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Tax March Hopes to Con You Into Supporting Tax Hikes

Tue, 04/17/2018 - 4:15am

Most Americans dread the lead up to tax day for what it means for their pocketbooks. This year, a collection of cynical leftists hope to use tax day to convince Americans of a fiction: that repealing last year’s tax reform will cut their taxes.

Aiming to organize tax day protests across the country, Tax March claims that last year’s tax reform raised taxes “for 92 million middle-class families.” This is a lie, and their preferred remedy of repealing the Tax Cuts and Jobs Act will produce exactly the result they claim justifies their opposition to it.

The tiny sliver of truth used to concoct the false middle-class tax hike claim is the fact that parliamentary procedures meant that the only way to secure enough votes to pass the tax reform bill was for the individual rate reductions to expire after 10 years. This means that 2027 will bring about a return to the tax rates that existed prior to TCJA. That’s assuming that they aren’t first extended, for which there will be considerable political pressure.

To claim that a temporary tax cut is actually a tax hike because rates will eventually return to their previous levels is utterly disingenuous.

If Tax March and Democrats like Nancy Pelosi and Chuck Schumer who make common cause with it actually cared about the fact that rates will return to their old levels in 2027 then they would propose making the new rates permanent. Instead, they want to repeal TCJA.

Take a moment to consider the sheer outrageousness of their position. In response to the pain of rate cuts expiring in 2027, Tax March wants to repeal the cuts entirely and make rates go up right now.

Unfortunately, thanks to a combination of dishonest media coverage and Republican political ineptitude, much of the public is still not well informed about how the tax changes will affect them according to a new study from the James Madison Institute. That’s a problem for Congressional Republicans, but also for tax reform supporters more generally. Still, public ignorance in no way excuses the lies of cynical demagogues aiming to dope voters into supporting tax hikes in the name of preventing them.

The Looming Fiscal Nightmare of Extravagant Unfunded Pensions for State and Local Bureaucrats

Mon, 04/16/2018 - 4:55pm

Politicians have a giant incentive to provide lavish benefits to interest groups that then recycle some of the loot back to elected officials in the form of campaign contributions.

But the real key to the scam is that the bill gets imposed on future generations.

The American Legislative Exchange Council has a must-read report on the giant funding gaps that this has produced in the pension plans for state and local government bureaucrats.

If net pension assets are determined using more realistic investment return assumptions, pension funding gaps are much wider than even the large sums reported in state financial documents. Unfunded liabilities (using a risk-free rate of return assumption) of state-administered pension plans now exceed $6 trillion—an increase of $433 billion since our 2016 report. The national average funding ratio is a mere 33.7 percent, amounting to $18,676 dollars of unfunded liabilities for every resident of the United States. …the personal share of liability for every resident in each state, an indicator of the severity of the taxes to be borne now or in the future by each taxpayer for promises made but not funded. In Alaska, each resident is on the hook for a staggering $45,689, the highest in the nation. Connecticut, Ohio, Illinois, and New Mexico follow for the five highest per person unfunded pension liabilities.

This map is the most important takeaway from the report. It shows which states have the highest per-capita unfunded liabilities.

I’m not surprised to see AlaskaIllinoisConnecticut, and New Jersey near the bottom of the rankings. All of them were choices in my poll on which state was “most likely to collapse.”

But perhaps New Mexico, Hawaii, and Ohio should have been on that list as well.

For further background on the issue, here are some passages from a pension primer published by Forbes.

Years ago, as an actuarial student, …I remember…first, the eye-popping idea that state constitutions promised state and local employees that they could keep their existing benefits, not just for past service accruals, but for all future years of employment; and, second, the notion that it was generally accepted for public plans to be un- or underfunded… this is the story that’s repeated over and over again.  Pensions are made more generous — with high accrual rates, low retirement eligibility ages, generous cost of living provisions — as a means of providing more generous compensation to state and local employees, without actually needing to pay anything from the current year’s budget.  Costs are deferred until well after current legislators have themselves retired. …pension debt is even worse than ordinary state debts, for instance, bond issues for building up infrastructure.  Pension debt is nothing other than borrowing to pay for present-day employee salaries.

In other words, bureaucrat pensions are a scam, an opportunity for politicians to buy off a powerful voting bloc today while imposing the bill on the future.

Bureaucrats are making out like bandits, as the New York Times recently reported.

A public university president in Oregon gives new meaning to the idea of a pensioner. Joseph Robertson, …who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension. It is $76,111. Per month. That is considerably more than the average Oregon family earns in a year. Oregon — like many other states and cities, including New Jersey, Kentucky and Connecticut — is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster. More government workers are retiring, including more than 2,000, like Dr. Robertson, who get pensions exceeding $100,000 a year. The state is not the most profligate pension payer in America… “It’s an affront to everybody who pays taxes,” said Bruce Dennis, a retired carpenter from outside Portland who earned a $54,000-a-year pension by swinging a hammer for 45 years. No one gives him extra money.

But there’s a problem with this scam.

As Margaret Thatcher famously noted, sooner or later you run out of other people’s money.

And we’re getting to that point, as illustrated by this article for the Wall Street Journal. It cites what’s happening on the state level in Connecticut.

Connecticut has just 31.7% of what it needs to pay its employees’ future retirement benefits, according to state financial reports. A fund for teachers has 52.3%.Together, that adds up to more than $37 billion in unfunded pension liabilities, or about $10,300 per Connecticut resident. Connecticut’s unfunded pension liabilities resulted from nearly 40 years of politicians making promises about benefits without adequately funding them, according to a 2015 study by the Center for Retirement Research at Boston College.

And it gives an example of trouble at the local level from a city in Michigan.

East Lansing, home of Michigan State University…is struggling with almost $125 million in unfunded pension and retiree health-care liabilities, has been cutting services… East Lansing asked MSU to pony up $100 million over 20 years to help shore up the city’s underfunded pension plan. The alternative, the city said, was asking voters to approve a 1% income tax that would hit university employees and working students. After negotiations went nowhere, the city brought the income-tax proposal before voters in a referendum last November. …On Nov. 7, East Lansing residents shot down the income-tax referendum, forcing the city to debate what services to cut to save money for the pension obligations. …The city hopes to shed another 17 police and fire positions over the next two years… Altmann suggested a long list of potential cuts to make more room in the budget for increased pension payments: closing the fire station on MSU’s campus, shuttering the city’s pool, aquatic center, dog park and soccer complex, suspending bulk leaf pickup and plowing of public sidewalks and ending annual jazz, folk, film and art festivals.

This is not going to end well.

And the problem seems to get worse every year.

Doesn’t matter who is slicing and dicing the data. The numbers always look grim.

When the next recession hits, many of these simmering problems are going to explode.

A Painful Lesson for German Taxpayers

Sun, 04/15/2018 - 12:01pm

I’ve been in Prague the past few days for a meeting of the European Resource Bank. I spoke today about a relatively unknown international bureaucracy called the European Bank for Reconstruction and Development and I warned that it is going through a process of OECD-ization, which is simply my way of saying it is pursuing bad policy.

I’ll write about that issue in the near future, but today’s topic is based on a presentation from Michael Jäger of the Barvarian Taxpayers Association. He shared some depressing data on how the German government imposed a surtax for the ostensibly limited purpose of helping the finance the reunification of West Germany and East Germany.

But limited apparently means forever.

You’ll notice two things in the chart he shared.

  • First, the German government has been the big winner from this new levy, collecting €214 billion euros over the past 15 years and spending less than €157 billion euros. In other words, the politicians now have a lot of extra loot to spend elsewhere.
  • Second, revenues continue to rise even though the ostensible purpose of the tax is disappearing. Herr Jäger is pressuring the German government to eliminate the tax, but Frau Merkel apparently has little interest in reducing the nation’s tax burden.

To save non-German speakers from having to translate, the dark blue bars are “federal allocations to new states” and the light blue bars are “revenues from the solidarity surcharge.”

The big lesson to learn from this data is that temporary taxes are like temporary programs. They will last forever unless politicians somehow can be pressured to reduce their grip on the economy.

And that’s not easy, though I told some participants in the conference that it could be done. The United States government actually repealed a temporary telephone tax that was imposed to help finance the Spanish-American War.

That’s the good news.

The bad news is that the tax wasn’t repealed until last decade, more than 100 years after that war ended. I’m not joking.

Another painful lesson is that taxes on the rich often wind up penalizing other people. The Spanish-American War telephone tax was supposed to hit rich people since they were the ones who first utilized telephone technology.

But then the rest of us eventually got telephones as well, and we also had to pay the tax.

Just as the income tax was first imposed on just a tiny handful of very wealthy people, but it eventually morphed into a malignant tax code that now bedevils tens of millions of households with modest incomes.

Something to keep in mind when the crowd in Washington says we should have a value-added tax. Based on what’s happened in Europe, I guarantee it would just be a matter of time before that tax became more onerous to finance an ever-expanding burden of government spending.

Socialism: A Dreary Failure, Malignantly Evil, or Both?

Sat, 04/14/2018 - 12:44pm

When trying to convince someone about the downsides of socialism, I generally make a practical argument. I point out that socialism has universally failed, whether looking at totalitarian versions in places such as North Korea and Cuba or democratic versions in places such as Venezuela and Greece.

Simply stated, the particular strain of socialism doesn’t make a difference. At the end of the day, the greater the level of statism, the greater the level of economic damage.

But our friends on the left aren’t discouraged. Indeed, the support for cranks like Bernie Sanders and Jeremy Corbyn is a sign that socialist policies still have appeal to some people.

Writing for CapX, Kristian Niemietz of London’s Institute for Economic Affairs contemplates the resurgence of socialism. He starts by citing examples of pro-socialist writings.

Opinion pieces which tell us to stop obsessing over socialism’s past failures…have almost become a genre… Nathan Robinson, the editor of Current Affairs, wrote…that socialism has not “failed”. It has just never been done properly… Closer to home, Owen Jones wrote that Cuba’s current version of socialism was not “real” socialism… And Washington Post columnist Elizabeth Bruenig wrote an article with the self-explanatory title ‘It’s time to give socialism a try’.

Kristian provides three reasons why the we’ll-do-better-next-time theory of socialism is very impractical.

…articles in this genre share a number of common flaws. First, as much as the authors insist that previous examples of socialism were not “really” socialist, none of them can tell us what exactly they would do differently. …Secondly, the authors do not seem to realise that there is nothing remotely new about the lofty aspirations they talk about, and the buzzphrases they use. Giving “the people” democratic control over economic life has always been the aspiration, and the promise, of socialism. …Thirdly, contemporary socialists completely fail to address the deficiencies of socialism in the economic sphere. They talk a lot about how their version of socialism would be democratic, participatory, non-authoritarian, nice and cuddly. Suppose they could…magically make that work. What then? They would then be able to avoid the Gulags, the show trials and the secret police… But we would still be left with a dysfunctional economy.

