Category: Public Finance

Progressive Good Crime

Coinciding with the Biden Administration’s push for higher taxes on wealthy individuals and a greatly expanded IRS, ProPublica published documents that purport to show private tax information of several high profile billionaires including Jeff Bezos, Bill Gates, Michael Bloomberg and others. 

Leaking these documents is, of course, illegal. And just like the Lois Lerner episode, no one will be punished for committing this crime. That’s because in the progressive mind this is Good Crime. Chances are, the perpetrators will never be revealed. 

ProPublica has said that it doesn’t know the source of the documents. Fat chance of that, by the way. If ProPublica doesn’t know its source, there is be no way they could have authenticated the documents or determined their accuracy. But they printed the documents anyway, undoubtedly because it furthers the story—fiction really—that the rich don’t pay their “fair share”. 

Among other stunning revelations, the documents, if accurate, show that (1) wealthy individuals (like everybody else) didn’t pay income taxes when their reportable income was zero; (2) wealthy individuals (like everyone else) didn’t pay capital gains taxes in years when they didn’t realize any capital gains by selling assets, and (3) wealthy individuals used plenty of lawyers and accountants to make sure that they legally minimized their tax bills. Which is to say that the behavior of these individuals was both legal, proper and rational. 

On the other hand, amid all the faux indignation, it should be noted that the documents that were leaked were leaked illegally. In so doing the leakers (1) violated the privacy of those whose documents were leaked and (2) demonstrated for the umpteenth time the gross incompetence of the IRS when it comes to guarding citizen privacy. More likely it is worse; the IRS simply followed the orders of its political masters to weaponize the agency, as in the recent case of Lois Lerner. Which is not to leave out Richard Nixon and Lyndon Johnson. 

As to the substance of the matter: Congress is supposed to determine tax policy. For some reason or other all those lefties wailing about “saving our democracy” don’t seem to think much of our democratic processes.  If they did they wouldn’t be cheering on the clearly illegal leaking of documents designed to gin up outrage against success while running around the legislative process. 

As it turns out, progressives are at least half-right when they assert that the rich do not pay their fair share of the tax burden. The rich pay far too much. It is the middle class that is undertaxed. 

Consider the following statistics, using the latest available data. In 2017 the top 50% of taxpayers paid 97% of all federal income taxes. They bottom 50% paid the remaining 3%. The top 1% paid 38.5% of individual income taxes; the bottom 90% paid only 29.9%. The top 5% paid 59%; the top 10% paid 70%. As these numbers make clear, the tax income burden is shouldered by the wealthy, not by the middle class. These data are available in greater detail here. 

The middle class, as it turns out, is by far the greater net beneficiary of federal largesse. Lower income Americans on balance receive net cash benefits from the government. That is offset by the junky schools they have to put up with and inadequate police protection in poor neighborhoods. All the cash payments do is create a permanent dependent class. This is the vote buying operation that is the hallmark of progressive politics (tax, spend and vote). It remains firmly in place, and has so since the days when it was instituted by FDR. 

If progressives were truly interested in tax fairness, which they manifestly are not, they would specify ahead of time what tax shares would constitute fairness for the different deciles of the income distribution. But of course they never do that. Moreover, there is a simple way to ensure that everybody pays the same tax rate. The tax code could be amended so that everyone earning $25,000 per year or more would be required to pay 17% of their income in tax. No exemptions, no deductions. Period.

The mere hint of a flat tax where everybody pays the same rate would have progressives screaming bloody murder along with tax lawyers, accountants and lobbyists. I should say other lobbyists. The reason is simple. Progressives are not interested in either tax fairness or tax efficiency. What they are really interested in is command-and-control of the nation’s economy. Progressives want to use the police power of the federal government to commandeer private resources so that they can regulate and transform America into a little socialist utopia. No matter how long they have to goose-step their way toward the goal.  

JFB

Will the Real Bernie Sanders Please Stand Up?

