Voice For Liberty

Tag: Barack Obama

  • Kansas and Wichita quick takes: Tuesday September 20, 2011

    Douglas Place value. The budget published by the city for the Douglas Place project, a downtown Wichita hotel, includes $2,600,000 for purchase of the existing building that will be turned into the hotel. According to Sedgwick County, the property has an appraised market value of $710,900. A good question for someone to ask is why the developers are paying so much more than that — or why the property is appraised so low if in fact it is worth $2,600,000. Or, does the fact that the city is offering subsidies drive up the value of property?

    Douglas Place vote delayed. Today the Wichita City Council delayed the vote on the second reading of the subsidy package for the Douglas Place project. Some of the subsidy programs require five votes, and with the mayor and council member Pete Meitzner absent, and with council member Michael O’Donnell opposed, there weren’t five votes to pass these measures.

    Solyndra unnoticed by some. As of last Friday, prime time programs on the MSNBC television network haven’t covered the scandal involving Solyndra, a solar energy company that received $535 million worth of loan guarantees from the Obama administration, reports Newsbusters.

    On Solyndra, the real lesson. Tim Carney gets it just right when he notices that Republicans are using the Solyndra scandal as a hammer against President Barack Obama in particular and Democrats in general. Instead, Carney writes that Solyndra is an example of “influence peddling, incompetence and waste that are inevitable whenever government becomes deeply entangled in industry.” Republicans do this too. Here in Wichita most Republican members of the city council vote for this. … Continues Carney: “If Republicans were willing to broaden their attack beyond criticizing this one loan deal, they could indict the whole practice of government-business collusion. The GOP could show how Solyndra is the inevitable consequence of Obama’s type of big-government policies. … The problem is that Obama’s stated agenda, which involves giving government a central role in the private sector, inevitably creates waste, gives benefits to the well-connected, and opens the door for cronyism and corruption. Obama promised to be the scourge of the lobbyists and the antidote to special-interest dominance in Washington, but he also promised an activist government role in the economy. The two are nearly mutually exclusive.” More by Carney in the Washington Examiner at Republicans dodge the real lesson of Solyndra.

    Spreading the wealth: the costs. Leslie Carbone writing in The Moral Case Against Spreading the Wealth: “There are two principal reasons why the federal government should not be in the business of wealth redistribution. First, government imposed wealth redistribution doesn’t work: It doesn’t create, or even spread prosperity, it dampens it.” On the moral case, Carbone writes: “Government imposed redistribution does moral harm as well. First, wealth redistribution discourages the virtuous behavior that creates wealth: hard work, saving, investment, personal responsibility. In the natural order, virtue and vice carry their own consequences. Virtue yields largely positive results. Hard work, patience, and orderliness, for example, tend to generate prosperity. Vice, on the other hand, brings negative consequences. Sloth, impatience, and recklessness lead to suffering. By taxing the fruits of the virtuous behavior that creates wealth, government redistribution discourages that behavior.” … Concluding, Carbone see cause for optimism: “[Millions] are rejecting what F.A. Hayek so aptly called the fatal conceit of paternalistic government. Decades of federal expansion have demonstrated what history, economics, philosophy, and common sense have told us all along: People, working through the market, are the engines of prosperity, both moral and financial — but only if we get government out of their way.

    Kansas schools to be topic. This week’s meeting (September 23rd) of the Wichita Pachyderm Club presents Dave Trabert, President of Kansas Policy Institute, speaking on the topic “Why Not Kansas: Getting every student an effective education.” … The public is welcome and encouraged to attend Wichita Pachyderm meetings. For more information click on Wichita Pachyderm Club … Upcoming speakers: On September 30, U.S. Representative Mike Pompeo of Wichita on “An update from Washington.” … On October 7, John Locke — reincarnated through the miracle of modern technology — speaking on “Life, Liberty, and Property.” … On October 14, Sedgwick County Commission Members Richard Ranzau and James Skelton, speaking on “What its like to be a new member of the Sedgwick County Board of County commissioners?” … On October 21, N. Trip Shawver, Attorney/Mediator, on “The magic of mediation, its uses and benefits.”

    Natural rights. From LearnLiberty.org, a project of Institute for Humane Studies: “Individuals have rights. But are they natural? And how do they compare and contrast with legal or constitutional rights? Are legal or constitutional rights similar to those inalienable rights mentioned in the Declaration of Independence? Professor Aeon Skoble distinguishes such constitutional rights, such as the right to vote, from the rights protected by governments and constitutions — natural rights not actually granted by governments themselves. He concludes that legal systems should create rights that are compatible with natural rights.”

  • Obama: Not enough spending on schools

    Andrew J. Coulson notes that President Barack Obama says we’re not spending enough on schools and presents evidence of just how much we are spending on schools. His article is Obama Jobs Plan to Push More K-12 Bloat?

    Take a look at the chart that Coulson prepared, showing the growth rate of public school employment compared to the growth in students.

    Changes in public school employment and enrollment.Changes in public school employment and enrollment.

    Considering that personnel costs are the largest portion of school spending, it’s pretty hard to make the case that we haven’t been spending on schools. Coulson’s article also compares the trend in student achievement compared to spending.

    Looking at the numbers a different way, I computed the ratio of staff to students, with the following result: There are many more teachers and staff for each student.

