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Investment, Productivity, Wages, and Economic Prosperity

Sat, 08/19/2017 - 12:45pm

Here’s a simple and fundamental question: What is economic growth?

And here’s a simple answer: It’s when there’s more national income.

That seems like a trivial tautology, but let’s explore some implications. When you dig into the numbers, it turns out that increases in national income (usually measured by gross domestic product, though I prefer gross domestic income) are driven by two factors.

  • More people.
  • More output per hour, also known as increased productivity.

This is why people sometimes say that GDP growth is a function of population growth plus productivity growth.

And what really matters, at least if we want higher living standards, is to have more output per hour. As a result, we should be very concerned that productivity growth seems to be lagging in the United States.

Here’s a chart that was created by the Wall Street Journal, showing data from the Labor Department on productivity all the way back to the 1950s.

And here’s what I wrote about these numbers in a column for the Hill, starting with the observation that productivity growth is very important for long-run prosperity.

…one thing that presumably unites economists is that we all recognize higher productivity is a good thing. It’s what enables higher wages for workers, higher earnings for companies and higher living standards for the nation.

I then point out that we have a problem.

…when we see weak productivity numbers, that’s not good news. …there is a very worrisome trend this century. Productivity is increasing, but at ever-lower rates, which helps to explain why the overall rate of economic growth this century has lagged compared to the post-World War II average.

But I also share suggestions for policy reforms that would lead to higher productivity.

…tax reform could be…beneficial. …a lower corporate tax rate…a key reason…is that investors will have a bigger incentive to finance new projects that will boost productivity and thus boost wages. …to replace “depreciation” with “expensing” would be particularly helpful since the current approach imposes an unwarranted tax on new investments.

The column explains why it’s foolish to impose tax penalties on income that is saved and investedPolicies such as the capital gains tax and death tax punish capital formation and thus reduce productivity growth.

Politicians impose these levies to go after “the rich,” but it’s the rest of us who suffer because of slower growth.

But my column doesn’t just focus on investments in “physical capital.” I also argue that our current education system does a very poor job of boosting “human capital.”

The United States spends more on education — on a per-pupil basis — than other nations. Yet, international test scores show that we get very mediocre results. We see a similar pattern inside the country, with high levels of spending associated with more bureaucracy rather than better outcomes. …it’s time to unleash the power of markets by allowing greater school choice. There’s certainly plenty of evidence that this approach will be more effective.

I closed the column by noting that productivity growth increased under both Ronald Reagan and Bill Clinton when the United States was moving in the direction of free markets. Conversely, I also noted that productivity growth has declined under the government-centric policies of George W. Bush and Barack Obama.

Seems like the lesson should be obvious.

P.S. I looked at this same issue back in 2012 when writing about the recipe for increased prosperity. I pointed out that capital and labor are the two factors of production and explained that a bigger economy is a function of more labor, more capital, and/or the more efficient use of labor and capital. Well, another way of saying “more efficient use” is to say “higher productivity.”

After all, it’s much better to have a bigger economy because we’re more productive rather than because we all take a second job on the weekends.

P.P.S. For those who want to get deeper in the economic weeds, this column on China includes a discussion of potential production and this column on Hong Kong includes two great videos on growth from Marginal Revolution University.

The Federal Government Should Get Out of Infrastructure

Fri, 08/18/2017 - 12:37pm

I’ve called for the abolition of the Department of Transportation on more than one occasion, so I was very excited to see this new video about infrastructure from Johan Norberg.

Very well put. As Johan says (channeling Bastiat), we should remember that jobs are destroyed when money is taken out of the private sector to build infrastructure.

So it behooves us to make sure that any new project isn’t a boondoggle and instead will increase the economy’s productive capacity.

Which is why we should strive for decentralization and shrink Washington’s footprint. If a state or local government is paying for its own projects, presumably it’ll have a greater incentive to avoid wasteful pork. When the federal government pays, by contrast, that’s a recipe for waste.

Veronique de Rugy explains the issue in a column for Reason. She starts with some economic analysis.

Economists have long recognized that roads, bridges, airports, and canals are the conduits through which goods are exchanged, and as such, infrastructure can play a productive role in economic growth. But not all infrastructure spending is equal. Ample literature shows, in fact, that it’s a particularly bad vehicle for stimulus and does not, in practice, boost short-term jobs or economic growth. …Publicly funded infrastructure projects often aren’t good investments in the long term, either. Most spending orchestrated by the federal government suffers from terrible incentives that lead to malinvestment—resources wasted in inefficient ways and on low-priority efforts. Projects get approved for political reasons and are either totally unnecessary or harmed by cost overruns and corruption.

And she concludes by arguing for market forces rather than federal involvement.

[Trump] should put an end to the whole idea that infrastructure should be centrally planned, taxpayer-funded, and the responsibility of the federal (as opposed to state or local) government. The current system obliterates the discipline that comes from knowing a project needs to pay for itself to survive. User fees should become our preferred option for funding infrastructure. That change kills two birds with one stone: It lessens the need for massive federal expenditures, and it gives the private sector an incentive to spend money on crucial but not exactly sexy maintenance tasks. …If Trump wants the United States to have “world-class” infrastructure, the surest way is through market-based reforms that increase competition while reducing subsidies and regulations. Embrace real privatization, not federally directed private investments.

Writing for U.S. News & World Report, Tracy Miller similarly argues that decentralization is the best approach.

Highways as well as public transportation are currently funded with money from the federal Highway Trust Fund, and by state and local governments. …Money from the fund has strings attached that raise costs and limit state and local governments’ ability to choose which projects have priority. These strings include prevailing wage laws, which require contractors receiving federal money to pay unionized wages even if they could attract qualified workers willing to work for less. High-profile projects chosen by politically powerful congressmen can easily take priority over projects that would generate greater benefits for their constituents. From an administrative standpoint, it would not be very difficult to reduce or eliminate the federal government’s role in highway and transit funding. Instead of gas taxes going to the federal government before being returned to the states, as is presently the case, each state could collect all taxes on fuel sold within its borders and decide how best to spend it. This would make it possible to downsize the U.S. Department of Transportation, saving taxpayers billions of dollars.

He explains why reform will lead to better – and cheaper – transportation.

Local governments – with greater awareness of the local needs of metropolitan areas, small towns or rural areas – can do a better job of funding and managing roads, highways and public transportation that serve primarily local residents. State governments or private firms, meanwhile, can best manage interstate and other major highways that cater mostly to long-distance travelers, especially if they could cover expenses with user fees. …Many drivers object to the idea of paying tolls for the use of currently “free” interstate highways, whether they are managed by private firms or state governments. But highways aren’t free – the costs are hidden within our fuel taxes. If mileage-based user fees are applied to all highways and set at the correct levels, they can become a much more efficient (and ultimately cheaper) replacement for fuel taxes.

Professor Edward Glaeser of Harvard summarizes the issue nicely in an article for CNBC.

Our current system of federal funding for transportation means that taxpayers in New York fund highways in Montana and drivers in Utah pay for New York’s airports. If President Trump wants to seriously improve American infrastructure spending, he should champion a new federalism for transportation, in which infrastructure is funded by states, localities and especially the users themselves. …The best decisions are made when decision-makers bear the costs and reap the benefits. When companies invest, they agonize about whether future customers will pay enough to cover the production costs. …Having lived through Boston’s Big Dig, I am well aware of how the promise of federal funding skews local decision-making. Local leaders stop asking themselves whether the benefits cover the costs because it’s somebody else’s nickel. …Detroit would have never built its absurd People Mover Monorail without federal encouragement and funding.

He elaborates on some of the implications for different types of infrastructure.

If new automotive infrastructure is meant to be self-financing, then the decision to build is a straightforward business investment and there is little need for large-scale federal funding. …The beneficiaries of metro systems are the businesses and commuters within a state. They could be funded with local property or sales taxes. My favorite metro funding model is in Hong Kong, where the city’s private mass transit system funds itself by building high-rises atop new train stops. …More federal funding for dysfunctional airports just perpetuates the status quo. They would be far healthier if they were split apart from the larger agency and allowed to operate, compete and charge higher landing fees, either as independent self-funding public airports, as in the U.K., or as private entities.

Amen. I’m not surprised to see Hong Kong as a role model. And I’ve already written about the U.K.’s success with privatization.

Speaking of privatization, a column in the Wall Street Journal points out that this is the way to improve airports in America.

Why do American passengers pay so much to get so little? Because their airports, by global standards, are terribly managed. Cities from London to Buenos Aires have sold or leased their airports to private companies. To make a profit, these firms must hold down costs while enticing customers with lots of flights, competitive fares and appealing terminals. The firm that manages London’s Heathrow, currently eighth in the international ranking, was so intent on attracting passengers that it built a nonstop express train to the city’s center. It’s also seeking to add another runway, as is the rival firm running Gatwick Airport. American airports are typically run by politicians in conjunction with the dominant airlines, which help finance the terminals in return for long-term leases on gates and facilities. The airlines use their control to keep out competitors; the politicians use their share of the revenue to reward unionized airport workers. No one puts the passenger first.

The author cites the San Juan airport as an example of what can happen under privatization.

If you want to see how much better American airports could be, take a plane to Puerto Rico. Until four years ago, the main airport in San Juan was run, and neglected, by an unwieldy bureaucracy, the Puerto Rico Ports Authority. The terminal was a confusing jumble of dim corridors. On rainy days, the ceilings leaked; on hot days, the air conditioning faltered. The stores were tacky and the restaurants greasy spoons, often rented at bargain rates to politicians’ friends or relatives. …Airlines switched operations to other Caribbean hubs. In 2013 the Ports Authority leased the airport for 40 years to Aerostar, a partnership operating airports in Cancún and other Mexican cities. The new managers agreed to make capital improvements, reduce landing fees and pay the Ports Authority $1.2 billion—half up-front. The result, three years later, is an airport nobody would call Third World. The redesigned concourses are sleek and airy, and revenue from new retail and restaurants has doubled. …Airlines no longer control the gates, but they’re reaping other benefits. “We’re paying lower fees for a much better airport,” says Michael Luciano, who runs Delta’s operations in San Juan. “Almost every area has been renovated. You go into any restroom, and it’s bright and clean—things like that are really important to our customers.” Passenger volume has been growing 4% annually, well above the industry average.

I can personally vouch for this. Because of all my travel in the Caribbean, I’ve used the San Juan airport extensively over the years, including just last week for the Liberty International conference.

The difference between today’s airport and the dump that used to exist is like the difference between night and day.

By the way, let’s also dismiss the notion that there’s some sort of infrastructure crisis.

I’ve already shared data from the World Economic Forum’s Global Competitiveness Report, which shows that the United States actually ranks relatively high compared to other nations.

And I’ve also shared solid numbers making the same point from Chris Edwards, one of my colleagues at the Cato Institute. Michael Sargent of the Heritage Foundation has a tweet that nicely shows that there isn’t a crisis.

Oh, and let’s also consider the example of Japan, which thought infrastructure spending was some sort of economic elixir. That didn’t work so well, as pointed out by the Wall Street Journal.

The U.S. economy isn’t growing at merely 2% because of potholes or airports… The prime illustration is Japan, which since the 1980s has tried to build its way out of stagnation. The country now boasts perhaps the world’s most spectacular suspension bridges, maglev trains, elevated highways and man-made islands, but the cost was trillions of yen of debt (now 230% of GDP) and no better growth. Nor could a monorail save Detroit. Projects make economic sense only to the extent they clear rigorous cost-benefit tests.

And if you want to know the infrastructure that is least likely to pass a cost-benefit test, just look at mass transit.

A good place to start is the Wall Street Journal‘s recent editorial on a subway line in New York City.

New York City opened a new subway line—about a century after the project was proposed and merely decades after ground-breaking in 1972…by far the most expensive train track in the history of the world. The story is an example of what not to do… This first phase of the new line—amounting to 1.6 miles in a single neighborhood, with three new stations and a renovated stop—cost some $4.451 billion. …The next leg of the Second Avenue subway, which would extend the train 29 blocks north into Harlem starting in 2020, is projected to cost an astonishing $6 billion, and that is surely an underestimate.

Gabriel Roth, writing for the Washington Examiner, has the right idea.

…abolish the subsidies. The federal government forces road users to spend some $10 billion a year on non-road assets of little or no benefit to them. Those payments are not only wasteful in themselves; they also encourage states and local governments to squander money on mass transit, whose costs users are not prepared to cover — not even the operating costs. If local communities consider such expenditures important, they should pay for them themselves.

By the way, just to show my libertarian bona fides, I think decentralization is just part of the answer. In my fantasy world, the private sector plays a bigger role.

And the good news, as I wrote back in 2014, is that my fantasy is a reality in some instances.

Here’s another example from Hawaii.

