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CF&P Foundation Policy Brief Reviews the Renewable Fuel Standard

Mon, 09/28/2020 - 3:31pm

Center for Freedom and Prosperity Foundation

For Immediate Release
Tuesday, September 28, 2020
202-285-0244

www.freedomandprosperity.org

CF&P Foundation Policy Brief Reviews the Renewable Fuel Standard

The RFS has failed to achieve the stated goals from its enactment

(Washington, D.C., Monday, September, 2020) The Center for Freedom and Prosperity Foundation released today a new Policy Brief paper that reviews the evidence on the Renewable Fuel Standard. The paper finds that the RFS has not advanced the stated policy goals, environmental improvements and energy independence, of those who enacted it.

Regarding the environment, the paper notes that expectations that conventional corn ethanol would give way to more advanced biofuels have not become reality. Instead, increasing corn production has led to a number of negative economic consequences. Economically, RFS is found to introduce market distortions that harm consumers and refiners, and does not advance energy independence.

Link to the paper: http://freedomandprosperity.org/2020/publications/the-renewable-fuel-standard-and-its-challenges/

PDF Download: http://www.freedomandprosperity.org/files/PolicyBriefs/CFP_PolicyBrief_Renewable_Fuel_Standard.pdf

For additional comments:

Andrew Quinlan, President, can be reached at 202-285-0244, [email protected]
Brian Garst, Vice President, can be reached at [email protected]

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Kudos to Trump and Biden for Aggressive Tax Avoidance

Mon, 09/28/2020 - 12:42pm

Washington is a cesspool of waste, fraud, and abuse.

All taxpayers, to avoid having their income squandered in D.C., should go above and beyond the call of duty to minimize the amount they send to the IRS.

Which is why today’s column is a bipartisan love fest for Donald Trump and Joe Biden – both of whom have been very aggressive in limiting their tax liabilities.

Here are some details from the report in the New York Times about Trump’s leaked tax returns.

Donald J. Trump paid $750 in federal income taxes the year he won the presidency. In his first year in the White House, he paid another $750. He had paid no income taxes at all in 10 of the previous 15 years — largely because he reported losing much more money than he made. …His reports to the I.R.S. portray a businessman who takes in hundreds of millions of dollars a year yet racks up chronic losses that he aggressively employs to avoid paying taxes. …They report that Mr. Trump owns hundreds of millions of dollars in valuable assets, but they do not reveal his true wealth. …Most of Mr. Trump’s core enterprises — from his constellation of golf courses to his conservative-magnet hotel in Washington — report losing millions, if not tens of millions, of dollars year after year. …Business losses can work like a tax-avoidance coupon: A dollar lost on one business reduces a dollar of taxable income from elsewhere. The types and amounts of income that can be used in a given year vary, depending on an owner’s tax status. But some losses can be saved for later use, or even used to request a refund on taxes paid in a prior year.

It’s worth noting that the leaked returns didn’t show any unknown business ties to Russia. Nor do they suggest any criminality.

Instead, Trump appears to have relied on using losses in some years to offset income in other years – a perfectly legitimate practice.

Now let’s look at some of what CNBC reported about Joe Biden’s clever tactic to save lots of money.

…consider borrowing a tax-planning tip from Joe Biden. The former vice president…reported about $10 million in income in 2017 from a pair of S-corporations… The two entities were paid for the couple’s book deals and speaking gigs. …both S-corps generated a lot of income, they paid out modest salaries in comparison. …In 2017, the two companies paid the couple a combined $245,833 in wages. …any amounts the Bidens received as a distribution wasn’t subject to the 15.3% combined Social Security and Medicare tax. …Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co. in Milwaukee. “…if you don’t report that income to the business as wages, then that portion of the income avoids Social Security and Medicare taxes,” he said.

So how much did this aggressive strategy save  the family?

The article doesn’t do all the math, but it certainly seems like the Biden household avoided having to cough up any payroll taxes on more than $9.75 million.

There’s a “wage base cap” on Social Security taxes (thankfully), so it’s possible that their tax avoidance only saved them about $283,000 (what they would have paid in Medicare taxes – 2.9 percent rather than 15.3 percent).

But that’s still a nice chunk of change – about four times as much as the average household earned that year.

As far as I’m concerned, we should applaud both Trump and Biden. Tax avoidance is legal. Even more important, it’s the right thing to do.

Though my applause for Biden is somewhat muted because he said in 2008 that paying more tax is patriotic. So he’s guilty of tax hypocrisy, which seems to be a common vice for folks on the left (the ClintonsJohn Kerry, Obama’s first Treasury Secretary, Obama’s second Treasury SecretaryGovernor Pritzker of Illinois, etc).

For all his flaws, at least Trump isn’t a hypocrite on this issue (though all his spending may pave the way for future tax increases).

P.S. Here’s a story about the greatest-ever tactic for escaping taxes.

P.P.S. And here’s my favorite adults-only story about tax avoidance.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

The Renewable Fuel Standard and Its Challenges

Mon, 09/28/2020 - 12:38pm
The Renewable Fuel Standard and Its Challenges

[Download PDF]

September 2020

By Brian Garst

Calling it a matter of national and economic security, President George W. Bush signed the Energy Policy Act of 2005 that included creation of the Renewable Fuel Standard (RFS), or ethanol mandate. Expanded considerably in 2007, the RFS mandates a minimum volume of biofuel, increasing annually until 2022, that must be blended into the nation’s fuel supply by refiners and importers. Beyond 2022 the EPA is authorized to set volume amounts.

The RFS consists of four interrelated mandates with volume requirements specified in the statute: total renewable fuel, total advanced biofuel, cellulosic biofuel, and biomass-based diesel. Cellulosic and biomass-based diesel are both subcategories of advanced biofuel, which also includes a category for other advanced biofuels without a specified requirement. A requirement for conventional biofuels, corn ethanol, is also implied by the difference between the total renewable fuel and advanced biofuel mandates. The statute also provides various production and environmental requirements to qualify as a biofuel under the RFS.

Compliance is managed through a tradable credit system. Renewable identification numbers (RINs) are generated for each gallon of qualifying renewable fuel, which refiners and importers must submit to the EPA to meet their obligations as determined by sales volume and the annual mandates. RINs can either be generated by blending biofuels, remaining attached to them when they are sold, or purchased directly from those with a surplus.

The RFS was intended by its creators to reduce pollution from the use of fossil fuels and help achieve energy independence. In the 15 years of its existence, the RFS has failed to advance its stated purposes while leading to adverse consequences for consumers, refiners, and the environment.

Environmental Damage

Expectations were that the use of conventional corn ethanol would give way over time to more advanced, environmentally friendly biofuels. Technological advancement has failed to cooperate, and producers are overwhelmingly reliant on conventional ethanol to meet the annual total renewable fuel mandate.

Expansion of corn production due to RFS mandates has significant environmental consequences. Damage from life-cycle emissions for conventional ethanol exceed those of gasoline.1

Runoff from nitrogen-rich fertilizers required to grow corn travels the Mississippi River to the Gulf of Mexico where it contributes to an annual hypoxic zone, or “dead zone,” where oxygen levels are so low that it can kill sea life. The dead zone reached a record 8,776 square miles in 2017. Corn and soybeans, a feedstock for biodiesel, are estimated to contribute 52% of the nitrogen load to the Gulf of Mexico from the Mississippi watershed.2

Similar problems plague other regions. A National Wildlife Foundation report notes, “Concurrent to corn’s expansion has been an increase in the intensity and occurrence of annual algal blooms in the Great Lakes… In August 2014 the city of Toledo, Ohio suffered a drinking water shortage affecting half a million residents for three days thanks to the largest toxic algal bloom in Lake Erie ever recorded.”3

For all these and other reasons, such as decreased biodiversity and wildlife habitat loss, a majority of environmentalists have serious concerns with the RFS mandate.4

Economic Effects

The statutory total renewable fuel target has not been met since 2014. The Environmental Protection Agency (EPA) has statutory authority to waive, in part or in whole, the requirements for cellulosic and biomass-based biofuel, and total renewable fuels, when certain conditions are met. It is also required, beginning in 2016, to “reset” the volumes for future years to an unspecified amount when any of the mandates has been waived by at least 20% for two consecutive years or by 50% in one year.

The waiver authority and “reset” recognize that Congress would likely be slower than market participants to respond to new information and changing market conditions, but executive branch officials are still influenced by political concerns and not solely responsive to markets, to the extent the statute allows such considerations. These provisions also contribute to industry uncertainty. Volatility in RIN prices, for instance, is driven in large part because “[u]ncertainty around potential changes to the Renewable Fuel Standard (RFS) … disrupts the logic of the market and creates RINs price movements and volatility not normally seen under similar market conditions.”5

When RIN prices are high, RFS supporters argue, it encourages refiners to blend more biofuel to generate RINs either to meet their obligations or to sell. But this theory ignores the reality that many refiners lack the infrastructure to blend their own biofuel in response to any signal from this dysfunctional market and are beholden to RINs purchases no matter the cost. The unfortunate reality is that when statutory biofuel production requirements exceed market demand it leads to escalating RIN prices that threaten jobs and refining capacity, while increasing costs for consumers.

Additionally, directing corn increasingly toward the production of biofuels, and agriculture toward the production of corn, drives up prices on food and fuel.6

The use of corn as a feedstock for animals means consumers not only pay higher prices for corn and the crops losing acreage to corn production, but also for beef and poultry.

