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

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

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

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

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

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

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

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

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

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

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

Earlier today, I answered those questions with three tweets.

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

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

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

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

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

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

Biden Promises Race and Gender-based Prioritization for Economic Relief

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

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

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

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

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

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

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Image credit: Marc Nozell | CC BY 2.0.

The Globe’s Looming Fiscal Crisis

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

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

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

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

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

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

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

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

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

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

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

Here’s a visual from the report.

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

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

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

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

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

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

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

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

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

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

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Image credit: germantown | Pixabay License.

The Lesson We Should Learn from 2020

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

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

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

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

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

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

Amen.

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

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

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

agree.

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

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

agree.

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

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

At the risk of understatement, I agree.

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

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

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

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

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

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

The Most Under-Noticed Development of 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The final sentence is the above excerpt is especially insightful.

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

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

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

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

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Image credit: Masai Mara | CC BY 2.0.

Reckless Keynesian Advice from the OECD

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

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

So what did politicians do?

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

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

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

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

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

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

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

Don’t hold your breath waiting for an answer.

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

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

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

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

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

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

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

Very true.

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

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

Bob Dylan and the Capital Gains Tax

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

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

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

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

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

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

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

At the risk of understatement, I disagree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Suddenly Real Threat of a Higher Corporate Income Tax Rate

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

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

All things considered, not a bad outcome.

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

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

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

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

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

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

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

Here’s the chart included with the article.

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

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

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

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

Which ultimately means lower wages for American workers.

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

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Image credit: geralt | Pixabay License.

Equality, Equity, and Capitalism

Tue, 01/05/2021 - 12:21pm

In an ad during last year’s campaign, Kamala Harris asserted that “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested redistribution.

Here’s an oft-used meme illustrating this argument that fairness is only possible with “equality of outcomes.”

I admit this is a clever image, but only in theory.

If you look at the societies that actually have followed Marx’s dictum of “From each according to his ability, to each according to his needs,” you find misery and destitution (nations such as CubaNorth Korea, and Venezuela today, and countries such as Maoist China and the Soviet Union in the past).

Sort of like this modified meme.

But the above meme only tells part of the story.

Because here’s a look at what capitalism actually delivers.

In other words, there may be inequality in capitalism, but only in the sense that some people get richer faster than other people get richer.

If we mixed the final two memes, we would get something akin to the right side of this image, which shows equal misery under socialism and unequal prosperity under capitalism (hat tip to Winston Churchill).

The bottom line is that if we care about the well being of the less fortunate, the policy goal should be free markets and limited government.

Which was the entire point of my three-part series (herehere, and here) on poverty and inequality.

P.S. Here’s a story from Sweden about what happens when the ideology of equality produces bizarre choices.

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

The Return of Reckless Keynesian Economic Policy

Mon, 01/04/2021 - 12:26pm

Trump was a big spender before coronavirus and he became an even-bigger spender once the pandemic began.

But the White House generally didn’t add insult to injury by citing Keynesian economic theory to justify the president’s profligacy .

Prior to the pandemic, the excuse was that more money was needed for defense and that required (from a political perspective) more money for domestic programs.

And once the coronavirus hit, the excuse was that people and businesses needed to be compensated because of government-mandated lockdowns.

I thought the pre-pandemic excuse was pathetic and I’ve been skeptical of the post-pandemic excuse (why, for instance, are bureaucrats getting checks when their comfy jobs aren’t at risk?).

Well, Trump in on the way out and Biden is on the way in, which means one big spender is being replaced by another.

But there will be one difference, at least stylistically.  Biden will copy Obama by citing Keynesian theory to justify his spending binges.

Which means heartburn from me because I’ve been trying for years to drive a stake through the heart of this free-lunch concept.

But I obviously need to address the issue again.

To begin, Andy Kessler opines about so-called stimulus in his Wall Street Journal column.

…get ready for the “multipliers.” You know, the idea that a government dollar spent magically turns into multiple dollars in the economy. …Expect more multiplier mumbo jumbo as the Biden administration begins its tax-and-spend fiesta. …during the early days of the Obama administration. The financial crisis team…were “carrying around this list of multipliers”… Every dollar spent extending unemployment insurance benefits would, the fairy tale went, boost the economy by $1.64. …every dollar spent on food stamps would spur a $1.73 increase in gross domestic product. …“bang for the buck”—the proverbial free lunch. It’s more like “dud for the dollar” because it didn’t work. It never does. Multipliers are a canard, a Keynesian conceit. …The theory of multipliers is based on the Keynesian view that poorer consumers tend to spend a large amount of increased income, and the rich less so. But multipliers are half a story. Someone has to put up the original money that allegedly gets multiplied, taking it away from the private sector and negating whatever dwindling chain of transactions are hypothesized.

Amen.

Kessler is making many of the same points I made in my 2008 video about Keynesian economics, so I obviously agree.

