In two maps today, the New York Times illustrates the growing dependence of Americans on federal government subsidies or welfare.
Cato at Liberty
Cato at Liberty
This post co-authored with Rafael Fonseca, MD, Chairman of the Department of Medicine, Mayo Clinic, Phoenix, AZ
Much has been written about how politics and ideology influence research funding, suppress research in certain areas, and lead to the cherry-picking and misrepresentation of evidence in support of a narrative or agenda. Science journalist John Tierney explored “The Real War on Science” in an excellent essay in City Journal in 2016. Reflecting on this phenomenon in 2011, Patrick J. Michaels stated:
The process is synergistic and self-fulfilling. Periodicals like Science are what academia uses to define the current truth. But the monolithic leftward inclination of the reviewing community clearly permits one interpretation (even if not supported by the results) and not another. This type of blatant politicized science is becoming the norm in the environmental arena, and probably has infiltrated most every other discipline, too.
It certainly has infiltrated research into the emotionally charged opioid overdose problem afflicting the US and many other western nations. Policy decisions have been rooted in a narrative seemingly immune to the facts: that the problem is largely the result of greedy pharmaceutical companies manipulating careless and poorly-trained doctors into “hooking” patients on highly addictive opioids and condemning them to a nightmarish life of drug addiction.
Tierney writes of confirmation bias—the tendency of people to seek out and accept information that confirms their beliefs and prejudices. He bemoans the “groupthink” that allows confirmation bias to infiltrate the peer review process. He cites a well-known study that demonstrated reviewers were more likely to find problems with a study’s methodology if the findings were contrary to their prejudices yet overlook methodological shortcomings if the findings were confirmatory.
Sometimes investigators try to “spin” their findings to make them comport to the narrative and appear confirmatory, increasing the likelihood that their research gets published.
Both of us are practicing physicians, and each of us recently experienced reminders that research into the opioid overdose issue is not exempt from politicization and confirmation bias. We would like to present two recent examples where this confirmation bias became self-evident.
One of us, Rafael Fonseca, recently encountered a peer reviewed publication that asserted, and concluded by conjecture, that opioid manufacturers, by providing meals to physicians at educational presentations, were skewing prescription patterns and increasing the number of opioids being prescribed. A cursory review of the published data suggested that correcting for variables such as specialty was needed to understand such putative association. After undertaking a full data analysis (reported in the Healthcare Blog with Dr. John Tucker), we were able to refute the findings of that publication. In short, we found that the influence of meals provided on prescribing was negligible, and that similar effects were seen when providers attended meals provided by companies that produce other products used for the treatment of pain, but not opioids. We provided a compelling case that increased attendance to these meals, and opioid prescription, was more of a reflection of the practice pattern of such physicians (i.e. they treat pain patients) rather than a heinous quid pro quo. Readers are referred to our analysis and the original paper.
We remain disappointed by the apparent ease with which such publications appear in major medical journals as well as the scarcity of detailed rebuttals. The authors of this paper did not discuss considerations that are relevant such as multivariable analyses. Not only were these missing, but the article concluded by suggesting that policy changes are needed, and that companies should be prevented from supporting such meals. Individuals who served as peer reviewers of this article apparently missed the limitations we presented in our independent review and accepted at face value the conclusions presented. The editors of the journal did not consider confounding covariates, which as we have shown, would make the analysis questionable. Perhaps, most troubling, is that a letter to the editor was submitted with our findings and was rejected as being of “low priority.” This was problematic given that, even though our letter was an abridged version of our full analysis, it directly refuted the conclusion of the paper. We cannot claim ill intention in the process but are surprised that even when pointed out, it seems that a prevailing narrative trumped scientific rigor. The prevailing current narrative is that greedy pharmaceutical companies duped doctors to inappropriately prescribing opioids. If we want to curtail deaths associated with opioid overdoses we must find the correct factual context of the problem. Facts are established with science and can be distorted by heuristics serving ideology.
