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Updated: 49 min 38 sec ago

Historical Evidence on Reducing Large Debt Burdens

Thu, 03/07/2019 - 12:48pm

The long-run fiscal outlook for most developed nations is very grim thanks to demographic change and poorly designed entitlement programs.

For all intents and purposes, we’re all destined to become Greece according to long-run projections from the International Monetary FundBank for International Settlements, and Organization for Economic Cooperation and Development.

Are there any solutions to this “most predictable crisis“?

Politicians such as Alexandria Ocasio-Cortez and Bernie Sanders would like us to believe the answer involves never-ending tax increases. But such an approach is a recipe for more debt because the economy will weaken and governments will spend more money (look at what’s been happening in Europe, for instance).

A more sensible approach is a spending cap. I’ve pointed out, for instance, how Swiss government debt has plummeted ever since voters imposed annual limits on budgetary growth.

We also can learn lessons from history according to new research from the International Monetary Fund.

The report contains some very interesting economic history and the evolution of government finance, including the Bank of England being created and given a monopoly so the government would have a vehicle for borrowing money (as I observed in my video on central banking).

But it mostly tells the story of how governments and public finance simultaneously evolved.

Although the written record points to instances of public borrowing as long as two thousand years ago, recent scholarship points to 1000-1400 A.D. as when borrowing agreements with states were concluded with regularity and debt contracts entered into by sovereigns were standardized. …The supply of loans from city-states and territorial monarchies was driven by the need to finance military campaigns and secure borders. …From the 16th century, Europe’s political geography coalesced into the nation states recognized at the Peace of Westphalia in 1648. In parallel, many European states evolved from absolutist regimes to more limited government. …Fiscal states thus evolved in response to the efforts of rulers to secure borders, expand territory and survive. After 1650, larger, more centralized states increasingly possessed the fiscal machinery to raise revenue in uniform ways and had a veto player, such as a parliament, to monitor and discipline public expenditure.

There’s also lots of information in the report about how some governments, primarily outside of Europe, began to borrow money.

In many cases, this produced bad results, with defaults and economic crisis. As the authors wrote, “Debasement and restructuring also have a long history.”

But the part of the report that caught my eye was the description of how three advanced nations – the United Kingdom, the United States, and France – successfully dealt with large debt burdens before World War I.

…we describe three notable debt consolidation episodes before World War I: Great Britain after the Napoleonic Wars, the United States in the last third of the 19th century, and France in the decades leading up to 1913. While the colorful debt crises and defaults of the first era of globalization have been much discussed, less attention has been paid to these successful consolidation episodes. We focus on these three cases because they involved three of the largest economies of the period, but also because their debt burdens were among the heaviest. British public debt as a share of GDP was higher in the aftermath of the Napoleonic Wars, for example, than Greek public debt in 2018. But in all three cases, high public debts were successfully reduced relative to GDP.

In each case, war-time spending was the cause of the debt buildup.

The Napoleonic Wars, Franco-Prussian War and U.S. Civil War were the three most expensive conflicts of the 19th century. …debt accounted for the single largest share of wartime financing.

Here’s a table showing that these nations dramatically reduced their debt burdens.

To be sure, there were differences in the three nations.

The reduction in the British debt-GDP ratio was by far the largest and longest: the debt ratio fell from 194 percent in 1822 to 28 percent nine decades later. …The French public-debt-GDP ratio fell from 96 percent in 1896 to 51 percent in 1913… This case ranks second in size but first in pace. U.S. (federal or union) government debt was not as high at the end of the Civil War, and the subsequent consolidation was more leisurely; however, the process is notable for having reduced the debt-GDP ratio to virtually zero by World War I.

When the authors investigated how these nations reduced their debt burdens, they found that limited government was a common answer.

This was true in the United Kingdom.

Britain achieved the impressive feat of maintaining an average primary surplus of 1.6 percent of GDP for nearly a century (the only deficit in Figure 2 is at the time of the Boer War). One of the political legacies of Peel and Gladstone was a fiscal theory or philosophy of “sound finance” emphasizing budget surpluses, low taxes and minimal government expenditure. …demands for spending on welfare relief from the disenfranchised masses were kept in check. In exchange, the self-taxing class of income-tax-paying electors relieved the non-electors from the burden of direct taxation… Budget surpluses then made feasible further reductions in tariffs and taxes, which reduced the cost of living for the working class

It was true in the United States.

In the U.S., primary surpluses were consistently achieved… Southern states opposed an expansive role for the federal government, while entitlements limited to Civil War pensions contained pressure for public spending.

And it was true even in France.

In France, debt reduction was entirely accounted for by primary surpluses. Those surpluses exceeded British levels, reaching 2.5 percent of GDP on average, albeit over a shorter period.

Remember, this was a period when total government spending only consumed about 10 percent of economic output.

And this was a period when there was no welfare state. Redistribution was virtually nonexistent. Not even in France.

So it shouldn’t be a surprise that debt quickly fell in all three countries.

The common thread was small government.

…in all three of these large-scale debt consolidations, governments and societies went to great lengths to service and repay heavy debts. …it reflected prevailing conceptions of the limited functions of government, and limited popular pressure for public programs, entitlements and transfers.

What’s equally important is to note what didn’t happen.

No default. No inflation. No indirect confiscation.

…there was no restructuring or renegotiation of official or privately-held debts in these cases. Nor was there financial repression, i.e., measures artificially depressing interest rates. …Governments for their part did little to bottle up savings at home or to otherwise use regulation and legislation to artificially depress yields. …None of these three governments undertook involuntary restructurings despite the inheritance of heavy debt.

Now let’s shift from the past to the future

The authors point out how debt is rising today because of the welfare state rather than war.

The end of the last century also saw, for the first time, a secular increase in public-debt-to-GDP ratios in a variety of countries in conjunction not with wars and crises but in response to popular demands on governments for pensions, health care, and other often unfunded social services.

Given the demographic changes I mentioned at the beginning of the column, this does not bode well.

So what are the likely implications? As the authors note, there are two ways of dealing with high debt levels.

Countries have pursued two broad approaches to debt reduction. The orthodox approach relies on growth, primary surpluses, and the privatization of government assets. In turn this encourages long debt duration and non-resident holdings. Heterodox approaches, in contrast, include restructuring debt contracts, generating inflation, taxing wealth and repressing private finance.

At the risk of understatement, I fear Robert Higgs is right and that today’s politicians (and today’s voters!) will choose the latter approach.

Given that those policies will make a bad situation even worse, I’m not overflowing with confidence about the future.

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Image credit: geralt | Pixabay License.

The FDA’s Wrongheaded Approach to Opioids

Wed, 03/06/2019 - 10:07am

The FDA has announced new measures designed to combat opioid abuse, promising “an aggressive approach to regulatory action.” Unfortunately, many of the solutions offered by the agency will harm patients while not doing much to reduce overdoses, and might even make the problem worse.

We often hear the problem called an “opioid crisis,” but on closer inspection this moniker appears misleading. Opioids are a potent pain medication that many need and use responsibly. There’s little risk of overdose from the proper medical use of prescription opioids. Most opioid overdoses instead occur from use of powerful synthetics like fentanyl.  Even in the roughly 30 percent of fatal overdose cases involving prescription opioids, fentanyl or heroin are also often involved.

Pretty much all of the increase in opioid deaths in recent years are due to the spike in fentanyl related deaths, which is why “opioid-related deaths keep rising as pain pill prescriptions fall.” Our Taxpayers Against Illicit Opioids project exists to further draw attention to this unfortunate misconception.

The FDA at least pays lip services to this reality. Their statement acknowledged “the growing prevalence of illicit fentanyl,” and that “the rate of overdose death continues to increase,” despite declines in prescription opioid use, “due in part to the increasing abuse of potent adulterated or illicitly manufactured fentanyl products purchased through online channels and sold as street drugs.”

And yet, unfortunately, their proposed solutions involve even stronger crackdowns on prescription opioids. They also promise to “strengthen enforcement against illicit opioids,” but they are unlikely to succeed so long as they are creating demand in the illicit market by restricting access to legal drugs.

In a recent study from the Cato Institute, Jeffrey Miron, Greg Sollenberger, and Laura Nicolae compare the standard “more prescription, more deaths” explanation that the FDA seems to accept with a “more restrictions, more deaths” explanation that puts much of the blame on years of restrictive policies like rules that limit prescribing and raids on supposed “pill mills.” What they find is much more evidence for the latter explanation:

The standard view of the opioid epidemic argues that increased prescribing caused the recent increase in opioid overdose deaths. Medical use of opioids, however, is not a major cause of opioid addiction or overdose. Instead, available evidence suggests that the array of recent state and federal restrictions on legal access to opioids likely contributed to increasing overdoses by pushing users to diverted or illicit sources. Over the past few years, the opioid epidemic has accelerated due to overdoses caused by heroin and synthetic drugs such as fentanyl, despite reduced prescribing. Further restrictions on prescribing are unlikely to decrease overdose deaths.

The cost of these restrictive policies can be measured in worse care and lower quality of life for chronic pain sufferers. A recent New York Times op-ed describes the plight of one such patient:

Katie Tulley suffers from an incurable bladder disorder so painful that it feels “like tearing skin off your arm and pouring acid on it, 24/7,” she said. On scans, the organ looks like an open sore.

…Now, because of legal concerns about overdose risk, her doctors have considered stopping her medication, even though she has never misused it. And so, when she recently discovered a suspicious lump in her belly, she found herself hoping it was cancer. “I shouldn’t ‘want’ cancer,” she said. “But at this point it’s the only way to be treated” for her pain.

Pain patients point to a “climate of fear” caused by CDC guidelines on opioid prescribing, which has not only made it harder to get prescribed an effective treatment, but has led some pharmacists fearing government retribution to refuse to fill even those prescriptions that patients do manage to obtain.

The White House tweeted that “reduc[ing] the volume of opioid prescriptions” is a way to “prevent new opioid addiction.” But the best evidence to date suggests otherwise, as does the history of prohibitions more generally. The FDA should revise its approach and stop harming patients.

 

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Image credit: K-State Research and Extension, licensed under CC BY 2.0.

Is Trump’s Treasury Department Supporting a Cronyist Plan to Empower Fannie Mae and Freddie Mac?

Tue, 03/05/2019 - 12:28pm

What’s the worst thing the government does?

That’s a difficult question to answer. I’ve argued that giving U.S. tax dollars to the OECD is the worst item in the budget, on a per-dollar-spent basis.

And I’ve expressed scathing disdain for the horrid practice of civil asset forfeiture. There are also really destructive features of the tax system, such as FATCA and the death tax.

But you could make a strong case for Fannie Mae and Freddie Mac as well.

These two government-created corporations not only reduce long-run growth by distorting the allocation of capital, they also bear considerable responsibility for last decade’s financial crisis since they played a major role in fueling the housing bubble.

The U.K.-based Economist describes America’s interventionist regime as a form of socialism.

…the mortgage system…is…largely nationalised and subject to administrative control. …America’s mortgage-finance system, with $11 trillion of debt, is probably the biggest concentration of financial risk to be found anywhere. …The supply of mortgages in America has an air of distinctly socialist command-and-control about it. …The structure of these loans, their volume and the risks they entail are controlled not by markets but by administrative fiat. …the subsidy for housing debt is running at about $150 billion a year, or roughly 1% of GDP. A crisis as bad as last time would cost taxpayers 2-4% of GDP, not far off the bail-out of the banks in 2008-12. …the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. …There are at least 10,000 relevant pages of federal laws, regulatory orders and rule books. …In the land of the free, where home ownership is a national dream, borrowing to buy a house is a government business for which taxpayers are on the hook.

In other words, our system of housing finance is mucked up by government intervention (very much akin to the way healthcare is a mess because of government).

That’s the bad news.

The good news is that Fannie and Freddie have been in “conservatorship” every since they got a big bailout last decade. And that means the two cronyist firms are now somewhat constrained. They can’t lobby, for instance (though Republicans and Democrats still seek to expand subsidies in response to campaign cash from other housing-related lobbyists).

But the worst news is that there are people in the Trump Administration who want to go back to the bad ol’ pre-bailout days.

The Wall Street Journal opined on the issue as Trump prepared to take office. The editorial noted that the implicit government guarantee for Fannie Mae and Freddie Mac led to an explicit bailout.

Fan and Fred’s owners feasted for decades on an implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.

As part of that bailout and the subsequent “conservatorship,” Fannie and Freddie still get to operate, and they still have a big implicit subsidy that allows near-automatic profits (at least until and unless there’s another big hiccup in the housing market), but the Treasury Department gets those profits.

Needless to say, this upsets the shareholders. They bought stock so they could get a slice of the undeserved profits generated by the Fannie/Freddie cronyist business model.

They claim going back to the pre-bailout days would be a form of privatization, but the WSJ editorial correctly warns that it’s not pro-free market to allow these two government-created companies to distort housing markets with their government-granted favors, preferences, and subsidies.

…the expectation that Treasury secretary nominee Steven Mnuchin is going to revive the Beltway model of public risk and private reward. …private shareholders of these so-called government-sponsored enterprises keep pretending that something other than the government is responsible for their income streams. As if anyone would buy their guarantees—or give them cheap financing—if Uncle Sam weren’t standing behind them. …what they really want is to liberate for themselves the profits that flow from a duopoly backed by taxpayers. …We’re all for businesses getting out of government control—unless they’re playing with taxpayer money. Americans were told that Fannie and Freddie were safe for years before the last crisis. The right answer is to shut them down.

Amen. Not just shut them down, dump them in the Potomac River.

The Wall Street Journal then revisited the issue early last year, once again expressing concern that the Treasury Secretary wants to go back to the days of unchecked cronyism.

Fannie Mae is again going hat in hand to taxpayers… Washington should take this news as a kick in the keister to finally start winding down the mortgage giant and its busted brother, Freddie Mac . But the Trump Administration seems to be moving in the opposite direction. …The pair, now in “conservatorship,”…were left in limbo. Hedge funds bought up their shares, betting they could pressure Washington into bringing back the old business model of public risk and private reward. …Treasury Secretary Steven Mnuchin told the Senate Banking Committee: “I think it’s critical that we have a 30-year mortgage. I don’t believe that the private markets on their own could support it.” But many countries have robust housing markets and ownership rates without a 30-year mortgage guarantee. Mr. Mnuchin sounds like his predecessor, Democrat Jack Lew. Wasn’t Donald Trump elected to eliminate crony capitalism?