Since Kessler’s column poked holes in the theory, now let’s look at some new evidence.

Former Senator Phil Gramm has a column on this topic in today’s WSJ, co-authored by Mike Solon.

The main takeaway is that Obama did a Keynesian “stimulus” and the economy suffered a weaker-than-normal recovery.

Between the start of the subprime mortgage crisis and the end of the recession in mid-2009, net new spending of $1.6 trillion was enacted. In 2009, federal spending as a share of gross domestic product surged by an unprecedented 4.2 percentage points to reach 24.4%, the highest level since World War II. Spending was 23.3% of GDP in 2010. …what happened after 2010? …some six months into the Obama administration, the Office of Management and Budget and the Congressional Budget Office both confidently predicted an economic boom, with real GDP growing an average of 3.6% from 2010-13. …Yet…growth from 2010-13 averaged less than 2.1%, half the 4.2% average growth rates in the four-year periods following the previous 10 postwar recessions. The Obama recovery didn’t falter for lack of sustained stimulus; it was shackled from the beginning by his economic program.

I think it’s especially instructive to compare the economy’s weak performance under Obama with the strong recovery we enjoyed under Reagan.

By the way, I think it’s possible to artificially and temporarily boost consumption with so-called stimulus spending, but increasing consumer spending with borrowed money is not the same as boosting national income.

Anyhow, what’s the moral of this story?

Because Mr. Biden’s proposed program is little more than Mr. Obama’s tax, spend and regulate agenda on steroids, and because his appointees are merely grayer retreads of the Obama administration, it is excessively optimistic to believe that his stimulus will do any more good for the economy than Mr. Obama’s did. …How does it end? …it isn’t a question of if government is going to run out of other people’s money, but when.

For what it’s worth, I think the United States could be profligate for decades before we reach some sort of fiscal crisis.

But Gramm and Solon are correct to cite Thatcher’s warning that statists eventually run out of other people’s money.

P.S. My fingers are crossed that Biden is more like Bill Clinton rather than Barack Obama, but I’m not overly hopeful.

P.P.S. We have a very recent example of Paul Krugman being wrong about Keynesian economics.

P.P.P.S. Even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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

Three Economics Risks for 2021 and Beyond

Sun, 01/03/2021 - 12:28pm

In an interview with Fox Business last week, I touched on three policies (easy money from the Fed, Biden’s class-warfare tax agenda, and the ever-increasing burden of federal spending) that create risks for the economy in 2021.

I didn’t have a chance to elaborate in the interview, but it’s worth noting that Biden will inherit two of the aforementioned problems.

Trump has been profligate with our money, and he was that way even before the coronavirus became an excuse to open the budgetary spigot. Moreover, he was just like Obama in pressuring the Federal Reserve for Keynesian-style monetary policy.

Unfortunately, there’s no reason to think Biden will try to reverse those mistakes.

Indeed, he wants expand the burden of federal spending. And, regarding monetary policy, appointing Janet Yellen as Secretary of Treasury certainly suggests he is comfortable with the current approach.

And to make matters worse, he definitely wants a more punitive tax system. We will shortly learn whether Democrats take control of the Senate, which presumably would give Biden more leeway to enact his class-warfare tax agenda.

As I said in the interview, that would create economic headwinds.

P.S. I mentioned in the interview that we have “three Americas” with regards to coronavirus. I’m not sure I was completely clear, so here’s what I was trying to get across.

  1. Tourism-reliant states – They are going to be in bad shape until coronavirus is in the rear-view mirror and people feel comfortable with traveling and socializing.
  2. Lock-down states – They have higher unemployment rates because more businesses are shut down.
  3. Laissez-faire states – These are the states that generally allow businesses to remain open and have lower unemployment rates.

For what it’s worth, I think it’s best to let businesses stay open and to allow them and their customers to assess safety risks. It will be interesting to see whether any link is discovered between state policy and coronavirus rates.

P.P.S. At the risk of over-simplification, bad fiscal policy erodes the economy’s long-run growth rate. Bad monetary policy, by contrast, is what causes economic volatility and downturns.

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Image credit: Biden13 | CC BY 2.0.

Successful Entrepreneurs Make the Rest of Us Richer

Sat, 01/02/2021 - 12:05pm

Back on December 28, I shared four charts for the explicit reason that I wanted everyone to understand that average living standards in the western world have skyrocketed over the past few centuries.

I could have used that data to clear up myths about “robber barons” or “sweatshops,” but I had a more modest goal. I simply wanted to show that it’s possible for all of us to become much richer if we give the economy enough breathing room.

And that means policy makers should focus on growth rather than inequality (especially since the policies to reduce inequality generally lead to less prosperity).

Some pundits don’t grasp that essential point. Christopher Ingraham of the Washington Post groused in a recent column that Jeff Bezos and Elon Musk became much wealthier in 2020.