Their livelihood was being threatened, and they were tired of waiting for government help, so business owners and residents on Hawaii’s Kauai island pulled together and completed a $4 million repair job to a state park — for free. …The state Department of Land and Natural Resources had estimated that the damage would cost $4 million to fix, money the agency doesn’t have, according to a news release from department Chairwoman Laura Thielen. …So Slack, other business owners and residents made the decision not to sit on their hands and wait for state money that many expected would never come. Instead, they pulled together machinery and manpower and hit the ground running March 23. And after only eight days, all of the repairs were done, Pleas said. It was a shockingly quick fix to a problem that may have taken much longer if they waited for state money to funnel in. “We can wait around for the state or federal government to make this move, or we can go out and do our part,” Slack said. “Just like everyone’s sitting around waiting for a stimulus check, we were waiting for this but decided we couldn’t wait anymore.” …”We shouldn’t have to do this, but when it gets to a state level, it just gets so bureaucratic, something that took us eight days would have taken them years,” said Troy Martin of Martin Steel, who donated machinery and steel for the repairs. “So we got together — the community — and we got it done.”

Reminds me of the guy who built some stairs at a park for $550 because the Toronto government was taking too long and planned to spend $65,000 to do the same thing.

And here’s another case study from Portland.

Portland Anarchist Road Care (PARC) is a community collaboration of skilled workers who volunteer their services to fix the damaged roads around Portland, Oregon. Citing concerns about governmental bureaucracy, the current political climate, a lack of funds and a seeming lack of care, the members of PARC decided to take things into their own very capable hands.

I have no idea whether these people are libertarian-minded anarcho-capitalists or deeply confused left-wing nihilist anarchists, but kudos to them for stepping up and doing a job cheaply and efficiently. The very opposite of what we expect from government.

P.S. Since Nazis are in the news and since I’m writing about infrastructure, here are some blurbs from an academic study on how Germany’s National Socialists used autobahn outlays to generate political support.

The idea that political support can effectively be bought has a long lineage – from the days of the Roman emperors to modern democracies, `bread and circus’ have been used to boost the popularity of politicians. A large literature in economics argues more generally that political support can be ‘bought’. …In this paper, we analyze the political benefits of building the worldʹs first nationwide highway network in Germany after 1933 – one of the canonical cases of government infrastructure investment. We show that building the Autobahn was highly effective in reducing opposition to the Hitler regime. …What accounts for the Autobahn’s success in winning “hearts and minds”? We discuss the economic and transport benefits. In the aggregate, these have been shown to be minimal (Ritschl 1998; Vahrenkamp 2010). …we argue that the motorways…increased support because they could be exploited by propaganda as powerful symbols of competent, energetic government. …Our results suggest that infrastructure spending can indeed create electoral support for a nascent dictatorship – it can win the “hearts and minds” of the populace. In the case of Germany, direct economic benefits of pork‐barrel spending in affected districts may have played a role.

Seems that politicians, whether motivated by evil or run-of-the-mill ambition, love spending other people’s money to build political support. Is it any wonder that we hold them in such low esteem?

P.P.S. Fans of “public choice” doubtlessly will be amused by the IMF’s 2014 flip-flop on infrastructure.

Because Protecting the Environment Is Important, Capitalism Should Play a Bigger Role

Thu, 08/17/2017 - 12:24pm

Over the years, I’ve had fun mocking the silly extremism of the environmental movement.

That being said, protecting the environment is a worthy and important goal.

And that’s why some of us want to give the private sector a bigger role.

John Stossel, for instance, has a must-watch video on how capitalism can save endangered rhinos.

Professor Philip Booth expands on the lesson in the video and urges broad application of market forces to preserve the environment.

Especially well-enforced property rights.

…what is needed for better husbandry of ecological resources is more widespread and deeper establishment of property rights together with their enforcement. The cause of environmentalism is often associated with the Left. This is despite the fact that some of the worst environmental outcomes in the history of our planet have been associated with Communist governments. …a great deal of serious work has been produced by those who believe in market or community-based solutions to environmental problems, and a relatively small role for government. For example, Ronald Coase and Elinor Ostrom are two Nobel Prize winners in economics who have made profound contributions to our understanding of how markets and communities can promote environmental conservation. Indeed, the intellectual and moral high ground when it comes to environmentalism ought to be taken by those who believe in private property, strong community institutions and a free economy.

Philip explains why private ownership produces conservation.

If things are owned, they will tend to be looked after. The owner of a lake will not fish it to near extinction (or even over-fish the lake to a small degree) because the breeding potential of the fish would be reduced.

He then explains the downside of public ownership.

On the other hand, if the lake is not owned by anybody, or if it is owned by the government and fishing is unregulated, the lake will be fished to extinction because nobody has any benefit from holding back. Local businesses may well also pollute the lake if there are no well-defined ownership rights. The much-cited work here is Hardin’s Tragedy of the Commons (1968), though, in fact, Hardin was simply referring back to a pamphlet by William Forster Lloyd which was written in 1833. In that pamphlet, a situation was described whereby common land was open to grazing by all. The land would then be over-grazed because a person would get the benefit of putting additional cattle on the land without the cost that arises from over-grazing which would be shared by all users.

He points out that one advantage of Brexit is that the U.K. can implement a fisheries system based on property rights.

Now that fishing policy has been repatriated, the UK should establish property rights in sea fisheries. Few would seriously question private property when it comes to the land. For example, it is rare these days to find people who would suggest that farms should be nationalised or collectivised or returned to an unregulated commons where anybody can graze their animals without restriction. It would be understood that this would lead to chaos, inefficiency and environmental catastrophe.

And since we have real-world evidence that fisheries based on property rights are very successful, hopefully the U.K. government will implement this reform.

So what’s the bottom line on capitalism and the environment?

If we want sustainable environmental outcomes, the answer almost never lies with government control, but with the establishment and enforcement of property rights over environmental resources. This provides the incentive to nurture and conserve. Where the government does intervene it should try to mimic markets. When it comes to the environment, misguided government intervention can lead to conflict and poor environmental outcomes. The best thing the government can do is put its own house in order and ensure that property rights are enforced through proper policing and courts systems. That is certainly the experience of forested areas in South America.

Let’s close by noting one other reason to give the market a bigger role. Simply stated, environmentalists seem to have no sense of cost-benefit analysis. Instead, we get bizarre policies that seem motivated primarily by virtue signalling.

And don’t forget green energy programs, which impose heavy costs on consumers and also are a combination of virtue signaling and cronyism.

No wonder many of us don’t trust the left on global warming, even if we recognize it may be a real issue.

P.S. There is at least one employee at the Environmental Protection Agency who deserves serious consideration for the Bureaucrat Hall of Fame.

Republicans Embrace Bad Economics and Bad Policy

Wed, 08/16/2017 - 12:44pm

To be blunt, Republicans are heading in the wrong direction on fiscal policy. They have full control of the executive and legislative branches, but instead of using their power to promote Reaganomics, it looks like we’re getting a reincarnation of the big-government Bush years.

As Yogi Berra might have said, “it’s deja vu all over again.”

Let’s look at the evidence. According to the Hill, the Keynesian virus has infected GOP thinking on tax cuts.

Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.

That is nonsense. Just as giving people a check and calling it “stimulus” didn’t help the economy under Obama, giving people a check and calling it a tax cut won’t help the economy under Trump.

Tax cuts boost growth when they reduce the marginal tax rate on productive behavior such as work, saving, investment, or entrepreneurship. When that happens, people have an incentive to generate more income. And that leads to more national income, a.k.a., economic growth.

Borrowing money from the economy’s left pocket and then stuffing checks (oops, I mean retroactive tax cuts) in the economy’s right pocket, by contrast, simply reallocates national income.

Indeed, this is one of the reasons why the economy didn’t get much benefit from the 2001 Bush tax cut, especially when compared to the growth-oriented 2003 tax cut. Unfortunately, Republicans haven’t learned that lesson.

Republicans have taken steps in the past to ensure that taxpayers directly felt the benefits of tax cuts. As part of the 2001 tax cuts enacted by President George W. Bush, taxpayers received rebate checks.

The article does include some analysis from people who understand that retroactive tax cuts aren’t economically beneficial.

…there are also drawbacks to making tax changes retroactive. …such changes would add to the cost of the bill, but would not be an effective way to encourage new spending and investments. “It has all of the costs of the tax cuts but none of the economic benefits,” said Committee for a Responsible Federal Budget President Maya MacGuineas, who added that “you don’t make investments in the rear-view mirror.”

I’m not always on the same side as Maya, but she’s right on this issue. You can’t encourage people to generate more income in the past. If you want more growth, you have to reduce marginal tax rates on future activity.

By the way, I’m not arguing that there is no political benefit to retroactive tax cuts. If Republicans simply stated that they were going to send rebate checks to curry favor with voters, I’d roll my eyes and shrug my shoulders.

But when they make Keynesian arguments to justify such a policy, I can’t help but get upset about the economic illiteracy.

Speaking of bad economic policy, GOPers also are pursuing bad spending policy.

Politico has a report on a potential budget deal where everyone wins…except taxpayers.

The White House is pushing a deal on Capitol Hill to head off a government shutdown that would lift strict spending caps long opposed by Democrats in exchange for money for President Donald Trump’s border wall with Mexico, multiple sources said.

So much for Trump’s promise to get tough on the budget, even if it meant a shutdown.

Instead, the backroom negotiations are leading to more spending for all interest groups.

Marc Short, the White House’s director of legislative affairs, …also lobbied for a big budget increase for the Pentagon, another priority for Trump. …The White House is offering Democrats more funding for their own pet projects.

The only good news is that Democrats are so upset about the symbolism of the fence that they may not go for the deal.

Democrats show no sign of yielding on the issue. They have already blocked the project once.

Unfortunately, I expect this is just posturing. When the dust settles, I expect the desire for more spending (from both parties) will produce a deal that is bad news. At least for those of us who don’t want America to become Greece (any faster than already scheduled).

Republican and Democratic congressional aides have predicted for months that both sides will come together on a spending agreement to raise spending caps for the Pentagon as well as for nondefense domestic programs.

So let’s check our scorecard. On the tax side of the equation, we’ll hopefully still get some good policy, such as a lower corporate tax rate, but it probably will be accompanied by some gimmicky Keynesian policy.

On the spending side of the equation, it appears my fears about Trump may have been correct and he’s going to be a typical big-government Republican.

It’s possible, of course, that I’m being needlessly pessimistic and we’ll get the kinds of policies I fantasized about in early 2016. But I wouldn’t bet money on a positive outcome.

Great Moments in State Government

Tue, 08/15/2017 - 12:13pm

When I write about the actions of state governments, it’s usually to highlight a specific bad policy. As you can imagine, states like CaliforniaConnecticutIllinoisNew York, and New Jersey give me a never-ending amount of material.

But I frequently run across things that are happening in the states that don’t really merit an entire column, but nonetheless are worthy of attention since they symbolize the venality and incompetence of politicians.

So I’ve decided that it’s time for a series on “great moments in state government” to augment my already well-developed series on “great moments in local government.”

Let’s start by looking at a truly bizarre example of occupational licensing from Tennessee.

A decade ago, Martha Stowe founded True Equine, an equine-services company, a few miles south of Nashville, Tenn., in Williamson County. After earning a certificate in equine myofascial release, a massage technique that releases tension and pain in a horse’s body, Martha soon acquired a large clientele. …In April 2016, however, Stowe’s well-established business was upended when she received a threatening letter from the Board of Veterinary Medical Examiners, a board within Tennessee’s Department of Health. Only licensed veterinarians are permitted to massage horses, the board’s attorney explained, and if Stowe continued to practice myofascial release, she could be fined up to $500 and receive a six-month jail sentence. …The board also sent the letter to fellow Williamson County resident Laurie Wheeler, a professional jazz musician and licensed massage therapist who, like Stowe, is certified in equine myofascial release. …Upon receiving the veterinary board’s letter, Wheeler was stunned — after all, she was certified, and not only that, she had never even accepted money for her services. But, she says, the government threatened to “fine me and put me in jail for voluntarily working on animals.” For Wheeler, helping horses is more than a volunteer position or an occupation; it’s a call to duty.

But there is some good news.

A pro-market think tank is helping the women fight back.

Both women disregarded the veterinary board’s warnings and subsequently looked to the Beacon Center of Tennessee, a free-market think tank, for legal representation. According to Braden Boucek, director of litigation for the Beacon Center, the board’s decision to allow only licensed veterinarians to massage horses is a violation of the U.S. Constitution’s equal-protection clause. Moreover, because the Constitution protects private property, which in turn protects the right to acquire property and the right to earn a living, the board’s decision violates the 14th Amendment. …Threatening to jail an individual for massaging a horse is absurd. These women aren’t giving medical advice to owners, or surgically operating on horses, or doing anything that only a licensed veterinarian could do. Remember, this kind of massage is not even taught in veterinary school. Under Tennessee’s logic, why shouldn’t massage therapists who practice exclusively on people be required to hold a medical degree? The veterinary board ought to take the necessary steps to begin updating this illogical statute. If it doesn’t, it will need to explain in court why it’s permissible to deprive Stowe and Wheeler of their fundamental constitutional rights.

Amen. I admire Tennessee for not having an income tax. It’s time, though, for the Volunteer State to extend economic freedom to horse masseurs.

Now let’s shift to Wisconsin where we have another example of cronyism.

State lawmakers may be brave when it comes to curtailing special privileges for government employees, but they like special protections for private industry.