At the time of this blog post we have requested the primary data from the authors to resolve data inconsistencies. We have not received the data, because the authors claim they intend to make it public at some point in the future pending a publication they have submitted. Through social media channels an Associate Editor of the journal was recently made aware of our analysis and stated it should be submitted as a letter to the editor or as a publication. We offered to write it as a full report and noted that our letter had already been rejected, and we received no further response. We have also contacted the Editor but have yet to get a response.
An example of how researchers “spin” their findings to comport with the prevailing narrative and increase the likelihood of publication occurred on January 17, 2018 when Jeffrey Singer encountered a story in the Los Angeles Times touting a recently published study in the peer-reviewed medical journal BMJ, in which the principal finding was that refilling opioid prescriptions given to patients for acute pain dramatically increased their risk of addiction. The Times reporter wrote:
A study published Wednesday in the BMJ finds that for every additional week a patient takes drugs like oxycodone and hydrocodone, the chance that he or she will wind up abusing the drug increases by 20%. And every time a prescription for opioid painkillers is refilled, the risk of abuse rises by 44%.”
The reporter was accurate. The study by researchers at Harvard and Johns Hopkins looked at 568,000 opioid “naïve” patients in the Aetna health insurance data base given prescription opioids for acute postoperative pain over the period of 2008–2016. It began the conclusion to its abstract with: “Each refill and week of opioid prescription is associated with a large increase in opioid misuse among opioid naïve patients…” But what the Times reporter neglected to mention, and what the study’s authors only mentioned in passing, was the initial finding: the “total misuse rate,” i.e., rate of all opioid misuse diagnostic codes (defined separately as dependence, abuse, and overdose—a broad category within which addiction is only one component) among the 568,000 patients prescribed the opioids, was 0.6 percent. It was only upon reading the actual study as opposed to the press coverage that this rather encouraging news—opioids prescribed for acute pain have a very low misuse rate—became apparent.
Instead of emphasizing this encouraging finding, the bulk of the study investigates the effect the duration of time a patient is on opioids—expressed principally by numbers of refills—has on the misuse rate. The authors indeed found that each refill and additional week of opioid use was “associated with an adjusted increase in the rate of misuse of 44%.”
However, looking at the actual numbers behind those percentages finds the incidence of opioid misuse rose from 145 cases per 100,000 person years, or 0.15 percent per year, in patients who had no refills, to 293 cases per 100,000 person years, or 0.29 percent per year, for persons who had one refill. Indeed, that is nearly double. But if you nearly double a very low number, you still get a low number. Also, the correlation of prescription refills with an increase in misuse does not prove causation. Possible causes are debatable, with many confounding possibilities. The study lacks any discussion or exploration into matters of cause and effect.
Rather than point out that the incidence of misuse is extremely low in patients given opioids for acute postsurgical pain, even after multiple refills, the authors chose to pass over the low overall incidence of misuse and instead focus on the “large increase in opioid misuse” seen with each refill and week of opioid use.
These are just two examples of how scientific research is susceptible to the biases of the researchers and influenced by political exigencies. They both fed into the prevailing narrative animating policy toward opioid use, abuse, and overdose. Both provide good examples of how researchers as well as peer reviewers fall easy prey to confirmation bias.
Readers should approach every new “study” reported in the peer-reviewed science literature with a modicum of skepticism.
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The World Trade Organization is facing an existential crisis because of bullying by President Trump. That crisis can only be resolved if the United States and the 163 other members of the World Trade Organization negotiate a solution to what is most motivating these actions: American angst over the global rules for imposing anti-dumping and other trade remedies against unfair trade practices.
Central to Trump’s assault on the longstanding liberal international order in trade is his threat to grind the settlement of international trade disputes to a halt in the WTO. He is doing this by blocking the appointment and reappointment of the WTO judges whose rulings help resolve the trade disputes. U.S. intransigence may soon reduce the WTO Appellate Body from its full roster of seven judges down to the minimum of three needed to decide an appeal.
