IGEG
Institute for Global Economic Growth
Halting French Economic Thrust
Taxing Questions … and Misfires
Consent of the Governed
Taxes, Truth and CBS
Out to Lunch at Treasury?
Wealth Creators Vs. Protectors
Kerry Economically Scary?
How to Find Osama
The Growth Agenda
Making the World Better
Regulation Therapy
Economics Chasm Between
The Ideal … and Potential
Tallying Presidential Economic Success
Marketing Failure
What Is Evidence?
Responsibility and Governance
Reality Denial
Incompetence or Sabotage?
Beguiling Curves of the Swedish Model
Putin and the Reformers
All So Taxing
Regulatory Malpractice
How to Create More Jobs
Minority Party Syndrome
Kerry’s Economic Beliefs
Voting with Their Feet
Offshore Finance
The Deficit Bugaboo
How to Control the Habit
Fox in the Henhouse
Outside the Box
Markets and Monopolies
The
By Richard W. Rahn
Published December 29, 2004
Treasury Secretary John Snow "can stay as long as he wants, provided it is not very long," is destined to go down in history as one of those classic
The phrase appeared in an article in The Washington Post as a quote from "a senior administration official" one week before the president finally announced Mr. Snow would be retained. For some time, officials of the Bush administration also made it known they were looking for a replacement, but in the end seemed unable to find someone both willing to take the job and clearly superior to Mr. Snow.
John Snow came to the job two years ago with good reviews after the disappointing performance of his predecessor, Paul O'Neill. So what went wrong?
Mr. Snow came to the job after heading a major railroad. Therefore, much of his experience was unrelated to the many tasks at Treasury. Thus, it was unrealistic to expect him to be up to speed on Day One with the many difficult domestic and international tax and economic issues he had to deal with.
But he does hold a Ph.D. in economics and a law degree, and had
The first charge against Mr. Snow has been his very uneven public presentations. He has given first-rate speeches, but all too often he has given very muddled talks and press interviews. Mr. Snow proved to be a Bush loyalist during the campaign by tirelessly giving speech after speech on behalf of the president. But the White House and campaign staff had so many misgivings about the inconsistent quality of his performances that he was sent primarily to small markets where he would not face the fierce interrogation of the national TV and print press.
Despite his personal enthusiasm for the president and the Bush tax cuts, he failed to effectively utilize his Treasury staff to counter the Democrats' economic offensive and misstatements. This failure resulted in the American people believing the economy was in far worse shape than it was (and is), and this misinformation reduced the president's economic approval ratings and unnecessarily cost him votes.
Those who are concerned about the fall in the dollar also criticize Mr. Snow for his mixed messages on the issue. He has said the administration favors a strong dollar, while at other times he seemingly implied he likes the weaker dollar because it will help manufacturing exports.
Despite the urgings of many tax economists and scholars in the major think tanks (as well as some in the Bush White House), Mr. Snow has done little to insist his own tax revenue operation move away from static analysis and do more realistic dynamic tax scoring.
Moreover, he has tolerated performance by some of his staff whose personal agendas have undermined administration positions. One example is a proposal (made in the last week of the
Senior White House economic officials and many members of Congress, plus virtually every regulatory agency, industry group and public-policy organization that testified on the proposal oppose it. Opposition is intense because the move would undermine our economic and national security, violate financial privacy rights and weaken the dollar. Mr. Snow told several senior members of Congress he would withdraw the proposal. By not doing so he has damaged his credibility.
In the eyes of
Thus Mr. Snow faces an enormous test: Can he develop and sell proposals to the American people and the Congress that will substantially improve both our tax and Social Security systems? To do so, he needs to greatly beef up his economic and tax policy team. (He could start by naming Glenn Hubbard, former chairman of the president's Council of Economic Advisers, in Treasury's just-vacated No. 2 spot. To head tax policy, he needs to find someone who is committed to the president's agenda, rather than just another
He also needs to start working with, reaching out and regularly listening to allies in the Congress and the free-market public policy organizations. If he continues turning a deaf ear to his friendly critics (those who want him to succeed) as he has over the last year, he will have little chance of success.
Two years ago, the president told us John Snow could do the job, and many of us gave him a ringing endorsement. But he has little time to improve his hand so that those who are betting Mr. Snow will melt before spring will need to pay up.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published December 22, 2004
Are you in favor of a national identity card? Even though many Americans are against the idea of a national identity card, it is coming. In fact, in many ways, it is already here. Every American citizen and every foreign worker in
You cannot board an airliner or certain trains, cash a check, go to a hospital, obtain a hotel room or even enter some office buildings without showing a photo ID. You cannot travel to foreign countries without a passport. Yes, we have no national ID card but, instead, we are required to have many ID cards just to engage in the normal activities of life.
We are torn on the issue of a national ID because we do not want big brother government to monitor us (we all know the potential horrors from the Gestapo and sci-fi movies).
On the other hand, we understand the legitimate needs of many purveyors of public and private services to know who we are. We also worry about the theft of our identity. We want to be able to provide our medical history to those who need it to help us in a medical emergency, but we don't want those who might abuse or embarrass us with that knowledge to have the information.
In the current world, we are required to know and give more passwords than most of us can remember to access our bank and credit card accounts, frequent flyer accounts, e-mail and Internet providers, and other information service accounts.
If the question posed at the beginning of this commentary was: "Would you be in favor of a card that could prove your ID while at the same time protect you from giving information about yourself (including medical and financial information) that you do not wish to provide?" I am sure that more people would give a yes response.
The fact is we do not need nor should we have a government issued national ID card. What we need is for the government to specify for what purposes and when it positively must know our identity, and what constitutes acceptable proof. Private organizations, such as airlines, banks and merchants already do the same thing. Then the private sector will develop the most user-privacy-friendly and cost-effective devices. Tiny computer chips containing all of the necessary biometric information coupled with nearly unbreakable encryption have already been developed. Consumers will be able to choose what information they wish to have stored in such devices, and who is allowed to have access to what. The chips can be placed in "smart cards," cell phones and PDAs, or even implanted in the body.
In my ideal world, the government would know with certainty who has voted (but not their vote), who is coming into the country, to whom it is making payments and from whom it is receiving taxes. I would like to be able to prove my identity to government agencies, airlines, banks, etc., and have access to all my password accounts and computers, and deliver such additional information about myself to those I choose to (such as my medical history to a hospital in case of an emergency), while protecting all my information from those with whom I choose not to share it.
In addition, I do not want to have to carry more than one device with me (such as a card or PDA), nor do I want to have to remember any passwords.
Fortunately, the current technology will indeed allow all of the above (my thumbprint could give me access to my PDA with all of the passwords, etc.).
The Government Passport Agency is in the process of developing new passports to prevent counterfeiting and to give more secure ID. In reality, it is not necessary for us to have passports. What is necessary is for the government to know whether or not I am a
Again, we do not need a government issued ID. Those who require information about us (including government agencies) should merely specify what information they need and what forms are acceptable. Private companies can then compete to give us the most secure, cost-effective, user-friendly personal information and protection ID devices and systems.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published December 7, 2004
The dollar has fallen about 35 percent against the euro over the last three years. What in practical terms does the fall mean, how important is it, and what should be done?
Three years ago, the typical American worker had to work about 15 minutes to earn enough after taxes to buy a "Big Mac Meal" in either the
If you say the above makes no sense, you are correct. Nothing has happened in the relative economic performance of the Italian and American economies in the last three years to justify such a swing in purchasing power. Relative productivity and domestic prices are still roughly the same in the two countries, so why the big change in exchange rates? Before answering, I shall first explain what has not caused the rate change.
You may have read the
Others argue the
Foreigners obtain dollars by selling goods and services in the
The central banks of many countries, most notably
The huge swings in currency values increase risk and hence reduce investment and, in turn, hurt global economic growth. Firms active in more than one country can see sharp changes both in costs and profits, much of it beyond their control.
The problem is that central banks, like the U.S. Fed, are charged with maintaining price stability (in their own countries). But without a common point of reference, which the gold standard once provided, it is hard to determine "price stability." Computers and high-tech equipment tend to fall in (relative) price because of technological and productivity gains. Oil prices can fluctuate rapidly because of unexpected supply-and-demand changes. The price of a house is less relevant to buyers than the mortgage cost, a function of interest rates.
A currency is supposed to provide a benchmark to determine the relative value of goods and services. So long as the major central banks use different and elastic benchmarks, the world will suffer from exchange rate instability. Neither Alan Greenspan, nor the leaders of the European Central Bank or the Bank of Japan (and even yours truly) know how to properly define money or determine how much should be supplied.
What is to be done? The great and Nobel Prize-winning economist F.A. Hayek provided the answer for us more than 30 years ago: Governments should give up their monopoly over money. If the market could operate freely, private parties would compete to provide the "best" money. Ultimately, we might end up with a global commodity basket standard, a gold standard or some other measure that best provides the functions of money.
Governments would still need to define the appropriate measure for tax and government payments, but private parties could contract in whatever "money" they wished to for all goods and services, including labor. For private monies to compete effectively, all capital gains' taxes would need be eliminated from currency transactions. Short of this reform, destructive exchange rate swings probably will continue to plague the world.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published December 1, 2004
On Nov. 18, in a speech given at the Finance Ministry in Vienna, Austria, the very highly regarded European economist and first woman president of the Mont Pelerin Society, Professor Victoria Curzon Price, called for eliminating the corporate income tax.
There, in the center of socialist Europe, was not only the call to get rid of this destructive tax, but almost everyone in an audience of economists, various government finance officials and public policy experts appeared to agree with her.
The idea and practice of the corporate income tax has been dying slowly for the last two decades. The corporate income tax is a highly destructive tax that greatly distorts proper economic decision-making, taxes the same income more than once, is endlessly complex, and provides a declining share of tax revenue in most countries. For instance, in the
Good economists have long known the corporate income tax causes more problems than it solves. Many countries, seeking higher economic growth and employment, have sharply cut their tax rates. Ireland cut its corporate tax rate from 43 percent to only 12 1/2 percent, attracting investment from around the world and, in turn, becoming not only one of the fastest-growing but one of the wealthiest economies in Europe.
The new market economies of
As a result of this competition, even
Looking at these numbers, it is easy to understand why corporations doing business around the world elect not to have the
Those who oppose eliminating the corporate tax will say we cannot afford the revenue loss. They say such things because they do not think beyond the first order. Think about it for a minute. If you eliminate the corporate tax, corporate profits will increase, causing corporations to hire more workers and/or raise wages and invest more in new and better equipment, and/or increase their dividend payouts. All this will cause the price of corporate stock to rise and the government to receive more in capital-gains tax revenues. The government will also receive more tax revenue from the increase in dividends paid and workers hired. If we look at the experience of other countries who have greatly reduced corporate tax rates, like
The U.S. Treasury and Congress' Joint Tax Committee use very simple-minded static revenue models when estimating proposed tax changes. That is why they almost always get it wrong. I have no doubt a properly constructed dynamic model or, better yet, an actual experiment of eliminating the corporate tax will prove we are better off without it.
The corporate tax is enormously complex and hence extremely expensive to administer; tends to drive companies to set up operations outside the United States; discourages foreign investment in the U.S., thereby driving down the dollar's value; taxes capital income more than once, thus reducing the U.S. saving rate, which also drives down the dollar's value; and makes us less competitive. The corporate rate is also unfair to businesses that need a corporate form as opposed to a single proprietorship, partnership, limited liability company and real estate investment trust (REIT). which are not burdened with the extra level of taxation.
The president has pledged fundamental tax reform. A first step ought to be eliminating the corporate income tax, because it will greatly simplify the tax code and its enforcement, make
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published November 18, 2004
Since the 1976 presidential election, the Democrats have not received more than 50 percent of the popular vote. Most organisms, except for very primitive ones, usually modify their behavior after repeated failure in order to survive.
Much has been written about why the Democrats continue to fail in the polls. But as an economist, I have been particularly struck by how they have failed to learn sound economics, despite all the empirical economic and political evidence of what works and what doesn't.
Let's start with taxes. There is overwhelming evidence our present maximum tax rates on both labor and capital are so high they reduce economic growth, job creation and the general level of wellbeing for Americans.
Despite this, Democrat candidates from Walter Mondale to John Kerry keep proposing higher marginal tax rates on labor and capital. (Note: President Clinton was the exception. He said he would reduce tax rates but then turned around and increased them.) Higher tax rates are not only an economic loser but are also a political loser.
For many years, public opinion polls have shown most Americans do not want the rich to pay more in taxes. In fact, most Americans, including low-income Americans, say they do not think anyone should pay more than 20 percent of income in taxes. Polls also consistently show most Americans do not think we are undertaxed but think the government spends too much.
Most Americans dream of being rich by being entrepreneurs or winning the lottery, and they don't want it all taxed away. Democrats have let their left-wing ideology overwhelm the empirical evidence -- and then are surprised when they lose.
Politicians always have trouble with free trade. Most economists on both the left and right have understood free trade maximizes economic welfare by enabling consumers to get the best goods and services at the lowest prices.
Too many Republicans cater to some businesses that demand protection. Fortunately, most Republican politicians both understand and play homage to the principle of free trade, though they occasionally deviate from it in practice.
The Democrats, however, have allowed themselves to become hostage to union bosses who are most often protectionists. However, there are far more consumers who enjoy the low prices at the Wal-Marts and the like than there are bosses and workers who might temporarily benefit from protectionism.
For years, Democrats have believed political success can be achieved by promising ever more government spending on everything. Too many Republicans have also bought this line, but still are slightly less addicted to big government.
The American people say they love those programs that benefit them, but are intuitively wise enough to know there is not an endless free lunch with government spending. This is why politicians who say they favor cutting government spending in general (but often not specifically) are more likely to be elected than those who promise almost unlimited spending.
Americans have looked at
Democrats send a contradictory message on regulation. One moment they argue people ought to be free to do almost anything they want -- same-sex "marriage," pornography, etc. -- and the next moment arguing government needs to regulate everything they consume or produce.
Most Americans are keenly aware government overregulation reduces their economic well-being and their freedoms. They resent being told what trees they cannot cut down on their own property. They understand if employers are not allowed to fire underperformers, they will be more reluctant to hire anyone and, particularly, to take a chance on someone who may have messed up in the past. One thing that distinguishes
Unlike 30 years ago, almost all Americans understand we need to change Social Security because we are living longer and having fewer children.
People may be uncertain as to the best corrective action, but they do understand Democrats' denial of the problem is devoid of reality.
In the days since the election, I have read and listened to an endless parade of Democrats describe what they did wrong -- not enough emphasis on morality or national security, communicating poorly, and on and on. Yet, most of the defeated either fail to understand or will not admit the whole of their economic message is bad economics and bad politics. A party cannot be in denial of the problems with taxes, government spending, regulation and Social Security and expect to have a majority of Americans vote for them.
People may not accept all the Republican solutions, but the Republicans, unlike the Democrats, show themselves to be more developed organisms by responding to the cues from their environment.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published November 11, 2004
Back in 1984, if you had bet
Yet during the last days of October, a remarkable conference -- the First European Resource Bank -- was held in the pleasant ski resort of
This European Resource Bank was modeled after the almost three-decade-old annual Resource Bank run by the Heritage Foundation, in conjunction with the Atlas Economic Research Foundation and the Philadelphia Society. The U.S. Resource Bank has become a large affair attended by representatives of hundreds of think tanks from around the world.
Those of us who have been involved in the free-market ideas movement over the last several decades, have often been frustrated by the lack of such groups in
The very distinguished American Nobel laureate economist, Milton Friedman, is the last surviving member of the original Mont Pelerin group. (Note: The American left stole the word "liberal" and reversed its meaning. A classical liberal would be considered a conservative or libertarian in
The Mont Pelerin Society begat the IEA and hundreds of other free-market policy institutes around the world. Even though the idea of the modern free-market institute was created on European soil, it gained full flower in
President Reagan was the first
Until recently, the socialists in Continental Europe largely strnagled independent free-market think tanks before they could become self-sustaining. For instance, while donations to nonprofit public policy organizations (think tanks) are tax-deductible in the U.S., in France you not get no tax deduction, you are required to pay a substantial tax on the contribution -- another proof socialists dislike competition, particularly in ideas.
