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Cronyism, Corruption, and the Obama White House

Thu, 05/04/2017 - 12:00pm

One of the points I repeatedly make is that big government breeds corruption for the simple reason that politicians have more power to reward friends and punish enemies.

It’s especially nauseating when big companies learn that they can get in bed with big government in order to obtain unearned wealth with bailouts, subsidies, protectionism, and other examples of cronyism.

And these odious forms of government intervention reduce our living standards by distorting the allocation of labor and capital.

But just as crime is bad for society but good for criminals, it’s also true that cronyism is bad for the economy and good for cronies.

Two professors at the University of the Illinois decided to measure the “value” of cronyism for politically connected companies.

Gaining political access can be of significant value for corporations, particularly since governments play an increasingly prominent role in influencing firms. Governments affect economic activities not only through regulations, but also by playing the role of customers, financiers, and partners of firms in the private sector. …Therefore, gaining and maintaining access to influential policymakers can be an important source of competitive advantage… In this paper, we investigate the characteristics of firms with political access as well as the valuation effects of political access for corporations. Using a novel dataset of White House visitor logs, we identify top corporate executives of S&P 1500 firms that have face-to-face meetings with high-level federal government officials. …We match the names of visitors in the White House visitor logs to the names of corporate executives of S&P1500 firms during the period from January 2009 through December 2015. We are able to identify 2,286 meetings between corporate executives and federal government officials at the White House.

And what did they find?

That cronyism is lucrative (I deliberately chose that word rather than “profitable” because money that it legitimately earned is very honorable).

Here are some of the findings.

…we find that firms that contributed more to Obama’s presidential election campaigns are more likely to have access to the White House. We also find that firms that spend more on lobbying, firms that receive more government contracts… Second, we find that corporate executives’ meetings with White House officials are followed by significant positive cumulative abnormal returns (CARs). For example, the CAR is about 0.865% during a 51-day window surrounding the meetings (i.e., 10 days before to 40 days after the meetings). We also find that the result is driven mainly by meetings with the President and his top aides.

For those interested, here are the companies that had a lot of interaction with the Obama White House.

And here are the officials that they met with.

 

For what it’s worth, I would be especially suspicious of the meetings with Valerie Jarrett and the three Chiefs of Staff. Those officials are political operatives rather than policy experts, so companies meeting with them were probably looking for favors.

Interestingly, it turns out that it wasn’t a good idea for companies to “invest” a lot of time and effort into cultivating relationships with Democrats.

…we exploit the election of Donald J. Trump as the 45th President of the U.S. as a shock to political access. We find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. The economic magnitude is nontrivial as well: after controlling for various factors that are likely correlated with firms’ political activities, such as campaign contributions, lobbying expenses, and government contracts, the stocks of firms with access to the Obama administration underperform the stocks of otherwise similar firms by about 80 basis points in the three days immediately following the election.

Though I guess you can’t blame the companies. Most observers (including me) expected Hillary to win, so the firms were simply playing the odds (albeit from an amoral perspective).

By the way, there are two very important caveats to share.

  • First, we can’t universally assume that corporate executives who met with White House officials were seeking special favors. They may simply have been urging the Obama Administration not to raise taxes or impose new regulations (i.e., honorable forms of lobbying).
  • Second, we can’t assume that the bad forms of lobbying have disappeared simply because there’s a Republican in the White House. As we saw during the Bush years, the GOP is more than capable of creating opportunities for unearned wealth by expanding the size and scope government.

For what it’s worth, I fear Trump will be tempted to play favorites as well. Which is why the real message for today is that smaller government is the only way to limit the corrupt interaction of big business and big government.

This image from the libertarian page on Reddit illustrates why my leftist buddies are naive to think that a bigger government will be a weapon against cronyism.

P.S. We should learn from Estonia on how to limit cronyism.

The Continuing Revenge of the Laffer Curve

Wed, 05/03/2017 - 12:55pm

Seven years ago, I wrote about the “Butterfield Effect,” which is a term used to mock clueless journalists.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Journalists are especially susceptible to silly statements when writing about the real-world impact of tax policy.

They don’t realize (or prefer not to acknowledge) that changes in tax rates alter incentives to engage in productive behavior, and this leads to changes in taxable income. Which leads to changes in tax revenue, a relationship known as the Laffer Curve.

Here are some remarkable examples of the Butterfield Effect.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

And now we can add to the collection.

Here are some excerpts from a report by a Connecticut TV station.

Connecticut’s state budget woes are compounding with collections from the state income tax collapsing, despite two high-end tax hikes in the past six years. …wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington. …It now looks like expected revenue from the final Income filing will be a whopping $450 million less than had been expected.

Reviewing the first sentence, it would be more accurate to replace “despite” with “because.”

Indeed, the story basically admits that the tax increases have backfired because some rich people are fleeing the state, while others have simply decided to earn and/or report less income.

The question is whether politicians are willing to learn any lessons so they can reverse the state’s disastrous economic decline.

But don’t hold your breath. We have an overseas example of the Laffer Curve, and one of the main lessons is that politicians are willing to sacrifice just about everything in the pursuit of power.

Here are some passages from a story in the U.K.-based Times.

The SNP is expected to fight next month’s general election on a commitment to reintroduce a 50p top rate of tax… The rate at present is 45p on any earnings over £150,000. …civil service analysis suggested that introducing a 50p top rate of tax in Scotland could cost the government up to £30 million a year, as the biggest earners could seek to avoid paying the levy by moving their money south of the border.

If you read the full report, you’ll notice that the head of the Scottish National Party previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K. when the 50 percent rate was imposed).

But now that there’s an election, she’s decided to resurrect that awful policy, presumably because a sufficient number of Scottish voters are motivated by hate and envy.

This kind of self-destructive behavior (by both politicians and voters) is one of the reasons why I’m not overly optimistic about the future of Scotland if it becomes an independent nation.

P.S. I’m not quite as pessimistic about the future of tax policy in the United States. The success of the Reagan tax cuts is a very powerful example and American voters still have a bit of a libertarian streak. I’m not expecting big tax cuts, to be sure, but at least we’re fighting in the United States over how to cut taxes rather than how to raise them.

The “Stupid Party” Strikes Again with a Disheartening Deal to Avoid a Government Shutdown

Tue, 05/02/2017 - 12:53pm

Republicans control the House, the Senate, and the White House.

In theory, that means a long-overdue opportunity to eliminate wasteful programs and cut pork-barrel spending.

In reality, it mostly means business as usual.

Politicians in Washington just reached a deal to fund the government for the rest of the current fiscal year. As reported by the Washington Post, it’s not exactly a victory for libertarians or small-government conservatives.

Democrats are surprised by just how many concessions they extracted in the trillion-dollar deal, considering that Republicans have unified control of government. …Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. …the NIH will get a $2 billion boost — on top of the huge increase it got last year. …Planned Parenthood…will continue to receive funding at current levels. …after the deal was reached…, Chuck Schumer and Nancy Pelosi quickly put out celebratory statements. …“Overall, the compromise resembles more of an Obama administration-era budget than a Trump one,” Bloomberg reports. …Reuters: “While Republicans control the House, Senate and White House, Democrats scored … significant victories in the deal.” …Vox: “Conservatives got almost nothing they wanted.”

I guess you could call this a triumph of “public choice” over campaign rhetoric. Politicians did what’s in the best interest of politicians rather than what would be best for the nation.

I’m disappointed, as you might expect. But as I say in this interview, there are far more important battles. I’ll gladly accept a bit of pork and profligacy in the 2017 budget if that clears the decks for much-needed repeal of Obamacare and long-overdue reform of the tax code.

But here’s the catch. I don’t expect that these reforms will actually happen. Yes, the deck has been cleared, but I don’t think Republicans will take advantage of the opportunity.

The fundamental problem, which I pointed out in a different interview, is that there’s not a governing majority for smaller government. And that has some very grim implications.

Even more depressing, I point out that only Trump has the power to turn things around. Yet I see very little evidence that he, a) believes in smaller government, or b) is willing to expend any political capital to achieve smaller government.

To make matters worse, Republicans have convinced themselves that they lose the spin battle whenever there is a shutdown or some other high-stakes fiscal fight with Democrats.

For what it’s worth, I’m trying to remind Republicans that it is in their long-run political interests to do the right thing (as Reagan demonstrated). That’s why, in the first interview, I said they need to gut Obamacare and lower taxes if they want to do well in the 2018 and 2020 elections.

But don’t hold your breath waiting for the “stupid party” to behave intelligently.

CFPB’s Prepaid Card Rule Is Another Obama-Era Agency Overreach

Tue, 05/02/2017 - 12:25pm

Originally published by Townhall.com on May 1, 2017.

Ronald Reagan was right to say that the most terrifying words in the English language are: “I’m from the government, and I’m here to help.” Perhaps no federal agency has demonstrated that truth better than the Consumer Financial Protection Bureau (CFPB). In the name of protecting consumers, the unaccountable agency keeps creating rules and regulations that make it harder to access the products and services that most improve our lives.

The latest example comes in the form of new rules for prepaid debit cards and mobile wallets. The massive 1,689-page prepaid card rule, which along with numerous other expansive regulations, was pushed out near the end of the Obama administration, and will impose significant burdens on prepaid cards that will inevitably reduce their utility to the very communities that benefit from them the most.

Prepaid cards are an important financial tool for tens of millions of Americans. Usage of prepaid cards has exploded in recent years, up from just $1 billion in 2003 to an expected $112 billion in 2018. Lower-income individuals who often lack access to traditional banking services are especially likely to find the cards useful for managing their financial affairs. Prepaid cards make it easier for individuals to shop or pay their bills on time, and are typically cheaper than other available alternatives.

Unfortunately, the CFPB’s one-size-fits-all rule threatens to change all that. Even as the growing usage of prepaid cards suggests that consumers like the product they are getting, the CFPB insists that they must be protected through unnecessary but expensive disclosure rules, new mandated error resolution procedures, and various other new restrictions and limitations.

Included in all those pages of regulations are also picayune trivia like the font size and colors that must be used on the disclosure forms presented before purchase that no one will actually bother to read. All told, CFPB’s rules are expected to cost the industry into the hundreds of millions, and possibly more than a billion dollars. These costs will be passed on to consumers through higher prices and fees or reduced availability.

Some of the features CFPB is demanding sound nice in theory, but they are the sort of options that are already available through more traditional financial services. Forcing those rules onto the products that exist primarily because they offer a cheaper alternative to banks is effectively the same as wiping out those choices altogether. The millions of Americans who have chosen to forgo the features of traditional financial services in order to save money, or because they could not afford them at all, are effectively having their choices overridden by government bureaucrats who think they know what is best for everyone regardless of individual circumstance.

To make matters even worse, the rule is overly broad and would also impose its new burdens on innovative digital payment services like Google Wallet and PayPal. Who knows what great future innovations will be snuffed out by the precedent set through including these vastly different services under the same regulatory umbrella?

