Korean Tax-Cutter Wins

The corporate tax-cutting revolution may take another step forward with the election of Lee Myung-bak to the South Korean presidency.

Lee has promised to cut the country’s federal corporate tax rate from 25 to 20 percent.

Lee seems to have a very pro-market perspective on fiscal economics: “The ratio of taxation against national income was 17.9 percent under former President Kim Young-sam’s administration, but it increased to 20 percent under the incumbent administration, which almost stops the economy from growing.”

America’s tax ratio is closing in on 19 percent of GDP and our federal corporate tax rate at 35 percent will be 75 percent higher than Korea’s.

The Man with the Plan

The Russian government’s monthly propaganda insert in the Washington Post includes this headline today:

The Man with the Plan/President Putin Has Got the Nation’s Future Mapped Out

It reminded me of an article I wrote a few years ago with the same title, “The Man with the Plan.” (In Liberty, July 1996, or you can read it in my forthcoming book The Politics of Freedom.) I was writing about Clinton adviser Ira Magaziner, whose various planning schemes, while scary, are certainly not as bad as the ones that have been tried in Russia over the past century. Though this idea, expressed by presidential candidate Bill Clinton on the campaign trail in 1992, might come close:

We ought to begin by doing something simple. We ought to say right now, we ought to have a national inventory of the capacity of … every manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.

We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next twenty years and then we have to decide how to get from there to there. From what we have to what we need to do.

Five-year plans not having planned out so well, Clinton and Magaziner decided the problem was their short-term focus. Whether Bill or Hillary, Putin or Magaziner, when I hear the phrase “the man (or woman) with the plan,” I think of Adam Smith:

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

A Moment of Idiocy, of Real Idiocy

The above title is the correct assessment of the new energy bill that President Bush just signed into law less than 24 hrs after the House approved it by a 314–100 margin. House Speaker Nancy Pelosi, speaking just prior to yesterday’s vote, gave the politicians’ assessment: “You are present at a moment of change, of real change.”

Of course, it’s not that much of a change for politicians to substitute their collective judgment for the private decisions of consumers who have strong incentives (stronger than politicians!) to make the most efficient choices. Still, the new energy bill — assuming Congress sticks to it — will make some changes:

  • The incandescent light will be phased out of existence beginning in 2012.
  • Average fuel economy for new vehicles will move from the current 25.0 MPG to 35.0 by 2020 — a standard that only the Toyota Prius and Honda Civic hybrids currently meet.
  • New government mandates and subsidies will push the domestic ethanol industry to some 36 billion gallons in sales by 2020. (This will actually lessen fuel efficiency because ethanol gets considerably worse mileage than gasoline.)
  • The move to more biofuels will continue to increase food prices as farmland is reallocated to the production of energy stocks.

All this leads to one question: Why are these mandates necessary? If the changes are as sensible as Congress and the White House claim, consumers would make them privately. Indeed, the data indicate that consumer preference for fuel-efficient cars is stronger than what the economics would justify.

So then, what is this energy bill really all about?

ADDENDUM:  Beth Douglas Kelly, a mechanical engineer who specializes in energy R&D, emailed me about a bit of sloppiness in my parenthetical that ethanol gets worse gas mileage than gasoline. My statement is correct but, she points out, it’s not that important — it simply means that a certain volume of gasoline gets you farther than the same volume of ethanol. That fact bypasses the important questions of gasoline’s and ethanol’s costs (understood in a broad sense).

Here are the important comparisons:

  • What is the cost per mile for gasoline vs. ethanol? (Currently, gasoline still beats ethanol when you take into account the loss of gas mileage.)
  • What are the environmental externalities of gasoline and ethanol? (Here, ethanol seems to be better but there’s still some argument.)
  • What are the other externalities of gasoline use vs. ethanol use?
  • Will consumers ever be made to bear (and thus judge between) those costs, or will politicians continue to hide them?

Unfunded State Health Costs: Still $1.4 Trillion

The New York Times and Washington Post report today on a new study by the Pew Center on the States regarding unfunded state and local pension and health costs for retirees.

Let’s just look at the health costs. Pew finds that state governments have promised their workers $370 billion of retiree health care that they have not put money aside for. Unless those benefits are cut, that figure represents the looming hit on future taxpayers.

But Pew only looks at state governments, which employ 4.3 million people, according to Census data. Local governments employ 11.8 million people. If the local health care problem is as big as the state problem, the total state/local unfunded amount would be $1.4 trillion.

Interestingly, that is precisely the figure that Jagadeesh Gokhale and I came up with when we looked at this problem last year. We estimated that state and local governments have racked up about $1.4 trillion in unfunded retiree health costs.

Our study and the Pew study highlight two fundamental problems. First, governments have been irresponsible in making huge promises to workers regarding future benefits, but then not funding them as private benefit plans would.

