Once again: Politics over Economics

Posted on by

Harvard Economist Greg Mankiw points out that President Obama has again chosen politics over economics in his deal with the house Republicans to avoid the fiscal cliff.  Obama appointed the bipartisan Bowles-Simpson commission to examine the necessary fiscal reforms to move the U.S. economy forward.  The primary recommendations presented by the commission were almost entirely rejected by the President.

 

Instead of reforming entitlement programs and avoiding tax increases, the legislation passed by the house ignores both the current $16 trillion debt and the increasing annual deficits due to massive entitlement programs.  Marginal tax rates are set to increase on those earning more than $400,000 which will have an impact on many small businesses who create a large portion of the jobs in this country.

 

So, once again there is little evidence that the President is seeking to advance lasting reform.  Political pandering is more important than securing America’s economic future.

Thoughts from Moldova: Foreign Policy and American Exceptionalism

Posted on by

I am currently in the Republic of Moldova speaking at a conference on the theme of the U.S. Presidential Election, and it’s interesting to reflect upon the U.S. political process from Eastern Europe in a place where democracy is new and struggling.  The Moldovan government today is a democracy born out of the collapse of the Soviet Union approximately twenty years ago, and it is a place where the communist party still has significant influence.

The U.S. has a significant presence here with a vibrant embassy community, USAID workers, Peace Corps volunteers, and many NGO’s working to support democracy and economic development.  What comes to mind as I look back to America is thinking about the presence of the U.S. throughout the world and the U.S. foreign policy more broadly.  In the final debate between President Obama and Governor Romney, there was a brief discussion of America’s role in the world and the distinctive view of each candidate came to light.

Political Scientist Seymour Martin Lipset wrote about American exceptionalism calling American “the first new nation,” one wholly independent and free.  This idea of America as exceptional has never been rooted in arrogance or the need to promote our particular culture or behaviors.  Exceptionalism is rooted in the belief that America is unique based on the ideals of liberty, freedom, and the nature of man.  Thus, America has much to offer the world and our foreign policy should reflect these ideals.  Yet, this exceptionalism seems to be lost on the current president.

Governor Romney proposed that America’s role in the world should reflect this idea of exceptionalism, and he criticized President Obama’s Middle East “apology tour” shortly after Obama took office.  While the president argued that he was not traveling around the world apologizing for U.S. foreign policy, the posture of his view of America’s role in the world is a distortion of the excpetionalism America offers.

In Moldova, it is very clear that America is exceptional.  Exceptional in offering the world, and Eastern Europe in particular, a model of freedom and what it means to live in a society where the relationship between the citizen and government is one where the citizen can participate without fear and one where the common man has a voice.  There is no fault in this exceptionalism…no reason for apologies…no reason to diminish America’s role in the world.  This exceptionalism leads to America’s vibrant role in the world today.  This role is powerful in promoting democracy in places where people are not free or where people still live under the cloud of government corruption.  In Eastern Europe America’s exceptionalism is essential for training both the citizens of this part of the world and their leaders in how to develop accountability for actions, transparency in governing, and freedom to voice dissent and new ideas.  This role is changing the face of a part of the world where corruption, bribery, and institutional breakdown is a constant struggle.

American foreign policy should continue to provide bold leadership in the world today.  This role is not intended to shift cultural values or change the nature of the informal arrangements among citizens of a particular country.  Yet, American exceptionalism is a powerful influence for freedom and liberty throughout the world, and this role of American foreign policy must continue for decades to come.

Energy Policy – Hope v. Change

Posted on by

During the presidential debate on Tuesday night, President Obama and Governor Romney struggled at times to give any substantive policy specifics.  We often hear platitudes which correctly speak to the ideological differences of each party, but there is often limited discussion on real policy differences in these debate formats.

Yet, in Tuesday’s debate we did hear specifics In terms of energy policy and the real policy differences highlight the economics of hope versus change.  Romney clearly wants to build the pipeline from Canada to the Golf Coast, and Obama blocked approval of this pipeline.  Romney wants to drill for more oil in North America, increase permits for companies to drill off the coast of Alaska and the eastern seaboard, and expand coal mining expanding the resources America is richly endowed with.  The president’s policy is full of hope…hope for alternative energy to take off and “lead us to energy independence.”

