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Updated: 37 min 56 sec ago

The European Union’s Carbon Protectionism

Tue, 07/13/2021 - 12:57pm

Over the past four years, Donald Trump presumably was the biggest threat to global trade.

His ignorant protectionism hurt American consumers and businesses – and undermined the competitiveness of the U.S. economy.

Over the next four years (and beyond), it’s quite likely that the biggest threat to global trade will be the European Union.

More specifically, politicians and bureaucrats in Brussels want to toss a hand grenade into cross-border commerce by imposing trade taxes on nations that don’t impose carbon taxes.

The Wall Street Journal has a must-read editorial about this threat to world commerce.

Western politicians have failed to persuade their own voters to commit economic suicide by banning fossil fuels, and forget about China, Russia or India. The climate lobby’s fallback, which is starting to emerge, is to punish the foreigners and their own consumers with climate tariffs. Bureaucrats at the European Commission are due to unveil the proposed Carbon Border Adjustment Mechanism (CBAM) later this month… Brussels wants to impose tariffs to bring the cost of carbon-dioxide emissions tied to an imported good into line with what a European producer would pay to produce the same good. …a carbon tariff would impose an enormous burden on companies seeking to sell to the EU—even the low-emitting firms—and as a result probably will trigger a trade war. …Under the leaked plan, foreign firms would have to undertake detailed carbon audits to report emissions to EU regulators, and then would have to work out what proportion of the emissions attributable to goods shipped to the EU already were covered by carbon taxes elsewhere. …The choice between costly compliance or a punitive default tariff risks deterring smaller foreign companies from trying to navigate this system.

Needless to say, the so-called carbon audits will create big openings for cronyism and favoritism.

Lobbyists will be fat and happy while businesses and consumers will get hit with higher costs.

The editorial’s conclusion wisely warns that it would be a big mistake for Europeans to trigger a trade war.

Western elites haven’t convinced their voters to pay the price of their climate obsessions. Like Donald Trump, they now want to blame foreigners. In the process they’ll force their consumers to pay more for imports and domestic goods, and they’ll harm their own exporters if countries retaliate. The last thing the world economy needs as it recovers from a pandemic is a climate-change trade war.

Writing for Forbes, Tilak Doshi speculates whether the United States will copy the Europeans.

…the European Parliament overwhelmingly endorsed the creation of a “carbon border adjustment mechanism” (CBAM) that would shield EU companies against cheaper imports from countries with “weaker” climate policies. …Now that the Biden administration has elevated climate change to its highest priority across the whole of government, it would seem that the EU and the US working together with like-minded governments in Canada and the UK would be in a position to set up a “trans-Atlantic climate club”  and thereby impose a global cost on carbon emissions. …Australian Trade Minister Dan Tehan labelled carbon tariffs “a new form of protectionism.” …For most developing countries, “worries of an increasing carbon footprint generated by economic growth are second to worries that growth many not happen at all.” …What sets off this new protectionism from its predecessors is the sheer scope of its application.

I’m actually hopeful on this issue.

Biden and his team doubtlessly are sympathetic to the E.U.’s initiative, but I don’t think Congress will approve a carbon tax on the American people.

And if the U.S. doesn’t have a carbon tax, there wouldn’t be any reason to impose discriminatory taxes on other nations that also don’t have that levy.

That being said, the Biden Administration would have some leeway to cause problems. For instance, would they push for the World Trade Organization to accept the E.U.’s attack on free trade?

When dealing with politicians, I always hope for the best, but assume the worst.

P.S. Here are my seven reasons to support free trade, as well as my eight questions for protectionists.

P.P.S. You shouldn’t be surprised to learn that the French were early advocates of carbon protectionism.

P.P.P.S. Some American politicians have pushed for regulatory protectionism.

Is “Capitalism” Worth Defending?

Mon, 07/12/2021 - 12:05pm

I like capitalism, both because it’s moral and it delivers superior results compared to any alternative.

I even have a 2-part series (here and here) on “defending capitalism” and a 5-part series on the “case for capitalism.”

Perhaps most important, it’s a system that delivers great results if the goal is lifting people out of poverty.

Is it possible, though, that “capitalism” is a tarnished word?

That may be the case, according to new polling data from the United Kingdom.

Edward Malnick recently wrote about Frank Luntz’s research, which is finding knee-jerk hostility to the “C” word.

Dr Frank Luntz is testing public opinion in Britain to find an alternative to “capitalism”, after 170 years of use, because he fears it is becoming a “bad word”. …Capitalism itself is already a “bad word” in the US and is fast becoming so in the UK too, he says, adding: “It’s one of the key things I’m trying to figure out … does this country need an alternative to the word capitalism? I think it does. We’re about to find out.” Questions on capitalism, and voters’ approach to it, form part of a giant survey Dr Luntz has put together as part of a project for the Centre for Policy Studies (CPS) think tank, at which he has based himself for the summer.

