastly behind schedule and over budget, and will likely never come close to covering its operating costs once it is built. …Just the first leg of this $77 billion project will cost billions more than budgeted. And the project is already at least 11 years behind schedule.
Government is a big reason why transit is so inefficient and expensive.
Industry expert Randal O’Toole wrote about the harmful impact of socialized systems back in 2018.
Public ownership of transit has significantly increased the cost of transit, creating another disadvantage for the transit industry relative to other modes of travel. Before 1964, transit systems in most American cities were private and profitable, albeit declining. In 1964, Congress gave cities and states incentives to take over transit systems, and within a decade nearly all had been municipalized …followed by a staggering decline in transit productivity. In the decade before 1964, transit systems carried an average of about 59,000 riders per operating employee. This plunged after 1964 and today averages fewer than 27,000 riders per employee… It is doubtful that any American industry has suffered a 54 percent decline in worker productivity over 30 years unless it was another industry taken over by the government and inflicted with all the inefficiencies associated with government control and management.
We’ll close with this chart from O’Toole’s study, which shows total taxpayer subsidies over time.
The bottom line is that government transit systems are a lot like government schools. More and more money gets spent over time with worse and worse results.
The bad news is that federalism has declined in the United States as politicians in Washington have expanded the size and scope of the national government.
The good news is that some federalism still exists and this means Americans have some ability to choose the type of government they prefer by “voting with their feet.”
You won’t be surprised to learn that people generally prefer option #2.
Researchers have found a significant correlation between state fiscal policy and migration patterns.
And it’s still happening.
In a column for the Wall Street Journal a few days ago, Allysia Finley and Kate LaVoie discuss some research based on IRS data about taxpayer migration patterns.
Here’s some of what they wrote.
New IRS data compiled by research outfit Wirepoints illustrate the flight from high- to low-tax states. …Retirees in the Midwest and Northeast are flocking to sunnier climes. But notably, states with no income tax (Florida, Nevada, Tennessee and Wyoming) made up four of the 10 states with the largest income gains. On the other hand, five of the 10 states with the greatest income losses (NY, Connecticut, New Jersey, Minnesota, California) ranked among the top 10 states with the highest top marginal income tax rates. …Florida gained a whopping $17.7 billion in AGI including $3.4 billion from New York, $1.2 billion from California, $1.9 billion from Illinois, $1.7 billion from New Jersey and $1 billion from Connecticut. California, on the other hand, lost $8.8 billion including $1.6 billion to Texas, $1.5 billion to Nevada, $1.2 billion to Arizona and $700 million to Washington.
Here’s a very informative visual, showing the share of income that either left a state (top half of the chart) or entered a state (bottom half of the chart).
Our friends on the left say that this data merely shows that retirees move to states with nicer climates.
That is surely a partial explanation, but it doesn’t explain why California – the state with the nation’s best climate – is losing people and businesses.
Let’s return to the Finley-LaVoie column, because there’s some additional data that deserves attention. They point out that states with better policy are big net winners when you look at the average income of migrants.
The average taxpayer who moved to Florida from the other 49 states had an AGI of $110,000… By contrast, the average taxpayer who left Florida had an AGI of just $66,000. In sum, high-tax states aren’t just losing more taxpayers—they are losing higher-income ones. Similarly, low and no income states are generally gaining more taxpayers who also earn more. …When blue states lose high earners, their tax base shrinks, but their cost base continues to grow due to rich government employee pay, pensions and other benefits. …The result is that low-tax states are getting richer while those that impose higher taxes are getting poorer.
Let’s conclude by asking why some politicians, such as the hypocritical governor of Illinois, don’t care when they’re on the losing side of these trends?
I don’t actually know what they’re thinking, of course, but I suspect the answer has something to do with the fact that departing taxpayers probably are more libertarian and conservative. So if you’re a big-spending politician, you probably are not very upset when migration patterns mean your state becomes more left-leaning over time.
That’s a smart political approach.
Until, of course, those states no longer have enough productive people to finance big government.
Today we’re going to mix two things that seem disconnected.
Our first topic is federalism, which is the sensible principle that deciding things at the local level, or even state level, is better than being ruled by faraway politicians and a big, centralized bureaucracy.
You can still get awful policies from local politicians and state politicians, of course, but at least it is easier to monitor their actions, remove them from power, or move away if necessary.
A big reason I’m a fan of federalism because it creates competition among governments. For instance, I cheer when businesses, investors, and entrepreneurs escape from high-tax states like California and New York and move to zero-income tax states such as Florida and Texas.
When programs are centralized in Washington, by contrast, you simply add another layer of bureaucracy and expense.
But it’s not just a money issue. When Washington is in charge, you get a one-size-fits-all approach. That means there’s no room for innovation and diversity, which makes it much less likely that policy makers can learn what works and what doesn’t work.
Our second topic involves a story about record-setting levels of waste in California.
In a column published by Reason, Steven Greenhut describes how the unemployment insurance program in the Golden State has experienced jaw-dropping levels of fraud.
This is one of the most infuriating scandals ever to plague our state. The department, which is responsible for paying out unemployment insurance claims, has been incapable of paying legitimate claims even as it has paid as much as $31 billion in fraudulent ones, often to inmates. …Here’s a desk-pounder from CBS Los Angeles: “A Fresno girl who just celebrated her first birthday is collecting $167 per week in unemployment benefits after a claim was filed on her behalf stating that she was an unemployed actor.” The Southern California News Group reported last month that one man “is suspected of using the identities of 23 inmates and others to obtain more than $3 million in state unemployment benefits.” Approximately 10 percent of the paid claims have been fraudulent, with another 17 percent under suspicion. This will be “the largest fraud investigation in the history of America,” according to one expert.
I suspect that we’ll discover that most of the suspicious payments also were fraudulent, which means one-fourth of the money went to crooks.
Meanwhile, the same bureaucrats who blindly sent out checks to the wrong people also managed to ignore inquiries from the right people.
The department’s call center only answered 1 percent of calls that Californians had made to check on their claim status.
Amazingly, the Biden Administration has decided that the person in charge of all this waste and fraud should be rewarded.
Julie Su, the state labor secretary who was responsible for the department, may receive a big promotion…to serve as President Joe Biden’s pick for deputy secretary of the federal department of labor.
I fully agree with Mr. Greenhut’s concluding observation.
Welcome to…government, where no good deed goes unpunished and no level of incompetence goes unrewarded.
At this point, you may be wondering about the connection between our two topics.
To show how they are related, I’ll ask this rhetorical question: Why aren’t people in California upset about losing at least $31 billion to fraud, especially since the entire state budget is about $134 billion?
The answer is that they’re not wasting their own money!
The vast majority of the pandemic-related unemployment funds were provided by Washington, most notably (1) extended benefits under existing UI, (2) pandemic expansion of UI to cover people not normally eligible for UI, and (3) bonus payments.
So we shouldn’t be surprised that California bureaucrats didn’t care how much of the money was lost to fraud. As Milton Friedman wisely pointed out, there’s no incentive to be responsible when spending other people’s money on other people.
Now I’ll ask another rhetorical question: What would have happened if California was in charge of not only spending the money, but also was in charge of raising the money?
I’m sure there would have been plenty of waste and fraud, but even profligate California officials would have figured out it wasn’t a good idea to squander $31 billion of their own money.
The bottom line is you get better outcomes when there’s genuine decentralization. Simply stated, politicians have to be at least semi-responsible when they have to raise the money that they spend. It’s called accountability.
Which is why even the left-leaning OECD and left-leaning IMF have produced research confirming superior results with real federalism.
And, given the federal government’s incompetent response to the pandemic, I’m an even bigger fan of federalism today.
Though that doesn’t mean states are paragons of efficiency and competence. Here’s a map from the New York Times showing the percent of each state’s population that has receive at least one shot of the vaccine.
Why is Oklahoma doing so much better than Kansas? Why is West Virginia so far ahead of Pennsylvania?
Part of the answer is whether the states were willing to let Washington micro-manage their delivery.
The Wall Street Journal editorialized a few days ago about lessons we should learn.
The gap continues to grow between states that are getting shots into arms, and those arguing over who gets what and when. North Dakota had administered some 84% of its supply as of Jan. 23, and West Virginia about 83%—far better than states like California (45%) or Alabama (47%). Federalism is showing what works—and what doesn’t. …The risk is that Team Biden tries to micromanage state administration of the vaccine, especially now that the media, Democrats and some public-health officials are blaming slow state rollouts on a “vacuum” of federal leadership. But vaccine administration was always intended to be state-led, and too many jurisdictions squandered the ample time they had for preparation. …the biggest state mistakes so far have been adhering too much to the federal government’s initial guidance… The states with the highest per capita vaccination rates are all rule-breakers—Alaska (12,885 per 100,000), West Virginia (11,321), and North Dakota (9,602) as of Jan. 23. Top performers also thought creatively about how best to distribute and administer the vaccine, even if that meant departing from federal advice. …Mr. Biden is under pressure from the left to infuse the vaccine rollout with “equity” politics. As California (5,568 per 100,000) and New York (5,816 per 100,000) show, such bickering is a recipe for fewer vaccines and more deaths.
George Will, opining in today’s Washington Post, adds his two cents to the discussion, citing Philip Howard’s work on inflexible bureaucracy.
The covid-19 tragedy teaches this: Government is more apt to achieve adequacy when it does not try to achieve purity. …the benefits of federalism: Among 50 governors, at least a few are apt to be wiser and nimbler than the federal bureaucracy. …there are too many lawyers and too much law, and that both surpluses are encouraged by misbegotten ideas about ideal governance. “…This is not an unavoidable side-effect of big government, but a deliberate precept of its operating philosophy. Law will not only set goals and governing principles, but it will also dictate exactly how to implement those goals correctly.” …Then the pandemic arrived. Red tape prevented public health officials from using tests they possessed or buying tests overseas. To function, hospitals had to jettison myriad dictates about restrictions on telemedicine, ambulance equipment and many other matters. …The Progressive Era project that began 120 years ago got its second wind 60 years ago. …A virulent, fast-moving and mutating virus is teaching the cost of this.
