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A Secret Glimpse at Life Inside a Bureaucracy

Mon, 01/09/2017 - 3:56pm

More than two years ago, I shared a couple of humorous images showing the languorous lifestyle of lazy bureaucrats.

While those images were amusing, they didn’t really capture the true nature of bureaucracy.

For a more accurate look at life inside Leviathan, here’s a video showing an unfortunate woman trying to get a permit from a government agency.

It should probably be accompanied by a trigger warning lest it cause flashbacks for readers who have been in the same situation.

Very well done, I think you’ll agree. I especially like the subtle features of the video, such as the bureaucrat’s competitive desire to show his coworker that he won’t let a mere citizen prevail. And the part at the end showing the disappointment by all the bureaucrats also was a good touch.

Sadly, the story in the video isn’t just satire.

First, there are many absurd rules that require people to get permission from bureaucrats in order to work. All those laws and rules should be repealed. If consumers value certification and training, that can be handled by the private sector.

Second, it does seem as if bureaucrats relish the opportunity to torment taxpayers. I recall having to make four trips to the DMV when helping my oldest kid get his learner’s permit. Each time, I was told an additional bit of paperwork that was required, but at no point was I told all the forms and paperwork needed. Hence I had the pleasure of waiting in lines over and over again.

Though I did learn as time passed. By the time my last kid needed his permit, it only took two trips.

Since we’re on the topic of bureaucrat humor, regular readers know about the Bureaucrat Hall of Fame. Well, just as the Baseball Hall of Fame has a committee that looks back in time to find players who were overlooked and deserve membership, we need something to recognize deserving bureaucrats who somehow escaped my attention.

And if we travel back in time to 2013, John Beale of the Environmental Protection Agency clearly can make a strong case that he belongs in the Hall of Fame.

The EPA’s highest-paid employee and a leading expert on climate change was sentenced to 32 months in federal prison Wednesday for lying to his bosses and saying he was a CIA spy working in Pakistan so he could avoid doing his real job. …Beale told the court…that he got a “rush” and a “sense of excitement” by telling people he was worked for the CIA. …He perpetrated his fraud largely by failing to show up at the EPA for months at a time, including one 18-month stretch starting in June 2011 when he did “absolutely no work,” as his lawyer acknowledged in a sentencing memo filed last week.

Though, in his defense, he wasn’t goofing off all the time.

He also spent time trying to learn about new ways to hinder the private sector.

…he used the time “trying to find ways to fine tune the capitalist system” to discourage companies from damaging the environment. “I spent a lot of time reading on that,” said Beale.

For what it’s worth, he probably spent most of his time figuring out how to bilk colleagues.

Nor was that Beale’s only deception, according to court documents. In 2008, Beale didn’t show up at the EPA for six months, telling his boss that he was part of a special multi-agency election-year project relating to “candidate security.” He billed the government $57,000 for five trips to California that were made purely “for personal reasons,” his lawyer acknowledged. (His parents lived there.) He also claimed to be suffering from malaria that he got while serving in Vietnam. According to his lawyer’s filing, he didn’t have malaria and never served in Vietnam. He told the story to EPA officials so he could get special handicap parking at a garage near EPA headquarters. …Beale took 33 airplane trips between 2003 and 2011, costing the government $266,190. On 70 percent of those, he traveled first class and stayed at high end hotels, charging more than twice the government’s allowed per diem limit. But his expense vouchers were routinely approved by another EPA official

Not surprisingly, the EPA took years to figure out something was amiss.

After all, why care about malfeasance when you’re spending other people’s money?

Beale was caught when he “retired” very publicly but kept drawing his large salary for another year and a half.

Heck, I’m surprised the EPA’s leadership didn’t award themselves bonuses for incompetence, like their counterparts at the VA and IRS.

P.S. Here’s a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

CF&P Letter Calls on Congress to Include OECD with UN Defunding Effort

Mon, 01/09/2017 - 6:30am

Center for Freedom and Prosperity

For Immediate Release
Monday, January 9, 2017
202-285-0244

www.freedomandprosperity.org

CF&P Letter Calls on Congress to
Include OECD with UN Defunding Effort

(Washington, D.C., Monday, January 9, 2017) The Center for Freedom and Prosperity (CF&P) today released an open letter to members of Congress calling for the inclusion of the Organization for Economic Cooperation and Development (OECD) in discussions regarding the funding of international organizations.

