Topic: Tax and Budget Policy

Endless Earmarks

One sure way to create an uprising against big government would be to sign up every American voter to Senator Tom Coburn’s daily email reports on pork spending. I should take news about pork in stride, but I can’t help myself. I get disgusted every time I read the Coburn blasts.

Today’s item that turned my stomach was from the Waterbury Republican American (Connecticut):

One of the more enlightening disclosures from the legislature’s latest ethics eruption was the state spends about $10 million a year on the salaries and benefits of more than 50 agency administrators whose main function is to lobby lawmakers.

For taxpayers, this may be the costliest appropriation in the distended $16.3 billion state budget. It funds squads of unfettered lobbyists who wheedle and when necessary sleep with key legislators for ungodly sums of your tax dollars for dubious programs and projects. One reason state taxes are so high, state budget growth easily outstrips inflation every year and the state’s per-capita debt is among the highest in the nation is the government constantly lobbies itself to spend and borrow more.

The self-reinforcing or perpetual motion aspect of big government is one of the most disturbing aspects of federal subsidies, which I explore in this study.

Anyway, kudos to Coburn’s staff for its daily reminders of folly in government. You can get on the daily pork blast by emailing Roland_Foster [at] coburn.senate.gov.

Keynesians in the White House

President Bush is considering a “stimulus package” to boost the U.S. economy. But the idea that the government should be trying to manipulate short-term economic performance with fiscal policy is very misguided. 

The Washington Post today quotes a Bush advisor: “What everyone’s looking at is what is the fastest way to get money out there.” Huh? Where does the advisor think the money is going to come from? This stimulus concept is Keynesian mythology and should have been buried decades ago.

What Bush and Congress should consider are long-term, permanent changes to the tax code to make the economy more productive, such as a corporate tax rate cut or more favorable treatment for capital investment. If that helps in the short-term, that’s good, but spurring long-term growth in the economy is far more important than worrying about temporary ups and downs.  

An Unconvincing Evasion

Michael Goldfarb of the Weekly Standard offers what I think is a pretty unconvincing defense of his post that I criticized yesterday.

The whole thing started because Goldfarb thought it would be appropriate to snicker at the fact that Greenwald had estimated China’s annual defense spending at $65 billion. His post was titled “When Lefties Pretend to Know Anything About the Military,” and he sneered at those “who act like they understand military spending but find themselves flummoxed over terms like ‘purchasing power parity.’”

But in truth it is Michael Goldfarb who demonstrates beyond doubt that he is flummoxed over PPP. We can see this in the fact that he refuses to back down from his claim that $450 billion is a “pretty good guess” for Chinese defense spending. It’s not a pretty good guess. It’s absolutely absurd, and if he can find one serious PLA analyst anywhere who will endorse it, I’ll buy him lunch.

For reference, the Pentagon, which has historically offered the high-end estimate of all estimates of Chinese defense spending, argued in 2007 (.pdf) that Chinese defense spending was between $85 and $125 billion, much closer to Greenwald’s estimate than to the one that Goldfarb continues to endorse of $450 billion.

I don’t want to dry up this otherwise juicy conversation with a long discussion of defense economics, but since they’re so central to understanding why the $450 billion figure is absurd, I’ll just refer readers again here. (Goldfarb for some reason omitted the link from his excerpt of my post.) You can’t do what Tkacik does, and just blanket the CIA’s figure for the PLA budget with the PPP converter and then take that number out and run with it. Moreover, the World Bank estimate of the PPP converter for China was recently revised downward by 40 percent, further undermining the figure. Goldfarb seems either uninterested or unaware of this.

There are even more problems with the Ramesh Ponnuru/Goldfarb argument that we should view the entirety of the rest of the world as “criminals” or “arsonists” against whom we should judge our defense budget:

We’d expect the police department to have a budget many times that of all the criminals combined, wouldn’t we? Fire departments spend a lot more fighting arson than arsonists spend.

This is just nuts. Here is a listing of the top 10 defense spenders out there, from Greenwald’s list (I’m not sure whether the rankings are still exactly right, but you get the idea):

1. United States
2. China
3. Russia
4. France
5. United Kingdom
6. Japan
7. Germany
8. Italy
9. South Korea
10. India

These are the “criminals” against whom we are supposed to be arming ourselves? Okay, so Russia and China are on the list, and we aren’t absolutely certain of their intentions. But England?!? Japan? Italy? India? Is it really America Alone, taking on the rest of the world? Please. Is this sort of thing supposed to pass for serious analysis?

More on Chinese Military Spending

Michael Goldfarb of the Weekly Standard blog takes aim at this Glenn Greenwald post lamenting the fact that the U.S. spends more on defense than the rest of the world combined. In his post, Goldfarb protests that Greenwald is using a figure for Chinese defense spending that is too low and criticizes those “who act like they understand military spending but find themselves flummoxed over terms like ‘purchasing power parity.’”

Thankfully for all of us, Goldfarb called Globalsecurity.org’s John Pike, who was able to inform him that attempting to ascertain the exact level of Chinese military spending is a “fiendishly complex problem…[that] approaches not even being a meaningful question.”

I say thankfully, because Goldfarb must have come to his senses since he last took a crack at Chinese military spending. That time he consulted with the Heritage Foundation’s John Tkacik, who has been touting his argument that China’s military spending is roughly equivalent to U.S. defense spending. For reasons I’ve laid out in detail before here, this is not a serious argument. It’s not clear why Goldfarb has chosen to jettison Tkacik’s figure in favor of Mr. Pike’s caution, but it’s a welcome development. Still, it would be good to know whether Mr. Goldfarb now thinks he was mistaken to tout the absurd figure last March.

