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Posts Tagged ‘Government intervention’

From the perspective of lifestyle (factors such as climate, scenery, and recreational opportunities), there’s probably no better state in which to live than California.

But if you want to be an entrepreneur, start a business, and create jobs, the Golden State is one of the worst places in America.

I’ve already written about the state’s punitive tax system. The 13.3 percent tax rate is far higher than any other state. That’s an acceptable burden to rich folks in Silicon Valley since they amass their wealth in the form of unrealized (and untaxable) capital gains.

But it’s a crippling burden for regular business owners.

California also has a very unfriendly regulatory regime, ranking a lowly 48 out of 50 according a comprehensive study.

What does that mean, in practical terms?

Let’s look at a few examples to understand the state’s hostile business environment.

We’ll start with the high-profile case of Elon Musk, who is openly rebelling against government red tape by restarting production in his Tesla factory.

Tesla CEO Elon Musk confirmed Monday he’s flouting county rules by reopening a Northern California plant amid concerns over safety during the coronavirus crisis, tweeting: “I will be on the line with everyone else. If anyone is arrested, I ask that it only be me.” …Musk tweeted, “Tesla is restarting production today against Alameda County rules. …all other auto companies in US are approved to resume. Only Tesla has been singled out. This is super messed up!” …The county later responded in a statement: “We have notified Tesla that they can only maintain Minimum Basic Operations until we have an approved plan…and we hope that Tesla will likewise comply without further enforcement measures.” …a frustrated Musk wrote that he was filing a lawsuit to halt the local restrictions and predicted relocating Tesla’s Palo Alto, Calif., headquarters to Texas or Nevada.

To be sure, this is a very unusual example, one where the battle is complicated by the very difficult issue of how to deal with a serious virus.

So let’s zoom out and consider other examples that existed well before the pandemic.

Andy Quinlan of the Center for Freedom and Prosperity explains for Townhall that California has a long history of policies that discourage entrepreneurship and job creation.

To climb out of the massive pit the economy has been thrown into, it will take not just the release of workers from their homes, but also entrepreneurs and innovators capable of adapting to a new economic environment. Unfortunately, innovators are often treated very poorly by all levels of government. And the worst offender is arguably California… Consider last year’s passage of AB 5. It upended California’s gig economy by requiring that contractors be reclassified as employees, even against their will, when certain thresholds were met. The arbitrary caps were set so low that self-employed freelancers have been devastated by a loss of work as many companies suddenly stopped working with California workers. …The state’s regulators are also unfairly attacking an innovative hotel business. OYO Hotels…focuses on the small hotels ignored by the large chains, offering them proprietary technology and marketing assistance to dramatically improve their ability to reach and attract customers, along with capital to ensure their rooms are up to the company’s standards… But California’s regulators have other ideas. They…claim that OYO’s activities make it a franchise, and therefore it was required to seek approval before ever operating in the state.

John Moorlach, a senator in California’s legislature, wrote a column for the Orange County Register about the Golden State’s anti-growth mentality.

If you were a corporate manager looking to build or lease a plant and hire workers, where would you look first? California, with a $13 minimum wage rising to $15 in 2022? …Then there’s the state income tax. During times of plenty, maybe it’s worthwhile to put up with California’s 13.3% top state personal income tax rate… But during tough times? …If you needed that 13.3 percent to re-invest in your company, instead of going to a poorly run state government, where would you go? …Companies that play by the rules, paying all the taxes and observing every labor regulation, will be at a disadvantage… The cost structure will just be too high. So many of these honest firms will go out of business, join the underground economy or move to Texas. …Every state needs a healthy economy in order to survive. …over-burdening its entrepreneurial sector…becomes an abuse.

Now you know why many people are “voting with their feet” and leaving the state.

Let’s close with my home-made visual that illustrates what red tape means for entrepreneurs.

Yes, there are some entrepreneurs who can make it all the way, but many others don’t have the time, money, energy, or expertise the navigate the entire course.

And others can get through eventually, but only at the cost of shrinking their businesses and hiring fewer workers.

Here’s the bottom line: This isn’t a binary no-regulation-vs-all-regulation choice. The states with the best scores for regulation (the top 5 are Kansas, Nebraska, Idaho, Iowa, and Indiana) have red tape, but it’s a question of degree.

Sensible jurisdictions give entrepreneurs more “breathing room” to start businesses and create jobs. Which is why the scholarly evidence shows that less regulation is good for prosperity.

P.S. The good news is that entrepreneurs can escape California’s red tape by moving across the border. The bad news is that this strategy doesn’t solve the problem of federal rules and mandates.

P.P.S. Since I’m always asked about this comparison, you can review data comparing Texas and California by clicking here, herehere, and here.

P.P.P.S. Here’s my favorite California vs Texas joke.

P.P.P.P.S. Libertarian readers will appreciate the argument for private regulation.

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Since I’ve never smoked or vaped, I have no personal interest in the the regulatory battle over vaping and e-cigarettes.

That being said, I started writing about this issue back in 2016 because it involves several important principles.

  1. The libertarian argument that people should be free to do what they want with their own bodies
  2. Whether the “administrative state” should be able to unilaterally grab more regulatory power.
  3. The degree to which “harm reduction” or “zero tolerance” should guide government policies.

From a public health perspective, the third point is most important.

It’s a fight between those who want the Food and Drug Administration to use its self-anointed regulatory authority to ban e-cigarettes (because vaping is worse than not vaping) and those who explain that e-cigarettes are helpful (because vaping is far less risky than smoking).

This fight has a September 9 deadline. The Food and Drug Administration decided several years ago that its power to regulate tobacco somehow meant it also has the power to regulate vaping. The bureaucrats then created a system requiring future approval for marketing and sale of e-cigarettes and related products (originally to be unveiled in 2022 but a federal judge has ordered an earlier deadline).

The FDA has basically given itself the power to prohibit these products, and if you’re interested in that aspect of the battle, here are two short articles (pro and con) about that effort.

I want to focus today on whether it makes sense to impose prohibition, and it’s a simple matter of cost-benefit analysis. Some people want to enjoy nicotine, so is it better for them to vape or to smoke?

Writing for the American Enterprise Institute, Roger Bate points out that smoking is far worse.

…there is an increasing amount of evidence to support it over smoking. As Michael Siegel — a public health Professor at Boston University — says “there is overwhelming evidence that smoking is more hazardous than vaping. One of the most compelling lines of evidence is a series of studies showing that when smokers switch to e-cigarettes, they experience immediate and dramatic improvement in both their respiratory and cardiovascular health, measured both subjectively and objectively.” Cancer rates are at an all-time low partially due to the introduction of vaping and subsequent reduction in smoking.

And if people can’t vape, that leads to more smoking.

Six scholars, in a new study for the National Bureau of Economic Research, found that higher taxes on vaping led to more cigarette consumption.

We explore the effect of e-cigarette taxes enacted in eight states and two large counties on e-cigarette prices, e-cigarette sales, and sales of other tobacco products. …We then calculate an e-cigarette own-price elasticity of -1.5 and a positive cross-price elasticity of demand between e-cigarettes and traditional cigarettes of 0.9, suggesting that e-cigarettes and traditional cigarettes are economic substitutes. We simulate that for every one standard e-cigarette pod (a device that contains liquid nicotine) of 0.7 ml no longer purchased as a result of an e-cigarette tax, the same tax increases traditional cigarettes purchased by 6.4 extra packs.

If you don’t want to read an academic study, a press release from Georgia State University (home to one of the scholars) summarizes the key findings.

Increasing taxes on e-cigarettes in an attempt to cut vaping may cause people to purchase more traditional cigarettes according to a new study funded by the National Institutes of Health. For every 10 percent increase in e-cigarette prices, e-cigarette sales drop 26 percent while traditional cigarette sales jump by 11 percent. …“Vaping-related illnesses are a public health concern. However, cigarettes continue to kill nearly 480,000 Americans each year, and several research reviews support the conclusion that e-cigarettes contain fewer toxicants and are safer for non-pregnant adults,” said co-author Erik Nesson of Ball State University. …Michael F. Pesko from Georgia State University. “We estimate that for every 1 e-cigarette pod no longer purchased as a result of an e-cigarette tax, 6.2 extra packs of cigarettes are purchased instead,” he said. “The public health impact of e-cigarette taxes in this case is likely negative.”

Needless to say, if higher taxes on vaping lead to more smoking, one can only imagine how much additional cigarettes will be consumed if vaping is outlawed.

And that means more cancer, more heart disease, and other illnesses.

The folks who support anti-vaping policies respond by arguing that vaping enables nicotine consumption by some young people and may even be a gateway to smoking.

That’s probably true, but it’s also true that some of those young people would opt for smoking if they didn’t have the option to vape.

From a utilitarian perspective, the bottom line is that vaping saves lives.

The anti-vaping crowd might even admit that’s true, but they presumably would then argue in favor of banning cigarettes.

But why stop there? Obesity also is a major threat to health, so why not ban cakes, pies, pasta, and french fries? And big gulps (oh, wait, that’s already happening)?

And mandate broccoli consumption as well, along with a government-required five-mile jog on days that end in “y”.

At the risk of understatement, the right solution is to let adults make their own decisions. The FDA should quit its harassment campaign against vaping.

P.S. If FDA bureaucrats actually want to save lives, they should focus on their onerous rules and silly regulations that have hampered the private economy’s ability to respond to the coronavirus.

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Since government officials have imposed severe restrictions on economic activity, I’m sympathetic to the notion that businesses should be compensated.

But, as I warn in this CNBC interview, I have major concerns about big government and big business getting in bed together.

As is so often the case with interviews on live TV, there are many issues that didn’t get appropriate attention (either because there was too little time or because I failed to address a key point).

  • A major risk of bailouts is that politicians will insist on having a say in how companies operate. Indeed, that’s what Christian Weller was calling for in the final part of the interview. I should have pointed out the huge economic downside of having government in the boardroom.
  • There’s a rationale for short-run emergency legislation, but we should be very concerned that self-interested politicians and power-hungry bureaucracies will use the coronavirus crisis as an excuse to permanently expand their power and control over the economy’s productive sector.

P.S. I usually try to avoid making predictions (economists are lousy forecasters), but I feel confident in asserting that my friends on the left – once the coronavirus crisis has ended – will be complaining about big businesses having too much power.

I’m not against large companies, per se. But I don’t want bigger firms to gain an advantage over small companies by getting in bed with government.

If we want fair and honest competition, we need separation of business and state. No bailouts, no cronyism, no subsidies, and no favoritism.

That’s the part folks on the left don’t understand.

P.S. If you want more information on the economic damage caused by bailouts, watch this video and this video.

P.P.S. Speaking of videos, here’s some satire about the toys that politicians get for their children.

P.P.P.S. I wish this was satire, but American taxpayers are helping to underwrite cronyism in other countries.

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Exactly one month ago, I wrote “A Primer on Price Gouging” to explain why government-mandated price controls are an unwise response when prices for certain goods climb after a disaster.

Here’s a video from Johan Norberg on the topic.

And here’s Professor Michael Munger from Duke University on the same issue.

Those are both excellent presentations.

In a column for the Nashville Business Journal, Professor Daniel Smith explains in written form why laws against price gouging inevitably backfire.

High prices in the wake of a disaster or in the face of uncertainty often spark consumer outrage and calls for stricter price-gouging laws. Such measures, however, would actually harm consumers searching for necessities in emergencies. …in the face of uncertainty, such as the coronavirus, it is instinctive for consumers to stock up on goods, such as water, toilet paper, and nonperishable food. Stores need some way to discourage consumers from hoarding or wasting necessities as well as to encourage the increased manufacture and delivery of necessities to the affected area. Higher prices, driven by the increase in demand for these goods, naturally incentivize both of these important functions. …higher price encourages consumers outside of the affected area to also economize on their purchases. The increased demand for building materials for rebuilding New Orleans after Hurricane Katrina drove building material prices up across the nation, leading unaffected consumers to delay less essential building or remodeling projects. …Higher prices also encourage the manufacture and delivery of necessities to the affected area. …higher market prices, by increasing the supply of necessary goods, is the driving force that will ultimately push the price back down. …there is always concern for providing for low-income residents. But the empty shelves created by price gouging laws do little to help them.

It’s worth pointing out, incidentally, that workers can engage in “price gouging” as well.

This tweet from Mark Perry cites a story about nurses being able to earn much more money if they agree to work in New York City.

For what it’s worth, I fully support those nurses extracting much higher pay. They’re going into the medical equivalent of a war zone.

And that’s a good outcome for society. Allowing prices (whether for goods or labor) to rise and fall in response to market conditions ensures that resources go where they have the most value.

Sadly, many politicians in Washington either don’t know or don’t care about the harmful impact of intervention.

Indeed, the House of Representatives wants to demonize so-called price gougers, as reported by Billy Billion of Reason.

When it comes to the federal government’s coronavirus response, there is much room for self-criticism. But that won’t come from the House’s new select oversight committee, announced by Speaker Nancy Pelosi (D–Calif.)… House Majority Whip Jim Clyburn (D–S.C.), telling CNN’s Jake Tapper that the committee will instead focus on things like “price gouging” and “profiteering.” …In other words, if Clyburn’s description is to be taken at face value, lawmakers will scapegoat private businesses, as opposed to delving into the list of ways the government has failed the American public. …The South Carolina representative said the House will…punish those that set high prices on essential goods, though he didn’t say how this would work in practice.

What’s really galling about the actions of Pelosi, Clyburn, and other politicians is that they’re insulated from the policies they impose on the rest of us.

They have voted themselves generous pensions, so they they don’t have to worry about a bankrupt Social Security system.

They have voted themselves lavish fringe benefits, so they don’t have to worry about dealing with the Obamacare disaster.

And they doubtlessly have arranged to be first in line for goods and services if there are shortages caused by anti-gouging laws.

Maybe, just maybe, they’re part of the problem rather than part of the solution.

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An unfettered “price system” is a core feature of capitalism, as explained in videos from Marginal Revolution, Learn Liberty, and Russ Roberts.

This video from Don Boudreaux is a great addition to that collection.

What happens, though, when politicians interfere with this system by dictating minimum or maximum prices?

I’ve previously addressed why price controls are misguided, looking at the sector-specific impact of government price-rigging for items such as rental housing, labor, and pharmaceuticals.

Now let’s consider the macroeconomic impact of price controls.

The World Bank has just published a new working paper on this issue. Here are some of the key findings.

Price controls have a long history with well documented examples… In the 20th century, these policies were used extensively in several Western countries…, culminating with widespread controls in the United States and the United Kingdom in the 1970s… Price controls were also ubiquitous in communist countries with planned economies. …Price controls can be imposed in a variety of ways. They may involve price ceilings, or price floors, imposed on selected goods and services by the authorities. …this study seeks to enumerate the challenges that price controls impose for growth and development and government policies. While they may be introduced with the best intentions to improve social outcomes, available evidence suggests that price controls often undermine growth and development, impose fiscal burdens…price control measures frequently morph into distortive subsidy regimes. Important social, fiscal and environmental costs are likely to follow, as well as adverse consequences for investment and employment, and productivity growth.

Unsurprisingly, the report finds that price controls are more common in emerging markets and developing economies (EMDEs), especially in low-income countries (LICs).

Price controls are widely employed across advanced economies and EMDEs. They tend to be much more pervasive in EMDEs than in advanced economies… Among EMDEs, they are more prevalent in LICs… In EMDEs that have become middle-income countries (MICs) since 2001, price controls are somewhat less common than in the average EMDE

The logical conclusion, of course, is that the existence of price controls helps to explain why these countries have lower levels of economic development.

Here’s a chart from the study showing the prevalence of price controls.

The study goes on to list all the negative effects associated with price controls.

If you don’t want to read a lengthy excerpt, I’ve highlighted some of the adverse consequences.

The use of price controls can have adverse consequences for growth for several reasons. Price ceilings can depress producer margins and discourage domestic investment and entrepreneurial activity…they can discourage foreign investment in those sectors by increasing the country risk premium facing global firms…where the controlled price is above that required for a competitive return to investment, its maintenance requires barriers to entry or costly government stockpiling of excess supply… Price-support controls can depress competition… Price control regimes may also tilt the allocation of resources towards the subsidized sector. …such policies can end up reducing productivity, and worsening income inequality… They may lead to inefficient use of subsidized inputs… They can also adversely affect incentives to adopt productivity-raising new technologies. Empirical evidence suggests that market-oriented structural reforms, including the reduction of price controls and their related subsidies, are strongly associated with improved firm-level productivity in EMDEs… Moreover, price controls that distort consumption towards price-controlled goods, can cause chronic shortages of these goods… Price controls in the financial sector, such as ceilings on interest rates, can distort financial markets… These measures reduce the supply of credit to safer borrowers and small and medium-sized enterprises, increase the level of non-performing loans, reduce competition and innovation in lending markets, and increase informal lending. Moreover, they can exacerbate inequality by limiting the poor’s access to lending. …Replacing price controls…, coupled with structural reforms, can be both pro-poor and pro-growth. Indeed, policies to lower subsidies that underpin price controls appear to be associated with higher per capita output growth.

An exhaustive list, to put it mildly. I’m almost surprised that lung cancer and tooth decay weren’t included as well.

Let’s now shift from macro impact to micro examples.

Writing for the Hill, Professor J.W. Verret of George Mason University Law School looked at price controls on payment processing.

In 2011, the Federal Reserve adopted rules implementing fee caps on debit card transactions, pursuant to the Dodd-Frank Act of 2010. These rules have led to diminished access to credit products for consumers and have failed in their promise to lower consumer debit fees. The last eight years have shown this to be a failed experiment. …The amendment’s direct price control has gotten most of the attention and well-deserved criticism, having resulted in the same consequences as all price controls. Every college student taking Economics 101 learns that keeping prices at an artificially low level results in an undersupply of vital goods or services. …Supporters of the Durbin amendment’s price controls and exclusivity ban argued that the provision would pass cost savings on to consumers. That alone was not a legitimate argument in the first place, as it would merely reflect use of government power to take property rights from innovators and redistribute them to politically sympathetic beneficiaries. Even if one were willing to accept that as a legitimate policy goal, the fact is it didn’t happen. Studies by the Federal Reserve Bank of Richmond demonstrate that the Durbin amendment didn’t even fulfill its intended purpose. Retailers simply kept the cost savings. Thus, the Durbin Act merely reflected a very successful act of lobbying by retailers.

Yet another bad feature of a very bad law.

We also have a story in the Washington Post regarding price controls on brides in China.

