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Posts Tagged ‘Government intervention’

I’ve written nearly 6,100 columns for International Liberty, but only one of those columns has focused on Lebanon.

That was back in 2018, when I explained how the nation could have avoided a fiscal crisis with a spending cap.

Now it’s time to once again write about Lebanon, though maybe today’s column is actually more about media bias.

That’s because this story in the Washington Post, authored by Sarah Dadouch, shows how journalists have far too little understanding of economics.

Lebanon’s worsening financial meltdown has been accompanied by a dire shortage of imported fuel. Roads in cities like Beirut and Tripoli are now lined with cars queuing for hours to get their allotted amount of gasoline, at most a third of a tank. …smugglers have discovered there’s good money to be made by buying gasoline in Lebanon at the heavily subsidized price and then selling it on the black market in Syria, which has a debilitating fuel crisis of its own. …Many Lebanese politicians blame the gasoline crisis partly on smuggling… In April, Lebanon’s caretaker energy minister said the disparity in gasoline prices between Lebanon and Syria means smugglers can make huge profits next door. …The Lebanese army, which has received more than $2.5 billion in aid from the United States since 2006, has made concerted efforts to curb the illicit commerce.

The smugglers aren’t the cause of Lebanon’s energy crisis. They’re merely a symptom of the real problem, which is that the country’s politicians buy votes from motorists by subsidizing gasoline.

Get rid of those subsidies and smuggling will disappear overnight.

The moral of the story is that bad things happen when politicians interfere with prices. We have forty centuries of evidence showing price controls don’t work. When politicians try to curry favor by rigging prices, bad things happen.

And the second moral of the story is that journalists don’t understand the first moral of the story (not that I’m surprised, given the shaky track record of the Washington Post).

P.S. I’m flabbergasted that American taxpayers have sent $2.5 billion of foreign aid to Lebanon’s army, which gives the government fiscal leeway to pursue bad policies such as gasoline subsidies!

P.P.S. While gasoline subsidies are an insanely foolish policy for a nation enduring a fiscal crisis, fiscal policy isn’t even Lebanon’s biggest problem. As noted in this video, the country does even worse on trade policy, regulatory policy, and rule of law.

P.P.P.S. The post-war German economic miracle was triggered by the removal of price controls.

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Programs such as Medicare and Medicaid, along with the tax code’s healthcare exclusion, have created a system where consumers directly pay for only about 10 percent of the care they receive.

We think it’s normal and appropriate for either the government or an insurance company to foot the bill.

Yet this system of “third-party payer” explains why the health care system in the United States is inefficient and expensive.

Is it possible, though, to put the toothpaste back in the tube? Can we unwind the bad government policies that have undermined market forces?

There are certainly big-picture reforms that would be helpful. Genuine entitlement reform could address the problems with Medicare and Medicaid, and fundamental tax reform could get rid of the healthcare exclusion.

But progress is possible even without major policy change.

Reason interviewed a doctor, Lee Gross, who decided to set up a practice based on “direct primary care,” which means no involvement from government or insurance companies. Just health consumers and health providers directly buying and selling.

Here’s some of what he said about this market-based approach.

When I was in the fee-for-service system, I felt like I was playing a game of Whac-A-Mole with Medicare. …Eventually we just said, “No more.” …the epiphany was “Why are we inserting so many people at the primary care level between the doctor and the patient? Why are we insuring primary care?” The more people that you insert between the doctor and patient, the more expensive it gets, the more cumbersome it gets…we created one of the first direct primary care practices in the country. …essentially it’s a membership-based primary care program. …Once a patient is a member of our practice, anything that we can do within the four walls of our office is included at no additional charge. …Insurance is good for the big stuff. It’s not good for the little stuff. It’s too complicated. What we do in direct primary care is we make the predictable things affordable for everybody. We take the stuff that you’re going to need on an everyday basis and we put affordable price tags on it, and we say you don’t need your insurance for this. In fact, the insurance makes it more expensive. …You need your homeowners insurance if your house burns down. You don’t need it to mow the lawn.

The good news is that Dr. Gross’ practice is part of a growing movement.

Direct primary care is absolutely a growing movement. …There’s well over 1,500 practices around the country… There are some regulatory barriers that get in the way of expanding this model. …if we’re looking for the ideal health care system, we want to see three pillars. We want to see lower cost, better quality, and more choices. You cannot have all three of those in a government-run system. You can only have those in a free market capitalist system.

Indeed, I’ve shared previous examples of this phenomenon from Maine and North Carolina.

And it even works for surgery, as you can see from this must-watch video from Reason.

Let’s now circle back to some analysis of what’s wrong with the current system.

John Stossel explained a few years ago how government-encouraged over-insurance causes problems.

Someone else paying changes our behavior. We don’t shop around. We don’t ask, “Do I really need that test?” “Is there a place where it’s cheaper?” Hospitals and doctors don’t try very hard to do things cheaply. Imagine if you had “grocery insurance.” You’d buy expensive foods; supermarkets would never have sales. Everyone would spend more. Insurance coverage—third-party payment—is revered by the media and socialists (redundant?) but is a terrible way to pay for things. Today, 7 in 8 health care dollars are paid by Medicare, Medicaid or private insurance companies. Because there’s no real health care market, costs rose 467 percent over the last three decades. By contrast, prices fell in the few medical areas not covered by insurance, like plastic surgery and LASIK eye care. Patients shop around, forcing health providers to compete.

The final couple of sentences are extremely important.

As illustrated by this data from Mark Perry, there are a few parts of the health care system where there’s little or no third-party payer.

And what do we find? Prices go down rather than up.

For all intents and purposes, the goal should be to make health insurance more like homeowners insurance or auto insurance.

Speaking of the latter, David Graham compared market-driven auto insurance and government-subsidized health insurance.

There are…similarities between health care and car ownership… We can go for many years with predictable spending on both cars and medical care until — out of the blue — something terrible happens. For that reason, we value insurance for both. But there’s a key difference… Car insurance, while not a trivial expense, is a relatively small share of the total cost of owning a car. According to the AAA, the average premium was $1,023, just under 12 percent of the total cost of ownership. Even excluding depreciation, insurance is just one-fifth of the total cost. In other words, we do not expect auto insurers to pay claims for most of the cost of operating and maintaining a car. Health care is completely the opposite. …Insurance adds administrative costs and bureaucratic interference. …Left to our own devices, we would never buy coverage for every single medical expense.

The moral of the story is that government intervention has made America’s health system a mess.

Unsurprisingly, many politicians say the answer it to have even more government (which is how we got Obamacare).

P.S. In less than eight minutes, I explain the economics of third-party payer in this speech.

P.P.S. Government-created third-party payer also has led to higher costs and widespread inefficiency in higher education.

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Most people say the key feature of capitalism is competition. Hard to argue with that characterization, but I would go one step further and say that it is one of the consequences of competition – “creative destruction” – that best captures why free markets make it possible for entrepreneurs to deliver mass prosperity.

But what’s the key feature of government? Is it waste? Dependency? Corruption?

Those are all good answers, but perhaps “unintended consequences” should be first on the list. Courtesy of Reason, here are three examples.

I’ve previously written about both ethanol subsidies and so-called employment protection legislation, two of the three examples were already familiar to me.

I wasn’t aware, however, that businesses resorted to big concrete edifices to get around Vermont’s billboard ban (though I have read, in a classic case of baptists and bootleggers, that big companies such as hotel chains sometimes try to thwart competition from small businesses by teaming up with environmentalists to ban billboards).

In the world of fiscal policy, there are many example of unintended consequences.

I’ll conclude by asking an open question: Can anyone give an example of a positive unintended consequence of government?

This isn’t a joke query. I assume there are a few examples, even if I can’t think of any of them.

P.S. Here’s a humorous example of an unintended consequence.

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When I did my final assessment of Trump’s economic record, I gave him credit for cutting red tape in some areas, but also noted that he increased government intervention in other areas.

…there were some very positive moves on regulation, but they were partly offset by areas where Trump increased intervention (coal subsidies, property rights, Fannie/Freddie, and international tax rules, for instance).

I did give him credit, on net, for moving regulatory policy in the right direction. In other words, the good things he did regarding red tape outweighed the bad things.

But that’s a judgement call, in part because it’s rather difficult to measure the myriad forms of regulation from dozens of different bureaucracies, but also because there’s no agreement on how to measure success (is it a victory, for instance, to reduce the rate of increase in red tape?).

To see how this is challenging, let’s see what various experts wrote about Trump’s regulatory track record.

A new study, authored by Professors Cary Coglianese, Natasha Sarin, and Stuart Shapiro, pours cold water on Trump’s claim that he successfully reduced economic intervention.

