Originally published at AIER.
April heralds two markers in Americans’ financial calendar. Neither brings joy. Their anguish reminds us of the dire need for fiscal reform before it’s too late. The first day is Tax Day on April 15, when you must file taxes to the IRS. The other day is Tax Freedom Day on April 16. The latter is the 104th day of the year, which represents when Americans, on average, can stop working to pay taxes and start working to improve their own lives and further their economic goals. We work 30 percent of our days to pay government alone. This stark division of the year into earning to pay for the government versus for oneself casts a revealing light on taxation’s burden. These dismal dates indicate an urgent need to overhaul the fiscal regime of excessive government spending that drives taxes higher. The pain and uncertainty from an ever-changing federal progressive marginal individual income tax system with forced withholding and payment or refund later are destructive. These costs distort our ability to prosper. Central to minimizing these burdens and distortions is for the federal government to spend less, thereby reducing the amount needed from taxes. And the tax system should be simplified by moving to a broad-based, flat-income tax. Eventually, we could eliminate income taxes and fund our significantly reduced spending with a broad-based, flat final sales tax, but politics too often takes precedence over prudence. States without personal income taxes, such as Texas and Florida, often showcase stronger economic performance, underscoring the potential benefits of a consumption-based tax model. The Tax Foundation’s analysis shows that these states enjoy higher growth rates and attract businesses and residents alike, advocating for the efficiency of a less burdensome tax system. Unlike taxes on income, a consumption tax better aligns with economic volatility and taxpayers’ decisions. It introduces a transparent, simpler tax system, starkly contrasting the current convoluted income tax code, thereby supporting more freedom to choose, increased savings, and faster economic growth. But the looming uncertainty inevitably generated by temporary tax measures and seemingly endless, excessive government spending demands attention. For instance, the individual income tax rate reductions, full-expensing, and other provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 expire over the next year, creating a cloud of uncertainty. Moreover, the multi-trillion-dollar deficits from overspending result in further economic destruction because of higher interest rates and less investment. The economic impact was notable, with the Congressional Budget Office reporting a surge in GDP growth following the TCJA’s implementation. But the uncertainty surrounding its future dampens long-term economic prospects and investments. Permanent tax reform, aimed at fostering stability and growth, requires a commitment to fiscal discipline and a reevaluation of government spending priorities. The erratic nature of such spending and tax policies erodes the stability crucial for economic prosperity. Uncertainty, particularly around taxes, inhibits investment and innovation. Predictability is key to strategic planning and growth. For entrepreneurs, uncertainty is a strong disincentive. The fluctuating tax landscape presents a significant barrier to economic expansion. Addressing this uncertainty requires permanent growth-oriented tax policies and controlling government spending. The direction of tax reform must be twofold: advocating for broad-based, flat taxes and championing sustainable government budgets. This dual approach promises to enhance economic liberty and lay a foundation for robust growth, which should also reduce the number of days to Tax Freedom Day so more money is in our pockets. Reflecting on Tax Day and Tax Freedom Day sparks a broader discussion on tax reform. We can envision a society that values freedom, peace, and prosperity by championing pro-growth policies of a simplified, flat tax system and sustainable spending. Dispelling tax uncertainties and controlling government spending pave the way for economic policies that foster rather than hinder human flourishing. The journey toward a more rational tax system is not merely fiscal; it’s a moral imperative. It demands bold, persuasive advocacy for policies that champion economic soundness while embracing the principles of liberty and opportunity. We can inspire a movement toward genuine economic reform on this Tax Day by addressing the challenges posed by the current tax code and advocating for a shift toward a better fiscal regime with more days working for ourselves instead of Uncle Sam.
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Originally published at Daily Caller.
The National Association of Insurance Commissioners’ (NAIC) recent regulatory proposals have concerned stakeholders across the U.S. insurance landscape. At the heart of the controversy are proposed changes that could fundamentally alter how life insurance companies invest in financial instruments, with far-reaching consequences for the broader economy and, more specifically, the retirement security of millions of Americans. The NAIC, as a non-governmental entity that wields considerable influence over the insurance industry’s regulatory framework, operates in a unique space where its decisions can have national implications. Its recent move to increase capital requirements from 30% to 45% on residual asset-backed securities (ABS) tranches is a poignant example of regulatory action with unintended consequences. The proposal reflects a perceived higher risk assessment by necessitating higher financial reserves against these investments. However, this risk reassessment and the consequent regulatory response have not gone unchallenged. Critics, armed with analyses such as the Oliver Wyman report, contend that the data does not substantiate these changes, highlighting a dissonance between the empirical evidence and regulatory action. The implications of the NAIC’s proposals extend beyond the immediate financial health of life insurance companies to impact broader retirement planning. By disincentivizing investments in ABS and similar financial instruments, these regulatory changes threaten to narrow the investment options available to life insurance companies. Given the critical role that life insurance companies play in providing annuity products and as major institutional investors, the potential for these regulatory changes to affect market dynamics and returns for retirees is a major concern. These decisions should be made from a bottom-up approach in the marketplace, not from a top-down approach by NAIC. Amidst these regulatory developments, the suggested influence of external political forces, including the Biden administration and labor unions, introduces an additional layer of complexity. The assertion that these proposals may be driven by broader political objectives, rather than by an unbiased assessment of market risks and consumer protection needs, underscores the potential for regulatory processes to be co-opted for ideological ends. This prospect is particularly troubling in retirement planning, where American workers’ and retirees’ economic well-being and choices should be paramount. The debate over the NAIC’s proposed regulatory changes highlights the broader challenges of ensuring that this regulatory body operates with a commitment to transparency, accountability and evidence-based policymaking. An institutional framework that supports free-market competition, consumer choice and the economic interests of Americans in this financial space is needed, given the oversized influence of NAIC and the government. As the insurance industry navigates these regulatory waters, the call for a balanced, data-driven approach to regulation — prioritizing American workers’ long-term financial security and the U.S. economy’s health — is urgent. Regulation should be the last resort instead of the first for potential problems, as the marketplace, through a well-functioning price system, is best at regulating things to those who want and provide them most. The NAIC’s regulatory proposals represent a critical juncture for the U.S. insurance industry and the financial system supporting American retirement planning. The potential for these proposals to disincentivize key investment strategies poses a considerable risk to the sustainability of defined-contribution plans. It highlights the need for vigilant oversight of the regulatory process to hold regulators in check. Stakeholders, including policymakers, industry leaders and the public, must engage in substantive dialogue to ensure that future regulatory actions are grounded in solid empirical evidence and aligned with the prosperity of Americans. As this debate unfolds, upholding principles of competition, consumer protection and the integrity of the retirement planning framework in the marketplace remains paramount. At best, the NAIC proposal should be delayed for a year to give more time to examine its effects. But given the evidence so far, the proposal should be trashed. Originally published at Econlib.
Through the Consumer Financial Protection Bureau (CFPB), the Biden administration has proposed a regulation to cap how much credit card companies can charge us when we’re late on a payment to just $8. This sounds great on the surface, right? Lower fees mean less stress when we’re struggling to make ends meet, as inflation-adjusted average weekly earnings have been down 4.2 percent. But, as with many things that seem too good to be true, there’s a catch. This well-meaning price control could make things the most challenging for those it’s supposed to help. First, why do credit card companies charge late fees? It’s not just about making an extra buck. These fees support more credit available for everyone and encourage us to pay on time, which helps the credit system run smoothly. Now, the CFPB is shaking things up by setting a price ceiling on these fees at $8. While it could save us some money if we slip up and pay late, credit card companies will find ways to compensate for this lost income. And how do they do that? Well, they might start charging more for other things, tightening who they give credit to, or increasing interest rates. That means, in the end, credit could be more expensive and harder to get for all of us. Not just individuals who could feel the squeeze, but small businesses, too. Many small businesses rely on credit to manage their cash flow and growth. If banks start being pickier about who they lend to or raise their fees, these small businesses will find it more costly to get credit. This isn’t just bad news for them; it’s bad news for everyone, as the result will be higher prices for consumers, lower wages, and fewer jobs for workers. Remember that small banks and credit unions are a big deal for the local economy. These institutions often depend on fees to keep things running. If they can charge less for late payments, they might not be able to lend as much. This could hit communities hard, making it tougher for people to get loans for starting a small business, buying a home, or building a project. Economists have long warned about the dangers of well-intentioned but poorly thought-out regulations. By setting a one-size-fits-all rule for late fees, the government would make credit more expensive and less accessible for everyone. The idea is to protect us from unfair fees, but the real-world result would be different if access to credit were limited for those who need it most. History proves that often the biggest challenge is to protect consumers from the consequences of government actions. In trying to shield us from high late fees, the government will set us up for a situation where credit is harder to come by and more expensive. This doesn’t mean we shouldn’t try to protect consumers. Still, we need to think carefully about the consequences of our actions and let markets work, which is the best way to protect consumers as they have sovereignty over their purchases. While capping credit card late fees sounds like a simple fix, the ripple effects would be complex and wide-reaching. It’s crucial to keep credit accessible and affordable, support small businesses, and ensure the financial system remains robust. Let’s look at the implications of this price control regulation before rushing into it. Price controls never work as intended, as history has proven. Instead, we should ensure people in the marketplace determine what’s best for them rather than the Biden administration’s top-down, one-size-fits-none approach. Originally published at AIER.
Recently, the Biden administration handed $1.5 billion to the nation’s largest domestic semiconductor manufacturer, GlobalFoundries, the biggest payout from the CHIPS and Science Act of 2022 so far. The argument for this corporate welfare is America is too dependent on chips from China and Taiwan so more should be made domestically. Instead of seeing how America should reduce the cost of doing business for all semiconductor businesses here, some businesses will be picked as winners and others as losers. The cost of this form of socialism gives capitalism a bad rap and should be rejected. This move echoes a broader trend of governments worldwide intervening in their economies through industrial policy. A cocktail of targeted subsidies, tax breaks, and regulatory tinkering, industrial policy aims to sculpt economic outcomes by favoring specific industries or firms, all for the supposed benefit of the national economy. Industrial policy puts business “investment” decisions in the hands of government bureaucrats. What could go wrong? While its champions tout its potential to boost competitiveness and spur innovation, the reality often tells a different story, especially in light of massive deficit spending. In practice, industrial policy tends to fan the flames of higher prices and sow the seeds of economic destruction. Politicians too often meddle with voluntary market dynamics by artificially bolstering favored sectors through subsidies and tax perks, resulting in the misallocation of resources and distorted prices. Moreover, the infusion of government funds to bankroll these initiatives with borrowed money can contribute to the Federal Reserve helping finance the debt, increasing the money supply, and stoking inflation. The nexus between deficit spending and prices looms large over industrial policy. When politicians resort to deficit spending to bankroll industrial ventures, they put upward pressure on interest rates by issuing more debt and competing with scarce private funds. Elevated interest rates disturb private investment, ushering in a likely economic slowdown. Suppose deficit financing leans heavily on monetary expansion, whereby the central bank snaps up government debt. In that case, it fuels inflation by flooding the market with money that chases fewer goods and services. The national debt is above $34 trillion, and the Federal Reserve has already monetized much of the increase in recent years. Racking up even more deficits is insane: repeating the same mistakes and expecting a different result. Excessive spending and money printing have landed us with above-target inflation for over three years running. The repercussions of industrial policy ripple beyond inflation to encompass the broader economic landscape. Excessive government meddling in specific industries crowds out private investment and entrepreneurship. When particular firms enjoy subsidies and preferential treatment, it distorts the competitive landscape and deters innovation. This stifles economic vibrancy and impedes the rise of new industries or technologies crucial for sustained growth. For a cautionary tale of how Biden’s recent move could play out, look no further than Europe. Nations like Sweden, heralded by the West as a utopian example of big government yielding big benefits, spent the last year grappling with economic strife driven by dwindling private consumption and housing construction. Europe’s penchant for industrial policy, marked by subsidies, high taxes, and regulatory hoops, has contributed to its economic stagnation. To sidestep the dilemma of industrial policy missteps, policymakers should stop propping up their favorite sector or industry and instead unleash people to flourish by getting the government out of the way. Politicians should foster an environment conducive to entrepreneurship, innovation, and competition. This entails cutting government spending, reducing taxes, trimming red tape, and championing trade by removing barriers to private sector flourishing. By allowing market forces to determine resource allocation and rewarding entrepreneurship and risk-taking, people here and elsewhere can unleash their full potential and adapt to changing circumstances more effectively than under industrial policy frameworks. Biden’s billion-dollar amount to one company may seem like a lot, but that’s just a drop in the bucket of what’s to come from the CHIPS Act. Instead, these funds should be eliminated, preventing Congress from taking us further down the road to serfdom. Originally published at Texas Scorecard.
