Harvard economists have proven one of the major theses of American Nightmare, which is that land-use regulation is a major cause of growing income inequality in the United States. By restricting labor mobility, the economists say, such regulation has played a “central role” in income disparities.

When measured on a state-by-state basis, American income inequality declined at a steady rate of 1.8 percent per year from 1880 to 1980. The slowing and reversal of this long-term trend after 1980 is startling. Not by coincidence, the states with the strongest land-use regulations–those on the Pacific Coast and in New England–began such regulation in the 1970s and 1980s.

Forty to 75 percent of the decline in inequality before 1880, the Harvard economists say, was due to migration of workers from low-income states to high-income states. The freedom to easily move faded after 1980 as many of the highest-income states used land-use regulation to make housing unaffordable to low-income workers. Average incomes in those states grew, leading them to congratulate themselves for attracting high-paid workers when what they were really doing is driving out low- and (in California, at least) middle-income workers.

As Virginia Postrel puts it, “the best-educated, most-affluent, most politically influential Americans like th[e] result” of economic segregation, because it “keeps out fat people with bad taste.” Postrel refers to these well-educated people as “elites,” but I simply call them “middle class.”

Middle class doesn’t mean middle income; it means people with managerial, creative, or other jobs that require thinking, not repetitive or physical labor. As a proxy, I use college education: less than 30 percent of working-age Americans have a bachelor’s degree or better. Though some people with college degrees flip burgers just as some without such degrees gained enough knowledge on the job to be promoted into management, it seems likely that about 30 percent of the population are middle- or upper-class while 70 percent are working- or lower-class.

Census data show that, in the late 1970s, the average worker with a high school diploma but no college education earned more than 64 percent as much as the average worker with a bachelor’s degree. By 2010, it was less than 53 percent.

As I’ve pointed out elsewhere, the barrier between the 1 percent and the 99 percent is far more porous than the one between middle class and working class. The rising cost of higher education and the high cost of moving into regions with land-use regulation prevent less-educated people from bettering themselves. Increased regulation of commercial operations limit people’s ability to start small businesses. Increased traffic congestion (favored by “progressive” anti-auto cities) also hits working-class people harder than middle-class workers as the former are less likely to be able to take advantage of flex-time, telecommuting, and other ways of avoiding congestion.

Britain, which has regulated land use since 1947, is suffering many of the same problems. As the Telegraph reports, this regulation has divided “the nation between old and young, haves and have-nots.”

Of course, many urban planners still refuse to believe that land-use regulation makes housing expensive. Never mind the fact that economists at Harvard, Whartons, and a wide range of other universities agree that it does. Let’s just ignore the fact that such regulation is destroying our economy and oppressing low-income families. All that is important is that the middle-class elites who benefit are happy.

Mitt Romney is being criticized for supporting “territorial taxation,” which is the common-sense notion that each nation gets to control the taxation of economic activity inside its borders.

While promoting his own class-warfare agenda, President Obama recently condemned Romney’s approach. His views, unsurprisingly, were echoed in a New York Times editorial.

President Obama raised … his proposals for tax credits for manufacturers in the United States to encourage the creation of new jobs. He said this was greatly preferable to Mitt Romney’s support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. It’s not surprising that large multinational corporations strongly support a territorial tax system, which, they say, would make them more competitive with foreign rivals. What they don’t say, and what Mr. Obama stressed, is that eliminating federal taxes on foreign profits would create a powerful incentive for companies to shift even more jobs and investment overseas—the opposite of what the economy needs.

Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes, let’s set that topic aside and focus on the issue of territorial taxation.

Or, to be more specific, let’s compare the proposed system of territorial taxation to the current U.S. system of “worldwide taxation.”

Worldwide taxation means that a company is taxed not only on its domestic earnings, but also on its foreign earnings. Yet the “foreign-source income” of U.S. companies is “domestic-source income” in the nations where those earnings are generated, so that income already is subject to tax by those other governments.

In other words, worldwide taxation results in a version of double taxation.

The U.S. system seeks to mitigate this bad effect by allowing American-based companies a “credit” for some of the taxes they pay to foreign governments, but that system is very incomplete.

And even if it worked perfectly, America’s high corporate tax rate still puts U.S. companies in a very disadvantageous position. If an American firm, Dutch firm, and Irish firm are competing for business in Ireland, the latter two only pay the 12.5 percent Irish corporate tax on any profits they earn. The U.S. company also pays that tax, but then also pays an additional 22.5 percent to the IRS (the 35 percent U.S. tax rate minus a credit for the 12.5 percent Irish tax).

