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Posts Tagged ‘Government intervention’

The libertarian message of limited government generally is not warmly received in Washington because politicians, bureaucrats, cronyists, lobbyists, contractors, and other insiders profit from the status quo.

The D.C. area is now the richest region of the country, filled with folks who gladly support higher taxes because they realize that “They may send an additional 5 percent of their income to the IRS, but their income will be 20 percent higher because of all the money sloshing around Washington.”

But what about folks in the real world? Do the folks from “outside the beltway” believe in smaller government?

As a general rule, I think ordinary people are sympathetic to limited government, particularly if you have a chance to dispassionately explain how nations with good policy routinely out-perform countries with bad policy.

But there are issues that present challenges because a non-trivial share of the population thinks the free-market approach is too radical or unrealistic. To cite a few examples that I’ve written about in the past:

Today, I want to add to that list. When discussing the merits of government intervention, there are people who generally believe in markets, but nonetheless argue that we need antitrust laws to protect consumers from avaricious companies.

I agree that businesses are looking to maximize profits, but I disagree with the notion that this puts consumers in peril. In a free-market economy, businesses can get money only by providing goods and services that are valued by consumers.

Indeed, consumers are only in danger when government puts its thumb on the scale with handouts, subsidies, restrictions, bailouts, regulations, licensing, mandates, and other forms of intervention. Because when government rigs the market and hinders competition, that’s when consumers can get exploited.

Moreover, to the extent we have monopolies in America, it’s because of government. Just think of the Postal Service. Or Social Security. Or the air traffic control system. Those are all things that should be handled by the private sector, but they exist because of government coercion.

Now that we’ve reviewed the theoretical argument, let’s look at how antitrust laws are grossly inconsistent in practice. Professor Mark Perry of the American Enterprise Institute pointed out that it’s possible for companies to get in trouble with antitrust bureaucrats regardless of the prices they charge.

If your company’s prices are too close to the same as your competitors’ prices, government bureaucrats will come after you and charge you with price-fixing and collusion as 35 auto parts manufacturers found out recently… If your company’s prices are too high, government bureaucrats will come after you and charge you with price-gouging, as five airlines found out recently… And finally, if your company’s prices are too low, government bureaucrats will come after you and charge you with predatory pricing or selling products below cost, as the grocery chain Meijer found out recently after opening stores in Wisconsin.

Now put yourself in the position of a pricing manager at a company. What are you supposed to do if bureaucrats can come after you no matter what price you charge?!? This makes no sense.

And it sparked my memory. Back when I was a college student in the 1970s and first learning about free markets, I remember coming across a short film, The Incredible Bread Machine, that argued in favor of economic liberty.

It was accompanied by a poem that told the story of an entrepreneur named Tom Smith who invented a technology to produce cheap bread for the masses. That was good news, but then the price of bread rose after an increase in business taxation and that led to accusations that the entrepreneur was exploiting his “market power.”

And that’s when the antitrust bureaucrats got involved. Here’s the relevant section of the poem, and you’ll notice that 1970s satire is eerily similar to today’s antitrust reality.

So, antitrust now took a hand.
Of course, it was appalled
At what it found was going on.
The “bread trust,” it was called.

Now this was getting serious.
So Smith felt that he must
Have a friendly interview
With the men in antitrust.
So, hat in hand, he went to them.
They’d surely been misled;
No rule of law had he defied.
But then their lawyer said:

The rule of law, in complex times,
Has proved itself deficient.
We much prefer the rule of men!
It’s vastly more efficient.
Now, let me state the present rules.

The lawyer then went on,
These very simpIe guidelines
You can rely upon:
You’re gouging on your prices if
You charge more than the rest.
But it’s unfair competition
If you think you can charge less.

A second point that we would make
To help avoid confusion:
Don’t try to charge the same amount:
That would be collusion!
You must compete. But not too much,
For if you do, you see,
Then the market would be yours
And that’s monopoly!”

Price too high? Or price too low?
Now, which charge did they make?
Well, they weren’t loath to charging both
With Public Good at stake!

In fact, they went one better
They charged “monopoly!”
No muss, no fuss, oh woe is us,
Egad, they charged all three!

Here’s the 1975 film version of the Incredible Bread Machine. The poem begins shortly after 30:00, though I suggest watching the whole video for its historical value, as well as the commentary at the end by Milton Friedman.

