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New Research: Even Talking about Tax Increases Can Cause Economic Damage

Mon, 12/17/2018 - 12:38pm

I recently wrote about the failed 1990 budget deal. My big complaint was that President George H.W. Bush compounded the mistake of higher taxes by also allowing a big increase in the burden of government spending.

However, I didn’t blame the agreement for that year’s recession for the simple reason that the downturn began in July and the tax hike was signed in November (that would make me like Paul Krugman, who wanted people to think that Estonia’s 2008 recession was caused by spending cuts in 2009).

But maybe I’m not being sufficiently critical. After all, Bush announced he would abandon his no-tax pledge in June, and that was then followed by months of tax-hike negotiations. Isn’t it reasonable to think all that talk would have a negative effect, especially on investors and business owners?

The answer may be yes, at least in part. There’s a very interesting new study by Sandra García-Uribe at Spain’s central bank. She examines how the anticipation of tax changes affects economic performance.

Prior to the approval of laws, there is often widespread information about the progress of bills. This information may be valuable for the forecasts that agents make about the economic environment in the future. …This paper provides a way to account for the economic responses to anticipation of tax shocks… In this paper I introduce a new measure of mass media anticipations of tax bill approvals by exploiting the content of news in the US television during the period 1968-2007. …this is the first paper that exploits a dynamic factor model to account for fiscal policy effects on economic activity. The factor specification considers the dynamics of the factor and the potential effects of tax changes and their anticipation on it.

She’s definitely correct about there being a process for tax legislation, so people (“agents” in economic jargon) have ample warning.

The study includes data on how tax increases harm growth once they are adopted.

Figure 3 presents the implementation effects of exogenous tax liability changes on economic activity, in the period 1948 to 2007…The figure shows the cumulative effects in terms of an increase in tax liabilities of a one percent of QGDP together with the one-standard-error bands. The maximum effects are achieved 29 months after implementation of the tax changes when monthly economic activity growth drops by 99.56%. …the maximum implementation effect of a 1% of QGDP increase of tax liabilities is a reduction of monthly economic activity growth of 0,28%. …For the period that we dispose of television data, 1968 to 2007, immediate implementation effects are -6.6% for monthly economic activity growth. Two months after implementation the effects are -10.7%. Maximum effects are a -69.1% and happen 25 months after implementation.

Here’s a chart showing the negative impact of tax increases.

But does the discussion of tax changes also impact the economy?

According to the research, the answer is yes.

Anticipating tax increases reduces economic activity by 1,36% while anticipating tax cuts stimulates it by 3,04%. …Conditional on the media release of information about a potential tax approval, it is likely that people is aware of what is the net tax liability change associated to the potential approval since media also makes reference to terms like ”increase”, ”rise” or ”cut”. There are 20 episode approvals in the sample and learning how to predict the sign joint to the approval based on 10 approvals per sign resulted in something unfeasible. I construct an indicator variable that captures the mention of ”increase” or ”rise” within the tax news to approximate the possibility of a tax rise approval. …In columns (3) and (4) I control for this indicator and its interaction with media anticipation of tax approvals …A 10% probability of tax approvals conditional on the tax news at t not mentioning tax increases significantly stimulates current monthly economic activity growth by 3.04%. In the case of the media mentioning tax increases the effect is a reduction of monthly economic activity growth by 1.36%.

For economic junkies, here’s the relevant table from the study.

By the way, none of this changes my view that monetary policy is always the first place to look when assigning blame for economic downturns and volatility.

Simply stated, taxation is just one of many factors that determine economic performance. But the fact that it’s not the only thing that matters doesn’t change the fact that it’s a very bad idea to increase the tax burden.

Trade and Creative Destruction

Sun, 12/16/2018 - 12:35pm

I have a four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.

Here’s Part III, which explains how trade (whether domestic or international) leads to creative destruction, which results in some painful short-run costs but also yields immense long-run benefits.

I recently argued that creative destruction is the best part and worst part of capitalism.

It’s bad if you’re a worker in a company that loses out (or if you’re an investor in that company). but it’s also what enables us to become more prosperous over time.

I’m not alone. Writing for CapX, Oliver Wiseman reviewed Capitalism in America, a new book by Alan Greenspan and Adrian Wooldridge. Here are some key observations.

…there was nothing predictable about America’s rise from colonial backwater to world-beating economy. …The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold.” …The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity…” On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”. …The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.

For those interested in economic history, Joseph Schumpeter gets most of the credit for developing the concept of creative destruction.

This Powerpoint slide is a nice summary of Schumpeter’s contribution (notwithstanding the fact that the person misspelled his name).

And here’s a Tweet showing that Schumpeter was under no illusions about the folly of socialism.

Turns out, Schumpeter was a troll. pic.twitter.com/7ApBK5UYSy

— Damir Marusic (@dmarusic) December 12, 2018

The bottom line is that creative destruction is what gives us churning, and churning is what dethrones rich and powerful incumbents. My friends on the left should be cheering for it.

Instead, they push for regulations and taxes that hinder creative destruction. And that means less long-run prosperity for all of us.

Piketty Urges Higher Taxes in Response to French Tax Revolt

Sat, 12/15/2018 - 12:20pm

Less than 10 years ago, many European nations suffered fiscal crises because of a combination of excessive spendingpunitive taxes, and crippling debt.

The crises have since abated, largely because of direct and indirect bailouts. But the underlying policy mistakes haven’t been fixed.

Indeed, the burden of government spending has increased in Europe and debt levels today are much higher than they were when the previous crisis began.

Unsurprisingly, these large fiscal burdens have resulted in anemic economic performance, which helps to explain why middle-class French taxpayers launched nationwide protests in response to a big increase in fuel taxes.

The French President, Emmanuel Macron, capitulated.

But some have suggested that Macron’s problem is that he wasn’t sufficiently bold.

I’m not joking. Led by Thomas Piketty, a few dozen European leftists have issued a Manifesto for bigger government.

We, European citizens, from different backgrounds and countries, are today launching this appeal for the in-depth transformation of the European institutions and policies. This Manifesto contains concrete proposals, in particular a project for a Democratization Treaty and a Budget Project… Our proposals are based on the creation of a Budget for democratization which would be debated and voted by a sovereign European Assembly. …This Budget, if the European Assembly so desires, will be financed by four major European taxes, the tangible markers of this European solidarity. These will apply to the profits of major firms, the top incomes (over 200,000 Euros per annum), the highest wealth owners (over 1 million Euros) and the carbon emissions (with a minimum price of 30 Euros per tonne).

Here are the taxes they propose as part of their plan to expand the burden of government spending.

I’m surprised they didn’t include a tax on financial transactions.

And here’s a video (in French, but with English subtitles) explaining their scheme.

To put it mildly, this plan is absurd. It would impose another layer of government and another layer of tax on a continent that already is suffocating because the public sector is too large.

I’m not the only one with concerns.

In a column for Bloomberg, Leonid Bershidsky points out why he is underwhelmed by Piketty’s proposal.

The reforms proposed by Piketty and a group of intellectuals and politicians — notably Pablo Iglesias, leader of Spain’s leftist Podemos party — include the creation of a European Assembly. It would have the power to shape a common budget and impose common taxes…Piketty advocates four measures that would collect a total equivalent to 4 percent of Europe’s GDP… What is being proposed is essentially a return to the fiscal policies of the 1970s, which provoked Astrid Lindgren to write her satirical essay “Pomperipossa in Monismania.” In 1976, the children’s author was confronted with a tax bill of 102 percent of her income. …Hit them with new taxes and watch them flee to the U.S. and Asia. They won’t stay like patriotic Lindgren, whose essay helped to topple the Swedish government in 1976. And no amount of government funding…will repair the damage that envy-based taxation can wreak on economies already finding it hard to innovate.

Let’s not forget, by the way, the many thousands of French households who also have suffered 100 percent-plus tax rates.

But let’s not digress.

Writing for CapX, John Ashmore explains why Piketty’s plan will make Europe’s problems even worse.

…a group of politicians, academics and policy wonks spearheaded by…French economist Thomas Piketty…have put their names to a new Manifesto for the Democratisation of Europe. …For the most part, the manifesto reads like a souped up version of the kind of policies we’ve heard time and again from leftwing politicians. …The details of today’s ‘manifesto’ make Labour’s Marxist Shadow Chancellor John McDonnell look like a moderate centrist. Where Labour advocate putting corporation tax back up to 26 per cent, Piketty and co want it hiked to 37 per cent. And while we Brits spent plenty of the Coalition years discussing whether income tax should be 45p or 50p in the pound, the Manifesto goes all guns blazing for a 65 per cent top rate… these measures are projected to raise 800bn euros, equivalent to four times the current EU budget. …that would be a huge transfer of power, not from the rich from the poor, but from taxpayers to politicians.