In an attempt to deal with this self-imposed disadvantage, the U.S. tax system also has something called “deferral,” which allows American companies to delay the extra tax (though the Obama administration has proposed to eliminate that provision).

Romney proposes to put American companies on a level playing field by going in the other direction. Instead of immediate worldwide taxation, as Obama wants, Romney wants to implement territorial taxation.

But what about the accusation from the New York Times that territorial taxation “would create a powerful incentive for companies to shift even more jobs and investment overseas”?

Well, they’re somewhat right … and yet they’re totally wrong. Here’s what I’ve said about that issue:

If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldn’t be surprised that some of them will consider that option. So does this mean the President’s proposal might save some American jobs? Definitely not. If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.

To put it bluntly, America’s tax code is driving jobs and investment to other nations. America’s high corporate tax rate is a huge self-inflected wound for American competitiveness.

Getting rid of deferral doesn’t solve any problems, as I explain in this video. Indeed, Obama’s policy would make a bad system even worse.

But, it’s also important to admit that shifting to territorial taxation isn’t a complete solution. Yes, it will help American-based companies compete for market share abroad by creating a level playing field. But if policymakers want to make the United States a more attractive location for jobs and investment, then a big cut in the corporate tax rate should be the next step.

The nation’s biggest subprime student lender–your federal government!—has just called out private “subprime” lenders.

This morning the Consumer Financial Protection Bureau and U.S. Department of Education released a report examining private student loans. It concludes that private lenders were out of control, just like all of Wall Street, before the “Great Recession” hit, a fact largely evidenced by high default rates. It was, the report argues, a part of the overall subprime lending debacle and it hurt innocent students.

“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan in a release accompanying the report.

What’s the report’s solution to the problem? Push people into federal loans to the maximum extent possible. After all, those loans have low, taxpayer-backed interest rates; generous repayment terms, including speedy forgiveness for anyone going into “public service”; and essentially no requirement that borrowers offer evidence of creditworthiness.

Wait—essentially no evidence of creditworthiness? Isn’t that subprime lending in its very purest form? Indeed it is, which is perhaps why the report offers no comparison of default rates on private and federal loans.

Basically, the report is pushing for even greater subprime lending, only with taxpayers on the hook rather than voluntary investors.

The report tries to further portray the fate of private lending as part of an exclusively Wall Street-driven recession by arguing that a big drop in private lending between the 2007-08 and 2008-09 academic years was entirely the result of private lenders suffering from the collapse of credit markets. No doubt that had a significant role, but the report somehow manages to not discuss numerous changes to federal law in the 2007–2010 time frame that pushed private lenders out of the way, including:

• The College Cost Reduction and Access Act (2007), which set federal subsidized-loan interest rates on their halving path from 6.8 percent to the current 3.4 percent.
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  The Ensuring Continued Access to Student Loans Act (2008), which increased unsubsidized loan maximums, reduced eligiblity criteria for PLUS loans (the only loans requiring some demonstration of creditworthiness), and offered federal money when guaranteed lending participants couldn’t get it through capital markets.
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  The reauthorized Higher Education Act (2008), which increased Pell Grant maximums, authorized forgiveness of up to $10,000 in debt for anyone working in an area of “national need,” and added new regulations for private lending.
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  The Student Aid and Fiscal Responsibility Act (2010), which ended federal guaranteed lending in favor of federal lending directly from the U.S. Treasury

Fully private lending probably was reined in thanks to the recession, which is a good thing, with private lenders taking less risk when it didn’t pay off. But it is no doubt also important that Washington enacted many laws that made it much harder for private lenders to compete. The fact is the Feds can subprime-lend without any major concern about losing big bucks. It’s only taxpayer money, after all, and there’s always more of that! Plus the political dividends are sizable, enabling politicians to heartily and repeatedly congratulate themselves for “making sure everyone can go to college!”

That gets us to the next critical point: In addition to reinforcing the utterly discredited notion that the recession was all the fault of “greedy Wall Street fat cats,” a report focusing on private lending is just a distraction from the 800-pound gorilla in higher education: the federal government. At their peak in 2007-08, private loan originations were less than one-third the size of federal loans, and about one-fifth the size of all federal aid. Today they are slightly more than one-20th the size of federal loans, and about one-30th the size of all federal aid.

