Archive for August, 2009
Consequential Trade Decision Looms
By September 17, President Obama will decide whether to reject, adopt, or modify recommendations from the U.S. International Trade Commission to impose duties of 55 percent on tires imported from China. As I’ve stated before, imposition of duties could be the most consequential trade policy decision in several years, since it is rare that the president is tied so directly to a decision to impose barriers. Trade restraints would be perceived by the Chinese as the direct wishes of the U.S. president, which would not be taken lightly in Beijing.
Although I elaborate further in a forthcoming paper, here is some smart analysis from trade lawyer and Cato coauthor Scott Lincicome.
The Price We All Pay for High Tax Rates
Politicians tend to like high tax rates because they believe it yields more revenue for them to redistribute. Yet the perverse incentive effects of high rates tend to limit the increase in revenue, since the higher the rates, the more worthwhile are tax avoidance activities. At some point it becomes better to consume than invest and play than work, since the rate of return is so low.
Reports Robert Carroll for the Tax Foundation:
Economic Effects of High Tax Rates
High tax rates discourage work, saving and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today’s tax code. For example, taxpayers can reduce their tax bill by financing more of a home purchase, receiving more of their compensation as tax-free fringe benefits, or rebalancing their investment portfolios towards tax-exempt state and local government bonds.It’s important to remember that every time a taxpayer makes a decision based on tax considerations rather than economic merit, we all lose. It wastes resources by redirecting them to less productive uses. The cost of high tax rates is not trivial. Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.
This does not mean that tax cuts pay for themselves. Rather, tax rate changes can have a profound effect on the size of the tax base, with lower tax rates increasing the size of the tax base and higher tax rates, such as those proposed by President Obama, shrinking the tax base. A shrinking tax base is not only suggestive of the economic costs of high tax rates, but also means that the government will take in less revenue than the casual observer might assume.
High Tax Rates Will Shrink the Federal Income Tax Base
Consider the combined effect of President Obama’s proposal to raise the top tax rate from 35 percent to 39.6 percent and the new surtax. This means high-income households will receive 54 cents rather than 65 cents from every dollar they earn; that is, the after-tax reward from earning income falls by 17 percent. Based on the research mentioned above, with such large increases in tax rates, we can expect taxpayers facing the top tax rates to reduce their reported incomes by nearly 7 percent.What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.
Overall, simulating the effect of the higher tax rates in 2011 shows that the federal government can expect to raise at most only 60 cents on the dollar. While “large” is always in the eye of the beholder, losing 40 cents on a dollar should cause us all to question this policy. Moreover, this is a cautious estimate. It is based on the behavioral response estimated for the overall taxpaying population, even though high-income households are likely to be much more responsive. Thus, we might expect an even faster shrinkage of the federal tax base from these tax increases.
President Barack Obama wants Americans to believe that they can enjoy all of his proposed programs without paying for them because “the rich” will cover the cost. Alas, this is a dangerous political fantasy. Taxing “the rich” will only be the start. To get real money, the big spenders are going to have to tax the middle class as well. There ain’t no such thing as a free lunch–or a free government program!
Measuring Policy Success
NPR reported this morning that “Cash for Clunkers” style programs in Germany and France are “popular and successful.” Successful by what standard? I see that the Wall Street Journal has reported that in Europe “’cash for clunker’ programs have breathed fresh life into a battered auto industry.”
Yes, by that standard, no doubt subsidies for buying cars are successful in encouraging the sale of cars. Certainly subsidies to homebuying encouraged the buying of homes. A “Cash for Computers” program would “breathe fresh life” into computer sales. Make it “Cash for Compaq” or “Cash for Windows,” and you could direct purchasers to particular companies.
But to declare a policy successful, shouldn’t you mean that it makes the country better off? And that means that the subsidies produced more economic growth or more overall consumer satisfaction than a policy of nonintervention would have. That’s a much harder standard to meet. Subsidies by definition divert consumer choices from their natural outcome. Economists generally agree that subsidies create deadweight losses for society. And sometimes, by distorting consumer decisions and encouraging decisions that don’t make real economic sense — as in the long effort to channel consumer resources into housing — subsidies eventually prove unsustainable and unstable.
Indeed, it seems likely that another part of the Wall Street Journal was correct when it described “Cash for Clunkers” as “crackpot economics.”
Time for a Change in Sugar Policy
Washington’s dysfunctional agricultural policy is costing consumers again. Limits on sugar imports, designed to protect a few large sugar producers, are driving up prices in a tight market. Reports the Wall Street Journal:
Some of America’s biggest food companies say the U.S. could ‘virtually run out of sugar’ if the Obama administration doesn’t ease import restrictions amid soaring prices for the key commodity.
In a letter to Agriculture Secretary Thomas Vilsack, the big brands — including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. — bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.
The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn’t allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil.
While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, ‘consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted.’
Officials of many food companies — several of which are enjoying rising profits this year despite the recession — declined to comment on how much they might raise prices if they don’t get their way in Washington.
The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.