Normally, I would argue against any government involvement.
In this case, however, taxpayers financed a big chunk of the development, so I’ll begrudgingly acknowledge that this gives politicians and bureaucrats the right to make allocation decisions.
But that doesn’t mean we can’t criticize those decisions when they result in mistakes. Especially since delayed vaccine rollout literally can result in needless deaths.
There are no perfect answers in this kind of situation, but surely we would be in better shape if Washington simply distributed the vaccines to the states, with the assumption that they would immunize as many people as possible, as quickly as possible.
Yes, some states would bungle the process (as we’re seeing in poorly governed jurisdictions such as New York and California), but a big advantage of federalism is that residents might learn from the superior performance of other states that they need better-quality elected officials.
P.S. In his column, George Will cites Philip Howard, who thinks bureaucratic rules from Washington are too rigid. I certainly agree that a prescriptive, one-size-fits-all approach is misguided, but regulatory flexibility can be a recipe for corruption and cronyism. The right approach is to end federal involvement whenever possible.
Early last decade, a former Prime Minister of Iceland was brought before a special tribunal to determine whether he was legally responsible for his nation’s 2008 economic downturn.
As you might imagine, I had mixed emotions about that story.
On one hand, I don’t like politicians and I viscerally like the idea of holding them accountable for bad outcomes.
On the other hand, I believe in the rule of law and it’s absurd to bring charges against someone when no law has actually been broken. Moreover, tossing politicians in jail because we don’t like their policies is the kind of thing you might find is some backwater banana republic.
And, to add some humor to this analysis, it would contribute to prison overcrowding if we did things such as jailing Bush for TARP, Obama for the failed stimulus, and Trump for his bungled protectionism.
But it’s time to look at this issue from a serious perspective because a former governor in Michigan, as reported by the Detroit Free Press, is going to be dragged into court because of contaminated water in the state’s 7th-largest city.
Michigan Attorney General Dana Nessel filed two charges of willful neglect of duty against former Gov. Rick Snyder on Wednesday, a day before her office is set to announce new details in the Flint water crisis investigation. …Each charge Snyder faces is a misdemeanor punishable by up to a year in prison or a fine of $1,000 or less. …a misdemeanor conviction could allow a judge to issue a significant restitution order against Snyder, a multi-millionaire who made a fortune in computers and venture capital before he was elected Michigan governor in 2010.
You may be wondering why the Attorney General is targeting a former governor for the flawed operation of a city water system. Shouldn’t local officials be held accountable?
Snyder…was governor when state-appointed managers in Flint switched the city’s water to the Flint River in 2014 as a cost-saving step while a pipeline was being built to Lake Huron. The water, however, was not treated to reduce corrosion — a disastrous decision affirmed by state regulators that caused lead to leach from old pipes and poison the distribution system used by nearly 100,000 residents.
So does this mean the former governor committed some sort of crime?
I guess we’ll find out if there’s a trial, but it certainly seems like partisan politics may be the real reason for the charges.
David Griem, a Detroit criminal defense attorney and former federal and state prosecutor, said he believes politics are a significant factor in the case. …“I can’t think of a good reason for this other than vendetta and politics. I challenge anyone to come up with a reason that makes sense other than closed-door politics…”
The bottom line, as I explained back in 2016 when writing about mess in Flint, is that you blur responsibility and accountability when multiple layers of government are involved in anything.
Decentralization is good for many reasons, including the fact that it’s much harder to deflect blame when something bad happens at the local level.
More specifically, nobody should be responsible for Flint’s water system other than the people from that city. If they screw up (as they did) by voting for venal politicians who funneled too much of the city’s money to a cossetted group of bureaucrats (a common problem), that’s their fault and they then need to deal with the consequences.
Sadly, we’re moving in the wrong direction in the United States, with Washington playing an ever-greater role in things that should be handled by state and local governments.
Let’s conclude by returning to the topic of whether politicians should face legal consequences for bad policy.
I’m very tempted to support anything that makes life harder for that oleaginous group of people. But the tort system (going to court and suing for damages) is actually a preferable way of addressing accidental damage to people.
That’s a big part of how we encourage safe and sound behavior in the private sector. Though I’ll be the first to admit it won’t work as well when dealing with government mistakes because taxpayers (rather than bureaucrats and politicians) bear the burden when there are successful lawsuits.
Largely because of my support for jurisdictional competition, I’m a big fan of federalism.
Simply stated, our liberties are better protected when there’s decentralization since politicians are less like to over-tax and over-spend when they know potential victims of plunder have the option of moving across a border.
Now let’s look at some additional scholarly evidence. A study published by the OECD, authored by Hansjörg Blöchliger, Balázs Égert and Kaja Fredriksen, investigates the impact of federalism on outcomes in developed nations.
Here are the key findings from the abstract.
This paper presents empirical research on the potential effects of fiscal decentralisation on a set of outcomes such as GDP, productivity, public investment and school performance. The results can be summarised as follows: decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels. The impact seems to be stronger for revenue decentralisation than for spending decentralisation. Decentralisation is strongly and positively associated with educational outcomes as measured by international student assessments (PISA). While educational functions can be delegated either to sub-central governments (SCG) or to schools, the results suggest that both strategies appear to be equally beneficial for educational performance. Finally, investment in physical and – especially – human capital as a share of general government spending is significantly higher in more decentralised countries.
Here’s some detail from the body of the paper about the pro-growth impact of decentralization (especially when sub-national governments are responsible for raising their own funds).
Across countries, sub-central fiscal power, as measured by revenue or spending shares, is positively associated with economic activity. Doubling sub-central tax or spending shares (e.g. increasing the ratio of sub-central to general government tax revenue from 6 to 12%) is associated with a GDP per capita increase of around 3%. …Revenue decentralisation appears to be more strongly related with income gains than spending decentralisation. This empirical finding may reflect that “true” fiscal autonomy is better captured by the sub-central revenue share, as a large part of sub-central spending may be mandated or regulated by central government. … the estimated relationship never becomes negative and is not hump-shaped, i.e. “more decentralisation always tends to be better”.
The part of “more decentralisation always tends to be better” is a good result.
Though we’re still less centralized than most nations, as you can see from this chart from the OECD study.
Kudos to Canada and Switzerland for leading the world in federalism.
Here are some additional details from the study. I’m especially interested to see that the authors acknowledge how jurisdictional competition helps to explain why nations with federalism perform better.
Decentralised fiscal frameworks can raise TFP through an increase in the efficiency and productivity of the public sector… Public sector productivity is influenced by competition between SCGs and inter-jurisdictional mobility. Most SCGs aim at attracting and retaining mobile production factors, in order to promote investment and economic activity. They can do so by using fiscal policy, among other instruments. Since firms are choosing their location based on where they expect the highest returns on investment, and since returns depend (partly) on public inputs, SCGs have an incentive to raise the productivity of their public sector. SCGs may also try to improve the relationship between taxation and public service levels, by lowering taxes… The more decentralised a country, the stronger these competitive forces could be. Competition and inter-jurisdictional mobility could be weakened by large intergovernmental transfer systems, in particular fiscal equalisation.
Let’s close by looking at the study’s estimates of how nations would enjoy more prosperity by shifting in the direction of decentralization.
…an assessment of what a country might gain in terms of higher GDP if it moved to the benchmark of the most decentralised country. To be more specific, the gains were calculated for each federal country if it moved tax decentralisation to the level of Canada, and for each unitary country if it moved tax decentralisation to the level of Sweden (Figure 6). Further decentralisation could potentially be associated with an average increase of GDP of around 1% to 2% for federal countries and 3% to 4% for unitary countries, with values for more centralised countries being larger.
Here’s the accompanying chart.
Since the U.S. still has some federalism, our gain isn’t very large, but nations such as Austria, Belgium, Slovakia, Ireland, Luxembourg, and the United Kingdom could get big boosts.
P.S. I didn’t focus on the findings about better educational outcomes in decentralized nations. But I can’t resist pointing out that this is an additional reason to abolish the Department of Education.
P.P.S. Here’s a video discussing how Switzerland benefits from federalism.
Indeed, I’ve even proposed that Washington shouldn’t operate any social programs. No food stamps. No Medicaid. No redistribution programs of any kind.
Such programs, to the extent they should exist, should be handled by state and local governments.
The welfare reform legislation under Bill Clinton is an example of how to move in the right direction. A top-down program from Washington was turned into a block grant, and then state and local governments got the freedom to choose policies that might actually help the poor become self-sufficient instead of being trapped in dependency.
Not pure libertarianism, of course, but still an example of progress. And we got good results.
Given this track record, I was very interested to see a column in today’s New York Times by Ezekial Emanuel and Rahm Emanuel on the topic of federal-state fiscal relations.
Medicaid and unemployment insurance…need permanent institutional reform and modernization. …the next stimulus package…should then be…a…federal-state Grand Bargain would solve festering problems in health care and unemployment assistance Years of political experience show that no matter how imperative and sensible, a policy’s chances of success are diminished unless it delivers political benefits. This bargain would create a victory for both parties.
This sounds intriguing. And potentially even desirable.
There’s no question, after all, that the current Medicaid system desperately needs reform. And the unemployment program also is a mess, luring people into joblessness.
So what exactly are the Emanuel brothers proposing? What is the “Grand Bargain” that offers benefits for both sides?
Sadly, it turns out that their bipartisan rhetoric is just an excuse for bigger government.
The bargain, which we call American Modernization Initiative…the federal government to assume the costs and administration of Medicaid and unemployment insurance, the states would have to agree to use freed up resources — a quarter of a trillion dollars per year — to invest in education and infrastructure. …The Grand Bargain is not only good policy, but good politics. …Governors would no longer be responsible for large programs… With the American Modernization Initiative, the constant, bitter battles over cutting state programs to fund growing Medicaid costs will disappear.
Yes, you read correctly. Their idea of a “bargain” is that the federal government agrees to spend more money so that that state governments will then have the ability to spend more money.
According to Chris Edwards, there are now nearly 1,400 programs involving some sort of link or overlap between the federal government and state governments.