If the U.S. continues this strategy, the appellate court will be left with only three judges in September, and only one judge by December 2019—not enough to hear an appeal. Already slowed by the current shortage of judges, the rule-based dispute settlement system that has resolved more than 500 international trade disputes since its creation in 1995, and that has prevented an untold number of additional disputes, could come then to a standstill.
The impasse over judicial appointments in the WTO is ostensibly about what U.S. officials see as the supposed straying of WTO appellate judges from the strict bounds of their instructions into forbidden legal terrain in some of their rulings. Overlooked in the U.S. is the inconvenient fact that there are 163 other WTO members that have not professed to observe a pattern of judicial “over-reaching.”
Actually, the blockade is driven by the decades-long frustration of some within the U.S. with their failure to negotiate WTO rules that would assure the U.S. virtually unlimited latitude in imposing anti-dumping duties and other trade remedies on imported goods, and that would mandate that WTO judges largely defer in their rulings on such remedies to U.S. decisionmakers.
Trump and his trade collaborators see America as possessing the sovereign right to impose anti-dumping tariffs and other remedies to alleged unfair trade practices with a domestic discretion akin to international legal impunity. This is not a new view—American industries challenged by foreign competitors and American protectionists representing those industries in the trade bar have long abused U.S. trade remedies to keep foreign competition out of the domestic market. Now they also hold power in the Trump Administration.
But other countries hold a different view. For decades, other countries, like American consumers and many American producers reliant on imports, have been repeatedly victimized by U.S. administrative agencies under the sway of protectionist interests. These agencies tend to rig U.S. domestic trade rules against foreign producers and then apply those rules in ways that discriminate against foreign goods under the legal pretense of fighting trade unfairness. This has happened for decades already with steel imports.
These protectionists forget that there is just one set of WTO trade remedy rules for all WTO members – not one set of rules for Americans and another set of rules for everyone else. Given this, do we want other countries to be able to use their own trade remedies laws to treat our exports the same way we treat theirs? And why should other countries eliminate their own trade abuses if we refuse to eliminate ours?
Since the establishment of the WTO in 1995, the main constraint on the unchecked use by the U.S. of trade remedies has been the WTO rules the U.S. helped negotiate and place in the WTO treaty – rules that have been consistently upheld by the Appellate Body. While the U.S. has (despite what Trump tells us) won about 86 percent of the cases it has brought against other countries before the WTO, it has lost about 75 percent of the cases other countries have brought against the U.S. (which is better than the global average of 84 percent).
Most of these losses have been in politically sensitive disputes over U.S. anti-dumping and other trade remedies. And many of them have been over repeated challenges to the same US trade actions because the U.S. has either refused to comply fully with adverse WTO rulings or has only pretended to comply.
In dumping in particular, the U.S. prefers to retain practices that find dumping where it does not exist and magnify the extent of dumping – and thus maximize the amount of anti-dumping duties – where dumping does exist. (In trade jargon, this is called “zeroing.” The U.S. has lost a long series of “zeroing” disputes.)
Fueling the U.S. foot-dragging is the belief that it has not gotten the extent of legal deference from WTO judges it thought it had secured in the WTO rules for applying anti-dumping duties. Americans who favor the unfettered use of anti-dumping measures feel they have been cheated.
Their legal problem is this:
A sentence the U.S. succeeded in putting in the WTO anti-dumping rules provides that if one of those rules “admits of more than one permissible interpretation,” then WTO judges must defer to the domestic decision “if it rests upon one of those permissible interpretations.” But the previous sentence, on which the U.S. also agreed, instructs the WTO judges to interpret the anti-dumping rules “in accordance with customary rules of interpretation of public international law.” And the use of those interpretative rules always results in a judicial finding of one ordinary meaning for international rules – never two.