In other words, private loans are but bit players in a student-aid show dominated by Washington. It is super-abundant federal aid, not private lending, that signficantly fuels tuition inflation, enables dreadful college completion rates, and fosters a glut of degree holders. Yet it’s those same federal lenders who dare scold private companies and warn us about their subprime failures.

Oh, the irony!

Eventually, Syrian president Bashar-al Assad will fall from power. When that will happen has been the subject of much speculation. Appearing on NPR’s On Point, CBS News foreign correspondent Clarissa Ward, who won a 2012 Peabody Award for her reporting on the Syrian uprising, had this to say about “the endgame and the final chapter and the final countdown” and all the other clichés we have been hearing:

[T]he reality on the ground is that the regime still has some fight left in it. They are still militarily far superior to rebel forces. Rebel forces are still desperately lacking the heavy weaponry they would need to seriously take on the regime militarily. They are still not a cohesive fighting force with a clear command structure. There is still almost no coordination among the various rebel groups. So I think it’s a little early to talk about the final countdown. But certainly what we’ve seen transpiring in Damascus over the past few days … I think it is a turning point. We have opened a new chapter even if it’s not the final chapter in this.

Earlier this week I wrote about the Obama administration’s proposal to shift $5.6 billion dollars out of the Pentagon’s base budget into the Overseas Contingency Operations (OCO) account. Because the OCO budget was exempted from last year’s Budget Control Act (BCA), this gimmick was clearly intended to allow the Pentagon to evade the BCA limits, and had attracted the attention of House Budget chair Paul Ryan (R‑WI), Republican Study Committee chair Jim Jordan (R‑OH), and a handful of budget watchers. I anticipated that one or more members would call attention to it during floor debate over the defense bill.

Sure enough, on Wednesday afternoon, Rep. Mick Mulvaney (R‑SC) offered an amendment to undo the shift. Unfortunately, Mulvaney’s amendment was ruled out of order, ignoring the fact that the entire defense bill exceeded the BCA spending limits and thus also should have been ruled out of order. I thought the proposal to fix the dubious OCO shift would die there.

Not so. Undaunted, Mulvaney returned with a new amendment co-sponsored with Reps. Jordan and Peter Welch (D‑VT) that did not actually transfer any funds—thus conforming to House rules—but that expressed the same goals articulated in the earlier amendment. As Mulvaney, Jordan, and Welch explained in a “dear colleague” letter:

Our amendment, similar to a Sense of the House resolution, supports the policy of moving $5.6 billion in non-war costs back to the Base Budget. It fully supports the resources our troops on the battlefield will need, but it does not actually transfer any funding. It simply highlights a non-partisan issue—accountability and transparency—by demonstrating support to move these non-war costs back to the Base Budget in the FY13 CR and future budget requests. (Emphasis in original)

The gambit worked: the resolution passed 238–178, with strong bipartisan support. House Armed Services Committee chairman Howard “Buck” McKeon (R‑CA) voted no, as did Appropriations chair Harold “Hal” Rogers (R‑KY) and the House Appropriations Committee-Defense Subcommittee chair C.W. Bill Young (R‑FL). But 154 Republicans voted for the amendment, including Budget chairman Ryan, House whip Eric Cantor (R‑VA), and Rules Committee chair David Dreier (R‑CA).

It was a modest, and largely symbolic, victory for transparency and accountability. The next step is to end the war in Afghanistan and eliminate the OCO account entirely. That separate pot of money for the war(s) has served to obscure the enormous growth in the Pentagon’s base budget over the past decade.

Last night, the House approved a Pentagon budget bill of nearly $606 billion, $1.1 billion below the level recommended by the GOP leadership. Congratulations are in order for freshman Republican Mick Mulvaney (SC‑5), and retiring Democrat Barney Frank (MA‑4), for co-sponsoring the amendment that effectively froze spending at last year’s level.

According to Politico’s David Rogers, “the freeze marks a modest but still important turning point in the budget wars with 89 Republicans joining 158 Democrats on the key 247–167 vote.”

It is a modest step, but I’m encouraged that 88 Republicans sided with Mulvaney. This should send a message to House Armed Services Committee chairman Howard P. “Buck” McKeon and others who have claimed, falsely, that defense spending has been gutted in recent years, or who contend, absurdly, that the United States cannot maintain its safety and security with a budget that is well above post–cold war levels.

