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Updated: 1 hour 38 min ago

The World’s Most Depressing Tweet

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

France, Taxes, and Riots

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The European Central Bank confirms that the answer is no.

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

A few closing observations on this data.

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

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

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

The Economic Illiteracy of Tariff Man

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

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

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

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

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

Here my corrective commentary.

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

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

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

Supply-Side Economics and the Post-Reagan Years

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

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

I have a more jaundiced view about Trump.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Looming Debt Crisis in Developing Economies

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

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

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

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

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

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

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

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

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

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

And what is “effective fiscal policy”?

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

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

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

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

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

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

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

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

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

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

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

But most of it bad.

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

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

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

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

The Equal-Pay Myth that Refuses to Die

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What the New Socialists Get Wrong

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

International Evidence for Spending Restraint

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

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

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

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

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

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

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

Every single example Steve cites is supported by strong evidence.

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

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

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

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

They’ve never answered my challenge.

Not once.

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

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

The Economics of Trade, Specialization, and Comparative Advantage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And here’s the best chart from the study.

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

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

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

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

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

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

Should Uncle Sam Subsidize Wages?

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

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

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

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

National Review published an excerpt from his book.

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

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

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

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

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

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

Now let’s discuss the policy implications.

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

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

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

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

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

I’m not the only skeptic of this plan.

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

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

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

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

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

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

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

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

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

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

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

A Teachable Moment on Taxes and Deadweight Loss, Courtesy of D.C.’s Greedy Government

Thu, 11/29/2018 - 12:34pm

The central argument against punitive taxation is that it leads to less economic activity.

Here’s a visual from an excellent video tutorial by Professor Alex Tabarrok. It shows that government grabs a share of private output when a tax is imposed, thus reducing the benefits to buyers (“consumer surplus”) and sellers (“producer surplus).

But it also shows that some economic activity never takes place (“deadweight loss”).

When discussing the economics of taxation, I always try to remind people that deadweight loss also represents foregone taxable activity, which is why the Laffer Curve is a very real thing (as even Paul Krugman admits).

To see these principles at work in the real world, let’s look at a report from the Washington Post. The story deals with cigarette taxation, but I’m not sharing this out of any sympathy for smokers. Instead, the goal is to understand and appreciate the broader point of how changes in tax policy can cause changes in behavior.

The sign on the window of a BP gas station in Southeast Washington advertises a pack of Newports for $10.75. Few customers were willing to pay that much. But several men in the gas station’s parking lot had better luck illegally hawking single cigarettes for 75 cents. The drop in legal sales and spike in black market “loosies” are the result of $2-a-pack increase in cigarette taxes that took effect last month… Anti-tobacco advocates hailed the higher legal age and the tax increase as ways to discourage smoking. But retailers say the city has instead encouraged the black market and sent customers outside the city.

Since I don’t want politicians to have more money, I’m glad smokers are engaging in tax avoidance.

And I feel sympathy for merchants who are hurt by the tax.

Shoukat Choudhry, the owner of the BP and four other gas stations in the city, says he does not see whom the higher taxes are helping. His customers can drive less than a mile to buy cheaper cigarettes in Maryland. He says the men in his parking lot are selling to teenagers. And the city is not getting as much tax revenue from his shops. Cigarette revenue at the BP store alone fell from $63,000 in September to $45,000 in October, when the tax increase took effect on the first of the month. …The amateur sellers say the higher cigarette tax has not been a bonanza for them. They upped their price a quarter for a single cigarette.

It’s also quite likely that the Laffer Curve will wreak havoc with the plans of the D.C. government.

Citywide figures for cigarette sales in October — as measured by tax revenue — will not be available until next month, city officials said. The District projected higher cigarette taxes would bring in $12 million over the next four years. Proceeds from the tax revenue are funding maternal and early childhood care programs. The Campaign for Tobacco-Free Kids says the fear of declining tax revenue because of black market sales has not materialized elsewhere.

Actually, there is plenty of evidence – both in America and elsewhere – that higher cigarette taxes backfire.

I would be shocked if D.C. doesn’t create new evidence since avoidance is so easy.

…critics of the tax increase say the District is unique because of how easy it is to travel to neighboring Virginia, which has a 30-cent tax, and Maryland, with a $2 tax. “What person in their right mind is going to pay $9 or $10 for a pack of cigarettes when they can go to Virginia?” said Kirk McCauley of the WMDA Service Station and Automotive Repair Association, a regional association for gas stations. …Ronald Jackson, who declined to buy a loose cigarette from the BP parking lot, says he saves money with a quick drive to Maryland to buy five cartons of Newport 100s, the legal limit. “After they increased the price, I just go over the border,” said Jackson, a 56-year-old Southeast D.C. resident. “They are much cheaper.”

An under-appreciated aspect of this tax is how it encourages the underground economy.

Though I’m happy to see (especially remembering what happened to Eric Garner) that D.C. police have no interest in hindering black market sales.

The D.C. Council originally set aside money from the cigarette tax increase for two police officers to crack down on illegal sales outside of stores. But that funding was removed amid concerns about excessive enforcement and that it would strain police relations with the community. On a Tuesday morning, Choudhry, the owner of the Southeast BP, stopped a police officer who was filling up his motorcycle at the BP station to point out a group of men selling cigarettes in his parking lot. The officer drove off without action. …On a good day, he can pull about $70 in profit. “Would you rather that we rob or steal,” said Mike, who said he has spent 15 years in jail. “Or do you want us out here selling things?”

Kudos to Mike. I’m glad he’s engaging in voluntary exchange rather than robbing and stealing. Though maybe he got in trouble with the law in the first place because of voluntary exchange (a all-too-common problem for people in Washington).

