I’m not a big fan of government conspiracy theories, largely because the people in Washington are too bloody incompetent to do anything effectively. Heck, sometimes they can’t even waste money properly even though they have lots of practice.

But it recently crossed my mind that maybe President Obama was born in Denmark. Not in a serious way, of course, but you’ll understand my thought process when you read this passage from a report by the government-appointed Danish Economic Council. It doesn’t mention the Laffer Curve, but the report openly states that an increase in the top tax rate would lose revenue because of changes in taxpayer behavior.

…increased taxation on high income earners in Denmark at best is revenue neutral, and may even reduce total tax revenue. This result applies whether one considers the top 10, the top 5 or the top 1 per cent income group. …Using the base estimate of the elasticity of taxable labour income of 0.2, the conclusion is thus that the existing Danish tax system implies an effective tax rate on high income earners that is above — though close to — the tax rate that generates the highest tax revenue. …As an example, the revenue effect of an increase in the marginal tax rate by 6 percentage points for high-income earners is calculated. Using the base estimate of the behavioural response to taxation, this leads to a revenue loss of about ½ billion DKK. …Overall, the scope for acquiring extra tax revenue from high income earners in Denmark is very limited.

Yet there are some politicians in Denmark who want to raise tax rates, even though the damage to the economy will be so significant that the government loses revenue!

If you’re thinking this sounds familiar, you probably remember President Obama’s infamous statement during the 2008 campaign that he wanted to raise the capital gains tax rate for reasons of “fairness” regardless of whether tax revenues decreased (if you think I’m somehow exaggerating or distorting his words, just go to the 4:20 mark of this video).

By the way, the Danish study probably understates how much revenue the government would lose. Their base estimate about the elasticity of taxable labor income (economist jargon for how sensitive labor income is to changes in tax rates) is much lower than Alan Reynolds reported in his recent Wall Street Journal column.

Rich people, unlike the rest of us, have tremendous ability to change the timing, composition, and level of their income, which is a big reason why upper-income taxpayers paid much more to the IRS in the 1980s after President Reagan slashed the top tax rate from 70 percent to 28 percent.

I’m constantly amazed — in a bad way — that politicians and bureaucrats have been so successful in resisting the insights of the Laffer Curve. The U.S. Treasury Department, for instance, is to the left of the Danish Economic Council and basically assumes that tax policy has no impact on economic performance. The same can be said about the Joint Committee on Taxation on Capitol Hill.

This has to be a case of leftist ideology trumping reality, because the evidence for the Laffer Curve is quite powerful — some of it even being produced by international bureaucracies.

• Such as this study by economists from the University of Chicago and Federal Reserve.
• Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
• Or this European Central Bank study showing substantial Laffer-Curve effects.
• Or this research from the American Enterprise Institute about the Laffer Curve for the corporate income tax.

None of this is to suggest that “all tax cuts pay for themselves.” That only happens in unusual cases where a group of taxpayers — such as wealthy entrepreneurs and investors — have considerable flexibility in their economic affairs.

In most cases, the government will collect more revenue when tax rates increase. This is because the impact of the change in the tax rate is larger than the impact of the change in taxable income.

But the real question is whether it is ever a good idea to reduce private economic output in order to give politicians more money to spend. To sensible people, that’s the most important insight of the Laffer Curve.

P.S. While this discussion has focused on the foolishness of setting tax rates so high that the government loses revenue, this does not mean politicians should seek the revenue-maximizing tax rate. The ideal point on the Laffer Curve is the growth-maximizing tax rate.

Remember back in 2009, when President Obama and his team told us that we needed to spend $800 billion on a so-called stimulus package?

The crowd in Washington was quite confident that Keynesian spending was going to save the day, even though similar efforts had failed for Hoover and Roosevelt in the 1930s, for Japan in the 1990s, and for Bush in 2008.

Nonetheless, we were assured that the stimulus was needed to keep unemployment from rising above 8 percent.

Well, that claim has turned out to be hollow. Not that we needed additional evidence, but the new numbers from the Labor Department re-confirm that the White House prediction was wildly inaccurate. The 8.2 percent unemployment rate is 2.5 percentage points above the administration’s prediction.

