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To Discourage China’s Mercantilism, Trump Should Use the World Trade Organization instead of Unilateral Trade Barriers

Wed, 03/21/2018 - 12:35pm

At the risk of stating the obvious, I’m not a fan of international bureaucracies. The International Monetary Fund and the Organization for Economic Cooperation and Development are the worst multilateral institutions because of their promotion of bad policy, but I’ve also gone after the United Nations and World Bank for their periodic efforts to advance statism.

But this doesn’t mean I’m reflexively against international organizations. My criticisms of the IMF, OECD, UN, and WB are solely a function of their work to empower governments at the expense of people.

And this is why I generally like the World Trade Organization. The WTO is a Geneva-based international bureaucracy, but its mission is to empower people at the expense of governments by reducing import taxes and other trade barriers.

Which explains why I think President Trump will be making a mistake if he imposes unilateral tariffs on China. Yes, there seems to be strong evidence that China’s government is misbehaving, but I think that a positive outcome is far more likely if the U.S. government takes the issue before the WTO. Which is what I said in this short interview with Neil Cavuto.

And I’m not alone.

Bloomberg editorialized recently about this issue.

President Donald Trump…is…addressing a legitimate trade dispute: China’s alleged theft of intellectual property and forced technology transfers. …the U.S. alleges — with reason — that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. …Yet unilateral blanket tariffs of the sort the administration is considering are the wrong answer. In the first instance, they’d hurt U.S. consumers and producers even if they didn’t provoke retaliation (which they probably would). They’d undermine the World Trade Organization’s dispute-resolution system, perhaps fatally.

And the editorial points out that the WTO is a better place to settle the dispute.

…one can question the WTO’s effectiveness in resolving disputes of this kind: The process moves slowly. On the other hand, it works. The U.S. has won the great majority of the cases it’s taken there. The complaint against China’s practices would be stronger if it was coordinated with other governments. Japan and the European Union share U.S. concerns and would be willing to cooperate. As recently as last month, this seemed to be the strategy. …the U.S. needs to take the lead, once more, in global economic statecraft. Champion the rules-based order that has served the country and the world so well. Strengthen the WTO, don’t subvert it.

And the Wall Street Journal opined today on this topic.

…there’s no denying that Beijing’s mercantilism has fueled the political backlash against free trade. China’s increasingly predatory behavior, especially intellectual-property theft, poses a particular problem to a sustainable trading system. The question is how to respond in a way that encourages better Chinese behavior without harming the global economy and American companies and workers. …the danger is a tariff tit-for-tat that harms everyone. …Beijing is more likely to respond in kind at such a broad public assault on its goods.

The WSJ notes that China’s behavior has left something to be desired.

Beijing has turned to mercantilism over the last decade. …The government gives subsidies in several forms, including loans from state-owned banks on easy terms and low interest rates. …Along with subsidies and government help in acquiring foreign companies, the policy explicitly requires foreign companies to transfer intellectual property in return for access to the Chinese market. …Beijing has also stepped up its use of regulations to discriminate against foreign companies. …All of these policies violate WTO agreements. …The China problem now is the predatory use of government power to punish foreign competitors to benefit Chinese companies.

The WSJ doesn’t necessarily think the WTO is the right vehicle to respond, but it definitely supports a plurilateral approach.

…remedies should be based on the principle of reciprocity. If Beijing pressures multinational car companies to build electric cars in China, the U.S., EU and Japan could impose a tariff on Chinese-made vehicles and restrict the transfer of related technology. This would avoid the Trump Administration’s approach of tariffs on a wide variety of goods, a policy that alienates allies and raises the risk of a wider trade war. A targeted approach…could even strengthen the WTO as China would have an interest in modernizing and using the organization’s courts to resolve the disputes.

I’m a fiscal wonk rather than a trade wonk, so I’m open to the notion that perhaps a plurilateral approach is better than the WTO’s dispute resolution mechanism.

Though it’s worth noting that the United States has a very high batting average when bringing cases to the WTO.

Dan Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, reviewed WTO trade disputes involving the U.S. from 1995 to March of this year. He found that the U.S. prevailed in 91 percent of cases that it brought against other countries. “When the United States has been a complainant (as it has in 114 of 522 WTO disputes over 22 years — more than any other WTO member) it has prevailed on 91 percent of adjudicated issues,” he wrote.

I’ll close by noting that China’s bad policies don’t make it an enemy. The European Union is a semi-protectionist bloc and it isn’t our enemy either.

My goal is to simply point out that China’s approach to trade can be improved and should be improved. And since the country has moved in the right direction on overall economic policy (with very positive effects for the Chinese people), my hope is that coordinated opposition to Chinese mercantilism will have a positive effect.

Another Proposed Expansion of Costly and Ineffective Financial Regulation

Tue, 03/20/2018 - 6:41pm

Beginning in the 1980s, money-laundering laws were enacted in hopes of discouraging criminal activity by making it harder for crooks to use the banking system. Unfortunately, this approach has been an expensive failure.

Amazingly, some politicians actually want to make these laws even worse. I wrote last year about some intrusive, expensive, and pointless legislation proposed by Senators Grassley, Feinstein, Cornyn, and Whitehouse.

Now there’s another equally misguided set of proposals from Senators Rubio and Wyden, along with Representatives Pearce, Luetkemeyer, and Maloney. They want to require complicated and needless ownership data from millions of small businesses and organizations.

David Burton of the Heritage Foundation has a comprehensive report on the legislation. Here’s some of what he wrote.

Congress is seriously considering imposing a beneficial ownership reporting regime on American businesses and other entities, including charities and churches. …the House and Senate bills…share three salient characteristics. First, they would impose a large compliance burden on the private sector, primarily on small businesses, charities, and religious organizations. Second, they create hundreds of thousands—potentially more than one million—inadvertent felons out of otherwise law-abiding citizens. Third, they do virtually nothing to achieve their stated aim of protecting society from terrorism or other forms of illicit finance. …Furthermore, the creation of this expensive and socially damaging reporting edifice is unnecessary. The vast majority of the information that the proposed beneficial ownership reporting regime would obtain is already provided to the Internal Revenue Service.

Richard Rahn criticizes this new proposal in his weekly column.

…what would you think of a member of Congress who proposes to put a new regulation on the smallest of businesses that does not meet a cost-benefit test, denies basic privacy protections and, because of its vagueness and ambiguity, is likely to cause very high numbers of otherwise law-abiding Americans to be felons? …Some bureaucrats and elected officials argue that the government needs to know who the “beneficial owners” are of even the tiniest of businesses in order to combat “money-laundering,” tax evasion or terrorism. …Should the church ladies who run the local non-profit food bank be put in jail for their failure to submit the form to the Feds that would give them the exemption from the beneficial ownership requirement? …Given how few people are actually convicted of money-laundering, the overwhelming evidence is that 99 percent of the people being forced to submit to these costly and time-consuming proposed regulations will not be guilty of money-laundering, terrorism or whatever, and thus should not be harassed by government.

Writing for the Hill, J.W. Verret, an expert in business law from George Mason University Law School, highlights some of the serious problems with this new regulatory scheme.

Legislation under consideration in Congress, the Counter Terrorism and Illicit Finance Act, risks tying entrepreneurs’ hands with even more red tape. In fact, it could destroy any benefit some small businesses stand to gain from the tax reform legislation passed last year. It would require corporations and limited liability companies with fewer than 20 employees to file a form with the Treasury Department at the time of formation, and update it annually, listing the names of all beneficial owners and individuals exercising control. …Given the substantial penalties, this will impose a massive regulatory tax on small businesses as they spend money on lawyers that should go toward workers’ pay. …It is unlikely someone on a terrorist watch list would provide their real name on the required form, and Treasury will probably never have sufficient resources to audit names in real time.

Professor Verret explains some of the practical problems and tradeoffs with these proposals.

…some individual money laundering investigations would be easier with a small business registry available. But IRS tax fraud investigations would be much easier with access to taxpayers’ bank account login information — would we tolerate the associated costs and privacy violations? …How is the term “beneficial owner” defined? How is “control” defined? As a professor of corporate law, I have given multiple lectures on those very questions. What if your company is owned, in part, by another company? Or there is a chain of ownership through multiple intermediary companies? What if a creditor of the company, though not currently a shareholder or beneficial owner, obtains the contractual right to convert their debt contract into ownership equity at some point in the future? …for the average small business owner, navigating those complexities against the backdrop of a potential three year prison sentence will often require legal counsel. Companies affected by this legislation should conservatively expect to spend at least $5,000 on a corporate lawyer to help navigate the complexities of the new filing requirements.

Needless to say, squandering $5,000 or more for some useless paperwork is not a recipe for more entrepreneurship.

So how do advocates for this type of legislation respond?

Clay Fuller of the American Enterprise Institute wants us to have faith that bad people will freely divulge their real identities and that bureaucrats will make effective use of the information.

It is time to weed out illicit financing and unfair competition from criminals and bad actors. …Passing the House Financial Services Committee’s Counter Terrorism and Illicit Finance Act should be a priority for the 115th Congress. …Dictators, terrorists and criminals have been freeriding on the prosperity and liberty of the American economy for too long. Officials at FinCEN are sure that beneficial ownership legislation will exponentially increase conviction rates. We should give law enforcement what they need to do their jobs.

Gee, all that sounds persuasive. I’m also against dictators, terrorists, and criminals.

But if you read his entire column, you’ll notice that he offers zero evidence that this costly new legislation actually would catch more bad guys.

And since we already know that anti-money laundering laws impose heavy costs and catch almost no bad guys, wouldn’t it be smart to figure out better ways of allocating law enforcement resources?

I don’t know if we should be distressed or comforted, but other parts of the world also are hamstringing their financial industries with similar policies.

Here’s some analysis from Europe.

…a new reportfrom Consult Hyperion, commissioned by Mitek, reveals that the average UK bank is currently wasting £5 million each year due to manual and inefficient Know Your Customer (KYC) processes, and this annual waste is expected to rise to £10 million in three years. …Key Findings…Inefficient KYC processes cost the average bank £47 million a year…Total costs for KYC processes range from £10 to £100 per check…In the UK, 25% of applications are abandoned due to KYC friction… The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes,” said Steve Pannifer, author of the report and COO at Consult Hyperion.

And here’s an update from Asia.

Anti-money laundering and know-your-customer compliance have become leading concerns at financial institutions in Asia today. … we estimate that AML compliance budgets across the six Asian markets in this study total an estimated US$1.5 billion annually for banks alone. …A majority of respondents (55%) indicated that AML compliance has a negative impact on their firms’ business productivity. …An additional 15% felt that AML compliance actually threatens their firms’ ability to do business. …Eighty-two per cent of survey respondents saw overall AML compliance costs increasing in 2016, with one third projecting that costs will rise by 20% or more.

The bottom line is that laws and regulations dealing with money laundering are introduced with high hopes of reducing crime.

And when there’s no effect on criminal activity, proponents urge ever-increasing levels of red tape. And when that doesn’t work, they propose new levels of regulation. And still, nothing changes.

Lather, rinse, repeat.

Here’s the video I narrated on this topic. It’s now a bit dated, but everything I said is even truer today.

Let’s close with a surreal column in the Washington Post from Dana Milbank. He was victimized by silly anti-money laundering policies but seems to approve.

