One almost feels sorry for Treasury Secretary Tim Geithner.

He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).

Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.

And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.“I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”

[caption align=right]

…at birth?[/caption]

[caption align=right]Separated…[/caption]

This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.

But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.

The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which — as shown in this chart — are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.

Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense — much as American politicians were lying (or bamboozled) when they supported TARP.

It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.

But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.

Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

The Wall Street Journal reports on rising state and federal unemployment taxes at a time when unemployment remains high. Keynesian economists keep telling us that unemployment benefits have a stimulative “multiplier effect” on the economy. Unfortunately, that sticky little problem of the government having to suck resources out of the economy to pay for this alleged stimulus keeps getting in the way:

The higher tax tab could discourage hiring. ‘It’s just one more cost to add,’ said Douglas Devnew, vice president for finance and administration at Trumpf Inc., a Farmington, Conn., manufacturer. ‘Companies like ours are going to think that much harder if we need more folks.’

Yes, that’s only an anecdote. But I find anecdotes to be considerably more indicative of reality than, say, the fancy economic models favored by the White House that continue to erroneously predict growth and reduced unemployment if the government spends more of the private sector’s money.

If anecdotes aren’t your thing, check out this excellent Cato essay on the unemployment insurance system. Critics of a government administered unemployment insurance system are often accused of being callous toward the plight of those seeking work. But the essay’s examination of the history of unemployment insurance, and the ill-effects and failures of the government-run system indicate that it’s the supporters of the government-run system who should be on the defensive.

Former OMB Director Peter Orszag has written a provocative New Republic essay calling for less democracy. Most people, myself included, would be inclined to dismiss his effort as an obviously self-serving call for rule by progressive experts. I believe that temptation should be put aside. After all, in 1789 and afterwards, the American people have not created a democracy but rather a republic. So we should address Orszag’s arguments on their merits while asking whether he is proposing a “Republican remedy for the diseases most incident to Republican Government.”

A bit of historical context offers a way into Orszag’s argument. Progressives did favor expert influence over government, but they also plumped for direct democracy; the referendum and the initiative were progressive reforms. They believed direct rule of the people would bypass corrupt and “reactionary” state legislatures who refused to enact progressive legislation. Orszag does not propose reforms introducing direct rule; he is thus left with the expert aspect of the progressive legacy. Why not more democracy?

The people are dysfunctional. Orszag reasons that legislative gridlock does harm to the nation and will do more in the future, that gridlock is rooted in polarization of the masses and not just of elites, and that polarization arises from people living and interacting only with people who share their views. Representatives in DC reflect these divisions. The problem, according to Orszag, is not in our agents but in ourselves. In response, we should sever the link between policymaking and the problematic people.

You need not equate the voice of the people with the voice of God to find Orszag’s analysis unconvincing. Is it really so surprising that the people are so polarized? For decades, we have lived under a redistributive government. Your gain is my loss and vice-versa. The politics of redistribution also foster a rhetoric of blame and contempt. You are the cause of my problems and vice-versa. In the zero sum struggles around the redistributive state, people begin to see each other as friend and enemy. Big Government leads to Big Polarization.

Orszag offers three general ways around the people and their representatives: automatic policies, backstop rules (like the sequester governing the supercommittee), and institutions more independent of the dysfunctional people. I focus on the last of these.

Is the independent judgment of experts what we need? Policies are means to ends, and the latter are tied to values. For example, Cato experts often argue for a policy of deregulation to limit government and thereby increase individual liberty. Experts have special knowledge about means not ends, about the effects of policies and not about the worth of values.

However, Orszag might say, Americans agree about ends/​values. Everyone wants more, not less, economic growth. Politicians (and their constituents) bicker over the policies needed to bring growth; in contrast, experts agree about the effects of policies. If we turn over policy to experts, we will get policies that achieve the ends everyone wants. Is this true? Consider for a moment the expert debates about the stimulus, the most recent policy designed to renew growth. Would you say those debates reflect expert agreement or a polarization not unlike what Orszag ascribes to the public?

Orszag’s case for more independent institutions cites policies that involve ends as much as means, values as much as facts. Tax policy might be given to a board of independent experts similar to the Federal Reserve. But making tax policy requires making tradeoffs between liberty and equality (among other values). Why would a board of experts have special knowledge about the proper tradeoff between those two cardinal values? In fact, mainstream economics assumes such values and their proper relationship cannot be known. Hence, economists begin with exogenous preferences which are not a matter of knowledge but rather, of will. The most important decisions about tax policy are simply not within the competence of experts.

You might think that Orszag takes as his slogan “taxation without representation” but that would be unfair. He does allow that the legislature could overrule his various independent institutions and their judgments about ends and means. But the experts would set the agenda, and political scientists have found that those who set the agenda usually win the policy battle. So actually Orszag is proposing “taxation (usually) without representation.” The original Tea Party Patriots of 1773 might wonder: has it really come to this?

Orszag does have a point. Americans do deeply disagree about public ends and means and thus about the size and scope of government. Why must all those disagreements be resolved in Washington? Must we always be at one another’s throats? Actually, no. The same political tradition that promised “no taxation without representation” also endorsed a division of power between national and subnational governments. Federalism offers an chance for people who deeply disagree about values to live at some distance politically from one another. We are too centralized and too much a nation for the people that we have become.

But we can and should deal with this challenge by drawing on, not repudiating, American political culture.

Update: I did a podcast on this topic with Cato’s Caleb Brown.

Whether I’m criticizing Warren Buffett’s innumeracy or explaining how to identify illegitimate loopholes, I frequently write about the perverse impact of double taxation.

