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Defense, Debt, and a Choice for the GOP

Wed, 10/03/2018 - 2:38am

Back in January, I explained that Republicans in Congress were fools to believe that they could grow defense spending without substantial entitlement reforms:

It is simply not possible to grow defense spending without substantial, cost-curbing reforms to the rest of the federal budget. Over the past half century the federal government has fundamentally changed its role in the US economy: in 1962 the federal budget gave $2 to the Pentagon for every $1 it spent on welfare-state entitlements; in 2017 defense spending amounted to 22 cents for every $1 to entitlements. The Pentagon’s share of the federal budget has fallen from 49 percent under President Kennedy to just below 15 percent today.

I also noted that back in June 2017, Representative Cheney (R-WY) and her dad, former Vice President Dick Cheney, wrote:

Providing for the defense of America is the most sacred constitutional obligation of the U.S. Congress. If Congress fails in this, no balanced budget, no health-care reform, no tax reform, no entitlement reform will matter. If lawmakers fail to provide the resources necessary for the defense of the nation, nothing else they do will matter.

Since then, Congress has increased defense spending substantially, closing in on an all-time-high in Pentagon appropriations. So now that Representative Cheney and other strong supporters of our armed forces have gotten what they wanted, will you now please turn your attention to entitlements?

The need for entitlement reform is not just a matter of fiscal conservatism. It is, in fact, also a national security issue. Or, as I pointed out in another article back in January, House Speaker Paul Ryan (R-WI) was dead wrong thinking that

we can grow defense spending without entitlement reform. When I made that point last week, the Chinese government proved me right: with a mere whisper about reconsidering their investments in US Treasury bonds, Beijing rattled Wall Street and — if ever so briefly — raised our interest rates. In a financial heartbeat, China demonstrated that our government debt, built over half a century of excessive welfare-state spending, is a major threat to our national security.

The financial tremors were caused by a recommendation from senior Chinese government officials that the country change its investment policies toward U.S. Treasuries. I noted that

the Chinese whisper could very well have been a muscle-flexing move. From a US national-security viewpoint it was perfectly timed. It came just as Congressional budget talks kicked into high gear and Republicans raised demands for more defense spending. The message from Beijing was that if they wanted to, they could stop our efforts at increasing defense spending, and even disrupt our ability to maintain current levels of defense spending.

With $1 trillion in U.S. Treasuries, the Chinese could indeed do some real harm if they wanted to. My numbers from January:

As of 2017, the interest cost on the federal debt was $457 billion. This equals an interest rate of 2.26 percent on the entire federal debt. If the interest had been 0.3 percentage points higher, the same level as it was in 2013, interest payments would have exceeded $518 billion. That would have topped federal spending on income security ($514 billion). At an average interest rate of 2.75 percent, the total interest cost would have been $556 billion, a smidgen more than the $546-billion budget for the Department of Health and Human Services. With a 3 percent rate, the US Treasury would have had to spend $607 billion on interest — $4 billion more than the entire Department of Defense budget.

If the Chinese chose to dump their Treasuries onto the global debt market, it would cause interest rates to rise much higher than three percent. An interest shock wave would have disruptive effects on a Congress that has not only ignored entitlement spending, but actively worked to remove all stops to spending growth. Having thrown out the sequester, dismantled the IPAB panel in Medicare and “suspended” the debt ceiling, our beloved senators and representatives no longer have anything between them and a virtual Autobahn of spending growth.

It was hardly surprising, then, to see a recent CNBC report  that said exactly what I warned about already back in January:

The federal government could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs. The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive. With less money coming in and more going toward interest, political leaders will find it harder to address pressing needs like fixing crumbling roads and bridges or to make emergency moves like pulling the economy out of future recessions.

Dear GOP, what is it going to be? Are you going to systematically address runaway entitlement spending, or are you going to continue to outspend the world’s drunken sailors?

We have reasons to fear that the Republican majority on Capitol Hill leans in the drunken-sailor direction. There is growing support among their ranks for a paid-leave proposal from Senator Rubio (R-FL). A general income-security program – the technical term for paid leave – is one of the three missing pieces in the American welfare state, before it becomes a full-blown European behemoth (the other two are universal child care and single-payer health care).

As if paid leave were not enough, the Republican-led Congress has already opened the door for a single-payer health care system. Not only would that destroy the world’s best health care system (bruised as it is from Obamacare) but it would require nightmarish tax increases.

Perhaps emerging signs of a new global debt crisis might motivate the GOP to rethink their spending habits. If not, the United States will be pulled down into a Greek-style fiscal tailspin the like of which we have not seen at last since the Great Depression. When that happens, everything the Republicans in Congress have worked for, especially in terms of more defense spending, will be squandered.

 

Market-Driven Prosperity Produces Better Public Health

Tue, 10/02/2018 - 12:18pm

Back in 2012, I shared a chart showing that workplace deaths declined substantially after the creation of the Occupational Safety and Health Administration.

But I then shared a second chart showing that workplace deaths declined just as much before OSHA was created.

The moral of my story was quite simple. Deaths primarily fell because America become much more prosperous. And there’s a lot of evidence that wealthier is healthier.

Today, let’s look at a similar example.

study published by the National Bureau of Economic Research looks at the impact of public health measures in the early 1900s. They start by sharing some good news.

Since the mid-19th century, mortality rates in the Western world have plummeted and life expectancy has risen dramatically. Sometimes referred to as the mortality transition, this development is widely recognized as one of the most significant in the history of human welfare (Fogel 2004). Two features characterize the mortality transition. First, it was driven by reductions in infectious diseases and diseases of infancy and childhood (Omran 2005; Costa 2015). Second, it was concentrated in urban areas.

Do government policies deserve the credit?

There’s some evidence for that hypothesis.

…recent reviews of the literature emphasize the role of public health efforts, especially those aimed at purifying the water supply. For instance, Cutler et al. (2006) argue that public health efforts drove the dramatic reductions in food- and water-borne diseases at the turn of the 20th century. Similarly, Costa (2015) argues that clean-water technologies such as filtration and chlorination were “the biggest contributor[s] to the decline in infant mortality”

To be sure, there were huge public projects in the first several decades of last century. Here’s the data on sewage treatment facilities.

And here’s some data on milk purification efforts.

And the study has data on other aspects of public health as well.

The key question is whether all these efforts were successful. The three authors decided to investigate.

Using data on 25 major American cities for the years 1900-1940, the current study revisits the causes of the urban mortality decline at the turn of the 20th century. Specifically, we conduct a statistical horse race that attempts to distinguish the effects of ambitious, often extraordinarily expensive (Costa 2015, p. 554), public health interventions aimed at controlling mortality from food-and-water-borne diseases. Following previous researchers (Troesken 2004; Cutler and Miller 2005; Beach et al. 2016; Knutsson 2018), we explore the extent to which filtering and chlorinating drinking water contributed to the decline in typhoid mortality observed during the period under study and, more generally, to the observed declines in total and infant mortality. In addition, we explore the effects several other municipal-level efforts that were, at the time, viewed as critical in the fight against typhoid and other food- and water-borne diseases (Meckel 1990; Levitt et al. 2007; Melosi 2008) but have not received nearly as much attention from modern-day researchers. These interventions include: the treatment of sewage before its discharge into lakes, rivers and streams; projects designed to deliver clean water from further afield such as aqueducts and water cribs; requirements that milk sold within city limits meet strict bacteriological standards; and requirements that milk come from tuberculin-tested cows. Because the urban mortality transition was characterized by substantial reductions in infant and childhood mortality (Omran 2005) and because exclusive breastfeeding was not the norm during the period under study (Wolf 2001, 2003), improvements in milk quality seem a particularly promising avenue to explore.

But here’s the surprising result.

They did not find much evidence that public health efforts made a difference.

…our results suggest that the building of a water filtration plant cut the typhoid mortality rate by nearly 40 percent. More generally, however, our results are not consistent with the argument that public health interventions drove the extraordinary reductions in infant and total mortality observed between 1900 and 1940. Specifically, we find that efforts to purify milk had no appreciable effect on infant mortality and no effect on mortality from non-pulmonary tuberculosis (TB), which was often transmitted through infected milk. Likewise, neither chlorinating the water supply nor constructing sewage treatment plants appears to have been effective. …Our results point to other factors such as better living conditions and improved nutrition as being responsible for the sharp decline in urban mortality at the turn of the 20th century.

Here’s the chart showing that infant mortality consistently declined, largely independent of public health efforts.

I’m not suggesting, by the way, that public health spending is bad. Nor am I asserting that it’s a waste of money.

Notwithstanding some of the jokes that target libertarians, the goal isn’t to abolish every regulation or program governing safety and health. Maybe I’m a bad libertarian, but I’d pick a city with sewage treatment over one without.

But my main point is that I don’t need to make that choice. Nobody does.

The data strongly suggests that economic growth and rising levels of prosperity are the real drivers of improved health outcomes. Market-driven prosperity is what generates the wealth needed to improve public health, whether the actual delivery takes place via public or private action.