A 65-percent top tax rate? At the risk of understatement, that’s a recipe for less entrepreneurship and less innovation.

Moreover, based on America’s experience during the Reagan years, it’s safe to say that actual tax receipts would fall far, far short of the projection.

But the higher spending would be real, as would the inevitable increase in red ink. And it’s worth noting that the Manifesto proposes to subsidize the debt of bankrupt welfare states. Very much akin to the eurobond scheme, which I pointed out would be like cosigning a loan for an unemployed alcoholic with a gambling addiction.

P.S. During my recent trip to London, I repeatedly warned people that a real Brexit was the only sensible choice because the European Union at some point will fully morph into a transfer union (i.e., a European budget financed by European taxes). It was nice of Piketty to issue a Manifesto that confirms my concerns. Simply stated, the United Kingdom will be much better off in the long run if it escapes.

P.P.S. Let’s not forget that Piketty’s core argument for class warfare has been thoroughly and repeatedly debunked. Indeed, only 3 percent of economists agree with his theory.

How Washington Profits from “Tax Extenders”

Fri, 12/14/2018 - 12:18pm

Since I’m a proponent of tax reform, I don’t like special favors in the tax code.

Deductions, exemptions, credits, exclusions, and other preferences are back-door forms of cronyism and government intervention.

Indeed, they basically exist to lure people into making decisions that otherwise aren’t economically rational.

These distortionary provisions help to explain why we have a hopelessly convoluted and deeply corrupt tax code of more than 75,000 pages.

And they also encourage higher tax rates as greedy politicians seek alternative sources of revenue.

This current debate over “tax extenders” is a sad illustration of why the system is such a mess.

Writing for Reason, Veronique de Rugy explains how special interests work the system.

Tax extenders are temporary and narrowly targeted tax provisions for individuals and businesses. Examples include the deductibility of mortgage-insurance premiums and tax credits for coal produced from reserves owned by Native American tribes. …These tax provisions were last authorized as part of the Bipartisan Budget Act of 2018, which retroactively extended them through the end of 2017, after which they have thus far been left to remain expired. If Congress indeed takes up extenders during the current lame-duck session, any extended provisions are likely to once again apply retroactively through the end of 2018, or perhaps longer. There are several problems with this approach to tax policy. Frequently allowing tax provisions to expire before retroactively reauthorizing them creates uncertainty that undermines any potential benefits from incentivizing particular behaviors.

To make matters more complicated, a few of the extenders are good policy because they seek to limit double taxation (a pervasive problem in the U.S. tax system).

…not all tax extenders are a problem. Some are meant to avoid or limit the double taxation of income that’s common in our tax code. Those extenders should be preserved. Yet others are straightforward giveaways to special interests. Those should be eliminated.

Veronique suggests a sensible approach.

It’s time for a new approach under which tax extenders are evaluated and debated on their individual merits. The emphasis should be on eliminating special-interest handouts or provisions that otherwise represent bad policy. Conversely, any and all worthy provisions should be made permanent features of the tax code. …The dire need to fix the federal budget, along with the dysfunctional effects from extenders, should provide the additional motivation needed to end this practice once and for all.

Needless to say, Washington is very resistant to sensible policies.

In part, that’s for the typical “public choice” reasons (i.e., special interests getting into bed with politicians to manipulate the system).

But the debate over extenders is even sleazier than that.

As Howard Gleckman explained for Forbes, lobbyists, politicians, and other insiders relish temporary provisions because they offer more than one bite at the shakedown apple.

If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act.  A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him. Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.

In other words, the temporary nature of extenders is a feature, not a bug.

This is a perfect (albeit depressing) example of how the federal government is largely a racket. It enriches insiders (as I noted a few days ago) and the rest of us bear the cost.

All of which reinforces my wish that we could rip up the tax code and replace it with a simple and fair flat tax. Not only would we get more growth, we would eliminate a major avenue for D.C. corruption.

P.S. I focused today on the perverse process, but I can’t help but single out the special tax break for electric vehicles, which unquestionably is one of the most egregious tax extenders.

EV tax credits…subsidize the wealthy at the expense of the lower and middle classes. Recent research by Dr. Wayne Winegarden of the Pacific Research Institute shows that 79 percent of EV tax credits were claimed by households with adjusted gross incomes greater than $100,000. Asking struggling Americans to subsidize the lifestyles of America’s wealthiest is perverse… Voters also shouldn’t be fooled by the promise of large environmental benefits. Modern internal combustion engines emit very little pollution compared to older models. Electric vehicles are also only as clean as the electricity that powers them, which in the United States primarily comes from fossil fuels.

was hoping that provisions such as the EV tax credit would get wiped out as part of tax reform. Alas, it survived.

I don’t like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I especially dislike government flood insuranceSocial Securitygovernment-run lotteries, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts. Let’s add the EV tax credit to this shameful list.

George H.W. Bush: Good Man, Bad President

Thu, 12/13/2018 - 12:49pm

I’m not a fan of President Bush. The first one or the second one.

Both adopted policies that, on net, reduced economic liberty.

Today, let’s focus on the recently deceased George H.W. Bush (a.k.a., Bush 41). By all accounts, he was a very good man, but that doesn’t mean he was a very good president. Or even a mildly good one.

Steve Moore’s column in the Washington Times is a damning indictment of his infamous read-my-lips tax betrayal.

Liberals love George H.W. Bush for the very tax increase betrayal that destroyed his presidency. …This was not just the political blunder of the half-century, it was a fiscal policy catastrophe. …What the history books are writing is that Mr. Bush showed political “courage” in breaking his “Read my lips: No new taxes” pledge, and he was thrown out of office for doing the right thing.Wrong. The quick story is that the Reagan expansion — in no small part due to the reduction of the highest tax rates from 70 percent to 28 percent — was shrinking deficit spending dramatically by the end of Ronald Reagan’s presidency. The budget deficit had fallen in half down to 2.9 percent of GDP by 1988. It was headed to below 2 percent if Mr. Bush simply had did nothing. …the 1990 budget deal became a license for Democrats to spend and spend. …Government expenditures accelerated at a faster pace than at any time in 30 years. In two years time, the domestic budget grew by almost 20 percent above inflation. …The tax increases either caused the recession or exacerbated it — ending the Reagan expansion. The economy lost 100,000 jobs and the unemployment rate rose and the unemployment rate rose from 5.5 percent to 7.4 percent. Real disposable income fell from 1990 to the eve of the 1992 election. If this tax hike was a success, so was the Hindenburg.

There’s a lot of good analysis in Steve’s column.

But I want to emphasize the part about the budget deficit being on a downward trajectory when Reagan left the White House. That’s absolutely accurate, as confirmed by both OMB and CBO projections.

All Bush needed to do was maintain the Gipper’s pro-market policies.

Unfortunately, he decided that “kinder and gentler” meant putting Washington first and giving politicians and bureaucrats more power over the economy.

And not just on fiscal policy.

Jim Bovard points out in USA Today that Bush 41 also had some very unseemly bouts of protectionism.

Bush was the most protectionist president since Herbert Hoover. Like Trump, he spoke of the need for level playing fields and fair trade. But Bush-style fairness gave federal bureaucrats practically endless vetoes over Americans’ freedom to choose foreign goods. Bush’s Commerce Department ravaged importers with one bureaucratic scam after another, using the dumping law to convict 97 percent of imports investigated, claiming that their prices were unfairly low to American producers (not consumers). Bush also ordered the U.S. International Trade Commission to investigate after ice cream imports threatened to exceed one percent of the U.S. market. And he perpetuated import quotas on steel and machine tools. …he slapped new textile import quotas on Nigeria, Indonesia, Egypt, the Philippines, Burma (now Myanmar), Costa Rica, Panama, Pakistan and many other nations. Mexico was allowed to sell Americans only 35,292 bras in 1989 — part of a byzantine regime that also restricted imports of tampons, typing ribbons, tarps, twine, table linen, tapestries, ties and thousands of other products.

To be fair, George H.W. Bush played a key role in moving forward NAFTA and the WTO/GATT, so his record on trade is mixed rather than bad.

Let’s return to the tax issue. Alan Reynolds explains that the Bush 41 tax hike was a painful example of the Laffer Curve in action.

