Archives: June, 2010

How to Explain Free Trade in Less Than Three Minutes

The professionally ignorant (and I’m thinking here of Lou Dobbs, among others) never “get it” about trade. They think it’s some complex swindle, in which we deny ourselves “jobs,” or that it should be about being “fair” or “balanced.” They don’t see how free trade creates prosperity and peace. I was inspired by the outstanding trade economist Doug Irwin of Dartmouth to explain what goes on when people trade. The challenge was to explain international trade in under 3 minutes. So here’s the result in 2:57: The Great Prosperity Machine.

Share it with your favorite protectionist, or with professors and teachers. (There’s more information at AtlasNetwork.org/BastiatLegacy.)

Watch and share:

Political Economy in Three Panels

Indeed, every improved product or service may make us no longer value products and services we previously used. That’s what Schumpeter called “creative destruction.” A longer version of the same phenomenon was on the front page of Monday’s Wall Street Journal, in an article about how Wal-Mart’s rivals secretly fund “grassroots local campaigns” against Wal-Mart, organized by political consulting firms, to protect the existing firms’ positions. Every innovator puts somebody out of business, as Agnes’s friend recognizes.

Ruth Richardson: The Queen of Fiscal Squeezes

In my posting of June 3, 2010, “Prof Krugman Is Wrong, Again,” I argued and presented evidence to indicate that Prof. Krugman and other fiscalists, who peddle the idea that more government spending is the economic elixir for the United States, are wrong.  They have latched onto an old idea – naive Keynesianism – that has congealed into a crust of dogma by endless repetition and obeisance.

When fiscal deficits and debt levels are “large” and the state of confidence is “low,” fiscal multipliers can be negative.  Under these conditions, a fiscal consolidation, not a fiscal stimulus, is stimulative.

While my June 3, 2010 posting contained well-known contra-Keynesian cases, my friend Peter Redward in Singapore reminded me that I failed to include New Zealand’s 1991 budget squeeze.  This leaves me a bit red-faced as another good friend, Ruth Richardson, was New Zealand’s Minister of Finance (November 1990 - 1993) and was responsible for the 1991 budget.  As Ruth makes clear in her memoirs Making A Difference (Chapter 11 - The Mother of All Budgets), the purpose of New Zealand’s fiscal squeeze was to restore confidence and boost economic growth.  Her squeeze worked like a charm, as Roger Kerr, Executive Director of the New Zealand Business Roundtable, recounts.

Problems with Nationalism?

I try to avoid Sunday morning talk shows like the plague, but somehow I happened to catch five minutes of Fareed Zakaria’s “GPS” show on CNN International.  Elliott Abrams and Peter Beinart were arguing about the Gaza flotilla and Beinart’s New York Review of Books article about liberal Zionism.

What I found interesting about the segment was the exchange between the two men about the argument Beinart made in the article: that many young Jews saw the choice before them not as being between liberal Zionism and conservative Zionism, but rather between conservative Zionism and no Zionism.  Beinart spelled out the argument, and this is what followed:

ZAKARIA: Elliott, you can briefly respond to this, and then we’ve got to go.

ABRAMS: OK. I think it’s quite historical.

What Peter is forgetting, that Jewish liberals have never supported Israel. They didn’t support the founding of the state of Israel. The reform movement was anti-Zionist for decades and decades.

Jewish liberals have a problem with particularism, nationalism, Zionism, and they always have. And it isn’t due to anything that is going on in Israel, it’s due to things that are going on inside their heads. They need to grow up and realize that Israel has a right to defend itself. (emphasis mine)

I’ve included his whole response for context, but I’m only really interested in the italicized part of the argument.  Aren’t all Americans supposed to have problems with nationalism?  Not our own nationalism, of course, which we have re-labeled “exceptionalism.”  But foreign nationalism?  Isn’t that supposed to be pernicious?

The way in which Abrams presented the argument struck me as being a normative claim, not positive.  That is, “particularism, nationalism, and Zionism” were not just things that Jewish liberals have problems with, but rather they were things that Jewish liberals have problems with but should not.

Abrams’ inclusion of Zionism alongside nationalism ought perhaps to caution him about Zionism’s susceptibility to the perils that have plagued other nationalisms through history.

Download Cult of the Presidency for Free!

Download my book for free!

Last week, the New Republic’s Jonathan Chait praised Cult of the Presidency, and the Economist quoted the book.  Which reminds me, I provided a link in my last post, but forgot to stress the fact that we’re now literally giving it away with free online downloads (especially nice for those of you who are Kindle owners).

With presidential “daddyism” rampant, and our National Father-Protector’s manifest failure to protect us from oil spills and tornadoes, there couldn’t be a better time to check out the comprehensive libertarian indictment (if I do say so myself) of the presidency, the very model of a modern constitutional monstrosity.

Download it here.

Will Higher Tax Rates in 2011 Cause an Economic Collapse?

Art Laffer has a compelling column in yesterday’s Wall Street Journal, where he makes the case that future tax rate increases will cause considerable economic damage because people have an incentive to maximize income this year to take advantage of current tax rates – resulting in an artificial drop in economic activity next year. In effect, this will be a reverse version of the experiment in the early 1980s, when entrepreneurs and investors had an incentive to postpone economic activity since Reagan’s tax rate reductions were phased in over several years. I am reluctant to endorse Art’s prediction that the “economy will collapse,” since even good economists are lousy forecasters. But we certainly will see a large degree of tax planning, which will lead to less revenue than expected next year. And the higher tax rates will inhibit growth, though it is impossible to predict whether this means 2.1 percent growth instead of 2.3 percent growth, for instance, or 0.5 percent growth instead of 0.6 percent growth.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. …the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. …Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere. …if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be. …In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%. But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011. …The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

Overpaid Federal Workers

I posted an essay on federal worker pay over at downsizinggovernment.org. The essay gathers together ideas and data from my recent blogs on the topic.

As I’ve noted, the average compensation of federal civilian workers in 2008 was $120,000 a year, which strikes most people as rather high. Defenders of the current system argue that the generous pay is deserved because the federal government has a unique high-end workforce.

But consider some ordinary and mundane offices in the U.S. Department of Agriculture, which I happened to be looking at the other day:

  • The USDA’s Office of Communications employs 77 people and will pay $9 million in wages and benefits this year. That works out to $117,000 each for these public relations workers, which is close to the overall federal compensation average.
  • Similarly, the 62 employees of the USDA’s Office of Chief Economist will earn an average $177,000 each in wages and benefits this year, which is far higher than the federal average.

Apparently, it isn’t just rocket scientists that are earning high levels of federal compensation, it is also workers in many run-of-the-mill bureaucratic jobs.

(Data for fiscal 2010 from the appendix of the 2011 federal budget, pages 68 and 72).