It is hard to imagine, but some people actually thought it was perfectly reasonable (and Constitutional) for the government to dictate to business what they should charge for their products and dictate to workers what their time was worth. I was working at J.C. Penney in Sacramento and going to grad school at night, but I took time out to send “The Case against Wage and Price Controls” to National Review in July. It became the cover story on September 24, and Bill Buckley later hired me over lunch in San Francisco. If anyone is interested, it’s available at SCRIBD here.
Cato at Liberty
Cato at Liberty
Email Signup
Sign up to have blog posts delivered straight to your inbox!
Topics
Tax and Budget Policy
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- If pumping up Keynesian “aggregate demand” hasn’t worked, what can policymakers do? They should focus on microeconomic reforms to spur growth over the long run.
- If the U.S. Postal Service is to continue operating like a business instead of becoming just another taxpayer-funded bureaucracy, Congress is going to have to hand the reins over to the private sector.
- Those of us who desire the limited federal government that Madison envisioned are often accused of being uncaring about those who are in need. In fact, the opposite is the truth: we recognize that government programs are wasteful, ineffective, and counterproductive to the aims that they are trying to achieve.
- More Medicare fraud. In other news, the sun came up this morning.
- An essay on terminating the Small Business Administration has been added to the Downsizing website.
Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.
Related Tags
‘Corporations Are [Made of] People’
Mitt Romney’s explanation of why he’s against raising taxes on corporations — indeed, America already has some of the highest corporate tax rates in the developed world — at the Iowa State Fair was a bit awkward but not wholly incorrect. Reason’s Katherine Mangu-Ward has a good post with video and transcript, but here’s the salient bit:
ROMNEY: We have to make sure that the promises we make — and Social Security, Medicaid, and Medicare — are promises we can keep. And there are various ways of doing that. One is, we could raise taxes on people.
AUDIENCE MEMBER: Corporations!
ROMNEY: Corporations are people, my friend. We can raise taxes on—
AUDIENCE MEMBER: No, they’re not!
ROMNEY: Of course they are. Everything corporations earn also goes to people.
AUDIENCE: [LAUGHTER]
ROMNEY: Where do you think it goes?
AUDIENCE MEMBER: It goes into their pockets!
ROMNEY: Whose pockets? Whose pockets? People’s pockets! Human beings, my friend. So number one, you can raise taxes. That’s not the approach that I would take.
Now, obviously, Romney is not saying that corporations are living, breathing beings with rights to abortion (or not, or depending on the stage of development of the fetal/baby corporations) and marriage, who are subject to Obamacare’s individual mandate (or even Romneycare’s for Massachusetts corporations), can be put to death if they murder someone, and so forth. He means that corporate money always comes from, flows through, and ends up in human hands. It cannot be otherwise: we are the only beings/entities/“things” on the planet that deal in money. Not even the honey badger does that.
Easy Money from the Federal Reserve Is Not the Solution for America’s Economic Problems
Allen Meltzer, an economist at Carnegie Mellon University, writes today in the Wall Street Journal about the Fed’s worrisome announcement that it will continue the easy-money policy of artificially low interest rates.
Professor Meltzer’s key point (at least to me) is that the economy is weak because of too much government intervention and too much federal spending, and you don’t solve those problems with a loose-money policy – especially since banks already are sitting on $1.6 trillion of excess reserves. (Why lend money when the economy is weak and you may not get repaid?)
Meltzer then outlines some of the reforms that would boost growth, all of which are desirable, albeit a bit tame for my tastes:
[T]he United States does not have the kind of problems that printing more money will cure. Banks currently hold more than $1.6 trillion of idle reserves at the Fed. Banks can use those idle reserves to create enormous amounts of money. Interest rates on federal funds remain near zero. Longer-term interest rates on Treasurys are at record lows. What reason can there be for adding more excess reserves? The main effect would be a further devaluation of the dollar against competing currencies and gold, followed by a rise in the price of oil and other imports. …Money growth (M2) reached 10% for the past six months, presaging more inflation ahead.
…What we need most is confidence in our future. That calls for:
- Reducing corporate tax rates permanently to encourage investment (paid for by closing loopholes).
- Agreeing on long-term reductions in entitlement spending.
- A five-year moratorium on new regulations affecting energy, environment, health and finance.