    K-12 Education Staff Per Student Ratio

  • Obama job plan not likely to help

    In order to help the economy President Barack Obama promises to soon reveal a plan to create jobs. Today’s preview before a union audience in Detroit didn’t provide many details, but based on the president’s past actions and guesses as to what the plan is likely to contain, it’s unlikely the plan will work.

    Various news reports and commentary have mentioned these as possible elements of an Obama jobs plan:

    A tax credit for hiring new workers. Some sources have suggested the plan might use tax credits to pay companies as much as $5,000 per new worker hired. Another estimate said Obama will have another tax credit plan that creates 900,000 additional jobs at a cost of $30 billion. That’s $33,333 per job. There’s evidence that these programs don’t work very well, as many of the jobs the government pays for are ones that companies were going to create anyway. This is also not a cut in marginal tax rates. Instead, it is more properly classified as a government spending program.

    Job training. This is a common response by government. Government, however, has a history of training the wrong people for the wrong jobs. The private sector is much better positioned to train its employees. But job training sounds like education, something that’s it’s difficult to be opposed to, no matter how poor a job the government does.

    Spending on infrastructure, especially school repairs.

    Extending the one-year cut in the payroll (Social Security and Medicare) tax. Less tax money flowing to government is always a good idea. Balanced against this is the need to pay for Social Security and Medicare.

    Extending unemployment insurance benefits. There’s some sense in doing this. Obama didn’t start the recession, but his policies are prolonging it and preventing recovery. So it’s not necessarily workers’ fault they were laid off and can’t find a job. But there’s a lot of evidence that extending unemployment insurance benefits extends the time many people will be out of work.

    Signing trade agreements. This is a good idea, as allowing free trade increases the wealth of everyone. But, you don’t need a treaty in order to have free trade.

    Help for homeowners. The housing crisis, caused by government, is a major problem. The value of houses must be allowed to fall to their natural level. Any programs that prevent this, or delays this market-clearing from happening, only prolongs the problem. It’s likely that any program coming from the Obama administration will do this.

    In his speech today, Obama’s speech today mentioned spending on “roads and bridges.” he also called for an extension of the payroll tax cut, which he said placed an extra $1,000 in the pocket of the average family, and he alluded to the trade agreements.

    He challenged Republicans to support tax cuts for working class companies, instead of for oil companies and the rich, and said “The time for Washington games is over. The time for action is now.”

    The problem with the president’s proposals is that they do not provide an environment for the growth of business. Some of his plans, like repairing schools, simply grow government at the expense of the private sector and leave future taxpayers a bill.

    The tax cuts for hiring workers is simply a spending program. The president — if he does propose these tax credits — will likely present them as a tax cut. That’s true in one sense, as it leaves more money in the private sector rather than government, which is good. But these tax credits aren’t what we need to really grow the economy, even through the program will leave more money in the private sector.

    For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

    Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. This is not to say that I am not in favor of these programs. Anything that reduces the burden of taxes is welcome. But they are not the type of tax cuts that spur economic growth.

    Why are low marginal tax rates important to economic growth? First, high marginal tax rates discourage people from producing. As people get to keep less and less of what they produce after they pay higher tax rates, most decide to produce less. Some stop producing anything.

    Second, high marginal tax rates encourage people to invest in economically unproductive investments — like tax shelters — simply to avoid paying tax, without regard to the underlying wisdom of the investment. Or, people decide that since government takes so much of the money they earn, they might as well spend it on tax-deductible expenses that they might not buy otherwise. A company might hold an engineering conference at an expensive luxury resort instead of a modestly-priced facility — or instead of holding it electronically.

    Who responds most positively to reductions in marginal tax rates? First, with about half of American households paying no federal income tax at all — although they do pay payroll taxes — the idea of marginal tax rates doesn’t apply to them. That leaves high-income workers, or as Jeffrey A. Miron explains, the most economically productive members of society that are positively affected by marginal income tax rates:

    The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

    It is these “energetic and productive” people that are responsible for a great deal of economic activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

    In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

    The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.”

    This is one of the things the president needs to do to grow jobs: reduce marginal tax rates. Then, reduce spending. This, along with sound monetary policies, has the best track record of producing private sector economic growth, and with that, jobs. But both of these, since they reduce rather than grow government, are not within Barack Obama’s realm of thinking, and so are not likely to be proposed.

  • ‘Honest services’ law expansion sought

    While the U.S. Supreme Court has attempted to limit the application of vague “honest services” statutes, the Obama Administration is working to restore what the Wall Street Journal describes as “essentially unlimited prosecutorial discretion to bring white-collar cases.”

    David Rittgers of the Cato Institute explains the meaning of this law: “The ‘honest services’ statute criminalizes ‘a scheme or artifice to deprive another of the intangible right of honest services.’ This criminalized an employee lying to his employer, and as Justice Scalia pointed out, ‘would seemingly cover a salaried employee’s phoning in sick to go to a ball game.’ Prosecutors were able to get those convicted up to five years in federal prison, a $250,000 fine, or both.”

    On the impact of the laws, Rittgers writes: “As a practical matter, the law gave federal prosecutors the power to criminalize objectionable behavior, conflating the merely unethical with the intentionally criminal. Behavior that was not illegal under state law (particularly state ethics requirements for public officials) became illegal under federal law.”

