Reviving Basket Cases

Mugabe is out in Zimbabwe.  It is not the worst economic and political basket case in the world but there is a great opportunity for its citizens and the world to improve.  Zimbabwe actually moved up in the last year or two as Heritage moved them up to a score of 44 (of 100) that lifts them into the repressive category.  Freedom House kindly puts them into the Partially Free category with a score of 32 of 100.  We have seen this description of the problems of newly found freedom for Zimbabwe in several places.  Here it comes from Neo-neocon:

“In the past we could never criticize the president,” said Felex Share, a political reporter, in the hours before Mugabe’s resignation. “Right now, we can touch anything.”

How will Zimbabwe deal with its opportunity?  What will the world do?  A better question is: What can the world do?  Answer: It can’t do much compared to Zimbabwe because only they can change the culture of corruption and so on that is causing the problem.

It is hard to change as the quote says and Douglas North described more generally.  Cambodia is in the news and we use it as an example.  It was hell on earth during the Khmer Rouge regime in the late 70s.  It is better now but it still only scores 59.5 from Heritage which is still just in the mostly unfree category while Freedom House scores them at 31 and categorizes them as unfree.  Much of Eastern Europe did much better after the fall of Communism but they were not in the Cambodia/Zimbabwe category before freedom returned and they had a capitalistic past to return to.  They also had freedom next door (or reunification for East and West Germany) and that helped too.

We hope that Zimbabwe propers.  We know that some critical elements like rule of law and the basic elements of capitalism are necessary for improvement but the citizens of Zimbabwe need to choose the path themselves because that is the only way to get them to follow it.  We hope you choose capitalism and hope the world makes it easy to do so.

We hope there will be opportunities to remediate additional basket cases like (but not limited to) Venezuela, Cuba, and North Korea in the near future.  Perhaps we can learn something in Zimbabwe that will help us and them.

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Good Luck Zimbabwe

It appears that Zimbabwe has ousted the tyrant Robert Mugabe and his first lady Grace who has ruled and ruined the country over the last 37 years.  Right now Zimbabwe ranks 175 out of 180 countries on Heritage’s Index of Economic Freedom.  Here is a quote from Heritage:

Zimbabwe’s economy is characterized by instability and volatility, both of which are hallmarks of excessive government interference and mismanagement. Massive corruption and disastrous economic policies have plunged Zimbabwe into poverty. The government’s near bankruptcy has triggered large protests over unpaid civil service wages and a continuing economic crisis.

We wish Zimbabwe well.  We recognize how difficult it will be to make headway after 37 years of misrule. If they are reading we want to remind them that capitalism works and socialism doesn’t.  As evidence, three of the five countries below them are Venezuela, Cuba, and North Korea.  Good luck.

Reviving An Old Slur

The “news” industry has rediscovered an old slur: Trickle-Down Economics (TDE).  Catherine Rampell is on the editorial page

Sidebar: We know we made fun of Kevin Williamson for stooping to take on Catherine but she is just part of this post.

She is saying things like this:

Of course, Republican lawmakers and administration officials promise that these corporate giveaways will really, truly, honest-to-goodness primarily benefit us regular humans, especially humans in the middle class.

That’s because, they claim, corporate tax cuts will unleash a wave of business investment and therefore economic growth, most of which will trickle down to the little people-people.

Well, heroes one thing Kevin Hassett, The Donald’s chair of the Council of Economic Advisors, said (from Larry Kudlow):

“Economists who have studied the effects of taxes over time have discovered a consensus,” he said. “Lower marginal tax rates and a broader base increase the rate of economic growth and well-being.”

Here is Kevin on CNBC:

The new report from Hassett, out Monday morning, projects that reducing the corporate tax rate to 20 percent will result in a windfall for U.S. workers. He predicted average U.S. household income would increase at least $4,000 a year but could rise as much as $9,000 annually.

It is an interesting question of the incidence of corporate taxes.  What percentage falls on owners and workers?  Catherine is suggesting that 100 percent falls on owners.  That seems unlikely.  It seems even more unlikely that the owners will decide to put all that money in their mattresses.

