Archive for May, 2010
What’s the Future for Supply-Side Economics?
Kevin Williamson has a long-overdue piece in National Review making two essential points about supply-side economics and the Laffer Curve. First, he explains that tax cuts are not the fiscal equivalent of a perpetual motion machine. Simply stated, too many Republicans have fallen into very sloppy habits. They oftentimes fail to understand the difference between “supply-side” tax rate reductions that actually improve incentives to engage in productive behavior and social-engineering tax cuts that simply allow people to keep more money, regardless of whether they create more wealth. This does not necessarily mean the latter form of tax cuts are bad, but they definitely do not boost economic performance and generate revenue feedback. Moreover, even when GOPers are talking about supply-side tax cuts, they frequently exaggerate the positive effects by claiming that lower tax rates “pay for themselves.” I certainly think that can happen, and I give real-world examples in this video on the Laffer Curve (including Reagan’s lower tax rates on those evil rich people), but self-financing tax cuts are not common.
Williamson’s second point is that the true fiscal burden is best measured by looking at how much government is spending. I might quibble with his description of deficits as a form of deferred taxation since technically debt can be rolled over in perpetuity, but his main point is right on the mark. There is no doubt that most forms of government spending — regardless of the means of financing — harm growth by diverting money from the productive sector of the economy (technically, the economic damage occurs because capital and labor are misallocated and incentives are diminished, but let’s not get too wonky). Here are some excerpts from Williamson’s article:
Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don’t get Reagan tax cuts without Tip O’Neill spending cuts. Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals. …even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing. …The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. …It is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. …The problem with magical supply-siderism is that it gives Republicans a rhetorical and intellectual framework in which to ignore spending — just keep cutting taxes, the argument goes, and somebody else will eventually have to cut spending. The results speak for themselves: Tom DeLay and Dennis Hastert and Trent Lott and Bill Frist all know how to count, but, under their leadership, Republicans spent all the money the country had and then some.
Now that we’ve chastised Republicans, it’s time to turn our attention to the Democrats. We know they are bad on spending (I often joke that Republicans expand government out of stupidity, while Democrats do it for reasons of malice), so let’s focus on their approach to Laffer Curve issues. If the GOP is guilty of being too exuberant, the Democrats and their allies at the Joint Committee on Taxation (the bureaucracy on Capitol Hill that estimates the revenue impact of tax policy changes) are guilty of deliberate blindness. The current methodology used by the JCT (with the full support of the Democrats) is to assume that changes in tax policy — regardless of magnitude — have zero impact on economic performance. If you double tax rates, the JCT assumes the economy is unaffected and people earn just as much taxable income. If you replace the IRS with a flat tax, the JCT assumes there is no effect on macroeconomic performance. Sounds unbelievable, but this video has the gory details, including when my former boss, Senator Bob Packwood was told by JCT that revenues would rise year after year even if the government imposed a 100 percent tax rate.
Interestingly, the European Central Bank just released a new study showing that there are substantial Laffer Curve affects and that lower tax rates generate large amounts of revenue feedback. In a few cases (Sweden and Denmark), the researchers even conclude that some lower tax rates would be in that rare category of self-financing tax cuts. But the key point from this ultra-establishment institution is that changes in tax rates do lead to changes in taxable income. This means it is an empirical question to determine the revenue impact. Here’s a key excerpt from the study’s conclusion:
We show that there exist robust steady state Laffer curves for labor taxes as well as capital taxes. …EU-14 countries are much closer to the slippery slopes than the US. More precisely, we find that the US can increase tax revenues by 30% by raising labor taxes but only 6% by raising capital income taxes, while the same numbers for EU-14 are 8% and 1% respectively. …We find that for the US model 32% of a labor tax cut and 51% of a capital tax cut are self-financing in the steady state. In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing. We therefore conclude that there rarely is a free lunch due to tax cuts. However, a substantial fraction of the lunch will be paid for by the efficiency gains in the economy due to tax cuts.
Contrary to over-enthusiastic Republicans and deliberately-dour Democrats, the Laffer Curve/supply-side economics debate is not a binary choice between self-financing tax cuts and zero-impact tax cuts. Yes, there are examples of each, but the real debate should focus on which types of tax reforms generate the most bang for the buck. In the 1980s, the GOP seems to have the right grasp of this issue, focusing on lowering tax rates and reducing the discriminatory tax bias against saving and investment. This approach generated meaningful results. As Nobel laureate Robert Lucas wrote, “The supply side economists, if that is the right term for those whose research we have been discussing, have delivered the largest genuinely free lunch that I have seen in 25 years of this business, and I believe we would be a better society if we followed their advice.”