Both the extent and impact of the Administration’s efforts to eliminate regulation are considerably less substantial than President Trump and his supporters have claimed. …We recognize that the Trump Administration has repealed or modified a series of agency regulations adopted under the Obama Administration, and even that the Administration has adopted a smaller number of new regulations deemed significant than other recent administrations. Yet overall the reality of regulatory elimination is rather unremarkable… The Administration has accomplished markedly little compared to what it has claimed. … in measuring levels of regulatory activity,researchers rely on a variety of sources of data, including overall pages in the Federal Register and the CFR,the incidence of new rules published in the Federal Register,and the number of actions listed in the semi-annual regulatory agenda. …The Code of Federal Regulations (CFR) is the authoritative source of all existing regulatory requirements on the books. …Growth continued in the Obama Administration to 185,053 pages in 2016. If President Trump’s claim to have eliminated 25,000 pages were correct, we would expect to see no more than160,000 pages in the CFR by now. But, quite to the contrary, the count as of the end of 2019 was185,984 pages—actually a somewhat greater number of pages, not fewer.

Here’s Figure 1 from the paper, which does confirm that there was not a 25,000-page reduction in red tape.

Though if you focus on the last couple of years, it is obvious that the rate of increase slowed significantly. Depending on one’s perspective, that is either a victory or a smaller defeat.

The authors do acknowledge that the number of pages isn’t even the right way to measure regulatory burden.

So they then examine the claim that the Trump Administration had more initiatives to reduce rather than increase red tape.

A count of pages in the CFR is only an indirect proxy for regulatory obligations. …Another way to look at what the Trump Administration has done by way of deregulation would be to look not at pages but at the number of actual rules. …Although the President and his supporters have claimed various levels of deregulatory activity—from 7 to 22 rules removed for every new rule added—these claims are false or misleading. …The lists overcount deregulatory actions by including withdrawals of proposals that were never finalized, delays in effective dates which do not eliminate regulations, non-regulatory actions such as the repeal of guidance documents, and even proposed deregulatory actions rather than completed ones. In addition, when comparing deregulatory actions to regulatory ones, the White House only counts new regulations designated as “significant,” while they count deregulatory actions of any magnitude or level of significance… rather than there being more deregulatory actions than other actions, as the Trump Administration’s claims have implied, there was, in fact, just the opposite. Overall about three completed actions in the regulatory agenda appear for every action designated as deregulatory.

The bottom line, based on their assessment, is that Trump didn’t accomplish much, particularly when compared to what happened under Carter and Clinton.

…in terms of“dramatic regulatory relief,” nothing the Trump Administration has done compares to the deregulation of the airlines, rail, and truck transportation that was executed by the Carter Administration in the late 1970s. Prior to that time, these major sectors of the economy—along with others, such as natural gas and telecommunications—were subject to regulations of prices and outputs—an inefficient form of regulation that advantaged incumbent firms but at the expense of consumers. President Carter championed major deregulatory initiatives that loosened the government restrictions on the air, rail, and transport sectors.Retrospective analysis indicates that the deregulation of these industries resulted in $70 billion in annual consumer benefits. …the evidence does not support the Trump Administration’s claims to have engaged in a dramatic scaling back of government regulation. More pages were removed from the CFR in the Clinton Administration than the Trump Administration. A more substantial unleashing of market forces occurred from the deregulatory changes made in the Carter Administration. And the Trump Administration has done at least as much regulating as it has deregulating.

For what it’s worth, Clinton was much more market oriented than most people realize. And Carter, while misguided in some areas, did a very good job on regulation.

So it’s not necessarily a knock on Trump to say he fell short of those two presidents.

Now let’s look at a pro-Trump perspective.

Professor Casey Mulligan of the University of Chicago early last year offered an upbeat assessment of the former president’s performance in tackling regulations.

In just three years the administration has reversed hundreds of regulations, many of which drone on for hundreds of pages. …Many of the regulations reversed had been written and implemented at the behest of special interests, including large banks, trial lawyers, major health insurance companies, big tech companies, labor unions, and foreign drug manufacturers. …the Council of Economic Advisers (CEA)…dedicated a great deal of manpower preparing a comprehensive and rigorous assessment of deregulation since 2017. That report, released in June, concluded that the past three years of deregulation is comparable to, and probably exceeds, any deregulatory episode in modern U.S. history. …the CEA report estimates that over the next five to 10 years, the deregulatory efforts of the Trump administration will increase annual real incomes in the United States by $3,100 per household.

I wrote about the above-mentioned report from the CEA in the summer of 2019. The CEA’s goal was to present Trump’s policies favorably, so I certainly don’t object to some skepticism from outsiders, but I also noted that, “the underlying assumptions aren’t overly aggressive” and “even modest improvements in growth lead to meaningful income gains over time.”

In a column for the Hill, James Broughel of the Mercatus Center analyzed Trump’s track record and concluded that some good things happened.

…the president issued Executive Order 13,771 soon after taking office. Its “2 for 1” requirement received the most attention: Two regulations must be identified for elimination each time a new one is put forward. However, perhaps more important is the “regulatory budget” it set up, which essentially set a cap on new regulatory costs executive branch agencies can impose. …A look at the data suggests the cap is largely working. On Jan. 20, 2017 — Trump’s inauguration day — there were 1,079,601 regulatory restrictions on the books. By Dec. 6, 2019, that number stood at 1,077,822. While the code has not declined substantially by this measure — and the administration should acknowledge that aggregate cuts to-date have been modest — it’s rare to see a code fail to grow across an entire presidential term.

Incidentally, the Mercatus measure of “regulatory restrictions” almost certainly is better than other measures of red tape, so it’s disappointing that Coglianese, Sarin, and Shapiro failed to include it in their analysis.

But if we’re simply looking at the volume of “significant rules,” here’s a tweet from James Pethokoukis showing that the increase in red tape dramatically slowed once Trump took over.

Philip Wallach of the R Street Institute examined Trump’s track record on red tape in an article for National Review in late 2019 and he thought the glass was half empty rather than half full.

Regulation became one area where conservatives wary of Trump allowed themselves high hopes. Trump’s experiences as a developer left him with a bone-deep skepticism of regulations. …There have been some real bright spots for deregulators. Many of the Obama administration’s aggressive and legally dubious environmental rules have been stalled or rolled back, including the Waters of the United States rule, Corporate Average Fuel Economy standards for tailpipe emissions, and the Clean Power Plan, which regulated greenhouse-gas emissions from existing power plants. The Endangered Species Act will be interpreted so as to make it less burdensome. Promises to scrap Obamacare may have gone unfulfilled, but the administration has quietly and constructively made the program more flexible for states and individuals. …the Trump administration…to an unprecedented degree…has…issu[ed] far fewer new regulations than any of its predecessors.

As you can see, it’s important to define success. Is it a victory to have “far fewer new regulations”?

Or, as you can see in the following excerpt from Wallach’s article, is it a victory to cut red tape by less than Obama increased it?

These triumphs notwithstanding, three years in, hopes of a thoroughgoing overhaul have been dashed. …hitting the pause button, however unusual, does not a revolution make. The hoped-for transformation of the administrative state is nowhere to be found. …In 2018, the administration sought to show its relative merit by noting that, through its first two years, the Obama administration had imposed $245 billion in regulatory costs. The Trump administration’s negative $33 billion in costs imposed at that point certainly was a lot less than $245 billion. But the comparison cuts harder in the other direction: The administration is admitting that it is coming nowhere close to reversing the costs imposed even by the Obama administration — let alone the decades of regulatory burdens built up previously. …the administration’s math allows it to take credit for deregulatory policies as soon as they are promulgated, without paying any attention to whether they are carried through. …the administrative state has been more discomfited than deconstructed by the Trump administration.

Last but not least, former Obama official Cass Sunstein opined for Bloomberg back in 2018 that Trump’s main achievement was to slow the tide of new regulations.

Is President Donald Trump dismantling the regulatory state? Not close. …let’s take a broader perspective. Under George W. Bush, the Office of Information and Regulatory Affairs approved about 2,500 final regulations. Under Barack Obama, it approved about 2,100 final regulations. …By comparison, the Trump administration has repealed … dozens of finalized regulations. …about 2 percent of the number of regulations finalized over the past 16 years. …Much more fundamentally, he’s substantially slowed the flow of new ones. …From Bush’s inauguration to Sept. 1, 2002, the Office of Information and Regulatory Affairs approved about 400 proposed regulations and about 500 final regulations. From Obama’s inauguration to Sept. 1, 2010, the Office of Information and Regulatory Affairs approved about 270 proposed regulations and about 470 final regulations. …the Bush and Obama administrations look pretty similar… The Trump administration is a big outlier. From Trump’s inauguration to the present, the Office of Information and Regulatory Affairs approved about 170 proposed regulations and about 160 final regulations. That’s a major reduction.

So what’s my two cents?

The obvious conclusion is that the Trump Administration did some good things to ease the nation’s regulatory burden, but there was no major paradigm shift.

The United States had a lot of red tape when Trump took office and it had a lot of red tape when Trump left office, though he definitely slowed the rate of increase.