I did not expect that my wife and I would be flagged as possible financiers of international terrorism. …The teller told me my account had been blocked. My wife went to an ATM to take out $200. Denied. Soon I discovered that checks I had written to the au pair and my daughter’s volleyball instructor had bounced. …I began making calls to the bank and eventually got an explanation: The bank was looking into whether my wife and I were laundering money, as they are required to by the Bank Secrecy Act as amended by the Patriot Act. …the bank seemed particularly suspicious that my wife was the terrorist… The bank needed answers. Did she work for the government? How much money does she make? Is she a government contractor? …a week later they came back with a new threat to freeze the account and a more peculiar question: Is my wife politically influential?

Sounds like an awful example of a bank being forced by bad laws to harass a customer.

Heck, it is an awful example of that happening.

But in a remarkable display of left-wing masochism, Milbank approves.

The people who flagged us were right to do so. …Citibank, though perhaps clumsy, was doing what it should be doing. “Know your customer” regulations are important because they prevent organized-crime networks, terrorists and assorted bad guys from moving money. Banking regulations generally are a hassle, and expensive. But they protect us — not just from terrorists such as my wife and me but from financial institutions that would otherwise exploit their customers and jeopardize economic stability the way they did before the 2008 crash.

I guess we know which way Milbank would have responded to this poll question from 2013.

But he would be wrong because money-laundering laws don’t stop terrorism.

We’re giving up freedom and imposing high costs on our economy, yet we’re not getting any additional security in exchange.

And I can’t resist commenting on his absurd assertion that money laundering played a role in the 2008 crash. Does he think that mafia kingpins somehow controlled the Federal Reserve and insisted on easy-money policies and artificially low interest rates? Does he think ISIS operatives were somehow responsible for reckless Fannie Mae and Freddie Mac subsidies?

Wow, I thought the people who blamed “tax havens” for the financial crisis deserved the prize for silliest fantasies. But Milbank gives them a run for their money.

The Product Safety Commission Hit An Iceberg And Lost Its Way

Tue, 03/20/2018 - 2:15am

Originally published by The Daily Caller on March 19, 2017.

Far too often it seems like the federal government runs on autopilot. Federal regulatory inertia ensures that the bureaucratic state, thanks to its unmanageable size and vast powers, tends to resist political change. This is especially true for “independent” agencies like the Consumer Product Safety Commission (CPSC) that are subject to little if any meaningful oversight.

In recent years, the CPSC has become increasingly aggressive. Not content simply to monitor for defective products, the Democratic-controlled agency under Barack Obama targeted products that otherwise worked just fine if their misuse, or use by someone under the intended age, could conceivably result in any danger whatsoever.

The agency also proved willing to ignore procedure and engage in vindictive and punitive campaigns against those who questioned its actions.

Consider the case of BuckyBalls, small, spherical magnets intended for use by adults that can also be harmful when swallowed.

Needless to say, you probably shouldn’t swallow magnets. More importantly, you shouldn’t leave them around to be swallowed by young children who don’t know any better.

Citing a few examples of children ingesting magnets and suffering internal damage, the CPSC declared that the warning labels it had previously worked with the company to establish were not enough. The product had to be eradicated.

Despite being relatively low-risk, with just 22 reported incidents of ingested Buckyballs between March 2009 through October 2011, or one for every 100,000 sets sold, the CPSC initiated a recall in 2012. Their lawyers made the ridiculous argument that the labels, which the CPSC had previously approved, were defective because they were only placed on the box the magnets came in, rather than the magnets themselves. And since that was clearly impossible, they asked for the makers of Buckyballs to stop selling their only product.

Before the company could even respond, the CPSC started an underhanded campaign to destroy the company’s distribution network by contacting retailers with vague letters that strongly implied the potential for future enforcement actions. And when Craig Zucker, the creator of Buckyballs, fought back with a humorous PR campaign, the CPSC took the unprecedented step of trying to financially ruin him by naming him personally in its $57 million lawsuit to pay for the desired recall.

For daring to speak back to his bureaucratic overlords, Zucker was expected to pay the administrative costs for destroying his company. He eventually settled with the CPSC, but for a tiny fraction of their demands, just to end the inquisition. But it was far too late for Buckyballs, and the CPSC officially banned the product and all like it entirely from the marketplace.

Yet you can still buy similar magnets from several other companies these days. That’s because the U.S. Court of Appeals for the 10th Circuit threw out the ban on the basis that CPSC stacked its shoddy cost-benefit analysis to reach the desired conclusion.

The magnet overreach is, sadly, not an isolated incident. More recently, the commission has targeted BOB jogging strollers for use of a quick release front wheel that makes for easy storing, such as in a trunk. Like Buckyballs, the product works fine and is not dangerous if used properly. But improper use, such as by pushing the stroller without the wheel fully latched, could possibly, maybe, under some circumstances potentially harm a child.

Even worse is the agency’s attempt to ban certain flame-retardant chemicals, often used in mattresses or furniture, based on faulty claims from environmental activists and despite the EPA already monitoring their use. The Democratic political-appointees overrode the judgment of their own CPSC staff to undertake a first-of-its-kind ban on an entire class of chemicals, which also just happen to be necessary to pass a federally mandated open flame test.

Frustration with these sorts of disproportionate regulatory jihads are partly why voters chose to elect a political outsider in 2016. Whether one agrees with him or not, the way our system works, President Trump should now be able to reshape the leadership of executive agencies to better align them with the vision that won the last election. Yet Senate Democrats have used every procedural trick to slow the process of approving new appointments as much as possible.

In the case of the CPSC, the result is a rogue agency that is still operating well beyond its intended limits.

Acting Chairman Ann Marie Buerkle has been attacked by the Democratic majority on the commission for daring to suggest the agency should prioritize fact-based rulemaking over emotion. The fact that Buerkle is still the lone Republican on the commission more than a year into Trump’s term is emblematic of a broader regulatory problem.

An absence of new leadership is leaving agencies free to continue their Obama-era overreaches well after Obama has left office. This is not how our system is supposed to work. Moreover, these agencies are doing serious damage to American businesses and the economy, all while ignoring their responsibilities to fairly weigh the costs and benefits of proposed regulations without bias.

Employment-Based Visas the Way to Foster America’s Economic Success

Tue, 03/20/2018 - 12:24am

Originally published by The Hill on March 18, 2017.

Republicans made the elimination of onerous Obama-era regulations an early priority, but the effort has since stalled. That’s unfortunate, as a great many destructive rules remain either in effect or in the pipeline. One such proposed regulation, an effort to sabotage the EB-5 investor program, ought to be addressed in any upcoming immigration package produced by Congress.

While it is true that the overall issue of immigration is contentious, there are some areas where consensus should be possible. Especially if a there are immigrants who unambiguously would increase per-capita prosperity in America.

And that’s why the EB-5 issue is important. For background, EB stands for employment-based, and the EB-5 visas are for immigrants willing to invest at least $1 million, or $500,000 in certain circumstances, in a U.S.-based commercial enterprise to be eligible for lawful permanent residence in the U.S.

For all intents and purposes, it’s a way of bringing job creators to America.

Over the years this program has attracted significant foreign investment to the United States. The $20 billion in investment attributed to EB-5 visas is credited with creating over 174,000 jobs, or about 16 per investor, according to a Department of Commerce report.

Unfortunately, the Obama administration took a shot at the program on its way out the door. In a “midnight regulation” proposed on Jan. 13, the Department of Homeland Security’s U.S. Citizenship and Immigration Services sought to raise the eligibility requirements and enact other changes to the program.

There’s ample room to discuss reforms to the EB-5 program. For instance, family members of investors are currently counted against the 10,000 cap on program participants even though Congress did not intend for employment-based green cards to work in this fashion. Given the tremendous value of the program, the cap itself also is far too low. Further safeguards are also needed to prevent cronyism and abuse of the program by politicians.

But these are properly questions for the legislative body, which is where reforms to the program ought to be decided. Unfortunately, the Trump administration’s DHS has not opted as of yet to withdraw the rule despite a request from last year from several Senators. The lawmakers argued that raising eligibility requirements “will likely undermine the program’s functionality.”

The bottom line is that the EB-5 program ought to be a slam-dunk. It attracts people who will create jobs and can’t possibly be considered a burden on taxpayers by ending up on the welfare rolls.

One might wonder why upper-income people would want to come to America, but there are good reasons for doing so. Some want to escape excessive taxation, such as from France or Italy, while others look to flee from unstable regimes or where the rule of law is weaker, like China or India.

Whatever their reasons may be, the U.S. would be foolish not to take them. If we’re going to have a system where lawmakers are picking and choosing who to let in the country — which is the case for anything less than full open borders — why not make it a priority to have successful investors?

If rich people didn’t want to come to America, then that would be a worrisome sign. But, for the time being at least, many do. Many other nations, however, also recognize the value in attracting investors and have “economic citizenship” programs designed to do just that.

To remain competitive in the fight to attract economically successful migrants, not only should Obama-era regulations seeking to limit the EB-5 program be withdrawn, but it would be wise for a DACA or broader immigration package to also simplify the EB-5 program and raise the cap.

Using Protectionism to Reduce Protectionism?

Mon, 03/19/2018 - 12:04pm

I’ve been very critical of Trump’s protectionism. I explained why he was wrong before the 2016 election and I’ve continued to argue he is misguided ever since he became President.

Most recently, I even expressed hope that Congress would overturn his new taxes on American consumers.

Some people are arguing, however, that the situation isn’t quite so bad because Trump may have a clever plan to use tariffs as a tool to force other nations to reduce their trade barriers.

I very much hope that’s the case, as I noted in this interview with Fox Business, but I’m not holding my breath for a favorable outcome.

I’m not the only one who is skeptical.

In her column for the Wall Street Journal, Mary Anastasia O’Grady pours cold water on the hypothesis that Trump is playing a very clever game.

President Trump’s practice of staking out extreme positions on trade as a negotiating tactic is a sign of his brilliance. Or so we’re told. But that theory took on water last week, when Mr. Trump had to backtrack on a promise to hit Mexico and Canada with a 25% tariff on steel and a 10% tariff on aluminum, without any concessions from either Mexico City or Ottawa. …Mr. “Art of the Deal” figured out that his opening tariff bid was on track to blow up the two best foreign markets for American-made steel and significant markets for American-made aluminum. It’s a good bet that the same producers who are lobbying for protection asked the president to back off the neighbors. The gaffe exposes the Trump administration’s failure to grasp the complexity of the supply chains that interconnect the global economy.

Well said.

By the way, I’m not just picking on Trump. I’ve criticized other Presidents for protectionist policies, most notably Hoover.

And I even dinged Saint Ronald for trade barriers (though I also noted Reagan’s good policies regarding NAFTA and the GATT).

Unsurprisingly George W. Bush also belongs on the list. Professor Vernon Smith relates a story about Bush’s protectionism in the Wall Street Journal.

I was one of nine American Nobel laureates invited to visit the White House Nov. 19, 2002, by President George W. Bush. Each of us had a few minutes to speak privately with the president… Mr. Bush congratulated me on my award in economics. …I added: “You must be doing some things right, but you did two things wrong—your steel tariff proposal and the farm bill.” I startled him, but our exchange was not over. …Later in the Lincoln Room, Mr. Bush was talking with a group of my colleagues from George Mason University. Seeing me nearby, he raised his voice in a friendly retort: “Earlier, your laureate friend gave me a hard time about the steel tariff. I’m thinking that he should handle the economics, and I’ll take care of the politics.”