But identifying and advocating pro-growth tax reforms, as Williamson notes, is just part of the battle. The real test of fiscal responsibility if controlling the size of government. Republicans miserably failed at this essential task during the Bush year. If they want to do the right thing for the nation, and if they want to avert a Greek-style fiscal collapse, they should devote most of their energies to reducing the burden of government spending.
Walter Olson Joins Cato
I’m pleased to report that Walter Olson, known to many Cato@Liberty readers for his Overlawyered website, has joined the Cato Institute. Wally led the Manhattan Institute’s litigation reform program for more than a quarter of a century. He’ll be a senior fellow in our Center for Constitutional Studies, with a wide-ranging portfolio.
A Yale graduate, Wally began his career at Regulation magazine, back when it was published by the American Enterprise Institute. He has authored three books, 1991′s The Litigation Explosion, 1997′s The Excuse Factory, and 2003′s The Rule of Lawyers, and countless articles. And another book will be out in the fall on bad ideas coming from the legal academy, Schools for Misrule. At PointofLaw.com, Jim Copland, director of Manhattan’s Center for Legal Policy, gives us a rich account of Wally’s contributions. We’re delighted to have Wally on board.
While You Were Watching the Economy, Health Care, Wars…
…the federal government was taking over education. At least, it was moving a lot further in that direction, with Secretary of Education Arne Duncan wielding billions of “stimulus” dollars to coerce states to do Washington’s bidding. And that’s not just my take. It’s also the New York Times’:
Mr. Duncan is a man in a hurry. He has far more money to dole out than any previous secretary of education, and he is using it in ways that extend the federal government’s reach into virtually every area of education, from pre-kindergarten to college.
Race to the Top. SAFRA. National standards. For well over a year, we at the Center for Educational Freedom have issued warnings about all of these escalations of utterly unconstitutional federal power in education, but it has been nearly impossible to cut through all of the huge, non-education stories to get much notice.
Unfortunately, the hits just keep on coming. While the nation is fixated on oil in the Gulf of Mexico and the supposed evils of Wall Street, the administration continues to change the constantly moving target that is the Race to the Top program, now essentially offering individual districts in California a chance to compete in RTTT round two. This despite states explicitly being identified as THE competitors in the current RTTT. It almost makes you conclude that you just can’t trust anything you’re told about RTTT by the administration, and that there is no good reason for any state to expect a fair race.
Thankfully, there is some good news to report. According to the Times, the ever-expansive Department of Education is now about as popular as the tax man — but not quite:
A new survey by the Pew Research Center found distrust of government at its highest level in 30 years. Of all federal agencies, the department of education’s approval rating had fallen most sharply, to 40 percent from 61 percent in 1998. In fact, the department got the lowest rating of any federal agency, including the Internal Revenue Service.
And that is with ED operating largely under the radar. Imagine if people actually knew what Duncan and company were doing!
Help Kareem Now
We’ve written about the jailed Egyptian blogger known as Kareem before. Now the people who are working for his release are asking that people “flood the jail with mail” so that Kareem and his jailers will know that the world is watching. I hope you’ll take a moment to help.
Kareem attended a conference for Arabic liberal and libertarian bloggers and writers in 2006, when he was 21 years old. Within months he was arrested and sentenced. He has served more than 3/4 of a four-year sentence for writing about freedom, democracy, and women’s rights on his blog, and yet he still has not been released. He has suffered not only the loss of his freedom, but continuing abuse. It is important to let the Egyptian authorities know he is not forgotten. Please help by writing to him. And please follow the guidelines and not include anything incendiary or likely to lead to his being harmed further.
As Tom Palmer and Raja Kamal wrote in the Washington Post, “People should be free to express their opinions without fear of being imprisoned or killed. Blogging should not be a crime.”
In 2008 students at the first convention of Students for Liberty rallied for Kareem on the steps of Columbia University (at right). Others around the world, on the web and in person, have tried to keep a light shining on Kareem’s case. But it’s hard to maintain such a campaign for years, as the Egyptian authorities refuse to let this young man go. Don’t let them think that no one notices.
More details about the case can be found here.