- An explicit inflation target between zero and 2% to force the Fed to pay more attention to the medium term and to increase public confidence that we will not experience runaway inflation.
The president is wrong to pose the issue as more taxes for millionaires to pay for more redistribution now. That path leads to future crises because higher taxes support the low productivity growth of the welfare state, delay the transition to export-led growth, and do not reduce future budget liabilities enough.
Meltzer’s final point about the futility of class-warfare taxes is very important. He doesn’t use the term, but he’s making a Laffer Curve argument. Simply stated, if punitive tax rates cause investors, entrepreneurs, and small business owners to earn/declare less taxable income, then the government won’t collect as much money as predicted by the Joint Committee on Taxation’s simplistic models.
Of course, Obama said in 2008 than he wanted high tax rates for reasons of “fairness,” even if such policies didn’t lead to more tax revenue. That destructive mentality probably helps explain why not only banks, but also other companies, are sitting on cash and afraid to make significant investments.
But if you really want to understand how Obama’s policies are causing “regime uncertainty,” this cartoon is spot on.
Related Tags
Terminating the Small Business Administration
An essay on terminating the Small Business Administration has been added to Cato’s Downsizing Government website.
Some highlights:
- Established in 1953, the agency had earned the nickname “Small Scandal Administration” by the mid-70s. President Reagan’s budget director, David Stockman, called it a “billion dollar waste—a rat hole” that benefited few small businesses, while distorting credit markets. Unfortunately, both Republicans and Democrats have continued to support it.
- The SBA guarantees loans issued by private lenders for up to 85 percent of losses in the event that loan recipients default. As a result of the guarantee, lenders are more willing to lend money to riskier applicants because the SBA is ultimately responsible for the bulk of any losses. The SBA is supposed to charge fees sufficient to require no annual appropriations from Congress. However, that has not been the case, and its lending programs continue to rely on taxpayer subsidies.
- Policymakers argue that market-driven lending denies credit to worthy small businesses, and so the Small Business Administration must correct this alleged “market failure.” The essay explains that there is no “market failure” to justify the SBA’s lending programs.
- Only small shares of small businesses get started with a loan from a commercial lender. Furthermore, loans issued by commercial lenders that are backed by the SBA represent only a very small share of total commercial loans to small businesses.
- The SBA’s lending programs benefit a powerful special interest group: the banking industry. The banking industry was originally opposed to the creation of the SBA on the grounds that the federal government should not be involved in commercial lending. However, when the SBA switched from direct lending to backing loans issued by private lenders, the banking industry became a key supporter of the SBA.
Related Tags
English Riots, Moral Relativism, Gun Control, and the Welfare State
I wrote earlier this year about the connection between a morally corrupt welfare state and the riots in the United Kingdom.
But what’s happening now is not just some left-wing punks engaging in political street theater. Instead, the UK is dealing with a bigger problem of societal decay caused in part by a government’s failure to fulfill one of its few legitimate functions: protection of property.
To make matters worse, the political class has disarmed law-abiding people, thus exacerbating the risks. These two photos are a pretty good summary of what this means. On the left, we have Korean entrepreneurs using guns to defend themselves from murdering thugs during the 1992 LA riots. On the right, we have Turkish entrepreneurs reduced to using their fists (and some hidden knives, I hope) to protect themselves in London.
![Media Name: 58852252.jpg](/sites/cato.org/files/styles/pubs_2x/public/download-remote-images/danieljmitchell.files.wordpress.com/242824454758/58852252.jpg?itok=G47n82j_)
![Media Name: turkish-dalston_1967918c.jpg](/sites/cato.org/files/styles/pubs_2x/public/download-remote-images/i.telegraph.co.uk/279299000340/turkish-dalston_1967918c.jpg?itok=376pZzJC)
Which group do you think has a better chance of surviving when things spiral out of control? When the welfare state collapses, will the Koreans or the Turks be in a better position to protect themselves? And what does it say about the morality of a political class that wants innocent people to be vulnerable when bad government policies lead to chaos?
Speaking of chaos, let’s look at the “root causes” of the riots and looting in the United Kingdom.
Allister Heath is the editor of City A.M. in London, and normally I follow his economic insights, but his analysis of the turmoil is superb as well. Here’s an excerpt. But as Instapundit likes to say, read the whole article.