Link to the letter:
http://freedomandprosperity.org/files/OECD/OECD_defunding_letter_01-2017.pdf

Citing the organization’s steady drift away from its core mission, the letter from CF&P President Andrew Quinlan makes the case that OECD funding no longer serves the interests of American taxpayers. Full text of the letter:

January 9, 2017

Dear Senators and Representatives:

Congress is considering a much-needed look at the use of American taxpayer funds to support international organizations that repeatedly work against the interests of the United States and the taxpaying public. While that effort is currently focused primarily on the United Nations, it should be expanded to also cover the Organization for Economic Cooperation and Development (OECD).

The OECD was founded to serve as a tool for lowering trade barriers and other obstacles to the free market erected by governments. Thanks to decades of mission creep, however, the OECD today often works against those original goals and the best interests of the United States. It aims instead to advance the interests of finance ministers and tax collectors from European welfare states whatever the cost to the global economy. For instance, the OECD has long fought to limit tax competition, with the most recent example being the massive BEPS tax grab widely understood to be aimed at U.S.-headquartered multinationals.

To make matters worse, the organization has become increasingly politicized. Not only did several top officials weigh in on the U.S. presidential campaign with critical comments toward then-candidate Donald Trump, but the organization has for years recommended policies in the U.S. designed to grow government and advance the agenda of the left. These include encouraging adoption of a VAT and other tax increases, supporting big government-style healthcare, endorsing Keynesian-style “stimulus” spending binges, and advocating for cap-and-trade regulations, among other positions.

For these reasons, a broad coalition of free market and taxpayer protection organizations has in the past called on Congress to cut off OECD funding. Congress should make clear that it is wrong to ask American taxpayers to subsidize any organization whose work is fundamentally partisan and counter to the interests of the American public, and should expand its current inquiry to include taxpayer subsidies to the OECD.

Sincerely,

Andrew F. Quinlan
President, Center for Freedom and Prosperity

Attached to the letter

“OECD Subsides are Against U.S. Interests,” Libertas Study, CF&P.
http://freedomandprosperity.org/files/Libertas/OECD%20Libertas%202012-02.pdf

Coalition for Tax Competition Letter On Defunding OECD, May 12, 2016. http://www.freedomandprosperity.org/files/OECD/ctc-OECDFundingBEPS-2016-05-12.pdf

The Center for Freedom & Prosperity is a Washington, DC-based think-tank dedicated to the promotion of tax competition, financial privacy, and fiscal sovereignty. Since its founding in 2000, CF&P has led the opposition to the OECD’s ongoing war against tax competition, from its “Harmful Tax Competition” paper, the blacklists and bullying of low-tax jurisdictions, its efforts to eliminate financial privacy, and now its BEPS tax-grab against U.S. businesses.

For additional comments:
Andrew Quinlan can be reached at 202-285-0244, [email protected]
Brian Garst, Dir. of Policy and Communications, can be reached at [email protected]

###

Letter to Congress on Including OECD While Considering UN Defunding

Mon, 01/09/2017 - 1:43am

[PDF Version]

January 9, 2017

Dear Senators and Representatives:

Congress is considering a much needed look at the use of American taxpayer funds to support international organizations that repeatedly work against the interests of the United States and the taxpaying public. While that effort is currently focused primarily on the United Nations, it should be expanded to also cover the Organization for Economic Cooperation and Development (OECD).

The OECD was founded to serve as a tool for lowering trade barriers and other obstacles to the free market erected by governments. Thanks to decades of mission creep, however, the OECD today often works against those original goals and the best interests of the United States. It aims instead to advance the interests of finance ministers and tax collectors from European welfare states whatever the cost to the global economy. For instance, the OECD has long fought to limit tax competition, with the most recent example being the massive BEPS tax grab widely understood to be aimed at U.S.-headquartered multinationals.

To make matters worse, the organization has become increasingly politicized. Not only did several top officials weigh in on the U.S. presidential campaign with critical comments toward then-candidate Donald Trump, but the organization has for years recommended policies in the U.S. designed to grow government and advance the agenda of the left. These include encouraging adoption of a VAT and other tax increases, supporting big government-style healthcare, endorsing Keynesian-style “stimulus” spending binges, and advocating for cap-and-trade regulations, among other positions.

For these reasons, a broad coalition of free market and taxpayer protection organizations has in the past called on Congress to cut off OECD funding. Congress should make clear that it is wrong to ask American taxpayers to subsidize any organization whose work is fundamentally partisan and counter to the interests of the American public, and should expand its current inquiry to include taxpayer subsidies to the OECD.