Defenders of the Obama administration sometimes respond by saying that the downturn was more serious than anyone predicted. That’s a legitimate point, so I don’t put too much blame on the White House for the initial spike in joblessness.

But I do blame them for the fact that the labor market has remained weak for such a long time. The chart below, which I generated this morning using the Minneapolis Fed’s interactive website, shows employment data for all the post-World War II recessions. The current business cycle is the red line. As you can see, some recessions were deeper in the beginning and some were milder. But the one thing that is unambiguous is that we’ve never had a jobs recovery as anemic as the one we’re experiencing now.

Job creation has been extraordinarily weak. Indeed, the current 8.2 percent unemployment rate understates the bad news because it doesn’t capture all the people who have given up and dropped out of the labor force.

By the way, I don’t think the so-called stimulus is the main cause of today’s poor employment data. Rather, the vast majority of that money was simply wasted.

Today’s weak job market is affected by factors such as the threat of higher taxes in 2013 (when the 2001 and 2003 tax cuts are scheduled to expire), the costly impact of Obamacare, and the harsh regulatory environment. This cartoon shows, in an amusing fashion, the effect these policies have on entrepreneurs and investors.

Postscript: Click on this link if you want to compare Obamanomics and Reaganomics. The difference is astounding.

Post-postscript: The president will probably continue to blame “headwinds” for the dismal job numbers, so this cartoon is definitely worth sharing.

Post-post-postscript: Since I’m sharing cartoons, I can’t resist recycling this classic about Keynesian stimulus.

House Oversight and Government Reform Committee chairman Darrell Issa (R‑CA) released a report today on failed mortgage company Countrywide’s use of a VIP loan program to curry favor with Beltway decision-makers. Members of Congress, congressional staffers, and cabinet officials received preferential treatment – including rate discounts and fee waivers – from Countrywide.

Countrywide was a major beneficiary of the federal government’s overzealous subsidization of housing, which contributed to the housing bubble and bust that fueled the recent economic downturn. As I explained in a Cato essay on HUD scandals, Countrywide had a close relationship with Fannie Mae, the government-sponsored mortgage giant that eventually collapsed and, along with Freddie Mac, has cost taxpayers over $180 billion and counting:

In 1999, Countrywide, which had become the nation’s largest residential housing lender, reached an exclusive agreement to sell Fannie Mae billions of dollars in mortgages in exchange for lower “guarantee” fees that Fannie charged originators when it bought their loans. The success, and then failure, of both entities became intertwined as Fannie purchased large amounts of subprime loans and securities, which allowed subprime lenders like Countrywide to grow their businesses. When the subprime market collapsed in 2007, Countrywide collapsed as well. It was bought at a fire sale price by the Bank of America, while a broken Fannie Mae was taken over by the federal government.

Fannie Mae executives received numerous VIP loans from Countrywide. According to Issa’s report, Countrywide “buttressed” Fannie’s massive lobbying efforts to stop Congress from passing legislation that would rein in the GSEs:

Countrywide gave VIP loans to congressional staff who played a role in policy discussions that affected Countrywide. Staff with connections to the committees of jurisdiction for mortgage industry issues in the House and Senate received VIP loans from Countrywide. Between 2000 and 2005, Fannie Mae and Freddie Mac committed their vast lobbying resources to defeating GSE reform legislation considered by the Senate Committee on Banking, Housing, and Urban Affairs and House Committee on Financial Services. Countrywide buttressed the efforts of Fannie’s lobbyists by connecting with key staffers through the VIP program. Documents obtained by the Committee show a staffer in the office of Senator Robert Bennett received several VIP loans. Along with Christopher Dodd, Bennett was a member of the Senate Banking Committee, the committee of jurisdiction for the Senate’s consideration of legislation affecting the GSEs and the mortgage industry. As early as 1998, House Financial Services Committee staff were receiving VIP loans from Countrywide.

Regardless of whether any of this was technically illegal, it’s another example of the privileged life enjoyed by the Beltway class. Both Republicans and Democrats benefited from the Countrywide favor factory, which is also another example of how when one clears away the fog of partisan politics, they will see that we taxpaying peons are merely pawns in a never-ending struggle for control over our lives.