Billionaires as a class have added about $1 trillion to their total net worth since the pandemic began. And roughly one-fifth of that haul flowed into the pockets of just two men: Jeff Bezos, chief executive of Amazon (and owner of The Washington Post), and Elon Musk of Tesla and SpaceX fame. …the two men increased their net worth by a staggering $200 billion last year, a sum greater than the gross domestic products of 139 countries. …two men amassed enough wealth this year to end all hunger in America (with a price tag of $25 billion, according to one estimate) eight times over… The evident difficulty of getting billionaire wealth to trickle down to everyone else is a challenge for policymakers in our new gilded era.

Notice, specifically, that Mr. Ingraham ponders the “difficulty of getting billionaire wealth to trickle down to everyone else.”

What he apparently does not understand is that the rest of us don’t lose money when people like Bezos and Musk become richer.

Indeed, it’s far more accurate to say that they actually created wealth for the rest of us.

If you don’t believe me, perhaps you’ll be convinced by Professor William Nordhaus of Yale, who authored a seminal study back in 2004 that estimated producers only capture a tiny slice of the wealth they create for society.

The present study examines the importance of Schumpeterian profits in the United States economy. …We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. …Using data from the U.S. nonfarm business section, I estimate that innovators are able to capture about 2.2 percent of the total social surplus from innovation. This number results from a low rate of initial appropriability (estimated to be around 7 percent) along with a high rate of depreciation of Schumpeterian profits (judged to be around 20 percent per year).

By the way, Professor Nordhaus won the Nobel Prize for his work on climate change, is affiliated with the Brookings Institution, and he supports a carbon tax. So he’s not some fire-breathing libertarian with a mission of defending capitalism.

He simply crunched the data and found innovators produce far more wealth for society than they do for themselves.

In a 2018 article for the American Institute for Economic Research, Professor Don Boudreaux of George Mason University elaborated on the implications of the Nordhaus research.

…each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality. …That’s quite a bargain for humanity! …Bezos alone is responsible for making his fellow human beings nearly $6.5 trillion dollars better off as a group. …Similar calculations can in principle be made for every entrepreneur who has ever succeeded in the modern market economy, from legendary titans such as Bezos and the late Steve Jobs to the far more numerous yet unknown – but as a group no less important – entrepreneurs who innovate in much smaller ways. …It’s as if strangers routinely approach us and, asking nothing in return, hand to each of us a stash of cash. …capitalism works magnificently.

Amen to the final three words.

Back in 2014, I explained that we should be thankful for rich entrepreneurs.

They made the rest of us richer as they became rich themselves. That’s a win-win situation.

I’ll close by citing the words of Joseph Schumpeter. He’s not nearly as famous as other economists such as Milton Friedman or Adam Smith, but I don’t know anybody who was more succinct and more accurate in describing the real-world benefit of capitalism.

P.S. Needless to say, the above analysis gets much weaker if companies such as Tesla and Amazon are benefiting from government cronyism.

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Image credit: Seattle City Council | CC BY 2.0.

Hopes and Fears for 2021

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

Yesterday was my review of the best and worst policy developments in 2020.

Today, I’ll share my hopes and fears for 2021.

These are not predictions (economists have a terrible track record when try to make forecasts). Instead, these are merely good and bad things that might plausibly happen.

We’ll start with the positives.

Gridlock – I don’t necessarily think Biden is a hard-core leftist, but his fiscal agenda is terrible. I want him to have an excuse to put those policies on the back burner, and that will happen if Republicans control the Senate and we have “gridlock.” Simply stated, I’d rather nothing happen in Washington than have bad things happen. By the way, I’ll openly admit to being a hypocrite on this issue. At some point, I hope there will be a White House and a Congress that want to reform the tax code and fix entitlements. When that happens, I won’t want any obstacles.

Supreme Court tosses civil asset forfeiture – I’m recycling this item from last year because I’m hopeful that it’s just a matter of time before the Justices toss out this wretched policy that literally allows government to steal property from people who have not been convicted of any crime, or even charged with any wrongdoing.

Trade liberalization – To be charitable, Trump was a disaster on trade. Biden almost certainly will move policy in the right direction, including a restoration of the World Trade Organization‘s ability to settle disputes.

I used to list the collapse of Venezuela’s totalitarian government as one of my annual hopes and I still think that will happen, hopefully sooner rather than later. That being said, I’m getting a superstitious feeling that I’m jinxing regime change since I’ve listed that hope the past three years and it hasn’t happened.

Now let’s look at the negatives.

Absence of gridlock, leading to big anti-growth tax increases – If Democrats win both Senate seats in Georgia in a few days, that will give them control of the Senate, which will dramatically increase the danger that Biden will push his class-warfare tax policies.