P.S. On another topic, I can’t resist sharing this man-bites-dog passage from a recent editorial in the New York Times.

…the next government will have to do more to make the country more productive, and that includes…cutting pensions, streamlining regulations, privatizing state-owned businesses.

No, this isn’t a joke. The NYT actually endorsed pro-market reforms to shrink the size and scope of government.

That’s the good news.

The bad news is that the editorial was about Greece rather than United States.

But at least there’s hope that the editors are becoming more rational, particularly when you also consider that the New York Times recently published columns showing the superiority of funded pension systems over tax-and-transfer programs like Social Security and revealing that feminist-supported government intervention in labor markets hurts intended beneficiaries.

To be sure, a few good pieces hardly offset the NYT‘s long track record of economic illiteracy, but a journey of a thousand miles begins with a first step.

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Bernie Sanders, Vermont’s pseudo-socialist senator, thinks that America can learn from Europe.

He’s right.

But he’s also wrong. That’s because he thinks that Europe is a role model to emulate rather than a warning signal of mistakes to avoid. Needless to say, that’s borderline crazy.

Heck, even President Obama has pointed out that the United States out-performs our European counterparts.

In his Washington Post column, Robert Samuelson warns that it would be a mistake to follow the European model of more taxes and additional regulation. He starts with (what should be) an obvious point about businesses responding to incentives.

We can learn from Europe about job creation, but many Americans may reject the underlying lesson. It is: If you price labor too high — pay workers more than they produce — businesses will slow or stop hiring.

He then points out that bad incentives in Europe are leading to bad results.

Europe’s economy is in the doldrums. Growth in the eurozone (the 19 countries using the euro) is weak… Eurozone unemployment is 11.1 percent, barely down from the peak of about 12 percent. This contrasts with the United States, where the jobless rate has dropped from 10 percent in October 2009 to 5.3 percent now.

And what exactly are the bad incentives in Europe?

Simply stated, governments are imposing too many burdens on the economy’s productive sector.

In a fascinating article in the latest “Journal of Economic Perspectives,” economist Christian Thimann — a former top adviser at the European Central Bank and now at the French investment bank AXA — argues that Europe’s debt crisis and the weak recovery both stem from high wage and compensation costs. “Jobs fail to be created in a number of [eurozone] countries not because of a ‘lack of demand’ as often claimed,” Thimann writes,” but mainly because wage costs are high relative to productivity, social insurance and tax burdens are heavy, and the business environment is excessively burdensome.”

Which brings us back to the point Samuelson made earlier.

If the costs of new workers exceed the likely benefits in higher sales and profits, companies will hire less or not at all.

And just in case the implications aren’t obvious, he spells it out.

…we should not ignore the implications for the United States. …it’s tempting to load the costs of social policies onto business. …The Affordable Care Act (aka Obamacare) requires firms to provide health insurance for workers; a $15 minimum wage would raise labor costs sharply for many firms; and there are proposals mandating paid maternity and sick leave. All these seem worthy causes, but we need to be alert to unintended consequences. If we make hiring too expensive, there will be less hiring.

Amen. As I’ve already noted, businesses aren’t charities. They won’t hire new workers if that means lower profits!

But Europe has a lot of these policies, so unemployment is higher. And we have politicians in America who want to copy Europe’s mistakes.

The problem is not just that politicians are making it more expensive to hire workers. Bad government policy also is making it more expensive to do almost anything.

The U.K.-based Telegraph has a story looking at how some European governments are making other business activities needlessly costly and difficult.

…doing business in Portugal, Ireland, Italy, Greece and Spain is more difficult, expensive and slower than in stronger, neighbouring countries. …Looking at the average time it takes to get construction permits, electricity connected, contracts enforced and goods exported shows the disparity.

This chart shows that the problem is especially acute in Southern Europe.

Let’s close by making a very important point about differences within Europe. While it’s sometimes useful and interesting to look at big-picture comparisons (such as average unemployment in the EU vs US or average income in the EU vs US), it’s also important to realize that European nations (notwithstanding pressures for harmonization, centralization, and bureaucratization from the European Commission) still have considerable leeway to determine their own economic policies.

