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Updated: 33 min ago

Trump Is Right: Congress Needs to Expedite Drug Price Relief

Wed, 03/04/2020 - 12:05pm

Originally published by American Thinker on March 3, 2020.

Reports over the past week have stated that President Trump is frustrated over Congress’ stalled initiatives to cut drug prices.

Who can blame him? Americans spend more on prescription drugs on average than citizens of any other nation on the planet, to the tune of $1,200 per person per year. It’s no secret that they’re frustrated about it, and it’s about time for Congress to act.

Even since the president’s State of the Union of just a few weeks ago, where he made fixing the issue a centerpiece of his address to Congress, the scope of the drug cost problem has gotten even more alarming.

For example, according to a February 13 study, Medicare Part D plans are putting generic prescription drugs on non-generic tiers more than 50% of the time, while they are putting them on preferred generic tiering only 10% of the time.

That’s just wonky way of saying that drug plans are making a habit of putting generics on the same pricing tiers as brand-name drugs — not permitting many consumers to realize their cost-savings. To make matters worse, many generic drugs aren’t being included within the program at all.

This policy’s implications for American consumers have been eye-popping. As recently pointed out by Sen. James Lankford (R-Okla.) in his Federal Fumbles: Ways the Government Dropped the Ball report, consumers have been robbed of a whopping $22 billion due to this deliberate sleight of hand.

Given that Medicare Part D is a federal program, readers might be wondering why the federal government permits drug plans to, in essence, mislabel their drugs to incentivize the use of expensive brand-names. The answer is deserving of a “Thanks Obama!” react.

Up until a few years ago, drug plans were required to act with good ethics and have their drug tiering match the actual drugs found within them. Then, bureaucrats in the Obama-administration irrationally decided to loosen the standards, promoting crony capitalism and benefiting large drug companies at the expense of price competition and consumers’ pocketbooks.

President Trump is right: it’s long past time for Congress to fix the issue of high drug costs. But while a lot of bills before Congress attempt to tackle drug price transparency, transparency won’t mean much if drug plans are still allowed to rig costs upward. And so, addressing this issue has to start with fixing the Obama tiering rule-change.

Thankfully, Rep. David McKinley (R-W.V.), has already introduced HR 4913 to fix this problem. It would simply reverse Obama’s disastrous interference in Medicare — putting low-cost generic drugs on the appropriate generic tiers and creating a dedicated specialty tier for specialty generic drugs and biosimilars.

While the rest of Congress remains consumed by partisan gridlock, the bill’s 20 cosponsors, almost evenly split between Democrats and Republicans, have managed to unite around this commonsense legislation.

The Senate wants in on this too. A number of Republican and Democrat senators, including Chuck Grassley (R-Iowa), Bill Cassidy (R-La.), Ben Cardin (D-Md.), and Bob Menendez (D-N.J.) have expressed support for reversing this Obama era-rule change as well.

Without a doubt, this bill presents more promise of passing both houses of Congress than any other. That said, the first quarter of 2020 is quickly coming to a close. If Congress is going to realize its goal of passing drug reform legislation by the end of the year, it needs to begin moving the process forward.

The first step, as always, is getting the bill scored by the Congressional Budget Office (CBO). By law, the CBO is required to produce formal cost estimates for all non-appropriation measures, so Congress won’t be getting any closer to its year-end goal for drug pricing relief without its analysis.

The CBO score will also be beneficial for uncovering just how much of America’s drug pricing problem the McKinley bill be singlehandedly responsible for fixing. One independent analysis shows that seniors would save an astounding $4 billion from the legislation. If CBO’s projections track with this study, it will become clear as day to all of Congress that this legislation is exactly what the American people need.

Once the CBO conducts its analysis, the relevant congressional committees can ram the bill through the full bodies of both chambers so the bill can finally await President Trump’s signature. And make no mistake about it: the president will sign this bill. As he said in his State of the Union, “Get a bill to my desk, and I will sign it into law without delay.”

The White House is right to be frustrated with Congress’ sluggishness in fixing the nation’s drug pricing impasse thus far, especially given all of this month’s new data that has shown how much worse the problem at hand is becoming. At the same time, though, many members are taking significant strides to address this problem directly by its roots through rectifying the Obama administration’s mistakes. Now, they just need to push it through the CBO and the relevant committees’ procedural hoops so the American people can finally reap the rewards of this bipartisan victory.

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Image credit: K-State Research and Extension | CC BY 2.0.

Trump and the Politics of Coronavirus

Tue, 03/03/2020 - 12:30pm

Notwithstanding dalliances in other fields, I’m a policy wonk.

But I will pontificate (often incorrectly) on politics when asked, which is what happened in this interview about the electoral impact of the coronavirus.

My basic point is that Trump is much better than the average Republican about “controlling the narrative.”

In other words, he doesn’t allow the media to frame issues in a way that is adverse to his interests.

Given Trump’s Jekyll-Hyde approach to economic policy, I have mixed feelings about his Jedi-like ability.

But I will point out why narratives are so important in public policy.

Since I’ve shifted to my comfort zone of public policy, I’ll also say something about trade.

One of the big risks from the coronavirus is that it will weaken global trade. Which led me to mention in the interview that hopefully Trump might learn from this growing crisis that expanded trade is good for prosperity.

Though I admit I’m not very optimistic given his mercantilist perspective.

P.S. Textbook discussions of “robber barons” and “sweatshops” are other examples of how bad narratives lead to distorted history.

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

The Inevitability of Bureaucratic Bloat

Mon, 03/02/2020 - 12:23pm

I’m not a big fan of bureaucracy, mostly because government employees are overpaid and they often work for departments and agencies that shouldn’t exist.

Today, motivated by “public choice” insights about self-interested behavior, I want to make an important point about how bureaucracies operate.

We’ll review two articles about completely disconnected issues. But they both make the same point about ever-expanding bureaucracy.

First, the Economist has an article about central banks, specifically looking at how they employ thousands of bureaucrats. What makes the numbers so remarkable, at least in most of Europe, is that they no longer have currencies to manage.

Central bankers around the world have long pondered why productivity growth is slowing. …But might central banks themselves, with their armies of employees, be part of the problem? …many central banks in Europe look flabby. Although the euro area’s 19 national central banks have ceded many of their monetary-policymaking responsibilities to the European Central Bank (ECB)—they no longer set monetary policy by themselves, for instance—they still retain thousands of employees… the Banque de France and the Bundesbank each employ more than 10,000 people… The Bank of Italy employs 6,700. All told, the ECB and the euro zone’s national central banks boast a headcount of nearly 50,000. …The Board of Governors in Washington, DC, where most policy decisions are made, had about 3,000 staff at last count. When the Fed’s 12 regional reserve banks are included, the number rises to more than 20,000.

I actually wrote about this issue back in 2009 and mentioned the still-relevant caveat that some central banks have roles beyond monetary policy, such as bank supervision.

That being said, this chart suggests that there’s plenty of fat to cut.

What I would like to see is a comparison of staffing levels for countries that use the euro, both before and after they outsourced monetary policy the European Central Bank.

I would be shocked if there was a decline in the number of bureaucrats, even though monetary policy presumably is the primary reason central banks exist.

By the way, there’s a sentence in the article that cries out for correction.

Although central banks have become more important since the global financial crisis, it is not clear why they need quite so many regional staff.

It would be far more accurate if the sentence was modified to read: “…have become more of a threat to macroeconomic stability since the global financial crisis that they helped to create.”

But I’m digressing.

Let’s now look at the next article about bureaucracy.

John Lehman, a former Secretary of the Navy, recently opined in the Wall Street Journal about bureaucratic bloat at the National Security Council.

The problems that plague the NSC trace to before its founding in 1947. The White House has long sought to centralize decision-making to overcome the political jockeying that often takes place within the national-security establishment. …The NSC was established in the 1947 National Security Act, which named the members of the council: president, vice president and secretaries of state and defense. …under President Nixon…, Mr. Kissinger grew the council to include one deputy, 32 policy professionals and 60 administrators. …the NSC has only continued to expand. By the end of the Obama administration, 34 policy professionals supported by 60 administrators had exploded to three deputies, more than 400 policy professionals and 1,300 administrators. The council lost the ability to make fast decisions informed by the best intelligence. The NSC became one more layer in the wedding cake of government agencies.

Wow.

A bureaucracy that didn’t exist until 1947 and didn’t even have a boss until 1953 then grows to almost 100 people about 20 years later.