But a slower rate of increase is still not good news, as illustrated by the fact that the Fraser Institute calculates that America’s score on red tape has declined slightly since 2016.

Indeed, the overall score for economic liberty in the United States has declined slightly since Obama left office, which is evidence for my argument that Trump delivered an incoherent mix of good policies (taxes, for instance) and bad policies (trade, for instance).

P.S. Trump’s Jekyll-Hyde record on economic policy is one of the reasons why I prefer Reaganism over Trumpism. The establishment doesn’t like either of those options, but I very much prefer the one that unambiguously reduces the size and scope of government.

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While I freely self-identify as a libertarian, I don’t think of myself as a philosophical ideologue.

Instead, I’m someone who likes digging into data to determine the impact of government policy. And because I’ve repeatedly noticed that more government almost always leads to worse outcomes, I’ve become a practical ideologue.

In other words, when looking at at an issue, I now have a default assumption that government is going to be the problem, not the solution.

I think more people will share my viewpoint if they peruse this chart from Mark Perry.

It shows changes in prices for selected goods and services over the past 21 years, and the inescapable conclusion (as I noted when writing about the 2014 version of his chart) is that we get higher relative prices in sectors where there’s the most government intervention.

Especially healthcare and higher education.

By contrast, we see falling relative prices (and sometimes falling absolute prices!) in sectors where there is little or no government intervention.

Here’s some of Mark’s description of what we can learn from his chart.

I’ve updated the chart above with price changes through the end of last year. During the most recent 21-year period from January 2000 to December 2020, the CPI for All Items increased by 54.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly wages. …Various observations that have been made about the huge divergence in price patterns over the last several decades… The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices.

By the way, I can’t resist also calling attention to Mark’s data on what’s happened over time to prices for various health care services and procedures.

We find that prices have skyrocketed in areas of the healthcare sector where government plays a big role, especially hospital care.

By contrast, prices have been steady (or even falling!) in areas of the healthcare sector where competitive markets are allowed to operate, most notably for cosmetic procedures.

It’s almost as if it makes sense to have a default assumption that government is the problem rather than the solution.

P.S. While the data in Mark’s chart tell a depressing story about the harmful effect of government intervention, he shares one bit of good news in his article.

The annual increase in college tuition and fees of only 1.4% last year was the smallest annual increase in the history of the CPI for college tuition and fees going back to 1978, and the only annual increase ever below 2%. That increase is far below the average annual increase in college tuition of nearly 7% over the last 42 years. So perhaps the “higher education bubble” is finally starting to show signs of deflating?

I hope he’s right, but worry he’s wrong.

P.P.S. Sadly (but predictably), some people seem to think government-caused price increases are a reason to support more government intervention.

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Assuming they behave ethically and earn money honestly, I applaud big companies and their wealthy owners.

That’s why I recently defended Jeff Bezos’ large fortune. The owner of Amazon mostly (but not entirely) became rich by providing value to the rest of us.

Today, though, I’m very disappointed in Bezos and Amazon. Why? Because the company wants to use the coercive power of government to screw over its competitors in the small business community.

Here’s a look at the company’s full-page advertisement in support of a higher minimum wage.

As a very rich company that already relies on a high degree of automation, it easily can afford to pay $15 per hour and above to every employee.

Indeed, it made a very showy decision back in 2018 to have a company-wide floor on compensation. Which is their choice.

But it’s utterly despicable to then climb in bed with politicians and urge a costly mandate on small-business competitors.

And it’s utterly callous for the company to take such a step when it will means unemployment for hundreds of thousands – if not millions – of workers with marginal skills.

The company is behaving just as badly as the unions that push higher minimum wages in order to push competing workers out of the market.

P.S. Don’t forget that many state governments already screwed over small businesses by mandating their closure while not imposing the same pandemic-related restrictions on Amazon and big box stores.

P.P.S. It is possible that Amazon is also motivated by a desire to appease the Biden Administration and the Democratic-controlled Congress. In other words, the company openly endorses statist policies such as the higher minimum wage in hopes that it won’t be targeted with other actions (antitrust, wealth tax, etc). Or maybe Amazon has a deal to support the higher minimum wage in exchange for the Biden Administration opposing the European Union’s tax raid on American tech companies. But those excuses don’t justify screwing over small businesses and low-skill workers.

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Every so often, I highlight tweets that deserve attention because they say something important, usually in a clever and succinct fashion.

Today, I’m highlighting what I consider to be the year’s best tweet.

The tweet is from Matthew Lesh of the Adam Smith Institute in London and it shows the big difference between private sector results and government incompetence.

Some readers may wonder if he is being unfair? Is the tweet merely libertarian-style grousing?

Well, consider this recent story from the Washington Post, which details how government incompetence at the Centers for Disease Control (CDC) greatly delayed testing capacity.

On Jan. 13, the World Health Organization had made public a recipe for how to configure such a test, and several countries wasted no time getting started: Within hours, scientists in Thailand used the instructions to deploy a new test. The CDC would not roll out one that worked for 46 more days. …The agency squandered weeks as it pursued a test design far more complicated than the WHO version and as its scientists wrestled with failures… The CDC’s response to what became the nation’s deadliest pandemic in a century marked a low point in its 74-year history. …Without tests to identify the early cases, health authorities nationwide were unable to isolate the infected and trace the rapid spread among their close contacts. …120 public health labs were without a government-approved test of their own and, with few exceptions, depended wholly on getting the CDC’s kits. …companies had no incentive to navigate regulatory hurdles and mass-produce kits.

The above story describes how the CDC screwed up at the start of the pandemic.

In her December 27 column for the Washington Post, Megan McArdle highlights a new example of CDC incompetence.

…the now-infamous November meeting of the CDC’s Advisory Committee on Immunization Practices…unanimously agreed that essential workers should get vaccinated ahead of the elderly, even though they’d been told this would mean up to 6 percent more deaths. This decision was supported in part by noting that America’s essential workers are more racially diverse than its senior citizens. …the discussion of whether to prioritize essential workers was anything but robust. …not one of those 14 intelligent and dedicated health professionals suggested adopting the plan that kills the fewest people. …for the past nine months, public health experts have insisted that minimizing deaths should override other concerns, even quite important ones. So how, in this case, did equity conquer death?

Let’s close with some excerpts from Aaron Sibarium’s article on the same issue for the Washington Free Beacon.

The committee openly acknowledged that its initial plan would result in more deaths than “vaccinating older adults first.” But, the panel said, the plan would reduce racial disparities—something they deemed more important than saving lives… The result was an explicitly race-conscious plan that would have prioritized shrinking the case gap between races over saving the most lives. …All of this—the exclusions, the contradictions, the moral redundancies—helped disguise the agenda that it justified, giving unscientific value judgments an air of scientific assuredness.

The really amazing aspect of this story is that there almost surely would be more minority deaths if this this approach was implemented.

But the “woke” bureaucrats though that would have been okay since there would have been an even-greater increase in white deaths.

This is healthcare version of their warped view that it’s okay to support policies that reduce income for poor people so long as the rich incur even greater losses.

Anyhow, I guess we should “congratulate” the CDC for showing it can compete with the WHO in the contest to see which bureaucracy had the worst response to the coronavirus (we already had plenty of evidence that the FDA is incompetent).

We can add this column to my series (here, here, here, and here) on how government blundering magnified the coronavirus pandemic.

P.S. If I had the flair for self-promotion that you often find in D.C., I would have been tempted to claim that my tweet from earlier today deserves some sort of recognition.

But I don’t need attention and affirmation. I simply want people to understand that it’s reprehensible that we have cossetted international bureaucrats (who get lavish, tax-free salaries!) pushing sloppy and ideological nonsense that will make the world less prosperous.

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When I write an everything-you-need-to-know column, I’m inevitably guilty of hyperbole.

All that I’m really doing is highlighting a very compelling example of how politicians make a mess of just about anything they touch.

That’s even true in the rare cases when they’re trying to enact policies I prefer.

The crux of the problem is that politicians like having some level of power and control over various sectors of the economy, for the simple public choice-driven reason that they can then extort bribes, campaign cash, and other goodies.

Which is good news for donors, crooks, and cronies, as P.J. O’Rourke wisely noted.

But it’s bad news for those of us who don’t like sleaze. Yet sleaze is almost inevitable when politicians have power to interfere with private market transactions.

Check out these excerpts from a Politico report.

In the past decade, 15 states have legalized a regulated marijuana market for adults over 21, and another 17 have legalized medical marijuana. But in their rush to limit the numbers of licensed vendors and give local municipalities control of where to locate dispensaries, they created something else: A market for local corruption. Almost all the states that legalized pot either require the approval of local officials – as in Massachusetts — or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures – the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. …They have also created a culture in which would-be cannabis entrepreneurs feel obliged to make large campaign contributions or hire politically connected lobbyists. …It’s not just local officials. Allegations of corruption have reached the state level in numerous marijuana programs, especially ones in which a small group of commissioners are charged with dispensing limited numbers of licenses.

