Back to Top

Center for Freedom and Prosperity (CF&P)

Subscribe to Center for Freedom and Prosperity (CF&P) feed
Updated: 54 min 47 sec ago

The Best and Worst States for Economic Policy?

Wed, 10/21/2020 - 12:01pm

Back in July, I wrote a three-part series designed to identify the states with the greediest politicians.

The results sometimes matched expectations. Florida generally looked very responsible, for instance, while New York looked rather profligate.

But other results were mixed. In particular, Alaska and Wyoming have very good tax systems, but they use energy taxes to finance bloated public sectors.

Today, let’s build on that research by reviewing two new reports than rank state economic policy.

First, we have the American Legislative Exchange Council’s 2020 Report on Economic Freedom. It’s based on several factors, but I can’t help but notice that the 10-best-ranked states include five with no income tax and three with flat taxes.

If you look at the 10 states at the bottom of the rankings, by contrast, they almost all have so-called progressive taxes. The only exceptions are Alaska, which (as noted above) finances a big government with energy taxes, and Illinois, which has a flat tax that currently is under assault by the state’s big spenders.

Now let’s look at the Tax Foundation’s newly released State Business Tax Climate Index.

As you can see, the top 10 is dominated by states that either don’t tax income, or have flat taxes, and the one state (Montana) with a so-called progressive tax compensates by having no sales tax.

Every state in the bottom 10, meanwhile, has a discriminatory income tax.

The two reports cited above measure different things. But both use good data and rely on sound methodology, so it’s very interesting to see which states score well (and score poorly) in both.

The states that crack the top 10 in both reports are South Dakota, Florida, New Hampshire, Utah, and Indiana.

And the states that languish in the bottom 10 in both reports are Louisiana (they should have adopted Bobby Jindal’s plan when they had a chance) and New Jersey (not exactly a surprise).

P.S. I recently wrote about Chris Edwards’ Report Card on America’s Governors. So if we mesh those results (New Hampshire was in the top category while New Jersey was in the bottom category) with today’s results, the folks in the Granite State get the triple crown while the folks in the Garden State get a booby prize.

———
Image credit: Mapswire | CC BY 4.0.

The Six Most Important Ballot Initiatives of 2020

Tue, 10/20/2020 - 12:52pm

Since Americans are not as sensible as the Swiss, I’m generally not a fan of direct democracy in the United States.

Simply stated, I don’t like untrammeled majoritarianism, which occurs when 51 percent of voters can pillage 49 percent of voters.

But I’ll admit that the level of my angst fluctuates depending on whether voters make wise choices. With that in mind, here are the six ballot initiatives that I’ll be closely watching on election day.

1. Proposed Amendment to the 1970 Illinois Constitution

The most important ballot initiative is the proposal by the hypocritical governor of Illinois to undo the state’s flat tax. I’ve already dedicated an entire column to this issue, so I’ll simply add some additional analysis from a Wall Street Journal editorial.

Illinois voters will decide next month whether to enact a progressive income tax, paving the way for a new top rate of 7.99%. …The Prairie State currently ranks 36th worst in overall tax burden because its flat individual rate of 4.95% offsets very high property and other taxes. …its proposed slate of new individual income tax rates, along with a corporate tax hike tied to the same ballot measure, would drop the state’s rank overall to 47th. That would move Illinois into Dante’s ninth ring of tax hell, ahead of only New Jersey, New York and California. …Iowa and Missouri have…slashed their top rates in recent years rather than jacking them up as Illinois Democrats intend. Kentucky lawmakers in 2018 replaced their progressive income tax with a flat rate of 5%. Heading in the opposite direction of neighboring states could push many of Illinois’s overburdened families and businesses across the border.

2. Arizona Proposition 208

There’s a class-warfare proposal to dramatically increase the top income tax rate in Arizona.

Once again, the editors at the Wall Street Journal have spot-on analysis.

Arizona has long been a refuge for Americans seeking relief from high-tax California and states in the Northeast. But a tax referendum on the ballot Nov. 3 would whack job creators and make people rethink retirement in Scottsdale or a business move to Tucson. …The current top rate of 4.5% would rise to 8%, which would move the state to the 10th highest income-tax rate in the country, from 11th lowest today… Arizona would move closer to California (13.3% top rate) than Nevada (no income tax). …about half of the targets would be small businesses that pay taxes at the individual rate… They employ a huge chunk of Arizona workers, and the added tax costs would trickle down in lower pay and fewer jobs. …One definition of fiscal insanity would be to raise state taxes when the Biden Democrats may soon raise federal tax rates to heights not seen since the 1970s.

3. California Proposition 16

In California, politicians want the state to have to power to engage in racial and sexual discrimination. In pursuit of that goal, they are asking voters to repeal Proposition 209, adopted by voters in 1996.

Gail Heriot, a law professor who also serves on the U.S. Civil Rights Commission, explains why this is a bad idea in a column for Real Clear Politics.

California’s deep-blue legislature has been itching to repeal Proposition 209 for years. …Proposition 209 amended California’s constitution to prohibit the state from engaging in preferential treatment based on race or sex. It was a rebuke to the identity politics obsessions of state and local governments. …By approving Proposition 209 by a wide margin, they aimed to end the race and sex spoils system. …The best reason for retaining Proposition 209 is…that the initiative has been good for Californians — of all races…the number of under-represented minority students in academic jeopardy collapsed. …in the years immediately following Proposition 209, it had three effects on under-represented minorities in the UC system. It increased (1) graduation rates, (2) GPAs, and (3) the number of science or engineering majors.

4. California Proposition 15

Since we just discussed one bad California proposition, we may as well mention another.

There’s also a scheme to (again) raise taxes. The Wall Street Journal opines on this misguided initiative.

Sooner or later California’s public unions had to hit up the hoi polloi to pay for their pensions after soaking what’s left of the state’s millionaire class, and here they come. On Nov. 3, Californians will vote on a “split roll” ballot initiative (Prop. 15) that seeks to enact the biggest tax hike in state history. …Under current law, tax rates on residential and commercial property are capped at 1% of their assessed value—i.e., the purchase price—and can increase by no more than 2% annually. …This is the only balm in California’s oppressive tax climate and acts as a modest restraint on the government spending ratchet. Unions know that attempting to repeal this entirely would spur a homeowner revolt, so they are targeting businesses. …Facebook CEO Mark Zuckerberg is Prop. 15’s second biggest donor. Perhaps he’s trying to atone for his wealth, but as the NAACP and minority business groups explained in a letter to him in August: “Unlike Facebook, restaurants, dry cleaners, nail salons and other small businesses can’t operate right now and many may never open again. The last thing they need is a billionaire pushing higher taxes on them under the false flag of social justice.” …Prop. 15 would raise property taxes by $8.5 billion to $12.5 billion a year by 2025.

5. Colorado Proposition 117

Proponents of fiscal responsibility in Colorado want to strengthen TABOR (or, to be more accurate, stop the erosion of TABOR) by requiring a public vote for non-trivial efforts to increase government revenue.

Here’s a summary from CPR.

Proposition 117..would add a new TABOR-like provision to state law, requiring the state government to get voter permission before it creates major new “enterprises,” which are partially funded by fees. Colorado voters already have authority over tax increases and rarely approve them. The state Supreme Court has held that a fee is different from a tax because it is reasonably connected to a specific purpose. And in the years that TABOR has been in effect, lawmakers have used them as a way to raise money without raising taxes. Critics see fees as an end-run around TABOR’s spending limits.

6. Colorado Proposition 116

Sticking with Colorado, there’s also a proposal to lower the state’s flat tax.

Once again, let’s use CPR as a source.

This initiative would cut the state’s income tax rate from 4.63 percent to 4.55 percent. …This change would reduce the state government’s revenue by an estimated $170 million in the next fiscal year. Supporters argue it would boost businesses and consumer spending, while opponents say it would weaken government services and social supports already severely cut by the downturn. The measure was originally intended to counter a progressive tax measure that failed to make the ballot.

Honorable Mention

There are many other ballot initiatives. Here are some that I care about, even if they were not important enough to be featured.

Proposition 21 for rent control in California. Bad idea.

Proposition 22 to penalize the gig economy in California. Also a bad idea. [Oops, got this backwards. Prop 22 would undo the legislation that penalizes the gig economy.]