Many of us involved with the economic transition in former communist countries helped them establish free-market think tanks to vitalize their economic policies. As a result, there are now dozens of these vibrant organizations in former communist states -- often staffed by people who have worked with the major
The economic stagnation, coupled with the oppressive taxation and regulation in old Europe (
Finally, it is noteworthy that the first European Resource Bank meeting was organized by a French economist, Pierre Garello, director of the Institute for Economic Studies Europe, and held in
The students may soon be role models for their professors from Old Europe and the
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
Are you aware of the ongoing world war between a French-led high tax alliance and the
France and its statist allies have been losing the war for economic supremacy to the lower-tax developing and developed countries, like the
The French try to disguise their real agenda by calling for "tax harmonization" so all countries would have the same tax rates. However, they do not mean harmonization at low but at high rates like the French have. The French and their German and other allies have demanded that the new eastern member countries of the European Union raise their tax rates under the threat of not being allowed all the benefits other EU countries enjoy. The French, Germans and some of the other high-tax EU countries also developed what they called the European Savings Directive that forces other independent financial centers, like Switzerland, Luxembourg, Bermuda, and Cayman, to report financial information on individuals to the EU governments (which might cause them to be victims of criminal or terrorists groups) or withhold taxes for the EU governments. Finally, the French have "captured" (as a result of
The OECD was originally created by the developed countries to collect and disseminate statistical data and to promote pro-growth, free market economic polices. However, in recent years, France and her allies have been using the OECD's Fiscal Affairs Committee to promote their tax harmonization and anti-tax competition agenda.
The
As you would expect, the OECD and the French are unhappy with the Senate action, and are trying to use their influence in the
Most members of Congress and representatives of interested public policy organizations have no desire to kill the OECD's legitimate statistical collection and reporting. However, the only way Congress can get the attention of the OECD and its allies in the State and Treasury Departments is to deny the OECD funding. The sensible compromise would be for the OECD to agree to cease and desist from all activities designed to discourage tax competition, and for the Treasury Department to withdraw its related French-inspired, proposed interest reporting regulation in exchange for
Treasury and State Department officials are in the position to work out such a compromise. If they fail to do so, what will it tell us about where their loyalties lie?
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
Published
Sen. John Kerry keeps telling us that "the rich" need to pay more in taxes. The senator and his wife are among the 400 richest Americans. He says that he has "a plan to tax the rich." Under the senator's tax plan, what percentage of the Kerrys' income do you think they would pay the
According to an analysis by the Argus Group, a well respected tax law and economics firm, the Kerrys' average tax rate would only increase by 1.8 percentage points to 15.2 percent under the senator's plan, while many small business people would see their average rate rise by 4.0 percentage points, resulting in effective rates as high as 35 to 40 percent, including certain deduction phase-outs.
Last year, Mr. Kerry and his wife paid only 13.4 percent of their declared $5.5 million income in federal taxes. President and Mrs. Bush, whose income was only 15 percent of the Kerrys', paid a tax rate more than twice as high, 27.7 percent. Despite all of the senator's bombast about the rich paying more, under his plan he and Mrs. Kerry would still pay a lower average rate than most middle-income Americans.
As Mr. Kerry's own tax situation shows, he is not proposing increased taxes on those who are already rich -- through inheritance, hard work, luck or marrying a rich woman -- but is proposing increasing taxes on those who are trying to become rich. His plan proposes to make it more difficult for people to join his club of the very wealthy. If you are already rich, you can tax shelter much of your income, but if you have little in the way of assets, it is almost impossible to shelter your earnings from taxes.
Mr. Kerry's running mate, Sen. John Edwards, also shares this tax hypocrisy. Last year, Mr. and Mrs. Edwards paid an average tax rate of only 5.1 percent on their reported $434,000 of income, or less than one-third of what the average taxpayer pays.
Estimates of the Kerrys' worth range from a low of $700 million to a high of 3.2 billion dollars. How much income would you expect a billion dollars to produce? The Kerrys reported $5 million in income, which is a return of only about one-half of 1 percent, far lower than the return on even
The obvious questions to Mr. Kerry are: How does he justify proposing a tax rate for himself that is less than half of what he expects many young professionals and small business people to pay, many of whom may have little or no assets? How can he accuse others of not paying their fair share in taxes, when he refuses to give full details about his own family financial situation? Does he really expect us to believe his family only earned $5 million on a billion dollars of assets last year?
It is noteworthy that not one of the debate moderators or reporters like Tim Russert of "Meet the Press" who have interviewed Mr. Kerry have asked him about the obvious hypocrisy of his tax positions. This fact is another indication that the liberal media establishment is part of the hypocrisy and cover-up.
According to the economic literature, the 15 percent tax rate Mr. Kerry has proposed for his family is probably fairly close to the long-run revenue maximizing rate for the personal income tax. If it is good enough for the Kerry family, it ought to be good enough for the rest of us. A 15 percent maximum rate for all tax payers would stimulate an additional supply of labor and capital, which would result in much higher economic growth and lower unemployment.
Republicans should use the opportunity of the Kerry hypocrisy to advocate a 15 percent (Kerry rate) maximum tax rate for everyone. There are two ways of reaching the goal. The first approach would be to establish a 15 percent flat tax rate on all income (except for lower rates or exclusions for low-income people). The second approach would be to allow taxpayers to exclude a portion of their income if they save it in a tax deferred account like an IRA, or health care savings account, etc. (Under this approach, if we had a nominal maximum tax rate of 39.6 percent -- as advocated by Mr. Kerry -- but wanted to allow even the non-rich to legally enjoy an effective tax rate of 15 percent, we would need to allow people to place up to 62 percent of their income in tax deferred accounts.)
Ironically, the Kerry hypocrisy might well lead us to what is known by economists as the consumed income tax, whereby savings and investment are excluded from income and only consumption is taxed. Economic efficiency, growth and employment would be enhanced because people would only be taxed on what they take out of the economy rather than what they put into it. Let's demand the 15 percent Kerry max tax for everyone.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
Assume you were on a ship that sank in the middle of the ocean. You, your family and 200 fellow passengers manage to reach a small isolated island where you think you can survive. Assume this happened before the advent of satellites, aircraft, and modern communications. This made it a rescue unlikely for many months, or perhaps years.
A fellow passenger turns out to be a thug who has recruited several other thugs to work with him. The thugs kill five of your fellow passengers without provocation. The rest of you try to decide what to do. Several passengers advocate getting together and killing the thugs. Several others argue killing is wrong and that you should do nothing because you cannot be sure the thugs will kill any of the rest of you.
Others want to reason with and thereby "contain" the thugs. Those who favor containment argue it is wrong to kill the thugs since they have not said they will definitely kill any of the rest of you. But, since they might, you should try to contain them.
As an individual, you need to decide which group of passengers you should support. Before deciding, you try to think through the consequences of each alternative. If you join the pacifists and it turns out the thugs suddenly have a change of heart and stop killing, then all the remaining passengers will be safe until rescued. But what if you join the pacifists and the thugs keep on killing? How will you feel, particularly, if they start killing members of your own family?
If the risk of joining the pacifists seems too high, you might consider joining those who argue for containment. Given the island has no materials for building a jail, containment will have to be provided by groups of passengers large enough to protect themselves, watching the thugs at all times.
In darkness or bad weather, it will be very difficult if not impossible, to make sure all the thugs do not escape from the defined containment perimeter. If a thug escapes, everyone will be at risk, particularly the women and children.
If you don't want to risk the women and children, as well as your own life, you may decide to join those who want to kill the thugs. This alternative also is not without risks. Though there are enough nonthug men to overpower and kill the thugs, some good men may be killed or injured in the struggle.
Good people have faced real versions of the above parable since the dawn of civilization. Unfortunately, evil exists. History teaches if evil is not stopped, many good people will be killed. If all nonevil people were pacifists, there would be no pacifists.
The record of trying to contain, rather than destroy, evil is mixed. Again, history shows containment can work for short periods but is unstable. Ultimately those contained find ways to get out, and either evil triumphs or good destroys evil.
When Ronald Reagan took office, he understood the containment strategy of the early Cold War years no longer worked. The Soviets were expanding around the globe and building up their military. Mr. Reagan, unlike many in the establishment, realized we would win or lose. He set out to win.
How he did so is vividly portrayed in a riveting new movie, "In the Face of Evil." The movie is quite remarkable because the producers have managed in a documentary to capture the tension of the Cold War with the heart-stopping effect of a good action movie. "In the Face of Evil" is exciting, entertaining, thought-provoking and never boring.
The movie is a good history lesson that causes viewers to think about a profound issue. To win, Mr. Reagan realized the battle had to be waged not only on the military front, but also on technological, economic, psychological and moral fronts to avoid a nuclear conflagration. He understood the necessary tradeoffs, such as the relative risk of a larger deficit compared to risks of insufficient military capability or an economy strangled by excessive taxation.
Our current presidential election is, in part, a battle over conflicting risk analysis. The Kerry Democrats lean more toward trying to contain evil. The Bush Republicans lean more toward trying to destroy evil. Either alternative entails real human costs. The Kerry approach might save more
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published October 7, 2004
Have you noticed the press tends to ask the candidates the same old tired questions, whether at a press conference, interview or debate? Yet there are many basic questions on tax policy (and other topics) Americans should have answers to before they vote.
Here are some of those questions, which I am urging reporters with access to Mr. Bush and Mr. Kerry, including the debate moderators, to ask.
To Mr. Bush and Mr. Kerry: (1) What is the maximum federal income tax rate you think any American should pay? (2) On what basis did you select that number? (Note: The average federal tax rate for all Americans is now about 15 percent, and surveys over the years indicate most Americans do not believe it is fair for anyone to pay more than 20 percent.)
To Mr. Kerry: Even though you have failed to produce income tax returns for yourself and Mrs. Kerry, the information you did produce indicates your wife's effective federal income tax rate was less than 12 percent (less than that for the average American). If your tax rate proposals were current law, what would be your and Mrs. Kerry's effective tax rate? (Note: It appears from the limited tax information the Kerry campaign has provided, most of the Kerrys' wealth is in tax sheltered investments -- such as tax-free municipal bonds -- which would not be affected by Mr. Kerry's tax increase proposals.)
To Mr. Kerry: You have proposed increasing the maximum federal income tax rate to almost 40 percent for many small business owners and other working Americans. This tax rate is far higher than what you and Mrs. Kerry appear to pay or would pay under your proposals. Is this fair, and if so why? (Note: The Kerrys are reported to be among the 400 richest Americans.)
To Mr. Kerry: You have said you want the wealthiest Americans to pay more taxes. However, under your proposals, many people who clearly are not wealthy and some with even negative net worths would have their taxes increased, while many wealthy people would not pay more in taxes. Is this fair? (Note: The Kerry rhetoric confuses wealth and taxable income, and these are not the same. For instance, people who borrow to start or grow businesses, or have serious and very expensive medical problems often have negative net worths, even though they may earn $200,000 a year. These people are not wealthy. However, many very wealthy people may receive little in taxable income, because they bought tax free municipal bonds or did other -- totally legal -- things to tax shelter their income. One can be a billionaire and not pay an additional penny of tax under the Kerry tax proposals.)
To Mr. Bush and Mr. Kerry: Some economists believe the decline in U.S. manufacturing employment is partly due to our allowing imports to come into the country tax free (because foreign producers rebate their consumption taxes at the border) and compete against taxable U.S. goods, and yet require our exports to compete globally against foreign goods with U.S. taxes included in the price. Do you agree there is a problem? If so, what would you do to address it?
To Mr. Bush and Mr. Kerry: Many fine economists, such as Nobel Prize winner Robert Lucas, have argued the single best thing we can do to improve economic performance and job creation is eliminate taxes on capital, such as taxes on capital gains, interest and dividends. Do you agree? Why or why not?
To Mr. Kerry: Your economic adviser, former Treasury Secretary Robert Rubin, endorsed a proposal whereby the United Nations would be able to directly tax American citizens and businesses. Do you agree with your adviser that the U.N. should be able to directly tax Americans, rather than only receive a grant from the
To Mr. Kerry: In the summer of 2000 -- before President Bush was elected president -- he proposed cutting taxes immediately to reverse the decline in the economy that resulted in the recession at the end of the Clinton administration. As economists know, the recession caused the job losses about which you have been so critical. We understand you and the
Democracy functions best when the voters are informed, and that, in turn, requires the press to demand specific answers from the candidates rather than slogans.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published October 2, 2004
If you managed a business and noticed one of your five major competitors had changed its product design and was gaining market share against your firm and other competitors, what would you do?
A decade ago, the world's automobile manufacturers noticed firms with SUVs in their product line were gaining market share. Companies that produced no SUVs quickly added them -- a normal and rational market response.
The major TV news companies -- ABC, CBS, NBC, CNN -- have all been losing market share to Fox News but so far have failed to respond in a rational market way. Recent surveys by the
Fox News had the most credibility with Republicans, and CNN had the most credibility with Democrats. On average, approximately twice as many Democrats as Republicans rate CBS, ABC, NBC and CNN as credible.
All the above named news organizations are owned by publicly listed major corporations. These corporations' executives are supposed to try to maximize profits to their shareholders. For years, surveys have shown the country has more conservatives than liberals, and there are almost an even number of Republican and Democrat voters. Therefore, does it make economic sense to have four left-leaning (five if you count MSNBC separate from NBC) TV news organizations, and only one right-leaning? One would think normal competitive pressures would lead one or more of the existing left-leaning news organizations to shift to the right to gain market share. It should be easier to obtain a bigger market share by competing for half of the potential market with only one competitor than competing against three or four others for half of the market.
Before the rise of Fox News, all TV news organizations could afford to be liberal since there was no conservative opposition. They could compete on other grounds, such as number of news bureaus or the attractiveness of their on-air personalities. Given that we know stockowners tend be more Republican than Democrat, it is a fair assumption that for at least some of the Democrat-leaning news organizations a majority of their owners are likely Republicans. Thus, it is not unreasonable to conclude these public companies' managers neither follow profit maximization nor reflect the political wishes of most owners.
I expect this is because if top management at GE (which owns NBC), for example, were to tell the folks who run NBC News, "We want you to shift the news coverage from liberal to conservative (or even neutral)," the NBC news folks would cry press censorship, and this would be echoed by all of their political soul-mates of the left, including the people at CBS and ABC News, as well as the New York Times and The Washington Post. GE's top managers know this and are intimidated.
For decades, the electronic media's leftist journalists have argued Republican media owners are obliged to fund Democrat reporters' opinions -- but, of course, not the other way around.
The family that controls the New York Times are well-known as Democrats with a left-wing agenda, which is reflected in their newspaper. This is fine, because the New York Times' owners have a perfect right to spend their money as they see fit, even if it does not maximize profits. However, the situation is different with GE (and the other major TV media parents), because most of their stockholders are not interested in the company pushing a left-wing agenda but in maximum profits.
At some point, some top executives (or board members) of the companies that own TV news organizations will get the courage to do what they already should have done and say "enough of this left-wing claptrap which is costing us market share and profits." If they fail to do so, they will eventually open themselves up to a stockholder revolt or suit.
Dan Rather likes to sign off his program with the word "courage." Perhaps those in corporate headquarters should take him at his word and get rid of him, rather than to be held hostage to his ego and political agenda as he slowly kills CBS News.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published September 23, 2004
If I told you the world is becoming both more and less democratic at the same time, you might reply, "how can that be?" Follow along and you shall see.
Do you believe "Governments are instituted among Men, deriving their just Powers from the Consent of the Governed?" It is not just the overwhelming majority of Americans who believe in this statement from the Declaration of Independence, but as evidenced by the global rise in democracy, a majority of the world's population now subscribe to this statement.
According to Freedom House, 65 percent of the world's people now live in at least limited democracies, where they are free or partially free, and their laws and rules are established by consent of the governed. Yet, at the same time, international organizations have arisen, which increasingly establish rules and regulations not consented to by the governed.
Just in tax and financial regulation, the organizations include entities such as the United Nations, the International Monetary Fund (IMF), the World Bank, the Organization for Economic Cooperation and Development (OECD), and the Financial Action Task Force (FATF). In addition, national governments, such as the
All these organizations have gone well beyond their original mandates and exercise or try to exercise powers over institutions or individuals who neither directly nor indirectly voted to be so regulated.
For example, the Financial Action Task Force is an organization of international bureaucrats funded by 33 countries, with the goal of fighting financial crime. That sounds all well and good. FATF has no direct power, but it can put countries on its sanctions list, which discourages major banks from correspondent banking relations with the offending countries, which can mean financial death to small countries. If all the FATF requirements were justified on a reasonable cost-benefit basis and did not interfere with basic civil liberties, there would be no basis for complaint.
But many of their requirements, such as the "know your customer rules" (also promulgated by the IMF and
The EU has developed a "Savings Directive," demanding non-EU countries either financially report information to, or collect taxes for, EU governments. They have bullied the Swiss and other governments into partial acceptance of this measure, though it is clear Swiss voters would be unlikely to approve such an economically harmful and liberty restricting proposal.
The British government demands its colonies comply, though it would hurt them economically, and they have no vote in the matter. (Sometimes it appears the Brits learned little from the American Revolution.)