With all the fiscal troubles in Greece, Spain, Ireland, Portugal, and Italy, there’s not much attention being paid to Cyprus.

But the Mediterranean island nation is a good case study illustrating the economic dangers of big government.

For all intents and purposes, Cyprus is now bankrupt, and the only question that remains to be answered is whether it will get handouts from the IMF-ECB-EC troika, handouts from Russia, or both. Here’s some of what has been reported by AP.

Cyprus’ president on Thursday defended his government’s decision to seek financial aid from the island nation’s eurozone partners while at the same time asking for a loan from Russia, insisting that the two are perfectly compatible. …Cyprus, with a population of 862,000 people, last week became the fifth country that uses the euro currency to seek a European bailout… The country is currently in talks with the so-called ‘troika’ — the body made up of officials from the European Commission, the European Central Bank and the International Monetary Fund — on how much bailout money it will need and the conditions that will come attached. Locked out of international markets because of its junk credit rating status, Cyprus is paying its bills thanks to a €2.5 billion ($3.14 billion) Russian loan that it clinched last year. But that money is expected to run out by the end of the year.

So what caused this mess? Is Cyprus merely the helpless and innocent victim of economic turmoil in nearby Greece?

That’s certainly the spin from Cypriot politicians, but the budget data shows that Cyprus is in trouble because of excessive spending. This chart, based on data from the International Monetary Fund, shows that the burden of government spending has jumped by an average of 8.3 percent annually since the mid-1990s.

My Golden Rule of fiscal policy is that government spending should grow slower than economic output. Nations that follow that rule generally enjoy good results, while nations that violate that rule inevitably get in trouble.

Interestingly, if Cypriot politicians had engaged in a very modest amount of spending restraint and limited annual budgetary increases to 3 percent, there would be a giant budget surplus today and the burden of government spending would be down to 21.4 percent of GDP, very close to the levels in the hyper-prosperous jurisdictions of Hong Kong and Singapore.

Actually, that’s not true. If the burden of government spending had grown as 3 percent instead of 8.3 percent, economic growth would have been much stronger, so GDP would have been much larger and the public sector would be an ever smaller share of economic output.

Speaking of GDP, the burden of government spending in Cyprus, measured as a share of GDP, has climbed dramatically since 1995.

A simple way to look at this data is that Cyprus used to have a Swiss-sized government and now it has a Greek-sized government. Government spending is just one of many policies that impact economic performance, but is anyone surprised that this huge increase in the size of the public sector has had a big negative impact on Cyprus?

Interestingly, if government spending had remained at 33.9 percent of GDP in Cyprus, the nation would have a big budget surplus today. Would that have required huge and savage budget cuts? Perhaps in the fantasy world of Paul Krugman, but politicians could have achieved that modest goal if they had simply limited annual spending increases to 6 percent.

But that was too “draconian” for Cypriot politicians, so they increased spending by an average of more than 8 percent each year.

What’s the moral of the story? Simply stated, the fiscal policy variable that matters most is the growth of government. Cyprus got in trouble because the burden of government grew faster than the productive sector of the economy.

That’s the disease, and deficits and debt are the symptoms of that underlying problem.

Europe’s political elite doubtlessly will push for higher taxes, but that approach — at best — simply masks the symptoms in the short run and usually exacerbates the disease in the long run.

Corporate welfare is a bipartisan problem, and it’s a problem at both the federal and state level. Yesterday, I discussed the recent demise of Obama-subsidized Abound Solar and the fact that Indiana Republicans were also involved in helping the company obtain taxpayer handouts. Adding insult to injury is another example of “crony capitalism” gone awry in Indiana.

The Indy Star recently reported on an attempt by the state’s Indiana Economic Development Corporation to pressure the city of Madison into subsidizing a manufacturing facility for a shady California businesswoman. The entire investigative report needs to be read in order to fully appreciate the incompetence displayed by the IEDC’s wannabe venture capitalists, but here are some excerpts:

Build us a 40,000-square-foot manufacturing facility, throw in some needed equipment — all for around $5 million — and we’ll create up to 200 new jobs. That was the pitch by a California businesswoman and her renewable energy company, Global Energy Solutions, to officials at the Indiana Economic Development Corp. and, ultimately, the city of Madison.