Wisconsin state regulators…[are]…banning state grocery stores from selling one of the Emerald Isle’s most popular (and tasty) products: Kerrygold butter. Never mind that Wisconsinites have been buying Kerrygold for years with no problems. Or that it remains legal in the 49 other states. Badger State bureaucrats, trying to protect the state dairy industry, are suddenly enforcing a 1970 law that requires all butter sold in the state to go through a complicated evaluation by a state panel. This is the same state that once banned margarine because it was a competitive threat to local dairies. …as a result of the ban, Kerrygold-loving Wisconsinites have been forced to make butter runs across the state border, bringing back suitcases stuffed with the import. In Ireland, meanwhile, the ban is leading to headlines such as this in the Irish Mirror: “Shopkeepers in Wisconsin could face JAIL if they sell Kerrygold butter.”

Maybe butter consumers in Wisconsin can fly to Norway and learn how to get around misguided policies that make butter a black-market commodity.

Remember, if you outlaw butter, only outlaws will have butter.

Now let’s look at some onerous government intervention in my state of Virginia. And this one is personal since I don’t like the hassle of annual vehicle inspections.

…my annual Virginia motor vehicle safety inspection was due in a month. I knew my car wouldn’t pass and that I wouldn’t be allowed to stay on the road with that light on. Never mind that the light has nothing to do with the safe operation of the vehicle. And also never mind that in a 2015 study the Government Accountability Office “examined the effect of inspection programs on crash rates related to vehicle component failure, but showed no clear influence.” AAA Public Affairs Vice President Mike Wright said, “Nobody can prove with any degree of certainty that spending the money, suffering the inconvenience of getting your vehicle inspected, actually produces desired results.” …Virginia has a personal vehicle safety program overseen by the state police that cannot be shown to enhance public safety. The people who perform inspections are often the same people who fix any identified deficiencies. …A government program that requires the purchase of a good or service in return for a nonexistent public benefit is illiberal and anti-consumer. Two-thirds of states see no need to impose the burden of annual personal vehicle safety inspections on their citizens; Virginia should end its inspection requirement.

For what it’s worth, the People’s Republic of the District of Columbia doesn’t have this requirement. Kind of embarrassing that Virginia is more interventionist.

Our final example come from Illinois, where a local newspaper has a superb editorial on a sordid example of wasteful sleaze in the state budget.

Let’s eliminate the Illinois Arts Council Agency from the state budget. They must have taken lessons on government efficiency from our local townships, spending $1 million on staff and overhead in 2016 to hand out $834,900 in grants. The council is chaired by Shirley Madigan, who has been in that position since 1983. Funny, her husband, Mike, has been Illinois House Speaker since then, too. …guess who gets the money? Their well-heeled friends. Madigan’s alma mater received $95,100, another board member’s employer received $165,650 and yet another board member’s pet opera company received $503,000. Surprise! …Illinois Gov. Bruce Rauner has an opportunity to let someone else be a matron of the arts and appoint a majority of board members dedicated to either eliminating the council or at least making it a transparent organization that helps local artists rather than makes your taxes a minor revenue source for well-connected, large arts institutions.

Needless to say, the first option (eliminating the council) is the superior choice, just like we should shut down the National Endowment for the Arts in D.C.

But let’s set that aside. I’m still scratching my head about a bureaucracy that spends $1 million to give away $834.9 thousand. Though that’s actually efficient if you compare it with the German tax that resulted in €30 euros of government expense for every €1 collected.

To conclude, there’s a common thread in these four stories. In each case, politicians at the state level have policies to enable unearned wealth to flow to the pockets of their friends and allies.

In other words, the First Theorem of Government doesn’t just apply to what’s happening in Washington.

P.S. I’ve only had a few previous “great moments” for state governments. One from Florida involved a felony arrest of some luckless guy who was simply trying to impress his girlfriend by releasing some balloons, and the other from Virginia involved three misdemeanors for the horrid crime of rescuing a wounded deer.

Will Congress Preserve Monopoly Power for Healthcare Lobbyists?

Mon, 08/14/2017 - 4:04pm

Originally published by The Hill on August 9, 2017.

In its never-ending quest to corner the contact lens market, the American Optometric Association (AOA) has begun a new lobbying campaign to persuade the Federal Trade Commission (FTC) to abandon its efforts to protect competition in the contact lens market.

The FTC has proposed to shore up its rules ensuring market competition by requiring eye care professionals to obtain a signed form from each of their patients verifying that a copy of their prescription has been received. This small step is necessary to break the government-created monopoly that large contact lens manufacturers like Johnson & Johnson have hugely profited from over the years.

Unfortunately, lobbyists have convinced Rep. Leonard Lance (R-N.J.) and Rep. Bobby Rush (D-Ill.) to lead a House “Dear Colleague” letter, sponsored by the AOA, to encourage the FTC to withdraw the new regulation. It should be noted that two of the largest contact lens manufacturers, Johnson & Johnson and Allergan, ranked #2 and #3 as the top donors to Lance’s 2016 campaign fundraising efforts.

Johnson & Johnson control 40 percent of the contact lens industry thanks to a history of offering eye care providers a substantial kickback on every sale of their products, thus encouraging product loyalty. The AOA and the manufacturers have lobbied hard over the years to try to maintain this symbiotic relationship at the expense of the 42 million contact lens wearers in the U.S.

Up until 2004 when the Fairness to Contact Lens Consumers Act (FCLCA) became law, eye care professionals were not required to permit their patients to shop around for lenses. The AOA and manufacturers even colluded to ensure that they were the exclusive source for purchasing the lenses they prescribed until being hit with multi-state antitrust lawsuit in 1994. Yet despite being exposed, they continued to engage in other dirty tricks. Often unable to acquire a physical copy of their own prescription, patients were forced to pay whatever over-inflated prices the optometrist charged.

Since patients were liberated in 2004, the AOA and Johnson & Johnson have lost market share to e-commerce and outside retailers. The free market flourished by providing more choices at better prices.

The FCLCA has been a blessing for consumers, but there are still some holes. According to a recent Consumer Action survey, nearly one-third of patients today still do not receive their prescriptions from eye care professionals, who are engaging in benign neglect of the law. That’s why last year, the FTC proposed requiring eye care professionals to obtain a signed form from each patient signifying they received a copy of their prescription.

Now, once again, the AOA is complaining about a regulation that requires them to have the patient sign one singular form to verify that the optometrist is following the law. They simply get it signed and file it for three years. That’s all there is to it.

Offices already have their patients sign for insurance or credit card payments, and patients fill out an untold number of forms regarding health history that are then maintained for years in the patient’s file. Adding one more form that protects the rights of consumers is surely worth that extra minute or two. Moreover, this minimally burdensome requirement is only necessary because prescribers keep flouting protections designed to ensure competition in a system where the government mandates patients visit a practitioner in the first place.

Through generous campaign donations, along with some questionable research, the AOA has convinced Lance and Rush that complying with this regulation could cost offices upwards of $75,000 each year and that it is too costly to take this step to ensure that patient rights are upheld. But, it is necessary due to the ongoing issue of patients still not being told they have a right to their prescriptions and thinking that they have no choice but to purchase contact lenses while in the office rather than shopping for the best price.

Now, in just a few weeks, this issue can be resolved by Sens. Shelley Moore Capito (R-W.V.) and Chris Coons (D-Del.). It has been reported that language undermining the FTC’s recently proposed update will be added by the Financial Services and General Government (FSGG) Committee at the upcoming markup. As leaders of the Appropriations Subcommittee, Capito and Coons will have the opportunity to strike this language from the bill.

Given the AOA’s history of questionable behavior, senators ought to be more skeptical of the group’s self-serving arguments and lobbying campaign. They should understand the negative implications that Lance and Rush’s sign-on letter would have for the American people, and they should put a stop to the anti-competitive practices of the eye care industry. The future of affordable eye care will depend on their decision.

Some Uplifting News about Race in America

Mon, 08/14/2017 - 12:46pm

The racist march in Charlottesville, VA, was awful news. The vehicular murder of a woman by one of the racists is even worse news.

The good news is that almost everyone in the nation is united in condemning the marchers.

I especially like what Senator Ben Sasse said about how America isn’t an ethnic identity, but rather a nation of ideals.

It’s also good news is that the free market punishes racism. That’s because people who make decisions based on irrational hatred are less efficient and productive and therefore lose market share.

Indeed, here’s the abstract of an encouraging study on that topic.

Economic theory has long maintained that employers pay a price for engaging in racial discrimination. According to Gary Becker’s seminal work on this topic and the rich literature that followed, racial preferences unrelated to productivity are costly and, in a competitive market, should drive discriminatory employers out of business. …This research pairs an experimental audit study of racial discrimination in employment with an employer database capturing information on establishment survival, examining the relationship between observed discrimination and firm longevity. Results suggest that employers who engage in hiring discrimination are less likely to remain in business six years later.

Indeed, another academic study showed that racist managers result in a less productive workforce.

Examining the performance of cashiers in a French grocery store chain, we find that manager bias negatively affects minority job performance. In the stores studied, cashiers work with different managers on different days and their schedules are determined quasi-randomly. When minority cashiers, but not majority cashiers, are scheduled to work with managers who are biased (as determined by an Implicit Association Test), they are absent more often, spend less time at work, scan items more slowly, and take more time between customers. Manager bias has consequences for the average performance of minority workers: while on average minority and majority workers perform equivalently, on days where managers are unbiased, minorities perform significantly better than do majority workers. This appears to be because biased managers interact less with minorities, leading minorities to exert less effort.

Writing for Capitalism, Richard Ebeling explains how markets punish racism.

…one of the most important aspects of the free market is precisely that it tempers irrational action. The market ultimately rewards producers by one test and only one test: can a producer deliver the desired goods and services more cheaply and with better quality than another producer who is competing for the same consumer business? Any employer who fails to judge the usefulness of the resources he can buy or hire — including labor — according to the standards of cost and quality efficiency will run the risk of losing business he otherwise could gain. The market, therefore, penalizes those who judge prospective employees on the basis of their race rather than on the talents and expertise they could contribute to the production of a commodity desired by the consuming public. Why? Because the profit motive acts as an incentive for some businessmen to set aside their racial prejudices for the sake of maximizing their net revenues. And, over time, this puts pressure on an increasing number of prospective employers to do the same — if they are to avoid losing out to their market rivals. …The free market…is the great destroyer of racial prejudices and the great liberator of the individual from the bondage of racial barriers.

But let’s move beyond academic analysis.

Given the horrid events in Charlottesville, I want to share some uplifting stories, sort of like the heartwarming story from Ferguson, MO, that I wrote about in 2014.

I have four examples of racial progress from both blacks and whites

Here’s an example from the New York Times of how people should think and behave.

What the black state trooper saw was a civilian in distress. Yes, this was a white man, attending a white supremacist rally in front of the South Carolina State House. And yes, he was wearing a black T-shirt emblazoned with a swastika. But the trooper concentrated only on this: an older civilian, spent on the granite steps. Overcome, it appeared, by an unforgiving July sun… The trooper motioned for help from the Columbia fire chief, who is also black. Then, with a firm grip, he began walking the wilted white man up the steps toward the air-conditioned oasis of the State House. …The meaning of this image — of a black officer helping a white supremacist, both in uniform — depends on the beholder. You might see a refreshing coda to the Confederate flag controversy… But what does the trooper see? His name is Leroy Smith, and he happens to be the director of the South Carolina Department of Public Safety. …Mr. Smith said he was taken aback by the worldwide attention but hoped the image would help society move past the recent spasms of hate and violence… Asked why he thinks the photo has had such resonance, he gave a simple answer: Love. “I think that’s the greatest thing in the world — love,” said the burly, soft-spoken trooper, who is just shy of 50. “And that’s why so many people were moved by it.”

I have to imagine that Mr. Smith experienced more than enough racism as he grew up.

Yet not only did he become a successful professional, he developed an attitude that should inspire people of every color.

Here’s a story that’s also amazing. It’s about a black guy who has a mission of saving Klan members.

When someone Daryl Davis has befriended leaves the Ku Klux Klan, he often gives Davis the robe he wore as a member of that group. Over the years, Davis, by his own account, has amassed dozens of these retired jerseys of hate. …Davis goes to Klan rallies. He has invited Klansmen to his home and visited them. He calls some of them “friend” even as they call him inferior. In one moving segment, the film recounts how Davis met the daughters of an incarcerated Klan member at the airport and drove them to the prison so that they could visit their father. Eventually the family noticed that none of the man’s Klan colleagues were serving or loving them as much as Davis was. Their ideology of hate collapsed in the face of undeserved compassion. …Part of what makes him so effective at talking to the Klan is that he has read every book he can find on the subject. He asks questions. He gathers information. He listens. …“I never set out to convert anyone,” he says in the film. Through a mix of diplomacy and Socratic questioning, he will sometimes see a racist begin to think about his ideology rather than simply proclaim it. Eventually, “they end up converting themselves.” …Davis believes we will be better and stronger and healthier and happier together as one nation than as a segregated one. …Ornstein asks Davis what he is feeling as he watches a video profile of former racists who have left the Klan. What Davis says next was both profound and powerful, a message of hope to a nation… “These are my fellow Americans.”

Wow. I hope some day to be half as good a person as Mr. Davis.

The Washington Post has a heartwarming story about a kid who was raised to be racist and ultimately discarded that poisonous form of collectivism.