The late President G.H.W. Bush famously reneged on his “no new taxes” pledge… The new law was intended to raise more revenue from high-income households and unincorporated businesses.  It was supposed to raise revenue partly by raising the top tax rate from 28% to 31% but more importantly by phasing-out deductions and personal exemptions… Treasury estimates expected revenues after the 1990 budget deal to be higher by a half-percent of GDP.  What happened instead is that revenues fell from 17.8% of GDP in 1989 to 17.3% in 1991, and then to 17% in 1992 and 1993.  Instead of rising from 17.8% of GDP to 18.3% as initial estimates assumed, revenues fell to 17%. …A recession began in October 1990, just as the intended tax increase was being enacted.  To blame the weak revenues of 1991-93 entirely on that brief recession begs the obvious question: To what extent was a recession that began with a tax increase caused or at least worsened by that tax increase?  …When discussing tax increases (or tax cuts), journalists and economists must take care to distinguish between intended effects on revenue and actual effects.

We’ll never know, of course, how the 1990 tax increase impacted the economy. As a general rule, I think monetary policy is the first place to look when assigning blame for downturns.

But there’s no question that the tax increase wasn’t helpful.

That being said, my biggest complaint about Bush 41 was not his tax increase. It was all the new spending.

Not just new spending in general. What’s especially galling is that he allowed domestic spending to skyrocket. Almost twice as fast as it increased under Obama and more than twice the rate of increase we endured under Clinton and Carter.

The opposite of Reaganomics, to put it mildly.

There’s No Galt’s Gulch, but New Zealand, Switzerland, and Hong Kong Are the Next-Best Alternatives

Wed, 12/12/2018 - 9:27pm

What’s the world’s freest nation?

I’ve suggested that Australia as an option if the United States ever suffers a Greek-style collapse, but my answer wasn’t based solely on that country’s level of freedom.

Another option is to look at Economic Freedom of the World, which is an excellent resource, but it only measures the degree to which a nation allows free markets.

If you want to know the world’s freest nation, the best option is to peruse the Human Freedom Index.  First released in 2013, it combines economic freedom and personal freedom.

The 2018 version has just been published, and, as you can see, New Zealand is the world’s most-libertarian nation, followed by Switzerland and Hong Kong. The United States is tied with Sweden for #17.

If you scan the top-20 list, you’ll notice that North America, Western Europe, and the Antipodes (Australia and New Zealand) dominate.

And that also is apparent on this map (darker is better). So maybe “western civilization” isn’t so bad after all.

Here is an explanation of the report’s guiding methodology. Simply stated, it’s a ranking of “negative liberty,” which is basically freedom from government coercion.

The Human Freedom Index casts a wide net in an attempt to capture as broad a set of freedoms as could be clearly identified and measured. …Freedom in our usage is a social concept that recognizes the dignity of individuals and is defined by the absence of coercive constraint. …Freedom thus implies that individuals have the right to lead their lives as they wish as long as they respect the equal rights of others. Isaiah Berlin best elucidated this notion of freedom, commonly known as negative liberty. In the simplest terms, negative liberty means noninterference by others. …This index is thus an attempt to measure the extent to which the negative rights of individuals are respected in the countries observed. By negative rights, we mean freedom from interference—predominantly by government—in people’s right to choose to do, say, or think anything they want, provided that it does not infringe on the rights of others to do likewise.

Unsurprisingly, there is a correlation between personal freedom and economic freedom.

Though it’s not a perfect correlation. The Index highlights some of the exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland and New Zealand, which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom rank significantly lower in economic freedom. For example, Sweden ranked 3rd in personal freedom but 43rd in economic freedom; Slovenia ranked 23rd in personal freedom but 71st in economic freedom; and Argentina ranked in 42nd place in personal freedom but 160th in economic freedom. Similarly, some countries that ranked high on economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked in 2nd place in economic freedom while ranking 62nd in personal freedom; the United Arab Emirates ranked 37th in economic freedom but 149th in personal freedom; and Qatar ranked 38th in economic freedom but 134th in personal freedom.

This raises an interesting question. If you had to move, and assuming you couldn’t move to a nation that offered both types of freedom, would you prefer a place like Sweden or a place like Singapore?

As an economist, my bias would be to choose Singapore.

But if you look at the nations in the top-10 for personal freedom, they’re all great place to live (and they tend to be very market-oriented other than their big welfare states). So I certainly wouldn’t blame anyone for instead choosing Sweden.

P.S. There are some very attractive micro-states that were not including in the Human Freedom Index, presumably because of inadequate data. I suspect places such as BermudaLiechtensteinMonaco, and the Cayman Islands would all get very high scores if they were included.

More Evidence for Private Social Security

Tue, 12/11/2018 - 12:46pm

The world is in the middle of a dramatic demographic transition caused by increasing lifespans and falling birthrates.

One consequence of this change is that traditional tax-and-transfer, pay-as-you-go retirement schemes (such as Social Security in the United States) are basically bankrupt.

The problem is so acute that even the normally statist bureaucrats at the Organization for Economic Cooperation and Development are expressing considerable sympathy for reforms that would allow much greater reliance on private savings (shifting to what is known as “funded” systems).

Countries should introduce funded arrangements gradually… Policymakers should carefully assess the transition as it may put an additional, short-term, strain on public finances… Tax rules should be straightforward, stable and consistent across all retirement savings plans. …Countries with an “EET” tax regime should maintain the deferred taxation structure… Funded, private pensions may be expected to support broader economic growth and accelerate the development of local capital markets by creating a pool of pension savings that must be invested. The role of funded, private pensions in economic development is likely to become more important still as countries place a higher priority on the objective of labour force participation. Funded pensions increase the incentive to work and save and by encouraging older workers to stay in the labour market they can help to address concerns about the sustainability and adequacy of public PAYG pensions in the face of demographic changes.

Here’s a chart from the OECD report. It shows that many developed nations already have fully or partly privatized systems.

By the way, I corrected a glaring mistake. The OECD chart shows Australia as blue. I changed it to white since they have a fully private Social Security system Down Under.

The report highlights some of the secondary economic benefits of private systems.

Funded pensions offer a number of advantages compared to PAYG pensions. They provide stronger incentives to participate in the labor market and to save for retirement. They create a pool of savings that can be put to productive use in the broader economy. Increasing national savings or reallocating savings to longer-term investment supports the development of financial markets. …More domestic savings reduces dependency on foreign savings to finance necessary investment. Higher investment may lead to higher productive capacity, increasing GDP, wages and employment, higher tax revenues and lower deficits.

Here’s the chart showing that countries with private retirement systems are among the world leaders in pension assets.

The report highlights some of the specific nations and how they benefited.

Over the long term, transition costs may be at least partially offset by additional positive economic effects associated with introducing private pensions rather than relying solely on public provision. …poverty rates have declined in Australia, the Netherlands and Switzerland since mandatory funded pensions were introduced. The initial transformation of Poland’s public PAYG system into a multi-pillar DC approach helped to encourage Warsaw’s development as a financial centre. …the introduction of funded DC pensions in Chile encouraged the growth of financial markets and provided a source of domestic financing.

For those seeking additional information on national reforms, I’ve written about the following jurisdictions.

At some point, I also need to write about the Singaporean system, which is one of the reasons that nation is so successful.

P.S. Needless to say, it would be nice if the United States was added to this list at some point. Though I won’t be holding my breath for any progress while Trump is in the White House.

Research on Why Lower-Income People Are Skeptical about a Bigger Welfare State

Mon, 12/10/2018 - 12:28pm

There was a book last decade by Thomas Frank, What’s the Matter with Kansas?, that asked why lower-income voters in the state didn’t vote for greater levels of redistribution.

The author claimed these voters were sidetracked by cultural issues, which may very well be part of the story. I like to think that these Kansans also were motivated by ethics and that they realized it would be wrong to use government coercion to take money from other people.

And maybe, unlike the folks at the IMF, they were not motivated by envy and they realized that high taxes and more redistribution would make them worse off over time because of the negative impact on overall prosperity.

Well, it appears that the folks in Kansas aren’t that different from people in India, Morocco, Nigeria, Mexico, and South Africa. At least that’s the takeaway from some new research that Christopher Hoy wrote about for the World Bank. Here’s the issue he investigated.

Social commentators and researchers struggle to explain why, despite growing inequality in many countries around the world,  there is often relatively limited support among poorer people for policies where they are set to benefit (such as increases in cash transfers or in the minimum wage). …Conventional theories of preferences for redistribution, such as the Meltzer-Richard Hypothesis, imply that if poor people were made aware they were relatively poorer than most other people in their country, they would become more supportive of redistribution. Yet there is little empirical evidence that evaluates this prediction. …empirical evidence is needed to understand how poorer people’s misperceptions of their relative position in the national income distribution effects their support for redistribution.

