It would be much better, as I discuss in this interview with Yahoo Finance, if Trump instead declared a ceasefire in the trade wars he’s started.
The interview largely revolved around trade policy and monetary policy, so I was mostly critical of Trump.
But I want to focus on the point I made midway through the discussion, when I said that Trump is undermining and offsetting some of his Administration’s good policies – most notably tax reform and regulatory easing.
As an economist, I’m frustrated by this inconsistency. It’s akin to a watching a kid get good grades in some classes and bad grades in others (and I worry his GPA is declining).
Though I suppose I shouldn’t be surprised. This is what the theory of “public choice” tells us to expect.
I can only imagine, though, how frustrating this must be for Republican political operatives. They’re focused on winning in 2020 and the President is sabotaging that goal with bad trade policy.
I also had an opportunity to discuss these issues yesterday on CNBC.
As you can see, I started with a political observation about the American people being naturally inclined to support growth and upward mobility, which suggests limited appeal for the spiteful agenda of Bernie Sanders, AOC, and the rest of the class-warfare crowd.
I hope I’m right about that, and a quick online search found this bit of somewhat-encouraging polling data from 2014.
Since I’m a bit of a bleeding-heart libertarian, I then took the opportunity to condemn various forms of cronyism (such as the corrupt TARP bailout) that transfer unearned money into the pockets of undeserving rich people.
I suggested that honest people from across the ideological spectrum could – and should – come together to curtail such nauseating policies. That’s the kind of fairness government should promote.
Though I’ll confess I’m not very hopeful. I concluded the discussion by observing that Senator Sanders recently chose to sacrifice the interests of poor children in order to curry favor with the union bosses at the National Education Association.
P.S. As indicated by his question about the desirability of millionaires, the host (Robert Frank) seemed sympathetic to good policy. He also was sufficiently well informed to know about how China’s partial liberalization has lifted hundreds of millions of people out of abject poverty.
The good news is that we probably have a couple of decades before the crisis occurs. The bad news is that our political class seems to have no interest in the reforms that would be necessary to avert the crisis.
Though maybe the crisis will occur sooner than we think. I wrote back in 2015 that the debate between Hillary Clinton and Bernie Sanders was merely a discussion over how fast we should drive in the wrong direction.
Well, Crazy Bernie didn’t get the nomination, but he seems to have won the war for the soul of the party. As I point out in this second clip, the radicals are now in the ascendancy on the left.
By the way, here’s the interview with Thomas Sowell that was used as a lead-in to my interview. He may be even more pessimistic than I am.
Though you’ll notice that Professor Sowell included a caveat, speculating that maybe there will be some unforeseeable development that saves the western world (or perhaps just the United States) from gradual decay.
Let’s close this column with some optimism on that point.
I’m old enough to remember the malaise of the 1970s, which wasn’t just based on the economic mess caused by Nixon-style and Carter-style statism. Many people also thought capitalism was no better than communism and that we needed to find some sort of middle ground (and some economists were horribly guilty of this sin).
Thankfully, Reagan had a different approach (including mockery rather than moral equivalence) and the western world won the Cold War.
I cared a lot about the 1995-96 shutdown and the 2013 shutdown because those were battles involving the size and scope of government.
But I don’t have a dog in the current fight over immigration and border security. That being said, I told Neil Cavuto that there are several fiscal policy lessons we can learn from the current shutdown fight.
A short TV interview just scratches the surface of an issue, so here are some additional details.
The first lesson is that much of what the government does is irrelevant to America.
I pointed out that ordinary Americans don’t notice or care that departments such as Housing and Urban Development are closed because there’s no net value generated by such bureaucracies.
The second lesson is that some parts of government should be shut down permanently.
If people don’t care or notice that a department is temporarily closed, they probably won’t care or notice if it is permanently closed.
I think that message applies to bureaucracies that are affected by the current shutdown (such as HUD and Transportation) as well as to some of the bureaucracies that are unaffected (Education, Energy, Agriculture, etc).
The third lesson is that temporary shutdowns are not a money-saving exercise.
A shutdown does not alter the amount of entitlement spending and it does not change annually appropriated spending. And since bureaucrats always get back pay for their involuntary vacations, there aren’t any savings there, either.
I’m not being nihilistic. Instead, I’m making the simple point that America’s Founders had the right idea in creating a factionalism-based system that enables gridlock.
Last but not least, the fifth lesson is that bureaucrats should have less power over economic activity.
I mentioned that there wouldn’t be any threat of disrupted air travel if all airports got to use a privatized version of TSA.
But that’s just one small example. Tim Carney’s column in the Washington Examiner is a must-read on the issue of pointless bureaucratic impediments to commerce.
…the government shutdown is another lesson… Before now, if an out of state brewery issued a new seasonal, you could simply purchase it across state lines thanks to…Form 5100.31 approvals… Of course, if you’re a particularly skeptical type, you may have a question… Why in the world should a brewer need federal approval on new beer labels? Once we ask that question, a thousand analogous questions come to mind. And in the asking, we expose the trick in so many stories about the crucial work of our expansive federal government. The trick is that the government’s work is often made necessary only by needless federal meddling in the first place. …when some reporter tries to tell you to be grateful that the federal government is opening a gate for you, ask them why the wall is there in the first place.
Amen.
This is what I was trying to get across in the interview about business decisions being stymied until some bureaucrats signs off.
Let’s wrap up today’s column with a superb Reason video by John Stossel.
P.S. No column on this topic would be complete without adding to our collection of shutdown humor (h/t: Libertarian Reddit).
After the horrific school shooting in Parkland, Florida, I explained that the gun-control policies being pushed by left-leaning students such as David Hogg would be utterly ineffective at deterring evil people.
But give the kid credit. He’s fully exploiting his 15 minutes of fame (in a way that makes Sandra Fluke look like an amateur).
His latest idea is to somehow boycott financial firms that do business with gun manufacturers.
Dana Loesch asked me to appear on her show to discuss the economics of this issue. It’s a Skype interview, so the quality on my end leaves something to be desired, but I hopefully got across my main point that boycotts only work if consumers change their buying patterns. And, to be blunt, David Hogg is not going to change the minds of people who appreciate the 2nd Amendment.
Except it won’t work because Hogg’s hyperbole isn’t nearly as effective as the coercive power of government.
Indeed, Hogg is far more likely to increase gun sales, which is the point of this bit of satire.
Though I don’t want to imply that the leftist students from Parkland, Florida, have been completely ineffective.
They demanded change. And the school gave it to them in the form of a preposterous requirement for see-through backpacks. Here are some details from a CNN story.
Survivors of a school shooting in Parkland, Florida, returned from spring break Monday to new security measures that some students said made them feel like they were in prison. Marjory Stoneman Douglas students encountered security barriers and bag check lines as they entered campus Monday morning. Inside the school, administrators handed out the students’ newest mandatory accessories: a see-through backpack much like the ones required at some stadiums and arenas… Now, with the bags, they’re sacrificing their privacy for what he and others consider an ineffective security measure.
Of course these clear backpacks are a joke.
But, as illustrated by this bit of satire, it’s rather naive to expect good results when you ask for more government.
And since students such as Hogg make a big deal about “assault rifles” that are functionally the same as other rifles, it’s poetic justice that he’s now being deprived of an “assault backpack.”
But why stop there?
Surely we don’t want to run the risk of a student hiding a gun under their clothes. We need to ban “assault clothing”!
But David Hogg isn’t meekly acquiescing to see-through backpacks. At least according to this final bit of satire.
Ouch. I thought some of the anti-Fluke humor was hard hitting, but both “hold my sippy cup” and “from my damp soft hands” are rather brutal.
It’s not easy being a libertarian in the policy world of Washington. I view the flat tax as a timid intermediate step, with the real goal being a tiny federal government (like the Founding Fathers envisioned) that can be financed without any broad-based tax.
Yet even my timid intermediate step is considered radical and impractical by DC standards. There’s no discussion of fundamental tax reform. Instead, the debate revolves around whether we can reduce a couple of tax rates in one part of the code and “pay for” those changes by altering some provisions in another part of the code.
This is very frustrating, which is why I joked with Neil Cavuto that we could kill two birds with one stone by trading Trump, Hillary, Manafort, and Podesta to Russia in exchange for that country’s 13 percent flat tax.
But I want to address a couple of serious points in the interview.
First, it would be very good for long-run growth if the tax system created a level playing field between housing and business investment.
Third, because it is vitally important to reduce the corporate tax rate, even a curmudgeon like me will accept half a loaf (or less, ugh).
To conclude, most people assume that something will pass simply because GOPers desperately need some sort of victory to compensate for their failure to repeal (or even just tinker with) Obamacare.
That’s true, but that doesn’t change the fact that any bill can be defeated if Democrats are unified in opposition and a small handful of Republicans decide to vote no.
By the way, I’m not completely unsympathetic to some of the Republicans who are wavering on whether to vote for a reform bill. Consider their predicament: If there’s a bill that cuts the corporate tax rate and gets rid of the deduction for state and local income taxes(to my chagrin, I’m assuming property taxes will still be deductible), that will be a net plus for the economy. But, depending on other provisions in the legislation, it may mean that a non-trivial number of voters (especially from high-tax states) will be hit with a tax increase.
Members of Congress who want good policy can explain to those voters that the economy will grow faster. They can tell those voters that their state politicians now will be more likely to reduce state income tax burdens. I think those assertions are true, but voters looking at higher tax burdens probably won’t care about those long-run effects.