This issue is now heating up, with reports indicating that the Treasury Secretary is pushing to restore the moral hazard-based system that caused so much damage last decade.

The Trump administration is at war with itself over who should take the lead in the reform of the government-backed mortgage companies Fannie Mae and Freddie Mac… The battle centers on whether the Treasury Department should continue to advocate what it views as a plan for the future of the mortgage companies or cede control of those efforts to the incoming chief of the Federal Housing Financial Agency (FHFA), economist Mark Calabria.

The good news is that Trump has nominated a sensible person to head FHFA, which has some oversight authority over Fannie and Freddie.

And it’s also good news that some of the economic people at the White House understand the danger of loosening the current limits on Fannie and Freddie.

White House economic officials…are seeking to prevent a repeat of the risk-taking activities by the companies that contributed to the mortgage bubble, leading to its 2008 collapse and $200 billion government bailout. These officials, who spoke on the condition of anonymity, also say any reform must have the blessing of Calabria, a long-time libertarian economist and frequent critic of the outfit’s pre-crisis business model. ..He is also wary of returning Fannie and Freddie to their previous incarnations as private companies that have shareholders, but also receive backing from the federal government if they get in trouble as they did in 2008.

But it seems that the Treasury Department has some officials who – just like their predecessors in the Obama Administration – learned nothing from the financial crisis.

They want to give Fannie and Freddie free rein, perhaps in order to help some speculator buddies.

Treasury Secretary Steve Mnuchin and his top house advisor Craig Phillips, have so far taken the lead… In January, acting director of the Federal Housing Agency Joseph Otting privately told employees about plans…, referring to Mnuchin’s past statements on the matter… Mnuchin also has business ties with at least one of the major investors in the GSE’s stock that has benefited amid the speculation… Paulson – who has stakes in the GSE’s preferred class of stock — has also submitted a proposal… A key feature of the framework touted by Mnuchin, Phillips, Otting and Paulson is that both Fannie and Freddie would have some backing from the federal government in times of emergency while remaining public companies, a business model similar to the one the GSEs operated with before 2008.

Given the Treasury Department’s bad performance on other issues, I’m not surprised that they’re on the wrong side on this issue as well.

Tobias Peter of the American Enterprise Institute outlines the correct approach.

The GSEs, however, do very little that cannot be done – and is not already done – by the private sector. In addition, these institutions pose a significant financial risk to U.S. taxpayers. Weighing this cost against the minimal benefits makes the case that the GSEs should be eliminated. …regulators have tilted the playing field in favor of the GSEs. …GSE borrowers can thus take on more debt to offset higher prices. With inventories lower than ever, this extra debt ends up driving prices even higher, creating a vicious cycle of more debt, higher prices, greater risk and, ironically, more demand for the GSEs. What keeps the GSEs in business are the same failed housing policies that brought us the last financial crisis. The GSEs are not needed in the housing market – and they have become detrimental to the market’s long-term health. They could be eliminated… This would create space for the re-emergence of an active private mortgage-backed securities market that ensures a safer and more stable housing finance system with access for all while letting taxpayers off the hook.

Mr. Peter is correct.

Here’s a flowchart that shows what happened and the choice we now face.

At the risk of stating the obvious, real privatization is the right approach. This would mean an end to the era of special favors and subsidies.

  • No taxpayers guarantees for mortgage-backed securities
  • No special exemption from complying with SEC red tape.
  • No more special tax favors such as special exemptions.

Sadly, I’m not holding my breath for any of this to happen.

The real battle in DC is between conservatorship and fake privatization (which really should be called turbo-charged and lobbyist-fueled cronyism).

And if that’s the case, then the obvious choice is to retain the status quo.

P.S. This is a secondary issue, but it’s worth noting that Fannie and Freddie like to squander money. Here are some excerpts from a report published by the Washington Free Beacon.

Fannie Mae is charging taxpayers millions for upgrades to its new headquarters, including $250,000 for a chandelier. The inspector general for the Federal Housing Finance Agency (FHFA), which acts as a conservator for the mortgage lender, recently noted $32 million in questionable costs in an audit for Fannie Mae’s new headquarters in downtown Washington, D.C. …The inspector general reported that costs for the new headquarters have “risen dramatically,” to $171 million, up from $115 million when the consolidated headquarters was announced in 2015. …After the inspector general inquired about the chandelier, officials scrapped plans for a $150,000 “hanging key sculpture,” and $985,000 for “decorative screens” in a conference room.

The bottom line is that Fannie and Freddie, at best, undermine prosperity by diverting money from productive investment, and, at worst, they saddle the nation with financial crisis.

They should be shut down, not resuscitated.

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Image credit: Jeff Turner, licensed under CC BY 2.0.

My Sporadically Successful Career as a Global Money Launderer

Mon, 03/04/2019 - 12:32pm

I’ve written repeatedly about how anti-money laundering (AML) laws are pointlessexpensiveintrusivediscriminatory, and ineffective.

And they especially hurt poor people according to the World Bank.

That’s a miserable track record, even by government standards.

Now it’s time to share two personal stories to illustrate how AML laws work in practice.

Episode 1

Last decade, I wrote an article for a U.K.-based publication that focused on the insurance industry. I didn’t even realize they paid, so I was obviously happy when a check arrived in the mail.

The only catch was that the check was in British pounds and various charges and conversion fees would have consumed almost all the money if I tried to deposit the money in my local bank.

But that wasn’t too much of a problem since I had an upcoming trip to give a speech in England.

I figured I would swing by the British bank where the magazine had an account, show them my passport, and get my cash.

Oh, such youthful naiveté.

Here’s what actually happened. I stopped by a branch and was told that I couldn’t cash the check because anti-money laundering rules required that I have an address in the U.K. (my hotel didn’t count).

Needless to say, I was a bit irritated. Though I didn’t give up. In hopes that my experience was an anomaly (i.e., a particularly silly teller with a bureaucratic mindset), I stopped at another branch of the bank.

But that didn’t work. I got the same excuse about AML requirements.

And I was similarly thwarted at a third branch. By the way, the tellers sympathized with my plight, but they said the government was being very strict.

So I figured the way to get around this regulatory barrier would be to sign the check and have a friend deposit the money in her account and then give me some cash.

But her bank said this was also against the AML rules.

Fortunately, we got lucky when we went to another branch of her bank. A teller basically acknowledged that government’s rules made it impossible for me to get my money and she decided to engage in a much-appreciated act of civil disobedience.

This episode was annoying, but the silver lining is that I was in the U.K. to speak at an international economic crime conference in Cambridge on the topic of money laundering.

So I began my speech a day or two later by pseudo-confessing that I had just violated the nation’s silly and counterproductive laws on money laundering (I said “this may have happened to me” to give me some legal wiggle room since the audience was dominated by government officials, and I didn’t want to take any risks).

Episode 2

Today, I had my second incident with anti-money laundering laws.

I have a friend from the Caribbean who now operates a small Dubai-based business and he asked me if I could use Western Union to wire some money to an employee in the Dominican Republic.

I’ve done this for him a couple of times in the past (it is far cheaper to send money from the U.S.), so I stopped by a branch this morning, filled out the paperwork and sent the money.

Or, to be more accurate, I thought I sent the money.

As I was walking out, I got a text from Western Union saying that they put a hold on the transfer and that I needed to call a 1-800 number to answer some questions.

So I made the call and was told that they blocked the transfer because they were trying to “protect me” from potential consumer fraud.

It’s possible that this was a potential reason, but I immediately suspected that Western Union was actually trying to comply with the various inane and counter-productive AML laws and regulations imposed by Washington.

My suspicions were warranted. Even though I explained that I wasn’t a victim of fraud and answered 10 minutes of pointless questions (how long did I know my friend in Dubai? when did I last see him? what would the employee use the money for?), Western Union ultimately decided to reject the transfer.

Why? I assume because AML laws and regulations require companies to flag “unusual transactions,” and financial institutions would rather turn away business rather than risk getting some bureaucrat upset.

So my unblemished track record of being a successful “money launderer” came to an end.

But here’s the real bottom line.

Other than wasting about 30 minutes, I didn’t lose anything. But a small business owner will now have to pay $150 more for a transaction, and an employee from a poor country will have to wait longer to get money.

In some sense, even Western Union is a victim. The company lost the $20 fee for my transaction. But that’s probably trivial compared to the money that they pay for staffers who have the job of investigating whether various transfers satisfy Uncle Sam’s onerous rules.

Even my “successful” example of money laundering in Episode 1 was costly. I lost about two hours of my day.

And if I wasn’t for the nice teller who decided to break the law, I probably would have lost out on about $100. Perhaps not worst outcome in the world, but now think about how poor people suffer when they suffer similar losses thanks to these policies.

Remember, by the way, all these costs aren’t offset by any benefits. There is zero evidence that AML laws reduce underlying crime rates (which was the rationale for these laws being imposed in the first place!).

P.S. You may not think AML policy lends itself to humor, but here’s an amusing anecdote involving our former President.

P.P.S. Some folks on the left use AML arguments to justify their “war on cash,” and they’re pushing to restrict cash as an interim measure.

P.P.P.S. Leftist politicians frequently accuse so-called tax havens of being sanctuaries for dirty money, but those low-tax jurisdictions have much better track records than onshore nations.

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Image credit: HM Revenue & Customs, licensed under CC BY 2.0.

Great Moments in German Tax Enforcement

Sun, 03/03/2019 - 12:07pm

Germany is like the Nordic nations.

It gets a decent ranking (#20) for overall economic freedom, but mostly because a bad score for fiscal policy is offset by reasonably good scores in other policy areas.

Taking a closer look at fiscal policy, there’s a heavy burden of government spending (not as bad as France, for what it’s worth) and taxes consume a big chunk of household income.

And the Germans are big believers in enforcing onerous tax laws. Sometimes in remarkable ways.

  • Using parking meters to levy taxes on the services of prostitutes.
  • Losing 30€ for every 1€ collected by taxing online sales of coffee.
  • Imposing a new development tax for an 80-year old street
  • Levying a fine on a one-armed man for having a one-handled bicycle.

To be fair, the last example is a penalty rather than a tax, but it’s included because it captures Germany’s über-zealous approach to enforcement.

Today, we’re going to add to this list by looking at what happens to taxpayers when they can’t afford their country’s onerous tax burden.

One of the consequences, as reported by the BBC, is that you can lose the family pooch.

A town in Germany has made headlines for seizing a family’s dog over unpaid taxes – and then selling it on eBay. German media report that officials in Ahlen initially wanted to seize the wheelchair of a disabled resident as the most valuable item on the premises. Instead, they settled on a pedigree pug bitch named Edda. One of the officials then listed the dog on eBay at an apparent bargain price of €750 – half of what its new owner expected to pay. …Edda’s new owner was Michaela Jordan, a police officer, who told the newspaper she was initially suspicious of the low price. Upon calling the number listed in the advert, she spoke to an employee of Ahlen’s administration, who explained that the dog had been seized because the owner owed the city money – including for unpaid dog tax. …the former owner said…her three children miss the dog.

I feel sorry for the kids.

Though, to look on the bright side, they learned a lesson about big government. I’m guessing they are now immune to the European Commission’s attempt to brainwash children in favor of higher taxes.

And I guess we should all be happy that the tax police didn’t seize the wheelchair (maybe they were inspired by Francois the Merciful?).

In any event, I also noticed that the dog’s new owner is a bureaucrat – i.e., a net tax consumer rather than a net tax payer. There’s probably a lesson there as well.

Though even bureaucrats should be careful when dealing with government.

Edda had medical problems that were not disclosed. Since changing owners in December, she has needed four operations due to eye problems, including an emergency operation over Christmas. …totaling about €1,800.

The bottom line is that Germans are over-taxed and they have tax collectors that go above and beyond the call of duty.

Ideally, the nation’s taxpayers will get angry, have their version of the Tea Party, and elect some better politicians. Until that happens, I recommend they copy the clever tax-avoidance tactics of their FrenchSpanishIrish, and Austrian neighbors.

P.S. You won’t be surprised to learn that Germany’s surtax to finance reunification is still being imposed even though East Germany was aborbed almost three decades ago (though it took more than 100 years for Washington to repeal the “temporary” telephone tax to finance the Spanish-American War).

P.P.S. Germany needs another Ludwig Erhard.

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Image credit: betexion, licensed under Pixabay License.

The Folly of Rent Control

Sat, 03/02/2019 - 12:56pm

People sometimes ask me how I’ve managed to write a column every single day since November 2009.

Sadly, the answer has a lot to do with politicians having a vote-buying and power-grabbing incentive to produce a never-ending supply of bad policies.

Consider what just happened in Oregon.

Oregon Gov. Kate Brown signed into law a first-in-the-nation rent control bill Thursday…Senate Bill 608′s rent control and eviction protections go into effect immediately. …The law caps annual rent increases to 7 percent plus inflation throughout the state, which amounts to a limit of just over 10 percent this year. …The bill passed quickly through the House and Senate amid a Democratic supermajority.

This is spectacularly bad policy.

  • My first reaction is that such laws should be unconstitutional since politicians are violating a provision of the Bill of Rights by taking part of the value of private property without compensation.
  • My second reaction is that such laws will backfire because they address (in a bone-headed fashion) the symptom of rising rents rather than the (usually government-caused) problem of inadequate housing supply.
  • My third reaction is that price controls never work, regardless of the market or sector, so limits on rent will exacerbate housing problems.

By the way, economic illiteracy is not confined to Oregon. Or even to the United States

Berlin is contemplating rent control as well.

…local politicians here have proposed a radical idea to tackle the problem: introducing a rent cap that would freeze all existing rents for the next five years. …By freezing existing rents for five years, Zado said, the city could help prevent massive increases. …but there could also be significant downsides. Such a policy could exacerbate the city’s existing housing shortage: some experts say it might lead developers to seek buyers, not renters, for their new apartments. …said Michael Voigtländer of the German Economic Institute in Cologne. “That lack of housing won’t be solved if the rents are capped.” …head of the German Housing Industry association, told German newspaper Die Zeit it could even keep developers from building additional housing in the coming years: “A rent stop would lead to our member companies building about 50,000 fewer apartments in the next five years,” he said.

The national government also is acting in a self-destructive manner.

Germany has taken nationwide action in recent years to begin grappling with this problem: in 2015, parliament passed a law restricting how much landlords could raise rents. Under that legislation, the rental price on a new contract should be no more than 10% higher than the average price in that particular neighbourhood.

