Economics

Center on Wealth & Poverty

Rewards of Economic Freedom

If you had to list 10 freedoms that are important to you from your most to your least important, how would you rank them? You might ask your family and friends the same question, and I expect you will find the lists and priorities quite different.Those who work in the media are likely to rank freedom of the press near Read More ›

Who is Stuck on Stupid?

Two adjoining building lots with beautiful views of the Gulf of Mexico were for sale. One was purchased by Mr. Charles Ant, an engineer, and the other was purchased by Mr. Teddy Grasshopper, a lawyer. Each lot was 6 feet above sea level. Scientists had calculated there was a 10 percent chance of a 5-foot storm surge, a 5 percent Read More ›

Price-Gouging?

If you bought a home 10 years ago for $100,000 and just sold it for $300,000, have you engaged in price gouging? Most people would say “no,” provided there were willing buyers and sellers of both sides of the transaction merely responding to the market at the time.
As a result of hurricanes Katrina and Rita, some politicians have demanded prosecution of “price gougers.” In many states, like Florida, “price gouging” is illegal. The Florida statutes say, “It is illegal to charge unconscionable prices for goods or services following a declared state of emergency.”

Hmmm, I know what the law means when says burglary or murder are illegal, but an “unconscionable price”?

So I looked in Webster’s Dictionary, and found unconscionable is defined as “excessive; extortionate” and gouge is defined as “to extort from or to swindle.”

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Feeding the kitty for Katrina

Assume you were a regular blood donor but had an accident in which you lost a considerable amount of blood. Do you think you should increase or decrease the size and frequency of your blood donations until you recover?

Though most politicians are smart enough to answer, “decrease the blood donations,” many seem not smart enough to understand that, when you take an economic hit, you don’t want to unnecessarily add burdens to the economy. I refer to the call from some politicians to increase taxes or not extend President Bush’s tax cuts to “pay” for New Orleans. (Note: Not making the tax cuts permanent is the same as a tax increase because tax rates therefore would be higher than now.)

The tax increase proponents seemingly cannot grasp that taxes reduce our economic vitality. When taxes rise, the economy slows. When taxes are reduced, job creation and economic growth accelerate. Those who do not understand the role of incentives are always surprised when tax revenues increase, as they did after the Reagan and recent Bush tax cuts, and fall or stagnate when tax rates increase. (For instance, the capital gains tax now — at a maximum 15 percent — produces many times the tax revenue it did when the rate was 40 percent, even after adjusting for inflation and the economy’s size.)

Raising tax rates can increase government revenue over the long run, if the rate is low enough to only have a minimal effect on incentives to work, save and invest. Unfortunately, almost all major U.S. taxes are at rates where the disincentive effects of any rate increase eventually swamp any short-term revenue gains. Almost any tax rate increase can augment revenues in the very short run (the next week or month), before people and businesses have time to adjust their behavior, which most often result in lower long-term tax revenue.

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Britain Slowly Sinking

From the time of the Thatcher reforms in the early 1980s, Britain has been the star economic performer among the major European nations. The British went from having the lowest per capita income of the European big four (Germany, France, Italy and Britain) to having the highest one, but now there are signs the economic sickness in “old Europe” is beginning to infect the British.

The British economy had been growing an average of almost 3 percent yearly for the last two decades, which is quite respectable, given that French and German economies have grown much more slowly. Over the same period, the U.S. grew at an average rate of almost 4 percent, far higher than any of the major European economies.

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Lessons of Smaller States

REYKJAVIK, Iceland.

Why is this cold, rainy land with its stark volcanic landscape, without much in the way of natural resources, one of the wealthiest places on Earth?

Small states, in the past, were most often poorer on a per capital income basis than large states, but in the last half-century many have become much richer then their large neighbors. Among the wealthiest places on the planet, in addition to the United States, we now find Luxembourg, Hong Kong, Denmark and Ireland, none with many natural resources.