Taking up almost all of the above the fold back page of the 11/18 La Crosse Tribune  is an associated press (AP) story (yes it is an editorial pretending it is a news story) that we can’t find on the Internet.  The headline is: Giving Trickle-Down Another Try.  Here the AP is going for a triple slur.  They get Reagan, Trump, economics all in one headline.  It gives the Tax Policy Center the highly coveted “nonpartisan” designation.  [Perhaps they are just wrong and not partisan.] It blames the W’s 2001-3 tax cuts for the Great Recession and notes that W’s expansion was one of the weakest.  Hmmm, which President, we wonder, had the weakest?

If you would like a more detailed discussion of the slur check out Thomas Sowell from 2012.

Catherine and the AP seem desperate to make slurs and throw stuff against the wall and hope that something sticks.  To get the success of the Reagan tax cuts from The Donald’s tax cuts we need to couple it with deregulation and good central banking.  There seems to be good news on deregulation.  The Donald doesn’t fill us with confidence and we worry about trade but he is our best chance.

 

What Is Audacious Tax Reform?

David M. Snick at the WSJ suggests we should apply the Warren Miller standard, go big or go home, to GOP tax proposals.  In David’s word, proposals should be audacious.  We are not convinced but here is our plan to meet that standard:

The Graetz Plan to reduce payroll and income taxes while adding VAT plus
Eliminate tariffs, death tax, corporate tax and gas tax and replace with carbon tax.

David is afraid that the current political situation will lead to

Fearing this outcome, Republican leaders are being tempted to play small ball. They might suggest modestly lowering the corporate tax rate. They might propose allowing full expensing of business investment, to be scaled back after several years. To help the middle class? They’ll throw in a modest hike to the standard deduction. Anything to get something done.

Not as audacious as our proposal and not our favorite choices but we would be delighted.  David thinks it is small ball.  What does he suggest?

Republicans shouldn’t play small ball. Their goal should be a tax-reform plan that will create robust economic growth, which in turn will help heal a bitterly divided nation.

Yup, we are on board for robust economic growth.  The key to robust economic growth is productivity.  So what does David suggest?

 At minimum, the standard deduction should be tripled. But reformers also need to think creatively. Tax reform, entitlement reform and health-care reform cannot be considered in isolation. Working families need relief across the board.

So his only two suggestions are: be audacious and triple the standard deduction?  We guess.  And even David recognizes that increasing the standard deduction will have little impact on because, as he says:

People who earn less than $50,000 a year pay an average effective income-tax rate of 4.3%.

So a thousand dollars in deductions nets them $43.  Increasing the standard deduction does nothing for growth and little for low income folks.  As David says and everyone recognizes, payroll tax is a bigger deal than income tax for folks in the lower quintiles of income.  See the Graetz Plan for one possible idea.

Then David invokes Reagan to suggest we favor Main Street over Wall Street.  We don’t know what David means by that as applied to tax policy.  We do know that Reagan understood that incentives matter and fought against those that denigrated his program as “trickle down economics“.  Sending a check to folks is the opposite of supporting robust economic growth.  Better incentives are the way to do that.  Substantially reducing or eliminating the corporate tax is the best way to support robust economic growth.  We are not sure if it qualifies as audacious.

Capital Investment And Growth

Recently we were discussing Reihan’s assertion (look it up it is really recent) that we should go for immediate expensing for capital expenditures rather than lowering corporate rates because capital expenditures are the path to productivity.  We were unconvinced because we see the path to productivity including software and R&D which are already immediately expensed.

Today we found a WSJ article by James Mackintosh that suggests some support for our vision.

Sidebar: We at first used argument rather than vision.  We changed it to vision because, as we said at the time, we have no data to provide.  It just makes sense to us that buildings and equipment are just part of the productivity story.  End Sidebar.

James is discussing the potential pitfalls of Amazon’s new headquarters.  As part of the background he reports:

The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.

Along the way he gives examples of overspending including the 1840 British railway boom, peak oil, dot-com, and shipping.  In addition, James notes:

Investing in growth is more plausible. Academics have shown that higher R&D spending on average is followed by better stock performance than for companies with lower R&D spending.

