Monday, May 31, 2010

Taxpayers vs. Bureaucrats, Part XXVII

Another local government in California is contemplating bankruptcy. That's hardly big news, though, since many California jurisdictions have been bled dry by greedy public sector unions and the city of Vallejo already has thrown in the towel. What is amazing, though, is that the government unions are trying to get the state to pass a bill barring bankruptcy. This is eerily akin to the part of Atlas Shrugged where government officials torture John Galt in hopes of trying to force him to produce. The political thugs in Atlas Shrugged were desperate because people no longer were producing anything they could steal. The pathetic politicians and government workers - both in Ayn Rand's book and in California - obviously don't understand that parasites should not be so greedy that they kiill the host animal. Here's a Reuters excerpt:

Antioch's leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area. ...But cost-cutting measures may not be enough to keep Antioch's books balanced, so its city council is openly discussing bankruptcy. ...Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm. ...Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo's general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions. Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014. ...Talk of municipal bankruptcy has not escaped California's politically powerful public employee unions. A number of them are pressing the legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could be stacked with union-friendly appointees, bankruptcy pleas could be rejected or delayed. "It's a horrible bill," Levinson said. "If you don't have the bankruptcy outlet, what do you do? If you can't pay your bills what do you do?"

Get Government Out of the Education Business

There's a controversy in Texas because the State Board of Education has mandated the inclusion of certain materials in textbooks. This has elicited howls of protests from the left, which generally has controlled how some issues are portrayed. Since I don't want leftist propaganda being pushed on kids, I'm mildly sympathetic to the Texas educrats, but the best way to solve the controversy is school choice. As Jeff Jacoby explains for the Boston Globe, education in America should be more like religion. This means getting rid of one-size-fits-all monopoly schools operated by the government:

“Throughout American history,’’ writes Neal McCluskey of the Cato Institute, “public schooling has produced political disputes, animosity, and sometimes even bloodshed between diverse people.’’ Political fighting is neither rare nor anomalous: In the course of just one school year, 2005-06, McCluskey tallied almost 150 reported cases of public-school conflicts. There were bitter battles that year over Darwinism-vs.-intelligent-design in Pennsylvania and Kansas, heated fights over books about Cuba in Florida, and an emotional dispute in California over the portrayal of Hindus in history texts. In Lexington, Mass., a teacher’s decision to read a story celebrating gay marriage to her second-grade class without first notifying parents triggered a fight that ultimately wound up in federal court. Again and again, Americans find themselves at war with each other over public schooling. Yet furious conflict over religion in this country is almost unheard-of. Why? Why don’t American Catholics and Protestants angrily attack each other’s views of clerical celibacy or papal infallibility? Why is there no bitter struggle between Orthodox and Reform Jews to control the content of the Sabbath liturgy? Why don’t American atheists clash with American believers over whether children should be taught to pray before going to sleep? ...The answer is no mystery. America is a land of religious freedom, in which people decide for themselves what to believe and how to worship. No religion is funded by government. Elected officials have no say in the doctrine of any faith or the content of any religious service. Religion flourishes in America because church and state are separate. And it flourishes so peacefully because no one is forced to support anyone else’s faith, or to attend a church he isn’t happy with, or to bring up children according to the religious views of whichever faction has the most votes. Religion is peaceful because it is government-free. Liberate the schools, and they too would be at peace. Taxpayer-funded, one-curriculum-fits-all schooling makes conflict inevitable. There would be far less animosity if parents were as free to choose how and where their children learn as they are to choose how and where they worship. Separation of church and state has made America an exemplar of religious pluralism and tolerance. Imagine what separation of school and state could do for education.

Obama Administration Trying to Rig Government Statistics for Ideological Purposes

The government's so-called War on Poverty has been a dismal failure, largely because giving people money as a condition of being poor is a very good way of ensuring that some of them will choose to remain poor. But now the White House wants to make a bad situation even worse by concocting a new definition of poverty completely divorced from reality. As Robert Samuelson explains in his Washington Post column, this rigged system means that the poverty rate would remain the same even if every person in America suddenly had twice as much income:

...the poor's material well-being has improved. The official poverty measure obscures this by counting only pre-tax cash income and ignoring other sources of support. These include the earned-income tax credit (a rebate to low-income workers), food stamps, health insurance (Medicaid), and housing and energy subsidies. Spending by poor households from all sources may be double their reported income, reports a study by Nicholas Eberstadt of the American Enterprise Institute. Although many poor live hand-to-mouth, they've participated in rising living standards. In 2005, 91 percent had microwaves, 79 percent air conditioning and 48 percent cellphones. ...the administration' poverty number would compound public confusion. It also raises questions about whether the statistic is tailored to favor a political agenda. The "supplemental measure" ties the poverty threshold to what the poorest third of Americans spend on food, housing, clothes and utilities. The actual threshold -- not yet calculated -- will almost certainly be higher than today's poverty line. Moreover, the new definition has strange consequences. Suppose that all Americans doubled their incomes tomorrow, and suppose that their spending on food, clothing, housing and utilities also doubled. That would seem to signify less poverty -- but not by the new poverty measure. It wouldn't decline, because the poverty threshold would go up as spending went up. Many Americans would find this weird: People get richer but "poverty" stays stuck. ...The new indicator is a "propaganda device" to promote income redistribution by showing that poverty is stubborn or increasing, says the Heritage Foundation's Robert Rector. He has a point. The Census Bureau has estimated statistics similar to the administration's proposal. In 2008, the traditional poverty rate was 13.2 percent; estimates of the new statistic range up to 17 percent. The new poverty statistic exceeds the old, and the gap grows larger over time. To paraphrase the late Sen. Daniel Patrick Moynihan: The administration is defining poverty up. It's legitimate to debate how much we should aid the poor or try to reduce economic inequality. But the debate should not be skewed by misleading statistics that not one American in 100,000 could possibly understand. Government statistics should strive for political neutrality. This one fails.

Sunday, May 30, 2010

The Worst Experience of My Kids' Lives

I finally figured out why I had children. My oldest son came back from Austria last night, so I drafted him and my youngest sin into slave labor. They got to sop up the toxic mess left in the freezer and then empty the freezer and the trash bags full of rotting food and maggots at the dump. But as you can see, they enjoyed this wonderful opportunity to help their doting father.

Taxpayers vs. Bureaucrats, Part XXVI

Two cheers for House Republicans, who plan on offering an amendment to freeze the pay of federal bureaucrats. There are two reasons, though, why they don't deserve three cheers. First, they should be proposing significant pay cuts, as nations such as Spain and Ireland have implemented. Second, they didn't do anything to rein in excessive pay for government workers when they were in power, so Stenny Hoyer actually is right when he accuses them of playing politics. That being said, I don't complain when politicians do the right thing for the wrong reason. Here's a blurb from the Politico story:

House Republicans will try to force a vote on freezing federal wages when Democrats bring a defense spending bill to the floor Friday afternoon. ...Even though the proposal would be attached to the defense bill, military salaries would be exempt from the pay freeze. The proposal would also freeze pay for members of Congress. ...Republicans say that freezing federal salaries — except for those in the military — would save the government $30 billion in the next decade. The Obama administration intends to increase federal salaries 1.4 percent. ...“We need to reject this cynical ploy to make federal employees a scapegoat for spending after congressional Republicans added trillions to the debt when they were in the majority,” House Majority Leader Steny Hoyer (D-Md.) wrote in an e-mailed statement.

The End of the World in 3 Minutes

I don't know who did this, and I'm not sure what point they are trying to make, but it's rather amusing and it also makes a good point about the idiocy of bailouts.

Saturday, May 29, 2010

The Worst Experience of My Entire Life

Pardon the deviation from commentary on political economy, but I have to tell this story - perhaps as a form of catharsis.

As regular readers know, I got back from Europe Thursday afternoon. When I got to my house, I noticed a very unpleasant smell. Given that there was a cat box that hadn't been changed in 11 days, that wasn't too much of a surprise, but the smell was beyond that.

Something was rotting. My first instinct was to blame the cats. It is not uncommon for me to smell something terrible and then find a dead mouse or bird that one of the cats dragged into the house. This was a very strong odor, so I was worried that something large - like a rabbit or squirrel, was decomposing under a sofa someplace.