The new rule was taped onto doorways around town: Officials were limiting what a groom-to-be could pay for a bride. The going rate was about $38,000, or five times the average annual salary in this village about four hours outside of Beijing. Now, families were told to keep it below $2,900. Anything more and they would risk being accused of human trafficking. The “bride price”…has been part of the marriage pact in most of China for centuries. The costs, though, are swelling as China copes with one of the biggest demographic imbalances in history. …There are an estimated 30 million or so more men then women in China… So officials in Da’anliu and other villages have taken matters into their own hands on one thing they can control: the bride price. …The controls are good if you have a son. Not so good for families with a daughter. Ask Liang, a pear farmer in Da’anliu. He has one daughter. When it comes time for her to marry, “I will ask whatever amount I want,” he said. “It’s not fair otherwise.” …“It’s the market,” he said. “I’m allowed to charge what the market will bear for my pears. Why not my daughter?” …The Da’anliu Communist Party secretary, Liang Huabin, has seen the way families scrimp and save and panic over the bride price. …He was not sure what to do about it until one of his constituents sent him a picture of a bride price limit instituted in another Chinese village. He decided to try something similar. …Wang Feng, a sociologist who studies Chinese demography at the University of California at Irvine, said…families…would find ways around any regulation — even limits on bride price. “It’s trying to cure a symptom, not the root issue,” he said

Yet another bit of evidence that price controls don’t work, even in a market that shouldn’t exist (at the risk of coming across as a chauvinistic westerner, Chinese daughters should be able to make their own marriage choices).

Since I started this column with a video, I’ll recycle a video I first shared nearly 10 years ago.

It shows how removal of price controls triggered the post-war economic miracle in West Germany.

For those who want more information on this topic, the Mises Institute has an online version of Forty Centuries of Wage and Price Controls, authored in 1978 by Robert L. Scheuttinger and Eamonn F. Butler.

These first few sentences from Chapter 1 aptly summarize the lessons from history.

From the earliest times, from the very inception of organized government, rulers and their officials have attempted, with varying degrees of success, to “control” their economies. The notion that there is a “just” or “fair” price for a certain commodity, a price which can and ought to be enforced by government, is apparently coterminous with civilization. For the past forty-six centuries (at least) governments all over the world have tried to fix wages and prices from time to time. When their efforts failed, as they usually did, governments then put the blame on the wickedness and dishonesty of their subjects, rather than upon the ineffectiveness of the official policy. The same tendencies remain today.

Last but not least, here’s a cartoon from the book.

It shows (I think) the former head of the AFL-CIO, George Meany, in the role of Darth Vader and Jimmy Carter as a hapless version of Luke Skywalker.

This was back when wage and price controls were a government-imposed response to government-created inflation (a classic example of Mitchell’s Law).

Nowadays, price controls are primarily a tool for various interest groups to tilt the playing field.

P.S. The late Jeff MacNelly was the Michael Ramirez of the Reagan generation. For example, see these cartoons about government shutdowns, the tax code, and the United Nations.

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The current crisis teaches us that excessive regulation and bureaucratic sloth can have deadly consequences.

Here’s John Stossel’s video with another lesson, explaining that we need more capitalism rather than more government.

This seems like a no-brainer, especially given the wretched economic performance of countries where the government owns or controls the means of production.

But not everyone agrees. The appropriately named Paris Marx wants government to have more power, making the case for nationalization of Amazon in an article for Jacobin.

The government needs to…respond to the needs of people across the country as the pandemic situation deteriorates. The response should be to nationalize Amazon and integrate it with the USPS. …Nationalizing the company would also allow Amazon workers to get covered by the same union as postal workers… Amazon isn’t just an online e-commerce marketplace. …Amazon Web Services (AWS) is a cloud computing platform…the cloud should be placed under public ownership. Taking control of AWS would allow the government to…ensure the cloud platform is serving the public good… We have a rare opportunity to fundamentally alter the economy to serve the needs of people instead of private profit, and it’s time to seize it.

Call me crazy, but if the government takes over Amazon and merges it with the Postal Service, I’m guessing that what emerges will have the inefficiency of the latter rather than the nimbleness of the former.

Just imagine a giant Department of Motor Vehicles (or, on a related note, the government’s track record on teaching kids to drive).

Which is why the U.K.-based Economist warned back in 2017 about the dangers of government-run companies.

Expanded state ownership is a poor way to cure economic ailments. For much of the 20th century, economists were open to a bit of dirigisme. …But in the 1970s economists came to see state ownership as a costly fix to such problems. Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance. Firms with the backing of the state are less vulnerable to competition; as they lumber on they hoard resources that could be better used elsewhere. …economists saw in the productivity slowdown of the 1970s evidence that an overreaching state was throttling economic dynamism. …State-owned firms pose risks beyond that to dynamism. Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful. As state control over the economy grows, political connections become a surer route to business success than entrepreneurialism.

The good news is that very few politicians are supporting explicit nationalization.

The bad news is that there’s plenty of support for intermediate steps involving cronyism, industrial policy, and various types of direct and indirect subsidies.

Including in the legislation recently approved in Washington (not that anyone should be surprised).

Professor Amit Seru from Stanford and Professor Luigi Zingales from the University of Chicago warn, in a column for the Wall Street Journal, that the U.S. has take a dangerous step on the road to central planning.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money… This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private. …The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

In other words, the U.S. is moving in the wrong direction on my “Industrial Policy Spectrum.”

The key unanswered question is whether the government’s new powers will be temporary or permanent.

There’s a legitimate argument for some form of intervention while the crisis in ongoing. But what happens once things go back to normal? Will politicians allow the “creative destruction” of capitalism, or will they use their expanded power to permanently interfere with market forces?

If they choose the latter, there will be less long-run prosperity.

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Most economic downturns are caused by misguided government policy, which leads to predictable battles over how to address the fallout as well as battles over how to avoid the same mistakes in the future.

Today’s crisis is different. It’s more akin to a natural disaster. But it’s not a one-off event like a big hurricane or earthquake. It’s an ongoing pandemic, which is having a terrible impact on many sectors of the economy. And if it lasts a long time, the consequences will be catastrophic depression rather than ordinary recession (which is why it is reasonable to contemplate the economic and health tradeoffs of re-opening the economy).

To deal with the immediate consequences of this crisis, Washington has responded by approving a mutli-trillion dollar relief package. And I won’t be surprised if politicians come back with another huge package.

Since responding to a pandemic is a legitimate function of government, I don’t have a principled objection to emergency legislation (for wonky readers, there’s an interesting debate in libertarian circles about whether government assistance – even bailouts – can be justified because government has ordered a shutdown of economic activity, which can be viewed as a “regulatory taking“).

That being said, I worry that self-interested politicians will use the crisis as an excuse to shovel goodies to their friends and cronies.

And I also want to minimize the danger that politicians will use the crisis as a reason to permanently expand the size and scope of government.

I’ve already written about how the crowd in Washington is exploiting the crisis with regards to three different issues.

Today, let’s consider a potential downside of providing assistance to companies. We’ll focus on airlines, but the lessons apply to any businesses that get government assistance.

A Bloomberg report explains why this issue, in general, is controversial.

…the administration may consider asking for an equity stake in corporations that want coronavirus aid from taxpayers. …Against that, there’s the potential for political risk. During the financial crisis, some Republicans decried a tilt toward European-style socialism. The current crisis coincides with the — albeit fading — candidacy of Bernie Sanders, and his democratic socialist platform. …“This is a very big slippery slope because the ownership of private capital by government is not traditionally consistent with capitalism,” said Kevin Caron, portfolio manager for Washington Crossing.

The Wall Street Journal‘s editorial on this issue focuses on the airline industry and makes some very important points.

America’s beleaguered passenger airlines are allocated roughly $50 billion in the coronavirus relief bill… The idea is simply to freeze the staff list for six months, at which point the pandemic might have receded and air travel recovered. In exchange, Congress has authorized the Treasury Secretary, at his sole discretion, to “receive warrants, options, preferred stock, debt securities, notes, or other financial instruments” that constitute “appropriate compensation to the Federal Government.” …The desire to get something for the taxpayer’s buck is understandable, but there’s a real risk here of a long-term nationalization. …Washington should have no role in directing the business of a private company, and Treasury Secretary Steven Mnuchin perhaps would agree. What if his successor turns out to be Treasury Secretary Elizabeth Warren? …Helping the airlines weather a 100-year pandemic might be, arguably, within the government’s job description. Owning them isn’t.

The bad news is that are no good options.

It’s not a good idea to simply give taxpayer money to airlines. And it’s also not a good outcome for airlines to go bankrupt, perhaps leading to a total shutdown rather than a reorganization.

Some outcomes, however, are worse than others. And having government as a major shareholder is the option with the greatest long-run risk. Simply stated, it’s a recipe for cronyism and industrial policy.

Based on what’s already happened on issues such as energy and trade, I don’t trust President Trump and his team to have a hands-off attitude. What will happen, as we approach the November election, if the White House thinks it can win a key state by forcing a company (either an airline or any other affected firm) to increase jobs and/or pay?

Or, if you happen to trust Trump, what happens if Joe Biden wins in November and – as the Wall Street Journal warned – a dogmatic interventionist like Elizabeth Warren becomes Treasury Secretary.

She already has a very bad track record on issues of corporate governance. Do you want her to have the power that comes with being a major shareholder?

For all intents and purposes, this is why I unveiled the Fifth Theorem of Government last September.

I’ll close with some troubling observations about where we may be heading.

  1. The technical definition of fascism (at least with regards to its economic policy) is nominal private ownership of business but government control.
  2. The technical definition of socialism is outright government ownership and control of business (along with other policies such as central planning and price controls).

Which raises the depressing issue of how much government ownership is required to get to #1 and how much additional government ownership is required to get to #2.

Could it be that Bernie Sanders may be the real winner, regardless of who is in the White House next year?

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Five days ago, I wrote “Coronavirus and Big Government” to highlight how sloth-like bureaucracy and stifling red tape deserve much of the blame for America’s slow response to the crisis.

And I started that column by sharing four points from a previous column on “Government, Coronavirus, and Libertarianism.” I’ll start today’s column by repeating the final observation.

4. The federal government has hindered an effective response to the coronavirus.

Here’s a video from John Stossel documenting the federal government’s clumsy incompetence.

And here are a bunch of stories and tweets that provide additional elaboration.

Feel free to click on the underlying stories if you want to get even angrier about the deadly impact of big government.

The silver lining to all the bad news is that politicians and bureaucrats have been relaxing regulatory barriers.

But will they learn the right lesson and permanently repeal government-created barriers that hinder the provision of health care?

Is it true, as Robert Tracinski wrote for the Bulwark, that “We’re All Libertarians now”?

This talking point has since been taken up by others in a more technically accurate form: there are no libertarians in a pandemic. The idea is that when a crisis hits, everyone suddenly realizes how much they need Big Government. This is a bizarre argument to make about a virus that got a foothold partly because of the corrupt and tyrannical policies of a communist government in China. The outbreak is currently at its worst in Italy, where socialized medicine has not turned out to be a panacea. And it was allowed to get out of control in America because the feds imposed an incompetent government monopoly on COVID-19 testing, blocking the use of better and faster tests developed by private companies. …There has been a surge of emergency deregulation to lift artificial barriers that prevent people from solving problems. …the loosening of federal controls on the private development of diagnostic testing, after the disastrous attempt to centralize it all at the CDC. We’re also seeing the suspension of restrictive licensing requirements on doctors and nurses to allow them to work across state lines, so they can go where the shortages are worst. There has also been a whole series of waivers on restrictions on the transportation and serving of food and beverages in order to help restaurants stay in business and feed their customers by offering curb-side service.

Needless to say, I hope Tracinski is right.

But I worry that the net result of this crisis is that we’ll have more red tape and the CDC and FDA will have bigger budgets.

If you think I’m being too pessimistic, just remember that the Department of Veterans Affairs was rewarded with more money after letting veterans die on secret waiting lists, the IRS was rewarded with more money after persecuting Tea Party groups to help Obama’s political prospects, and the education monopoly endlessly gets rewarded with more money even though student outcomes stagnate or deteriorate.

All as predicted by the First Theorem of Government.

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Back in 2013, I joked that “you get bipartisanship when the Stupid Party and the Evil Party both agree on something.”

That generally means bad outcomes, with the TARP bailout being a prime illustration.

We now have another example since many Republicans and Democrats want to restrict – or even ban – companies from buying shares from owners (i.e., company shareholders).

Known as stock buybacks, these share purchases should be viewed as an innocuous way of distributing profits.

But you’ll see below that many politicians think they be able to dictate how private businesses operate.

First, let’s look at some excerpts from the Tax Foundation’s very useful primer on the issue.

It’s important to understand why stock buybacks occur and the economic role they play. The new tax law lowered the corporate income tax rate… A lower rate also means that corporations will receive larger profits than anticipated on investments they made in the past—it should be expected that companies would share at least some of this unexpected increase in cash with their shareholders. …Stock buybacks are complements to investment, not substitutes for it. Research shows that stock buybacks do not deprive firms of capital that they would otherwise invest, and further, that stock buybacks can facilitate long-term investment by redirecting funds from lower growth firms to higher growth firms. …Limiting the ability of a corporation to return value to shareholders—value which was created by productive investments made in the past—will not improve economic conditions.

Many experts from the worlds of finance, business, and public policy have tried to explain why stock buybacks should not be viewed as controversial.

In a column for the Wall Street Journal, for instance, Donald Luskin and Chris Hynes explain why it’s a bad idea to curtail buybacks.

Sen. Elizabeth Warren would require, among other things, that to receive aid…companies receiving aid be permanently barred from executing share buybacks, even after the aid is repaid. This is an opportunistic mutation of the left’s longstanding claim that buybacks are a uniquely evil form of predatory capitalism. In reality, buybacks create benefits for shareholders large and small… Shareholders must receive a dividend when it’s declared and pay taxes on it. In a share buyback, investors who want cash can sell some shares and pay taxes. If they don’t want cash, they can choose to hold on to their shares. …Some opponents of buybacks…argue that they waste company cash that ought to be reinvested in plant and equipment. But not every company is in growth mode, and even those that are might have more cash than growth ideas. …Paying money out to shareholders frees them to reinvest in new companies with big growth ideas. This is the best way to promote growth for the economy as a whole.

The Washington Post is not exactly a hotbed of libertarian thinking, so it’s noteworthy that its editorial warned that politicians shouldn’t be dictating private business choices.

the practice by which public corporations use spare cash to buy back their own stock has turned into a policy flash point for both Democrats and Republicans. The basic allegation is that profits devoted to stock buybacks…are profits not plowed back into new plants, equipment or higher wages. …Contrary to the concerns about diverting investment funds, U.S. nonresidential investment and job creation have been rising for most of the past decade. When shareholders get cash for their stocks, the money doesn’t disappear; it flows through the economy, often as productive investment elsewhere. …Perhaps a tax change would accomplish something — though companies would still have an incentive to give spare cash back to shareholders as long as there is no clearly superior investment alternative. Critics of stock buybacks are saying, in effect, that elected officials or regulators may know better than companies themselves what should be done with extra cash.

Writing for the Foundation for Economic Education, Ethan Lamb points out why Senator Cory Booker doesn’t understand the economics of buybacks.

Senator Cory Booker…reintroduced the “Workers Dividend Act,” which would mandate corporations match every dollar spent on buybacks with compensation toward employees. …this bill presupposes that stock buybacks are inherently bad for society. …Booker doesn’t understand the function of stock buybacks. …Buybacks are just another mechanism, like dividends, to return money to shareholders. …Booker and company will also argue that stock buybacks come at the expense of investment, whether it be in the form of wages or capital expenditures. …none of that is true. …stock buybacks are a brilliant example of the free-market system offering a win-win to both parties. In other words, when the corporation purchases its own stock, the money from that exchange has to go somewhere. Presumably, the investor that just received the money would re-invest in another company that would be more inclined to use that money on investments in labor, R&D, or capital.

The editors of the Wall Street Journal warned about the risks of government intervention.

Stock buybacks are the latest bipartisan piñata, whacked by politicians on the left and right who misunderstand capital markets. …Repurchasing shares is simply one way a company can return cash to owners if it lacks better ideas for investment. …Senators complain that “when corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest.” But the money doesn’t fall into a black hole. An investor who sells stock into a buyback will save or reinvest the proceeds. …Banning buybacks won’t create better investment options inside companies. Instead CEOs may spend more on corporate jets or pet projects with marginal economic returns. …A recent report from Mr. Rubio floats the idea of raising tax rates on buybacks. …For example: “An increased tax rate on repurchases might raise revenue to finance other incentives for capital investment.” In other words, Mr. Rubio wants politicians to have more leverage to direct how businesses deploy their capital. This would produce less investment, not more, with corresponding damage to workers and federal revenue.

Jon Hartley, in an article for National Review, debunks the notion that there’s some sort of special tax favoritism for buybacks.

Marco Rubio’s plan to tax stock buybacks in the hopes of spurring investment…is heavily flawed for multiple reasons. …the senator seems to be operating under the incorrect belief that buybacks are tax-advantaged, when in fact buybacks are already taxed in the form of capital-gains taxes. Since 2003, when the dividend-tax rate was lowered to remove the tax advantage then afforded buybacks, the tax rates on qualified dividends and long-term capital gains have been the same. …let’s take a hypothetical example: Say an investor bought a stock at $100 and over the period of a year, the stock price appreciated by 10 percent to $110 after the company increased its profits and paid corporate taxes (at today’s 21 percent rate) on its earnings. If the company pays a $2 dividend at the end of the year and the investor sells the stock at $108 (ex-dividend), the investor pays the 23.8 percent dividend tax on the $2 dividend received and 23.8 percent on the $8 capital gain. If the company buys back some of its stock at $110 instead of paying a dividend and the investor sells his shares at $110, the investor pays the long-term capital-gains tax of 23.8 percent on the $10 he made. …Now, let’s imagine that Senator Rubio’s legislation is passed and a tax on buybacks goes into effect. …A transaction that was previously subject to two layers of taxation (corporate and capital-gains taxes) is suddenly subject to three layers of taxation (corporate taxes, capital-gains taxes, and buyback taxes), yielding a higher overall tax bill.

Ted Frank, writing for the Washington Examiner, adds further analysis.

Sen. Josh Hawley, a Missouri Republican, proposed banning buybacks as one of a series of conditions of government relief. Anyone making blanket condemnations of stock buybacks is either confused or otherwise fundamentally unserious — and proposing counterproductive policies that will slow the recovery. …It’s economically indistinguishable from a special dividend, where a corporation pays out money to every shareholder, except it permits shareholders to elect their own tax consequences, unlike a dividend that creates a tax event immediately. …Proposals to ban buybacks are effectively proposals to demand corporations hold such huge stockpiles of cash, depriving shareholders of investment choices. Such proposals will backfire by slowing down the economic recovery when money that could be invested is instead held in corporate bank accounts, doing nothing.