There’s still time for Congress to use the Congressional Review Act and its procedures for overriding recently enacted regulations to undo this Obama-era agency overreach. A resolution introduced by 34 members of the House Financial Services Committee, H.J. Res. 73, would put a stop to the CFPB’s misguided effort. The full Congress must now take it up to protect a vital industry and consumers.

Lessons from the Reagan Tax Cuts

Mon, 05/01/2017 - 12:52pm

In a column in today’s  New York Times, Steven Rattner attacks Trump’s tax plan for being unrealistic. Since I also think the proposal isn’t very plausible, I’m not overly bothered by that message. However, Rattner tries to bolster his case by making very inaccurate and/or misleading claims about the Reagan tax cuts.

Given my admiration for the Gipper, those assertions cry out for correction. Starting with his straw man claim that the tax cuts were supposed to pay for themselves.

…four decades ago…the rollout of what proved to be among our country’s greatest economic follies — the alchemistic belief that huge tax cuts can pay for themselves by unleashing faster economic growth.

Neither Reagan nor his administration claimed that the tax cuts would be self-financing.

Instead, they simply pointed out that the economy would grow faster and that this would generate some level of revenue feedback.

Which is exactly what happened. Heck, even leftists agree that there’s a Laffer Curve. The only disagreement is the point where tax receipts are maximized (and I don’t care which side is right on that issue since I don’t want to enable bigger government).

Anyhow, Rattner also wants us to believe the tax cuts hurt the economy.

…the plan immediately made a bad economy worse.

This is remarkable blindness and/or bias. The double dip recession of 1980-1982 was the result of economic distortions caused by bad monetary policy (by the way, Reagan deserves immense credit for having the moral courage to wean the country from easy-money policy).

But even if one wants to ignore the impact of monetary policy, how can you blame the second dip of the recession, which began in July 1981, on a tax cut that was signed into law in August 1981?!?

Moreover, while Reagan’s tax cut was adopted in 1981, it was phased in over several years. And because of previously legislated tax increases, as well as inflation-driven bracket creep (prior to 1985, households were pushed into higher tax brackets by inflation even though their real income did not rise), the economy did not enjoy a tax cut until 1983. Not coincidentally, that’s when the economy began to boom.

Rattner even wants us to believe the Reagan tax plan caused higher interest rates.

…the Reagan tax cut increased the budget deficit, helping elevate interest rates over 20 percent, which in turn contributed to the double-dip recession that ensued. The stock market fell by more than 20 percent.

The deficit jumped mostly because of the double-dip recession, just as red ink always climbs when there is an economic downturn.

And interest rates were high largely because inflation was so high (lenders don’t like to deliberately lose money).

But the most amazing part of the above excerpt is that Rattner wants us to believe the Reagan tax cuts caused the part of the double-dip recession that occurred in 1980, when Jimmy Carter was still president.

That’s sort of like Paul Krugman trying to imply that Estonia’s 2008 recession was caused by spending cuts that took place in 2009!

You also won’t be surprised to learn that Rattner selectively likes Keynesianism.

Big deficits can sometimes be advisable, as they were in aiding recovery from the 2009 recession.

I guess he wants us to applaud Obama’s so-called stimulus and be impressed by the very anemic recovery that followed.

But we’re supposed to overlook the booming economy of the Reagan years.

Last but not least, it’s noteworthy that Rattner – in spite of his bias – endorses part of the Trump tax plan.

I understand our need to lower the corporate tax rate to compete with other countries and adjust other provisions to keep companies and jobs here. Critics are correct that our business-tax structure encourages companies to ship jobs and even themselves overseas.

And when even folks like Rattner realize that the current corporate tax system is indefensible, that explains why I’m semi-hopeful that we’ll get a lower rate at some point in the near future.

Now let’s look at broader lessons from the Reagan tax cuts.

Lesson #1: Lower Tax Rates Can Boost Growth

We can draw some conclusions by looking at how low-tax economies such as Singapore and Hong Kong outperform the United States. Or we can compare growth in the United States with the economic stagnation in high-tax Europe.

We can also compare growth during the Reagan years with the economic malaise of the 1970s.

Moreover, there’s lots of academic evidence showing that lower tax rates lead to better economic performance

The bottom line is that people respond to incentives. When tax rates climb, there’s more “deadweight loss” in the economy. So when tax rates fall, output increases.

Lesson #2: Some Tax Cuts “Pay for Themselves”

The key insight of the Laffer Curve is not that tax cuts are self-financing. Instead, the lesson is simply that certain tax cuts (i.e., lower marginal rates on productive behavior) lead to more economic activity. Which is another way of saying that certain tax cuts lead to more taxable income.

It’s then an empirical issue to assess the level of revenue feedback.

In the vast majority of the cases, the revenue feedback caused by more taxable income isn’t enough to offset the revenue loss associated with lower tax rates. However, we do have very strong evidencethat upper-income taxpayers actually paid more to the IRS because of the Reagan tax cuts.

This is presumably because wealthier taxpayers have much greater ability to control the timing, level, and composition of their income.

Lesson #3: Reagan Put the United States on a Path to Fiscal Balance

I already explained above why it is wrong to blame the Reagan tax cuts for the recession-driven deficits of the early 1980s. Indeed, I suspect most leftists privately agree with that assessment.

But there’s still a widespread belief that Reagan’s tax policy put the United States on an unsustainable fiscal path.

Yet the Congressional Budget Office, as Reagan left office in early 1989, projected that budget deficits, which had been consistently shrinking as a share of GDP, would continue to shrink if Reagan’s policies were left in place.

Moreover, the deficit was falling because government spending was projected to grow slower than the private sector, which is the key to good fiscal policy.

Lesson #4: Lower Tax Rates Are Just One Piece of a Larger Puzzle

Having just disgorged hundreds of words on the importance of lower tax rates, let’s close by noting that fiscal policy is just one of many factors that determine an economy’s performance.

Indeed, tax and budget issues only account for 20 percent of a nation’s economic performance according to Economic Freedom of the World.

So it’s quite possible for a nation to be relatively free even with a bad tax system, and it’s also possible for a country to be economically repressed if it has a good tax system.

And this explains why economic freedom increased in America during the Clinton years, notwithstanding the 1993 tax hike. Simply stated, it’s the overall policy mix that matters.

I’ll conclude by noting that aggregate economic freedom in America increased during the Reagan years.

And the biggest reason for the increase was better fiscal policy.

It’s possible that we may also get more economic freedom during the Trump years. Indeed, I gave him a decent score for his first 100 days.

But it takes a lot of political courage to consistently fight for economic liberty in a town that cheers statism. And even though there’s a strong case to be made that there are political benefits to good policy, I’m not overly optimistic that Trump will be another Reagan.

The Most Emotionally Satisfying Argument for Trump’s Corporate Tax Cut

Sun, 04/30/2017 - 12:10pm

I like the main components of the Trump tax plan, particularly the sweeping reduction in the corporate tax rate.

But, as I say at the beginning of this Fox Business interview, there’s a big difference between proposing a good idea and actually getting legislation approved.

But just because I’m pessimistic, that doesn’t change the fact that a lower tax burden would be good for the country.

Toward the end of the interview, I explained that the most important reason for better tax policy is not necessarily to lower taxes for families, but rather to get more prosperity.

If we can restore the kind of growth we achieved when we had more market-friendly policy in the 1980s and 1990s, that would be hugely beneficial for ordinary people.

That’s the main economic argument for Trump’s plan.

But now I’ve come across what I’ll call the emotionally gratifying argument for Trump’s tax cuts. The Bureau of National Affairs is reporting that European socialists are whining that a lower corporate tax rate in the United States will cause “a race to the bottom.”

U.S. President Donald Trump’s plans to slash corporate taxes by more than half will accelerate a “race to the bottom” and undermine global efforts to combat corporate tax evasion by multinationals, according to a second political group in the European Parliament. The Socialists and Democrats, made up of 190 European Parliament lawmakers, insisted the Trump tax reform, announced April 26, threatens the current work in the Organization for Economic Cooperation and Development and the Group of Twenty to establish a fair and efficient tax system.

As you might expect, the socialists make some nonsensical arguments.

Paul Tang—who heads the Group of the Progressive Alliance of Socialists and Democrats and leads the European Parliament negotiations on the pending EU Common Corporate Tax Base (CCTB) proposal—accused the Trump administration of pursuing a “beggar-they-neighbor policy similar to those in the 1930s.”

Huh?!? Does Mr. Tang think there were tax cuts in the 1930s?

That was a decade of tax increases, at least in the United States!

Or is he somehow trying to equate tax cuts with protectionism? But that makes zero sense. Yes, protectionism was rampant that decade, but higher tariffs mean higher taxes on trade. That’s the opposite of tax cuts.

Mr Tang is either economically illiterate or historically illiterate. Heck, he’s a socialist, so probably both.

Meanwhile, another European parliamentarian complained that the U.S. would become more of a tax haven if Trump’s tax cut was enacted.

Sven Giegold, a European Green Party member and leading tax expert in the European Parliament, told Bloomberg BNA in a April 27 telephone interview that the Trump tax plan further cemented the U.S. as a tax haven. He added the German government must put the issue on the agenda during its current term as holder of the G-20 presidency. …The European Green Party insists the U.S. has become an international tax haven because, among other things, it has not committed to implement the OECD Common Reporting Standard and various U.S. states, including Delaware, Nevada and South Dakota, have laws that allow companies to hide beneficial owners.

He’s right and wrong.

Yes, the United States is a tax haven, but only for foreigners who passively invest in the American economy (we generally don’t tax interest and capital gains received by foreigners, and we also generally don’t share information about the indirect investments of foreigners with their home governments).

Corporate income, however, is the result of direct investment, and that income is subject to tax by the IRS.

But I suppose it’s asking too much to expect politicians to understand such nuances.

For what it’s worth, I assume Mr. Giegold is simply unhappy that a lower corporate tax rate would make America more attractive for jobs and investment.

Moreover, he presumably understands adoption of Trump’s plan would put pressure on European nations to lower their corporate tax rates. Which is exactly what happened after the U.S. dropped its corporate tax rate back in the 1980s.

Which is yet another example of why tax competition is something that should be celebrated rather than persecuted. It forces politicians to adopt better policy even when they don’t want to.

That is what gets them angry. And I find their angst very gratifying.

P.S. You may have noticed at the very end of the interview that I couldn’t resist interjecting a plea to reduce the burden of government spending. That’s not merely a throwaway line. When the Congressional Budget Office released its fiscal forecast earlier this year, I crunched the numbers and showed that we could balance the budget within 10 years and lower the tax burden by $3 trillion (on a static basis!) if politicians simply restrained spending so that it grew 1.96 percent per year.

P.P.S. It’s worth remembering that the “race to the bottom” is actually a race to better policy and more growth. And politicians should be comforted by the fact that this doesn’t necessarily mean less revenue.