Initiatives to legalize marijuana in Arizona, Montana, New Jersey, and South Dakota. The libertarian side of me is very supportive, but the fiscal side of me doesn’t like the fact that one of the motives is a desire to collect more tax revenue.

Ranked-choice voting in Alaska and Massachusetts. This is a system that requires voters rank all candidates and awards victory to whoever has the strongest support across all ballots. It is assumed that the impact will be more centrist candidates and more civil elections. I don’t have strong views, but it’s worth noting that Australia uses this approach and it’s one of my favorite nations.

13 initiatives in San Francisco. Lot of tax increases, as you might expect from that poorly governed city.

P.S. Voting for politicians who make bad decisions is unfortunate. Directly voting for bad propositions isn’t any better.

More Scholarly Evidence for Switzerland’s Debt Brake

Mon, 10/19/2020 - 12:45pm

For a land-locked nation without many natural resources, Switzerland is remarkably successful.

One reason for the country’s success is pro-market policy. Switzerland routinely scores in the top 5 according to both Economic Freedom of the World and Index of Economic Freedom.

More specifically, I’m a big fan of the country’s fiscal policy, especially the “Debt Brake,” which was imposed when voters overwhelmingly adopted the provision (84.7 percent approval) early this century.

There’s always been a debate, however, whether Switzerland’s good outcomes are because of the debt brake, or because of some random reason, such as the sensibility of Swiss voters.

Three academic economists, Michele Salvi, Christoph Schaltegger, and Lukas Schmid, investigated this issue in a study for Kyklos, a scholarly journal published by the University of Basel.

A prominent means to prevent excess debt accumulation is the use of fiscal rules. In fact,fiscal rules focus on securing solvency of governments by concentrating on the intertemporal budget constraint. …there is a strong positive association between constrained fiscal discretion and improved fiscal performance. …Our paper presents evidence on the effect of a fiscal rule with a strict enforcement mechanism… We analyze the consequences of the centrally imposed balanced budget rule on public debt in Switzerland. …the Swiss debt containment rule stands out as a clearly defined fiscal rule with a constitutional basis that constrains deviating from a balanced budget in the long-term. …The rule consists of a simple mechanism stating that expenditure may not exceed revenues over the course of an economic cycle. …The debt containment rule brings a“top-down”element into the budgeting process, which has a strong disciplinary appeal and leads to more accurate budgeting. …one key aspect is the fact that the debt containment rule sets a clear expenditure ceiling.

The key parts from the above excerpt are “expenditure may not exceed” and “clear expenditure ceiling.”

Those statements ratify my oft-made point that the debt brake is really a spending cap. And spending caps are far and away the only effective macro-fiscal rule.

The policy certainly has generated good results for Switzerland. Here’s what the authors found when thy crunched numbers to compare the country’s current fiscal trajectory with what would have happened without a spending cap.

To construct the counterfactual outcome of the debt ratio for Switzerland without a debt containment rule, we select a control group…countries expected to be driven by a similar structural process as Switzerland. …Due to the availability of comprehensive debt data, the observation period is restricted to last from 1980 until 2010. …we divide the time period into a pre-treatment period from 1980 to 2002 and a postintervention period from 2003 to 2010. …Figure 2 displays the central government debt ratio for Switzerland and its synthetic counterpart during the study period. …In 2003, the two debt ratio curves start to diverge. …it appears that the introduction of the debt containment rule led to a substantial and persistent decrease in the debt ratio in Switzerland.

And here’s the relevant set of charts from the study.

Here’s one more sentence I want to cite since it echoes the argument I’ve made to my Keynesian friends about how they also should support a Swiss-style spending cap.

The debt containment rule has made a significant contribution to switching from a procyclical to a cyclically appropriate fiscal policy.

Simply stated, the political tradeoff embedded in the debt brake is that politicians get to modestly increase spending during a downturn, even though revenues are falling, but they also can only enact modest spending increases during growth years, even if revenue is growing much faster.

By the way, you will have noticed that the study focused on how the debt brake helped to reduce red ink.

Regular readers know that I’m far more interested in focusing on the real fiscal problem, which is excessive government spending.

So I’ll close by looking at some additional evidence from Switzerland. Here’s a chart, based on IMF data, showing that the growth rate of spending fell sharply after the debt brake was adopted.

I looked at the 2003-2010 period, since it matched the years in the study discussed above.

But I also calculated the spending growth rate for 2003-2019 and confirmed that the debt brake’s success hasn’t just been a temporary phenomenon.

P.S. Click here for a short presentation on the debt brake, as well as similar presentations on Hong Kong’s spending cap and Colorado’s TABOR spending cap.

———
Image credit: bigbirdz | CC BY 2.0.

Don’t Reward Profligate States with Bailouts

Sat, 10/17/2020 - 12:49pm

One of the problems with state balanced budget requirements is that tax revenues are very sensitive to economic conditions.

Boom Years: When there’s robust economic growth, politicians collect unanticipated revenue because more people have good jobs and more businesses are earning money.

And what do politicians do when this happens? They spend a big chunk of that unanticipated tax revenue.

Bust Years: When there’s a recession and tax revenues unexpectedly decline, state politicians are in a tough position because they’ve made lots of promises to spend money, including for the extra spending that took place when the economy was growing.

And what do politicians do when this happens? They usually respond with a combination of spending cuts and tax increases.

This boom-bust budgeting is unwise for many reasons, but I don’t like it because it leads to a long-run expansion in the size of government (the spending increases in the boom years almost always are greater than the cutbacks in the bust years).

Indeed, one of the reasons why I prefer a spending cap instead of a balanced budget requirement is that you avoid this “ratchet effect.”

Now let’s look at some real-time data on why this matters. Given what’s happened with the coronavirus, we’re currently in a “bust year” and many governors and state legislators claim that they’re dealing with special conditions that necessitate a bailout from Washington.

In a column for the Wall Street Journal, Jonathan Williams of the American Legislative Exchange Council and Dave Trabert of the Kansas Policy Institute explore the topic.

Many governors now seek a federal bailout, but borrowing trillions more will only make matters worse for taxpayers… Every state provides the same basic services, but some do it at much lower cost, which allows them to have lower taxes. ……high-spending states are at the front of the line for a federal bailout. …Too many elected officials would rather have taxpayers submit to a tax increase now, or pay off bailout debt later, than do the hard work of eliminating unnecessary spending.

Their column includes plenty of hard data showing that the states clamoring for the bailouts wouldn’t be facing any fiscal problems if they weren’t spending so much money.

…The 41 states with an income tax spent 55% more per resident in 2018 than did the nine states without an income tax. Florida, which doesn’t have an income tax, spent the least, at $2,327 per resident. Texas and New Hampshire, also without income taxes, have the next lowest spending at $2,585 and $2,773, respectively. New Hampshire is frugal enough to avoid a sales tax. …New York, which has an income tax, spends $5,231 per resident. Gov. Andrew Cuomo threatens to cut services unless he gets a $60 billion bailout over two years. If New York spent at Florida’s level per resident, the Empire State would save $56.7 billion each year. If Illinois Gov. Jay Pritzker were to trim his state’s per resident spending to match Texas’, he would save his taxpayers $22.3 billion a year—and there would be no need for any income-tax increase. Gov. Gavin Newsom could save Californians $64.6 billion annually if his state matched New Hampshire’s spending.

Here’s the map that accompanied the column, showing per-capita spending levels in each state.

Earlier this year, I looked at state data, but also included spending by local governments.

But slicing the numbers in a different way doesn’t change the fact that some states spend much more (and without delivering more and/or better services).

Some people portray this as a battle of red states vs. blue states, but I prefer to avoid the politics and simply compare big-spending states to modest-spending states. For instance, compare New York and Florida. If that’s not enough, also compare Texas and California.

Democracy and Liberty

Fri, 10/16/2020 - 12:41pm

A pure democracy, where 51 percent of the people have the right to do anything they want, is not a desirable form of government. It means tyranny of the majority.

That’s why America’s Founding Fathers instead created a constitutional republic, not only because they wanted to limit the power of the central government but also because they wanted certain rights to be inalienable – i.e., guaranteed and protected even if 99 percent of the population feel otherwise.

Some pundits and some lawmakers in Washington either don’t understand this part of American history or they want to pretend it doesn’t exist.

Fortunately, Senator Lee of Utah is not one of those people, as illustrated by this recent tweet.