Re-regulation – Trump did not have a perfect track record on red tape (coal subsidiesproperty rightsFannie/Freddie, for instance), but there was a net shift in the right direction during his four years. Biden almost certainly will impose more intervention. Indeed, I’m not aware of a single regulatory issue where he’s on the right side. So don’t get your hopes up for better showerheads and dishwashers.

Kamala Harris becomes president – The Vice President-Elect staked out policies far to the left of Biden when she ran for president. And she has a reprehensible track record of trampling rights when she was California’s top cop. That’s an unsavory combination. If she’s even half as bad as her rhetoric, we all should wish Biden good health for the next four years.

P.S. If you want to see hope and fears for previous years, here are my thoughts for 202020192018, and 2017.

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Image credit: Alexandra_Koch | Pixabay License.

The Best and Worst of 2020

Thu, 12/31/2020 - 12:23pm

One of my traditions, which started in 2013, is to share the year’s best and worst policy outcomes of the past 365 days.

For instance, last year I celebrated Boris Johnson’s landslide victory in the United Kingdom and also was very happy that Colorado voters preserved TABOR. But I bemoaned Trump’s protectionism and fretted about the ever-rising burden of government spending.

So what can we say about 2020?

The big news of the year was the pandemic, of course, but my best-and-worst list focuses on public policy.

In other words, this column will highlight the positive or negative actions of politicians (or voters) rather than the vindictiveness of Mother Nature.

So let’s look at major developments in 2020, and we’ll start with the good news.

Illinois voters preserve the flat tax – The only good feature of Illinois fiscal policy is that the state’s constitution mandates a flat tax. The big spenders in Springfield despise that policy, but they can’t get rid of it without permission from voters. So, led by the state’s hypocritical governor, they put an initiative on the ballot to allow discriminatory tax rates. Fortunately, the people of Illinois rejected the class-warfare measure by a comfortable 53.3 percent-46.7 percent margin.

An acceptable Brexit deal – The people of the United Kingdom wisely voted to leave the European Union back in 2016, but a genuine escape from Brussels did not seem likely until Boris Johnson’s landslide victory in 2019. Even then, it wasn’t clear that the European Union’s spiteful officials would agree to unfettered trade in a post-Brexit environment. Fortunately, there is now an agreement that – while far from perfect – does allow the U.K. to escape the sinking ship of the E.U.

Voters reject the War on Drugs – I’ve never liked drugs and I recognize that there will be social harms with legalization. That being said, the social harm from prohibition is much greater, so I’m pleased that voters all over the nation approved ballot initiatives to give people more freedom to get high.

Now for the bad news of 2020.

Washington’s bungled response to the pandemic – As indicated above, the existence of the coronavirus doesn’t count as bad policy, but the federal government’s incompetent response certainly belongs on this list. We learned, over and over and over and over again, that bloated bureaucracies do not deliver good results. Heck, we’re still learning that lesson.

China clamps down on Hong Kong – As a long-time admirer of Hong Kong’s market-driven economic vitality, I’m saddened that China is increasing its control. So far, Beijing is focusing on ways of restricting Hong Kong’s political autonomy, but I fear it is just a matter of time before economic freedom is negatively impacted. For what it’s worth, I’m also distressed that economic policy seems to be moving in the wrong direction in Mainland China as well.

Chilean voters put the nation’s prosperity at risk – One of the world’s biggest success stories during my lifetime has been Chile’s shift from authoritarian statism to capitalist prosperity. Poverty has dramatically declined and Chile is now the richest nation in Latin America. Sadly, voters approved an initiative that could result in a new constitution based on the welfare state vision of “positive rights.”

I’ll close with a bonus section, so to speak.

2020 election – If you care about trade and spending, then Biden’s victory may turn out to be good news. If you care about taxes and red tape, then Biden’s victory may turn out to be bad news.

But I thought the biggest election takeaway is that the left did not do well in congressional races or state races.

And I suppose I should add that it’s good news that Democratic voters ultimately opted not to nominate some of the awful politicians who ran for president, most notably Bernie Sanders and Elizabeth Warren.

And I’m tempted to add that they also wisely rejected Kamala Harris, but that backfired since she’s now going to be a heartbeat away from the presidency.

P.S. I’ve already cited my 2013 and 2019 editions. If you’re curious, here are my best and worst for 2018201720162015, and 2014.

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Image credit: kai Stachowiak | CC0 Public Domain.

Once Again, Everything You Need to Know about Government in a Single Story

Wed, 12/30/2020 - 12:05pm

Ronald Reagan hit the nail on the head when he warned that government is usually the problem rather than the solution.

It’s not just that the economy suffers when there is too much spending, regulation, and taxing, we also have far too many politicians and bureaucrats who behave as if they’re motivated by personal interest rather than the national interest.

Not that we need any more evidence, but there’s an editorial in today’s Wall Street Journal that perfectly captures what’s wrong with Washington.