The U.N. has proposed an International Tax Organization to limit tax competition among countries and enable the U.N. to tax directly without going through national governments. (Former Clinton Treasury Secretary and Kerry chief economic adviser Bob Rubin signed on to this dreadful proposal as a
What the world faces is the danger U.S. Founding Father and President James Madison warned of two centuries ago.
Given that unalienable rights of man are now being eroded by multinational bureaucratic organizations, often with the quiet support of national governments, what is to be done?
One solution is for citizens in a number of countries to push for legislation giving the citizens (including corporations and associations) the private cause of action to sue such organizations in their own courts when the regulatory demands neither meet a reasonable cost-benefit test and/or violate civil liberties embodied in the law or constitution of their own country. Even if only a few countries passed such legislation, provided one or two big countries were among them, it probably would be sufficient to re-establish the necessary balance of power.
Almost all organizations try to grow and gain power at the expense of others; this is not new. What is new is the rise of multinational organizations unconstrained by adequate checks and balances. National leaders and their bureaucratic agencies are too often in bed with their counterparts in these organizations, so necessary oversight is not provided.
Citizen legal empowerment may be our best hope to preserve both the liberties and economic opportunities of the world's people against the global bureaucratic power elites. We need to re-establish consent of the governed before it is too late.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
How do you think the sanctimonious people at TV's "60 Minutes" would portray a company charged by the FCC with "serious indecency violations," that made expensive settlements with employees and others because of injuries related to asbestos and other hazardous material exposures, underfunded its employee pension, is legally accused of securities violations, employs those who widely distributed forged documents in an effort to destroy political opponents, failed to dismiss or discipline employees who violated the company code of conduct, owned offshore enterprises that paid little or no U.S. corporate tax, and operated in and/or dealt with countries harboring terrorists?
The company that engaged in all of these practices is Viacom, parent company of CBS, which produces "60 Minutes."
The folks at "60 Minutes" remind me of the preacher who damns the sinners every Sunday, but then is caught in the brothel. Viacom is a huge media company that not only owns CBS, but hundreds of individual radio and TV stations; cable operations like MTV, Showtime and Nickelodeon; Paramount Pictures; theme parks; publishing houses, including Simon & Schuster; and many other operations around the globe.
The problem with Viacom is not its difficulties with some acquisitions and operations, but that its CBS News unit has a long and continuing record of misrepresentation, hypocrisy, or worse is allowed to continue in clear violation of the company's own code of conduct and best economic interest.
The people who produce "60 Minutes" have a long history of pursuing corporate and individual wrongdoers. This is all to the good, provided it is done honestly, and not just to make those with different political or other views (such as religious) or competitors look silly or corrupt. Over the years, it has been all too obvious a (liberal Democrat) political agenda at CBS has taken priority over factual news.
In an attempt to discredit Vice President Dick Cheney, "60 Minutes" recently did a hatchet job on Halliburton, where Mr. Cheney once was chief executive officer. The central CBS charge was that Halliburton created offshore companies to reduce its tax burden. The fact virtually every large company with sizable foreign operations does the same thing, and it is totally legal and proper, escaped the people at "60 Minutes" in their rush to tarnish Halliburton and Mr. Cheney.
To make the story more interesting, "60 Minutes" reporter Lesley Stahl and her team went to the
Instead, Miss Stahl and her crew hid a camera in a notebook, filmed and broadcast the interview in direct violation of their promise. (I learned about this accidentally when a colleague and I interviewed the founding partner of the same law firm regarding a book we are writing on Cayman economic success.)
Miss Stahl then went on to rap CBS competitor General Electric Co. (which owns NBC) for similar tax practices, even though both GE and Halliburton are the epitome of corporate virtue compared to Viacom and CBS.
The real scandal "60 Minutes" should have reported is the
The average
The Viacom (CBS) corporate responsibility statement says: "Obeying both the letter and spirit of the law is one of the foundations of Viacom's ethical standards. It is Viacom's policy to comply with all applicable laws, rules and regulations. You must always conduct your business affairs with honesty, integrity and good judgment."
Obviously, Viacom has not been enforcing its own standards at CBS News. The blatant partisanship, continuing misrepresentation and lack of ethical standards at CBS News probably explains part of its continuing drop in market share -- not good for stockholders and a failure in top management.
(If you wonder where I got all of the dirt on Viacom reported in the first paragraph, it was found in its own filings with the Securities and Exchange Commission and recent news reports.)
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
If the major departments of government were baseball teams, the Treasury Department would be the New York Yankees. Historically, from the time of Alexander Hamilton, most of the best and brightest in government were in Treasury.
Treasury was viewed as the class act. Treasury officials were treated with the respect that officials of HUD (Housing and Urban Development) could only dream of.
At times of war, Defense would eclipse Treasury, and occasionally State or Justice would have their moments of glory; but over the decades, Treasury was the shining prince.
During the first Reagan administration, Treasury Secretary Don Regan assembled a team of world-class economists and lawyers who took the lead in devising and selling a revolutionary tax and economic plan that not only revitalized the American economy but helped set the stage for a global change in economic policy. The Reagan/Regan Treasury was also in the forefront of selling its success to the voters during the 1984 presidential campaign. Treasury clearly was one of the key ingredients in Mr. Reagan's economic and election successes.
In President Clinton's 1996 re-election campaign, Treasury Secretary Bob Rubin, Deputy Secretary Larry Summers and the Treasury staff did an extraordinary job convincing the media and many Americans that they had created an economic miracle. Without the Treasury team, Mr. Clinton's re-election would have been unlikely.
Mr. Clinton actually had inherited a nicely growing economy from the first President Bush (real growth in 1992 was a respectable 3 percent and unemployment was falling). Mr. Clinton also had the advantage of the end of the Cold War (largely engineered by Ronald Reagan). He was able to drastically reduce defense spending, which allowed him to hold down overall spending. During the first
The second
Polls show many (if not a majority of) Americans think their economy is in far worse shape than it is and that John Kerry would be better for the economy than Mr. Bush. The Treasury Department is not only supposed to take the lead in developing and managing economic policy but also in explaining it to the American people (as it historically has). The objective reality is that Treasury has failed in its task, and this failure is now understood by key people in the White House and the Bush campaign and among Republicans in Congress.
Treasury has lost many of its best people. Too many of the current seat-warmers are arrogant wafflers who refuse to give substantive answers to legitimate questions posed by friends in the Congress and the think tanks, and by the press.
During the Reagan years, when Republicans in Congress or the think tanks were critical of or had policy questions, Treasury staff would call them, set up meetings and lay out their case.
Too many in the current Treasury just hide under their desks, which merely reinforces the belief they have no case.
The problem partly is Treasury has become a revolving door for tax lobbyists who seem more interested in currying favor with the bureaucracy than doing what is best for the economy.
The president has made it very clear he wants to get rid of regulations that do not meet reasonable cost-benefit tests and wants to simplify the tax system. Yet there are people in the Treasury Office of Tax Policy who push proposals to do the opposite. It is well known some Treasury personnel have personal agendas opposed to both the Bush agenda and the best interests of the American people. Yet, at the same time, others in Treasury who are trying to get the word out of how the Bush administration took a sow's ear and turned it into a silk purse, are put on an all too short leash.
All this is demoralizing to the many fine and exceptionally talented people still at Treasury and very disappointing to many former Treasury officials.
Treasury Secretary John Snow only has two months to educate the American people about how the Bush administration took an economy in recession and made it more successful than the first
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
Published
A major reason the liberal elites so hate President Bush is the policies he pushes will reduce their power and influence. Sens. John Kerry and Edward Kennedy, Massachusetts Democrats, claim they are the protectors of the little guy and the middle class. Yet their proposals are designed to protect the elite like themselves who inherited rather than created wealth.
Much of the evidence comes from institutional financial consultant, Criton Zoakos, head of Leto Research. Mr. Zoakos reviewed opinion polls of voting behavior and noticed a most interesting relationship between voting preference and share of wealth. Starting with the basics, Mr. Zoakos noted: "Opinion polls suggest that Sen. John Kerry enjoys the overwhelming support of voters self-designated as 'upper class.' These comprise 4 percent of all voters."
In the 2000 elections, this elite group voted 56 percent for Al Gore and 39 percent for George Bush. Mr. Zoakos also noted that in 2000, self-designated "working class" (18 percent of voters) and "lower class" (2 percent of voters) supported Al Gore by 51 percent and 46 percent for Mr. Bush.
Mr. Bush did have a small majority of voters who defined themselves as "middle class" in the 2000 election, and recent polls indicate his "middle class" vote base has strengthened.
What is not well known (and contrary to the liberal media myth) is that wealth in
Over the same period, the drop in holdings owned by the top 0.1 percent (tenth of 1 percent) was even sharper (10.07 percent in 1920 to 3.90 percent in 2000).
This drop in relative wealth holdings by the richest was more than offset by a rise in middle-class wealth holdings. It also appears from the Forbes Magazine data that the 400 richest Americans in recent years have also increased their relative share of the pie of the top 1 percent.
Thus, many in the top 1 percent feel squeezed, not absolutely, but relatively, by the rise of the middle and entrepreneurial classes on both flanks.
The very wealthy can be divided into two distinct groups -- those who by their own skills, hard work and some luck created wealth and jobs, and those who were lucky inheritors of wealth. The Kerrys and Kennedys of the world, who owe their inherited fortunes to the hard work and risk-taking of others, tend to look down and fear the "noveau riche," forgetting that their own ancestors were once "noveau riche" or worse.
It is the conflicting economic interests between those who perceive themselves as upper class (by virtue of inherited wealth) and those who perceive themselves as middle or entrepreneurial class, which largely accounts for their different political choices. As Mr. Zoakos observed: "The middle class prefers fiscal, monetary and regulatory polices that favor wealth creation and competition.The upper class prefers policies that favor wealth preservation and protection from competition."
If you do not have much wealth and want to improve your situation, you will prefer a tax system with relatively low marginal tax rates on labor income and capital gains, and provisions which allow reasonable tax-free savings for retirement, medical care, and education.
Such a tax system enables an individual to create wealth and reduce dependency. President Bush has both enacted and proposed measures to move the tax system in this direction.
If you already have a great deal of money, you will prefer a tax system that allows unlimited amounts of tax-exempt investment income from low-risk vehicles like state and local government bonds. You may also prefer high tax rates on earned income and capital gains to make it more difficult for those who have little wealth to become wealthy like you. This is the approach Mr. Kerry advocates, even though his rhetoric is about the middle class squeeze -- which his tax policies would only worsen. Mr. Kerry has said his tax increase will only apply to people making $200,000 a year or more. But many of these people have few assets because they are entrepreneurs who are in debt and building a business or young professionals, like doctors, who are still paying off hundreds of thousands of dollars in student loans.
From the very limited wealth and tax information the Kerrys have revealed about themselves, it appears Mr. Kerry's tax proposal might not cause the Kerry family to pay any additional tax, though they are clearly in the top .001 percent of all Americans in terms of wealth. Mr. Kerry's proposal to tax people making more than $200,000 per year applies to incomes slightly greater than a
If Mr. Kerry chose not to be hypocritical and really wanted to "tax the rich more" as he has said, he could do it by proposing to tax the income from all sources for those with net assets of more than $10 million at whatever higher rate he thought appropriate. I suggest the $10 million net asset figure because this is roughly the amount one would need to enjoy a $200,000 relatively risk-free retirement income and, according to Mr. Kerry, above that income level one is wealthy.
Perhaps a Republican member of Congress should introduce such a bill to see if Mr. Kerry and Mr. Kennedy would support it.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
Why do some economies grow while others do not? Economic growth has preoccupied many economists for the last two centuries. Fortunately, we now largely know which policies foster economic growth and which do not.
Unfortunately, there remains much economic know-nothingism in the political and media classes, producing statements that such-and-such a policy will create growth when, in fact, it will do the opposite.
To understand what will really create economic growth, let's start with the basics. Growth occurs when productive capital investment increases (that is, new and better plant and machinery, including computers and information systems); the amount and quality of labor increases; and innovations or policies reduce costs. Traditional studies for the U.S. economy roughly showed incremental capital investment accounted for 0.75 percent of growth yearly, and incremental labor accounted for a similar amount, while real cost reduction (innovation and productivity) accounted for 1.5 percent yearly, for an average total growth rate of about 3 percent yearly.
One of the world's most highly regarded economists is Professor Arnold Harberger, who has spent a long and productive life studying factors that affect economic growth and advising governments. In a paper, he delivered Aug. 15 to the Mont Pelerin Society, Mr. Harberger argues that, given economic history, "it is a cause for rejoicing when a [developed] country manages a growth rate of 3 to 4 percent per annum in real terms." The
Mr. Harberger argues the movement toward freer trade has had a noticeable and measurable positive impact on not only
Critics of freer trade point to the costs of lost workers in some specific factory, and it is indeed true that those factory workers who lose their jobs at least temporarily are worse off, but all those who consume the lower-priced products are better off -- and there are many times more consumers than producers of any good. Try to picture a world where there are no Wal-Marts or Home Depots, where there are just small mom-and-pop high-cost stores selling only domestic merchandise -- that is the world of 50 years ago, 1954. Few Americans could afford air-conditioners and dish washers. Black and white TVs were expensive and unreliable.
The average American now has a home 50 percent bigger than the homes of a half-century ago, with multiple bathrooms, color TVs and other appliances that did not exist, along with much better and safer automobiles. The increases in productivity and trade liberalization have not produced the job losses and wage reductions critics predicted. Real jobs and much higher real wages have grown much faster than our population over the last half-century, which is why a much a higher percentage of our population now has jobs than 50 years ago. The average job not only pays far more, after adjusting for inflation, but the work environments for most people are far superior. Working in an air-conditioned office or nice store sure beats working in a overly hot or overly cold and grimy factory.
Those politicians who propose policies that would restrict trade, increase taxes on capital and/or labor; and increase costly regulations on labor and business are in effect proposing policies to reduce economic and job growth. Unfortunately, Mr. Kerry proposes to do all of the above. He wants to put restrictions on both current and future trade agreements -- and each one of these would cause a one-time drop in baseline economic growth and a permanently reduced economic level.
His proposals to "tax the rich" would in fact increase taxes on capital -- i.e., capital gains, dividends and savings, all of which will reduce the capital stock. (He has argued that the negatives of his tax increase proposals will be offset by a drop in the deficit, but his new spending proposals exceed many times any possible revenue increase from his tax package.) Also, his proposals to raise the minimum wage and impose other restrictions on worker employment will only reduce jobs and real wages.
Such policies are not compassionate but in fact are hurtful. Either Mr. Kerry does not or chooses not to understand economic reality.
Both Mr. Kerry and President Bush should propose major and specific cuts in other government spending and regulatory costs to offset the rise in oil prices and increases in homeland security costs if they desire to keep the economy growing. The American people deserve more than wishful thinking and silly rhetoric from their leaders.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published August 15, 2004
Having just finished reading the report of the September 11 commission, I was shocked; shocked to learn major
It seems not to have occurred to anyone there are market solutions for many information problems the intelligence community faces. Two examples follow. The first is the general problem of economic intelligence, and the second is using the market to find a particular someone -- Osama bin Laden.
A couple of decades ago, I became aware the CIA was systematically overstating the size of the Soviet and Eastern European economies, An article I wrote about it was published in 1984. My critique, and those of others then, had no impact. At the end of the Cold War, we indeed found real per capita incomes in the Soviet Union and
The CIA greatly overestimated the size of these countries' civilian economies because the agency overrelied on the translations of official documents and periodicals rather than have agents or embassy personnel walk about and see what goods were available at what price. This is "market research."
Those of us who had spent time in the former communist countries before and during the economic transition were well aware few goods in the old
That there were far fewer goods at much higher prices was well known to many in the Western press and business community, but the CIA ignored much of this evidence -- I suspect partly because it would have diminished the perceived threat.
Intelligence agencies should do much more "contracting out." There are economic and market research firms operating in virtually every country with considerable local expertise. For the right price, they could provide the CIA much better information, at a far less cost, than it would likely obtain on its own.
Using principles of market economics should not be limited to gathering economic intelligence, but greatly expanded to gathering information on weapons systems and terrorists.
At some price, there is almost always someone who will reveal secrets any government might like to know -- and usually this price is far lower than other ways of seeking the information.
For instance, after three years and expenditure of many tens of billions of dollars, we (i.e., the CIA and others) still have not found Osama bin Laden.
A couple of years ago, the
The reason $25 million has not worked is that getting bin Laden is both dangerous and expensive, and you would probably need a team to do it. So by the time you add up your expenses and divide the net amount after taxes among your team, the risk-reward ratio is not sufficiently attractive.
At some price, getting bin Laden becomes attractive to many reasonably competent people, and some brave and enterprising soul would get him.