Needless to say, what’s happening in the marijuana industry happens wherever and whenever politicians have power.

“All government contracting and licensing is subject to these kinds of forces,” said Douglas Berman, a law professor at Ohio State University who authors a blog on marijuana policy. …“There’s a lot of deal-making between businesses and localities that creates the environment of everyone working their way towards getting a piece of the action,” Berman said. Whether it’s city or county officials that need to be appeased, local control is “just another opportunity for another set of hands to be outstretched.”

The report concludes by noting that corruption can be avoided very simply. Just make sure politicians and other people in government have no power or authority.

States that have largely avoided corruption controversies either do not have license caps — like Colorado or Oklahoma — or dole out a limited number of licenses through a lottery rather than scoring the applicants by merit — like Arizona. Many entrepreneurs, particularly those who lost out on license applications, believe the government shouldn’t be in the business of picking winners and losers and should just let the free market do its job.

Amen.

I’ll conclude by noting that politicians are doing the right thing in the worst way.

I want to end the War on Drugs because it is a costly failure. It’s not that I think drug use is a good idea. But I recognize that the social harm of prohibition is greater than the social harm of legalization.

And, as a libertarian, I believe people should be free to make their own decisions (consistent with the libertarian non-aggression principle, of course), even if I happen to disapprove.

Sadly, politicians are not legalizing pot for libertarian reasons.

Instead, they see it as a way of having a new product to tax (and they’re botching that). And, as illustrated by today’s story, they see it as a way of lining their own pockets.

I’m almost tempted to say we’d be better off if marijuana was criminalized so it could be sold on the black market instead.

But the real moral of the story is that government power is a recipe corruption.

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Regulatory policy is one of the five ingredients in the recipe for growth and prosperity.

Ideally, there should be a minimal amount of red tape, and it should be governed by sensible cost-benefit analysis (i.e., so it deals with genuine externalities such as pollution).

Unfortunately, politicians rarely favor this light-touch approach, in part because of unseemly “public choice” incentives and in part because they focus only on the benefit side of the cost-benefit equation.

But the cost is very real.

And that means that there are substantial benefits when governments reduce the regulatory burden.

Let’s look at some research published by Italy’s central bank. Sauro Mocetti, Emanuela Ciapanna, and Alessandro Notarpietro investigated the impact of liberalization last decade. Here’s what they looked at.

…the importance of structural reforms, aimed at promoting sustainable and balanced growth, has been at the center of the economic debate, in Italy… Structural reforms are measures designed for modifying the very structure of an economy; they typically act on the supply side,i.e. by removing obstacles to an efficient (and equitable) production of goods and services, and by increasing productivity, so as to improve a country’s capacity to increase its growth potential… The aim of this paper is to assess the macroeconomic impact of three major structural reforms carried out in Italy over the last decade. They include (i)liberalization of services, (ii) incentives to “business innovation” (included in the so-called “Industry 4.0” Plan) and (iii) several measures in the civil justice system aimed at increasing the courts efficiency.

And here are their results.

Our results indicate that the three reforms, introduced in different years and with different timing, starting in 2011 and up to 2017, have already begun to produce their effects on the main macroeconomic variables and on Italy’s potential output. In particular, and taking into account the uncertainty surrounding our micro-econometric estimates, by 2019 GDP was between 3 and 6% higher than it would otherwise have been in the absence of these reforms, with the largest contribution being attributable to the liberalizations in the service sector. A further increase of about 2 percentage points would be reached in the next decade, due to the unfolding of the effects of all the reforms considered here. Therefore, the long-run increase in Italy’s potential output would lie in between 4% and 8%. We also detect non-negligible effects on the labor market: employment would increase in the long term by about 0.4%, while the unemployment rate would be reduced by about 0.3 percentage points.

More output and more jobs. Hard to argue with that outcome.

Here are some charts from the study. Figure 7 shows the impact on some macroeconomic aggregates.

And Figure 8 shows the estimated improvement in the labor market.

These results are good news, but Italy still has a long way to go. It’s only ranked #51 according to Economic Freedom of the World, and it’s score for regulation has only improved by a slight margin over the past decade.

P.S. I shared some research earlier this year about the positive impact of another type of deregulation in Italy.

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Even though I agree with the “nanny state” crowd on a few issues (sugary soda and cigarettes are not healthy, for instance), I oppose their efforts to impose their preferences using government coercion.

Especially when their initiatives lower our quality of life.

Call me crazy, but I don’t like having to flush a toilet more than once.

And I really don’t like modern gas cans that spill gas all over the place as I’m trying to refill a hot lawnmower (immolation doesn’t seem like it would be a pleasant experience).

But what’s really annoying is going to a hotel that has installed low-flow showerheads, or visiting with someone who has that type of showerhead in their home. At the very least, it means you will spend at least twice as much time as normal to get clean.

Well, we have a bit of good news.

The Trump Administration wants consumers to have the option of enjoying better showers. Here are some excerpts from a CNN story by .

The US Department of Energy on Tuesday finalized a pair of new rules rolling back water efficiency standards on showerheads… The new showerhead rule goes after the two-and-a-half-gallon-per-minute maximum flow rate set by Congress in the 1990s. Under current federal law, each showerhead in a fixture counts toward that limit collectively — but the Energy Department’s new rule means each showerhead individually can reach the limit set by Congress. …”Today the Trump Administration affirmed its commitment to reducing regulatory burdens and safeguarding consumer choice,” Secretary of Energy Dan Brouillette said in a statement. “With these rule changes, Americans can choose products that are best suited to meet their individual needs and the needs of their families.” The rollbacks were quickly rebuked by environmental advocates and consumer and appliance standards groups.

If I understand correctly, we’ll still have inadequate showerheads, but we’ll be allowed to have showers that use more than one of them.

Not the ideal outcome, to be sure, but definitely better than the status quo.

But don’t get too excited. It’s very likely that the incoming Biden Administration will propose and then adopt a new regulation to overturn what just happened.

So refurbish your shower now while the opportunity exists.

Or, if you live in a grandfathered home that still has decent amenities, don’t sell.

P.S. I’m normally not in favor of more laws, but I would strongly favor legislation mandating that all politicians and bureaucrats have to retrofit their residences any time some idiotic new regulation is imposed. In other words, no grandfathering for the ruling class. They should live by the rules they want to impose on the rest of us, whether we’re looking at showerheads, taxes, coronavirus, or education.

P.P.S. The Trump Administration also has a new rule that would allow a return to better-quality dishwashers.

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Last year, I shared this video from the Competitive Enterprise Institute to help explain how government bureaucrats are making it harder for Americans to clean their plates, bowls, and silverware.

Washington’s dishwasher mandate is just one example of how red tape diminishes the quality of life.

Bureaucrats have concocted other ways of spreading misery and frustration.

Call me crazy, but I don’t like spending extra time in the shower, flushing more than once, and risking self-immolation when I refill my lawnmower.

But there is a bit of good news. The Trump Administration wants to make it easier for us to clean up after dinner.

The Wall Street Journal’s editorial is a good summary of the issue.

For years American homes have been stuck with dishwashers that take forever and still don’t get the job done. A new Department of Energy rule…will help change that. …Regulations on energy and water usage—tightened in 2013 by the Obama Administration—mean that dishwashers now take at least two hours to complete a full wash cycle. Dishes may still emerge with pieces of last night’s lasagna baked on. …CEI petitioned the Energy Department to allow dishwashers that would reduce the average cycle to one hour from two, while also giving better performance. CEI argued that if the aim of the regulation was to conserve water and energy, it’s unlikely they achieved their purpose. People responded to poor dishwasher performance by pre-rinsing each dish before putting it through their washers, wasting more water… The revised DOE rule is…an example of how common-sense deregulation can deliver real benefits for the public.

And Sam Rutzick of Reason explains this latest development in the battle for clean dishes.

Trump’s Department of Energy finalized a rule establishing a new product class for residential dishwashers that will have a normal cycle time of up to one hour and that can use five gallons of water per cycle. Those rules effectively roll back an Obama-era rule limiting standard dishwashers to use no more than 3.1 gallons of water per cycle. That limit forced dishwasher companies to adjust their products’ cycle lengths. And the supposedly more efficient but less useful dishwashers have been a punchline…the average dishwasher cycle time has jumped from the one-hour cycle that was common a decade ago to more than two hours today. The tighter rules didn’t lead to energy savings for customers. …they actually increased water consumption by 63 billion gallons, as households would have to run their dishwashers multiple cycles, or pre-rinse their dishes by hand, in order to get dishes actually clean.

But Rutzick’s column contains a very important caveat.

Joe Biden may reverse this important bit of deregulation.

Unfortunately, the new rules may not last. While the incoming administration has been vague about which deregulatory efforts they intend to undo, they have spoken in favor of tightening environmental regulations—and the new dishwasher rules could be a casualty. If so, that’ll be bad news for consumers. 

