Tag: economics

Three Lessons from the Tax Defeat in Kansas

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Lessons from the Reagan Tax Cuts

In a column in today’s  New York Times, Steven Rattner attacks Trump’s tax plan for being unrealistic. Since I also think the proposal isn’t very plausible, I’m not overly bothered by that message. However, Rattner tries to bolster his case by making very inaccurate and/or misleading claims about the Reagan tax cuts.

Given my admiration for the Gipper, those assertions cry out for correction. Starting with his straw man claim that the tax cuts were supposed to pay for themselves.

…four decades ago…the rollout of what proved to be among our country’s greatest economic follies — the alchemistic belief that huge tax cuts can pay for themselves by unleashing faster economic growth.

Neither Reagan nor his administration claimed that the tax cuts would be self-financing.

Instead, they simply pointed out that the economy would grow faster and that this would generate some level of revenue feedback.

Which is exactly what happened. Heck, even leftists agree that there’s a Laffer Curve. The only disagreement is the point where tax receipts are maximized (and I don’t care which side is right on that issue since I don’t want to enable bigger government).

Anyhow, Rattner also wants us to believe the tax cuts hurt the economy.

…the plan immediately made a bad economy worse.

This is remarkable blindness and/or bias. The double dip recession of 1980-1982 was the result of economic distortions caused by bad monetary policy (by the way, Reagan deserves immense credit for having the moral courage to wean the country from easy-money policy).

Supporters of BATs and VATs are wrong about trade and taxes

My crusade against the border-adjustable tax (BAT) continues.

In a column co-authored with Veronique de Rugy of Mercatus, I explain in today’s Wall Street Journal why Republicans should drop this prospective source of new tax revenue.

…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.

Here’s what supporters claim.

Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds persuasive, at least until you look at both sides of the equation.

When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.

New Video Shows the Simple Recipe for Poor Nations to Become Rich Nations—in Spite of Bad Advice from International Bureaucracies

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s the main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

Further Thoughts on Mariel Boatlift

Jason Richwine just blogged about my recent Mariel Boatlift post that confirmed George Borjas’ finding of wage increases for those with only a high school degree in post-Mariel Miami.  George Borjas understood my quick extension of his research.  Below are some of Richwine’s points and my quick responses. 

“The point is not especially interesting, since the standard immigration narrative has always been that efficiency gains come at the expense of the natives with whom immigrants most directly compete – high school dropouts, in the case of Mariel.”

It’s important to identify which skill-group of Miamians could have benefited from the Boatlift.  George Borjas pointed out in his report for the Center for Immigration Studies:  “Economic theory predicts that immigration will redistribute income by lowering the wages of competing American workers and increasing the wages of complementary American workers as well as profits for business owners and other “users” of immigrant labor.”  Borjas focused on the benefits for business owners and other “users” of immigrant labor in that paper. 

Does “Wagner’s Law” Mean Libertarians Should Acquiesce to Big Government?

There’s a lot of speculation in Washington about what a Trump Administration will do on government spending. Based on his rhetoric it’s hard to know whether he’ll be a big-spending populist or a budget-cutting businessman.

But what if that fight is pointless?

Back in October, Will Wilkinson of the Niskanen Center wrote a very interesting—albeit depressing—article about the potential futility of trying to reduce the size of government. He starts with the observation that government tends to get bigger as nations get richer.

“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. …Wagner’s Law names a real, observed, robust empirical pattern. …It’s mainly the positive relationship between rising demand for welfare services/transfers and rising GDP per capita that drives Wagner’s Law.

I’ve also written about Wagner’s Law, mostly to debunk the silly leftist interpretation that bigger government causes more wealth (in other words, they get the causality backwards), but also to point out that other policies matter and that some big-government nations have wisely mitigated the harmful economic impact of excessive spending and taxation by having very pro-market policies in areas such as trade and regulation.

In any event, Will includes a chart showing that there certainly has been a lot more redistribution spending in the United States over the past 70 years, so it certainly is true that the political process has produced results consistent with Wagner’s Law. As America has become richer, voters and politicians have figured out how to redistribute ever-larger amounts of money.

By the way, this data is completely consistent with my recent column that pointed out how defense spending plays only a minor role in America’s fiscal challenge.

Understanding When China Can (and Can’t) Wield Economic Influence

China Flag SmokestacksAs China grows more economically powerful there is growing concern about how it will convert its economic power into strategic influence. In its 2016 annual report, the U.S.-China Economic and Security Review Commission recommends closer scrutiny of Chinese economic practices and advocates creating a panel to prevent China’s state-owned enterprises from gaining “effective control” over U.S. companies. Fear of China’s commercial influence has recently spread to Hollywood as well, with recent purchases of film studios and theater chains by China’s Dalian Wanda leading to a torrent of commentary warning against Beijing’s nefarious long-term intentions.

The idea that China can easily convert its economic clout into influence is attractive and intuitive given the government’s important role in the economy. In Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control, William J. Norris, a professor at Texas A&M University’s Bush School of Government and Public Service, casts a skeptical eye on this assumption. Norris came to the Cato Institute recently to discuss his theory of economic statecraft and shed light on the complex domestic factors that help or hinder China from using commercial actors to achieve strategic goals. (Full disclosure, as a student at Texas A&M I spent several months as Norris’s research assistant while he worked on the book.) Using a theoretical model rooted in principal-agent theory applied to several case studies, Norris is able to show that China’s political leadership and commercial actors are not always on the same page.  

Economic statecraft is the intentional manipulation of economic interaction to produce or affect some sort of strategic end. Norris finds that effective economic statecraft requires state control over commercial actors and state unity across different sectors of government. While the Chinese government may have nominal control over its state-owned enterprises, it can be very difficult to get local officials in sync with provincial or national-level officials, which impedes the effective execution of economic statecraft. In some of Norris’s case studies Chinese commercial actors made decisions with little direction or oversight from state officials that had unintended strategic effects down the road.

The most important take-away from Norris’s book is, “economic statecraft is not an easy lever of national power for [China] to wield. To be effective, many factors need to align.” China’s economy makes it easier for the government to use its companies in strategic ways, but even in the Chinese system there are numerous factors that make it difficult to use commercial actors to achieve strategic goals. While Beijing has used commercial actors to achieve strategic goals, not every move by a Chinese state-owned enterprise is a strategic master stroke designed to maximize China’s power or undermine the United States. In order to better identify the real cases of Chinese economic statecraft, it would be prudent for analysts to apply the model in Norris’s book. 

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