I checked the usual places, but couldn't find anything. So I shrugged my shoulders and went to sleep.

The next day, Friday, I went to work and stayed late catching up on things that built up during my absence. I came home, noticed the smell again, but couldn't find anything and went to bed.

I woke up today, greeted by the same foul smell and was beginning to think I would have to take the house apart. But my first order of business was to mow the lawn and handle some other yard work. So I mowed and then decided to open the garage to get some weed killer.

Big mistake.

The odor hit me like a freight train, followed by an awareness of hundreds of flies buzzing around, and then followed by the horrifying realization that the freezer door was open.

Nothing I write can capture the scene that greeted me, but let your imagination contemplate the combination of a full freezer and nearly two weeks of warm weather. I won't provide too many gross details, but I will say that if maggots were worth anything, I'd be a rich man today.

So I spent over one hour pulling various disgusting and putrid things out of the freezer, breathing only with my mouth, and trying not to recycle my lunch. Tomorrow, I'll have to sop up a disgusting brown liquid that has accumulated in the bottom of the freezer. Oh, and to add insult to injury, garbage pickup isn't until Tuesday, so the smell won't go away anytime soon (and it will probably linger even after then).

I've had some unpleasant experiences in my life, including the discovery of no toilet paper (or paper towels, or anything) after making an emergency bathroom visit in Romania. Nothing, though, comes remotely close to the nightmare I endured today.

Fiscal Centralization Will Accelerate Europe's Debt Crisis

David Ignatius continues his odd habit of drawing wrong conclusions from Europe's fiscal crisis. In a previous post, we made fun of one of his columns because he said America needed a value-added tax to avoid a Greek-style crisis. Yet since Greece has a VAT, he was, for all intents and purposes, arguing that we should copy Greece's policies to avoid Greece's problems. Now he has a column saying that Europe needs fiscal centralization to make the euro work. This is a rather interesting assertion since Ignatius comes from a nation that shows that it is possible to have a common currency with 50 different states with 50 different fiscal policies. Perhaps this is why he wrote an entire column on the topic without ever offering any analysis or evidence for his position. Here's an excerpt:

...there's a radical mismatch between the ideal of economic integration and the reality that the eurozone has 16 different fiscal regimes -- a disconnect that helped produce this crisis. ...With this crisis, [Italian President Giorgio Napolitano] argued, Europeans must finally accept that union "implies a partial transfer of national sovereignty." The current halfway integration simply isn't strong enough to support a common currency, he suggested. ...Investors keep pounding Europe in part because they don't yet see the mechanisms that will enforce discipline. The European Union just established a trillion-dollar bailout fund, but what happens when it runs out? There's a pledge to impose strict conditions on Greece, Portugal and the rest in exchange for loans, but it still isn't clear how Brussels will make this austerity regime work. ...What worries me is that the dictates of economics and politics are now in conflict in Europe. To sustain its common currency, Europe needs integrated fiscal policies that are enforceable on all members.
Given his reliance on empty assertions, let's step into the vacuum and make two observations. First, letting Greece officially default would have been the best way to enforce fiscal discipline. A default would have radically curtailed Greece's ability (and the ability of other European nations) to overspend by borrowing cheap money and leaving the bill for future generations. The bailout, by contrast, rewarded profligacy and sent a signal to other European nations that it is possible to over-tax and over-spend and send the bill to taxpayers in other nations.

Second, a centralized fiscal policy would exacerbate Europe's fiscal problems by creating a tragedy of the commons. The existence of a pot of money in Brussels would encourage every nation to maximize its share of the loot, in the same way that a bloated federal government in Washington subsidizes bad fiscal behavior by state politicians. It wouldn't matter whether the centralized fiscal policy replaced a portion of national budgets or (more likely) represented an additional source of government largesse. Europe's problems exist because too many people have learned to try to live off the labor of too few people. Another layer of government makes that problem worse, not better - especially since it would open up the possibility of having people from other nations bear the burden.

The Rent Seekers Strike Back

Apologies to Star Wars fans for the title, but it seemed very fitting considering the profound amoral mentality of the lobbyists who have launched a public relations campaign to defend earmarks. The key part of the story is excerpted below for your reading pleasure, but let's focus on the "best" defense of earmarking. I've talked to some Republican politicians who argue the practice is legitimate because it means that elected officials rather than faceless bureaucrats are deciding how money is being allocated. That sounds semi-legitimate, but it overlooks three key problems.

1. Earmarking facilitates higher spending. The politicians on the Appropriations Committees allow other members to insert special requests (earmarks) - but only if they agree to vote for the underlying bill. This "log-rolling" practice makes it much more difficult for fiscally responsible members to convince their colleagues to support smaller budgets.

2. Earmarking is naked corruption. In the majority of cases, earmarks are inserted at the request of campaign contributors. In some cases, the contributors are lobbyists representing clients. In other cases, the contributors are the actual earmark beneficiaries. In either case, the process accurately could be described as bribery.

3. Earmarking supports programs and activities that should not exist. The "bridge to nowhere" became a symbol of the earmarking process, but the underlying problem is that members of the Alaska delegation focused on steering as many transportation dollars to their state as possible when they should have been fighting to get rid of the Department of Transportation.
Almost everybody in Washington loves earmarks. Politicians get to raise campaign cash. Lobbyists get rich charging clients. Special interests get money they haven't earned. Congressional staff facilitate the process so they eventually can become rich lobbyists. The only losers are taxpayers and the Constitution. Anyhow, here's the nauseating excerpt:

Lobbyists who pursue congressional earmarks are planning a public-relations campaign to defend the practice, as voters signal they no longer want lawmakers to direct millions of federal dollars to pet projects back home. The Ferguson Group, one of the largest earmark lobbying shops in Washington, is seeking donations from other appropriations lobbyists to establish a group that would promote the benefits of earmarks through a media campaign, according to documents obtained by The Hill. ...“We have decided to form an informal coalition, tentatively called the Earmark Reform and Education Coalition, with the overall goal being to foster a rational conversation about earmarking among all interested parties, so that we can preserve what works and reform what does not.” ...A third option is to partner with the American League of Lobbyists (ALL), according to Ferguson’s memo. Dave Wenhold, ALL’s president and a partner at Miller/Wenhold Capitol Strategies, said the organization has not decided on whether to join the campaign, but he defended earmarks as “the most transparent and accountable form of funding.”

Friday, May 28, 2010

Is Hillary Clinton Ignorant about Geography, Fiscal Policy, or Both?

Hillary Clinton recently opined that Brazil was a great role model for the idea of soaking the rich with higher tax rates. She didn't really offer evidence for that specific assertion, but Politico reports that she did say that ""Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they're growing like crazy."

I'm not sure if "growing like crazy" is an accurate description, particularly since poor nations normally have decent growth rates because they start from such a low baseline.

But let's excuse that bit of rhetorical excess and focus on the really flawed portion of her remarks.

Contrary to her direct quote, Brazil does not have the "highest tax-to-GDP rate in the Western Hemisphere." It may have the highest tax burden in South America. And it may even have the highest tax burden in all of Latin America, but its overall tax burden of about 24 percent of GDP is slightly below the aggregate tax burden in America.

I suppose I should issue a caveat and say there's a very slight chance that the recession has temporarily pushed American tax receipts as a share of GDP below the Brazilian level, but that isn't apparent from the IMF data. Moreover, there's no doubt that the tax burden in Canada is significantly higher than the Brazilian burden.

So Mrs. Clinton either was unaware that the United States and Canada are in the Western Hemisphere, or has no clue how to read fiscal statistics.

But let's suspend reality and assume that Brazil has a higher tax-to-GDP ratio. Would that somehow be proof that Brazil is a role model for class-warfare taxation? There is no precise definition of that term, to be sure, but high tax rates on the rich presumably are a necessary component of any class-warfare system. Yet Brazil's top tax rate is 27.5 percent. That's not exactly a low-rate system such as Hong Kong, and it's 27.5 percentage points higher than the zero-percent rate in the Cayman Islands, but it also happens to be significantly lower than the 35 percent (soon to be 39.6 percent) rate in the United States. If that's class warfare, sign me up for the Brazilian approach.

