Archives: 05/2011

Back-Door Tax Increases Are a Recipe for Bigger Government

Martin Feldstein’s on a roll, but not in a good way. Earlier this week in the Wall Street Journal, he advocated throwing in the towel on reforming Social Security into a system of personal retirement accounts. Today, in the New York Times, he endorses big tax increases.

Rather odd positions for someone who served as Chairman of President Reagan’s Council of Economic Advisers. The Gipper must be rolling in his grave.

To be fair, when compared to Obama’s tax-hike plan, Feldstein wants to raise taxes in ways that impose much less damage on the economy. Obama wants to raise tax rate on productive behavior, thus discouraging work, saving, investment, and entrepreneurship. Feldstein, by contrast, wants to cap various tax preferences.

Reducing the budget deficit and stopping the explosion of our national debt will require more tax revenue… But the need for more revenue needn’t mean higher tax rates. …tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name. …such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care. …here is a way to curb this loss of revenue without eliminating any individual deduction: limit the total tax saving for any individual to a maximum percentage of his total income. …What’s the result? Taxpayers with incomes of $25,000 to $50,000 would pay about $1,000 more in taxes; those with incomes of more than $500,000 might pay $40,000 more. The cap would affect more than 80 percent of taxpayers. Although they would continue to benefit from the mortgage deduction, the health insurance exclusion and other tax expenditures, their tax savings would not increase if they took out a larger mortgage or a more expensive insurance policy. … a 2 percent cap on tax expenditures in 2011 would raise tax revenue by $278 billion — nearly 30 percent of total projected income tax revenue for this year. The extra revenue would increase over time, reaching nearly half of the projected future fiscal deficits.

I’m not a fan of tax preferences. I agree with much of Professor Feldstein’s argument about the inefficiency and distortions that are created when government plays industrial policy with the tax code.

But there are good ways and bad ways of addressing the problem. If Professor Feldstein was proposing to cap or eliminate tax preferences as part of a plan that also lowered tax rates, that would be great news.

Unfortunately, Feldstein is proposing to cap tax preferences in order to funnel more money to Washington. But giving more tax revenue to politicians and bureaucrats, in the words of P.J. O’Rourke, would be like giving whiskey and car keys to teenage boys.

The big problem with Feldstein’s approach is that any source of additional revenue will ease up the pressure to restrain government spending. There are several budget plans, such as Congressman Ryan’s proposal and the House Study Committee plan, that would significantly improve America’s fiscal position by restraining the growth of federal spending. But these pro-growth initiatives will have zero chance of getting enacted if politicians think more revenue is forthcoming.

America’s fiscal problem is too much spending, not insufficient revenue.

Yes, the tax code is riddled with terrible provisions that are both corrupt and economically inefficient. But those provisions should be eliminated as part of tax reform - not as part of a plan to give politicians an excuse to prop up big government.

Want Medicare & Medicaid Reform? Stay On Message

This morning’s tempest-in-a-teapot concerns an internally inconsistent and now-corrected Washington Post story that claimed House Republicans had abandoned the badly needed Medicare reforms contained in the budget plan they passed the other week.

The original headline read: “Medicare dropped from GOP budget proposal,” even though the article clearly states, “[House Majority Leader Eric] Cantor [R-VA] said, he would press for all the provisions in the Ryan proposal, including changes to Medicare and Medicaid.”  The Post has since changed the headline to: “Budget talks: Republicans offer to seek common ground with Democrats.”

The confusion appears to stem from comments such as these by Cantor and House Budget Committee Paul Ryan (R-WI):

The biggest mandatory programs — often called “entitlements” — are Medicare, Medicaid and Social Security. But Cantor said negotiators could avoid the “big three,” which Democrats have vowed to defend, by focusing on changes in other areas. “If we can come to some agreement [and] act to effect those savings now, this year, it will yield a lot of savings in subsequent years,” he said.

At a breakfast for reporters hosted by Bloomberg News, Ryan echoed that view, saying, “We’re not going to get a grand-slam agreement . . . because of just the political parameters” set by Obama. But Ryan said his budget offers a “menu of options . . . that I think we could get that are not necessarily the global agreement on, say, Medicare or Social Security.” That menu includes proposals from Obama’s budget request, such as ending grants for worsted-wool producers and requiring graduate students to pay interest on college loans while they are still in school.

Thus the problem appears to be that Republicans are rising to the media’s bait and trying to predict for reporters how the budget negotiations will play out in the end.  Instead of staying on message – Making Medicare look more like Social Security is the only alternative to government rationing and higher taxes…Reform Medicaid the way Congress successfully reformed welfare in 1996…What’s your plan? – Republicans are negotiating with themselves, in public.   So instead of getting a pro-reform message before the American people, we get news cycles that make reformers look weak by falsely reporting that Republicans have abandoned the field.  This isn’t media bias: if Republicans care about entitlement reform, they need to be more disciplined.