Texas can pass bold school choice legislation when the next legislative session starts in January 2025. This could finally happen because of the recent election wins in the House primaries, efforts led by Gov. Greg Abbott. The election wins include pro-school choice candidates beating anti-school choice incumbents or filling seats of retiring anti-school choice members. More incumbents, including House Speaker Dade Phelan, were forced to a runoff in May. Moreover, 80 percent of Republicans voted for Proposition 11 on the primary ballot to support school choice, which matters in a dominantly red state. In the evolving educational reform landscape, universal education savings accounts (ESAs) provide the best path to empower parents to decide their children’s education. They are also a practical, fiscally responsible strategy for reimagining the future of education. At least 10 states have passed universal school choice, and more are likely to do so soon. But these states haven’t reached the pinnacle of what a competitive education system should look like. The optimal school choice approach should liberate education from the constraints of the monopoly government school system, draw upon successful market-driven solutions, and offer a simplified education finance system. The Texas Legislature essentially controls the current school finance system with funding from taxpayers through taxes collected by the state, school district, and federal governments. The inefficiency and ineffectiveness of the status quo are stark, including questionable but relevant declining test scores. This highlights a critical need for an approach that better serves students’ and families’ unique needs and aspirations. The state’s school finance system is based on many factors to the school system, but the Texas Education Agency recently reported that the average funding per student was $14,928 in the 2021-22 school year. Total funding was $80.6 billion for 5.5 million students. Of course, this is how much is spent, but the actual cost of the monopoly government school system is hidden and driven higher by politics rather than market outcomes. ESAs provide flexibility in covering many educational services, including various schooling options, tutoring, testing, and other related expenses. This empowers parents to customize their children’s education to suit individual learning styles and interests. This adaptability is vital for fostering environments where children excel academically, socially, and emotionally. Implementing a universal ESA program demands a framework that balances simplicity with accountability, ensuring the focus remains on expanding educational opportunities and improving student outcomes. While many current ESA programs run alongside the government school system, this doesn’t provide the most competitive framework. Running them in tandem, whereby the funding remains the same or even increases for government schools while creating a new system to fund ESAs, is costly and lacks the incentives for optimal outcomes. Instead, we should pursue a simplified education finance approach that maximizes competition, reduces costs, and lowers taxes by funding students, instead of a system. A bold proposal would provide parents with an ESA of $10,000 per child for the school year but paid monthly or the preferred frequency to choose any approved schooling, including government, private, charter, home, co-op, tutoring, or other types of schooling. With about 6.3 million school-age children in Texas, the annual total expenditure would be $63 billion, or $17.6 billion less than what’s being spent today on government schools. Parents could receive an ESA of as much as $12,800 per student to keep the same expenditures as today. However, given the bloated bureaucracy and misguided direction of government schools, the $10,000 amount would help force efficiencies while reducing taxpayers’ costs and incentivizing new education providers. The lower cost of $17.6 billion would provide an opportunity for substantial school property tax relief. Combining ESAs and property tax relief would further accentuate the proposal’s appeal, addressing the lack of school choice and burdensome property taxes. The bold approach eliminates most, if not all, of the current antiquated government school finance system with one that gives parents a way to meet their children’s unique learning needs best. It would help alleviate the hardship for many families that can choose alternatives for financial reasons, pay lower property taxes, or have money remaining to invest in their children’s quality of life and educational pursuits. As states across the nation begin to recognize the transformative potential of this bold universal school choice approach, the momentum is undeniable. This trend underscores a growing consensus on the need for educational systems that prioritize choice, flexibility, and parental empowerment. By breaking free from the monopoly government school finance system and embracing a bold ESA finance approach that empowers parents, we can pave the way for a future where every child can achieve their full potential. Originally published at The Center Square.
The recent surge of bills attempting to rein in social media outrage in Florida and across America has sparked debate over the role of government in regulating them. Florida Gov. Ron DeSantis vetoed an initial bill banning minors on social media. In his veto message, he said, “Protecting children from harms associated with social media is important, as is supporting parents’ rights and maintaining the ability of adults to engage in anonymous speech.” We should empower parents to determine what's best for their children on social media, or otherwise. This will work better than putting politicians and government bureaucrats in charge, which is what these types of bills do. These bills are likely unconstitutional, as they violate the First Amendment. Furthermore, excessive government regulation of social media stifles innovation and entrepreneurship in the digital space, especially small businesses. By imposing burdensome restrictions on online platforms, we risk hindering the development of new technologies and services that could benefit families. A more pragmatic approach fosters competition in the marketplace, allowing consumers to choose the platforms that best align with their values and preferences. These regulations would hurt many start-up firms as they won’t have the resources to hire as many lawyers to jump through the hoops imposed on them that larger, incumbent companies can afford. They would also need to pay third-party verification systems that cost thousands of dollars, making it more challenging to start a business, as noted in a recent report by Engine. Gov. DeSantis has been a vocal advocate for parental empowerment, emphasizing the importance of transparency and accountability from social media companies. His initial pushback of government overreach of social media should be championed rather than resorting to bans for questionable reasons, as social media isn’t the culprit for bad parenting or bad legislation. In light of ongoing NetChoice cases at the Supreme Court, where the organization has fought against state-level regulations deemed infringing on free speech and commerce, we should uphold free speech in the digital age. By joining parents in advocating for greater transparency and accountability by social media companies where applicable, we can champion the interests of Americans and assert state sovereignty. Rather than relying on government mandates and regulations, we should foster a culture of parental responsibility and provide families with the resources they need to navigate the digital landscape safely. If politicians and bureaucrats take over these responsibilities, it will lead to less incentive for parents to be engaged with their kids and what they’re doing online. This would be a terrible path forward as the government has already made bad situations worse regarding safety-net handouts, a monopoly government school system, and more. Let’s stick with a proven approach that supports parents and social media providers rather than a top-down, likely unconstitutional one. Originally published at AIER.
ohn Cochrane’s The Fiscal Theory of the Price Level examines the relationship between fiscal policy and inflation, which many consider to be the increase in the price level of a basket of goods and services. An influential and accomplished economist at the Hoover Institution, Cochrane is one of the most forward-thinking economists today. His approach challenges conventional wisdom and presents a compelling case for reevaluating our understanding of the economy. I learned much from reading the book and while interviewing him about it on my Let People Prosper Show podcast. I highly recommend reading this extensive book, though I have reservations about fiscal policy trumping monetary policy when considering the influence on inflation. Cochrane begins by laying out the foundational principles of his theory. He emphasizes the roles of government debt, taxes, and inflation expectations on prices. He argues that traditional economic models, which focus primarily on the role of central banks in controlling inflation through monetary policy, such as those by Milton Friedman, overlook the substantial effect of fiscal variables on prices. By uniquely integrating fiscal considerations and the public’s expectations about those factors into economic analysis, Cochrane aims to provide a more robust framework for understanding and predicting inflationary trends. He delves into various theoretical and empirical aspects of fiscal theory, drawing on a wide range of literature and evidence to support his arguments. He explores the implications of government budget constraints, the role of Ricardian equivalence that assumes a balanced budget over time, and the potential limitations of conventional monetary tools in controlling inflationary pressures. His thorough examination of these issues provides readers with a comprehensive understanding of the complexities of studying the relationship between fiscal policy and inflation. Cochrane’s arguments are persuasive and well-supported, but some aspects of his analysis warrant scrutiny. One area of contention is Cochrane’s emphasis on the primacy of fiscal policy in driving inflationary dynamics, particularly his assertion that the Federal Reserve plays a secondary role compared to Congress in shaping inflation outcomes. While Cochrane makes a compelling case for the importance of fiscal variables, the penultimate creator of inflation is the Fed when it creates more money than the goods and services produced. Milton Friedman, who extensively studied the role of the Fed in economic activity and inflation, said: “Inflation is always and everywhere a monetary phenomenon. It is a result of a greater increase in the quantity of money than in the output of goods and services which is available for spending.” The Fed controls what’s called “high-powered money” of various assets on its balance sheet. These assets include mostly Treasury securities from the tens of trillions of dollars in debt issued by the federal government. It also includes mortgage-backed securities, lending to financial institutions, federal agency debt, and other lending facilities. I agree with Cochrane that federal deficits give ammunition to the Fed when it purchases Treasury debt, grows high-powered money, contributes to more money chasing too few goods and services, and results in inflation. But other assets on the Fed’s balance sheet also matter, especially since the Great Financial Crisis in 2008 when the Fed started quantitative easing. Cochrane’s framework overlooks the significant role of monetary policy in influencing inflation expectations and shaping the broader economic environment. While fiscal policy can play a role in determining long-term inflation trends, as the debt distorts interest rates in the market, the Fed’s control of the money supply to target the federal funds rate and influence other rates along the yield curve remains a potent tool for managing expectations. While we should challenge Congress to adopt a fiscal rule for sustainable budgets to relieve excessive spending that drives up the national debt, this does not undermine the source of inflation: the Fed. But if Congress could balance its budget, which hasn’t happened since 2001, it would remove a bullet the Fed could shoot at the economy. In other words, a sustainable fiscal policy, wherein Congress passes balanced budgets by limiting government spending — the ultimate burden of government and the source of budget deficits — would help control inflation. While this could mitigate the assets available for the Fed to add to high-powered money, it would not solve the inflation problem because of many other available assets. Another issue that arises from considering fiscal policy the prime mover of inflation is how it works in practice. Fiscal policy is not directly expansionary or contractionary, as it is just taking funds from some people to give to others, with many of the takers being politicians and bureaucrats in government. These actions move money around in the economy without increasing productive activity that creates goods and services. There are roles for the federal, state, and local governments, but those should be limited to those outlined in constitutions. If Congress would abide by the Constitution, whereby it funded only limited government instead of the bloated federal government today, then fiscal policy would not be so burdensome. Fiscal policy would also not fall into the Keynesian trap of trying to “stabilize economic activity,” as the only thing that governments typically stimulate is more government because of the created failures due to the limited knowledge and rent seeking by politicians and bureaucrats. The underlying problem is usually government failures that cannot be resolved by more government. When Congress returns to its limited, constitutional roles, the federal budget will be drastically cut, resulting in lower taxes and opportunities to pay down and retire the national debt. This would also help reduce the massive distortions throughout the economy from government spending, taxes, and regulations. It would also decrease the Fed’s influence on the economy, but not entirely because of the other assets available for its disposal. The Fed also distorts economic activity through its ability to influence each stage of the production process with the assets on its balance sheet and its effect on interest rates. When the Fed purchases Treasury debt and increases high-powered money, the new money does not go to everyone simultaneously. Instead, the money trickles down from the financial sector to other sectors based on credit availability and other factors, in what is called the Cantillon effect. The manipulation of different markets throughout the production process of goods by the new money and the influence the purchase of assets by the Fed has on interest rates create boom and bust cycles. There is ample evidence about these economic steps, especially from the Austrian business cycle theory. Fiscal policy influences many steps in the production process through subsidies, tax breaks, and regulations, which hinder the voluntary production of individual goods and services through a well-functioning price system. But Congress cannot increase the money supply, which only the Fed can do, nor influence the general price level nor the resulting inflation. All things considered, Cochrane’s comprehensive exploration of fiscal theory and extensive analysis of its implications for the price level riveted me. His methodical dissection of economic concepts and pragmatic approach to examining fiscal policy offered a fresh perspective on economic dynamics. In conclusion, the Fiscal Theory of the Price Level offers a valuable contribution to the ongoing debate surrounding the determinants of inflation and the role of fiscal policy in the economy. While I’m sympathetic to Cochrane’s arguments, it is essential to recognize the importance of a central bank’s monetary policy in causing inflation through its balance sheet. Additionally, we should acknowledge the distortions caused by government policy, whether fiscal or monetary, and recognize the secondary role of fiscal policy compared to monetary policy in addressing inflationary pressures. To ensure sound economic outcomes, it is imperative to establish strong fiscal and monetary rules that provide an institutional framework limiting the burdens of government actions on our lives and livelihoods. Despite my dissent on the emphasis placed on fiscal policy’s role in inflation, the book’s productive discourse on the delicate dynamics of key economic elements make this an important contribution to inflation studies. Originally published at AIER.
