Topic: General

Obama’s New Budget: Burden of Government Spending Rises More than Twice as Fast as Inflation

The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion net tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully small) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

Finding a Way Back From the Brink in Ukraine

Ukrainians won an important political battle by ousting the corrupt Viktor Yanukovich as president.  But replacing Yanukovich with another dubious politico will change little.

Washington also triumphed.  Without doing much—no troops, no money, few words—Americans watched protestors frustrate Russia’s Vladimir Putin. 

But now Russia is attempting to win as well, intervening in Crimea.  Moscow has created a tinderbox ready to burst into flames.  The only certainty is that the U.S. should avoid being drawn into a war with Russia. 

In 2010 Yanukovich triumphed in a poll considered to be fair if not entirely clean.  His corrupt proclivities surprised no one.  However, while tarred as pro-Russian, in accepting Putin’s largesse last November Yanukovich actually refused to sign the Moscow-led Customs Union.

Still, protestors filled Maidan Square in Kiev over Yanukovich’s rejection of a trade agreement with the European Union.  As I point out in my latest Forbes column:  “The issue, in contrast to Kiev’s later brutal treatment of protestors, had nothing to do with democracy, human rights, or even sovereignty.”  As such, it was not America’s business, but up to the Ukrainian people.

And Ukraine is divided.  Broadly speaking, the nation’s west is nationalist and leans European while the east is Russo-friendly. 

Demonstrations quickly turned into a de facto putsch or street revolution.  Yanukovich’s ouster was a gain for Ukraine, but similar street violence could be deployed against better elected leaders in the future.

Moreover, many of those who look east and voted for Yanukovich feel cheated.  There was no fascist coup, but the government they helped elect was violently overthrown.  Some of them, especially in Crimea, prefer to shift their allegiance to Russia.

Kiev should engage disenfranchised Yanukovich backers.  Kiev also should reassure Moscow that Ukraine will not join any anti-Russian bloc, including NATO.  But if Crimeans, in particular, want to return to Russia, they should be able to do so. 

There is no important let alone vital security issue at stake for the U.S. in the specific choices Ukrainians make.  The violent protests against the Yanukovich government demonstrate that Moscow has no hope of dominating the country.  Kiev will be independent and almost certainly will look west economically. 

Russia could still play the new Great Game.  Unfortunately, rather than play Vladimir Putin upended the board by taking effective control of the Crimea. 

Yet Putin tossed aside his trump card, a planned referendum by Crimea’s residents.  A majority secession vote would have allowed him to claim the moral high ground.  However, an election conducted under foreign occupation lacks credibility.

As it stands Russia has committed acts of aggression and war. 

Even in the worst case the U.S. has no cause for military intervention.  Who controls the Crimea ain’t worth a possible nuclear confrontation.

Putin is a nasty guy, but Great Power wannabe Russia is no ideologically-driven superpower Soviet Union.  Moscow perceives its vital interests as securing regional security, not winning global domination.  Yet bringing Ukraine into NATO would have created a formal legal commitment to start World War III.

The allies should develop an out for Russia.  For instance, Moscow withdraws its forces while Kiev schedules independence referendums in Russian-leaning areas. 

If Putin refuses to draw back, Washington and Brussels have little choice but to retaliate.  The allies could impose a range of sanctions, though most steps, other than excluding Russian banks from international finance, wouldn’t have much impact. 

Tougher would be banning investment and trade, though the Europeans are unlikely to stop purchasing natural gas from Moscow.  The other problem is the tougher the response the more likely Russia would harm American interests elsewhere, including in Afghanistan, Iran, and Korea. 

The Ukrainian people deserve a better future.  But that is not within Washington’s power to bestow.  Today the U.S. should concentrate on pulling Russia back from the brink in Ukraine. 

A new cold war is in no one’s interest.  A hot war would be a global catastrophe.

Does Occupational Licensing Make Sense?

The standard argument for occupational licensing - government-imposed limits on who can supply medical, legal, plumbing, and other services - is that such laws protect the public from low-quality provision of these services.

This argument is not convincing on its own: licensing limits the quantity of services provided, raising price, and thus harming consumers. A necessary condition for licensing to make sense, therefore, is that any improvements in service quality outweight the losses from higher prices.