Here’s the methodology he used.

I conducted the first cross country survey experiment on preferences for redistribution in the developing world… The experiment involved over 16,000 respondents in five developing countries that make up almost 25% of the global population (India, Nigeria, Mexico, South Africa and Morocco). …To test whether informing poor people of their relative position in the national income distribution makes them more supportive of redistribution, I randomly allocate half of the respondents in each country to be told which quintile their household belongs to in the national income distribution (based upon their reported household income and the number of household members). …After the treatment they were asked if they thought the gap between the rich and poor was too large and whether the government was responsible for closing this gap.

And here are some of the results.

People tend to think they are in the middle of the income distribution, regardless of whether they are rich or poor. …poor people who perceived themselves to be in the bottom two quintiles of the distribution were between 15 to 28 percentage points more likely to prefer lower levels of inequality than poor people who perceived themselves to be in the top two quintiles. …Surprisingly, telling poor people that they are poorer than they thought makes them less concerned about the gap between the rich and poor in their country…there was no effect from the treatment on these people’s support for the government to close the gap between the rich and poor.

Here’s a chart showing how people became less sympathetic to government-coerced redistribution after learning more about their own economic status.

The author speculates on possible reasons for these results.

A plausible channel that is causing this effect is people using their own living standard as a ‘benchmark’ for what they consider acceptable for others. …people…realise two points. Firstly, there are fewer people in their country with a living standard they considered to be relatively poor than they had thought. Secondly, what they had considered to be an ‘average’ living standard (their own standard of living) is actually relatively poor compared to other people in their country. I show how both of these points would lead people to respond by being less likely to be concerned about the gap between the rich and poor in their country. …there are opposing channels through which poorer people’s preferences for redistribution respond to information about their relative position. On the one hand, poorer people may be more supportive if they are set to benefit from redistribution. However, on the other hand they may be less supportive if they are less concerned about the absolute living standard of people who are relatively poor.

These are all plausible answers.

Though I have the same questions about this research as I did about Frank’s book. Do people in these five developing nations have any level of moral aversion to redistribution and/or do they understand (at least implicitly) that a tax-and-redistribute model is a recipe for national economic decline?

Perhaps a more practical way of looking at the issue is to ask whether lower-income people care most about economic growth or economic inequality.

Many of the professional left, including the ideologues at the IMF, are fixated on the latter and they’re willing to hurt the poor if the rich suffer even greater harm (in other words, Margaret Thatcher was right about their motives).

By contrast, I strongly suspect the average lower-income person is far more interested in more prosperity for their family and far less concerned about the prosperity of the rich family on the other side of town. They presumably are unaware of the powerful Chinese data on poverty reduction and inequality, but they instinctively understand that a rising tide lifts all boats.

The World’s Most Depressing Tweet

Sun, 12/09/2018 - 12:43pm

I periodically will make use of “most depressing” in the title of a column when sharing bad news.

And new data from the Census Bureau definitely qualifies as bad news. It confirms what I’ve written about how the Washington region has become the richest part of America.

But the D.C. area didn’t become wealthy by producing value. Instead, it’s rolling in money because of overpaid bureaucratsfat-cat lobbyistssleazy politiciansbeltway-bandit contractors, and other grifters who have figured out how to hitch a ride on the federal gravy train.

Anyhow, here’s a tweet with the bad news (at least if you’re a serf elsewhere in America who is paying taxes to keep Washington fat and happy).

Highest counties by median household income (2013-2017):
-Loudoun County, Va.
-Fairfax County, Va.
-Howard County, Md.
-Falls Church City, Va.
-Arlington County, Va. https://t.co/1AA3U00xBA #ACSdata

— U.S. Census Bureau (@uscensusbureau) December 6, 2018

Most of my friends who work for the federal government privately will admit that they are very fortunate.

But when I run into someone who denies that bureaucrats get above-market compensation, I simply share this data from the Labor Department. That usually shuts them up.

By the way, there’s strong evidence from the European Central Bank that overpaid bureaucrats have a negative impact on macroeconomic performance.

And the World Bank has produced a study showing how bureaucrats manipulate the political process.

…public sector workers are not just simply implementers of policies designed by the politicians in charge of supervising them — so called agents and principals, respectively. Public sector workers can have the power to influence whether politicians are elected, thereby influencing whether policies to improve service delivery are adopted and how they are implemented, if at all. This has implications for the quality of public services: if the main purpose of the relationship between politicians and public servants is not to deliver quality public services, but rather to share rents accruing from public office, then service delivery outcomes are likely to be poor.

Here’s my video explaining how bureaucrats are overpaid. It was filmed in 2010, so many of the numbers are now out-dated, but the arguments are just as strong today as they were back then.

But keep in mind that the bureaucracy is only one piece of the puzzle.

The D.C. metropolitan region is unjustly rich because of everyone else who has figured out how to divert taxpayer money into their pockets. That includes disgusting examples of Democrat sleaze and Republican sleaze.

Simply stated, Washington is riddled with rampant corruption as insiders get rich at our expense. No wonder many of them object to my license plate!

P.S. Here’s some data comparing the size and cost of bureaucracy in various nations.

France, Taxes, and Riots

Sat, 12/08/2018 - 12:21pm

Maybe there’s hope for France. When GreeksBelgians, and the Brits riot, it’s because they want more handouts.

The French, by contrast, have taken to the streets to protest higher taxes. And they have plenty of reasons to be upset, as the Wall Street Journal reports.

France became the most heavily taxed of the world’s rich countries in 2017… The Organization for Economic Cooperation and Development’s annual review of taxes in its 36 members published on Wednesday showed the French government’s tax revenues were the equivalent of 46.2% of economic output, up from 45.5% in 2016 and 43.4% in 2000. The Danish government’s tax take, which was the highest among OECD members between 2002 and 2016, fell to 46% of gross domestic product from 46.2% in the previous year and 46.9% in 2000. …The rise in French tax revenues was in line with a longstanding trend… The average tax take across the organization’s members edged up to 34.2% of GDP in 2017 from 34% in 2016 and 33.8% in 2000.

I suppose we should applaud Denmark for no longer being at the top of this list.

The tax burden on Danes is still absurdly high, but at least there is a small bit of progress (presumably because of a modest amount of long-overdue spending restraint).

Shifting back to France, the WSJ story mentions that the French president had to retreat on his plan for higher fuel taxes.

President Emmanuel Macron backed off a fuel-tax increase that enraged much of the nation and sparked a grass-roots protest movement against his government. …Before Tuesday’s climb down, Mr. Macron’s government had planned to raise fuel taxes in an effort to cut automobile pollution. …But the planned move sparked the worst riots to hit Paris in decades on Saturday, leaving the city’s shopping and tourist center dotted with burning cars and damaged storefronts. Protesters vandalized the Arc de Triomphe, rattling Mr. Macron’s administration and the country.

For what it’s worth, I’m glad Macron backed down. He actually has some good proposals to liberalize the French economy. That’s where he should be focused, not on concocting new ways to fleece citizens.

To be sure, over-taxation is not limited to France. Here are the most heavily taxed nations according to the OECD report.

Income taxes and payroll taxes generate most of the revenue, as you can see. But keep in mind that all of these countries also have onerous (and ever-increasing) value-added taxes, as well as other levies.

If I was in France (or any of these nations), the first thing I would point out is that people are getting ripped off.

A huge chunk of their income is seized by tax collectors, yet they’re not getting better services in exchange.

Are schools, roads, and healthcare in France better than they are in Switzerland or New Zealand, where the burden of government is much lower?

Or are they better in France than they are in Hong Kong and Singapore, where the fiscal burden is much, much lower?

The European Central Bank confirms that the answer is no.

Here is the data on taxes and spending for OECD member nations. For some reason, not all countries in the OECD’s tax database are included in the OECD’s spending database. Regardless, the obvious takeaway is that big welfare states require confiscatory tax regimes (with the middle class getting pillaged).

A few closing observations on this data.

  • Governments also have non-tax revenues, so red ink is only a partial explanation for the gap between spending and taxes in various nations.
  • Because of somewhat distorted GDP data, the actual tax burden in Ireland and Luxembourg is worse than shown in these numbers.
  • From 1965-present, the tax burden has increased the most in Greece. Needless to say, that has not been a recipe for economic or fiscal success.
  • The U.S. has a modest fiscal burden compared to other industrialized nations, which helps to explain why living standards are higher in America.
  • Mexico is not a low-tax nation. Like many developing economies, its government is simply too incompetent and corrupt to enforce onerous tax laws.

