Category Archives: Milton Friedman

Dan Mitchell: America’s fiscal future is very grim, largely because of an ever-expanding burden of entitlement spending!

How to Solve America’s Worsening Fiscal Mess

America’s fiscal future is very grim, largely because of an ever-expanding burden of entitlement spending.

To see the magnitude of the problem, let’s peruse the Budget and Economic Outlook, which was released yesterday by the Congressional Budget Office has some.

Most people are focusing on how deficits are going to climb from $1 trillion to $2 trillion-plus over the next 10 years.

That’s not good news, but we should be far more worried about the fact that the burden of government spending is growing faster than the private economy. As a result, government will be consuming an ever-larger share of national output.

The budget wonks who (mistakenly) focus on red ink say the problem is so serious that we need higher taxes.

They look at this chart, which is based on CBO’s baseline forecast (what will happen if taxes and spending are left on autopilot), and assert we have no choice but to raise taxes.

They point out that the annual deficit in 2032 will be almost $2.3 trillion and that it’s impossible cut spending by that much.

Needless to say, it would be a near-impossible political undertaking to cut $2.3 trillion in one year (though it would fulfill libertarian fantasies).

But what if, instead of kicking the can down the road, policymakers imposed some sort of overall spending cap to avoid a giant deficit in 10 year.

This second chart displays that scenario. I took CBO’s baseline (autopilot) numbers and assumed that spending could only increase by 1.4 percent annually starting in 2024.

As you can see, that modest bit of fiscal discipline completely eliminates the project $2.3 trillion annual deficit in 2032.

In other words, there is no need for any tax increase.

Especially since politicians almost certainly would respond to the expectation of additional revenue by increasing spending above the baseline (as would happen with Joe Biden’s so-called Build Back Better scheme).

I’ll close by noting that there’s no need to fixate on whether the budget is balanced by 2032. What matters is trend lines.

It’s not good for government to grow faster than the private economy in the long run. And it’s not good for deficits and debt to climb as a share of economic output in the long run.

Both of those outcomes can be avoided if we have some sort of spending cap so that outlays grow slower than the private sector.

The stricter the cap, the quicker the progress.

  • I prefer actual cuts (a requirement to reduce nominal spending each year).
  • I would be happy with a hard freeze (like we had for a few years after the Tea Party revolt).
  • As noted above, a 1.4 percent spending cap balances the budget by 2032.
  • But we would make progress, albeit slow progress, even if the spending cap allowed the budget to grow by 2.0 percent of 2.5 percent per year.

P.S. I start the spending cap in 2024 because spending is not projected to grow by very much between 2022 and 2023. That’s not because today’s politicians are being responsible, however. It’s simply a result of one-time pandemic emergency spending coming to an end. But since that one-time spending has a big impact on short-run numbers, I delayed the spending cap for one year.

P.P.S. The blue revenue line has a kink in 2025 because the baseline forecast assumes that many of the Trump tax cuts expire that year. If those tax cuts are extended or made permanent, revenues would be about $400 billion lower in 2032. As such, balancing the budget by that year would require a spending cap that allows annual outlays to increase by less than 0.9 percent per year.

P.P.P.S. President Biden is bragging that the deficit is falling this year, but that’s only because the one-time pandemic spending is coming to an end.

P.P.P.P.S. A spending cap is a simple solution, but it would not be an easy solution. In the long-run, it would require genuine entitlement reform.

Another Reason for Spending Caps

The United States needs a constitutional spending cap, sort of like the “debt brake” that has been producing positive results in Switzerland for the past two decades.

Imposing a limit on annual spending increases would be a much-needed way of stopping politicians from saddling the nation with “Goldfish Government.”

The best-case scenario is that a spending cap is very stringent (say, limiting annual spending increases to 2 percent annually). This level of fiscal restraint reduces the burden of government spending compared to the private sector (i.e., it fulfills fiscal policy’s Golden Rule).

The avoid-harm scenario is that a spending cap prevents government from becoming a bigger burden. Given dismal long-run fiscal forecasts (a consequence of demographic change and poorly designed entitlement programs), this actually would be an impressive achievement.

There are also some auxiliary benefits of a spending cap.

A new working paper from Italy’s central bank, authored by Anna Laura Mancini and Pietro Tommasino, considers whether spending caps can mitigate the problem of dishonest budgeting by politicians.

…policy-makers have an incentive to “plan to cheat”. That is, they promise an amount of expenditures higher than what they will actually deliver, because this allows them to cater to the demands of the various groups of voters, and at the same time they present overoptimistic revenue forecasts, in order to preserve the appearance of fiscal discipline. Once the extra revenues hoped for by the government fail to materialize, budgeted investment expenditures are downsized or abandoned altogether. In this context, caps on realized spending can contribute to more realistic ex ante spending plans. Indeed, politicians have less room to inflate planned expenditures, once there is a legal ceiling in place.

The authors crunch the numbers and conclude that spending caps result in a greater level of fiscal honesty.

In this paper, we provide evidence in favour of this theoretical intuition, exploiting a unique dataset including the ex-ante budget plans as well as ex-post budget outcomes of…a rule that constrains capital expenditures in municipalities with more than 5,000 residents. …Our analysis show that the municipalities subject to the new capital-spending rule significantly reduced their over-optimism in expenditure projections… Furthermore, in the new regime revenue projections are also more accurate (less over-optimistic). …The reform reduced the forecast error concerning capital expenditures… The effects is significant both statistically and in economic terms. …the introduction of the cap on investment reduced the forecast error on investment expenditures by almost €1 mln, or 35% of the pre-reform average error.

For wonky readers, Figure 1 shows some of relevant data.

For what it’s worth, we seem to have a different problem in the United States.

Rather than exaggerate potential spending on so-called public investment, as seems to have been the case in Italy, American politicians generally low-ball cost estimates for infrastructure projects.

And then, once the projects get started, we get absurd cost overruns (with the high-speed rail project in California being an especially absurd example).

The good news is that a spending cap solves both the Italian version of the problem and the American version of the problem.

As the authors found in their research, it removes the incentive for dishonest budgeting in Italy. And, if adopted in the United States, politicians would learn that it doesn’t help to produce laughably low cost estimates if a spending cap means there is no way of financing cost overruns in the future.

P.S. There is a spending limit in Hong Kong’s constitution, and it has generated very positive results. Given China’s increasing control, it’s unclear how effective it will be in the future.

P.P.S. There’s also a spending limit in Colorado’s constitution, known as the Taxpayers Bill of Rights. It has been very successful.

P.P.P.S. Last month, I wrote about research from both the IMF and the ECB about the benefits of spending caps.

Steve Forbes is 100 percent correct, as was Milton Friedman. Bloated and wasteful government spending is the problem, not inadequate revenue. Deficits are merely a symptom of over-spending:

The late Nobel Prize-winning economist Milton Friedman once famously observed that he would prefer a federal government budget of $1 trillion (this was when a trillion bucks was real money) with a big deficit to a federal budget of $2 trillion that was balanced. His obvious point was that the bigger Washington is, the more of a burden it puts on the economy, whether it finances its spending via taxation, borrowing or printing money. So it’s not President Obama’s mind-numbing, from-here-to-eternity deficits that we should be worrying about but the increasing deadweight put on the rest of us by Washington’s burgeoning budget bloat. Senate Republicans were right to put the kibosh on the formation of a formal bipartisan deficit-fighting commission. Those things always end up increasing taxes while doing little to reduce spending. …One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth. The more the government takes as a proportion of the economy, the worse equity markets do and the higher the unemployment rate.

Everything You Need to Know about the National Debt

The title of this column is an exaggeration. What we’re really going to do today is explain the main things you need to knowabout government debt.

We’ll start with this video from Kite and Key Media, which correctly observes that entitlement programs are the main cause of red ink.

I like that the video pointed out how tax-the-rich schemeswouldn’t work, though it would have been nice if they added some information on how genuine entitlement reform could solve the problem  (as you can see here and here, I’ve also nit-picked other debt-themed videos).

Which is why I humbly think this is the best video ever produced on the topic.

As you can see, I’m not an anti-debt fanatic. It was perfectly okay, for instance, to incur debt to win World War II.

But I’m very skeptical of running up the nation’s credit card for routine pork and fake stimulus.

But my main message, which I’ve shared over and over again, is that deficits and debt are merely a symptom. The underlying disease is excessive government spending.

And that spending hurts our economy whether it is financed by taxing or borrowing (or, heaven forbid, by printing money).

Now let’s look at some recent articles on the topic.

We’ll start with Eric Boehm’s column for Reason, which explains how red ink has exploded in recent years.

America’s national debt exceeded $10 trillion for the first time ever in October 2008. By mid-September 2017 the national debt had doubled to $20 trillion. …data released by the U.S. Treasury confirmed that the national debt reached a new milestone: $30 trillion.…Entitlements like Social Security and Medicare are in dire fiscal straits and will become even more costly as the average American gets older. Even without another unexpected crisis, deficits will exceed $1 trillion annually, which means the debt will continue growing, both in real terms and as a percentage of the economy. The Congressional Budget Office estimates that the federal government will add another $12.2 trillion to the debt by 2031.

As already stated, I think the real problem is the spending and the debt is the symptom.

But it is possible, of course, that debt rises so high that investors (the people who buy government bonds) begin to lose faith that they will get repaid.

At that point, governments have to pay higher interest rates to compensate for perceived risk of default, which exacerbates the fiscal burden.

And if there’s not a credible plan to fix the problem, a country can go into a downward spiral. In other words, a debt crisis.

This is what happened to Greece. And I think it’s just a matter of time before it happens to Italy.

Heck, many European nations are vulnerable to a debt crisis. As are many developing countries. And don’t forget Japan.

Could the United States also be hit by a debt crisis? Will we reach a “tipping point” that leads to the aforementioned loss of faith?

That’s one of the possibilities mentioned in the New York Timescolumn by Peter Coy.

It’s hard to know how much to worry about the federal debt of the United States. …Either the United States can continue to run big deficits and skate along with no harm done or it’s at risk of losing investors’ confidence and having to pay higher interest rates on its debt, which would suppress economic growth. …the huge increase in federal debt incurred during and after the past two recessions — those of 2007-09 and 2020 — has used upa lot of the “fiscal space” the United States once had. In other words, the federal government is closer to the tipping point where big increases in debt finally start to become a real problem. …any given amount of debt becomes easier to sustain as long as the growth rate of the economy (and thus the growth rate of tax revenue) is higher than the interest rate on the debt. In that scenario, interest payments gradually shrink relative to tax revenue. …but it doesn’t explain how much more the debt can grow. …Past a certain point, there’s a double whammy of more dollars of debt plus higher interest costs on each dollar. …sovereign debt crises tend to be self-fulfilling prophecies: Investors get nervous about a government’s ability to pay, so they demand higher interest rates, which raise borrowing costs and produce the bad outcome they feared. It’s a dynamic that Argentines are familiar with — and that Americans had better hope they never experience.

For what it’s worth, I think other major nations will suffer fiscal crisis before the problem becomes acute in the United States.

I really this will make me sound uncharacteristically optimistic, but I’m keeping my fingers crossed that this will finally lead politicians to adopt a spending cap so we don’t become Argentina.

P.S. The Wall Street Journal recently editorialized on the issue of government debt and made a very important point about the difference between the $30 trillion “gross debt” and the “debt held by the public,” which is about $6 trillion lower.

…the debt really isn’t $30 trillion. About $6 trillion of that is debt the government owes to itself in Social Security and other IOUs. …The debt held by the public is some $24 trillion, which is bad enough.

As I’ve noted when writing about Social Security, the IOUs in government trust funds are not real.

They’re just bookkeeping entries, as even Bill Clinton’s budget freely admitted.

Indeed, if you want to know whether some is both honest and knowledgeable about budget matters, ask them which measure of the national debt really matters.

As you can see from this exchange of tweets, competent and careful budget people (regardless of whether they favor big government or small government) focus on “debt held by the public,” which is the term for the money government actually borrows from credit markets.

If you want to know the difference between the various types of government debt – including “unfunded liabilities” – watch this video.

P.P.S. This column explains how and when debt matters. If you’re interested in how to reduce the debt, there’s very good evidence that spending restraint is the only effective approach. Even in cases where debt is enormous.

P.P.P.S. By contrast, the evidence is very clear that higher taxesactually make debt problems worse.

Yes, Starve the Beast

As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting.…So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending.Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”


Friedman & Sowell: Should Our School System Be Privatized?

Regular readers know that the two things that get me most excited are the Georgia Bulldogs and the fight against a bloated public sector that is ineffective in the best of circumstances and more often than not is a threat to our freedoms.

So you will not be surprised to know that I am delighted that former Georgia Bulldog star Fran Tarkenton (who also happened to play in the NFL) has a superb piece in the Wall Street Journal ripping apart the inherent inefficiency of government-run monopoly schools.

Here is the key passage.

Imagine the National Football League in an alternate reality. Each player’s salary is based on how long he’s been in the league. It’s about tenure, not talent. The same scale is used for every player, no matter whether he’s an All-Pro quarterback or the last man on the roster. For every year a player’s been in this NFL, he gets a bump in pay. The only difference between Tom Brady and the worst player in the league is a few years of step increases. And if a player makes it through his third season, he can never be cut from the roster until he chooses to retire, except in the most extreme cases of misconduct. Let’s face the truth about this alternate reality: The on-field product would steadily decline. Why bother playing harder or better and risk getting hurt? No matter how much money was poured into the league, it wouldn’t get better. In fact, in many ways the disincentive to play harder or to try to stand out would be even stronger with more money. Of course, a few wild-eyed reformers might suggest the whole system was broken and needed revamping to reward better results, but the players union would refuse to budge and then demonize the reform advocates: “They hate football. They hate the players. They hate the fans.” The only thing that might get done would be building bigger, more expensive stadiums and installing more state-of-the-art technology. But that just wouldn’t help.

This sounds absurd, of course, but Mr. Tarkenton goes on to explain that this is precisely how government schools operate.

If you haven’t figured it out yet, the NFL in this alternate reality is the real-life American public education system. Teachers’ salaries have no relation to whether teachers are actually good at their job—excellence isn’t rewarded, and neither is extra effort. Pay is almost solely determined by how many years they’ve been teaching. That’s it. After a teacher earns tenure, which is often essentially automatic, firing him or her becomes almost impossible, no matter how bad the performance might be. And if you criticize the system, you’re demonized for hating teachers and not believing in our nation’s children. Inflation-adjusted spending per student in the United States has nearly tripled since 1970. According to the Organization for Economic Cooperation and Development, we spend more per student than any nation except Switzerland, with only middling results to show for it.

Actually, I will disagree with the last sentence of this excerpt. We’re not even getting “middling results.” Here’s a chart from an earlier post showing that we’ve gotten more bureaucracy and more spending but no improvement over the past 40 years.

So what’s the solution to this mess? Well, since government is the problem, it stands to reason that competition and markets are the answer.

Sweden, Chile, and the Netherlands are just some of the countries that have seen good results after breaking up state-run education monopolies.

Watch this video to get more details.

Economics 101: School Choice Example Shows Why Government Monopolies Are Bad

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In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

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MAY 23, 2018 REWIND: Sen. Chuck Schumer slammed President Trump on Wednesday for soaring gas prices — blaming his decision to reimpose sanctions on Iran for higher costs that he said will burn away the GOP tax cut! ($2.94)

Schumer blames Trump for soaring gas prices

Sen. Chuck Schumer slammed President Trump on Wednesday for soaring gas prices — blaming his decision to reimpose sanctions on Iran for higher costs that he said will burn away the GOP tax cut.

“Gas prices will roughly cancel out the 2018 consumption boost from the tax cuts,” Schumer said at an Exxon gas station on Capitol Hill.

“That’s right, whatever meager benefit working families may have seen from Trump’s tax scam for the rich has been wiped out by the gas prices that President Trump is responsible for.”

Schumer argued that Trump’s move earlier this month to reinstate economic sanctions on Iran spooked oil markets, sending prices through the roof.

AAA predicts Americans this summer will pay the highest prices at the pump since 2014.

The average US price Wednesday was $2.947 a gallon.

The Trump administration referred The Post’s requests for comment to the Treasury Department, which did not immediately respond

U.S. Inflation Rate by Year From 1929 to 2023

How Bad Is Inflation? Past, Present, Future.

boat yard during world war II
•••

The U.S. inflation rate by year is the percentage of change in product and service prices from one year to the next, or “year-over-year.”

The inflation rate responds to each phase of the business cycle. That’s the natural rise and fall of economic growth that occurs over time. The cycle corresponds to the highs and lows of a nation’s gross domestic product (GDP), which measures all goods and services produced in the country.

Key Takeaways

  • The U.S. inflation rate by year reflects how much prices change year-over-year.
  • Year-over-year inflation rates give a clearer picture of price changes than annual average inflation.
  • The Federal Reserve uses monetary policy to achieve its target rate of 2% inflation.
  • In 2022 in the wake of the Covid-19 pandemic, inflation reached 7%, its highest rate in decades.