In a just-concluded meeting of the Mont Pelerin Society in Iceland, some leaders of small states that have developed very successful economies met with some of the worlds’ leading free-market economists and policy institute professionals, partly to discuss what lessons the rest of the world can learn from these small states. Mart Laar, former prime minister of Estonia, was the principle architect of his country’s remarkable economic transformation from impoverished vassal of the Soviet Union into one of the world’s freest (No. 4 in the world according to the 2005 Index of Economic Freedom) and most dynamic economies. Mr. Laar said he succeeded by following the teachings of Nobel Prize-winning economists F.A. Hayek and Milton Friedman.

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Jude Wanniski, 1936-2005

As Jude Wanniski knew, and expounded, “Economies are driven not by the dollars in people’s pockets but by the ideas in their heads.” By that measure, the U.S. economy still rides high on Jude’s ideas and Jude — who for many years wrote editorials on economics for this newspaper — ranks high on the lists of the world’s richest men. As a prime legatee of this wealth, I find it grows ever faster with the passing years. As countries from Russia to New Zealand follow the lead of his low-tax vision, I cherish more and more my winnings and my memories of him.

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Spooked by the Obvious

If you suddenly learned the government had reduced taxes on interest, dividends and capital gains, would you save and invest more or less? Most people would say more, because saving and investing would be more profitable with lower tax rates. As obvious as this seems, much of the Washington establishment is shocked the deficit is falling rapidly due to surging tax revenues, despite the “massive” Bush tax cuts.

The Washington establishment was shocked back in the late 1970s when, as a result of the capital-gains rate tax cut, tax revenues went up rather than down. They were shocked again in the mid-1980s when revenues surged despite the “massive” Reagan tax rate cuts. They were again shocked in the early 1990s when new tax revenues did not pour in after the Bush 41 tax rate increase. In the mid-1990s, they were also shocked when the Republican Congress forced President Clinton to cut the capital-gains tax rate, and revenues soared, leading to an unanticipated budget surplus.

Many in the political and bureaucratic class, not only in Washington, but in most world governments, are rather simple-minded on economics. They tend to think if they just increase tax rates they will get more money to spend. They rarely think about the behavioral responses of people and companies to changes in tax rates, and how the sum of these individual behavioral responses will affect the whole economy.

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Who’s Afraid of Scientific Methods?

People who consider themselves very rational argue that most disputes about what is true and what is not can be settled by calmly looking at the evidence and letting it guide them to the proper conclusion. However, many who claim to be adherents of the scientific method seem to lose their “scientific objectivity” in some of the great debates of the day.

The global warming debate is a glaring example of where many enthusiasts have lost all sense of the scientific method in reaching their conclusions. Some European leaders have even implied President Bush and Americans are stupid for not embracing both the theology of global warming and their policy solutions, all designed to enhance state power.

To rationally debate the issue, we should start by being modest about what we do and do not know. Arguably, it seems the globe has been very slowly warming in the last few decades. But remember: Only a couple of decades ago, many leading scientists — like Carl Sagan — warned us about global cooling.

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Why Do We Regulate?

Should government regulate business? I expect most people would answer “yes” to that question, but if you ask them why, I expect these same people will have a harder time giving an answer that makes sense.

Some may say, “in order to prevent businesses from engaging in fraud or misrepresentation.” But we do not need regulation to do that; there are already many federal, state and local statutes against fraud and misrepresentation, and businesses that behave badly can be dealt with through normal civil and criminal legal means. Others who are a bit more sophisticated might argue that we need to regulate business in order to protect people from “market failures.” However, the empirical evidence is that there are far fewer “market failures” than commonly imagined, and many of these so-called market failures are actually a result of misguided government policy or regulation.

For a minute, try to imagine a world without government regulation, but where all of the standard laws against theft, fraud, misrepresentation and bodily injury still exist. Under such a scenario, what do you think would happen if we had no food and drug administration to tell us what was safe to consume? No financial regulators to protect us from bank failures and financial scams? No health and safety regulators to protect us from unsafe products? Would we all die? Not likely, because the judicial system, coupled with private standard setting associations, would likely give us an equal, if not a higher, level of protection than we have now.

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