The biggest of these programs is Medicaid, accounting for 56 percent of the overall spending.
So why not give the states a choice: They either take full responsibility for Medicaid – including the financing after some transition period. Or they take responsibility for the other 1,385 programs (probably more by now) programs – assuming, again, they are responsible for the financing after a transition period.
Regardless of their choice, the end result would be a system where there’s a reasonably significant shift toward federalism. And perhaps we would add a bit of clarity to the blurry line that currently sets the boundary between what’s Washington’s job and what’s the role of state governments.
And maybe, just maybe, there wouldn’t be as much wasteful leakage as we have now.
P.S. For what it’s worth, there’s strong academic evidence that decentralized governments produce better outcomes.
P.P.S. Federalism doesn’t only apply to income-redistribution programs. We also should eliminate any role for Washington in areas like education and transportation.
P.P.P.S. Here’s the data on the history of redistribution spending in developed nations.
To add some hard data to the discussion, let’s compare the degree of fiscal decentralization in the United States in both 1902 and 2019, based on numbers from the Census Bureau (click on Govt_Finances) and the Office of Management and Budget (click on Table 14.3).
As you can see from the chart, Washington now accounts for a much bigger share of overall government spending.
By the way, these numbers should not be misinterpreted.
There’s been no reduction in the burden of state and local government outlays. Indeed, there’s been a steady increase in such spending, even after adjusting for inflation.
But the federal government has grown far more rapidly.
The bottom line is we now have much bigger government and it’s more remote because of centralization.
I mentioned Switzerland in the latter part of my answer.
Here’s the data comparing Switzerland and the United States. As you can see, Switzerland has been more successful in retaining genuine federalism.
Indeed, the two countries are mirror images, with nearly 2/3rds of government spending in the U.S. coming from Washington and nearly 2/3rds of government in Switzerland taking place a the level of cantons and municipalities.
P.S. Here’s what scholars from the Austrian School have said about federalism.
I wrote earlier this month about coronavirus becoming an excuse for more bad public policy.
American politicians certainly have been pushing all sorts of proposals for biggergovernment, showing that they have embraced the notion that you don’t want to let a “crisis go to waste.”
But nothing that’s happening in the United States is as monumentally misguided as the effort to create a new method of centralized redistribution in the European Union.
Kai Weiss of the Vienna-based Austrian Economic Center explains what is happening in a column for CapX.
…‘never let a good crisis go to waste’ seems to have become the mantra of both the European Commission a number of national leaders. The coronavirus has become a justification for…‘more Europe’ (which tends to actually mean more EU, to the detriment of Europe). The clearest sign of this renewed Euro-fervour is the plan cooked up by Angela Merkel and Emmanuel Macron earlier this week… Seasoned Brussels observers will be shocked to learn that their proposals have very little to do with the pandemic, and everything to do with deepening the centralisation of EU power and top-down policymaking. While Germany has traditionally…opposed the idea of eurobonds or similar debt collectivisation instruments, it is now advocating for precisely those policies. A €500 billion Recovery Fund… the initial plan is for the European Commission to raise the money on the financial markets. It would subsequently be paid back by the member states and through increased “own resources” – i.e., new taxes levied directly by Brussels… The good news is that none of these policy proposals are yet set in stone. There are some big legal questions, particularly on the Recovery Fund, and national parliaments would need to agree to this expansion of Brussels’ writ. Already countries like the Netherlands, Austria, Denmark, and Sweden have voiced criticism… But for all these obstacles, the direction of travel looks alarmingly clear. The consensus among the EU’s power brokers, as with pretty much any major world event, is that the answer is ‘more Europe’. ..For Macron Merkel and their allies, this is far too good a crisis to pass up.
A story in the New York Times has additional details, including a discussion of potential obstacles.
Ms. Merkel this week agreed to break with two longstanding taboos in German policy. Along with the French president, Emmanuel Macron, Ms. Merkel proposed a 500 billion euro fund… It would allow the transfer of funds from richer countries… And it would do so with money borrowed collectively by the European Union as a whole. …Whatever emerges from the European Commission will be followed by tough negotiations… Chancellor Sebastian Kurz of Austria has raised objections to the idea of grants rather than loans, saying that he has been in contact with the leaders of Sweden, the Netherlands and Denmark. “Our position remains unchanged,’’ he said. …opposition may also come from member states in Central and Eastern Europe. …Those countries are going to be reluctant…to see so much European aid — for which they will in the end have to help pay — skewed to southern countries that are richer than they are. …in northern countries, moves for collective debt to bail out poorer southern countries may feed far-right, anti-European populists like the Alternative for Germany or the Sweden Democrats. They are angry at the idea of subsidizing southerners who, they believe, work less hard and retire much earlier.
What’s depressing about this report is that it appears the battle will revolve around whether the €500 billion will be distributed as grants or loans.
The real fight should be whether there should be any expansion of intra-E.U. redistribution.
For what it’s worth, Germany used to oppose such ideas, especially if funded by borrowing. But Angela Merkel has decided to throw German taxpayers under the bus.
Let’s close with some analysis from Matthew Lynn of the Spectator.
Die-hard European Union federalists have plotted for it for years. …The Greeks and Italians have pleaded for it. And French presidents have made no end of grand speeches, full of references to solidarity and common visions, proposing it. The Germans have finally relented and agreed, at least in part, to share debt within the EU and the euro-zone, and bail-out the weaker members of the club. …The money will be borrowed, based on income from the EU’s future budgets, but it will in effect be guaranteed by the member states, based on the EU’s ‘capital key’. …the rescue plan is completely unfair on all the EU countries outside the euro-zone. …why should they pay for it? Poland…will still be expected to pay in five per cent (or 25bn euros (£22bn)) to bail-out of far richer Italy (Polish GDP per capital is $15,000 (£12,000) compared with $34,000 (£27,000) for Italy).
Pro-centralization politicians are claiming this fund is needed to deal with the consequences of the coronavirus, but that’s largely a smokescreen. It will take many months for this proposal to get up and running – assuming, of course, that Merkel and Macron succeed in bullying nations such as Austria and the Netherlands into submission.
By that time, even the worst-hit countries already will have absorbed temporary health-related costs.
The bottom line is that this initiative is really about the long-held desire by the left to turn the E.U. into a transfer union.
The immediate losers will be taxpayers in Germany, as well as those in Austria, Sweden, the Netherlands, Finland, and a few other nations.
But all of Europe will suffer in the long run because of an increase in the continent’s overall fiscal burden.
And keep in mind that this is just the camel’s nose under the tent. It’s just a matter of time before this supposedly limited step becomes a template for further expansions in the size and scope of government.
Yet another reason why E.U. membership is increasingly an anchor for nations that want more prosperity.
P.S. As suggested by Mr. Lynn’s column, countries in Eastern Europe should fight this scheme. After all, these countries are relatively poor (a legacy of communist enslavement) and presumably don’t want to subsidize their better-off cousins in places like Spain and Italy. But that argument also implies that they should have resisted the Greek bailout about ten years ago, yet they didn’t. Sadly, Eastern European governments acquiesce to bad ideas because their politicians are bribed with “structural adjustment funds” from the European Union.
P.P.S. The luckiest Europeans are the British. They wisely opted for Brexit so they presumably won’t be on the hook for this costly new type of E.U.-wide redistribution (indeed, my main argument for Brexit, which now appears very prescient, was that the E.U. would morph into a transfer union).
Since I don’t have any expertise on epidemiology, I’m not arguing that the economy should be opened immediately. I’m simply stating that the people who do make such decisions should be guided by the unavoidable tradeoff that exists between lives lost from disease and lives lost from foregone prosperity.
Which then raises the question of who should make such decisions.
As reported by the New York Post, President Trump claims he has all the authority.
President Trump on Monday said the decision to reopen the country’s ailing economy ultimately rests with him, not state leaders, as he feuds with governors over when to allow Americans to return to work. …Trump is now looking at reopening the economy by May 1, putting him on a collision course with state leaders who are pushing back, saying it would be dangerous to “take our foot off of the accelerator” in the war against the virus. …Rebuffing the president’s claims Monday, constitutional experts say it is state leaders who have the power to police their citizens under the 10th Amendment.
Trump is wrong.
He’s wrong in part because the Constitution limits the powers of the central government.
But he’s also wrong because – as explained by scholars from the Austrian School of Economics – we’re far more likely to get better choices when they’re decentralized.
In some cases, that means allowing individuals to make informed choices about how much risk to take.
But, to the extent government must be involved, it makes more sense to have state and local officials make choices rather than the crowd in Washington.
Opining for the Wall Street Journal, Walter Olson explains why federalism is the right approach.
Public-health merits aside, the president can’t legally order the nation back to work. The lockdown and closure orders were issued by state governments, and the president doesn’t have the power to order them to reverse their policies. In America’s constitutional design, …the national government is confined to enumerated powers. It has no general authority to dictate to state governments. Many of the powers government holds, in particular the “police power” invoked to counter epidemics, are exercised by state governments and the cities to which states delegate power. …Modernizers have long scoffed at America’s federalist structure as inefficient and outdated, especially in handling emergencies. …Today you won’t find these critics scoffing at the states or overglamorizing Washington. One federal institution after another, including the Food and Drug Administration and Centers for Disease Control and Prevention, has been caught flat-footed by Covid-19. …State governments, by contrast, with some exceptions here and there, have responded to the emergency more skillfully and in a way that has won more public confidence. …The record of federal systems—some of the best known are in Canada, Germany and Switzerland—suggests there’s a lot of resilience packed into the model.
Michael Brendan Dougherty elaborates in an article for National Review.
Writer Molly Jong-Fast complains, “So the states are basically governing themselves because our president doesn’t know how to president at all?” Well, no. It’s simple: Our president doesn’t have dictatorial powers, even in a national emergency. The president doesn’t have authority to shut down your local gin joint. Your state governor does have this power, in extraordinary circumstances. That so many governors have done so, often responding to popular demand for shutdowns, demonstrates America’s genuine practice of federalism — a system that is allowing us to respond to this crisis even faster than the states of Europe… One of the reasons federalism can act faster is that it allows decentralization. It is less politically risky to impose measures in one state than on an entire nation. You can respond where the hotspots are, rather than imposing costs evenly across an undifferentiated mass of the nation where the overall average risk may be low.
