The MARKET CENTER is a platform for periodic observations about economic policy, philsophy, government, and the political process. Some of the commentary will relate to tax competition issues, but this site is designed to allow a wide range of topics to be analyzed. Readers are invited to submit questions, though we cannot promise public responses to every query. Readers also have an opportunity to sign up to receive postings via email.

The views expressed by Andrew Quinlan and Dan Mitchell on this weblog are solely their own and are not necessarily those of their employers, The Center for Freedom and Prosperity Foundation and The Cato Institute, respectively.

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CF&P's Market Center Blog Archives
January 2009


Saturday, January 31, 2009 ~ 6:21 p.m., Dan Mitchell Wrote:
A Case Study of OSHA Excess.
The National Center for Policy Analysis has issued a new report showing how bureaucracies such as the Occupational Safety and Health Administration routinely impose regulations that fail (supposedly required) cost-benefit tests:

    OSHA recently proposed legislation to regulate construction work in confined spaces, such as sewer and ventilation systems, underground vaults and silos. The rule would apply to construction firms, electrical and other utility contractors and water supply/irrigation companies. It requires contractors to classify and document all confined spaces on a construction site, distribute and collect entry permits, provide safety evaluations to employees entering confined spaces and maintain air quality data from the site for 30 years. Further, general contractors would be required to coordinate the activities of multiple subcontractors with respect to their work in confined spaces. ...A study sponsored by the Associated General Contractors of America (AGC) shows that OSHA understates the cost of complying with the proposed rule, including the recordkeeping requirements, and the numbers of establishments, employees and industries affected. ...Since the early 20th century, employers have had incentives to increase workplace safety. In fact, the financial liability of employers for workplace accidents — as reflected in their worker's compensation premiums — is the greatest incentive for employers to improve safety. Furthermore, increased work-place safety reduces employers' costs due to injuries and lost productivity. OSHA regulations, on the other hand, increase regulatory compliance costs, but don't necessarily improve safety.

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Friday, January 30, 2009 ~ 5:28 p.m., Dan Mitchell Wrote:
Taxpayers Are Financing Lobbying for More Government.
In a stark example of adding insult to injury, the Washington Times reports that companies getting bailouts somehow have enough money to spend millions of dollars on lobbying:

    Many of the large American companies that received billions of taxpayer bailout dollars by pleading that they didn't have enough money to lend to customers were, at the same time, spending millions of dollars dispatching lobbyists to influence the federal government. A Washington Times review of lobbying disclosure reports found that 18 of the top 20 recipients of federal bailout money spent a combined $12.2 million lobbying the White House, the Treasury Department, Congress and federal agencies during the last quarter of 2008. ...Citigroup - which with $45 billion is the No. 1 recipient of taxpayer assistance - spent $1.3 million on lobbying in the fourth quarter, nearly as much as the $1.4 million it spent in the third quarter. Bank of America spent $820,000 during the quarter, down from $1 million. "Taxpayers are now significant shareholders in these companies," said Steve Ellis, vice president at Taxpayers for Common Sense, a watchdog group in Washington. "The last thing taxpayers want is to be paying for somebody to lobby their elected representatives to get more money." The top 20 companies have received $241 billion collectively in TARP assistance. They spent $12.2 million on lobbying in the fourth quarter of last year, compared with $13.5 million during the third quarter.
    http://www.washingtontimes.com/news/2009/jan/23/top-bailout-recipients-als o-major-lobbyists/

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Thursday, January 29, 2009 ~ 7:19 p.m., Dan Mitchell Wrote:
Obama's Ineffective Tax-Cut proposal.
Alex Brill of the American Enterprise Institute explains why President Obama's temporary tax credit is not going to help the economy. But even if the credit was permanent, that would not make much of a difference since tax cuts only help growth when marginal tax rates on productive behavior are reduced:

    Obama advisers have begun outlining a "temporary" $500 per worker tax credit. Aside from being temporary, this Obama policy seems nearly identical to the "Making Work Pay" tax credit he supported during the campaign. ...this new policy, despite its obvious political appeal, will do very little to actually boost the economy. What it will do is create short-term compliance headaches for millions of employers and increase the long-term fiscal burden on future generations. ...a refundable income tax credit is still an outlay and not truly a tax cut. Furthermore, the federal government already provides a tax credit to offset the payroll tax for low-income workers. It's called the earned income tax credit (EITC). ...The rebate checks that were sent out in 2008 failed. ...the only significant difference between rebate checks from the Treasury and a change to employer withholding schedules is that the administrative burden of the tax withholding change is far more costly. Millions of employers will be forced to rush into their accounting department and implement a payroll change for more than 150 million workers. ...There is no real evidence that a temporary tax policy change does a lot for the economy.
    http://www.american.com/archive/2009/why-obama2019s-2018tax-cuts2019 -won2019t-work

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Wednesday, January 28, 2009 ~ 5:25 p.m., Dan Mitchell Wrote:
The Deadly Impact of the Death Tax.
The Wall Street Journal opines about the negative impact of Obama's decision to re-impose the death tax, a policy that will have a very negative impact on saving and investment:

    President-elect Obama and Congressional leaders intend to maintain the estate tax rather than let it expire on schedule in 2010. ...The death tax strikes most heavily at small- and medium-sized family-owned businesses that generate the majority of new American jobs. So hitting these family businesses with a multimillion dollar tax bill when the owner dies won't help job creation. Republicans are partly to blame here for making this easy for Democrats, thanks to their mistakes in the 2001 tax bill. Rather than repeal the tax immediately, Republicans got bamboozled into agreeing to a 10-year phase-out that eliminates the tax only for a single year. Then the rate goes all the way back in 2011 to the confiscatory 55% rate of the Clinton era, with a mere $1 million exclusion. Republicans never did fix the tax revenue estimating process on Capitol Hill, and this is one price for that failure. ...The death tax is supposed to be an easy way to extract revenue from the likes of Warren Buffett and Bill Gates, who support the tax. It won't. The super wealthy have foundations and other tax dodges to shield themselves from much of the tax. A 2006 Joint Economic Committee (JEC) study found that death tax "liabilities depend on the skill of the estate planner, rather than on capacity to pay." So much for tax fairness. By contrast, "family-run firms and farms particularly feel the pinch of the estate tax, because they are less likely to have the liquid resources needed to meet their estate tax liabilities." The latest JEC estimate is that the death tax has reduced the stock of capital in the economy by about $847 billion. So let's get this straight: We are said to need an economic stimulus plan that will borrow and spend roughly the same amount of money to replace the capital stock that the estate tax has wiped out. Go figure. This lost capital reinvestment translates into fewer workers on business payrolls. Douglas Holtz-Eakin, the former Congressional Budget Office director, estimates in a new study that the economy would create roughly 1.3 million more small business jobs with no death tax rather than with a 45% rate. Foreign governments understand this relationship, which is why they have been slashing their estate taxes in recent years. According to the American Council for Capital Formation, the U.S. has the third highest estate tax in the developed world -- 49% if you add the federal rate and average state rate, just below 50% in Japan and South Korea.