Nick King of the Centre for Policy Studies suggests we use something other than “capitalism” when describing an agenda of limited government.

…language matters. Capitalism is unpopular. But to many of capitalism’s advocates, terms like free enterprise and open markets can be used interchangeably with it – and other polling suggests these concepts are more favourably received. If a phrase is more appealing than capitalism to those who reject it as a concept, then it makes sense for those who believe in the benefits of this system to adopt the language which people more readily accept.

I’m perfectly happy to talk about “free enterprise” rather than “capitalism.”

I even wrote about making that verbal shift back in 2016, though I obviously still frequently use “capitalism” when talking about economic liberty.

But perhaps I need to be more disciplined. Especially if I want my message to be heard by young people.

Kristian Niemietz of London’s Institute of Economic Affairs has a very depressing assessment of what millennials are thinking.

Surveys show that there is a lot of truth in the cliché of the ‘woke socialist Millennial’. Younger people really do quite consistently express hostility to capitalism, and positive views of socialist alternatives of some sort. For example, around 40 per cent of Millennials claim to have a favourable opinion of socialism and a similar proportion agree with the statement that ‘communism could have worked if it had been better executed’. …67 per cent of younger people say they would like to live in a socialist economic system. Young people associate ‘socialism’ predominantly with positive terms, such as ‘workers’, ‘public’, ‘equal’ and ‘fair’. Very few associate it with ‘failure’ and virtually nobody associates it with Venezuela, the erstwhile showcase of ‘21st Century Socialism’. Capitalism, meanwhile, is predominantly associated with terms such as ‘exploitative’, ‘unfair’, ‘the rich’ and ‘corporations’. …When presented with an anti-capitalist statement, the vast majority of young people agree with it… However, when presented with a diametrically opposed pro-capitalist statement, we often find net approval for that statement too. This suggests that when young people embrace a socialist argument, this is often not a deeply-held conviction.

None of this is a surprise. I’ve written a couple of times about the foolish views of young people.

Heck, I was writing about this problem way back in 2013.

I’m tempted to conclude that young people are simply stupid and we shouldn’t allow them to vote.

But I realize that’s not a constructive sentiment. So perhaps instead we should send them to live for a year in GreeceArgentina, or Italy. And if that doesn’t sober them up, they can spend a second year in VenezuelaNorth Korea, or Cuba.

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Image credit: Jacob Bøtter | CC BY 2.0.

Biden’s Misguided Plan for a Bigger Welfare State

Sun, 07/11/2021 - 12:48pm

President Biden pushed through $1.9 trillion of new spending earlier this year, but that so-called stimulus plan was mostly for one-time giveaways. As I warn in this recent discussion on Denver’s KHOW, we should be much more worried about his proposals to permanently expand the welfare state.

When I first got to Washington, I would be upset that politicians wanted to add billions of dollars to the burden of government.

Well, those were the good ol’ days. Biden is proposing to divert trillions of dollars from the private sector to expand the welfare state.

Even worse, he wants to make more Americans dependent on the federal government.

Maybe that’s a smart way of buying votes, but it will erode societal capital.

John Cogan and Daniel Heil of the Hoover Institution warned about the consequences of this dependency agenda in a column for the Wall Street Journal.

The federal government’s system of entitlements is the largest money-shuffling machine in human history, and President Biden intends to make it a lot bigger. His American Families Plan—which he recently attempted to tie to a bipartisan infrastructure deal—proposes to extend the reach of federal entitlements to 21 million additional Americans, the largest expansion since Lyndon B. Johnson’s Great Society. …more than half of working-age households would be on the entitlement rolls if the plan were enacted in its current form. …57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

Many of the handouts would go to people with middle-class incomes.

And higher.

…The American Families Plan proposes several new entitlement programs. One promises students the government will pick up the entire cost of community-college tuition; another promises families earning 1.5 times their state’s median income that Washington will cover all daycare expenses above 7% of family income for children under 5; still another promises workers up to 12 weeks of federally financed wage subsidies to take time off to care for newborns or sick family members. …Two-parent households with two preschool-age children and incomes up to $130,000 would qualify for federal cash assistance for daycare. Single parents with two preschoolers and incomes up to $113,000 would qualify. And some families with incomes over $200,000 would be eligible for health-insurance subsidies. Other parts of the plan, such as paid leave and free community college, have no income limits at all.

The Wall Street Journal opined on this issue last month. Here are the key passages from their editorial.

