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Biden and the OECD Pushing “Global Minimum Tax” to Increase Business Tax Burdens

Tue, 03/16/2021 - 12:11pm

For the past couple of decades, I’ve been warning (over and over and over and over again) that politicians want to curtail tax competition so that it will be easier for them to increase tax burdens.

They’ve even been using an international bureaucracy – the Paris-based Organization for Economic Cooperation and Development – in an effort to create a global high-tax cartel. Sort of an “OPEC for politicians.”

All of which would lead to “goldfish government.” Though “predatory government” also would be an accurate term.

The Obama Administration did not have a good track record on this issue, and neither did the Trump Administration.

Now the Biden Administration wants to be even worse. Especially if Treasury Secretary Janet Yellen continues to play a major role.

Here are some excerpts from a story in today’s Washington Post by Jeff Stein.

Treasury Secretary Janet Yellen is working with her counterparts worldwide to forge an agreement on a global minimum tax on multinational corporations, as the White House looks for revenue… A key source of new revenue probably will be corporate taxes… Biden has said he would aim to raise potentially hundreds of billions more in revenue from big businesses. …tax experts…say raising the rate could damage U.S. competitiveness. …Yellen is working…through an effort at the Organization for Economic Cooperation and Development in which more than 140 countries are participating. The goal is for countries to agree in principle to a minimum corporate tax rate… “A global minimum tax could stop the destructive global race to the bottom…,” Yellen told U.S. senators during her confirmation process. …The impact of the falling international tax rate has hit the United States as well, constraining lawmakers’ ambitions to approve new domestic programs.

Needless to say, any type of tax harmonization is a bad idea, and it is an especially bad idea to impose a minimum rate on a tax that does so much economic damage.

Here are four points that deserve attention.

  1. Higher corporate tax burdens will be bad news for workers, consumers, and investors.
  2. Regarding the so-called race to the bottom, even the IMF and OECD have admitted that lower corporate tax rates have not led to lower corporate tax revenue.
  3. Once politicians impose a global agreement for a minimum corporate tax rate, they will then start increasing the rate.
  4. Politicians also will then seek agreements for minimum tax rates on personal income, capital gains, and dividends.

I also want to cite one more passage from the article because it shows why the business community will probably lose this battle.

The U.S. Chamber of Commerce says it supports a “multilateral” approach to the problem but is “extremely concerned”.

I don’t mean to be impolite, but the lobbyists at the Chamber of Commerce must be morons to support the OECD’s multilateral approach. It was obvious from the beginning that the goal was to grab more revenue from companies.

I’m tempted to say the companies that belong to the Chamber of Commerce deserve to pay higher taxes, but the rest of us would suffer collateral damage. Instead, maybe we can come up with a special personal tax on business lobbyists and the CEOs that hire them?

Let’s wrap this up. The Wall Street Journal opined on the issue this morning.

As you might expect, the editors have a jaundiced view.

Handing out money is always popular, especially when there appear to be no costs. Enjoy the moment because the costs will soon arrive in the form of tax increases. Treasury Secretary Janet Yellen put that looming prospect on the table… The Treasury Secretary is also floating a global minimum tax on corporations, which would reduce the tax competition among countries that is a rare discipline on political tax appetites.

Amen. The WSJ understands that tax competition is a vital and necessary constraint on the greed of politicians.

P.S. Even OECD economists have acknowledged that tax competition helps to curtail excessive government.

P.P.S. Though an occasional bit of good research does not change the fact that the OECD is a counterproductive international bureaucracy that advocates for statist policy.

P.P.P.S. To add insult to injury, American taxpayers finance the biggest portion of the OECD’s budget.

P.P.P.P.S. To add insult upon insult, OECD bureaucrats get tax-free salaries while pushing for higher taxes on everyone else.

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Image credit: OECD Organisation for Economic Co-operation and Development | CC BY-NC-ND 2.0.

Blame Washington for the Great Depression

Mon, 03/15/2021 - 12:25pm

There are several false narratives about economic history, involving topics ranging from the recent financial crisis to 19th-century sweatshops.

But probably the biggest falsehood, as explained in this video by Prof. Lee Ohanian, is the notion that big government saved us from the Great Depression.

The only shortcoming of Ohanian’s video is that he’s analyzing just one of President Roosevelt’s mistakes.

Yes, it is very important to explain why FDR’s corporatism was profoundly misguided, but we also should recognize that he had terrible fiscal policy as well.

Roosevelt had two competing camps of advisers on the budget, one of which wanted to borrow and spend, while the other wanted to tax and spend. Sadly, both groups enjoyed plenty of victories.

With so many policy mistakes, we shouldn’t be surprised that the economy remained mired in a depression for an entire decade.

What’s tragic is that most of that suffering could have been avoided if FDR and his appointees simply remembered how President Harding a dozen years earlier had cut taxes and spending to rescue the economy from a deep downturn.

Let’s look at some additional analysis.

Writing for CapX, Tim Worstall explains how FDR’s blundering made things worse, especially compared to what happened in the United Kingdom.

…what caused the Great Depression was a series of bad political choices… The British…government cut spending and things turned out rather better than that in the US. …the much worse American experience was a direct result of the huge expansion of government. Far from saving the US economy, Roosevelt’s various interventions actually prolonged the agony. …The Depression was over in the UK by 1934. …the American disaster toiled on rather longer. So, what were the big differences? …the UK cut state spending… FDR boosted the role of the federal government in many ways. …the National Recovery Administration, which was a disastrous attempt at managing prices. …the imposition of cartels upon both business and agriculture. This suite of ill-advised measures delayed the recovery.

The only good news is that we didn’t get a resuscitation of those policies after World War II, which meant the economy had a chance to finally recover.

So what’s the moral of the story?

As Larry Reed wrote for the Foundation for Economic Education, the Great Depression was caused by a series of foolish interventions by politicians in Washington, and we need to remember that lesson so we don’t repeat the mistakes of history.

The history of the Great Crash and subsequent Depression provides a sad litany of policy blunders in Washington. Altogether, they needlessly caused and prolonged the pain; roller coaster monetary policy, sky-high tariff hikes, massive tax increases, government-supervised destruction of foodstuffs, gold seizures, price-fixing regulations, soaring deficits and debt, special favors to organized labor that stifled investment and boosted unemployment. …myths and misconceptions about our most calamitous economic episode abound. Fortunately, recent scholarship is slowly changing that. The simplistic, error-filled assumption that free markets failed and government rescued us—once conventional “wisdom”—no longer gets by unquestioned.

For further information on the Great Depression and bad government policy, you can watch other videos here and here.

P.S. Walter Williams and Thomas Sowell both have written on the issue as well.

P.P.S. With regards to economic policy, FDR was an awful president. And he would have been even worse had he succeeded in pushing through his plan for a 100 percent top tax rate and his proposal for a so-called economic bill of rights.

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Image credit: U.S. National Archives and Records Administration | Public Domain.

California Politicians Help Workers…into the Unemployment Line

Sun, 03/14/2021 - 4:53pm

Over the years, I’ve shared many amusing memes and cartoons about minimum wage laws.

But this one, based on a skit from The Eric Andre Show, may be the best of all.

Not because it’s making a different point than the others, but because what has just happened in Southern California.

Local politicians in a couple of cities recently mandated higher wages (labeled “hero pay”) for workers in grocery stores.

The immediate consequences of that legislation provide a clear-cut example of why it is so foolish for politicians to mandate levels of pay that make it unprofitable to operate a business.

Let’s look at a couple of news reports.

We’ll start with a story from the local CBS affiliate in Los Angeles. Here are some excerpts.

Kroger is closing three more of its stores in Los Angeles after the city passed a “hero pay” ordinance mandating a $5 pay bump for grocery and pharmacy workers. …“It’s never our desire to close a store, but when you factor in the increased costs of…an extra pay mandate that will cost nearly $20 million over the next 120 days, it becomes impossible to operate these three stores,” Kroger said in a statement.

The same thing is happening in nearby Long Beach.

Ralphs and Food 4 Less recently announced that they will be closing two…stores in Long Beach after Mayor Robert Garcia approved a city ordinance that would impose a $4 “hero pay” salary boost… “As a result of the City of Long Beach’s decision to pass an ordinance mandating Extra Pay for grocery workers, we have made the difficult decision to permanently close long-struggling store locations in Long Beach,” said a company spokesperson. …The permanent closures will happen on April 17 for long-struggling locations and will impact nearly 200 employees between the two locations.

What happened in Los Angeles and Long Beach is obviously a lesson in economics.

But it’s also a lesson in politics.

I’m guessing that most of the local politicians knew that they would be throwing many people into the unemployment line when they mandated “hero pay,” but they simply didn’t care.

What mattered to them is that they got headlines for “caring” when they enacted the legislation. They don’t care about the unintended (but very predictable) consequences.

Which is yet another reason we should have a very low opinion of politicians.

P.S. If you want more memes and cartoons about the minimum wage, click herehereherehere, and here.

Does the European Union Promote Economic Freedom?

Sat, 03/13/2021 - 4:27pm

Two years ago, I shared a study from three scholars that investigated whether membership in the European Union (EU) is associated with better economic performance.