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Tuesday, January 27, 2009 ~ 6:41 p.m., Dan Mitchell Wrote:
Sloppy GAO "Tax Haven" Report.
The Government Accountability Office recently published a report on the degree to which US-domiciled companies have subsidiaries in so-called tax havens. While the report did contain caveats noting that this does not imply any illegal behavior, the presentation clearly was produced to allow anti-tax haven politicians to engage in shallow demagoguery. Apparently the politicians do not understand that companies with lower after-tax profits are less likely to be competitive: 

    Many of the largest United States corporations, including big banks now receiving federal bailout money, operate scores of subsidiaries in offshore tax havens that may let them evade or defer their tax bills, according to a government study released Friday. ...The 63-page report drew unusually revealing criticism from the Treasury Department. Michael F. Mundaca, the deputy assistant secretary for international tax affairs, wrote in a letter included in the report that because there was no universal definition for an offshore tax haven, any list of havens "is likely to be regarded as a blacklist and may be used as the basis for the imposition of sanctions or other negative measures" that would "inappropriately negatively affect our economic and other relations with listed countries."

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Monday, January 26, 2009 ~ 8:18 a.m., Dan Mitchell Wrote:
Does Obama Want Another Risky Bubble?
Steve Chapman wonders why President Obama wants to keep all the policies that caused the housing bubble - and exacerbate the problem with more subsidies:

    We all know how we got into this economic mess. We spent too much, borrowed with abandon and acted like the bills would never come due. So what's the prescription for getting out? Spending more, borrowing more and acting like the bills will never come due. When something sounds too good to be true, it usually is. This alleged cure deserves special scrutiny because it invites our policymakers to redouble the very policies that caused the crisis. Congress and the new administration are all too eager to abandon restraint so that we can overcome the consequences of excess.

    Take mortgages. The current recession stems from the popping of the real estate bubble, which came about because too much money went into housing. But now the Obama administration and House Democrats are pushing to assure more investment in housing.

    They intend to raise the limit on loans that mortgage giants Fannie Mae and Freddie Mac can buy from $417,000 last year to $729,750 in some markets. And James Lockhart, who oversees the two companies as head of the Federal Housing Finance Agency, told The Wall Street Journal they should accept a lower rate of return than in the past in order to help Americans buy homes. But it's worth remembering where our problems began: with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession. The sad reality is that the housing sector has gotten too big and will have to shrink. A lot of people who prospered from catering to the inflated demand for housing, from carpenters to real estate agents, will have to find new ways to make a living. That's what the end of a bubble means. ...The economy foundered partly because we were too dependent on debt to finance current consumption, and that was unsustainable. But burning some $825 billion on fiscal stimulus, as President Obama proposes, means more of the same. We will be borrowing money to prevent a decline in our current standard of living. That money will eventually have to be paid back, which will require a decline in our future standard of living.
    http://townhall.com/columnists/SteveChapman/2009/01/22/repeating_our_eco nomic_errors

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Sunday, January 25, 2009 ~ 9:27 p.m., Dan Mitchell Wrote:
Another Dismal Bush Legacy.
Investor's Business Daily bemoans the growth of the government bureaucracy and explains why this hinders economic efficiency:

    In 2008, government payrolls topped 22 million. At the same time, manufacturing and construction payrolls fell to nearly 20 million. ...government payrolls have been on the upswing for decades, save for a brief downward blip during Ronald Reagan's first term. This is an indication that too many resources are being directed to the wrong place. For every additional worker employed by a government at some level, there is one fewer worker who can contribute to real economic growth. Despite claims to the contrary, governments and their employees cannot force economies to grow by growing themselves. They are unable to create wealth. Instead, they seize wealth through taxes, depriving the private sector of the capital needed for growth, and regulate commerce often to the point of obstructing progress. ...Of course, a minimum number of employees is needed perform legitimate government functions. But no government worker builds a house, car or washing machine; designs innovative technologies that make businesses run more efficiently; starts a new company that puts people to work in productive jobs; turns raw materials into fuels that give us power, mobility and warmth; or creates entire industries that both benefit consumers and boost the economy. ...When a private employer offers a job and the offer is accepted, the welfare of both the employer and employee is improved. The employer has a new worker who will make the company more productive and the worker has a job to meet his needs. But when a government job is filled, a third party is involved, and the welfare of that party — the taxpayers who pay the public employee's salary — is harmed and the economy ultimately damaged. ...If government workers and bureaucracy were indeed the engine of the growth, as some in Washington argue, then the Soviet Union would still be intact, East Germany would have a model economy and China would not be moving away from communism.

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Saturday, January 24, 2009 ~ 6:45 p.m., Dan Mitchell Wrote:
Regulatory Competition Between States and Feds Should Be Expanded, not Curtailed.
The Washington Post has a fairly lengthy report on the the competing system of bank charters. But rather than analyze how this system of federal and state charters forces regulators to be less onerous, the story presupposes that this somehow is a gap in the regulatory structure that requires attention. This would be a mistake. Indeed, rather than force banks into one national system, the same model should be extended to insurance. Governments - including regulators - are much more likely to act in a responsible fashion when they know their "clients" have a choice:

    At least 30 banks since 2000 have escaped federal regulatory action by walking away from their federal regulators and moving under state supervision, taking advantage of a long-standing system that allows banks to choose between federal and state oversight, according to a Washington Post review of government records. The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors. ...Some regulatory experts say that eliminating the opportunity to switch regulators is critical to strengthening oversight. ...Since 2000, about 240 banks have converted from federal to state charters. Regulators and bank executives say many of those institutions simply wanted to save money. ...But the pursuit of leniency is an important undercurrent. ...The roughly 1,550 banks with national charters are regulated by the Office of the Comptroller of the Currency. The 5,600 state-chartered banks are regulated under 50 sets of state rules. In a parallel system, the federal Office of Thrift Supervision competes with state regulators to charter savings-and-loans. While every bank and thrift requires a charter to operate, they all have at least two choices. ...Critics have long complained that the system allows banks to play regulators against one another, creating what former Federal Reserve Chairman Arthur Burns memorably described as a "competition in laxity." ...A smaller number of banks, about 90, have converted from state to federal charters since 2000.
    http://www.washingtonpost.com/wp-dyn/content/article/2009/01/21/AR2009 012104267.html

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Friday, January 23, 2009 ~ 4:15 a.m., Dan Mitchell Wrote:
Europe's Wretched Economic Future.
A new study from the National Center for Policy Analysis outlines the staggering unfunded liabilities of Europe's social welfare systems. The United States is not in as bad shape, fortunately, though many politicians want to make America more like Europe - which would mean Europe's dismal economic outlook:

    ...many European countries are undergoing rapid population aging as their Baby Boom generations enter retirement, senior citizens live longer and fertility rates remain well below the population replacement level. ...large portions of their government budgets are funded on a pay-as-you-go basis. That means that no real resources are set aside and invested each year by government or individuals to prefund future expenditures on such programs. Spending on promised retirement and health-care benefits for the elderly will increase. But there will be fewer workers to pay benefits as the bills come due, and the growth of income from which to extract taxes to support these programs will slow. As a result, all European countries have large unfunded liabilities... The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government's borrowing rate, in order to fund current policies indefinitely. ...By 2020, the average EU country will need to raise the tax rate to 55 percent of national income to pay promised benefits. ...In comparison, the United States' shortfall for Social Security and Medicare alone has been somewhat smaller than the EU average, at 6.5 percent of future GDP. But as a result of the expansion of the Medicare program to cover prescription drugs, the U.S. fiscal imbalance is now 8.2 percent of future GDP.