I suppose it's possible that Brazil's top tax rate recently has been boosted, but that didn't show up in a Google search. And even if the rate was just increased, that would hardly be proof of Mrs. Clinton's strange hypothesis that high tax rates and/or high tax-to-GDP rates are a magical formula for growth. That would require looking at future growth rates with the higher rate, not the recent growth rates with the 27.5 percent top tax rate.

But pointing out Mrs. Clinton's mistakes seems a bit rude and I do like to be a gentleman, so let's at least give her points for consistency. Earlier this year, she urged higher tax rates on the so-called rich in Pakistan, so at least she doesn't discriminate in her desire to punish success.

Tax Freedom Day in the U.K. Video

The Taxpayers Alliance has a brief but compelling video, entitled "How long do you work for the tax man?," which shows how an ordinary worker in the United Kingdom spends more than one-half his day laboring for government. "What will they tax next?" is still the best policy video to come out of the U.K., in my humble opinion, but this one is very much worth watching - especially since America is becoming more like Europe with each passing day.

What makes the video particularly depressing is that it only considers the tax burden. Regulations and government spending also are a burden on average workers, largely because of foregone economic growth.

The (Unintentional?) Use of Humor by Obama's Economic Team

The Secretary of the Treasury is a comedian as well as a tax cheat. At least that's the only rational interpretation of his recent statements in Europe, where he used the do-as-I-say-not-as-I-do routine while pretending to tell the Europeans to be fiscally responsible. The Wall Street Journal, in keeping with the deadpan style of the gig, reported Geithner's comments as if they represented serious advice: "U.S. Treasury Secretary Timothy Geithner landed in Europe and reasserted a traditional American role of dispenser of financial advice to the world, telling European governments to get their fiscal houses in order."

The key to any good monologue, though, is knowing how to follow one joke with another. Geithner did not disappoint. He then did a 180-degree turn, leaving the audience rolling in the aisles by urging spending and bailout policies directly at odds with his previous joke: "Mr. Geithner pushed continental Europe to speed up the rescue of debt-laden economies, and to not stint on fiscal stimulus."

Geithner may have been the headliner, but the Wall Street Journal also reported on some of the warm-up acts, including a so-so performance from Christina Romer, Chairman of the White House Council of Economic Advisors. Romer doesn't have Geithner's advantage of simultaneously being a tax cheat and being in charge of tax enforcement, so she's tried to carve out an interesting niche in the world of humor by pushing for policies that contradict her academic writings. It's unclear whether her reference to "pulling out" was an attempt to be risque (perhaps influenced by the President's naughty use of the "teabagger" phrase), but here's how the the WSJ covered her stand-up routine: "She told reporters that she, too, would warn European and other countries against pulling out of their stimulus plans too quickly. 'There's a certain amount of rush for the exits on fiscal policy,' Ms. Romer said."

Perhaps not surprisingly, some critics failed to undersand the subtle use of humor and irony by Obama officials and actually took the comments seriously. The article reports on a wet-blanket reaction from one think tank representative: "For Geithner critics, the new U.S. assertiveness is misplaced. Desmond Lachman, a former senior IMF European official who is now a researcher at the American Enterprise Institute, said the repeated bailouts engineered by Mr. Geithner have made the overall problem worse, and that the U.S. advice of providing even more financing for heavily indebted countries like Greece is bound to fail."

Thursday, May 27, 2010

So Why Is Obama Considering another "Stimulus"?!?

Bigger government hurts growth by diverting resources from productive uses to political purposes. That's common sense to most people. But it's nice to find even academics at Harvard are confirming this relationship - and showing that having local politicians with seniority is bad for growth since it means even more wasteful spending. Excerpted below is the abstract of a new study from the Harvard Business School, and kudos to Veronique de Rugy, who alerted me to this report by putting up a post at National Reveiew's Corner:

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate reactions follow both Senate and House committee chair changes, are present among large and small firms and within large and small states, are partially reversed when the congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism - entirely distinct from the more traditional interest rate and tax channels - suggests new considerations in assessing the impact of government spending on private sector economic activity.

Wednesday, May 26, 2010

Greetings from Macedonia (and reflections on my new transsexual friend)

Having spoken earlier today in Skopje, I'm finally done with the Free Market Road Show and get to head back to the United States tomorrow.

I suppose the highlight of the entire Road Show was getting to know Professor Deirdre McCloskey, who took part in four of the seven conferences. Deirdre is a first-rate economist, committed advocate of freedom, and a genuine renaissance woman with impressive knowledge of just about everything.

But what's genuinely unique (to put it mildly) is that Deirdre is a transsexual. Indeed, I first met Deirdre when she was Donald and he came to give a lecture at George Mason University (and I used his textbook when I was getting my Masters degree at Georgia).

One of the many good things about being a libertarian is a natural respect for the rights of others. So long as people don't interfere with your rights of life, liberty, and property, they should be free to make their own decisions.

That doesn't mean you have to agree with, endorse, or want to mimic every choice they make, whether it is eating onion soup (yuk) or having certain operations (ouch!).

If you want to read more about a very interesting person and her "crossing" (as she describes it), click here and here. And if you want to read Deirdre's excellent book, The Bourgeois Virtues, she mentioned at every conference that it makes an excellent Christmas gift.

More Garbage-In-Garbage-Out from CBO

You don't need to watch old Gunsmoke episodes if you want to travel into the past. Just read the latest Congressional Budget Office "research" claiming that Obama's so-called stimulus "increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million." CBO's analysis is a throwback to the widely discredited Keynesian theory that assumes you can enrich yourself by switching money from your left pocket to right pocket. For all intents and purposes, CBO wants us to believe their Keynesian model and ignore real world data. This is akin to the famous line attributed to Willie Nelson, who was caught with another woman by his wife and supposedly said, "Are you going to believe me or your lying eyes?"

Using its own Keynesian model, the White House last year said that wasting $800 billion was necessary to keep the unemployment rate from rising above 8 percent. Yet the joblessness rate quickly jumped to 10 percent and remains stubbornly high. We've already beaten this dead horse (here, here, here, here, and here) in part because the White House has embarrassed itself even further with silly attempts to find some way of turning a sow's ear into a silk purse. This is why Obama Administration estimates have evolved from "jobs created" to "jobs saved" to "jobs financed."

The CBO's most recent "calculations" are just another version of the same economic alchemy. But don't believe me. Buried at the end of the report is this passage, where CBO basically admits that its new "research" simply plugged new spending numbers into its Keynesian formula. This sounds absurd, and it is, but don't forget that these are the same geniuses that predicted that a giant new healthcare entitlement would reduce long-run budget deficits.

CBO’s current estimates of the impact of ARRA on output and employment differ slightly from those presented in its February 2010 report primarily because the agency has revised its estimates of ARRA’s impact on federal spending on the basis of new information. Outlays resulting from ARRA in the first quarter of calendar year 2010 were higher than the amount that CBO projected in February 2010 in preparing its estimate of the law’s likely impact on output and employment, primarily because a larger-than-expected amount of refundable tax credits was disbursed in the first quarter rather than later in the year. That change makes the estimated impact of ARRA on output and employment in the first quarter slightly higher than what CBO projected in February.

Send Mayor Daley to Jamaica...and Without a Gun to Defend Himself

Is there anything more despicable than a politician with personal (taxpayer-financed!) security guards who wants to prevent other people from having the right of self defense? Mayor Daley of Chicago is a good example of this strange species (scientific name: hypocratus sleazious). The priceless John Lott looks at the evidence from Jamaica to show the idiocy of gun control:

With Chicago's Mayor Daley again claiming that a gun ban is necessary to keep Chicagoans safe, Jamaica and other countries with gun bans might teach Americans a lesson. ...every instance we have data for shows that when a ban has been imposed, murder rates rise. ...Jamaica wasn't always the extremely violent country that it is today (see the figure here). Jamaica experienced large increases in murder rates since enacting a handgun bans in 1974. Since the gun ban, Jamaica’s murder rate has soared to become one of the highest in the world, currently at least double that of other Caribbean countries. ...Just as Mexico's President Calderon showed last week, it is always easy for politicians to blame crime on guns. The crime data in Jamaica shows the same thing as the crime data in Chicago and Washington have shown. It is the law-abiding, good citizens, not the criminals, who are disarmed by gun bans.

