September 6, 2011 4:36PM

If You Like Obama’s Economic Team, You’ll Love Romney’s…

Just when you thought Keynesian economics was finally dead among Republicans, Mitt Romney announces two prominent New Keynesian academics, Greg Mankiw and Glenn Hubbard, as the heart of his economic team.  So if you loved how Obama has managed to continue the flawed economics of the Bush administration*, you'll feel pretty safe with Romney. 

Sadly the real problem goes beyond Romney and Obama.  The financial crisis and the government's response to it illustrate the failure of much of mainstream macroeconomics.  Yes, the Romney team would have had its stimulus proposal tilted more toward temporary tax cuts, but it still would have made efforts at government fine-tuning of the economy.  In the grand scheme of things, there is not a dime's worth of difference between Mankiw, Bernanke, and Romer.

Romney's announcement does, however, give the other Republican candidates an opportunity to appoint someone outside the failed New Keynesian consensus that rules macroeconomics.

*In the interest of full disclosure: I spent 11 months with the Bush administration, leaving once I figured how there was no real commitment to free markets.

September 6, 2011 4:34PM

President Obama vs. the People on Smaller Government

Writers in the establishment media, such as E. J. Dionne Jr., Ezra Klein, and indeed two letters in today's Washington Post, keep insisting that President Obama is moderate or centrist, contrary to the claims of us hysterics who think that a trillion-dollar increase in annual spending, $4 trillion in new debt, a government takeover of two automobile companies, a complete government takeover of health care (which the president preferred but couldn't get out of Congress), and sweeping new financial regulation that doesn't reform the easy-money and housing-preference policies that caused the financial crisis is a pretty statist agenda.

But it looks like the American people see a big gap between the kind of government they want and the kind they think President Obama wants.

A new Washington Post-ABC News poll finds that

there has been little change in the widespread public perception that Obama favors a bigger federal government that offers more services.

That highlights a major disconnect between Obama and the public. Only 38 percent of those polled say they favor a larger government with more services, while 56 percent say they favor a smaller government with fewer services.

As depicted in this graphic:

Media Name: Smaller-Government.jpg

Voters understand that President Obama favors larger government. Duh. And they don't.

As I’ve noted previously, I’ve always thought the “smaller government” question is incomplete. It offers respondents a benefit of larger government — “more services” — but it doesn’t mention that the cost of “larger government with more services” is higher taxes. The question ought to give both the cost and the benefit for each option. The Rasmussen poll does ask the question that way, and found a week ago that voters preferred “smaller government with fewer services and lower taxes” by a margin of 62 to 28 percent.

I know some people are skeptical of Rasmussen’s polling. (A Republican consulting firm recently found results very similar to the Rasmussen poll.) So I invite Gallup, Harris, the New York Times, the Washington Post, and other pollsters to ask this more balanced question and see what results they get.

Meanwhile, only 38 percent of Americans want "larger government with more services," but 70 percent think President Obama does. There's a number that ought to worry Democratic strategists.

September 6, 2011 2:40PM

Spending in the Tax Code

The IRS made payments of $4.2 billion last year in refundable tax credits to illegal aliens, according to an audit by the Treasury’s Inspector General. “Refundable” tax credits are cash subsidies -- federal outlays -- given to people who don’t pay any income tax.

Even by Washington standards, flushing $4.2 billion down the drain in a single year is pretty impressive. And what’s weird in this case is that federal law is apparently ambiguous about whether or not these payments should have been made.

The larger problem here is that the overall cost of refundable tax subsidies has skyrocketed in recent years. The chart shows the outlay portions of the largest two refundable tax credits—the earned income tax credit (EITC) and the child tax credit (CTC). (This is fiscal year federal budget data).

Media Name: 201109_blog_edwards61.jpg

  • The EITC has grown in cost from $4.4 billion in 1990, to $26.1 billion in 2000, and to an estimated $44.9 billion in 2011.
  • The CTC was enacted in 1997, and then its cost rose from $0.8 billion in 2000 to an estimated $22.9 billion in 2011.