Now that Bernie Sanders (I. Rolling Stone) is well on his way to getting the Democratic nomination for President it is worth reflecting on what Senator Sanders really stands for. It sure isn’t freedom and opportunity for all. If you want to see an apologist for authoritarians and dictators, a good place to start would be–Senator Sanders.

Let’s go right to the source, which is to say, Senator Sanders himself. Take a look at the video below.

Keep this video in mind when Sanders and his friends start to pretend that there is anything more than a semantic difference between “democratic socialism” and socialism. They are one and the same.

Not only that, the countries that Sanders points to as models of “democratic socialism”–namely the Scandinavian countries–are anything but. They are more capitalist than the U.S. Not to put too fine a point on it, their policies tend to be far more friendly to free markets than are public policies in the U.S. For instance, they have school choice, and their tax systems are far less progressive than in the U.S. In the Scandinavian countries, the middle class actually pays for government benefits, unlike the U.S. For example, in the U.S., the top quintile of income tax filers pays about 95% of all income taxes. The top half pays about 97% of all income taxes. That’s worth thinking about the next time Sanders goes on one of his rants about the evil rich.

JFB

A Giveaway to the Rich they Say

The reaction of progressives to the passage of the recent tax bill tells you all you need to know about what progressivism is really all about. The tax bill is, they repeat endlessly “a giveaway to the rich and to big corporations”. Let’s think about that for a moment.

It is, or ought to be, glaringly obvious that to give something away you have to own it to begin with. So, what progressives are really saying is that the state owns all of your income except for what it allows you to keep. And let’s not kid ourselves about this. It is what they truly believe.

The point of taxation is supposed to be about financing legitimate government activities—like the production of public goods, the classic being defense. And there are other public goods like the highway system, public health, and the courts to name a few. But by and large, that is not where the federal government concentrates its efforts. The focus of the federal government is on income redistribution. The numbers are published by the Office of Management and Budget. They can be accessed at this link:

https://obamawhitehouse.archives.gov/omb/budget/Historicals

Progressives can pretend all they like that they can achieve some sort of optimal income distribution, but it is impossible. It simply denies human nature, not that it has ever stopped them before. They can reduce income inequality, though. All they have to do is adopt the policies that are working so well in Venezuela. Otherwise they will simply continue on with their traditional vote buying operation,the time tested modus operandi of welfare state politicians.

Something like 72% of FY 2017 federal spending was budgeted for Human Resources, which as a practical matter means Medicare, Medicaid, Social Security, Social Services and other welfare payments. Net interest on the debt is another 7 percentage points. Medicare and Social Security are gargantuan programs that (largely) benefit those over 65 and are funded by the current generation of taxpayers. (The Trust fund is simply an accounting fiction; it has no actual money). Since wealth is highly and positively correlated with age, these programs redistribute money to the relatively well-off (older people) from the relatively less well-off (younger people).

For perspective consider this. In 1980 defense spending accounted for 22.7% of the budget and 4.8% of GDP. Today defense spending has shrunk enough so that it accounts for only 14.7% of the budget and 3.2% of GDP. On the other hand, Human Resource outlays soared from 53% of outlays to 72% today. In 1980 it was 11.2% of GDP; now it is 15.4% of GDP. So over the years, the federal government has essentially become a giant check writing operation, paying the most to the most powerful and politically well-connected people. That is the nature of progressivism.

And then there is the argument about the deficit. When the deficit exploded something like $9.3 trillion over the Obama years, progressives were strangely silent. But the prospect of an extra $1.5 trillion over 10 years provokes hysterical caterwauling, never mind that they want to spend even more on Social Security. All of which suggests that they believe they can tax their way out of the fiscal nightmare that is the welfare state.

In McCulloch vs. Maryland (1819) Daniel Webster argued that “The power to tax is the power to destroy”. Chief Justice John Marshall agreed, saying “That the power to tax involves the power to destroy…[is] not to be denied”.