Debunking a Critique of Capitalism

Mon, 10/01/2018 - 12:37pm

Over the years, I’ve felt compelled to “debunk” various articles, columns, and speeches that fundamentally misrepresented and/or misunderstood key economic issues.

A partial list includes Keynesian economics, the Laffer CurveObama tax propagandaElizabeth Warren’s class warfaresequester hysteriaexport subsidieslibertarianismcarried interestgovernment sizeinequalityScandinavia, and the value-added tax.

It’s time to add to that list. In a column for the Washington Post, Steven Pearlstein claims to have identified “Five myths about capitalism.” He’s not necessarily attacking free enterprise, but he does make several points that rub me the wrong way and/or should be addressed. Here’s his introduction.

Thirty years ago, in the face of a serious economic challenge from Japan and Europe, the United States embraced a form of free-market capitalism that was less regulated, less equal, more prone to booms and busts. Driving that shift was a set of useful myths about motivation, fairness and economic growth that helped restore American competitiveness. …Here are five of the most persistent ones.

Before we get to his myths, I can’t resist questioning his assertion that markets lead to “more booms and busts,” in part because we had very long and strong expansions during the market-oriented Reagan and Clinton years and in part because the big 2008 recession was largely a result of bad government policy.

But let’s set that aside and look at Pearlstein’s myths. Here’s his first assertion.

Adam Smith, the father of economics, first pointed out in his most famous work, “The Wealth of Nations ,” that in vigorously pursuing our own selfish interests in a market system, we are led “as if by an invisible hand” to promote the prosperity of others. …Smith, however, was never the prophet of greed that free-market cheerleaders have made him out to be. In other passages from “The Wealth of Nations,” and in his earlier work, “The Theory of Moral Sentiments,” Smith makes clear that for capitalism to succeed, selfishness must be tempered by an equally powerful inclination toward cooperation, empathy and trust — traits that are hard-wired into our nature and reinforced by our moral instincts. …An economy organized around the cynical presumption that everyone is greedy is likely to be no more successful than one organized around the utopian assumption that everyone will act out of altruism.

This isn’t really a myth as much as a misrepresentation. What “free-market cheerleaders” extol Smith as a “prophet of greed”?

I self-identify as one of those cheerleaders, and I simply point to Smith’s famous observation about how self-interest is what drives merchants to improve our lives.

Do some people go crazy with greed? Of course.

But that’s true in any system (look at how Chavez’s family members lined their pockets).

What makes capitalism a preferable system is that greedy people have to cater to consumers if they want more money.

Here’s Pearlstein’s second myth.

This is an almost universal belief among corporate executives and directors — that it is their principal mission and legal obligation to deliver the highest possible return to their shareholders. The economist Milton Friedman first declared in the 1970s that the “one social responsibility of business [is] . . . to increase its profits,” but the corporate raiders of the 1980s were the ones who forced that view on executives and directors, threatening to take their companies or fire them if they didn’t go along. …“maximizing shareholder value”…is now widely taught by business schools, ruthlessly demanded by Wall Street’s analysts and “activist” investors, and lavishly reinforced by executive pay packages tied to profits and share prices. In fact, corporations are free to balance the interests of shareholders with those of customers, workers or the public… Legally, corporations can be formed for any purpose. …The only time a corporation is obligated to maximize its share price is when it puts itself up for sale.

I’m not sure what point he’s making. Does he think companies shouldn’t try to make profits? Does he not understand the purpose of profits? Does he want to put corporate governance under the control of politicians, like Elizabeth Warren?

For what it’s worth, he’s correct that corporations can be set up for reasons other than profit, though I’m not sure that’s any sort of stunning revelation.

Here’s the third supposed myth.

The theory of “marginal productivity” holds that a worker’s wage or salary reflects the “amount of output the worker can produce,” according to Harvard’s Greg Mankiw, author of a best-selling economics textbook. This idea is useful in constructing economic models, but Mankiw and others have also relied on it to justify widening income inequality and to oppose proposals to redistribute income… In reality, however, the pay set by markets is also subjective, reflecting the laws and social norms under which markets operate. The incomes earned by workers who planted tobacco — and those who owned tobacco plantations — changed considerably after slavery was abolished, and again after laws protecting sharecroppers were enacted, and again when minimum-wage laws were passed… While it is probably better to rely on markets rather than government to set pay levels, that doesn’t mean that the way the markets set pay is a purely objective assessment of economic contribution or that redistribution is theft.

I’m glad he acknowledges that it is “probably better” for markets to set wages, but this section is largely incoherent.

He writes about slavery, but that has nothing to do with capitalism. After all, slavery was government-sanctioned and government-enforced involuntary labor, whereas a defining feature of capitalism is voluntary exchange.

Now for the fourth myth.

The reason Americans tolerate higher levels of income inequality is because of our faith that we all have a fair chance at achieving the American Dream or becoming the next Bill Gates. “In America we stand for equality,” writes Arthur Brooks of the American Enterprise Institute, a leading defender of the morality of capitalism. “But for the large majority of us, this means equality of opportunity, not equality of outcome.” …But while the United States has made great strides in removing legal barriers to equal opportunity, at least half the difference in income between any two people is determined by their parents, either through inherited traits like intelligence, good looks, ambition and reliability (nature), or through the quality and circumstances of their upbringing and education (nurture). …Unless we are prepared to engage in extensive genetic reengineering, or require that all children be brought up in state-run boarding schools, we must acknowledge that we can never achieve full equality of opportunity.

This section actually makes some sense. Some people do have better parents and better genes, and that does put them in a better position to succeed.

In any event, I very much hope that Pearlstein doesn’t think that government-imposed “genetic reengineering” and/or “state-run boarding schools” are good ideas.

Here’s the final myth, and also the one that got me most agitated.

Economists have long believed that there is an unavoidable trade-off between equality and growth — having more of one means having less of the other. Arthur Okun’s book about it, “Equality and Efficiency: The Big Tradeoff,”remains a classic. The implosion of communism and the decisions of socialist countries like Sweden to reduce taxes and welfare are widely seen as acknowledgments of the failure of overly egalitarian systems to produce adequate economic growth. But evidence suggests that there is also a point at which high levels of inequality begin to deliver less economic growth, not more — and that the United States has passed that point, according to research by the International Monetary Fund. …rising income inequality erodes the trust people have in one another and their willingness to cooperate.

I’m glad he cited Okun, and it’s also good that he cited Sweden’s turn in the right direction.

But it’s very disappointing that he called attention to the IMF’s incredibly shoddy research on inequality.

As I’ve repeatedly explained, inequality that results from voluntary exchange is fine and inequality that results from Cronyism is bad. Studies that fail to distinguish between the two are either deliberately dishonestor breathtakingly shoddy.

I’ll close by asking critics of capitalism to give just one accurate answer to my two-question challenge. Or, if that’s too difficult, create the left-wing version of this chart.

I won’t be holding my breath.

Assessing Philosophical Orientation with a 5-Dimensional Quiz

Sun, 09/30/2018 - 12:14pm

It’s time to augment our collection of surveys that test political orientation. Here are the ones I’ve previously shared.

Today’s addition is a quiz called the “5-Dimensional Political Compass.”

It’s only 30 questions, covering everything from economic issues, international issues, and cultural issues. Your answers are limited to yes, no, and maybe, so there’s not much opportunity for nuance.

Even though I like the concept of a multi-dimensional test, I’m not completely thrilled with how I was graded.

I have no objection to being a “conservative” and “libertarian,” but I’m an avid proponent of free trade, so how can I be a “total-isolationist”?

It turns out that the quiz has nothing on trade and several questions related to international organizations and global governance. Given my views on such issues, that must explain how I’m classified.

I also don’t like being called a “nationalist,” but I’m guessing that’s because of my “yes” to the question about whether “my country is inherently better.”

It’s not that I think Americans are better, but I very much appreciate that I’m part of a nation founded on an ideal of freedom rather than shared nationality, race, or religion. In other words, I’m saying “my country’s organizational principles are inherently better.”

For what it’s worth, if I changed my answer to “maybe” on that question, the “nationalist” part would disappear and my results would change to “conservative libertarian total-isolationist traditionalist.”

Speaking of “traditionalist,” I’m mildly uncomfortable with that label. I think I got that outcome because I answered “yes” to the first question about the “decline of traditional families” being harmful and “maybe” to the second question about “moral decay of our society.”

I guess it all depends on what people think is implied by the questions. I answered “yes” to the first because I think it is unfortunate to have so many children from broken homes, whereas somebody else might answer “yes” because they are bothered by two men or two women getting married.

And when I think about “moral decay,” I’m focusing on the erosion of societal capital, not whether someone smokes pot or looks at a naked picture on the Internet.

Choosing Reverse-Class-Warfare to Subsidize Bigger Government

Sat, 09/29/2018 - 12:54pm

Politicians who preach class warfare repeatedly assert that we need higher taxes on “the rich.”

Indeed, that’s been the biggest political issue (and oftentimes biggest economic issue) in every recent tax fight (the Trump tax reform and Obama’s fiscal cliff), as well as the issue that generates the most controversy when discussing tax reform.