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Thursday, January 22, 2009 ~ 9:12 p.m., Dan Mitchell Wrote:
Keynesianism Does Not Work, Even During War.
Robert Barro, one of America's top economists, outlines his recent research in the Wall Street Journal showing that there is no magic "multiplier" from government spending. Even during World War II, the best possible case for Keynesianism, the data show that government spending reduces activity in the productive sector of the economy. Unfortunately, Obama and his economic team are basing their so-called stimulus on this perpetual-motion-machine theory of economics:

    The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. ...Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists. I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. ...There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. ...in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936. Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis.

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Wednesday, January 21, 2009 ~ 11:46 p.m., Dan Mitchell Wrote:
FEMA Mission Creep Symbolizes What Is Wrong with Government.
Mark Steyn is a very funny writer, but his underlying message is very serious in this Orange County Register column describing how government disaster declarations have morphed from genuine emergencies to yet another excuse to fleece taxpayers and create dependency:

    ...last week was that the Bush administration formally declared a federal emergency in the District of Columbia. So what was it? An ice storm? A hurricane? No, it's the inauguration of his successor. ...a presidential inauguration is not (to be boringly technical about it) an "emergency." It's penciled in well in advance – in this case, so well in advance that for years Democrats have been driving around with "1-20-09" bumper stickers on the back of their Priuses. ...The proposition that a new federal administration is itself a federal emergency is almost too perfect an emblem of American government in the 21st century. FEMA was created in the 1970s initially to coordinate the emergency response to catastrophic events such as a nuclear attack. But there weren't a lot of those even in the Carter years, so, as is the way with bureaucracies, FEMA just growed like Topsy. In his first year in office, Bill Clinton declared a then-record-setting 58 federal emergencies. By the end of the Nineties, Mother Nature was finding it hard to come up with a meteorological phenomenon that didn't qualify as a federal emergency... The Cato Institute's James Bovard was struck by the plight of Vernon, Conn., a town ravaged in the winter of 1995-96 by, er, slightly more snow than they'd expected. So FEMA sent them a check for $40,023. ...So why did they need "federal emergency" aid? Because the town had only budgeted $104,516, and so claimed to be "overwhelmed" by the additional costs. They could have asked the good burghers of Vernon to chip in an extra five bucks apiece. But why bother when FEMA's so eager to give you a warm bath in the federal love nectar? ...So a "federal emergency" is no longer a nuclear strike on Cleveland or even a Category Three hurricane, but now a snowfall in New England and an inaugural ball at the Mayflower Hotel. ...The metastasization of FEMA teaches several lessons – the first and most obvious being that any new government program, agency or entitlement will always outgrow whatever narrow purpose it was created for. Which is why we small-government types are wary of creating any new ones in the first place. Thus, an itsy-bitsy bit of inconsequential government tinkering on the periphery of the mortgage market expanded to the point where federally mandated home loans to the uncreditworthy came close to collapsing not just the U.S. property market but the global financial system. If you'd suggested in the Seventies a new federal agency to cope with municipal snow removal in Connecticut, you'd have been laughed out the room. But, with government, mission creep isn't a bug but the defining feature. ...Eventually, you reach a tipping point: At some point in the next four years, we will reach a situation where the majority of Americans pay no federal income tax but are able to vote themselves more goodies from those who do. The most basic of conservative principles is that if you reward bad behavior you get more of it. We now have a government offering trillion-dollar rewards for bad behavior to the financial system, to the housing market, to the auto unions and to individual voters.
    http://www.ocregister.com/articles/federal-emergency-fema-2283617-new-g overnment"

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Tuesday, January 20, 2009 ~ 9:22 p.m., Sven Larson Wrote:
Two magic words for states' fiscal crisis: cut spending.
State budgets are in the red because state legislators keep doling out money as if there was no tomorrow. A good example is Arizona where spending has increased by 66 percent in five years. The deficit is now 13 percent of the budget. Byron Schlomach of the Goldwater Institute presents the obvious solution: a laundry list of spending cuts that would close the budget gap and take Arizona's state spending back to 2006 levels. The cuts are by no means radical, but they nevertheless show how easy it is for state lawmakers to turn the tide on run-amok spending - if they want to.

    Arizona is in the midst of a budget crisis. The state government is on track to overspend its current revenues by an unprecedented $1.2 billion in the current fi scal year. Although a more than 13 percent spending/revenue gap should be considered a critical issue worthy of immediate attention, the last budget was adopted even as there were clear signs that revenues could not keep up. This means that when the legislature meets in January 2009, it will have to take immediate action to avoid a fi nancial catastrophe. Tax increases are not an option and should not be on the table for discussion. Taxes reduce economic activity, punishing productivity, innovation, and hard work. Government spending often discourages exactly the same activity by rewarding constituencies and projects that often fail to make signifi cant contributions to the citizenryʼs standard of living. Immediate action does not necessarily mean drastic action. In many cases, returning agency budgets to fi scal year (FY) 2006 levels would do much to put Arizona on a more secure fi nancial footing. That is because much of the budget gap is the result of dramatic increases in spending in recent years. In fact, in just the last five years, Arizonaʼs General Fund spending increased 66 percent while population and infl ation grew just 33 percent. These cuts, which amount to just a little more than $1 billion, certainly are not prescriptive, but they serve as a starting point. They are also not currently enough to completely close the current gap. However, there is no doubt that further digging by the full legislature can reveal additional reduction opportunities. Budget decisions are sure to be diffi cult and, in some cases, politically unpleasant. However, they are necessary if Arizona is to restore its fiscal health.
    http://www.goldwaterinstitute.org/Common/Img/121808%20Budget%20Cuts -Byron.pdf

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Monday, January 19, 2009 ~ 7:54 p.m., Dan Mitchell Wrote:
OECD Admits High Personal and Corporate Tax Rates Hurt Prosperity.
There's additional evidence that the OECD is a two-headed entity. While the Committee on Fiscal Affairs persecutes low-tax jurisdictions as part of its anti-tax competition jihad, the economists at the Paris-based bureaucracy have published a new study showing that high tax rates on personal and corporate income reduce productivity and entrepreneurship:

    Taxes can have an effect on countries' material living standards by affecting the determinants of GDP per capita - labour, capital and productivity. For instance, by distorting factor prices and returns to market activities, they can alter households' labour supply decisions and incentives to enrol in higher education, as well as firms' incentives to invest and to hire employees, and thus, lead to an inefficient allocation of factor inputs and lower productivity. ...The findings of this paper suggest that taxes have an adverse effect on industry-level investment. In particular, corporate taxes reduce investment by increasing the user cost of capital. ...The paper finds new evidence that both personal and corporate income taxes have a negative effect on productivity. ...High top marginal personal income tax rates are found to impede long-run productivity working through the channel of entrepreneurial activity and this effect is estimated to be stronger the higher the entrepreneurial activity is in an industry. ...The results also support the assumption that social security contributions have a negative influence on TFP and that this effect is more pronounced in industries that are characterised by high labour intensity.
    http://puck.sourceoecd.org/vl=3152820/cl=22/nw=1/rpsv/cgi-bin/wppdf?file= 5kz7vwq7js26.pdf