Derek Black was already hosting his own radio show. He had launched a white nationalist website for children…He was not only a leader of racial politics but also a product of them. His father, Don Black, had created Stormfront, the Internet’s first and largest white nationalist site, with 300,000 users and counting. His mother, Chloe, had once been married to David Duke, one of the country’s most infamous racial zealots, and Duke had become Derek’s godfather. They had raised Derek at the forefront of the movement, and some white nationalists had begun calling him “the heir.”

Then he went to college.

Derek finished high school… He decided he wanted to study medieval European history, so he applied to New College of Florida, a top-ranked liberal arts school with a strong history program. …New College was in Sarasota, three hours across the state, and it was the first time Derek had lived away from home. …He watched zombie movies with students from his dorm, a group that included a Peruvian immigrant and an Orthodox Jew. Maybe they were usurpers, as his father had said, but Derek also kind of liked them, and gradually he went from keeping his convictions quiet to actively disguising them.

But then he was outed.

He left after one semester to study abroad in Germany, because he wanted to learn the language. He kept in touch with New College partly through a student message board, known as the forum, whose updates were automatically sent to his email. One night in April 2011, Derek noticed a message posted to all students at 1:56 a.m. It was written by someone Derek didn’t know — an upperclassman who had been researching terrorist groups online when he stumbled across a familiar face. “Have you seen this man?” the message read, and beneath those words was a picture that was unmistakable. The red hair. The cowboy hat. “Derek black: white supremacist, radio host…new college student???” the post read. “How do we as a community respond?” By the time Derek returned to campus for the next semester, more than a thousand responses had been written to that post. …He returned to Sarasota, applied for permission to live outside of required student housing and rented a room a few miles away. A few of his friends from the previous year emailed to say they felt betrayed, and strangers sometimes flipped him off from a safe distance on campus.

  Here’s the part of the story that’s really great.

One of Derek’s acquaintances from that first semester decided he might have an idea. He started reading Stormfront and listening to Derek’s radio show. Then, in late September, he sent Derek a text message. “What are you doing Friday night?” he wrote. …Matthew had spent a few weeks debating whether it was a good idea. He and Derek had lived near each other in the dorm, but they hadn’t spoken since Derek was exposed on the forum. Matthew, who almost always wore a yarmulke, had experienced enough anti-Semitism in his life to be familiar with the KKK, David Duke and Stormfront. He went back and read some of Derek’s posts on the site from 2007 and 2008: “Jews are NOT white.” “Jews worm their way into power over our society.” “They must go.” Matthew decided his best chance to affect Derek’s thinking was not to ignore him or confront him, but simply to include him. “Maybe he’d never spent time with a Jewish person before,” Matthew remembered thinking.

And here’s what happened.

It’s a long excerpt, but very much worth reading.

Nobody mentioned white nationalism or the forum, out of respect for Matthew. Derek was quiet and polite, and he came back the next week and then the next, until after a few months, nobody felt all that threatened… On the rare occasions when Derek directed conversation during those dinners, it was about the particulars of Arabic grammar, or marine aquatics, or the roots of Christianity in medieval times. He came across as smart and curious, and mostly he listened. He heard a Peruvian immigrant tell stories about attending a high school that was 90 percent Hispanic. He asked Matthew about his opinions on Israel and Palestine. They were both still wary of each other: Derek wondered whether Matthew was trying to get him drunk so he would say offensive things that would appear on the forum; Matthew wondered whether Derek was trying to cultivate a Jewish friend to protect himself against charges of anti-Semitism. But they also liked each other, and they started playing pool at a bar near campus. Some members of the Shabbat group gradually began to ask Derek about his views, and he occasionally clarified them in conversations and emails throughout 2011 and 2012. …Derek was becoming more and more confused about exactly what he believed. Sometimes he looked through posts on Stormfront, hoping to reaffirm his ideology, but now the message threads about Obama’s birth certificate or DNA tests for citizenship just seemed bizarre and conspiratorial. He stopped posting on Stormfront. He began inventing excuses to get out of his radio show, leaving his father alone on the air each morning to explain why Derek wouldn’t be calling in. …“Get out of this,” one of his Shabbat friends emailed a few weeks after Derek’s graduation in May 2013, urging Derek to publicly disavow white nationalism. “Get out before it ruins some part of your future more than it already irreparably has.” Derek stayed near campus to housesit for a professor after graduation, and he began to consider making a public statement. He knew he no longer believed in white nationalism, and he had made plans to distance himself from his past by changing part of his name and moving across the country for graduate school. His instinct was to slip away quietly, but his advocacy had always been public — a legacy of radio shows, Internet posts, TV appearances, and an annual conference on racial tactics.

But Derek decided he needed a public break.

He took out his computer and began writing a statement. “A large section of the community I grew up in believes strongly in white nationalism, and members of my family whom I respect greatly, particularly my father, have long been resolute advocates for that cause. I was not prepared to risk driving a wedge in those relationships. “After a great deal of thought since then, I have resolved that it is in the best interests of everyone involved to be honest about my slow but steady disaffiliation from white nationalism. I can’t support a movement that tells me I can’t be a friend to whomever I wish or that other people’s races require me to think of them in a certain way or be suspicious at their advancements. “The things I have said as well as my actions have been harmful to people of color, people of Jewish descent, activists striving for opportunity and fairness for all. I am sorry for the damage done.”

If you read the whole story, you’ll get fascinating details on how Derek’s family dealt with his epiphany.

You’ll also learn that he became a Hillary voter, which is disappointing since he should have become a libertarian.

But that’s a minor detail. The main thing is that he cast aside the collectivism of racism and group-think.

Here’s another story about a white guy that did the right thing.

Ten years after getting a tattoo, the expression on a stranger’s face changed a man’s heart and mind about his tattoo. …A man, who declined KVUE’s request for an interview, recently called Texas Bob’s asking Barr for a cover up. “He’s got an old tattoo of a skull with a rebel flag bandana around his head,” he said. An expression on a woman’s face changed his heart. “An older black lady saw him and saw the tattoo and her expression changed as she saw it,” Barr said. “That seemed like it just broke his heart a little bit and he decided that day that it was time to do something about it.” Barr blacked out the rebel flag bandana on the man’s tattoo. “He seemed like a little weight had been lifted from him,” Barr said.

By the way, it’s very possible that the guy didn’t have any racist motive when he first got the tattoo. He may simply have been from the south and didn’t think beyond that. Or maybe he just thought it was cool, or edgy.

But it is heartwarming that he changed his mind – not because he was forced to – but because he saw that it hurt someone else’s feelings. That’s a very good type of empathy.

And this isn’t a one-off story, at least if this report from the Washington Post is any indication.

Randy Stiles learned the hard way: Having a Confederate flag tattoo that reads “Southern Pride” with a noose hanging off it isn’t a path to success. “A lot of public ridicule came from it,” Stiles, 25, said this month as he waited to get the flag on his right forearm removed. “I’ve got to get it gone.” Eliminating a tattoo like that takes hours under the needle and usually costs as much as $500. But Southside Tattoo in Brooklyn Park, Md., is removing the hate for free, covering up racist and gang-related tattoos as part of its mission.

I realize that these stories are just anecdotes, but I suspect that 90 percent-plus of Americans have the right aspirations when it comes to race.

Professor Glenn Reynolds wrote about this positive sentiment back in 2015.

…if you leave the politicians, the pundits and the crazies aside, ordinary Americans are behaving quite differently. Maybe we should be paying more attention to that bit of good news. And maybe so should the politicians and pundits. After the Charleston shooting, citizens of South Carolina, both black and white, joined hands, and more than 15,000 of them marched in a show of love and friendship. …20,000 people show up for a multiracial “All Lives Matter” march in Birmingham, Ala. It could be the largest such march there since MLK. Glenn Beck and Chuck Norris were there, but that’s not all. …“Alveda King, a niece of civil rights activist the Rev. Martin Luther King Jr., marched in the front row. Bishop Jim Lowe, pastor of the predominantly black Guiding Light Church in Birmingham, co-organized the march with Beck and marched with him at the front. As a child, Lowe attended Sixteenth Street Baptist Church, where the march started, a headquarters church for the civil rights movement in Birmingham. Lowe and his sisters were in the church when a KKK bomb blew up the church and killed four little girls on Sept. 15, 1963.” …Once again the national news media, noted Washington Post blogger David Weigel, “was largely absent.” No time for positivity where race is concerned, I guess. Meanwhile, in Houston, more than a thousand people of all races gathered at an impromptu memorial for murdered Sheriff’s Deputy Darren Goforth. As station KHOU reported, “Those gathered lit candles and gave hugs, hoping to turn the murder from hate to healing.” From hate to healing: That’s what’s bubbling up from the American people, even as our political leadership sows division. Which will win out? That depends on what we all do next, doesn’t it? The American people have a strong spirit of egalitarianism and kindness, one that shows over and over again. But our political class sees more gain in promoting hatred and division. Who will win? If we’re lucky, our “leaders” will follow the people on this.

Incidentally, we obviously have some problems still to solve in America, but we should be proud of how far we’ve come.

Especially compared to the rest of the world, as illustrated by this map.

Courtesy of the American Enterprise Institute, here’s some more evidence of societal progress.

Opinions about interracial dating and marriage on a personal level have…evolved significantly. In 1971, 48 percent nationally said they would not approve of their own children dating someone of another race, while 28 percent said they would approve. In 2014, nearly eight in ten Americans said it wouldn’t matter at all if someone in their family was going to marry someone of another race. Nine percent said they would be happy about it, while 11 percent said they would be unhappy. Today, a majority of whites (54 percent) say they would neither favor nor oppose a close relative marrying a black person. Blacks are slightly less ambivalent, with 42 percent of them giving that response about a close relative marrying a white person. Fifty-two percent favor the idea compared to 30 percent of whites. Along with these changes in public opinion, interracial marriage is also becoming more common in the United States. Pew Research Center analysis of the 2013 American Community Survey found that 6.3 percent of all marriages that year were between people of different races, compared to less than 1 percent in 1970.

And progress isn’t just about attitudes.

Thomas Edsall of the New York Times wrote an encouraging column about economic progress among African-Americans.

…the black upper middle class is ascending the economic ladder at a faster rate than its white counterpart. … William Julius Wilson, a sociologist at Harvard and the author of “The Truly Disadvantaged,”…wrote…”One of the most significant changes in recent decades is the remarkable gains in income among more affluent blacks. When we adjust for inflation to 2014 dollars, the percentage of black Americans earning at least $75,000 more than doubled from 1970 to 2014, to 21 percent. Those making $100,000 or more almost quadrupled to 13 percent (in contrast white Americans saw a less striking increase, from 11 to 26 percent).” In an NBER paper issued in November 2016, Patrick Bayer, an economist at Duke, and Kerwin Charles, a professor of public policy at the University of Chicago, published comparable findings, reporting that “higher quantile black men have experienced substantial gains in both relative earnings levels and their positional rank in the white earnings distribution.”

Jason Riley of the Wall Street Journal also opined about black progress.

During a period of legal discrimination and violent hostility to their advancement, blacks managed to make unprecedented gains that have never been repeated. Black poverty fell to 47% from 87% between 1940 and 1960—before the implementation of Great Society programs that receive so much credit for poverty reduction. The percentage of black white-collar workers quadrupled between 1940 and 1970—before the implementation of affirmative-action policies that supposedly produced today’s black middle class. In New York City, the earnings of black workers tripled between 1940 and 1950, and over the next decade the city saw a 55% increase in the number of black lawyers, a 56% increase in the number of black doctors and a 125% increase in the number of black teachers.

Let’s hope all this progress continues.

In part, this means public policy reforms such as school choice and welfare reform. Another part of the answer is for government to simply get out of the way since even policies designed to help minorities can backfire.

But mostly this is a question of individual morality. We should all try to be like Daryl Davis and the rest of the people in the above stories.

The Bizarre Allure of Socialism, Part II

Sun, 08/13/2017 - 12:30pm

Back in June, I wrote about the bizarre allure of socialism and said that advocates (who generally don’t even know what socialism really means) were some of the most anti-empirical people in the world.

…even though the real-world evidence against big government is so strong, it’s rather baffling that many young people are drawn to that coercive ideology and disturbing that a non-trivial number of voters favor this failed form of statism. …Socialism has a technical definition involving government ownership of the means of production and central planning of the economy. But most people today think socialism is big government, with business still privately owned but with lots of redistribution and intervention (I’ve argued, for instance, that even Bernie Sanders isn’t a real socialist, and that there are big differences between countries like Sweden, China, and North Korea). For what it’s worth, that’s actually closer to the technical definition of fascism.

Now let’s update that column.

It seems that the cancer of socialism is spreading, at least if this story in The Week is any indication.

Things are looking up for the Democratic Socialists of America. With a membership of 25,000, it is now the largest socialist group in America since the Second World War. And last weekend in Chicago, it held its largest convention, by a considerable margin, in its history. …Membership has more than tripled in a year, gaining a large boost from the candidacy of Bernie Sanders… That sharp surge in new recruits — most of whom are fairly young — has created a fairly stark age bifurcation among members. Somewhat akin to Sanders campaign, there is an old guard of people who have been carrying the left-wing torch for years, and a recent surge of new members…most of the major proposals were adopted with large majorities. Among other things, delegates voted to…endorse the Boycott, Divestment, and Sanctions movement (directed at ending the Israeli occupation of the West Bank and Gaza), …and to endorse Medicare for all as a major priority.