And if you peruse Economic Freedom of the World, you’ll see that Northern European nations such as Finland (#10), Denmark (#19), Germany (#28), and the Netherlands (#34) are all considered market-friendly, while Southern European countries such as Spain (#51), France (#58), Italy (#79), and Greece (#84) are much lower in the rankings.

The Nordic nations are especially interesting. They have large welfare states, but they have very pro-market policies in other areas. So to elaborate on what Senator Sanders asserted, we actually could learn some good lessons from Scandinavian nations in areas other than fiscal policy.

P.S. Since we picked on Bernie Sanders already, let’s create some balance by also mocking Hillary Clinton.

Here’s a clever satirical video about her email scandal.

And if that doesn’t satisfy your craving, click here for more Hillary humor.

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Over the past few years, Hillary Clinton has taken advantage of several opportunities to demonstrate that she doesn’t understand economics.

Though that’s not a problem. I have friends who routinely demonstrate their economic ignorance by saying things that don’t make sense.

The problem is that Hillary may actually wind up in a position of power. So there’s a danger that the entire nation could be victimized because of her disregard of the laws of supply and demand.

Let’s look at a fresh example. The New York Times has a story about Ms. Clinton’s latest effort to bribe people with their own money.

Hillary Rodham Clinton on Monday will propose major new spending by the federal government that would help undergraduates pay tuition at public colleges without needing loans. …her proposals…would cost $350 billion over 10 years…about $175 billion in grants would go to states that guarantee that students would not have to take out loans to cover tuition at four-year public colleges and universities.

To make matters worse, some of this money would be used to bribe states into additional spending (sort of the higher-education version of Obamacare’s Medicaid scam).

In return for the money, states would have to end budget cuts to increase spending over time on higher education, while also working to slow the growth of tuition, though the plan does not require states to cap it.

And to make matters even worsier (yes, that’s a made-up word, but it seems appropriate), there’s a big tax increase to finance Ms. Clinton’s new scheme.

Mrs. Clinton would pay for the plan by capping the value of itemized deductions that wealthy families can take on their tax returns.

I don’t like distortionary tax preferences, but loopholes should be eliminated as part of a shift to a low-rate flat tax, not to finance the vote-buying schemes of the crowd in Washington.

But let’s set aside the concerns about fiscal policy and focus on what Clinton’s plan would mean for higher education.

And we’ll start with a thought experiment. Imagine you sold cars and the government decided to give people lots of money to buy your products. In the world of economics, this causes the “demand curve” to shift to the right.

Now answer a simple question: Would car prices under this policy (a) increase, or (b) decrease?

The obvious answer is (a). That’s certainly what has happened in the healthcare sector because of programs such as Medicare and Medicaid. That also happened in housing last decade thanks to bad monetary policy and corrupt Fannie Mae and Freddie Mac subsidies.

Moreover, there’s lots of evidence that the same thing already has happened with higher education. And now there’s new research that reaches the same conclusion.

As pointed out by the Wall Street Journal, recent scholarly data confirms that colleges and universities jack up prices to capture the additional subsidies.

Politicians…their solutions—cheap loans and taxpayer cash—end up increasing the cost of a degree. The latest evidence that schools jack up tuition to absorb federal money comes in a new report from the Federal Reserve Bank of New York. …The Fed researchers looked at how colleges responded when Congress bumped up per pupil aid limits between 2006 and 2008. Sure enough, students took out more loans, but universities gobbled up most of the money. Ohio University economist Richard Vedder connected these dots a decade ago, estimating in 2006 that every dollar of grant aid raised tuition 35 cents. He now looks prescient. The New York Fed study found that for every new dollar a college receives in Direct Subsidized Loans, a school raises its price by 65 cents. For every dollar in Pell Grants, a college raises tuition by 55 cents. This is one reason tuition has outpaced inflation every year for decades, while the average borrower now finishes college owing more than $28,000.

So what’s the bottom line? What will happen if Hillary Clinton expands subsidies to higher education?

Simple, more government subsidies will mean more wasteful inefficiency and higher costs.

Administrative bloat, reduced faculty loads and Shangri La dorms… College will continue to be expensive as long as government aid amounts to a wealth transfer to universities.

In other words, Ms. Clinton’s plan will double down on the policies (described in this video) that already have made college needlessly expensive.

All she’s doing is shifting more of the cost onto the backs of taxpayers.

