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Updated: 17 min 12 sec ago

A Gold Standard vs. the Federal Reserve’s Fiat Money

Tue, 08/03/2021 - 12:21pm

I’m not a big fan of the Federal Reserve, mostly because of its Keynesian monetary policy.

Incumbent politicians often applaud when the central bank intervenes to create excess liquidity and artificially low interest rates. That’s because the Keynesian approach produces a short-run “sugar high” that seems positive.

But such policies also create boom-bust conditions.

Indeed, the Federal Reserve deserves considerable blame for some of the economy’s worst episodes of the past 100-plus years – most notably the Great Depression, 1970s stagflation, and the 2008 financial crisis.

So what’s the solution?

I’ve previously pointed out that the classical gold standard has some attractive features but is not politically realistic.

But perhaps it’s time to reassess.

In a column for today’s Wall Street Journal, Professors William Luther and Alexander Salter explain the differences between a gold standard and today’s system of fiat money (i.e., a monetary system with no constraints).

Under a genuine gold standard, …Competition among gold miners adjusts the money supply in response to changes in demand, making purchasing power stable and predictable over long periods. The threat of customers redeeming notes and deposits for gold discourages banks from overissuing… Fiat dollars aren’t constrained by the supply of gold or any other commodity. The Federal Reserve can expand the money supply as much or as little as it sees fit, regardless of changes in money demand. When the Fed expands the money supply too much, an unsustainable boom and costly inflation follow.

They then compare the track records of the two systems.

…nearly all economists believe the U.S. economy has performed better under fiat money than it would have with the gold standard. This conventional wisdom is wrong. The gold standard wasn’t perfect, but the fiat dollar has been even worse. …in practice, the Fed has failed to govern the money supply responsibly. Inflation averaged only 0.2% a year from 1790 to 1913, when the Federal Reserve Act passed. Inflation was higher under the Fed-managed gold standard, averaging 2.7% from 1914 to 1971. It has been even higher without the constraint of gold. From 1972 to 2019, inflation averaged 4%. …the Fed…has also become less predictable. In a 2012 article published in the Journal of Macroeconomics, George Selgin, William D. Lastrapes and Lawrence H. White find “almost no persistence in the variance of inflation prior to the Fed’s establishment, and a very high degree of persistence afterwards.” …One might be willing to accept the costs of higher inflation and a less predictable price level if a Fed-managed fiat dollar reduced undesirable macroeconomic fluctuation. But that hasn’t happened. Consider the past two decades. The early 2000s had an unsustainable boom, as the Fed held interest rates too low for too long.

There was also a column on this issue in the WSJ two years ago.

James Grant opined about (the awful) President Nixon’s decision to make Federal Reserve policy completely independent of the gold anchor.

Richard Nixon announced the suspension of the Treasury’s standing offer to foreign governments to exchange dollars for gold, or vice versa, at the unvarying rate of $35 an ounce. The date was Aug. 15, 1971. Ever since, the dollar has been undefined in law. …In the long sweep of monetary history, this is a new system. Not until relatively recently did any central bank attempt to promote full employment and what is called price stability (but is really a never-ending inflation) by issuing paper money and manipulating interest rates. …a world-wide monetary system based on the scientifically informed discretion of Ph.D. economists. The Fed alone employs 700 of them.

But Grant says the gold standard worked reasonably well.

A 20th-century scholar, reviewing the record of the gold standard from 1880-1914, was unabashedly admiring of it: “Only a trifling number of countries were forced off the gold standard, once adopted, and devaluations of gold currencies were highly exceptional. Yet all this was achieved in spite of a volume of international reserves that, for many of the countries at least, was amazingly small and in spite of a minimum of international cooperation . . . on monetary matters.” …Arthur I. Bloomfield wrote those words, and the Federal Reserve Bank of New York published them, in 1959.

The new approach, which Grant mockingly calls the “Ph.D. standard,” gives central bankers discretionary power to do all sorts of worrisome things.

The ideology of the gold standard was laissez-faire; that of the Ph.D. standard (let’s call it) is statism. Gold-standard central bankers bought few, if any, government securities. Today’s central bankers stuff their balance sheets with them. In the gold-standard era, the stockholders of a commercial bank were responsible for the solvency of the institution in which they held a fractional interest. The Ph.D. standard brought the age of the government bailout and too big to fail.

By the way, the purpose of today’s column isn’t to unreservedly endorse a gold standard.

Such as system is very stable in the long run but can lead to short-term inflation or deflation based on what’s happening with the market for gold. And those short-term fluctuations can be economically disruptive.

I was messaging earlier today with Robert O’Quinn, the former Chief Economist at the Department of Labor (who also worked at the Fed) and got this reaction to the Luther-Salter column.

Which is better matching the long-term growth of the economy and the demand for money? The profitability of gold mining or central bank decision-making? A good monetary rule may be better than a classical gold standard. The difficulty is sustaining a good rule.

The problem, of course, is that I don’t trust politicians (and their Fed appointees) to follow a good rule.

  • Especially in a world where many of them believe in Keynesian boom-bust monetary policy.
  • Especially in a world where many of them think the Fed should prop up or bailout Wall Street.
  • Especially in a world where many of them might use the central bank to finance big government.
  • Especially in a world where many of them support a “war against cash” to empower politicians.

The bottom line is that we have to choose between two imperfect options and decide which one has a bigger downside.

P.S. Since a return to a classical gold standard is highly unlikely (and because the libertarian dream of “free banking” is even more improbable), the best we can hope for is a president who 1) makes good appointments to the Fed, and 2) supports sound-money policies even when it means short-run political pain. We’ve had one president like that in my lifetime.

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Image credit: Federal Reserve | United States government Work.

The History of the Income Tax in Just Seven Minutes

Mon, 08/02/2021 - 12:56pm

I recently explained the evolution of taxation – and the unfortunate consequences of income taxation – to a seminar in the country of Georgia.

One of my main points was that income taxes are a relatively new source of revenue.

The first income tax was adopted in the United Kingdom in the mid-1800s and other nations followed over the next 50-plus years (the United States joined that unfortunate club in 1913).

And, as noted in the video, income tax enabled a massive expansion in the burden of government spending.

In a column for the Foundation for Economic Education, Martin Litwak explains how the U.S. and U.K. made the mistaken choice to impose income taxes.

