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Is France Suffering from Excessive Austerity?

Mon, 01/25/2021 - 12:31pm

If asked to describe French economic policy, rational people will use phrases such as “big government” and “high taxes.” Or perhaps “dirigisme” and “bureaucracy.”

And they would be correct.

Here’s a chart from the OECD, showing spending burdens for major European nations. In a continent that’s known for big welfare states and costly government, France (highlighted in red) easily ranks as the worst of the worst.

France also ranks as the worst of the worst when looking just at spending on social welfare programs.

Indeed, it’s probably just a matter of time before the country becomes another Greece.

But none of these facts matter to Rokhaya Diallo, a French journalist who thinks her nation’s government is too small.

I’m not joking. She actually wrote a column for the Washington Post asserting that France’s response to the corornavirus has been hampered by fiscal austerity.

…the government has failed multiple times at handling the crisis… It was a shock for citizens to discover that France — the world’s seventh largest economy, widely praised for its remarkable health system — could end up struggling to cover the basic needs of its hospitals. But was it a total surprise? Not really. …President Emmanuel Macron…policies…favored the richest fringes of the population while abandoning workers who did not earn enough to cover their necessities. …Under Macron, more than $3 billion (2.6 billion euros) has been cut from public hospitals in 2018 and 2019 — far more than under his predecessor. And it took the pandemic to ensure there were no further cuts to this vital infrastructure. …a politician who claimed he intended to govern a “start-up nation” and thereby support a neoliberal agenda. …For the past two decades, French public services have been damaged by austerity rules… The major health crisis has exposed the serious damages caused by the neoliberal turn implemented in France. At a moment when effective public services are needed more than ever before, austerity is a threat not only to the social stability but also the well-being of the population.

Wow. I’m reminded of the official from Belgium (3rd-biggest fiscal burden in the above chart) who complained a few years ago about “the small size of the Belgian government.”

These people must live in an alternative universe where facts don’t matter.

By the way, if Ms. Diallo is actually interested in “the well-being of the population,” I wonder what she thinks of the OECD data that shows that people in the bottom 10 percent in the United States are better off than the average middle class person in France?

Given that the United States, with its medium-sized government, does so much better than France, with its large-sized government, how can she reconcile those numbers with her dogmatic view that society will be better off if government is even bigger?

Needless to say, I’m not holding my breath expecting her to address these issues.

But the people of France have noticed something is wrong. Many of them would flee to the United States if they had the opportunity.

P.S. Regarding the title of Ms. Diallo’s column, neoliberal is the term used in Europe for classical liberals – i.e., advocates of small government and individual liberty.

P.P.S. The current president of France, Emmanuel Macron, has expressed some sympathy for market-oriented reforms, which may explain Ms. Diallo’s hostility (but does not justify her inaccuracy).

A Battlefield Conversion on Fiscal Policy for the GOP

Sat, 01/23/2021 - 12:07pm

I have relentlessly criticized Republicans in recent years for being profligate big spenders.

But I have some good news. The GOP is finding religion and is once again fretting about big government.

The bad news is that many of them are total hypocrites.

The only reason that they’re now beating their chests about fiscal responsibility is that there’s now a Democrat in the White House pushing for big government rather than a Republican in the White House pushing for big government.

Talking a few days ago with Politifact, I remarked on the GOP’s battlefield conversion.

“The very narrow Democratic majorities in the House and Senate will make big policy changes difficult for Biden,” said Daniel Mitchell, a conservative economist with decades of experience in Washington. “Republicans were big spenders under Trump, but they’ll dust off their fiscal conservatism rhetoric with Biden in the White House. …”There will be unanimous, or near-unanimous, GOP opposition to the tax increases,” Mitchell said. That could make passage difficult.

I’m not the only one to notice Republicans change their spots when Democrats are in charge.

In her Washington Post column, Catherine Rampell also notes their hypocrisy.

It’s almost like clockwork. As soon as a Democrat enters the White House, Republicans pretend to care about deficits again. …And so Republicans laid the groundwork for blocking the Biden administration’s request for more covid-19 fiscal relief, on the grounds that further spending is not merely unnecessary but also irresponsible. …These foul-weather fiscal hawks neglect to mention, …before the coronavirus pandemic — the Republican-controlled Senate passed and President Donald Trump signed spending bills that added…$2 trillion to deficits.

If Ms. Rampell’s column focused solely on Republicans behaving inconsistently, I would fully applaud.

Unfortunately, she also used the opportunity to make some assertions that deserve some pushback. Beginning with what she said about the 2017 tax reform.

…the GOP’s prized 2017 tax cuts added nearly $2 trillion to deficits.

It is true that the legislation is a short-run tax cut, but there’s no long-run revenue reduction because many of the provisions expire at the end of 2025.

And, as Brian Riedl made clear in this chart, the tax cuts only play a tiny role even if all the provisions ultimately are made permanent.

Ms. Rampell then makes a Keynesian argument that more spending would be stimulative.

…the U.S. economy actually needs more federal spending, and President Biden has proposed a $1.9 trillion plan… Republicans objecting to Biden’s proposal…seem to be writing off the need for more relief entirely, at least now that a Democrat is president.

Is she right about Republican hypocrisy? Yes.

Is she right that bigger government produces growth? No.

If Biden and the Democrats were simply arguing that some level of handouts are needed and justified to compensate for government-mandated shutdowns, I wouldn’t be happy, but I also wouldn’t complain.

But I do object to the mechanistic argument that government can magically produce prosperity by borrowing money from the economy’s left pocket and putting it in the economy’s right pocket.

At best, the borrow-and-spend approach only produces a transitory bump in consumption, but does nothing for real problem of inadequate income (which is why we should focus on GDI rather than GDP).

She also engages in a bit of historical revisionism about Obama’s failed stimulus from 2009.

This is, not coincidentally, almost exactly what they did about a decade ago. …Republicans suddenly demanded to turn off fiscal (and monetary) spigots once Barack Obama was elected.

In reality, Republicans didn’t control either the House or Senate in Obama’s first two years. He was able to adopt his so-called stimulus. And the economy was stagnant.

Republicans did win the House at the end of 2010 and were somewhat successful in controlling spending for the next few years. And that’s when the economy did better.

Just like it did better during the Reagan and Clinton years when there was spending restraint.

To put this discussion in the proper context, I’ll close with another chart from Brian Riedl. The long-run problem we face is not red ink. Deficits and debt are merely the symptom of the real problem of excessive government spending.

P.S. I wish Politicifact had identified me as a libertarian. I’m only willing to be called a conservative if that means Reaganism, but I worry it now means Trumpism.

The Destabilizing Mix of Demography and Entitlements, Part II

Fri, 01/22/2021 - 12:18pm

A few days ago, I shared some slides from a presentation to an e-symposium organized by Trends Research in Abu Dhabi.

Here’s a video of my presentation, which includes 16 visuals to drive home the point that the world is facing a demographic/entitlement crisis.

Today, I want to share five more visuals to underscore the severity and magnitude of this catastrophe.

But before we look at the charts, I’ll start by saying this isn’t a fast-developing problem. It’s taken several decades to get where we are now and most nations probably have several decades before an actual crisis materializes.

Though what’s already happened in Greece (and what’s presumably about to happen in Italy) should underscore the seriousness of this issue.

This issue is global, as illustrated by this chart showing the staggering shift that will happen to the world’s population. Simply stated, there are going to be lots and lots of old people, but no concomitant increase in the number of children.

It’s not just that there’s not a corresponding increase in the number of children.

The real story is that birthrates are plummeting.

The data for Europe is particularly sobering.

Here’s a look at some other nations that face big fertility declines.

By the way, there’s absolutely nothing wrong with families deciding they want fewer children.

But it does create a big fiscal problem because governments have tax-and-transfer entitlement programs that were created when everyone thought there would always be ever-larger generations.

But that’s not happening now, which explains why the world is going from eight workers per retiree to four workers per retiree.

That’s the global data. For many developed regions, such as Europe, the situation is far more challenging.

And the United States isn’t far behind.

I’ll close by observing that there’s actually a very simple solution to this problem. We need genuine entitlement reform.

Sadly, that definitely didn’t happen in the past four years in the United States. And it also won’t be happening in the next four years.

