Confirming Fidel Castro’s recent confession that “the Cuban model doesn’t even works for us anymore” (did it ever work?), Havana has announced the massive layoff of 500,000 state workers in the upcoming months. This is approximately 12 percent of the government workforce (and 10 percent of the total labor force).

The big question is whether the meager non-state sector can absorb such an influx of workers in such a short period of time. My take is that the only way Cuba can accomplish this is by aggressively liberalizing its economy: privatizing most industries and farmland, cutting red tape, freeing prices, lowering taxes (which fall heavily on the tiny private sector), and getting rid of thousands of restrictions on private businesses that currently thwart entrepreneurship. This, of course, means abandoning altogether the current communist model and moving towards a capitalist system. So far, the reforms introduced by Raúl Castro since becoming president three years ago have been far too timid and in some instances even counterproductive.

As Oleh Havrylyshyn, former Ukrainian deputy minister of finance, wrote in a paper published by Cato three years ago on the transformation of post-communist economies, rapid reforms (as opposed to gradual ones) bring about better results in terms of higher growth rates, lower unemployment, higher investment, etc. Interestingly, Havrylyshyn also found that “all of the rapid reformers developed into liberal democracies, whereas in many of the gradual reformers… small groups of super-wealthy oligarchs captured the state and dominated its economic decisionmaking.”

The Cuban ruling elite cannot afford to waste time. Very soon, hundreds of thousands of Cubans will be looking for a job in the dilapidated private sector. Social unrest could easily erupt if their search for a job or occupation goes unfulfilled. In the end, only a swift transition towards capitalism can rescue the Cuban people.

As predicted, President Obama’s second annual back to school address – yes, the address is now “annual” — was relatively uncontroversial. It did give the President a caring, motivator-in-chief photo-op, which is certainly to his politicial benefit, but this time around there were no inappropriate study guides to go with the speech, nor did the president belittle profit-making endeavors. It was pretty much just trite, “work hard and be nice” fluff.

Unfortunately, the address has given some members of the media the chance to whitewash last year’s speech controversy, again working in the political favor of the President. Noting the absence of rancor this time around, some reporters portrayed last year’s brouhaha as if it were just the result of petty Republican partisanship, not mentioning at all the U.S. Department of Education lesson plans that kicked the whole thing off. It’s been a bit like reporting on World War I without mentioning the assassination of Franz Ferdinand.

More disheartening is the “annual” part of all this, because it seems the nation has quietly resigned itself to yet another chip being taken out of federalism. It doesn’t matter that the president has no constitutional authority to kick off each new school year with an address to the nation’s kids, or that it opens up the very real possibility of serious politicization as the address becomes increasingly ensconsed. Right now the speech seems to do no harm, so no one wants to fight it.

There is one final reason this is discouraging. As a writer over at Pileus Blog laments, the speech is yet further evidence of “the way in which politics creeps into every nook and cranny of our world, leaving little space for us to breathe the fresh air of private life.” Indeed, now not even our children are able to breathe free.

In a new study, economists Atif Mian and Amir Sufi find that the government’s “cash for clunkers” program “had no long run effect on auto purchases.”

C4C was supposed to stimulate the struggling automobile industry – and thus the economy – by inducing people to purchase autos today that they might otherwise have purchased in the future. However, whereas the White House’s Council of Economic Advisors claimed that C4C “pulled forward” purchases that would have occurred five years into the future, Mian and Sufi found that it merely pulled forward purchases that would have been made in the next seven months.

From the study:

In the subsequent ten months after the program (September 2009 through June 2010), high clunker cities purchased significantly fewer automobiles than low clunker cities. By the end of March 2010, seven months after the program, the cumulative purchases of high and low clunker cities from July 2009 to March 2010 were almost the same. In other words, the relative impact of the program on high clunker cities was almost completely reversed in just seven months.

Mian and Sufi also looked at whether C4C had a positive effect on other aspects of the economy. The answer is pretty much “no”:

Cities with high CARS exposure show no noticeable difference in economic outcomes from before the program to after the program relative to cities with low CARS exposure. We also examine economic outcomes for cities that have a high number of employees working in the auto industry. There is some evidence that high auto employment share cities had a relative increase in employment after the CARS program, but there is no noticeable effect on either house prices or household defaults. We should caution however that the effect of CARS on employment in the automobile industry is difficult to separate from the federal bailouts of General Motors and Chrysler in early 2009.