Amen to the last point.

wrote last year that Marxist socialism is disgusting and brutal compared to liberal socialism, but both versions lead to economic malaise.

Which leads to the conclusion of Kristian’s column.

Ultimately, the contemporary argument for socialism boils down to: “next time will be different, because we say so.” After more than two dozen failed attempts, that is just not good enough.

Of course, some people instinctively knew that socialism was a pre-determined recipe for failure. Here’s the great Winston Churchill speaking about statism shortly after World War II.

Spot on. You can’t control an economy without controlling people.

And here’s another voice from the past, courtesy of Reddit‘s libertarian page.

And here’s Mr. Rogers imagining a fantasy world where socialism might work.

 

Last but not least, let’s close with this gem from Reddit‘s Libertarian Meme page.

 

Though when you think about people starving to death in places like Venezuela and North Korea, I suppose we shouldn’t laugh too much.

The “Buffett Rule” and the Taxation of Labor and Capital

Fri, 04/13/2018 - 12:11pm

Politicians routinely assert that they want more economic growth. That’s a laudable sentiment, although I doubt their sincerity for the simple reason that these are the same people who frequently impose policies that discourage productive economic activity.

Growth occurs when there’s an increase in the quantity and/or quality of labor and capital. These so-called factors of production determine how efficiently we produce and how much we produce.

Which is why there should be low taxes on labor and capital.

And it’s also a good idea for these factors of production to be taxed at the same rate so government policy isn’t tilting the playing field.

Unfortunately, we don’t have low taxes and we also don’t have neutral taxes.

Indeed, Timothy Egan argues in the New York Times that these two factors of production are not taxed equally. I agree.

Except Egan completely bungles the analysis and preposterously claims that labor is taxed at a higher rate.

Dear Government: Enclosed please find my 2017 tax form, and a check for the amount I owe, just ahead of the deadline. …you’re still punishing me for working — taxing wages and business income at a much higher rate than the money I make doing nothing, like holding stocks. Plus, you’re still taxing Warren Buffett at a lower rate than his secretary, despite his plea for fairness.

Wow, he manages to cram a lot of inaccuracy into a couple of sentences.

In reality, the current tax code is very biased against saving and investment.

Here’s some of what I wrote when I debunked Warren Buffett’s deeply flawed claim about relative tax burdens back in 2011.

…dividends and capital gains are both forms of double taxation. …if he wants honest effective tax rate numbers, he needs to show the…corporate tax rate. …Moreover, …Buffett completely ignores the impact of the death tax

For years, I’ve been recycling a chart showing how the American tax code mistreats saving and investment. But that chart became outdated by the fiscal cliff deal, then became even more inaccurate because of Obamacare tax hikes, and most recently became even more inaccurate thanks to the Trump tax plan.

So here’s an up-to-date version.

And for purposes of today’s issue, the top side and left side of the flowchart combine to show how labor income is taxed and the top side and right side of the flowchart combine to show how capital is taxed.

The problem with Egan’s analysis is that he compares taxes on labor income (as high as 37 percent) with the 23.8 percent rate on dividends and/or capital gains. Yet that’s either incredibly sloppy or grievously dishonest because that income also gets hit by the corporate income tax.

And it’s worth pointing out that stocks and other financial assets are purchased with after-tax dollars (captured by the top portion of the chart).

P.S. Adding payroll taxes to the flowchart doesn’t change anything. There would be an additional levy at the top of the chart, leading to a lower level of after-tax earning. So the net result is simply that people have less money to either spend or invest.

P.P.S. Warren Buffett periodically – and inaccurately – asserts that his tax rate in higher than his secretary’s tax rate. Yet his theoretical support for higher tax burdens crashes into the reality of his professional tax-minimization behavior.

Eurocrats are scheming to raise Americans’ taxes — how will Trump fight back?

Fri, 04/13/2018 - 1:49am

Originally published by The Washington Examiner on April 7, 2017.

For years, European tax collectors have been targeting American firms. Recently, EU commissioners unveiled a proposal aimed at siphoning billions of dollars from American tech companies by targeting gross revenues instead of profits. Even worse, they wrote the rules in such a way as to ensure that only American companies, and not any European tech firms, would be affected.

Unfortunately, it’s going to get even worse. The G20 and the Organization for Economic Cooperation and Development, or OECD, are gearing up to tackle “digitalization.” Their overriding concern is finding a way for high-tax nations to get their pound of flesh from the growing digital economy.

These developments are bad enough, but it’s necessary to understand that this is merely a new battleground in a war that has been waged for decades, primarily through the work of the OECD.

The OECD was created to improve trade and promote economic progress, but today it prioritizes the interests of tax collectors above taxpayers and consumers. Its recent actions have focused on increasing tax collections at any cost.

Since the OECD is dominated by high-tax European nations, their work is often aimed at punishing U.S. companies. The so-called Base Erosion and Profit Shifting, or BEPS, project, for instance, was presented as ensuring “fair” taxes on multinational corporations, but in truth sought to raid U.S. companies with large overseas cash holdings — maintained due to perverse incentives in the old U.S. tax code — to close their own fiscal gaps.

Capital is mobile, and taxpayers can “shop around” for jurisdictions with more favorable rates. This process is known as tax competition, and it makes it harder for politicians to impose excessive tax rates.

The high-tax European nations that dominate the OECD’s agenda worry that tax competition leads to a “race to the bottom,” but it’s a baseless fear. Taxes are just one of many factors that determine a jurisdiction’s attractiveness. Quality of services and regulatory efficiency are also important, and taxpayers are willing to accept a reasonable cost for their provision.

Nevertheless, “race to the bottom” rhetoric was quickly deployed following passage of tax reform in the U.S. After Congress merely brought corporate tax rates down to a level about even with the OECD average, International Monetary Fund head Christine Lagarde said, “What is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing.’”

International tax collectors, in other words, fear that the response to the recent tax reform might mirror what happened in the 1980s and 1990s, when competition forced even tax-happy nations to significantly lower their corporate rates. This process was good for workers, consumers, and the global economy, but politicians viewed tax competition as a negative. BEPS targets businesses, but the OECD also frequently urges higher taxes on individuals. In their annual economic reports, it routinely calls for the U.S. to raise taxes on Americans and increase government spending. This is the opposite of what our economy needs.

There are ways for the U.S. to fight back. President Trump could order career bureaucrats at the Treasury Department who represent the U.S. abroad to finally stand up for taxpayers. Instead of going along with the initiatives of European tax collectors, the U.S. should say that enough is enough.

Congress also has the option of denying funds to the OECD. The U.S. is its single largest contributor, and it is truly perverse that American taxpayers are subsidizing the work of an agency that aims to make them worse off.

If our leaders choose not to do any of these things, they should expect more attacks on U.S. economic interests. Taxpayers may soon find that many of the benefits achieved from a tax reform effort that was decades in the making can be quickly snatched away by foreign tax collectors and the undemocratic international organizations that they control.

Economic Freedom in Europe

Thu, 04/12/2018 - 12:38pm

I periodically share data comparing the United States and Europe, usually because I want to convince people that America’s medium-sized welfare state is better (less worse) than Europe’s bloated welfare states.

In other words, Bernie Sanders is wrong.

But I sometimes feel guilty when making these unflattering comparisons because Europe – at least by world standards – actually deserves a good bit of praise.

If you look at Economic Freedom of the World, you’ll find that the 28 nations of the European Union (outlined in red) have relatively strong scores. Indeed, 27 of them rank in the top half, with Greece being the embarrassing exception.

And 17 EU nations rank in the top quartile, three of them above the U.S.

If you dig into the data, you’ll find that EU nations generally get crummy scores for fiscal policy, but misguided policies on taxes and spending are more than offset by superior scores for trade, monetary policy, regulatory policy, and quality of governance.

Now let’s look at some recent trends. I mentioned yesterday that I’m at the European Parliament in Brussels for a conference on economic freedom.

My friend Martin Agerup from Denmark gave an overview of economic freedom in EU nations, and I want to highlight some of his slides.

We’ll start with this modified ranking of economic freedom, which looks at where a hypothetical European nation would rank if it cherry-picked the best real-world scores (for the five major indices) of the various EU countries.

This hypothetical country, based on the best practices of various EU nations, would have the third-highest score for economic liberty – trailing only Hong Kong and Singapore.

This underscores my point about considerable economic liberty in Europe.

Martin also looked at trends in the European Union.

Here’s a slide looking at the evolution of economic freedom in Western Europe and Eastern Europe.

Three things are worth noting about this chart.

  • First, there was a dramatic improvement in economic freedom in Western Europe (blue line) from 1975-2000. Many people know about Thatchernomics, but there was a lot of pro-market reform in the rest of Europe.
  • Second, you’ll notice the giant jump in economic freedom in Eastern Europe (red line) from 1995-2005. The collapse of communism has resulted in vast improvements in economic liberty.
  • Third, the overall continent has seen comparatively little progress in recent years.

But averages can be deceiving. This next chart shows that some nations did rise and fall over the past decade. Many Eastern European nations boosted their scores by a modest degree, and Sweden also deserves a special mention.

Greece stands out for the worst performance in the past 10 years.

Which gives me an excuse to share one final chart from Martin’s presentation. Sweden suffered a deep crisis at the start of the 1990s, somewhat akin to what Greece suffered in 2008. But the two countries responded in radically different ways. Sweden shrank government and boosted economic liberty while Greece increased the size and scope of the state (aided and abetted by bailouts!).

This video has more details on the comparison of the two countries.

P.S. Notwithstanding the relatively nice things I just wrote about Europe, the continent faces some major fiscal challenges. And middle-class taxpayers, who already are being suffocated by high taxes, will probably get further pillaged.

More Government Spending = Weaker Economic Performance

Wed, 04/11/2018 - 12:00pm

I’m in Brussels, where I’m participating in an “Economic Freedom Summit” on the unfriendly turf of the European Parliament.

My role was to chair a panel earlier today about whether Venezuela can recover from socialism. I obviously have an opinion on that topic, but I want to write today about some information that was shared on the panel about transition economies.

Andrei Illarionov, a former adviser to Vladimir Putin, gave a talk about economic reform in Russia. I also have an opinion on that topic, but that’s also not today’s issue.

Instead, I want to share some of his charts on the broader topic of government spending and economic growth.

As you might expect, he showed the negative correlation between the size of government and economic performance in Russia.

He also had numbers for the United States, though for a much longer period of time.

He also had the data for Germany.

And also the numbers for Japan.

