Topic: Government and Politics

Another Petty Dispute Involving U.S. Allies

Alliances tend to entangle America in confrontations that have little or no relevance to the security and liberty of the republic.  A prime example of that problem is the ongoing, bitter dispute between Japan and South Korea over some largely uninhabited rocks and the waters surrounding them.  Tokyo and Seoul cannot even agree on the correct name of the islands or the body of water.  Japanese call the islands Takeshima, while South Koreans insist on the name Dokdo.  For Japanese (and most of the world), the spits of rock are located in the Sea of Japan, but South Koreans hate that name and instead call it the East Sea.

As I discuss in a recent National Interest Online article, outsiders might be tempted to snicker at such a parochial feud, but it has significant policy implications.  U.S. officials are seeking to strengthen Washington’s alliances with both Japan and South Korea to counter China’s growing power in East Asia.  A key component of that strategy is to encourage closer bilateral military cooperation between Tokyo and Seoul.  The Takeshima/Dokdo dispute is a major impediment to such cooperation.  Beijing has been quick to take advantage of the animosity by actively courting South Korea.  

Japanese and South Korean leaders also pressure Washington to take sides in the controversy.  Such efforts should be rebuffed firmly.  Which country has sovereignty over the islands and the surrounding fishing waters should be a matter of profound indifference to all Americans.

There is a larger lesson in this petty territorial dispute.  As my colleague Doug Bandow has correctly observed, Washington collects allies with less thought and discrimination than most people collect Facebook friends.  In doing so, we also collect all of the disputes and feuds that those “friends” wage with other parties.  That is an unnecessary and unwise policy for a superpower.

Audit the Fed: What Would Milton Friedman Say?

Senator Rand Paul (R-KY) introduced a bill (S.264) which is popularly known as “Audit the Fed” (ATF). The bill picked up 30 initial co-sponsors. Although the Fed is already extensively audited in the accounting sense of the term, the ATF bill would expand the scope and scale of Fed auditing. Indeed, monetary policy decisions, which have been exempt from any sort of “auditing” since 1978, would see their auditing exemption lifted if the bill becomes law.

There is popular support for the idea that the Fed should be audited. More than three-quarters of registered voters would give the general idea of auditing the Fed a green light. It’s no surprise, then, that there has been bipartisan support for similar proposals in the past. However, none of these have become law because the push-back from Fed officials and other “experts” has been strong. Today is no different, with the Fed and the Obama White House all singing the same tune: “It’s Dangerous.” 

The real issue at stake is whether the Fed should be independent. The opponents of the ATF bill naturally think that the law would imperil the Fed’s autonomy and that this would be objectionable.

What would Milton Friedman say? Well, we don’t know for certain because unfortunately he is unable to read S.264. That said, Friedman weighed in on the issue of central bank independence on several occasions. Indeed, an essay he penned in 1962 was titled “Should there be an Independent Monetary Authority?” (In: In Search of a Monetary Constitution, edited by Leland B. Yeager, Harvard University Press). Friedman concluded that “The case against a fully independent central bank is strong indeed.”

Milton Friedman’s position on this issue was quite clear at the time. There is little doubt as to whether he would see the situation at hand any differently. 

Grading the Rubio-Lee Tax Reform Plan

In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system:

  1. High tax rates that penalize productive behavior.
  2. Pervasive double taxation that discourages saving and investment.
  3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

Obamacare’s Fate Turns on Whether Roberts and Kennedy Think State and Federal Exchanges Are the Same

It all depends on what the meaning of “by” is.

The four liberal justices clearly believe that an exchange established “for” or “in” a state by the federal government is the same as an exchange “established by the state,” to quote the relevant statute. Justices Scalia and Alito (and presumably the silent Thomas) equally firmly believe that words mean what they say.

So this case, as expected, turns on the views of Chief Justice Roberts and Justice Kennedy, who gave very little away at oral argument. If the government wins here, then not only will Obamacare continue to be rewritten by the IRS, but any executive agency – and any future president – will be able to rewrite any law. Accordingly, for the sake of the rule of law, I fervently hope that Roberts and Kennedy decide to enforce the Affordable Care Act as written and let Congress clean up its own mess.