Fortunately, there is a solution to this mess. Simply get the federal government out of the education business. This would reverse the bad policies that have caused colleges and universities to become more expensive and less efficient.

Sadly, this ideal approach probably won’t be adopted anytime soon.

But that doesn’t mean progress is impossible. Washington may actually move policy a bit in the right direction. And Elizabeth Warren (yes, that Elizabeth Warren) may even play a constructive role.

As reported by the Wonkblog section of the Washington Post, there’s growing interest in a plan to make colleges and universities partly responsible when students default on loans.

A coalition of liberal and conservative lawmakers is promoting a plan on Capitol Hill that would force colleges to pay up when their students default. If schools share the risk of borrowing or have some “skin in the game,” policymakers figure they would work harder to keep costs down….Senate Democrats, led by Elizabeth Warren (D-Mass.) and Jack Reed (D-R.I.), introduced legislation in 2013 requiring schools with default rates above 15 percent to reimburse the government 5 percent of the total defaulted debt. The higher the default rate, the higher the penalty. …Congressional Republicans are renewing the call for schools to share the risk of borrowing, as are presidential hopefuls Wisconsin Gov. Scott Walker and Ben Carson. The policy is being considered as a part of the re-authorization of the Higher Education Act.

The story even has some very sensible economic analysis about how third-party payer should be blamed for rising prices.

As it stands, there is little incentive for colleges to keep costs under control. As long as there is a supply of students and federal financial aid, both for-profit and nonprofit schools can charge high prices and encourage people to take out loans to cover the cost. If schools had a financial stake in every student’s ability to repay loans, they might be less inclined to saddle students with debt in the first place—or they might lower costs altogether.

Gee, what a shocking thought. If people have to play with their own money rather than taxpayer money, they suddenly behave more responsibly!

P.S. We should also remember that there is such a thing as too much “investment” in higher education.

P.P.S. Third-party payer in higher education also shows how government money can corrupt private institutions. Though any effort to stamp out such corruption should apply equally to government schools as well.

P.P.P.S. Now for the most important news. The Beltway Bandits are now Eastern National Champions of 55+ AAA softball, winning five straight games in Raleigh, NC, this past weekend.

We’ll play in Las Vegas for a national title in late September.

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What’s the best way to understand the burden of government regulation and red tape?

Is it better to focus on the overall burden by sharing data about aggregate cost, job losses, time wasted, and foregone growth?

Or is it better to look at specific examples of regulatory foolishness, such as silly rules that force consumers to use crummy dishwashers, inferior light bulbs, substandard toilets, and inadequate washing machines?

If the latter approach is best, we have a great (in a bad sense) new example.

Nicole Carroll of CrossFit has a column in the Washington Post that dissects a disturbing new regulatory scheme from the busy-body local government.

D.C….government is developing misguided regulations that would add burdensome red tape to the most innovative fitness programs. Specifically, the D.C. Council has enacted a law — the first in the nation — that would define what personal fitness trainers can and cannot do, require them to register.

Just in case you think this sounds reasonable in theory (and you shouldn’t), take a look at what it means in practice.

If early drafts of the regulations are advanced, D.C. fitness trainers will have to divert their attention from improving lives to bureaucratic burdens: taking courses they don’t need, adhering to methods they don’t believe in, paying fees that will be passed on to their clients and looking over their shoulders at ever-present regulators. The draft regulations even call for a four-year college degree.

Huh?!? Why would a personal trainer need a college degree? And why should trainers be forced to take courses or follow one-size-fits-all methodologies?

Sounds like a bunch of red tape that will make it hard for low-income people to become trainers.

And what will this mean for consumers?

Well, higher costs at the very least.

The immediate impact would be to make fitness programs less accessible, more expensive and more elitist. Thousands of residents would lose the opportunity to follow programs that will help them get stronger, lose weight and enjoy a better quality of life.

Sound like a lose-lose proposition, right?

Who could be for such a bad idea? Why are D.C. politicians pushing such a foolish plan?

The answer is special-interest corruption.

…entrenched interests can drive up costs and close markets for competitors, preventing new products and services from improving the status quo. The groups pushing hardest for licensure are entrenched institutions such as the American College of Sports Medicine, the National Strength and Conditioning Association and the Register of Exercise Professionals. …a not-so-credible agenda to defend their long-established but increasingly threatened business models and stifle successful competition. They want the licensing because they will profit from it. For those in the Exercise Industrial Complex, the fear of disruptive competition explains why they want to make the District the first jurisdiction in the nation to regulate fitness programs.

