Topic: Government and Politics

Washington Sport: Throwing Competitors under the Bus

By
Chris Edwards

One reason why Washington keeps getting bigger is that so many business people are willing to throw their competitors under the government bus. The Washington Post today describes how a major lobby group representing small banks cut a secret deal with Rep. Barney Frank to not oppose his big-government financial bill if it excluded small banks from regulations and shifted $1.5 billion in annual fees from them to the big banks.

We saw a similar jockeying of lobbyists with the Obamacare health bill, and we see it with legislation on the agenda right now. With the Internet tax bill before Congress (the Marketplace Fairness Act), giant Amazon has switched sides to support expanding online sales taxes, and thus throwing smaller retailers and consumers under the bus.

With corporate tax reform under discussion, all firms want a lower rate but some firms not targeted by base broadening seem willing to throw those that are under the bus. The problem is that some of the proposed base broadening is bad policy, so legislation could end up making road kill of economic growth.

What about the ethics of all this? It’s appalling to see how bad legislation like Dodd-Frank gets passed on the strength of special-interest payoffs. But lobbyists—such as the head of the small-bank association profiled by the Post—surely think that acting in the interests of their members is the ethical thing to do.

As for legislators, most of them probably think that you can’t make an omelette without cracking eggs. So while they may know that they are causing some damage, they also have warm feelings for the people they are helping—friends in the lobby groups they smooze with, other legislators they owe favors to, and businesses in their home districts. Furthermore, legislators can absolve any nagging ethical doubts they may have by demonizing the groups that the government is running over in legislation.

The problem is that when Washington acts to expand an already big government, it nearly always damages society overall. That’s because government legislation coerces people to take actions that they would not freely choose. Reducing freedom nearly always means reducing prosperity. So while Capitol Hill horse-trading may seem like a good sport, the end result is often more mandates and taxes enforced by police power. It is usually a zero-sum game, or much worse.

Private markets work on fundamentally different principles. The main one being that voluntary trade is mutually beneficial. If individuals and businesses are acting in an honest fashion and not trampling anyone’s rights, freedom of trade is a win-win for all involved. It generates value and leads to overall growth and prosperity in society.

So while the ethics of lobbyists is a concern, a more important problem in Washington is that too many legislators think they can solve society’s problems with mandates and taxes. Dirty Harry said “a man’s got to know his limitations.” And so do policymakers because their good intentions are not enough to overcome the inevitable damage caused by further expansions in government power.      

Topics: 
Government and Politics, Tax and Budget Policy

Capitalizing on Big Government

By
David Boaz

The Securities and Exchange Commission is investigating “political intelligence” firms that promise to give investors advance word of what Congress and regulators may do next. A continuing Washington Post investigation reports:

Antonia Ferrier, a spokeswoman for [Sen. Orrin] Hatch, said the senator is aware that his staff participates in such events [as an investor phone call on Medicare and private insurers, organized by a Washington consulting firm] and that communicating with these types of groups is not unusual given the technical nature of the issues the committee handles.

“Staff members meet with stakeholders on every side of an issue as a means of better crafting policy solutions,” Ferrier said. “What information they share is the same information that Senator Hatch shares in an open and transparent way with his constituents. Senator Hatch has a zero-tolerance policy for anyone who would take advantage of privileged information, and he’s confident that no one on his staff has done that.”

This is just one more inevitable facet of the system we live under. As long as the federal government spends trillions of dollars, and reallocates more trillions through taxes and regulation, and issues bans and mandates on everything from contraception to local speed limits, you’re going to see a lot of money spent to control how those decisions are made. Which includes spending money to find out what the decisions will be, in order to make appropriate investment choices. 

I’ve been writing about this for years, apparently to no avail. I focused on why money flows to Washington way back in 1983 in the Wall Street Journal:

Business people know that you have to invest to make money. Businesses invest in factories, labor, research and development, marketing, and all the other processes that bring goods to consumers and, they hope, lead to profits. They also invest in political processes that may yield profits.

If more money can be made by investing in Washington than by drilling another oil well, money will be spent there.

Nobel laureate F.A. Hayek explained the process 40 years ago in his prophetic book The Road to Serfdom: “As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of this directing power.”

As the size and power of government increase, we can expect more of society’s resources to be directed toward influencing government.

We can pass all the laws we want, launch insider training investigations – but as long as the federal government is acquiring and redistributing so much wealth, businesses and investors are going to go to great lengths to figure out where it’s going and how to get a piece of it.

Topics: 
Government and Politics

Huge Value-Added Tax Increases in Europe Show Why Washington Politicians Should Never Be Given a New Source of Tax Revenue

By
Daniel J. Mitchell

The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.

The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.

So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*

And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.

Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.

VAT EU Increase

As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.

Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.

For more information, here’s my video that describes the VAT and explains why it’s a bad idea.

The Value Added Tax: A Hidden New Tax to Finance Much Bigger Government

*The same thing is now happening in Japan.

P.S. I don’t know if you’ll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.

Topics: 
General, Government and Politics, International Economics and Development, Tax and Budget Policy

Scoring Immigration Reform Correctly

By
Alex Nowrasteh

Word is our pro-free-market brethren at the Heritage Foundation will release a new study on the fiscal impact of immigration reform in time for the congressional debate. It will be an update to a 2007 study that played a key role in derailing immigration reform then.

