Much of the political behavior we see is theater or, even worse, buffoonery. I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.
This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called ABetterWay-Tax-Snapshot.
The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.
The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.
Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.
There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.
The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.
The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates). Below is a table listing annual growth rates for real output (GDP) since the last recession ended.
The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.
The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.
Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.
I recently saw a local newspaper article discussing the selection of economics textbooks to be used in teaching economics to high school students in my local school district. A school board member expressed some concerns that a text might be chosen that could reflect the political or other biases of the text authors. As an economist, I (unsurprisingly) endorse teaching economics to high school students but I am well aware that many economists express opinions about economic policy and other economics issues that do not reflect solid economic analysis. Rather their statements reflect their political or other biases. And so I decided to pursue an example of possible bias recently discussed in a journal devoted to economic analysis.
Richard Vedder is Emeritus Professor of Economics at Ohio University and he recently wrote an article in the Winter 2016 issue of the Cato Journal on the state of academic economics. One matter that he discusses there is the accuracy or possible bias of economics texts and he provides what to me is a stunning example of misinformation in an economics text. I checked Professor Vedder’s example and it is indeed entirely accurate.
In Principles of Economics, 12th Edition (1985), written by the late Paul A. Samuelson and William D. Nordhaus, there is a discussion of the Soviet Union. Consider the following statement (Samuelson and Nordhaus, p. 775) about economic growth in the Soviet Union.
…there can be no doubt that the Soviet planning system has been a powerful engine for economic growth.
The Soviet Union collapsed in 1991 just six years after this statement was published! Does it seem reasonable to you, dear reader, that a country that is a growth engine of such magnitude would break apart a short time later? How can we explain this astonishing statement? How could these economists be wrong? Read more…
The Trustees of the Social Security System issue a report each year on the overall state of the system. The 2015 report is available publicly (https://www.ssa.gov/oact/tr/2015/trTOC.html). Consider the following statement in the Overview section of this recently-released report.
The open group unfunded obligation for OASDI over the 75-year period is $10.7 trillion in present value….
In the above statement, OASDI stands for Old Age and Survivors Disability Insurance, the formal name for the Social Security program. The statement seems shocking because it suggests an enormous payment of benefits owed to individuals for which there is no funding source. This staggeringly large number is what is often reported in the media. But my guess is that most readers have no way of knowing how this number arises. With a bit of arithmetic, it is possible to show how it is obtained. Read more…
Ronald Reagan once made a comment to the effect that government programs never seem to end. A recent story in the press indicates why Reagan was spot on with this comment.
A recent media report indicated that Senator Ted Cruz is campaigning in Iowa and he has criticized the ethanol programs imposed by the federal government. While Senator Cruz is not the only senator taking this position (for example, I have heard Senator John McCain enunciate an identical position in the past), what is remarkable is that Senator Cruz has made these critical remarks in a state containing residents, such as corn farmers, who benefit mightily from ethanol fuel mandates. The press report indicates that the ethanol industry is spending millions of dollars in an advertising campaign designed to prevent Senator Cruz from winning the Iowa caucuses.
This news report illustrates the truth of a comment that I heard the late Milton Friedman make many years ago explaining why government programs seem to last forever. The benefits of the ethanol program accrue to a small number of individuals who are fully aware of the manner in which they benefit. The costs of these programs are diffuse and spread across many individuals and are small, per individual, compared to the per-individual benefits that accrue to those who are made better off by the ethanol program. Indeed, those bearing the costs may not even be aware that they are made worse off by the ethanol mandates.
Econ 101 students can easily figure out the impact of ethanol fuel requirements. The demand for corn rises which raises the relative price of corn. Farmers rationally put more land into growing corn, an act which reduces the supply of crops other than corn, thus raising their relative prices. So we see that crops have their prices increased (and paid by consumers) in agricultural markets.
Second, talk to any automotive engineer as I have and they describe the ethanol mandates as absurd. They do little to reduce gasoline consumption and it is an inefficient fuel. As a friend once said, you could plant the entire United States with corn and you still could not run all of the cars in the U.S. Finally, there is now scientific evidence (I even saw this described on the evening television news many years ago) that ethanol production pollutes the environment more than the production of gasoline.
But corn farmers and those in the ethanol industry vote and use their votes partly to keep this environmentally-destructive subsidy to themselves in place. Welcome to the corruption of a democracy.
A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.
Peter Wallison is on the staff of the American Enterprise Institute. He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.
I have also written previously on the crisis (read those posts here and here). All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.
I read in the local newspaper today that there is some discussion going on in the Michigan state legislature regarding the federal government deficit. Specifically, there is a coalition of states that has begun to form that would force the federal government to convene a constitutional convention only concerned with the adoption of a balanced-budget requirement imposed on the federal government. Michigan is apparently discussing whether the state should be a part of that coalition. This development is a very good one for reasons that I will sketch below.
By allowing government deficits to exist, there has been a perversion of government policy that may well destroy our country in the future. It is all too often observed that government programs exist mainly to line the pockets of politically-connected groups, thereby enhancing the reelection prospects of the politicians handing out the subsidies. There is an enormous list of these programs. The Export-Import Bank, farm subsidies, ethanol programs, and many more (see a previous post for others) do nothing for the welfare of the country but the recipients of these programs benefit mightily. As the late Milton Friedman said many years ago, the benefits of these programs benefit a few who lobby furiously to get them, but the costs are diffuse, spreading across many people. And so the cost to each person is small and may not even be recognized by the individual bearing these costs. As a result, it is all too easy for the government to borrow to finance yet another vote-buying scheme. All it has to do is borrow to finance any new such spending program since raising tax rates may anger taxpayers.
The problem is that the United States is heading for an explosion of its entitlement costs that has been noted many times by economists (I wrote on this previously here). No economist that I know thinks that the U.S. can finance several trillion dollars in deficits and so, when these occur in the future, what is to be done?