The difference between the expected pace of biofuel development and reality should come as little surprise, as economic developments are hard to predict. As Friedrich Hayek explained in “The Use of Knowledge in Society,” individuals, even large groups of individuals such as lawmakers and regulators, cannot possess the same level of information as exists dispersed throughout all participants of an economy, and thus will struggle to match the efficiency of decentralized resource allocation, much less do so for decades hence. The flexibility built into the statute attempts to mitigate this problem but has not succeeded.

The costs to consumers and producers have not led to the primary economic benefit promised by RFS drafters: energy independence. What gains have been made on that front have been driven by the shale boom’s increases in natural gas production, whereas the disconnect between RFS requirements and market conditions contributes to uncertainty, undermines refining capacity, and increases the costs of energy for consumers.

Political Challenges Remain

The RFS is a source of ongoing political battles between ethanol producers, environmentalists, refiners, oil companies, and consumer advocates. In 2019, President Trump’s EPA approved year-round sale of E15, gasoline with up to 15 percent ethanol, which in 2011 the Obama administration prohibited in summer months to limit smog. 7

EPA historically has used its statutory authority to grant more small refiner exemptions, which courts ruled had been erroneously denied during the Obama administration, relieving some financial pressure on small refineries in the process.

Since gasoline retailers and wholesalers still blend with ethanol the fuel that small refiners produce, with EPA pledging to offset waivers and maintain fuel targets, the exemptions avoid harming the key farming constituency. Future exemptions of this sort are in doubt, making serious EPA commitment to addressing manipulation of the artificial RINs market an even higher priority. Yet, despite being net beneficiaries of these changes, the ethanol industry continues to demand accommodations at the expense of consumers, the environment, and overall economic efficiency.8

Leading up to the 2020 election, President Trump pledged to allow sale of E15 blends through existing infrastructure previously limited to sale of E10 and denied scores of pending waiver requests from small refiners following pressure from farm state legislators.9

These most recent moves from the Trump administration will not resolve the disputes over the RFS. Farmers and the ethanol industry want to expand the RFS while the environmental and economic consequences accumulate. An evaluation of the effects of the RFS suggests the opposite is needed. The Renewable Fuel Standard has not achieved the policy goals for which it was created and requires serious reform if not outright abolition.

Brian Garst is Vice President of the Center for Freedom and Prosperity.

Notes

1. S. Kent Hoekman, Amber Broch, Xiaowei (Vivian) Liu, “Environmental implication of higher ethanol production and use in the U.S.: A literature review. Part I – Impacts on water, soil, and air quality,” Renewable and Sustainable Energy Reviews81, pp. 3140-3158. 

2. William F. Ritter and S. Rao Chitikela, “The Mississippi River Basin Nitrogen Problem: Past History and Future Challenges to Solve It.” In Watershed Management 2020, pp. 109-123. Reston, VA: American Society of Civil Engineers, 2020. 

3. David DeGennaro, “Fueling Destruction: The Unintended Consequences of the Renewable Fuel Standard on Land, Water, and Wildlife,” National Wildlife Foundation. 

4. “New Survey: Vast Majority of Environmentalists Want RFS Corn Ethanol Mandates Reduced,” American Council for Capital Formation, November 11, 2016. http://accf.org/2016/11/11/new-survey-vast-majority-of-environmentalists-want-rfs-corn-ethanol-mandates-reduced/ 

5. Testimony of Paul Niznik, Argus Media, Inc., before the House Energy and Commerce Committee (July 25, 2018), https://docs.house.gov/meetings/IF/IF18/20180725/108610/HHRG-115- IF18-Wstate-NiznikP-20180725.pdf 

6. See GAO, “Renewable Fuel Standard: Information on Likely Program Effects on Gasoline Prices and Greenhouse Gas Emissions,” May 2019. https://www.gao.gov/assets/700/698914.pdf 

7. https://www.reuters.com/article/us-usa-biofuels-ethanol/trump-lifts-curbs-on-e15-gasoline-to-help-farmers-angering-big-oil-idUSKCN1T11BN 

8. See “U.S. Ethanol Giant No Longer Wants to Rely on Trump’s EPA,” Bloomberg Law, August 7, 2020. 

9. https://www.reuters.com/article/usa-election-biofuels/trump-decision-to-cut-refiner-biofuel-waivers-followed-pressure-from-farm-states-sources-idUSL1N2FR2BX 

Keynesian Economics Is Wrong…Again

Sun, 09/27/2020 - 12:32pm

I’ve previously written that Keynesian economics is like Freddy Kreuger. No matter how many times it is killed off by real-world evidence, it comes back to life whenever a politician wants to justify a vote-buying orgy of new spending.

And there will always be Keynesian economists who will then crank up their simplistic models that churn out results predicting that a bigger burden of government spending somehow will produce additional growth.

They never bother to explain why they think draining funds from the private sector is good for growth, of course, or why they think politicians supposedly spend money more wisely than households and businesses.

Nonetheless, there are some journalists who are willing to act as stenographers for their assertions.

In a September 25 story for the Washington Post, Tory Newmyer gives free publicity to Keynesian predictions that the economy will grow faster if Biden wins and then imposes his profligate agenda – which they underestimate to include $7.3 trillion of new spending and $4.1 trillion of new taxes over the next 10 years.

A Democratic sweep that puts Joe Biden in the White House and the party back in the Senate majority would produce 7.4 million more jobs and a faster economic recovery than if President Trump retains power. …Moody’s Analytics economists Mark Zandi and Bernard Yaros…see the higher government spending a Biden administration would approve — for emergency relief programs, infrastructure, and an expanded social safety net — giving the economy a potent injection of stimulus. …while a Biden administration would seek to offset some of his proposed $7.3 trillion in new spending over the next decade with $4.1 trillion in higher taxes on corporations and the wealthy, “the net of these crosscurrents is to boost economic activity,” the economists write.

Here’s one of the charts that was included in the story, which purports to show how bigger government leads to faster growth.

If there was a contest for the world’s most inaccurate economist, Zandi almost surely would win a gold medal.

But his laughable track record is hardly worth mentioning. What matters more is that we have decades of real-world experience with Keynesian economics. And it never works.

It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.

Now let’s look at another example of how Keynesian predictions are wrong.

Professor Casey Mulligan from the University of Chicago analyzed what happened when turbo-charged unemployment benefits recently ended.

July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. …Paul Krugman explained in August that “I’ve been doing the math, and it’s terrifying. . . . Their spending will fall by a lot . . . [and there is] a substantial ‘multiplier’ effect, as spending cuts lead to falling incomes, leading to further spending cuts.” GDP could fall 4 to 5 percent, and perhaps as much as ten percent… Wednesday the Census Bureau’s advance retail-sales report provided our first extensive look at consumer spending in August, which is the first month with reduced benefits (reduced roughly $50 billion for the month). Did consumer spending drop by tens of billions, starting our economy on the promised path toward recession?

Not exactly. As shown in this accompanying chart, “…retail sales increased $3 billion above July.”

Professor Mulligan explains why Keynesian economics doesn’t work in the real world.

Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy. The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total.

Amen.

At best, Keynesian policy enables a transitory boost in consumption, but there’s no increase in production. At the risk of stating the obvious, a nation’s gross domestic income does not increase when the government borrows money from one group of people and redistributes it to another group of people.

P.S. Since today’s topic is Keynesian economics here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining 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.

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Image credit: Marc Nozell | CC BY 2.0.

The Constitution, the Supreme Court, and Judicial Activism

Sat, 09/26/2020 - 12:10pm

Some of my right-wing friends complain about “judicial activism,” which seems to mean that they want courts to defer to other branches of government.

Since I’m opposed to majoritarianism and because I want courts to defend and protect all parts of the Constitution, I put together this visual to illustrate why I think they’ve picked the wrong goal.

This handful of examples is designed to make clear that “activism” is sometimes appropriate.

But not always, which is why constitutionalism should be the right goal.

In a column for Reason, Damon Root gives a good example of what this means.

In 1938 the Supreme Court concocted a bifurcated approach to judicial review that treats some constitutional rights as more equal than others. If a law or regulation infringes on a right that the Court has deemed fundamental (such as freedom of speech or the right to vote), the Court said in United States v. Carolene Products Co., the judiciary should presume that law or regulation to be unconstitutional and subject it to “more exacting judicial scrutiny.” By contrast, in cases dealing with “regulatory legislation affecting ordinary commercial transactions,” Carolene Products stated, “the existence of facts supporting the legislative judgment is to be presumed.” In other words, judges are supposed to tip the scales in favor of lawmakers when economic liberty might be at stake. Now known as the rational-basis test, this rubber stamp approach has led to some truly dreadful judgments. …the rational-basis standard…runs counter to the text and history of the 14th Amendment, which was written, ratified, and originally understood to protect (among other rights) the right to economic liberty. In the words of Rep. John Bingham (R), the Ohio congressman who served as the principal author of Section One of the 14th Amendment in 1866, “the provisions of the Constitution guaranteeing rights, privileges, and immunities” includes “the constitutional liberty…to work in an honest calling and contribute by your toil in some sort to the support of yourself, to the support of your fellow men, and to be secure in the enjoyment of the fruits of your toil.”

Sounds like United States v. Carolene Products Co. ranks up there with Wickard v. Filburn as one of the Supreme Court’s worst decisions.

George Will shares some thoughts on the proper role of the judiciary in his Washington Post column.