…income tax is a rather recent “invention,”… Income Tax was first introduced by William Pitt in the United Kingdom in 1798, and it started to be charged in 1799. The aim was not to finance original expenses of the State but the Napoleonic Wars. …It was kept in force until the Battle of Waterloo. When the tax was annulled again, every document that referred to it was burnt, due to the sense of shame associated with having established and charged this tax. …Prime Minister Robert Peel reestablished it in 1841, not to finance a war but to cover the Government’s deficit. …the United States became independent from the United Kingdom in 1776…the country imposed the first income tax…to finance…the Civil War. …In 1872, the income tax was annulled, basically due to the pressure of taxpayers, who deemed it expropriatory… In 1894, the income tax was incorporated again, but the next year, …the Supreme Court declared it unconstitutional. …In 1909, the creation of this tax was proposed again… The 16th Amendment was introduced precisely to achieve this goal.

A sad column.

But it gets worse because politicians also then imposed payroll taxes.

Then they imposed value-added taxes.

Both of which helped to finance further expansions in the burden of government spending.

The bottom line is that it’s never a good idea to give politicians a new source of revenue.

Especially new taxes that are capable of generating a lot of revenue (or a medium amount or small amount of revenue).

P.S. Interestingly, many early advocates of income taxes in the U.K. and U.S. were not trying to finance a big welfare state, but rather wanted a new revenue source so they could lower or eliminate protectionist taxes on imports.

The moral of the story is to be careful of unintended consequences.

P.P.S. If you enjoyed watching a video about the history of the income tax, here’s a (much longer) history of economic policy in the 20th century.

U.S. vs. China: You Don’t Beat Cronyism with Cronyism

Sun, 08/01/2021 - 12:15pm

China is not going to surpass the United States as the world’s dominant economy.

As I first wrote back in 2010, China is a paper tiger. Yes, there was some pro-market reform last century, which helped reduce mass poverty, but China only took modest steps in the right direction.

According to the latest edition of Economic Freedom of the World, China scores just 6.21, which places it 124th out of 162 nations.

Is that better than a score of 3.69, which is where China was in 1990?

Yes, of course.

But does that score indicate that China will become richer than the United States, which has a current score of 8.22 (the world’s 6th-highest level of economic liberty)?

Of course not.

My answer might change of China engaged in more economic liberalization, as I have urged. But it seems the opposite is happening and China is backsliding toward more state control.

And that means the United States almost surely will remain far more prosperous.

(While Joe Biden is doing his best to drag economic policy in the wrong direction, but it would takes decades of far-worse policy to bring the U.S. down to the level of France (#58) or Greece (#92), much less all the way down to being on par with China).

But some people must not be very familiar with data about China and its economy.

For instance, President Trump’s former top trade official, Robert Lighthizer, wrote that the United States should copy China’s cronyism in a column in the New York Times.

I’m not joking. Mr. Lighthizer openly embraces industrial policy and protectionism.

…we need a multifaceted long-term strategy. …Our strategy must include…an industrial policy that includes subsidies to foster the development of the most advanced science and technology…and a robust plan to combat China’s unfair trade practices. …The Senate legislation would achieve some of what is needed. It calls for $200 billion to bolster scientific and technological innovation, $52 billion to rebuild our capacity to make semiconductors, and a supply-chain resiliency program… The House should perfect the provisions of the Senate bill that restructure and enhance federal support for science and innovation and strip out those that weaken our trade laws and encourage Chinese imports.

Geesh, no wonder Trump’s trade policy was such a disaster.

Lighthizer not only doesn’t understand economics, he also doesn’t know history.

Adam Thierer of the Mercatus Center points out that the current angst about China is a repeat verse of a song we heard over and over again in the late 1980s.

Back then, everyone thought Japan was on the verge of overtaking the United States, ostensibly because that nation had wise politicians and bureaucrats who knew how to pick winners and losers.

Thierer’s article tells us what really happened.

In 1949, the Japanese government created the Ministry of International Trade and Industry (MITI) to work with other government bodies (especially the Bank of Japan) to devise plans for industrial sectors in which they hoped to make advances. Although not as heavy-handed as Chinese planning authorities are today, MITI came to have enormous influence over private-sector research and investment decisions during the next five decades. The organization used a variety of the same policy levers that Chinese officials do today, with a particular focus on trade management and industrial policy investments in sectors perceived to be “strategic” for future economic advance. …By the late 1970s…, U.S. officials and market analysts came to view MITI with a combination of reverence and revulsion, believing that it had concocted an industrial policy cocktail that was fueling Japan’s success at the expense of American companies and interests. …By the end of the 1980s, fears about “Japan Inc.” had reached a fever pitch. …Just as Japan phobia was reaching its zenith in the early 1990s, Japan’s fortunes began taking a turn for the worse. The Japanese stock market crashed in 1990… Japan suffered a brutal economic downturn that became known as the Lost Decade, which really lasted almost two decades. …by the late 1990s many scholars came to view most Japanese industrial policy initiatives as a costly bust.

Amen.

I wrote that Japan was a “basket case” back in 2013. A bit of hyperbole, to be sure, but I was trying to drive home the point that the nation’s politicians have made some costly mistakes.

Not just industrial policy, but also tax increasesKeynesian spending, and other forms of intervention.

No wonder the country has gone downhill in terms of competitiveness.

But let’s not focus too much on Japan (which, despite all my grousing, still ranks #20 for economic liberty).

For purposes of today’s column, the main points are 1) that China is no threat to overtake the United States, and 2) that copying that nation’s industrial policy would be a mistake.

P.S. If China wants to pursue industrial policy and other forms of cronyism, that’s a mistake that mostly hurts the Chinese people. To the extent such policies are designed to subsidize exports (as Lighthizer argues), the best response is to utilize the World Trade Organization, not to copy China’s misguided interventionism.

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Image credit: Foreign and Commonwealth Office | CC BY 2.0.

The (Anti-) Convergence Club

Sat, 07/31/2021 - 12:47pm

Economists widely agree with the theory of “convergence,” which is the (mostly true) idea that poor nations should grow faster than rich nations.

This means that we can learn important lessons by looking at examples of “divergence,” and I provide 20 examples in this presentation.

The above video is an excerpt from a presentation I made earlier this week to a seminar organized by the New Economic School in the country of Georgia.

While it seems like I was making the same point, over and over again (and I was), I wanted the students to understand that the real-world evidence clearly shows that good policy is critical if less-developed nations want convergence.

And I also wanted them to realize that there are many examples of free market-oriented nations growing much faster than anti-market countries.

But, by contrast, there are not examples that go the other way.

I’ve challenged my leftist friends to cite one case study of a poor nation that became a rich nation with big government.

Or to cite a single example of an anti-market nation that has grown faster than a market-oriented country.

Especially when using decades of data, which means there’s no ability to cherry-pick the data and create a misleading impression.

Needless to say, I’m still waiting for them to give me an answer.

