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A crucial graph in the Wall Street Journal article, “Trump Fiscal Plain Roils the GOP,” relies on estimates from the Tax Policy Center. Unfortunately, the TPC provides only static estimates of revenue effects of House Republican or Trump tax plans.  That is, they assume lower marginal tax rates on families and firms have literally no effect at all on tax avoidance or long-term economic growth. 

The Wall Street Journal graph purports to project budget deficits over the next 10 years under Congressional Budget Office (CBO) baseline, the House Republican tax plan and the Trump tax plan.  This is quite misleading, because all three scenarios treat future federal spending as given, unchangeable.  Federal spending rose from 17.6% of GDP in 2001 to 19.1% by 2007, and is now 20.7% in 2015. The 2017 Budget projects spending to reach to 22.4% by 2021 and keep rising. 

The CBO August baseline projects federal spending to total $50.2 trillion from 2017 to 2026, so a mere 5% reduction in that growth would exceed $2.5 trillion.

Under President-elect Trump’s revised tax proposal, claims the Tax Policy Center, “revenues would fall by $6.2 billion over the first decade before accounting for interest costs and macroeconomic effects. Including those factors, the federal debt would rise by at least $7 trillion over the first decade.” 

Do not confuse these alleged “macroeconomic effects” with dynamic analysis used in Tax Foundation models and academic studies. The Tax Foundation estimates, for example, that the House Republican tax plan “would reduce federal revenue by $2.4 trillion over the first decades on a static basis,” but that figure shrinks to $191 billion once they properly account for improved investment incentives,  greater labor and entrepreneurial effort and therefore faster economic growth. 

By contrast, the Tax Policy Center presents only “macro feedback” estimates for the Trump plan.  The TPC Keynesian model and Penn-Wharton models assume that revenue losses are 2.6% of GDP, the same as static estimates.  But interest rates are higher, adding to deficits and debt.

The TPC Keynesian model is all about alleged effects of budget deficits on demand and interest rates – not about supply-side microeconomic incentives to raise potential output by raising labor force participation, entrepreneurship and investment.  

According to the Tax Policy Center, “The marginal rate cuts would boost incentives to work, save and invest if interest rates do not change [emphasis added] … However, increased government borrowing could push up interest rates and crowd out private investment, thereby offsetting some or all of the plan’s positive effects on private investment unless federal spending was sharply reduced to offset the effect of the tax cuts on the deficit.” 

This is confusing or confused.  TPC begins by admitting lower marginal tax rates on labor and capital “would” provide incentive for more and better labor and capital, and therefore faster long-run growth of the economy and taxable income. In the short run, “TPC estimates that the impact on output could be between 0.4 and 3.6 percent in 2017, 0.2 and 2.3 percent in 2018 and smaller amounts in later years.”  Their mid-range estimate is that “the Trump tax plan would boost the level of output by about 1.7 percent in 2017, by 1.1 percent in 2018, and by smaller amounts in later years.”  Despite faster economic growth for 5 years, the net “feedback effect” supposedly reduces the 10-year static revenue loss by a surprisingly trivial 1.9% (from $6.15 trillion to $6.03 trillion) for reasons hidden inside the Keynesian model.

“The TPC’s Keynesian model takes into account how tax and spending policies alter demand for goods and services… and how close the economy is to full capacity.”  Despite references to supply-side incentives, the Keynesian model does not allow such incentives to enlarge “full capacity” – potential GDP: “TPC plans to build a neoclassical model of potential output whose results could be integrated with those the Keynesian model, but that work is still in progress.”  This denial of supply-side effects is a fatal flaw in the model’s revenue estimates. The Trump tax plan is assumed to raise economic growth for only five years before we bump up against “full capacity” because tax rates are assumed to affect only demand, not supply.

For example, the TPC says “allowing businesses to elect to expense investment would create an incentive for businesses to raise investment spending, further increasing demand.  These effects on aggregate demand would raise output relative to its potential for several years … [emphasis added].

On the contrary, more investment spending clearly increases supply – increasing capacity and potential GDP.  Lower marginal tax rates on added labor income likewise raise the supply of human capital (participation rates and incentives to invest in education).

If Trump’s tax policy “would boost incentives to work, save and invest” then the future economy and tax base must be larger than otherwise.  It follows that future deficits cannot be nearly as large as the static TPC estimates claim.  It also follows that there will also be more savings with which to finance both public and private borrowing.

Tax Policy Center estimate of a 10-year $6.2 trillion revenue loss is used to predict higher interest rates, and those higher interest rates prevent the economy from growing faster, which in turn vindicates the static assumption of a $6.2 trillion revenue loss.  

The circularity of this tangled fable is remarkably illogical.  How could interest rates remain higher if private investment is crowded out leaving GDP growth unchanged?

The TPC tells a similar story about the House Republican tax plan.  “Although the House GOP tax plan would improve incentives to save and invest, it would also substantially increase budget deficits unless offset by spending cuts, resulting in higher interest rates that would crowd out investment [emphasis added].”  This too is an unsupported assertion. The TPC analysis predicts more private savings and therefore cannot simply assume deficits “would crowd out investment.”

The TPC’s stubborn notion that deficits raise interest rates dates back to a 2004 Brookings paper by Bill Gale and Peter Orzsag which estimated that “a sustained 1 percent of GDP rise in projected deficits would raise current yields by between 20 and 60 basis points, holding other factors constant.”   In reality, actual and projected deficits have been much higher since 2004, yet bond yields fell dramatically.  Japan routinely runs deficits of 5-7% of GDP with bond yields near zero.

The TPC alludes to the Penn-Wharton Budget model as though it is less Keynesian than their own (or that of the CBO).  Yet the architect of that model, Kent Smetters argues that “tax cuts will lead the government to increase its borrowings, which in turn will increase the debt with the general public… Such debt will compete with private capital for household savings and international capital flows.” Like the TPC, Smetters first assumes the TPC static revenue loss is a meaningful number and then goes on to theorize about U.S. and foreign investors making fewer private investments because they (rather than U.S. and foreign central banks) must supposedly purchase more Treasury bills and bonds.  Like the TPC model, the Smetters model also assumes potential output is unaffected by greater investment and work effort, so faster growth in the first few years must supposedly be offset by slower growth after 2024. Assume slow productivity gains and slow labor force growth, then slow GDP growth must (by definition) be the best we can do.

The Tax Policy Center estimates that the revised Trump plan would reduce revenues by 2.6% of GDP (regardless of economic growth).  But it is important to realize that this “loss” is only in comparison with the rising CBO baseline.  With no change in tax policy, the CBO projects the individual income tax will rise faster than GDP every year with no adverse effects on the economy.  The individual income tax is projected to be 8.5% in 2017, then 8.7% in the following year, then 8.9%, 9.1%, 9.2% 9.3%, 9.4%, 9.5%, 9.6%, 9.7%, 9.8% and so on.  

This ever-increasing tax burden is mainly because ever-increasing real wages will supposedly push more and more families into the 35% and 39.6% tax brackets, and also subject them to Obamacare’s 0.9% surtax on labor and 3.8% surtax on investments. 

If revenues from the individual income tax instead remain at the unusually high 2003-2015 level of  8.3 percent of GDP (which would beat any previous 10-year average), then revenues over the next ten years will turn out to be $2.62 trillion smaller than the CBO projects. 

In other words, nearly half of the Tax Policy Center’s $6.2 trillion static revenue loss from the revised Trump plan is due to the CBO’s implausible assumption of endless automatic tax increases, rather than to a huge “tax cut” (at least in the House GOP plan) when compared with taxes we have actually been paying.

The Urban-Brookings Tax Policy Center produced some estimates of the tax revenues supposedly lost by the most recent (September) Trump tax plan, which raised the top tax rate from 25% to 33%.  

These estimates are being widely misunderstood by the Wall Street Journal, New York Times and others, so it may help to actually see the TPC 10-year totals organized by tax changes proposed for individuals, corporations and pass-through businesses. 

The estimates themselves are questionable as are related estimates of the distribution of tax cuts by income groups.  I will deal with those issues in separate posts.  

What most needs emphasizing at this point is that although reporters are writing as though the Trump package is about personal income tax cuts, that only accounts for 22% of the estimated revenue loss (relative to bloated CBO estimates).  Moreover, the 10-year $1.5 trillion loss of revenue from modestly lower individual income tax rates is much smaller than estimated revenue increases from repealing personal exemptions ($2 trillion) and capping itemized deductions ($559 billion).  

The only significant net reduction in taxes on non-business income is from (1) repeal of the alternative minimum tax ($413 billion), and (2) more than doubling the standard deduction ($1.7 trillion) – neither change being of any help to top-income taxpayers. 