Indeed, I’ve even recycled the title that I used just three days ago because the WSJ column is such a powerful example.

Read these excepts about a legal attack against Walmart and ask yourself whether the federal government is acting like mobsters conducting a shakedown operation.

…the Justice Department’s new suit..claims that Walmart “failed to detect and report at least hundreds of thousands of suspicious orders” and that as a pharmacy it “unlawfully filled thousands upon thousands of invalid controlled-substance prescriptions.” …The complaint…is really a 160-page exercise in scapegoating a company because it is well-known and has deep pockets. Walmart doesn’t push pills on opioid addicts. Its pharmacists fill valid prescriptions written by doctors who are licensed by their states and registered with the Drug Enforcement Administration (DEA). …Walmart says it has passed tens of thousands of leads about suspicious prescriptions to state and federal law enforcement. It’s the job of the DEA and state medical boards to investigate and revoke doctors’ licenses and prescribing privileges if there’s wrongdoing.

For all intents and purposes, the company is in a no-win situation.

When pharmacists have refused to fill questionable prescriptions, doctors have sometimes sued for defamation and patients have sometimes sued for discrimination. Several states have prohibited pharmacists from interfering with the doctor-patient relationship by second-guessing valid prescriptions. No federal law supersedes these state laws. …the DEA has suggested that some combinations of opioids never have a legitimate medical purpose and should never be filled. Yet the Centers for Medicare & Medicaid Services continues to cover these opioid combinations… In effect DOJ is asking the federal court to overrule state law in favor of informal federal guidance and a vague notion of pharmaceutical best practices. This harassment was typical of the Obama era.

This issue reminds me of the federal government’s policy on money laundering. In that case, the government not only orders banks to spy on customers, but also to read their minds to somehow figure out if a financial transaction is connected to criminal behavior.

The net result is a very costly and intrusive system that has utterly failed to achieve its purpose of reducing criminal behavior.

But that doesn’t stop Uncle Sam from periodically imposing heavy fines on banks for nit-picking violations, just like the federal government today wants to extort a bunch of money out of Walmart.

It’s almost enough to make you think there’s a pattern.

P.S. I have a .500 batting average in my experiences as a global money launderer.

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Image credit: Andy Withers | CC BY-NC-ND 2.0.

2020’s Tweet of the Year

Tue, 12/29/2020 - 12:21pm

Every so often, I highlight tweets that deserve attention because they say something important, usually in a clever and succinct fashion.

Today, I’m highlighting what I consider to be the year’s best tweet.

The tweet is from Matthew Lesh of the Adam Smith Institute in London and it shows the big difference between private sector results and government incompetence.

Some readers may wonder if he is being unfair? Is the tweet merely libertarian-style grousing?

Well, consider this recent story from the Washington Post, which details how government incompetence at the Centers for Disease Control (CDC) greatly delayed testing capacity.

On Jan. 13, the World Health Organization had made public a recipe for how to configure such a test, and several countries wasted no time getting started: Within hours, scientists in Thailand used the instructions to deploy a new test. The CDC would not roll out one that worked for 46 more days. …The agency squandered weeks as it pursued a test design far more complicated than the WHO version and as its scientists wrestled with failures… The CDC’s response to what became the nation’s deadliest pandemic in a century marked a low point in its 74-year history. …Without tests to identify the early cases, health authorities nationwide were unable to isolate the infected and trace the rapid spread among their close contacts. …120 public health labs were without a government-approved test of their own and, with few exceptions, depended wholly on getting the CDC’s kits. …companies had no incentive to navigate regulatory hurdles and mass-produce kits.

The above story describes how the CDC screwed up at the start of the pandemic.

In her December 27 column for the Washington Post, Megan McArdle highlights a new example of CDC incompetence.

…the now-infamous November meeting of the CDC’s Advisory Committee on Immunization Practices…unanimously agreed that essential workers should get vaccinated ahead of the elderly, even though they’d been told this would mean up to 6 percent more deaths. This decision was supported in part by noting that America’s essential workers are more racially diverse than its senior citizens. …the discussion of whether to prioritize essential workers was anything but robust. …not one of those 14 intelligent and dedicated health professionals suggested adopting the plan that kills the fewest people. …for the past nine months, public health experts have insisted that minimizing deaths should override other concerns, even quite important ones. So how, in this case, did equity conquer death?

Let’s close with some excerpts from Aaron Sibarium’s article on the same issue for the Washington Free Beacon.

The committee openly acknowledged that its initial plan would result in more deaths than “vaccinating older adults first.” But, the panel said, the plan would reduce racial disparities—something they deemed more important than saving lives… The result was an explicitly race-conscious plan that would have prioritized shrinking the case gap between races over saving the most lives. …All of this—the exclusions, the contradictions, the moral redundancies—helped disguise the agenda that it justified, giving unscientific value judgments an air of scientific assuredness.