Before reading that study, I assumed that EU membership was bad news for rich countries with decent economic policy (hence my support for Brexit), but I figured it was a good idea for poor countries with not-so-good policy.

I may have been wrong about the latter. The authors found that “EU membership has no impact on economic growth” and that “EU entry seems to have reduced economic growth.”

Ouch.

But I’m always interested in seeing new research on this topic.

So I was delighted to read a new report published by the European Liberal Forum.* Written by Constantinos Saravakos, Emmanuel Schizas, Mara Vidali, Angela De Martiis, and Giorgio Vernoni, it also seeks to ascertain if there is a link between EU membership and economic liberty.

…this publication seeks to examine whether a trajectory towards EU membership is a driver for more economic freedom. The key research question is if European Union economic policies promote economic freedom. The answer in this question is essential…because an economic environment based on market economy has a positive relationship with several prosperity outcomes. …Taking into account the huge EU enlargement that took place since 2004, when 13 countries have accessed the Union, and the on process enlargement with several formal or informal candidates, the analysis focuses on whether the structural reforms required for a country to become a member of EU contribute to economic freedom, covering the period from 2000 to 2017. …our research considers the relationship between a country’s Economic Freedom of the World index score (and sub-index scores) and its progress along the EU accession process.

Contrary to the study I wrote about two years ago, they find that countries have benefited from membership.

…as a country approaches EU membership status, then economic freedom, as proxied by the proximity to the EFW frontier, increases by at least 0.2, and this effect is associated with the process of accession…the main channel by which EU accession might contribute positively to a candidate or member state’s economic freedom is by boosting the freedom to trade… The present study provides empirical evidence of a link between the EU accession process and the aim of promoting economic freedom.

Here’s a chart from the report, which certainly suggests that something good is happening in the European Union.

Economic freedom, on average, has increased for the 28 nations of the EU since 2000 (based on a 1-10 scale).**

But when I looked at that chart, I wondered what we were really seeing.

Most notably, I was curious what we would find if we looked at the the nations of Western Europe, the ones that used to be known as the EU-15 before the bloc was enlarged (13 new countries have joined this century, mostly from Eastern Europe).**

So I went to the same source, Economic Freedom of the World, to measure what’s happened in those countries. Lo and behold, the average level of economic liberty has declined (which didn’t surprise me since I found something similar when I crunched some data back in 2016).

This doesn’t mean we should necessarily conclude that EU membership is bad for prosperity, but I’m not optimistic.

When I talk to pro-EU friends, here are some questions I ask:

  • Would Eastern European nations have liberalized their economies without becoming part of the EU?
  • Since Western European nations wield most of the power inside the EU, is it worrisome that they are becoming more statist in their orientation?
  • What are the implications for EU nations of demographic change (aging populations and falling birthrates)?
  • Will the EU’s nascent transfer union lead to more economic liberalization or less economic liberalization?

The bottom line is that I don’t think there are encouraging answers to these questions. Which is why we can expect that Europe will continue to fall behind the United States (which makes it rather odd that President Biden wants to make the USA more like the EU).

*In Europe, liberal means pro-market “classical liberalism” rather than the entitlement-based American version.

**The United Kingdom has now escaped the EU, but it was part of the bloc during the periods being measured.

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Image credit: Sébastien Bertrand | CC BY 2.0.

The Education Debate: Opportunity for All…or Opportunity for None?

Fri, 03/12/2021 - 12:55pm

Government schools in America are a national disgrace.

Every year, we throw more money into the system and every year we get back mediocre results.

The numbers are especially depressing when you compare how other nations get better outcomes while having significantly lower levels of per-pupil spending.

Given this grim situation, I’m always on the lookout for analysis that can help us figure out how to make things better.

Though some people seemingly want to make things worse.

In an article for the Atlantic, Caitlin Flanagan reveals how elite private schools have become high-pressure pathways for entrance to elite colleges. It’s a fascinating – and even disturbing – look at the life of people (mostly) in the top-1 percent.

But what grabbed my attention was her conclusion. She accurately observes that government schools do a crappy job, but then suggests that high-performing private schools are the problem.

In a just society, there wouldn’t be a need for these expensive schools, or for private wealth to subsidize something as fundamental as an education. We wouldn’t give rich kids and a tiny number of lottery winners an outstanding education while so many poor kids attend failing schools. In a just society, an education wouldn’t be a luxury item. …We’ve allowed the majority of our public schools to founder, while expensive private schools play an outsize role in determining who gets to claim a coveted spot in the winners’ circle. …Public-school education—the specific force that has helped generations of Americans transcend the circumstances of their birth—is profoundly, perhaps irreparably, broken. In my own state of California, only half of public-school students are at grade level in reading, and even fewer are in math. …Shouldn’t the schools that serve poor children be the very best schools we have?

At the risk of understatement, this point of view (the article’s headline in the print edition is “Private Schools Are Indefensible”) is utterly perverse.

If we know that private schools do a better job (and not just the super-elite schools discussed in the article), then the ethical answer should be to get rid of the government school monopoly and adopt a system of school choice so that the children of non-rich families also have an opportunity to get a quality education.

That would be good for kids and it would be good for taxpayers (we’re spending record amounts of money on the failed government school monopoly, so turning that money into vouchers would provide enough funding for families to afford the vast majority of private schools).

But this brings up another issue. What if leftists aren’t just against private education? What if they also object to any sort of system where better students get better outcomes?

Chester Finn of the Hoover Institution wrote a column last November for the Wall Street Journal about the efforts to undermine the tiny handful of high-performing government schools.

Nationwide, selective-admission public schools, also known as “exam schools,” are under attack… Much like elite universities, critics allege, these schools have been admitting far too many whites and Asians and not nearly enough blacks and Latinos. …in New York, …admission…is governed by the eighth-grader’ scores on a specialized admission test. …there’s no denying that they’re full of Asian and white kids, many from low-income and middle-class families. …Mayor Bill de Blasio and his schools chancellor have recently pushed to make the admissions process more “equitable.” They want to…abolish the entry exam…[i]nstead of repairing the elementary and middle schools attended by poor and minority kids… Consider another furor in Virginia, over admission to the esteemed Thomas Jefferson High School for Science and Technology in Fairfax County, regularly ranked the country’s top high school by U.S. News. Thomas Jefferson is in such demand that it can accept fewer than 1 in 6 applicants. …The Fairfax County superintendent and board last month moved to abolish the qualification exam… the remedies being sought in every case are wrongheaded. …School systems…have to face the reality that some kids are smarter and more motivated than others, no matter their color. That’s anathema to “progressive” reformers, who prefer to abolish accelerated classes for high achievers. …The progressive assault on education in the name of equity ends up denying smart kids from every background the kind of education that will assist them to make the most of their abilities.

I’m almost at a loss for words.

For all intents and purposes, our friends on the left would rather have everyone be mediocre than allow some students to succeed.

  • They don’t want some kids to succeed by attending private school.
  • They don’t want some kids to succeed by attending so-called exam schools.
  • They don’t want some kids to succeed by taking accelerated classes.
  • They don’t want some kids to succeed by attending charter schools.
  • They don’t want some kid to succeed by being home-schooled.

This hostility to achievement is reprehensible.

Part of it is probably motivated by a cynical attempt to appease teacher unions.

And part of it is presumably the ideological belief in equality of outcomes rather than equality of opportunity, even if the net result is that all students are worse off (the same perverse instinct that leads them to support economic policies that hurt the poor so long as the rich get hurt more).

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

The World’s Most Politically Illiterate Statement

Thu, 03/11/2021 - 12:19pm

Exactly one month ago, I declared that Congresswoman Ayanna Pressley deserved an award for the “world’s most economically illiterate statement” because of her claim that “poverty is not naturally occurring.”

In reality, poverty has been the norm throughout history. As documented by Professors Deirdre McCloskey and Don Boudreaux, it was only the development of capitalism (starting a few hundred years ago in Europe) that enabled humanity to enjoy amazing and unprecedented increases in living standards.

Moreover, Ms. Pressely was trying to argue that redistribution was the proper way to address poverty, and I concluded my column by noting “that part of her statement also is wrong, according to both U.S. data and global data.”

Today, I want to debunk another preposterous assertion.

David Smith of the U.K.-based Guardian wrote a column yesterday claiming that Biden’s so-called stimulus should be celebrated since it marks an end to forty years of Reaganomics.

…he will…be on a mission to restore faith in government. Confidence in it “has been plummeting since the late 60s to what it is now”, Biden noted in his remarks last week. His legislation, called the American Rescue Plan, can correct that with the biggest expansion of the welfare state in decades. …Biden knows better than anyone what that means. When he was born, in 1942, the president was Franklin Roosevelt, architect of the New Deal… When Biden was a student at the University of Delaware, Lyndon Johnson embarked on his project of the “Great Society”… Then came Ronald Reagan and his famous quip: “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.” …He described Johnson’s “Great Society” as a fundamental wrong turn and set about dismantling it. …This orthodoxy held and dominated the political centre ground. …Biden’s could hardly be more of a polar opposite. …All the more reason to enjoy his victory lap and celebrate that four decades of Reaganism and “trickle down” economics are at an end.