TAX POLICY CENTER ESTIMATES OF 10-YEAR REVENUE LOSS FROM TRUMP TAX PLAN, 2016-2026, $ billions

Repeal Obamacare 3.8% investment income tax 

-145

Repeal alternative minimum tax

-413

Repeal head of household filing status

131

Repeal personal exemptions

2,000

Individual income tax rates of 12, 25, and 33 percent 

-1,490

Increase standard deduction to $35,000/couple ($24,000 in GOP plan)

-1,688

Cap itemized deductions at $100,000 ($200,000 joint return)

559

Childcare refundable tax credit

-132

Repeal estate, gift and GST taxes but tax capital gains at death.

-174

TOTAL INDIVIDUAL TAX LESS PASS-THROUGH BUSINESS = 22% of Total

-1,353

 

 

Elective flat rate of 15 percent on pass-through income  

-895

Shifting of wages and salaries to 15% business income (tax avoidance)

-649

Allow expensing of non-corp investment & disallow interest deduction for those electing to expense

-689

Tax carried interests as ordinary business income

10

Repeal certain pass-through business tax expenditures

58

TOTAL PASS-THROUGH BUSINESS = 35.2% of Total

-2,164

 

 

Reduce corporate rate to 15% & repeal corporate AMT

-2,355

Allow expensing of corp investment & disallow interest deduction for those electing to expense.

-593

Deemed repatriation 10 yrs. of untaxed foreign earnings then tax foreign subsidiaries on accrued profit

148

Repeal certain corporate tax expenditures

167

 

 

TOTAL CORPORATE BUSINESS = 43.8% of Total

-2,633

 

 

TOTAL STATIC REVENUE LOSS  

-6,150

In a recent CNBC interview, Donald Trump’s pick for Commerce Secretary, Wilbur Ross, explained why he thought the Trans-Pacific Partnership was a “horrible deal.”  His main complaint was that the agreement has “terrible rules of origin.”  Specifically, he warned, “In automotive, a majority of a car could come from outside TPP, namely could come from China, and still get all the benefits of TPP.”  Presumably this is what Trump was talking about when he said China would “come in … through the back door.”

All trade agreements have rules of origin that specify how much of a product’s manufacturing has to occur within a member country for it to qualify for tariff preferences.  These rules differ from product to product and are the result of negotiation and industry pressure.  Under the TPP’s rules of origin for automobiles and most auto parts, at least 45% of an import’s value must have been created within one or more TPP members for the good to qualify.

So, technically, Ross is correct.  A hypothetical car could contain 55% Chinese content and still be eligible for TPP preferences as long as all the rest came from Japan, Mexico, the United States, or some combination of TPP members.  What Ross is missing, however, is why this is a good thing.  

For one thing, liberal rules of origin help alleviate the problem of trade diversion.  Reducing protectionist trade barriers removes artificial impediments to economic growth by enabling greater specialization that relies on a country’s comparative advantages.  But trade agreements only remove barriers between some countries, leaving others in place.  When all countries’ exports are burdened equally, investment still flows to where products can be made most efficiently.  Tariff preferences, while better than no liberalization at all, have the downside of incentivizing investment based on where there are preferences, creating their own sort of inefficiency.

Ross himself alludes to this problem in his CNBC interview when he notes that “Mexico has 44 treaties with other countries that make it very advantageous to do international shipping from Mexico rather than from the United States.”  But if the rules of origin in Mexico’s treaties allow for high levels of non-Mexican content, some of those goods shipping out of Mexico might be largely made in America.  Mexico’s treaties could benefit American companies that use Mexican parts just as the TPP could benefit Chinese companies that use American parts.

Strict rules of origin, on the other hand, threaten to interfere with cross-border supply chains.  With or without trade agreements, the fact is that many industries have expanded beyond national borders.  Any automobile purchased in the United States, regardless of brand, is going to have lots of foreign-made parts.  The manufacturing process from raw material to pickup truck involves the labor of people in countries all around the world.  The phenomenon of global supply chains unlocks new levels of comparative advantage—instead of car-making, the relevant activities are things like engine-making, glass blowing, software design, and assembly.  Each part of the process is more valuable if the other parts are done as efficiently as possible.  U.S. autoworkers are more productive (and therefore better compensated) when these supply chains are not hindered by tariffs.

Some industries, of course, would rather have protection than efficiency.  The reason that Ross is focusing on automobiles in his criticism of the TPP is that Detroit automakers are highly invested in North American supply chains.  They benefit from tariff-free trade under NAFTA, but NAFTA has very strict rules of origin for autos—requiring over 60% of content to be from the region. 

Replacing that arrangement with the TPP’s 45% rule would open up a lot of competition not only from Japan but from China and Thailand as well.  The TPP would eliminate some of the benefits Canadian and Mexican suppliers currently enjoy under NAFTA’s preferential access.  More competition among suppliers, however, will lower costs for U.S. operations and make the industry as a whole more competitive.

Like other Trump advisors, Ross has expressed a preference for bilateral trade agreements rather than regional ones.  Combined with strict rules of origin, this strategy (if pursued) would worsen the problem of trade diversion; promote inefficient, policy-driven supply chains; enrich rent-seeking cronies at the expense of economic growth; and generate the least possible benefit from trade liberalization.  That’s why previous administrations (Obama with the TPP; George W. Bush with the Free Trade Area of the Americas) have preferred a regional approach. 

Ultimately, Ross’s analysis of the impact of the TPP is fatally flawed due to his erroneous understanding of trade as a zero-sum game.  Trade is a cooperative endeavor in which people in different countries seek mutual advantage through exchange.  Allowing people in China to benefit from trade with Americans is not a failing of the TPP.  On the contrary, it’s one of the ways the TPP would help create value for U.S. companies and better jobs for American workers.  

Cato’s forum on Capitol Hill yesterday featured Senator James Lankford of Oklahoma. The senator mainly talked about his Federal Fumbles report, but he also mentioned his proposed “Taxpayers Right-to-Know Act.”

The legislation complements the priorities of President-elect Trump who complained about “waste, fraud and abuse all over the place,” and promised “we will cut so much, your head will spin.” To know where to cut, Trump and his team will need to learn about hundreds of programs and determine which ones are the biggest failures.

The Trump team can study DownsizingGovernment.org for spending cut ideas. But it would be also useful if the Office of Management and Budget (OMB) provided better information about each federal program.

That’s the thrust of Lankford’s Right-to-Know Act. It would “require OMB to list all [federal] programs, their funding levels, the number of beneficiaries of the programs, and link each program to all related evaluations, assessments, performance reviews, or government reports.” On its website, the OMB would also list the statutes authorizing each program and the number of federal employees, contractors, and grantees who administer them.

Transparency reforms should be extended to the websites of all federal agencies. I’d like to see agencies highlight on their homepages auditor reports on the performance of each program. I’d like to see the “About” pages on agency websites discuss both the pros and cons of agency activities, and not just present one-sided visions. I’d like to see federal agencies provide detailed cost-benefit analyses of each one of their spending programs.

Federal agencies work for us. We pay the bills. Agencies should inform us about their failures as well as their successes. Lankford’s legislation would be a step forward, but more needs to be done. 

In the photo from the left: Justin Bogie of the Heritage Foundation, me, Senator Lankford, and Tom Schatz of Citizens Against Government Waste.

With school choice advocate Betsy DeVos slated to become the next U.S. Secretary of Education, the battle between regulation and freedom has suddenly become more intense, with people on both sides exchanging fire. Yesterday, Jason Bedrick weighed in against regulation, while today Jeffrey Selingo warns that a major reason “choice hasn’t necessarily led to better outcomes in higher education is the absence of a strong gatekeeper for quality control.”

This sort of assertion strikes me as more an article of intuitive faith than a conclusion based on evidence. If only some well-informed, smart group of experts decided what people could choose, choices would be much better. The problem is that no one has the omniscience to do the job, especially so effectively that the costs of bureaucracy, barriers to entry, and kneecapping of innovation don’t severely outweigh the hoped-for benefits.

The University of Arkansas’ Jay Greene tackles the omniscience problem in his response to many of the calls for heavier gates, preferably triple-locked and backed with a moat and walls with dudes on top ready to drop hot tar on anyone unsavory who might get in. Writeth Greene:

I’ve written previously about the disconnect between near-term test score gains and changes in later life outcomes. If we can’t reliably use rigorously identified test score gains to predict later life outcomes, then on what basis will regulators be able to judge quality to protect families against making bad choices?…

But let’s say you don’t believe me about the weak predictive power of test score gains and are determined to use tests as the main indicator of school quality. We are still left with the question of whether regulators are any good at identifying which schools will contribute to test score gains. Fortunately, we have a recent study that examined whether the criteria used by regulators in New Orleans are predictive of test score growth — even if we accept test gains as a reliable indicator of quality. The bottom line is that none of the factors used by authorizers to open or renew charter schools in New Orleans were predictive of how much test score growth these schools could produce later on.

Gatekeeping sounds so safe and reassuring at first: someone let us choose only good stuff, and good stuff is all we’ll get. But the reality is no one is the deity necessary to infallibly—or even close to infallibly—know good stuff when they see it.

So does higher ed offer no lesson for K-12? Hardly, but it’s the opposite of what Selingo suggests: K-12 needs to decentralize and put funding in the hands of families.