The company was searching for a site in Indiana — and the purpose of the IEDC, which reports to the Indiana secretary of commerce, is to lure jobs to Indiana and often provide incentives. IEDC officials did just that. They approved $1.5 million in tax credit and training incentives. They also began pressuring the city of Madison to act on the proposal — and quickly.

“Secretary of Commerce Dan Hasler asked me to send the following message,” an IEDC official emailed City Council President Laura Hodges. “If Madison is not going to take advantage of the job creation and investment opportunity being presented by Global Energy Solutions (and that’s OK), don’t further frustrate the company with delays. We do not want to lose this project for Indiana.”

In their rush to generate a favorable press release for Gov. Mitch Daniels, which is the IEDC’s real mission, IEDC officials apparently didn’t bother to look into the background of the character they were anxious to fork over taxpayer money to:

An Indianapolis Star investigation has uncovered numerous red flags regarding Global Energy Solutions and its president, Mynette Boykin — red flags that experts say raise questions about the IEDC’s due diligence on a project that would have cost local and regional taxpayers several million dollars:

Boykin claimed that another company of hers, Secured Capital Investment Group, would eventually commit $500,000 to the Indiana project, emails show. That company, however, forfeited its California business license in 2011 because it didn’t pay more than $40,000 in taxes.

Boykin noted in her business plan that DC Solar Solutions would be “working in collaboration” with her on the project. When The Star contacted the owners of DC Solar Solutions, they said they never agreed to work with Boykin.

Boykin filed for bankruptcy in 2005 with $1 million in debts. In April of this year, a company filed suit against her for an unpaid $100,000 loan.

The Star shared Boykin’s business plan with an industry expert, who called it “extremely amateurish” and questioned the validity and viability of the proposal.

The Star also determined that other parts of Boykin’s plan are identical to a sample business plan posted on the website bplans​.com. The sample plan was for a company that makes auto tools.

The good news is that, unlike the IEDC, the locals in Madison did some probing. As they should have given that the cost to the city would have been $4 to $5 million. When a presentation given by Boykin failed to impress Madison’s city council, it became clear that the deal was dead. That didn’t sit well with the IEDC’s representing bureaucrat:

Regardless, IEDC official Wanda Heath was there, and she addressed the council for the first time. She sounded irritated. “You could tell she wasn’t happy,” said Councilman Darrell Henderson, a Democrat.

She also made it clear that she felt that Madison council members weren’t doing their job properly. “She said, ‘You guys are moving way too slow; you’re making Madison look bad; this process should never take this long; no business is ever going to come to Madison being treated like this,’” said Councilman Rick Berry, a Republican.

“I really thought that was out of order,” another councilman, Republican Jim Lee, said. Lee told The Star that in his 12-plus years as a councilman, he had never before seen a representative from the state at an executive session. He felt like he and the other council members were being talked down to.

After leaving town, a defiant Boykin told the Star that “We will come to a different state. Probably right next to you guys.” Unfortunately, it’s not implausible that another state’s Department of Corporate Welfare will eventually come to her aid as this sort of scheming with taxpayer money is definitely not a problem that is unique to Indiana.

Solyndra received some company late last week when Abound Solar filed for bankruptcy and announced that it was shutting down operations. Abound, which received $70 million from taxpayers, is the third company backed by a Department of Energy loan program to go belly up.

According to Politico, Abound’s failure is an opportunity for Republicans to score some political points:

Thursday’s news is likely to rally Republican critics of the DOE loan program, who, citing the collapse of Solyndra, have argued that the administration is putting billions of taxpayer dollars on the line by investing in risky renewable-energy companies.

According to me, there are three reasons why Republicans would be hypocrites if they try to:

1) In 2010, Indiana Republican Gov. Mitch Daniels pledged $12 million in tax incentives for a new Abound facility in Tipton, IN. From the Indy Star:

“Abound Solar showed a lot of promise,” said Indiana Economic Development Corp. spokeswoman Katelyn Hancock, “and it is unfortunate for Hoosiers that the company’s plans in Tipton have not come to fruition.”