The really amazing aspect of this story is that there almost surely would be more minority deaths if this this approach was implemented.

But the “woke” bureaucrats though that would have been okay since there would have been an even-greater increase in white deaths.

This is healthcare version of their warped view that it’s okay to support policies that reduce income for poor people so long as the rich incur even greater losses.

Anyhow, I guess we should “congratulate” the CDC for showing it can compete with the WHO in the contest to see which bureaucracy had the worst response to the coronavirus (we already had plenty of evidence that the FDA is incompetent).

We can add this column to my series (hereherehere, and here) on how government blundering magnified the coronavirus pandemic.

P.S. If I had the flair for self-promotion that you often find in D.C., I would have been tempted to claim that my tweet from earlier today deserves some sort of recognition.

But I don’t need attention and affirmation. I simply want people to understand that it’s reprehensible that we have cossetted international bureaucrats (who get lavish, tax-free salaries!) pushing sloppy and ideological nonsense that will make the world less prosperous.

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Image credit: Raed Mansour | CC BY 2.0.

Economic Growth and the “Size of the Pie”

Mon, 12/28/2020 - 12:03pm

My recent three-part series (herehere, and here) explained why policy makers should seek to reduce poverty rather than inequality.

I want to expand on that point today by showing why growing the pie is more important than how it is sliced.

I’ve previously opined on why economic growth is important, showing that the United States today would be almost as poor as Mexico if our rate of economic growth since 1895 was just one-percentage point less than it actually was.

Moreover, I also showed in that 2017 column how much smaller increments of additional growth over time can mean thousands of dollars of additional income for an average household.

And, the previous year, I shared two excellent videos from Marginal Revolution University while writing about Hong Kong’s remarkable jump from poverty to prosperity.

For today’s column, I want to expand on this point using the economic growth page from Max Roser’s great site, Our World in Data. We’ll start with this chart showing how per-capita economic output dramatically increased a few hundred years ago.

This kind of data won’t be news to regular readers. I’ve already shared great videos from Deirdre McCloskey and Don Boudreaux that make the same point about the explosion of prosperity in the modern era.

And if anyone somehow thinks this growth doesn’t matter, Roser’s page shows that there are countless ways of graphing the relationship between economic output and good outcomes, such as how long we livechild mortalityaccess to electricityhunger, and literacy.

The bottom line is that we are unimaginably rich compared to prior generations, largely thanks to the rule of law, expanded trade, and limited government.

That recipe for growth and prosperity works anywhere and everywhere it is tried. Here’s another chart showing how other parts of the world are being to prosper thanks to economic liberalization.

I want to cite two additional charts from Roser’s page.

First, here’s a chart showing productivity rates in selected nations. Why is this important? Because economic prosperity is basically driven by how much we work and how productive we are.

There are all sorts of interesting things embedded in the above chart.

Our final chart shows the importance of convergence.

Once again, there are some important observations embedded in the above chart.

  • Very poor nations such as Botwsana and China can enjoy meaningful gains with partial economic liberalization.
  • Western nations can enjoy more prosperity over time, but they won’t catch the United States so long as they are burdened with too much government.
  • Singapore shows that full convergence is not only possible, but also that laissez-faire countries can even surpass the United States.

P.S. I can’t resist recycling my “never-answered question” in hopes of getting any of my left-leaning friends to cite a single example of their policies producing mass prosperity.

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Image credit: geralt | Pixabay License.

Everything You Need to Know about Government in a Single Story

Sun, 12/27/2020 - 12:59pm

When I write an everything-you-need-to-know column, I’m inevitably guilty of hyperbole.

All that I’m really doing is highlighting a very compelling example of how politicians make a mess of just about anything they touch.

That’s even true in the rare cases when they’re trying to enact policies I prefer.

The crux of the problem is that politicians like having some level of power and control over various sectors of the economy, for the simple public choice-driven reason that they can then extort bribes, campaign cash, and other goodies.

Which is good news for donors, crooks, and cronies, as P.J. O’Rourke wisely noted.

But it’s bad news for those of us who don’t like sleaze. Yet sleaze is almost inevitable when politicians have power to interfere with private market transactions.

Check out these excerpts from a Politico report.

In the past decade, 15 states have legalized a regulated marijuana market for adults over 21, and another 17 have legalized medical marijuana. But in their rush to limit the numbers of licensed vendors and give local municipalities control of where to locate dispensaries, they created something else: A market for local corruption. Almost all the states that legalized pot either require the approval of local officials – as in Massachusetts — or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures – the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. …They have also created a culture in which would-be cannabis entrepreneurs feel obliged to make large campaign contributions or hire politically connected lobbyists. …It’s not just local officials. Allegations of corruption have reached the state level in numerous marijuana programs, especially ones in which a small group of commissioners are charged with dispensing limited numbers of licenses.