Second, “public sector employees are far more likely to receive retirement benefits [than private sector employees] and the gulf between private and public sectors continues to grow,” according to Pew. For example, 82 percent of government workers receive retiree health benefits, compared to just 33 percent of private sector workers.

The solution is to cut back sharply on the gold-plated benefits received by government workers, while privatizing as many state and local activities as possible.

Prior posts: here, here, and here.

The Democrats’ Distorted Take on trade and the 1990s

The debate among the Democratic presidential candidates has become stuck in the past. When they are not debating the alleged shortcomings of the 15-year-old North American Free Trade Agreement, they have been sparring over the economic record of the 1990s.

Not surprisingly, front-runner Hillary Clinton touts the economic success of the previous decade, when her husband Bill Clinton was president and she was exercising influence down the hall in the West Wing.

“Sometimes an opponent of mine [read Barack Obama] says we talk about the 1990s too much,” Clinton said recently on the campaign trail, according to this morning’s Financial Times. “That is because in the 1990s we had the greatest economic performance in decades. I like to talk about what works because I want to get back to doing what works.”

Yet candidate Clinton and her fellow Democratic candidates also routinely trash NAFTA, which the former President Clinton shepherded through a Democratic Congress in 1993. They blame the trade agreement with Canada and Mexico for costing the U.S. economy million of manufacturing jobs.

So what was the real record of the 1990s? Was it a time of unprecedented growth and prosperity presided over by a generally pro-trade, Democratic president? Or was it a time of stagnation and job losses caused by a trade agreement that now, according to Hillary Clinton, must be reopened and revised?

The right answer is that the 1990s were a good time for the U.S. economy, and expanding trade and globalization—including NAFTA— were among of the reasons.

As I noted in a recent study for Cato, titled “Trading Up,” the economic record of the U.S. economy during the past decade, including the late 1990s, offers yet another reason to support further trade liberalization:

Rising real wages and compensation during the past decade pose a serious challenge to the “trade is making us worse off” thesis. If we are to believe that expanding trade and competition with low-wage countries have eliminated high-laying manufacturing jobs and depressed the earnings of U.S. workers, how do the critics of trade explain the remarkable labor-market gains of the past decade? Since 1997, during a period of rapidly increased trade and globalization, the number of workers employed in the U.S. economy jumped by more than 16 million, while the unemployment rate is now slightly below what it was a decade ago at a similar stage in the business cycle. And those employed workers, as we’ve seen, are earning significantly higher real hourly compensation than workers a decade ago when the U.S. economy was less globalized. That record is not an indictment of more liberal trade but a vindication.

What works is a more open, efficient and competitive U.S. market.

DHS: And We Even Obey the Law!

The Department of Homeland Security’s Officer for Civil Rights & Civil Liberties, Daniel W. Sutherland, explains here the great pains DHS is taking … well, not to embarrass itself as American Muslims return from the Hajj. Well and good.

But he goes a little far in touting the department’s efforts: “For the first time in the federal government, a Cabinet-level Secretary has placed two civil libertarians in senior leadership positions – Hugo Teufel, our Chief Privacy Officer, and me.”

The Officer for Civil Rights and Civil Liberties and the Privacy Officer are statutory positions. I’m not sure self-congratulation is in order for following the law.

Defeat Terrorism

Terrorism is a strategy used by the weak to goad the strong into self-injurious overreaction.

DownsizeDC has a campaign underway that I think is critical to defeating terrorism. It’s described on their site this way: “We’re looking for a few brave Americans to start a real war on terror — by not being afraid!”

The “I am Not Afraid” campaign is not about passing or killing any legislation. It is just to get Washington, D.C.’s consistent overreaction to the threat of terrorism under control. The sense of proportion this campaign seeks to create really makes it worth a visit, but here’s a taste:

Nearly 800,000 people have died in car accidents in the last twenty years. During that time there have been exactly two Islamic terrorist attacks on U.S. soil, with less than 3,000 total fatalities. That’s more than 200 TIMES as many Americans dying in their cars as at the hands of Islamic terrorism. And yet …We’ve turned the whole world upside down in response to the two terrorist attacks. We’ve launched invasions, created vast new bureaucracies, shredded the Bill of Rights, compounded regulations, spent hundreds of billions of dollars, and disrupted travel and commerce. But no one is suggesting that we do 200 times as much to address the driving risk, which is 200 times greater.

Terror warriors, keep your straw men in the barn. This is not a pacifist, terrorism-denial campaign. It seeks proportional responses to threats, and acceptance of harms that cannot reasonably be prevented. The message to legislators:

“I am not afraid of terrorism, and I want you to stop being afraid on my behalf. Please start scaling back the official government war on terror. Please replace it with a smaller, more focused anti-terrorist police effort in keeping with the rule of law. Please stop overreacting. I understand that it will not be possible to stop all terrorist acts. I accept that. I am not afraid.”

This is good, important work to defeat terrorism.