So it seems almost inconceivable that the class-warfare crowd would support a change to the tax code that would only benefit the top-10 percent, right?

Yet that’s exactly what’s happening in the fight over the deduction for state and local taxes.

Democrats want to restore an unlimited deduction, thereby enabling people to shield more of their income from tax. But, as the Tax Foundation notes, that change only produces benefits for upper-income taxpayers.

Itemized deductions such as the SALT deduction are mostly utilized by higher-income individuals. As such, any change to the SALT deduction will chiefly impact them. In addition, the value of a deduction increases as a taxpayer’s statutory tax rate increases. A deduction against the top rate of 37 percent is more valuable than a deduction against the 32 percent tax rate. We estimate that eliminating the SALT deduction cap would have no impact on taxpayers in the bottom two income quintiles and a negligible impact on taxpayers in the third and fourth quintiles. …However, taxpayers in the top 5 and 1 percent of income earners would see an increase in after-tax income of 1.6 percent and 3.7 percent respectively.

And if restoring the deduction is “paid for” by raising the corporate tax rate, the net effect is to raise taxes on the bottom-90 percent in order to give a tax to top-10 percent.

Or, to be more precise, to give a tax cut to the top-1 percent.

Some of you may be thinking that the Tax Foundation leans right and therefore can’t be trusted.

So let’s look at some research from the Tax Policy Center, which is a joint project of the left-leaning Urban Institute and left-leaning Brookings Institution.

Only about 9 percent of households would benefit from repeal of the Tax Cuts and Jobs Act’s (TCJA) $10,000 cap on the state and local property tax (SALT) deduction, and more than 96 percent of the tax cut would go to the highest-income 20 percent of households… For all middle-income taxpayers, the average tax cut would be $10. Those in the top 1 percent would pay an average of $31,000, or 2 percent of after-tax income, less.

And here’s the TPC chart showing how almost all the tax relief goes to upper-income taxpayers.

So what’s going on? Why are Democrats fighting for an idea that would give the rich a $31,000 tax cut while only providing $10 of relief for middle-class taxpayers?!?

The simple answer is that they think the loophole is a very valuable way of facilitating higher taxes and bigger government at the state and local level. And they’re right, so I don’t blame them.

But it’s nonetheless very revealing that they are willing to jettison their tax-the-rich rhetoric when it interferes with their make-government-bigger agenda.

P.S. This “SALT” debate strikes me as being similar to the Laffer-Curve debate, which requires folks on the left to choose whether it’s more important to punish rich people or to get more revenue to spend.

Mirror, Mirror, on the Wall, Which State Has the Best Tax System of All?

Fri, 09/28/2018 - 12:46pm

Yesterday, I wrote about the newest edition of Economic Freedom of the World, which is my favorite annual publication.

Not far behind is the Tax Foundation’s State Business Tax Climate Index, which is sort of the domestic version of their equally fascinating (to a wonk) International Tax Competitiveness Index.

And what can we learn from this year’s review of state tax policy? Plenty.

…the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking.

That’s the theory, but what about the results?

Here are the best and worst states.

If you pay close attention, there’s a common thread for the best states.

The absence of a major tax is a common factor among many of the top 10 states. …there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.

By the way, both Utah and Indiana are among the nine states with flat tax systems, so every top-10 state has at least one attractive feature.

But if you peruse the bottom-10 states, you’ll find that every one of them has an income tax with “progressive” rates that punish people for contributing more to the economy.

Indeed, half of the states on that unfortunate list are part of the “Class-Warfare Graduated Tax” club.

Not a desirable group, assuming the goal is faster growth and more jobs.

The Tax Foundation’s report also is worth reading because it reviews some of the academic evidence about the superiority of pro-growth tax systems.

Helms (1985) and Bartik (1985) put forth forceful arguments based on empirical research that taxes guide business decisions. Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. Bartik concluded that the conventional view that state and local taxes have little effect on business is false. Papke and Papke (1986) found that tax differentials among locations may be an important business location factor, concluding that consistently high business taxes can represent a hindrance to the location of industry. …Agostini and Tulayasathien (2001) examined the effects of corporate income taxes on the location of foreign direct investment in U.S. states. They determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” Therefore, they found that foreign direct investment was quite sensitive to states’ corporate tax rates. Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …Gupta and Hofmann (2003) regressed capital expenditures against a variety of factors… Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

None of this research should come as a surprise.

Businesses aren’t moving from California to Texas because business executives prefer heat and humidity over ocean and mountains.

The bottom line is that tax rates matter, whether we’re looking at state data, national data, or international data.

Let’s close by sharing a map from the report. Simply stated, red is bad and teal (or whatever that color is) is good.

P.S. My one complaint about this report from the Tax Foundation is that it doesn’t include the overall fiscal burden. Alaska and Wyoming score well because they have small populations and easily fund much of their (extravagant) state budgets with energy-related taxes. If data on the burden of state government spending was included, South Dakota would be the best state.

P.P.S. Unsurprisingly, Americans are moving from high-tax states to low-tax states.

P.P.P.S. It’s also no surprise to find New Jersey in last place.

New Rankings for Economic Freedom: The United States Climbs to #6

Thu, 09/27/2018 - 2:39am

Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New ZealandSwitzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Koreaand Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

What Motivates the Left, Disdain for the Rich or a Desire to Help the Poor?

Wed, 09/26/2018 - 12:18pm

I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challengewhich simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

Preserving Corporate Handouts Is Not the Answer for Vulnerable Republicans

Mon, 09/24/2018 - 11:28pm

Originally published by Inside Sources on September 21, 2018.

An animal is most dangerous when cornered, as are politicians facing tough re-election campaigns if we’re to judge by reports that Sen. Dean Heller, R-Nevada, is preparing legislation to prevent the electric vehicle tax credit from phasing out as intended. The Republican majority is certainly in jeopardy as the GOP faces a daunting election environment, but that shouldn’t become an excuse for embracing corporate handouts.

Along with a lot of other wasteful spending, the package of bills passed in response to the financial crisis in 2008 provided purchasers of electric passenger vehicles with up to $7,500 in federal tax benefits, and many states have subsequently added more benefits. Initially, the credit applied only to the first 250,000 electric vehicles, but as part of the Obama stimulus it was expanded to cover the first 200,000 vehicles for each manufacturer.

But now even that limitation is in jeopardy and, as so often is the case, a government program intended to last a limited time is in danger of being extended into perpetuity. That the effort might be carried out under the watch of the party claiming to prefer smaller government merely adds insult to injury.

Heller’s reason for pursuing the issue is obvious. Tesla’s Gigafactory 1, which manufactures lithium-ion batteries, is in Nevada, and Tesla has just crossed the 200,000 EV threshold. Tax benefits for Tesla customers will be phasing out over the next year, and that will obviously be bad for Tesla’s bottom line.

Keeping the gravy flowing to in-state businesses is probably good politics for a senator in a close election. And for Republicans as a whole, anything that helps keep a colleague in office could be the difference between keeping their congressional majority or watching Democrats take power after November’s election.

Unfortunately, EV tax credits aren’t similarly good as policy. Instead, they represent one of many policies that 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 at any time, but it’s particularly egregious to continue doing so when the national debt just hit $21 trillion.

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. And since all personal vehicles in the United States account for approximately 3 percent of global greenhouse gas emissions, even an influx of electric vehicles into the market would have a negligible effect on potential climate change, not that Americans are flocking to electrics even with the tax incentives in place.

But ultimately this is not about whether electric or internal combustion engines are better. The issue should be whether politicians or consumers are best situated to render that judgment.

Once all the myths are stripped away, the only reason left for extending EV tax credits is electoral advancement through corporate welfare. But while sacrificing their principles to support corporate handouts, and despite the cost to taxpayers, in the hopes of preserving a vulnerable Senate seat might seem a fair bargain for Republicans. If they did a better job of matching their rhetoric with actual fiscal discipline, then they probably wouldn’t be facing such an electoral backlash in the first place.

What Makes Someone Decide to Be a Conservative or Liberal, a Statist or Libertarian?

Mon, 09/24/2018 - 12:42pm

Politically aware people generally understand the policy differences between conservative and liberals (as they are currently defined, not classical liberals).

For those who don’t follow politics, there’s an accurate – and amusing – guide from Playboy that explains the difference between Republicans and Democrats.

And it includes libertarians and greens as well, which is a nice touch for those of us with unconventional views.

But what actually causes someone to pick an ideology?

In February, I shared a bunch of research that looked at how various personal characteristics are associated with – and may even cause – political differences.

This is interesting research. Though I suspect it irks many of us, regardless of our philosophical orientation, since it implies that our views aren’t necessarily the result of reason.

According to an article in Business Insider, this type of research even shows that differences extend beyond politics.

