Archives: 09/2012

Johan Norberg on PBS

Cato senior fellow Johan Norberg hosts a documentary, “Europe’s Debt: America’s Crisis?” being seen on PBS stations over the next few weeks. The Free to Choose Network, which produced the film, describes it this way:

Four investigative reports, shot on location in Greece, Brussels, California and Washington DC, highlight this in depth examination of Europe’s current debt crisis and its connection to the U.S. economy.  Narrated by Swedish author Johan Norberg, and George Mason University professor, Don Boudreaux, the investigative reports ask:  “Where did Europe go wrong” and “is the United States now repeating the same mistakes?”

Participants include Cato friends Jacob Mchangama and Tanja Stumberger, as well as such key players as former comptroller general David Walker, former European Commissioner Frits Bolkestein, and Ann Johnson, mayor of Stockton, California.

“Europe’s Debt: America’s Crisis?” airs on Washington’s channel 32 Tuesday night at 10. For other broadcasts, from Boston to San Francisco, check the listings here.

And for more perspectives on this topic, check out Cato’s upcoming conference, “Europe’s Crisis and the Welfare State: Lessons for the United States,” on October 10.

Tax Rates Impact Economic Performance, but other Policies also Matter

I’m a big fan of fundamental tax reform, in part because I believe in fairness and want to reduce corruption.

But I also think the flat tax will boost the economy’s performance, largely because lower tax rates are the key to good tax policy.

There are four basic reasons that I cite when explaining why lower rates improve growth.

  1. They lower the price of work and production compared to leisure.
  2. They lower the price of saving and investment relative to consumption.
  3. They increase the incentive to use resources efficiently rather than seek out loopholes.
  4. They attract jobs and investment from other nations.

As you can see, there’s nothing surprising or unusual on my list. Just basic microeconomic analysis.

Yet some people argue that lower tax rates don’t make a difference. And if lower tax rates don’t help an economy, then presumably there is no downside if Obama’s class-warfare tax policy is implemented.

Many of these people are citing David Leonhardt’s column in Saturday’s New York Times. The basic argument is that Bush cut tax rates, but the economy stunk, while Clinton increased tax rates and the economy did well.

The defining economic policy of the last decade, of course, was the Bush tax cuts. President George W. Bush and Congress, including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow. The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression. Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates and again predicting that good times will follow. …Mr. Romney and Mr. Ryan would do voters a service by explaining why a cut in tax rates would work better this time than last time.

While I’ll explain below why I think he’s wrong, Leonhardt’s column is reasonably fair. He gives some space to both Glenn Hubbard and Phil Swagel, both of whom make good points.

“To me, the Bush tax cuts get too much attention,” said R. Glenn Hubbard, who helped design them as the chairman of Mr. Bush’s Council of Economic Advisers and is now a Romney adviser. “The pro-growth elements of the tax cuts were fairly modest in size,” he added, because they also included politically minded cuts like the child tax credit. Phillip L. Swagel, another former Bush aide, said that even a tax cut as large as Mr. Bush’s “doesn’t translate quickly into higher growth.” Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.

I hope, by the way, that neither Hubbard nor Swagel made the Keynesian argument that tax cuts are pro-growth because “they put money in people’s pockets.” Leonhardt doesn’t directly attribute that argument to either of them, so I hope they’re only guilty of proximity to flawed thinking.

But that’s besides the point. Several people have asked my reaction to the column, so it’s time to recycle something I wrote back in February. It was about whether a nation should reform its tax system, but the arguments are the same if we replace “a flat tax” with “lower tax rates.”

…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.

There are five major policy areas, each of which counts for 20 percent of a nation’s grade.

  1. Size of government
  2. Regulation
  3. Monetary Policy
  4. Trade
  5. Rule of Law/Property Rights

Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.

But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.

Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.

In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.

Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.

Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.

To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.

Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.

This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when he left office.

Don’t Rush Me, Kid, I’m Striking!

In case you weren’t sure whether the teachers union in Chicago – where the strike continues despite widespread agreement last week that kids would be in school today – is really fighting for “the children,” here’s all the quote you need:

“Our members are not happy,” CTU President Karen Lewis said, according to the Associated Press. “They want to know if there is anything more they can get. They feel rushed.”