P.S. Hong Kong and Singapore have very low birth rates and very long lifespans, but those jurisdictions are in reasonably good shape because they didn’t make the mistake of imposing western-style welfare states.

P.P.S. Some have argued that the demographic problem can be solved by having government-created incentives for fertility. At the risk of understatement, I’m skeptical of that approach.

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Image credit: Matthias Zomer | Pexels License.

The Case Against Biden’s Class-Warfare Tax Policy, Part IV

Thu, 01/21/2021 - 12:51pm

I’ve shared three reasons why Biden’s tax plan is misguided (the tax code is biased against rich taxpayers, the tax hike would have Laffer-Curve implications, and it would saddle America with the world’s highest corporate tax burden).

For Part IV of the series, let’s explain why every piece of his plan will backfire.

There are three main arguments for higher taxes, though I don’t find any of them convincing.

  1. Spite and envy against successful entrepreneurs, investors, innovators, and business owners.
  2. Bringing more money to Washington to finance a larger burden of government spending.
  3. Bringing more money to Washington to ostensibly lower the burden of deficits and debt.

For what it’s worth, Biden’s proposed spending increases are far larger than his proposed tax increases, so we can rule out reason #3.

So we have to ask ourselves whether reasons #1 and #2 are compelling.

And when considering those two arguments, we also should ask whether those reasons are sufficiently compelling to justify throwing millions of Americans into unemployment and reducing the nation’s competitiveness.

The answer should be a resounding no.

In a column in the Wall Street Journal from last July, Philip DeMuth elaborated on the damage that would be inflicted by Biden’s class-warfare agenda.

Mr. Biden has proposed to reinstate the Obama tax rates for top earners while simultaneously imposing an unlimited 12.4% Social Security payroll tax on earnings over $400,000. …Mr. Biden proposes to eliminate the capital gains reset to fair market value at death. For long-term holdings, much of that gain is merely inflation, created by the government’s failure to maintain price stability, so this is effectively a tax on a tax. The remaining gains are usually from corporate earnings, which were already taxed once, when they came in the door. It will be difficult to keep your business or farm in the family if the Biden scheme forces it to be liquidated to pay the death taxes. …If a President Biden has his way, the top capital-gains tax rate will be 39.6%—the same as for ordinary income. This could be a triple whammy: cutting the estate tax exemption in half, eliminating the capital gains reset to fair market value, and then doubling the capital-gains tax rate. A small step for the government, a giant loss for the American family. …The former vice president’s ambitious spending programs would more than offset any new revenue from his tax proposals. …This isn’t a debate between growing the pie vs. redistributing the pie; it is about everyone settling for a smaller pie.

The final two sentences deserve extra attention.

First, nobody should be deluded that tax increases will be used to reduce red ink. Yes, Biden is proposing to collect a lot more money, but he’s proposing about $2 of new spending for every $1 of projected tax revenue.

Brian Riedl’s Chartbook has the grim details on Biden’s spending agenda.

Second, the point about “growing the pie” is critically important since even a very small reduction in long-run growth will have a surprisingly large impact on household finances within a few decades.

The bottom line is that living standards in the United States are significantly higher than living standards in Europe, in large part because fiscal burdens are not as onerous in America.

Biden’s plan to make America more like FranceItaly, and Greece is not a good idea.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

Ranking Presidents: Trump’s Mixed Economic Record

Wed, 01/20/2021 - 4:34pm

Since both political parties have sent good and bad people to the White House, I don’t think it makes much sense to compare all Democratic presidents vs all Republican presidents.

But we can learn a lot by looking at the track record of specific presidents. I’ve done that with several past chief executives (WilsonHooverFDRNixonReaganBush IClintonBush II, and Obama), and today we’re going to assess Trump’s performance.

The bottom line, as you can see from the chart, is that he did really well in some areas and really poorly in other areas, so his overall record was flat. Or perhaps slightly negative.

The bottom line is that Trump was good on taxes and bad on spending and trade.

And there were some very positive moves on regulation, but they were partly offset by areas where Trump increased intervention (coal subsidiesproperty rightsFannie/Freddie, and international tax rules, for instance).

By the way, I’d like to give Trump a negative grade for his failure to address entitlements, but, in the interest of fairness, I only include actual policy changes.

Having given my big-picture assessment, here are some columns and articles that offer interesting insights.

We’ll start with some pro-Trump analysis. Professor Casey Mulligan opined in the Wall Street Journal that he restored growth (until the coronavirus, of course).

The Obama administration promulgated hundreds of new federal regulations that protected certain special interests from market competition. The beneficiaries included large banks, trial lawyers, big tech, major health-insurance companies, labor unions and foreign drug manufacturers. President Trump promised to undo all that, and in many cases succeeded, sometimes with the help of a Republican Congress. …Mr. Trump also helped remove government obstacles to innovation and competition in health care. Democrats will tell you that the first calendar-year drop in retail prescription drug prices in 46 years was mere coincidence, not the result of deregulation. …The Fed and the Obama economic team overpredicted growth almost every year from 2010-16. When growth failed to meet their rosy predictions, Mr. Obama’s advisers blamed the poor economic performance on America itself. …No one in Washington predicted that small business optimism would skyrocket to record levels when Mr. Trump was elected, that real wages would grow again (especially for blue-collar workers), that business formation would hit 20th-century highs, or that poverty and unemployment rates would quickly fall to record lows for Hispanics and African-Americans.  …Although Mr. Trump’s economic policy was imperfect, it was preferable by a long shot to Mr. Obama’s, which punished work, hiring and success rather than rewarding them. 

And here’s a chart that definitely makes Trump look good compared to Obama.

Those numbers will look much worse once 2020 numbers are included, but I won’t blame Trump for coronavirus-caused economic havoc (though I also don’t give him full credit for the good data in 2019).

Now let’s look at some less-than-flattering analysis.

Jeffrey Tucker of the American Institute for Economic Research lists some of Trump’s statist policies.

From 2015, even from his first public speeches following his presidential run, it was clear that Donald Trump was not a conservative in the Reagan tradition… This is not an American ideal. It’s not about freedom, rights, the rule of law, much less the limits on government. …Trump’s first year began with a more traditional Republican agenda of tax cuts, deregulation, and non-progressive court appointments. …That all changed on January 22, 2018. …This was the beginning of the trade war that would expand to Europe, Canada, Mexico, most of Asia, and ultimately the entire world. …What he ended up seeking was nothing short of trade autarky. …In addition to this calamity, US government spending soared 47% while the money supply registered record increases as measured by M1. The effects of this debt and money printing will be felt through next year.

Rick Newman wrote for Yahoo that Trump’s fiscal performance makes him an honorary Democrat.

Trump’s last-second objection to the $900 billion coronavirus relief bill Congress approved after eight months of negotiation is an unexpected Christmas gift for Democrats. Trump says the $600 direct payment to most Americans contained in the bill is too small. He wants $2,000. Trump could have insisted on this while Congress was drafting the bill… Democrats are gleeful. They’d happily accept a supersized stimulus payment, and even better, they now get to watch Republicans battle each other as they try to figure out what to do about Trump. Some Congressional Republicans think $2,000 is too generous, and there’s no chance of that getting into the bill unless other provisions come out. 

Newman was focusing on Trump’s spending proclivities during the pandemic, but the assertion that “maybe Trump’s a Democrat” applies to his fiscal record during his first three years as well.

P.S. I didn’t rank Trump on monetary policy for the same reason I didn’t rank Obama on that issue. Simply stated, I think both of them pursued a misguided Keynesian approach of easy money and artificially low interest rates, but we don’t have firm evidence (yet) of negative consequences.

P.P.S. I also didn’t give Trump a grade, positive or negative, regarding coronavirus. The federal government failed, but those failures largely were independent of the White House.

P.P.P.S. I generally approved of Trump’s judicial appointments, but don’t includes judges in my assessments of economic policy (though I may have to change my mind if they restore the Constitution’s protections of economic liberty and limits on the power of Washington).

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Image credit: Gage Skidmore | CC BY-SA 2.0.

The Destabilizing Mix of Demography and Entitlements, Part I

Tue, 01/19/2021 - 2:32pm

I’ve written many times about demographic change and the implications for public policy – both in the United States and around the world.