Since the panel’s main focus was countries making the transition from communism, Andrei also looked at the relationship between government spending and growth rates in those nations.

Last but not least, here are his calculations based on 56 years of data in developed countries, on the impact of government spending on economic growth.

This is powerful data, even when you factor in the caveats Andrei mentioned in the discussion.

For all intents and purposes, the lines in Andrei’s various charts are measures of the downward sloping portion of the Rahn Cure. I explain in this video.

I’ve shared research on government spending and economic performance on any occasions, including some findings from a very good book published by London’s Institute for Economic Affairs.

And it’s worth noting that even the left-leaning OECD has produced findings very similar to Andrei’s data.

  • The OECD admitted in one study that “a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries.”
  • The OECD admitted in another study that “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points.”
  • The OECD admitted in a different study that “an increase of about one percentage point in the tax pressure (or, equivalently one half of a percentage point in government consumption, taken as a proxy for government size)…could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent.”

And the IMF also has a statist orientation, but it also has confessed that larger governments hinder growth, writing that “A tax cut for the middle-class, financed from a lump-sum reduction in government spending, …raises the steady state GDP by just under 1 percent after 5 years… in the simple case where the tax cuts are paid for by lump sum cuts in government spending, the personal income tax multiplier is around 3.”

In other words, the research clearly shows that shrinking the burden of government spending is a great recipe to promote greater prosperity. Andrei’s data is simply another layer of evidence.

The European Bank for Reconstruction and Development: Cronyism and Corruption Instead of Growth

Wed, 04/11/2018 - 1:16am

[PDF Version]

April 2018, Vol. XII, Issue I

The European Bank for Reconstruction and Development: Cronyism and Corruption Instead of Growth

The European Bank for Reconstruction and Development was created in 1990 to help former Soviet-Bloc nations make the transition from communism. The ostensible mission of this multilateral development bank, which began operations in 1991, is “furthering progress towards market-oriented economies and the promotion of private and entrepreneurial initiative.”

While these are very admirable goals, the EBRD has been ineffective, perhaps even counterproductive. There is no evidence that its policies have generated additional growth. Indeed, it is highly likely that the EBRD undermines prosperity since much of its operations are based on cronyism, with bureaucrats providing special privileges to politically connected private companies – thus politicizing the allocation of capital, undermining competitive markets, and fomenting corruption.

Given the dismal track record of other international bureaucracies, as well as the systemic failure of foreign aid to produce better economic performance, it’s unclear whether any reforms could salvage the EBRD.

By Daniel J. Mitchell

Introduction

The European Bank for Reconstruction and Development (EBRD) started operations in 1991 with a primary goal of helping promote economic development in nations that had been part of the former Soviet Bloc. Most of the original donor nations were from Western Europe, though a handful of other nations such as the United States and Australia also were inaugural supporters of the ERBD.

Donors at the time committed the equivalent of 10 billion euros to the EBRD in order “to foster the transition towards open market‑oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics.”[1]

Structurally, the ERBD is a regional multilateral development bank, similar to the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank. Like other multilateral development banks, the EBRD is supposed to be self-sustaining. Some would even say profitable. But this is somewhat misleading since “…MDBs receive subsidies from their shareholders in the form of subsidised capital and tax exemptions and from their borrowers in the form of their preferred creditor status.”[2]

In any event, there is a difference between the ERBD and other MDBs. The creators of the EBRD decided to follow an unconventional path. Instead of helping to finance government projects such as infrastructure, which would be a typical activity of the other regional development banks, the EBRD “was given a mandate to finance investments, mostly in the private sector.”[3]

The important issue that will be addressed in this report is whether the EBRD has been successful in its core mission of promoting economic developing in post-Soviet economies. Unfortunately, an analysis of the actions of this comparatively new international bureaucracy indicates that it hinders rather than enables market-friendly reforms in transition economies.

Key Finding – Wrong Approach, Ineffective Results

The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. A successful transition was seen as good for people in former Soviet-Bloc countries, of course, but it also was viewed as a smart investment on behalf of taxpayers in western nations.

But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. There already had been numerous post-World War II initiatives – the World Bank, the International Monetary Fund, national foreign-aid programs, etc – that were based on the notion that government intervention somehow could create growth in less-developed parts of the world.

These initiatives did not work.[4] Simply stated, nations grow if local politicians adopt the right policies. And that growth occurs even if there’s not one penny of aid. But if they impose the wrong policies, their economies will remain stagnant, regardless of how much aid they receive. This is known as the “Foreign Aid Paradox.”[5]

If poor nations want better economic performance, there is a recipe for growth and prosperity. It involves small government, free markets, and non-intervention. Here are the five major indices associated with growth, based on Economic Freedom of the World, an annual index published by Canada’s Fraser Institute.[6]

  1. Size of government – a measure of the fiscal burden of taxes and spending.
  2. Legal system and property rights – a measure of the quality and honesty of the rule of law.
  3. Sound money – a measure of monetary stability and open capital markets.
  4. Freedom to trade internationally – a measure of barriers to global markets.
  5. Regulation – a measure of red tape in credit markets, labor markets, and business operations.

Incidentally, the Heritage Foundation’s Index of Economic Freedom[7] and the World Economic Forum’s Global Competitiveness Report[8] also measure the quality of government policy based on similar indices. And they get very similar results. The bottom line is that outsiders can’t produce growth in a developing or transition nation unless they somehow have the power to coerce good policy.

At the risk of understatement, that’s not how multilateral development banks such as the EBRD or other global bureaucracies operate. At best, the EBRD and other aid providers can use moral suasion to encourage good policy. But in practice, aid providers rarely do even that.

Development experts openly admit that outside governments and bureaucracies are ineffective.

  • Professor William Easterly, now at New York University after many years at the World Bank, sagely observed that, “The West’s efforts…have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. …Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers.”[9]
  • Peter Bauer, a development economist and winner of the 2002 Milton Friedman Prize, cynically observed that foreign aid was basically “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”[10]
  • Dambisa Moyo, writing about her home continent, grimly noted that, “The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations. …A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power.”[11]

Unfortunately, even though its founding documents pay homage to markets and even though the webpage today contains similar rhetoric, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.

  • There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
  • There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
  • There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.
Problems

Let’s review some of the specific shortcomings and mistakes of the EBRD. We’ll look at both design flaws and operational flaws.

Capital Misallocation

A “macro” problem that is common to all multilateral development banks, as well as other international financial institutions such as the International Monetary Fund, is that the decisions of these bureaucracies distort the allocation of capital.

In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires.

There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people.

The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses. Defenders of the status quo argue that the EBRD fulfills an important role by supplying capital to underserved regions. But this is wrong on two levels.

  1. Good investments would not need subsidized capital, particularly is a world awash in capital seeking profitable opportunities.
  2. If investments in a certain region are not attractive, that means one of two things.
    1. It would be a waste of money to divert capital to that region.
    2. There are policy barriers to capital that local governments should fix.
Cronyism

A “micro” problem is that the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition.

As the Economist observed, “…for the past 20 years, from Malaysia to Mexico, crony capitalists—individuals who earn their riches thanks to their chumminess with government—have had a golden era” and “Industries that have a lot of interaction with the state are vulnerable to crony capitalism.”[12]

And Tim Ridley, writing for the U.K.-based Times, warned, “Continuing prosperity depends on…what the economist Joseph Schumpeter called creative destruction. …there is ever more opportunity to live off “rents” from artificial scarcity created by government… businesses become embedded in government cronyism…heavily dependent on government contracts, favours or subsidies.”[13]

In other words, cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly.

To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.[14] This chart compares donor nations from Western Europe and the United States to recipient nations in the former Soviet Bloc. The gaps are substantial.

Given that recipient nations already have a severe problem with cronyism, is it remarkable that the EBRD is enabling and encouraging these bad policies. Especially when the donor nations – while far from perfect – have done a decent job of insulating their economies from cronyist policies.

Some might argue that the EBRD’s track record of not losing money insulates it from the charge of cronyism.[15] But after-the-fact profitability is not a measure of success since subsidized capital can allow a firm to gain an undeserved advantage over competitors. In other words, it’s a sign of successful cronyism rather than successful governance.

Corruption

When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands,[16] so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot?

For instance, a column in the EU Observer noted that, “EBRD money has ended up in the pockets of people associated closely with the authoritarian regime of President Alexander Lukashenko in Belarus, raising some doubts over the verification mechanisms in place at the bank to ensure the public money it disburses actually benefits ordinary people in its theatre of operations.”[17]

Another analysis found that, “in the EBRD’s projects, an increasing number of cases are becoming visible in which serious allegations of corruption do not seem to have had an impact on the EBRD’s stance towards the project or the company leading the projects.”[18]

None of this should be a surprise. Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.”[19] And they also have disappointing numbers from Transparency International’s “corruption perceptions index.”[20]

So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.

Ironically, even the EBRD’s own research indicates that government facilitates and enables corruption. A working paper from 2015 found that “…unexpected financial windfalls increase corruption in local government. … Our results imply that a 10 per cent increase in the per capita amount of disbursed funds leads to a 12.2 per cent increase in corruption. …Our results highlight the governance pitfalls of…assistance from international organisations.”[21]

Leftward Drift

Like many multilateral organizations, the EBRD advocates policies that would increase the power of the state relative to the private economy. In the case of the EBRD, however, these statist policies are directly contrary to the ostensible pro-market mission of the bureaucracy.

Consider the EBRD’s 2016-17 transition report, for instance, which embraced destructive capital taxes.

Taxing wealth…may be an effective method of fiscal redistribution, as well as a means of raising additional revenue. Taxes on inheritance, in particular, tend to be less distortionary, in the sense that they affect people’s level of effort or employment decisions to a lesser extent.[22]

This is remarkably shoddy economic analysis. Taxing wealth and inheritances may not have a big impact of incentives to provide labor, but such policies surely have a major impact on incentives to provide capital. And since all economic theories, even socialism and Marxism, agree that capital accumulation is a vital prerequisite for economic growth, rising living standards, and higher wages, punitive taxes on saving and investment are especially destructive.

The transition report also veers into class warfare by expressing support for higher taxes and bigger government.

Tackling broader inequality requires…redistribution through taxation and public spending.[23]

To be fair, the report does note that inequality is not necessarily bad. Moreover, it draws a distinction between earned wealth and cronyism-generated wealth. That insight suggests that there should be a very aggressive campaign to stamp out government favoritism, but the EBRD appears to be somewhat muted on this topic – perhaps because one of its core functions is diverting capital to favored companies and industries.

Even when the EBRD identifies a genuinely important issue, there is an unwillingness to propose real solutions. For instance, the report highlights the importance of education to promote equality of opportunity, yet there is no discussion of pro-market reforms such as school choice that would deliver better results for less money.

