Conservatism Revealed

What does it say about the Republican Party when the leading fusionist conservative in the field - Mitt Romney, darling of National Review and erstwhile heir to Ronald Reagan - runs and wins a campaign arguing that the federal government is responsible for all of the ills facing the U.S. auto industry, that the taxpayer should pony up the corporate welfare checks going to Detroit and increase them by a factor of five, that the federal government can and should move heaven and earth to save “every job” at risk in this economy, and that economic recovery is best achieved by a sit-down involving auto industry CEOs, labor bosses, and government agents armed with Harvard MBAs to produce a well-coordinated strategic economic plan? That is, what explains the emergence of economic fascism (in a non-pejorative sense) in the Grand Old Party at the expense of free market capitalism?

I have no answer. But it certainly explains the increasing migration of libertarians voters to the Democratic Party. They may be no better, but at least the Dems offer libertarians something in social and foreign policy circles that the Republicans don’t.

Romney Revealed

Mitt Romney’s victory in Michigan’s Republican primary last night throws the GOP race for president wide open. But it should also end once and for all the idea that Romney is the heir to Reagan-style conservatism.

For some reason, Romney has been able to claim the Reagan mantle despite his support for:

  • A health care plan virtually indistinguishable for the one proposed by Hillary Clinton;
  • Support for No Child Left Behind, calls for increased federal education spending, and a proposal to have the federal government give a laptop computer to every schoolchild in America;
  • Calls for increased farm price supports;
  • Support for the Medicare prescription drug benefit; and
  • An undistinguished record on taxes and spending as Massachusetts governor, earning a C on Cato’s governor’s report card, and including support for $500 million in increased fees and corporate taxes.

But in Michigan, Romney pulled out all the big government stops with a call for $20 billion in corporate welfare to revive the state’s struggling auto industry. Romney, who called his proposal “a work-out, not a bail-out,” also promised that as president he would develop “a national policy to help automakers.”

George W. Bush once said, “When somebody hurts, government has got to move.” Mitt Romney echoes that, “A lot of Washington politicians are aware of it, aware of the pain, but they haven’t done anything about it. I will.”

Ronald Reagan must be spinning in his grave.

IMF Concludes Lower Tax Rates Can Yield More Tax Revenue

A new study from the International Monetary Fund looks at what happened in Russia after the 13 percent flat tax was implemented and concludes that there was a Laffer Curve effect. Indeed, the increase in taxable income was so large that it completely offset the impact of the lower tax rate. In other words, this was one of the rare cases of a tax cut “paying for itself” (in the vast majority of cases, lower tax rates generate revenue feedback, but the net result is still less money for government).

Interestingly, the study finds that the additional revenue materialized because people are more willing to obey the law when the tax rate is low, as theory would predict, but did not find an increase in labor supply, which theory also would predict This anomaly aside, it is still good news that the IMF recognizes that there is a Laffer Curve and that high tax rates are needlessly destructive:

Can tax rate cuts increase revenues?

…The Russian flat tax experiment is particularly interesting: after the introduction of flat taxes, and effective personal income tax rate cuts, tax revenues increased substantially and almost immediately. Furthermore, they increased much faster than labor supply and output. The paper explains how tax rate cuts can increase tax revenues through tax compliance spillovers in such a manner.

…This paper shows that endogenous tax compliance responses can be responsible for the massive increase in tax revenues. The key intuition is that tax regimes are prone to spillovers, as the aggregate behavior of taxpayers determines how much time the tax authority can dedicate to the individual taxpayer. In a way, tax evaders protect each other by tying down the tax authority’s limited capacity. Hence, small cuts in the tax rates can lead to much larger changes in the behavior of taxpayers — most importantly, it can make them much more likely to declare their incomes honestly. These spillovers can lead to increasing tax revenues.

…taxpayers evade less tax payments when the tax rate is lower… evasion increases with the tax rate.

…Three cases could be highlighted. First, countries with high official tax rates and relatively weaker tax authorities, such as some of the transition economies, might benefit from tax rate cuts and improving compliance. Second, the model might be also relevant for countries with high tax rates, even if tax enforcement seems to be strong in absolute terms. Third, low tax countries which have particularly weak tax enforcement could also think about improving tax compliance via tax rate cuts.

The Supreme Court Helps Out the Economy

Today the Supreme Court, in one of the most important securities law rulings in years, Stoneridge Investment Partners v. Scientific-Atlanta, decided that fraud claims are not allowed against third parties who did not directly mislead investors but were business partners with those who did. Investors, the Court said in a narrow 5-3 ruling (Justice Breyer took no part in the case), may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock – whether that involved public statements, omissions of key facts, manipulative trading, or other deceptive conduct. One impact of the decision is likely to be the end of a $40 billion lawsuit against financial institutions growing out of the Enron scandal.

Although this was the result expected by Court-watches, the split decision – along the usual “liberal/conservative” lines, with Justice Kennedy writing the opinion as he has tended to in such situations – was a bit of a surprise. The opposite result would have been disastrous for Wall Street, with massive ramifications on the economy as a whole. It would also have greatly expanded the court-created private right of action that is not expressly spelled out in the relevant securities laws. Ultimately, the Court’s ruling in Stoneridge wisely prevents an implied cause of action against the whole marketplace in which those who do directly mislead investors do business.