At the moment, $25 million plus $5 million a month since September 11, 2001, adds up to a bounty of about $200 million. That may sound like a lot of money, but it only works out less than a dollar for each American, and we have already spent many times that sum trying to find him.
I expect $200 million is a large enough pot to even induce thousands of American trial lawyers to start combing the hills of Afghanistan, like gold prospectors in California in 1849 -- and nothing could be more beneficial to the U.S. economy.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published August 6, 2004
Would you expand your stock market holdings if you knew taxes would be increased on businesses' most valuable employees? Business depreciation allowances would be reduced? Tax disadvantages of
A rational person understands the Democrats propose many anti-economic growth policies and there appears roughly a 50 percent chance the Democrat will be elected. Therefore, one's stock market holdings are likely to have less value if Mr. Kerry is elected.
Every good economist understands higher taxes on labor and capital reduce economic growth and job creation. Good economists also understand the "fair trade" agenda Mr. Kerry proposes is nothing more than a code word for protectionism, that will result in slower economic growth and job losses.
The Kerry Democrats have also proposed a higher minimum wage that will increase unemployment for teenagers and the least skilled. Finally, Mr. Kerry has proposed upward of $2 trillion in new federal government spending, and the Democrats have endorsed the "pay-go" rule, which says any new spending must be covered by higher taxes. This means the tax increases necessary to pay for all of the proposed new spending are many times the tax increases Mr. Kerry has already proposed.
In sum, the Kerry Democrats have in reality proposed the platform most contrary to economic growth and jobs creation in
The Democrats have handed the Republicans a golden opportunity to set forth a true economic growth and jobs creation plan. Unfortunately, it is not at all clear the Bush administration and the Republicans have the skills and bold thinking to take advantage of the opportunity presented.
The Democrats are good at selling falsehoods, and the Republicans are lousy at selling the truth. Many in
Thus the first task of the Republican team is to educate the American public about the reality of the
But even if the Republicans accomplish these first two tasks, it will not be enough unless they have a credible growth package of their own and can sell it to the American people.
The Bush campaign and the White House are now engaged in an internal battle about what economic package should be proposed. There are those who understand the need for policy boldness and an aggressive sales campaign, and there are those who are timid, scared, and defensive (the girly-men in Arnold-speak). President Bush has said he does not want to repeat his father's mistakes. One of his father's biggest mistakes was to enter his re-election campaign without a vision of where he wanted to lead the country on the economic front (unlike Mr. Reagan). We soon will know whether the son will follow the father with the economic vision deficit and likely election loss or set forth a bold vision sold in a way that grabs the attention of and excites the voters, leading to re-election.
What would a bold pro-growth agenda include? On the tax front it would contain a sincere commitment to fundamental tax reform and simplification, where no American would pay more in taxes and many would pay less. It would include proposals to make American companies more internationally competitive by ensuring our corporate tax rate was lower than the average of our competitors, rather than the fourth-highest in the world. It would include the pledge to make permanent all the recent tax cuts, including repeal of the death tax, and keep the accelerated depreciation -- slated to expire at the end of this year -- so vital for business capital investment.
A growth agenda would also contain a pledge to make the necessary Social Security reform while there is time. The president should endorse a plan like the one just proposed by Rep. Paul Ryan, Wisconsin Republican, that would enable all Americans to enjoy higher and more secure retirement benefits through partial privatization.
Necessary regulatory reform should be addressed by insisting on more complete and better cost-benefit analysis for all regulations, with an expanded right of private action to enforce reasonable cost-benefit tests. A renewed commitment to tort reform needs to be part of the package. Finally, realistic and sincere proposals must be made to reduce the rate of growth of federal spending below the economy's growth rate.
If Mr. Bush and his campaign do all the above competently and effectively, he should win, even with continuing difficulty in
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
There are a lady barber and a finance minister, both of whom, in very different ways, are making their homelands better, in part, because of their American experience.
It has long been recognized the remittances foreign workers send to their homelands dwarf official foreign aid in both size and effectiveness.
What is often not recognized is how foreign visitors and immigrants use the skills and knowledge they acquire in
No government foreign aid program could ever approach the cost-effectiveness of what Zahira Zahir and Milen Veltchev are doing as individuals.
Zahira Zahir is a barber. She started life in
After building her reputation, she became the barber to many of
Zahira then did a very American thing. She formed a nonprofit, tax-deductible foundation, "Friends of Zahira's Schools Foundation," www.zahiraschools.org, and used her connections to help raise money for the school. Former Secretary of State Jim Baker and former President Bush have held fund-raisers for her; Laura Bush and many other notables, including Commerce Secretary Don Evans, have been very helpful. Establishing a voluntary association or foundation to help solve a problem is almost automatic for most Americans, but such activities are rare in many parts of the world. For instance, the French discourage such activities by actually taxing contributions to certain foundations that would be tax-deductible in the
Milen Veltchev is the Bulgarian finance minister and, perhaps, the youngest finance minister in the world at age 38. He graduated from a university in
Later, he went to the Massachusetts Institute of Technology, majoring in finance. He then spent six years with Merrill Lynch in
Inflation has been whipped and is now only about 2 percent. Foreign investment and domestic bank credit are both growing very rapidly. The overall tax burden has been reduced to about the same as in the
Under Mr. Veltchev, the Bulgarian budget has been balanced; the debt/GDP ratio has been sharply reduced and is now below the European average. In sum, as it gets ready to enter the EU,
It is doubtful Milen Veltchev would have been anywhere near the successful finance minister he is -- despite his brilliance -- if he had not had the education in finance and economics he received in the U.S. and the real-world financial work experience he had in New York and London. Unlike many of his counterparts around the globe, he has a keen understanding of how tax rates affect incentives, and what needs to be done to build the confidence of capital markets to encourage both domestic and foreign investment.
Despite its many flaws, the
World peace will only be achieved when free market, democratic capitalism is in place everywhere. By allowing bright young people to come to
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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By Richard W. Rahn
Published
Do you believe the benefits of government regulation should exceed their costs? Of course you do. Yet almost every day we can pick up our newspapers and find examples of foolish, silly and just plain stupid regulations unjustified on any reasonable cost-benefit basis.
For instance, banks and other financial institutions must file currency transactions reports on anybody who deposits or withdraws more than $10,000 in cash at one time. Millions of these reports are filed each year, on what even the government admits are almost always totally innocent people.
Yet at the same time, very few criminals are nabbed as a result of the reports, because the bad guys know the rules and how to get around them -- which is easy to do. Meanwhile, millions of innocent people have their privacy invaded at great cost to the banking institutions (and much of this cost is passed on to their customers) for almost no benefit.
Thousands of equally foolish regulations exist. The result is every year hundreds of billions of dollars are wasted, and citizens unnecessarily harassed because of poorly thought out and mismanaged regulations. These costs make all Americans poorer and less free, yet the problem has gone on for decades.
The problem of excessive regulation has been long recognized. A presidential commission told Franklin D. Roosevelt back in 1937 that all the new regulatory agencies he had created under the New Deal constituted, "a headless fourth branch of government, a haphazard deposit of irresponsible agencies and uncoordinated powers."
The problem has spread far beyond the agencies referred to in the report to
Over the years, there have been attempts to reign in the regulatory octopus, but the results have been limited. The Office of Regulatory Affairs at the Office of Management and Budget has stopped some of the worst rule proposals. But its mandate is limited to "major regulations" costing $100 million or more. Many departments, such as the
Too few government regulations are subjected to rigorous cost-benefit tests, even when required. Many government agencies do not take the requirement seriously, act in good faith or present accurate data. The regulators have a strong incentive to underestimate the true costs of their regulations.
As Congress has increasingly delegated its lawmaking power to government agencies, the previously established checks and balances have broken down. Even when the intent of a regulation is desirable, administrative agencies have little incentive to design it to be as cost-effective as possible.
Fortunately, there is a solution. In recent years, Congress has established the right of "private course of action," whereby individuals can sue an agency not adequately enforcing some civil rights or environmental laws. The courts have been empowered to compensate lawyers who prevail in these suits for the fees and associated litigation expenses in order to encourage private enforcement of these laws.
Congress should expand the right of "private course of action" to allow any individual or group to sue an agency for issuing a regulation the benefits of which do not exceed the costs. If the private party is able to prove, by a reasonable standard, that a regulation is not cost-effective, that party would be entitled to normal legal fees plus the fees of professionals who did the necessary technical work.
The agency issuing the faulty regulation should be required to pay the awarded fees out of its own budget. In addition, the agency would be required to withdraw the regulation or reissue it to operate in a cost-effective manner.
If the above proposal were adopted, regulatory agencies would have strong incentives to be more careful both in the number and content of regulations issued. It is unlikely the provision of "private course of action" would be greatly abused, because those bringing suit against the regulatory agency would not be reimbursed unless they could prove the regulation does not meet a reasonable cost-benefit test.
I am no fan of our litigious society, but I would much prefer the trial lawyers be employed reducing the deadweight loss from government actions rather than adding deadweight costs to the private sector.
In sum, the above proposal offers a market solution to an existing lack of adequate checks and balances within the government regulatory agencies. It would empower the citizen to stop the excesses of government.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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Published July 8, 2004
Sen. John Kerry and his fellow Democrats seem to believe that by attacking President Bush for "inadequate" job creation the Republicans will be too inept to remind the American people that it was the
With polls showing Mr. Kerry ahead on economic issues, the Democrats chutzpah is succeeding.
Mr. Kerry and his allies say they will bring back "Clintonomics" that gave us "great prosperity." It requires no great skill to take over a growing economy with a falling unemployment and leave it in a recession, which is precisely what Bill Clinton did.
Democratic propagandists have also led many Americans to believe Mr. Clinton's economic performance was vastly superior to Ronald Reagan's, but the real facts show quite the reverse.
Mr. Reagan did the opposite from Mr. Clinton in that he took over a failing economy -- with double-digit inflation and no growth -- and turned it into a low inflation, high-growth economy. Under Mr. Reagan, the standard "Misery Index" dropped 7.8 points, threefold better than Mr. Clinton's performance. New jobs, economic growth and real incomes all grew faster under Mr. Reagan than under Mr. Clinton.
The Democrats are fond of saying more new jobs were created under Mr. Clinton than under Mr. Reagan. They are right by a small margin if you take the absolute number of jobs from the January each president took office until the January they left office. But as every economist knows, jobs lag changes in economic policy and the business cycle by a year or more.
Correcting the number for the lag shows that under Mr. Reagan's policies 19.4 million new jobs were created and under Mr. Clinton only 13.7 million new jobs were created.
The difference becomes even starker when one adjusts for the bigger
The federal tax burden as a percent of gross domestic product (GDP) fell by more than 8 percent under Mr. Reagan, while it increased by 15 percent under Mr. Clinton, leaving us less free and less prosperous. Both Mr. Reagan and Mr. Clinton kept domestic discretionary spending growing at a rate less than nominal GDP, for which they are entitled to high marks.
Mr. Reagan had to increase defense spending to win the Cold War, while Mr. Clinton had the luxury of reducing defense spending, both in relative and absolute terms.
Mr. Reagan was criticized for running deficits, which he did. However, it is the total national debt in relation to our GDP that is the correct measure of economic burden. The little known fact is under Mr. Reagan the ratio of debt to GDP (401/2 percent) did not increase during his last three years because the economy was growing faster than the deficit, and in fact he left us with a lower debt burden than did Franklin Roosevelt (more than 100 percent of GDP), John F. Kennedy (42.3 percent) and Mr. Clinton at the end of his first term (46 percent).
Ironically, Mr.Clinton led us into the recession because of his preoccupation with balancing the budget. Rather than cut overall spending to balance the budget, he increased the tax burden on capital, which led to government taxing high-cost private sector savings and investment to pay off low-cost government debt. (This was as foolish as would be for an individual to reduce a low-cost 6 percent mortgage by paying down the principal with high-cost credit card loans.) The result was to deprive the private sector of productive capital, hence the recession.
The Bush administration and Republicans in general have failed to make an issue of who and what caused the recession. They seemed to have forgotten their own history. In the summer of 2000, Mr. Bush and his economic team had noticed the sinking economy. The Democrats, including John Kerry, were in denial. Mr. Bush proposed a tax cut which, if enacted in the summer of 2000, might have enabled us to avoid the recession. The Democrats opposed the cut and hence it was not enacted. As a result, we were in a recession the quarter Mr. Bush took office. If Al Gore had won, we would have been in the same recession, and it would have been interesting to see whom he would have blamed.
If President Bush can propose and sell a new Reaganomics -- tax reduction, serious spending restraint, and free trade -- he will win on the economy, provided his team reminds the American people of Mr. Clinton's real record. Mr. Kerry is engaging in a risky strategy by advocating higher taxes and, unlike Mr. Clinton, even more government spending and trade protectionism. If enacted, such policies would likely lead to another recession.He is betting on the lack of memory and economic ignorance of the media and the American people, coupled with the incompetence of the Republican economic media team. If Mr. Kerry succeeds with this gambit, it will be a sad reflection on both our political parties.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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Published
Is it possible, within our children's lifetimes, to have a world where war and state sponsored terrorism is very remote? The answer is not only yes, but we are much closer to that ideal than most people think.
A truly peaceful world can only be and will be a world where virtually everyone lives under a regime reasonably close to being a free market capitalist democracy. Utopian, you say? I say not. Look at the evidence. First, we know democratic nations virtually never wage war on each other, particularly if their people have a middle income or higher standard of living.
President Bush has been ridiculed and criticized by many on the left and the right for saying he wants to help bring democracy to the
Is it possible for the whole world to become democratic? According to Freedom House, in 1900 there were only 25 countries accounting for 19.2 percent of the world's population that could even be considered limited democracies. By the year 2000 the number of restricted and true democracies had grown to 126 countries, accounting for 70.8 percent of the world's population. Almost all of the previously fascist and most of the communist countries have become or are rapidly becoming free market, democratic states.
Virtually every country in North and South America, with the exception of
Most of the countries of
The remaining holdouts are most of the countries in the Middle East, many countries in central Asia, and roughly half of
As countries become richer, their populations demand more democracy and freedom.
Compared to capitalism, all the other "isms," like socialism and communism, are economic failures, and ultimately the successful model should prevail with a little encouragement. Many nations once poor are rapidly becoming middle-income societies, as they move toward protecting private property and free markets. Poverty is rapidly diminishing worldwide.
Winson Churchill once said, "Democracy is the worst form of government, except for all the others." And he was right. Totalitarian, authoritarian and theocratic systems are increasingly doomed to fail in a world where governments no longer can monopolize information.
The challenge for any American government (and our allies around the globe) is to spur the remaining minority of low-income, nondemocracies to make the necessary changes before they or bands of their own citizens engage in some sort of suicidal behavior that may kill tens of thousands or millions.
Our debate should not be about whether we export democracy, civil liberties, the protection of private property, free markets, free trade, and nonoppressive tax and regulatory regimes to the rest of the world, but how we do so. Unfortunately, we do not have the luxury of time to obtain change in countries like
Those who claim to be practical by saying we either cannot do or should not do anything to accelerate change in the nondemocratic states are putting us more at risk. They are fleeing from making the tough choices about how we accelerate change before many of us are dead.
George Bush is not being idealistic when he says the rest of the world must become democratic (and more free market capitalist). He is being realistic as there is no other choice.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
The
By Richard W. Rahn
Published June 18, 2004
In the last half-century, under which president did the economy perform the best? Most Americans would answer Ronald Reagan, while some Democratic commentators have argued it was Bill Clinton or John F. Kennedy. What is the truth?
A president has a major influence on tax, spending, regulatory and trade policies that largely determine the rate of economic growth, but he is constrained by Congress, particularly when one or both houses are controlled by the opposition party. A president has much less influence on inflation and interest rates in that they are largely determined by the independent Federal Reserve.
However, a president can influence the Fed through his selection of the chairman and members of the board, as well as through "moral suasion."
Increasing the rate of economic growth, creating jobs, reducing inflation and interest rates -- up to a point, and reducing the tax burden are normally considered hallmarks of a presidential success. A president who needs to correct the failed economic policies of a predecessor will have more difficulty obtaining very low unemployment, so the degree of improvement over the previous administration is an important measure of success, rather than the average or ending number.
A well-known Democrat economist, the late Arthur Okun, created the misery index (i.e., the rate of inflation plus the unemployment rate), which was a proxy to tell the public whether they were better off under the current or under the previous administration. Using the misery index criteria, three Presidents -- Messrs. Kennedy, Reagan and Clinton -- improved on their predecessor's performance by the end of their own term. The economic misery index dropped the most on Mr. Reagan's watch to only 10.1 from Mr. Carter's horrific 17.9.
