Tag Archives: dependency

Inflation: The Leftist “Tax the Poor” Policy

23 Thursday Sep 2021

Posted by in Deficits, Inflation, Redistribution

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Recent years have seen explosive growth in federal deficits along with growth rates in the money supply that would have made John Maynard Keynes blush. It’s no coincidence that a new school of thought has developed among certain “monetary economists”. But as someone trained in monetary economics, I wish I could make those quote marks larger. This new school of thought is known as Modern Monetary Theory (MMT), and it asserts that the money spigot is a perfectly legitimate means of financing government spending and, furthermore, that it is not necessarily inflationary. Here is how Scott Sumner and Patrick Horan describe MMT:

“A central idea of MMT is that a government that issues its own fiat currency can pay its bills in that same currency. These governments need not worry about budget deficits when contemplating additional spending. Thus because the US government has a monopoly on money creation, our federal government does not need to raise all its revenue through tax or bond finance. A government with its own currency cannot go bankrupt because it can always issue more currency to cover any budget deficit. … MMT advocates argue that this why the US government can afford expensive programs such as a jobs guarantee and universal healthcare.”

Spend and Print

Joe Biden’s $3.5 trillion “social infrastructure” package would be just a start, but that’s likely to be more like $5.5T once the budget gimmicks are stripped out. We can be somewhat hopeful, because that initiative looks increasingly likely to fail in Congress, at least this time around. But the tax side of that bill was already $2.6T short of the latter spending figure, and the tax provisions keep shrinking. Now, it’s looking more like a shortfall of $3.5T would require financing. Moderate Democrats may not support this crazy bill in the end, but Dems from deep blue states want to reinstate state and local tax deductibility, which would cut the tax component still more. Well who cares? Print the money, say the brave MMT advocates.

Sumner gets to the heart of the problem in this piece. Progressives, with false assurance from MMT, want loose monetary policy to make their expansive programs “affordable”. As he explains, if this happens while the economy is near its production potential, inflation is a sure thing. These lessons were learned long ago, but have been conveniently forgotten by the political class (or they simply prefer to ignore them), instead jumping onto the MMT bandwagon.

Inflation Is Taxation

No conscientious observer of government finance should ever forget that inflation is a form of taxation. Assets whose values are either fixed or subject to some inertia are devalued by inflation in terms of purchasing power, or in real terms, as economists put it. Strictly speaking, this is true when inflation is unexpected… if it is expected, then lenders and borrowers can negotiate terms that will compensate for these changes in real value. But when inflation is unexpected, the losses to lenders are offset by gains to borrowers. Of course the federal government is a gigantic borrower, so inflation can represent a confiscation of wealth from the public.

It’s not small potatoes. Currently, about $22T of U.S. Treasury debt is held by the public, and its average maturity is more than 5 years. If the Federal Reserve engineers an unexpected 1% jump in the rate of inflation, it shaves over $1T off the real value of that debt before it’s repaid, and it reduces the real interest cost of that debt as well. Of course, the holders of that debt will suffer an immediate loss if they are forced to sell prior to maturity for any reason, since new buyers will be demanding higher yields to compensate for higher inflation if it is expected to persist.

The Poor Losers

Inflation causes redistributions to take place, especially when it is unexpected inflation. We’ve already discussed lenders and borrowers, but similar considerations apply to anyone entering into fixed price contracts for goods or labor. Here’s what Claudio Bario of the Bank of International Settlements (BIS) has to say about these shifts:

“Inflation shifts income and wealth away from those who are least aware of it, or least able to protect against it. These segments of the population often coincide with lower-income groups, which explains why inflation has often been portrayed as a most regressive form of tax. The ‘inflation tax’ takes its toll through the erosion of the value of financial assets and contracts fixed in nominal terms.”

Inflation is a regressive tax! In this respect, economist Noah Smith echos Bario in a recent op-ed in which he discusses “money illusion”, or the confusion of real and nominal income:

“Workers … who are slow to perceive the rise in prices they pay for goods like cars and groceries, won’t realize this, and will be happy with their unusually large raises. But companies, whose accountants and managers certainly know the true inflation rate, will also be happy, because they know they’re not actually paying more for labor.

That information asymmetry between workers and employers may be exactly what keeps wages from rising faster than inflation. If workers take a year to realize how much prices have gone up, they may be satisfied with the raises they got during the time of high inflation — even if that inflation ultimately turns out to be transitory. By then, it might be too late to negotiate for a real, inflation-adjusted raise.”

Inflation taxes and redistributions become more acute at higher rates of inflation, but any unexpected escalation in the rate of inflation will take a toll on the poor. Bario elaborates on the mechanisms by which inflation inflicts budgetary pain on the those at the lower end of the socioeconomic spectrum.