Great Moments in Government

Any guesses how many bureaucrats took how many years to concoct this recipe?

Tuesday, May 25, 2010

The United States of Greece

Americans should not get too smug about the troubles in Europe because the Bush-Obama policies of wasteful spending are bringing us down the same path. The latest evidence comes from a well-researched article about personal income in USA Today showing that the share from private paychecks fell to a record low and the share from government handouts reached a record high. As Veronique de Rugy of the Mercatus Center points out in her quote, this is the pattern that led to fiscal disaster in Greece:
Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010. ...The result is a major shift in the source of personal income from private wages to government programs. The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says. ...Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs. Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.

Too Little and Too Late for Europe, Part II

When even the New York Times is writing articles about the collapse of the European welfare state, you know that the political establishment is finally recognizing the writing on the wall. Recognizing a problem and solving a problem, however, are two different things. They need to use an axe on their budgets, but the examples below indicate a scalpel is being wielded instead. The key thing to look for is whether government spending in the future is consuming a larger or smaller share of economic output (GDP), and I sadly expect the burden of government spending in Europe to grow:
The deficit crisis that threatens the euro has also undermined the sustainability of the European standard of social welfare, built by left-leaning governments since the end of World War II. Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism. Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. ...But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead. With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle.... The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.... The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable. In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece's bloated state sector and its employees. "They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions," he said. "As for us, the way things are going we'll have to work until we're 70." ...the region lacks competitiveness in world markets. According to the European Commission, by 2050 the percentage of Europeans older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to 1. ...Figures show the severity of the problem. Gross public social expenditures in the European Union increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure now is 31 percent, the highest in Europe... The challenge is particularly daunting in France, which has done less to reduce the state's obligations than some of its neighbors. ...The legal retirement age in France is 60, while Germany recently raised it to 67 for those born after 1963. With the retirement of the baby boomers, the number of pensioners will rise 47 percent in France between now and 2050, while the number under 60 will remain stagnant. ...President Nicolas Sarkozy has vowed to pass major pension reform this year. ...the government, afraid to lower pensions, wants to increase taxes on high salaries and increase the years of work. ...while most French see a pension overhaul as necessary, up to 60 percent say working past 60 is not the answer...."This will have to be harmonized, Europeanized, or it won't work - you can't have a pension at 67 here and 55 in Greece," Mr. Fischer said.The problems are even more acute in the "new democracies" of the euro zone - Greece, Portugal and Spain - that embraced European democratic ideals and that Europe embraced for political reasons in the postwar era, perhaps before their economies were ready. They have built lavish state systems on the back of the euro, but now must change. Under threat of default, Greece has frozen pensions for three years and drafted a bill to raise the legal retirement age to 65. Greece froze public-sector pay and trimmed benefits for state employees, including a bonus two months of salary. Portugal has cut 5 percent from the salaries of senior public employees and politicians and increased taxes, while canceling big projects; Spain is cutting civil service salaries by 5 percent and freezing pay in 2011 while also chopping public projects. ...In Athens, Mr. Iordanidis, the graduate who makes 800 euros a month in a bookstore, said he saw one possible upside. "It could be a chance to overhaul the whole rancid system," he said, "and create a state that actually works."

Greetings from Montenegro

Different city, different country, but the same speech on the Free Market Road Show. So let's instead focus on what's nice about Montenegro. The scenery is pleasant, if you know what I mean, but this nation also has some attractive policies. It has the world's lowest flat tax, with a rate of just 9 percent (I suggested they go to zero since they're so close anyhow). Government spending is a problem, consuming more than 40 percent of GDP, but they are in better shape than most other European nations.

One of the best things about Montenegro is the sense that the future might be better than the past. The government is at least aware that spending should be reduced. Moreover, there is even a free market private university in the country that is doing a great job educating students about the importance of limited government and individual freedom. The Cato Institute's Richard Rahn, who also spoke at today's conference, has a column in today's Washington Times, discussing this remarkable university:

Professor Vukotic has created a new private university in Montenegro, University of Donja Gorica (UDG), that already has 1,500 students and a large, new building. He has been able to attract world-class scholars from a number of countries, including the United States, to teach or lecture. UDG also already has established cooperative agreements with universities in Europe and North America. ...Montenegro has made much progress toward a free and prosperous society, in part because of the extraordinary work of Mr. Vukotic. It has adopted the euro as its currency even though it is not yet a member of the European Union. It has just put in a 9 percent flat tax and moved toward free trade. Yet Montenegro still has much to do, particularly in protecting private property and eliminating corruption. Its future success will depend much on how well those bright young students can translate what they have learned from Mr. Vukotic and his colleagues by keeping the pressure on the government and the private sector to accelerate and maintain the reforms for an increasingly civil, prosperous and free society.

Monday, May 24, 2010

Europe's Reforms, I Fear, Will Be Too Little and Too Late, Part I

Governments that tax work and subsidize sloth are committing a form of slow-motion suicide, and the Greek fiscal crisis is the canary in the coal mine of this phenomenon. Interestingly, some European governments are trying to halt the downward slide, though I suspect that most of them will fail to take the necessary steps. But it's nonetheless good news that this is getting coverage since it is equally important that the United States learn the right lessons so we can reverse the reckless big-government policies of the Bush-Obama years. Here's an excerpt from a thorough AP story:
...the welfare state — cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism — is coming under its most serious threat in decades: Europe's sovereign debt crisis. Deep budget cuts are under way across Europe. Although the first round is focused mostly on government payrolls — the least politically explosive target — welfare benefits are looking increasingly vulnerable. "The current welfare state is unaffordable," said Uri Dadush, director of the Carnegie Endowment's International Economics Program. ..."We have to adjust our social security systems in a way that they motivate people to accept regular work and do not give counterproductive incentives," German Finance Minister Wolfgang Schaeuble told news weekly Frankfurter Allgemeine Sonntagszeitung on Saturday. ...Demographers and economists began warning decades ago that social welfare was doomed by the aging of Europe's baby boomers. Some governments had been trimming and reforming, but now almost all are scrambling to close deficits in order to prevent a wider collapse of confidence in the euro. The [British] government has promised to raise the age at which citizens receive a state pension — up from 60 to 65 for women, and from 65 to 66 for men. It also plans to toughen the welfare regime, requiring the unemployed to try to find jobs in order to collect benefits. ...Ministers are reviewing the long-term affordability of the country's generous public sector pensions. ...France's conservative government is focusing on raising the retirement age. Many workers can now retire at 60 with 50 percent of their average salary. ...Unions in France are organizing a national day of protest marches and strikes on Thursday to demand protection of wages and the retirement age. [Spain] has proposed hiking the retirement age for men from 65 to 67. ...After sharp cutbacks imposed as the condition of an international bailout this month, Greeks must now contribute to pension funds for 40 instead of 37 years before retiring, and the age of early retirement is set to 60 at the earliest. Civil servants with monthly salaries of above 3,000 euros ($3,750) will lose two extra months of salary — one paid at Christmas, the other split between Easter and summer vacation.