But now let’s zoom out and return to our discussion about economics and taxation.

An under-appreciated point to consider is that deadweight loss grows geometrically larger as tax rates go up. In other words, you don’t just double damage when you double tax rates. The consequences are far more severe.

Here are two charts that were created for a chapter I co-authored in a book about demographics and capital taxation. This first chart shows how a $1 tax leads to 25-cents of deadweight loss.

But if the tax doubles to $2, the deadweight loss doesn’t just double.

In this hypothetical example, it rises to $1 from 25-cents.

For any given tax on any particular economic activity, the amount of deadweight loss will depend on both supply and demand sensitivities. Some taxes impose high costs. Others impose low costs.

But in all cases, the deadweight loss increases disproportionately fast as the tax rate is increased. And that has big implications for whether there should be high tax rates on personal income and corporate income, as well as whether there should be heavy death taxes and harsh tax rates on capital gains, interest, and dividends.

Some of my left-wing friends shrug their shoulders because they assume that rich people bear the burden. But remember that the reduction of “consumer surplus” is a measure of the loss to taxpayers. The deadweight loss is the foregone output to society.

Will Trump/GM Spat Ensure the End of Electric Vehicle Handouts?

Wed, 11/28/2018 - 9:57am

President Trump is angry at GM after it announced it would be closing up to four U.S. manufacturing plants. GM, in turn, says that Trump administration’s tariffs on imported steel have cost it $1 billion. In response to GM’s announcement, President Trump threatened he would be “looking at cutting all GM subsidies, including for electric cars.”

Trump’s tendency to attack specific companies, Amazon being another frequent target, for perceived personal or political slights is extremely troublesome from a free market perspective. Wielding the power of government to force companies into making decisions based on the preferences of politicians instead of economic factors is a recipe for corruption and waste.

That said, reducing subsidies to GM is in alignment with good policy, so long as one company is not singled out relative to others in its industry.

And the good news for Trump is that ending electric vehicle subsidies to GM requires doing absolutely nothing.

Once the company hits its 200,000th electric vehicle sale, which it is expected to do in the near future, it will trigger a phase-out of the EV tax credit for consumers of GM vehicles. Tesla is the only other company that has hit the threshold thus far, meaning GM will soon be at a relative disadvantage to most other electric vehicle manufacturers (don’t feel too bad for them, they were more than happy to accept this trade-off when the subsidies gave them a leg-up against non-EV manufacturers).

Despite the ease with which crony EV subsidies can be gotten ride of–by literally doing nothing and letting them die–some Congressional geniuses from both parties want to bring them back. Thankfully, though, no extension for EV credit was included in the recently unveiled tax extenders package. And Trump’s new interest in the issue may just help ensure they are allowed to expire as intended.

Whether through Incompetence or Malice, Theresa May Is Sabotaging Brexit

Tue, 11/27/2018 - 12:20pm

I just spent several days in London, where I met with journalists and experts at think tanks to find out what’s happening with Brexit.

By way of background, I think voters in the UK made the right decision for the simple reason that the Brussels-based European Union is a slowly sinking ship based on centralization, harmonization, and bureaucratization.

Membership already involves onerous regulations, and remaining a member of the EU would mean – sooner or later – sending ever-larger amounts of money to Brussels, where it then would be used to prop up Europe’s failing welfare states.

Getting out may involve some short-term pain, but it will avert far greater pain in the future.

At least that was the theory.

The reality is that the Tory-led government in London has made a mess of the negotiations. The newly announced deal isn’t a real Brexit.

Writing for the Telegraph, Dan Hannan, a British member of the European Parliament, sums up why the deal is a joke.

The deal, as one Italian newspaper puts it, represents “a resounding victory for the EU over Her Majesty’s subjects”. Yet there was nothing inevitable about this climbdown. On the contrary, there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …the disastrous acceptance of the EU’s sequencing, which meant that all British leverage, including the exaggerated financial contributions, would be tossed away before the EU even began to discuss trade. …Can you blame Eurocrats for gloating? They sensed right at the start that they were dealing with a defeated and dispirited British team, whose only objective was to come back with something – anything – that could be described as a technical fulfilment of the referendum mandate. …we have ended up with the sort of deal that a defeated nation signs under duress. Britain will be subject to all the costs and obligations of EU membership with no vote, no voice and no veto.

But it gets worse.

Unbelievably, Britain has given the EU a veto over whether it can leave these arrangements: unlike EU membership itself, we have no right to walk away. Brussels will run our trade policy, our economy, even elements of our taxation for as long as it likes. As the usually Euro-fanatical Bloomberg asked incredulously last week, “Once Britain has acceded to this, what reason is there for the EU to agree to any other kind of deal?” …Leavers never did “own” this process. From the start, it has been controlled by those who wished it wasn’t happening, and who defined success as salvaging as much as they could of the old dispensation.

That final sentence is key. Theresa May was not a Brexit supporter. She failed to play some very strong cards and she basically worked to come up with a fake Brexit.

It remains to be seen, though, whether Parliament will approve this humiliating package. The House of Commons will vote in about two weeks and here’s how the UK-based Times describes the possible outcomes if the plan gets rejected.