I’m guessing that the bifurcated conference meant a handful of old people who are genuine socialists and a bunch of young people who think socialism is just a bunch of government-coerced redistribution and intervention.

Both groups, however, deserve scorn for favoring a system that elevates the state over individuals. That approach is grossly immoral.

Not to mention that it’s never worked. Nobody has ever provided a good answer to my two-part challenge.

There is no example of a successful socialist nation anywhere in the world. Cuba? No. North Korea? No. The Soviet Empire? Don’t make me laugh. Venezuela? You must be joking.

Denmark or Sweden? Umm…, they’re not socialist, though their economies have been hurt by excessive redistribution. Greece? Give me a break.

I could continue, but no sense beating a dead horse.

Let’s close with a bit of humor. A friend in Australia sent me this clever image. I gather it’s a parody of an actual left-wing gathering Down Under. Regardless, I found it rather amusing.

P.S. If you like visuals mocking socialism, I’ve amassed a very nice collection. Click hereherehereherehereherehereherehereherehere, and here for examples.

Debt Limit Should Be an Opportunity Rather than a Crisis

Sat, 08/12/2017 - 12:21pm

There are some charming traditions, like the swallows returning every year to the Mission of San Juan Capistrano.

But other traditions are far less impressive, most notably the make-believe hysteria that occurs every time the federal government approaches its “debt limit.”

High-level government officials will publicly fret that a failure to increase the limit will produce an unprecedented calamity because the Treasury Department will be forced to default on U.S. government debt, thus triggering a global panic.

And this triggers anxiety in predictable quarters.

story in USA Today is representative of the sky-is-falling mentality.

Congress will confront a potentially devastating financial crisis in September as lawmakers scramble to…prevent the nation from defaulting on its debt for the first time in history. …The debt limit, set by Congress, is the legal amount the U.S. Treasury can borrow to pay the government’s existing bills, including Social Security and Medicare benefits, military salaries, tax refunds, interest on the national debt, and other obligations. The government has never defaulted on its debt before, and no one knows for sure what the impact would be. However, economists warn that it could plunge the U.S. back into recession and spark a global economic crisis.

Paul Krugman is predictably hysterical about the prospect.

The odds of a self-inflicted US debt crisis now look pretty good: hard-line Republicans are eager to hold the economy hostage… So it looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt. How bad will that be? The truth is that we don’t know.. Until now, US debt has played a special role in the world economy, because it is — or was — the ultimate safe asset, the thing people can use to secure transactions with no questions about it retaining its value. …Taking away that role could be very nasty.

Even some establishment voices are fanning the flames, including Maya MacGuineas of the Committee for a Responsible Federal Budget.

Our economic standing is too sterling and the global economy too important to imperil over the disagreements of American domestic politics — as fundamental as they may be. It is the height of recklessness — a view held for decades reflected in the fact that raising the debt ceiling was once a mundane piece of housekeeping that garnered no attention. It was practically automatic.

And Professor Edward Kleinbard of the University of Southern California also thinks the apocalypse is nigh.

Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling. This will cost the Treasury tens of billions of dollars every year for decades to come in higher interest charges and probably trigger a severe recession. …almost all economists and policy makers agree on the enormous fiscal, economic and reputational costs of default. That’s why, in the past, we’ve always managed to avoid it.

Sounds ominous, right?

And I agree that it would be very bad news if the U.S. government didn’t pay all interest and principal to bondholders, as scheduled.

But here’s the good news. The odds of that happening are about the same as the odds of me being the keynote speaker at the next convention of the Socialist Party.

As I’ve said over the years in television interviews, at press conferences, and in congressional testimony (on more than one occasion), there won’t be a default for the simple reason that the federal government collects far more money than needed to pay all bondholders without any delay.

And nothing has happened to the budget numbers to change that analysis.

Here are the latest CBO projections on major budget aggregates. I’ve circled total tax receipts for the next three years, as well as annual net interest payments. As you can see, the Treasury will be collecting more than 10 times as much revenue as needed to fulfill obligations to the folks who have lent money to Uncle Sam.

By the way, some of you may be thinking I’m a cranky libertarian who is blind to the danger of default.

Well, I am a libertarian, and I do get cranky about the various shenanigans in Washington, so let me engage in what’s known as an “appeal to authority.”

Here’s what the Congressional Budget Office said in its recent report on the debt limit.

When Would the Extraordinary Measures and Cash Run Out, and What Would Happen Then? If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. …That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both.

In other words, the government can choose to pay interest on the debt and defer other bills. As I’ve repeatedly said in all my public pronouncements, a default will occur only if an administration wants it to occur.

But that’s not going to happen. Just as Obama’s various Treasury Secretaries would have “prioritized” payments to bondholders, Trump’s Treasury Secretary will do the same thing if push comes to shove.

Some budget experts on the left know this is true so they try to blur the issue by stating that it is “default” to postpone payment on any type of government spending. Here’s some of what Kleinbard wrote in his column.

…some conservative policy makers besides Mr. Mulvaney have convinced themselves that crashing into the debt ceiling won’t be a big deal because the government can “prioritize” its bill payments, so that interest on Treasury debt will be paid on a current basis, while other bills sit unpaid. Understanding the false allure of prioritization requires a little background. …there are profound doubts as to whether the Treasury could even implement prioritization, beyond ring fencing interest payments, because its payment systems are designed to pay all claims as they are due, regardless of their origin. More important, prioritization is default by another name. The consequences are the same, regardless of which i.o.u.s Treasury chooses to dishonor. All valid claims against the United States are backed by the credit of the United States… The deliberate nonpayment of billions of dollars of uncontested claims every month thus constitutes default, even if the Treasury is paying some of its other debts.

The last sentence in the above excerpt is bunk. Postponing or deferring bills is not good budget policy. It’s basically what happens in poorly governed places like Greece and Illinois. But it’s not default. There wouldn’t be any risk to financial markets if the Treasury Department was late in disbursing farm subsidy checks or Medicaid reimbursements.

Let’s close by indulging one of my fantasies. If Donald Trump wanted to force good policy from Congress, he could threaten to veto any debt limit that wasn’t accompanied by something desirable such as a spending cap or entitlement reform. The politicians on Capitol Hill would balk of course, but Trump could shrug his shoulders and start “prioritization” once the debt limit was reached. So long as all bondholders received promised payments, there would be no danger to financial markets. By contrast, however, the various interest groups feeding at the federal trough would begin to squeal once their checks started slowing down. At some point, Congress would be forced to capitulate.

In other words, Trump has the capacity to score a big victory on the debt limit, just like he has the unilateral ability to score a big victory on Obamacare repeal and/or the 2018 spending bills.

I’m not holding my breath for this to happen, but it’s nice to dream. Especially since a big fight over the debt limit today (if successful) could save us from something far worse in the future.

The Sad Decline of Economic Literacy at the New York Times

Fri, 08/11/2017 - 12:03pm

Every so often, I mock the New York Times for biased or sloppy analysis.

Now there’s a new column by David Leonhardt that cries out for correction.

He’s very upset that upper-income people are enjoying higher incomes over time.

A…team of inequality researchers…has been getting some attention recently for a chart… It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality. …the very affluent, and only the very affluent, have received significant raises in recent decades. This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. …only very affluent families — those in roughly the top 1/40th of the income distribution — have received…large raises. …The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

And here’s the chart that ostensibly shows that the economy is broken.

And what is the solution for this alleged problem? Class-warfare taxation and bigger government, of course.

…there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population. Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

Whenever I see this type of data, I’m automatically suspicious for two reasons.

  1. The people at various income levels in 1980 aren’t the same as the people at those income levels in 2014. In other words, there is considerable income mobility, with some high-income people falling to the middle of the pack, or even below, and some low-income people climbing the middle of the income distribution, or even higher. At the very least, this type of chart exaggerates the degree to which “the rich are getting richer.”
  2. Moreover, rich people getting rich doesn’t imply that poor people are losing income. This chart shows that all income percentiles generally enjoy more income with each passing year, so it isn’t grossly misleading like the charts that incorrectly imply income gains for the rich are at the expense of the poor. Nonetheless, a reader won’t have any way of knowing that more inequality and poverty reduction can go hand in hand.

But I think this chart from the New York Times inadvertently shows something very interesting.

As shown in the excerpt above, Mr. Leonhardt wants us to look at this data and support bigger government and class warfare.

Yet look at the annual data. The chart above has the numbers for 1980 and 2014. To the right, I’ve put together the numbers for 1987, 1996, and 2004.

One obvious conclusion is that prosperity (as shown by rising income levels) was much more broadly and equally shared in the 1980s and 1990s, back when the economy was moving in the direction of free markets and smaller government under both Reagan and Clinton.

But look at what happened last decade, and what’s been happening this decade. Government has been expanding (as measured by falling scores from Economic Freedom of the World).

And that’s the period, thanks to Bush-Obama statism, when lower-income people began to lag and income gains were mostly concentrated at the top of the income redistribution.

As the very least, this certainly suggests that Leonhardt’s policy agenda is misguided. Assuming, of course, the goal is to enable more prosperity for the less fortunate.

I’ll add another point. I suspect that big income gains for the rich in recent years are the result of easy-money policies from the Federal Reserve, which have – at least in part – pushed up the value of financial assets.

The bottom line is that Leonhardt seems motivated by ideology, so he bends the data in hopes of justifying his leftist agenda.

What makes this sad is that the New York Times used to be far more sensible.

Back in 1982, shortly after the Professors Hall and Rabushka unveiled their plan for a flat tax, here’s what the New York Times opined.

Who can defend a tax code so complicated that even the most educated family needs a professional to decide how much it owes? …President Reagan’s tax package will eventually roll back rates to the level of the late 1970’s, but it will not simplify the code or rid it of provisions that penalize hard work and reward unproductive investment. …the income base that is taxed has been so eroded by exceptions and preferences that the rates on what is left to tax must be kept high. Thus, the tax on an extra dollar of income for a typical family earning $20,000 is 28 percent and progressively higher for the more affluent. …The most dramatic fresh start, without changing the total amount collected, would be a flat-rate tax levied on a greatly broadened income base. Senator Helms of North Carolina would rid the law of virtually every tax preference and tax all income at about 12 percent. Representative Panetta of Cali-fornia would retain a few preferences and tax at a flat 19 percent. Either approach would greatly improve the efficiency of the system, simplifying calculations and increasing the incentive to earn.

And here’s what the editors wrote about Governor Jerry Brown’s modified flat tax in 199s. They started by praising the core principles of the flat tax.

Taking Jerry Brown seriously means taking his flat tax proposal seriously. Needlessly, he’s made that hard to do. By being careless, the former California Governor has bent a good idea out of shape. …Mr. Brown’s basic idea — creating a simplified code that encourages saving — is exactly right. …The present tax code is riddled with wasteful contradictions and complexity. For example, profit from corporate investment is taxed twice — when earned by the corporation and again when distributed to shareholders. That powerfully discourages savings and investment — the exact opposite of what the economy needs to grow. The remedy is, in a word, integration, meshing personal and corporate codes so that the brunt of taxes falls on consumption, not saving. …there is a reform that achieves all these objectives. Robert Hall and Alvin Rabushka, economists at the Hoover Institution, have proposed an integrated code that applies a single rate to both personal and corporate income. Their plan wipes away most deductions and exemptions, permitting a low tax rate of 19 percent. …Under the Hall-Rabushka plan, individuals would pay taxes on earnings and corporations would pay tax on interest, dividends and profits. That way, every dollar of income would be taxed once and only once.

And they rightly criticized Governor Brown for violating those principles.

Jerry Brown borrowed some of the elements of Hall-Rabushka. He too would eliminate wasteful exemptions, adopt a single rate and favor saving by exempting corporate investment. But at that point, he turns glib. He would impose on corporations a value-added tax, similar to a national sales tax. That eliminates the elegant symmetry of Hall-Rabushka. Indirectly, Mr. Brown’s variation would tax some income twice — which is why his supposed 13 percent rate would collect revenue equal to about 20 percent of total income.

Wow, this isn’t what I would write, but it’s within shouting distance.

The editors back then understood the importance of low marginal tax rates and they recognized that double taxation is a bad thing.

Now check out what the New York Times believes today about tax reform.

First and foremost, the editors want more money taken from the productive economy to expand the D.C. swamp.

Real reform would honestly confront the fact that in the next decade we will need roughly $4.5 trillion more revenue than currently projected to meet our existing commitment…. Even more would be needed if the government were to make greater investments.

And even though class-warfare taxation is unlikely to generate much revenue, the editors want both higher tax rates and more double taxation.

…it would make sense to increase the top rates on them and eliminate a break on income from investments. …the richest 1 percent pay 33 percent of their total income in taxes; if rates were changed so they paid 40 percent, it would generate $170 billion of revenue in the first year.

The editors want to take one of the most anti-competitive features of the current system and make it even worse.

It would also be a good idea to scale back accelerated depreciation allowances that let businesses write off investments faster than assets actually wear out. Speedy write-offs for luxuries like corporate jets could be eliminated altogether.