And then 1700 bureaucrats by the Obama Administration.

Needless to say, I’m sure that the growth of the NSC bureaucracy wasn’t accompanied by staffing reductions at the Department of State, Department of Defense, or any other related box on the ever-expanding federal flowchart.

Whenever I read stories like the two cited above, I can’t help but remember what Mark Steyn wrote almost ten years ago.

London administered the vast sprawling fractious tribal dump of Sudan with about 200 British civil servants for what, with hindsight, was the least-worst two-thirds of a century in that country’s existence. These days I doubt 200 civil servants would be enough for the average branch office of the Federal Department of Community Organizer Grant Applications. Abroad as at home, the United States urgently needs to start learning how to do more with less.

As always, Steyn is very clever. But there’s a very serious underlying point. Is there any evidence that additional bureaucracy has produced better decision making?

Either in the field of central banking, national security, or in any other area where more and more bureaucrats exercise more and more control over our lives?

Maybe there is such evidence, but I haven’t seen it. Instead, I see research showing how bureaucracy stifles growthcreates wastepromotes inefficiencycrowds out private jobsdelivers bad outcomes, acts in a self-serving fashion, and bankrupts governments.

Michael Bloomberg and Entitlements: Rational (at Least in the Past), but not Right

Sat, 02/29/2020 - 12:10pm

The race for the Democratic nomination is very depressing. All the candidates – even supposed moderates such as Biden and Buttigieg – are openly advocating a much bigger burden of government.

I’m hoping some of their proposals are simply election-year pandering, that they really don’t believe in statism, and that they would be reasonable if they got to the White House.

We got a good bit of economic liberalization under Bill Clinton, for instance, even though he didn’t campaign as any sort of libertarian.

Some people speculate that Michael Bloomberg, the former New York City mayor, might be this year’s closet moderate. A few people have even sent me this CNN article as proof of his underlying rationality.

…when he was mayor of New York City, Bloomberg twice compared Social Security to a “Ponzi scheme” and repeatedly said cuts to that program as well as Medicare and Medicaid had to be part of any serious solution to reducing the federal deficit. …if there’s ever a Ponzi scheme, people say Madoff was the biggest? Wrong. Social Security is, far and away,” Bloomberg said in a January 2009 appearance… “We are giving monies out with the next guy’s money coming in and at the end of — when the music stops — it’s just not gonna be enough chairs for everybody,” Bloomberg said. …Bloomberg’s past comments are at odds with the mainstream positions within the Democratic Party. …During other radio appearances, Bloomberg called for passing Simpson-Bowles, the deficit cutting plan named after former Wyoming Republican Sen. Alan Simpson and former Clinton White House chief of staff Erskine Bowles.

I have mixed feelings after reading that article.

The good news is that Bloomberg at one point was semi-rational about entitlements.

  • He understood Social Security is a Ponzi scheme, meaning that the system is only made possible by having new people enter the scheme to finance promises made to people who joined earlier.
  • He recognized that some sort of corrective action was needed on entitlements because of enormous unfunded promises, driven by demographic change and poorly designed programs.

The bad news is that Bloomberg never supported the right policies that would address both Social Security’s gigantic fiscal shortfall and the fact that the program is a really bad deal for younger workers. Instead, he supported plans such as Simpson-Bowles that would merely make people pay more to get less.

The worst news is that Bloomberg has abandoned his semi-rational view and is now urging higher taxes and program expansions. He’s presumably not as bad as some of the other candidates, but that’s damning with faint praise.

Here’s a simple way of thinking about Social Security. First, are people actually connected to reality? Do they understand math and demographics? If yes, they’re on the rational (left) side of this 2×2 matrix.

But even if people are rational and recognize there’s a problem, do they support the right type of reform (top half), which is personal retirement accounts?

As you can see, Bloomberg used to be in the bottom-left quadrant, which is bad but rational. Now he’s in the bottom-right quadrant, which is bad and irrational.

A politician who is good and rational will be in top-left quadrant.

P.S. Social Security technically isn’t a Ponzi scheme. That’s because people have the freedom to reject a con artist peddling a pyramid scam. With Social Security, by contrast, participants are legally required to be part of the scheme.

P.P.S. The logical assumption is that the top-right quadrant is empty other than a question mark. After all, any politicians who supports good policy presumably would also recognize there’s a problem. That being said, Trump could be the exception. He doesn’t think we have an entitlement problem, so he obviously belongs on the right side of the matrix. But if he decided to support individual accounts (Trump is very inconsistent on policy, but that does mean he is good on some issues), he could replace the question mark.

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Image credit: DonkeyHotey | CC BY 2.0.

Loan Interest Cap Threatens Credit Access for Millions of Americans

Fri, 02/28/2020 - 12:52pm

Originally published by Townhall on February 27, 2020.

Congress is taking aim at short-term loans. The Veterans and Consumers Fair Credit Act (H.R. 5050) would set a federal cap on loan interest rates. The intention is to protect consumers, but capping interest rates would have the opposite effect, doing the most harm to those with the least financial means.

Proponents cite high annual percentage rates (APR) on small-dollar loans to argue that lenders are taking advantage of desperate borrowers. One problem with this argument is that an annual rate is a poor metric by which to judge a loan with a two-week term. For example, the 36 percent APR cap proposed by H.R. 5050 would mean a charge of only $1.38 on a $100 loan over two weeks. That doesn’t come close to covering the fixed cost of running of a business, especially one in an industry so heavily regulated as financial services, nor provide sufficient compensation to justify serving those at highest risk of default.

Whenever politicians pick an arbitrary limitation on market prices, the expected response can be anticipated by first imagining the most extreme limitation. What would happen, in other words, if no interest could be charged for a loan? Quite simply, there would be no lending. A slightly less onerous limitation, such as a 5 percent cap would see some lending but only in large dollar amounts and to the most credit-worthy individuals.

The pattern should be easy to see: the lower the cap, the fewer borrowers that will be served. The corollary is that allowing market prices to work ensures the maximum number is served.

A study by Thomas Durkin and Gregory Elliehausen of the Federal Reserve Board and Min Hwang of George Washington University found that a 36 percent APR cap would require loans of at least $2,600 for lenders to break even. Since lenders aren’t in the business of losing money, this effectively bans loans of less than $2,600 and forces those who need smaller loans to choose from less desirable options.

Basically, the proposed cap won’t affect most borrows who are able to secure conventional loans. For those without easy access to credit, however, like the over 8 million households found to be unbanked in a 2017 survey by the Federal Deposit Insurance Corporation, it will mean nowhere to turn other than black market loan sharks or relying on family and friends.

There’s more than just theory telling us to expect this result.

When Chile lowered its rate cap on small, unsecured loans from 56 to 36 percent in 2013, it allowed researchers to study the impact on consumer welfare. J. Cuesta and A. Sepulveda found that 16 percent of borrowers benefited a very small amount, but 82 percent were harmed to a much greater degree through loss of credit access.

Similarly, a study by Carlos Madeira at the Central Bank of Chile found an estimated 9.7 percent of households were excluded from bank credit, with the strongest impact on the youngest, least educated and poorest families. Many other studies report similar findings.

Politicians often make the mistake of assuming that poor people necessarily make bad financial decisions. Instead, more often than not, they are simply choosing the least bad option available. The way to improve their situation is not to take away that option, no matter how unsavory it may seem to those privileged with better alternatives, but to find ways to expand the range of choices available to the poor.

In the financial industry, that might mean revisiting government regulations that make the cost of doing business excessively high. Unfortunately, that’s not as politically easy as singling out one industry as the bad guy and promising to protect consumers from their unsavory ways. The poor don’t need that kind of “protection” from their own choices, especially when it will leave them unquestionably worse off.

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Image credit: QuoteInspector.com | CC BY-ND 2.0.

Instead of Stabilizing National Finances, Tax Increases Would Hasten America’s Budgetary Decline

Fri, 02/28/2020 - 12:05pm

This CF&P video is nearly 10 years old, so some of the numbers are outdated, but the seven reasons to reject tax increases are still very relevant.

I’m recycling the video because the battle over tax increases is becoming more heated.

Indeed, depending on what happens in November, we may be fighting against major tax-hike proposals in less than one year.

Every single candidate seeking the Democratic nomination (such as Joe BidenBernie SandersElizabeth WarrenMichael BloombergPete Buttigieg, etc) wants Washington to have much more of our money.

And there are plenty of cheerleaders for a bigger welfare state who favor this outcome. Some of them urge class-warfare tax increases. Other admit that lower-income and middle-class people will need to be pillaged to finance bigger government.