Here’s the bottom line.

Instead of raising standards, burdensome regulations would have the effect of driving newcomers out of the industry — and pricing many moderate-income people out of fitness programs.

Licensing and regulation of personal trainers is just one example of a worrisome trend in governments across the country.

This video from the Institute for Justice has disturbing details of how special interests conspire with politicians in various states to impose high burdens that make it hard for people to work.

Isn’t this typical? Politicians always claim to be for the little guy, but licensing rules are all about erecting high barriers to protect entrenched incumbents from competition.

This chart shows how much time and money is needed to work in certain professions that generally use lower-income workers.

By the way, the same principle applies to the tax system. The political elites often argue against a flat tax because it would be a boon to the rich.

But it’s the powerful and well-connected that benefit from the Byzantine system of credits, exemptions, deductions, exclusions, preferences, and other loopholes in the tax code.

Rest assured that poor people aren’t hiring all the high-paid lobbyists that specialize in manipulating the tax code in Washington. Which is why honest and well-intentioned leftists should support real tax reform. Just like they should support sweeping deregulation.

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Is the third time the charm, at least for bailouts?

First, we had the TARP bailout in the United States, and that turned out to be a corrupt mess.

Second, we had the Greek bailout, which has squandered hundreds of billions of euros to prop up a welfare state.

Now we have a third big bailout, with China seeking to stabilize that nation’s faltering stock market. So anybody want to guess how this will work out?

To put it mildly, the Wall Street Journal does not have a favorable opinion of this financial market intervention.

Beijing…officials pumped public money into the market. It hasn’t worked; the Shanghai Composite Index closed Thursday at 3661, 29% below its June peak. …Peking University economist Christopher Balding has added up the bailout and stimulus measures announced since the market panic started in late June. They total $1.3 trillion, or more than 10% of GDP.

So why is this a bad thing?

For two reasons, as the WSJ explains. First, it’s an unjustified wealth transfer. Second, it creates an economic environment contaminated by moral hazard.

Investors who bought when the market was already frothy are getting a chance to exit with some of their profits intact. But Chinese who don’t own stocks are justified in asking why they must subsidize their fellow citizens’ poor decisions. Mr. Balding’s spreadsheet shows that the market-rescue measures represent a huge transfer of wealth to investors who should have been prepared to shoulder the risks when they bought shares. The failed bailout reinforces the expectation that Beijing will attempt to manage the financial markets in the future. This moral hazard means the volatility will continue, along with the costs of future bailouts.

You won’t be surprised to learn that I share the Wall Street Journal’s skepticism. In a recent interview with Neil Cavuto, I said the Chinese government (like just about all governments) is too focused on short-run pain avoidance.

In other words, by trying to prop up markets in the short run, I think the Chinese government will cause a far greater amount of economic pain in the long run.

Two other points from the interview deserve highlighting.

  1. China’s economy needs more economic liberalization (as opposed to the snake oil being peddled by the IMF) if it hopes to become a first-world nation. While there’s been a lot of progress since the wretched deprivation and poverty of Mao’s era, China is still way behind the United States and other nations with more capitalistic systems. Hong Kong, Singapore, and Taiwan are appropriate role models.
  2. Whenever folks on the left point to a “success story” that ostensibly proves big government and central planning are more successful that capitalism, it’s just a matter of time before they’re proven wrong. Some of them were delusional enough to think the Soviet Union was economically successful (see bottom of this post) and events proved them wrong. As I pointed out in the interview, some of them thought Japan’s model of central planning was the ticket for prosperity and events proved them wrong. More recently, some of them have argued that China’s state-driven economy was a role model and they’re now being shown to be wrong.

P.S. Let’s close with some economic humor.

Fans of old-time comedy are probably familiar with the famous who’s-on-first exchange between Abbott and Costello.

Well, here’s a modern version of that exchange that showed up in my mailbox yesterday, only it deals with joblessness. I won’t strain credibility by asserting it’s as funny as the original sketch, but it does indirectly highlight the fact that we should focus primarily on labor force participation since that measure how many people are producing wealth for the nation.

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good Subject. Terrible times. It’s 5.6%.