The entitlements are by far the biggest long-term economic threat from the Biden agenda. …entitlements that spend automatically based on eligibility are nearly impossible to repeal, or even reform, and they represent a huge tax-and-spend wedge far into the future. …We’d highlight two points. First is the dishonesty about costs. Entitlements always start small but then soar. The Biden Families Plan is even more dishonest than usual. For example, it pretends the child tax credit ends in 2025, so its cost is $449 billion over the 10-year budget window that is used for reconciliation bills that require only 51 votes to pass the Senate. But a future Congress will never repeal the credit. …Second, these programs aren’t intended as a “safety net” for the poor or those temporarily down on their luck. They are explicitly designed to make the middle class dependent on government handouts.

The editorial explicitly warns that the United States will economically suffer if politicians copy Europe’s counterproductive redistributionism.

…on present trend the U.S. is falling into the same entitlement trap as Western Europe. Entitlement spending requires higher taxes, which grab 40% or more of GDP. Economic growth declines as more money flows to transfer payments instead of investment. The entitlement state becomes too large to afford but also too politically entrenched to reform. …Only a decade ago the Tea Party fought ObamaCare. Now most Beltway conservatives worry more about Big Tech than they do Big Government. If the Biden Families Plan passes, these conservatives will find themselves spending the rest of their careers as tax collectors for the entitlement state.

Amen. I’m baffled when folks on the left argue that we should “catch up” with Europe.

Are they not aware that American living standards are far higher? Do they not understand that low-income people in the United States often have more income than middle-class people on the other side of the Atlantic Ocean?

P.S. As I mentioned in the interview, the 21st century has been bad news for fiscal policy, with two big-government Republicans and two big-government Democrats.

For what it’s worth, the $3,000-per-child handouts are Biden’s most damaging idea. In one fell swoop, he would create a trillion-dollar entitlement program and repeal the successful Clinton-Gingrich welfare reform.

Haiti and the Failure of Foreign Aid

Sat, 07/10/2021 - 12:41pm

Foreign aid is an expensive failure.

American taxpayers have coughed up hundreds of billions of dollars in recent decades for various government-to-government handouts, and the total is far higher when you include the aid payments of other nations and the activities of international bureaucracies.

Yet rather than helping, these handouts most likely have reduced prosperity in recipient nations.

Why? Because foreign aid subsidizes bigger government and creates a dependency culture.

And it’s not just economists who recognize this problem. A column in the New York Times by Maria Abi-Habib explores how foreign aid has backfired for Haiti.

Almost every time Haitians think their circumstances cannot get any worse, it seems the nation takes another ominous turn, and it is now teetering on the verge of a political void… In the shadow of the richest country in the world, people wonder: How could this happen to Haiti? …Haiti’s failures have not occurred in a vacuum; they have been assisted by the international community, which has pumped $13 billion of aid into the country over the last decade. But instead of the nation-building the money was supposed to achieve, Haiti’s institutions have become further hollowed out in recent years. …the money has served as a complicating lifeline — leaving the government with few incentives to carry out the institutional reforms necessary to rebuild the country, as it bets that every time the situation worsens, international governments will open their coffers… The aid has propped up the country and its leaders… The nation-building exercises that the United States and its international partners have embarked upon in Haiti and around the world have done little to create functioning states, instead creating a system where questionable actors with little national support…are propped up.

I’m tempted to say that the headline should be changed to “Haiti Still Despairs Because of $13 Billion in Foreign Aid.”

But I’ll instead make the more modest point that the Ms. Abi-Habib is correct about Haiti needing state capacity (properly defined, of course).

But that’s just part of the solution. Haiti also needs more economic liberty.

According to the most-recent edition of Economic Freedom of the World, the country has a bad score of 6.58 on a 1-10 scale, which places it #104 out of 162 nations.

And that’s actually an exaggeration because Haiti gets a misleadingly good score (#15) for fiscal policy.

Yes, the overall level of taxes and spending is modest, but that’s not a policy choice. It’s because the government is too incompetent to administer a tax system.

The data from the most-recent edition of the Index of Economic Freedom also shows that Haiti has bad policy, with an overall score of 50.8 on a 0-100 scale, which means the country is #155 out of 178 nations

That’s not quite as bad as Venezuela, but it’s still a horrible score.

The obvious takeaway is that foreign aid is bad for taxpayers and bad for recipient nations.

Free markets are the recipe for growth and prosperity. Government-to-government handouts not only don’t work, but they seem to make things worse.

P.S. Allowing free trade between the U.S. and Haiti would be a very practical way of helping.

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Image credit: Oxfam East Africa | CC BY 2.0.