I want to close by sharing two additional columns that argue against restrictions on stock buybacks, but also suggest that there may be some desirable reforms that might – as a side effect – lead to fewer buybacks.

Clifford Asness recently opined for the Wall Street Journal about buybacks and investment, echoing many of the points included in the above excerpts.

Share buybacks are when a company purchases its own common shares on the open market. After a buyback, a company is left with less cash and fewer shares outstanding. Buybacks, along with ordinary dividends, are one of the main ways companies return cash to investors—the ultimate objective of any investment. So why have buybacks become the subject of vitriolic criticism? …The lead accusation against buybacks is that they “starve investment.” …Related to the claims of starving investment, some argue that today’s buybacks are a form of “self-liquidation” in which companies are systematically shrinking away. This ignores that…the net cash outflow from share buybacks has been more than replaced by cash inflow due to new borrowing (think of this as a debt-for-equity swap). Despite buybacks, on net companies have been raising money, not liquidating. …Buybacks…facilitate a movement of capital from companies that don’t need it to those that do. That’s how markets are supposed to work.

But he then notes that the tax code’s bias for debt could be a problem.

…there are some possible problems with buybacks. If taken to excess far beyond today’s levels and financed with debt, they could lead to too much leverage.

Noah Smith explains for Bloomberg that banning stock buybacks is the wrong response to the wrong question.

Stock buybacks are a fraught and confusing issue. …A number of politicians have decried this practice, and sought restrictions or a ban. …Many observers are mystified by this animosity. …share repurchases are like dividends — a way to return money to shareholders. When companies don’t have any way to invest their money profitably, they might as well give the money back to investors.

But he then suggests other government policy mistakes that could be artificially boosting the level of buybacks.

…many of the concerns people have with buybacks probably could be better addressed by reforming other parts of the corporate system. If executive short-termism is the problem, stock- and option-based compensation should be discouraged. If debt is the problem, tax corporate borrowing more heavily. …instead of attacking buybacks, reformers should focus on fixing other parts of corporate America.

Since I just wrote about the tax code being biased in favor of debt, I obviously am very sympathetic to tax reforms that would put debt and equity on a level-playing field.

Noah Smith raised the issue of whether stock- and option-based compensation arrangements for company executives are artificially encouraging buybacks.

Well, my modest contribution to this discussion is to explain that such compensation packages became more prevalent after Bill Clinton’s failed 1993 tax hike imposed a significant indirect tax increase on corporate salaries of more than $1 million. That tax hike, however, did not apply to performance-based compensation, such as measures tied to a stock’s performance.

So what we’re really looking at are a couple of example’s of Mitchell’s Law in action.

Politicians adopt bad policies (favoritism for debt in the tax code and higher taxes on regular salaries), which lead to unintended consequences (more stock buybacks), which then gives politicians an excuse to further expand the size and scope of the federal government (restrictions and bans on buybacks).

Lather, rinse, repeat.

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I wrote last week about the libertarian response to the coronavirus crisis and made four simple points.

  1. Governments should focus on protecting life, liberty, and property. That includes fighting pandemics.
  2. A big sprawling federal government will be less capable and competent when responding to a real crisis.
  3. International evidence suggests greater government control is not a good recipe for success.
  4. Domestic evidence indicates that bureaucracies such as the FDA and CDC are exacerbating the problem.

That column led to an invitation, from the folks at Pairagraph, to participate in a debate with Jason Furman, a Harvard professor who served as Chairman of President Obama’s Council of Economic Advisers.

Here are some excerpts from Jason’s opening statement.

Dan, you wrote a thoughtful piece the other day on a “Libertarian Perspective on the Coronavirus Response.” …But, I would also hope you would support me…in supporting a temporary increase in the share of Medicaid costs paid by the federal government. …health treatment is essential, and extra money…will help hospitals expand capacity as needed. After the pandemic is over we can take more time to debate the cost-benefit of this public funding for a low-income entitlement.

He then lists these four fiscal proposals.

Here’s some of what I wrote in my opening response.

Regarding potential steps to boost the economy, …conventional remedies may not be effective in the current environment. I don’t think my preferred policies (lower tax rates, for instance) will have much impact when people and businesses are focused on curtailing the spread of the virus. And I also don’t think Keynesian policies will be effective… That being said, we are facing a black-swan environment. …there is enormous pressure for Washington to do something.

What about Jason’s four proposals?

I agree on his first suggestion, but not on the mechanism.

…more health infrastructure would be very helpful. Which is why I want the private sector to take the lead. We’ll get faster results at lower cost.

As you might guess from what I wrote two days ago about paid sick leave, I’m very skeptical about program expansions.

I don’t want politicians to exploit a crisis to impose their long-standing policy preferences – especially when taxpayers, consumers, and workers will be burdened with long-run costs.

However, I’m open to his other two proposals.

I don’t think universal payments and/or business loans will prevent short-term economic harm. But if the federal government is going to do something, then payments and loans at least address a real problem (temporary loss of income) with a plausible action (temporary provision of cash).

Though I do warn that these ideas will have adverse unintended consequences.

In an ideal world, firms would guard against black-swan events by having business interruption insurance and households would similarly protect themselves by setting aside funds in savings accounts. Those prudent steps will be less likely in a world where people expect government intervention.

Our submissions are limited to 500 words, so neither of us had much opportunity to share details (there will be a second round, so the debate isn’t over yet).

Even with that limit, I made sure to mention Crisis and Leviathan, Robert Higgs’ must-read book about the unfortunate history of politicians using crises as an excuse to seize more power and control over the private economy.

That’s because my biggest fear is that this temporary crisis will lead to permanent expansions in the size and scope of government.

Libertarians don’t fear the “slippery slope” because we’re paranoid. We fear it because we understand the perverse incentive structure of politicians.

I don’t know whether we’ll become Greece or Venezuela if we tumble down that slope. But I know it will lead to a bad outcome.

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I’m not a big fan of paternalism because of my libertarian belief that people should be free to govern their own lives.

That’s true even if they make choices that I think are foolish.

Needless to say, many politicians don’t share this laissez-faire perspective.

But not all governments are equally intrusive. Epicenter has released a new version of the Nanny State Index, allowing us to see which EU nations have the most onerous rules governing private behavior.

The Index has been charting the slide towards coercive paternalism since 2016 and there is little good news to report this year. Once again, Finland tops the league table but although it maintains a strong lead, other countries are closing the gap. …Whether it is food, drink, vaping or smoking, the lifestyle regulators have the wind in their sails… In general, the story is one of a constantly expanding nanny state raising prices and trampling freedom. The blame lies overwhelmingly with domestic governments, not with the European Union. Although the EU has made the situation worse with its counter-productive policies on tobacco and e-cigarettes, it cannot be held responsible for regressive taxation, draconian smoking bans and excessive regulation of alcohol and food. The gulf between the more liberal countries at the bottom of the Index and the more heavy-handed countries at the top shows how much latitude member states have. Treating your citizens like children is, by and large, a domestic policy choice.

As you can see from this table, Finland is the worst, followed by two of the (otherwise sensible) Baltic nations.

Meanwhile, Germany gets the best score, followed by Czech Republic and Slovakia.

The report’s author, Christopher Snowdon of London’s Institute of Economic Affairs, observes that nanny-state policies don’t even achieve their putative goal of longer lifespans.

Insofar as ‘public health’ campaigners acknowledge the damage done by their policies, they argue that it is more than offset by the benefit to health – the ends justify the means. But there is little evidence that countries with more paternalistic policies enjoy greater health or longevity. As Figure 1 shows below, there is no correlation whatsoever between Nanny State Index scores and life expectancy.

Here’s the chart showing the lack of a relationship between paternalism and longevity.

By contrast, there is a correlation between economic prosperity and life expectancy.

…there is a strong, statistically significant relationship between health and wealth. Figure 4 shows the relationship between life expectancy and economic prosperity as measured by per capita GDP. This suggests that pursuing economic growth would bring much greater benefits to health than coercive efforts to control personal behaviour with bans and taxes.

Here’s the chart from the study showing the relationship between the two variables.

The obvious takeaway is that European governments should focus on policies that expand economic liberty if they truly care about the well-being of their citizens.

P.S. What about the United States? I’m not sure where we would rank in the Nanny State Index. Though we do have some indication of which states have a more laissez-faire attitude. When I wrote about Freedom in the 50 States back in 2013, I noted that Massachusetts ranked #1 in the “bachelor party” category (based on issues such as booze, hookers, fireworks, and drugs). That category doesn’t exist int he most-recent edition, but Nebraska ranks #1 in the “victimless crimes” category.

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The most obvious threat to free enterprise is Bernie Sanders, though other prominent leftists are giving “Crazy Bernie” plenty of competition.

But I sometimes wonder whether the more tangible threat to capitalism comes from self-described conservatives who say they support markets but embrace trendy ideas that would expand the size and scope of the federal government.

The people who gravitate to these ideas inevitably argue that a Reagan-style agenda of free markets and limited government is somehow inadequate.

They even make the laughable claim that the Republican Party in recent decades has been dominated by libertarian economic thinking. I’m not joking.

And they come up with creative justifications for bad ideas.

For instance, Oren Cass has concocted a “cost of thriving index” that purports to show ever-increasing economic pressure on families.

Cost-of-Thriving Index (COTI): the number of weeks of the median male wage required to pay for rent on a three-bedroom house at the 40th percentile of a local market’s prices, a family health insurance premium, a semester of public college, and the operation of a vehicle. …The COTI shows a declining capacity of a worker to meet the major costs of a typical middle-class household. As the COTI basket has become unaffordable, families have found workarounds, like having more household members work more hours, making do without, borrowing, and relying on government support. Each of these comes with its own costs, undermines the stability of families and the rationale for their formation, and creates high levels of stress and uncertainty. …The U.S. economy of recent decades has eroded, rather than reinforced, the American model of thriving, self-sufficient fami­lies.

Here’s his COTI graph, which supposedly shows that a breadwinner would have to work 53 weeks per year to buy what was easily affordable back in 1985.

A number of experts have identified serious methodological problems with his work (see Scott Winship, Mark Perry, Robert Verbruggen, Stan Veuger, Matt Yglesias, Don Boudreaux, and Andrew Biggs).

I want to make a different point. So I’m going to ignore all the problems that exist with the methodology and data, and I’m going to assume – for the sake of argument – that Cass’ chart is accurate.

And the reason I’m willing to make that heroic assumption is that Cass inadvertently shows why bigger government and more intervention is a bad idea.

Here are the numbers he used to create his chart.

If you examine what’s happened with the different categories, you’ll quickly notice that almost all the increase in his index is the result of ever-high costs for health care and college.

Yet those are precisely the areas where there the role of government has increased.

More specifically, we have a massive third-party-payer problem with health care caused by Medicare, Medicaid, and the tax code’s healthcare exclusion.

And we have a massive third-party-payer problem in higher education thanks to a big expansion of loans, grants, and other subsidies.

In both cases, providers have responded to government intervention with higher prices and massive inefficiency.

The bottom line is that the chart should be modified to show the harmful impact of government.

The challenge for Cass is to somehow explain why more government is a good idea when his own numbers show that we’re getting bad results in the sectors where we already have lots of government.

Maybe, just maybe, there’s a lesson to be learned. Or a principle that should be applied.

P.S. Or we could just listen to Ronald Reagan (see 2nd and 8th videos).

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The main problem with America’s health care system is government intervention (Medicare, Medicaid, the tax code’s healthcare exclusion, etc).

The main symptom of all that intervention is pervasive “third-party payer,” which is the term for a system where people buy goods and services with other people’s money.

And pervasive is no exaggeration. According to government data, nearly 90 percent of health care expenditures are paid for by someone other than the consumer.

And that means buyers are not sensitive to price. Which means sellers have little incentive to be efficient and keep prices under control.

The net effect is that the free market is not allowed to operate in most parts of the health care system. So it shouldn’t be a surprise that we have ever-rising costs and lots of bureaucracy.

Let’s look at an example.

One of my former colleagues, Michael Cannon, recently wrote about what happened when Obamacare mandated that birth control be covered by insurance (third-party payer) rather than being directly purchased by consumers.

The Affordable Care Act (ACA) dramatically expanded insurance coverage for prescription contraceptives such as “the pill.” From August 2012 through January 2014, the federal government phased in the ACA’s requirement that nearly all private health insurance plans must cover all Food and Drug Administration‐​approved prescription contraceptives with no cost‐​sharing. …As a result of these changes, the share of consumers who are sensitive to the price of contraceptives plummeted. …among women with large‐​employer coverage who use oral contraceptives, “the share experiencing out‐​of‐​pocket spending…declined from 94 percent in 2012 to 11 percent in 2017.” …The ACA’s reshaping of the market for oral contraceptives precisely coincided with a dramatic increase in prices for those items. …As the mandate began to take effect and as the ACA made oral contraceptives seem “free” to more purchasers, prices for hormones and oral contraceptives began to rise. …Once the mandate took full effect, prices began to rise rapidly. From May 2013 through May 2019, while real prices for non‐​prescription drugs and prescription drugs overall rose just 12 percent and 37 percent, respectively, prices for hormones and oral contraceptives rose 108 percent. …these data suggest that trying to make oral contraceptives “free” for insured consumers had the unintended consequence of making them far more expensive.

Here’s the chart, which is a powerful – and depressing – illustration of how government intervention leads to rising prices.

Notice how birth control costs (the orange line) begin to skyrocket as the Obamacare mandate took effect.

Another depressing thing to consider is that consumers get tricked into thinking that birth control is free.

In reality, of course, the higher costs get built in to the price of health insurance, which then means less take-home pay for the people who thought they were benefiting. But since they don’t understand that this is what’s happening, they decide their employers are too greedy or that compensation is stagnant.

Sigh.

Needless to say, the companies selling birth control lobbied to get their product automatically covered. After all, they knew they could raise prices (as shown in the chart) once customers started buying with other people’s money.

P.S. Several years ago, Sandra Fluke got her 15 minutes of fame by asserting that she had a right to third-party-financed birth control. That led to some clever jokes, including this cartoon, these images, this cartoon, and this video.

P.P.S. When markets are allowed to operate in healthcare, relative prices fall.

P.P.P.S. Government-created third-party payer is also generating higher costs and needless bureaucracy in higher education.

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Regulatory policy has been one of the bright spots of the Trump Administration (along with tax policy).

But it’s not a perfect record.

In a column for Townhall, Steve Sherman describes how the Labor Department launched a regulatory attack against Oracle in the final days of the Obama Administration.

President Obama was not a good president, but he was really good at issuing midnight regulations… Obama’s army of left-wing lawyers were also busy writing up last minute lawsuits… President Obama’s administration went after the tech companies Palantir, Google, then Oracle by alleging discrimination using statistics gathered as part of routine audits of these government contractors. In all of these suits, no actual evidence of discrimination was presented, merely statistics gathered that claimed to prove discrimination. This type of evidence would be tossed out in a real court, but with these suits, they were handled administratively and internally at the Department of Labor. …Oracle was so outraged by continued harassment that they fought back and sued the federal government for violating the Constitution’s separation of powers arguing that the lawsuits statutory authority.

So why am I criticizing the Trump Administration for regulatory harassment that was launched under Obama?

For the simple reason that some of Trump’s appointees have allowed the assault to continue, as former Congressman Bob Barr explained for the Daily Caller.

The Trump administration has performed admirably in reducing the regulatory red tape that has strangled American businesses… But for reasons not entirely clear, the Department of Labor has lagged behind other agencies in this regard. One clear example is the way the department’s Office of Federal Contract Compliance Programs (OFCCP) has continued unnecessary and counterproductive Obama-era litigation against tech companies… In a 2017 study, the U.S. Chamber of Commerce…set forth in extensive detail that the OFCCP in recent years had become enamored of faulty, statistics-based challenges to companies engaged in federal contracts… A number of lawsuits reflecting this abusive approach to regulatory enforcement were filed against large tech companies in the waning months of the Obama administration. …the Department of Labor sued…, just two days before President Trump was sworn in, Oracle. …the Labor Department instead has become…a regulatory bully searching for ways to punish companies. …Hopefully, …Donald Trump and Eugene Scalia…will step in and make sure that the small but powerful agency…gets on board the administration’s drive to actually reduce federal regulatory burdens

The Washington Post has some details on the dispute between Oracle and the federal government.

…the Labor Department…alleges Oracle, the database management company founded by billionaire Larry Ellison, paid some women as much as 20 percent less than their male peers, or $37,000, in 2016. The lawsuit was filed by the department’s Office of Federal Contract Compliance Programs, which audits companies with government contracts worth more than $100 million a year. …The hearing in San Francisco has broad significance for the tech industry because the allegations against Oracle are similar to the department’s claims that other tech giants, including Google and Palantir, exercised systemic bias against minority and female employees in hiring, pay or promotion. …Oracle’s lawyer argued that the Labor Department’s expert witness compared employees based on broad job titles and failed to take into account that a software developer who worked on Oracle’s product PeopleSoft is valued differently in the market than developers who work on the artificial intelligence of machine learning. …The department claims Oracle’s college recruiting program hired 500 graduates between 2013 and 2016 for product development roles at its Redwood Shores, Calif., headquarters, 90 percent of whom were Asian. During the same period, Oracle only hired six black people through the recruitment program. …The agency argues that pay disparities stem from Oracle’s practice of…relying on prior salaries to set their pay at Oracle.

The key thing to understand is that the federal government is unable to find any victims of actual discrimination.

As the Wall street Journal opines, bureaucrats are relying on statistical differences.

Protecting the constitutional separation of powers is back in political fashion as more businesses challenge abuses of administrative agencies. One case worth watching is Oracle’s lawsuit arguing that the Labor Department has usurped the federal judiciary and other executive agencies. Labor’s Office of Federal Contract Compliance Programs (OFCCP) filed a discrimination complaint against Oracle in the waning days of the Obama Administration. During a routine audit, the OFCCP in 2014 conducted a statistical analysis of Oracle’s workforce. And what do you know? The agency says it discovered disparities based on race and sex that it claimed were prima facie evidence of discrimination. …In sum, the agency said Oracle discriminated against every class of worker in one way or another. It demanded that Oracle lose current and forgo future federal contracts plus pay up to $400 million in restitution to its alleged victims. Yet its case all but collapsed at an administrative trial this month. The Labor office presented no evidence of intentional discrimination or even witnesses who claimed as much. …Oracle is suing the OFCCP for violating the Administrative Procedure Act and separation of powers. …the agency investigates, prosecutes, tries and punishes businesses even though it has no legislative authority to do so.