NATO’s New Troubles

The North Atlantic Treaty Organization is beginning to fracture. Its members have taken on burdens that have proved more difficult than expected, and increasingly, they are failing to meet the challenges confronting them. In “Cracks in the Foundation: NATO’s New Troubles,” Cato scholar Stanley Kober argues that the future of the alliance is unclear and the United States should begin discussions with our allies about what a post-NATO world would look like.

It’s Not My Fault They’re Kissing

My friend Blake Hounshell (he’s actually a friend, not “my friend” in the Washington sense) has a post up at FP Passport observing President Bush’s and Saudi dictator King Abdullah’s latest canoodling. In that post, Blake argues that

if you’re a gasoline-consuming American, you’re deeply complicit in this marriage, too. So laugh all you want at Bush, but he kisses Saudi cheek for thee—just as U.S. presidents have done for decades.

To which I would respond “baloney!” There’s nothing about the fact that we–or Europe, or China, or Japan–consume oil that mandates that we play kissy-poo with Abdullah or anybody else. There are a few theories why we would want to kiss up to the Saudis, and none of them hold water. The first is that the Saudis, who control 25% of the world’s proven oil reserves, make production decisions based on political relationships rather than economic considerations, and therefore when we kiss up to them, we increase the likelihood that they’ll make production decisions that are in our interests (and in contravention of their own). Like now, for example, the president is pleading that OPEC members increase production so as to tamp down the price of gasoline in the U.S.

As my colleague Jerry Taylor is wont to point out, however, “no amount of ‘get tough’ rhetoric or ‘pretty please’ diplomacy has ever affected OPEC production decisions, despite what American politicians would have you believe.” So that theory needs reworking.

There’s also the belief that we need to keep a close relationship with the Saudis to shore up our position in the region and resume the pursuit of our *ahem* traditional goal in the region of “promoting stability.” But this theory, too, leaves a lot to be desired. Our traditional posture in the Middle East has essentially amounted to a transfer payment from U.S. taxpayers to the Saudi Royal Family and the oil companies it runs. (Kuwait and the GCC countries, too.) Essentially we cover a substantial amount of the cost that it takes to defend these countries from prospective predators. But one has to ask “What would the Arabs do in the absence of an American security commitment?” 75% of the Saudi government’s revenue comes from oil. 45% of the country’s GDP comes from oil. Are we to assume that, absent a U.S. security commitment, the Saudi royal family is just going to cower in a defensive crouch and leave that money on the table for any rogue actor in the region to swoop in and take? Seems unlikely. The royal family seems much more interested in preserving itself and expanding its wealth than that.

To the contrary, it seems more likely that they would spend more, and get more serious about defending themselves from outside threats. Now, one could make the argument at this point that the Arabs in recent years have not proved themselves to be particularly formidable opponents on the battlefield, which is persuasive to a point. But even if, say, Iran made the remarkably rash move of launching a war against Saudi Arabia, Saudi’s defense budget dwarfs Iran’s and Saudi’s military technology is decades ahead of Iran’s. Even if they were to begin losing a conventional conflict against (hypothetically, again) Iran, standoff forces like long-range U.S. bombers could zoom in to restore the status quo ante without batting an eyelash.

So I’m left wondering why, exactly, it’s American gasoline consumers who are forcing U.S. presidents to suck up to Abdullah and the Saudi Royal Family. Any theories are hereby welcomed. In the meantime, please do give a read to Eugene Gholz’s and Daryl Press’s Policy Analysis titled “Energy Alarmism: The Myths that Make Americans Worry about Oil” for much more detail, and data that informed my arguments above.

Et Tu, City Journal? A Terrible Argument for Dismissing School Choice

In a forthcoming City Journal article, Manhattan Institute senior fellow Sol Stern suggests that school choice is failing to measure up, and that choice supporters need to find a “Plan B.” The New York Sun covers Stern’s essay here.

While Stern has done some excellent writing on education in the past, this particular piece is confused and at times factually incorrect. There are many other problems with Stern’s article, but it seems best to begin with the basic facts.

Before calling for a Plan B, one should be aware of the successes of Plan A.

Stern writes, “In 2002, after a decade of organizing by school choice activists, only two programs [for poor children] existed: one in Milwaukee, the other in Cleveland …” In fact, there were three programs that targeted disadvantaged students.

Florida’s voucher program was passed in 1999 and available to students in failing schools, which was used as a proxy or “poor children” (though it was later overturned by that state’s supreme court).

Stern then turns from this very specific accounting to a broad discussion of “proposals for voucher programs” and private school choice in general. But he fails to mention the other voucher programs passed and still in existence; special needs vouchers in Florida, Ohio, Utah, and Georgia and for foster-care children in Arizona.

And although Stern seems most interested in choice programs meant only for disadvantaged children, he fails to mention any of the many education tax credit programs passed in recent years. Five states – Arizona, Florida, Iowa, Pennsylvania, and Rhode Island – have donation tax credit programs. Nearly $150 million in scholarship funds support close to 100,000 low-income children. And that’s not counting the most recent business-donation programs in Arizona and Rhode Island, or Arizona’s personal-donation tax credit program which serves primarily low-income families.

Stern’s article is simply not an accurate reflection of the significant and accelerating legislative success school choice has seen in recent years.