James is far from conclusive on the subject but we continue to think that rates are more important than immediate expensing.  One reason is the evidence he provides on capital spending not leading to stock market price increases but R&D does.  Obviously, stock market prices and productivity are only weakly connected through profits.  It is not QED but it suggests some of the problems with capital spending.  It buttresses the basic argument that rates provide the incentive for profits and solve the problem with firms moving out of the country.  We have moved a little more strongly in favor of rate reductions over immediate expensing.

Reihan’s Assertion

Reihan Salam has an interesting assertion about taxes and productivity in his Who Needs Advisory Boards in the 9/11 NRODT (The National Review magazine).  Reihan’s thoughtful article is worth a subscription.  First, let’s start with an assertion Reihan makes and provides data on:

Right now, our chief interest should be in boosting productivity growth.  From the end of the Second World War to the start of the Great Recession, real GDP per capita in the US has grown at 2.5 percent a year.  Since then it has grown at a mere 0.6 percent a year.

Yup, we totally agree.

Sidebar: Phil Gramm and Michael Solon at the WSJ frame the same issue slightly differently as bringing back three percent GDP growth.  The difference between the numbers reflects population growth.  We prefer Reihan’s formulation because it eliminates population growth.  Of course, the open-borders folks at the WSJ like it the other way. End Sidebar.

Taxation is an important issue in producing real GDP per capita growth.  Two of the possibilities are reducing the corporate tax rate or full expensing.  We prefer The Donald’s view of reducing the tax rates on all businesses not just corporations.  Full expensing mean that equipment et cetera can be expensed immediately for tax purposes rather than depreciated over time.

In discussing these options Reihan supports full expensing over lower rates because he thinks the former will be better for productivity.  In fact, he thinks the choice will have profound implications for America’s economic well-being because we should reward companies for investing in new equipment rather than reward companies for investments made ages ago.

The issue is: do depreciable assets drive productivity?  We don’t know the answer but our priors are that it does not.  We  agree that machinery is part of the equation but think that productivity is driven by R&D, software, and things that are already fully expensed.  It is a great question for grad students out there.  We would like to see the data.

Reihan brings up a problem for full expensing if we have a binary choice between full expensing and lower business tax rates.  US multinationals move operations and profits to current tax havens.  There the profits stay to avoid US taxes.  This leads to less investment in the US.  It is one of the reasons why we are for lower rates if it is a binary choice is between lower rates and full expensing.  Let the US be a tax haven.

We would like better data on what is best for productivity.  At the same time we cannot let perfect be the enemy of good.  As Reihan concludes, overhauling corporate [business] taxes could be an achievement for the ages.  We agree.  Our suggestion is to ignore personal taxes and get corporate taxes somewhere near right.

 

Bjorn For Something

Bjorn Lomborg is back at the WSJ telling us to be rational about climate change.  It is a timely message given what happens when a hurricane or two hits the US.  Steven Hayward has a great hurricane chart.  Here is an example of Bjorn being rational:

In this case, the science is unambiguous. Rising temperatures mean that malaria-carrying mosquitoes can become endemic in more places.

But looking mainly to global-warming policies means missing the most important levers of tackling malaria. Malaria is a consequence of poverty: The worst affected are those poorer households in rural areas with less ability to purchase mosquito nets and treatment. Focusing on what we could achieve in the future through global-warming policies takes our attention away from what we could accomplish today.

Do read the whole thing.  If you meet a zealot send him to see Bjorn.  Bjorn is a climate change believer but he recognizes economics too.  See his website.

One topic we like to discuss is binary choices.  You can see that Bjorn uses binary choices as argument.  As he explains in more detail after the quote above, you can fight malaria by fighting climate change or by malaria prevention.  Malaria prevention is much cheaper and much more effective at saving lives.  Bjorn doesn’t mention it but malaria prevention is much more certain to be effective and much more timely than trying to address malaria by addressing climate change.

Unfortunately, Bjorn doesn’t appear to be a US citizen so he would need to be appointed to any government post.  Fortunately, he is making sense.