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Sunday, January 18, 2009 ~ 9:25 p.m., Dan Mitchell Wrote:
OECD Study Acknowledges Laffer Curve, Admits Progressivity Bad for Growth.
The Paris-based Organization for Economic Cooperation and Development is a schizophrenic organization. Its Committee on Fiscal Affairs pushed to thwart tax competition in order to enable high tax rates, yet the bureaucracy's professional economists publish studies noting that high tax rates are damaging. The latest example is a fiscal survey of Japan, which explicitly notes that lower corporate tax rates lead to a Laffer Curve effect, while also warning that progressivity (penalizing people who contribute most to society with higher tax rates) is bad for growth:

    ...additional government revenue should be balanced against the risk that high corporate tax rates will reduce economic activity and Japan's potential growth rate, in the context of growing international tax competition. Given the serious fiscal situation, the government has thus far resisted pressure from domestic business groups, such as Nippon Keidanren (2006), to reduce statutory corporate tax rates. However, the impact of lower tax rates on government revenues is likely to be limited by positive supply-side effects. Indeed, in some OECD countries, revenue was boosted by lower tax rates, thanks to higher profitability and the increased size of the corporate sector (2007 OECD Economic Survey of the United Kingdom). Indeed, the amount of taxable income in the corporate sector tends to be higher in countries with low corporate tax rates. Consequently, corporate income tax receipts show less variation across countries as the impact of higher tax rates is negated by the lower level of taxable income. As a result, there is almost no correlation between the statutory corporate tax rate and corporate tax receipts as a share of GDP. ...The weak degree of progressivity in the personal income tax system thus has a positive impact on both labour inputs and on human capital and labour productivity. Maintaining the relatively low degree of progressivity, or even reducing it further subject to the fiscal constraints, would be beneficial for Japan's growth potential.
    http://puck.sourceoecd.org/vl=3152820/cl=22/nw=1/rpsv/cgi-bin/wppdf?file= 5kz839rkxlxt.pdf

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Saturday, January 17, 2009 ~ 10:17 p.m., Dan Mitchell Wrote:
Ending the Economic Downturn by Abolishing the Corporate Tax.
A column in the Wall Street Journal explains how Roosevelt's policies lengthened the Great Depression and caused considerable misery. Unfortunately, it appears that Obama wants to mimic those disastrous policies. A far better approach, by contrast, would be to completely eliminate the corporate income tax:

    Mr. Obama's policy plans are driven by the conventional economic wisdom that the New Deal economic programs ended the Great Depression. Not so. In fact, thanks to New Deal policies and programs, the U.S. economy faltered for years longer than it might otherwise have done. ...After four years of FDR's policies, joblessness declined to 14.3% -- still very high but heading in the right direction. Then things turned for worse again: By the fall of 1937, the U.S. entered a secondary depression and unemployment began to rise, reaching 19% in 1938. By 1939 Roosevelt's own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. "We have tried spending money," Morgenthau wrote in his diary. "We are spending more than we have ever spent before and it does not work. . . . After eight years of this Administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!" ...in the long term a return to growth will depend on dynamic job creation by American business -- not the U.S. government. Under a two-year plan designed to create three million to four million jobs, Mr. Obama's plan would have the federal government begin distributing funds for public-works projects carried out by the states. With government already spending 20% of GDP, federal government, not private enterprise, will become the growth industry. The effect of these policies, like FDR's, will be to lengthen the pain. ...In addition to New Deal spending programs, a series of new taxes were introduced that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors. From 1930 to 1940, the top marginal income-tax rate rose to 79% from 25% while the corporate income-tax rate doubled to 24% from 12%. In addition, Roosevelt tacked on an excess profits tax and undistributed profits tax. He imposed an excise tax on dividends. Even the new Social Security payroll tax added 2%. As a result, the New Deal forced the allocation of money away from the private sector. As economist Henry Hazlitt wrote back in 1946, New Deal programs prevented the creation of the types of jobs which have the multiplier effect of successful businesses. Creating "work" prevented innovation and new jobs that would create other jobs. The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. The U.S. corporate tax rate, currently the highest in the world, should be cut to 0% (corporate income would still be taxed, of course, when distributed to shareholders as dividends). The capital-gains tax should be cut further.

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Friday, January 16, 2009 ~ 6:31 p.m., Sven Larson Wrote:
Ohio governor wants more spending, asks federal taxpayers to pay.
Asking the federal government for a cash handout has almost become a national sport, especially among spending-addicted state politicians. In Ohio, governor Strickland is working to add 50,000 more children to the Medicaid program. As Marc Kilmer of the Buckeye Institute explains, some of those kids have parents who make more than $60,000 per year, which raises the obvious question of why federal taxpayers should finance their health insurance:

    If you've turned on your TV lately, you've probably seen Governor Ted Strickland talking about why the federal government should be giving Ohio and other states a cash infusion. Much like the auto company executives who trekked to Capitol Hill late last year, Governor Strickland is going hat in hand to President-elect Obama and the new Congress asking for federal dollars. But why should the feds give the governor more money when he is still pushing for a costly and unnecessary expansion of state health insurance?

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Thursday, January 15, 2009 ~ 12:09 p.m., Sven Larson Wrote:
A common sense voice against a state bailout.
While tax-and-spend governors seek a $1 trillion bailout package from the federal government [http://freedomandprosperity.org/blog/2009-01/2009-01.shtml#062], some sensible cautionary voices are making themselves heard. One of them is Brian Riedl. Writing for the Oklahoma Council for Policy Affairs, he calls state bailouts a shell game. He makes the obvious yet important point that shifting taxes and spending from the state level to the federal level does not make anyone better off. A tax is still a tax, regardless of whether it is the federal government or the state that takes and spends the money. Indeed, a federal tax is worse because federalism is undermined and state politicians feel less of a need to compete with each other by controlling the burden of government:

    Sending federal aid to states wouldn't save taxpayers a dime because state taxpayers are also federal taxpayers. Hiking federal taxes to keep state taxes from rising is like running up your Visa card to keep the MasterCard balance from rising. Either way, you'll pay. All that changes is where you send your payment. ... Furthermore, the inclusion of such a bailout in an economic "stimulus" package makes little sense. State spending doesn't suddenly become stimulative if it's funded by Washington instead of state governments. Either way, all spending "injected" into the economy must first be taxed or borrowed out of the economy. It doesn't matter which level of government is doing the taxing, borrowing, or spending.
    http://www.ocpathink.org/publications/perspective-archives/january-2009-vol ume-16-number-1/?module=perspective&id=2229

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Wednesday, January 14, 2009 ~ 8:15 p.m., Sven Larson Wrote:
Big Brother Meets Greedy Government.
Some state governments may soon force their residents to have a GPS transponder in their cars. The purpose, of course, is to tax them based on their driving pattern. As the Associated Press reports, there is also a good chance the next U.S. Congress will make the GPS in every car a federal mandate. What's next: a chip in everyone's head to tax their walking habits?