Thus, the Appellate Body, in doing its job by following the rules of treaty interpretation it has been instructed by the WTO members to use in the WTO treaty, has never found that an anti-dumping rule “admits of more than one permissible interpretation,” and so it has never given the U.S. the extent of deference that it desires and still believes—wrongly—it negotiated.
Other WTO members are uncertain about how best to react to President Trump’s bullying on judicial appointments. In response, they must not yield to his intimidation by curtailing the jurisdiction of WTO judges by, in effect, allowing the U.S. to be the judge and the jury in its own cases. Instead, they should embrace a proposal that has already been made by the European Union. In exchange for an end to the U.S. blockade of WTO judicial appointments and U.S. agreement to WTO reforms that reinforce the indispensable independence and impartiality of WTO judges while also strengthening the whole WTO dispute settlement system, the 163 other WTO members should agree to negotiate anew on the true core of U.S. concern – the rules on dumping.
This does not mean acquiescing to the arrogant American ambition of having the international legal discretion to do whatever it chooses in applying trade remedies, while expecting other countries to do exactly as the U.S. wishes. It does mean resuming anti-dumping negotiations on the degree of deference owed to domestic authorities – and this time reaching an agreed solution in more precise wording of the anti-dumping rules in the WTO treaty – wording that has consistency and clarity.
In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.
But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade.
Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.
Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs. They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could. But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade. But just close your eyes and imagine.
MLF make the following claim:
President Trump won a victory for freer trade last week when he and the president of the European Commission, Jean-Claude Juncker, agreed to find ways to lower tariffs and other barriers to each other’s exports. The outlines of the deal are still sketchy, but it calls for the Europeans to buy more American petroleum, soybeans and manufactured goods and for Mr. Trump to reduce his auto and steel tariffs. We were particularly heartened that Mr. Trump and the Europeans now have a handshake agreement to aim for zero tariffs on both sides of the Atlantic.
The only accurate part of this paragraph is that “the outlines of the deal are still sketchy.” As I described last week, nothing was agreed at that meeting except that new tariffs would not be imposed for the time being. In his Rose Garden statement after meeting with Juncker, Trump said they had agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods (my emphasis).” But there is no timetable and if there were, those discussions would exclude agricultural products, natural resources, services, and—well—automobiles and parts, which together constitute a big chunk of transatlantic trade.
Instead of moving us in the direction of lower tariffs and broader trade liberalization, a more accurate interpretation of the meeting is that Trump made clear that he is digging in for a trade war of attrition with China and that he fully expects Juncker to have his back. The plan includes such banana republic tactics as buying the quiet of Trump’s trade war casualties ($12 billion for farmers and likely more to come for manufacturers) and compelling the EU (and other trade partners) to purchase more U.S. soy, natural gas, and other products previously destined for China, lest the steel and aluminum tariffs remain in place, and auto tariffs follow—perhaps as early as October. Considering that the EU will have a tough time absorbing much of the U.S. supply rendered “excess” by Trump’s tariffs and the retaliation they incited, it is only a matter of time before Trump loses patience and transatlantic discord starts boiling again.
MLF:
This was Mr. Trump’s idea. The night before the agreement, he proposed in a tweet that “Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade!” Amen.
Of course, zero trade barriers would be great. But Trump’s idea? Hardly. In 2002, in the Doha Round, the Bush administration put forward a far more ambitious proposal for zero tariffs on industrial goods for all countries by 2015. More recently, the Transatlantic Trade and Investment Partnership (TTIP) negotiations included proposals to eliminate tariffs, non-tariff barriers, and subsidies. Neither of those efforts was successful, but the idea has been in play since well before Trump came to town and is not especially radical.
MLF:
This is a winning strategy that we’ve long endorsed with our friends at the White House because it is fully consistent with what Mr. Trump has often told us: his threat of tariffs is a negotiating tactic to get to lower trade barriers and a “level playing field.”