    In other words, the power of prosecutors was vast. While the Court rewrote the law, Rittgers contends that little has changed.

    The Journal notes how the honest services laws amount to a large expansion of the criminal justice system, and is used as a method of back-door business regulation: “Among the multitude of federal, state and local laws, there is little human behavior, much less criminal activity, that remains outside the reach of the justice system. Federal white-collar criminal statutes have multiplied in recent years, often as a way to regulate business conduct.”

    The vagueness of this law troubles Timothy Sandefur, an attorney at the Pacific Legal Foundation and Cato Institute Adjunct Scholar. In his article Get Rid of Vague Laws: They impede on individual rights and economic freedom, he explained the danger of vague laws: “There’s probably nothing more dangerous to individual rights than vaguely written laws. They give prosecutors and judges undue power to decide whether or not to punish conduct that people did not know was illegal at the time. Vagueness turns the law into a sword dangling over citizens’ heads — and because government officials can choose when and how to enforce their own interpretations of the law, vagueness gives them power to make their decisions from unfair or discriminatory motives.”

    Sandefur notes that vagueness combined with proliferation of criminal laws gives government large power over citizens: “Combine vagueness with the ever expanding number of statutes and regulations affecting businesses and entrepreneurs on a daily basis and the result is a government bureaucracy with almost unlimited power to intimidate and blackmail citizens with the threat of prosecution — or to punish practically any conduct they choose to declare ‘illegal.’”

    Sandefur explains this and more in an audio broadcast The Intangible Right of Honest Services.

    The Journal piece also warns of the danger of vague laws: “Vague laws are invitations to legal mischief. In his recent dissent in Sykes v. U.S., Justice Antonin Scalia wrote that ‘We face a Congress that puts forth an ever-increasing volume of laws in general, and of criminal laws in particular. It should be no surprise that as the volume increases, so do the number of imprecise laws.’”

    What is troubling are the efforts by the Obama Administration and some members of Congress to undo what limits the Court applied, and also their efforts to expand the power of prosecutors. An assistant U.S. attorney general told Congress that it needed to “remedy” the Court’s decision. The Journal also reports there are three bills in Congress that would “[expand] the reach of prosecutors to go after unpopular politicians or businesses whom they can’t pin with a real crime.”

    An example is a bill introduced in the last Congress by Vermont Senator Patrick Leahy, titled “Honest Services Restoration Act.” In the current Congress, virtually identical legislation has been introduced under the title H.R. 1468: Honest Services Restoration Act. It was introduced by Representative Anthony Weiner of New York, who is no longer serving in Congress.

    The Journal article is Return of ‘Honest Services’: Politicians try to restore prosecutorial powers that the Supreme Court killed (subscription required).

  • Supply-side economics, instead of taxes, is cure for recession

    From April, 2010.

    Sound money and income tax cuts — the elements of supply-side economics — have produced economic growth in America, according to Dr. Brian Domitrovic of Sam Houston State University. When our country imposes inflationary loose money policies and high income taxes, economic growth suffers, as in the period from 1973 to 1982. Unfortunately, these are the policies of President Barack Obama and his administration.

    Domitrovic lectured on principles in his book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity last night at Friends University. His lecture was part of the Law, Liberty & the Market lecture series, which is underwritten by the Fred C. and Mary R. Koch Foundation in Wichita.

    “Unemployment at nine percent, five grueling quarters of decline in GDP growth, the stock market snapped back from its horrid 50 percent decline, but still needing a good 25 percent to get back to its old high: this has been some economic contraction.” While this may sound like a description of the current recession, it’s not. Instead, Domitrovic was describing the recession of 1974 and 1975. The stagflation period from 1973 to 1982, characterized by both high unemployment and high inflation, was a dark period in American history.

    There was also a mortgage and foreclosure crisis during that decade, but it affected the most prudent homeowners the worst. Property taxes in California went up five-fold in a period of ten years. Selling your house resulted in the loss of half your equity because of the capital gains taxes that were in effect then.

    While unemployment is high today, inflation is low, with prices even declining slightly last year. Being unemployed while prices are rising at nine percent per year — or 33 percent during one two-year period — is much worse than being unemployed today.

    In 1980 the bank prime interest rate reached 22%. (It’s 3.25% today.) It was impossible to save money in the 1970s, as the real tax rates on saving exceeded one hundred percent.

    Our economic crisis today is the “junior partner” to the stagflation decade. Our current political leaders should not be comparing the current situation to the Great Depression of the 1930s. Instead, the stagflation period has better lessons to teach us. It took 20 years for American living standards to recover to the level attained before the Great Depression started, Domitrovic told the audience, so we should not implement the same policies in response to the current recession.

    Instead, we have a fairly recent crisis — the stagflation period — which was solved “so firmly, so efficiently, so permanently” that the quarter-century following this period is known as the “Great Moderation.” There was economic growth year after year, inflation nearly vanished, unemployment was low, interest rates settled, businesses started, and stocks and bonds boomed.

    It was supply-side economics that ended the stagflation and lead to the long period of prosperity, the Great Moderation. Failing to embrace supply-side economics as a response to the economic problems that arose in 2008 was one of our greatest mistakes.