This elementary observation rubbed some people the wrong way.

Indeed, it even generated a hostile article by Nathaniel Zelinsky in the Bulwark, an anti-Trump site operated by former Republicans.

This message fits a growing and disturbing trend. Among the conservative intelligentsia, especially in certain legal circles, it has become stylish to view self-governance as nothing more than a means to a very particular set of ends. And should “conservative” policies lose out in the democratic process, then liberal democracy itself should go. …Among Federalist Society members, a group once defined by a commitment to judicial restraint to protect democracy, one today hears about “active judging”—the notion that life-tenured jurists shouldn’t hesitate to strike down popularly enacted legislation. …these tendencies share a common endpoint: Upset the delicate bargain of American democracy and impose a narrow set of preferences on the rest of us. And it’s exactly this vein of illiberalism that Senator Lee tapped into. …Yes, the Founders crafted a constitutional structure that prevents the majority from easily imposing itself on a minority and places some hard limits on the government’s powers. But Senator Lee’s attack on “rank democracy”…leaves little room for…collective self-government.

At the risk of understatement, Mr. Zelinsky’s attack on Senator Lee is completely incoherent.

The Utah Senator was celebrating the “classical liberalism” of America’s founding principles. Senator Lee was extolling a system that protects individual rights.

That’s the opposite of “illiberalism.”

To be sure, there are some folks on the right who don’t embrace those values. But Senator Lee isn’t one of them.

This isn’t a new controversy, by the way. Writing last year for the U.K.-based Guardian, Quinn Slobodian accused “neoliberals” of favoring economic freedom over democracy (in Europe, they often use “neoliberal” as a term for libertarians).

The ideal world described by these indexes is one where property rights and security of contract are the highest values, inflation is the chief enemy of liberty, capital flight is a human right and democratic elections may work actively against the maintenance of economic freedom. …The definition of freedom they used meant that democracy was a moot point, monetary stability was paramount and any expansion of social services would lead to a fall in the rankings. Taxation was theft, pure and simple, and austerity was the only path to the top. …Pinochet, Thatcher and Reagan may be dead. But economic freedom indexes carry the neoliberal banner by deeming the goals of social justice forever illegitimate…the indexes help perpetuate the idea that economics must be protected from the excesses of politics – to the point that an authoritarian government that protects free markets is preferable to a democratic one that redesigns them.

Unlike the Zelinsky piece, Slobodian’s column is actually coherent.

He wants untrammeled majoritarianism, at least when he thinks it will result in bigger government.

And he’s correct that classical liberals reject that approach.

But we have good reasons for that skepticism. Writing earlier this year for the Foundation for Economic Education, Professor Gary Galles explained why it’s better to rely on “market democracy” rather than “political democracy.”

In a political democracy, a majority can also force its preferences on others in any issue. That is why our founders adopted constraints on majority abuse, such as limited, delegated powers and the Bill of Rights. However, those constraints have largely been undermined. In contrast to political democracy, free-market capitalism, which reflects democratic self-government, represents a far better ideal. Its system of exclusively voluntary cooperation based on self-ownership requires that property rights be respected; no majority can violate owners’ rights. …a superior form of democracy is to remove virtually all decisions and policies that we need not share in common (almost all of them, beyond the mutual protection of our property rights) from government dictation, even if they are “democratic,” and let people exercise self-government through their own voluntary arrangements, protected by their inalienable rights.

Amen. Professor Galles is correct.

Pure democracy is simply another way of saying untrammeled majoritarianism.

And that system of government is a threat the rights of minorities – whether you’re talking about religious minorities, ethnic minorities, sexual minorities, political minorities, or any other subset of the population that may be unpopular at some point with mass opinion.

P.S. Here’s an amusing Michael Ramirez cartoon about Obama and the Constitution.

P.P.S. On the 150th anniversary of the Declaration of Independence, Calvin Coolidge correctly summarized the meaning of the American experiment.

P.P.P.S. If you want a horrifying example of majoritarianism in action, see Venezuela.

P.P.P.P.S. To be fair, Switzerland is a very successful example of a nation based not only on majoritarianism, but also direct democracy (my two cents is that the nation’s decentralization is the real reason for its success).

For a Competitive Tax System, the U.S. Should Copy Estonia Rather than Italy

Thu, 10/15/2020 - 12:35pm

Whether we’re examining Economic Freedom of the WorldIndex of Economic FreedomWorld Competitiveness Ranking, the Global Competitiveness Report, or the World Bank’s Doing Business, publications that endeavor to give us apples-to-apples comparisons of economic policy provide useful measuring sticks.

I’m especially interested in comparisons that focus on fiscal policy.

So I was very interested to see that the Tax Foundation just released its annual International Tax Competitiveness Index, which measures the quality of tax policy of nations that are part of the Organization for Economic Cooperation and Development.

Here are highlights from the report, starting with some background.

The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development… In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies. Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly… Not all recent changes in tax policy among OECD countries have improved the structure of tax systems; some have made a negative impact. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. …To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of tax rates, but also how taxes are structured.

The ITCI is a very useful publication. Indeed, I’d like it to be expanded. When writing about last year’s edition, I mentioned it should cover more nations and also include the aggregate tax burden as one of the variables.

But let’s not make the perfect the enemy of the good. With regards to this year’s version, what nations have the best and worst tax regimes?

Estonia ranks #1 (not a big surprise) and Italy is at the bottom (also not a big surprise).

For the seventh year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax system. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system… Italy has the least competitive tax system in the OECD. It has a wealth tax, a financial transaction tax, and an estate tax. Italy also has a high compliance burden associated with its individual tax system. It takes businesses an estimated 169 hours to comply with the individual income tax.

American readers presumably are most interested in the United States, so here’s the data showing that the United States has a mediocre grade, ranking #21 out of 36 nations.

If you dig through the details, the good news is that the United States has a very high score for “consumption taxes,” which largely is because we haven’t copied the mistake of other nations and imposed a value-added tax.

The U.S. also gets credit for “expensing,” though the report notes that policy is scheduled to expire.

The bad news, by contrast, is that America ranks below average for corporate taxes and individual taxes and way below average for property taxes and international tax rules.

The report also notes that America’s “progressive tax” is a weakness that undermines competitiveness.

But let’s look at the glass as being half full rather than half empty. When the Tax Foundation launched this publication back in 2014, the United States was a lowly #32 out of 34 nations. And we were still mired near the bottom in 2016, ranked #31 out of 35 countries.

Thanks to the Trump tax reform, however, the United States has subsequently enjoyed the biggest improvement of any nations. There’s still plenty of policy mistakes that need to be addressed, but at least we’re moving in the right direction.

———
Image credit: Pixy.org | CC0 Public Domain.

The IMF Urges Nations to Adopt Greek-Style Fiscal Policy

Wed, 10/14/2020 - 12:57pm

Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

———
Image credit: IMF | Public Domain.

Economic Policy: Blue States vs. Red States

Tue, 10/13/2020 - 12:40pm

I’ve written favorably about the pro-growth policies of low-tax states such as TexasFlorida, and Tennessee, while criticizing the anti-growth policies of high-tax states such as IllinoisCalifornia, and New York.

Does that mean we should conclude that “red states” are better than “blue states”? In this video for Prager University, Steve Moore says the answer is yes.

The most persuasive part of the video is the data on people “voting with their feet” against the blue states.

There’s lots of data showing a clear relationship between the tax burden and migration patterns. Presumably for two reasons:

  1. People don’t like being overtaxed and thus move from high-tax states to low-tax states.
  2. More jobs are created in low-tax states, and people move for those employment opportunities.

There’s a debate about whether people also move because they want better weather.

I’m sure that’s somewhat true, but Steve points out in the video that California has the nation’s best climate yet also is losing taxpayers to other states.

Since we’re discussing red states vs blue states, let’s look at some excerpts from a column by Nihal Krishan of the Washington Examiner.

States run by Republican governors on average have economically outperformed states run by Democratic governors in recent months. …Overall, Democratic-run states, particularly those in the Northeast and Midwest, had larger contractions in gross domestic product than Republican-run states in the Plains and the South, according to the latest state GDP data for the second quarter of 2020, released by the Commerce Department on Friday. Of the 20 states with the smallest decrease in state GDP, 13 were run by Republican governors, while the bottom 25 states with the highest decrease in state GDP were predominantly Democratic-run states. …Republican-controlled Utah had the second-lowest unemployment rate in the country in August at 4.1%, and the second-lowest GDP drop, at just over 18% in the second quarter. Nevada, run by Democrats, had the highest unemployment rate, at 13.2%. It was closely followed by Democratic-run Rhode Island, 12.8%, and New York, 12.5%.