Professor Smith points out, however, that Bush was wrong on the politics as well as the economics (a lesson the GOP should have learned from Reagan).

His proposal collided with a widespread political backlash at home and abroad, and with retaliation from our foreign trading partners. The Bush steel tariff, imposed in 2002, was rescinded in 2003. It was not feasible. He recognized its unreality, and backed off.

Hopefully, Trump will retreat as well.

The last thing the world needs is a repeat of the 1930s.

But if that happens, be prepared for very bad news. Here’s a report on how trade taxes would undermine America’s economy.

A full-blown trade war would erase any economic benefits from the Republican tax cuts passed last year, according to an analysis by the University of Pennsylvania. …The Penn Wharton Budget Model, a research center at the university,imagined the worst case — no US imports or exports crossing borders tariff-free. The United States has free trade agreements with 20 nations. Wharton’s model assumes those all disappear. Such a trade war would make US economic output 0.9% lower than otherwise by 2027, according to the analysis. …Over the longer term, the costs of a trade war would heavily outweigh the benefits of the tax cut. By 2040, the US would lose 5.3% of economic output in the worst trade-war scenario, compared with a 1.6% increase from the tax cuts, the university found. Put another way, a full-blown trade war would cost the economy $200 billion over 10 years, and $1.4 trillion by 2040. American wages would decline, too, falling 1.1% over the next 10 years.

Last but not least, Mark Perry recently shared three videos from Khan Academy on international trade and economics. All of them are worth watching if you really want to understand the issue.  But here’s the one that I think everyone should watch.

And Mark adds this chart, which reinforces the point from the video – and something I’ve also tried to explain – about a capital surplus being the necessary and automatic flip side of a trade deficit.

In other words, when foreigners get dollars, they oftentimes think the best use of that money is to invest in America’s future. That’s a sign of strength, not weakness.

P.S. If you think protectionism is a good idea, please review these five charts.

P.P.S. Though I’m willing to go back to 19th-century tariffs – assuming we roll back all the government that has accumulated since then.

Mocking Gun Control

Sun, 03/18/2018 - 12:53pm

I shared some satire about gun control last month, but the left’s campaign to exploit the horrible Parkland shooting seems to have instigated a bunch of new material.

So let’s have some weekend fun.

We’ll start with this humorous image from Reddit‘s libertarian page that actually does a good job of showing that gun control is pointless because criminals don’t care about laws.

This next image, also from Reddit, resonates with me because I’ve had many conversations with leftists who genuinely think a “semi-automatic rifle” is the same as a machine gun.

Or that “assault weapons” are somehow more lethal hunting rifles.

Though the gun-control crowd doesn’t seem to care even when you point out that their talking points are nonsense.

This next image arrived in my inbox a few days ago. I imagine the women calling the cops also failed this IQ test.

Next we have an apparently genuine sign from one of the student protests against civil liberties. Astoundingly, this girl doesn’t realize that she has everything wrong. The White House is filled with armed personnel and her school is the gun-free zone.

And we know from this cartoon whether bad people prefer unarmed victims. I guess we’ll call the student Exhibit A in the case against government-run schools.

I like this next item because libertarians seem to be the only ones who value both the 1st Amendment and 2nd Amendment.

Given how California has drifted so far to the left, this next joke my turn into reality at some point. Well, even they’re not that foolish, but I can’t help but hope it might happen.

Last but not least, this item from Reddit‘s libertarian page does make me wonder about my left-wing friends. They despise Trump, yet they want to citizens to be disarmed.

Wow. Reminds me of this image.

P.S. You can still cast a vote in the online poll to identify the most important reason to defend the Second Amendment.

New Jersey’s Fiscal Suicide

Sat, 03/17/2018 - 12:30pm

A couple of decades can make a huge difference in the political and economic life of a jurisdiction.

And here’s something especially amazing from a bit more than five decades in the past. New Jersey used to have no state income tax and no state sales tax.

Yes, your eyes are not deceiving you. The basket case of New Jersey used to be a mid-Atlantic version of New Hampshire. But once the sales tax was imposed in 1966 and the income tax was imposed in 1976, it’s been all downhill ever since.

An article in the City Journal helps to explain the state’s fiscal decay.

Brendan Byrne, a Democratic former governor of the Garden State, …told mayors that the state would need a “large revenue package”… The heart of the package would be a new statewide income tax, which went into permanent effect in 1977. Byrne promised that the additional money would help relieve the high property-tax burden on New Jersey’s citizens… Four decades later, the plan has failed. …politicians and special interests don’t see new streams of tax revenue as a means to replace or eliminate an existing stream, but rather as a way of adding to the public coffers. (For those who entertain fantasies of a value-added tax replacing the federal income tax, take heed.) New Jersey’s income tax started with a top rate of about 2.5 percent; it’s now around 9 percent.

Needless to say, nothing politicians promised has happened.

Property taxes haven’t been reduced. They’ve gone up. The government schools haven’t improved. Instead, the test scores in the state are embarrassing. And debt hasn’t gone down. Red ink instead has skyrocketed.

And what’s amazing – and depressing – is that New Jersey politicians continue to make a bad situation worse. Here are some excerpts from a Bloomberg report.

New Jersey Governor Phil Murphy proposed taxing online-room booking, ride-sharing, marijuana, e-cigarettes and Internet transactions along with raising taxes on millionaires and retail sales to fund a record $37.4 billion budget that would boost spending on schools, pensions and mass transit. …Murphy, a Democrat…has promised additional spending on underfunded schools and transportation in a credit-battered state with an estimated $8.7 billion structural deficit for the fiscal year that starts July 1. …Murphy said Tuesday in his budget address to lawmakers. “A millionaire’s tax is the right thing to do –- and now is the time to do it.” …The budget…would…restore the state’s sales tax to 7 percent from 6.625 percent… Murphy’s proposal would almost triple the direct state subsidy for New Jersey Transit, which has been plagued by safety and financial issues.

More taxes, more spending, followed by even more taxes and more spending.

I wonder if Greek taxpayers would want to tell their counterparts in New Jersey how that story ends.

Assuming, of course, there are any taxpayers left in the Garden State. There’s already been a big exodus of productive people who are tired of being treated like fatted calves.

And don’t forget that New Jersey taxpayers no longer have unlimited ability to deduct their state and local taxes on their federal tax return. So these tax hikes will hurt much more than past increases.

In any event, taxpayers better escape before the die.

Though I know one guy who won’t be leaving.

P.S. Anybody want to guess whether New Jersey collapses before CaliforniaIllinois, or Connecticut? They’re all in the process of committing slow-motion suicide.

Honesty about Gun Confiscation

Fri, 03/16/2018 - 12:37pm

I have a special page to highlight honest left wingers, and I’ve acknowledged several who have confessed that gun control is misguided.

A columnist for Vox also is honest. Dylan Matthews starts by acknowledging that the standard agenda of the anti-gun movement is pointless.

Congress’s decision not to pass background checks is not what’s keeping the US from European gun violence levels. The expiration of the assault weapons ban is not behind the gap.

But don’t get your hopes up that Matthews is on the right side.

His problem with the incremental ideas is that they don’t go far enough.

What’s behind the gap, plenty of research indicates, is that Americans have more guns. …Realistically, a gun control plan that has any hope of getting us down to European levels of violence is going to mean taking a huge number of guns away from a huge number of gun owners. …And here’s the truth: Even the most ardent gun control advocates aren’t pushing measures that could close the gap. Not even close. …Obama’s plan to tackle gun violence focused on universal background checks for gun sales, banning assault weapons again, and increasing criminal penalties for illicit gun traffickers. That’s nowhere near as dramatic as taking…America’s guns off the street.

I obviously disagree, but I give him credit for honesty. Unlike other leftists who privately share the same ideology, Matthews is open and honest about his desire to eviscerate civil liberties.

Even if he understands it’s not going to happen anytime soon.

…large-scale confiscation look like easily the most promising approach… Large-scale confiscation is not going to happen. That’s no reason to stop advocating it.

So I applaud Matthews for not hiding his true desire. Just like I applaud leftists who openly admit that they want 90 percent tax rates or who freely confess that they think all our income belongs to government.

I think they’re all profoundly misguided, but that’s a separate issue.

Now let’s briefly contemplate what would be necessary for Mr. Matthews to get his wish of total gun confiscation.

Reason produced a mocking “five-step” video on the near-impossible actions that would be needed to achieve that goal.

But the first three steps in that video were about how difficult it is to amend the Constitution and I don’t think that’s what the left has in mind. If they ever get to the point of trying to ban guns, presumably it will be after a leftist President has put a sufficient number of doctrinaire Ruth Bader Ginsburg clones on the Supreme Court. In which case, they will simply pretend the 2nd Amendment doesn’t say what it says.

And if that happens, then presumably it will be easy to envision the fourth step, which is legislation prohibiting private ownership of firearms. After all, does anybody doubt that this is what Chuck Schumer and Nancy Pelosi actually would prefer?

But I fully agree that the fifth and final step – actually confiscating guns – would be extremely difficult.

There was a poll on this issue back in 2013 and it’s worth noting that respondents, by a 3-1 margin, said they would defy such a law.

I oscillate between being proud about the result and being disappointed that the margin isn’t 10-1 in favor of defiance.

Regardless, the takeaway from this result is that there would be pervasive and ubiquitous civil disobedience.

Moreover, it goes without saying that the people who obeyed such a fascist law would not be the criminals. So the net effect of such legislation would be an unfortunate shift in the ratio of good gun owners and bad gun owners.

The Capital Gains Tax Should Not Be Imposed on Inflationary Gains

Thu, 03/15/2018 - 12:31pm

Ideally, there should be no capital gains tax.

After all, the levy is a self-destructive form of double taxation that reduces the quantity and quality of investment. And that’s not good for wages and jobs.

To add insult to injury (to be more accurate, to add injury to injury), the tax isn’t indexed for inflation. So investors get taxed on the full increase in the value of an asset even though a significant chunk of the increase often is due solely to inflation.

Steven Entin of the Tax Foundation has some new research on this issue.

Many elements of the income tax are adjusted for inflation, such as tax brackets, standard deductions, and income thresholds or dollar amounts of some tax credits.However, the purchase price of assets later sold for capital gains or losses is not adjusted for inflation. As a result, inflation can do a real number on savers by turning real losses into taxable nominal gains. To avoid such outcomes, it would make sense for the government to allow an inflation adjustment for the cost of assets.

Steve points out that the absence of indexing is very brutal during periods of high inflation – which may soon become a relevant issue again.

During the late 1960s and 1970s, when inflation was high and the stock market was flat, it was not uncommon for people who sold assets to report inflated nominal capital gains that were negative in terms of purchasing power. In effect, the savers were taxed on a real loss. …Suppose one had bought $100 of stock in the XYZ Corporation in 1965, and sold it in 1981, for $110. This looks like a $10 gain. But…The stock would have had to rise to $286 just to keep pace with inflation. …the investor lost $176, in 1981 dollars ($286 – $110). Any tax collected on the nominal $10 gain was, in fact, a tax on a real loss.

But even if inflation remains low, this is still an important issue.

Taxing genuine capital gains is bad enough, so it’s not a surprise to learn that taxing inflationary gains is even worse. It exacerbates the anti-capital bias in the current tax code.