Some of that political analysis is reasonable. FDR’s failed New Deal did expand government, as did LBJ’s failed War on Poverty.

And it’s also true that Reagan challenged their big-government orthodoxy and was somewhat successful in reining in the welfare state (“dismantling it” is a huge exaggeration, however).

But the author’s claim that there were “four decades of Reaganism” is breathtaking nonsense.

  • George H.W. Bush expanded the burden of government.
  • George W. Bush expanded the burden of government.
  • Barack Obama expanded the burden of government.
  • Donald Trump expanded the burden of government.

That’s 24 years of statist policies after Reagan left office.

If Mr. Smith actually knew the subject matter and wanted to write an honest article, he could have made an argument about 16 years of Reaganism because we also benefited from a net reduction in the burden of government during Clinton’s eight years in office.

But the 21st century has been nothing but bad news for proponents of free markets. If you peruse Economic Freedom of the World, you’ll find that America’s level of economic freedom peaked in 2000 with a score of 8.67 (on a 1-10 scale).

Now the score for the United States has dropped to 8.22.

By the way, that’s not catastrophically bad. There’s no immediate risk of America becoming another Greece. And we’ll presumably never turn into Venezuela, no matter how hard Biden tries (it wouldn’t even happen if Vice President Harris took over).

That being said, what we’ve endured over the past two decades definitely is not Reaganism. The “Washington Consensus” is just a distant memory.

P.S. David Smith’s article is an example of sloppy journalism at a left-wing newspaper, but I’ll always have a bit of fondness for the Guardian because of the unintended compliment it bestowed upon me back in 2009.

P.P.S. For younger readers who did not experience the Reagan years, here’s my assessment of his record and here are some videos of some of his iconic remarks (and here’s a bonus video).

Expanding the Welfare State with Per-Child Handouts

Wed, 03/10/2021 - 12:26pm

Two days ago, I shared data showing that people in the big nations of Western Europe only have about 75 cents of income for every $1 that Americans earn.

That’s a remarkable gap, and it’s getting larger rather than smaller, even though theory says that shouldn’t happen.

But what’s even more shocking is that a poor person in the United States would be middle class in most European nations.

And a low-income person in America is better off than the average European.

When I see numbers like this (and lots of other data I have shared over the years, all of which tells the same story), I have two reactions.

  • First, I want to laugh at anyone who thinks Europeans have a better distribution of income.
  • Second, I want to scream at anyone who things we should copy the European economic policy.

But my laughing and screaming obviously has no effect because Washington politicians are poised to enact a giant expansion of the welfare state.

And there’s plenty of support for this risky concept from both Democrats and Republicans.

On the GOP side, Senator Mitt Romney has proposed a big tax increase to pay for a big increase in redistribution spending in the form of universal handouts for families with children, an idea that I criticized early last month.

And Oren Cass, a former campaign aide for Romney, has a slightly different plan to impose higher taxes to fund handouts for families with children. I recently critiqued that plan in an article co-authored with Veronique de Rugy of the Mercatus Center. Here’s some of what we wrote.

…the proposal for a Family Income Supplemental Credit (Fisc) from Oren Cass and Wells King is misguided, mostly because it would raise tax rates and expand the burden of government spending. …the Fisc would cost $200 billion annually. …$80 billion per year, would be financed with tax increases. …this fact alone should make the Fisc a non-starter as a matter of fiscal policy. …Income tax rates already are too high, and President Biden wants to raise them further. Self-styled conservatives should not be aiding and abetting the push for class-warfare taxation by adding to the collection of proposed tax-rate increases on workers, investors, entrepreneurs, and business owners. …it would be desirable for families to have more economic opportunity and financial security. However, it doesn’t follow that conservatives should support subsidizing child-bearing and -rearing. We do not think copying Europe and imposing more redistribution is the right approach. Americans enjoy far-higher living standards than people on the other side of the Atlantic Ocean, thanks in part to our smaller fiscal burden.

As you might expect, folks on the left are very excited about expanding the welfare state.

Biden’s so-called stimulus plan also contains a big one-time handout to households with children (with proponents hoping the lure of free cash will lead those households to demand that Washington make such giveaways a permanent part of American life).

Scott Winship of the American Enterprise Institute pours cold water on all the above proposals. Except he focuses not on fiscal policy, but on the fact that these schemes will subsidize dependency and encourage out-of-wedlock births – thus undermining the very successful welfare reform of the 1990s.

A child allowance would send unconditional cash benefits to nearly all families on a per-child basis. …Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run—an overreliance on government transfers, poverty over longer stretches of childhood, intergenerational poverty, and geographically concentrated poverty. …Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s. This was a period in which policy reforms encouraged work, by imposing time limits and work requirements on receipt of cash welfare and expanding benefits to low-income workers. …We should strive to reduce child poverty further, but it matters how we do so. Reducing this year’s poverty while exacerbating entrenched poverty and reversing the progress we have made since welfare reform would be a hollow victory indeed. So much the worse if a child allowance leads to irresistible calls for a universal basic income, which would also increase nonwork among the childless.

Michael Barone is similarly perplexed that lawmakers are so intent on reversing the progress of welfare reform.

When public policies have produced disastrous results, and when alternative policies have resulted in immediate, seemingly miraculous improvement, why would anyone want to go back to the earlier policies? …births to unwed mothers and welfare dependency rose…from 1965 to 1975, violent crime and welfare dependency, both heavily concentrated among blacks, nearly tripled — tripled. For two more decades, crime and welfare dependency remained at the same high levels, sometimes zooming higher. …Reform, first by Thompson in Wisconsin and then by Newt Gingrich and Bill Clinton in the 1996 welfare bill, required mothers to work. Social workers’ focus was changed from handing out more checks to helping moms get and hold jobs. The results: Welfare rolls plummeted; teen births plunged; kids raised by working moms did better in school and in life. Liberals have tried to stealthily roll back the reforms. They’ve been joined by some cultural conservatives, worried about population decline… These include Sen. Mitt Romney, who supports a child allowance that is fully refundable — which is to say that government will send a check to parents, married or unmarried… A version of this, limited to one year, has been inserted in the “COVID relief” bill of President Joe Biden’s administration. A single parent with two kids, working or not, could qualify for $7,200 a year plus $6,400 in food stamps. …Mickey Kaus…argues that…”(A) large subset of recipients will go from one worker to zero workers.” That means “millions of kids growing up in fatherless homes, where nobody goes into the labor force, where the mainstream world of employment is a foreign country.” Past experience says he’s right and that…the people most hurt will be black Americans.

So is there a real danger that per-child handouts will become law?

The obvious answer is yes since they are included in Biden’s faux stimulus.

But that’s just a one-year giveaway. It’s unclear whether households will get addicted to that free cash and thus demand that the handouts get extended (based on my Second Theorem of Government, I’m pessimistic).

Robert VerBruggen has some polling data on this topic.

Here’s how he characterized the results.

So, what does the average person think…? The 2019 American Family Survey, a poll covering 3,000 adults from the Center for the Study of Elections and Democracy, tested four different child tax credit proposals… The results give us a sense of how the public—and some key segments of it—see the issue. Interestingly, none of the ideas had majority support… Nearly half of Americans can support a credit sold as tax relief that’s either broad-based (CTC1) or targeted to the lower-income (CTC3), but an across-the-board handout to parents just for being parents (CTC4) can’t even garner one-third support. …the major takeaways are these: 1) The child tax credit, in general, is not as popular as one might think — even in questions that don’t mention the taxes needed to pay for it, it never manages a majority; and 2) despite some energy on the pro-family intellectual right for flat, universal child allowances (CTC4), Republicans and even independents among the general public are really not fond of the idea.

This data is semi-encouraging. I’m definitely glad people are suspicious of big per-child handouts. And I suspect opposition will grow when people learn about the European-style taxes that would be needed to finance such a huge giveaway.

But it doesn’t help the fight for sensible policy when some self-styled conservatives advocate for big expansions of the welfare state – especially when such ideas inevitably will erode societal capital.

P.S. As indicated by the above excerpt, Scott Winship’s article concludes with a warning that universal per-child handouts could be the camel’s nose under the tent for a “basic income,” which is the crazy notion that government should give everyone money. That’s an additional reason to reject the idea, as even Joe Biden once realized.

P.P.S. Some proponents use the term “child tax credit” to describe per-child handouts, but that’s disingenuous at best. A handout doesn’t magically become a tax cut just because the recipient happens to pay tax. Moreover, the handouts in these proposals generally are “refundable,” which is simply fiscal jargon for handouts that also go to people who don’t pay any tax.

P.P.P.S. The real-world evidence casts considerable doubt on the notion that per-child handouts will increase birthrates.

Biden’s Misguided Keynesian “Stimulus”

Tue, 03/09/2021 - 12:32pm

We have decades of real-world experience with Keynesian economics. The results are not pretty.

It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.

  • They were wrong about growth after World War II (and would have been wrong, if they were around at the time, about growth when Harding slashed spending in the early 1920s).
  • They were wrong about Thatcher in the 1980s.
  • They were wrong about Reagan in the 1980s.
  • They were wrong about Canada in the 1990s.
  • They were wrong after the sequester in 2013.
  • They were wrong about unemployment benefits in 2020.

