There are lots of people in Washington who claim to want to tax the rich. But it’s worth looking past the rhetoric and focusing on the actual policies being enacted. Here’s the NYT: Accounting firm brochures and websites are peppered with headlines like “Using opportunity zone investment to super charge estate planning” and “Investing in Qualified Opportunity Zones with Irrevocable Grantor Trusts.” In the trade press, a tax lawyer explains how to combine the opportunity zones tax break with a pre-existing tax break for selling stock in small businesses. On a popular opportunity zones website someone asks: “How can I combine cryptocurrency mining while taking advantage of the opportunity zones tax incentive?” Another site advises how best to combine the benefits of opportunity zones with the Historic Tax Credits.. . . Those tax returns showed that 84 percent of the zones got no opportunity zones money at all. Half the money went to the best-off 1 percent of zones. That’s hardly surprising. With so many zones to choose from, much of the money flowed to those that were already rising or those that governors chose foolishly. Some 25 percent of New York State’s opportunity zones are in booming Brooklyn. The city government in Austin, Texas, one of the fastest-growing metro areas in the nation, asked for four opportunity zones. The governor allotted it 21. The best way to reduce this problem is to move to a tax system with lower marginal rates and fewer loopholes.  Unfortunately, we are moving in the opposite direction.  For instance, there are indications that Congress may bring back the SALT deduction, which primarily benefits wealthy people.  And marginal tax rates are likely to increase, which will encourage even more wasteful tax dodging: During his campaign, President Biden vowed to “reform opportunity zones to fulfill their promise,” but so far the administration hasn’t proposed anything or used its regulatory muscle. And its proposed capital-gains tax increase and other tax increases would only make opportunity zones even more attractive to the tax-averse rich. The efficiency gains of the 1980s and 1990s are gradually being undone. PS.  I did a podcast with David Beckworth discussing my new book.  Here is the transcript.   (0 COMMENTS)

In a private comment on my Regulation review of Acimoglu and Robinson’s The Narrow Corridor, George Mason University professor Dan Klein challenges the continuity I see between (classical) liberalism and anarchism. The contentious point was summarized in the last paragraph of my review: An improved and more useful study of the narrow corridor would, in my opinion, switch the normative positions of anarchy and the state. Instead of looking at how the state can protect “society” against anarchy, it would ask how the state can protect feasible anarchy—that is, whatever level of anarchy is possible. The normative primacy should go to anarchy, not to Leviathan. Dan wrote to me (and allowed me to share it): I think that we ought to be talking up liberalism, and contending over its meaning. I don’t see the anarchy talk as useful. This is certainly an objection to be considered but the idea I was expressing is not foreign to liberal thinking. In his 1969 book Éloge de la société de consommation (“In Praise of the Consumer Society”), French philosopher Raymond Ruyer wrote that real anarchism, feasible and actually realized, as opposed to mere sentimental talk, is simply the [classical] liberal economy and everything it encourages: political democracy, civil (and not only civic) liberty, free, unsubsidized, and unplanned culture. Only the liberal economy can promote the “withering away of the state” and of politics, their withering away or at least their limitation; centralizing socialism cannot do that. [French original:] l’anarchisme véritable, réalisable et réalisé, et non resté à l’état de déclaration sentimentale, c’est tout simplement l’économie libérale, avec tout ce qu’elle entraîne : démocratie politique, liberté civile (et non simplement civique), culture libre, et non subventionnée et dirigée. C’est l’économie libérale qui, seule, peut favoriser le “dépérissement de l’État” et de la politique—le dépérissement ou du moins la limitation—ce n’est pas le socialisme centralisateur. In the same vein, Émile Faguet, a liberal who was elected to the Académie française in 1900 (the featured picture of this post is a portrait of him from that year), wrote in his Politiques et moralistes du dix-neuvième siècle  (Lecène, Oudin et Cie, 1891): A coherent liberal is an anarchist who does not really dare his opinion; an anarchist is an uncompromising liberal. Un libéral systématique est un anarchiste qui n’a pas tout le courage de son opinion ; un anarchiste est un libéral intransigeant. James Buchanan, who called himself a liberal, defended “ordered anarchy.” Anthony de Jasay defined himself as both a liberal à la Hume and an anarchist. One objection to the view of a continuum between liberalism and anarchism is that other major political philosophies also have anarchist extensions. It is certainly true for socialism in some important Marxist interpretations (see Vladimir Lenin, The State and the Revolution [1917], who defends the “withering away of the state” that Ruyer was quoting). It is unfortunate that marxism has long colonized the anarchist ideal.  In the old European conservatism, anarchism may not have often been popular but it was arguably realized in primitive stateless societies. That, in these societies, conservatism and socialism are difficult to distinguish point to perennial similarities between the two ideologies. William Graham Sumner, the Yale professor of the late 19th and early 20th century, had strong liberal beliefs as the story reported by his student Irving Fisher illustrates (Irving Fisher before the Yale Socialist Club in 1941, quoted in Mark Thorton, The Economics of Prohibition [University of Utah Press, 1991], p. 17): I believe [William Graham Sumner] was one of the greatest professor we ever had at Yale, but I have drawn far away from his point of view, that of the old laissez faire doctrine. I remember he said in his classroom: “Gentlemen, the time is coming when there will be two great classes, Socialists, and Anarchists. The Anarchists want the government to be nothing, and the Socialists want government to be everything. There can be no greater contrast. Well, the time will come when there will be only these two great parties, the Anarchists representing the laissez faire doctrine and the Socialists representing the extreme view on the other side, and when that time comes I am an Anarchist.” That amused his class very much, for he was as far from a revolutionary as you could expect. It seems clear that only classical liberalism can seriously claim to be the “real anarchism, feasible and actually realized” as well as the only major political philosophy consistent with “ordered anarchy” cum individual liberty. Whether, in this ideal, one wishes to emphasize liberalism or anarchism may be a matter of personal sensibility or strategy, rather than substance. (0 COMMENTS)

Author and journalist Sam Quinones talks about his book, The Least of Us, with EconTalk host Russ Roberts. Quinones focuses on the devastation caused by methamphetamine and fentanyl, the latest evolution of innovation in the supply of mind-altering drugs in the United States. The latest versions of meth, he argues, are more emotionally damaging than before and have played a central role in the expansion of the homeless in tent encampments in American cities. The conversation includes an exploration of the rising number of overdose deaths in the United States and what role community and other institutions might play in reducing the death toll. (0 COMMENTS)

Author and journalist Sam Quinones talks about his book, The Least of Us, with EconTalk host Russ Roberts. Quinones focuses on the devastation caused by methamphetamine and fentanyl, the latest evolution of innovation in the supply of mind-altering drugs in the United States. The latest versions of meth, he argues, are more emotionally damaging than before and have […] The post Sam Quinones on Meth, Fentanyl, and the Least of Us appeared first on Econlib.

In a recent post, I pointed out that Washington State had much lower Covid fatality rates than California, which were in turn much lower than Arizona. I argued that the difference was probably cultural. An alternative hypothesis is that the difference is due to tighter regulations in Washington State. To get at this issue, consider the death rate from Covid in Washington and Idaho: Washington 1060/million Covid deaths Idaho 1744/million Covid deaths Now consider the death rates in King county (Seattle area) and Spokane County, which is way over along the Idaho border: King County: 846/million Spokane County 1745/million Some of this may be vaccination rates, but probably not all. I recall that even a year ago (i.e. before vaccines), the Covid death rate in the Bay Area of California was far lower than in Southern California. The exact same state, but different cultural attitudes toward risk.  It’s not about state mandates; it’s about culture. The example of Sweden might seem to point in the opposite direction, as its Covid death rate is far higher than in Norway or Finland.  In my view, however, the biggest problem in Sweden was not the lack of mandates; it was (misguided) government recommendations that people not wear masks.  The Swedes are more likely to follow government recommendations than most other cultures.  In America, you do not see differences in Covid death rates between similar states that are anywhere near as large as the nine-fold difference between Sweden and Norway.  Sweden really is an outlier. BTW, I’m not suggesting that being more cautious is always best; I believe that roughly 1/3 of the country is too cautious and 1/3 are not cautious enough. Of course I’m in the rational middle group. 🙂 (0 COMMENTS)

In my previous post, I described how budget gimmicks prevent politicians from having to explain whether or not the policies they push are pushing desirable social and financial objectives. Here is a good example. Two weeks ago, I wrote about the serious problem with Congress’s attempt to expand the child tax credit. Well, new evidence suggests that opponents of the programs are correct about its short and long term consequences, which go beyond its $1.6 trillion cost over a decade. This new working paper is by Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu and was published by the University of Chicago’s Becker Friedman Institute. The authors find that the behavioral effects of the expanded CTC, such as creating incentives for some parents to work less or leave the workforce, are a much bigger issue than previously documented. The Wall Street Journal Editorial Board has since picked up on these disincentive effects as well. AEI’s Scott Winship has a great summary. Here is a tidbit: “[Corinth, Meyer, Stadnicki and Wu] CMSW find that the work disincentives created by the expanded CTC are larger than previous researchers have claimed — perhaps sizable enough to reverse the employment gains caused by welfare reform and the EITC in the 1990s — and primarily impact single parent families. As a result, existing studies have overstated the short-term poverty-reduction impact of the policy by a third. Notably, the NAS committee failed to model the primary behavioral response to the new CTC that would be expected to reduce employment. In contrast, the committee did include such a response in its modeling of an Earned Income Tax Credit (EITC) expansion, when the financial incentives involved would be expected to increase employment. The CMSW paper does not model all of the potential short-term work disincentives embedded in the new CTC, nor does it model short-term incentives that would be expected to increase the share of children living with single parents, nor any long-term incentives on work, living arrangements, marriage, or fertility that might be expected to work against poverty reduction even more. It does not examine the potentially negative impact of the expanded CTC on other outcomes, such as intergenerational mobility. But by demonstrating the importance of short-term work disincentives (and the blind spot that many researchers have regarding behavioral effects), CMSW have strengthened the case that child allowances might have precisely the unintended consequences that conservative critics fear.” The whole thing is a must read here. The bottom line is that the cost of the child credit expansion isn’t the only or even the biggest concern we should have. Its impact on some people’s willingness to work, marry, and ultimately on intergenerational mobility and child poverty should be front and center of anyone’s concern with this program expansion. Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (0 COMMENTS)

Taxes: There’s their Beef Co-blogger Bryan Caplan and his favorite philosopher Michael Huemer have debated whether one should eat beef. Neither has persuaded the other. But there’s one thing that I think they can agree on, a measure that would reduce coercion and marginally reduce the demand for beef: end the tax on beef producers that is used to fund the “Beef: It’s What’ for Dinner” ads. Baylen Linnekin, a food lawyer who always writes sensibly about government regulation of food, lays out the issue here. It turns out that many ranchers are protesting the tax. One little quibble: Linnekin writes that the tax raises prices without benefiting ranchers. His view is that the tax shifts the supply curve to the left, increasing prices. He’s right. But it almost certainly raises the demand for beef too, which also leads to increased prices; but this part of the price increase does benefit ranchers. What he could probably argue is that the benefit to many ranchers is less than the part of the tax burden they bear. And there’s a good chance that would be correct; otherwise they probably wouldn’t be protesting the tax. (0 COMMENTS)

There’s no shame in making forecasts that prove inaccurate; I’ve done so many times. Nonetheless, it is useful to try to figure out why a particular forecast didn’t pan out. Stephen Rose has a paper on the effects of trade on the US economy, which contained this observation: [T]he notion that the United States can continue to run trade deficits is incomprehensible for many people. In 1988, Harvard finance professor Benjamin Friedman in his book Day of Reckoning wrote that the United States would have serious negative economic consequences because it had five years of trade deficits that averaged a bit less than 2 percent of GDP. He argued that the United States would have to pay off the principle and the interest in the 1990s, which would lead to a negative capital balance. This would require the value of the dollar to decline so that exports would increase, and imports would decrease to maintain the United States’ balance of all payments. None of these things happened. Instead of negative consequences, U.S. GDP growth in the 1990s was higher than GDP growth in the 1970s, 1980s, and 2000s. Furthermore, between 1994 and 2019, the trade deficit was never less than 2 percent of GDP. This continued imbalance was offset by massive inflows of foreign capital. As of the fourth quarter of 2020, foreigners held $41 trillion of U.S. assets versus the $27 trillion of foreign assets held by the United States. One would think that a $14 trillion net international debt would lead yearly investment balances to be negative as well, yet, this has not played out. The United States gets a higher rate of return on its foreign assets than foreigners get on their U.S. assets. The difference is so large that the United States has had positive investment income in every quarter during these years. It seems logical that if a current account deficit represents net borrowing by a country, then these deficits will lead to a future negative capital balance, as interest is paid on the loans.  The problem is that current account deficits do not represent net borrowing; rather they reflect the net flow of capital.  And capital assets include not just loans, but also equity. Suppose that each year someone borrows $1,000,000 at 2% interest.  They invest $500,000 in the stock market, where their return averages 5%.  The other $500,000 is spent on luxury goods.  How long can they keep doing this? Forever. The 5% return on their stock portfolio is more than enough to pay the 2% interest on their loan, with some left over to add to their capital.  This can go on for as long as the investment income exceeds the interest payments on the loan. This example is a good way of visualizing why Friedman was wrong back in 1988.  He started with the common sense idea that people and countries cannot live beyond their means forever.  If they spend more than they earn, then at some point there will be a bill to pay.  But he forgot that investments in real capital goods can be highly productive.  America is not actually living beyond its means; it’s using its intellectual capital to produce highly valuable investments throughout the global economy. Here’s another common sense notion that proved incorrect.  During the decades after WWII, many manufacturing jobs moved from high cost northeastern states like Massachusetts to lower cost southern states like Alabama.  Common sense suggests that this would cause the two economies to converge over time.  And for a period they did seem to be converging, as per capital income grew faster in the south than the northeast.  But over the past 40 years this process has gone into reverse, with incomes in Massachusetts rising rapidly as it shifted to higher value added products.    Here’s Rose: In 1960, the New England and Mid-Atlantic states had the highest and third-highest concentration of manufacturing employment—42 and 37 percent, respectively. In contrast, by 2019, these two regions had a lower-than-average proportion of manufacturing workers. The East South Central (Alabama, Kentucky, Mississippi, and Tennessee) and the West North Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) regions had an above-average manufacturing share in 2019, but below-average manufacturing shares in 1960. The East South Central region benefited from two waves of manufacturing employment—the movement of firms from New England and the Mid-Atlantic in the 1970s and 1980s and the arrival of many foreign automotive firms opening factories in the United States after 1980. The movement of manufacturing employment across states does not support the primacy of manufacturing industries as the key to a strong economy. Indeed, the two regions with the largest manufacturing share loss—New England and Mid-Atlantic—had 6 of the top 10 states in terms of GDP per capita (and this does not include Washington, D.C., which has the highest GDP per capita). Despite the high cost of living, the population of places like Massachusetts, New York City, and Washington DC grew much more rapidly during the 2010s that the population of low cost East South Central states like Alabama, Mississippi, Arkansas, Kentucky and Louisiana.  (Tennessee is an exception, due to booming Nashville.  It also has no state income tax.) Rose’s entire paper is well worth reading.  It shows that very little of the job loss in America is due to trade, most is due to automation. HT:  David Levey (0 COMMENTS)

I’m working on a speech that I’ll give at the local Osher Lifelong Learning Institute (OLLI) next month. The topic is my Uncle Fred Henderson’s and Aunt Jamie Henderson’s adventures while crossing the Atlantic in April 1941. Their ship, the Zam Zam, was attacked and sunk by a German raider called the Atlantis. My cousin, their son, sent me a writeup his mother had done of her adventures while getting off the ship into the lifeboat and thereafter. She and Fred were separated in occupied France and she and other Canadian women and children were sent to southern Germany. Ultimately the Canadian women were sent to Berlin where they were under house arrest for about 8 months before being freed. Aunt Jamie writes: From time to time there would be rumors [DRH note: I’m surprised that she didn’t spell it “rumours”] that we would be released. Everytime a German inspector visited we usually had an interview. Isabel [Guernsey] was the spokesperson. Finally, three months later we were informed that we Canadians were to proceed to Berlin where arrangements would be made by the American Embassy for our return to Canada. [U.S. wasn’t at war yet.] We could scarcely believe it. Canada did not intern German women. When we arrived in Berlin, no one was there to meet us as no one had been advised we were arriving. There we were, a group of seven (Canadians) and seven (others) alone on the station platform. We waited and waited. Finally Isabel phoned the American Embassy. The third Secretary of the Embassy arrived and soon found accomodations for us. (emphasis added) By the way, one of the friends she made at the U.S. Embassy was George F. Kennan. The picture above is of the women in Berlin. My aunt is on the far left. (0 COMMENTS)