Professor Ilya Somin wrote on this same topic for Reason. He noted limitations on federalism in a pandemic, but also pointed out the benefits of decentralization.
The US is a large and diverse nation, and it is unlikely that a single “one-size-fits-all” set of social distancing rules can work equally well everywhere. In addition, state-by-state experimentation with different approaches can increase our still dangerously limited knowledge of which policies are the most effective. Moreover, if one policymaker screws up, his or her errors are less likely to have a catastrophic effect on the whole nation. …There is, in fact, a long history of state and local governments taking the lead in battling the spread of contagious disease. During the 1918-19 flu pandemic, state and local restrictions were the primary means of inhibiting the spread of the virus, while the federal government did very little.
John Daniel Davidson of the Federalist echoes the benefits of having choices made at the state and local level.
The founders wisely chose a federal republic for our form of government, which means sovereignty is divided between states and the federal government. The powers of the federal government are limited and enumerated, while all powers not granted to the feds are reserved for the states, including emergency police powers of the kind we’re seeing states and localities use now. …Much of the media seems wholly unaware of this basic feature of our system of government. …Trump explained that many governors might have a more direct line on this equipment and if so they should go ahead and acquire it themselves, no need to wait on Washington, D.C. This is of course exactly the way federalism is supposed to work. …We should expect the government power that’s closest to affected communities to be the most active, while Washington, D.C., concern itself with larger problems.
And those “larger problems” are the ones enumerated in Article 1, Section 8.
The bottom line is that we should always remember the Third Theorem of Government, which helps to explain one of the reasons why it’s generally a bad idea to give the folks in Washington more power and authority.
Instead, we should try to be more like Switzerland, which is one of the world’s best-governed nations in large part because of a very decentralized approach.
Which may be why economists at the (normally statist) International Monetary Fund found a clear link between federalism and quality governance.
Moreover, it’s relatively easy to move across a border if a state or city is doing something foolish. Leaving the country, by contrast, is a much bigger step (and a lot harder if you have some money).
That being said, politicians outside of Washington deserve plenty of scorn (to show that Washington has no monopoly on venality and incompetence, I periodically share columns that highlight “Great Moments in State Government” and “Great Moments in Local Government“).
And the coronavirus crisis is giving us plenty of new evidence.
Writing for the Federalist, John Daniel Davidson takes aim at control-freak politicians.
…some mayors and governors…think they have unlimited and arbitrary power over their fellow citizens, that they can order them to do or not do just about anything under the guise of protecting public health. We’ve now witnessed local and state governments issue decrees about what people can and cannot buy in stores, arrest parents playing with their children in public parks, yank people off public buses at random, remove basketball rims along with private property, ticket churchgoers… The most egregious example of this outpouring of authoritarianism was an attempt by Louisville, Kentucky, Mayor Greg Fischer to ban drive-in church services on Easter. …he also threatened arrest and criminal penalties for anyone who dared violate his order, and in an Orwellian twist, invited people to snitch on their fellow citizens. …this didn’t just happen in Louisville. Two churches in Greenville, Mississippi, that were holding drive-in services for Holy Week said police showed up and ordered churchgoers to leave or face a $500 fine. …the targeting of churches, while undoubtedly the most offensive overreach by state and local governments, is hardly the only instance of government gone wild. In Michigan, Gov. Gretchen Whitmer has taken it upon herself to declare what items are and are not “essential,” dictating to grocery stores what they can and cannot sell… Among the nonessential, and therefore banned, items are fruit and vegetable plants and seeds. …(Lottery tickets, on the other hand, are still permitted.)
There’s so much outrageous material in this article that it’s almost impossible to focus on one item.
I’ll simply note that it is entirely predictable – but totally disgusting – that Governor Whitmer in Michigan has exempted sales of lottery tickets from her lockdown order. I guess risk is okay if it’s for the purpose of getting more revenue by screwing poor people.
Since we’re on the topic of Governor Whitmer and Michigan, this tweet indicates that it’s okay to put infants in danger. After all, they don’t line the pockets of government by purchasing lottery tickets.
Per order from @GovWhitmer, people in Michigan are now banned from purchasing a new baby car seat in stores.
Let’s look at more examples of nanny-state authoritarianism.
David Harsanyi’s column in National Review is appropriately scathing.
Free people act out of self-preservation, but they shouldn’t be coerced to act through the authoritarian whims of the state. Yet this is exactly what’s happening. …politicians act as if a health crisis gives them license to lord over the most private activities of America people in ways that are wholly inconsistent with the spirit and letter of the Constitution. …What business is it of Vermont or Howard County, Ind., to dictate that Walmart, Costco, or Target stop selling “non-essential” items, such as electronics or clothing? …it is an astonishing abuse of power to issue stay-at-home orders, enforced by criminal law, empowering police to harass and fine individuals for nothing more than taking a walk. …The criminalization of movement ends with…three Massachusetts men being arrested, and facing the possibility of 90 days in jail, for crossing state lines and golfing — a sport built for social distancing — in Rhode Island. …In California, surfers, who stay far away from each other, are banned from going in the water. Elsewhere, hikers are banned from roaming the millions of acres in national parks. …Would-be petty tyrants, such as Dallas judge Clay Jenkins, who implores residences to rat out neighbors who sell cigarettes.
So many awful examples, but I’m especially nauseated by Judge Jenkins and his call for snitching. Makes me wonder if he’s related to Andrew Cuomo, Richard Daley, or David Cameron.
I’ll close with two amusing items.
First, every red-blooded American should cheer for this jogger (and you should cheer for him if you’re a red-blooded person from abroad as well).
What the heck is the harm of going for a run alone on the beach? It's probably a thousand times safer than putting gas in your car or getting groceries. Run Forest run! pic.twitter.com/Po1n8m4XWg
— IAMis Dangerous to Evil I hope (@IAMISjp) April 10, 2020
Second, here’s some satire that is both seasonal and accurate (though, to be fair, the disciples weren’t practicing social distancing).
P.S. Maybe this is the kind of harassment that led to “Libertarian Jesus“?
In a recently released study, two economists for the World Bank decided to investigate the effectiveness of government spending.
Governments of developing countries typically spend resources equivalent to between 15 and 30 percent of GDP. Hence, small changes in the efficiency of public spending could have a significant impact on GDP and on the attainment of the government’s objectives. The first challenge faced by stakeholders is measuring efficiency. This paper attempts such quantification and verifies empirical regularities in the cross country-variation in the efficiency scores.
So they calculated how much different governments were spending and the results that were being achieved.
Using two different methodologies, here’s what they found for health spending and life expectancy.
The goal, of course, is to get good results (to be higher on the vertical axis) without having to spend a lot of money (in other words, try to be farther left on the horizontal axis).
And here are the numbers for education quality and education spending.
The economist then crunched all the numbers to determine the relationship between spending and outcomes.
The results may surprise some people.
Government expenditure (GOVEXP) is negatively associated with efficiency scores in education (Tables 14 a and b). This result is robust to changes in the output indicator selected. In the output efficiency case, the impact is ambiguous specially when the PISA Math and Science scores are the output indicators (Table 14 b). In health (Tables 15 a and b), the negative association is present in both input and output efficiency. In infrastructure, the expenditure variables (GOVEXP and PUBGFC10PC) are negative in the six output indicators that are used (Table 16a).23 There is a robust trade-off between size of expenditure and efficiency. …The share of public financing within the total (sum of public and private) is robustly associated with lower efficiency scores.
But here’s another surprise.
These World Bank results are not an outlier.
The European Central Bank has two separate studies (here and here) that conclude smaller government is more effective.
And why does it seem like the size and scope of government keeps expanding around the world?
If I’m feeling optimistic, I’ll disagree with the tone of those questions. There are reasons to be cheerful, after all. the Soviet Empire collapsed and there’s solid data that global economic liberty has increased over the past few decades. And for those who care about evidence, there’s a slam-dunk argument that smaller government means more prosperity.
But if I’m feeling pessimistic, I’ll look at grim numbers suggesting that the burden of government automatically will expand because of demographic change. And I also worry about eroding societal capital, with more and more people thinking it’s okay to live off the government. And let’s not forget “public choice,” the theory that explains why politicians have an incentive to make government bigger.
I go back and forth on whether the glass is half full or half empty, and I’m not sure which side is winning. All I can say for sure is that Americans are getting increasingly polarized as we have big fights about the proper role of government.
Which is why I’ve always thought decentralization would be a good idea. No just for policy reasons, but also for domestic tranquility. All the leftists could move to places such as California, Illinois, and New Jersey and vote themselves Greek-style government. And all the advocates of limited government could move to more laissez-faire states such as New Hampshire, Texas, and South Dakota.
But statists will never agree to that approach. And these two sentences from Reddit‘s Libertarian page succinctly explain the left’s opposition.
This guy nails it.
Libertarians have no objection to a bunch of statists creating some sort of socialist or communist mini-society, so long as it’s voluntary. Indeed, we’ve periodically had experimental societies in America based on Marxist principles. Starting with the Pilgrims (who learned from their mistake). And I still laugh every time I think about Bernie Sanders getting ejected from a hippie commune because he was too lazy to do his share of the common work.
But this tolerance isn’t a two-way street. Libertarians will let socialists create statist systems inside a free society, but the left won’t allow libertarian outposts in statist societies.
Heck, our statist friends don’t even like it when other nations have pro-market policy. That’s one of the reasons international bureaucracies always persecute so-called tax havens. Folks on the left may be misguided, but they’re usually not stupid. They know that statist systems will quickly fail if productive people have the ability to move themselves (or at least their money) across national borders.
The bottom line is that federalism is good because it means people can easily move when a government imposes bad policy. This is also a recipe for tolerance and tranquility, though only one side sees it that way.