Scenario 1: a second Commons vote The prime minister fails to secure Commons support for her withdrawal agreement… Her response is to…then bring…it back for a second vote…, as happened in America after Congress initially rejected its government’s bank rescue plan in 2008. …Scenario 2: change of prime minister May fails to get the deal through and either resigns, or faces a confidence vote among Tory MPs which, if she lost, would also see her step down. …The question for Tory MPs would then be whether to back the deal mainly negotiated under May… Scenario 3: a second referendum A defeat for May could result in a second referendum but only if she or her successor supported it. Tory policy is to oppose a second referendum. …Scenario 4: no-deal Brexit Tory Brexiteers in the cabinet and in the party would respond to a defeat for the May proposals by pushing for a no-deal Brexit, or a “managed” no-deal. …Scenario 5: the Norway option Though there is no parliamentary majority at present for the May deal, or for no deal, there could be for a closer relationship with the EU. This could take the form of…the EEA (European Economic Area), the so-called Norway option.

For what it’s worth, I fear “Scenario 1.” Members of the Conservative Party are like American Republicans. They occasionally spout the right rhetoric, but most of them are go-along-to-get-along hacks who happily will trade their votes for a back-room favor.

So I will be disappointed but not surprised if this deal is enacted. It’s even possible it will be approved on the first vote.

My preference is for “Scenario 4” leading to something akin to “Scenario 5.”

report from the Adam Smith Institute offers a user-friendly description of this “Norway option.”

We cannot however be subordinate to a supranational institution… Nor should we make do with a semi-detached position inside the EU that also gives us semi-detached influence while still constraining the UK in the wider world. …we have to leave and reform the relationship in a characteristically British, outward-looking and open way. …The UK therefore requires something of a “soft” exit that maintains open trade but removes Britain from political union and from all that Britain has consistently struggled with – the Common Agricultural Policy, the Common Fisheries Policy, the hollowing out and the outsourcing of democracy, the constraints on global trade deals.

And what does that look like?

…the most optimal way to exit would be to take up a position outside the EU but inside the European Economic Area (‘EEA’), which very likely means re-joining the European Free Trade Association (‘EFTA’). As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle and it would mean no regulatory divergence or tariffs but it would mean retaining freedom of movement for EU/EEA nationals. …Such a deal would require agreement from the EU and EFTA but both would have strong reasons for allowing it…with the UK on board, EFTA would instantly become the fourth largest trade grouping in the world. …In short, EEA countries have a market-based relationship with the EU by having full single market access. They are free of the EU’s political union ambitions, and can class themselves as self-governing nation states. …The EEA position also opens up the ability to make trade agreements with third countries (something the UK cannot do now), would provide the UK with the freedom to set its own levels of VAT, and would allow the UK to step away from its joint liability of EU debts. That would be very attractive to Britain seeking a liberal soft exit.

Here’s a table showing the difference between EU membership and EEA membership.

Sounds like the outline of a acceptable deal, right?

Not so fast. The crowd in Brussels doesn’t want a good deal, even though it would be positive for the economic well-being of EU member nations. They have an ideological desire to turn the European Union into a technocratic superstate and they deeply resent the British for choosing self-government and democracy.

As such, the goal is to either maneuver the British government into a humiliating surrender (Theresa May was happy to oblige) or to force a hard Brexit, which would probably cause some short-term economic disruption.

But there was also resistance on the British end to this option since it ostensibly (but perhaps not necessarily) requires free movement of people. In other words, it might mean unchecked migration from EU/EEA nations, which arouses some nativist concerns.

Since I mentioned that a hard Brexit could lead to potential short-term economic disruption, this is a good opportunity to cite a very key section of Mark Littlewood’s recent column in the UK-based Times.

The Treasury has suggested that GDP could fall by as much as 7.7 per cent if Britain exited the EU without a deal. However, is there any reason to treat this projection any more seriously than the Treasury’s view that the Leave vote itself would lead to a recession and a reduction in GDP by between 3 per cent and 6 per cent? Almost all official predictions relating to the economic impact of the Brexit vote have been shown to be enormously over-pessimistic. Why should one assume that present forecasts are not beset by the same flaws?

Amen. The anti-Brexit crowd (the “remainers”) tried to win by arguing that a vote for Brexit would cause an economic collapse. That “Project Fear” was exposed as a joke (and was the target of some clever humor).

And the new version of Project Fear is similarly dishonest.

In a column for CapX, Julian Jessop of the Institute of Economic Affairs has additional details.

The public is being bombarded with warnings of potentially devastating impacts on the economy, their security and their welfare if the UK becomes a “third country” at 11pm on 29th March 2019, without the Withdrawal Agreement and framework for a future relationship anticipated in Article 50.…the daftest headline…is that a “no-deal” Brexit means that the UK would run out of food by August 2019 (the 7th, to be precise). This relies on the bizarre assumption that the UK would no longer be able to import food, not just from the EU but from anywhere in the world, and that we would continue to export food even as our own people starve. …it is often assumed that the EU would ignore its other legal obligations, including WTO rules. …the EU would not be able to treat the UK any less favourably than other WTO members.. Relying on the courts to fix things is also ra.rely a good idea. But it is absolutely right that the EU can’t go out of its way to make life difficult for the UK either.

Run out of food? Good grief, I thought the global-warming Cassandras were the world’s worst when it comes to exaggeration, but they’re amateurs compared to the anti-Brexit crowd.

Anyhow, this column is already too long, but here are links to four other CapX columns for interested parties.

I especially like the last column. One of the behind-the-scenes aspects of the Brexit debate is that the eurocrats in Brussels are scared that the UK will become more market-oriented once it has escaped the EU’s regulatory clutches.

And just as the EU has gone after Ireland and Switzerland for supposedly insufficient taxation, it also now is trying to hamstring the United Kingdom. All the more reason to escape and become the Singapore of Europe.

P.S. Donald Trump could help the United Kingdom by negotiating a quick and clean free-trade agreement. Sadly, that violates his protectionist instincts.