Debilitating, widespread fear. The country held to ransom by feckless youths. Thousands of shocked Londoners cowering in their homes, with many shops, banks and offices shutting early. …It no longer feels as if we live in a civilised country. The cause of the riots is the looters; opportunistic, greedy, arrogant and amoral young criminals who believe that they have the right to steal, burn and destroy other people’s property. There were no extenuating circumstances, no excuses. …decades of failed social, educational, family and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstream society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy. For this the establishment and the dominant politically correct ideology are to blame: they deemed it acceptable to permanently chuck welfare money… Criminals need to fear the possibility and consequence of arrest; if they do not, they suddenly realise that the emperor has no clothes. At some point, something was bound to happen to trigger both these forces and for consumerist thugs to let themselves loose on innocent bystanders. …the argument made by some that the riots were “caused” or “provoked” by cuts, university fees or unemployment is wrong-headed. …the state will spend 50.1 per cent of GDP this year; state spending has still been rising by 2 per cent year on year in cash terms. It has never been as high as it is today – in fact, it is squeezing out private sector growth and hence reducing opportunities and jobs. …This wasn’t a political protest, it was thievery. …We need to see New York style zero tolerance policing, with all offences, however minor, prosecuted. But what matters right now is to regain control, to stamp out the violence and to arrest, prosecute and jail as many thugs as possible. The law-abiding mainstream majority feels that it has been abandoned and betrayed by the establishment and is very, very angry.
Charity and the Federal Government
David Boaz’s post on bizarre and utterly preposterous claims that the federal government’s “social safety net” has been shrinking brought to my mind James Madison’s position that “Charity is no part of the legislative duty of the government.”
“The Father of the Constitution” wasn’t being cold-hearted when he took this position during a 1794 debate in the House of Representatives over federal aid to refugees. Rather, he was merely recognizing that “the government of the United States is a definite government, confined to specified objects.” Charity just wasn’t one of the specified objects. Of course, future politicians decided otherwise.
Today, most young Americans grow up in federally subsidized schools offering federally subsidized meals. They are inculcated to view the federal government as a benevolent caregiver that exists to provide Americans with housing, food, health care, and even income (to name just a few). Madison’s unfortunately quaint notion that the federal government isn’t supposed to be engaged in “charitable” activities would probably leave them dumbfounded.
I single out children because this week a private charity that I am involved with, the Purple Feet Foundation, is giving select inner-city sixth graders an opportunity to take hold of their futures now. Instead of promoting dependency, these kids will spend the week engaged in educational activities that will hopefully inspire them to utilize their individual talents to succeed in life. The Foundation does not seek, nor will it accept, taxpayer money. I believe this sets a good example for these kids.
Those of us who desire the limited federal government that Madison envisioned are often accused of being uncaring about those who are in need. In fact, the opposite is the truth: we recognize that government programs are wasteful, ineffective, and counterproductive to the aims that they are trying to achieve. As a Cato essay on federal welfare explains, private charity is superior to government programs for several reasons:
Private charities are able to individualize their approaches to the circumstances of poor people. By contrast, government programs are usually designed in a one-size-fits-all manner that treats all recipients alike. Most government programs rely on the simple provision of cash or services without any attempt to differentiate between the needs of recipients.
The eligibility requirements for government welfare programs are arbitrary and cannot be changed to fit individual circumstances. Consequently, some people in genuine need do not receive assistance, while benefits often go to people who do not really need them. Surveys of people with low incomes generally indicate a higher level of satisfaction with private charities than with government welfare agencies.
Private charities also have a better record of actually delivering aid to recipients because they do not have as much administrative overhead, inefficiency, and waste as government programs. A lot of the money spent on federal and state social welfare programs never reaches recipients because it is consumed by fraud and bureaucracy…
Another advantage of private charity is that aid is much more likely to be targeted to short-term emergency assistance, not long-term dependency. Private charity provides a safety net, not a way of life. Moreover, private charities may demand that the poor change their behavior in exchange for assistance, such as stopping drug abuse, looking for a job, or avoiding pregnancy. Private charities are more likely than government programs to offer counseling and one-on-one follow-up, rather than simply providing a check.