This story needs to be told, again and again, especially since we’re now going to have another real-world test case thanks to President Biden’s so-called American Rescue Plan.

I just wrote a column on Biden’s proposal for the Foundation for Economic Education, and it is co-authored by Robert O’Quinn, who most recently served as the Chief Economist at the Department of Labor.

We started by pointing out that Biden is basically copying Trump’s big-spending approach, but with a different justification (Keynesianism instead of coronavirus).

Mr. Biden is bringing a new twist to the profligacy. Instead of trying to justify the new spending by saying it is needed to compensate households and businesses for government-mandated lockdowns, he is making the Keynesian argument that the new spending is a way of stimulating the economy. The same approach was used when he was Vice President, of course, but did not yield positive results. …Mr. Biden and his team apparently think the anemic results were a consequence of not spending enough money. Hence, the huge $1.9 trillion price tag for his plan. Will his approach work? …We can learn about economic recovery today by reviewing what happened during the Great Recession earlier this century and what happened at the end of World War II.

We explain the causes of the previous recession and point out that Obama’s so-called stimulus didn’t work.

…the Great Recession…was the result of an unsustainable housing bubble caused by overly accommodative monetary policy from the Federal Reserve and misguided housing policies. …it took years to clean up the mess from the bursting of the housing bubble. Households slowly rebuilt their savings and cleaned up their balance sheets. …Banks had to work out problem loans and rebuild their capital… Obama’s stimulus did not drive that healing process and spending more money would have done little to accelerate it.

And we also point out that the economy recovered very quickly after World War II, even though the Keynesians predicted disaster in the absence of a giant new package such as Truman’s 21-Point Program (his version of FDR’s horrible vision of an entitlement society).

Keynesians feared that demobilization would throw the US economy into a deep depression as federal spending was reduced. Paul Samuelson even wrote in 1943 that a failure to come up with alternative forms of government spending would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” …President Harry Truman proposed “a 21-Point Program for the Reconversion Period” shortly after the war ended. But his plan, which was basically a reprise of Franklin Roosevelt’s New Deal, was largely ignored by Congress. Did the economy collapse, as the Keynesians feared? Hardly. …Spared a repeat of FDR’s interventionism, the economy enjoyed strong growth. One of the big tailwinds for growth is that the forced savings accumulated during the war years allowed consumers to go on a peacetime buying binge.

That last sentence in the above excerpt is key because 2021 is a lot like 1945. Back then, households had lots of money in the bank (wartime rationing and controls meant there wasn’t much to buy), which helped trigger the post-war boom.

Something similar is about to happen, as we explain in the column.

The current economic conditions are somewhat reminiscent of the ones that existed after World War II. The limited ability to spend money during the pandemic has helped boost the personal saving rate…  In aggregate terms, personal saving soared from $1.2 trillion in 2019 to $2.9 trillion in 2020. …pent-up demand funded with more than $1 trillion in excess savings will resuscitate…GDP.

So what does all this mean? Well, the good news is that 2021 is going to be a very good year for the economy. That’s already baked into the cake.

The bad news is that Biden is taking advantage of the current political situation to increase the burden of government spending.

…the economy prospered after World War II despite (or perhaps because of) the failure of Mr. Truman’s 21-point proposal. President Biden’s team is either unaware of this history, or they simply do not care. Perhaps they simply want to take advantage of the current environment to reward key constituencies. Or they may be trying to resuscitate the tattered reputation of Keynesian economics by spending a bunch of money so they can take credit for an economic recovery that is already destined to happen.

Since I gave the good news and bad news, I’ll close with the worse news.

There’s every reason to expect very strong growth in 2021, but Biden’s spending binge means that future growth won’t be as robust

  • Especially since the economy also is saddled with lots of wasteful spending by BushObama, and Trump.
  • And especially if Biden is able to push through his agenda of higher taxes on work, saving, and investment.

The bottom line is that the United States is becoming more like Europe and the economic data tells us that means less prosperity and lower living standards.

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Image credit: National Portrait Gallery | CC BY-NC-ND 3.0.

Comparing Prosperity: The United States vs. Europe

Mon, 03/08/2021 - 4:40pm

I periodically write about the importance of long-run growth and about the importance of convergence (whether poorer countries are catching up with richer countries, as suggested by theory).

This is because such data, especially over decades, teaches us very important lessons about the policies that are most likely to generate prosperity.

I’m revisiting these issues today because John Cochrane, a Senior Fellow at the Hoover Institution and a former professor of economics at the University of Chicago, recently wrote a column that contains a must-see chart showing how some of the major European nations have been losing ground to the United States over the past several decades.

The main thing to understand is that European nations were catching up to the United States after World War II, which is what one would expect.

But that trend came to a halt about 40 years ago and now these nations are suffering divergence instead of enjoying convergence.

Here’s some of Cochrane’s analysis.

…the US is 54% better off than the UK.. France…50% less than US. …the US is 96% better off than Italy. …And it’s been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy… Once noticeably better off than the UK, and contending with France, Italy’s GDP per capita is now lower than it was in 2000. GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it’s getting worse.

What’s most remarkable, as I wrote about back in 2014, is that the gap between the United States and Europe is “getting worse.”

Cochrane wonders if this is evidence against the European Union’s free-trade rules.

This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world’s biggest free trade zone really is a striking fact to gnaw on. Sure, other things are not held constant. Perhaps what should have been the world’s biggest free trade zone became the world’s biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, “it would have been even worse” is a hard argument to make.

For what it’s worth, I don’t think it’s “a hard argument to make”. I’ve pointed out – over and over again – that Europe’s reasonably good policies in some areas are more than offset by really bad fiscal policy.

Think of the different types of economic policy as classes for a student. If a kid flunks one class, that’s going to produce a sub-par grade point average even if there was good marks in all the other classes.

That’s what has happened on the other side of the Atlantic Ocean. Europe is suffering the consequences of a stifling tax burden and an onerous burden of government spending.

Besides, I suspect some of the benefits of free trade inside the European Union are offset by the damage of the E.U.’s protectionist barriers against trade with the rest of the world.

P.S. Some people may wonder why Germany was not included in Cochrane’s chart. I assume that’s because the reunification of West Germany and East Germany about 30 years ago creates a massive discontinuity in the data. For those interested, Germany is slightly better off than France and the U.K., according to the Maddison data, but still lagging well behind the United States.

P.P.S. Speaking of Germany, the divergence between East Germany and West Germany teaches an obvious lesson.

P.P.P.S. I don’t think it’s a coincidence that America started out-performing Europe after Reaganomics was implemented.

P.P.P.P.S One obvious takeaway from Cochrane’s data (though not obvious to President Biden) is that the United States should not be copying Europe. Unless, of course, one wants ordinary Americans to be much poorer.

Four CBO Charts on America’s Fiscal Decline

Sat, 03/06/2021 - 12:21pm

Two days ago, the Congressional Budget Office released its latest long-run fiscal forecast. The report focuses – incorrectly – on the growth of red ink.

And most of the people who have written about the report also have focused – incorrectly – on the rising levels of debt.

That’s the bad news.

The good news is that the report also contains lots of data on the variables – the spending burden and the tax burden – that should command our attention.

Here are four visuals from the report. We’ll start with Figure 7, which shows what will happen to spending and taxes over the next three decades. I’ve highlighted in red the most important numbers.

The right-most column gives you the big picture. The main takeaway (and it’s been this way for a while) is that more than 100 percent of America’s long-run fiscal problem is driven by the fact that government spending (“total outlays”) will consume a much greater share of our economic output.

The top-left of Figure 7 shows the growth of entitlement programs (which captures the fiscal problems of Social SecurityMedicare, and Medicaid).

So lot’s look at Figure 9, which presents the same data in a different way.

The moral of the story is that America desperately needs genuine entitlement reform.

Why did I write above that government spending is responsible for “more than 100 percent of America’s long-run fiscal problem”?

Because, as depicted in Figure 11, there’s a built-in tax increase over the next three decades.

In other words, the fiscal mess in Washington is not the result of inadequate tax revenue.

Last but not least, Figure 13 is worth sharing because it shows how small differences in some variables can make a big difference over time. I’m especially interested in the top chart, which shows how slight differences in productivity (which determines the all-important variable of per-capita growth) have a big impact on long-run debt.

It would be preferable, of course, if the CBO report showed how greater productivity impacts both revenue and spending. We would see that faster growth generates more tax revenue (without raising tax rates) and reduces spending (people with good jobs are less likely to be dependent on government redistribution programs).

P.S. Yes, government debt matters. It matters in the short run because it’s a measure of how much private saving is being diverted to finance government. And it matters in the long run because excessive red ink can trigger a fiscal crisis when investors decide that a government no longer can be trusted to pay back lenders (see Greece, for instance). But we should never forget that it is excessive spending that drives the debt. Cure the disease of excessive spending and it is all but certain that you eliminate the symptom of red ink.

P.P.S. For what it’s worth, the United States is not Greece. At least not yet.