For what it’s worth, while he embraced some very bad policies during the campaign, I don’t think Joe Biden is a Bernie Sanders-style nutjob.

But I fear environmentalism is an area where he will push policy significantly to the left.

So I’m not overly optimistic that we’ll have better dishwashers in the future.

The only good news is that Americans, every time they do the dishes, will have an irritating reminder that government is the problem rather than the solution.

P.S. Yes, I realize better dishwashers are not as important as better tax policy (or as important as worse trade policy), but I don’t think politicians should be undermining our quality of life.

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Some policies will improve with Biden in the White House, most notably trade, but also government spending (not because Biden is good, but rather because Republicans will go back to pretending to be fiscally conservative).

But some policies will move in the wrong direction. Biden is awful on tax policy, for instance, though I expect Republicans in the Senate will block his class-warfare agenda.

Biden is also very bad on regulatory issues. Unfortunately, this is an area where the new President (and his appointees) will have plenty of authority to shift policy in the wrong direction.

I’m especially worried that Biden will resuscitate an Obama-era policy of strong-arming banks so they won’t do business with unpopular industries. This video, which I first shared back in 2016, explains this reprehensible policy.

Norbert Michel of the Heritage Foundation, in a column for Forbes, provides some additional background on the policy.

Choke Point consisted of bureaucrats in several independent federal agencies taking it upon themselves to shut legal businesses – such as payday lenders and firearms dealers – out of the banking system. Given the nature of the U.S. regulatory framework, this operation was easy to pull off. Officials at the Federal Deposit Insurance Corporation (FDIC), for instance, simply had to inform the banks they were overseeing that the government considered certain types of their customers “high risk.” The mere implication of a threat was enough to pressure banks into closing accounts, because no U.S. bank wants anything to do with extra audits or investigations from their regulator, much less additional operating restrictions or civil and criminal charges. Banks are incredibly sensitive to any type of pressure from federal regulators, and they know that the regulators have enormous discretion.

In a column for the Wall Street Journal earlier this year, Phil Gramm and Mike Solon elaborated on the left’s campaign to politicize the banking system.

Banking was used as a weapon against legal, solvent businesses by the Obama administration during Operation Choke Point, a program to deny the disfavored access to banking services. The Federal Deposit Insurance Corp. labeled certain businesses “high risk,” including firearms and ammunition dealers, check-cashers, payday lenders and fireworks vendors. Unelected regulators, not Congress or courts, marked these industries as “dirty business” and made it “unacceptable for an insured depository institution” to offer them banking services. …With Democrats unable to ban guns legislatively, Rep. Carolyn Maloney admonished banks at a recent hearing to not “finance gun slaughter.” When she urged JPMorgan to deny credit for legal firearm sales as other banks had done, the CEO responded, “We can certainly consider that. Yes.” At the same hearing, Rep. Rashida Tlaib challenged bank CEOs: “Will any of your banks make a commitment to phase out your investments in fossil fuels and dirty energy?” The CEOs declined to defend fossil fuels… Letting political intimidation dictate the availability of private credit endangers freedom and stifles productivity growth and job creation. …The use of political intimidation to allocate capital is an assault on economic efficiency and freedom.

There is, however, a bit of good news.

The Trump Administration ended Operation Choke Point back in 2017.

And, although it is happening at the last minute, the Trump Administration is now trying to strengthen the rule of law so banks won’t feel pressured to discriminate against certain industries in the future.

In a column published yesterday by the Wall Street Journal, Brian Brooks and Charles Calomiris of the Office of the Comptroller of the Currency (OCC) explain the new rule that their agency has unveiled.

…there have been too many allegations of banks cutting off vital services, credit and capital that legal businesses rely on to create jobs, meet community needs and support the economy. The Office of the Comptroller of the Currency, where we serve as acting comptroller and chief economist, respectively, on Friday proposed a rule to prevent banks from discriminating against legal businesses and individuals. The rule would require bankers to do what they do best: assess risk and underwrite credit decisions. …politically driven discrimination against particular industries has threatened fairness in banking. Under the Obama administration, Operation Choke Point, in which the OCC did not take part, involved regulators discouraging banks from serving legal and constitutionally protected businesses such as payday lenders and gun and ammunition sellers. …the Dodd-Frank Act of 2010 added to the OCC’s traditional mission of safety and soundness the obligation to ensure fair access to financial services… Banks may not exclude entire parts of the economy for reasons unrelated to objective, quantifiable risks specific to an individual customer.

Sadly, if Biden has the same attitude as Obama about the rule of law, a future OCC can reverse anything Trump’s people adopt.

I’ll close with a libertarian-minded observation.

Because I believe in freedom of association, I think banks should have the liberty to discriminate against specific businesses, or even entire industries.

But there’s a big difference between banks choosing to discriminate and being coerced into such behavior by government regulators.

So it was disgusting that Obama’s regulators went after industries they didn’t like, such as gun dealers.

But it would be equally reprehensible if a Republican Administration went after an industry it didn’t like, such as legal marijuana.

P.S. The broader lesson to learn from Operation Choke Point is that regulatory power for governments is a vehicle for corruption and malfeasance.

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More than ten years ago, I narrated this video in hopes of convincing politicians and bureaucrats that anti-money laundering laws (and associated regulations) were a costly and intrusive failure.

Sadly, my efforts to bring sanity to so-called AML policy (sometimes known as know-your-customer rules, or KYC) have been just as much of a failure as my efforts to get a flat tax. Or my campaign for a spending cap.

I can’t event get my left-leaning friends to care about this issue, even though poor people are disproportionately harmed when governments impose AML mandates on financial institutions.

Worst of all, not only is AML policy not getting better, there are constant efforts to make it more onerous.

The most-recent example is a proposed regulation, which Andrea O’Sullivan discusses in an article for Reason.

…the Federal Reserve and Treasury Department have proposed expanding what is called the “travel rule” to capture international funds transfers above $250. Currently, financial institutions are required to make certain reports on customers when they send international transactions in excess of $3,000. This has been the threshold since the travel rule was first adopted in the U.S. in 1996… surveilled people are suspected of no crime, nor are they given any opportunity to opt out of this data collection. Still, the government preemptively requires that their transactions be tagged and tracked as if they had done something wrong. …it’s worrying that government agencies don’t even consider personal privacy when proposing new regulations. …By law, federal agencies must issue cost-benefit analyses that weigh the trade-offs of a proposed new rule to industry and society. The travel rule analysis only considers the costs that would be imposed on banks on regulators. The extreme cost to privacy for millions of Americans is not even an afterthought… America’s financial surveillance system…creates compliance and hacking risks for institutions that must store this data. And it doesn’t even work very well. Criminals are routinely able to get the finance they need despite this web of data tracking. Meanwhile, innocent people may have trouble making transactions or get caught in the hassle of some overzealous agent. It’s a big mess.

This is an absurd proposal. The odds of any criminal being caught by added red tape are trivially small. Yet the bureaucrats at the Federal Reserve and Treasury are pushing this new regulation because they don’t care about costs that are borne by others.

Ideally, the entire reporting regime should be scrapped. As an interim measure, the $3,000 figure should be adjusted for the inflation that’s occurred since 1996, which would push the reporting limit to about $5,000.

Since we’re on the topic of inflation and reporting requirements, Prof. Randall Holcombe wrote an article for the Foundation for Economic Education about the anti-privacy reporting rules for other financial transactions.

…the Currency and Foreign Transactions Reporting Act of 1970 requires that financial institutions must keep records of cash transactions summing to more than $10,000 in one day and report suspicious transactions to the federal government. …because the limit is stated as a dollar amount ($10,000), inflation lowers the real value of that limit year after year. Adjusting for inflation, $10,000 in 1970, when the Act was passed, would be $65,000 today. …it appears to me the Act violates the Fourth Amendment, which states in part, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated…”

Let’s close with a story in the Wall Street Journal that highlights how ordinary people are victimized by AML laws.

Mary Ann Liegey, a retired teacher in Manhasset, N.Y., was shocked in March when she received a letter from her local parish: “Your $20 check payable to St. Mary’s Church…was returned due to Frozen/Blocked Account.” The 75-year-old Ms. Liegey discovered that Citigroup Inc. had blocked her checking and trust accounts after she didn’t respond to a notice asking her for personal information to verify the accounts—part of the bank’s efforts to comply with government-mandated rules referred to as “know your customer,” or KYC. The rules are designed to make it harder for money launderers, terrorists and other criminals to finance illicit activities, hide funds or move dirty money around the globe. …The difficulty and complexity of these reviews are exacerbated by advances in technology that have fundamentally changed the ways people interact with banks. More customers are opening accounts or interacting through mobile apps rather than by walking into a branch and presenting physical identification.

Ms. Liegey isn’t the only victim.

There’s also Mr. Laderer.

Bill Laderer, who owns a landscaping business in Sea Cliff, N.Y., groused that Capital One Financial Corp. suddenly cut off his credit card because he hadn’t provided an employee identification number for his business, which has operated since 1941.