Note that the $4.2 billion paid to illegal aliens is not the only rip-off element of these refundable tax subsidies. For decades, auditors have been finding an enormous amount of errors and fraud in EITC payments. The IRS currently estimates that the error and fraud rate in the EITC is between 24 and 29 percent, or more than $10 billion a year in waste.

The CTC and EITC should be scrapped. The CTC started out as a Republican effort to distort the tax code in a socially conservative manner, and it has now morphed into a large welfare program. As for the EITC—any program that hands out one-quarter of its spending erroneously and fraudulently is grossly unfair to the taxpayers who are footing the bills.

September 6, 2011 12:45PM

This Month’s Cato Unbound: Brain, Belief, and Politics with Michael Shermer

In recent years, brain science has converged on a surprising framework to explain how we believe the things we believe. It appears that the origin of belief is emotive, rooted in things like group allegiance or the affinities we may have for certain patterns of moral values. Only later does our rationality speak up. "Motivated reasoning" is the term psychology gives this process, although a cynic might possibly be forgiven for calling it "bias."

Where does this leave our beliefs about politics? On the one hand, we may have some cause for despair, as our beliefs may not be as objectively justified as we like to imagine. On the other, the emerging science of mind may yield effective ways to correct our biases, or at least to understand their origins. If so, a new, more sophisticated political science may be in order, one rooted firmly in brain science.

This month's Cato Unbound features libertarian science writer Michael Shermer , who leads things off with a taste from his new book The Believing Brain: From Ghosts and Gods to Politics and Conspiracies---How We Construct Beliefs and Reinforce Them as Truths. He will be answered by Artificial Intelligence expert Eliezer Yudkowsky, perhaps best known for his work at the group blog LessWrong.com; Christian blogger and cultural critic Joe Carter of First Things and Evangelical Outpost; and Reason magazine's science columnist Ronald Bailey.

Discussion will continue through the month, so be sure to stop by often or subscribe to Cato Unbound via RSS.

September 6, 2011 11:54AM

Yes, the Department of Education Is Unconstitutional

Tina Korbe at HotAir had a mostly-great post on Michele Bachmann’s completely correct observation that the federal government is not authorized by the Constitution to muck about in education.

Specifically, Bachmann said, “[T]he Constitution does not specifically enumerate nor does it give to the federal government the role and duty to superintend over education that historically has been held by the parents and by local communities and by state governments.” Kudos to Bachmann for that. My colleague Neal McCluskey is the go-to guy on all of this, and explains it very succinctly in many places.

Korbe notes that Bachmann is right about the Constitution, but in an “update” at the end of her post, inexplicably adds:

Just wanted to clarify that Bachmann is “right about the Constitution” insofar as she says that the Constitution does not explicitly enumerate education as among the responsibilities of the federal government. I do not think the Ed Department is unconstitutional — but neither is it constitutionally mandated, leaving the people with the option of determining whether education is best directed at the federal or state level.

The Department of Education, along with so much else the federal government does, is unconstitutional. The only things that are constitutional for it to do are those things enumerated in the Constitution. Hence, if something is not listed there, it cannot do that something, period. That’s the whole point of enumerated powers.

Tina, I think a second “update” is in order!

Oh, and the feds have manifestly failed to achieve anything with their involvement over the decades.

September 6, 2011 8:17AM

Olbermann Mocks Obama ‘Jobs’ Plan; Try Blenders, Not More School Spending

Information about President Obama’s forthcoming “jobs” plan is so disappointing that even Keith Olbermann is mocking him.

And the saddest part has to be more spending on school infrastructure. As I pointed out last week, per-student spending on facilities has increased 150 percent over the last two decades, even after adjusting for inflation. And Andrew Coulson explained how public schools can spend so much and still have infrastructure problems: waste and incompetence.