Business Cycle: Expansion and Peak

The business cycle runs in four phases. The first phase is the expansion phase. This is when economic growth is positive, with a healthy 2% rate of inflation. The Federal Reserve (“the Fed”) considers this an acceptable rate of inflation.1 On August 27, 2020, the Fed announced that it would allow a target inflation rate of more than 2% if that will help ensure maximum employment. It still seeks a 2% inflation over time but is willing to allow higher rates if inflation has been low for a while.2

As the economy expands past a 3% rate of growth, it can create an asset bubble. That’s when the market value of an asset increases more rapidly than its underlying real value.

The second phase of the cycle is known as thepeak.” This is the time when expansion ends and contraction begins.

Economic Cycles
Business Cycle Phases.

Business Cycle: Contraction and Trough

As the market resists any higher prices, a decline begins. This is the beginning of the third, or contraction, phase. The growth rate turns negative. If it lasts long enough, it can create a recession.

During a recession, deflation can occur. That’s a decrease in the prices of goods and services. It can often be more dangerous than inflation.

As the economy continues its downward trend, it reaches the lowest level possible for the circumstances. This trough is the fourth phase, where contraction ends and economic expansion begins. The rate of inflation begins to increase again, and the cycle repeats.

During recessions and troughs, the Fed uses monetary policy to control inflation, deflation, and disinflation.

The Effect of Monetary Policy

The Fed focuses on the core inflation rate, which excludes gas and food prices. These volatile prices change from month to month, hiding underlying inflation trends.

The Fed sets a target inflation rate of 2%. If the core rate rises much above that, the Fed will execute a contractionary monetary policy. It will increase the federal funds rate, which is the interest rate when banks lend to each other overnight. Historically, this action reduces demand and pushes inflation lower.

The Fed can also lower the federal discount rate, which makes it cheaper to borrow money from the Fed itself. This is an attempt to increase demand and raise prices.

Other tools that the Fed uses are:

  • Reserve requirements (the amount banks hold in reserves)
  • Open market operations (buying or selling U.S. securities from member banks)
  • Reserve interest (paying interest on excess reserves)3

U.S. Inflation Rate History and Forecast

The best way to compare inflation rates is to use the end-of-year consumer price index (CPI), which creates an image of a specific point in time.

The table below compares the inflation rate (December end-of-year) with the fed funds rate, the phase of the business cycle, and the significant events influencing inflation. A more detailed forecast is in the U.S. Economic Outlook.

Year Inflation Rate YOY4 Fed Funds Rate*5 Business Cycle (GDP Growth)67 Events Affecting Inflation8
1929 0.6% NA August peak Market crash
1930 -6.4% NA Contraction (-8.5%) Smoot-Hawley
1931 -9.3% NA Contraction (-6.4%) Dust Bowl
1932 -10.3% NA Contraction (-12.9%) Hoover tax hikes
1933 0.8% NA Contraction ended in March (-1.2%) FDR’s New Deal
1934 1.5% NA Expansion (10.8%) U.S. debt rose
1935 3.0% NA Expansion (8.9%) Social Security
1936 1.4% NA Expansion (12.9%) FDR tax hikes
1937 2.9% NA Expansion peaked in May (5.1%) Depression resumes
1938 -2.8% NA Contraction ended in June (-3.3%) Depression ended
1939 0.0% NA Expansion (8.0% Dust Bowl ended
1940 0.7% NA Expansion (8.8%) Defense increased
1941 9.9% NA Expansion (17.7%) Pearl Harbor
1942 9.0% NA Expansion (18.9%) Defense spending
1943 3.0% NA Expansion (17.0%) Defense spending
1944 2.3% NA Expansion (8.0%) Bretton Woods
1945 2.2% NA Feb. peak, Oct. trough (-1.0%) Truman ended WWII
1946 18.1% NA Expansion (-11.6%) Budget cuts
1947 8.8% NA Expansion (-1.1%) Cold War spending
1948 3.0% NA Nov. peak (4.1%)
1949 -2.1% NA Oct trough (-0.6%) Fair Deal, NATO
1950 5.9% NA Expansion (8.7%) Korean War
1951 6.0% NA Expansion (8.0%)
1952 0.8% NA Expansion (4.1%)
1953 0.7% NA July peak (4.7%) Eisenhower ended Korean War
1954 -0.7% 1.25% May trough (-0.6%) Dow returned to 1929 high
1955 0.4% 2.50% Expansion (7.1%)
1956 3.0% 3.00% Expansion (2.1%)
1957 2.9% 3.00% Aug. peak (2.1%) Recession
1958 1.8% 2.50% April trough (-0.7%) Recession ended
1959 1.7% 4.00% Expansion (6.9%) Fed raised rates
1960 1.4% 2.00% April peak (2.6%) Recession
1961 0.7% 2.25% Feb. trough (2.6%) JFK’s deficit spending ended recession
1962 1.3% 3.00% Expansion (6.1%)
1963 1.6% 3.5% Expansion (4.4%)
1964 1.0% 3.75% Expansion (5.8%) LBJ Medicare, Medicaid
1965 1.9% 4.25% Expansion (6.5%)
1966 3.5% 5.50% Expansion (6.6%) Vietnam War
1967 3.0% 4.50% Expansion (2.7%)
1968 4.7% 6.00% Expansion (4.9%) Moon landing
1969 6.2% 9.00% Dec. peak (3.1%) Nixon took office
1970 5.6% 5.00% Nov. trough (0.2%) Recession
1971 3.3% 5.00% Expansion (3.3%) Wage-price controls
1972 3.4% 5.75% Expansion (5.3%) Stagflation
1973 8.7% 9.00% Nov. peak (5.6%) End of gold standard
1974 12.3% 8.00% Contraction (-0.5%) Watergate
1975 6.9% 4.75% March trough (-0.2%) Stop-gap monetary policy confused businesses and kept prices high
1976 4.9% 4.75% Expansion (5.4%)
1977 6.7% 6.50% Expansion (4.6%)
1978 9.0% 10.00% Expansion (5.5%)
1979 13.3% 12.00% Expansion (3.2%)
1980 12.5% 18.00% Jan. peak (-0.3%) Recession
1981 8.9% 12.00% July trough (2.5%) Reagan tax cut
1982 3.8% 8.50% November (-1.8%) Recession ended
1983 3.8% 9.25% Expansion (4.6%) Military spending
1984 3.9% 8.25% Expansion (7.2%)
1985 3.8% 7.75% Expansion (4.2%)
1986 1.1% 6.00% Expansion (3.5%) Tax cut
1987 4.4% 6.75% Expansion (3.5%) Black Monday crash
1988 4.4% 9.75% Expansion (4.2%) Fed raised rates
1989 4.6% 8.25% Expansion (3.7%) S&L Crisis
1990 6.1% 7.00% July peak (1.9%) Recession
1991 3.1% 4.00% Mar trough (-0.1%) Fed lowered rates
1992 2.9% 3.00% Expansion (3.5%) NAFTA drafted
1993 2.7% 3.00% Expansion (2.8%) Balanced Budget Act
1994 2.7% 5.50% Expansion (4.0%)
1995 2.5% 5.50% Expansion (2.7%)
1996 3.3% 5.25% Expansion (3.8%) Welfare reform
1997 1.7% 5.50% Expansion (4.4%) Fed raised rates
1998 1.6% 4.75% Expansion (4.5%) LTCM crisis
1999 2.7% 5.50% Expansion (4.8%) Glass-Steagall repealed
2000 3.4% 6.50% Expansion (4.1%) Tech bubble burst
2001 1.6% 1.75% March peak, Nov. trough (1.0%) Bush tax cut, 9/11 attacks
2002 2.4% 1.25% Expansion (1.7%) War on Terror
2003 1.9% 1.00% Expansion (2.9%) JGTRRA
2004 3.3% 2.25% Expansion (3.8%)
2005 3.4% 4.25% Expansion (3.5%) Katrina, Bankruptcy Act
2006 2.5% 5.25% Expansion (2.9%)
2007 4.1% 4.25% Dec peak (1.9%) Bank crisis
2008 0.1% 0.25% Contraction (-0.1%) Financial crisis
2009 2.7% 0.25% June trough (-2.5%) ARRA
2010 1.5% 0.25% Expansion (2.6%) ACA, Dodd-Frank Act
2011 3.0% 0.25% Expansion (1.6%) Debt ceiling crisis
2012 1.7% 0.25% Expansion (2.2%)
2013 1.5% 0.25% Expansion (1.8%) Government shutdown. Sequestration
2014 0.8% 0.25% Expansion (2.5%) QE ends
2015 0.7% 0.50% Expansion (3.1%) Deflation in oil and gas prices
2016 2.1% 0.75% Expansion (1.7%)
2017 2.1% 1.50% Expansion (2.3%)
2018 1.9% 2.50% Expansion (3.0%)
2019 2.3% 1.75% Expansion (2.2%)
2020 1.4% 0.25% Contraction (-3.4%) Impact of COVID
2021 7.0% 0.25% Expansion (5.9%) Forecast
2022 2.3% (est.) 0.30% (est.) Expansion (3.8%) FFR midpoint projection
2023 2.2% (est.) 1.0%

Why the Inflation Rate Matters

The inflation rate demonstrates the health of a country’s economy. It is a measurement tool used by a country’s central bank, economists, and government officials to gauge whether action is needed to keep an economy healthy. That’s when businesses are producing, consumers are spending, and supply and demand are as close to equilibrium as possible.

A healthy rate of inflation is good for both consumers and businesses. During deflation, consumers hold on to their cash because the goods will be cheaper tomorrow. Businesses lose money, cutting costs by reducing pay or employment. That happened during the subprime housing crisis.

In galloping inflation, consumers spend now before prices rise tomorrow. That artificially increases demand. Businesses raise prices because they can, as inflation spirals out of control.

When inflation is steady, at around 2%, the economy is more or less as stable as it can get. Consumers are buying what businesses are selling.

Frequently Asked Questions (FAQs)

How is inflation measured?

There are several ways to measure inflation, but the U.S. Bureau of Labor Statistics uses the consumer price index. The CPI aggregates price data from 23,000 businesses and 80,000 consumer goods to determine how much prices have changed in a given period of time. If the CPI rises by 3% year over year, for example, then the inflation rate is 3%. The Fed, on the other hand, relies on the price index for personal consumption expenditures (PCE). This index gives more weight to items such as healthcare costs.

What is the highest inflation rate in U.S. history?

Since the introduction of the CPI in 1913, the highest rate of annual inflation in the U.S. was 17.8% in 1917. The 1970s saw the longest period of sustained high inflation rates.9

How do you hedge against inflation?

Because inflation causes money to lose value over time, hedging against it is an important part of any sound investing strategy. Investors use a diversified portfolio with a variety of asset types to offset inflation and ensure that the overall growth of their portfolio outpaces it.

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Too Much Money Portends High Inflation

The Fed should pay attention to Milton Friedman’s wisdom.

June’s inflation index jumped 5.4% from a year ago, the highest reading since August 2008. The experts were surprised. Clearly, Federal Reserve watchers never bothered to consult Milton Friedman. Lost is a core Friedman dictum: “Inflation is always and everywhere a monetary phenomenon.”

In his Feb. 23 testimony to Congress, Fed Chairman Jerome Powell said that the growth in the money supply, specifically M2, “doesn’t really have important implications.” The experts, the press and the bond vigilantes were as quick to unlearn monetarism, if they ever had learned it, as Mr. Powell. Reporting about U.S. inflation rarely contains the words “money supply.” We are repeatedly told that the most recent upticks in inflation are anomalous and “transitory.”

Wrong. The inflation upticks aren’t temporary and were predictable, driven by an extraordinary explosion in the money supply. Since March 2020, the M2 has been growing at an average annualized rate of 23.9%—the fastest since World War II. There is so much money out there that banks don’t know what to do with it. Via reverse repurchase agreements, banks and money-market funds are lending money to the Fed to the tune of $860 billion. That’s unprecedented.

According to monetarism, asset-price inflation should have occurred with a lag of one to nine months. Then, with a lag of six to 18 months, economic activity should have started to pick up. Lastly, after a lag of 12 to 24 months, generalized inflation should have set in. That’s the standard monetarist sequence, and it’s been followed to a T.

To get a handle on what the recent money supply explosion implies for inflation, consider a monetarist model for determining national income. That famous model was displayed on Milton Friedman’s California license plates. It’s compact: MV=Py, where M is the money supply, V is the velocity of money (the speed at which it circulates), P is the price level, and y is real gross domestic product.

Plug numbers into the model and solve for M, and money supply (M2) should be growing at around 6% a year for the Fed to hit its inflation target of 2%. With M2 growing at nearly four times the “ideal” rate since March 2020, inflation is baked into the cake, and it’s likely to persist. By the end of the year, the year-over-year inflation rate will be at least 6% and possibly as high as 9%.

Some who like to throw cold water on monetarism argue that the velocity of money has collapsed and will mitigate the inflationary impact of the rapid growth of the money supply. While velocity did collapse with the onset of Covid, it’s on track to pick up until the end of 2024. Consequently, velocity will grease the monetary wheels. That’s why inflation might hit the high end of our forecast range.

Mr. Powell and his colleagues should start paying attention to the money supply. Money matters. Indeed, it dominates.

Mr. Greenwood is chief economist at Invesco in London. Mr. Hanke is a professor of applied economics at Johns Hopkins University.

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, and – Power of the Market.“If we could just stop the printing presses, we would stop inflation,” Milton Friedman says in “How to Cure Inflation” from the Free To Choose series. Now as then, there is only one cause of inflation, and that is when governments print too much money. Milton explains why it is that politicians like inflation, and why wage and price controls are not solutions to the problem.

In this episode Friedman notes, “Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.

That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later.”
Pt 3
Germany, 1945, a devastated country. A nation defeated in war. The new governing body was the Allied Control Commission, representing the United States, Britain, France and the Soviet Union. They imposed strict controls on practically every aspect of life including wages and prices. Along with the effects of war, the results were tragic. The basic economic order of the country began to collapse. Money lost its value. People reverted to primitive barter where they used cameras, fountain pens, cigarettes, whiskey as money. That was less than 40 years ago.
This is Germany as we know it today. Transformed into a place a lot of people would like to live in. How did they achieve their miraculous recovery? What did they know that we don’t know?
Early one Sunday morning, it was June 20, 1948, the German Minister of Economics, Ludwig Earhardt, a professional economist, simultaneously introduced a new currency, today’s Deutsche Mark, and in one fell swoop, abolished almost all controls on prices and wages. Why did he do it on a Sunday morning? It wasn’t as you might suppose because the Stock Markets were closed on that day, it was, as he loved to confess, because the offices of the American, the British, and the French occupation authorities were closed that day. He was sure that if he had done it when they open they would have countermanded the order. It worked like a charm. Within days, the shops were full of goods. Within months, the German economy was humming along at full steam. Economists weren’t surprised at the results, after all, that’s what a price system is for. But to the rest of the world it seemed an economic miracle that a defeated and devastated country could in little more than a decade become the strongest economy on the continent of Europe.
In a sense this city, West Berlin, is something of a unique economic test tube. Set as it is deep in Communist East Germany. Two fundamentally different economic systems collide here in Europe. Ours and theirs, separated by political philosophies, definitions of freedom and a steel and concrete wall.
To digress from inflation, economic freedom does not stand alone. It is part of a wider order. I wanted to show you how much difference it makes by letting you see how the people live on the other side of that Berlin Wall. But the East German authorities wouldn’t let us. The people over there speak the same language as the people over here. They have the same culture. They have the same for bearers. They are the same people. Yet you don’t need me to tell you how differently they live. There is one simple explanation. The political system over there cannot tolerate economic freedom. The political system over here could not exist without it.
But political freedom cannot be preserved unless inflation is kept in bounds. That’s the responsibility of government which has a monopoly over places like this. The reason we have inflation in the United States or for that matter anywhere in the world is because these pieces of paper and the accompanying book entry or their counterparts in other nations are growing more rapidly than the quantity of goods and services produced. The truth is inflation is made in one place and in one place only. Here in Washington. This is the only place were there are presses like this that turn out these pieces of paper we call money. This is the place where the power resides to determine how rapidly the amount of money shall increase.
What happened to all that noise? That’s what would happen to inflation if we stop letting the amount of money grow so rapidly. This is not a new idea. It’s not a new cure. It’s not a new problem. It’s happened over and over again in history. Sometimes inflation has been cured this way on purpose. Sometimes it’s happened by accident. During the Civil War the North, late in the Civil War, overran the place in the South where the printing presses were sitting up, where the pieces of paper were being turned out. Prior to that point, the South had a very rapid inflation. If my memory serves me right, something like 4% a month. It took the Confederacy something over two weeks to find a new place where they could set up their printing presses and start them going again. During that two week period, inflation came to a halt. After the two week period, when the presses started running again, inflation started up again. It’s that clear, that straightforward. More recently, there’s another dramatic example of the only effective way to deal with rampant inflation.
In 1973, Japanese housewives going to market were faced with an unpleasant fact. The cash in their purses seemed to be losing its value. Prices were starting to sore as the awful story of inflation began to unfold once again. The Japanese government knew what to do. What’s more, they were prepared to do it. When it was all over, economists were able to record precisely what had happened. In 1971 the quantity of money started to grow more rapidly. As always happens, inflation wasn’t affected for a time. But by late 1972 it started to respond. In early 73 the government reacted. It started to cut monetary growth. But inflation continued to soar for a time. The delayed reaction made 1973 a very tough year of recession. Inflation tumbled only when the government demonstrated its determination to keep monetary growth in check. It took five years to squeeze inflation out of the system. Japan attained relative stability. Unfortunately, there’s no way to avoid the difficult road the Japanese had to follow before they could have both low inflation and a healthy economy. First they had to live through a recession until slow monetary growth had its delayed effect on inflation.
Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.
That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later. That’s why it’s so hard to persist with the cure. In the United States, four times in the 20 years after 1957, we undertook the cure. But each time we lacked the will to continue. As a result, we had all the bad effects and none of the good effects. Japan on the other hand, by sticking to a policy of slowing down the printing presses for five years, was by 1978 able to reap all the benefits, low inflation and a recovering economy. But there is nothing special about Japan. Every country that has had the courage to persist in a policy of slow monetary growth has been able to cure inflation and at the same time achieve a healthy economy.