COSTELLO: That many people are out of work?

ABBOTT: No, that’s 23%.

COSTELLO: You just said 5.6%.

ABBOTT: 5.6% unemployed.

COSTELLO: Right, 5.6% out of work.

ABBOTT: No, that’s 23%.

COSTELLO: Okay, so it’s 23% unemployed.

ABBOTT: No, that’s 5.6%.

COSTELLO: Wait a minute! Is it 5.6% or 23%?

ABBOTT: 5.6% are unemployed. 23% are out of work.

COSTELLO: If you are out of work, you are unemployed.

ABBOTT: No, Congress said you can’t count the “out of work” as the unemployed. You have to look for work to be unemployed.

COSTELLO: But they are out of work!

ABBOTT: No, you miss his point.

COSTELLO: What point?

ABBOTT: Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But ALL of them are out of work.

ABBOTTNo, the unemployed are actively looking for work. Those who are out of work gave up looking; and if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you’re off the unemployment rolls, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLOThe unemployment rate just goes down because you don’t look for work?

ABBOTTAbsolutely it goes down. That’s how it gets to 5.6%. Otherwise it would be 23%.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.

ABBOTT: Now you’re thinking like an economist.

COSTELLO: I don’t even know what the hell I just said!

ABBOTT: Now you’re thinking like a politician.

P.P.S. While economists deservedly get mocked, we’re not totally useless. We occasionally show a bit of cleverness.

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When I wrote about the media, it’s generally to criticize sloppy and/or biased reporting

But maybe I need to have a new category that features misleading headlines.

For instance, here’s a report by Fox Business News that grabbed my attention because of the headline. The story is about the arrest of an IRS bureaucrat.

The main reason I was startled by the story is that it didn’t seem at all newsworthy.

To be blunt, isn’t it the job of IRS employees to use our Social Security numbers to steal our money? That’s certainly what goes through my mind as I fill out my tax return.

So why was this bureaucrat arrested?

Was it for being a slacker, I wondered? The federal government confiscates about $3.5 trillion of our money each year, after all, which means the 95,000 IRS bureaucrats generate an average haul of more than $35 million. By contrast, $326 thousand is a mere pittance.

But then I read the story and realized that the story was about a completely different kind of theft. It appears that the bureaucrat was getting in on the nationwide scam of filing false claims to get EIC handouts.

An IRS employee who worked in the agency’s St. Louis, MO., office pled guilty this week to charges of tax fraud. Demetria Brown netted $326,000 in a fraud in which she stole taxpayer identities and created fake tax returns to steal refunds. …The scheme lasted seven years from 2008 to 2001.

So my first instinct was correct. There isn’t really anything newsworthy in that story. After all, nobody should be surprised that income-redistribution programs such as the EIC attract a lot of fraud. Nobody should be surprised that an IRS bureaucrat decided to take other people’s money (above and beyond the excessive salary the rest of us paid for). And nobody should be surprised that the other bureaucrats at the IRS were so incompetent that the scam was successful for seven years.

By the way, this isn’t the first time a thieving IRS bureaucrat generated a story with a misleading headline.

Speaking of which, here’s our second example of a headline that creates a completely false impression. It’s from a story in the Toronto Star.

Needless to say, I was completely shocked at first. After all, France is the nation where the national sport is taxation. It’s the country where taxes are so onerous that even the European Commission warns about over-taxation. It’s the nation where thousands of people have to pay more than 100 percent of their income to the tax authorities. It’s the country where high taxes are equated to patriotism. And it’s the nation that pushes tax policies that are so radical than even the Obama Administration sometimes says no.

So is it true? Is France going to become a Libertopia? The Galt’s Gulch of Europe?

But then my bubble burst. It turns out the story is about a technical shift in how taxes are collected.

The government wants to shift to a system of automatic withholding, similar to that in Canada and much of the rest of the world. Employees in France currently pay taxes a year after their income is earned. Christian Eckert, France’s budget secretary, said Wednesday that the government will not double-tax workers in 2018, the year automatic withholding is to begin. So 2017 incomes could effectively be tax-free for regular salaries. Taxpayers won’t actually feel much of a difference though — they would still spend 2017 paying for the previous year.

Though this might create an interesting social science experiment.