P.P.P.S. But we will be if there’s not some long-run spending restraint (an approach that worked in the 1800s), which almost certainly would require a spending cap.

P.P.P.P.S. There is zero evidence that tax increases would be successful. Indeed, that approach would make matters worse if history is any guide.

Boris Johnson’s Fiscal Policy: Politics over Prudence

Fri, 03/05/2021 - 12:17pm

Two years ago, I wrote about how two former Prime Ministers in the United Kingdom, David Cameron and Theresa May, did a very good job of restraining spending.

On average, spending increased by only 1.8 percent per year last decade, which helped to substantially reduce the fiscal burden of government relative to the private economy.

That was an impressive result, and it adds to the collection of success stories showing what happens when governments obey fiscal policy’s Golden Rule.

That was the good news.

The bad news is that spending restraint evaporated once the pandemic began.

The worse news is that the current Prime Minister, Boris Johnson, has no intention of restoring fiscal discipline now that the coronavirus is fading away.

The Wall Street Journal opined on the new budget that was just released by the supposedly conservative government.

London has spent some £407 billion ($568 billion) on pandemic relief since last year… This has blown a hole in public finances, with the fiscal deficit expected to be around 10% of GDP this year. …Britain’s political class, and especially the governing Conservative party, …faces pressure to “pay for” all this relief. …an increase to the corporate profits tax rate to 25% from 19%…freezing previously announced increases in the thresholds for personal income-tax brackets. This tax hike on the sly is estimated to raise an additional £18 billion starting next year from beleaguered households who discover inflation pushing them into higher brackets. A holiday on the stamp duty on property purchases will expire in October, walloping households as the recovery is meant to begin. …The government’s Office for Budget Responsibility estimates that by 2026 tax revenue as a share of GDP will be 35%, the highest since 1969. The Institute for Fiscal Studies, a think tank, estimates that the additional £29 billion in annual revenue expected by 2026 amounts to the largest tax increase in any budget since 1993. …This Tory government came to power promising to unleash Britain’s entrepreneurial businesses for a post-Brexit growth spurt, and freeing those animal spirits is even more important after the pandemic. A super-taxing budget is a huge gamble.

The WSJ focused on all the tax increases.

Allister Heath’s column in the Daily Telegraph informs us that the bad news on taxes is a predictable and inevitable consequence of being weak on spending restraint.

For the past 50 years, the Tory party had believed that high tax rates, especially on income and profits, were bad for the economy and had strived to cut them. Today, this is no longer true… The Tory taboo on increasing direct rates of taxation…is over… Britain will continue its shift to the Left on economics, sinking ever-deeper into a social-democratic, low growth, European-style model… Johnson, sadly, is planning to increase spending permanently by two percentage points of GDP and taxes by one. He is a big-government Conservative… the main problem facing the public finances longer-term isn’t the economic scarring from the pandemic, but the fact that the Tories are determined to keep increasing spending as if Covid never happened. …Reaganomics is over in Britain, dead and buried, as is much of the economic side of Thatcherism.

Here’s a chart from the U.K.’s Office of Budget Responsibility (OBR), which shows both taxes and spending as a share of gross domestic output (GDP).

I’ve added some text to show that there was fiscal progress under Thatcher, Cameron, and May, along with fiscal profligacy under Blair (and during the coronavirus, of course).

I also used OBR data to construct this chart, which shows inflation-adjusted spending over the past five decades, as well as projections until 2025.

The most worrisome part of the chart (and the biggest indictment of Boris Johnson) is the way spending climbs at a rapid rate in the final four years.

P.S. Because of my strong support for Brexit, I was very happy that Boris Johnson won a landslide victory in late 2019. And he then delivered an acceptable version of Brexit, so that worked out well. However, it definitely doesn’t look like he will fulfill my hopes of being a post-Brexit, 21st century version of Margaret Thatcher.

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Image credit: EU2017EE Estonian Presidency | CC BY 2.0.

Five Notable Takeaways from the 2021 Index of Economic Freedom

Thu, 03/04/2021 - 2:29pm

The 2021 edition of the Index of Economic Freedom was released today (as I’ve repeatedly stated, it’s my favorite annual publication from the Heritage Foundation).

There are five things that merit attention

1. Hong Kong is no longer in first place. Indeed, it’s no longer even part of the rankings because the authors have determined that Hong Kong no longer has real sovereignty.

So that means Singapore is now the world’s most laissez-faire jurisdiction, followed by New ZealandAustralia, and Switzerland.

Here are the top 30 nations.

I assume nobody will be surprised to learn that CubaVenezuela, and North Korea are the three most economically repressive regimes.

2. Most Nordic nations rank above the United States. I highlighted Denmark’s better economic policy when writing about last year’s Index, but Iceland and Finland also rank ahead of America. And Sweden is just one spot behind the USA. Only Norway, cushioned by oil wealth, trails by a meaningful margin.

The United States has better fiscal policy than these countries, but that variable gets too much attention. In areas such as trade and red tape, the Nordic nations are generally more market oriented.

3. More economic freedom means more national prosperity. I’ve repeatedly made this point, but some people never seem to learn. Nonetheless, I’ll share this graph in hopes that data eventually triumphs over ideology.

4. I’m impressed by Taiwan and surprised by Spain. It’s obviously easy for a nation to improve when it starts with a low score. But it’s not easy to make a big jump if a country starts with a high score. So Taiwan’s appearance on the below list is an additional reason to be impressed by that nation’s pro-market orientation.

And, given my recent criticism of Spain, I’m surprised to see that nation made a big jump. I dug into the details and the improvements are in areas other than fiscal policy.

It’s good news, but not overly impressive, to see improvements by nations that start with very low scores.

5. Donald Trump did not deliver more economic liberty. When I point out Trump’s mixed performance, some people accuse me of being a curmudgeonly libertarian who unrealistically demands perfection.

Well, I am curmudgeonly and I am a libertarian, but I’m not alone in noticing Trump’s shortcomings. As you can see from the Heritage Foundation’s data for the United States, we have less economic liberty now than when Trump took office.

The bottom line is that Trump was no Ronald Reagan. On economic issues, he wasn’t even a Bill Clinton.

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Image credit: Pixy.org | CC0 Public Domain.

Everything You Need to Know about Teacher Unions

Wed, 03/03/2021 - 12:18pm

Other than some clever examples of gallows humor, the only silver lining to coronavirus pandemic is that more people now understand that teacher unions are an obstacle to quality education.

This video hopefully will make that lesson apparent to everyone.

What a reprehensible person.

Needless to say, I don’t blame Mr. Meyer for putting his kid in a private preschool. And I won’t blame him if he then sends her to a private elementary school and a private high school.

After all, teachers in government schools presumably are very aware that private schools do a much better job than government schools.

But it’s total hypocrisy for him to take advantage of in-person schooling for his daughter while fighting to deny that option for parents who have no choice but to rely on government schools.

Sort of like Joe Biden or Hillary Clinton wanting higher taxes on the rest of us while coming up with a clever tax strategies to protect their money from the IRS.

But I’m digressing (which is understandable since our friends on the left can be very hypocritical).

Let’s get back to our main topic. The Daily Caller has an article about Mr. Meyer’s despicable hypocrisy.

Viral video footage shows a California teachers union president who led school closures dropping his daughter off at a private school. …“Meet Matt Meyer. White man with dreads and president of the local teachers’ union,” the group tweeted Saturday. “He’s been saying it is unsafe for *your kid* to be back at school, all the while dropping his kid off at private school.” …The video was filmed by Berkeley area parents who did not give their names out of fear of retaliation… The video sparked a backlash among parents who want their children to return to in-person learning as soon as possible.

A total hypocrite.

Just like Gregory Hutchings. Just like Elizabeth Warren. Just like Barack Obama. Just like Dan McCready. Just like Arne Duncan. Just like…well, you get the point.

Again, there is absolutely nothing wrong with all of them opting to send their kids to private schools. Indeed, it’s what they should be doing given the subpar track record of government schools.

But it’s disgusting that they want to deny that same opportunity for parents who don’t have the same financial resources. Especially since minority children are the ones who suffer most.

P.S. It’s worth pointing out that this column is an attack on teacher unions, not teachers. For what it’s worth, the main argument for school choice is that it would be better for students. That being said, good teachers also would prosper in a choice-based system.

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Image credit: InstagramFOTOGRAFIN | Pixabay License.

The Economics of Unholy Alliances: Bootleggers and Baptists

Tue, 03/02/2021 - 12:04pm

The class-warfare crowd and tax lawyers don’t have a lot in common, but both groups oppose the flat tax. An even stranger unholy alliance involves the War on Drugs, which has the support of both the activists who despise drugs and the criminals who get rich selling drugs in the black market.

Professor Bruce Yandle explains this “bootleggers and baptists” phenomenon.

Professor Yandle, who is at Clemson University, even has a book on this topic, co-authored with Professor Adam Smith of Johnson & Wales University (no relation to has namesake, the author of The Wealth of Nations, at least to my knowledge).

One message of the book is that politicians often have noble-sounding reasons for the things they do, but closer investigation usually reveals that interest groups are the real beneficiaries.

In other words, the phenomenon of bootleggers and baptists is run-of-the-mill government corruption, an example of “public choice” in action.