The Trump Economy v. the Obama Economy

Mon, 11/26/2018 - 12:54pm

During his final days in office, I gave a thumbs-down assessment of Barack Obama’s presidency. Simply stated, he increased the burden of government during his tenure, and that led to anemic economic numbers.

Now the economy seems to be doing a bit better, which is leading my friends on the left to make two impossible-to-reconcile claims.

  1. It is doing better, but Obama deserves credit.
  2. The economy isn’t doing better.

I’ve previously explained that the first argument doesn’t hold water. Today, let’s address the second argument.

Writing in the Wall Street Journal, former CEO Andy Puzder claims that Trump easily wins over Obama when you look at the numbers.

For eight years under President Obama, the growing burden of government suppressed the economic recovery that should have followed the recession of 2008-09. Mr. Obama nonetheless has claimed responsibility for today’s boom, asking Americans in September to “remember when this recovery started.” Yet it wasn’t until President Trump took office that the economy surged. …The result is a rising tide that is lifting boats across every class and region of the country. …Today unemployment rests at 3.7%, near a 50-year low. Since the government began reporting the data, unemployment has never been as low as it is today for African-Americans, Latinos, Asians and people with only a high-school education.

It’s certainly good news that unemployment rates have dropped. But labor-force participation numbers still haven’t fully recovered, or even come close to fully recovering, so the data on jobs is not quite as impressive as it sounds.

That being said, Puzder has a compelling indictment of Obama’s performance.

During a typical recovery, the economy grows at a rate between 3% and 4%, and the Obama administration predicted such a surge in its 2010 midsession review. It never came. The “recovery” of those years often felt much like a recession.

Amen. This echoes my criticism of Obamanomics. He made the U.S. a bit more like Europe, so it’s no surprise that growth was weak.

Let’s now look at Puzder’s evidence that Trump has done a better job. He compares the end of the Obama economy with the beginning of the Trump economy.

GDP growth staggered along at 1.5% in Mr. Obama’s final six full quarters in office. …growth doubled to 3% during Mr. Trump’s first six full quarters. …the increase in job openings over Mr. Trump’s first 21 months has averaged an impressive 75,000 a month. Over Mr. Obama’s last 21 months in office, the number of job openings increased an average of 900 a month. …During Mr. Obama’s last 21 months, the number of employed Americans increased an average of 157,000 a month. Under Mr. Trump, the increase has accelerated to 214,000 a month, a 36% improvement. …In Mr. Obama’s final 21 months, weekly earnings rose an average of $1.31 a month. Under Mr. Trump, weekly earnings have increased an average of $1.84 cents a month: a 40% improvement that’s come mostly since tax reform took effect in January. Over that period, weekly earnings have grown an average of $2.31 a month, a 76% increase over Mr. Obama’s last 21 months. …The unemployment rate declined 13% during Mr. Obama’s last 21 months, but from there it has dropped another 23% during Mr. Trump’s tenure.

All of this data is compelling, but I caution my GOP/Trump friends about relying on short-run economic data to make their case.

For instance, what if the economy is in a false boom caused by easy money? If that leads to a recession, will they want Trump to take the blame?

Or let’s consider a more tangible example. Trump and his supporters used to make a big deal out of rising stock prices, but that argument no longer appears to be very persuasive.

Let’s close with two charts that take different sides. The first one is from MSNBC, which makes a persuasive case that reductions in unemployment under Trump are simply a continuation of the trend.

On the other hand, this second chart, which comes from the White House, shows that economic outcomes are better than what the Obama Administration predicted.

This also is compelling data, and I’ve explained that even small improvements in economic performance are very desirable.

Though it remains to be seen whether this additional growth is either real or sustainable.

The bottom line is that there’s no reason to expect big economic improvements under Trump, at least in the long run. His good policies on taxes and regulation are offset by bad policies on spending and trade.

Sloppy and Malignant Bias from the New York Times

Sun, 11/25/2018 - 12:19pm

I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

But all these instances of intentional and unintentional bias are trivial compared to our next example.

The New York Times has gone above and beyond conventional media bias with a video entitled, “How Capitalism Ruined China’s Health Care System.”

Here’s the part that caused my jaw to drop.

After the sad opening story about the guy with the sick mother, there’s a section from 1:33-2:27 that makes two observations that basically show the premise of the video is totally wrong.

  • First, it points out (from 1:33-1:42) that there is a universal, government-run health system that ostensibly covers the guy’s mother, so her unfortunate status is yet another example that coverage in a government-run healthcare system is not the same as treatment.
  • Second, it points out (from 2:05-2:27) that life expectancy soared once the communist party relaxed its grip on the economy and allowed some liberalization, which would seem to be powerful evidence that capitalism leads to better health outcomes.

These are astounding mistakes.

But it gets worse. Sarah Lilly, who lives in China, debunked the rest of the video in a column for FEE.

The New York Times…attempts to blame capitalism for the many problems in China’s health care system. …As a resident of China and a recipient of outstanding private health care here, I was confused as to why the Times would show us the horrors of a capitalist system without actually visiting a private health care facility. …All of the horrors depicted in the high-quality video—the long lines, the scalping, and the hospital fights—occurred at government-run health care facilities. …At the very least, failing to feature a single private medical facility while blaming capitalism for the dysfunction of China’s public health system is intellectually dishonest.

She points out that the big-picture analysis in the video is wrong.

In the video, the Times praises Chairman Mao’s introduction of “free” health care and claims that when capitalism was introduced into the country, the state retreated and care was no longer free. Neither statement is true. First, health care was never free; it was paid for by tax revenues. Second, the state never retreated; rather, its regulatory apparatus became vaster and even more invasive. Out of sheer necessity, China allowed for the creation of private hospitals to ease the burden of the country’s heavily bureaucratic and deteriorating health care system.