I’ll close by citing Thomas Sowell’s column for Jewish World Review on how “disparate impact” is basically a scam.

“Disparate impact” statistics have for decades been used, in many different contexts, to claim that discrimination was the reason why different groups are not equally represented as employees or in desirable positions… The implicit assumption is that such statistics about particular outcomes would normally reflect the percentage of people in the population. But, no matter how plausible this might seem on the surface, it is seldom found in real life… Blacks are far more statistically “over-represented” among basketball stars in the NBA… Hispanics are similarly far more “over-represented” among baseball stars than in the general population. Asian Americans are likewise far more “over-represented” among students at leading engineering schools like M.I.T. and Cal Tech than in the population as a whole. None of this is peculiar to the United States. You can find innumerable examples of such group disparities in countries around the world and throughout recorded history.

Sowell isn’t just theorizing.

He wrote a thoroughly researched book on exactly this issue.

The bottom line is that groups – on average – sometimes have different interests and aptitudes.

Walter Williams observed about ten years ago that, “Not every choice based on race represents racism and if you think so, you risk misidentifying and confusing human behavior.”

And there’s no evidence that Oracle even made decisions based on race to begin with.

So the bureaucrats at the Department of Labor are using bad methodology to harass and extort a company.

Left-leaning administrations have a track record of pushing bad policies on their way out of office, so I’m not surprised the Obama Administration launched the attack on Oracle. But I am surprised that the Trump Administration has allowed the legal assault against the company to continue.

P.S. While I normally don’t think the federal government should have any power to interfere with regards to market outcomes for hiring, pay, promotion, and association, it’s legitimate for Uncle Sam to put conditions on companies that bid on federal contracts. I just wish they would fight actual examples of bias, not mere statistical differences.

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Just as the sun rises in the east and sets in the west, there are some consistent patterns with government.

Politicians, for instance, will enact a policy that distorts the economy and causes damage (with regards to trade, bailouts, guns, health, whatever). And they’ll then point to the damage and assert that even more intervention is needed.

I call this Mitchell’s Law, though I certainly don’t claim to be the first to observe this distressing tendency.

Today, we’re going to examine a classic example of this phenomenon by looking at how politicians are distorting the housing market with supply restrictions that produce higher costs, and then compounding their mistake with subsidies and price controls.

Edward Pinto of the American Enterprise Institute offers some economic analysis.

Recently there has been a flurry of legislative proposals to add yet more housing subsidies to the housing sector, already one of the most heavily subsidized. …These are the most recent in a long history of ill-conceived policies that increase housing demand but do nothing about supply. The result: higher home prices and rents, particularly for low-income and minority households, the very ones these initiatives profess to help. …layers of subsidies combined with federal, state, and local regulations act to drive up costs while simultaneously constraining supply. …For example, Los Angeles has a median home price that is 8.8 times median income, up from 4.2 times in 1979. And median rent in LA is 49% of the median income, up from 32% in 1979. These results are largely driven by (i) easy access to credit which drive demand and prices ever higher, (ii) local land use restrictions and regulations that constrain new supply and drive building costs higher, and (iii) housing subsidies that make it even more difficult for market rate housing to compete. …Market-based solutions are the only way to bring home prices and rents back in line with median incomes and improve accessibility.

While there are plenty of bad housing policies in Washington (Fannie Mae and Freddie Mac, Department of Housing and Urban Development, mortgage-interest deduction, etc), much of the problem is caused by state and local governments.

Kevin Williamson of National Review cites a regulation in Dallas to show that government intervention causes problems.

…smaller secondary residences built on the lots of other houses..have long been a go-to source of cheap housing in college towns and other places with substantial itinerant populations of temporarily penniless young people. …Dallas…prohibited the building and rental of these residences in the 1970s on the theory that this would help to improve the living conditions on the south side of town… To the great surprise of nobody except politicians and their creatures, prohibiting the construction and rental of affordable housing did not do much to help poor people in Dallas connect with affordable housing. …The politicians have decided that there is an affordable-housing crisis in America. They should know: They created it. …Why? Because people who own homes have more political power than people who might want to buy one at some point in the future.

The Wall Street Journal opined today about the inane anti-housing policies in the Beaver State.

Politicians bemoan the lack of affordable housing, but their policies often create the problem. Look no further than Oregon… Oregon’s population grew by nearly 400,000 between 2010 and 2019. But the state added a mere 37 housing permits for every 100 new residents… Oregon’s land-use rules have been dysfunctional for decades. …strict limits on urban expansion…urban growth boundaries… Rising housing prices are the inevitable result of this government-imposed scarcity. …Portland has enforced an “inclusionary zoning” requirement on new residential buildings with 20 or more units. The city now compels many landlords to rent up to a fifth of new units at below-market rates. …Permits for 20-plus-unit residential buildings plummeted 64% in 25 months after inclusionary zoning took effect, while applications to build smaller multi-family structures spiked… The rest of Oregon is following Portland’s bad example with more price controls. Last year it became the first state to impose universal rent control.

To show the impact of regulatory restrictions, the invaluable Mark Perry of the American Enterprise Institute has a must-read comparison of Los Angeles with two Texas cities.

Adjusting for population, there are about 600 homeless people per 1 million population in Houston and Dallas, but nearly five times as many in LA at 2,707. The comparisons…highlight the simple economic logic that if you restrict the supply of new housing units (especially multifamily homes, duplexes, and large apartment buildings) in states like California with onerous building, land use, and zoning regulations, those restrictions are guaranteed to result in higher housing costs, higher apartment rents, and ultimately a greater homeless population. …The increasing rents, escalating home prices, and growing homelessness problem in California cities like LA are a direct result of local and state restrictions that artificially constrict the supply of new housing units. The solution is therefore simple, but politically unpopular and probably not politically feasible: California should increase its supply of housing by reducing its onerous restrictions on building new housing units.

Here’s his accompanying table. Notice how Dallas and Houston are much more affordable than Los Angeles.

And there’s less homelessness as well, in large part because housing is cheaper.

Kevin Williamson wrote in National Review about the anti-housing policies of New York’s governor.

Some of the inflated expenses associated with life in New York can be avoided… But you have to live somewhere. As in the Bay Area, Washington, and other Democrat-dominated cities, housing is the real killer in New York City and environs. …Like most U.S. cities advertising themselves as “progressive,” New York has a lot of political leaders who talk about affordable housing and a lot of political policies that keep affordable housing — and many other kinds of housing — from being built. This is not accidental: People who already own property typically have a lot more political influence than people in the first-time home-buyer market. …At the behest of moneyed environmental interests, Cuomo has stood athwart the building of practically any new conventional energy infrastructure, including pipelines for clean-burning natural gas. …Much of New York’s gas comes from Pennsylvania and West Virginia, but there isn’t enough carrying capacity to get it to New York. And New York has plenty of gas of its own, too, but New Yorkers can’t use it — thanks again to Cuomo, who has banned modern gas-extraction techniques in the state, again at the behest of the anti-energy ideologues who enjoy an outsized financial footprint in the Democratic party.

In addition to zoning laws and other land-use restrictions, the government also makes construction more expensive, as explained in a report in the Wall Street Journal.

The average cost for home builders to comply with regulations for new home construction has increased by nearly 30% over the last five years, according to new research from the National Association of Home Builders. Regulatory costs such as local impact fees, storm-water discharge permits and new construction codes, which have risen at roughly the same rate as the average price for new homes, make it increasingly difficult for builders to pursue affordable single-family construction projects… The cost of regulation imposed during the land development and construction process on average represented $84,671 of the cost of the average new single-family home in March. That is up from $65,224 in 2011, the last time the home-building industry group conducted a similar survey on regulatory costs. …A study this week from housing research firm Zelman & Associates found that local infrastructure “impact fees” have increased by 45% on average since 2005 in 37 key home building markets across the country, to about $21,000 per home.

Here’s a sobering graphic from the article.

All this regulation is bad for macroeconomic performance.

A recent study by two economists finds that land-use restrictions result in substantial misallocation of labor, causing a non-trivial reduction in economic output and family income.

The increase in spatial wage dispersion is driven at least in part by cities like New York, San Francisco, and San Jose, which…adopted land use restrictions that significantly constrained the amount of new housing that can be built. As described by Glaeser (2014), since the 1960s coastal US cities have gone through a property rights revolution that has significantly reduced the elasticity of housing supply… Instead of increasing local employment, productivity growth in housing-constrained cities primarily pushes up housing prices and nominal wages. The resulting misallocation of workers lowers aggregate output and welfare of workers in all US cities. This paper measures the aggregate productivity costs of local housing constraints… We use data from 220 metropolitan areas in the United States from 1964 to 2009… we calculate that increasing housing supply in New York, San Jose, and San Francisco by relaxing land use restrictions to the level of the median US city would increase the growth rate of aggregate output by 36.3 percent. In this scenario, US GDP in 2009 would be 3.7 percent higher, which translates into an additional $3,685 in average annual earnings. …We conclude that local land use regulations that restrict housing supply in dynamic labor markets have important externalities on the rest of the country. Incumbent homeowners in high productivity cities have a private incentive to restrict housing supply. …this lowers income and welfare of all US workers.

So how can this problem be fixed?

In a column for the Foundation for Economic Education, Cathy Reisenwitz explains that state and local politicians need to remove barriers.

America is in the middle of a housing crisis. The cause is simple: we’re not building housing fast enough to keep up with jobs. While the number of U.S. households grew by 11.2 million between 2005 and 2015, we only added about 9.9 million new housing units. …this isn’t a problem Washington can fix. That’s because this problem, and its solution, lies in cities and towns across the country. …Cities across the country make it impossible to build enough housing to meet demand by blocking, restricting, and delaying housing developments. …Even in areas where you can technically build multi-unit homes, other land-use restrictions make it all-but-impossible. These exclusionary land use practices include height restrictions, setback requirements, parking minimums, community review, aesthetic considerations, and minimum lot sizes. …A recent statistical analysis…showed that in 44 out of 50 states, the more land-use regulations on the books, the more homes cost. Reducing land use regulations is the right move for getting Americans out of poverty and into work.

Let’s close with some good news.

Salim Furth has a new article for City Journal, and he argues that all the evidence is actually changing minds and leading to some deregulation.

Last year, Democratic- and Republican-led states and municipalities passed legislation addressing housing affordability, a hopeful sign that housing deregulation is beginning to attract bipartisan support… Encouragingly, Arkansas and Texas have squelched such requirements through bipartisan state legislation. Arkansas has restored autonomy to homeowners on virtually all building-design choices, from color to roof pitch, while Texas has purged local restrictions on building materials. …North Carolina and Texas…passed legislation requires cities and counties to issue project approvals within a few weeks. In Texas, a developer can now move forward with construction if a municipality takes more than 30 days to review a completed application. North Carolina now imposes a 15-business-day limit for building permits involving one- and two-family dwellings. …State legislators will likely continue to address housing-supply restrictions in the years ahead. …The battle over rent control and inclusionary zoning could intensify as well, as it already has in California and Oregon. …policymakers in blue and red states alike should consider how current regulations restrict housing supply and drive up prices.

The bottom line is that housing across the nation will be much more affordable if state and local governments let markets operate.

Here’s a map showing estimates of land-use restrictions in major metropolitan areas. The goal for the nation should be more green and less red.

Incidentally, Fairfax, VA, is part of the D.C. area, so that red spot indicates that my home’s value is being subsidized (as are the homes of Washington’s parasite class).

But since I believe in a just society, I hope my part of the map becomes green, even if it means my home becomes less valuable (folks on the left are willing to hurt the poor so long as they also hurt the rich, whereas I’m willing to sacrifice myself so long as unjust favoritism for others also vanishes).

 

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When I want to explain that excessive government shortens lifespans, I’m going to have a new and powerful argument thanks to the Trump  Administration’s misguided efforts to restrict vaping.

The issue is very simple.

Some people want nicotine. If vaping products are not available, they will opt for cigarettes, which are vastly more dangerous.

The Wall Street Journal recently opined on the issue, echoing the point I made about how the Trump policy will open the door for higher-risk black-market products.

The Food and Drug Administration on Thursday announced a ban on flavored e-cigarettes…don’t think this will…make teens stop vaping. …it’s not clear how much good the FDA ban will do. It is already illegal for teens under age 18 to buy e-cigarettes, but that hasn’t stopped them. …One risk of the FDA’s flavor ban is more teens might buy e-cigarettes on the black market that are less safe. Illegal products are the main culprits in the recent cases of vaping-related lung illness.

Here’s some of what Jacob Sullum wrote on this topic.

In a wake-up call for people who claim to be concerned about smoking-related disease and death, five prominent public health scholars warn that the “tremendous” harm-reducing potential of e-cigarettes could be nullified by panicky political responses to underage consumption and vaping-related lung injuries. …”There is solid scientific evidence that vaping nicotine is much safer than smoking,” the authors note, while “evidence from multiple strong observational studies and randomized trials suggests that vaping nicotine is more appealing and more effective than [nicotine replacement therapy, such as patches and gum,] at displacing smoking.” …that displacement is not limited to adults. Fairchild and her co-authors point out that “population youth smoking rates dropped much faster in the years vaping surged the most (2013–2019) than in prior years, reaching record lows during that same period, which suggests that nicotine vape use may be replacing smoking more than promoting it.” E-cigarette prohibitionists may think they are acting “out of an abundance of caution,” but the policies they advocate look downright reckless when you consider the ongoing death toll from cigarette smoking.

In the interview, I mentioned that the United Kingdom has a far more sensible approach.

Matt Ridley wrote a piece for the Wall Street Journal about his country’s policy.

Nicotine itself is far less harmful to smokers than the other chemicals created during combustion. Heavyweight studies confirm that there are much lower levels of dangerous chemicals in e-cigarette vapor than in smoke and fewer biomarkers of harm in the bodies of vapers than smokers. …In both the U.K. and the U.S. the rapid growth in vaping has coincided with rapid reductions in smoking rates, especially among young people. Yet there is a stark contrast between the two countries in how vaping has been treated by public health authorities… Many British smokers have switched entirely to vaping, encouraged by the government, whose official position is that vaping is 95% safer than smoking, an assertion now backed by early studies of disease incidence. The organizations that have signed a statement saying that vaping is significantly less harmful than smoking include Public Health England, the Association of Directors of Public Health, the Royal College of Physicians and the Royal Society for Public Health. …The argument for harm reduction is not one that comes easily to some public-health advocates, because it means promoting behaviors that may still be harmful, just less so than the alternative. Vaping doesn’t have to prove entirely safe for it to save lives, given that it mostly replaces smoking.

Brad Polumbo adds some details in a column for the Washington Examiner.

America’s war on vaping is in full swing. But when you consider the positive approach taken in the United Kingdom, the foolishness of this new conflict is laid bare. …Vaping is much healthier than smoking traditional cigarettes. E-cigarettes do contain nicotine, but nicotine was never really the problem with traditional cigarettes in the first place — it’s essentially similar to caffeine. Rather, the enormous public health problem posed by cigarettes is due to the cancer-causing chemicals they contain, such as tar, for example. Vaping products do not contain similar chemicals, making them much, much less likely to cause cancer. …If the government is to do anything to address vaping, it should be to promote it as an alternative to smoking. This is what the U.K.’s government has done, to massive success. …A sober analysis reveals that we are doing exactly the opposite of everything we should be doing. We are putting up more barriers and restrictions on vaping, and instead, we should embrace the U.K.’s approach.

Let’s shift from international policy to state policy.

In another column for Reason, Jacob Sullum explains that awful politicians in Massachusetts want to combine two bad policies – vape bans and asset forfeiture.

Massachusetts has “the worst civil forfeiture laws in the country.” It looks like state legislators are about to outdo themselves. The Massachusetts House of Representatives…approved a bill that would ban flavored e-cigarettes, impose a 75 percent excise tax on “electronic nicotine delivery systems” (including e-liquids as well as devices), and authorize forfeiture of cars driven by vapers caught with “untaxed” products. …The bill also says a police officer who “discovers an untaxed electronic nicotine delivery system in the possession of a person who is not a licensed or commissioner-authorized electronic nicotine delivery system distributor” may seize both the product and the “receptacle” in which it is found, “including, but not limited to, a motor vehicle, boat or airplane in which the electronic nicotine delivery systems are contained or transported.” …Massachusetts is poised to deprive vapers of the harm-reducing products they used to quit smoking, then steal their cars if they dare to defy that unjust and irrational edict.

Needless to say, two negatives don’t make a positive.

Let’s close with this chart, which (in a logical world) should put an end to the debate.

Yes, it would be nice if nobody used any sort of dangerous product. But in the real world, where we face tradeoffs, I’d much prefer that people get nicotine from vaping.

P.S. And people should have the freedom to make choices that involve risk. Libertarianism is about treating people like adults.

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As I discuss in this recent interview, a higher minimum wage is a terrible idea if we care about facts and evidence (and also want to help poor people).

In the interview, I mentioned that minimum wage mandates aren’t good news for workers who lose their jobs.

One of them, Simone Barron, wrote in the Wall Street Journal about her unfortunate experience after the minimum wage was increased in Seattle.

This city’s minimum wage is rising to $16.39 an hour on Jan. 1. Instead of receiving a bigger paycheck, I’m left without any pay at all… That’s because the restaurant where I’ve worked for six years is closing as a consequence of the city’s harmful minimum-wage experiment. …When rent is too high, labor costs too much, and customers don’t want to pay $40 for a roast-chicken entree, the only way for many operators to ease the pain is to close. So now, after six years working at Mr. Douglas’s restaurant Tanakasan, I need to find a new work home. My first thought was to go back to Sitka & Spruce, a restaurant where I had once worked. …As it turns out, I can’t return to Sitka & Spruce. Its James Beard Award-winning owner, Matt Dillon, is closing Sitka after 14 years, defeated by the one-two punch of rising rents and labor costs. …I often hear people in Seattle lament that it’s becoming “more corporate.” The truth is that the city has made it nearly impossible for many small businesses to survive. …I’ve started applying for other open positions around town. I landed an interview at a restaurant called Super Bueno, owned by another established chef, Ethan Stowell. Before I could even confirm the interview, Mr. Stowell announced that he will close down Super Bueno at the end of the year.

Just in case you’re tempted to dismiss Ms. Barron’s story as a mere anecdote, let’s now look at some broader evidence.

There’s a new study from the National Bureau of Economic Research that measures the impact of minimum wage mandates. The results are not encouraging.