…what in the brains of conservative and liberal voters actually drive their belief systems? Scientists have been researching the psychological differences between people with different stances, and there are a few key ways that people on opposite ends of the political spectrum see the world. …Liberal and conservative tastes in music and art are different. …liberals enjoyed more cubist and abstract art. …conservative readers tended to say they’d rather visit Times Square than the Metropolitan Museum of Art. …conservative voters were found to be more likely to agree with statements like: “I often have tender, concerned feelings for my family members who are less fortunate than me.” But their responses suggested such feelings did not extend to people from other countries. Liberals, on the other hand, were more likely to feel that same level of compassion for people around the world, and even to non-human and imaginary subjects like animals and aliens. …A longitudinal study of more than 16,000 people in the UK found that… “Children who showed higher levels of conduct problems — that is, aggression, fighting, stealing from peers — were more likely to be economically left-leaning.”

What about libertarians?

In his Bloomberg column, Professor Tyler Cowen reveals that we are the most thoughtful group.

Libertarians measure as being the most analytical political group. That’s according to something called the cognitive reflection test, which is designed to measure whether an individual will override his or her immediate emotional responses and give a question further consideration. So if you aren’t a libertarian, maybe you ought to give that philosophy another look. It’s a relatively exclusive club, replete with people who are politically engaged, able to handle abstract arguments and capable of deeper reflection.

Trump voters and independents, by contrast, are less informed and more impulsive.

What else can we learn from this new study of political and analytical tendencies, conducted by Gordon Pennycook and David G. Rand of Yale University? …one group that measured as especially nonanalytical was Democrats who crossed party lines and voted for Donald Trump. There is a stereotype of a less well-educated voter, perhaps both white and male, who reacts negatively and emotionally to Hillary Clinton… For all the dangers of stereotyping, the study’s data are consistent with that picture. …independents do poorly on the analytic dimension. …that group measures as relatively impulsive and prone to less informed judgments.

And here’s some research on “free-marketeers” from the U.K.-based Times.

Clever children will probably grow up to have free-market economic views, according to new academic research. The direct link between intelligence and economic conservatism holds true even if the self-interest that high earners have in a lower-tax, free-market economy is taken into account. The authors of the research, Gary Lewis and Timothy Bates, psychologists at Royal Holloway, University of London and Edinburgh University respectively, state: “Intelligence assessed in childhood [ages 10-11] was predictive of adult [30-33] economic conservatism.” …The authors studied data from the 1970 British Cohort Study and the National Child Development Study of 1958, both of which measured the intelligence of more than 17,000 children before they were distorted by educational differences. The authors also adjusted for sex, parental social class and childhood conduct problems.

I like these results, for the obvious reason.

But also notice that the authors adjusted the data based on the assumption that a “lower-tax, free-market economy” generates greater wealth. Interesting (and accurate) admission.

Now let’s consider the statist side of the spectrum.

According to some revised research that was reported by the New York Post, our friends on the left have authoritarian tendencies.

A political-science journal that published an oft-cited study claiming conservatives were more likely to show traits associated with “psychoticism” now says it got it wrong. Very wrong. The American Journal of Political Science published a correction this year saying that the 2012 paper has “an error” — and that liberal political beliefs, not conservative ones, are actually linked to psychoticism. …“The descriptive analyses report that those higher in Eysenck’s psychoticism are more conservative, but they are actually more liberal; and where the original manuscript reports those higher in neuroticism and social desirability are more liberal, they are, in fact, more conservative.” In the paper, psychoticism is associated with traits such as tough-mindedness, risk-taking, sensation-seeking, impulsivity and authoritarianism.

Since we’re on the topic of authoritarianism, let’s close by looking at some new research, reported by PsyPost, that doesn’t reflect well on the right or left.

New research provides evidence that left-wing authoritarian attitudes exist in the United States. The preliminary findings, published in the scientific journal Political Psychology, suggest liberals could be just as likely to be authoritarians as conservatives. …Conway and his colleagues developed a measure of left-wing authoritarianism, which was adapted from the right-wing authoritarianism scale developed by psychologist Bob Altemeyer. …The new LWA scale, on the other hand, asks questions such as: “It’s always better to trust the judgment of the proper authorities in science with respect to issues like global warming and evolution than to listen to the noisy rabble-rousers in our society who are trying to create doubts in people’s minds” and “Our country desperately needs a mighty leader who will do what has to be done to destroy the radical new ways and sinfulness that are ruining us.” …The researchers found that left-wing authoritarianism was associated with liberal views, dogmatism, and prejudice.

In other words, partisans on both sides are tempted to use the coercive power of government to impose their beliefs.

Which underscores why government shouldn’t have much power in the first place!

The good news is that we still have lots of freedom. At least compared to the rest of the world.

The bad news is that we have less freedom than we used to have.

P.S. You could say we’re becoming less like Liberland and more like Senator Murphy’s dystopia.

The Problems With Green Central Planning

Mon, 09/24/2018 - 8:13am

The 20th century was full of examples, large and small, of what grand-scale economic planning does to an economy, and its people. Sadly, that wealth of experience has not deterred socialists from trying over and over again. One of the many examples of our time is Venezuela, where president Maduro just raised the minimum wage.  As Bloomberg reports, Maduro’s move is going to accelerate the Venezuelan economic tailspin:

President Nicolas Maduro intended the mandate as political boost, but it’s having the opposite effect as companies, already hit by Venezuela’s epic economic contraction, tell workers they can’t afford to keep them. While there have been many similar moves in the past, never has one been so disruptive, arriving amid hyperinflation, depression and devaluation. Some employers are restructuring costs, rejiggering pay scales and negotiating settlements with workers. Others are simply dismissing people. Much of the action happens secretively as companies try to avoid punishment by the government, which has been jailing those it believes are flouting the rules.

The Miami Herald has more details:

Nearly 40 percent of all Venezuelan stores have closed their doors — some of them perhaps permanently — after the government of President Nicolás Maduro increased the minimum salary by nearly 3,500 percent in one fell swoop … Many of the companies, which had been barely surviving the gradual collapse of the economy, saw the salary increase and other changes announced last month as the fatal blow in a string of policies that have been gradually strangling their operations.

For example, stores are not allowed to raise prices to match cost hikes. According to the Herald, government inspectors can have store owners jailed if they do not comply with the government’s price dictates. But that is not all: if a business decides to close the doors, government can seize its facilities and equipment.

It is no wonder that Venezuela has become a monumental economic disaster zone, with one million percent inflation, widespread starvation and a population fleeing just about anywhere they can. The silver lining in the Venezuelan implosion is that the lessons of central planning are now readily available to a new generation, too young to have seen the Soviet empire in action.

There is also a general lesson to be learned from the central planning disasters in recent history. For at least a few decades now, the environmental movement has been gradually advancing its own version of central planning. This movement, the origins of which are more than a little shady, is trying to micromanage our lives in the name of the general good.

We are now beginning to see the consequences of this green central planning. The automotive industry is a good example, as the problems with hybrid and electric cars get worse. The latest example is from Toyota, which has to recall a million gas-hybrid vehicles due to a serious fire risk originating in the hybrid power control system.

Construction, maintenance and repair of hybrid vehicles is not exactly an environmentally friendly endeavor. At the far end of the spectrum is the horrible practice of child slave labor in central Africa, for the sole purpose of mining cobalt, a key ingredient in hybrid batteries. Yet the environmental movement continues to push for green central planning, with tax rebates to all who buy hybrid or fully electric cars.

Tesla Motors is another example of green central planning. This house of tax-paid cards has received billions of tax dollars in subsidies, yet continues to implode like a hot-air balloon.

Beyond the automotive industry, green central planning has pushed hard for more wind power. As it turns out, this supposedly magic-bullet solution to our energy problems is not that environmentally friendly after all. On the contrary, as demonstrated in an innovative Chinese research project, wind energy it is actually harmful to the environment. Not only do wind farms have a generally harmful effect on regional climate, but they are also bad for vegetation and, consequently, animal life:

The results showed that: (1) WFs had a significant inhibiting effect on vegetation growth, … and (2) the major impact factors might be the changes in temperature and soil moisture: WFs suppressed soil moisture and enhanced water stress in the study area. This research provides significant observational evidence that WFs can inhibit the growth and productivity of the underlying vegetation.

Green central planning is yet another example of what happens when government imposes an ideology on its people. With some luck, the regulatory rollback under the Trump administration will mark the turning point for green central planning in America, but we are by no means out of the woods yet (no pun intended). The ideological battle against big government is certain to continue for many more years to come.

Seven Reasons to Support Free Trade

Sun, 09/23/2018 - 12:39pm

Earlier this week, Neil Cavuto asked me about the politics of trade and I warned that Trump’s protectionism may backfire on Republicans because many workers and businesses are suffering the consequences.

Needless to say, I’m not a political expert, and I think even the folks who do that for a living have a hard time disentangling the various factors that motivate voters, so we may not even know for sure after the mid-term elections.

But I do have some actual knowledge of economics, so this is a good opportunity to share some excerpts from my recent article in the Federalist. I start with the basic observation that interventionism is misguided.

…the economy grows faster when markets rather than politicians determine where labor and capital go. …Simply stated, government intervention is a recipe for cronyism, corruption, and inefficiency. It’s no coincidence that market-oriented jurisdictions such as Hong Kong are so much more prosperous than state-driven nations such as Greece. This appreciation of markets explains why conservatives should be in the forefront of the battle to defend free trade.