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Dan Mitchell: “I don’t think politicians and bureaucrats should be able to interfere with my freedom to buy good and services from people who happen to live in other nations”

Milton Friedman – Free Trade vs. Protectionism

Free to Choose Part 2: The Tyranny of Control (Featuring Milton Friedman

Trade, Jobs, and Wages

I’m a knee-jerk supporter of free trade, which simply means I don’t think politicians and bureaucrats should be able to interfere with my freedom to buy good and services from people who happen to live in other nations.

But my support for free trade is not just based on ideology. I also cite data on how trade taxes and other restrictions make nations poorer.

Simply stated, trade barriers (like other forms of government intervention) make an economy less efficient.

And the negative effects go beyond overall economic output. Researchers also find job losses, lower productivity, and increased inequality.

Today, let’s look at some new research on this topic. The IMF earlier this year released a new working paper authored by Kim Beaton, Valerie Cerra, and Metodij Hadzi-Vaskov.

Here are the main results.

…firms in countries and industries experiencing greater competition from imports reduce employment slightly. …Even so, the low elasticity of employment growth to imports indicates a limited adverse impact. …Contrary to popular belief and anti-globalization sentiment, import competition is associated with higher average wage growth across the global sample of firms…, driven by the EMDEs… Taking employment and wages together, import growth in an industry leads to a rise in the wage bill of domestic firms in the same industry. Thus, while import competition generates some job dislocations, the overall impact on earnings of workers in the same industry is positive.

Here’s a chart that was included with the study.

One unexpected finding from the study is that rich nations are more likely to enjoy job gains.

The job loss associated with import competition appears to be dominated by the behavior of firms in emerging and developing economies… In contrast, the import shock provides a statistically significant positive boost to firms’ employment in advanced economies.

And here’s a finding that should not surprise anyone.

…we find relatively positive outcomes of import competition on exposed firms, including higher sales, profits, wage growth, and investment. Moreover, the import shock to exposed firms, and the ensuing employment changes, do not take place in isolation. Import growth often goes hand in hand with export growth, which spurs job creation.

But I didn’t like everything I found in the paper. In some circumstances, trade reduces inequality, but by hurting those with high incomes rather than helping those with low incomes.

Our results also show that firms experiencing higher imports shocks are those with higher average wage levels. Thus, to the extent that employment growth is lower in these more exposed firms, it could lead to lower inequality.

For some of our friends on the left, this is a good outcome. Crazy.

Fortunately, trade generally helps everyone, so this quirky result is an exception rather than the rule.

The bottom line is that free trade is an overall winner for the economy. Does that mean that everyone benefits in short run? Of course not.

Jobs always get destroyed when there’s competition. And that’s true whether the competition comes from inside a country or outside a country.

The goal, of course, is to have a vibrant economy that regularly produces plenty of new jobs to offset any job losses.

Don’t Sweat the Trade Deficit

When the Commerce Department announced in February that the United States had a record trade deficit for 2021, I shared this video to help make the point that those trade numbers were that year’s “least important economic news.”

The main thing to understand is that a trade deficit is simply the flip side of an investment surplus.

When Americans use dollars to buy goods from other nations, those dollars are only valuable to foreigners because they can use them to buy things from America.

In many cases, they buy American goods and services. But they also use many of those dollars to invest in the U.S. economy.

That’s generally a positive thing. It’s a vote of confidence about America’s economic future.

Jeff Jacoby of the Boston Globe shares my viewpoint. He recently opined on this issue, echoing the important insight about the link between trade flows and investment flows.

The US trade deficit hit an all-time high in March, widening to nearly $110 billion as the nation imported considerably more goods than it exported. That can’t be good, right? Actually, it’s fine. …It’s not an indication of actual economic weakness. …Quite the contrary: All things being equal, imports are usually evidence of economic vitality and success.…The dollars Americans spend on imports aren’t “lost.” They are exchanged for desirable and affordable goods, services, parts, and commodities that strengthen Americans’ economy while elevating their US lifestyle. Better still, those dollars then come back to the United States, where they are used to invest in American assets or buy American exports, creating even more value and putting even more Americans to work. …a trade “deficit” isn’t a debt we owe. It is an accounting entry that tells us how much more we were enriched by foreigners than they were by us. ..the US economy has some real problems. Happily, the trade deficit isn’t one of them. Imports are good. And more imports? They’re good too.

This does not mean, however, that everyone is a winner.

As I explain in this video, jobs are destroyed when there is trade between nations. But I also point out that jobs are destroyed by trade inside a nation’s borders.

That’s bad news for workers in sectors that are dying (such as typewriter makers after personal computers hit the market).

What’s important is whether the new jobs that are createdexceed the number of jobs that are lost.

This is what is called “creative destruction.” It’s painful, but it is why we are much richer today than we were in the past.

The good news is that this usually happens…at least if politicians resist the temptation to over-tax, over-spend, and over-regulate.

The bottom line is that free trade is much better for long-run prosperity than protectionism.

Unless, of course, you think it’s a good idea to copy the policies of Herbert Hoover.

Trump, Sanders, and the Snake-Oil Economics of Protectionism

John Cowperthwaite deserves a lot of credit for Hong Kong’s prosperity. As a British appointee, he took a hands-off policy and allowed the colony’s economy to thrive. He didn’t even want the government to collect statistics since that would give interventionists data that might be used to argue for interventionism.

I have mixed feelings about that approach. I constantly use statistics because they so often show that free markets and small government produce the best outcomes. I even use data to show that Hong Kong’s economy should be emulated.

On the other hand, there are some statistics that cause a lot of mischief.

I’ve argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the focus to GDI, the debate would more naturally focus on pro-growth policies to boost wages, small business income, and corporate profits rather than the misguided policies (such asKeynesian economics) that are enabled by a focus on GDP.

That being said, there’s a good argument that the worst government statistic is the “trade deficit.”

This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.

Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And for any readers who nonetheless think protectionism might be a good idea, I challenge them to answer these eight questions.

I’m confident that both Donald Trump and Bernie Sanders wouldn’t be able to successfully answer any of them. Yet it appears they’ve gained some traction with voters by calling for protectionism.

That’s quite unfortunate. If the pro-trade policy consensus in America breaks down, that would create dangerous opportunities for politicians and bureaucrats to rig the game in favor of special interests while also imposing higher costs of taxpayers and consumers.

Let’s dig into the issue.

In a column for the Wall Street Journal, Mort Kondracke and Matthew Slaughter combine to produce a strong defense of trade.

…the four leading presidential candidates…oppose the U.S. ratifying the Trans-Pacific Partnership. All four demonize trade the same way. …Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” …America’s exporters and importers are among the country’s most dynamic companies, paying their workers about 15%-20% more than workers earn elsewhere in the economy. The overall gains are large. Trade and related activities—spurred by accords such as the North American Free Trade Agreement, or Nafta, have boosted annual U.S. income today by about 10 percentage points of GDP relative to what it would have been otherwise. This translates into an aggregate gain of about $1.8 trillion in 2015—thousands of dollars per U.S. household every year. …creative destruction—the movement of people and capital from weaker businesses to stronger ones and new opportunities—is how many of the gains from trade arise. …For generations, American presidents of both parties have spoken about the benefits of trade. “Economic isolation and political leadership are wholly incompatible,” warned John Kennedy. “A creative, competitive America is the answer to a changing world,” said Ronald Reagan. “We should always remember: protectionism is destructionism.”

By the way, I think Kondracke and Slaughter paint with too broad a brush. Both Cruz and Clinton are far less protectionist than Trump and Sanders. Though the authors are correct in noting that they’ve been reluctant (especially in the case of Clinton) to vigorously defend free trade.

The great legal scholar Richard Epstein (also my former debating partner) writesabout the dangers of protectionism.

There are of course major difference between the insidious Trump and buffoonish Sanders. …Still, the real selling point of each boils down to one issue: In the indecorous language of the pollster, Pat Caddell, Americans feel “they have been screwed” by free trade. …free trade is in retreat as protectionism becomes the common thread across the both political parties. It is as though the economic unwisdom of the 1930 Smoot-Hawley Tariff Act is back.

Richard makes a very important point that politicians often support protectionism in an attempt to hide the damage they do with other misguided policies.

Free trade offers an uncompromising indictment of, and a powerful corrective for, America’s unsound economic policies. …the reason that local businesses outsource from the United States is the same reason why foreign businesses are reluctant to expand operations here. Our regulatory and labor environment is hostile to economic growth and there are no signs of that abating anytime soon. …the steady decline in freedom and productivity inside the United States has continued apace. Ironically, the strong likelihood that the next American president will expand protectionist practices will only make matters worse: firms, both foreign and domestic, are more reluctant to invest in the United States…free trade gives the federal government and the individual states strong incentives to clean up their act so that they can once again be attractive to foreign investment.

My buddy Ross Kaminsky explains in the American Spectator that free trade is good because it is part of the competitive process that boosts living standards, particularly for the poor.

…in trade, as in any economic endeavor, there are losers in the short run. Capitalism is, after all, fundamentally a system of creative destruction. But if there is any area of agreement among economists of all political stripes…it is that free trade provides large net benefits to the societies that engage in it, even if other nations do not lower trade barriers to the same degree. Furthermore, the benefits of trade accrue in large measure to the lower economic echelons of society in an extension of Schumpeter’s profound observation that “the capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

And Ross echoes Richard Epstein’s point about the real problem being anti-growth policies that make America less competitive.

Trade is complex and like all complex things politicians will dumb it down in a way that benefits them, generally by lying to the public and creating a frothy anger against those “damn furiners” instead of pointing fingers at the true culprits: unions, regulators, and politicians of all stripes.

Ross and Richard are right. If politicians really want more jobs in America, they should be adopting policies to boost U.S. competitiveness.

And we don’t need giant steps. Yes, a flat tax would be great, but even incremental reforms such as a lower corporate tax rate or the right tax treatment of business investment would yield big dividends.

Let’s add a few more voices to the discussion.

In an editorial, the Wall Street Journal debunks Donald Trump’s protectionist tirade against China.

The real-estate developer recently added Japan to his most-wanted list of job killers… “They’re killing us. You know what we sell to Japan? Practically nothing.” Is $116 billion worth of annual goods and services exports to Japan practically nothing? Japan is the fourth largest U.S. export market in goods after Canada, Mexico and China. …The best way to boost American exports is to remove trade barriers with new trade agreements. U.S. farm producers would particularly benefit from the Trans-Pacific Partnership with Japan and 10 other countries. Japanese tariffs on beef would fall to 9% in the 16th year of the deal from 38.5% while the 20% tariff on ground pork would be eliminated in six years. Japan’s 21.3% levy on poultry and eggs would be abolished in six to 13 years.

Writing for the Washington Post, David Ignatius defends trade in general and trade agreements in particular.

…the revolt against free trade that has captured both parties could do the most long-term damage. …there’s strong evidence that trade has benefited the U.S. economy and created whole new industries in which the United States is dominant. That’s the essence of the “creative destruction” that makes a market economy so potent: It relentlessly pushes innovation and change. …The bipartisan protectionism of Trump and Sanders has focused its attacks on the Trans-Pacific Partnership… Robert Z. Lawrence and Tyler Moran estimate that between 2017 and 2026, when TPP would have its major impact, the costs to displaced workers would be 6 percent of the benefits to the economy — or an 18-to-1 benefit-to-cost ratio. …David Autor, David Dorn and Gordon Hanson…noted that the pact would promote trade in knowledge industries where the United States has a big advantage and that “killing the TPP would do little to bring factory work back to America.”

Ignatius also makes a very important observation that protectionists want us to be scared of nations that have much bigger problems than the United States.

Trump, the businessman, seems weirdly out of touch with real economic trends. He speaks of Japan as though it were an economic powerhouse, when it has actually suffered a two-decades-long slump; he describes a surging China, when the numbers show its growth is sagging.

Amen. Japan has huge problems and China still has quite a way to go before it becomes a developed nation.

Let’s close with some good news. Politicians may be engaging in anti-trade demagoguery, and there may be some voters that are motivated by hostility to voluntary exchange, but that doesn’t mean the protectionists have won.

Indeed, pro-trade sentiment has never been higher by some measures. Here’s some amazingly positive polling data from Gallup.

P.S. One final point. The growing burden of government spending and taxation since World War II have been very unfortunate, but the good news is that we have strong evidence that the economic damage of worsening fiscal policy has been offset by the economic gains from trade liberalization. It would be tragic to see that reversed.

P.P.S. Fans of Richard Epstein may enjoy this video of him reminiscing about Barack Obama’s undistinguished tenure at the University of Chicago Law School, as well asthis video of him dismantling George Soros in a debate that took place at Cato.

Related posts:

FRIEDMAN FRIDAY Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes)

Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes) In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 7 of 7 (Transcript and Video) “I’m not pro business, I’m pro free enterprise, which is a very different thing, and the reason I’m pro free enterprise”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 6 of 7 (Transcript and Video) “We are the ones who promote freedom, and free enterprise, and individual initiative, And what do we do? We force puny little Hong Kong to impose limits, restrictions on its exports at tariffs, in order to protect our textile workers”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 5 of 7 (Transcript and Video) “There is no measure whatsoever that would do more to prevent private monopoly development than complete free trade”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 4 of 7 (Transcript and Video) ” What we need are constitutional restraints on the power of government to interfere with free markets in foreign exchange, in foreign trade, and in many other aspects of our lives.”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 3 of 7 (Transcript and Video) “When anyone complains about unfair competition, consumers beware, That is really a cry for special privilege always at the expense of the consumer”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 2 of 7 (Transcript and Video) “As always, economic freedom promotes human freedom”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” Milton Friedman’s FREE TO CHOOSE Part 1 of 7 (Transcript and Video) “Adam Smith’s… key idea was that self-interest could produce an orderly society benefiting everybody, It was as though there were an invisible hand at work”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

Open letter to President Obama (Part 654) “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 7 of 7 (Transcript and Video) “I’m not pro business, I’m pro free enterprise, which is a very different thing, and the reason I’m pro free enterprise”

Open letter to President Obama (Part 654) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]

Open letter to President Obama (Part 650) “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 6 of 7 (Transcript and Video) “We are the ones who promote freedom, and free enterprise, and individual initiative, And what do we do? We force puny little Hong Kong to impose limits, restrictions on its exports at tariffs, in order to protect our textile workers”

Open letter to President Obama (Part 650) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]

__________

Daniel Mitchell: The bottom line is that Biden used the pandemic as an excuse to squander $1.9 trillion, even though at most only $80 billion of the money was for anything that was even vaguely related to vaccines and treatments!

Least Surprising Headline of All Time

Government spending, almost by definition, is wasteful. But it’s worth distinguishing between two types of waste.

  1. Money that is spent properly but inefficiently.
  2. Money that is diverted by crooks and scammers.

Today, we’re going to focus on the second type of waste.

I’ve previously written about widespread fraud affecting programs such as Medicare, Medicaid, food stamps, welfare, disability, and the earned income credit.

Now let’s augment our previous analysis exposing how coronavirus-related spending has been a windfall for criminals.

We’ll start with a report from the Washington Post , authored by Tony Romm and Yeganeh Torbati. It contains a headline that begins with a quote that could apply to just about anything the government does.

Testifying at a little-noticed congressional hearing this spring, a top watchdog for the Labor Department estimated there could have been “at least” $163 billion in unemployment-related “overpayments,”a projection that includes wrongly paid sums as well as “significant” benefits obtained by malicious actors. …In many cases, the criminals stole the unemployment funds using real Americans’ personal information. They bombarded states with applications filed in the names of actual workers or people in prison — sometimes to such a degree that, in the case of Maryland, fraudulent claims came to outnumber real requests for help..

