Archives: 05/2012

Italy Slowly Recognizes that the Substance of ‘Austerity’ Matters

Apologists for big government have regularly warned that Europe’s austerity measures would push the European economy into a recession. To some extent they’ve been correct, but not for the reasons they claim. So far austerity in countries like Greece and Italy have been austerity for the private sector, not the public. They’ve attempted to close budget gaps by tax increases rather than spending cuts. Witness Mario Monti’s implementation of a tax on first home purchases (sure to do wonders for your housing and construction labor markets).

Fortunately there is some small ray of hope that Italy has come to recognize the error of its ways. As reported in today’s Financial Times, instead of pushing for an increase in the value-added tax, Italy will focus its next austerity measures on cutting government.  As the Financial Times goes on to explain:

The new government’s €30bn austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognised by ministers as having driven Italy deeper into recession.

When even the Financial Times recognizes that tax increases are contractionary, then perhaps there is some hope for Italy (and Europe) after all. Now if we can actually get spending costs of real significance (€30 billion is a rounding error for the Italian government’s budget).

Why College Should Be Given Away for Free

The editor of The Nation thinks college should be given away for free. She’s probably right, but perhaps not in the sense she intends. So many college degrees today are intrinsically worthless that it should really not be possible to find people willing to pay for them. As I wrote in a recent New York TimesRoom for Debate” commentary:

Barely half of students at four-year public institutions graduate in six years — and many learn very little along the way. Nearly half of all college students made no significant gains in critical thinking, complex reasoning, or written communication after two full years of study, according to research by Richard Arum and Josipa Roksa. Even among the more elite subset of students who stick around for four full years of college, a third made no significant gains in these areas.

So what’s the alternative if you’re a high school senior seeking higher education? How about this: instead of handing control over that education to someone else, decide what it is you would like to learn over those four years and then… learn it. Thanks to the Web, the material covered in virtually every undergraduate program is readily available at little cost—and the same is true for many advanced programs. And, having learned it, spend a few hundred dollars to create a website or even simply a YouTube channel on which you demonstrate your new skills/understanding. Conduct research. Write it up. Build something. Translate Cyrano into English, maintaining the Alexandrine meter and rhyme. Whatever it is. Then, when you’re ready to apply for work, submit your resume with a link to this portfolio of relevant work.

Employers, ask yourself this question: Would you rather hire someone with a portfolio such as the one described above, visibly demonstrating competency and personal initiative, or someone with a degree that is generally supposed to signal that competency, but that you can’t readily assess for yourself?

[And since “resume” and “curriculum vitae” are both foreign language terms, why don’t we call these portfolios-in-lieu-of-college-degrees the student’s savoir-faire. Literally: “know how to do.”]

Bin Laden’s Death, One Year On

The killing of Osama bin Laden marked a significant achievement in America’s long war against al Qaeda. Yet, following last year’s Navy SEAL raid in Abbottabad, Pakistan, it became clear that disrupting, dismantling, and defeating al Qaeda did not require the occupation of distant lands. Indeed, even in the absence of the terrorist leader’s death, the sad and simple truth was that the protracted wars of occupation waged in 9/11’s name were an enormous drain on American taxpayers and counterproductive to the goal of stopping terrorism.

Certainly, bin Laden’s killing does not mean the end of al Qaeda, but it does provide another reason to bring our ongoing sacrifice in blood and treasure in Afghanistan to a swift end. Moreover, Americans should be circumspect about planners in Washington expanding the War on Terror to distant enemies in Pakistan, Yemen, the Horn of Africa, and elsewhere. Al Qaeda and its associates have always been manageable security problems, not existential threats to America that require endless war by remote control.

The lesson of 9/11 and its Saudi terrorist financier is that would-be terrorists have reduced their dependence on specific base camps and physical havens. They can plan, organize, and train from virtually anywhere in the world, from Kandahar and Hamburg to Malaysia and Los Angeles. Indeed, the very al Qaeda terrorists responsible for 9/11 not only found sanctuary in poverty-stricken Afghanistan, but also in politically free and economically prosperous countries like Germany, Spain, and the United States. In this respect, policymakers and prominent opinion leaders must stop conflating the punishment of al Qaeda with the creation of stable societies, particularly when propping up corrupt and illegitimate foreign governments and waging counterinsurgency campaigns distracts from the conceptually simpler task of targeted counterterrorism measures to find and eliminate terrorist threats.