I’m not sure where MLF have been lately, but they seem to have overlooked the fact that the president is not only “threatening” tariffs. He has already imposed them on $100 billion of imports from Europe, Canada, Mexico, Japan, China, and most of the rest of the world. In the next week or so, another $16 billion of imports from China are likely to be hit, and another $200 billion could be subject to 25 percent duties by as early as September.
Last week, Commerce Secretary Wilbur Ross wondered why there was so much handwringing over the matter of assessing 25 percent tariffs on another $200 billion of Chinese goods: “Fifty billion dollars a year on an $18 trillion or so economy is three-tenths of one percent. It’s not something that’s going to be cataclysmic.” Well, it might not be immediately cataclysmic, but a more relevant comparison is that the total value of all duties collected by U.S. Customs in 2017 was just $33 billion. Only in a George Orwell novel could this beefing up of duty collection be called free trade.
MLF:
The next step should be to extend this zero tariff offer to other key allies, including Britain, Canada, Mexico and South Korea.
Again, this is willful ignorance, right? Anyone who writes about trade in the New York Times has to know that nearly all tariffs between the United States and Canada and between the United States and Mexico are already zero today under the NAFTA, and that the Korea‑U.S. free trade agreement includes a roadmap to get us almost all the way there in a decade. One major exception is Trump’s insistence on preserving the 25 percent U.S. tariff on pick-up trucks until the year 2041.
MLF:
If Mr. Trump’s goal is more jobs and higher wages, America comes out the big winner under the zero tariff scenario. Most of our major trading partners have higher tariffs than we do. A study by the president’s Council of Economic Advisers calculates that the average American tariff is 3.5 percent, while the average European Union rate is 5 percent, China’s is nearly 10 percent and the world average is around 10 percent. On a level playing field, American companies can compete with anyone, and our exporters will gain advantage if trade barriers are abolished.
Actually, what this tells us is that the U.S. government has been better to American businesses and households than the governments of China and the EU have been to their own domestic entities. Trump’s tack amounts to his threatening to reduce the freedoms of Americans unless and until the other governments allow their citizens to be freer. So much for America first.
Moreover, jobs and wages are linked to the performance of businesses. American workers benefit, generally, when their employers are profitable. Profits are maximized by maximizing revenues and minimizing costs.
Generally speaking, U.S. export revenues could be higher if U.S. exporters faced lower barriers abroad. But import tariffs don’t compensate for those foreign barriers. They exacerbate the problem because half of the value of U.S. imports are inputs to U.S. production and tariffs raise their costs. Threatening to raise the cost of production on U.S. businesses (and the cost of living for U.S. households) unless foreign governments reduce their own tariffs makes no economic or business sense. Higher tariffs abroad and higher tariffs at home conspire to squeeze profits from both ends, and that’s not good for U.S. employment or compensation. This back of the envelope analysis shows how Trump’s tariffs imperil the expected benefits to U.S. manufacturers from the tax reforms, which MLF were instrumental in advancing.
The optimal response to higher foreign tariffs, which work to reduce U.S. business revenues, is to lower our own tariffs, which would reduce U.S. production costs. So not only is the economics wrong, but the strategy hasn’t produced the results that MLF are celebrating. So far China and nearly every country hit with steel and aluminum tariffs has refused to negotiate under duress. What if these governments continue to remain unwilling to submit to Trump’s gunboat diplomacy? Even if they were inclined to, why would they have any reason to believe that Trump wouldn’t use the same tactics to get more concessions next time? This is a dubious and very dangerous “strategy.”
In any case, the fact that the United States has lower average tariffs than most countries helps explain the relative success of the U.S. economy over the years. The United States remains the world’s top destination for foreign direct investment, and lower tariffs give us an advantage in the competition to attract and retain that investment. One of the arguments for corporate tax reform with which MLF presumably agree is that lower rates would free up profits to be reinvested in the U.S. economy. Lower taxes on imports have the same effect. We didn’t need agreement from Beijing or Brussels to reduce U.S. corporate rates and we certainly don’t need their consent to do the same for tariffs.