We are clearly at the point where the tax burden, which is properly measured in terms of outlays and promised future outlays rather than collections, is destructive. The present value of promised future outlays for Social Security, Medicare, Medicaid and debt service is estimated to be between $100 and $200 trillion. This with a GDP of $20 trillion. It is obviously not sustainable, and the only way to get it under control is to reform entitlements. Which is what progressives simply refuse to do, preferring instead to yammer on about taxing the rich to squeeze $100 trillion in taxes from a $20 trillion economy. Quite a trick that would be.

JFB

The Tax Reform That Isn’t

It is now tax reform season, which means that politicians are poised to unleash even more nonsense on the public than is customary. So perhaps it makes sense to frame some of the underlying issues that are involved. First and foremost: There is not a snowball’s chance in hell that taxes—properly understood—are going to be reduced. I repeat: there is no chance—none, nada, zero—that the total tax burden is going to be reduced. It is merely going to be redistributed, and to boot the total burden next year will be larger than this year, and the same condition will hold the year after that, and the year after that. Until the unavoidable default.

 

To see this it is imperative to define terms and do it properly because words that politicians and their sycophants use are designed to obfuscate rather than clarify. This, by the way, is not unique to arguments about the tax code. They do it all the time, pretty much about everything. So: how should we define the tax burden?

 

Definition: The tax burden is equal to the resources that government commands that would otherwise have remained in the private sector. That means that the real tax burden is not simply equal to the cash government collects from income taxes, sales taxes, other excise taxes, user fees, payroll taxes and various other sources. The real tax is equal to the total amount of money government spends plus the cost of regulatory compliance.   This definition differentiates between the government’s demand for economic resources and how it finances the demand.

 

The Income Statement: Revenues are equal to the cash taxes government collects directly plus the regulatory compliance costs it imposes on business that government would otherwise have to bear if it did the job itself. Expenses are cash disbursements. But government spends far more cash than it collects in direct taxes, so it has to make up the difference, which it does by borrowing the difference.

 

The Balance Sheet: Here is where it gets exceptionally tricky, because the government doesn’t publish a balance sheet. And it doesn’t do so for a very good reason. The Government is insolvent and doesn’t care to admit it.

 

Let’s consider: conceptually speaking what would the government’s balance sheet look like if it published one?

 

Assets = Implied taxing power, otherwise known as the tax base.

Liabilities = All the payments it has promised to make in the future. These include debt service and transfer payments, the largest being Social Security, Medicare and Medicaid. The present value of these unfunded liabilities (plus accumulated debt on the books) ranges from a relatively modest estimate of $100 trillion (from the optimists) to about $200 trillion from the not-so-optimistic. According to the Fed, total net worth of U.S. households is about $85 trillion. That leaves us short somewhere between $15 trillion and $115 trillion. (Corporate assets are largely included in household wealth through stock ownership.)

 

Since U.S. GDP is about $20 trillion, there is no possible way that the U.S. can grow its way out of this. In fact, its liabilities in the form of promised entitlement payments are growing at an increasing rate of speed, so the situation is getting worse rather than better.

 

The only reasonable conclusion is that the U.S. is inevitably going to default on its promises. The only question is when and to whom.

 

 

This conclusion is both inescapably correct and studiously avoided. Progressives have spent the last 100 years or so building a welfare state that is careening toward default by obfuscating the nature of the problem, which is, as Margaret Thatcher put it, Socialists eventually run out of other people’s money to spend.

 

Consider the current discussion over “tax reform” currently taking place. The discussion will carefully ignore the indisputable fact that total government spending and therefore the tax burden, is going to rise. The entire discussion about tax reform / tax relief is entirely distributional without so much as a nod to the underlying structural problem.

 

The Republicans will claim, as they always do, that reducing marginal tax rates a few percentage points will lead to an increase in economic growth sufficient to offset the loss from lower rates. They will propose taking a smaller piece of a much bigger pie. The problem is that there is scant evidence that the modest Republican reforms will have the desired effect because they are not going to address the underlying entitlements beast, which is in the process of devouring everything in its path.