And Ms. Griffit.

Donna Griffit has had a Citigroup account for her California-based business, which helps startups craft pitches, for more than a decade. At the beginning of February, she got a letter saying the bank needed unspecified information from her by month’s end or her account could be closed. When she called the bank a few days later, no one could figure out what was needed, and the bank said it would get back to her, she recalled. She thought it was resolved. But in June, she discovered her account had been frozen.

I’ll close with this excerpt, which shows that all of us are actually victims because banks are spending lots of money to comply with AML/KYC laws.

Needless to say, those costs are passed along to customers.

…the average spending on KYC-related procedures for corporate and asset-manager clients by financial institutions with more than $10 billion in revenue grew to $150 million last year, with each having about 300 employees directly involved, up from just 68 a year prior.

What makes these laws so perverse is that they impose high costs on both individuals and businesses.

Yet they don’t reduce crime.

They don’t reduce terrorism.

They don’t stop drug dealers.

They don’t stop the mafia.

The bottom line is that you don’t help law enforcement by creating haystacks of data and then expect them to find needles.

Nonetheless, politicians support these laws because they can tell their constituents that they’re fighting bad people.

P.S. A recent aspect of AML/KYC laws is that there are proposals to ban cash (including the $100 bill).

P.P.S. In my campaign to be a global money launderer, I have one victory and one defeat.

P.P.P.S. Statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

P.P.P.P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

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I’m a big fan of New Zealand because the nation is a great example of how sweeping free-market reforms lead to very good results.

Perhaps most impressive, New Zealand has very high levels of societal capital, ranking #1 in the new Global Index of Economic Mentality.

And the country also gets very high scores from Economic Freedom of the World and the Index of Economic Freedom.

But that doesn’t mean policy is perfect. The current Primer Minister already has demonstrated she has a very limited understanding of economics, and now she’s proving her lack of knowledge by imposing a version of “comparable worth.”

In a column for the New York Times, lavishes praise on this misguided scheme, which would give politicians and bureaucrats the power to decide that certain professions are systematically underpaid based on the share of female workers.

…a New Zealand law aimed at eliminating pay discrimination against women in female-dominated occupations…provides a road map for addressing the seemingly intractable gender pay gap. …Instead of “equal pay for equal work,” supporters of pay equity call for “equal pay for work of equal value,” or “comparable worth.” They ask us to consider whether a female-dominated occupation such as nursing home aide, for instance, is really so different from a male-dominated one, such as corrections officer… What is at stake is…a societywide reckoning with the value of “women’s work.” How much do we really think this work is worth? But also: How do we decide? …In effect, New Zealand is engaged in a countrywide effort to…fundamentally rethink the value of the work typically done by women. But where equal pay processes are relatively straightforward, pay equity, when done properly, challenges us to think deeply and objectively about a job and its components. …To negotiate the New Zealand social workers’ settlement, for instance, a working group composed of union officials, delegates from the Ministry of Children, social workers and employer representatives undertook a comprehensive assessment… Unions in New Zealand are currently pursuing over a dozen public sector claims, covering, among others, library assistants, clerical workers and customer-facing roles.

Ms. Sussman writes about an “intractable gender pay gap,” but the academic evidence suggests that this concept is nonsensical.

Simply stated, if women were systematically underpaid, investors and businesses would reap enormous profits by by setting up female-only firms to take advantage of pay differentials.

Heck, it’s worth noting that even a member of Obama’s Council of Economic Advisors refused to support similar arguments in the United States.

For what it’s worth, the New Zealand legislation mostly seems to be a back-door way to funnel more pay to bureaucrats.

New Zealand has, so far, been able to take the steps it has because the government pays for these wages. It’s not yet clear when, or whether, these efforts will work their way into the private sector. The vast majority of New Zealand’s businesses are small, with some 95 percent of firms employing fewer than 20 people. …proponents of pay equity say arguments about affordability miss the point. “Employers are not entitled to make even small profits on the backs of underpaid women,” said Linda Hill, a member of the Coalition for Equal Value, Equal Pay, a group of feminists who have worked in different fields on this issue for years. “Businesses that can’t pay fair wages aren’t viable businesses.”

Wow, Ms. Hill must be the New Zealand version of Hillary Clinton (who, when asked about the potential impact of the 1993 Hillarycare legislation, infamously and dismissively said that “I can’t be responsible for every undercapitalized entrepreneur in America”).

By the way, Ms. Sussman likes the idea of imposing comparable worth in the United States, which she explicitly acknowledges is the opposite of free markets.

In America, where state support for gender equality has never been less robust, pay equity’s financial obligation will likely fall on individuals. Are we willing to pay more, say, at the grocery store, or to the home health aides who look after our elderly? Are we willing to re-examine the assumptions embedded in what we have been told are “free markets” for labor?

The bottom line is that comparable worth is a form of government-imposed price controls, in this case dictating the price of labor.

And, as explained in videos from Marginal RevolutionLearn Liberty, and Russ Roberts, it’s a very bad idea to let politicians interfere with prices.

P.S. For those who want to fully understand the economics of “comparable worth,” read this superb report by one of my colleagues from grad school, Professor Deb Walker.

P.P.S. New Zealand was not included in the study I wrote about last week, so it’s unclear how much bureaucrats already are overpaid.

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Last night’s train-wreck debate reinforced my disdain for politicians.

But let’s ignore the immature theatrics from Trump and Biden and focus on one of their policy disagreements.

The two candidates squabbled over whether creating a government-administered health plan (see page 31 for a description of Biden’s so-called  “public option“) would lead to the demise of the current system of employer-provided health insurance.

For what it’s worth, there are two big reasons why I’m not a fan of the current employer-based system.

That being said, I’m very aware of the fact that politicians are always capable of making things worse (the “lather-rinse-repeat cycle” of government failure).

So let’s consider this key question: Government intervention has made our health system expensive and inefficient, but would a “public option” make things better or worse?

About two months ago, I shared this video which explains why the so-called public option will wind up being an expensive boondoggle.

Given the track record of health entitlements, I think the video you just watched is correct. A public option would be a fiscal nightmare.

But does that mean it also would be a threat to the employer-based system of private health insurance?

I think the answer is yes, largely because the subsidies that will make the system more expensive are also the subsidies that will make the public option seem like a good deal.

Let’s use two analogies to get this point across.

  • Fannie Mae and Freddie Mac dominate housing finance, not because government-created entities are efficient, but because they use subsidies from the federal government to under-price private competitors.
  • Parents know private schools produce much better educational outcomes than government schools, but most families opt for the inferior option because it’s already being financed by their tax dollars.

I fear the same thing will happen with the so-called public option. Politicians (in their never-ending efforts to but votes) will keep increasing the subsidies. That will make employer-based health plans seem less attractive by comparison.

And there will also be political pressure to provide an ever-more-extensive set of benefits (as illustrated by the cartoon). That will also make employer-based health plans seem less attractive by comparison.

The net result of all this is that even though the vast majority of workers are happy with their current employer-provided health plans, Biden’s public option will slowly but surely squeeze them out of the market.

The bottom line is that we’ll wind up with single-payer, government-run healthcare, but politicians would be sneaking it in the back door.

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Last November, I criticized Nancy Pelosi’s scheme to impose European-style price controls on pharmaceutical drugs in the United States.

I wasn’t the only one who objected to Pelosi’s reckless idea.

We have forty centuries of experience demonstrating that price controls don’t work. The inevitable result is shortages and diminished production (sellers won’t produce sufficient quantities of a product if they are forced to lose money on additional sales).

Which helps to explain why the Wall Street Journal also was not a fan of Pelosi’s proposal

Here’s some of the paper’s editorial on the adverse impact of her proposed intervention.

Mrs. Pelosi’s legislation would direct the secretary of Health and Human Services to “negotiate” a “fair price” with drug manufacturers… Any company that refuses to negotiate would get slapped with a 65% excise tax on its annual gross sales that would escalate by 10% each quarter. Yes, 65% on sales. …The bill also sets a starting point for Medicare negotiations at 1.2 times the average price of drugs in Australia, Canada, France, Germany, Japan and the U.K.—all of which have some form of socialized health system. …foreign price controls have reduced access to breakthrough treatments. …Price controls are also a prescription for less innovation since they reduce the payoff on risky research and development. …Only about 12% of molecules that enter clinical testing ultimately obtain FDA approval, and those successes have to pay for the 88% that fail. …Price controls would hamper competition by slowing new drug development. The U.S. accounts for most of the world’s pharmaceutical research and development, so there would be fewer breakthrough therapies for rare pediatric genetic disorders, cancers or hearing loss.

A damning indictment of knee-jerk interventionism, to put it mildly.

Well, a bad idea from Democrats such as price controls doesn’t magically become a good idea simply because it subsequently gets pushed by a Republican (unless, of course, you qualify as a partisan as defined by my Ninth Theorem of Government).