And she also explains that the details of the video are wrong.

The Times video depicts the ungodly long line most Chinese face to see a physician. …It’s an appalling scene. …There’s just one problem. The Shanghai Cancer Center is a public hospital, not a private one. The long lines, scalpers, bribes, and physical fights with hospital staff—all of these exclusively happen in the public, communist, government-run hospitals. …In an egregious bit of sleight-of-hand, the Grey Lady asserts that capitalism is ruining Chinese health care while presenting us with a hospital where capitalism is not practiced.

To be fair, we get the same type of mistake when journalists look at the flaws in the American health system. They blame capitalism when the problems of ever-higher prices and uneven coverage are the consequences of government intervention.

P.S. My columns about sloppy bias at the New York Times don’t include Paul Krugman’s writings. Debunking those mistakes requires several different collections.

Ruling on Federal Genital Mutilation Law Poses a Libertarian Quandary

Sat, 11/24/2018 - 12:15pm

My opinions on crime are very straightforward.

This set of principles explains my views on a wide range of issues, such as the War on Drugsasset forfeituremoney launderingsearch and seizure, and the death penalty.

But I sometimes come across an incident that challenges these principles.

Let’s look at a horrible story from Michigan about girls being genitally mutilated.

Dr. Jumana Nagarwala was arrested in April 2017 and accused of leading a criminal conspiracy that involved multiple doctors and resulted in the mutilation of nine girls over the course of twelve years. The practice, which is universally recognized as a gross violation of human rights, is traditional among the Dawoodi Bohra, the Muslim sect to which Nagarwala and his co-conspirators belong.

My visceral instinct is for some tit-for-tat justice. The so-called doctors should receive equivalent treatment, without the benefit of anesthesia.

Since that’s not an option, a very lengthy prison sentence could be the next-best alternative.

But something very unusual happened. The barbaric doctors had been charged by the federal government based on a federal law against genital mutilation, and a judge decided that the statute exceeded the proper powers of the federal government.

A federal judge dismissed charges Tuesday against several Michigan doctors accused of mutilating the genitals of numerous underage girls, ruling that the federal prohibition against the practice is unconstitutional. U.S. District Judge Bernard Friedman argued that the 22-year-old federal law prohibiting female genital mutilation (FGM), which went unused until last year, constitutes federal overreach. …the judge’s ruling entirely clears four defendants in the case, including three mothers who allegedly handed their underage daughters over to Nagarwala to be mutilated.

This is a quandary.

I want the “doctors” to be thrown under the jail, yet part of me is very happy that a federal judge actually acknowledges that the Constitution imposes some limits on federal power.

Too bad Judge Friedman wasn’t sitting in for Justice John Roberts when the Obamacare case was (wrongly) decided.

Anyhow, here’s what has since happened.

In response to the case, Michigan governor Rick Snyder signed new laws prohibiting the practice of FGM, but as those laws applied only to future violations, the defendants in this case were charged under the old federal statute. Twenty-three other states, however, do not have laws banning the practice, leading critics of the judge’s ruling to suggest that parents intent on mutilating their daughters for religious purposes will simply travel to states where they can do so legally.

I have a couple of concluding thoughts.

First, I imagine that all 50 states – even crazy California – will pass laws against this barbaric ritual. So there’s no reason to relax my strong support for federalism.

Second, I hope Michigan authorities figure out how to charge the so-called doctors under existing state laws against assault, kidnapping, and anything else that might work.

In conclusion, I’m not under the illusion that any system will deliver perfect justice. But I do think we would get the best-possible outcomes if we adhered to constitutional principles and restricted the size and scope of the federal government.

P.S. Let’s not forget that jury nullification also should exist as an additional bulwark against bad laws and abusive officials.

Another Anti-Market Policy by Trump

Fri, 11/23/2018 - 12:48pm

While I have no objection to applauding Donald Trump’s good policies such as tax reform and deregulation, I also don’t hesitate to criticize his bad policies.

His big missteps are protectionism and fiscal profligacy, but he also does small things that are misguided.

I’ve already written about his energy socialism and his increased handouts to the World Bank.

Today, we’re going to analyze his proposal for price controls on certain prescription drugs.

For some background on the topic, we’ll start with a very sound editorial from the Wall Street Journal. Here are the key passages.

…the U.S. shouldn’t put the world’s most innovative drug market at the mercy of what Greece is willing to pay for a cancer treatment. …a potential rule…would tether what Medicare Part B pays for certain drugs to a price index of what other developed countries pay. The goal is to bring prices down to 126% of what other countries pay, versus 180% today. …The reason European countries pay less for drugs is because they run single-payer health systems and dictate the prices they’re willing to pay. …Other countries have the luxury of extortion because the U.S. produces more drugs than the rest of the world combined. Mr. Trump mentioned these realities in his speech but blew past them to suggest importing the same bad behavior.

If we import bad policies, we import bad outcomes.

Europe does pay more—in the form of reduced access. Of 74 cancer drugs launched between 2011 and 2018, 70 (95%) are available in the United States. Compare that with 74% in the U.K., 49% in Japan, and 8% in Greece. This should cure anyone of the delusion that these countries will simply start to pay more for drugs. They’re willing to deny treatments… Better quality care in the U.S. is why America outpaces 10 European countries on cancer survival rates… Any investor who wants to bankroll the cure for Alzheimer’s is already staring at a very small chance of success—and the Trump HHS proposal adds another a potential limit on return that will be restricted further if Democrats retake power and use it as a precedent.

Here’s the bottom line.