    As the current crisis enters its third year, we should not be surprised that recovery is slow to arrive. “Tepid and incomplete recovery was, in fact, the record of the New Deal, which our policymakers have looked to for inspiration,” Domitrovic explained.

    Supply-side economics consists of stable money and marginal tax cuts. These are the policies that defeated stagflation and lead to the Great Moderation.

    Domitrovic explained that in 1913, two great institutions of macroeconomic management were created, the Federal Reserve system and the income tax. Prior to this time, the United States had no ability to conduct macroeconomic policy, either fiscal or monetary policy.

    Since 1913, the economic history of the U.S. has been that of “serial disaster.” From 1913 to 1919, prices increased by 100 percent. Prior to that, there had never a peacetime inflation in the U.S. The top rate of the income tax, which started at a rate of seven percent, had increased to 77 percent by 1917. From 1919 to 1921, the U.S. experienced its worse recession up to that time. Unemployment rose to 18 percent. Prior to this time, unemployment was not a problem.

    The fix was President Warren Harding’s Treasury Secretary Andrew Mellon telling the Federal Reserve to keep the dollar stable instead of trying to manipulate the price level, and the income tax rate was cut by two-thirds. As a result, from 1921 to 1929 inflation was low, less than one percent, and that nation experienced the boom known as the Roaring Twenties. Economic progress boomed.

    But in 1929, the Federal Reserve started to deflate the currency in an attempt to get prices back to the 1913 level. In 1932 the top income tax rate was raised to 63 percent from 25 percent. “There you have the Great Depression,” Domitrovic said. It was a crisis of macroeconomic management, not a failure of capitalism, as is commonly believed.

    Franklin Roosevelt instructed the Federal Reserve to keep the price level steady, which was one good policy he implemented. But he increased income tax rates.

    In 1947 income tax rates were cut and the Federal Reserve pursued stable prices after the inflation of World War II.

    A pattern emerged: stable prices coupled with income tax cuts lead to recovery. When these policies are not applied, recovery was weak and collapsed. These patterns repeated through the rest of the century.

    During the Eisenhower Administration, the top tax rate was 91 percent. Eisenhower refused to cut taxes, and there were three recessions during his presidency.

    John F. Kennedy wanted to solve the crisis. His advisors told him to loosen money and raise taxes, even though the top marginal rate was 91 percent. The idea, according to recently-deceased economist and Kennedy adviser Paul Samuelson, was that by increasing the money supply people would spend money, which would cause production to increase and workers to be hired. But increasing the money supply produces inflationary pressures. The solution was very high income tax rates, which sops up the extra money that causes inflation.

    But Robert Mundell, only 29 years old at the time, wrote a memo that advised the opposite, advocating stable money and low taxes. Kennedy adopted this policy, and a great boom resulted for seven years.

    But Lyndon Johnson asked his Federal Reserve Chairman to increase the money supply, and passed an income tax surcharge to attempt to control the danger of inflation — the “neoclassical synthesis.” Inflation rose. Nixon increased the capital gains tax and established the alternative minimum tax. The result was the double-dip recession of 1969 to 1970, which cost more in economic output than the cost of the entire Viet Nam war.

    Still, the Federal Reserve kept increasing the money supply, and the income tax rate was increased. Nixon insisted that printing money would save the economy, and in order to control inflation, Nixon imposed price controls. The result was an investment strike. If businesses could not charge the prices they needed, they would enter other fields of businesses, such as commodities. The prices of commodities rose rapidly, and there was the terrible double-dip recession of 1974 to 1975.

    Mundell, along with Robert Bartley of the Wall Street Journal and others, started to encourage government to tighten the money supply and lower taxes. At the same time United States Representative Jack Kemp introduced a bill calling for a large tax cut and stable money. Kemp’s bill passed both houses of Congress with a veto-proof majority. But Jimmy Carter had it killed in committee.

    If not for Carter’s action, the Kemp-Roth tax cuts would have become law in November 1978. These tax cuts, had they been passed and been coupled with Carter’s appointment of Paul Volcker — an advocate of stable money — as chairman of the Federal Reserve in August 1979, would have found the policy elements of “Reaganomics” in place at that time. Domitrovic said the economy would have recovered rapidly, and it is likely that Ronald Reagan would not have run for president in 1980.

    Instead, the period from 1979 to 1981 was a brutal period of economic history, with high unemployment, high inflation, and tanking markets.

    Upon entering office, Reagan was able to implement sound money policy and tax cuts — by then called supply-side economics — and the economy started the boom that lasted for 25 years. During this time there was only one recession, in 1990 and 1991. This is in contrast to the three recessions during Eisenhower’s eight years in office.

    Supply-side economics is one of the greatest success stories in economics and government, Domitrovic said. Despite evidence of its success, despite the fact that every objection to it has collapsed, policymakers did not follow its policies in 2008. Objections to supply-side economics that have proven to be unfounded include:

    It is inflationary. This is the basis for George H.W. Bush’s characterization of supply-side economics as “voodoo” economics. But inflation since 1982 has been very low.

    It would cause crowding-out. This refers to the fact that tax cuts can cause budget deficits, and the government would have to borrow so much money that none would be available for private business investment. But the 1980s, 1990s, and 2000s were a period of historic expansion, with the Dow Jones stock market average increasing by a factor of 15 during this time.