Let’s see what experts have to say about this issue.

We’ll start with the perspective of landlords, which was included in this New York Times report.

…landlords say that the legislation will compel owners to take their properties off the rental market because they will no longer be able to earn enough rent from them — deepening the housing crisis rather than easing it. …Mr. DiLorenzo said his primary fear was that lawmakers would ultimately bar rents from rising more than a bare minimum, which would prevent landlords from meeting their expenses and eventually drive them out of business. The real solution to rising rents, he said, is to make it easier to build decent and affordable housing in Oregon by eliminating a multitude of fees and regulations.

Landlords have an obvious interest in this issue, so let’s now share some insights from people who don’t have a dog in the fight, but who understand economics.

Megan McArdle debunks this inane example of price controls.

Serial experimentation with this policy has repeatedly shown the same result. Initially, tenants rejoice, and rent control looks like a victory for the poor over the landlord class. But the stifling of price signals leads to problems. …incomes rise, and rents don’t. People with higher incomes have more resources to pursue access to artificially cheap real estate: friends who work for management companies, “key fees” or simply incomes that promise landlords they won’t have to worry about collecting the rent. …lucky insiders come to dominate rent-controlled apartments, especially because having gotten their hands on an absurdly cheap apartment, said elites are loathe to move and free up space for others. The longer the rent-control policies remain, the more these imbalances grow. …Deprived of the ability to make a profit, landlords skimp on maintenance and refuse to build new housing.

Megan also explains that the damage of rent control is compounded by policies that restrict the development of additional housing.

Rent control is one of the most effective ways to destroy a city’s housing stock, but it’s far from the only one. You can also enact extremely strict building codes, with lengthy and highly bureaucratic processes, which will restrict the supply of housing. This is what has happened in many American cities… policymakers should remember that a price is just the intersection of supply and demand. If you alter the price, but don’t alter the supply or the demand, the problem doesn’t go away; rationing just shows up in different forms.

Mark Hemingway, originally from Oregon, explains in the Wall Street Journal what is happening in the state.

Virtually every mainstream economist, from Paul Krugman to Thomas Sowell, has condemned rent control as bad policy. Oregon’s problem isn’t rising rents. It’s the lack of affordable housing… the state remains resistant to new development. Oregon adopted widely hailed “smart growth” policies in the 1970s, imposing “urban growth boundaries” around cities to prevent sprawl. …This has artificially inflated the price of land within the boundaries. …On top of all this, Oregon has a red-tape problem that skews developer incentives. “Systems and development charges and permit fees for even a 500-square-foot unit in the city of Eugene right now are close to about $20,000 per unit,” says real-estate agent James St. Clair. “There’s no incentive to build small affordable units…” Rather than addressing the lack of housing supply, legislators have seized on rent control.

For those who prefer videos over words, here’s a succinct video from Johan Norberg on the folly of rent control.

Mark Perry of the American Enterprise Institute summarize the real problem in a column for the Foundation for Economic Education.

…rent control is making a comeback in response to rising housing prices in urban areas across the country in states like California, Illinois, Washington, and Massachusetts. …As the graphical Supply/Demand analysis…illustrates very clearly, rent control laws that artificially force the rental price of housing (P1 above) below the market-clearing equilibrium price (P0) are guaranteed to create a housing shortage by: a) increasing the number of rental units demanded at the artificially low rents (QD) and b) decreasing the number of rental units supplied to the market (QS). You can artificially restrict the amount of rent a landlord can legally charge for a rental unit, but you can’t force developers, builders, and landlords to build or supply more rental housing in the future. And the supply of rental housing in markets with rent control is guaranteed to decline. …Price controls aren’t the answer. Building more housing is the only real solution to increase the supply of affordable housing.

Here’s Mark’s graph.

In another column for FEE, Luis Pablo de la Horra summarizes why rent control is so misguided.

Rent control is one of those policies that continues to attract the favor of the public despite the fact it has repeatedly proven to be ineffective when it comes to improving the lives of those it is aimed at. …Rent controls often lead to a shortage of rental houses since landladies and landlords find it unprofitable to rent out their apartments at capped prices. In addition, the stock of dwellings tends to deteriorate because home-owners will have little incentive to invest in the maintenance and refurbishment of their houses. …here is some empirical evidence. A 2017 paper published by three Stanford economists shows that rent controls in San Francisco reduced rental housing supply by 15 percent, which in turn increased rental prices in the other parts of the city by around 5 percent. Another recent paper blames restrictions on the use of land (the so-called zoning) for the increasing housing prices in large US cities.

Let’s see what the other side has to say on the topic. Unsurprisingly, the New York Times is on the wrong side.

Here are some excerpts from an editorial that is a case study of economic illiteracy.

New York’s system of rent regulation, limiting how much landlords can charge tenants, began in the 1940s to help a growing middle class. There are about one million apartments covered under rent-restricting regulations now… here are some actions lawmakers can take: …Return control of the rent laws to New York City… Landlords’ ability to raise the rent by 20 percent every time an apartment is vacated is a perverse incentive… Lawmakers should scrap this incentive entirely. …the state agency that enforces rent laws…needs more funding… require landlords to submit receipts for improvements to individual apartments to the agency and the tenant.

This is remarkably bad. And sad as well. The New York Times in recent memory was actually economically sensible, endorsing a flat tax and urging elimination of the minimum wage.

Now it fully embraces policies that even rational left-leaning economists condemn.

Indeed, you can probably tell a lot about the ethics of your left-wing friends if you ask them about rent control.

The ones with good intentions will reject rent control while the demagogues (and the ignorant) will applaud this foolish example of price controls.

Minneapolis provides a good example of ethical leftists, as Elliot Kaufman explainsin the Wall Street Journal.

Earlier this month the City Council overwhelmingly approved an ambitious plan to encourage higher-density development and increase the supply of housing. …The Comp Plan would allow the construction of duplexes and triplexes in areasonce reserved for single-family homes, rezoning areas near public transportation for larger apartment buildings, and doing away with parking requirements for new housing. …The Comp Plan takes a market-based approach but proclaims left-wing goals. It vows to “eliminate” racial and economic disparities and aggressively fight climate change. …The Comp Plan promotes denser development, which urbanists on both left and right see as the solution to a host of problems. More density in a city like Minneapolis could help renew both geographic and economic mobility.

We’ll close with this great quote from a Swedish economist.

P.S. Rent control can be a great scam for privileged insiders.

P.P.S. Rent control also rewards and empowers unscrupulous and reprehensible people.

P.P.P.S. Amazingly, California voters actually rejected a state referendum to allow rent control (though this isn’t stopping one of their politicians from trying to muck up rental markets).

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Image credit: photos-public-domain.com, licensed under Public Domain.

Financing Big Government with the Printing Press

Fri, 03/01/2019 - 12:52pm

Back in January, I wrote about the $42 trillion price tag of Alexandria Ocasio-Cortez’s Green New Deal.

To pay for this massive expansion in the burden of government spending, some advocates have embraced “Modern Monetary Theory,” which basically assumes the Federal Reserve can finance new boondoggles by printing money.

I debated this issue yesterday on CNBC. Here’s a clip from that interview.

Wow, this Modern Monetary Theory (MMT) reminds me of the old joke about “I can’t be out of money. I still have checks in my checkbook.”

I don’t know how far Ms. Kelton would go with this approach. I know from previous encounters that she’s a genuine Keynesian and thus willing to borrow lots of money to finance a larger public sector. But her answer at 2:45 of the interview also suggests she’s okay with using the Federal Reserve to finance bigger government.

In either case, our debate is really about the size of government.

And anybody who wants a bigger burden of government is at least semi-obliged to say how it would be financed. The MMT crowd stands out because they basically say the Federal Reserve can print money.

To help understand the various options, I’ve created a helpful flowchart.

It’s possible, of course, for my statist friends to say “all of the above,” so these are not mutually exclusive categories.

Though the MMT people who select “Print money!” are probably the craziest.

And I hope that they are not successful. After all, nations that have used the printing press to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

I noted in the interview that MMT is so radical that it is opposed by conventional economists on the right and left.

For instance, Michael Strain of the right-leaning American Enterprise Institute opines that the theory is preposterous and nonsensical.

…modern monetary theory…freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month. …MMT is…sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy. …The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. …this is about all that can be said favorably regarding modern monetary theory. …it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe. …what does MMT have to say about inflation when it does materialize? …it falls to the institution with authority over tax and budget policy — the U.S. Congress — to make sure prices are stable by raising taxes… MMT seems to call for tax increases in order to restrain inflation. …Modern monetary theory…if enacted it could cause great harm to the U.S. economy.

From the left side of the spectrum, here’s some of what Joseph Minarik wrote on the topic.

MMT rests on simplistic observations that have just enough truth to take in those who need to believe. Believers in MMT see crying societal needs… By common reckoning, government lacks the resources to address all of those needs immediately. MMT solves that problem with a simple and (literally) true observation: The federal government can just print the money. …And that is what willing policymakers choose to hear: Anything. Without limit. It is so convenient —  “too good to check.” …to MMT adherents, the Federal Reserve and all other inflation “Chicken Littles” are and forever have been totally wrong. There has not been rapid inflation for 20 years or so. Therefore, there never will be inflation again. …Yes, inflation is low. But it always is before it rises. And once inflation begins, slowing it is hard and painful. MMT is the perfect theory for the video game generation, which never saw the 1960s economic miscalculations so much like what MMT advocates today, and apparently believes that such mistakes can be reversed painlessly by just hitting the reset button. …the consequences could be catastrophic.

Catastrophic indeed.

Letting the inflation genie out of the bottle is not a good idea. And the policies of the MMT crowd presumably would lead to something far worse than what America experienced in the 1970s.

Rescuing the economy from that inflation was painful, so it’s not pleasant to imagine what would be needed to salvage the country if the MMT people ever got their hands on the levers of power.

Let’s wrap this up. Earlier this week, I presented a guide to fiscal policy based on six core principles.

If Modern Monetary Theory gains more traction, I may have to add a postscript.

P.S. If ever imposed, I suspect MMT would be very good news for people with a lot of gold and/or a lot of Bitcoin.

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Image credit: pxhere, licensed under CC0 Public Domain.

Trump Treasury Secretary Supports French Tax Harmonization Scheme

Thu, 02/28/2019 - 12:24pm

Much to the consternation of some Republicans, I periodically explain that the Trump Administration is – at best – a mixed blessing for supporters of limited government.

It’s not just that Trump is the most protectionist president since Herbert Hoover, though that’s certainly a damning indictment.

The Trump White House also has been very weak on government spending, and the track record on that issue could get even worse since the President supports a new entitlement for childcare.

Yes, there are issues where Trump has been a net plus for economic liberty.

The overall regulatory burden is declining (though the Administration’s record is far from perfect when looking at anti-market interventions).

And the President gets a good mark on tax policy thanks to the Tax Cut and Jobs Act.

But Trump’s grade on that issue may be about to drop thanks to horribly misguided actions by his Treasury Secretary, Steven Mnuchin. Here are some excerpts from a report by France 24.

US Treasury Secretary Steven Mnuchin said Wednesday that the US supported a push by France for a minimum corporate tax rate for developed countries worldwide… “It’s something we absolutely support, that there’s not a chase to the bottom on taxation,” Mnuchin said in Paris after talks with Finance Minister Bruno Le Maire. Le Maire said last month a minimum tax rate would be a priority for France during its presidency of the G7 nations this year. …France in particular has railed against Amazon, Google and other technology giants that declare their European income in low-tax countries like Ireland or Luxembourg.

Needless to say, it’s utterly depressing that a Republican (in name only?) Treasury Secretary explicitly condemns tax competition.

Politicians and their flunkies grouse about a “race to the bottom” when tax competition exists, not because tax rates would ever drop to zero (we should be so lucky), but because they don’t like it when the geese with the golden eggs have the ability to fly away.

They like having the option of ever-higher taxes.

In reality, the world desperately needs tax competition to reduce the danger of “goldfish government,” which occurs when vote-seeking politicians can’t resist the temptation to destroy an economy with too much government (see GreeceVenezuelaZimbabwe, etc).

I’ll close with a remarkable observation.

The Obama Administration supported a scheme that would have required American companies to pay a tax of at least 19 percent on income earned in other jurisdictions, even if tax rates were lower (as in Ireland) or zero (as in Cayman).

This was very bad policy, completely contrary to the principle of “territorial taxation” that is part of all market-friendly tax reforms such as the flat tax.

Yet Trump’s Treasury Secretary, by prioritizing tax revenue over prosperity, is supporting a proposal for global minimum tax rates that is much worse than what the Obama Administration wanted.

And even further to the left compared to the policy supported by Bill Clinton.

P.S. I’m sure the bureaucrats at the European Commission and Organization for Economic Cooperation and Development are delighted with Mnuchin’s policy, especially since American companies will be the ones most disadvantaged.

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Image credit: DonkeyHotey, licensed under CC BY 2.0.

Hard Brexit Is a Much Better Option than Brexit in Name Only

Wed, 02/27/2019 - 12:48pm

My views on Brexit haven’t changed since I wrote “The Economic Case for Brexit” back in 2016.

It’s a simple issue of what route is most likely to produce prosperity for the people of the United Kingdom. And that means escaping the dirigiste grasp of the European Union.

The European Union’s governmental manifestations (most notably, an über-powerful bureaucracy called the European Commission, a largely powerless but nonetheless expensive European Parliament, and a sovereignty-eroding European Court of Justice) are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline….Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

But if I was rewriting that column today, I would change the title to “The Economic Case for Hard Brexit.”

That’s because Prime Minister Theresa May and other opponents are pushing for a watered-down version of Brexit. Sort of Brexit in Name Only.

Indeed, Dan Hannan, a member of the European Parliament, explains in the Washington Examiner that the deal negotiated by Theresa May is the worst possible outcome.

This is the sort of deal that a country signs when it has lost a war. Under its terms, Britain will remain subject to all the costs and obligations of EU membership, but will give up its vote, its voice and its veto. …EU exporters will enjoy privileged access to the world’s fifth-largest economy. They won’t need to worry about world competition. …In the two-and-a-half years since the referendum, civil servants, politicians, financiers and politically-connected business cartels have worked assiduously to overturn to result. …Some, including George Soros and Tony Blair, sought to overturn the result outright with a new referendum. Others, more craftily, sought instead to ensure that, while something technically called Brexit may happen, nothing actually changes. Sadly, they have achieved something far worse than no change. Their deal — Theresa May’s deal — will leave Britain in a more disadvantageous place than either leaving cleanly or staying put. It keeps the burdens of EU membership but junks the advantages.