The one unifying principle on the left, as illustrated by this column for The Week by Paul Waldman, is the belief that Americans are under-taxed.

…as an American, when it comes to taxes you’ve got it easy. …we pay much lower taxes than most of our peer countries. In the United States, our tax-to-GDP ratio is about 26 percent, far below the 34 percent average of the advanced economies in the Organisation for Economic Co-operation and Development (OECD), and drastically less than some European countries (Denmark tops the list at 46 percent). …We have chosen — whether we did it consciously or not — to create a system that makes it easier for a small number of people to get super-rich, but also makes life more cruel and difficult for everyone else. …We could all pay more, and in return get more from government than we’re getting now. We just have to decide to do it.

This is a very weak argument since a cursory investigation quickly reveals that Americans have much higher living standards than people in other developed nations.

That’s a good thing, not a “cruel and difficult” consequence, though I’m not surprised that folks on the left are impervious to real-world evidence.

However, I am surprised when otherwise sensible people throw in the towel and say it’s time to surrender on the issue of taxes.

The latest example is James Capretta of the American Enterprise Institute.

Here’s some of what he wrote on the topic.

…the GOP commitment, implied and explicit at the same time, to never, ever support a net tax increase, under any circumstance, is making sensible lawmaking far more difficult than it should be. It’s time to break free of this counterproductive constraint. …The no tax hike position got its start in the 1986 tax reform effort. Several business and policy advocacy organizations began asking members of the House and Senate, as well as candidates for seats in those chambers, to sign a pledge opposing a net increase in income tax rates. …The pledge became politically salient in 1992, when then President George H.W. Bush lost his bid for reelection. His loss is widely assumed to have been caused, at least in part, by his acceptance of a large tax hike…after having pledged never to increase taxes… Retaining the GOP’s absolutist position on taxes might be defensible if the party were advancing an agenda that demonstrated it could govern responsibly without new revenue. Unfortunately, Republicans have proved beyond all doubt that they have no such agenda. In fact, the party has gladly gone along with successive bipartisan deals that increased federal spending by hundreds of billions.

For what it’s worth, I don’t think Jim is theoretically wrong.

Heck, even I offered up three scenarios where a tax increase could be an acceptable price in order to achieve much-needed spending reforms. And I’ll even add a fourth scenario by admitting that I would trade a modest tax increase for a Swiss-style spending cap.

But every one of my options is a meaningless fantasy.

In the real world, those acceptable scenarios are not part of the discussion. Instead, two very bad things inevitably happen when tax increases are on the table.

  1. The automatic default assumption is that tax increases should be 50 percent of any budget deal. That’s bad news, but the worse news is that the other 50 percent of the budget deal isn’t even genuine spending cuts. Instead, all we get is reductions (often illusory or transitory) in previously planned increases. The net result is bigger government (and it’s even worse in Europe!). This is why every budget deal in recent history has backfired – except the one that cut taxes in 1997.
  2. Budget deals result in the worst types of tax increases for the simple reason that budget deals get judged by their impact on “distribution tables.” And since the make-believe spending cuts ostensibly will reduce benefits for lower-income and middle-class people, the crowd in Washington demands that the tax increases should target investors, entrepreneurs, business owners, and others with above-average incomes. Yet these are the tax hikes that disproportionately hinder growth.

The bottom line is that tax increases should be a no-go zone. If Washington gets more of our money, that will “feed the beast.”

At the risk of under-statement, Grover Norquist’s no-tax-hike pledge is good policy (and good politics for the GOP). Americans for Tax Reform should double down in its opposition to tax increases.

P.S. There’s great wisdom on tax policy from these four presidents.

If the “Cost of Thriving” Is Going Up, It’s Because Government Is Getting Bigger

Thu, 02/27/2020 - 12:56pm

The most obvious threat to free enterprise is Bernie Sanders, though other prominent leftists are giving “Crazy Bernie” plenty of competition.

But I sometimes wonder whether the more tangible threat to capitalism comes from self-described conservatives who say they support markets but embrace trendy ideas that would expand the size and scope of the federal government.

The people who gravitate to these ideas inevitably argue that a Reagan-style agenda of free markets and limited government is somehow inadequate.

They even make the laughable claim that the Republican Party in recent decades has been dominated by libertarian economic thinking. I’m not joking.

And they come up with creative justifications for bad ideas.

For instance, Oren Cass has concocted a “cost of thriving index” that purports to show ever-increasing economic pressure on families.

Cost-of-Thriving Index (COTI): the number of weeks of the median male wage required to pay for rent on a three-bedroom house at the 40th percentile of a local market’s prices, a family health insurance premium, a semester of public college, and the operation of a vehicle. …The COTI shows a declining capacity of a worker to meet the major costs of a typical middle-class household. As the COTI basket has become unaffordable, families have found workarounds, like having more household members work more hours, making do without, borrowing, and relying on government support. Each of these comes with its own costs, undermines the stability of families and the rationale for their formation, and creates high levels of stress and uncertainty. …The U.S. economy of recent decades has eroded, rather than reinforced, the American model of thriving, self-sufficient fami­lies.

Here’s his COTI graph, which supposedly shows that a breadwinner would have to work 53 weeks per year to buy what was easily affordable back in 1985.

A number of experts have identified serious methodological problems with his work (see Scott WinshipMark PerryRobert VerbruggenStan VeugerMatt YglesiasDon Boudreaux, and Andrew Biggs).

I want to make a different point. So I’m going to ignore all the problems that exist with the methodology and data, and I’m going to assume – for the sake of argument – that Cass’ chart is accurate.

And the reason I’m willing to make that heroic assumption is that Cass inadvertently shows why bigger government and more intervention is a bad idea.

Here are the numbers he used to create his chart.

If you examine what’s happened with the different categories, you’ll quickly notice that almost all the increase in his index is the result of ever-high costs for health care and college.

Yet those are precisely the areas where there the role of government has increased.

More specifically, we have a massive third-party-payer problem with health care caused by MedicareMedicaid, and the tax code’s healthcare exclusion.

And we have a massive third-party-payer problem in higher education thanks to a big expansion of loans, grants, and other subsidies.

In both cases, providers have responded to government intervention with higher prices and massive inefficiency.

The bottom line is that the chart should be modified to show the harmful impact of government.

The challenge for Cass is to somehow explain why more government is a good idea when his own numbers show that we’re getting bad results in the sectors where we already have lots of government.

Maybe, just maybe, there’s a lesson to be learned. Or a principle that should be applied.

P.S. Or we could just listen to Ronald Reagan (see 2nd and 8th videos).

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Image credit: BrendelSignature | CC BY-SA 3.0.

Perverse Love for Cuba from Bernie Sanders

Wed, 02/26/2020 - 12:43pm

Last week, I shared a 24-question quiz that ostensibly determines whether you’re a communist.

Though it might be just as accurate to ask one simple question: Do you have warm feelings about the Marxist dictatorship in Cuba?

On that basis, Bernie Sanders fails.

At best, he’s an ignorant dupe and apologist. At worst, he’s a true believer.

Regardless, his views are wrong and easy to debunk.

Writing in the Washington Post, Francisco Toro opines about Bernie Sanders and Cuba.

…you can begin to glimpse the enormous concern Venezuelans and Cubans feel when we hear Bernie Sanders praise Fidel Castro’s education system. …Cuba’s overall educational performance is middling for the region: roughly similar to that of many other Latin American countries… There was never any need to build a police state to bring people to school — an insight so obvious, it’s ludicrous to even have to write it. …To Cubans and Venezuelans — who have witnessed much the same kind of propaganda — talk of Cuban educational prowess grates not because it’s wrong, exactly, but because it serves as a simple way to identify who’s ready to be duped by regime apologists. …When Sanders parrots Fidel’s propaganda, he fails the test.

What’s especially grating is that the propaganda is either false or misleading.

Marian Tupy and Chelsea Follett summarize just a few of the problems with fawning claims about Cuba’s performance.