Hey Daily Kos, Cato Is Not A ‘Republican-supporting’ Institution

I guess it’s not a huge surprise that a writer at The Daily Kos would characterize Cato as “Republican-supporting” when it suits a purpose. Just for their future reference, here is a laundry list of positions taken by Cato scholars that most Republicans (Beltway Republicans, at least) tend to abhor:

We libertarians continue to be amazed at the inconsistency exhibited by the left and the right: conservatives dislike government power except when it comes to militarizing our foreign policy and, oftentimes, running people’s personal lives; liberals profess dislike for government power except when it comes to micromanaging the economy, which can quickly morph into micromanaging everything else. The Nanny-state is pushed equally by liberals and conservatives.

Ralph Waldo Emerson once said that “A foolish consistency is the hobgoblin of small minds.” (my emphasis) I think Cato scholars demonstrate a different kind of consistency in our principled adherence to limited, constitutional government, individual liberty, free markets, and peace. Our positions do not change whenever Republicrats replace Democans in office.

Why al Qaeda May Never Die

The first anniversary of the murderous raid on Osama bin Laden’s hideaway presents an opportunity to evaluate the threat al Qaeda now poses. For its part, the Obama administration/reelection campaign seems more interested in using the event to score political points against Mitt Romney. But terrorism alarmists are more focused on al Qaeda itself and are in peak form explaining that, although the organization has been weakened, it still manages to present a grave threat.

Various techniques, honed over a decade, are applied to support this contention. If they are accepted as valid, al Qaeda will cease to exist or be “defeated” only when we run entirely out of tiny groups or individual nuts operating with al Qaeda-like aspirations.

One technique is to espy and assess various “linkages” or “connections” or “ties” or “threads” between and among a range of disparate terrorists or terrorist groups, most of which appear rather gossamer and of only limited consequence on closer examination.

Another is to darkly elevate the vague and the distinctly aspirational as if there were some tangible potential there. Thus, al Qaeda’s “ideology of the global jihad” still “survives,” we are told, and the group is “making provisions for the long term,” is “poised to survive,” “is regrouping,” is “not entirely isolated,” might work with Iran because “they share a common enemy,” has been “embraced” by a Nigerian group with purely local concerns, has provided “strategic advice,” has “inspired” a number of inept would-be amateur terrorists here and there, and has been thinking about plotting the assassination of Barack Obama.

A third technique is to exaggerate the importance and effectiveness of the “affiliated groups” linked to al Qaeda central. In particular, alarmists point to the al Qaeda affiliate in chaotic Yemen, proclaiming it to be the “deadliest” and the “most aggressive” of these and a “major threat.”

Insofar as it threatens the United States, the Yemen group has been elevated by two efforts at international terrorism, both of which failed abysmally.

It apparently supplied the 2009 underwear bomber with an explosive that he was unable to detonate, one that, a test by the BBC suggests, might not have downed his plane even if it had gone off.

The other failure is the foiled effort to set off bombs contained within laser printers on planes bound for the United States in 2010. The organization explained that one of their packages contained a copy of Charles Dickens’ novel Great Expectations to express its optimism about the operation’s success even as the group promised more such attacks. The optimism, and thus far the promise, have gone unfulfilled.

With that track record, the group may pose a problem or concern to the United States. But it scarcely presents a “major threat.”

Much of the alarmist perspective has been generated in opposition to Defense Secretary Leon Panetta’s contention last year that “we’re within reach of strategically defeating al-Qaeda.” Insofar as this declaration can be decoded, it actually seems to be supported by the alarmists’ own admission that “the organization that brought us 9/11 is essentially gone” and that it no longer plays “a major strategic and operational role.”

More important, however, is to supply some degree of quantitative heft to an evaluation of the “threat.”