“As regards wealth distribution, the financial assets that are most vulnerable to inflation are cash and bank accounts – the typical savings vehicles held by the poorest segments of the population. This is mostly because the poorest have access only to limited investment options to protect their savings. …

… wages and pensions – the main sources of income for a large majority of households and even more so for the poorest half of the population – are typically fixed in nominal terms and hence vulnerable to inflation. Indexation mechanisms, such as those adopted in many [advanced economies] in the 1970s, are no panacea: they may fail to keep pace as inflation accelerates; …”

In addition to the inflationary gains reaped by government, it’s clear that inflation gives rise to redistributions between private parties: generally from those with lower incomes and wealth to their employers, producers, financial institutions, and pension payers (businesses, state and local governments). An exception is some low income debtors might benefit if they owe long term obligations at fixed interest rates, but low income individuals are often constrained from obtaining this form of credit.

Causing, Then Exploiting, Inequality

Another especially galling aspect of the Left’s focus on money finance is how its consequences fly in the face of their concerns about income and wealth inequality. Inflation is typically manifested in rising equity prices: nominal stock values tend to escalate in an inflationary environment, protecting their owners from losses to the real value of their investments. Stocks are generally a good inflation hedge. Yet we know that stocks are disproportionately owned by those in the highest strata of the income and wealth distributions. Later, of course, the Left will seek to level the burgeoning inequality wrought by their own policies by “taxing the rich”! Apparently, for the Left, consistency is never considered a virtue. This is not unlike another trick, which is to blame “greedy corporations” for the inflation wrought by Leftist policies.

It’s a great irony that the Left, which purports to support the poor and working people, would propose a form of government finance that is so regressive in its effects. To be generous, perhaps it’s just another case of “progressives” unknowingly hurting the ones they love. The expansive programs they advocate will confer government benefits to many individuals in higher income brackets, not just the poor, but those government alms will help to compensate for higher inflation. But this too takes advantage of money illusion, because those benefits might well buy progressives the loyalty of beneficiaries unable to recognize the ongoing erosion in their standard of living, and who are unwilling to come to grips with their increasing dependency.

But Tut, Tut, They Say

Advocates of MMT, in combination with expansive government, also have a tendency to deny that inflation has ever been a consequence of such policies. As Sumner points out, they have forgotten historical episodes that run contrary to the theory, and most “popular” advocates of MMT fail to recognize the important role played by limits on the economy’s production potential. When money growth outruns the economy’s ability to produce real goods and services, the prices of goods will rise.

Infrastructure Or Infra-Stricture? The Democrats’ $3.5 Trillion Reconciliation Bill

16 Thursday Sep 2021

Posted by in Big Government, Central Planning, infrastructure, Uncategorized

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The Socialist Party faithful once known as Democrats are pushing a $3.5 trillion piece of legislation they call an “infrastructure” bill. They hope to pass it via budget reconciliation rules with a simple majority in the Senate. The Dems came around to admitting that the bill is not about infrastructure in the sense in which we usually understand the term: physical installations like roads, bridges, sewer systems, power lines, canals, port facilities, and the like. These kinds of investments generally have a salutary impact on the nation’s productivity. Some “traditional” infrastructure, albeit with another hefty wallop of green subsidies, is covered in the $1.2 trillion “other” infrastructure bill already passed by the Senate but not the House. The reconciliation bill, however, addresses “social infrastructure”, which is to say it would authorize a massive expansion in the welfare state.

What Is Infrastructure?

Traditionally, public and private infrastructure are underlying assets that facilitate production or consumption in one way or another, consistent with the prefix “infra”, meaning below or within. For example, a new factory requires physical access by roads and/or rail, as well as sewer service, water, gas and/or electric supply. All of the underlying physical components that enable that factory to operate may be thought of as private infrastructure, which has largely private benefits. Therefore, it is often privately funded, though certainly not always.

Projects having many beneficiaries, such as highways, municipal sewers, water, gas and electrical trunk lines, canals, and ports may be classified as public infrastructure, though they can be provided and funded privately. Pure public infrastructure provides services that are non-rivalrous and non-excludable, but examples are sparse. Nevertheless, the greater the public nature of benefits, the greater the rationale for government involvement in their provision. In practice, a great deal of “public” infrastructure is funded by user fees. In fact, a failure to charge user fees for private benefits often leads to a tragedy of the commons, such as the overuse of free roads, imposing a heavier burden on taxpayers.

The use of the term “infrastructure” to describe forms of public support is not new, but the scope of government interventions to which the term is applied has mushroomed during the Biden Administration. Just about any spending program you can think of is likely to be labeled “infrastructure” by so-called progressives. The locution is borrowed somewhat questionably, seemingly motivated by the underlying structure of political incentives. More bluntly, it sounds good as a sales tactic!

$3.5 Trillion and Chains

Among other questionable items, the so-called budget reconciliation “infrastructure” bill allocates funds toward meeting:

“… the President’s climate change goals of 80% clean electricity and 50% economy-wide carbon emissions by 2030, while advancing environmental justice and American manufacturing. The framework would fund:
• Clean Energy Standard
• Clean Energy and Vehicle Tax Incentives
• Civilian Climate Corps
• Climate Smart Agriculture, Wildfire Prevention and Forestry
• Federal procurement of clean technologies
• Weatherization and Electrification of Buildings
• Clean Energy Accelerator”

The resolution would also institute “methane reduction and polluter import fees”. Thus, we must be prepared for a complete reconfiguration of our energy sector toward a portfolio of immature and uneconomic technologies. This amounts to an economic straightjacket.