If you’re reading this, you are a very lucky person because you were born at the right time. If you were born 500 years ago, 1000 years ago, or 1500 years ago, the odds are overwhelming that you would have endured a very short and difficult life, one that was characterized by unimaginable poverty.
But then, as explained in short videos by Professors Deirdre McCloskey and Don Boudreaux, the world suddenly became much richer starting a few hundred years ago.
Today, let’s expand on that evidence by looking at some recent analysis.
Here are some excerpts from a fascinating Aeon article by Professor Joel Mokyr.
How and why did the modern world and its unprecedented prosperity begin? …One of the oldest and most persuasive explanations is the long political fragmentation of Europe. …The modern European economic miracle was…neither designed nor planned. …How did this work? In brief, Europe’s political fragmentation spurred productive competition. It meant that European rulers found themselves competing for the best and most productive intellectuals and artisans. …the existence of multiple competing states encouraged scientific and technological innovation. …the rivalries between the states, and their examples to one another, also meliorated some of the worst possibilities of political authoritarianism. …interstate competition was a powerful economic mover. More important, perhaps, the ‘states system’ constrained the ability of political and religious authorities to control intellectual innovation.
Mokyr then explains that the benefits of jurisdictional competition were augmented and enabled by a form of labor mobility.
…political fragmentation was not enough. …more was needed. The size of the ‘market’ that intellectual and technological innovators faced was one element of scientific and technological development that has not perhaps received as much attention it should. …political and religious fragmentation did not mean small audiences for intellectual innovators. Political fragmentation existed alongside a remarkable intellectual and cultural unity. Europe offered a more or less integrated market for ideas, a continent-wide network of learned men and women, in which new ideas were distributed and circulated. …In early modern Europe, national boundaries mattered little in the thin but lively and mobile community of intellectuals in Europe. Despite slow and uncomfortable travel, many of Europe’s leading intellectuals moved back and forth between states. …If Europe’s intellectuals moved with unprecedented frequency and ease, their ideas travelled even faster. …Europe’s unique combination of political fragmentation and its pan-European institutions of learning brought dramatic intellectual changes in the way new ideas circulated. …Europe’s intellectual community enjoyed the best of two worlds, both the advantages of an integrated transnational academic community and a competitive states system.
By the way, I don’t consider this the “best of two worlds.” Labor mobility is a feature of jurisdictional competition, so I would say it’s simply one of the benefits. But six of one, half dozen of the other.
Let’s now look at another benefit of capitalism. Here are some passages from a CapX column on how the development of a merchant class constrained militarism. Here’s the thesis.
Although a number of things contributed to the huge decline in violence of the late medieval period, …the development of capitalism, and the rise of a merchant class whose wealth was not won with a sword, played a huge part.
And here’s an example.
This order was first shaken in 1302 when France’s cavalry confidently marched north to suppress a revolt by the Flemish. Flanders is not naturally rich in resources –Vlaanderen means flooded – but its people had turned swamps into sheep pastures and towns, building a cloth industry that made it the wealthiest part of Europe, its GDP per capita 20 per cent greater than France and 25 per cent better than England. …The Flemish were traders, not knights, which is why the French were sure of victory. And yet, with enough money to pay for a large, well-drilled infantry they were able for the first time to destroy the cavalry at the Battle of the Golden Spurs. It was the beginning of the end – no longer could the aristocracy simply push around the bourgeoisie, and as the latter grew in strength so it undermined the violence-obsessed culture of the nobility.
And another example.
European capitalism had begun in northern Italy, chiefly Venice, one of nine Italian cities that had surpassed 50,000 people by this point. …Venice was high in trust, a vital component for the growth of sophisticated markets, and so was the first to develop joint-stock companies and banks. …The Venetians, along with their arch-rivals the Genoese and Pisans, had been involved in the crusades, but despite papal prohibition had continued to trade with the infidel. Indeed, nothing would stop their desire to engage in commerce, and Arab geographer and traveller Ibn Jubayr noted that “It is amazing to see that the fires of discord burn” between Christians and Muslims when it comes to politics but, when trading, travellers “come and go without interference”.
And another case study.
London was behind Italy or Flanders but it was catching up. The city had started to grow as a trading hub in the 12th century, and its mayor, William Hardel, was the only commoner to witness Magna Carta in 1215 and helped secure Clause 41, which stated that all foreign “merchants are to be safe and secure in departing from and coming to England” without “evil exactions”. London expanded rapidly in the later middle ages, increasing its share of England’s wealth from two to nine per cent, and Henry IV (1399-1413) was the first king to invite its merchants on to the royal council, among them Sir Richard Whittington…the merchants purposefully avoided conflict, so that when in the 1380s Richard II tried to raise an army in the city to fight his various internal enemies he was met with apathy
What makes this analysis especially important is that military conflict is one of the putative downsides of political fragmentation. Indeed, Mokyr mentions that in his article.
I confess I don’t know enough to judge that issue. For instance, I’d like to know if there were there more wars in Europe, or were European wars between countries as opposed to an equal amount of civil wars elsewhere in the world?
In any event, at least there is some evidence that the prosperity generated by capitalism produced resistance to militarism. Sort of brings to mind Bastiat’s famous statement about trade and war.
Let’s close by looking at Europe today and exploring whether jurisdictional competition on the continent. The good news is that the principle of “mutual recognition” has produced a form of competitive federalism, as explained in an article by Professor Michael Greve.
…the principle of reciprocity and “mutual recognition”…allows decentralized political institutions to coexist with a common, open, and efficient economic market. …cross-border trade…must be governed either by the rules of the country where a particular good or service ends up or by the rules of its origin country. The former “destination” principle would compel each company to comply with different and often conflicting regulations in all the member states where its products might end up. The result is not a common market but a collection of regulatory fiefdoms. The solution to this dilemma is the opposite, origin-based rule: so long as a company in a member state complies with the laws of its home state, it may freely sell its goods and services in other member states. …the origin principle…is commonly called the principle of “mutual recognition.” …it is the only principle that is consistent with both a common economic market and political decentralization. Mutual recognition integrates member states without central intervention. …Mutual recognition, then, liberates commerce by eliminating the cost of complying with different, conflicting, and often incomprehensible rules. Beyond that, mutual recognition institutionalizes jurisdictional competition. …The ability of individuals and firms to vote with their feet, modems, and pocketbooks will liberate markets and discipline politicians. …Trade unions, environmental interests, and any other interest group whose agenda rests on redistribution consistently oppose mutual recognition: they cannot rob Peter to pay Paul if Peter is allowed to escape to more hospitable climes.
Incidentally, the “origin principle” is at the core of the battle over the so-called Streamlined Sales Tax Proposal, a scheme by certain state governments to impose destination-based tax laws on out-of-state merchants.
For what it’s worth, Europe generally has been better than the United States about using the origin-based approach.
Europeans [are] ahead of the United States in viewing mutual recognition as an efficient means of harmonizing, as it were, the demands of economic integration and political diversity. Here at home, mutual recognition governs corporate chartering—but almost nothing else. Tort law, insurance and financial regulation, state taxation, product labeling, and most other areas of regulation are either subject to a destination rule or else preempted under federal law. No American legislator or corporate executive has ever heard of mutual recognition, let alone pressed it as a serious policy option.
Insurance regulation is a key example. Many states impose costly mandates that drive up the cost of health insurance. But if consumers had the freedom to buy health insurance from companies based in more market-oriented states, they would be able to save money.
Unfortunately, statists in Europe are moving in the wrong direction, seeking to replace mutual recognition with one-size-fits-all harmonization.
The European political class is bent on establishing pan-European, sovereign political institutions. …As political aspirations begin to dominate the process of European integration, mutual recognition will be jettisoned. …Habermas denounces the premises on which mutual recognition rests as the “building blocks of a neoliberal world view,” and he declares them at odds with “the Europeans’ normative self-understanding.” The European Union must therefore construct a European society of citizens, a pan-European “public sphere,” and a shared European political culture…precisely to confine economic competition and choice to a subordinate sphere. …the Europeans will harmonize their way toward a common constitution and citizenship, with dental care for all.
If the centralizers in Europe succeed (and they’ve already moved policy in the wrong direction), that will not bode well.
Europe already faces severe challenges because of excessive government and bad demographics.
Harmonization will exacerbate the problem of too much government because the “stationary bandit” no longer will face competitive pressure.
If states were in charge of such programs, by contrast, there would be lots of innovation and experimentation. This would help policy makers understand the best way of taking care of the truly destitute while helping others transition to productive and self-sufficient lives.
Today, let’s look specifically at food stamps. I’ve already explained why federalism is the right way of fixing the program.
And here are some additional reasons to support reform.
Writing for USA Today, Jim Bovard opined on the program’s glaring shortcomings – many of which were exacerbated by the Obama Administration’s efforts to expand dependency.
Why did the food stamp program spiral out of control? The Obama administration believed that maximizing handouts would maximize prosperity… So the feds bankrolled massive recruiting campaigns to sway people to abandon self-reliance. A North Carolina social services agency won a USDA “Hunger Champions Award” for attacking “mountain pride” as a reason not to accept government handouts. In Alabama, people received fliers proclaiming: “Be a patriot. Bring your food stamp money home.” The state of Florida paid individual recruiters to sign up at least 150 new food stamp recipients per month. …enrollment also skyrocketed after Obama effectively suspended the three-month limit for able-bodied adults without dependents to collect food stamps. From 2008 to 2010, the number of able-bodied recipients doubled.
Jim points out several reasons why the program is bad for the economy and bad for poor people.
A 2012 Journal of Public Economics study concluded that receiving food stamps sharply reduces work hours by single mothers. …state governments have little or no incentive to police the program because losses from fraud or waste don’t come out of state budgets. …the program is a dietary disaster. Walter Willett, chair of Harvard University’s Department of Nutrition, observed in 2015, “We’ve analyzed what (food stamp) participants are eating and it’s horrible food. It’s a diet designed to produce obesity and diabetes.” A 2017 study published in BMC Public Health found that food stamp recipients were twice as likely to be obese as eligible non-recipients. …A 2016 USDA report revealed that soft drinks and other sweetened beverages are the most common purchase in food stamp households, accounting for almost 10% of monthly expenditures. “Desserts, salty snacks, candy and sugar” account for another 10% of food stamp expenditures.
