Archives: 07/2012

On Death Tax, the U.S. Is Worse than Greece, Worse than France, and Even Worse than Venezuela

Considering that every economic theory agrees that living standards and worker compensation are closely correlated with the amount of capital in an economy (this picture is a compelling illustration of the relationship), one would think that politicians - particularly those who say they want to improve wages - would be very anxious not to create tax penalties on saving and investment.

Yet the United States imposes very harsh tax burdens on capital formation, largely thanks to multiple layers of tax on income that is saved and invested.

But we compound the damage with very high tax rates, including the highest corporate tax burden in the developed world.

And the double taxation of dividends and capital gains is nearly the worst in the world (and will get even worse if Obama’s class-warfare proposals are approved).

To make matters worse, the United States also has one of the most onerous death taxes in the world. As you can see from this chart prepared by the Joint Economic Committee, it is more punitive than places such as Greece, France, and Venezuela.

Who would have ever thought that Russia would have the correct death tax rate, while the United States would have one of the world’s worst systems?

Fortunately, not all U.S. tax policies are this bad. Our taxation of labor income is generally not as bad as other industrialized nations. And the burden of government spending in the United States tends to be lower than European nations (though both Bush and Obama have undermined that advantage).

And if you look at broad measures of economic freedom, America tends to be in - or near - the top 10 (though that’s more a reflection of how bad other nations are).

But these mitigating factors don’t change the fact that the U.S. needlessly punishes saving and investment, and workers are the biggest victims. So let’s junk the internal revenue code and adopt a simple and fair flat tax.

Did Glass-Steagall Put a Man on the Moon?

I have to admit I have yet to view an entire episode of Aaron Sorkin’s The Newsroom, as I find a sufficient amount of fiction on the real news.  As Cato scholar Trevor Burrus recently illustrated, the show plays pretty loose with the facts, completely distorting the substance of Citizens United.

The show’s recent explanation of the Glass-Steagall Act, which separated investment and commercial banking, is actually a fairly accurate portrayal of the religious-like devotion expressed by proponents of Glass-Steagall. During the short segment, which you can view here, we are led to believe that the Glass-Steagall Act led to “60 years of increasing middle class wealth”, as well as helping the United States win World War II and put a man on the moon. Setting aside the fact that the 10 years immediately following the passage of Glass-Steagall were pretty lousy by any standard and witnessed hundreds of bank failures, the notion that if we simply brought back Glass-Steagall everything would be fine ignores lots of facts and questions.

First let’s start with the obvious: Bear Stearns, Lehman Brothers, Goldman Sachs, and Merrill Lynch were all stand-alone investment banks.  They didn’t take deposits.  And of course, Fannie and Freddie weren’t even banks.  I have yet to hear a good explanation of how Glass-Steagall would have prevented trouble at these institutions. And those banks that did combine investment and commercial activities, like Wachovia, WaMu, and Citibank, got into trouble because of their mortgage portfolios.

That brings us to the bizarre implicit assumption behind Glass-Steagall: that somehow commercial banking is risk free.  Anyone ever hear of the savings-and-loan crisis of the late 1980s and early 1990s?  No investment banking angle there.  How about the 400+ small and medium banks that failed in the recent crisis? According to the FDIC, not one of them was brought down by proprietary trading.

The proponents of Glass-Steagall also ignore one of the basic rules of finance:  diversification generally reduces risk.  Given that both commercial and investment banking entail risk, if we want to reduce risk to the federal safety net, then I would suggest that the best approach would be to scale back that safety net. The best way to end bailouts is simply to just stop doing them.

If you are looking to why we had relatively stable banking and economic outcomes from around 1950 to 1970, I suggest you consider we had relatively sound monetary policy.  Both your banking system and your economy are only going to be as sound as your monetary policy.  To quote Christina and David Romer, “In the 1950s, policymakers had a sensible view of potential output and a model of the economy in which inflation certainly did not lower long-run unemployment and quite possibly raised it.”  Getting back to that “sensible view” of monetary policy would go a long way toward improving the economy and avoiding financial crises.

The Obama Girls’ Health Care Choices

According to the White House, President Obama recently told a crowd of supporters:

Mr. Romney wants to get rid of funding for Planned Parenthood.  I think that is a bad idea.  I’ve got two daughters. I want them to control their own health care choices.

Umm, yeah. Two things about that.

One, if—as President Obama wills it—the president of the United States gets to determine Planned Parenthood’s funding levels, then his daughters do not control their health care choices.

Two, it hardly seems that Obama’s daughters—these children of The One Percent—have even the most plausible claim that low-income Americans should be forced to pay for their … eventual … services that Planned Parenthood provides.

Ranting Against Big Government—But Voting for It

Drudge is currently linking to a Brietbart TV video titled “‘USA! USA!’ Congressman’s Anti-Big Government Rant Gets Standing Ovation on House Floor.” In it, Rep. Mike Kelly (R-Pa.) unleashes an oratorical blast against the stifling regulatory regime in Washington. It’s good stuff, but, unfortunately, Rep. Kelly’s anti-big government credentials are questionable.