What’s motivated me to write about this issue is a story from Petaluma, California. As reported by Axios, the city wants to ban new gas stations for the supposed purpose of fighting climate change.

Petaluma, California, has voted to outlaw new gas stations, the first of what climate activists hope will be numerous cities and counties to do so. …Expect more such ordinances, particularly in liberal towns. Grassroots groups are popping up with the mission of spreading this type of ban… “This is not a ban on the existing gas stations, which are providing all the gas currently needed,” Matt Krogh, U.S. oil and gas campaign director for the environmental group Stand.earth, tells Axios. …The city councilor who introduced the measure, D’Lynda Fischer, is quoted as saying: “The goal here is to move away from fossil fuels…” A Seattle-based group called Coltura, which aims to phase out gasoline altogether, is working on the issue locally and nationally. …In the 2020s, this is not the time to be expanding fossil fuel infrastructure,” Woody Hastings, co-coordinator of CONGAS, tells Axios. …He says his group has succeeded in blocking three applications to build new stations in Sonoma.

Given my views of climate activists, I don’t want to say this effort is noble. But I’m sure the average person might say this is a well-meaning crusade.

But let’s take a jaundiced look at what’s really happening. At the risk of being the skunk at a garden party, I’ll state that what’s happening, either in the town of Petaluma or in Sonoma County, will have zero impact on the climate.

But it could have a big impact on the owners of existing gas stations. They now have no reason to worry about new competitors. Which makes their gas stations more valuable and gives them greater leeway to raise prices.

Mr. Hastings, the climate activist quoted in the above excerpt, even acknowledged in the story that a ban would help existing stations.

“The problem with allowing new gas stations is we don’t really need them and they’re putting existing gas stations out of business.”

The bottom line is that consumers will lose because the government is limiting competition.

Which is good news for the bootleggers (the owners of gas stations that already exist) and the baptists (the green activists who feel good because they think they’re saving the planet).

P.S. There are countless examples of bootleggers and baptists working together in Washington.

The moral of the story is that it’s almost always insiders who benefit when politicians do something.

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Image credit: Rennett Stowe | CC BY 2.0.

The United Nations and Global Taxation

Mon, 03/01/2021 - 12:22pm

Last summer, I provided testimony to the United Nations’ High-Level Panel on Financial Accountability Transparency & Integrity.

I touched on many issues, but my testimony  focused on some core principles of sensible taxation.

Was my testimony effective? Did the bureaucrats at the U.N. incorporate any of my observations into their conclusions?

Nope. I had no impact. Zero. Nada. Zilch.

That’s my self-assessment after reading the report that the U.N.’s FACTI panel just released. Here are some excerpts.

…even before the present crisis, the international financial system was not conducive to directing investment of resources into sustainable development. …States need robust financing to revitalise transformative action to eradicate poverty, reduce inequalities… Mobilisation of public resources, internationally and domestically, can be enhanced… The Panel proposes a Global Pact for Financial Integrity for Sustainable Development… All taxpayers should pay their fair share, including a minimum global corporate income tax rate on profits… Establish an inclusive and legitimate global coordination mechanism at United Nations Economic and Social Council (ECOSOC) to address financial integrity on a systemic level.

The over-arching goal of the U.N. is to empower governments by weakening tax competition.

There were 14 specific recommendations in the report, each with multiple parts.

Here’s the one that deserves a bit of attention.

This policy, if ever enacted, would have all sorts of negative implications.

Here are four obvious concerns.

  1. For starters, no jurisdiction would be able to opt for the best-possible tax system of no income tax. So it would be very bad news for places such as BermudaMonaco, and the Cayman Islands.
  2. It also would mean higher taxes in many other places such the report calls for “setting a rate of 20-30% on profits.” So it would be very bad news for places with low rates, such as IrelandEstonia, and Switzerland.
  3. Eventually it would mean higher taxes for everyone since politicians, once they have the power, would repeatedly raise the “global minimum tax rate” to extract more money from the economy’s productive sector.
  4. And once politicians have the power to set minimum tax rates for corporate taxation, it would merely be a matter of time before they adopted the same approach for the personal income tax.

I’ll close by zooming out to address one of the themes in the report.

Over and over again, it asserts that more tax money (the report repeatedly uses euphemisms such as “robust financing” and “public resources”) will translate into faster economic development.

This is a common theme at the U.N., but there’s never the slightest effort to provide any support for this assertion. No data, no evidence, no research, and no examples. It’s what i call the “magic beans” theory of growth.

As I’ve periodically asked, shouldn’t they provide a case study of this approach ever being successful, either now or at any point in history?

But don’t hold your breath.

Here’s a CF&P video that addresses this issue.

P.S. When I read the FACTI report, it reminded me that there’s plenty of waste and fat to cut at the United Nations.

P.P.S. Bureaucrats at the U.N. have asserted that low tax burdens somehow are a violation of human rights. But since those bureaucrats get tax-free salaries, perhaps they should lead by example and surrender a big chunk of their income before coming after the rest of us.

Even the OECD Finds that Class-Warfare Taxes Lead to Lower Incomes

Sat, 02/27/2021 - 12:58pm

I’m not a big fan of the Organization for Economic Cooperation and Development. Simply stated, the Paris-based international bureaucracy represents the interests of governments, and that means the OECD often pushes policies that serve the interests of politicians at the expense of taxpayers and consumers.

I’m particularly irked that OECD bureaucrats spend so much time and effort persecuting low-tax jurisdictions. And some of their work on issues such as poverty and inequality is grotesquely dishonest and sloppy.

But there are some good economists at the OECD. They’re apparently not allowed to have any role in policy, much to my dismay, but they occasionally produce very good research studies.

Such as the 2016 study that showed how many European welfare states would enjoy big increases in prosperity if they reduced the burden of government spending.

And the pair of studies that concluded spending caps were the most effective rule for sensible fiscal policy.

Or the study admitting that competition between governments leads to better tax policy.

Today, let’s look at another example of sensible analysis by OECD economists.

In a study published in late 2017, Oguzhan Akgun, Boris Cournède and Jean-Marc Fournier examined how different types of taxes impacted economic performance.

Lo and behold, they found that it’s good to have lower tax rates on businesses and it’s good to have lower tax rates on workers.

The present paper looks at the long-term effects of tax shifts on inequality and output for an unchanged size of government. …This study uses econometric analysis to provide estimates of distributional and output effects that can be expected based on the track record in OECD countries. …The main findings emerging from the analysis are: …Higher marginal effective rates of corporate income taxation are linked with significantly lower long-term output levels. …Greater progressivity in the upper half of the income distribution, in the form of higher tax wedges on above average income earners, is linked with lower long-term output. …taxes on net wealth are found to be associated with lower output levels, in line with the literature on their distortive effects.

These finding are not a surprise, particularly for people who read the Tax Foundation’s research back in 2016.

Here’s the key visual from the OECD study. The top half shows how many nations could enjoy significant gains in disposable income if tax rates were lowered on workers with above-average incomes. The lower half shows how many nations also could enjoy gains in disposable income

The obvious takeaway is that the study shows that Biden’s class-warfare tax agenda will be bad for American competitiveness and American prosperity.

There are many other findings in the study, not all of which I like, and not all of which make sense.

For instance, the authors want us to believe that death taxes may actually have a positive impact on the economy.

Greater reliance on inheritance and gift taxes…appears to be output-enhancing by comparison with other revenue sources.

I realize the study is only claiming that such taxes are less damaging than other taxes, but it still doesn’t make sense since death taxes directly drain capital out of the economy’s productive sector.

The study also look at the impact of various tax changes on “inequality,” leading the authors to give a negative assessment to some tax cuts even if those reforms would increase the well-being of those with lower incomes (thus confirming Margaret Thatcher’s warning that some folks on the left are willing to hurt the poor if the rich are hurt by a greater amount).

I’ll close with two other findings from the study, both of which are more to my liking.

First, we find that consumption taxes (such as the value-added tax) hurt the economy, but not as much as income taxes.

Consumption taxes entail some disincentive effects, which are generally found to be weaker than those of income taxes.

Second, green taxes hurt the poor more than they hurt the rich.

…environmental taxes can increase inequality.

Given all the rich hypocrites on this issue, this doesn’t surprise me. They know they won’t be the main victims.

For what it’s worth, the OECD nonetheless wants a big energy tax on American families (thus confirming once again that there’s a disconnect between the left-leaning political types who are in charge and the professional economists who do real research).

P.S. Even if some OECD economists do good work, American taxpayers should not be subsidizing the group.

The Link Between GDP, Living Standards, and Economic Liberty

Fri, 02/26/2021 - 12:15pm

repeatedly write about the importance of economic growth, usually citing data about gross domestic product (GDP), which is defined as “a monetary measure of the market value of all the final goods and services produced in a specific time period.”

And I frequently use that GDP data when comparing long-run performance for various nations in order to demonstrates that you get more economic output with free markets and limited government.

Critics sometimes respond by arguing that GDP is an abstract measure that doesn’t necessarily capture the actual well-being of people.