MLF:
The alternative is higher tariffs on steel, aluminum, autos and hundreds of products imported from other countries, particularly China. Those actions have led to retaliatory tariffs imposed on products grown or manufactured in America. This has hurt farmers, the stock market and economic growth.
It’s difficult to fathom that MLF consider higher U.S. tariffs on these inputs and consumer goods to be leverage. Those U.S. tariffs are hurting the economy and threatening to negate the benefits of the tax reform they helped achieve. Those enduring costs, as well as the retaliation impacting U.S. farmers and others are what Trump’s trade policies have wrought.
MLF:
A no-tariffs trade strategy would also allow the United States to seize the moral high ground in the debate. Mr. Trump would be transformed from the evil disrupter of international commerce to a potential savior — just as 30 years ago Mr. Reagan’s international image changed from superhawk to peacemaker almost overnight.
After insulting and bullying U.S. trade partners, imposing enormous costs on the global economy, fomenting profound business uncertainty and diplomatic angst, and snuffing out any remaining fumes of good will toward his administration, it is unlikely that President Trump would ever be considered anything more sparing than an evil disrupter. But in the final analysis, it is apparent that the intended audience for the MLF op-ed is none other than President Trump himself.
The last few paragraphs make clear that the authors—all Trump advisors—are trying to encourage the president to end up on the right side of history. For that they deserve some credit. But they still lose more points for excusing the president’s numerous transgressions, giving intellectual cover to mercantilists and nationalists who believe the United States shouldn’t be constrained by the trade rules, and for supposing that Trump would ever read the New York Times.
The federal government dispenses unequal treatment to Americans through subsidies, regulations, and narrow tax breaks. The unequal treatment generates lobbying and corruption as the government-determined winners dig in to defend their lucre and the losers agitate for a share.
Washington is a universe of thousands of separate special-interest galaxies, each with spiraling masses of lobbyists orbiting politicians and bureaucrats whose power is a gravitational force. Scientists say that the universe is mainly filled with dark energy, and the same is true of the nation’s capital.
The Tax Cuts and Jobs Act of 2017 created a new special-interest galaxy called “Opportunity Zones.” O Zones are tax structures that infuse governors and U.S. Treasury officials with the power to divide every state in the nation into winner and loser areas. Projects in the winner areas receive capital gains tax breaks, while projects in the loser areas get the shaft.
O Zones are already generating dark energy, as a recent Washington Post story illustrates:
The Treasury Department last week reversed itself after lobbying by Nevada Republicans and agreed to let a previously ineligible county reap huge benefits from the new tax law.
The effort was led by Nevada’s governor, Brian Sandoval (R), and Sen. Dean Heller (R‑Nev.), who separately spoke with Treasury Secretary Steven Mnuchin and pushed for Storey County to win designation as an “Opportunity Zone,” which was established in the law to help distressed areas attract money.
Working behind the scenes to help the effort was a Storey County brothel owner and real estate investor, Lance Gilman, who told local officials that the designation could lead to a surge of investments within the next few years. Gilman is also a major GOP donor and made a $5,000 campaign contribution to Heller in the midst of the process, the biggest contribution he had ever given to a candidate for federal office.
Treasury officials had initially deemed that Storey County’s income levels were too high to qualify, based on the metrics they had used to judge every other nomination for the special tax status. But after weeks of prodding from Nevada officials, Treasury relented and gave the designation to Storey County using new data.
The successful campaign to win this lucrative designation illustrates how political pressure can redirect billions of dollars in federal benefits, which are supposed to be distributed in a non-arbitrary manner.
It shows how the new tax law, meant to simplify the tax code when it passed in December, is creating opportunities for gamesmanship — in this case by public officials and business executives seeking to exploit the Trump administration’s discretion in interpreting the law.
…several other Nevada business owners are furious at the designation. To push Storey County for the Opportunity Zone designation, Sandoval had to withdraw the April 20 nomination of Dayton, Nev., an economically depressed neighboring community that lacks Storey County’s huge industrial center.