Taxing unrealized capital gains on property, stocks, and other assets is not just a bad idea, it’s an economic fallacy that undermines economic growth and personal liberty. Unfortunately, President Biden’s $7.3 trillion budget proposes such a federal tax. Vermont and ten other states have made similar moves. This tax should be rejected, as it is fundamentally unjust, likely unconstitutional, and would hinder prosperity and individual freedom. A tax on unrealized capital gains means that individuals are penalized for owning appreciating assets, regardless of whether they have realized any actual income from selling them. If you purchased a stock for $100 this year, for example, and it increased to $110 next year, you would pay the assigned tax rate on the $10 capital gain. You didn’t sell the asset, so you don’t realize the $10 appreciation, but must pay the tax regardless. The following year, it dropped to $100, so there was a loss of $10. Would you be able to deduct that loss from your tax liability? The devil is in the details of the approach to this tax, but the devil is also in the tax itself. Adam Michel of Cato Institute explained two types of unrealized taxes in President Biden’s latest budget:
Taxing unrealized capital gains contradicts the basic principles of fairness and property rights essential for a free and prosperous society. Taxation, if we’re going to have it on income, should be based on actual income earned, not on paper gains that may never materialize. Moreover, taxing unrealized gains hurts economic activity by discouraging investment and capital formation, the lifeblood of a dynamic economy. When individuals know their unrealized gains will be taxed, they have less incentive to invest in productive assets such as stocks, real estate, or businesses. This leads to a misallocation of resources and slower economic growth. Additionally, this tax reduces the capital available for entrepreneurship and innovation. Start-ups and small businesses often rely on investment from individuals willing to take risks in the hope of eventually earning a return on their investment. By taxing unrealized capital gains, we discourage risk-taking and stifle innovation, essential elements for improving productivity and raising living standards. The tax undermines personal liberty by infringing on individuals’ property rights and financial privacy. It gives the government unprecedented control over people’s assets and creates a powerful disincentive for individuals to save and invest. This is particularly troublesome in an era of increasing government surveillance and intrusion into private affairs. Proponents of taxing unrealized capital gains argue that it is a way to address income inequality and raise revenue for social programs. This argument can’t withstand scrutiny. This tax does little to address the root causes of income inequality, such as government failures in fiscal and monetary policies. Instead, this new tax would merely redistribute wealth from productive individuals to the government, thereby further misallocating hard-earned money. Furthermore, the tax revenue raised from this tax will be far less than proponents anticipate, as individuals will work less, invest less, and find ways to avoid such taxes through legal paths. This would result in less economic prosperity and a resulting decline in tax collections. From an economic and moral perspective, taxing unrealized capital gains from property, stocks, and other assets is a bad idea. It undermines economic growth, stifles innovation, and infringes on personal liberty. Instead of resorting to the misguided policies of the Biden administration and some states, we should remove barriers created by the government. These include reducing spending, taxes, and regulations. We should also impose fiscal and monetary rules. Achieving these goals and ending the bad idea of a new tax on unrealized capital gains will encourage investment, entrepreneurship, and economic opportunity for all. Only then can we truly unleash the potential of a free and prosperous society. Originally published at Washington Times.
In President Biden‘s recent State of the Union address, he painted a rosy economic picture, touting what he called “Bidenomics” as the driving force behind what he claims is a robust economy. He pointed to a low unemployment rate, the absence of a recession, and a lower inflation rate as evidence of success. Reality, however, tells a different story. And Mr. Biden’s recently released irresponsible budget sends the federal government and America further toward bankruptcy. Despite the president’s assertions, the economy and inflation remain top concerns for most Americans. The disconnect between the headlines and the lives of ordinary citizens underscores the profound challenges facing the nation’s economic landscape. This sense of malaise can be directly attributed to the flawed principles underlying Bidenomics, as outlined in his latest budget. These include excessive spending, taxation and regulation. Each is destructive, but together, they are catastrophic. The result has been stagflation and less household employment in four of the last five months. There have also been lower inflation-adjusted average weekly earnings by 4.2% since January 2021, when Mr. Biden took office. Rather than fostering economic growth and prosperity, Bidenomics has stifled innovation, investment and job creation. At its core, Bidenomics represents a misguided attempt to address complex economic issues through heavy-handed government intervention. While the administration may tout short-term gains, the long-term consequences of such policies are far-reaching and unaffordable. The reality is that excessive government spending has led to unsustainable levels of debt, burdening future generations with the consequences of fiscal irresponsibility. Similarly, excessive taxation is stifling entrepreneurship and dampening economic activity, limiting opportunities for individuals and businesses alike. Excessive regulation serves only to hamper innovation and drive up costs, exacerbating the challenges facing working families. Unfortunately, Mr. Biden’s latest budget proposal doubles down on these bad policies. Even with rosy assumptions of tax collections being a higher share of economic output over time as the tax hikes will reduce growth and, therefore, lower taxes as a share of gross domestic product, the budget continues massive deficits every year. This will result in higher interest rates, higher inflation, more investment These results have been highlighted in economic theory by economists such as Alberto Alesina and John B. Taylor. Their research has found that raising taxes doesn’t help close budget deficits because of the reduction in growth from higher taxes in a dynamic economy. The way forward should be cutting or at least better-limiting government spending — the ultimate burden of government on taxpayers. Amid these challenges, America also needs a return to optimism and flourishing. This includes leadership that inspires confidence, fosters innovation, and empowers people to pursue their dreams. We need out-of-the-box policies prioritizing economic freedom and individual opportunity, allowing the entrepreneurial spirit to thrive and driving growth and prosperity. More specifically, this means reducing the burden of government intervention through lower spending and taxes, streamlining regulations, and fostering an environment where entrepreneurship can thrive. By embracing fiscal sustainability and making tough choices, we can ensure the long-term stability and prosperity of our nation. In short, while Mr. Biden tries to spin a positive narrative about the economy, the facts speak for themselves. We cannot afford Bidenomics, no matter the headlines, what was touted in the State of the Union address, or the latest budget. The stakes are too high, and the consequences too grave, to ignore the reality of our economic situation. We need leadership that is willing to confront the hard truths and enact policies that prioritize the well-being of all Americans, fostering an environment where optimism and flourishing can thrive. Originally published at National Review Online.
Few government programs are regularly up for debate as much as the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps. The latest controversy is whether the food purchased by its recipients should be restricted to healthier diets that exclude snacks and sodas. While this approach seems reasonable, its tradeoffs necessitate SNAP reforms that balance keeping this costly program temporary for recipients while supporting their agency and choice for long-term self-sufficiency. Enacted in its current form in 1964 as part of President Lyndon B. Johnson’s War on Poverty, SNAP has evolved into one of the nation’s most extensive safety-net programs, assisting more than 42 million Americans at a cost to taxpayers of $113 billion in 2023. With the Farm Bill coming up for reauthorization by Congress on September 30, it’s time to consider improvements for SNAP and other programs in the existing legislation. The Farm Bill has included funding and rules for commodity programs since it was first enacted in the Agricultural Adjustment Act of 1933. But nutrition (primarily through SNAP) is expected to account for 84 percent of the $1.5 trillion spent on programs in the bill over the next decade. The free-market approach to SNAP reform should be rooted in economic freedom and individual empowerment and emphasize the importance of preserving flexibility in food purchases while promoting self-sufficiency and work for recipients. This perspective draws inspiration from the teachings of free-market economists such as Milton Friedman, who championed the idea of individual choice in economic decision-making. Since its inception, SNAP has undergone numerous reforms and expansions, reflecting shifting societal attitudes and economic realities. Originally conceived as a program to provide recipients quick, temporary relief from hunger and malnutrition, SNAP has become a permanent fixture for many people experiencing economic hardship. For example, a household of four — to be eligible, its gross monthly household income must not exceed $3,250 — will receive a maximum monthly allotment of $973 per month. Central to SNAP reform should be the concept of self-sufficiency. SNAP can honor recipients’ dignity and agency as they navigate their way through the challenges posed by poverty by allowing them to make purchases based on their preferences and circumstances, even if that includes snacks or soda. This flexibility respects recipients’ autonomy and acknowledges their capacity to make informed decisions about their dietary needs. This can also help reduce the incentive for recipients to sell SNAP allotments to others and purchase items they prefer more. We should also acknowledge that these food subsidies distort the grocery market. The restrictions on what SNAP recipients can purchase today drive them to specific items such as milk. The artificial boost in demand then drives up the price and sometimes the profit margins for those items, thereby making them more expensive for everyone while lining the pockets of a few suppliers. Because SNAP raises some prices for Americans and adds to the national debt, contributing to higher interest rates and inflation, we need a better-functioning program or we need to end it. In addition to promoting self-sufficiency, a flexible SNAP program should align with work to reduce poverty so recipients use the program temporarily as intended. Rather than imposing top-down restrictions on food choices, as some are trying to do, policy-makers should focus on unleashing opportunities for recipients to improve their circumstances through education, training, and employment. These steps have a proven record of supporting long-term success. Furthermore, a streamlined approach to SNAP administration would improve the program’s effectiveness while minimizing waste and abuse. By reducing bureaucratic hurdles, we could help ensure that the taxpayer dollars that fund the program are used more efficiently to support those in need. As policy-makers contemplate reforms to SNAP with the upcoming Farm Bill renewal, they must recognize the program’s historical context and evolution. Originally conceived as a temporary measure for recipients to address hunger and malnutrition, SNAP has become a permanent, costly safety net for many recipients. By preserving flexibility in food purchases and empowering recipients with more opportunities to work and move out of poverty, we can support individual freedom and decision-making, two fundamental elements of a vibrant and prosperous society. The Farm Bill presents an opportunity to do so through meaningful reforms to SNAP that help strengthen Americans’ resolve to overcome obstacles. The above reforms would make the help provided by SNAP temporary and flexible, and complement it with a pathway to work. There should also be a push to reduce bureaucratic bloat by streamlining the program and arranging for periodic independent efficiency audits by third-party private firms or a state auditor, so that its funds only go to the people they are intended for. Moreover, adhering to more free-market approaches across the economy — with less government spending, lower taxes, and reduced regulation — can provide more opportunities for people to get jobs and move out of poverty forever. This will allow people to flourish rather than being dependent on government programs that discourage self-sufficiency. As we navigate the complexities of food insecurity, let us heed the wisdom of free-market economics and empower recipients to chart their path to a brighter future. Originally published at Law & Liberty.