Surveillance Cameras and Civil Liberties II
In a piece at Politico today, David Rittgers raised a number of important points on the role of surveillance cameras in law enforcement, about which I blogged yesterday at Politico Arena and Cato@Liberty. To add still more to the subject, David is quite right: the cop on the beat, assuming he’s there, will be better than the camera at preventing crime. In at least two cases, however, cameras can fight crime not only ex post but ex ante as well. First, cameras monitored in real time — as private cameras often are in apartment buildings, casinos, warehouses, and elsewhere — can facilitate crime prevention by alerting monitors to suspicious activity. And second, would-be criminals who are concerned about being caught may think twice if they suspect they’re being monitored. Cameras will not deter suicide bombers, of course; nor will they deter those who are unaware they’re being monitored, as may have been the case with the incompetent bomb maker in Times Square – who seems at this writing (we await more facts) to have wanted to “get away,” all the way to Pakistan.
But to add further to the civil liberties point I made yesterday, not only are surveillance tapes usually more accurate that eyewitness accounts in identifying criminals, thereby lessening the very real problem of mistaken prosecutions and convictions, but they aid also in the equally real problem of police (and even prosecutorial) abuse. Two weeks ago David blogged about the recent University of Maryland case involving the notorious Prince George’s County police department, where a video showed police brutality that the police later falsified in their report. And surveillance tapes can work in the other direction too — to protect police from false accusations of brutality. So the civil liberties implications of surveillance cameras are many, and often not what they seem on first impression.
Life under Prohibition
Washington, D.C., has the highest percentage of marijuana smokers in the nation, reports the Washington Post. “More than 11 percent of Washingtonians older than 26 reported smoking marijuana in the past year — the highest percentage of any state in the nation, according to a 2007 survey by the U.S. Substance Abuse and Mental Health Services Administration.”
Is that a problem? Well, back around 1990 a satirical revue described the city government as “the nation’s first work-free drug zone.” But the people described in the Post article seem to work pretty hard, as scientists, businessmen, and so on.
One problem is inadvertently described by D.C. Assistant Police Chief Peter Newsham:
“People don’t feel marijuana is dangerous, but it is, because of the way it is sold,” he said. “We frequently recover weapons when serving search warrants associated with the sale of marijuana.”
Exactly. Because marijuana is illegal, it’s not sold by kindly old liquor store owners. It’s distributed by people who are by definition criminal and who tend to engage in criminal behavior to protect their markets.
Its illegal distribution also accounts for another phenomenon that the Post notes:
Teenagers in parts of the city said they can buy pot more easily than beer or cigarettes.
Legal products, for sale to adults only, are harder for teenagers to obtain than a product that is illegal for everyone. Maybe it’s time to rethink the success of drug prohibition.
The City That Never Blinks?
A few points about closed circuit surveillance cameras, since their relative uselessness in the camera-festooned Times Square doesn’t seem to have stemmed the call for yet more cameras as an anti-terror measure.
First, I think it’s helpful to be clear just what we’re talking about when we say “urban surveillance cameras.” Lots of private businesses and apartment buildings have their own cameras trained at least in part on public spaces. And at this point, most of us are carrying around miniature cameras in our pockets 24/7 as well. I’ve read reports suggesting that the most promising video police obtained of the suspected bomber came not from the many CCTV cameras the city has in place there, but from a tourist who’d been taping in Times Square. These provide many of the same advantages as official surveillance networks—after a crime occurs, police can obtain and collate footage from the scene from the various owners—without creating a centrally controlled surveillance architecture. For the remainder of the post, I’ll assume “cameras” means just such a citywide network of government controlled cameras, of the sort famously deployed in the U.K. and planned for New York—but it’s worth noting that a city without these kinds of cameras is not necessarily a city without video evidence of crimes.
Second, while there will of course be the odd case one can find where cameras were instrumental in solving a crime, the research that’s been done on public CCTV networks shows tha they’re of stunningly little evidentiary or deterrent value. There are a few specific types of locations where the presence of cameras does seem to reduce, crime, or at least push it elsewhere. They seem to be fairly effective in parking lots. But on the whole, at the city level, they just don’t work very well. In Britain, famously festooned with CCTV cameras, they’re only rarely useful in apprehending street criminals, and the boroughs with more cameras don’t seem to be any better at catching crooks than those with few. Anecdotal evidence can be beguiling here, because once you’ve created such a system of course the history of a few memorable apprehensions will involve the use of that system. If we gave cops lassos instead of guns and tasers, they’d end up lassoing a few crooks sooner or later too, but that hardly goes to show lassos are the right tool for the job.