A new study, however, finds that when de-regulation allows nurse practioners to perform more tasks without doctor supervision, the price of well-child medical exams declines (as implied by standard economics), with no “changes … in outcomes such as infant mortality rates.”

In at least this case, therefore, licensure is all cost and no benefit.

Obama Administration Rips Off Middle Class and Threatens Elephants

As I’ve written before, the Obama administration plans to effectively ban the sale of all ivory in America, even if purchased or inherited legally years ago. If you can’t prove its age, you can be arrested and have your property confiscated—unless you are well-connected and exempted.

Elephants are being killed for their ivory. Activists unable to protect the animals now are targeting Americans who followed the law in buying and selling legal old ivory objects. 

But as I point out my latest piece in the American Spectator:

advocates of banning antique sales seem more interested in punishing people who bought and sold ivory legally because they bought and sold ivory, not because doing so would prevent poaching.  It is an exercise in moral vanity and political posturing, not practical conservation.

Some ban proponents complain of the difficulty of distinguishing between new and old ivory. Actually, European carving disappeared decades ago. Asian carving continues, but old and new differ in character, subject, wear, age, coloring, quality, and more. 

Nor do collectors of and dealers in antiques seek out poached ivory. Punishing people who followed the law and invested in legal objects might make a few extremists feel good, but won’t save a single elephant today.

Ivory entered America legally until 1989. Antiques with proper certification could be imported after that. But in mid-February the administration announced that if you had followed the law, it planned to render your collection or inventory essentially valueless.

The new guidance from the U.S. Fish and Wildlife Service indicated that most every auctioneer, collector, and dealer—and anyone else who has purchased or received something made of ivory—better hire a lawyer before selling their ivory possessions. 

The prospective rules are biased against average folks. If you represent the non-profit cultural establishment, you’ll get around the rules.

Point one, no “commercial” imports even of antiques will be allowed. However, the rules apparently will exempt “museum and educational specimens.” According to the administration’s reasoning, non-profit institutions will have a unique right to continue driving elephants to extinction.

Point two, exports are banned, except antiques in what the government calls “exceptional circumstances.” But “certain noncommercial items” will be allowed, so people with friends in government likely will be able to hurdle any new burdens in a single bound. Everyone else better hire a lawyer or lobbyist.

Freedom on Film

It’s Oscar time again, and once again there are some Best Picture nominees of special interest to libertarians. Dallas Buyers Club is a terrific movie with a strong libertarian message about self-help, entrepreneurship, overbearing and even lethal regulation, and social tolerance. 12 Years a Slave is a profound and painful movie about the horrors of slavery in a country conceived in liberty. Philomena is a tender personal story that sharply attacks the Catholic church and its censorious attitude toward sex, themes that would resonate with some libertarian viewers. This wasn’t the best year for libertarian movies – 2000 was pretty good – but libertarians will have some rooting interest Sunday night.

As I told Washington Post film critic Ann Hornaday in 2005, “America is basically a libertarian country, so Americans are going to put libertarian themes into the art they create, and sometimes it’s more explicit and sometimes it’s less so. But it’s not a big surprise to see individualism, anti-totalitarianism and fighting for freedom and social tolerance showing up in American art.” Here are some of my favorite examples (and of course they’re not all American):

Shenandoah, a 1965 film starring Jimmy Stewart, is often regarded as the best libertarian film Hollywood ever made. Stewart is a Virginia farmer who wants to stay out of the Civil War. Not our fight, he tells his sons. He refuses to let the state take his sons, or his horses, for war. Inevitably, though, his family is drawn into the war raging around them, and the movie becomes very sad. This is a powerful movie about independence, self-reliance, individualism, and the horrors of war. (There’s also a stage musical based on the movie that’s worth seeing, or you could listen to the antiwar ballad “I’ve Heard It All Before” here.)