They also want to further undermine the ability of U.S. companies to compete on a level playing field in foreign markets.

…they should agree to close…the ability of corporations to defer tax on profits earned abroad.

In a display of knee-jerk statism, the editors also want new tax burdens to finance an ever-larger burden of government. Such as an energy tax.

New forms of taxation are also needed. Even prominent Republicans like James Baker III, George Shultz and Henry Paulson Jr. support a carbon tax imposed on emissions to reduce greenhouse gases. …revenue generated by carbon taxes could be used for other purposes as well, including investments in renewable energy and public transportation.

And a tax on financial transactions.

Revenue can also be raised by imposing a tax on the trading of stocks, bonds and derivatives. …Estimates show that a financial transaction tax of even 0.01 percent per trade ($10 on a $100,000 trade) could raise $185 billion over 10 years, enough to finance prekindergarten for 3- and 4-year olds, with money left over.

But the granddaddy of new taxes would be the value-added tax, a money machine for bigger government.

A value-added tax would be akin to a national sales tax, but harder to evade than traditional sales taxes and thus an efficient revenue raiser.

I’m genuinely curious whether there is any type of tax increase the NYT wouldn’t support.

But that’s not really the point of this column. The real lesson is that it’s sad that the editors have gone from being rationally left to being ideologically left.

P.S. I confess that I especially enjoy when the New York Times inadvertently publishes pieces that show the benefits of free markets and personal liberty.

Which is sort of what happened with Leonhardt’s data, which shows more broadly shared prosperity when economic liberty was increasing.

New Zealand’s Road Map for Sweeping Pro-Market Reform

Thu, 08/10/2017 - 12:24pm

wrote last September that New Zealand is the unsung success story of the world.

No, it doesn’t rank above Hong Kong and Singapore, which routinely rank as the two jurisdictions with the most economic liberty.

But it deserves praise for rising so far and fast considering how the country was mired in statist misery just three decades ago. That’s the story of this great video, narrated by Johan Norberg, from Free to Choose Media. It runs 56 minutes, but it’s very much worth your time.

But just in case you don’t have a spare hour to watch the full video, I can tell you that it explains how New Zealand made a radical shift to free markets in key areas such as agriculture, trade, fisheries, and industry.

wrote about New Zealand’s shift to a property rights-based fisheries system, which is a remarkable success. But I’m even more impressed that the country, which has a very significant agricultural sector, decided to eliminate all subsidies. I fantasize about similar reforms in the United States.

To give you an idea of New Zealand’s overall deregulatory success, it is now ranked first in the World Bank’s Doing Business.

As a fiscal policy wonk, my one complaint is that the video doesn’t give much attention to tax and budget policy.

Which is an unfortunate oversight because there’s a very positive story to tell. In the early 1990s, the government basically imposed a nominal spending freeze. And during that five-year period, the burden of government spending fell by more than 10-percentage points of GDP.

And because policy makers dealt with the underlying disease of too much spending, that also meant eliminating the symptom of red ink. In other words, a big deficit became a big surplus.

The same thing also has been happening this decade. Outlays have been increasing by an average of less than 2 percent annually. And because this complies with my Golden Rule, that means a shrinking burden of spending.

And there’s also a good story to tell about tax policy. The top income tax rate has been slashed from 66 percent to 33 percent, and the capital gains tax has been abolished.

Let’s close by highlighting what should be the main lesson of the video, namely that any country can rescue itself from economic decline.

As I watched, the first thing that occurred to me is that New Zealand’s reforms are – or at least should be – a road map for Greece to follow.

The Fraser Institute’s Economic Freedom of the World shows the history of economic liberty in the two nations, and you can see that they used to be very similar – in a bad way – back in the 1970s. They began to diverge between 1975 and 1985, mostly because policy got even worse in Greece. Then both adopted better policy started in 1985, but New Zealand went much farther in the right direction.

Policy has been generally stable in both nations this century. That’s acceptable for New Zealand, but it’s basically a recipe for continued misery in Greece.

But the good news is that Greece can simply copy New Zealand to get the same good results.

P.S. Remember when Gary Johnson caught grief for being unable to list any admirable foreign leaders. I defended him by pointing out that there are not any obvious choices in office today, but I did mention that Roger Douglas and Ruth Richardson – both prominently featured in the above video – would be on list if it included former politicians.

P.P.S. New Zealand ranks #3 for total human freedom, trailing only Hong Kong and Switzerland.

Does Trump Deserve Credit for Surging Stock Prices?

Wed, 08/09/2017 - 12:16pm

I’m rather frustrated about the lack of real results from the Republicans in Washington.

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 complementary 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.

The European Welfare State Means a Stifling Burden for Middle-Class Taxpayers

Tue, 08/08/2017 - 12:40pm

According to leftists like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.

They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).

But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.

Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.

And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.

Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.

Here’s a chart the WSJ included with the editorial.

As you can see, high payroll taxes and the value-added tax are a very costly combination.

And the rest of Europe is similar to Germany.

…Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.

Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.

Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).

The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.

According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).

But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.

Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.

Sternberg makes the same point in his column.

Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.

Exactly.

There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.

And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.

P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.

P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.

President Trump Can Help Get Puerto Rico Back On Track

Mon, 08/07/2017 - 6:04pm

Originally published by The Daily Caller on August 4, 2017.

Thanks to decades of financial mismanagement, numerous state and local governments throughout the U.S. are facing imminent fiscal collapse. On a debt-to-GDP ratio, none is in worse shape than Puerto Rico. Unfortunately, the oversight board created by Congress to help get the island’s finances in order has not lived up to its promise. President Trump should use his appointment power to help get it back on track.

Puerto Rico is struggling to deal with its $122 billion debt, $74 billion in bonds and $48 billion in unfunded pension liabilities. Congress passed the bipartisan Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) last year as an alternative to a bailout, and with the hopes that the island would negotiate fairly with its creditors and get its spending under control.

Sadly, things have not worked out that way.

Both current governor Ricardo Rosselló and the previous governor, Alejandro Garcia Padilla, have done everything in their power to avoid the politically difficult but necessary decisions that would lead to fiscal belt-tightening. The Oversight Board created by PROMESA even rubber stamped the government’s plan to unlawfully reprioritize pension payments out of the general fund ahead of general obligation debts, despite the latter being constitutionally guaranteed. The plan also lacked needed fiscal reforms, instead calling for increases in payroll and operational expenses over the next decade.

In addition to forestalling Puerto Rico’s resurgence, the Oversight Board has cost U.S. taxpayers a lot of money. In the 12 months following the passage of PROMESA, the board has spent $31 million, with no meaningful progress toward a reasonable solution to Puerto Rico’s debt problem.

The Puerto Rico Center for Investigative Journalism filed suit against the Oversight Board, citing its lack of transparency and refusal to release financial disclosures and other relevant documents, such as its communications with the Puerto Rican government. This is clearly not the orderly and fiscally responsible process that Congress was hoping for.

Six of the PROMESA board members were selected by Congress, but one, Judge Anthony Gonzalez of New York, was put in place by President Obama. President Trump has the right to replace this appointment with one of his own, which he should exercise.

Replacing Judge Gonzalez with an expert in municipal finance, and a strong statement that the administration expects lawful priorities and liens to be respected would send a powerful message to the board that its current direction is not acceptable. Otherwise, Puerto Rico risks losing its ability to access credit markets in the future, which will be needed again once the island is on stable footing and hopefully better focused on achieving economic growth.

Altogether, state and local governments have $5.6 trillion in unfunded pension liabilities. The dangers presented by Puerto Rico’s current trajectory thus extend well beyond the commonwealth. Allowing it to renege on constitutional obligations to creditors, and to do so with the approval of the federally appointed Oversight Board, would send a terrible signal to credit markets at a time when many other jurisdictions are facing their own looming debt crises.

Puerto Rico’s self-inflicted debt load is just one of many challenges, like high unemployment, that the island faces. But it can’t begin to address those problems until its fiscal house is put in order. President Trump can help get it on the right path by replacing Obama’s appointee with one of his own and demanding a return to transparency and accountability.

Egregious Media Dishonesty Overshadows Important Economic Observation

Mon, 08/07/2017 - 12:38pm

While it’s quite clear that the establishment media leans to the left, I don’t get too agitated about bias. Though every so often I can’t resist the temptation to comment when I come across egregious examples on issues such as povertygunsGreecejobstaxes, and education.

The bias extends to politics, of course, though the only time I felt compelled to comment was when ABC News rushed to imply that the Tea Party somehow was connected to a mass shooting in Colorado.

Well, I now feel compelled to comment again. But this example goes beyond bias and should be characterized as blatant and disgusting dishonesty. The hacks at Time took a quote from Charles Koch and then used selective editing to completely misrepresent what he actually said.

In a just world, the person who engaged in this bit of mendacity would lose his or her job and never again work in journalism. But I would hold my breath waiting for that to happen.

But let’s set aside the issue of media bias and dishonesty.

I want to highlight what Mr. Koch said about GDP. He expressed skepticism of that measure because it doesn’t distinguish between good expenditures and bad expenditures.

That’s one of the reasons why I prefer gross domestic income instead of gross domestic product. In simple terms, GDI measures how our national income is generated and GDP measures how it is allocated.

As the Bureau of Economic Analysis explains, the two numbers are basically different sides of the same coin.

In national economic accounting, GDP and GDI are conceptually equal. GDP measures overall economic activity by final expenditures, and GDI measures it by the incomes generated from producing GDP. In practice, GDP and GDI differ because they are constructed using different sources of information. …when one looks at annual data – where the timing differences are less important, the correlation between GDP and GDI is 0.97.

That correlation shouldn’t be a surprise. Indeed, over a longer period of time, the two numbers should be identical.

Both go up when the economy is doing well, and both go down when there is a recession.

But I want to make a more subtle point.

The reason I like GDI over GDP is because one the former is more likely to lead people to support good policy while the latter is more likely to lead people in the direction of bad policy.

Here’s some of what I wrote on the topic back in 2013.

GDP numbers only measure how we spend or allocate our national income. It’s a very indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub. Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable? The same principle is true – or should be true – for a country. That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income. …We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

And, on a related note, you can back to 2009 for a column I wrote explaining that consumer spending is a reflection of a strong economy, not the cause of a  strong economy.

And this video ties everything together by debunking the Keynesian argument that politicians should focus on goosing consumer spending.

France, Yachts, and the Real Victims of Class-Warfare Taxation

Sun, 08/06/2017 - 12:01pm

Remember John Kerry, the former Secretary of State and Massachusetts Senator, the guy who routinely advocated higher taxes but then made sure to protect his own wealth? Not only did he protect much of his fortune in so-called tax havens, he even went through the trouble of domiciling his yacht outside of his home state to minimize his tax burden.

I didn’t object to Kerry’s tax avoidance, but I was irked by his hypocrisy. If taxes are supposed to be so wonderful, shouldn’t he have led by example?

At the risk of understatement, folks on the left are not very good about practicing what they preach.

But let’s not dwell on John Kerry. Instead, let’s focus on other yacht owners so we can learn an important lesson about tax policy.

And, as is so often the case, France is an example of the policies to avoid.

Where have all the superyachts gone? That is the question that locals and business owners in the south of France are asking this summer. And the answer appears to be: Italy, Greece, Turkey, and Spain. …While the ongoing presence of €10 cups of coffee and €1000 bottles of Champagne might serve to reassure the casual observer that the region is still as attractive to the sun-loving super-rich as it ever was, appearances can be deceptive. Talk to locals involved in the multibillion-euro yachting sector—and in the south of France that’s nearly everyone, in some trickle-down shape or form, as yachting is by some measures the biggest earner in the region after hotels and wine—and you detect a sinking feeling. …More and more yachting money is draining away…washing up in other European countries such as Spain, Italy, Greece, and Turkey.

Having once paid the equivalent of $11 for a diet coke in Monaco, I can confirm that it is a painfully expensive region.

But let’s focus on the more important issue: Why are the big yachts staying away from the French Riviera?

Apparently, they’re avoiding France for the same reason that entrepreneurs are avoiding France. The tax burden is excessive.

The core reason for the superyacht exodus is financial; France has tightened…tax regulations for the captains and crew members of yachts who officially reside in France, and often have families on the mainland, but traditionally have evaded all tax by claiming they were earning their salary offshore. The country has also taken a hard line on imposing 20 percent VAT on yacht fuel sales, which often used to be dodged. Given that a typical fill can be around €100,000, it is understandable that many captains are simply sailing around the corner.

I don’t share this story because I feel sorry for wealthy people.

Instead, the real lesson to be learned is that when politicians aim at the rich, it’s the rest of us that get victimized.

Ordinary workers, whether at marinas or on board the yachts, are the ones who are losing out.

Revenue at the iconic marina in Saint-Tropez has…fallen by 30 percent since the beginning of the year, while Toulon, a less glamorous destination, has suffered a 40 percent decline. …They stated that refueling a 42-meter yacht in Italy (instead of France) “gives a saving of nearly €21,000 a week because of the difference in tax.” Sales by the four largest marine fuel vendors has fallen by 50 percent this summer, the letter said, adding that French “yachties”—an inexperienced 19-year-old deckhand makes around €2,000 per month and a good Captain can command €300,000—were being laid off in droves, as, due to the new tax rules, national insurance, health and other compulsory contributions which boat owners pay for crew members have increased from 15 to 55 percent of their wages. The letter stated that “the additional cost of maintaining a seven-person crew in France is €300,000 (£268,000) a year.”