I mean, what’s the hurry? It’s not the union’s education!

Okay… Then Give Us Back the Extra $90 Billion

In his latest column, David Brooks asserts that Americans “spend roughly $11,000 per student” on K-12 public schooling. This is false. We actually spend about $14,000 per student.

Why is his figure so erroneously low? The answer may astonish and anger you.

The likely source for Brooks’ figure is the last row in column 3 of Table 191, in the Department of Education’s latest Digest of Education Statistics: “Current expenditure per pupil in average daily attendance” for the year 2008-09 (the most recent reported). The value was $11,231. The first and biggest problem with this number is that “current” spending is a subset of total spending—but Brooks didn’t tell you that, did he? He just said “we spend roughly…,” not “our current spending excluding the following items is…”

As it happens, “current” or “operating” expenditures exclude costs like construction and debt service. These, however, are real costs that have to be paid in real dollars (to the extent our dollars are “real” after yet more QE) by real taxpayers. What difference does this make? Just look one column to the left. “Total expenditures” per pupil for the same year were $13,015. Bit of a difference. In fact, on a national level, it’s a difference of over $90 billion annually (see the top two rows of column 9, Table 188).

Of course that was back in 2008-09, when U.S. dollars were worth more than they are now. Adjusting for inflation into today’s dollars ups the figure to about $14,000 / pupil. Moreover, we’re almost certainly spending more today than we were in 2008-09, despite the economic downturn, but for some reason the public school monopoly prefers to release only aged data—as though they were fine cheeses.

So the next time someone claims to tell you what U.S. public schools spend per pupil, ask if they’re just citing you the current operating expenses subtotal. If so, tell them you want your other $90 billion back, since they apparently don’t seem to be using it.

How GOP Freshmen Voted on Continuing Resolution

Yesterday, the House passed a continuing resolution that will keep the government funded for the next six months. Republicans and Democrats were eager to avoid a budget fight—and possibly a government shutdown—with little more than a month to go before the elections. With that potential distraction out of the way, the two sides can now focus on convincing voters that their brand of big government is the superior choice.

Politico has a good breakdown of the CR’s contents. Here are a couple of snippets:

[The continuing resolution] restores the higher spending targets set in the Budget Control Act—and with such haste and pique—that billions will go out without any distinction between the merits of different programs. Labor, health, and education spending that’s so often targeted for cuts by the GOP will grow by close to $1 billion. The Commodity Futures Trading Commission budget, the bane of anti-regulatory forces, inches up again, albeit far less than the White House requested…

The new top line for non-emergency appropriations will be $1.047 trillion, an $8 billion increase over what the Congressional Budget Office estimates is the current rate of spending… But in their desire to keep the bill simple—and move fast—Republicans opted to distribute most of the increase, $5.9 billion, through a mechanical formula that automatically ups most accounts by 0.612 percent.

As Roll Call noted earlier in the week, the CR vote represented a test for Republican freshmen, a.k.a., the “Tea Party Class”:

The defining narrative of this Congress has been deficit reduction, pushed mostly by an anti-government-spending class of 87 freshman House Republicans. But as November inches closer, Members will have to balance their promises to slash spending against the reality that a shutdown could be an irreversible gamble in their bid to win back the Senate and White House. For his part, Speaker John Boehner (R-Ohio) seems optimistic, having recently said the group has “matured.”

After the jump, the table shows that only 28 of the 87 Republican freshmen—32 percent—voted against the CR. (A “yes” means they voted against the CR.) I guess that means that, per John Boehner, those 28 members have maturity issues.

Another Suspect in the Libya Attack

Almost before the embers had cooled in the attack on the U.S. consulate in Benghazi, Libya that took the lives of Ambassador Christopher Stevens and three other staffers, suspicion centered on Ansar al Sharia and the Omar Abdul Rahman Brigades, two North African radical Islamist factions loosely affiliated with al Qaeda. One of those groups is most likely the perpetrator, but we need to at least consider other possibilities.