War may be the most awful thing men do, but slavery is a close contender. Steven Spielberg’s Amistad (1997) tells a fascinating story about a ship full of Africans that turned up in New England in 1839. The question: Under American law, are they slaves? A long legal battle ensues, going up to the Supreme Court. Libertarians like to joke about lawyers. Sometimes we even quote the Shakespeare line, “The first thing we do, let’s kill all the lawyers” — not realizing that that line was said by a killer who understood that the law stands in the way of would-be tyrants. Amistad gives us a picture of a society governed by law; even the vile institution of slavery was subject to the rule of law. And when the former president, John Quincy Adams, makes his argument before the Supreme Court, it should inspire us all to appreciate the law that protects our freedom.

Gap Pay Raise Follows Rand Not Obama

Clothing retailer Gap Inc. has won praise from the White House in announcing its decision to raise entry-level wages to $9 an hour this year, and $10 next year. President Obama applauded Gap and argued that Congress should follow suit by passing a bill to increase the federal minimum wage from $7.25 an hour to $10.10 by 2016.

But there’s a big difference between a voluntary increase in a market-determined wage rate and a government-mandated minimum wage.

Gap must report to shareholders and make a profit to stay in business; politicians report to voters and must win elections to stay in office. Polls show that the American public strongly support a higher federal minimum wage — but only if it appears to be costless.

President Obama, in promoting a higher minimum wage, argues that it would “lift wages for more than 16 million workers—all without requiring a single dollar in new taxes or spending.” This is the free lunch that politicians love to promise—and it is an illusion.

When the government arbitrarily pushes up wage rates above the competitive level, two things happen: some jobs are lost; and more workers look for jobs but can’t find them, so unemployment of lower-skilled workers increases. These effects are greater in the long run as employers switch to labor-saving technology.

When firms make adjustments in expectation of higher minimum wages (both federal and state), there will be a decrease in the number of jobs for lower-skilled workers (mostly younger, inexperienced, less-educated workers) but an increase in the demand for higher-productivity, skilled workers who complement the new technology.

Gap has already made significant investments in labor-saving technology and recently implemented a “reserve-in-store” computer program that relies on higher-skilled workers whom Gap invests in to enhance their human capital. Gone are the days when high-school dropouts could easily get a job with retailers. As Gap raises its starting wage, there will be more competition for a dwindling number of jobs. More workers will want a job, but fewer workers will be hired, and those that are will be of higher quality.

Glenn K. Murphy, Gap’s CEO, told the company’s employers upon announcing the change in policy, “To us, this is not a political issue. Our decision to invest in front-line employees will directly support our business, and is one that we expect to deliver a return many times over.”

This is free-market, Randian thinking: self-interest is the motivating factor, not altruism.

When President Obama says, “It’s time to pass [the minimum wage] bill and give America a raise,” he is making a promise that can’t be kept: some workers will gain (those who have higher productivity) but others (the least productive workers who most need a job to gain experience and move up the income ladder) will lose.

Indeed, the Congressional Budget Office now tells us that an increase in the federal minimum wage to $10.10 an hour could cost a loss of 500,000 jobs. Those most affected would be low-productivity workers in low-income families—making them poorer, not richer. (If the government promises a wage of $10.10 an hour but a worker loses her job or can’t find one, then her income is zero.) There is no free lunch!

People do what is in their own best interest. Gap may win some friends by increasing entry-level wages and saying this is in tune with company “values,” but unless that business decision is profitable Gap will lose sales, and its shares will drop in value. There is thus a market test of the decision to raise wages.

The government has no business telling private employers what to pay or telling workers they cannot offer their labor services at less than the legal minimum wage, even if they are willing to do so to retain or get a job. The President’s minimum wage is anti-economic freedom and violates personal freedom; Gap’s higher entry wage does neither. This is a case of “the emperor has no clothes!”

Jared Bernstein’s “Tax Reform” Assault on Pensions, IRAs and 401(k)s

The bad habit of defining “tax reform” in terms of fairness or “closing loopholes” sidesteps the most essential task of effective tax policy – namely, to collect taxes in ways that do the least possible damage to incentives for productive effort, investment and entrepreneurship.

The Joint Committee on Taxation list of “tax expenditures” is arbitrary accounting, not economics, and tax expenditures are not necessarily “loopholes.” These estimates do not take taxpayer behavior into account and therefore do not estimate revenues that could be raised by closing the so-called loopholes (e.g., a higher tax on capital gains would shrink asset sales and revenues). Policies that make sense in terms of economic incentives can therefore be portrayed as useless tax subsidies in the purely static accounting of “tax expenditures.”