…in a recent 60 Minutes interview on CBS. Senator Sanders applauded Cuba’s education and healthcare system. Potential Sanders supporters should know that Cuba’s literacy rate and healthcare system are nothing to lionize. First, consider literacy. …Cuba’s literacy rate rose by 26 percent between 1950/53 and 2000. But literacy rose even more, by 37 percent, in Paraguay. Food consumption in Cuba actually declined by 12 percent between 1954/57 and 1995/97. It rose by 19 percent in Chile and by 28 percent in Mexico over the same time period. …Next, consider healthcare. Sanders has repeatedly extolled Cuba’s healthcare system… Life expectancy is the best proxy measure of health. According to Cuba’s official data, it rose by 25 percent between 1960 and 2017. Yet life expectancy increased even faster in comparable countries: in Mexico it improved by 35 percent, in the Dominican Republic by 43 percent, and in impoverished Haiti by 51 percent.

For what it’s worth, President Obama’s favorable comments about Cuban health care also were embarrassingly inaccurate.

The bottom line is that Cuba performs poorly when looking at education, health, nutrition, and other variables.

But none of that should be a surprise since poor countries generally can’t afford good things or deliver good outcomes.

And the lesson we should learn is that Cuba is poor because government is far too big. Simply stated, the absence of capitalism has been a recipe for misery.

The most shocking statistic is that living standards in Cuba and Hong Kong were very similar when Castro first imposed his version of Marxist socialism.

Yet now there’s a giant gap, with people in Hong Kong enjoying unimaginable prosperity compared to the impoverished residents of Cuba.

Let’s close with two additional items. First, here’s a video from four guys who traveled to Cuba for an up-close view of socialism.

And if you liked that video, here’s another first-hand account of the (nonexistent) glories of Cuban socialism.

Our final item is this look at a street, both as it looked before communism and how it looks today.

The lesson, of course, is similar to the one that we get when examining North Korea from outer space. Communism simply doesn’t work.

P.S. On the topic of silly propaganda, Jeffrey Sachs actually rates Cuba above the United States for meeting development goals, and Cuba also was placed above the United States by a radical environmental group.

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Image credit: Max Pixel | CC0 Public Domain.

More Red Tape = More Corruption

Tue, 02/25/2020 - 12:34pm

Back in 2014, I shared a World Bank study that measured how tax complexity facilitates more corruption by government officials.

Not that anyone should have been surprised. Complex tax codes enable politicians to extort bribes when writing the law (a problem that definitely exists in Washington) and they makes it possible for bureaucrats to extort bribes when administering the system.

Now the World Bank has a new study showing how a larger regulatory burden enables and facilitates corruption.

The two authors, Mohammad Amin and Yew Chong Soh, wanted to use better types of data to get an accurate assessment of the problem.

Business regulations often create opportunities for public officials to collect bribes… If true, this simple insight provides a practical and powerful way for deregulation to combat corruption and its many harmful effects on the economy. …Regulation is often measured by laws on the books rather than the actual regulatory burden on the firms even though it is the latter that is the primary determinant of corruption… The present paper attempts to fill this gap in the literature by using firm-level survey data on the actual corruption and regulatory burden experienced by the firms. …the public choice theory, stresses that regulation is intended to create rents to be distributed between the industry incumbents and the corrupt public officials. In some cases, the main beneficiary of regulation is the industry (regulatory capture view) while in others, it is the politicians and public officials (tollbooth view). …The present paper contributes to the…literature in several ways. …most previous studies have used perceived corruption indices…we depart from the literature by using firms’ experience with corruption instead. … for regulation, we use the actual regulatory burden experienced by the firms rather than rules on the books. This is an important departure from the literature.

For those not familiar with the term, “public choice” refers to research on the self-interested behavior of people in government.

Anyhow, prior research already showed that red tape gave politicians and bureaucrats the ability to extort money from the private economy.

…several studies analyze the possible effects of regulation on corruption. Using macro-level data for a cross-section of 85 countries in 1999, Djankov et al. (2002) look at the relationship between entry regulations and the level of corruption. …Consistent with the tollbooth view, the study finds strong evidence of higher corruption associated with heavier regulation of businesses. Using data from three worldwide firm surveys, Kaufmann and Wei (2000) confirm that when bribe-extracting bureaucrats can endogenously choose regulatory burden and delay, the effective (not just nominal) red tape and bribery can be positively correlated across firms.

The results in the new World Bank study build on the earlier research and confirm (as I noted in a video more than 10 years ago) more power for government means more corruption by government.

Our results show a large positive impact of the regulatory burden on the level of overall corruption as well as petty corruption. For the baseline specification, the overall bribery rate (bribes as percentage of firms’ annual sales) rises by about 0.03 percentage point for each percentage point increase in the regulatory burden. …The results show that irrespective of the set of controls, there is a large positive relationship between Overall Corruption and Time Tax… That is, for each percentage point increase in the regulatory burden, the overall bribe rate increases by 0.028 percentage point. Alternatively, an increase in regulatory burden from its minimum to maximum level leads to 2.8 percentage points increase in the level of overall corruption. This is a large increase given that the mean level of overall corruption equals about 1.1 percent.

By the way, “time tax” is defined as “the average of the percentage of senior management’s time spent in dealing with business regulations”

Here’s a graphic from the study for those of you who like digging into the empirical details.

P.S. The World Bank also released a study last year showing how more regulation reduces business productivity. Needless to say, that ultimately translates into lower wages for workers.

P.P.S. I’ve been asked why the World Bank seems friendlier to good policy than either the International Monetary Fund or Organization for Economic Cooperation and Development. I point out that it’s not uncommon to see quality work from the professional economists at all international bureaucracies, even the IMF and OECD. But the World Bank seems to have a higher percentage of quality research. My guess it that this is a result of its focus on poverty alleviation.

The Gun Control IQ Test, Part II

Mon, 02/24/2020 - 12:17pm

Back in 2012, I asked readers to pretend they were criminals and to contemplate whether they would want to rob a house with armed residents.

This “IQ test” was designed to help people understand that cost-benefit analysis applies to all types of human behavior, including criminality. Some criminals are smart and some criminals are stupid, but all of them want to get the most benefit at the lowest cost.

And, at the risk of understatement, the possibility of getting shot is definitely a potential cost.

But don’t take my word for it. A Colorado TV station has a very revealing story about burglars engaging in cost-benefit analysis.

In the dead of night, when no one is awake — that’s when it’s most likely that a burglar will break into your home. It usually happens in minutes, but of all the house on the block, the thieves picked yours. What about your house made it a target? Two El Paso County jail inmates are spilling their secrets. They are two men behinds dozens of break-ins back in 2011. …Their opportunities came in the form of doors left unlocked, garage doors never closed and patio screens unlatched… When asked, what in a home will make you turn away? …They say any indication on your home or vehicles that you could fight back could keep them away. Inmate #2 explains, “If it’s something that says you’re Republican, you’re not going to get hit because Republicans like their 2nd Amendment rights. They love carrying guns. I’m not going to mess with that guy.” …”I don’t know if you’re in there with a shotgun waiting for me. We’re literally terrified,” Inmate #1 says.

Here’s a screenshot from the interview.

The obvious takeaway is that criminals prefer unarmed victims (as do dictatorsterroristsmass shooters, etc).

This is common sense, which is why some folks on the left have had epiphanies on the issue of guns.

It also may explain why a strong majority of Americans agreed that gun ownership promotes safety.

Nearly six in 10 Americans say that gun ownership increases safety…58 percent agree with the statement that gun ownership does more to increase safety by allowing law-abiding citizens to protect themselves. …These findings represent a reversal from 1999, when a majority — 52 percent — said gun ownership reduces safety. And they come at a time when 47 percent of American adults say they have a firearm in the household, up from 44 percent in 1999.

There was a very recent episode in Texas that underscores why it’s important for good people to possess weapons.

New Texas gun laws made it possible for a security team at the West Freeway Church of Christ in White Settlement to act quickly and save countless lives of worshipers on Sunday, some lawmakers said. A gunman killed two people before a member of the congregation’s security team fatally shot him. “…we have taken a number of steps to help make sure that our places of worship — which should be a refuge from evils of the world — are safe for all who attend,” Lt. Gov. Dan Patrick said… State Sen. Donna Campbell…said the new law worked. “This is clearly why it was passed,” she said. “Evil is out there. But it’s not the gun. It’s the person who has control of the gun.” …State Rep. Matt Krause, R-Fort Worth, echoed the sentiment. …“The Texas Legislature understood there were some weaknesses in the laws preventing law abiding Texans from protecting themselves,” Krause said. “I think we saw the benefits of those recent laws taking effect.”

The gunman presumably thought the church was filled with unarmed victims.

Thankfully, that wasn’t the case. And this will send a signal to other lunatics. At least in Texas.

An entire town in Georgia is sending a message to bad guys about potentially very high costs.