For every American, a courtroom should be a level playing field, with the law blind to the “identity, power, and resources of the litigants.” This is not, however, the reality when an individual challenges a statute’s constitutionality. The tilted field favors the government — meaning legislative majorities — because federal jurisprudence invented, and…states have reflexively adopted, the presumption of constitutionality. …In Federalist No. 78, Alexander Hamilton wrote that “the courts were designed to be an intermediate body between the people and the legislature, in order, among other things, to keep the latter within the limits assigned to their authority.” However, the presumption of statutory constitutionality has this practical consequence: Although the members of all three branches of government swear constitutional oaths, legislatures enjoy practical primacy. …Clark Neily notes that between 1954 and 2002, the U.S. Supreme Court invalidated 0.65 percent of the laws Congress passed (103 of 15,817), 0.5 percent of federal regulations and less than 0.05 percent of state laws. Those who praise such judicial passivity must implausibly assume, as Neily says, that government “hits the constitutional strike zone” at least 99.5 percent of the time. How likely is this? Judicial passivity has been encouraged by decades of reflexive conservative denunciations of “judicial activism.” These denunciations have been paired with celebrations of “judicial deference” to legislative majoritarianism.

Mr. Will has made a strong argument that we could use a bit more “activism” and a bit less “deference.” Properly defined, of course.

Properly defined, of course. Looking at the image to the right, I want an activist judiciary when the tree is outside the fence and a deferential judiciary when the tree is inside the fence.

And that doesn’t necessarily mean libertarian policy.

For instance, the Constitution does include a postal service as one of the enumerated powers. That doesn’t mean the federal government is obliged to set up post offices, but they certainly have that right.

And, thanks to the unfortunate mistake of the 16th Amendment, our wretched internal revenue code passes constitutional muster (though having the authority to tax is not the same as the authority to spend).

P.S. You won’t be surprised to learn that E.J. Dionne is against the right kind of judicial activism.

P.P.S. Several people have messaged me over the years to ask about abortion and the Constitution. That’s not my area of expertise, but I’ll simply observe that it won’t make much difference if Roe vs. Wade is overturned. All that would happen is that legislatures would be in charge and many states would allow abortion on demand.

P.P.P.S. I also get asked about the advisability of a balanced budget amendment. That might be better than nothing, but a spending cap provision (similar to what exists in SwitzerlandHong Kong, and Colorado) would be far preferable.

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Image credit: Mark Fischer | CC BY-SA 2.0.

Importing Price Controls from Europe Will Undermine Pharmaceutical Innovation

Fri, 09/25/2020 - 12:52pm

Last November, I criticized Nancy Pelosi’s scheme to impose European-style price controls on pharmaceutical drugs in the United States.

I wasn’t the only one who objected to Pelosi’s reckless idea.

We have forty centuries of experience demonstrating that price controls don’t work. The inevitable result is shortages and diminished production (sellers won’t produce sufficient quantities of a product if they are forced to lose money on additional sales).

Which helps to explain why the Wall Street Journal also was not a fan of Pelosi’s proposal

Here’s some of the paper’s editorial on the adverse impact of her proposed intervention.

Mrs. Pelosi’s legislation would direct the secretary of Health and Human Services to “negotiate” a “fair price” with drug manufacturers… Any company that refuses to negotiate would get slapped with a 65% excise tax on its annual gross sales that would escalate by 10% each quarter. Yes, 65% on sales. …The bill also sets a starting point for Medicare negotiations at 1.2 times the average price of drugs in Australia, Canada, France, Germany, Japan and the U.K.—all of which have some form of socialized health system. …foreign price controls have reduced access to breakthrough treatments. …Price controls are also a prescription for less innovation since they reduce the payoff on risky research and development. …Only about 12% of molecules that enter clinical testing ultimately obtain FDA approval, and those successes have to pay for the 88% that fail. …Price controls would hamper competition by slowing new drug development. The U.S. accounts for most of the world’s pharmaceutical research and development, so there would be fewer breakthrough therapies for rare pediatric genetic disorders, cancers or hearing loss.

A damning indictment of knee-jerk interventionism, to put it mildly.

Well, a bad idea from Democrats such as price controls doesn’t magically become a good idea simply because it subsequently gets pushed by a Republican (unless, of course, you qualify as a partisan as defined by my Ninth Theorem of Government).

Unfortunately, we now have a new example of bipartisan foolishness.

CF&P’s Andy Quinlan opined on President Trump’s misguided plan to adopt European-style price controls.

…other nations have been free riders on America’s innovative pharmaceutical industry. …they have enacted socialist price controls to limit what they pay knowing that the largest market would pick up the slack to ensure a steady supply of new lifesaving drugs. It needs to stop, but President Trump’s recent executive order is not the right way to do it. …his “Most Favored Nations” Executive Order to…limit…prescription medication payments made through Medicare… But this is a flawed way of thinking about the problem. Other nations are…engaging in theft via price controls. …drugs can take months or even a year longer to arrive in countries with socialist healthcare systems. Patients suffer as a result… Another likely consequence is less innovation. Some drugs in this new price environment will no longer be cost effective to be developed. Patients again will suffer. …Getting foreign jurisdictions to pay for their share of pharmaceutical innovation by putting a stop to price manipulation is a noble goal. But it should not come at the expense U.S. industry and patients.

study by Doug Badger for the Galen Institute points out that the Trump Administration’s approach – for all intents and purposes – would use Obamacare’s so-called Center for Medicare and Medicaid Innovation to impose foreign price controls on prescription drugs in the United States.

The Affordable Care Act created CMMI and vested it with extraordinary powers. …The statute also shields CMMI projects against administrative and judicial review. …two HHS secretaries have claimed authority under CMMI to mandate a Medicare Part B payment mechanism without having to seek new legislation. …the Trump administration issued an advance notice of proposed rulemaking (ANPRM) announcing its intention to propose a far more sweeping Medicare Part B drug demonstration project….to…scrap the ASP Medicare reimbursement methodology in favor of one based on drug prices paid in other countries. …CMS is considering the establishment of an “international price index” (IPI). It would calculate the IPI based on the average price per standard unit of a drug in select foreign countries.

This is troubling for several reasons.

…the other countries on the proposed list have lower living standards than do Americans, as measured by per capita household disposable income… The median disposable per-capita income in the IPI countries is thus about one-third less than in the U.S. …Medicare reimbursement for physician-administered drugs would largely be based on international reference prices in which the regulatory agency of one government sets drug prices based at least in part on those set by regulatory agencies in other countries. …for all the different payment methodologies Congress has devised for medical goods and services, it has never based reimbursement on prices that prevail in foreign countries. The agency’s role is to implement congressionally-established reimbursement systems, not to create them out of whole cloth.

As you might expect, the Wall Street Journal has also weighed in on Trump’s plan.

The editorial points out there will be very adverse consequences if the President imposes European-style price controls.

Mr. Trump signed an executive order that could make…life-saving therapies less likely. Mr. Trump has been threatening drug makers for months with government price controls. …The President’s order directs the Department of Health and Human Services to require drug makers to give Medicare the “most favored nation” (i.e., lowest) price that other economically developed countries pay. …This ignores some crucial details. …Other countries also have to wait longer for breakthrough therapies, which is one reason the U.S. has much higher cancer survival rates. …The larger reality is that developing novel therapies isn’t cheap and can take years—sometimes decades—of research. Most products in clinical pipelines fail, and even those that succeed aren’t guaranteed to produce a profit. …The risk for all Americans is that drug makers will shelve therapies for hard-to-treat diseases that are in the early stages of development because of the high failure rate and low expected profit. This risk is most acute for therapies that treat rarer forms of diseases… The victims will be the cancer patients of the future, including perhaps some reading this editorial.

The bottom line, as I noted in the above interview and as many others have observed, is that other nations are free-riding on American consumers.

They get access to most of the drugs at low prices (since pharmaceuticals are cheap to produce once they are finally approved).

But the net result, as I tried to illustrate in this modified image, is that American consumers finance the lion’s share of new research and development.

This isn’t fair.

But we’d be jumping from the frying pan into the fire if we had European-type price controls that stifled innovation by pharmaceutical companies.

Sure, we’d enjoy lower prices in the short run, but we would have fewer life-saving drugs in the future.

P.S. There’s an analogy between prescription drugs and NATO since Americans bear a disproportionate share of costs for both. However, there’s a strong argument that there’s no longer a need for NATO. By contrast, I don’t think anyone thinks it would be a good idea to stifle the development of new drugs.

P.P.S. As an alternative, a friend has been urging me to support the idea of using the coercive power of government to mandate that American-based pharmaceutical companies charge market prices when selling overseas – an approach that would give foreign governments a choice of paying more or not getting the drugs. That seems like a better approach, at least in theory, but my friend has no answer when I point out that those companies would then have an incentive to leave the United States (as many firms did before Trump lowered the corporate tax rate to improve U.S. competitiveness).

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Image credit: Images Money | CC BY 2.0.

Breonna Taylor Is another Casualty in the Foolish War on Drugs

Thu, 09/24/2020 - 12:46pm

I frequently cite Mark Perry in my columns (including what I wrote yesterday) because he has an uncommon ability to focus on what’s actually important when writing about economic issues.

It turns out he also has that ability when it comes to social issues, as illustrated by this tweet.

For those who aren’t familiar with Ms. Taylor, she was killed when cops raided her residence based on a dubious search warrant.