    Government debt is a burden to future generations. But the nation experienced great prosperity and economic expansion during the Great Moderation, and interest payments on the debt were not a major burden.

    Tax cuts would place the U.S. in a “fiscal hole,” with budget deficits forever. But by the 1990s we were running budget surpluses. Domitrovic said that when Clinton balanced the budget in 2000, the total level of government expenditure was 18.4 percent of gross domestic product. In Reagan’s last year in office (1989) revenues were 18.4 percent of GDP. “In other words, Reagan’s tax policy plus Clinton’s spending policy was exactly sufficient for a perfectly balanced budget.”

    Supply-side economics causes inequality. But Domitrovic said that tax cuts mean that wealthy people don’t have to hide their income from taxes, making their income more productive publicly. Inequality has decreased.

    Summarizing, Domitrovic told the audience that the lessons of the Great Moderation are that when the institutions of 1913 — Federal Reserve and the income tax — are tamed, the American economy does wonderful things. Stable money and low taxes, combined with the entrepreneurial knack of Americans, produces remarkable economic growth and job opportunities. But when the macroeconomic institutions of 1913 run a muck the economy will suffer. The current policies of the Obama Administration — loose money and rising taxes — are not going to produce prosperity.

  • Kansas and Wichita quick takes: Wednesday August 3, 2011

    Debt ceiling. What is the real value of the debt ceiling? Has it ever constrained the growth of government debt, until now? Thomas Sowell in Debt-Ceiling Chicken: “Some people may have been shocked when the credit-rating firm Moody’s recently suggested that the debt-ceiling law be repealed, in order to avoid fiscal crises which can throw world financial markets into turmoil that can injure countries around the world. Anyone who wants to show that Moody’s is wrong should be prepared to show the actual benefits of the debt-ceiling, not its goals or hopes. That will not be easy, if possible at all. … The national debt-ceiling law should be judged by what it actually does, not by how good an idea it seems to be. The one thing that the national debt-ceiling has never done is to put a ceiling on the rising national debt. Time and time again, for years on end, the national debt-ceiling has been raised whenever the national debt gets near whatever the current ceiling might be. Regardless of what it is supposed to do, what the national debt-ceiling actually does is enable any administration to get all the political benefits of runaway spending for the benefit of their favorite constituencies — and then invite the opposition party to share the blame, by either raising the national debt ceiling, or by voting for unpopular cutbacks in spending or increases in taxes.”

    Was August 2nd a deadline? All through the debate over raising the federal debt ceiling it was taken as granted that the deadline — the day the U.S. Treasury would run out of money — was August second. U.S. Representative Tim Huelskamp, who is in his first term representing the Kansas first district, has released data that shows otherwise. A chart on his website shows a declining balance in the treasury, but projections show a positive balance far past August second.

    Despite drag of government health care, Canada thrives. The unemployment rate in Canada has fallen, GDP growth is healthy, and there were no bank bailouts. It has been able to reduce the size of its government relative to its economy, writes Jason Clemens in Why Canada Is Beating America: It shrank government, and now unemployment and debt are declining: “Total government spending as a share of the economy peaked at a little over 53% in 1993. Through a combination of spending cuts in the 1990s and spending restraint during the 2000s, it declined to a little under 40% of GDP by 2008.” … For 2010, government spending at all levels in the U.S. amounted to 36.22 percent of GDP, according to the Bureau of Economic Analysis. While that compares favorably with Canada’s level, the trend in the U.S. is for spending to increase, having risen from 30.82 percent in 2004. … According to Clemens, the success of Canada’s economy is in spite of its government health care, not because of it: “The unavoidable challenge is the country’s health-care system. … Canada devotes a relatively high share of its economy to health care without enjoying commensurate outcomes. Of the 28 countries in the Organization for Economic Cooperation and Development (OECD) that have universal access, Canada has the sixth-highest rate of health spending as a share of its economy.” It would be one matter if Canadians enjoyed good results from all this health care spending. “But Canadians’ access to care is poor, despite high spending. The country ranks 20th of 22 OECD countries for access to physicians. … Waiting times for treatment continue to worsen.” … Liberals in the U.S. point to Canada as a model for government health care, but the actual situation is not one that we should aspire to.

    Kansas government website revamped. Kansas has remodeled its main website, kansas.gov. Besides a new look, I think a useful feature will be the use of a Google site-specific search feature. These generally work very well, applying the power of the popular and effective search engine to a specific website. Time will tell as to whether the design is useful. The state does not have a good record in recent times of website redesigns, as the effort to replace the legislature’s website right as the session started was a disaster. The press release with other details is at New State Web Portal Provides Better Experience, Mobility.

    Demand is not the problem. A recent letter to the Wichita Eagle started with “The only thing that creates jobs is demand for product.” This idea of economic wealth deriving from consumer demand is a Keynesian concept, and we’ve seen over and over the wreckage that Keynesian economics leaves on countries — starting with our own efforts to cure the Great Depression to the failing economic policies of President Barack Obama. It’s also curious to blame economic stagnation on the absence of desire of people for more stuff. People want more stuff — that’s human nature. It is by producing more that we create the wealth necessary to satisfy our demands. Production benefits from capital formation, and the policies of the United States are not favorable for this. … The author also promotes increasing exports while at the same time urging Americans to buy only U.S.-made products. This ignores the fact that trade — no matter who the trading partner — is a source of wealth. Both parties are made better-off through trade; otherwise the transaction would not take place.

