Will the UK Chase Away the Geese with the Golden Eggs?

Allister Heath has an excellent column in the Spectator explaining how Gordon Brown’s class-warfare policies will discourage successful foreigners from moving to the United Kingdom.

London will be hit particularly hard because the attack on “non-domiciled residents” will be augmented by higher capital gains taxes and policies to discourage British expatriates from spending too much time (and money) in the city.

But some people will benefit. Swiss realtors are probably delighted with Brown’s self-destructive proposals, since many highly-productive people will now be looking to relocate to tax-friendly jurisdictions:

[T]he Treasury now admits that 3,000 non-dom expats will leave Britain in April, when the changes, including a £30,000 annual poll tax, are due to kick in. This is a truly remarkable admission, of which far too little has been made. Given how hard all economies, including Britain, strive to attract high-net-worth investors and the highly skilled these days, it is difficult to fathom why any government in its right mind would wish suddenly to begin penalising those it has sought to woo for so long. What is most absurd about this is that the Treasury readily acknowledges, in the very same document laying out its tax hike plans, that ‘in an increasingly globalised economy it is crucial for the UK’s competitiveness that the UK continues to attract international talent to this country’.

…[T]he assault on the non-doms is going hand in hand with a hike in capital gains tax, a rise in corporation tax on small companies, and a crackdown on the 29,000 non-residents who commute most weeks from Monaco or the Isle of Man. All of these changes add up to a simple message to the skilled, hard-working and above all footloose international talent to which today’s Britain owes so much of its success: don’t bother coming here, we don’t value you any longer.

…Tax lawyers are starting to warn their clients seeking to relocate to Britain that the current volley of tax hikes is likely to be merely the thin edge of a much more punitive wedge. Brown’s attack on the non-doms could easily become Brown’s very own Sarbanes-Oxley, the ultra-onerous piece of post-Enron legislation in America which chased away hundreds of companies to more welcoming shores. But what is most distressing to non-doms currently based in the City, and to many of those considering moving here, is that the Tories support an almost identical policy.

Keeping up Appearances in Higher Education

Over the last few days there’s been quite a to-do about colleges and universities with endowments that, in the case of wealth-leading Harvard, could buy almost eight aircraft carriers, nearly 1.7 million Toyota Priuses, or about 87 million 16GB iPod Touches. Just yesterday, in fact, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) sent a letter to the 136 top colleges and universities on the latest endowment ranking asking what, exactly, all their booty was going to, and why it wasn’t being used to keep tuition down.

Grassley especially has been on a crusade over the last year-or-so to cajole wealthy institutions of higher education into keeping tuition down by spending from their endowments. If they don’t, he has threatened, federal law might be changed so that they have to spend 5 percent of their endowments annually to keep them tax exempt.

While it is absolutely legitimate to argue that government shouldn’t give preferential treatment to wealth hoarders, this is political grandstanding. Politicians use higher education as one of their greatest sources of middle-class bribery, and all the aid they lavish on students is almost certainly a much greater tuition inflator than tight-fisted endowment managers. Moreover, while Harvard has a ton of money, very few of the nation’s over four-thousand degree-granting institutions have even close to the kingly Crimson sum: only 19 have sufficiently hefty endowments to buy even one aircraft carrier, only 76 have endowments exceeding $1 billion, and most have either small endowments or none at all.

Interestingly, at almost the same time the annual endowment ranking came out, an article was published in Change magazine that gives the lie to one of the biggest justifications offered for throwing public money at students and schools: to survive in the flat world, almost everyone will need a college education. The final report from the Secretary of Education’s Commission on the Future of Higher Education put it right up front, declaring that, “ninety percent of the fastest-growing jobs in the new knowledge-driven economy will require some postsecondary education” and therefore “colleges and universities must continue to be the major route for new generations of Americans to achieve social mobility.”

According to Paul Barton, an analyst at, of all places, the SAT-producing Educational Testing Service, the notion that we’ll need vastly more college-educated people to fill the future workforce is pretty much bunk. He breaks down many workforce projections to make his point, and you should read his whole piece, but I’ll give you just one glimpse of why you shouldn’t take a politicized statistic like the one trumpeted by the higher education commission and make policy based on it:

Looking…at the 10 occupations with the fastest or highest rate of growth, six of the 10 require either an associate’s or a bachelor’s degree; the other four require from short-term to moderate-term on-the-job training. But looking at the projected increase in the number of jobs in the 10 fastest-growing occupations, 61 percent of those new jobs will not require college and 39 percent will. 

Even among the fastest growing jobs, it turns out, most positions won’t require any college education, which means that policymakers are wasting a lot of resources shoveling money into student aid and creating cozy conditions for colleges on the grounds that they need to ensure that more and more people can afford a college education. Don’t expect, though, to hear about that from any senators, colleges, or students. After all, like normal human beings, it’s not really what’s best for the country that they’re after, but what’s best for themselves.

Stimulus: Kindergarten Keynesianism

It is very curious that some top economists are pushing the Bush/Pelosi $100 billion stimulus giveaway.