Sincerely,

Andrew F. Quinlan
President
Center for Freedom and Prosperity

Another Welfare-Subsidized Terrorist

Sun, 01/08/2017 - 12:05pm

Whenever mass shootings occur, some people quickly jump to conclusions before there’s any evidence.

Folks on the right are occasionally guilty of immediately assuming Islamic terrorism, which is somewhat understandable. Folks on the left, meanwhile, are sometimes guilty of instinctively assuming Tea Party-inspired violence (I’m not joking).

I confess that I’m prone to do something similar. Whenever there is a terrorist attack, I automatically wonder if we’ll find out welfare payments and other goodies from the government helped subsidize the evil actions.

In my defense, there’s a reason I think this way. Whether we’re talking about Jihadi John or the Tsarnaev brothers, there are lots of examples of dirtbag terrorists getting handouts from taxpayers.

It happens a lot in other nations. And it’s now happening with disturbing frequency in the United States.

It’s even gotten to the point where I’ve created a special terror wing in the Moocher Hall of Fame. And, as more evidence accumulates, the medieval savage who drove a truck through a Christmas market in Germany may be eligible for membership.

Here’s some of what we know, as reported by the Daily Caller.

Berlin truck attack terrorist Anis Amri used several different identities to claim multiple welfare checks simultaneously in different cities around Germany. Amri, the Tunisian refugee who killed 12 and injured 48 at a Christmas market in Berlin Dec. 19… The investigation was closed in November because Amri’s whereabouts were unknown. …Welfare is a common way for terrorists to fund their activities in Europe.

The U.K.-based Express reveals that the terrorist was very proficient at ripping off taxpayers before deciding to kill them.

Despite being shot dead in Italy just days after the attack, the Tunisian refugee is now under investigation for fraud after conning German authorities into handing over cash to fund his terror exploits. After travelling from Tunisia to Europe in 2011, he used up to eight different aliases and several different nationalities – at times even claiming to be from Egypt or Lebanon. Reports claim Amri carried several different false identity documents and used aliases to collect welfare in cities across Germany.

The story also has details on how welfare payments subsidized previous terrorist actions.

Welfare fraud was key to funding terror attacks in Brussels in March and in Paris last year. Terrorists collected around £45,000 in benefits which they used to pay for the brutal attacks in the major European cities. …Meanwhile, Danish authorities came under fire recently after it emerged 36 Islamic State fighters continued to receive benefits for months after leaving the country to join other members of the brutal regime in Syria and Iraq.

And while I’m not sure RT is a legitimate news source, it says Amri used 14 identities for mooching.

Anis Amri, the Tunisian man accused of driving a truck into a crowd of Christmas market shoppers in Berlin, used at least 14 different identities, a German police chief said. …Among other things, this allowed the man to receive social benefits under different names in different municipalities, the police chief said.

A close associate (and suspected co-conspirator) of Amri also was mooching off the system according to news reports.

A spokeswoman for the office of Germany’s chief prosecutor on Wednesday said authorities have taken a second Tunisian suspect into custody following raids in Berlin on Tuesday. …However, she added that there was insufficient evidence to charge the suspect. In a separate statement, the federal prosecutor’s office announced the man had been charged with committing social welfare fraud and would remain in custody. …the suspect had previously been detained on suspicion of supplying explosives intended for a prospective attack in Dusseldorf. …The 26-year-old suspect allegedly had dinner with Amri at a restaurant the night before the attack, according to Köhler. The suspect allegedly met Amri in late 2015. “Süddeutsche Zeitung” reported that the two men traveled together from Italy to Germany that year.

Gee, sounds like a model citizen. Merkel must be proud of her caring and sharing welfare state.

Last but not least, a story in the U.K.-based Telegraph has some added details on the sordid history of welfare-funded terrorism in Europe.

The jihadists suspected of carrying out the bomb and gun attacks in Paris and Brussels used British benefits payments to fund international terrorism, a court has heard. …Zakaria Bouffassil, 26, from Birmingham is accused of handing over the cash which had been withdrawn from the bank account of Anouar Haddouchi, a Belgian national, who had been claiming benefits while living in the West Midlands with his wife. Kingston Crown Court heard how thousands of pounds of taxpayers’ money continued to be paid into Haddouchi’s bank account, even after he had left Britain for Syria and had begun fighting for Islamic State in Iraq and Levant (Isil). …On the opening day of their trial, jurors heard how some of the most notorious and wanted terrorists in Europe had used British taxpayers’ money to fund their activities in Syria and elsewhere.

Though I suppose I shouldn’t say “sordid history.” This is more like societal suicide.