Next we have a series of generous programs and expansions that would encourage dependence on government:

“• Universal Pre-K for 3 and 4-year old children
• High quality and affordable Child Care
• [free] Community College, HBCUs and MSIs, and Pell Grants
• Paid Family and Medical Leave
• Nutrition Assistance
• Affordable Housing”

If anything, pre-school seems to have cognitive drawbacks for children. Several of these items, most obviously the family leave mandate, would entail significant regulatory and cost burdens on private businesses.

There are more generous provisions on the health care front, which are good for further increasing the federal government’s role in directing, regulating, and funding medical care:

“• new Dental, Vision, and Hearing benefit to Medicare
• Home and Community-Based Services expansion
• Extend the Affordable Care Act Expansion from the ARP
• Close the Medicaid “Coverage Gap” in the States that refused to expand
• Reduced patient spending on prescription drugs”

Finally, we have a series of categories intended to “help workers and communities across the country recover from the COVID-19 pandemic and reverse trends of economic inequality.”

“• Housing Investments
• Innovation and R & D Upgrades
• American Manufacturing and Supply Chains Funding
• LPRs for Immigrants and Border Mangt. • Pro-Worker Incentives and Penalties • Investment in Workers and Communities • Small Business Support

I might suggest that a recovery from the pandemic would be better served by getting the federal government out of everyone’s business. The list includes greater largess and more intrusions by the federal government. The fourth item above, grants of legal permanent residency (LPR) or green cards, would legalize up to 8 million immigrants, allowing them to qualify for a range of federal benefits. It would obviously legitimize otherwise illegal border crossings and prevent any possibility of eventual deportation.

Screwing the Pooch

How many of those measures really sound like infrastructure? This bill goes on for more than 10,000 pages, so the chance that lawmakers will have an opportunity to rationally assess all of its provisions is about nil! And the reconciliation bill doesn’t stop at $3.5T. There are a few budget gimmicks being leveraged that could add as much as $2T of non-infrastructure spending to the package. One cute trick is to add certain provisions affecting revenue or spending years from now in order to cut the bill’s stated price tag.

A number of the bill’s generous giveaways will have negative effects on productive incentives. It’s also clear that some items in the bill will supplement the far Left’s educational agenda, which is seeped in critical theory. And the bill will increase the dominance of the federal government over not only the private sector, but state and local sovereignty as well. This is another stage in the metastasis of the federal bureaucracy and the dependency fostered by the welfare state.

Taxing the Golden Goose

But here’s the really big rub: the whole mess has to be paid for. The flip side of our growing dependency on government is the huge obligation to fund it. Check this out:

“American ‘consumer units,’ as BLS calls them, spent a net total of $17,211.12 on taxes last year while spending only $16,839.89 on food, clothing, healthcare and entertainment combined,”

Democrats continue to dicker over the tax provisions of the bill, but the most recent iteration of their plan is to cover about $2.9 trillion of the cost via tax hikes. Naturally, the major emphasis is on penalizing corporations and “the rich”. The latest plan includes:

  • increasing the corporate income tax from 21% to 26.8%;
  • increasing the top tax rate on capital gains from 20% to 25%;
  • an increase in the tax rate for incomes greater than $400,000 ($450,000 if married filing jointly)
  • adding a 3% tax surcharge for those with adjusted gross incomes in excess of $5 million;
  • Higher taxes on tobacco and nicotine products;
  • halving the estate and gift tax exemption;
  • limiting deductions for executive compensation;
  • changes in rules for carried interest and crypto assets.

There are a few offsets, including the promise of tax reductions for individuals earning less than $200,000 and businesses earning less than $400,000. We’ll see about that. Those cuts would expire by 2027, which reduces their “cost” to the government, but it will be controversial when the time comes.

The Dem sell job includes the notion that corporate income belongs to the “rich”, but as I’ve noted before, the burden of the corporate income tax falls largely on corporate workers and consumers. Lower wages and higher prices are almost sure to follow. This would deepen the blade of the Democrats’ political hari-kari, but they pin their hopes on the power of alms. Once bestowed, however, those will be difficult if not impossible to revoke, and the Dems know this all too well.

The assault on the “rich” in the reconciliation bill is both ill-advised and unlikely to yield the levels of revenue projected by Democrats. Like it or not, the wealthy provide the capital for most productive investment. Taxing their returns and their wealth more heavily can only reduce incentive to do so. Those investors will seek out more tax-advantaged uses for their funds. That includes investments in non-productive but federally-subsidized alternatives. Capital gains can often be deferred, of course. These penalties also ensure that more resources will be consumed in compliance and tax-avoidance efforts. The solutions offered by armies of accountants and tax attorneys will tend to direct funds to uses that are suboptimal in terms of growth in economic capacity.