Dr. Eduardo Morgan Jr., RIP

Fri, 07/09/2021 - 3:52pm

I was saddened to learn of the passing yesterday of Dr. Eduardo Morgan Jr., who was instrumental in CF&P’s early efforts to establish and coordinate a global response to overreaches of the OECD, a leader in the movement for freedom, and a good friend and mentor to me personally.

Dr. Morgan served as Panama’s Minister of Government and Justice in 1968, as the president’s personal envoy to the government of Japan from 1979 to 1982, and as Ambassador of the Republic of Panama in Washington, DC from 1996 to 1998.

It was in his role as U.S. ambassador that Dr. Morgan saw the frustrating hypocrisy of U.S. leaders’ attacks on low-tax jurisdictions that sought to compete for investment and capital using many of the same policies, such as respect for financial privacy, prevalent in parts of the United States. 

And it was our mutual understanding of the threat posed by organizations like the OECD to the economic wellbeing of countries such as Panama that brought us together. His influence and leadership helped us fight and win crucial early battles against the global tax elite.

CF&P, and really the entire freedom movement, will undoubtedly miss Dr. Morgan’s advocacy and leadership, but I am truly saddened at the loss of this great man… Thank you Eduardo for your friendship and love… God bless you… Rest in peace.

Tax Cartels Mean Ever-Higher Tax Rates

Fri, 07/09/2021 - 12:58pm

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatcher triggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said. The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

  1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
  2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click herehere, and here.

The Adverse Economic Consequences of “Basic Income”

Thu, 07/08/2021 - 12:50pm

When I first looked at the issue of “basic income,” back in 2013, my gut reaction was deep skepticism.

That’s because I feared many people would drop out of the labor force if they could live off government handouts (as illustrated by this Wizard-of-Id parody).

It’s true that the current amalgamation of welfare programs also discourages work and creates dependency, but a government-provided basic income could make a bad situation worse.

Especially if politicians didn’t get rid of other redistribution programs (a very realistic concern).

That being said, what’s the evidence, either pro or con?

There was an experiment in Finland, which poured cold water on the concept.

And now we have some U.S.-focused research. Four economists from the University of Chicago (Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky) investigated this topic in a new study from the National Bureau of Economic Research.

Here’s a description of their methodology, which used lottery winnings as a proxy for the effect of government handouts.

How do Americans respond to idiosyncratic and exogenous changes in household wealth and unearned income? Economists and policymakers are keenly interested in this question. …the earnings responses to such shocks are important…to assess the effects of public policy such as…universal basic income. However, giving a credible answer to this question has proven difficult. …We analyze a wide range of individual and household responses to lottery winnings and explore the economic implications of these responses for a number of key questions. …our analyses are based on a population-level panel data set which is constructed by combining the universe of worker tax records with third-party-reported lottery winnings.

And here are some of their results.

We find that Americans respond to an exogenous increase in household wealth by significantly reducing their employment and labor earnings. For an extra 100 dollars in wealth, households reduce their annual earnings by approximately 2.3 dollars on average. …the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents.

At the risk of understatement, this data should be the death knell for this bad idea.

Especially when you consider the impact of the higher tax rates that would be necessary to fund the basic income.

As illustrated by Figure 5.1 from the study, tax-financed handouts would be bad news for America’s economy.

P.S. Swiss voters overwhelmingly rejected a referendum for basic income back in 2016 (perhaps my speech in Switzerland convinced a few people?).

P.P.S. Interestingly, Joe Biden expressed skepticism about the idea back in 2017, but he obviously has had a change of heart, given his current support for big, per-child handouts.

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Image credit: Steven Depolo | CC BY 2.0.

Economic Illiteracy from the Washington Post

Wed, 07/07/2021 - 12:17pm

I’ve written nearly 6,100 columns for International Liberty, but only one of those columns has focused on Lebanon.

That was back in 2018, when I explained how the nation could have avoided a fiscal crisis with a spending cap.

Now it’s time to once again write about Lebanon, though maybe today’s column is actually more about media bias.

That’s because this story in the Washington Post, authored by Sarah Dadouch, shows how journalists have far too little understanding of economics.

Lebanon’s worsening financial meltdown has been accompanied by a dire shortage of imported fuel. Roads in cities like Beirut and Tripoli are now lined with cars queuing for hours to get their allotted amount of gasoline, at most a third of a tank. …smugglers have discovered there’s good money to be made by buying gasoline in Lebanon at the heavily subsidized price and then selling it on the black market in Syria, which has a debilitating fuel crisis of its own. …Many Lebanese politicians blame the gasoline crisis partly on smuggling… In April, Lebanon’s caretaker energy minister said the disparity in gasoline prices between Lebanon and Syria means smugglers can make huge profits next door. …The Lebanese army, which has received more than $2.5 billion in aid from the United States since 2006, has made concerted efforts to curb the illicit commerce.

The smugglers aren’t the cause of Lebanon’s energy crisis. They’re merely a symptom of the real problem, which is that the country’s politicians buy votes from motorists by subsidizing gasoline.

Get rid of those subsidies and smuggling will disappear overnight.

The moral of the story is that bad things happen when politicians interfere with prices. We have forty centuries of evidence showing price controls don’t work. When politicians try to curry favor by rigging prices, bad things happen.

And the second moral of the story is that journalists don’t understand the first moral of the story (not that I’m surprised, given the shaky track record of the Washington Post).

P.S. I’m flabbergasted that American taxpayers have sent $2.5 billion of foreign aid to Lebanon’s army, which gives the government fiscal leeway to pursue bad policies such as gasoline subsidies!

P.P.S. While gasoline subsidies are an insanely foolish policy for a nation enduring a fiscal crisis, fiscal policy isn’t even Lebanon’s biggest problem. As noted in this video, the country does even worse on trade policy, regulatory policy, and rule of law.

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

Free-Market Health Care

Tue, 07/06/2021 - 9:59am

Programs such as Medicare and Medicaid, along with the tax code’s healthcare exclusion, have created a system where consumers directly pay for only about 10 percent of the care they receive.

We think it’s normal and appropriate for either the government or an insurance company to foot the bill.

Yet this system of “third-party payer” explains why the health care system in the United States is inefficient and expensive.

Is it possible, though, to put the toothpaste back in the tube? Can we unwind the bad government policies that have undermined market forces?

There are certainly big-picture reforms that would be helpful. Genuine entitlement reform could address the problems with Medicare and Medicaid, and fundamental tax reform could get rid of the healthcare exclusion.

But progress is possible even without major policy change.

Reason interviewed a doctor, Lee Gross, who decided to set up a practice based on “direct primary care,” which means no involvement from government or insurance companies. Just health consumers and health providers directly buying and selling.

Here’s some of what he said about this market-based approach.

When I was in the fee-for-service system, I felt like I was playing a game of Whac-A-Mole with Medicare. …Eventually we just said, “No more.” …the epiphany was “Why are we inserting so many people at the primary care level between the doctor and the patient? Why are we insuring primary care?” The more people that you insert between the doctor and patient, the more expensive it gets, the more cumbersome it gets…we created one of the first direct primary care practices in the country. …essentially it’s a membership-based primary care program. …Once a patient is a member of our practice, anything that we can do within the four walls of our office is included at no additional charge. …Insurance is good for the big stuff. It’s not good for the little stuff. It’s too complicated. What we do in direct primary care is we make the predictable things affordable for everybody. We take the stuff that you’re going to need on an everyday basis and we put affordable price tags on it, and we say you don’t need your insurance for this. In fact, the insurance makes it more expensive. …You need your homeowners insurance if your house burns down. You don’t need it to mow the lawn.

The good news is that Dr. Gross’ practice is part of a growing movement.

Direct primary care is absolutely a growing movement. …There’s well over 1,500 practices around the country… There are some regulatory barriers that get in the way of expanding this model. …if we’re looking for the ideal health care system, we want to see three pillars. We want to see lower cost, better quality, and more choices. You cannot have all three of those in a government-run system. You can only have those in a free market capitalist system.

Indeed, I’ve shared previous examples of this phenomenon from Maine and North Carolina.

And it even works for surgery, as you can see from this must-watch video from Reason.

Let’s now circle back to some analysis of what’s wrong with the current system.

John Stossel explained a few years ago how government-encouraged over-insurance causes problems.

Someone else paying changes our behavior. We don’t shop around. We don’t ask, “Do I really need that test?” “Is there a place where it’s cheaper?” Hospitals and doctors don’t try very hard to do things cheaply. Imagine if you had “grocery insurance.” You’d buy expensive foods; supermarkets would never have sales. Everyone would spend more. Insurance coverage—third-party payment—is revered by the media and socialists (redundant?) but is a terrible way to pay for things. Today, 7 in 8 health care dollars are paid by Medicare, Medicaid or private insurance companies. Because there’s no real health care market, costs rose 467 percent over the last three decades. By contrast, prices fell in the few medical areas not covered by insurance, like plastic surgery and LASIK eye care. Patients shop around, forcing health providers to compete.

The final couple of sentences are extremely important.

As illustrated by this data from Mark Perry, there are a few parts of the health care system where there’s little or no third-party payer.

And what do we find? Prices go down rather than up.

For all intents and purposes, the goal should be to make health insurance more like homeowners insurance or auto insurance.