Another example is that the 2016-17 transition report has an entire chapter on “financial inclusion” and the extent to which low-income people can access and benefit from the banking system. And that chapter specifically notes that “A lack of documentation is…an issue for the young” and that “Documentation requirements may have a particular impact on workers in the informal sector and the self-employed.” Yet there is only very weak and indirect criticism of the “money-laundering laws” that impose high costs on financial firms and specifically make financial services too expensive for poor people.

The 2017-18 transition report is not quite so slanted, but it has a chapter on “Green Growth” which is based on the illogical premise that relatively poor economies can benefit from utilizing more expensive forms of energy. The EBRD could have been honest and put forth an argument that it is necessary and desirable to sacrifice growth to achieve ostensible environmental benefits. Instead, it decided to promote the economic version of a perpetual motion machine.[24]

The EBRD’s muddled approach to economics is captured in the components used to measure a “sustainable” market economy, which confuses means and ends. Components such as “capacity to add value and innovate” are merely descriptions of a competitive economy. And “well-governed” certainly is a good trait for both the public sector and corporate sector. But those are ends. What about means? Table S.1. lists some positive policies such as open trade and capital markets, but it also lists “climate change” and “gender equality,” which easily could be excuses for anti-market interventions by governments.

For all intents and purposes, it appears the EBRD now openly rejects its original mission, openly disputes the notion that markets are the engine for growth and prosperity.

Views on the roles of the state and the private sector have also evolved since the start of the transition process. Following the fall of the Berlin Wall, the prevailing economic thinking was that the economic role of the state should be limited…  More recently, however, it has increasingly been recognised – particularly after the 2008-09 financial crisis – that unfettered markets…can lead to suboptimal outcomes such as rising inequality… The slow growth that has been observed in the aftermath of the financial crisis – especially the high unemployment rates and the weak growth in real incomes – has contributed, in some countries, to public disillusionment with markets and a decline in public support for market reforms.[25]

This is not the mentality of a bureaucracy that is going to help nations shrink the size and scope of government.

Additional problems

There are other concerns about the EBRD.

  • Bad fiscal policy and/or lack of good fiscal policy – Like many international bureaucracies, the EBRD almost always says the right thing on trade policy. And the EBRD usually is reasonably sensible on regulatory policy (with “climate” being a notable exception). But the bureaucracy is AWOL – at best – on fiscal policy. The EBRD’s transition indicators, for instance, could be greatly strengthened by including taxation (overall burden, marginal tax rates, tax complexity, etc). Even the World Bank includes such measures in Doing Business.[26]
  • Duplication and mission creep – It’s unclear why the EBRD was created since it fulfills (at least in theory) the same mission as the World Bank. Was there really a need for another bureaucracy? The EBRD’s bureaucrats would say yes, naturally, since they get lavish salaries that are exempt from national taxation.[27] That’s good for them, but that doesn’t change the fact that there’s no evidence that the EBRD improves growth in recipient nations. Yet that isn’t stopping the bureaucracy from expanding. Greece, Cyprus, Turkey, Jordan, Morocco, Egypt, and Lebanon were never part of the Soviet Bloc, yet they are now getting subsidies from the EBRD.[28]
  • Whither Democracy? – The founding documents of the EBRD and the current website laud “multi-party democracy” and “pluralism”, and for good reason. Indeed, the EBRD ostensibly is only supposed to help nations satisfying those criteria.[29] Yet the bureaucracy is diverting capital to several governments that are ranked as “not free” by Freedom House. Indeed, both Uzbekistan and Turkmenistan are ranked about being among the world’s 10-most repressive governments.[30]
Conclusion

The EBRD has a noble-sounding mission. But good intentions and lofty rhetoric don’t produce economic growth, higher living standards, and better outcomes.

The EBRD is a duplicative bureaucracy that was created under the dubious premise that a new multilateral institution could somehow boost economic performance notwithstanding the dismal track record of foreign aid.

Even more troubling, the EBRD has chosen to operate as a cronyist organizations, distorting the allocation of capital and undermining competitive markets by providing preferential funds to politically well-connected firms.

The only identifiable beneficiaries of the EBRD, other than favored companies, are the bureaucrats. That’s not a worthwhile legacy.

__________________________________

Daniel J. Mitchell is a co-founder of the Center for Freedom and Prosperity Foundation and serves as the Chairman of its Board of Directors.

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

_______________________________________________

Endnotes

[1] European Bank for Reconstruction and Development, “Basic Documents of the EBRD,” September 30, 2013. Available at http://www.ebrd.com/news/publications/institutional-documents/basic-documents-of-the-ebrd.html.

[2] Ibid.

[3] Willem Buiter and Steven Fries, “What should the multilateral development banks do?”, Working Paper  No. 74, European Bank for Reconstruction and Development, June 2002. Available at http://www.ebrd.com/downloads/research/economics/workingpapers/wp0074.pdf.

[4] Dženan Đonlagić and Amra Kožarić, 2010. “Justification Of Criticism Of The International Financial Institutions,” Economic Annals, Faculty of Economics, University of Belgrade, vol. 55(186), pages 115-132.

[5] Daniel J. Mitchell, “The Foreign Aid Paradox,” International Liberty, October 31, 2016. Available at https://danieljmitchell.wordpress.com/2016/10/31/the-foreign-aid-paradox/.

[6] James Gwartney, Robert Lawson, and others, Economic Freedom of the World, Fraser Institute, September 28, 2017. Available at https://www.fraserinstitute.org/studies/economic-freedom-of-the-world-2017-annual-report.

[7] Terry Miller, Anthony B. Kim, and James M. Roberts, 2018 Index of Economic Freedom, Heritage Foundation, January 2018. Available at https://www.heritage.org/index/pdf/2018/book/index_2018.pdf.

[8] Klaus Schwab, ed, Global Competitiveness Report, 2017-2018, World Economic Forum, 2017. Available at http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf.

[9] William Easterly, “Why Aid Doesn’t Work,” Cato Unbound, April 2, 2006. Available at https://www.cato-unbound.org/2006/04/02/william-easterly/why-doesnt-aid-work.

[10] The Economist, “A Voice for the Poor,” May 2, 2002. Available at https://www.economist.com/node/1109786.

[11] Dambisa Moyo, “Why Foreign Aid Is Hurting Africa,” Wall Street Journal, March 21, 2009. Available at https://www.wsj.com/articles/SB123758895999200083.

[12] Economist, “Comparing crony capitalism around the world,” May 5, 2016. Available at https://www.economist.com/blogs/graphicdetail/2016/05/daily-chart-2.

[13] Tim Ridley, “Cautious crony organizations stifle innovation,” Times, April 9, 2018. Available at https://www.thetimes.co.uk/edition/comment/cautious-crony-organisations-stifle-innovation-0bswjhk8p.

[14] Economic Freedom of the World, “Dataset,” 2017. Available at https://www.fraserinstitute.org/economic-freedom/dataset?geozone=world&year=2015&page=dataset&filter=1&min-year=2&max-year=0.

[15] European Bank for Reconstruction and Development, “2016 in Numbers,” (accessed April 10, 2018). Available at http://2016.ar-ebrd.com/in-numbers/.

[16] European Bank for Reconstruction and Development, “Stories,” (accessed April 10, 2018).. Available at http://2016.ar-ebrd.com/category/our-stories/.

[17] Ionut Apostol, “Lessons Learned for the EBRD,” EU Observer, April 10, 2012. Available at https://euobserver.com/opinion/115831.

[18] CEE Bankwatch Network “Coal and corruption – the case of the European Bank for Reconstruction and Development,” December 2013. Available at https://bankwatch.org/wp-content/uploads/2013/12/EBRD-coal-corruption.pdf.

[19] World Bank, Worldwide Governance Indicators, (accessed April 10, 2018). Available at http://databank.worldbank.org/data/reports.aspx?source=worldwide-governance-indicators.

[20] Transparency International, Corruption Perceptions Index, 2017, February 21, 2018. Available at https://www.transparency.org/news/feature/corruption_perceptions_index_2017.

[21] Elena Nikolova and Nikolay Marinov, “Do public fund windfalls increase corruption? Evidence from a natural disaster,” Working Paper No. 179, European Bank for Reconstruction and Development, April 2015. Available at http://www.ebrd.com/documents/oce/do-public-fund-windfalls-increase-corruption-evidence-from-a-natural-disaster.pdf.

[22] European Bank for Reconstruction and Development, “Transition Report 2016-17”, November 4, 2016. Available at http://www.ebrd.com/news/publications/transition-report/transition-report-201617.html.

[23] Ibid.

[24] European Bank for Reconstruction and Development, “Transition Report 2017-18,” November 22, 2017. Available at http://www.ebrd.com/transition-report-2017-18.

[25] European Bank for Reconstruction and Development, “Transition Report 2017-18,” November 22, 2017. Available at http://www.ebrd.com/transition-report-2017-18.

[26] World Bank, Doing Business: Reforming to Create Jobs, October 31, 2017. Available at http://www.doingbusiness.org/reports/global-reports/doing-business-2018.

[27] European Bank for Reconstruction and Development, “Basic Documents of the EBRD,” September 30, 2013. Available at http://www.ebrd.com/news/publications/institutional-documents/basic-documents-of-the-ebrd.html.

[28] European Bank for Reconstruction and Development, “Where We Are,” accessed April 9, 2018. Available at http://www.ebrd.com/where-we-are.html.

[29] Ibid.

[30] Freedom House, “Freedom in the World, 2018,” January 16, 2018. Available at https://freedomhouse.org/report/freedom-world/freedom-world-2018.

In a Single Image, Everything You Need to Know about the New CBO Budget Numbers

Tue, 04/10/2018 - 12:38pm

The Congressional Budget Office just released its annual Economic and Budget Outlook, and almost everyone in Washington is agitated (or pretending to be agitated) about annual deficits exceeding $1 trillion starting in the 2020 fiscal year.

All that red ink isn’t good news, but I’m much more concerned (and genuinely so) about this line from CBO’s forecast. In just 10 years, the burden of federal spending is going to jump from 20.6 percent of GDP to 23.6 percent!

Simply stated, we’ve entered the era of baby boomer retirement. And because we have some very poorly designed entitlement programs, that means the federal budget – assuming we leave it on autopilot – is going to consume an ever-growing share of our national economic output.

The bottom line is that Washington is violating my Golden Rule.

Let’s look at the underlying numbers. Federal spending is projected by CBO to grow by an average of about 5.5 percent per year over the next decade while nominal GDP is estimated to grow by just 4.0  percent annually.