I’ve addressed this concern in the past by pointing out that you find the same relationship between prosperity and economic liberty when looking at the OECD’s data on “actual individual consumption.”

But Max Roser of Oxford University recently shared some data (from Our World in Data) that may be even more useful because it shows that GDP is strongly correlated with median daily expenditure.

There are a couple of obvious takeaways from this data, most notably that nations in the top-right portion of the chart have much higher levels of economic liberty that countries in the bottom-left portion.

We also see that the United States does very well compared to most other developed nations, though we shouldn’t be surprised to see that Switzerland does even better.

And I assume the dot in the top-right corner is hyper-free market Singapore.

The moral of the story is that there’s a tried-and-true recipe for growth and prosperity based on free markets and limited government.

For those who doubt that assertion, please identify a country – from anywhere in the world and from any period of history – that became rich with statist policies?

won’t be holding my breath waiting for an answer.

P.S. One important thing to understand is that the vertical axis in the above chart is based on “median” daily expenditure, which means the spending of the hypothetical person in each nation who is better off than 50 percent of the population and worse off than 50 percent of the population.

The “mean” average, by contrast, is calculated by dividing total expenditure by population.

Both median and mean are legitimate ways of figuring out an average, but median is often viewed as a better way of showing the person in the middle while mean is viewed as a better way of capturing aggregate conditions.

For what it’s worth, the U.S. bubble in the above chart presumably would be even higher if the vertical axis was based on mean rather than median daily expenditure. That’s because of a large number of very successful people with very high expenditure levels in America.

P.P.S. By the way, I should point out that Our World in Data is not a libertarian site or conservative site. Indeed, I suspect the academics who run it lean to the left.

Just consider this bit of editorializing in the site’s discussion about economic growth: “While in the US, for example, most of the income gains went to the richest members of society this is not true of other countries where economic growth was widely shared among all.”

It’s certainly true the rich have enjoyed large income gains in the United States, so there’s nothing technically inaccurate about that gratuitous bit of class warfare.

But people who work closely with economic data surely understand that you don’t just want to focus on how the pie is sliced. You also want to know the size of the pie.

When you look at both types of data, you learn that ordinary Americans are much better off than ordinary people in other nations – which is the opposite of what is implied by the quote.

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Image credit: geralt | Pixabay License.

Improving Bad Government: The Case of Chile and Milton Friedman

Thu, 02/25/2021 - 12:26pm

I’ve written many times about the spectacularly positive impact of pro-market reforms in Chile.

The shift toward free markets, which began in the mid-1970s, was especially beneficial for the less fortunate (see herehere, and here).

But it’s quite common for critics to assert that Chile is a bad example because many of the reforms were enacted by General Augusto Pinochet, a dictator who seized power in 1973. And some of those critics also attack Milton Friedman for urging Pinochet to liberalize the economy and reduce the burden of government.

Are these critics right?

To answer that question, I very much recommend the following cartoon strip by Peter Bagge. Published by Reason, it accurately depicts the efforts of reformers to get good reforms from a bad government.

It starts in 1973, with a group of Chilean economists, known as the “Chicago Boys,” who wanted free markets.

In 1975, they invited Milton Friedman to help make the case for economic reform.

This 1982 strip shows some of the controversies that materialized.

But by the time we got to the 21st century, everything Friedman said turned out to be true.

Chile had become an “improbable success.”

This cartoon strip is great for two reasons.

  • First, I’ll be able to share it with people who want to delegitimize Chile’s transition to a market-oriented democracy (ranked #14 according to the most-recent edition of Economic Freedom of the World). Simply stated, it was bad that Chile had a dictatorship, but it was good that the dictatorship allowed pro-market reforms (particularly when compared to the alternative of a dictatorship with no reforms). And it was great that Chile became a democracy (a process presumably aided by mass prosperity).
  • Second, we should encourage engagement with distasteful governments. I certainly don’t endorse China’s government or Russia’s government, but I’ve advised government officials from both nations. Heck, I would even give advice to Cuba’s government or North Korea’s government (not that I’m expecting to be asked). My goal is to promote more liberty and it would make me very happy if I could have just a tiny fraction of Friedman’s influence in pursuing that goal.

P.S. Here’s Milton Friedman discussing his role in Chile.

P.P.S. While I disagree, it’s easy to understand why some people try to delegitimize Chile’s reforms by linking them to Pinochet. What baffles me are the folks who try to argue that the reforms were a failure. See, for instance, Prof. Dani Rodrik and the New York Times.

P.P.P.S. Critics also tried to smear Prof. James Buchanan for supporting economic liberalization in Chile.

The Weak Case for Government-Financed Research and Development

Wed, 02/24/2021 - 12:32pm

While it’s true that every penny in the budget requires money to be diverted from the economy’s productive sector, not all government spending is created equal when considering the impact on growth.

Some types of spending, such as redistribution programs, are doubly harmful to prosperity. The economy is first hurt by the taxes needed to finance the programs, and then the economy is hurt because the programs give people incentives to rely on the government rather than work.

Other types of spending, however, require a cost-benefit analysis.

Consider the case of education. There are costs when politicians take money out of the private sector to finance education, but there are benefits from having an educated population.

That doesn’t tell us how much to spend, of course, and it also overlooks equally important questions such as whether the money will generate better results if used to finance a government monopoly or a choice-based system. But I’m simply making the point that there are costs and benefits.

Now let’s apply this analysis to government-financed research and development, which involves everything from the National Science Foundation to NASA, and from global warming grants to weapons development for the Pentagon.

Proponents argue that these are “public goods,” meaning that they produce economy-wide benefits and can only be handled by government.

But that view seems to be based in large part on faith rather than evidence.

Matt Ridley, the former science editor for the Economistwrote about this topic for the Wall Street Journal back in 2015. If you only have time to read one article, this might be the best choice.

He starts by explaining that most breakthroughs come from private initiative.

Most technological breakthroughs come from technologists tinkering, not from researchers chasing hypotheses. Heretical as it may sound, “basic science” isn’t nearly as productive of new inventions as we tend to think. …Politicians believe that innovation can be turned on and off like a tap: You start with pure scientific insights, which then get translated into applied science, which in turn become useful technology. So what you must do, as a patriotic legislator, is to ensure that there is a ready supply of money to scientists on the top floor of their ivory towers, and lo and behold, technology will come clanking out of the pipe at the bottom of the tower. …this story…so prevalent in the world of science and politics—that science drives innovation, which drives commerce—is mostly wrong. It misunderstands where innovation comes from. Indeed, it generally gets it backward. …It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. …Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do.

Government funding, by contrast, does not have a good track record.

It follows that there is less need for government to fund science: Industry will do this itself. Having made innovations, it will then pay for research into the principles behind them. Having invented the steam engine, it will pay for thermodynamics. …For more than a half century, it has been an article of faith that science would not get funded if government did not do it, and economic growth would not happen if science did not get funded by the taxpayer. …there is still no empirical demonstration of the need for public funding of research and that the historical record suggests the opposite. After all, in the late 19th and early 20th centuries, the U.S. and Britain made huge contributions to science with negligible public funding, while Germany and France, with hefty public funding, achieved no greater results either in science or in economics. …public funding of research almost certainly crowds out private funding. That is to say, if the government spends money on the wrong kind of science, it tends to stop researchers from working on the right kind of science.

Ridley doesn’t claim there are no benefits. Instead, he makes the more practical point that government R&D has high costs with relatively low benefits.

…the argument for public funding of science rests on a list of the discoveries made with public funds, from the Internet (defense science in the U.S.) to the Higgs boson (particle physics at CERN in Switzerland). But that is highly misleading. Given that government has funded science munificently from its huge tax take, it would be odd if it had not found out something. This tells us nothing about what would have been discovered by alternative funding arrangements. And we can never know what discoveries were not made because government funding crowded out philanthropic and commercial funding.

Ridley’s analysis is backed up by scholarly research.

Here are some excerpts from a study by the Bureau of Labor Statistics.

This paper reviews the literature on R&D to provide guidelines for recent efforts to include R&D in the national income accounts. …The overall rate of return to R&D is very large, perhaps 25 percent as a private return and a total of 65 percent for social returns. However, these returns apply only to privately financed R&D in industry. Returns to many forms of publicly financed R&D are near zero. …On the basis of the evidence considered, privately financed R&D in industry should be treated as an investment and included in the relevant R&D stock. Returns to R&D are very high, but these high returns accrue only to privately financed R&D. Many elements of university and government research have very low returns, overwhelmingly contribute to economic growth only indirectly, if at all, and do not belong in investment.

And here are some passages from a 2003 report by the Organization for Economic Cooperation and Development.

…the pace of accumulation of physical and human capital plays a major role in the growth process. Most notably, the estimated impact of increases in human capital (as measured by average years in education) on output suggests high returns to investment in education. The results also point to a marked positive effect of business-sector R&D, while the analysis could find no clear-cut relationship between public R&D activities and growth …there are significant differences in the returns of R&D expenditure across sectors, and the private sector may be better able to channel resources towards high return R&D activities …regressions including separate variables for business-performed R&D and that performed by other institutions (mainly public research institutes) suggest that it is the former that drives the positive association between total R&D intensity and output growth. …The negative results for public R&D are surprising…they suggest publicly-performed R&D crowds out resources that could be alternatively used by the private sector, including private R&D. There is some evidence of this effect in studies.