Taxation of fictitious gains or other capital income reduces saving and raises the cost of capital, thereby retarding investment, productivity growth, and wage growth. …In an ideal tax system, saving would not be treated worse than consumption. …When we earn income and pay tax, and use the after-tax income for consumption, the federal government generally leaves the consumption alone, except for a few excise taxes… The earnings are taxed, but not the enjoyment of the subsequent purchases. Saving is a purchase too. It lets us “buy” a stream of future income with after-tax money. But if we buy a bond, the stream of interest is taxed. If we buy a share of stock, the dividends are taxed, and any reinvested earnings that increase the value of the company are taxed as capital gains.

Here’s Steve’s conclusion.

Inflation raises the price of many assets acquired by savers. When they sell the assets, much of their capital gains may be due only to inflation. Inflation-related gains are not a real increase in wealth. Indexing the purchase price (tax basis) for inflation would provide savers some relief for this type of tax on fictitious income.

Well said, though I have one minor quibble. A capital gain, whether real or caused by inflation, is not income. It’s a change in nominal net worth.

Though I’m sure Steve would agree with me. He’s presumably using “income” because the tax code treats that change in net worth as income.

There is a chance we’ll see some progress on this issue. Ryan Ellis, writing for Forbes, is optimistic that the newly appointed head of Trump’s National Economic Council will try to fix this problem.

There’s one project that Kudlow needs to get to work on right away: indexing the basis of capital gains to inflation. …Just last August, Kudlow wrote an op-ed…urging President Trump to do this by executive order. …This finally may be the time that this issue is ready to cross the finish line.

Executive order?

Yes, because the law specifies the rates for capital gains taxation, but it’s up to the Treasury Department to specify what counts as a gain. And there’s a very strong argument that it’s not a genuine gain if an asset rises in value solely because of inflation.

Ryan explains the mechanics of how indexing would work.

How would indexing capital gains basis to inflation work? In the tax world, reporting a capital gain is a pretty simple exercise. When you sell an asset, like a stock, you report how much you sold it for. You can subtract what you bought it for (your “basis”) from what you sold it for to arrive at your gain. …If you’ve held the asset longer than a year, you generally pay tax at…20 percent, plus the 3.8 percent Obamacare investment surtax… A problem arises in that your basis purchase may have happened many years ago. The real value of the money you used to buy a stock has been eroded by inflation. For example, $100 in 1990 is only worth $51.41 today, a little more than half the supposed basis in real terms. …Someone whose $100 initial investment has grown to $500 would see a big difference in taxes.

Here’s the table showing that difference.

And here’s what it means.

Uncle Sam still gets to tax the gain–he just doesn’t get to take the phantom gains attributable to inflation. In fact, $22.50 of the current law tax–nearly one quarter of the tax bill–is entirely due to inflation, not any real increase in wealth. …This law change would help owners of real estate, including corporate owners of real estate. It would help small businesses who pay the capital gains tax when acquired by larger firms. It would help everyone in America with a prized collection of old baseball cards or stamps sitting in an album in their den. This is truly a tax cut for everyone.

For more information, here’s a CF&P video on the topic:

As was pointed out in the video, Ronald Reagan indexed much of the tax code as part of his 1981 tax cut. Now it’s time to take the next step.

But let’s not forget that indexing should only be an interim step (assuming, of course, that the White House and Treasury are willing to do the right thing and protect investors from inflation).

The real goal should be a total repeal of the capital gains tax.

A Primer on Debt, Deficits, and Public Finance

Wed, 03/14/2018 - 12:25pm

Way back in 2009, I narrated a video explaining that people worry too much about deficits and debt. Red ink isn’t desirable, to be sure, but I pointed out that the real problem is government spending.

And the bottom line is that most types of government spending are bad for an economy, regardless of whether they are financed by taxes or borrowing.

It is possible, of course, for a nation to have a debt crisis. But keep in mind that this simply means a government has accumulated so much debt that investors no longer trust that they will receive payments on government bonds.

That’s not a good outcome, but replacing debt-financed spending with tax-financed spending is like jumping out of the frying pan and into the fire. Or the fire into the frying pan, if you prefer. In either case, politicians are ignoring the real problem.

Greece is a cautionary example. Thanks to a period of overspending, Greek politicians drove the country into a debt crisis. But this dark cloud had a silver lining. The good news (at least relatively speaking) is that the government no longer could borrow from the private sector to finance more spending.

But the bad news is that Greek politicians subsequently hammered the economy with huge tax increases in hopes of propping up the country’s bloated welfare state. And the “troika” made a bad situation worse with bailout funds (mostly to protect big banks that unwisely lent money to Greek politicians, but that’s a separate story).

In other words, Greece got in trouble because of too much government spending and it remains in trouble because of too much government spending. As is the case for many other European nations.

And I fear the United States is slowly but surely heading in that direction. I elaborate on the problem of government spending – and the concomitant symptom of red ink – in this interview with the Mises Institute.

For all intents and purposes, I’m trying to convince people that deficits and debt are bad, but they’re bad mostly because they are a sign that government is too big. Sort of like a brain tumor being the real problem and headaches being a warning sign.

I feel like Goldilocks on this issue. Except instead of porridge that is too hot or too cold, I deal with people on both sides who think red ink is either wonderful or terrible.

For an example of the former group, here’s some of what Stephanie Kelton wrote for the New York Times last October.

…bigger deficits wouldn’t wreck the nation’s finances. …Lawmakers are obsessed with avoiding an increase in the deficit. …It’s also holding us back. Politicians of both parties should stop using the deficit as a guide to public policy. Instead, they should be advancing legislation aimed at raising living standards and delivering…long-term prosperity.

Hard to disagree with the above excerpt.

But here’s the part I don’t like. She’s a believer in the perpetual motion machineof Keynesian economics. She thinks deficits are actually good for the economy and she wants to use debt to finance an ever-larger burden of government spending.

Government spending adds new money to the economy, and taxes take some of that money out again. …we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy. …the deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.


Now let’s check out the view of the so-called deficit hawks who think red ink is an abomination.

Here are some passages from a Hill report on the battle over last year’s tax plan.

A handful of GOP deficit hawks are worried that their party’s tax plan could add trillions to the deficit, deepening a debt crisis for future generations. …The tax plan could cost the government $1.5 trillion in revenue over the next decade… Sen. Bob Corker (R-Tenn.), who recently announced his retirement at the end of this Congress, has warned he’ll oppose the tax plan if it adds to the deficit. …In a separate interview, he told The New York Times that the debt is “the greatest threat to our nation,” more dangerous than the Islamic State in Iraq and Syria, or North Korea.

Ugh, again.

The threat isn’t the red ink. The real danger is an ever-increasing burden of government spending, driven by entitlements.

Besides, the GOP tax bill actually is a long-run tax increase!

Let’s close with a video on the topic from Marginal Revolution. It has too much Keynesianism in it for my tastes, but the discussion of Argentina’s default is useful for those who wonder about whether the United States is going to have a debt meltdown at some point.

P.S. I don’t agree with Keynesians and I don’t agree with the self-styled deficit hawks. But I can appreciate that both groups have a consistent approach to public finance. What really galls me are the statist hypocrites who are cheerleaders for debt when there are proposals to increase government spending, but then do a backflip and pretend that debt is terrible and must be reduced when tax increases are being discussed.

Is Good Globalism Being Undermined by Bad Globalism?

Tue, 03/13/2018 - 12:18pm

The biggest challenge, when I talk to politicians about the free-market agenda, is convincing them that they should restrain the growth of government. To be more specific, I think they often understand and accept the argument that ever-rising fiscal burdens are bad for a nation’s economic and moral health, but they are afraid that voters and interest groups will kick them out of office if they reduce the size and scope of the public sector.

I have a different challenge when talking to ordinary people about the free-market agenda. They’re quite comfortable (at least in theory) with the notion that it’s good to cap the growth of government spending, but there is a lot of skepticism about trade. And their doubts sometimes persist even after I share my eight questions and five charts showing the folly of protectionism.

In part, I think these skeptics share Trump’s mistaken belief that a trade deficit is a sign of weakness. But I’ve also found in my many conversations that some people simply are not comfortable with globalization.

But what does that concept even mean?

In his latest column for the New York Times, Bret Stephens points out that there’s no clear definition of what it means to be pro-globalist.

I grew up in Mexico City… Since then, I have lived in Chicago, London, Brussels, Jerusalem, New York and Hamburg. I suppose this makes me a “globalist” in certain eyes… To be a globalist means almost nothing — even “Davos Man” has to trundle home somewhere after the annual forum draws to a close. Rex Tillerson is as much a globalist as Samantha Power. Ditto for John Bolton and John Kerry, Charles Koch and George Soros, Mike Pompeo and Julian Assange. A term that embraces opposites has almost no explanatory power.

So he suggests a definition of what it means.

Maybe it’s time now to make “globalist” mean something after all. An earlier generation of globalists — they called themselves internationalists — had learned the lessons of the 1930s and understood that the U.S. could not cut itself off from the world and expect to remain safe from it. Successive generations of Americans — military and foreign-service officers, businessmen and teachers, humanitarians and entertainers — went out into the world and sought to make it a better place.

All of that sounds very appealing.

Especially when compared to what it means to be on the other side.

To be an anti-globalist…does specify something. …In short, anti-globalism is economic illiteracy married to a conspiracy mind-set.

Since I’ve written about the foolishness of protectionism and also explained why it’s silly to believe in conspiracy theories, I obviously agree.

But we have a problem. Globalism (or globalization, or internationalism, or the policies of “Davos Man,”, or whatever you want to call it) increasingly is perceived to be about more than free trade and comity between nations. In the minds of market-oriented people, it is getting linked with other policies that cause considerable angst.

  • Does globalism mean supporting the OECD’s efforts to undermine tax competition so that it’s easier for politicians to impose bad tax policy and more redistribution?
  • Does globalism mean agreeing with the IMF’s support for bailouts and higher taxes, policies which arguably are only for the benefit of politically connected big banks?
  • Does globalism mean adding regulatory harmonization to trade agreements, supplanting the much more market-friendly approach of mutual recognition?
  • Does globalism mean signing onto agreements that give powers to unaccountable and corrupt international bureaucracies such as the United Nations?
  • Does globalism mean siding with the European Commission in imposing one-size-fits-all rules for member nations notwithstanding the subsidiarity principle?

This is why I find this issue so frustrating.

Like Bret Stephens, I consider myself a globalist. To me, it’s a way of saying I want peaceful trade and investment flows between people in different nations. Heck, it’s also a way of saying I like and appreciate other peoples and other cultures.

But many of the other people who self-identify as globalists support policies that increase the power of governments over the private economy.

Here’s my simplified way to looking at this issues. All globalists are in favor of free trade and cross-border investment flows, but there’s then a division based on whether they want governments to compete or collude. And that’s basically a proxy for whether they favor small government or big government.

In this 2×2 matrix, the globalists are on the left side, but they’re divided between “Good Globalism” and “Bad Globalism.” Sort of the difference between Switzerland and Sweden.

I initially identified the bottom-right as “Anti Globalism,” but decided that “Statism” was the better label. After all, there should be a place for those who want global agreements to expand the power of government while also closing borders to trade and investment. Maybe India would be a good example of this bad approach.

But I couldn’t figure out a good label for the top-right. So I put “Irrationality” for the obvious reason that competition and protectionism are mutually exclusive concepts. And I have no idea what country belongs in this box.

P.S. This is my first stab at this issue. I’m open to suggestions on better labels and descriptions for my 2×2 matrix. And I also freely admit that there are aspects of the globalization debate – such as migration and military alliances – that aren’t included in my analysis. I’ll let others figure out how to create and classify a 4-dimensional matrix.