The Federal Tax Code Should Not Subsidize Greedy Politicians in New York and California

Sat, 04/29/2017 - 12:25pm

If I had to pick my least-favorite tax loophole, the economist part of my brain would select the healthcare exclusion. After all, that special preference creates a destructive incentive for over-insurance and contributes (along with Medicare, Medicaid, Obamacare, etc) to the third-party payer crisis that is crippling America’s healthcare system.

But if I based my answer on the more visceral, instinctive portion of my brain, I would select the deduction for state and local taxes. As I’ve previously noted, that odious tax break enables higher taxes at the state and local level. Simply stated, greedy politicians in a state like California can boost tax rates and soothe anxious state taxpayers by telling them that they can use their higher payments to Sacramento as a deduction to reduce their payments to Washington.

What’s ironic about this loophole is that it’s basically a write-off for the rich. Only 30 percent of all taxpayers utilize the deduction for state and local taxes. But they’re not evenly distributed by income. Here’s a sobering table from a report by the Tax Foundation.

The beneficiaries also aren’t evenly distributed by geography.

Here’s a map from the Tax Foundation showing in dark blue that only a tiny part of the country benefits from this unfair loophole for high-income taxpayers.

As you can see from the map, the vast majority of the nation deducts less than $2,000 in state and local taxes.

But if you really want to see who benefits, don’t simply look at the dark blue sections. After all, most of those people would happily give up the state and local tax deduction in exchange for some of the other policies that are part of tax reform – particularly lower tax rates and less double taxation.

And I suspect that’s even true for the people who hugely benefit from the deduction. The biggest beneficiaries of this loophole are concentrated in a tiny handful of wealthy counties in New York, California, New Jersey, and Connecticut.

As you can see, they reap enormous advantages from the state and local tax deduction, though I suspect these same people also would benefit if tax rates were lowered and double taxation was reduced.

Regardless of who benefits and loses, there’s a more fundamental question. Should federal tax law be distorted to subsidize high tax burdens at the state and local level?

Kevin Williamson of National Review says no.

…the deduction of state taxes against federal tax liabilities creates a subsidy and an incentive for higher state taxes. California in essence is able to capture money that would be federal revenue and use it for its own ends, an option that is not practically available to low-tax (and no-income-tax) states such as Nevada and Florida. It makes sense to allow the states to compete on taxes and services, but the federal tax code biases that competition in favor of high-tax jurisdictions.

The Governor of New York, by contrast, argues that the tax code should subsidize his profligacy.

It would be “devastating on the state of New York, California, et cetera, if you didn’t allow the people of this state to deduct their state and local taxes,” Cuomo told reporters… State and local governments have been working to preserve the deduction, and they argue that doing away with the preference would hurt states and localities’ flexibility to make tax changes.

By the way, I noticed how the reporter displays bias. Instead of being honest and writing that that the loophole enables higher taxes, she writes that the loss of the preference “would hurt states and localities’ flexibility to make tax changes.”

Gee, anyone want to guess how that “flexibility” is displayed?

Though at least the reporter acknowledged that the deduction is primarily for rich people in blue states.

…the deduction…is viewed as disproportionately benefiting wealthy people. It also tends to be used in areas that lean Democratic.

And that’s confirmed by a 2016 news report from the Wall Street Journal.

Repealing the federal deduction for state and local taxes would make 23.6% of U.S. households pay an average of $2,348 more to the Internal Revenue Service for 2016. But those costs—almost $1.3 trillion over a decade—aren’t evenly spread… Ranked by the average potential tax increase, the top 13 states (including Washington, D.C.), as well as 16 of the top 17, voted twice for President Barack Obama. …And nearly one-third of the cost would be paid by residents of California and New York, two solidly Democratic states. …President Ronald Reagan tried repealing the deduction as part of the tax-code overhaul in 1986, but he was rebuffed by congressional Democrats and state officials. …Republicans argue that the break subsidizes high state taxes, because governors and legislators know they can raise income taxes on their citizens and have the federal government pick up part of the tab. …half the cost of repealing the deduction would be borne by households making $100,000 to $500,000, using a broad definition of income. Another 30% would be borne by households making more than $1 million. Under the GOP plans, residents of high-tax states wouldn’t necessarily pay more in federal taxes than they do now. They would benefit from tax-rate cuts.

Here’s one final image that underscores the unfairness of the deduction.

The Tax Policy Center has a report on the loophole for state and local taxes and they put together this chart showing that rich people are far more likely to take advantage of the deduction. And it’s worth much more for them than it is for lower-income Americans.

How much more? Well, more than 90 percent of taxpayers earning more than $1 million use the deduction and their average tax break is more than $260,000. By contrast, only a small fraction of taxpayers earning less than $50 thousand annually benefit from the deduction and they only get a tax break of about $3,800.

Yet leftists who complain about rich people manipulating the tax system usually defend this tax break.

It’s enough to make you think their real goal is bigger government.

I’ll close by calling attention to the mid-part of this interview. I shared it a couple of days ago as part of a big-picture discussion of Trump’s tax plan. But I specifically address the state and local tax deduction around 3:00 and 4:30 of the discussion.

P.S. In addition to the loophole that encourages higher taxes at the state and local level, there’s also a special tax preference that encourages higher spending at the state and local level. Sigh.

P.P.S. Now, perhaps, people will understand why I want to rip up the current system and replace it with a simple and fair flat tax.

A Report Card on Trump’s 100 Days

Fri, 04/28/2017 - 12:44pm

Back in March, I wrote a 50-day assessment on Trump’s presidency.

I listed six questions and mostly concluded that there wasn’t enough information to give accurate answers. In other words, if Trump was a student, he would have received an “I” for incomplete.

Now that we’re at the 100-day point, I’m tempted to say that his grade hasn’t changed.

We still don’t know what he’ll do on issues such as the entitlement crisis, the border-adjustable tax, infrastructure, and red tape.

But I feel compelled to issue another report card, so here’s my take on the Trump’s economic performance, based on the five big categories from Economic Freedom of the World.

  • Fiscal Policy – Trump has proposed a good tax cut, though I fear it won’t go anywhere because a sufficient number of squeamish Republicans will feign concern about deficits. That excuse wouldn’t exist if the White House and congressional GOPers were more serious about spending restraint, so there’s plenty of blame to go around. Though I’m nonetheless hopeful that the corporate tax rate will be reduced. Trump Grade: B
  • Trade – Trump has moved policy in the wrong direction, but I’m weirdly relieved that he’s being somewhat restrained. He decided China is not a currency manipulator and he decided that the U.S. should remain part of NAFTA. In other words, he been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is imposing new burdens on consumers and taxpayers. Trump Grade: D
  • Regulation – This is Trump’s best issue area. He’s rolled back some Obama-era regulations, which is a good start. And he’s made some very sensible appointments, which means there’s hope of ameliorating the statist orientation of bureaucracies such as the FDA and the FCC. Trump Grade: B
  • Monetary Policy – I have no idea how to assign a grade. Trump hasn’t said anything, much less done anything, on monetary policy. Trump Grade: I
  • Rule of Law – Trump has been aggressive with executive orders, which worries me even if I happen to agree with the underlying policy. The White House hasn’t tried to flout court decisions, however, so that’s a good sign. The appointment and confirmation of Justice Gorsuch also bodes well (assuming he doesn’t “grow in office” like Justice Roberts). Trump Grade: B

Overall, Trump’s GPA is better than I would have predicted before the election, so I’m pleasantly surprised. But there’s still a long way to go before final exams.

Red Ink, Washington Politics, and the Trump Tax Cuts

Thu, 04/27/2017 - 12:39pm

I expressed pessimism yesterday about Trump’s tax plan. Simply stated, I don’t think Congress is willing to enact a large tax cut given the nation’s grim fiscal outlook.

In this Fox Business interview, I elaborated on my concerns while also pointing out that the plan would be very good if it somehow got enacted.

We now have some preliminary numbers that illustrate why I’m concerned.

The Committee for a Responsible Federal Budget put together a quick guess about the revenue implications of Trump’s new plan. Their admittedly rough estimate is that federal revenues would be reduced by close to $6 trillion over 10 years.

Incidentally, these revenue estimates are very inaccurate because they are based on “static scoring,” which is the antiquated notion that major changes in tax policy have no impact on economic performance.

But these numbers nonetheless are useful since the Joint Committee on Taxation basically uses that approach when producing official revenue estimates that guide congressional action.

In other words, it doesn’t matter, at least for purposes of enacting legislation, that there would be substantial revenue feedback in the real world (the rich actually paid more, for instance, when Reagan dropped the top tax rate from 70 percent to 28 percent). Politicians on Capitol Hill will point to the JCT’s static numbers, gasp with feigned horror, and use higher deficits as an excuse to vote no (even though those same lawmakers generally have no problem with red ink when voting to expand the burden of government spending).

That being said, they wouldn’t necessarily have that excuse if the Trump Administration was more aggressive about trying to shrink the size and scope of the federal government. So there’s plenty of blame to go around.

Until something changes, however, I don’t think Trump’s tax cut is very realistic. So if you want my prediction on what will happen, I’m sticking to the three options I shared yesterday.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

By the way, the Wall Street Journal editorialized favorably about the plan this morning, mostly because it reflects the sensible supply-side view that it is good to have lower tax rates on productive behavior.

While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity. …Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. …The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do.

But the WSJ shares my assessment that the plan will not survive in its current form.

…the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law… Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%… Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years.

For what it’s worth, if the final result is a 15 percent or 20 percent corporate tax rate, I’ll actually be quite pleased. That reform would be very good for the economy and national competitiveness. And regardless of what JCT projects, there would be substantial revenue feedback.

Unfortunately, Trump’s Good Tax Plan Is Not a Serious Tax Plan

Wed, 04/26/2017 - 12:37pm

I want tax cuts. I support tax cuts. I relish tax cuts.

  • I like tax cuts because I’m a curmudgeonly libertarian and I think people should have the first claim on the money they earn.
  • I like tax cuts because I’m an economist and we’ll get more growth if penalties on productive behavior are reduced.
  • I like tax cuts because the academic research supports the “starve-the-beast” theory of less revenue leading to less spending.

This is why I wrote favorably about Trump’s campaign tax plan, and this is why I like Trump’s new tax plan (with a few exceptions).

But I confess that my heart’s not in it. Simply stated, I don’t think the new plan is serious.

If Trump really wanted a big tax cut, he would have a comprehensive plan to restrain the growth of government spending. He doesn’t.

If Trump genuinely wanted lower taxes, he would be aggressively pushing for genuine entitlement reform. He isn’t.

And Congress isn’t much better. At least in the absence of leadership from the White House.

It’s not merely that I’m concerned lawmakers won’t put the brakes on spending. And it’s not just that I fear they won’t enact much-needed entitlement reform. I worry they’ll actually increase the burden of federal spending. Just look what’s happening as Congress and the White House negotiate a spending bill for the remainder of the 2017 fiscal year. The pending deal would trade more defense spending for more Obamacare subsidies. Everyone wins…except taxpayers.