Billions of taxpayer dollars have been invested in green technology, from wind to solar to electric automobiles (see the Chevy Volt), yet much of these dollars are being used to (attempt to) shift market incentives and the president is learning that artificial incentives do not change behavior.  The costs are still simply too high for consumers to purchase electric vehicles or solar power for their home.  Thus, the hope of green energy is not a policy that leads to change.  In fact, the outcome is a failure to invest in traditional energy resources and subsequently higher prices for gasoline, in particular.

A new energy policy agenda is needed, and this policy should be based on reducing regulations and a strategy to find and extract oil that is located in the North America.  This will ultimately change the scope of energy dependence on foreign sources, and it will move the decision on investment choices for energy to the market (where it should be).

Recap: Catch my flat tax podcast on Coffee & Markets

Posted on by

The guys over at Coffee & Markets were kind enough to have me on their show for a recent discussion on the flat tax.  Play it online or download the podcast to listen later. Check it out at RedState’s website: http://www.redstate.com/2012/09/18/how-would-a-flat-tax-impact-the-middle-class/.

And while you’re at it, be sure to follow Coffee & Markets on Twitter @CoffeeandMarket and the Helms Center @HelmsCenter.

The Problem of Healthcare Costs

Posted on by

Many argue that the Affordable Care Act (often referred to as Obamacare), is better for patients.  Those who do not have healthcare will be forced to purchase health insurance.  This mandate provision in the law that requires the uninsured to purchase health coverage gives those under certain income levels a subsidy to buy their insurance, and all others will pay for their insurance out-of-pocket.

The Congressional Budget Office (CBO) recently reported that the number of Americans who will face tax penalty unless they purchase insurance is 50 percent higher than originally estimated when the bill was passed.  One of the unintended consequences of this new law is that many who must purchase health insurance (or face a penalty) are increasingly those in the middle class that President Obama promised to protect.

One question that arises is what criteria determine the best system for patients?  In any country, there will not be enough healthcare to provide all citizens unlimited care.  Healthcare is a scarce resource and must be allocated as such.  Yet, one of the most prominent problems with healthcare allocation is that costs have climbed at a much faster rate than inflation and the rapidly changing technological improvements in healthcare don’t lower costs as in most industries.  Thus, the myriad challenges with government spending and huge deficits for entitlement programs such as Medicaid and Medicare.  Costs continue to rise, and the Affordable Care Act does little to deal with this cost problem and patients suffer because they cannot afford care.

New York University economist William Baumol, recently published the book Cost Disease where he addresses this issue.  The subtitle of the book “Why Computers Get Cheaper and Health Care Doesn’t” gets right to the heart of the issue.  In it, Baumol explains this disease where in the service sector (and particularly in government) productivity tends to stagnate while costs rise over time.  In healthcare for example, it takes the same amount of time for a nurse to perform a basic task, such as bandaging a wound, today as it did 20 years ago.  So, healthcare workers’ wages rise overtime yet productivity tends to remain flat (or flatter).  Presumably then we should experience lower costs in healthcare on the capital intensive/technological side of the industry.

Why does technological advancement in healthcare fail to reduce costs?  The answer here is not that a MRI scan and a personal computer are fundamentally different in terms of their technological development, but the pricing system for these products and services is profoundly different.  It is estimated by the CBO that half of all healthcare costs are driven by advances in technology, and while patients are the primary beneficiaries of this technology third parties pay for them.  Insurance companies and government programs approve a specific payment for a particular medical procedure and this procedure becomes available at the mandated price.  The supplier now has no incentive to lower its price because there is no competitive pressure to do so, and there is little prospect of increasing sales and market position by reducing prices.

Consequently, in healthcare both the cost disease problem explained by Baumol and the third party payment system create an industry where prices rise unchecked and there is no market-based means of cost reduction.  The Affordable Care Act fails to address the most basic problem with the U.S. healthcare system, which is uncontrollable costs

Runaway Spending

Posted on by

Despite the rhetoric espoused by both party’s during their respective conventions, the Republicans must continually challenge Mr. Obama on the fundamental problem of unsustainable government spending.  Every time a Romney-Ryan policy is criticized, the runaway freight train of Obama spending should be part of the rebuttal.

When the Obama administration claims that the Romney-Ryan Medicare plan will harm the elderly (which is a distortion because those over 55 can keep Medicare as is), the response should be “what do you plan to do about a budget that is 1 trillion dollars in the hole this year?”  Raising taxes on the wealthy is not a viable policy option to solve this spending problem.