For example, a recent New York Times article by former vice presidential adviser Jared Bernstein complains that tax deferral for retirement savings is unfair because, “most savings subsidies go to households that would surely save anyway, while almost nothing goes to the households that need help to save.” 

These “subsidies” for high-bracket taxpayers mainly consist of deferring rather than avoiding taxes, which only partly offsets the way savings are double-taxed. Even if higher-income households would actually save the same without 401(k) accounts (which contradicts research), they would still end up with much smaller retirement savings. Dividends and capital gains would then be repeatedly taxed, year after year, rather than being continually reinvested within a tax-deferred pension, IRA or 401(k) account. 

Estimated “subsidies” from tax deferral are deceptive: Instead of having recent dividends and capital gains taxed at a 15-20 percent rate in recent years, distributions from tax-deferred accounts will later be taxed at rates up to 39.6 percent. It’s a subsidy only if you don’t live much past 70.

Bernstein presents a graph showing the top 20 percent getting a 66 percent share of these “subsidies” for pensions and defined-contribution plans while the middle fifth gets only nine percent and the poorest 20 percent just two percent. What these figures actually demonstrate is that (1) people who work full-time for many years have more income to save than those who don’t, and that (2) people who pay no income tax cannot benefit from any policy that reduces taxable income, even temporarily.

There are five times as many workers in the top 20 percent than there are in the bottom 20 percent. To exclude young singles and old retirees, Gerald Mayer examined the work experience of households headed by someone between the working ages of 22 and 62. Average work hours among the poorest 20 percent still amounted to just 1,415 hours a year in 2010, while those in the middle fifth worked 2,771 hours, and the top 20 percent worked 4060 hours.

If Bernstein’s “subsidies” were properly expressed as shares of income, rather than as shares of foregone tax revenue, the differences nearly vanish. The Congressional Budget Office (the undisclosed source of his estimates) shows tax benefits for retirement savings worth only about twice as much to the top 20 percent (2 percent of net income) as to the middle 20 percent (0.9 percent of income). Retirement savings incentives appear to be worth only 0.4 percent of income to the poorest 20 percent, since they rarely owe taxes, yet annual benefits are a poor guide to lifetime benefits. Those in low income groups while they are young commonly move up to higher tax brackets by the time they start saving for retirement.

The alleged unfairness of lower-income households not getting the same dollar tax break as couples earning more than $115,100 (the top 20 percent) could be alleviated by reducing marginal tax rates on two-earner families. But Bernstein instead suggests “closing loopholes that make it easy for wealthy individuals to exceed contribution limits to tax-preferred accounts (as was found to be the case with Mitt Romney), reducing contribution limits for high-income filers, or simple limiting the value of tax breaks for the wealthiest of filers (e.g. allowing them to deduct such contributions at 28 percent instead of 39.6 percent.” None of these schemes would add a dime to the savings of low or middle-income households, of course, and they wouldn’t work.

It is not legal – and therefore not “easy”– to exceed strict contribution limits for high-income taxpayers, and Mitt Romney certainly did not do so.  What Romney did was to roll over qualified retirement plans into an IRA and then earn high compounded returns on very successful investments.  Similarly, albeit on a much smaller scale, I rolled-over a lump-sum pension into an IRA in 1990 when I changed jobs, and that IRA is now 12-times larger thanks to compound interest and bold investments.  Since I never contributed another dollar after 1990, tougher or lower contribution limits would have been entirely irrelevant.  

Bernstein’s final proposal is from the Obama budget – “allowing taxpayers to deduct contributions at 28 percent instead of 38.6 percent.” But that too is irrelevant. Any alleged “loopholes” for retirement savings have nothing to do with itemized deductions for top-bracket taxpayers, who are not allowed to deduct contributions to an IRA.  Failure to include employer contributions as taxable income is not an itemized deduction to begin with, nor is the exclusion from adjusted gross income for contributions to a Keogh retirement plan for the self-employed.  

In the process of giving “tax reform” a bad name, Jared Bernstein uses a sham fairness argument to justify arbitrary and unworkable anti-affluence policies that are irrelevant to any ill-defined problems.