Soros, Epstein, and Caldwell on Hayek

Last Thursday must have been Hayek Day. In the morning was the release of the rap video, “Fight of the Century: Keynes vs. Hayek Round Two.” And then in the afternoon a distinguished panel convened in the Cato Institute’s F. A. Hayek Auditorium to discuss Hayek’s great work The Constitution of Liberty, just released in a new definitive edition by the University of Chicago Press. The forum was moderated by Cato fellow in social thought Ronald Hamowy, who edited the new edition. Panelists were Hayek’s intellectual biographer and editor of The Collected Works of F. A. Hayek, Bruce Caldwell; the brilliant legal scholar Richard Epstein; and the hedge-fund billionaire and Open Society Foundations founder George Soros. (Find video and transcript here; easier-to-search video here.)

It was a lively discussion, as various attendees have already noted. Soros raised eyebrows in the audience with his opening remarks:

Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources as long as the government doesn’t interfere. It’s a highly formalized and mathematical theory whose two main pillars are the efficient market hypothesis and the theory of rational expectations. It’s usually called the Chicago School and it has come to dominate the teaching of economics in the United States. I refer to it as market fundamentalism.

He went on to criticize that theory and to offer his own alternative theory of “reflexivity,” while praising Hayek’s warning “against the slavish imitation of natural science” in the social sciences. Richard Epstein countered that Hayek wasn’t systematic enough:

In some sense, I’m taking exactly the opposite side of George Soros; saying that in effect, if he had been a little bit more systematic, had tried to been a little bit more Newtonian in the way in which he had worked things, he might have been able to come up with a more persuasive presentation of a series of ideas in The Constitution of Liberty which I think are really, enormously instructive on one hand, but in certain kinds of ways are in fact incomplete.

Epstein argued that Hayek’s work points not to unfettered markets but to a “presumption against regulation.” Bruce Caldwell, giving voice to some of the whispers in the audience, responded to Soros:

I think that George has a handle on some parts of Hayek but misunderstands other parts of Hayek. And that if he understood those other parts of Hayek he would identify himself, I’ll say it provocatively, as a Hayekian. I don’t think that that’s necessarily true, but I spent the morning rereading The Soros Lectures by George Soros and there were just lots and lots of areas where things that he wrote in here I think are certainly consistent with many of Hayek’s insights.

I’m just going to mention a couple of things in your talk that I would disagree with and I think that [with] further study of Hayek you might see my point. First of all, Hayek and the Austrians in my estimation reject the usefulness of an efficient market hypothesis and a theory of rational expectations for capturing the workings of a market process. So if the acceptance of those two theories is the defining characteristic of being a market fundamentalist, then he’s not the sort of market fundamentalist that you’re describing. I think a pithy way of putting this is that there’s definitely a difference methodologically and in other realms between Chicago and Vienna.

Soros responded:

I think he has allowed himself to be, let’s say expropriated by the Chicago School and the extremist view of markets which claims that markets are perfect, and that of course he also denied in his Nobel Prize lecture which I thought was a reminder to the Chicago School that they’ve gone too far.

Continuing his earlier call for all sides to acknowledge that they may have half the truth and should engage in more dialogue, Soros continued:

Soros: Maybe we can find common ground. I think that we would all agree that government regulation is a necessary evil. I don’t know if we could agree with that –

Epstein: Well, but the necessary evil means you set the presumption against it….

Soros: Look, I happen to agree with you, because while I argue that markets are unstable and this instability has been artificially expurgated from current economic dogma, I also agree that regulations are inherently imperfect. In fact, in my writings I have said that they are more imperfect than markets. Why? Because they are bureaucratic, they are subject to financial interests and very much influenced by political – So if you can avoid regulations you should. So we have actually found common ground.

Some observers picked up on Soros’s criticisms of the less-than-savory political and legislative processes that produced the recent health care and financial-reform bills. I’m just glad to have arranged a lively and civil discussion on the most important social thinker of the 20th century.

We are honored that in the last years of his life F. A. Hayek was a Distinguished Senior Fellow of the Cato Institute. A few months ago, when Kate Zernike wrote in the New York Times that Tea Party activists were resurrecting “long-dormant ideas [found in] once-obscure texts by dead writers,” I noted that she meant

those of F. A. Hayek, the winner of the Nobel Prize in Economics, who met with President Reagan at the White House, whose book The Constitution of Liberty was declared by Margaret Thatcher “This is what we believe,” who was described by Milton Friedman as “the most important social thinker of the 20th century” and by White House economic adviser Lawrence H. Summers as the author of “the single most important thing to learn from an economics course today,” who is the hero of The Commanding Heights, the book and PBS series by Daniel Yergin and Joseph Stanislaw, and whose book The Road to Serfdom has never gone out of print and has sold 100,000 copies this year.

I should have added that John Cassidy wrote in the New Yorker that “on the biggest issue of all, the vitality of capitalism, he was vindicated to such an extent that it is hardly an exaggeration to refer to the twentieth century as the Hayek century.” Hayek was not just an economist. He also published impressive works on political theory and psychology.

He’s like Marx, only right.

Let’s Not Go to the Video

Not that I think it will happen for the next several days, but it’s time for the chattering class to move past the White House’s decision not to release death photographs of Osama bin Laden.