American higher education has huge problems that I’ve listed so many times I can’t bear to repeat them (though I’ll get to two big ones in a moment). But even with its mammoth flaws, our higher education system works far better than elementary and secondary schooling. Our colleges feature top faculty talent, dominate international rankings, and attract students from all around the world. Pretty sure we can’t say that for K-12!

Higher ed’s relative dynamism and international prominence is almost certainly a function of our colleges having lots of autonomy coupled with a need to compete for students.

But there are still those tremendous problems, perhaps the greatest of which are massive noncompletion and huge price inflation. Both, however, are largely functions of a funding system that is fundamentally the same as K-12 education: someone other than the consumer is paying the bill. When someone else pays—especially nameless, faceless taxpayers—consumers’ incentives to think long and hard about what they are buying, and the prices they pay, shrink.

Go ahead, pursue the Uzbekistani studies major with badminton minor, and take six years (or more) to do it—someone else is footing the bill!

Of course, public elementary and secondary schools are funded directly—not through students—so they don’t face the price-inflation problem. Such inflation is, however, a very real concern should school choice become widespread, especially through vouchers. And while American higher education shows that it is much better that schools be autonomous and forced to compete, this is reality: any big subsidies will have big, ugly side effects.

Is the higher education lesson for K-12 schooling that it needs bigger, stronger gates? No. It’s that tough gatekeeping makes worse a situation already suffering from massive subsidization.

This morning President-elect Donald Trump announced via Twitter that “I will be holding a major news conference in New York City with my children on December 15 to discuss the fact that I will be leaving my great business in total in order to fully focus on running the country in order to MAKE AMERICA GREAT AGAIN! While I am not mandated to do this under the law, I feel it is visually important, as President, to in no way have a conflict of interest with my various businesses. Hence, legal documents are being crafted which take me completely out of business operations. The Presidency is a far more important task!”

With that announcement, Trump takes one important step toward addressing both the wider problem of conflicts of interest, and within it the narrower problem—of distinct constitutional dimensions—of the Trump Organization’s complex ongoing dealings with foreign governments. On those latter entanglements, I argue in a new Philadelphia Inquirer piece that under the Emoluments Clause of the Constitution, Congress will affirmatively need to “decide what it is willing to live with in the way of Trump conflicts”—and it should draw those lines before the fact, not after. Excerpt:

…That clause reads in relevant part: “And no Person holding any Office of Profit or Trust under [the United States] , shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.”…

The wording of the clause itself points one way to resolution: Congress can give consent, as it did in the early years of the Republic to presents received by Ben Franklin and John Jay. …

…it can’t be good for America to generate a series of possible impeachable offenses from a running stream of controversies about whether arm’s-length prices were charged in transactions petty or grand. …

There is no doubt that doing the right thing poses genuine difficulties for Trump not faced by other recent presidents. If he signals that he understands the nature of the problem, it would not be unreasonable to ask for extra time to solve it.

For reasons that Randall Eliason outlines in this helpful explainer, Emoluments Clause issues do not map well onto the concept of “bribery.” (Payments can violate the Emoluments Clause even if made with honest intent on both sides; bribery, for its part, is subject to a separate ban.) Removing himself from day-to-day management should help Trump avoid some violations of the Clause (for example, it will become less likely that a foreign state firm will wind up compensating him for his time). Stephen Bainbridge of UCLA has suggested that if the President-elect refuses to divest ownership of his business he at a minimum “needs to create an insulation wall separating his political activities from those of the organization. Such walls were formerly known in colloquial legal speech as ‘Chinese walls.’”

Even if Trump does that, serious Emolument Clause issues will remain, especially those surrounding favorable treatment that a presidentially owned business may not have sought out but which may nonetheless constitute “presents.” Congress should expect to ramp up the expertise it can apply to these problems, and (absent divestiture) assign ongoing committee responsibility to tracking them. And it should issue clear guidelines as to what it is willing and not willing to approve. Such a policy will not only signal that lawmakers are taking their constitutional responsibilities seriously, but could also benefit the Trump Organization itself by clarifying how it needs to respond if and when foreign officials begin acting with otherwise inexplicable solicitude toward its interests.

Expanded and adapted from Overlawyered.

President-elect Trump’s pick for Secretary of Transportation, Elaine Chao, may provide some clues about his infrastructure policies. High-speed rail advocates have hoped that Trump will support their boondoggles, and his big talk about infrastructure spending as an economic stimulus has done nothing to dim those hopes. Chao may be leaning in that direction as well.

Chao was previously Secretary of Labor under George W. Bush, and prior to that served as Deputy Secretary of Transportation under George H.W. Bush. Born in Taiwan in 1953, Chao’s father was captain of a merchant marine vessal. In 1961, the family moved to the United States where her father started the Foremost Shipping Company, which now owns at least 15 ships. 

Chao received a degree in economics from Mount Holyoke College in 1973 and an MBA from Harvard Business School in 1979. Just seven years later, she was made Deputy Administrator of the Maritime Administration in the Department of Transportation. Two years after that, she became chair of the Federal Maritime Commission, and Deputy Transportation Secretary a year after that. In 1993, she married Mitch McConnell.

As deputy transportation secretary, she let it be known that she thinks the United States has built about enough highways, and she has the respect of the heavily subsidized passenger rail industry. Thus, she may be inclined to support light rail, high-speed rail, and other transportation projects that many (including this writer) consider to be obsolete in today’s world.

Digging a hole in the ground, lining it with concrete, and filling it up could be considered “infrastructure,” but it won’t contribute much to the national economy. Transportation infrastructure adds to the nation’s gross domestic product only if it increases passenger travel and/or freight shipments. Rail projects aimed at getting people out of cars, buses, and planes will actually reduce the nation’s GDP because they cost more than the forms of travel they are supposed to replace.

Meanwhile, much of the Interstate Highway System is at the end of its service life. Washington Metro recently announced it needs to spend $25 billion on “capital needs” (maintenance) over the next ten years to keep its trains going. The New York, Chicago, Philadelphia, Boston, San Francsico, and Atlanta transit systems have similar needs and similar budget shortfalls. 

Trump and Chao will have to decide if America should rebuild its existing infrastructure or let that infrastructure fall apart as it builds brand-new infrastructure that it won’t be able to afford to maintain. Even with the tax breaks proposed in Trump’s infrastructure plan, the country won’t be able to do both. While Chao may turn out to be Trump’s least controversial nomination, the actions she takes as secretary will be heavily debated.

President-Elect Trump’s selection of philanthropist and long-time school choice advocate Betsy DeVos for Secretary of Education has the public education establishment and its allies in panic mode. American Federation of Teachers President Randi Weingarten tweeted “Trump has chosen the most ideological, anti-public ed nominee since the creation of the Dept of Education.” Over at Slate, Dana Goldstein frets that “Trump could gut public education“—even though federal dollars account for less than 10 percent of district school funding nationwide. The New York Times has also run series of hand-wringing pieces about what the Trump administration has in store for our nation’s education system.

At the center of the panic over Trump’s nomination of DeVos is their support for school choice. Although light on details, Trump has pledged to devote $20 billion to a federal voucher program. As is so often the case, the most vocal opponents of federal school choice are right for the wrong reasons. Not only does the federal government lack constitutional jurisdiction (outside of Washington, D.C., military installations, and tribal lands), but a federal voucher program poses a danger to school choice efforts nationwide because a less-friendly future administration could attach regulations that undermine choice policies. Such regulations are always a threat to the effectiveness of school choice policies, but when a particular state adopts harmful regulations, the negative effects are localized. Louisiana’s folly does not affect Florida. Not so with a national voucher program. Moreover, harmful regulations are easier to fight at the state level than at the federal level, where the exercise of “pen and phone” executive authority is increasingly (and unfortunately) the norm.

Many of Trump’s critics have not addressed very real federalism concerns, but have instead used the DeVos appointment to attack school choice generally, particularly its more free-market forms.

In a New York Times blog, Kevin Carey of the left-wing New America Foundation writes:

Ms. Devos [sic] will also be hamstrung by the fact that her deregulated school choice philosophy has not been considered a resounding success. In her home state, Detroit’s laissez-faire choice policies have led to a wild west of cutthroat competition and poor academic results. While there is substantial academic literature on school vouchers and while debates continue between opposing camps of researchers, it’s safe to say that vouchers have not produced the kind of large improvements in academic achievement that market-oriented reformers originally promised.

In a Times op-ed, Tulane Professor Douglas Harris echoed these critiques, claiming that “even charter advocates acknowledge” that Detroit’s charter school system—which DeVos supposedly “devised […] to run like the Wild West”—is “the biggest school reform disaster in the country.”

Consider this: Detroit is one of many cities in the country that participates in an objective and rigorous test of student academic skills, called the National Assessment of Educational Progress [NAEP]. The other cities participating in the urban version of this test, including Baltimore, Cleveland and Memphis, are widely considered to be among the lowest-performing school districts in the country.