    Oregon is among a growing number of states exploring ways to tax drivers based on the number of miles they drive instead of how much gas they use, even going so far as to install GPS monitoring devices in 300 vehicles. The idea first emerged nearly 10 years ago as Oregon lawmakers worried that fuel-efficient cars such as gas-electric hybrids could pose a threat to road upkeep, which is paid for largely with gasoline taxes. ... Congress is talking about it, too. A congressional commission has envisioned a system similar to the prototype Oregon tested in 2006-2007. The National Commission on Surface Transportation Infrastructure Financing is considering calling for higher gas taxes to keep highways, bridges and transit programs in good shape. But over the long term, commission members say, the nation should consider taxing mileage rather than gasoline as drivers use more fuel-efficient and electric vehicles. As cars burn less fuel, "the gas tax isn't going to fill the bill," said Rep. Peter DeFazio of Oregon, a member of the House Transportation and Infrastructure Committee. The next Congress "could begin to set the stage, perhaps looking at some much more robust pilot programs, to begin the research, to work with manufacturers."

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Tuesday, January 13, 2009 ~ 4:41 p.m., Dan Mitchell Wrote:
Sarkozy and Merkel Pushing Dangerous Scheme for Global Regulation.
While Bush has implemented bad policy and Obama plans to implement more of the same, there are worse options. Europe's leading statist politicians want to impose an inherently risky global regulatory regime that unavoidably would increase the burden of government and promote corruption. The biggest danger, though, would be the absence of regulatory competition as all nations were forced into a one-size-fits-all regime. This would cripple innovation and increase systemic risk. The EU Observer reports on the dangerous agenda:

    German Chancellor Angela Merkel and French President Nicholas Sarkozy have warned the US not to block attempts to build an international financial regulator, calling for a new economic body similar to the UN's Security Council. "I've always in my political life been a supporter of a close alliance with the United States but let's be clear: in the 21st century, a single nation can no longer say what we must do or what we must think," said Mr Sarkozy at an international symposium in Paris on Thursday (8 January), shortly before US president-elect Barack Obama enters office. ...Ms Merkel, also in attendance at the conference, echoed the French president's warning to Washington. "No country can act alone in this day and age, not even the United States, however powerful they may be," she said, Deutsche Welle reports. She said that hopes that out of the economic crisis, governments can construct a new architecture for managing global capitalism. "Our response [to the economic crisis] must be more than a few rules," she said. "The crisis is an opportunity to create an international architecture of institutions." ..."Our response must be more than a few rules," she added. "The crisis is an opportunity to create an international architecture of institutions." The centre-right German leader also warned businesses there was no returning to laissez-faire approaches by governments once the crisis has passed.

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Monday, January 12, 2009 ~ 9:16 p.m., Dan Mitchell Wrote:
More Regulation Is not the Answer.
Steve Chapman notes that adding more regulations on top of existing regulations will not solve any problems:

    ...regulators, it turns out, were not oblivious to what was going on. Nor were they lacking in means to rein Madoff in. In fact, as The Wall Street Journal reported the other day, the Securities and Exchange Commission had been suspicious of his methods for a long time. It had even heard in 2005 from a competing investment executive who drafted a 21-page report arguing that Madoff was running a Ponzi scheme. ...The government had actually investigated him -- not once or twice, but "at least eight times in 16 years," according to the Journal. Yet it "never came close to uncovering" the operation, which may have begun as early as the 1970s. So what makes anyone think that future bureaucrats, no matter how vast their authority, will be able to do better? Advocates of stricter regulation often talk as though the choice for protecting investors is between imperfect market mechanisms and foolproof government regulations. In fact, governments, like every other institution, are staffed by fallible individuals who can be fooled as easily as anyone else. ...The call for more intervention assumes that if one aspirin won't cure a case of pneumonia, two will. And if America's weird aversion to regulation is the problem, how come banks in government-addicted Europe are in the same hole? "By some measures, in fact, European banks exposed themselves to even higher levels of risky debt than American banks did," the International Herald Tribune reported in October.
    http://townhall.com/columnists/SteveChapman/2009/01/08/the_empty_case_f or_more_regulation

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Sunday, January 11, 2009 ~ 6:58 p.m., Dan Mitchell Wrote:
The Right Way to Fight Recession.
Jim Powell explains how President Harding successfully ended a deep recession by lowering tax rates and reducing government spending. Unfortunately, President Bush and President-Elect Obama have moved America in the wrong direction, repeating the mistakes of Hoover and Roosevelt:

    Which U.S. president ranks as America's greatest depression fighter? Not the fabled Franklin Delano Roosevelt, since unemployment averaged 17 percent through the New Deal period (1933–1940). What banished high unemployment was the conscription of 12 million men into the armed forces during World War II. FDR actually prolonged high unemployment: he tripled taxes; he signed laws that made it more expensive for employers to hire people, made discounting illegal, and authorized the destruction of food; and he launched costly infrastructure projects like the Tennessee Valley Authority that became a drag on states receiving TVA-subsidized electricity. America's greatest depression fighter was Warren Gamaliel Harding. ...Harding inherited Wilson's mess — in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million. Harding had a much better understanding of how an economy works than FDR. As historian Robert K. Murray wrote in The Harding Era, the man who would become our 29th president "always decried high taxes, government waste, and excessive governmental interference in the private sector of the economy. In February 1920, shortly after announcing his candidacy, he advocated a cut in government expenditures and stated that government ought to 'strike the shackles from industry. . . . We need vastly more freedom than we do regulation.' " One of Harding's campaign slogans was "less government in business," and it served him well. Harding embraced the advice of Treasury Secretary Andrew Mellon and called for tax cuts in his first message to Congress on April 12, 1921. The highest taxes, on corporate revenues and "excess" profits, were to be cut. ...Harding's Secretary of Commerce Herbert Hoover wanted government intervention in the economy — which as president he was to pursue when he faced the Great Depression a decade later — but Harding would have none of it. He insisted that relief measures were a local responsibility. Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes fell from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding's policies started a trend. The low point for federal taxes was reached in 1924; for federal spending, in1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930. Conspicuously absent was the business-bashing that became a hallmark of FDR's speeches. Absent, too, were New Deal-type big government programs to make it more expensive for employers to hire people, to force prices above market levels, or to promote cartels and monopolies. ...With Harding's tax and spending cuts and relatively non-interventionist economic policy, GNP rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million — a reported 6.7 percent of the labor force — in 1922. So, just a year and a half after Harding became president, the Roaring 20s were underway. The unemployment rate continued to decline, reaching an extraordinary low of 1.8 percent in 1926. ...While Harding can hardly be considered a champion of laissez-faire economics (he supported tariffs, after all), the pro-growth policies he implemented are directly responsible for the astonishingly rapid growth in prosperity — and widely shared prosperity — America enjoyed throughout the Roaring 20s. ...Rather than follow the model of FDR — whose policies raised only Americans' spirits — President-elect Obama ought to consider the model of Warren G. Harding, whose policies raised Americans' standard of living, and lifted the nation itself out of a depression — before it had a chance to become Great.
    http://article.nationalreview.com/?q=MWI2OWUyOWE2NmZjMmQ2ZTg5 YzIzZjczY2I2Mzg2N2Q

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Sunday, January 11, 2009 ~ 6:30 p.m., Dan Mitchell Wrote:
Investment Is Key to Growth, not Consumption.
Writing in the Wall Street Journal, Hal Varian of UCLA makes the sensible point that private investment is the key to long run prosperity - and higher levels of consumption in the future. Politicians, unfortunately, want to artificially boost consumption by redistributing money from private credit markets to Keynesian schemes:

    These days it seems like it is our patriotic duty to consume more. And if we don't choose to spend more money ourselves, the government will do it for us. But wait a minute. Isn't it excessive spending that got us into this mess in the first place? Spending more now seems like drinking Scotch to cure a hangover. ...That brings us to private investment, which hasn't been getting nearly as much attention as it deserves. This is unfortunate, since private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private-sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn't increase, where will the extra consumption come from in the future? Ultimately, we want to end up with a significantly higher savings rate in the U.S. than we have seen recently. That means some other component of demand must increase to compensate for the reduced consumption. And the most attractive candidate by far is private investment.

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Saturday, January 10, 2009 ~ 9:10 p.m., Dan Mitchell Wrote:
Will Taxpayers Get Screwed Again?
Banks, car companies, home builders, ethanol scammers, and steel companies are among the industries and interest groups trying to stick their snouts in the public trough. Now another group is looking for a handout, but I'll resist the temptation to speculate on what they're trying to stick and where they're trying to stick it. CNN reports:

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Friday, January 9, 2009 ~ 7:44 p.m., Dan Mitchell Wrote:
Canada's Pro-Growth Stimulus.
A previous post noted that South Korea's government actually is including some things in its stimulus bill that will improve economic performance. Politicians in most country's, including the United States, are using the downturn as an excuse for more wasteful spending. Canadian politicians will probably waste money as well, but Tax-news.com reports that they are joining South Korea and also doing some things that have a positive impact on economic growth:

    Canadian Finance Minister Jim Flaherty took the opportunity on New Year's Eve to inform Canadians of new tax relief measures that will benefit them in 2009. ...said Flaherty. "The tax reduction measures implemented by this government since 2006 mean that, in 2009-10, Canadians and Canadian businesses will pay CAD31bn (USD25.4bn) less in taxes – the equivalent of nearly two percent of gross domestic product (GDP)." The following measures come into effect in 2009: • The introduction of the Tax-Free Savings Account, which will allow Canadians to set money aside in eligible investments and watch those savings grow tax-free throughout their lifetimes; • The reduction of the general corporate income tax rate to 19% from 19.5%. Overall, the general corporate income tax rate is being reduced from 22.12% (including the corporate surtax) in 2007 to 15% by 2012; • The extension of accelerated capital cost allowance treatment for three years for investment in manufacturing or processing machinery and equipment.
    http://www.tax-news.com/asp/story/Canadian_Government_Summarizes_Tax _Relief_For_2009_xxxx34357.html

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Thursday, January 8, 2009 ~ 6:02 p.m., Dan Mitchell Wrote:
Government Intervention Hurts Intended Beneficiaries.
George Will's column in the Washington Post looks at the unintended consequences when politicians interfere in private labor markets. Many civil-rights laws and court decisions were based on the notion that aptitude tests were inherently discriminatory. This led employers, fearing lawsuits, to make a college degree a prerequisite for getting a job. Yet this has made it harder for some minorities, because of their poor backgrounds, to get the necessary credentials. It also has contributed to rising tuition costs because of the artificial boost to demand:

    A unanimous Supreme Court, disregarding the relevant legislative history, held that Congress intended the 1964 act to proscribe not only overt discrimination but also "practices that are fair in form, but discriminatory in operation." The court added: "The touchstone is business necessity. If an employment practice which operates to exclude Negroes cannot be shown to be related to job performance, the practice is prohibited." Thus a heavy burden of proof was placed on employers, including that of proving that any test that produced a "disparate impact" detrimental to certain minorities was a "business necessity" for various particular jobs. In 1972, Congress codified the Griggs misinterpretation of what Congress had done in 1964. And after a 1989 Supreme Court ruling partially undid Griggs, Congress in 1991 repudiated that 1989 ruling and essentially reimposed the burden of proof on employers. Small wonder, then, that many employers, fearing endless litigation about multiple uncertainties, threw up their hands and, to avoid legal liability, threw out intelligence and aptitude tests for potential employees. Instead, they began requiring college degrees as indices of applicants' satisfactory intelligence and diligence. This is, of course, just one reason college attendance increased from 5.8 million in 1970 to 17.5 million in 2005. But it probably had a, well, disparate impact by making employment more difficult for minorities. O'Keefe and Vedder write: "Qualified minorities who performed well on an intelligence or aptitude test and would have been offered a job directly 30 or 40 years ago are now compelled to attend a college or university for four years and incur significant costs. For some young people from poorer families, those costs are out of reach." Indeed, by turning college degrees into indispensable credentials for many of society's better jobs, this series of events increased demand for degrees and, O'Keefe and Vedder say, contributed to "an environment of aggressive tuition increases." Furthermore they reasonably wonder whether this supposed civil rights victory, which erected barriers between high school graduates and high-paying jobs, has exacerbated the widening income disparities between high school and college graduates.
    http://www.washingtonpost.com/wp-dyn/content/article/2009/01/02/AR2009 010202098.html

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Wednesday, January 7, 2009 ~ 7:00 p.m., Dan Mitchell Wrote:
Obama Wants 600,000 More Federal Bureaucrats.
In his weekly radio address, President-Elect Obama regurgitated some typical nonsense about how everyone "across the political spectrum" agrees that the burden of government spending should increase and that this somehow will "stimulate" the economy (for an explanation of why this is nonsense, see http://www.youtube.com/watch?v=VoxDyC7y7PM). Perhaps the most disturbing aspect of his radio address, though, is that he says he wants to create three million new jobs, eighty percent of them in the private sector. I'm no math genius, but 20 percent of three million works out to be 600,000 new bureaucrats to harass the American people. This is hope and change?

    Economists from across the political spectrum agree that if we don't act swiftly and boldly, we could see a much deeper economic downturn that could lead to double digit unemployment and the American Dream slipping further and further out of reach. ...we can't just fall into the old Washington habit of throwing money at the problem. We must make strategic investments that will serve as a down payment on our long-term economic future. We must demand vigorous oversight and strict accountability for achieving results. And we must restore fiscal responsibility and make the tough choices so that as the economy recovers, the deficit starts to come down. That is how we will achieve the number one goal of my plan-which is to create three million new jobs, more than eighty percent of them in the private sector.

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Tuesday, January 6, 2009 ~ 1:14 p.m., Dan Mitchell Wrote:
Spendaholic Governors Want $1 Trillion from Feds to Replenish Political Liquor Cabinet.
Every interest group is busy in Washington lobbying for a slice of the so-called stimulus plan being concocted by the incoming Obama Administration. The governors are especially greedy, particularly the ones that already have taxed and spent their states into deep trouble. As Reuters reports, five of them are asking for $1 trillion. They say this money would restore the economy, but everyone who has watched this video (http://www.youtube.com/watch?v=VoxDyC7y7PM) knows that is nonsense. The real purpose is to buy more votes with other people's money:

    Governors of five U.S. states urged the federal government to provide $1 trillion in aid to the country's 50 states to help pay for education, welfare and infrastructure as states struggle with steep budget deficits amid a deepening recession. The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin -- all Democrats -- said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues. ...The governors said during a conference call with reporters that the plan had been discussed with Congressional leaders and the incoming administration, which had indicated its willingness to help. "The Obama team has been very receptive in listening to us," said Gov. Jim Doyle of Wisconsin. He said "quite a number" of other governors back the initiative. ...The proposal comes amid expectations that the Obama administration, which takes office on January 20, will provide hundreds of billions of dollars in economic stimulus to boost the shrinking U.S. economy and halt the loss of jobs.

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Tuesday, January 6, 2009 ~ 12:22 p.m., Dan Mitchell Wrote:
The Long-Term Damage of Bush's Statism.
Bloomberg reports that a growing number of experts are now admitting that Bush's huge expansion of government will cause immense long-run damage to the economy and living standards:

    The Bush administration's $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat. The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts. "We're seeing a more statist world economy," says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. "That's not good for growth in the longer run." It's not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University's Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector. … The increase in the government's role in the economy has been breathtaking. The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion. Winding back the intervention may not be easy, says Sapienza, who has studied the effect of government ownership on bank lending. When Italy nationalized banks in 1933, "the architects who designed the system envisaged it as temporary," she says. "It was in place until the end of the 1990s." … greater government involvement will make businesses less likely to deploy capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs. "It's the job of companies, not governments, to take risk and accept the consequences," Chaney says. "There is no incentive for governments to take risk, so they won't." … Until recently, "investors could, broadly speaking, ignore the role of the government when thinking about markets" says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. "This period is over." … "We'll end a financial crisis with a fiscal crisis," says Vito Tanzi, former director of fiscal affairs at the IMF. "We'll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so."
    http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aDjmuEp Doctc

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Monday, January 5, 2009 ~ 8:22 p.m., Dan Mitchell Wrote:
America's Self-Destructive Corporate Tax Rate Should Be Slashed.
Alex Brill of the American Enterprise Institute has a thorough article explaining how the U.S. corporate tax system hinders competitiveness. Even statists should favor a lower rate since the evidence he compiles indicates that there would be a substantial Laffer-Curve effect:

    The United States has the second highest statutory corporate tax rates among industrialized countries, largely because other countries have dramatically reduced their statutory rates while the U.S. rate has remained constant. As a result, the rates of return to corporate tax planning strategies for U.S.-based multinational corporations have increased and the efficiency of the tax system has eroded. Furthermore, the higher U.S. tax rate, in conjunction with a worldwide system of taxing income, adversely affects the global competitiveness of U.S. businesses competing abroad, as the after-tax rate of return on foreign investments may be lower for U.S.-based corporations than for foreign-based firms. Finally, the high statutory rate in the United States exacerbates a range of inefficiencies in the current tax system, including the distortion between debt and equity financing, the interasset distortion from uneven capital taxation, and the tax distortions caused by the choice of organizational form (C corporation versus passthrough entities). ...the revenue-maximizing rate has declined over time, and in the most recent five-year period (2000-2005), it is 26.7 percent among OECD countries collectively. Because of the disproportionate size of the U.S. economy relative to other OECD member countries, the results from this model cannot be directly applied to the United States. Nevertheless, it is plausible that a reduction in the U.S. corporate tax rate need not result in a reduction in tax revenue. In fact, given that the U.S. corporate tax rate is so high, a lower rate could lead to higher tax revenues. ...distortions between corporate and noncorporate capital will be minimal with a corporate tax rate near 20 percent. Such a rate cut would significantly reduce the distortion between debtand equity-financing, make the United States more attractive for foreign direct investment, and eliminate many distortions in international tax policy.

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Monday, January 5, 2009 ~ 7:54 p.m., Dan Mitchell Wrote:
Wasteful Spending Is Not Stimulative.
Investor's Business Daily correctly notes that episodes of big-spending Keynesianism have not boosted economic growth. The editorial urges that policy makers instead mimic the successful tax-rate reductions of the 1920s, 1960s, and 1980s:

    The massive new spending program that is being pushed by congressional Democrats emboldened by their newly enhanced majorities may come up as soon as Tuesday, when they return from their holiday breaks. Unfortunately, they've picked the least effective way to give the economy a boost. Those who argue for hundreds of billions of dollars for infrastructure projects and "green jobs" have it all wrong. We've tried those remedies before and found them wanting. In the 1930s, for instance, we went on an infrastructure binge, building new roads, dams and schools; electrifying the rural south and enlarging our ports, among other major tasks. ...all that activity didn't pull the the country out of depression - not by a long shot. Unemployment averaged 17% in the '30s, and it wasn't until 1941 - the start of World War II - that GDP returned to its 1929 level. Japan followed the same Keynesian game plan after its real estate bust of 1989. To the applause of many American liberals, hundreds of trillions of yen were spent on infrastructure, raising outlays on big projects from 6.5% of GDP in 1990 to 8.3% in 1996 - even more than contemplated under Obama's plan. That didn't work either. The 1990s were a "lost decade" for Japan's economy, and the country is still stagnating. Its infrastructure boom did have one lasting legacy, however: Japan is now the most heavily indebted nation in the OECD. ...Obama might want to rethink his aversion to tax cuts. They'll actually work. How do we know? Because they have in the past. In the '20s, '60s, '80s and again this decade, new presidents also faced grim economic conditions. Each time, the president - be it Coolidge, Kennedy, Reagan or Bush - cut taxes. And each time the economy boomed.

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Sunday, January 4, 2009 ~ 6:36 p.m., Dan Mitchell Wrote:
The Next Step in Airline Deregulation.
The dismantling of the government-aided airline cartel about 30 years ago was a major success, but an article in the American notes that deregulation will never be complete so long as government-operated airports lead to bottlenecks that hinder efficient air travel:

    ...proponents of the Airline Deregulation Act knew at the time that it was incomplete. Congress deregulated the airline sector but left the government-run aviation infrastructure intact. As deregulation guru Alfred E. Kahn said in 1978, "There is no guarantee that freer competition on the airline side of the equation-that is the part that creates the demand for airports-alone will solve these problems. On the contrary, it will stimulate more air travel." Competition unleashed a torrent of demand for flying, but the infrastructure has not been able to keep up. Airports are still largely owned and operated by the government. They serve as chokepoints in the aviation system, and their capacity has been constrained by the Federal Aviation Administration (FAA), which has been slow to implement new air-traffic control technologies. ...When it comes to such privatization, the United States trails far behind the rest of the world. Indeed, its first large-scale experiment with private airport ownership began just a few months ago, when, as part of a pilot program run by the FAA, Chicago's Midway Airport was sold for $2.5 billion to a consortium including Citigroup, Vancouver International Airport, and John Hancock Life Insurance. Winston and de Rus report that in many foreign countries, "privatization has not had an adverse effect on an air transportation system's performance." The countries that have experimented with airline privatization include Australia, New Zealand, the United Kingdom, Canada, and China. ...The results of foreign privatization experiments affirm that competition, choice, and proper incentives are the essential components of a safe and efficient aviation infrastructure sector. U.S. policymakers and airline executives ought to pay close attention.
    http://www.american.com/archive/2008/december-12-08/should-we-privatize -airports