Using intertemporal variation in whether a state’s minimum wage is bound by the federal rate and credit-score data for approximately 15.2 million establishments for the period 1989–2013, we find that increases in the federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishments located in the states bound to the federal minimum wage and those located in competitive and low-income areas experience higher financial stress. Increases in the minimum wage also lead to lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses. …Our results document some potential costs of a one-size-fits-all nationwide minimum wage, and we highlight how it can have an adverse effect on the financial health of some small businesses.

But not everybody cares about evidence.

The New York Times just opined in favor of the Bernie Sanders approach on the topic.

Over the past five years, a wave of increases in state and local minimum-wage standards has pushed the average effective minimum wage in the United States to the highest level on record. The average worker must be paid at least $11.80 an hour… Millions of workers are being left behind because 21 states still use the federal standard, $7.25 an hour… House Democrats passed legislation in July that would gradually increase the federal standard, to $15 an hour in 2025…the legislation also would require automatic adjustments in the minimum wage to keep pace with wage growth in the broader economy. …For most companies, the bill is relatively small, and it can be defrayed by giving less money to shareholders, or by raising prices. …The American economy is generating plenty of jobs; the problem is in the paychecks. The solution is a $15 federal minimum wage.

Interestingly, the editorial actually acknowledged that a one-size-fits-all $15 mandate would backfire.

It is possible that a national $15 standard would produce the kinds of damage critics have long predicted; the Congressional Budget Office puts the potential increase in unemployment…3.7 million people… Workers may be most vulnerable in areas where prevailing wages are relatively low. In California, for example, the minimum wage for large employers (more than 25 workers) will rise to $13 an hour on Wednesday. That is unlikely to cause problems in San Francisco — but the new minimum is quite close to the median hourly wage of $15.23 in the Visalia metropolitan area in the Central Valley. The federal minimum would apply to metropolitan areas like Daphne, Ala., and Sumter, S.C., where the median worker earned less than $15 an hour in 2018. One simple corrective, proposed by Senator Michael Bennet of Colorado, would be to include exemptions from the $15 standard for low-wage metropolitan areas and rural areas.

In other words, the NYT endorsed a $15 federal minimum wage, and then concluded by admitting it would be very bad if there actually was a $15 federal minimum wage.

This is why I prefer this editorial from the New York Times.

…there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market. …An increase in the minimum wage…would increase employers’ incentives to evade the law, expanding the underground economy. More important, it would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired. …Those at greatest risk from a higher minimum would be young, poor workers, who already face formidable barriers to getting and keeping jobs. …The idea of using a minimum wage to overcome poverty is old, honorable – and fundamentally flawed. It’s time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little.

Sadly, that editorial was from 1987, back when the newspaper had a more rational perspective.

In those days, the New York Times also favored the flat tax.

Today, the publication is almost a parody of “woke” emotion since many reporters and editors push a statist agenda, presumably because (their perceptions of) good intentions matter more than good results.

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In order to protect against “Goldfish Government,” it’s very important to make sure that the powers of government are constrained by national borders.

This is the reason why I’m a passionate defender of tax competition and fiscal sovereignty (even if it means being subjected to slurs, attacks, and imprisonment!).

And it’s why I oppose extraterritorial tax laws such as FATCA.

The fight against extraterritoriality isn’t limited to fiscal issues. It’s also become a big problem in the area of financial regulation.

In a new study for the Center for Freedom and Prosperity, Bruce Zagaris addresses the over-use of sanctions and how they produce undesirable unintended consequences.

The widespread use of economic sanctions constitutes one of the paradoxes of contemporary American foreign policy. Although sanctions are often criticized, even derided, they are simultaneously and quickly becoming the policy mechanism of choice for the United States. The U.S. has economic sanctions against dozens of countries. Even though the success rate of sanctions is unimpressive, sanctions are so popular that they are being introduced by many states and municipalities. …In a global economy, unilateral sanctions tend to impose greater costs on U.S. businesses than on the target, which can usually find substitute sources of supply and financing. …As the U.S. is increasingly resorting to unilateral sanctions, they are inadvertently mobilizing a club of countries and international organizations, including U.S. allies, to develop ways to circumvent U.S. sanctions. …Sanctions are criticized due to their lack of effectiveness, adverse humanitarian effects, and adverse public health effects. Sanctions foment criminalization both during and after the sanctions as a way to circumvent sanctions. Sanctions also result in unintended negative effects on neighbor countries… The excessive use of economic sanctions, especially when U.S. allies oppose them and become targets, produces diplomatic tension, and damages the U.S.’s economy and reputation abroad. The growing number of countries in the club of targets has caused countries to develop innovative means to circumvent the use of the dollar.

I’ve previously written about how the dollar’s role as the world’s reserve currency could be threatened by extraterritoriality, so I fully agree with the concerns in Bruce’s study.

Interestingly, even the U.S. Treasury Secretary acknowledges that there is a problem.

The issue also has been featured on the op-ed page of the Wall Street Journal.

Sahil Mahtani of Investec Asset Management opined that excessive sanctioning by Obama and Trump creates risks for the dollar.

Will the U.S. dollar soon lose its status as the world’s pre-eminent currency? …Developments in foreign-exchange markets during the past 18 months point toward dedollarization. …The increasing use of economic sanctions under Presidents Obama and Trump is the immediate cause of dedollarization. …the change in posture among the trans-Atlantic democracies is noteworthy. …the emergence of a genuinely multipolar world means the coming market cycle is likely to be different. The U.S. dollar may finally be knocked off its pedestal.

Other experts also have warned about how sanctions can backfire on the American economy.

 

The Economist also has highlighted how promiscuous use of sanctions is both wrong and could backfire against America.

The United States…has increasingly punished foreign firms for misconduct that happens outside America. Scores of banks have paid tens of billions of dollars in fines. In the past 12 months several multinationals, including Glencore and ZTE, have been put through the legal wringer. …America has taken it upon itself to become the business world’s policeman, judge and jury. …as the full extent of extraterritorial legal activity has become clearer, so have three glaring problems. …Facing little scrutiny, prosecutors have applied ever more expansive interpretations of what counts as the sort of link to America that makes an alleged crime punishable there; indirect contact with foreign banks with branches in America, or using Gmail, now seems to be enough. …Second, the punishments can be disproportionate. In 2014 BNP Paribas, a French bank, was hit with a sanctions-related fine of $8.9bn, enough to threaten its stability. …Third, America’s legal actions can often become intertwined with its commercial interests. …American banks have picked up business from European rivals left punch-drunk by fines. Sometimes American firms are in the line of fire—Goldman Sachs is being investigated by the DOJ for its role in the 1MDB scandal in Malaysia. But many foreign executives suspect that American firms get special treatment and are wilier about navigating the rules. …escalating use of extraterritorial legal actions will ultimately backfire. It will discourage foreign firms from tapping American capital markets. It will encourage China and Europe to promote their currencies as rivals to the dollar… Far from expressing geopolitical might, America’s legal overreach would then end up diminishing American power.

To be sure, not every issue should be decided solely on the basis of economics. More GDP is good, but not at the cost of sacrificing honor and dignity.

Some nations might be so evil that sanctions are justified.

But policy makers should be fully aware that there are costs when sanctions are imposed.

Those costs include foregone trade, which would be bad for American consumers, workers, and businesses.

Most important, those costs could mean the dollar gets weakened or dethroned as the world’s reserve currency and the U.S. loses its “exorbitant privilege.”

And that could mean less investment in America, which translates into fewer jobs and lower wages.

P.S. The study by Bruce Zagaris is the third in a series on why extraterritoriality is a bad idea. The first study focused on extraterritorial taxation. The second study analyzed extraterritorial financial regulation.

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In pure socialist systems, governments own and operate companies (the “means of production“). Such an approach also requires central planning and price controls.

But you don’t need socialism to have government-controlled companies. There are plenty of “state-owned enterprises” that exist in supposedly market-oriented nations.

Including in the United States. The federal government, for instance, owns and operates the air traffic control system and the postal service, to cite two big examples.

So what happens when politicians are de facto shareholders?

Today, thanks to some new research from the Asian Development Bank Institute, we’re going to look at the economic consequences of such firms.

Throughout history, and especially since the end of World War II, state-owned enterprises (SOEs) have been created in much of the world… Although private companies play a dominant role in market-based societies, enterprises with government ownership are still key players in the global economy, making their performance important for economic growth and competitiveness… Thus, scholars and policymakers around the world have been left with a task of reassessing the efficiency of state ownership. …In this paper, we aim to investigate whether certain ownership types consistently show superior economic performance relative to others when controlling for other economic factors. …we aim to fill in this gap and report further empirical evidence on the relative efficiency of public and private companies.

According to the study, state-run companies play a very large role in some countries.

The authors consider some of the theoretical reasons why state-run firms might not be very efficient, including “public choice.”

Agency theory…states that in a corporation, managers (or agents) may follow a personal agenda rather than work on behalf of, and for the interest of, the principals who own the corporation. Within a SOE, in particular, …the managers of SOEs are those who are appointed by the government…and seek firm-specific rents, such as high pay, fringe benefits, and low effort levels. Unlike their peers who operate in private-owned enterprises and may face the risk of replacement and dismissal due to their firms’ low performance…, the chief executive officers (CEOs) of SOEs are put under little financial constraint, and their compensation is not necessarily linked to firm performance… Public choice theory…also provides a cornerstone conceptual framework on which SOEs’ underperformance can be explained. This framework assumes that…special interests affect…governments’ own objectives.

They put together a dataset of more than 25,000 companies, both government and private, and then looked at key performance metrics.

Not surprisingly, government-run firms are not very efficient compared to their private counterparts.

…we find significant evidence that SOEs are outperformed by their POEs counterparts. The findings are consistent over both simple univariate comparisons and multivariate regressions. Government firms appear to be less profitable than POEs. They are also more dependent on debt and financial support from outside sources rather than equity. Hence, we provide support for the view that public firms are less efficient than private firms… The cross-sectional comparisons also show that government firms tend to be more labor intensive and have higher labor costs than non-government ones. …The differences in profitability appear to be economically important. The average return on assets for private firms is 8.010, almost twice that for SOEs. …SOEs have a higher liabilities-to-assets ratio, meaning that they tend to rely more on debt than shareholder funds. … state-owned companies…generate smaller sales volumes and have a higher cost per one employee. In other words, firms owned by private sectors are more labor efficient than government ones. …our findings suggest that privatization could be considered as a driver for firm efficiency.

For those that like perusing quantitative results, here are the results of their statistical regressions.

I’ve highlighted the key difference.

As already noted, government-run firms accumulate more debt.

This is presumably because investors assume that government-run companies won’t default.

Not because they don’t lose money, but rather because the political pressures that led to their creation also will prevent their demise.

SOEs can enjoy a “soft” budget constraint since they are backed by the government for their funding… They have the advantage of borrowing funds at a lower rate rather than accessing the equity market to raise capital… Thus, the discipline that capital markets impose on state-held firms and the threat of financial distress for them is less important than their private counterparts. …it is worth noting that such “soft” budget constraints, to a certain extent, could also be a source of inefficiency in government firms.

In other words, the growth-enhancing process of “creative destruction” is blocked when governments are in charge of companies.

For what it’s worth, this is a big problem in nations such as China.

Though we also saw a version of this in the United States, with the big bailouts of Fannie Mae and Freddie Mac, both of which are government-sponsored enterprises (private ownership, but created by government and controlled by government).

And there are many other examples of bad results when the federal government has intervened in the business world.

The bottom line is that government should not be owning, operating, controlling, or directing private companies. These forms of intervention inevitably produce inefficiency, subsidies, cronyism, corruption, and waste.

And it means that people like you and me wind up with less income and lower living standards because politicians are misallocating labor and capital.

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I’m a big fan of Marco Rubio. The Florida Senator has been very good on some big issues and on some small issues. And he’s willing to fight important philosophical battles.

No politician is perfect (for instance, Rubio defends sugar subsidies), so I’ve always judged them by whether – on net – they’re on the side of more freedom or more statism.

Which is the ideal framework for today’s column.

Earlier this month, Rubio wrote a column for National Review asserting it is time for “common-good capitalism.”

Pope Leo XIII wrote that the ultimate goal for any society should be to “make men better” by providing people the opportunity to attain the dignity that comes from hard work, ownership, and raising a family. …What makes this society possible is the rights of both workers and businesses, but also their obligations to each other. …In the economy Pope Leo described, workers and businesses are not competitors for their share of limited resources, but partners in an effort that strengthens the entire nation. …This…doesn’t describe the economy we actually have today. Large corporations have become vehicles for shareholders and banks to assert claims to cash flows, rather than engines of productive innovation. Over the past 40 years, the financial sector’s share of corporate profits increased from about 10 to nearly 30 percent. The share of profits sent to shareholders increased by 300 percent. This occurred while investment of those profits back into the companies’ workers — and future — dropped 20 percent. …This is what it looks like when, as Pope Francis warned, “finance overwhelms the real economy.” …Diagnosing the problem is something we should be able to achieve… Ultimately, deciding what the government should do about it must be the core question of our politics. …What we need to do is restore common-good capitalism. …our nation does not exist to serve the interests of the market; the market exists to serve our nation.

Some of this rhetoric rubs me the wrong way (and citing an economic illiterate like Pope Francis is appalling), but what really matters is whether Rubio is proposing more power for government or less power for government.

That’s hard to say because he doesn’t offer much in terms of policy.

Though I’m not overly impressed by the handful of ideas that were mentioned.

I don’t pretend to know anything about rare-earth minerals, but it’s laughable to think the Small Business Administration is a wellspring of innovation, and there’s plenty of evidence that paid parental leave is bad policy (child tax credits aren’t bad, but there are other tax policies that are far better for families).

On the other hand, Rubio also has been making the case for “full expensing,” which is a very good policy.

Since we don’t have any additional details, I don’t know whether his new agenda is a net plus or a net negative.

Kevin Williamson of National Review, by contrast, is definitely not a fan of Rubio’s approach. Here’s some of what he wrote last week.

Senator Rubio…joins the ranks of those who propose to reinvent capitalism — “common-good capitalism,” he calls it. …Senator Rubio, working from remarks originally delivered in a speech at Catholic University, references a series of popes — Leo XIII, mostly, but also Benedict and Francis — to describe (whether the senator understands this or not) the familiar moral basis of fascist economic thinking… I write this as a fellow Catholic: God defend us from these backward, primitive-minded Catholic social reformers. …power is what is at issue. Men such as Senator Rubio desire for themselves the power to overrule markets — to limit trade and property rights, enterprise and exchange — in the service of what Senator Rubio describes as the “common good.” The problems with that are…Senator Rubio does not know what the common good is and has no way of knowing. …What we need from men in government is not the quasi-metaphysical project of reinventing capitalism in the name of the “common good.” …This is not a brief for anarchism. …We need stability and predictability from a government that secures our liberty and our property in the least obtrusive way that can be managed.

And he followed up two days later with another critical column, even equating Rubio’s agenda to Elizabeth Warren’s loony proposal.

From Senator Marco Rubio and his “common-good capitalism” to Senator Elizabeth Warren and her “accountable capitalism,” politicians right and left who want politicians to have more power over private economic decisions assume a dilemma in which something called “capitalism” must be balanced against or made subordinate to something called the “common good.” This is the great forgetful stupidity of our time. …Capitalism, meaning security in one’s own property and in the right to work and to trade, is the common good… What is contemplated by Senator Rubio and Senator Warren — along with a few batty adherents of the primitive nonidea known in Catholic circles as “integralism” and everywhere else more forthrightly as “totalitarianism” — is to invert the purpose of the U.S. government. …We’re supposed to give up our property rights so that these two and their ilk can use corporate welfare to fortify their own political interests? …The “stakeholder” thesis put forward by Rubio and Warren would strip shareholders of control of their own property and use that property in the service of interests of other parties, who are not its rightful owners. …the great prosperity currently enjoyed by North Americans and Western Europeans — and, increasingly, by the rest of the world — is a product…of capitalism… It wasn’t magic. It wasn’t the cleverness of Senator Rubio or Senator Warren. It wasn’t the big ideas of Pope Francis, to the modest extent that he has any economic ideas worth identifying as such.

Oren Cass argues that Williamson is both unfair and wrong about Rubio.

Williamson believes that Rubio wants to “be . . . the bandit, taking control of other people’s property”; “strip shareholders of control of their own property,” which “is robbery”; “redefine away the property rights of millions of Americans”; “limit . . . property rights”; and “run Apple or Facebook or Ford.” …I’ve read the Rubio speech carefully and can find none of this. …Rubio’s project is to explore the vast gray expanse between the white of liberty and the black of property theft. …This is the terrain on which many of American history’s great public deliberations have unfolded, yielding policies from Hamilton’s Report on Manufactures to the “internal improvements” of the early 1800s, the tariff debates between McKinley and Bryan, Teddy Roosevelt’s trust-busting, Franklin Roosevelt’s New Deal, Kennedy’s space race, and Reagan’s import quotas. Property theft all of it, at gunpoint no less, if I understand Williamson correctly. …Someone will have to make a value judgment as to what “goods” are in fact “good” and thus worthy of providing publicly.

Cass is right that there’s a lot of space between pure capitalism and awful statism. I’ve made the same point.

But it does worry me that he favorably cites a bunch of historical policy mistakes, such as protectionism, antitrust laws, and the New Deal.

Jonah Goldberg makes the should-be-obvious point that the United States is hardly a laissez-faire paradise.

For as long as I can remember, people on the left have complained about “unfettered capitalism.” …Senator Bernie Sanders said earlier this year that “we have to talk about democratic socialism as an alternative to unfettered capitalism.” …Recently, the concern with capitalism’s unfetteredness has become bipartisan. Senators Josh Hawley and Marco Rubio have taken up the cause in a series of speeches and policy proposals. Conservative intellectuals such as Patrick Deneen and Yoram Hazony have taken dead aim at unrestrained capitalism. J. D. Vance, the author of Hillbilly Elegy, and Tucker Carlson of Fox News have suggested that economic policy is run by . . . libertarians. My response to this dismaying development is: What on earth are these people talking about? …If you think there are no restraints on the market or on economic activity, why on earth do we have the Department of Labor, HHS, HUD, FDA, EPA, OSHA, or IRS? The United States has one of the most progressive tax systems in the world (i.e., the share of taxes paid by the rich versus everyone else). If you take into account all social-welfare spending, we spend more on entitlements than plenty of rich countries. Now, if you think we don’t spend, regulate, or tax enough, fine. Make your case. If you think we should spend and tax differently, I’m right there with you. But the notion that the United States is a libertarian fantasyland is itself a fantasy.

Amen.

And this brings me to my modest contribution to this discussion.

I’ve already admitted that Rubio hasn’t provided enough details to assess whether he wants more liberty or more statism.

