Archives: October, 2012

Opting Out of the Regulatory State

What do you do when your economy is suffocating under too many regulations, but strong opposition prevents you from far-reaching liberalization? The British finance minister George Osborne has had an interesting idea regarding Britain’s onerous labor market regulations. As he said to the Conservative Party conference in Birmingham earlier:

Today we set out proposals for a radical change to employment law. It’s a voluntary three way deal. You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for. Owners, workers, and the taxman, all in it together.

Seems like a potentially rewarding policy innovation. Much will depend on how many people and companies actually opt out of this particular component of the regulatory state, and what, if any, impact will that have on making the British labor market more efficient.

A Highway to Nowhere

The New York Times offers an interesting look at the pathologies of European federalism through a case study of southern Italy.

From 2000 to 2011, Italy received more than $60 billion in European Union financing to underwrite a wide array of programs, in areas including agriculture and infrastructure, most of it directed to the south, with little but a half-completed highway to show for it…(Greece received $50 billion, an enormous amount in per capita terms, also to unclear effect.)

The article talks about corruption in parts of Italy, but the problem is also politics.

But the problem goes well beyond corruption and cuts to the heart of the political systems of most of Southern Europe, in which politicians have traditionally offered citizens state-financed work in exchange for votes…

Over the years, as many as 6,000 workers have been employed by hundreds of subcontractors. (No one from the large construction companies from the Italian center or north has been convicted of any crimes.) The south is a land of unfinished works because finished works don’t pay,” said Aldo Varano, a journalist and author of several books on Calabria…

The European Union neither puts conditions on the spending nor monitors the projects. The incentives are not good. It is hard to imagine that the incentives would be much better if Brussels tried to monitor the spending.

Things might improve if the money for the projects were raised and spent locally. There might be less buying of votes with other people’s money (i.e. people who cannot vote). Still we ought to consider the possibility that such schemes cannot foster economic development in these regions. The best choice might be to do nothing and let emigration improve outcomes for the people in these areas.

In any case, when you hear about the radical spending reductions in southern Europe, remember the Italian highway to nowhere.

The Day After the Election in Venezuela

Unfortunately there was no upset in yesterday’s presidential election in Venezuela. Hugo Chávez handily won another six-year term with 54% of the vote. Despite running an inspiring campaign that at some point seemed to threaten Chávez’s rule, Henrique Capriles came up short with 44%. The vote was clean, even though the election wouldn’t be considered fair in any mature democracy.

What happened? It seems clear that Chávez was able to mobilize his people to the polls. Despite the mismanagement of the economy, the spike in crime, the crumbling infrastructure and widespread corruption, many Venezuelans still like Chávez. And he made sure to buy their love this year by increasing public spending in the last 12 months by 30% in real terms. Others might not like him, but still feel compelled to vote for him. Over 8 million Venezuelans receive some kind of permanent income or handout from the government. The regime wasn’t subtle letting them know that those goodies would be gone if they voted for Capriles. The Economist reported on the intimidation faced by an important segment of these voters:

Some public employees—whose ranks have more than doubled under Mr Chávez to over 2m—have been obliged to fill out forms saying exactly where they will be voting. Like the election ballots, these forms require a signature and a thumbprint: the implication that the government will monitor how they vote does not need to be spelled out.

This is certainly a heartbreaking defeat for the opposition. There is no doubt that Chávez will continue to lead Venezuela down the authoritarian path. However, this election has created a credible opposition leader who, unlike opposition candidates in the past, will have a prominent voice in national politics, especially as the economic and social conditions deteriorate markedly as they are sure to do. If Chávez really is terminally ill with cancer, as is very likely, then the stature of Capriles will continue to grow as the next leader of Venezuela.

Major New Study about the Top 1 Percent… And Much More

This new Cato Institute Working Paper by Senior Fellow Alan Reynolds confirms recent studies which find little or no sustained increase in the inequality of disposable income for the U.S. population as a whole over the past 20 years, even though estimates of the top 1 percent’s share of pretax, pretransfer (market) income spiked upward in 1986-88, 1997-2000 and 2003-2007.