I wrote a column for Creators yesterday where I noted that while for me more spending is always too much, for some politicians, it will never be enough. In fact, to pass a gigantic $3.5 trillion spending bill, which is facing opposition from Senators Manchin and Sinema, some legislators are ready to resort to budget gimmicks. In fact, they are quite open about it. But now I am thinking that I underplayed the budget gimmick part of the argument. For some backgrounds, Mr. Manchin has said for months that he wouldn’t vote for a reconciliation bill that’s more than $1.5 trillion. Incidentally, I hope that people manage to keep some perspective here: $1.5 trillion is called a compromise, but it is still a massive and oversized amount of spending. Back to budget gimmicks. Here is President Biden a few days ago on how to ultimately make his new entitlements permanent even if now he has to compromise on size: “every major fundamental shift that has taken place in the American economy has seldom ever come with one single piece of legislation at the — at the beginning. For example — you’ve heard me say this before, but it’s relevant — when Roosevelt passed Social Security, it didn’t bear any resemblance to what it is now.  And so, the idea that we’re going to — everything that is — gets passed is going to be the totality of what it’s going to end up being remains to be seen. And my message this morning was: Look, it’s very important to establish the principle — the principle that is contained in the amendment, such as childcare, the Child Tax Credit.  Well, it may be that the Child Tax Credit gets altered in terms of amount.  But once it’s put in place, even though it’s only for several years, it gets harder and harder to take it out.  And that’s my point to people.  We don’t have to get everything all at once.” Here is House Representative Alexandra Osario Cortez on Meet the Press explaining how to make a $3.5 trillion bill look like a $1.5 trillion one: “Washington math is notoriously funny … one of the ideas that is out there is fully fund what we can fully fund, but maybe instead of doing it for 10 years, you fully fund it for five years.” Here is Representative Jamie Raskin a few days ago: “Rep. Jamie Raskin (D., Md.) told liberal activists on a call Monday night that he wanted to include a long list of programs that he hoped would prove popular enough that lawmakers in the future would feel compelled to continue them. “Let’s plant a flag on everything that we need and everything that we want and we will prove to America how important it is, how vital it is to our people and then we will live to fight another day,” he said.” The bottom line is that if 10-year budget projections were ever a meaningful budgetary tool, they have lost all its meaning. Democrats used an early expiration budget gimmick to make their new entitlements look less expensive, in hope here to fool the reluctant Senators who have made the mistake of setting a cost limit rather than say “no” to new programs. The Republicans use this trick for budget related issues too, but more recently to pass large tax cuts in 2017 when they had some of the provisions expire in 5 years as opposed to making them permanent. The use of budget gimmicks isn’t either new or limited to early expiration. In fact, early expiration is one of many timing gimmicks that rest on the manipulation of the budget year in which items of revenue or expenditure are reported. Some of them involve simply accelerating receipts or delaying payments into alternate budget years or taking advantage of the fact that the federal budget operates under a fiscal year, which begins on October 1, while many government activities are based on a calendar year or some other time period. Then you have the emergency gimmick, a favorite of the Bush administration, which labelled the cost of the war in Iraq as “emergency” spending for each year so it wouldn’t count under the budget caps. You also have the keeping off-budget gimmick. Technically speaking, the term “off-budget” only refers to entities explicitly excluded from the budget by statute.  According to the United States Senate glossary, “At present, off-budget entities include the Social Security trust funds and the Postal Service.” Obviously, the distinction between what is called “on-budget” and “off-budget” doesn’t change the fact that its spending like any other spending. That said, lawmakers keep other spending items off-the-record informally. Some time ago, I wrote a paper on the issue. But the reason I bring it up today is that budget gimmicks have consequences beyond letting lawmakers get away with spending money. These budget numbers are meant to inform policymakers about the best policies to adopt, and here these budget gimmicks slant important policy choices. As legislators manipulate numbers for political purposes, they rarely stop to think or are forced to explain whether or not the policy they want to adopt serve genuine social and financial policy objectives. This is why budget gimmicks matter.   (1 COMMENTS)