Circling back to our main topic, I joked years ago that the French national sport is taxation. It’s so bad that thousand of taxpayers have faced effective tax rates of more than 100 percent. Indeed, taxes are so onerous that even EU bureaucrats have warned taxes are excessive.

P.S. I guess we shouldn’t be surprised that more than half the population would flee to America if they had the opportunity.

The Economic Illiteracy of Tariff Man

Fri, 12/07/2018 - 12:43pm

Both Barack Obama and Hillary Clinton have said really foolish things, but Donald Trump may have set a new record for economic illiteracy with this tweet.

….I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN

— Donald J. Trump (@realDonaldTrump) December 4, 2018

This tweet contains an astounding collection of inaccurate and offensive statements.

Here my corrective commentary.

I’ll briefly elaborate, starting at the top left and going clockwise.

The bottom line is that Trump is playing with fire. Indeed, what’s happening in financial markets is a very worrisome sign that he’s putting the economy at risk.

To be sure, I don’t think all of the volatility on Wall Street can be blamed on Trump’s protectionist policies and statement (the Federal Reserve should be blamed for creating a fragile market with easy-money policies). But a trade war could be the trigger that leads to the next recession.

Supply-Side Economics and the Post-Reagan Years

Thu, 12/06/2018 - 12:25pm

Steve Moore and Art Laffer are the authors of Trumponomics, a largely favorable book about the President’s economic policy.

I have a more jaundiced view about Trump.

I’m happy to praise his good policies (taxes and regulation), but I also condemn his bad policies (spending and trade).

And as you might expect, some people are completely on the opposite side from Moore and Laffer.

Writing for New York, Jonathan Chait offers a very unfriendly review of the book. He starts by categorizing Steve and Art (as well as Larry Kudlow, who wrote the foreword) as being fixated on tax rates.

The authors of Trumponomics are Larry Kudlow (who left in the middle of its writing to accept a job as director of the National Economic Council), Stephen Moore, and Arthur Laffer. The three fervently propound supply-side economics, a doctrine that holds that economic performance hinges largely on maintaining low tax rates on the rich. …Kudlow, Moore, and Laffer are unusually fixated on tax cuts, but they are merely extreme examples of the entire Republican Establishment, which shared their broad priorities.

For what it’s worth, I think low tax rates are good policy. And I suspect that the vast majority of economists will agree with the notion that lower tax rates are better for growth than high tax rates.

But Chait presumably thinks that Larry, Steve, and Art overstate the importance of low rates (hence, the qualification about “economic performance hinges largely”).

To bolster his case, he claims advocates of low tax rates were wrong about the 1990s and the 2000s.

In the 1990s, the supply-siders insisted Bill Clinton’s increase in the top tax rate would create a recession and cause revenue to plummet. The following decade, they heralded the Bush tax cuts as the elixir that had brought in a glorious new era of prosperity. …The supply-siders have maintained absolute faith in their dogma in the face of repeated failure by banishing all doubt. …they have confined their failed predictions to the memory hole.

If Chait’s point is simply that some supply-siders have been too exuberant at times, I won’t argue. Exaggeration, overstatement, and tunnel vision are pervasive on all sides in Washington.

Heck, I sometimes fall victim to the same temptation, though I try to atone for my bouts of puffery by bending over backwards to point out that taxation is just one piece of the big policy puzzle.

Which is why I want to focus on this next excerpt from Chait’s article. He is very agitated that the book praises the economic performance of the Clinton years and criticizes the economic performance of the Bush years.

A brief economic history in Trumponomics touts the gains made from 1982 to 1999, and laments “those gains stalled out after 2000 under Presidents George W. Bush and Barack Obama.” Notice, in addition to starting the Reagan era in 1982, thus absolving him for any blame for the recession that began a year into his presidency, they have retroactively moved the hated leftist Bill Clinton into the right-wing hero camp and the beloved conservative hero George W. Bush into the failed left-wing statist camp.

Well, there’s a reason Clinton is in the good camp and Bush is in the bad camp.

As you can see from Economic Freedom of the World (I added some numbers and commentary), the U.S. enjoyed increasing economic liberty during the 1990s and suffered decreasing economic liberty during the 2000s.

For what it’s worth, I’m not claiming that Bill Clinton wanted more economic liberty or that George W. Bush wanted more statism. Maybe the credit/blame belongs to Congress. Or maybe presidents get swept up in events that happen to occur when they’re in office.

All I’m saying is that Steve and Art are correct when they point out that the nation got better overall policy under Clinton and worse overall policy under Bush.

In other words, Clinton’s 1993 tax increase was bad, but it was more than offset by pro-market reforms in other areas. Likewise, Bush’s tax cuts were good, but they were more than offset by anti-market policies in other areas.

P.S. Chait complained about Moore and Laffer “starting the Reagan era in 1982, thus absolving him for any blame for the recession that began a year into his presidency”.

Since I’m a fan of Reaganomics, I feel compelled to offer three comments.

  • First, the recession began in July 1981. That’s six months into Reagan’s presidency rather than one year.
  • Second, does Chait really want to claim that the downturn was Reagan’s fault? If so, I’m curious to get his explanation for how a tax cut that was signed in August caused a recession that began the previous month.
  • Third, the recession almost certainly should be blamed on bad monetary policy, and even Robert Samuelson points out that Reagan deserves immense praise for his handling of that issue.

P.P.S. Bill Clinton’s 1993 tax hike didn’t produce the budget surpluses of the late 1990s. If you don’t believe me, check out the numbers from Bill Clinton’s FY1996 budget.

The Looming Debt Crisis in Developing Economies

Wed, 12/05/2018 - 12:19pm

I don’t like writing about deficits and debt because I don’t want to deflect attention from the more important underlying problem of excessive government spending.

Indeed, I constantly explain that spending is what diverts resources from the productive sector of the economy,regardless of whether outlays are financed by taxes or borrowing. This is why a spending cap is far and away the best rule for fiscal policy.

That being said, red ink does matter when politicians incur so much debt that investors (i.e., the folks in the private sector who buy government debt) decide that a government no longer is trustworthy. And when that happens, interest rates climb because investors insist on getting a higher return to compensate for the risk of default.

And if things really deteriorate, a government may default (i.e., no longer make promised payments) and investors obviously will refuse to lend any more money. That’s basically what happened in Greece.

Sadly, most governments have not learned from Greece’s mistakes. Indeed, government debt in Europe is now significantly higher than it was before the 2008 recession.

This suggests that there will be another fiscal crisis when the next recession occurs. Italy presumably will be the big domino to fall, though there are many other nations in Europe that could get in trouble.

But the problems of excessive spending and excessive debt are not limited to Europe. Or Japan.

The World Bank has a new report that shows that red ink is a growing problem in the rest of the world. More specifically, the report is about “fiscal space,” which some see as a measure of budgetary flexibility but I interpret as an indicator of budgetary vulnerability. Here’s how it is defined in the report.

…fiscal space is simply defined as the availability of budgetary resources to conduct effective fiscal policy. …some studies define it as the budgetary room to create and allocate funding for a certain purpose without threatening a sovereign’s financial position. …Debt service capacity is a critical component of fiscal space. It has multiple dimensions, including financing needs that are related to budget positions and debt rollover, access to liquid markets, resilience to changes in market valuations of debt, and the coverage of contingent liabilities. …Market participants’ perceptions of sovereign risk reflect and, in turn, influence an economy’s ability to tap markets and service its obligations. Thus, fiscal space can function as an essential instrument of macroeconomic risk management.

And what is “effective fiscal policy”?

From the World Bank’s misguided perspective, it’s the ability to engage in Keynesian spending.

Countries with ample fiscal space can use stimulus measures more extensively.

But let’s set aside that anti-empirical assertion.

I found the report useful (though depressing) because it had data showing how debt levels have increased, especially in emerging market and developing economies (EMDEs).

Fiscal space improved during 2000−07, but has shrunk around the world since the global financial crisis. …debt sustainability indicators, including government debt and fiscal sustainability gaps, have deteriorated in at least three-quarters of countries in the world. …and perceptions of market participants on sovereign credit risks have worsened. …Since 2011, fiscal space has shrunk in EMDEs. …fiscal deficits widened to 3 to 5 percent of GDP in 2016, on average… Government debt has risen to 54 percent of GDP, on average, in 2017. …EMDEs need to shore up fiscal positions to prevent sudden spikes in financing costs… Fiscal space has been shrinking in EMDEs since the global financial crisis. It needs to be strengthened.