It has become commonplace  to use top 1 percent shares of market income as a shorthand measure of inequality, and as an argument for greater taxes on higher incomes and/or larger transfer payments to the bottom 90 percent.  This paper finds the data inappropriate for such purposes for several reasons:

  • Excluding rapidly increased transfer payments and employer-financed benefits from total income results in exaggerating the rise in the top 1 percent’s share between 1979 and 2010 by 23 percent because a growing share of other income is missing.
  • Using estimates of the top 1 percent’s share of pretax, pretransfer income (Piketty and Saez 2003) as an argument for higher tax rates on top incomes or larger transfer payments to others is illogical and contradictory because the data exclude taxes and transfers.
  • Using highly cyclical top 1 percent shares as a measure of overall inequality leads, paradoxically, to describing most recessions as a welcome reduction in inequality, because poverty and unemployment rates typically rise when the top 1 percent’s share falls, and fall when the top 1 percent’s share rises.
  • Top 1 percent incomes are shown to be extremely sensitive (“elastic”) to changes in the highest tax rates on ordinary income, capital gains and dividends.  Although estimates of the elasticity of ordinary income for the top 1 percent range from 0.62 (Saez 2004) to 1.99 (Moffitt and Wilhelm), those estimates fail to account for demonstrably dramatic responses to changes in the highest tax rate on capital gains and dividends.

Reynolds estimates that more than half of the increase in the top 1 percent’s share of pretax, pretransfer income since 1983, and all of the increase since 2000,  is attributable to behavioral reactions to lower marginal tax rates on salaries, unincorporated businesses, dividends and capital gains. After reviewing numerous data sources, he finds no compelling evidence of any large and sustained increase in the inequality of disposable income over the past two decades.

You Can Say it All You Want

…but that doesn’t make it true.

One of the laws recently signed by the president, which Congress quietly passed before leaving town to campaign, was Public Law 112-176. Among other things, it extended the authorization the national background check system, E-Verify.

A line tacked on to the end of the law speaks to an issue with E-Verify:

Nothing in this Act may be construed to authorize the planning, testing, piloting, or development of a national identification card.

Well, you can say it all you want, but that doesn’t make it true.

Maybe Congress is playing a little trick, saying “no national ID card,” knowing that E-Verify is a cardless national ID system.

Camille Paglia on Art and Capitalism

The Wall Street Journal’s Saturday “Review” section is one of the best weekly magazines around, because of articles like this one from Camille Paglia:

Capitalism has its weaknesses. But it is capitalism that ended the stranglehold of the hereditary aristocracies, raised the standard of living for most of the world and enabled the emancipation of women. The routine defamation of capitalism by armchair leftists in academe and the mainstream media has cut young artists and thinkers off from the authentic cultural energies of our time.

Economic Ignorance Accelerates

Just when you thought economic ignorance couldn’t sink any lower, a letter in the Washington Post criticizes Mitt Romney for repairing a brick walkway at his house rather than hiring a contractor – and thus “cheating people out of jobs.”

Uh-oh. I just made myself a sandwich, thus cheating a deli employee out of a job. I drive myself to work instead of using a chauffeur, thus putting chauffeurs out of work. I do my own laundry – well, this could go on all day.

Of course, the writer’s argument isn’t really any different from the usual complaints about trade, outsourcing, and shutting down unprofitable businesses. Everyone seeks to produce as much output for as little expenditure as possible. That’s why we trade with each other, so as to improve our standard of living.  Lord Keynes himself, encountering a stack of towels in a men’s room, is said to have “swept the whole pile of towels on the floor and crumpled them up, explaining that his way of using towels did more to stimulate employment among restaurant workers.” I would like to have seen the look of gratitude on the face of the restaurant worker who saw Lord Keynes creating jobs.

Economic progress happens when people find more efficient ways of doing things. Sometimes that means “outsourcing” a task, whether it’s a business’s payroll function or taking your laundry to a service. Sometimes it means “insourcing,” as when word processors made it easier for writers and executives to do their own typing, or the price of shipping rises and a company finds it cheaper to manufacture in an American plant rather than in China, or when a homeowner decides he could repair his own walkway for less than the cost of hiring a contractor. And as long as we allow markets to function, billions of people will make tens of billions of decisions every day that will push toward the optimal use of resources to satisfy as many human wants as possible.

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