Mr. Trump is right that Europe, Australia and many others are freeloaders on U.S. innovation, and better intellectual property protections in trade deals might help. But that is no reason to repeat their price-control mistake and undermine the reasons the United States is the last, best hope for medical progress.

Sadly, there aren’t many politicians willing to say and do the right thing.

Which is why Congressman Bucshon of Indiana deserves praise. Here are some details from a report by the Hill.

Rep. Larry Bucshon (R-Ind.) on Friday criticized a drug pricing proposal President Trump made last month, marking some of the first public resistance to the move from congressional Republicans. Bucshon told The Hill that Trump’s proposal to lower some drug prices in Medicare by tying them to cheaper prices in other countries is too far of a move toward “price controls.” …“I understand that we do want to get drug prices down but I think that any proposal that would lead to government price-fixing in that space is a pathway we don’t want to follow.” Trump’s move, announced in October, went farther in the direction of price controls on drugs than what Republicans typically support. Some Democrats praised his move… Bucshon helped lead opposition to a somewhat similar Medicare drug pricing proposal from former President Obama in 2016.

Amen.

A bad Obama policy of intervention doesn’t suddenly become a good policy simply because Trump has adopted it.

Here’s some of what I wrote about the issue in a column for FEE.

…prescription drug prices are typically higher in the US than many other nations. That’s both because bad domestic policies restrict the kind of competition that would keep prices in check and the fact that many foreign governments enact price controls while threatening to steal patents from companies that don’t cooperate. So, it’s especially troubling to see a proposed rule from the Trump administration that would index prescription drug reimbursements under Medicare Part B—which covers drugs exclusively handled by physicians and hospitals like vaccines and cancer medications—based on the prices paid in other countries, including those with nationalized health care systems. To borrow a legal metaphor, it’s fruit of the poisonous tree.

And what happens when we import bad policies?

At stake aren’t just high-minded free-market principles but the vitality of the most innovative pharmaceutical market in the world. US drug companies have only weathered the abuses of foreign governments because the domestic market is large enough that they can recoup the losses. That’s why the president is right to call it “very, very unfair” for other countries to keep their prices artificially low at the expense of American patients; but importing those losses by allowing foreign abuses to set US prices will mean no more market in which to offset losses to socialized systems and thus an inevitable decline in research and development of new medications.

What’s the bottom line? As I noted, we’ll get bad results.

From rent control to the gasoline lines of the 1970s, the connection between price controls and shortages has been well established.

In the case of pharmaceuticals, I fear the main result will be a decline in innovation. The drug companies make nice profits in drugs that already are developed and approved, so I doubt they’ll have much incentive to withhold production on existing drugs if price controls are imposed.

But those profits help to offset the very high cost of development and testing. Including for all the research and development that doesn’t produce marketable products.

So the real victims will be all of us since we won’t have access to the potentially life-saving and life-improving drugs that might be created in the future – assuming an absence of price controls.

The economics of price controls are clear. The consequences are always bad, whether we’re looking at price controls on labor, price controls on gasoline, or price controls on other products.

Which is why such policies generally are supported by the world’s most economically illiterate governments (or, in the case of Nixon, the most venal politicians). Oh, and don’t forget Puerto Rico.

We need Ludwig Erhard, but we got Donald Trump.

A Thanksgiving Turkey from the Department of Agriculture

Thu, 11/22/2018 - 12:44pm

Some departments of the federal government should be shut down because of federalism. High on that list would be the Department of Education and Department of Transportation.

Other departments should be shut down because there is simply no role for any government involvement at any level.

I usually cite the Department of Housing and Urban Development as an example, but the Department of Agriculture also should be terminated.

It’s a rat’s nest of special interest favors. I’ve previously written about inane intervention to enrich Big DairyBig Sugar, and Big Corn.

But I confess that I was unaware of Big Cranberry.

The Wall Street Journal opines about the nonsensical nature of cranberry intervention.

As you dip into the Thanksgiving cranberry sauce, here’s a tart story that may make you want to drain the bog. This fall the U.S. Agriculture Department gave cranberry growers its approval to dump a quarter of their 2018 crop. Tons of fruit and juice—in the ballpark of 100 million pounds—will be turned into compost, used as animal feed, donated or otherwise discarded. The goal is to prop up prices.

Needless to say, there’s nothing about propping up cranberry prices in Article 1, Section 8, of the Constitution.

This is also a common-sense issue, as the WSJ explains.

The USDA rule caps growers’ production based on their historical output, with some exemptions. Small cranberry processors aren’t covered, and neither are those that don’t have inventory left over from last year. The trouble is that this reduces everyone’s incentive to downsize… Among the many economic perversities of agricultural policy, this is merely a vignette. Still, America is growing 100 million pounds of cranberries and then throwing them away to raise prices per government order. Wouldn’t it be better—and easier—to let the market work?

By the way, Trump’s protectionism is also part of the problem.

President Trump’s trade war hasn’t helped. About a third of production usually goes overseas. But in June the European Union put a 25% tariff on U.S. cranberry-juice concentrate in retaliation for U.S. steel tariffs. A month later, China bumped its tariff on dried cranberries to 40% from 15%. Mexico and Canada also added duties.

A typical Washington cluster-you-know-what.

Though I don’t recommend thinking about it too much, lest you get indigestion.

The solution is to copy New Zealand and get rid of all agriculture handouts.

South Africa Observations

Wed, 11/21/2018 - 12:38pm

I’m at the Capetown Airport, about to leave South Africa, so this is an opportune time to share some thoughts on what I learned in the past seven days.

1. Land Seizures – The number-one issue in the country is a plan by the government to impose Zimbabwe-style land confiscation. I already wrote about that issue, so I’ll cite today an editorial from the Wall Street Journal.