Here is a set of charts from the report, showing both developed nations (red lines) and developing nations (yellow lines). The top-left chart shows debt climbing for EMDEs and the bottom-right chart shows debt ratings dropping for EMDEs.

The EMDEs have lower debt levels, but their debt is rated as more risky because poorer nations don’t have a very good track record of dealing with recessions and fiscal crises (would you lend money to Argentina?).

In any event, the yellow lines in the top-left chart and bottom-right chart are both headed in the wrong directions.

The bottom line? It won’t just be European welfare states that get in trouble when there’s another recession.

By the way, the report from the World Bank offers some policy advice. Some of it potentially good.

Pension reforms could…support fiscal credibility and generate long-term fiscal gains… credible and well-designed institutional mechanisms can help support fiscal discipline and strengthen fiscal space. …Fiscal rules impose numerical constraints on budgetary aggregates—debt, overall balance, expenditures.

But most of it bad.

Fiscal sustainability could be improved by increasing the efficiency of revenue collection… Measures to strengthen revenue collection could include broadening tax bases to remove loopholes for higher-income households or profitable corporates. In countries with high levels of informality, taxing the informal sector—for example, by promoting a change in payment methods to non-cash transaction and facilitating collective action by informal sector associations—could help raise revenues directly, as well as indirectly… In EMDEs, reforms to broaden revenue bases and strengthen tax administration can generate revenue gains.

At the risk of stating the obvious, the problem in developing nations is bad government policy, not insufficient revenue in the hands of politicians.

P.S. I included the caveat that some of the recommendations were “potentially good” since the report didn’t specify the type of pension reform or the type of fiscal rule. I like to think the authors were referring to personal retirement accounts and spending caps, but it’s not clear.

P.P.S. The IMF subsidizes and encourages bad fiscal policy with bailouts. Fortunately, there is a much more sensible approach.

The Equal-Pay Myth that Refuses to Die

Tue, 12/04/2018 - 12:31pm

While capitalism is the only system to produce mass prosperity, I actually support free enterprise more because it is a moral system based on voluntary exchange. The various forms of statism, by contrast, are based on government coercion.

But non-coercion not the only moral reason to support capitalism. I also applaud that free markets penalize racism and sexism. Simply stated, narrow-minded people are going to lose business to ethical competitors and forego income if they make choices based on animus rather than what makes economic sense.

This doesn’t mean an end to racism and sexism, but it certainly suggests that systemic and pervasive discrimination is very unlikely without government intervention (such as the Jim Crow laws that created government-enforced racism).

This is why I’m naturally suspicious of the claim that there’s a gender pay gap.

Mark Perry and Andrew Biggs of the American Enterprise Institute summarize the issue, pointing out that wage differences reflect personal choices and economic realities

…the 20% gender wage gap is actually a tiresome statistical myth that persists in the face of overwhelming evidence to the contrary. …The reality is that men and women make very different career and work choices, and frequently play very different family roles, especially for families with children. While gender discrimination undoubtedly occurs, it is individuals’ choice – not discrimination – which accounts for the vast majority of gender differences in earnings. …Compensating wage differentials are differences in pay that are designed to attract employees to jobs that otherwise would be undesirable. …The undesirable aspects of certain jobs can range from the mundane to the gruesome. For instance, men have longer average commute times to their jobs than women. In the U.S., the average male spends 33 more hours commuting to work each year. How much extra pay would you demand to spend the equivalent of four additional eight-hour days sitting in traffic or on a bus riding to work? …men are also much more likely to be injured or killed on the job. Economists have long found that, all else equal, more dangerous jobs pay higher average wages than safer jobs. And the 20 jobs with the highest occupational fatality rates are on average 94% male and 92.5% of workplace fatalities overall are men.

Writing for the Hill, Christina Hoff Summers of AEI issues a challenge that left-feminists are unable to answer. They never even try.

Everywhere we hear that for the same work, women only make 77 cents for every dollar a man makes. Think about that. If it were true, why wouldn’t businesses only hire women? Wages are the biggest expense for most businesses. So, hiring only women would reduce costs by nearly a quarter — and that would go right to the bottom line.

She points out that academic research repeatedly had debunked the claim that there is systemic discrimination that requires government intervention.

…this claim has been debunked over and over again. …The 23-cent gender pay gap we often hear about is simply the difference between the average earnings of all men and women who work full-time. It does not account for differences in occupations, positions, education, job tenure, or hours worked per week. When economists account for these relevant factors, the wage gap narrows to a few cents. By now, even feminist wage gap activists agree — at least when pressed.

Speaking of academic evidence, the Wall Street Journal opines about some recent research from Harvard economists.

Progressives claim that the pay difference between men and women is caused by sexism that government must redress. But a new study offers compelling evidence that the choices and priorities of women account for much of the disparity. The study examined data from the Massachusetts Bay Transportation Authority because it is a union shop with uniform hourly wagesin which men and women adhere to the same rules and enjoy the same benefits. Workers are promoted based on seniority, not performance. Male and female workers of the same seniority have the same options for scheduling, routes, vacation and overtime. Under such rigid work rules, even a sexist boss or manager would have little ability to give men preferential treatment. Yet even at the Transportation Authority, female train and bus operators earned less than men. To explain why, Harvard economists Valentin Bolotnyy and Natalia Emanuel looked at time cards and scheduling from 2011 to 2017, also factoring in sex, age, date of hire, tenure, and whether an employee was married or had dependents. They found that male train and bus operators worked about 83% more overtime hours than their female colleagues and were twice as likely to accept an overtime shift on short notice. …The study ratifies the common-sense observation that men and women often have different priorities, and the best way to accommodate them is through the marketplace, not the untender mercies of government.

Notwithstanding all this evidence, some journalists are willing to publicize nonsensical numbers. Here are some excerpts from a column by Annie Lowrey in the Atlantic.

Do women earn…a shocking 49 cents on the dollar, as calculated by the social scientists Stephen Rose and Heidi Hartmann in a new analysis published by the Institute for Women’s Policy Research? …According to Rose, …the most accurate way to compare women’s and men’s earnings is to take the career-long view. “When you look at all women versus all men over time, the gap is 51 cents,” he said, referring to the 15-year figure. …What might help close this wide, long earnings chasm? Rose and Hartmann suggest…paid family leave and child-care subsidies…public-policy changes would give women more control over their working lives, and would help foster a more equitable workplace. And that would be good for everybody.

I’m guessing Ms Lowrey knows this study is tripe because she seeks to preserve her credibility by noting that pay gaps basically disappear when using honest numbers.

The most common way to measure the gender earnings gap is to look at how much women working full-time and year-round make, and compare it with what men working full-time and year-round make. …That number has some significant shortcomings, researchers have long argued. Women work different kinds of jobs than men do and have different levels of work experience, too. …Comparing apples to apples and oranges to oranges, women earn close to what men earn: Women in similar workplaces with similar titles and similar credentials make pretty much what their male peers do, whether they are fast-food employees making close to the minimum wage or corporate executives making hundreds of thousands of dollars a year.

But she doesn’t explain why the study is garbage.

To understand that, we’ll turn to Carrie Lukas, who debunks the IWPR numbers for National Review.

The study claims that the wage gap has been woefully understated, and that in reality women “earn just 49 cents to the typical men’s dollar, much less than the 80 cents usually reported.” How did they come to this jaw-dropping conclusion? Simple. They have redefined the “gender wage gap.” They are no longer looking at full-time workers, or even at consistent part-time workers. Rather, they are comparing the earnings of all women and all men who worked at any point during a 15-year period. More than four out of every ten women took more than a year out of the work force during that period, which was nearly twice the rate of men. As a result, women, on average, earned a lot less. That’s hardly a shock. …IWPR is misleading readers with the suggestion that the “wage gap” is really 49 cents on the dollar. …those who care about women’s economic advancement should seek to build an awareness of the very real consequences of the choices women make they decide what to study, which fields to enter, and how to plan their work lives so they can make informed choices.

Let’s close with this video from Ms. Sommers, which includes some rather amusing information about hypocrisy in the Obama White House.

P.S. Since I mentioned the previous administration, it’s worth noting that one of Obama’s appointees to the Council of Economic Advisers refused to defend the White House’s absurd claim that women only got 77 cents for doing the same work as men.

P.P.S. Given its track record of shoddy and biased output, is anyone surprised that the Paris-based Organization for Economic Cooperation and Development is pushing dishonest gender pay data?

What the New Socialists Get Wrong

Mon, 12/03/2018 - 4:12pm

On Fox News on Sunday November 18, Wyoming Congressman Liz Cheney referred to the agenda of the new Democrat House majority as “socialist”. She even went as far as to compare it to the Soviet Union:

I think the real Russia threat, Maria, is when you look at the kind of Soviet-style economic policy that the Democrats in particular, some of the freshmen coming in are advocating, government-provided jobs for everybody, government-provided housing for everybody.