What isn’t funded by new taxes will be borrowed by the federal government or simply printed by the Federal Reserve. Thus, the federal government will not only compete with the private sector for additional resources, but the monetary authority will provide fuel for more inflation.

Fracturing Support?

Fortunately, a few moderate Democrats in both the House and the Senate are balking at the exorbitance of the reconciliation bill. Senator Joe Manchin of West Virginia has said he would like to see a package of no more than $1.5 trillion. That still represents a huge expansion of government, but at least Manchin has offered a whiff of sanity. Equally welcome are threats from radical Democrats like Senator Bernie Sanders and Rep. Antonia Ocasio-Cortez that a failure to pass the full reconciliation package will mean a loss of their support for the original $1.2 trillion infrastructure bill, much of which is wasteful. We should be so lucky! But that’s a lot of pork for politicians to walk away from.

Infra-Shackles

The so-called infrastructure investments in the reconciliation bill represent a range of constraints on economic growth and consumer well being. Increasing the government’s dominance is never a good prescription for productivity, whether due to regulatory and compliance costs, bureaucratization of decision-making, minimizing the role of price signals, pure waste through bad incentives and graft, and public vs. private competition for resources. The destructive tax incentives for funding the bill are an additional layer of constraints on growth. Let’s hope the moderate Democrats hold firm, or even better, that the tantrum-prone radical Democrats are forced to make good on their threats.

Lockdowns Subvert Public Health and Life Itself

15 Thursday Oct 2020

Posted by in Coronavirus, Lockdowns, Public Health, Uncategorized

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Acceptance of risk is a necessary part of a good life, and extreme efforts to avoid it are your own business. Government has no power to guarantee absolute safety, nor should we presume to have such a right. Ongoing COVID lockdowns are an implicit assertion of exactly that kind of government power, despite the impotence of those efforts, and they constitute a rejection of more fundamental rights.

Lockdowns have had destructive effects on health and economic well being while conferring little if any benefit in mitigating harm from the virus. The lockdowns were originally sold as a way to “flatten the curve”, that is, to avoid a spike in cases and an overburdened health care system. However, this arguably well-qualified rationale later expanded in scope to encompass the mitigation of smaller and much less deadly outbreaks among younger cohorts, and then to the very idea of extinguishing the virus altogether. It’s become painfully obvious that such measures are not capable of achieving those goals.

In the U.S., the ongoing lockdowns have been a cause célèbre largely on the interventionist Left, and they have been prolonged mainly by Democrats at various levels of government. In a way, this is not unlike many other policies championed by the Left, often ostensibly designed to help members of the underclasses: instead, those policies often destroy or wrongly obviate incentives and promote dependency on the state. In this case, the plunge into dependency is a reality the Left would very much like to ignore, or to blame on someone else. You know who.

The lockdowns have been largely unsuccessful in mitigating the spread of the virus. At the same time, they have been used as a pretext to deny constitutional rights such as the free practice of religion, assembly, and a broad range of unenumerated rights under the “penumbra” of the Bill of Rights and the Ninth Amendment. What’s more, the severity of the economic blow caused by lockdowns has been borne disproportionately by the working poor and the small businesses who employ so many of them.

Lockdowns are deadly. It’s not clear that they’ve saved any lives, but they have massively disrupted the operation of the health care system with major consequences for those with chronic and undiagnosed conditions. The lockdowns have also led to spikes in mental health issues, alcoholism, drug abuse, and deaths of despair. A recent study found that over 26% of the excess deaths during the pandemic were non-COVID deaths. Those deaths were avoidable or accelerated, whereas the lockdowns have failed to meaningfully curtail COVID deaths. Don’t tell me about reduced traffic fatalities: that reduction is relatively small relative to the increase in non-COVID excess deaths (see below).

What proof do we have that lockdowns cause excess deaths? See this study in The Lancet on cancer deaths due to lockdown-induced delays in diagnoses. See this study on UK school closures. See this Oxfam International report on lockdown-induced starvation. Other reports from the UK suggests that lockdown deaths are widespread, having taken nearly 2,800 per week early in the pandemic, and many other deaths yet to occur have been made inevitable by lockdowns. Doctors in the U.S. have warned that lockdowns are a “mass casualty incident”, and a German government study warned of the same.

The Ethical Skeptic (TES) on Twitter has been tracking a measure of lockdown deaths for some time now. The following graphic provides a breakdown of excess non-COVID deaths since the start of the pandemic. The total “pie” shows almost 320,000 excess deaths through September 26th (avoiding less complete counts in recent weeks), as reported by the CDC. COVID accounted for 202,000 of those deaths, based on state-level reporting. Of the remaining 117,000 excess deaths, TES uses CDC data to allocate roughly 85,000 to various causes, the largest (more than half) being “Suicide, Addiction, Abandonment, and Abuse”. Other large categories include Cardio/Diabetes, Stroke, premature Alzheimers/Dementia death, and Cancer Access. Nearly 32,000 excess deaths remain as a “backlog”, not yet reported with a cause by states.