The Congressional Budget Office (CBO) just released the February 2024 Budget and Economic Outlook, and projections look grim. This year, net interest cost—the federal government’s interest payments on debt held by the public minus interest income—stands at a staggering $659 billion in 2023 and has recently soared to about $1 trillion. Unless politicians face these facts and restrain spending, Americans can expect rising inflation and painful tax hikes without improvement in public services. Some politicians quickly blamed a lack of tax revenue, calling for repealing the 2017 Trump tax cuts. But how much more money can they take? New IRS data shows that 98% of all income taxes are paid by the top 50% of income earners, those making at least $46,637. Moreover, 35% of Americans feel worse off than 12 months ago and inflation remains the primary concern for those across the income spectrum. So perhaps, rather than taking more money, the government should own up to its mistakes. The massive net interest costs result from bad spending habits, not a lack of revenue. This requires the federal government to adopt strict fiscal and monetary rules to rein in wasteful deficit spending and money printing that fuel higher interest rates and inflation. Net interest cost is the second largest taxpayer expenditure after Social Security and is higher than spending on Medicaid, federal programs for children, income security programs, or veterans’ programs. And it’s expected to grow. The CBO projects net interest to surpass Medicare spending this year and balloon to $1.6 trillion in 2034 as a result of higher debt and higher interest rates. Interest rates on Treasury debt are at the highest since 2007, paying between 4% and 5.5%, and the rates are expected to rise further. As the stockpile of gross federal debt is expected to grow by about $20 trillion to $54 trillion over the next decade, politicians will face an increasing temptation to rely on the Federal Reserve to pay for it by printing money. If the Fed does, the dollar’s value will decline, and Americans will continue to struggle financially. In an ideal world, politicians will organize the budget process to focus on funding a limited government and ensuring Americans keep their hard-earned money. They would also have plans to cut spending during times of economic downturn to reduce tax burdens on families and businesses and avoid the Keynesian fallacies of deficit spending to fill gaps in economic growth. However, America isn’t Shangri-La. As Thomas Sowell poignantly notes, a politician’s first goal is to get elected, the second goal is to get reelected, and the third goal is far behind the first two. So long as there are investors happy to purchase Treasury debt, there will be politicians who are happy to sway voters with generous spending programs financed by public debt. This must end. Instead, Washington should require strong institutional constraints with a spending limit. The limit should cover the entire budget and hold any budget growth to a maximum rate of population growth plus inflation. This growth limit represents the average taxpayer’s ability to pay for spending. Following this limit from 2004 to 2023 would have resulted in a $700 billion debt increase instead of the actual increase of $20 trillion. Such a policy has been in effect in Colorado since 1992. It is the Taxpayer’s Bill of Rights (TABOR) amendment to the Colorado Constitution. TABOR has revenue and expenditure limitations that apply to state and local governments. The revenue limitation applies to all tax revenue, prevents new taxes and fees, and must be overridden by popular vote. Expenditures are limited to revenue from the previous year plus the rate of population growth plus inflation. Any revenue above this limitation must be refunded with interest to Colorado citizens. A spending cap like TABOR is necessary but not sufficient to solve the problem because politicians in Washington can still pressure the Federal Reserve to pay for the increased debt by printing money. Therefore, it must be combined with a monetary rule to force fiscal sustainability while requiring sound money with fewer distortions in the economy. Monetary rules can come in many forms. While no rule is perfect, research shows that a rule-based monetary policy can result in greater stability and predictability in money growth than the current policy of “Constrained Discretion” whereby the Fed follows rules during “normal times” and has discretion during “extraordinary times.” Whether we are in ordinary or extraordinary times is up to policymakers, who typically don’t want to “let a good crisis go to waste,” as they say. Milton Friedman advocated for a money growth rate rule, the “k-percent rule.” This rule states that the central bank should print money at a constant rate (k-percent) every year. A variation of this rule was used by Fed Chair Paul Volcker in the late 1970s and early 1980s to tackle the Great Inflation with much success. Unfortunately, the Fed had already done too much damage with excessive money growth before then, so the cuts to the Fed’s balance sheet contributed to soaring interest rates that forced destructive corrections in the economy, resulting in a double-dip recession in the early 1980s. This led to the Fed abandoning money growth targeting in October 1982. It is important to note, though, that this “monetarist experiment” was not bound to any law, constitutional or statutory. During that time, the Fed still operated under discretion, which is why it was able to abandon the monetary growth rule just a few years after it had begun, unfortunately. There are other rules that could be applied. John Taylor proposed what’s been coined the Taylor Rule, which estimates what the federal funds rate target, which is the lending rate between banks, should be based on the natural rate of interest, economic output from its potential, and inflation from target inflation. Scott Sumner most recently popularized nominal GDP targeting, which uses the equation of exchange to allow the money supply times the velocity of money to equal nominal GDP. It has different variations, but the key is that velocity changes over time, so the money supply should change based on money demand to achieve a nominal GDP level or growth rate over time. By focusing on a rules-based approach to spending and monetary policy, Americans do not have to worry about electing the perfect candidate every election. Proper constraints will nudge even the worst politicians to make fiscally responsible choices and reduce net interest costs. Furthermore, America will be better positioned to respond to crises at home and abroad. If Congress wants to see who is to blame for the grim CBO projections, they should look in the mirror. Stop looking to take hard-earned money away from Americans and focus on sound budget and monetary reforms now. Originally published at James Madison Institute.
America’s Antitrust laws have been essential to the legal landscape for over a century. They were designed to protect competition and consumer welfare. However, the Biden administration’s onslaught on competition through flawed antitrust efforts has threatened consumer welfare and profitability. This is especially true for “Big Tech” companies that generate substantial consumer welfare and billions of dollars in economic activity. While these efforts are purportedly aimed at safeguarding the interests of consumers, they pose a major threat to free-market capitalism and, thereby, the nation’s prosperity. Understanding the origins of antitrust laws illuminates why current antitrust accusations are far from their original purpose. Antitrust laws trace back to the Sherman Anti-Trust Act’s enactment in 1890. The landmark legislation was aimed to curb anticompetitive practices. Section 1 prohibits contracts in restraint of trade, regardless of the size of the firms participating. Section 2 prohibits monopolization or the abuse of monopoly power by firms with substantial market shares. Further reinforcement came with the Clayton Act in 1914, which focused on preventing mergers that could substantially lessen competition or tend to create a monopoly. However, applying antitrust laws lacked consistency and often yielded ambiguous results, especially during the mid-20th century. Fast forward to the 1970s, legal scholars proposed a paradigm shift. Figures like Aaron Director, Robert Bork, and others delved into the legislative history of the Sherman Act, concluding that its primary purpose was to protect consumers from the harm caused by cartels without undermining economic efficiency. This approach laid the foundation for what we now call the consumer welfare standard, a critical development in antitrust enforcement. In the late 1970s, the U.S. Supreme Court recognized this standard in several cases, asserting that business conduct raising antitrust concerns must be evaluated based on demonstrable economic effects. This standard has since guided antitrust law, emphasizing a simple question: does the conduct make consumers better or worse off? If the conduct improves or does not harm consumers, the conduct is allowed; otherwise, the government can intervene. The consumer welfare standard is a seemingly straightforward approach that has been a guiding light to antitrust cases. But it has failed to hold those currently at the Federal Trade Commission (FTC) and Department of Justice accountable for their excessive efforts. In recent years, calls to wield antitrust laws to address the conduct of prominent technology companies like Amazon and Google, which some pejoratively call “Big Tech,” have gained momentum. However, these movements are misguided and pose significant risks to the principles of free-market capitalism. Expanding the enforcement powers of antitrust agencies, as advocated by some on the left and right, revives an old “big is bad” approach reminiscent of a bygone era when antitrust enforcement was highly politicized. Instead of fostering competition, such a progressive approach undermines the competitive market process. This destroys the instrumental activity that provides innovation, affordable prices, and high-quality goods and services, all critical for human flourishing. This lawsuit purports to challenge Amazon’s management of its online marketplace, alleging that sellers are forced to charge high prices and lose profit by using Amazon’s add-on services and advertisements. The FTC contends that these choices are obligatory and accuses Amazon of operating as a monopoly, leading to higher prices for lower-quality products. Numerous surveys and studies reveal that consumers are pleased with Amazon’s services, so this attack against the consumer welfare standard does not appear to be about what is best for customers despite the claims of progressive antitrust enforcers. Moreover, consumers have the agency to take their dollars elsewhere, as Amazon is hardly the only online seller. The principles that drive capitalism are rooted in competition; when competition is stifled, consumers and entrepreneurs lose. Another example of abusing antitrust is the Department of Justice’s (DOJ) lawsuit against Google. The suit contends that Google has dominated the market as the default browser on popular devices through monopolistic means and must be stopped. However, Google is the default browser via legal marketing tactics, which the consumer can easily change, as numerous search engine options can be implemented on any device. Therefore, the case fails to meet the standard of a solid antitrust law violation of making consumers worse off. Consumers still have many options when selecting a default browser, but most choose Google because they like it best. This lawsuit is emblematic of a broader issue – applying antitrust laws to preserve competition. Antitrust laws should protect consumers by evaluating whether they are better or worse off due to a company’s actions. It should not be a mechanism to stifle competition to level the playing field. Enforcing such laws without considering the diverse preferences of consumers is a disservice to the very principles on which capitalism–and antitrust laws–were founded. If we’re going to have antitrust laws rather than just letting market forces work, the consumer welfare standard is an essential framework for evaluating antitrust cases. It ensures that the focus remains on improving people’s lives rather than manipulating the market based on antitrust enforcers’ interests or political persuasions. This standard can help keep regulators from blocking innovation and economic growth by limiting their ability to pick winners and losers. While concerns about the size of large tech companies and their censorship practices may be warranted, granting more power and discretion to government bureaucrats is not the solution. Expanding antitrust laws and enforcement powers will lead to politicized enforcement, often aimed at serving the interests of big government, with a disregard for the effects on consumers and the broader economy. Such a big-government approach would curtail entrepreneurship, freedom of speech, job creation, investment, and economic prosperity. Proposals to create new antitrust laws are unlikely to address concerns related to censorship and bias in tech companies. Instead, they will usher in uncertainty as legal standards evolve, causing companies to settle such cases to avoid costly legal battles. Such settlements may not necessarily benefit consumers or the economy and will drive up entry costs, creating a high barrier for startups. At a time of elevated inflation, the labor market faces challenges, and the economy is in turmoil. Pursuing lawsuits against successful companies diverts resources from critical issues and misuses taxpayer money. The time is now to refocus on what genuinely matters, acknowledge the limitations of government intervention in regulating markets, and allow the principles of free-market capitalism to flourish. This approach should recognize that dispersed, decentralized information through people in markets is much better than through central planning. Free-market capitalism is not the enemy but the best path to prosperity and freedom. We would be wise to have more of it, not destruction by the radical Biden administration. Originally published at Daily Caller.
The Biden administration wants to cap credit card late fees through the Consumer Financial Protection Bureau (CFPB). But hold on – this could spell trouble, especially for those the rules intend to help. The CFPB’s proposed rule to cap credit card late fees may reflect a well-intentioned effort to enhance consumer protection, suggesting that lower-income households may be hurt the most. However, stakeholders, including the American Bankers Association, caution against doing so because of many unintended consequences. These include restricting access to credit for those in need, creating perverse incentives to not pay on time, and raising the cost of banking and credit by passing along these costs to everyone. Late fees may be a nuisance, but they’re crucial to keeping credit card systems in check and getting credit to those who need it. By capping late fees at $8 and limiting them to 25 percent of the minimum payment, the CFPB risks upsetting the delicate balance of the financial ecosystem. Whether we like it or not, credit cards serve as a lifeline for millions of Americans, offering convenience, security, and a way to build credit. Indeed, for families living paycheck to paycheck, every dollar counts. But it’s imperative to point out that late fees are not solely punitive measures. Late fees encourage people to pay on time, reducing defaults and helping provide needed access to credit. But if late fees get capped, it’s not just the big banks that’ll feel the pinch – it’s everyday people and small businesses. Banks will likely raise fees or tighten lending standards to compensate for lost revenue. That means higher costs and less access to credit for everyone. Economist Dan Mitchell’s analysis highlights the unintended consequences of well-intended regulations and urges policymakers to tread carefully. Late fees contribute significantly to the bottom line for card issuers, but they also influence consumer payment patterns and debt management strategies. Imposing price controls like these on the marketplace isn’t free. People in the marketplace are best at pricing things, including credit card late fees. Government-imposed restrictions, such as caps on late fees, will distort market signals and hinder economic efficiency. In Texas, where local banks are the backbone of many communities, as in many other states, this policy could hit especially hard. If banks can’t use late fees to encourage timely payments, businesses might struggle to get the credit they need to grow and thrive. In fact, Glenn Hamer, president of the Texas Association of Business, recently noted the symbiotic relationship between late fees and small depository institutions. Many local banks rely on late fees to cover operational costs and extend credit to consumers. Imposing strict limits on late fees could jeopardize the viability of these institutions, limiting access to credit for underserved communities. The Small Business Regulatory Enforcement Fairness Act (SBREFA) underscores the importance of assessing the impact of regulatory proposals on small businesses. Late fees are a lifeline for small depository institutions, enabling them to compete in the credit card market. Any regulatory changes must carefully consider the implications for these businesses and the communities they serve. Economist Milton Friedman warned: “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.” Before the CFPB rushes into this, let’s pump the brakes. Because when it comes to late fees on credit cards, or “junk fees” in general, one size does not fit all. Originally published at The City Journal.