Speaking of the latter, David Graham compared market-driven auto insurance and government-subsidized health insurance.

There are…similarities between health care and car ownership… We can go for many years with predictable spending on both cars and medical care until — out of the blue — something terrible happens. For that reason, we value insurance for both. But there’s a key difference… Car insurance, while not a trivial expense, is a relatively small share of the total cost of owning a car. According to the AAA, the average premium was $1,023, just under 12 percent of the total cost of ownership. Even excluding depreciation, insurance is just one-fifth of the total cost. In other words, we do not expect auto insurers to pay claims for most of the cost of operating and maintaining a car. Health care is completely the opposite. …Insurance adds administrative costs and bureaucratic interference. …Left to our own devices, we would never buy coverage for every single medical expense.

The moral of the story is that government intervention has made America’s health system a mess.

Unsurprisingly, many politicians say the answer it to have even more government (which is how we got Obamacare).

P.S. In less than eight minutes, I explain the economics of third-party payer in this speech.

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: Department of Foreign Affairs and Trade | CC BY 2.0.

Government Intervention and Unintended Consequences

Mon, 07/05/2021 - 12:39pm

Most people say the key feature of capitalism is competition. Hard to argue with that characterization, but I would go one step further and say that it is one of the consequences of competition – “creative destruction” – that best captures why free markets make it possible for entrepreneurs to deliver mass prosperity.

But what’s the key feature of government? Is it wasteDependencyCorruption?

Those are all good answers, but perhaps “unintended consequences” should be first on the list. Courtesy of Reason, here are three examples.

I’ve previously written about both ethanol subsidies and so-called employment protection legislation, two of the three examples were already familiar to me.

I wasn’t aware, however, that businesses resorted to big concrete edifices to get around Vermont’s billboard ban (though I have read, in a classic case of baptists and bootleggers, that big companies such as hotel chains sometimes try to thwart competition from small businesses by teaming up with environmentalists to ban billboards).

In the world of fiscal policy, there are many example of unintended consequences.

I’ll conclude by asking an open question: Can anyone give an example of a positive unintended consequence of government?

This isn’t a joke query. I assume there are a few examples, even if I can’t think of any of them.

P.S. Here’s a humorous example of an unintended consequence.

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Image credit: Andy Withers | CC BY-NC-ND 2.0.

Is the United States Defined by 1619 or 1776?

Sun, 07/04/2021 - 12:29pm

Since this is America’s Independence Day, I’m going to continue my tradition (see 2010201120122013201420152016201720182019, and 2020) of authoring a July 4-themed column.

What will make this year special, though, is that we’re going to tackle the heavy topic of whether the United States lives up to its own ideals.

Two years ago, the New York Times unveiled the “1619 Project,” which largely argues that slavery and racism are part of the nation’s DNA. The NYT states that the project “aims to reframe the country’s history by placing the consequences of slavery…at the very center of our national narrative.”

As a libertarian, I don’t believe our government is good and pure today, and I also don’t believe it was good and pure in the past. So I have no problem with a skeptical assessment of American history.

That being said, I have a positive view of America’s founding and consider the Declaration of Independence in 1776 and the unveiling of the Constitution in 1787 as victories for liberty.

But only partial victories. What happened in the late 1700s should be viewed as the beginning of a process that slowly but surely has extended the blessings of liberty to the broader population.

Just as Martin Luther King stated back in 1964, “the arc of the moral universe…bends toward justice.”

At the risk of oversimplifying, the 1619 Project has people fighting about two sides of the same coin.

  • Some people say the story of the United States is bad because of a legacy of slavery, segregation, and racism.
  • Other people say the story of the United States is good because of progress against slavery, segregation, and racism.

But the battle is about more than whether we have a glass-half-full or glass-half-empty view of history.

It’s also about fanciful claims, such as the assertion that the War of Independence was fought to preserve slavery. In an article for Quillette, Phillip Magness points out that historians almost universally reject that interpretation.

Critics on both the Left and Right took issue with the paper’s declared intention of displacing 1776 with the alternative date… For several months after the 1619 Project first launched, its creator and organizer Nikole Hannah-Jones doubled down on the claim. “I argue that 1619 is our true founding,” she tweeted the week after the project launched. …the historical controversies around the 1619 Project intensified in late 2019 and early 2020. A group of five distinguished historians took issue with Hannah-Jones’s lead essay, focusing on its historically unsupported claim that protecting slavery was a primary motive of the American revolutionaries when they broke away from Britain in 1776. …a historian who the Times recruited to fact-check Hannah-Jones’s essay revealed that she had warned the paper against publishing its claims about the motives of the American Revolution on account of their weak evidence. The 1619 Project’s editors ignored the advice.