Here are the background stories from the examples of divergence in my presentation.

My last example showed important examples of convergence.

  • Example #20: United States vs. Hong Kong, Singapore, and Switzerland

And here are a few other examples of divergence that I didn’t include in my presentation.

Shifting back to convergence, my column on breaking out of the “middle income trap” also has very interesting data on how Hong Kong, Singapore, Ireland, and Taiwan have closed the gap with (or even exceeded) the United States.

I also recommend this column which looks at a wide range of nations that are converging with, diverging from, or staying flat compared with the United States, as well as this column showing how Ireland has caught up and surpassed other European nations.

The moral of the story is that there’s a very simple recipe showing how poor nations can become rich nations.

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Image credit: Pixy.org | CC0 Public Domain.

There Should Be No Federal Funding for Mass Transit

Fri, 07/30/2021 - 12:13pm

As a matter of sensible public policy (and well as fealty to the Constitution), the federal government should not be involved in transportation.

But since I don’t expect the current crowd in Washington has any interest in getting rid of the Department of Transportation, perhaps we should have a more modest goal of eliminating subsidies for mass transit.

After all, there’s no reason why taxpayers across the nation should be subsidizing the cost of railway, bus, and subway travel in a handful of cities.

Getting rid of these handouts would save a decent chunk of money. Here’s a chart from Downsizing Government, which shows the history of pre-pandemic spending by the Federal Transit Administration.

But that chart is now out of date since politicians have used the pandemic as an excuse to dramatically increase the burden of federal spending. Including big handouts for mass transit.

And now they want to raid taxpayers for more transit money as part of a spending spree on infrastructure.

The Wall Street Journal editorialized about this topic a couple of days ago.

Democrats are accusing Republicans of holding up the Senate infrastructure deal over funding for mass transit. Here’s what’s really going on: Republicans have bowed to most Democratic demands. But now Democrats are also insisting that they acquiesce to spending ever more to rescue broken rail and bus systems in big liberal cities. Mass transit typically receives $13 billion in federal funds each year, and Congress provided an additional $70 billion for urban transit last year in the myriad pandemic spending bills. That’s more than six times the normal transit budget and more than the annual operating and capital spending of every transit agency in the U.S. combined. …But most mass transit systems face a larger structural budget problem that pre-dated the pandemic: Ballooning operating costs from generous labor contracts and pension payments, which are siphoning off money from system improvements and repairs. Many systems have also been losing riders due to lousy service… So Democrats want Republicans to bail out those cities and their public unions. Republicans have agreed to a $48.5 billion supplemental appropriation for mass transit in the deal. But in addition Democrats are demanding that 20% of transportation spending from the highway trust fund—financed by gas tax revenues—go toward transit.

This is throwing good money after bad.

In a column for the Foundation for Economic Education back in 2019, Hans Bader explained that mass transit in an inefficient money pit.

Mass transit is largely a failure and continues to decline despite growing subsidies to many mass transit systems. Light rail systems are white elephants. …South Korea is abolishing its celebrated high-speed rail line from its capital, Seoul, to a nearby major city because it can’t cover even the marginal costs of keeping the trains running. Most people who ride trains don’t need maximum possible speed, and most of those who do will still take the plane to reach distant destinations. …most Japanese don’t take the bullet train either; they take buses because the bullet train is too expensive. Bullet trains do interfere with freight lines, so Japanese freight lines carry much less cargo than in the United States, where railroads—rather than trucks—carry most freight, thereby reducing pollution… California’s so-called bullet train is vastly behind schedule and over budget, and will likely never come close to covering its operating costs once it is built. …Just the first leg of this $77 billion project will cost billions more than budgeted. And the project is already at least 11 years behind schedule.

Government is a big reason why transit is so inefficient and expensive.

Industry expert Randal O’Toole wrote about the harmful impact of socialized systems back in 2018.

Public ownership of transit has significantly increased the cost of transit, creating another disadvantage for the transit industry relative to other modes of travel. Before 1964, transit systems in most American cities were private and profitable, albeit declining. In 1964, Congress gave cities and states incentives to take over transit systems, and within a decade nearly all had been municipalized …followed by a staggering decline in transit productivity. In the decade before 1964, transit systems carried an average of about 59,000 riders per operating employee. This plunged after 1964 and today averages fewer than 27,000 riders per employee… It is doubtful that any American industry has suffered a 54 percent decline in worker productivity over 30 years unless it was another industry taken over by the government and inflicted with all the inefficiencies associated with government control and management.

We’ll close with this chart from O’Toole’s study, which shows total taxpayer subsidies over time.

The bottom line is that government transit systems are a lot like government schools. More and more money gets spent over time with worse and worse results.

Except maybe mass transit is even worse because of absurd cost overruns.

P.S. Click here and here to learn more about the boondoggle of government-funded rail.

P.P.S. Click here to learn more about the boondoggle of government-funded subways.

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Image credit: WikimediaImages | Pixabay License.

The Case Against Biden’s Per-Child Handouts

Thu, 07/29/2021 - 4:12pm

Joe Biden wants to dramatically expand the welfare state (more than $5 trillion of new spending over the next 10 years).

In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.

In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.

As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.

But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.

At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.

Others share my concern about the impact of Biden’s plan.

Matt Weidinger dissects per-child handouts in an article for National Review.

This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?

David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.

Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.

By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.

I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.

Biden’s plan has only 29 percent support (versus 43 percent opposition).

I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).

The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.

P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.

Government Spending Is a Problem, Regardless of How It Is Financed

Wed, 07/28/2021 - 12:27pm

Back in 2019, I listed “Six Principles to Guide Policy on Government Spending.”

If I was required to put it all in one sentence (sort of), here’s the most important thing to understand about fiscal policy.

This does not mean, by the way, that we should be anarcho-capitalists and oppose all government spending.

But it does mean that all government spending imposes a burden on the economy and that politicians should only spend money to finance “public goods” that generate offsetting benefits.

Assuming, of course, that the goal is greater prosperity.

I’m motivated to address this topic because Philip Klein wrote a column for National Review about Biden’s new spending. He points out that this new spending is bad, regardless of whether it is debt-financed or tax-financed.

As Democrats race toward squandering another $4.1 trillion — perhaps with some Republican help — we are being told over and over how the biggest stumbling block is figuring out how the new spending will be “paid for.” …Senator Joe Manchin (D., W.Va.), who is trying to maintain his image as a moderate, insisted that he doesn’t believe the spending should be passed if it isn’t fully financed. “Everything should be paid for,” Manchin has told reporters. …Republican members of the bipartisan group have also made similar comments. …But it is folly to consider massive amounts of new spending to be “responsible” as long as members of Congress come up with enough taxes to raise… At some point in the next few weeks, Democrats (and possibly Republicans) will announce that they have reached a deal on some sort of major spending compromise. They will claim that it is fully paid for, and assert that it is fiscally responsible. But there is nothing responsible about adding trillions in new obligations at a time when the nation is already heading for fiscal catastrophe.