To the administration’s claim that it is trying “to keep our country safe,” Associated Press intelligence writer Kimberly Dozier rhetorically observes, “How safe remains in question.”

But there is a perfectly valid method for assessing the question and for measuring the risk international terrorism presents to the United States. At current rates, an American’s chance of becoming a victim of terrorism in the United States is about 1 in 3.5 million per year. In comparison, that same American stands a 1 in 22,000 yearly chance of becoming a homicide victim, a 1 in 8,000 chance of perishing in an auto accident, and a 1 in 500 chance of dying from cancer.

These calculations are based, of course, on historical data. However, the terrorism data include not only 9/11, but also the Oklahoma City bombing of 1995, and alarmists who would reject such history need to explain why they think terrorists will suddenly become vastly more competent in the future.

But no one seems to be making that argument. Indeed, notes Dozier, U.S. officials say al Qaeda has become less capable of a large attack like 9/11.

She also discloses that these officials made this brave disclosure only on condition of anonymity because they feared that “publicly identifying themselves could make them a target” of terrorists. Meanwhile, however, terrorism specialist Peter Bergen observed to Dozier in heroic full attribution mode that “The last terror attack (in the West) was seven years ago in London,” that there “haven’t been any major attacks in the U.S.,” and that “they are recruiting no-hopers and dead-enders.”

The problem is that there is an endless supply of no-hopers and dead-enders out there.

And also, it appears, of terrorism alarmists.

Cross-posted from the Skeptics at the National Interest.

Corporate Tax Laffer Curve

The Sunday New York Times described Apple’s successful efforts to reduce its U.S. and California corporate tax burdens. The article hints that the situation is a moral outrage, and it includes sob stories of governments that are supposedly hurting because they don’t raise enough tax revenues from businesses.

More importantly, the story provides further evidence that corporate profits, investment capital, intellectual property, and reported income are highly mobile in the global economy. Dan Mitchell and I examined these issues at length in Global Tax Revolution.

What should the United States do about the new global reality of footloose corporations? The obvious answer that we discuss in the book is to chop our uniquely high statutory corporate tax rate of 40 percent, which is now the highest in the world.  

The NYT reporters did not mention that reform option, perhaps because they focused so much on the fear of governments losing revenues. But I have good news for the NYT reporters! We could chop our corporate tax rate substantially, and as corporate tax avoidance fell and investment rose, the government would probably not lose any money – it may even raise some. Governments, businesses, and the broader economy could all be winners from a corporate tax rate cut.

Here’s some evidence. For 19 OECD countries with good data back to the 1960s, I plotted the average corporate tax rate and the average corporate tax revenues raised by those countries. The chart illustrates the Laffer Curve effect of chopping high statutory tax rates on a mobile tax base.

The chart shows that between the mid-1960s and the mid-1980s, many advanced economies had corporate tax rates of 40 percent or higher. Governments collected about 2.5 percent of GDP from corporate taxes during those years.

Then came the Thatcher-Reagan tax-cutting revolution, and corporate tax rates began falling everywhere. They kept on falling during the 1990s and 2000s. From 1985 to 2010, the average rate for the sample of 19 countries was cut from 45 percent to 26 percent.

With that huge rate cut, governments are collecting less corporate tax revenues, right? Not at all.  Revenues soared during the 1990s and 2000s. More recently, revenues have dropped off due to the recession and economic stagnation in many countries.

However, it is amazing that even with the depth of the recent economic crisis, average corporate tax revenues are still higher than they were prior to the beginning of the rate-cutting revolution of the 1980s.

Data Notes:

  • OECD corporate tax revenue data is here. For three countries with missing 2010 data, I proxied the values with the 2009 figures. 
  • OECD corporate tax rate data back to 1981 is available here. I have used the central government rates only because I have not found a good source for subnational corporate rates for years prior to this OECD data.
  • For this reason, the revenues (which include subnational governments) and the rates (which don’t) are not an exact match, but that’s not a big problem for the purpose of showing the rate/revenue trends over time.
  • The 19 countries represented in chart are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, United Kingdom, and the United States.

For further discussion and background on the data, see here.