You won’t be surprised to learn that some bureaucrats did not want to stop the fraud.

Some of the malicious actors potentially even avoided detection, at least for a time, after the Labor Department refused to supply information needed to assist federal fraud investigations.

And you also won’t be surprised to learn that some states allowed far more fraud than other states.

In California, state officials acknowledged in October 2021 that they may have paid out more than $20 billion in undeserved unemployment payments to criminals. That included at least $810 million that had been wrongly paid to applicants whose information matched the names of people in prison.

The Wall Street Journal also opined on the topic of wasteful covid-related spending, but its editorial focused on the $1.9 trillion boondoggle that was pushed through by Biden.

…what happened to the $1.9 trillion for Covid Democrats passed last March? Most went to transfer payments, including child tax credits, enhanced unemployment benefitsand stimulus checks. About a quarter subsidized state and local budgets and schools. Democrats appropriated a mere $80 billion for public health, only $16 billion of which was available for vaccines and therapies. …Democrats skimped on vaccine and therapies in order to ladle benefits to their political constituencies.

The bottom line is that Biden used the pandemic as an excuse to squander $1.9 trillion, even though at most only $80 billion of the money was for anything that was even vaguely related to vaccines and treatments.

From an economic perspective, that legislation was a spectacular failure.

I wonder whether we’ll ever learn how much of the remaining $1.82 trillion was wasted?

I’m guessing the answer is $1.82 trillion, but we won’t know how much was lost to run-of-the-mill waste and how much was lost to outright fraud.

P.S. Don’t forget that all government spending, even the small fraction that is spent wisely and efficiently, imposes economic costs. For more information, click here, here, here, here, here, and here.

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Milton Friedman on Spending

MILTON FRIEDMAN ON SPENDING

I identified four heroes from the “Battle of Ideas” video I shared in late August – Friedrich Hayek, Milton Friedman, Ronald Reagan, and Margaret Thatcher. Here’s one of those heroes, Milton Friedman, explaining what’s needed to control big government.

Friedman Fundamentals: How To Control Big Government

For all intents and purposes, Friedman is pointing out that there’s a “public choice” incentive for government to expand.

To counteract that disturbing trend, he explains that we need a high level of “societal capital.” In other words, we need a self-reliant and ethical populace – i.e., people who realize it’s wrong to use the coercive power of government to take from others.

Sadly, I don’t think that’s an accurate description of today’s United States.

So how, then, can we get control of government?

Since politicians are unlikely to control spending in the short run (their time horizon is always the next election), our best hope is to get them to agree to a rule that constrains what can happen in the future.

I’ve repeatedly argued in favor of a spending cap. Such a policy has a proven track record, and is far more effective than a balanced budget requirement.

That’s what should happen.

Now let’s focus on what shouldn’t happen. As Milton Friedman famously observed in 2001, tax increases are never the solution because politicians will simply spend any additional revenue (and the tax increases also will hurt the economy and cause Laffer-Curve feedback effects).

P.S. You can enjoy more wisdom from Friedman on issues such as the role of the firmspending other people’s money, and so-called Robber Barons.

P.P.S. On the issue of spending other people’s money, here’s an example of Jay Leno channeling Friedman.

ECB and IMF Studies Show Spending Caps Are the Ideal Fiscal Rule

Back in 2017, the Center for Freedom and Prosperity released this video to help explain why spending caps are the most sensible and sustainable fiscal rule.

Switzerland actually has a spending cap in its constitution, and similar fiscal rules also exist in Hong Kong and the state of Colorado.

These policies have produced very good results.

There are many reasons to support a spending cap, including the obvious observation that an expenditure limit (as it is sometimes called) directly addresses the actual problem of excessive government.

And addressing the underlying disease works better than rules that focus on symptoms, such as balanced budget requirements or anti-deficit mandates.

You’ll notice toward the end of the video that the narrator cites pro-spending cap research from international bureaucracies, which is remarkable since those institutions normally have a biasfor bigger government.

I’ve also written about that research, citing studies by the International Monetary Fund (here and here), the Organization for Economic Cooperation and Development (here and here) and the European Central Bank (here).

Today, let’s look at more evidence from these bureaucracies.

We’ll start with a new study from the European Central Bank. Here’s some of what the authors (Nicholai Benalal, Maximilian Freier, Wim Melyn, Stefan Van Parys, and Lukas Reiss) found when comparing spending limits and anti-deficit rules.

this paper provides an in-depth assessment of two alternative measures of fiscal consolidation and expansion: the change in the structural balance (dSB) and the expenditure benchmark (EB). Both the dSB and the EB are currently used to assess compliance with the fiscal rules under the Stability and Growth Pact (SGP).The EB was introduced as an indicator in 2011, and has gained in importance relative to the dSB since the European Commission began to put more emphasis on it in 2016.A comparison of the fiscal performance of euro area countries reveals significant differences depending on whether the assessment is based on the dSB or the EB. this paper finds that the EB has advantages over the dSB as a fiscal performance indicator. …expenditure rules…provide more predictability in fiscal requirements. …Even more importantly, the EB can be shown to be less procyclical as a fiscal rule than the dSB. 

Let’s also review some 2019 research from the International Monetary Fund.

This study (authored by Kodjovi Eklou and Marcelin Joanis) looks at whether fiscal rules can constrain vote-buying politicians.

In order to increase their chances of reelection, politicians are known to undertake fiscal manipulations, especially in election years. These fiscal manipulations typically take the form of increased public expenditure… Many countries, both developed and developing, have adopted fiscal rules in recent decades as an attempt to enforce fiscal discipline. …In this paper, we employ a cross-country panel dataset in order to test whether fiscal rules adopted in developing countries have been effective in constraining political budget cycles. The dataset covers 67 developing countries over the period 1985-2007. …Our dependent variable is the general government’s final consumption expenditure as a share of GDP.

Here’s what the authors concluded about the effectiveness of spending caps.

Our empirical evidence in a sample of 67 developing countries over the period 1985-2007, shows that fiscal rules cause fiscal discipline over the electoral cycle. More specifically, in election years with fiscal rules in place, public consumption is reduced by 1.65% point of GDP as compared to election years without these rules. Furthermore, the effectiveness of these rules depends on their type… In particular, expenditure rules, rules covering the general government and rules characterized by a monitoring body outside the government dampen political budget cycles in government consumption.

Indeed, footnote 12 of the paper specifically notes the superiority of expenditure limits.

…the results show that public consumption is reduced by 2.44% points during election years with expenditure rules in place. The findings on expenditure rules are consistent with Cordes et al. (2015) who show that the compliance rate for these rules are high.

Last but not least, the fiscal experts at the Office of Management and Budget included in Trump’s final budget some very encouraging language at the end of Chapter 10 of the Analytical Perspectives.

…additional efforts to control spending are needed. Several budget process reforms should be considered, including setting spending caps… Outlay caps that are consistent with the historical average as a share of gross domestic product (GDP),post-World War II levels could be enforced with sequestration across programs similar to other budget enforcement regimes. An outlay cap on mandatory spending would complement discretionary caps, which have been in place since 2013. The Budget proposes to continue discretionary caps through 2025 at declining levels and declining levels through 2030.

Trump was a big spender, of course, but at least there were people in his administration who realized there was a problem.

And they recognized the right solution.

P.S. It’s also interesting that the authors of the IMF study found that fiscal rules work better in democracies.

…estimates focusing on the subsample of democratic elections. The effect of fiscal rules on the political budget cycle is larger… More specifically, public consumption is reduced by 2.46% point of GDP (while it is 1.65% point in the baseline).

This may not bode well for the durability of Hong Kong’s spending cap.

The authors also found that foreign aid makes it less likely that a government will follow sensible policy.

Foreign aid, which relaxes the budget constraint of the government, is negatively correlated with the probability of having fiscal rules.

Needless to say, nobody should be surprised to learn that foreign aid undermines good policy.

Yes, Starve the Beast

As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting.…So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending.Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”


Friedman & Sowell: Should Our School System Be Privatized?

Regular readers know that the two things that get me most excited are the Georgia Bulldogs and the fight against a bloated public sector that is ineffective in the best of circumstances and more often than not is a threat to our freedoms.

So you will not be surprised to know that I am delighted that former Georgia Bulldog star Fran Tarkenton (who also happened to play in the NFL) has a superb piece in the Wall Street Journal ripping apart the inherent inefficiency of government-run monopoly schools.

Here is the key passage.

Imagine the National Football League in an alternate reality. Each player’s salary is based on how long he’s been in the league. It’s about tenure, not talent. The same scale is used for every player, no matter whether he’s an All-Pro quarterback or the last man on the roster. For every year a player’s been in this NFL, he gets a bump in pay. The only difference between Tom Brady and the worst player in the league is a few years of step increases. And if a player makes it through his third season, he can never be cut from the roster until he chooses to retire, except in the most extreme cases of misconduct. Let’s face the truth about this alternate reality: The on-field product would steadily decline. Why bother playing harder or better and risk getting hurt? No matter how much money was poured into the league, it wouldn’t get better. In fact, in many ways the disincentive to play harder or to try to stand out would be even stronger with more money. Of course, a few wild-eyed reformers might suggest the whole system was broken and needed revamping to reward better results, but the players union would refuse to budge and then demonize the reform advocates: “They hate football. They hate the players. They hate the fans.” The only thing that might get done would be building bigger, more expensive stadiums and installing more state-of-the-art technology. But that just wouldn’t help.

This sounds absurd, of course, but Mr. Tarkenton goes on to explain that this is precisely how government schools operate.

If you haven’t figured it out yet, the NFL in this alternate reality is the real-life American public education system. Teachers’ salaries have no relation to whether teachers are actually good at their job—excellence isn’t rewarded, and neither is extra effort. Pay is almost solely determined by how many years they’ve been teaching. That’s it. After a teacher earns tenure, which is often essentially automatic, firing him or her becomes almost impossible, no matter how bad the performance might be. And if you criticize the system, you’re demonized for hating teachers and not believing in our nation’s children. Inflation-adjusted spending per student in the United States has nearly tripled since 1970. According to the Organization for Economic Cooperation and Development, we spend more per student than any nation except Switzerland, with only middling results to show for it.

Actually, I will disagree with the last sentence of this excerpt. We’re not even getting “middling results.” Here’s a chart from an earlier post showing that we’ve gotten more bureaucracy and more spending but no improvement over the past 40 years.

So what’s the solution to this mess? Well, since government is the problem, it stands to reason that competition and markets are the answer.

Sweden, Chile, and the Netherlands are just some of the countries that have seen good results after breaking up state-run education monopolies.

Watch this video to get more details.

Economics 101: School Choice Example Shows Why Government Monopolies Are Bad

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_________

Dan Mitchell: Reagan was the runaway champion, but it’s worth noting that the burden of domestic spending also declined during the Clinton years.

In Defense of Bill Clinton

More than 10 years ago, I narrated this videoshowing how the United States benefited from spending restraint under both Ronald Reagan and Bill Clinton. Since today’s topic is Clinton’s policies, pay attention starting about 4:00.

If you don’t have time to watch the video, I hope you will at least pay attention to this chart, which appeared near the end (about 6:00).

It shows what happened to domestic spending (entitlements plus discretionary) as a share of economic outputduring the Reagan years, the Clinton years, and the 2001-2010 period under Bush and Obama.

Reagan was the runaway champion, but it’s worth noting that the burden of domestic spending also declined during the Clinton years.

But it wasn’t just that Bill Clinton was good on spending. Good things happened in the 1990s in other areas as well, especially trade.

In a column for the Wall Street Journal, Bill Galston defends Clinton’s “neoliberal” record.

… critics often mark the Clinton administration as the moment when establishment Democrats capitulated to the ideology of the unfettered market. Poor and working-class Americans paid the price, they charge… The historical record tells a different story. …During eight years of the Clinton administration, annual real growth in gross domestic product averaged a robust 3.8% while inflation was restrained, averaging 2.6%.Payrolls increased by 22.9 million… Unemployment fell from 7.3% in January 1993 to…4.2% at the end of President Clinton’s second term. Adjusted for inflation, real median household income rose by 13.9%. …During the administration, federal spending as a share of GDP fell from 21.2% to 17.5%… What about the poor? The poverty rate declined during the Clinton administration by nearly one quarter, from 15.1% to 11.3%, near its historic low. And it declined even faster among minorities—by 8.1 percentage points for Hispanics and 10.9 points for blacks. …In sum, during the heyday of neoliberalism, Americans weren’t forced to choose between high growth and low inflation or between aggregate growth and fairness for the poor, working class and minorities.

Why did we get these good results?

Because overall economic freedom increased during the Clinton years. And when the burden of government is reduced,that creates more opportunity for upward advancement for everyone in society.

By the way, I’m not arguing in today’s column that Bill Clinton deserves all the credit. There’s little doubt that the Republican landslide in 1994 played a big role in many of the subsequent pro-market reforms (such as welfare reform, the 1997 tax cut, etc).

But I will say that Bill Clinton at least was amenable to pro-market compromises, which is not what we saw during the Obama years (and I doubt we will see a shift to the center from Biden if Republicans win Congress this November).

P.S. Republicans were able to impose some fiscal discipline on Obama after the Tea Party landslide of 2010

P.P.S. For those who want more details, click here for a detailed examination of the fiscal policy performance of various modern presidents.

Below is a discussion from Milton Friedman on Bill Clinton and Ronald Reagan.

February 10, 1999 | Recorded on February 10, 1999

PRESIDENTIAL REPORT CARD: Milton Friedman on the State of the Union

with guest Milton Friedman
Former Hoover fellow and Nobel laureate Milton Friedman.

Milton Friedman, Senior Research Fellow, Hoover Institution and Nobel Laureate in Economic Sciences grades the achievements of the Clinton administration and evaluates the programs the President proposed in his 1999 State of the Union address.

Milton Friedman vs Bill Clinton (1999)

Published on May 28, 2012 by

ROBINSON Just the last eight years, or would you give high marks to Volcker as well, Greenspan’s predecessor?

FRIEDMAN That’s an interesting case, because you have to give the credit there really to Reagan. There’s no other President who would have stood by while the Fed followed the policy it did. If you remember— you don’t remember that period but if you go back…

ROBINSON I do actually, I had just started at the White House in those days…

FRIEDMAN …if you go back to that period, stopping the inflation that was raging which reached double-digit levels at the end of the ’70s and early ’80s required stepping on the brakes hard and produced a recession. And if you remember, Reagan’s popular ranking went way down in…

ROBINSON Down into the thirties.

FRIEDMAN …thirties, right. No other President would have stood by and said to the Fed, keep doing what you’re doing, you’re doing the right thing. But Reagan did do that. And that’s what enabled Volcker to do what Volcker did.

ROBINSON Back to the present to find out what Milton Friedman thinks of President Clinton’s legislative goals for the rest of his term.

THE SUNSHINE PLOYS

ROBINSON Let me ask you to apply your thinking to the principle points of Bill Clinton’s program for the remaining couple of years in office. The President’s program is intended— we’ll take old folks first— to, I quote now, “Address the challenge of a senior boom by using the budget surplus to help save Social Security.”

FRIEDMAN Well, the proposal, if you look at it in detail, is a complete fake.

ROBINSON A complete fake?

FRIEDMAN Absolutely.

ROBINSON He wants to take sixty percent— a little more than sixty percent of budget surplus over the next fifteen years…

FRIEDMAN Where does that come from? He’s counting that twice. That comes from the proceeds of the payroll taxes that are now in, which, in principle, though not in practice, are supposed to be used for Social Security, but which have indeed been financing every regular event. If he doesn’t do a thing about the surplus, that would still end up in bonds in the hands of the Social Security so-called Trust Fund.

ROBINSON You say he’s guilty of a little bit of a flim-flam game with the books.

FRIEDMAN Absolutely.

ROBINSON Within forty-eight hours of that State of the Union Address in which he made this proposal, Alan Greenspan, whom you have just praised, endorsed the proposal— in general terms, not specific terms, but he endorsed the proposal— and the Republicans in Congress said yep, that’s a good idea, sign us up for that too. How is it that he’s able to get everybody to go for what you call a flim-flam game?

FRIEDMAN Look, do you need to ask that question now after six years of Clinton? How he’s been able to get one flim-flam game after another. How he’s been able to bamboozle the people into thinking that he deserves higher ratings because he lies. Clinton is a superb politician who has a most extraordinary capacity to exude sincerity. He’s an incredible phenomenon. I think he’s a genius. But go back to the Social Security program. The first thing to be said is that all this nonsense about saving something for Social Security is pure fiction. It’s wrong to think that what people are paying into Social Security, what people are paying in the form of wage taxes, is what they’re paying for their own security. [

ROBINSON That’s nonsense.] There is no relationship whatsoever. We have a system under which you have a set of taxes for Social Security— named for Social Security, but it doesn’t matter, they’re payroll taxes, terrible taxes, regressive taxes. Nobody… you could not get a legislature to vote such a tax on its own. Can you imagine proposing a tax that would impose — let’s say sixteen percent tax— on all wages from the first dollar up to the maximum and nothing beyond that. Can you imagine voting that? Similarly, the other side of the picture is that we have made a series of commitments to people like me— I receive Social Security payments…

ROBINSON Oh so, it’s my payroll tax that goes to…

FRIEDMAN Absolutely. Absolutely. It’s not only your payroll tax, it’s your income tax, it’s whatever taxes you pay. I get them. And if you think you’re going to get ’em, you’re kidding yourself.