The Evil of Lookism

Just when you thought leftism couldn't get any weirder, there's a column in the Washington Post advocating a government ban on discrimination against ugly people. If you read the article, there actually is a lot of research showing that attractive people have a big advantage over unattractive people (and Greg Mankiw has written about the advantage tall people have over short people). That being said, it is amazing that anyone actually thinks the government can somehow offset the lottery of genetic luck. But if legislation is enacted, I plan on filing a lawsuit against Gisele Bundchen because she clearly is discriminating in favor of tall, good-looking football players when she should be dating me:
In the 19th century, many American cities banned public appearances by "unsightly" individuals. A Chicago ordinance was typical: "Any person who is diseased, maimed, mutilated, or in any way deformed, so as to be an unsightly or disgusting subject . . . shall not . . . expose himself to public view, under the penalty of a fine of $1 for each offense." Although the government is no longer in the business of enforcing such discrimination, it still allows businesses, schools and other organizations to indulge their own prejudices. Over the past half-century, the United States has expanded protections against discrimination... Yet bias based on appearance remains perfectly permissible in all but one state and six cities and counties. Across the rest of the country, looks are the last bastion of acceptable bigotry. California in 2001, Jennifer Portnick, a 240-pound aerobics instructor, was denied a franchise by Jazzercise, a national fitness chain. Jazzercise explained that its image demanded instructors who are "fit" and "toned." ...In a survey by the National Association to Advance Fat Acceptance, 62 percent of its overweight female members and 42 percent of its overweight male members said they had been turned down for a job because of their weight. ...Prevailing beauty standards penalize people who lack the time and money to invest in their appearance. And weight discrimination, in particular, imposes special costs on people who live in communities with shortages of healthy food options and exercise facilities. So why not simply ban discrimination based on appearance? ...Opponents of a ban on appearance-based discrimination...warn that it would trivialize other, more serious forms of bias. After all, if the goal is a level playing field, why draw the line at looks? "By the time you've finished preventing discrimination against the ugly, the short, the skinny, the bald, the knobbly-kneed, the flat-chested, and the stupid," Andrew Sullivan wrote in the London Sunday Times in 1999, "you're living in a totalitarian state."

Brazil's President Is Wiser than Obama

Every so often, perhaps inadvertently, a collectivist says something very smart. In the case of Lula da Silva, Brazil's socialist president, he made the common-sense observation that you can't redistribute without first producing. He didn't quite realize what he was saying, one imagines, since he presumably would have realized that capitalism is a superior system in both the short run and long run, but at least he recognized the role of wealth creation. Obama, by contrast, acts as if the blessings of a free market economy automatically exist and that people will continue to produce even if he persists with his statist plans to simultaneously subsidize sloth and penalize productive behavior. Here's the excerpt with the Brazilian President's amazing statement:
He described the situation when he was elected Brazilian president: "The country had no credit, had no working capital or financing or income distribution. What kind of capitalism was that? A capitalism without capital. I decided then that it was necessary to first build capitalism, then make socialism, we must have something to distribute before doing so."

Sunday, May 23, 2010

Republican Wins Hawaii Special Election

It may not mean much since the Democratic vote was divided by two candidates, and it is offset by the loss in the Pennsylvania special election, but it must rankle Obama that the GOP won his childhood congressional seat after 20 years of Democratic control. We will see this November whether this is a trend or anomaly:
Djou won with close to 40 percent of the vote in the mail-in special election, beating Democrats Colleen Hanabusa, with 31 percent, and Ed Case, 28 percent. ...The applause from Djou's victory party could be heard six time zones away in Washington, D.C., where national party leaders trumpeted a victory on President Barack Obama's home turf. "I congratulate Charles Djou for his victory and a successful campaign based on the widely shared values of cutting spending, shrinking government and creating real, permanent American jobs," said U.S. Rep. Pete Sessions, R-Texas, chairman of the Republican Congressional Campaign Committee.

Greetings from Hungary

A conference in Hungary was the most recent event on the Free Market Road Show. I tried to do something different at this event, focusing mostly on the Laffer Curve as I explained how European governments will fail if they try to fix the over-spending problem by raising taxes.

But regular readers of this blog have been exposed to plenty of Laffer Curve analysis, so allow me instead speculate on the meaning of the recent Hungarian elections, which resulted in a landslide victory for the supposedly right-wing party. With more than two-thirds of seats in Parliament, there is no obstacle to economic reform, and the party campaigned on smaller government and lower tax rates.

But here's the issues. Is the Fidesz Party a bunch of Bush clones, politicians who talk a good game but then make government bigger once they get in power? Or will the new Prime Minister (who also ruled from 1998-2002) be a principled advocate of freedom who uses his overwhelming mandate to implement a flat tax and reduce the horrific burden of government spending in his country (more than 50 percent of GDP)? I'm not overflowing with optimism, but I hope I'm wrong.

Killing Jobs with Class Warfare Corporate Taxation

Richard Rahn's Washington Times column makes several key points about corporate taxation, including the fact that excessive taxation of capital (the corporate income tax being just one example) is extremely foolish such taxes impose the most damage - per dollar collected - when compared with other forms of revenue. To add injury to injury, the U.S. corporate income tax is especially destructive in a competitive global economy.

The majority of taxaholics are particularly addicted to the most destructive taxes, being the taxes on capital. Up to a point, perfectly sound arguments can be made for taxing tobacco, alcohol, gasoline, etc. However, taxing capital at high rates or double or triple taxing is nothing more than self-destruction. Capital is what business people use to hire workers and purchase new plants and equipment. Taxes on corporations, capital gains, dividends and interest are primarily taxes on capital - and the heavier the tax, the fewer new jobs. In a new report published by the Cato Institute, international tax experts Duanjie Chen and Jack Mintz at the University of Calgary in Canada state that the U.S. "statutory corporate income tax rate is one of the highest in the world ... which harms the economy and encourages companies to shift investment and profits abroad to lower-tax jurisdictions." (See attached chart.)The authors estimated effective tax rates for 80 countries. (Effective tax rates take into account statutory tax rates plus tax base items that affect taxes paid on new investment, such as depreciation allowances.) They found that the "U.S. effective corporate rate is 35.0 percent, which is much higher than the 80-nation average of just 18.2 percent."
For a more detailed explanation of why the corporate income tax should be reduced, see the very first video produced by the Center for Freedom and Prosperity. It was supposed to be a test for internal purposes, and the production values are not as advanced (hopefully) as more recent videos, but the message is worth sharing.

Saturday, May 22, 2010

Obamacare Means IRS Nightmare for Small Business

We've looked at this issue before, but this new CNN article fleshes out the awful IRS rules in the new healthcare bill:

The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. ...The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year. ...Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year's transactions. ...The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the "1099-Misc" form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods. Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you're making the payment to -- even if it's a giant retailer like Staples or Best Buy -- at the time of the transaction, or else facing IRS penalties. ...SMC's survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business -- adding an estimated $6,000 to the cost of preparing the average tax return. And that's without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke's group didn't see coming when it conducted its survey last year. "These folks are doing their paperwork in the evenings and on the weekends already," he says. "This certainly adds to the burden substantially."

Greetings from Serbia

I don't really have much to say about the conference in Belgrade. I'm giving the same speech over and over again. Each audience is hearing it for the first time, but I'm boring myself. Like many cities in former communist nations, Belgrade is a bit run down, but the Danube is an impressive river, and here's a photo of an old fortress at the key intersection of the Danube and Sava rivers.

Friday, May 21, 2010

Is the FairTax Political Poison?

I have a question for my friends who support a national sales tax. First, some background. Beginning with the defeat of Woody Jenkins in his Louisiana Senate race back in the 1990s, various versions of the national sales tax have caused political headaches for GOP candidates. Even candidates from conservative states, such as Sen. DeMint in South Carolina, have been put on the defensive because they said good things about the FairTax. The latest example comes from the Pennsylvania special election for Rep. Murtha's seat. As this Wall Street Journal column points out, the winning Democratic candidate hammered the Republican because of his support for the FairTax. So even though I have said very nice things about a national sales tax, testified about the virtues of the national sales tax, and debated in favor of a national sales tax over the current system, I am increasingly convinced that the flat tax is the only plan that is sufficiently immune to demagoguery. Can anyone give me a persuasive argument about the political viability of the FairTax?

Democrats turned the table and ran against Mr. Burns on taxes. The GOP businessman had flirted in the past with supporting the FAIR tax, a version of a national sales tax that supporters want to replace the income tax. Mr. Critz's ads blasted Mr. Burns for supporting a 23% sales tax increase without mentioning the income tax elimination, and the GOP seems to have been caught flat-footed. Republicans can rightly complain that this is unfair and that Mr. Critz will vote to raise taxes when Mrs. Pelosi gives the order. But they need a real-time campaign answer to the tax-hike charge. Whatever the merits of the FAIR tax in theory, we've long thought it is a political loser because voters figure they'll get the sales tax without losing the income tax. At a minimum, FAIR tax supporters shouldn't have left Mr. Burns defenseless on the subject. By the way, this is also a political warning to Republicans inclined to fall for the Democratic trap of agreeing to a new value-added tax in return for lower income-tax rates.