And I continued to beat that drum in an interview last week with Fox Business.
The Wall Street Journalagrees that the time has come for a lower corporate rate. Unless, of course, one would prefer the United States to fall even further behind other countries.
President Emmanuel Macron last week pushed a budget featuring substantial tax relief through the National Assembly. The top rate on corporate profits will fall to 28% by 2020 from 33.33% today, and Mr. Macron has promised 25% by 2022. …Critics branded Mr. Macron “the President for the rich” for these overhauls, but the main effect will be to stimulate investment and job creation… The Netherlands also is jumping on the bandwagon. Prime Minister Mark Rutte promises to cut the top corporate rate to 21% from 25% by 2021… Do American politicians really want to have to explain to voters why they let the U.S. trail even France?
For the most part, opponents of tax reform in the United States understand that they have lost the competitiveness argument. So they will pay lip service to the notion that a lower corporate rate is desirable (heck, even Obama notionally agreed), but they will fret about the loss of tax revenue and a supposed windfall for the “rich.”
I agree that tax revenues will decrease, at least in the short run. But there’s some very good research showing the long-run revenue-maximizing corporate rate is somewhere between 15 percent and 25 percent.
And Chris Edwards of the Cato Institute reviewed fifty years of data for industrialized nations and ascertained that lower tax rates are associated with rising revenue.
There’s also good evidence from Canada and the United Kingdom if you want country-specific examples of the relationship between corporate tax rates and corporate tax revenue.
And what about the debate over whether the “rich” benefit?
That issue is a red herring. Yes, shareholders of companies, on average, have higher incomes, and they will benefit if the rate is reduced, but I’ve never been motivated by animosity against those with more money (assuming they earned their money rather than mooching off the government).
What does get my juices flowing, however, is growth. And if we can get more dynamism in the economy, that translates into more jobs and higher income.
A new report from the Council of Economic Advisers estimates the potential benefit for ordinary people.
Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. …Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.
There’s some good cross-country data showing nations with lower corporate tax rates do better.
Between 2012 and 2016, the 10 lowest corporate tax countries of the OECD had corporate tax rates 13.9 percentage points lower than the 10 highest corporate tax countries, about the same scale as the reduction currently under consideration in the U.S. The average wage growth in the low tax countries has been dramatically higher.
Here’s the accompanying chart.
As you can see, there’s a clear divergence between higher-tax and lower-tax nations. Though, given the limited time period in the chart and the fact that many other factors can impact wage growth, I’m actually more persuaded by some of the other empirical research cited in the CEA report.
Arulpalapam et al (2012) find that workers pay nearly 50 percent of the tax, while Desai et al (2007) estimate a worker share of 45 to 75 percent. Gravelle and Smetters (2006) generate a rate of 21 percent when the rate of capital mobility across countries is moderate and 73 percent when capital can flow freely, evidence that the labor incidence is likely both dynamic and positively correlated with the rate of international capital transfers. A Congressional Budget Office (CBO) study (Randolph, 2006) finds that workers bear 70 percent of the corporate income tax burden in the baseline and 59 to 91 percent in alternative specifications. In a summary study, Jensen and Mathur (2011) argue for an assumption of greater than 50 percent. …A cross-country study by Hassett and Mathur (2006) based on 65 countries and 25 years of data finds that the elasticity of worker wages in manufacturing after five years with respect to the highest marginal tax rate in a country is as low as -1.0 in some specifications, although other sets of control variables increase the elasticity to -0.3. Expanded analysis by Felix (2007) follows the Hassett and Mathur strategy, but incorporates additional control variables, including worker education levels. Felix settles on an elasticity of worker wages with respect to corporate income taxes of -0.4, at the high end of the Hassett and Mathur range. …Felix (2009) estimates an elasticity of worker wages with respect to corporate income tax rates based on variation in the marginal tax rate across U.S. states. In this case, the elasticity is substantially lower; a 1 percentage point increase in the top marginal state corporate rate reduces gross wages by 0.14 to 0.36 percent over the entire period (1977-2005) and by up to 0.45 percent for the most recent period in her data (2000-2005). …Desai et al (2007)…measure both the changes in worker wages and changes in capital income associated with corporate income tax changes. The estimated labor burden of the corporate tax rate varies from 45 to 75 percent under various specifications in the paper.
That’s a lot of jargon, so I suspect that many readers will find data from Germany and Australia to be more useful when considering how workers benefit from lower corporate rates.
P.S. While I think a lower corporate tax rate may result in more revenue over time, that’s definitely not my goal.
But the most depressing experience was probably the TARP bailout. In part, it was depressing because bad government policy created the conditions for the crisis, so it was frustrating to see the crowd in Washington blame capitalism (in effect, a repeat of what happened in the 1930s).
In other words, TARP was pure cronyism. Wall Street firms had “invested” in Washington by giving lots of contributions to politicians and TARP was their payoff.
With this background, you’ll understand why I asserted in this interview that the dissolution of two business advisory councils is the silver lining to the black cloud of Charlottesville.
Since that was just one segment of a longer interview and I didn’t get a chance to elaborate, here are some excerpts from an article in Harvard Business Review by Robert Litan and Ian Hathaway about the connection between anemic productivity numbers (which I wrote about last week) and cronyism.
Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work. In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors. Most people think of entrepreneurship as being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process. A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living. Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.
But the authors look at the issue more broadly to see if there is an economy-wide problem.
Do we…see a rise in unproductive entrepreneurship, as Baumol theorized? …James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing. In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.
This is very depressing.
I don’t want companies to do well because the CEOs cozy up to politicians. If entrepreneurs and corporations are going to be rolling in money, I want that to happen because they are providing valued goods and services to consumers.
I wrote about Bessen’s research last year. It’s very unsettling to think that companies make more money because of political connections than they do from research and development.
There are two reasons this is troubling.
First, it means slower growth because government intervention is undermining the efficient allocation of labor and capital that occurs with productive entrepreneurship.
Second, cronyism is very corrosive because people equate business with capitalism, so their support for capitalism declines when they see companies getting special favors.
I wish ordinary people understood that big business and free enterprise are not the same thing.
Yet Trump and some GOPers want to take credit for a rising stock market, as if that is some sort of positive reaction to their non-accomplishments.
As you can see from this interview, I don’t completely reject this hypothesis. After all, stock values are a reflection of the market’s expectations of future after-tax profits. So if investors think that good reforms – such as a lower corporate tax rate – are going to happen, then it makes sense that the value of financial assets will increase.
By the way, I can’t resist commenting on the claim from the Economic Policy Institute that the stock market is a “meaningless indicator” that has nothing to do with the well-being of workers.
That’s nonsense. Assuming we’re looking at genuine and durable increases in stock values (rather than a bubble), that’s a reflection of a growing economy, which translates into more income for workers.
In the language of economists, capital and labor are complimentary goods. More of one increases the value of the other. Which is why I told the folks at Politifact that it’s good for workers in the long run when financial assets become more valuable since that presumably means more investment.
Dan Mitchell, a scholar at the libertarian Cato Institute, agreed that “capital and labor compete for shares of income in the short run.” Over the long term, however, “there is no trade-off between corporate profits and labor income,” he said.
But let’s focus on the bigger issue of whether Trump deserves any credit for the stock market’s performance.
Ira Stoll, writing for the New York Sun, shares some very appropriate caveats.
The stock market, in other words, is like a lot of things: politicians want to take credit for it when news is good, but absolve themselves of responsibility when news is bad. One might hope for a more consistent perspective from journalists or from independent research organizations. Imagine, say, an election-day to election-day presidential job-performance dashboard that included data on measures such as stock market performance, the value of the dollar, job creation, unemployment, labor force participation, and real GDP growth. It can indeed be hard to isolate a president’s influence on all these things from other variables, such as, say, the composition of Congress. Should Mr. Obama or President Clinton get credit for the stock market booms in their terms? Or should the Republican Congresses under which they occurred? How does one accurately account for the period between the election and inauguration, when stock market gains may reflect anticipated improvements, but growth results measure existing budgets and policies?
Having given lots of reasons to be cautious, Stoll nonetheless thinks investors are buoyed by the pro-growth parts of Trump’s agenda.
…steps Mr. Trump takes — reducing regulation or slowing the growth of it, reducing corporate income tax rates, allowing more energy exploration — will outweigh any negatives. In other words, there’s a decent case that Mr. Trump does deserve at least some credit for the stock market gains.
I don’t have any objection to this analysis.
Though allow me to add another caveat to the list. As I explained when discussing the same topic back in March (see final interview) and indirectly suggested in the above interview, Trump is playing a risky game.
What if the stock market is artificially inflated because of the Fed’s easy-money policy? If that’s the case, there almost certainly will be a correction and stock values will drop.
This won’t be Trump’s fault, but he’ll then be very vulnerable when opponents argue that he should be blamed. As the old saying goes, live by the sword, die by the sword.
In my humble opinion, politicians (at least the ones who support good policy on net, and I still don’t know whether Trump is in this category) should argue for good policy because that will lead to higher per-capita income over time.
And they also should say, in the interests of accuracy, that it generally takes time to see good results.
Consider the lesson of the Reagan years. The first couple of years were a bit bumpy, both because some of Reagan’s good reforms – particularly the tax cuts – were slowly phased in and because some short-run pain was inevitable as inflation was brought under control (an overlooked and very beneficial achievement). But once his policies kicked in, the economic results were very positive.
