Friday, October 8, 2010

David Cameron's Foolish (or Cynical) Naivete about the Laffer Curve

Even though he's allowing the budget to grow twice as fast as inflation, some people seem to think the new U.K. Prime Minster is a fiscal conservative. I'm skeptical. Not only is spending rising much too fast (there are promises of more restraint in the future, but I'll believe it when it happens), but Cameron and the Tory/Liberal coalition government are increasing the value-added tax and increasing the capital gains tax. Perhaps worst of all, they are leaving in place the new 50 percent tax rate that former Labor Prime Minister Gordon Brown imposed in hopes that class-warfare policy would help him get elected. But as this Daily Telegraph story suggests, it is quite likely that the higher tax rate will lose revenue as productive people escape to Switzerland and other jurisdictions not influenced by the politics of hate and envy.
One-in-four hedge fund employees has already left London to move to Switzerland, which is said to have a more stable tax regime, according to consultancy Kinetic partners. Calculations by the company claim the UK could have already forgone about £500m in tax revenues, based on the 1,000 or so hedge fund managers it says have already left the country. ...High-profile departures this year include Alan Howard, founder of Brevan Howard, and Mike Platt, founder of BlueCrest Capital.

This story shows both the power of the Laffer Curve and the importance of tax competition. The greedy politicians in England doubtlessly resent the "brain drain" to Switzerland. Like their U.S. counterparts, politicians view taxpayers as serfs who are supposed to blindly produce more income for the ruling class to expropriate and redistribute.

While I'm obviously not a big fan of British fiscal policy, America is worse in one important way. At least British taxpayers have the liberty to leave without being raped by the U.K. tax authority. Once they leave the United Kingdom and make their home in Switzerland, they are no longer British taxpayers. Americans who want to move, by contrast, are unable to escape the punitive internal revenue code. Indeed, the United States is one of the few nations in the world to have exit taxes, an odious approach generally associated with loathsome regimes such as the Soviet Union and Nazi Germany.

First Class Bureaucrats, Coach Class Taxpayers

Here's a story I got from the Advice Goddess twitter feed. It seems airlines are upset that federal air marshals almost always grab first class seats. This isn't good for airlines, since it uses up seats that they need for paying customers. It's not good for security since the main threat in on-board explosives carried by terrorists who want to sit over the wings. And it's not good for Dan Mitchell since it means he's less likely to get upgraded when the good seats are occupied by bureaucrats. Since I'm waiting for a flight to Australia, you can guess which upsets me the most. Here's a blurb from the Wall Street Journal story.
To protect the nation's air travelers, federal air marshals deployed after the 2001 terrorist attacks try to travel incognito, often in pairs, and choose flights identified with the potential to fall under threat. And they almost always fly first class—something some airlines would like to change. With cockpit doors fortified and a history of attackers choosing coach seats, some airline executives and security experts question whether the first-class practice is really necessary—or even a good idea. It could weaken security by isolating marshals or making them easier for terrorists to identify, airline executives say. With more threats in the coach cabin now, first-class clustering may not make as much security sense. Security experts say bombers are a bigger threat today than knife-wielding attackers trying to get through secure cockpit doors, and Transportation Security Administration checkpoints are heavily focused on explosives, whether hidden in shoes, liquids or under clothes. Some believe bombers try to target areas over the wing—a structurally critical location and also the site of fuel storage—to cause the most damage to the aircraft. ...By law, airlines must provide seats to marshals at no cost in any cabin requested. With first-class and business-class seats in particular, the revenue loss to airlines can be substantial because they can't sell last-minute tickets or upgrades, and travelers sometimes get bumped to the back or lose out on upgrade opportunities. When travelers do get bumped, airlines are barred from divulging why the first-class seat was unexpectedly taken away.

Thursday, October 7, 2010

Political Humor

I received this joke today. It's definitely worth passing on. I don't want to spoil the punch line, so I'll just say it would be more amusing if there actually was a choice two yeas ago.

Guy goes into a bar, there's a robot bartender.