Thursday, May 20, 2010

Asset Forfeiture Laws Should Be Repealed

I´ve already posted a great video from the folks at the Institute for Justice about this issue, but this John Stossel column is another good reminder of the corrupt and evil impact of asset forfeiture laws. If bureaucrats have an incentive to take people´s property - even if they never get convicted of a crime, the results are bound to be horrendous. Repeal is the right answer, but at the very least the laws should be changed so cops and prosecutors can´t line their own pockets:

Zaher El-Ali has repaired and sold cars in Houston for 30 years. One day, he sold a truck to a man on credit. Ali was holding the title to the car until he was paid, but before he got his money the buyer was arrested for drunk driving. The cops then seized Ali's truck and kept it, planning to sell it. ...The police say they can keep it under forfeiture law because the person driving the car that day broke the law. It doesn't matter that the driver wasn't the owner. It's as if the truck committed the crime. "I have never seen a truck drive," Ali said. I don't think it's the fault of the truck. And they know better." Something has gone wrong when the police can seize the property of innocent people. ... This is serious, folks. The police can seize your property if they think it was used in a crime. If you want it back, you must prove it was not used criminally. The burden of proof is on you. This reverses a centuries-old safeguard in Anglo-American law against arbitrary government power. The feds do this, too. In 1986, the Justice Department made $94 million on forfeitures. Today, its forfeiture fund has more than a billion in it. ..."When you give people the wrong incentives, people respond accordingly. And so it shouldn't be surprising that they're stretching the definition of law enforcement," Balko said. "But the fundamental point is that you should not have people out there enforcing the laws benefiting directly from them."

Walter Williams on Immigration

I have mixed feelings about the right response to illegal immigration. I don´t favor amnesty because of my respect for the rule of law and because it would encourage more illegal immigration. On the other hand, I certainly do not want law enforcement resources diverted to hassling people who are in America solely in search of a better life based on hard and honest work. Walter Williams has a good column on the issue which concludes with a call for more legal immigration:
I believe most people, even my open-borders libertarian friends, would not say that everyone on the planet had a right to live in the U.S. That being the case suggests there will be conditions that a person must meet to live in the U.S. ...most Americans would recoil at the suggestion that somebody other than Americans should be allowed to set the conditions for people to live in the U.S. ...Probably, the overwhelming majority of Mexican illegal immigrants are hardworking, honest and otherwise law-abiding members of the communities in which they reside. It would surely be a heart-wrenching scenario for such a person to be stopped for a driving infraction, have his illegal immigrant status discovered and face deportation proceedings. Regardless of the hardship suffered, being in the U.S. without authorization is a crime. ...Various estimates put the illegal immigrant population in the U.S. between 10 and 20 million. One argument says we can't round up and deport all those people. That argument differs little from one that says since we can't catch every burglar, we should grant burglars amnesty. Catching and imprisoning some burglars sends a message to would-be burglars that there might be a price to pay. Similarly, imprisoning some illegal immigrants and then deporting them after their sentences were served would send a signal to others who are here illegally or who are contemplating illegal entry that there's a price to pay. ...Start strict enforcement of immigration law, as Arizona has begun. Strictly enforce border security. Most importantly, modernize and streamline our cumbersome immigration laws so that people can more easily migrate to our country.

Taxpayers vs. Bureaucrats, Part XXV

TARP was awful and the GM-Chrysler bailout was terrible, but those wretched pieces of legislation would be surpassed by something even more reprehensible if politicians signed on to this terrible idea to bail out the bloated pension plans of state and local government bureaucrats. If this happens, I hope taxpayers respond with massive civil disobedience when it comes to paying taxes. Here is an excerpt from the Financial Times:

Illinois used to have a plan to pay off the gaping shortfall in the pension funds that pay retired teachers, university employees, state workers, judges and politicians, Dan Long recalls. Mr Long, director of the Commission on Government Forecasting and Accountability, the non-partisan auditing arm of the Illinois state legislature, remembers that, back in 1994, the state laid out a proposal that would have paid off most of what was then a $17bn gap by 2011. ...Illinois is the poster child of unfunded pensions in the US. But state retirement systems could become a national concern, new research shows. Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade. ...if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1,000bn, he says. “It is more than a local problem,” Mr Rauh said. “The federal government could be on the hook.” Estimates put the unfunded liabilities at between $1,000bn and $3,000bn after years of states promising benefits but not contributing enough in both good times and bad to cover them. ...States have begun reforms, with some lowering return expectations and raising employee contributions and retirement ages. Mr Rauh said such measures were cosmetic and states needed comprehensive, federally sponsored reform that would require closing the systems to new members, shifting state workers to Social Security and individual plans similar to those that are used by the private sector in order to obtain incentives to borrow to bridge the gaps.

Greetings from Austria

I spoke yesterday in Vienna on the third stop on the FMRS tour. My speech focused on solutions to the fiscal crisis. I pointed out the need to substantially reduce the burden of government spending and also warned against higher tax rates - in part because higher tax rates discourage much-needed economic growth.

This puts me in direct conflict with many European politicians, many of whom think extracting more money from taxpayers is the answer to the over-spending problem. Some of these politicians try to sound more rational by saying they don't necessarily want to boost tax rates and instead would be happy to collect more money by more onerous enforcement of existing tax laws.

I don't think it is reasonable to expect big reductions in the underground (or shadow) economy. In a previous post, I quoted an IMF paper authored by Friedrich Schneider, which noted (with particular reference to Austria):
Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy. …In Austria, the burden of direct taxes (including social security payments) has been the biggest influence on the growth of the shadow economy… Other studies show similar results for the Scandinavian countries, Germany, and the United States. In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points. …A study of Quebec City in Canada shows that people are highly mobile between the official and the shadow economy, and that as net wages in the official economy go up, they work less in the shadow economy. This study also emphasizes that where people perceive the tax rate as too high, an increase in the (marginal) tax rate will lead to a decrease in tax revenue.
Interestingly, I just came across a new study from the Bank of Italy that looks at the issue from the perspective of "taxpayer morale." The study finds that tax compliance also is sensitive to public perceptions about whether taxpayer money is being wasted. This excerpt touches on many of the key issues, and all I could think of when reading the study was bailouts, handouts, and other forms of corrupt and inefficient spending on both sides of the Atlantic:

...our measure of public spending inefficiency enters with the expected negative sign, and it is significant at the 1 percent level. Taxpayers interacting with a more efficient public sector are likely to show a higher level of tax morale. Our result can be interpreted by looking at the interaction between citizens and the government as a contractual relationship, implying duties and rights for each contract partner. If the taxpayer observes that the tax burden is not spent efficiently, he will feel cheated and his willingness to cooperate will fall. ...Torgler and Werner (2005) state that greater fiscal autonomy allows regions to spend the tax revenues according to local preferences and this, in turn, might have a positive impact on tax morale. ...As expected, the coefficient on the level of public spending per capita enters with a positive sign, and it is significantly different from zero. On the other side, we find a weak positive relationship between fiscal autonomy and tax morale, thus partially confirming the results by Torgler and Werner (2005). At the same time, the coefficient of public spending inefficiency remains negative and highly significant. ...We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues. This evidence can be interpreted in terms of a psychological contract between taxpayer and fiscal authorities in which the former punishes the local government when he observes that resources are not spent well. Therefore, encouraging more efficient spending of public resources has wider consequences and contributes to increasing the citizens’ propensity to pay taxes.