Using the "misery index" improvement criteria, Mr. Reagan was clearly No. 1, followed by Mr. Clinton and Mr. Kennedy. Mr. Carter by far performed worse than any of the last nine presidents.
The rate of economic growth is often considered a measure of a president's success. However, this measure must be used with care, given it normally takes at least a year after a new president takes office before he can get his initial tax and spending program enacted by Congress. Thus, it is appropriate to lag this measure by one year so a new president is not saddled with the sins or virtues of his predecessor.
John Kennedy is the clear winner in the growth criteria. He had the advantage of taking office during the middle of an economic recovery, and the wisdom to enact major tax cuts, both of which resulted in very high growth rates during and immediately after his administration.
Ronald Reagan comes in next in the growth race, even though the economy suffered from stagnation and double-digit inflation and interest rates when he took office. Also, his major tax cuts were not fully effective until two years into his administration. Mr. Clinton comes in third, having inherited a growing economy, but his policies left the nation in a recession.
Mr. Reagan and Mr. Clinton come in No. 1 and No. 1, respectively, in the jobs' creation race. About 17 million jobs were created during each of their times in office, but Mr. Reagan did it with a labor force about 18 percent smaller than the one when Mr. Clinton took office. In addition, employment lags economic growth, so when an appropriate one-year lag is used to adjust the figures, Mr. Reagan also obtains a substantial absolute advantage in numbers of new jobs created.
Both Mr. Kennedy and Mr. Reagan cut taxes for all income levels. Mr. Kennedy reduced the maximum rate from 91 percent to 70 percent, and Mr. Reagan from 70 percent to 28 percent. In both cases, the economy boomed and federal government tax revenues actually increased. Under Mr. Reagan, federal tax revenues rose from $599 billion in 1981 to $991 billion in 1989. despite the tax rate cuts.
Opponents of Mr. Reagan charge his deficits "left future generations saddled with debt." Mr. Reagan did use debt to partially fund his increase in military spending to win the Cold War, just as Franklin Roosevelt used debt to win World War II. At the end of the
As a rough rule of thumb, if the economy grows 6 percent (4 percent real and 2 percent inflation), a deficit of 2 percent to 3 percent yearly can be sustained forever without increasing the national debt burden. (If your personal income grows faster than the amount it costs you to service your debts, you can keep acquiring debt and yet the burden will grow lighter rather than heavier.) During the last three years of both the Reagan and the Kennedy administrations, GDP was growing faster than the debt burden.
By any reasonable criteria, Presidents Reagan and Kennedy were far and away the most economically successful presidents in the past half-century. They both left the economy stronger and freer than they found it. And most Americans, regardless of income level, were clearly better off. Mr. Reagan faced a far tougher challenge than did Mr. Kennedy, whose term was also too short to be definitive.
The jury is still out on the current President Bush, but his tax cuts are working in the same magical way they did for Presidents Kennedy and Reagan. If the Fed can keep inflation low, and if the administration can reduce the growth in spending and regulation, Mr. Bush still has the opportunity to a place in the top three -- if he is re-elected.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published June 4, 2004
Did you know that the
During the past year, the
The unemployment rate is now lower than the average of the 1970s, 1980s and 1990s. In addition, productivity growth has been soaring, interest rates are the lowest in decades, and real disposable income is up an annual 3.9 percent.
With all this good economic news, you would expect President Bush to be far ahead of Sen. John Kerry, Massachusetts Democrat, when it comes to the question of "which candidate would be best for the economy."
But in fact, several recent polls have shown Mr. Kerry ahead of Mr. Bush on this question. Part of the explanation is few Americans are aware of the above economic facts and how well the economy has been performing.
Even fewer Americans are aware policy failures in the Clinton-Gore administration gave us the recession, which was in place when President Bush took office. Probably, only a small minority of the electorate understand the fatal flaw in the Clinton-Gore economic policy was the big increase in effective tax rates on capital, and that John Kerry is now proposing to go back to those same failed policies.
The Bush administration has all the empirical evidence it needs to make the case that the president has and will manage the economy well, yet the polls clearly indicate failure to do so.
The president is open to legitimate attack on the very rapid growth in government spending, and his less-than-pure free market trade policies. But here again, Mr. Kerry has given away his substantive advantage by advocating even more government spending and more trade restrictions, particularly on outsourcing.
Some in the administration have blamed the media for "not carrying the good news about the economy." It is indeed true the national news media has a left bias, and many reporters are hostile to the President and are pro-Kerry. However, this is no excuse. All recent Republican presidents and officeholders have suffered from the same bias, but many, like Ronald Reagan, were able to overcome it.
The Bush economic team has yet to learn how to tell its story in a clear, concise and factually correct manner. Treasury Secretary John Snow and Commerce Secretary Don Evans give the numbers in their talks, but rarely explain clearly and correctly how their policies actually reversed the Clinton-Gore recession and gave us the current boom. (They usually do give credit to the tax cuts, but often fail to differentiate between the effects of supply-side and demand side cuts, leaving them vulnerable to Mr. Kerry's charge of "tax cuts for the rich.")
National Economic Council Chairman Stephen Friedman has been all but invisible, and presidential Council of Economic Advisers Chairman Greg Mankiw has been muzzled ever since he told the truth about "outsourcing" (i.e., it is good for the American economy).
The president and his economic team have yet to lay out their vision of what a second Bush term would mean for the economy. They have hinted at tax reform (and so has John Kerry), Social Security reform and measures to expand ownership of investments. These are all well and good, but they need to be bold, clear and compelling on each of the above, and to make sure the numbers and assumptions they use are accurate.
The president ought to tackle excessive spending and regulation (which most Americans correctly understand to be a major problem) by stating he is going to establish a serious program to require real cost-benefit analysis for every government spending and regulatory activity.
The government has actually had some success -- with its Office of Regulatory Affairs in Office of Management and Budget -- in stopping or modifying some major regulations that did not pass a reasonable cost-benefit test. This successful activity needs to be expanded to all regulations -- even those from the Internal Revenue Service -- and to all government spending programs, and to our support of multinational organizations like the United Nations, International Monetary Fund, World Bank, Organization for Economic Cooperation and Development and Financial Action Task Force.
James Carville is famous for saying, "It's the economy stupid." The current President Bush's father lost that debate with President Clinton, even though the economy had been growing smartly for the year preceding the election.
If the current president and his economic team do not quickly do a better job in marketing the economic facts and an economic vision, history may repeat itself.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
Imagine a club where members of the volleyball teams enjoy drinking and eating more than exercising and, as a result, are very fat and out of shape.
The club decides to expand its membership to include a group of men who only recently gained their independence from abusive parents and now are working hard on bettering themselves. The newcomers wish to join the volleyball teams.
The existing players say to the new guys, "This is 'not fair' because you are slimmer and more energetic than we, thus you must put on weight belts so you are as slow as we are."
In the above, substitute
After the end of World War II, most European countries experienced rapid economic growth until the 1980s.
The miracle came by abolishing price controls, instituting sound money, avoiding repressive taxes and regulations, and instituting the rule of law. Having achieved prosperity, the French, Germans and some of their neighbors began increasing taxes to redistribute income, and evolved into stultifying regulatory states. The predictable result is economic growth in
Because the Eastern and Central European countries suffered under the communists for four decades, their real income levels average only 47 percent that of the E.U.
Eight of these countries (plus
But now the bureaucrats of the old E.U. are trying to extend E.U. labor regulations to the new entrants that make it almost impossible to fire a nonproductive worker. These regulations have resulted in little E.U. private sector job growth for the last couple of decades and very high unemployment.
Yet, at the same time, these old
The former communist countries have greatly reduced tax rates to make themselves internationally competitive. As a result, they have been growing much faster than most E.U. countries -- that is, they have been catching up, which is precisely the goal. The French and Germans, rather than applauding this, are now trying to stop it.
German Chancellor Gerhard Schroeder recently demanded the new entrants agree to minimum taxes (i.e., the weight belt). The Germans and French claim they are seeking "tax harmonization" rather than "destructive tax competition."
Of course, in the real world tax competition is highly desirable, because it forces governments to operate more efficiently and protects both the pocketbooks and the liberties of taxpayers. The argument against tax competition is identical to that made when the inefficient, pricey retail store demands the new discount store raise its prices "to be fair."
The Organization for Economic Cooperation and Development (OECD), whose members are high-income nations, will meet in
The
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published May 22, 2004
Have you seen any of the photos of Jane Fonda and John Kerry together back when he was a war protester? Do you know which of the photos are real and which are phony? Digital technology has made it easy to create pictures that purport to show something that never was.
The late-night television comedians and many Internet pranksters create pictures showing the famous in funny situations, most often in good fun.
The fun ends for both the accused and law enforcement officials when what is presented is said to be photographic evidence of a crime. We remember the famous pictures of Josef Stalin with his colleagues who, as they were physically liquidated, were also airbrushed out of the pictures.
However, a competent expert could examine an original negative or photo and tell if it had been altered. In the digital world, proving a photo is real can be almost impossible. The new technologies make it easier to both frame someone and create doubt about actual photographic evidence.
Life has suddenly become more risky for news editors. The editor of the London Daily Mirror, Piers Morgan, was just fired for publishing fake photographs of British troops abusing Iraqi prisoners. His newspaper had to apologize both to the British military and their readers. In the new digital world, the rules have changed. The mere presentation of a photo is no longer sufficient evidence for anything unless you know who took it and when, and the photographer's motivation and reputation.
In the age of terrorism, jumping to conclusions based on a digital photograph can have terrible consequences if the act portrayed is not independently verified.
When it comes to our computers, the situation is far worse. Law enforcement officers often seize the computer of suspected wrongdoers to see what compromising material may have been retained. Our problem is almost all our computers have wire or wireless connection to the Web. We thus are subject to outsiders dumping things into our computers without our knowledge or, even worse, having our browsers hijacked and used by outsiders for committing a crime.
Most "cookies" placed in our computers are harmless and used by marketers to gain information about our search patterns and/or speed information from certain Web sites to our computers. Browser hijackings are not harmless; they are malicious programs. Purveyors of kiddy porn, financial criminals, and terrorists, all without our knowledge, could use our computers without entering our premises.
There have been news reports about a man jailed for child porn though he claimed a browser hijacker placed porno images of children on his computer. Without knowing whether this particular story is true, it is technically possible. Everyone is at risk from personal enemies and unscrupulous law enforcement authorities who will find it relatively easy, if they so choose, to place compromising material on our computers.
Evidence tampering and salting has always been a problem -- remember the
The new digital technologies also allow the almost perfect replication of voices, signatures and even works of art. Some biometric identifications, such as fingerprints, can also be digitally copied and misused.
It is important all those who reply on information that can be or has been digitized treat it with some degree of caution or even skepticism. In law, there are "rules of evidence" that must be followed in legal proceedings. The basic prerequisites of admissibility of evidence are relevance, materiality and competence. Evidence is considered "competent" if it meets certain traditional requirements of reliability.
The problem for law enforcement, the courts and even the press is that "traditional requirements of reliability" for pictorial, electronic and documentary evidence are no longer sufficient because of the new digital technologies. Relying on old standards will cause too many innocent people to be wrongly accused or convicted.
The solution is for those in the legal system, as well as the public at large, to demand collaborating evidence before coming to conclusions based on digital evidence alone.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
Should the president resign if employees within the government fail to their jobs properly? Sensible people will say "of course not." However, the serious question is, when should top officers or directors of any organization be held directly responsible for failures or misdeeds of subordinates?
The public is exposed to what appears to be an almost continuous series of management and governance failures in: Major private corporations, such as Enron, WorldCom, Credit Lyonnaise, and Parmalat; News organizations, such as the New York Times, USA Today, and the BBC; and Government agencies, such as the CIA, MI6, the FBI, the U.S. Defense Department, the Securities Exchange Commission, the United Nations' Iraq food for peace program; and what seems as the never-ending scandal of corruption in the French government.
As a result, serious students of management, and corporate and government governance have been holding conferences and other forums to discuss improvement in governance.
In virtually all the failures, one of more of the following conditions existed:
• Inadequate communication to all members of the organization of required behavioral and ethical standards.
• Overreliance on the formal chain of command for information flow.
• Failure of top management and/or directors to take quick and decisive corrective action when failures were detected. Also, there is a tendency in almost all organizations to either implicitly or explicitly suppress bad news. It is not necessarily true, though widely believed, that coverups and bad news suppressions always fail.
Failures in private business organizations are hard to suppress over long periods because the pressure of competition eventually reveals the poor performers. In the meantime, incompetent or corrupt executives might have pocketed millions of dollars that has been taken from stockholders in the form of reduced value of their investment. As bad as business scandals are, the market eventually forces a change in behavior or the firm goes out of business.
The more serious problem is with governments and government agencies because, being monopolies, their failures are often not readily apparent and poor performance can go on for decades. Too few government agencies and programs are subject to rigorous cost-benefit analysis and management effectiveness evaluations on a regular basis, if ever. Government managers also often have more difficulty firing or demoting weak performing personnel because of all too rigid civil service protections.
In most countries and jurisdictions, legislative oversight of government agencies tends to be irregular, inconsistent, and far too political. The congressional reaction to the Iraqi prisoner abuse scandal is a prime example. Even though the Congress (and the news media) had been given information for months about prisoner abuse, it was not until the pictures came out that the outcry began, and then, all too predictably, some members immediately called for the head of Mr. Rumsfeld even though all the facts were not yet known.
(Note: the infinitely worse 1968 Mai Lai massacre occurred on the Democrats' watch, and many of those calling for Mr. Rumsfeld to be fired had a different view back then -- but that is the nature of politics.)
The old
What should be done to improve performance? Undoubtedly, anyone with a clear and continuing record of incompetence or dishonesty at any level in any organization needs to be reprimanded or dismissed and, in cases of illegal behavior, prosecuted.
Those in management who fail to give clear instructions to subordinates or who fail to carry out the instructions of senior management and the supervisory authority (whether it be a board or legislative body or committee) need to be held accountable. At the same time, it should be realized everyone occasionally makes mistakes and misjudgments, and it is impossible for senior managers in large (and even small) organizations to know what everyone in the chain of command is doing all the time. Thus, it is important oversight bodies develop multiple sources of information, and senior management maintain good information systems about the operations of organizations for which they have responsibility.
All organizations are made up of humans, and humans are fallible. Successful organizations are thus designed to catch the mistakes of fallible humans early and encourage quick corrective action. The people at the top cannot be held responsible for all the actions of their underlings, but they can be held legitimately responsible for developing proper information and corrective systems.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
If you ask anyone with the most casual knowledge of baseball which team won the most World Series games in the last 80 years, the Chicago Cubs or the New York Yankees, you would expect to get the right answer at least 90 percent of the time. Even diehard Cubs fans would tell you it was the Yankees because they would not want to appear ignorant.
As with baseball, knowledgeable people normally give correct answers to questions even though they might prefer a different answer. The exception to this rule is political history and public policy, where all too many knowledgeable people feel free to say things contrary to empirical evidence -- and often do so without embarrassment.
Current examples are many political commentators, as well as elected politicians, who frequently say the country went from surplus to deficit because of the Bush tax cuts.
The deficit actually was caused by a large increase in government spending (voted for by majorities of both parties), which began at the end of the
The tax rate reductions are only a minor part of the deficit, and the country would be in deficit with or without the tax changes. The numbers are easy to come by, so there is no excuse for commentators to make incorrect statements. What would happen to a sports reporter who consistently gave incorrect baseball statistics?
Recently, I listened to a well-educated reporter whom I happen to know and who was speaking on an NPR show. He claimed it was not proven Alger Hiss, who was a high-ranking State Department official in the 1940s, had been a spy and implied Hiss got a bum rap because of the "right wing."
The fact is Hiss was fairly convicted, and several serious researchers have shown the evidence against him was overwhelming. When the KGB files were finally opened at the end of the Cold War, they showed that indeed Hiss was a Soviet spy. Yet, many on the American left still cling to the myth of his innocence, despite the evidence.
Such individuals have no more credibility than Holocaust deniers, yet the news media treated them as serious people.
Another common myth is that increasing the minimum wage can raise real incomes without increasing unemployment. Such assertions defy economic logic and endless empirical studies.
Yet advocates of higher minimum wages engage in reality denial without challenge from those who should know better. One of these higher minimum wage advocates appeared on the "Dennis Miller" show a week ago. Fortunately, Mr. Miller had the wit to say he favored a $200,000 a year minimum wage, implicitly noting the fallacy in his guest's argument.
Many on the left created the myth Ronald Reagan was a mental lightweight. Some have continued to repeat this nonsense in the face of overwhelming evidence Mr. Reagan was a serious political thinker who himself wrote and researched more policy commentaries, papers and speeches than any other recent president. When he studied economics in college, Mr. Reagan was regarded as gifted with an exceptional memory.