Krishan notes that this short-run data is heavily impact by the coronavirus and the shutdown policies adopted by various states, so it presumably doesn’t tell us much about the overall quality (or lack thereof) of economic policy.

wrote about some multi-year data last year (before coronavirus was a problem) and found that low-tax states were creating jobs at a significantly faster rate than high-tax states.

But even that data only covered a bit more than three years.

I prefer policy comparisons over a longer period of time since that presumably removes randomness. Indeed, when comparing California, Texas, and Kansas a few years ago, I pointed out how a five-year set of data can yield different results (and presumably less-robust and less-accurate results) than a fifteen-year set of data.

P.S. What would be best is if we had several decades of data that could be matched with rigorous long-run measures of economic freedom in various states – similar to the data I use for my convergence/divergence articles that compare nations. Sadly, we have the former, but don’t have the latter (there are very good measures of economic freedom in the various states today, but we don’t have good historical estimates).

Class Warfare and Traffic Fines

Mon, 10/12/2020 - 12:30pm

One of the best political cartoons I’ve ever seen was this gem from Glenn McCoy.

It very effectively captures how greedy local governments breed resentment and create conflict by using the law to fleece residents (and it definitely will be featured if I ever do another political cartoonist contest).

This is not a trivial topic. I’ve previously written about how fees, fines and charges can wreck the lives of the less fortunate.

So how do we solve this problem?

Alec Schierenbeck, in a column for the New York Times, argues we should impose much higher fines on rich people.

For people living on the economic margins, even minor offenses can impose crushing financial obligations, trapping them in a cycle of debt and incarceration for nonpayment. …Across America, one-size-fits-all fines are the norm… Other places have saner methods. Finland and Argentina, for example, have tailored fines to income for almost 100 years. The most common model, the “day fine,” scales sanctions to a person’s daily wage. A small offense like littering might cost a fraction of a day’s pay. A serious crime might swallow a month’s paycheck. Everyone pays the same proportion of their income. …Finland…handed a businessman a $67,000 speeding ticket for going 14 miles per hour above the limit.

He argues this is a matter of fairness.

…scaling fines to income is a matter of basic fairness. …The flat fine threatens poor people with financial ruin while letting rich people break the law without meaningful repercussions. Equity requires punishment that is equally felt. …while punishment is supposed to prevent undesirable conduct from happening in the first place, flat fines deter the wealthy less than everyone else. …That’s particularly true in cities like Ferguson that went easy on wealthier residents but treated poor people like cash cows. After all, the city would get more bang for its buck pulling over a rich driver with a blown blinker.

I think Schierenbeck is both right and wrong.

He’s correct that his approach would be more fair. An income-based speeding ticket would be akin to a flat tax – i.e., take the same proportion of everyone’s income. For what it’s worth, I made this argument with regard to traffic offenses back in 2015.

But that approach won’t do anything to help poor people (to be fair, the author doesn’t claim it would).

If we want to protect low-income people from greedy governments, there are several options.

  • Have fewer nuisance laws that lead to fines, fees, and charges.
  • Have income-based fines, but at a low level for rich and poor alike.
  • Perhaps most important, control government spending so politicians have less incentive to grab more money from people.

The bottom line is that I don’t want government to screw over poor people, just as I don’t want government to screw over middle-class people or rich people.

P.S. My point about higher fines on the rich not helping the poor is the same an my argument that class-warfare taxes on upper-income taxpayers don’t do anything to help the less fortunate. Indeed, poor people actually suffer collateral damage because of diminished prosperity.

———
Image credit: Nathan Rupert | CC BY-NC-ND 2.0.

America’s “Wretched Hive of Scum and Villainy”: Part I

Sun, 10/11/2020 - 12:24pm

Earlier this year, I asked “Why are there so many bad and corrupt people in government?” and suggested two possible explanations.

  1. Shallow, insecure, and power-hungry people are drawn to politics because they want to control the lives of others.
  2. Good people run for political office, but then slowly but surely get corrupted because of “public choice” incentives.

I’m sure both answers apply to some extent. But let’s consider whether one answer is more accurate in more cases?

In an article for Quillette, Professor Crispin Sartwell of Dickinson College looks at this chicken-or-egg issue of whether people are corrupted by government or corrupt people gravitate to government.

“Power corrupts,” as the saying goes, and a corollary is that, other things being equal, the more power, the more corruption. …But perhaps the explanation runs the other way: It’s not only or not even primarily that power corrupts, but that corrupt people seek power, and the most effectively corrupt are likeliest to succeed in their quest. …That is, it is likely that a political career would attract moral corner-cutters. …There may be a certain percentage of people who seek power because they want to do good, or it may be that in the back of their minds, every political leader believes that he intends to do good. But to use power to do good, you’ll have to do whatever’s necessary to get that power. You’ll likely have to compromise whatever basic moral principles (“tell the truth,” for example) you came in with. …political power is a constant temptation to hypocrisy, or just flatly demands it. And when the public persona and the private reality come apart, a human being becomes a moral disaster, a mere deception. That is a fate common among politicians.

Professor Sartwell may not have a firm answer, but one obvious conclusion is that good people will be scarce in Washington.

And it’s not just the politicians we should worry about. The whole town seems to attract dodgy people.

In a 2018 study, Professor Ryan Murphy of Southern Methodist University found that Washington has far more psychopaths than any other part of the country.

Psychopathy, one of the “dark triad” of personality characteristics predicting antisocial behavior, is an important finding in psychology relevant for all social sciences. …While a very small percentage of individuals in any given state may actually be true psychopaths, the level of psychopathy present, on average, within an aggregate population (i.e., not simply the low percentages of psychopaths) is a distinct research question. …The most extreme data point is the District of Columbia, which received a standardized score of 3.48. …The presence of psychopaths in District of Columbia is consistent with the conjecture found in Murphy (2016) that psychopaths are likely to be effective in the political sphere. …The District of Columbia is measured to be far more psychopathic than any individual state in the country, a fact that can be readily explained…by the type of person who may be drawn a literal seat of power.

Moreover, we know that the crowd in D.C. figuratively screws taxpayers, but it appears they’re also busy screwing in other ways.

Residents in Washington, D.C. have the highest rates of sexually transmitted disease, compared to 50 states, according to a recent Center for Disease Control and Prevention report. Out of the four kinds of STDs that the CDC report identified – chlamydia, gonorrhea, primary and secondary syphilis and congenital syphilis – the district scored No.1 in the first three by a large margin… For every 100,000 D.C. residents, 1,083 cases of chlamydia were reported. Alaska came in second with only 772 cases. Similarly, the district had 480 cases of gonorrhea per 100,000 population, double the rate of Mississippi, which ranked second.

Since this report was based on data in 2016, it’s possible another state has overtaken D.C.

But given Washington’s big lead, that would take a lot of risky extracurricular activity.

This tweet caught my eye because it nicely captures how the “experienced” people in Washington often may be the worst of the worst.

Amateur politicians do unethical things that are against the rules.

Professional politicians do unethical things that they’ve written the rules to allow.

— Dan McLaughlin (@baseballcrank) March 6, 2019

And we’ll close with this quote, which comes down on the side of bad people naturally gravitating to government.

P.S. If you like mocking the political class, you can read about how the buffoons in DC spend their time screwing us and wasting our money. We also have some examples of what people in MontanaLouisianaNevada, and Wyoming think about big-spending politicians. This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting. Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry. Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

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

Whitewashing East Germany’s Stalinist Dictatorship

Sat, 10/10/2020 - 12:22pm

In my lifetime, perhaps the greatest moment for human liberty took place 31 years ago when the corrupt socialist dictatorship of East Germany lost the will and ability to maintain the Berlin Wall.

Almost overnight, there was hope for the long-suffering people of the so-called German Democratic Republic.

In a spontaneous celebration that still brings tears to my eyes, they joined together with the free people of West Germany to tear down the ugly symbol of Marxist tyranny and oppression.