The robot says, "What will you have?"

The guy says, "Martini."

The robot brings back the best martini ever and says to the man, "What's your IQ.

The guy says, "168."

The robot then proceeds to talk about physics, space exploration and medical technology.

The guy leaves, but he is curious... So he goes back into the bar.

The robot bartender says, "What will you have?"

The guy says, "Martini."

Again, the robot makes a great martini gives it to the man and says, "What's your IQ?"

The guy says, "100."

The robot then starts to talk about Nascar, Budweiser and John Deere tractors.

The guy leaves, but finds it very interesting, so he thinks he will try it one more time.

He goes back into the bar.

The robot says, "What will you have?"

The guy says, "Martini," and the robot brings him another great martini.

The robot then says, "What's your IQ?"

The guy says, "Uh, about 50."

The robot leans in real close and says, "So, are you still happy you voted for Obama?"

Should Food Stamps Be Restricted to "Healthy Foods"?

As indicated by my post on how to handle prisoners with AIDS, I periodically run into issues where I'm not sure about the right answer. Here's another case. Politicians in New York have a proposal to prohibit people from using food stamps to buy sugary drinks. Part of me is irritated by paternalistic, nanny-state busybodies who want to tell other people how to live. On the other hand, maybe this proposal will make people less willing to mooch off taxpayers by accepting food stamps (though I suspect they'll just bring two carts to the checkout line, one with things that can be purchased with food stamps, and the other filled with sodas, booze, and other items that would require cash). The ideal answer, of course, is to get rid of the federal food stamp program and let states and communities experiment with the best way of handling these issues. Here's an excerpt from the AP report.
New Yorkers on food stamps would not be allowed to spend them on sugar-sweetened drinks under an obesity-fighting proposal being floated by Mayor Michael Bloomberg and Gov. David Paterson. ...If approved, it would be the first time an item would be banned from the federal program based solely on nutritional value. The idea has been suggested previously, including in 2008 in Maine, where it drew criticism from advocates for the poor who argued it unfairly singled out low-income people and risked scaring off potential needy recipients. And in 2004 the USDA rejected Minnesota's plan to ban junk food, including soda and candy, from food stamp purchases, saying it would violate the Food Stamp Act's definition of what is food and could create "confusion and embarrassment" at the register. The food stamp system...does not currently restrict any other foods based on nutrition. Recipients can essentially buy any food for the household, although there are some limits on hot or prepared foods. Food stamps also cannot be used to buy alcohol, cigarettes or items such as pet food, vitamins or household goods. ...There still are many unhealthful products New Yorkers could purchase with food stamps, including potato chips, ice cream and candy.

Wednesday, October 6, 2010

Where are the '60s Hippies Now that They're Needed to Fight Keynesianism?

Keynesian economic theory is the social-science version of a perpetual motion machine. It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket. Not surprisingly, nations that adopt this approach do not succeed. Deficit spending did not work for Hoover and Roosevelt is the 1930s. It did not work for Japan in the 1990s. And it hasn't worked for Bush or Obama.

The Keynesians invariably respond by arguing that these failures simply show that politicians didn't spend enough money. I don't know whether to be amused or horrified, but some Keynesians even say that a war would be the best way of boosting economic growth. Here's a blurb from a story in National Journal.
America's economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today. Nobelist Paul Krugman, a New York Times columnist, and Harvard's Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. ...Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact "exogenous" shock like a major war -- something similar to what Krugman called the "coordinated fiscal expansion known as World War II" -- would be enough to break the cycle. ...Both reiterated their previously argued views that the Obama administration's stimulus was far too small to fill the output gap.
Two additional comments. First, if Martin Feldstein's views on this issue represent what it means to be a conservative, then I'm especially glad I'm a libertarian. Second, Alan Reynolds has a good piece eviscerating Keynesianism, including a section dealing with Krugman's World-War-II-was-good-for-the-economy assertion.