And it doesn’t matter whether politicians are interfering with transactions between neighbors or interfering with transactions between people who live in different countries.

We understand it would be wrong to let politicians interfere with our freedom to trade with our local grocery store. We also understand it would be a mistake to allow politicians to hinder our liberty to trade with people in neighboring states. The same argument applies when looking at our trade with people in other nations.

I then list seven reasons why free trade is desirable, starting with the fact that exchange, by definition, is mutually beneficial.

1. Voluntary Trade Is a De Facto Good – The capitalist system, based on competition and trade, is defined by voluntary exchange. There is no need for “balance” between participants. We all have trade deficits with our local gas stations. …they never buy from us. Is that bad? Of course not.

And it doesn’t matter whether people in one country are buying more than people in another country.

2. A ‘Trade Deficit’ Means a ‘Capital Surplus’ – Nations don’t trade, people do. So when people in one nation buy goods from people in another nation, the money doesn’t disappear. …Foreigners have placed trillions of dollars in America’s financial markets… This “capital surplus” boosts prosperity and should be celebrated, not bemoaned.

I also point out that trade barriers enable cronyism and corruption.

3. Protectionism Corrupts Markets – Many people unfortunately equate capitalism with big business. This is very unfortunate because large companies…manipulate the political process in order to obtain unearned profits. Trade barriers…interfere with genuine free markets…they contribute to the perception that capitalism is merely a system for the benefit of the rich and powerful.

I then share Bastiat’s wisdom about the “seen” and the “unseen.”

4. Trade Barriers Reduce Jobs and Growth – It’s easy to identify jobs that have been “saved” because of protectionism…it’s not easy to calculate the greater number of jobs that are lost because of higher prices, lost purchasing power, enforced inefficiency, and lost competitiveness.

I admit that trade of any kind can be harsh, but that’s what drives prosperity.

5. Creative Destruction Is Painful But Beneficial – Trade causes pain, but not because goods cross borders. Far more jobs are lost because of domestic trade than because of international trade. …These changes, including ones driven by cross-border trade, are painful for some people, but we all wind up much richer if markets are allowed to function.

I close with two lessons in economic history, starting with an explanation of what drove growth in the 19th century.

6. Tariffs Didn’t Create Growth in the 1800s – …the growth of the 1800s wasn’t because of trade barriers. This was an era before the welfare state. Government was very small and there were no income taxes. There was no regulatory state. …Those were the policies that helped make America an economic powerhouse.

And concluding with an observation about the success of nations with laissez-faire trade policy.

7. Protectionist Nations Lag Free-Trade Jurisdictions – …sometimes it’s easier for people to learn from real-world examples. Hong Kong and Singapore are the two jurisdictions with the world’s lowest trade barriers. Is it any coincidence that they have become rich and prosperous? …countries like New Zealand enjoyed a renaissance after dismantling trade barriers.

The bottom line is that Trump’s protectionism is bad policy. And risky policy.

I politely ask those who disagree to answer these eight questions.

What’s Happening with Wages?

Sat, 09/22/2018 - 12:55pm

Some economic statistics are very important in the world of politics.

When President Obama’s so-called stimulus was in effect, critics (including me) kept pointing to higher-than-predicted unemployment rates. President Trump, meanwhile, mistakenly thinks America somehow is losing because of the trade deficit. And the GDP numbers are the subject of considerable discussion on all sides.

Another very important piece of data is wage growth, especially since Trump wants to claim his policies are generating big results. I take a jaundiced view on such claims, but the issue is very important, so let’s take a look at two interesting columns.

Michael Strain of the American Enterprise Institute, writing for Bloomberg, starts by noting that some folks on the left think workers are being screwed.

Are wages determined by market forces, or do businesses get to decide what pay they offer to workers? …Why has wage growth been so sluggish for so many years? …you might answer that employers have made the decision to boost profits at the expense of raising wages. …it is common to hear some prominent analysts and organizations on the left argue that the link between wages and productivity for most workers has effectively been severed.

Not so fast, he writes.

Businesses don’t pay employees less than the value of their productivity — the amount of revenue workers generate for their employer — because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets. …worker productivity remains the dominant force in setting wages. …Market forces are powerful. A recent paper by economists Anna M. Stansbury and Lawrence H. Summers of Harvard confirms this. They find that over the last four decades, a one-percentage-point increase in productivity growth is associated with a 0.73 percentage point increase in the growth rate of median compensation. That’s a strong link.

I have two thoughts on this. First, productivity is the key to our prosperity. I’m in full agreement with Paul Krugman’s observation that, “Productivity isn’t everything, but in the long run it is almost everything.”

Second, as illustrated by this chart, we get more productivity with greater levels of investment.

The problem is that government often undermines productivity growth.

Governments have thrown a wrench in the market machine through the absurd proliferation of occupational licenses, reducing wages for workers who can’t get a license and restricting the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individuals in occupations with state-specific licensing requirements is over one-third lower than among individuals in occupations that don’t have such rules.

Amen.

And there are plenty of additional policies that have a negative effect as well.

In a column for the Wall Street Journal, David Henderson says the data on wage growth tell an incomplete story.

Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

He digs into some of the data that have been shared by the CEA.

…the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data. …including benefits would add 0.2 percentage point to the 2017-18 figure. …An alternate measure of inflation, the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages. …The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18.

I have two thoughts about this data.

First, I don’t pretend to know the ideal measure to capture inflation, but I definitely know that we’d have lower prices in the absence of government intervention.

Second, the CEA definitely is right about fringe benefits being an ever-larger share of total compensation (mostly driven by government intervention).

And these observations apply, regardless of who’s in the White House.

This is not a partisan point. The same methodology would show that real wages grew more than was reported during much of President Obama’s time in office. …there is, in this context, one relevant difference between the Trump and Obama administrations: the 2017 tax cut. Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study.

I obviously like the part about tax cuts being helpful, but I’ll reiterate my concernthat this effect will evaporate if GOPers don’t get serious about spending restraint.

And I’ll close with the essential observation that there is no substitute for across-the-board pro-market policies if the goal is improving people’s lives.

Remarkable OECD Study on Corporate Tax Rates, Corporate Tax Revenue, and the Laffer Curve

Fri, 09/21/2018 - 12:42pm

Last month, I revealed that even Paul Krugman agreed with the core principle of the Laffer Curve.

Today, we have another unlikely ally. Regular readers know that I’m not a big fan of the Organization for Economic Cooperation and Development. The Paris-based international bureaucracy routinely urges higher tax burdens, both in the United States and elsewhere in the world.

But the professional economists who work for the OECD are much better than the political appointees who push a statist agenda.

So when I saw that three of them (Oguzhan Akgun, David Bartolini, and Boris Cournède) produced a study estimating the relationship between tax rates and tax revenues, I was very curious to see the results.

They start by openly acknowledging that high tax rates can backfire.

This paper investigates the capacity of governments to raise revenue by assessing the ways in which tax receipts respond to rates… Revenue returns from tax increases can be expected to decrease with the level of tax rates, because higher rates exacerbate disincentives to produce and raise incentives to avoid taxation. These two main channels can therefore imply that tax receipts rise less than proportionately with rates and may peak at a given point.

Given the OECD’s love affair with higher tax burdens, this is a remarkable admission about an important limit on the ability of governments to grab revenue.

Their estimate of the actual revenue-maximizing burden is almost secondary. But nonetheless still noteworthy.

According to the estimated coefficients in model 5 of Table 3, an EMTR of 25% maximises CIT revenue.

Not that different from the estimates produced at the Tax Foundation and American Enterprise Institute.

Here’s a chart showing the revenue-maximizing level of tax, which varies depending on the degree to which a country has close economic ties with the rest of the world.

Interestingly, the study openly admits that tax competition plays a big role.

Trade openness is found to reduce CIT revenue. The latter is consistent with…international tax competition, which is likely to increase the effects of tax rates on the location of firms or more broadly of their profit-generating activities.

Sadly, the political types at the OECD have a “BEPS” scheme that is designed to curtail tax competition.

Which is a very good argument for why tax competition should be allowed to flourish.

But let’s not digress. Here’s another remarkable admission in the study. The OECD economists point out that it is not a good idea for governments to try to maximize revenue.

Estimates of revenue-maximising rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance.

Amen. I cited a study in 2012 showing that a revenue-maximizing tax rate might destroy as much as $20 of private sector output for every $1 collected by government. Only Bernie Sanders would think that’s a good deal.

Last but not least, the study even points out a class-warfare approach is misguided when looking at personal income taxes.

More progressive broadly defined personal income taxes generally yield more revenue, but very strong progressivity is associated with lower revenue.

Another wise observation.

The bottom line is that high tax rates of any kind are not a good idea.

P.S. The International Monetary Fund inadvertently provided very strong evidence about the Laffer Curve and corporate taxes.

P.P.S. An occasional good study doesn’t change my belief that the OECD no longer should be subsidized by American taxpayers.