And that unfortunate trend isn’t limited to the nest 10 years. CBO’s latest long-run forecast, which I discussed last year, shows a never-ending deterioration of America’s fiscal position.

Hello Greece.

Fortunately, there is a solution to this mess.

A modest amount of spending restraint can quickly reverse our fiscal troubles and put us on a path to a balanced budget. More importantly, limits on the growth of spending can slowly reduce the size of the federal government relative to the private sector.

Here’s a chart, based on CBO’s numbers, that shows how much Uncle Sam is spending this year (a bit over $4.1 trillion), along with a blue line showing projected tax revenues over the next 10 years (blue line). And I’ve shown what happens if spending is “only” allowed to increase by either 2 percent annually (orange line) or 3 percent annually (grey line) over the next decade.

This chart is basically everything you need to know. It shows that our fiscal situation is not hopeless. All we have to do is make sure government is growing slower than the productive sector of the economy.

A good rule of thumb, as suggested in the chart title, is that government shouldn’t grow faster than the rate of inflation.

And we’ve done it before.

  • During the Clinton years, the United States enjoyed a multi-year period of spending restraint. We got a balanced budget because of that frugality. More important, spending fell as a share of GDP.
  • During the Obama years, we benefited from a five-year de facto spending freeze. Deficits dropped dramatically and the nation experienced the biggest drop in the relative burden of spending since the end of World War II.

And many other nations also have also managed multi-year periods of spending restraint.

Let’s close with a video I narrated which illustrates how modest spending discipline generates good outcomes.

It’s from 2010, so the numbers are no longer relevant, but otherwise the analysis applies just as strongly today.

P.S. I’m not overly optimistic that President Trump is serious about solving this problem. His proposed a semi-decent amount of spending restraint in last year’s budget, but then he signed into law a grotesque budget-busting appropriations bill.

A Deceptive and Inaccurate Call for Higher Taxes

Mon, 04/09/2018 - 12:15pm

Five former Democratic appointees to the Council of Economic Advisers have a column in today’s Washington Post asserting that we should not blame entitlements for America’s future fiscal problems.

The good news is that they at least recognize that there’s a future problem.

The bad news is that their analysis is sloppy, inaccurate, and deceptive.

They start with an observation about red ink that is generally true, though I think the link between government borrowing and interest rates is rather weak (at least until a government – like Greece – gets to the point where investors no longer trust its ability to repay).

The federal budget deficit is on track to exceed $1 trillion next yearand get worse over time. Eventually, ever-rising debt and deficits will cause interest rates to rise. …the growing debt will take an increasing toll.

But the authors don’t want us to blame entitlements for ever-rising levels of red ink.

It is dishonest to single out entitlements for blame.

That’s a remarkable claim since the Congressional Budget Office (which is not a small government-oriented bureaucracy, to put it mildly) unambiguously shows that rising levels of so-called mandatory spending are driving our long-run fiscal problems.

CBO’s own charts make this abundantly clear (click on the image to see the original column with the full-size chart).

So how do the authors get around this problem?

First, they try to confuse the issue by myopically focusing on the short run.

The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.

Okay, fair enough. There will be a short-run tax cut because of the recent tax legislation. But the column is supposed to be about the future debt crisis. And that’s a medium-term and long-term issue.

Well, it turns out that they have to focus on the short run because their arguments become very weak – or completely false – when we look at the overall fiscal situation.

For instance, they make an inaccurate observation about the recent tax reform legislation.

…the tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the preexisting shortfalls in Social Security and Medicare.

That’s wrong. The legislation actually increases the long-run tax burden.

And that’s in addition to the long-understood reality that the tax burden already is scheduled to gradually increase, even measured as a share of economic output.

Once again, the CBO has a chart with the relevant data. Note especially the steady rise in the burden of the income tax (once again, feel free to click on the image to see the original column with the full-size chart).

The authors do pay lip service to the notion that there should be some spending restraint.

There is some room for…spending reductions in these programs, but not to an extent large enough to solve the long-run debt problem.

But even that admission is deceptive.

We don’t actually need spending reductions. We simply need to slow down the growth of government. Indeed, our long-run debt problem would be solved if imposed some sort of Swiss-style or Hong Kong-style spending cap so that the budget couldn’t grow faster than 3 percent yearly.

In any event, they wrap up their column by unveiling their main agenda. They want higher taxes.

Additional revenue is critical…responding to the looming fiscal challenge required a balanced approach that combined increased revenue with reduced spending. Two bipartisan commissions, Simpson-Bowles and Domenici-Rivlin, proposed such approaches that called for tax reform to raise revenue as a percent of GDP…set tax policy to realize adequate revenue.

As I already noted, the tax burden already is going to climb as a share of GDP. But the authors want an increase on top of the built-in increase.

And it’s very revealing that they cite Simpson-Bowles, which is basically a left-wing proposal of higher taxes combined with the wrong type of entitlement reform. To be fair, the Domenici-Rivlin plan has the right kind of entitlement reform, but that proposal is nonetheless bad news since it contains a value-added tax.

The bottom line is that the five Democratic CEA appointees who put together the column (I’m wondering why Austan Goolsbee didn’t add his name) do not make a compelling case for higher taxes.

Unless, of course, the goal is to enable a bigger burden of government.

P.S. In a perverse way, I actually like the column we discussed today. Five top economists on the left put their heads together and tried to figure out the most compelling argument for higher taxes. Yet what they produced is shoddy and deceptive. In other words, they didn’t make a strong argument because they don’t have a strong argument. Reminds me of Robert Rubin’s anemic argument last year against the GOP tax plan.

Good News on Unemployment, but So-So News on Jobs and Dependency

Sun, 04/08/2018 - 12:58pm

There is a lot of good news about the job market in America.

The official unemployment rate, released just yesterday, is down to 4.1 percent, which is the lowest its been since the end of the Clinton years. Even more impressive, the number of people getting unemployment benefits (i.e., getting paid not to work) has dropped to the lowest level since the early 1970s.

I don’t want to rain on this parade, but the numbers aren’t as good as they seem.

Back during the Obama years, I repeatedly pointed out the real health of the labor market should be measured by looking at either the rate of labor force participation or the employment-population ratio.

These are the numbers that give us a more accurate picture of the extent to which labor is being productively utilized (remember, national income is determined by the quality and quantity of labor and capital in the economy).

So let’s dig into the government’s database on labor force statistics and see where we stand when examining these more-insightful numbers.

We’ll start with the data on the rate of labor force participation, which is basically a measure of those working and looking for work as a share of the adult population. As you can see, that rate dropped significantly at the end of the Bush years/beginning of the Obama years. And it hasn’t recovered even though the recession ended back in 2009.

By the way, we shouldn’t expect this rate to be 100 percent, or even anywhere close to that high. After all, the 16-and-up population includes plenty of full-time students, retired people, disabled, stay-at-home moms (or dads), and others.

But I worry about the downward trend.

Now let’s look at the employment-population ratio, which is slightly more encouraging. We see a precipitous drop during the recession, but at least the number has been trending in the right direction for several years.

Though it’s nonetheless semi-depressing that the increase has been rather slow and we haven’t come anywhere close to recovering from the downturn.

To help understand the rate of joblessness, here’s a video from the Mercatus Center.

And to better understand the rate of employment, here’s a video from Nicholas Eberstadt at the American Enterprise Institute.

As far as I’m concerned, the key factoid is near the end, where he points out that we would have 10 million additional working-age men productively employed if the rate of employment today was the same as it was in 1965.

And that’s largely the fault of government programs – such as unemployment insurancedisabilityObamacarelicensing, etc – that make it easier for people to choose to be unproductive.

Speaking of which, let’s close with some excerpts from one of Jason Riley’s columns in the Wall Street Journal.

Peter Cove dropped out of a graduate program at the University of Wisconsin-Madison more than 50 years ago to enlist in Lyndon Johnson’s War on Poverty. These days, he’s fighting a war on dependency. …Mr. Cove moved to New York in 1965 to work for the city’s new Anti-Poverty Operations Board… Mr. Cove…noticed… “The government’s unprecedented expenditures failed to bring about the decline in poverty that Johnson had promised. Instead, they made things worse.” Between 1962 and 2012, the percentage of the U.S. population receiving government assistance in the form of cash transfers almost doubled to 21% from 11.7%. …Between 1965 and 2011, the official poverty rate was essentially flat, while government spending per person on poverty programs rose by more than 900% after inflation. “…But as welfare spending soared, the decline in poverty came to a grinding halt.” …Mr. Cove…came to understand that the answer to poverty is prosperity, that the private sector is the better generator of prosperity, and that the best antipoverty program is a job. “Not only does big government get in the way when it provides disincentives to work, it also has a profoundly negative effect on community,”… The increase in government dependency that Mr. Cove laments predates President Obama by decades, but it did accelerate on Mr. Obama’s watch.

Great points, particularly about how the welfare state actually undermined progress on reducing poverty and also eroded societal capital.

All of which is captured in this Wizard-of-Id satire.

P.S. Some honest leftists admit that the welfare state has caused collateral damage.

Swamp-Creature Republicans Think They Can Atone for a Spending Binge with a Hollow (and Sure-to-Lose) Vote for the Wrong Version of a Constitutional Amendment

Sat, 04/07/2018 - 12:50pm

My major long-run project during Obama’s presidency was to educate Republicans in Washington about the need for genuine entitlement reform. I explained to them that the United States was doomed, largely because of demographics, to suffer a Greek-style fiscal future if we left policy on autopilot.

Needless to say, I didn’t expect any positive reforms while Obama was in the White House.

Instead, I proselytized for fiscal sanity in hopes that the GOP might be willing to fix our fiscal mess if they had total control of the White House and Congress after the 2016 election.

And it seemed like things were moving in the right direction.

After they took power in 2010, House Republicans repeatedly voted for budget resolutions that included meaningful changes to MedicaidMedicare, and Obamacare, as well as reductions in wasteful pork-barrel spending. And after the 2014 GOP landslide, Senate Republicans also voted for a budget resolution that assumed good reform.

Then we got the unexpected Trump victory in 2016 and Republicans held all the levers of power starting in 2017.

Sounds like good news for advocates of spending restraint, right?

That may be true in some alternative universe, but that’s definitely not the case in Washington.

As I warned before the election, President Trump is a big-government Republican. And a majority of congressional GOPers, after years of chest beating about the importance of spending restraint, suddenly have decided that the swamp is really a hot tub.

In 2017, my main gripe was that Republicans committed a sin of omission. They had power and didn’t adopt good reforms.

In 2018, they shifted to a sin of commission, voting to bust the spending caps as part of an orgy of new spending.

And guess what they want to do for an encore?