In November 2023, Texas voters approved a constitutional amendment, HJR 2, which Governor Greg Abbott said would “ensure more than $18 billion in property tax cuts—the largest property tax cut in Texas history.” Texas homeowners’ hopes were dashed at the start of 2024, however, when they got their property tax bills. The promised $18 billion reduction amounted to only $12.7 billion in new property tax relief, a fraction of the state’s record $32.7 billion budget surplus, while the other $5.3 billion merely maintained property tax relief from years past. While Texas doesn’t have a state income tax, it does have the nation’s sixth-most burdensome property taxes. These taxes obstruct peoples’ ability to buy homes and price others out of the homes they’re in. Texans expect and deserve clarity about their property tax bills, but state policymakers’ failed promises and lack of transparency have eroded public trust. Despite the governor’s claim, the 2023 tax relief package, spread over two years, isn’t even the state’s largest historic property tax cut. In 2006, the Texas legislature apportioned $14.2 billion to reducing residents’ property taxes, cutting school district maintenance and operations (M&O) property tax rates by a third for 2008–09 biennium, and making up the difference with a revised franchise tax, a higher cigarette tax, and a higher motor vehicle sales tax. Adjusted for inflation, 2023’s cut would have had to exceed $21 billion to surpass the 2006 cut. The new package's biggest achievement was saving taxpayers $5 billion in 2023 by reducing the maximum school district M&O property tax rate by 10.7 cents per $100 valuation; it also raised the homestead exemption of taxable value for school district M&O property taxes to $100,000 and limited appraisal-value increases to 20 percent for other property. And yet, Texans’ total property taxes paid in 2023 nevertheless rose by $165.2 million over 2022, an overall increase of 0.4 percent. That net increase came from school district tax hikes to fund more debt ($890.2 million); municipal governments ($1.3 billion); county governments ($1.5 billion); and special purpose districts ($1.5 billion). These hikes effectively washed away state-level reductions. While this result is ultimately the fault of local governments, the state should have done more to provide relief and restrict localities’ spending and taxes. This growth in local property tax collections is part of a larger trend. From 1998 to 2023, Texas’s total property taxes collected rose 338 percent while the rate of population growth plus inflation was just 136 percent. No wonder so many Texans feel as though they are being crushed by housing unaffordability. How can Texas fix its spending problem? Rather than resort to temporary fixes, the state needs a robust spending cap in its constitution like Colorado’s Taxpayer’s Bill of Rights (TABOR), which limits state and local government spending increases to no more than the rate of population growth plus inflation. Though Colorado’s TABOR has been the gold standard for a state spending limit since its enactment in 1992, it can be improved. At this time, TABOR applies to Colorado’s general revenue, less than half of its total funds; it should be expanded to apply to all state funds, which would account for about two-thirds of its budget, as originally intended. Texas, or Colorado itself, could also improve the model by replacing the latter’s policy of refunding excess tax revenue to taxpayers with up-front income-tax-rate cuts. Texas enacted a statutory spending limit in 2021, but it lacks teeth, as an overriding constitutional spending limit covers just 45 percent of the budget and can be exceeded by a simple majority. In conjunction with a stronger constitutional spending limit, the Texas legislature should implement strategic budget cuts. These efforts combined with the stricter constitutional spending limit would create opportunities for surpluses at the state and local levels, which would pave the way for the state to reduce school M&O property taxes annually until they are fully eliminated. This alone would shave off nearly half of the property tax burden in Texas. Viewed from the coasts, Texas is a beacon of economic freedom. But as its spending and property tax data show, it isn’t perfect. The Texas legislature should acknowledge its failed promises and deliver real property tax relief for its citizens. Originally published at Dallas Express.
National School Choice Week was last month, a time when all states should be celebrating the educational freedom they provide to teachers, parents, and, most of all, students. Sadly, only about 20% of states have embraced universal school choice, with Texas being among the 80% failing to partake in the school choice revolution. Texas leads the nation in many respects, but our educational landscape continues to lag behind. Without universal school choice, we will continue regressing, compelling families to seek superior educational options elsewhere. The consequences of this regression are already evident, making it imperative for Texas to act. School choice through education savings accounts (ESAs) would allow families to direct their money for their children’s education to approved schooling providers. These include traditional public schools, charter schools, private schools, virtual learning, co-ops, and homeschooling. ESAs are the gold standard for school choice, and 13 states have already adopted them. ESAs put the power in the hands of parents, where it should be, by giving them the funds for education to choose which schooling best meets their kids’ unique needs. It’s essential to distinguish ESAs from controversial “vouchers,” as ESAs offer a more comprehensive range of educational choices. Rather than funding following the child from a government school to a private school with vouchers, the funding goes to the parents, who decide how to use it with ESAs. This also helps break the connection between dollars going directly to an institution where politicians and bureaucrats can regulate. Instead, ESAs give freedom for different types of schooling to compete in a market without the many rules that hamper government schools today. While there was a glimmer of hope in late 2023 for Texas to pass ESAs, the legislation, which had many problems, failed due to insufficient support from Democrats and rural Republicans. This setback carries considerable weight, particularly when other states embrace the competition and innovation accompanying universal school choice. Texas can’t afford to be left in the shadows. The consequences of our state’s hesitancy in progressing toward educational freedom are evident. According to The Heritage Foundation, between 2007 and 2022, rural Texans, a group purportedly opposed to school choice, witnessed a 20-point decline in 8th-grade math scores and a 12-point decrease in 8th-grade reading. Regarding 8th-grade reading scores across the state, we are four points below the national average. The subpar results are disturbing, with Texas spending an average of nearly $15,000 per student. Moreover, the pandemic has underscored the need for flexible and diverse learning options. Families faced unprecedented challenges during school closures, revealing the shortcomings of a one-size-fits-all educational approach that left substantial learning loss. Universal school choice can serve as a crucial buffer, ensuring students have access to adequate and adaptable learning environments, whether in-person, virtual, or a combination. The heart of the matter lies in the freedom of educational options. School choice makes diverse educational opportunities accessible to families, dismantling the notion that quality education is a privilege reserved for the affluent. Every parent deserves the freedom to choose the best path for their child’s education. As it stands, taxpayers fund schools that may not benefit their children. Redirecting these dollars back into the hands of parents creates a system where informed choices determine the efficacy of schools. This fosters competition, improving the educational landscape for teachers and students. And entrepreneurs will have many more opportunities to open new schools not available today in a market dominated by government schools and destructive regulations. Texas must also consider the long-term economic impact of educational choices. The state is cultivating a skilled and adaptable workforce by fostering an environment where students can access tailored educational experiences. This, in turn, attracts businesses and ensures the state remains competitive in an ever-evolving global economy. The Lone Star State stands at a crucial crossroads. Embracing universal school choice is not just a necessity: it is an investment in the future, unlocking the potential of our students and helping every child receive the education they deserve. The time for choice is now. Texas must lead the charge in providing its citizens with the educational freedom they need to thrive in the 21st century or risk getting left behind. Originally published at Dallas Express.
Home “owners” in Dallas and surrounding cities find themselves grappling with the weight of unaffordability as property taxes soar, increasing by $120 million despite the touted cuts at the end of 2023. A recent study reveals the burden on renters in Texas and nationwide, with many paying over 30% of their monthly income on housing. A factor contributing to this rising cost of renting, and housing in general, is soaring property taxes. The predicament stems from excessive state and local spending and purported property tax “cuts” that too often merely shift the burden through exemptions. Renters, technically anyone with a monthly payment or a mortgage since homeowners are just renting from the government, bear the brunt of this financial strain, emphasizing the urgent need for fiscal reform. Late last year, Dallas residents witnessed a modest one-cent property tax reduction rate, with surrounding cities experiencing varying degrees of reduction. Fort Worth saw a 4-cent reduction, and McKinney a 3-cent reduction. Despite these adjustments, most cities, including Dallas, faced increased property taxes eclipsed by rising spending and housing appraisals. Even in Plano, recognized for its low property taxes in the DFW area, homeowners will endure higher monthly property tax amounts due to home valuation hikes. The incongruity between property tax decreases and housing cost increases is alarming, prompting a closer look at the numbers. According to Axios, the average taxable value of homes in Denton County rose from approximately $402,000 in 2022 to around $449,000 in 2023. Similarly, the average market value of Collin County homes increased from about $513,000 in 2022 to roughly $584,000 in 2023. One doesn’t need to be a mathematician to recognize how a property tax decrease of even a few cents doesn’t begin to keep pace with skyrocketing home valuations and rent. No wonder 20% of Dallas homebuyers looked to get out of the city last year. The crux of the issue lies in reining in local spending. The axiom holds: the burden of government is not how much it taxes but how much it spends. Dallas, with its escalating budget that reached a historic high last year, renders proposed property tax cuts inconsequential. My new research released by Texans for Fiscal Responsibility highlights how property taxes continued to go up last year by $165 million, even with the Texas Legislature passing $12.7 billion in new property tax relief. This ended up being the second largest property tax relief in Texas history, not the largest as many politicians have been claiming since last July, which is what I wrote then. The best path for Texans is to finally have their right to own their prosperity instead of renting from the government by paying property taxes forever. This can be done by restraining state and local government spending and using resulting state surpluses to reduce school property tax rates until they’re zero. And by local governments, including Dallas, using their resulting surpluses to reduce their property tax rates until they’re zero. Dallas must adopt a spending limit, one that does not permit the budget to exceed the rate of population growth rate plus inflation – a measure aligned with what the average taxpayer can afford. Performance-based budgeting and independent efficiency audits, preferably conducted by private auditors, should identify opportunities for improvements and reductions in ineffective programs, helping provide more opportunities for property tax relief. Dallas leaders can empower their constituents by redirecting taxpayer money to them while funding limited government. The adoption of these strategic measures not only benefits homeowners but extends its positive impact to renters and business owners, providing tangible rewards for their hard work and fostering a more economically vibrant community. Dallas leaders are responsible for ushering in a new era of fiscal responsibility that ensures affordability for all residents and supports sustained economic growth. The path to long-lasting property tax relief is clear: let’s seize this opportunity for positive change and secure a brighter, more prosperous future for Dallas. Originally published at American Institute for Economic Research.