That being said, I’m skeptical of “common-good capitalism” in the same way I’m suspicious about “nationalist conservatism” and “reform conservatism” (and we know for a fact that “kinder-and-gentler conservatism” and “compassionate conservatism” meant more statism).

So here’s my challenge to Rubio and Cass (as well as everyone else who proposes an alternative to Reagan-style small-government conservatism). Please specifically identify how much government you want. Yes, there is a “vast gray expanse” between pure laissez-faire and pure statism, as Cass noted. But he didn’t say where in that expanse he wants America to be.

To help people respond to this challenge, here’s a chart, based on the data from Economic Freedom of the World. In that “vast gray expanse” between pure capitalism and pure statism, should policy makers try to shift America in the direction of Hong Kong? Or in the direction of Sweden, or even Greece?

The bottom line is that we need to climb the scale (i.e., have more overall economic liberty) if we want more prosperity.

That’s what will help facilitate all the things, such as good jobs and strong communities, that Senator Rubio wants for America.

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As part of National Education Week, I’ve looked at the deterioration of K-12 government schools and also explained why a market-based choice system would be a better alternative.

The good news is that we have a choice system for higher education. Students can choose from thousands of colleges and universities.

The bad news is that federal subsidies are making that system increasingly expensive and bureaucratic.

That’s today’s topic.

The underlying problem is “third-party payer,” which is a wonky term to describe what happens when students are buying education with money from somebody else. When this happens, they tend to not care about the price, which then makes it possible for colleges and universities to increase tuition so they become the real beneficiaries of the subsidies.

So nobody should be surprised that college costs are skyrocketing upwards, both in absolute terms and relative terms.

It’s a bubble, but one that probably won’t pop because of the ongoing stream of subsidies.

Jon Miltimore has a very good summary of the perverse incentives created by government.

Federal loans have made tuition far more expensive. Universities get paid up front—so whether students graduate, drop out, or default on the loan doesn’t matter. Departing students are easily replaced. Confident that students have access to cheap money (which can be expensive in the long run), colleges have no incentive to control or cut back the prices of housing, tuition, fees, and meals. …The best solution is to get the federal government out of the loan business altogether. If universities themselves offered loans, incentives would push them toward controlling costs and maximizing student success after graduation. Another option is income share agreements, which allow potential employers or independent organizations to pay tuition in exchange for a percentage of the students’ future earnings. …When markets seem to falter—recent, painful examples include the student loan bubble and housing crisis—the culprit is often government intervening in a way that warps incentives.

In a study for the Mercatus Center, Veronique de Rugy and Jack Salmon compile numbers and analyze studies.

The evidence broadly suggests that institutions of higher education are capturing need-based federal aid and responding to increased federal aid generosity by reducing institutional aid. …federal and state student aid funding expanding significantly over time, from just under $3 billion in 1970 to just under $160 billion in 2017. …Increased eligibility over time has led to a large and growing proportion of college students who receive federal financial aid. …there is a growing strand of economic literature examining the relationship between federal aid and tuition prices. …A study by Bradley Curs and Luciana Dar…finds that…institutions actually raise tuition levels and reduce their institutional aid when the state increases need-based awards. …A study by Stephanie Cellini and Claudia Goldin…finds that for comparable full-time nondegree programs in the same field over 2005–2009, institutions that are eligible for federal aid raised tuition by about 78 percent more than institutions that are ineligible. …Grey Gordon and Aaron Hedlund…develop a quantitative model for higher education to test explanations for the steep rise in college tuition between 1987 and 2010. …These results reveal that increased federal aid is responsible for more than doubling the cost of tuition over a 23-year period.

Here’s a chart from the study showing the explosion of federal subsidies.

By the way, Paul Krugman actually thinks taxpayers have been “starving” higher education.

Let’s get back to exploring the analysis of more sensible economists. Professor Antony Davies and James Harrigan make two key points in their FEE column.

First, subsidies are producing consumers who don’t make sensible education purchases.

…total student debt in the United States passed the $1.5 trillion mark. …the total has been growing at around $80 billion per year. …Around 11 percent of student debt is either delinquent or in default, which is more than four times the delinquency rates for credit cards and residential mortgages. …the problem with making college “free…” that a student must repay a college loan gives him tremendous incentive to at least consider what jobs he could obtain with the college education he must pay for after graduation. A student who is unencumbered by the need to repay a college loan faces little cost when choosing to major in something with little to no future value. …It’s well worth taking out tens of thousands of dollars in loans to pay for a degree that increases a student’s expected lifetime earnings by millions of dollars. But taking out tens of thousands in loans to pay for a degree that increases a student’s expected lifetime earnings by the same tens of thousands or less is, financially, a terrible investment.

Here’s a chart from their article, which looks at the value of various majors.

Second, the problems are caused by bad government policy.

We are in the midst of a college loan bubble for almost all of the same reasons that, a decade ago, we found ourselves in the midst of a housing loan bubble. …In both bubbles, the government interfered in markets in two critical ways. First, the government stepped in as a lender. Second, it shielded private lenders from the consequences of making bad loans. …Making college “free” will simply double-down on the very problem we already face. With “free” college, not only will colleges not have to care whether students can repay their loans, but the students themselves will also not have to care. Meanwhile, taxpayers will be on the hook for the numerous imprudent decisions by both colleges and students. It will bring about the worst of all possible worlds.

Victor Davis Hanson of the Hoover Institution used to be a Classics Professor at California State University. So he’s well positioned to provide a then-now comparison.

Here’s what he experienced in his early years.

Overwhelmingly liberal and often hippish in appearance, American faculty of the early 1970s still only rarely indoctrinated students or bullied them to mimic their own progressivism. Rather, in both the humanities and sciences, students were taught the inductive method of evaluating evidence… As an undergraduate and graduate student at hotbeds of prior 1960s protests at UC Santa Cruz and Stanford, I don’t think I had a single conservative professor. Yet there were few faculty members, in Western Civilization, history, classics, or mandatory general education science and math classes, who either sought to indoctrinate us with their liberal world view or punished us for remaining conservative. …Administrators in the 1960s and 1970s were relatively few. Most faculty saw administration as a temporary if necessary evil that took precious time away from teaching and research and so were admired for putting up with it. …Professors taught large loads—four or five classes a semester for California State University faculty. …The result was that both college tuition and room and board stayed relatively inexpensive.

And here’s what it’s become.

What went wrong? …Politics increasingly infected courses as competence eroded—logical for faculty and students since the former required far less of the latter. Across the curriculum, race, class, and gender studies found their way into art, music, literature, philosophy and history classes. Deduction now replaced the old empiricism. Grades inflated… Universities emulated the ethos of loan sharks and shake-down businesses. The con was as simple as it was insidiously brilliant. Academic lobbyists pressed the government for billions in guaranteed student loans… The federal government-backed student loans. That guarantee greenlighted cash-flush universities to pay inter alia for diversity czars, assistant provosts of “inclusion,” and armies of woke aides and facilitators, to reduce teaching loads, and to open more race/class/gender “centers” on campus—by jacking up college costs higher than the rate of inflation. Student debt soared. …A new generation owes $1.5 trillion in student debt… One’s 20s are now redefined as the lost decade, as marriage, child-rearing, and home buying are put off, to the extent they still occur, into one’s 30s. …The result was reduced teaching, a bonanza of release time, administrative bloat, Club Med dorms, gyms, and student unions, and epidemics of highly paid but non-teaching careerist advisors, and counselors.

So what’s his solution?

Universities should be held responsible for repaying a large percentage of the loans they issued and yet in advance knew well could not and would not be repaid. The government should get out of the campus loan insurance business.

Amen.

As I said at the end of this recent TV interview, colleges and universities need to have some skin in the game.

Daniel Kowalski explains for FEE that government policy is causing ever-higher costs.

Student loans did not exist in their present form until the federal government passed the Higher Education Act of 1965, which had taxpayers guaranteeing loans made by private lenders to students. While the program might have had good intentions, it has had unforeseen harmful consequences. …Secured financing of student loans resulted in a surge of students applying for college. This increase in demand was, in turn, met with an increase in price because university administrators would charge more if people were willing to pay it… According to Forbes, the average price of tuition has increased eight times faster than wages since the 1980s. …The government’s backing of student loans has caused the price of higher education to artificially rise…the current system of student loan financing needs to be reformed. Schools should not be given a blank check, and the government-guaranteed loans should only cover a partial amount of tuition. Schools should also be responsible for directly lending a portion of student loans so that it’s in their financial interest to make sure graduates enter the job market with the skills and requirements needed to get a well-paying job. If a student fails to pay back their loan, then the college or university should also share in the taxpayer’s loss.

All this government-fueled debt has real consequences. Three economists from the Federal Reserve found it hinders home ownership.

To estimate the effect of the increased student loan debt on homeownership, we tracked student loan and mortgage borrowing for individuals who were between 24 and 32 years old in 2005. Using these data, we constructed a model to estimate the impact of increased student loan borrowing on the likelihood of students becoming homeowners during this period of their lives. We found that a $1,000 increase in student loan debt (accumulated during the prime college-going years and measured in 2014 dollars) causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s. …According to our calculations, the increase in student loan debt between 2005 and 2014 reduced the homeownership rate among young adults by 2 percentage points. The homeownership rate for this group fell 9 percentage points over this period (figure 2), implying that a little over 20 percent of the overall decline in homeownership among the young can be attributed to the rise in student loan debt.

For those interested, here are some of their empirical findings.

By the way, I discussed the negative interaction of student debt and housing in the second half of this TV interview.

Professor Richard Vedder explains for the Wall Street Journal that this subsidized system has resulted in an environment in which neither students nor faculty work very hard.

One reason college is so costly and so little real learning occurs is that collegiate resources are vastly underused. Students don’t study much, professors teach little, few people read most of the obscure papers the professors write, and even the buildings are empty most of the time. …Surveys of student work habits find that the average amount of time spent in class and otherwise studying is about 27 hours a week. The typical student takes classes only 32 weeks a year, so he spends fewer than 900 hours annually on academics—less time than a typical eighth-grader… As economists Philip Babcock and Mindy Marks have demonstrated, students in the middle of the 20th century spent nearly 50% more time—around 40 hours weekly—studying. They now lack incentives to work very hard, since the average grade today—a B or B-plus—is much higher than in 1960… Sociologists Richard Arum and Josipa Roksa have demonstrated, using the Collegiate Learning Assessment, that the typical college senior has only marginally better critical reasoning and writing skills than a freshman. Federal Adult Literacy Survey data, admittedly somewhat outdated, shows declining literacy among college grads in the late 20th and early 21st centuries. …the typical professor is in class around one-third fewer hours than his 1965 counterpart. …The litany of underused resources goes on. In 1970 at a typical university there were perhaps two professors for each administrator. Today, there are usually more nonteaching administrators than professors.

Unfortunately, many politicians respond to these government-caused problems by proposing even more government.

That’s what Hillary Clinton did in 2016 and it’s what politicians – most notably Elizabeth Warren and Bernie Sanders – are doing for 2020.

But that will make a bad situation even worse.

Paul Boyce, writing for FEE, explains that free college will lower standards and make college degrees relatively meaningless.

…college enrollment rates reached more than 40 percent in 2017. Of those, nearly one in three (31 percent) drop out entirely. Why should the average taxpayer subsidize this? …If college is free, it is likely that this rate will increase further. Students won’t have any skin in the game because they won’t be picking the tab up at the end. This effects efficient decisionmaking. In France, for example, the dropout rate is as high as 50 percent. …Government has a track record of underfunding. …This is demonstrated in France, which runs a “free” system. Its universities are heavily underfunded and unable to satisfy student enrollment. …As college enrollment has increased, standards have fallen to accommodate for this. …it defeats the goal of creating a well-educated workforce. …it dilutes the importance and value of a degree. …Undergraduate degrees will become the norm, and the financial return will become negligible.

And the experience of other nations isn’t a cause for optimism.

Andrew Hammel, an American who taught for many years at a German university, is not overly impressed by that nation’s free-tuition regime.

…in their early teen years, the brightest German students are sent to the most prestigious form of German high school, the Gymnasium. Currently, over 50 percent of German students earn this privilege (this number has jumped in the last 30 years, prompting charges of grade inflation). Gymnasium graduates with reasonable grades are guaranteed a place in a German university; there is no entrance exam. 95 percent of German students attend public universities, where they are charged fees, but not formal tuition. All professors at public universities are civil servants. …Supporters of the tuition-free system note that 65 percent of Germans say university should be tuition-free, “even if this means the quality of education is slightly worse.” …The system also gives students extra freedom: you can study art history or sociology, knowing that you won’t be hounded by creditors if you later find only spotty employment. …one-third of all students who enroll in German universities never finish. A recent OECD study found that only 28.6 percent of Germans aged between 25 and 64 had a tertiary education degree… German universities punch below their weight in international rankings… Gather any group of German professors, and talk will immediately turn to the burgeoning bureaucracy which distracts them from teaching and research. …Americans who teach ordinary classes in Germany find average German students somewhat less motivated than their dues-paying American counterparts. The top third of motivated students would succeed anywhere, and the bottom third, as we have seen, drop out.

I’ll close with an observation about inefficiency in higher education.

Here’s a chart I shared a few years ago. I’m sure the problem is even worse today.

The bottom line is that student debt, administrative bloat, and expensive tuition are all predictable consequences of federal subsidies.

P.S. If you’re worried about political correctness in higher education (and you have the appropriate subscriptions), I recommend this column in the Wall Street Journal and this George Will column in the Washington Post.

P.P.S. Here’s a video interview with Richard Vedder about high costs and inefficiency in higher education. And I also recommend this video explanation by Professor Daniel Lin.

P.P.P.S. It also turns that all these subsidies have a negative correlation with private-sector employment.

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The World Bank has released its annual report on the Ease of Doing Business.

Unsurprisingly, the top spots are dominated by market-oriented jurisdictions, with New Zealand, Singapore, and Hong Kong (at least for now!) winning the gold, silver, and bronze. The United States does reasonably well, finishing in sixth place.

It’s also worth noting that Nordic nations do quite well. Denmark even beats the United States, and Norway and Sweden are both in the top 10.

Georgia gets a very good score, as does Taiwan. And I’m sure Pope Francis will be irked to see that Mauritius ranks highly.

I’m surprised, though, to see Russia at #28 and China at #31. That’s better than France!

And I’m even more surprised that normally laissez-faire Switzerland is down at #36.

What economic lessons can we learn from the report? First, the authors remind us that less red tape means more prosperity.

Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development. … The ease of doing business score serves as the basis for ranking economies on their business environment: the ranking is obtained by sorting the economies by their scores. The ease of doing business score shows an economy’s absolute position relative to the best regulatory performance, whereas the ease of doing business ranking is an indication of an economy’s position relative to that of other economies.

By the way, here’s a simple depiction of the World Bank’s methodology.

It’s also worth noting that less intervention means less corruption.

There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done. The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average 8 procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with 4 and 11 steps, respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements—such as obtaining licenses and paying taxes—experience a lower incidence of bribery.

Poor countries, not surprisingly, have more red tape.

An entrepreneur in a low-income economy typically spends around 50 percent of the country’s per-capita income to launch a company, compared with just 4.2 percent for an entrepreneur in a high-income economy. It takes nearly six times as long on average to start a business in the economies ranked in the bottom 50 as in the top 20. There’s ample room for developing economies to catch up with developed countries on most of the Doing Business indicators. Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies.

Africa and Latin America are especially bad.

Sub-Saharan Africa remains one of the weak-performing regions on the ease of doing business with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. …Latin America and the Caribbean also lags in terms of reform implementation and impact. …not a single economy in Latin America and the Caribbean ranks among the top 50 on the ease of doing business.

I’m disappointed, by the way, that Chile is only ranked #59.

Now let’s shift to some very important graphs about the relationship between economic freedom and national prosperity.

We’ll start with a look at the relationship between employment regulation and per-capita income. Not surprisingly, countries that make it hard to hire workers and fire workers have lower levels of prosperity.

Here’s a chart showing the relationship between employment regulation and the underground economy.

The moral of the story is that lots of red tape drives employers and employees to the black market.

Perhaps most important, there’s a very clear link between good regulatory policy and overall entrepreneurship.

Here’s a bit of good news.

Developing nations have reduced the burden of red tape in some areas, in part because Ease of Doing Business puts pressure on governments.

We can see the results in this chart.

I’ll close with a look at the regulatory burden in the United States, which also can be considered good news.

Here’s the annual score for the past five years (a higher number is better).

I’m frequently critical of this White House, but I also believe in giving credit when it’s deserved. The bottom line is that Trump’s policies have been a net plus for businesses.

In other words, lower tax rates and less red tape have more than offset the pain of protectionism.

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For a multitude of reasons, I wasn’t a fan of Mitt Romney’s candidacy in 2012. But when supporters of Barack Obama accused him of somehow being responsible for a woman who died from cancer, I jumped to his defense by pointing out the link between unnecessary deaths and bad economic policy.

Simply stated, market-friendly policies produce more prosperity and wealthier societies enjoy longer lifespans. Indeed, even one of Obama’s top appointees openly acknowledged that wealthier is healthier.

Which is why folks on the left are failing to do proper cost-benefit analysis when they assert that we need redistribution and intervention to help people live longer.

This issue was hot in 2017 when Republicans briefly toyed with the idea of fulfilling a campaign promise and repealing Obamacare.

Defenders of the law said repeal would cause needless deaths.

In a column for National Review, Oren Cass debunked those assertions.

If you are going to claim that someone’s policy will cause upward of 200,000 deaths, I feel that you should have relevant supporting evidence. Maybe I’m just old-fashioned that way. Certainly, no such standards seem to hamper the editors at Vox. Instead, they’ve just published “208,500 additional deaths could occur by 2026 under the Senate health plan,” in which Ann Crawford-Roberts et al. assure readers that they are using “solid estimates firmly rooted in scientific evidence — unlike the dubious claim that the ACA has saved ‘zero’ lives.” Except here’s the thing: That claim about zero lives saved is supported by multiple independent lines of analysis. …There are the numerous studies showing that patients on Medicaid achieve worse health outcomes than those without any insurance. There is the “gold-standard” randomized controlled trial in Oregon that found no significant improvement in physical health from Medicaid coverage. …There is a paper from Yale researchers that found states achieve better health outcomes when they allocate less of their social spending toward health care. And now we even have data from the ACA itself. …the nation’s mortality rate stopped decreasing and actually increased when the ACA was implemented, and matters were worst in the states that accepted the ACA’s Medicaid expansion. …None of that makes Medicaid worthless. It does not mean that Medicaid, or the ACA generally, is killing people (though the evidence for that proposition looks as good as the evidence for the idea that it is saving many lives).