From 1975 to 1979, Mr. Reagan gave more than 1,000 daily radio broadcasts, two-thirds of which he wrote himself, covering a very wide range of topics.
For those who may doubt Mr. Reagan's intellect, I suggest you read "Reagan, In His Own Hand: The Writings of Ronald Reagan that Reveal His Revolutionary Vision for
The most persistent public policy myth is that socialism is a form of economic organization superior to free market, democratic capitalism. Virtually every form of socialism conceivable by the mind of man has been tried somewhere during the last 200 years -- and all have ultimately failed.
There were the socialists of the French Revolution, the early American and English utopians, the Marxists and the Fascists (who managed to murder more than 100 million of their own citizens), the Fabians and the social democrats.
Though these various forms of socialism always resulted in economic stagnation or worse, many still proudly proclaim themselves socialists. American academics and politicians continue praising Fidel Castro, or even Josef Stalin, on TV and are treated with respect by their weak-minded hosts.
Again, what would we do with a sports reporter who was no more factual about athletic accomplishment than the academics, commentators and politicians who espouse the aforementioned nonsense? We would give him no air time otherwise laugh at him, or shun him, and certainly not pay him.
People are entitled to their own opinions but not their own facts. Perhaps it is time for those who care about accuracy and standards to start shunning those who don't.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
An old
The Bush administration has put this rule backward when it comes to economic policy. It is accepting blame for things it didn't do and not taking adequate credit for good things it has done, while at the same time doing things that are both politically and economically harmful.
The last recession began in the quarter President Bush was inaugurated, and has been labeled by the media "the Bush recession," even though there was nothing Mr. Bush could have done to prevent it by the time he took office.
If Americans really knew the recession was due to mistakes made in the Clinton-Gore years, and that the robust recovery we now enjoy was largely caused by the Bush tax cuts, they would rate Mr. Bush superior to John Kerry on the economy.
But recent polls show Mr. Bush trailing Mr. Kerry on the economy. We now know the recession largely resulted from record high taxes (as a percentage of gross domestic product), particularly on capital, in the
Mr. Kerry has proposed an economic plan that would return us to policies that gave us the last recession. Yet, because of uncorrected misinformation, these policies are viewed as superior to those that gave us the recovery.
Occasionally, you might hear an administration official mutter something about inheriting the recession. But many accept the conventional wisdom the recession began on the president's watch and that he was somehow responsible.
If the Treasury and the National Economic Policy staff were not asleep at the switch, they would have a daily drumbeat, including many statements by the president, on how they cured the Clinton-Gore recession until even the left-leaning national news media would have to report it. They also would explain how the Kerry plan would increase chances of a new recession.
When a friend makes costly mistakes and you have not warned him, you tend to blame yourself. But when a friend makes costly mistakes for which he has been forewarned many times by many experienced and knowledgeable people, you tend to blame your friend. From the beginning of the Bush administration, sympathetic, experienced economists have warned its officials about the need to avoid some very obvious mistakes. Unfortunately, these warnings have gone unheeded, and, as a result, the president's re-election is in doubt.
Perhaps the biggest mistake is the telecommunications mess. The
The Justice Department, which deserves an F in antitrust economics, has made another mistake. It doesn't understand there is no monopoly in business applications' software -- the "Oracle" case -- and therefore damages the economy by discouraging investment and undermining the stock market.
The Treasury Department has made the administration look foolish by failing to withdraw proposed Clinton-era "interest-reporting regulations." These rules are designed to force
Treasury Secretary John Snow reportedly has told some members of Congress, who are justifiably outraged at the proposal and believe has no legal basis, that he intends to withdraw it. Yet, he has not acted, and some on his staff say "no decision has been made." This, despite the fact that when the president took office both his National Economic Council chief and the chairman of the Council of Economic Advisers said the proposed rules were destructive and should be withdrawn.
Finally, the Bush administration has been warned repeatedly by many of leading policy institutes that it needs to exercise more control over the World Bank, the International Monetary Fund and the Organization for Economic Cooperation and Development, because they are pushing policies that harm world economic growth and U.S. interests.
Officials in the Treasury and State Department, who are responsible for these agencies, have done nothing. As a result, the bad policies continue, and the IMF has just called for the
Is the irresponsibility of some officials in the Bush administration about the above-mentioned issues solely the result of incompetence or do they have a different personal agenda? When you ask responsible people in the administration about these miscreants, they only say it would likely be worse under a Kerry administration -- how true and how sad.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published April 26, 2004
When considering the Swedish model, one can be forgiven for thinking of a comely statuesque blond with blue eyes. However, to economists and policy junkies, the Swedish model refers to the "third way" between socialism and capitalism many on the American left laud as the ideal.
Does the Swedish model work as advertised? According to a new paper by the highly regarded Swedish economist, Nils Karlson, the "model has become quite different from what was intended and to what many people still believe to be the case."
The extent of the failure of the Swedish model are both shocking and little known. For example, no new net jobs have been produced in the Swedish private sector since 1950. (By contrast, the U.S. created more than 60 million new private-sector jobs during the same period, from 52 million in 1950 to about 115 million in 2002.) "None of top 50 companies on the
Again, contrast this with the U.S. where many of our biggest companies had not been born or known of in 1970, such as Microsoft, Intel, Wal-Mart, Home Depot, Cisco, etc., Mr. Karlson's litany of failures of the Swedish model include: "Sweden has dropped from fourth to 14th place in 2002 among the OECD countries (i.e., affluent industrialized countries) in terms of GDP per capita since 1970."
In addition, "well over 1 million people out of a work force of around four million did not work in 2003 but lived on various kinds of public welfare programs, such as, pre-pension schemes, unemployment benefits, sick-leave programs, etc." Finally, "a majority of the adult population are either employed by the state or clients of the state in a sense that they have a majority of the income coming from public subsidies."
A half-century ago,
The outlines of the Swedish "third way" welfare state began appearing in the 1950s. As late as 1960, taxing and government spending in
The rise in taxing and spending was coupled with increased market regulation, "social engineering" and state planning. All the taxing, spending and regulation had a number of unintended consequences, such as undermining volunteer organizations as people increasingly turned to the state for help. Job security legislation made employers more reluctant to hire. Fewer new firms were created, new inventions and innovations declined, and real costs of providing goods and services rose. Increasing taxes on labor undermined work incentives and increased the "black" or underground economy.
In addition to cataloging the economic decline resulting from the rise in the Swedish welfare state, Mr. Karlson argues that perhaps the most damaging consequence of the "third way" is the loss of "dignity" among the Swedish people. Mr. Karlson takes a classical approach and argues every individual has a "unique value" and a "good society" requires individual liberty, personal responsibility and respect for the liberty of others.
As the welfare state undermines the ability to engage in productive activity to support oneself, and individual liberty and responsibility, there will be a corresponding loss in dignity. This loss of dignity debilitates both the individual and society.
The Swedish model teaches us good intentions are not enough when trying to create a humane, compassionate and prosperous society. Failure to fully understand the economic and social consequences of policies that increasingly regulate and tax productive activity was the Swedish model's fatal flaw.
Unfortunately, this same ignorance of the consequences of taxing, spending and regulation is rampant among far too many of the American political and media class. The good news is the Swedish model is not totally useless; it is a fine model of what not to do if only we can get the American people and their opinion leaders to understand it.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
The participants included Ed Crane, president of the Washington-based libertarian Cato Institute; Jose Pinera who, as a Chilean government minister, began the world's first privatized social security system a quarter-century ago; and Ruth Richardson, who, as finance minister, was instrumental in New Zealand's highly successful free market reforms.
They were in
President Putin has received mixed reviews in the West. On one hand, he has been reforming
The Putin administration has the clear goal of greatly increasing
Economic Adviser Illarionov and President Putin well understand part of
In his dialogue with Mr. Putin, Ed Crane of the Cato Institute emphasized the importance of privatizing all the press and not restricting press freedoms, and noted that a truly strong leader makes his people freer. President Putin was highly engaged in the meeting and clearly understood the observations and recommendations being made to him.
If one goes to downtown
Mr. Putin may go down in history as just another Russian ruler who squandered the opportunity or he as
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published April 8, 2004
Have the Canadians found a better balance between the public and private sectors? If you listen to many in the news media and many liberal Democrats,
These critics in the U.S. say they do not want a European-type socialist economy but would like a relatively bigger government that provides more services than the U.S. government (and lower drug prices and free medical care) -- in short, Canada.
Is it true
However, beginning in the early 1980s,
The result is the Canadians now have a government that spends about 40 percent of its GDP (at the federal, provincial, and local levels), while the
Once the
The first study is "Economic Freedom in North America" (jointly prepared with the
Unfortunately for
"Government Failure in Canada, 1997-2004: A Survey of Reports from the Auditor General," again by the Fraser Institute, details extensive waste, misrepresentation, red tape, incompetence, program failure, self-service and self-dealing in the Canadian government. The report concludes that: "The main lesson from the facts as assembled by the Auditor General is that governments are not very effective vehicles for accomplishing outcomes. ... Public purposes ... can be accomplished as well, or better, by contracting, privatizing or ceding the activity to the private sector."
Those on the left who want a Canadian style health care system fail to acknowledge it has resulted in extensive waiting times, limitations on treatments, and massive shortages, all of which have forced tens of thousands of Canadians each year to go to the U.S. for needed medical treatment.
And finally, as crime rates have risen in
For those who say they want bigger government and more economic regulation, the results of the experiment are in. The evidence from
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published April 4, 2004
Will Sen. John Kerry's tax plan, as he says, actually increase the tax burden on the rich? Probably not. The one who pays a tax is frequently not the one who bears the burden of the tax. This fact has led to much bad tax policy -- and parts of the Kerry tax plan will only worsen the situation.
The good parts of the Kerry plan, i.e., the reduced corporate tax rate, have gained him the ire of his labor and left-wing supporters. On the other hand, the bad part of his proposals, such as ending corporate tax deferral on foreign income and increasing the marginal tax rates of the upper incomes, have earned him the justified scorn of most economists and tax experts.
Over the next several months, both President Bush and Mr. Kerry will have ample time to develop sound and coherent tax programs. In evaluating their proposals, it is important to understand the difference between who pays the tax and where the tax burden actually falls.
Politicians get political mileage by saying such things as: "Let's increase taxes on greedy corporations." It sounds great until one begins to reflect on exactly who these "greedy" corporations are. Who actually owns these corporations? Is it some small group of fat rich old men? Or is it all those Americans who have pension funds, 401(k)s, mutual funds, etc.? The fact is most Americans are the real owners, directly or indirectly, because their pension funds and mutual funds own most of the stock in
Some argue the corporation owners bear most of the burden of the corporate income tax. If that is true, those tens of millions of Americans with some of their pensions and savings in corporate stock suffer from any increased corporate tax.
Others say the corporate tax burden is passed on to workers in the form of lower wages, or to the companies' customers by higher prices and less service. It is also clearly true the corporate income tax reduces the capital a company has to invest in new equipment and hire new workers.
In the real world, parts of the corporate tax burden do fall on workers, customers, suppliers and investors. This relative burden varies widely from company to company, depending on differing circumstances. But no matter how you slice the burden, it is unambiguously clear the corporate income tax reduces job creation and economic growth.
Another greatly misunderstood tax is the "inheritance" or "death" tax. Proponents argue it is a tax on the rich. The problem with this argument is the person who was rich is now dead, and hence cannot be taxed. The beneficiaries of the rich person's estate may or may not be rich.
For example, suppose a rich man left an estate of $10 million to be divided equally among 1,000 poor people he had identified before his passing. If the tax rate was 50 percent, each poor heir would get $10,000 but, in effect, would have to pay a $5,000 tax on it. Is that good policy?
Take the other extreme, and assume Bill Gates' father, on passing, gives his multimillion-dollar estate to Bill Gates. The fact this inheritance is subject to the same 50 percent tax as in our first example probably will not be considered as unjust as when a poor person receives $10,000.
But again, let's look at the true burden of the tax. The question must be asked: Who is likely to make better use of the money -- Bill Gates or the
Again, in the real world, most rich people leave substantial parts of their estates to people who are not rich, and these people of modest means bear the real burden of the high death tax rates, as well as do all who remain jobless because of reduced investment.
Finally, some on the left (and Mr. Kerry) have said they want higher taxes on the rich -- which seems to mean someone making more than $200,000 per year, or slightly more than the salary of a
However, many of those making $200,000 a year are not rich. Take a young doctor who recently graduated from medical school with several hundred thousand dollars in debts incurred for her medical education. Her income may be high, but she has a negative net worth and thus certainly is not rich. The Kerry proposal, by increasing marginal tax rates of those who are working hard to become rich, will actually limit the number of the rich to those who already are rich.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published
In today's parlance, George Washington was a victim of medical malpractice. When he became ill, he was bled by his doctors, which almost certainly hastened his death. Like
The "doctors" in this case are a group of politicians, tax and law enforcement officials, who are operating without the constraint of national boundaries or economic sense.
People around the globe are justifiably concerned about terrorism and ordinary criminality. A certain international political class has used this anxiety to argue that since criminals and terrorists use money, all monetary movements and holdings must be monitored. Yes, it is useful to be able to trace the money trail of al Qaeda operatives. But does that mean all citizens of every country should be subject to having all their financial privacy destroyed? Furthermore, is it cost-effective to monitor almost everyone, or would both public and private law enforcement dollars be more wisely spent monitoring the activities of those individuals or groups known or strongly suspected of engaging in terrorist or criminal activities?
The problem is there are now literally dozens of organizations issuing rules and regulations that apply not only to financial institutions but to all "money service providers," including such activities as pawn shops, used car dealers and real estate agents. The agencies within the U.S. government issuing the new financial rules and regulations include the Internal Revenue Service, the FBI, the Justice Department, the Financial Crimes Enforcement Network (FinCen) and the Federal Reserve.
In addition, U.S. financial institutions and other businesses engaged in operations outside the U.S. or those involved in international transactions are also faced with a barrage of new rules and regulations from many foreign governments, plus the European Union, and from international institutions such as the Organization for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF) and the U.N.
Millions of businesses are subject to at least some of these rules and regulations, and it is close to impossible to inform them of their obligations. Even the largest international banks, with huge staffs of lawyers and anticrime enforcement personnel, are unable to fully work through this ever-expanding morass of regulation.
Smaller banks and businesses are at a competitive disadvantage because of the disproportionate effect of these regulatory costs. Some of the regulators are aiming at terrorists, others at ordinary criminals, and some at tax avoiders or evaders. Most of the regulations are directed at "money launderers," even though the term has a very elastic definition.
Many of these new rules and regulations are overlapping, some are contradictory, some violate basic civil liberties and many are costly to administer and do not meet reasonable cost-benefit tests. Yet the Bush administration just announced a doubling in the budget for FinCen, as well as budget increases for many of the other financial rulemaking bodies.
The reason we should care is that all of these extra, and in many cases totally unnecessary, costs are passed along to consumers of financial services as higher fees and more expensive and fewer choices in financial products. This directly translates into job losses not only in financial industries but in all businesses that rely on some outside financing.
In addition, it will make it more difficult for low-income people, the young and recent immigrants to open bank accounts. We are now seeing, for the first time in our nation's history, a rise in the portion of our citizens without banking relationships. Costly regulations that force more people into the cash economy not only make life more dangerous for those who cannot open bank accounts, but also have the perverse effect of making it more difficult for law enforcement to trace funds of criminals.
There is little evidence all the new rules and paperwork are having any appreciable effect on crime or terrorism, because there is an almost infinite number of ways to "launder" money, and organized terrorists and criminals can almost always find ways around the regulations. On the other hand, there is considerable evidence of damage to our pocketbooks and civil liberties from these regulations.
The
In addition, an international organization is needed to apply the same strict cost-benefit and civil liberties' tests to all proposed regulations emanating from international bodies like the OECD, FATF, and the U.N., as well as those from governments that affect nonresident institutions.
If financial institutions and their customers are weakened or bled to death by regulatory malpractice, the war against real criminals and terrorists will only be made more difficult.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published March 9, 2004
Why aren't more jobs being created? Ask President Bush's political opponents and even some of his friends. It is a legitimate question and it deserves a serious answer.
Mr. Bush's Democratic opponents blame him but fail to admit the recession began on the Clinton/Gore watch. Neither do they tell us precisely what they would have done or will do now about the problem.
To understand the real problem and its solutions, it is important to start with the basics. For a job to be created, there has to be a demand for a good or a service. When business people see the demand for their products increasing, they hire more workers to produce and sell the products. They will hire workers as long as the cost of hiring the additional worker is less than the net revenue cost of the worker.