All of this is – or should have been – totally predictable.

French tax authorities should have learned from what happened a few years ago in Italy.

Or from what happened in France a few decades ago.

…the French have been down this avenue before. “It happened in France about 30 years ago, so people moved their boats to Italy… Yachting is huge revenue earner for the region. …we contribute huge sums in social security alone. “But the bigger issue is that people holidaying on yachts here go ashore and spend money—and a lot of it.” Says Heslin: “The possibility of this happening if taxes and fees were increased has actually been talked about for the last two years, and everyone warned what would happen. “But this where the French government so often goes wrong, this attitude of, ‘Well, we are France, people will always come here.’” This time, it appears, they have called it wrong. Edmiston says, “Yachting is very important to local economy, but if people are not made to feel welcome here, there are plenty of other places where they will be.”

Incidentally, we have similar examples of counterproductive class warfare in the United States. Florida politicians shot themselves in the foot a number of years ago with high taxes on yachts.

And the luxury tax on yachts, which was part of President George H.W. Bush’s disastrous tax-hike deal in 1990, hurt middle-class boat builders much more than upper-income boat buyers.

But let’s zoom out and make a broader point about public finance and tax policy.

Harsh taxes on yachts backfire because the people being targeted have considerable ability to escape the tax by simply choosing to buy yachts, staff yachts, and sail yachts where taxes aren’t so onerous.

Let’s now apply this insight to something far more important than yachts.

Investment is a key for long-run growth and higher living standards. All economic theories – even Marxism ans socialism – agree that capital formation is necessary to increase productivity and thus boost wages.

Yet people don’t have to save and invest. They can choose to immediately enjoy their earnings, especially if there are harsh taxes on income that is saved and invested.

Or they can choose to (mis)allocate capital in ways that make sense from a tax perspective, but might not be very beneficial for the economy.

And upper-income taxpayers have a lot of latitude over how much of their money is saved and invested, as well as how it is saved and invested.

So when politicians impose high taxes on income that is saved and invested, they can expect big supply-side responses, just as there are big responses when they impose punitive taxes on yachts.

But here’s the bottom line. When they over-tax yachts, the damage isn’t that great. Yes, some local workers are out of jobs, but that tends to be offset by more job creation in other jurisdictions that now have more business from big boats.

Over-taxing saving and investment, by contrast, can permanently lower a nation’s prosperity by reducing capital formation. And to the extent that this policy is imposed on the entire world (which is basically what the OECD is seeking), then there’s no additional growth in other jurisdictions to offset the suffering caused by bad tax policy in one jurisdiction.

Capitalist Reforms Boosting Baltic Prosperity

Sat, 08/05/2017 - 12:53pm

I’m a fan of the Baltic nations in part because they were among the first to adopt flat tax systems after the collapse of the Soviet empire. But tax reform was just the beginning. Estonia, Latvia, and Lithuania have liberalized across the board as part of their efforts to become prosperous.

Economic Freedom of the World is always the first place to check when you want to understand whether countries have good policy. And the dataset for the Baltic nations does show that all three nations are in the top quartile, with Lithuania and Estonia cracking the top 20.

So are these market-oriented policies paying dividends? Has the shift in the direction of free markets and limited government resulted in more prosperity?

The short answer is yes. The European Central Bank has released some very interesting analysis on the economic performance of these countries.

The Baltic States have been able to maintain an impressive rate of convergence towards the average EU per capita income over the past 20 years. …these three countries have each pursued a strongly free-market and pro-business economic agenda… The three countries are different in many ways, but share a number of key features: very high levels of trade and financial openness and very high labour mobility; high economic flexibility with wage bargaining mainly at firm level; relatively good institutional framework conditions; and low levels of public debt.

And this has translated into strong growth, which has resulted in higher incomes.

The Baltic States are among the few euro area countries (along with Slovakia) in which real GDP per capita in purchasing power standard (PPS) terms has shown substantial convergence towards the EU average over the last 20 years. While in 1995 their average per capita income (in PPS) stood at only around 28% of the EU15 average, in 2015 it reached 66.5% (see Chart A).

Here’s the chart showing how quickly the Baltic countries are catching up to Western Europe.

The ECB report also measured how fast the Baltic nations have grown compared to theory.

The long-term convergence performance of the Baltic States has exceeded what would have been expected based on their initial income level.

And here’s the chart showing how they have over-performed.

The ECB study says that the Baltic countries have been especially good about replacing cronyism with the rule of law.

One of the possible reasons for the fairly strong convergence performance of the Baltic States is the strong improvement in institutional quality in these countries… The Worldwide Governance Indicators of the World Bank, which is a composite indicator of institutional quality, suggests that institutional quality has improved markedly in the Baltic States – especially in Estonia – over the recent decades.

I agree. Indeed, I’ve written that Estonia is a good role model, having reduced corruption by limiting the power of politicians and bureaucrats.

The report also credits the three countries with rapid rebounds from the financial crisis, which is a point I made back in 2011.

While the crisis hit the Baltic States hard, the adjustment of imbalances was very fast. The rapid adjustment in fiscal balances and private sector balance sheets implied that the Baltic States could avoid the accumulation of a large debt overhang. In addition, the fast reduction in unemployment helped to decrease the risk of hysteresis, thus avoiding lasting consequences for potential growth. …The external adjustment of the Baltic States was facilitated by painful but effective internal devaluation. …This relatively fast adjustment in the Baltic States was facilitated in part by a strong initial rebound in employment growth, supported by an adjustment in labour costs.

I also think genuine spending cuts helped produce the quick economic rebound.

Though the report does warn that there are no guarantees that the Baltic countries will fully converge with Western Europe.

International experience suggests that countries that reach a middle income level, like the Baltic States, tend to find it difficult to converge further and achieve a high income level. A World Bank study suggests that out of 101 middle-income economies in 1960, only 13 had become high-income economies by 2008.

This is a good point. As I explained two years ago, full convergence is very difficult. North America and Western Europe became rich in part because of very small public sectors in the 1800s and early 1900s. Indeed, there was virtually no welfare state until the 1930s and the level of redistribution was comparatively small until the 1960s.

Unfortunately, this is one area where the Baltic nations are weak. Yes, the burden of government spending may be modest compared to other EU countries, but the public sector nonetheless consumes more than 35 percent of GDP. And even though these nations have flat taxes, they also have stifling payroll taxes and government-fueling value-added taxes.

Another problem (not just in the Baltic region, but all through Eastern Europe) is that the demographic outlook is unfriendly, which means that the welfare state automatically will become a bigger burden over time.

If the Baltic countries want genuine convergence (or if they want to surpass Western Europe), that will require additional reform, particularly efforts to reduce the burden of government spending to the levels found in Hong Kong and Singapore.

Unfortunately, it’s more likely that policy will move in the other direction. There are constant efforts to repeal the flat tax systems in the Baltic countries. And efforts by the European Commission to harmonize business taxation ultimately may undermine the pro-growth approach to business taxation in the region as well.

P.S. For those who want an in-depth look at a Baltic nation, I recommend this video about Estonia. And if you want some amusement, check out how Paul Krugman wanted people to believe that Estonia’s 2008 recession was caused by 2009 spending cuts.

Should Central America Listen to the WSJ and Copy Hong Kong, or Listen to the OECD and Copy Greece?

Fri, 08/04/2017 - 12:04pm

The great thing about the Economic Freedom of the World is that it’s like the Swiss Army Knife of global policy. No matter where you are or what issue you’re dealing with, EFW will offer insight about how to generate more prosperity.

Since today’s focus is Central America, let’s look at the EFW data.

As you can see, it’s a mixed bag. Some nations are in the top quartile, such as Costa Rica, Guatemala, and Panama, though none of them get high absolute scores. Mexico, by contrast, has a lot of statism and is ranked only #88, which means it is in the third quartile. And Belize is a miserable #122 and stuck in the bottom quartile (where Cuba also would be if that backwards country would be ranked if it produced adequate statistics).

One of the great challenges for development in Central America (as well as other parts of the developing world) is figuring out how to get poor and middle-income nations to make the jump to the next level.

Mary Anastasia O’Grady of the Wall Street Journal has a column on how to get more growth in Central America. She focuses on Guatemala, but what she writes is applicable for all neighboring countries.

…faster economic growth is part of what’s needed for the region… To succeed, it will have to break with the State Department’s conventional wisdom that underdevelopment is caused by a paucity of taxes and regulation. It will also have to climb down from its view that trade is a zero-sum game. Policy makers might start by reading a new report on micro, small and medium-sized businesses in Guatemala by the Kirzner Center for Entrepreneurship at Francisco Marroquin University in Guatemala City. It measures—by way of household surveys in 179 municipalities and interviews with industry experts—“attitudes, activities and aspirations of the entrepreneur.” …the GEM study ranks Guatemala No. 1 for its positive view of entrepreneurship as a career choice. Guatemala also ranks high (No. 9) for the percentage of the population engaged in new businesses, defined as less than 3½ years old. And it ranks 12th in terms of the percentage of the population who “are latent entrepreneurs and who intend to start a business within three years.”

She explains that Guatemalan entrepreneurship is hampered by excessive taxation and regulation.

Yet Guatemalan eagerness to run a business has not translated into prosperity for the nation… The country ranks a lowly 59th in entrepreneurs’ expectations that they will create six or more jobs in five years. It also sinks to near the bottom of the pack (62nd) in creating business-service companies. …The World Bank’s 2017 “Doing Business” survey provides many clues about why the informal economy is so large. Guatemala ranks 88th out of 190 countries world-wide for ease of running an enterprise, but in key categories that make up the index it performs much worse. The survey finds that it takes 256 hours to comply with the tax code. The total tax take is 35.2% of profits. It takes almost 20 days to start a legal enterprise and costs 24% of per capita income. To enforce a contract it takes more than 1,400 days and costs more than 26% of the claim.

The good news is that we know the answers that will generate prosperity. The bad news is that Guatemala gets a lot of bad advice.

The obvious solution is an overhaul of the tax, regulatory and legal systems in order to increase economic freedom. A lower tax rate and a simpler code would give companies an incentive to operate legally, thereby broadening the base and improving access to credit. Instead the Guatemalan authorities—encouraged by the State Department and the International Monetary Fund—spend their resources trying to impose a complex, costly system in an economy of mostly informal businesses with a much-smaller number of legal, productive entrepreneurs. Recently the United Nations International Commission against Impunity in Guatemala recommended a new tax to fight “impunity.” This is no way to attract capital or raise revenue.

Speaking of bad advice, let’s now contrast the sensible recommendations of Ms. O’Grady to the knee-jerk statism of the Organization for Economic Cooperation and Development. In a new report on Costa Rica’s tax system, the OECD urged ever-higher fiscal burdens for the country. Including destructive class warfare.

Costa Rica’s tax revenues are…insufficient to finance the country’s current spending needs. …In addition to raising more tax revenue…, Costa Rica needs to…enhance the redistributive role of its tax system. …the role of the personal income tax (PIT) should be strengthened as it currently raises little revenue and does not contribute to reducing inequality. …Collecting greater revenues from the PIT, by lowering the income threshold above which PIT has to be paid as well as by introducing additional PIT brackets and gradually raising the top PIT rate, could contribute to reducing income inequality.

But the OECD doesn’t merely want to hurt successful taxpayers.

The bureaucracy is proposing other taxes that target everyone in the country. Including a pernicious value-added tax.

Costa Rica does not have a modern VAT system in place. …Costa Rica’s priority should be to introduce a well-designed and broad-based VAT system…to be able to generate additional revenues… There is scope to improve the environmental effectiveness of tax policy while also increasing revenue.

So why is the OECD so dogmatically in favor of higher taxes in Costa Rica?

Are revenues less than 5 percent of GDP, indicating that the country is unable to finance genuine public goods such as rule of law?

Is the government so starved of revenue that Costa Rico can’t replicate the formula – a public sector consuming about 10 percent of economic output – that enabled the western world to become rich?

Of course not. The report openly acknowledges that the Costa Rican tax system already consumes more than 23 percent of GDP.

The obvious conclusion if that the burden of government in Costa Rica should be downsized. And that’s true whether you think that the growth-maximizing size of government, based on the experience of the western world, is 5 percent-10 percent of GDP. Or whether you limit yourself to modern data and think the growth-maximizing size of government, based on Hong Kong and Singapore, is 15 percent-20 percent of economic output.

Here’s another amazing part of the report, as in amazingly bad and clueless.

The OECD actually admits that rising levels of government debt are the result of spending increases.

…significant increases in expenditures have not been matched by increases in tax revenues. …Between 2008 and 2013, overall government spending increased as a result of higher public sector remuneration as well as higher government transfers to finance public sector social programmes.

What’s particularly discouraging, as you just read, is that the higher spending wasn’t even in areas, such as infrastructure, where there might arguably be a potential for some long-run economic benefit.

Instead, the government has been squandering money on bureaucrat compensation and the welfare state.

Here’s another remarkable admission in the OECD report.