Klein is correct.

Biden’s spending binge will be just as damaging to prosperity if it is financed with taxes rather than financed by debt.

The key thing to realize is that we’ll have less growth if more of the economy’s output is consumed by government spending.

Giving politicians and bureaucrats more control over the allocation of resources is a very bad idea (as even the World BankOECD, and IMF have admitted).

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Image credit: Shaw Girl | CC BY-NC-ND 2.0.

Will a Bernie Sanders-Style President Reverse Peru’s Economic Progress?

Tue, 07/27/2021 - 4:27pm

When writing about economic policy in Latin America, Chile gets lots of attention because it’s a remarkable story of success.

Similarly, Venezuela gets lots of attention because it’s a remarkable story of failure (with Argentina also deserving condemnation for its downward slide).

But we can also learn from other Latin nations.

For instance, I wrote back in 2016 that Peru was one of the world’s “overlooked success stories” because of a big increase in economic liberty back in the good ol’ days of the Washington Consensus.

The huge increase in economic liberty that began in the mid-1980s has subsequently been followed by a period of stability.

Policy is not perfect in Peru, especially with regards to regulation and the legal system.

But it is #29 in the world according to the most-recent edition of Economic Freedom of the World, which puts the country in the “most free” quartile.

Not bad for a nation that was in the “least free” quartile as recently as 1990 (and among the five-lowest-scoring nations in 1985).

Perhaps more important, the economic liberalization in Peru is paying dividends.

Looking at the Maddison data on per-capita GDP (adjusted for inflation), you can see that living standards have basically doubled this century.

In this case, “not bad” would be an extreme understatement. Peru deserves to be viewed as a success story.

Now for some bad news.

While Peru has made great progress in recent decades, the nation may be on the verge of slipping into Venezuelan-style economic mismanagement following the recent election of Pedro Castillo, who campaigned on a far-left platform.

Surprisingly, the Washington Post has a superb editorial on this topic.

Now, the question is whether Mr. Castillo will seek to undermine…the country’s free market economy, or pursue or a more moderate course. At stake is whether the South American country of 32 million will follow the disastrous example of Venezuela, whose autocratic socialist regime has destroyed its prosperity, or continue what, until the covid-19 pandemic, was a record of steadily rising living standards. …Mr. Castillo, who was nominated by a Marxist-Leninist party founded by a Cuba-educated hardliner, says he is not a Communist. He campaigned on nationalizing the mining companies that are the foundation of the economy and summoning a constituent assembly to rewrite the constitution, the political tactic pioneered by Venezuelan strongman Hugo Chávez. But the head of his economics transition team has said there will be no nationalizations, expropriations, or exchange and price controls, and Mr. Castillo has indicated he will leave the conservative president of the central bank in place.Given that the president’s party lacks the parliamentary majority it would need to authorize a new constitution or change foreign investment laws… Venezuela’s implosion, which has caused 5 million people to flee the country for its neighbors — including 1 million in Peru — has demonstrated the consequences of leftist misrule for the region.

Wow, that’s a great defense of free markets that shows a great understanding that statism is a recipe for disaster.

I only wish the Washington Post was similarly concerned about “leftist misrule” in the United States (a.k.a., the Biden-Bernie agenda).

But I’m digressing. For purposes of today’s analysis, let’s simply hope that soon-to-be President Castillo doesn’t wreck Peru’s progress.

After all, we know the recipe for growth and prosperity, so it makes sense to worry when politicians want to do the opposite.

P.S. Let’s similarly hope that Chile’s progress isn’t undone by a new, dirigiste constitution.

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Image credit: Serious Cat | CC BY-SA 2.0.

The Biden-Bernie Budget Blowout

Sun, 07/25/2021 - 12:19pm

Back in 2009, there was strong and passionate opposition to Bush’s corrupt TARP scheme and Obama’s fake stimulus boondoggle – both of which had price tags of less than $1 trillion.

Today, Biden has already squandered $1.9 trillion on his version of “stimulus” and has asked Congress to expand the federal government’s budgetary burden by another $3.5 trillion (plus about $600 billion for so-called infrastructure).

Yet there doesn’t seem to be the same intensity of opposition, even though Biden is proposing policies that are far more costly.

Is this simply because Republicans were corrupted by Trump’s profligacy and are now comfortable with big government?

Or are they distracted by cultural battles over issues such as critical race theory?

I don’t know, but I’m very worried that insufficient opposition may result in Biden’s dependency agenda getting enacted.

And I’m even more worried because we now know that the left intends to increase the spending burden by a lot more than $3.5 trillion. Especially since Bernie Sanders is Chairman of the Senate Budget Committee.

The Wall Street Journal opined on this topic a couple of days ago.

Democrats have provided few details of what they plan to include in Sen. Bernie Sanders’s $3.5 trillion budget proposal, and now we know why. The real cost is $5 trillion or more… Their plan is to include every program but start small and pretend they’re temporary. This will let them skirt the budget-reconciliation rule that spending can’t add to the deficit outside a 10-year budget window without triggering a 60-vote threshold to pass. The nonprofit Committee for a Responsible Federal Budget examined the budget outline… Assuming the major provisions will be made permanent and continue through the 10-year budget window, the group says, the “policies under consideration could cost between $5 trillion and $5.5 trillion over a decade.” …All of this false accounting will let Democrats pretend the overall cost of their budget spending is lower than it really is… Any way you add it up, Democrats are attempting to pass the biggest expansion of government since the 1960s with narrow majorities and no electoral mandate. No wonder they want to disguise its real cost.

By the way, it’s not just Democrats who play this game. Some provisions of the Trump tax cut expire in 2025 because Republicans also finagled to get around restrictions that govern the 10-year budget process.

That being said, I don’t think there’s moral equivalency between proposals to let people keep their own money and the Biden-Bernie scheme to buy votes with other people’s money.

Anyhow, here’s the relevant table from the Committee for a Responsible Federal Budget’s report.

P.S. This battle is not just an issue of dollars and cents. Some of the Biden-Bernie proposals, such as per-child handouts, would increase dependency by undoing Bill Clinton’s welfare reform.

P.P.S. Don’t forget all the debilitating taxes that will accompany all the new spending.

P.P.P.S. But at least we’ll “catch up” with Europe if Biden-Bernie agenda is enacted.