The Soviet label is misplaced, but there is no doubt that the recent election allowed European-style socialism to make big inroads on Capitol Hill. Cheney’s warning about it is well taken, and underscored by the fact that Bernie Sanders disciples are taking over the Democrat party, both in Congress and at the state level.

This new movement has two distinctive features: it is obsessed with economic redistribution, and it thinks that economic growth is irrelevant.

I accounted for the anti-growth agenda in chapter 6 of my book The Rise of Big Government. It is a troubling idea on any day, but even more so when the U.S. economy may be heading for a slowdown. If these Democrat socialists get what they want, with big tax hikes and indifference to economic growth, our country will plunge into a deep crisis.

Sometimes, socialists try to defend their anti-growth agenda by saying that growth is harmful for the environment. The fact that our environment is increasingly clean and the U.S. economy becomes more energy efficient with growth, is of no consequence. Even the point that growth is good for the poor – brilliantly argued by Dan Mitchell – is lost on the left.

We could stop here and simply give up trying to understand the new socialists. Unfortunately, people do fall for socialist punditry, and the antidote cannot be to ignore those ideas. Instead, it begins with an understanding – and careful refutation – of their ideas.

When the left say that growth is unimportant, it is not because they dismiss it altogether. They just don’t think that growth can improve people’s living conditions. It is, of course, easy to counter this argument by explaining that lack of growth makes everyone equally poor, but the resistance to growth is it a resilient weed in the garden of economic thought. It is best defeated through an understanding – and careful refutation – of its theoretical foundations.

The origin of the anti-growth argument is a deliberate misrepresentation of David Ricardo’s 200-year-old theory known as the “iron law of wages”. In Ricardo’s original form, this theory stipulates two kinds of wages: the market wage, which is what workers are paid depending on the supply-and-demand conditions of the labor market; and the so-called natural wage.

The natural wage is what workers need to make in order to sustain themselves. It allows workers to buy whatever they need to eat, have a roof over their heads and keep themselves in good basic health. In short, it is the wage they need in order to be able to show up for work the next day again.

The key to the iron law of wages lies in the dynamic between the natural wage and the market wage. Suppose technological innovations improve overall productivity in the economy and wages start rising. The market wage rises above the natural wage and people’s standard of living increases. When the standard of living increases, people have more babies.

An expanding population is not a problem per se, but under Ricardo’s reasoning land is a fixed resource. With land as a fixed resource, food and housing become fixed resources as well. As population grows, so does demand for food and housing. An excess demand situation occurs that drives up food and home prices. As inflation takes a toll on the cost of basic living, the natural wage rises, eventually catching up with the market wage. When it does, the surplus that caused an increase in the population is gone.

This is a deterministic representation of Ricardo’s theory, and as such it does not give Ricardo full credit. He was not a determinist; he used the land-restriction point simply to explain how – in the very long run – the natural wage could come to increase and possibly restrict growth in the standard of living. With technological advancement, a staple of Ricardo’s reasoning, the gap between the market wage and the natural wage would continue to increase. As it does, it eventually eliminates the hardship of poverty.

Up to the point right before poverty elimination, the left is fine with Ricardo’s theory. Their problems start when the free market, through economic growth, can eliminate poverty.

That, of course, cannot happen. To prevent it, the left has perverted the Ricardian iron law of wages into what is known today as Marxist economic theory.

Like Ricardo, Marx defines a “subsistence” wage at which workers make enough to survive but nothing more; survival, again, is defined as “reproduction” of the labor force. Workers can eat, sleep, clothe themselves and stay healthy. The difference between Marx and Ricardo is that Marx makes people responsible for keeping the subsistence wage from rising. In his warped world, capitalists fight workers for the “surplus value” of production.

Whenever the market wage rises above the subsistence wage, a surplus is created. To keep workers from getting part of that surplus, Marx believed that capitalists maintained a “reserve army” of workers. They do this by regularly causing recessions, thereby filling the ranks of the unemployed until profits skyrocket again.

This is the theory upon which the American left builds its understanding of the economy. Hiding in this Marxist labyrinth of illogical sophistry, they propose steadily higher taxes and endless government programs for economic redistribution. Shielded from reality by their socialist liturgy, the left ignores every basic economic fact available to them. For starters, business profits do not rise in recessions, and businesses do not cause recessions through some kind of worldwide conspiracy.

There is more: unlike what Marxists will have us believe, business owners do not think of their employees as some sort of cattle that can come and go. They invest in their employees, train them, give them responsibilities, rely on them for productivity and quality – and reward them accordingly. A business owner who treats his employees the Marxist way will find his employees leaving for better opportunities.

Leftist economic thinking is neither logical nor empirical. It is an exercise in backward theorizing: define a political agenda, then invent a theory that can render a perception of credibility to it. That may work for academic conferences and coffee-shop agitation, but as a foundation for economic policy and other legislation, it is not only useless – it is dangerous.

International Evidence for Spending Restraint

Sun, 12/02/2018 - 12:21pm

With the exception of 2010-2014, when the Tea Party briefly had a grip on the Republican Party, the burden of government spending has been increasing in the United States.

This unfortunate trend can’t continue indefinitely, so sooner or later we’ll reach a point where politicians will feel pressured to address growing fiscal imbalances.

The crowd in Washington will want some sort of “budget summit,” which – if history is any guide – means that the senior lawmakers who created the problem go behind closed doors to craft a deal involving real tax increases and fake spending cuts.

Unsurprisingly, that approach doesn’t work. At best, the tax hike is a substitute for much-needed spending restraint. And in many cases, politicians treat the expectation of higher revenues as an excuse to increase outlays.

This isn’t just the pattern in the United States. Politicians all over the world have been raising taxes, yet debt levels continue to climb.

The right solution, indeed the only solution, is spending restraint. Which is the lesson Steve Davies expounds upon in this video for Learn Liberty.

Every single example Steve cites is supported by strong evidence.

Indeed, I’ve written about each and every nation he mentions.

What makes this debate so frustrating is that all the evidence is on the side of spending restraint.

It’s not just academic scholars who have shown that fiscal consolidations based on spending restraint are far more successful. Even left-leaning bureaucracies have admitted that spending control is the only approach that produces good results.

I’ve shown how limiting the growth of spending is the sensible way to reduce the fiscal burden of government and control red ink. And when I share this table during debates, I always ask my friends on the left to show their collection of nations that got good results with tax increases.

They’ve never answered my challenge.

Not once.

The bottom line is that we know that the Golden Rule of spending restraint is good for growth, and we know spending restraint is the way to reduce red ink.

That’s the good news. The bad news is that politicians have a “public choice” incentive to instead raise taxes. That game doesn’t end well.

The Economics of Trade, Specialization, and Comparative Advantage

Sat, 12/01/2018 - 12:05pm

Three weeks ago, I shared a video about the economics of trade balances.

Here’s the next video in the Freedom Partner series, which looks at why trade (whether inside a nation or across borders) makes our lives better.

Simply stated, we would all be miserably poor if we couldn’t trade.

But when we can exchange with each other, we naturally begin to specialize in what we like and what we do best. Adam Smith referred to this as the “division of labour” and he noted that this enables much greater prosperity.

A related concept is comparative advantage, which is a way of illustrating how we become richer when trade enables us to focus on what we do best compared to others.

Alan Blinder summarized this concept in a column for the Wall Street Journal.

A snarky mathematician once challenged the great Paul Samuelson to name an economic proposition that is true but not obvious. Samuelson’s choice was comparative advantage, which shows, among other things, that there are mutual gains from trade even if one nation is better than another at producing everything. Here’s a homespun illustration. Suppose a surgeon is also a whiz at house painting—better than most professional painters. Should she therefore take time off from her medical practice to paint her own house? Certainly not. For while she may have a slight edge over most painters when it comes to painting walls, she has an enormous edge when it comes to performing surgery. Surgery is her comparative advantage, so she should specialize in it and let some others, who don’t know their way around an operating room, specialize in painting—their comparative advantage. That way, the whole economy becomes more efficient. The same principle applies to nations.

Some of Samuelson’s observations over a lengthy and influential career were not so great, but his analysis about comparative advantage was spot on.

This short clip from Matt Ridley also is a very good description of why we should trade and reap the benefits of comparative advantage.

Last but not least, here’s a video from FEE on why specialization gives us so many great things.

By the way, I cited a couple of studies in my video.