And it’s definitely bad for taxpayers. In a column for the Wall Street Journal, Kristina Rasmussen explained how rich people are able to bilk the system.
Consider the food stamp program’s longstanding policy of “broad-based categorical eligibility.” You probably assume that food stamps go to poor people only. But this policy, which the U.S. Department of Agriculture instituted during the Clinton administration, allows state food-stamp programs to grant benefits to anyone who has moderately low wage income, regardless of net worth. A family with a seven-figure bank account can be eligible for food stamps. That’s how lottery winners—including actual millionaires—wind up getting food stamps. In 2012 Amanda Clayton of Detroit was revealed to be receiving $200 in monthly food aid despite having won $1 million the year before. “I feel that it’s OK because I have no income,” she said, “and I have bills to pay. I have two houses.” In 2011 Leroy Fick of Bay County, Mich., was found to be receiving food assistance despite having taken home $850,000 in lottery winnings the previous year. …more than 30 states continue to have no asset limits. All you need to collect food aid is two things: an income below a multiple of the poverty line, ranging from 130% to 200%; and eligibility for some sort of benefit funded by Temporary Assistance for Needy Families (TANF), the main welfare program for single parents. And there’s the “one weird trick.” The state spends TANF dollars to print a welfare brochure. The brochure itself is defined as a “benefit,” which everybody is “eligible” to receive, thereby meeting the USDA requirement. Of the 47 million Americans who received food stamps in 2014, some four million got them under “broad-based categorical eligibility”—most because their wealth would have made them ineligible otherwise.
The good news is that the White House wants to reform the scandal-plagued program.
The bad news is that Trump and his people have chosen paternalism rather than federalism.
The Budget would also create a new approach to nutrition assistance that combines traditional SNAP benefits with U.S. Department of Agriculture Foods provided directly to households. This cost-effective approach supports American agriculture, prevents certain types of program abuse, provides state flexibility in delivering food benefits, and ensures the nutritional value of the benefits provided. …Under the proposal, households receiving $90 or more per month in SNAP benefits will receive a portion of their benefits in the form of a USDA Foods package, which would include items such as shelf-stable milk, ready to eat cereals, pasta, peanut butter, beans and canned fruit, vegetables, and meat, poultry or fish. …This cost-effective approach will generate significant savings to taxpayers with no loss in food benefits to participants.
By the way, the fact that I don’t like the plan doesn’t mean I agree with some of the leftist critics. As this “perplexed meme” illustrates, the folks who correctly mock the White House’s proposal are also the same ones who want the government to have massive powers over matters that are far more complex than delivering food.
While the budget plan takes the wrong approach, the White House has done something good via the regulatory process by giving states more flexibility for work requirements.
Kansas, Maine, Wisconsin, and Alabama have achieved good results already, and now the same thing is happening in Georgia, as noted by PJ Media.
Thousands of Georgia residents who depend on food stamps are losing their benefits because they have failed to meet the state’s new requirements that force the able-bodied without children to find jobs. …“The greater good is people being employed, being productive and contributing to the state,” Bobby Cagle, director of the state Department of Family and Children Services, said. …State Rep. Greg Morris (R) said the fact that thousands of people have lost their benefits only showed the magnitude of the problem of welfare fraud in Georgia. He said the new mandate is working. “This is about protecting taxpayer dollars from abuse, and taking people off the cycle of dependency,” Morris said. However, Benita Dodd, vice president of the conservative Georgia Public Policy Foundation, wrote that saving taxpayer dollars was not the program’s ultimate goal. “The goal must be to focus aid on those who truly need help and restore the dignity of work to able-bodied adults,” Dodd wrote. “Reducing dependency and promoting economic opportunity help end the cycle of poverty, reinforce the temporary nature of assistance and encourage personal responsibility.”
The bottom line is that I don’t know how much work should be required, or what kind. I also don’t know whether the idea of direct food delivery in Trump’s budget is necessarily a bad idea.
Which is why I want decentralization of the program. Let states try different approaches and then learn from each other. That’s good for taxpayers and good for poor people.
Which is basically what I said in this interview more than six years ago.
P.S. Here’s a map showing which states (as of a few years ago) had the highest rate of food stamp dependency.
P.P.S. And here’s a table showing which states have the highest levels of food stamp dependency relative to the eligible population.
But there’s actually no conflict because we can decide that some things are distasteful without wanting to infringe on the freedom of others to partake. And you can make that decision for moral reasons or utilitarian reasons.
Now let’s consider two more statements.
The rule of law is a bulwark of a civilized society and government officials should not engage in arbitrary enforcement.
Attorney General Jeff Sessions is wrong to enforce federal drug laws in states that have decriminalized marijuana.
I’m tempted to agree with both sentences. The rule of law is vital, after all, and I definitely don’t like (and not for the first time) when Sessions uses the Justice Department to hassle people for victimless crimes.
But here’s my quandary: Should we applaud if government officials ignore laws, even laws we don’t like? That approach has some distasteful implications. If you’re on the right, would you want a left-leaning government to have the leeway to ignore criminal behavior by, say, union bosses? If you’re a leftist, would you want a libertarian-leaning government to have the ability to decide that tax laws can be ignored?
Charles C. W. Cooke of National Review hits the nail on the head.
There’s no question that the right approach is for the federal government to eliminate drug laws. Heck, even people who support the War on Drugs should favor this approach since criminal justice (other than a few select areas such as treason) should be a matter for state and local governments.
And a broader point is that we simply have too many laws. Harvey Silverglate estimates that the average person unknowingly commits three felonies per day.
This means that government officials could probably indict, convict, and imprison almost all of us. Needless to say, that’s not how a free and just society should work.
Our Byzantine tax code is an example. Many of us probably unintentionally violate the law because of needless complexity. Or even if we haven’t violated the law, I’m guessing a prosecutor could convince a grand jury that we should be indicted. And who knows what would happen after that.
So while I mostly argue for tax reform because I want more growth, I also think there’s a moral argument for a simple and fair system.
All that being said, I obviously don’t want the Justice Department in Washington to waste law enforcement resources in a campaign to undermine states that have decriminalized pot. But there’s a right way and a wrong way to solve this problem.
P.S. You can click here for other libertarian quandaries.
Time for a confession. My left-wing friends are correct. I’m an idiot.
Why?
Because I’m an anti-tax libertarian, yet I keep writing favorably about a provision that will raise my taxes. I’m talking specifically about the provision, currently in both the House and Senate tax plans, to eliminate the deduction for state and local income taxes (and maybe also property taxes, though the House proposal will retain deductibility for the first $10,000).
I think this distortion in the tax code is very bad policy and I hope the loophole is entirely eliminated (including the property tax deduction).
But as I look at all the provisions in both bills and speculate about the contours of a final agreement, it’s highly likely that the net result will be a tax hike on one of my favorite people – me!
That being said, let’s remind ourselves why the deduction is a bad idea.
Citing the self-destructive example of a recent tax hike in Illinois, Andrew Wilford of the National Taxpayers Union points out that the deduction enables and encourages state and local politicians to impose higher taxes.
…eliminating SALT would…remove this incentive for local governments to overtax its citizens. … this incentive to hike taxes can prove significant enough to drive state policy. In Illinois, residents were forced to bear the burden of a 32 percent hike on their taxes because of the state’s unwillingness to tackle its growing pension funding problem. Tax increases did not solve this underlying spending problem, but it was politically expedient— in part because state lawmakers knew that the federal government would pick up part of the tab.
Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction… In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.
But I don’t want today’s column to fixate on the policy argument.
Looking at the situation in the Golden State, that’s certainly the argument from the folks at Vox.
Just three of the 14 California House Republicans went against leadership… Republicans in California clearly ran on cutting taxes — but this tax bill could raise taxes on their constituents. …it also sets up their constituents for more risk. Cutting the state and local tax deduction puts undue burden on the state’s budget… “At this point it looks like California Republicans are eager to lose their seats in 2018,” Tyler Law, a spokesperson for the Democratic Congressional Campaign Committee, said.
Though Kimberly Strassel of the Wall Street Journal has a more upbeat (if you’re a Republican) assessment. She starts by explaining how California GOPers were targeted.
The House GOP passed its tax-reform bill on Thursday, and special medals of valor go to the 11 of 14 California Republicans who voted in support. The lobbyist brigade had joined with Democrats to target the Golden State delegation, seeing it as their best shot at peeling off enough Republicans to kill the bill. The assault was brutal, dishonest and all-out. …Gov. Jerry Brown unleashed on state Republicans, calling them “sheep” for supporting an end to most state and local tax, or SALT, deductions, and sending them letters deploring the tax hit on residents of high-tax California. Minority Leader Nancy Pelosi accused them of “looting” the state. Her Senate counterpart, New York’s Chuck Schumer, warned of “political fallout” that would be “catastrophic.”
They fought back by arguing that the Democrats are the high-tax party.
What proved most effective, however, was the state Republicans’ willingness to go on offense and throw SALT in Gov. Brown’s face. California has the heaviest tax burden in the country and only just implemented a punishing new 12-cent-a-gallon-increase in its gasoline tax. Mr. McCarthy used the occasion to release a video pouncing on that hike and noting that “if Gov. Brown is worried about the tax burden, let’s make cutting [taxes] a federal and state project.” Other state Republicans ran with that message, even more bluntly. “Why punish the rest of the nation because California is stupid?” asked Rep. Duncan Hunter in a local TV interview. Even Rep. Darrell Issa, who voted “no” on Thursday (along with Dana Rohrabacher and Tom McClintock ), zapped a letter back to Gov. Brown, noting that if SALT had become a big issue, it was “a direct result of the tremendous weight that your misguided policies have put on California taxpayers.”
At the risk of sounding like a mealy-mouthed Washington apparatchik, I’m going to agree with both Vox and the Wall Street Journal.
The bottom line is that voting for tax reform probably does endanger GOP lawmakers from high-tax states, which is the message that the leftists at Vox are peddling in hopes of preserving the awful status quo.