That incident, and the subsequent fallout, has triggered social unrest, and I recommend David French’s analysis if you want to know more about the various legal issues surrounding the case.

I want to focus on the bigger point, which is the foolishness of the War on Drugs.

Jacob Sullum of Reason captures my feelings in this excellent article.

Louisville, Kentucky, police officers did a lot of things wrong when they killed Breonna Taylor, an unarmed 26-year-old EMT and aspiring nurse, during a fruitless no-knock drug raid last spring. But the litany of errors that led to Taylor’s death would be incomplete if it did not include the biggest mistake of all: the belief that violence is an appropriate response to peaceful conduct that violates no one’s rights. If politicians did not uncritically accept that premise, which underlies a war on drugs that the government has been waging for more than a century, Taylor would still be alive. …Drug prohibition legalizes conduct that otherwise would be instantly recognized as felonious, including assault, theft, trespassing, burglary, kidnapping, and murder. It makes police officers enemies to be feared rather than allies to be welcomed. …That problem goes far beyond the cases, such as Taylor’s, that are highlighted by Black Lives Matter. When a middle-aged white couple is killed in a drug raid instigated by a black narcotics officer who lied to obtain the search warrant (as happened in Houston last year) or a white 19-year-old is fatally shot by a white police officer during a marijuana sting (as happened in South Carolina several years ago), those outcomes are just as senseless and heartbreaking as the death of a young black woman gunned down by white drug warriors.

The individual tragedies in the War on Drugs, he explains, are compounded by the societal damage.

At any given time, nearly half a million people are incarcerated in U.S. jails or prisons for drug offenses. Drug offenders account for almost half of federal prisoners and 15 percent of state prisoners. Arresting all of those people for actions that violated no one’s rights unjustly deprives them of their liberty and impairs their life prospects. It also hurts their families and communities. …Which is not to say that the burdens of prohibition fall exclusively on people who like illegal drugs. Everyone else pays too, in the form of squandered taxpayer money, diverted law enforcement resources, theft driven by artificially high drug prices, and eroded civil liberties. …The war on drugs is also the main excuse for the system of legalized theft known as civil asset forfeiture, which allows police to take cash and other property they claim is connected to drug offenses.

I would add just one point to Sullum’s superb column. The War on Drugs is not only responsible for the horrid policy of asset forfeiture, it’s also the excuse for costly and intrusive laws on “money laundering.”

I’ll close with a few additional observations.

I’ve previously explained why the War on Drugs is pointless and counterproductive.

My argument isn’t that drugs do no harm. Instead, I want people to understand that the social harm of criminalization is much greater than the social harm of legalization.

If you want some additional data, I strongly recommend this collection of tweets by Joshua Collins.

1) THREAD: The War on Drugs Has Been a Dismal Failure; What’s Next?

In CO, 15,000 ppl were killed in a 20-year war against cartels, while the conflict in MEX caused more than 120,000 deaths and disappearances since 2006. Drug addiction rates in the U.S. have remained the same pic.twitter.com/bLdnMHL7gU

— ‍♂️Count Joshua VonCollins (@InvisiblesMuros) September 19, 2019

And here’s the logic – or lack of logic – of the War on Drugs captured in an image.

I call this the lather-rinse-repeat cycle of government failure.

P.S. Mark Perry is also famous for his Venn diagrams that expose hypocrisy (see herehereherehere, and here). He even motivated me to create my own version.

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Image credit: West Midlands Police | CC BY-SA 2.0.

Third-Party Payer Hurts American Healthcare

Wed, 09/23/2020 - 12:55pm

I’ve shared many videos (hereherehereherehere, and here) explaining how government has made America’s health system expensive and inefficient. I especially recommend my 2019 speech to the European Resource Bank.

Now let’s add this video to our collection.

One lesson to take from all these videos is that the main problem with America’s health care system is multiple forms of government intervention (MedicareMedicaid, the tax code’s healthcare exclusion, etc).

And the main symptom of all that intervention is pervasive “third-party payer,” which is the term for a system where people buy goods and services with other people’s money.

And guess what happens when people go shopping with other people’s money?

Mark Perry of the American Enterprise Institute explains that third-party payer leads to higher costs.

One of the reasons that the costs of medical care services in the US have increased more than twice as much as general consumer prices since 1998 is that a large and increasing share of medical costs are paid by third parties (private health insurance, Medicare, Medicaid, Department of Veterans Affairs, etc.) and only a small and shrinking percentage of health care costs are paid out-of-pocket by consumers. …It’s no big surprise that overall health care costs have continued to rise over time as the share of third-party payments has risen to almost 90% and the out-of-pocket share approaches 10%. Consumers of health care have significantly reduced incentives to monitor prices and be cost-conscious buyers of medical and hospital services when they pay only about $1 out of every $10 spent themselves, and the incentives of medical care providers to hold costs down are greatly reduced knowing that their customers aren’t paying out-of-pocket and aren’t price sensitive.

The best part of his article is when he compares cosmetic medical care to regular medical care to show how market forces – when allowed – lead to lower costs in the health sector.

Cosmetic procedures, unlike most medical services, are not usually covered by insurance. Patients typically paying 100% out-of-pocket for elective cosmetic procedures are cost-conscious and have strong incentives to shop around and compare prices at the dozens of competing providers in any large city. Providers operate in a very competitive market with transparent pricing and therefore have incentives to provide cosmetic procedures at competitive prices. Those providers are also less burdened and encumbered by the bureaucratic paperwork that is typically involved with the provision of most standard medical care with third-party payments. Because of the price transparency and market competition that characterizes the market for cosmetic procedures, the prices of most cosmetic procedures have fallen in real terms.

Here’s Mark’s chart showing how costs have changed over the past 20 years.

Pay special attention to the bottom right, where I’ve highlighted in red  how competition and markets have lowered relative prices for cosmetic care – which starkly contrasts with the health sectors where government plays a dominant role.

Singapore seems to have the most-market-oriented system in the world.

In a column for the Wall Street Journal, George Shultz and Vidar Jorgensen explain that the system is successful because people spend their own money.

If the U.S. wants lower costs, better outcomes, faster innovation and universal access, it should look to the country that has the closest thing to a functioning health-care market: Singapore. The city-state spends only 5% of GDP on medical care but has considerably better health outcomes than the U.S. …What does Singapore do that’s so effective? …All health-care providers in Singapore must post their prices and outcomes so buyers can judge the cost and quality. …Singaporeans are required to fund HSAs through a system called MediSave and to purchase catastrophic health insurance. As a result, patients spend their own money on health care and get to pocket any savings. …The combination of transparency and financial incentives has led to price and quality competition so intense that health-care costs are 75% lower in Singapore than in the U.S. …Singapore’s system of health-care finance shouldn’t seem foreign to Americans, nor should we doubt that it could work here. The U.S. has already seen that the combination of competition and price transparency can be successful: Witness the falling prices for Lasik and cosmetic surgery, which aren’t covered by insurance.

My modest contribution to this discussion is to share this OECD data showing that almost all other member nations are better than the United States on this issue.

No wonder healthcare is more expensive in the United States.

P.S. There’s also more government spending on healthcare in the United States, per capita, than there is in almost every other nation.

P.P.S. Government-created third-party payer also has led to higher costs and widespread inefficiency in higher education.

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Image credit: http://401kcalculator.org | CC BY-SA 2.0.

America’s Fiscal Problem Is Spending, not Red Ink

Tue, 09/22/2020 - 12:50pm

The Congressional Budget Office released it’s 2020 Long-Term Budget Outlook yesterday.

Almost everybody has focused on CBO’s projections for record levels of red ink. And it is worrisome that debt is heading to Greek/Japanese levels (especially if the folks who buy government bonds think American politicians are more like Greek politicians rather than Japanese politicians).

But what should really have us worried, both in the short run and the long run, is that the burden of government spending is on an upward trajectory.

CBO has some charts showing that federal government spending will consume more than 30 percent of GDP by 2050, assuming the budget is left on autopilot.

But I dug into CBO’s database and created my own chart because I think it does a much better job of illustrating our problem.

As you can see, the problem is that government spending is projected to grow too fast, violating the Golden Rule of fiscal policy.

The solution to this problem is very simple.

We need spending restraint, ideally enforced by some sort of spending cap.

And if we control the growth of spending (preferably so that it grows no more than the rate of inflation), the projections for ever-rising levels of red ink will disappear.

In other words, you can get rid of symptoms (red ink) when you cure the underlying disease (big government).

P.S. Given all the profligacy over the past year, you won’t be surprised to learn that this year’s long-run forecast from CBO is more depressing than last year’s forecast.

P.P.S. While the solution is simple, it’s not easy. Restraining the growth of spending – especially in the long run – will require entitlement reforms, especially for Medicare and Medicaid.

P.P.P.S. Tax increases almost certainly would make a bad situation even worse by weakening the economy and encouraging more spending.

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Image credit: pxhere | CC0 Public Domain.

Blue State Blues in California

Mon, 09/21/2020 - 12:08pm

If you’re a curmudgeonly libertarian like me, you don’t like big government because it impinges on individual liberty.

Most people, however, get irked with government for the practical reason that it costs so much and fails to provide decent services.

California is a good example. Or perhaps we should say bad example.

The Tax Foundation recently shared data on the relative cost of living in various metropolitan areas. Looking at the 12-most expensive places to live, 75 percent of them are in California.

