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Free Markets, Rule of Law, and Limited Government: A Recipe for Singapore’s Amazing Prosperity

Thu, 06/29/2017 - 12:02pm

Singapore is one of my favorite nations for the simple reason that it consistently gets very high scores from Economic Freedom of the World and the Index of Economic Freedom (as well as from Doing Business, Global Competitiveness Report, and World Competitiveness Yearbook).

I also greatly admire Singapore’s strict adherence to my Golden Rule for a 10-year period beginning in the late 1990s. Government spending actually shrank by a bit more than 1 percent per year, on average, over that decade.

This reduced the burden of government spending to just 12 percent of economic output, almost as low as it was in North America and Western Europe in the 1800s.

Unfortunately, the public sector has since crept back up to 20 percent of GDP, but that’s still very low compared to the rest of the developed world.

What’s especially attractive is that the welfare state is very small in Singapore. According to the IMF (see page 44), expenditures on “social development” are only about 8 percent of GDP, and that category includes education and health care. If you peruse Singapore budget documents, spending on “transfers” is well under 5 percent of economic output.

Either figure is far below levels of redistribution in other developed nations.

One of the reasons the welfare state is so small is that individuals are required to set aside their own money for health and retirement.

And since the burden of spending is modest, that enables Singapore to have a non-oppressive tax regime.

That’s the good news. The bad news is that a value-added tax was imposed back in the 1990s. Though the rate has stayed low (so far) and hasn’t (yet) become a money machine for big government.

Singapore is also very good in areas other than fiscal policy. It is a shining example of the benefits of open trade. It ranks very highly for rule of law. And there’s very little regulation.

Indeed, Singapore has consistently ranked #2 for economic freedom in recent decades, trailing only Hong Kong (the U.S. briefly edged out Singapore for second place after all the market-friendly reforms of the Reagan and Clinton years, but now we trail by a wide margin thanks to the statism of the Bush-Obama years).

Here’s a graph from Economic Freedom of the World showing how Singapore started at a decent point in 1970 and then had a 20-year period of improvement (most because of deregulation and better monetary policy).

As I repeatedly argue, if you want good economic results, you need good policy.

And that’s exactly the story of Singapore.

I’m currently in the country because I spoke earlier today at a conference on global investment (the audience got quite excited when I explained the effort to defund the OECD).

Walking the streets, it’s hard not to be impressed by the widespread prosperity of the jurisdiction. Sleek buildings. Fancy shops. Lots of professionals.

And ordinary people are the biggest winners. Here’s a remarkable chart from Human Progress showing per capita GDP (in $2015 inflation-adjusted dollars) in Singapore and the United States, along with the world average.

As you can see, Singapore used to be far below the United States and somewhat below the world average. Now it is one of the wealthiest places on the planet.

Singapore’s jump from poverty to prosperity is astounding.

What’s really remarkable is that the country was as poor as Jamaica back in the 1960s. But thanks to rapid economic growth, the people of Singapore enjoy very high living standards today.

The moral of the story is that ordinary people in Singapore enjoy prosperity because the government was smart enough to focus on growth and didn’t worry about inequality.

Here’s what Marian Tupy, one of my colleagues at the Cato Institute, wrote about the country’s incredible growth.

The incredible transformation of Singapore from a sleepy outpost of the British Empire to a global commercial and technological hub was partly facilitated by a very high degree of economic freedom. …As late as 1970, per person income in Singapore was 54 percent of the global average. Today it is 321 percent of the global average.

Now for the bad news.

Singapore is very pro-market, but it’s not very pro-liberty. In an article for the Foundation for Economic Education, Donovan Choy highlights some of the nation’s shortcomings.

Within libertarian circles, Singapore generally enjoys a good reputation for its economic freedom.

But it’s not Nirvana.

The Housing Development Board (HDB), the public housing arm of the state, houses more than 80% of the population in high-rise apartment homes. …Education is largely monopolized by the state from the primary school level up until the university level… Singapore suffers from a severe lack of press freedom, ranking at an alarming 151 in the World Press Freedom Index… The state also controls public broadcasting from television to radio. …Singapore is perhaps most well-known for its non-tolerance of drugs. Drug users can be jailed or housed in rehabilitation centers for up to three years and drug traffickers face the death penalty. …Singaporean males are also subject to mandatory conscription of up to two years by the age of 18, a law that has been in effect since 1967. Civil ownership of guns are outlawed in Singapore.

These are reasons why Singapore does not earn a high score in the Human Freedom Index.

But I’m an economist, so I’m still as positively impressed as I was back in 2009.

P.S. The bureaucrats at the OECD produced a report on Asian economies and argued that taxes should consume at least 25 percent of GDP to achieve prosperity, which was a remarkable assertion since the report showed that Singapore was the richest nation in the region and has a tax burden barely half that level. That’s an example of what soccer fans call an “own goal.” The OECD wasn’t just being statist, it was being incompetently statist.

Advertising Tax Would Jeopardize 20 Million American Jobs

Wed, 06/28/2017 - 7:29pm

Originally published by Investor’s Business Daily on June 26, 2017.

Republicans have struggled to put together a tax reform plan with enough support to pass Congress. The major hang-up is their self-imposed need to find revenue offsets to “pay for” the pro-growth rate cuts and reforms. However, that challenge shouldn’t mean that every bad idea to raise money, like an advertising tax, should now be on the table.

Talks of a federal ad tax had been dead since the 1950s until former Rep. Dave Camp, R-Mich., gave the idea new life in his 2014 tax reform proposal. Camp wanted to convert advertising from being a fully deductible business expense — as it has been for over a century — to just half deductible, with the rest being amortized over the course of a decade.

While Camp’s proposal went nowhere, current Ways and Means Committee Chairman Kevin Brady recently acknowledged that there “may be a need” to look at some of the revenue raisers in the old plan to complete his 2017 tax reform proposal.

Let’s hope that the advertising tax is not one of the ones being looked at. There’s no good reason to treat advertising costs differently than other business expenses. To do so would be to make the tax code more complicated, instead of less. Even more importantly, it would have drastic negative consequences for the economy.

In 2014, IHS Global conducted a study on advertising’s impact on the American economy, and the results were astounding. IHS found that in just that year alone, the country’s $297 billion in advertising spending generated $5.5 trillion in sales, or 16% of the nation’s total economic activity. It also helped create 20 million jobs, which in 2014 amounted to 14% of total U.S. employment.

Clearly, ad spending is a significant driver of economic growth, providing tremendous return on investment for the American economy (approximately $19 worth of sales activity for every $1 spent on advertising). The labor force participation rate is still sitting at the lowest level it’s been at since the Carter presidency, while higher-paying job sectors continue to struggle. Republicans should be careful not to make these concerning numbers plummet even more out of desperation to score a political “win.”

The dangers of the advertising tax cannot be overstated. In fact, it already has a history of wreaking havoc on the economy.

In the 1980s, Florida briefly imposed one, and it led to the immediate loss of 50,000 jobs and $2.5 billion in personal income. Even worse is the fact that the tax’s administrative costs ended up exceeding the tax revenue. The Florida ad tax was wildly unpopular — so much so that the legislature was forced to repeal it after just 6 months. The New York Times reported that then-Gov. Robert Martinez “suffered political embarrassment in his first year in office by having to shift from ardent support of the tax to advocating its repeal.”

Similarly, a study from the University of Oxford found that Austria’s advertising tax had a noticeable impact on the price of goods. In the case of consumer necessities like food and education, this mandate often led to costs shifting upward. This is to be expected — the less information consumers are exposed to about competing products, the easier it is for market leaders to maintain artificially higher market share.

On the campaign trail, President Donald Trump promised to simplify the tax code for American families and businesses, creating more jobs and economic mobility by leaving more money in the hands of the people who’ve earned it. The advertising tax would undoubtedly fail on these fronts; it will do nothing but worsen the sorry state of the economy.

Kevin Brady and the rest of the Ways and Means Committee should take note of the facts of the matter at hand and learn from history so that the ad tax can be put to bed once and for all.

Medicaid Reform and Math-Challenged Reporters at the New York Times and Washington Post

Wed, 06/28/2017 - 12:49pm

Senate Republicans have produced their Obamacare repeal legislation, though as I noted at the end of this interview, it’s really more a bill about Medicaid reform than Obamacare repeal.

While it’s disappointing that big parts of Obamacare are left in place, it’s definitely true that Medicaid desperately needs reform, ideally by shifting the program to the states, thus replicating the success of welfare reform.

But critics are savaging this idea, implying that “deep cuts” will hurt the quality of care. Indeed, some of them are even engaging in poisonous rhetoric about people dying because of cutbacks.

There’s one small problem with the argument, however. Nobody is proposing to cut Medicaid. Republicans are merely proposing to limit annual spending increases. Yet this counts as a “cut” in the upside-down world of Washington budgeting.

The Washington Post contributes to innumeracy with a column explicitly designed to argue that the program is being cut.

…the Senate proposal includes significant cuts to Medicaid spending…the Senate bill is more reliant on Medicaid cuts than even the House bill…spending on the program would decline in 2026 by 26 percent…That’s a decrease of over $770 billion on Medicaid over the next 10 years. …By 2026, the federal government would cut 1 of every 4 dollars it spends on Medicaid.

An article in the New York Times has a remarkably inaccurate headline, which presumably isn’t the fault of reporters. Though the story has its share of dishonest rhetoric, especially in the first few paragraphs.

Senate Republicans…took a major step…, unveiling a bill to make deep cuts in Medicaid… The Senate measure…would also slice billions of dollars from Medicaid, a program that serves one in five Americans… The Senate bill would also cap overall federal spending on Medicaid: States would receive a per-beneficiary allotment of money. …State officials and health policy experts predict that many people would be dropped from Medicaid because states would not fill the fiscal hole left by the loss of federal money.

“Loss of federal money”?

I’d like to lose some money using that math. Here’s a chart showing the truth. The data come directly from the Congressional Budget Office.

 

At the risk of pointing out the obvious, it’s not a cut if spending rises from $393 billion to $464 billion.

Federal outlays on the program will climb by about 2 percent annually.

By the way, it’s perfectly fair for opponents to say that they want the program to grow faster in order to achieve different goals.

But they should be honest with numbers.

Now that we’ve addressed math, let’s close with a bit of policy.

The Wall Street Journal recently opined on the important goal of giving state policymakers the power and responsibility to manage the program. The bottom line is that recent waivers have been highly successful.

…center-right and even liberal states have spent more than a decade improving a program originally meant for poor women and children and the disabled. Even as ObamaCare changed Medicaid and exploded enrollment, these reforms are working… The modern era of Medicaid reform began in 2007, when Governor Mitch Daniels signed the Healthy Indiana Plan that introduced consumer-directed insurance options, including Health Savings Accounts (HSAs). Two years later, Rhode Island Governor Donald Carcieri applied for a Medicaid block grant that gives states a fixed sum of money in return for Washington’s regulatory forbearance. Both programs were designed to improve the incentives to manage costs and increase upward mobility so fewer people need Medicaid. Over the first three years, the Rhode Island waiver saved some $100 million in local funds and overall spending fell about $3 billion below the $12 billion cap. The fixed federal spending limit encouraged the state to innovate, such as reducing hospital admissions for chronic diseases or transitioning the frail elderly to community care from nursing homes. The waiver has continued to pay dividends under Democratic Governor Gina Raimondo. …This reform honor roll could continue: the 21 states that have moved more than 75% of all beneficiaries to managed care, Colorado’s pediatric “medical homes” program, Texas’s Medicaid waiver to devolve control to localities from the Austin bureaucracy.

By contrast, the current system is not successful.

It doesn’t even generate better health, notwithstanding hundreds of billions of dollars of annual spending.

Avik Roy explained this perverse result in Forbes back in 2013.

Piles of studies have shown that people on Medicaid have health outcomes that are no better, and often worse, than those with no insurance at all. …authors of the Oregon study published their updated, two-year results, finding that Medicaid “generated no significant improvement in measured physical health outcomes.” The result calls into question the $450 billion a year we spend on Medicaid… And all of that, despite the fact that the study had many biasing factors working in Medicaid’s favor: most notably, the fact that Oregon’s Medicaid program pays doctors better; and also that the Medicaid enrollees were sicker, and therefore more likely to benefit from medical care than the control arm.

In other words, I was understating things when I wrote above that there was “one small problem” with the left’s assertion about Medicaid cuts hurting people.