Retirees Are the Third Victims of Obamacare

We've already identified kids and low-income workers as groups that are being hurt by the new scheme for government-run healthcare. Now we can add retirees to the list. Gee, I wonder what happened to that promise about being able to keep your existing health plan? Here's an excerpt from a story in the Wall Street Journal.

3M Co. confirmed it would eventually stop offering its health-insurance plan to retirees, citing the federal health overhaul as a factor. The changes won't start to phase in until 2013. But they show how companies are beginning to respond to the new law... 3M illustrates that others may not opt to retain such plans over the next few years... The company didn't specify how many workers would be impacted. It currently has 23,000 U.S. retirees. ...Sen. Charles Grassley, an Iowa Republican, said that "for all the employees who were promised they'd be able to keep their current benefits after the health-care law passed, I'm worried that the recent changes we've heard about...are just the beginning."

Tuesday, October 5, 2010

Taxpayers vs Bureaucrats, Part XLI

I've avoided this topic in recent weeks because it's too depressing, but this story is too outrageous to ignore. The County of Los Angeles has 199 bureaucrats who "earned" more than $250,000 last year. According to Census Bureau data for 2008, the median household income in the county was 55,000, Here's a blurb from the L.A.Times about incomes of the bureaucratic gilded class.

Nearly 200 Los Angeles County employees earned more than a quarter of a million dollars in 2009, according to a list of the county's top earners released late Monday in response to a Public Records Act request from The Times. The highest earners list was dominated by physicians and other medical personnel, but also included county firefighters and a handful of top sheriff's employees. Some of the best-known names on the list belong to elected officials — although none of the five county supervisors, who make $178,789 a year, qualified. ...The Times requested the base salary, overtime and "other earnings" for county employees whose total annual pay exceeded $250,000. "Other earnings" can include bonuses for special skills or responsibilities or unused benefits cashed out as taxable income, among other things. ...Overtime played a big role, with only 65 people making the list on base salary alone. Thirty workers made more than $80,000 in overtime. Twenty-two of them work for the county Fire Department, four work for public hospitals, two were psychiatrists for the Mental Health Department, and two were physician specialists for the Sheriff's Department.

Monday, October 4, 2010

Obama's Policy Failure, Part I

Former Senator Phil Gramm had a column last week in the Wall Street Journal that deserves two blog posts. This first post highlights Gramm's analysis showing that the U.S. has been very Keynesian compared to Europe, with numerous efforts to jump start the economy with deficit spending. But Senator Gramm hits the nail on the head, comparing America's tepid recovery with the better performance across the Atlantic.

During the average recovery since World War II, gross domestic product (GDP) surpassed the pre-recession high five quarters after the recession began. It has never taken longer than seven quarters. Yet today, after 11 quarters, GDP is still below what it was in the fourth quarter of 2007. The economy is growing at only about a third of the rate of previous postwar recoveries from major recessions. Obama administration officials such as Treasury Secretary Tim Geithner have argued that without their policies the economy would be worse, and we might have fallen "off a cliff." While this assertion cannot be tested, we can compare the recent experience of other countries to our own. ...There are 4.6% fewer people employed in the U.S. today than at the start of the recession. Euro zone countries have lost 1.7% of their jobs. ...This simple comparison suggests...that American economic policy has been less effective in increasing employment than the policies of other developed nations. ...While the most recent quarterly growth figures are just a snapshot in time, it is hardly encouraging that economic growth in the U.S. (1.7%) is lower than in the euro zone (4%), U.K. (4.8%), G-7 (2.8%) and OECD (2%).

Here's How to Balance the Budget

Our fiscal policy goal should be smaller government, but here's a video for folks who think that balancing the budget should be the main objective.



The main message is that restraining the growth of government is the right way to get rid of red ink, so there is no conflict between advocates of limited government and supporters of fiscal balance.

More specifically, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they'll happen even faster if spending grows at an even slower rate.

This debunks the statist argument that there is no choice but to raise taxes.