So what do people get in exchange for living in such expensive areas?

They get great weather and scenery, but they also get lousy government.

Victor Davis Hanson wrote for National Review about his state’s decline.

Might it also have been smarter not to raise income taxes on top tiers to over 13 percent? After 2017, when high earners could no longer write off their property taxes and state income taxes, the real state-income-tax bite doubled. So still more of the most productive residents left the state. Yet if the state gets its way, raising rates to over 16 percent and inaugurating a wealth tax, there will be a stampede. It is not just that the upper middle class can no longer afford coastal living at $1,000 a square foot and $15,000–$20,000 a year in “low” property taxes. The rub is more about what they get in return: terrible roads, crumbling bridges, human-enhanced droughts, power blackouts, dismal schools that rank near the nation’s bottom, half the nation’s homeless, a third of its welfare recipients, one-fifth of the residents living below the poverty level — and more lectures from the likes of privileged Gavin Newsom on the progressive possibilities of manipulating the chaos. California enshrined the idea that the higher taxes become, the worse state services will be.

Even regular journalists have noticed something is wrong.

In an article in the San Francisco Chronicle, Heather Kelly, Reed Albergotti, Brady Dennis and Scott Wilson discuss the growing dissatisfaction with California life.

California has become a warming, burning, epidemic-challenged and expensive state, with many who live in sophisticated cities, idyllic oceanfront towns and windblown mountain communities thinking hard about the viability of a place many have called home forever. For the first time in a decade, more people left California last year for other states than arrived. …for many of California’s 40 million residents, the California Dream has become the California Compromise, one increasingly challenging to justify, with…a thumb-on-the-scales economy, high taxes… California is increasingly a service economy that pays a far larger share of its income in taxes and on housing and food. …Three years ago, state lawmakers approved the nation’s second-highest gasoline tax, adding more than 47 cents to the price of a gallon. …service workers in particular are…paying far more as a share of their income on fuel just to stay employed. …A poll conducted late last year by the University of California at Berkeley found that more than half of California voters had given “serious” or “some” consideration to leaving the state because of the high cost of housing, heavy taxation or its political culture. …Business is booming for Scott Fuller, who runs a real estate relocation business. Called Leaving the Bay Area and Leaving SoCal, the company helps people ready to move away from the state’s two largest metro areas sell their homes and find others.

Niall Ferguson opines for Bloomberg about the Golden State’s outlook.

As my Hoover Institution colleague Victor Davis Hanson put it last month, California is “the progressive model of the future: a once-innovative, rich state that is now a civilization in near ruins.”… It’s not that California politicians don’t know how to spend money. Back in 2007, total state spending was $146 billion. Last year it was $215 billion. …the tax system is one of the most progressive, with a 13.3% top tax rate on incomes above $1 million — and that’s no longer deductible from the federal tax bill as it used to be. …And there’s worse to come. The latest brilliant ideas in Sacramento are to raise the top income rate up to 16.8% and to levy a wealth tax (0.4% on personal fortunes over $30 million) that you couldn’t even avoid paying if you left the state. (The proposal envisages payment for up to 10 years after departure to a lower-tax state.) It is a strange place that seeks to repel the rich while making itself a magnet for illegal immigrants… And the results of all this progressive policy? A poverty boom. California now has 12% of the nation’s population, but over 30% of its welfare recipients. …according to a new Census Bureau report, which takes housing and other costs into account, the real poverty rate in California is 17.2%, the highest of any state. …But that’s not all. The state’s public schools rank 37th in the country… Health care and pension costs are unsustainable. …people eventually vote with their feet. From 2007 until 2016, about five million people moved to California but six million moved out to other states. For years before that, the newcomers were poorer than the leavers. This net exodus is surging in 2020. …Now we know the true meaning of Calexit. It’s not secession. It’s exodus.

It’s not just high taxes and poor services.

George Will indicts California’s politicians for fomenting racial discord in his Washington Post column.

California…progressives…have placed on November ballots Proposition 16 to repeal the state constitution’s provision…forbidding racial preferences in public education, employment and contracting. Repeal, which would repudiate individual rights in favor of group entitlements, is part of a comprehensive California agenda to make everything about race, ethnicity and gender. …Proposition 16 should be seen primarily as an act of ideological aggression, a bold assertion that racial and gender quotas — identity politics translated into a spoils system — should be forthrightly proclaimed and permanently practiced… California already requires that by the end of 2021 some publicly traded companies based in the state must have at least three women on their boards of directors… And by 2022, boards with nine or more directors must include at least three government-favored minorities. …Gov. Gavin Newsom (D) signed legislation requiring all 430,000 undergraduates in the California State University system to take an “ethnic studies” course, and there may soon be a similar mandate for all high school students. “Ethnic studies” is an anodyne description for what surely will be, in the hands of woke “educators,” grievance studies.

Several years ago, I crunched some numbers to show California’s gradual decline.

But there was probably no need for those calculations. All we really need to understand is that people are “voting with their feet” against the Golden State.

Simply stated, productive people are paying too much of a burden thanks to excessive spendingexcessive taxes, and excessive regulation.

So they’re leaving.

P.S. Many Californians are moving to the Lone Star State, and if you want data comparing Texas and California, click herehereherehere, and here.

P.P.S. Some folks in California started talking about secession after Trump’s election. Now that the state’s politicians are seeking a bailout, I expect that talk has disappeared.

Convergence and Capitalism

Sun, 09/20/2020 - 12:52pm

Earlier this month, as part of my ongoing series about convergence and divergence, I wrote about why South Korea has grown so much faster than Brazil.

My main conclusion is that nations need decent policy to prosper, and Johan Norberg shares a similar perspective in this video.

Let’s see what academic researchers have to say about this topic.

In an article for the Journal of Economic Literature, Paul Johnson and Chris Papageorgiou have a somewhat pessimistic assessment about the outlook for lower-income countries.

In its simplest form, convergence suggests that poor countries have the propensity to grow faster than the rich, so to eventually catch up to them. …there is a broad consensus of no evidence supporting absolute convergence in cross-country per capita incomes—that is poor countries do not seem to be unconditionally catching up to rich ones. …Our reading of the evidence…is that recent optimism in favor of rapid and sustainable convergence is unfounded. …with the exception of a few countries in Asia that exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies, especially in governance and in political institutions. But as is now well known, these are merely one-off level effects.

Here’s a table from their study.

As you can see, high-income countries (HIC) generally grew faster last century, which is evidence for divergence.

But in the 2000s, there was better performance by middle-income countries (MIC) and low-income countries (LIC).

That seems to be evidence that the “Washington Consensus” for pro-market policies generated good results.

Indeed, maybe I’m just trying to be hopeful, but I like to think that the last several decades have provided a roadmap for convergence. Simply stated, nations have to shift toward capitalism.

For another point of view, Dev Patel, Justin Sandefur and Arvind Subramanian have a somewhat upbeat article published by the Center for Global Development.

…the basic facts about economic growth around the world turned completely upside down a quarter century ago—and the literature doesn’t seem to have noticed. …While unconditional convergence was singularly absent in the past, there has been unconditional convergence, beginning (weakly) around 1990 and emphatically for the last two decades. …Looking at the 43 countries the World Bank classified as “low income” in 1990, 65 percent have grown faster than the high-income average since 1990. The same is true for 82 percent of the 62 middle-income countries circa 1990. …It’s not “just” China and India, home to a third of the world’s population on their own: developing countries on average are outpacing the developed world.

Here’s a pair of graphs from the article. On the left, we see nations of all income levels grew at roughly the same rate between 1960 and today.

But if we look on the right at the data from 2000 until the present, low-income and middle-income countries are enjoying faster growth.

That article, however, doesn’t include much discussion of why there’s been some convergence.

So let’s cite one more study.

In a report for the European Central Bank, Juan Luis Diaz del Hoyo, Ettore Dorrucci, Frigyes Ferdinand Heinz, and Sona Muzikarova look for lessons from European Union nations.

…sound policymaking plays a key role in the attainment of real convergence, primarily via adequate measures and reforms at national level. …for a given euro area Member State to achieve economic convergence it needs to improve its institutional quality, i.e. that of those institutions and governance standards that facilitate growth… some euro area countries have not met expectations in terms of delivery of sustainable convergence… in the period 1999-2016 income convergence towards the EU average occurred and was significant in some of the late euro adopters (the Baltics and Slovakia), but not in the south of Europe. …Several low-income euro area members have, in fact, only just maintained (Slovenia and Spain) or even increased (Greece, Cyprus and Portugal) their income gaps in respect of the EU average.

Let’s close with two charts from the ECB study.

First, look at this chart tracking the relative performances of Italy, Spain, Portugal, Greece, and Ireland compared to the average of Western European nations.

What stands out is that Ireland went from being a relatively poor nation to a relatively rich nation.

Needless to say, I would argue that Ireland’s dramatic improvement is closely correlated with a shift toward free markets that began in the 1980s.

Indeed, Ireland currently has the 10th-highest level of economic freedom for all countries.

Next, here’s a chart reviewing how various European nations have performed since 1999.

Ireland grew the fastest, given where it started. But notice how Slovakia and the Baltic nations also have been star performers.

So the nations that have adopted free-market reforms have grown faster than one might expect based on convergence theory.

And you won’t be surprised to see that the nations that have lagged – Greece and Italy – are infamous for statist policies and an unwillingness to reform.