There is still much work to be done, however. The budget remains more than $6 billion above the spending caps set by last year’s Budget Control Act and doesn’t come close to meeting the levels dictated by the BCA’s sequestration provision that was supposed to go into effect when the deficit reduction supercommittee failed to hammer out a deal. Indeed, although I am encouraged by the large number of Republicans who bucked their leadership and McKeon, it is troubling that any House member who claimed to care about deficit reduction and out-of-control spending by voting for the BCA would then vote for a budget that exceeds those caps. An amendment that would conform with the BCA targets by cutting $7.5 billion from the top line garnered just 24 Republican votes. I haven’t yet bounced yesterday’s roll call against last year’s BCA vote, but members who voted for the BCA but against this amendment seem to be trying to have it both ways.

Fareed Zakaria is a good journalist. But he’s also human. In his Washington Post column yesterday, Zakaria concludes that President Obama has a stronger case to make for his economic prescriptions than does Governor Romney. However, that conclusion—at least as presented in the column—is premised on a misreading of some recently published data.

Zakaria distills President Obama’s message down to the belief that investment in infrastructure, education, training, basic sciences, and technologies of the future are key to economic recovery, while Romney argues that relief from taxes and excessive regulatory burdens is the answer.

While both views have merit in Zakaria’s estimation, Obama has the stronger case. Why? Because Romney is barking about a relatively insignificant problem, concludes Zakaria:

We need a tax and regulatory structure that creates strong incentives for businesses to flourish. The thing is, we already have one.

To support that claim, Zakaria cites a figure from the 2011-12 edition of the World Economic Forum’s Global Competitiveness Report that ranks the United States 5th (out of 142 countries) and concludes that “whether compared with our own past—of, say, 30 years ago—or with other countries, the United States has become more business-friendly.” The problem is that he’s citing the wrong number and, thus, reaching the wrong conclusion.

The United States is ranked 5th on the overall global competitiveness index, which is a weighted value reflecting scores assigned for 12 broad criteria presumed to affect “competitiveness,” including: (1) institutions, (2) infrastructure, (3) macroeconomic environment, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labor market efficiency, (8) financial market development, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation. U.S. scores on regulations and taxes contribute to that final ranking, but 5th is not where the United States ranks on those criteria.

To add another layer of complexity, the scores assigned to each of these 12 criteria are derived by weight-averaging the scores from individual survey questions. For example, there are 21 questions related to the first criteria, “institutions”—questions about property rights, public trust of politicians, judicial independence, transparency of government policymaking, etc. There are nine questions that feed into the infrastructure score; six that feed into the macroeconomic environment score, 16 that comprise the goods market efficiency score, and so on.

Zakaria errs by citing the overall, weighted average U.S. rank of 5th to support his assertion that we already have a tax and regulatory structure that creates strong incentives for business to flourish. That relatively high ranking reflects a few obvious U.S. advantages—tax and regulatory structure not being among them. The United States ranks fairly high with respect to some criteria, including “market size,” “university-industry collaboration in R&D” (which feeds into the innovation criterion), “strength of investor protection” (institutions), “availability of airline seats” (infrastructure), “inflation” (macroeconomic environment), “extent of marketing” (business sophistication), and a few others.

But on taxes and regulations, the U.S. ranks poorly. On the “Burden of Government Regulation,” the United States ranked 58th with a score of 3.4 on a scale from 0‑to‑7, slightly above the global average of 3.3. On the “Extent and Effect of Taxation,” the United States ranked 63rd out of 142 countries. On “Total Tax Rate, % Profits,” the United States came in 96th out of 142. On the issues that President Obama is pushing, the United States performs better than on those Romney advocates, which seriously weakens Zakaria’s argument.

The United States ranks 24th on quality of total infrastructure, better than on taxes and regulations. Likewise for “technological readiness” and “innovation.” “Higher education” (but not “job training”) generates bad scores for the United States, but clearly not for lack of spending. You can dig into the data here, and you’ll find that they tell a very different story than the one you may have read in yesterday’s Post.

Of course, Zakaria might still believe Obama has the stronger argument. But we should all be clear about the fact that regulations and taxes are real and growing problems, and that dismissing them as insignificant, even if inadvertent, doesn’t help policymakers find the solutions. Combine those impediments to investment and hiring with the growing perception that crony capitalism is on the rise (U.S. rank: 50th out of 142), that customs procedures present obstacles to global supply chains (rank: 58th of 142), that U.S. public debt weighs heavily on the economy (rank: 132th of 142), and that government spending is on a ruinous path (rank: 139th of 142 countries), and it becomes more apparent why an increasingly mobile business community often seeks the refuge and relatively warm embrace of foreign shores.