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Are members of the hedge fund crowd really just getting lucky by pushing paper around? Is the tax treatment of carried interest a national scandal? Is there a principled case for taxing capital gains at a different rate than ordinary income? And what’s the right approach to take towards comprehensive tax reform? Those are some of the questions I explore with Professor Epstein this week as we examine Donald Trump’s criticisms of financial elites. Listen in below or subscribe to The Libertarian podcast via iTunes.
Mandating companies pay this or that benefit may seem like a free lunch to policymakers. Workers are helped, and taxpayers don’t bear the burden. Yet as Larry Summers wrote in “Some Simple Economics of Mandated Benefits” back in 1989: “If policymakers fail to recognize the costs of mandated benefits because they do not appear in the government budget, then mandated benefit programs could lead to excessive spending on social programs. There is no sense in which benefits become ‘free’ just because the government mandates that employers offer them to workers. … Mandated benefit programs can work against the interests of those who most require the benefit being offered.”
The Economist looks at this issue, in the context of part-timers, freelancers, and independent contract. Gig economy alert!
The main benefits associated with employment fall into three broad categories: public pensions, health care, and unemployment insurance. In the case of pensions, governments usually levy payroll taxes on firms in proportion to their workforce, and use the proceeds to support pensioners. Hire a worker as a contractor, and firms need not pay the levy; in America, the self-employed must instead pay it themselves. Workers’ advocates claim this means contractors face higher tax rates than employees.
Despite all the pushback Pope Francis has been getting from free-marketeers, two important stipulations are in order: markets are not equally good at solving all problems, and many of their best features can be undermined by the greedy or immoral. They can work miracles like nothing else, but they’re also somewhat dependent on flawed human beings
As David Sussman notes on the Member Feed, the Interwebs are currently awash with news of alleged price gouging by Turing Pharmaceuticals. The drug in question, Daraprim, was developed decades ago and is used to treat toxoplasmosis, a parasitic infection that’s a minor problem (at worst) for the healthy, but a serious one for the immunodeficient or babies whose mothers were infected while pregnant. The drug was developed decades ago and has a tiny market — currently, under 9,000 prescriptions per year. It had been available for as little as $50 per prescription as recently as five years ago. After being sold to another company, the price of the drug rose to $500 per prescription in 2011, then to $1,100 last year. Assuming everything remains constant, the same prescription under the newly-announced price would cost just shy of $63,000. I’m not sure about babies, but the Mayo Clinic reports that the immunodeficient may need treatment for life.
As Megan McArdle wrote a few weeks ago, drugs that are in fierce demand by a small number of people are an inherently difficult problem for markets — or, really, any system — to solve. When you also factor in the regulatory costs, the fact that most drugs are actually purchased by third parties, and the fact that drug manufacturing is relatively inexpensive, you’ve got what looks like a perfect storm of grossly unfair and exploitative price gouging. Even if it’s genuinely the best a market can do under difficult circumstances, it sure looks bad.
Buckle your seat belts, everybody. We’ve reached peak disruption: a story of the gig economy intersecting with the rise of the robots. From Thomas Lee in the San Francisco Chronicle:
From taxicab unions and package couriers to politicians and regulators, a growing crowd of people would like to destroy Uber. Add one more name to the list: Uber founder and CEO Travis Kalanick.
Somewhere lost in the scrum over whether Uber drivers are employees or contractors, or whether the company conducts proper background checks, is the simple fact that Kalanick wants to eventually replace all Uber drivers with software and computers. Like Google and Tesla, Uber is trying to develop a car that can drive without a human operator.
Donald Trump has made financial elites one of his latest targets, recently declaring on Face the Nation that, “I have hedge fund guys that are making a lot of money that aren’t paying anything [in taxes]. They’re paying nothing and it’s ridiculous. I want to save the middle class. The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky.” As I note in my new column for Defining Ideas, that considerably misstates the case:
The reality is the opposite of what Trump claims. When these hedge fund guys trade, they are not just haphazardly shifting paper around. They are shifting paper as a means to transfer wealth and reallocate risk. Nor do they do it in a self-contained universe. They have paying clients who need accurate information and reliable execution to enter into transactions essential to their business survival.
In countless ways, the financial system—and the bankers and hedge funders that are participating in it—supports the so-called real economy. Start with the simple notion of liquidity. People need to have access to cash and cash equivalents all the time to pay bills and to make investments and gifts. It is those hedge funders who organize complex payment systems—credit, debit, electronic funds transfers, and more—that allow for literally billions of small and large financial transactions to take place every second of every day.