A few facts are clear: The assault was not a spontaneous demonstration in response to the notorious video mocking the Prophet Mohammad—a demonstration that simply spiraled out of control. Even the nasty, but less violent, demonstrations in Egypt, Iraq, Yemen, and other Muslim countries do not fully fit that description, and the Libya attack was fundamentally different from all of those other incidents. The assault in Benghazi had all the earmarks of a well-planned, well-coordinated, professional military operation.

It is possible that either Ansar al Sharia or the Abdul Rahman Brigades had the capability to carry out such a sophisticated attack, but another faction was even more capable: former security personnel from Muammar Qaddafi’s regime. And that group had a strong motive for assassinating Ambassador Stevens: He had been the U.S. envoy to rebel groups in Libya, helping to coordinate U.S. and NATO aid to the insurgents who eventually overthrew Qaddafi. “As the conflict in Libya unfolded, Chris was one of the first Americans on the ground in Benghazi,” Secretary of State Hillary Clinton confirmed on Wednesday. Indeed, one report asserted that he had “wrangled a ride on a Greek cargo ship” early in the conflict to get into Benghazi, the initial rebel stronghold.

Pro-Qaddafi elements were undoubtedly aware of his none-too-subtle role in the revolution. The attack on the consulate could have been payback. Indeed, Libya’s ambassador to the United States, Ali Aujali, insisted that his government had intelligence that “Qaddafi’s associates” were involved in the attack. It is tempting to summarily dismiss that thesis, since the new Libyan government is prone to blame every unpleasant development on remnants of Qaddafi’s regime, much as Iraqi and U.S. officials had the lazy habit of blaming all attacks during the first few years of the U.S.-led occupation of Iraq on “Saddam dead-enders.”

But it’s possible that the Libyan ambassador could be right in this case. As I’ve written elsewhere, Libya is a deeply divided tribal society, with the main political fissure running north-south roughly through the middle of the country. Eastern tribes dominated the revolution (and previous unsuccessful rebellions against Qaddafi), while western tribes were the bulk of his supporters. Qaddafi’s death did not erase those divisions, and opponents of the new regime had ample reason to hate Stevens as an architect of their new, inferior status.

Although Islamic extremists were the most likely perpetrators of the attack and assassination, we should not be blind to other possibilities. Libya is a turbulent snake pit into which the United States has wandered. There are a lot of nasty actors—and more than one suspect in the consulate murders.

The CFPB Gets One Right?

It’s no secret that I’m not a big fan of the Dodd-Frank-created Consumer Financial Protection Bureau (CFPB), mostly because I believe it will not be good for consumers.  So let me acknowledge an instance in which the agency is attempting to do something good.

One thing I dislike more than the CFPB is the practice of many state and local governments to use their “abandoned” property laws to steal the remaining value of a consumer’s gift card.  Here’s how it often works:  Say your favorite aunt gives you an Amazon gift card for your birthday.  Now you don’t know what you want to use it for, so you put it in a drawer in your house.  If you leave it there for more than two years—even considering that it is in your house (that is, in your actual possession)—but you don’t use it, states like Maine consider it “abandoned” and force the merchant (in this case Amazon) who issued it to transfer its outstanding value to the government.  If that’s not theft, I don’t know what is.

The CFPB has issued a notice for comment on whether these laws should be preempted by federal statute.  Now if the CFPB was really doing its job, it would simply cite Article I, Section 10 of the Constitution, which prohibits states from ”impairing the obligation of contracts.” But I suspect that the CFPB doesn’t fundamentally have a problem with states rewriting contracts, at least not when the states claim the rewriting somehow benefits consumers.  Oddly enough in the abandoned gift card instances, however, the states in question are benefiting the merchant. These laws relieve the merchant of his obligation to honor the cards’ promise to the consumer, because the state puts itself in the place of the consumer.

I am withholding final judgment on this CFPB initiative because, after all, this is a notice for comment, not a final rule or preemption. As the CFPB was intentionally structured to be a captive of specific special interests, I worry that once the affected governors and mayors mobilize to protect their ability to steal consumers’ gift cards, the CFPB will fold like a cheap suit.  Here’s hoping the agency gets this one right.