Indeed, Magness’ article discusses how the New York Times has largely conceded it made a mistake and has “stealth edited” the 1619 website.

Magness also has criticized the way supporters of the 1619 Project are attempting to promote statist economic policies.

Here’s some what he wrote for the American Institute for Economic Research.

When I first weighed in upon the New York Times’ 1619 Project, I was struck by its conflicted messaging. …certain 1619 Project essayists infused this worthy line of inquiry with a heavy stream of ideological advocacy. Times reporter Nikole Hannah-Jones announced this political intention openly, pairing progressive activism with the initiative’s stated educational purposes. …A historical discussion about the Constitution’s notoriously strained handling of slavery quickly drifted into a list of partisan grievances against the tax and health care policy views of congressional Republicans in the twenty-first century. …The 1619 Project, it seemed, could serve as both an enduring long-term curriculum for high school and college classrooms and an activist manual… This tendency finds its most visible display in…Matthew Desmond’s essay on the relationship between slavery and modern American capitalism. …Lurking beneath it all was a long list of Desmond’s own modern progressive political causes—economic inequality…and a general disdain for deregulation and free market thought. In short, Desmond was weaponizing the history of slavery to attack modern capitalism.

If you want to spend 79 minutes learning about why Desmond is wrong, this Reason interview with Magness is very informative.

I’ll simply add that it’s absurd to link slavery with capitalism. In a laissez-faire society, government’s legitimate role is to protect the “negative rights” of life, liberty, and property.

Yet slavery is based on government laws that allow one person to own another person.

Let’s wrap up today’s column by looking at the future rather than the past.

In a book review for the Wall Street Journal, Jason Riley discusses Robert Woodson’s concerns that the 1619 Project may promote a victim mentality and discourage upward mobility.

Mr. Woodson is a veteran community activist who broke with the traditional civil-rights leadership in the 1970s after realizing that the agenda of “racial grievance groups” like the NAACP was increasingly at odds with the actual wants and needs of the black underclass. …After the New York Times published its “1619 Project”…he became incensed. …Mr. Woodson responded by initiating his own project, “1776 Unites,” which enlisted a group of black scholars, journalists and social activists “who uphold the true origins of our nation and the principles through which its founding promise can be fulfilled.” …Mr. Woodson released “Red, White and Black: Rescuing American History from Revisionists and Race Hustlers.” The book is a collection of essays by 1776 Unites participants, and its publication is a public service. …In the book’s introduction, Mr. Woodson writes that his goal is not to offer point-by-point rebuttals. Rather, he wants to “debunk the myth that present-day problems are related to our past . . . specifically, debunking the myth that slavery is the source of present-day disparities and injustice.” Mr. Woodson understands that pointing out the moral shortcomings of others might prove cathartic, but it will do little if anything to facilitate black upward mobility. And he flatly rejects the notion that “the destiny of black Americans is determined by what whites do—or what they have done in the past,” which is otherwise known as critical race theory.

As I wrote a few days ago, critical race theory can be a helpful way to understand history, but it also can be harmful if it labels everyone as either a victim or an oppressor.

much prefer how Walter Williams viewed race-related issues.

America’s Future Fiscal Crisis Can Be Averted

Sat, 07/03/2021 - 12:14pm

I’m not optimist about America’s fiscal future. Thanks primarily to entitlement programs, the long-run outlook shows an ever-increasing burden of government spending.

And rather than hit the brakes, Biden wants to step on the gas with new giveaways, especially his plan to gut Bill Clinton’s welfare reform by creating new per-child handouts that would subsidize idleness and family dissolution.

But that doesn’t mean the problems can’t be fixed. We simply need to replace fiscal profligacy with spending restraint.

To set the stage for this discussion, here’s a look at what’s happened to the budget over the past several decades.  You can see how the burden of federal spending has steadily increased, with noticeable one-time bumps in 2008-2009 (TARP and Obama’s so-called stimulus) and 2020-2021 (coronavirus).

The chart also includes projections between 2021 and 2031, based on new numbers from the Congressional Budget Office.

For today’s column, I want to focus on the next 10 years and show how the current fiscal mess can be averted with some modest spending restraint.

This second chart shows that spending actually drops over the next two years as coronavirus-related spending comes to an end. But once we get to 2023, the orange line shows that “baseline” spending (what happens to the budget if things are left on autopilot) climbs rapidly, more than twice the rate needed to keep pace with inflation.

But if there’s any sort of fiscal restraint (a freeze or some sort of spending cap), then the numbers look much better.

More specifically, a freeze or a 1-percent spending cap would actually produce a budget surplus by the year 2031.