Frank Soto joins us this week; pessimistic about the pope, optimistic about conservatives’ political future. Is Marco Rubio out of the race? We’re done talking about Trump, and — given the prescience of Flyover Country — let us simply assume that this is the start of something. Speaking of which, Rob Long points out an article in which Newsmax declares Flyover Country to be the #1 conservative podcast in the Multiverse. You’ve got to read between the lines, but that’s essentially what they’re saying.
Intro includes a song from Ronald Jenkees; closing music this week comes from Public Service Broadcasting; h/t Ricochet member Lance.
Economist Deirdre McCloskey recently spoke in London, and this brief summary nicely captures her talk and her work on the power of economic freedom. Next year will see the arrival of her latest book, “Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World,” the completion of a trilogy on the wonder-working power of modern capitalism.
Now, McCloskey does not like the word “capitalism.” She would prefer our economic system be called “technological and institutional betterment at a frenetic pace, tested by unforced exchange among all the parties involved.”
Or perhaps “fantastically successful liberalism, in the old European sense, applied to trade and politics, as it was applied also to science and music and painting and literature.”
It’s easy to be dismissive of the mindless cheerleading in the mainstream media as they crow about the ever-decreasing unemployment rate when it is obvious to anyone who has contact with the world outside of the Wall-Street-to-Washington Axis that the U.S. employment situation is not healthy. I’ve pointed out previously that, though U3 unemployment continues its bizarre march down, the labor force participation rate has never improved during this “economic recovery” and remains at multi-decade lows. Upon further reflection, and after witnessing yet another septuagenarian bag my groceries this week, I think I may have been overly simplistic and harsh when discussing the job market before. There are Americans who are finding themselves working more and more these days: the elderly.
I’m lucky in that — in exchange for an ice cream sundae after dinner last week — my four year old daughter agreed to let me stay in her basement when I age. Sucker. Unfortunately, not all Americans have such choices. From 2002 to 2012, as the labor force participation rate for 25 to 54 year olds dropped from 83.3 to 81.4 percent, the labor participation rate for those 65 and older increased from 13.2 to 18.5 percent (2012 was the most recent government labor participation rate data I could find broken out by age; perhaps they are too embarrassed to continue publishing this information as the situation has likely worsened since then). Now, you might be thinking, “Sure, there are more 65 year olds working, but 65 isn’t what it was back when Trog had to club wooly mammoths for a living so these folks are probably just socking away a bit more in that 401K before enjoying a dream retirement.” The problem is the labor participation rate for those over 75 also rose, from 5.1 percent in 2002 to 7.6 percent in 2012 and is forecasted to be 10.5 percent in 2022. Unless that cryogenic freezing works out, I’m not sure when these unfortunate folks are going to enjoy those golden years.
I’ve been pondering an item I saw in the Wall Street Journal the other day about states creating “automatic IRAs” for residents who don’t have a retirement plan at work. So far only three states – California, Illinois, and Oregon – have approved such programs, and none have actually gone into operation as of yet. The general idea is that workers without any other retirement plan would have an automatic payroll deduction into an IRA, but they could opt out if they want.
In general, I like to see the states moving into areas that are thought (incorrectly) to be federal concerns. The federal social security system has no legitimate constitutional basis – it was upheld in the midst of the New Deal by an FDR-friendly majority of the court. Justice Cardozo’s opinion was based mainly on the idea that Social Security was good policy given the “crisis” of the Depression. The policy argument looks a little thin now, with the Social Security Trust Fund facing depletion. That’s not to mention the inherent unfairness of paying into a hypothetical retirement account that your heirs cannot inherit.
While there were some great moments in the latest GOP debate, and some terrific individual performances — Carly Fiorina seemed to grab all the buzz in the aftermath — one thing that barely came up was the economy. It was very much like the first debate.
The day after the candidates faced off, Fed chair Janet Yellen announced a stand-pat, no-interest-rate-liftoff policy. Now, I don’t expect presidential candidates to be Fed watchers. But Yellen did raise the issue of a still-soft economy, despite all the QE and zero-interest-rate policies. And I think Yellen was right. There will be a time to normalize Fed target rates. But not yet.
That said, it would have been a good thing if any of the candidates talked about our money. A strong and steady dollar — the world’s unit of account (in theory) — is pro-growth, as we saw in the ’60s, ’80s, and ’90s. A collapsing greenback smothers growth, as we saw in the 2000s.