    Debt ceiling bill. A budget cut only by Washington standards. “Throwing in the towel.” All the angst over the past month seems to have produced very little in the way of meaningful reform. Here several Cato Institute policy experts comment on this week’s lawmaking. “This week’s bipartisan deal to raise the debt limit and achieve some spending reductions will do little in the way of actual spending cuts, defers all the tough decisions on spending and debt to a “SuperCongress” committee and will do little to protect the United States credit rating. Cato Institute Senior Fellows Dan Mitchell and Jagadeesh Gokhale and Director of Tax Policy Studies Chris Edwards comment on the debt deal.”

  • U.S. receipts and expenditures

    A recent op-ed by Sen. Bernie Sanders of Vermont in the Wall Street Journal (Why Americans Are So Angry: Republicans want the entire burden of deficit reduction to be carried by the elderly, the sick, children and working families), besides holding faulty reasoning in every paragraph, hold a few factual errors that deserve discussion.

    Raise tax rates to raise revenue

    For example, Sanders writes regarding the rich: “Their effective tax rate, in recent years, has been reduced to the lowest in modern history.” He’s arguing for tax increases on the rich as a way of balancing the budget. (Really, he just wants more money to spend. He’s not serious about closing the deficit.)

    There are many like Sanders and President Barack Obama who call for raising taxes, especially on the rich, as a way to generate more revenue and balance the budget. But try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law. W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.’”

    So tax rates may be low, or they may be high, but tax revenue, as a percent of GDP, remains nearly constant.

    Hauser's LawHauser’s Law illustrated. No matter what the top marginal tax rate, taxes collected remain an almost constant percentage of GDP.

    Tax revenue is down

    Sanders also wrote “The sum of all the revenue collected by the Treasury today totals just 14.8% of our gross domestic product, the lowest in about 50 years.” Sanders is incorrect here. In 2010 receipts to the federal government as a percent of GDP was 16.73 percent, according to the Bureau of Economic Analysis. For the first quarter of 2011, the figure is 16.97 percent. These numbers are much higher than what Sanders claims. He didn’t mention where he got his figures.

    From 1960 to 2010 — the 50 year period Sanders mentions — the average revenue collected was 18.32 percent of GDP. The current figure is lower than that, so Sanders is correct that current revenue collections are lower than recent history, and that may be what has Sanders worried.

    A look back at the history of federal receipts and expenditures is useful. A chart is below.

    While President Ronald Reagan was able to cut tax rates, he couldn’t control spending as easily, and that led to large deficits. As a percent of the economy, spending rose during his term, although by the time he left office it was at the same level of GDP as when he took office. The message of Reagan’s presidency is that it’s easier to cut taxes than to cut spending. But we must always be in favor of cutting taxes, and hope that politicians have the fortitude to cut spending to match.

    It’s doctrinaire among liberals today to cite President Bill Clinton and his tax increase as the cause of the prosperity of the late 1990s and the accompanying budget surpluses for several years. But his tax increase was not the only thing going on in those years that contributed to a budget surplus. The peace dividend, as defense spending fell during his term, helped. Clinton had nothing to do with the end of Cold War; he was just lucky to be in place to benefit from its end.

    If cutting spending relative to the size of the economy was Clinton’s goal — and I don’t think it really was — he was lucky to have a Republican Congress starting in 1995 to help him accomplish this goal. With a Democratically-controlled Congress, it’s unlikely that spending would have been restrained, and with that, no budget surplus. While many bemoan gridlock in Washington because nothing gets done, the gridlock of the Clinton years led to less spending — and that’s good.

    We should also remember that in 1997 the capital gains tax rate fell from 28 percent to 20 percent. Capital gains taxes collected soared. That was a Republican initiative, and it contributed to increased tax revenue during the Clinton surplus years.

    The Clinton years were good for controlling spending, starting in 1993 with spending at 22.56 percent of GDP, and exiting in 2000 with spending at 18.81 percent. As to the prosperity of the Clinton years, many seem to forget that much of it was based on a bubble that couldn’t be sustained — the dot-com bubble. While not as large as the housing bubble, it was prosperity that very suddenly evaporated.

    Then President George W. Bush took office. In 2001 spending as a percent of GDP was 19.25 percent, and it rose slowly during his term, reaching 21.80 percent in 2008. Then it exploded to 24.75 percent in 2009 and slightly less in 2010. For the second quarter of 2011, the trend is upwards, as spending reached 25.50 percent of GDP.

    From the end of World War II to the start of Reagan’s presidency, spending steadily rose, relative to the size of the economy. From Reagan to Clinton we did a good job reversing this trend. But starting with the second Bush, and rapidly accelerating with Obama, spending is rising off the chart. It will be difficult to reverse this trend, but we must. Even though tax revenue has declined, we must remember what Milton Friedman taught us: the true measure of the size of government is spending, as spending not paid for today is taxation put off to the future.

    Federal receipts and expenditures as percentage of gross domestic productFederal receipts and expenditures as percentage of gross domestic product.