Recent headlines for the January jobs report indicate a robust economy. But a more thorough look reveals challenges for Americans. One recent headline proclaimed “Voters are finally noticing that Bidenomics is working.” But just 30 percent of Americans think the economy is doing well. When asked who would handle the economy better, people give former president Donald Trump a 22-point advantage over President Biden. Challenges include increasing part-time employment in recent months, declining household employment in three of the last four months for a net decline of 398,000 job holders, mounting public debt burdens, and declining real wages, which have fallen by 4.4 percent since January 2021. Why these results? Bidenomics is based on costly Keynesian boom-and-bust policies. With so much whiplash, it’s no wonder people are conflicted about the economy. In the latest jobs report for January, a net increase of 353,000 nonfarm jobs from the establishment survey appears robust, as it was well above the consensus estimate of 185,000 new jobs. But let’s dig deeper. Last month, household employment declined by 31,000, contradicting the headlines. The divergence of jobs added between the household survey and the establishment survey has widened since March 2022. This period coincides with declining real gross domestic product in the first and second quarters of 2022 (usually that’s deemed a recession, but it hasn’t been yet). Indexing these two employment levels to 100 in January 2021, they were essentially the same until March 2022, but nonfarm employment was 2.5 percent higher in January 2024. While this divergence mystifies some, a primary reason is how the surveys are conducted. The establishment survey reports the answers from businesses and the household survey from individual citizens. The establishment survey often counts the same person working in multiple jobs, while the household survey counts each person employed. This likely explains much of the divergence, as many people work multiple jobs to make ends meet. The surge in part-time employment and more discouraged workers underscores the fragility of the labor market. Though average weekly earnings increased by 3 percent in January over a year prior, this is below inflation of 3.1 percent. Real average weekly earnings had increased for seven months before falling last month. And there had been declines in year-over-year average weekly earnings for 24 of the prior 25 months before June 2023. These real wages are down 4.4 percent since Biden took office in January 2021. As purchasing power declines, mounting debts become more urgent. Total US household debt has reached unprecedented levels, with credit card debt soaring by 14.5 percent over the last year to a staggering $1.13 trillion in the fourth quarter of 2023. Such substantial growth in debt raises concerns about the current (unsustainable?) consumption trends, business investment, and a looming financial crisis. The surge in mortgage rates to over seven percent for the first time since December and rising home prices exacerbate housing affordability challenges, particularly for aspiring homeowners. An integral component of what some consider the “American Dream,” housing affordability is a major factor discouraging Americans. The euphoria surrounding the January 2024 jobs report is misplaced. Policymakers should heed these warning signs and enact meaningful reforms to address root causes. Biden’s policy approach undergirds most of these difficulties. Bidenomics focuses on his Build Back Better agenda that picks winners and losers by redistributing taxpayer money for supposed economic gains through large deficit spending. We haven’t seen an agenda of this magnitude since LBJ’s Great Society in the 1960s or possibly since FDR’s New Deal in the 1930s. Both were damaging, as the Great Society dramatically expanded the size and scope of government, contributing to the Great Inflation in the 1970s, and the New Deal contributed to a longer and harsher Great Depression. Just since January 2021, Congress passed the following major spending bills upon request of the Biden administration:
These four bills will add nearly $4.3 trillion to the national debt. But at least another $2.5 trillion will be added to the national debt for student loan forgiveness schemes, SNAP expansions, net interest increases, Ukraine funding, PACT Act, and more. In total over the past three years, excessive spending will lead to more than $7 trillion added to the national debt, which now totals $34 trillion — a 21 percent increase since 2021. There seems to be no end to soaring debt with the recent discussions of more taxpayer money to Ukraine, Israel, the border, and the “bipartisan tax deal,” collectively adding at least another $700 billion to the debt over a decade. Record debts accrued by households and by the federal government (paid by households) are not signs of a robust economy. This will likely worsen before it improves, as household savings dry up. And with interest rates likely to stay higher for longer because of persistent inflation, debts will crowd out household finances and the federal budget. The Federal Reserve has monetized much of this increased national debt over the last few years by ballooning its balance sheet from $4 trillion to $9 trillion and back down to a still-bloated $7.6 trillion. This helps explain persistent inflation, massive misallocation of resources, and costly malinvestments across the economy, keeping the economy afloat yet fragile. Excessive deficit spending weighs heavily on future generations, saddling them with unsustainable debt levels they have no voice in. Today, everyone owes about $100,000, and taxpayers owe $165,000, toward the national debt. Of course, these amounts don’t include the hundreds of trillions of dollars in unfunded liabilities for the quickly-going-bankrupt welfare programs of Social Security and Medicare. Future generations will be on the hook for even more national debt if Bidenomics continues and Congress doesn’t reduce government spending now. This is why the national debt is the biggest national crisis for America. We’re robbing current and future generations of their hopes and dreams. Fortunately, there’s a better path forward if politicians have the willpower. This path should be chosen before we reap the major costs of a bigger crisis. I’ve recently outlined what this should look like at AIER. In short, we need a fiscal rule of a spending limit covering the entire budget based on a maximum rate of population growth plus inflation. There should also be a monetary rule that ideally reduces and caps the Fed’s current balance sheet to at least where it was before the lockdowns. My work with Americans for Tax Reform shows that had the federal government used this spending limit over the last 20 years, the debt would have increased by just $700 billion instead of the actual $20.2 trillion. That’s much more manageable and would point us in a more sustainable fiscal and monetary direction. Together, fiscal and monetary rules that rein in government will help reduce the roles that politicians and bureaucrats have in our lives so we can achieve our unique American dreams. If not, we will have wasted many dreams on Bidenomics that can make things look good on the surface, but cause rot underneath. Originally published at Econlib.
Amid a heated election year, the teachings of economist Friedrich Hayek provide a guiding beacon, urging us to transcend partisan lines and champion free-market capitalism that benefits everyone. I recently interviewed Dr. Bruce Caldwell of Duke University about his book, Hayek: A Life, 1899-1950, who helped shed light on Hayek’s views on pressing issues today. As we navigate the complex landscape of governance, we should heed Hayek’s call for market-based approaches, especially with trade and immigration, where the clash of political ideologies often obscures the path to rational decision-making. Hayek’s teachings underscore the need for policy approaches prioritizing broader economic health rather than conforming to the whims of political affiliations or interest groups. He did not advocate for simplistic labels like “left and right” but viewed political thought as a triangle, with socialism, conservatism, and liberalism representing the three points. He favored liberalism, in the classical sense. His writings compel us to consider whether policies align with our principles and values. One example is trade protectionism, with tariffs enacted while president and pushed again by Donald Trump. Hayek’s book, The Road to Serfdom, cautioned against the pitfalls of protectionism and advocated for free-market principles that embrace competition in free trade. While protectionist measures like tariffs may appeal to certain political bases, they come at the expense of economic efficiency and growth. They ultimately cost us more for purchases and inhibit our choices as competition is artificially manipulated where it would otherwise organically select the best providers of resources. A Hayekian approach to trade involves understanding that dynamic economies thrive on diversity and exchanging goods and services across borders. Another issue at the forefront of political debates that Hayek’s approach helps shed light on is immigration. He recognized that allowing the free movement of individuals fosters economic dynamism and innovation. Policies that restrict immigration solely for political gain risk stifling economic growth and impeding the exchange of ideas that fuels progress. A Hayekian perspective on immigration advocates for policies that acknowledge the economic benefits of a diverse and dynamic workforce. Instead of succumbing to populist narratives that frame immigration as a threat, Hayek prompts us to view it as an opportunity. An influx of skilled and motivated individuals can contribute to a vibrant economy, filling gaps in the labor market and injecting fresh perspectives that drive entrepreneurship. Too often, misinformation about immigration has led even conservatives to favor more government involvement in tightening borders and deportation. However, as Hayek outlined in his development of “the knowledge problem,” expecting a government of people with limited knowledge of the issue and tradeoffs from policy choices too often results in worse outcomes. The people in government do not and never will have all the answers. Instead, collecting everyone’s ideas in the market leads to having the most available knowledge and, therefore, better outcomes. In short, government failures are worse than any perceived market failures. Taking a cue from Hayek, we should strive for more free trade agreements, especially with our allies, which means an end to all tariffs and other barriers. We should also enact market-based immigration policies that balance national security concerns with the economic advantages of attracting talent from diverse backgrounds. As we prepare to select our nation’s president for the next four years, Hayek’s teachings serve as a guidepost, urging us to prioritize people’s well-being over the allure of party-centric agendas. Embracing a Hayekian perspective requires a willingness to critically evaluate policies based on their economic merit rather than their alignment with partisan ideologies. Only by doing so can we navigate the complex economic landscape and ensure a prosperous and dynamic future for all. Originally published at AIER.
Congress hasn’t done its primary job of passing a balanced budget or even a full-year budget in decades. This must change soon before the fiscal crisis gets worse. But that’s unlikely because few seem to care. Congress recently passed the third continuing resolution for fiscal year 2024 in the amount of $1.7 trillion. This budget legerdemain kicks the federal budget to March, when members will repeat the same omnibus process, one fraught with hijinks and grandstanding. Instead of an actual debate about what we should or should not spend on a department and agency basis, we get calls to “shut down the government” if any number of demands aren’t met. Now, there’s a “bipartisan tax deal” that could add more than $600 billion to the debt over a decade. Democrats don’t seem to care about the debt much, and some who adhere to the ideology of modern monetary theory even think it is helpful for economic growth. But the Republicans also seem to have little, if any, courage to restrain spending, so they just keep cutting taxes and spending us into greater levels of debt. The late, great economist Milton Friedman said, “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.” But spending is the ultimate burden of government on taxpayers and must be addressed first. The Republican agenda has prioritized border security, rightly or wrongly, over everything else to deal with a humanitarian crisis along the border with Mexico. Former president and top GOP presidential contender Donald Trump has insisted on prioritizing this issue. Events at the border continue to boil with the fight between Texas Governor Greg Abbott and President Biden after a recent Supreme Court decision. The decision has limited reach as it “temporarily allows the Border Patrol agents to continue cutting and moving the razor wire installed by Texas. However, since the ruling came through the emergency docket, the case is now passed back down to the lower court, who will hear the case with oral arguments.” The Republican pursuit of an aggressive border security deal as the number one priority risks further inflating bloated spending as the issue gets subordinated. While some argue that illegal immigration costs far more than border security, compelling studies indicate that immigrants, when provided opportunities, make substantial contributions to society, enriching the economy. The more aggressive approach to border security during Trump’s term contributed to extravagant federal deficit spending. There has also been a high cost to Texans in the state’s budget to address border security issues of more than $5 billion in the current budget and at least $5 billion more since 2016. Addressing illegal immigration issues and averting an impending fiscal crisis requires substantial debate about these issues rather than the current partisan-fueled fire drill over continuing resolution funding. With budget deficits expected to be at least $2 trillion per year over the next decade and net interest payments recently surpassing $1 trillion, every scarce taxpayer dollar must be used wisely, if at all. This could be done with market-based reforms that would foster better fiscal, economic, and border situations. Economist Richard Vedder and others proposed an immigration approach that would create an international market for visas whereby the government issues some of them for refugees, and the rest are auctioned off to people willing and able to purchase them. The government could use this money to pay down deficits, and there would be better accountability for those with visas while providing necessary resources along the border. The biggest national threat continues to be Congress’ profligate spending, which the primary drivers are so-called “entitlements” and must be swiftly reformed with market-based approaches. But right behind it is the Federal Reserve’s bloated balance sheet, which must be addressed. Despite a 14 percent reduction since its peak of about $9 trillion in May 2022, the Fed’s balance sheet remains a staggering 85 percent higher than pre-pandemic levels. Lingering issues of the Fed running losses of $116.4 billion last year, propping up struggling financial institutions with its costly bank term funding program, and the ongoing cost of trying to artificially hold down market interest rates as federal budget deficits soar exacerbate a fiscal-monetary crisis. Manifestations of the underlying economic malaise are evident in falling real wages down 1.3 percent since Biden took office, inflation surpassing set targets, unattainable housing affordability, and families grappling with saving money. These symptoms, rather than isolated issues, indicate the pervasive consequences of unchecked government spending and money printing, casting a long shadow on Americans’ well-being. The latest efforts by Congress to pass the continuing resolution and propose the latest tax deal will make the fiscal situation worse. While the latest idea of a fiscal commission could do what is good in theory, there are already calls to raise taxes, which will be detrimental to the economy and the fiscal picture. The path forward must be fiscal sustainability. This includes a long-term solution of a spending limit. The limit should cover the entire budget and hold any growth to a maximum rate of population growth plus inflation. This growth limit represents the average taxpayer’s ability to pay for spending. Doing so would have resulted in just a $700 billion increase in the debt instead of the actual increase of $20 trillion from 2004 to 2023. The spending limit should be combined with a monetary rule that removes much of the discretion of central bankers. This will support sound money. It can be achieved by moving to a single price stability mandate and preferably a high-powered money growth rate rule of the Fed’s assets. Other rules include the Taylor rule or nominal GDP targeting. While each of these rules has pros and cons, the money growth rate rule advocated for by Milton Friedman is the simplest. It’s simply a rule based on how fast currency plus bank reserves grow. This would be the easiest for the public to understand, to hold officials accountable, and to tie the Fed’s balance sheet directly to inflation. John Taylor proposed what’s been coined the Taylor rule that estimates what the federal funds rate, which is the lending rate between banks, should be based on the natural rate of interest, economic output from its potential, and inflation from target inflation. Scott Sumner most recently popularized nominal GDP targeting, which uses the equation of exchange (MV=Py) to allow the money supply times the velocity of money to equal nominal GDP. There are different variations of it, but the key is that velocity changes over time, so the money supply should change based on money demand to achieve a nominal GDP level or growth rate over time. Rules over discretion, at least until we can rightfully end the Fed, should hold those in Congress and at the Fed in check because their limited knowledge will always result in bad outcomes for people in the marketplace. Such measures are pivotal in preventing further debt accumulation, safeguarding America’s credibility, and preserving the economy’s stability. The choices made today will reverberate into the future, shaping the economic landscape for future generations. This call to action is for policymakers to tread carefully, adopt prudent fiscal and monetary sustainability through a rules-based approach, and prioritize the long-term well-being of the country with market-based reforms over short-term politics. Failure on these issues will prevent us from addressing the humanitarian crisis along the border, China, or other concerns. These efforts will be challenging, but they’re essential for freedom and prosperity. Originally published at Inside Sources.