P.P.S. Not all global agreements are bad. Consider international pacts on air traffic control. Or certain anti-pollution treaties.

P.P.P.S. For more information on today’s topic, here’s my explanation of how borders can promote liberty, and here’s my explanation for why protectionism and tax harmonization are two peas in a pod.

Seven Adverse Consequences of Big Government

Mon, 03/12/2018 - 12:07pm

I’ve narrated a video on why big government is theoretically bad for an economy, another video looking at the empirical evidence on government spending and economic performance, and also a video on the growth-maximizing size of the public sector.

But if you want to see a lot of what I said condensed into one video, here’s Dennis Prager talking about differences in how the left and right view government. The opening part of the video is interesting, though I suspect his descriptions only apply to philosophically motivated activists on each side.

The part I want to focus on begins about 1:15, when he outlines seven adverse consequences of ever-growing government.

I think he put together a very good list. Here’s my two cents on his seven points.

  1. More Corruption – He points out that a government with lots of power and control will be very susceptible to misbehavior as interest groups and politicians figure out ways of scamming the system. Very similar to the message in one of my videos.
  2. Less Liberty – It is basically a tautology that ever-larger government necessitates a reduction in liberty. Not in a totalitarian sense, but taxes and regulations constrain the freedom of individual to earn and control income.
  3. Fiscal Crisis – He warns that big government is a recipe for fiscal crisis. I’m not sure if this has to be inevitable, but from a practical perspective, he is rightDemographic change and entitlements are a poisonous combination.
  4. Punitive Taxation – If government consistently expands faster than the productive sector of the economy, that almost certainly means ever-higher taxes, which ultimately will be self defeating because of the Laffer Curve.
  5. Unsustainable Debt – An expanding burden of government spending also will mean ever-higher levels of red ink, especially once the tax burden is so high that additional levies don’t produce much – if any – revenue.
  6. Totalitarianism – This is probably Prager’s weakest point. He’s right that bad people do very bad things when they control a government, but I suspect western nations will suffer societal breakdown rather that dictatorship.
  7. Dependency – He closes very strong with observations about the danger of luring people into reliance on government. This concern about the erosion of societal capital is much more important than most people think.

For all intents and purposes, Prager’s video is a very good description of “goldfish government.”

This is the term I use to describe the unfortunate tendency of politicians to over-tax and over-spend until a society faces a crisis.

For what it’s worth, I don’t think western nations necessarily will collapse (though some almost certainly will depending on the degree to which societal capital has been destroyed).

But I will acknowledge that politicians generally don’t like taking the necessary steps to avert fiscal crisis.

Which is one of the reasons I’m such a big fan of tax competition. I don’t want politicians to think that endless tax increases are a way of postponing the fiscal day of reckoning.

The (Highly Implausible but Theoretically Attractive) Case for Import Taxes

Sun, 03/11/2018 - 12:25pm

Every time I write a column criticizing Trump’s protectionism, I get pushback. Some of the resistance is from people who genuinely think trade barriers are a good thing, and I routinely respond by asking them to ponder these eight questions or these five charts.

But I also get negative feedback from people who point out that the United States imposed significant import taxes in the 1800s, a period when the United States transitioned from agricultural poverty to middle-class prosperity.

Doesn’t this prove tariffs are pro-growth?

That’s sort of what Brian Domitrovic asserts in a recent column for Forbes.

There is an indisputable chronological correlation between the tariff and phenomenal economic growth. From the late 18th to the early 20th twentieth centuries, the United States steadily developed into the most successful economy in the world.

Brian’s column explores how trade taxes worked in the early history of the United States, but let’s skip to the part that is relevant to today’s discussion.

From 1789 to 1913, the size of the federal government in the economy as a whole averaged about 3%, with variation in time of war. Today, that number is over 20%—a 7-fold increase. State and local government was another 3% back then, and is another 12% today. Where total government was 6% of economic output in the era of the tariff, it is five times larger at over 30% today.

In other words, the real lesson to be learned is not that trade taxes are good for growth, but rather that an economy can prosper if the public sector is very small. And Brian is right that the federal government used to be only a tiny burden in the United States.

Brian even makes the case that government may have stayed small during the 1800s precisely because import taxes were seen as naked cronyism.

The quid pro quo the populace made with the tariff is that Congress and its conspirators in business got their favors, but in turn Congress’s realm, the government, had to stay small. Therefore, the private economy was free… Boundless growth at the hands of entrepreneurs and a talented and ambitious workforce built up year after year as Congress got to curry its petty favors on the condition that government stayed limited in size.

He also explains that politicians back then were very cognizant of the Laffer Curve.

A tariff “for revenue” was one where a rate was set low enough for the good in question to flow into the country in sufficient quantity to bring in increasing receipts to the government. A “prohibitive” tariff was one that was so high, receipts would go up if a rate were lowered. The “Laffer curve” concept was the most discussed theorem in political-economic debates in the United States in the 19th century.

The same principle applies to the income tax today. A modest rate generates lots of revenue, whereas a punitive rate can actually cause a drop in tax receipts.

And, speaking of the income tax, the introduction of that awful levy actually gave Hoover and other politicians the fiscal leeway to impose “prohibitive” tariffs…with very bad results.

After the income tax was put in place in 1913, the tariff shed its revenue purpose and became exclusively a vehicle for cronyism. Therefore it got very high—so high, in 1930, that…the…system was ruined and the result was the Great Depression.

For what it’s worth, I think there were lots of other bad policies from Hoover and Roosevelt that caused – and then exacerbated – the economic damage of the 1930s, so high tariffs don’t deserve all the blame.

But let’s not digress from our main topic of whether trade taxes can be justified.

Brian’s column doesn’t say that tariffs are good, but he does point out that such a system was only capable of financing a very small government. And that meant the private sector had lots of breathing room to operate.

But a “sin of omission” is that he also could have elaborated on the economic benefits of having no income tax. During the 1800s (with the exception of Lincoln’s income tax during the Civil War and an income tax in 1894 that was declared unconstitutional in 1895), there was no personal income tax. And no corporate income tax. And no payroll taxes. Or death tax. Or capital gains tax.

Dean Clancy highlighted these benefits when considering the conditions that would be necessary for him to support trade taxes.

I sort of agree. But I hope Dean would agree to a friendly tweak to his tweet, so that it read “McKinley-size tariffs were a less-worse option because of…”, and then list the policies that actually were good, such as no taxes on income and very small government.

Sadly, I don’t see any practical way of unwinding all the bad policy of the past 100 years.

So the case for trade taxes is very similar to the market-friendly case for a value-added tax. Yes, there is a theoretical argument to replace all income taxes with a VAT, but it’s not realistic.

Likewise, I’m open to the argument that higher tariffs might be acceptable, but only if someone first shows me a practical plan to 1) shrink the federal government back down to what the Founding Fathers envisioned, and 2) get rid of the IRS and all taxes on income.

P.S. Alexander Hamilton, writing about tariffs and excises in Federalist 21, clearly appreciated the insights of the Laffer Curve: “It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.”

P.P.S. The Cayman Islands is the closest example of a successful modern economy that finances a big chunk of government with import taxes. But that example is somewhat limited since almost all goods are imported. For such an economy, tariffs are basically the same as a sales tax. For what it’s worth, I would argue Cayman’s fiscal system has more in common with Monaco today than with the United States in the 1800s.

New IMF Study Shows U.S. Would Benefit from Lower Tax Rates and Less Government Spending

Sat, 03/10/2018 - 12:29pm

I’m not a fan of international bureaucracies, but they’re not universally bad. Yes, we almost always get a bad policy agenda from the left-leaning political appointees who run these organizations.

But it’s also true that the professional economists at these bureaucracies oftentimes produce solid research. A good example is the new study of the American fiscal system by three economists at the International Monetary Fund.

They start with an observation that should be uncontroversial but is nonetheless surprising given the tendency of the IMF’s leadership to advocate more taxes.

The consensus is that reducing distortionary taxes on labor and capital income can stimulate economic activity by encouraging an increase in labor supply and higher savings. Indeed, the empirical literature on tax multipliers is vast and points to measurable effects of reducing taxes on output and employment.

I’m delighted by these two sentences. Makes me wonder why the political types who run the IMF overlook these basic insights when they’re bullying governments into enacting higher tax rates!

But let’s set that aside and look at the specific findings in this report. Here’s what the IMF tried to calculate.

We simulate three types of tax policy changes (i) A “middle-class tax cut” which reduces the effective tax rates for households earning between 0.5 to 4 times the median income and is offset by lower government spending; (ii) A “middle-class tax cut” and an EITC expansion that is fully financed by an increase in consumption taxes; (iii) tax cut for high income groups that is also combined with an EITC expansion and financed by a higher consumption tax.

Since I’ve pointed out that not all tax cuts are created equal, I think this kind of research can be very helpful.

Here are the core findings from the IMF’s analysis.

The model generates positive effects on growth, consumption and investment that are broadly in line with the recent empirical literature on PIT multipliers. Despite the positive macro response, supply side effects are never strong enough to prevent cuts from being revenue losing (i.e., tax cuts do not “pay for themselves”). …A tax cut for the middle-class, financed from a lump-sum reduction in government spending, results in a loss of revenues of 0.8 percent of GDP but raises the steady state GDP by just under 1 percent after 5 years (i.e., a personal income tax multiplier of 1.1). …growth effects are smaller when lower personal income taxes are paid for with a VAT. …Tax cuts for higher income groups tend to have a stronger aggregate impact than tax cuts for the middle class. Indeed, in the simple case where the tax cuts are paid for by lump sum cuts in government spending, the personal income tax multiplier is around 3. … tax cuts that are incident on high income households increase income polarization.

This all makes sense. Lower tax rates are good for growth, particularly if offset by reductions in the burden of government spending.

And since lower tax rates are only self-financing in very rare circumstances, I have no problem with the conclusion about lower revenues.

Indeed, the concluding section about “income polarization” was the only part of the above excerpt that rubbed me the wrong way. And even then, I’m only irked because of the implication that lower tax rates might be a bad idea if the rich get richer faster than the poor get richer.

While I like the overall findings, I want to focus on two details from the study.

First, let’s look at the results for middle-class tax cuts. The IMF researchers looked at two versions, with one tax cut financed by lower spending and the other tax cut financed by higher consumption taxation.

As you can see from these two charts, you get more growth and higher wages when you simultaneously reduce taxes and spending.

Second, let’s look at the IMF’s comparison of middle-class tax cuts and tax cuts for high-income people. The conclusion is that you get more bang-for-the-buck when lowering tax rates at the top.

…there are larger growth effects when the tax cut is incident on the higher income groups. The reasons behind this are two-fold: First, the top quintile responds to lower taxes by saving more which, in the closed economy version of the model, leads to more capital formation and a decline in the equilibrium real interest rate. Second, those receiving a reduction in their tax rate supply more high-skilled labor which helps boost output.

By the way, I should hasten to add that this isn’t an argument against middle-class tax relief. As far as I’m concerned, all taxpayers are sending too much money to politicians.

I’m merely highlighting this analysis because some types of tax cuts have larger growth effects. For what it’s worth, I’m not even sure I agree with the IMF’s analysis of why lower tax rates on the rich produce more growth. I suspect the main reason for the stronger results is that high-income taxpayers have much greater ability to change their behavior in response to altered incentives.