A Cuban Exile Speaks for Millions
Renowned Cuban writer Carlos Alberto Montaner speaks for millions of Cubans in his statement on freedom below. It is a translation of the speech he gave in Madrid last Friday upon accepting a well deserved award given by the Instituto Juan de Mariana for defending liberty.
Freedom for What?*
In 1980, shortly after making a dramatic exit from Cuba, the magnificent writer Reinaldo Arenas collected in a book his more combative articles and essays and titled it “The Need for Freedom.”
It was a shout. Reinaldo felt the need to be free. Human beings need to be free. He was asphyxiating in Cuba. He lived in sadness, fear and indignation. None of those three emotions is pleasant, and sometimes they twisted in his heart to the point of desperation.
After finding exile, Reinaldo felt profound relief and said something that was both wondrous and painful: for the first time, he had shown his true face. He had “unmasked” himself and felt the warm sensation of being himself, without the fear that such an act might bring him punishment and alienation.
In totalitarian societies, the pain of not being free and moving about in disguise becomes somatic in various ways, from a knot in the throat to a diffuse malaise expressed by assorted neurotic behaviors.
Tuesday Links
- David Rittgers on the New York bomb plot: “This is one of the few cases in which police surveillance cameras earn their keep. When it comes to deterring crime and terrorism, police on the beat are still the sharpest tool we have. The Times Square plot was foiled by an alert person and a prompt police response — not by a camera. …But cameras aid in the response — helping piece together the plot and track down those responsible.” More on this from Roger Pilon.
- Quiz Time: If government spending is growing faster than GDP, can the resulting deficit problem be solved by: (A) decreasing the rate of growth of government spending, (B) increasing tax rates, (C) decreasing the rate of growth of government spending and increasing tax rates? Click here to find out how you did.
- Gene Healy: Busting the Myth of Camelot.
- Doug Bandow on what to do about North Korea: “Beijing should take the lead in forging a new, active policy designed to both denuclearize the Korean peninsula and promote political and economic reform in the North.”
- Podcast: “Alcohol and the Commerce Clause” featuring Ilya Shapiro.
First Impressions from Abu Dhabi
Abu Dhabi, United Arab Emirates—I arrived in Abu Dhabi late last night, and have spent the day in a series of meetings (with one more scheduled for this evening). The 9-day trip, organized and led by Jon Alterman of the Center for Strategic and International Studies, will also take us to Dubai and Riyadh. If the accommodations are even half as nice as our current digs (on a 5-star scale, I’d rate the hotel an “8″) then we’re in for a real treat. (Sorry Doug and Malou).
My first impressions of Abu Dhabi generally conform to what I expected based on my very limited knowledge of the place. I last visited here onboard USS Ticonderoga in 1992, but frankly remember very little. A few buildings looked vaguely familiar, but that is about it. I have had to rely on a packet of materials that Jon assembled for our group in order to get up to speed.
This is a wealthy country; oil wealth, to be sure, which can be as much a curse as a blessing. But there are signs of diversification. Cranes abound, and unlike in Dubai, where the financial crisis has put a chill on a once-booming real estate market, Abu Dhabi continues to do well. Indeed, much of the traffic flowing into the city, I was told, is made up of cars from Dubai. I’m anxious to see the contrast when we visit there later this week.
This is a nervous country. Emiratis (at least the ones we met today) are nervous about Iran, a traditional adversary, and a rising power in the region made more powerful by the overthrow of Saddam Hussein. They worry about Iran’s nuclear ambitions. They worry about how Iran’s behavior might change if they were to acquire nuclear weapons. But they also worry about the ramifications of military action against Iran’s nuclear facilities, given that the retaliation is likely to be directed at numerous targets in the region. They don’t hold out much hope that sanctions will be particularly effective in convincing the Iranians to reverse course, but they support the effort nonetheless.
Looking past Iran, Emiratis are nervous about a future that depends far too much on proceeds from the sale of oil, and on the contributions of expatriates who make up more than 80 percent of the UAE’s total population of nearly 5 million. These expats operate the hotels and the restaurants. They can be seen building the roads and skyscrapers. They are instrumental in Abu Dhabi’s nascent homeland security unit, the Critical National Infrastructure Authority. They help manage the UAE’s nuclear power program. And they serve as advisers at the highest levels of the national security apparatus.