But I’m not fixated on getting to a balanced budget. What’s more important is that the burden of government spending shrinks when the budget grows slower than the private sector.

In other words, we get good results when policy makers follow fiscal policy’s Golden Rule.

P.S. While it’s difficult to convince politicians to support spending restraint, it’s worth noting that the nation enjoyed a five-year spending freeze between 2009-2014.

P.P.S. In the long run, a spending freeze almost certainly requires genuine entitlement reform.

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Image credit: GPA Photo Archive | Public Domain Mark 1.0.

The Tradeoff Between Tax Progressivity and Economic Output

Fri, 07/02/2021 - 12:03pm

Almost everybody (even, apparently, Paul Krugman) agrees that you don’t want to be on the downward-sloping part of the Laffer Curve.

That’s where higher tax rates do so much economic damage that government collects even less revenue.

But I would argue that tax increases that produce more revenue also are a bad idea.

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

That would not be a good deal, at least for those of us who aren’t D.C. insiders.

Heck, according to research from economists at the University of Chicago and Federal Reserve, there are some tax increases that would destroy even greater levels of private income for every additional dollar that politicians got to spend.

The simple way of thinking about this is that you don’t want to be at the revenue-maximizing point of the Laffer Curve.

Because the closer you get to that point, the greater the damage to the private sector compared to any revenue collected.

To help understand this key point, let’s review a new study from Spain’s central bank. Authored by Nezih Guner, Javier López-Segovia and Roberto Ramos, it investigates the impact of higher tax rates.

They first look at what happens when progressivity (τ) is increased.

In the first experiment, we…change…the entire tax schedule, so that all households below the mean labor income face lower average taxes, while those above the mean income face higher average taxes. Since…richer individuals face higher taxes, all else equal, the government collects more taxes. All else, however, is not equal since more progressive taxes lower incentives to work and save. As a result, a higher τ might result in lower, not higher, revenue. The question is where the top of the Laffer curve is. We find that the tax revenue from labor income is maximized with τ = 0 .19. The increase in tax collection is, however, very small: the tax revenue from labor income increases only by 0.82% (or about 0.28% of the GDP). The tax revenue from labor income is, however, only one part of the total tax collection. There are also taxes on capital and consumption. With τ = 0 .19, while the tax collection from labor income is maximized, the total tax collection declines by 1.55%. This happens since with a higher τ, the aggregate labor, capital and output decline significantly. Indeed, the total tax collection falls for any increase in τ, and the level of τ that maximizes total tax revenue is much lower, τ = 0 .025, than its benchmark value.

The key takeaway is that more progressivity puts Spain on the wrong (downward-sloping) side of the Laffer Curve.

Here’s Table 6, which shows big declines in output, labor supply, and investment as progressivity increases.

Here’s some of the accompanying explanation.

The upper panel of Table 6 shows that capital, effective labor and output decline monotonically with τ. Hence, as the economy moves from τ = 0 .1581 to τ = 0 .19, the government is collecting higher taxes from labor, but the aggregate labor supply and output decline. For τ higher than 0.19, the decline in labor supply dominates and tax collection from labor income is lower. …The level of τ that maximizes the total tax collection is 0.025, which implies significantly less progressive taxes than in the benchmark economy. …In the economy with τ = 0 .025, the aggregate capital, labor and output increase significantly. The steady state output, for example, is almost 11 percentage points higher than the benchmark economy. As a result, the government is able to collect higher taxes despite lowering taxes on the top earners.

The authors also put together an estimate of Spain’s Laffer Curve, with the red-dashed line showing total tax revenue.

The authors also looked at what happens if politicians simply increase top tax rates.

They found that there are scenarios that would enable the Spanish government to collect more revenue.

We find that it is possible to generate higher total tax revenue by increasing taxes on the top earners. …The main message of our quantitative exercises is that…the extra revenue is not substantial. Higher progressivity has significant adverse effects on output and labor supply, which limits the room for collecting higher taxes. As a result, the only way to generate substantial revenue is with significant increases in marginal tax rates for a large group

But notice that those higher taxes would have “significant adverse effects on output and labor supply.”

Which brings us back to the earlier discussion about the desirability of causing a lot of damage to the private economy in order to give politicians a bit more money to spend.

The authors have a neutral tone, but the rest of should be able to draw the logical conclusion that higher taxes would be a big mistake for Spain.

And since the underlying economic principles apply in all nations, we also should conclude that higher taxes would be a big mistake for the United States.

P.S. We conducted a very successful experiment in the 1980s involving lower tax rates. Biden now wants to see what happens if we try the opposite approach.

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Image credit: Max Pixel | CC0 Public Domain.

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