But I want to close with the observation that enacting tax reform will improve the electoral outlook for blue-state Republicans even if it’s not necessarily good for current GOP incumbents.
And that means politicians in blue states will be under even greater pressure to lower tax rates rather than increase tax rates. If they don’t do the right thing, more and more taxpayers will escape, as the Wall Street Journalopines.
The liberal tax model is to fleece the rich to finance spending on entitlements and government programs that invariably grow faster than the economy and revenues. IRS data on tax migration show this model is now breaking down in progressive states as the affluent run for cover and the middle class is left paying the bills. Between 2012 and 2015 (the most recent data), a net $8.5 billion in adjusted gross income left New Jersey while $6.2 billion poured out of Connecticut—4% of the latter state’s total income. Illinois lost $13.6 billion. During that period, Florida with no income tax gained $39.3 billion in AGI. …As these state laboratories of Democratic governance show, dunning the rich ultimately hurts people of all incomes by repressing the growth needed to create jobs, boost wages and raise government revenues that fund public services. If the Republican House and Senate tax-reform bills follow through with eliminating all or part of the state and local tax deduction, progressive states will have an even harder time hiding the damage. They should be the next candidates for reform.
Indeed, the mere prospect of tax reform already is causing statists to rethink their approach.
The Republican tax reform…already it’s having a political impact in at least one high-tax, ill-governed state. Democrat Steve Sweeney, president of the New Jersey Senate, said last week that the GOP decision to eliminate the state and local tax deduction could throw a new tax increase on millionaires into doubt. …Excellent news. Making politicians in Trenton, Albany, Sacramento and Springfield nervous about raising taxes is one desirable outcome of tax reform. These politicians have been passing the burden of their tax-and-spend policies onto taxpayers in other states via the state and local deduction. If that goes away, Democrats will have to rethink their policies lest they drive from their states the affluent taxpayers who finance most of state government. …Here’s a radical idea: Cut taxes and make New Jersey more desirable for people to work and invest. Tax reform in Washington could also spur reform in the states.
If tax reform happens and the deduction for state and local taxes is eliminated, the left’s class-warfare agenda will become much less appealing – and much harder to implement.
And in that kind of environment, it should be much easier for Republican politicians to win votes.
For all intents and purposes, tax reform for Republicans could be like Obamacare for Democrats.
Federal tax reform would have a similar impact, except the GOP will be the long-run winners. Voters in high-tax states will be more reluctant to vote for Democrats once a $100 tax hike (for instance) actually costs $100. Which is why genuine tax reform is a win-win situation.
I’ve called for the abolition of the Department of Transportation. On more than one occasion.
So I was very excited to see this new video about infrastructure from Johan Norberg.
Very well put. As Johan says (channeling Bastiat), we should remember that jobs are destroyed when money is taken out of the private sector to build infrastructure.
So it behooves us to make sure that any new project isn’t a boondoggle and instead will increase the economy’s productive capacity.
Veronique de Rugy explains the issue in a column for Reason. She starts with some economic analysis.
Economists have long recognized that roads, bridges, airports, and canals are the conduits through which goods are exchanged, and as such, infrastructure can play a productive role in economic growth. But not all infrastructure spending is equal. Ample literature shows, in fact, that it’s a particularly bad vehicle for stimulus and does not, in practice, boost short-term jobs or economic growth. …Publicly funded infrastructure projects often aren’t good investments in the long term, either. Most spending orchestrated by the federal government suffers from terrible incentives that lead to malinvestment—resources wasted in inefficient ways and on low-priority efforts. Projects get approved for political reasons and are either totally unnecessary or harmed by cost overruns and corruption.
And she concludes by arguing for market forces rather than federal involvement.
[Trump] should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive. User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks. …If Trump wants the United States to have “world-class” infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.
Writing for U.S. News & World Report, Tracy Miller similarly argues that decentralization is the best approach.
Highways as well as public transportation are currently funded with money from the federal Highway Trust Fund, and by state and local governments. …Money from the fund has strings attached that raise costs and limit state and local governments’ ability to choose which projects have priority. These strings include prevailing wage laws, which require contractors receiving federal money to pay unionized wages even if they could attract qualified workers willing to work for less. High-profile projects chosen by politically powerful congressmen can easily take priority over projects that would generate greater benefits for their constituents. From an administrative standpoint, it would not be very difficult to reduce or eliminate the federal government’s role in highway and transit funding. Instead of gas taxes going to the federal government before being returned to the states, as is presently the case, each state could collect all taxes on fuel sold within its borders and decide how best to spend it. This would make it possible to downsize the U.S. Department of Transportation, saving taxpayers billions of dollars.
He explains why reform will lead to better – and cheaper – transportation.
Local governments – with greater awareness of the local needs of metropolitan areas, small towns or rural areas – can do a better job of funding and managing roads, highways and public transportation that serve primarily local residents. State governments or private firms, meanwhile, can best manage interstate and other major highways that cater mostly to long-distance travelers, especially if they could cover expenses with user fees. …Many drivers object to the idea of paying tolls for the use of currently “free” interstate highways, whether they are managed by private firms or state governments. But highways aren’t free – the costs are hidden within our fuel taxes. If mileage-based user fees are applied to all highways and set at the correct levels, they can become a much more efficient (and ultimately cheaper) replacement for fuel taxes.
Professor Edward Glaeser of Harvard summarizes the issue nicely in an article for CNBC.
Our current system of federal funding for transportation means that taxpayers in New York fund highways in Montana and drivers in Utah pay for New York’s airports. If President Trump wants to seriously improve American infrastructure spending, he should champion a new federalism for transportation, in which infrastructure is funded by states, localities and especially the users themselves. …The best decisions are made when decision-makers bear the costs and reap the benefits. When companies invest, they agonize about whether future customers will pay enough to cover the production costs. …Having lived through Boston’s Big Dig, I am well aware of how the promise of federal funding skews local decision-making. Local leaders stop asking themselves whether the benefits cover the costs because it’s somebody else’s nickel. …Detroit would have never built its absurd People Mover Monorail without federal encouragement and funding.
He elaborates on some of the implications for different types of infrastructure.
If new automotive infrastructure is meant to be self-financing, then the decision to build is a straightforward business investment and there is little need for large-scale federal funding. …The beneficiaries of metro systems are the businesses and commuters within a state. They could be funded with local property or sales taxes. My favorite metro funding model is in Hong Kong, where the city’s private mass transit system funds itself by building high-rises atop new train stops. …More federal funding for dysfunctional airports just perpetuates the status quo. They would be far healthier if they were split apart from the larger agency and allowed to operate, compete and charge higher landing fees, either as independent self-funding public airports, as in the U.K., or as private entities.
Speaking of privatization, a column in the Wall Street Journal points out that this is the way to improve airports in America.
Why do American passengers pay so much to get so little? Because their airports, by global standards, are terribly managed. Cities from London to Buenos Aires have sold or leased their airports to private companies. To make a profit, these firms must hold down costs while enticing customers with lots of flights, competitive fares and appealing terminals. The firm that manages London’s Heathrow, currently eighth in the international ranking, was so intent on attracting passengers that it built a nonstop express train to the city’s center. It’s also seeking to add another runway, as is the rival firm running Gatwick Airport. American airports are typically run by politicians in conjunction with the dominant airlines, which help finance the terminals in return for long-term leases on gates and facilities. The airlines use their control to keep out competitors; the politicians use their share of the revenue to reward unionized airport workers. No one puts the passenger first.
The author cites the San Juan airport as an example of what can happen under privatization.
If you want to see how much better American airports could be, take a plane to Puerto Rico. Until four years ago, the main airport in San Juan was run, and neglected, by an unwieldy bureaucracy, the Puerto Rico Ports Authority. The terminal was a confusing jumble of dim corridors. On rainy days, the ceilings leaked; on hot days, the air conditioning faltered. The stores were tacky and the restaurants greasy spoons, often rented at bargain rates to politicians’ friends or relatives. …Airlines switched operations to other Caribbean hubs. In 2013 the Ports Authority leased the airport for 40 years to Aerostar, a partnership operating airports in Cancún and other Mexican cities. The new managers agreed to make capital improvements, reduce landing fees and pay the Ports Authority $1.2 billion—half up-front. The result, three years later, is an airport nobody would call Third World. The redesigned concourses are sleek and airy, and revenue from new retail and restaurants has doubled. …Airlines no longer control the gates, but they’re reaping other benefits. “We’re paying lower fees for a much better airport,” says Michael Luciano, who runs Delta’s operations in San Juan. “Almost every area has been renovated. You go into any restroom, and it’s bright and clean—things like that are really important to our customers.” Passenger volume has been growing 4% annually, well above the industry average.
I can personally vouch for this. Because of all my travel in the Caribbean, I’ve used the San Juan airport extensively over the years, including just last week for the Liberty International conference.
The difference between today’s airport and the dump that used to exist is like the difference between night and day.
By the way, let’s also dismiss the notion that there’s some sort of infrastructure crisis.
I’ve already shared data from the World Economic Forum’s Global Competitiveness Report, which shows that the United States actually ranks relatively high compared to other nations.
And I’ve also shared solid numbers making the same point from Chris Edwards, one of my colleagues at the Cato Institute. Michael Sargent of the Heritage Foundation has a tweet that nicely shows that there isn’t a crisis.
Oh, and let’s also consider the example of Japan, which thought infrastructure spending was some sort of economic elixir. That didn’t work so well, as pointed out by the Wall Street Journal.
The U.S. economy isn’t growing at merely 2% because of potholes or airports… The prime illustration is Japan, which since the 1980s has tried to build its way out of stagnation. The country now boasts perhaps the world’s most spectacular suspension bridges, maglev trains, elevated highways and man-made islands, but the cost was trillions of yen of debt (now 230% of GDP) and no better growth. Nor could a monorail save Detroit. Projects make economic sense only to the extent they clear rigorous cost-benefit tests.
And if you want to know the infrastructure that is least likely to pass a cost-benefit test, just look at mass transit.