It’s depressing to see how Republicans are bungling the Obamacare issue. But it’s also understandable since it’s politically difficult to reduce handouts once people get hooked on the heroin of government dependency (a point I made even before Obamacare was enacted).
Unfortunately, I fear that the GOP might bungle the tax issue as well. I was interviewed the other day by Dana Loesch on this topic and highlighted several issues.
Myth #4: The U.S. income tax is more regressive than other nations
Fact: It is the most progressive in the entire OECD
There are several ways to slice the data, so one can quibble with Brian’s assertion. But when comparing taxes paid by the rich compared to taxes paid by the poor, it is true that the United States relies more on upper-income taxpayers than any other developed nation. Not because we tax the rich more, but because we tax the poor less.
Myth #5: The U.S. tax code is becoming more regressive over time
Fact: It has become increasingly progressive over the past 35 years
But if Republicans can’t even manage to cut taxes today, when they control both the executive and legislative branch, then neither one of my fantasies will ever become reality.
I don’t like the income tax that’s been imposed by our overlords in Washington. Indeed, I’ve speculated whether October 3 is the worst day of the year because that’s the date when the Revenue Act of 1913 was signed into law.
And, as discussed in this interview about Seattle from last week, I’m also not a fan of local income taxes.
From an economic perspective, I think a local income tax would be suicidally foolish for Seattle. Simply stated, this levy will drive some well-heeled people to live and work outside the city’s borders. And when revenues fall short of projections, Seattle politicians likely will compensate by increasing the tax rate and also extending the tax so it is imposed on those with more modest incomes. And that will drive more people out of the city, which will lead to an even higher rate that hits even more people.
Lather, rinse, repeat.
Though I pointed out that this grim outcome may be averted if the courts rule that Seattle doesn’t have the legal authority to impose an income tax.
But I also explained in the discussion that a genuine belief in federalism means that you should support the right of state and local governments to impose bad policy. I criticize states such as California and Illinois when they expand the burden of government. And I criticize local entities such as Hartford, Connecticut, and Fairfax County, Virginia, when they expand the burden of government.
But I don’t think that Washington should seek to prohibit bad policy. If some sub-national governments want to torment their citizens with excessive government, so be it.
There are limits, however, to this bad version of federalism. State and local governments should not be allowed to impose laws outside their borders. That’s why I’m opposed to the so-called Marketplace Fairness Act. And they shouldn’t seek federal handouts to subsidize bad policy, such as John Kasich’s whining for more Medicaid funding.
Moreover, a state or local government can’t trample basic constitutional freedoms, for instance. If Seattle goes overboard with its anti-gun policies, federal courts presumably (hopefully!) would strike down those infringements against the 2nd Amendment. Likewise, the same thing also would (should) happen if the local government tried to hinder free speech. Or discriminate on the basis on race.
The bottom line is that I generally support the rights of state and local governments to impose bad policy, so long as they respect constitutional freedoms, don’t impose extra-territorial laws, and don’t ask for handouts.
And I closed the above interview by saying it sometimes helps to have bad examples so the rest of the nation knows what to avoid. Greece and France play that role for the industrialized world. Venezuela stands alone as a symbol of failed statism in developing world. Places like Connecticut and New Jersey are poster children for failed state policy. And now Seattle can join Detroit as a case study of what not to do at the local level.
But I haven’t spent that much time looking at how we got to where we are today, other than in 2015 when I cited a very interesting report from the Joint Economic Committee that provided decade-by-decade data on changes in the burden of federal spending.
But I had a chance to touch on this issue in a recent interview when asked to comment on the unfortunate milestone of a $4 trillion federal budget.
This first graph shows changes in nominal spending over time. As I pointed out in the interview, it took 200 years before the crowd in Washington got spending up to $1 trillion.
But in the past three decades, it has skyrocketed to $4 trillion.
But nominal spending numbers are not the most useful data when looking at long-run changes.
After all, we’ve had lots of inflation. Simply stated, dollars today are worth a lot less than dollars in the past.
So this second chart shows inflation-adjusted federal outlays. As you can see, we have a graph that doesn’t look quite the same. It’s much easier to see the budgetary impact of World War II, for instance, and post-war spending growth isn’t quite as dramatic.
Though it’s still significant. As I noted in the interview, the burden of inflation-adjusted federal spending has doubled since 1985.
But even inflation-adjusted data doesn’t tell the real story.
And that’s what I show in this final chart measuring federal spending as a share of economic output (gross domestic product).
Now it’s very easy to see that World War II involved a massive one-time fiscal cost. But the most important data is what happened after the war. The burden of federal outlays initially dropped to 12 percent of GDP. That’s higher than it was before the war, but at least in retrospect not a bad place to be.
Unfortunately, there’s been a gradual expansion in the economic burden of the federal budget ever since.
Though if you pay close attention to the numbers, there are some interesting secondary stories. You’ll notice that the negative upward trend was reversed during the Reagan years and we continued to make progress during the Clinton years.
Unfortunately, policy then moved in the wrong direction under Bush and Obama.
If I was Captain Ahab in a Herman Melville novel, my Moby Dick would be the Organization for Economic Cooperation and Development. I have spent more than 15 years fighting that Paris-based bureaucracy. Even to the point that the OECD threatened to throw me in a Mexican jail.
My main gripe is that the OECD, in hopes of propping up the European welfare states that dominate its membership, tries to enable big tax increases by undermining tax competition.
And, to add insult to injury, the bureaucrats at the OECD get a special exemption so their gold-plated salaries are tax free, even though they spend so much time trying to impose higher taxes on the rest of us.
So when I had a chance earlier today to comment on the OECD’s statist agenda, I could barely contain myself
Notwithstanding the glitch at the beginning (the perils of a producer talking in my ear), I greatly enjoyed the opportunity to castigate the OECD.
Indeed, returning to my Moby Dick analogy, I’m increasingly hopeful that the harpoons I keep throwing at the OECD may finally draw some blood.
In his budget, President Trump has proposed to cut overall spending for international organizations. And we’re talking about a real budget cut, not the phony kind of cut where spending merely grows at a slightly slower rate.
The budget doesn’t specify funding levels for the various bureaucracies, but various Administration officials have told me that their goal is to completely defund the Paris-based bureaucracy.
But I’m trying not to get too excited. It’s still up to Congress to decide OECD funding, and the bureaucrats in Paris have been very clever about currying favor with the members of the subcommittee that doles out cash for international organizations.
Though as I mentioned in the interview, the OECD didn’t do itself any favors by openly trashing Trump last year. Even if they have their doubts about Trump, I suspect most GOPers in Congress aren’t happy that the bureaucrats in Paris were trying to tilt the election for Hillary Clinton.
Here are some examples.
The OECD’s number-two bureaucrat, Doug Frantz, actually equated America’s president with the former head of Germany’s National Socialist Workers Party.
The Deputy Secretary General of the OECD has described…Donald Trump as a “lunatic” whose political rise mirrors that of Hitler and Mussolini. …Speaking on RTÉ’s This Week, Doug Frantz said…“if you look at the basis ‘us and them’ that Donald Trump sets up, that Hitler set up, that Mussolini set up, then you can begin to at least be concerned and I’m concerned: I think any right-minded person should be concerned…The person who sits in the White House is the most powerful person in the world and if that person is someone who follows every whim and appeals to the most base instincts of a population, then we’re all under real threat”.
And another news report caught the OECD’s Secretary General, Angel Gurria, basically asserting that Trump is racist.
Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development and former Mexican foreign minister, says the word “racist” can be applied to Donald Trump. …Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. I think that because the American public is wise, it will then act in consequence,” Gurria adds.
By the way, I’m making sure to share these partisan statements with lots of people in Congress and the Administration.
In an ideal world, lawmakers would defund the OECD because it is an egregious waste of money. But if they defund the bureaucracy because its top two officials tried to interfere with the US election, I’ll still be happy with the final outcome.
I’ll close by recycling the video on the OECD that I narrated for the Center for Freedom and Prosperity.
P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending, tax policy, and expenditure limits.
But even if the bureaucracy ended its statist advocacy agenda and gave staff economists carte blanche to produce good papers, that still wouldn’t change my view that American tax dollars should not be funding the OECD. Though I confess it would be a much less attractive target if it returned to its original mission of collecting statistics and publishing studies.
The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.
The bad news is that they nonetheless can’t be trusted with tax reform.
Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.
Here’s the problem. Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.
This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.
Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.
The Hill is reporting that the Trump Administration is still undecided on the BAT.
The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.
While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.
And that’s apparently under discussion.
The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.
The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.
The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.
I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.
Why? Because it’s quite likely politicians will replace it with a tax that is even worse.
This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.
Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.
…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.
The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.
Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.
From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.
With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.
And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.
P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.
As Ronald Reagan pointed out many years ago, Washington is a company town. But rather than being home to a firm or industry that earns money by providing value to willing consumers, the “company” is a federal government that uses a coercive tax system to provide unearned wealth to various interest groups.
And the beneficiaries of that redistribution zealously guard their privileges and pay very close attention to any developments that might threaten their access to the public trough
Federal bureaucrats are particularly concerned whenever there is talk about spending restraint. They get lavishly compensated compared to folks in the private sector, so they definitely fret whenever something might happen to derail their gravy train.