The WaPo’s Catherine Rampell certainly sums up what I was thinking during the recent GOP debate:
To the great disappointment of econo-nerds everywhere, the economy was almost entirely ignored during Wednesday’s Republican presidential debate. Over the course of three hours, the moderators and debaters found time for but a few minutes of discussion on the economy, most of that on the minimum wage. There was almost nothing on jobs; nothing on inflation; one throwaway mention of trade; and nothing on the Federal Reserve’s impending interest-rate decision, which would be announced the following day (spoiler: the Fed kept rates at zero percent— more on that in a bit). And so the econ-Twitterverse cried out: Whither the economy? Attention must be paid!
Rampell speculates Republicans don’t want to talk so much about the economy because of its slow improvement. Sort of makes sense.”The economy is not as strong as it should be” is a less compelling narrative than, “The economy is in the tank.”
I’m still working my way through Ron Bailey’s The End of Doom, but wanted to share a passage from a few chapters back. Bailey devotes a few pages to botanist Norman Borlaug. I knew Borlaug’s new wheat strains were responsible for launching the Green Revolution — and put him at the top of the short list for individuals who’ve saved the most lives in human history — but I had no idea of the free market angle on his work:
Borlaug’s achievements were not confined to the laboratory and fields. He insisted that governments pay poor farmers world prices for their grain. At the time, many developing nations—eager to supply cheap food to their urban citizens, who might otherwise rebel—required their farmers to sell into a government concession that paid them less than half of the world market price for their agricultural products. The result, predictably, was hoarding and underproduction. Using his hard-won prestige as a kind of platform, Borlaug persuaded the governments of Pakistan and India to drop such self-defeating policies. Fair prices and high doses of fertilizer combined with new grains changed everything. By 1968 Pakistan was self-sufficient in wheat, and by 1974 India was self-sufficient in all cereals.
Charity played an important part in the Green Revolution, as Borlaug’s research was funded by a grant from the Rockefeller Foundation. Its wealth, of course, would never have existed had its founder not created one of the greatest industrial empires of all time by providing people with affordable energy and lighting. Charity can catalyze change for the better and provide a vital alternative when need arises — but the ability to meet the necessities of life is fueled by markets.
This is the second in a series on the importance and durability of conservative successes since Reagan took office and since Obama lost his supermajority; we do win battles and they can stay won.
Though FDR created the modern Democratic Party as a diverse array of government entities and sales pitches to attract various identity groups, its heart was legally-empowered unions. In what might be considered the first individual mandate, Americans under a pro-union government would be forced to pay dues to a third party who would spend it, in part, on getting Democrats elected. There’s a raft of ways in which that system was enhanced; since 1931, for instance, Davis-Bacon prevailing wage laws have meant that government had to overpay for contracts, with much of the surplus going to unions, who were also helped by the additional red tape. Because people rarely give much of their own free will, declared union spending on the 2012 cycle topped $1.7 billion, while the Obama campaign ($0.5 billion), DNC ($0.3 billion), and declared outside spending on the Presidential race ($0.1 billion) didn’t compare.
But it’s more than money. Unions are the Democrats’ answer for why America is great. All the wonderful changes of the twentieth century, the incredible wealth enjoyed by our middle class, the massively superior quality of life we have over our parents … all these are explained, in their telling, by unions. The roll free markets serve in conservative mythology (and in reality) are credited to unions in the Left’s narrative. They can also point to unions as a source for social capital and the guarantors of individual rights, making them not merely the purported engine of economic growth, but also the Left’s church.
Americans are pretty interested in these Republican presidential debates. Last night’s at the Reagan Library appears to be the highest-rated event in CNN’s history. So whatever else the debates are for the GOP, they are an opportunity to present to millions of voters a modern vision about growth, opportunity and shared prosperity in a changing US economy. And talk about a news hook. The Census Bureau yesterday released new figures — whatever their flaws— showing continued middle-class income stagnation.
Yet the “middle” class was mentioned just four times vs. 10 times for the “Middle East.”
“Parent” — as in “single parents,” for instance — was mentioned just three times vs. 23 times for Planned Parenthood.