Depending on how rigorously France decides to be with its definition of “regular salaries,” this might be an opportunity for long-suffering French taxpayers to figure out ways of delaying 2016 income until 2017 and accelerating 2018 income so it’s received in 2017.

This could be a particularly useful strategy for investors, entrepreneurs, and small business owners, all of whom (if they’re like their American counterparts) presumably have some control over the timing, level, and composition of their income.

But I suspect the French government already is contemplating ways of making sure that every possible penny is being taxed at the highest possible rate, so I won’t hold my breath.

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When I first got to Washington in the mid-1980s, one of the big issues was the supposedly invincible Japanese economy. Folks on the left claimed that Japan was doing well because the government had considerable power to micro-manage the economy with industrial policy.

With the benefit of hindsight, it’s now quite apparent that was the wrong approach.

In more recent years, some on the left have praised China’s economic model. And while it’s true that the country has enjoyed strong growth, it’s far from a role model.

Here’s some of what I wrote back in 2010.

Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom – which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. …This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation.

With my skeptical view of the Chinese economic system, I figured it was just a matter of time before the nation experienced some economic hiccups.

And the recent drop in the Shanghai stock market certainly would be an example. I discussed the topic earlier this week in this Skype interview with Blaze TV.

To elaborate, there’s no precise formula for determining a nation’s prosperity. After all, economies are not machines.

But there is a strong relationship between prosperity and the level of economic freedom.

And as I explained earlier this year, China’s problem is that government is still far too big. As such, its overall ranking from Economic Freedom of the World is still very low.

And this means that the Chinese people – while much better off then they were under a pure communist system – are still not rich.

I mentioned the comparative numbers on per-capita economic output in the interview, which is something I wrote about back in 2011. And you can click here if you want the underlying figures to confirm that Americans are far more prosperous.

By the way, this is an issue where the establishment seems to have a semi-decent understanding of what’s happening, even if they don’t necessarily draw any larger lessons from the episode.

The Associated Press, for instance, has a good report on the issue. Here’s some of the story, which looks at why the the stock market seems untethered from economic fundamentals.

When China’s economy was roaring along at double digit rates in the 2000s, Chinese stocks floundered. But starting in the summer of 2014, as evidence of an economic slowdown gathered, the Shanghai Composite index climbed nearly 150 percent. …Now the Chinese stock bubble has burst and Shanghai shares are in a free fall. They’ve lost about 30 percent since peaking last month. …Prices in the stock market are supposed to reflect business realities: the health of the economy, the quality of the companies listed on stock exchanges, the comparative allure of alternative investments. But in a communist country where the government plays an oversized role in the economy, investors pay more attention to signals coming from policymakers in Beijing than to earnings reports, management shake-ups and new product announcements.

If savvy investors think it’s important to focus on what the government is doing, that’s obviously bad news.

During the booming 2000s, only politically connected firms were allowed to list on stock exchanges for the most part. Many of them were run by insiders of dubious managerial talent. The markets were dominated by inefficient state-owned companies. Investors were especially wary of investing in big government banks believed to be sinking under the weight of bad loans. Stocks went nowhere.

And when the government started to encourage a bubble, that also wasn’t a good idea.

…state media began encouraging Chinese to buy stock, even as the country’s economic outlook dimmed. The economy grew 7.4 percent last year, the slowest pace since 1990. It’s expected to decelerate further this year. But authorities allowed investors to borrow to buy ever-more shares. Unsophisticated investors — more than a third left school at the junior high level — got the message and bought enthusiastically, taking Chinese stocks to dangerous heights. Now it’s all crashing down.

I’m not sure “all crashing down” is the right conclusion.

As I said in the interview, the market doubled and now it’s down about 30 percent, so many investors are still in good shape.

That being said, I have no idea whether the market will recover, stabilize, or continue to drop.

But I do feel comfortable making a larger point about the relationship between economic freedom and long-run prosperity.

So if you want to learn lessons from East Asia, look at the strong performances of Hong Kong, Taiwan, Singapore, and South Korea, all of which provide very impressive examples of sustained growth enabled by small government and free markets.

P.S. I was greatly amused when the head of China’s sovereign wealth fund mocked the Europeans for destructive welfare state policies.

P.P.S. Click here if you want some morbid humor about China’s pseudo-communist regime.

P.P.P.S. Though I give China credit for trimming at least one of the special privileges provided to government bureaucrats.

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