  • Kansas and Wichita quick takes: Monday August 1, 2011

    Debt deal seen as victory for smaller government. Wall Street Journal Review & Outlook A Tea Party Triumph: The debt deal is a rare bipartisan victory for the forces of smaller government. “If a good political compromise is one that has something for everyone to hate, then last night’s bipartisan debt-ceiling deal is a triumph. The bargain is nonetheless better than what seemed achievable in recent days, especially given the revolt of some GOP conservatives that gave the White House and Democrats more political leverage. .. The big picture is that the deal is a victory for the cause of smaller government, arguably the biggest since welfare reform in 1996. Most bipartisan budget deals trade tax increases that are immediate for spending cuts that turn out to be fictional. This one includes no immediate tax increases, despite President Obama’s demand as recently as last Monday. The immediate spending cuts are real, if smaller than we’d prefer, and the longer-term cuts could be real if Republicans hold Congress and continue to enforce the deal’s spending caps.” … Most commenters, from all political viewpoints, say the fuss over the raising of the debt ceiling would not have happened but for tea party activists.

    Wichita city council. This week the Wichita City Council accepts comment on the city budget at its Tuesday morning meeting. The final public hearing on the budget will be at the August 9th meeting. The city has a page with the budget, supporting documents, presentations, and video at 2012-2013 Proposed Budget. … As always, the agenda packet is available at Wichita city council agendas.

    Sedgwick County Commission. This week the Sedgwick County Commission will adopt — or not — its budget. The only remaining opportunity for public input, at least in a public hearing situation, is Tuesday evening at 7:00 pm in the county commission meeting room. At its Wednesday morning meeting the commission will vote whether to adopt the budget, and no input from the public will be taken at that time. More information about the county’s budget is at Sedgwick County Division of Finance. … The commission will also consider an interesting road vacation item that has advocates of property rights split on the matter. The agenda information is at Sedgwick County Commission, August 3, 2011.

    Obama on the debt ceiling, 2006 version. As a United States Senator from Illinois in March 2006, President Barack Obama said this: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the US Government can not pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” It’s not uncommon for politicians of all stripes to undergo shifts in thought like this. But, the very real question that we need to ask is this: Did his core values really change, or does he say whatever advances the political goal he wants to accomplish at the moment? … This is not limited to Democrats, as a Republican member of the House — I can’t remember his name — insisted that the Boehner plan had bipartisan support, despite receiving just five votes from Democrats.

    New Wichita city council members. This Friday’s meeting (August 5th) of the Wichita Pachyderm Club spotlights the three newest members of the Wichita City Council: Pete Meitzner (district 2, east Wichita), James Clendenin (district 3, south and southeast Wichita), and Michael O’Donnell (district 4, south and southwest Wichita). Their topic will be “What it’s like to be a new member of the Wichita City Council?” … Upcoming speakers: On August 12 Kansas Representative Marc Rhoades, Chair of the Kansas House of Representatives Committee on Appropriations, will speak on “The impact of the freshman legislators on the 2011 House budgetary process.” … On August 19, Jay M. Price, Ph.D., Associate Professor and Director of the public history program at Wichita State University, speaking on “Clashes of Values in Kansas History.” His recent Wichita Eagle op-ed was Kansas a stage for “values showdowns.” … On August 26, Kansas State Representatives Jim Howell and Joseph Scapa speaking on “Our freshmen year in the Kansas Legislature.” … On September 2 the Petroleum Club is closed for the holiday, so there will be no meeting. … On September 9, Mark Masterson, Director, Sedgwick County Department of Corrections, on the topic “Juvenile Justice System in Sedgwick County.” Following, from 2:00 pm to 3:00 pm, Pachyderm Club members and guests are invited to tour the Sedgwick County Juvenile Detention Center located at 700 South Hydraulic, Wichita, Kansas. … On September 16, Merrill Eisenhower Atwater, great grandson of President Dwight D. Eisenhower, will present a program with the topic to be determined. … On September 23, Dave Trabert, President of Kansas Policy Institute, speaking on the topic Why Not Kansas,” an initiative to provide information about school choice. … On September 30, U.S. Representative Mike Pompeo of Wichita on “An update from Washington.”

    Project moves forward, despite missing welfare. The project didn’t qualify for tax exemptions via Wichita’s industrial revenue bond program, but nonetheless the project will proceed. The project is Pixius Communications and its expansion at 301 N. St. Francis Street. According to the Wichita Business Journal, the project will proceed, but on a smaller scale. Moving forward despite the claim that corporate welfare of one form or another is required reminds me of the Save-A-Lot grocery store now under construction in Wichita’s Planeview neighborhood. Rob Snyder, the initial developer was insistent that subsidies were required. But someone else found a way to do it without subsidy.

    Wichita downtown restaurants. There are mixed opinions, writes the Wichita Business Journal.

    Cato University. Last week I was away attending Cato University, a summer seminar on political economy. (That’s why the articles from last week were reruns.) Besides attending many very informative lectures and meeting lovers of liberty from across the world, I became aware of several brilliant Cato scholars and executives whom I had not paid much attention to. One in particular is Tom G. Palmer, who is Senior Fellow and Director of Cato University, besides holding a position at Atlas Economic Research Foundation. He delivered many of our lectures and is the author of Realizing Freedom: Libertarian Theory, History, and Practice. An important chapter from this book is Twenty Myths about Markets. In this video he discusses being effective in bringing about change.