 

 

For their part, the Democrats are still intent on increasing spending for entitlements and “paying” for it by taxing “the rich”. Here we note in passing that Progressives have exactly two solutions for all problems. Tax the rich, and appeal to “the international community”.

 

But let’s go on from here. The great project of building the welfare state, seemingly paid for by taxing the rich, has created a situation in which the financing of the welfare state is divorced from the actual cost of running the welfare state, at least in the public mind. And inevitably that means the public will insist on getting more and more “free” stuff. And because Progressives have convinced otherwise sensible people that they are victims of corporations and the rich, they will continue to demand all this apparently free stuff as a matter of right. It will not end well. They are rapidly running out of other people’s money to spend.

 

 

JFB

The Trump Tax Plan

As promised, the Trump Administration released the outline of its tax plan. Predictably and amusingly enough, it was greeted by cries of horror and anguish by Progressives. It would appear that the Trump plan would allow American taxpayers to keep more of their own money. This simply will not do. Bernie Sanders, Chuck Schumer and Tom Perez have made much better plans for it. Look at the job they have done already.

 

 

Before addressing the plan, let’s take a look at some facts, to put all this in context. First, let’s define the word “tax”. As Milton Friedman never tired of saying, federal taxes are not simply the checks that taxpayers send to the government. Taxes are equal to the resources that the government consumes. That is best measured, however imperfectly, by government spending. Taxpayer checks are merely part of the financing package. Borrowing to cover deficits is another. The real tax burden is a combination of the two. (It’s actually more, when you toss in unfunded mandates and regulatory compliance, but let’s leave that aside).

 

 

As the chart illustrates, spending is far more variable than tax receipts. In fact the standard deviation of receipts as a percent of GDP is 1.1% around a mean of 17.4%. That compares to a standard deviation for spending of 1.6% around a mean of 20.3%.

 

This still underestimates government resource use because it does not adequately capture things like regulatory compliance costs. Nor does it include loan guarantees or unfunded liabilities like Social Security.

 

This brings two subsidiary questions  to the fore. Who pays the taxes (defined narrowly in terms of revenue collections), and where is the money spent? The answer to the question of who pays the taxes is easy. It is the much-maligned rich. In 2013 (using the latest data available) the upper 1% of pre-tax income earners paid 38% of all federal income taxes; the upper 10% paid about 63%, and the upper quintile paid 88%. By contrast the bottom quintile paid a negative rate of 4%. In fact the bottom 40% got more back from refunds and “refundable credits” than they paid in.

 

These data are available from the Joint Economic Committee of Congress at this link.

 

So where does all that money go? Transfer payments and interest on the debt. In 2014, the government spent $3,883 trillion. Of that, $2,420 trillion (62%) went to transfer payments, mostly for Social Security ($834 billion) and Medicare ($587 billion). Interest payments on the debt amounted to $442 billion. All told transfer payments and interest on the debt captured about 74% of all federal dollars. These data are available at this link at the Bureau of Labor Statistics.

 

For all the talk about investing in infrastructure, the reality is that the modern Administrative state is really about income redistribution. Specifically what we are dealing with is an extraordinarily progressive tax-spend-and-vote regime that has created an entitlement culture that is all too ready to punish success and reward failure. And it has produced plenty of policy failure.

 

The Trump Administration proposes to cut both individual and corporate tax rates. Individual rates would go to a 3-bracket system (10%, 25% and 35%), and the corporate rate would go to 15%. The Trump plan would eliminate most deductions, except for the mortgage deduction and charitable giving. The plan also eliminates the inheritance tax.

 

Democrats are up in arms because the Party of Science refuses to acknowledge that flattening and simplifying the tax code has the potential to produce enormous gains in the private sector through greater efficiency, investment and innovation. They would rather continue to subsidize the failing models of the early 20th century—like the public school system and its teachers unions, for instance. But as tax reform goes, the Trump plan gets only a B minus. That is because the Trump plan—outline really—is a change on the margin when radical surgery is needed. A much better plan would be a flat rate of about 18% for all with incomes over something like $30, 000, with no deductions or exemptions at all, including the home mortgage deduction and charitable giving. Nor should the federal government be in the business of subsidizing child care through the tax code, as the Trump plan promises to do.