In the ultimate add-insult-to-injury gesture, Republicans (at least the ones in the House) are hoping voters will overlook their profligacy because they’re going to have a symbolic vote on a poorly drafted version of a balanced budget amendment.

The House is slated to vote next week on a balanced budget amendment to the Constitution… The decision to bring the measure — which would require Congress not to spend more than it brings in — to the floor comes just weeks after the passage of a $1.3 trillion spending package that is projected to add billions to the deficit. …The measure has virtually no chance of becoming law as it would need Democratic support in the Senate and ratification from the majority of states.

This is insulting.

These clowns vote to expand the burden of spending and now they want to hoodwink voters with a sham vote for something that has no chance of happening (an amendment requires two-thirds support from both the House and Senate, and then would require ratification from three-fourths of state legislatures).

Do they really think we’re that stupid?!?

To make matters worse, they’re not even proposing a good version of an amendment. Here’s the core provision of H.J. Res 2.

Section 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a rollcall vote.

Sound reasonable and innocuous, but I’ve been telling folks on Capitol Hill this is the wrong approach. I pointed out that 49 out of 50 states have some form of balanced budget requirement, yet that doesn’t stop states such as IllinoisCalifornia, and New Jersey from over-taxing and over-spending, or from accumulating more debt.

I also explained that the so-called Maastricht rules in the European Union operate in a similar fashion, yet that hasn’t stopped nations such as GreeceFrance, and Italy from over-taxing and over-spending, or from accumulating more debt.

The problem, I explained, is that anti-deficit rules simply give politicians an excuse to raise taxes (which leads to more spending and more red ink, but I don’t think that causes many sleepless nights for elected officials).

If Republicans are going to go through the trouble of having a phony and symbolic vote, they should at least craft a good amendment. In other words, they should rally behind some sort of spending cap modeled after what exists in Switzerland and Hong Kong. They could even use Representative Kevin Brady’s widely praised MAP Act as a template.

A spending cap is far superior to a balanced-budget rule for two reasons.

  1. A spending cap puts the focus on the real problem of excessive growth of government. And if you impose some sort of cap that complies with the Golden Rule, you simultaneously address the real problem of too much spending and the symptom of red ink.
  2. A spending cap is much easier to enforce since politicians know that spending can only increase each year by, say 2 percent. A balanced-budget rule, by contrast, is inherently unstable and unworkable because annual revenues can jump or fall significantly depending on economic conditions.

And it’s not just me saying this. Even left-leaning international bureaucracies such as the International Monetary Fund (twice), the European Central Bank, and the Organization for Economic Cooperation and Development (twice) have acknowledged that spending caps are the only effective fiscal rule.

At the risk of stating the obvious, Republican politicians are behaving in a despicable fashion.

So you can understand my caustic and frustrated responses in this recent interview with Charles Payne. I’m upset because it’s quite likely that Trump’s spending splurge eventually is going to lead to higher taxes.

I pointed out in the interview that Trump was in a position of power. He could have won the budget fight if he was willing to play hardball with a shutdown.

And I also explained that there shouldn’t be a Washington infrastructure plan for the simple reason that we shouldn’t have a federal Department of Transportation.

Which State Will Be the First to Suffer Fiscal Collapse?

Fri, 04/06/2018 - 12:11pm

I’m a big fan of federalism because states have the flexibility to choose good policy or bad policy.

And that’s good news for me since I get to write about the consequences.

One of the main lessons we learn (see herehereherehere, and here) is that high-earning taxpayers tend to migrate from states with onerous tax burdens and they tend to land in places where there is no state income tax (we also learn that welfare recipients move to states with bigger handouts, but that’s an issue for another day).

In this interview with Stuart Varney, we discuss whether this trend of tax-motivated migration is going to accelerate.

I mentioned in the interview that restricting the state and local tax deduction is going to accelerate the flight from high-tax states, which underscores what I wrote earlier this year about that provision of the tax bill being a “big [expletive deleted] deal.”

I suggested that Stuart create a poll on which state will be the first to go bankrupt.

And there’s a lot of data to help people choose.

Technically, I don’t think bankruptcy is even possible since there’s no provision for such a step in federal law.

But it’s still an interesting issue, so I decided to create a poll on the question. To make it manageable, I limited the selection to 10 states, all of which rank poorly in one or more of the surveys listed above. And, to avoid technical quibbles, the question is about “fiscal collapse” rather than bankruptcy, default, or bailouts. Anyhow, as they say in Chicago, vote early and vote often.

P.S. I asked a similar question about bankruptcies in developed nations back in 2011. Back then, it appeared Portugal might be the right answer. Today, I’d pick Italy.

Keynesian Economics and Transitory, Beggar-Thy-Neighbor Stimulus

Thu, 04/05/2018 - 12:57pm

When I give speeches on Keynesian economics, I usually begin with a theoretical discussion on why consumer spending is a consequence of growth rather than the cause of growth.

I then focus on two reasons to be skeptical about borrow-and-spend schemes to artificially boost growth.

  • In the short run, it makes no sense to “stimulate” an economy by borrowing from one group of people and giving the money to another group of people. It’s like trying to become richer by taking money out of your left pocket and putting it in your right pocket.
  • In the long run, so-called stimulus creates a ratchet effect for larger government since politicians rarely obey Keynes’ admonition to cut back on government spending and run surpluses when the economy is in an expansion phase.

But I oftentimes include a caveat when discussing the first point.

It is possible, I hypothesize, to increase your short-run consumption if you take money out of a foreigner’s left pocket and put it in your right pocket.

I hasten to add that this is probably not a wise course of action since the money may be squandered and you simply wind up further in debt, but I admit that the short-run consumption data will be better.

Well, there’s a new academic study on exactly this issue from the European Stability Mechanism (sort of an IMF for eurozone countries).

Here’s what the authors decided to investigate.

In this paper, we argue that there is a natural and largely unexplored connection between fiscal multipliers and the foreign holdings of public debt. The intuition is simple….fiscal expansions can…have crowding-out effects on the domestic private sector. Probably the most important among the latter is that the resources used by the domestic private sector to acquire public debt can detract from consumption and investment. This implies that the crowding-out effect of fiscal expansions is likely to be stronger when they are financed by selling public debt to domestic (as opposed to foreign) residents.

Here’s some of the data on foreign holdings of national debt.

Our data on foreign holdings of public debt reveals interesting patterns. First of all, there is significant variation across countries: in some countries, such as Canada and Japan, the share of public debt held by foreigners is consistently low, whereas in others, such as Finland and Austria, foreigners hold more than 75% of public debt towards the end of the sample. Over time, in line with the rise of financial globalization, the general pattern is one of increasing public debt in the hands of foreigners. In the United States, for instance, the share of public debt held by foreigners has increased from less than 5% in the 1950s to close to 50% today.

And here’s a chart from the study showing how foreign holdings of U.S. government debt have increased over time.

And their conclusions, after crunching all the numbers, is that nations can boost short-run consumption if a significant share of new debt is financed by foreigners.

Our main result is that, consistent with the previous argument, the estimated size of fiscal multipliers is increasing in the share of public debt that is in the hands of foreigners. This result holds both for the United States during the postwar period, and for a panel of advanced (OECD) economies over the last few decades. …We find that the average foreign share, i.e., the share of public debt held by foreigners before a fiscal shock, …reflect capital inflows, which help finance fiscal expansions thereby minimizing their crowding-out effects on domestic investment.

Incidentally, the authors acknowledge that this creates a beggar-thy-neighbor effect.

Our findings…point to a potentially negative spillover: to the extent that fiscal expansions are financed via foreign borrowing, their crowding-out effects are exported and consumption and investment are reduced elsewhere.

In other words, any transitory benefit one country experiences will be offset by losses elsewhere.

But politicians barely care about their own voters, much less those who live in other countries, so that certainly would not be an effective argument against Keynesian spending binges.

For what it’s worth, I still think the most persuasive argument is that Keynesian economics has an awful track record, even if there’s some ability to shift part of the short-run cost onto foreigners. After all, ask Keynesians to identify an example of successful government stimulus.

And let’s not forget that the long-run costs are always negative because larger government sectors necessarily lead to smaller productive sectors.

P.S. I feel somewhat guilty for writing a column that acknowledges a potential benefit (albeit transitory and unneighborly) of Keynesian economics, so allow me to expiate my sins by sharing this comparison of Keynesian economics and Austrian economics.

For what it’s worth, I think the Austrians over-emphasize the importance of interest rates. But there’s no question they are much closer to the truth than the Keynesians.

P.P.S. If you want to enjoy some cartoons about Keynesian economics, click herehere, here, and here. Here’s some clever mockery of Keynesianism. And here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

Trump’s Failing Grade on Trade Threatens His Overall GPA on Economic Policy

Wed, 04/04/2018 - 12:08pm

explained last month that the World Trade Organization’s dispute-resolution mechanism is the best way of discouraging China from short-sighted mercantilist and cronyist trade policies.

The Trump Administration, though, thinks that the best response to bad Chinese trade policy is to adopt bad American trade policy.

In this interview, I fret that tit-for-tat protectionism is bad, and might even lead to a 1930s-style trade war.

The Wall Street Journal also is concerned, opining this morning about Trump’s self-destructive protectionism.

Stocks have given up their earlier gains since the President unveiled his protectionist trade agenda…the main policy concern is the new uncertainty from rising trade tension. China slapped punitive tariffs on 128 categories of American goods on Monday in retaliation for the Trump Administration’s national-security levies on steel (25%) and aluminum (10%) imports last month. …it sends a pointed message that a larger trade war would hurt American businesses, farmers in particular. …China’s retaliation is best understood as an economic and political demonstration, hitting a small number of products to signal where future blows could fall if the Trump Administration imposes punitive tariffs on $60 billion in Chinese goods to punish the theft of intellectual property. It’s notable that both Republican-leaning and Democratic states were hit. Tariffs on America’s biggest exports to China, such as soybeans and Boeing aircraft, were held in reserve. But don’t be surprised if they’re on the list if the President imposes Section 301 tariffs as he has vowed to do. …there will be significant collateral damage to innocent business bystanders, American consumers, and the overall U.S. economy. Mr. Trump risks undermining the policy gains from tax reform and deregulation that have teed up the economy for faster growth.

Amen, especially that last sentence.

As I warned in the interview, Trump is sabotaging the progress he made on tax policy and regulation.

Not a smart move since he likes to use the stock market as a report card on his performance. Live by the Dow Jones, die by the Dow Jones. Though, in this case, his protectionism means he wants to commit suicide by the Dow Jones.

Speaking of report cards, here’s a mock report card I created for the President. It’s not as amusing as the mock college transcript from Obama’s time at Columbia, but it highlights how bad policy – on spending as well as trade – is offsetting good policy.