In this profligate environment, it’s hard to be optimistic about tax cuts.

By the way, I fully agree we would get more growth if Trump’s tax plan was enacted. But the Laffer Curve doesn’t say that all tax cuts pay for themselves with faster growth. That only happens in rather rare circumstances.

Yes, the lower corporate tax rate would have a big supply-side impact (and there’s plenty of evidence from overseas to support that notion), but many of the other provisions of his plan are sure to reduce revenue.

Again, I don’t lose sleep about the prospect of less money going to Washington. But you can be sure that politicians pay attention to that issue.

Which is why I’m pessimistic. I don’t think Congress is willing to approve a big tax cut.

The bottom line is that there are three possible outcomes.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

Ultimately, I want to completely junk our corrupt system and replace it with a simple and fair flat tax. But for 2017, I’ll be happy if we simply slash the corporate rate.

If There’s Going to Be a Government Shutdown, Do It for a Good Reason

Tue, 04/25/2017 - 12:14pm

I’m normally a big fan of shutting down the government and I’ve tried to convince timid lawmakers that shutdown fights can be worthwhile.

The bottom line is that nothing really bad happens when there’s a shutdown (notwithstanding petty efforts by bureaucrats) for the simple reasons that only “non-essential” parts of the bureaucracy actually get closed. In other words, a government shutdown in all cases is simply a partial shutdown.

And since I don’t favor any funding of non-essential functions, I view a partial shutdown as a good start. Indeed, while the various interest groups in DC hyperventilate about supposed disaster, I experience a feeling of joy and serenity (as illustrated by this modified cartoon, which originally was altered to show my reaction to sequestration).

As far as I’m concerned, the key lesson from shutdown fights is that our nation will be better off if bureaucracies such as the Department of Housing and Urban Development or Department of Education are permanently shuttered. And let’s add the Department of Energy, Department of Transportation, and Department of Agriculture just for the fun of it.

These entities shouldn’t get short-run funding or long-run funding.

That’s the point I made in the second half of this recent interview on Fox Business.

I’m not the only person who likes the idea of a partial shutdown.

Writing for the Resurgent, Erick Erickson explains how a shutdown fight would be valuable.

Americans need to be reminded that the world will not end if the government shuts down. They need to be reminded to take care of themselves instead of relying on Uncle Sam’s teet. A government shutdown with the GOP in charge would be a far different thing from a government shutdown run by Democrats. President Obama tried to inflict maximum pain on the American people to force the GOP to reopen government. President Trump, instead, could take a different approach and use the experience to show Americans how out of control government has really gotten.

And Larry Kudlow had a similar message in a column for National Review back in 2015.

…sometimes you have to make a point. Send a message. Show voters what you really believe. Take a stand. …Most of the Beltway media will blame Republicans. Democrats will blame Republicans. And GOP pundits will blame Republicans. Political death, they will say. Really? …during the Reagan-O’Neill era, most of the shutdowns were budget focused. Reagan wanted less spending; the Democrats wanted more. …The Reagan-O’Neill-era shutdowns were short, and in most of them Reagan prevailed. Meanwhile, the Reagan recovery flourished, the Republicans held the Senate (until 1986), and the Gipper was reelected in a landslide in 1984. Going back to the Obamacare-related shutdown of 2013, a bit more than a year later the Republicans swept the Senate and gained an even larger majority in the House. …shutdowns are a cumbersome way to make a point. …But perhaps Republican leadership in both Houses might think of this: There are too many deals and not enough principles, beliefs, and clear messaging.

Having now provided all this evidence in favor of government shutdowns, you would think I’m excited about the possibility that there will be a partial shutdown this Saturday when a temporary funding bill expires.

Unfortunately, that’s not the case. I view the shutdown as a means to an end. I want those fights to occur in hopes that there will be reforms that shrink the overall burden of government spending.

In this case, though, the shutdown fight largely revolves around President Trump’s request for money to build part of a wall between Mexico and the United States. Some people think that’s a good idea and others think it’s a bad idea, but the one thing I can say with certainty is that it’s not a money-saving idea. Even if Trump wanted to finance the wall by reducing outlays in other parts of the budget, the net result would not be smaller government.

The bottom line is that even though I almost always cheer for a government shutdown, I’ll be sitting on the sidelines for this fight.

But if Trump and congressional Republicans at some point decide to fight for much-needed spending restraint (a naive hope, I realize), then I’ll be the first to cheer if that battle leads to a shutdown.

Unearned Prosperity for Washington’s Ruling Class

Mon, 04/24/2017 - 12:48pm

Every so often, I share an image that is unambiguously depressing. Usually because it suggests that freedom is slowly eroding.

I now have another addition to that depressing list.

Just as the Minneapolis Federal Reserve has an interactive website that allows users to compare recoveries and recessions, which is very useful for comparing Reaganomics and Obamanomics, the St. Louis Federal Reserve has an interactive website that allows users to compare national and regional economic data.

And that’s the source of today’s depressing chart. It shows median inflation-adjusted household income for the entire nation and for the District of Columbia. As you can see, the nation’s capital used to be somewhat similar to the rest of the nation. But over the past 10 years, DC residents have become an economic elite, with a representative household “earning” almost $14,000 more than the national average.

By the way, I put quotation marks around “earning” in the previous sentence for a very specific reason.

There is nothing wrong with some people accumulating lots of wealth and income if their prosperity is the result of voluntary exchange.

In the case of Washington, DC, however, much of the capital’s prosperity is the result of coercive redistribution. The lavish compensation of federal bureaucrats is a direct transfer from taxpayers to a gilded class, while the various lobbyists, contractors, cronyists, politicians, and other insiders are fat and happy because of a combination of direct and indirect redistribution.

I should also point out that the entire region is prospering at the expense of the rest of the nation.

By the way, some people will be tempted to argue that rising income levels in DC are simply a result of gentrification as higher-income whites displace lower-income blacks. Yes, that is happening, but that begs the question of where the new residents are getting all their income and why the nation’s capital is an increasingly attractive place for those people to live.

The answer, in large part, is that government is a growth industry. Except it’s not an industry. It’s increasingly just a racket for insiders to get rich at the expense of everyone else.

Government Schools + Anti-Gun Political Correctness = Child Abuse

Sun, 04/23/2017 - 12:39pm

Several years ago, I would regularly share horror stories about innocent kids being abused by politically correct government school administrators who overreacted to anything remotely resembling a gun.

I even had a U.S. vs. U.K. stupidity contest that featured many examples of anti-gun lunacy, though Canada may actually win the prize for the most absurd case of political correctness.

But I eventually stopped sharing these types of stories because it seemed there were so many and I felt like I was making the same points over and over again.

Time for the hiatus to end. I’ve run across a handful of stories that are so preposterous that I can’t resist revisiting the issue.

Here’s our first example. A local television station in North Carolina reports that a little girl was suspended because she pretended that a stick was a gun while playing with her friends.

A local mother is outraged after her 5-year-old daughter was suspended from school because of a stick that resembled a gun. …It started Friday when her mother got a call from the principal about a playground incident. Caitlin explained that she and her two friends were using their imaginations, playing “King and Queen.” In this case, Caitlin was the guard protecting the royals and picked up the gun to imitate shooting an intruder into the kingdom. Hoke County Schools said Caitlin posed a threat to other students when she made a shooting motion, thus violating policy 4331. …Miller says Caitlin was alienated by her friends and teachers as a result of the suspension. She hopes that the school will issue some sort of apology to her daughter.

I’m not the only one who thinks this is insane.

POLL: Should 5-year-old girl be suspended for playing with ‘stick gun’? https://t.co/vQpNDwk1LZ

— ABC11 EyewitnessNews (@ABC11_WTVD) March 29, 2017

Now for our second story.

It’s about a very dangerous 11-year old girl who – gasp!! – used a butter knife. A Florida television station has the details.

A South Florida couple is outraged after they said their daughter was suspended from her middle school for using a child butter knife at lunchtime to cut a peach. …Souto’s daughter is an honor roll student at Silver Trail Middle School in Pembroke Pines. …Ronald and Andrea Souto told Local 10 News reporter Michael Seiden that their 11-year-old daughter was suspended for six days for bringing the knife to school. “This is a set of a spoon, fork and knife for toddlers — one year old,” Andrea Souto said. “It is made for children to learn how to eat properly. She’s used it since she was baby.” According to the school district, the girl violated the county’s weapon policy when she used her butter knife in the cafeteria to cut the peach. …Ronald said he hopes what happened to his daughter will bring change to the district, specifically new polices when it comes to weapons.

But this rogue child didn’t just get suspended. She may become an actual criminal.

The Soutos said they were shocked about the suspension and are now concerned that their daughter’s act of kindness could lead to criminal charges. …The Pembroke Pines Police Department said it has turned over their investigation to the State Attorney’s Office. It’s unclear whether prosecutors will file charges.

Our third story comes from a St. Louis TV station and it involves a four-year old boy who was suspended for a shell casing.

Hunter, 4, has been suspended from his preschool for bringing a shell casing from a fired bullet to school. He’d been at the preschool for about a year, she said, and now was in tears. Neither she nor Hunter’s dad knew it, but he found something he thought was pretty neat and he took it to school Tuesday to show his friends. …Hunter’s parents got a letter from the school’s director saying Hunter had been suspended for 7 days. …It turns out the casing came from a visit with Hunter’s grandpa who is a Caseyville police officer, Jackson said. …The school’s vice-president e-mailed her that he was notifying the Illinois Department of Children and Family Services (DCFS).

The last sentence is particularly chilling since DCFS bureaucrats presumably have the power to take children from their families. So imagine the horrible position of Hunter’s parents, who not only have to deal with their kid being suspended for doing nothing wrong, but also have to worry about the state kidnapping their child if some anti-gun bureaucrat woke up on the wrong side of the bed.

Our fourth and final story is courtesy of the Montgomery Advertiser in Alabama, where a teenager was expelled for a year because of a water gun.

A family is up in arms after their 16-year-old daughter was expelled from Prattville High School for having a water gun on campus. …she was banned from school property and any extra-curricular activities for the same period. …She said a male classmate handed the toy to her daughter “as a joke.” “…the second you picked it up, you know its plastic and a toy,” she said. “So we can understand the initial reaction, not knowing it wasn’t a real gun. But after the principal and school officials knew it was a water gun, things should never have progressed this far.” …The family wants any reference to the expulsion removed from Laney’s academic records, McPhillips’ letters read. …If the expulsion isn’t removed from Laney’s academic record, the family is considering filing legal action

I suppose there are two big-picture lessons to be learned.

First, it’s hard to be optimistic about the education system after reading this type of story.

If bureaucrats at government schools don’t have common sense, how can they teach reading, writing, and arithmetic?

Maybe (especially given the shocking lack of results after record levels of staffing and funding) we should break up the government school monopoly and let parents choose better-quality schools.