One of the central questions of the current Republican presidential campaign is when potential candidates will talk about important issues of political economy. That talk has thus far been in short supply because of the intellectual oxygen that is sucked out of the room every time Donald Trump walks into it. The recent remarks by Wisconsin Governor Scott Walker in union-dominated Las Vegas, however, have begun to change that. They represent his effort to breathe some life into his faltering campaign by harking back to his successful effort to take on public unions in Wisconsin.
High-stakes gambles like this usually lose. Indeed, to everyone’s surprise, Walker seems to have become a long-shot at this point. Nonetheless, even if his latest proposals don’t revive his candidacy, other Republicans should take up this cause. The union movement is powerful and united, but it is also vulnerable to political attack. The forces that led to the adoption of right-to-work laws in Wisconsin, Indiana, and Michigan are good evidence that many voters, including union members, realize that powerful unions are as bad for working people as they are for employers in the long run
Walker is not a theoretical type, so his speech does not offer the intellectual justifications for curbing the union power that has pervaded American life since the passage of the National Labor Relations Act of 1935. The major problem with unions is that they are monopolies. Employment markets need to be competitive, with ease of entry and exit by both firms and individuals. If you keep tabs on employer efforts to monopolize through the antitrust laws and otherwise leave the process free to function, the interplay of market forces will give both workers and employers the opportunity to work together to maximize their joint welfare by figuring ways to expand the pie and then divide the proceeds.
Donald Trump, again saying things supposed Republicans usually don’t say:
U.S. Republican party presidential frontrunner Donald Trump said on Sunday high salaries paid to chief executives were a “joke” and a “disgrace” and said these were often approved by company boards stacked with the CEO’s friends. Trump, a real estate mogul who has said he plans to use his net worth of $8.7 billion to fund his White House campaign, said in an interview with CBS’s “Face the Nation” that it was hard to tackle the question of corporate pay because too many corporate boards lacked independence. “It’s disgraceful. Sometimes the boards rule but I would probably say it’s less than 10 percent; and you see these guys making enormous amounts of money. It’s a total and complete joke,” he said.
In the interview, “Face the Nation” host John Dickerson trotted out the factoid that CEO pay is on average some 350 times larger than the average worker’s compensation.
Republicans are sort of boxed in when it comes to taxes. For three decades, tax cuts have been the party’s core issue, and a winning one at that. It helped give the party two two-term presidents and control of Congress after decades in the minority. But today (a) the top rate is 40%, not 70% as it was in 1980; (b) more than 40% of Americans pay no income taxes; (c) federal debt, as a share of GDP, has more than doubled since 2007; (d) a tsunami of entitlement spending is coming; and (e) the American public doubts the pro-growth impact of high-end tax cuts.
Jeb!’s tax plan provides a good opportunity to explain why cutting corporate tax rates below individual tax rates will only worsen problems with the existing tax structure.
We tend to think of large multinationals, or at least publicly-traded corporations, as the paradigm corporate taxpayers. But according to the 2012 IRS Corporate Income Tax Report, 86 percent of Form 1120 filers (commonly known as C Corps) had assets of less than $1 million. (I used the data in Figure F, to separate out the S Corp returns.)
Jeb Bush will not be offering American voters a fantasy tax plan. Unfortunately, this is a detail too often worth noting when examining Republican tax ideas. Bush’s economic blueprint, announced this week, doesn’t replace the current income tax with a flat tax, a national sales tax, or some other tax based on a close reading of the biblical Book of Deuteronomy.
Rather, if you assembled a random group of smart, GOP-leaning economists and told them to cook up a plan to boost long-term economic growth, their recipe would likely resemble Bush’s “Reform and Growth Act of 2017.” Which is why the Bush plan kind of also looks like the Mitt Romney plan from 2012. Like Romney, Bush would reduce the top tax rate to 28 percent while also reducing corporate and investment tax rates. The theory here is that more investment would increase productivity and economic growth. One of the especially disappointing features of the current recovery has been the lack of business spending and weak productivity gains — at least as officially measured.
The Bush plan has a populist streak, though. The focus isn’t solely on heroic entrepreneurs and multinational firms locked in cutthroat global competition. Bush would double the standard deduction taken by most of us, expand the Earned Income Tax Credit for childless workers, move some 15 million low-income Americans off the income tax rolls, and close the “carried interest” tax break for hedge-fund managers. Hey, 47 percent, he cares! To be fair, most politically successful Republican tax plans contain a mix of changes to improve economic incentives while providing direct tax relief for the broad middle class. That was the Reagan model, the Bush II model, and now apparently the Bush III model, too.