The final jobs report for 2023 was recently reported. The headlines look good but don’t tell the full story. This has been a common theme with many economic indicators, from the labor market to economic output. With this being an election year, politicians are trying to milk every apparent “win” or “loss” for voter approval. With all the noise, we need an honest assessment of the economic ups and downs to help guide voters in November. First, the payroll survey shows that were 216,000 net non-farm jobs added in December, which historically is rather robust. However, that’s not even half the story. To examine how many productive private-sector jobs were added in December, we need to make some corrections. This includes subtracting 52,000 unproductive government jobs added in December as they are a burden on private-sector workers. Also, we need to subtract the 71,000 jobs that were revised down for October and November. Doing so leaves just 95,000 productive non-farm jobs added in December, which is historically weak. Couple these findings with even weaker results from the household survey showing 683,000 fewer people were employed compared with November 2023, and this report is even weaker. While the unemployment rate was unchanged from the previous report at 3.7 percent, the labor force dropped by nearly 700,000 last month, meaning fewer people had work or were looking for work. The labor force participation rate dropped to 62.5 percent, the lowest since February 2023. Contributing factors to the declining labor force participation are myriad and complex, not always correlated to the economy. But they are typically connected with expanded roles of government and other factors. For example, the Economic Policy Innovation Center recently released a report highlighting how millions of people have dropped out of the labor force. The author notes “if the employment-to-population ratio were the same today as it was before the COVID-19 pandemic in February 2020, 2.6 million more people would be employed today.” The report finds that the largest share of people leaving have been retirees since the pandemic. The next largest group is 20 to 24 years old, who have been living off the handouts since the pandemic or with their parents. Interestingly, even with skyrocketing daycare costs, those without kids are a large share of those leaving the workforce. This makes some sense as maybe they are young and don’t have kids and have other means to survive, but this also is a conundrum because they’re reducing their long-term earnings potential. But with recent minimum wage hikes by 22 states that no doubt will displace many low-skilled workers and the rise in dependency on government safety nets over the last few years, there’s likely to be more people out of the labor force for longer. Speaking of distortion, average weekly earnings have been improving, but after adjusting for inflation, they are up just 0.4 percent over the last year. While it’s promising to see real wages go up after years when it wasn’t, workers would feel much more relief if inflation were further slowed. But mischief in Congress and the Federal Reserve keeps that from happening. Inflation soared due to the federal government’s deficit spending, mostly monetized by the Federal Reserve. This created a situation of too much money chasing too few goods that resulted in persistent inflation. As purchasing power remains a problem for many Americans, workers become disenchanted with jobs, especially when the monetary benefit of government handouts exceeds wages. Reducing government spending is imperative. Doing so will help the Fed tame inflation, reignite labor force participation, and spur job creation. Celebrating wins is important, especially during the recovery after the Donald Trump lockdowns, but our leaders must not turn a blind eye to underlying problems. As we await jobs reports, we must consider the underlying issues that affect Americans directly rather than just the headlines. What we uncover might shape whether our elected leader champions free-market flourishing or leans toward the big-government ideologies our forefathers warned against. Originally published at Daily Caller.
A new study from the International Monetary Fund (IMF) has ruffled assumptions, asserting that “40% of global employment is exposed to AI.” The study also predicts that high-skilled jobs will bear the brunt of this transformation, disproportionately influencing roles that traditionally require higher education and professional experience. Among advanced economies, the IMF estimates that the share of jobs affected by AI could be 60 percent. Half of them could benefit from increased productivity, and the other half hurt by replacement. The IMF concludes that the impending shift should compel countries, particularly those well-prepared for AI integration like the U.S., to implement “robust regulatory frameworks.” They argue this would help cultivate a safe and responsible AI environment with safety nets to help those whose jobs are AI “vulnerable.” But we don’t have to look too far back to realize how attempting to harness AI innovation and its results would be disastrous for people and prosperity. The rise of AI presents a unique chance for society to better adapt to challenges and capitalize on new opportunities. Humanity has always adapted to new technological possibilities, turning most disruptions into positive outcomes. For instance, dedicated professionals called “calculators” once performed complex calculations. With the emergence of pocket-sized calculators in 1971, the computing revolution began, showcasing the transformative potential of technological innovation. Those human calculators, who would today be considered high-skilled, highly vulnerable individuals, went behind the machines and created and perfected better computational technologies. Whether or not they felt threatened by the technology, they adapted nevertheless and made their skills indispensable to the technology. As the electronic calculator removed much busy work, their minds were more available to focus on tasks machines couldn’t perform. The emergence of health-related diagnostic tools like X-rays and MRIs did not render doctors less valuable but widened the breadth of their jobs. Tractors did not displace farmers but made aspects of the role significantly more accessible, allowing for higher output. The examples of technology helping humans by making their jobs easier are endless. High-skilled professionals facing AI exposure should view this revolution as an opportunity to learn and grow. Rather than advocating for regulatory barriers, individuals can proactively enhance their skills, pursue further education, earn certificates, or even explore career transitions. The power of spontaneous order in free markets lies in allowing people to innovate when not restricted by government overreach. The IMF study’s conclusion urging countries to hurriedly embrace AI regulation overlooks the resilience and adaptability inherent in free societies. Attempting to pause AI innovation is impractical in the face of rapid advancements by other nations. Our big tech competitors like China and the UAE will not inhibit progress with red tape, so why would we? We’ve already seen demonstrative instances. Recall that in June 2023, Meta launched what was, at the time, the largest open-source language model ever, Llama 2. For almost two months after that, America was the global AI leader due to this technology, only to be eclipsed by the UAE government with their release of Falcon 180b, which has more than double the parameters of Llama 2. In a matter of weeks, America lost its top spot in AI innovation. Imagine what would happen if we introduced more regulatory barriers, as suggested by the IMF, or required a pause in AI advancement, as suggested by Elon Musk and others last year. It’s not just the U.S. reputation as a world leader at stake but our very security, as we could quickly be overtaken by nations who embrace the power of AI in technology, cybersecurity, and beyond. To maintain leadership in the AI landscape, the U.S. must welcome disruptive changes and cultivate an environment encouraging competitiveness. The future belongs to those who can adapt and innovate, and AI, as a tool created by humans, should be embraced rather than feared. Originally published at American Institute for Economic Research.
The Economist recently compared Joe Biden’s and Donald Trump’s economic records, concluding Biden wins so far. While the article raises valid points, it excludes key details that make the findings questionable. Ten months from now, there’s a high likelihood Biden and Trump could go head-to-head again for the presidency, especially after the results from the Iowa caucus. But voters should be informed about the effects of their policies on key issues like immigration, inflation, and wages. Starting with a divisive bang, let’s look at each leader’s track record concerning immigration. The Economist correctly noted that apprehensions along the southern border were much lower under Trump. They increased by the most in 12 years during the economic expansion of 2019, decreased early in the COVID-19 pandemic when people could be turned away for public health concerns, and rose again during the lockdowns. While some may see apprehensions rising between Trump and Biden as a loss for Biden, I see it as a loss for both. This metric is somewhat unreliable, given one person can be caught and counted multiple times, and those caught are a subset of total migrants. The truth is immigration is good for the economy, but government failures create unnecessarily complex barriers against legal immigration, contributing to the humanitarian crisis along the Mexico border today. Neither President has pushed for what’s needed (market-based immigration reforms) both lose. Inflation is another hot topic, especially for Biden. The Economist hands the win to Trump, as inflation was far lower during his presidency. But can we give him the credit? Remember, Trump pressured the Federal Reserve to reduce its interest rate target and expand its balance sheet, which was inflationary. His deficit spending skyrocketed during the lockdowns and was mostly monetized by the Federal Reserve, contributing to what was always going to be persistent inflation. Biden made this deficit spending and resulting inflation much worse. Add in the Fed’s many questionable decisions, such as doubling its assets, cutting and maintaining a zero interest rate target for too long, and focusing too much on woke nonsense, and we can see how this was always going to be persistent inflation. But even the Fed’s latest projections indicate it won’t hit its average inflation target of two percent until at least 2026. Likely, it will cut the current federal funds rate target range of 5.25 percent to 5.5 percent three times this year, keep a bloated balance sheet to finance massive budget deficits, and run record losses. If so, this inflation projection is too rosy. Some of Trump’s policies helped stabilize prices, including his tax and regulation reductions. But he still allowed egregious spending. Biden has doubled down on red ink that has contributed to the recent 40-year-high inflation rate. While inflation has been moderating recently under Biden, Trump gets the win. Of course, neither Presidents nor Congress control inflation, as that job is the Fed’s, but its fiscal policies influence it. When it comes to inflation-adjusted wages, The Economist grants a tie. Let’s consider real average weekly earnings that include hourly earnings and hours worked per week, adjusted for the chained consumer price index, which adjusts for the substitution bias and has been used for indexing federal tax brackets since the Tax Cuts and Jobs Act of 2017. Trump’s era witnessed a robust upward trajectory of real earnings, with considerable gains by lower-income earners, thereby reducing income inequality. We must acknowledge a real wage spike in 2020 during Trump’s lockdowns, marked by the loss of 22 million jobs and various challenges. To maintain a fair analysis, I disregard this spike. A year later, real wages demonstrated a decline under Biden. Extending the timeframe to two years later, real wages remain relatively flat to slightly increased. To provide a contextual understanding, when we consider the trend under Trump, excluding the 2020 spike, real wages for all private workers or production and nonsupervisory workers fall below those observed during Biden. It’s worth noting, however, that these wages have been higher since 2019, albeit nearly stagnant for all private workers. Given real earnings, I agree with The Economist that Trump and Biden are tied. While much more can be said for each President’s policies, continuing to add context when making assessments is crucial. I give Trump a nuanced “win” overall because his policies supported more flourishing during his first three years until the terrible mistake of the COVID lockdowns, with its huge, long-term costs. I should note that I made a strong case inside the White House for no shutdowns and less government spending but, alas, my efforts, and those by others, lost to Fauci, Birx, and Trump. Given the improved purchasing power during his presidency, Trump receives better poll ratings than Biden after three years of their presidencies. But this win doesn’t mean that Trump’s record is best regarding these issues, protectionism, and more. Let’s hope free-market capitalism, the best path to let people prosper, is on display this November, no matter who is on the ballot. On January 1st, 22 states and 38 cities and counties raised their minimum wages, sparking some celebration for 10 million workers who get a pay hike, and many doubts for the rest.