Yes, the fact that there are no actual cuts is a problem with that argument. But the second problem with the left’s argument is that Medicaid doesn’t seem to have any effect on health outcomes. So if Republicans actually did cut the program, it’s unclear how anybody would suffer (other than the fraudsters who bilk the program).

New CF&P Paper Investigates Russian Efforts to Influence U.S. Energy Policy Through Environmentalist Groups

Wed, 06/28/2017 - 12:46pm

Center for Freedom and Prosperity Foundation

For Immediate Release
Wednesday, June 28, 2017
202-285-0244

www.freedomandprosperity.org

New CF&P Paper Investigates Russian Efforts to Influence U.S. Energy Policy Through Environmentalist Groups

(Washington, D.C., Wednesday, June 28, 2017) The Center for Freedom and Prosperity Foundation released today a new report titled, “Russia’s Ties to U.S. Environmentalist Groups.” Authored by Eugene Slaven, the report shines a light on covert Russian efforts to influence U.S. energy policy.

Link to the paper: http://freedomandprosperity.org/2017/publications/russias-ties-to-u-s-environmentalist-groups

Executive Summary:

Revelations that Russia may have interfered in the 2016 U.S. elections have dominated headlines in recent months. While we may never know the full extent of Russia’s influence on the election or its outcome, there is, in fact, overwhelming evidence of Russia’s meddling in one critical sphere of U.S. politics: energy policy. Evidence shows that a complex network of offshore firms has intimate ties to the Kremlin and connections to U.S.-based anti-fracking and anti-oil lobbies.

The investigative report documents how executives with ties to Vladimir Putin funneled millions to anti-fracking groups in the U.S. in order to benefit Russia’s oil export-driven economy. It concludes by noting the need for investigations into Russian election meddling to also consider their activities to influence other policy areas.

CF&P President Andrew Quinlan commented, “It’s critically important to understand how foreign powers are seeking to undermine U.S. energy markets. We hope this investigative paper is just the first in a much broader inquiry.”

About the Author: Eugene Slaven is a freelance writer and former Associate Director at CF&P. He holds a B.S. in Business Administration from Carnegie Mellon University and an M.A. In Political Management from The George Washington University.

For additional information:
Andrew Quinlan can be reached at 202-285-0244, [email protected]

 

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Russia’s Ties to U.S. Environmentalist Groups

Wed, 06/28/2017 - 12:13pm
Russia’s Ties to U.S. Environmentalist Groups

[Download PDF]

June 2017

By Eugene Slaven

Revelations that Russia may have interfered in the 2016 U.S. elections have dominated headlines in recent months. While we may never know the full extent of Russia’s influence on the election or its outcome, there is, in fact, overwhelming evidence of Russia’s meddling in one critical sphere of U.S. politics: energy policy. Evidence shows that a complex network of offshore firms has intimate ties to the Kremlin and connections to U.S. based anti-fracking and anti-oil lobbies.

—————————

As congressional committees, journalists, and intelligence officials investigate the extent of Russia’s interference in the 2016 elections, one important aspect that has thus far been overlooked is Russia’s financial ties to powerful anti-fracking and anti-oil lobbies in the United States.1

The evidence is overwhelming, even if the graph connecting the dots between Moscow and U.S.-based environmental advocacy groups is non-linear, and at times as one would expect, obfuscated.

What is Russia’s interest in meddling in U.S. energy policy?

The natural gas boom ignited by the fracking revolution has played a central role in driving down global oil prices, which has significantly hampered Russia’s oil-centric economy. Ergo, it is in Russia’s economic interest to inflict damage on the U.S. fracking industry. To put it another way, what’s bad for fracking is good for Russia.

A 2014 report released by Republican members of the U.S. Senate Committee on Environment and Public Works sheds light on an intricate network of wealthy donors—the committee dubs them “Billionaires’ Club”—who utilize complex arrangements to funnel millions of dollars into the U.S’s best-known and active environmentalist groups, including the Natural Resources Defense Council and Environmental Defense Fund.2

Perhaps the report’s most significant revelation is the existence of a group called Klein Ltd and its $23 million donation to a group called Sea Change Foundation.

According to its disclosure forms, Sea Change Foundation gets its funding from only two sources: The Nathaniel Simons family and Klein Ltd. Billionaire Nathanial Simons is the foundation’s founder and sole board member who generously gives to left-wing environmentalist causes (See Appendix).

Sea Change Foundation’s primary function is bundling millions of dollars for U.S. environmental groups. In 2011, the group gave $15 million to the Sierra Club, $13.5 million to the Natural Resources Defense Council, and $18.1 million to League of Conservation Voters—three of the biggest and most active left-wing environmentalist groups aggressively lobbying against oil and natural gas.3

To be sure, bundling is not inherently nefarious; conservative billionaires bundle millions for their causes, liberal billionaires bundle millions for their causes, and the earth keeps spinning.

The potentially nefarious aspect comes to light when we learn who the key players are behind the mysterious Klein Ltd.—one of Sea Change Foundation’s two benefactors.

Klein Ltd. is based out of Wakefield Quin—a Bermuda law firm that according to its website is “a full-service firm with a history of advising both local and international clients in the areas of banking, corporate and commercial, real estate, restructuring and insolvency, trusts, private client and litigation.”4

That sounds like an innocuous cookie cutter offshore law firm, except that Wakefield Quin is run by executives with intimate Kremlin ties, including Putin’s friend and adviser, Leonid Reiman.5 Furthermore, Wakefield Quin’s senior counsel is a man named Roderick Forrest, who along with Nicholas Hoskins and Marlies Smith formed Klein. Hoskins and Forrest were directors in the IPOC Group, which in 2008 was convicted of money laundering by a British Virgin Islands court, and had $45 million in holdings confiscated. IPOC Group is owned by the very same Leonid Reiman.

Wakefield Quin clients include 20 companies and investment funds with ties to the Russian government. And this disproportionately Russia-heavy portfolio shouldn’t come as a surprise, given the firm’s leadership’s connection to Putin.6 Hoskins and Forrest also happen to be executives of Spectrum Partners Ltd., a fund with offices in several countries, including Moscow, with a portfolio that’s heavy on Russian securities.

Given the media frenzy over Russia’s tampering in the 2016 elections, the evidence that shadowy firms with direct ties to the Kremlin fund left-wing environmental groups should pique most journalists’ interest. And the fact that Putin’s Russia has aggressively influenced global geopolitics is all the more reason to relentlessly pursue this story.

Perhaps the clearest example of Russia’s willingness to use most any means necessary to affect global oil and gas markets is its well-documented role in the building of the “South Stream” pipeline to Bulgaria.

As The New York Times reported in 2014, shortly after Russia annexed Crimea, Bulgaria’s parliament drafted legislation sanctioning a gas pipeline from Russia to Bulgaria. The legislation was largely written by Russia’s state-owned energy giant, Gazprom, and was spearheaded by Putin’s energy minister, with the explicit intent of enriching Putin and his cronies.7

Compared to the Bulgaria scandal, Russia’s funding of left-wing environmentalist groups is a relatively passive gambit in Russia’s quest to exert influence over the global energy market.

So, what does all this mean? In short, we know that Putin is committed to expanding Russia’s sphere of influence and strengthening Russia’s economic position. We know the risk U.S. fracking poses to Russia’s economy, and we know the direct Russian ties to firms that contribute tens of millions of dollars to anti-fracking environmentalist groups.

As we look into Russia’s role in the 2016 elections, it’s incumbent on all responsible parties to examine Russia’s ties to anti-fracking environmentalist groups as well. After all, anyone who is concerned about a foreign power influencing U.S. public opinion should be alarmed by evidence that Russia is shaping public opinion (and public policy) through its ties to such groups.

Eugene Slaven is a freelance writer, a former Charles Koch Institute Associate, and former Associate Director of the Center for Freedom and Prosperity. He is the author of the comedy novel A Life of Misery and Triumph and the self-help guide Enemy Thoughts. Eugene holds a B.S. in Business Administration from Carnegie Mellon University and an M.A. in Political Management from The George Washington University.

Notes

1. See Lachlan Markay, “Foreign Firm Funding U.S. Green Groups Tied to State-Owned Russian Oil Company,” The Washington Free Beacon, January 27, 2015. http://freebeacon.com/issues/foreign-firm-funding-u-s-green-groups-tied-to-state-owned-russian-oil-company/ 

2. U.S. Senate Committee on Environment & Public Works. EPW Republicans Release In-Depth Environmental Collusion Report, “The Chain Of Environmental Command: How A Club Of Billionaires And Their Foundations Control The Environmental Movement And Obama’s EPA”. July 30, 2014. 

3. “Big Donors…Big Conflicts: How Wealthy Donors Use the Sierra Club to Push Their Agenda,” Energy & Environment Legal Institute, July 2015. https://eelegal.org/wp-content/uploads/2015/07/Big-Donors-Big-Conflicts-Final1.pdf 

4. “About Us.” Wakefield Quin http://www.wq.bm/about-us/ (retrieved April 19, 2017). 

5. “From Russia With Love: Examining Links Between U.S. Environmental Funders and the Kremlin,” Big Greed Radicals, December, 2015. https://www.biggreenradicals.com/wp-content/uploads/2015/12/Klein_Report_12-2015.pdf 

6. Markay, “Foreign Firm Funding U.S. Green Groups”. 

7. Jim Yardley and Jo Becker, “How Putin Forged a Pipeline Deal That Derailed,” The New York Times. December 30, 2014. https://www.nytimes.com/2014/12/31/world/europe/how-putin-forged-a-pipeline-deal-that-derailed-.html 

Appendix
Financial Statements, Sea Change Foundation

Minimum Wage Increases Are Bad News for Low-Skilled Workers in General, not Just for those Who Lose their Jobs

Tue, 06/27/2017 - 12:12pm

When I debate my leftist friends on the minimum wage, it’s often a strange experience. When other people are listening or watching, they’ll adopt a very extreme position and basically claim that politicians have the power to dramatically boost take-home pay by simply mandating higher levels of pay. And somehow there won’t be any noticeable negative impact on employment and labor markets, even though businesses only create jobs if they expect some net profit.

But when we talk privately, they have a more nuanced argument. They’ll confess that higher minimum wages will cause some low-skilled workers to become unemployed, but then justify that outcome using either or both of these arguments.

  • Amoral utilitarianism – A large number of people will get pay raises and only a small handful will lose their jobs, and this is okay if policy is based on some notion of greatest good for the greatest number. In other words, you can’t make an omelet without breaking a few eggs.
  • Keynesian stimulus – Some people will lose their jobs, but the income gains for those who keep their jobs will boost “aggregate demand” and thus provide a boost for the economy. Sort of like they also claim giving people unemployment benefits will somehow generate more economic activity.

I’ve always rejected the first argument because I believe in the individual right of contract. The government should not prevent an employer and employee from engaging in voluntary exchange.

And I’ve always rejected the second argument because there can’t be any net “stimulus” since any additional income for workers is automatically offset by less income for employers.

So who is right?

Well, the real world just kicked advocates of higher minimum wages in the teeth. Or maybe even someplace even more painful. A new study from the National Bureau of Economic Research looks at the impact of the $11 and $13 minimum wages in the city of Seattle and finds very bad results.

Let’s start by simply citing what the local government did.

This paper, using rich administrative data on employment, earnings and hours in Washington State, re-examines this prediction in the context of Seattle’s minimum wage increases from $9.47 to $11/hour in April 2015 and to $13/hour in January 2016.

And here’s a table from the study, showing details on the minimum-wage mandate.

And what’s been happening as a result of this intervention in the labor market?

Unsurprisingly, the jump to $13 has been much more damaging that the jump to $11.

…conclusion: employment losses associated with Seattle’s mandated wage increases are in fact large enough to have resulted in net reductions in payroll expenses – and total employee earnings – in the low-wage job market. …We show that the impact of Seattle’s minimum wage increase on wage levels is much smaller than the statutory increase, reflecting the fact that most affected low-wage workers were already earning more than the statutory minimum at baseline. Our estimates imply, then, that conventionally calculated elasticities are substantially underestimated. Our preferred estimates suggest that the rise from $9.47 to $11 produced disemployment effects that approximately offset wage effects, with elasticity estimates around -1. The subsequent increase to as much as $13 yielded more substantial disemployment effects, with net elasticity estimates closer to -3.