Then Goldfarb takes it on himself to declare that those who advocate a lower defense budget “just don’t understand the issues. And they shouldn’t pretend to.” One might say the same thing about basically everybody who wrote for the Weekly Standard about Iraq before the war, but that would be uncharitable. But the larger point is that Goldfarb’s statement isn’t even true, unless he thinks he can write, say, Richard Betts out of the debate.

Even if one accepts Goldfarb’s criticism of Greenwald’s figure for China’s defense expenditures, it doesn’t affect the finding that the U.S. spends more on defense than the rest of the world combined. Unless Goldfarb then wants to repair to Tkacik’s argument about the Chinese defense budget, which I don’t imagine he wants to. Either way, it’s odd to see someone waving his hands and advising that we be cautious with figures of Chinese defense spending when he chose to tout the most outlandish figure out there just several months back…

Britain, Canada, Germany, Italy, Spain, and Now Kuwait

To close out a year of remarkable corporate tax cutting around the world, Kuwait has passed a bill to sharply cut its uniquely high rate. Here is the one-sentence story in the Washington Post today (page D8):

Kuwait’s parliament passed a bill to cut taxes on profit of foreign companies to 15 percent, abolishing a progressive scale established in 1955 with a maximum rate of 55 percent, in a bid to attract investments and diversify the economy.

Progressive is the past; flat is the future. 

What’s So Funny about P. J. O’Rourke?

I decided to give a young colleague a post-graduate course in political science and economics – P. J. O’Rourke’s books Parliament of Whores and Eat the Rich. So I went to my local Barnes & Noble to search for them. Not in Current Affairs. Not in Economics. No separate section called Politics. I decided to try Borders. But first – to avoid yet more driving around – I went online to see if my local Borders stores had them in stock. (An excellent innovation that Barnes & Noble should copy, for customers who like to look at the actual book before buying it, or who don’t do their Christmas shopping far enough in advance to shop online.) Sure enough, they did, in a couple of stores just blocks from the Cato Institute. Checking to see where in the store I would find them, I discovered that they would both be shelved under “Humor–Humorous Writing.” Oh, right, I thought, they’re not books on economics or current affairs, they’re humor.

Yes, P.J. is one of the funniest writers around. But what people often miss when they talk about his humor is what a good reporter and what an insightful analyst he is. Parliament of Whores is a very funny book, but it’s also a very perceptive analysis of politics in a late 20th century democracy. And if you read Eat the Rich, you’ll learn more about how countries get rich—and why they don’t – than in a whole year of econ at most colleges. In fact, I’ve decided that the best answer to the question “What’s the best book to start learning economics?” is Eat the Rich.

On page 1, P. J. starts with the right question: “Why do some places prosper and thrive while others just suck?” Supply-and-demand curves are all well and good, but what we really want to know is how not to be mired in poverty. He writes that he tried returning to his college economics texts but quickly remembered why he hated them at the time–though he does attempt, for instance, to explain comparative advantage in terms of John Grisham and Courtney Love. Instead he decided to visit economically successful and unsuccessful societies and try to figure out what make them work or not work. So he headed off to Sweden, Hong Kong, Albania, Cuba, Tanzania, Russia, China, and Wall Street.

In Tanzania he gapes at the magnificent natural beauty and the appalling human poverty. Why is Tanzania so poor? he asks people, and he gets a variety of answers. One answer, he notes, is that Tanzania is actually not poor by the standards of human history; it has a life expectancy about that of the United States in 1920, which is a lot better than humans in 1720, or 1220, or 20. But, he finally concludes, the real answer is the collective “ujamaa” policies pursued by the sainted post-colonial leader Julius Nyerere. The answer is “ujaama—they planned it. They planned it, and we paid for it. Rich countries underwrote Tanzanian economic idiocy.”

From Tanzania P. J. moves on to Hong Kong, where he finds “the best contemporary example of laissez-faire….The British colonial government turned Hong Kong into an economic miracle by doing nothing.”

You could do worse than to take a semester-long course on political economy where the texts are Eat the Rich and Parliament of Whores. So, bookstore owners, leave them in the Humorous Writing section for sure, but also put copies in the Economics, Politics, and Current Affairs sections.

Will the IRS Drive More Business Offshore?

In a baffling move, the Internal Revenue Service is poised to unilaterally change the rules for “captive” insurance companies, a policy that will drive business out of the
United States.

It is unclear whether the tax agency actually has the regulatory authority to make this change, and the IRS in the past has tried to use regulations to overturn existing law, so anything is possible. In any event, a report from the Cayman Islands shows that low-tax jurisdictions are looking forward to taking advantage of the IRS’s initiative:

A recent Internal Revenue Service proposal to remove tax deductions for certain U.S. captives may drive more companies to go offshore, with Cayman and Bermuda the prime beneficiaries of the change. If approved, this proposal would eliminate the ability of U.S. captives to claim tax deductions for money set aside in reserves to pay for future claims and losses. Instead, these deductions would only be allowed at the time the actual claims are paid out, potentially leading to millions of dollars in taxes being collected up front.

…Vermont has been the only real onshore competitor for Bermuda and Cayman as large numbers of U.S. companies have turned to captives, transforming this once exotic product into a mainstream choice on the global market place.  …To date, Bermuda leads the captive market with about 870 companies, followed by Cayman (756) and Vermont (562).