Even better, the fall of the Berlin Wall was a precursor to the total collapse of the Soviet Empire, thus liberating hundreds of millions of people from the horrific brutality of communism.

But not everybody is happy that the communism wound up on the ash heap of history. In a column for Jacobin, Loren Balhorn wistfully remembers East Germany’s Stalinst regime.

On October 3, 1990, the German Democratic Republic (GDR), formerly one of the most enthusiastic members of the Warsaw Pact, …ceased to exist…the uprisings of 1989–1990 across Eastern Europe saw the consolidation of a neoliberal order as the supposed price to pay for basic civil liberties and nominal freedom of movement. Communist parties that had ruled for decades fell into disarray, hastily rebranding themselves as social democrats or dissolving entirely. The fall of the Soviet bloc also demoralized large sections of the Left on the other side of the Iron Curtain, prompting the collapse of the international communist movement. …The specter of dictatorship and economic stagnation that is used to (one-sidedly) characterize life in the Eastern Bloc continues to be cited as incontrovertible “proof” that capitalism is the only workable — and indeed desirable — socioeconomic system. Moreover, socialism’s collapse in 1989 demonstrated that, when presented with the choice, most workers opt for the material abundance of capitalism and liberal democracy over whatever a socialist system has to offer. …whatever gains workers had made under socialism evidently were not enough to retain their loyalty when the moment of decision came. …But did it have to be this way?

After posing the rhetorical question whether it had “to be this way?”, Balhorn provides a very twisted answer

For many who survived fascism and wanted a new, better Germany, the GDR appeared as the natural choice. A number of prominent leftist intellectuals and artists, like renowned playwright Bertolt Brecht, composer Hanns Eisler, philosopher Ernst Bloch, and legal theorist Wolfgang Abendroth, opted to move East and lend their services to the cause. …Beyond these famous examples, it should not be forgotten that over five hundred thousand Germans chose to migrate not West but East in the first decade of the GDR’s existence. …The Wall…gave the GDR the chance to build a society that was broadly characterized by modest prosperity and social equality between classes and genders. Workers were guaranteed employment, housing, and all-day childcare, while basic foodstuffs and other goods were heavily subsidized. Though wages were only half of what they were in the West, adjusted for prices in relation to earnings, GDR workers’ actual purchasing power was more or less the same. …class distinctions in the GDR were in fact dramatically reduced, both in material as well as cultural terms.

In other words, Balhorn wants readers to believe that equal levels of misery and deprivation in former communist nations are something to celebrate.

I can’t resist pointing out that his assertion about levels of purchasing power being “more of less the same” in West Germany and East Germany is utter nonsense.

Here’s the data from a column I wrote last year.

Simply stated, both parts of Germany started out from a very low level after the destruction of World War II.

But then West Germany, triggered by the free-market reforms of leaders such as Ludwig Erhard, became a rich nation while East Germany lagged far behind.

Here’s one final excerpt which must set a record for romanticizing a Marxist dictatorship.

…the women and men who lived and worked in the GDR spent four decades building a society they understood as such and registered a number of remarkable achievements. …we can look to many of its achievements in education, housing, childcare, and labor relations as evidence that society does not have to be organized around the interests of the wealthy and that the free market is not the only way to organize an economy. It is possible to ensure that everyone has a place to live, health care, enough food to eat, and access to education — something that no capitalist society can claim today.

This is – at best – moral blindness.

noted back in 2017 that there were some economists who used to write about the supposed superior performance of communist nations. But there were merely guilty of naively believing data from communist nations (and also guilty of not actually understanding economics).

I don’t think any of them would be dumb enough to praise East Germany today.

So Loren Balhorn definitely qualifies as a dupe and apologist.

P.S. You won’t be surprised to learn that the nations with the most pro-market reforms are the ones that have most prospered since the collapse of communism.

P.P.S. There’s a grocery store in Texas that played a role in the collapse of the Soviet Union.

———
Image credit: US Dept of Defense | CC by 2.0.

The Renewable Fuel Mandate is a Failed Policy

Fri, 10/09/2020 - 12:47pm

Originally published by Inside Sources on October 8, 2020.

One of the many political dysfunctions plaguing the nation is the fact that failed policies rarely come to a quick and decisive end.

Case in point: It has long been clear that the Renewable Fuel Standard (RFS) has not and will not achieve its objectives, yet both parties participate in its perpetuation and even expansion.

recent paper published by my organization, the Center for Freedom and Prosperity, reviews the record of the RFS and summarizes: “In the 15 years of its existence, the RFS has failed to advance its stated purposes while leading to adverse consequences for consumers, refiners, and the environment.”

Drafters of the mandate expected biofuel to develop along a predictable path, but technology doesn’t necessarily follow the route most convenient for politicians.

Instead of transitioning from corn starch ethanol to more advanced biofuels as hoped, increases in the mandate over the years are met with even greater reliance on corn, causing problems for just about everyone except corn farmers.

Economically, consumers suffer because competition for corn drives up prices for foods losing acreage to corn and for livestock that use corn for feed.

It has also squeezed small refiners unable to blend their own biofuel and who are reliant on the secondary trading market, dysfunctional owing to its nature as a product of government instead of real economic demand, to meet statutory quotas.

Of a particular irony is the environmental record of the mandate. The presumption that renewable energy equals environmental improvement has proven false, at least in this case corn ethanol. As mentioned, corn constitutes the bulk of biofuel produced in the U.S., and its production has proven to have many adverse consequences.

The total life-cycle emissions of corn ethanol exceed gasoline, so it does nothing to advance carbon reduction goals. The heavy use of nitrogen-rich fertilizers to grow corn also create “dead zones” in the Gulf of Mexico where sea life often dies due to a lack of oxygen.

Toxic algal blooms in the Great Lakes are similarly made worse.

It’s no surprise, then, that surveys of environmentalists show a majority oppose the corn ethanol mandate. Yet despite what appears to be a broad, cross-ideological coalition opposed to the RFS, it has thus far avoided serious reforms.

Despite benefits to farmers like approving year-round sale of E15, gasoline with up to 15 percent ethanol, and denying a slew of waivers for small refiners hurting from the mandate, ethanol backers say Trump has done too little.

Joe Biden has taken up their cause by pledging to double down on ethanol. His rhetoric tellingly focuses on “rural America and our nation’s farmers,” in a tacit admission that the modern RFS is little more than a special interest carve-out rather than a defensible energy policy.

Incidentally, Biden will wipe out demand for ethanol by subsidizing electric vehicles as part of his $2 trillion climate plan.

A large part of the explanation for the mandate’s staying power is the influence of farm-state legislators. A closely divided electorate puts a premium on every seat as potentially decisive in the balance of power, giving that constituency tremendous influence. But while the politics are complicated, the policy questions themselves are not.

The evidence is clear that for consumers and the nation the RFS is a bad deal.

———
Image credit: Beeki | Pixabay License.

Education Bureaucrat: Choice for Me, Equal Mediocrity for Thee

Fri, 10/09/2020 - 12:09pm

Writing about the failed government education monopoly back in 2013, I paraphrased Winston Churchill and observed that, “never has so much been spent so recklessly with such meager results.”

This more-recent data from Mark Perry shows that inflation-adjusted spending has ballooned in recent decades, driven in part by teacher expenses but even more so by the cost of bureaucrats.

Robby Soave recently wrote about the hypocrisy of one of those non-teaching bureaucrats.

In a must-read article for Reason, he notes that the lavishly compensated superintendent of government schools in a suburb of Washington, DC, has decided that one of his kids will get a better education at a private school.

Alexandria City Public Schools (ACPS) Superintendent Gregory Hutchings has always been proud to call himself a parent of two children who attend public school. …But now, Hutchings has pulled one of his kids from ACPS—which remains all-virtual, to the frustration of many parents—and instead enrolled the child in a private Catholic high school currently following a hybrid model: some distance learning, and some in-person education. …It’s hard to blame Hutchings for trying to do right by his own child. But he is in a position to do right by thousands of other kids who don’t have the same opportunity.

Mr. Hutchings is a hypocrite, but that’s hardly a surprise.

So was Barack Obama. And Obama’s Secretary of Education. Lots of other leftists also have opposed school choice while allowing their kids to benefit from superior private schools, including Elizabeth Warren.

Why are they hypocrites? Because they put the self-interest of teacher unions before the educational interests of other people’s children.