President Barack Obama ran on the platform of change. How about changing agricultural policies which enrich the farm lobby at consumer and taxpayer expense?
Amateur Hour at DHS
The controversial Department of Homeland Security (DHS) report Rightwing Extremism: Current Economic and Political Climate Fueling Resurgence in Radicalization and Recruitment stirred criticism that the DHS had turned away from monitoring real terrorism plots and was now labeling veterans, pro-life groups, and limited government advocates as threats to national security. Consider those fears vindicated.
Americans for Limited Government (ALG) filed a Freedom of Information Act request for the documents and correspondence that supported the DHS report. The result: DHS sent a letter and list of the sources used to assess a significant number of innocent Americans as potential terrorists.
Seriously, read the whole thing. This collection of open source material amounts to an afternoon of internet browsing. Several arrests and indictments are mentioned, but newspapers and blogs are used instead of primary documents such as actual arrest reports and indictments that are available over the internet.
When a government agency charged with the physical security of the nation’s borders is running around on the internet looking for accusations of racism instead of using actual law enforcement and intelligence reports to justify its threat assessments, we are all in trouble. As Jeffrey Rosen has said, the biggest problem with DHS is that it was “a bureaucratic and philosophical mistake.”
Create a bureaucracy designed to inflate fears and issue color-coded threat levels, and that is what you will get. But don’t be surprised when TSA agents at the airport decide to go beyond their aviation security mission and get rebuked by a federal judge. Expect people lawfully traveling with cash to get detained without probable cause or even reasonable suspicion that they are breaking the law or pose a threat to airline safety. Anticipate that the “no-fly” list will become a “no-rights” list when a politician can seek political advantage by advocating that anyone designated for double-secret probation be denied their Second Amendment rights.
In related news, Jonathan Turley highlights the fact that English comedian Paul O’Grady was held on suspicion of being an illegal alien from Cuba because of his “funny accent.”
Your tax dollars at work.
How’s My Wife? Compared to What?
The Washington Post‘s Ezra Klein interviewed Nancy-Ann DeParle, director of the Obama administration’s Office of Health Reform. I know and like both of these people a lot. But this part of their exchange was just too much:
Q: A Rasmussen poll result said that in May, 35 percent of respondents rated the United States health care system as either good or excellent. Today, it’s 48 percent. Why are those underlying perspectives changing?
A: I have no idea. If anything, I’d expect it to be slightly worse because there’s been a lot of discussion about the need for reforms of the insurance market.
Maybe it’s because those reforms are making the status quo look better?
The Government Habit
Someone once observed that the problem with conservatives is that they want to ban anything that they don’t like and the problem with liberals is that they think anything good ought to be subsidized by taxpayer dollars. And so it goes with needle exchanges. Too many jurisdictions ban needles from stores. And then the liberals who fight the bans want to leap over to government funding for needle exchanges. It is as if no one has considered the idea that the government should just stay out of it altogether.
Media Failure?
Just a few minutes ago on the washingtonpost.com homepage, there was an example of one of my pet peeves about bias — possibly unconscious bias — in the way the major media cover issues. A homepage headline read “Price of Failure on Health Care,” and the Howard Kurtz article itself is titled “The Price of Failure.” Kurtz explores what would happen if “health care reform [goes] down in flames.”
So what does he mean by “Failure on Health Care”? He means President Obama not getting the sweeping new government programs that he seeks. But to many of us Post readers, that would actually be “Success on Health Care.” It would mean that American health care would not get worse under the burden of government regulations and restrictions.
The media tendency to refer to the defeat of a big-government scheme as “failure” reflects a possibly unconscious bias toward government action. As I’ve written before:
Does one ever hear “Congress failed today to reduce taxes”? “No Progress on Deregulation”? I don’t think so. Journalists unconsciously assume that Congress should Do the Right Thing. When it doesn’t, that’s “failure” or “no progress.” Journalists and headline writers should try to find neutral language to describe Congress’s actions.
(Kurtz’s article actually focuses on the political consequences to Obama of not passing his signature issue, and I have no quarrel with the article. But the headlines convey the sense that it would be a “failure” for Congress not to pass a government health-care plan.)
President Throws U.S. Postal Service Under the Bus
In a speech yesterday in defense of his health care plan, President Obama used an interesting analogy to dismiss criticism that the inclusion of a government-run insurance option could undermine private insurers:
“UPS and FedEx are doing just fine… It’s the Post Office that’s always having problems.”
Comparing the USPS with a proposed government-run insurance plan is probably counterproductive for the President’s aims. But making the analogy and deriding the government-run mail carrier — while acknowledging that private-sector UPS and FedEx are “fine” — provides some nice ammo for those of us who think the government should be less involved in both health care and mail delivery.
Now I understand that comparing the USPS to FedEx and UPS isn’t exactly apples to apples. But that’s due at least in part to the fact that the USPS has a government-granted monopoly on first (and third) class mail. When it comes to mailing a letter, there is no private option for Americans.