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

Two Sensible Observations on Tax Policy from the Washington Post (Mixed with Typical Bad Analysis)

Sat, 07/24/2021 - 12:34pm

It’s presumably not controversial to point out that the Washington Post (like much of the media) leans to the left. Indeed, the paper’s bias has given me plenty of material over the years.

As you can see, what really irks me is when the bias translates into sloppy, inaccurate, or misleading statements.

  • In 2011, the Post asserted that a plan to trim the budget by less than 2/10ths of 1 percent would “slash” spending.
  • Later that year, the Post claimed that the German government was “fiscally conservative.”
  • In 2013, the Post launched an inaccurate attack on the Heritage Foundation.
  • In 2017, the Post described a $71 budget increase as a $770 billion cut.
  • Later that year, the Post claimed a spending cut was a tax increase.
  • In 2018, the Post made the same type of mistake, asserting that a $500 billion increase was a $537 billion cut.
  • This year, the Post claimed Bush and Obama copied Reagan’s fiscal conservatism.
  • Also this year, the Post blamed smugglers for an energy crisis caused by Lebanese price controls.

But, to be fair, the Washington Post occasionally winds up on the right side of an issue.

It’s editorialized in favor of school choice, for instance, and also has opined in favor of privatizing the Postal Service.

And sometimes it has editorials that are both right and wrong. Which is a good description of the Post‘s new editorial on tax policy.

We’ll start with the good news. The Washington Post appears to understand that a wealth tax would be a bad idea, both because it can lead to very high effective tax rates and because it would be a nightmare to administer.

Ms. Warren’s version of the wealth tax, which calls for 2 percent annual levies on net wealth above $50 million, and 3 percent above $1 billion, very rich people would face large tax bills even when they had little or negative net income, forcing them to sell assets to pay their taxes. …huge chunks of private wealth tied up in real estate, rare art and closely held businesses are more difficult — sometimes impossible — to assess consistently. …Such problems help explain why national wealth taxes yielded only modest revenue in the 11 European countries that levied them as of 1995, and why most of those countries subsequently repealed them.

I’m disappointed that the Post overlooked the biggest argument, which is that wealth taxation would reduce saving and investment and thus lead to lower wages.

But I suppose I should be happy with modest steps on the road to economic literacy.

The Post‘s editorial also echoed my argument by pointing out that ProPublica was very dishonest in the way it presented data illegally obtained from the IRS.

ProPublica muddied a basic distinction, which, properly understood, actually fortifies the case against a wealth tax. The story likened on-paper asset price appreciation with actual cash income, then lamented that the two aren’t taxed at the same rate. …ProPublica’s logic implies that, when the stock market goes down, Elon Musk, whose billions are tied up in shares of Tesla, should get a tax cut.

Amen (this argument also applies to the left’s argument for taxing unrealized capital gains).

Now that I’ve presented the sensible portions of the Post‘s editorial, let’s shift to the bad parts.

First and foremost, the entire purpose of the editorial was to support more class-warfare taxation.

But instead of wealth taxes, the Post wants much-higher capital gains taxes – including Biden’s hybrid capital gains tax/death tax.

Fortunately, legitimate goals of a wealth tax can be achieved through other means… This would require undoing not only some of the 2017 GOP tax cuts, but much previous tax policy as well… The higher capital gains rate should be applied to a broader base of investment income… President Biden’s American Families Plan calls for reform of this so-called “stepped-up basis” loophole that would yield an estimated $322.5 billion over 10 years.

The editorial also calls for an expanded death tax, one that would raise six times as much money as the current approach.

…simply reverting to estate tax rules in place as recently as 2004 could yield $98 billion per year, far more than the $16 billion the government raised in 2020.

Last but not least, it argues for these tax increases because it wants us to believe that politicians will wisely use any additional revenue in ways that will increase economic opportunity.

The public sector could use new revenue from stiffer capital gains and estate taxes to expand opportunity.

This is the “fairy dust” or “magic beans” theory of economic development.

Proponents argue that if we give politicians more money, we’ll somehow get more prosperity.

At the risk of understatement, this theory isn’t based on empirical evidence.

Which is the message of a 2017 video from the Center for Freedom and Prosperity. And it’s also the reason I repeatedly ask the never-answered question.

P.S. To make the argument that capital gains taxes and death taxes are better than wealth taxation, the Post editorial cites research from the Paris-based Organization for Economic Cooperation and Development. Too bad the Post didn’t read the OECD study showing that class-warfare taxes reduce overall prosperity. Or the OECD study showing that more government spending reduces prosperity.

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Image credit: Jon S | CC BY 2.0.

The Economics of Inequality

Fri, 07/23/2021 - 12:18pm

In my four-part series on inequality (hereherehere, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

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Image credit: germantown | Pixabay License.

Left-Leaning Business Executive Condemns Milton Friedman, but Did Exactly What Friedman Recommended

Wed, 07/21/2021 - 12:31pm

Last year, I weighed in on the debate about whether companies should be operated for the benefit of owners (shareholders) or for the broader community (stakeholders).

Unsurprisingly, I sided with Milton Friedman and argued that businesses have a responsibility to maximize profits – assuming, of course, ethical behavior.

Moreover, I cited research showing how this is the approach that actually produces the maximum benefits for the rest of us (i.e., stakeholders).

But some people are not convinced by these insights.

David Gelles of the New York Times has a glowing profile of a former CEO, Hubert Joly, largely because of his apparent hostility to free markets.

Hubert Joly took over Best Buy in 2012… Since stepping down as chief executive in 2019, Mr. Joly has taken up a post teaching at Harvard Business School… In his book, on the speaking circuit and in meetings with other executives, Mr. Joly has taken up a campaign against the capitalist st atus quo. “…on the top of my F.B.I. most wanted list…is Milton Friedman, with his shareholder primacy — the excessive, obsessive focus on profits as the key thing that matters.”

Mr. Joly’s overt disdain for Friedman’s position seems noteworthy.

But it also seems hypocritical.

Why?

Because Joly did exactly what Friedman recommended. He is viewed as a successful CEO because he made changes that had the effect of making shareholders richer.

…the electronics retailer was struggling… Sales and profits were sagging, and the stock price had cratered. …Eschewing the conventional wisdom — that Best Buy should slash wages and cut costs in a bid to jack up profitability — Mr. Joly began investing in the company. He gave workers better perks… The strategy worked, and Best Buy shares soared during his tenure.

So why, then, is Mr. Joly so hostile to Friedman when he followed his approach?

Beats me, but I’m guessing he somehow thinks Friedman’s maxim means that a CEO should “slash wages” and close stores. And that sounds mean and heartless.