Also of interest in the graphic are estimates of life-years lost. The vast bulk of COVID victims are elderly, of course, which means that any estimate of lost years per victim must be relatively low. On the other hand, most non-COVID, lockdown-related deaths are among younger victims, with correspondingly greater life-years lost. TES’s aggregate estimate is that lockdown-related excess deaths involve double the life-years lost of COVID deaths. Of course, that is an estimate, but even granting some latitude for error, the reality is horrifying!

John Tierney in City Journal cites several recent studies concluding that lockdowns have been largely ineffective in Europe and in the U.S. While Tierney doesn’t rule out the possibility that lockdowns have produced some benefits, they have carried excessive costs and risks to public health going forward, such as lingering issues for those having deferred important health care decisions as well as disruption in future economic prospects. Ultimately, lockdowns don’t accomplish anything:

“While the economic and social costs have been enormous, it’s not clear that the lockdowns have brought significant health benefits beyond what was achieved by people’s voluntary social distancing and other actions.”

Tierney also discusses the costs and benefits of lockdowns in terms of life years: quality-adjusted life-years (QALY), which is a widely-used measure for evaluating of the use of health care resources:

“By the QALY measure, the lockdowns must be the most costly—and cost-ineffective—medical intervention in history because most of the beneficiaries are so near the end of life. Covid-19 disproportionately affects people over 65, who have accounted for nearly 80 percent of the deaths in the United States. The vast majority suffered from other ailments, and more than 40 percent of the victims were living in nursing homes, where the median life expectancy after admission is just five months. In Britain, a study led by the Imperial College economist David Miles concluded that even if you gave the lockdown full credit for averting the most unrealistic worst-case scenario (the projection of 500,000 British deaths, more than ten times the current toll), it would still flunk even the most lenient QALY cost-benefit test.”

We can now count the World Health Organization among the detractors of lockdowns. According to WHO’s Dr. David Nabarro:

“Lockdowns just have one consequence that you must never ever belittle, and that is making poor people an awful lot poorer…. Look what’s happened to smallholder farmers all over the world. … Look what’s happening to poverty levels. It seems that we may well have a doubling of world poverty by next year. We may well have at least a doubling of child malnutrition.”

In another condemnation of the public health consequences of lockdowns, number of distinguished epidemiologists have signed off on a statement known as The Great Barrington Declaration. The declaration advocates a focused approach of protecting the most vulnerable from the virus, while allowing those at low risk to proceed with their lives in whatever way they deem acceptable. Those at low risk of severe disease can acquire immunity, which ultimately inures to the benefit of the most vulnerable. With few, brief, and local exceptions, this is how we have always dealt with pandemics in the past. That’s real life!

Human Potential Exceeds the Human Burden

30 Friday Nov 2018

Posted by in Abortion, Mobility, Redistribution

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Are human beings a burden, and in what way? Between two camps of opinion on this question are many shades of thought, and some inconsistencies. But whether the discussion is centered on the macro-societal level or the family level, the view of people and population growth as burdensome promotes centralized social control and authoritarian rule, with an attendant imposition of burdens on human freedom and productive effort.

Naysaying Greens

The environmental Left views people as a net burden on resources while failing to recognize their resource value, without which our world would yield little in the way of food and other comforts. It is mankind’s ability to process and transform raw materials that makes the planet so hospitable.

The world’s human population has increased by a factor of 18 times in the last 400 years, but food supplies have grown even faster. Each person has potential as a resource capable of a net positive contribution to societal and global well being. If we wrongly conclude that people are burdensome, however, it offers a rationale to statists for regulating the lives of individuals, preventing them from producing and consuming as they would otherwise choose.

Sirens of Dependency

There will always be individuals who cannot provide for themselves, sometimes due to temporary circumstances and sometimes as a permanent condition. If the latter, these individuals find themselves in the lower tail of the distribution of human productive capacity. The undeniable burden of this lower tail for humanity can be dealt with through various social support structures, including family, religious organizations, private social organizations, and the public safety net.

People of true compassion have always helped to fill this need privately and voluntarily, but “compassionate” motives can be a false and corrupting when the public sector becomes the tool of choice. Actual and potential beneficiaries of public largess can vote for their alms at the expense of others, along with those well-meaning partisans who confuse forced redistribution with compassion. And benefits and taxes often create disincentives that undermine a society’s productive dynamic. Under such circumstances, the lower tail and its burden of dependency grows larger than necessary, and society’s ability to carry that burden is diminished.

Burdensome Children

Children are unable to provide for themselves up to varying ages, so they do create an economic burden for their parents. That burden might loom large in the event of an unexpected pregnancy, but most parents find the burden well worth bearing, whether planned or unplanned, ex ante and ex post, and for reasons that often have little to do with material concerns. But many individuals and families in the lower tail simply cannot bear the economic burden on their own; others not in the lower tail might simply find the prospective burden of an unexpected pregnancy a bit too heavy or inconvenient for non-economic reasons.