 

But the Trump plan is better than nothing. That said, among the worst arguments against the proposal is that the plan has to be “paid for”.  Taxes represent government’s use of what would otherwise be private resources.  The phrase “paying for” a change in tax rates under static analysis (which is what the CBO is required to do) is simply an attempt to redistribute the burden without addressing the underlying problem. A real reform of public finances would reduce the total amount of government spending, privatize Social Security and Medicare, and reduce and flatten tax rates.

 

That’s what real change would look like. Absent that, we are still headed down the path chosen by Greece.

 

JFB

 

Where’s that $100 Trillion?

That’s right. Trillion.

 

There is a reason, actually lots of them, why Washington is consumed with the latest Trumpian Tweet to the effect that Team Obama spied on Trump’s Presidential campaign. For one thing, if the charge is true, it would suggest that the Obama White House used the power of the White House to attempt to influence the election outcome in a way that is wholly improper, if not illegal. At the moment Trump & Co have produced exactly zero evidence that any of this is in fact true.

 

On the other hand, Andrew McCarthy, a former federal prosecutor argues there is a plausible case to be made that the Obama White House, and by implication Obama himself, did in fact orchestrate surveillance of the Trump campaign or Trump associates, if not Trump himself. McCarthy’s analyses are worth reading and are available here, here, here and here.

 

Now, back to the $100 trillion.

 

While Washington is busy (1) with its various conspiracy theories and (2) dreaming up new ways to waste your money, the present value of unfunded Social Security, Medicare and Medicaid obligations continues to grow unabated. Entitlements plus debt service now accounts for something in the area of 71% of all federal spending. The present value of unfunded entitlements plus accumulated federal debt amounts to about $100 trillion conservatively speaking, give or take a few trillion, as they say in Washington.

 

And it is slated to get worse as the population ages.

 

President Trump has grandly and repeatedly announced that he does not intend to act to curb the growth of entitlements. Bernie Sanders and Elizabeth Warren have gone him one better. They want to increase entitlement spending. They will of course “pay for” all of this by “taxing the rich.”

 

That will be difficult since U.S. GDP amounts to a mere $20 trillion or so. Clearing the books will require finding an extra $80 trillion, after all earnings have been confiscated. As it turns out the total dollar amount of wealth held by households and non-profit organizations is about $107 trillion, so government could just come along and confiscate all private wealth to balance the books on entitlements. And have a little left over. Probably to start a new entitlement program.

 

By now it should be obvious even to diehard Progressives that the nation’s finances are simply out of control and that there is no conceivable way that government can pay all its bills. Unless there is major reform the government is simply going to default.

 

More likely there will be a series of partial defaults, taken one step at a time. It will begin by pushing back the retirement age, which is the equivalent of rescheduling a loan because the funds are not available to pay off the principal. And where medical services are concerned government will begin by rationing, and will simply deny medical care to those not deemed worthy of it. There is no escaping this outcome without substantial reform.

 

The Administrative State resembles nothing so much as an elaborate Ponzi scheme; its survival depends on a suspension of disbelief. But because the Administrative State is a structural fraud, it is inherently incapable of taking the action needed for reform before the whole thing comes crashing down. Which is why the mandarins in Washington would rather talk about anything but entitlement reform. In this they bear a striking resemblance to Wylie Coyote who is just fine when he runs off a cliff—that is, until he looks down. Which may not be too far from where we are today.

There is a Choice

So that leaves a choice. We can dismantle the fraud that is the Administrative State and replace it with market liberalism and limited government. Or we can continue on and follow the path of Greece and Venezuela.

 

Unless there’s an extra $100 trillion lying around that nobody knows about except Wylie Coyote.