After all, we’re not talking about welfare payments for a tiny fraction of terrorists. It really is a theme.

I linked to some examples above, and if you want more evidence, click here, here, here, here, and here.

By the way, I’m not claiming that welfare causes terrorism. Though I do wonder if Mickey Kaus has a point when he does make that link.

…extreme anti-social terrorist ideologies (radical Islam, in particular) seem to breed in “oppositional” cultures supported by various government welfare benefits. …The social logic is simple: Ethnic differences make it easy for those outside of, for example, French Arab neighborhoods to discriminate against those inside, and easy for those inside to resent the mainstream culture around them. Meanwhile, relatively generous welfare benefits enable those in the ethnic ghetto to stay there, stay unemployed, and seethe. Without government subsidies, they would have to overcome the prejudice against them and integrate into the mainstream working culture. Work, in this sense, is anti-terrorist medicine.

I don’t particularly like government-provided welfare of any kind, but I definitely think there should be strict rules against handouts for immigrants. And if that makes them less susceptible to terrorist ideologies, that’s a big fringe benefit.

P.S. It goes without saying that politicians aren’t trying to subsidize terrorism. It’s just a byproduct of bad policy. They do, however, explicitly and deliberately subsidize terrorism insurance for big companies. A rather unique example of corporate welfare.

Donald Trump’s Very Good and Very Bad Business Policy

Sat, 01/07/2017 - 4:04pm

For the next four years, I suspect I’m going to suffer a lot of whiplash as I yank myself back and forth, acting as both a critic and supporter of Donald Trump’s policy.

This happened a lot during the campaign, as Trump would say very good things one day and then say very bad things the next day.

And now that he’s President-Elect Trump, that pattern is continuing. Consider his approach to American businesses. In the space of just a few minutes, he manages to be a Reaganesque tax cutter and an Obamaesque cronyist.

I discussed this bizarre mix in a recent interview with Dana Loesch.

I guess the only way to make sense of Trump’s policy is that it’s a random collection of carrots and sticks. The carrots are policies to encourage companies to create jobs in America, and Trump is proposing both good carrots such as a much lower corporate tax rate and bad carrots such as special Solyndra-style handouts (except, instead of loot for green energy, firms get loot for maintaining production in America).

And the sticks are all bad, ranging for public shaming to explicit protectionism.

As I said during the interview, Trump is probably scoring political points, but what we should really care about is whether policy is moving in the right direction.

The Wall Street Journal is rather skeptical, opining that Republican-backed cronyism will be just as bad as Democrat-backed cronyism.

A giant flaw in President Obama’s economic policy has been the politicized allocation of capital, from green energy to housing. Donald Trump suffers from a similar industrial-policy temptation, as we’ve seen…with his arm-twisting of Carrier to change its decision to move a plant to Mexico from Indiana. …A mercantilist Trump trade policy that jeopardized those exports would throw far more Americans out of work than the relatively low-paying jobs he’s preserved for now in Indianapolis. Mr. Trump’s Carrier squeeze might even cost more U.S. jobs if it makes CEOs more reluctant to build plants in the U.S. because it would be politically difficult to close them. Mr. Trump has now muscled his way into at least two corporate decisions about where and how to do business. But who would you rather have making a decision about where to make furnaces or cars? A company whose profitability depends on making good decisions, or a branding executive turned politician who wants to claim political credit? The larger point is that America won’t become more prosperous by forcing companies to make noneconomic investments.

Here’s some of what Tyler Cowen wrote about Trump’s approach.

One of Donald Trump’s most consistent campaign promises has been to prevent U.S. businesses from moving good jobs to Mexico… Economists might regard this as a misguided form of protectionism, but in fact, it’s worse than that: If instituted, it could prove a major step toward imposing capital controls on the American economy and politicizing many business decisions. …Using the law to forbid factory closures would have serious negative consequences. For one thing, those factories may be losing money and end up going bankrupt. For another, stopping the closure of old plants would lock the U.S. into earlier technologies and modes of production, limiting progress and economic advancement. An alternative policy would prohibit companies from cutting American production and expanding in Mexico… The end result would be that Asian, European and Mexican investors would gain at the expense of U.S. companies. …Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors — Mexico — suddenly would be hobbled.

Those are all very practical and sensible arguments against protectionism.

But Tyler points out that Trump’s agenda could lead to something even worse.

…a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be. …It also could bring the kind of crony capitalist nightmare scenarios described by Ayn Rand in her novel “Atlas Shrugged,” a book many Republican legislators would be well advised to now read or reread.