But Joly showed that Friedman’s maxim could be fulfilled in a different way. He figured out how to please consumers so that it was possible to expand the business and make workers better off.

Which is actually what capitalism – oops, I mean free enterprise – is all about. People getting richer over time as competition and liberty combine to raise living standards.

Sometimes that happens because a poorly run company contracts (the seemingly heartless process of creative destruction) and sometimes that happens because a well-run company expands.

P.S. There’s one more quote from Mr. Joly that I want to address. As part of his interview with the NYT, he seemingly played the role of a guilt-ridden rich guy.

“I’m on the record saying that the more taxes I pay, the happier I am.”

To be fair, he didn’t actually say that he supported tax increases, either on himself or anyone else. It’s possible that he was really saying that he likes earning more money, which then results in a higher tax bill.

But just in case he was doing some left-wing virtue signalling in favor of tax increases, I’m glad to inform him that there is a website at the Treasury Department that allows him to voluntary turn more money over to the crowd in Washington.

Somehow, I suspect he’ll be like other hypocrites on the left and fail to take advantage of that opportunity.

Biden’s Awful Plan for a Hybrid Death Tax/Capital Gains Tax

Wed, 07/21/2021 - 10:32am

More than 10 years ago, I narrated this video explaining why there should be no capital gains tax.

The economic argument against capital gains taxation is very simple. It is wrong to impose discriminatory taxes on income that is saved and invested.

It’s bad enough that government gets to tax our income one time, but it’s even worse when they get to impose multiple layers of tax on the same dollar.

Unfortunately, nobody told Biden. As part of his class-warfare agenda, he wants to increase the capital gains tax rate from 23.8 percent to 43.4 percent.

Even worse, he wants to expand the capital gains tax so that it functions as an additional form of death tax.

And that tax would be imposed even if assets aren’t sold. In other words, it would a tax on capital gains that only exist on paper (a nutty idea associated with Sens. Ron Wyden and Elizabeth Warren).

I’m not joking. In an article for National Review, Ryan Ellis explains why Biden’s proposal is so misguided.

The Biden administration proposes that on top of the old death tax, which is assessed on estates, the federal government should add a new tax on the deceased’s last 1040 personal-income-tax return. This new, second tax would apply to tens of millions of Americans. …the year someone died, all of their unrealized capital gains (gains on unsold real estate, family farms and businesses, stocks and other investments, artwork, collectibles, etc.) would be subject to taxation as if the assets in question had been sold that year. …In short, what the Biden administration is proposing is to tax the capital gains on a person’s property when they die, even if the assets that account for those gains haven’t actually been sold. …to make matters worse, the administration also supports raising the top tax rate on long-term capital gains from 23.8 percent to 43.4 percent. When state capital-gains-tax rates are factored in, this would make the combined rate at or above 50 percent in many places — the highest capital-gains-tax rate in the world, and the highest in American history.

This sounds bad (and it is bad).

But there’s more bad news.

…that’s not all. After these unrealized, unsold, phantom gains are subject to the new 50 percent double death tax, there is still the matter of the old death tax to deal with. Imagine a 50 percent death tax followed by a 40 percent death tax on what is left, and you get the idea. Karl Marx called for the confiscation of wealth at death, but even he probably never dreamed this big. …Just like the old death tax, the double death tax would be a dream for the estate-planning industry, armies of actuaries and attorneys, and other tax professionals. But for the average American, it would be a nightmare. The death tax we have is bad enough. A second death tax would be a catastrophic mistake.

Hank Adler and Madison Spach also wrote about this topic last month for the Wall Street Journal.

Here’s some of what they wrote.

Mr. Biden’s American Families Plan would subject many estates worth far less than $11.7 million to a punishing new death tax. The plan would raise the total top rate on capital gains, currently 23.8% for most assets, to 40.8%—higher than the 40% maximum estate tax. It would apply the same tax to unrealized capital gains at death… The American Families Plan would result in negative value at death for many long-held leveraged real-estate assets. …Scenarios in which the new death tax would significantly reduce, nearly eliminate or even totally eliminate the net worth of decedents who invested and held real estate for decades wouldn’t be uncommon. …The American Families Plan would discourage long-term investment. That would be particularly true for those with existing wealth who would begin focusing on cash flow rather than long-term investment. The combination of the new death tax plus existing estate tax rates would change risk-reward ratios.

The bottom line is that it is very misguided to impose harsh and discriminatory taxes on capital gains. Especially if the tax occurs simply because a taxpayer dies.

P.S. Keep in mind that there’s no “indexing,” which means investors often are being taxed on gains that merely reflect inflation.

P.P.S. Rather than increasing the tax burden on capital gains, we should copy Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, and Turkey. What do they have in common? A capital gains tax rate of zero.

The World’s Most Perverse (but Perhaps Accurate) Observation about Cuba

Tue, 07/20/2021 - 12:31pm

Weird items sometimes show up in my inbox, and this clip from Nikole Hannah-Jones (creator of the academically shoddy 1619 Project) definitely qualifies.

She actually cites the economic wasteland of Cuba as a role model for equality.

Ms. Hannah-Jones said that Cuba’s results are because of socialism.

On that point, I’ll agree, though I think it shows why that collectivist ideology is so destructive.

Let’s look at some comparisons based on the Maddison data. This first chart shows how Cuba has fallen far behind Panama and the Dominican Republic, two other multi-racial nations in the region.

The key thing to realize is that Cuba was equal to (or richer than) those countries when the communists took power in Cuba.

But socialist policies have caused Cuba’s economy to stagnate and now Panama is almost three times richer and the Dominican Republic is nearly two times richer (and you can click here is you also want to see comparisons with Chile and Costa Rica).

In other words, Cuba is a role model, but not for anything positive.

Let’s drive that point home with another chart comparing three nations – Cuba, Singapore, and Taiwan – that were roughly equal back in 1959.

What makes this comparison especially instructive is that Cuba went for socialism and Singapore and Taiwan became pro-market reformers. So it should be no surprise that the latter two have far surpassed Cuba.

The same thing is true, by the way, if you compare Hong Kong and Cuba.

Let’s conclude by addressing one final point.

Ms. Hannah-Jones asserted that Cuba deserves praise for having equality.

I doubt that’s true since left-wing dictators usually steal lots of money while ordinary people suffer.

But even if she’s right and Cuba genuinely has equality, it’s only because socialism has impoverished everyone, including the ruling class.

Our friends on the left apparently think that’s something to applaud, as Margaret Thatcher observed, but I’d rather be part of a society characterized by an “unequal sharing of the blessings.”

