Economic Lesson from Europe: Higher Tax Rates Are a Recipe for More Red Ink

We can learn a lot of economic lessons from Europe.

Today, we’re going to focus on another lesson, which is that higher taxes lead to more red ink. And let’s hope Hillary Clinton is paying attention.

I’ve already made the argument, using European fiscal data to show that big increases in the tax burden over the past several decades have resulted in much higher levels of government debt.

But let’s now augment that argument by considering what’s happened in recent years.

There’s been a big fiscal crisis in Europe, which has forced governments to engage in austerity.

But the type of austerity matters. A lot.

Here’s some of what I wrote back in 2014.

…austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint). But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).

And when I claim politicians in Europe have chosen the wrong kind of austerity, that’s not hyperbole.

Does The U.S. Really Need an Ally Like Saudi Arabia?

Despite recently expressing doubts about America’s relationship with Saudi Arabia, President Barack Obama again flew to Riyadh and sought to “reassure” the Saudi royals about U.S. support.

The Kingdom of Saudi Arabia should raise the question: what are allies for? The president should have started moving Washington and Riyadh toward a more normal relationship.

Most important, the U.S. should drop any security guarantee, whether explicit or implicit. If the KSA is worth defending, its own people should do so. At the same time, the U.S. should take a more even-handed approach in the Iranian-Saudi cold war, looking for opportunities to draw Tehran away from Islamic extremism.

America’s relationship with the KSA was always based on oil. But supplies are expanding; even the U.S. is going from net consumer to exporter. Anyway, a successor regime would sell to the highest bidder.

Saudi Arabia is supposed to promote regional stability, but intervened in Bahrain to block reforms by the Sunni monarchy for the Shia majority, funded radical insurgents in an attempt to oust Syrian President Bashar al-Assad, and is seeking to destabilize Lebanon’s fragile confessional political system.

Worse, Riyadh has turned Yemen’s long-running domestic conflict into a destructive sectarian battle with Iran. Since the 1979 overthrow of the Shah Washington has seen the KSA as a significant barrier to expansion by Tehran. However, the nuclear agreement creates important new opportunities.

Modern Mercantilism is No Justification for U.S. Global Military Presence

America’s major alliances date back decades. Washington has been protecting Europe, Japan, and South Korea for longer than most Americans have been alive.

The original justification for this expensive global role was the Evil Empire, as President Ronald Reagan called the Soviet Union. Aggressive communism had to be contained, and America’s allies were in various degrees of prostration at the end of World War II and the Korean War.

For a brief moment of history the U.S. had to take on a unique and oversize international role. But as the world moved into the 1980s, it was the lethargy and stinginess of America’s allies that prevented them from taking over most, if not full, responsibility for their own security.

Washington should stop allowing Asians and Europeans to continue cowering behind it. That they prefer not to do more is understandable. But that is no reason for America to do it for them.

The traditional argument for turning the Pentagon into an international welfare agency was security. That claim has grown threadbare given how the existential threats that once confronted, or at least plausibly affected, the U.S. have disappeared.

No peer competitor, no contending global power, no countervailing alliance, no cohesive coalition of adversaries, no credible threat to global commerce, no anything at all.

What remains is, well, paltry compared to threats of global and nuclear conflict. Genuine problems, such as terrorism, but ones requiring limited, nuanced responses, not big alliances, aggressive wars, foreign occupations, endless bombing, and more. The Pentagon could do and spend far less while still safeguarding Americans.

So then, what are the existing alliances for?

Anthony V. Rinna of the SinoNK group recently suggested protecting commerce: “Managing the threat posed by instability on the Korean Peninsula to the United States’ economic interest cannot be done only through a combination of diplomacy and nuclear deterrence. It also requires the continual presence of American conventional armed forces.”

Cato Beats Back Attempt to Stop Our Brief from Even Being Filed

It’s quite rare that a counsel denies Cato (or anyone) consent to file an amicus brief. That just forces us to file a perfunctory motion, thereby drawing more court attention to our brief than it otherwise would’ve received. Experienced lawyers know that there’s really no point objecting to these briefs; the court will itself reject any bizarre or disrespectful ones, and judges are free to disregard (or not even read) amicus briefs anyway.

In the case of Harte v. Board of Commissioners, however, counsel representing some (but not all) of the defendants in a civil suit made just such an objection. As you’ll recallHarte is the case where police officers are accused of using excessive force and pursing an unreasonable search for their military-style raid of a private home in Johnson County, Kansas. The evidence that led to the raid was that the Hartes had visited a gardening store and thrown out wet tea leaves that were misidentified as marijuana.

Cato thus moved for permission to file before the U.S. Court of Appeals for the Tenth Circuit, arguing simply that the case implicates the constitutional safeguards that exist to preserve person and property from unnecessary harms. Our brief advances unique and helpful arguments about Fourth Amendment common law and the systemic use of military-style raids by police. Had law enforcement in this case done routine police work, an armed raid need not to have taken place.