Tyler’s best-case scenario is that Trump doesn’t try to change policy and instead just uses the bully pulpit to…well, be a bully.

…public jawboning  also would be an unfortunate form of politicizing the economy, but at least there wouldn’t be new laws or regulations to back it up in a systematic way.

Though I’ll close by noting that this best-case scenario is still a very bad case.

The mere fact that politicians think they have the right to interfere with the internal decisions of companies is a dangerous development.

It’s cronyism on steroids.

And even if Trump somehow restrains himself (how likely is that?!?), sooner or later that bad mentality will lead to bad policy.

Yes, I’m making a slippery-slope argument. But not just because I’m a libertarian who is paranoid about government power.

My fear is based on lots of real-world evidence. It turns out that slippery slopes are very slippery.

The bottom line is that politicians don’t even do a good job of running the government. Let’s not allow them to run private companies as well. And that’s true whether they have an R after their names or a D after their names.

The Negative Macroeconomic Impact of Overpaid Bureaucrats

Fri, 01/06/2017 - 12:13pm

Last year, I shared some remarkable research from the Organization for Economic Cooperation and Development about the negative relationship between government spending and economic performance.

The economists at the Paris-based bureaucracy looked at data from its member nations (primarily Europe, North America, and the Pacific Rim), discovered that the countries with bigger government experienced less growth, and concluded that there would be much more prosperity if those nations merely reduced government modestly.

So you can imagine what sort of numbers that study would have generated if a few jurisdictions with genuinely modest-sized government, such as Hong Kong and Singapore, were part of the data.

But that’s a separate issue. Today’s topic is about a study from another international bureaucracy. The European Central Bank has new research looking at the impact specifically of excessive pay for government bureaucrats. Here are the key findings from the nontechnical summary at the beginning of the paper.

…there are benefits from government wage bill reform that go beyond the objective of fiscal consolidation. …a rationalisation of government wages and employment policies can generate favourable labour market effects in the medium to longer term through competitiveness and efficiency gains. Competitiveness gains materialise through the spillovers effects of public wage moderation on the determination of private sector wages. …An important aspect of the debate on public wage bill restraint concerns how long such policies can be sustained over time. …Additional margins of short-term adjustment include the moderation of still high public-to-private wages gaps, or a possible continuation of the downsizing trend in public employment, depending on the country-specific situation. …Finally, the paper argues that reforms affecting public sector personnel are most effective and have more sustained effects when the measures implemented are of a structural nature… Some examples are…measures to streamline the size and scope of government.

Wow, an international bureaucracy writing about the economic benefits that accrue if policy makers “streamline the size and scope of government.” Be still, my beating heart!

If you’re a policy wonk, you’ll like the fact that the study is filled with lots of interesting data and charts.

…aggregate data show that the euro area government wage differential with respect to the private sector increased from 20% in 2007 to 25% in 2009, and subsequently fell to 23% in 2014.

Here’s the relevant chart. The blue line, which links to the left axis, shows the degree to which bureaucrats are overpaid compared to the private sector. For the past 10 years, the “pay premium” has been in the 20 percent-25 percent range.

This problem of excessive pay for the bureaucracy has been a growing problem.

…general government compensation of employees grew faster than nominal GDP over the whole 2007-2014 crisis period

Though once the “austerity” era began about 2010, there was a bit of reform to bureaucrat compensation (in Europe, “fiscal consolidation” mostly meant higher taxes, but some spending restraint), particularly in nations that were forced to make changes because investors were becoming increasingly reluctant to lend them more money..

Here’s a chart showing bureaucrat pay as a share of GDP, with the blue bar showing the amount of economic output consumed by government workers in 2010 and the yellow dots showing the level in 2014. Some countries increased the relative burden of bureaucrat compensation and others reduced it, but what strikes me as noteworthy is that Germany and the Czech Republic deserve praise for keeping the burden low (honorable mention for Luxembourg and Slovakia) while Denmark stands out for being absurdly extravagant.

For a longer-term perspective, at least with regards to the size of the bureaucracy, here’s a table showing the share of the population getting a paycheck from government. Fascinating data. I especially like the columns on the right, which show that Ireland, the Netherlands, and the United Kingdom deserve credit for reducing over time the amount of bureaucrats relative to the private sector. The nations that have moved farthest in the wrong direction, by contrast, are Greece (gee, what a surprise), Spain, Portugal, and Finland.

Now let’s get to the meat of the study, which looks at the economic impact of less bureaucracy.