But let’s return to Mr. Hutchings, because not only is he a hypocrite, he’s also a believer in equal levels of mediocrity.

Hutchings previously expressed concerns about parents seeking alternative educational arrangements. In a July 23 virtual conversation with parents and teachers detailing the district’s fall plans, Hutchings fretted that in-person learning pods would cause some students to get ahead of their Zoom-based public school counterparts. …Hutchings described pod-based learners as “privileged.” “If you’re able to put your child in a learning pod, your kids are getting ahead,” he said. “The other students don’t get that same access.” Students enrolled in pod-based learning, private tutoring, or private schooling that involves in-person instruction are indeed better off than those languishing in virtual education. But that’s a failure of public schools, which have largely chosen to privilege the demands of unions over the needs of children.

This is truly reprehensible.

In the past, I’ve criticized President George W. Bush “No Child Left Behind” scheme because it involved more centralization and more wasted money.

Hutchings is even worse. His policy should be called “No Child Gets Ahead.” And he’s not alone. My home county of Fairfax has the same disgusting attitude.

All things considered, Mr. Hutchings deserves membership in the Bureaucrat Hall of Fame.

P.S. It goes without saying, but I’ll say it anyhow, that the record spending increases for government schools have not been matched by improvements in educational outcomes. Heck, the chart shows that there haven’t been any improvements.

P.P.S. Getting rid of the Department of Education would be a good idea, but keep in mind that the battle for school choice is largely won and lost on the state and local level.

P.P.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.

———
Image credit: Ken Gallager | CC BY-SA 4.0.

How Can the New York Times Write about the Failure of Venezuela and not Mention Socialism?

Thu, 10/08/2020 - 12:00pm

Every so often, I’ll grouse about media sloppiness/media bias, most often from the Washington Post or New York Times, but also from other outlets (ReutersTimeABC, the Associated Press, etc).

Let’s add to the collection today by perusing an interesting – but frustrating – article in the New York Times about Venezuela’s near-decimated oil industry.

Authored by Sheyla Urdaneta, Anatoly Kurmanaev and Isayen Herrera, it provides a thorough description of how the energy sector in oil-rich Venezuela has collapsed.

For the first time in a century, there are no rigs searching for oil in Venezuela. Wells that once tapped the world’s largest crude reserves are abandoned… Refineries that once processed oil for export are rusting hulks… Fuel shortages have brought the country to a standstill. At gas stations, lines go on for miles. …The country that a decade ago was the largest producer in Latin America, earning about $90 billion a year from oil exports, is expected to net about $2.3 billion by this year’s end… More than five million Venezuelans, or one in six residents, have fled the country since 2015, creating one of the world’s greatest refugee crises, according to the United Nations. The country now has the highest poverty rate in Latin America, overtaking Haiti.

But here’s what shocked me. The article never once mentions socialism. Or statism. Or leftist economic policy.

Instead, there is one allusion to “mismanagement” and one sentence that refers to government policy.

…years of gross mismanagement… Hugo Chávez, appeared on the national stage in the 1990s promising a revolution that would put Venezuela’s oil to work for its poor majority, he captivated the nation. …Mr. Chávez commandeered the country’s respected state oil company for his radical development program. He fired nearly 20,000 oil professionals, nationalized foreign-owned oil assets and allowed allies to plunder the oil revenues.

Almost 1800 words in the article, yet virtually no discussion of how maybe, just maybe, Venezuela’s hard shift to the left (as illustrated by the chart, economic freedom has steadily declined this century) may have contributed to the collapse of the country’s major industry.

This is journalistic malpractice. Sort of like writing about 2020 and not mentioning coronavirus or writing about 1944 and not mentioning World War II.

For those of you who do care about facts, it’s worth knowing that Venezuela has the world’s lowest level of economic liberty according to Economic Freedom of the World and second-to-lowest level of economic liberty according to the Index of Economic Freedom.

In a column for USA Today, Daniel di Martino writes about the awful consequences of his nation’s drift to socialism.

All my life, I lived under socialism in Venezuela until I left and came to the United States as a student in 2016. Because the regime in charge imposed price controls and nationalized the most important private industries, production plummeted. No wonder I had to wait hours in lines to buy simple products such as toothpaste or flour. …My family and I suffered from blackouts and lack of water. The regime nationalized electricity in 2007 in an effort to make electricity “free.” Unsurprisingly, this resulted in underinvestment in the electrical grid. By 2016, my home lost power roughly once a week. …The real reason my family went without water and electricity was the socialist economy instituted by dictators Hugo Chavez and Nicolas Maduro. The welfare programs, many minimum-wage hikes and nationalizations implemented by their regimes resulted in a colossal government deficit that the central bank covered by simply printing more money — leading to rampant inflation. …I watched what was once one of the richest countries in Latin America gradually fall apart under the weight of big government.

And he issues a warning about what could happen to the United States.

…neither Medicare for All nor a wealth tax alone would turn the United States into Venezuela overnight. No single radical proposal would do that. However, if all or most of these measures are implemented, they could have the same catastrophic consequences for the American people that they had for Venezuela.

The good news, so to speak, is that it would take many decades of bad policy to turn the U.S. into an economic basket case. There’s even a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy.

But that doesn’t mean it would be a good idea to see how quickly the U.S. could become Venezuela. As I pointed out when writing about Argentina, it’s possible for a rich country to tax, spend, and regulate itself into economic crisis.

P.S. If you like gallows humor, you can find Venezuela-themed jokes hereherehereherehere, and here.

P.P.S. I speculated about the looming collapse of Venezuela in both 2018 and 2019. Sadly, it looks like the regime will last at least until 2021.

America’s Best and Worst Governors

Wed, 10/07/2020 - 12:57pm

According to the Fraser Institute’s calculations of overall economic freedom, Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive estimates of economic liberty in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we focus just on fiscal policy?

Earlier this year, I wrote three columns that illustrated different ways – income taxessales taxes, and government spending burden – of measuring the quality of state fiscal policy.

Today, let’s look at a comprehensive assessment of the nation’s governors, courtesy of Chris Edwards. Here’s his core methodology.

…this year’s 15th biennial fiscal report card on the governors…examines state budget actions since 2018. It uses statistical data to grade the governors on their tax and spending records—governors who have restrained taxes and spending receive higher grades, while those who have substantially increased taxes and spending receive lower grades. …Scores ranging from 0 to 100 were calculated for each governor on the basis of seven tax and spending variables. Scores closer to 100 indicate governors who favored smaller-government policies.

Only four governors got the highest grade (and that’s using a curve!), led by Chris Sununu of New Hampshire.

Those of you who follow politics may be interested in knowing that Kristi Noem (R-SD) and Ron DeSantis (R-FL), both potential presidential candidates in 2024, got “B” grades. So good, but not great.

Now let’s look at the most profligate chief executives.

The worst of the worst is Jay Inslee of Washington. So however bad Biden’s agenda is for the country, let’s be happy that Governor Inslee didn’t win the Democratic presidential nomination.

I’m not surprised by the other “F” governors. Though I am surprised that Gov. Pritzker isn’t in last place, given his efforts to get rid of the the Illinois flat tax.

For what it’s worth, the best-ranked Democrat (a “B” grade) is Steve Sisolak of Nevada. I assume this means he hasn’t tried to ruin the state’s zero-income-tax status. The worst-ranked Republican (a “D” grade) is Bill Lee of Tennessee and his bad score is because of huge increases in the state spending burden.

Last but not least, Chris identifies a systemic problem impacting almost all states. Simply stated, government spending has been growing too rapidly, more than double what would be needed to keep pace with inflation.

General fund spending grew at an annual average rate of 4.1 percent between 2010 and 2020, including increases of 5.5 percent in 2019 and 5.8 percent in 2020.

Here’s the accompanying chart.

In the study, Chris says states should use “rainy day funds” to avoid boom-and-bust budgeting (in other words, set aside some revenue when the economy is growing so it’s not necessary to make big adjustments when there’s a recession).

That’s definitely a prudent approach, and the study points out that some blue-leaning states like California follow that policy, while others (most notably, Illinois) recklessly spent surplus revenue.

My two cents is that a spending cap is the best long-run solution, and Colorado’s TABOR is easily the best fiscal rule among the 50 states.