Great Moments in Government-Run Healthcare

British healthcare is often criticized for long waiting lines and slovenly conditions, but that's just part of the story. Here's a frightening story about a women who actually got treated - and died as a result. To be fair, this presumably is a tragic exception and most people in the United Kingdom surely receive adequate care. That being said, how can medical professionals miss a six-inch handle stuck in someone's butt?!? Here's an excerpt from the Sun newspaper:

A young mum died after a series of blunders by doctors who failed to spot a six-inch long toilet brush handle embedded in her buttock, an inquest was told today. Cindy Corton, 35, was left with the bizarre injury after a drunken fall in a friend's bathroom in 2005 but "serious errors" by doctors then led to her death. It was two years before Cindy, who was in constant pain, was able to convince doctors that the thin serrated plastic handle was stuck in the flesh of her bottom. By then what should have been a routine procedure to remove it had become much more dangerous because the handle had become embedded in her pelvis. After two unsuccessful operations in 2007 the mother-of-one was in such agony that she agreed to undergo further surgery in June last year despite being told it could prove fatal. Cindy of Sleaford, Lincs, spent more than ten hours in surgery at Nottingham's Queens Medical Centre but died from massive blood loss. ...Cindy's husband, a construction manager, is now taking legal action against United Lincolnshire Hospitals Trust. ...He added: "Cindy got a very poor service from the NHS. I'm sure she would have got better treatment in foreign countries."

Will "Hauser's Law" Protect Us from Revenue-Hungry Politicians?

David Ranson had a good column earlier this week in the Wall Street Journal explaining that federal tax revenues historically have hovered around 19 percent of gross domestic product, regardless whether tax rates are high or low. One reason for this relationship, as he explains, is that the Laffer Curve is a real-world constraint on class warfare tax policy. When politicians boost tax rates, that motivates taxpayers to earn and/or report less income to the IRS:

The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth. revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution's W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. "Hauser's Law," as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP. ...he tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect.
Several people have asked my opinion about the piece. I like the column, of course, but I'm not nearly so optimistic that 19 percent of GDP represents some sort of limit on the federal government's taxing power. There are many nations in Europe with tax burdens closer to 50 percent, for instance, so governments obviously have figured how to extract much higher shares of national output. Part of the difference is because America has a federal system, and state and local governments collect taxes of about 10 percent of GDP. That still leaves a significant gap in total tax collections, though, so the real question is why American politicians are not as proficient as their European cousins at confiscating money from the private sector?

One reason is that European countries have value-added taxes, which are a disturbingly efficient way of generating more revenue. So does this mean that "Hauser's Law" will protect us if politicians are too scared to impose a nationwide sales tax? That's certainly a necessary condition for restraining government, but probably not a sufficient condition. If you look at the table, which is excerpted from the OECD's annual Revenue Statistics publication, you can see that nations such as New Zealand and Denmark have figured out how to extract huge amounts of money using the personal and corporate income tax.

In some cases, tax rates are higher in other nations, but the main factor seems to be that the top tax rates in other nations are imposed at much lower levels of income. Americans don't get hit with the maximum tax rate until our incomes are nine times the national average. In other nations, by contrast, the top tax rates take effect much faster, in some cases when taxpayers have just average incomes. In other words, European nations collect a lot more money because they impose much higher tax rates on ordinary people. Here's a chart I put together a few years ago for a paper I wrote for Heritage (you can find updated numbers in Table 1.7 of this OECD website, but the chart will still look the same).

Europeans also sometimes impose high tax rates on rich people, but this is not the reason that tax receipts consume nearly 50 percent of GDP in some nations. Rich people in Europe, like their counterparts in America, have much greater ability to control the amount of taxable income that is earned and/or reported. These "Laffer Curve" responses limit the degree to which politicians can finance big government on the backs of a small minority.

But high tax rates on the rich do serve a very important political goal. Politicians understand that ordinary people will be less likely to resist oppressive tax rates if they think that those with larger incomes are being treated even worse. Simply stated, higher tax rates on the rich are a necessary precondition for higher tax rates on average taxpayers.

For "Hauser's Law" to be effective, this means proponents of limited government need to fight two battles. First, they need to stop a VAT. Second, they need to block higher tax rates on the so-called rich in order to prevent higher tax rates on the middle class.

Wednesday, May 19, 2010

Greetings from the Czech Republic

I spoke today in Prague at the second installment of the Free Market Road Show. I gave a standard presentation about fiscal policy, including strong warnings that all industrialized nations run the risk of Greek-style fiscal collapse because of entitlement programs and demographic changes. What's remarkable, though, is that nobody pretends anymore that this isn't happening. The question and answer session saw many people ask when the world was coming to an end (from a fiscal perspective) and whether certain nations would be good places to escape when welfare states descend into lawlessness and chaos. Meanwhile, in the Nero-fiddles-while-Rome-burns category, Europe's statist Chancellor, Angela Merkel, confirmed to the world that she is a blithering idiot and/or a shallow and reprehensible political hack by imposing a ban on "short selling," which occurs when investors make decisions based on an assumption that an asset (such as a Greek government bond) will fall in value. In the real world, short sellers perform a valuable role by helping to limit speculative bubbles. In the political world, however, short sellers are targeted by demagogues. If Merkel is right and short sellers are guilty of causing assets to fall, then thermometers are guilty of causing fevers. Bloomberg reports on Germany's national embarrassment:

German Chancellor Angela Merkel laid out proposals to gain control over “destructive” financial markets, after she imposed a unilateral ban on naked short- selling that sent stocks sliding. ...“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world,” Merkel told lawmakers in Berlin today.

Another Deficit Hypocrite

Paul Volcker is a typical Washington insider who maintains his favorable connections by endorsing bigger government. In recent months, he's been busy supporting a value-added tax. Now he is saying that it is absolutely critical to address the deficit. Here's and excerpt from a Bloomberg report:

Former Federal Reserve Chairman Paul Volcker, a top outside adviser to President Barack Obama, said time is “growing short” for the U.S. to address problems ranging from its budget deficit to Social Security obligations. “We better get started,” the 82-year-old former central banker said in a speech yesterday in Stanford, California. “Today’s concerns may soon become tomorrow’s existential crises.”
This is the same Volcker, though, who defended Obama's $800 billion so-called stimulus. And a quick Google search does not reveal any evidence that he opposed the giant fiscal sinkhole of Obamacare (I only spent five minutes searching, so I definitely feel comfortable stating that any opposition - if it existed at all - was very muted). In other words, Volcker is a typical beltway hack. When politicians are engaged in an orgy of new spending, he either supports them or stays quiet. But when the discussion turns to taxes, then suddely the deficit is the worst thing in the world and tough steps need to be taken. It would be nice if hypocrites like Volcker just dropped out of sight and played golf all day.

Three Cheers for Canada

Sleazy politicians from France, Germany, England, and the United States want a bank taxes that would finance national piggy banks to bail out politically favored companies and industries. But they are not stupid, so they realize that nations that impose bank taxes will lose deposits to nations with more sensible policy. This is why the statists want to convince all nations to adopt the same policy. Fortunately, some nations are resisting harmonized bank taxes, and Canada is taking the lead. Canadian leaders rightfully explain that their banks never got in trouble, largely because Canada does not have foolish housing subsidies. Let us hope that Canada, as well as other nations such as Brazil and Australia, block the corrupt policies being pushed by statists such as Obama and Merkel.

Canada will "resist" a bank tax, Industry Minister Tony Clement said Tuesday as ministers fanned out across the world to raise opposition to the proposal for avoiding another financial crisis. "Canada is, and will remain, opposed to a tax that would penalize financial institutions that remained strong and prosperous while many of the world's banks failed," Clement told a press conference with Foreign Minister Lawrence Cannon. ...Attempts to reach international agreement on coordinated bank taxes at last month's G20 and IMF meetings ran aground. Nations including Canada and Brazil, whose banking sectors emerged largely unscathed from the financial crisis, objected to the plan, favoring higher capital reserve requirements instead. But it is expected to be revived at the next meeting of G20 leaders in Toronto next month, with Germany's Angela Merkel vowing to press for the proposal supported by many in Europe. Clement said the bank tax would "encourage risky behavior" if it is used to create a bank bailout fund and "reward bad behavior" of those institutions responsible for the recent financial crisis in the first place. ..."This tax would reach into consumers' pockets and punish our financial institutions which have taken precautions to avoid the very turmoil that is afflicting other parts of the globe," Clement lamented.