The authors cite some of the existing academic research, much of which focuses on the degree to which excessive pay for the public sector causes economy-wide distortions that make nations less competitive and result in slower growth. Basically, excessive pay for bureaucrats forces private employers to increase pay as well, but in ways that aren’t sustainable based on underlying levels of productivity.

A seminal work Alesina et al. (2002) found that reducing public wage expenditure generates reductions in private wages per employee, which improves competitiveness, increasing profits, investment, and economic growth. …A key argument is that public wage restraint may set in motion a labour market adjustment through the inter-linkages with private wages. …The literature has found robust evidence of significant interrelations between public and private sector wages per employee. A wealth of recent empirical papers provides evidence of a direct causal relationship between these variables. …The empirical literature tends to find that public employment crowds-out private sector employment.

But when fiscal pressures force politicians to cut back on the excessive pay for government employees, this enables the private sector to have pay levels that are consistent with sustainable long-run growth.

The authors share some of their new findings.

…the recent consolidation period has contributed to some competitiveness gains in the euro area, in view of the evidence provided on the partial correction of the public-private wage premium. …Overall, the restraint in public wages directly reduced unit labour cost (ULC) growth in the euro area during the 2010-2014 period. …The existence of distortions in public-private wage gaps…can be particularly harmful for competitiveness given that public sector activities are concentrated in non-tradable sectors, which are less exposed to international competition. …There is evidence that the recent public wage restraint has driven the partial correction of the existing positive public-private wage premium in the euro area.

The authors close by discussing some policy implications.

Well-designed government wages and employment policies and reforms may generate overall economy competitiveness gains and increase the efficiency of the labour market. …public employment adjustments can affect GDP and total economy employment positively if there are large inefficiencies in the government sector… In addition, if a public pay gap exists, the latter positive effect of public wage restraint becomes amplified as labour market inefficiencies are also reduced.

This is helpful research. It’s not often that a government bureaucracy releases a study showing that overpaid bureaucrats hinder overall economic performance.

Though I hasten to add that the study only looked at the macroeconomic effect of excessive pay. As I argue near the end of this video I narrated for the Center for Freedom and Prosperity, the additional problem is that various bureaucracies are engaging in activities that are economically harmful. In the case of the United States, the Department of Agriculture, Department of Education, and Department of Housing and Urban Development would be just a few examples of agencies where programmatic spending surely is more damaging that bureaucrat compensation.

The good news is that the ECB study also recognizes the need for structural reform. That’s why there was a reference to the need to “streamline the size and scope of government.”

The bad news is that politicians don’t care about this consensus.

Trump Should Reject Schumer’s Tax Hiking Olive Branch On Carried Interest

Thu, 01/05/2017 - 12:22pm

This article originally appeared on The Daily Caller on January 4, 2017.

Liberal New Yorker and new Senate Minority Leader Chuck Schumer wants to work with President-elect Trump on certain issues, according to a recent speech. The two go way back, which is cause for concern. One of the issues he singled out as potential common ground is “closing” the so-called “carried interest loophole.”

At the heart of the question over how to tax carried interest—the share of profit from an investment that goes to a fund or investment manager—is a long-running debate between the left and the right over how to treat capital earnings in general.

Economists on the right understand that taxes on capital gains are a form of double taxation because the size of the return has already been reduced by corporate income taxes. The same is true for dividend payments. That’s why the correct tax rate for both is zero.

Moreover, double taxing capital has a very negative impact on the economy because capital is the fuel of a free market system. Savings and investments represent deferred consumption, as they are what we set aside today so that we may produce and consume more tomorrow. Because it compounds over time, small differences in growth eventually lead to huge differences in the standard of living.

The left doesn’t see it that way. They frame it as a simple question of fairness, arguing that capital income should be treated the same as labor income. What they ignore is the unseen reduction in capital income that has already occurred due to corporate taxes, the fact that investments represent a risk as they are not guaranteed a return at all, and that such risk-taking needs to be encouraged to grow the economy.

So where does carried interest come into all this?

Often times investments are undertaken through partnerships, where one partner brings the money to the table while the other brings the knowledge or expertise needed to put it to productive use. A portion of the capital gain is paid to the knowledgeable party—the manager of the fund—rewarding them based on the size of the return. This is known as the carried interest.

Both the investor and the manager are paid out of the same investment return. They are also both risking that there will not be a return at all. It thus makes sense, and helps reduce double taxation, that they both be taxed at the same rate—the capital gains rate. But the left calls this a “loophole” and insists carried interest be taxed as if it is labor income. Not only would this exacerbate double taxation, but it would also serve as the camel’s nose under the tent, providing a means for the left to eventually expand the destructive taxation of all capital in hopes of securing more “revenue” for pet spending projects.