P.S. Governor Sununu of New Hampshire needs to continue getting good scores to atone for his father’s terrible role, as Chief of Staff for George H.W. Bush, in pushing through the failed 1990 tax increase.

The Most Important Ballot Initiative of 2020

Tue, 10/06/2020 - 12:27pm

On election day, most people focus on the big-ticket partisan battles, such as this year’s contest between Trump and Biden.

Let’s not forget, though, that there are sometimes very important referendum battles at the state (or even local) level.

This year, the most important referendum will be in Illinois, where hypocritical Governor J.B. Pritzker wants voters to approve an initiative to replace the state’s flat tax with a discriminatory progressive tax.

I’ve already explained that the flat tax is the only thing saving Illinois from going further and faster in the wrong direction. Let’s add some additional evidence, starting with excerpts from this editorial in the Wall Street Journal.

The last state to adopt a progressive income tax was Connecticut in 1996, and we know how that turned out. Now Democrats in Illinois want to follow Connecticut down the elevator shaft with a referendum replacing the state’s flat 4.95% income tax with progressive rates… Public unions have long wanted to enact a progressive tax to pay for increased spending and pensions, and they think the political moment has finally arrived. Democratic Gov. J.B. Pritzker says a progressive tax will hit only the wealthy… Don’t believe it. There aren’t enough wealthy in the state to pay for his spending promises, so eventually Democrats will come after the middle class. …Illinois has no fiscal room to fail. Since 2015 Illinois’s GDP has grown a mere 1% annually, about half as fast as the U.S. and slower than Ohio (1.4%), Indiana (1.7%), Wisconsin (1.7%) and Michigan (2.1%). About 11% of Illinois residents have left since 2001, the second biggest state exodus after New York. Taxpayer flight has been accelerating as income and property taxes have risen. …A progressive tax would be a gift to Florida and Texas.

The head of the Illinois Chamber of Commerce, Todd Maisch, also worries that other states will benefit if voters make the wrong choice. Here are excerpts from his column in the Chicago Sun-Times.

The rest of the nation’s states are cheering on Illinois’ efforts to enact a progressive income tax. That’s because they know it will be one more self-inflicted blow to our state’s economy, certain to drive dollars, jobs and families into their waiting arms. …The reality is that this proposal is intended to do just one thing: Make it easier to raise taxes on all Illinoisans. …the spenders in Springfield are coming for you too, sooner or later. Proponents of the progressive tax know something they don’t want to tell you. Taxing millionaires will in no way meet their appetite for state spending. There simply isn’t enough money at the higher income levels to satisfy their demands. Tax rates will go up and tax brackets will reach lower and lower incomes. …Other states already are benefiting from the outmigration of Illinoisans and their money. Illinois passing the progressive tax is exactly what they are hoping for.

Amen. We already have lots of evidence showing that taxpayers move from high-tax states to low-tax states. And Illinois already has been bleeding taxable income to other states, so it’s very likely that a progressive tax would dramatically worsen the state’s position.

Illinois voters can and should learn from what’s happened elsewhere.

For instance, Orphe Divounguy of the Illinois Policy Institute shares evidence from California about the adverse impact of class-warfare taxation.

Illinois Gov. J.B. Pritzker finds himself in the same place as then-California Gov. Jerry Brown was in back in 2012 – trying to convince voters that a progressive state income tax hike will fix state finances in crisis. Brown claimed the burden of those tax hikes would only harm those earning $250,000 or more – the top 3% of earners. That’s exactly what Pritzker promises with his “fair tax” proposal. Brown was wrong. …Here are the main findings of the new study… The negative economic effects of the tax hike wiped out nearly half of the expected additional tax revenue. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45% of the additional tax revenues from the tax hike… The “temporary” income tax hike, which has now been extended through 2030, made it about 40% more likely wealthy residents would move out of California, primarily to states without income taxes.

Illinois voters also should learn from the painful experiences of taxpayers in Connecticut and New Jersey.

The Wall Street Journal editorialized this morning about their negative experiences.

Illinois is the nation’s leading fiscal basket case, with runaway pension liabilities and public-union control of Springfield. But it has had one saving grace: a flat-rate income tax that makes it harder for the political class to raise taxes. Now that last barrier to decline is in jeopardy on the November ballot. …the pattern of other blue states is instructive. Democratic governors have often lowballed voters with modest rates when introducing a new tax, only to ratchet up the levels in each administration. …New Jersey first taxed individual income in 1976 amid a national revenue slump, with a top rate of 2.5%. …Democratic Gov. James Florio raised the tax to 7%… A decade later Democrats raised the top rate to 8.97%, and last year Gov. Murphy added the 10.75% rate… Or take Connecticut… For decades its lack of an income tax lured New York workers and businesses, but Gov. Lowell Weicker introduced the tax in 1991…and the original 1.5% rate has since been raised five times to today’s 6.99%.

And here’s the chart that every taxpayer should memorize before they vote next month.

And never forget that ever-increasing tax rates on high earners inevitably are accompanied by ever-increasing tax rates on everyone else – exactly as predicted by the Sixth Theorem of Government.

So if middle-class Illinois voters approve the so-called Fair Tax initiative, they’ll have nobody to blame but themselves when their tax rates also climb.

P.S. If voters in very-blue Illinois reject Pritzker’s class-warfare tax referendum, I wonder if that will discourage Democrats in Washington from embracing Biden’s class warfare agenda next year (assuming he wins the election)?

P.P.S. There’s a debate whether ballot initiatives and other forms of “direct democracy” are a good idea. Professor Garett Jones of George Mason University persuasively argues we’ll get better governance with less democracy. On the other hand, Switzerland is a very successful, very well-governed nation where voters directly decide all sorts of major policy issues.

Correcting Pope Francis…Again

Mon, 10/05/2020 - 12:07pm

While I generally don’t think recycling is economically sensible, I am going to reuse this 2013 BBC interview because it’s time (again) to criticize the economic illiteracy of Pope Francis.

As I’ve previously explained, it’s good to care for the less fortunate. Indeed, as I explain in the interview, it’s part of being a good person.

It’s misguided, however, to think that higher taxes and bigger government are an effective way of lifting people out of poverty.

Indeed, we have centuries of evidence demonstrating that only capitalism produces mass prosperity.

Sadly, Pope Francis has a Peronist mindset on economic matters. So when he issues his thoughts on economic matters, we get erroneous cliches rather than helpful analysis.

story from the Associated Press summarizes the Pope’s new attack on economic liberty.

Pope Francis says…the “magic theories” of market capitalism have failed and that the world needs a new type of politics that promotes dialogue and solidarity… The document draws its inspiration from…the pope’s previous preaching on the injustices of the global economy. “…not everything can be resolved by market freedom,” he wrote. …As an outgrowth of that, Francis rejected the concept of an absolute right to property for individuals… He repeated his criticism of the “perverse” global economic system, which he said consistently keeps the poor on the margins while enriching the few… Francis also rejected “trickle-down” economic theory… “Neo-liberalism simply reproduces itself by resorting to magic theories of ‘spillover’ or ‘trickle’ — without using the name — as the only solution to societal problems,” he wrote. “There is little appreciation of the fact that the alleged ‘spillover’ does not resolve the inequality.

And here’s how NPR reported the Pope’s anti-market message.

The document..is a scathing description of laissez faire capitalism… Once the pandemic passes, the pope writes, “our worst response would be to plunge even more deeply into feverish consumerism and new forms of egotistic self-preservation.” …Francis says the marketplace cannot resolve every problem, and he denounces what he describes as “this dogma of neoliberal faith” that “resort[s] to the magic theories of ‘spillover’ or ‘trickle.’ ” A good economic policy, he says, creates jobs — it doesn’t eliminate them.

The Pope is right that good policy creates jobs, by the way, but he’s wildly wrong to think that there’s a better alternative than capitalism.

For what it’s worth, I’m guessing that he doesn’t like the fact that capitalism means “creative destruction,” which does result in millions of jobs being eliminated every year. But, barring a recession, that same process also leads to the creation of an even greater number of new jobs.

Equally important, this is the process that results in higher productivity, higher wages, and higher living standards.

The bottom line is that a statist economic agenda – at best – offers the poor a life of dependency (especially when you consider the very high implicit marginal tax rates created by redistribution programs).