As we recently noted, short-term measures implemented by policymakers to “fix” the economy have introduced unwelcome economic distortions. For example, because auto purchasers benefiting from C4C were required to turn in their used cars for destruction, the supply of used cars decreased. The result is that prices of used cars increased, which has hurt low-income families and others struggling through the recession.

Policymakers should stop trying to “fix” economic problems with short-term gimmicks, especially since it was ill-advised government policies that facilitated the present economic downturn. Given that these “fixes” are only driving up already dangerous levels of debt, policymakers should reverse course and pursue policies that would facilitate long-term economic growth such as eliminating burdensome programs and regulations.

The European Union was meant to create a common market with free movement of goods, services, capital and people. The citizens of the “new” member states, such as the Czech Republic, should have been free to work in the “old” member states, such as Austria, from the date of accession of the “new” members to the EU on May 1, 2004. The Austrian government managed to postpone the horror of having laborers from ex-communist countries offer cheaper services to the Austrian citizenry until 2011.

With the 2011 deadline looming, Austrian politicians came up with an ingenious way to make it more difficult for the Czechs and other hoi polloi to enter the Austrian labor market. Beginning next year, it will be “illegal” for Austrian employers to pay less to a foreign laborer than they would to an Austrian. I am looking forward to seeing how this is to be accomplished without further wage regulations (collective bargaining and wage minimums in different sectors of the economy are widely used) and accompanying corruption.

I hope that the Czechs take the Austrian government to the European Court of Justice and pronto. If the Austrian measure is allowed to stand, it will undermine one of the four freedoms, and destroy an important source of competition and wealth creation in Europe.

Justice Breyer appeared on Good Morning America today, telling George Stephanopoulous that burning the Koran may not be protected by the First Amendment. As Breyer puts it, this may be akin to “shouting fire in a crowded theater,” since internet-driven publicity could bring retaliatory violence here or abroad.

Let me get this straight – burning a Koran isn’t protected the same way that burning a Bible or the American flag is, or a neo-Nazi march through a neighborhood of Holocaust survivors. The “crowded theater” is now global, and all someone has to do to diminish the First Amendment rights of all Americans is threaten to use violence if an offending word is uttered.

That’s not a consistent interpretation of the First Amendment, but Breyer’s record of consistency isn’t very good when constitutional rights may put lives at risk.

President Obama wants to raise the top two individual income tax rates for 2011. The top rates will rise from 33% to 36% and from 35% to 39.6%, unless the president and Congress agree to extend the current rate structure.

Before taking action on this issue, policymakers should consider the following facts and data. (All information is cited in my related congressional testimony).

• President Bush cut the top federal tax rate by 5 percentage points, but the average top rate in the 30 OECD nations has also fallen by 5 percentage points since 2000.
• Unless policymakers extend current tax relief, the combined U.S. federal-state top rate will increase from 41.9% to about 46.5%, based on OECD data. That will give us about the tenth highest rate among the 30 OECD nations.
• The chart shows that the average top OECD rate fell from 46.7% in 2000 to 41.5% in 2009. If we let the Bush tax cuts expire, we won’t be simply going back to our situation in 2000—the world has changed since then as other countries have adopted more competitive tax rates.

• President Obama’s proposed top federal rate of 39.6 percent is 41-percent higher than the 28-percent top income rate achieved in the late 1980s after the bipartisan Tax Reform Act of 1986.
• Higher marginal tax rates will reduce incentives for working, investing, and expanding businesses, and they will increase incentives for tax avoidance and evasion.
• If income tax rates rise, some high-income workers will work fewer hours and retire earlier. Some spouses in two-earner families will stay out of the workforce. Some angel investors will have less cash to invest in start-up ventures. And some small businesses will decide not to buy new equipment or hire new workers.
• Higher-income taxpayers often have a lot of flexibility on their working and investing decisions—tax them more and they will reduce their reported income alot. Robert Carroll finds that this effect of raising the top rate from 35% to 40% would offset about 40 percent of the government’s otherwise expected revenue gain.
• Today’s highest-earners are generally not passive inheritors of wealth, but are usually self-made and entrepreneurial. Glenn Hubbard notes, “when you look at data, you see that people who are rich almost entirely are rich because of entrepreneurial risk taking.”
• Many people with high incomes are angel investors, who help to fuel small business expansion. If their taxes go up, they will have less money and fewer incentives to invest, and they will park more of their money in tax-free municipal bonds.
• More than half of all business income in the United States is reported on individual returns, not corporate returns. This income is reported by proprietorships, partnerships, LLCs, and S corporations. If the top two individual income tax rates are increased, it would hit a substantial amount of this business income.
• Robert Carroll looked at individual tax filers who derived more than half of their income from a business. He found that one-quarter of these taxpayers were in the top two tax rate brackets, and thus would be hit by the proposed tax increases.
• The Joint Committee on Taxation found that about 25 million individual tax returns will report about $1 trillion of net positive business income in 2011. Of that total, 44 percent is in the top two income tax brackets and thus would be hit by the proposed tax increase.
• In an empirical study, Glenn Hubbard and William Gentry found that higher marginal tax rates discourage entry into self-employment and business ownership. A study by Donald Bruce and Tami Gurley for the SBA similarly found that marginal tax rates affect entrepreneurship.
• Once a small business is up and running, empirical research by Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen found that higher individual income tax rates negatively affect hiring, investment, and expansion.
   

Those are the facts, and here are my views. It’s very sad that a nation that has been a bastion of free market growth and individual achievement has a tax code that is becoming very hostile to high-earners, entrepreneurs, and businesses.

Let’s keep the Bush tax cuts, cut our corporate tax rate from 40% to 20%, and cut government spending. Rather than the government filling its coffers at the expense of families, that policy would make the economy boom, and fill government coffers as a side effect of rising family incomes.

Yesterday, the U.S. Department of Education released the latest student-loan default data, and along with it offered some good ol’ fashioned profit-bashing. Meanwhile, politically favored schools got off with nary a negative word.

The FY 2008 default rates certainly aren’t good. Overall, 7 percent of borrowers whose first payments were due between October 1, 2007, and September 30, 2008, had defaulted by September 30, 2009. And yes, for-profit schools had the highest rate out of non-profit private, public, and for-profit schools, which came in at 4 percent, 6 percent, and 11.6 percent, respectively.

To what did Secretary of Education Arne Duncan attribute these results? The overall default rate, he suggested, was but the sad consequence of “many students…struggling to pay back their student loans during very difficult economic times.” The for-profit rate, however, had a very different cause: “[F]or-profit schools have profited and prospered thanks to federal dollars” and many have saddled “students with debt they cannot afford in exchange for degrees and certificates they cannot use.”

Already, you can see that for-profits are largely just an easy political target: All defaulting borrowers are portrayed as victims; wasteful, money-hoarding, non-profit institutions get no mention; and for-profits are painted as predators.

Of course, for-profits do have higher default rates, so maybe they really are predators. But there’s more from yesterday…

At roughly the same time Duncan was dumping on for-profit schools, his boss was feting another subset of higher education: historically black colleges and universities (HBCUs). Indeed, he was kicking off National HBCU Week, and lauding the schools’ work. But guess what? While the Education Department doesn’t release default rates for HBCUs as a group, quickly pulling those schools’ data together and averaging their default rates indicates a rate even higher than for-profit schools: almost 12 percent. Moreover, for four-year, private, non-profit HBCUs — which like for-profit colleges don’t get big state subsidies to help keep tuition artificially low — the default rate is nearly 13 percent.

So why no criticism by Duncan of HBCUs? Heck, why was his boss celebrating them?

Because they are politically favored, that’s why. Of course, this is in part because of their very important historical mission to furnish higher education to long-oppressed African Americans. It is also, though, because like all “non-profit” colleges and universities, HBCUs act as if their employees have no interest in higher salaries, nicer facilities, easier workloads — all the rewards that the people in not-for-profit schools give themselves instead of paying profits out to shareholders. But there’s no evidence that people in HBCUs or other non-profit schools are any less self-interested than people working or investing in for-profit institutions. 

Why do I point this out? Not to pick on HBCUs, but to further illustrate the point that the attack on for-profit schools isn’t really about saving taxpayer dollars or protecting students, but going after the easiest target to demagogue — people honest about trying to benefit themselves as much as “the students.” It is also to illustrate, once again, that when we let government fund something, it is political calculus — not educational benefits, economic effectiveness, or what’s best for taxpayers — that ultimately drives the policies. Which is why government needs to get out of the higher ed business that it has made both bloated and, ultimately, a net drain on the economy.