The focus on this largely media-driven issue is an unnecessary distraction from what should be a broader discussion about the direction of U.S. counterterrorism efforts. Photographic evidence is not necessary to establish Osama bin Laden’s death. Al Qaeda has not disputed that its founder and leader is, in fact, dead. And photographic evidence has not stopped the conspiracy theorists from claiming that Americans never landed on the moon. If anything, AQ might wish for the photos to be released to keep the focus on them, and on bin Laden. Pakistan’s civilian and military leaders might prefer Americans to be talking about photos, and not the mounting evidence that Pakistan has been playing a double game. 

 But that is all speculation. The rest of the world seems to want to move beyond the actions of this mass murderer and his organization, and Americans should want that as well. We should revisit all of our policies pertaining to counterterrorism. We should review the policies and procedures that allowed U.S. personnel to deliver justice to bin Laden. We should examine the effect that similar policies have had on AQ, writ large, and inquire as to whether these should be continued or modified. And we should scrutinize the rationale for keeping 100,000 U.S. troops in Afghanistan. Bin Laden’s killing was not contingent upon the creation of a functioning state in Afghanistan, and effective counterterrorism going forward should not be made contingent on similar nation-building missions.

Nearly Half of Detroiters Illiterate. Cause Apparently a Mystery.

A study funded by 10 major foundations reported yesterday that 47 percent of Detroiters are functionally illiterate–unable to read a bus schedule, fill out a resume, or make sense of the directions on an aspirin bottle.

When I checked back in 2008, Detroit public schools were spending $13,000 / pupil, which was then above the national average.

The report notes that half of the illiterate population has either a high school diploma or a GED. That’s beside the point. Virtually the entire illiterate  population has completed elementary school, the level at which reading is theoretically taught. That’s seven years of schooling (k-6), at a cost of roughly $100,000, for… nothing.

The study mainly calls for adult education services to remediate the problem after it has occurred. Perhaps when the city’s illiteracy rate reaches 100 percent the recommendations will suggest replacing the failed k-12 monopoly with something more effective. Of course, by then who’ll be able to read them?

End of an Era, Passing of an Age

Yesterday’s giants continue to exit the arena:  I missed the news cycle on this, but two weeks ago Bill Rusher died at the ripe old age of 87.

Rusher was a conservative writer and activist, and the publisher of National Review in its first few decades.  Although he mostly dropped off the public stage after retiring from NR in 1989, he had latterly been involved with such Cato-friendly groups as the Pacific Research Institute and Pacific Legal Foundation.

From the Wall Street Journal’s obit-itorial:

In the early 1960s, Rusher and others built the foundation for what became Barry Goldwater’s successful run for the Republican Presidential nomination in 1964. While Goldwater lost, his candidacy signaled the conservative ascendancy within the GOP that culminated in Ronald Reagan’s election in 1980.

Rusher wrote a successful syndicated column for 36 years in which he exhibited his fundamental optimism about America and its purposes—even through the dark days of reckless government expansion after 2008. Having once thought Reagan should mount a populist, third-party challenge to the GOP in the 1970s, Rusher and the tea party were kindred spirits. He had a deep faith in the ability of the American people to regain their bearings after a political mistake.

He was also a man of great personal dignity and superb taste who we recall once offering us the very good advice that, “The best restaurant is the restaurant that knows you best.”

It is this last bit that has perhaps stuck most with me about the man, whom I met a few times in college because Rusher enjoyed mentoring young right-of-center writers.  I remember well talking with him late into the night about how to balance intellectualism and activism, or more simply how to put ideas into action.  Well into his 70s by then, Rusher had this cool, stylish charm, a lively mind behind a steely manner (and an impeccable wardrobe).

Not quite a household name any more even in conservative circles, Bill Rusher will certainly be missed in my household.

Obamacare on Appeal

As advocates gear up for the first appellate argument in the ongoing Obamacare lawsuits – Tuesday in Richmond – today marks an important milestone: the filing of two eloquent briefs responding to the government’s appeal of Judge Roger Vinson’s January ruling that found the individual mandate unconstitutional and non-severable, thereby striking the entire legislation. 

These two briefs, one by 26 states (and for the first time signed by former solicitor general Paul Clement) and one by the private co-plaintiffs in that same Florida case (the National Federation of Independent Business and two individuals) present a full-throated defense of the basic principle upon which this country was founded: that the federal government is one of enumerated and limited powers whose primary goal is to preserve liberty.  They describe exhaustively why that government cannot require people to buy goods or services as a means of regulating interstate commerce and why therefore the unprecedented individual mandate goes beyond what the Constitution authorizes.  Indeed, forcing people to buy health insurance is neither a regulation of interstate commerce nor a constitutionally appropriate means of achieving such regulation. 

If the Eleventh Circuit, which will hear argument June 8 in Atlanta, takes these arguments seriously – and adheres to the truism that the Constitution provides fixed limits on federal power – then the “linchpin” of Obamacare is doomed.  Any ruling to the contrary, allowing the individual mandate to stand, would unleash an entirely novel and unbounded conception of federal power.

Cato will be filing our own brief a week from today.  Georgetown law professor and Cato senior fellow Randy Barnett will not be on it, however, because he has joined the NFIB’s legal team – an exciting development, to be sure!