If Professors Really Believe in Socialism, Why Don't They Try this Classroom Experiment?

This little story appeared in my inbox. It's obviously meant to illustrate the perverse incentive structure created by redistribution, but one wonders why statists in the academic world don't follow through on their convictions and use this grading system.

A professor said he had never failed a single student before but had, once, failed an entire class. The class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer. The professor then said ok, we will have an experiment in this class on socialism.

All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A.

After the first test the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. But, as the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too, so they studied little.

The second test average was a D. No one was happy.

When the third test rolled around, the average was an F.

The scores never increased as bickering, blame, and name calling all resulted in hard feelings and no one would study for anyone else.

To their great surprise, all failed. The professor told them that socialism would ultimately fail because the harder it is to succeed the greater the reward, but when a government takes all the reward away, no one will try so no one will succeed.

Great Moments in Human Rights

Forget the Magna Carta and the Constitution. Finland is now on the cutting edge of protecting, promoting, and guaranteeing fundamental rights. As the BBC story excerpted below reports, Finland has announced that broadband access is now a legal right! Yes, you're reading it here first. But not just the right to broadband. Apparently one megabit per second is a human right today and 100 megabits per second is a human right by 2015. I gather this is the Finnish version of a "living, breathing" right. My only question, though, is whether older Finns can sue the government for failing to provide this right back in the awful, deprived days before Al Gore invented the Internet?

From 1 July every Finn will have the right to access to a 1Mbps (megabit per second) broadband connection. Finland has vowed to connect everyone to a 100Mbps connection by 2015. In the UK the government has promised a minimum connection of at least 2Mbps to all homes by 2012 but has stopped short of enshrining this as a right in law. The Finnish deal means that from 1 July all telecommunications companies will be obliged to provide all residents with broadband lines that can run at a minimum 1Mbps speed.

The Problem Is Big Government, not Campaign Contributions

A Washington Post columnist is understandably disgusted that Congressman Jim Moran is a corrupt thief who swaps earmarks for campaign cash, but she draws the wrong conclusion. The problem is not campaign contributions. That's just the symptom. The real problem is that government is far too big, and politicians are auctioning off undeserved money to people who don't deserve it. Restricting the 1st Amendment by making it harder for people to participate in the political process, as the columnist urges, won't solve the problem because people who think it is okay to receive undeserved money will figure out another route to bribe politicians. The only real solution is to stop the corrupt redistribution that drives the process, which is the point made in the video under the excerpt:

"You don't have to drink. You just have to pay." Has there ever been a better summary of how Washington works -- and the need for campaign finance reform -- than this line from a 2007 e-mail? The context: An executive at Innovative Concepts, a small defense contractor, was balking at going to a wine-tasting fundraiser for Rep. Jim Moran. The Virginia Democrat sits on the House Appropriations subcommittee that controls defense spending -- and the executive's boss made clear that attendance had nothing to do with the quality of the cabernet. Moran raked in almost $92,000 at the event, sponsored by the now-defunct lobbying firm PMA Group. And Innovative Concepts received an $800,000 earmark in the next defense spending bill. ...There is nothing necessarily illegal in the Innovative Concepts transaction, which is, of course, the scandal. Washington operates on the tacit understanding that campaign contributions grease the way for access and influence. Both sides in this transaction, lawmaker and donor, perceive, or at least present, themselves as the victim: elected officials as captives of a system that demands incessant fundraising; donors as the target of a none-too-subtle shakedown scheme. ...There is a simple way out of this swamp -- public financing of congressional campaigns. ...The estimated cost is $2 billion to $3 billion per election.

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."

Taxing the Rich Won't Raise Revenue - but Will Hurt the Economy

Writing in the Wall Street Journal, my Cato Institute colleague Alan Reynolds offers a simple economics lesson about pitfalls of class-warfare tax policy:

...the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that "the elasticity of taxable income" (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS. The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that "for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%." That elasticity estimate of 0.5 would whittle the Obama team's hoped-for $1.2 trillion down to $671 billion. As the authors note, however, "there is much evidence to suggest that the ETI is higher for high-income individuals." The authors' illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich. For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates. If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration's intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.

Political Alchemy, Part I: Turning Spending Increases into Tax Cuts

Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead.

This bit of legerdemain is made possible, thanks to the convolutions of the personal income tax, by adopting or expanding refundable tax credits. But in this case, "refundable" does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax.