  • Tax expenditures, or loopholes

    While most critics of government spending focus on entitlements, regular appropriations, and earmarks, there is a category of spending that not many have paid much attention. This spending is called “tax expenditures.” This year as part of the debate or controversy over raising the federal debt ceiling, attention is being paid to the cost of these tax expenditures, although the term commonly used is “loophole.”

    It’s a big issue. As economist Martin Feldstein wrote in the Wall Street Journal, tax expenditures were thought to increase the federal budget deficit by $1 trillion in 2010.

    We know where President Barack Obama stands. He is firm in wanting to increase tax revenue by eliminating tax expenditures. He focuses on those that apply to the rich, although there are plenty of tax expenditures that apply to the working poor and middle class, such as the earned income tax credit and child care credit.

    To speak of these tax expenditures or loopholes having a “cost” makes sense only if you adopt a certain view of the world. It has to do with who owns what — you or government. George Reisman recently explained: “The underlying assumption of those who hold this view is that the government already owns the funds in question whether it has collected them in taxes or not. The government is the alleged owner of funds that belong to the taxpayer and which it abstains from taking. It allegedly spends these funds in allowing the taxpayers to keep them.”

    Reisman further explained that eliminating tax expenditures is a tax increase, pure and simple, and must not be embraced: “The notion of tax expenditures provides the pretext for massive tax increases in the name of reducing government spending. This notion must be cast aside, so that the target of tax reform will be reductions in actual government spending, which then must be followed by reductions in taxes.”

    Other economists agree. Thomas J. DiLorenzo, in his essay More Loophole Lobbyists, Please warns of the “oldest trick in the book,” which he says is “Give up your deductions, and we will reduce your income tax rate.”

    I agree with their arguments. Increasing tax revenue to the state by eliminating tax expenditures is not a good thing. At the same time, the tax expenditures are a problem. Their very existence, and the continual effort to expand them or prevent their closing, is harmful to the economy, too. Spending through the tax system is a major way of implementing crony capitalism, that is, political entrepreneurship instead of market entrepreneurship, as explained by Charles G. Koch in The Wall Street Journal: “Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

    Koch went on to explain that “Our elected officials would do well to remember that the most prosperous countries are those that allow consumers — not governments — to direct the use of resources. Allowing the government to pick winners and losers hurts almost everyone, especially our poorest citizens.”

    I agree with that, too. This is why this is a difficult issue.

    Tax expenditures are implemented through the tax system. It’s usually the income tax system, especially at the federal level, but also at the state level.

    Some of the tax expenditures consist of deductions: The government deciding not to collect tax on income that is spent for a specific purpose. An example is the deduction for home mortgage interest. For 2010, this is estimated to “cost” the federal government $103.7 billion in taxes that it would otherwise collect, according to the Joint Committee on Taxation.

    The tax expenditures that really “cost” the government — and by extension, other taxpayers that must pay unless spending is also reduced — are tax credits. These reduce the tax that must be paid dollar for dollar. An example is the “credit for alcohol fuels,” which is to say ethanol. The cost of this tax credit program for 2010 is given as $10.1 billion. Many credits are refundable, meaning that if the taxpayer has no tax liability, the government will send the recipient a check.

    Other examples of tax credits cited by Feldstein include “$500 million annual subsidy for the rehabilitation of historic structures and a $4 billion annual subsidy of employer-paid transportation benefits.”

    While supporters of many of these programs portray them as not costing the government anything, Feldstein writes that they do: “These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures.”

    I argued this in testimony I presented to a committee in the Kansas Legislature last year, when it was considering restoring and expanding the Kansas historic preservation tax credit program. I told committee members: “We must recognize that a tax credit is an appropriation of Kansans’ money made through the tax system. If the legislature is not comfortable with writing a real estate developer a check for over $1,000,000 — as in the case with one Wichita developer — it should not make a roundabout contribution through the tax system that has the same economic impact on the state’s finances.”

    In that committee, not one member voted against this program, even though the committee has some members who consider themselves very fiscally conservative and hawks on spending.

    In Wichita, the city council regularly steers spending to certain companies through the tax system by granting property tax exemptions and tax increment financing.

    Feldstein describes problems with spending implemented through the tax system:

    • Politicians use tax expenditures to grow the welfare state. While proposing a freeze on discretionary spending, President Obama at the same time proposed an expansion of a tax credit program for child or elderly care.
    • Once enshrined in the tax law, these appropriations don’t have to be reauthorized each year. They’re on auto-pilot, so to speak.
    • Eliminating tax expenditures is looked on by Republicans as a tax increase, so they are reluctant to support their elimination. Felstein counters: “But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking.”
    • Tax expenditures distort the economy in harmful ways: “[Eliminating tax expenditures] would also increase overall economic efficiency by removing incentives that distort private spending decisions.”

    Feldstein concludes: “Cutting tax expenditures is really the best way to reduce government spending. And to be politically acceptable, the cuts in tax expenditures must be widespread, requiring most taxpayers to give up something so that the fiscal deficits can decline.”

    The ‘Tax Expenditure’ Solution for Our National Debt

    The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%.

    By Martin Feldstein

    When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

    These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.” This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

    Continue reading at the Wall Street Journal (subscription required)