P.S. Ms. Hannah-Jones may be even more wrong about Cuba than Bernie SandersJeffrey Sachs, or Nicholas Kristof.

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Image credit: Max Pixel | CC0 Public Domain.

The Left’s Dependency Agenda, Part I

Mon, 07/19/2021 - 12:22pm

Over the past couple of years, one of the most disturbing – and also revealing – things to happen in Washington is when Congresswoman Alexandria Ocasio-Cortez proposed giving more money to people “unwilling to work.”

As discussed in this interview, the left seems to want more dependency.

This is a very unfortunate development. Just four years ago, Joe Biden rejected no-strings-handouts such as “basic income.”

But now he’s proposing a massive expansion of the welfare state, including huge per-child handouts that effectively would repeal Bill Clinton’s very successful welfare reform.

The obvious takeaway is that many politicians in Washington want to create a society where government dependency is normal and desirable.

That may be a good vote-buying strategy, but it has horrible consequences. Both morally and economically.

Let’s address one of the specific issues from the interview.

Regarding bonus unemployment benefits. I warned that we should be careful about over-interpreting short-run data. And that’s especially true because the states providing extra payments for joblessness are generally the states that also had the most onerous lockdown policies during the pandemic.

So, if unemployment is dropping in a state, is it because extra benefits have been cancelled, or is it a result of relaxed lockdown policies? Or is it something else, like lower tax rates?

One obvious way of trying to answer these questions is to ask people why they’re not working.

Here are the results of a recent poll, as reported by Λxios.

About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday. …U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons. … Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021. Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits.

So our friends on the left tell us that bigger handouts have no adverse economic consequences while the people getting the payments openly admit that they aren’t working because they can live off the taxpayers.

I know which group I believe.

P.S. Both this Wizard-of-Id parody and this cartoon do a great job of showing the economics of incentives.

P.P.S. Since the interview also included some discussion of basic income, here’s a recent study showing how those universal handouts would cripple work incentives.

States Lowering Income Tax Rates

Sun, 07/18/2021 - 12:18pm

The best news of 2021 almost surely is the big expansion of school choice in several states.

That’s a great development, especially for poor and minority families.

But there’s another positive trend at the state level. As indicated by this map from the Tax Foundation, tax rates have been reduced in several jurisdictions.

I’ve already written about Arizona’s very attractive tax reform, though I also acknowledged that the new law mostly stops the tax system from getting worse (because of a bad 2020 referendum result).

But stopping something bad is an achievement, regardless.

What about other states? The Tax Foundation’s article has all the details you could possibly want, including phase-in times and presence (in some states) of revenue triggers.

For purposes of today’s column, let’s simply focus on what’s happening to top tax rates. Here’s a table with the key results, ranked by the size of the rate reduction.

Kudos to Arizona, of course, but Iowa and Louisiana also deserve praise for significantly dropping their top tax rates.

As these states move in the right direction, keep in mind that some states are shifting (or trying to shift) in the wrong direction.

And bigger differences between sensible states and class-warfare states will increase interstate tax migration – with predictable political consequences.

Democrats Embrace Protectionist Tax Hike on Lower-Income and Middle-Class Americans

Sat, 07/17/2021 - 12:34pm

I’ve been warning, over and over and over again, that a European-style welfare state means huge tax increases on ordinary people.

Simply stated, there are not enough rich people to finance big government (even Paul Krugman agrees).

This means Joe Biden and Democrats need to make a choice: What matters most, their desire to make government bigger, or their promise not to impose higher taxes on families making less than $400K per year?

We now have the answer to that question, and I hope nobody is surprised to learn that they picked government over taxpayers.

But what is surprising is that they picked the Trump approach of protectionist taxes on global trade.

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

Democrats have agreed to include a tax on imports from nations that lack aggressive climate change policies as part of a sweeping $3.5 trillion budget plan… The move to tax imports was made public Wednesday, the same day that the European Union outlined its own proposal for a similar carbon border tax, a novel tool that is designed to protect domestic manufacturing. …skeptics caution that a carbon border tax, which has yet to be implemented by any country, would be difficult to carry out, and could anger trading partners and face a challenge at the World Trade Organization. Unlike the Europeans, who outlined their plan in a 291-page document, Democrats released no details about their tax proposal on Wednesday. Calling it simply a “polluter import fee,” the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate. …verifying the amount of carbon…produced by foreign manufacturing is tricky, experts say.

It’s always a bad idea to give politicians a new source of revenue.

But it’s a worse idea to give them a new source of revenue that will require bureaucrats to measure the amount of carbon produced by every imported good. As I pointed out a few days ago when discussing the European Union’s version of this protectionist scheme, that’s a huge recipe for cronyism and favoritism.

P.S. I’ll be very curious to see how different international bureaucracies react to these anti-trade proposals. The OECD and IMF, while usually bad on fiscal issues, historically have favored unfettered trade. And the World Trade Organization exists specifically to protect global commerce. But will these organizations now change their position to curry favor with the nations that control their purse strings?

The theory of “public choice” suggests we shouldn’t be optimistic.

Winners and Losers from a Global Tax Cartel

Fri, 07/16/2021 - 12:56pm

I critiqued Biden’s proposal for a global corporate tax cartel as part of a recent discussion with South Africa’s Free Market Foundation.

Here’s the segment where I explain why it would be bad for developing nations.

At the risk of stating the obvious, Joe Biden is pushing this policy because he wants more tax revenue to fund his misguided plan for a bigger welfare state in the United States.

And the same is true for politicians in other big nations such as France, Japan, and Germany.

So as negotiations continue and rules are decided, rest assured that those countries will look after themselves and politicians from developing nations will be lucky to get a few crumbs from the table.

This discussion gives me a good excuse to put together this list of the potential winners and losers from a global tax cartel.

Since I slapped this together in five minutes, I won’t pretend it’s comprehensive.

But it’s hopefully more complete than a simple statement that politicians are the winners and people in the private sector are the losers.

Speaking of losers, my list includes “Nations with sensible tax policy,” and that’s a good reason to share this story from the New York Times. It’s about Janet Yellen’s efforts to convince Irish politicians to sacrifice their nation’s economic advantage.

The United States is hopeful that Ireland will drop its resistance to joining the global tax agreement… The agreement, which gained the support of the Group of 20 nations on Saturday, would usher in a global minimum tax of at least 15 percent. It would also change how taxing rights were allocated, allowing countries to collect levies from large, profitable multinational firms based on where their goods and services were sold. …Ms. Yellen held high-stakes meetings in Brussels this week with Paschal Donohoe, Ireland’s finance minister… She needs Mr. Donohoe’s support because the European Union requires unanimity among its members to formally join the deal.