This is hardly a trivial issue. According to the Congressional Budget Office, the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative "effective" income tax rate. In simple terms (though perhaps with profound political implications), the income tax is a revenue generator for a big share of the population.

And the problem is going to get worse if the President's budget is approved. Buried in the fine print, on pages 188-189 of the Analytical Perspective of the Budget, you will see that the President is proposing to increase this hidden form of spending by more than $152 billion over the next ten years.

It is worth noting that proponents argue that it is okay to classify this new spending as tax cuts because it somehow offsets other tax payments, especially the payroll tax. I'm sympathetic to lower taxes on everybody, including the poor, but surely it is better to be honest and simply cut the taxes that people pay. The current methodology, by contrast, is open to abuse. Heck, I'm surprised politicians don't classify other forms of spending as tax cuts. Maybe corporate welfare can be reclassified as a corporate tax cut (I better stop lest I give the political class any ideas).

Defenders also assert that some so-called refundable tax credits, particularly the earned income tax credit, are designed to encourage work. That is partly true, but credits like the EITC are withdrawn as income climbs, and this means poor people face punitive marginal tax rates, so the overall effect on hours worked may be negligible.

The right approach, of course, is to get the federal government out of the racket of redistributing income.

Was Jesus a Socialist?

Speaking earlier this week to a group of kids, President Obama invoked Jesus and the three wise men to justify his agenda of redistribution. I'm not exactly a religious scholar, but this surely is absurd. Doesn't Christianity (and, I assume, Judaisim and other faiths) require individuals - using free will - to act charitably? Using the coercive power of government to forcibly redistribute other people's money, by contrast, is moral preening at best and could be characterized as government thuggery. Writing for Townhall.com, Cal Thomas certainly was not amused:

Speaking Monday afternoon to a group of children from the Washington, D.C., Boys and Girls Club, the president delivered a mini sermon on "why we celebrate Christmas." He asked the children if they knew. One piped up and said "The birth of baby Jesus." ...The president spoke of what Jesus "symbolizes for people all around the world," which he said, "is the possibility of peace and people treating each other with respect." And then, in the best tradition of a community organizer, the president said Jesus is about "doing something for other people." Even the "three wise men" were invoked to support the president's idea of wealth redistribution: "...these guys ... have all this money, they've got all this wealth and power, and they took a long trip to a manger just to see a little baby." And what conclusion should be drawn from that journey? The president told the children, "...it just shows you that because you're powerful or you're wealthy, that's not what's important. What's important is ... the kind of spirit you have." To the president, this means the spirit of government taking from the productive and giving to the nonproductive. To Him, Jesus is a socialist, or perhaps an early Robin Hood. ...only people can be compassionate. A government check too often brings dependence and a sense of entitlement.

I must quibble with one small part of Cal's column. Robin Hood was a freedom fighter, not a redistributionist. His mission was to reclaim money that the nobles stole (i.e., taxed) from the peasantry. Modern society has turned the story upside down.

The Global Warming Shakedown, Part I

The Wall Street Journal's editorial page lifts a rock and looks at the sordid redistribution of other people's money that is happening in Copenhagen. The unavoidable conclusion is that developing countries are there to cash in on a new foreign-aid boondoggle and rich countries are there because politicians are seeking a new source of power over their national economies:

Monday's walkout revealed the real reason that the developing world is in Copenhagen in the first place: They see climate change as a potential foreign-aid bonanza, and they are at the table to leverage the West's environmental angst into massive transfers of wealth. ...the developed world has been pouring trillions of dollars into development aid in various forms for decades, with little to show for it. The reasons are well-known: Corruption, political oppression, government control of the economy and the absence of rule of law combine to keep poor countries poor. And those factors also ensure that most aid is squandered or skimmed off the top.Recasting foreign aid as "climate mitigation" won't change any of that. ...The G-77 scoffed at a European offer of €7.2 billion ($10 billion) over three years. Instead, the Sudanese chairman of the group, Lumumba Stanislaus Di-Aping, suggested in an interview with Mother Jones magazine that something on the order of a trillion dollars, or more, would be appropriate. "The world's scientists and policy decision makers have publicly stated that this is the greatest risk humanity has ever faced," says Mr. Di-Aping. "Now if that's the case, it's very strange that $10 billion is considered adequate financing." Mr. Di-Aping deserves credit for taking the climate alarmists on their own terms and drawing consistent conclusions.

How and Why Government Spending Diminishes Economic Performance

In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.