The bottom line – assuming you want to improve the lives of people in poor nation – is that the world needs more capitalism and less government.

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Image credit: geralt | Pixabay License.

The Case Against Government Schools

Sat, 09/19/2020 - 12:44pm

I’ve been writing about the benefits of school choice for a long time, largely because government schools are becoming ever-more expensive while produced ever-more dismal outcomes.

But even I was surprised to see this tweet, which shows how so many parents in New York City seek alternative educational opportunities for their children.

What makes these numbers so shocking is that parents are forced to pay for government schools. So when they opt for alternatives such as private schools, they’re paying twice.

But they decide the extra cost is justified because they know government-run schools don’t do a good job (and those failures have become even more apparent because of coronavirus).

For instance, David Harsanyi indicts government schooling in an article for National Review.

“Public” schools have been a catastrophe for the United States. …State-run schools have undercut two fundamental conditions of a healthy tolerant society. First, they’ve created millions of civic illiterates who are disconnected from long-held communal values and national identity. Second, they’ve exacerbated the very inequalities that trigger the tearing apart of fissures. …No institution has fought harder to preserve segregated communities than the average teachers’ union. …Prosperous Americans already enjoy school choice — and not merely because they can afford private schools. …This entire dynamic is driven by the antiquated notion that the best way to educate kids is to throw them into the nearest government building. It’s the teachers’ unions that safeguard these fiefdoms through racketeering schemes: First they funnel taxpayer dollars to the political campaigns of allies who, when elected, return the favor by protecting union monopolies and supporting higher taxes that fund unions and ultimately political campaigns. …most poor parents, typically black or Hispanic, are compelled to send their kids to inferior schools… Joe Biden says he’ll create not a child-oriented Department of Education but a “teacher-oriented Department of Education.” By teachers, Biden means unions. …It’s likely that left-wing ideologues run your school district. They decide what your children learn. …The embedded left-wing nature of big school districts is so normalized that parents rarely say a word. …a voucher system creates opportunities for all kinds of students, not just wealthy ones.

I suppose it should be explicitly stated that those opportunities would produce better results, both for taxpayers and for kids.

In an article for the American Institute for Economic Research, Gregory van Kipnis compares government schools and private schools.

Only when there is a monopoly are we denied choice. The negative consequences of that are well known… Monopolies produce goods and services at a higher price and a lower quality than would be obtained in a competitive market. That is certainly the case with public education. …society should be interested in data about the costs and outcomes of different approaches to education, namely public versus private schools, and how this data should affect our choices and behavior.

And what does the data tell us?

…currently (as of 2018), a public school education in the US costs 89% more than private education; that is, $14,653 for a public school and $7,736 for a private education. The high relative cost of public school education has persisted since the earliest period for which the data has been collected – 1965 (Chart 1a). …Private education is significantly less expensive.

Here’s the chart showing that government schools are far more expensive.

This raises a separate question: Are government schools more expensive because they’re producing better results?

Nope.

While the generally accepted knowledge is that private education produces better results than public school education, …Chart 4…shows the trends and levels in the composite ACT test results (meaning for math and reading combined) for the period 2001-2014, for private, public and homeschooled children. …The results speak for themselves – private schools test at a significantly higher level than public schools, and the gap is widening.

Here’s a chart showing the difference.

So what’s the bottom line?

Consumers of any product know they get better outcomes, as measured by quality and price, if the product is offered in competitive markets. This is true even in markets that have only limited competition. Any competition is better than none. Just as that principle is true in the markets for cars and cafes, so it is true in the market for educational services. …It is manifestly cheaper to get a private education and get a far better education in a private school. The problem holding back the growth in private education is that you have to pay twice to get it. The economics and facts support the logic of freeing parents to obtain private education and alternative public education for their children. To further facilitate this decision, parents should be given vouchers and credits equal to the cost of public school in their area, which they can freely use to fund their choice of better education in the private sector.

Amen. School choices produces better educational outcomes and saves money for taxpayers.

Hard to argue with the data (unless, of course, your motive is to appease teacher unions).

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Image credit: amboo who? | CC BY-SA 2.0.

Fiscal Insanity from New Jersey

Fri, 09/18/2020 - 12:35pm

New Jersey is a tragic example of state veering in the wrong direction.

Back in the 1960s, it was basically like New Hampshire, with no income tax and no sales tax. State politicians then told voters in the mid-1960s that a sales tax was needed, in part to reduce property taxes. Then state politicians told voters in the mid-1970s that an income tax was needed, again in part to reduce property taxes.

So how did that work out?

Well, the state now has a very high sales tax and a very high income tax. And you won’t be surprised that it still have very high property taxes – arguably the worst in the nation according to the Tax Foundation.

But you have to give credit to politicians from the Garden State.

They are very innovative at coming up with ways to make a bad situation even worse.

In an article for City Journal, Steven Malanga reviews the current status of New Jersey’s misguided fiscal policies.

Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program. New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected. …Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. …The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money.

The very latest development is that the state’s politicians want to exacerbate New Jersey’s uncompetitive tax system by extending the state’s top tax rate of 10.75 percent to a larger group of taxpayers.

The New York Times reports on a new tax scheme concocted by the Governor and state legislature.

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax… Gov. Philip D. Murphy, a Democrat, announced a deal with legislative leaders to increase state taxes on income over $1 million by nearly 2 percentage points, giving New Jersey one of the highest state tax rates on wealthy people in the country. …The new tax in New Jersey…is expected to generate an estimated $390 million this fiscal year… With every call for a new tax comes criticism from Republicans and some business leaders who warn that higher taxes will lead to an exodus of affluent residents.

As is so often the case, the Wall Street Journal‘s editorial does a good job of nailing the issue.

New Jersey Gov. Phil Murphy and State Senate President Steve Sweeney struck a deal on Thursday to raise the state’s top marginal tax rate to 10.75% from 8.97% on income of more than $1 million. Two years ago, Democrats increased the top rate to 10.75% on taxpayers making more than $5 million. …New Jersey’s bleeding budget can’t afford to lose any millionaires. In 2018 New Jersey lost a net $3.2 billion in adjusted gross income to other states, including $2 billion to zero-income tax Florida, according to IRS data. More will surely follow now.

The WSJ is right.

As shown by this map, there’s already been a steady exodus of people from the Garden State. More worrisome is that the people leaving tend to have higher-than-average incomes (and it’s been that way for a while since New Jersey’s been pursuing bad policy for a while).

I’ll add one additional point to this discussion. One of the best features of the 2017 tax reform is that there’s now a limit on deducting state and local taxes when filing with the IRS.

This means that people living in high-tax jurisdiction such as CaliforniaNew York, and Illinois (and, of course, New Jersey) now bear the full burden of state taxes.

In other words, New Jersey’s politicians are pursuing a very foolish policy at a time when federal tax law now makes bad state policy even more suicidal.

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Image credit: alex grichenko | CC0 Public Domain.

Biden’s Policy to Increase the Tax Burden on Investment, Wages, and Job Creation

Thu, 09/17/2020 - 12:13pm

Every single economic school of thought agrees with the proposition that investment is a key factor in driving wages and growth.

Even foolish concepts such as socialism and Marxism acknowledge this relationship, though they want the government to be in charge of deciding where to invest and how much to invest (an approach that has a miserable track record).

Another widely shared proposition is that higher tax rates will discourage whatever is being taxed. Even politicians understand this notion, for instance, when arguing for higher taxes on tobacco.

To be sure, economists will argue about the magnitude of the response (will a higher tax rate cause a big effect, medium effect, or a small effect?).

But they’ll all agree that a higher tax on something will lead to less of that thing.

Which is why I always argue that we need the lowest-possible tax rates on the activities – work, saving, investment, and entrepreneurship – that create wealth and prosperity.

That’s why it’s so disappointing that Joe Biden, as part of his platform in the presidential race, has embraced class-warfare taxation.

And it’s even more disappointing that he specifically supports policies that will impose a much higher tax burden on capital formation.

How much higher? Kyle Pomerleau of the American Enterprise Institute churned through Biden’s proposals to see what it would mean for tax rates on investment and business activity.

Former Vice President and Democratic presidential candidate Joe Biden has proposed several tax increases that focus on raising taxes on business and capital income. Taxing business and capital income can affect saving and investment decisions by reducing the return to these activities and distorting the allocation across different assets, forms of financing, and business forms. Under current law, the weighted average marginal effective tax rate (METR) on business assets is 19.6 percent… Biden’s tax proposals would raise the METR on business investment in the United States by 7.8 percentage points to 27.5 percent in 2021. The effective tax rate would rise on most assets and new investment in all industries. In addition to increasing the overall tax burden on business investment, Biden’s proposals would increase the bias in favor of debt-financed and noncorporate investment over equity-financed and corporate investment.

Here’s the most illuminating visual from Kyle’s report.

The first row of data shows that the effective tax rate just by almost 8 percentage points.

I also think it’s important to focus on the last two rows. Notice that the tax burden on equity increases by a lot while the tax burden on debt actually drops slightly.

This is very foolish since almost all economists will acknowledge that it’s a bad idea to create more risk for an economy by imposing a preference for debt (indeed, mitigating this bias was one of the best features of the 2017 tax reform).

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Image credit: Gage Skidmore | CC BY-SA 2.0.

Does Trump Deserve Credit for Strong 2019 Economic Data?

Wed, 09/16/2020 - 12:07pm

Regular readers know that I give Trump mixed grades on economic policy.