Max Bloom also wrote that year about the controversy for National Review.

Repealing Obamacare will kill 24,000 people a year! No, 36,000! No, 43,000! The tax cuts are blood money! There is more than a little hyperbole about the overhaul of Obamacare proposed by the House and the Senate, and the rhetoric about tens of thousands of deaths is not a bad example. …The only thing better than a natural experiment is a random experiment, in which people are randomly distributed into groups that, in this case, either receive health insurance or don’t. Exactly this happened in Oregon in 2008, when the state randomly selected 30,000 from a waiting list of 90,000 low-income adults to participate in a limited expansion of Medicaid. In theory, this should have produced a perfect test of the effects of insurance on health-care outcomes — indeed, as Peter Suderman notes, a bevy of liberal writers touted an early analysis of the experiment as a conclusive vindication of the effects of health insurance. Until they saw the final data, that is. The Oregon study found that “Medicaid coverage generated no significant improvements in measured physical health outcomes in the first two years.” …In short, the only problem with the estimate that Obamacare repeal will kill tens of thousands is that it cherry-picks one study out of several, ignores the limitations of that study, assumes that private insurance and Medicaid are equivalent, assumes that losing health insurance and gaining health insurance are precisely symmetric, uses implausible estimates of coverage loss, and relies on an idiosyncratic definition of the word “kill.” Otherwise, it’s fine.

By the way, these two articles didn’t even consider the “cost” side of cost-benefit analysis.

The columns simply noted that there’s no evidence for the notion that Obamacare-type subsidies help people live longer. In other words, the “benefit” side of cost-benefit equation is empty.

So imagine what we would discover about health outcomes if various Obamacare costs (job losses, tax increases, lower income, etc) were added to the analysis.

A similar debate is happening on the other side of the ocean.

In a column for CapX, Guy Dampier addresses the silly claim that spending restraint kills people.

…a November 2017 paper in the British Medical Journal…found a link between restrictions on health and social care spending – austerity – and 120,000 additional deaths between 2010 and 2017. The paper’s authors..reached this by extrapolating from an estimated 45,000 “higher than expected” number of deaths between 2011 and 2014 and then projecting that to cover 2010 to 2017. …although even they had to admit they had only captured association and not discovered causation. …The medical community responded to the BMJ paper with scepticism. …Others pointed out the many issues in the methodology. …the IPPR, a think tank with close links to Labour, published a report in June this year with a similar claim: that if trends in mortality between 1990 and 2012 had continued there “could have been 130,000 deaths averted between 2012 and 2017”. …When pressed the IPPR admitted that the apparent spike in mortality had started two years before austerity began… The years of austerity have been tough for many people, without doubt. But these issues show that neither claim – of 120,000 or 130,000 deaths – stands up to scrutiny.

Once again, the left’s numbers only look at one side of the equation.

There’s no attempt to measure the health benefits of a faster-growing, less-encumbered economy.

Yet even using incomplete analysis, they don’t have any persuasive evidence for bigger government.

Let’s now close by looking at a global example.

Last year, the Washington Post published a fascinating article on pollution and life expectancy, and it included analysis on which parts of the world are getting cleaner and dirtier.

University of Chicago researchers wanted to make air quality measurements less abstract and more relatable — and what is more relatable than years of life? The pollution most responsible for shortening lives consists of the tiniest airborne particles, called PM2.5. They are small enough to penetrate deep into the lungs and bloodstream, causing breathing and cardiovascular problems, cancer and possibly even dementia. They’re bad for healthy people and terrible for young children, the elderly and anyone who already has heart or respiratory problems. …The Chicago team started with satellite data that mapped the annual PM2.5 concentration in air all over the world, from 1998 to 2016. …Then they calculated how much longer people would live if the air they breathe had fewer — or none — of these particles. The result of the project is the Air Quality Life Index.

Here’s the accompanying map, which shows good news for most parts of the world other than China, India, and Indonesia.

The obvious takeaway from this article is that nations should strive mightily to reduce this type of air pollution. Especially in Asia.

And maybe that’s actually true.

But let’s consider both sides of the equation. These Asian nations are in the process of industrialization, which means they are getting much richer and therefore have the ability to enjoy much better levels of food, housing, and health care.

We also know that life expectancy has significantly improved in China. So the bad impact of pollution obviously is being offset by something.

And the article notes that China is now working to curtail pollution, which makes sense since nations become more environmentally conscious as incomes increase.

By the way, I’m not trying to identify the right tradeoff between pollution and growth. Or the ideal tradeoff between redistribution and growth.

Instead, I’m simply pointing out that tradeoffs exist, even if some of my friends on the left like to pretend otherwise.

If you’ve been diligent enough to get to this point, you deserve to enjoy this very topical Remy video.

Rather appropriate that Elizabeth Warren plays a starring role.

P.S. You can enjoy more Remy videos by clicking here, hereherehere, and here.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).

Bad economists, by contrast, only consider direct effects (the “seen”).

Let’s look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen” benefits.

Unfortunately, stadium subsidies are just the tip of the cronyism iceberg.

In a column for the Dallas Morning News, Dean Stansel of Southern Methodist University discussed some of his research on the topic.

While state and local economic development incentives may seem to help the local economy, the offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective of the nation as a whole, these policies are clearly a net loss. …In a new research paper, my colleague, Meg Tuszynski, and I examined whether there is any relationship between economic development incentive programs and five measures of entrepreneurial activity. Like the previous literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a negative relationship with patent activity, a key measure of new innovation. …A recent study by the Mercatus Center found that 12 states could reduce their corporate income tax by more than 20 percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business franchise tax. In six states, it could either be completely eliminated or reduced by more than 90 percent. These are big savings that would provide substantial tax relief to all businesses, both big and small, not just those with political influence. …That would provide a more level playing field in which all businesses can thrive.

And here’s a Wall Street Journal editorial from earlier the year.

Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doubt. …Now add General Electric , which announced…it will renege on its plan to build a glassy, 12-story headquarters on Boston’s waterfront. …The company reportedly…pledged to bring 800 jobs to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar spent, “you will get back one thousand fold, take my word for it.” …two CEOs later, a beleaguered GE won’t be building that fancy tower at all. There won’t even be 800 jobs. …GE will lease back enough space in two existing brick buildings for 250 employees. …what a failure of corporate welfare.

Let’s wrap this up with a look at some additional scholarly research.

Economists for the World Bank investigated government favoritism in Egypt and found that cronyism rewards politically connected companies at the expense of the overall economy.

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms’ innovation activities. …The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. …The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce…long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms.

For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less innovation.

The World Bank also found awful results because of cronyism in Ukraine.

But this isn’t a problem only in developing nations.

There’s some depressing research about the growing prevalence of cronyism in the United States (ethanol handouts, the Export-Import Bankprotectionismtax favoritismbailoutssubsidies, and green energy are just a few examples of how the friends of politicians get unearned wealth).

Cronyism is bad under Democrats and it’s bad under Republicans. Time for separation of business and state!

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Identifying the worst government policy would be a challenge. Would it be minimum wage laws, which deprive low-skilled workers of a chance for employment and upward mobility? Would it be class-warfare tax rates that generate large amounts of economic damage compared to potential (if any) revenue?

Those are tempting choices, but there’s a strong case that nothing is as foolish as rent control.

Here’s a map showing which states impose or allow this destructive form of intervention.

California politicians are very susceptible to bad ideas.

True to form, as reported by the New York Times, they actually want to impose statewide rent control.

California lawmakers approved a statewide rent cap on Wednesday covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction… a momentous political swing. For a quarter-century, California law has sharply curbed the ability of localities to impose rent control. Now, the state itself has taken that step. …Economists from both the left and the right have a well-established aversion to rent control, arguing that such policies ignore the message of rising prices, which is to build more housing. Studies in San Francisco and elsewhere show that price caps often prompt landlords to abandon the rental business by converting their units to owner-occupied homes. And since rent controls typically have no income threshold, they have been faulted for benefiting high-income tenants.

I’m glad the article included the evidence from economists, especially since the headline is grossly inaccurate. If we care about evidence, it’s far more accurate to say that rent control will exacerbate the state’s housing problems.

Which is why the Wall Street Journal opined that this type of intervention is especially destructive.

California already boasts the highest housing costs in the country, and even liberals have come around to acknowledging that not enough homes are built to meet demand. The state has added about half as many housing units as needed to accommodate population growth, and more than half of Californians spend 30% of their income on rent.Blame a thousand regulatory burdens. Local governments limit what housing developers can build and where. They layer on permitting fees, and then there are the state’s high labor costs and expensive green-energy mandates and restrictions that opponents can exploit to block projects for years. …The upshot is that an “affordable” housing unit in California costs $332,000 to build and nearly $600,000 in San Francisco, according to state budget figures. Developers can’t turn a profit on low- and middle-income homes… And now Democrats want to constrain housing prices by fiat. Mr. Newsom and Democratic legislators are pushing a law to limit annual rent increases across the state to 5% plus inflation. …Building permits in the first seven months this year have fallen 17% compared to 2018 despite an increase in state subsidies. …California’s progressive regulatory complex is contributing to this housing slowdown by driving businesses and people from the state. More than 700,000 residents have left since 2010.

By the way, the politicians in Albany already made the same mistake.

And, as you might expect, the Wall Street Journal‘s editorial page had the correct response.

Law by law, Gov. Andrew Cuomo and Democrats are chipping away at the policies that made New York City livable after decades of decline… Democrats this week are ramming through rent-control bills that…effectively dictates rents for one million or so rent-regulated apartments and restricts landlords’ ability to evict tenants who don’t pay. …Once a tenant moves out—which doesn’t happen often since folks can pass on the entitlement to friends and relatives—landlords would be required to offer the unit to another tenant at restricted rates. …Nor could they raise rates by more than 2% annually to pay for improvements or evict a nonpaying tenant who “cannot find a similar suitable dwelling in the same neighborhood.” Since landlords would have less incentive to make fixes, more apartments will deteriorate and come to resemble New York City’s squalid public housing. …One result will be less housing investment… Progressives are vindicating CEO Jeff Bezos ’s decision to pull Amazon’s second headquarters out of New York. Don’t be surprised if other businesses follow.

You won’t be surprised to learn that politicians in other nations sometimes make the same mistake.

The U.K.-based Guardian wrote about how rent control has backfired in Sweden.

Half a million are on the waiting list for rent-controlled flats in Stockholm, meaning a two-tier system, bribes and a thriving parallel market… the system is experiencing acute pressures. Building of rental homes almost dried up after a financial crisis in the early 1990s, and there is a dire shortage of properties. Demand is such that it is almost impossible to get a direct contract. With nearly half of all Stockholmers – about 500,000 people – in the queue, it can take 20 or 30 years to get to the top of the pile. …The result is a thriving rental property black market, with bribes of as much as 100,000 kronor per room to obtain a direct contract, McCormac says. Many people sublet space in their rental apartments. …“Rent controls were supposed to enable people to live in central locations, but now it is having the opposite effect,” McCormac says. “People without social connections will have a very hard time finding a flat,” says Kleberg.

And Germany is making the same mistake – even though it should have learned from the mistakes under Hitler’s national socialism and East Germany’s communism.

…the kinds of ideas traditionally associated with planned economies are gaining more and more support all over Germany. …Substantial numbers of people have moved to Germany’s major cities…the supply of housing has failed to keep pace with these significant developments, and this is largely because construction approval processes are so long-winded and the latest environmental regulations have made building prohibitively expensive. …In Germany’s capital, Berlin, …it now takes 12 years to draft and approve a zoning plan, which in many cases is a prerequisite for the development of new dwellings. …An initiative in Berlin calling for the expropriation of private real estate companies has collected three times as many signatures as it needed to initiate a petition for a referendum. …Kevin Kühnert, chairman of the youth organization of the center-left SPD…has gone as far as calling for a complete ban on private property owners renting out their apartments. …Berlin’s Senate approved the main components of a rent freeze in the German capital. …Advocates of such central economic planning react sensitively when they are reminded that it has already been tried… An earlier rent freeze was approved in Germany on April 20, 1936, as a gift from the National Socialist Party to the citizens of Germany on Adolf Hitler’s 47th birthday. The National Socialists’ rent cap was adopted into the GDR’s socialist law by Price Regulation No. 415 of May 6, 1955, and it remained in force until the collapse of the GDR in 1989.

Now let’s review some economic research.

Three Stanford professors researched the issue, looking specifically as San Francisco’s local rent control rules.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20% and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law. …In the long run, landlords’ substitution toward owner-occupied and newly constructed rental housing not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply towards less affordable types of housing that likely cater to the tastes of higher income individuals. Ultimately, these endogenous shifts in the housing supply likely drove up citywide rents, damaging housing affordability for future renters…it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. …rent control has contributed to widening income inequality of the city.

To be fair, rent control is just one of several bad policies that mess up the city’s housing market.

Now let’s shift to the other side of the country.

Jeff Jacoby of the Boston Globe shared evidence from a disastrous experiment in Massachusetts.

…a handful of Democratic lawmakers want to bring the horror of rent control… This isn’t happening only in Massachusetts. …Oregon’s governor just signed a statewide rent-control law and efforts to overturn rent-control bans are underway in Illinois, Colorado, and Washington state. …the folly of rent control is so well-established that to deny it requires, as Hillary Clinton might say, a willing suspension of disbelief. Massachusetts and most other states have banned rent control because the harm it causes far outweighs any benefit it confers. When politicians impose a ceiling on rent, the results are invariable: housing shortages, depressed real estate values, increased decay, less new construction. …The longer rent control persists, and the more harshly it is enforced, the worse the problem grows. …in New York City, where strict rent controls date back to World War II, the annual rate at which apartments turn over is less than half the national average, while the share of tenants who haven’t moved in more than 20 years is more than double the national average. …Acknowledging the damage caused by rent control is neither a right- nor left-wing issue. …the communist foreign minister of Vietnam…made…the…point in 1989: “The Americans couldn’t destroy Hanoi,” Nguyen Co Thach remarked, “but we have destroyed our city by very low rents.” …When Massachusetts voters struck down rent control in 1994, it was in the teeth of preposterous fearmongering by hardline tenant activists… What happened in reality was that tens of thousands of apartments were decontrolled with no ill effects… When tenants were analyzed by occupation, it was high-earning professionals and managers who predominated among the beneficiaries of rent control; semi-skilled and unskilled workers lagged far behind. Rent control always ends up benefiting the young, strong, and well-to-do at the expense of the old, weak, and poor.

Meanwhile, Meghan McArdle opined in the Washington Post about the perverse economic consequences of rent control.

…there are a few questions where there’s near unanimity, and rent control is one of them. Pretty much every economist agrees that rent controls are bad. …the policy appears to be making a comeback. …City governments may have to relearn why their predecessors pruned back rent-control policies. Rent control is supposed to protect poor, deserving tenants from the depredations of greedy landlords. And it does, up to a point. …The problem is that rent control doesn’t do anything about the reason that rents are rising, which is that there are more people who want to live in desirable areas than there are homes for them to live in. Housing follows the same basic laws of economics as other goods that consumers need… rent control also reduces the incentive to supply rental housing. …an actual solution to skyrocketing rents: Build more housing, so that the rent controls won’t be necessary… To do that, cities would need to ease the costly land-use regulations that make it so difficult for developers to fill the unmet demand. …Alas, that’s not going to happen… Declining housing stock is just one of the many potential costs of rent controls; others include a deteriorating housing stock as landlords stop investing in their properties, and higher rents. Yes, higher, because rent control creates a two-tier housing market. There are cheap, price-stabilized apartments that rarely turn over, because why would you give up such a great deal? Then there are the uncontrolled apartments, which everyone else in the city has to fight over, bidding up the price. …the people getting the biggest benefit are white, affluent Manhattanites.

By the way, you hopefully have noticed a pattern.

Rich people generally get the biggest benefits under rent control.

Let’s close with a look at how economists from across the philosophical spectrum view rent control

Here’s some survey data from the University of Chicago.

Incidentally, there’s an obvious reason why politicians persist in pushing bad policy. In the case of rent control, it’s because tenants outnumber landlords.

So even if politicians understand that the policy will backfire, their desire to get votes will trump common sense. Especially if they assume they can blame “greedy landlords” for the inevitable housing shortages and then push for government housing subsidies as an ostensible solution.

Another example of Mitchell’s Law.

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Something really strange is happening. Yesterday, I wrote about how I agreed with Trump on a trade issue.

Today, I’m going to agree with Crazy Bernie about a moral hazard issue.

Shocking, but true. The Vermont socialist actually understands that it makes no sense to subsidize new homes in flood-prone areas.

I’ll probably never again have a chance to write this next sentence, so it deserves an exclamation point. Bernie is completely correct!

Flood insurance encourages people to take on excessive risk (i.e., it creates moral hazard). And the subsidies often benefit rich people with beachfront homes (which may explain why Senator Sanders is on the right side)

If nothing else, politicians are very clever about doing the wrong thing in multiple ways.

So we’re not merely talking about luring people into flood-prone areas with subsidized insurance.

Sometimes government uses rental subsidies to put people in flood-prone areas.

Here are some excerpts from a story in the New York Times.

When a deadly rainstorm unloaded on Houston in 2016, Sharobin White’s apartment complex flooded in up to six feet of water. She sent her toddler and 6-year-old to safety on an air mattress, but her family lost nearly everything, including their car. When Hurricane Harvey hit the next year, it happened all over again: Families rushed to evacuate, and Ms. White’s car, a used Chevrolet she bought after the last flood, was destroyed. …But Ms. White and many of her neighbors cannot afford to leave. They are among hundreds of thousands of Americans — from New York to Miami to Phoenix — who live in government-subsidized housing that is at serious risk of flooding… But the Department of Housing and Urban Development, which oversees some of the at-risk properties, does not currently have a universal policy against paying for housing in a designated flood zone. …Nationwide, about 450,000 government-subsidized households — about 8 to 9 percent — are in flood plains…

While FEMA and government-subsidized flood insurance wouldn’t even exist in my libertarian fantasy world, I’m willing to acknowledge that government sometimes does things that aren’t completely foolish.

For instances, it’s better to subsidize people to move out of flood-prone areas instead of subsidizing them to rebuild in those areas.

Nashville is trying to move people…away from flood-prone areas. The voluntary program uses a combination of federal, state and local funds to offer market value for their homes. If the owners accept the offer, they move out, the city razes the house and prohibits future development. The acquired land becomes an absorbent creekside buffer, much of it serving as parks with playgrounds and walking paths. …While a number of cities around the country have similar relocation projects to address increased flooding, disaster mitigation experts consider Nashville’s a model that other communities would be wise to learn from: The United States spends far more on helping people rebuild after disasters than preventing problems. …research shows that a dollar spent on mitigation before a disaster strikes results in at least six dollars in savings. There are many reasons more people end up rebuilding in place than moving away. Reimbursement is relatively quick, while FEMA’s buyout programs tend to be slow and difficult to navigate.