Saturday, October 2, 2010

There Is No Libertarian or Conservative Argument for Higher Taxes

Eli Lehrer has an article on the FrumForum entitled "Five Revenue Raisers the GOP Should Back." He argues it would be good to get rid of preferences such as the state and local tax deduction and the mortgage interest deduction, and he also asserts that there should be "user fees" for things such as transportation.

As an avid supporter of a flat tax and market pricing, I have no objection to these policies. Indeed, I would love to get rid of the state and local tax deduction so that taxpayers in Texas and Florida no longer have to subsidize the fiscal profligacy of politicians in California and New York.

But there is a giant difference between getting rid of certain tax preferences as part of revenue-neutral (or even better, tax-cutting) tax reform and getting rid of tax preferences in order to give politicians more revenue to spend.

The former is a noble goal. Who can argue, after all, with the idea of getting rid of the corrupt and punitive internal revenue code and replacing it with a simple and fair flat tax? Lots of loopholes are eliminated, so there are plenty of tax-raising provisions in tax reform. But every one of those provisions is offset by provisions that lower tax rates and get rid of double taxation of saving and investment.

The latter, by contrast, is an exercise in trying to lose with minimal damage - sort of the "French Army Theory" of taxation, surrender gracefully and hope that your new masters give you a few crumbs after their celebratory feast.

What is especially strange about this approach is that the Republicans who advocate higher taxes claim that they are political realists. Yet if we look at real-world evidence, the moment Republicans show their "realism" by putting taxes on the table, the entire debate shifts.

Instead of the debate being tax-hikes vs. no-tax-hikes, it becomes a debate over who-should-pay-more-tax. Republicans win the first debate. They get slaughtered in the second debate.

Remember when the first President Bush agreed to enter into tax-hike negotiations in 1990? He set out two conditions - that there should be a reduction in the capital gains tax and that there should be no increase in income tax rates. So what happened? As everyone with an IQ above room temperature predicted, the capital gains tax stayed the same and income tax rates increased.

Last but not least, this conversation only exists because some people have thrown in the towel, acquiescing to the idea that there is no way to balance the budget without higher taxes. Yet the Congressional Budget Office data shows that the budget can be balanced by 2020 simply by limiting annual spending growth to 2 percent.

Low-Income Workers Are the Second Victims of Obamacare

This blog already has noted that Obamacare has crippled the market for "kids only" health insurance policies. Unsurprisingly, that is just the beginning of the bad news. The latest development is that health policies designed to provide insurance to low-income workers may no longer be economically feasible. The Wall Street Journal comments.

Among President Obama's core health-care promises was that Americans can keep their current coverage if they like it. Among the reasons that a new ObamaCare squall blows in every other day is that this claim simply is not true, as people are discovering. The latest fracas was incited by Janet Adamy's scoop in the Journal this week that McDonald's Corp. may be forced to cancel its current coverage for 29,500 employees as a result of ObamaCare. McDonald's told Health and Human Services regulators that new mandates will make its plans "economically prohibitive" and cause "a huge disruption" unless it gets a waiver. ...The entire philosophical and policy architecture of ObamaCare is explicitly designed to standardize health benefits and how those benefits should be paid for. Those choices and tradeoffs will be made for everyone by Ms. Sebelius's regulators. ...Around 2.5 million consumers are covered by "mini-med" policies, most of them concentrated in low-wage industries like fast food, hospitality and retail that have large numbers of part-time or temporary workers. In the case of the restaurants, 75% of the workforce turns over every year and nearly half are under age 25. Mini-med plans are a temporary stopgap for businesses that have low margins and face high labor and health costs. But Democrats hate mini-med and other skinny-benefit plans, calling them "underinsurance." ObamaCare is meant to run them out of the market by mandating benefits, eliminating coverage caps and certain technical rules about how premiums must be spent. ...In other words, the choice is between relatively affordable coverage that isn't as generous as Democrats think it should be and dumping coverage entirely. McDonald's may eventually offer the high-cost plans that Ms. Sebelius favors, or get its waiver, but many of its less profitable or smaller competitors won't. While subsidized ObamaCare options will be available in 2014, those costs will merely be transferred to taxpayers.