Needless to say, what’s happening in the marijuana industry happens wherever and whenever politicians have power.

“All government contracting and licensing is subject to these kinds of forces,” said Douglas Berman, a law professor at Ohio State University who authors a blog on marijuana policy. …“There’s a lot of deal-making between businesses and localities that creates the environment of everyone working their way towards getting a piece of the action,” Berman said. Whether it’s city or county officials that need to be appeased, local control is “just another opportunity for another set of hands to be outstretched.”

The report concludes by noting that corruption can be avoided very simply. Just make sure politicians and other people in government have no power or authority.

States that have largely avoided corruption controversies either do not have license caps — like Colorado or Oklahoma — or dole out a limited number of licenses through a lottery rather than scoring the applicants by merit — like Arizona. Many entrepreneurs, particularly those who lost out on license applications, believe the government shouldn’t be in the business of picking winners and losers and should just let the free market do its job.

Amen.

I’ll conclude by noting that politicians are doing the right thing in the worst way.

I want to end the War on Drugs because it is a costly failure. It’s not that I think drug use is a good idea. But I recognize that the social harm of prohibition is greater than the social harm of legalization.

And, as a libertarian, I believe people should be free to make their own decisions (consistent with the libertarian non-aggression principle, of course), even if I happen to disapprove.

Sadly, politicians are not legalizing pot for libertarian reasons.

Instead, they see it as a way of having a new product to tax (and they’re botching that). And, as illustrated by today’s story, they see it as a way of lining their own pockets.

I’m almost tempted to say we’d be better off if marijuana was criminalized so it could be sold on the black market instead.

But the real moral of the story is that government power is a recipe corruption.

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Image credit: Kiwiev | CC0 1.0.

Another Leftist Has an Epiphany on Guns

Sat, 12/26/2020 - 12:53pm

I’m (unfortunately) not a rich person, but that doesn’t stop me from opposing punitive taxes on successful entrepreneurs, investors, and small business owners.

Likewise, I’m not a gun aficionado, but that doesn’t stop me from opposing efforts to restrict the rights of law-abiding people to own and bear arms.

In part, my views on guns are driven by cost-benefit analysis. Simply stated, the evidence is fairly clear that there is less crime when bad people have to worry that potential victims have the ability to defend themselves.

But I also very much agree with the constitutional argument for gun ownership, as well as the “societal disarray” argument.

Interestingly, it seems that more folks on the left are coming to their senses on the issue of gun control, generally for practical reasons rather than philosophical reasons.

  • In 2012, I shared some important observations from Jeffrey Goldberg, a left-leaning writer for The Atlantic. In his column, he basically admitted his side was wrong about gun control.
  • Then, in 2013, I wrote about a column by Justin Cronin in the New York Times. He self-identified as a liberal, but explained how real-world events have led him to become a supporter of private gun ownership.
  • In 2015, I shared a column by Jamelle Bouie in Slate, who addressed the left’s fixation on trying to ban so-called assault weapons and explains that such policies are meaningless.
  • More recently, in 2017, Leah Libresco wrote in the Washington Post that advocates of gun control are driven by emotion rather empirical research and evidence.
  • Last but not least, Alex Kingsbury in 2019 acknowledged the futility of gun control in a column for the New York Times.

Today, we’re going to add to the collection.

Charles Blow of the New York Times recently wrote about how he has become more understanding of why fellow blacks want to own guns.

Growing up in rural northern Louisiana, everyone I knew, at least every household, seemed to have guns. …Gun ownership was the norm in those parts, including in the Black community. It was not associated with danger but with safety. …Indeed, one could argue that the right to bear arms in this country has never been so brazenly and openly abridged as it has against Black people. Many state codes prohibited Black gun ownership before the Civil War and allowed for the disarmament of Black people after. …When I moved north, first to Detroit and then to New York, I moved into a mental space of more stringent gun control. …city dwellers simply didn’t have the same need for weapons as the people in the rural community where I was raised… I, like many, were convinced that fewer guns in the Black community would make it safer. But, for many Black people, that sentiment has turned. …gun sales to Black people are surging. …I, as much as anyone, would like to live in a society in which all citizens felt safe without the need of personal firearms. America could have created such a society. However, it chose not to. …many Black people feel the need to defend themselves from their own country.

To be sure, Mr. Blow can’t be considered a full convert to the 2nd Amendment. That being said, I think it’s nonetheless remarkable that even a committed, hard-core leftist has (partially) seen the light.

Though I can’t resist quibbling with one point in his column. He wrote, “America could have created” a society where gun control would be desirable because no guns would be needed, but “it chose not to.”

I would replace “it chose not to” with “our government is not sufficiently competent.”