A recent segment on a local station in Washington, DC, focused on their angst, and I provided a contrary point of view.
Needless to say, my friends who work for the federal government generally don’t agree with my assessment.
Some of them have even told me that I’m off base because the federal workforce is remarkably efficient. Indeed, several of them even sent me an article from the Washington Post that claims the number of bureaucrats hasn’t changed since the late 1960s.
They claim this is evidence that the bureaucracy has become more efficient.
But they’re wrong. The official federal workforce may not have changed, but research from the Brooking Institution reveals that this statistic is illusory because of a giant shadow bureaucracy.
George Will’s latest column is about this metastasizing hidden bureaucracy.
…government has prudently become stealthy about how it becomes ever bigger. In a new Brookings paper, …government expands by indirection, using three kinds of “administrative proxies” — state and local government, for-profit businesses, and nonprofit organizations. Since 1960, the number of state and local government employees has tripled to more than 18 million, a growth driven by federal money: Between the early 1960s and early 2010s, the inflation-adjusted value of federal grants for the states increased more than tenfold. …“By conservative estimates,” DiIulio writes, “there are about 3 million state and local government workers” — about 50 percent more than the number of federal workers — “funded via federal grants and contracts.” Then there are for-profit contractors, used, DiIulio says, “by every federal department, bureau and agency.” For almost a decade, the Defense Department’s full-time equivalent of 700,000 to 800,000 civilian workers have been supplemented by the full-time equivalent of 620,000 to 770,000 for-profit contract employees. …the government spends more (about $350 billion) on defense contractors than on all official federal bureaucrats ($250 billion). Finally, “employment in the tax-exempt or independent sector more than doubled between 1977 and 2012 to more than 11 million.” Approximately a third of the revenues to nonprofits (e.g., Planned Parenthood) flow in one way or another from government.
When you add it all together, the numbers are shocking.
“If,” DiIulio calculates, “only one-fifth of the 11 million nonprofit sector employees owe their jobs to federal or intergovernmental grant, contract or fee funding, that’s 2.2 million workers” — slightly more than the official federal workforce. To which add the estimated 7.5 million for-profit contractors. Plus the conservative estimate of 3 million federally funded employees of state and local governments. To this total of more than 12 million add the approximately 2 million federal employees. This 14 million is about 10 million more than the estimated 4 million federal employees and contractors during the Eisenhower administration.
In other words, the federal budget has expanded and so have the number of people with taxpayer-financed jobs.
By the way, there’s nothing theoretically wrong with a government bureaucracy using non-profits or contractors. Assuming, of course, that both the agency and the person are doing something productive.
And that was the point I tried to make it the interview. I don’t care whether the Department of Agriculture or Department of Education is filled with official bureaucrats or shadow bureaucrats. What I do care about, however, is that they are part of an agency that should not exist.
For three decades, I’ve been trying to convince politicians to adopt good policy. I give them theoretical reasons why it’s a good idea to have limited government. I share with them empirical evidence demonstrating the superiority of free markets over statism. And I’m probably annoyingly relentless about disseminating examples of good and bad policy from around the world (my version of “teachable moments”).
But if you want to get a politician to do the right thing, you need more than theory, data, and real-world case studies. You need to convince them – notwithstanding my Second Theorem of Government – that good policy won’t threaten their reelection.
My usual approach is to remind them that Ronald Reagan adopted a bunch of supposedly unpopular policies, yet he got reelected in a landslide because reducing the burden of government allowed the private sector to grow much faster. George H.W. Bush, by contrast, became a one-term blunder because his tax increase and other statist policies undermined the economy’s performance.
I’m hoping this argument will resonate with some of my friends who are now working in the White House. And I don’t rely on vague hints. In this clip from a recent interview, I bluntly point out that good policy is good politics because a faster-growing economy presumably will have a big impact on the 2020 election.
But the Republican plan did not try to fix the government-imposed third-party-payer distortions that cause health care to be so expensive and inefficient. And I pointed out at the end of this clip that Republicans would have been held responsible as the system got even more costly and bureaucratic.
Now let’s shift to fiscal policy.
Here’s a clip from an interview about Trump’s budget. I’m happy about some of the specific reductions (see here, here, and here), but I grouse that there’s no attempt to fix entitlements and I’m also unhappy that the reductions in domestic discretionary spending are used to benefit the Pentagon rather than taxpayers.
The latter half of the above interview is about the corruption that defines the Washington swamp. Yes, it’s possible that Trump could use the “bully pulpit” to push Congress in the right direction, but I wish I had more time to emphasize that shrinking the overall size of government is the only way to really “drain the swamp.”
And since we’re talking about good policy and good politics, here’s a clip from another interview.
Back when the stock market was climbing, I suggested it was a rather risky move for Trump to say higher stock values were a referendum on the benefits of his policies. After all, what goes up can go down.
The hosts acknowledge that the stock market may decline in the short run, but they seem optimistic in the long run based on what happened during the Reagan years.
In other words, there was a direct connection between good policy, good economy, and good political results. Indeed, let’s enshrine this relationship in a “Fourth Theorem of Government.”
For what it’s worth, Reagan also demonstrated leadership, enacting all those pro-growth reforms over the vociferous opposition of various interest groups.
Will Trump’s reform be that bold and that brave? His proposed 15-percent corporate tax rate deserves praise, and he seems serious about restraining the regulatory state, but he will need to do a lot more if he wants to be the second coming of Ronald Reagan. Not only will he need more good policies, but he’ll also need to ditch some of the bad policies (childcare subsidies, infrastructure pork, carried-interest capital gains tax hike, etc) that would increase the burden of government.
The jury is still out, but I’m a bit pessimistic on the final verdict.
We have reached the 50th full day of the Trump Presidency.
In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.
Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.
Heck, Trump hasn’t even told us what he really thinks on some of these issues.
What does he really want to do on tax cuts and tax reform? His original plan is off the table, but otherwise we don’t know.
And regulation? I’m guessing a shift in the right direction, but this is another example where we don’t know how far or how fast.
In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.
I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.
You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!
The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.
Why is it so hard for them to recognize, I endlessly wonder, that when you tax something, you get less of it? And why don’t they realize that when you tax something at high rates, the effect is even larger?
But for today, I want to focus on the part of the interview where I suggested that a lower corporate tax rate might generate more revenue in the long run.
Last decade, the experts at the American Enterprise Institute calculated that the revenue-maximizing corporate tax rate is about 25 percent.
More recently, the number crunchers at the Tax Foundation estimated the long-run revenue-maximizing rate is even lower, at about 15 percent.
You can (and should) read their studies, but all you really need to understand is that companies will have a greater incentive to both earn and report more income when the rate is reasonable.
But since the U.S. rate is very high (and we also have very punitive rules), companies are discouraged from investing and producing in America. Firms also have an incentive to seek out deductions, credits, exemptions, and other preferences when rates are high. And multinational companies understandably will seek to minimize the amount of income they report in the United States.
In other words, a big reduction in the corporate rate would be unambiguously positive for the American economy. And because there will be more investment and job creation, there also will be more taxable income. In other words, a bigger “tax base.”
P.S. Economists at the Australian Treasury calculated the effect of a lower corporate rate and found both substantial revenue feedback and significant benefits for workers. The same thing would happen in the United States.
I was recently interviewed on Fox Business Network about Trump’s policies and the economy, and the discussion jumped around from issues such as border-adjustable taxation to energy regulation.
Though the central theme of the discussion was whether Trump had good ideas for American jobs and business competitiveness.
Given my schizophrenic views on Trump, this meant I was both supportive and critical, and I hope certain people in the White House paid attention to my comment about there being no need for the “stick” of protectionism if Trump delivers on the “carrot” of tax cuts and deregulation.
For today, though, I want to elaborate on why protectionism is the wrong approach. I mentioned in the interview that the long-run outlook for manufacturing employment wasn’t very good, but that we shouldn’t blame trade. So I decided to find a chart that illustrated this point, which then gave me the idea of using a Q&A format to share several charts and tables that make very strong points about trade and protectionism.
Did you know…that manufacturing employment is falling because of productivity growth rather than trade?
The bad news (at least for certain workers) is that manufacturing employment has fallen. And it will continue to fall. But as illustrated by this chart from Professor Don Boudreaux, manufacturing output is at record highs. What’s really happening is that productivity improvements enable more to be produced while using fewer workers. And this is happening all over the world.
Did you know…that there’s a strong relationship between trade openness and national prosperity?
One of Professor Boudreaux’s students augmented one of his charts to show the link between pro-trade policies and per-capita economic output.
Did you know…that you can’t hurt importers without also hurting exporters?
Many of the major multinational firms engage in considerable cross-border trade, meaning that they are both major importers and major exporters. Here’s a very illuminating chart from the Peterson Institute of International Economics.
Did you know…that protectionism imposes enormous losses on consumers and therefore is a net job destroyer?
There has been considerable research on the results of various protectionist policies and the results shared by Mark Perry of the American Enterprise Institute inevitably show substantial economic costs, which means that the jobs that are saved (the “seen“) are more than offset by the jobs that are lost or never created (the “unseen“).
Last but not least, did you know….that economists are nearly unanimous in their recognition that trade barriers undermine prosperity?
There are plenty of jokes (many well deserved!) about economists, including the stereotype that economists can’t agree on anything. But there’s near-unanimity in the profession that protectionism is misguided.