Solutions are available, of course. They range from sexual abstinence and prophylactics to adoption services, as well as hard sacrifice by new parents. And then there is abortion. The pro-choice Left makes the argument that children are so burdensome as to justify the termination of pregnancies at almost any stage. The ease with which they make that argument and traffic in the imposition of that burden upon the innocent is horrific. Furthermore, regimes dominated by the Left have often instituted formal population control measures, and Western leftists such as the late Margaret Sanger, founder of Planned Parenthood, have advocated strenuously for eugenics.

Burdens at the Border

Are migrants a burden or a blessing? In general, the latter, because mobility allows individuals to exploit economic opportunities, with consequent gains to themselves and to those who demand their services. This is generally true from the perspective of nations; it is the basis of the traditional economic argument in favor of liberalized, legal immigration to which I subscribe. But some partisans on both sides of the immigration debate accept the idea that immigrants impose a burden. That may be correct under some circumstances.

Opponents of immigration reform certainly identify immigrants as a burden to productive citizens and taxpayers. Critics of border control, on the other hand, are motivated by compassion for political refugees or economically disadvantaged immigrants, whether employment opportunities exist for them or not. In fact, would-be immigrants are often attracted by generous public benefits in the receiving country, and so they are likely to add to a country’s lower-tail burden, as I’ve described it. But the no-borders crowd insists that society must shoulder any burden created by the combined effect of an open border with generous public benefits, and even immediate voting rights.

The Burdens of Overbearance

The Left imagines that people create many burdens, but the Left is happy to impose many burdens in pursuit of their “ideal” society: planned by experts, egalitarian, highly regulated, profit-free, and green. They wish to “save the planet” by imposing burdens, regulating and restricting economic growth and sparing no expense to minimize the human “footprint”. They wish to fund redistributive social programs by burdening productive resources with taxes, while crowding-out private efforts to provide charitable relief. They wish to prevent the perceived burden of children by offering, and even funding publicly, the “choice” to impose an ultimate burden on those too weak to register a protest. And they wish to burden taxpayers by availing all potential migrants, without question, of generous public benefits.

Burdens are a fact of life, but people with the freedom to exploit their own effort and ingenuity for gain have increasingly shouldered their own burdens and much more. Over the last few centuries, human ingenuity has expanded the effective quantity of all resources by many orders of magnitude. In so doing, the scale and scope of real poverty have been reduced dramatically. But those who would deign to manage our burdens for us, under the authority of the state, are more threatening to our well being than beneficent.

Government Supplies a Cliff; Would you Jump?

14 Friday Aug 2015

Posted by in Big Government, Welfare State

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welfare cliff

People respond to incentives. That does not, in and of itself, make some people “energetic” and others “lazy”. To the contrary, it really means they are responsive and capable of calculating rewards. Critics of the welfare state are sometimes accused of labeling welfare recipients as “lazy”, which is absurd and a cop-out response to serious questions about the size, effectiveness, and even the fairness of means-tested benefits. The structure of welfare benefits in the U.S. often penalizes work effort and market earnings. That being the case, who can blame a recipient for minimizing work effort? From their perspective, that is what society wants them to do. Note that this has nothing to do with the provision of a social safety net for those who are unable to help themselves.

The welfare incentive phenomenon is explored by Zero Hedge under the Fight Club nom de guerre Tyler Durden in “When Work Is Punished: The Ongoing Tragedy Of America’s Welfare State“:

“At issue is the so-called “welfare cliff” beyond which families will literally become poorer the higher their wages, as the drop off in entitlements more than offsets the increase in earnings.“

The cliff looks different in different states and even differs by county. The chart at the top of this post is for Pennsylvania, from the state’s Secretary of Public Welfare, though I saw it on this post from LiberalForum. (Go to the link if the image is not clear). The Zero Hedge post linked above includes a dramatic illustration for Cook County in Illinois. Not many welfare recipients participate in all of the programs shown in the charts, but the point is that many of the programs create nasty incentives that tend to “trap” families at low income levels. Often, these workers and their families would be better off in the long-run if they were to suffer the consequences of the cliff in order to gain more work experience. Unfortunately, few have the resources to ride out a period of lower total income precipitated by the cliff. Another obvious implication is that increases in the minimum wage would actually harm some families by pushing them over the cliff.

Welfare cliffs differ by the recipients’ family structure (one- versus two-parent households, number of children) and do not apply to every welfare program. For example, the Earned Income Tax Credit (EITC) is very well-behaved in the sense that additional work and/or wage income flows through as a net gain the household. While most welfare programs involve a benefits cliff, incentives are undermined even before that point. A flattening in the level of total income as earned income rises indicates that the recipient faces an increasing marginal tax rate. The chart above shows that total income is relatively flat over a range of earned income below the income at which they’d encounter the cliff. This flat range starts at an earned income of $15,000 to $20,000 and extends up to the severe cliff at almost $30,000.