He gets good marks on issues such as taxes and regulation, but bad marks in other areas, most notably spending and trade.

Which is why I’ve sometimes asserted that there has been only a small improvement in the economy’s performance under Trump compared to Obama.

But I may have to revisit that viewpoint. The Census Bureau released its annual report yesterday on Income and Poverty in the United States. The numbers for 2019 were spectacularly good, with the White House taking a big victory lap.

Here are the three charts that merit special attention.

First, we have the numbers on inflation-adjusted median household income. You can see big jumps for all demographic groups.

Next, here’s a look at whether Americans are getting richer or poorer over time.

As you can from this chart, an ever-larger share are earning high incomes (a point I made last month, but this new data is even better).

Last but not least, here’s the data on the poverty rate.

Once again, remarkably good numbers, with all demographic groups enjoying big improvements.

We’ll see some bad news, of course, when the 2020 data is released at this point next year. But that’s the result of coronavirus.

So let’s focus on whether Trump deserves credit for 2019, especially since I got several emails yesterday from Trump supporters asking whether I’m willing to reassess my views on his policies.

At the risk of sounding petulant, my answer is no. I don’t care how good the data looks in any particular year. Excessive government spending is never a good idea, and it’s also never a good idea to throw sand in the gears of global trade.

But perhaps we should rethink whether the positive effects of some policies are stronger and more immediate while the negative effects of other policies are weaker and more gradual.

I’ll close with two cautionary notes about “sugar high” economics.

For what it’s worth, we’re not going to resolve this debate because coronavirus has been a huge, exogenous economic shock.

Though if (or when) the United States ever gets to a tipping point of too much debt, there may be some retroactive regret that Trump (along with Obama and Bush) viewed the federal budget as a party fund.

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Image credit: The White House | Public Domain.

Help Reduce Poverty With Capitalism

Tue, 09/15/2020 - 12:18pm

Back in 2017, I shared this video explaining why capitalism is unquestionably the best way to help poor people.

I’m recycling the video today because it’s a great introduction for a discussion about how best to help poor people.

As part of my Eighth Theorem of Government, I made the point that it’s wrong to fixate on inequality. Instead, the goal should be poverty reduction.

And the best way to help the poor, as I noted when criticizing Pope Francis’ support for statism in a BBC interview, is free markets and limited government.

Now we have additional evidence for this approach thanks to a new study from the Hoover Institution.

Authored by Ed Lazear, former Chairman of the Council of Economic Advisors, it uses hard data from Economic Freedom of the World and the Index of Economic Freedom to see how poor people do in capitalist nations compared to socialist nations.

If you’re pressed for time, here are the key passages from the introduction.

This study analyzes income data from 162 countries over multiple decades, coupled with measures of economic freedom, size of government, and transfers to determine how various parts of society fare under capitalism and socialism. The main conclusion is that the poor, defined as having income in the lowest 10 percent of a country’s income distribution, do significantly better in economies with free markets, competition, and low state ownership. More impressive is that moving from a heavy emphasis on government to a free market enhances the income of the poor substantially. …Changing freedom from the Mexico level to the Singapore level is predicted to raise the income of the poor by about 40 percent. All income groups benefit from the change, but the change typically helps the poor more than other income groups.

For those interested, let’s now dig into the details.

The study specifically looks at the degree to which state ownership (i.e., textbook socialism) has an impact on income.

As one might suspect, more state ownership means lower income.

A number of measures of free-market capitalism and socialism have been suggested. The analysis starts by examining the metric that most closely matches the dictionary definition of socialism, namely, the amount of state ownership of capital… The basic approach in this section is to examine the relation of income of three groups to state ownership. …All coefficients on the state ownership index are positive, strong, and statistically significant. For example, using the coefficient in column 4, a one standard deviation increase in private ownership increases median income by about 19 percent of the mean value of the log of median income. Also interesting is that the lowest income groups benefit as much or more from private ownership as the highest income groups. …The cross-country correlation between private ownership and income ten years in the future is positive and strong. It is also true that median income seems to rise over time within a country as the country moves toward more private ownership and less state ownership.

The study highlights several interesting examples.

For instance, it shows that poor people immensely benefited from China’s partial shift to capitalism, even though inequality increased (something I pointed out a few years ago).

Here’s the data on Chile, which shows both rich and poor benefited from that nation’s shift to capitalism.

By the way, I have several columns (hereherehere, and here) documenting how poor people have been the big winners from Chile’s pro-market reforms.

Next we have the example of South Korea.

That data is especially powerful, by the way, when you compare South Korea and North Korea.

Last (and, in this case, least), we have the data from the unfortunate nation of Venezuela.

Chavez’s family personally gained from socialism, but this chart shows how the rest of the nation has stagnated.

So what’s the bottom line?

Lazear summarizes his results.

…there is no evidence that, as a general matter, high-income groups benefit more from a move toward capitalism than low-income groups. The effect of changing state ownership and economic freedom on income is not larger for the rich than for the poor. Second, income growth is positively correlated across deciles. The situation is closer to a rising tide lifting all boats than to the fat man becoming fat by making the thin man thin. Finally, there is no consistent evidence across the large number of countries and time periods examined of any strong and widespread link between income growth and inequality. There are examples, like China, where income growth was coupled with large increases in inequality, but others like Chile, where strong income growth came about without much change in inequality, and South Korea, where inequality declined slightly as economic freedom and income grew over time.

Amen. This analysis underscores my oft-made argument that inequality is irrelevant and that policy makers instead should have a laser-like focus on economic growth.

Assuming, of course, that they want poor people to climb the economic ladder to prosperity.

P.S. The Lazear study points out that Scandinavian nations are definitely not socialist based on measures of state ownership.

Some might define socialist economies as merely being those that have high levels of redistribution, meaning high taxes and transfers. …It is certainly true that the Scandinavian countries have higher taxes and transfers than non-Scandinavian countries… Scandinavian countries all have low state ownership index values…and high values of the economic freedom index. The values for Scandinavia look much more like those for the United States than they do for pre-1985 China or post-2000 Venezuela. …Perhaps a more accurate description of Scandinavia is that the countries rely primarily on private ownership and markets but have chosen to have a large government transfer program, which implies not only high transfers but also high taxes.

I’ll simply add that the high transfers and high taxes have negative consequences for Scandinavian nations, but those countries at least have very pro-market policies in other areas to compensate for the damage caused by bad fiscal policy.

P.P.S. For my friends on the left who may suspect that Lazear cherry-picked his examples. I’ll simply challenge them to show a contrary example.

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Image credit: Max Pixel | CC0 1.0.

How Much Economic Freedom Does the U.S. Enjoy Today Compared to Obama’s Last Year in Office?

Mon, 09/14/2020 - 12:58pm

The latest edition of Economic Freedom of the World has been released by the Fraser Institute. The good news is that the United States is in the top 10 (we dropped as low as #18 during Obama’s first term).

The bad news is that Australia jumped in front of the United States, so America is now #6 instead of #5 like last year.

Here are the 20 jurisdictions in the world with the highest levels of economic liberty.

Here are some of the highlights from the report.

Hong Kong and Singapore, as usual, occupy the top two positions. The next highest scoring nations are New Zealand, Switzerland, United States, Australia, Mauritius, Georgia, Canada, and Ireland. The rankings of some other major countries are Japan (20th), Germany (21st), Italy (51st), France (58th), Mexico (68th), Russia (89th), India (105th), Brazil (105th), and China (124th). The 10 lowest-rated countries are: Central African Republic, Democratic Republic of Congo, Zimbabwe, Republic of Congo, Algeria, Iran, Angola, Libya, Sudan, and, lastly, Venezuela.

It’s not exactly a surprise that Venezuela is in last place, though keep in mind that a few basket-case nations aren’t included in the rankings because of inadequate data (most notably, North Korea and Cuba).

Some people may be surprised that Hong Kong is still #1, but there’s a good (albeit temporary) reason.

Between 1997 and 2018, there was no evidence of significant policy changes in Hong Kong as the result of the 1997 establishment of Hong Kong as a Special Administrative Region within China. Our data indicate that there have not been any major changes in tax and spending policy, monetary stability, or regulatory policy. In fact, Hong Kong’s 2018 rating of 8.94 is its highest since the financial crisis in 2008. However, it will be surprising if the apparent increase in the insecurity of property rights and the weakening of the rule of law caused by the interventions of the Chinese government in 2019 and 2020 do not result in lower scores

For those interested in the United States, here are the scores for the five major components.

For what it’s worth, I think American monetary policy should be ranked lower, but I admit that’s a subjective opinion that can’t be quantified (at least not yet).

Our worst score is for trade. Though that’s not just the fault of Trump. Yes, he’s caused a decline, but the U.S. score has been on a downward trajectory for almost 20 years.

Speaking of Trump, readers who get upset by my periodic criticisms of the President (such as what I wrote yesterday) may be interested in knowing that the U.S. now has a lower score (8.22 out of 10) than it did in Obama’s last year (8.32 out of 10).

P.S. Last but not least, here’s a map showing which nations are in various categories. All you really need to know is that it’s good to be blue and bad to be red.

P.P.S. China’s low score explains why I don’t think there’s any danger of that nation becoming an economic powerhouse (a point I first made back in 2010). At least not until and unless President Xi has the wisdom to allow a second wave of pro-growth reform.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

The Trump Administration Tramples Property Rights

Sun, 09/13/2020 - 12:49pm

During the Obama years, I frequently criticized the Administration’s bad policy choices. On a wide range of issues.