P.S. I wrote a few weeks ago about former President Obama’s dismal legacy. I then augmented that analysis with a more recent postscript citing Ramesh Ponnuru’s observation that Obama failed in his effort to be the left’s Reagan. Now it’s time for another worthy postscript. The Wall Street Journal reviewed the new numbers for growth in 2016 and opined on what this means for Obama’s overall record.
…growth for all of 2016 clocked in at 1.6%, the slowest since 2011 and down from 2.6% in 2015. That marks the 11th consecutive year that GDP growth failed to reach 3%, the longest period since the Bureau of Economic Analysis began reporting the figure. The fourth quarter also rings out the Obama era with an average annual growth rate of 1.8%, which is right down there with George W. Bush for the lowest among modern Presidents. Mr. Obama inherited a deep recession, but that makes the 2.1% growth average since the recession ended all the more dismaying. You have to work hard to suppress growth after a deep downturn, and Mr. Obama did that by putting income redistribution ahead of growth as a policy priority.
There’s monopoly power when government prohibits or restricts competition in a sector of the economy (cable TV franchises, occupational licensing, etc).
There’s monopoly power when government subsidizes select participants in a sector of the economy (Fannie Mae, Freddie Mac, etc).
Now it’s time to consider a real-world example from the private sector and ask whether we should be concerned about monopoly power. ATT and Time Warner have announced a merger, a step that has triggered lots of hand-wringing by politicians.
But as I explain in this interview for a British news outlet, the expanded company won’t have any power or ability to coerce me, particularly so long as politicians don’t create any “barriers to entry” to hinder the entry of new competitors to the market.
The Skype connection became garbled for a few seconds at the end of the interview, but I think my point about the misuse of antitrust laws was reasonably clear.
Suffice to say that allowing politicians and bureaucrats to have any authority over mergers is a recipe for abuse and corruption as companies try to use antitrust laws to sabotage their competitors.
Let’s see what some experts have written on this topic. And we’ll start by looking at the big picture. Writing for Bloomberg, Professor Tyler Cowen points out that antitrust laws often don’t make sense.
Reading through old cases does not induce great faith in the contemporary usefulness of 19th- and 20th-century antitrust laws. …For instance, the famous suits against Standard Oil, Kodak and Alcoa wouldn’t make sense in today’s globalized economy. …In 1998, the U.S. Justice Department initiated an antitrust suit against Microsoft, partly on the grounds that the company sought to extend its market power to browsers. Few people today think the company’s Internet Explorer browser failed because the government restored competitiveness; Firefox and Google built better software. Yet prosecutors spent years distracting the talent of one of America’s most successful companies, as they had with IBM earlier in a 13-year case dropped in 1982.
And he points out how monopoly power often is created by government intervention and regulation.
…there is a strong case that growing concentration in the hospital market has raised health-care costs. Some major metropolitan areas have only a small number of hospital chains. Part of the problem is that highly regulated environments encourage consolidation and larger firms to deal with compliance costs… Cable television is another area where anti-monopoly remedies might be appropriate, but keep in mind that cable is typically a government-created local monopoly.
Now let’s look at he specific case of the ATT/Time Warner merger.
Holman Jenkins of the Wall Street Journal is not impressed by those who want government interference. And he shares my disdain for the way influence peddlers in Washington are the big beneficiaries of antitrust laws.
…this week’s proposed merger of AT&T and Time Warner is eliciting opposition that is ferocious, idiotic and almost contentless. …tens of thousands of people in Washington make their living by extracting rents from companies going about their business and trying to adapt to besetting waves of technological and market change. …Unwisely, Silicon Valley mostly sat out 2014’s epic battle over the Obama administration’s desire to impose antique utility regulation on broadband. Its argument: Who cares? Technology will swamp the regulators with broadband ubiquity anyway, so why pick a fight…the Valley’s naïfs may discover they have underestimated the power of bureaucratic perversity and political indifference to things that would actually serve the public good. One way to look at the inevitable torture AT&T is about to undergo at the hands of Washington’s regulators: It will be the first test of the libertarian-optimist theory that technology is more powerful than a bloody-minded bureaucrat.
Last but not least, Paula Dwyer’s Bloomberg column takes a dim view of those who want the heavy foot of government to second guess the invisible hand of the market.
Donald Trump and Bernie Sanders, wearing their populist stripes, want regulators to block it outright. …the politicians’ concerns are overblown. …Antitrust, of course, is meant to protect consumers from the higher prices and reduced choices that result when a company has market power. But a merged AT&T and Time Warner are in different industries, and their merger wouldn’t affect ownership concentration. Nor would it result in the loss of a competitor from the market.
And she points out the dismal history of antitrust enforcement.
…think back to 1974 to the original AT&T antitrust case, which also began from a fear of vertical integration. …For sure, AT&T had a monopoly, but it was created and sanctioned by the federal government. All that was needed was a government deregulation order and a green light that it wouldn’t block competitors. Instead, the U.S. sued to break up Ma Bell. …If the U.S. had simply deregulated plain old telephone service, any one of these technologies could have forced AT&T to adjust or disappear. The U.S.’s 1998 antitrust case against Microsoft had much the same fighting-the-last-war problem. …while the Justice Department was fixating on browsers and operating systems, the personal computer was losing market share to laptops, which lost out to tablets and which are now being overtaken by smartphones. While Microsoft was bogged down with the Windows case, which it eventually settled in 2001 on favorable terms to the company, a new generation of tech giants — Google, Facebook, Amazon — took flight. The lesson is that a technology or media conglomerate’s dominance these days is almost certainly transitory.
In other words, let the merger proceed. It may be a wise business decision. Or it may be a foolish business decision.
But that outcome should be determined by the preferences of consumers in a competitive marketplace.
The heavy foot of government shouldn’t play a role. Especially since, as noted by this cartoon, antitrust laws are so broad and vague that companies can get in legal trouble for charging more than their competitors, less than their competitors, and the same as their competitors.
P.S. If this information hasn’t been sufficient to make you skeptical about antitrust laws, then also keep in mind that the European Commission’s tax shakedown of Apple is based on antitrust policy rather than tax policy.
The establishment media, by contrast, is excited about the election and many journalists are doing everything possible to aid the election of Hillary Clinton. In some cases, their bias leads to them to make silly pronouncements on public policy in hopes of undermining Trump. Which irks me since I’m then in the unwanted position of accidentally being on the same side as “The Donald.”
For instance, some of Trump’s private tax data was leaked to the New York Times, which breathlessly reported that he had a huge loss in 1995, and that he presumably used that “net operating loss” (NOL) to offset income in future years.
As I pointed out in this interview, Trump did nothing wrong based on the information we now have. Nothing morally wrong. Nothing legally wrong. Nothing economically wrong.
All that people really need to know is that NOLs exist in the tax code because businesses sometimes lose money (the worst thing that happens to individuals, by contrast, is that we get laid off and have zero income). With NOLs, companies basically get a version of “income averaging” so that they’re taxed on their long-run net income (i.e., total profits minus total losses).
In other words, this is not a controversy. Or it shouldn’t be.
But if you don’t believe me, let’s peruse the pages of The Flat Tax, which was written by Alvin Rabushka and Robert Hall at Stanford University’s Hoover Institution and is considered the Bible for tax reformers.
Here’s what it says about business losses in Chapter 5.
Remember that self-employed persons fill out the business tax form just as a large corporation does. Business losses can be carried forward without limit to offset future profits (assuming your bank or rich relatives will keep lending you money). There is no such thing as a tax loss under the individual wage tax. You can’t reduce your compensation tax by generating business losses. Well-paid individuals who farm as a hobby or engage in other dubious sidelines to shelter their wages from the IRS had better enjoy their costly hobbies; the IRS will not give them any break under the flat tax.
And here’s the business postcard for the flat tax. As you can see, it’s a very simple system based on the common-sense notion that profits equal total receipts minus total expenses.
And it allows “carry-forward” of losses, which is just another term for a company being able to use NOLs in one year to offset profits in a subsequent year.
But it’s not just advocates of the flat tax how hold this view.
A news report for the Wall Street Journal notes that NOLs are very normal in the business world for the simple reason that companies sometimes lose money.
The tax treatment of losses, bound to become a subject of national debate, is a typically uncontroversial feature of the income-tax system. The government doesn’t pay net refunds when business owners lose money, but it lets taxpayers use those losses to smooth their tax payments as they make money. That reflects the fact that “the natural business cycle of a taxpayer may exceed 12 months,” according to a congressional report.
Megan McArdle of Bloomberg also comments on this make-believe controversy.
At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. …this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. …Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. The Times could have just as truthfully written that the provision was “particularly prized by America’s small businesses, farmers and authors,” many of whom depend on the NOL to ensure that they do not end up paying extraordinary marginal tax rates — possibly exceeding 100 percent — on income that may not fit itself neatly into the regular rotation of the earth around the sun.
I like how she zings the NYT for its biased treatment of the issue.
She also explains why the law allows NOLs and why businesses (including, presumably, Trump’s companies) would prefer to never be in a position to utilize them.