Counsel for Johnson County, perhaps seeing an opportunity to bill his clients for more (taxpayer-funded) hours, disagreed. To Lawrence L. Ferree III, our brief is “simply a lame attempt to morph this case into Cato’s libertarian mantra” on a case of “narrow issues.” Credit is due to Mr. Ferree for his rhetorical flare, but his arguments fall flat. 

Ferree tried to argue that our brief would not be helpful to the court because the search of the Harte’s residence wasn’t a “raid,” our brief is “boilerplate,” and that the case does not implicate Fourth Amendment common law. Well, it takes a certain degree of mental gymnastics to argue that a seven-person team armed with AR-15s, trained dogs, and a battering ram isn’t a raid team. It’s also curious that Ferree’s legal argument against our filing contained some of the exact same language he used to oppose the Marijuana Policy Project’s brief – “boilerplate” arguments, indeed.

Philly Pays $1.5 Million to “Ghost Teachers”

The Philadelphia school district is in a near-constant state of financial crisis. There are many factors contributing to this sorry state–particularly its governance structure–but it is compounded by fiscal mismanagement. One particularly egregious example is paying six-figure salaries to the tune of $1.5 million a year to “ghost teachers” that do not teach. Pennsylvania Watchdog explains:

As part of the contract with the School District of Philadelphia, the local teachers union is permitted to take up to 63 teachers out of the classroom to work full-time for the Philadelphia Federation of Teachers. The practice, known as “release time” or “official time,” allows public school teachers to leave the classroom and continue to earn a public salary, benefits, pension and seniority.

These so-called ghost teachers perform a variety of jobs for the PFT, serving as either information officers for other teachers or carrying out the union’s political agenda.

“Teachers should be paid to teach,” attorney Kara Sweigart, who is arguing ghost teacher lawsuits for the Fairness Center, a free legal service for employees who feel they’ve been wronged by their unions, told Watchdog.

“At a time when school districts are hurting financially, districts should be devoting every tax dollar to support students,” she said, “not to pay the salaries of employees of a private political organization.”

According to public salary data available through Philadelphia city agencies, the school district is paying 16 ghost teachers $1.5 million this year. All of them are making at least $81,000.

A Monetary Policy Primer, Part 2: The Demand for Money

Although there’s no such thing as a straightforward measure of the quantity of money in an economy, monetary policy is nonetheless about managing that quantity.  How ought it to be managed?  The (misleadingly) simple-sounding answer is: so that it neither falls short of nor exceeds the quantity of money demanded by the public.

So much for a summary of Part 1.  Now for the hard part: dealing with the many questions this summary raises.  How can a central bank manage a quantity without being certain just how to define, let alone measure, that quantity?  How is it possible for the quantity of money supplied to differ from the quantity demanded?  When those things do differ, how can one tell?  Finally, just what does “the demand for money” mean?

Uncle Sam the Middleman

The federal government funds hundreds of subsidy programs for state, local, and private activities, such as programs for housing and economic development. State and local governments, businesses, charities, and individuals could fund such local activities by themselves without federal aid. But America is increasingly kicking local activities up to the federal government, and so Uncle Sam the Middleman keeps growing.

How much does Uncle Sam the Middleman cost? As a rough estimate, the federal bureaucracy represents about 10 percent of the costs of the projects it gets involved in.

I described how U.S. Department of Agriculture (USDA) rural programs fund such activities as local broadband, clam fishing, energy projects, apartment construction, and street paving. USDA rural programs will cost federal taxpayers $6.5 billion in 2016. Most of the money will go to the people and businesses that are subsidized, but a portion will end up in the hands of federal bureaucrats.

The federal budget appendix shows that there are 5,000 workers in the USDA’s Rural Housing Service, Rural Utilities Services, and Rural Business Cooperative Service. Based on data in the appendix, they earn an average annual salary of about $73,000 and receive benefits of $25,000. They earn less than other federal workers, but still far more, on average, than private sector workers. Fun fact: these 50 rural program administrators earn an average annual salary of about $135,000.

All and all, workers in the three rural agencies impose an annual cost on taxpayers of about $490 million. But these folks need office space, telephones, travel expenses, and supplies to do their paperwork. Based on data in the appendix, that cost is roughly $38,000 per worker for the rural programs, or $190 million a year.

Thus, of the $6.5 billion taxpayer cost of the rural programs, roughly $680 million does not get to the broadband companies, the clam fisherman, and street paving contractors—it goes into the pockets of the federal middlemen.

Why is this important? Because politicians and federal program supporters often talk as if federal funding of local activities is a free boost to the economy. But it is not free for a lot of reasons. Most directly, federal programs are not free because Uncle Sam the Middleman carves off for itself about 10 percent of the money flowing through it.

The USDA rural programs spent $651,000 on an arts center in Bozeman. But about $65,000 would not have gotten to the arts center; it would have been consumed by the federal bureaucracy. Rather than raising the money locally, Bozeman citizens essentially filled in their 1040s, sent their income tax money to Washington, and then had to lobby federal officials to get some of it back for their arts center. Such roundabout financing of local projects makes no sense.

For more on the problems of America’s roundabout financing system, see here.