It’s a bit different from the grades I gave on the one-year anniversary of Trump’s inauguration, but more time has passed.

P.S. In the section for “teacher comments,” I suggested that the President needs extra tutoring to understand that a capital surplus (the flip side of a trade deficit) is generally a very positive indicator.

P.P.S. Let’s not forget that Trump is also threatening to deep-six NAFTA, so there are multiple threats to open global trade.

Privatization Options for the Scandal-Plagued Veterans Administration

Tue, 04/03/2018 - 12:51pm

I try not to pay much attention to the staffing decisions of President Trump’s “Boston-phone-book presidency.” Yes, I realize those choices are important, but my focus is policy.

As such, I don’t have any strong opinions on the ouster of David Shulkin, the now-former Secretary at the Department of Veterans Affairs. But I definitely have something to say about whether America’s military vets should be consigned to an inefficient (at best) and costly form of government-run healthcare.

We should never forget that the VA put vets on secret – and sometimes fatal – waiting lists. And then the bureaucrats awarded themselves big bonuses. That is horribly disgusting.

By the way, the VA scandals haven’t stopped.

Here are some excerpts from a report in USA Today.

A USA TODAY investigation found the VA — the nation’s largest employer of health care workers — has for years concealed mistakes and misdeeds by staff members entrusted with the care of veterans. …In some cases, agency managers do not report troubled practitioners to the National Practitioner Data Bank, making it easier for them to keep working with patients elsewhere. The agency also failed to ensure VA hospitals reported disciplined providers to state licensing boards. In other cases, veterans’ hospitals signed secret settlement deals with dozens of doctors, nurses and health care workers that included promises to conceal serious mistakes — from inappropriate relationships and breakdowns in supervision to dangerous medical errors – even after forcing them out of the VA. …The VA has been under fire in recent years for serious problems, including revelations of life-threatening delays in treating veterans in 2014 and efforts to cover up shortfalls by falsifying records.

So what’s the answer? How can we fix a dysfunctional bureaucracy?

The honest answer is that we can’t. Inefficiency, sloth, and failure are inherent parts of government (yes, the free market also is far from perfect, but at least there’s a profit-and-loss incentive that rewards good firms and punishes bad ones).

So it’s time to get the private sector involved. Though I noted in the TV discussion that not all privatization is created equal. If the government simply contracts with selected healthcare providers, that could be a recipe for cronyism since politicians would try to help their campaign contributors.

I much prefer the advance-funding model developed by Chris Preble and Michael Cannon, which would give active-duty service members added money, up front, to purchase a benefits package to cover future costs related to their military service.

For what it’s worth, former VA Secretary Shulkin, in a recent column for the New York Times, was very critical of privatization. But it isn’t clear whether he was referring to the contracted-out version or the advance-funding version.

I am convinced that privatization is a political issue aimed at rewarding select people and companies with profits, even if it undermines care for veterans. …individuals, who seek to privatize veteran health care as an alternative to government-run V.A. care, unfortunately fail to engage in realistic plans regarding who will care for the more than 9 million veterans who rely on the department for life-sustaining care. …privatization leading to the dismantling of the department’s extensive health care system is a terrible idea.

But even if you accept that he’s criticizing the less-preferred from or privatization, he definitely likes throwing rocks in a giant glass house considering the VA received ever-larger amounts of money and generated a horrible track record.

As I said at the end of my interview, a private healthcare provider might get a contract via cronyism, but it still would be a better option for vets since that company presumably wouldn’t let them die on secret waiting lists.

And since the advance-funding option obviously would be for future veterans, we do need a better market-based approach for current veterans.

I’ll close by sharing a Politico article on the infamous boondoggle that got Shulkin in trouble.

Veterans Affairs Secretary David Shulkin’s chief of staff altered an email to create a pretext for taxpayers to pay for Shulkin’s wife to accompany him on a 10-day trip to Europe last summer, the agency’s inspector general reported… The report by Inspector General Michael Missal also claims that Shulkin improperly accepted a gift of Wimbledon tickets during the trip, and a VA employee’s time was misused planning tourist activities for Shulkin and his entourage. …the VA paid for Shulkin’s wife’s airfare, which cost more than $4,300.

This obviously does not reflect well on Shulkin. But the real scandal almost certainly is that the trip to Europe occurred. We don’t know how many bureaucrats participated and what supposedly was going to be achieved by this junked, but I’m guessing the total tab was enormous and the total value was zero. The fact that taxpayers also were saddled with the cost of Shulkin’s wife’s trip merely added insult to injury.

P.S. Since money isn’t unlimited, I think the focus should be on helping veterans injured in battle rather than providing lavish benefits to anyone and everyone who ever wore a uniform.

P.P.S. I mentioned in the interview that the VA is run for the benefit of its bureaucrats. If you doubt me, check out this double-dipping bureaucrat with the triple-dipping scam.

The Statism-Generated Misery of Venezuela, Captured in Four Videos

Mon, 04/02/2018 - 12:22pm

Yesterday’s column looked at the continued government-caused decay of Venezuelan society. To put it mildly, it’s a very sad story of how pervasive statism can destroy a country.

I also wondered whether leftists such as Bernie Sanders, Michael Moore, and Jeremy Corbyn will ever change their minds and (hopefully) apologize for giving aid and comfort to the evil Chavez-Maduro regime. (I’m not holding my breath.)

Today, let’s revisit the issue.

But instead of citing news reports, let’s look at four videos on the tragedy in Venezuela. We’ll start with Reason‘s excellent summary.

I like how the video concludes with a warning that America should avoid the same mistakes.

And that’s not just a throwaway line. Venezuela did not become a basket case overnight. There wasn’t an on-off switch that Chavez or Maduro used to turn the country from capitalism to statism.

Instead, it was the combined effect of decades of bad policy decisions.

In other words, gradual deterioration eventually turned into major disaster. Which may help explain why I’m so distressed about the creeping statism of the Bush and Obama (and perhaps Trump) years.

But I’m digressing. Let’s get back to the videos. Our next item is a report from the New York Times. It’s disappointing (but not overly surprising) that there’s no mention of the big-government policies that have reduced people to scouring for garbage, but you will learn about the horror of daily life for the poor.

Our next video, from Prager University, is a very straightforward description of how socialism has destroyed Venezuela.

I especially like how she concludes with a warning about how big government erodes societal capital, which then makes it very hard to restored liberty.

And the part about classifying involuntary weight loss as the “Maduro Diet” also was a highlight, at least if you like dark humor.

Our last video is an excerpt from a speech by a Venezuelan economist.

The part that grabbed my attention was the downward cycle of government-created inflation and government-imposed minimum-wage hikes. One bad policy leading to another bad policy, over and over again. Lather, rinse, repeat.

And while he doubtlessly exaggerated when he said that every single person in Venezuela would be happy to eat out of America’s trash cans, it’s still horrifying that a big chunk of the population would welcome such an opportunity.

So where will all this lead? At the start of the year, I expressed hope that the people of Venezuela would rise up and overthrow their tyrannical government. I don’t know if I should turn that hope into a prediction, but it certainly seems like it is only a matter of time before something dramatic happens.

From Bad to Worse: The Ongoing Implosion of Venezuelan Statism

Sun, 04/01/2018 - 12:13pm

As far as I’m concerned, everything you need to know about capitalism vs. statism is captured in this chart comparing per-capita economic output in Chile and Venezuela.

Ask yourself which country offers more opportunity, especially for the poor? The obvious answer is Chile, where poverty has rapidly declined ever since the country shifted to free enterprise. In Venezuela, by contrast, poor children die of malnutrition thanks to pervasive interventionism.

Indeed, having shared several horrifying stories of human suffering and government venality from Venezuela (including 28 separate examples in April 2017 and 28 different separate examples in December 2017), I’ve reached the point where nothing shocks me.

So now I mostly wonder whether leftist apologists feel any shame when they see grim news from that statist hellhole.

For instance, what does Joe Stiglitz think about this report from the Miami Herald?

At 16, Liliana has become the mother figure for a gang of Venezuelan children and young adults called the Chacao, named after the neighborhood they’ve claimed as their territory. The 15 members, ranging in age from 10 to 23, work together to survive vicious fights for “quality” garbage in crumbling, shortage-plagued Venezuela. Their weapons are knives and sticks and machetes. The prize? Garbage that contains food good enough to eat. …A year ago, the gang was “stationed” around a supermarket at a mall called Centro Comercial Ciudad Tamanaco that generates tons of garbage. But a feared rival gang from the neighborhood Las Mercedes also wanted the garbage.

And what does Bernie Sanders think about this story from NPR?

The Pharmaceutical Federation of Venezuela estimates the country is suffering from an 85 percent shortage of medicine amid an economic crisis… The entire Venezuelan health care system is on the verge of collapse, says Francisco Valencia, head of the public health advocacy group Codevida. Some hospitals lack electricity, and more than 13,000 doctors have left Venezuela in the past four years in search of better opportunities. “They don’t give food to the patients in the hospital…” Government data shows infant mortality rose by 30 percent in 2016… The International Monetary Fund predicts inflation will soar to 13,000 percent this year and the economy will shrink by 15 percent. …The monthly minimum wage for many Venezuelans is now equal to $3, according to the AP. …Maduro blames the country’s growing crisis on…the U.S…leading an effort to wipe out socialism in Venezuela.

I’d be curious to know what Michael Moore thinks about this news from CNN?

Venezuela’s devastating food crisis means wheat flour has become a rare commodity in the country. Some churches have run out of the ingredient needed to make the sacramental bread that is central to celebrating the Holy Eucharist… So, members of the Catholic diocese of Cúcuta, Colombia, braved heavy rain this week to deliver the wafers over a bridge that connects the two countries… Venezuela’s economic crisis, fueled by a decline in oil production, shows no signs of improvement.People are starving because of routine food shortages. They are dying in hospitals because basic medicine and equipment aren’t available.

And what does Jeremy Corbyn think about this Bloomberg report?

Ruiz’s weekly salary of 110,000 bolivares — about 50 cents at the black-market exchange rate — buys him less than a kilo of corn meal or rice. His only protein comes from 170 grams of canned tuna included in a food box the government provides to low-income families. It shows up every 45 days or so. “I haven’t eaten meat for two months,” he said. …Hunger is hastening the ruin of Venezuelan’s oil industry as workers grow too weak and hungry for heavy labor. With children dying of malnutrition and adults sifting garbage for table scraps, food has become more important than employment, and thousands are walking off the job. …Venezuela, a socialist autocracy that once was South America’s most prosperous nation, is suffering a collapse almost without precedent.

Or how about getting Sean Penn‘s reaction to this story from the New York Times?