Tuesday, May 18, 2010

Greetings from Slovakia

I'm in Bratislava, where I spoke at the first stop of the Hayek Institut's seven-nations Free Market Road Show. Slovakia is one of my favorite nations because it has both a flat tax and personal retirement accounts. A new wave of reform may be possible, depending on the outcome of the June 12 elections.

A new liberal (classical liberal, meaning free market) party has been launched, and their campaign's message focuses on representing future generations. Here is the billboard that ones sees in Slovakia. Not sure how it would fly in America, but I certainly wish the party well.

Senate Unanimously Rejects Greek Bailout

In an uncharacteristic display of fiscal rectitude, Senators voted 94-0 against the Greek bailout. But don't get too excited. They only voted to instruct the White house to oppose the bailout in the absence of a plan to pay back the money. Needless to say, the Greeks, the IMF, and/or the White House will lie if the amendment becomes law. Speaking of which, approving an amendment in the Senate means nothing unless the provision is included in a final bill. Last but not least, the amendment is too weak. It should have blocked any bailout. Heck, it should have withdrawn the United States from the IMF altogether. But a baby needs to learn to crawl before it can walk, so I suppose we should be happy that the kleptocrats in Washington at least cast a symbolic vote to defend taxpayers. Here's a report from the EU Business:

The US Senate on Monday easily approved a measure aimed at blocking International Monetary Fund (IMF) aid packages like the one for Greece absent a guarantee that the money will be repaid. Lawmakers voted 94-0 to approve the measure, crafted by Republican Senator John Cornyn of Texas, attaching it to broad legislation to overhaul financial industry rules in the wake of the 2008 global economic meltdown. The amendment calls for President Barack Obama's administration to measure any IMF aid package to a country whose public debt exceeds its annual gross domestic product in order to certify that the loan will be repaid. If the administration were unable to make such a certification, it would be directed to oppose the assistance and vote against it at the IMF. "Greece is going to get 40 billion dollars in loans from the IMF, out of which seven billion dollars is attributable to the contributions of the American taxpayer. They shouldn't have to do that unless we have an assurance that it will be paid back," Cornyn said shortly before the vote. ...If the Senate passes the overhaul legislation, Cornyn's measure would still need to survive a House-Senate "conference" to reconcile their rival versions of the bill before it can go to Obama to be signed into law.

Obama Is a Liar (like most politicians)

The only question is whether he deliberately and knowingly lied, and I say to Fox News that there is no alternative explanation. The only issue now is whether he pays a price like the first President Bush, who also lied to the American people about taxes.

Monday, May 17, 2010

You're Playing this Game, Whether You Want to or Not

We may as well enjoy a good laugh on our trip down the Road to Serfdom.

School Choice Issue exposes Gap Between Honest Leftists and Politicial Hacks

There are a handful of issues that expose hypocrites on both sides of the philosophical spectrum. Republicans and conservatives love to talk about free markets, for instance, but you often find them voting for completely sleazy and corrupt forms of corporate welfare such as the ethanol subsidy for big agri-business. For Democrats and leftists, a powerful example is education. They claim to want to help the poor, especially minorities, yet all too often they cast aside those people and instead side with the teacher unions by opposing school choice. So kudos to the Philadelphia branch of the ADL, as well as a local Democratic politician, for doing the right thing and putting kids before special interests. Jeff Jacoby explains in his Boston Globe column:

Three months ago, the executive committee of ADL’s Philadelphia chapter voted overwhelmingly in favor of a resolution endorsing vouchers. Now it is urging the entire organization to follow suit."We believe school choice to be an urgent civil rights issue,’’ the committee argued in a brief being circulated among ADL’s 30 regional offices. Despite decades of increased spending on K-12 education, "the evidence that our public education system is failing to educate our children is staggering.’’ ADL should reverse its longtime position "as a moral imperative,’’ the Philadelphia leadership urges, and "issue a resolution in favor of school choice.’’As it happens, the ADL regional board isn’t the only liberal voice in Philadelphia calling for expanded school choice. State Senator Anthony Williams, a black Democrat and a candidate in Pennsylvania’s gubernatorial primary this week, is the founder of a charter school, a champion of vouchers, and an ardent believer in the power of competition to improve the quality of education. His position puts him sharply at odds with the state’s largest teachers’ union, which opposes choice and has endorsed his main opponent. But Williams — like the local ADL leadership — sees school choice as the great civil rights battle of the day."Anybody who was for Brown v. Board of Education — it baffles me that they would be against vouchers,’’ he told me last week.

The Drug War Is a Failure

The Associated Press has a thorough story looking at the utter failure in the War on Drugs. In part, this is a predictable result of government incompetence, akin to the War on Poverty. And just as the so-called War on Poverty has negative side effects such as increased dependency, the War on Drugs has negative said effects including lots of wasteful government spending. I'm personally very anti-drug, and if I ever catch any of my kids doing drugs, they'll be sorry, but that doesn't mean the government should be involved. Let's look at some of the key excerpts from the article, beginning with a look at the overall cost and an admission that all the added spending hasn't generated any positive results:

After 40 years, the United States' war on drugs has cost $1 trillion and hundreds of thousands of lives, and for what? Drug use is rampant and violence even more brutal and widespread. Even U.S. drug czar Gil Kerlikowske concedes the strategy hasn't worked. "In the grand scheme, it has not been successful," Kerlikowske told The Associated Press. ...President Richard M. Nixon seized on a new war he thought he could win. "This nation faces a major crisis in terms of the increasing use of drugs, particularly among our young people," Nixon said as he signed the Comprehensive Drug Abuse Prevention and Control Act. The following year, he said: "Public enemy No. 1 in the United States is drug abuse. In order to fight and defeat this enemy, it is necessary to wage a new, all-out offensive." His first drug-fighting budget was $100 million. Now it's $15.1 billion, 31 times Nixon's amount even when adjusted for inflation.
Experts who have looked at the issue say criminalization is bad policy, costing lives, expanding government, and misallocating law enforcement resources:

Using Freedom of Information Act requests, archival records, federal budgets and dozens of interviews with leaders and analysts, the AP tracked where that money went, and found that the United States repeatedly increased budgets for programs that did little to stop the flow of drugs. ...Studies show that jail time tends to increase drug abuse. ...Harvard University economist Jeffrey Miron says the only sure thing taxpayers get for more spending on police and soldiers is more homicides. "Current policy is not having an effect of reducing drug use," Miron said, "but it's costing the public a fortune." ...The dealers who are caught have overwhelmed justice systems in the United States and elsewhere. U.S. prosecutors declined to file charges in 7,482 drug cases last year, most because they simply didn't have the time. That's about one out of every four drug cases. ......A full 10 percent of Mexico's economy is built on drug proceeds — $25 billion smuggled in from the United States every year, of which 25 cents of each $100 smuggled is seized at the border.
The good news is that there is growing interest in a free-market/libertarian approach:

A decade ago, no politician who wanted to keep his job would breathe a word about legalization, but a consensus is growing across the country that at least marijuana will someday be regulated and sold like tobacco and alcohol. California voters decide in November whether to legalize marijuana, and South Dakota will vote this fall on whether to allow medical uses of marijuana, already permitted in California and 13 other states.
Unfortunately, Obama seems to have little interest in a more rational policy, even though he admits drug use when he was young. As usual, politicians get to live their lives using one set of rules while imposing a different set of rules on everyone else:

Obama is requesting a record $15.5 billion for the drug war for 2011, about two thirds of it for law enforcement at the front lines of the battle: police, military and border patrol agents struggling to seize drugs and arrest traffickers and users. ...Until 100 years ago, drugs were simply a commodity. ...In 1904, an Episcopal bishop returning from a mission in the Far East argued for banning opium after observing "the natives' moral degeneration." In 1914, The New York Times reported that cocaine caused blacks to commit "violent crimes," and that it made them resistant to police bullets. ...a young Barack Obama was one of those young users, a teenager smoking pot and trying "a little blow when you could afford it," as he wrote in "Dreams From My Father." When asked during his campaign if he had inhaled the pot, he replied: "That was the point." So why persist with costly programs that don't work?