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Sunday, January 4, 2009 ~ 6:12 p.m., Dan Mitchell Wrote:
Stingy Leftists Fail True Compassion Test.
This blog has noted research showing that advocates of limited government are far more generous than those who define compassion by having a big welfare state. It is refreshing to see that even statists (or at least one statist writing for the New York Times) are admitting that there is a paucity of real compassion on the left side of the political spectrum:

    Liberals show tremendous compassion in pushing for generous government spending to help the neediest people at home and abroad. Yet when it comes to individual contributions to charitable causes, liberals are cheapskates. Arthur Brooks, the author of a book on donors to charity, "Who Really Cares," cites data that households headed by conservatives give 30 percent more to charity than households headed by liberals. A study by Google found an even greater disproportion: average annual contributions reported by conservatives were almost double those of liberals. Other research has reached similar conclusions. The "generosity index" from the Catalogue for Philanthropy typically finds that red states are the most likely to give to nonprofits, while Northeastern states are least likely to do so. The upshot is that Democrats, who speak passionately about the hungry and homeless, personally fork over less money to charity than Republicans - the ones who try to cut health insurance for children. ...Something similar is true internationally. European countries seem to show more compassion than America in providing safety nets for the poor, and they give far more humanitarian foreign aid per capita than the United States does. But as individuals, Europeans are far less charitable than Americans. Americans give sums to charity equivalent to 1.67 percent of G.N.P., according to a terrific new book, "Philanthrocapitalism," by Matthew Bishop and Michael Green. The British are second, with 0.73 percent, while the stingiest people on the list are the French, at 0.14 percent. ...Conservatives also appear to be more generous than liberals in nonfinancial ways. People in red states are considerably more likely to volunteer for good causes, and conservatives give blood more often. If liberals and moderates gave blood as often as conservatives, Mr. Brooks said, the American blood supply would increase by 45 percent.

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Saturday, January 3, 2009 ~ 3:48 p.m., Dan Mitchell Wrote:
The Right Way to Help Auto Companies.
Holman Jenkins explains in the Wall Street Journal that removing government-created impediments is the best way of helping the Big Three:

    Like all regulatory schemes, Congress's hallowed Corporate Average Fuel Economy rules froze in place a conception of the auto industry as it appeared to the simple minds of Congress in the early 1970s, when three manufacturers dominated the U.S. market, making full lines of vehicles. ...The Big Three, left to their own devices, would surely specialize in those vehicles on which they make money -- i.e., those with hefty price tags and markups relative to their man-hour content. Even at the peak of gas prices, half the vehicles sold in the U.S. were light trucks. In November, amid a collapsed home construction industry and with $4 gasoline fresh in mind, what were the two top sellers? Pickups by Ford and Chevy -- and the Dodge Ram was No. 7. ...The fuel-economy rules apply equally to foreign brands, of course, some of which also specialize in big, powerful vehicles. But they afford themselves an out. BMW paid $230 million in CAFE fines from 1983 to 2007 to avoid building small cars at a loss to please Washington. Volvo paid $56 million. Daimler paid $55 million. Why don't the Big Three take this out? Explains the Government Accountability Office, because they fear the political repercussions of being tagged with "unlawful conduct." They must be laughing up their sleeves in Stuttgart, having unloaded Chrysler in the nick of time. Democrats had just taken over Congress the previous November, vowing tough new mileage standards. One week before the Chrysler sale, candidate Barack Obama gave an environmental speech harshly critical of the Detroit auto makers. Three weeks after, the Big Three ran up the white flag and agreed not to oppose new fuel economy rules.

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Friday, January 2, 2009 ~ 11:00 p.m., Sven Larson Wrote:
State Medicaid reforms miss the free market goal.
Medicaid is the single most burdensome entitlement program in state budgets. Some states have tried to reform it, but with little success. As Adam Frey with the Pacific Research Institute explains, one reason is that the reforms extend Medicaid to more people. Louisiana is next in line. Governor Jindal wants to let enrollees choose providers, which is good. But he also wants to put many more people on Medicaid and expand coverage, which increases the burden on taxpayers and invites lobbyist rent-seeking:

    By offering a minimum of at least two CCNs [Consumer Choice Networks] per region, Jindal and Levine hope to "transform the system of care for the poor by creating a model where consumers choose a medical home that optimizes the appropriate care, engages the consumer in their own health and provides transparent measurement of performance." However, ... the report acknowledges that choices could be limited. Much like all government programs, Louisiana's Medicaid budget is already the focus of intense lobbying from drug makers, hospitals, nursing homes and other health care providers. A warning that such rent-seeking may persist appears in the report's claim that, "the state may, based on actuarial data, limit the number of networks in a market to provide a sufficient number of enrollees to maintain the critical mass necessary for successful plan operation." This sort of policy, if enacted, opens the floodgates to special interests as it allows for inefficient providers to avoid being challenged by potential competitors. ... Unfortunately, the Jindal-Levine plan is also looking to expand its Medicaid coverage in the Region 5 area of Lake Charles for parents and caretaker relatives with incomes from 51 percent of the FPL up to and including 200 percent of the FPL, as well childless adults with incomes from 0 percent up to 200 percent of the FPL.

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Thursday, January 1, 2009 ~ 4:30 p.m., Dan Mitchell Wrote:
Will Obama Repeat the Mistakes of Bush and FDR?
Amity Shlaes, author of an excellent economic history of the New Deal (The Forgotten Man), explains how President Roosevelt made the economy worse - somewhat akin to the erratic policy of the Bush Administration. The key question now is whether President-Elect Obama makes the same mistakes:

    The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers. The idea that experiments are warranted in current circumstances comes from the New Deal. ...there is significant evidence that the very arbitrariness of the New Deal made the Depression worse. In 1932, stunned market players and citizens wanted to know what the new rules were. They voted for a party with a platform so moderate it could have been written by today's Concord Coalition: stability, sound money, balanced budgets. That was the Democratic Party, led by Roosevelt. ...Using emergency powers, FDR yanked the country off the gold standard. ...Some of the worst destruction came with FDR's gold experiment. ...Roosevelt was right to want to introduce more money into the economy (the United States was deflating). But his method was like trying to raise an ocean level by adding water by the thimbleful. What horrified markets even more was that FDR managed the operation personally, day by day, over a breakfast tray. No one ever knew what the increase would be. One Friday in November 1933, for example, Roosevelt told Treasury Secretary Henry Morgenthau that he thought the gold price ought to be raised 21 cents. Why that amount, Morgenthau asked. "Because it's three times seven," FDR replied. ....The arbitrary quality of other initiatives reinforced concerns. The New Deal centerpiece, the National Recovery Administration, helped some businesses compete and criminalized others for the same behavior. Sometimes Roosevelt goaded federal prosecutors into harassing corporate executives. Other times, he schmoozed the same execs at the White House. ...Uncertain, markets froze. Businesses refused to hire or invest in equipment. Unemployment stayed stuck in the teens. The 'deal' part of the New Deal phrase was problematic; businesses didn't want individual favors, they wanted clear laws for all. ....Today, uncertainty also chills. Questions abound over the future regulation of stocks and derivatives, over tax policy, over bailouts. All this makes it hard for the market to settle on equity or home prices.
    http://www.washingtonpost.com/wp-dyn/content/article/2008/12/30/AR2008 123002660.html?wpisrc=newsletter

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