South Africa needs another enlightened leader like Nelson Mandela, but it keeps electing imitations of Robert Mugabe. President Cyril Ramaphosa confirmed recently that his government plans to expropriate private property without compensation, following the examples of Zimbabwe and Venezuela. …Supporters of expropriation claim black South Africans own less than 2% of rural land, and less than 7% of urban land… But the government’s 2017 land audit used questionable data… The Institute of Race Relations estimates black South Africans control 30% to 50% of the country’s land. …Mandela insisted that land reform is best achieved through a “willing buyer, willing seller” principle, as it is in other democracies with a strong rule of law. …snatching private property is about as destructive a policy as there is. The ANC was founded as a revolutionary party, and the tragedy is that it won’t let the revolution end.

To be sure, whites generally got the land illegitimately in the first place (something settlers also did to the Indians in America), so it’s not as if they are the angels in this conflict.

I’m simply saying that copying Zimbabwe-style policies would be catastrophically destructive to South Africa’s economy. Rich landowners obviously will be hurt, but poor black will be the biggest victims when the already-shaky economy goes under.

It’s unclear at this stage how far the government will push this policy. But since the nation already has suffered the biggest year-over-year decline in the International Property Rights Index, any additional steps in the wrong direction would be most unfortunate.

By the way, the news of property rights isn’t all bad. Here’s a video showing how poor people are getting titles to their homes.

2. Mandela’s Legacy – I remarked on my Facebook page that Nelson Mandela should be viewed as a great leader. I was one of many people who thought South Africa would descend into civil war between the races. Mandela deserves an immense amount of credit (along with unsung heroes in the South African community of classical liberals, such as Leon Louw of the Free Market Foundation) for ensuring the nation enjoyed a peaceful transition.

Did Mandela have some misguided views? Of course. He was a socialist, at least nominally. And he joined the South African Communist Party at one point.

But so what? Thomas Jefferson and George Washington were slaveowners, yet we recognize that they played key roles in the founding of America. Simply stated, people can do great things yet still be imperfect.

3. Race – Notwithstanding South Africa’s peaceful transition from apartheid to democracy, the nation faces some major race-related challenges. Simply stated, blacks are relatively poor and whites are relatively rich. And that’s what leads some politicians to pursue bad policy, such as class-warfare taxation and the aforementioned land confiscation.

To make matters even more complicated, there is also a significant – and very wealthy – Indian minority. Indeed, they are the ones who have benefited most from the end of apartheid, which has aroused some racial resentment.

Last but not least, there is also a significant mixed-race community that is culturally separate from native blacks (they speak Afrikaans, for instance).

4. Dependency – I wrote about this problem in 2014 and my visit has led me to conclude that I understated the problem. Simply stated, South Africa is not at the stage of development where it can afford a welfare state. Western nations didn’t travel down that path until the 1930s, after they already reached a certain level of development and could afford to hamstring their economies.

5. Labor law – Similarly, South Africa also has European-style labor protection laws, which discourage job creation. Such policies reduce employment in developed nations, but they cripple employment in developing nations.

By the way, if you want a great understanding of South Africa’s economic challenges, you should buy South Africa Can Work by Frans Rautenbach.

6. Corruption – In addition to the anti-market policies described above, South Africa also has a pervasive problem with political sleaze. Simply stated, politicians have been using government as a means of looting the public.

Here are some excerpts from a report in the New York Times.

…city officials drove across the black township’s dirt roads in a pickup truck, summoning residents to the town hall. …the visiting political boss, Mosebenzi Joseph Zwane, sold them on his latest deal: a government-backed dairy farm… The dairy farm turned out to be a classic South African fraud, prosecutors say: Millions of dollars from state coffers, meant to uplift the poor, vanished in a web of bank accounts controlled by politically connected companies and individuals. …In the generation since apartheid ended in 1994, tens of billions of dollars in public funds — intended to develop the economy and improve the lives of black South Africans — have been siphoned off by leaders of the A.N.C. …Corruption has enriched A.N.C. leaders and their business allies… that is just a small measure of the corruption that has whittled away at virtually every institution in the country, including schools, public housing, the police, the power utility, South African Airways and state enterprises overseeing everything from rail service to the defense industry.

That last sentence is key, though the reporter never made the right connection. The reason there is so much corruption is precisely because the government has some degree of power over “every institution in the country.”

Shrink the size and scope of the state and much of that problem automatically disappears.

Here’s another excerpt, which is noteworthy since it overlooks the fact that the government created laws requiring black shareholders and directors. Needless to say, that system wound up enriching politically connected blacks rather than ordinary citizens.

A smattering of influential figures, like the current president, Mr. Ramaphosa, amassed extraordinary wealth. They were allowed to buy shares of white-owned companies on extremely generous terms and invited to sit on corporate boards. They acted as conduits between the governing party and the white-dominated business world. Some of the A.N.C. leaders who were left out of that bonanza quickly found a new road to wealth: lucrative government contracts. The public tap became a legitimate source of wealth for the well connected, but also a wellspring of corruption and political patronage, much as it had been for the white minority during apartheid.

7. Crime – The biggest quality-of-life problem in South Africa is crime. The homes of successful people are often mini-fortresses, with big spiked walls topped by electrified wires. Large aggressive dogs and private security patrols also are ubiquitous. Sadly, the government doesn’t do a good job of policing, yet it also makes it difficult to legally own firearms.

8. Education – To be blunt, government schools in South Africa generally are a disaster. Reminds me of the mess in India, except there isn’t a similar network of private schools to give parents better options.