Here’s a chart from the study looking at the impact on hours worked.

If you want a healthy labor market, it’s not good to be below the line.

And here’s some of the explanatory text.

…Because the estimated magnitude of employment losses exceeds the magnitude of wage gains in the second phase-in period, we would expect a decline in total payroll for jobs paying under $13 per hour relative to baseline. Indeed, we observe this decline in first-differences when comparing “peak” calendar quarters, as shown in Table 3 above. …point estimates suggest payroll declines of 4.0% to 7.6% (averaging 5.8%) during the second phase-in period. This implies that the minimum wage increase to $13 from the baseline level of $9.47 reduced income paid to low-wage employees of single-location Seattle businesses by roughly $120 million on an annual basis. …Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.

But the biggest takeaway from the report is that hours dropped so much that the average low-wage worker wound up with less income

The reduction in hours would cost the average employee $179 per month, while the wage increase would recoup only $54 of this loss, leaving a net loss of $125 per month (6.6%), which is sizable for a low-wage worker.

Here’s the relevant chart.

Once again, it’s not good to be below the line.

This data is remarkable because it shows that higher minimum wages are a bad idea, even according to the metrics of our friends on the left.

  • The amoral utlitarianism argument doesn’t apply because it’s no longer possible to claim that income gains for those keeping jobs will more than offset income losses for those who become unemployed.
  • The Keynesian aggregate-demand argument doesn’t apply because it’s no longer possible to assert macroeconomic benefits based on the assumption of a net increase in “spending power” in the economy.

Let’s close with a couple of observations from others who have looked at the new study.

Diana Furchtgott-Roth of the Manhattan Institute (and formerly Chief Economist at the Department of Labor) highlights the most relevant findings.

Raising the pay floor has led to net losses in payroll expenses and worker incomes for low-wage workers. …When hourly wages rose from $11 to $13 in 2016, hours of work and earnings for low-wage workers were reduced by 9 percent for the first three calendar quarters, resulting in 3.5 million fewer hours worked for each calendar quarter.  The number of jobs declined by 7 percent, with the result that 5,000 jobs were lost. …The evidence shows that in Seattle, low-wage workers got less money in their pockets, rather than more.

Some proponents of intervention and mandates may want to dismiss Diana’s analysis since of her reputation as a market-friendly scholar.

But even Ben Casselman and Kathryn Casteel of FiveThirtyEight basically reach the same conclusion.

As cities across the country pushed their minimum wages to untested heights in recent years, some economists began to ask: How high is too high? Seattle, with its highest-in-the-country minimum wage, may have hit that limit. …New research released Monday by a team of economists at the University of Washington suggests the wage hike may have come at a significant cost: The increase led to steep declines in employment for low-wage workers, and a drop in hours for those who kept their jobs. Crucially, the negative impact of lost jobs and hours more than offset the benefits of higher wages — on average, low-wage workers earned $125 per month less because of the higher wage.

I’m amused to find more evidence that left-leaning economists admit that higher minimum wages cause damage, albeit never on the record.

Even some liberal economists have expressed concern, often privately, that employers might respond differently to a minimum wage of $12 or $15, which would affect a far broader swath of workers.

I’m wondering how they can look at themselves in the mirror. It seems very immoral (in other words, beyond amoral) to publicly defend a policy that you privately admit is bad.

I understand that this type of dishonesty happens all the time in the political world (for example, some Republicans are now supporting Trump’s plans for infrastructure boondoggles and parental leave when they would have been strongly opposed if the same policies had been proposed by Obama).

But what’s the point of being a tenured academic if you can’t at least be honest?

Though maybe there’s some sort of cognitive dissonance at play, where they feel the rules of honesty don’t apply in the political world. For instance, both Paul Krugman and Larry Summers have acknowledged in their academic work that unemployment benefits lead to more unemployment. But they pretend that’s not the case when commenting on the policy debate.

But I’m digressing. Let’s close by recycling this CF&P video on minimum wages.

Whether for Reasons of Good Policy or Personal Revenge, Trump and Republicans Should End Subsidies for the OECD

Mon, 06/26/2017 - 12:06pm

If I was Captain Ahab in a Herman Melville novel, my Moby Dick would be the Organization for Economic Cooperation and Development. I have spent more than 15 years fighting that Paris-based bureaucracy. Even to the point that the OECD threatened to throw me in a Mexican jail.

So when I had a chance earlier today to comment on the OECD’s statist agenda, I could barely contain myself:

Notwithstanding the glitch at the beginning (the perils of a producer talking in my ear), I greatly enjoyed the opportunity to castigate the OECD.

Indeed, returning to my Moby Dick analogy, I’m increasingly hopeful that the harpoons I keep throwing at the OECD may finally draw some blood.

In his budget, President Trump has proposed to cut overall spending for international organizations. And we’re talking about a real budget cut, not the phony kind of cut where spending merely grows at a slightly slower rate.

The budget doesn’t specify funding levels for the various bureaucracies, but various Administration officials have told me that their goal is to completely defund the Paris-based bureaucracy.

To quote Chris Matthews, this definitely sends a thrill up my leg.

But I’m trying not to get too excited. It’s still up to Congress to decide OECD funding, and the bureaucrats in Paris have been very clever about currying favor with the members of the subcommittee that doles out cash for international organizations.

Though as I mentioned in the interview, the OECD didn’t do itself any favors by openly trashing Trump last year. Even if they have their doubts about Trump, I suspect most GOPers in Congress aren’t happy that the bureaucrats in Paris were trying to tilt the election for Hillary Clinton.

Here are some examples.

The OECD’s number-two bureaucrat, Doug Frantz, actually equated America’s president with the former head of Germany’s National Socialist Workers Party.

The Deputy Secretary General of the OECD has described…Donald Trump as a “lunatic” whose political rise mirrors that of Hitler and Mussolini. …Speaking on RTÉ’s This Week, Doug Frantz said…“if you look at the basis ‘us and them’ that Donald Trump sets up, that Hitler set up, that Mussolini set up, then you can begin to at least be concerned and I’m concerned: I think any right-minded person should be concerned…The person who sits in the White House is the most powerful person in the world and if that person is someone who follows every whim and appeals to the most base instincts of a population, then we’re all under real threat”.

And another news report caught the OECD’s Secretary General, Angel Gurria, basically asserting that Trump is racist.

Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development  and former Mexican foreign minister,says the word “racist” can be applied to Donald Trump. …Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. I think that because the American public is wise, it will then act in consequence,” Gurria adds.

By the way, I’m making sure to share these partisan statements with lots of people in Congress and the Administration.

In an ideal world, lawmakers would defund the OECD because it is an egregious waste of money. But if they defund the bureaucracy because its top two officials tried to interfere with the US election, I’ll still be happy with the final outcome.

I’ll close by recycling the CF&P video on the OECD that I narrated.

P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending, tax policy, and expenditure limits.

But even if the bureaucracy ended its statist advocacy agenda and gave staff economists carte blanche to produce good papers, that still wouldn’t change my view that American tax dollars should not be funding the OECD. Though I confess it would be a much less attractive target if it returned to its original mission of collecting statistics and publishing studies.

More Dishonest “Poverty” Research that Doesn’t Measure Poverty

Sun, 06/25/2017 - 12:43pm

I periodically share data showing that living standards are higher in the United States than in Europe.

My goal isn’t to be jingoistic. Instead, I’m warning readers that we won’t be as prosperous if we copy our tax-and-spend friends on the other side of the Atlantic (just like I try to draw certain conclusions when showing how many low-tax jurisdictions have higher levels of economic output than the United States).

I’m sometimes asked, though, how America can be doing better than Europe when we have more poverty.

And when I ask them why they think that’s the case, they will point to sources such as this study from the German-based Institute of Labor Economics. Here’s some attention-grabbing data from the report.

The United States has the highest poverty rate both overall and among households with an employed person, but it stands farther away from the other countries on its in-work poverty rate than its overall poverty rate. The contrast between the US and three other English-speaking countries — Australia, Ireland, and the United Kingdom — is particularly striking. Compared to those three nations, the United States has an overall poverty rate only a little higher but an in-work poverty rate that is much higher.

And here’s the main chart from the study, with the United States as the bottom. It appears that there twice as much poverty in the USA as there is in a stagnant economy like France.

There even appears to be more poverty in America than there is in Spain and Italy, both of which are so economically shaky that they required bailouts during the recent fiscal/financial crisis.

Sounds horrible, right?

Yes, it does sound really bad. However, it’s total nonsense. Because what you read in the excerpt and see in the graph has nothing to do with poverty.

Instead, it’s a measure of income distribution.

And, if you read carefully, the study actually admits there’s a bait-and-switch.

The…approach to measuring poverty is a “relative” one, with the poverty line set at 60 or 50 percent of the median income.

Think about what this means. A country where everyone is impoverished will have zero or close-to-zero poverty because everyone is at the median income. But as I’ve explained before, a very wealthy society can have lots of “poverty” if some people are a lot richer than others.

And since the United States is much richer than other nations, this means an American household with $35,000 of income can be poor, even though they wouldn’t count as poor if they earned that much elsewhere.

This is like grading on a rigged curve. And if you read the fine print of the IZA study, you’ll see that the “poverty” threshold for a four-person household magically jumps by $16,260.

For a household of four (two adults, two children) the difference between the official US threshold and the 60-percent-of-median threshold amounts to more than $16,000 ($24,000 versus $40,260). This means that the size of the working poor population in America according to the official poverty measure is significantly lower than the size obtained in studies using a relative threshold.

In other words, you can calculate a much higher poverty rate if you include people who aren’t poor.

By the way, since the IZA report acknowledges this bait-and-switch approach, I guess one would have to say that the study technically is honest.

But it’s still misleading because most people aren’t going to read the fine print. Instead, they’ll see the main chart showing higher “poverty” and assume that there is a much higher percentage of actual poor people in the United States.

Moreover, some people may understand that there’s a bait-and-switch and simply want to help fool additional people.

And I’m guessing that this is exactly what the authors and the IZA staff expected and wanted. And if that’s the case, then the study is deliberately misleading, even if not technically dishonest.

I’ll close by stating that I don’t mind if folks on the left want to argue that market-based societies are somehow unfair because some people are richer than others. And it’s also fine for them to argue that we should be willing sacrifice some of our national prosperity to achieve more after-the-fact equality of income.

But I’d like for them to be upfront about their agenda and not hide behind dodgy data manipulation.

A Taxpayer-Funded Smear Job of Professor James Buchanan

Sat, 06/24/2017 - 12:09pm

My daily columns usually revolve around public policy issues such as tax reform, entitlements, and corrupt government. And while sometimes get a bit agitated about bad things in Washington, it’s because I’m a curmudgeonly libertarian, not because of some personal stake (other than being an oppressed taxpayer).

But sometimes there is a personal connection, like when I responded to the Washington Post‘s front-page attack on CF&P.

Today, I’m writing because of a different kind of personal connection. I got my Ph.D. from George Mason University, and one of the great parts of that experience was taking a couple of classes from James Buchanan, who won the Nobel Prize shortly after I arrived on campus.

Professor Buchanan was more than an economist. He was also a social philosopher. He thought big thoughts and cared deeply about a free society. I didn’t have the opportunity to develop a close relationship with Buchanan, but I felt privileged to take his classes and also to hear his insights in various conferences and colloquia during my years on campus.

I mention this connection because a Duke professor, Nancy MacLean, has just written a book that takes some very cheap shots at Buchanan. Heck, the title makes clear her agenda: Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America. Subtle, huh?

I’ll openly admit at this point I have not read the book. I would, if somebody gave me a free copy, but I have no desire to potentially generate royalties for Ms. MacLean by spending money for a copy.

But a review in the Atlantic is a good example of why I think the book merits condemnation.

Nancy MacLean’s Democracy in Chains is part of a new wave of historiography that has been examining the southern roots of modern conservatism. …Her book includes familiar villains—principally the Koch brothers—and devotes many pages to think tanks like the Cato Institute and the Heritage Foundation, whose ideological programs are hardly a secret. But what sets Democracy in Chains apart is that it begins in the South, and emphasizes a genuinely original and very influential political thinker, the economist James M. Buchanan. …she has dug deep into her material—not just Buchanan’s voluminous, unsorted papers, but other archives, too—and she has made powerful and disturbing use of it all.

And what did she find that was so disturbing?