Second, keep in mind that anti-gun statists know they can’t win the intellectual argument against private gun ownership, so they’re trying to stigmatize anything remotely connected to guns in hopes of eventually winning the political argument.

Congress Should Tell the Music Industry ‘No’ When it Comes to Legislating Royalties

Sun, 04/23/2017 - 2:48am

Originally published by The Hill on April 21, 2017.

If the music industry has its way, Congress will soon pass legislation that will charge consumers more for listening to music.

Major publishers of music have made record revenues from music royalties, but now they want Congress to legislate even larger profits. The largest publishers and record labels have created a front group called MusicFirst, which is organizing major lobbying efforts in Congress to generate artificially higher profits for the industry.

Currently, local radio stations receive free airplay in exchange for the free exposure they provide to artists. That exposure is highly valuable as it reaches hundreds of millions of people each week. One study suggested that the total value of such airplay totals nearly $2.5 billion annually.

Radio airplay is what determines the commercial success of artists, and it’s clear that record labels would even pay for its promotional value. But federal law prohibits doing so. The “free airplay for free advertising” set-up was created at the onset of the radio age to please both sides of the music equation, and to ensure that money would not corrupt or influence radio playlists.

Yet despite the fact that the music industry receives billions in free advertising from local radio stations every year, it’s asking Congress to impose a new royalty fee on local radio stations for playing popular music.

The specifics of the proposal are still being worked out, but it has already involved big hitters in the music industry. The group financed Grammys on the Hill and Advocacy Day earlier this month, and had about one hundred of the biggest celebrities in the entertainment industry knock on representatives’ office doors.

The leading music publishers and record labels dismiss the value of radio play for music success, yet airtime on local radio stations remains the largest factor in the success of popular music. “That’s where they get a lot of my music,” said country artist and 2017’s honoree at Grammys on the Hill Keith Urban. As a result, the record labels and publishers behind MusicFirst annually invest millions in promoting music for radio airplay.

MusicFirst, referring to the promotional value of radio airtime, notes in a statement, “In any other market-based arrangement they (local radio stations) would have to compensate the owner of that music at market rate.” But the reality is that in any other market-based arrangement, “big music” would also be paying for the promotion of their product as advertising.

In an open letter to Congress, MusicFirst said their proposal was based on “market-based principles [that] drive compensation for all artists and creators.” The problem is that the market would not set the “market rate” at all: The coalition is advocating for a government rate-setting agency to dictate prices on local radio stations.

Clearly, this effort is not one of seeking increased revenues for the music industry via the free market, but one of seeking a government-imposed fee at the expense of those who listen to popular music via local radio stations.

While the industry has sought several times in the past, through both legislation as well as regulatory action, to increase their profit margins, all of those efforts have failed. One such effort in the past was the Songwriter Equity Act, which did not go anywhere in Congress. The music industry has also unsuccessfully sought to get the Department of Justice to allow for artificially higher royalty rates off the backs of taxpayers.

Bailing out the music industry should not even be on Congress’ map. Voters elected their members of Congress to repeal and replace ObamaCare, reform the federal government, create jobs, and build a much stronger economy. Congress should heed the wishes of the voters that elected them and tell “big music” that the era of special interest bailouts is over.

The Horrifying Death Throes of Venezuelan Socialism, Captured in 28 Headlines

Sat, 04/22/2017 - 12:24pm

I wrote last year that Venezuela was entering the “fourth circle of statist hell.”

How else, after all, can you describe a government that is so venal and incompetent that it resorts to confiscating toys in an effort to strengthen its hold on power?

I also wrote last year that Atlas was “shrugging” in Venezuela.

But shrugging may soon turn to shrugged. It’s hard to see how Maduro’s despotic regime can hold power much longer. Consider this collection of horrifying stories.

The Washington Post reported:

With inflation spiraling out of control, food and medicine supplies dwindling and violent crimes on the rise, women as young as 27 are seeking out surgeons to avoid unwanted pregnancies. A study by PLAFAM, the biggest family planning clinic in the country, estimates that about 23 percent more Venezuelan women are being sterilized today as compared to four years ago, said the clinic’s director, Enrique Abache. “The financial crisis is one of the main causes for this,” he explained. Years of government mismanagement have fueled what is now a full-blown humanitarian crisis in a country where infant mortality has almost doubled in recent years. …mothers often spend whole days searching for milk powder or diapers. Those who can’t find them are simply forced to go without.

From a story in CapX:

How serious is Venezuela’s crisis? Bad enough that, in 2016, Venezuelans became the top US asylum-seekers… Venezuelan asylum claims increased by 150 per cent from 2015 to 2016. Though Venezuela does not publicly circulate emigration information, estimates suggest that between 700,000 and two million Venezuelans have emigrated since 1999. …Sometimes, from here, it can seem as though the entire population – fed up with shortages of medicine and food, with crime and with the political trajectory of the nation – wants to leave.

Some grim news from the Japan Times:

Julio Noguera…spends his evenings searching through the garbage for food. “I come here looking for food because if I didn’t, I’d starve to death,” Noguera said as he sorted through a pile of moldy potatoes. “With things like they are, no one helps anyone and no one gives away meals.” Across town, unemployed people converge every dusk at a trash heap on a downtown Caracas sidewalk to pick through rotten fruit and vegetables tossed out by nearby shops. They are frequently joined by small business owners, college students and pensioners — people who consider themselves middle class even though their living standards have long ago been pulverized by triple-digit inflation, food shortages and a collapsing currency. …Nearly half of Venezuelans say they can no longer afford to eat three meals a day, according to a recent poll.

The Wall Street Journal opines:

cities around the country…have been hit hard by police, national guard troops and the regime’s paramilitary forces as the dictatorship of Nicolás Maduro tries to contain a wildfire of rebellion. …The government is running out of money to buy imports, and since it has crippled domestic production, privation is growing more profound. …Roving bands of government-sponsored militias terrorize civil society as they have for more than a decade. …a 16-year-old girl politely informed Mr. Maduro that students in her school often faint from hunger. …Mr. Maduro was pelted with stones as he left a military rally in Bolívar state… Meanwhile, Mr. Maduro is doubling down on centralized control of a shrinking food supply. …Those who do not support the regime can be cut off.

The thuggery will worsen according to the Washington Free Beacon:

The socialist leader of Venezuela announced in a speech to regime loyalists his plan to arm hundreds of thousands of supporters after a years-long campaign to confiscate civilian-owned guns. …The Venezuelan government justified the gun bans and confiscations by saying they were needed to combat the country’s violent crime and murder epidemic. However, statistics reported by the nonprofit Venezuelan Violence Observatory show the murder rate in Venezuela increased from 73 murders per 100,000 inhabitants the year the gun ban was instituted to 91.8 murders per 100,000 inhabitants in 2016. …As protests and unrest increase in Venezuela, Maduro’s regime has created a landscape where civilians are disarmed but his supporters are not. The latest round of mass demonstrations in the streets of Caracas have already claimed five lives.

Even zoo animals are suffering, as reported by the Miami Herald:

An apparently malnourished African elephant in a Venezuelan zoo — her ribs showing through her sagging skin — has become the latest symbol the deep economic crisis in what was once one of Latin America’s most prosperous nations. …Ruperta is suffering from diarrhea and dehydration after zoo officials only had squash to feed her for several days. According to the newspaper, when neighbors tried to bring food to the elephant over the weekend, the donations were turned away by zoo officials… in a nation where a grinding economic crisis is forcing many to skip meals and go hungry, Ruperta’s fate has touched a nerve. …Román Camacho, a local reporter who broke the story, said a whistle-blower within the park service alerted him that Ruperta had grown so hungry that she collapsed last Thursday. …Also last year, a horse at a local zoo was reportedly butchered by hungry Venezuelans.

The New York Times has noticed:

Venezuela was once one of Latin America’s economic powerhouses… A growing number of Venezuelans are going hungry in a food shortage, and dying from treatable ailments in squalid, ill-equipped hospitals. …Until political prisoners are released, the prospects for a restoration of democratic rule are very dim. …Inflation has soared to an estimated 700 percent, while people in this oil-rich nation are left digging through piles of trash for scraps of food.

Productive people are escaping, Bloomberg reports:

For Venezuelan exiles with money, Madrid has become a home away from home. They are increasingly turning to the Spanish capital as a place to invest as their home country falls further into economic chaos and the political mood turns more sour in U.S. havens such as Miami. The number of Venezuelans arriving in Spain rose more than 50 percent in 2015, according to the Spanish statistics office.

The monetary system is also a disaster reports the New York Times:

President Nicolás Maduro of Venezuela made a baffling announcement…, saying that his government intended to yank the 100 bolívar note from circulation… Venezuelans, who have endured months of chronic food and medicine shortages, mobbed banks and A.T.M.s in a desperate attempt to offload their stacks of the highest denomination bill, which has become so devalued it is now worth roughly 3 cents in American dollars. …the Maduro government…has spent years…imposing arbitrary currency controls that have made a once prosperous economy one of the world’s most dysfunctional. …Venezuela was expelled from the regional trade bloc Mercosur in early December.

The outflow of people is staggering according to Fox:

Along with basic food, medicine and even toilet paper, Venezuela now lacks the materials to meet to the soaring demand for new passports – making it almost impossible for those few Venezuelans with the monetary means of escaping the troubled Latin American nation to do so. While estimates of how many passport requests the socialist government received last year vary from between 1.8 million to 3 million, only 300,000 of the elusive documents were doled out. Everyday, hundreds of people line up outside the passport agency, known as Saime, in the capital of Caracas in the hopes of obtaining one. It’s an ironic, and yet sad situation, for a country that used to be one of Latin America’s wealthiest and one that was used to seeing people flock to, not away from. …Adding to the overall misery are a drastic rise in violent crime – especially in the capital city of Caracas – rolling blackouts and widespread and often times bloody protests against the government. …since Chávez took power in 1999 nearly 2 million Venezuelans have fled the country and hundreds of thousands are marking their time until they obtains the funds and the passport that will allow them to leave.

Government insiders are getting rich, as noted by the New York Post:

Venezuela is no longer a country with a government, institutions and a civil society. It’s a geographic area terrorized by a criminal enterprise that pretends to govern, with a civil society made up of two sets of people: accomplices and victims. More than 30 million of the latter. …The Hugo Chavez-led looting spree began in 2000. …More than $1 trillion has disappeared… Loving parents are putting their children up for adoption because they have nothing to feed them; the elderly are starving; patients with treatable conditions are dying in hospitals that lack basic medicine like insulin and oxygen, where vital equipment has been pilfered and emergency rooms operate without electricity. …Meanwhile, those in power can focus on what they do best: looting the country’s natural-resource wealth and manufacturing and trafficking illegal narcotics. In fact, Maduro just upped his game by appointing Tareck el-Aissami, a drug kingpin, as vice president.