Capitalism, by contrast, gives the poor opportunity and upward mobility (as I noted a few years ago, it would be much better to be a poor person in Hong Kong than in France).

P.S. I strongly recommend what Thomas Sowell and George Will wrote about the Pope’s anti-market ideology.

P.P.S. Mauritius is a powerful example of why the Pope is very fallible on economic matters.

Milton Friedman on Taxation

Sun, 10/04/2020 - 12:34pm

Yesterday’s column featured some of Milton Friedman’s wisdom from 50 years ago on how a high level of societal capital (work ethic, spirit of self-reliance, etc) is needed if we want to limit government.

Today, let’s look at what he said back then about that era’s high tax rates.

His core argument is that high marginal tax rates are self-defeating because the affected taxpayers (like Trump and Biden) will change their behavior to protect themselves from being pillaged.

This was in the pre-Reagan era, when the top federal tax rate was 70 percent, and notice that Friedman made a Laffer Curve-type prediction that a flat tax of 19 percent would collect more revenue than the so-called progressive system.

We actually don’t know if that specific prediction would have been accurate, but we do know that Reagan successfully lowered the top tax rate on the rich from 70 percent in 1980 to 28 percent in 1988.

So, by looking at what happened to tax revenues from these taxpayers, we can get a pretty good idea whether Friedman’s prediction was correct.

Well, here’s the IRS data from 1980 and 1988 for taxpayers impacted by the highest tax rate. I’ve circled (in red) the relevant data showing how we got more rich people, more taxable income, and more tax revenue.

The bottom line is that Friedman was right.

Good tax policy (i.e., lower rates on productive behavior) can be a win-win situation. Taxpayers earn more and keep more, while politicians also wind up with more because the economic pie expands.

Something to keep in mind since some politicians in Washington want a return to confiscatory taxes on work, saving, investment, and entrepreneurship.

Milton Friedman on Spending

Sat, 10/03/2020 - 12:28pm

I identified four heroes from the “Battle of Ideas” video I shared in late August – Friedrich Hayek, Milton Friedman, Ronald Reagan, and Margaret Thatcher. Here’s one of those heroes, Milton Friedman, explaining what’s needed to control big government.

For all intents and purposes, Friedman is pointing out that there’s a “public choice” incentive for government to expand.

To counteract that disturbing trend, he explains that we need a high level of “societal capital.” In other words, we need a self-reliant and ethical populace – i.e., people who realize it’s wrong to use the coercive power of government to take from others.

Sadly, I don’t think that’s an accurate description of today’s United States.

So how, then, can we get control of government?

Since politicians are unlikely to control spending in the short run (their time horizon is always the next election), our best hope is to get them to agree to a rule that constrains what can happen in the future.

I’ve repeatedly argued in favor of a spending cap. Such a policy has a proven track record, and is far more effective than a balanced budget requirement.

That’s what should happen.

Now let’s focus on what shouldn’t happen. As Milton Friedman famously observed in 2001, tax increases are never the solution because politicians will simply spend any additional revenue (and the tax increases also will hurt the economy and cause Laffer-Curve feedback effects).

P.S. You can enjoy more wisdom from Friedman on issues such as the role of the firmspending other people’s money, and so-called Robber Barons.

P.P.S. On the issue of spending other people’s money, here’s an example of Jay Leno channeling Friedman.

Do Small Countries and Small States Have Lower Levels of Red Tape?

Fri, 10/02/2020 - 12:12pm

When I write about regulation, I mostly focus on cost-benefit analysis.

Simply stated, red tape makes it more expensive for people and businesses to do things, much as adding obstacles makes it more difficult for someone to get from Point A to Point B.

So a relevant question is whether proposed regulations generate enough benefits to justify the added expense (I’m generally skeptical, but those are empirical matters).

But there’s another question we should ask, which is why governments create new rules and red tape in the first place?

Those are all plausible explanations.

But one thing that never occurred to me is that we may get more regulation if we live in a state or nation with lots of people.

That’s a topic that James Bailey, James Broughel, and Patrick A. McLaughlin investigated in a new study from the Mercatus Center. Here’s a description of their methodology.

…very few academic studies have advanced scholars’ understanding of the relationship between regulation and population. This article is intended to help fill this gap in the literature. We aim to test whether this population-regulation connection holds using more recent, more refined, and more comprehensive measures of regulation. …This study is the first to use RegData to measure why some polities are more regulated than others, the first to use the full State RegData (released in October 2019) for any econometric analysis, and the first to combine federal and state RegData for the United States with RegData datasets for other countries (Australia and Canada).

Here is some of the key data from the United States, Canada, and Australia.

The United States has about an order of magnitude more people than Canada, along with about an order of magnitude more regulatory restrictions than Canada. Conversely, Australia is less populous than Canada but has nearly twice as many regulatory restrictions. On a per capita basis, Canada, with only 0.0023 restrictions per capita for the entire time period examined, appears somewhat less regulated than the United States (at about 0.0032 restrictions per capita) and significantly less regulated than Australia (whose restrictions per capita rise from about 0.0053 in 2005 to a peak of 0.0095 in 2012, and taper slightly to 0.0092 in 2018). We note, however, that both the Canadian and the Australian regulatory systems are fairly decentralized compared to that of the United States, delegating a considerable amount of autonomy and authority to provincial governments.

The study includes some interesting charts.

First, we see that there are a lot more regulatory restrictions in the United States than in Canada and Australia.

Though if you adjust for population size, Australia has the most red tape.

Kudos to Canada for having the lowest level of red tape, both in absolute terms and in per-capita terms. As I wrote a few years ago, there are many Canadian policies we should emulate.

One common feature of the U.S., Canada, and Australia is that all three nations have some degree of federalism, which means that some government policies are handled at the state/provincial level.

And this means the Mercatus study has another way of measuring the relationship between population and red tape. In the United States, we learn that more people means more regulations.

Figure 3 compares the 2000 population and 2018 regulatory restriction counts of 46 US states and the District of Columbia. We see a strong positive correlation between population and regulatory restrictions. Running a basic linear regression with no controls, we find that, on average, an increase in population of 1,000 people is associated with a statistically significant increase of 9 regulatory restrictions. …we next take the log of both population and regulatory restrictions and run a simple linear regression on these variables…which show that, on average, a 10 percent increase in population is associated with a 3.27 percent increase in regulatory restrictions.

Here’s the relevant chart from the study.

Congratulations to South Dakota for having the lowest level of red tape (the state also scores well on fiscal policy).

Canada and Australia have fewer subnational governments, but the study finds a similar relationship between population size and regulatory restrictions.

While Canada and Australia do not have enough provinces to support proper regression analysis, Figures 4 and 5 plot their subnational populations against their subnational regulatory restrictions. The results are also suggestive of a positive population-regulation correlation.

Here’s the chart for Canada.

And here’s the chart for Australia.

The relationship between red tape and population isn’t a perfect fit, either in the U.S. or in the other two countries. But there certainly seems to be some level of correlation.

But why?

The authors offer some potential answers.

…we show that larger polities consistently have more regulation. This provides support for previous theoretical work that posited a fixed cost associated with regulating. Specifically, the fixed costs of establishing new bureaus, staffing them, and funding them to implement and enforce regulations may fall on a per capita basis with a larger population. In addition to the fixed cost explanation, Mulligan and Shliefer offer other alternative explanations for why regulation may increase with population levels…the scope of activities to regulate becomes larger as population increases.

Sounds like we should turn the 50 states into 500 states (to help ensure good political outcomes, let’s leave CaliforniaNew York, and Illinois alone and subdivide the libertarian-leaning states).

Not only would we get less red tape, we’d also benefit from additional regulatory diversity and additional regulatory competition.

P.S. Our friends on the left want to go in the opposite direction, favoring global regulation.

———
Image credit: Lilly_M | CC BY-SA 3.0.

Pages

Donate to Tea Party Manatee





Follow us on social media

About

If you have Constitutional values, believe in fiscal restraint, limited government, and a free market economy - then join us or just come and listen to one of our excellent speakers. We meet every Tuesday from 6-8 pm at Mixon Fruit Farms in the Honeybell Hall, 2525 27th St. East, Bradenton, Florida. Map it

Tea Party Manatee welcomes all constitution loving Americans.

Our core values are:

  • Defend the Constitution
  • Fiscal Responsibility
  • Limited Government
  • Free Markets
  • God and Country

Read more