While it’s encouraging to see a better approach, we wouldn’t need to worry about the issue if government got out of the business of subsidizing flood insurance.

Which helps to explain why the Wall Street Journal expressed disappointment last year when Republicans blew a golden opportunity to fix the program.

One disappointment you can count on is a GOP failure to fix one of the worst programs in government: taxpayer subsidized flood insurance. …The Federal Emergency Management Agency’s flood insurance program was set to expire on Nov. 30, and Congress rammed through a temporary extension to buy more time. Congress was supposed to deal with the program as part of the end-of-the-year rush. The program runs a $1.4 billion annual deficit, which comes from insurance priced too low to compensate for the risk of building homes near water. Congress last year forgave $16 billion of the program’s $24 billion debt to Treasury, not that anyone learned anything. The program then borrowed another $6 billion. …If Republicans can’t fix this example of failed government because it might upset parochial interests, they deserve some time in the political wilderness.

In other words, Bernie Sanders is better on this issue than last year’s GOP Congress.

I’ve criticized Republicans on many occasions, but this must rank as the most damning comparison.

But let’s set aside politics and partisanship.

What matters is that the federal government is operating an insanely foolish program that puts people at risk, soaks taxpayers, and destroys wealth.

Gee, maybe Reagan was right when he pointed out that government is the problem rather than the solution.

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Ronald Reagan must be turning over in his grave.

This newfound flirtation with industrial policy, mostly from nationalist conservatives, is especially noxious since you open the door to cronyism and corruption when you give politicians and bureaucrats the power to play favorites in the economy.

I’m going to cite three leading proponents of industrial policy. To be fair, none of them are proposing full-scale Soviet-style central planning.

But it is fair to say that they envision something akin to Japan’s policies in the 1980s.

Some of them even explicitly argue we should copy China’s current policies.

In a column for the New York Times, Julius Krein celebrates the fact that Marco Rubio and Alexandria Ocasio-Cortez both believe politicians should have more power over the economy.

…a few years ago, the phrase “industrial policy” was employed mainly as a term of abuse. Economists almost universally insisted that state interventions to improve competitiveness, prioritize investment in strategic sectors and structure market incentives around political goals were backward policies doomed to failure — whether applied in America, Asia or anywhere in between. …In the wake of the 2008 financial crisis, however, the Reagan-Bush-Clinton neoliberal consensus seems intellectually and politically bankrupt. …a growing number of politicians and intellectuals…are finding common ground under the banner of industrial policy. Even the typically neoliberal Financial Times editorial board recently argued in favor of industrial policy, calling on the United States to “drop concerns around state planning.” …Why now? The United States has essentially experienced two lost decades, and inequality has reached Gilded Age levels. …United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia.

There are some very sloppy assertions in the above passages.

You can certainly argue that Reagan and Clinton had similar “neoliberal” policies (i.e., classical liberal), but Bush was a statist.

Also, the Financial Times very much leans to the left. Not crazy Sanders-Corbyn leftism, but consistently in favor of a larger role for government.

Anyhow, what exactly does Mr. Krein have in mind?

More spending, more intervention, and more cronyism.

A successful American industrial policy would draw on replicable foreign models as well as take lessons from our history. Some simple first steps would be to update the Small Business Investment Company and Small Business Innovation Research programs — which played a role in catalyzing Silicon Valley decades ago — to focus more on domestic hardware businesses. …Government agencies could also step in to seed investment funds focused on strategic industries and to incentivize commercial lending to key sectors, policies that have proven successful in other countries… the United States needs to invest more in applied research… Elizabeth Warren has also proposed a government-sponsored research and licensing model for the pharmaceutical industry, which could be applied to other industries as well. …Senator Gary Peters, Democrat of Michigan, has called for the creation of a National Institute of Manufacturing, taking inspiration from the National Institutes of Health. …A successful industrial policy would aim to strengthen worker bargaining power while organizing and training a better skilled labor force. Industrial policy also involves, and even depends upon, rebuilding infrastructure.

In other words, if you like the so-called Alexandria Ocasio-Cortez’s Green New Deal and Elizabeth Warren’s corporate cronyism, you’ll love all the other ideas for additional government intervention.

Oren Cass of the Manhattan Institute also wants to give politicians more control over the private economy.

My argument rests on three claims… First, that market economies do not automatically allocate resources well across sectors. Second, that policymakers have tools that can support vital sectors that might otherwise suffer from underinvestment—I will call those tools “industrial policy.” Third, that while the policies produced by our political system will be far from ideal, efforts at sensible industrial policy can improve upon our status quo, which is itself far from ideal. …Our popular obsession with manufacturing isn’t some nostalgic anachronism. …manufacturing is unique for the complexity of its supply chains and the interaction between innovation and production. …the case for industrial policy requires recognition not only of certain sectors’ value, but also that the market will overlook the value in theory and that we are underinvesting in practice. That the free market will not solve this should be fairly self-evident… Manufacturing output is only 12% of GDP in America… Productivity growth has slowed nationwide, even flatlining in recent years. Wages have stagnated. Our trade deficit has skyrocketed.

So what are his solutions?

Like Julius Krein, he wants government intervention. Lots of it.

Fund basic research across the sciences… Fund applied research… Support private-sector R&D and commercialization with subsidies and specialized institutes… Increase infrastructure investment… Bias the tax code in favor of profits generated from the productive use of labor… Retaliate aggressively against mercantilist countries that undermine market competition… Tax foreign acquisition of U.S. assets, making U.S. goods relatively more attractive… Impose local content requirements in key supply chains like communications… Libertarians often posit an ideal world of policy non-intervention as superior to the messy reality of policy action. But that ideal does not exist—messy reality is the only reality… That’s especially the case here, because you can have free trade, or you can have free markets, but you can’t have both.

I’m not sure what’s worse, an infrastructure boondoggle or a tax on inbound investment?

More tinkering with the tax code, or more handouts for industries?

And here are excerpts from a column for the Daily Caller by Robert Atkinson.

When the idea first surfaced in the late 1970s that the United States should adopt a national industrial policy, mainstream “free market” conservatives decried it as one step away from handing the reins of the economy over to a state planning committee like the Soviet Gosplan. But now, …the idea has been getting a fresh look among some conservatives who argue that, absent an industrial strategy, America will be at a competitive disadvantage. …Conservatives’ skepticism of industrial policy perhaps stems from the idea’s origins. It started gaining currency during the Carter administration, with many traditional Democratic party interests, including labor unions and politicians in the Northeast and Midwest, arguing for a strong federal role… However, over the next decade, as economic competitors like Germany and Japan began to challenge the United States in consumer electronics, autos, and even high-tech industries like computer chips, the focus of debates about industrial policy broadened to encompass overall U.S. competitiveness. …There was a bipartisan response…that collectively amounted to a first draft of a national industrial policy… But as the economic challenge from Japan receded…, interest in industrial policies waned. …The newly dominant neoclassical economists preached that the U.S. “recipe” of free markets, property rights, and entrepreneurial spirit inoculated America against any and all economic threats.

As with Krein and Cass, Atkinson wants to copy the failed interventionist policies of other nations.

But that was then and this is now — a now where we face intense competition from China. …Increasingly leaders across the political spectrum are returning to a notion that we should put the national interest at the center of economic policies, and that free-market globalization doesn’t necessarily do that… Conservatives increasingly realize that without some kind of industrial policy the United States will fall behind China, with significant national security and economic implications. …So, what would a conservative-inspired, market-strengthening industrial policy look like? …it would acknowledge that America’s “traded sector” industries are critical to our future competitiveness… The right industrial policy will advance prosperity more than laisse-faire capitalism would. …there are a significant number of market failures around innovation, including externalities, network failures, system interdependencies, and the public-goods nature of technology platforms. …this is why only government can “pick winners.” …It should mean expanding supports for exporters by ensuring the Ex-Im Bank has adequate lending authority… this debate boils down to a fundamental choice for conservatives: small government and liberty versus stronger…government that delivers economic security

What’s a “market-strengthening industrial policy”? Is that like a “growth-stimulating tax increase”? Or a “work-ethic-enhancing welfare program”?

I realize I’m being snarky, but how else should I respond to someone who actually wants to expand the cronyist Export-Import Bank?

Let’s now look at what’s wrong with industrial policy.

In a column for Reason, Veronique de Rugy of the Mercatus Center warns that American politicians who favor industrial policy are misreading China’s economic history.

…calls from politicians on both sides of the aisle to implement industrial policy. …These policies are tired, utterly uninspiring schemes that governments around the world have tried and, invariably, failed at. …As for the notion that “other countries are doing it,” I’m curious to hear what great successes have come out of, say, China’s industrial policies. In his latest book, The State Strikes Back: The End of Economic Reform in China?, Nicholas Lardy of the Peterson Institute for International Economics shows that China’s growth since 1978 has actually been the product of market-oriented reforms, not state-owned programs. …Why should we want America to become more like China? Here’s yet another politician thinking that somehow, the same government that…botched the launch of HealthCare.gov, gave us the Solyndra scandal, and can keep neither Amtrak nor the Postal Service solvent, can effectively coordinate a strategic vision for American manufacturing. …The real problem with industrial policy, economic development strategy, central planning, or whatever you want to call these interventions is that government officials…cannot outperform the wisdom of the market at picking winners. In fact, government intervention in any sector creates distortions, misdirects investments toward politically favored companies, and hinders the ability of unsubsidized competitors to offer better alternatives. Central planning in all forms is poisonous to innovation.

As usual, Veronique is spot one.

I’ve also explained that China’s economy is being held back by statist policies.

Veronique also addressed the topic of industrial policy in a column for the New York Times,

With “Made in China 2025,” Beijing’s 2015 anticapitalist plan for an industrial policy under which the state would pick “winners,” China has taken a step back from capitalism. …China’s new industrial policy has worked one marvel — namely, scaring many American conservatives into believing that the main driver of economic growth isn’t the market but bureaucrats invested with power to control the allocation of natural and financial resources. …I thought we learned this lesson after many American intellectuals, economists and politicians were proven spectacularly wrong in predicting that the Soviet Union would become an economic rival. …government officials cannot outperform the market at picking winners. In practice it ends up picking losers or hindering the abilities of the winners to achieve their greatest potential. Central planning is antithetical to innovation, as is already visible in China. …the United States has instituted industrial policies in the past out of unwarranted fears of other countries’ industrial policies. The results have always imposed great costs on consumers and taxpayers and introduced significant economic distortions. …Conservatives…should learn about the failed United States industrial policies of the 1980s, which were responses to the Japanese government’s attempt to dominate key consumer electronics technologies. These efforts worked neither in Japan nor in the United States. The past has taught us that industrial policies fail often because they favor existing industries that are well connected politically at the expense of would-be entrepreneurs… We shouldn’t allow fear-mongering to hobble America’s free enterprise system.

Amen.

My modest contribution to this discussion is to share one of my experiences as a relative newcomer to D.C. in the late 1980s and early 1990s.

I had to fight all sorts of people who said that Japan was eating our lunch and that the United States needed industrial policy.

I kept pointing out that Japan deserved some praise for its post-WWII shift to markets, but that the country’s economy was being undermined by corporatism, intervention, and industrial policy.

At the time, I remember being mocked for my supposed naivete. But the past 30 years have proven me right.

Now it’s deja vu all over again, as Yogi Berra might say.

Except now China is the bogeyman. Which doesn’t make much sense since China lags behind the United States far more than Japan lagged the U.S. in the 1980s (per-capita output in China, at best, in only one-fourth of American levels).

And China will never catch the U.S. if it relies on industrial policy instead of pro-market reform.

So why should American policy makers copy China’s mistakes?

P.S. There is a separate issue involving national security, where there may be legitimate reasons to deny China access to high-end technology or to make sure American defense firms don’t have to rely on China for inputs. But that’s not an argument for industrial policy.

P.P.S. There is a separate issue involving trade, where there may be legitimate reasons to pressure China so that it competes fairly and behaves honorably. But that’s not an argument for industrial policy.

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When I wrote last month about the Green New Deal, I warned that it was cronyism on steroids.

Simply stated, the proposal gives politicians massive new powers to intervene and this would be a recipe for staggering levels of Solyndra-style corruption.

Well, the World Bank has some new scholarly research that echoes my concerns. Two economists investigated the relationship with the regulatory burden and corruption.

Empirical studies such as Meon and Sekkat (2005) and De Rosa et al. (2010) show that corruption is more damaging for economic performance at higher levels of regulation or lower levels of governance quality. …Building on the above literature, in this paper, we use firm-level survey data on 39,732 firms in 111 countries collected by the World Bank’s Enterprise Surveys between 2009 and 2017 to test the hypothesis that corruption impedes firm productivity more at higher levels of regulation. …estimate the model using sample weighted OLS (Ordinary Least Squares) regression analysis.

And what did they discover?

We find that the negative relationship between corruption and productivity is amplified at high levels of regulation. In fact, at low levels of regulation, the relationship between corruption and productivity is insignificant. …we find that a 1 percent increase in bribes that firms pay to get things done, expressed as the share of annual sales, is significantly associated with about a 0.9 percent decrease in productivity of firms at the 75th percentile value of regulation (high regulation). In contrast, at the 25th percentile value of regulation (low regulation), the corresponding change is very small and statistically insignificant, though it is still negative. …after we control for investment, skills and raw materials, the coefficients of the interaction term between corruption and regulation became much larger… This provides support for the hypothesis that corruption is more damaging for productivity at higher levels of regulation.

Lord Acton famously wrote that “power corrupts, and absolute power corrupts absolutely.”

Based on the results from the World Bank study, we can say “regulation corrupts, and added regulation corrupts additionally.”

Not very poetic, but definitely accurate.

Figure 4 from the study shows this relationship.

Seems like we need separation of business and state, not just separation of church and state.

This gives me a good excuse to recycle this video I narrated more than 10 years ago.

P.S. Five years ago, I cited a World Bank study showing that tax complexity facilitates corruption. Which means a simple and fair flat tax isn’t merely a way of achieving more prosperity, it’s also a way of draining the swamp.

The moral of the story – whether we’re looking at red tape, taxes, spending, trade, or any other issue – is that smaller government is the most effective way of reducing sleaze and corruption.

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Having been inspired by Ronald Reagan’s libertarian-ish message (and track record), I’ve always been suspicious of alternative forms of conservatism for the simple reason that they always seem to mean bigger government.

To be fair, proponents of all these approaches always paid homage to the role of markets, so we’re not talking about Bernie Sanders-type nuttiness.

But I don’t want to travel in the wrong direction, even if only at 10 miles-per-hour rather than 90 miles-per-hour.

Now there’s a new alternative to Reaganism called “national conservatism.” It’s loosely defined, as you can see by reports from both left-leaning outlets (New York, New Republic) and right-leaning outlets (Townhall, Daily Signal).

There are parts of this new movement that are appealing, at least if I’m reading them correctly. Proponents are appropriately skeptical of global governance, though maybe not for the reasons that arouse my antipathy. But the enemy of my enemy is my friend in this battle.

They also don’t seem very fond of nation building, which also pleases me. And I also am somewhat sympathetic to their arguments about national unity – assuming it’s based on the proper definition of patriotism.

But their economic views, at best, are worrisome. And, as George Will opines, they’re sometimes awful.

…“national conservatives”…advocate unprecedented expansion of government to purge America of excessive respect for market forces and to affirm robust confidence in government as a social engineer allocating wealth and opportunity. …The Manhattan Institute’s Oren Cass advocates “industrial policy” — what other socialists call “economic planning”… He especially means subsidizing manufacturing..he admits that as government, i.e., politics, permeates the economy on manufacturing’s behalf, “regulatory capture,” other forms of corruption and “market distortions will emerge.” Emerge? Using government to create market distortions is national conservatism’s agenda. …Their agenda is much more ambitious than President Richard M. Nixon’s 1971 imposition of wage and price controls, which were temporary fiascos. Their agenda is even more ambitious than the New Deal’s cartelization of industries, which had the temporary (and unachieved) purpose of curing unemployment. What national conservatives propose is government fine-tuning the economy’s composition and making sure resources are “well” distributed, as the government (i.e., the political class) decides, forever. …Although the national conservatives’ anti-capitalism purports to be populist, it would further empower the administrative state’s faux aristocracy of administrators who would decide which communities and economic sectors should receive “well”-allocated resources. Furthermore, national conservatism is paternalistic populism. This might seem oxymoronic, but so did “Elizabeth Warren conservatives” until national conservatives emerged as such.

Since Nixon and FDR were two of America’s worst presidents, Will is drawing a very harsh comparison.

To give the other side, here are excerpts from a New York Times column by Oren Cass.

…a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy. Genuine prosperity depends upon people working as productive contributors to their society, through which they can achieve self-sufficiency, support their families, participate in their communities, and raise children prepared to do the same.

None of this sounds bad.

Heck, it sounds good. I’m in favor of strong families and strong communities.

But what does this rhetoric mean? Here’s where I start to worry.

Crucially, while a labor market left alone will seek an efficient equilibrium, economic theory never promises that the equilibrium will be a socially desirable, inclusive one. A genuine conservatism values markets as powerful mechanisms that foster choice, promote competition and deliver growth, but always in service to the larger end of a cohesive society in which people can thrive. …In some cases, …conservatives will head in new directions or even reverse course. …an insistence that workers throughout the labor market share in productivity growth……longstanding hostility toward organized labor will give way to an emphasis on reform. …new forms of organizing through which workers can support one another, engage with management and contribute to civil society should be a conservative priority.

And my worry turns to unfettered angst when I read some of the specific ideas that Cass mentions.

…a wage subsidy delivered directly into each low-wage paycheck…skepticism of unfettered international trade…legislation that would require the Federal Reserve to close the trade deficit by taxing foreign purchases of American assets.

To put it mildly, more redistribution, more protectionism, and taxes on investment is not a Reaganite agenda.

I’ll close with a political observation. Defenders of national conservatism have told me that the Reagan message is old and stale. It supposedly doesn’t apply to new problems in a new era.

Yet non-conservative Republicans lost twice to Obama while a hypothetical poll in 2013 showed Reagan would trounce Obama.

Some national conservatives point to Trump’s victory as an alternative, but I think that had more to do with Hillary Clinton. In any event, I very much doubt Trumpism is a long-term model for political success. Or economic success.

Maybe the real lesson is that good policy is good politics?

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