Much of the problem is the result of schools being run for the benefit of unionized teachers (sound familiar?) rather than students. There is some movement in the Cape province to allow charter schools, so hopefully that reform effort will bear fruit.

9. Concluding thoughts – I’ll close with a couple of random non-policy observations. First, South Africa still has some quasi-independent tribal kingdoms. Not exactly the Swiss model of federalism, but it’s better than nothing. Second, it is possible to have multiple wives (I thought of Oscar Wilde’s famous saying when I heard that). Third, everybody should visit South Africa for the scenery and wildlife. I spent a day at Kruger National Park and it was breathtaking even though I barely scratched the surface (by the way, Frans also wrote a great book about the Park).

P.S. Here’s my comparison of Botswana, South Africa, and Zimbabwe. Botswana is the obvious success story of the three.

P.P.S. The IMF predictably is pushing anti-growth policy on sub-Saharan Africa.

Income Mobility and Middle Class Prosperity

Tue, 11/20/2018 - 12:28pm

I generally don’t write much about the distribution of income (most-recent example from 2017), largely because that feeds into the false notion that the economy is a fixed pie and that politicians should have the power to re-slice if they think incomes aren’t sufficiently equal.

I think growth is far more important, especially for poor people, which is what I said (using the amazing data from China) in a recent debate at Pomona College in California.

But some people don’t accept the growth argument.

Or, to be more exact, they may acknowledge that there is growth but they think the rich wind up with all the gains when the economy prospers.

So let’s review some of the evidence. We’ll start with Robert Samuelson of the Washington Post, who points out that living standards have jumped for people at all levels of income in America.

…the rich are getting richer. The rest of us — say politicians, pundits and scholars — are stagnating. The top 1 percent have grabbed most income gains, while average Americans are stuck in the mud. Well, it’s not so. …the Congressional Budget Office…recently found that most Americans had experienced clear-cut income gains since the early 1980s. This conclusion is exceptionally important, because the CBO study is arguably the most comprehensive tabulation of Americans’ incomes. Most studies of incomes have glaring omissions. …The CBO study covers all…areas. …If the bottom 99 percent experienced stagnation, their 2015 incomes would be close to those of 1979, the study’s first year. This is what most people apparently believe. The study found otherwise. The poorest fifth of Americans (a fifth is known as a “quintile”) enjoyed a roughly 80 percent post-tax income increase since 1979. The richest quintile — those just below the top 1 percent — had a similar gain of nearly 80 percent. The middle three quintiles achieved less, about a 50 percent rise in post-tax incomes.

And here’s the data from Samuelson’s column showing what’s happened in the 21st Century.

Incidentally, economists from the Federal Reserve Bank of San Francisco explain that weaknesses in data mean that upward mobility in America is not being properly measured.

…one needs to keep in mind that measured productivity growth is designed to capture growth in market activities. Thus, it may not fully capture the growth in people’s economic welfare… Measuring real growth properly is useful for addressing a host of questions. For example, existing studies use measured inflation to calculate the real income of children relative to their parents. Chetty et al. (2017) find that 50% of children born in 1984 achieved higher incomes than their parents at age 30. Adjusting for missing growth would raise the real income of children about 17% relative to their parents, increasing the fraction of those who do better than their parents by a meaningful amount.

Moreover, Professor Russ Roberts points out that many analysts rely on snapshots at two periods of time when estimating changes in prosperity.

Adjusted for inflation, the US economy has more than doubled in real terms since 1975. How much of that growth has gone to the average person? …Most people believe that the middle class and the poor are stagnating, treading water, while the rich get all the goodies. …these depressing conclusions rely on studies and data that are incomplete or flawed. …the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. …But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress.

When you follow the same people over time, however, you get a much more optimistic assessment.

When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich. Studies that use panel data — data that is generated from following the same people over time — consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns. Here are some of the studies… This first study, from the Pew Charitable Trusts, conducted by Leonard Lopoo and Thomas DeLeire uses the Panel Study of Income Dynamics (PSID) and compares the family incomes of children to the income of their parents.⁴ Parents income is taken from a series of years in the 1960s. Children’s income is taken from a series of years in the early 2000s. As shown in Figure 1, 84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20% surpassed their parents. …Gerald Auten, Geoffrey Gee, and Nicholas Turner of the Office of Tax Analysis in the Treasury Department used tax returns to see how rich and poor did between 1987 and 2007. They find the same encouraging pattern: poorer people had the largest percentage gains in income over time.

For more information, here’s some data from the Pew study.

Let’s also look at a column by Professor Mark Rank in the New York Times. It was written back in 2014, but his observations about people rising and falling show that there is considerable mobility in the United States.

To what extent do everyday Americans experience these levels of affluence, at least some of the time? In order to answer such questions, Thomas A. Hirschl of Cornell and I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60… The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …the image of a static 1 and 99 percent is largely incorrect. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60… Ultimately, this information casts serious doubt on the notion of a rigid class structure in the United States based upon income. It suggests that the United States is indeed a land of opportunity, that the American dream is still possible

Amen.

Last but not least, for those of you who really like digging into data, here’s a video from Russ Roberts about the different ways of measuring middle-class incomes.

I cited some Pew data above, so I’ll close by calling your attention to the video of Pew data in this 2015 column. The bottom line is that middle-class Americans are enjoying more prosperity over time.

But it’s also true that different government policies could lead to higher or lower levels of income.

Which is why I’m perplexed that my left-wing friends want policies that would make the United States more like Europe.

Unsurprisingly, I think we should focus instead on pro-market changes that will increase America’s advantage over Europe.

P.S. The healthcare exclusion has a negative impact on take-home pay for ordinary Americans.

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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

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