Brian Wesbury and Bob Stein, both with First Trust Advisors, point out that Hard Brexit is the best option. Trade would continue, but based on WTO rules instead of the EU’s free trade agreement.

Some analysts and investors are concerned about a “Hard Brexit,” in which the U.K. supposedly plunges into chaos as it crashes out of the EU without an agreement. …Count us skeptical. …Any harm to the U.K.’s economy would be relatively mild… It’s not like there would be no trade between the U.K. and the EU after a Hard Brexit. Trade rules would simply shift to the ones that apply between the EU and other countries under the World Trade Organization, like those that apply to EU-U.S. trade.

While WTO rules are quite good, they’re not as good as complete free trade.

But there would be pressure to move in that direction under a Hard Brexit.

…the EU would be under enormous pressure to lower tariffs and cut a new deal with the U.K. In 2017, the rest of the European Union ran a roughly $90 billion trade surplus with the U.K. So if a Hard Brexit makes it tougher for the rest of the EU to export to the U.K., every national capital in the EU would be flooded with lobbyists asking to cut a deal. Meanwhile, leaving the EU means the U.K. would have the freedom to make free trade deals with the U.S. and Canada, and any other country it wanted, without having to wait for the EU. Yes, a Hard Brexit risks some financial jobs, but the same argument was used when the U.K. decided not to join the Euro currency bloc, after which London kept its role as Europe’s financial center.

For what it’s worth, I’m more interested in whether we can get a really good trade deal between the US and UK following a Hard Brexit.

Regardless, any possible slippage on trade between the UK and EU would be more than offset by the likelihood of better policy in other areas.

…there’s another basic reason why a Hard Brexit would be in the long-term interests of the U.K….any organization powerful enough to overrule the democratic process in the U.K. regarding economic laws and regulations…is also powerful enough to impose anti-free market policies… And, over time, since men are not angels and power corrupts, any international body with such power would gravitate toward policies that aggrandize the international political elite… In fact, the EU has already issued rules that stifle competition, like setting a standard minimum Value-Added Tax rate.

Felix Hathaway from London’s Institute of Economic Affairs, debunks Project Fear in an article just published by Cayman Financial Review.

…the only option ahead with a clear path, and requiring no new legislation in parliament, is some form of ‘Hard Brexit.’ …By Hard Brexit I mean the U.K. leaving the EU on March 29 without a withdrawal agreement. Unlike most other options, this does not require the cooperation of the EU to proceed. In this scenario, the U.K. leaves both Single Market and Customs Union of the European Union at 11 p.m. on March 29, 2019, along with leaving the various political institutions of the EU and the jurisdiction of the Court of Justice of the EU. …many of the more alarming warnings of no cooperation at all can be dismissed as fanciful. A more believable ‘no deal’ Brexit might look as follows. …the Commission is doing all it can to publicly rule out this sort of “managed no deal,” yet in doing so has stated that it would unilaterally extend agreements in selected sectors, including for financial services, following a WTO exit. …one could reasonably expect further agreements, possibly at the 11th hour in March… These would likely cover citizens’ rights, road haulage, and facilitated customs checks for certain classes of goods, and would be negotiated with the member states with which the U.K. does the most business.

For what it’s worth, I think vindictive EU bureaucrats probably want to inflict some needless harm, even though it will hurt them as much – and maybe more – than it would hurt the UK.

But Felix is right that common sense – sooner or later – will lead to agreements to smooth over any bumps in the transition. Indeed, he just wrote another article demonstrating how this is already happening.

Here’s the most important part of his article, which I like because it echoes my arguments about the pressure for better policy in an independent United Kingdom.

Ultimately, the most significant factor will be domestic policy decisions by the U.K. government, particularly in areas of taxation and housing. This may be fairly unexciting news at the end of an article about Brexit, but if the U.K. is to succeed as a “free trading, buccaneering nation,” such success will depend in large part on the ability of companies to attract investment through low corporate taxes, and the ability of workers to move to where they will be most productive through further housebuilding in key areas. …perhaps as an unexpected consequence of the conversation surrounding Brexit,… A recent ComRes poll found that, although divided on almost every other aspect, a clear two thirds of voters agree that when Brexit is complete, “the U.K. should try to become the lowest tax, business-friendliest country in Europe, focused on building strong international trade links.”

And keep in mind that bureaucrats in Brussels are pushing to make the European Union more statist (which, sadly, is contrary to the continent’s historical tradition), so it’s becoming ever-more important to escape.

This is why what happens with Brexit is among my greatest hopes and fears for 2019.

Let’s close with a bit of humor.

The Cockburn column in the Spectator mocks the New York Times for its anti-Brexit fanaticism.

The Times usually supports democracy in backward and violent states, but it hates Brexit. No news is too fake for the Times to print when it comes to Brexit. This week, the Times hit new heights of fantasy. ‘Roads gridlocked with trucks. Empty supermarket shelves. An economy thrown into paralysis,’ a would-be novelist named Scott Reyburn wrote earlier this week. His story, ‘As Brexit Looms, the Art World Prepares for the Fallout’, was recycled as a front-page item on the Times’s international edition. …Britain is in a ‘crazed Brexit vortex’, adds Roger Cohen, holder of the Tom Friedman Chair in Applied Chin-Stroking. …Yes, the British government are useless. But nobody in London is stockpiling food. Nobody is fighting in the streets, as the French are every weekend. The markets factored in their Brexit uncertainty two years ago. The supermarkets and roads are as jammed as ever. …The economy is doing much better than the Eurozone, which is slipping into recession. Polls show the British, who the Times characterize as sliding down a neofascist vortex, to be more welcoming of immigration than any other European people.

Bad journalism from the New York Times is hardly a surprise.

I’m mostly sharing his column because this satirical paragraph got me laughing.

The scene that met Cockburn’s eyes upon exiting the terminal at Heathrow reminded him of his days as a foreign correspondent during the Lebanese civil war, or a night out in south London. A dog was eating the innards of a corpse, because supplies of Romanian dog food have broken down. A naked fat man had carved off a slice of his own buttock and was roasting it over a burning tyre, because imports of Bulgarian lamb are held up at Calais. A woman offered to prostitute herself for an avocado, and to sell both of her blank-eyed children for a packet of French butter. There were no black taxis either, because London’s notoriously pro-Brexit taxi drivers had all joined one nationalist militia or other. Finally, a black-market cheese dealer with a rocket launcher affixed to the back of his pickup agreed to take Cockburn into the city. They bribed their way through the checkpoints with wedges of brie. Or not.

Speaking of laughs, this Brexit tapestry is quite amusing.

P.S. There are some anti-Brexit people who support free markets, which is rather baffling since I can’t imagine why they would want the U.K. to be part of a bureaucracy that tries to brainwash children in favor of higher taxes. Indeed I was only semi-joking when I wrote that Brussels was “the most statist place on the planet.”

P.P.S. Though there are many reasons to question whether U.K. politicians can be trusted to adopt good policy.

The Cayman Islands: A Role Model for Harmony and Prosperity

Tue, 02/26/2019 - 12:47pm

I’m currently in the Cayman Islands, which is one of my favorite places since – like BermudaMonacoVanuatuAntigua and Barbuda, and a few other lucky places in the world – it has no income tax.

At the risk of stating the obvious, the absence of an income tax has helped make the Cayman Islands very prosperous, 14th-richest in the world according to the latest data from the World Bank on per-capita economic output (top 10 in the world if you exclude oil-rich jurisdictions).

This does not mean, incidentally, that economic policy is perfect in the Cayman Islands.

There is a overly large and excessively compensated government bureaucracy. Indeed, financing the civil service is becoming such a burden that the Cayman Islands almost made a suicidal decision to impose an income tax earlier this decade.

And the absence of an income tax doesn’t mean an absence of taxes. Here’s a chart from a 2010 report on the jurisdiction’s fiscal challenges. Yes, the tax burden is low compared to many nations, but the government nonetheless collects plenty of revenue from import duties, fees on financial services, and tourism.

But the key thing to understand is that not all taxes are created equal. Some levies impose much more damage than others.

Richard Rahn, a fellow member of the Cayman Financial Review editorial board, explained this insight a few years ago in a column for the Washington Times.

Cayman is prosperous… Critics of Cayman and other offshore financial centers call them “tax havens,” ignoring the fact that they all have many taxes, particularly on consumption — which is good tax policy — rather than on productive labor and capital — which is bad tax policy. The statist political actors in the high-tax jurisdictions will not admit that people do not work, save and invest if they are going to be overly taxed and otherwise abused by their own governments.

And it’s also worth noting that the Cayman Islands are a role model for racial tranquility.

There are people from 135 nations and “mixed” is the largest racial category.

Here are some excerpts from a column published by Forbes about the progressive social structure of the Cayman Islands.

Somebody recently said to me “The Cayman Islands is just a mailbox.”  I started wondering if that was fair. The Cayman Islands are a real places where people live.  And they are not all attorneys and accountants, although they do have more than their fair share.  …a big upside to the Caymans. …Mr. Leung, who is of Asian descent, noticed a whiff of it in Scotland, but finds the Caymans utterly devoid of racism.  Pirates, refugees, shipwrecked sailors and enslaved people might not seem to be the best material to start a country to some, but clearly there is an upside.

I’ll close by noting that there is some trouble in paradise.

The Cayman Islands faces unrelenting pressure from international bureaucracies and high-tax nations. There is a lot of resentment because the jurisdiction is so successful.

The Cayman Islands will not be bullied by countries that cannot compete with this jurisdiction on a level playing field, Premier Alden McLaughlin told an audience… He said that despite the Cayman government’s cooperation on international standards, the Netherlands and others are more concerned about the zero tax rate here. …“But we will not be bullied by those who are jealous of our success, resentful of our tax policies and unable to compete with us on a level playing field,” McLaughlin said.

What makes these attacks so ironic and unfair is that the Cayman Islands actually has much tougher standards than “onshore” nations such as the United States and United Kingdom.

Since I began this column by looking at World Bank data on the most prosperous, let’s wrap up by perusing the U.N.’s numbers.

Hmmm…, lots of so-called tax havens are on this list. I wonder if we can draw any conclusions?

Folks on the left have accused me of “trading with the enemy” for supporting these jurisdictions, but the real story is that we should emulate rather than prosecute these low-tax jurisdictions.

P.S. My affection for the Cayman Islands is mutual.

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Image credit: Max Pixel, licensed under CC0 1.0.

Six Key Things to Understand for Sensible Fiscal Policy

Mon, 02/25/2019 - 12:34pm

When I’m asked for a basic tutorial on fiscal policy, I normally share my four videos on the economics of government spending and my primer on fundamental tax reform.

But this six-minute interview may be a quicker introduction to spending issues since I had the opportunity to touch on almost every key principle.

Culled from the discussion, here is what everyone should understand about the spending side of the fiscal ledger.

Principle #1 – America’s fiscal problem is a government that is too big and growing too fast. Government spending diverts resources from the productive sector of the economy, regardless of how it is financed. There is real-world evidence that large public sectors sap the private sector’s vitality, augmented by lots of academic research on the negative relationship between government spending and economic performance.

Principle #2 – Entitlements programs are the main drivers of excessive spending. All the long-run forecasts show that the burden of spending is rising because of the so-called mandatory spending programs. Social SecurityMedicare, and Medicaid were not designed to keep pace with demographic changes (falling birthrates, increasing longevity), so spending for these program will consume ever-larger shares of economic output.

Principle #3 – Deficits and debt are symptoms of the underlying problem. Government borrowing is not a good idea, but it’s primarily bad because it is a way of financing a larger burden of spending. The appropriate analogy is that, just as a person with a brain tumor shouldn’t fixate on the accompanying headache, taxpayers paying for a bloated government should pay excessive attention to the portion financed by red ink.

Principle #4 – Existing red ink is small compared to the federal government’s unfunded liabilities. People fixate on current levels of deficits and debt, which are a measure of all the additional spending financed by red ink. But today’s amount of red ink is relatively small compared to unfunded liabilities (i.e., measures of how much future spending will exceed projected revenues).

Principle #5 – A spending cap is the best way to solve America’s fiscal problems. Balanced budget rules are better than nothing, but they have a don’t control the size and growth of government. Spending caps are the only fiscal rules that have a strong track record, even confirmed by research from the International Monetary Fund and Organization for Economic Cooperation and Development.

Here’s one final principle, though I didn’t mention it in the interview.

Principle #6 – Increasing taxes will make a bad situation worse. Since government spending is the real fiscal problem, higher taxes, at best, replace debt-financed spending with tax-financed spending. In reality, higher taxes loosen political constraints on policy makers and “feed the beast,” so the most likely outcome – as seen in Europe – is that overall spending levels increase and long-term debt actually increases.

In an ideal world, these six principles would be put in a frame and nailed above the desk of every politician, government official, and bureaucrat who deals with fiscal policy.

Not that it would make much difference since their decisions are guided by “public choice” no matter what principles they see at their desk, but it’s nice to fantasize.

Here are a few other observations from the interview.

P.S. Needless to say, I wish limits on enumerated powers were still a guiding principle for fiscal policy. Sadly, the days of Madisonian constitutionalism are long gone.

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Image credit: Max Pixel, licensed under CC0 Public Domain.

Are Billionaires Good or Bad?

Sun, 02/24/2019 - 12:21pm

don’t always fully agree with Will Wilkinson of the Niskanen Institute, but I’m an avid reader of his work because he writes intelligently on issues that I care about.

I especially like it when we’re on the same side. A good example is his recent column about billionaires in the New York Times. He starts by observing that politicians such as Bernie Sanders and Alexandria Ocasio-Cortez are demonizing the super-rich.

Socialists have long held that large stores of private wealth are tantamount to violence against those in need. …Thanks at least in part to Bernie Sanders and the sizzling rise of Alexandria Ocasio-Cortez,… Enthusiasm for radical leveling is whistling out of the hard-left fringe… Ms. Ocasio-Cortez’s policy adviser, Dan Riffle, contends that “every billionaire is a policy failure”… He’d like to see the 2020 Democratic primary contenders answer a question: Can it be morally appropriate for anyone to be a billionaire?

Will answers Mr. Riffle’s question by noting that the world’s most successful nations operate on the principles of classical liberalism.