An unconventional welcome sign greets visitors….addressing would-be criminals and warning them not to cross the locals.“Welcome to Harris County, Georgia,” it reads, sarcastically adding: “Our citizens have concealed weapons. If you kill someone, we might kill you back. We have ONE jail and 356 cemeteries. Enjoy your stay! -Sheriff Mike Jolley.” The sheriff said it’s his saucy way of welcoming people to his county while…warning them that a number of the citizens exercise their right to bear arms. …Jolley said over that the past several years, concealed weapon permits in Harris County have tripled. …Jolley said he is giving out-of-towners fair notice about what they can expect.

Crooks presumably realize that there are some unarmed homes in Harris County, notwithstanding the sign, but this message may influence their cost-benefit analyses.

The bottom line is that there are bad people in the world and gun-free zones (whether in public areas or private homes) tilt the playing field in favor of those bad people.

Which is why the idea is so ripe for satire (also see here and here).

P.S. Speaking of satire, this comparison of Chicago and Houston is entertaining.

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Image credit: Ratha Grimes | CC BY 2.0.

Because Trump’s Winning on the Economy, He’s “Losing” on the Trade Deficit

Sun, 02/23/2020 - 12:12pm

Early last year, I shared a video explaining that trade deficits generally don’t matter. I even suggested trade deficits might be a sign of economic strength because foreigners who earned dollars were anxious to invest them in the American economy.

I’m recycling this video to make a point about trade and the economy for both Trump supporters and Trump critics.

For Trump supporters, I want them to understand that the trade deficit has increased under his policies. The data from the latest Commerce Department report show that the yearly trade deficit has increased from about $500 billion at the end of the Obama years to a bit over $600 billion during the Trump years.

And the reason I’m making this point is that I want Trump supporters to realize that they shouldn’t be upset about trade balances. Indeed, they should be happy because there’s a strong argument that the trade deficit is increasing in large part because Trump’s pro-growth tax reform and regulatory reform and making America more attractive for foreign investors.

For Trump critics, I want them to understand the same point, though from a different perspective. Many of them have been (correctly) critical of Trump’s protectionism. And they’ve been happy to point out that his taxes on foreign goods haven’t reduced the trade deficit.

But I would like them to contemplate why the economy has continued to grow. Hopefully, they will realize that pro-market policies in other areas are offsetting the damage of protectionism and therefore be more supportive of capitalism.

The Wall Street Journal opined on this topic last year.

President Trump can take a bow that his tax reform and deregulation are working as intended. …The trade deficit grew… This is not bad economic news. Imports grew faster than exports as the U.S. economy accelerated and much of the world slowed. The dollar grew stronger as capital flowed into the U.S., and the trade deficit grew to offset the larger capital inflows as it must by definition under the national income accounts. …a larger trade deficit is a benign byproduct of a healthier American economy. Supply-side policies revived animal spirits and gave the economy a second wind. …The best way to respond to a trade deficit is to ignore it.

From a left-of-center perspective, Fareed Zakaria made the same point in a recent column for the Washington Post.

Trump campaigned relentlessly on the notion that America’s economy was being ruined by large trade deficits. …He promised on the campaign trail in June 2016, “You will see a drop like you’ve never seen before.”In reality, the trade deficit has risen substantially under Trump. …when the United States has grown robustly, its trade deficit has tended to rise. If you want to achieve a sharp decline in the trade deficit, it’s easy — just trigger a recession. …while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). …The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, “the trade deficit should be something to brag about rather than denounce.” …Trump’s trade policy has been an enormously costly exercise, forcing Americans to pay tens of billions in taxes on imported goods, then using tens of billions of dollars in taxpayer funds to compensate farmers for lost income (because of retaliatory tariffs)… All to solve a problem that isn’t really a problem.

Veronique de Rugy of the Mercatus Center, writing for Reason, summarizes the issue.

President Donald Trump hates the trade deficit. …If elected, he promised, he would “end our chronic trade deficits.” …free traders…explained, a country’s trade balance is determined overwhelmingly by factors such as the U.S dollar serving as a reserve currency, the ratio of savings to investment opportunities at home and abroad, and the relative attractiveness of that country’s investment climate. As long as the United States is growing and remains an attractive place to invest, we Americans will continue to run trade deficits with the rest of the world. …They want these dollars, in part, to buy American exports. …More important, and often overlooked: Foreigners want dollars also to invest in America’s powerful economy. …the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as “job-generating foreign investment surpluses for a better America.” It is thus no surprise that as the American economy grew, the trade deficit also grew.

I’ll close with a chart that’s in the video because it reinforces the three columns cited above.

As you can see, the link between the trade deficit and an investment surplus isn’t just a theoretical construct. It’s an accounting identity.

The bottom line is that people on both sides of the political debate should ignore the trade deficit and instead focus on the tried-and-true recipe for generating prosperity.

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

How Radical Is Bernie Sanders?

Fri, 02/21/2020 - 12:59pm

Because of his extremist views, I often refer to Senator Sanders as “Crazy Bernie.”

You can argue I’m being unfair. After all, I pointed out during the last campaign that his voting record in the Senate was almost identical to the voting records of Hillary Clinton and Barack Obama (his vote rating also was similar to supposed moderate Joe Biden when he was a Senator).

But that doesn’t necessarily mean they think the same or have the same agenda. As the cartoon illustrates, Bernie wants to travel at a faster rate in the wrong direction.

And it’s quite likely that he wants to travel farther in the wrong direction. And he may even want to get to a very unpleasant destination.

You don’t have to believe me. You can simply listen to what Bernie Sanders has said, in this video narrated by Maxim Lott.

And if that’s not enough, here’s a video from Reason that has more of Crazy Bernie’s extremist statements.

So what should we think when we examine Bernie’s past statements, review his voting record in Congress, and also analyze his current platform?

Is he a radical? Crazy? A Marxist? A democratic socialist? A socialist democrat? Some combination of all those options?

We obviously have no way of knowing what his real motives and thoughts are, but James Pethokoukis of the America Enterprise Institute speculates whether Sanders has learned anything.

What lessons have the events of the last half century taught Bernie Sanders? …He’s certainly seen a lot that would seem to have direct bearing on his ideology, especially the collapse of the Soviet Union… Was he “very distressed” at the failure of the centrally planned Soviet economy? He certainly should have been, but only offers a condemnation of the authoritarian political system. …No wonder he’d rather talk about Scandinavia as his socialist success story. Those tiny economies score well on just about every economic metric. But there’s more to them than universal healthcare and generous paid leave. The Nordic model, according to a recent JPMorgan report, “entails a lot of capitalism and pro-business policies…” That’s stuff antithetical to the Sanders democratic socialist agenda. Indeed, the report concludes, “A real-life proof of concept for a successful democratic socialist society, like the Lost City of Atlantis, has yet to be found.”

For what it’s worth, Ryan Bourne points out that his agenda is more extreme than Jeremy Corbyn’s (which is not an easy task).

…some commentators are downplaying his socialist credentials, painting the veteran Senator as no more than a moderate social democrat. …To simply label him a socialist, without any caveats, is misleading. But it’s even more grossly misleading to suggest his “democratic socialist” ambitions stop at a Scandinavian-style welfare state. More redistribution is central to his agenda, sure, but he also proposes massive new market interventions, including the Green New Deal, a federal jobs guarantee, expansive price and wage controls… Sanders’ platform goes far beyond any modern social democracy in terms of government size and scope. Indeed, his policies can only be considered moderate if some three-way lovechild of the economics of 1970s Sweden, Argentina, and Yugoslavia’s market socialism is the baseline. …compare Labour’s 2019 manifesto against the Sanders’ economic platform. Doing so makes clear that Bernie is more radical than Corbyn on economics, both in absolute terms and relative to their countries’ respective politics. …Combined with national insurance, Labour’s top marginal income tax rate would have been 52%. Sanders’ top federal income taxrate alone would be 52%, bringing a top combined top rate of around 80% once state and payroll taxes are considered. Sanders wants a new wealth tax too, another option Labour shirked. …where there are differences, it’s because Sanders is offering the more radical leftwing policies. He and Labour both proposed big minimum wage rises, national rent control, mandated employee ownership, and workers on boards, for example. But where Labour proposed 10% worker ownership stakes in large companies, Sanders would mandate 20%… on the role of government, the declared economic platforms are instructive. Call it “democratic socialism,” or just plain old “interventionism,” Bernie Sanders is, in many respects, putting a more radical interventionist offer to the electorate than Jeremy Corbyn did.