But I also expressed disappointment when President Obama arbitrarily and unilaterally decided to override or overlook laws that were inconvenient to his agenda.

Or when he asserted powers that didn’t exist.

Simply stated, I care about the rule of law.

And I care about the rule of law regardless of which political party holds power.

Which is why I’m disgusted that the Trump Administration has stretched the law beyond the breaking point so that the Centers for Disease Control can run roughshod over private rental contracts.

In his column for the Washington Post, George Will observes the CDC is engaged in an unprecedented power grab.

…the Centers for Disease Control and Prevention…this month asserted a power to prohibit — through the end of 2020, but actually for as long as the CDC deems “necessary” — the eviction of private tenants from privately owned residences because of unpaid rent. This, even though eviction levels have been below normal during the lockdown. The CDC’s order protects tenants earning up to $99,000 — almost quadruple the official poverty line of $26,200 for a family of four. Or, for those filing joint tax returns, tenants earning up to $198,000, who are in the top quintile of U.S. households. …Noncompliant landlords can be fined up to $100,000 and incarcerated for up to a year. …A regulation promulgated by the executive branch grants vast — almost limitless, the CDC clearly thinks — discretion to an executive branch bureaucrat, the CDC director… And, if today’s director is correct, the director is authorized to curtail some property rights and abrogate some contracts nationwide, to suspend some state laws and strip state courts of jurisdiction in eviction cases. …The CDC presents all this as just another anti-infection protocol. Try, however, to imagine an activity or legal arrangement that the CDC, citing the regulation, could not overturn by fiat in the context of even a seasonal infectious disease such as the flu. Ilya Somin, law professor at George Mason University and another Cato adjunct scholar, notes: “Pretty much any economic transaction or movement of people and goods could potentially spread disease in some way.”

Christian Britschgi opines for Reason about the Trump Administration’s assault on property rights.

…the CDC’s eviction moratorium is an excellent example of how a patchwork of extreme, temporary policy interventions intended to stem the coronavirus pandemic has created a self-perpetuating justification for expanding government power across the board. …Over time, the economic damage and mass unemployed caused by a prolonged pandemic and continually extended shelter-in-place orders have fueled justifications for extending and expanding eviction moratoriums. After all, how can someone be expected to pay the rent if they aren’t legally allowed to work? Now a federal eviction moratorium covering all rental properties is being justified as necessary to ensure compliance with shelter-in-place orders. …the CDC’s order..ratchets up the government’s power in a way that won’t be easily undone.

Writing for the Foundation for Economic Education, Brad Polumbo explains why the CDC’s actions are so worrisome.

Under the direction of the Trump administration, the CDC instituted a unilateral order halting many evictions. It essentially nationalizes millions of private rental properties and strips landowners of their basic rights. …For legal justification, the Trump administration cites one vague law that says during a pandemic the CDC director “may take such measures to prevent such spread of the diseases as he/she deems reasonably necessary, including inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.” ….Across the country, millions of landlords will have tenants occupying their property and have no way to force them to pay rent or remove them if they won’t. …the federal government is trampling over private contracts and essentially seizing all affected rental properties as the domain of the state. …

Brad also makes the all-important point that the CDC’s regulation will actually make rental housing more expensive in the long run (sort of like the way rent control backfires).

…the CDC’s overreach will undoubtedly have severe economic consequences. This move will worsen the housing crisis in the long-run and make housing more expensive for everyone by decreasing supply. Many landlords will be unable to make their mortgage and property tax payments without rental income or any remedy for nonpayment. This will result in them losing their property and its eventual removal from the market. …this unprecedented invasion of contract rights and private property is sure to discourage future would-be landlords from renting out their property or entering the market. The long-term impact will be less housing overall, which means higher prices.

Congressman Thomas Massie of Kentucky is one of the nation’s most principled lawmakers.

Here’s his succinct analysis of what just happened.

Though I have a slight disagreement with Massie’s tweet.

This latest power grab by the federal government isn’t socialism. That would involve the government owning and operating rental properties.

Under the CDC edict, rental properties are still privately owned. It’s just that government controls how the property is used.

That’s a different economic system, as Thomas Sowell has explained.

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Image credit: Raed Mansour | CC BY 2.0.

Trump Administration Should No Longer Protect Venezuela from Paying for Its Misdeeds

Sun, 09/13/2020 - 4:16am

Originally published by Inside Sources on September 10, 2020.

Hugo Chavez’s socialist revolution, continuing today under Nicolás Maduro, brought untold misery to the people of Venezuela, but it also harmed non-Venezuelan companies and their shareholders.

To this day, victims of Chavez’s expropriations are being denied just compensation. Shockingly, even the Trump administration is obstructing the ability of companies to be made whole from thefts committed by Venezuela’s dictators.

Whereas market economies lead to the creation of vast new wealth, socialist governments confiscate and cannibalize the private economy until only ruin remains. And in a global economy, victims of socialist regimes are both domestic and foreign.

As much as we might prefer to allow those who embrace socialism to reap what they sow, preservation of the global economic system requires enforcing limits on the ability of governments to expropriate property from those based outside their borders.

Hugo Chavez did precisely that to fund his corrupt and repressive regime under the slogan, “All that was privatized, let it be nationalized.”

Foreign victims of his political greed included Verizon, U.S. food giant Cargill Inc., oil companies ExxonMobil and ConocoPhillips, energy producer AES Corp, and mining companies Gold Reserve Inc. and Crystallex, among numerous others.

Some of these companies simply sold off their stakes in Venezuelan subsidiaries to the government, though the threat of force makes it unlikely they received market value. Others have had to rely on courts and international bodies to try and recover their significant losses.

In 2017, for instance, Gold Reserve Inc settled its legal cases with Venezuela for approximately $1 billion after its Brisas gold project was seized in 2009. The company received about $254 million before Venezuela stopped making payments in November 2017.

Crystallex was awarded $1.4 billion in 2016 by a World Bank arbitration court for the 2008 seizure of its Las Cristinas mine, into which it had already sunk hundreds of millions of dollars. Faced with similar obstruction from the Venezuelan government, Crystallex sought to recover the judgment from CITGO, a subsidiary of the state-owned Petroleos de Venezuela.

The 3rd U.S. Circuit Court of Appeals ruled in Crystallex’s favor, and the U.S. Supreme Court declined Venezuela’s appeal.

All’s well that ends well, right? Unfortunately, it’s not to be.

The U.S. Treasury Department is protecting CITGO’s assets despite the proper legal process having been followed and the obvious justice in the rulings.

The reason, as is so often the case, is politics. After irregularities and fraud cast doubt on the legitimacy of Maduro’s 2018 reelection, opposition leader Juan Guaidó claimed the interim presidency with the backing of Venezuela’s National Assembly. He has subsequently been recognized by more than 50 governments, but Maduro and his loyalists at the top of the military refuse to let go of power.

While he hasn’t yet dislodged Maduro, Guaidó managed to wrest control of CITGO from Maduro with help from the Trump administration and U.S. courts. Guaidó is now lobbying the Trump administration to protect CITGO’s assets to boost his domestic profile, and the Treasury Department has fulfilled his request by preventing creditors from enforcing arbitral awards.

This is a mistake.

The preservation of property rights is essential for continued global prosperity and ought to trump short-term geopolitical interests. Protecting property rights and achieving foreign policy goals are not mutually exclusive. Whatever the merits of supporting Guaidó’s claim to the presidency, bolstering his efforts should not come at the expense of core American values.

It’s likely impossible to fully deny despotic regimes the ability to take what does not belong to them. But the law-abiding world nevertheless has some recourse when those same regimes attempt to profit through participation in the global market economy that they stifle within their own countries.

It’s time the Trump administration allowed that option to be exercised.

Lessons from 19th Century Cronyism

Sat, 09/12/2020 - 12:35pm

Politicians often support “industrial policy,” which means they get to grant special favors to well-connected companies or industries.

But as explained by Professor Burton Folsom, this approach didn’t work very will in the 1800s.

It’s not surprising, of course, that politicians like having the power to grant favors. It makes them feel important.

But such policies don’t work. At least if our measure of success includes things like competitiveness and efficiency. Or of if we care about the best interests of consumers and taxpayers.

Which is why is better to be on the correct side of this spectrum. In other words, as far from Soviet-style central planning as possible (I used to cite Hong Kong as an example of laissez-faire, but that may no longer be accurate).

By the way, the video also makes a good point about how the United States was not a laissez-faire paradise back in the 1800s.

While we didn’t have an income tax or a welfare state, there were other forms of intervention, as illustrated by the video, as well as lots of protectionism and regulation.

And don’t forget slavery, which was an especially grotesque anti-market policy.

The bottom line is that only politicians benefit when government has more power over the economy.

For the rest of us, the lesson to be learned is that government intervention doesn’t work. Not in the 1800s. Not in the 1900s. And not in this century, either.

If we want more prosperity, we should stick with the tried-and-true recipe for growth.

P.S. Professor Folsom also narrated a video showing how government intervention failed in the 1800s (railroads) and early 1900s (airplanes).

P.P.S. It’s especially disappointing that some self-styled conservatives are supporting industrial policy since – in practice – it means awful policies like Solyndra-style handouts and power-grab schemes like the Green New Deal.

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Image credit: John Schanlaub | CC BY 2.0.

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