…the existence of virtuous three-comma fortunes is a sign not of failure but of supreme policy success. …The empirical record is quite clear about the general form of national political economy that produces the happiest, healthiest, wealthiest, freest and longest lives. There’s no pithy name for it, so we’ll have to settle for “liberal-democratic welfare-state capitalism.” There’s a “social democratic” version, which is what you get in countries like Sweden, Norway and the Netherlands. And there’s a “neoliberal” (usually English-speaking) version, which is what you get in countries like Canada, New Zealand and the United States. …in comparative terms, they’re all insanely great. The typical citizen of these countries is as well-off as human beings have ever been. …guess what? There are billionaires in all of them. Egalitarian Sweden, an object of ardent progressive adoration, has more billionaires per capita than the United States.

Spot on.

Nations with a lot of economic freedom produce both billionaires and a high quality of life for ordinary people.

And, yes, that does include some Northern European welfare states (though, if I wrote the column, I would have noted that those nations became rich before welfare states were adopted).

But let’s not digress. Here’s the accompanying chart for Will’s column, which compares how nations score on the U.N.’s Human Development Index (based on lifespans, education, and income) and how many billionaires they have as a share of their populations.

I can’t resist pointing out that Hong Kong and Singapore both score highly, so the “welfare-state” part of “liberal-democratic welfare-state capitalism” certainly isn’t necessary to get on this list.

Indeed, the same is true of the other countries on the list if you look at the history of their economic development.

But I’m digressing again. Let’s get back to the column.

Will issues a very relevant challenge to the class-warfare crowd.

So what’s the problem? Preventing billion-dollar hoards guards against the bad consequences of … having the best sort of polity that has ever existed? …Inspect any credible international ranking of countries by democratic quality, equal treatment under the law or level of personal freedom. You’ll find the same passel of billionaire-tolerant states again and again. If there are billionaires in all the places where people flourish best, why think getting rid of them will make things go better?

And he makes a final point about how honestly earned wealth (i.e., not using government coercion) produces big benefits for the rest of us.

…there’s a big moral difference between positive-sum wealth production and zero-sum wealth extraction — a difference that corresponds to a rough-and-ready distinction between the deserving and undeserving rich. The distinction is sound because there’s a proven a way to make a moral killing: improve a huge number of other people’s lives while capturing a tiny slice of the surplus value. …According to William Nordhaus, the Nobel Prize-winning economist, innovators capture about 2 percent of the economic value they create. The rest of it accrues to consumers. Whatever that is, it’s not a raw deal. The accumulation of these innovations over time is the mechanism that drives compounding economic growth, which accounts for a vast improvement over the past 100 years in the typical American standard of living. Some people may have made an ungodly sum in the course of helping make this humanitarian miracle happen, but that’s O.K.

It’s not just O.K., it’s great news.

This is what has produced the unparalleled prosperity of western nations.

Though I fear some of our friends on the left won’t be convinced. At least not the ones who are fixated on inequality.

Some of them very openly admit they are willing to hurt lower-income and middle-class people so long as rich people suffer even more. The International Monetary Fund has even produced studies (yes, more than one!) justifying this harsh ideological view.

Margaret Thatcher is spinning in her grave.

P.S. There is a “Modest Proposal” to “solve” inequality by eliminating the rich.

Debating the IRS Budget

Sat, 02/23/2019 - 12:01pm

I recently appeared on CNBC to talk about everyone’s favorite government agency, those warm and cuddly folks at the IRS.

Our tax system is a dysfunctional mess, but you’ll notice that I mostly blamed politicians. After all, they are the ones who have unceasingly made the internal revenue code more complex, starting on that dark day in 1913 when the income tax was approved.

But I don’t want to give the IRS a free pass.

I’ve cited IRS incompetence and misbehavior in the past, most notably when discussing political biastargeted harassment, and other shenanigans.

And, as illustrated by these five examples, we can always cite new evidence.

Such as lack of accountability.

…a new report from the Cause of Action Institute reveals that the IRS has been evading numerous oversight mechanisms, and it refuses to comply with laws requiring it to measure the economic impact of its rules. Congress has passed several laws, including the Regulatory Flexibility Act and the Congressional Review Act, that require agencies to report on their rules’ economic impact to lawmakers and the public. …These good-government measures are meant to ensure unelected bureaucrats can be checked by the public. …the IRS has made up a series of exemptions that allow it to avoid basic scrutiny. The agency takes the position that its rules have no economic effect because any impact is attributable to the underlying law that authorized the rule.

Such as inefficiency.

Private debt collectors cost the Internal Revenue Service $20 million in the last fiscal year, but brought in only $6.7 million in back taxes, the agency’s taxpayer advocate reported Wednesday. That was less than 1 percent of the amount assigned for collection. What’s more, private contractors in some cases were paid 25 percent commissions on collections that the I.R.S. made without their help…the report stated, “the I.R.S. has implemented the program in a manner that causes excessive financial harm to taxpayers and constitutes an end run around taxpayer rights protections.”

Such as rewarding scandal.

The Internal Revenue Service (IRS) issued more than $1.7 million in awards in fiscal 2016 and early fiscal 2017 to employees who had been disciplined by the agency, a Treasury Department watchdog said. “Some of these employees had serious misconduct, such as unauthorized access to tax return information, substance abuse and sexual misconduct,” the Treasury Inspector General for Tax Administration (TIGTA) said in a report made public this week. …in fiscal 2016 and early fiscal 2017, the IRS had given awards to nearly 2,000 employees who were disciplined in the 12 months prior to receiving the bonus.

By the way, the IRS has a pattern of rewarding bad behavior.

Such as pursuing bad policy.

…for 35 years the Internal Revenue Service has exempted itself from the most basic regulatory oversight. …Tax regulations (like all regulations) have exploded in recent decades, and of course IRS bureaucrats impose their own policy judgments. The IRS has in recent years unilaterally decided when and how to enforce ObamaCare tax provisions, often dependent on political winds. In 2016 it proposed a rule to force more business owners to pay estate and gift taxes via a complicated new reading of the law. …Secretary Steve Mnuchin’s Treasury…department is inexplicably backing IRS lawlessness with a string of excuses.

Again, this is not the first time the IRS has interfered with congressional policy.

Such as stifling political speech.

The Internal Revenue Service infamously targeted dissenters during President Obama’s re-election campaign. Now the IRS is at it again. Earlier this year it issued a rule suppressing huge swaths of First Amendment protected speech. …The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve “business conditions . . . relating to an activity involving controlled substances…” The rule does not apply to all speech dealing with the listed substances, only that involving an “improvement” in “business conditions,” such as legalization or deregulation. …This is constitutionally pernicious viewpoint discrimination.

In other words, the bureaucrats didn’t learn from the Lois Lerner scandal.

Now that I’ve hopefully convinced people that I’m not going soft on IRS malfeasance, let’s look at the budgetary issue that was the focus of the CNBC interview.

Is the IRS budget too small? Should it be increased so that more agents can conduct more audits and extract more money?

Both the host and my fellow guest started from the assumption that the IRS budget has been gutted. But that relies on cherry-picked data, starting when the IRS budget was at a peak level in 2011 thanks in part to all the money sloshing around Washington following Obama’s failed stimulus legislation.

Here are the more relevant numbers, taken from lines 2564-2609 of this massive database in the OMB’s supplemental materials on the budget. As you can see, IRS spending – adjusted for inflation – has nearly doubled since the early 1980s.

In other words, we shouldn’t feel sorry for the IRS and give it more money.

To augment these numbers, I made two simple points in the above interview.

  • First, we should demand more efficiency from the bureaucracy.
  • Second, we should reform the tax code to eliminate complexity.

The latter point is especially important because we could dramatically improve compliance while also shrinking the IRS if we had a simple and fair system such as the flat tax.

Last but not least, here’s a clip from another recent interview. I explained that the recent shutdown will be used as an excuse for any problems that occur in the near future.

Standard operating procedure for any bureaucracy.

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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Image credit: TravelingOtter, licensed under CC BY-SA 2.0.

Supreme Court Chips Away at Egregious Scam of Civil Asset Forfeiture

Fri, 02/22/2019 - 12:46pm

It’s not easy being a libertarian. Thanks to senseless and harmful government policies, you run the risk of being perpetually outraged.

Well, we have some good news about that final example.

In a unanimous decision, the Supreme Court has chipped away at the odious practice of civil asset forfeiture.

Professor Ilya Somin, from George Mason University’s Law School, explains the legal issues.

The decision is potentially a major victory for property rights and civil liberties. The key questions before the Court are whether the Excessive Fines Clause of the Eighth Amendment is “incorporated” against state governments and, if so, whether at least some state civil asset forfeitures violate the Clause. The justices answered both questions with a unanimous and emphatic “yes.” As a result, the ruling could help curb abusive asset forfeitures, which enable law enforcement agencies to seize property that they suspect might have been used in a crime – including in many cases where the owner has never been convicted of anything, or even charged. Abusive forfeitures are a a widespread problem that often victimizes innocent people and particularly harms the poor. …the Court…previously ruled that the Fourteenth Amendment incorporates nearly all of the rest of the Bill of Rights against the states, including the Excessive Bail and Cruel and Unusual Punishment Clauses of the very same amendment. Justice Ruth Bader Ginsburg’s majority opinion offers a good explanation of why incorporation of the Clause is easily justified under the Court’s precedents.

This morning, the Wall Street Journal opined favorably on the ruling.

Police and prosecutors around America have long used asset forfeiture as a cash cow, but a unanimous Supreme Court ruling Wednesday should make them think twice. The Bill of Rights keeps paying dividends even after 228 years. …Justices left and right agree. In her opinion for the Court, Justice Ruth Bader Ginsburg held that the safeguard on excessive fines, quoting earlier cases, is “fundamental to our scheme of ordered liberty” and “deeply rooted in this Nation’s history and tradition.” …the Court’s ruling in Timbs v. Indiana puts states and cities on notice. Some police departments have set annual targets for asset seizures, and a limiting legal principle has been nowhere to be found. During oral argument, Indiana’s solicitor general said that if a driver in a Ferrari was going five miles over the speed limit, that could be grounds for police to take the car. …defendants trying to protect their property against unjust state seizure will now have the Constitution firmly on their side.

While this decision is good news, let’s not get too excited.

What we really need is for the Supreme Court to rule that the entire practice of civil asset forfeiture is unconstitutional.

Unlike criminal asset forfeiture, there’s no finding of illegal behavior in cases of civil asset forfeiture. Indeed, in many cases, the government steals the property of people who aren’t even charged with a crime!

That’s why it is so outrageous and immoral.

Here’s a short video on the topic from the Institute for Justice (which, incidentally, deserves credit for the victory at the Supreme Court).

P.S. It’s worth noting that the first two people to lead the Justice Department’s asset forfeiture division have repented their sins and say the racket should be ended. Too bad Trump is on the wrong side.

P.P.S. Given the human misery it has caused, we shouldn’t laugh about asset forfeiture, but this bit of humor is very entertaining.

New York’s Slow-Motion Fiscal Suicide

Thu, 02/21/2019 - 12:25pm

shared data a couple of weeks ago showing that Florida is the freest state in America (for both overall freedom and economic freedom) while New York is in last place (in both categories).

Well, it seems that freedom has consequences when people can “vote with their feet.”

We’ll start with an op-ed in the Miami Herald by Ed Pozzuoli.

In a recent press conference, New York Gov. Andrew Cuomo…mentioned Florida as an attractive option for New Yorkers who are unhappy… a Census Bureau report late last year detailing the states that lost residents because of high taxes, overregulation and dwindling opportunities. Leading the list? New York. …what jurisdiction did the Census folks say benefits the most from domestic “in-migration? You guessed it — Florida… our low-tax, business-friendly welcome to asylum seekers from Big Government states like New York… It’s Florida’s low taxes and reasonable regulatory environment that attract businesses here. Florida ranks sixth among states for new business creation. …Unlike the federal government, Florida balances its budget and does so without an income tax. New York can keep its big progressive government.

And that “big progressive government” means onerous and punitive taxes, as the Wall Street Journal opined.

New York City’s combined state and local top rate of 12.7% hits taxpayers earning more than $1 million and is the second highest in the country after California. The deduction limit raised New York’s top rate by an effective 5%, though this was partially offset by the tax reform’s 2.6 percentage-point reduction in the federal top rate. …According to IRS data we’ve examined, New York state lost $8.4 billion in income to other states in 2016 (the latest available data), up from $4.6 billion annually on average during the prior four years. Florida raked in the most New York wealth. Mr. Cuomo says that “a taxpayer in Florida would see no increase, or a decrease” under the GOP tax reform and “Florida also has no estate tax.” New York’s 16% estate tax hits assets over $10.1 million. …Mr. Cuomo promised to let New York’s tax surcharge on millionaires expire. But he has extended it again and again and now wants to renew it through 2024 because he says the state needs the money. Meantime, he warns that a wealth exodus could force spending cuts for education and higher taxes on middle-income earners. All of this was inevitable, as we and others warned. Yet rather than propose to make the state’s tax burden more competitive, Mr. Cuomo rages against a tax reform that has helped the overall U.S. economy, even in New York.

I especially enjoy how Governor Cuomo is irked because his state’s profligacy is no longer subsidized by an unlimited federal deduction for state and local taxes.

Investor’s Business Daily shares a similar perspective.

New York Gov. Andrew Cuomo…we appreciate his recent frankness on taxes. …”I don’t believe raising taxes on the rich,” Cuomo said. “That would be the worst thing to do. You would just expand the shortfall. God forbid if the rich leave.” …In support of his comments, Cuomo cited “anecdotal” evidence that showed high-income earners are leaving the high-tax Empire State for other low-tax states. But the evidence isn’t merely anecdotal. It’s a fact. …From 2010 to mid-2017, New York had a net outmigration of over 1 million people, more than any other state. No, they’re not all rich. But many are. …the wealthy have choices that others don’t. One of those choices is to move if taxes become not merely burdensome, but punitive. That’s what’s happening in New York. …Many high-income taxpayers are leaving New York for low-tax states, tired of paying the state’s bills and then being demonized leftist activists for being “rich” and told they must give more.

Let’s close with some excerpts from a column in the Washington Times by Richard Rahn. He compares New York, Virginia, and Florida.