Last week the Government Accountability Office reported on the state of Government Mail and the situation isn’t pretty:
USPS projects for fiscal year 2009:
• a net loss of $7 billion, even if it achieves record savings of more than $6 billion;
• an increase in outstanding debt to a total of $10.2 billion; and,
• despite this borrowing, an unprecedented $1 billion cash shortfall.USPS projects cash shortfalls because cost cutting and rate increases will not fully offset the impact of mail volume declines and other factors that increase costs—notably semiannual cost-of-living allowances (COLA) for employees covered by collective bargaining agreements. Compensation and benefits constitute close to 80 percent of USPS’s costs—a percentage that has remained similar over the years despite major advances in technology and the automation of postal operations. Also, USPS continues to pay a higher share of employee health benefit premiums than other federal agencies. Finally, USPS has high overhead (institutional) costs that are hard to change in the short term, such as the costs of providing universal service with 6-day delivery, a network of 37,000 post offices and retail facilities, and a delivery network of more than 149 million addresses.
It’s time to give Americans a private option for sending mail, with privatization of the USPS being the ultimate goal.
WashingtonWatch.com Earmarks Project Drives Obama Administration Reform
I was very pleased to read in Federal Computer Week this morning that the Office of Management and Budget will begin tracking earmark requests next year for the fiscal 2011 budget cycle.
OMB makes available some years’ approved earmarks, but not the earmark requests put forward by members of Congress. Tracking and publishing requests will shed light on the whole ecosystem of congressional earmarks—the favor factory, if you will.
OMB’s move follows a project WashingtonWatch.com has conducted this summer: asking the public to plug earmark disclosures into a database. The site now maps over 20,000 earmarks. (Well, technically, that much data breaks the mapping tool, but you can see state-by-state earmark maps.)
Earlier this year, the House and Senate Appropriations Committees required their members to disclose earmark requests. These disclosures—published as Web pages and PDF documents—were not useful, but public interest in this area is strong, and the public made them useful by entering them into WashingtonWatch.com’s database.
The project isn’t over, by the way, and the current focus is collecting earmarks requested by Appropriations Committee members.
It’s great news that next year the Obama Administration will track and disclose earmarks, from request all the way through to enactment. Given his struggle in the area lately, this is a chance to score some transparency points. President Obama campaigned against earmarks, promising reform, and this is an important step toward delivering on that promise.
“The Whole Foods Alternative to ObamaCare”
Whole Foods founder and CEO John Mackey has an op-ed in today’s Wall Street Journal titled, “The Whole Foods Alternative to ObamaCare.” Let’s just say Whole Foods may not be asked to cater any Democratic Party gatherings any time soon:
While we clearly need health-care reform, the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us much closer to a government takeover of our health-care system. Instead, we should be trying to achieve reforms by moving in the opposite direction—toward less government control and more individual empowerment.
Mackey then lists several alternatives to ObamaCare, including broader health savings accounts, letting people purchase health insurance across state lines, giving people who purchase their own coverage the same tax status as employer-sponsored insurance, and Medicare reform.
Mackey shows little patience for those who claim we have a right to health care:
At Whole Foods we allow our team members to vote on what benefits they most want the company to fund. Our Canadian and British employees express their benefit preferences very clearly—they want supplemental health-care dollars that they can control and spend themselves without permission from their governments. Why would they want such additional health-care benefit dollars if they already have an “intrinsic right to health care”? The answer is clear—no such right truly exists in either Canada or the U.K.—or in any other country.
Man, what a neanderthal. He must be anti-reform. Except:
Health-care reform is very important. Whatever reforms are enacted it is essential that they be financially responsible, and that we have the freedom to choose doctors and the health-care services that best suit our own unique set of lifestyle choices. We are all responsible for our own lives and our own health. We should take that responsibility very seriously and use our freedom to make wise lifestyle choices that will protect our health. Doing so will enrich our lives and will help create a vibrant and sustainable American society.
How will the White House Snitch Project grapple with this one? Claim that the founder of Whole Foods is in league with the insurance companies? In thrall to Big PhRMA? No, wait, that’s the Obama administration….
Change We Can’t Believe In?
In her Washington Post column today, Ruth Marcus doesn’t mention President Obama’s 1-for-46 record on posting bills online for five days before signing them. But she does single out a similar promise: “When the details of health reform were being hammered out, he vowed, ‘We’ll have the negotiations televised on C-SPAN so that people can see who is making arguments on behalf of their constituents, and who are making arguments on behalf of the drug companies or the insurance companies.’”
According to Marcus, dealmaking with the drug industry “underscores the dangerously wide gap between Obama’s idealistic campaign-trail promises and the gritty realities of governing. ”
Observers will continue to note peeling paint and growing rust spots on the “Change” icon that swept President Obama into office. He set high standards by which his lawmaking practices will be judged, and he’s not meeting them.
That’s not a personal knock on the president. He would if he could. But even a president can’t single-handedly undo the power dynamics that have accrued in and around Washington, D.C. for most of the last century — especially not one who believes that exercising government power is good.
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