“If someone has a $20 million gain in one year and a $10 million loss in the second year, that person should be treated the same as someone who had $5 million in each of the two years,” says Alan Viard, a tax specialist at the American Enterprise Institute, who like all the other experts, seemed somewhat surprised that this was not obvious. “There are definitely tax provisions narrowly targeted to various industries that you could take issue with,” says Ron Kovacev, a tax partner at Steptoe and Johnson. “The NOL is not one of them.” …Losing $900 million dollars may save you $315 million or so on future or past taxes. But astute readers will have noticed that it is not actually smart financial strategy to lose $900 million in order to get out of paying $315 million to the IRS. Most of us would rather have the other $585 million than a tax bill of $0. …If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy.
In other words, Trump used NOLs, but he would have greatly preferred to avoid the big $916 million loss in the first place.
Ryan Ellis, writing for Forbes, doesn’t suffer fools gladly on this issue.
…political reporters don’t know a damned thing about taxes. …That ignorance was on display in vivid colors over the weekend. We were told that this tricky NOL was some sort of “loophole” that only super-rich bad guys like Donald Trump got to use. We were told that this relieved him of having to pay taxes for 18 years, a laughably arbitrary, made up number that is the tautological output of simple arithmetic and wild assumptions. …It’s not difficult to see how political reporters got played like a fiddle here. Most of them have never actually run a business, much less learned about the tax rules surrounding them.
I especially like that Ryan also nails the NYT for bias, in this case because the reporters used made-up number to imply that he didn’t pay tax for almost two decades.
And Ryan also notes that NOLs are very common (and were even used in 2015 by Trump’s opponent).
…a net operating loss is very common in businesses. As Alan Cole of the Tax Foundation pointed out this morning, about 1 million taxpayers had an NOL in 1995. It results from business deductions exceeding business income in a particular year. …Trump’s not the only presidential candidate this year who once had a big loss on his taxes. In 2015, the Clintons realized a capital loss of nearly $700,000. That will be available in perpetuity to offset capital gains they might incur. Unlike an NOL, a capital loss can slowly be used to offset other income, albeit at a slow $3000 per year net of any other gains offset.
Now that we’ve established that there’s nothing remotely scandalous about NOLs, let’s see whether there are any lessons we can from this kerfuffle.
Let’s return to the Wall Street Journalstory cited earlier in this column.
Real-estate developers can generate losses more easily than other taxpayers. …Unlike investors in other businesses, they can use those losses to offset other income. …Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP, said…“Trump appears to have a perfect storm of allowable real-estate losses that can be offset against streams of income from salaries from his companies and royalty fees from the use of his name,” Mr. Skarlatos said. “Most taxpayers who have large real-estate losses don’t have such large steady streams of other ordinary income; they just have losses that may turn into profits in the future when they sell the real estate.”
This doesn’t tell us whether Trump actually did use his NOLs to offset other income, though I’m guessing the answer is yes. And as I speculated in the above interview, I wonder whether the losses were real losses or paper losses.
And others have suggested that Trump actually lost other people’s money and he was able to use their losses to offset some of his income.
I have no idea if that’s even possible, just as I have no idea whether his losses were real.
But I do know that a flat tax would put an end to any possible gamesmanship since it is a cash-flow system (which means it is based on actual transactions that take place, not whether companies use currency).
In a world with a flat tax, Trump would be allowed to “carry forward” losses, but only if they are real. And as explained above, he wouldn’t be able to use those losses to offset income that gets reported on the individual postcard.
But mostly it’s impossible to know what he really thinks for the simple reason that he probably doesn’t have deep thoughts about public policy (look at his flailing response to the question of debt). Even when he’s been specific, does anyone think he’s philosophically committed to what he has said while campaigning?
So my assessment, as explained in this interview with Neil Cavuto, is that Trump is a grenade that will explode in an unpredictable fashion.
So if you’re a libertarian and you choose to vote for Trump, just be forewarned that you’ll probably be standing next to the grenade when it explodes.
So what about the alternative? Is there a libertarian argument for Hillary Clinton (other than the fact that she’s not Trump)? Can a politician who has spent decades promoting cronyism and redistributionism actually deliver good policy?
Her husband actually did a good job when he was in the White House, but you can probably sense from this debate with Juan Williams on the Stossel show, I’m not overflowing with optimism that she also would preside over a shift to better policy.
Here are a few additional thoughts on my debate with Juan.
Keynesian economics doesn’t work, either in theory or in reality. And it’s laughable that the excuse for Keynesian failure is always that politicians should have spent more money.
Entitlements will cripple America’s economy if left on auto-pilot. I’ve repeatedly made the point that we’re like Greece 10 or 15 years ago. By claiming at the time that there was no crisis, Greek politicians ensured that a crisis eventually would occur. The same thing is happening here.
Last but not least, I was rhetorically correct but technically wrong about welfare dependency in Hong Kong. I said fewer than 3 percent of Hong Kong residents get public assistance when I should have said that Hong Kong spends less than 3 percent of GDP on redistribution. That’s an amazingly small welfare state, but it does ensnare about 5.5 percent of the population. Which if far lower than the share of the population getting handouts in America, so my point was still very much correct.
Not that any of this matters in the short run since there’s a 99.9 percent probability that America’s next President will be perfectly content to let the country sink further into the swamp of statism.
Which is what I did in this interview on Fox Business.
It wasn’t a long interview, but I had the opportunity to touch on four very important issues.
First, I explained that the Social Security Trust Fund is nothing but a pile of IOUs. It’s money the government owes itself, which means that the bonds in the Trust Fund can only be turned into real money by taking more from the private sector.
But if you don’t trust me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.
These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.
In other words, the Trust Fund is like putting IOUs to yourself in a college fund. When it’s time for junior to start his freshman year, you’ll have to find the money to cash those IOUs.
Second, Social Security already is in the red and the rising burden of spending for the program will lead to huge fiscal shortfalls.
Here’s a chart, based directly on the data from Table VI.G9 of the Trustees Report, showing the annual deficit in the program based on today’s dollars.
Andrew Biggs of the American Enterprise Institute weighed in on this issue earlier this year. Here’s some of what he wrote in a column for the Wall Street Journal.
Mrs. Clinton would raise retirement payments for widows as well as provide Social Security credits for individuals who take time out of the workforce to care for a child or an infirm adult.
Andrew points out that Hillary also has expressed support for increases in the payroll tax rate and letting the government impose the tax on a greater share of income.
Mrs. Clinton…has recently spoken in favor of both approaches.
By the way, the latter option is especially dangerous for the economy, as explained in this video.
Fourth, Social Security is in bad shape, but the main long-run entitlement challenge comes from health-related programs such as Medicare, Medicaid, and Obamacare.
That being said, I wouldn’t be surprised if most people instead chose Thatcher’s famous line about socialism and running out of other people’s money.
Which is a great line that cleverly pinpoints the ultimate consequence of statism. Just think Greece or Venezuela.
But what can we say about starting point rather than end point? Why do people get seduced by socialism in the first place?
For part of the answer, let’s turn to the famous quote from George Bernard Shaw about how “A government which robs Peter to pay Paul can always count on the support of Paul.”
Very insightful, I hope you’ll agree.
Though it’s an observation on all governments, not just socialist regimes.
So I’m going to propose a new quote: “Socialism is fun so long as someone else is paying for it.”
And the reason I concocted that quote is because it’s a perfect description of many of the people supporting Bernie Sanders.
According to a poll conducted by Vox, they want freebies from the government so long as they aren’t the ones paying for them.
When we polled voters, we found most Sanders supporters aren’t willing to pay more than an additional $1,000 in taxes for his biggest proposals. That’s well short of how much more the average taxpayer would pay under his tax plan. …In other words, even Sanders supporters are saying they don’t want to pay as much to the federal government for health care as they are paying right now in the private sector. …The kicker for all of this? Some analysts believe Sanders’s plan will cost twice as much as his campaign estimates. …Sanders supporters are far and away the most likely to want free public college tuition. Still, 14 percent said they don’t want to pay additional taxes for it — and another half said they would only pay up to $1,000 a year…the majority of Sanders supporters in our poll (much less all voters) aren’t willing to pay enough to actually support those nationalized services.
As you can see from this chart, they want government to pick up all their medical expenses, but they’re only willing to pay $1,000 or less.
Gee, what profound and deep thinkers.
Maybe we should ask them if they also want private jets if they only have to pay $1,000. And Hollywood mansions as well.
Mr. Sanders’s offerings to the American people are, quite simply, too good to be true, and much less feasible, politically or administratively, than he lets on. More expensive, as well. …Despite the substantial tax increases associated with Mr. Sanders’s policies, they would not be fully paid for — not even close. To the contrary, the tax hikes would be sufficient to cover just 46 percent of the spending increases, resulting in additional budget deficits of $18 trillion over 10 years. A deficit increase of that magnitude would cause an additional $3 trillion in interest payments over the same period — unless, of course, Mr. Sanders has another $18 trillion in tax increases or spending cuts up his sleeve.
The editorial writers at the Post, like so many people in Washington, make the mistake of fixating on the symptom of red ink instead of the underlying disease of excessive spending.
Would they actually favor his crazy ideas if he produced $18 trillion of additional tax hikes over the next 10 years?
Returning to the topic of whether Bernie voters actually would be willing to pay more tax, I recently appeared on Fox Business News to discuss the odd phenomenon of workers in the high-tech industry giving contributions to the anti-capitalist Senator from Vermont.
I confess that I don’t really know what would motivate someone to support Bernie Sanders, but I did share some thoughts.
Republicans in recent decades have been big spenders, so libertarian-minded voters in Silicon Valley may have decided to base their votes on social issues.