…many high-income New Yorkers have been moving their tax homes to Florida, undermining the New York tax base. …Florida imposes no state and local income taxes… Florida is booming, with a budget surplus, while New York is mired in debt. Only 50 years ago, New York had four times the population of Florida, and now Florida is larger than New York. …the state of Florida…created an environment where businesses could flourish without undue tax burdens and government interference. It went from being a poor state to a prosperous one. …citizens of New York should be asking: Why they are required to pay such high state and local income tax rates while the citizens of Florida get by perfectly well without any state income tax; Why they have three times more per capita debt than Floridians, and infrastructure that is in far worse shape; …Why it takes a third more of their citizens’ personal income to run the government than in Virginia or Florida; Why their state takes twice the percentage of per capita income in taxes than Virginia and Florida; …When it comes to taxes and government services, people’s feet tell more about how they feel than their mouths.

And if you want to know why so many people are traveling down I-95 from New York to Florida, this table from Richard’s column tells you everything you need to know.

For what it’s worth, there are people who are willing to pay extra tax to live in certain high-tax states. New York City has an allure for some people, as does California’s climate and scenery.

But are those factors enough to compensate for awful tax systems? Will they save those states from economic decay?

At best, they’ll delay the day of reckoning. For what it’s worth, I actually think New Jersey or Illinois will be the first state to fiscally self-destruct.

You can cast your vote by clicking here.

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Image credit: Zack Seward, licensed under CC BY-ND 2.0.

Trade, Congress, Separation of Powers, the Administrative State, and the Constitution

Wed, 02/20/2019 - 12:02pm

One of the interesting games in Washington is deciding who on the right (however defined) is a “Trumpie” and who is a “Reaganite.”

Here are a few indicators.

But, given the huge gap in their views, trade is probably the biggest way of separating the Trumpies from the Reaganites.

And if you want a clear dividing line for Members of Congress, just see whether they support the “Reciprocal Trade Act” or the “Congressional Trade Authority Act.”

The former is sponsored by Congressman Sean Duffy of Wisconsin and would empower Trump to impose more taxes on trade.

Bryan Riley of the National Taxpayers Union is wisely skeptical.

…treating our trading partners as allies rather than adversaries has paid enormous dividends for Americans. Just since 1990, world tariffs fell by nearly two-thirds as U.S. exports more than doubled, even after adjusting for inflation. …The Reciprocal Trade Act would turn this successful approach to trade on its head. …proponents who endorse this approach often argue that tariff reciprocity is needed to as a lever to reduce foreign trade barriers. But the White House’s own case studies show this is untrue. …Trump wants to replace a successful post-World War II policy based on the understanding that trade is win-win with one that is likely to encourage foreign governments to retaliate against Americans. …History shows trade policy is more likely to succeed if it is based on the Golden Rule instead of on hostile eye-for-an eye reciprocity. It turns out that the United States benefits when we treat our trading partners the way we would like them to treat us. …Princeton University’s Robert Keohane described how countries benefit from this “sequential reciprocity”… The goal of the Trump administration’s trade policy should be to promote reciprocal trade, not reciprocal taxes.

Here’s a chart from Bryan’s study that shows how trade liberalization in recent decades has been very successful.

In an article for National Interest, Clark Packard also pours cold water on the Reciprocal Trade Act.

The United States Reciprocal Trade Act, which will soon be introduced by Rep. Sean Duffy (R-Wis.), would expand the president’s already enormous unilateral authority to impose tariffs and other import restrictions. …the Reciprocal Trade Act would grant the president the authority to match the tariff applied to any given product by a trading partner. To use one of the administration’s favorite examples, the Europe Union applies a 10 percent tariff on imported automobiles, while the United States levies a 2.5 percent tariff on its imports. The Reciprocal Trade Act would allow the president unilaterally to raise the tariff to 10 percent on European cars as leverage for further negotiations.

He lists some of the reasons why the proposed law is bad policy.

The bill is enormously flawed and should be a nonstarter for myriad reasons. …violates U.S. commitments to the WTO’s Most-Favored Nation (MFN) principle of nondiscrimination. …The bill also would violate U.S. commitments under Article II of GATT. …the effect of the law would be that countries would retaliate against American exports and ensnare unrelated industries in a tit-for-tat. …The United States has been successful in getting other countries to lower tariffs and other trade barriers through negotiations. …the Reciprocal Trade Act would jeopardize this American-led system that has paid enormous dividends.

All of his points are accurate, though I don’t expect the president’s supporters would care about violating WTO obligations since they presumably would cheer if Trump pulled the U.S. out of the the agreement – even though it has been very beneficial for the United States.

Now let’s look at the Congressional Trade Authority Act, which would restrict rather than expand the ability of the executive branch to impose higher taxes on trade.

Adam Brandon of FreedomWorks explains the principles at stake.

…the Bicameral Congressional Trade Authority Act would ensure that all tariffs imposed by the executive branch in the name of national security must first be approved by Congress. Article I, Section 8 of the Constitution establishes that Congress “shall have the power to lay and collect taxes, duties, imposts, and excises.” The framers, in their wisdom, made this the very first power they delegated specifically to the legislative branch of the United States. Tariffs are taxes, and they adversely impact American consumers. Such measures should be enacted only after thoughtful debate by the elected representatives most accountable to the people of the United States. They should not be handed down unilaterally from the White House. …it’s time for Congress to reclaim their enumerated Article I power over trade. …FreedomWorks agrees with Rep. Gallagher and Sen. Toomey on the need to respect our Constitution and ensure Congress has full control over its Article I authority.

The Wall Street Journal opines favorably about Senator Toomey’s legislation.

…some on Capitol Hill are trying again to rein in the President’s tariff powers. …the Pennsylvania Republican…Mr. Toomey’s bill would require Congress’s blessing. Once a tariff is proposed, lawmakers have 60 days to pass a privileged resolution—no Senate filibuster to block consideration—authorizing it. No approval, no tariff.This is a serious reassertion of the Article I trade powers that Congress has long shirked. Since the bill is retroactive, President Trump would have to convince Congress that his tariffs on steel and aluminum are necessary. If lawmakers didn’t agree, the tariffs would end. …But that’s not all. The Commerce Secretary is now responsible for declaring that an import endangers national security. This bill would give the task, sensibly, to the Defense Secretary.

I like what Senator Toomey is trying to achieve. And I like it, not only because I don’t want politicians interfering with trade, but also because I support the Constitution.

America’s Founders deliberately set up a system based on Separation of Powers because they understood that unilateral power was a recipe for government abuse.

Interestingly, many Trumpies also claim to support the Constitution. Indeed, they are some of the biggest critics of the “administrative state,” which developed as federal agencies began to exercise legislative powers.

Which gives me an opportunity to contribute something to this discussion. I’m a great admirer of the American Enterprise Institute’s Mark Perry, in part because of his very clever hypocrisy-exposing Venn Diagrams (taxation and incentivesthe War on Drugsminimum wageFood and Drug Administration, and consenting adults).

So, in hopes of showing Trumpies the error of their ways, here’s my humble attempt to copy Mark.

P.S. Even though open trade is very beneficial for American prosperity, I would not want a future president to assert unilateral power to eliminate tariffs. Yes, I want better policy, but I also support the Constitution and the rule of law.

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Image credit: Bjoertvedt, licensed under CC BY-SA 3.

Paid Family Leave: An Ideological Analysis

Tue, 02/19/2019 - 10:51pm

[PDF Version]

Paid Family Leave: An Ideological Analysis

By Sven R. Larson*

In his 2019 State of the Union speech, President Donald Trump reaffirmed his commitment to paid family leave:

I am also proud to be the first President to include in my budget a plan for nationwide paid family leave – so that every parent has the chance to bond with their newborn child.

This was not the president’s first expression of commitment to this new entitlement. Two years ago, in his first budget since taking office, he appropriated $1.9 billion for what was de facto a pilot program for federally funded paid family leave.

The president’s renewed commitment to tax-paid income security for working families suggests that if Congress passes a paid-leave bill, he will sign it. Given the formidable fiscal risks associated with a program of this kind – with annual costs that could amount to hundreds of billions of dollars – there is notably little in terms of real, solid debate over it.

Specifically, there is a lack of principled discussion over the role of government in the financial security of America’s families. This paper is a contribution toward that discussion.

Paid family leave: an overview

As of December 2018, four states offer paid family leave to parents of newborns: California, New Jersey, New York and Rhode Island. The District of Columbia also has a program in place, and the state of Washington will start paying out benefits in January 2020.

With the election of Jared Polis to be the next governor of Colorado, and his fellow Democrats now controlling both chambers in the state legislature, the Centennial State is likely to soon join the paid-leave ranks. Having pledged to create government-funded single-payer health care and paid family leave, as well as universal child care, Polis is poised to put Colorado in the forefront of America’s welfare-state expansion.

In the meantime, the paid-leave issue has moved forward in Congress, most recently among Republicans. Senator Rubio (R-FL) has turned a proposal from the conservative Independent Women’s Forum (IWF) into the Economic Security for New Parents Act. With bipartisan support growing, in part thanks to Senator Ernst (R-IA), it is probably only a matter of time before Congress sends a paid-leave bill to the president’s desk. Given President Trump’s support for the idea, there is a fair chance he would sign it.

The surge in support for paid leave has emerged despite the absence of studies on how much it would cost taxpayers. Even more glaring is the lack of ideological debate over paid leave: with the build-up of conservative support, the conversation about government’s role in the lives of American families has faded into the background.

From both an economic and a fiscal viewpoint, there is a compelling case to be made against tax-paid family leave. Modeled after European standards, a federal paid-leave program could cost the federal government close to $500 billion per year – and this is just for leave related to child birth. Programs that provide paid leave often include personal sick leave and leave to care for a sick family relative. Expanded in those directions, paid leave could overtake Social Security as the single costliest entitlement program in the federal budget.

With an established economic case against paid leave, the ideological question emerges as the prominent one. Liberal proponents of paid leave want it for ideological reasons; the non-economic motives of conservatives are more obscure, reinforcing the case for a principled examination of the idea. This paper will place paid leave in the context of two opposing ideologies, asking pointedly: what vision does an ideology for paid leave have of the America that the children, whose parents are on paid leave, grow up to inherit? Likewise, what vision of America’s future emerges from an ideology that opposes paid leave?

The formal term for entitlement programs like paid family leave is “general income security”. They resemble Social Security in that they provide income-style entitlements, but they differ in that the entitled population is of working age. In addition to paid family leave, general income security programs – as they exist in Europe – include paid sick leave, paid leave for parents to stay home with sick children and for the care of other family members. There have even been experiments with general leave time for unspecified personal reasons.

Benefits are based on a person’s income, with replacement rates varying greatly. Existing European programs gravitate toward the 70-80 percent bracket; state-run programs in the United States offer lower replacements rates. They also replace income for a shorter period of time; while 6-12 weeks is the target in the United States, Canadian parents can take up to a year off, courtesy of taxpayers.

Funding normally comes from a payroll tax, which, combined with income-base benefits, theoretically means that every taxpayer is supposed to fund his own benefits. In practice, this model has proven difficult to maintain from a fiscal viewpoint, as exhibited by the very high payroll taxes in the Scandinavian countries. A similar model, used in Social Security, is expected to bankrupt the program in 2034.

The comparison to Social Security is relevant also from an ideological viewpoint. Social Security is generally perceived to be a personal income-security program administered by government. This is not the case: there is no direct relationship between a person’s tax payments into a general income security program and his benefits withdrawal. Current tax revenue fund current benefits. All a taxpayer earns is a set of IOUs, claims on the system’s future tax revenue. Technically, this means that Social Security redistributes money from the current working-age population to the elderly.

Furthermore, the benefits in Social Security are calculated based on a redistributive formula: the higher the income, the smaller the share that qualifies for benefits. By contrast, the Social Security tax is a flat rate of 6.2 percent up to a cap, currently $128,400. In other words, the funding of Social Security is slanted toward higher-income households, while lower-income households benefit disproportionately as a larger share of their income counts toward their benefits.

Existing paid-leave programs in the United States are built with generally the same fiscal architecture. The paid family leave program in California, for example, caps weekly benefits at $435, which equals a pre-tax annual income of approximately $23,000.[1] By contrast, the payroll tax funding the program applies to incomes up to five times the average benefit ($118,371 in 2018). The estimated average annual wage in California for 2018 is $56,458, which means that the average taxpayer earns almost 2.5 times the maximum benefits. In other words, low-income workers benefit substantially more from the paid-leave program than higher-earning families. Furthermore, the payroll tax applies to all income earners, not just those having or planning to have children.

New York activated its paid-leave program this year. It has a similar profile, where the average benefit paid out, $652.95, is half the average wage on which the paid-leave payroll tax is levied.

At the national level, the Economic Security for New Parents Act is based on Social Security, thus adopting its redistributive profile. The idea is, in fact, to allow parents to withdraw Social Security benefits already when they have children. There would be no new tax; current tax revenue is supposed to be sufficient.[2] Parents who use the paid-leave benefit would “repay” Social Security by delaying or diminishing benefits upon retirement.

A key problem with the Rubio-IWF program is that it is even more redistributive in nature than Social Security itself. In fact, Senator Rubio’s own presentation of the proposal suggests that families earning up to $30,000 per year could cash in more than 100 percent of their annual income while on paid leave. Those benefits would add to existing programs, such as the Earned Income Tax Credit, according to which a family with two income earners and two children and an annual income of up to $30,000 gets more from EITC than they pay in income taxes.[3] Given all other benefits the family can qualify for, they become a net taker as benefits exceed the personal income and Social Security taxes they pay.

Since federal income taxes are paid almost entirely by the upper half of all income earners, the Rubio-IWF program clearly belongs in the ideological camp that favors economic redistribution. It reinforces the role of the federal government as an engine of economic redistribution.

Already today, two thirds of the federal government budget is designated for the purposes of redistribution. This is both a question of averting a future fiscal disaster for the United States, and a question of ideology: what role do we want government to play in our lives? Adding yet another program adds to the pertinence of both questions.

In fact, there are two reasons to take seriously the ideological profile of paid family leave. First, there comes a point where government involvement in the economy, for the purposes of economic redistribution, becomes so pervasive that it takes a permanent and sizable toll on the economy. Eventually, this leads to economic stagnation and, over time, a slow decline in the standard of living.[4] Is it worth this price to pursue a larger welfare state in America?