That’s why a tax-and-spend liberal like Chuck Schumer is eager to work with a President Trump on the matter. And the obscurity of the issue, along with the ease with which it can be demagogued, makes that prospect frighteningly more likely.

The populist surge that delivered Donald Trump to the White House was fueled by anger at cronyism and special treatment for elites, but also many Americans’ despair over their economic prospects. That is why the President-elect must remember that capital is the lifeblood of the economy. Punishing those who direct investments to where they can provide the most economic value by double taxing earnings might provide a rhetorical populist victory, but it would be a loss for the economy as a whole and thus undermine his efforts to expand economic opportunities for those who need them most.

A New Year’s Message for Interventionists: Workers Do Best in Unregulated Labor Markets

Thu, 01/05/2017 - 12:03pm

It’s time to channel the wisdom of Frederic Bastiat.

There are many well-meaning people who understandably want to help workers by protecting them from bad outcomes such as pay reductions, layoffs, and discrimination.

My normal response is to remind them that the best thing for workers is a vibrant and growing economy. That’s the kind of environment that produces tight labor markets and more investment, both of which then lead to higher pay.

Even statists sort of understand that this is true, but it’s sometimes difficult to get them to grasp the implications. They oftentimes are drawn to specific forms of government intervention, even if you explain that there are adverse unintended consequences.

Let’s explore this issue further.

In a column for the New York Times, Megan McGrath writes about a big new mining project in a remote part of Australia that “has the potential to create 10,000 jobs.” While that’s obviously good news, she worries that the company “will repeat the mistakes made by companies during the last mining boom by using workplace practices that hurt workers and their families.”

And what are these mistaken “workplace practices”? Apparently, she thinks it is terrible that workers don’t want to move to the outback and instead prefer to continue living in cities and suburbs. So she thinks it is bad that they fly in for multi-week shifts, stay in temporary housing, and then fly back (at company expense) to their homes.

Employees…fly to remote mines from major cities to work weeks at a time, and fly home for several days off before starting the cycle again. These so-called fly-in, fly-out jobs, which offer hefty pay, are widely known here as “fifo.” At the peak of the boom in 2012, …more than 100,000 of these held fifo positions.

Though it seems these workers are making very rational decisions on how to maximize the net benefits of these positions.

…fifo workers in the last boom were young, undereducated men lured by salaries that far surpassed what they could earn for similar work outside the industry — up to $100,000 a year to shift earth and drive trucks. The average full-time mining employee in 2016 earned $1,000 more per week than other Australians.

So what’s the downside? Why are workers supposedly being exploited by these lucrative jobs?

According to McGrath, the mining camps don’t have a lot of amenities.

…fifo life comes at a steep price. The management in many mines controls the transient workers’ schedules — setting times for meals, showers and sleep. The workers often can’t visit nearby towns and recreational facilities such as gyms and swimming pools because of a lack of transportation. Many employees have to share beds. They work 12-hour shifts, seven days a week, up to three weeks at a time.

That doesn’t sound great, but this also explains why the mining companies have to pay a boatload of money to attract workers. This is a well-established pattern that is familiar to labor economists. If working conditions are unpalatable, then employers have to compensate with more remuneration.

But Ms. McGrath doesn’t think workers should get extra cash. She would rather the mining company compensate workers indirectly.

A lot can be done to improve life in the camps. Shorter swings would help workers maintain bonds with their families. More stable living situations, with less sharing of living spaces, would increase a sense of value and belonging. Workers should be encouraged to visit nearby towns to reduce their isolation. The Adani megamine could be in operation for 60 years, experts say. Roads for the mine and the region should be improved so employees can move with their families to existing townships and drive to work.

Of course, she doesn’t admit that she wants workers to get less cash compensation, but that would be the real-world impact of her proposed policies.

She says that the mining companies should “put people ahead of profits.” But that’s a vacuous statement. Projects like this new mine only exist because investors expect to earn a return. Otherwise, they wouldn’t take the enormous risk of sinking so much capital into such endeavors.

All this new investment is good news for unemployed or under-employed Australians since they’ll now have an opportunity to compete for jobs that pay very well, particularly for workers without a lot of education.

By the way, if workers really valued all the things that are on Ms. McGrath’s list, the company would offer those fringe benefits instead of higher wages. But that’s obviously not the case. The market has spoken.

By the way, I can’t resist pointing out that she also does not understand tax policy. In a sensible system, companies calculate their taxable profit by adding up their total revenue and then subtracting all their costs. What’s left is profit, a slice of which is then grabbed by the government.