 

Brace yourself, because the giant scandal that she uncovered is that – gasp! – Buchanan was a classical liberal who believed in small government. And he consorted with other intellectuals with similar views.

The behind-the-scenes days and works of Buchanan show how much deliberation and persistence—in the face of formidable opposition—underlie the antigoverning politics ascendant today. …the University of Chicago, where Buchanan received his doctorate in 1948. During the postwar years, other faculty included Hayek and Friedman, who were shaping a new pro-market economics, part of a growing backlash against the policies of the New Deal. Hayek initiated Buchanan into the Mont Pelerin Society, the select group of intellectuals who convened periodically to talk and plot libertarian doctrine.

But here’s the disgusting part of the book, at least if the review accurately reflects the contents. MacLean does her best to imply that Buchanan somehow must be a racist. In part because of where he was born and raised.

Buchanan owed his tenacity to blood and soil and upbringing. Born in 1919 on a family farm in Tennessee.

By the way, the term “blood and soil” has very odious connotations. I don’t know if that term is used in the book. If not, then the reviewer, Sam Tannenhaus, is the one who deserves condemnation.

The book also implies that Buchanan is racist because he tried to take advantage of Virginia’s desegregation battle to push for school choice.

Buchanan played a part, MacLean writes, by teaming up with another new University of Virginia hire, G. Warren Nutter (who was later a close adviser to Barry Goldwater), on an influential paper. In it they argued that the crux of the desegregation problem was that “state run” schools had become a “monopoly,” which could be broken by privatization. If authorities sold off school buildings and equipment, and limited their own involvement in education to setting minimum standards, then all different kinds of schools might blossom.

And why is this supposed to be racist?

Because some rednecks might choose schools without black people.

…these schemes were…gave ammunition to southern policy makers looking to mount the nonracial case for maintaining Jim Crow in a new form. Friedman himself left race completely out of it. Buchanan did too at first, telling skeptical colleagues in the North that the “transcendent issue” had nothing to do with race; it came down to the question of “whether the federal government shall dictate the solutions.” But in their paper (initially a document submitted to a Virginia education commission and soon published in a Richmond newspaper), Buchanan and Nutter were more direct, stating their belief that “every individual should be free to associate with persons of his own choosing”.

In other words, we’re supposed to believe that Buchanan was racist simply because some people – in a system based on freedom of choice – might make race-based decisions.

But that’s like saying advocates of free speech are racist because some people will make racist statements or write racist books.

For what it’s worth, I wish the racist Democrats who controlled the state in the 1950s had adopted school choice. After all, the ultimate effect of their actions would have been very beneficial for black students.

That would have been delicious irony.

But I’m digressing. I wonder whether Tannenhaus is the one who is guilty of smearing rather than the author. His review, after all, notes that MacLean apparently didn’t think Buchanan’s work was motivated by race.

…race, MacLean acknowledges, was not ultimately a major issue for Buchanan.

The review then shifts to Buchanan’s main intellectual legacy, the “public choice” school of economics (first formally proposed in Calculus of Consent, co-authored with Gordon Tullock).

Governments, they argued, were being assessed in the wrong way. The error was a legacy of New Deal thinking, which glorified elected officials and career bureaucrats as disinterested servants of the public good, despite the obvious coercive effects of the programs they put into place. Why not instead see politicians and government administrators as self-interested players in the marketplace, trying to “maximize their utility”—that is, win the next election or enlarge their department’s budget? This idea turned the whole notion of a beneficent government, and of programs and policies designed more or less selflessly, into a kind of fairy tale expertly woven by politicians and their flacks. Not that politicians were evil. They were looking out for themselves, as most of us do. The difference was in the damage they did.

Sounds quite reasonable to me. And Tannenhaus even grants that the theory has some merit.

You didn’t have to accept Buchanan’s ideology to see that he had a point about the growth of government-centered clientelism—“dependency,” in the term used by a new wave of neoconservatives such as Daniel Patrick Moynihan.

But he then is very critical of Buchanan’s support for rules to constrain government.

The enemy was the public itself, expressed through the tyranny of majority rule… It wasn’t enough to elect true-believing politicians. The rules of government needed to be rewritten.

Actually, the rules don’t need “to be rewritten.” The United States already has a Constitution that was explicitly designed to protect against majoritarianism. The problem is justices who put politics first and the Constitution second.

Now let’s address a second part of the book that irked me. The author links Buchanan to Chile, which to a leftist is an automatic sign of guilt.

…in Chile, after Augusto Pinochet’s coup against the socialist Salvador Allende in 1973. A vogue for public choice had swept Pinochet’s administration. Buchanan’s books were translated, and some of his acolytes helped restructure Chile’s economy. Labor unions were banned, and social security and health care were both privatized. On a week-long visit in 1980, Buchanan gave formal lectures to “top representatives of a governing elite that melded the military and the corporate world,” MacLean reports, and he dispensed counsel in private conversations.

There’s no evidence, from what I can tell, that Buchanan endorsed or supported Pinochet’s bad record on human rights. Instead, he’s simply “guilty” of encouraging a bad government to adopt good policy.

But if providing policy advice supposedly implies support for everything a government does, then I’m guilty of supporting Russia, China, and many other regimes. Needless to say, that’s nonsense.

In any event, here’s the part that doesn’t make sense.

Buchanan said very little about his part in assisting Chile’s reformers—and he said very little, too, when the country’s economy cratered, and Pinochet at last fired the Buchananites.

The economy “cratered”? Really?

Chile has been a star performer since the market reforms on the 1980s.

Maybe MacLean and/or Tannenhaus are geographically illiterate and meant Venezuela?

Because only a blind ideologue could deny the tremendous success of Chile’s economy.

Now let’s look at some excerpts from a review in Slate written by Rebecca Onion. It starts with a major smear.

When the Supreme Court decided, in the 1954 case of Brown vs. Board of Education, that segregated public schools were unconstitutional, Tennessee-born economist James McGill Buchanan was horrified.

Again, I haven’t read the book. But I have to imagine that if the author had the slightest bit of evidence, one of the reviews would have shared it. Instead, we get nothing but assertions. Is MacLean the one who smears Buchanan, or are the reviewers guilty of asserting that the Nobel Laureate is somehow racist because he doesn’t support a big welfare state?

I don’t know, but someone is being grossly unfair.

For what it’s worth, I never caught even the slightest whiff of racism from Buchanan during my time at GMU. Which stands to reason since libertarians and classical liberals are all about individual rights and view racism as a form of collectivism.

But it is true that Buchanan was not a fan of big government.

…the libertarian thinker found comfortable homes at a series of research universities and spent his time articulating a new grand vision of American society, a country in which government would be close to nonexistent, and would have no obligation to provide education—or health care, or old-age support, or food, or housing—to anyone.

Ms. Onion’s review includes a Q&A section with the author.

Here’s some of what MacLean said, starting with a description of public choice.

He had a very different personality from somebody like Milton Friedman. …His books were really written for other scholars, not so much the general public. …His basic idea is that people had been wrong to think of political actors as concerned with the common good or the public interest, when in fact, according to Buchanan’s way of looking at things, everyone should be understood as a self-interested actor seeking their own advantage.

She then asserts – with no evidence – that public choice isn’t an accurate way of describing the world.

…there were other people who actually tested that empirically and found out that it didn’t hold, so it’s really a caricature of the political process, but it’s a caricature that’s become very, very widespread right now.

This strikes me as nonsense. Anybody who works in DC has a very jaundiced view of the political process.

We see public choice in action every day.

She also criticizes Buchanan’s work in Chile.

…he went from writing that to advising the Pinochet junta in Chile on how to craft their constitution. This document was later called a “constitution of locks and bolts,” [and was designed] to make it so that the majority couldn’t make its will felt in the political system, unless it was a huge supermajority. So yeah, it’s pretty dark.

Well, if that’s a “dark” approach, then America’s Founders were very dark as well.

MacLean also links Buchanan to Cato.

Buchanan helped with the founding of the Cato Institute and with various other intellectual enterprises that were close to Charles Koch’s heart, like this thing called the Institute for Humane Studies.

She then plays armchair psychologist and tries to guess Buchanan’s real motivation. After all, surely he couldn’t have been motivated by a belief in liberty and limited government?

I think it’s also much more about this psychology of threatened domination. People who believe it will harm their liberty for other people to have full citizenship and be able to work together to govern society. And that somehow that goes much deeper than money to me. It’s hard to find the right words for it, but it’s a whole way of being in the world and seeing others. Assuming one’s right to dominate.

In other words, if you don’t want a tax-and-transfer welfare state, that means you want to dominate others. Amazing bit of mind reading.

Or perhaps a bit of projection.

It’s folks on the left, after all, who concoct strange theories involving Koch, Cato, and other parts of a vast libertarian conspiracy.

If we really had that much power, I can assure you that government would be much smaller than it is today.

Here’s what MacLean says about Buchanan being part of the supposedly sinister Koch network.

The most important thing I want readers to take from this book is an understanding that the Koch network and all of these people are doing what they’re doing because they understand that their ideas make them a permanent minority. They cannot win if they are honest about what they’re doing.

Let’s close by sharing some very bizarre passages from a review by Genevieve Valentine for NPR.

…economist James Buchanan — an early herald of libertarianism — began to cultivate a group of like-minded thinkers with the goal of changing government. This ideology eventually reached the billionaire Charles Koch… This sixty-year campaign to make libertarianism mainstream…is at the heart of Democracy in Chains.

Here’s Ms. Valentine’s contribution to gutter politics.

…this isn’t the first time Nancy MacLean has investigated the dark side of the American conservative movement (she also wrote Behind the Mask of Chivalry: The Making of the Second Ku Klux Klan).

A collectivist-minded group like the KKK was part of the conservative movement? Is there any evidence for that slanderous assertion?

Of course not.

And besides, what would that have to do with libertarianism?

But Ms. Valentine is just warming up. Did you know that libertarians somehow are at fault for the incompetence of Flint, MI, which is governed by Democrats?

As MacLean lays out in their own words, these men developed a strategy of misinformation and lying about outcomes until they had enough power that the public couldn’t retaliate against policies libertarians knew were destructive. (Look no further than Flint, MacLean says, where the Koch-funded Mackinac Center was behind policies that led to the water crisis.)

And she repeats the crazy assertion that Chile’s shift to free markets backfired, even though the economy boomed and subsequent governments dominated by Social Democrats have left the reforms in place.

By the time we reach Buchanan’s role in the rise of Chilean strongman Augusto Pinochet (which backfired so badly on the people of Chile that Buchanan remained silent about it for the rest of his life), that’s all you need to know about who Buchanan was.

It’s also remarkable that she wants us to think there’s something sinister about Buchanan remaining “silent” about his role in Chile.

This is a man who gave dozens of speeches every year in countries all around the world, while also producing all sorts of books and scholarly articles. Does she really think he was supposed to spend his time reminiscing about a couple of speeches and meetings back in 1980?

Here’s the bottom line. Professor Buchanan is “guilty” of believing in individual liberty and favoring constraints on government. It’s perfectly fair for folks on the left to object to those views (as well as the views of other Nobel Laureates with similar outlooks).

But when they want to ascribe base motives for his views, without the slightest shred of evidence, that’s crossing the line.

P.S. You probably won’t be surprised to learn that Ms. MacLean’s book was subsidized by taxpayers. Isn’t that wonderful. Not only do we subsidize international bureaucracies that push statism, we taxpayers also subsidize hit jobs on scholars who object to statism.

Everything You Need to Know about Government, in a Single Picture

Fri, 06/23/2017 - 12:55pm

Last night, I retweeted an image that rubbed me the wrong way.

It showed three kids who were handcuffed by undercover cops for criminal activity.

And what was their crime? Were they picking pockets? Beating up tourists? Slashing tires?

Nope, none of those things. Instead, they were (gasp!!) selling water to thirsty people. And they didn’t have a piece of paper from the government giving them permission to participate in voluntary exchange. Oh, the horror.

And everyone knows that selling water without a license is a gateway drug to the ultimate underage crime of operating an unlicensed lemonade stand. Or maybe even shoveling snow, cutting grass, or selling worms without government approval!

Here’s the original tweet.

Undercover @usparkpolicepio handcuffing kids on @NationalMallNPS for selling water. pic.twitter.com/7iSqP4UYMq

— Tim Krepp (@timkrepp) June 22, 2017

This really sums up why libertarians don’t like government. All too often, it’s the unfair application of force against innocent behavior.

