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.
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Today, I am joined by Dr. John B. Taylor, the George P. Shultz Senior Fellow in Economics at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University.
Join us as we discuss the economic situation, the performance of monetary and fiscal policies, the importance of policy rules like his famous Taylor rule, and lessons in economic freedom. Without economic freedom and policy rules, we are unlikely to let people prosper. Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. See show notes for this episode on Substack and subscribe to receive it in your inbox: www.vanceginn.substack.com Visit my website for economic insights: www.vanceginn.com In today’s This Week’s Economy episode 52, I discuss the benefits of economics, school choice, spending limits, abundance, vacations, and much more in 8 minutes!
I explain how abundance matters through a limited government that provides more rest and leisure. Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. See show notes for this episode on Substack and subscribe to receive it in your inbox: www.vanceginn.substack.com Visit my website for economic insights: www.vanceginn.com 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. Could Colorado become one of the seven states with no income tax? Vance Ginn, former White House Office of Management and Budget, believes the state is on the #Path2Zero.
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. Today, I am joined by Dr. Justin Callais, who is an Assistant Professor of Economics at the University of Louisiana at Lafayette.
Join us as we discuss social mobility in the 50 states, Louisiana’s economic and population challenges, sound economics, and much more. This includes the lack of social mobility in Louisiana from too much government. Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. See show notes for this episode on Substack and subscribe to receive it in your inbox: www.vanceginn.substack.com Visit my website for economic insights: www.vanceginn.com 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. In today’s This Week’s Economy episode 51, I discuss the latest hot topics on Super Tuesday, Biden’s SOTU, universal school choice, and much more!
Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. See show notes for this episode on Substack and subscribe to receive it in your inbox: www.vanceginn.substack.com Visit my website for economic insights: www.vanceginn.com 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. Today, I am joined by the Center for Freedom and Prosperity’s President Dr. Dan Mitchell. Join us as we discuss Biden’s hype about junk fees, excessive spending crisis, and much more.
Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. Subscribe and see show notes for this episode on Substack - www.vanceginn.substack.com Visit my website for economic insights - www.vanceginn.com In today’s This Week’s Economy episode 50, I discuss the latest hot topics on Big Tech, fiscal commission, sustainable budgets, Texas spending, school choice, and much more!
Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. Subscribe and see show notes for this episode on Substack - www.vanceginn.substack.com Visit my website for economic insights - www.vanceginn.com 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. Episode 85 is with Dr. Adam Michel, director of tax policy studies at the Cato Institute.
Today, we discuss: 1) Problems with OECD and global taxes; 2) Tax cliff coming in 2025 from many expiring TCJA provisions; and 3) Why a fiscal crisis without major spending reforms, how taxes influence human behavior, the truth about The Laffer Curve, and much more. Please like and comment on this video, subscribe to the channel, share it on social media, and provide a rating and review. Thanks! Also, subscribe and see show notes for this episode on Substack (www.vanceginn.substack.com) and visit my website for economic insights (www.vanceginn.com). In today’s This Week’s Economy episode 49, I provide a trigger warning about my 10 unpopular views, housing deregulation, property taxes, Gen-Zers moving to Texas, and much more. Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. Also, subscribe and see show notes for this episode on Substack (www.vanceginn.substack.com) and visit my website for economic insights (www.vanceginn.com).
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. Episode 84 is with Dr. Sven Larson, author and economics writer for The European Conservative.
Today, we discuss: 1) Larson's experience growing up in Sweden during its economic collapse and Sweden's example of how big government can destroy the economy; 2) How America's welfare system is beginning to mimic Europe's; and 3) How increased taxes and increased spending decrease GDP growth and opportunities for young workers. Please like and comment on this video, subscribe to the channel, share it on social media, and provide a rating and review. Thanks! Also, subscribe and see show notes for this episode on Substack (www.vanceginn.substack.com) and visit my website for economic insights (www.vanceginn.com). 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. Thank you for listening to the 48th episode of "This Week's Economy."
Please like this video, subscribe to the channel, share it on social media, and provide a rating and review. Also, subscribe and see show notes for this episode on Substack (www.vanceginn.substack.com) and visit my website for economic insights (www.vanceginn.com). Episode 83 is with Dr. Michael Strain, director of Economic Policy Studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.
Today, we discuss: 1) Why the American Dream is NOT dead, and much economic pessimism is overblown; 2) The problem with populism and its origins on both sides of the aisle; and 3) Reasons for optimism on wages, GDP, and much more. Please like and comment on this video, subscribe to the channel, share it on social media, and provide a rating and review. Thanks! Also, subscribe and see show notes for this episode on Substack (www.vanceginn.substack.com) and visit my website for economic insights (www.vanceginn.com). 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. |
Vance Ginn, Ph.D.
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