Terence Kealey’s 2017 testimony to the Senate’s Homeland Security and Governmental Affairs Committee also is worth perusing.

…the British Industrial Revolution of the 19th century, like the British Agricultural Revolution of the 18th century, was laissez faire… The US was laissez faire in science between 1776 and 1940, yet by 1890 it had overtaken the UK to become the richest industrialized country in the world. Meanwhile those European countries – including France and the German states – whose governments invested most in science failed to converge on the UK or the US, let alone overtake them. …as shown by the successes of the Wright brothers, Thomas Edison and Nikola Tesla, to say nothing of the great industries of Pittsburgh and Detroit – US science, technology and industry flourished. …since 1830 the long-term rates of GDP per capita and TFP (total factor productivity) growth in the US have been steady (with GDP per capita, for example, growing at just under 2% per annum) and the inauguration of the federal funding for science had the following effect on long-term rates of GDP per capita and TFP growth: none.

The good news, relatively speaking, is that the private sector now plays a very dominant role in R&D expenditures.

This was not always the case. This chart, from Iain Murray’s research, shows that government played the dominant role in the 1950s, 1960s, and 1970s.

Let’s close with two real-world examples of how private R&D drives progress.

First, here are some excerpts from a 2017 column in the Wall Street Journal by Tom Stossel.

He explains that progress in curing and treating diseases comes from the private sector rather than the National Institutes of Health.

The assumption seems to be that the root of all medical innovation is university research, primarily funded by federal grants. This is mistaken. The private economy, not the government, actually discovers and develops most of the insights and products that advance health. The history of medical progress supports this conclusion. …innovation came from physicians in universities and research institutes that were supported by philanthropy. Private industry provided chemicals used in the studies and then manufactured therapies on a mass scale. …Practical innovation requires incremental efforts. But the reviewers of grant applications for medical research are obsessed with theory-based science and novelty for novelty’s sake. …Academic administrators, operating under the delusion that government largess would grow forever, have become entitled. …By contrast, private investment in medicine has kept pace with the aging population and is the principal engine for advancement. More than 80% of new drug approvals originate from work solely performed in private companies. …Great advances in health care have been made, but there are still important challenges, from obesity to dementia. One step toward addressing them would be for Washington to adopt the right approach to medical innovation—and to stop simply throwing money at the current inefficient system.

Second, here’s more of Terence Kealey’s work, in this case some commentary from last year that focuses on space exploration.

…all powered flight started in the private sector, for the Wright brothers were not government‐​funded researchers. …A team of full‐​time government‐​funded researchers, operating out of the Smithsonian Institution, were then also trying to launch heavier‐​than‐​air machines. Even though the Smithsonian team enjoyed a budget that was a hundred times larger than that of the Wrights, its prototypes always crashed. Airplanes are but one of the many gifts that private research and development has bestowed on humanity. As are space rockets. The great space‐​rocket pioneer was Robert “Moonie” Goddard (1882–1945), a professor at Clark College in Massachusetts. Funded with $100,000 from the Guggenheims and $10,000 from the Hodgkins Fund, the projects that resulted in his achievements were extraordinary: By 1925 he had created the first liquid‐​fueled rocket. By 1932 he had developed a gyro stabilizer… Elon Musk’s company, SpaceX,…doing something — namely, putting humans into orbit — that previously had been achieved only by governments. NASA could now be seen as only a temporary interruption of a process that had started in the private sector. …If there is a science that proves the resilience of the private sector, it is space science, including, of course, astronomy. Time again, what at the time was the largest optical telescope in the world was privately funded… Radio astronomy, moreover, was actually born in the private sector, when Karl Jansky of Bell Labs discovered in 1931 that stars emitted radio waves. Grote Reber, a radio engineer, built the first radio telescope, a parabolic dish reflector in his backyard in Chicago in 1937.

The purpose of this column isn’t to argue that there shouldn’t be any government-funded research.

Indeed, because there’s at least some hope of that such spending generates benefits, I prefer R&D spending over almost all other types of spending (it’s better than redistribution outlays, and also better than money that goes for the Department of AgricultureDepartment of EducationDepartment of Housing and Urban Development, etc).

But “better than” other types of government spending is not the same as “better than” leaving the money in the economy’s productive sector.

The bottom line is that there simply isn’t any evidence that government-financed R&D generally passes the cost-benefit test described at the start of the column.

Which means that we should be very skeptical when politicians and interest groups plead for more funding (needless to say, evidence tells us we should be skeptical of any requests for bigger government, not just those for more R&D spending).

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Image credit: axventura | CC BY 4.0.

The Never-Ending Economic Tragedy of Argentina

Tue, 02/23/2021 - 12:17pm

What nation serves as the most powerful example of how statism can wreck an economy and impoverish people?

Those are all good choices, but perhaps Argentina is the best example (or should we say worst example?).

If you go back 100 years, Argentina was one of the world’s richest nations. And, as recently as the late 1940s, it still ranked in the top 10 for per-capita economic output.

But then the nation veered to the left. Whether you call it Peronism or democratic socialism, there was a huge increase in the size and scope of government.

As you might expect, the results were terrible. Argentina since then has been the world’s worst-performing economy.

But things can always get worse.

In an article for National Review, Antonella Marty points out that President Fernandez is doing his part to continue the awful pattern of statism-generated crises in Argentina.

…it was already challenging for Argentines to maintain businesses and overcome the endless regulations and bureaucratic hurdles that comprise everyday life…the government of Alberto Fernández and Cristina Fernández de Kirchner has made matters worse… In brief: …The Argentine economy has been in recession since 2018. …Argentina ranks 126th in the World Bank’s Doing Business index, between Paraguay and Iran. It takes about five months to open a business in Argentina. …Argentina has public debt approaching 90 percent of GDP. …Argentina has one of the highest inflation rates in the world: 36.6 percent over the past year. Every month, wages steadily decline, and every 10 or 12 years, like clockwork, the Argentine peso crashes, diminishing household savings. …Argentine debt still trades at a steep discount, because investors rightfully recognize the dim prospects for a government that limits the creation of wealth through aggressive taxation, price controls, currency regulation, and skyrocketing levels of public spending. Argentina still does not realize the problem that has trapped us in a cycle of repeated crises for decades: the government. …The “solutions” invoked by left-wing Peronists — the progeny of the populist 20th-century president Juan Perón — always involve increased state intervention in the economy. Alberto Fernández has done nothing different. …As always, Argentina cannot solve the problem of big government with more government.

Perhaps the worst policy under Fernandez is the new wealth tax.

In an article for the Washington Post, Diego Laje and Anthony Faiola look at Argentina’s embrace of this destructive levy.

At least as far back as the 1940s, …class conflict has lingered just below the surface of this chronically indebted South American state. To dig itself out of a gaping fiscal hole made worse by the pandemic, Argentina is issuing a clarion call now echoing around the globe: Make the rich pay. …So why not, proponents argue, foist the cost of the epic global recession caused by the pandemic onto those who can most afford it? …Argentina, saddled with crippling debt exacerbated by the pandemic, adopted a one-time special levy on the rich in December, demanding up to 3.5 percent of the total net worth of citizens who hold at least $3.4 million of assets. …Argentina is turning to its wealthiest citizens after having lost the faith of foreign investors, and with little other means to plug financial holes. …fearful Argentines hoarded U.S. dollars, and the government, as it so often has in the past, turned to the printing press to make ends meet. Now Argentina is seeking another major bailout from the IMF… In recent months, Walmart, Latam Airlines, Uber Eats, Norwegian Airlines and Nike have reduced operations in Argentina or left the country. …Argentina crashed from its place at the top of the global wealth chain long ago, in a succession of economic crises, dictatorships and bruising political battles between the ruralistas and the Peronistas. 

The reporters don’t make the obvious connection between Peronist policies and the economy’s decline, but at least readers learn that Argentina hasn’t been doing well.

And the authors deserve credit for acknowledging that there are serious concerns about how wealth taxes can undermine prosperity.

But wealth taxes are notoriously tricky to get right, and they have a history of deeply negative side effects that can seriously undermine their intent. In France, for instance, a long-standing wealth tax, repealed in 2018, was blamed for an increase in tax dodging and the flight of thousands of the country’s richest citizens. …A decade ago, 12 of the world’s most-developed countries had wealth taxes on the books. The number has fallen to three.

I’m tempted to say the big takeaway from today’s column is that wealth taxes are a bad idea.

That’s true, of course, but the bigger lesson we should absorb is that a rich nation can become a poor nation.

Simply stated, if a government imposes enough bad policies – as has been the case in Argentina – then it’s just a matter of time before it declines relative to nations with sensible policies.

Perhaps there’s a lesson there for Joe Biden?

P.S. I sometimes fantasize that Argentina can experience a Chilean-style economic revitalization, but that seems very unlikely since even supposedly right-wing politicians pursue statist policies.

P.P.S. Though there is a small sliver of libertarianism in Argentina.

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Image credit: eliasbuty | Pixabay License.

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