This episode of government thuggery has received a surprising amount of coverage. Here are some excerpts from a story by U.S. News & World Report.

Police handcuffed three teenagers Thursday evening for attempting to selling water without a permit on the National Mall.Photos tweeted by passerby Tim Krepp, a tour guide and writer, show three plainclothes U.S. Park Police officers detaining the three African-American teens near the Mall’s Smithsonian Castle, located between the Washington Monument and the U.S. Capitol.

The good news is that the kids weren’t actually arrested.

A spokeswoman for the U.S. Park Police, Sgt. Anna Rose, confirms three teenagers were detained for vending without a license, but says she feels “this has gotten blown out of proportion.” The three teens, ages 16 and 17, were detained for “illegally selling water” but were not charged, Rose says. They were held until their parents arrived. A fourth individual was immediately released after officers determined he was uninvolved, she says.

If you click on Mr. Krepp’s tweet and read the comments, you’ll notice some discussion of whether white kids would have been treated the same way.

I don’t like to assume racism without real evidence, so my default assumption is that the cops were primarily motivated by a desire to fill their quota and have some proof that they weren’t goofing off.

But it’s also worth noting that the over-criminalization of society creates opportunities for bad people in government to target minorities (or other groups that fall into disfavor). And if it’s dangerous to ride a train while black, then it’s also possible that it’s risky to sell water while black.

The broader lesson is that it’s a good idea to have fewer laws. And the laws that do exist should be designed to protect people from external aggression. Especially given the horror stories that are produced by the alternative approach.

New Legislation on Money Laundering Doubles Down on Failure

Thu, 06/22/2017 - 12:44pm

Thanks to decades of experience and research, we now know several things about so-called anti-money laundering (AML) laws.

It’s not that the theory behind these laws is without merit. The original notion was that perhaps we could reduce crime by figuring out ways to prevent crooks from utilizing the banking system. That’s a worthy goal. But it turns out that it doesn’t work.

For all intents and purposes, AML laws are a misallocation of law-enforcement resources.

So you would think that policy makers would be endeavoring to repeal these counterproductive rules and regulations, right?

But you would be wrong. Some of them actually want to double down on failure. To be more specific, four senators have introduced a bill to make these laws more intrusive and onerous.

Senate Judiciary Committee Chairman Chuck Grassley and Ranking Member Dianne Feinstein, along with Senators John Cornyn and Sheldon Whitehouse, today introduced legislation that modernizes and strengthens criminal laws against money laundering – a critical source of funding for terrorist organizations, drug cartels and other organized crime syndicates.  The Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 updates criminal money laundering and counterfeiting statutes, and promotes transparency in the U.S. financial system.

It’s quite possible that these politicians actually think this new law will somehow reduce all the bad things they put in the bill’s title (I’m surprised they didn’t add tooth decay and cancer to the list).

But if past experience is any guide, the real-world result will be more abuse of law-abiding citizens.

Writing for the Blaze, Justin Haskins warns how the new legislation can endanger innocent people.

Four U.S. senators have proposed legislation that would significantly expand the power of the federal government to seize citizens’ money when traveling in or out of the United States. …several troubling provisions in the law could put law-abiding American citizens at risk of losing tens of thousands of dollars for doing nothing more than failing to fill out a government form. Under current federal law, travelers transporting $10,000 or more in cash or other monetary instruments are required to report those funds to U.S. Customs and Border Protection. Failure to report funds, even if unintentional, can lead to the seizure of the money and criminal or civil penalties.

That approach already produces horrible abuses of innocent people.

And imagine what will happen if this new law is enacted.

The Combating Money Laundering, Terrorist Financing and Counterfeiting Act would expand “monetary instruments” covered under current law to include “prepaid access devices, stored value cards, digital currencies, and other similar instruments.” This is particularly problematic because digital currencies, such as Bitcoin, are theoretically always transported by the owner of the digital currency account wherever he or she goes, which means digital currency owners with accounts valued at $10,000 or more must always report their funds or risk having them seized. Even more troubling is the law treats all blank checks as though they are financial instruments valued in excess of $10,000 if the checking account contains at least $10,000, which means if a traveler accidently fails to report a blank check floating around in his or her luggage, the account holder could face stiff penalties — even if there is no suspicion of criminal activity.

Some of you may be thinking that it’s okay to subject innocent people to abuse if it achieves a very important goal of stopping terrorists.

But that’s not happening. In a must-read article for Foreign Affairs, Peter Neumann points out that AML laws are grossly ineffective in the fight against Islamo-fascism.

…the war on terrorist financing has failed. Today, there are more terrorist organizations, with more money, than ever before. …Driven by the assumption that terrorism costs money, governments have for years sought to cut off terrorists’ access to the global financial system. They have introduced blacklists, frozen assets, and imposed countless regulations designed to prevent terrorist financing, costing the public and private sectors billions of dollars.

And what’s the result of all this expense?

It hasn’t stopped terrorism.

…there is no evidence that it has ever thwarted a terrorist campaign. Most attacks require very little money, and terrorists tend to use a wide range of money-transfer and fundraising methods, many of which avoid the international financial system. …Terrorist operations are cheap, and according to a 2015 study by the Norwegian Defense Research Establishment, over 90 percent of the jihadist cells in Europe between 1994 and 2013 were “self-funded,” typically through savings, welfare payments, personal loans, or the proceeds of petty crime. …many jihadists have used their own savings and welfare payments or taken out small loans; others have borrowed money from their friends or family. …Financial tools cannot stop lone attackers from driving cars into crowds.

But it has imposed major burdens on innocent parties.

…the focus on the financial sector proved ineffective; it has also harmed innocent people and businesses. To address policymakers’ demands, financial institutions have “de-risked” their portfolios, shedding investments and clients that might be linked to terrorist financing. …De-risking, moreover, has resulted in the de facto exclusion of entire countries, mostly poor ones such as Afghanistan and Somalia, from the global financial system. The bank accounts of refugees, charities that operate in regions torn apart by civil war, and even Western citizens with family links to so-called risk countries have been closed. Practically no Western bank now offers cash transfers to Somalia, for example, although 40 percent of the population depends on remittances from abroad.

And what is the author’s bottom line?

Simply stated, the current system is a failure.

Instead of continuing to look for needles in a haystack, governments should overhaul their approach to countering terrorist funding… Otherwise, they will waste time and money on a strategy that cannot deliver security for many more years to come. .. Policymakers need to acknowledge that the war on terrorist financing, as it has been conducted since 2001, has often been costly and counterproductive, harming innocent people and companies without significantly constraining terrorist groups’ ability to operate.

I agree.

Indeed, I wrote an article for Pace Law Review, published back in 2005, that made many of the same points, including a lot of attention on the theoretical role of cost-benefit analysis.

Law enforcement policy should include cost/benefit analysis so that resources are best allocated to protect life, liberty, and property. This should not be a controversial proposition. Cost-benefit analysis…already is part of the public policy process. For instance, few people would think it is acceptable for a city of 10 million to have just one police officer. Yet it is also true that few would want that city to have five million police officers. In other words, there is a point where additional law enforcement expenditures – both public and private – exceed the likely benefits. Every government makes such decisions. Cost-benefit analysis applies to aggregate resource allocation choices, such as how many police officers to employ in a city, but also to how a given level of resources are utilized. In other words, since there are not unlimited resources, it makes sense to allocate those resources in ways that yield the greatest benefit. On a practical level, city officials must decide how many officers to put on each shift, how many officers to assign to different neighborhoods, and how many officers to allocate to each type of crime. The same issues apply in the war against terrorism. Officials must decide not only on the level of resources devoted to fighting terrorism, but they also must make allocation decisions between, say, human intelligence and electronic surveillance.

Now let’s shift from theory to evidence.

I argued AML laws didn’t pass the test.

…while anti-money laundering laws theoretically help the war against terror, this does not mean that they necessarily are justified by cost-benefit analysis. A…book from the Institute for International Economics…strongly supports anti-money laundering laws and advocates their expansion. But the authors admit that these laws imposed costs of $7 billion in 2003, yet they admitted that, “While the number of suspicious activity reports filed has risen rapidly in recent years…total seizures and forfeitures amount to an extremely small sum (approximately $700 million annually in the United States) when compared with the crude estimates of the total amounts laundered. Moreover, there has not been an increase in the number of federal convictions for money laundering.” The private sector bears most of the cost of anti-money laundering laws, but the authors also note that, “Budgetary costs for AML laws have tripled in the last 20 years for prevention and quadrupled for enforcement.” The key question, of course, is whether these costs are matched by concomitant benefits. The answer almost certainly is no. …the government seizes very little dirty money. There are only about 2,000 convictions for federal money laundering offenses each year, and that number falls by more than 50 percent not counting cases where money laundering was an add-on charge to another offense.

Let’s close with passages from a couple of additional articles.

First, Richard Rahn explains why all anti-money laundering laws are misguided in a very recent column for the Washington Times.

…what is even more shocking is the extent to which various government organizations monitor and, in many cases, restrict financial freedom, and seize assets without criminal conviction. …The government argues that it must collect financial data and then share it with many domestic and foreign government organizations in order to stop tax evasion, money laundering, drug dealing, other assorted criminality, and terrorist finance — all of which sounds good at first glance, until one looks at what really happens. If you think that the war on drugs has been a failure, look at the war on money laundering, tax evasion and terrorist finance for an even bigger failure. …money laundering is a crime of intent, rather than actions, in which two different people can engage in the same set of financial transactions, but if one has criminal intent he or she can be charged while the other person is home free. Such vague law is both ripe with abuse and difficult to prove. …The financial information that government agencies now routinely collect is widely shared, not only with other domestic government agencies, but increasingly with foreign governments — many of which do not protect individual liberty and other basic rights.

And here are some excerpts from a column in Reason by Elizabeth Nolan Brown.

American and British banks are monitoring customers’ contraception purchases, DVD-rental frequency, dining-out habits, and more in a misguided attempt to detect human traffickers… Their intrusive and ineffective efforts come at the behest of government agencies, who have been eager to use asset-forfeiture powers… The U.S. and U.K. banks RUSI researchers interviewed said they were happy to help law enforcement prosecute human traffickers and had little problems turning over financial records for people already arrested or under investigation. But proactively finding potential traffickers themselves proved more difficult. As RUSI explains, “the often unremarkable nature of transactions related to” human trafficking made finding criminals or victims via transaction monitoring a time-consuming and unfruitful endeavor. Yet financial institutions are boxed in by regulations that threaten to punish them severely should they participate in the flow of illegally begotten money, however unwittingly. The bind leaves banks and other financial services eager to cast as wide a net as possible, terminating relationships with “suspicious” customers, monitoring the bank accounts of people they know, or turning their records over to law enforcement rather than risk allegations of not doing enough to comply.

In other words, these laws are a costly – but ineffective – burden.

Which is what I said in this CF&P video:

Three Lessons from the Tax Defeat in Kansas

Wed, 06/21/2017 - 12:58pm

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Here’s some of what he wrote in his NYT column.

…there was an idea, a theory, behind the Kansas tax cuts: the claim that cutting taxes on the wealthy would produce explosive economic growth. It was a foolish theory, belied by decades of experience: remember the economic collapse that was supposed to follow the Clinton tax hikes, or the boom that was supposed to follow the Bush tax cuts? …eventually the theory’s failure was too much even for Republican legislators.

Another New York Times columnist did a victory dance as well.

The most momentous political news of the past week…was the Kansas Legislature’s decision to defy the governor and raise income taxes… Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending, except for education — and promising that those policies would unleash boundless growth. The taxes were cut, and by a lot.

Brownback’s supply-side experiment was a flop, the author argues.

The cuts came. But the growth never did. As the rest of the country was growing at rates of just above 2 percent, Kansas grew at considerably slower rates, finally hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on education… The experiment has been a disaster. …the Republican Kansas Legislature faced reality. Earlier this year it passed tax increases, which the governor vetoed. Last Tuesday, the legislators overrode the veto. Not only is it a tax increase — it’s even a progressive tax increase! …More than half of the Republicans in both houses voted for the increases.

If you read the articles, columns, and editorials in the New York Times, you’ll notice there isn’t a lot of detail on what actually happened in the Sunflower State. Lots of rhetoric, but short on details.

So let’s go to the Tax Foundation, which has a thorough review including this very helpful chart showing tax rates before the cuts, during the cuts, and what will now happen in future years (the article also notes that the new legislation repeals the exemption for small-business income).