Unfortunately, we now have a new example of bipartisan foolishness.

Andy Quinlan of the Center for Freedom and Prosperity opined on President Trump’s misguided plan to adopt European-style price controls.

…other nations have been free riders on America’s innovative pharmaceutical industry. …they have enacted socialist price controls to limit what they pay knowing that the largest market would pick up the slack to ensure a steady supply of new lifesaving drugs. It needs to stop, but President Trump’s recent executive order is not the right way to do it. …his “Most Favored Nations” Executive Order to…limit…prescription medication payments made through Medicare… But this is a flawed way of thinking about the problem. Other nations are…engaging in theft via price controls. …drugs can take months or even a year longer to arrive in countries with socialist healthcare systems. Patients suffer as a result… Another likely consequence is less innovation. Some drugs in this new price environment will no longer be cost effective to be developed. Patients again will suffer. …Getting foreign jurisdictions to pay for their share of pharmaceutical innovation by putting a stop to price manipulation is a noble goal. But it should not come at the expense U.S. industry and patients.

A study by Doug Badger for the Galen Institute points out that the Trump Administration’s approach – for all intents and purposes – would use Obamacare’s so-called Center for Medicare and Medicaid Innovation to impose foreign price controls on prescription drugs in the United States.

The Affordable Care Act created CMMI and vested it with extraordinary powers. …The statute also shields CMMI projects against administrative and judicial review. …two HHS secretaries have claimed authority under CMMI to mandate a Medicare Part B payment mechanism without having to seek new legislation. …the Trump administration issued an advance notice of proposed rulemaking (ANPRM) announcing its intention to propose a far more sweeping Medicare Part B drug demonstration project….to…scrap the ASP Medicare reimbursement methodology in favor of one based on drug prices paid in other countries. …CMS is considering the establishment of an “international price index” (IPI). It would calculate the IPI based on the average price per standard unit of a drug in select foreign countries.

This is troubling for several reasons.

…the other countries on the proposed list have lower living standards than do Americans, as measured by per capita household disposable income… The median disposable per-capita income in the IPI countries is thus about one-third less than in the U.S. …Medicare reimbursement for physician-administered drugs would largely be based on international reference prices in which the regulatory agency of one government sets drug prices based at least in part on those set by regulatory agencies in other countries. …for all the different payment methodologies Congress has devised for medical goods and services, it has never based reimbursement on prices that prevail in foreign countries. The agency’s role is to implement congressionally-established reimbursement systems, not to create them out of whole cloth.

As you might expect, the Wall Street Journal has also weighed in on Trump’s plan.

The editorial points out there will be very adverse consequences if the President imposes European-style price controls.

Mr. Trump signed an executive order that could make…life-saving therapies less likely. Mr. Trump has been threatening drug makers for months with government price controls. …The President’s order directs the Department of Health and Human Services to require drug makers to give Medicare the “most favored nation” (i.e., lowest) price that other economically developed countries pay. …This ignores some crucial details. …Other countries also have to wait longer for breakthrough therapies, which is one reason the U.S. has much higher cancer survival rates. …The larger reality is that developing novel therapies isn’t cheap and can take years—sometimes decades—of research. Most products in clinical pipelines fail, and even those that succeed aren’t guaranteed to produce a profit. …The risk for all Americans is that drug makers will shelve therapies for hard-to-treat diseases that are in the early stages of development because of the high failure rate and low expected profit. This risk is most acute for therapies that treat rarer forms of diseases… The victims will be the cancer patients of the future, including perhaps some reading this editorial.

The bottom line, as I noted in the above interview and as many others have observed, is that other nations are free-riding on American consumers.

They get access to most of the drugs at low prices (since pharmaceuticals are cheap to produce once they are finally approved).

But the net result, as I tried to illustrate in this modified image, is that American consumers finance the lion’s share of new research and development.

This isn’t fair.

But we’d be jumping from the frying pan into the fire if we had European-type price controls that stifled innovation by pharmaceutical companies.

Sure, we’d enjoy lower prices in the short run, but we would have fewer life-saving drugs in the future.

P.S. There’s an analogy between prescription drugs and NATO since Americans bear a disproportionate share of costs for both. However, there’s a strong argument that there’s no longer a need for NATO. By contrast, I don’t think anyone thinks it would be a good idea to stifle the development of new drugs.

P.P.S. As an alternative, a friend has been urging me to support the idea of using the coercive power of government to mandate that American-based pharmaceutical companies charge market prices when selling overseas – an approach that would give foreign governments a choice of paying more or not getting the drugs. That seems like a better approach, at least in theory, but my friend has no answer when I point out that those companies would then have an incentive to leave the United States (as many firms did before Trump lowered the corporate tax rate to improve U.S. competitiveness).

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I’ve shared many videos (here, here, here, here, here, and here) explaining how government has made America’s health system expensive and inefficient. I especially recommend my 2019 speech to the European Resource Bank.

Now let’s add this video to our collection.

One lesson to take from all these videos is that the main problem with America’s health care system is multiple forms of government intervention (MedicareMedicaid, the tax code’s healthcare exclusion, etc).

And 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 guess what happens when people go shopping with other people’s money?

Mark Perry of the American Enterprise Institute explains that third-party payer leads to higher costs.

One of the reasons that the costs of medical care services in the US have increased more than twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage of health care costs are paid out-of-pocket by consumers. …It’s no big surprise that overall health care costs have continued to rise over time as the share of third-party payments has risen to almost 90% and the out-of-pocket share approaches 10%. Consumers of health care have significantly reduced incentives to monitor prices and be cost-conscious buyers of medical and hospital services when they pay only about $1 out of every $10 spent themselves, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t paying out-of-pocket and aren’t price sensitive.

The best part of his article is when he compares cosmetic medical care to regular medical care to show how market forces – when allowed – lead to lower costs in the health sector.

Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients typically paying 100% out-of-pocket for elective cosmetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. Because of the price transparency and market competition that characterizes the market for cosmetic procedures, the prices of most cosmetic procedures have fallen in real terms.

Here’s Mark’s chart showing how costs have changed over the past 20 years.

Pay special attention to the bottom right, where I’ve highlighted in red  how competition and markets have lowered relative prices for cosmetic care – which starkly contrasts with the health sectors where government plays a dominant role.

Singapore seems to have the most-market-oriented system in the world.

In a column for the Wall Street Journal, George Shultz and Vidar Jorgensen explain that the system is successful because people spend their own money.

If the U.S. wants lower costs, better outcomes, faster innovation and universal access, it should look to the country that has the closest thing to a functioning health-care market: Singapore. The city-state spends only 5% of GDP on medical care but has considerably better health outcomes than the U.S. …What does Singapore do that’s so effective? …All health-care providers in Singapore must post their prices and outcomes so buyers can judge the cost and quality. …Singaporeans are required to fund HSAs through a system called MediSave and to purchase catastrophic health insurance. As a result, patients spend their own money on health care and get to pocket any savings. …The combination of transparency and financial incentives has led to price and quality competition so intense that health-care costs are 75% lower in Singapore than in the U.S. …Singapore’s system of health-care finance shouldn’t seem foreign to Americans, nor should we doubt that it could work here. The U.S. has already seen that the combination of competition and price transparency can be successful: Witness the falling prices for Lasik and cosmetic surgery, which aren’t covered by insurance.

My modest contribution to this discussion is to share this OECD data showing that almost all other member nations are better than the United States on this issue.

No wonder heathcare is more expensive in the United States.

P.S. There’s also more government spending on healthcare in the United States, per capita, than there is in almost every other nation.

P.P.S. Government-created third-party payer also has led to higher costs and widespread inefficiency in higher education.

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During the Obama years, I frequently criticized the Administration’s bad policy choices. On a wide range of issues.

But I also expressed disappointment when President Obama arbitrarily and unilaterally decided to override or overlook laws that were inconvenient to his agenda.

Or when he asserted powers that didn’t exist.

Simply stated, I care about the rule of law.

And I care about the rule of law regardless of which political party holds power.

Which is why I’m disgusted that the Trump Administration has stretched the law beyond the breaking point so that the Centers for Disease Control can run roughshod over private rental contracts.

In his column for the Washington Post, George Will observes the CDC is engaged in an unprecedented power grab.

…the Centers for Disease Control and Prevention…this month asserted a power to prohibit — through the end of 2020, but actually for as long as the CDC deems “necessary” — the eviction of private tenants from privately owned residences because of unpaid rent. This, even though eviction levels have been below normal during the lockdown. The CDC’s order protects tenants earning up to $99,000 — almost quadruple the official poverty line of $26,200 for a family of four. Or, for those filing joint tax returns, tenants earning up to $198,000, who are in the top quintile of U.S. households. …Noncompliant landlords can be fined up to $100,000 and incarcerated for up to a year. …A regulation promulgated by the executive branch grants vast — almost limitless, the CDC clearly thinks — discretion to an executive branch bureaucrat, the CDC director… And, if today’s director is correct, the director is authorized to curtail some property rights and abrogate some contracts nationwide, to suspend some state laws and strip state courts of jurisdiction in eviction cases. …The CDC presents all this as just another anti-infection protocol. Try, however, to imagine an activity or legal arrangement that the CDC, citing the regulation, could not overturn by fiat in the context of even a seasonal infectious disease such as the flu. Ilya Somin, law professor at George Mason University and another Cato adjunct scholar, notes: “Pretty much any economic transaction or movement of people and goods could potentially spread disease in some way.”