For the past three weeks, Wilya Hernández, her husband and their daughter, 2, have been sleeping on the garbage-strewn streets of Cúcuta, a sprawling and chaotic city on Colombia’s side of the border with Venezuela. Though Antonela, the toddler, often misses meals, Ms. Hernández has no desire to return home to Venezuela. …“I sold my hair to feed my girl,” Ms. Hernández said, pulling back her locks to reveal a shaved head underneath, adding that wigmakers now walk the plazas of Cúcuta where many Venezuelans congregate, wearing signs advertising that they give cash for hair. …“If I can’t afford to go the bathroom, I’ll go on the street,” Ms. Hernández added. “That’s when guys walking by say creepy things.”

I wonder if Noam Chomsky has any comments about this Washington Post story?

A friend recently sent me a photograph…, just a blurry cellphone shot of trash… And yet I can’t stop thinking about it, because strewn about in the trash are at least a dozen 20-bolivar bills, small-denomination currency now so worthless even looters didn’t think it was worth their time to stop and pick them up. …according to the “official” exchange rate, …each of those bills is worth $2. In fact, as Venezuela sinks deeper…into…hyperinflation…, bolivar banknotes have come to be worth basically nothing: Each bill is worth about $0.0001 at the current exchange rate… It’s easy to see why the thieves left them behind.

Last but not least, I wonder what Jesse Jackson thinks about this news from the U.K.-based Guardian?

More than half of young Venezuelans want to move abroad permanently, after food shortages, violence and a political crisis escalated to new extremes in 2017, according to a new survey. Once Latin America’s richest country, Venezuela’s economy is now collapsing… One of the most painful effects of the current crisis has been widespread hunger. In 2015, when inflation and food shortages were well below current levels, nearly 45% of Venezuelans said there were times when they were unable to afford food; in the latest study, that figure had risen to 79% – one of the highest rates in the world. …Norma Gutiérrez, a radiologist in eastern Caracas, is one of those…would-be migrants. Acute shortages in the hospital where she works depress her, and she says the idea of emigrating crosses her mind at least once a week.

By the way, in an example of unintended humor, the Socialist Party of Great Britain has a ready-made answer to all those questions. The misery is the fault of capitalism. I’m not kidding.

And folks on the establishment left occasionally try to imply that it’s all the result of falling oil prices.

Two years ago, I concocted a visual showing the “Five Circles of Statist Hell” and speculated that Venezuela was getting close to the fourth level. Though I still don’t think it’s nearly as bad as North Korea.

The Bill of Rights, Gun Ownership, and the Constitution

Sat, 03/31/2018 - 12:09pm

I don’t own an AR-15. I’m not a “gun person,” whatever that means. I hardly ever shoot. And I never hunt.

But I’m nonetheless a big supporter of private gun ownership. In part, this is because I have a libertarian belief in civil liberties. In other words, my default assumption is that people should have freedom (the notion of “negative liberty“), whereas many folks on the left have a default assumption for that the state should determine what’s allowed.

I also support private gun ownership because I want a safer society. Criminals and other bad people are less likely to engage in mayhem if they know potential victims can defend themselves. And I also think that there’s a greater-than-zero chance that bad government policy eventually will lead to periodic breakdowns of civil society, in which case gun owners will be the last line of defense for law and order.

I’m sometimes asked, though, whether supporters of the 2nd Amendment are too rigid. Shouldn’t the NRA and other groups support proposals for “common-sense gun safety”?

Some of these gun-control ideas may even sound reasonable, but they all suffer from a common flaw. None of them would disarm criminals or reduce gun crime. And I’ve detected a very troubling pattern, namely that when you explain why these schemes won’t work, the knee-jerk response from the anti-gun crowd is that we then need greater levels of control. Indeed, if you press them on the issue, they’ll often admit that their real goal is gun confiscation.

Though most folks in leadership positions on the left are crafty enough that they try to hide this extreme view.

So that’s why – in a perverse way – I want to applaud John Paul Stevens, the former Supreme Court Justice, for his column in the New York Times that openly and explicitly argues for the repeal of the 2nd Amendment.

…demonstrators should…demand a repeal of the Second Amendment. …that amendment…is a relic of the 18th century. …to get rid of the Second Amendment would be simple and would do more to weaken the N.R.A.’s ability to stymie legislative debate and block constructive gun control legislation than any other available option. …That simple but dramatic action would…eliminate the only legal rule that protects sellers of firearms in the United States.

The reason I’m semi-applauding Stevens is that he’s an honest leftist. He’s bluntly urging that we jettison part of the Bill of Rights.

Many – if not most – people on the left want that outcome. And a growing number of them are coming out of the pro-confiscation closet. In an article for Commentary, Noah Rothman links to several articles urging repeal of the 2nd Amendment.

They’re talking about repealing the Second Amendment. It started with former Supreme Court Justice John Paul Stevens and George Washington University Law Professor Jonathan Turley. …Turley and Stevens were joined this week by op-ed writers in the pages of Esquire and the Seattle Times. Democratic candidates for federal office have even enlisted in the ranksvvvvvvvv of those calling for an amendment to curtail the freedoms in the Bill of Rights. …anti-Second Amendment themes…have been expressed unashamedly for years, from liberal activists like Michael Moore to conservative opinion writers at the New York Times.  Those calling for the repeal of the right to bear arms today are only echoing similar calls made years ago in venues ranging from Rolling Stone, MSNBC, and Vanity Fair to the Jesuit publication America Magazine.

But others on the left prefer to hide their views on the issue.

Indeed, they even want to hide the views of their fellow travelers. Chris Cuomo, who has a show on MSNBC, preposterously asserted that nobody supports repeal of the 2nd Amendment.

this is a lot of bunk. no one calling for 2A repeal. stop with the bogeymen. we need to stop the shootings and have a rational conversation about what can be done. https://t.co/P2MYoY4EtO

— Christopher C. Cuomo (@ChrisCuomo) March 28, 2018

It’s also worth noting that Justice Stevens got scolded by a gun-control advocate at the Washington Post.

One of the biggest threats to the recovery of the Democratic Party these days is overreach. …But rarely do we see such an unhelpful, untimely and fanciful idea as the one put forward by retired Supreme Court justice John Paul Stevens. …Stevens calls for a repeal of the Second Amendment. The move might as well be considered an in-kind contribution to the National Rifle Association, to Republicans’ efforts to keep the House and Senate in 2018, and to President Trump’s 2020 reelection bid. In one fell swoop, Stevens has lent credence to the talking point that the left really just wants to get rid of gun ownership. …This is exactly the kind of thing that motivates the right and signals to working-class swing voters that perhaps the Democratic Party and the political left doesn’t really get them.

The bottom line is that the left’s ultimate goal is gutting the 2nd Amendment. Not much doubt of that, even if some leftists are politically savvy enough to understand that their extremist policy is politically suicidal.

But let’s set aside the politics and look at the legal issues. There’s another reason why I’m perversely happy about the Stevens oped. Even though he was on the wrong side of the case, he effectively admits that the 2008 Heller decisionenshrined and upheld the individual right to own firearms.

And the five Justices who out-voted Stevens made the right decision. I’m not a legal expert, so I’ll simply cite some people who are very competent to discuss the issue. Starting with what Damon Root wrote for Reason.

One problem with Stevens’ position is that he is dead wrong about the legal history. …For example, consider how the Second Amendment was treated in St. George Tucker’s 1803 View of the Constitution of the United Stateswhich was the first extended analysis and commentary published about the Constitution. For generations of law students, lawyers, and judges, Tucker’s View served as a go-to con-law textbook. …He observed the debates over the ratification of the Constitution and the Bill of Rights as they happened. And he had no doubt that the Second Amendment secured an individual right of the “nonmilitary” type. “This may be considered as the true palladium of liberty,” Tucker wrote of the Second Amendment. “The right of self-defense is the first law of nature.” In other words, the Heller majority’s view of the Second Amendment is as old and venerable as the amendment itself.

Well stated.

Though the real hero of this story is probably Joyce Lee Malcolm, the scholar whose work was instrumental in producing the Heller decision. John Miller explainsfor National Review.

Malcolm looks nothing like a hardened veteran of the gun-control wars. Small, slender, and bookish, she’s a wisp of a woman who enjoys plunging into archives and sitting through panel discussions at academic conferences. Her favorite topic is 17th- and 18th-century Anglo-American history… She doesn’t belong to the National Rifle Association, nor does she hunt. …She is also the lady who saved the Second Amendment — a scholar whose work helped make possible the Supreme Court’s landmark Heller decision, which in 2008 recognized an individual right to possess a firearm.

Ms. Malcolm started as a traditional academic.

For her dissertation, she moved to Oxford and Cambridge, with children in tow. …Malcolm’s doctoral dissertation focused on King Charles I and the problem of loyalty in the 1640s… The Royal Historical Society published her first book.

But her subsequent research uncovered some fascinating insights about the right to keep and bear arms.

At a time when armies were marching around England, ordinary people became anxious about surrendering guns. Then, in 1689, the English Bill of Rights responded by granting Protestants the right to “have Arms for their Defence.” Malcolm wasn’t the first person to notice this, of course, but as an American who had studied political loyalty in England, she approached the topic from a fresh angle. “The English felt a need to put this in writing because the king had been disarming his political opponents,” she says. “This is the origin of our Second Amendment. It’s an individual right.” …Fellowships allowed her to pursue her interest in how the right to bear arms migrated across the ocean and took root in colonial America. “The subject hadn’t been done from the English side because it’s an American question, and American constitutional scholars didn’t know the English material very well,” she says. …The Second Amendment, she insisted, recognizes an individual right to gun ownership as an essential feature of limited government. In her book’s preface, she called this the “least understood of those liberties secured by Englishmen and bequeathed to their American colonists.”

And it turns out that careful scholarship can produce profound results.

…in 2008, came Heller, arguably the most important gun-rights case in U.S. history. A 5–4 decision written by Scalia and citing Malcolm three times, it swept away the claims of gun-control theorists and declared that Americans enjoy an individual right to gun ownership. “…it gave us this substantial right.” She remembers a thought from the day the Court ruled: “If I have done nothing else my whole life, I have accomplished something important.” …the right to bear arms will not be infringed — thanks in part to the pioneering scholarship of Joyce Lee Malcolm.

Let’s close with a video from Prager University, narrated by Eugene Volokh, a law professor at UCLA. He explains the legal and historical meaning of the 2nd Amendment.

In other words, the bottom line is that the Justice Stevens and other honest leftists are right. The 2nd Amendment would need to be repealed in order to impose meaningful gun control.

And I suppose it’s also worth mentioning that it won’t be easy to ban and confiscate guns if they ever succeeded in weakening the Bill of Rights. But, hopefully, we’ll never get to that stage.

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