We know that folks on the left are happy about tax cuts being reversed in Kansas. So what are conservatives and libertarians saying?

The Wall Street Journal opined on what really happened in the state.

…national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes. The reality is more prosaic—and politically cynical. …At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.

And the editorial also explains why there wasn’t much of an economic bounce when Brownback’s tax cuts were implemented, but suggests there was a bit of good news.

Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy. But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.

I concur. When I examined the data a few years ago, I also found some positive signs.

In any event, the WSJ is not overly optimistic about what this means for the state.

The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.

And Reason published an article by Ben Haller with similar conclusions.

What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front. Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year. …tax cuts do not necessarily pay for themselves. Fiscal conservatives, libertarians, …may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state’s woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.

Since Haller mentioned spending, here’s another Tax Foundation chart showing inflation-adjusted state spending in Kansas. Keep in mind that Brownback was elected in 2010. The left argued that he “slashed” spending, but that assertion obviously is empty demagoguery.

Now time for my two cents.

Looking at what happened, there are three lessons from Kansas.

  1. A long-run win for tax cutters. If this is a defeat, I hope there are similar losses all over the country. If you peruse the first chart in this column, you’ll see that tax rates in 2017 and 2018 will still be significantly lower than they were when Brownback took office. In other words, the net result of his tenure will be a permanent reduction in the tax burden, just like with the Bush tax cuts. Not as much as Brownback wanted, to be sure, but leftists are grading on a very strange curve if they think they’ve won any sort of long-run victory.
  2. Be realistic and prudent. It’s a good idea to under-promise and over-deliver. That’s true for substance and rhetoric.
    1. Don’t claim that tax cuts pay for themselves. That only happens in rare circumstances, usually involving taxpayers who have considerable controlover the timing, level, and composition of their income. In the vast majority of cases, tax cuts reduce revenue, though generally not as much as projected once “supply-side” responses are added to the equation.
    2. Big tax cuts require some spending restraint. Since tax cuts generally will lead to less revenue, they probably won’t be durable unless there’s eventually some spending restraint (which is one of the reasons why the Bush tax cuts were partially repealed and why I’m not overly optimistic about the Trump tax plan).
    3. Tax policy matters, but so does everything else. Lower tax rates are wonderful, but there are many factors that determine a jurisdiction’s long-run prosperity. As just mentioned, spending restraint is important. But state lawmakers also should pay attention to many other issues, such as licensing, regulation, and pension reform.
  3. Many Republicans are pro-tax big spenders. Most fiscal fights are really battles over the trend line of spending. Advocates of lower tax rates generally are fighting to reduce the growth of government, preferably so it expands slower than the private sector. Advocates of tax hikes, by contrast, want to enable a larger burden of government spending. What happened in Kansas shows that it’s hard to starve the beast if you’re not willing to put government on a diet.

By the way, all three points are why the GOP is having trouble in Washington.

The moral of the story? As I noted when writing about Belgium, it’s hard to have good tax policy if you don’t have good spending policy.

Red State, Blue State, Independent State, Moocher State

Tue, 06/20/2017 - 12:27pm

I don’t know if Dr. Seuss would appreciate my title, which borrows from his children’s classic.

But given how I enjoy comparative rankings, I couldn’t help myself after perusing a new study from WalletHub that ranks states on their independence (or lack thereof).

Being a policy wonk, what really caught my attention was the section on government dependency, which is based on four criteria.

As you can see, the four factors are not weighted equally. The “federally dependent states” variable is considered four times as important as any of the other variables.

That’s important, to be sure, but is it really more important (or that much more important) than the other categories?

Moreover, I’m not sure the “tax freedom day” variable is a measure of dependency. What’s really captured by this variable, given the way the tax code doesn’t tax low-income people and over-taxes high-income people, is the degree to which states have lots of rich people or poor people. But that’s not a measure of dependence (particularly if the rich people stole money instead of earning it).

But I’m quibbling. I might put together a different formula with some different variables, but WalletHub has done something very interesting.

And if we look at their 25 least-dependent states, you see a very interesting pattern. Of the 10-most independent states, only three of them are Trump-voting red states (Kansas, Nebraska, and Utah).

The other seven are blue states. And some of them – such as Illinois, New Jersey, and California – are dark blue states.

And the #11 and #12 states also were Hillary states as well.

Which raises an interesting question. Why are voters in those states in favor of big government when they don’t disproportionately benefit from handouts?

Are they culturally left-wing, putting social issues above economic issues?

Or are they motivated by some issue involving foreign policy and/or defense?

Or maybe masochistic?

Beats me.

By the way, the WalletHub email announcing the report included a very interesting factoid that may explain why Hillary lost Pennsylvania.

Pennsylvania has the lowest percentage of government workers (local, state and federal), at 10.8 percent. Alaska has the nation’s highest percentage, at 25.1 percent.

Though I can’t see those details in the actual report, which is disappointing. I’d like to see a ranking of the states based solely on the number-of-bureaucrats criteria (we have data comparing countries, for those interested).

Now let’s shift to the states that have the highest levels of dependency.

If you look at the bottom of the final image, you’ll notice that it’s a reverse of the top-10. Seven of the most-dependent states are red states that voted for Trump.

Only New Mexico, Oregon, and Maine supported Hillary (and Trump actually won one-fourth of Maine’s electoral votes).

So this raises a separate question. Are red state people voting against their interests? Should they be voting for politicians who will further expand the size and scope of government so they can get even more goodies from Uncle Sam?

For what it’s worth, a leftist actually wrote a book entitled What’s the Matter with Kansas, which examined why the people of the Sunflower State weren’t voting for statism.

Well, part of the answer may be that Kansas is one of the most independent states, so perhaps the author should have picked another example.

But even if he had selected Mississippi (#49), I suspected the answer is that low-income people don’t necessarily think that it’s morally right to steal money from other states, even if the loot is laundered through Washington.

In other words, people in those states still have social capital or cultural capital.

It’s also possible, of course, that voters in red states with lots of dependency (at least as measured by WalletHub) are instead motivated by cultural issues or foreign policy issues.

There’s even a very interesting study from Professor Alesina at Harvard, which finds that ethnically diverse jurisdictions can be more hostile to redistribution (and homogeneous societies like the Nordic nations are more supportive of a large welfare state).

And since many of the red states at the bottom of the rankings also happen to be states with large minority populations, perhaps that’s a partial explanation.

Though California has a very large minority population as well, yet it routinely votes for more redistribution.

The bottom line is that we probably can’t draw any sweeping conclusions from this data.

Though it leaves me even more convinced that the best approach is to eliminate all DC-based redistribution and let states decide how much to tax and how much to spend. In other words, federalism.

P.S. I put together my own ranking of state dependency, based on a formula involving welfare usage and poverty. Vermont was the worst state and Nevada was the best state.

P.P.S. I also shared calculations based solely on the share of eligible people who signed up for food stamps. Interestingly, Californians rank as the most self-reliant. Maybe my predictions of long-run doom for that state are a bit exaggerated.

 

The Nanny State, Showerheads, and the Declining Quality of Life

Mon, 06/19/2017 - 12:49pm

When I write about regulation, I usually focus on big-picture issues involving economic costs, living standards, and competitiveness.

Those are very important concerns, but the average person in American probably gets more irked by rules that impact the quality of life.

That’s a grim list, but it’s time to augment it.

Jeffrey Tucker of the Foundation for Economic Education explains that the government also has made showering a less pleasant experience. He starts by expressing envy about Brazilian showers.

…was shocked with delight at the shower in Brazil. …step into the shower and you have a glorious capitalist experience. Hot water, really hot, pours down on you like a mighty and unending waterfall… At least the socialists in Brazil knew better than to destroy such an essential of civilized life.

I know what he’s talking about.

I’m in a hotel (not in Brazil), and my shower this morning was a tedious experience because the water flow was so anemic.

Why would a hotel not want customers to have an enjoyable and quick shower?

The answer is government.

…here we’ve forgotten. We have long lived with regulated showers, plugged up with a stopper imposed by government controls imposed in 1992. There was no public announcement. It just happened gradually. After a few years, you couldn’t buy a decent shower head. They called it a flow restrictor and said it would increase efficiency. By efficiency, the government means “doesn’t work as well as it used to.” …You can see the evidence of the bureaucrat in your shower if you pull off the showerhead and look inside. It has all this complicated stuff inside, whereas it should just be an open hole, you know, so the water could get through. The flow stopper is mandated by the federal government.

The problem isn’t just the water coming out of the showerhead. It’s the water coming into your home.

It’s not just about the showerhead. The water pressure in our homes and apartments has been gradually getting worse for two decades, thanks to EPA mandates on state and local governments. This has meant that even with a good showerhead, the shower is not as good as it might be. It also means that less water is running through our pipes, causing lines to clog and homes to stink just slightly like the sewer. This problem is much more difficult to fix, especially because plumbers are forbidden by law from hacking your water pressure.

So why are politicians and bureaucrats imposing these rules?

Ostensibly for purposes of conservation.

…what about the need to conserve water? Well, the Department of the Interior says that domestic water use, which includes even the water you use on your lawn and flower beds, constitutes a mere 2% of the total, so this unrelenting misery spread by government regulations makes hardly a dent in the whole. In any case, what is the point of some vague sense of “conserving” when the whole purpose of modern appliances and indoor plumbing is to improve our lives and sanitation? (Free societies have a method for knowing how much of something to use or not use; it is called the signaling system of prices.)

Jeffrey is right. If there really is a water shortage (as there sometimes is in parts of the country and world), then prices are the best way of encouraging conservation.

Now let’s dig in the archives of the Wall Street Journal for a 2010 column on the showerhead issue.

Apparently, bureaucrats are irked that builders and consumers used multiple showerheads to boost the quality of their daily showers.

Regulators are going after some of the luxury shower fixtures that took off in the housing boom. Many have multiple nozzles, cost thousands of dollars and emit as many as 12 gallons of water a minute. In May, the DOE stunned the plumbing-products industry when it said it would adopt a strict definition of the term “showerhead”… A 1992 federal law says a showerhead can deliver no more than 2.5 gallons per minute at a flowing water pressure of 80 pounds per square inch. For years, the term “showerhead” in federal regulations was understood by many manufacturers to mean a device that directs water onto a bather. Each nozzle in a shower was considered separate and in compliance if it delivered no more than the 2.5-gallon maximum. But in May, the DOE said a “showerhead” may incorporate “one or more sprays, nozzles or openings.” Under the new interpretation, all nozzles would count as a single showerhead and be deemed noncompliant if, taken together, they exceed the 2.5 gallons-a-minute maximum.

And here’s something that’s both amusing and depressing.

The regulations are so crazy that an entrepreneur didn’t think they were real.

Altmans Products, a U.S. unit of Grupo Helvex of Mexico City, says it got a letter from the DOE in January and has stopped selling several popular models, including the Shower Rose, which delivers 12 gallons of water a minute. Pedro Mier, the firm’s vice president, says his customers “just like to feel they’re getting a lot of water.” Until getting the DOE letter, his firm didn’t know U.S. law limited showerhead water usage, Mr. Mier says. “At first, I thought it was a scam.”

Unsurprisingly, California is “leading” the way. Here are some passages from an article in the L.A. Times from almost two years ago.

The flow of water from shower heads and bathroom faucets in California will be sharply reduced under strict new limits approved Wednesday by the state Energy Commission. Current rules, established in 1994 at the federal level, allow a maximum flow of 2.5 gallons per minute from a shower head. Effective next July, the limit will fall to 2.0 gallons per minute and will be reduced again in July 2018, to 1.8 gallons, giving California the toughest standard of any U.S. state.

Though “toughest standard” is the wrong way to describe what’s happening. It’s actually the “worst shower” of any state.

P.S. I forget the quality of shower I experienced in South Korea, but I was very impressed (see postscript) by the toilet.

The Endless Failure (but Bizarre Allure) of Socialism

Sun, 06/18/2017 - 12:41pm

Back in 2014, I wrote a column asking my leftist friends two very serious questions. And I often repeat these questions when debating proponents of bigger government.

  • Can you name a nation that became rich with statist policies?
  • Can you name a nation that with interventionism and big government that is out-performing a similar nation with free markets and small government?