 

JFB

The Bidding War Begins

We are now at that point in the Presidential race where the two major combatants begin to offer payoffs to interest groups in order to buy their votes come November. But instead of payoffs, the candidates refer to “investments”. This time the primary payoff target is construction workers. The preferred payoff mechanism is infrastructure spending.

 

The Columbus Dispatch reports that Hillary Clinton plans “…to invest in infrastructure as a way to create more jobs.” She promises “…to improve schools and water systems, expand broadband access and invest in clean energy.” She will “…unleash the power of the private sector to create more jobs at higher pay.” She will “…create an infrastructure bank to collect public and private money”, which is a surefire way to create conflicts of interest and special deals for insiders, a specialty of the Clintons.

 

Not to be outdone, Donald Trump upped the ante. According to CBS News, Trump says the “… the U.S. government should exploit historically low interest rates and borrow hundreds of billions—if not trillions of dollars—to repair aging infrastructure across the country.” Trump didn’t specify how much but when asked if it could be more than the $500 billion Hillary Clinton proposed, Trump said “You’d need a lot more than that to do it right”.

 

In this he appears to be in the camp of Paul Krugman who insists that there is “an overwhelming case for more government borrowing” to invest in infrastructure, in part because interest rates are historically low.

 

Thus far none of the candidates (or Krugman for that matter) has explained why taking capital from the private sector is going to produce a net increase in wealth. That would require making the case that these (unspecified) public sector investments would be more efficient than private sector investments would be. That argument ought to test to patience of even the most credulous voters.

 

On the surface, the proposed infrastructure spending would create construction jobs that are easily observable. But what is more important is what you can’t easily see: the jobs and wealth that are not created in the private sector as a result of capital being transferred from the private sector to the public sector. That is the crux of the matter, and it explains why investment decisions generally belong in the hands of private actors rather than politicians.

 

It is clear that Clinton and Trump are on the same side. Each professes to believe that transferring more capital from the private sector to the public sector for infrastructure investment results in net job and wealth creation. Not surprisingly, neither has offered a shred of evidence to support this.

 

It is also worth noting that the great majority of public infrastructure investment is done at the state and local level. And it is financed in the municipal bond market. In 2014 for instance, the Congressional Budget Office notes that public spending on transportation and water infrastructure amounted to $416 billion, of which $320 was state and local spending and $96 billion was federal.

 

That is as it should be. The people who use the infrastructure should be the ones who pay for it. They can pay for it a number of ways: for example through state and local income, excise and sales taxes, user fees, tolls and licenses. But there isn’t any reason why the construction and maintenance of municipal bridges and city subway systems should be financed by the federal government.

 

Separating the locus of taxes from the provision of services is an affront to federalism. It is a ploy designed to obfuscate the distribution of costs and benefits. It raises costs by hiding them; it encourages political bargaining as a substitute for market prices, and increases corruption, a subject with which both the Clinton and Trump camps are all too familiar.

 

There are ways to invest in needed public infrastructure that are transparent and more reliant on market mechanisms. Neither of the two major candidates seems to be interested in going there. That’s not surprising either.

Please take a look at John Stossel’s video below on infrastructure.

 

JFB

The Candidates are Starting to Talk Econ

We are rapidly approaching what is one of the most predictably awful exercises in a presidential campaign. The candidates are about to present their economic “plans”. We can expect the candidates to recite the usual pieties about tackling the deficit, and eliminating waste, fraud and abuse. At the same time they will save social security and Medicare, and create good paying middle-class American jobs in manufacturing.

 

For some reason or other the notion that the President can “manage” the economy has taken hold of the body politic like a dog on a mailman’s ankle. While it is certainly true that good economic policy will encourage economic growth, innovation and wealth creation, it is just as true that bad economic policy will tend to discourage those results. Which is to say that government can set the conditions that individuals and firms need to prosper, but that government is utterly incapable of doing much more than that.

 

The basic conditions that are necessary (but not sufficient) for prosperity are well known. They include free and competitive markets, the rule of law, an independent judiciary and protection of property rights, contract enforcement, sensible regulations, low taxes, neutral monetary policy, and political stability. Beyond that, government intervention generally results in more harm than good.