Zero Hedge quotes a report from the Illinois Policy Institute:

“We realize that this is a painful topic in a country in which the issue of welfare benefits and cutting (or not) the spending side of the fiscal cliff have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for Americans who find themselves facing a comparable dilemma: either remain on the left side of minimum US wage and rely on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same (or much lower) disposable income at the end of the day.“

Another interesting take on this issue is offered by Dan Mitchell, who cites a recent National Bureau of Economic Research (NBER) paper, which finds:

“…the decline in desire to work since the mid-90s lowered the unemployment rate by about 0.5 ppt and the participation rate by 1.75 ppt. This is a large effect…“

The findings suggest that the welfare reforms of the 1990s actually had positive effects on work effort, though even the EITC creates some incentive problems for second earners. Worst of all is the incentive impact of expanded disability benefits, which have undone some of the gains from reform. Newer programs like Mortgage Assistance and now, Obamacare, have added to the work disincentives. Mitchell cites other research that reinforce these conclusions.

The welfare cliff harms economic efficiency by distorting the offer price of labor, by increasing costs to taxpayers, and by reducing the availability of productive resources. It is grossly unfair because it consigns its intended beneficiaries to a life of dependency. What a waste! Here is Mitchell’s prescription:

“Regarding the broader issue of redistribution and dependency, I argue that federalism is the best approach, both because states will face competitive pressure to avoid excessively generous benefits and because states will learn from each other about the best ways to help the truly needy while minimizing the negative impact of handouts on incentives for productive behavior.“

A side effect of negative welfare incentives is that they increase the relative benefits of participating in illegal income-earning activity. The “War on Drugs” exacerbates this effect by driving up drug prices. Of course, this activity is untaxed, and because it is unreported, it does not push the recipient toward the benefits cliff. This is another example of different government policies working at cross purposes, which is all too common.

Government and Perpetual Poverty

07 Thursday May 2015

Posted by in Welfare State

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The welfare state has 1) reduced measured poverty, but it has 2) failed to provide sufficient opportunity and economic mobility. In “Two Premises on Poverty and Culture“, Ross Douthat writes that it should be easy for Left and Right to agree on these points. #1 is a fairly well-established empirical fact, while #2 leaves plenty of room to debate what went wrong and how to fix it. The Left might well call for more resources to be plowed into the effort; the right believes that the welfare state has fostered dependency and subverted social institutions. The best that can be said is that the modern welfare state leaves the poor “running in place”, but that concedes far too much to programs rife with disincentives for legal, market work effort. I wrote about this topic just over a month ago, in “Poverty Maintenance Is Not a Win“. While Douthat’s short essay sought common ground upon which Right and Left can debate reforms, he notes that anti-poverty programs:

“... raise incomes but also increase dependency, encourage idleness, crowd out the basic institutions of civil society, and so on through the libertarian critique.“

This is not to diminish the waste inherent in other areas of government largess, such as corporate subsidies, defense spending, and over-regulation. Virtually any government program can be called out on waste and unintended consequences. Tonight, however, we’re featuring the dismal results of the welfare state. Thomas Sowell, a well-known African American economist, is uncompromising in his condemnation of the welfare state in connection with recent protests by blacks against perceived injustices in “The Inconvenient Truth about Ghetto Communities“:

“Anyone who is serious about evidence need only compare black communities as they evolved in the first 100 years after slavery with black communities as they evolved in the first 50 years after the explosive growth of the welfare state, beginning in the 1960s. …

We are told that such riots are a result of black poverty and white racism. But in fact — for those who still have some respect for facts — black poverty was far worse, and white racism was far worse, prior to 1960. But violent crime within black ghettos was far less.

There is no doubt that the behavioral dysfunctions induced by welfare state incentives have been compounded by the war on drugs. Like all prohibitions, it offers black market “opportunities” to the poor and unskilled while promoting violence and a high risk of arrest and imprisonment, contributing to the destruction of families and communities. But the welfare state itself effectively subsidizes the drug-war pathway to perdition:

You cannot take any people, of any color, and exempt them from the requirements of civilization — including work, behavioral standards, personal responsibility, and all the other basic things that the clever intelligentsia disdain — without ruinous consequences to them and to society at large.

Non-judgmental subsidies of counterproductive lifestyles are treating people as if they were livestock, to be fed and tended by others in a welfare state — and yet expecting them to develop as human beings have developed when facing the challenges of life themselves.“

The usual trope promoted by the Left is that more resources are required to end the cycle of dependency. That is dubious in light of the dramatic increases in U.S. welfare spending over the past 50 years. Those increases have been fairly steady, yet significant decreases in the incidence of poverty came to an end before 1970:

“Today, government spends 16 times more, adjusting for inflation, on means-tested welfare or anti-poverty programs than it did when the War on Poverty started. But as welfare spending soared, the decline in poverty came to a grinding halt.“

Finally, here is a little object lesson in the way Leftists typically misperceive facts surrounding the actual allocation of budgetary resources and the concomitant results. On April 28th, Jon Stewart said:

“If we are spending a trillion dollars to rebuild Afghanistan’s schools, we can’t, you know, put a little taste Baltimore’s way. It’s crazy.“

Alex Tabarrok castigates Stewart for this gross misrepresentation of the foreign aid budget and the complete distortion of the facts surrounding school funding in Baltimore. Actually, per-student funding for the Baltimore city public schools is over 26% greater (a difference of more than $3,500 per year) than for the schools in Fairfax County, VA. The latter is considered one of the best school districts in the country. The funding of Baltimore schools is dominated by state contributions, but federal funding there exceeds local funding.