Detroit is not only the lowest in this group of lowest-performing districts on the math and reading scores, it is the lowest by far. One well-regarded study found that Detroit’s charter schools performed at about the same dismal level as its traditional public schools. The situation is so bad that national philanthropists interested in school reform refuse to work in Detroit. As someone who has studied the city’s schools and used to work there, I am saddened by all this.

Likewise, Harvard Professor Paul Reville decried that “in places like Michigan and Arizona where the approach to opening up choice has been a Wild West version of an unregulated free market, the results have been highly disappointing, giving school choice a bad name.”

Charter schools in Michigan and Arizona may be subject to fewer government regulations than in other states, but it’s absurd to describe the sectors as “laissez-faire” or “an unregulated free market.” For example, charter school regulations in both states, as elsewhere, limit the ability of charter schools to set their own mission (e.g., they must be secular), mandate that they administer the state standardized test, forbid them from setting their own admissions standards, forbid them from charging tuition, limit who can teach in the schools, limit the growth of the number of schools, and so on.

“Laissez-faire” indeed!

And although Michigan’s results are far from stellar, they’re also not the “disaster” that Harris depicts. Indeed, Harris links to the 2013 CREDO report, which found that, on average, Detroit’s charter schools outperformed the district schools that their students would otherwise have attended. Indeed, nearly half of Detroit’s charter schools outperformed the city’s traditional district schools in reading and math scores, while only one percent of charter schools performed worse in reading and only seven percent performed worse in math.

Source: CREDO’s 2013 report on charter schools (page 44).

CREDO’s 2015 report even called Detroit’s charter sector “a model to other communities.” I’d say that’s overstating it. Nevertheless, while Detroit’s district schools are so bad that it’s not a very high bar, Detroit does show how even a significantly regulated system of school choice can outperform the government’s system of district schools. Using the CREDO study to knock Detroit’s charter sector is, to borrow a phrase from Harris, “a triumph of ideology over evidence.” 

And since Harris mentioned the NAEP, let’s see how Arizona’s “Wild West” charter sector performs. As education analyst Matthew Ladner has detailed, Arizona’s charter sector not only outperformed the state average for gains between the 2011 4th-grade and 2015 8th-grade NAEP tests for math and language arts, but they beat the statewide average gains for every single state. The Arizona charter sector’s gains between the 2009 and 2015 NAEP science tests were at least double the statewide average gains everywhere else.

Source: Matthew Ladner.

A word of caution is in order. These comparisons don’t account for differences in demographics among states nor changes in demographics over time. The raw NAEP results cannot tell us whether a particular policy caused any improvement or decline in the scores. Moreover, as Ladner notes, it’s possible to have significant gains while simultaneously doing poorly overall. The bowler whose average score improves from a 25 to a 50 might earn the “Most Improved” trophy while still being the worst bowler in the league. That said, after controlling for demographics, Arizona’s math and language arts scores are above average (13th nationwide). Although we don’t have adjusted scores for Arizona’s charter sector, they are likely even better. Moreover, even using raw scores, Arizona charter students perform about as well as Massachusetts students on the 2015 8th grade NAEP science test. For that matter, Arizona’s charter schools topped the list for college attendance among Arizona’s 2015 graduates.

If Harris believes that supposed lack of regulation in Detroit’s charter sector (at least as compared to charter school regulations in other states) accounts for their poor performance on the NAEP, how does he explain the Arizona results?

Indeed, even without heavy top-down oversight, Arizona manages to close down poorly performing charter schools fairly quickly through a rather innovative method called “parental choice.” The average closed charter operated for only four years and had an average of only 62 students enrolled in their final year. As Ladner explains, parents put most of those charters out of business before the regulatory apparatus got around to it:

Arizona parents seem extremely adept at putting down charter schools with extreme prejudice. Arizona parents detonate far more schools on the launching pad compared to the number we see bumbling ineffectively through the term of their charter to be shut by authorities (or to give up the ghost in year 14 in an ambiguous fashion). Both of these things happen, but the former happens with much greater regularity than the latter. Having a vibrant system of open enrollment, charter schools and some private school choice means that Arizona parents can take the view that life is too short have your child enrolled in an ineffective institution.

The critics’ read of the evidence on voucher programs also leaves much to be desired. Harris points only to research on statewide voucher programs in Louisiana and Ohio that found negative impacts, but he ignores the near-consensus of more than a dozen random-assignment studies that found modest positive impacts on student performance on tests as well as on high school graduation and college matriculation. Outside of Louisiana’s heavily regulated voucher program, none were found to produce a negative impact and only one found no discernible impact. (The Ohio study was not random-assignment and its comparison group may have been severely compromised by the study’s design.) Moreover, nearly every study on the impact of private school choice policies on district school performance found a positive impact, including in Louisiana and Ohio. The one exception was Washington, D.C., where the voucher funds come from a separate source and therefore a decrease in district school enrollment does not affect their funding.

On the whole thus far, private school choice programs have been an improvement over the status quo. Nevertheless, Carey is only half right when he writes that “vouchers have not produced the kind of large improvements in academic achievement that market-oriented reformers originally promised” because no state has yet adopted the sort of large-scale, lightly regulated, universal voucher system that market-oriented reformers like Milton Friedman called for. Instead, most voucher programs are limited in scale and eligibility and subject to numerous regulations. They’re designed, essentially, to fill empty seats rather than to revolutionize the way education is delivered. Small-scale choice programs should be expected to deliver positive but small-scale results, and that is what the research has found.

Advocates of large-scale private school choice programs should be careful not to over-promise, but critics of market-oriented educational choice policies should also be careful not to cherry pick or to make claims that the research literature does not support. Outside heavily regulated environments, private school choice policies have a consistently positive track record. What we should be able to agree about is that the positive track record of state-level school choice policies does not imply that Congress should enact a federal voucher program.

Donald Trump has called the North American Free Trade Agreement the “worst trade deal ever negotiated.” If he were speaking on behalf of Canadian exporters or American consumers of softwood lumber, his point would have some validity. For more than 20 years, NAFTA has failed to deliver free trade in lumber. Instead, a system of managed trade has persisted at the behest of rent-seeking U.S. producers, egged on by Washington lawyers and lobbyists who know a gravy train when they see one.

Those who consider the United States a beacon of free trade in a swirling sea of protectionist scofflaws will be surprised by the sordid details of the decades-long lumber dispute between the United States and Canada. Among those details is the story of how the U.S. Commerce Department (DOC) ran roughshod over the rule of law to manufacture the leverage needed to extort from Canadian lumber mills a sum of $1 billion, which was used to line the pockets of American mills and the U.S. Forestry Service, while restricting lumber imports for nearly a decade through October 2015, at great expense to retailers, builders, and home buyers.

With that ugly history mostly expunged from the public’s memory, the U.S. lumber industry is back at the trough again, demanding its government intervene to restrict Canadian supply, following a whole 13 month period during which it was forced out of the nest to operate in an environment rife with real market conditions! In the quiet shadows of the Friday after Thanksgiving, U.S. softwood lumber producers filed new antidumping and countervailing duty petitions with the DOC and U.S. International Trade Commission (ITC), alleging that dumped and subsidized Canadian imports were causing material injury to the domestic industry.

Whether the DOC finds legitimate evidence of dumping or countervailable subsidization is actually beside the point here. The agency has proven itself quite capable of producing evidence it is willing to defend as legitimate, which is all that matters when the game plan is to use the specter of a long, drawn out procedural battle—a period during which importers have no certainty about whether they will have to pay duties or how large that bill will be—to arm-twist the Canadians back to the table to agree, once again, to limited U.S. access in exchange for suspension of the unfair trade petitions.

If the investigations go forward and injurious dumping and/or injurious subsidization are found—a likely outcome given the discretion DOC has to administer these laws—preliminary duties likely would be imposed in April 2017 and final duties imposed by the end of the year.  Depending on those duty rates (and how willing importers are to stomach the risk that their duty liability increases) imports of lumber from Canada could continue. But, the more likely outcome is that the two sides will reach a new agreement to limit Canadian access to the U.S. market, through quantitative restrictions, export taxes, or some combination of the two, before preliminary countervailing and antidumping duties are imposed. 

Unfortunately, this wouldn’t be the first time that the U.S. trade remedy laws have been used to extort settlements under which foreign producers agree to restrict their exports to the United States in exchange for the U.S. government dropping often spurious claims against them. But the lumber case provides an especially egregious example of how the United States—self-proclaimed champion of free trade—uses the threat of protectionism to strong arm even its closest trade partner.

(If you’re interested in diving deeper into this post, the full story is published here, on Forbes.)

At the risk of understatement, I’m not a fan of the Organization for Economic Cooperation and Development. Perhaps reflecting the mindset of the European governments that dominate its membership, the Paris-based international bureaucracy has morphed into a cheerleader for statist policies.

All of which was just fine from the perspective of the Obama Administration, which doubtlessly appreciated the OECD’s partisan work to promote class warfare and pimp for wasteful Keynesian spending.