CNN shares some bad news:

Venezuela only has $10.5 billion in foreign reserves left, according to its most recent central bank data. For rest of the year, Venezuela owes roughly $7.2 billion in outstanding debt payments. In 2011, Venezuela had roughly $30 billion in reserves. In 2015, it had $20 billion. The trend can’t persist much longer, but it’s hard to know exactly when Venezuela will run completely out of cash. …The thinning reserves paint a scary financial picture as the country faces a humanitarian crisis sparked by an economic meltdown. Venezuelans are suffering massive food and medical shortages, as well as skyrocketing grocery prices. Massive government overspending, a crashing currency, mismanagement of the country’s infrastructure and corruption are all factors that have sparked extremely high inflation in Venezuela. Inflation is expected to rise 1,660% this year and 2,880% in 2018, according to the IMF.

A dour column from Real Clear World:

Socialist economic policies and government corruption have destroyed a once-thriving economy sitting on the world’s largest oil reserves. …Index of Economic Freedom…looks at the economic freedom of countries throughout the world. In that period of time, Venezuela’s score has declined the most out of any country, going from 59.8 to 27.0 (on a scale of 1-100). It is now in second-to-last place, right behind Cuba and better only than North Korea. …The World Health Organization estimates that there are shortages for 75 percent of necessary medications and medical supplies such as antibiotics, vaccines, and scalpels. Blackouts resulting from a crumbling energy infrastructure are a daily occurrence. The death of newborns has become a common phenomenon… All the while, Venezuelan government officials have been using oil revenues to line their own pockets.

The Washington Post opines on the disaster:

Venezuela, which was once Latin America’s richest country, has become an unwilling test site for how much economic and social stress a modern nation can tolerate before it descends into pure anarchy. …Venezuelans have struggled with mounting shortages of food, medicine and other consumer goods, as well as triple-digit inflation that has rendered the national currency, the bolivar, worthless. … President Nicolás Maduro, an economically illiterate former bus driver, …also closed Venezuela’s borders with Colombia and Brazil, on the theory that traders were hoarding currency in those countries. …the president is doing his best to blame the United States for the fiasco… Venezuelans no longer believe such nonsense. A survey released this month by pollster Alfredo Keller showed that only 1 percent said the United States was to blame for the country’s crisis, while 76 percent blamed Mr. Maduro and the regime founded by Hugo Chávez. …Only 19 percent said they still supported the regime.

Investor’s Business Daily piles on:

Want to lose weight fast? …Just move to Venezuela. There, the new Socialist Diet has caused the population to lose millions of pounds in 12 months. Unwillingly, of course. …A new study of Venezuela’s stunning decline under Hugo Chavez’s socialist model…reports that the average Venezuelan lost 19 pounds in the last year. Today, the 2016 Living Conditions Survey finds, 32.5% of Venezuelans eat only once or twice a day, up from 11.3% just one year ago. And 93.3% of all people don’t earn enough to buy sufficient food. …Bring socialism to your country, and you bring misery. It’s the one thing that socialism produces an abundance of. …formerly middle-class Venezuelans scavenge for food — some even stooping to dumpster diving and eating formerly beloved pets just to stay alive — socialists allied with Maduro have changed nothing. …rule of law has been rejected for the rule of one tyrant. Children aren’t spared; they’re dying by the hundreds from curable diseases, a lack of medicine, electricity outages and no incubators for newborns.

Some heartbreak from the New York Times:

Kevin Lara Lugo…died on his 16th birthday.He spent the day before foraging for food in an empty lot, because there was nothing to eat at home. Then in a hospital because what he found made him gravely ill.Hours later, he was dead on a gurney, which doctors rolled by his mother as she watched helplessly. She said the hospital had lacked the simplest supplies needed to save him on that day last July. … Inflation has driven office workers to abandon the cities and head to illegal pit mines in the jungle, willing to subject themselves to armed gangs and multiple bouts of malaria for the chance to earn a living. Doctors have prepared to operate on bloody tables because they did not have enough water to clean them. Psychiatric patients have had to be tied to chairs in mental hospitals because there was no medication left to treat their delusions. Hunger has driven some people to riot — and others into rickety fishing boats, fleeing Venezuela on reckless journeys by sea. But it was the story of a boy with no food, who had gone searching for wild roots to eat but ended up poisoning himself instead, that seemed to embody everything that had gone wrong in Venezuela.

Peak socialism, as reported by Foreign Policy:

A fleet of rundown Venezuelan oil tankers carrying some 4 million barrels of oil and other fuels is wallowing in the Caribbean Sea. Not because of bad weather, or mechanical problems, but because Venezuela’s state-owned oil company, Petróleos de Venezuela SA, doesn’t have the cash to get them to their final destinations. …it’s doubly bad news for Venezuela, a country in dire economic straits and full-fledged crisis, with a political impasse, looting, dangerous food and health supply shortages, and massive protests. Venezuela is massively reliant on oil exports to bankroll government services. But the cash-strapped country can’t even find the money to service the vessels that carry its exports. …Venezuela, once Latin America’s most powerful petrostate, is on the brink of collapse after decades of economic mismanagement.

More on insider corruption, exposed by the Washington Post:

Formerly a stable, sophisticated, middle-income country awash in oil wealth, Venezuela has experienced a dizzying downward spiral over the past two years. Today, Venezuela’s is arguably the world’s worst-run economy. Food shortages are pervasive, and food prices are rising fast — a deadly combination that has left millions unable to find enough to eat. …Why doesn’t the army rebel? …we have the genuinely shocking answer: Far from rebelling, Venezuela’s armed forces actively profit from their countrymen’s hunger.This year, President Nicolás Maduro granted the armed forces virtually unlimited authority over the nation’s food imports and distribution. Domestic food production is down sharply in the wake of a botched land reform program, meaning imports now account for most of the nation’s food. But putting the military in charge of this delicate domain has led to an explosion of corruption, as well-connected officers mercilessly prey on every part of the distribution chain, from the initial contracts and the foreign currency needed to fund them to storage, transportation and distribution. …A government that bills itself as radically pro-poor in fact drips with contempt for the poor.

More tragic sadness, this time from Reuters:

Struggling to feed herself and her seven children, Venezuelan mother Zulay Pulgar asked a neighbor in October to take over care of her six-year-old daughter, a victim of a pummeling economic crisis. …”It’s better that she has another family than go into prostitution, drugs or die of hunger,” the 43-year-old unemployed mother said… With average wages less than the equivalent of $50 a month at black market rates, three local councils and four national welfare groups all confirmed an increase in parents handing children over to the state, charities or friends and family. …the trend highlights Venezuela’s fraying social fabric and the heavy toll that a deep recession and soaring inflation are taking on the country with the world’s largest oil reserves. …most economists pin the responsibility on socialist policies introduced by former president Hugo Chavez, which his successor Nicolas Maduro has doubled down on… Two-thirds of 1,099 households with children in Caracas, ranging across social classes, said they were not eating enough in a survey released last week by children’s’ rights group… In some cases, parents are simply abandoning their kids. Last month, a baby boy was found inside a bag in a relatively wealthy area of Caracas and a malnourished one-year-old boy was found abandoned in a cardboard box in the eastern city of Ciudad Guayana, local media reported. …There are also more cases of children begging or prostituting themselves

Even Vox is aware of the problem:

…new data capturing the woes of the once well-heeled South American nation is shocking: According to new results from an annual national survey, nearly three-quarters of respondents reported losing an average of 19 pounds between 2015 and 2016. …Shortages of food, medicine, and many basic items abound in what was once the richest country in South America per capita in the 20th century. Malaria is ravaging a country that was the first in the world to eliminate the disease in its populated areas. Now there’s evidence that the economic chaos is translating into a malnutrition crisis… Alejandro Velasco, a scholar of Latin American history at New York University, believes Chávez’s model of socialism…”strangled the already meager productive apparatus of Venezuela,” he explained during an interview in January. …Chávez’s spending regime also left the country acutely vulnerable to emergency. Ricardo Hausmann, director of the Center for International Development at Harvard’s Kennedy School, notes…that Chávez’s government.. “over-spent and quintupled the public foreign debt.”

The Economist has given up on Venezuelan statism:

Every weekday morning, a queue of several dozen forlorn people forms outside the dingy headquarters of SAIME, Venezuela’s passport agency. As shortages and violence have made life in the country less bearable, more people are applying for passports so they can go somewhere else. …As desperation rises, so does the intransigence of Venezuela’s “Bolivarian” regime, whose policies have ruined the economy and sabotaged democracy. The economy shrank by 18.6% last year, according to an estimate by the central bank, leaked this month to Reuters… Inflation was 800%. …In 2001 Venezuela was the richest country in South America; it is now among the poorest.

Venezuela is even begging at the UN according to the Associated Press:

Venezuela’s President Nicolas Maduro has asked the United Nations for “help” boosting medicine supplies as he struggles to combat crippling shortages. …acknowledging that Venezuela needs outside help is a telling sign of how far the nation sitting atop the world’s largest petroleum reserves has fallen under Maduro. …Venezuelans…have been suffering from widespread shortages and triple-digit inflation… OAS Secretary General Luis Almagro is pushing to expel Maduro’s government from the group for breaking the country’s democratic order and violating human rights. Maduro’s government disavowed a landslide loss to the opposition in legislative elections in 2015, and then suspended a recall campaign seeking to force him from office before the 2018 election.

Bloomberg notes that an oil-rich nation even has shortages of gas:

…drivers lined up at filling stations amid a worsening shortage of fuel. While Petroleos de Venezuela SA says the situation is normalizing and blamed the lines on transport delays, the opposition says the company has had to reduce costly fuel imports as it tries to preserve cash to pay its foreign debt. …As the company’s crumbling refineries fail to meet domestic demand, imports have become a financial burden because the country buys fuel abroad at market prices only to sell it for pennies per gallon at home. … “It’s unbelievable that this is happening in an oil producing country.” …The hunt for gasoline is just the latest headache for consumers after years of severe economic contraction and triple-digit inflation have produced shortages of everything from bread to antibiotics.

The Miami Herald reports the government is making it even harder for hungry people to get fed:

Facing a bread shortage that is spawning massive lines and souring the national mood, the Venezuelan government is responding this week by detaining bakers and seizing establishments. In a press release, the National Superintendent for the Defense of Socioeconomic Rights said it had charged four people and temporarily seized two bakeries as the socialist administration accused bakers of being part of a broad “economic war” aimed at destabilizing the country. …The government said bakeries are only allowed to produce French bread and white loaves, or pan canilla, with government-imported flour. …The notion that bread could become an issue in Venezuela is one more indictment of an economic system gone bust. The country boasts the world’s largest oil reserves but it has to import just about everything else. …President Nicolás Maduro launched “Plan 700” against what he called a “bread war,” ordering officials to do spot checks of bakeries nationwide.