Image

As the chart above demonstrates, the trend shows government borrows approximately 45 cents of every dollar it spends.  This level of imbalance is not only unprecedented historically during peacetime, but it is a problem that more tax revenue cannot solve.  Even when considering one of the most punitive tax increase proposal by the democrats in the House of Representatives, a tax on the wealthy making $1 million or more a year (both income and capital gains tax increases) would actually raise $40 billion to $50 billion a year which is only about 3% of the annual federal deficit.  This increase in revenue is barring an absence of any negative effects on economic growth, which is no certainty when taxes are raised on those who drive economic activity.

The U.S. government has a major spending problem, and both the candidates and the American people need to start acknowledging the disastrous path we are on.

Should We Be Talking About a Flat Tax?

Posted on by

The economy has most certainly become the central discussion point for both the Obama and Romney campaigns during this election year.  With the addition of Congressman Paul Ryan to the Romney ticket in August, discussions of the Ryan Plan have reemerged.  Ryan has largely shied away discussing a flat tax option, although he did suggest a flat tax plan in the past, and found some merit it candidate Rick Perry’s optional flat tax plan last October.  On Tuesday, Ryan appeared on GMA where he argued with anchor George Stephanopoulos that a reduction of tax rates was necessary for economic growth.  With all the tax reform talk, it’s left me wondering if the Eastern European model of flat taxes will affect the political rhetoric before the November elections.

Since 1994, 24 countries (the bulk in Eastern Europe) have adopted a flat tax system.  This spread of the flat tax has been quite remarkable during the past 15 years, and it has contributed to the widespread economic growth throughout Eastern Europe.  Additionally, the flat tax in many of these countries has helped create a simple system of revenue collection that saves millions in implementation and collection costs.

Is the European model the ticket to U.S. financial recovery?  Let’s first consider the complexity of the U.S. tax code.  It is estimated that taxpayers and firms spend over 6 billion hours per year attempting to correctly file tax returns.  Not only does this figure represent the equivalent of millions of workers, but it also pulls billions of dollars out of more productive uses.  According to the IRS Taxpayer Advocates, who reported to Congress in 2010, the complexity of the American tax code is driven in part by the continual changes to the system as the federal government attempts to squeeze more and more out of taxpayers.  In the past decade there have been approximately 4,400 tax code changes resulting in an additional 3.8 million words to document the U.S. tax code.

It is clear that this complexity costs billions of dollars each year just for taxpayers to comply with the laws, yet it also costs the Federal government billions in tax fraud and avoidance.  Again, Eastern Europe provides a lesson here where compliance of Russian taxpayers increased by over 30% after the adoption of a flat tax system.

In addition to the massive waste of resources due to complexity, the American tax code is a drag on economic growth and progress.  U.S. households and firms make decisions with their resources that are based not on market returns but on tax sheltering and loopholes.  Foreign firms weigh the costs of locating in the U.S. based on a tax rate that is the second highest in the world.  Congress and the White House are continually using the tax code to regulate.  The tax code has become the primary means of legislation, and the continual additions and changes imposed on the tax system contribute to uncertainty and fear among firms which eventually lead to decisions that hinder economic development.

Objections to a flat tax almost always hinge on fairness rather than economic efficiency or outcomes.  A progressive tax is deemed “fair” because higher income earners pay a higher marginal tax rate, and thus any talk of a flat tax is immediately rejected by those who see unnecessary benefits to the rich.  Yet, with a flat tax the more you earn the more you pay (as with a progressive tax system) and with a true flat tax you no longer have the countless loopholes and deductions to hide behind.  A flat tax system is more “fair” by any economic measure as taxpayers do not have to spend time and resources gaming the system in order to shelter their income (a practice that certainly benefits the rich).

If America wants to move past the stagnation of the previous four years and begin to see consistent economic growth again, tax reform is necessary.  The examples in Eastern Europe demonstrate that flat tax reform is possible and can have a significant economic impact.  What these examples also show, is that strong executive leadership is a crucial component of any successful tax reform.  The Romney-Ryan ticket has a clear opportunity to set the agenda early and champion the necessary reforms to unburden American individuals and firms with an outdated, inefficient, and costly tax system.

Dr. Peter Frank is co-author of a recent study entitled “The Flat Tax: Has its Time Come?” which can be read in its entirety at www.jessehelmscenter.org.  Frank is also the Jesse Helms Free Enterprise Fellow at the Jesse Helms Center and a professor of economics at Wingate University.  You can reach him by email at PeterFrank@jessehelmscenter.org