While this is perhaps a well-intentioned policy, intentions don’t indicate a policy’s effectiveness. Many economists argue that this decision will disadvantage the people it aims to help, namely, lower-skilled workers. Minimum wage hikes aim to make it “livable,” an increasingly frequent discussion due to government-created rampant inflation in recent years. I don’t disagree that $7.25 hourly, the federal minimum wage matched by many states, is insufficient for most to afford necessities. But helping lower-skilled workers move up the economic ladder is more complex than governments arbitrarily raising wages. Because I want to see everyone flourish, especially the neediest among us, I’m against a minimum wage and definitely against increasing it more. Elevating the minimum wage this drastically and suddenly will lead to widespread job losses, because employers must balance profitability with labor that costs more but adds no higher output. The spate of layoffs by major corporations in 2023, driven by slowing sales exacerbated by decreased purchasing power, demonstrates this reality. Now, envision a scenario where these higher-paid retained workers burden employers. Rather than a boon, this often translates into more layoffs or price hikes as companies seek to maintain profitability. The optimistic projection by the Economic Policy Institute, suggesting a $6.95 billion windfall for workers from the recent state minimum wage increases, rests on a questionable assumption that every worker will retain his job. In reality, employers may resort to cost-cutting measures to stay profitable, jeopardizing quality and output, and ultimately resulting in layoffs. If an employer must pay someone $16 hourly, the new minimum wage in New York and California, whom will they pay? Would it be a higher-skilled college graduate or a less-skilled worker with only a high school diploma? You can deduce which hire is the safer option. When the cost of obtaining more education or skills is higher than the cost of relying on government unemployment benefits, dependence becomes the more appealing choice over labor-force participation. Another often-overlooked negative impact of minimum wages is decreased negotiating power. When workers with qualifications and experience who merit higher pay are confined to a predetermined minimum wage, their bargaining potential is stifled. These labor market dynamics, however, extend beyond individual choices. The intriguing patterns in state migration rates underscore how higher minimum wages deter people from seeking better opportunities. Look at California and New York, champions of minimum wage increases. Both experienced some of the highest rates of outmigration in 2023. Conversely, with their comparatively lower minimum wages, Texas and Florida witnessed a substantial influx of new residents. People vote with their feet. The allure of better prospects, lower living costs, and increased job opportunities in states with few-or-no minimum wage hikes outweighs the appeal of higher minimum wages in other states. States with lower minimum wages continue to increase in appeal because, contrary to popular belief, only a very small share of hourly paid workers earn minimum wage, and not for long. Professor of Economics at UC San Diego Jeffrey Clemens’ findings reveal that most minimum-wage workers experience consistent wage growth over time. According to his research, over 12 months, about 70 percent of individuals studied initially employed at or near the minimum wage saw an improvement in their earnings, with an average wage increase of $1.39. The data suggest that the narrative surrounding the persistence of “career minimum wage workers” applies to very few people. But even so, those low-wage jobs maintain value. Low-wage positions, typically entry-level or part-time jobs, serve as the initial rung toward better opportunities with higher pay. Unfortunately, governments inadvertently eliminate many of these essential entry-level jobs by advocating for higher minimum wages. This lost first rung has profound consequences, especially for vulnerable groups like young individuals, part-time workers, the unmarried, and those without a high school diploma. Such individuals rely on these low-wage positions for income and to escape the cycle of government dependency and poverty. Employers and workers alike deserve freedom. Burdensome government regulations that hinder free-market flourishing culminate in the mandated minimum wage, which stifles opportunity rather than allowing spontaneous order to create jobs and economic growth. The states that just increased the minimum wage will experience more problems than they’ve already created. People will continue to vote with their feet. Hopefully, leaders at federal, state, and local levels will come to grips with the best paths to help people prosper, however unpopular those paths may be. These paths that improve productivity to demand higher market wages and increase output to supply higher-paid jobs are found in an institutional framework of free-market capitalism. Specifically for the labor market, politicians should provide universal school choice, remove government obstacles like occupational licensing and forced union dues, rein in spending to cut taxes, and reduce regulations. In short, more government isn’t the answer to higher wages because government is the problem. Let’s not double down on government failures. Originally published at AIER. We must learn from history or be doomed to repeat it. This includes honestly assessing the economy in 2023 so that we have better information for making decisions in 2024.
Starting with a bang on many people’s minds is housing affordability. The year commenced with a surge in the average 30-year fixed mortgage rate from 6.5% in January to nearly 8% in October but has declined recently to about 6.6%. These higher mortgage rates and record-high housing prices contributed to an unaffordable housing market. While existing home sales were up 0.8% in November, they are down 7.3% over the last year, indicating a struggling housing market for families that will unlikely improve much in 2024. Another concern is costly inflation. Rampant hikes in the cost of a typical basket of goods and services have meant less purchasing power for us. This contributes to making housing, food, education, and other expenses for that basket less comfortable or worse for many families. As of November 2023, the core consumption personal expenditures increase was 3.2% year-over-year. This price measure of a basket of goods and services excludes food and energy and is what the Federal Reserve prefers to watch. While core PCE inflation has moderated from close to 6% in 2022, the recent 3.2% inflation rate remains 60% higher than the Fed’s average inflation target of 2%. Although moderating inflation represents some relief for many Americans, the challenge is that average weekly earnings adjusted for core inflation declined in 23 of the last 35 months since January 2021. In total, these real average weekly earnings are down 0.8% since then, indicating why inflation is a top concern. An additional problem is debt. Because earnings haven’t been keeping up with inflation, credit card debt soared to more than $1 trillion as people struggled to make ends meet, which is a bad sign for 2024. And many people have been going through their savings and retirement funds quickly. What about jobs? The White House recently celebrated “total job gains achieved under the Biden administration reached 14.1 million through November 2023.” But this metric becomes less impressive considering that 9.4 million of those jobs were just recovering jobs lost during the pandemic lockdowns. So, there have been 4.7 million new jobs added since January 2021, which is 134,000 per month. While this is positive, it is not record-breaking. The weaker labor market in recent months indicates that 2024 could be tough for many workers. Most people’s pocketbooks did not grow but diminished this year, and the job market similarly lags. But what about the nation’s overall growth? Hasn’t GDP soared? Not exactly. In the third quarter of 2023, the annualized real GDP growth hit 4.9%, which appears robust. But when you dig into the details, it’s more complicated. Government spending, which is a drag on the economy as it must take taxes from the private sector and distort market activities, threw in 0.99 percentage points. And private inventories, influenced by the whims of fluctuating interest rate expectations, chipped in 1.27 percentage points. When you exclude those contributions to consider stable real private GDP, there was just a 2.6% bump up. This slower pace didn’t just pop out of nowhere. It’s been a saga since early 2022, when we hit a two-quarter decline in real gross domestic product, waving a big red flag for a recession. And when you consider the valuable metric of real gross domestic output, which is the average or real gross domestic product and real gross domestic income, the economy has declined in three out of the last seven quarters. While these economic issues suggest stagflation triggered by misguided pandemic lockdowns and subsequent trillions of new money printing of deficit-spending, there may be some relief. The Fed’s slow correction to its bloated assets of $9 trillion at its peak to $7.7 trillion contributed to interest rates soaring since March 2022. But with Congress continuing to deficit spend of about $2 trillion per year and net interest payments soaring to $1 trillion per year, there are massive economic challenges ahead. These deficits will make it more difficult for the Fed to correctly normalize its assets quickly to get them back to at least the pre-pandemic $4 trillion. This is because the budget deficits would contribute to higher interest rates, so the Fed will likely monetize the debt more to help Congress avoid needed spending restraint. While these truths are tough to swallow, many beacons of hope also emerged throughout the year that should be noted. In 2023, a momentous shift unfolded with a transformative surge in educational choice. Twenty states expanded school choice, and a record-breaking 10 states passed some form of universal school choice, making 36% of American students eligible for a private choice program. Some states have been slow to increase educational freedom, but this revolution’s overall impact is historical. Recognizing that children are the cornerstone of our nation’s future and acknowledging that improved education is a pivotal predictor of their success, the catalyst for change is undeniably rooted in more universal school choice. The second bright light is the flat state tax revolution. Many states took bold steps to enhance their economic landscapes. Notably, prominent states like California and New York faced ongoing out-migration as individuals sought refuge from progressive policies, and less heralded states embraced free-market principles, propelling them onto the national stage. More conservative Florida and Texas continued to lead the way in places where people moved in 2023. The third thing to cheer is a responsible movement toward a sustainable state budget revolution. Some states are pushing toward improving their spending limits to one that covers more of the budget, limits budget growth to no more than population growth plus inflation, and has a supermajority vote to bust the limit or raise taxes. The synergy of these reforms demonstrates the power of federalism as states experiment with policies, revealing effective strategies and fostering a healthy laboratory of competition. We need lawmakers at the federal, state, and local governments to recognize what works and implement them. The trajectory in 2024 and beyond hinges on embracing free-market capitalism, which is the best path to let people prosper. This includes less government spending, less money printing, more school choice, and more tax relief. In short, less government. That’s how we get a more prosperous 2024. Happy New Year! Originally published at Econlib. In 2023, Texas led the U.S. on many fronts: job growth, economic expansion, energy production, and a record surplus of $33 billion. This was when many other states, especially California, were reporting economic challenges and deficits.
Despite Comptroller Glenn Hegar's warning to spend wisely, the 88th Texas Legislature chose out-of-control, record spending. This isn’t a record Texans wanted because it means less available money for property tax relief. Texas can reverse course to lead the U.S. in fiscal responsibility by passing sustainable budgets that result in more surplus to return to taxpayers by reducing school property tax rates until they are zero. In 2023, the Texas Legislature passed the largest spending increase in state history. The fiscal 2024-25 budget increased appropriations by 21.3% to $321 billion, or, excluding federal funds, by 31.7% in state funds to a staggering $219 billion. Even more disturbing is that currently reported amounts may increase further as some legislation passed in the special sessions increases spending. Either way, the budget growth far eclipsed the rate of population growth plus inflation, which increased by 16% over the prior two years. This rate is a good comparison because it represents the average taxpayer’s ability to pay for government spending. This record spending, along with records of over $10 billion in new corporate welfare payments even to multi-billion-dollar companies and more than $13 billion in constitutional amendments that move money outside of the state’s spending limit, sets a challenging path forward. The bloated fiscal 2024-25 budget now looms as the new baseline for lawmakers, expanding government to the chagrin of many Texans. The excessive budget increase overshadowed Gov. Greg Abbott’s historic tax relief compromise signed into law during the Legislature’s second special session. While hailed as the largest property tax cut in Texas history, it fell short. The total for new school property tax relief was $12.7 billion. It falls short of the $14.2 billion appropriated for reducing school property taxes in fiscal 2008-09 due to a Supreme Court of Texas ruling that the school finance system was unconstitutional. But when the amount is adjusted for inflation since then, the $14.2 billion would be about $21 billion. Even when factoring in the state’s contribution of $5.3 billion to maintain reductions in school property taxes in prior sessions, the $18.3 billion in combined relief remains well below the $21 billion needed to be the largest in Texas history. It should be noted that the $14.2 billion for property tax relief for fiscal 2008-09 helped cut school property taxes by just $2 billion in 2007. But then school property taxes increased by $2.3 billion in 2008, surpassing 2006 before the relief by $300 million. Total property taxes decreased by just $450 million in 2007 and then increased by $3.8 billion in 2008. While those with property received some relief in their property tax bill in 2023, especially those with a homestead exemption, the amount will not be nearly as much as some lawmakers claimed. Worse still, these savings won’t likely last as local governments continue to push to pass bonds and increase spending and taxes. The Legislature should focus this interim on doing efficiency audits across the government, much like it started with safety net programs. Finding savings across the government with so much excessive spending recently will help maintain the property tax relief passed last year; spending excesses will not lead to calls for tax increases, and resulting surpluses can put school property taxes on a fast path to zero next session. There will also be an opportunity to put the new, stronger statutory spending limit in the constitution and have this limit cover spending by local governments. There should also be a requirement that at least 90% of resulting surpluses by the state go toward reducing school property tax rates and by local governments to reduce their own property tax rates. Doing so will achieve fiscal sustainability and put all property taxes on a path to elimination. In the meantime, Texans have opportunities in the March primary and November general election to consider many candidates' policy proposals. Do candidates on the ballot support eliminating property taxes, reducing government spending, and increasing prosperity? We need more politicians pushing for these things because they benefit Texas families and entrepreneurs. Let’s not have big-government socialism creep more into Texas but turn back toward free-market capitalism that has contributed to abundance. Originally published at The Center Square. |
Vance Ginn, Ph.D.
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