In any event, here’s the IMF’s comparison of the two types of tax cuts and what happens to output, consumption, and investment.

P.S. Since we’re discussing the occasional good work of international bureaucracies, here’s my favorite World Bank study and here’s my favorite OECD study.

P.P.S. I’ve never seen any good research from the United Nations. I’m not claiming there’s never been an economically sound study from that bureaucracy. All I’m saying is that I’ve never run across an example.

P.P.P.S. I don’t know if the European Central Bank should be characterized as an international bureaucracy, but it definitely has the highest percentage of quality research (see hereherehereherehere, and here for examples).

Fiscal Fights with Friends: Should there Be a Federal Program for Paid Parental Leave?

Fri, 03/09/2018 - 12:33pm

Back in 2015, I wrote some columns about policy differences with folks who normally would be considered allies.

  • In Part I, I defended the flat tax, which had been criticized by Reihan Salam
  • In Part II, I explained why I thought a comprehensive fiscal package from the American Enterprise Institute was too timid.
  • In Part III, I disagreed with Jerry Taylor’s argument for a carbon tax.

Now it’s time for another friendly spat.

A handful of right-of-center groups and individuals have decided to embrace a new entitlement for paid parental leave.

Such as the Independent Women’s Forum.

…the United States is the only industrialized nation that does not mandate or subsidize at least some form of paid parental leave. …there is a way for the federal government to provide paid parental leave to every worker in the United States at no additional cost: offer new parents the opportunity to collect early Social Security benefits after the arrival of their child in exchange for their agreeing to defer the collection of their Social Security retirement benefits. …New parents deserve this choice.

Along with the American Enterprise Institute (cooperating with the left-leaning Urban Institute).

…public interest in creating a federal paid family leave policy has grown. …we came up with a compromise proposal… Its key elements are benefits available to both mothers and fathers, a wage-replacement rate of 70 percent up to a cap of $600 per week for eight weeks, and job protection for those who take leave. It would be financed in part by a payroll tax on employees and in part by savings in other parts of the budget. …we felt an obligation…this was better than doing nothing when the US is the only developed nation without a national paid leave policy.

And Ramesh Ponnuru of National Review.

The more I’ve followed the debate, the more I’ve supported the idea. …there are certain similarities between the personal-account and paid-leave ideas that ought to reduce conservative skepticism of the latter. …there’s a mental block that’s keeping the paid-leave objectors from seeing how much these debates have in common.

Kristin Shapiro of IWF and Andrew Biggs of AEI elaborated on a version of this idea in a column for the Wall Street Journal.

The U.S. is the only industrialized nation without a law guaranteeing workers paid parental leave. The idea has broad public support, but how to pay for it? One idea is to mandate that employers fund it, but economists find employers offset the cost by reducing wages for female employees. …Our proposal is simple: Offer new parents the opportunity to collect early Social Security benefits for a period—say, 12 weeks—after the arrival of their child. To offset the cost, parents would agree to delay collecting Social Security retirement benefits… We estimate that to make the Social Security program financially whole, a parent who claimed 12 weeks of benefits would need to delay claiming retirement benefits by only around six weeks. …This idea should be considered as Congress turns to entitlement reform. It’s a fiscally responsible opportunity to help parents and children.

All of this sounds nice, but there are several reasons why I’m very skeptical.

But let’s first distinguish between a very bad idea and a somewhat bad idea. The AEI-Urban scheme for a payroll-tax-funded paid leave program is the very bad idea. The United States already has a baked-in-the-cake entitlement crisis, so the last thing we need is the creation of another tax-and-transfer program.

So I’ll focus instead on the IWF-designed plan to enable parents to get payments from Social Security when they have a new child.

I have three objections.

  1. From a big-picture philosophical perspective, I don’t think the federal government should have any role in family life. Childcare certainly is not one of the enumerated powers in Article 1, Section 8, of the Constitution. Proponents of intervention routinely argue that the United States is the only advanced nation without such a program, but I view that as a feature, not a bug. We’re also the only advanced nation without a value-added tax. Does that mean we should join other countries and commit fiscal suicide with that onerous levy?
  2. Another objection is that there is a very significant risk that a small program eventually become will become much larger. I haven’t crunched the numbers, but I assume the plan proposed by Shapiro and Biggs is neutral. In other words, the short-run spending for parental leave is offset by future reductions in retirement benefits. But once the principle is established that Uncle Sam is playing a role, what will stop future politicians from expanding the short-run goodies and eliminating the long-run savings? It’s worth remembering that the original income tax in 1913 had a top rate of 7 percent and it only applied to 1/2 of 1 percent of the population. How long did that last?
  3. Finally, I still haven’t given up on the fantasy of replacing the bankrupt tax-and-transfer Social Security system with a system of personal retirement accounts. Funded systems based on real savings work very well in jurisdictions such as AustraliaChileSwitzerlandHong Kong, and the Netherlands, but achieving this reform in the United States will be a huge challenge. And I fear that battle will become even harder if we turn Social Security into a piggy bank for other social goals. For what it’s worth, this is also why I oppose plans to integrate the payroll tax with the income tax.

Now let’s see what others have to say about a new entitlement for parental leave.

Veronique de Rugy of Mercatus explains for National Review why Ramesh’s support for a new federal entitlement is the wrong approach.

…we don’t currently have a national parental-leave entitlement. Yes, the plan he’s talking about isn’t as bad as what Hillary would propose, but it still assumes that the federal government should be playing a role in this. Let’s not pretend otherwise. It relies on the government-run Social Security system, and it increases spending for a good while. That’s regress, not progress. And we also need to be realistic. Once the door has been opened, the Left will radically expand the scheme in ways that none of us like. And, to be honest, I can already hear future conservatives demanding that the program be expanded because parents who have to retire a few months later because they use paid leaves pay “a retirement penalty” compared to non-parents. …my point of reference for judging this plan is economic freedom and smaller government involvement. If you prefer more pro-family benefits even at the risk of growing the government, then we won’t agree.

Writing for Reason, Shikha Dalmia also is a skeptic.

…this is a flawed proposal that’ll do more harm than good, including to its intended beneficiaries. …The scheme will incentivize more workers to take off and for longer periods of time. This will be especially disruptive for small businesses and start-ups that operate on a shoestring budget and can’t spread the responsibilities of the absent workers across a large workforce. They will inevitably shy away from hiring young women of childbearing age. This will diminish these women’s job options. …Furthermore, it isn’t like Social Security has a ton of spare cash lying around to dole out to people other than retirees. The program used to generate surpluses when its worker-to-retiree ratio was high. But this ratio has dropped from 42 workers to one retiree in 1945 to less than four workers per retiree now. And even though payroll taxes have gone up from 2 percent at the program’s inception to 12.6 percent now, the system is still taking in less money than it is paying out in benefits, because of all the retiring baby boomers. …It is also beyond naïve to think that once the government is allowed to dip into Social Security to pay for family leave at childbirth, it’ll simply stop there. Why shouldn’t families taking care of old and sick parents get a similar deal? Liberals are already floating proposals to use Social Security for student loan forgiveness. The possibilities are endless.

The Wall Street Journal opined against the idea last month.

…some in the ostensible party of limited government think this is the perfect time to add a new entitlement for paid family leave. …this would shift the burden of providing the benefit from the private economy to government. Academic evidence shows that family leave keeps employees in their jobs and can make them happier or more productive, which is one reason many companies pay for it. But why pay when the government offers 12 weeks? …This “crowd out” effect is a hallmark of all entitlements… Also strap yourselves in for the politics. Social Security started as a 2% payroll tax to support the elderly poor, but the tax is now 12.4% and the program is still severely under-funded.

The WSJ shares my concerns about a small program morphing into a huge entitlement.

No politician is going to deny leave to a pregnant 22-year-old merely because she hasn’t paid much into Social Security. Watch the social right demand a comparable cash benefit for stay-at-home moms, and also dads, or caring for an elderly dependent. And wait until you meet the focus group known as Congressional Democrats, who are already dismissing the proposal as unfair for forcing women to choose between children and retirement. Democrats will quickly wipe out the deferral period so everyone is entitled to leave now and get the same retirement benefits later. And once Republicans open Social Security for family leave, the door will open for other social goals. Why not college tuition? …every entitlement since Revolutionary War pensions has skied down this slope of inexorable expansion. Disability started as limited insurance but now sends checks to roughly nine million people. Medicaid was intended to cover the vulnerable and disabled but today dozens of states cover childless working-age adults above the poverty line.

If you want more information, I had two columns last year (here and here) explaining why federally mandated parental leave is a bad idea.

To put the issue in context, we should be asking whether it makes sense for the government to make employees more expensive to employers. And since these proponents will probably sell this new entitlement as being good for new mothers, it’s worth pointing out that even a columnist for the New York Times admitted that women actually get hurt by such policies.

Remember, if someone says the answer is more government, they’ve asked a very silly question.

Will Congress Reject Trump’s Job-Killing Tax Increases on Trade?

Thu, 03/08/2018 - 12:11pm

wrote last month about the risk of Trump harming American workers, consumers, and producers by pulling the United States out of NAFTA.

That’s still a danger to the U.S. economy, but it’s been pushed to the back burner by a more immediate threat – the President’s unilateral decision to impose big tax increases on steel and aluminum imports.

American trade law (specifically the Trade Expansion Act of 1962) does give Trump the authority to impose such taxes, but it’s worth noting that Congress has the power to change the law and negate the President’s short-sighted actions.

To be sure, such a change presumably would require two-thirds support to override a Trump veto. And I have no idea how many congressional Republicans are loyal to free markets rather than Trump, and I also don’t know how many congressional Democrats would vote against Trump’s protectionism, either because they support trade or because they simply don’t like the President.

But I do know that there would be lots of support. In today’s Washington Post, Charles Koch makes a principled case for open trade and condemns the President’s protectionism.

Countries with the freest trade have tended to not only be the wealthiest but also the most tolerant. Conversely, the restriction of trade — whether through tariffs, quotas or other means — has hurt the economy and pitted people against each other. Tariffs increase prices, limit choices, reduce competition and inhibit innovation. Equally troubling, research shows that they fail to increase the number of jobs overall. …History is filled with examples of administrations that have implemented trade restrictions with devastating results. At the dawn of the Great Depression, the Smoot-Hawley Tariff Act raised U.S. tariffs on more than 20,000 imported goods, which accelerated our decline instead of correcting it. More recently, President George W. Bush’s 30 percent steel tariff led to increased consumer costs and higher unemployment. And President Barack Obama’s 2009 decision to raise tariffs on Chinese tires ultimately burdened consumers with $1.1 billion in higher prices. The cost per job saved was nearly $1 million , not considering all the lost jobs that went unmeasured.

And he specifically condemns the new trade taxes Trump has imposed.

The administration’s recent decision to impose major steel and aluminum tariffs — on top of higher tariffs on washing machines and solar panels — will have the same harmful effect. …those who can least afford it will be harmed the most. Having just helped consumers keep more of their money by passing tax reform, it makes little sense to take it away via higher costs.

Mr. Koch also observed that we’ve become richer during a period when trade taxes fell.

It is no coincidence that our quality of life has improved over the years as the average U.S. tariff on imported goods has fallen — from nearly 20 percent in 1932 to less than 4 percent in 2016.