 

For example, the idea that government is going to “create jobs” and raise (real) wages is simply nonsense. Entrepreneurs and businesses create jobs as they seek to make profits. Real wages eventually rise (or fall) to the point where they equal marginal productivity. Firms assume the risks of hiring workers when they see the possibility to profit by creating new goods and services, or by improving on existing ones. They do not create jobs for their own sake. In fact businesses try to minimize inputs (like labor and capital) with respect to outputs. That’s how they maximize profits, which is the point of the enterprise.

 

On the other hand, government is incapable of creating jobs on balance, except insofar as those jobs are necessary to allow the larger economy (and society) to function efficiently and effectively. Sure, a government agency can hire somebody to dig holes in the sand and then hire someone else to fill the holes back in. But, with apologies to Lord Keynes, that doesn’t really create net employment because no wealth is created. Resources are just wasted. The money spent in make-work projects could have been spent on productive activity that actually created wealth. That would result in economic growth and greater opportunity.

 

Every dollar that government spends is a dollar taken from the private sector. With that in mind there are two tests that should be applied to the candidates’ economic policy proposals. First, is the policy directed at producing a public good. A public good is defined as one where (a) consumption is non-rival and (b) the costs of excludability are prohibitively high. For example, the classic example is defense. We all benefit from defense, and one citizen’s protection does not detract from another’s. Consumption is therefore non-rival.

On the other hand, only one of us can eat a given ice cream cone. An ice cream cone stands as a private good in contrast to defense, which is a public good.

 

The question of excludability of consumption addresses the problem of free riders. A classic example here is a lighthouse. The idea is that once the lighthouse is built, it is virtually impossible to stop a ship from using its beacon even if the ship hasn’t paid a fee. Since free-riders can’t be stopped from using the lighthouse’s services, the returns from building lighthouses are less than they should be, so fewer than the optimal quantity of lighthouses get built. The argument is that government should step in and supply lighthouses to rectify market failure.

 

(However, it is worth noting that in The Problem of the Lighthouse, economics Nobel laureate Ronald Coase pointed out that the problem could easily be solved by checking ships registries and charging on that basis.)

 

After the public goods question is resolved, the second test comes to the fore, namely the question of opportunity cost. Every dollar government spends is taken from the private sector, either directly by taxation, or indirectly by borrowing in competition with the private sector. So each dollar government spends should produce more goods and services (that the citizens actually want) than would have been produced by the private sector, had government not acted.

 

So we have three basic criteria for evaluating the candidate’s economic policy proposals. Are the policy proposals aimed at producing public goods as opposed to private benefits? Will the diversion of private sector funds to the public sector produce a result in a net output gain? Will the candidate’s respective economic proposals serve to strengthen or weaken the conditions necessary for prosperity?

These are the criteria that On Liberty Watch will use to evaluate the economic policy proposals of the candidates.

JFB

 

 

 

Privatize Social Security…Before It’s Too Late

The overwhelming majority of Americans believes that the Social Security Trust Fund has the cash it needs to pay its obligations to current and future retirees. They also think that they are legally entitled to it. Nothing could be further from the truth.

 

In a recent report, the Trustees for the Social Security Trust Fund—a Trust Fund in name only—calculated the present value of the System’s unfunded future obligations for both an infinite horizon and a 75-year horizon as of 2015. They found that over a 75 year horizon the System is underfunded by $10.7 trillion; over an infinite horizon the shortfall is $25.8 trillion, all in constant dollars. And that number is not included in standard budget deficit figures. It is “off-budget”.

 

To put this in perspective, U.S. GDP for 2015 amounted to $17.9 trillion; federal tax receipts were about $3.25 trillion (a record) and total federal spending clocked in at $3.8 trillion (also a record). Which means that the present value of unfunded Social Security obligations is about 60% of the entirety of U.S. GDP. It is 2.82 times all federal spending for 2015, and 3.29 times all federal tax receipts. In short, not only is the system grossly underfunded, there is no conceivable way that the System can be re-structured so that it can meet its obligations under current law.