What is particularly irksome to me is the way the OECD often uses dishonest methodology to advance the cause of big government:

But my disdain for the leftist political appointees who run the OECD doesn’t prevent me from acknowledging that the professional economists who work for the institution occasionally generate good statistics and analysis.

For instance, I’ve cited two examples (here and here) of OECD research showing that spending caps are the only effective fiscal rule. And I praised another OECD study that admitted the beneficial impact of tax competition. I even listed several good examples of OECD research on tax policy as part of a column that ripped the bureaucracy for some very shoddy work in favor of Obama’s redistribution agenda.

And now we have some more good research to add to that limited list. A new working paper by two economists at the OECD contains some remarkable findings about the negative impact of government spending on economic performance. If you’re pressed for time, here’s the key takeaway from their research:

Governments in the OECD spend on average about 40% of GDP on the provision of public goods, services and transfers. The sheer size of the public sector has prompted a large amount of research on the link between the size of government and economic growth. …This paper investigates empirically the effect of the size and the composition of public spending on long-term growth… The main findings that emerge from the analysis are… Larger governments are associated with lower long-term growth. Larger governments also slowdown the catch-up to the productivity frontier.

For those who want more information, the working paper is filled with useful information and analysis.

Here’s one of the charts from the study, showing how government spending is allocated in OECD nations.

The report also acknowledges that there’s a lot of preexisting research showing that government spending hinders economic growth.

There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995; Myles 2009; Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015). …the link between the size of government and growth may vary with the income level and could be hump-shaped (Armey, 1995). A few studies have found support for the existence of a non-linear relationship between the size of government and growth (e.g. Vedder and Gallaway, 1998; Pevcin, 2004; Chen and Lee, 2005).

By the way, the reference to “hump-shaped” means that the OECD is even aware of the Rahn Curve.

The methodology in the paper is not ideal from my perspective. For all intents and purposes, the economists compare economic performance of the OECD’s big-government nations with the growth numbers from the OECD’s not-quite-as-big-government nations. But even with that limitation, the study generates some powerful results.

…the simulation assumes that in countries where the size of government is above the average level of countries in the bottom half of the sample, the government size will gradually converge to this level (36% of GDP). Similar to the spending mix reforms, this reform is phased in over 10 years. Such a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries with currently large or ineffective governments. …a reduction of the size of government has a positive, but moderate, effect on the income of the poor. The average disposable income also rises. However, the rich gain relatively more. Finally, in countries where the government is less effective (such as Italy) the growth effect dominates and a moderate reduction of the size of government would have a large growth effect, so that it would lift all boats.

And here’s a chart showing how much more growth would be possible if the countries with really-big government downsized their public sectors to the somewhat-big level.

Even with the methodology limitations I described, these results are astounding. Potential GDP gains of more than 30 percent for Greece and Italy. Gains of more than 20 percent for Slovenia, France, and Hungary. And more than 10 percent for Belgium, Czech Republic, Portugal, and Poland.

The working paper also looks at the composition of government spending. In other words, just as not all taxes are equally damaging, the same is true for spending programs.

The results from the estimation of the size of the government and the public spending mix illustrate that public spending matters for long-term growth…pension and subsidy spending [are] the two items with a significantly negative effect on growth. As each regression includes the size of government and one spending share, the estimates provide the effect of increasing this type of spending while decreasing spending on other items to keep the spending to GDP ratio unchanged… larger governments are in several specifications significantly and negatively associated with long-term growth. This is consistent with the literature… Larger governments can impede convergence (Table 8, columns 1 and 3), because they are associated with higher taxation that can discourage business investment including foreign investment and households to supply labour.

Pensions and subsidies seem to cause the most economic harm.

Reducing the share of pension spending in primary spending yields sizeable growth gains with no significant adverse effect on disposable income inequality. This reduction could be achieved by an increase in the effective retirement age or by cutting the replacement rate. …Cutting public subsidies boosts growth, as public subsidies…can distort the allocation of resources and undermine competition. …Education outcomes depend not only on education spending but also on the effectiveness of education policies, and the literature suggest the latter can be more important. Since the seminal work of Coleman (1966), a broad literature suggests that there is no clear link between education spending and education outcomes. …policies aimed at increasing education spending effectiveness can be more appropriate than an across-the-board rise of education spending. …It may be that, beyond a certain point, additional spending on investment has adverse effects, if poorly managed.

For those of you with statistical/econometric knowledge, here’s some relevant data from the study.

And you can match the numbers in Table 6 with these excerpts.

…pension spending reduces growth (Table 6, columns 2, 5, 7 and 10). Increasing the share of pension spending in primary spending by one percentage point (offset by a reduction in other spending) would decrease potential GDP by about 2%. …Public spending on subsidies also reduces growth (Table 6, columns 3, 5, 8 and 10). …increasing the share of public subsidies in primary spending by one percentage point would decrease potential GDP by about 7%.

If you’re not a stats wonk, these two charts may be more helpful and easy to understand.

What jumped out at me is how the normally sensible nation of Switzerland is very bad about subsidies. That’s a policy they obviously need to fix (along with the fact that they also have a wealth tax, which is very uncharacteristic for that country).

But I’m digressing.

Let’s return to the study. One of the interesting things about the working paper is that it notes that bad fiscal policy can be somewhat mitigated by having market-oriented policies in other areas, which is a point I always make when writing about Scandinavian nations.

…countries with a high level of public spending may also be characterised by features that partly offset the adverse growth effect of government size. …in Sweden the mix of growth-friendly structural policies…may have offset the adverse growth effect of a large government sector.

In other words, the moral of the story is that smaller government is good and free markets are good. Mix the two together and you have best of all worlds.

P.S. Even if the OECD published dozens of quality studies like this one, I would still argue that American taxpayers should no longer be forced to subsidize the Paris-based bureaucracy. And even if the OECD’s political types stopped pushing statist policies, I would still have the same view about ending handouts from American taxpayers. This has nothing to do with the fact that the bureaucrats once threatened to have me arrested and thrown in a Mexican jail. I simply don’t think taxpayers should fund international bureaucracies.

P.P.S. Other international bureaucracies, including the World Bank and European Central Bank, also have published good research about the negative effect of excessive government spending.

Yesterday the President-elect of the United States tweeted:

Nobody should be allowed to burn the American flag - if they do, there must be consequences - perhaps loss of citizenship or year in jail!

This view directly contradicts First Amendment doctrine established in the case of Texas v. Johnson (1989). Texas had outlawed desecration of venerated objects including the American flag. The state argued this prohibition protected a symbol of national unity and precluded breaches of the peace by those who would take offense at the flag being burned.

Gregory Johnson, a demonstrator at the 1984 Republican Convention, burned a flag as part of a protest. Johnson and his fellow protesters chanted “America, the red, white, and blue, we spit on you” while the flag burned. He was convicted of destroying the flag and sentenced to a year in jail and fined $2,000. Texas thus did exactly what the President-elect wants concerning flag burning.

A five-member majority of the Supreme Court ruled that flag burning constituted “symbolic speech” protected by the First Amendment. Indeed, Johnson burned the flag in 1984 to express a series of political views. The Court ruled that prohibiting this speech did not and was unlikely to prevent violence. As to national unity, Justice William Brennan noted an earlier statement by the Court:

If there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opinion or force citizens to confess by word or act their faith therein.

Concurring with the opinion, Justice Anthony Kennedy wrote:

Though symbols often are what we ourselves make of them, the flag is constant in expressing beliefs Americans share, beliefs in law and peace and that freedom which sustains the human spirit. The case here today forces recognition of the costs to which those beliefs commit us. It is poignant but fundamental that the flag protects those who hold it in contempt.

This tweet marks at least the second time the President-elect has repudiated settled First Amendment doctrine. He earlier criticized the broad protection for free speech enunciated in New York Times v. Sullivan (1964), a decision that complicated suing speakers for libel.

Donald Trump wishes to criminalize flag burning for giving offense to those who value what the American flag represents. Many others have called for limiting speech that offends religions or ethnic groups. In The Tyranny of Silence, Cato’s own Flemming Rose recounts that some Muslim clerics in Europe called for censorship of speech giving offense to Islam. No doubt Mr. Trump would not join their calls for protecting the faith. But he does agree with those radical clerics that giving offense should justify government limits on free speech.

I wonder if the President-elect understands why his comments disturb so many people who differ otherwise about so much. He appears to oppose basic ideals underpinning liberal democracy. He is also the President-elect.

The fog of war, coupled with the output from multiple propaganda machines, makes it difficult to determine which side has the upper hand in any conflict. In Syria, it appears from recent reportage from Aleppo that President Bashar al-Assad’s forces are getting the upper hand. But are they?

The best objective way to determine the course of a conflict is to observe black market (read: free market) exchange rates, and to translate changes in those rates via purchasing power parity into implied inflation rates. We at the Johns Hopkins–Cato Institute Troubled Currencies Project have been doing that for Syria since 2013.

The two accompanying charts—one for the Syrian pound and another for Syria’s implied annual inflation rate—plot the course of the war. It is clear that Assad and his allies are getting the upper hand. The pound has been stabilizing since June of this year and inflation has been trending downwards.

In yesterday’s Investor’s Business Daily, Club for Growth President David McIntosh and I had a short piece on the perilous implications of President-elect Trump’s threats to unilaterally withdraw the United States from our trade agreements or impose punitive and wide-ranging tariffs on imports. The economic effects of Trump’s promises have been explored at length (see, e.g., this new one on NAFTA and Texas), but most trade law experts are just now digesting the legal issues. What we’re finding is, to use the technical term, a big mess that could have unforeseen economic and constitutional implications in the Age of Trump. As we note:

For almost a century, American trade policy has been formed and implemented by a successful “gentlemen’s agreement” between Congress and the president. Congress delegated to the president some of its Article I, Section 8 powers to “regulate Commerce with foreign nations” so that the president may efficiently execute our domestic trade laws. The president negotiates and signs FTAs with foreign countries, while Congress retains the ultimate constitutional authority over international trade, for example by approving or rejecting agreements or by amending US trade laws.

As a result of this compromise, the United States has entered into 14 Free Trade Agreements with 20 different countries and imposed targeted unilateral trade relief measures — all without significant conflict between Congress and the President.

The question now is whether Mr. Trump, as president, could and should single-handedly implement his trade agenda on Jan. 20, 2017 without any congressional action.

The IBD op-ed scratches the surface of these legal issues, but below are more details on just a few of the many ambiguities lurking in U.S. trade law—ambiguities that, if not properly clarified, could be exploited by a protectionist U.S. president against the original intent of the Congress that delegated their constitutional authority over trade policy under the (incorrect!) assumption that the president would always be the U.S. government’s biggest proponent of free trade.

NAFTA

Under U.S. Law, FTAs are negotiated and signed by the president, but have limited legal force in the United States until they are converted into implementing legislation (which would amend current law), passed by Congress, and then signed into law by the president. In the case of NAFTA, this meant that President Clinton signed the deal, but it was Congress who ultimately approved and implemented it through the North American Free Trade Agreement Implementation Act, which President Clinton subsequently signed into law.

Such a process indicates that a similar one would be needed to terminate NAFTA, but the law is far from clear in this regard. The President’s constitutional authority over foreign affairs (under Article II) and “termination and withdrawal authority” under the Trade Act of 1974 would very likely give him the authority to withdraw, without congressional approval, from NAFTA under Article 2205 of the Agreement. At that time, Canada and Mexico would immediately be free to withdraw any and all trade concessions (e.g., preferential tariff treatment) made under NAFTA with respect to the United States.

Withdrawal, however, might not automatically terminate the Implementation Act, thus leaving U.S. duties and other NAFTA commitments in place while Canada and Mexico do as they please. The only certain way to terminate the Act would be through Congressional passage of another piece of legislation, but the President could claim that the Act self-terminates after withdrawal under Section 109(b) of the Act (“During any period in which a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country”). The Act and its supporting documents do not clarify this provision, and there is no post-WWII precedent relating to U.S. termination of an FTA. Thus, the President could theoretically instruct Customs and other agencies to raise US trade barriers to non-NAFTA levels on his view that the Implementing Act has terminated, while Congress claims he has no such authority.

Similar ambiguity exists in the NAFTA Implementation Act with respect to raising “additional duties” on NAFTA imports via presidential proclamation when the President determines that they are “necessary or appropriate to maintain the general level of reciprocal and mutually advantageous concessions with respect to Canada or Mexico.” None of this is defined or explained in the Act or elsewhere and, again, there is no historical precedent.

Making things even more complicated, the Trade Act of 1974 and the 1988 Trade Promotion Authority (“fast track”) law governing NAFTA negotiations and implementation each contain their own, unclear provisions on the President’s unilateral authority to raise duties on trade agreement partners via presidential proclamation.

The relationship between all of these overlapping, ambiguous laws is a complex matter of statutory interpretation—certainly not something a President should simply pursue without congressional input, especially given what’s at stake here.

Other U.S. Trade Agreements

Similar provisions in other U.S. FTAs and implementing Acts—particularly those in the US–Korea FTA (Article 24.5 of the Agreement and Section 107(c) of the implementing law) and other bilateral FTAs—raise similar, perhaps even more pressing problems. Even the WTO Agreements and the Uruguay Round Agreements Act (URAA) implementing them in the United States, while expressly foreclosing unilateral termination of the URAA by the President (thank heavens), raise other concerns about new executive branch protectionism without congressional consent.

Tariffs and Other Unilateral Protectionism

Finally, various U.S. laws permit the President to unilaterally impose duties for reasons not thoroughly explained in law, regulation or practice. These ambiguities exist for much the same reasons as those in our trade agreement laws: the President has constitutional power over foreign affairs and the execution of U.S. law, and is traditionally the most trusted person in the U.S. government not to use these protectionist tools to reward discrete domestic constituents. For example, President-elect Trump has threatened to impose tariffs under Section 232 of the Trade Expansion Act of 1962, which only permits them when a certain product is “being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.” However, neither Section 232 nor the relevant regulations define the term “national security.” Past agency practice would argue against using Section 232 in ways envisioned by Candidate Trump, but this is hardly reassuring when President Trump appoints the head of the agency. Trump might therefore try to block imports under Section 232 in ways never envisioned by Congress or past Presidents.

* * *

So could a President Trump carry out his many campaign threats without congressional input? As shown in the examples above, the law is unclear in many cases—primarily because Congress in the modern era never anticipated a president more protectionist than its House and Senate majorities. Indeed, Congress’ broad delegation of authority to the President is based on the implicit understanding that the executive branch was more insulated from discrete constituent interests and thus in the best position to advocate free trade, which provides broad and significant national benefits but smaller, concentrated costs. Now, however, things may have changed, and our laws aren’t prepared for a president who views open trade as a threat and protectionism as a weapon.

Indeed, the reality of the President-elect’s trade intentions has shined a bright light on the many ambiguities in U.S. trade law—ambiguities that confuse both the practical operation of our laws and the proper separation of powers intended by Congress therein, but were ignored (including by me!) because of the longstanding bipartisan consensus in favor of trade liberalization, congressional–executive cooperation on trade, and the implicit understanding of the president’s special role in promoting U.S. trade liberalization. With the “free trade consensus” now clearly frayed—if not completely torn apart—we should seriously reconsider Congress’ historical delegation of trade powers.

During the Bush and Obama years, Congresses controlled by the opposition party have railed against executive overreach and pushed for limits on powers delegated or assumed by the President through liberal interpretations of poorly-drafted laws. By acting now to clarify various ambiguities in current U.S. trade law, our political leaders can finally match their words with their deeds and, in the process, avoid not only economic calamities but also a potential constitutional crisis. Only time will tell if congressional Republicans are up to the task.

We released The Human Freedom Index 2016 today. It is our second annual report that presents the state of overall freedom in the world based on a broad measure of personal, civil and economic freedom. Co-published by the Cato Institute, the Fraser Institute (Canada) and the Liberales Institut (Germany), my coauthor Tanja Porcnik and I look at 79 distinct indicators in 159 countries on issues ranging from freedom of speech and association to women’s freedoms, the extent of voluntary exchange, safety and security, the rule of law and more.

Given the rise of populism, nationalism and authoritarianism in many countries around the world in recent years, we think that it is becoming increasingly important not only to appreciate the inherent value of freedom, but also to better appreciate its central role in human progress. For that reason, we think it’s worth measuring carefully.

The top 10 freest jurisdictions are below. The United States ranks 23rd. Compared to 2008—the earliest year for which we have sufficient data for a robust index—the United States has been on a decline; it ranked 16th that year. In terms of economic freedom, for which we have decades of comparable data, the United States has been on a long-term decline since the year 2000. Surely, the war on drugs, the war on terror, the expansion of the regulatory state, the rise of crony capitalism and the erosion of property rights due to the abuse of eminent domain have contributed to the U.S. fall in the rule of law and overall human freedom. The United States can unfortunately no longer claim to be the world’s bastion of liberty.

Other country rankings of interest include Chile (29), the freest country in Latin America, while Venezuela (154) is the least free in the region (we don’t measure Cuba because of a lack of reliable data). India ranks 87th, Russia 115th and China 141st. Turkey ranks 73rd, South Africa 74th, Brazil 82nd and Egypt 144th.

The level of freedom matters for prosperity and overall well-being. For example, the average income per capita of the top quartile of countries is $37,147, far above that of the least free quartile ($8,700). All dimensions of freedom matter and reinforce each other. As countries become more free and therefore more prosperous, the data suggest that they first have relatively higher levels of economic freedom compared to personal freedoms, and that once they reach a high level of freedom, they have relatively higher levels of personal freedom compared to economic freedom, but all indicators of freedom are high. Put another way, if you want to live in a country with a high level of personal freedom, you better have a relatively high level of economic freedom (see graph below).

We also find a strong correlation between human freedom and democracy, which we measure separately. Hong Kong is an outlier in this regard and, given Beijing’s increasing interference there, we are concerned about it maintaining its high level of freedom. Read a discussion on that and more in the full report.

At 6:55 this morning President-elect Donald Trump tweeted. “Nobody should be allowed to burn the American flag - if they do, there must be consequences - perhaps loss of citizenship or year in jail!” Seemingly unprovoked—we’ve hardly seen a rash of flag-burning lately—it’s one more sign that we’re likely in for a wild ride over the next four years, assuming impeachment doesn’t occur first.

There’s a market for such views, to be sure, although most who voted for Mr. Trump probably are not in it. Liberty-loving Americans understand that there’s all the difference in the world between defending the right to burn the flag and defending the burning of the flag. It’s the difference between rights and values. Voltaire is said to have put it succinctly: “I may disagree with what you say, but I’ll defend to the death your right to say it.” (It’s probably apocryphal, but he should have said it!) Popular speech doesn’t need defending; unpopular speech does.

That principle is so basic to our political and legal order that the Framers of our Constitution embedded it in the First Amendment. And when there was a rash of flag-burning a while ago, the Supreme Court upheld the right to desecrate the flag, first in 1989 against a Texas statute, a year later against an act of Congress. Justice Antonin Scalia, lauded often by Mr. Trump, joined the majority in the first case. He wrote the opinion for the Court in the second.

But the issue does not seem to die. Republicans pressed for a constitutional amendment to ban flag desecration in 1995, shortly after they took over Congress following 40 years in the wilderness. And the proposed amendment arose again in 1999. Invariably, a misguided patriotism is behind such efforts. But as I concluded my congressional testimony opposing such an amendment in that last instance:

It is said also that the flag is special because men have fought and died for it. Let me suggest in response that men have fought and died not for the flag but for the principles it represents. People give their lives for principles, not for symbols. When we dishonor those principles, to protect their symbol, we dishonor the men who died to preserve them. That is not a business this Congress should be about. We owe it to those men, men who have made the ultimate sacrifice, to resist the pressures of the moment so that we may preserve the principles of the ages.

There doubtless will be occasions ahead when we will have to resist the pressures of the moment to preserve the principles of the ages. We must steel ourselves for that.

Cato Senior Fellow Nat Hentoff once had the opportunity to interview Fidel Castro’s henchman, Che Guevara.  As Nat relates in this video clip, Che’s gatekeeper messed up–just assuming that since Nat wrote for the Village Voice, he would be another fawning lefty journalist.  Wrong!

When Nat Hentoff Met Che Guevara

In 2003, Nat wrote: “Having interviewed Cubans who survived Castro’s gulags, I have never understood or respected the parade of American entertainers, politicians and intellectuals who travel to Cuba to be entranced by this ruthless dictator who, for me, has all the charisma of a preening thug.”

And here’s Richard Cohen in today’s Washington Post: “Fidel Castro was a killer. He came to power in a revolution and so violence was probably inescapable. But he followed it with mass executions — the guilty, the innocent, it hardly mattered. He imposed a totalitarian system on Cuba even harsher and more homicidal than the one that preceded it. He persecuted homosexuals, dissidents, critical writers and journalists. He would not tolerate a free press, and his own political party was the only one permitted. In the end, he ruined his country’s economy while at the same time exporting terrorism.”  Read the whole thing.

This makes perfect sense – in a country ruled by the Communist Party:

China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook.

Of course, it would be crazy in a capitalist country ruled by a party committed to free enterprise.

As the Washington DC City Council prepares to vote on a bill that would provide workers in Washington, DC up to 11 weeks of paid family leave upon the birth of a child, a fundamental question remains unanswered: how much should government intervene in how employers compensate workers?

The federal government does so quite a bit at present. By exempting employer-provided health insurance from income taxes, our tax law is responsible for the fact that a majority of Americans get their health insurance from their employer. The exemption is also largely responsible for the fact that so many of these employers have what can only be described as overly generous health insurance plans, which can cover health care expenses both routine and exceptional.

The tax code also nudged American businesses to provide pensions as well, since the money set aside in a defined benefit plan generally isn’t taxed. When pension law created the tax breaks for employer-provided health insurance these spouted up instead.

In the heyday of unionism, labor union leaders pushed for more fringe benefits for their workers, often more fervently than they sought out wage increases. They did so in part because of the tax break—why not get a tax-free benefit for workers rather than have workers pay for the same benefit with after-tax wages, they reasoned—and partly because such benefits could be made more durable than other forms of compensation. For instance, the UAW contracts in the 1970s-1990s typically provided health insurance for laid-off workers for up to a year after they were let go, and sometimes longer.

This wasn’t necessarily a good thing for the U.S. economy. Rigid compensation meant that companies resorted to overtime when demand picked up rather than hire more workers. While it also deterred them from laying off workers when there was a downturn in demand since the attendant cost savings would be slight, the short-term stability was an ephemeral benefit to workers. There were fewer jobs available as a result and it did nothing to encourage employment growth in such industries.

Some of these benefits were jettisoned—or at least scaled back—after the bankruptcy of GM and Chrysler in 2008—fifteen years after at Caterpillar—and today the manufacturing workers in a union are much more likely to have a 401k, health insurance with co-pays, deductibles and a monthly contribution, and modest ancillary benefits.

Unions changed course only in part because of their reduced leverage after the diminution of manufacturing in the U.S. economy. They also perceived that their workers would rather have money than an additional benefit. Also, the realization that many workers’ manufacturing jobs may be less permanent than a generation ago also helped change demand. A long-term benefit means little for someone who worries that their job may not exist after the next recession.

More flexible compensation that is directly tied to a worker benefits the economy in the long run. Firms find it less expensive to contract and expand, which should increase employment in the long run. It should also increase wages, if and when we return to a full-employment economy—the tremendous wage gains in the bottom quintiles of the income distribution in the late 1990s should be the goal of every administration of both parties.

Now the DC government is countering this trend by providing a new benefit, financed not by the companies directly but via a tax of .62 percent on corporate profits. To its credit, there has been some thought put into how to efficiently create this benefit, and the Council concluded that by having the government finance it rather than having the employer pay for it directly removes any disincentive that such a benefit would have towards hiring expectant parents. It also reduced the cost, along with the attendant tax increase, by capping the benefits at roughly $1,000 a week, so it’s a little more egalitarian than it would otherwise be.

But the new benefit is still a mistake. It will end up increasing the cost of doing business in DC and will likely end up pushing a few businesses that are trying to decide between DC or Virginia or Maryland to head to one of the other states. To suggest that it’s too small of a tax to matter may sound intuitively appealing, but the notion that costs do not really matter is becoming a tired trope. It is the reason why the left says the minimum wage will not decrease employment, land-use restrictions don’t increase housing costs, or that unemployment insurance benefits don’t lengthen unemployment spells. One can argue about the degree of the impact, but to pretend firms can “swallow” costs ad infinitum is just facile.

If the DC City Council wants to do more about the plight of the working poor, it should focus more on how to encourage them to acquire a better education. DC’s aggressive embrace of charter schools has paid dividends in that respect, as I have observed firsthand. Additionally, the federal government should take steps to reduce the disincentives to work that exist in the tax code. University of Chicago economist Casey Mulligan has found in his research that most working Americans earning between $30,000 and $50,000 face an implicit marginal tax rate in excess of 50 percent.

A narrowly-focused benefit such as paid family leave will be a costly solution with unintended consequences, the least of which is serving as a harbinger for other taxes for other benefits.

 

 

 

There’s a lot of speculation in Washington about what a Trump Administration will do on government spending. Based on his rhetoric it’s hard to know whether he’ll be a big-spending populist or a budget-cutting businessman.

But what if that fight is pointless?

Back in October, Will Wilkinson of the Niskanen Center wrote a very interesting—albeit depressing—article about the potential futility of trying to reduce the size of government. He starts with the observation that government tends to get bigger as nations get richer.

“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. …Wagner’s Law names a real, observed, robust empirical pattern. …It’s mainly the positive relationship between rising demand for welfare services/transfers and rising GDP per capita that drives Wagner’s Law.

I’ve also written about Wagner’s Law, mostly to debunk the silly leftist interpretation that bigger government causes more wealth (in other words, they get the causality backwards), but also to point out that other policies matter and that some big-government nations have wisely mitigated the harmful economic impact of excessive spending and taxation by having very pro-market policies in areas such as trade and regulation.

In any event, Will includes a chart showing that there certainly has been a lot more redistribution spending in the United States over the past 70 years, so it certainly is true that the political process has produced results consistent with Wagner’s Law. As America has become richer, voters and politicians have figured out how to redistribute ever-larger amounts of money.

By the way, this data is completely consistent with my recent column that pointed out how defense spending plays only a minor role in America’s fiscal challenge.

But let’s get back to Will’s article. He asserts that Wagner’s Law is bad news for advocates of smaller government.