And there’s always more bad policy, as Reuters reports:

Venezuela’s socialist President Nicolas Maduro announced on Sunday a 50 percent hike in the minimum wage and pensions, the fifth increase over the last year… “In times of economic war and mafia attacks …we must protect employment and workers’ income,” added Maduro, who has now increased the minimum wage by a cumulative 322 percent since February 2016. …critics say his incompetence, and 17 years of failed socialist policies, are behind Venezuela’s economic mess. They say the constant minimum wage hikes symbolize Maduro’s policy failures… Venezuela’s inflation hit 181 percent in 2015, according to official data, though opponents say the true figure was higher. There is no official data for 2016, but…inflation was more than 500 percent in 2016, while the economy shrank 12 percent.

Which means, per the AP, more people want to leave:

Venezuelans for the first time led asylum requests to the United States as the country’s middle class fled the crashing, oil-dependent economy. Data from the U.S. government’s Citizenship and Immigration Services show that 18,155 Venezuelans submitted asylum requests last year, a 150 percent increase over 2015 and six times the level seen in 2014. …The vast majority leaving are middle-class Venezuelans who don’t qualify for refugee status reserved for those seeking to escape political persecution, according to Julio Henriquez, director of the Boston-based nonprofit Refugee Freedom Program, which has been drawing attention to the trend. “The pace at which requests are increasing is alarming,” said Henriquez, whose group obtained the still-unpublished data in a Feb. 8 meeting between U.S. officials and immigration lawyers.

And the government is engaged in more looting, MSN reports:

General Motors said it has been forced to stop operating in Venezuela on Wednesday after one of its plants was illegally seized by local authorities. The seizure, in the country’s industrial hub of Valencia, comes amid a deepening economic and political crisis that has sparked weeks of deadly street protests. …The auto giant did not provide any details about its plant being seized, other than saying it “was unexpectedly taken by authorities, preventing normal operations.” It said other assets, “such as vehicles,” had also been stripped from the site. …Venezuela’s car industry has been in freefall, hit by a lack of raw materials stemming from complex currency controls and stagnant local production, and many plants are barely producing at all. Venezuela’s government has taken over factories in the past. In 2014 the government announced the “temporary” takeover of two plants belonging to U.S. cleaning products maker Clorox Co.

Last but not least, here’s a column from the Week:

Venezuela cannot wake up from its socialist nightmare. …across the country, people are starving. Venezuela, a beautiful, oil-rich country, once one of the wealthiest nations in the Southern Hemisphere, is only sinking further into economic devastation and chaotic, corrupt authoritarianism. …Meanwhile, the economy keeps rotting. Venezuela has topped Bloomberg‘s Economic Misery Index, a benchmark whose title is self-explanatory, for three years running. The economy shrank by 18 percent last year, with unemployment at 25 percent, and inflation slated to be 750 percent this year and 2,000 percent the next…there are outbreaks of scabies, a disease easily prevented with basic hygienic practices; hospitals are running out of even basic drugs. Caracas is the murder capital of the world. Corruption has infected the country wholesale even as it has created a new class of kleptocratic oligarchs linked to the security services. …The whole of Venezuelan society is breaking down at a fundamental level. …It is truly heartbreaking. …And I blame socialism. …And now it’s Venezuelans, especially the poorest and more marginal among them, who are paying the price for this madness.

Let’s close with a video on the tragic situation in Venezuela.

I wonder if Bernie Sanders still thinks this is a system worth supporting?

OSHA Must Revisit Costly Expansion Of Maritime Construction Rule

Sat, 04/22/2017 - 2:46am

Originally published by The Daily Caller on April 11, 2017.

In the waning hours of the Obama administration, the Occupational Safety and Health Administration (OSHA) finalized a rule to dramatically lower the level of permissible exposure to beryllium in workplaces. This expensive regulation was expanded behind closed doors after its initial public proposal and lacks strong scientific support. It is set to take effect May 20, after President Trump directed agencies to delay for 60 days rules that had been published in the federal register but not yet taken effect. His administration should insist that OSHA reverse the last-minute expansion of the rule, and at the very least follow proper procedures if it wishes to expand it again.

OSHA says that lowering the allowed level of beryllium exposure from 2.0 micrograms per cubic meter of air to 0.2 micrograms over an eight-hour period will save over 90 lives per year. But it hasn’t provided evidence to sustain that number, nor the fanciful claim that the rule will somehow provide net savings of $560.8 million per year.

Given the way these agencies work, their estimation that the rule will cost $74 million per year to implement is almost certainly low. American business don’t need those added costs.

Nevertheless, the major problem with the rule is its last-minute expansion to cover not only those working with beryllium alloys, but also abrasive blasting in the construction and shipyard industries.

The materials used for abrasive blasting, like coal and copper slag—waste products from coal power plants or smelting and refining processes—would otherwise end up in landfills. Instead, it is recycled and put to use. It also contains only trace amounts of beryllium, as much as 22,000 times less than in some copper beryllium alloys, the original focus of the rule.

The already heavily regulated abrasive blasting industry, which directly employs over 400,000 workers, has never had a documented case of beryllium-related illness in either the manufacture or use of coal and copper slag abrasive materials. There are also likely to be unintended health consequences if the industry is effectively forced to substitute silica-based materials in order to avoid unaffordable burdens.

The added provisions in the regulation were never offered for public comment, thus limiting stakeholder input. Congressman Byrne (R-AL), Chairman of the Subcommittee on Workforce Protections, recently authored a letter chastising OSHA for this “impermissible overreach,” and called for an indefinite delay to the rule while the agency reopens the rule-making process and follows proper procedure for amending the scope of the original proposed rule.

If OSHA fails to take his advice and adhere to the rules put in place to ensure transparency and accountability in the regulatory process, then Congress has a remedy. The Congressional Review Act provides a mechanism for the reversal of agency ruling within 60 legislative days after a rule is submitted to Congress.

OSHA had the dubious distinction of being the originator of the only rule—requiring workplaces to create ergonomic programs—ever repealed using the Congressional Review Act prior to this year’s Congress, which has undone several costly Obama-era regulations already. If OSHA wishes to avoid seeing another of its rules preempted by Congress, it should respect the regulatory process and take out the 11th-hour expansion of the beryllium rule.

Who Will Prevail in Sunday’s French Presidential Contest and Earn the Right to Preside over the Nation’s Decline?

Fri, 04/21/2017 - 12:00pm

The last time there was a presidential election in France, I like to think my endorsement made a difference in the outcome.

Now that another election is about to take place, with a first round this Sunday and a runoff election between the top-2 candidates two weeks later, it’s time to once again pontificate about the political situation in France. But before looking at the major candidates, let’s consider a couple of pieces of economic data to get a sense of the enormous challenges that will have to be overcome to boost France’s anemic economy.

We’ll start with this measure of implicit pension debt (IPD) in various European nations. France, not surprisingly, has made commitments to spend money that greatly exceeds the private sector’s capacity to generate tax revenue.

By the way, the accompanying article notes that the numbers for France are even worse than suggested by the chart.

Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts. …According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. …And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017. …The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.

Here’s another sobering visual. France is doing a very good job of scaring off the geese that lay the golden eggs. It is losing more millionaires than any other country.

The combined message of these two visuals is that the already-enormous burden of spending in France will get worse, yet the country is chasing away the people who finance the lion’s share of the government’s budget.

And lots of young entrepreneurs also are escaping, which further exacerbates the nation’s long-run troubles.

Now that we’ve looked at where France is heading, let’s contemplate whether the politicians running for President will make the situation better or worse.

We’ll start with this helpful table summarizing the views of the major candidates (though the hard-left vote apparently has consolidated behind Mélenchon, so Hamon can be ignored).

What’s not captured in this table, however, is that the presidential race pits two outsiders (Mélenchon and Le Pen) against two establishment candidates (Macron and Fillon).

And this is leading to some interesting analysis. The establishment point of view is captured by Sebastian Mallaby’s column in the Washington Post. He is very opposed to Fillon, Le Pen, and Mélenchon, and also rather concerned that his preferred candidate – Emmanuel Macron – won’t make it to the runoff.

In the first round of its presidential election, to be held on Sunday, some three-quarters of the French electorate are expected to back candidates who stand variously for corruption, a 100 percent top tax rate, Islamophobia, Russophilia, Holocaust denial, the undermining of NATO and the traumatic breakup of Europe’s political and monetary union. France was once the cradle of the Western Enlightenment. Now it threatens to become a spectacle of decadent collapse.

I disagree with some of Mallaby’s analysis, but enjoyed his depiction of Mélenchon, who bizarrely thinks Venezuela is a role model.

Jean-Luc Mélenchon, the Communist-allied candidate who styles himself after Venezuela’s Hugo Chávez and promises a “citizens’ revolution.” No prizes for guessing that he’s the one who proposes a 100 percent top tax rate… Oblivious to the fact that France has taxed and regulated its way to a 25 percent youth unemployment rate and a government-debt trajectory that threatens Armageddon, he wants further cuts to the French workweek, an additional 10,000 civil servants and a shift in the retirement age from 62 to 60.

To put it in simple terms, Mélenchon is appealing to voters who think Hollandedidn’t go far enough.

CNN reports that Mélenchon is even more fixated on class warfare than Bernie Sanders.

Instead of a 90 percent top tax rate, he wants to steal every penny from the supposedly evil rich.

Jean-Luc Mélenchon, who has been endorsed by the French Communist Party, says he would introduce a 100% tax on income above €400,000 ($425,000). …France already has some of the world’s highest rates of income tax, and previous attempts to push them even higher have failed. …Around 10,000 millionaires left the country in 2015, followed by 12,000 last year, according to New World Wealth.

Though maybe he’s the French version of Obama, who also got support from communists.

And, like Obama, he thinks he should get to decide when someone has earned enough money.

“I believe that there is a limit to the accumulation [of wealth],” Mélenchon said in March. “If there are any who want to go abroad, well, goodbye!”

Though at least he has the courage of his convictions. He doesn’t mind if upper-income taxpayers leave. Though I wonder if he’s given any thought to who will then pay the bills?

Anyhow, the 100 percent tax is just one of many crazy ideas.

He also wants to limit pay for CEOs to 20 times the salary of their worst-paid employee. …Here’s a quick look at Mélenchon’s other economic policy proposals: Cut France’s working week to four days…More vacation days for workers…Raise minimum wage by 16%…Increase the tax on inherited wealth…100% renewable energy by 2050…No new free trade agreements…Nationalize French energy company EDF and gas provider Engie.

Now let’s shift to other candidates. I’m irked that Macron generally is portrayed as a centrist and even more irked that Le Pen is portrayed as being on the right.

Prince Michael of Liechtenstein is a very astute observer of European political and economic affairs and his analysis is more accurate. We’ll start with what he wrote about Le Pen’s support for statism.

Ms. Le Pen’s…socialist economic program will continue the ongoing destruction of the French economy, its competitiveness and public finances. …Such a scenario would, however, only accelerate a disaster that was already looming. The present government’s socialist policies, which have shied away from reform and preserved France’s oversized public sector, will eventually bear the same results.