So you may be wondering what Ms. Yellen said? Did she have some clever and insightful argument of how Ireland would benefit (or at least not be hurt) if politicians create a global tax cartel?

Nope. The best she could come up with is that Ireland’s tax system wouldn’t be as bad as the one she wants for the United States.

Ms. Yellen told her Irish counterpart that Ireland’s economic model would not be upended if it increased its tax rate from 12.5 percent…it would still have a large gap between its rate and the 21 percent tax rate on foreign earnings that the Biden administration has proposed.

And her weak argument is even weaker when you consider that she’s already pushing for a much-higher minimum tax.

The bottom line is that Ireland has reaped enormous benefits from its decision to enact a low corporate tax rate. But if a global tax cartel is imposed, it would simply be a matter of time before that country gets relegated to being an economic backwater on the periphery of Europe.

P.S. Part of the discussion in the video was about developing nations having the right to copy the economic model (no income tax and no welfare state) that enabled North American and Western Europe to become rich in the 1800s. Sadly, I don’t think many politicians in the developing world are interested in that approach nowadays, but rich nations shouldn’t make it impossible.

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Image credit: Gerald R. Ford School of Public Policy University of Michigan | CC BY-ND 2.0.

3 Issues Where Biden Should (But Probably Won’t) Support Increased Competition

Thu, 07/15/2021 - 10:46am

President Biden recently issued an “Executive Order on Promoting Competition in the American Economy” (EO). It covers a vast array of issues, and can correctly be framed as yet another data point in the thesis that the presidency has grown too big and acquired excessive unilateral powers.

The EO can further be criticized on many of the specific policies it promotes. Among the discouraging items are directives to expand anti-trust enforcement and revisit even past mergers previously cleared by regulators, reverse market reforms on rail, and re-impose “net neutrality” controls over the internet.

It also gets some things broadly right, like promoting generic and biosimilar drugs, and tackling excessive occupational licensing, though to what degree that latter can be solved federally instead of at the state level remains to be seen.

But regardless of the particulars, I think an underappreciated fact is that we’re now fighting on the home turf of liberty. Yes, Biden has an often warped perception of what constitutes competition, but that’s a debate we ought to welcome.

In that spirit, here are 3 issues in which competition is either lacking or under threat in which Biden should (but sadly very likely will not) take the side of increased competition.

1) Trade. Over a year after the deadline obligated by law, Biden’s Commerce Department recently released the Section 232 reports generated at Trump’s request to justify potential, but never implemented, automotive tariffs on national security grounds. Now that they are public, we can confirm that the national security justification was as baseless as we all assumed. The Biden administration should release the remaining Trump-era Section 232 reports on imports of uranium ore, titanium sponges, transformers and their components, and vanadium.

That’s the somewhat good news. Now here’s the bad.

Not only has Biden extended the Trump tariff taxes that actually were implemented, even moving to double them on Canadian lumber, he has doubled down on protectionism with expansion of misguided “Buy American” initiatives. Biden is also an ardent supporter of the Jones Act, a shipbuilding protectionism law that limits trade between American ports to U.S.-flag vessels that has had devastating economic consequences, particularly for isolated jurisdictions like Hawaii and Puerto Rico.

It’s time for Biden to realize that the benefits of competition don’t end at national borders.

2) Education. School choice is on the march, thanks in no small part to the dismal performance of public schools when it came to serving children during the pandemic and re-opening in a timely fashion for in-person learning.

It’s even drawing support from unlikely sources like the Washington Post editorial board, which recently authored a defense of D.C.’s Opportunity Scholarship Program titled with uncharacteristic honesty, “Why are unions and Democrats so opposed to giving poor children a choice in schooling?” They even acknowledged that improvements to D.C. public schools are “perhaps in part due to competition from school choice.” Probably an understatement, but a welcome admission nonetheless.

And while those who largely control the government schools and what they teach don’t want to hear it, another timely benefit of school choice is that it provides the best answer to resolving the curriculum wars.

3) Tax Competition. Companies don’t like to have competition, but it benefits consumers when they do. Governments don’t like competition either, but it benefits taxpayers when they are forced to compete for mobile labor and capital.

Unfortunately, President Biden is determined to eliminate tax competition. He and his Treasury Secretary Janet Yellen are pushing for a global tax cartel with the clear intention of taking advantage of diminished competition to raise taxes.

I don’t expect Biden to reverse his position on tax competition, or any of these issues for that matter, but if he actually took his competition rhetoric seriously, he would.

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

The Case Against Socialism, Part III

Wed, 07/14/2021 - 12:02pm

Part I of this series looked at socialism’s track record of failure, while Part II pointed out that greater levels of socialism lead to greater levels of misery.

For Part III, let’s start with this video on the economics of socialism.

If the world was governed by logic, there would be no need to address this topic for a third time.

After all, the evidence is overwhelming that capitalism (oops, I mean free enterprise) does a better job than socialism.

But it seems that we don’t live in a logical world. We have too many people who have an anti-empirical belief in bigger government.

And, if the polling data is accurate, the problem seems especially acute with young people.

I’ve wondered whether sub-par government schools are part of the problem. Are they mis-educating kids?

I don’t know if that was a problem in the past, but Richard Rahn warns in the Washington Times that it will probably be a problem in the future.

Recent polls have shown rising support for socialism and an increasingly negative view of capitalism, particularly among the young.  …Most of those who say they support socialism are probably unaware that it has failed every place and time that it has been tried. …They may also not be aware that socialism relies on coercion to function… By contrast, capitalism relies on the voluntary exchange of goods and services… Last week at the NEA’s annual meeting, the delegates demanded that the union issue a study criticizing, among many things, “capitalism.” Has anyone thought through the alternatives – a system based on slavery or serfdom…? Under capitalism, investment and productive labor are allocated by individual consumer choice. …Under socialism, there is no good mechanism for meeting consumer demand; the socialist leaders decide what the people should have. There is no mechanism for creating and encouraging innovation – that is why socialist states normally only produce something new after it has already been produced in a capitalist country… So why then are the teachers’ unions advocating that capitalism be attacked, and socialism be applauded? The answer is simple, willful ignorance.

I’ve always supported school choice because I want better educational outcomes, especially for poor and minority students.

In recent months, I’ve wondered we also need school choice because of what teacher unions are doing on issues such as critical race theory and school re-openings.

Now it seems we need choice simply to protect kids from the risk of being propagandized.

P.S. Or protect kids from nonsensical forms of discipline.

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Image credit: ZiaLater | CC BY-SA 3.0.

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

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