Heck, I would probably add “or trustworthy” as well. Given the unsavory history of gun control, Mr. Blow should be among the first to appreciate that argument.

P.S. In 2018, I shared the story of Ryan Moore, another leftist who changed his mind on gun control. But since he also evolved away from being a leftist, I don’t include him

The Poisonous Economics of Wealth Taxation

Thu, 12/24/2020 - 12:32pm

I don’t like higher taxes, whether looking at levies on income, capital gains, payroll, death, or consumption. But if asked to identify the worst way of hiking taxes, the wealth tax might lead the list because of the economic damage caused per dollar collected.

If you don’t want to spend two minutes watching the video, which is excerpted from an online debate organized by my left-leaning friends at TaxCOOP, everything I said can be boiled down to the following four points.

  1. A wealth tax might reduce inequality, but only because the rich would suffer even greater losses than the poor.
  2. Punishing saving and investing is a bad idea since all economic theories agree capital formation is key to long-run prosperity.
  3. A wealth tax is a huge tax increase on saving and investment, perhaps equal to a 50 percent or 100 percent marginal tax rate.
  4. A wealth tax would be an administrative nightmare, requiring a bigger IRS, since many assets are difficult to measure.

I first addressed the issue back in 2012 and 2014, but I’m now writing more often about the wealth tax because it’s evolved from being a bad idea to being a real threat.

Joe Biden didn’t include a wealth tax in his class-warfare campaign manifesto, but Bernie Sanders and Elizabeth Warren both pushed for the idea. And there are plenty of other Democrats in Congress who also support this punitive levy.

So let’s add to our arguments.

In a report for the Manhattan Institute, Allison Schrager and Beth Akers summarize why a wealth tax is misguided.

Wealth taxes are inefficient and ineffective because wealth is inherently more difficult to measure. Privately held companies, for example, are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value. Also, financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets that are hard to value. A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. In part, the taxes failed to raise much revenue because wealthy individuals easily moved their assets across borders to avoid taxation. …Wealth taxes distort behavior in a way that is harmful to economic growth and national prosperity. By taking a fraction of people’s wealth each year, the tax reduces the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation. …think of it as a tax on capital income. And when you put the tax in income terms, 2% can be enormous. For example, if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income!

Writing for National Review, Philip Cross highlights why a wealth tax is economic malpractice.

The temptation to adopt a wealth tax will grow in the aftermath of record budget deficits resulting from the pandemic-induced recession. …However, the case for a wealth tax rests on questionable or unfounded assumptions. …Proponents argue that wealth taxes generate substantial net revenues… However, Europe’s experiment with wealth taxes yielded little revenue. …wealth taxes raised only 1.0 percent of GDP in Spain and Switzerland, 0.4 percent in Norway, and 0.2 percent in France in 2017, not enough to significantly affect either government finances or wealth distribution. As a result, most European nations abandoned wealth taxes years ago. …A wealth tax is rife with administrative problems because it creates the incentive to minimize reported wealth. …Besides, taxpayers can easily circumvent a wealth tax. Canada’s former Prime Minister Jean Chretien warned that “there is nothing more nervous than a million dollars — it moves very fast, and it doesn’t speak any language.” …Compounding the mobility of capital is the willingness of people to move to avoid or minimize taxes. One study of estate taxes found that 21.4 percent of the 400 richest Americans moved from states levying an estate tax to a state without one, while only 1.2 percent did the reverse. …A wealth tax also distorts economic incentives, encouraging consumption while penalizing the savings and investments that foster higher long-term growth. This is especially true when wealth taxes are layered on top of taxes on the capital income that wealth generates.

Even folks who might otherwise be sympathetic are throwing cold water on the idea of a wealth tax.

In a column for Bloomberg, Ferdinando Giugliano points out that it would be foolish to impose big taxes on coronavirus-weakened economies.

A growing number of economists are recommending a one-off wealth tax… In its latest World Economic Outlook, the International Monetary Fund has…recommended higher taxes on richer individuals — including taxing high-end property, capital gains and wealth — to reduce public debt. …I can see why a government would want to introduce a one-off levy on the rich after an extraordinary shock such as a pandemic or a war. …The main problem right now is that it’s too soon to be talking about a wealth tax. …A wealth tax would simply depress spending at a time of shrinking economic output. …There will be a time for redistribution. But…governments must focus on…growth now — and come back to that wealth tax later.

Mr. Giugliano is wrong, of course, to imply or think that there’s ever a good time for a wealth tax.

And he’s also wrong to make the Keynesian argument (that a wealth tax would depress spending), when the correct argument is that it would depress savings and investment, which then leads to foregone wages and lower living standards.

But I wanted to cite his column largely to give me an excuse to criticize the International Monetary Fund.

It galls me that a bunch of bureaucrats recommend tax increases on the rest of us – particularly since they are not only lavishly compensated, but also because they get tax-free salaries.

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