Topic: General

Wise Words on Fiscal Sovereignty and Corporate Taxation (sort of) from Bill Clinton

I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse—94th out of 100 countries according to a couple of German economists—when you look at details of how corporate income is calculated.

Crumbling Bridges

A Wall Street Journal story today begins “America’s road to recovery may face a costly detour due to a fraying transportation network. One in nine of the country’s 607,380 bridges are structurally deficient …”

Newspapers have been full of such infrastructure stories in recent years. Pro-spending lobby groups such as ASCE have certainly pumped-up public concerns. America’s highways are becoming more congested, and we should have a discussion about how to finance needed expansions in capacity.

But the popular “crumbling bridges” theme is a bit of a scam. Federal Highway Administration (FHWA) data does show that one in nine bridges are structurally deficient. However, the WSJ doesn’t tell its readers that the share of bridges that are deficient has been steadily declining for two decades, as the chart below reveals.

Bridge1

In 2012, 66,749 of the nation’s 607,380 bridges were structurally deficient, which is 11 percent, or one in nine, as the WSJ reports. But that’s down from 124,072 out of 572,629 bridges, or 22 percent in 1992, according to FHWA.

The general thrust of the WSJ story is correct that having an efficient transportation system aids economic growth. But falling down bridges isn’t the central problem, and hiking gas taxes and boosting federal spending isn’t the solution. Instead, we can spur growth and improve the efficiency of America’s infrastructure by moving as much of it as we can to the private sector.

The Boy Who Cried Wolf Was Eventually Right

“We are reaching end times for Western affluence,” warns economist Stephen King (insert obligatory horror joke here) in yesterday’s New York Times. King, who has authored a book entitled When the Money Runs Out: The End of Western Affluence, joins the ranks of economic Cassandras like Tyler Cowen and Robert Gordon, both of whom have made waves with pessimistic takes on the U.S. economy’s prospects. Like Cowen and Gordon, King couches his claims in overstatements that make it easier for skeptical readers to dismiss his arguments. Peel away the hype, though, and these growth pessmists are still fundamentally correct. The wolf really is at the door this time. In other words, the growth outlook really is darkening.

Cowen put the hype right in the title of his attention-getting book: The Great Stagnation, his term for the past 40 years or so. Of course, real GDP per capita has nearly doubled since 1973, so stagnation is obviously an inapt term. It’s true that productivity growth and growth in median incomes have slowed down, but The Moderate Slowdown is a pretty boring book title. Meanwhile, Gordon saw Cowen and raised him with the highly provocative and speculative argument that technological progress is largely exhausted and, therefore, the 250-year era of modern economic growth is winding down. You don’t have to be Raymond Kurzweil to find that contention unpersuasive.

Now King warns that Western affluence is coming to an end. Well it’s not: even if all growth stopped tomorrow, today’s advanced economies are affluent beyond the wildest dreams of yesteryear.

Push past the hype, though, and Cowen, Gordon, and King are making a point that really needs to be more widely understood: growth is getting harder for the U.S. economy, and there are strong reasons for thinking that growth rates over the next decade or two will fall short of the long-term U.S. historical average. As I explain in a new Cato paper released today, you don’t have to be a pessimist about the future of innovation to be pessimistic about the U.S. economy’s medium-term growth outlook. The main source of weakness lies in demographics: the 20th century saw big increases in both the percentage of the population in the workforce (thanks to the changing role of women in society) and the overall skill level of the workforce (thanks to a huge increase in formal schooling). The rise in schooling has slowed down considerably since 1980, and the labor force participation rate has actually been falling since 2000 (it’s now back to where it was in 1979). What were tailwinds for growth have turned into headwinds.

Topics:

Can the Communist Party Take Back the Czech Republic?

PRAGUE, CZECH REPUBLIC—The Czech Republic is one of the most successful members of the former Soviet Empire. Yet Czechs with whom I recently spoke fear liberty is in retreat. The former Communist Party might reenter government after elections later this month. 

Czechoslovakia was “liberated” by the Red Army at the end of World War II. After the Berlin Wall fell on November 9, 1989, the so-called Velvet Revolution ousted the Czech Communist Party. Czechoslovakia soon adopted wide-ranging free market economic reforms and split into the Czech Republic and Slovakia. 

In March Milos Zeman became the country’s first popularly elected president. The former Social Democratic prime minister has roiled Czech politics by claiming ever more expansive authority. 

Most dramatically, after the prime minister’s summer resignation President Zeman appointed a leftist government against the wishes of the parliamentary majority. The new cabinet lost a vote of confidence, but remains as caretaker until the upcoming election. 

Equally controversial are the president’s policies.  As I wrote in my new Forbes online article:

Moreover, the president reversed course on the EU after appealing to supporters of the Euro-skeptic [former President Vaclav] Klaus during the presidential campaign.  Once in office President Zeman hoisted the EU flag over the Prague Castle, which hosts the presidential office, and signed the European Stability Mechanism, the EU bail-out fund.  He describes himself as a “Euro-Federalist,” advocates common European fiscal, tax, foreign, and defense policies, and supports adopting the Euro as the Czech currency.