Interestingly, social democrats from Nordic nations think Bernie Sanders is too far to the left.

Johan Hassel, the international secretary for Sweden’s ruling Social Democrats, visited Iowa before the caucuses, and he wasn’t impressed with America’s standard bearer for democratic socialism, Sen. Bernie Sanders (I-Vt.). “We were at a Sanders event, and it was like being at a Left Party meeting,” he told Sweden’s Svenska Dagbladet newspaper… “It was a mixture of very young people and old Marxists, who think they were right all along. There were no ordinary people there, simply.” …Lars Løkke Rasmussen, then the prime minister of Denmark, made a similar point in a speech at Harvard in 2015, when Sanders was gaining national attention. “I know that some people in the U.S. associate the Nordic model with some sort of socialism,” he said. “Denmark is far from a socialist planned economy. Denmark is a market economy”.

Giancarlo Sopo, opining for the Washington Examiner, worries that Sanders actually is an unrepentant Marxist.

Sanders is not the nice, Nordic-style “democratic socialist” he claims to be. At his core, Sanders is almost certainly an all-out Marxist. …The man has no business being anywhere near the Oval Office — not even on a guided tour. …Sanders has been an unabashed apologist for communism, an evil ideology with a body count of 100 million people dead in its wake. …While people such as my grandfather were languishing as political prisoners in Cuba, Sanders said that he was so “excited” about the island’s communist revolution that watching JFK get tough on Fidel Castro made him want to “puke.” …The 78-year-old presidential candidate even honeymooned in the Soviet Union and came back full of praise for it. Some may not grasp how bizarre this was during the Cold War… Sanders’s platform, which openly calls for nationalizing major industries such as higher education, healthcare, and even the internet, falls well outside the mainstream of U.S. politics and more closely resembles the central planning committees in Cuba and Venezuela.

Last but not least, in a column for the Wall Street Journal, Elliot Kaufman compares Sanders’ radical past with his modern rhetoric.

Campaigning for U.S. Senate in 1971, he demanded the nationalization of utilities. In 1973 he proposed a federal takeover of “the entire energy industry,” and in 1974 he wanted a 100% tax on all income above $1 million. In 1976 he asserted that workers needed to “take immediate control of the economy if we are to survive” and called for “public ownership of utilities, banks and major industries.” He had a plan for “public control over capital.” As late as 1987 he asserted that “democracy means public ownership of the major means of production.” …He had also begun a dalliance with the Socialist Workers Party, a communist group that had followed Leon Trotsky. Mr. Sanders endorsed the SWP’s presidential nominee in 1980 and 1984, spoke at SWP campaign rallies during that period, and in 1980 was part of its slate of would-be presidential electors. …After three decades in Congress, he has settled on a populist vision that fits in on the Democratic left. In a major speech last June elaborating his idea of socialism, he cast himself in the tradition of Franklin D. Roosevelt… He enumerated a series of positive rights—to “quality health care,” “as much education as one needs,” “a good job that pays a living wage,” “affordable housing,”… But he said nothing about state control over the means of production or Fidel Castro’s revolution.

So who’s the real Bernie Sanders?

I have no idea whether he still wants government ownership and control of the means of production (i.e., pure socialism with state-run factories, collective farms, etc). I also don’t know whether his past support for awful Marxist dictatorships meant he actually was a Marxist.

But I can confidently state that his current policy agenda is nuts.

A few years ago, I created a three-pronged spectrum in an attempt to illustrate the various strains of leftism.

I’ve decided to create a more up-to-date version. It shows that the Nordic nations are part of the rational left. A bit further to the left are conventional leftists such Joe Biden, Hillary Clinton, and then Barack Obama.

At that point, there’s a divergence, with Hitler and Stalin representing totalitarian socialism at the top and pure socialists (such as the U.K.’s Clement Attlee, who nationalized industries and sectors after World War II) at the bottom.

Without knowing what he truly thinks, I’ve put Bernie Sanders in a middle category for “Crazies.”

I suspect he has sympathies for the two other strains of leftism, but the real-world impact of his policies is that America would become an even-worse version of Greece (though hopefully not as bad as Venezuela).

P.S. Given that he’s now the leading candidate to win the Democratic Party’s nomination, and given that he’s ahead in some national polls, I’m very thankful that America’s Founders bequeathed to us a system based on separation of powers. If Sanders somehow makes it to the White House, he’ll have a very difficult time pushing through the radical parts of his agenda. Yes, it’s true that recent presidents (both Obama and Trump) have sought to expand a president’s power to unilaterally change policy, but I feel confident that even John Roberts and the rest of the Supreme Court would intervene to prevent unilateral tax increases and nationalizations.

P.P.S. More than 10 years ago, I speculated that America’s separation-of-powers system would save the country from Obamacare and cap-and-trade. I was half right.

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

The VAT Anchor on Japan’s Economy

Thu, 02/20/2020 - 12:52pm

Back in 2012, I warned that the value-added tax (a hidden version of a national sales tax) was enabling bad fiscal policy in Japan, in large part because politicians wouldn’t make much-needed entitlement reforms if they had the option of raising the VAT.

Later that year, I repeated my warning, noting that politicians in Japan were becoming increasingly vocal about grabbing more money.

Unsurprisingly, these warnings had no effect. In 2013, Japan’s politicians announced the VAT would increase the following year.

Did the increase in the tax burden generate any subsequent good results?

Nope. The economy remained stagnant and debt continued to increase.

Needless to say, Japan’s politicians didn’t learn from this mistake. Notwithstanding my warnings in 2018 and 2019, they just increased the VAT yet again.

So how’s that working out for them?

In a column for the Wall Street Journal, Mike Bird discusses the economic impact of the most-recent increase in the value-added tax.

Japan’s economy shrank sharply in the final three months of 2019, logging its second-worst quarter in the past decade. That would be easier to stomach if it weren’t because of a mistake policy makers have now made three times. In October, Japan raised its sales tax to 10% from 8%—and spending tanked. Household consumption fell 11.5% on an annualized basis in the October-December quarter, fueling a 6.3% fall in annualized gross domestic product. Sales-tax increases in 1997 and 2014 likewise knocked the economy off course. The three worst quarters for household consumption in the past quarter-century were those in which sales tax was raised. …the thinking that led to such destructive behavior is bizarrely resilient.

Here’s the accompanying chart, which shows how every increase in the VAT caused a drop in consumption.

For what it’s worth, I don’t find this chart very persuasive.

Yes, consumption drops in the short run when there’s an increase in the VAT, but there doesn’t seem to be any impact on the long-run trend.

Moreover, I don’t think consumer spending is an important variable, at least not in the sense of driving the economy.

But I’m digressing. Let’s get back to Japan’s VAT mistake.

The Wall Street Journal opined on the issue earlier this week.

The third time wasn’t the charm for Tokyo’s long-running attempt to increase its consumption tax. Data released Monday show Japan’s economy contracted in the last three months of 2019 as the tax hike hammered growth—as many warned and like the previous two times the tax has been raised since its 1989 introduction, in 1997 and 2014. …Wage growth is anemic despite a tight labor market, and the Labor Ministry calculates that inflation-adjusted pay fell 3.5% from 2012-2018. The tax rise creates a new and higher squeeze on household incomes. …The usual suspects are now calling for more Keynesian spending on public works and social spending. Three decades of similar blowouts have created the fiscal mess that always becomes justification for more consumption-tax hikes. …It’s too late for Japan to avoid the costs of Mr. Abe’s economic failures. But other governments can learn the lessons that Japan’s leaders refuse to heed.

Unfortunately, other leaders aren’t learning the right lessons.

Especially not in Europe, where politicians have been increasing the VAT with disturbing regularity.

Needless to say, those VAT increases are having the same impact in Europe as they are in Japan – bigger governmentmore debt, and anemic economic performance.

Let’s close by citing three additional sentences from the WSJ editorial.

The fiscal pyromaniacs at the IMF want even further VAT increases in Japan.

The International Monetary Fund thinks the consumption-tax rate will have to rise to 15% over the next decade, and to 20% by 2050. But first the fund’s wizards say Tokyo must expand its Keynesian spending to make the economy “strong” enough to bear the tax hikes to pay for the spending. Got that?

wrote last year about the IMF’s perverse fixation on ever-increasing VAT burdens in Japan, so I’m not surprised that the international bureaucracy is continuing its campaign.