The high-tech industry may simply be sending “protection money” to leftist politicians, though that’s probably a motive only for senior executives.
It’s rather ironic that the left goes after companies like WalMart and Exxon when firms like Google and Apple have much bigger profit margins.
Politicians are infamous for being cagey, but “The Donald” is an entirely different animal. Instead of using weasel words that create wiggle room, he simply makes bold statements that are impossible to reconcile.
Consider his views on government debt.
Here’s an interview with Dana Loesch of Blaze TV from earlier this week. I was in Zurich and it was past midnight, so I was a tad bit undiplomatic about Trump’s endlessly evolving views. Simply stated, it’s not a good idea to default. And it’s not a good idea to monetize debt either.
For what it’s worth, while Trump is oscillating between different position on debt, one of his top advisers is claiming that his plan will produce a multi-trillion dollar surplus.
Sigh.
The sensible approach would be for Trump to make simple points.
But he hasn’t asked me for advice, so I’m not holding my breath waiting for him to say the right thing.
It’s also a challenge to decipher Trump’s position on tax policy.
He actually put forth a good tax proposal, but nobody takes it seriously since he doesn’t have a concomitant plan to restrain spending.
So his campaign supposedly designated Larry Kudlow and Steve Moore to modify the plan, but then said the original proposal would stay unchanged.
This does not create a sense of confidence.
Trump also is getting pressure on his personal tax situation. He said he would release his tax return(s). Now he says he won’t. I speculated on what this implies in an essay for Time, listing five reasons why he may decide to keep his returns confidential.
The first two reasons deal with a desire for privacy and a political concern that he may appear to be less wealthy than he’s led folks to believe.
First, he may resent the idea of letting the world look at his tax returns for reasons of personal privacy, which is an understandable sentiment. …Can Trump get away with stonewalling on his returns? Perhaps. President Barack Obama refused to release his college transcript and didn’t seem to suffer any political damage. …Second, Trump’s tax return will probably show a surprisingly low level of income, and he might be concerned that such a revelation would erode the super-successful-billionaire aura that he has created.
I also suspect he’s worried that his tax return will make him look like…gasp…a tax avoider.
Third, to the degree that Trump’s return shows a lower-than-expected amount of taxable income, this will probably be because his accountants and tax lawyers have carefully plumbed the 75,000-page internal revenue code for deductions, credits, exemptions, exclusions and other preferences… Since we all seek to legally minimize our tax liabilities, that shouldn’t be a political problem. …That normally would be a persuasive answer, but voters may look askance when they learn that Trump is taking advantage of mysterious provisions dealing with things they don’t understand, like depreciation, carryforwards, foreign tax credits, muni bonds and deferral. …Fourth, for very wealthy individuals and large companies, the complexity of the tax code means there’s no way of knowing if a tax return is accurate. …Given Trump’s persona, he presumably pushes the envelope.
Last but not least, I imagine Trump has “offshore” structures.
Fifth, it’s highly likely that Trump does business with so-called tax havens. For successful investors and entrepreneurs with cross-border economic activity, this is almost obligatory because jurisdictions like the Cayman Islands have ideal combinations of quality governance and tax neutrality. …But in a political environment where the left has tried to demonize “offshore” tax planning, any revelations about BVI companies, Panama law firms, Jersey trusts and Liechtenstein accounts will be fodder for Trump’s many enemies.
Needless to say, I greatly sympathize with Trump’s desire to minimize his tax burden and I applaud his use of so-called tax havens (which are routinely utilized by wealthy Democrats).
And I even sympathize with his desire for privacy even though divulging personal financial information is now a routine obligation for politicians.
The point I should have made in my essay is that Trump would be in a stronger position if he said from the start that his tax returns are nobody else’s business.
And shifting back to policy, he’ll be in a stronger position if he picks a message and sticks to it (though ideally not the same message as Hillary Clinton).
P.S. Since I mentioned Obama’s still-secret college transcript, I may as well share this very clever mock transcript that explains a lot about his misguided approach to policy.
I normally enjoy working for the Cato Institute since it’s a principled and effective organization.
But every so often, my job requires an unpleasant task, and watching the State-of-the-Union Address as part of Cato’s live-tweeting program counts as one my least enjoyable experiences since joining the team.
But let’s make lemonade out of lemons by looking at lessons that can be learned from Obama’s speech. The most jarring part of the evening was when Obama bragged about the American economy.
Moreover, being proud that we’re doing better than Europe is akin to getting a participation ribbon in a soccer league for kids.
And the chest thumping about the unemployment rate was very misplaced since that piece of data only looks good because so many Americans have given up on finding a job.
I’ve pontificated on that issue before and cited the Labor Department’s overall data, but let’s dig a little deeper to fully understand why Obama should have apologized rather than patted himself on the back.
Here’s the employment/population ratio for the prime, working-age population of those between 25 and 54 years of age.
As you can see, this ratio has improved a bit over the past five years, but it appears that there’s very little hope that the overall employment situation will ever recover to where it was before the recession.
Here’s another way of looking at the same data. It’s labor force participation by age. The lines don’t seem that far apart, but a 3-4 percentage point decline across age groups adds up to millions of people no longer productively employed.
Last but not least, here’s another way of approaching this data.
We have a chart from the St. Louis Federal Reserve Bank showing the number of working-age people not in the labor force.
There are two takeaways from this chart.
First, it’s clear that the problem started well before Obama.
But it’s also clear that the problem has gotten much worse during his tenure.
So you’ll understand why I cited labor-force participation (along with stagnant household income) as Obama’s real legacy in this interview.
By the way, one of the perils of live TV is that you sometimes get curve balls. And since the Ted Cruz birther controversy is now big news, I was asked my opinion even though I don’t have the slightest competency to discuss the issue.
Sort of like the time I went on a program for the ostensible purpose of discussing trade and wound up trapped in a discussion on America’s relationship with North Korea.
My only regret from yesterday’s interview is that I wasn’t clever enough to say that I was more worried about Cruz supporting a Canadian-style tax system than I was about Cruz being born in Canada.
P.S. While I’m not happy about Cruz including a value-added tax in his reform proposal, don’t read too much into that grousing since there are warts in the other candidates’ plans as well.
But let’s focus on the short run, which isn’t quite so depressing. I was one of John Stossel’s guests as we looked at what happened in 2015 and gave a sober assessment of whether the United States is moving in the right direction or wrong direction.
If you don’t want to watch 30-plus minutes, here are the highlights.
I’ll start with what has me worried and/or glum.
According to the political betting markets (which I feel are more accurate than polls), Donald Trump’s chances keep increasing. I don’t feel confident, however, that he would shrink the size and scope of government if he made it to the White House. And he’s using up the oxygen of candidates who (while imperfect) seem more sincerely interested in advancing economic liberty.
American society is becoming more tolerant. As I argued on the program, I don’t care whether people approve of gays or pot smoking, but I do want to be part of a society that (unlike Iran!) doesn’t persecute or harass people for behaviors or beliefs that don’t harm others.
So some good things are happening.
Though I reserve the right to be really depressed later this year.
Several years ago, I shared some analysis suggesting that voting for Obamacare resulted in about 25 Democrats losing their congressional seats in 2010. And since more Democrats presumably lost seats in 2012 and 2014 because of that costly and misguided scheme, it surely seems that expanding government’s role in health care was a net negative for the Democratic Party.
Being a contrarian, however, I then suggested in my analysis that Obamacare nonetheless might be a net plus for Democrats, at least in the long run. Simply stated, as more and more people get ensnared in the quicksand of government dependency, that creates an ever-growing bloc of voters who may think that it is in their interest to support politicians who advocate for bigger government.
Let’s expand on that issue today.
Some of my Republican friends (I’m willing to associate with all sorts of disreputable people) have been making the point that President Obama has crippled the Democratic Party.
And they have a compelling case. If you compare the number of Democrats in the House and Senate when Obama took office with the amount that there are today, it’s clear that the President has been very bad news his party.
I suppose a defender of the President somehow might argue that the losses for congressional Democrats would have been more severe without Obama, but that would be a huge intellectual challenge.
Perhaps even more important, there’s been a giant loss of Democratic state legislators during Obama’s tenure, with more than 900 seats going from Democrat control to Republican control.
That’s resulted in a huge shift in the partisan control of state legislatures. Which, by the way, has very important implications for Congress because of the redistricting that takes place every 10 years.
So it seems like Republicans are in a good situation. They control Congress and they control most of the states.
And if GOPers pick up the White House in 2016, it surely seems like that would be the icing on the cake for those who say Obama was bad news for the Democrats.
But now let me give some encouraging news for my Democrat friends (like I said, I consort with shady people).
Second, even if small government-oriented Republicans controlled Washington after the 2016 election, that might not change the nation’s long-run trend toward more dependency.
These are some of the issues I explore in this CBN interview.
The most relevant point in the interview, in my humble opinion, was the discussion about one-third of the way through the interview. I talked about the “ratchet effect,” which occurs when the statists expand the size and scope of government a lot and good policy makers then get control and reduce it by only a small amount.
Stay in that pattern long enough and you eventually become Greece (which is why I emphasized in the interview the need to reverse this trend with big systemic changes such as genuine entitlement reform).
One final point. Pat gave me an opportunity to brag about the Cato Institute at the end of the interview. It is nice to work at a think tank that cares solely about policy and not about partisan labels. So we criticize big-government Republicans just as much as we criticize big-government Democrats.