But the president’s school construction plans are such a spectacularly sorry response to our Great Recession, Little Depression, malaise, what-have-you, that it deserves to be revisited with a pitch-perfect intro by Mr. Olbermann:


September 6, 2011 8:13AM

Are Tax Havens Moral or Immoral?

Being the world's self-appointed defender of so-called tax havens has led to some rather bizarre episodes.

For instance, the bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.

On a more amusing note, my efforts to defend tax havens made me the beneficiary of grade inflation and I was listed as the 244th most important person in the world of global  finance — even higher than George Soros and Paul Krugman.

But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policymakers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.

Sort of like convincing thieves that it's a good idea for houses to have alarm systems.

And it means I'm also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.

Here's a typical example. Paul Vallely has a column, entitled "There is no moral case for tax havens," in the UK-based Independent.

To determine whether tax havens are immoral, let's peruse Mr. Vallely's column. It begins with an attack on Ugland House in the Cayman Islands.

There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.

As I've already explained in a post about a certain senator from North Dakota, a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.

In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. President Obama, by the way, demagogued about Ugland House during the 2008 campaign.

Let's see what else Vallely has to say:

Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?

Actually, there are lots of people who have very compelling reasons to keep their money in havens, and only a tiny minority of them are escaping onerous tax burdens.What about:

  • Jews in North Africa and the Middle East?

  • Persecuted ethnic Chinese in Indonesia and the Philippines?

  • Political dissidents in places such as Russia and Venezuela?

  • Entrepreneurs in regimes such as Venezuela and Zimbabwe?

  • Families threatened by kidnapping failed states such as Mexico?

  • Homosexuals in homophobic regimes such as Iran?

As this video explains, there are billions of people around the world who are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.

And let's not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.

Vallely is apparently unaware of these practical, real-world concerns. Instead, he is content with sweeping proclamations:

The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice.

But if he is against unfairness, cheating, and injustice, why does he want to empower the institution — government — that is the largest source of oppression in the world?

To be fair, Vallely does attempt to address the other side of the argument.

Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth.

...Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.

He can't resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, Vallely offers no supporting data. Moreover, you won't be surprised to learn that the real-world evidence directly contradicts what he wrote: the most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.

Last but not least, the author addresses the issue that really motivates the left: the potential loss of access to other people's money, funds that they want the government to confiscate and redistribute.

Christian Aid reckons that tax dodging costs developing countries at least $160bn a year — far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. ...Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.

There are several problems with this passage, including Vallely's confusion of tax evasion with tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why add more fuel to the fire by giving politicians even more money to waste?

Consider some real-world evidence: The Wall Street Journal has an article on the Canton of Zug, Switzerland's tax haven within a tax haven. This hopefully won't surprise anyone, but low-tax policies have been very beneficial for Zug:

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug's history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them.

Here's some more evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn't the choice between growth and stagnation also a moral issue?

Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get.

...[B]usinesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies' efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn't belong) is 9.4%, Zug's is 1.9%.

It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.

Describing Zug's development as "astonishing," Matthias Michel, the head of the canton government, said, "We are too small for the success we have had."

...Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.

It's worth pointing out that the residents of Zug are not some sort of anomaly. The rest of Switzerland is filled with people who recognize the value of limited government:

[T]he Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.

Sadly, even though the world is filled with evidence that smaller government is good for prosperity (and even more evidence that big government is bad for growth), statism is not abating.

Indeed, the anti-tax haven campaign continues to gain steam. At a recent OECD meeting, high-tax nations (with the support of the Obama administration) put in place a bureaucratic monstrosity that is likely to become a world tax organization.

This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.

If that's a moral outcome, then I want to be amoral.

To conclude, here are two other videos on tax havens. This one looks at the economic issues:

And here's a video debunking some of the usual attacks on low-tax jurisdictions: