Tax Revolution Institute Essay Contest

I recently won the Tax Revolution Institute essay contest, an honor that surprised me. The essay can be read here.


Can Investment Saving Save The Economy?

A real and disturbing trend has emerged: Economic growth is slowing down, and we don’t know why–or for how long. That is the topic of discussion in Harvard economist Greg Mankiw’s newest New York Times column.

Mankiw offers multiple reasons why growth is slowing down, but before we get to those–and their supposed solutions–let’s first diagnose the problem. As Mankiw writes, “the growth rate of real G.D.P. per person has averaged just 0.44 percent per year, compared with the historical norm of 2.0 percent. At a rate of 2.0 percent, incomes double every 35 years. At a rate of 0.44 percent, it takes about 160 years to double.” In other words, had growth during the recent “recovery” met historical averages–the growth didn’t even have to be spectacular, just normal–we would be much wealthier today than we are.

In fact, if the growth trend continues, we will be much, much poorer. The recent drop in median income is nothing like what we will face in the future.

So, what is causing this?

Mankiw offers a few theories. The theory I like to side with is the one where the government is the problem (see here). That may be my conservatism speaking, but it makes the most sense. Median income, for example, is falling because we are working less, exemplified by record low labor participation rates.

Many have argued this is simply a symptom of demographic changes; Americans are getting older, and older people are less likely to work. But this can’t explain falling teenage labor force participation rates.

Both of these trends began around 2000, when regulations began to increase at an even faster pace, and they accelerated during Obama’s presidency, when both tax increases and regulatory increases were underway. Not to mention skyrocketing spending, among other things.

One other theory–the secular stagnation theory–holds that there isn’t enough demand to provide sufficient amount of employment to our economy. The solution? Government investment spending.

But there’s a problem with this: A new report by the CBO has concluded the effect of government investment is, when all is said and done, essentially zero.

The short-term effects of a billion dollars in spending is only $50 million. The effect on productivity is long-term, with the effects only being fully hashed out 20 years later. But even these long-run effects aren’t very large. Putting all of the effects together, a $500 billion investment spending package would shrink the economy by $9 billion but grow it by $15 billion, leading to a $6 billion increase in GDP. But, as our economy is worth in excess of $18 trillion, these effects are minuscule.

So the real solutions aren’t more government intrusion; the solution is less. We need to undo the bad policies of today and implement better policies tomorrow. We need health care reform, tort reform, immigration reform, tax reform, entitlement reform, and most of all, regulatory reform. Even Michael Mandel of the Progressive Policy Institute believes we need to drastically reform the regulatory bureaucracy in this country.

Even if those policies don’t bring us to the historical level, I suspect they will bring us up a few points. And that means a lot in the long run.

The more mudslinging that enters the political realm, the less positive change can be done. Leftists need to stop calling conservatives idiots, bigots, and crazies; conservatives need to stop calling liberals idiots, bigots, and crazies. We need to stop. Because if we don’t, we’ll all be a lot worse off.

On The “Immigrants Do Jobs Americans Won’t Do”

Progressives frequently claim “[Illegal] immigrants do jobs Americans won’t do.” But the argument is wrong–really wrong. I support immigration. I support immigration reform. But, really, people have to stop using this argument.

Never say immigrants “do jobs Americans don’t do.” The argument is false; Americans would be willing to do those jobs if wages were high enough.

In reality, the argument should be “immigrants do jobs that wouldn’t otherwise exist without their labor.” Indeed, those jobs wouldn’t exist if wages were higher than they were. The only reason those jobs haven’t been outsourced or automated is because immigrants come here to do them.

A way to conceptualize this is to imagine a minimum wage hike. More Americans would be willing to work at McDonalds if the minimum wage was $50. Of course, a minimum wage of $50 would mean McDonalds would have fewer jobs to offer.

In the same way, immigrants aren’t stealing American farm jobs; they are doing jobs that wouldn’t exist if farmers had to pay their farm hands ludicrously high wages.

So the argument liberals like to use isn’t necessarily wrong. They are correct to say illegal immigrants don’t take jobs away from natives, but the phraseology is off. Way off.

And this isn’t the only reason why undocumented immigrants don’t “take” jobs.

See, it would be difficult for immigrants to steal jobs from natives just based on their educational composition. Immigrants are usually either really educated or not educated at all. Around 80% either have a PhD or are high school dropouts. Most Americans, by contrast, are somewhere in the middle (high school diploma through masters degree), meaning they don’t compete for the same jobs.

So how do immigrants affect the labor market? Well, when low-skilled immigrants come, they are usually not fluent in English and are uneducated, so they specialize in low-skilled manual labor. Companies now are able to have more manual oriented jobs–building houses, roads, cleaning yards, sewing clothes, etc. But, with more manual jobs, they also need more managerial jobs in order to keep things in order. These managerial positions are generally mid-education (HS diploma – master’s) and are usually filled by natives who are fluent in English. This means, for the average American, low-skilled immigrants benefit native workers. The theory that immigrants compliment, rather than supplement, American labor has been empirically demonstrated.

On the high-skilled end (generally these are the “legal” immigrants), these are the people who make businesses, innovate, and contribute to high-skilled labor markets. These people are pretty much universally considered “good” by most restrictionists.

In sum, when the phraseology of the popular “they do jobs you won’t do” argument is amended, the argument works well. And other arguments–like how immigrants don’t substitute American labor, but instead they compliment it, are also valid points. But please, stop saying immigrants do jobs Americans won’t do. It’s just flat out wrong.

The Affordable Care Act Isn’t So Affordable

Business Insider has a new interesting article summarizing the results of a recent Urban Institute report. The results shouldn’t surprise those on the political right, because it confirms what we have been saying all along: The Affordable Care Act (ACA) hasn’t made healthcare any more affordable.

The following image comes directly from the article.

obamacare premium map

While some states, including the state in which I currently reside (New Mexico), have seen a decline in premiums, the overall trend seems to be up. The average increase, according to the report, is 20%. 12 states have seen increases above that average, and sometimes significantly so (AK at 40%, OK at 41%, and TN at 38% are the most extreme examples).

The results of the report are similar to studies emanating from the Manhattan Institute, which also finds large increases in health care costs (see here and here).

The authors of the Urban Institute study conclude that the wide range of price changes can be explained by differences in competition. Business Insider writes,

“However, the most important factors associated with lowest-cost silver plan premiums and premium increases are those defining the contours of competition in the market,” the report concluded. “Rating areas with more competitors had significantly lower premiums and lower rates of increase than those that did not.”

Indeed, conservatives have a solution to this: By empowering the consumer and reducing barriers to competition, we can usher in a period of health care cost reductions while maintaining state of the art medical care.

An advanced copy of a new study by Dr. Scott Atlas has been released by the Hoover Institution. The report explains how to do just that: empower the consumer and increase competition.

Amnesty and Illegal Immigration

A common complaint against giving illegal immigrants “amnesty” (and, by the way, the recent “amnesty” proposals aren’t really amnesty), is that giving immigrants clemency will incentivize more illegal immigration. The logic is appealing: If immigrants aren’t punished for braking the law, others will be encouraged to keep breaking it. If there are no consequences, why not?

But these fears are not borne out in the data. A working paper by American University has concluded Reagans 1986 amnesty reduced the number of border apprehensions (a proxy for illegal migrant crossings).

Even if the conclusion of the report is disbelieved, research generally finds no effect between amnesties and illegal immigrant crossings.

Either way, demographic and economic factors influence the number of incoming migrants much more than any amnesty program ever could.

You Can Be In The top 1%, Too

Chelsea German, a Cato Institute scholar and editor of their new(ish) project,, recently wrote an article about the odds of making it to the top 1% in the United States. Apparently, the odds are pretty good.

German writes,

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

11% is pretty good odds. Indeed, the reason, she argues, is because social mobility in the U.S. is high and turnover at the top of the income spectrum is also high. As she notes:

Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

This echoes what American Enterprise Institute scholar Mark J. Perry has said elsewhere.

This also echoes Thomas Sowell’s claim that “people who were in the top 1 percent in 1996 had their incomes fall — repeat, fall — by 26 percent by 2005 … More than half the people who were in the top 1 percent in 1996 were no longer there in 2005.”

So there’s more than what meets the eye when it comes to income inequality. So be careful when pushing tax hikes for the “rich.” One day, you might become the “rich” you once demonized.

The Power of Economic Freedom

Cato economist Dan Mitchell has a new blog post about the power of economic freedom in Europe. The first picture in his post details living standards across Europe, and the leaders wont surprise those who’ve been in favor of free markets.

Just a quick glance would suggest there is a correlation between economic freedom and prosperity. The eastern nations, who for decades languished under communist rule, are the poorest, whereas the wealthiest have had quasi-free markets for decades or, in the case of the Anglo nations, centuries.

Next, Mitchell went to Fraser’s economic freedom index. Here’s the list.

As you can see, the top ten wealthiest nations in Europe also happen to all be in the top 31 nations on Fraser’s economic freedom index. The two wealthiest nations in Europe, Switzerland and Luxembourg, have very low taxes and are tax havens. Mitchell believes all nations should follow their example and strive to have lower tax burdens.

For the other nations, while they have higher than optimal taxation and spending, they make up for it in other areas. These nations generally have open trade, a strong rule of law, and private property protection, for example.

The only nation in the top ten in Europe that is not in the top 31 is Sweden, but as I have noted elsewhere, Sweden is still not a liberal utopia, and has some things we should emulate (like universal school choice, free trade, and low corporate taxation).

The lesson from these images is clear: We need more economic freedom, not less. But we shouldn’t necessarily aim to be more like Switzerland or the UK. We should probably aim to be more like Hong Kong and Singapore. But that’s a discussion for another day.

Economic Theory Demonstrates the Harms of (Most) Regulation

Economist Scott Sumner, who works at the Mercatus Center and Bentley University, has an interesting new blog post up at EconLog (a blog I highly recommend everyone interested in public policy follow. Sumner, Bryan Caplan, David Henderson, and other amazing economists have excellent sub-sections). Sumner’s post is all about demonstrating why most regulations are counterproductive.

Sumner uses a simple example: Imagine if the government were to pass a pro-consumer regulation and ban ATM fees. This, according to Sumner, would be counterproductive.

Banks will see this as a cost increase, and pass the cost on to consumers in other ways. Can I be sure this will occur? No, but it’s very likely. Suppose I told you that Congress passed a 10-cent increase in the gas tax. What would you expect to happen to gas prices at the pump? Most people would expect a 10-cent increase. In fact, the oil industry is perhaps the industry where taxes are least likely to be passed on to consumers. That’s because the supply of oil is less elastic that the supply of almost any other good, including banking services. So if you think gas taxes are passed on to consumers, then you should be even more certain that I’m right about the elimination of bank fees being passed on to consumers in other ways, such as fees on deposits, or lower interest rates on deposits. …

If consumers pay less in one place and more in others, does the regulation actually hurt consumers? Yes it does, because it also hurts bank efficiency. Eliminating ATM fees will reduce the profit maximizing number of ATMs, which will make banks less efficient. Since tellers cost more than ATMs, the cost increase passed on to consumers will be larger than the saving from ATMs.

Now, this logic applies to most regulations. But note the word “most.” Indeed, Sumner concedes that this logic does not apply to regulations that are meant to address market failures, like “monopoly power, externalities, and information asymmetry.” So some regulations are necessary.

But the logic does apply to regulations liberals love, like overtime pay.

Sumner ends with a plan to reduce regulation. He closes with, “We’d be better off passing a law sun-setting all regs, and the entire Federal tax code, in 2025. Then give Congress the next 9 years to set about re-passing all the regs and taxes that actually make sense.”

Interesting idea, but it’s dangerous. I think it puts too much faith in Congress to do the right thing. Not only that, but it assumes members of Congress won’t make the same mistakes they’ve already made. If history serves as any guide, I suspect they would pass new laws that are just as bad, if not worse. But there’s some food for thought.

A New Report On The Economic Impacts of Union

Liberal prognosticators predicted the decline in union membership since the 1960s (which accelerated in the 1980s) would lead to lower wages and make the poor poorer. Today, they blame the decline of the middle class–which is a myth, by the way–on the decline in union membership. A new report by the American Action Forum debunks these claims.