The high tax burden is a key driver of the informal economy in Costa Rica. The IMF estimated the size of the informal economy in Costa Rica at approximately 42% of GDP in the early 2000s… Past work from the IMF showed that rigidities in the labor market and the high tax burden were the most important drivers of informality.

Yet does the OECD reach the logical conclusion that Costa Rica needs deregulation and lower tax rates? Of course not.

The Paris-based bureaucrats instead want measures to somehow force workers into the tax net.

Bringing more taxpayers within the formal economy should be a key priority. …the tax burden in Costa Rica is borne by a small number of taxpayers. This puts a limit on the amount of tax revenue that can be raised…and puts a limit to the impact of the tax system in reducing inequality.

Ironically, the OECD report actually includes a table showing why the IMF is right in this instance. As you can see, social insurance taxes create an enormous wedge between what it costs to employ a worker and how much after-tax income a worker receives.

In other words, the large size of the underground economy is a predictable consequence of high tax rates.

Let’s conclude with the sad observation that the OECD’s bad advice for Costa Rica is not an anomaly. International bureaucracies are routinely urging higher tax burdens.

Indeed, I joked a few years ago in El Salvador that the nation’s air force should shoot down any planes with IMF bureaucrats in order to protect the country from bad economic advice.

Envy, Fairness, Redistribution, Compassion, and Morality

Thu, 08/03/2017 - 12:14pm

I confess that I’m never sure how best to persuade and educate people about the value of limited government.

Regular readers presumably will put me in the second camp since most of my columns involve data and evidence on the superior outcomes associated with markets compared to statism.

That being said, I actually don’t think we will prevail until and unless we can convince people that it is ethically wrong to use government power to dictate and control the lives of other people.

So I’m always trying to figure out what motivates people and how they decide what policies to support.

With this in mind, I was very interested to see that nine scholars from five continents (North America, South America, Europe, Asia, and Australia), representing six countries (Canada, United States, Argentina, Netherlands, Israel, and Australia) and four disciplines (psychology, criminology, economics, and anthropology), produced a major study on what motivates support for redistribution.

Why do people support economic redistribution? …By economic redistribution, we mean the modification of a distribution of resources across a population as the result of a political process. …it is worthwhile to understand how distributive policies are mapped into and refracted through our evolved psychological mechanisms.

The study explains how human evolution may impact our attitudes, a topic that I addressed back in 2010.

The human mind has been organized by natural selection to respond to evolutionarily recurrent challenges and opportunities pertaining to the social distribution of resources, as well as other social interactions. …For example, it was hypothesized that modern welfare activates the evolved forager risk-pooling psychology — a psychology that causes humans to be more motivated to share when individual productivity is subject to chance-driven interruptions, and less motivated to share when they think they are being exploited by low-effort free riders. Ancestrally, sharing resources that came in unsynchronized, high-variance, large packages (e.g., large game) allowed individuals to buffer each other’s shortfalls at low additional cost.

Here’s how the authors structured their research.

…we propose that the mind perceives modern redistribution as an ancestral game or scene featuring three notional players: the needy other, the better-off other, and the actor herself. …we use the existence of individual differences in compassion, self-interest, and envy as a research tool for investigating the joint contribution of these motivational systems to forming attitudes about redistribution.

And here’s how they conducted their research.

We conducted 13 studies with 6,024 participants in four countries to test the hypothesis that compassion, envy, and self-interest jointly predict support for redistribution. Participants completed instruments measuring their (i) support for redistribution; (ii) dispositional compassion; (iii) dispositional envy; (iv) expected personal gain or loss from redistribution (our measure of self-interest); (v) political party identification; (vi) aid given personally to the poor; (vii) wealthy-harming preferences; (viii) endorsement of pro-cedural fairness; (ix) endorsement of distributional fairness; (x) age; (xi) gender; and (xii) socioeconomic status (SES).

Now let’s look at some of the findings, starting with the fact that personal compassion is not associated with support for coerced redistribution. Indeed, advocates of government redistribution tend to be less generous (a point that I’ve previously noted).

Consider personally aiding the poor—as distinct from supporting state-enacted redistribution. Participants in the United States, India, and the United Kingdom (studies 1a–c) were asked whether they had given money, food, or other material resources of their own to the poor during the last 12 mo; 74–90% of the participants had. …dispositional compassion was the only reliable predictor of giving aid to the poor. A unit increase in dispositional compassion is associated with 161%, 361%, and 96% increased odds of having given aid to the poor in the United States, India, and the United Kingdom. …Interestingly, support for government redistribution was not a unique predictor of personally aiding the poor in the regressions… Support for government redistribution is not aiding the needy writ large—in the United States, data from the General Social Survey indicate that support for redistribution is associated with lower charitable contributions to religious and nonreligious causes (61). Unlike supporting redistribution, aiding the needy is predicted by compassion alone.

But here’s the most shocking part of the results.

The people motivated by envy are often interested in hurting those above them than they are in helping those below them.

…consider envy. Participants in the United States, India, and the United Kingdom (studies 1a–c) were given two hypothetical scenarios and asked to indicate their preferred one. In one scenario, the wealthy pay an additional 10% in taxes, and the poor receive an additional sum of money. In the other scenario, the wealthy pay an additional 50% in taxes (i.e., a tax increment five times greater than in the first scenario), and the poor receive (only) one-half the additional amount that they receive in the first scenario. That is, higher taxes paid by the wealthy yielded relatively less money for the poor, and vice versa… Fourteen percent to 18% of the American, Indian, and British participants indicated a preference for the scenario featuring a higher tax rate for the wealthy even though it produced less money to help the poor (SI Appendix, Table S3). We regressed this wealthy-harming preference simultaneously on support for redistribution… Dispositional envy was the only reliable predictor. A unit increase in envy is associated with 23%, 47%, and 43% greater odds of preferring the wealthy-harming scenario in the United States, India, and the United Kingdom.

This is astounding, in a very bad way.

It means that there really are people who are willing to deprive poor people so long as they can hurt rich people.

Even though I have shared polling data echoing these findings, I still have a hard time accepting that some people think like that.

But the data in this study seem to confirm Margaret Thatcher’s observation about what really motivates the left.

The authors have a more neutral way of saying this. They simply point out that compassion and envy can lead to very different results.

Compassion and envy motivate the attainment of different ends. Compassion, but not envy, predicts personally helping the poor. Envy, but not compassion, predicts a desire to tax the wealthy even when that costs the poor.

Since we’re on the topic or morality, markets, and statism, my colleague Ryan Bourne wrote an interesting column for CapX looking at research on what type of system brings out the best in people.

It turns out that markets promote cooperation and trust.

…experimental work of Herbert Gintis, who has analysed the behaviours of 15 tribal societies from around the world, including “hunter-gatherers, horticulturalists, nomadic herders, and small-scale sedentary farmers — in Africa, Latin America, and Asia.” Playing a host of economic games, Gintis found that societies exposed to voluntary exchange through markets were more highly motivated by non-financial fairness considerations than those which were not. “The notion that the market economy makes people greedy, selfish, and amoral is simply fallacious,” Gintis concluded. …Gintis again summarises, “movements for religious and lifestyle tolerance, gender equality, and democracy have flourished and triumphed in societies governed by market exchange, and nowhere else.”

Whereas greater government control and intervention produce a zero-sum mentality and cheating.

…we might expect greed, cheating and intolerance to be more prevalent in societies where individuals can only fulfil selfish desires by taking from, overpowering or using dominant political or hierarchical positions to rule over and extort from others. Markets actually encourage collaboration and exchange between parties that might otherwise not interact. This interdependency discourages violence and builds trust and tolerance. …In a 2014 paper, economists tested Berlin residents’ willingness to cheat in a simple game involving rolling die, whereby self-reported scores could lead to small monetary pay-offs. Participants presented passports and ID cards to the researchers, which allowed them to assess their backgrounds. The results were clear: participants from an East German family background were far more likely to cheat than those from the West. What is more, the “longer individuals were exposed to socialism, the more likely they were to cheat.”

All of which brings me back to where I started.

How do you persuade people to favor liberty if they are somehow wired to have a zero-sum view of the world and they think that goal of public policy is to tear down the rich, even if that hurts the poor?

Though the internal inconsistency of the previous sentence maybe points to the problem. If the poor and the rich are both hurt by a policy (or if both benefit from a policy), then the world clearly isn’t zero-sum. And we now from voluminous evidence, of course, that the world isn’t that way.

But how to convince people, other than making the same arguments over and over again?

P.S. Jonah Goldberg and Dennis Prager both have videos with some insight on this issue.

Tax Withholding: A Prerequisite for Bigger Government

Wed, 08/02/2017 - 12:53pm

The internal revenue code is a reprehensible mess that torments taxpayers and undermines American competitiveness.

The good news is that Americans don’t like the tax system.

The bad news is that they don’t dislike it nearly as much as they should. At least in my humble opinion.

There are two reasons for the inadequate level of disdain.

  • First, nearly half of all households are no longer are subject to the income tax. Indeed, the system is actually a revenue generator for some households since the EITC wage subsidy is a redistribution program laundered through the tax code.
  • Second, many people get a warm and fuzzy feeling when they file their taxes because of the expectation that they will get a sizable refund, even though that payment from the IRS is simply a reflection of having paid too much tax during the prior year.

For those of us who want to scrap the tax system, this is a challenge.

And I’m not shy about admitting the problem.

About three-quarters typically get money back, with refunds so far this year averaging almost $3,000. For many, it will be the single biggest payment they receive all year. …the fact that so many people are getting paid by the IRS, and not the other way around, takes some of the edge off a day when they’re trying to stoke public anger at the tax system. “The fact that people are looking forward to tax time rubs me the wrong way,” said Dan Mitchell, a tax expert at the libertarian Cato Institute. “I would like them to be upset.”

I also have a good idea of why the problem exists.

It’s withholding. And it started back during World War II. Here’s some background.

During the war, tax rates went up, and a broader number of people were expected to pay them. Professor Anuj Desai from the University of Wisconsin Law School said there was a saying that income tax went from “a class tax to a mass tax.” …“The thought was that if we withhold a little bit every bit every paycheck, people won’t have to worry about the problem of coming up with a huge chunk of money,” Desai said. But withholding is also a remarkably efficient way for the government to raise money, and policymakers knew that. …“You could never have the taxes that were levied during World War II without withholding. It was absolutely essential for that purpose,” economist Milton Friedman said in an interview… Friedman worked with the Treasury Department at the time withholding was introduced. Withholding stuck around after the war, much to Friedman’s chagrin. “Unfortunately, once you got it installed, it’s almost impossible to get rid of it,”  Friedman said. “It’s too useful to the people in power.”

Jeffrey Tucker of the Foundation for Economic Education elaborates.

The problem is…the withholding tax. Instead of being collected directly from the payer, the government  collects them “at the source,” which is to say that they are collected from the institution that pays wages and salaries — on behalf of the taxpayer. …one of the most amazingly brilliant innovations of the modern state. This tinkering with the system — the creation of the institution called withholding — has created an illusion that paying taxes is really about getting free money! When the check arrives from the government a month or so later, the taxpayer is actually tempted to think: wow, this is really great! A pillaging has been spun to look like a gift. …Withholding dramatically changed the psychology of paying taxes. It almost feels like you aren’t paying any at all. The worker gets used to how much after-tax income she makes and adapts to it quickly. Then when tax time arrives, there is no more to pay. Instead you file and find yourself on the receiving end of what seems like an unexpected gift of a check from government. Yet in reality your refund is nothing more than the belated return of a zero-interest loan you were forced to provide the government.

Exactly.

Every time I talk to somehow who is happy about a refund, I ask them whether they will give me an interest free loan instead. After all, I’d be happy to collect money from them all year long and then return it the following April.

But I’m digressing.

Jeffrey points out how the political dynamics of tax day would change in the absence of withholding.

If we really wanted to make a wonderful change in favor of transparency and decency, one that would mark a shift in people’s perceptions of the costs of government, the withholding tax could just be repealed completely. …every taxpayer would pay the full amount owed to the government every April 15 and otherwise receive full compensation the rest of the year. Such a seemingly small change would have a dramatic effect on public perceptions of taxation and government. Even from the age of 16, every citizen would have a more pungent reminder of the costs of government. We would no longer live the illusion that we can all get something for nothing and that government isn’t really expensive after all.

Ben Domenech of the Federalist agrees.

The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. …Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door.

By the way, this isn’t merely impractical libertarian fantasy.

There’s a real-world example of a tax system where people actually write checks to the government and are much more aware of the cost of the public sector. It’s called Hong Kong, which is – not coincidentally – an economic success story in large part because of a good fiscal system.

And I would argue that good fiscal system exists because taxpayers are directly sensitive to the cost of government (it also helps that there’s a spending cap in Hong Kong).

Let’s close with some government propaganda. This Disney cartoon was produced before withholding. As you can see the government basically had to make the case that people should set aside money out of their paychecks so they would have enough money to make periodic tax payments.

This was a plausible case when seeking to finance a war against National Socialism and Japanese imperialism. It wouldn’t be nearly as persuasive today when the government seems to specialize in financing wastefraud, and abuse.

P.S. At the bottom of this column, you can watch a much better cartoon from the 1940s.

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