The one showing 2-percent to 5-percent faster growth was published by the International Monetary Fund last November. Here’s part of the abstract.

In the cross section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We adopt the Frankel and Romer (1999) identification strategy, and exploit countries’ exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross-country estimates for trade’s impact on real income are consistently positive and significant over time.

And here’s the best chart from the study.

It shows that pro-trade nations are both more rich (solid green line) and more equal (dashed green line).

The moral of the story is that protectionism generates undeserved riches for the friends of politicians while lowering the living standards of everyone else.

The other study is from the Peterson Institute for International Economics. Here are the key findings.

We use four very different methods to estimate past gains. Each of these methods entails its own set of assumptions. Estimated annual gains are on the order of $1 trillion. The estimated gain in 2003 income is in the range of $2,800 to $5,000 additional income for the average person and between $7,100 and $12,900 for the average household. Future gains are harder to quantify, not surprisingly since the future is always difficult to predict. The estimates range from $450 billion to $1.3 trillion.

And my favorite visual from the study shows the negative impact of 1930s-style trade taxes.

At the risk of understatement, repeating the policies of Herbert Hoover would be a very bad idea.

Should Uncle Sam Subsidize Wages?

Fri, 11/30/2018 - 12:50pm

Washington is a place that gets infatuated with trendy ideas. A few years ago, everyone was talking about a “universal basic income” because of the strange assumption that millions of people will be unemployable in the future.

That idea was mostly embraced by folks on the left (though not Joe Biden), but there’s now a related idea on the right to provide “wage subsidies” so that unemployable (or difficult to employ) people can get work.

A leading proponent is Oren Cass of the Manhattan Institute, who wrote The Once and Future Worker: A Vision for the Renewal of Work in America.

National Review published an excerpt from his book.

Work has enormous social value for the individuals who engage in it and for the formation and stability of their families, the opportunities of their children, and the vibrancy of their communities. Ideally, the labor market would settle in a place where productive, family-supporting work was available to all people in all places. But nothing in the theory of economics guarantees such an outcome… If we really want to “pay for jobs” — and we should — then we should do it directly. …a…“Federal Work Bonus,”…an additional $3 into your check for every hour worked? That would be a wage subsidy. …a wage subsidy aims to produce that effect in the labor market. Workers unwilling to sell their labor for less than $12 per hour may be worth only $9 per hour to an employer. No job will emerge in that scenario. With the insertion of a $3-per-hour wage subsidy, by contrast, the employer can pay the $9 per hour that the work is worth and the worker can receive the $12 per hour that he demanded. Thus will appear a job where none existed before. …The value of the subsidy would be set relative to a “target wage” of, say, $15 per hour and would close half the gap between the market wage and the target. A worker would initially receive a subsidy of $3 per hour in this case, equal to approximately $6,000 per year if he worked full-time.

The wage subsidy Cass advocates is similar to the “earned income tax credit,” which is basically a redistribution program that is administered through the tax code.

But Cass wants the EITC to be universally available rather than primarily targeted at households with children.

The federal earned income-tax credit (EITC) already operates something like a wage subsidy, offering low-income households large tax refunds that can exceed what they paid in taxes to begin with. But the EITC gets paid long after the income is earned — at tax time the following year — based on an opaque formula. It creates none of a wage subsidy’s immediate, transparent effect in the labor market. …The EITC also skews its benefits heavily toward households with children. A single person working full-time at minimum wage would get a credit of $41, less than 1 percent of what his colleague with kids can expect.

For what it’s worth, Cass acknowledges that employers might capture some of the benefits of a wage subsidy.

If the government offers a $3 subsidy atop a $9-per-hour job, the result will not necessarily be a $12-per-hour job. The employer might instead cut the market wage to $8, to which the government would add $3.50 — half the $7 gap to the target wage of $15 — leaving the worker with $11.50. …How workers and employers respond to the subsidy will vary based on labor-market conditions. What we do know from studies of the EITC and a similar program in the United Kingdom is that, in those instances, roughly 75 percent of the financial benefit accrued to workers.

Now let’s discuss the policy implications.

Cass openly admits that a wage subsidy is a form of redistribution, and – much to my dismay – he doesn’t object if at least some of that new spending is financed by higher taxes.

Subsidizing wages is a particularly well-tailored response to the challenges that globalization presents for American workers. First, the wage subsidy is the appropriate mechanism for redistributing gains from the economy’s “winners” to its “losers.” It comes closest to doing this directly, by taking tax revenue drawn from higher earners and inserting it directly into the paychecks of lower earners. …it is redistribution. And yes, high-income taxpayers will finance it. …The roughly $200 billion price tag for a wage subsidy might require some new tax revenue, but its funding could come largely from the existing safety net, which already dedicates more than $1 trillion annually to low-income households — including many with workers.

The following excerpt also rubbed me the wrong way since he seems to be saying that it would be better if Washington had expanded redistribution instead of lowering the corporate tax rate.

…in debates over the 2017 tax-reform package, which ultimately increased the ten-year federal deficit by $1.5 trillion for the sake of reducing the corporate tax rate, while failing to deliver even the small EITC increase for childless workers that Ryan had once championed. Indeed, while the Khanna proposal in its 2017 form is not a serious one, even it could have been implemented more cheaply than the tax reform that ultimately passed. The deficit spending would have been equally costly, but at least the labor market and its low-wage workers would have been the chief beneficiaries. …the Republican party’s relative disinterest in the labor market is made apparent by its preference for a tax cut over a wage subsidy.

This is very troubling. In the long run, faster growth is much better for low-income workers.

I’m not the only skeptic of this plan.

Writing for the Week, AEI’s Jame Pethokoukis argues that Cass bases his idea on a misreading of the economy.

One of his innovative analytical insights is that economic growth from globalization is bad for workers. …This is a terrible reading of history… America would be worse off today if it had somehow kept the closed “golden age” economy of the 1950s and 1960s. Its lack of openness greatly harmed American workers… Too much of American industry became complacent, unproductive… Likewise, would America have a more thriving economy today without Silicon Valley? …Cass’ reading of the data isn’t much better as he adopts the stance of many leftists that most Americans are no better off than decades ago. Yet a recent Congressional Budget Office study shows a nearly 50 percent increase in middle-class incomes since 1970, with incomes for the bottom fifth up some 80 percent.

And Michael Strain, also with the American Enterprise Institute, was similarly critical in a column for Bloomberg.

Economic growth is under attack. Or, more specifically, the idea that public policy should place a large amount of emphasis on the economy’s rate of growth is under assault… Traditionally, conservatives have placed a premium on growth as the best way to advance the fortunes of all Americans. But in recent years, some on the right have [been] playing down the importance of growth to the well-being of many working-class Americans. The latest argument for that position comes from Oren Cass… Cass argues that the results from decades of policies designed to encourage GDP growth are “embarrassing” and have “steered the nation off course.” …conservatives have been right in their traditional focus on growth. Let’s recall why. …the hot U.S. economy is the best jobs program available for lower-wage and vulnerable workers. …this strength is benefiting low-wage workers more than other groups. …Growth doesn’t just help low-income and working-class households in the short term. Over longer periods, seemingly small changes in the growth rate have large consequences. In the past four decades, for example, real GDP per person has increased from about $28,000 to over $55,000, growing at about 1.7 percent per year. If growth instead had been 1 percent, average GDP per head would be about three-quarters what it is today.

Needless to say, I strongly agree with Strain’s final point about the importance of faster growth.

Though I confess to being at a disadvantage when judging these anti-Cass columns since I haven’t read the book.

However, to the degree that Cass truly has given up on growth (i.e., accepting some form of the “secular stagnation” hypothesis), then I side with Pethokoukis and Strain.

But that’s not my main concern. Here are the four reasons that motivate my objection to wage subsidies.

  1. Redistribution should not be a responsibility of the federal government. Indeed, I want all redistribution devolved to state and local governments (or to the private sector).
  2. Cass says the program will cost $200 billion. Like with most government programs, I assume the actual fiscal burden will wind up being much higher. Especially after the left starts a bidding war.
  3. Existing wages subsidies are riddled with fraud because the government effectively gives people lots of money simply for filing a tax return, yet rarely bothers to confirm they actually earned the income.
  4. Wage subsidies actually turn into wage penalties (i.e., punitive implicit marginal tax rates) when income rises above the target level and the handouts are withdrawn.

The bottom line is that Cass is right that it’s better to subsidize work rather than idleness.

However, Americans already are too dependent on Uncle Sam. It would be even better if we simply achieved more growth by adopting the tried-and-tested recipe for prosperity.

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