Bottom 90% Pretax Pretransfer Income is no Proxy for Median After-Tax Income

bottom 90 percent vs CBO median

This graph illustrates a few points made in my recent Wall Street Journal article.  First of all, the Piketty & Saez mean average of bottom 90% incomes per tax unit is not a credible proxy for median household income, particularly since the big reductions in middle-class taxes from 1981 to 2003.

Second, the red bars claiming bottom 90% incomes in the past six years have been no higher than they were in 1980 (Sen. Warren) or even 1968 (see the graph) is literally unbelievable.  If that were true then all other income statistics – including GDP – would have to be completely false.  

If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Caps

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.

After Eight Years of Losses, End the Government’s Postal Monopoly

The United States Postal Service lost $5.5 billion last year. That is the eighth annual loss in a row and the third highest ever. The only good news is that it remains below the red ink tsunami of $15.9 billion in 2012.

Why does the federal government deliver the mail? Why does it have a monopoly over delivering the mail?

The Postal Service one of the few government programs with actual constitutional warrant. Alas, America’s revolutionaries turned the system into a fount of federal patronage.  Local postmasters became perhaps the president’s most important appointments. The Postmaster General was a member of the Cabinet from 1829 to 1971.

With politics rather than service the PO’s priority, Congress took the next step and approved the Private Express Statutes, preventing anyone from competing with the government in delivering first class mail.   

That left the system ill-equipped to adapt to changing circumstances. In 1971 Congress turned the Post Office into the semi-independent USPS but retained its control over postal policies and, of course, preserved the system’s delivery monopoly.

Banning competition could not preserve the postal market.  The number of pieces of mail peaked in 2001 and continues to fall despite a rising population. USPS’s last profitable year was 2006.

With characteristic understatement, observed the Government Accountability Office:  “Given its financial problems and outlook, USPS cannot support its current level of service and operations.”

The postal unions insist that nothing is wrong—at least, nothing which a federal bail-out wouldn’t solve.  They reserve particular ire for the requirement that USPS prefund workers’ retirement.

But prefunding protects taxpayers. Washington’s unfunded (government) retirement liability is about $800 billion, growing every year.  Only USPS must prefund, which is unfair to taxpayers, not the postal service. 

There’s no other obvious way for USPS to become solvent.  Over the last half century the postal authorities raised rates 50 percent faster than the rate of inflation.  Pushing hikes even faster in the future would encourage more people to use alternatives. 

USPS has reduced costs through facility closures and staff reductions despite strong opposition.  Cuts in compensation, retirement benefits, and workforce levels and improvements in productivity also are obvious responses, but must overcome union opposition. 

Proposals for reducing services abound.  All of these anger consumers, encouraging them to go elsewhere—including to Federal Express and UPS, which offer better options for packages.  Irritated workers and customers also complain to Congress, creating political roadblocks for USPS.

Instead of attempting to save an unnecessary political monopoly, Congress should look abroad where numerous countries, some pushed by the European Union, have introduced competition and innovation into their postal markets. 

The Organization for Economic Co-operation and Development reported that such reforms had yielded “quality of service improvements, increases in profitability, increases in employment and real reductions in prices.”  Only in the supposed laissez faire paradise of America—where a union-led “Grand Alliance to Save Our Public Postal Service” just formed to ensure that whatever has been will forever be—do such ideas seem radical. 

Yet even President Barack Obama admitted a few years back that “it’s the post office that’s always having problems.”  In contrast, “UPS and FedEx are doing just fine.” 

Better management and less politics would help.  In fact, revenue was up a bit last year, despite the bigger loss.  But over the long-term USPS cannot escape from a seeming death spiral of bigger losses, higher rates, poorer services, fewer customers, bigger losses, and so on.

As I contend in the Freeman:  “Uncle Sam should ease out of the postal business.  Privatize USPS and drop the federal first class monopoly.  No one can say for sure what would happen.  But history suggests that innovative entrepreneurs would be more likely to find a cost-effective solution than will today’s mix of politicians and bureaucrats.”

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