The Pennsylvania freshman Republican is a member of the so-called “Tea Party Class.” His campaign website says the following:

America needs to have a business conversation. Along with many of his colleagues in the 2010 freshman class, Rep. Kelly has played a role in changing the debate from “How much do we grow government” to “How much do we shrink government.” If nothing else is accomplished in the 112th Congress, both sides of the aisle are now acknowledging that we cannot continue to bankrupt the future for our children and grandchildren. Mike has supported, voted for and co-sponsored a number of pieces of legislation that aim to reduce the size and scope of government. As long as he is serving the 3rd Congressional District, Mike will continue to be an unwavering voice for fiscal responsibility in Washington.

I’ve been trying to keep an eye on how the Republican freshmen are voting on bills and amendments to eliminate (or reauthorize) big government programs. On six recent votes, Kelly voted for big government every time:

  • He voted against an amendment that would have terminated the Economic Development Administration.
  • He voted against an amendment that would have defunded the Advanced Manufacturing Technology Consortia program, a new corporate welfare program requested by the Obama administration.
  • He voted to reauthorize the Export-Import Bank.
  • He voted against an amendment that would have terminated the Essential Air Service subsidy program.
  • He voted against an amendment that would have shut down the Department of Energy’s Title 17 loan guarantee program—the program that gave birth to Solyndra.
  • He voted against an amendment that would have terminated the Community Development Block Grant program.

So much for voting to “reduce the size and scope of government.”

Will Congress extend the ‘TAG’ Bank Bailout?

Looking back on the events of 2007-9, it’s easy to lose track of the various assistance programs instituted by our financial regulators.

For instance, there were at least 14 different Federal Reserve programs created.  A lot of criticisms can be leveled against those programs, but at least they had some basis in law.  The Federal Deposit Insurance Corporation, by constrast, created a couple of programs out of thin air, without any statutory authority.

One of those was the Transaction Account Guarantee (TAG) program.  Under TAG, the usual cap on per-account deposit insurance (currently $250,000) is lifted if the account pays no interest.  In today’s interest rate environment, it’s not hard for banks to offer zero-interest deposit accounts.

By the end of the first quarter of 2012, the TAG program backed over $1.5 trillion in deposits, accounting for much of the increase in insured U.S. deposits, from just under $5 trillion in Q1 2009 to over $7 trillion Q1 2012.  Most of the program is concentrated in the largest banks.  The 19 largest banks, each with assets in excess of $100 billion, hold two-thirds of TAG deposits, more than the remaining 7,288 U.S. banks combined.  Perhaps even more shocking is that the average TAG account is for over $2 million.

Maybe it’s just the circles I travel in, but I don’t know anyone with over $2 million in bank deposits.  This is a massive handout to the banks, businesses, and wealthy individuals.  Given that there are actual systems of private deposit insurance in the United States (for one example, see here), TAG is not only a government giveaway, but an unnecessary one at that.

Instead of letting the program expire (or better yet, punishing the FDIC for its illegal behavior), Section 343 of the Dodd-Frank Act extends TAG until January 1, 2013.  But as the Federal Reserve Bank of St. Louis points out out, “The TAG program has lost money because current premiums have not covered the losses the FDIC has incurred when a bank fails and the agency has to pay out deposits in excess of the $250,000 coverage limit.”

Despite the losses, the banking industry is lobbying for the extension of TAG.  If we are ever to restore market discipline to the banking industry and end the bailouts, Congress would be wise to let TAG expire.

Olympic Myths, Ancient and Modern

The Olympics are starting, which means that alongside the parade of athletes, we face a parade of grandees trying to use the Games for their own purposes.  The International Olympic Committee thinks that this multi-billion-dollar sports spectacle is really some sort of movement for world peace, while domestic politicians see the Olympics as a canvas on which to project their views on economics, international trade, environmental policy, and anything else they can dream up.

They’re all full of it.  As I explain in the Huffington Post,

The ancient reality could not have been further from these modern misconceptions, as Greek armies routinely violated the Olympic truce, sometimes battling in the Olympic sanctuary itself. Individual achievement was valued much more than participation, and wealth superceded ideology.

Pindar, the lyric poet whose odes tell us much of what we know about the early Olympians, wrote at the behest and patronage of wealthy athletes, who sought personal glory rather than the vindication of their city-state and its political system. The great champion Alcibiades used his prestige to gain fame and riches, often at the expense of “national interest.”  … .

Under today’s conditions of globalization – cultural homogenization, economic interdependence, decline of the nation-state even with respect to our enemies in war – international athletic competition assumes an ever-more parallel course to that of the world at large. As with all sporting events, the Olympics of the past two decades have become exponentially more entertainment-oriented. Even the proliferation of crass commercialism is a positive step because it returns the Olympics to the role they fulfill best: providing a forum for the globe’s finest athletes to show the rest of us a good time.

The Olympics now bring us the absolute best, without regard to color, creed, contract, or the Iron Curtain. The nature of the Olympic “movement,” meanwhile, has returned to the entertainment, ritual, and indeed athletic value of the original Games.

Ira Stoll makes a similar point at Reason.