Secondly, the scarce ideological debate over paid leave suggests that if it is given more attention, it will add value and perspectives to the conversation that may change minds. Furthermore, programs that provide some kind of income security to working adults tend to grow in size and scope. General income security programs are bigger and more generous in other countries, and suggesting that once a U.S. program is created, it will only change in one direction. This prediction is validated further by the fact that no federally funded entitlement program has ever shrunk, nor have they ever ended without being replaced by another.

Put more broadly: as the federal government expands further into economic redistribution, it eventually reaches a point where the United States as a constitutional republic permanently and decisively changes character. Therefore, the ideological question behind paid leave is more consequential than the program itself.

America’s ideological controversy

The thought of an ideological debate often boils down to the banality of a liberal-conservative shouting match over the issues in the current news cycle. At a more informed level, ideological exchange is about much more comprehensive perspectives on society. It is about visions of what our country should look like, now and, more importantly, in the future.

In the words of Michele Filippini, political science professor at University of Bologna, the philosophical definition of an ideology is “a constantly coherent expression of social totality”.[5] More prosaically, an ideology can be thought of as a socio-economic ideal in the image of which we would like to reshape society as we know it today.

The transformation of an ideology into policy and legislation centers in on the role of government – the state – in people’s lives. Therefore, an ideological analysis of a specific policy issue necessarily concentrates on how the issue will change the relationship between the state and individual citizens. Paid family leave clearly falls into the category of legislation that expands the state’s role in individual life. It is, the idea suggests, the role of the state to change individual behavior by altering the consequences – in this case the economic benefits – of individual decisions.

When the Founding Fathers authored the founding documents of the United States, their starting point was an entirely opposite idea of the state-individual relationship. They defined constraints for the state for the very purpose of protecting the individual and his inalienable rights. From there, they reasoned their way to what state would be needed as a support function for a society centered around individual freedom.

In other words, they ranked the individual as superior to the state. It was a radical idea in an era when the superiority of the state – typically embodied in a monarch – was the constitutional norm. This notion of building a society around the individual had been given its first systemic format in John Locke’s Second Treatise of Government, but the U.S. Constitution was the first successful effort at politically practicing the principle of enumerated state powers (as opposed to the traditional European idea of enumerated individual freedoms).

In modern terminology, we know the ideology that ranks the individual above the state as libertarianism. It defines a narrow set of legitimate state functions – protection of life, liberty and property – and characterized the United States for much of its first hundred years. Its influence included the expansion of individual freedom to all Americans through the termination of slavery.

With the beginning of the 20th century a shift began, where the state slowly but steadily broadened its presence in the lives of American families. Dan Mitchell has exposed this trend, which conspicuously coincides in time with the rise of a new crop of ideological thinking where the state is again superior to the individual. The purpose of this new statist thinking was different from the pre-United States European monarchy: the main role of the state was economic redistribution as opposed to feudalism, but the effect on individual freedom was similar.

As Mitchell demonstrates, after World War II peacetime spending by the federal government had expanded almost tenfold as share of GDP. It parked itself around 20 percent of GDP, where it has remained since then. It is, in essence, the economic symptom of an ideological challenge to libertarianism.

This challenge did not go unnoticed at the time. A good example is a 1956 essay by Charles Wolfe of the Foundation for Economic Education. Under the title Libertarians and the Constitution, Wolfe explains:

[Toward] the end of the nineteenth century, and especially since the 1930s, more and more Americans began to accept a theory of government – call it statism, collectivism, socialism, or what you will – in direct opposition to the individualist philosophy of our Founding Fathers.

Wolfe sees libertarians as the most ardent defenders of the values embraced by the authors of the Constitution. Those values, he says, are

rooted in a clear perception of the significance of the individual, his inclinations toward self-sufficiency and self-government, and his deep beliefs in the right to own and exchange the fruits of his labors without government intervention.

One of the clearest examples of this challenge, Wolfe notes, is the introduction of the federal income tax in 1913. The Social Security Act, President Franklin Roosevelt’s signature peacetime achievement, is equally significant.

President Lyndon Johnson’s War on Poverty was a major contribution toward the redefinition of the role of government in the United States. By importing key elements and ideological markers such as a relative poverty concept, the War on Poverty substantially redirected federal spending and made economic redistribution the principal purpose of federal tax revenue.[6] As Mitchell and Wolfe explain, Johnson’s presidency was not the beginning of that redefinition, but it was the point when a new ideology gained systemic footing in the American economy.

That ideology has many names; its front figure during the 20th century, John Rawls, defined it as social justice.[7] Compared to libertarianism, it fundamentally redefines the relationship between the individual and the state by demoting the former and elevating the latter. Technically, it removes the enumerated boundaries on state powers and allows for an unlimited growth in government spending. General income security, including paid family leave, fits well within the realm of social justice.

Libertarianism, on the other hand, excludes paid family leave from the list of legitimate state functions.

Libertarianism and the minimal state

While the origins of libertarianism stretch back to John Locke, it was Robert Nozick, Harvard professor of philosophy, who placed it in the context of the modern political discourse. He opened his legendary book Anarchy, State and Utopia with the question:[8] “If the state did not exist would it be necessary to invent it?”

Strikingly similar to the question implicit in the American founding, this question is best answered from the viewpoint of human nature. This is also Nozick’s approach. In a situation without government, he says, ”people generally satisfy moral constraints and generally act as they ought.”[9] It is not overly optimistic to make this assumption about human nature: it does not, he notes, “assume that all people act exactly as they should” – all it means is that we are intelligent and capable enough to maintain a free society by means of responsible citizenship.

In other words, Nozick clearly agrees with the Founding Fathers in that the individual ranks superior to the state. This calls for strict enumeration of state functions. However, Nozick also shared the fear that the founders had of a society where government would be too weak to uphold its minimal duties. If the state does not exist, he notes, conflicts between individuals will eventually descend into violence and the breakdown of ordered society (1974, p. 11):

private and personal enforcement of one’s rights (including those rights that are violated when one is excessively punished) leads to feuds, to an endless series of acts of retaliation and exactions of compensation. And there is no firm way to settle such a dispute, to end it and to have both parties know it is ended.

In the absence of the state, disputes between individuals will open a slippery slope of deterioration into anarchy. Once the boundary is established between the enumerated functions of the state and anarchy, a minimal state emerges a residual to human nature. Nozick again (1974, p. 11):

Only after the full resources of the state of nature are brought into play, namely all those voluntary arrangements and agreements persons might reach acting within their rights, and only after the effects of these are estimated, will we be in a position to see how serious are the inconveniencies that yet remain to be remedied by the state, and to estimate whether the remedy is worse than the disease.

The minimal state is the smallest tolerable state, a state confined to conflict resolution and the protection of life, liberty and property. It is also the largest tolerable state: it is explicitly prohibited from actively trying to alter the outcomes of voluntary trade – in other words, redistribute income and wealth.

For every right that an entitlement program assigns to one group of people, a reciprocal duty is assigned to another group. That duty consists of providing the resources necessary to fund the entitlement. As explained earlier, a tax-funded paid leave program is an entitlement program of this nature. Due to its redistributive nature, it violates the libertarian constraint on state functions.

Social justice and the welfare state

Tracing its roots back to the early 1800s, social justice as an ideology is almost as old as the American constitution. However, it was not until the latter half of that century that the message of economic redistribution gained enough momentum to become politically influential. The formation of social democrat parties and affiliated labor unions in Europe paralleled the emergence of Marxism as a formalized ideology of economic redistribution.

The pursuit of social justice split into two broad categories: one spearheaded by the likes of V.I. Lenin, leading to the violent, systemic transformation of entire nations; and another that followed a peaceful, parliamentary route through gradual reforms. While the Leninist path fell into well-earned disrepute with the collapse of the Soviet Union, the reformist alternative is still thriving, especially here in the United States.

At its core, the reformist pursuit of social justice is no less revolutionary than its Leninist brethren.[10] It calls for the state to take over responsibility for almost every dimension of private life: health care, child care, education (from kindergarten through college), general income security, retirement security, elderly care, housing and transportation. In Sweden, social democrat governments were exceptional in pursuing this image of complete social justice, but their American peers have not been unsuccessful. Having imported the foundations of the Swedish welfare-state model to the United States in the 1960s, they have gradually pushed expanded state functions into health care, welfare and education.

Paid family leave represents a major advancement into general income security. As explained by the works of John Rawls, it will not be the last example of government advancement into economic redistribution.

Over a period of 14 years, from 1957[11] to 1971 and the publication of A Theory of Justice, Rawls formulated an ideological foundation for social justice that has become as influential as Nozick’s Anarchy, State and Utopia. Rawls’s influence is borne by two contributions: his strict adherence to philosophical arguments, thus avoiding the relatively complicated reasoning of economic analysis; and his valiant attempt to steer clear of Lenin’s totalitarian waters.

Rawls’s bulwark against communism consisted primarily of an effort to make social justice compatible with the ideals of the American founding. In other words, without explicitly saying so, he tried to make the Scandinavian welfare state fit into the libertarian republic designed by the Founding Fathers. His method consisted of a redefinition of two concepts dear to the American constitutional republic: justice and liberty.

Justice, he says, is[12]

the elimination of arbitrary distinctions and the establishment, within the structure of a practice, of a proper balance between competing claims.

The only way that this definition of justice can work is if it is expanded into new territory, beyond justice as exaction of compensation for violations of life, liberty and property. That new territory is social justice, which brings the term “justice” straight into the economy. In his definition, Rawls makes “arbitrary distinctions” between individuals an injustice; by extending the arbitrariness of distinctions – differences – to “competing claims” he makes clear that his injustice is about economic distribution.

The term “claim” has nothing to do with criminal justice, but everything to do with want for goods and services. It refers squarely to a situation where person A makes a lot of money, person B makes little money and person B lays claim to some of person A’s income. This competition between person A’s claim to his own income and person B’s claim to what A makes, is a case of “arbitrary distinction” that Rawls then defines as a situation of social injustice.

By including economic distribution, Rawls effectively commodifies the term “justice”. A society is no longer just simply because people are secure in their lives, liberty and property; its government also has to establish an elaborate system for economic redistribution.

We know that system as the welfare state. Once the welfare state goes to work, it not only attenuates the concept of justice by elevating economic redistribution and demoting justice qua justice, but it also comes into direct conflict with liberty. A welfare state, the essence of which is a system of entitlements for select segments of the population, cannot deliver on its entitlement promises unless it forces others to provide the necessary resources.

A clash between social justice and liberty makes it impossible for Rawls and his disciples to fit their ideology into the American constitutional republic. Therefore, Rawls simply redefines the term “liberty” in the same way he does “justice”. Rawls does this by means of two principles,[13] the first of which says that “each person participating in a practice, or affected by it, has an equal right to the most extensive liberty compatible with a like liberty for all”.

Superficially, this sounds like the principle in the Declaration of Independence, namely that we are endowed with liberty by our Creator. However, this is not what Rawls means. He specifically refers to “a like liberty for all” and thereby turns liberty into a quantity for distribution – and redistribution – among individual citizens.

The second part of his definition brings him closer to commodifying liberty in the same way he did with justice. He says that one man’s quantity of liberty must be “compatible” with a distribution of liberty where everyone has an equal amount.

This definition of liberty is fundamentally at odds with how it is defined in the Declaration of Independence. It is also at odds with the definition proposed by Nozick and other libertarians. There, liberty simply means that a man’s life, liberty and property is respected entirely by others.

Rawls’s quantification of liberty necessarily becomes a commodification. One man’s liberty is directly dependent on another man’s liberty; my liberty must be compatible with my neighbor enjoying the same liberty.

If this was simply a matter of us respecting one another’s life, liberty and property, there would be no need for the compatibility component of Rawls’s definition. That connection is essential to establishing social justice as an ideology. It means, namely, that one man can gain more liberty and that in doing so, he directly diminishes another man’s liberty.

In other words, liberty is measurable in terms of commodities, and can be distributed among individuals. Therefore, it can also be re-distributed by government.

To turn this theory into practical policy, Rawls needs a measurement of the distribution of liberty that conveniently lends itself to legislation and statistical follow-up. It must be possible, simply, to see whether or not government has been successful in redistributing liberty.

Rawls recognizes this measurement problem (1957, 654), acknowledging that liberty must be measurable from “less” to “more”.[14] From a public policy viewpoint, the only practical forms of measurement are income and wealth. By translating liberty into money, government can use progressive taxation and a system of entitlements to reduce the liberty of those who have more, and expand the liberty of those who have less, until one man’s liberty is “compatible with alike liberty for all”.

Family Freedom Accounts: an ideological half-measure

Paid family leave is a contribution to the expansion of the welfare state and to the marginalization of government’s core duties in favor of economic redistribution. It also creates a new form of entitlement, general income security, that can easily be expanded into other forms of benefits, most obviously tax-paid sick leave. It does, in other words, open a big can of egalitarian worms that we chew away at both taxpayers and the libertarian ideals embedded in the U.S. Constitution.

The question, then, is why conservative groups such as IWF would want to propose this new entitlement. Senator Rubio has been quoted as motivating the Economic Security for New Parents Act with the need for “a conservative solution to provide paid family leave in a fiscally responsible way”. The IWF reinforces this view, suggesting the plan is “self-financing”. Senator Joni Ernst (R-IA) appears to be in favor of paid leave because she wants a bipartisan solution.

Other conservatives groups have developed ideas with less government involvement. In 2015 the American Action Forum opined that it was a way to ensure “that working families maintain the flexibility necessary to have children and raise a family”. Their model was less intrusive in that it steered clear of institutionalized economic redistribution. Instead, they suggested that

The federal government could enable businesses to offer workers the option to divert a portion of their pretax earnings to a paid leave savings account. This would be similar to a standard 401(k) retirement savings account … instead of accessing the savings during retirement, workers would be able to draw from them whenever they decide to take leave.

A year later the AAF shifted ideological footing with a proposal relying on tax credits and a redistributive profile of benefits. In view of this shift and the main stream of paid-leave proposals, their 2015 idea comes across as less problematic. It shares this character trait with another model called Family Freedom Accounts (FFA). Circulated early in 2018 on Capitol Hill, this model is based on the same idea as the AAF 401(k) model, namely that families should have direct control over the money they will be using for future time off from work.

Constructed as a general 401(k), or with some other tax-exempt status, the Family Freedom Account would allow the deferment of taxes until the point of withdrawal. Since the purpose of the account is to help families build income-related financial security, the terms for withdrawal would be related to leave from work where loss of income is an inevitable consequence. Such events could be, for example:

  • Leave to care for a newborn or a sick child that must be home from school;
  • Absence related to one’s own medical conditions, where the account would not pay for medical costs but exclusively replace lost income;
  • Care for a relative, such as a spouse or an elderly parent.

Income taxes, deferred at deposit, would be paid upon withdrawal. Since the account holder would have full control over the withdrawals (under specified terms), he or she can choose to take less out of the account than the income lost. That way, the deposits can last longer than they would at dollar-for-dollar withdrawal.

The idea of giving tax credits to individual savings is appealing in the context of proposals that are openly redistributive and explicitly – or, in the case of the IWF model, inevitably – rely on higher taxes. However, the fact that a reform is appealing in relation to less attractive alternatives does not give it a good independent standing. Both the AAF’s 401(k) model and the FFA proposal suffer from the same ideological problem: they are both subject to government control and approval.

To qualify for tax deferment, a family would have to withdraw money only for reasons that Congress has approved. While strictly not a redistributive matter – unlike a tax-funded model these models do not create financial inter-family relationships – the designated purpose of a tax deferment model is still ideologically charged. When government takes it upon itself to first tax people for a range of purposes, then allows a credit or a deferment for another range of purposes, it also decides, without our individual consent,

  1. What the worthy causes are on which to spend our money, and
  2. The government-approved ways that private citizens can plan their lives.

In other words, even when families can defer or deduct taxes, they still have to conform to policies that government have selected. Those selections, in turn, are based on ideological considerations: the selection process for what to use tax policy for, is as much a selection process for what private decisions should not receive government approval. That process is not guided by ideological considerations, which by definition elevates the state and demotes the individual. It is, in other words, a practice of social justice – and at least an implicit refutation of libertarianism.

It is also worth noting that when families are given tax incentives to plan their lives along certain ideological lines, government cements a specific tax structure over its alternatives. Since a 401(k) or FFA model for paid family leave relies on the personal income tax, it also makes it more difficult for future Congresses to reform away the personal income tax. A national sales tax – a subject that Dan Mitchell has covered at length – cannot be used for the same social-justice engineering purposes that an income tax lends itself to.

Conclusion

With President Trump’s commitment to paid family leave, the legislative and executive branches of the federal government are on the doorstep of bringing one of the biggest entitlement programs from Europe’s welfare states to America. This is happening with little debate, especially at the ideological level. This is unfortunate: general income security is one of three big pieces of the egalitarian welfare state still absent in the U.S. welfare state. Once created, it brings us a big step closer to a government that will be ideologically indistinguishable from Scandinavian, French, German, Spanish or Greek governments.

The lack of ideological conversation is even more notable, given that President Trump has ramped up his rhetorical refutation of socialism. In the same State of the Union speech where he again committed to paid leave, he made clear that “we renew our resolve that America will never become a socialist country.” Yet if he is willing to let the American welfare state expand, at the end of the day he will have to explain to the American people what the difference is between his vision of our country, and socialism.

Regardless of what term one chooses to use – egalitarianism or socialism – an ideology that promotes economic redistribution is antithetical to the founding principles of the American constitutional republic. Paid family leave is a form of economic redistribution; at what point in the growth of the welfare state will America cease to be what her Founders intended? At what point is a nation’s character changed to the point where she is indeed socialist?

It is for questions like these that America needs to have an ideological conversation about paid family leave, and the role of government in general in the lives of America’s families.

__________________________________

*  Ph.D., political economist and associate scholar with the Center for Freedom and Prosperity. Dr. Larson has a total of 20 years of experience in politics, political economy and public policy, stretching across three countries. His research is published by referee journals and free-market think tanks, and in books such as The Rise of Big Government: How Egalitarianism Conquered America (Routledge, 2018) and Industrial Poverty (Gower/Routledge 2014).

The Center for Freedom and Prosperity Foundation is a public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported and receives no funds from any government at any level, nor does it perform any government or other contract work. Nothing written here is to be construed as necessarily reflecting the views of the Center for Freedom and Prosperity Foundation or as an attempt to aid or hinder the passage of any bill before Congress.

_______________________________________________

Endnotes

[1] This is calculated for a married couple filing jointly, ignoring all deductions. California paid-leave benefits are exempt from state income taxes but must be reported on the federal tax return.

[2] This is a ruse. The period between the start-up of the program and the first repayments in the form of forfeited benefits would be several decades (assuming the mothers of newborns are typically 25-35 years of age), a period during which paid-leave benefits will create a substantial net drain of money from Social Security.

[3] Larson, S.R. The Rise of Big Government: How Egalitarianism Conquered America. Abingdon, UK: Routledge, 2018. See pp 16-18.

[4] Larson, S.R. Industrial Poverty: Yesterday Sweden, Today Europe, Tomorrow America, Aldershot, UK: Gower Applied Research, 2014.

[5] Filippini, M. Using Gramsci: A New Approach. London: Pluto Press, 2017.

[6] Larson (2018).

[7] Rawls, J. Justice as Fairness. The Journal of Philosophy, Vol. 54, No. 22 (Oct., 1957), pp. 653-662; and Rawls, J. A Theory of Justice. Cambridge, MA: Harvard University Press, 1971.

[8] Nozick, R. Anarchy, State and Utopia. New York, NY Basic Books, 1974.

[9] Nozick (1974).

[10] Galbraith, J.K. Economics and the Public Purpose. New York: Signet, 1973. See also Larson (2018).

[11] Rawls (1957).

[12] Ibid.

[13] Rawls (1957, 654).

[14] British philosopher H.L.A. Hart notes that Rawls only allows for “restriction of liberty for the sake of liberty itself” (1973, 537). However, this lexicographic ranking of liberty is not compatible with Rawls’s claim that liberty can be “more” or “less”.

References:

Filippini, M. Using Gramsci: A New Approach. London: Pluto Press, 2017.

Galbraith, J.K. Economics and the Public Purpose. New York: Signet, 1973

Hart, H.L.A. Rawls on Liberty and Its Priority. The University of Chicago Law Review. Vol. 40, No. 3 (Spring, 1973), pp. 534-555.

Larson, S.R. The Rise of Big Government: How Egalitarianism Conquered America. Abingdon, UK: Routledge, 2018. See pp 16-18.

Larson, S.R. Industrial Poverty: Yesterday Sweden, Today Europe, Tomorrow America, Aldershot, UK: Gower Applied Research, 2014.

Nozick, R. Anarchy, State and Utopia. New York, NY Basic Books, 1974.

Rawls, J. Justice as Fairness. The Journal of Philosophy, Vol. 54, No. 22 (Oct., 1957), pp. 653-662.

Rawls, J. A Theory of Justice. Cambridge, MA: Harvard University Press, 1971.

Low-Income Workers Are Victimized by Spain’s Suffocating Taxation

Tue, 02/19/2019 - 12:44pm

I’m not an optimist about the future of Europe, mostly because welfare states are unaffordable in nations suffering from demographic decline.

Given the grim trends on the continent, I expect many other nations (probably led by Italy) will experience the fiscal and economic mess that we’ve seen in Greece.

Let’s dig into this issue by reviewing a story in the New York Times about economic stagnation in Europe, focused mostly on Spain.

After decades of living comfortably in Spain’s upper middle class, the middle-aged couple are struggling with their decline. Spain’s economy, like the rest of Europe’s, is growing faster than before the 2008 financial crisis and creating jobs. But the work they could find pays a fraction of the combined 80,000-euro annual income they once earned. …Since the recession of the late 2000s, the middle class has shrunk in over two-thirds of the European Union…they face unprecedented levels of vulnerability.

So why are middle-class workers in such bad shape?

As you read the article, you find references to factors such as the “financial crisis” and “weakened social protections,” but no coherent explanation for why the private sector is languishing.

Unless you read all the way down to the 22nd paragraph, where you finally get an interesting detail that probably explains much of Spain’s economic malaise. Taxes are so absurdly high that a guy with a modest income only gets to keep one-third of the money he earns! This is such a jaw-dropping factoid that I’ve made it an image rather than an indented excerpt.

Wow, the confiscatory tax rates that Alexandria Ocasio-Cortez and Bernie Sanders want to impose on “rich” people in the United States already are already being imposed on low-income taxpayers in Spain.

No wonder Spaniards are so inventive about avoiding taxes.

And this story is a perfect example of why I constantly warn that European-type redistribution policies in the United States would result in much higher taxes for lower-income and middle-class taxpayers.

By the way, you probably won’t be surprised to learn that the current Spanish government (just like a previous Spanish government) wants to make a bad situation even worse.

Prime Minister Pedro Sánchez… The Socialist leader grabbed power last summer with the fragile backing of Podemos, the left-wing anti-austerity party. Warning of middle-class frustrations, his embattled government ordered a 22 percent rise in the minimum wage in January, and has vowed to reverse some labor laws, increase social spending and raise taxes on companies and the rich.

There’s an election in April, so we’ll see whether Sánchez’s plan to impoverish his country actually gets adopted.

My only prediction, based on what’s happened in the past, is that tax increases will not be successful.

P.S. The story has two additional excerpts that help to explain Spain’s anemic performance. We have very strong evidence in the United States that unemployment benefits subsidize joblessness. Spain appears to be learning the same lesson, though the government still pays people to be unemployed for 1-1/2 years.

Unemployment benefits…that state money, with budget cuts, now lasts 18 months, down from 24.

I’ve also written about how so-called labor-protection laws discourage hiring. Well, seems like Spain is a very grim example of how this type of intervention backfires on intended beneficiaries.

…temporary and part-time contracts…can lead to steady work and better incomes. But companies and Europe’s public sector have mostly used them to dodge protections for permanent employees. In Spain alone, 90 percent of new jobs in 2017 were temporary.

P.P.S. Here’s a sobering look at pre- and post-1990 growth in Spain and Poland.

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Image credit: Efraimstochter, licensed under Pixabay License.

New CF&P Paper Provides an Ideological Analysis of Paid Family Leave

Tue, 02/19/2019 - 12:07pm

Center for Freedom and Prosperity Foundation

For Immediate Release
Tuesday, February 19, 2019
202-285-0244

www.freedomandprosperity.org

New CF&P Paper Provides an Ideological Analysis of Paid Family Leave

(Washington, D.C., Tuesday,February 19, 2019) The Center for Freedom and Prosperity Foundation released today a new study titled, “Paid Family Leave: An Ideological Analysis.” Authored by Sven R. Larson, the paper adds much needed context to the ongoing debate over paid family leave.

Link to the paper: http://freedomandprosperity.org/2019/publications/paid-family-leave-an-ideological-analysis/

From the Summary:

Given the formidable fiscal risks associated with a program of this kind – with annual costs that could amount to hundreds of billions of dollars – there is notably little in terms of real, solid debate over it.

Specifically, there is a lack of principled discussion over the role of government in the financial security of America’s families. This paper is a contribution toward that discussion.

About the Author: Dr. Sven R. Larson is a Ph.D., political economist and associate scholar with the Center for Freedom and Prosperity. Dr. Larson has a total of 20 years of experience in politics, political economy and public policy, stretching across three countries. His research is published by referee journals and free-market think tanks, and in books such as The Rise of Big Government: How Egalitarianism Conquered America (Routledge, 2018) and Industrial Poverty (Gower/Routledge 2014).

For additional information:
Andrew Quinlan can be reached at 202-285-0244, [email protected]

 

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Basic Income and Handouts for People Who Are “Unwilling to Work”

Mon, 02/18/2019 - 12:23pm

When I wrote about Alexandria Ocasio-Cortez’s so-called Green New Deal, I mostly focused on the very expensive fiscal implications. I also noted that AOC’s proposed 70 percent tax rate on the rich wouldn’t even pay for a tiny fraction of the multi-trillion dollar cost (in other words, you and me would be pillaged).

Others focused on some of the inane goals of the legislation, such as phasing out cows and air travel.

But the part of the plan that produced the most controversy was the promise to provide “economic security” to those “unwilling to work.” This generated so much mockery that it no longer appears in any supporting documents and some supporters even claim that it never was part of the plan.

But some true believers aren’t backing down. Let’s look at some excerpts from Christine Emba’s recent column in the Washington Post.

The rollout of the progressives’ Green New Deal has been less than smooth. One major reason: the release of an FAQ that listed“economic security” for those “unwilling to work” as one of the program’s goals. “Unwilling”? The now-retracted FAQ made other eyebrow-raising claims, but conservatives pounced on that word in particular. …welfare as a reward for laziness, it was called extreme, absurd…a “Communist Manifesto, 21st Century.”

Give Ms. Emba credit.

She didn’t pretend, like many other folks on the left, that the promise of no-strings handouts for the indolent wasn’t part of AOC’s original plan. For this reason, we should probably add her to our collection of honest leftists.

But while I applaud the honesty at the start of her column, the analysis that follows is profoundly awful.

She basically argues that the success of welfare should be judged by whether recipients are happy to get free money.

…is the idea of unconditional economic security really so extraordinary? …A state-dispensed, unconditional cash stipend for every single citizen — whether willing to work or not — has been touted as a way to…perhaps end deep poverty …most Americans look askance at the idea of giving anyone anything free, let alone something as intangible as well-being. It’s life, liberty and the pursuit of happiness, after all. Actually getting it is up to you. But what if we thought differently? Well-being — happiness in some sense… Health is a key measure of well-being. Adequate food and housing support it. …Which outcomes do we really care about? …Work isn’t all that matters. Improving well-being is a more than respectable goal.

And she even cites the failed program from Finland to justify her position.

Finland recently completed a landmark basic income project… One of the main goals of the Finnish project was to test whether a basic income would promote employment. …the program wasn’t much of a success: During the first 12 months, at least, basic income recipients fared no better or worse at finding employment than a control group. But it made a radical difference in other ways. “The basic income recipients of the test group reported better well being in every way,” chief researcher Olli Kangas told Reuters.

For all intents and purposes, Ms. Emba is lowering the bar for success. Basic income no longer should be supported because it will encourage more work (as some claim). Instead, we should support it because non-working people will be happy to get more handouts.

Let’s think about what that means. I wrote about socialism a week ago and I shared a very persuasive cartoon that shows why the theory has an inherent practical flaw.

While I’m tempted to recycle that cartoon again, this Wizard-of-Id parody makes the same point.

The bottom line is rather grim. A society that taxes productivity and subsidizes idleness over time will get less of the former and more of the latter.

P.S. While recipients express positive thoughts when they get more handouts, Arthur Brooks has explained that depending on others is not a route to a genuinely happy and fulfilled life.

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