Indeed, this chart shows why the pro-tax crowd at the IMF is in love with the VAT. Simply stated, it’s a very effective money machine for bigger government.

It enables politicians to siphon money from the productive sector of the economy, whether we’re looking at poor nations or rich nations.

By contrast, it’s difficult to generate more revenue from the personal income tax because of the Laffer Curve.

P.S. Some VAT advocates actually claim the levy is good for growth. That’s a nonsensical claim. VATs drive a wedge between pre-tax income and post-tax consumption. What they really mean to say is that VATs don’t do as much damage, on a per-dollar-raised basis, as conventional income taxes (with punitive rates and double taxation).

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Image credit: victorpalmer | Pixabay License.

In a Single Graph, Everything You Need to Know about Third-Party Payer

Mon, 02/17/2020 - 12:21pm

The main problem with America’s health care system is government intervention (MedicareMedicaid, the tax code’s healthcare exclusion, etc).

The main symptom of all that intervention is pervasive “third-party payer,” which is the term for a system where people buy goods and services with other people’s money.

And pervasive is no exaggeration. According to government data, nearly 90 percent of health care expenditures are paid for by someone other than the consumer.

And that means buyers are not sensitive to price. Which means sellers have little incentive to be efficient and keep prices under control.

The net effect is that the free market is not allowed to operate in most parts of the health care system. So it shouldn’t be a surprise that we have ever-rising costs and lots of bureaucracy.

Let’s look at an example.

One of my former colleagues, Michael Cannon, recently wrote about what happened when Obamacare mandated that birth control be covered by insurance (third-party payer) rather than being directly purchased by consumers.

The Affordable Care Act (ACA) dramatically expanded insurance coverage for prescription contraceptives such as “the pill.” From August 2012 through January 2014, the federal government phased in the ACA’s requirement that nearly all private health insurance plans must cover all Food and Drug Administration‐​approved prescription contraceptives with no cost‐​sharing. …As a result of these changes, the share of consumers who are sensitive to the price of contraceptives plummeted. …among women with large‐​employer coverage who use oral contraceptives, “the share experiencing out‐​of‐​pocket spending…declined from 94 percent in 2012 to 11 percent in 2017.” …The ACA’s reshaping of the market for oral contraceptives precisely coincided with a dramatic increase in prices for those items. …As the mandate began to take effect and as the ACA made oral contraceptives seem “free” to more purchasers, prices for hormones and oral contraceptives began to rise. …Once the mandate took full effect, prices began to rise rapidly. From May 2013 through May 2019, while real prices for non‐​prescription drugs and prescription drugs overall rose just 12 percent and 37 percent, respectively, prices for hormones and oral contraceptives rose 108 percent. …these data suggest that trying to make oral contraceptives “free” for insured consumers had the unintended consequence of making them far more expensive.

Here’s the chart, which is a powerful – and depressing – illustration of how government intervention leads to rising prices.

Notice how birth control costs (the orange line) begin to skyrocket as the Obamacare mandate took effect.

Another depressing thing to consider is that consumers get tricked into thinking that birth control is free.

In reality, of course, the higher costs get built in to the price of health insurance, which then means less take-home pay for the people who thought they were benefiting. But since they don’t understand that this is what’s happening, they decide their employers are too greedy or that compensation is stagnant.

Sigh.

Needless to say, the companies selling birth control lobbied to get their product automatically covered. After all, they knew they could raise prices (as shown in the chart) once customers started buying with other people’s money.

P.S. Several years ago, Sandra Fluke got her 15 minutes of fame by asserting that she had a right to third-party-financed birth control. That led to some clever jokes, including this cartoonthese imagesthis cartoon, and this video.

P.P.S. When markets are allowed to operate in healthcare, relative prices fall.

P.P.P.S. Government-created third-party payer is also generating higher costs and needless bureaucracy in higher education.

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Image credit: Pictures of Money | CC BY 2.0.

Michael Bloomberg, Housing Finance, Race, and the 2008 Crisis

Sun, 02/16/2020 - 12:16pm

I have Republican friends who don’t trust Michael Bloomberg because he switched parties and Democratic friends who don’t trust him for the same reason. I tell all of them that it’s more important to focus on his policy agenda rather than his partisan identification.

Though that’s not a happy topic, at least from a libertarian perspective. For instance, I recently criticized his very bad tax plan.

And when he was mayor, I dinged him for his regressive views on the 2nd Amendment and his nanny-state approach to lifestyle choices.

Today, let’s consider his view on housing finance, which has generated controversy since video has surfaced with Bloomberg stating that the financial system got in trouble because anti-redlining policies required banks to make loans to customers in poor neighborhoods.

Other candidates, such as Elizabeth Warren, argue that this makes Bloomberg a supporter of racist practices (with the obvious implication that he might actually be a racist).

I’m reluctant to make such accusations, especially when I tracked down this longer version of the video and discovered that Bloomberg merely listed a bunch of policies that contributed to the housing bubble and financial crisis.

Redlining was the first thing he mentioned, but he also cites the Federal Reserve (dispenser of easy money) and Fannie Mae and Freddie Mac (dispensers of housing subsidies).

In the latter part of his answer, he focused on “securitization,” which is what happens when mortgages are bundled together and sold to investors (as “mortgage-backed securities”).

Much of what he says isn’t controversial.

But I want to point out a sin of omission.

Bloomberg mentioned Fannie Mae and Freddie Mac, but only in passing. This is troubling because these two government-created entities, as explained in this video, deserve much of the blame for both the bubble and the subsequent crisis.

Yes, the Federal Reserve also deserves criticism for flooding the economy with too much liquidity.

But it was the government’s housing intervention, specifically Fannie Mae and Freddie Mac, that channeled much of that excess liquidity into the housing market.

Simply stated, financial institutions were willing to make sloppy loans because they knew those mortgages could be bundled into securities and sold to Fannie Mae and Freddie Mac.

Though many banks were steered into also investing in mortgage-backed securities thanks to other misguided government regulations.

P.S. The wise approach, needless to say, is to shut down Fannie Mae and Freddie Mac as part of an agenda to end government intervention in the housing sector.

P.P.S. Obama was bad on this issue and Trump is bad on this issue, so I won’t be surprised if Bloomberg also is bad on this issue if he gets to the White House.

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Image credit: futureatlas.com | CC BY 2.0.

Capitalism Helps People in Poor Nations, Foreign Aid Helps Politicians in Poor Nations

Sat, 02/15/2020 - 12:44pm

wrote last October about how poor nations that followed the pro-market recipe of the “Washington Consensus” in the 1980s and 1990s got good results. Johan Norberg addresses the same topic in this video.

Sadly, international organizations are infamous nowadays for the bizarre argument that developing nations should try to boost prosperity by imposing higher taxes and bigger government. I’m not joking.

I was even a credentialed participant at a conference on precisely this topic at the United Nations. It was a strange experience to be surrounded by anti-empirical people, but at least I wasn’t threatened with arrest, as happened at an OECD event.

Needless to say, these folks also think it’s a good idea to use foreign aid to finance bigger fiscal burdens in poor nations.

I’ve previously explained why this is a bad idea, at least if we care about achieving more prosperity for people. Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.

Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.

For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.

Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

I’m a fan of “Swiss bank accounts” and “foreign financial havens,” but I want them available for taxpayers, not politicians and government insiders.

Sadly, foreign aid helps the wrong people get rich.

Jose Nino draws the most appropriate conclusion.

In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history.

Some folks may think Jose’s conclusion is too sweeping.

So let’s cite some more scholarly evidence.

Three economists, including one from the World Bank, found that foreign aid undermines democracy.

In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions.

Here’s a graph from the study showing the negative relationship between aid and democracy.

The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.

If we want to help poor people in poor nations, the only practical answer is pro-capitalism policies such as small governmentrule of law, and free trade.

P.S. Bigger government also enables corruption in rich nations.

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Image credit: Oxfam East Africa | CC BY 2.0.

J.B. Pritzker’s Dishonest (and Hypocritical) Campaign against the Illinois Flat Tax

Fri, 02/14/2020 - 12:56pm

The most important referendum in 2019 was the effort to get Colorado voters to eviscerate the Taxpayer Bill of Rights. Fortunately, the people of the Centennial State comfortably rejected the effort to bust the state’s successful spending cap.

The most important referendum in 2020 will ask voters in Illinois whether they want to get rid of the state’s flat tax and give politicians the leeway to arbitrarily impose higher rates on targeted taxpayers.

I’ve written many times about how a flat tax is far less destructive than so-called progressive taxation.