But that’s not enough for Ms. McGrath. She apparently believes that mining companies shouldn’t be allowed to subtract many of the costs associated with so-called fifo workers when calculating their annual profit. I’m not joking.

Mining companies are encouraged through tax incentives to use the transient workers. Some costs associated with a fifo worker — meals, transportation and airline tickets — can be claimed as production expenses, helping to lower a company’s tax bill.

I hope the Australian government isn’t dumb enough to buy this argument. Allowing a firm to subtract costs when calculating profit is simply common sense. And if doesn’t matter if those costs reflect fifo costs, investment expenditures, luxury travel, or band costumes.

For what it’s worth, if the government does get pressured into forcing companies to pay tax on these various business expenses, one very safe prediction is that the net effect will be to lower the wages offered to workers. Or, if the mandates, taxes, and regulations reach a certain level, the business will simply close down or new projects will be abandoned.

And those options obviously are not good news for workers.

Let’s now shift from the specific example of fifo workers to the broader issue of labor regulation. What happens if governments listen to people like Ms. McGrath and impose all sorts of rules that prevent flexible labor markets? According to recent scholarly research from three European economists, the consequence is more unemployment.

They start by pointing out that European nations with mandates and red tape have a lot more unemployment (particularly when the economy is weak) than countries with lightly regulated labor markets.

The Great Recession has brought a substantial increase in unemployment in Europe. Overall, unemployment rate in the euro area has grown from 8 percent in 2008 to 12 percent in 2014. The change in unemployment has been very heterogenous. In northern Europe, unemployment did not grow substantially or even fell: in Germany, for example, unemployment rate has actually declined from 7 to 5 percent. At the same time, in Greece unemployment has grown from 8 to 26 percent, in Spain — from 8 to 24 percent, and in Italy — from 6 to 13 percent. Why has unemployment dynamics been so different in European countries? The most common explanation is the difference in labor market institutions that prevents wages from adjusting downward. If wages cannot decline, negative aggregate demand shocks (such as the Great Recession) result in growth of unemployment.

The three economists wanted some way to test the impact of regulation, so they looked at the labor market for immigrants in Italy since some of them work in the formal (regulated) economy and some of them work in the shadow (unregulated) economy.

While this argument is straightforward, it is not easy to test empirically. Cross-country studies of labor markets are subject to comparability concerns. The same problems arise in comparing labor markets in different industries within the same country. In order to construct a convincing counterfactual for a regulated labor market, one needs to study a non-regulated labor market in the same sector within the same country. This is precisely what we do in this paper through comparing formal and informal markets in Italy over the course of 2004-12. We use a unique dataset, a large annual survey of immigrants working in Lombardy carried out by ISMU Foundation since 2004. …Our data cover 4000 full-time workers every year; one fifth of them works in the informal sector. The dataset is therefore sufficiently large to allow us comparing the evolution of wages in the formal and in the informal sector controlling for occupation, skills and other individual characteristics.

And what did they find?

In the absence of regulation, labor markets can adjust. The bad news for workers is that they get less pay. But the good news is that they’re more likely to still have jobs.

Our main result is presented in Figure 1. We do find that the wage differential between formal and informal sector has increased after 2008. Moreover, while the wages in the informal sector decreased by about 20 percent in 2008-12, the wages in the formal sector virtually did not fall at all. This is consistent with the view that there is substantial downward stickiness of wages in the regulated labor markets. …we find that both before and during the crisis, undocumented immigrants (those without a regular residence permit) are 9 percentage points more likely than documented immigrants to be in the labor force

Here’s the relevant chart from the study.

And here are some concluding thoughts from the study.

…despite the substantial growth of unemployment in 2008-12, the wages in the formal labor market have not adjusted. In the meanwhile, the wages in the unregulated informal labor market have declined substantially. The wage differential between formal and informal market that has been constant in 2004-08 has grown rapidly in 2008-12 from 18 to 35 percentage points. …These results are consistent with the view that regulation is responsible for lack of wage adjustment and increase in unemployment during the recessions.

For what it’s worth (and this is an important point), this helps explain why the Great Depression was so awful. Hoover and Roosevelt engaged in all sorts of interventions designed to “help” workers. But the net effect of these policies was to prevent markets from adjusting. So what presumably would have been a typical recession turned into a decade-long depression.

So what’s the moral of the story? Good intentions aren’t good if they lead to bad results. Which brings me back to my original point about helping workers by minimizing government intervention.

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