This is a country that values its good relations with the United States, but that understands that this relationship will always have its limits. In our last meeting of the day, a senior government official reminded us of how far the UAE had come in a relatively short time. Fifty years ago, according to this official, 1 in 4 women died during childbirth, and infant mortality was nearly 50 percent. Now the UAE is among the healthier countries in the world.
They do not take their good fortune for granted, however. They are striving to develop the skills necessary to operate their critical infrastructure, and to be able to better defend their country without having to rely so heavily on foreign assistance.
I’m off to another meeting, but I’ll write more later.
Earmarkers vs. Bureaucrats: Taxpayers Lose Either Way
One of the justifications members of Congress offer for earmarking is that the Constitution gives the legislative branch the “power of the purse.” Congressional earmarkers often denigrate the executive branch’s inability to effectively allocate funds. But just because the federal bureaucracy does an abysmal job of spending taxpayer money, it doesn’t mean lawmakers would do any better.
The following example out of Florida illustrates why lawmakers are just as likely as bureaucrats to misspend taxpayer money. According to the St. Petersburg Times, a developer who has never had a successful project was able to convince four members of Florida’s congressional delegation into supporting a $500,000 earmark for a Tampa affordable housing project. The developer had already wasted $563,000 in federal and state taxpayer funds on housing projects that now “sit vacant and rotting.”
According to the article, suckering more money out of Congress was apparently pretty easy:
But the federal earmark process involves little vetting of recipients. So the four members of Congress didn’t know that Foster had never successfully completed a housing project. They didn’t know he exaggerated the involvement of his partners in the proposal he presented to them. They didn’t know he has a record of mishandling grants for much less ambitious projects. And they didn’t know his nonprofit has faced legal troubles, including IRS liens for unpaid payroll taxes.
The lawmakers, who represent Florida and the Tampa Bay area, say they made their decision based largely on information provided by Foster. Others say he never should have gotten a cent.
“I am flabbergasted that this guy’s getting another $500,000. That’s just insane,” said Craig Rothburd, an attorney working pro bono for the Hillsborough County Homeless Coalition. The coalition directed a $400,000 state grant to Foster to develop housing for homeless people. It is now suing Foster for fraud and breach of contract.
Might these lawmakers have put a wee bit more effort into scrutinizing the developer had the money been their own?
Regardless of whether federal funds are allocated by the bureaucracy or earmarked by politicians, both are spending other people’s money. Neither has the incentive to conduct the due diligence necessary to ensure that the money is properly spent. This is one reason why the federal government’s “affordable housing” efforts have been a failure.
Therefore, the question of whether the executive or legislative branch should have more control over spending is a secondary concern. The primary focus should be on efforts to restrict the government’s activities to the small number defined in the Constitution.
Lobbying R Us
Think Washington lobbying is just for the big-money interests? Think you could never afford a lobbyist yourself? Well, think again! At Crazy Eddie’s Lobbying Service, our prices are insane!
The firm is actually called Keys to the Capitol. It was started not by Crazy Eddie or Sy and Marcy Syms, but by Paul Kanitra, who’s happy to call it McLobbying. Keys to the Capitol
targets small towns, humble associations and others of modest means that can’t even consider signing the $10,000-a-month retainers required by many top Washington firms. Instead, Kanitra’s company offers contracts starting at $995, month-to-month agreements and prices and other details spelled out on the company’s Web site.
Want some government money? Want to regulate your competitors? Come on down to Keys!
Now of course it might be that the new, low-priced, easy-to-understand lobbying firm would be helping people get government off their backs. Sort of a “leave us alone” lobbyist for Tea Party times.
Get real. What do you think those small towns want? They’re not hiring a Washington lobbyist, even a cheap one, to get government off their backs. They want a piece of that stimulus money, or that Race to the Top money, or that highway money, or whatever. And take a look at the Washington Post‘s description of one of Keys’s first clients,
the aptly named Louie Key, national director of the 3,000-member Aircraft Mechanics Fraternal Association of Aurora, Colo. Key was shopping around for a lobbyist to help his union on several federal issues, including persuading lawmakers to tighten oversight of repair stations that use unlicensed mechanics.
That’s right. This little ol’ association just wanted a nice simple law to impose new regulatory burdens on their cheaper competitors. That’s Washington in a nutshell. As long as the government has favors to hand out, people will pay lobbyists to get access. So come on down and get yours!
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