One or Two Cheers for Price Gougers, Three Cheers for Markets, and No Cheers for Anti-Gouging Laws

Thu, 09/20/2018 - 12:24pm

Responding to Hurricane Harvey last year, I shared three very good videos explaining why laws against “price gouging” are misguided.

Simply stated, politicians can’t wave a legislative wand and change underlying conditions of supply and demand.

Laws that artificially dictate the price of something almost surely will have adverse consequences (just as artificially setting the price of labor causes some joblessness and artificially controlling price of health insurance can cause a death spiral).

Needless to say, this is not a welcome observation in some quarters.

John Stossel addresses price gouging in a new Townhall column. He starts by describing the political response.

Officials in states hit by Hurricane Florence are on the lookout for “price gouging.” People who engage in “excessive pricing” face up to 30 days jail time, said North Carolina’s attorney general. South Carolina passed a “Price Gouging During Emergency” law that imposes a $1,000 fine per violation. …These are “bad people,” said Florida Attorney General Pam Bondi angrily during a previous storm.

He then explains some basic economics.

Pursuing profit is simply the best mechanism for bringing people supplies we need. Without rising prices indicating which materials are most sought-after, suppliers don’t know whether to rush in food, or bandages, or chainsaws. …Who will bring supplies to a disaster area if it’s illegal to make extra profit? It’s risky to invest in 19 generators, leave home, rent a U-Haul and drive 600 miles. …If prices don’t shoot up during disasters, consumers hoard. We rush to gas stations to top off our tanks. Stores run out of batteries because early customers stock up. Late arrivals may get nothing. … America should have learned that when Richard Nixon imposed price controls on gasoline. That gave us gasoline shortages and long gas lines. …allowing prices to rise, even sharply, is the best way to help desperate people get supplies they need. As supplies rush in, prices quickly return to normal. We shouldn’t call it gouging. It’s just supply and demand.

He concludes with some advice that politicians almost certainly will ignore.

The best thing “price police” can do in a disaster is stay out of the way.

Price police? I wonder if they get the same training as the milk police and bagpipe police?

But I’m digressing.

I’m going to augment Stossel’s analysis with some simple supply-and-demand curves. We’ll start with a look at a normal, competitive market. The supply curve shows producers are willing to provide ever-larger amounts of a product at higher and higher prices.

Conversely, the demand curve shows that consumers are willing to buy a lot of a product when prices are low, but the quantity they want declines as prices increase.

The “equilibrium price” is where the two curves intersect.

Now imagine you live in North Carolina and the hurricane is wreaking havoc. Two things are likely to happen. First, some sellers will be knocked out of the market. Maybe they lost power, got flooded, or went someplace safe for the duration of the storm.

The real-world impact is shown by this next graph. The supply curve has shifted to the left, meaning that there is less product available at any given prices. The net result is that the market price will go up.

The second effect is that there presumably will be more demand. Consumers will suddenly decide that certain goods (milk, bread, candles, batteries, generators, plywood, etc) are more valuable than they were last month.

This chart shows the effect of increased demand.

By the way, the way I randomly created the charts shows the quantity staying roughly the same, but that all depends on market conditions. Prices can rise a lot or a little, and quantity demanded can fall a lot or rise a lot.

Here’s all you really need to understand. If the government has anti-gouging laws that prevent prices from adjusting to market conditions, the result will be a shortage.

Which is what’s depicted in this chart. Consumers will want a lot of the product, but they won’t be able to find enough willing sellers.

That might seem like a good outcome if you were one of the lucky people who was willing to wait in line or otherwise got lucky (the “seen”). But it means a lot of consumers get left out (as Bastiat points out, those are the “unseen”).

For instance, look at what happened after Hurricane Sandy, for instance.

Perhaps most important, it means that there’s very little incentive for entrepreneurs to incur a lot of expense and effort to get much-needed supplies to a disaster area.

So people would be left waiting for the government, which means a sluggish reaction and often the wrong kind of help.

None of this suggests that “price gougers” are heroes. Yes, some of them take a risk with time and money (and maybe even personal safety) by rushing to a disaster zone. But others simply want to take advantage of an opportunity to jack up prices and get a windfall.

My point is simply that laws against gouging are bad since many consumers will be denied the opportunity to get desperately needed goods and services.

P.S. If you want more evidence of the folly of price controls, see how they backfired in Puerto Rico and Venezuela.

P.P.S. The post-war German economic miracle was triggered by the removal of price controls.

The Evidence-Based Case for Unilateral Free Trade

Wed, 09/19/2018 - 12:16pm

When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

Two-Plus Cheers for President Macron’s Plan to Gut the French Exit Tax

Tue, 09/18/2018 - 12:11pm

Assuming elected officials care about the consequences of their actions, the obvious answer to a question isn’t always the right answer.

  • Q: Why should a (sensible) politician oppose the minimum wage, especially since some workers will get a pay hike?

A: Because the bottom rungs of the economic ladder will disappear and marginally skilled people will lose a chance to find employment and develop work skills.

  • Q: Why should a (sensible) politician oppose so-called employment-protection legislation, especially since some employees will be protected from dismissal?

A: Because employers will be less likely to hire workers if they don’t have the freedom to fire them if circumstances change.

  • Q: Why should a (sensible) politician oppose class-warfare taxation, especially since they could redistribute money to 90 percent of voters?

A: Because the short-run benefits of buying votes will be offset by long-run damage to investment, competitiveness, and job creation.

Many politicians are not sensible, of course, which is why bad policy is so common.

So it’s worth noting when someone actually makes the right decision, especially if they do it for the right reason.

With that in mind, President Emmanuel Macron deserves praise for gutting his country’s punitive “exit tax.” The U.K.-based Financial Times has the key details.

French president Emmanuel Macron said that he would remove the so-called exit tax as it was damaging for France’s image as a place to do business. The tax requires those entrepreneurs or investors who hold more than €800,000 in financial assets or at least 50 per cent of a company to pay capital gains up to 15 years after leaving France.  …A finance ministry spokesperson on Saturday confirmed “the removal of the exit tax as it existed.” …”The exit tax sends a negative message to entrepreneurs in France, more than to investors. Why? Because it means that beyond a certain threshold, you are penalised if you leave,” Mr Macron had said… “I don’t want any exit tax. It doesn’t make sense. People are free to invest where they want. I mean, if you are able to attract [investment], good for you, but if not, one should be free to divorce,” added the French president.

Kudos to Macron. He not only points out that such a tax discourages investment and entrepreneurship, but he also makes the moral argument that people should be free to leave a jurisdiction that mistreats them.

To be sure, the proposal isn’t perfect.

Mr Macron has now decided to introduce a new “anti-abuse” tax targeted at assets sold within two years of someone leaving the country. …“The new system will henceforth target divestments occurring shortly after leaving France — two years — to avoid letting people make short trips abroad in order to optimise tax efficiencies,” added the spokesperson.

This is why I gave the plan two-plus cheers instead of three cheers.  Though I understand the political calculation. It would create a lot of controversy if a rich person moved for one year to one of the several European nations that have no capital gains tax (Netherlands, Belgium, Switzerland, etc), sold their assets, and then immediately moved back to France the following year.

The right policy, needless to say, is for there to be no capital gains tax, period.

But let’s not get sidetracked. Here are a few additional details from Reuters.

France imposed the so-called “Exit Tax” in 2011 during the presidency of Nicolas Sarkozy. …Its aim was to stop individuals temporarily changing their tax domicile in order to skirt French taxes but pro-business President Emmanuel Macron says it damages France’s attractiveness as an investment destination.

Yes, you read correctly, the class-warfare policy wasn’t imposed by the hard-leftFrancois Hollande, but by the Nicolas Sarkozy, the supposed conservative but de-facto leftist who preceded him.

What’s particularly bizarre is that Macron was a senior official for Hollande, yet he is the pro-market reformer who is trying to save France.

P.S. I’m embarrassed to admit that the United States has a very punitive exit tax(which Hillary Clinton wanted to make even worse).

P.P.S. Since one of my three examples at the beginning of today’s column dealt with the perverse consequences of “employment-protection laws,” I suppose it’s worth noting that’s another area where Macron is trying to reduce government intervention.

P.P.P.S. While Macron is a pro-market reformer at the national level, he advocates very bad ideas for the European Union.

A Primer on the Folly (and Evil) of Socialism

Mon, 09/17/2018 - 12:37pm

I’ve written many times about socialism, which is sometimes a frustrating task because the definition is slippery.

I suspect the average supporter of Bernie Sanders or Alexandria Ocasio-Cortez thinks that socialism is big government, with lots of handouts financed by class warfare taxation. Since that’s the common perception, is that the definition we should use?

The technical definition of socialism, though, is government ownership of the means of production, which entails central planning, price controls, and other forms of intervention. So, at the risk of being pedantic, is that how the term should be defined?

As an economist, I prefer the latter approach. Which is why I’ve pushed back (though not necessarily in a favorable way) against those who called Obama a socialist.