 

In short, the Social Security System is barreling ahead toward default. The money is just not there. Promised obligations will be cut and the retirement age at which benefits can be collected will be raised. In the parlance of the bond market, prospective beneficiaries (de facto bond holders) will have to take a “haircut” and the maturity of the debt (the retirement age) will be extended. There is no way around it; the Social System as currently structured is not sustainable.

 

Social Security beneficiaries (and potential beneficiaries) would be the equivalent of bondholders if they had a contractual right to the promised payment stream of retirement benefits. But they don’t. The Social Security Administration’s website clearly says that Congress had no intention of creating a legal contractual entitlement when it crafted the law establishing Social Security. Moreover, the Supreme Court ruled in 1960 in the case of Fleming v. Nestor that workers have no legally binding contractual rights to Social Security benefits.

 

No matter. Barrack Obama, (see video below), Hillary Clinton and Bernie Sanders want to expand Social Security benefits. So for that matter does Senator Elizabeth Warren. To no one’s surprise, Donald Trump has joined in a variation of this gravity-defying act of financial fraud. At last count, he claims he will maintain Social Security without cutting benefits; he has not yet gotten around to promising increased benefits. Give him time.

 

 

When the matter of financing comes up President Obama just dusts off his 3-card Monty skills and claims that he will finance his latest foray into financial never-never land by simply “asking” the “rich” to pay a little more. That is deliberate obfuscation. When President Obama’s words are translated into English, ask becomes demand, and rich refers to anyone making over $250, 000 in a given year. But there isn’t even close to enough money there (or anywhere for that matter) to pay for existing promises, much less an expansion of them.

 

Consider the latest year (2014) for which figures are available. Individuals filing the 2.7% of returns with incomes of $250,000 or more paid 51.6% of all U.S. federal income taxes. Which is another way of saying that the most productive members of society paid (and continues to pay) the majority of income taxes. And President Obama wants to further tax this small minority that drives growth, innovation and investment in order to purchase more votes from low information voters. In so doing he would guaranty slower economic growth and a worsening of public finances, which seems to be a specialty of his.

 

What’s worse is that Social Security disadvantages the less well to do. It is well established that life expectancy, income and education are highly correlated. Granted, there are many confounding influences, including behavioral ones. For example, highly educated people are likely to have higher incomes and they also are much less likely to smoke compared to poorly educated people. And the fact remains that a high school graduate will likely begin working and contributing payroll taxes many years before a college graduate. But retirement eligibility for both the high school graduate and the college graduate remains the same. Which means that that the high school graduate with the lower life expectancy will likely pay into the system earlier, work longer and collect fewer benefits. Which implies that lower-income blue-collar workers will be taxed to support middle class white-collar workers.

 

On top of that, Social Security transfers money to the relatively well off (retired people with assets) at the expense of people who are less well off (young workers with few assets). In so doing, it discourages savings and investment by young people, setting the stage for an even more pressing retirement crisis in the years ahead.

 

Because Social Security is structured as a pay-as-you-go system where beneficiaries have no legal claim on their promised benefits, the system will never be on a sound financial footing. Politicians will always respond to political rather than economic incentives, and will resist anything remotely close to true reform. Champions of paternalistic command-and-control (Obama, Clinton, Sanders, Trump and Warren among others) will resist change that transfers power from the mighty Administrative State (and themselves) to individuals.

 

The only way to truly reform the system is to establish the legal right of beneficiaries to control the funds that have been taxed from them for the express purpose of financing retirement. The effect would be to free up massive amounts of money for productive investment by putting those funds back into private hands where they belong. And it would force transparency on a source of public finance that is no more than a Ponzi scheme that would make Bernie Maddoff blush.

 

Libertarian think tanks like CATO have been making the reform case for years. They should be heeded before it’s too late.

JFB