…free-marketeers tend to insist that the key to achieving higher rates of economic growth is slashing the size of government. After all, it’s true that the private sector is better than government at putting resources to their most productive use and that some public spending crowds out private investment. If you’re really committed to the idea of stronger economic growth through government contraction, you’re pretty much committed to the idea that the pattern behind Wagner’s Law is a sort of fluke—a contingent correlation without any real cause-and-effect basis—and that there’s got to be some workaround or fix.

I don’t particularly agree with his characterization. You can believe (as I surely do) that smaller government would lead to faster growth without having to disbelieve, deny, or debunk Wagner’s Law.

  • First, it’s quite possible to have decent growth along with expanding government so long as other policy levers are moving in the right direction. Which is exactly what one Spanish scholar found when examining data for developed nations during the post-World War II period.
  • Second, it’s overly simplistic to characterize this debate as government or growth. The real issue is the rate of growth. After all, even France has a bit of growth in an average year. The real issue is whether there could be more growth with a lower level of taxes and spending. In other words, would the rest of the developed world grow faster with Hong Kong-sized government?

All that being said, Will certainly is right in his article when he points out that libertarians and other advocates of smaller government haven’t done a good job of constraining government spending.

He then examines some of the ideas have been proposed by folks on the right who want to constrain spending. Beginning with the starve-the-beast hypothesis.

The idea that it is possible to “starve the beast”—to reduce the size of government by starving the government of tax revenue—springs from this hope. But the actual effect of cutting taxes below the amount necessary to sustain current levels of government spending only underscores the unforgiving lawlikeness of Wagner’s Law. As our namesake Bill Niskanen showed, tax cuts that lead to budget shortfalls don’t lead to corresponding cuts in government spending. On the contrary, financing government spending through debt rather than taxes makes voters feel that government spending is cheaper than it really is, which makes them want even more of it.

Here’s my first substantive disagreement with Will. I’m definitely not in the all-we-have-to-do-is-cut-taxes camp, but I certainly like lower tax rates and I definitely believe that higher taxes would worsen our long-run fiscal outlook.

And I’ve looked closely at the starve-the-beast academic research. Niskanen’s study has some methodological problems and the Romer & Romer study that most people cite when arguing against the starve-the-beast hypothesis actually shows that cutting taxes is somewhat effective so long as tax cuts are durable.

Will then looks at whether it would be effective to end withholding.

…withholding made tax collection cheaper and more reliable. …paying taxes automatically and with a minimum of pain makes it less likely that you’ll be livid about them when you vote. The complaint…is the libertarian/conservative argument against a VAT or national sales tax in a nutshell. It’s the same line of reasoning that leads some libertarians and conservatives to flirt with the idea that we ought to pass a law that requires us to write a single, hugely infuriating check to the IRS each year. The idea is that if voters are really ticked off about taxes, they’ll want lower tax rates. So taxes need to be as salient and painful—i.e., as inefficient and distortionary—as possible.

Will is skeptical of this approach, though I would point out that the one major developed economy that doesn’t have withholding is Hong Kong. And that’s a place that has successfully constrained government spending.

To be sure, the spending restraint could exist for other reasons (such as the spending cap in Article 107 of the jurisdiction’s Basic Law), but the hypothesis that people will want less government if taxes are painful is quite reasonable.

And, by the way, requiring lump-sum payments rather than withholding wouldn’t change the degree to which taxes are distortionary.

Will then turns his attention to the “supply-side” argument about lower tax rates.

Supply-siders generally present two scenarios, and neither helps reduce the size of government. One: If the tax cuts pushed by ticked-off taxpayers create supply-side stimulus and increase rather than decrease revenue, there’s no downward pressure on spending. …But it doesn’t make government smaller. Two: If tax cuts aren’t self-funding and simply leave a hole in the budget, the beast (as Niskanen showed) does not therefore get starved. Instead, spending feels cheap, the beast grows even more, and the tax bill gets shifted to the future.

Since I’ve already addressed the starve-the-beast issue, I’ll simply note that self-financing tax cuts (which do exist, though only in rare cases) are only possible if there’s a big uptick in growth and/or compliance. And to the extent that the revenue feedback is due to growth, that will mean that the burden of government spending will fall relative to the size of the private sector even if actual outlays stay the same.

Maybe I’m insufficiently libertarian, but I’ll take that outcome every day of the week. Heck, I’m willing to let government get bigger so long as the private sector gets to grow at a faster pace (in other words, a world in which government is shrinking as a share of overall economic output).

Now we get to Will’s main point. He suggests that maybe libertarians shouldn’t be so fixated on the size of government.

…well-funded and well-organized attempts “to convince voters to reduce their demand for the services financed by federal spending” so far have all failed. It’s time to consider the possibility that there’s no convincing them. …If we look at the world, what we see is that when people get richer, they want more welfare state. Maybe there’s nothing much we can do about that. …When people get richer, they want more welfare state. You can want Americans to get continuously wealthier and also want the government to consume a smaller share of national economic output, but there’s very little reason to think you can have both of those things. That is what the world is telling us.

To the extent that Will is simply making a prediction about the likelihood of continued government expansion, I assume (and fear) he’s right.

But to the degree he’s arguing that we should meekly acquiesce to that outcome, then I’ll strongly disagree. I may lose the fight against big government, but I intend to go down swinging.

Interestingly, Will and I may not actually disagree. This passage points out that it’s a good idea to fight against ineffective programs and to support entitlement reform.

…accepting that it’s probably not possible to shrink government would have a transformative effect on right-leaning politics. We would focus on figuring out the best ways to match receipts to outlays… You start to accept that spending cuts are ultimately more about optimizing the composition and effectiveness of spending than about the overall level of spending or its rate of growth. This doesn’t mean not fighting like hell to slash nonsense programs, or not prioritizing reforms to make entitlement programs fiscally sustainable, or not trying to balance budgets from the spending side, or not trying to minimize the rate of spending growth. This just means that you do it all knowing that the rate of spending growth isn’t going to go negative unless you hit a recession, a debt crisis, or end a major war.

And, most important, this passage also highlights the desirability of a policy to “minimize the rate of spending growth.”

Gee, I think I know someone who relentlessly argues in favor of that approach. Indeed, this guy is so fixated on that policy that he even created a “Rule” to give the concept more attention.

I can’t remember his name right now, but I’m sure he’s a swell guy.

More seriously (and to echo the point I made above), it would be a libertarian victory to have government grow slower than the productive sector of the economy. To be sure, obeying my rule (which actually does happen every so often) doesn’t mean we’ll soon reach the libertarian Nirvana of the “night watchman” state set forth in the Constitution.

But the real fiscal fight in America is whether government is becoming a bigger burden, relative to the private economy, or whether its growth is being constrained so that it’s becoming a smaller burden.

Will closes with a very sensible point about not overlooking the other policy areas where government is hindering prosperity (though that doesn’t require us to give up on the very practical quest to limit the growth of government).

Giving up on the quixotic quest to…falsify Wagner’s Law would also lead us to…focus our energy on removing regulatory barriers to economic participation, innovation, and growth.

And his concluding passage is correct, but too pessimistic.

This is just a conjecture. But when…the United States—where the freedom-as-small-government philosophy is most powerfully promoted and most widely accepted—has lost ground in economic freedom year after year for nearly two decades, it’s a conjecture worth taking very seriously.

Yes, he’s right that overall economic freedom has declined during the Bush-Obama years.

But what about the fact that overall economic freedom increased during the Reagan-Clinton years? And what about the fact that we achieved a five-year nominal spending freeze even with Obama in the White House?

In other words, there’s no need to throw in the towel. I may not be overflowing with optimism about whether we ultimately succeed in sufficiently constraining the growth of government, but I feel very confident that it’s a worthwhile fight.

P.S. While I disagree with a few of Will’s points, I think his article is very worthwhile. Moreover, a consensus on restraining the growth of government would be an excellent outcome to the debate he has triggered.

But I can’t resist being a bit more critical about something Noah Smith wrote about Will’s article. In his Bloomberg column discussing the hypothesis that libertarians should focus less on (or perhaps even give up on) the battle against government spending, he has a passage that is designed to lure readers into thinking that small government is associated with economic deprivation.

…a stark fact – the richer a country is, the more its government tends to spend. …Today, the top spenders include countries such as France, Denmark and Finland, while the small-government ranks include Sudan, Nigeria and Bangladesh.

Sigh.

It’s true that the burden of government spending is much higher in France, Denmark, and Finland than in Sudan, Nigeria, and Bangladesh, but let’s take a look at the overall data from Economic Freedom of the World.

France (#57), Denmark (#21), and Finland (#20) are all much more market-oriented than Sudan (unrated, but would have an awful score), Nigeria (#113), and Bangladesh (#121). Smith’s argument is akin to me saying that government-built roads cause economic misery because that’s how they do it in the hellhole of North Korea.

More important, he either ignores or is unaware of the research showing that nations such as France, Denmark, and Finland became rich when government spending was very small. Sigh, again.

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