This has led to accusations of unfairness, and several executives said they haven’t gotten the straight story about why their nomination was pulled without their knowledge.
Unequal treatment generates bad feelings and divisions, negative forces in the universe. The dark energy of O Zone corruption was entirely predictable, and there will probably be lots more of it.
Corruption has similarly swirled around the federal LIHTC tax break, which empowers officials to make winner and loser decisions in local communities, as Vanessa Brown Calder and I discuss here and here.
Vanessa and I have further thoughts on O Zones here, here, and here.
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In the summer of 1982, after the Cato Institute’s week-long seminar at Dartmouth, I drove to Boston with one of the other attendees. Touring the city, we encountered a protest rally on Boston Common. I don’t remember just what the rally was about — probably the “nuclear freeze” or a general protest against nuclear weapons, which was a strong movement then. As we watched, a young woman approached and handed us flyers calling for socialism. “Like in Russia and China?” I asked her. Unwilling to defend those disastrous results, she responded “We’re more interested in the experiments currently going on in Zimbabwe and Nicaragua.” I knew very little about those “experiments” and had nothing much to say.
Now, though, 36 years later, we know a great deal about those experiments in socialism. The photograph at right appears on the front page of Friday’s Washington Post with the caption “Paramilitary members stand guard on July 17 at a dismantled barricade after police and pro-government forces stormed the Monimbo neighborhood of Masaya, Nicaragua, which had become a center of resistance.”
I was reminded of something very candid that the socialist economist Robert Heilbroner wrote: that socialism depends on central planning and a collective moral commitment and thus on command and obedience to the plan. And that means that “The rights of individuals to their Millian liberties [are] directly opposed to the basic social commitment to a deliberately embraced collective moral goal… Under socialism, every dissenting voice raises a threat similar to that raised under a democracy by those who preach antidemocracy.” Democratic liberties like free speech and free press are an inherent threat to the planners’ control.
And of course Zimbabwe suffered for some 37 years under the increasingly authoritarian rule of Robert Mugabe, which may or may not have changed with Mugabe’s replacement by his vice president.
Consider not just democracy but standard of living. In the 36 years since I had that conversation, Nicaragua has been under the rule of socialist Daniel Ortega for about half that time, and Zimbabwe under Mugabe for the entire period. Nicaragua’s GDP per capita is the lowest in Central America — far below market-liberal Costa Rica and 50 percent below war-torn Honduras. Zimbabwe is even poorer. These aren’t just numbers. They indicate how people live. They tell us that in 2018, in a world growing rapidly richer, where poverty is plummeting, people in these countries remain desperately in need of businesses, jobs, food, and medicine.
I wonder if my socialist interlocutor from 1982 is still interested in the socialist experiments in Nicaragua and Zimbabwe.
Footnote: Kristian Niemetz of IEA wrote about how socialist “experiments” always become embarrassing after a few years. Except for “very short-lived experiments, such as the Paris Commune.… Those are the Jim Morrisons of socialism. They ended before they could turn into embarrassments.”
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The Treasury Department is said to be studying the idea of providing some sort of inflation-protection (indexing) for the taxation of capital gains. Rep. Devin Nunes (R‑CA) has introduced a bill (H.R. 6444) to do just that. Predictably, Washington Post writer Matt O’Brien instantly dismissed the idea as “Trump’s new plan to cut taxes for the rich.”
O’Brien relies on a two-page memo from John Ricco which yanks mysterious estimates out of a black box – the closed-economy Penn-Wharton Budget Model. The “microsimulation model” predicts that the Top 1 Percent’s share of federal income taxes paid could fall from 28.6% to 28.4% as result of taxing only real capital gains. “That’s real money,” exclaims O’Brien.
