Topic: Tax and Budget Policy

Klein Slanders Friedman

A video interview of Naomi Klein, who’s promoting her new book, has some truly vicious slander of Milton Friedman. Klein says:

I start the book with a quote from Milton Friedman saying only a crisis, actual or perceived, produces real change. And you know Milton Friedman lived by this. His first laboratory was Chile under Augusto Pinoche, where the crisis was the coup and an economic crisis and it was after that that you had the economic shock therapy. And you also had another kind of shock which is torture, which was a way of enforcing these policies.

Klein seems to be insinuating that Friedman somehow orchestrated, supported, or encouraged the coup in Chile, or at least that he was an important Pinochet advisor. She also makes it sound like torturing people was one of Friedman’s policy recommendations. But here’s how Friedman tells the story:

MILTON FRIEDMAN: While I was in Santiago, Chile, I gave a talk at the Catholic University of Chile. Now, I should explain that the University of Chicago had had an arrangement for years with the Catholic University of Chile, whereby they send students to us and we send people down there to help them reorganize their economics department. And I gave a talk at the Catholic University of Chile under the title “The Fragility of Freedom.” The essence of the talk was that freedom was a very fragile thing and that what destroyed it more than anything else was central control; that in order to maintain freedom, you had to have free markets, and that free markets would work best if you had political freedom. So it was essentially an anti-totalitarian talk.

INTERVIEWER: So you envisaged, therefore, that the free markets ultimately would undermine Pinochet?

MILTON FRIEDMAN: Oh, absolutely. The emphasis of that talk was that free markets would undermine political centralization and political control. And incidentally, I should say that I was not in Chile as a guest of the government. I was in Chile as the guest of a private organization.

It’s true, of course, that Pinochet employed some of the economic policies Friedman had been advocating for decades, that some of Pinochet’s advisors had studied economics at the University of Chicago, and that Friedman subsequently cited the success of those policies. But just as Michael Moore’s endorsement of Cuba’s health care system doesn’t constitute endorsement of Castro’s dictatorial rule, so Friedman’s endorsement for Chilean tax or pension policies don’t constitute an endorsement of coups, purges, or torture.

There’s also some ideological slander at the heart of Klein’s argument, which she lays out later in the video. Klein seems to believe that Haliburton and Blackwater—companies that thrive on wartime corporate welfare—represent Friedman’s ideal society. Not only is this obviously wrong on a theoretical level, but it’s also flatly at odds with Friedman’s stated views. Milton Friedman was an opponent of the Iraq war and has been vociferous critic of corporate welfare for decades. Conflating Friedman’s advocacy of limited government with Bush’s interventionist foreign policy and profligate domestic spending illustrates either a failure to grasp the basics of Friedman’s position or a calculated attempt to play to the prejudices of her intended audience, many of whom will lump together anyone they don’t agree with as “right wingers,” even if they have little in common with one another.

John Berthoud, In Memoriam

BerthoudWe have lost a good friend in the battle for limited government with the passing yesterday of John Berthoud, president of National Taxpayers Union. John was a scholar, a leader in public policy in Washington, and the head of a very important institution that helps Americans understand the huge cost of their government. John was an extremely kind and honorable person, and he will be missed greatly.

Three Cheers for the World Bank

I admit I’m committing an ideological sin, but the World Bank has released its 2008 “Doing Business” report, which ranks 178 countries on regulatory impediments to entrepreurship, and it is a first-rate publication. I realize the World Bank should not exist, and I’m quite aware that many of their activities in other areas hinder economic growth, but this report is very helpful in promoting regulatory competition among jurisdictions. I’ll atone for my sin by coming up with a reason to criticize the international bureaucracy in the near future, but this EU Observer story shows how Doing Business creates pressure for regulatory liberalization:

Thanks to regulatory reforms, Eastern Europe and Central Asia have surpassed East Asia for ease of doing business, a World Bank report says. The report, called “Doing Business” compares and ranks 178 economies and seven regions on the basis of ten indicators related to business regulations. …Several of the region’s countries have also overtaken some Western European economies. Estonia and Georgia for instance, the region’s two top performers, have surpassed most EU members and both hold a spot in the top twenty.

Presidential Spending

Interest from an NYT reporter the other day prompted me to update data on federal spending by presidential term. The latest data show that the current President Bush is the biggest spender since Bush I, Ford, Carter, or FDR, depending on which spending category one considers.

The table shows annual average spending growth in real, or inflation-adjusted, dollars. It accounts for the different length of each president’s tenure. I have included data for Bush II’s first six years (FY2001 to FY2007). 

Looking at the rows in the table:

  • In overall outlays, Bush II is the biggest spender since Carter.
  • In defense, Bush II is the biggest spender since FDR (not shown).
  • In total nondefense spending (including entitlements), Bush I and Bush II both have records of big spending.
  • In nondefense discretionary spending, Bush II is the biggest spender since Ford.
  • Finally, in total noninterest spending, Bush II is again the biggest spender since Ford.

Comparing the first and last rows shows the difference that interest costs make. Bush II has benefited from low interest costs, which have partly offset high program costs in recent years. That has made Bush II’s fiscal record look a bit better than it actually is because the low interest costs are mainly thanks to four balanced budgets under Clinton. 