According to the report, the decline in union membership has been associated with four positive economic outcomes:

  1. Increased economic growth.
  2. Faster job creation.
  3. Greater worker earnings.
  4. Greater total labor earnings.

So much for the doom and gloom the left was expecting.

On growth, the report argues, “For every one-percentage point increase in the union membership rate, a state’s real GDP growth rate decreases by 0.25 percentage points. To put this in perspective, in 2013 state real GDP grew 1.28 percent on average. If the average union membership rate increased by one percentage point, then the state average real GDP growth rate would have declined to 1.03 percent.”

Ben Gitis, the author, also writes “the results indicate that a one-percentage point increase in the union membership rate is associated with a 0.11 percentage point decrease in the job growth rate.”

On wages, “the average weekly earnings growth rate for all workers in the state declines by 0.22 percentage points and for workers in businesses with fewer than 5 employees it declines by 0.14 percentage points. Again, these results mirror the raw data: average compounded annual average weekly earnings growth was slightly quicker (0.03 percentage point) in states where union membership declined than in states where it increased.”

And, on total labor earnings, “We find statistically significant evidence that an increase in a state’s union membership rate is associated with a decrease in the growth rate of total wage earnings for all workers in that state and particularly for those in small- and medium-size business establishments. For all workers, we find that a one-percentage point increase in the union membership rate is associated with a 0.20 percentage point decline in the total wage earnings growth rate.”

So, fortunately, the decline in union membership may be a good thing.

P.S. You still think unions gave you things like shorter work days and work weeks? That’s a myth, too. 

P.P.S. I don’t oppose unions in general. I oppose mandatory unions and I support right to work laws. I believe that, in a market system, workers should have the ability to collectivize as long as it is voluntary and as long as they don’t force others to join or pay dues.

R is Likely Not Greater than G

Thomas Pikkety, the famous economist who broke international headlines when his economic treatise, Capital In The 21st Century, became a global best seller, has some things to say about wealth inequality. Pikkety’s argument is simple: The rich are already rich, and will continue to get richer until they have everything that’s left. His thesis is also simple: R, or the rate of return on capital, exceeds G, the growth rate of the economy. In other words, r > g. An important assumption he makes, however–that families will continue to become wealthier and become the modern day equivalent of oligarchs–is just plain wrong.

As a study published in the Cato Journal notes, “this logic holds true only if the wealthy never dissipate their wealth through spending, charitable giving, taxation, ill-advised investments, and splitting bequests among multiple heirs.”

The Cato study looks at the Forbes list of the top 400 hyper-wealthy individuals in the world. Their research suggests at least half–and oftentimes more–of the people in the top 400 list are wealthy because of earned income, not inheritance. In fact, according to Forbes itself, the number of earned billionaires on the list has increased over time, and is at an all time high. The wealthy are getting rich because they produce things other people want. As transactions in a market economy are voluntary, any interaction between a producer–say, someone on the top 400 list–and a consumer, like you and me, is mutually beneficial. In other words, their wealth has made them better off, but as no one forces us to consume their products (and we only consume when we feel as though it will make us better off), their wealth has made us better off, too. Greg Mankiw makes a similar argument in his interesting paper, “Defending the One Percent.

The Washington Post also has an intriguing article on this, which states that, in 1992, inherited wealth made up 27% of the wealth the 1% had. Over time, this percentage fell; in 2007, that number was a mere 14.7%. Not only that, but the percentage of households reporting an inheritance transfer fell by 2.7% over the time period between 1989 and 2007.

What is also interesting is that inheritance may have a dampening effect on inequality. As a large percentage of wealth transfers are among middle class households, if we were to eliminate inheritance, inequality would increase. As a study by the BLS notes, “Our simulations show that eliminating inheritances … actually increases overall wealth inequality and, in particular, sharply reduces the share of the bottom 40 percent of the wealth distribution.”

So, in sum, most wealthy families do not inherit their wealth–they earn it, which benefits everyone; inheritance mainly benefits the middle class; and the number of people who earn their wealth as opposed to inherit it has increased over time, which poses a problem for Pikkety’s argument. And one last point: If r > g, and if that means, over time, the rich get richer and the poor get poorer, why is poverty at record lows when inequality has skyrocketed?