  • For years, these same economists told us that more savings is good for the economy. Now they are saying that more consumption is good.
  • For years, these same economists have lambasted the budget deficit. Now, they support blowing a new $100 billion hole in the federal budget.
  • Finally, many economists have long complained that Americans are shopoholics and have far too much credit card debt. Now stimulus-supporting economists are demanding that Americans spend, spend, spend!

It is surprising that anyone takes economists seriously anymore.

Anyway, stimulus proponents say that mailing $100 billion of cash to families will cause the nation’s output to grow. Yet this simple Keynesian chart illustrates that the result will be higher prices, not more output.

The stimulus causes the aggregate demand curve to shift to the right, as proponents suggest. That moves us along the aggregate supply curve, which I believe should be drawn vertically in this case. The result is that prices jump up from P1 to P2, but output does not rise.

Stimulus proponents would argue that the aggregate supply curve should be sloped, at least in the short run. In that case, the figure would show a temporary bump upwards in output.

But that seems unlikely to me. Keynesian theories about why output might increase usually rely on imperfections in markets or information. Producers get fooled into increasing their output for a while, before the errors are worked out and output falls back to its long-term level.

But that wouldn’t seem to be the case here. Let’s say the rebate checks get mailed out in May and June. A U.S. cigarette producer may notice a slight uptick in sales in those months as smokers spend their government checks. But cigarette producers probably watch the news and they will know that this is just a temporary blip. As such, they won’t add any new workers or buy any new machines.

So output would stay pretty fixed, while prices would adjust upward slightly to clear markets. But I don’t claim to be a Keynesian expert, so if one of our Keynesian readers wants to tell me where I’m wrong, I’d be happy to hear it. Until then, I remain convinced that the Bush/Pelosi scheme is crack-pot.

Shaken, Not Served?

As Jacob Grier notes, the Washington Post ran an excellent article highlighting a silly Virginia law that bans sangria. The law does not specifically outlaw sangria, but states that restaurants cannot serve beverages in which spirits are added to beer or wine. Sangria is a traditional Spanish beverage that runs afoul of the law because it is typically made from red wine and brandy. A restaurant in Northern Virginia is currently facing a $2,000 fine for violating the law.

As the article indicates, the law has broader implications

It’s not just sangria. Other popular drinks are also off-limits, including kir royals, which are made with sparkling wine, and boilermakers, which include beer and a shot of liquor.

This invites a question: does the law also make martinis illegal? Martinis are a mixture of gin or vodka and dry vermouth, which is a blend of fortified wine and herbs. Can a bartender in Virginia add fortified wine to spirits? The text of the law says you cannot “sell wine to which spirits or alcohol, or both, have been added,” but does not clarify if it is illegal to add wine to spirits.

Regardless of the legal implications for martinis, Manhattans, and other cocktails with vermouth, this is a silly and unnecessary law. Unfortunately this is just the tip of the iceberg, as many other states still have outdated, Prohibition-era laws on their books. The U.S. is riddled with ridiculous state liquor laws that impose restrictions on the size of beer bottles, the number of ounces of spirits allowed in a particular beverage, and the percentage of alcohol in beer, just to name a few. These attempts to reduce alcohol consumption are misguided and often counterproductive. State governments should get out of the nanny business and allow responsible adults to enjoy the alcoholic beverage of their choosing.

Stimulus Package Is Welfare, Not Tax Cuts

The Bush administration’s propaganda sheet on the ridiculous stimulus package claims that it includes $100 billion in individual “tax rebates” or “tax relief.” The sheet goes on to claim that the relief is “not federal spending that would have little impact on the economy.”

In fact, the $100 billion is simply extra spending; it is a giant one-time welfare program. To pay for it, the government will borrow an added $100 billion, which will impose $100 billion of higher taxes on future generations.

Suppose there was a Democrat in the White House and she proposed $100 billion in cash hand-outs to families. She could structure it exactly the same way as Bush has, but call it a “Family Food and Health Care Supplement.” The minority GOP would probably denounce it strongly as wasteful welfare, which it would be.

But, as we have seen dozens of times since 2001, because the political operators in the White House call themselves Republicans and conservatives, many members of the Republican party appear to be going along with this nonsense.

The $50 billion business tax relief (capital expensing) is a little different. As a temporary break, it makes no sense. If businesses just pull some of their 2009 investment into 2008 to get the break, it just means we’ll have an investment slump next year. All we will have done is, once again, screw around with corporate business plans instead of making permanent reforms to help companies compete in the global economy. 

I’m a supporter of making capital expensing a permanent part of tax law. But enacting expensing temporarily, as we did a few years ago, just makes politicians think of it as a gimmick to be enacted every two years before an election.       

Background on Mortgage Markets

I asked colleague Alan Reynolds a question about mortgages today, and he replied with what I think are some useful points that usually don’t appear in the crisis-obsessed media. Here are what Alan believes are the rough stylized facts:

  • Most foreclosures are prime, not subprime.
  • Half of subprime mortgages are fixed, not ARMs.
  • The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
  • About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
  • The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
  • Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
  • Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud – lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
  • Very few subprime borrowers qualified for the lowest teaser rates – most paid about 7% or so from the start, so far as I can tell.
  • The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.

Finally, Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”