To augment that analysis, Le Pen is considered on the right simply because of her anti-immigrant policy. But on economic policy, she is very much on the left.

Prince Michael also exposed Macron’s support for a more burdensome government.

Mr. Macron…claims that he will bring France’s budget deficit below the European benchmark of 3 percent. …The candidate’s plan…does not appear plausible in light of his intention to further increase government spending. Mr. Macron’s pronouncements indicate an adherence to the Keynesian economic policy approach at the EU level. According to him, Europe should end austerity and introduce a growth model in which additional spending – on top of the already lavish outlays planned by European Commission chief Jean-Claude Juncker – ought to be implemented. The Macron policies boil down to more state and more EU centralization. At the heart of the scheme is the creation of a European Ministry of Finance and Economy, an all-powerful body to plan and monitor the EU economy. …Macron intends to continue treating the French cancer with aspirin and transmit the disease to Germany and the rest of the EU, while demanding that they pay for France’s subsistence in the meantime.

In other words, Macron wants this cartoon to be official French policy. Yet some people actually think of him as a pro-market reformer. Wow.

Let’s conclude with these wise words from an editorial in today’s Wall Street Journal, which is very worried that the runoff may feature two pro-big government outsiders.

All four major candidates are polling at around 20%, but Mr. Mélenchon has momentum and the highest personal favorability. A Le Pen-Mélenchon finale would be a political shock to markets and perhaps to the future of the EU and eurozone. …Mr. Hollande’s Socialists have made France the sickest of Europe’s large economies, with growth of merely 1.1% in 2016, a jobless rate above 10% for most of the past five years, and youth unemployment at nearly 25%. His predecessor Nicolas Sarkozy and the Republicans talked a good reform game but never delivered. …the stage is set for candidates who appeal to nativism or a cost-free welfare state. Let’s hope a French majority steps back from the political brink.

By the way, it’s not yet time for me to make an official endorsement, though I’ll share my leanings.

I confess that I’m torn between Fillon and Mélenchon. By French standards, Fillon is apparently very pro-free market. So I should like him. He could be the Ronald Reagan or Margaret Thatcher of France.

But what if he turns out to be another Sarkozy, a big-government fraud?

If I support Mélenchon, by contrast, at least I can say with great confidence that I will be able to continue using France as an example of bad public policy. I realize that’s not an ideal outcome for the French people, but you know what they say about omelets and eggs.

In any event, I’ll wait until the runoff election before selecting a candidate.

 

Bureaucrat Pensions and America’s Brazilian Future

Thu, 04/20/2017 - 12:05pm

When I write about poorly designed entitlement programs, I will warn about America’s Greek future. Simply stated, we will suffer the same chaos and disarray now plaguing Greece if we don’t engage in serious reform.

Ideally sooner rather than later.

But when I write about state governments, perhaps it would be more appropriate to warn about a Brazilian future. That’s because many American states have made unaffordable and unfunded promises to give lavish benefits to retired bureaucrats, a topic that I’ve addressed on numerous occasions.

And why does that mean a Brazilian future? Because as Greece is already suffering the inevitable consequences of a bloated welfare state, Brazil is already suffering the inevitable consequences of a pension system that treats bureaucrats as a protected and cossetted class. Here are some excerpts from a sobering report in the Wall Street Journal.

Twenty years before Michel Temer became president of Brazil, he did something millions of his compatriots do, at great cost to the country’s coffers: He retired at age 55 and started collecting a generous pension. Delaying that moment until age 65 is at the center of Mr. Temer’s proposed economic overhaul. …making that happen is seen as a make-or-break test of whether the government can get its arms around mounting economic problems like rising debt, low investment and a stubborn recession now entering its third year. New pension rules are considered central to fixing an insolvent system.

It’s easy to understand why the system is bankrupt when you read the details.

…some retirees receive pensions before age 50 and surviving spouses can receive full pensions of the deceased while still drawing their own. The generosity of Brazil’s pension system is legendary—and, economists say, troubling as the country’s fertility rate plummets and life expectancy climbs. João Mansur, a long-time state legislator in Paraná state, served as interim governor there for 39 days in 1973, a stint that qualified him to retire with a $8,000 monthly pension. …Other former public workers who retire not only reap nearly the same income they got while on the job, but also see their checks get bumped up whenever those still working in the same job category get raises. …Retirement outlays will eat up 43% of the $422-billion national budget this year. …Demographics are playing against a generous system created in great part to bridge Brazil’s infamous social gap. Official statistics say there are 11 retirees for every 100 working-age Brazilians; that will rise to 44 per 100 by 2060.

Fixing this mess won’t be easy.

Brazil’s constitution must be amended to allow its pension system to be restructured… Mr. Temer has already been forced to make a series of major compromises, including exempting state and local government employees from the overhaul. …legislators have sought to further water down Mr. Temer’s proposals, by for instance maintaining the lower retirement ages for women and dragging out the transition from the old social-security regime to the new one.

In other words, Brazilian politicians are in the same position Greek politicians were in back in 2003. There’s a catastrophically bad fiscal forecast and the only issue is whether reforms will happen before a crisis actually begins. If you really want to be pessimistic, it’s even possible that Brazil has passed the tipping point of too much government dependency.

In any event, it appears that legislators prefer to kick the pension can down the road – even though that will make the problem harder to solve. Assuming they ever want to solve it.

Which is exactly what’s happening at the state level in America.

Consider these passages from a recent Bloomberg column.

Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007. Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs. …unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. …Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions. …many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used.

But this looming disaster will not hit all states equally.

Here’s a map from the Tax Foundation which shows a tiny handful of states actually have funded their pensions (in other words, they may provide extravagant benefits, but at least they’ve set aside enough money to finance them). Most states, though, have big shortfalls.

The lighter the color, the bigger the financing gap.

To get a sense of the states that have a very good economic outlook, look for a combination of zero income taxes and small unfunded liabilities.

South Dakota (best tax system and negative pension liability!) gets the top marks, followed by Tennessee and Florida. Honorable mention for the state of Washington.

And is anyone surprised that Illinois is tied for last place? Or that Connecticut and New Jersey are near the bottom? Kentucky’s awful position, by contrast, is somewhat unexpected.

P.S. Brazil’s government may kick the can down the road on pension reform, but at least they added a spending cap to their constitution.

Keeping Puerto Rico Honest

Wed, 04/19/2017 - 7:06pm

Originally published by The Washington Times on April 18, 2017.

Congress wisely declined to bail out Puerto Rico when its leaders turned to Washington with hat in hand for help with its $70 billion debt. Instead, they created an oversight board to compel the island commonwealth to solve its self-inflicted fiscal mess. Unfortunately, both the oversight board and the territory’s government have failed to adhere to congressional requirements and are not taking the bold steps necessary to spur economic growth and fix Puerto Rico’s finances.

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) was passed by Congress last year and aimed to restore fiscal responsibility to the commonwealth. In addition to creating the oversight board and tasking it with overseeing the island’s finances, the act provided a stay on litigation in order to give the government time to negotiate with bondholders. Crucially, it also mandated that any fiscal plan would “respect the lawful priorities or lawful liens, as may be applicable in the constitution, other laws, or agreements of a covered territory.”

Some debt restructuring is a necessary component of any realistic solution for Puerto Rico. How exactly that is accomplished makes a big difference, however. The island will eventually need access to bond markets again, which means excessive haircuts aren’t going to work. Nor can it play favorites and advantage certain debt-holders over others or ignore the legally established priorities. There won’t be many willing to lend to Puerto Rico in the future if rules are ignored.

Unfortunately, the government and the oversight board have not attempted to work with debt-holders in good faith. Instead, they’ve put forward a plan that ignores PROMESA’s requirement of respect for lawful priorities by advantaging certain interests over the general obligation debt that is guaranteed by the island’s constitution. The plan also only provides $800 million in debt service per year while keeping nearly 94 percent of revenue for other expenditures. There is virtually no fiscal reform — in fact, the budget plan calls for significant increases in payroll and operational expenses over the next decade — and no significant changes to the island’s pension system with its whopping $48 billion debt.

The plan does not represent the serious reforms that PROMESA was designed to bring about.

To make matters worse, the plan proposes a side deal to creditors of the Puerto Rico Electric Power Authority (PREPA), that would limit its bondholders to a 15 percent haircut while other debt-holders are likely to face haircuts of 77 percent under the current plan. A recent agreement reached between PREPA and its creditors imposing the 15 percent haircut and a new charge on consumers should likewise be rejected by the oversight board.

It would send a bad signal to credit markets if the commonwealth is able to renege on its constitutional pledge to prioritize general obligation bondholders. It shouldn’t be too much to ask that negotiations proceed fairly with all of the different creditor groups. They also must look at real spending reform and not try to balance on the backs of creditors alone.

Unfortunately, the government has sought to game the system by defining the vast majority of its budget as “essential services.” When it likely later invokes Title III of PROMESA, a court-supervised debt restructuring mechanism intended to be used only after negotiations with creditors fail to reach a satisfactory agreement, this designation will allow most spending to remain intact and unfairly put the bulk of the cuts on creditors. It would be bankruptcy by another name that Congress specifically sought to avoid.

And despite not attempting to negotiate with creditors, Puerto Rico has asked for the stay on litigation to be extended past its May 1 expiration. It’s not that costly litigation is desirable, of course, but an extension would only encourage the continued disregard of PROMESA’s requirements. Instead, Puerto Rico should be pressured to bring all bondholders to the table and negotiate honestly, and to make hard choices about spending cuts.

Ultimately, what the commonwealth needs is economic growth. With a stronger economy there will be more for everyone, and with common-sense fiscal restraint, the island will have a chance to grow out of its debt. There are actions Congress can and should take to make that growth more likely, but in the meantime, it must insist that the commonwealth’s government and the oversight board follow the requirements of PROMESA and respect the rule of law. Puerto Rico can’t afford to savage creditors to the point that investors lose confidence and jeopardize its ability to borrow, hopefully at more reasonable levels, in the future.

Republicans Can’t Be Trusted with Tax Reform

Wed, 04/19/2017 - 12:38pm

Fundamental tax reform such as a flat tax should accomplish three big goals.

The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.

The bad news is that they nonetheless can’t be trusted with tax reform.

Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.

Here’s the problem.  Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.

And some of them are even talking about very bad ideas, such as a value-added tax or carbon tax.

This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.

Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.

The Hill is reporting that the Trump Administration is still undecided on the BAT.

The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.

While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.

And that’s apparently under discussion.

The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.

The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.

The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.

I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.

Why? Because it’s quite likely politicians will replace it with a tax that is even worse.

This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.

Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.

…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.

The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.

Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.

From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.

With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.

And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.

P.S. In an ideal world, tax reform would be financed in large part with spending restraint. Sadly, Washington, DC, isn’t in the same galaxy as that ideal world.

P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.

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