But that doesn’t mean all the people in Washington is sitting on their collective hands. The folks at the Federal Reserve have been trying to goose the economy with an easy-money policy.
Unfortunately, as I argue in this recent interview, that’s not a recipe for success.
Yet if you don’t like the Fed trying to manipulate the economy, you’re often perceived as a crank. And if you’re an elected official who questions the Fed’s actions, you’re often portrayed as some sort of uninformed demagogue.
I explored this issue today in The Federalist. In my column, I defended Senators Rand Paul and Ted Cruz.
Rand Paul and Ted Cruz…deserve credit for criticizing the Federal Reserve. …This irks some folks, who seem to think Fed critics are knuckle-dragging rubes and yahoos with a superstitious fealty to the gold standard.
This isn’t a debate over the gold standard, per se, but instead of fight over monetary Keynesianism vs. monetary rules.
The dispute isn’t really about a gold standard, but whether the Federal Reserve should have lots of discretionary power. …On one side are the advocates of…the monetary component of Keynesian economics. Proponents explicitly want the Fed to fine-tune and micromanage the economy. …On the other side are folks who believe in rules to limit the Fed’s powers…because they believe discretionary power is more likely to give us bad results such as higher price inflation, volatility in output and employment, and financial instability.
And the Joint Economic Committee is on the side of rules. Here’s an excerpt from a JEC report that I cited in my article.
Well-reasoned, stable and predictable monetary policy reduces economic volatility and promotes long-term economic growth and job creation. Generally, ‘rules-based’ policies reduce uncertainties and facilitate long-term planning and investment. …Conversely, activist, interventionist, and discretionary monetary policies have been historically associated with increased economic volatility and subpar economic performance.
I then mention various rules-based methods of limiting the Fed’s discretion and conclude by commenting on the legitimacy of those who want to curtail the Federal Reserve.
Paul and Cruz may not be experts on monetary policy, just as left-wing senators doubtlessly have no understanding of the intricacies of discretionary monetary policy. But the two senators are on very solid ground, with an illustrious intellectual lineage, when they assert that it would be a good idea to constrain the Fed.
Now let’s expand on two issues. First, I mention in my article the gold standard as a potential rule to constrain the Fed. I’ve previously shared some analysis by George Selgin on this topic. He’s concluded that governments won’t ever allow its return and probably couldn’t be trusted with such a system anyway, but that doesn’t mean it doesn’t work.
Here are some excerpts from a recent article by George. Read the entire thing, but here’s the part that matters most for this discussion.
…the gold standard was hardly perfect, andgold bugs themselves sometimes make silly claims about their favorite former monetary standard. …the classical gold standard worked remarkably well (while it lasted). …it certainly did contribute both to the general abundance of goods of all sorts, to the ease with which goods and capital flowed from nation to nation, and, especially, to the sense of a state of affairs that was “normal, certain, and permanent.” The gold standard achieved these things mainly by securing a degree of price-level and exchange rate stability and predictability that has never been matched since.
And Norbert Michel of the Heritage Foundation touches on some of the same issues in a new column for Forbes.
Several candidates suggested the gold standard was a good system, and they’re all getting flak for talking about gold.
But here’s the most fascinating revelation from Norbert’s column. It turns out that even Ben Bernanke agrees with George Selgin that the classical gold standard worked very well. Norbert quotes this passage from Bernanke.
The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called “classical” gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value.
Both Norbert’s article and George’s article have lots of good (but depressing) analysis of how governments went off the gold standard because of World War I and then put in place a hopelessly weak and impractical version of a gold standard after the war (the politicians didn’t want to be constrained by an effective system).
So here’s Norbert’s bottom line, which is very similar to the conclusion in my column for The Federalist.
Many whofavor the gold standardrecognize that it provided a nominal anchor as opposed to the discretionary fiat system we have now. Maybe the gold standard isn’t the best way to achieve that nominal anchor, but we shouldn’t just dismiss the whole notion.
The second issue worth mentioning is that the best way to deal with bad monetary policy may be to have no monetary policy.
At least not a monetary policy from government. This video explains the merits of this approach.
Gee, maybe Friedrich Hayek was right and private markets produce better results than government monopolies.
Though this isn’t because of any animus toward Europe. Indeed, I always enjoy my visits. And some of America’s best (albeit eroding) features, such as rule of law and dignity of the individual, are a cultural inheritance from that continent.
Nor am I trying to overstate America’s competitiveness, which actually has eroded considerably during this century.
Instead, I’m simply trying to make the narrow point that too much government is already causing serious problems in Europe, and I’m worried those problems are spreading to the United States.
Yet some of our statist friends, most notably Senator Bernie Sanders, think America should deliberately choose to be more like Europe.
They have this halcyon vision that the average European is more prosperous and they exclaim that this is proof that a big welfare state is benign. Or perhaps even beneficial.
So it was with great interest that I read a new article by Ryan McMaken of the Mises Institute. He takes a data-driven look at the America-v-Europe economic debate.
The battle over the assumed success of European socialism continues. Many European countries like Sweden have gained a reputation as being very wealthy in spite of their highly regulated and taxed economies. From there, many assume that the rest of Europe is more or less similar, even if slightly poorer. But if we look more closely at the data, a very different picture emerges.
Actually, I have a minor disagreement with the above passage.
Countries like Sweden and Denmark are highly taxed, but it’s not true that they’re highly regulated.
The only reason that they generally lag behind the United States in the overall rankings is that they have very bad fiscal policy and that more than offsets the advantage they generally have over America in other categories.
But I’m digressing.
Let’s focus on the main point of the article, which is an effort to produce a neutral comparison of living standards in European nations and American states.
…if one is going to draw broad conclusions about poverty among various countries, GDP numbers are arguably not the best metric. For one, GDP per capita can be skewed upward by a small number of ultra-rich persons. …I thought it might be helpful to use data that relies on median income data instead, so as to better account for inequalities in income and to get a better picture of what the median resident’s purchasing power.
McMaken uses OECD data to calculate relative levels of median income.
The nationwide median income for the US is in red. To the left of the red column are other OECD countries, and to the right of the red bar are individual US states. These national-level comparisons take into account taxes, and include social benefits (e.g., “welfare” and state-subsidized health care) as income. Purchasing power is adjusted to take differences in the cost of living in different countries into account. Since Sweden is held up as a sort of promised land by American socialists, let’s compare it first. We find that, if it were to join the US as a state, Sweden would be poorer than all but 12 states, with a median income of $27,167.
And here’s the chart he described (click to enlarge). Remember, this is a look at the income of the median (rather than mean) household, so the numbers are not distorted by the presence of people like Bill Gates.
Here’s some additional analysis based on his number-crunching.
With the exception of Luxembourg ($38,502), Norway ($35,528), and Switzerland ($35,083), all countries shown would fail to rank as high-income states were they to become part of the United States. In fact, most would fare worse than Mississippi, the poorest state. For example, Mississippi has a higher median income ($23,017) than 18 countries measured here. The Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Japan, Korea, Poland, Portugal, Slovenia, Spain, and the United Kingdom all have median income levels below $23,000 and are thus below every single US state. …Germany, Europe’s economic powerhouse, has a median income ($25,528) level below all but 9 US states.
We could stop at this point and declare that the United States was more economically prosperous than all European nations other that oil-rich Norway and the twin financial centers of Switzerland and Luxembourg.
This doesn’t bode well for Bernie Sanders’ claim that America should be more like Sweden and Denmark.
But McMaken expands upon his analysis and explains that the above numbers actually are too generous to Europeans.
We’ve already accounted for cost of living at the national level (using PPP data), but the US is so much larger than all other countries compared here, we really need to consider the regional cost of living in the United States. Were we to calculate real incomes based on the cost of living in each state, we’d find that real purchasing power is even higher in many of the lower-income states than we see above. Using the BEA’s regional price parity index, we can take now account for the different cost of living in different states.
And he produces a new graph, once again featuring the United States average in red, with other developed nations to the left and numbers for various states to the right.
McMaken gives some added context to these new adjusted-for-cost-of-living numbers.
…there’s less variation in the median income levels among the US states. That makes sense because many states with low median incomes also have a very low cost of living. …This has had the effect of giving us a more realistic view of the purchasing power of the median household in US states. It is also more helpful in comparing individual states to OECD members, many of which have much higher costs of living than places like the American south and midwest. Now that we recognize how inexpensive it is to live in places like Tennessee, Florida, and Kentucky, we find that residents in those states now have higher median incomes than Sweden (a place that’s 30% more expensive than the US) and most other OECD countries measured.
And here’s the most powerful data from his article.
Once purchasing power among the US states is taken into account, we find that Sweden’s median income ($27,167) is higher than only six states… We find something similar when we look at Germany, but in Germany’s case, every single US state shows a higher median income than Germany. …None of this analysis should really surprise us.
In other words, even when we limit the comparison to Europe’s more successful welfare states, the United States does better.
Not because America is a hyper-free market jurisdiction like Hong Kong or Singapore. Instead, the U.S. does better simply because European nations deviate even further from the right recipe for prosperity.
I commented on some of these issues in this interview with Dana Loesch of Blaze TV, specifically noting that living standards in Denmark and Sweden are below American levels.
As an economist, I’m frustrated by this inconsistency. It’s akin to a watching a kid get good grades in some classes and bad grades in others (and I worry his GPA is declining).
International Liberty 