So, to increase employment, we can increase economic growth and/or reduce the cost of hiring workers.
The other day I heard the president say, "The tax cuts worked because they put money in people's pockets." In fact, the president misstated his own case.
The tax cuts worked by reducing the existing disincentives for working, saving and investing. (The tax cuts were financed by increasing the deficit. The same amount of money as was taken from the economy by government borrowing was returned as a result of rate reduction -- but the tax cuts did improve incentives to work, save and invest.)
One reason for the slow employment growth has been the rapid growth in government spending. Some people think government spending creates jobs (the old Keynesian myth) but, in fact, government spending reduces more jobs in the private sector than it can create in the government sector.
The reason is private sector jobs tend to be more productive than government jobs, and there is a considerable cost (i.e., dead weight loss) when government extracts monies from the private sector by taxing or borrowing to pay for the government jobs. Therefore, countries with large government sectors, like
Slowing the growth in government spending would speed job growth.
Another major reason for the slow growth in jobs is that tax cuts are now temporary and set to expire in stages over the next few years. The president has asked Congress to make the tax cuts permanent, which is the responsible thing to do.
However, business people are uncertain whether the tax cuts will be made permanent and, hence, are reluctant to expand as rapidly or hire as many workers as they would if they believed the tax cuts would remain. Those members of Congress who have said they will not vote to make the tax cuts permanent are, in effect, reducing job opportunities for their fellow Americans and ought to be held accountable.
Yet another major reason for slow job growth is the drop in the dollar and the rise in oil prices. The rise in oil prices and price increases of other internationally traded goods resulting from the drop in the dollar has the same effect as a tax increase on the American consumer.
This "tax increase" offsets some of the benefits of the rate reduction. When consumers pay more for gasoline, they have less money to spend on other goods and services; hence, the economy grows more slowly than it otherwise would, and fewer new jobs are created.
If the price of oil and other commodities continue to rise in dollar terms, this will not only slow our economic growth but could stop the recovery.
The administration needs to be far more aggressive about stopping the oil price increases. Remember, the price of oil is not set by the market but is set by the Organization of Petroleum Exporting Countries. We should tell the Saudis and other major OPEC oil-cartel members that the current price of oil is unacceptable and we will take action against them if they do not significantly reduce it.
If the Saudis attacked us and weakened our economy, we would not tolerate it. And we ought not to tolerate them using the price of oil as a weapon against us. If the administration does not take immediate action to rein in OPEC, its political opponents are likely to start accusing it of being too beholden to oil interests, thus putting at risk jobs of American workers.
Policy-makers in the administration have also been too passive regarding the fall in the dollar. Their rhetoric has been weak, and they have actually engaged in activities to discourage foreign investment into the
They should immediately withdraw the Internal Revenue Service's proposed interest reporting regulation (which virtually every economist who has commented on the issue has denounced as wretched policy) and reduce the withholding rates on dividend payments to foreign persons in line with the just passed dividend tax cut for Americans. These actions would again signal that the
Job growth has been too slow, and that is due to bad government policies. Both Republicans and Democrats are to blame. Unless the administration takes the actions recommended above, job growth will continue to be slow, which may cost the Republicans the election. They will have only themselves to blame.
Only if the administration cleans up its own mistakes, can it legitimately blame the Democrats for advocating policies -- higher taxes -- that slow job growth.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard W. Rahn
Published March 6, 2004
"There are two political parties in
The majority of Americans consistently tell pollsters they prefer lower taxes and less government spending. More Republicans than Democrats consistently say they believe in smaller government and lower taxes. Given these statements of belief, the Republican Party should be the permanent majority party, but it is not.
Republicans pride themselves on being better stewards of the public purse and providing more honest government than their Democrat competitors. In general, this is true, but Republicans have a tendency to commit political suicide, like lemmings jumping off a cliff, by taxing and spending like Democrats once they obtain majority status.
The result of rapid increases in taxing and spending is always the same. Businesses find themselves less competitive because of the growing tax burden, so they hire fewer workers and some businesses just pick up and move to greener pastures. This, in turn, causes the higher tax economy to slow relative to lower tax jurisdictions. Eventually, the citizens get fed up with the high taxes and reduced economic opportunity and throw out the ruling party. This cycle gets repeated time and time again, and the Republicans never seem to learn.
My own state of
When Mr. Warner proposed the tax increase, the politically smart and economically responsible thing for the Republican majority in the state legislature would have been to oppose it. Instead, the Republican Senate leadership came up with an even bigger tax increase proposal, once again proving they are members of the stupid party.
Note, the
Rather than be responsible and keep the growth in government programs at a rate no greater than citizens' incomes, many Republican members of the legislature offer lame excuses for going back on their promises to the voters.
Republicans tend to be less tolerant about being lied to by their elected representatives -- hence, we can expect to see numerous "former" Republican state politicians over the next couple of years.
At the national level, many Republican officials also have "Economic History Attention Deficit Disorder," a k a "EHADD." Herbert Hoover raised taxes, tariffs and spending, which turned a normal recession with help from the Federal Reserve into the Great Depression, and it took the Republicans more than a generation to make a comeback after that fiasco.
Richard Nixon thought it was smart to tax and spend like Lyndon Johnson, so his economic policies and Watergate resulted in us all having to suffer through the Jimmy Carter years.
Ronald Reagan is greatly respected because he didn't sell out his party or nation, and did manage to reduce the growth in the nondefense side of government spending and relieved us of punitive high tax rates.
The first George Bush came down with a case of EHADD after he was elected. Forgetting the lessons Mr. Reagan had taught, The former President Bush increased taxes after pledging not to -- which resulted in enough Republicans sitting out the next election to cause him to be unemployed.
Our current president clearly understands Republicans need to cut rather than increase taxes. But it is troubling that this administration appears not to comprehend that growth in government spending destroys more private sector jobs than can be created in the government sector and that limiting government means limiting spending growth.
It is even more depressing to listen to some Republican members of Congress, EHADD sufferers all, say they might not vote to make the recently enacted tax cuts permanent or, even worse, vote to increase taxes.
The reason Republicans are viewed as the stupid party, throwing away what should be their majority status, is that they have allowed those who suffer from EHADD to hold office and vote. Political leaders who are infected with EHADD are true weapons of mass destruction, and hence must be eliminated.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
The
By Richard Rahn
Published
Would John Kerry's economic policies be better than those of President Bush?
To answer this question, we need to know what these candidates propose regarding taxing, spending and regulation.
President Bush has just provided us a detailed budget. In addition to his spending plans, he has made it clear he wants Congress to make his tax cuts permanent. Given his track record and his explicit plans, we have a basis for judgments about how the economy will likely perform if he is re-elected.
The situation with Mr. Kerry is very different. We do not yet have a coherent tax and spending program from
First, we now know the economy was in recession the first quarter Mr. Bush took office. During that period, the economy was still operating under the taxing, spending and regulatory policies of the Clinton-Gore administration. Obviously, the Clinton-Gore folks made policy mistakes that led to the recession.
Question: What were these policy mistakes and what would Mr. Kerry have done differently to avoid the recession?
Question: If Mr. Kerry would have done things differently from the Clinton-Gore administration, why did he not say so at the time?
Mr. Kerry has criticized President Bush for the job losses that began with the recession.
Question: Specifically, what would Mr. Kerry have done differently to revive the economy that was in recession when President Bush took office, and how would his policies have prevented the job loss?
Mr. Kerry has criticized President Bush for "leading us from a surplus to a deficit." Sen. Kerry has said he favors the Bush tax cuts, except those for the "very wealthy." But the tax rate cuts for the "very wealthy" (i.e., top rate tax payers) have only accounted for a very tiny portion of the deficit and, if rescinded, will reduce future deficits by a minuscule three-tenths of 1 percent of gross domestic product.
According to the National Taxpayers Union analysis, Mr. Kerry has proposed new federal government spending that would add more than $265 billion to the federal budget each year.
Question: Specifically what tax and spending changes would Mr. Kerry have made to keep the budget in surplus? Mr. Kerry has told us what tax cuts he favors and what spending increases he favors, but these would increase the deficit.
Question: What specific spending cuts and tax increases does Mr. Kerry advocate to offset his tax-cut proposals and spending-increase proposals to achieve the budget surplus he says he favors?
Question: Is Mr. Kerry willing to submit all his proposed tax and spending changes to the nonpartisan Congressional Budget Office so they can be scored on the same basis as President Bush's proposals?
Mr. Kerry has said he will work to ensure
Over the long run, if a foreign competitor has lower costs than the U.S. company, the foreign competitor will most likely gain world market share and, perhaps, even run the U.S. company out of business. Either way, the
Questions: Why is Mr. Kerry proposing measures that will kill
The above are basic questions that neither the news media nor Mr. Kerry's Democrat or Republican opponents have shown much interest in.
Yet economic policy affects all Americans. It is troublesome that we know more about whom Mr. Kerry dated between his marriages than what he would have done to prevent the recession. What does it say about the seriousness of the news media and political classes when they are more concerned with contradictions in Mr. Kerry's accounts of what he did with his war medals than important contradictions in his job-creation proposals?
Let us hope we will be provided answers to the above questions in the near future so we serious voters can make an informed choice for president. Or do certain forces in the news media and the Kerry camp prefer we not make an informed choice?
Richard Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
National Review
pp. 26-30
When companies ‘reincorporate abroad,’ are they being unpatriotic? Or responsible?
RICHARD W. RAHN
Imagine you are the CEO of a major multinational firm. Your chief financial officer comes to you and says if you move your legal home from the United States to Bermuda the company will have a 20 percent increase in net profits. With the increased profits, the company will be able to expand production, hire more workers, do more R&D and pay stockholders a higher dividend.
However, your VP for government relations tells you that if the company changes its legal home you, as the CEO, will be accused of being unpatriotic by some members of Congress and certain presidential candidates. Even worse, these same politicians will threaten to bar your company from obtaining
As the CEO of the company, you know you have a fiduciary responsibility to your stockholders to maximize their economic return by all legal and ethical means. You also know that the proposal to move your company is entirely legal and would be considered good management practice. You are also aware that many of the politicians who are likely to attack you are the same people who attacked managers in other industries, like mutual funds, for not being good custodians of investors’ money. Despite what thoughtful people will clearly recognize as hypocrisy, those political attack dogs can cause considerable damage to you and your company as they have to other firms engaged in similar totally legal and appropriate behavior.
The Stanley Works (tools) company, for example, had planned in 2002 to reincorporate in
Politicians who make these irresponsible attacks have the implicit support of the liberal media and government bureaucrats who can make life hell for those with the temerity to cross them. What they all seem not to realize is that business people respond to incentives, whether it is a reward of a government contract, a tax cut, or the punishment of an IRS special audit.
The specific problem of inversion stems from the fact that the
The high
It is important to understand that these corporate inversions do not reduce a company’s tax liability on its
The above is totally legal, proper and ethical. As Judge Learned Hand said: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Corporate inversions usually only make sense for companies with substantial foreign profits. A company only selling in the
Again, the reason companies choose to move their legal homes is that the
Remember, the corporate tax is a double or triple tax on the same income since the original investment has already been taxed, and the dividends and capital gains resulting from the corporate income are taxed again.
Several proposals have been made to punish companies in one form or another who chose to invert, or to try to outlaw the practice altogether. All these proposals are highly destructive and would cost American jobs as
From before the time of the American Revolution, it has been our practice to flee from high-tax locales to lower-tax ones. Tax competition among the states has served to give us better government service at lower cost, and more liberty. The same is true in the international arena.
Congressman Ron Paul of
Those running for president or in Congress who advocate restrictions on corporate inversions rather than tax reform will only make worse the problem that they so demagogically attack.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
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It is true Cayman is the world's largest offshore financial center, and the world's fifth-biggest financial center, even though it is in the middle of the
But contrary to the mythology from movies and novels, Cayman did not become rich by catering to criminals. The truth is just the opposite. Think about it for a moment. If you were looking for a place to put your money, would you choose a bank run by incompetents or criminals in a jurisdiction run by the mob, or would you put your money in a bank run by honest and competent bankers in a country with the rule of law?
The fact is that big offshore financial centers, such as Cayman and Bermuda, and other big financial centers, such as
Most of the money in Cayman is institutional rather than individual, and it is more difficult for an individual to open an account in Cayman than in the
Cayman also has agreements with the Internal Revenue Service and the U.S. Justice Department for exchange of information on suspected criminals, tax evaders and terrorists. If you are a crook, it is not wise to try to open an account in well-run jurisdictions like Cayman and
Honest people, however, do benefit from reasonable bank privacy in these jurisdictions. Another fact is that more money is "laundered" in
Many people think there are piles of cash and gold sitting in vaults in places like Cayman. Again, the fact is there is very little physical cash and almost no gold sitting in vaults in places like Cayman.
What Cayman and some of its competitors provide is a place for large companies and financial institutions to consolidate funds -- in electronic form -- without being taxed or subject to unnecessary costly regulation, until these funds are productively reinvested throughout the globe (which can be as little as a matter of seconds).
Most of the money that flows into Cayman is invested in the
The money is owned by the millions of people who are investors in both American and foreign companies and who, for the most part, are unaware their retirement incomes are being both protected and enhanced because part of their investments are continuously being repackaged in Cayman as they go off to higher and better uses.
It is not well understood that the world would be poorer and there would be more people in poverty if places, such as Cayman, did not exist.
In the modern world, economic growth is highly dependent on capital investment. Financial capital is necessary to build new plant and equipment, to fund research and development, including medical breakthroughs and to provide the funds to hire workers. Many countries have very heavy taxes on capital, which means lower rates of investment and slower job creation.
Neither individuals nor companies will save if their savings are taxed away. Without savings there is no money for investment.
World economic growth is maximized when capital is invested in those activities and enterprises that provide the highest after tax risk adjusted rate of return. Places like Cayman provide highly efficient and low-cost environments for institutions to acquire and invest capital, protected by the rule of law. This is why most of the world's big banks operate in Cayman, as well as hundreds of insurance companies and thousands of institutional mutual and hedge funds.
Because Cayman and its competitors exist, institutions and individuals are willing to save more because they know they have a safe haven for their funds until they can find another productive and profitable investment. Without these financial centers, there would be less saving and investment and less efficient allocation of capital throughout the globe.
Some politicians in both Europe and the
If these politicians do not want funds to flow though Cayman and the other offshores, the constructive thing to do would be to reduce the taxation on productive saving and investment and reduce regulatory red tape in their home countries.
The next time you hear some politician bashing a company or individual who utilizes an offshore financial center, realize the politician is either ignorant of the economic facts or doesn't care if there are fewer jobs and more people in poverty throughout the world.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
By RICHARD W. RAHN
Are we better off having lower taxes on interest, dividends and capital gains (and other taxes on capital) or having a lower deficit? Obscure as it may seem, this is the central economic debate being fought in the political arena.
To fund any given level of government spending, our political leaders have to choose how much of the spending should be funded by taxing and how much by borrowing. Historically, Republicans tended to argue more than Democrats for a balanced budget or lower debt financing. Now, the parties have reversed themselves. Republicans have slowly accepted the supply-side argument that high marginal tax rates and the double tax on capital income is more damaging to the economy than modest increases in the deficit. Democrats have bought into the argument of former Treasury Secretary Robert Rubin and his allies that deficits are destructive and should be reduced through tax increases and, at the same time, they believe "fairness" requires the rich to pay a much larger share of the tax bill.
How damaging is the deficit and at what level does it become dangerous? Within limits, economists are not concerned about the deficit in a particular year. Their concern, correctly, is with the amount of government debt held by the public in relation to GDP. As long as individuals or businesses have a yearly rise in income, they can take on more debt without getting into trouble, provided the cost of the additional debt service does not rise faster than the rise in income. The same is true for government. Forty years ago, in 1962, federal government debt as a percentage of GDP was 43.6%. It fell to a low of 23.8% in 1974, rose to a high of 49.5% in 1993, and then dropped back to 33.1% in 2001. Currently, it is about 35% of GDP, and the CBO projects it to fall back to 30.7% in 2013.
Those who argue for lower levels of debt usually claim that higher debt crowds out new investment, leading to lower economic growth, more unemployment, higher inflation and higher interest rates, and is unfair to future generations, etc. At some level of debt, the arguments against it are undoubtedly true. But again, looking at the data for the last 40 years, there is no evidence that federal government debt levels up to at least 50% of GDP have been a problem. Surprisingly, real economic growth averaged almost 1% higher (3.47%) in the years where debt was more than 33% of GDP than in the years when it was less than 33% (2.59%.) Unemployment averaged 6.43% in the low-debt years, and only 5.65% in the high-debt years, and inflation averaged 7.6% in the low-debt years, and 2.9% in the high-debt years.