And I’ve also written that Illinois’ flat tax, enshrined in the state constitution, is the only decent feature of an otherwise terrible fiscal system.

So if the politicians convince voters to get rid of the flat tax, it will hasten the state’s economic decline (if you want more information, I strongly recommend perusing the numerous reports prepared by the Illinois Policy Institute).

Today, though, I want to focus on politics rather than economics.

To be more specific, I want to expose how supporters of higher taxes are using disingenuous tactics.

For instance, the state’s governor, J.B. Pritzker, warns that he’ll have to impose big spending cuts if voters don’t approve the referendum.

Gov. J.B. Pritzker said the state’s next budget will be balanced, but said if voters don’t approve a progressive income tax in November, he would have to reduce state spending across the board in future years. …the governor said 15 percent cuts in state spending would be needed across the board. …Illinois’ most recent budget called for spending about $40 billion dollars in state money. The state spends another $40 billion of federal tax money. …Pritzker is set to deliver his budget address on Feb. 19. He said he will propose a balanced budget to begin in July without relying on revenue from the proposed progressive income tax.

For what it’s worth, I actually think it would be good news if the state was forced to reduce the burden of government spending.

But that’s actually not the case.

How do I know Pritzker is lying?

Because his own budget documents project that state revenues (highlighted in red) are going to increase by nearly 2 percent annually under current law.

In other words, he wants a tax increase so he can increase overall spending at an even faster pace.

Of course, his tax increase also will increase the pace of taxpayers fleeing the state, which is why the referendum is actually a form of slow-motion fiscal suicide.

But let’s set that aside and examine another lie. Or, to be more accurate, a delayed lie.

The politicians in Illinois already have approved legislation to impose tax increases on the state’s most successful taxpayers, though the higher rates won’t actually become law until and unless the referendum is approved.

In hopes of bribing voters to approve the referendum, supporters assert that the other 97 percent of state taxpayers will get a cut.

That’s true. Most taxpayers will get a tiny reduction compared to the current 4.95 percent tax rate.

But how long will that last? Especially considering that the state’s long-run fiscal outlook is catastrophically bad?

The bottom line is that approving the referendum is like unlocking all the cars in a crime-ridden neighborhood. The expensive models will be the immediate targets, but it’s just a matter of time before everyone’s vehicle gets hit.

Indeed, this warning has such universal application that I’m going to make it my sixth theorem.

By the way, this theorem also applies when an income tax gets imposed, as happened with the United States in 1913 (and also a lesson that New Jersey residents learned in the 1970s and Connecticut residents learned in the 1990s).

P.S. Here are my other theorems.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.

P.P.S. Pritzker is a hypocrite because he does everything he can to minimize his own tax burden while asking for the power to take more money from everyone else.

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Image credit: The White House | Public Domain.

A 21st-Century Spending Cap Would Have Turned Deficits into Surpluses

Thu, 02/13/2020 - 12:38pm

Back in 2012, when America had a budget deficit above $1 trillion, Investor’s Business Daily opined that America’s fiscal mess could have been avoided if politicians had simply adopted a TABOR-style spending cap starting in 1998.

As illustrated by the accompanying chart, IBD showed how a giant deficit would have become very manageable if politicians simply limited spending so it grew no faster than population plus inflation.

What makes this alternative history so bittersweet is that there are places – such as Switzerland and Hong Kong – that already have successful spending caps that deliver positive results.

Indeed, spending caps have such a good track record that even left-leaning international bureaucracies like the International Monetary Fund and the Organization for Economic Cooperation and Development have acknowledged that they are the most effective fiscal rule.

To understand the benefits of spending caps, especially since we’re now back in an environment of $1 trillion-plus deficits, let’s replicate the IBD exercise.

Here’s a chart showing actual spending (orange line) and revenue (blue line) over the past 20 years, along with what would have happened to spending with a 3-percent cap on annual spending increases (grey line).

The net result is that today’s $1 trillion deficit would be a budget surplus of nearly $500 billion.

More important, the burden of spending today would be much lower, which means more resources being allocated by the productive sector of the economy. And that would mean more jobs and more prosperity.

P.S. While a spending cap is simple and effective, that doesn’t mean it’s easy. Abiding by a cap would force politicians to set priorities, which is a constraint they don’t like. In the long run, complying with a cap also would require some much-need entitlement reform, which also won’t be popular with the interest groups that control Washington.

P.P.S. We would need a spending cap of 1.7 percent to balance the budget over the next 10 years.

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

The Most-Flattering-Ever Tweet about Trump’s Economic Policy

Wed, 02/12/2020 - 12:06pm

pointed out yesterday that Donald Trump has increased domestic spending at a faster rate than Barack Obama, Bill Clinton, or Jimmy Carter.

The day before, I castigated him for proposing a budget that expands the burden of government spending by $2 trillion over the next decade.

And two days before that, I explained that he hasn’t really changed the trend line on jobs.

So it’s safe to say I don’t go out of my way to say nice things.

But I’m also very fair. I don’t hesitate to praise politicians whenever they do good things, or to point out evidence that their policies are having a desirable effect.

And here’s a tweet that suggest Trump has made a positive difference.

This is an amazing shift.

Especially since Trump hasn’t actually fixed the problems that lead some successful people to expatriate.

But he has moved policy in the right direction is some of those areas thanks to the 2017 tax legislation.

His other achievement, which is probably even more important, is that he’s not Hillary Clinton. In other words, we’re not getting the bad tax policies that might have occurred in a Clinton Administration.

So it’s understandable that there’s been a big drop in the number of expatriates. The type of people who might move (the “canaries in the coal mine“) now think things are getting better rather than worse.

By the way, we’re talking about small numbers of people. But they’re often exactly the type of people – entrepreneursinventors, and innovators – that help drive growth.

Which Modern President Is the Biggest Spender?

Tue, 02/11/2020 - 12:51pm

Trump’s new budget was released yesterday and almost every media outlet wrote about supposed multi-trillion dollar spending cuts when, in reality, the President’s budget actually calls for nearly $2 trillion of additional spending over the next 10 years.

The bottom line is that Trump is more akin to a big-government Republican rather than a Reagan-style conservative.

Today, let’s take a look at Table 3.2 of the Historical Tables of the Budget to assess how Trump’s record on spending compares to other modern presidents.

I’ve done this exercise in the past, starting in 2012 and most recently in 2017, but this is the first year we have enough data to include Trump’s performance.

And if we simply look at overall spending numbers (adjusted for inflation, of course), we get the shocking result that Obama increased spending at the slowest rate.

This surprising outcome is due in part to factors such as falling interest rates, a slowdown in military expenditures, and the fiscal impact of the 2010 elections (in other words, gridlock can be beneficial).

Trump, meanwhile, is near the bottom of the list (though not as bad as George W. Bush and LBJ).

What happens, though, if we remove interest payments from the data? After all, those outlays truly are uncontrollable (barring a default) and they mostly reflect spending decisions of prior administrations.

So if we want to judge a president’s fiscal policy, we should look at “primary spending,” which is the term used by budget geeks when looking at non-interest spending.

This measure doesn’t radically alter the results, but some presidents wind up looking better and others fall.

Another way of looking at the numbers is to remove the fiscal impact of bailouts, such as TARP (and also the savings & loan bailouts of the late 1980s).

The reason for this alteration is that the bailouts cause a big spike in spending when they occur, and then cause a drop afterwards because repayments actually are considered “negative spending,” as are the premiums that banks pay each year (I’m not kidding).

So presidents who are in office when the bailouts occur wind up looking worse, even though their policies may not have contributed to the problem. And the presidents who are in office when the repayments occur (remember, those count as negative spending) wind up looking better than they really are.

Here are the adjusted rankings (calculated by subtracting rows 46, 50, and 51 of Table 3.2). As you can see, Obama takes a bit of a tumble and Reagan is now the most fiscally prudent president.

Last but not least, now let’s also remove defense spending so we can see which presidents did the best (and the worst) when it comes to social welfare spending.

This is the most important category for those of us who believe the federal government should get out of the business of income redistribution and social insurance.

Reagan easily tops the list, limiting outlays to 0.5 percent annual growth. The other thing that’s remarkable is that every other Republican was worse than Bill Clinton, Jimmy Carter, and Barack Obama.

For what it’s worth, Trump is the best of the non-Reagan Republicans, though that is damning with very faint praise.

The first President Bush was awful on spending, and Nixon was catastrophically terrible.

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

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