I’ve yet to receive a good answer to either question. Many leftists point to certain European welfare states, but I debunk that claim by pointing out that those nations became rich when government was very small (about 10 percent of GDP, about one-half the size of the current Hong Kong and Singapore public sectors).

Others point to rapid growth in China, but that’s rather silly since improvements in that country’s economy are the result of partial liberalization. In any event, it’s not that difficult to have rapid growth rates when starting from a very low level. But even with a couple of decades of good growth, living standards in China are still relatively low.

So my challenge remains. I want a leftist (or anybody) to identify a successful statist nation, but I’m not holding my breath for good answers.

Yet 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.

The London-based Institute for Economic Affairs has released a video on the false allure of socialism.

I suppose a caveat might be appropriate at this stage.

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. But I guess I’m being pedantic by wanting more precision in how terms are used.

In any event, the IEA video is spot on. If you like videos debunking socialism, I have other examples here, here, and here.

Last but not least, here’s my favorite visual from the IEA video.

Tax Competition: So Powerful that even Politicians in Left-Wing States Feel Compelled to Cut Taxes for Rich People

Sat, 06/17/2017 - 12:57pm

Whenever I debate my left-wing friends on tax policy, they routinely assert that taxes don’t matter.

It’s unclear, though, whether they really believe their own rhetoric.

After all, if taxes don’t affect economic behavior, then why are folks on the left so terrified of tax havens? Why are they so opposed to tax competition?

And why are they so anxious to defend loopholes such as the deduction for state and local taxes.

Perhaps most revealing, why do leftists sometimes cut taxes when they hold power? A story in the Wall Street Journal notes that there’s been a little-noticed wave of state tax cuts. Specifically reductions and/or eliminations of state death taxes. And many of these supply-side reforms are happening in left-wing states!

In the past three years, nine states have eliminated or lowered their estate taxes, mostly by raising exemptions. And more reductions are coming. Minnesota lawmakers recently raised the state’s estate-tax exemption to $2.1 million retroactive to January, and the exemption will rise to $2.4 million next year. Maryland will raise its $3 million exemption to $4 million next year. New Jersey’s exemption, which used to rank last at $675,000 a person, rose to $2 million a person this year. Next year, New Jersey is scheduled to eliminate its estate tax altogether, joining about a half-dozen others that have ended their estate taxes over the past decade.

This is good news for affected taxpayers, but it’s also good news for the economy.

Death taxes are not only a punitive tax on capital, but they also discourage investors, entrepreneurs, and other high-income people from earning income once they have accumulated a certain level of savings.

But let’s focus on politics rather than economics. Why are governors and state legislators finally doing something sensible? Why are they lowering tax burdens on “rich” taxpayers instead of playing their usual game of class warfare?

It appears that tax competition deserves most of the credit.

This tax-cutting trend has been fueled by competition between the states for affluent and wealthy taxpayers. Such residents owe income taxes every year, but some are willing to move out of state to avoid death duties that come only once. Since the federal estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for inflation, state death duties have stood out.

I don’t fully agree with the above excerpt because there’s plenty of evidence that income taxes cause migration from high-tax states to zero-income-tax states.

But I agree that a state death tax can have a very large impact, particularly once a successful person has retired and has more flexibility.

Courtesy of the Tax Foundation, here are the states that still impose this destructive levy.

Though this map may soon have one less yellow state. As reported by the WSJ, politicians in the Bay State may be waking up.

In Massachusetts, some lawmakers are worried about losing residents to other states because of its estate tax, which brought in $400 million last year. They hope to raise the exemption to half the federal level and perhaps exclude the value of a residence as well. These measures stand a good chance of passage even as lawmakers are considering raising income taxes on millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz LLP in Needham, Mass., who tracks the issue for the Massachusetts Bar Association. State officials “are worried about a silent leak of people down to Florida, or even New Hampshire,” he adds.

I’m not sure the leak has been silent. There’s lots of data on the migration of productive people to lower-tax states.

But what matters is that tax competition is forcing the state legislature (which is overwhelmingly Democrat) to do the right thing, even though their normal instincts would be to squeeze upper-income taxpayers for more money.

As I’ve repeatedly written, tax competition also has a liberalizing impact on national tax policy.

Following the Reagan tax cuts and Thatcher tax cuts, politicians all over the world felt pressure to lower their tax rates on personal income. The same thing has happened with corporate tax rates, though Ireland deserves most of the credit for getting that process started.

I’ll close by recycling my video on tax competition. It focuses primarily on the fiscal rivalry between nations, but the lessons equally apply to states.

P.S. For what it’s worth, South Dakota arguably is the state with the best tax policy. It’s more difficult to identify the state with the worst policy, though New Jersey, Illinois, New York, California, and Connecticut can all make a strong claim to be at the bottom.

P.P.S. Notwithstanding my snarky title, I don’t particularly care whether there are tax cuts for rich people. But I care a lot about not having tax policies that penalize the behaviors (work, saving, investment, and entrepreneurship) that produce income, jobs, and opportunity for poor and middle-income people. And if that means reforms that allow upper-income people to keep more of their money, I’m okay with that since I’m not an envious person.

The Universal Private Retirement System Is an Additional Reason to Admire Switzerland

Fri, 06/16/2017 - 12:46pm

There’s a lot to admire about Switzerland, particularly compared to its profligate neighbors.

With all these features, you won’t be surprised to learn that Switzerland is highly ranked by Human Freedom Index (#2), Economic Freedom of the World (#4), Index of Economic Freedom (#4), Global Competitiveness Report (#1), Tax Oppression Index (#1), and World Competitiveness Yearbook (#2).

Today let’s augment our list of good Swiss policies for reviewing the near-universal system of private pensions. I’ve been in Switzerland this week for a couple of speeches in Geneva, as well as interviews and meetings in Zurich and Bern.

As part of my travels around the country, I took the time to learn more about the “second pillar” of the country’s pension system.

Here’s a basic description from the Swiss government (with the help of Google translate).

The first pension funds were founded more than a hundred years ago… In 1972 the occupational pensions were included in the constitution. There it represents the second column in the three-column concept… The BVG compulsory scheme applies to all employees who are already insured in the first pillar… Pension provision in the second pillar is based on an individual savings process. This starts at 25 years. However, the condition is an annual income that exceeds the threshold (since 2015: 21’150 francs). The savings process ends with the reaching of the pension age. The accumulated savings in the individual account of the insured [are] used to finance the retirement pension.

If you want something in original English, here’s a brief description from the Swiss-American Chamber of Commerce.

The second pillar is governed by the provisions of the laws on occupational pension provision (BVG)… Employees who are paid by the same employer an annual salary exceeding CHF 21,150 are subject to compulsory insurance. The share of the salary which is subject to compulsory insurance is…between CHF 24,675 (the coordination deduction) and CHF 84,600… An employer who employs persons subject to compulsory insurance must be affiliated to a provident institution entered in the register for occupational benefit plan. The contributions into the pension scheme depend on age and include a minimum saving portion of 7% – 18% of the coordinated salary plus a risk portion. Both are equally shared between employer and employee. The benefits of the insured persons consist in the old age, invalidity and survivors pensions.

One of the interesting quirks of the system is that the mandatory contribution rate changes with age. The older you are, the more you pay.

I’m not sure that makes a lot of sense if the goal is for people to have big nest eggs when they retire, but nobody asked me. In any event, here’s a table showing the age-dependent contribution rates from an OECD description of the Swiss system.

Technically speaking, the contributions are evenly split between employees and employers, though labor economists widely agree that workers bear the real cost.

It’s also worth noting that the Swiss system is based on “defined contribution” like the Chilean and Australian private retirement systems. This means retirement income generally is a function of how much is saved and how well it is invested.

By contrast, the Dutch private system is based on “defined benefit,” which means that workers get a pre-determined level of retirement income. As evidenced by huge shortfalls in the defined benefit regimes maintained by many public and private employers in the United States, this approach is very risky if there aren’t high levels of integrity and honesty.

Though that doesn’t seem to be a problem in the Netherlands. Speaking of the Dutch system, here’s a chart I shared back in 2014.

It was designed to laud the Netherlands, but you can see that Switzerland also had a large pool of pension assets, equal to more than 110 percent of GDP (according to OECD data, now 123 percent of GDP).

Looking at this data, ask yourself whether Switzerland (or the Netherlands, Iceland, Australia, etc) will be in a stronger position to handle the fiscal challenge of aging populations, particularly when compared to nations with virtually no private pension assets, such as France, Greece, and Japan.

The Swiss regime certainly isn’t perfect, and neither are the systems in other nations with private retirement savings. But at least those nations are in much better shape to deal with future demographic changes. Workers in Switzerland and other countries with similar systems have real assets rather than unsustainable political promises. And it’s also worth pointing out that there are macroeconomic benefits for nations that rely more on private savings rather than tax-and-transfer entitlement schemes.

In other words, the Swiss system is much better than America’s bankrupt Social Security scheme.

P.S. Back in 2011, I compared five good features of the United States to five good features of Switzerland. If retirement systems were part of that discussion, Switzerland would have enjoyed a sixth advantage.

P.P.S. Switzerland does have some warts. It is only ranked #31 in the World Bank’s Doing Business. It also has a self-destructive wealth tax. And government spending, though modest compared to neighbors, consumes slightly more than one-third of economic output.

A Lesson from China on Poverty Reduction and Inequality

Thu, 06/15/2017 - 12:30pm

I’ve written (many, many times) about how the best way to help the poor is to focus on economic growth rather than inequality.

After all, in a genuine market economy (as opposed to socialism, cronyism, or some other form of statism), the poor aren’t poor because some people are rich.

Today, let’s look at a real-world example of why it is a mistake to focus on inequality.

A study by five Chinese scholars looked at income inequality over time in their country. Their research, published in 2010, focused mostly on the methodological challenges of obtaining good long-run data and understanding the impact of urban and rural populations. But one clear conclusion is that inequality has increased in China.

This paper investigates the influences of the income overlap part on the nationwide Gini coefficient. Then we present a new approach to estimating the Chinese Gini ratio from 1978 to 2006, which avoids the shortcomings of current data sources. In line with the results, the authors further probe the trend of Chinese income disparity. …income inequality has been rising in China. …the national Gini ratio of 2006 is 1.52 times more than that of 1978.

Here’s a chart based on their data (combined with post-2006 data from Statista). It looks at historical trends for the Gini coefficient (a value of “1” is absolute inequality, with one person accumulating all the income in a society, whereas a value of “0” is absolute equality, with everyone having the same level of income.

As you can see, there’s been a significant increase in inequality.

My leftist friends are conditioned to think this is a terrible outcome, in large part because they incorrectly think the economy is a fixed pie.

And when you have that distorted view, higher absolute incomes for the rich necessarily imply lower absolute incomes for the poor.

My response (beyond pointing out that the economy is not a fixed pie), is to argue that the goal should be economic growth and poverty reduction. I don’t care if Bill Gates is getting richer at a faster rate than a poor person. I just want a society where everyone has the chance to climb the economic ladder.

And I also point out that it’s hard to design pro-growth policies that won’t produce more income for rich people. Yes, there are some reforms (licensing liberalization, cutting agriculture subsidies, reducing protectionism, shutting the Ex-Im Bank, reforming Social Security, ending bailouts) that will probably be disproportionately beneficial for those with low incomes, but those policies also will produce growth that will help upper-income people.*

But I’m digressing. The main goal of today’s column is to look at the inequality data from above and then add the following data on poverty reduction.

Here’s a chart I shared back in March. As you can see, there’s been a very impressive reduction in the number of people suffering severe deprivation in rural China (where incomes historically have been lowest).

Consider, now, both charts together.

The bottom line is that economic liberalization resulted in much faster growth. And because some people got richer at a faster rate than others got richer, that led to both an increase in inequality and a dramatic reduction in poverty.

Therefore, what happened in China creates a type of Rorschach test for folks on the left.

  • A well-meaning leftist will look at all this data and say, “I wish somehow everyone got richer at the same rate, but market-based reforms in China are wonderful because so many people escaped poverty.”
  • A spiteful leftist will look at all this data and say, “Because upper-income people benefited even more than low-income people, market-based reforms in China were a failure and should be reversed.”

Needless to say, the spiteful leftists are the ones who hate the rich more than they love the poor (here are some wise words from Margaret Thatcher on such people).

*To the extent that some upper-income taxpayers obtain unearned income via government intervention, then they may lose out from economic liberalization. Ethical rich people, however, will earn more income if there are pro-growth reforms.