At the end of
Those who argue for a tax increase to bring down the deficit, such as Mr. Rubin and his allies, have so far failed to distinguish the differing impact various types of tax increases would have on the economy. The deficit hawks argue that an additional dollar of tax revenue received by the government, if it is used to pay down the deficit, will result in one more dollar in the private sector available for productive investment. This is true if the dollar would otherwise be spent on consumption. However, if the dollar comes from individual or corporate saving, there would be no increase in capital available for private investment and, as a result, the economy would be no better off despite a lower deficit.
Tax economists have long known that consumption taxes, for each dollar raised, are far less damaging to the economy than taxes on capital. Yet all of the Democratic candidates for president are proposing tax increases that would fall largely on capital rather than on consumption. When they advocate increasing "taxes on the rich" -- such as higher marginal tax rates on upper-income people, and higher tax rates on capital gains, dividends and corporations -- they are, in fact, calling for higher taxes on productive saving and investment. These higher taxes would depress investment, productivity and wage growth, making workers bear the ultimate cost.
The cost of tax collection is considerable, both for the government and the taxpayer. Also, as tax rates rise, the increase in revenue diminishes as people have a greater incentive to find legal and illegal ways to avoid paying the tax (i.e., the Laffer curve effect). For instance, the repeated increases and decreases in the tax rate on capital gains have clearly demonstrated that the revenue-maximizing rate is under 20%. High tax rates, particularly on capital, misallocate resources, resulting in lower economic growth. This fact had become so obvious (both from rigorous economic analysis and from casual empirical observation) that during the last two decades it caused governments around the world to sharply lower their corporate and personal marginal rates, and spurred the movement toward flat taxes. The
There are costs involved whether the government obtains its funds from taxing or from borrowing. Yet the extraction costs of borrowing are far less costly than taxing. This is because the capital markets are very efficient. It only costs the government a few cents on the dollar to issue notes or bonds, and the effect of additional government borrowing on interest rates tends to be small (provided, of course, federal debt remains below 50% of GDP).
The failure of the Rubin deficit hawks to understand that high taxes on capital were more damaging to the economy than a modest deficit led them to embrace a budget surplus. While they received almost universal acclaim for this action, in effect, what they were doing was a costly drain on high-value, private-sector capital for the sake of reducing low-cost government debt. If in 2000, instead of running a surplus, the
Reducing the growth in government spending has many benefits, including less misallocation of resources and less need for both borrowing and taxes to keep the deficit within manageable range. Over the last three decades, federal government spending as a percentage of GDP has ranged from a low of 18.4% in 2000 to a high of 23.5% in 1983. This year it will be about 20.5% of GDP (or roughly the average of the last 30 years). Missing from the deficit debate, however, are serious proposals to substantially reduce the growth in spending.
To date, each of the Democratic candidates seems to have an economic plan that would repeat the mistakes of the deficit hawks. They would all increase rather than cut the taxes on capital, which would likely lead to another recession. President Ford made this mistake in 1974, as did President Carter in 1980 and the first President Bush in 1990.
The Bush team has put forth a realistic program for ensuring that the debt-to-GDP ratio will not increase over the long run, and that the deficit will decline to under 2% of GDP in the latter part of the decade. The challenge now for the president is to show that he will hit his budget targets by vetoing spending bills when necessary, and continue to reduce taxes on productive saving and investment to keep the economy growing.
Mr. Rahn, a senior fellow of the Discovery Institute, is an adjunct scholar at Cato.
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Did you know that between fiscal years 2001 and 2004 federal spending will rise by about 24 percent, and nondefense, discretionary outlays will increase about 31 percent?
In 2000, federal government outlays were 18.4 percent of GDP, but in 2004 they will be approximately 20.5 percent of GDP. By any measure, both defense and nondefense federal government spending is rising far faster than the real economy, and spending discipline is eroding.
Republicans claim to be fiscal conservatives who believe in smaller government. But the latest spending binge has occurred under a Republican President and a Republican Congress. Only under Lyndon Johnson did the budget grow faster than under President Bush.
The Republicans clearly have been irresponsible. But before you decide to throw the bums out, take a look at what their Democrat opponents propose. According to a study by the National Taxpayers Union, all the Democrat candidates for president propose spending tens, and in some cases, hundreds of billions of dollars more than Mr. Bush.
The sad fact is at the moment the voters are left with a choice between bad and truly awful. (For those interested in more details of the spending explosion, I recommend an excellent paper, "The Republican Spending Explosion," just released by the Cato Institute and authored by Veronique de Rugy - http://www.cato.org/pubs/briefs/bp-derugy.html.)
For decades, opinion pollsters have shown Americans prefer lower taxes and less government spending. Why then do the politicians tax and spend more than the people say they want? The answer is that for any spending program there is a concentration of benefits and a dispersion of costs.
Assume you live in a crowded metropolitan area and want more spending on rail mass transit. You and your supporters are likely to be quite vocal and put pressure on members of Congress to appropriate the funds, even though well more than 90 percent of your fellow citizens would receive no benefit from the appropriation. The cost to each of the 250 million Americans who do not ride rail mass transit is likely to be small enough for them not to find it worthwhile to fight the proposal.
It is also well known that government tends not to manage the taxpayers' money as carefully as would the taxpayers. Or as the Nobel prizewinning economist Milton Friedman has put it: "If you spend your own money on yourself, you tend to be very careful both how much you spend and how it is spent; but if you spend your money on someone else you are still very concerned about how much is spent, but somewhat less concerned about how it is spent; but if you spend someone else's money on yourself, you are not much concerned about how much is spent but you are concerned about how it is spent; but if you spend someone else's money on someone else, you neither are very concerned about how much is spent or how it is spent."
Do not despair, because there are constructive actions that can be taken. Most politicians are aware of the spending problem, but it is hard for them to say no. The solution is to establish procedures to make it easier for the politicians to say "No" and not so easy for them to say "Yes."
In the 1990s, it was clear to everyone we had more military bases than we needed or the Pentagon wanted, but members of Congress would fight to keep open any military base in their own districts whether it was necessary or not. House Majority leader Dick Armey came up with a brilliant solution. A commission was created to recommend what bases would be closed, and its recommendations could only be overturned by a supermajority of the Congress.
The Armey plan worked because members of Congress realized they needed to put in a constraint on their own behavior, and the commission idea was a politically acceptable way to do it.
Similar strategies can be used to control spending. Voters should lobby their elected officials and candidates to demand budget rules that require supermajority voting for all spending, or perhaps even a simple two-line constitutional amendment that would call for either two-thirds or three-fifths majority vote for all spending bills.
Such measures would make it more difficult for any specific spending proposal to be approved, but would not prevent spending on any program that a clear majority of the American people truly desired.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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"I am from the government and I am here to help you," is a well-known oxymoron again proving to be true. A decade ago, we had a mean Internal Revenue Service that did all sorts of terrible and unjustified things to innocent taxpayers. The people got mad, and the people's representatives -- the House and the Senate -- held hearings where they beat up on the IRS, and the IRS folks pledged to reform. They promised a new, kinder and gentler IRS that would be helpful to taxpayers.
We, the taxpayers, actually did get a nicer and more helpful IRS for several years, but it was not to last. To help protect us, Congress passed the Taxpayer Bill of Rights. As part of this legislation, Congress established an independent office within the IRS, called "The Taxpayer Advocate Service." The goals of this Service were "to protect individual and business taxpayer rights and reduce taxpayer burden."
On Jan. 18, the National Taxpayer Advocate, Nina E. Olson, sent a report to Congress that identified "sole proprietor tax noncompliance" as one of the "top two" problems faced by taxpayers. Ms. Olson then went on to recommend that "Congress enact a withholding requirement on payments to independent categories of nonwage workers."
In other words, the "taxpayer advocate," whose job description, in part, is to protect small business from being taxed too much, is saying small businesses need to be taxed more and also suffer an increased paperwork and compliance burden.
Advocates for small business are justifiably outraged. The office, set up to protect small business, has been hijacked by the pro-tax mafia at the IRS. The IRS presented no data to show the proposal would satisfy sound cost-benefit analysis, nor unduly interfere with civil liberties. One suspects the IRS did not provide such information because it would contradict their costly proposal.
Senate Finance Committee Chairman Charles Grassley, Iowa Republican, said he found the proposal "troubling, given the report notes a lack of IRS data on overall noncompliance."
He went on to comment: "It's counterproductive when government agencies contradict each other on tax compliance, as we saw the Treasury Department advising against public infrastructure leases as tax shelters, and the Transportation Department advising in favor of them."
As further evidence the IRS needs new leadership that both understands the complete economic effects of its actions and has a healthy respect for civil liberties, on Jan. 13 the IRS released a set of new compliance and enforcement proposals. While some of the proposals clearly have merit, others were items that would probably have enraged our Founding Fathers. For instance, the IRS wants to "impose penalties on the failure to disclose potentially abusive transactions."
The courts have long ruled taxpayers have a perfect right to so order their affairs as to minimize their tax burden as long as they do not explicitly violate the tax law. The term "potentially abusive" is so elastic as to enable the IRS to go after almost anyone for anything and is most certainly not in the spirit of the Constitution, which very explicitly provides one is presumed innocent until proved guilty.
Americans who give up their citizenship are sometimes taxed by the
We may not like it when fellow Americans give up their U.S. citizenship, but we should recognize they have the basic human right to do so without being pursued by a hit man from the IRS. Our country was founded on the principal of no taxation without representation (remember the
The Bush administration should immediately remove Ms. Olson as Taxpayer Advocate because she clearly does not understand her job description. In addition, it should set up a truly independent office within Treasury staffed by competent economists and civil libertarians with the authority to review and block any IRS or Treasury regulation or legislative proposal that does not meet sound cost-benefit and civil liberties tests. (There is a similar oversight office in the Office of Management and Budget that is quite effective in stopping abuses in other government agencies but has no authority over the IRS.)
Such an office would have prevented the embarrassment of the foolish and dangerous proposals mentioned above, as well as other outrages like the proposed interest-reporting regulation that would drive needed foreign capital out of the
By adopting the above reform, President Bush and Treasury Secretary John Snow could shore up their conservative-libertarian-small business base which is in danger of being lost because of an out-of-control IRS.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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Have you wondered why politicians frequently recommend policies that are destructive to economic growth? Or why cities with "rent control" end up having decrepit housing? Or why medical care costs rise much faster than inflation?
The answers to these and many other public policy questions can be found in Thomas Sowell's informative and entertaining new book, "Applied Economics." If I had chosen the title, I would have dropped "Applied Economics," which sounds boring (the book is not), and led with the subtitle "Thinking Beyond Stage One," which is the real theme of the book.
One characteristic of success is being able to think several steps ahead. A person who plays chess without this ability is destined for failure. The inability or unwillingness of policy-makers to think beyond stage one is why programs like socialized medicine invariably fail. As Mr. Sowell explains:
"Many of the unintended consequences of policies and programs would have been foreseeable from the outset if these processes had been analyzed in terms of incentives and constraints they created, instead of in terms of the desirability they proclaimed. Once we start thinking in terms of the chain of events set in motion by particular policies -- and following these events beyond stage one -- the world begins to look very different."
Politicians frequently are aware of consequences beyond stage one, but if they believe they will gain votes in the short run from a destructive policy they will often support it, provided the negative consequences of their actions come after the next election or, even better, on the next fellow's watch.
For instance,
Mr. Sowell gives example after example of how the foolish policies of politicians have increased the common misery rather than the common good. His goal is not to make fun of politicians acting like politicians, but to explain how easily the foolishness could have been both foreseen and avoided if the press and electorate had not been asleep at the switch.
As he notes: "Neither economics nor politics is just a matter of opinion and both require thinking beyond the immediate consequences of decisions to their long-term effects. Because so few politicians look beyond the next election, it is all the more important that the voters look ahead."
The slower everyone drives, the fewer traffic accidents there will be, so why don't we mandate that no one can drive more than five miles per hour? The answer, of course, is that time and convenience have value as well as safety. In the real world we make trade-offs, so we have come to a consensus that in some circumstances allowing people to drive 70 miles per hour is worth the risks.
In his chapter on risk, Mr. Sowell does a marvelous job explaining the concept of trade-offs, and how those who are activists for specific types of safety -- e.g., opposition to nuclear power -- often increase other and more serious risks -- coal mine accidents and air pollution.
Rich countries are much safer than poor countries. Countries become rich when they protect private-property rights, have a rule of law and do not oppress their citizens through excessive taxation and regulation. Mr. Sowell explains all of this in a way any reader can clearly understand, and can in turn explain to others.
The author has a well-deserved reputation as not only an outstanding economist, but one with the ability to make fundamental economic concepts both interesting and understandable to the non-economist, which is why his syndicated columns are so highly regarded.
He does not make the mistake, unlike Paul Krugman of the New York Times, of misstating facts and not thinking of the ultimate consequences for purely partisan political reasons.
If you are interested in honing your knowledge "to think beyond stage one," you will not go wrong by reading Mr. Sowell's new book.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.
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How many companies sell computer software? How many companies sell telecommunications services?
The answer to the first question is tens of thousands, and the answer to the second question is thousands. Both industries are clearly highly competitive. Competitive markets are a goal of economic policy. Hence the government ought not to be concerned about software and telecommunications, yet it is engaged in destructive meddling.
Both the Justice Department and the Federal Communications Commission employ many lawyers whose job is to prevent monopolies. But what happens when there are no monopolies to prevent? Being able bureaucrats, these antitrust lawyers know that, to keep their jobs, they need to find monopolies, whether real or not. The way they do this is by defining a market more and more narrowly until they find a monopoly.
As an example, you as a customer decide you want to buy a sports utility vehicle. There are many automobile companies marketing various types of SUVs in the
Now suppose you want to narrow your selection of an SUV to one that has a sliding rear roof that enables it to also serve as a small pickup truck. As far as I am aware, General Motors is the only company that now produces such a vehicle. Hence, GM has a monopoly in such a vehicle and the consumer has no choice. We are not concerned about it -- because if the vehicle proves popular, we know other companies will come out with similar models.
Oracle made a bid to buy another large software company last year, PeopleSoft. The Justice Department put a hold on the merger claiming it might monopolize a subset of the software market, called business application software. The Justice Department claimed the German company SAP and Oracle would be the only major competitors in this software sub-market, even though Oracle would still be No. 2.
I do not know if the merger makes economic sense for the stockholders of Oracle and PeopleSoft, but as an economist I do know the Justice Department complaint is nonsense. There are many companies selling products that can be fairly characterized as "business application software," even though they do not provide the full range of products that SAP, Oracle, PeopleSoft and some others do. Microsoft, IBM and others are quite capable of providing a full range of products if they so choose. There is no problem with market entry and consumer choice, properly defined.
What the Oracle/PeopleSoft case illustrates is not a problem with monopoly, but a problem of overstaffing in the Justice Department Anti-trust Division. Taxpayer money would be saved and economic efficiency enhanced if the Justice Department had far fewer antitrust lawyers.
The FCC is engaged in similar nonsense. Many years ago, most people had the choice of one telephone company. Today, most people who want to make a phone call or send an electronic message have the choice of many wireless companies, the old land-line phone company or their TV cable company. It is a highly competitive market.
Yet the bureaucrats at the FCC still choose to think we live in a world of a quarter-century ago, where the local phone company did have some monopoly pricing power. They are telling the local phone companies if they want to upgrade their services (such as providing fiber optic lines to local customers) they must make the upgraded lines available to their competitors at a government-determined price -- even though the TV cable companies, which can also provide high-speed Internet service, are not so restricted.
Would you invest the money and take the risk to build and operate a hotel if the government directed that you also had to provide rooms in your hotel, at a government-determined rate, for all your competitors to market at a higher price? And that you were required to clean and maintain the rooms sold by your competitors, and collect the monies for them from the guests? If you were rational, you would say "no" to such a one-sided deal; yet that is precisely what the local phone companies are being told they must do.
The predicable result is the phone companies, for perfectly good reasons, have not invested as much as they would in the new technologies to give Americans the superior high-speed Internet service they desire.
The inability or, more precisely, the unwillingness of the FCC bureaucrats to "think beyond stage one" has, in fact, resulted in less competition and inferior consumer choice, and far less economic efficiency. As with the Justice Department, the real problem is FCC overstaffing with too many bureaucrats who are more concerned about job preservation than the public good.
There are too many in government who refuse to distinguish between product differentiation that expands consumer choice, which is desirable, and real monopolies. If the administration and the Congress desire to be responsible by reducing government spending and increasing consumer choice and economic efficiency, they can begin by sharply cutting the budgets of the Justice Department and the FCC.
Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.
Copyright © 2004 News World Communications, Inc. All rights reserved.