No model can estimate how much revenue might be lost by indexing (if any) because that depends on such unknowable things as future asset values, future tax laws and future inflation. Yet Mr. Rico magically “projects” future realizations to “estimate that such a policy would reduce individual tax revenues by $102 billion during the next decade [sic] from 2018–2027.” Does that imaginary $102 billion still look like “real money” when spread over Rico’s extended 20-year “decade?” It would be a microscopic fraction of CBO’s projected individual income taxes of $21.1 trillion over that period.
One problem with the notion that indexing capital gains could only benefit the top 5 percent (over $225,251 in 2016) is that it wrongly assumes the capital gains tax only applies to stock market gains. Another Washington Post article said, “Researchers have estimated that the top 5 percent of households in terms of income hold about two-thirds of all stock and mutual fund investments, putting wealthier Americans in the position of benefiting much more than others from any changes to capital gains rules.” But the capital gains most likely to be seriously exaggerated by decades of inflation are not gains from selling financial assets, but from selling real assets. After many years of even moderate inflation, an unindexed tax may be imposed on purely illusory “gains” from the sale of real property that actually involve a loss of real purchasing power. A 2016 report from the Congressional Budget Office and Joint Committee on Taxation, “The Distribution of Asset Holdings and Capital Gains” reports that Americans held $7.5 trillion in stocks and mutual funds in 2010, but $12.2 trillion in private businesses and $8.5 trillion in nonresidential real estate.
A related problem with conventional distribution tables is that they add realized capital gains to income in the year in which a farm, building or business is sold, which makes it true by definition that unusually large one-time gains are received by those with “high incomes” (including those gains).
A much bigger problem is, as the first graph demonstrates, that the capital gains tax is voluntary: If you don’t sell, you pay no tax. When the top tax rate on realized gains was 28–40%, very few gains were realized – particularly among top-bracket taxpayers. When the top tax rate fell to 20% in 1982–96 and 1997–2000, and to 15% in 2003–2007, inflation-adjusted real revenue from the capital gains tax soared for several years (market crashes in 2001 and 2009 overwhelmed taxes, of course). This is just one reason static estimates of the alleged revenue loss from indexing are not credible: The elasticity of realizations is extremely sensitive to the tax rate and indexing is one way to reduce that tax rate (and raise realizations) for assets held for a long time.
If anyone wanted to cut taxes paid by the Top 1%, then raising the capital gains tax rate is the surest way to accomplish that. The second graph shows the Top 1%‘s share of individual income reported to the IRS (in data from Thomas Piketty and Emmanuel Saez) went way up whenever the tax rate on capital gains went down. By contrast, top 1% income from realized gains remained depressed whenever the tax was 28% (1987–1996) or higher (1969–77). The rush to sell before an increase in the capital gains tax in 1987 meant a third of all “income” reported by Top 1% taxpayers in 1986 was from bunching the realization of capital gains.
The inverted idea that a higher tax on capital gains is an effective way to “soak the rich” has not even been politically successful, because it is not so much an assault on investing as it is an assault on aging.
It is certainly true that people who have not yet accumulated much capital – which means most young people regardless of their current income – have also not yet accumulated capital gains. It takes time to accumulate capital, so vulnerability to capital gains taxes rises with age. And the U.S. has a rapidly-aging population.
When it comes to political arguments for high capital gains taxes on capital gains, the redistributionist left has never grasped that the people who are most fearful of high capital gains taxes are not “the rich” but seniors. The table, from the CBO/JCT study, shows that net capital gains accounted for only 1% of income among those age 35–44, 3% at age 55–64, and 6% for taxpayers 75 or older. This little-known fact makes the politics of advocating a high tax on capital gains more suicidal as a campaign issue than many politicians have supposed.
George McGovern’s seemingly clever 1972 campaign slogan that “money earned by money should be taxed as much as money earned by men” meant he favored a minimum tax of 75% on large capital gains (e.g., from selling the family farm or firm before retirement). That frightened seniors who counted on selling-off accumulated savings to finance retirement. Senator McGovern won only 36% of the vote of those age 50 or more. A high tax on realizing capital gains turned out to be bad politics as well as bad economics.