Christian Britschgi opines for Reason about the Trump Administration’s assault on property rights.

…the CDC’s eviction moratorium is an excellent example of how a patchwork of extreme, temporary policy interventions intended to stem the coronavirus pandemic has created a self-perpetuating justification for expanding government power across the board. …Over time, the economic damage and mass unemployed caused by a prolonged pandemic and continually extended shelter-in-place orders have fueled justifications for extending and expanding eviction moratoriums. After all, how can someone be expected to pay the rent if they aren’t legally allowed to work? Now a federal eviction moratorium covering all rental properties is being justified as necessary to ensure compliance with shelter-in-place orders. …the CDC’s order..ratchets up the government’s power in a way that won’t be easily undone.

Writing for the Foundation for Economic Education, Brad Polumbo explains why the CDC’s actions are so worrisome.

Under the direction of the Trump administration, the CDC instituted a unilateral order halting many evictions. It essentially nationalizes millions of private rental properties and strips landowners of their basic rights. …For legal justification, the Trump administration cites one vague law that says during a pandemic the CDC director “may take such measures to prevent such spread of the diseases as he/she deems reasonably necessary, including inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.” ….Across the country, millions of landlords will have tenants occupying their property and have no way to force them to pay rent or remove them if they won’t. …the federal government is trampling over private contracts and essentially seizing all affected rental properties as the domain of the state. …

Brad also makes the all-important point that the CDC’s regulation will actually make rental housing more expensive in the long run (sort of like the way rent control backfires).

…the CDC’s overreach will undoubtedly have severe economic consequences. This move will worsen the housing crisis in the long-run and make housing more expensive for everyone by decreasing supply. Many landlords will be unable to make their mortgage and property tax payments without rental income or any remedy for nonpayment. This will result in them losing their property and its eventual removal from the market. …this unprecedented invasion of contract rights and private property is sure to discourage future would-be landlords from renting out their property or entering the market. The long-term impact will be less housing overall, which means higher prices.

Congressman Thomas Massie of Kentucky is one of the nation’s most principled lawmakers.

Here’s his succinct analysis of what just happened.

Though I have a slight disagreement with Massie’s tweet.

This latest power grab by the federal government isn’t socialism. That would involve the government owning and operating rental properties.

Under the CDC edict, rental properties are still privately owned. It’s just that government controls how the property is used.

That’s a different economic system, as Thomas Sowell has explained.

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Politicians often support “industrial policy,” which means they get to grant special favors to well-connected companies or industries.

But as explained by Professor Burton Folsom, this approach didn’t work very will in the 1800s.

It’s not surprising, of course, that politicians like having the power to grant favors. It makes them feel important.

But such policies don’t work. At least if our measure of success includes things like competitiveness and efficiency. Or of if we care about the best interests of consumers and taxpayers.

Which is why is better to be on the correct side of this spectrum. In other words, as far from Soviet-style central planning as possible (I used to cite Hong Kong as an example of laissez-faire, but that may no longer be accurate).

By the way, the video also makes a good point about how the United States was not a laissez-faire paradise back in the 1800s.

While we didn’t have an income tax or a welfare state, there were other forms of intervention, as illustrated by the video, as well as lots of protectionism and regulation.

And don’t forget slavery, which was an especially grotesque anti-market policy.

The bottom line is that only politicians benefit when government has more power over the economy.

For the rest of us, the lesson to be learned is that government intervention doesn’t work. Not in the 1800s. Not in the 1900s. And not in this century, either.

If we want more prosperity, we should stick with the tried-and-true recipe for growth.

P.S. Professor Folsom also narrated a video showing how government intervention failed in the 1800s (railroads) and early 1900s (airplanes).

P.P.S. It’s especially disappointing that some self-styled conservatives are supporting industrial policy since – in practice – it means awful policies like Solyndra-style handouts and power-grab schemes like the Green New Deal.

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When I wrote yesterday that Trump’s overall rating on economic policy was “bad,” a few people wrote to complain.

I did acknowledge in the column that it may be too soon to give the current president a grade, but it’s not looking good. He not only has a bad record on big issues such as spending and trade, but he also is prone to cronyist policies in other areas.

Such as goodies for the coal industry.

Such as goodies for the housing lobby.

And goodies for corn growers, which is the topic of today’s column.

But we’re not going to look at traditional agriculture subsidies (which are awful in their own right). Instead we’re going to focus on government handouts that bribe corn growers and others into turning crops into fuel.

This is a policy that’s bad for taxpayers, bad for consumers, bad for the environment, and probably bad for motherhood and apple pie.

The Competitive Enterprise Institute wrote last year about this boondoggle.

President Trump has again sought changes to the Renewable Fuel Standard (RFS)… The previous reform effort granted ethanol producers and corn growers their request to raise the amount of ethanol allowed year-round in gasoline from 10 to 15 percent (E-15)… But this did not create peace. Pro-RFS forces soon demanded both E-15 and fewer small refinery waivers. Now, the administration has announced that, while it will still grant small refinery exemptions, it will reallocate the waived amounts to non-exempt refineries and thus preserve the 15 billion gallon maximum set out in the law. It will also ease the labelling requirements for gas stations selling E-15. …Lost in the debate between the biofuels industry and the petroleum industry is what the RFS means for consumers. Gasoline prices are relatively low right now, but not because of the RFS. And we are always one bad corn crop away from an ethanol-induced price spike. …The proposed changes can only add to the upward pressure on pump prices.

The year before, the Independent Institute criticized Trump’s approach.

…instead of terminating the Renewable Fuel Standard (RFS) — which mandates a sharp increase in renewable fuel consumption by 2022 — the Trump administration has doubled-down on biofuels. President Trump has said that he supports ramping up ethanol production even further by allowing gasoline containing 15 percent ethanol to be sold year-round. Doing so would expand ethanol use and encourage the EPA to ratchet that percentage up in subsequent years. …a comprehensive meta-analysis in the American Journal of Agricultural Economics found the greenhouse gas benefits of ethanol to be almost zero. For other pollutants like nitrogen oxides (NOx) and ozone, ethanol actually is worse than gasoline. Because 40 percent of the nation’s corn crop is used in the production of biofuels, ethanol production also raises food costs. As a result, consumers pay higher prices for beef, milk, poultry and pork, among other items. …Because the RFS moved corn growing to areas that require more water, more fertilizer, and more acreage, prairies and other wild-lands are disappearing, soil is eroding, groundwater is being depleted, and ocean dead zones are expanding. …If ethanol truly were a good substitute for gasoline, no E10 or E15 mandate would be necessary.

Ironically, Trump’s misguided handouts aren’t necessarily buying him any friends.

As reported by Bloomberg, one of the big recipients says it may diversify away from ethanol unless subsidies are increased.

American ethanol makers have for years been reliant on a government policy that mandates biofuel use. But industry stalwart Green Plains Inc. wants to break away from that dependence… The Omaha, Nebraska-based company has lost faith that the ethanol industry will get the support it needs from parts of the Trump administration, said Chief Executive officer Todd Becker. …“We are going to spend half a billion dollars transforming this company to be not dependent on government policy,” Becker said in an interview. The EPA is “no friend of ethanol. They’ve done everything they can to destroy the market for us. They’ve done everything they can to destroy this industry.” …The U.S. ethanol industry was born out of government support. In the 1970s, President Jimmy Carter asked agribusiness leaders to make biofuels… The industry got another boost in 2007, when the Renewable Fuels Standard expanded the mandate to blend ethanol into gasoline.

This takes chutzpah. Ethanol arguably could be the most subsidized product in the United States, yet beneficiaries say they may exit the industry without ever-increasing handouts.

I’m not sure how to react to this supposed threat.

  • Should I say, “Here’s your hat, what’s your hurry”?
  • Should I channel Clint Eastwood and say, “Go ahead, make my day”?
  • Or should I simply say, “Don’t let the door hit you on the way out”?

The bottom line is that ethanol handout were bad policy when they were first created and they are bad policy today. These handouts are misguided when Democrats are in charge, and they’re misguided when Republicans are in charge.

I’d like Trump to switch his position because of a newfound appreciation for free enterprise, but I’ll be happy if he shifts in the right direction simply because he doesn’t appreciate greedy complaints from the ethanol industry.

P.S. Trump isn’t the only Republican who is bad on this issue. Indeed, the GOPers who support free markets – such as Rand Paul and Ted Cruz – may be in the minority of the Party.

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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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