Simply stated, it will be increasingly difficult to maintain tax-and-transfer entitlement programs in societies where people are having fewer children and people are living longer.

I’m raising this issue because I spoke on this topic earlier today at an e-symposium organized by Trends Research in Abu Dhabi, UAE. Here’s a slide with my main message.

Why is it bad news from an economic perspective?

As I noted in the next slide, tax-and-transfer entitlement programs for the elderly (most notably Social Security and Medicare in the United States) become harder to finance when there are lots of beneficiaries and too few taxpayers to support them.

So what’s going to happen in various nations when the irresistible force of more beneficiaries meets the immovable object of fewer taxpayers?

In my presentation, I pointed out that there are only three potential solutions.

I explained that higher tax burdens and higher debt levels would not be economically prudent.

The right approach is genuine entitlement reform, but I freely admitted that this “pre-funding” model probably won’t happen.

Here’s the relevant slide.

By the way, Singapore is the role model for pre-funding, but many other nations have adopted that approach for retirement income (such as IsraelDenmarkSwitzerlandHong KongNetherlandsFaroe Islands, and Sweden).

Unfortunately, most nations are heading for a demographic iceberg (including the U.S.) but I fear few of them will enact the reforms that are needed to avert a bad outcome.

———
Image credit: Pedro Ribeiro Simões | CC BY 2.0.

Teacher Unions vs. Students

Mon, 01/18/2021 - 11:04am

Coronavirus has been a dark cloud. But if we want to find a silver lining, the government’s bungled response to the pandemic has exposed some weaknesses in the government school monopoly.

And this could mean opportunity for competing structures that can do a better job of educating kids.

  • School choice – An approach where parents get vouchers that they can send their kids to schools, either government or private, that compete to best serve their needs and interests.
  • Home schooling – An approach where parents direct their children’s education, often in cooperation with other parents and experts who specialize in certain fields.
  • Charter schools – An approach where education entrepreneurs (often groups of parents) set up government schools that operate outside of the existing monopoly.

Even before the coronavirus, there was plenty of evidence against the government’s monopoly.

Politicians have been shoveling ever-larger amounts of money into the system. Yet student outcomes have not improved.

Why? Part of the answer is that too many schools systems are run for the benefit of teacher unions, with student outcomes being a secondary (at best) concern.

And that problem has become increasingly apparent because of the pandemic.

But, in an article for Reason, Matt Welch hopes the despicable behavior of teacher unions may lead to long-overdue reforms.

…in the COVID-scarred year of 2020. Teachers unions, and the (largely Democratic) politicians they back, have relentlessly limited parental choice in the name of maximizing the autonomy of teachers to opt out of classrooms while still getting paid. No other country in the industrialized world has closed schools down to this degree. …The remote learning that tens of millions of kids are suffering through nationally is broadly understood to be a disaster. The results are as predictable as day following night: Parents are pulling their kids out of public schools. …I’m furious that public schools have used our money to fail poor kids. …unions and their allies have made America a global outlier in keeping schools shut, driving parents away from the systems, and some cities, in droves. …the same guilds that have such a concentrated amount of power are soon going to find themselves having to explain to the rank and file just why there aren’t as many jobs anymore.

Or, maybe the union bosses should explain why sauce for the goose isn’t also sauce for the gander.

They vigorously defend their jobs and perks, but they often make sure their kids aren’t victimized by the system.

For instance, here’s the headline of a story forwarded to me by a reader.

Not that I’m surprised.

I’ve shared many examples of two-faced behavior by defenders of the government education monopoly – crummy schools for the children of ordinary people but high-quality private schools for their kids.

So can we hope for reform?

Most of the action will need to take place at the state and local level, but the federal government unfortunately has been playing a bigger role in schooling, so it’s also worth paying attention to what we’ll get from the Biden Administration.

In a column for New York, Jonathan Chait worries that Democrats are so cowed by teacher unions that they aren’t even willing to maintain support for charter schools.

…charter schools have produced dramatic learning gains for low-income minority students. In city after city, from New York to New Orleans, charters have found ways to reach the children who have been most consistently failed by traditional schools. The evidence for their success has become overwhelming, with apolitical education researchers pronouncing themselves shocked at the size of the gains. …in 2015, a survey focused on charters in urban districts, where education reformers have concentrated their energies (and where gains have outpaced suburban and rural areas). It found urban charters on average gave their students the equivalent of 40 additional school days of learning in math and 28 additional days of learning in reading every year. CREDO’s studies confirm the conclusion that the lottery studies have found: In most cases, urban charters now provide the same group of students much better instruction. …The ability of urban charters all over the country to get nonselective groups of poor, Black students to learn at the same level as students in affluent, middle-class schools is one of the great domestic-policy achievements in American history.

Chait is on the left, but he’s honest.

So he recognizes that this is a battle over what really matters – currying favor with teacher unions or delivering better education for kids.

The final element of charters’ formula is inescapably controversial. They prioritize the welfare of their students over those of their employees, which means paying teachers based on effectiveness rather than how long they’ve been on the job — and being able to fire the worst ones. …the traditional practice of granting teachers near-total job security, without any differentiation based on performance, is a disaster for children.

Sadly, many folks on the left have decided that union bosses matter more than children.

They’re even willing to condemn minority children to substandard education to keep the unions happy.

…the second outcome of the charter-school breakthrough has been a bitter backlash within the Democratic Party. The political standing of the idea has moved in the opposite direction of the data, as two powerful forces — unions and progressive activists — have come to regard charter schools as a plutocratic assault on public education and an ideological betrayal. …as Biden turns from campaigning to governing, whether he will follow through on his threats to rein them in — or heed the data and permit charter schools to flourish — is perhaps the most unsettled policy mystery of his emerging administration. …or many education specialists, the left’s near abandonment of charter schools has been a bleak spectacle of unlearning — the equivalent of Lincoln promising to rip out municipal water systems or Eisenhower pledging to ban the polio vaccine. …Today, teachers unions have adopted a militant defense of the tenure prerogatives of their least effective members, equating that stance with a defense of the teaching profession as a whole. They have effectively mobilized progressives (and resurgent socialist activists) to their cause, which they identify as a defense of “public education”.

The actions of white leftists is particularly disgusting.

Polls show that the backlash against charters has been mainly confined to white liberals, while Black and Latino Democrats — whose children are disproportionately enrolled in those schools — remain supportive.

Though there are exceptions, to be sure. Not just Chait, but even the editors at the Washington Post.

But I fear too many Democrats have made a deal with the devil.

Teacher unions bring money and votes to the table. Meanwhile, many Democrats take for granted the votes of minorities. Given these real-world considerations, it makes sense (from a self-interest perspective) to side with the union bosses.

But from a humanitarian perspective, that’s an awful choice.

For what it’s worth, I have zero hope that Biden will be sympathetic to genuine school choice. But there’s a chance he could follow Obama and be somewhat open to charter schools.

And if that happens because of the coronavirus, that will indeed be a silver lining.

P.S. School choice doesn’t automatically mean every child will be an educational success, but evidence from SwedenChileCanada, and the Netherlands shows superior results when competition replaces government education monopolies.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

The Case Against Biden’s Class-Warfare Tax Policy, Part III

Sun, 01/17/2021 - 11:00am

In Part I of this series, I explained that President-Elect Biden’s soak-the-rich agenda didn’t make sense because the internal revenue code already is very biased against upper-income taxpayers. Indeed, the U.S. tax system is even more weighted against the rich than the tax codes of nations such as France and Sweden.

In Part II of this series, I explained that Biden’s proposed reincarnation of Obamanomics would not be a recipe for increased federal revenues. Simply stated, higher tax rates on productive behavior will lead to macro-economic and micro-economic responses that have the effect of producing lower-than-expected revenues.

For today’s addition to the series, I want to focus on how Biden’s tax agenda will discourage investment and undermine competitiveness by saddling the United States with the developed world’s highest effective tax rate on corporate income – as measured by the combined burden of the corporate income tax and the additional layer of tax when dividends are paid to shareholders.

Everything you need to know is captured by this new data from the Tax Foundation.

Needless to say, American policy makers should be striving to make our business tax system more like the one in Estonia.

Instead, Biden wants to go from America being worse than average to America being the absolute worst.

When faced with this data, my friends on the left usually respond in one of two ways.