ROBINSON It is a fundamental deceit hoisted upon the American people and sustained for lo these six decades.

FRIEDMAN Absolutely. If you read the Social Security brochures, they say this is a system under which you are putting aside money now for your retirement.

ROBINSON And that’s nonsense.

FRIEDMAN That is utterly fake. But let’s suppose it were true…

ROBINSON All-right.

FRIEDMAN …for a moment. Why is it that it’s appropriate for government to come and tell me what fraction of my income I should save for my old age? If that’s okay, why can’t it come in and tell me exactly what fraction of my income I have to spend for food, what fraction for housing, what fraction for clothing. Let me show you the absurdity of this.

ROBINSON All-right.

FRIEDMAN Consider a young man of thirty-five who has AIDS for whom the expected length of life is ten years at the most maybe. Maybe there’ll be a cure. But his expected length of life is not very long. Is it really intelligent for him to put aside fifteen percent of his income for retirement at age sixty-five?

ROBINSON It’s outrageous.

FRIEDMAN It’s outrageous.

ROBINSON Outrageous.

FRIEDMAN Exactly. The only word you can give to it. And in my opinion, the whole Social Security system is an outrage.

ROBINSON If Social Security is ‘an outrage,’ what would Milton Friedman do about it? A Bonding Experience

ROBINSON How would you get rid of it?

FRIEDMAN Very simply. Here I am, I’m entire to a certain number of payments in the future. Have the government give me a bond equal to the current present value of— expected value of what I’m entitled to. You have already accumulated some rights. And so have the government give you a bond which will be due when you’re sixty-five which will be the present value of what you’ve already accumulated under the law. And then close the whole thing up.

ROBINSON And just close the books.

FRIEDMAN Everybody gets what he’s entitled to— what he’s been promised. The unfunded debt under Social Security is funded, it’s made open and above-board. There’s not a penny of transition cost, and everybody is… In my world, the payroll tax would be abolished, would be eliminated. It’s the worst tax we have on the books. And everybody would be free to do what he wanted about his own retirement.

ROBINSON Okay.

FRIEDMAN And on the whole he would do very well. Now undoubtedly, people who argue against that say, well what are you going to do about these people who are so careless and so unprudent that they don’t accumulate anything for retirement. That’s a general problem. What do you do about people who are poor, whether for their own fault or not for their own fault? You and I and society in general is not willing to see ’em starve to death.

ROBINSON Correct.

FRIEDMAN Well, I have always been in favor of having a program under which (a negative income tax) under which you will have some income minimum you will provide for people whether they are indigent because they’re wastrels or whether they’re indigent because they’re in bad health…

ROBINSON Even if it’s their own fault, they don’t starve.

FRIEDMAN The problem is, it’s always seemed to me absurd that you make a hundred percent of the people do something in order to make sure that one or two percent of the people don’t behave badly.

ROBINSON Milton, that negative income tax proposal actually started to go someplace, if I remember my history correctly, that actually started to go someplace during the Nixon years, didn’t it? Didn’t Cap Weinberger…

FRIEDMAN Yes, it did… No, Moynihan, Pat Moynihan…

ROBINSON Moynihan. And what happened to it? Why did it die?

FRIEDMAN Because the public pressure was converted into a program that I testified against. It’s what happens in Washington all the time.

ROBINSON Right, right, okay.

ROBINSON Next question. What would Milton Friedman do with the mounting budget surplus?

SAVING PRIVATE EARNING

ROBINSON We’ve got seventy-nine, eighty billion dollars more coming in this year than the government…

FRIEDMAN I am in favor of reducing taxes under any circumstances, for any excuse, with any reason whatsoever because that’s the only way you’re ever going to get effective control over government spending. Sooner or later [

ROBINSON Choke off the supply.] if you don’t reduce taxes to get rid of that surplus, it’s going to be spent. The rule from not only the last few years, hundreds of years, is that governments will spend whatever the tax system will raise plus as much more as they can get away with.

ROBINSON The Republicans are calling for a ten percent…

FRIEDMAN It’s not enough.

ROBINSON …cut. Not enough. What is… Now Dan Quayle, who’s running for President— this is the most extreme- extreme may be the wrong word but this is the most dramatic proposal I’m aware of that’s on the table anywhere at the moment— he’s called for a thirty percent cut. Is that enough?

FRIEDMAN I don’t know. I would cut it as much as you can get away with.

ROBINSON So you’d run the numbers and give back virtually all the surplus.

FRIEDMAN What do you mean give back? Not take.

ROBINSON Excuse me. It’s not take. You’d lower taxes…

FRIEDMAN You know, this idea of giving back, which is a word you use, assumes…

ROBINSON I take back my words, but go ahead and ram them down my throat.

FRIEDMAN …it assumes that every individual is a property of the government and that all of the income that you earn is really the government’s, and it decides how much you can keep and how much it gets. I’ve always said, it treats people as if they were running around with an IBM card on their back which says ‘do not mutilate, punch, or disturb.’

ROBINSON Right. You’ve got more money coming in at the moment than is going out.

FRIEDMAN You ought to reduce taxes by enough to generate…

ROBINSON You don’t want to pay down the debt.

FRIEDMAN Oh no. No, I want to generate a deficit because I want pressure on to get the government to spend less.

ROBINSON You like a federal deficit.

FRIEDMAN No, I don’t like a federal deficit, but I like lower government spending.

ROBINSON All-right. President Clinton has another proposal for using that surplus, and he calls them USA accounts. He’s proposing to use about eleven percent of the surplus over the next fifteen years or so to establish, I quote now from his speech, “universal savings accounts, USA accounts, to give all Americans the means to save,” again quotation here, “with extra help for the least able to save.” Details to follow. You like that idea?

FRIEDMAN No, I think it’s a terrible idea. You know, the idea is saying, I’m going to take your money, but then I’ll give it back to you if you do with it what I tell you to do. Is that a way you have a free society of free, self-reliant individuals who are responsible for themselves? It’s a terrible…

ROBINSON Do you even agree with the premise that the savings rate is too low in this country?

FRIEDMAN I don’t agree with that premise. What is the right savings rate?

ROBINSON Well, gee, you’re the Nobel Prize winner, I thought you’d be able to clue me in.

FRIEDMAN The right savings rate… In a world in which you did not have distortions, in which you did not have government stepping in and distorting the rate at which people save or not, the right saving rate is whatever all the people of the community simply want to save. How much you want to save, how much I want to save. Why shouldn’t people be free to save what they want?

ROBINSON Let’s move to a more theoretical question. Why do we end up with so many stupid government programs when we’re supposed to be so smart in our own private affairs?

THINK LOCALLY, ACT GLOBALLY

ROBINSON How is it, you credit great intelligence, shrewdness, on the part of individuals when they’re spending their own money and managing their own property in the marketplace, how can we all be so dumb when we give up being players in the marketplace and become citizens participating in the political process? We get hoodwinked by Clinton, we go for this crazy sham of Social Security, how can we be so dumb?

FRIEDMAN Because it’s always so attractive to be able to do good at somebody else’s expense. That the real problem of our government. Government is a way by which every individual believes he can live at the expense of everybody else. That’s— I’m just repeating what Bastiat said two centuries ago, more than two centuries ago. You know, the thing that people don’t really understand is that free societies of the kind we’ve been lucky enough to experience for the last hundred-hundred and fifty years are a very rare exception in human history. Most people, most of history, and at any one time, most people at any one time, have lived in tyranny and misery. And it’s only for a brief period, and why? It is precisely because once you get some government program in— may have been a very good idea, it’s always proposed for good reasons— once it gets in, it becomes a special privilege of a small group which has an enormously strong interest to maintain it, and you do not have any comparable group that has the interest to get rid of it. And therefore, the hardest thing in the world is to get rid of any government program, however badly it works. In fact, try to name any government programs that have been eliminated.

ROBINSON The draft. Well, that’s not a…

FRIEDMAN Yes, the draft is an example, it’s one of the rare examples of a program that has been eliminated. One of the others was Postal Savings. It used to be that the postal system had a savings system which became very popular as a result of the Great Depression. But it disappeared. Why? Because by accident when they set it up, they limited the interest they could pay on postal savings to two percent, and when the market rate got higher than that, all the money was taken out of postal savings and postal savings came to an end. But aside from that, can you name programs that have been eliminated because they failed? And so how will we set a limit on government, and keep it coming back, and the only thing I can see on the horizon that offers a real chance are term-limits.

ROBINSON Term limits?

FRIEDMAN Right now, being a politician is a lifetime career. Being a Congressman is a lifetime career.

ROBINSON Do we have any evidence in the states where term-limits apply that it has worked as you would like to see it work? Term-limits have been in effect here in California for about a decade now… They may have been enacted a decade ago, so they’ve been in effect for perhaps six years…

FRIEDMAN It’s a little early. We don’t really have any very good… However, it so happened, I had occasion to have a conversation the other day with a former Governor of Virginia: Allen, George Allen.

ROBINSON Who, everybody says he’s going to be running for the Senate. Against Chuck Robb.

FRIEDMAN Yes, that’s what he intends to do.

ROBINSON He intends to do. All-right.

FRIEDMAN However, he had, Virginia has a one-term four-year term for the Governor. And he said, you know, he said, if we had had a two-year term, if we had had the situation in most states, that you can run for a second term, I would have spent the third and fourth year of my term working for re-election. I would never have been able to get done what I got done. It was the first real hands-on testimonial I’ve seen to a term-limit. It’s not a good idea for being a legislator to be a lifetime profession. The founders of our country had the idea of legislation as a part-time activity. It is in many states today. But at the federal government level, it’s a full-time profession. And that is very unhealthy because the legislature— it’s not a criticism of the individual— but any human being in that position, he’s going to sit in committee meetings, and day after day he’s going to hear arguments, good arguments, worthy arguments for new programs. He’s going to get very few arguments for getting rid of programs. And the evidence is clear: the longer people are in Congress, the more willing they are to vote government spending.

ROBINSON The polls all show the American people are very concerned about our public schools. What does Milton Friedman think of President Clinton’s proposals to improve those public schools? Hire Learning

ROBINSON President Clinton on public schools. According to the White House fact sheet, he wants to, I quote, “raise standards and increase accountability in public schools (I’ve got to take a deep breath to get through this) through proposals to end social promotion, bring high-quality teachers into the classroom, intervene in failing schools, provide school report cards to parents, strengthen our commitment to smaller class-sizes, and boost our efforts for school modernization.” What grade do you give that proposal?

FRIEDMAN F.

ROBINSON F.

FRIEDMAN What does it mean? It means more government control of schools. What do we really need in schools? We need competition. What we have is a monopoly, and like every monopoly, it’s producing a low-quality product at a very high cost. The way to improve that is to have competition, to make it possible for parents to have a choice of the schools their children attend. All high-income people have that choice now. They can choose their residence for a place with good schools, or they can send their children to private schools, pay twice for schooling: once in taxes and once in tuition. But the lower income classes can’t.

ROBINSON They’re stuck. Milton, didn’t public schools used to work?

FRIEDMAN Yes. When I graduated from high-school in 1928, there were 150,000 school districts in this country. Today, there are 15,000 and the population is twice as great. In the early day, you had local control of schools, and there was effective competition between a large number of local areas. But school districts got consolidated. They got run not by local people but by the professional educators. And most important of all, in the 1960s you began to have the emergence of teachers’ unions taking control of the schools. And since 1960, since the teachers’ unions started emerging, you have had on the whole a rather steady decline in the quality of schooling. If you want to improve automobiles, do you have government step in and tell people what brakes to put on, and so on, or do you rely on the fact that General Motors is going to try to beat Ford, is going to try to beat Toyota? Competition is the most effective way to improve quality, whether in computers, in automobiles, in suits, or in schooling.

ROBINSON Let me ask you to close, if I may, with a prediction. It’s 2009, ten years from today. Is the government of the United States bigger, or smaller?

FRIEDMAN Smaller.

ROBINSON Your ideas are winning?

FRIEDMAN No. The Internet is going to make it harder and harder to collect taxes.

ROBINSON How come?

FRIEDMAN Because you’ll be able to evade taxes, you’ll be able to do your deals in the Cayman Islands.

ROBINSON So the Internet…

FRIEDMAN At the moment I see the Internet as the most likely source of the smaller government.

ROBINSON But in your mind it really will have an effect. That’s not speculative…

FRIEDMAN No, no, no. I believe it will and I believe it’s having it now.

ROBINSON I see. Okay. Milton Friedman— Bill Clinton I hope you’re taking notes, we’ll send a tape of this to the White House— Milton Friedman, thank you very much.

FRIEDMAN That’s all-right. I assure you they won’t look at it. Thank you.

ROBINSON Doctor Friedman believes the government should be smaller and that it will become so. Maybe some future President will preside over such a small government that he can shrink up the State of the Union Address enough to get rid of the Teleprompter and deliver the speech from memory. I’m Peter Robinson. Thanks for joining us.

Dan Mitchell and Milton Friedman on while FREE TRADE IS GOOD and TRADE DEFICITS don’t matter!

Milton Friedman – Free Trade vs. Protectionism

Free to Choose Part 2: The Tyranny of Control (Featuring Milton Friedman

Don’t Sweat the Trade Deficit

When the Commerce Department announced in February that the United States had a record trade deficit for 2021, I shared this video to help make the point that those trade numbers were that year’s “least important economic news.”

The main thing to understand is that a trade deficit is simply the flip side of an investment surplus.

When Americans use dollars to buy goods from other nations, those dollars are only valuable to foreigners because they can use them to buy things from America.

In many cases, they buy American goods and services. But they also use many of those dollars to invest in the U.S. economy.

That’s generally a positive thing. It’s a vote of confidence about America’s economic future.

Jeff Jacoby of the Boston Globe shares my viewpoint. He recently opined on this issue, echoing the important insight about the link between trade flows and investment flows.

The US trade deficit hit an all-time high in March, widening to nearly $110 billion as the nation imported considerably more goods than it exported. That can’t be good, right? Actually, it’s fine. …It’s not an indication of actual economic weakness. …Quite the contrary: All things being equal, imports are usually evidence of economic vitality and success.…The dollars Americans spend on imports aren’t “lost.” They are exchanged for desirable and affordable goods, services, parts, and commodities that strengthen Americans’ economy while elevating their US lifestyle. Better still, those dollars then come back to the United States, where they are used to invest in American assets or buy American exports, creating even more value and putting even more Americans to work. …a trade “deficit” isn’t a debt we owe. It is an accounting entry that tells us how much more we were enriched by foreigners than they were by us. ..the US economy has some real problems. Happily, the trade deficit isn’t one of them. Imports are good. And more imports? They’re good too.

This does not mean, however, that everyone is a winner.

As I explain in this video, jobs are destroyed when there is trade between nations. But I also point out that jobs are destroyed by trade inside a nation’s borders.

That’s bad news for workers in sectors that are dying (such as typewriter makers after personal computers hit the market).

What’s important is whether the new jobs that are createdexceed the number of jobs that are lost.

This is what is called “creative destruction.” It’s painful, but it is why we are much richer today than we were in the past.

The good news is that this usually happens…at least if politicians resist the temptation to over-tax, over-spend, and over-regulate.

The bottom line is that free trade is much better for long-run prosperity than protectionism.

Unless, of course, you think it’s a good idea to copy the policies of Herbert Hoover.

Trump, Sanders, and the Snake-Oil Economics of Protectionism

John Cowperthwaite deserves a lot of credit for Hong Kong’s prosperity. As a British appointee, he took a hands-off policy and allowed the colony’s economy to thrive. He didn’t even want the government to collect statistics since that would give interventionists data that might be used to argue for interventionism.

I have mixed feelings about that approach. I constantly use statistics because they so often show that free markets and small government produce the best outcomes. I even use data to show that Hong Kong’s economy should be emulated.

On the other hand, there are some statistics that cause a lot of mischief.

I’ve argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the focus to GDI, the debate would more naturally focus on pro-growth policies to boost wages, small business income, and corporate profits rather than the misguided policies (such asKeynesian economics) that are enabled by a focus on GDP.

That being said, there’s a good argument that the worst government statistic is the “trade deficit.”

This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.

Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And for any readers who nonetheless think protectionism might be a good idea, I challenge them to answer these eight questions.

I’m confident that both Donald Trump and Bernie Sanders wouldn’t be able to successfully answer any of them. Yet it appears they’ve gained some traction with voters by calling for protectionism.

That’s quite unfortunate. If the pro-trade policy consensus in America breaks down, that would create dangerous opportunities for politicians and bureaucrats to rig the game in favor of special interests while also imposing higher costs of taxpayers and consumers.

Let’s dig into the issue.

In a column for the Wall Street Journal, Mort Kondracke and Matthew Slaughter combine to produce a strong defense of trade.

…the four leading presidential candidates…oppose the U.S. ratifying the Trans-Pacific Partnership. All four demonize trade the same way. …Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” …America’s exporters and importers are among the country’s most dynamic companies, paying their workers about 15%-20% more than workers earn elsewhere in the economy. The overall gains are large. Trade and related activities—spurred by accords such as the North American Free Trade Agreement, or Nafta, have boosted annual U.S. income today by about 10 percentage points of GDP relative to what it would have been otherwise. This translates into an aggregate gain of about $1.8 trillion in 2015—thousands of dollars per U.S. household every year. …creative destruction—the movement of people and capital from weaker businesses to stronger ones and new opportunities—is how many of the gains from trade arise. …For generations, American presidents of both parties have spoken about the benefits of trade. “Economic isolation and political leadership are wholly incompatible,” warned John Kennedy. “A creative, competitive America is the answer to a changing world,” said Ronald Reagan. “We should always remember: protectionism is destructionism.”

By the way, I think Kondracke and Slaughter paint with too broad a brush. Both Cruz and Clinton are far less protectionist than Trump and Sanders. Though the authors are correct in noting that they’ve been reluctant (especially in the case of Clinton) to vigorously defend free trade.

The great legal scholar Richard Epstein (also my former debating partner) writesabout the dangers of protectionism.

There are of course major difference between the insidious Trump and buffoonish Sanders. …Still, the real selling point of each boils down to one issue: In the indecorous language of the pollster, Pat Caddell, Americans feel “they have been screwed” by free trade. …free trade is in retreat as protectionism becomes the common thread across the both political parties. It is as though the economic unwisdom of the 1930 Smoot-Hawley Tariff Act is back.

Richard makes a very important point that politicians often support protectionism in an attempt to hide the damage they do with other misguided policies.

Free trade offers an uncompromising indictment of, and a powerful corrective for, America’s unsound economic policies. …the reason that local businesses outsource from the United States is the same reason why foreign businesses are reluctant to expand operations here. Our regulatory and labor environment is hostile to economic growth and there are no signs of that abating anytime soon. …the steady decline in freedom and productivity inside the United States has continued apace. Ironically, the strong likelihood that the next American president will expand protectionist practices will only make matters worse: firms, both foreign and domestic, are more reluctant to invest in the United States…free trade gives the federal government and the individual states strong incentives to clean up their act so that they can once again be attractive to foreign investment.

My buddy Ross Kaminsky explains in the American Spectator that free trade is good because it is part of the competitive process that boosts living standards, particularly for the poor.

…in trade, as in any economic endeavor, there are losers in the short run. Capitalism is, after all, fundamentally a system of creative destruction. But if there is any area of agreement among economists of all political stripes…it is that free trade provides large net benefits to the societies that engage in it, even if other nations do not lower trade barriers to the same degree. Furthermore, the benefits of trade accrue in large measure to the lower economic echelons of society in an extension of Schumpeter’s profound observation that “the capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

And Ross echoes Richard Epstein’s point about the real problem being anti-growth policies that make America less competitive.

Trade is complex and like all complex things politicians will dumb it down in a way that benefits them, generally by lying to the public and creating a frothy anger against those “damn furiners” instead of pointing fingers at the true culprits: unions, regulators, and politicians of all stripes.

Ross and Richard are right. If politicians really want more jobs in America, they should be adopting policies to boost U.S. competitiveness.

And we don’t need giant steps. Yes, a flat tax would be great, but even incremental reforms such as a lower corporate tax rate or the right tax treatment of business investment would yield big dividends.

Let’s add a few more voices to the discussion.

In an editorial, the Wall Street Journal debunks Donald Trump’s protectionist tirade against China.

The real-estate developer recently added Japan to his most-wanted list of job killers… “They’re killing us. You know what we sell to Japan? Practically nothing.” Is $116 billion worth of annual goods and services exports to Japan practically nothing? Japan is the fourth largest U.S. export market in goods after Canada, Mexico and China. …The best way to boost American exports is to remove trade barriers with new trade agreements. U.S. farm producers would particularly benefit from the Trans-Pacific Partnership with Japan and 10 other countries. Japanese tariffs on beef would fall to 9% in the 16th year of the deal from 38.5% while the 20% tariff on ground pork would be eliminated in six years. Japan’s 21.3% levy on poultry and eggs would be abolished in six to 13 years.

Writing for the Washington Post, David Ignatius defends trade in general and trade agreements in particular.

…the revolt against free trade that has captured both parties could do the most long-term damage. …there’s strong evidence that trade has benefited the U.S. economy and created whole new industries in which the United States is dominant. That’s the essence of the “creative destruction” that makes a market economy so potent: It relentlessly pushes innovation and change. …The bipartisan protectionism of Trump and Sanders has focused its attacks on the Trans-Pacific Partnership… Robert Z. Lawrence and Tyler Moran estimate that between 2017 and 2026, when TPP would have its major impact, the costs to displaced workers would be 6 percent of the benefits to the economy — or an 18-to-1 benefit-to-cost ratio. …David Autor, David Dorn and Gordon Hanson…noted that the pact would promote trade in knowledge industries where the United States has a big advantage and that “killing the TPP would do little to bring factory work back to America.”

Ignatius also makes a very important observation that protectionists want us to be scared of nations that have much bigger problems than the United States.

Trump, the businessman, seems weirdly out of touch with real economic trends. He speaks of Japan as though it were an economic powerhouse, when it has actually suffered a two-decades-long slump; he describes a surging China, when the numbers show its growth is sagging.

Amen. Japan has huge problems and China still has quite a way to go before it becomes a developed nation.

Let’s close with some good news. Politicians may be engaging in anti-trade demagoguery, and there may be some voters that are motivated by hostility to voluntary exchange, but that doesn’t mean the protectionists have won.

Indeed, pro-trade sentiment has never been higher by some measures. Here’s some amazingly positive polling data from Gallup.

P.S. One final point. The growing burden of government spending and taxation since World War II have been very unfortunate, but the good news is that we have strong evidence that the economic damage of worsening fiscal policy has been offset by the economic gains from trade liberalization. It would be tragic to see that reversed.

P.P.S. Fans of Richard Epstein may enjoy this video of him reminiscing about Barack Obama’s undistinguished tenure at the University of Chicago Law School, as well asthis video of him dismantling George Soros in a debate that took place at Cato.

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FRIEDMAN FRIDAY Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes)

Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes) In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 7 of 7 (Transcript and Video) “I’m not pro business, I’m pro free enterprise, which is a very different thing, and the reason I’m pro free enterprise”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 6 of 7 (Transcript and Video) “We are the ones who promote freedom, and free enterprise, and individual initiative, And what do we do? We force puny little Hong Kong to impose limits, restrictions on its exports at tariffs, in order to protect our textile workers”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 5 of 7 (Transcript and Video) “There is no measure whatsoever that would do more to prevent private monopoly development than complete free trade”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 4 of 7 (Transcript and Video) ” What we need are constitutional restraints on the power of government to interfere with free markets in foreign exchange, in foreign trade, and in many other aspects of our lives.”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 3 of 7 (Transcript and Video) “When anyone complains about unfair competition, consumers beware, That is really a cry for special privilege always at the expense of the consumer”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 2 of 7 (Transcript and Video) “As always, economic freedom promotes human freedom”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” Milton Friedman’s FREE TO CHOOSE Part 1 of 7 (Transcript and Video) “Adam Smith’s… key idea was that self-interest could produce an orderly society benefiting everybody, It was as though there were an invisible hand at work”

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Open letter to President Obama (Part 654) “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 7 of 7 (Transcript and Video) “I’m not pro business, I’m pro free enterprise, which is a very different thing, and the reason I’m pro free enterprise”

Open letter to President Obama (Part 654) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]

Open letter to President Obama (Part 650) “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 6 of 7 (Transcript and Video) “We are the ones who promote freedom, and free enterprise, and individual initiative, And what do we do? We force puny little Hong Kong to impose limits, restrictions on its exports at tariffs, in order to protect our textile workers”

Open letter to President Obama (Part 650) (Emailed to White House on July 22, 2013) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you […]

__________

Dan Mitchell article: Debunking Biden’s Absurd “Cut the Deficit” Claim

A.F. Branco for Oct 21, 2021

Debunking Biden’s Absurd “Cut the Deficit” Claim

After almost 16 months in office, what is President Biden’s track record on fiscal policy?

The good news is that his big tax-and-spend plan to “build back better” has not been approved by Congress (and fingers crossed that it stays that way).

The bad news is that he has done other things, such as getting a fake stimulus though Congress, as well as a so-called infrastructure package.

The Committee for a Responsible Federal Budget put together an estimate of his major initiatives.

By the way, the CRFB folks fixate on how these initiative impact the deficit. What we really should be concerned about is how much money is being spent.

But let’s set that aside and focus instead on a jaw-dropping claim from the White House.

Even though all of his major initiatives have increased red ink, he is patting himself on the backfor lower deficits.

For what it is worth, Biden’s claim is semi-accurate. It is true that budget deficits are temporarily falling.

But not because of him. Instead, red ink is falling because there was massive, one-time, multi-trillion dollar emergency spending for the COVID pandemic in 2020. That spending began to wind down in 2021 and it has mostly dissipated this year, so of course deficits have fallen.

For Biden to take credit for this drop would be akin to Truman taking credit for the big drop in red ink after World War II ended.

Eric Boehm of Reason wrote a column that debunks Biden’s ludicrous claim.

…this year’s budget deficit is forecasted to be the third or fourth-largest in American history—but President Joe Biden claims…his administration is overseeing a period of fiscal austerity. …Here are some words that actually tumbled out of the president’s mouth at a press conference… “We’re on track to cut the federal deficit by another $1.5 trillion by the end of this fiscal year. …on top of us having a $350 billion drop in the deficit last year, my first year as president,” Biden continued.…Those facts, however, exclude a few key details. …Biden took office the year after the budget deficit hit previously unimaginable highs due to a completely unprecedented spending binge triggered by a once-in-a-generation public health disaster. …if you look at the actual budgetary baselines published by the Congressional Budget Office—that is, the ongoing amount of annual federal spending absent any emergency stimulus bills like the ones passed on several occasions during the height of the pandemic—Biden has overseen a noticeable increase in the deficit above the pre-pandemic baseline. According to the Committee for a Responsible Federal Budget, a fiscal watchdog group that advocates for lower deficits, Biden’s policies have added about $2.5 trillion to the deficit over the next 10 years.

Brian Riedl is now with the Manhattan Institute, but we used to work together earlier this century at the Heritage Foundation. One of his admirable traits is that he hasn’t lost the ability to be outraged.

That comes through in his tweet about Biden’s supposed accomplishment.

By the way, I’m not making a partisan point. I have no doubt Trump would have done the same thing.

After all, politicians are probably the least ethical people in the nation. And Washington brings out the worst of the worst.

Biden talks up deficit reduction, as watchdog says it’s ‘highly misleading’

Last Updated: May 4, 2022 at 11:50 a.m. ETFirst Published: May 4, 2022 at 10:22 a.m. ET

President: ‘Bringing down the deficit is one way to ease inflationary pressures’

President Joe Biden speaks Wednesday about the economy at the White House. Also pictured (L-R) are Shalanda Young, director of the Office of Management and Budget; Cecilia Rouse, chair of the Council of Economic Advisers; and Brian Deese, director of the National Economic Council.

AFP/GETTY IMAGES

President Joe Biden on Wednesday delivered an economic speech that highlighted cuts to the federal deficit, even as some watchdogs have criticized his rhetoric around reducing red ink.

“The bottom line is the deficit went up every year under my predecessor, before the pandemic and during the pandemic, and it’s gone down both years since I’ve been here. Period. They’re the facts,” Biden said at the White House.

“Why is it important? Because bringing down the deficit is one way to ease inflationary pressures.”

The president has been talking up fiscal deficit reduction as a way to win over a key Democratic senator — West Virginia’s Joe Manchin — who has blocked Biden’s Build Back Better spending plan and wants to see Washington focused on closing the budget gap and fighting high inflation.

Biden’s rhetoric on eliminating red ink has drawn flak from the Committee for a Responsible Federal Budget, a nonpartisan watchdog organization.

“While President Biden’s Fiscal Year (FY) 2023 budget calls for $1.05 trillion of welcomed deficit reduction, the administration has largely been focused on taking credit for the expected $1.3 trillion fall in the deficit between FY 2021 and 2022,” the organization said in a blog post last month.

“The administration touting this victory is highly misleading; deficits are falling mainly because COVID relief is ending, and deficits will remain high even after this decline.”

Biden on Thursday said his administration revealed this week that it’s on track to cut the federal deficit by $1.5 trillion by the end of the current fiscal year, adding that it’s “the biggest decline in a single year ever in American history.”

The president’s remarks come after his Treasury Department on Monday surprised observers by announcing that it plans to pay down $26 billion in debt in the second quarter.

“For the first time since 2016, the Treasury Department is planning to pay down the national debt issued to the public this quarter,” he said on Wednesday. “For all the talk Republicans make about deficits, it didn’t happen a single quarter under my predecessor, not once.”

Biden’s speech initially had been planned for 2 p.m. Eastern, but the White House moved up the scheduled time for his remarks by three hours.

The Federal Reserve at 2 p.m. Eastern is expected to announce its biggest hike in interest rates in 20 years — a half-percentage-point rise — as the American central bank aims to combat the highest U.S. inflation in 40 years. Fed Chairman Jerome Powell is due to speak at a news conference at 2:30 p.m.

March 31, 2021

President Biden  c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

Please explain to me if you ever do plan to balance the budget while you are President? I have written these things below about you and I really do think that you don’t want to cut spending in order to balance the budget. It seems you ever are daring the Congress to stop you from spending more.

President Barack Obama speaks about the debt limit in the East Room of the White House in Washington. | AP Photo

“The credit of the United States ‘is not a bargaining chip,’ Obama said on 1-14-13. However, President Obama keeps getting our country’s credit rating downgraded as he raises the debt ceiling higher and higher!!!!

Washington Could Learn a Lot from a Drug Addict

Just spend more, don’t know how to cut!!! Really!!! That is not living in the real world is it?

Making more dependent on government is not the way to go!!

Why is our government in over 16 trillion dollars in debt? There are many reasons for this but the biggest reason is people say “Let’s spend someone else’s money to solve our problems.” Liberals like Max Brantley have talked this way for years. Brantley will say that conservatives are being harsh when they don’t want the government out encouraging people to be dependent on the government. The Obama adminstration has even promoted a plan for young people to follow like Julia the Moocher.  

David Ramsey demonstrates in his Arkansas Times Blog post of 1-14-13 that very point:

Arkansas Politics / Health Care Arkansas’s share of Medicaid expansion and the national debt

Posted by on Mon, Jan 14, 2013 at 1:02 PM

Baby carrot Arkansas Medicaid expansion image

Imagine standing a baby carrot up next to the 25-story Stephens building in Little Rock. That gives you a picture of the impact on the national debt that federal spending in Arkansas on Medicaid expansion would have, while here at home expansion would give coverage to more than 200,000 of our neediest citizens, create jobs, and save money for the state.

Here’s the thing: while more than a billion dollars a year in federal spending would represent a big-time stimulus for Arkansas, it’s not even a drop in the bucket when it comes to the national debt.

Currently, the national debt is around $16.4 trillion. In fiscal year 2015, the federal government would spend somewhere in the neighborhood of $1.2 billion to fund Medicaid expansion in Arkansas if we say yes. That’s about 1/13,700th of the debt.

It’s hard to get a handle on numbers that big, so to put that in perspective, let’s get back to the baby carrot. Imagine that the height of the Stephens building (365 feet) is the $16 trillion national debt. That $1.2 billion would be the length of a ladybug. Of course, we’re not just talking about one year if we expand. Between now and 2021, the federal government projects to contribute around $10 billion. The federal debt is projected to be around $25 trillion by then, so we’re talking about 1/2,500th of the debt. Compared to the Stephens building? That’s a baby carrot.

______________

Here is how it will all end if everyone feels they should be allowed to have their “baby carrot.”

How sad it is that liberals just don’t get this reality.

Here is what the Founding Fathers had to say about welfare. David Weinberger noted:

While living in Europe in the 1760s, Franklin observed: “in different countries … the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

Alexander Fraser Tytler, Lord Woodhouselee (15 October 1747 – 5 January 1813) was a Scottish lawyer, writer, and professor. Tytler was also a historian, and he noted, “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

Thomas Jefferson to Joseph Milligan

April 6, 1816

[Jefferson affirms that the main purpose of society is to enable human beings to keep the fruits of their labor. — TGW]

To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.” If the overgrown wealth of an individual be deemed dangerous to the State, the best corrective is the law of equal inheritance to all in equal degree; and the better, as this enforces a law of nature, while extra taxation violates it.

[From Writings of Thomas Jefferson, ed. Albert E. Bergh (Washington: Thomas Jefferson Memorial Association, 1904), 14:466.]

_______

Jefferson pointed out that to take from the rich and give to the poor through government is just wrong. Franklin knew the poor would have a better path upward without government welfare coming their way. Milton Friedman’s negative income tax is the best method for doing that and by taking away all welfare programs and letting them go to the churches for charity.

_____________

_________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733

Williams with Sowell – Minimum Wage

Thomas Sowell

Thomas Sowell – Reducing Black Unemployment

By WALTER WILLIAMS

—-

Ronald Reagan with Milton Friedman
Milton Friedman The Power of the Market 2-5

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Private charities are best solution and not government welfare

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The book “After the Welfare State”

Dan Mitchell Commenting on Obama’s Failure to Propose a Fiscal Plan Published on Aug 16, 2012 by danmitchellcato No description available. ___________ After the Welfare State Posted by David Boaz Cato senior fellow Tom G. Palmer, who is lecturing about freedom in Slovenia and Tbilisi this week, asked me to post this announcement of his […]

President Obama responds to Heritage Foundation critics on welfare reform waivers

Is President Obama gutting the welfare reform that Bill Clinton signed into law? Morning Bell: Obama Denies Gutting Welfare Reform Amy Payne August 8, 2012 at 9:15 am The Obama Administration came out swinging against its critics on welfare reform yesterday, with Press Secretary Jay Carney saying the charge that the Administration gutted the successful […]

Welfare reform part 3

Thomas Sowell – Welfare Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. The Continuing Good News About Welfare Reform By Robert Rector and Patrick Fagan, Ph.D. February 6, 2003 Six years ago, President Bill Clinton signed legislation overhauling part of the nation’s welfare system. […]

Welfare reform part 2

Uploaded by ForaTv on May 29, 2009 Complete video at: http://fora.tv/2009/05/18/James_Bartholomew_The_Welfare_State_Were_In Author James Bartholomew argues that welfare benefits actually increase government handouts by ‘ruining’ ambition. He compares welfare to a humane mousetrap. —– Welfare reform was working so good. Why did we have to abandon it? Look at this article from 2003. In the controversial […]

Why did Obama stop the Welfare Reform that Clinton put in?

Thomas Sowell If the welfare reform law was successful then why change it? Wasn’t Bill Clinton the president that signed into law? Obama Guts Welfare Reform Robert Rector and Kiki Bradley July 12, 2012 at 4:10 pm Today, the Obama Department of Health and Human Services (HHS) released an official policy directive rewriting the welfare […]

“Feedback Friday” Letter to White House generated form letter response July 10,2012 on welfare, etc (part 14)

I have been writing President Obama letters and have not received a personal response yet.  (He reads 10 letters a day personally and responds to each of them.) However, I did receive a form letter in the form of an email on July 10, 2012. I don’t know which letter of mine generated this response so I have […]

Biden talks up deficit reduction, as watchdog says it’s ‘highly misleading’

A.F. Branco for Oct 21, 2021

Biden talks up deficit reduction, as watchdog says it’s ‘highly misleading’

Last Updated: May 4, 2022 at 11:50 a.m. ETFirst Published: May 4, 2022 at 10:22 a.m. ET

President: ‘Bringing down the deficit is one way to ease inflationary pressures’

President Joe Biden speaks Wednesday about the economy at the White House. Also pictured (L-R) are Shalanda Young, director of the Office of Management and Budget; Cecilia Rouse, chair of the Council of Economic Advisers; and Brian Deese, director of the National Economic Council.

AFP/GETTY IMAGES

President Joe Biden on Wednesday delivered an economic speech that highlighted cuts to the federal deficit, even as some watchdogs have criticized his rhetoric around reducing red ink.

“The bottom line is the deficit went up every year under my predecessor, before the pandemic and during the pandemic, and it’s gone down both years since I’ve been here. Period. They’re the facts,” Biden said at the White House.

“Why is it important? Because bringing down the deficit is one way to ease inflationary pressures.”

The president has been talking up fiscal deficit reduction as a way to win over a key Democratic senator — West Virginia’s Joe Manchin — who has blocked Biden’s Build Back Better spending plan and wants to see Washington focused on closing the budget gap and fighting high inflation.

Biden’s rhetoric on eliminating red ink has drawn flak from the Committee for a Responsible Federal Budget, a nonpartisan watchdog organization.

“While President Biden’s Fiscal Year (FY) 2023 budget calls for $1.05 trillion of welcomed deficit reduction, the administration has largely been focused on taking credit for the expected $1.3 trillion fall in the deficit between FY 2021 and 2022,” the organization said in a blog post last month.

“The administration touting this victory is highly misleading; deficits are falling mainly because COVID relief is ending, and deficits will remain high even after this decline.”

Biden on Thursday said his administration revealed this week that it’s on track to cut the federal deficit by $1.5 trillion by the end of the current fiscal year, adding that it’s “the biggest decline in a single year ever in American history.”

The president’s remarks come after his Treasury Department on Monday surprised observers by announcing that it plans to pay down $26 billion in debt in the second quarter.

“For the first time since 2016, the Treasury Department is planning to pay down the national debt issued to the public this quarter,” he said on Wednesday. “For all the talk Republicans make about deficits, it didn’t happen a single quarter under my predecessor, not once.”

Biden’s speech initially had been planned for 2 p.m. Eastern, but the White House moved up the scheduled time for his remarks by three hours.

The Federal Reserve at 2 p.m. Eastern is expected to announce its biggest hike in interest rates in 20 years — a half-percentage-point rise — as the American central bank aims to combat the highest U.S. inflation in 40 years. Fed Chairman Jerome Powell is due to speak at a news conference at 2:30 p.m.

March 31, 2021

President Biden  c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

Please explain to me if you ever do plan to balance the budget while you are President? I have written these things below about you and I really do think that you don’t want to cut spending in order to balance the budget. It seems you ever are daring the Congress to stop you from spending more.

President Barack Obama speaks about the debt limit in the East Room of the White House in Washington. | AP Photo

“The credit of the United States ‘is not a bargaining chip,’ Obama said on 1-14-13. However, President Obama keeps getting our country’s credit rating downgraded as he raises the debt ceiling higher and higher!!!!

Washington Could Learn a Lot from a Drug Addict

Just spend more, don’t know how to cut!!! Really!!! That is not living in the real world is it?

Making more dependent on government is not the way to go!!

Why is our government in over 16 trillion dollars in debt? There are many reasons for this but the biggest reason is people say “Let’s spend someone else’s money to solve our problems.” Liberals like Max Brantley have talked this way for years. Brantley will say that conservatives are being harsh when they don’t want the government out encouraging people to be dependent on the government. The Obama adminstration has even promoted a plan for young people to follow like Julia the Moocher.  

David Ramsey demonstrates in his Arkansas Times Blog post of 1-14-13 that very point:

Arkansas Politics / Health Care Arkansas’s share of Medicaid expansion and the national debt

Posted by on Mon, Jan 14, 2013 at 1:02 PM

Baby carrot Arkansas Medicaid expansion image

Imagine standing a baby carrot up next to the 25-story Stephens building in Little Rock. That gives you a picture of the impact on the national debt that federal spending in Arkansas on Medicaid expansion would have, while here at home expansion would give coverage to more than 200,000 of our neediest citizens, create jobs, and save money for the state.

Here’s the thing: while more than a billion dollars a year in federal spending would represent a big-time stimulus for Arkansas, it’s not even a drop in the bucket when it comes to the national debt.

Currently, the national debt is around $16.4 trillion. In fiscal year 2015, the federal government would spend somewhere in the neighborhood of $1.2 billion to fund Medicaid expansion in Arkansas if we say yes. That’s about 1/13,700th of the debt.

It’s hard to get a handle on numbers that big, so to put that in perspective, let’s get back to the baby carrot. Imagine that the height of the Stephens building (365 feet) is the $16 trillion national debt. That $1.2 billion would be the length of a ladybug. Of course, we’re not just talking about one year if we expand. Between now and 2021, the federal government projects to contribute around $10 billion. The federal debt is projected to be around $25 trillion by then, so we’re talking about 1/2,500th of the debt. Compared to the Stephens building? That’s a baby carrot.

______________

Here is how it will all end if everyone feels they should be allowed to have their “baby carrot.”

How sad it is that liberals just don’t get this reality.

Here is what the Founding Fathers had to say about welfare. David Weinberger noted:

While living in Europe in the 1760s, Franklin observed: “in different countries … the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”

Alexander Fraser Tytler, Lord Woodhouselee (15 October 1747 – 5 January 1813) was a Scottish lawyer, writer, and professor. Tytler was also a historian, and he noted, “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

Thomas Jefferson to Joseph Milligan

April 6, 1816

[Jefferson affirms that the main purpose of society is to enable human beings to keep the fruits of their labor. — TGW]

To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.” If the overgrown wealth of an individual be deemed dangerous to the State, the best corrective is the law of equal inheritance to all in equal degree; and the better, as this enforces a law of nature, while extra taxation violates it.

[From Writings of Thomas Jefferson, ed. Albert E. Bergh (Washington: Thomas Jefferson Memorial Association, 1904), 14:466.]

_______

Jefferson pointed out that to take from the rich and give to the poor through government is just wrong. Franklin knew the poor would have a better path upward without government welfare coming their way. Milton Friedman’s negative income tax is the best method for doing that and by taking away all welfare programs and letting them go to the churches for charity.

_____________

_________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733

Williams with Sowell – Minimum Wage

Thomas Sowell

Thomas Sowell – Reducing Black Unemployment

By WALTER WILLIAMS

—-

Ronald Reagan with Milton Friedman
Milton Friedman The Power of the Market 2-5

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Dan Mitchell article: Updated Assessment of Switzerland’s Spending Cap

Updated Assessment of Switzerland’s Spending Cap

Since I’m a big fan of spending caps, I’m very happy to be in Zurich as part of the Free Market Road Show.

Switzerland’s spending cap (called “the debt brake“) is probably the best system in the world. It does have an escape clause for emergencies, so the government did increase spending during the pandemic.

But as this chart illustrates, Swiss lawmakers were much more responsible than their American counterparts. Over the past few years, IMF datashows that the national debt (as a share of GDP) increased by about 3.4 percent in Switzerland compared to 12.8 percent in the United States.

Even more amazing, Switzerland is now quickly restoring spending restraint.

Indeed, as reported by Le News, Switzerland already is going to be back to fiscal balance by the end of this year.

The Covid-19 pandemic plunged Switzerland’s budget into the red in 2020 and 2021. The federal government expects to returnto normality with a balanced budget in 2022. …In 2022, the federal government expects to spend CHF 0.6 billion less than it collects. …the government is aiming for an ordinary operating surplus of CHF 1 billion. Past budget surpluses may also be applied to the accumulated deficit to bring the accounting into line with the debt brake rules.

If you want to know why there such quick progress, one of the big banks, Credit Suisse, recently analyzed the nation’s fiscal status and explained how the debt brake requires future spending restraint to compensate for the emergency spending during the pandemic.

As part of the pandemic response, the Federal Council approved fiscal measures of over 70 billion Swiss francs… As a result of the debt brake, this deficit should be offset in the immediate following years. …the Federal Council announced that it would classify the majority of the fiscal measures as extraordinary spending. Under the law, this can be paid back more slowly – specifically, within six years. Additionally, with the escape clause, the Federal Assembly has the option of extending the repayment deadline even further in special cases.

Another international bank, ING, also issued a reportabout the country’s spending cap and actually expressed concern that the level of government debt is too low.

The main cause of Switzerland’s low indebtedness is a mechanism introduced by the Confederation to stabilise the federal debt: “the debt brake”. Enabled in the Constitution since 2003, with a population approval rate of 85% in 2001, the rule has strong legitimacy and many cantons have introduced similar models.The principle: public spending should not exceed revenues over a full economic cycle. The formula allows for a deficit during a recession, offset by surpluses during an expansion period. …the implementation of this system has resulted in a significant debt reduction, rather than just stabilisation. This is because the rule is applied asymmetrically and expenditure tends to be overestimated each year, while revenue is systematically underestimated. …every budget surplus is greeted with a self-congratulatory round of applause on the sound management of public finances.

Here’s a chart from the article showing on government debt began to decline once the spending cap was implemented. By contrast, debt in other industrialized nations has continued to climb.

Keep in mind, by the way, that this chart was before the pandemic.

Given Switzerland’s more prudent approach, the gap between the two lines is even higher today.

P.S. If you want a more in-depth discussion of how Switzerland’s de facto spending cap operates, there’s a very good article in the Swiss Journal of Economics and Statistics. Authored by Tobias Beljean and Alain Geier, the 2013 study has a lot of useful information.

…the success is not just visible in figures – it is also evident in the way that the budget process has changed. The debt brake has turned the budget process upside down. Previously, spending intentions were submitted by individual government offices, and it was very difficult to make changes to a large number of budget items during the short interval between the first consolidated budget plan (largely influenced by government offices) between April and the final budget proposal in June.More problematic still, the finance minister faced the potential opposition of six “spending” ministers, who were each looking for support to get their policy proposals into the budget. The budget process is now essentially a top-down process, in which targets are set at the beginning of the process and then broken down to individual ministries and offices. …One key aspect is the fact that the debt brake sets a clear target for the deficit and expenditure. …the (risk-averse) administration tends to plan its spending cautiously so as to not exceed the limit of the credit item. Hence, actual outcomes are mostly below spending limits and are not compensated for by occasional overspending and supplementary credits. The consequence for overall spending is a systematic undershooting of expenditure with respect to the budget. … This “revenue brake” and the “debt brake” taken together now result in a framework similar to an expenditure rule, as it is rather difficult to meet the requirements of the debt brake through revenue-side measures – at least in the short term.

P.P.S. You can also read a couple of good summaries (here and here) from the Swiss government’s Federal Finance Administration.

P.P.P.S. Hong Kong also has a spending cap, and Colorado’s Taxpayer Bill of Rights is a spending cap as well. You can click here to watch informative video presentations about the various spending caps.

Steve Forbes is 100 percent correct, as was Milton Friedman. Bloated and wasteful government spending is the problem, not inadequate revenue. Deficits are merely a symptom of over-spending:

The late Nobel Prize-winning economist Milton Friedman once famously observed that he would prefer a federal government budget of $1 trillion (this was when a trillion bucks was real money) with a big deficit to a federal budget of $2 trillion that was balanced. His obvious point was that the bigger Washington is, the more of a burden it puts on the economy, whether it finances its spending via taxation, borrowing or printing money. So it’s not President Obama’s mind-numbing, from-here-to-eternity deficits that we should be worrying about but the increasing deadweight put on the rest of us by Washington’s burgeoning budget bloat. Senate Republicans were right to put the kibosh on the formation of a formal bipartisan deficit-fighting commission. Those things always end up increasing taxes while doing little to reduce spending. …One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth. The more the government takes as a proportion of the economy, the worse equity markets do and the higher the unemployment rate.

Everything You Need to Know about the National Debt

The title of this column is an exaggeration. What we’re really going to do today is explain the main things you need to knowabout government debt.

We’ll start with this video from Kite and Key Media, which correctly observes that entitlement programs are the main cause of red ink.

I like that the video pointed out how tax-the-rich schemeswouldn’t work, though it would have been nice if they added some information on how genuine entitlement reform could solve the problem  (as you can see here and here, I’ve also nit-picked other debt-themed videos).

Which is why I humbly think this is the best video ever produced on the topic.

As you can see, I’m not an anti-debt fanatic. It was perfectly okay, for instance, to incur debt to win World War II.

But I’m very skeptical of running up the nation’s credit card for routine pork and fake stimulus.

But my main message, which I’ve shared over and over again, is that deficits and debt are merely a symptom. The underlying disease is excessive government spending.

And that spending hurts our economy whether it is financed by taxing or borrowing (or, heaven forbid, by printing money).

Now let’s look at some recent articles on the topic.

We’ll start with Eric Boehm’s column for Reason, which explains how red ink has exploded in recent years.

America’s national debt exceeded $10 trillion for the first time ever in October 2008. By mid-September 2017 the national debt had doubled to $20 trillion. …data released by the U.S. Treasury confirmed that the national debt reached a new milestone: $30 trillion.…Entitlements like Social Security and Medicare are in dire fiscal straits and will become even more costly as the average American gets older. Even without another unexpected crisis, deficits will exceed $1 trillion annually, which means the debt will continue growing, both in real terms and as a percentage of the economy. The Congressional Budget Office estimates that the federal government will add another $12.2 trillion to the debt by 2031.

As already stated, I think the real problem is the spending and the debt is the symptom.

But it is possible, of course, that debt rises so high that investors (the people who buy government bonds) begin to lose faith that they will get repaid.

At that point, governments have to pay higher interest rates to compensate for perceived risk of default, which exacerbates the fiscal burden.

And if there’s not a credible plan to fix the problem, a country can go into a downward spiral. In other words, a debt crisis.

This is what happened to Greece. And I think it’s just a matter of time before it happens to Italy.

Heck, many European nations are vulnerable to a debt crisis. As are many developing countries. And don’t forget Japan.

Could the United States also be hit by a debt crisis? Will we reach a “tipping point” that leads to the aforementioned loss of faith?

That’s one of the possibilities mentioned in the New York Timescolumn by Peter Coy.

It’s hard to know how much to worry about the federal debt of the United States. …Either the United States can continue to run big deficits and skate along with no harm done or it’s at risk of losing investors’ confidence and having to pay higher interest rates on its debt, which would suppress economic growth. …the huge increase in federal debt incurred during and after the past two recessions — those of 2007-09 and 2020 — has used upa lot of the “fiscal space” the United States once had. In other words, the federal government is closer to the tipping point where big increases in debt finally start to become a real problem. …any given amount of debt becomes easier to sustain as long as the growth rate of the economy (and thus the growth rate of tax revenue) is higher than the interest rate on the debt. In that scenario, interest payments gradually shrink relative to tax revenue. …but it doesn’t explain how much more the debt can grow. …Past a certain point, there’s a double whammy of more dollars of debt plus higher interest costs on each dollar. …sovereign debt crises tend to be self-fulfilling prophecies: Investors get nervous about a government’s ability to pay, so they demand higher interest rates, which raise borrowing costs and produce the bad outcome they feared. It’s a dynamic that Argentines are familiar with — and that Americans had better hope they never experience.

For what it’s worth, I think other major nations will suffer fiscal crisis before the problem becomes acute in the United States.

I really this will make me sound uncharacteristically optimistic, but I’m keeping my fingers crossed that this will finally lead politicians to adopt a spending cap so we don’t become Argentina.

P.S. The Wall Street Journal recently editorialized on the issue of government debt and made a very important point about the difference between the $30 trillion “gross debt” and the “debt held by the public,” which is about $6 trillion lower.

…the debt really isn’t $30 trillion. About $6 trillion of that is debt the government owes to itself in Social Security and other IOUs. …The debt held by the public is some $24 trillion, which is bad enough.

As I’ve noted when writing about Social Security, the IOUs in government trust funds are not real.

They’re just bookkeeping entries, as even Bill Clinton’s budget freely admitted.

Indeed, if you want to know whether some is both honest and knowledgeable about budget matters, ask them which measure of the national debt really matters.

As you can see from this exchange of tweets, competent and careful budget people (regardless of whether they favor big government or small government) focus on “debt held by the public,” which is the term for the money government actually borrows from credit markets.

If you want to know the difference between the various types of government debt – including “unfunded liabilities” – watch this video.

P.P.S. This column explains how and when debt matters. If you’re interested in how to reduce the debt, there’s very good evidence that spending restraint is the only effective approach. Even in cases where debt is enormous.

P.P.P.S. By contrast, the evidence is very clear that higher taxesactually make debt problems worse.

Yes, Starve the Beast

As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting.…So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending.Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”


Friedman & Sowell: Should Our School System Be Privatized?

Regular readers know that the two things that get me most excited are the Georgia Bulldogs and the fight against a bloated public sector that is ineffective in the best of circumstances and more often than not is a threat to our freedoms.

So you will not be surprised to know that I am delighted that former Georgia Bulldog star Fran Tarkenton (who also happened to play in the NFL) has a superb piece in the Wall Street Journal ripping apart the inherent inefficiency of government-run monopoly schools.

Here is the key passage.

Imagine the National Football League in an alternate reality. Each player’s salary is based on how long he’s been in the league. It’s about tenure, not talent. The same scale is used for every player, no matter whether he’s an All-Pro quarterback or the last man on the roster. For every year a player’s been in this NFL, he gets a bump in pay. The only difference between Tom Brady and the worst player in the league is a few years of step increases. And if a player makes it through his third season, he can never be cut from the roster until he chooses to retire, except in the most extreme cases of misconduct. Let’s face the truth about this alternate reality: The on-field product would steadily decline. Why bother playing harder or better and risk getting hurt? No matter how much money was poured into the league, it wouldn’t get better. In fact, in many ways the disincentive to play harder or to try to stand out would be even stronger with more money. Of course, a few wild-eyed reformers might suggest the whole system was broken and needed revamping to reward better results, but the players union would refuse to budge and then demonize the reform advocates: “They hate football. They hate the players. They hate the fans.” The only thing that might get done would be building bigger, more expensive stadiums and installing more state-of-the-art technology. But that just wouldn’t help.

This sounds absurd, of course, but Mr. Tarkenton goes on to explain that this is precisely how government schools operate.

If you haven’t figured it out yet, the NFL in this alternate reality is the real-life American public education system. Teachers’ salaries have no relation to whether teachers are actually good at their job—excellence isn’t rewarded, and neither is extra effort. Pay is almost solely determined by how many years they’ve been teaching. That’s it. After a teacher earns tenure, which is often essentially automatic, firing him or her becomes almost impossible, no matter how bad the performance might be. And if you criticize the system, you’re demonized for hating teachers and not believing in our nation’s children. Inflation-adjusted spending per student in the United States has nearly tripled since 1970. According to the Organization for Economic Cooperation and Development, we spend more per student than any nation except Switzerland, with only middling results to show for it.

Actually, I will disagree with the last sentence of this excerpt. We’re not even getting “middling results.” Here’s a chart from an earlier post showing that we’ve gotten more bureaucracy and more spending but no improvement over the past 40 years.

So what’s the solution to this mess? Well, since government is the problem, it stands to reason that competition and markets are the answer.

Sweden, Chile, and the Netherlands are just some of the countries that have seen good results after breaking up state-run education monopolies.

Watch this video to get more details.

Economics 101: School Choice Example Shows Why Government Monopolies Are Bad

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FRIEDMAN FRIDAY Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes)

Milton Friedman’s FREE TO CHOOSE “The Tyranny of Control” Transcript and Video (60 Minutes) In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 7 of 7 (Transcript and Video) “I’m not pro business, I’m pro free enterprise, which is a very different thing, and the reason I’m pro free enterprise”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 6 of 7 (Transcript and Video) “We are the ones who promote freedom, and free enterprise, and individual initiative, And what do we do? We force puny little Hong Kong to impose limits, restrictions on its exports at tariffs, in order to protect our textile workers”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 5 of 7 (Transcript and Video) “There is no measure whatsoever that would do more to prevent private monopoly development than complete free trade”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 4 of 7 (Transcript and Video) ” What we need are constitutional restraints on the power of government to interfere with free markets in foreign exchange, in foreign trade, and in many other aspects of our lives.”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 3 of 7 (Transcript and Video) “When anyone complains about unfair competition, consumers beware, That is really a cry for special privilege always at the expense of the consumer”

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, […]

FRIEDMAN FRIDAY “The Tyranny of Control” in Milton Friedman’s FREE TO CHOOSE Part 2 of 7 (Transcript and Video) “As always, economic freedom promotes human freedom”

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FRIEDMAN FRIDAY “The Tyranny of Control” Milton Friedman’s FREE TO CHOOSE Part 1 of 7 (Transcript and Video) “Adam Smith’s… key idea was that self-interest could produce an orderly society benefiting everybody, It was as though there were an invisible hand at work”

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Dan Mitchell on socialist winning in France! “it’s always better to let the left-wing party win when the supposedly right-wing party has a statist candidate.”

Hooray, the Socialist Beat the Socialist in France

Back in 2012, I endorsed a wretched socialist, Francois Hollande, to be president of France.

I knew he was terrible, but the supposedly right-wing incumbent, Nicolas Sarkozy, also was a proponent of dirigisme. As I wrote at the time, “it’s always better to let the left-wing party win when the supposedly right-wing party has a statist candidate.”

In France’s next election, in 2017, French voters faced a similarly dismal choice. Emmanuel Macron ran against Marine Le Pen and I urged voters to “pick the socialist over the socialist.”

Macron prevailed in that race and just won a rematch against Le Pen on Sunday.

I didn’t bother writing about the race ahead of time because it didn’t matter. Neither candidate promoted good ideas.

If you want to know France’s problems, the Fraser Institute’s Economic Freedom of the World is a good place to start.

According to the most recent edition, France ranks #53, which is a very poor grade for a developed nation.

The country’s biggest problem is fiscal policy. Out of 163 nations, it ranks #155 for “size of government.”

That’s even worse than Greece.

And if you look at the historical data from the Fraser Institute, you’ll see that France’s score actually has declined since Macron won in 2017.

Not by much, to be sure, but still a move in the wrong direction. Moreover, given France’s demographic outlook, things will get much worse in the not-too-distant future.

All the more reason why I’m not excited about Macron’s reelection victory.

But what do others say?

If you want a semi-optimistic perspective, the Wall Street Journal opined on the potential implications and seems to think Macron’s heart is in the right place.

The question is whether Mr. Macron will do more in the next five years to make France great again. …Mr. Macron defies traditional political divisions. In his first term he appointed center-right figures to key positions and made progress with tax and labor reform.  …Ms. Le Pen…ran to his left on economics, calling for a wealth tax on financial assets and trade protectionism. …While Mr. Macron showed free-market instincts in his first term, he has tacked to the left recently to shore up support from young and progressive voters. Far-left candidate Jean-Luc Mélenchon says he wants to be prime minister, and the coming National Assembly elections could be decisive in determining the direction of the country. Focusing on pro-growth reform—rather than climate obsessions or populist gestures like limiting executive pay—would help restore the economic vitality that Mr. Macron originally promised. It would also make it less likely for a radical like Ms. Le Pen or Mr. Mélenchon to take power in five years.

For a more negative perspective, here’s a CapX column from 2019, authored by Anne-Elisabeth Moutet.

…tax increases; a ballooning national debt and the highest government spending ratio to GDP in Europe… It’s become harder than ever to pinpoint a specific “Macron line”, but whatever it is, it isn’t a liberal one. …The president’s idea for modernising France’s industry is a mix of high-handed, interventionist industrial policyand a brushed-up reliance on top-down sectoral choices reminiscent of every single one of his predecessors, from de Gaulle onwards. …he announced €5bn investment into Le French Tech from well-coaxed institutional investors, with the aim of creating “25 French unicorns by 2025”. (The irony of having a government programme dedicated to create privately-held tech start-ups valued above $1bn seems to have escaped him). …The president’s policies oscillate according to polling and estimated image gains. As a result, the supposedly “courageous” reforms promised…are…watered down. …Macron believes sincerely in his top-down…plans.

For what it’s worth, I suspect Macron understandsthat his nation needs pro-market reform, but I also think he isn’t willing to take any risks to make it happen.

P.S. A few years ago, I shared a story that told you “everything you need to know about France.” Here are some excerpts from another story that captures the awful mindset holding back that country.

In less than three weeks, board game lovers in France bought all 10,000 copies of Kapital!, a new game about class struggle, injustice and French politics created by French sociologists.…One player will draw the good lot and fall among the rich; others will be the struggling poor and middle class. All players have to fight their way to the “tax haven” at the conclusion of the board. …The sociologists created the game to raise awareness about social injustice and the gap between the rich and poor. …The game was an instant success, selling out in less than three weeks.

This is almost as bad as the European Commission’s online game that was designed to brainwash children in favor of higher taxes.

P.P.S. Here’s a must-watch video explaining why America shouldn’t become another France.

Milton Friedman – Health Care Reform (1992) pt 1/4

Milton Friedman – Health Care Reform (1992) pt 2/4

Milton Friedman – Health Care Reform (1992) pt 3/4

Milton Friedman – Health Care Reform (1992) pt 4/4

The United Kingdom’s Failed Post-War Socialism

I’m in the United Kingdom for the Free Market Road Show and had planned on writing today about the awful economic policies of Boris Johnson, the supposedly Conservative Prime Minister.

Yes, he produced an acceptable Brexit, but otherwise has been a big spender. Sort of the a British version of Trump or Bush.

But I’m going to give Boris a (temporary) pass because I can’t help but vent my spleen about this sign I saw yesterday while touring the Imperial War Museum in London.

As you can imagine, I was irked by this bit of pro-socialist propaganda.

Since when does a government takeover of private industry lead to “a fairer, more caring society”?!?

Maybe that was the intention of the voters who elected Clement Attlee, the Labour Party who became Prime Minister after the 1945 election.

The real-world results, though, were disappointing. Indeed, the sign acknowledges that the post-war recovery was anemic.

But it then put the blame on conscription.

As a sensible Brit would say, this is utter bollocks.

Plenty of other nations drafted men into military service, yet they still managed to enjoy decent growth.

Why did those countries enjoy more prosperity? Because they didn’t copy Clement Attlee’s horrible mistake of nationalizing industry (genuine socialism, by the way).

Indeed, while the United Kingdom was becoming the “sick man of Europe,” West Germany boomed in large part because it went in the other direction,getting rid of dirigiste policies such as price controls.

There is a happy ending to this story.

Margaret Thatcher was elected in 1979 and privatized industries – in addition to other pro-growth reforms such as spending restraint and tax-rate reductions.

As a result, the United Kingdom in a very short period of time managed to overtake Germany in the Fraser Institute’s rankings for economic liberty.

I’ll close with a thoughtful and magnanimous offer.

I’ve corrected the mistaken wording on the sign at the Imperial War Museum. I hereby offer – free of charge – this new version.

P.S. It’s a long program, but I strongly encourage readers to watch Commanding Heights: The Battle of Ideas, which tells the economic history of the 20th century. You’ll learn how Thatcher saved the U.K. economy and how Reagan saved the U.S. economy.

Milton Friedman On Socialized Medicine

Nov 152014

 

A must see!

Nobel Laureate Economist Milton Friedman explores the unsettling dynamics set into motion when government imposes itself into the health care system. (1978)

Everything old is new again

– See more at: http://www.commonsenseevaluation.com/tag/milton-friedman/#sthash.cLJboBo8.dpuf

Milton Friedman on Medical Care (Full Lecture)

Published on Feb 2, 2014

The genius of Milton Friedman is that his economic insights are as powerful as they are timeless. Despite the fact that these comments were made more than thirty years ago in 1978 at the Mayo Clinic, they ring as true today as they did then. Milton Friedman’s six-part video series below on the economics of medical care is especially timely, in light of the fact that the Supreme Court ruled in favor of Obamacare this week and Milton Friedman predicted in this lecture that increased government involvement in health care would lead inevitably to completely socialized medicine. This Mayo Clinic lecture is also a testament to Milton Friedman’s effectiveness at delivering the message of individual liberty and limited government in a convincing and non-threatening way, as Milton explains diplomatically to an audience of physicians how the “power of organized medicine” led to significant restrictions on entry to their profession through the American Medical Association’s control over occupational licensing for physicians, which has contributed to the rising costs of medical care.

Milton Friedman: “I’m going to talk today about the economics of medical care. This in an area, in which we all know there has been a trend toward ever-greater government involvement. One step in this area inevitably leads to another. We have had an expansion of government involvement in the spending of money – Medicare, Medicaid funds, expenditures by the Department of Health, Education and Welfare for other medical purposes have been growing by leaps and bounds. They have gone from a very tiny portion of the total national expenditures on medical care to a substantial portion. If this trend continues, it inevitably leads to completely socialized medicine. I believe that this trend is very much against the interest of patients, physicians, and other health care personnel. And in the brief time I have to today, I want to explain why I believe the trend is so much against their interest, why it has occurred, and what, if anything can be done about it.”

Source…

– See more at: http://www.commonsenseevaluation.com/tag/milton-friedman/#sthash.cLJboBo8.dpuf

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I have written about Obamacare over and over again on this blog. Dan Mitchell has shared many funny cartoons about Obamacare too. Milton Friedman has spoken out about government healthcare many times in the past and his film series FREE TO CHOOSE is on You Tube and I encourage you to watch it. It is clear that the federal government debt is growing so much that it is endangering us because if things keep going like they are now we will not have any money left for the national defense because we are so far in debt as a nation.

We have been spending so much on our welfare state through food stamps and other programs that I am worrying that many of our citizens are becoming more dependent on government and in many cases they are losing their incentive to work hard because of the welfare trap the government has put in place. Other nations in Europe have gone down this road and we see what mess this has gotten them in. People really are losing their faith in big government and they want more liberty back. It seems to me we have to get back to the founding  principles that made our country great.  We also need to realize that a big government will encourage waste and corruption. Also raising taxes on the job creators is a very bad idea too. The Laffer Curve clearly demonstrates that when the tax rates are raised many individuals will move their investments to places where they will not get taxed as much.

In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount.  I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “The Anatomy of a Crisis” and “What is wrong with our schools?”  and “Created Equal”  and  From Cradle to Grave, and – Power of the Market.

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FRIEDMAN FRIDAY SEPTEMBER 4, 2006 An Interview with Milton Friedman

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