A few years ago, I tried to reconcile this definitional conflict by creating a diagram to show that there are several strains of socialism (or statism, leftism, progressivism, or whatever you want to call it).

I also created a 2×2 matrix to show how various nations should be characterized when measuring redistribution and intervention.

If you think I’m somehow being unfair, check out this recent column in the New York Times. Even an advocate for socialism has a hard time saying what it is.

Public support for socialism is growing. Self-identified socialists like Bernie Sanders, Alexandria Ocasio-Cortez and Rashida Tlaib are making inroads into the Democratic Party… Membership in the Democratic Socialists of America, the largest socialist organization in the country, is skyrocketing, especially among young people. …what do we mean, in 2018, when we talk about “socialism”? …Socialism means different things to different people. For some, it conjures the Soviet Union and the gulag; for others, Scandinavia and guaranteed income. But neither is the true vision of socialism. What the socialist seeks is freedom. …when the basic needs of life compel submission to the market and subjugation at work, we live not in freedom but in domination. Socialists want to end that domination: to establish freedom from rule by the boss, …from the obligation to sell for the sake of survival.

His claim that socialism is freedom sounds bizarre.

And it is bizarre. But it’s not new. It’s the crazy idea of “positive liberty” that was the basis of FDR’s so-called economic bill of rights.

Basically, we should all be “free” to live off of other people (though this cartoon sums up why that approach doesn’t work).

Though that’s just the start. Socialism eventually will mean…well, the proletariat will decide at some point.

There’s not much discussion, yet, of classic socialist tenets like worker control or collective ownership of the means of production. …today’s socialism is just getting started. …In magazines and on websites, in reading groups and party chapters, socialists are debating the next steps: state ownership of certain industries, worker councils and economic cooperatives… Mass action — sometimes illegal, always confrontational — will determine socialism’s final form. …As Marx and Engels understood…it is workers who get us there, who decide what and where “there” is. That, too, is a kind of freedom. Socialist freedom.

Is that the “freedom” to set up gulags and exterminate enemies?

I guess we’ll have to wait and see.

Writing for Bloomberg, Professor Noah Smith is both sympathetic and worriedabout the putative resurgence of socialism.

Observing the disaster that is Venezuela, many free-market proponents are inclined to say that socialism always fails. To bolster their claim, they can also point to the Soviet Union, to North Korea, or to Vietnam and China before those countries implemented free-market reforms. Those self-described communist systems generated vast poverty and famine… defenders of socialism have their own historical examples to cite. …Though one can quibble over the definition of the word “socialism,” there’s little question that the so-called social democracies of Denmark and Sweden offer some of the world’s highest living standards.

That being said, Smith is concerned that advocates of socialism don’t understand the risks of too much government. He cites a couple of examples, including the failure of price controls and also how India suffered from statism before starting reforms in 1991.

But his comments about the United Kingdom and the Thatcher reforms may be the most important, because the Brits actually tried real socialism (i.e., government ownership of the means of production).

…the U.K. provides a cautionary tale. After World War II, the U.K. nationalized industries like steel, coal, aviation, electricity, rail transport and some manufacturing. But the British economy lagged behind its continental European peers during the midcentury. Manufacturing and transportation especially stagnated. By the time Margaret Thatcher became prime minister in 1979, both France and Italy were richer in per capita terms… Thatcher unleashed a wave of privatizations, along with other free-market policies. Britain…growth accelerated, and by 1997 it had caught up and passed France and Italy.

Here’s a chart from his column showing how the U.K. fell behind when it was socialist but then regained the lead following pro-market reforms.

Professor Smith’s cautionary words are noteworthy since he (based on having read dozens of his columns) leans to the left.

And here’s another criticism of socialism, this time from an unabashed liberal (in the modern sense of the word, not classical liberalism). Bill Scher has a withering review of a new book by a group of socialists.

Felix Biederman, Matt Christman, Brendan James, Will Menaker and Virgil Texas—of the socialist, satirical podcast Chapo Trap House…make bank by selling you a candy-coated version of socialism, one that may offend real socialists even more than liberal gruel-peddlers like myself. …The indoctrination begins with a condemnation of America’s containment of Soviet communism. …“Who cares?” if the Soviets won the Cold War, they write. …After blaming American-led capitalism for the world’s ills, the authors take aim at their favorite target: liberals. …In their evisceration of liberals and establishment Democrats, we get the usual left-wing criticisms of the Barack Obama and Bill Clinton presidencies… The Chapo crew’s romp through the history of feckless liberalism doesn’t stop with Obama and Clinton. Jimmy Carter is slammed… Lyndon Johnson is excoriated… Not even Franklin Delano Roosevelt escapes.

By the way, I can’t resist interjecting to point out that socialists had good reasons to condemn Bill Clinton’s presidency. After all, economic freedom increased during his tenure.

Though I suppose they also should be free to criticize other Democratic administrations for the supposed sin of not moving to the left at a faster rate.

The conclusion of Scher’s review is brutal.

After slogging through 276 of the book’s 282 pages of bad history…, the authors finally get around to their grand plan. Spoiler alert! This is literally it, in its entirety:

“After setting everyone on equal footing (by seizing the billionaires’ money, socializing their wealth, and handing the keys of production over to workers), you’re looking at an economy that requires something like a three-hour workday, with machines taking care of most of the drudgery; and—as our public fund pays for things like health care, education, scientific research, and infrastructure—all this technology actually makes work quicker, easier, and more enjoyable.”

The notion that socialism is going to slough off all that annoying labor to our forthcoming legion of robot slaves may come as a surprise to many socialists. …The Chapo hosts’ aversion to hard work extends to this book. Why suffer the details of how this nonworkers’ paradise, free of paper pushing and ditch digging, is going to be realized, when you can take in more than $1 million a year by dressing up stale arguments and thin policy ideas with inside jokes? The infomercial socialists of Chapo have exploited the free market expertly, and at least saved themselves from the 9-to-5 prison.

Until reading this review, I confess that these clowns were unknown to me.

But I’m going to take a wild guess that (like Michael Moore) they don’t share their wealth with the masses.

Let’s close by now perusing a serious economic analysis of socialism. Mark Perry of the American Enterprise Institute looks at Why Socialism Failed.

Socialism is the ultimate Big Lie. While it falsely promises prosperity, equality, and security, it delivers the exact opposite: poverty, misery, inequality, and tyranny. Equality is achieved under socialism only in the sense that everyone is equal in his or her misery. …Socialism does not work because it is not consistent with fundamental principles of human behavior. …it is a system that ignores incentives. …A centrally planned economy without market prices or profits, where most of the property is owned or controlled by the state, is a system without an effective incentive mechanism to direct economic activity. …The strength of market-based capitalism can be attributed to an incentive structure based upon the three Ps: (1) Prices determined by market forces, (2) a Profit-and-Loss system of accounting, and (3) Private Property Rights. The failure of socialism in countries like Venezuela can be traced directly to its neglect of these three incentive-enhancing features.

Here’s some of what Mark wrote about socialism and prices.

The only alternative to a market price is a government-imposed price that always transmits misleading information about relative scarcity. Inappropriate behavior results from a controlled price because false information is transmitted by an artificial, non-market price. …The situation in socialist Venezuela provides a current example of the chaos and inefficiencies that are guaranteed to result from government price controls. As could be easily predicted, the widespread price controls imposed by the socialist regime in Venezuela in recent years led to chronic shortages of basic goods like milk, flour, rice and toilet paper, and long lines of customers waiting for hours to buy groceries at stores that frequently have mostly empty shelves.

Here are excerpts from his analysis of socialism and profits.

A profit system is an effective monitoring mechanism that continually evaluates the economic performance of every business enterprise. The firms that are the most efficient and most successful at serving consumers are rewarded with profits. … the profit system provides a strong disciplinary mechanism that continually redirects resources away from weak, failing, and inefficient firms toward those firms that are the most efficient and successful at serving consumers. …Under central planning, there is no profit-and-loss system of accounting to accurately measure the success or failure of various firms and producers. Without profits, there is no way to discipline firms that fail to serve the public interest and no way to reward firms that do. … Instead of continually reallocating resources towards greater efficiency, socialism falls into a vortex of inefficiency and failure.

And here are portions of what he wrote about socialism and property rights.

The failure of socialism around the world is a “tragedy of commons” on a global scale. …When assets are publicly owned, there are no incentives in place to encourage wise stewardship. While private property creates incentives for conservation and the responsible use of property, public property encourages irresponsibility and waste. …Public ownership encourages neglect and mismanagement. …Venezuela today is moving in the opposite direction. Under Hugo Chavez, the private property and assets of foreign-owned oil companies from the US, France, and Italy were nationalized and converted to state-owned, state-managed assets. The results were completely predictable: corruption, lack of investment, deteriorating capital assets, mismanagement and a sharp and ongoing decline.

His conclusion is especially powerful.