In Tipton, the news was disappointing, although, at this point, not so unexpected — and, unfortunately, not the first time this town about 35 miles north of Indianapolis has been dealt such a blow. The German auto parts maker Getrag also rolled into town with promises of plans to employ 1,400 people in the same $530 million manufacturing plant, about four miles west of downtown Tipton.

But after a financial dispute with Chrysler, Getrag backed out. So in the summer of 2010, state officials announced Abound’s impending arrival as a way to make good use of what had been a bad situation.

“While the loss of Getrag was disappointing after so much work, the region will now add 850 new jobs,” Gov. Mitch Daniels said in a statement on July 3, 2010. “What a great way to celebrate Independence Day.” (Daniels’ office on Thursday deferred comment to the IEDC, where he is chairman of the board.)

2) Four Republican members of Congress from Indiana pestered the Department of Energy to give Abound a federal handout. From the New York Times:

The Energy Department released letters it received in 2009 from members of Congress from Colorado and Indiana urging it to grant the loan guarantee. Four Indiana Republicans — Senator Richard G. Lugar and Representatives Dan Burton, Mike Pence and Mark Souder — were among the signers, as were Indiana’s Democratic senator, Evan Bayh, and several Colorado Democrats.

3) The Republican-controlled House of Representatives recently had a chance to shut down the Department of Energy loan program that subsidized Solyndra and Abound. The majority of House Republicans voted to keep it alive.

[See this Cato essay for more on Department of Energy’s poor track record when it comes to energy subsidies.]

Portugal is “on edge of abyss” reads the headline of a Reuters story last week. Despite receiving a $104.5 billion bailout last year from the EU and the IMF, the country’s economy continues to shrink as unemployment soars and uncertainty about its permanence in the euro remains steady. Just like Greece, Portugal might need a second bailout soon.

As has been the case elsewhere, some pundits claim that austerity is in part responsible for Portugal’s current economic malaise. Even the IMF has said that deficit targeting “may not be the best policy” if the country falls deeper into recession. The question then is what we understand by “austerity.”

First, it is important to point out that Portugal got in trouble for having a government that spent too much over a long time. Back in 2001 the country was the first to breach the 3% of GDP deficit ceiling agreed to as part of the Stability and Growth Pact. Since then, it ran significant budget deficits, and in 2009, as a reaction to the global downturn, Portugal implemented a massive stimulus package that shot its deficit to 9.4% of GDP. (It is worth noting that the stimulus didn’t work, unemployment went up from 9.5% in 2009 to 14.9% now).

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Spending in nominal terms increased on average by 5.6% every year from 2000 to 2010. As we can see in the graph, it accelerated in 2009 as the Socialist government of José Socrates tried to fend off the global recession with a Keynesian-style stimulus. It was not until 2011 that the new government of Pedro Passos Coelho began implementing spending cuts, which reduced overall spending by 5.5% from the previous year. Still, government spending in 2011 was at the same level of 2009. In real terms, there has been no decline in spending levels.

As a percentage of the size of the economy, total government spending in Portugal in 2011 stood at 45.2% of GDP, just a whisker down from its 2009 peak of 45.8%.

Early on Socrates tried to tame the deficit with tax increases. He raised the VAT rate from 19% to 21%. As part of last year’s the bailout agreement, Passos Coelho raised the VAT further to 23%, one of the highest rates in Europe. His government also introduced changes in the income tax: some rebates were scrapped; a surtax of 1.5% and 2.5% was introduced for middle and high income earners, respectively. A special corporate tax rate of 12.5% for small businesses was raised to 20%, and a surtax of 3% and 5% was created for medium and big companies, respectively. There were also tax increases on alcohol, fuel and tobacco.

The evidence suggests that even though in the last year there have been measurable spending cuts in Portugal (and I’m sure that people there are feeling the pinch from those cuts), tax increases constitute a significant chunk of the austerity policies implemented in that country.