This is an under-appreciated point. I’ve argued – and shared evidence – that trade liberalization played a key role in offsetting the damage of higher fiscal burdens in the post-WWII era. Yet Trump wants to reverse some or all of this progress.

The Wall Street Journal also opined on this issue.

President Trump could reduce the benefits of his tax cuts and regulatory rollback with protectionism. This risk became more serious after the Commerce Department…recommended broad restrictions on aluminum and steel imports that would punish American businesses and consumers. …the wide-ranging economic damage from restricting imports would overwhelm the narrow benefits to U.S. steel and aluminum makers.

The protectionists try to justify tariffs on the basis of national defense, but this is a silly argument since we’re not relying on potential enemies.

Canada accounts for 43% of aluminum imports—more than twice as much as China and Russia combined. Steel imports are also diversified with Canada (17%), South Korea (12%) and Mexico (9%) accounting for three of the top four foreign sources. China accounts for about 2% of steel and 10% of aluminum imports.

The WSJ then lists some of the harmful effects of trade taxes.

About 16 times more workers are employed today in U.S. steel-consuming industries than the 140,000 American steelworkers. Economists Joseph Francois and Laura Baughman found that more U.S. workers lost jobs (200,000) due to George W. Bush’s 2002 steel tariffs than were employed by the entire steel industry (187,500) at the time. …Raising the cost of steel and aluminum inputs would impel many manufacturers to move production abroad to stay competitive globally. Does Mr. Trump want more cars made in Mexico? …Oh, and don’t forget that other countries could retaliate with trade barriers that hurt American exporters. …Why would Mr. Trump undercut his achievements with trade barriers that harm American workers and consumers?

Irwin Stelzer, writing for the Weekly Standard, also is quite critical.

…the president doesn’t like trade deficits—job killers as he sees it—and so he has put tariffs on washing machines and solar panels and now is deciding what costs and restrictions to place on imports of steel and aluminium. …Never mind that such measures will raise the costs of steel and aluminum-using industries such as autos, making them less competitive with imports that can keep their costs down by buying cheaper, un-tariffed metals. One economic study after George W. Bush imposed tariffs on steel in 2002 concluded that job losses in steel-consuming industries exceeded the number that would have been lost had the entire American steel industry gone out of business. …if that causes job losses scattered among a lot of other industries and states, then so be it. Trump figures that those voters won’t make the connection between the job losses and the steel tariffs.

Last but not least, Tom Mullen eviscerates protectionism in a piece for CapX.

When Adam Smith wrote The Wealth of Nations, it…was to refute the kinds of protectionist ideas championed by conservatives like Edmund Burke and Alexander Hamilton in Smith’s day, Abraham Lincoln eighty years later, and Trump today. Bastiat remade Smith’s case in 1848. Henry Hazlitt did so again in 1946. …What is unseen is the money American consumers no longer have when thetariffs are put in place. For example, the tariff may result in them paying $200 for the same pair of sneakers they previously paid $100 for. That means they no longer have $100 they previously had after buying the sneakers, which they could spend on other products. Whatever jobs they were supporting with that $100 are now lost. …When the ledger is balanced, Americans, in general, are far better off without the tariff.

Here’s more on the economic poison of protectionism.

The lower prices Americans pay for automobiles, clothing, Apple iPhones, and Bobcats allow them to patronise those American industries which operate more efficiently than their overseas competitors. That’s called “comparative advantage,” something else free market advocates since Adam Smith have been educating people about. …No matter what spurious arguments special interests make in favour of tariffs, they are, at the end of the day, just another tax. …And don’t forget, all the unseen, negative consequences of tariffs apply equally to foreigners. If they are taxing imports on automobiles, their citizens have less money to spend on other products. Their businesses that use imported materials must raise their prices and become less competitive. Any advantage they appear to gain in one sector, they lose in another, with the same overall net loss as we experience.


Protectionism is a no-win game. Politicians in Country A take aim at businesses in Country B, but the main casualties are inside their own borders. Consumers lose, taxpayers lose, and all the upstream and downstream businesses in the supply chain lose.

Which is why researchers inevitably find that trade barriers are associated with net job losses. In other words, the “unseen” losses are far larger than the “seen” gains.

Which is exactly what Bastiat warned about more than 150 years ago.

P.S. Shifting gears, I’ve periodically complained about the immoral and amoral actions of large corporations. Simply stated, big businesses oftentimes are perfectly happy to use the coercive power of government to grab unearned wealth.

Koch Industries is a noble exception. Here’s another excerpt from Charles Koch’s Washington Post column.

One might assume that, as the head of Koch Industries — a large company involved in many industries, including steel — I would applaud such import tariffs because they would be to our immediate and financial benefit. But corporate leaders must reject this type of short-term thinking, and we have. …We only support policies that are based on equality under the law and that help people improve their lives. This is why we successfully lobbied to end direct ethanol subsidies, despite being one of the largest ethanol producers in the United States. It is why we fought against the inclusion of a border adjustment tax in the tax-reform package, even though it would have greatly increased our profits by increasing costs to consumers.

I’m obviously pleased that the folks at Koch are on the right side of the ethanol and BAT issues, but that’s a secondary matter. What’s praiseworthy is that the company rejects all cronyism. Even when it would benefit.

If more businesses acted that way, there would be a lot more support for free enterprise.

Switzerland: Home to Practical Libertarians rather than Ideological Libertarians

Wed, 03/07/2018 - 12:18pm

The Swiss people are normally very sensible when asked to vote in national referendums. Here are some recent results.

Though my favorite referendum result occurred several years before I started writing on this site.

Given all these results, you won’t be surprised to learn that Switzerland is near the top in rankings of economic freedom, trailing only Hong KongSingapore, and New Zealand.

But this does not mean that Switzerland is a libertarian nation. At least not in an ideological sense. And we have two new referendum results that underscore this point.

This past weekend, Swiss voters had an opportunity to get rid of the central government’s value-added tax, personal income tax, and corporate income tax.

Ending those taxes would be a libertarian fantasy, but the initiative to extend the levies was easily approved.

More than 84% of voters have renewed the government’s right to tax its citizens and companies for another 15 years. This is a unique feature of Switzerland’s political system of direct democracy and federalism.  …rejection would have been a nightmare for the government. …said Finance Minister Ueli Maurer in January. “If voters were to say no, the Swiss government wouldn’t have enough funds and there’s no way we could find another source of revenue or introduce spending cuts of the same order.”

Voters were swayed by arguments that a no vote would cause too much fiscal disruption. Slashing the central government’s budget by 60 percent might appeal to ideological libertarians, but it didn’t fly with don’t-rock-the-boat Swiss voters.

The direct federal tax and the sales tax together contributed about two-thirds of the Swiss central government’s budget, bringing in around 43.5 billion Swiss francs ($44.25 billion) in 2016. …Should voters reject the measure, the government would have to slash spending by more than 60 percent practically overnight or find new sources of revenue, Maurer told reporters.

Here’s a pie chart showing the revenue sources for the central government.

I would have voted no, of course, and I wish more Swiss voters had lined up against the initiative.

Not because I would have thought that an immediate 60-percent reduction in the size of the central government was feasible. But a larger share of no votes at least would have sent a signal to politicians in Bern that frugality is a good idea.

There was another referendum over the weekend that also produced an unfortunate result. Swiss voters approved continuing subsidies for state-run media.

The Swiss Broadcasting Corporation, Switzerland’s public broadcaster is largely funded by a broadcasting fee. This fee, known colloquially as Billag, the name of the agency that collects it, is paid by most companies and essentially every household. The No Billag initiative, is a bid to do away with fee. …the No Billag vote was rejected by 71.6% of voters.

The margin of defeat is especially disappointing since libertarians actively campaigned for this initiative.

Switzerland, like many European nations, has certain television and radio channels that are run by the government. …Together with other classical liberals in Switzerland, Frédéric Jollien is fighting against the royalties imposed by the government for media consumption. 450 Swiss Francs, the equivalent of €382 or $456, is the annual fee that consumers are required to pay, regardless if they want state-run TV and radio channels or not. …Journalists (who, by the way, are exempt from paying this fee) are releasing heavy verbal fire on the campaigners. They claim it would cause massive unemployment in the media sector, that it is anti-democratic, and that it would enable big foreign companies to take over the Swiss market.

Alas, the fear campaign succeeded.

But I hasten to add that this doesn’t mean Switzerland is turning towards statism. I suspect the real story is that the Swiss are content with the status quo.

And the status quo (especially by European standards) is a practical form of libertarianism.

Here’s some of what Dan Hannan wrote last year.

I have always loved Switzerland…its devolved decision-making, its entrenched Euroskepticism. …I am a Helvetophile for many of the same reasons as America’s Founders. James Madison was fascinated by the way Switzerland had “no concentered authority, the Diets being only a Congress of Delegates from some or all of the Cantons.” …George Mason was entranced by the militia system: “Every Husbandman will be quickly converted into a Soldier, when he knows & feels that he is to fight for his own. It is this which preserves the Freedom and Independence of the Swiss Cantons, in the midst of the most powerful Nations.” …Switzerland has stubbornly retained its sovereignty, despite being surrounded by the EU. …Swiss democracy is direct, decentralized and devolved. Most fiscal decisions are taken locally. Result? Swiss voters are the happiest in Europe, their economy is the freest, and their state budget the smallest.

And let’s not forget that Switzerland is still a bright spot on gun rights.

In February 2011, Swiss citizens voted in a referendum that called for a national gun registry and for firearms owned by members of the military to be stored in public arsenals. …Hermann Suter, who at the time was vice president of the Swiss gun-rights group Pro Tell, told the BBC then. “The gun at home is the best way to avoid dictatorships—only dictators take arms away from the citizens.” Apparently many of his fellow Swiss agreed. The referendum was easily defeated. Gun ownership in the country has deep historic roots… guns are popular… Children as young as 12 are taught how to shoot…and are encouraged to participate in highly popular target-shooting competitions. The country’s cultural attachment to firearms resembles America’s in some ways…it has the third-highest rate of private gun ownership in the world… The Swiss Defense Ministry estimates that there are 2 million privately owned weapons in the country of 8.3 million people.

Yet there’s almost no gun-related crime.

Switzerland has a low rate of gun crime, and hasn’t seen a mass shooting since 2001.

And let’s not forget that the fiscal burden of government in Switzerland is comparatively modest.

Not by libertarian standards. Not by historical standards.

But compared to other European nations, Switzerland is a fiscal Shangi-La. The tax burden is lower, and spending consumes a smaller share of economic output.

And this translates into lower levels of red ink.

P.S. I find Switzerland to be a very interesting case study, for reasons noted above and also on issues such as decentralizationprivacy rightsgun rights, and private retirement savings. But I’m a policy wonk, so I’m drawn to unusual examples. What does surprise me is that other people must be interested in the country as well. My 2011 column comparing Switzerland and the United States is the 7th-most-viewed piece in the history of this site.

CF&P Joins Coalition Against Trump Tariffs

Wed, 03/07/2018 - 10:40am

A coalition of 29 organization’s released a letter calling on President Trump to reverse course on planned tariffs on aluminum and steel. The letter notes:

Free trade is an integral foundation for any economy seeking growth, innovation, and expanded opportunity. Not only is free trade good for the U.S. economy, it is also good for the American taxpayer.

As President, you pledged to put America and American jobs first. But imposing tariffs would be bad for the economy and bad for American workers. U.S. manufacturers that consume steel employ an estimated 40 to 60 times more U.S. workers than do steel producing facilities. This tax hike would put these jobs at risk. In fact, when George W Bush increased tariffs on steel, 200,000 jobs were lost as a direct result.