The greater worry is the revival of the Communist Party. As memories of Communist repression fade, some Czechs long for the perceived stability of the past. 

Focus on Employment, Not Citizenship, to Reform Immigration

Immigration reform, once the top priority in Washington coming out of the 2012 presidential election, has stalled. This is unfortunate because the current system is a shambles. Some 11 million people live in the U.S. illegally. But attempting to fence off the country is no answer. 

Immigration benefits the United States. Many immigrants are natural entrepreneurs. Well-educated foreign workers are inventive and productive. Expanded work forces increase economic specialization and business flexibility. 

Immigration may depress some wages in the short-term; however, the work force is not fixed. Immigration makes a more innovative and productive economy, with new and better jobs. 

Nevertheless, the public is skeptical of immigration. To move forward, Congress should separate employment from citizenship. Legislators should expand work visas for individuals. Immigration auctions or tariffs would be innovative alternatives. Congress also should regularize the status of those currently in America illegally by granting residence and employment permits. However, Congress should set aside debate over turning illegal aliens into citizens. In fact, Rep. Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee, asked: “Are there options that we should consider between the extremes of mass deportation and a pathway to citizenship?”

Some immigration opponents complain that this approach would reward illegal behavior. However, the undocumented broke the law to improve their lives and the lives of their families, not to hurt others. Their presence also benefits the rest of us. Moreover, most Americans won’t support rounding up millions of people who have become part of U.S. society. Additional employment controls and sanctions would undermine domestic liberties. 

Immigration supporters are also critical of this approach. A blogger harkened back to the slave era, writing that the immigrants’ “status would be akin to the freedmen who were denied citizenship under the notorious Supreme Court decision in Dred Scott.”  Cristina Jimenez of the organization United We Dream called the idea “un-American.” 

However, in Dred Scott the court ruled that people who had been kidnapped and brought to America were not citizens. In contrast, today’s undocumented came voluntarily without any expectation of becoming citizens. Moreover, there is nothing “un-American” about not allowing those who entered the country illegally to jump the citizenship queue. 

Testifying to the Joint Economic Committee about “Debt Limit Brinksmanship”

As we get closer to the debt limit, the big spenders in Washington are becoming increasingly hysterical about the supposed possibility of default if politicians lose the ability to borrow more money.

I testified yesterday to the Joint Economic Committee on “The Economic Costs of Debt-Ceiling Brinkmanship” and I explained (reiterating points I made back in 2011) that there is zero chance of default.

Why? Because, as I outline beginning about the 3:10 mark of the video, annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion.

I actually made five points in my testimony. The first three should be quite familiar to regular readers.

First, America’s main fiscal problem is that government is too big. That’s the disease. Deficits and debt are symptoms of that underlying problem.

Second, you achieve good fiscal policy by following “Mitchell’s Golden Rule” so that government grows slower than private sector economic output.

Third, we’ve made some progress in the last two years thanks to genuine fiscal restraint, and we can balance the budget in a very short period of time if lawmakers impose a very modest bit of spending discipline in the future.

The fourth point, which I already discussed above, is that there’s no risk of default - unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

My fifth and final point deserves a bit of extra discussion. I explained that Greece is now suffering through a very deep recession, with record unemployment and harsh economic conditions. I asked the Committee a rhetorical question: Wouldn’t it have been preferable if there was some sort of mechanism, say, 15 years ago that would have enabled some lawmakers to throw sand in the gears so that the government couldn’t issue any more debt?

Debt limit jokesYes, there would have been some budgetary turmoil at the time, but it would have been trivial compared to the misery the Greek people currently are enduring.

I closed by drawing an analogy to the situation in Washington. We know we’re on an unsustainable path. Do we want to wait until we hit a crisis before we address the over-spending crisis? Or do we want to take prudent and modest steps today - such as genuine entitlement reform and spending caps - to ensure prosperity and long-run growth.

Seems like the answer should be simple…at least if you’re not trying to get reelected by bribing voters with their own money.

P.S. My argument for short-term fighting today to avoid fiscal crisis in the future was advanced in greater detail by a Wall Street expert back in 2011.

P.P.S. You can enjoy some good debt limit cartoons by clicking here and here.

It’s Amazingly Simple to Balance the Budget

I’m testifying tomorrow to the Joint Economic Committee about “The Economic Costs of Debt-Ceiling Brinkmanship.”

I won’t give away what I’m going to say (though you can probably figure out my views rather easily by reading this, this, and this), but I do want to share a chart from my testimony.

It shows that it is remarkably simple to balance the budget with a modest amount of spending restraint.

Based on Congressional Budget Office data, we can balance the budget in just three years if spending grows by “only” 1 percent per year.

Balanced Budget with Spending Restraint

The chart also shows that you can balance the budget in just four years if spending is allowed to grow “just” two percent annually.

And if you for some reason think that the burden of government spending should rise faster than inflation, then we can balance the budget in seven years by restraining spending so that it grows 3 percent each year.

Here are a couple of relevant observations.