By their failure to foster, promote, and nurture the potential of their people through incentive-enhancing institutions, centrally planned, socialist economies deprive the human spirit of its full development. Socialism fails because it kills and destroys the human spirit… Programs like socialized medicine, free college, guaranteed jobs, free housing, and living wage laws will continue to entice us… But those programs, like all socialist programs, will fail in the long run…because they ignore the important role of incentives. …Socialism is being repackaged and recycled by today’s left-leaning politicians including Sanders and Ocasio-Cortez and is being taken seriously by a new young and gullible generation, many who weren’t even alive when the historic events of the 1980s and 1990s occurred including the fall of the Berlin Wall and the collapse of the Soviet Union. But the lessons from history about the defects, deficiencies, and failures of socialism are very clear. As we’ve learned from countless examples throughout history, including now Venezuela, the main difference between capitalism and socialism is this: Capitalism works.

Amen.

The observation that capitalism works and socialism fails is the point of my two-question challenge for my left-leaning friends.

To be sure, my challenge applies to conventional leftists as well as all varieties of socialists.

The advocates of bigger government surely should be required to show at least one example of how their policies work in the real world. But they can’t.

I’ll close by sharing this wonderful video of Dan Hannan explaining why liberty is better than socialism.

If you enjoyed that video, you can also watch Hannan in action here and here.

Why Businesses Don’t Owe More Taxes to Fund Welfare for Low-Wage Workers

Mon, 09/17/2018 - 8:51am

I rarely get surprised these days by the pervasive economic illiteracy on the left. Yet precisely that happened when a friend sent me a link to an article in Forbes Magazine from back in April. The article claims that:

Walmart’s low-wage workers cost U.S. taxpayers an estimated $6.2 billion in public assistance including food stamps, Medicaid and subsidized housing, according to a report published to coincide with Tax Day, April 15.

The topic of this article is highly relevant. It is a clear attempt to shame corporate America for having received a much-needed tax cut, suggesting that if the Democrats win the House in November, they will be under heavy pressure from their support groups to reverse the Trump tax reform.

This point is reinforced by the fact that the report referred to in the Forbes article was published by Americans for Tax Fairness. This is a coalition that presents its sole goal – higher taxes – in the usual wrapping of leftist rhetoric. Here is what they say about taxes:

Everyone must pay their fair share. We need to reform our tax code, so it raises adequate revenues to meet critical needs in a fiscally responsible manner. This requires that wealthy Americans – the richest 2 percent – and corporations pay their fair share of taxes.

There is a lot to be said about the methodology of their study; for now, let us just note that the reason why tens of millions of working Americans receive various forms of government support is that Congress has created a welfare state. If there were no welfare state, there would be no “subsidies”, as Americans for Tax Fairness erroneously refers to entitlements.

However, mislabeling the welfare state is only one of their problems. Another problem is their argument on taxes. It is correct to characterize the federal tax system as unfair, but not in the way that Americans for Tax Fairness suggests.

It gets better, though. Their misrepresentation of welfare and their argument that the wealthier should pay higher taxes coalesce into a false accusation that America’s wealthy take advantage of the welfare state to somehow suppress low-income workers.

To make their argument work they need to somehow disconnect America’s businesses from the taxes that pay for the welfare state. Unfortunately, this mission is doomed before it gets off the ground.

Before the Trump tax reform, ten percent of the employed workforce in America paid 80 percent of all personal income taxes. Since personal income taxes account for 80 percent of federal tax revenue, this means that about 15 million people, out of a population of 320 million, paid 64 percent of the taxes that fund our nation’s welfare programs.

After the Trump tax reform, the burden of funding the federal government has been even more concentrated. With the cut in corporate income taxes and the changes to the personal tax code, that ten-percent top earning group now pays at least two thirds of all federal taxes.

And now for the $64,000 question of the day: who owns America’s large businesses? The answer, of course, is the wealthy. Jeff Bezos, Bill Gates, Michael Dell, Mark Zuckerberg, the Koch brothers, the Ford family, are all examples of very wealthy entrepreneurs who earn a lot of money – but also put their money to work in some of our nation’s largest and most successful businesses.

They are also part of the population that already provide the majority of the taxes that pay for our welfare state. In other words, our corporate founders, owners and executives already pay the bulk of the cost for the programs that some of their employees benefit from.

Perhaps the most absurd point behind the arguments for higher taxes on the rich is that such tax hikes somehow do not harm the people who work for those companies. Since the Trump tax cuts have benefited employees in businesses all over the country, it is not hard to imagine what would happen if the left got what it wanted and reversed those tax cuts.

As for the tax fairness argument, there is only one fair tax system, namely one where every person pays the same percentage in tax. As Dan Mitchell shows in this video, its advantages are easily explained in a minute. It might also be worth noting that wealthy taxpayers would still contribute much, much more toward funding government than people with regular incomes. The only downside is that sales of headache medication would decline substantially around April 15, as the flat tax would make our tax system fair, transparent and neutral to everyone’s efforts to earn more and grow their wealth.

World Bank Study Confirms that Free Markets Encourage Development in Poor Nations

Sun, 09/16/2018 - 12:43pm

periodically explain that pro-market policies are the best way of helping poor people.

The reason rich countries are rich is because they had lengthy periods of limited government, free markets, and the rule of law.

And the convergence literature shows that the same thing is true for developing nations.

Today, let’s look at some new research from the World Bank on how good policy plays a role in generating wealth from natural resources. The authors start by explaining the issue they want to investigate.

The literature on economic development often assumes that natural resource endowments are exogenous. …the resource economics literature has emphasized that the resource base is endogenous to investment in explorationand extraction. That literature has, however, overlooked the role that market orientation and institutions play in driving investments in the resource sector. Our aim is to bridge the gap between these two literatures and explore the effect of market orientation on the discovery of proven (known) natural resource wealth.

They cite the United States as an example of a country that benefited from the right policies.

The experience of the United States during the nineteenth and early twentieth century provides a historical account of the role of market orientation in driving natural wealth. Although the United States at the time of independence was considered to be a country of “abundance of land but virtually no mining potential” (O’Toole, 1977), by 1913 it was the world’s dominant producer of virtually every major industrial mineral (David and Wright, 1997). Rather than being driven by a comparative advantage in geological endowments, this resource-based development of the United States was driven among other things by an open market orientation and an accommodating legal environment with the government claiming no ultimate title to mineral rents

And they note that there is additional anecdotal evidence that liberalization produces good results.

Anecdotal evidence suggests that increased market orientation was followed by increased discoveries across continents and types of natural resources (see Table 1). The increase in discoveries after countries open up to the global economy appears to be quite stark. In Peru, for example, discoveries more than quadrupled, in Chile they tripled, and in Mexico they doubled. In Ghana, discoveries only started to occur after the opening of the economy.

Here’s a table showing the dramatic increase in discoveries after selected nations shift to a pro-market approach.

The authors want to see if such results are either random or policy-driven.

So they put together a detailed model and gathered lots of data.

…we put forward a simple two-region model of endogenous reserves based on Pindyck (1978) where multinational corporations are faced with an implicit tax which proxies for how closed market orientation is, and seek the lowest cost location. The model explores the interplay between market orientation and other channels such as the increase in the marginal cost of discoveries and (demand driven) natural resource price shocks. …For our empirical analysis we build a unique and hitherto unexploited dataset of the universe of world-wide major natural resource discoveries since 1950, covering 128 countries, 33 types of natural resources and over 60 years.

Here’s an example of the data they utilized.

And here are the results.

I’m not surprised to learn that good policy (i.e., free markets) generate a substantial increase in economic activity.

…our empirical analysis shows that market orientation causes a statistically and economically significant increase in natural resource discoveries. Our point estimates indicate that going from a closed to an open market orientation increases discoveries by 80-140 percent. …In a thought experiment whereby economies in Latin America and sub-Saharan Africa remained closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s.

The benefits are especially significant in developing nations, where market reforms appear to have produced a four-fold increase in the discovery of natural resources.

Here’s a look at the data for the entire study.

As you can see, there’s always an element of randomness and uncertainty in econometric research (“noise”), but the trend is readily apparent and the statistical tests provide a good amount of confidence about the strength of the relationship between more economic freedom and more economic activity.

I have two takeaways from this research.

First, we have the obvious result that property rightsrule of law, and other market-based policies are needed to help the poor.

Second, this is additional confirmation of my gut feeling that the World Bank is the best (least worst?) of the international bureaucracies. Yes, they waste money and are capable of producing bad research, but the organization’s culture seems to be focused on what changes are needed to help poor countries. And that often results in solid research (for other examples, see herehereherehere, and here).

You can occasionally find good analysis from other international bureaucracies, such as the OECD and IMF, but it’s far more likely that those organizations will promote statist analysis because of a pro-government mindset.

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About

If you have Constitutional values, believe in fiscal restraint, limited government, and a free market economy - then join us or just come and listen to one of our excellent speakers. We meet every Tuesday from 6-8 pm at Mixon Fruit Farms in the Honeybell Hall, 2525 27th St. East, Bradenton, Florida. Map it

Tea Party Manatee welcomes all like-minded Americans.

Our core values are:

  • Defend the Constitution
  • Fiscal Responsibility
  • Limited Government
  • Free Markets
  • God and Country

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