Two friends of CF&P also recently wrote on why tariffs are a bad idea. In his column for the Washington Times, Richard Rahn focuses on why the aluminum tariffs are wrongheaded:

Imported aluminum accounted for 64 percent of all aluminum used in the U.S. last year. By far, the biggest foreign supplier to the U.S. last year was Canada.

…Even though there are only a couple of firms left in the U.S. that produce primary aluminum, there are many that produce secondary aluminum and thousands that produce aluminum products from primary and secondary aluminum. A tariff on primary aluminum imports may be beneficial for those couple of producers, but it is insufficient to cause more companies to invest in smelters, and it raises costs for all of the aluminum product producers and consumers.

In 2016, the top six aluminum producing countries accounted for 77 percent of the world’s smelter capacity (primary aluminum), with the Chinese accounting for 54 percent, while the United States ranked number 6. The U.S. has higher energy costs than Canada (because Canada has abundant, low-cost hydropower), so much of the North American primary-aluminum production has migrated to Canada.

The aluminum industry in the two countries is highly integrated, with considerable cross-ownership and marketing relationships. When properly viewed as one (Canada and the U.S.) production and marketing area, North America is self-sufficient in primary, secondary and aluminum-product production.

He then makes the point that Chinese policies that harm their economy are not a good reason for pursuing the same in the US:

…China foolishly continues to build new smelter capacity even though it has no inherent energy cost advantage and, in fact, is reputed to have higher production costs than the U.S. If China was a true market economy, it would be importing aluminum from lower-cost producers.

China, by selling some of its aluminum below full costs (under accepted accounting conventions), is in effect giving away some of its product — which is a gift to aluminum product producers and final consumers. The Chinese worker is subsidizing Americans who drink beverages from aluminum cans.

American and other producers of primary aluminum are obviously unhappy that the Chinese are selling below full cost — which hurts their workers and stockholders. But this is a small group compared to all of those employed in the aluminum-product industries and the final consumers of aluminum products.

Finally, he addresses the supposed national security concerns:

The U.S. Department of Commerce produced a report in January, “The Effect of Imports of Aluminum on the National Security,” which provided much of the rationale for the proposed aluminum tariff. The report focuses on domestic U.S. smelter capacity rather on North American capacity (which is the relevant area given our defense-sharing agreements with Canada that go back more than 70 years, and the integration of the aluminum industry in the two countries).

The report also largely ignores the enormous U.S. secondary-aluminum capacity. The Chinese account for about 3 percent of U.S. aluminum consumption — which is no national security threat given the ability of the U.S. and all of our friends to satisfy its absence in a matter of weeks.

The proposed aluminum tariff makes no economic or political sense — a really bad idea.

Another article from Veronique de Rugy makes the case against the tariffs as well:

Mr. Trump and other protectionists justify tariffs by proclaiming that they will protect American workers from highly subsidized Chinese companies that sell their steel and aluminum at low prices in the United States market.

Never mind that we import more steel from 10 other nations than from China, or that domestic steel’s market share represents an impressive 70 percent. Nor is it a national security issue: Only 3 percent of that production goes toward the military.

Never mind that domestic steel profits and production have steadily risen since 2010, or that we already have more than 160 special duties on steel imports in place. These moguls demanded more protection and obtained satisfaction.

Decades ago, the Nobel Prize-winning economist Milton Friedman argued that businessmen themselves are among the biggest dangers to a free-market economy. They often seek government privileges to increase their profits and avoid competition. Indeed, import taxes — putting aside rhetoric about defending jobs — are well-known to have devastating effects on consumers. They are quite effective at lining the pockets of shareholders in protected industries.

We’ve seen this before. In 2002, President George W. Bush implemented his own steel tariffs. As expected, the taxes jacked up the price of domestic steel and temporarily boosted the industry’s profits. Steel-consuming industries, however, weren’t so lucky. According to an estimate from the nonpartisan Trade Partnership Worldwide, a staggering 200,000 people lost their jobs in downstream industries by the following year. That’s more workers than the entire steel industry had at the time.

She’s precisely right. This isn’t an us versus them, or U.S. versus China, issue. This is an industry versus industry issue, where Trump has decided to embrace the time-honored tradition of crony capitalism by picking winners and losers.

The problem with crony capitalism is that no matter which businesses are picked as “winners,” the mere act of making a choice renders all consumers losers.

Entitlements: The “Most Predictable Economic Crisis in History”

Tue, 03/06/2018 - 12:01pm

Writing about federal spending last week, I shared five charts illustrating how the process works and what’s causing America’s fiscal problems.

Most important, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending increasing much faster than what would be needed to keep pace with inflation.

And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as Social SecurityMedicareMedicaid, and Obamacare) were the real problem.

Let’s elaborate.

John Cogan, writing for the Wall Street Journalsummarizes our current predicament.

Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster. …all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. …If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. …entitlement spending accounts for nearly two-thirds of federal spending. …What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.

Here’s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.

And he concludes with a very dismal point.

…restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.

I largely agree. Trump has nominally endorsed some reforms, but the White House hasn’t expended the slightest bit of effort to fix any of the entitlement programs.

Now let’s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in an article for National Review.

…the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.” …Between 2008 and 2030, 74 million Americans born between 1946 and 1964 — or 10,000 per day — will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. …These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)… Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. …the spending avalanche has already begun. Since 2008 — when the first Baby Boomers qualified for early retirement — Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). …

Brian speculates on what will happen if politicians kick the can down the road.

…something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? …Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter… Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. …Frédéric Bastiat long ago observed that “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.

Not exactly a cause for optimism!

Last but not least, Charles Hughes writes on the looming entitlement crisis for E21.

Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. …Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. …The unsustainable nature of these programs face mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. …Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

By the way, it’s not just libertarians and conservatives who recognize there is a problem.

There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission.

For what it’s worth, I’m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the wrong kind of entitlement reform.

Heck, even folks on the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That’s a welcome acknowledgment of reality.

A note on the folly of tax cuts. The US govt is an insurance company with an army; its expenses dominated by the elderly — and the ratio of >65 to working-age is rising sharply 1/

— Paul Krugman (@paulkrugman) February 28, 2018

Sadly, he concludes that we should somehow fix this spending problem with tax hikes.

That hasn’t worked for Europe, though, so it’s silly to think that same tax-and-spend approach will work for the United States.

I’ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.

It’s certainly true that deficits and debt will increase in the absence of genuine entitlement reform, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn’t be a problem if matched by big tax hikes.

Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.

In other words, the real problem is spending, not how it’s financed.

I’m almost tempted to give all of them the Bob Dole Award.

P.S. For more on America’s built-in entitlement crisis, click hereherehere, and here.

Markets, Choice, and the Economic Illiteracy of Bernie Sanders and Jeremy Corbyn

Mon, 03/05/2018 - 12:21pm

Not all leftists are alike.

speculated a couple of years ago that there were four types of statists and put them on a spectrum. I put “rational leftists” at one end. If you wanted to pick a nation that represents this mindset, think Sweden. Nice, civilized, market-oriented, but plenty of redistribution.

On the other end of the spectrum were three less-palatable types.

  1. The “totalitarians,” which means a dictatorial state-run economy, as represented by the Soviet Union and China.
  2. The “socialists,” a democratically elected form of a state-run economy, as represented by post-WWII United Kingdom.
  3. The “crazies,” which I confess is a catch-all category to capture visceral, unthinking, and punitive intervention.

And for that final category, I listed Bernie Sanders and Greece as representatives.

And if you want to know why I listed Sanders, here’s some of Jeffrey Tucker’s FEE column from 2015.

Bernie Sanders, that sweet old socialist who we would have to invent if he didn’t exist in real life, elicited guffaws all over the Internet with his now famous comment about deodorant choice. “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers,” he said, “when children are hungry in this country.” …The underlying theory here is that the proliferation of deodorant and tennis shoes come at the expense of food for the poor. There is only a certain amount of wealth in the world, this thinking goes.

In practical terms, Sanders must think the world is zero-sum. I can’t be rich unless you are poor, and vice-versa.

Tucker explains that this isn’t true. Or, to be more accurate, it’s not true when markets are allowed to function.

That’s what was so captivating about the Industrial Revolution. All kinds of people were suddenly getting richer, and not by grabbing other people’s stuff. Wealth seemed to be actually expanding. ..Adam Smith…patiently observed how expansion of the division of labor, innovation, and trade — all based on secure ownership titles and free association — were working together to make everyone better off. This was not a zero-sum world. We escaped that fate long ago. …This was the single most marvelous discovery that economics made.

But because of his visceral disdain for markets, Sanders doesn’t trust free people to make decisions.

People who talk like Sanders imagine themselves in the position of dictators, deciding what social priorities ought to be. …What if they got their way? They would have to override billions of decentralized decisions. They would have to reject the judgements of millions of balance sheets. They would have to use massive force to prevent people from inventing, making bargains, striking deals, and buying and selling. It really does mean the end of freedom… It is for this reason that socialist central planning has brought reduced standards of living, poverty, and economic stagnation and chaos everywhere it has been tried.

And Sanders isn’t the only crazy.

Jeremy Corbyn’s economic views are also astoundingly bad, as explained by Andrew McKie for CapX.

…no matter how clueless and unrealistic the Labour leader is when it comes to Europe, that’s nothing compared with his failure to come to grips with the real world. Corbyn said: “I do not agree with or accept the idea there has to be competition in mail delivery. After all, we all have one letterbox, and it is much more efficient to have one postal delivery person coming down the street rather than three or four from different or competing companies.” …Corbyn isn’t just saying that Labour plans to renationalise the Royal Mail. …wave goodbye to Amazon Prime and next-day delivery from Asos, and say so long to FedEx, DHL or UPS and their guarantees. As for innovations that have just arrived or are in the works, such as universal same-day delivery and the use of drones, forget it.

McKie delves into the many reasons why Corbyn is so misguided.

The extraordinary point is that Corbyn really seems to think that, if there’s one of something, it’s neither realistic nor desirable that there should be any alternative on offer. Heaven forbid that you might think that you could make a choice, or that anyone else might provide a better, a cheaper or – in any way at all – a different service. …Corbyn’s “one-size fits all” approach ought to seem ridiculous, even if no one would laugh if they had to live in a country that operated that way. But he’s not joking; he really seems to think that all the reforms, the improvements in living standards, the economic growth and consumer choice of the last 40 years were a mistake, and that the state-run companies of Britain (then known as ‘the sick man of Europe”) were better. He doesn’t seem to realise that it is exactly the market – the existence of choice and competition – which led to those improvements, which drove innovation, drove up living standards, and drove down prices.

Everything Tucker and McKie says is spot on.

My two cents on this issue is that Sanders and Corbyn are guilty of two huge mistakes.

  • First, they think the economy is a fixed pie, which is laughably false. Just watch these videos by Don Boudreaux and Deirdre McCloskeyThe simple lesson is that everyone can become richer at the same time. At least if they have decent policy.
  • Second, they have no idea of the valuable role of “creative destruction” in encouraging ever-more efficient and less costly ways of generating ever-more valuable goods and services. Watch this video and this video for more details.

You don’t need to be an economist to understand why Sanders and Corbyn are wrong. Normal people can look at how fast various nations grow (or don’t grow) and draw the appropriate conclusions.


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