Which isn’t to say that the Olympics are no good – I love them so much that I wrote my master’s thesis on their post-Cold War transformation – but that in enjoying them you shouldn’t read in anything other than that you’re watching the best athletes in the world show their stuff.

Let the Games begin!

Talking about ‘Trade-offs’ between Liberty and Security Begs the Question

Over at the New York Times, reporter Scott Shane announces the beginning of a running dialogue about how to strike “the proper balance between liberty and security” more than a decade after the terror attacks of 9/11.  I want to suggest, however, that framing the question the way Shane does, in terms of optimizing the “trade-off” between these competing values, begs the crucial question: Has there been a trade-off? Have all the billions of dollars and intrusive new surveillance powers granted our intelligence agencies in recent years actually made us any safer? Shane presents the choice we face in a way that simply assumes, without argument, that they have:

The next president might reach one of two very different conclusions: to continue its record of success, the government should keep doing everything it is doing, and Americans should accept that the trade-offs of the national security state are permanent. Or: the terrorism emergency that began with 9/11 has eased, the threat has diminished, so the security bureaucracy should shrink accordingly and the pendulum should swing back in favor of civil liberties and individual privacy.

But surely there’s a third possible conclusion—and one with the virtue of being far better supported by the available evidence: That much of the expansion of the national security state has not involved any “trade-off” at all because it has not meaningfully increased our security; that the absence of major terror attacks since 9/11 is not remotely the same thing as a “record of success” for the “security bureaucracy,” and that to the extent a genuine “record of success” does exist, it has very little to do with the most controversial and prominent “War on Terror” measures.

As my colleague John Mueller observes, there has been essentially no serious effort to do any serious cost benefit analysis of the costly security measures imposed since 2001—probably in part because it seems so obvious that most would fail any such test. The mere fact that we haven’t seen a repeat of 9/11 hardly tells us much: We hadn’t had one in the decades before we started inflating the powers and budgets of the intelligence agencies either. Inferring a causal relationship from the absence of an already rare phenomenon is pure magical thinking—the national security equivalent of trumpeting the lack of volcano eruptions since the last virgin sacrifice.  Moreover, there have been multiple attacks over the past decade that the newly expanded security bureaucracy clearly failed to detect or preempt. The NSA’s vast surveillance apparatus didn’t stop shoe bomber Richard Reid or undie bomber Umar Farouk Abdulmutallab: Alert passengers did that. Attempted Times Square bomber Faisal Shazahd was foiled by his own incompetence and an alert street vendor.

Of course, our intelligence agencies have had concrete counterterrorism successes, but that in itself doesn’t tell us anything about the causes of those successes. If, as the saying goes, “everything changed” after 9/11,  we need to know which changes contributed to those successes and which didn’t. There little evidence that the intelligence failures leading up to the 2001 attacks were fundamentally about insufficient power or resources. Rather, as intelligence scholar Amy Zegart has convincingly argued, they were the result of organizational and cultural problems within the agencies which had been identified again and again and again over the years by expert panels and blue ribbon reports whose reform recommendations somehow never wound up getting implemented. To the extent some of those problems finally started to be addressed after 9/11, it would be a much more plausible explanation of any subsequent performance improvements.

What about the government’s own claims that some of these radical new surveillance powers have been vital, life-saving intelligence tools? That would support the “trade-off” thesis, but since it’s bad politics to announce that you’ve violated people’s rights frivolously, we should want to check those claims against some independent analysis. In the case of the warrantless surveillance program authorized by President Bush—predecessor to the programmatic surveillance now conducted under FISA’s section 702—we’ve actually got just that: An unclassified report by the Inspectors General of the intelligence community. And what did they find? A lot of officials making vague statements to the effect that the program was “one useful tool in the toolbox,” but not much in the way of concrete achievements—plots foiled or terrorists captured—that could be attributed to the program we’d been told for years was absolutely critical. Instead—as Scott Shane’s own reporting had told us!—it seems to have wasted the time of a lot of FBI agents chasing down all the dead-end leads it generated.

Approaching it from the other direction, we can look at the known cases of people charged with terror-related crimes. Do we find a string of plots foiled thanks to sophisticated surveillance methods that would have been unavailable under pre-2001 laws? We do not. Mostly we find human intelligence and tips from alert members of the community playing the critical role.

Benjamin Franklin’s wise aphorism notwithstanding, there are cases where we do face genuine trade-offs between liberty and security, and sometimes—as when we allow homes to be searched pursuant to a judicial warrant supported by probable cause—those are even trade-offs worth making. But many measures that make us more secure don’t affect liberty at all: The single reform that probably did the most to guarantee we wouldn’t see a repeat of 9/11 was the simple decision to reinforce and lock cockpit doors. And the easiest thing of all to do is is implement “security theater” that diminishes our privacy to create the appearance of “doing something” without actually making us any safer. Sometimes we face hard questions about the trade-off between liberty and security—but we shouldn’t even begin to consider which trade-offs are worth making until we’ve seen some solid evidence that the trade-off is real. For most “war on terror” measures, the evidence just isn’t there.