Some of them simply assert that there is no double taxation. I don’t know if they are ignorant or if they are dishonest.

The others (either more honest or more knowledgeable) will agree with the numbers but assert it is okay because any economic damage will be modest and the benefits of new spending will be significant.

But if higher taxes and more spending are somehow beneficial, why is the United States so much more prosperous than the nations that do have higher taxes and more spending?

P.S. While Biden’s proposals, if enacted, will result in the United States having a very bad tax system for companies, the U.S. will still have some big fiscal advantages over other nations.

P.P.S. Adding everything together, the biggest difference between the United States and other developed nations is that lower-income and middle-class taxpayers in America enjoy far lower tax burdens.

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Image credit: Vinícius Pimenta | Pexels License.

Coronavirus and the Failure of Big Government, Part V

Sat, 01/16/2021 - 10:19pm

I wrote a four-part series last year about coronavirus and big government (hereherehere, and here), so it goes without saying that the first two lines of this tweet deserve some sort of accuracy award for hitting the nail on the head.

But the sentiment expressed in the last line of the tweet also deserves some sort of award.

I don’t know if the award should be for false hope or naive expectation, but I am sadly confident that everything will stay the same. Or perhaps get even worse.

Simply stated, instead of the deregulation that’s needed, here are some more likely outcomes.

  • The World Health Organization will get rewarded with a bigger budget and more power, notwithstanding its failures.
  • The Centers for Disease Control will get rewarded with a bigger budget and more power, notwithstanding its failures.
  • The Food and Drug Administration will get rewarded with a bigger budget and more power, notwithstanding its failures.

Why am I so pessimistic? Because I understand “public choice,” which is the application of micro-economic analysis (things like incentives) to the behavior of politicians and bureaucrats. In other words, people in Washington act in ways to advance their own interests.

Just in case all this isn’t clear, here are a few headlines and tweets to drive the point home.

We’ll start with an understatement.

And here are examples of that failure.

Starting with a column in the Wall Street Journal.

And this tweet.

FDA officials wanted to engage private sector in February and were told to stand down. For many weeks, admin didn't get private sector involved as virus spread. It's a mistake now seen by many in the administration as one of the biggest response flaws. https://t.co/MxFXCFe3we https://t.co/JlmVmkGhqf

— Josh Dawsey (@jdawsey1) April 17, 2020

There are many more headlines that tell tragic stories.

From the Houston Chronicle.

Here’s a very sad and succinct headline.

Government intervention also hurt in little ways.

This tweet tells us the lesson we should learn.

"The fact that these inflexible regulations can easily be discarded in times of crisis demonstrates the absurdity of those policies in the first place. If throwing out the regulations leads to good outcomes now, they should stay off the books later." https://t.co/AyUSqx3zfF

— The FGA (@TheFGA) April 12, 2020

As does this tweet as well.

This should be a major takeaway from the U.S.’s wasted February. Centralized regulation was perhaps the biggest problem. https://t.co/yz18GM0BD0

— Ben Thompson (@benthompson) April 15, 2020

One of Trump’s great failures was protectionism.

So we shouldn’t be surprised that trade barriers also hurt the fight against the pandemic.

And here’s a tweet about the FDA’s bungling.

Bottlenecks are caused by rigidity of FDA approved protocol for testing.

It says use kits for RNA extraction sold by two specific firms that can’t keep up. Labs give up.

Meanwhile academics show that you you can skip the RNA extraction step. No matter. Not approved.

— Paul Romer (@paulmromer) April 11, 2020

Don’t forget that bureaucracy and big government also caused problems in other nations.

Such as the United Kingdom.

Public Health England—in response to The Sun—have confirmed by omission that they:

1. Rebuffed help from commercial labs;
2. Did not pursue a mass testing strategy.
3. Are too incompetent to be put in charge of a mass testing strategy.

Here’s what we know pic.twitter.com/ujbBvfGTRi

— Matthew Lesh (@matthewlesh) April 21, 2020

Sounds like the bureaucrats in the U.K. want to compete with the FDA and CDC for some sort of incompetence award.

NEW | "If Public Health England refuses to cut through the red tape and allow testing to take place in facilities outside of its direct control extremely soon, countless lives will be needlessly lost. Let’s get on with it.” – @JasonReed624 https://t.co/fJt2SaN3Yg

— Free Market Conservatives (@FMConservatives) April 9, 2020

There was a better response in Germany because the private sector played a much bigger role.

And the German approach was better than the United States as well.

One secret of Germany’s success in averting COVID deaths was that it had no limits on private testing — the opposite of what our @US_FDA did. https://t.co/rA8pwNSYd7 @businessinsider

— Dean Clancy (@DeanClancy) April 5, 2020

Needless to say, the WHO also deserves some negative attention.

Indeed, it should come with this warning label.

And we’ll close by shifting back to the failure of government in the United States.

This column from the New York Times captures the real lesson of the past 12 months.

P.S. At the risk of outing myself as a libertarian, this image tells us everything we need to know. As does this collection of cartoons.


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Image credit: Martin Jacobsen | CC BY-SA 3.0.

Spain’s Self-Imposed Fiscal Mess Is Going to Get Much Worse

Fri, 01/15/2021 - 10:51pm

Early last decade, when writing about Spain’s fiscal crisis, I pointed out that the country got in trouble for the same reason Greece got in trouble.

Simply stated, government spending grew faster than the private economy. And when nations violate fiscal policy’s Golden Rule, that means a growing fiscal burden and – if maintained for a long-enough period of time – a recipe for chaos.

Spain managed to get past that crisis, thanks to indirect bailouts and some belated spending restraint.

But some politicians in the country didn’t learn from that experience. The nation now has a hard-left government that is going to test how long it takes to create another fiscal crisis.

And even establishment-oriented experts are worried. In an article last June for the Bulwark, Desmond Lachman and John Kearns warned that Spanish politicians were putting the nation in a precarious fiscal position.

Spain’s economy was painfully slow to recover from its 2008 economic recession, which saw its GDP drop by 4 percent. …Over the past decade, a major reason for Spain’s poor economic performance was its need to mend its public finances, which were seriously compromised by the collapse of its housing bubble… Spain’s coronavirus-induced recession could now make the 2008 housing market collapse look like a minor speed bump. …Spain’s GDP is projected to contract by almost 13 percent. As in 2008, Spanish public finances will be sure to suffer… the country’s public-debt-to-GDP ratio will by the end of this year jump to 120 percent—a level appreciably above its 2010 peak. …Another disturbing projection is the toll that the recession will take on its banking system… It does not inspire confidence that Spanish banks entered the present crisis with among the slimmest capital reserves in Europe.

At the risk of understatement, no sensible person should have confidence in any aspect of Spain’s economy, not just the banking system.

A few days ago, Daniel Raisbeck authored a column for Reason about the country’s downward spiral to statism.

The PSOE-Podemos coalition is not only Spain’s most left-wing government since the country restored democracy after dictator Francisco Franco’s death in 1975; currently, it’s also the most leftist government in the entire European Union (E.U.). As you would expect, this has brought about a barrage of progressive pet projects…a torrent of debt, public spending, and tax increases. …The government’s budget for 2021 also includes record levels of spending after the executive raised the ceiling on non-financial expenditures by over 50 percent. …The Spanish government has also taken advantage of the current crisis to impose drastic tax hikes. These include a “tax harmonization” scheme—a euphemism for getting rid of fiscal competition—that would end the freedom of autonomous communities, the largest political and administrative units in Spain, to set their own policies in terms of wealth, inheritance, and income taxes, the last of which consist of both a national and a regional rate.

Let’s now look at a few additional passages from the article.

One of the reasons I oppose fiscal centralization in Europe is that it will subsidize more bad policy. Which is now happening.

Spain’s spending spree will be subsidized with €140 billion ($172 billion) of E.U. money, part of a “recovery fund” agreed upon last July at an emergency summit in Brussels.

It’s also worth noting that higher taxes don’t necessarily produce more revenue.

This is a lesson Spanish politicians already should have learned because of mistakes by the central government.

They also have evidence at the regional level. Catalonia has a bigger population than Madrid and imposes higher tax rates, but it collects less revenue.

…although Madrid…charges some of the country’s lowest rates for inheritance and income taxes, the region raises €900 million ($1.1 billion) more in taxes per year than the far more interventionist Catalonia according to economist José María Rotellar.

As you might expect, politicians in Catalonia grouse that Madrid’s lower tax rates are “fiscal dumping” and they argue in favor of tax harmonization.

Madrid’s leading lawmaker has a very deft response.

…the Republican Left of Catalonia, the pro-Catalan independence party that allowed Sánchez to become president, recently accused Madrid of practicing “fiscal dumping.” …Isabel Díaz Ayuso, the Popular Party president of the Community of Madrid, stated that “if Catalonia wants fiscal harmonization, they should reduce their own taxes,” a reference to that region’s notoriously high taxation levels.

Touche!

Let’s close by returning to the big-picture topic of whether it’s a good idea for Spain’s government to expand the nation’s fiscal burden.

The leftists politicians currently in charge make the usual class-warfare arguments about helping the poor and penalizing the rich. Whenever I hear that kind of nonsense, I’m reminded of this jaw-dropping story about how people with modest incomes are being strangled by statism.

Imagine only making €1000 per month and losing two-thirds of your income to government?!?

No wonder Spaniards come up with clever ways of lowering their tax burdens.

P.S. The current government of Spain may be naive (or malicious) about taxes, but there are some sensible economists at the country’s central bank who have written about the negative impact of higher tax rates.

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Image credit: Efraimstochter | Pixabay License.

Who Should Pay When Government Fails?

Thu, 01/14/2021 - 11:16am

Early last decade, a former Prime Minister of Iceland was brought before a special tribunal to determine whether he was legally responsible for his nation’s 2008 economic downturn.

As you might imagine, I had mixed emotions about that story.

On one hand, I don’t like politicians and I viscerally like the idea of holding them accountable for bad outcomes.

On the other hand, I believe in the rule of law and it’s absurd to bring charges against someone when no law has actually been broken. Moreover, tossing politicians in jail because we don’t like their policies is the kind of thing you might find is some backwater banana republic.

And, to add some humor to this analysis, it would contribute to prison overcrowding if we did things such as jailing Bush for TARP, Obama for the failed stimulus, and Trump for his bungled protectionism.

But it’s time to look at this issue from a serious perspective because a former governor in Michigan, as reported by the Detroit Free Press, is going to be dragged into court because of contaminated water in the state’s 7th-largest city.

Michigan Attorney General Dana Nessel filed two charges of willful neglect of duty against former Gov. Rick Snyder on Wednesday, a day before her office is set to announce new details in the Flint water crisis investigation. …Each charge Snyder faces is a misdemeanor punishable by up to a year in prison or a fine of $1,000 or less. …a misdemeanor conviction could allow a judge to issue a significant restitution order against Snyder, a multi-millionaire who made a fortune in computers and venture capital before he was elected Michigan governor in 2010.

You may be wondering why the Attorney General is targeting a former governor for the flawed operation of a city water system. Shouldn’t local officials be held accountable?

But there is a connection. Local politicians had spent the city into a fiscal crisis and the state appointed managers to clean up the mess.

Snyder…was governor when state-appointed managers in Flint switched the city’s water to the Flint River in 2014 as a cost-saving step while a pipeline was being built to Lake Huron. The water, however, was not treated to reduce corrosion — a disastrous decision affirmed by state regulators that caused lead to leach from old pipes and poison the distribution system used by nearly 100,000 residents.

So does this mean the former governor committed some sort of crime?

I guess we’ll find out if there’s a trial, but it certainly seems like partisan politics may be the real reason for the charges.

David Griem, a Detroit criminal defense attorney and former federal and state prosecutor, said he believes politics are a significant factor in the case. …“I can’t think of a good reason for this other than vendetta and politics. I challenge anyone to come up with a reason that makes sense other than closed-door politics…”

The bottom line, as I explained back in 2016 when writing about mess in Flint, is that you blur responsibility and accountability when multiple layers of government are involved in anything.

Which is why we need genuine federalism.

Decentralization is good for many reasons, including the fact that it’s much harder to deflect blame when something bad happens at the local level.

More specifically, nobody should be responsible for Flint’s water system other than the people from that city. If they screw up (as they did) by voting for venal politicians who funneled too much of the city’s money to a cossetted group of bureaucrats (a common problem), that’s their fault and they then need to deal with the consequences.

Sadly, we’re moving in the wrong direction in the United States, with Washington playing an ever-greater role in things that should be handled by state and local governments.

Let’s conclude by returning to the topic of whether politicians should face legal consequences for bad policy.

I’m very tempted to support anything that makes life harder for that oleaginous group of people. But the tort system (going to court and suing for damages) is actually a preferable way of addressing accidental damage to people.

That’s a big part of how we encourage safe and sound behavior in the private sector. Though I’ll be the first to admit it won’t work as well when dealing with government mistakes because taxpayers (rather than bureaucrats and politicians) bear the burden when there are successful lawsuits.

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Image credit: Daniel_B_photos | Pixabay License.

Ten Observations about Trump and the GOP

Wed, 01/13/2021 - 10:15am

Since I’m a policy wonk, I rarely play the role of political pundit other than biennial election predictions.

But I’m getting a lot of requests to comment about Trump, especially in light of the recent protest/riot/insurrection and the ongoing political fallout (impeachment, etc).

So here are 10 observations (full disclosure: I didn’t vote for Trump in 2016 or 2020, but have never been part of the Never-Trump community).

Trump’s style is bluster and bullying – As I wrote way back before the 2016 election, Trump’s personal style is akin to a temperamental child. This can be entertaining (which is why CNN and other networks gave him so much attention during his initial campaign), but it also has limitations as an approach to governance (for instance, you don’t stop a virus by merely asserting it won’t come to the United States).

Trump is America’s “Crazy Uncle” – Early in his presidency, I happened to be in New Zealand and was asked about Trump in a TV interview. I basically said he’s like a grouchy and opinionated uncle who shows up on holidays and dominates the conversation with controversial statements. Given what’s happened over the past few years, that observation holds up well.

Republicans lawmakewrs in Washington never liked Trump – GOPers in the House and Senate like some of the things Trump has accomplished (tax reform and conservative judges), but they’ve never liked having him as president because he is too erratic and too self-centered. But most important, they’ve been afraid his simultaneous popularity (with core GOP primary voters) and unpopularity (with, say, suburbanites) is a threat to their ability to stay in power. In other words, it’s hard to win general elections in some places as a Trumpian populist but also hard to win GOP primaries in many places as a Never-Trumper.

Republican voters, by contrast, like Trump – One thing that surprised me over the past four yeas is that I found strong support for Trump from grassroots conservative Republicans. Yes, they didn’t like his fiscal profligacy and they mostly didn’t like his protectionism, but they did like the fact that he was a “fighter,” unlike so many (but not all) Republican politicians who get cozy with the DC establishment. They also figured he was worth supporting because he was so reviled by the establishment media (i.e., the enemy of my enemy is my friend).

Republican lawmakers generally have been in a no-win situation – Because of Trump’s popularity with GOP voters, Republican lawmakers have felt a lot of pressure to act as Trump loyalists even though many of them don’t like his behavior and disagree with some of his policies.

Be glad there were normal GOPers in the Trump Administration – Some people in the Never-Trump community want to create a blacklist of people who worked for Trump. This is misguided in the vast majority of cases. Most Trump appointees had nothing to do with Trump’s excesses and instead did good things (deregulation, for instance) in the various agencies and departments where they worked.

There are three GOP wings: Populist Trumpies, conservative Reaganites, and the establishment – Most pundits portray GOP infighting as a battles between Trumpist conservatives and the Republican establishment (symbolized, perhaps, by Sen. Romney). But that’s an insufficient description of what’s happening because it overlooks the fact that there are plenty of Reagan-style conservatives who definitely are not part of the establishment, yet don’t fit in with Trump’s big-government populism. It will be very interesting to see which anti-establishment strain wields more influence in the next few years.

Trump’s legacy to GOP: Total Democratic control of DC – On January 21, 2017, Republicans controlled the House, the Senate, and the White House. Four years later (a few days from now), Democrats will control the House, the Senate, and the White House. By way of background, one of the reasons I don’t like George W. Bush is that his failed polices paved the way for the left to have total control of Washington in 2009 and 2010. Shouldn’t Trump be judged similarly?

In spite of his many flaws, why did Trump win normally Democratic states? – While I just explained that Trump set the stage for the left to have total power in Washington, Republicans need to figure out how Trump managed to win some states in 2016 that historically have been unwinnable when contested by establishment Republicans (though he lost some traditionally GOP-leaning states in 2020).

In spite of his many flaws, why did Trump get more minority votes? – Similarly, Republicans need to figure out how a supposedly racist Trump managed to win a higher percentage of minority voters than recent GOP nominees such as John McCain and Mitt Romney. The bottom line is Republicans need to figure out if there are good parts of Trumpism once Trump is out of the picture.

I’ll close with a few statements:

  • It is perfectly okay to have voted for Trump because you liked some of his policies (whether they are ones I like, such as tax cuts, or ones I don’t like, such as protectionism).
  • It is perfectly okay to have voted against Trump for the same reason.
  • It is perfectly okay to have voted for Trump because you wanted to shake up the Washington establishment with unconventional behavior.
  • It is perfectly okay to have voted against Trump because his unconventional behavior was offensive.
  • It is perfectly okay to have been a Never-Trumper or a Trumpian populist.
  • What’s not okay, though, is to engage in political violence.
  • And what’s utterly awful is lying to supporters and creating the conditions for political violence.

P.S. While it’s worth spending some time to dissect and analyze the past four years, I hope that libertarians, Reagan conservatives, Trump populists, Never-Trumpers, establishment Republicans, etc, all join together to fight some of Biden’s awful ideas (the “public option” threat to private health insurance, class-warfare taxesgun control, a blue-state bailout, etc).

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Image credit: Gage Skidmore | CC BY-SA 2.0.

Compared to the United States, Does Europe Have a “Better” Distribution of Income?

Tue, 01/12/2021 - 12:17pm

As illustrated by my recent three-part series (herehere, and here), I care about helping the poor rather then hurting the rich.

More broadly, I want a bigger economic pie so that everyone can have a larger slice. And I don’t particularly care if some people get richer faster than other people get richer (assuming they are earning money honestly and not relying on government favoritism).

In other words, it doesn’t bother me if someone like Bill Gates is getting richer faster than I’m getting richer, so long as there’s an economic environment that gives both of us a chance to prosper based on how much value we are providing to others.

But some folks are fixated on how the pie is sliced.

For instance, the Peterson Institute for International Economics recently tweeted that there is too much inequality in the United States (compared to Europe) and that something should be done to “fix” this supposed problem.

This type of data irks me because some people will assume that rising levels of income for the rich somehow imply falling levels of income for everyone else.

That may be true in nations with despotic socialist governments, such as CubaNorth Korea, and Venezuela, where the ruling class lines it pockets at the expense of the general population.

However, let’s focus on the United States and Europe, since the Peterson Institute wants readers to think that politicians in Washington should “fix” the distribution of income in America so that we resemble our friends on the other side of the Atlantic Ocean.

But first we must answer two very important questions: Are the non-rich in the United States suffering because rich people are doing well? And are the non-rich in Europe better off than the non-rich in America?

Earlier today, I answered those questions with three tweets.

I started with this tweet pointing out that average living standards are far higher in the United States than they are in Europe.

I then shared this tweet pointing out that the bottom 10 percent of people in America would be middle class compared to their counterparts in Europe.

I then concluded with this tweet showing that the bottom 20 percent of people in the United States have incomes higher than the average income in most European countries.

The moral of this story is that ordinary people are better off in America.

And that’s almost certainly because there’s generally more economic freedom in the United States – including lower tax burdens and less enervating redistribution.

P.S. While the Peterson Institute is very misguided on the tradeoff between inequality and growth, it is quite good on trade-related issues (see herehereherehereherehere, and here).

Biden Promises Race and Gender-based Prioritization for Economic Relief

Mon, 01/11/2021 - 2:26pm

Despite invoking the need for unity, the Biden transition team chose to put out the following divisive statement describing how the next administration will approach economic recovery:

“Our priority will be Black, Latino, Asian, and Native American owned small businesses, women-owned businesses, and finally having equal access to resources needed to reopen and rebuild.” — President-elect Biden pic.twitter.com/pIyDuhf5pH

— Biden-Harris Presidential Transition (@Transition46) January 10, 2021

As businesses continue to suffer under government lockdown orders and other restrictions, it is appalling to see any suggestion that efforts to relieve this pain will involve consideration of race, gender, and other irrelevant demographic characteristics.

Biden does not appear to be a true-believer of the woke ideology gaining ground on the left, but the fact that he would make such a statement and that his PR flaks would choose to highlight its most divisive quote suggests we can expect to see more corrosive racial and gender politics under a Biden administration.

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Image credit: Marc Nozell | CC BY 2.0.

The Globe’s Looming Fiscal Crisis

Mon, 01/11/2021 - 12:36pm

I have repeatedly warned that nations get in fiscal trouble when government is too big and growing too fast.

In such countries, it’s very common to find high levels of government debt as one of the symptoms of excessive spending.

This can create the conditions for a fiscal crisis, particularly during an economic downturn. Simply stated, investors (the people who buy government bonds) begin to worry that governments may renege on their promises (i.e., default).

There’s a must-read story on this issue in today’s Washington Post suggesting that the economic fallout from coronavirus has created conditions for new fiscal crises in nations across the globe.

Authored by Alexander Villegas, Anthony Faiola and Lesley Wroughton, the report explains that the downturn has produced record levels of debt.

Around the globe, the pandemic is racking up a mind-blowing bill: trillions of dollars in lost tax revenue, ramped-up spending and new borrowing set to burden the next generation with record levels of debt. In the direst cases — low- and middle-income countries, mostly in Africa and Latin America, that are already saddled with backbreaking debt — covering the rising costs is transforming into a high-stakes test of national solvency. …By the end of 2020, total government debt worldwide was projected to soar by $9 trillion and top 103 percent of global GDP, according to the Institute of International Finance — a historic jump of more than 10 percentage points in just one year. Countries have maxed out their figurative credit cards.

Keep in mind, by the way, that spending burdens were climbing in most nations, leading to more red ink, even before the pandemic.

That was true in developed nations (the U.S.EuropeJapan), but also in developing nations.

And, the story explains that developed nations are far more vulnerable to fiscal crisis.

The pandemic is hurtling heavily leveraged nations into an economic danger zone, threatening to bankrupt the worst-affected. Costa Rica, a country known for zip-lining tourists and American retirees, is scrambling to stave off a full-blown debt crisis, imposing emergency cuts and proposing harsher measures that touched off rare violent protests last fall. …Angola, in contrast, effectively shut out of global markets, is racing to strike a deal with the Chinese, but even that might not be enough to prevent a painful debt crisis. Sri Lanka, locked in recession, needs to make $4 billion in debt payments this year with only $6 billion in the bank. Brazil’s debt, worsened by a yawning budget deficit, has surged to a crippling 95 percent of GDP — raising alarm over the medium-term ability of the Latin American giant to stay afloat. …Zambia, once a shining example of Africa’s economic renaissance, is now the Ghost of Crises Future for debt-burdened countries slammed by the pandemic. The sub-Saharan nation fell into default in November.

Here’s a visual from the report.

To simplify, it’s good to be in a lighter-colored nation and bad to be in a darker-colored country. At least in terms of national debt burdens.

All this grim data understandably raises the very important question of what choices governments should now make.

Sadly, some self-styled experts are actually urging even more spending, mostly because of a dogmatic belief in the supposed elixir of Keynesian economics. In other words, they want governments to dig a deeper hole.

Analysts argue that the need for stimulus to keep economies running during this historically challenging period still outweighs the need to balance budgets. …the IMF…is telling countries that now is not the time to scrimp, lest they jeopardize still-fragile economic recoveries.

Politicians will want to follow that advice because it tells them that their vice (buying votes with other people’s money) is a virtue (more spending magically can boost growth).

In the real world, there are two big lessons we should learn.

  • First, it’s profoundly reckless to further increase tax and spending burdens when nations are already in trouble because of previous bouts of fiscal profligacy.
  • Second, countries should focus on spending restraint in both the short run and long run, ideally by enacting caps to limit annual spending increases.

For what it’s worth, the U.S. would be in great shape today if, back in 2000, lawmakers had adopted a Swiss-style spending cap.

P.S. One reason that spending caps work so well is that there’s built-in flexibility when dealing with economic volatility.

P.P.S. Financing government with the printing press won’t work any better than financing it with taxes and debt.

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Image credit: germantown | Pixabay License.

The Lesson We Should Learn from 2020

Sun, 01/10/2021 - 12:30pm

I’ve already written a column about the best and worst developments of 2020.

But what if we wanted to identify a lesson that society should have learned from the past 12 months?

Well, there’s an obvious answer, especially for those of us with libertarian sympathies.

In a column for the Foundation for Economic Education, Professor Alexander William Salter of Texas Tech University explains that the key takeaway from 2020 is that government doesn’t work very well, especially compared to the private sector.

The disaster that was 2020 is finally over. Now it’s time for the inevitable post-mortems. …the diagnosis is straightforward. COVID-19 was going to be bad, no matter what. But the failures of big government made it much, much worse. …In particular, the Centers for Disease Control, Food and Drug Administration, and public teachers’ unions are the great American villains of 2020. Meanwhile, the heroes of this year are almost entirely in the private sector. From Zoom to vaccine development, Big Pharma and Big Tech—yes, you read that right—made this horrible year bearable. …For progressives and so-called “national” conservatives who support big government, 2020 represented the ultimate test for their philosophies. …Both want a big, energetic state promoting what (they believe to be) the good of the nation. Well, here was their chance for the government to shine. The result was shameful failure. The COVID-19 crisis put left-wing and right-wing statism on trial—and both were found guilty of ill-intent and gross incompetence.

Amen.

Professor Salter’s message is basically an expanded version of the “tweet of the year” I wrote about last month.

He also explains more about the villains of 2020, starting with the Centers for Disease Control.

…the CDC is the reason America lagged behind other nations for so long in terms of COVID-19 testing. We had the virus genome fully mapped in January, which enabled the rapid production of private testing kits. But the CDC forced these operations to shut down, coming up with its own test—which was flawed, and even contaminated! …On this issue alone, CDC ineptitude is likely responsible for tens of thousands of deaths. …

agree.

He then turns his rhetorical fire on the Food and Drug Administration.

How about the FDA? It is no secret that the vaccine was delayed because it needed FDA approval. Indeed, several working vaccines could have come much earlier, were it not for our bungling bureaucrat gatekeepers.

agree.

Last but not least, he castigates the government’s school monopoly.

…largely due to pressure from public teachers’ unions, many schools remained closed in the fall. In fact, the US was pretty much the only country to pursue the alarmist policy of keeping schools closed. The toll on school-aged children is immense, from psychological trauma to impeded learning. Low-income families were hit especially hard.

At the risk of understatement, I agree.

The bottom line is that government failed us in 2020. Over and over and over and over again.

As you might expect, though, the crowd in Washington has reached the opposite conclusion.

They mostly used the pandemic as an excuse to expand the burden of government.

Hopefully, much of the new spending will be temporary, but it goes without saying that there will be considerable pressure in Washington to extend and expand various “temporary” programs.

P.S. The secondary lesson from 2020 is that a smaller government works better than a bigger government. And the tertiary lesson is that a decentralized smaller government is best of all.

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Image credit: Shaw Girl | CC BY-NC-ND 2.0.

The Most Under-Noticed Development of 2020

Sat, 01/09/2021 - 12:19pm

If you ask normal people about the biggest thing that happened in 2020, they’ll probably pick coronavirus, though some might say the 2020 election.

But if you ask a policy wonk, you may get a different answer. Especially if we’re allowed to tweak the question a bit and contemplate the most under-appreciated development of 2020.

In which case, my answer would be interstate tax migration.

I’ve been writing about this topic for years, but it seems that there’s been an acceleration. And, as illustrated by this map, people are moving from high-tax states to low-tax states.

The map comes from an article by Scott Sumner of the Mercatus Center, and here’s some of his analysis.

The movement of these industries is toward three states that have one thing in common—no state income tax. …Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas…tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done. …I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places. …Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) …Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. …last year more that half of the US population growth occurred in just two states—Texas and Florida. …Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth.

Wow, four states (all with no income tax) accounted for the bulk of America’s population growth. That’s a non-trivial factoid.

And I also think his observations about Kansas are spot on. Yes, the state improved it’s tax system, but it should have been bolder, like North Carolina.

The Washington Examiner recently opined on internal migration and also noted that people are escaping high-tax states.

…the state of Illinois has been a laggard in population growth. It has lost eight congressional districts since the 1950s. But new census estimates show that this decade, something very special has happened. …the land of Lincoln has lost a net 308,000 residents over the last seven years… And Illinois’s rapid shrinkage is occurring even as the United States grew by nearly 7% since the last census. …Illinois is not alone. The same census data point to two other big states that are also driving away residents with similarly impractical, ideologically leftist policies ⁠— California and New York. …New York, as a consequence, has also lost about 42,000 residents in the last decade. Its population peaked in 2015, and in the time since, it has lost about 320,000. A similar phenomenon is occurring in California, …with about 70,000 net residents vanishing in 2020. …residents are actually giving up and abandoning its beautiful, scenic inhabited areas. …the same census numbers show that people are gravitating toward states that have low or no income tax.

The mess in jurisdictions such as New YorkCaliforniaIllinoisNew Jersey, and Connecticut is so severe that I wasn’t sure how to vote in the first-to-bankruptcy poll.

And a recent editorial in the Wall Street Journal echoed these findings.

California’s population shrank for the first time as far back as records go (-69,532). According to a separate state government survey, a net 261,000 residents moved to other states during the period…many large businesses are shifting workforces to other states. …Last year Charles Schwab announced it is relocating its corporate headquarters to the Dallas region from San Francisco. Apple is building a new campus in Austin. Facebook this fall bought REI’s headquarters outside of Seattle. Oracle and Hewlett Packard Enterprise recently announced relocations to Texas. …Over the last decade, Illinois has lost 243,102 in population, about the size of Peoria and Naperville combined. …Democratic states in the Northeast last year lost population, led by New York (-126,355), Connecticut (-9,016) and New Jersey (-8,887). …By raising taxes again and again to pay for generous collective-bargained benefits, public unions are making Democratic states less competitive.

The final sentence is the above excerpt is especially insightful.

Among the states facing fiscal challenges, a common theme is that politicians and bureaucrats have a very cozy and corrupt relationship resulting in absurdly lavish (and unaffordable) compensation levels.

Let’s close with a bit of humor from the great cartoonist, Eric Allie. With all the interstate migration that happened last year, no wonder Santa Claus had some problems.

P.S. I also recommend this Lisa Benson cartoon, this Redpanels cartoon strip, and this Steven Breen Cartoon.

P.P.S. Even though it would be a massive tax cut for the rich, Democrats want to restore the state and local tax deduction. Even if they are successful, though, I suspect that change would only slow down the decline of blue states.

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Image credit: Masai Mara | CC BY 2.0.

Reckless Keynesian Advice from the OECD

Fri, 01/08/2021 - 12:01pm

For supporters of sensible policy, 2008 was not a good year. The economy suffered a big drop thanks to bad government policies (easy-money from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac).

So what did politicians do?

Sadly, they gave us another tragic example of Mitchell’s Law. In response the damage caused by one set of bad policies, they adopted another set of bad government policies (in this case, the TARP bailout and Keynesian “stimulus” schemes).

Quite predictably, bailouts and bigger government didn’t work. Either in the United States or elsewhere in the world.

But proponents of Keynesian economics never learn from their mistakes. They simply assert that their policies somehow would have worked if the government spent even more money and maintained profligacy over a longer period of time.

You may think I’m joking, but here’s another example of this phenomenon. According to a recent news report, a senior bureaucrat at the Organization for Economic Cooperation and Development says we can have more prosperity if politicians make government bigger – both today and tomorrow.

The chief economist of the OECD has urged governments not to rush to cut public spending deficits… Laurence Boone – who runs the Organisation for Economic Cooperation and Development’s Economics Department – also said that political leaders should use fiscal policy to revive their economies… Boone said that governments had been correct to invest in stimulus packages during 2009: “The mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic,” she commented.