But isn’t Congress responsible for federal spending? No, Congress shares the responsibility with the White House. Presidents set the overall tone for spending and they hold a powerful veto pen. Bush II’s big spending record, as shown in the data, is reflective of the big spending policy agenda set by his administration.   

SCHIP’s Perverse Incentives

Picking the worst government program would be a huge challenge, but picking the worst funding system is much easier. Programs involving joint federal-state funding contain built-in incentives to expand the size of government because politicians at either level can buy more votes by expanding the program, knowing that they only have to pay (depending on the formula) a share of the cost. In other words, lawmakers can promise $1 worth of goodies for, say, 50 cents. This is one of the reasons why Medicaid is a fiscal disaster. It’s also why welfare reform was a step in the right direction (the old system funneled more money to states when they added more people on the dole, creating a terrible incentive system). Unfortunately, politicians generally make things worse rather than better, and a Wall Street Journal editorial (sub only) shows how the SCHIP program is encouraging more government:

Schip was created in 1997 to help insure children from low-income families, but it has since become a stealth vehicle to expand government control of health care. Schip expires next week, and House and Senate negotiators are hashing out a “compromise” that would expand the program by about $35 billion over the next five years (plus a budget gimmick concealing at least $30 billion). … Many states like New Jersey have been taking advantage of Schip’s “flexibility” and covering more affluent children, their parents, and even childless adults. In a tardy response to this trend, the federal Department of Health and Human Services announced in August that before states could further expand their Schip programs beyond 250% of poverty, they would have to enroll 95% of children below 200% of poverty. …For several years the number of uninsured New Jersey children under 200% has held steady, while New Jersey’s Schip rolls have grown by about 10% a year. One major reason is that the state continues to enroll families with incomes up to $72,275. … Governor Corzine could always tax his own residents to pay for this largesse. Then again, New Jersey already has one of the worst tax burdens in the country, and Trenton has raised taxes five times in the last six years. For the Governor, the political beauty of Schip is that it allows New Jersey to finance its spendthrift ways on the backs of more responsible states.

Politicians and Retailers Conspire to Impose Sales Tax Cartel

As reported by, a collection of trade associations is calling on Congress to impose the so-called Streamlined Sales and Use Tax Agreement on all states. Their argument is that it is unfair to let online companies make tax-free sales to out-of-state consumers (states routinely choose not to tax their retailers who make such sales). There is an inequity in the current approach, to be sure, but politicians (with help from naive business groups) are picking the wrong solution. Creating a nationwide tax cartel - one that will require a massive invasion of privacy because of a database of online purchases – will insulate politicians from competition by making it extremely difficult for consumers to shop where taxes are lower. The right way to deal with the inequity is for states to apply their sales taxes (ideally at a low rate) on a non-discriminatory basis. In other words, the sales tax would apply to all sales made in a state, regardless of whether a good is sold in person or online, and regardless of whether the customer is an in-state resident or out-of-state resident. This would eliminate an inequity, preserve tax competition, and protect privacy.

The US National Retail Federation and nearly 100 retailers and trade associations are urging Congress to approve legislation making it easier to require internet merchants, mail-order houses and other “remote sellers” to collect sales tax across state lines. Coalition members are hoping to see action this fall on the Sales Tax Fairness and Simplification Act, which is pending in both the House and Senate. The measure would allow states that have implemented the Streamlined Sales and Use Tax Agreement to require that out-of-state merchants collect sales tax on merchandise sold to residents of their states. …While the Streamlined Sales and Use Tax Agreement went into effect on a voluntary basis in 2005, the coalition says that passage of federal legislation is needed before sales tax collection can become mandatory. Thus far, 22 states have passed legislation implementing the agreement. In addition, more than 1,000 companies have participated in the agreement voluntarily, and have collected more than $125 million in state and local sales tax that would otherwise have gone unpaid. The NRF helped draft the Streamlined Sales and Use Tax Agreement, and has long argued that remote sellers enjoy an unfair price advantage in situations where they are not required to collect sales tax. The NRF wants a level playing field where all retailers are subject to the same tax rules when their merchandise is sold from a store, through a catalog or over the internet.

Bush the Budget Warrior

After six and a half years of spending faster than LBJ, President Bush has decided to proclaim himself the guardian of the taxpayers, accusing Democrats of “working to bring back the failed tax-and-spend policies of the past.” The very recent past, perhaps? Today he complained that Congress has not yet completed appropriations bills for the fiscal year that begins Monday, and warned that Democrats shouldn’t send him an omnibus bill that would “make it easier for members to sneak in all kinds of special projects, put in wasteful spending or pork barrel that they are not willing to debate in the open.”

Republicans protecting the taxpayers from the tax-and-spend Democrats. It’s a golden oldie. But it doesn’t have much relevance in the past decade. As the chart below indicates, spending has risen more than twice as much in Bush’s first seven budgets as it did in Clinton’s eight years.

If President Bush is indeed going to be a fiscal conservative for the last one-sixth of his term, that’s good news. But he has already raised annual federal spending by more than one trillion dollars, and he’s not planning to reduce spending, just to slow the growth from a massively bloated base. Fiscal conservatism remains an orphan in today’s Washington.