Step-Up, Pay-Up & Shut-Up

23 Friday Jan 2015

Posted by in Taxes

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Predicting support among relatively affluent leftists for President Obama’s proposed elimination of the step-up in tax basis at death is probably a simple matter of knowing whether they have a surviving parent or whether they have a bequest motive of their own. Perhaps I’m too cynical: it probably depends on age as well (as that may influence awareness of the tax provision). Still, I’ll bet my predictions would be highly accurate for “affluent leftists of a certain age”.

A technical digression: the cost basis of an asset is the price originally paid. The tax basis is the same until the owner’s death. When the asset is ultimately sold, the gain over and above the tax basis is taxed at the capital gains tax rate, now 20% (plus a 3.8% Medicare surtax for incomes greater than $200,000). However, under current law, when an asset is held until death, an heir’s tax basis is “stepped-up” from cost to the asset’s value at that time. No income tax is owed at the time of the inheritance even if the asset is sold immediately. The estate tax still applies to the asset’s value (depending on the size of the estate and whether there is a surviving spouse), but there is no capital gains tax liability until an heir sells the asset at a price greater than the stepped-up tax basis.

Our rhetorically-inclined president calls this feature of the income tax code a “loophole,” despite the fact that it is a legal feature of our ridiculously-complicated income tax and that inherited assets are still subject to the estate tax.

Obama’s proposal would eliminate the stepped-up basis at death. The increase in value would be subject to the capital gains tax at the time of inheritance (even if the asset is not sold) and subject to the estate tax (40%) if the size of the estate exceeds a threshold (about $5.4 million per individual). In addition, the President wants to increase the capital gains tax rate to 24.2% (plus 3.8% yields the oft-quoted 28%). These points are generally unaffected by whether the asset is held in trust for the full benefit of the heir. There are some exemptions in Obama’s proposal to eliminate stepped-up tax basis for small, family-owned businesses and for gains on primary residences. Also, gains would be taxed only after the first $100,000 per individual and only at the time of the second death for a couple.

The double taxation of capital gains in large estates might not evoke much sympathy, but it would ultimately have negative consequences for the economy. It would bleed capital out of productive, employment-generating private investments to feed a resource-hungry Leviathan, notwithstanding Obama’s high-minded pretensions. Perhaps worse is the impact on smaller estates held by conscientious middle-class savers who have understood the magic of compound growth. The aggrieved children of many such savers would find themselves in the grips of a significant income tax liability, which might require a fire-sale of assets in order to make payments to the IRS.

Complex features like the stepped-up basis are not hallmarks of a well-designed tax system. They tend to be promulgated as a way of offsetting other features of the tax code that would otherwise be punitive. If anything, this web of features is an impediment to efficient revenue generation. A simple tax code would minimize compliance costs and eliminate the many provisions that distort economic decisions. But complexity lends itself to political manipulation, which is the subtext for President Obama’s failure to propose any sort off meaningful tax simplification. Instead, he proposes even more complexity to be administered by that most trusted of institutions: the IRS. Fortunately, the president’s tax package stands no chance of becoming law, but it is illustrative of his statist agenda and his economic ignorance.

This post at Reason critiques this and other aspects of the President’s tax plan. This note in Forbes gives more detail about the proposal but is just a bit too optimistic about its potential to benefit the middle class. For a variety of reasons, the middle class is unlikely to benefit in the long-run. Slower economic growth will take its toll, and the sad truth is that Obama is seeking to increase middle-class dependence on the state.

Well Done, Mr. President… You’ve Screwed Your Supporters!

23 Tuesday Sep 2014

Posted by in Uncategorized

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Sorry for the sarcasm, but I always have to laugh when I see that meme from The Daily Kos congratulating President Obama for a job well done. It lists some misleading, cherry-picked  statistics about the economy, pre- and post-Obama, and it attributes certain outcomes to the president over which he has absolutely no control. Would it be unfair to say that Obama had any control over the lousy outcomes cited by Stephen Moore in “Obamanomics victimizes president’s biggest supporters most“? Probably not, because this is exactly where an economic philosophy based on redistribution takes you: increasing dependency on the state. That’s economic cannibalism, and it is sad, though in fairness it must also be said that the big-government Bush years were a period of relatively stagnant median income growth.

As Moore says, “Income redistribution is not an economic strategy for growth. It’s a lifeboat strategy. It would be hard to point to a single initiative the Obama administration has proposed that would help businesses grow and invest.” And so we see that certain groups — blacks, hispanics, Americans with a high-school education or less, and single women with children — have all suffered disproportionately under President Obama relative to the median family, and the median family has nothing to brag about, having weathered more than a 3% decline in income since June 2009. See the chart in Moore’s article. The one inserted above is a little older, but it shows growth over a longer period by race.

My apologies for the obnoxious pop-up ads that appear when you go to the link with Moore’s article.