Don’t Implement Bad Policy Slower, Implement Good Policy

Wed, 06/14/2017 - 12:00pm

House Ways and Means Committee Chairman Kevin Brady, in response to strong opposition to his proposed border-adjustment tax, is now proposing a phase-in over 5 years. While this could satisfy those whose opposition was due merely to a fear of dramatic change to the tax code, it does nothing to address the substantive concerns offered by CF&P and others. Most notably, that it undermines tax competition and sets the stage for explosive government growth by introducing a VAT-like tax to the U.S.

Not only does it ignore the biggest issues with the BAT, but a phase-in introduces problems of its own. Here’s what Veronique de Rugy had to say:

Leaving aside the distortions and uncertainty that phasing in the tax will introduce, I doubt that it makes adopting the border-adjustment tax more politically feasible. Let’s talk about the trade deficit for a moment.

What do you think importers will do when they know that the tax today is at a lower rate than the tax tomorrow? They will anticipate tomorrow’s rate hike by importing more today and still raising costs tomorrow. How about exporters? If they think it is advantageous to delay exporting to benefit from a bigger export subsidy tomorrow, they will. You end up with a bigger trade deficit, at least in the short term. I am pretty sure that won’t fly with the trade-deficit obsessed Trump administration.

The ultimate problem, which a phase-in does nothing to solve, is that Republicans chose a bad policy to supply the revenue offsets for otherwise beneficial tax reforms. Clearly, the best solution is to replace it with good policy. That’s precisely what CF&P President Andrew Quinlan suggested to Ways and Means in a recent submission:

Although some arguments have been put forward to suggest that the DBCFT is desirable in its own right, it is only being proposed as a “pay-for” to offset the provisions of tax reform that are actually pro-growth. But even if it is decided that offsets are necessary, it makes little sense to choose a bad policy to pay for tax reform when there are alternatives available that also represent good policy…

Current reform plans rightly call for the elimination of the state and local tax deduction. This is good policy because the deduction encourages states to raise their tax burdens. However, other distortion-creating tax expenditures remain unchallenged, like the mortgage interest deduction, the municipal bond interest exemption, and the employer-provided health care exclusion. Closing these loopholes would not only provide the means to pay for rate reductions, but would simultaneously remove costly distortions from their respective markets.

The items listed above are not just revenue raisers but good policy changes in their own right. The mortgage interest deduction tilts the playing field toward housing, inducing over-investment that contributes to bubbles. The municipal bond interest exemption encourages state and local governments to take on debt and diverts capital away from private uses. And the healthcare exclusion is arguably the worst loophole in the tax code, as its distortions reverberate throughout the healthcare industry and explain much of its overall dysfunction.

This is not to suggest that these changes would be easy. All of these bad policies continue to exist either because they have entrenched interests which fight hard to keep their benefits or they are politically popular, or both. But if ever there is a time to address these issues it is now, as part of a pro-growth tax reform where large rate cuts can mitigate the impact on those particular groups. At the very least, Republicans should try. Why not start the move to tax reform from the strongest position on principle and then compromise only as much as necessary to get the job done, rather than starting with what amounts to a pre-emptive surrender in the fight to limit government.

Why not start the move to tax reform from the strongest position on principle and then compromise only as much as necessary to get the job done, rather than starting with what amounts to a pre-emptive surrender in the fight to limit government?

More Economic Malpractice at the IMF

Tue, 06/13/2017 - 12:14pm

I don’t like international bureaucracies that push statist policies.

In a perverse way, though, I admire their brassiness. They’re now arguing that higher taxes are good for growth.

This isn’t a joke. They never offer any evidence, of course, but it’s now routine to find international bureaucrats asserting that there will be more prosperity if more resources are taken out of the private sector and given to politicians (see the 3:30 mark of this video for some evidence).

Christine Lagarde, the lavishly paid head of the IMF, is doubling down on this bizarre idea that higher tax burdens are a way to generate more growth for poor nations.

…we are here to discuss an equally powerful tool for global growth — domestic resource mobilization. …taxes, and the improvement of tax systems, can boost development in incredible ways… So today, allow me first to explain the IMF’s commitment to capacity development and second, to outline strategies governments can use to generate stable sources of revenue…the IMF has a third important development mission — capacity development.

Keep in mind that all of the buzz phrases in the preceding passages – “resource mobilization” and “capacity development” – refer to governments imposing and collecting more taxes.

Again, I’m not joking.

…the focus of our event today — enabling countries to raise public tax revenues efficiently.

And there’s plenty of rhetoric about how higher taxes somehow translate into more prosperity.

Resource mobilization can, if pursued wisely, become a key pillar of strong economy… For many developing countries, increased revenue is a necessary catalyst to reach the 2030 Sustainable Development Goals, and can be a driver of inclusive growth. Yet in some countries revenue remains stagnant, as the resources needed to enhance economic and civic life sit on the sidelines.

Wow, money that the government doesn’t grab apparently will just “sit on the sidelines.”

Lagarde’s entire speech was a triumph of anti-empiricism.

For instance, the western world went from poverty to prosperity in the 1800s when government was very small, averaging less than 10 percent of economic output.

Yet Lagarde makes an unsubstantiated assertion that today’s poor nations should have tax burdens of at least 15 percent of GDP (the OECD is even worse, arguing that taxes should consume 25 percent of economic output).

How significant is the resource problem? Developing countries typically collect between 10 to 20 percent of GDP in taxes, while the average for advanced economies is closer to 40 percent. IMF staff research shows that developing countries should aim to collect 15 percent of GDP to improve the likelihood of achieving stable and sustainable growth.

By the way, I should not that the IMF partnered with Oxfam, the radical left-wing pressure group, at the conference where her speech was delivered (sort of like the OECD cooperating with the crazies in the Occupy movement).

Moreover, her support for higher taxes is rather hypocritical since she doesn’t have to pay tax on her munificent salary.

I’ve also written about the various ways the IMF has endorsed higher taxes in the United States.

It’s also worth noting that the IMF boss thinks America should have a bigger welfare state as well. Here’s some of what she said about policy in the United States.

Policies need to help lower income households – including through a higher federal minimum wage, more generous earned income tax credit, and upgraded social programs for the nonworking poor. …There is a need to deepen and improve the provision of reasonable benefits to households… This should include paid family leave to care for a child or a parent, childcare assistance, and a better disability insurance program. I would just note that the U.S. is the only country among advanced economies without paid maternity leave at the national level.

The IMF even figured out a way to criticize the notion of lower corporate taxation in the United States.

The IMF…said that already highly leveraged U.S. companies may not be in a position to translate a cash-flow boost from U.S. Republican tax reform proposals into productive capital investments that can aid sustainable growth. Instead, the Fund said the slug of cash, which is likely to include repatriation of profits held overseas by multinational corporations, could be channelled into risks such as purchases of financial assets, mergers and dividend payouts. Such temptations would be highest in the information technology and health care sectors, according to the report. “Cash flow from tax reforms may accrue mainly to sectors that have engaged in substantial financial risk taking,” the IMF said. “Such risk taking is associated with intermittent large destabilising swings in the financial system over the past few decades.”

Basically, the bureaucrats at the IMF want us to believe that money left in private hands will be poorly used.

That’s a strange theory, but the oddest part of this report is that the IMF actually argued that a small repatriation holiday in 2004 somehow caused the recession of 2008 (almost all rational people put the blame on the Federal Reserve and the duo of Fannie Mae and Freddie Mac).

The report noted that past major tax changes typically were followed by increases in financial risk-taking, including the tax reforms in 1986 and a corporate tax repatriation “holiday” in 2004. In both cases, these led to leverage buildups that were followed by recessions, in 1990 and 2008. …inflation and interest rates could rise more sharply than expected. This could increase market volatility and raise debt service costs for already-stretched corporate balance sheets, the IMF said. …”Tighter financial conditions could lead to distress” for weaker firms, the IMF said, noting that resulting losses would be borne by banks, life insurers, mutual funds, pension funds, and overseas institutions.

But the U.S. isn’t special.

The IMF wants higher tax burdens everywhere. Such as the Caribbean.

Over the past decade, governments in the Caribbean region have introduced the value-added tax (VAT) to modernize their tax system, rapidly mobilize revenue… VAT…has boosted revenues, the VAT has not reached its potential. …The paper also finds that although tax administration reforms can boost revenues, countries have just started… These reforms need to intensify in order to have a more significant impact on compliance and revenue.

Writing for the Weekly Standard, Irwin Stelzer has a very dim assessment of the International Monetary Fund’s actions.

He starts with some background information.

The original vision of the IMF was as an agency attending to global stability… Along with the World Bank, the agency was created at an alcohol-fueled conference of 730 delegates from 44 nations, convened 72 years ago in Bretton Woods, New Hampshire. No matter that the delegates from one of the important attendees, the Soviet Union, did not speak English: Harry Dexter White, the head of the U.S. delegation, was a Soviet agent who kept Moscow informed of the goings-on. …Today’s IMF includes 189 nations, has some 2,700 employees and an annual budget in excess of $1 billion, almost 18 percent of which comes from U.S. taxpayers.

He then points out that the IMF has a bad habit of putting dodgy people in charge.

In 2004 Rodrigo Rato took the top chair and served until 2007, when he resigned to face trial in Spain for a variety of frauds involving over 70 bank accounts, and the amassing of a €27 million fortune in a web of dozens of companies. Sr. Rato was succeeded by Dominique Strauss-Kahn… Strauss-Kahn did a reasonable job until arrested in New York City on charges of imposing himself on a hotel maid whose testimony proved so incredible that all criminal charges were dropped. But DSK did settle her civil suit for a reported $1.5 million… Madame Christine Lagarde, former French finance minister, took over as managing director. …Lagarde now faces a criminal trial in France for approving a 2008 arbitration decision award of £340 million to a major financial supporter of then-president Nicolas Sarkozy that was later reversed by an appeals court.

And he notes that these head bureaucrats are lavishly compensated.

…her job…pays $500,000 per year, tax free, plus benefits and a $75,000 allowance to be paid “without any certification or justification by you, to enable you to maintain, in the interests of the Fund, a scale of living appropriate to your position as Managing Director.” The salary is twice the take-home pay of the American president, who must pay taxes on his $400,000 salary… Vacations and sick leave follow generous European standards.

Last but not least, he points out that IMF economists have a lousy track record.

All of which might be money well spent if the IMF had been reasonably successful in one of its key functions—forecasting the outlook for the international economy. …one can’t help wondering what is going on in the IMF’s highly paid forecasting shop. A study of the 189 IMF members by the Economist finds 220 instances between 1999 and 2014 in which an economy grew one year before sinking the next. “In its April forecasts the IMF never once foresaw the contraction looming in the next year.” The magazine’s random-number generator got it right 18 percent of the time.

If all the IMF did was waste a lot of money producing inaccurate forecasts, I wouldn’t be overly upset.

After all, economists seemingly specialize in getting the future wrong. My problem is that the IMF pushes bad policy.

Let’s close with a defense of the bureaucracy.

Desmond Lachman of the American Enterprise Institute argues that the IMF is needed because of future crises.

A number of recent senior U.S. Treasury nominations, who are known for their antipathy towards the International Monetary Fund, seems to signal that President Trump might want to have a smaller IMF. Before he yields to the temptation of trying to downsize that institution, he might want to reflect on the fact that there is a high probability that during his term he will be confronted with a global economic crisis that will require a large IMF… It is generally not a good idea to think about downsizing the fire brigade on the eve of a major conflagration. In the same way, it would seem that President Trump would be ill-advised to think about reigning in the IMF at a time when there is the real prospect of a global economic crisis during his term of office.

I actually agree with much of what Desmond wrote about the possibility of economic and fiscal crisis in the near future.

The problem, though, is that the IMF is not a fire brigade. It’s more akin to a collection of fiscal pyromaniacs.

P.S. In the interest of fairness, I want to acknowledge that we sometimes get good analysis from the IMF. Economists from that bureaucracy have concluded (two times!) that spending caps are the most effective fiscal rule. They also made some good observations about tax policy earlier this year. And IMF researchers in 2016concluded that smaller government and lower taxes produce more prosperity. Moreover, an IMF study in 2015 found that decentralized government works better.

P.P.S. On the other hand, I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period. And I also think it’s funny that IMF bureaucrats inadvertently generated some very powerful evidence against the VAT.

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