While the 2007 study was influential, it was fatally flawed, as I detail here.  Hopefully Heritage’s updated version will correct for those criticisms and others, or else its analysis must be judged as lacking. 

The key flaw in Heritage’s 2007 study is its use of static fiscal scoring, rather than dynamic fiscal scoring, to evaluate that year’s immigration reform bill. “Scoring” a bill means predicting its impact on the U.S. budget in the future by estimating how it will affect future spending and tax revenue. A statically scored prediction assumes the bill will not affect the rest of the economy – which is highly unrealistic. 

A dynamically scored prediction, on the other hand, assumes that the bill will affect the rest of the economy, also changing tax revenue and government spending. Since increased immigration will increase the size of the economy, it will also increase tax revenue and some government spending. It’s important to factor those increases into any scoring model. Heritage’s 2007 study did not. 

The Congressional Budget Office (CBO) has adopted dynamic scoring for the coming immigration bill for reasons they explain here.  The best justification for using dynamic scoring comes from Ed Feulner, who only recently stepped down as head of the Heritage Foundation and retains an emeritus title there. He writes:

Indeed, some lawmakers are fighting a proposal that would require them to take real-world considerations into account. They prefer to keep ‘scoring’ each bill-estimating how it will affect the economy and the amount of taxes they take in-with the ‘static’ model used by the store owner’s friend. If, say, a 5 percent tax on something brings in $50 million, they assume a 10 percent tax will fetch $100 million.

Not surprisingly, this approach has caused lawmakers to come up with some wildly inaccurate assumptions over the years.

Feulner goes on to explain how numerous tax cuts actually produced more revenue despite static models predicting the opposite. 

Can you imagine any private business acting this way? Of course not. That’s why it’s time Congress switched to a method many business owners use-‘dynamic scoring’-which assumes that if you change the way you do business, customers will react in relatively predictable ways. Before they’ve hiked a price or changed a product, most companies have a pretty good idea of how many customers they’ll gain or lose.

Would ‘dynamic scoring’ always give lawmakers perfect estimates? No, but it surely would get much closer to the true cost than “static scoring” does. If doubts remain, put it to the test: Have Congress produce ‘static’ and ‘dynamic’ scores of various pieces of legislation for a few years and see which prove more accurate.

Using dynamic scoring to predict the effects of legislation is as relevant for immigration reform as it is for tax cuts. Allowing more legal immigration, and legalizing those here, will increase the number of workers and entrepreneurs in the U.S., necessarily growing the size of the economy. Capital accumulation and land improvements then catch up to the population growth. Those effects boost GDP, ergo tax revenue.

A common retort to the above is that many new immigrants will be low-skilled and, because of our progressive tax system, will not pay much in taxes.  Expanding the supply of laborers and entrepreneurs through immigration would increase profits, expand the production possibilities frontier, increase the return to capital, and raise incomes for most American workers who are complements.  Thus, even if most future immigrants are low-skilled—and they likely will be—their positive effect on the economy would increase tax revenues indirectly.   

Heritage’s former president supports dynamic scoring, and now so does the CBO, at least for immigration.  For the sake of an honest debate, I sure hope Heritage’s upcoming report does too.

Topics: 
General, Government and Politics, Trade and Immigration

Where Are the European Spending Cuts?

By
Daniel J. Mitchell

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Austerity in Europe

Here are some of his conclusions from reviewing the data:

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country - where protests are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Read the rest of this post »

Topics: 
General, Government and Politics, International Economics and Development, Tax and Budget Policy

A Question for Medicaid Deniers

By
Michael F. Cannon

A lot of people are writing about the Oregon Health Insurance Experiment results, released yesterday, which found zero evidence that expanding Medicaid to the most vulnerable people targeted by ObamaCare’s Medicaid expansion improves their physical health. Here’s my take on the study and its implications. Megan McArdle, Shikha Dalmia, Avik Roy, and Peter Suderman are making solid contributions to the debate. Zeke Emanuel gets points for making an admission against interest (“It’s disappointing”). Points also to Jennifer Rubin for her take on what the OHIE says about ObamaCare’s Medicaid expansion: “If there had been a giant trial of a heart medication with lousy results we wouldn’t proceed in mass-marketing the drug; we might even take it off the shelves.” Not a bad idea. Ezra Klein and Evan Soltas call for more such experiments. Yes! Let’s have more randomized, controlled trials of the effects of Medicaid, on pre-ObamaCare populations, in big states like California, New York, Texas, Florida, and Illinois, where we can harnass even more statistical power. The only unethical thing would be to keep spending trillions on this program without knowing whether it’s even effective (much less cost-effective).

Others are making less-solid contributions. Here’s a question for them.

Since the OHIE shows that Medicaid makes no difference in the diagnosis or use of medication to treat high blood pressure or high cholesterol, and has no effect on blood-sugar levels despite increasing diabetes diagnoses and medication use, would you support eliminating Medicaid coverage for these screenings and medications?

If not, why not?

Topics: 
Government and Politics, Health Care

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