By this, I mean the tendency of politicians to impose multiple layers of taxation on income that is saved and invested. Examples of this self-destructive practice include the death tax, the capital gains tax, and the second layer of tax of dividends.

Double taxation is particularly foolish since every economic theory—including socialism and Marxism—agrees that capital formation is necessary for long-run growth and higher living standards.

Yet even though this is a critically important issue, I’ve never been satisfied with the way I explain the topic. But perhaps this flowchart makes everything easier to understand.

There are a lot of boxes, so it’s not a simple flowchart, but the underlying message hopefully is very clear.

1. We earn income.
2. We then pay tax on that income.
3. We then either consume our after-tax income, or we save and invest it.
4. If we consume our after-tax income, the government largely leaves us alone.
5. If we save and invest our after-tax income, a single dollar of income can be taxed as many as four different times.

You don’t have to be a wild-eyed supply-side economist to conclude that this heavy bias against saving and investment is not a good idea for America’s long-run prosperity.

There are various ways to protect yourself from double taxation, particularly by using IRAs and 401(k)s. You lock up your capital until retirement, but it is protected from double taxation.

Also, you cannot accumulate enough savings and investment to be subject to the death tax, though that’s not exactly aiming high.

But these strategies—and others—are not economically optimal. There should not be a tax bias against capital formation.

Too bad we can’t be more like Hong Kong, which has eliminated all extra layers of taxation.

That’s the benefit of real tax reform such as a flat tax. You get a low tax rate and you get rid of corrupt loopholes, but you also get rid of double taxation so that the IRS only gets one bite at the apple.

The Institute for Research on the Economics of Taxation’s Michael Schuyler has written an interesting paper that compares the federal government’s bleak financial situation to that of the U.S. Postal Service. The entire paper is a good read, but here are a few key points:

• Congress is helping to run the USPS into the ground (see here for example). Congress is helping to run the government’s finances into the ground. We can’t separate Congress from the federal budget, but putting more space between Congress and the USPS could – and should – be done.
• The USPS is broke and it’s about to max out its $15 billion line of credit with the U.S. Treasury. Yet, Schuyler says that “the Postal Service is a model of financial rectitude compared to the overall federal government.” Yikes.
• The federal government gets the bulk of its revenues from taxation, which it extracts from citizens through force. The USPS depends on revenues generated from the sale of products and services. Thus, the USPS is on a “tighter leash.” As a result, the USPS has had to make more of an effort than the federal government to cut costs. Tightening the federal government’s “leash” by imposing restrictions on its ability to spend and borrow could help.
• The federal government’s “gaping fiscal hole” makes it harder to justify a bailout for the USPS. Schuyler says that Congress should instead allow the USPS “greater operational flexibility to lower costs in ways that would bring large savings relative to the inconvenience for mail users.”

See this Cato essay for more on the U.S. Postal Service.

Over at Downsizing the Federal Government, we focused on the following issues this past week:

• Interesting thoughts on reforming the U.S. Postal Service.
• If our bloated federal government is ever to be reined in, a return to fiscal federalism is a must. And if the states are to get their financial houses in order, state policymakers can’t be allowed to believe that a federal policy of “too big to fail” applies to them.
• Chris Edwards says that Warren Buffet’s tax story is bogus.
• Unless spending and deficits are cut, the United States is headed for economic ruin as growth falls and rising debt threatens further financial crises.
• There’s no point getting worked up about government waste if you’re also getting checks from the U.S. Treasury or demanding that the government solve society’s problems.

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

An audit released this week by the Department of Justice’s inspector general details wasteful and extravagant spending at DOJ conferences under both the Bush and Obama administrations. Stories about waste in government programs are as common as ants, but this one appears to have struck a nerve across the country—perhaps because the president is trying to convince us that Washington needs more money.

Yesterday I discussed the issue of $16 muffins at DOJ conferences on radio stations from California to New York, with points in between. The most common question I received was, “How can wasteful spending be stopped?” As I told listeners, the only way to stop it is to not give the offending agency or program any more money. Otherwise, government employees will continue wasting money for the simple reason that it isn’t their money. And because the government isn’t a business, politicians and government employees don’t have to be concerned with improving the bottom line. In short, there’s little incentive for the government not to waste money.

Politicians typically respond to stories about government waste by condemning the situation and promising to fix it. Government waste actually creates a good opportunity for politicians to feign concern for taxpayers. Reason’s Matt Welch explains:

The nation’s current and future deficit is driven overwhelmingly by health care, military and retirement spending, each of which involve ever-increasing promises that have proved politically career-threatening to scale back.

That’s why politicians prefer instead to talk about $16 muffins and $600 toilet seats—it’s the least expensive way to simulate fiscal responsibility. The boy who cries muffin while signing onto every new major entitlement and military adventure is not in any position to deliver lectures about tax-dollar stewardship. And never forget that the spending frenzy is distinctly bipartisan: Even alleged fiscal radical Rep. Paul Ryan, R‑Wisconsin, voted for the Troubled Assets Relief Program, the Iraq War and Medicare Part D.

Sadly, a lot of Americans buy it, which is why politicians keep selling it. As I’ve previously discussed, a majority of Americans erroneously believe that the federal budget’s imbalances can be fixed by just eliminating waste, fraud, and abuse. That’s why I made it a point to remind listeners that there’s no point getting worked up about government waste if they’re also getting checks from the U.S. Treasury or demanding that the government solve society’s problems. As Welch puts it, “As long as we believe that government is good at creating jobs and stimulating the economy, we’re going to be stuffed by much more than just $16 muffins.”