Needless to say, her analysis is wrong. If the answer is lots of spending over a long period of time, then why did the U.S. economy languish for an entire decade under the Keynesian policies of Hoover and FDR? And why has the Japanese economy languished for several decades when politicians on that side of the Pacific Ocean have imposed Keynesian policies?

Before pushing for another orgy of government spending, shouldn’t advocates of Keynesian economics be required to show us at least one success story for their approach, in any country and at any point in history?

Don’t hold your breath waiting for an answer.

By the way, before getting her sinecure at the OECD, Ms. Boone was an economic advisor to French President Francois Hollande.

That should have been a black mark. Hollande was the socialist who imposed confiscatory tax rates (resulting in effective tax rates above 100 percent for thousands of people) and drove entrepreneurs to flee the nation. Also, I can’t resist noting that Hollande copied Biden with the absurd assertion that higher taxes are “patriotic.”

Though, to be fair, Hollande eventually decided to be merciful and limit any taxpayer’s overall burden to 80 percent. How merciful!

Anyhow, you would think anyone associated with Hollande’s disastrous tenure would have a hard time getting another job.

But to the statists in charge of hiring at the OECD, Boone’s association with failed socialists policies apparently made her the most attractive candidate.

P.S. Returning to the article cited above, Ms. Boone did make one sensible observation, noting that Keynesian easy-money policies push up asset prices, which mostly benefits the rich.

…governments propped up growth with monetary policy – slashing interest rates and pumping liquidity into the banking system. But Boone argued that monetary policy “has distributional impacts” – it can for example drive up asset prices, favouring the wealthy.

Very true.

It’s great when people become rich by providing goods and services to the rest of us. It’s nauseating when people become rich because of bad government policy.

P.P.S. If governments follow Ms. Boone’s and expand the burden of government spending, it will be just a matter of time before they also impose higher taxes. But Ms. Boone won’t have to worry about that since OECD bureaucrats (like their counterparts at other international bureaucracies) get tax-free salaries.

Bob Dylan and the Capital Gains Tax

Thu, 01/07/2021 - 12:52pm

A “capital gain” occurs when you buy something and later sell it for a higher price. A capital gains tax is when politicians decide they get to grab a slice of that additional wealth.

I’ve repeatedly explained that it is economically foolish to have such a tax because it punishes saving, investment, risk taking, and entrepreneurship.

Simply stated, the capital gains tax is “double taxation,” which is what happens when there are additional layers of tax on income that is saved and invested.

I’m motivated to address this issue again because of a recent column in the Washington Post by Charles Lane.

He wants us to believe that singer-songwriter Bob Dylan has been rewarded by the capital gains tax.

Bob Dylan…just sold the rights to “Blowin’ in the Wind” and 600 other songs to Universal Music Publishing Group for a reported $300 million. …This is a tribute to his genius and, on the whole, to a political and economic system that rewards artists… Nevertheless, some socially conscious musician could write a song protesting the Dylan deal, because of what it reveals about that engine of irrationality and inequality known as the U.S. tax system. A cardinal defect of the system is highly favorable treatment of capital gains relative to ordinary income. The top rate on the former stands at 20 percent; on the latter, it is 37 percent. …the obscure 2006 law known as the Songwriters Capital Gains Tax Equity Act, which permits songwriters — but not painters, video game makers or novelists — to treat the proceeds from selling their copyrights as capital gains, too. …The capital gains break, for him and for others similarly situated, is basically a windfall. …President-elect Joe Biden supports equalizing capital gains and ordinary income rates, at least for households earning more than $1 million. If kept, Biden’s promise would restore a measure of equity and efficiency to the tax system.

At the risk of understatement, I disagree.

What Mr. Lane doesn’t appreciate or understand is that the Universal Music Publishing Group purchased the rights to Dylan’s music for $300 million because they expect his songs to generate more than $300 million of income in the future.

And that future income will be taxed when (and if) it actually materializes.

In other words, a capital gains tax is – for all intents and purposes – an added layer of tax on the expectation of future income. Double taxation in every possible sense.

This is why I’ve pointed out that Biden’s plan will make the tax code more punitive, not more equitable and efficient as Lane asserted.

Since we’re on the topic of capital gains taxation, I’ll also cite some relatively new research from the San Francisco Federal Reserve.

Here are the key findings in the working paper from Sungki Hong and Terry Moon.

This paper quantifies the aggregate effects of reducing capital gains taxes in the long run. We build a dynamic general equilibrium model with heterogeneous firms facing discrete capital gains tax rates based on firm size. We calibrate our model by targeting relevant micro moments and the difference-in-differences estimate of the capital elasticity based on the institutional setting in Korea. We find that the reform that reduced the capital gains tax rates from 24 percent to 10 percent for the firms affected by the new regulations increased aggregate investment by 2.6 percent and 1.7 percent in the short run and in the steady state, respectively. Moreover, a counterfactual analysis where we set a uniformly low tax rate of 10 percent shows that aggregate investment rose by 6.8 percent in the long run. …Our findings suggest that reducing capital gains tax rates would substantially increase investment in the short run, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes.

And here are two of the key charts from the study.

And here’s the part of the study that explains the above charts.

Panel A in Figure 2…shows the parallel trend in investment between the affected and unaffected firms…positive and statistically significant coefficients after the year 2014 indicate that lower tax rates induced the affected firms to increase investment. Panel B in Figure 2…shows the parallel trend in investment between the affected and unaffected firms…positive and statistically significant coefficients after the year 2014 indicate that lower tax rates induced the affected firms to increase the size of tangible assets.

The bottom line is that is that you get higher wages with more productivity…and you get more productivity with more investment…and you get more investment if you don’t impose harsh tax policies on people who invest.

Which is why the correct capital gains tax rate is zero, whether you’re looking at theory or evidence.

Which is the core message in my video on capital gains taxation.

P.S. There’s also a video explaining why it’s especially wrong to impose the capital gains tax on “gains” that are solely the result of inflation.

P.P.S. And somebody needs to do a video on why it’s an awful idea for the government to tax capital gains that only exist in theory.

The Suddenly Real Threat of a Higher Corporate Income Tax Rate

Wed, 01/06/2021 - 12:35pm

After November’s election, I figured we would have gridlock. Biden would propose some statist ideas, but they would be blocked by Republicans in the Senate.

All things considered, not a bad outcome.

But Democrats won the run-off elections yesterday for both Georgia Senate seats, which means they now have total control of Washington.

And that means, as I recently warned, a much bigger threat that Biden’s proposed tax increases may get enacted.

That won’t be good news for America’s economy or American competitiveness.

Today, let’s focus on the biggest tax increase that the President Elect is proposing.

In an article for National Review, Joseph Sullivan writes about the adverse impact of Biden’s increase in the corporate tax rate.

Biden’s corporate-tax proposal is remarkable. …If the U.S. adopted Biden’s proposed federal tax rate, its overall corporate-tax rate would not be “in line” with the rest of the G7. Assuming U.S. state and local corporate taxes stayed the same, Biden’s proposal would result in nearly the highest overall corporate-tax rate in the G7, according to data from the OECD. The U.S. would be tied with France. …The average overall corporate rate among the G7 has fallen to 25 percent… With the G7 average trending in one direction, Biden would move the U.S. in the opposite direction.

In other words, while the Biden team claims that a higher corporate tax won’t be too damaging because it will be similar to the rate in other major nations, the U.S. actually will be tied with France once you include the impact of state corporate tax burdens.

Here’s the chart included with the article.

And don’t forget that there are many other economies where the corporate tax rate is well below the G7 average.

The bottom line is that the United States currently ranks only #19 out of 35 nations in the Tax Foundation’s competitiveness ranking for OECD nations.

The good news is that being #19 is much better than being #31, which is where the U.S. was in 2016.

The bad news is that Biden wants to undo much of the 2017 reform, as well as impose other tax increases. And that means a much lower competitiveness score in the future.

Which ultimately means lower wages for American workers.

P.S. Although the proposed increase in the corporate rate is theoretically the biggest revenue raiser in Biden’s tax plan, I will safely predict that it won’t raise nearly as much revenue as projected by static revenue estimates. I wasn’t able to educate Obama on this issue, and I’m even less hopeful of getting through to Biden.

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Image credit: geralt | Pixabay License.

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