A good place to start is the Wall Street Journal‘s recent editorial on a subway line in New York City.
New York City opened a new subway line—about a century after the project was proposed and merely decades after ground-breaking in 1972…by far the most expensive train track in the history of the world. The story is an example of what not to do… This first phase of the new line—amounting to 1.6 miles in a single neighborhood, with three new stations and a renovated stop—cost some $4.451 billion. …The next leg of the Second Avenue subway, which would extend the train 29 blocks north into Harlem starting in 2020, is projected to cost an astonishing $6 billion, and that is surely an underestimate.
Gabriel Roth, writing for the Washington Examiner, has the right idea.
…abolish the subsidies. The federal government forces road users to spend some $10 billion a year on non-road assets of little or no benefit to them. Those payments are not only wasteful in themselves; they also encourage states and local governments to squander money on mass transit, whose costs users are not prepared to cover — not even the operating costs. If local communities consider such expenditures important, they should pay for them themselves.
By the way, just to show my libertarian bona fides, I think decentralization is just part of the answer. In my fantasy world, the private sector plays a bigger role.
And the good news, as I wrote back in 2014, is that my fantasy is reality in some instances.
Their livelihood was being threatened, and they were tired of waiting for government help, so business owners and residents on Hawaii’s Kauai island pulled together and completed a $4 million repair job to a state park — for free. …The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen. …So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23. And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in. “We can wait around for the state or federal government to make this move, or we can go out and do our part,” Slack said. “Just like everyone’s sitting around waiting for a stimulus check, we were waiting for this but decided we couldn’t wait anymore.” …”We shouldn’t have to do this, but when it gets to a state level, it just gets so bureaucratic, something that took us eight days would have taken them years,” said Troy Martin of Martin Steel, who donated machinery and steel for the repairs. “So we got together — the community — and we got it done.”
Reminds me of the guy who built some stairs at a park for $550 because the Toronto government was taking too long and planned to spend $65,000 to do the same thing.
Portland Anarchist Road Care (PARC) is a community collaboration of skilled workers who volunteer their services to fix the damaged roads around Portland, Oregon. Citing concerns about governmental bureaucracy, the current political climate, a lack of funds and a seeming lack of care, the members of PARC decided to take things into their own very capable hands.
I have no idea whether these people are libertarian-minded anarcho-capitalists or deeply confused left-wing nihilist anarchists, but kudos to them for steeping up and doing a job cheaply and efficiently. The very opposite of what we expect from government.
P.S. Since Nazis are in the news and since I’m writing about infrastructure, here are some blurbs from an academic study on how Germany’s National Socialists used autobahn outlays to generate political support.
The idea that political support can effectively be bought has a long lineage – from the days of the Roman emperors to modern democracies, `bread and circus’ have been used to boost the popularity of politicians. A large literature in economics argues more generally that political support can be ‘bought’. …In this paper, we analyze the political benefits of building the worldʹs first nationwide highway network in Germany after 1933 – one of the canonical cases of government infrastructure investment. We show that building the Autobahn was highly effective in reducing opposition to the Hitler regime. …What accounts for the Autobahn’s success in winning “hearts and minds”? We discuss the economic and transport benefits. In the aggregate, these have been shown to be minimal (Ritschl 1998; Vahrenkamp 2010). …we argue that the motorways…increased support because they could be exploited by propaganda as powerful symbols of competent, energetic government. …Our results suggest that infrastructure spending can indeed create electoral support for a nascent dictatorship – it can win the “hearts and minds” of the populace. In the case of Germany, direct economic benefits of pork‐barrel spending in affected districts may have played a role.
Seems that politicians, whether motivated by evil or run-of-the-mill ambition, love spending other people’s money to build political support. Is it any wonder that we hold them in such low esteem?
The real world is like a cold shower for our friends on the left. Everywhere they look, there is evidence that jurisdictions with free markets and small government outperform places with big welfare states and lots of intervention.
That’s true when comparing nations. And it’s also true when comparing states. That must be a source of endless frustration an disappointment for statists.
Speaking of disappointed statists, the real world has led to more bad news. The left-wing Mayor of Baltimore campaigned in favor of a $15 minimum wage, but then decided to veto legislation to impose that mandate. The Wall Street Journalopines on this development.
Mayor Catherine Pugh, a Democrat, has rejected a bill that would raise the city’s minimum wage to $15 an hour by 2022. She did so even though she had campaigned in favor of raising the minimum wage, which shows that economic reality can be a powerful educator. She explained her change of heart by noting that raising the rate above the $8.75 an hour minimum that prevails in the rest of Maryland would send jobs and tax revenue out of Baltimore to surrounding counties. The increase would also have raised the city’s payroll costs by $116 million over the next four years when she’s already coping with a deficit of $130 million in the education budget.
The key thing to notice is that the Mayor recognized that the real-world impact of bad legislation is that economic activity would shrink in the city and expand outside the city.
Writing for Reason, Eric Boehm also points out that the Mayor was constrained by the fact neighboring jurisdictions weren’t making the same mistake.
Pugh said the bill would not be in the best interest of Baltimore’s 76,000 unemployed workers and would drive businesses out of the city to the surrounding counties. …Indeed. Raising the minimum wage would not solve Baltimore’s economic troubles, and would likely only add to them. While support for a $15 minimum wage has become something of a litmus test for progressive politicians, the true test of any politician should be whether he or she is willing to set aside campaign trail rhetoric that flies in the face of economic reality. Signing the bill would have made progressive pols and activists happy—one Baltimore city councilman called Pugh’s decision “beyond disappointing” and a minimum wage activist group said it would remind voters of Pugh’s “broken promise”—but there’s no honor in following through on a promise to do more damage to an already struggling city’s economy. Pugh’s decision to veto a $15 minimum wage bill isn’t disappointing in the least. More politicians should learn from her example of valuing economic reality over populist rhetoric.
The Mayor’s veto is good news, though it remains to be seen whether city legislators will muster enough votes for an override.
Regardless of what happens, notice that the Mayor didn’t do the right thing because she believed in economic liberty and freedom of contract. She also didn’t do the right thing because she recognized that higher minimum wage mandates would lead to more joblessness.
Instead, she felt compelled to do the right thing because of jurisdictional competition. She was forced to acknowledge that bad policy in her city would explicitly backfire since economic activity is mobile. She had to admit that there are no magic boats.
And this underscores why federalism and decentralization are vital features of a good system. Governments are more likely to do bad things when the costs can be imposed on an entire nation (or, even better from their perspective, the entire world). But when bad policy is localized, it becomes very hard to disguise the costs of bad policy.
This is why nations such as Switzerland are so successful.
This is why researchers find decentralized systems are more efficient.
And, as today’s column illustrates, decentralization stopped the Mayor of Baltimore from a bad policy that would hurt poorly skilled workers. Just as federalism stopped Vermont politicians from imposing a destructive single-payer health system.
Entry-level jobs matter—and you don’t have to take my word for it. In a speech last week on workforce development in low-income communities, Federal Reserve Chair Janet Yellen said that “it is crucial for younger workers to establish a solid connection to employment early in their work lives.” Unfortunately, government policies are destroying entry-level jobs by giving businesses an incentive to automate at an accelerated pace. In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017. Nearly a quarter of them, 24%, said rising minimum wages. …The trend toward automation is particularly pronounced in areas where the local minimum wage is high.
Need more evidence?
By the way, even the normally left-leaning World Bank has research on the damaging impact of minimum wage mandates.
This paper uses a search-and-matching model to examine the effects of labor regulations that influence the cost of formal labor (notably minimum wages and payroll taxes) on labor market outcomes… The results indicate that these regulations, especially minimum wage policy, contribute to higher unemployment rates and constraint formalization…, especially for youth and women.
The research was about the labor market in Morocco, but the laws of supply and demand are universal.
As I’ve repeatedly stated, when you mandate that workers get paid more than what they’re worth, that’s a recipe for unemployment. And as the World Bank points out, it’s the more vulnerable members of society who pay the highest price.
In an ideal world, there should be no minimum wage mandates. But since that’s not an immediately practical goal, the best way of protecting low-skilled workers is to make sure Washington does not impose a nationwide increase. That won’t stop every state and local government from imposing destructive policies that cause unemployment, but the pressure of jurisdictional competition will
And when those bad policies do occur, that will simply give us more evidence against intervention. Which brings us back to where we started. The real world is a laboratory that shows statism is a bad idea.
P.S. In honor of Equal Pay Day, I can’t resist sharing this tidbit from the Washington Free Beacon.
Oh, you also won’t be surprised to learn that there was also a big pay gap in Hillary Clinton’s Senate office, as well as Obama’s White House. In reality, of course, the market punishes genuine discrimination and the pay gap is basically nonexistent when comparing workers with similar education, experience, and work patterns.
But that’s unwise. What happens in Europe can have an impact on policy in the United States.…A big polity can prosper, but only if it behaves like a confederation of statelets. The supreme exemplar is the U.S., the only large nation that gets anywhere near the top of those GDP rankings… I’m not wild about the direction the U.S. has been taking… But the U.S. is starting from a much better place. It was designed according to Jeffersonian principles. Power was dispersed, decentralized, and democratized. The E.U., by contrast, was designed to weld nations into a supranational bloc. …Where the Declaration of Independence promises life, liberty, and the pursuit of happiness, its European equivalent, the Charter of Fundamental Rights, entitles people to “strike action,” “affordable housing,” and “free healthcare.”
Those alternatives almost certainly involve protectionism, heavy-handed industrial policy and planning, or state aid to politically connected companies… If it weren’t for the pressure of the European Commission in the late 1980s, it is fanciful to think that Italy or France would have just given up state ownership of utilities, banks, or their industrial giants. …Conversely, the United Kingdom has not become a free market paradise after leaving the European Union. Quite the opposite. …the E.U.’s “single market” is far from perfect. …it often goes hand in hand with harmonized European rules rather than with simple mutual recognition of national standards. …Has the E.U. lived up fully to the ideals of Hayekian international federalism? Of course not. But it is blindingly obvious that it has performed better than the relevant alternatives.
International Liberty 