Please, enough with the state film subsidies

This New York Times headline “Hollywood Begs for a Tax Break in Some States, Including California”  was all I needed to read about this notorious and indisputably bad idea. From the Center on Budget and Policy Priorities:

State film subsidies are a wasteful, ineffective, and unfair instrument of economic development. While they appear to be a “quick fix” that provides jobs and business to state residents with only a short lag, in reality they benefit mostly non-residents, especially well-paid non-resident film and TV professionals. Some residents benefit from these subsidies, but most end up paying for them in the form of fewer services — such as education, healthcare, and police and fire protection — or higher taxes elsewhere. The benefits to the few are highly visible; the costs to the majority are hidden because they are spread so widely and detached from the subsidies.

State governments cannot afford to fritter away scarce public funds on film subsidies, or, for that matter, any other wasteful tax break. Instead, policymakers should broaden the base of their taxes to create a fairer and more neutral tax system. Economic development funds should be targeted on programs that are much more likely to be effective in the long run, such as support of education and training, enhancement of public safety, and maintenance and improvement of public infrastructure. Effective public support of economic development may not be glamorous, but at its best, it creates lasting benefits for residents from all walks of life.


‘Without abandoning principles, we need practical policies based on moral empathy’

Image Credit: Patrick G. Ryan

Image Credit: Patrick G. Ryan

My boss Arthur Brooks tells New York Times readers what he learned from the Dalai Lama in Dharamsala, India, and what the Dalai Lama can teach Washington. Read the whole thing, of course, but this I think is the main takeaway: “Without abandoning principles, we need practical policies based on moral empathy.”

Policymakers need to (a) deeply understand the actual problems faced by their fellow citizens, (b) carefully formulate plans with potential to ameliorate those problems, and care enough to push those plans in the face of special-interest opposition. Oh, and all of the above needs to be informed by values. Which values, exactly? Well, these would be a great start …

Pethokoukis, Economics, Taxes and Spending, U.S. Economy

Jacking up investment taxes to reduce income inequality is a bad idea

The New York Times

The New York Times

New York Times columnist Floyd Norris hates that investment income gets special tax treatment. He just doesn’t see a persuasive reason for it. So Norris counts it a good thing how the 2013 tax hikes on investment income will narrow the gap in tax rates between “the superrich and the very rich.” And if he had his way, investment income would be taxed at the same rates as labor income:

Of course, ordinary Americans also are eligible for preferential tax rates on dividends and capital gains, and for most of us they remain at 15 percent. The catch is that few of us have a lot of investments in taxable accounts and therefore derive little benefit from those breaks. … If Congress ever gets serious about increasing tax revenue enough to pay for the spending bills it passes, the big tax advantage given to unearned income may have to be reduced, if not eliminated.  … This year, that tax advantage has been reduced, even if only for some of the highest-paid Americans. It is a start toward a tax policy that no longer discriminates against people who have to work for a living because they do not have dividend checks to support them.

Here’s the thing, though: The capital gains preference reduces some key distortions and inefficiencies in the tax code: the lock-in effect (investors retain assets they would otherwise sell because of high tax rates), the bias against equity-financed investment by C corporations versus debt financing, and the penalty on savings. Indeed, many economists think shifting the US to a consumption tax, which would not tax investment income, would boost economic growth. Another possible, pro-growth reform–one I am surprised Norris fails to mention–would be to tax at ordinary rates an individual’s investments gains as they accrue and then match that with an elimination of the corporate income tax. Finally, if you are worried that the tax code discriminates against wage earners, why not expand capital ownership whether through expanded entrepreneurship, Social Security reform, or government-seeded personal stock portfolios. Lots of the doomsaying on inequality assumes weak economic growth. Let’s not accidentally make that a self-fulfilling prophecy.


On Europe’s taxi cartels …

The FT on tax cartels trying to crush app-enabled taxi services in Europe:

Reining in these apps in this way is completely absurd. Internet-based technologies are revolutionising industries and shifting employment patterns across the world. Why should taxi drivers be exempt? Neelie Kroes, the EU digital commissioner, described the Brussels court’s decision as “crazy” and “outrageous”. She was right to do so.

The views of the taxi lobbyists cannot be completely dismissed. Licensed taxi drivers in many cities have paid large sums of money to acquire their permits, often through auction. In Paris, drivers pay more than €200,000 to acquire one of the limited number of state taxi licences. In Florence, the cost of permits was recently put at €300,000. New York yellow cab medallions have been sold at auction for close to $1m. Many drivers view these licences as an asset that will guarantee their pension. Having made that investment, they will fight hard against any attempt to devalue it.

At the same time, city regulators will be wary of allowing a taxi free-for-all. A completely unlicensed taxi market has very low costs of entry. If too many drivers enter this market, urban congestion will result. Arguments about the safety of an unregulated market also have some validity.

Still, “e-hailing” is bedding in and the cartels will have to respond. Licensed drivers appeal to some as a service that is more secure and regulated. But one thing they could do is learn some lessons from the taxi-app business. Hailo, a London-based app company, now has 60 per cent of the city’s black cab drivers on its books. It has neatly fused licensed taxis with new technology.

Ultimately, however, licensed taxis will only survive if they go further. There need to be more permits, lower fares and faster pickups. If the taxi cartels fail to change, they will be “apped” to death.



Charles Murray on crony capitalism and the superrich

Here is a really interesting exchange on inequality between AEI’s Charles Murray and the Wall Street Journal’s Mary Kissel (via RealClearPolitics):

MARY KISSEL, WSJ: Why are these themes that are so divisive, income inequality, fairness, why do Democrats use them? Why do they work?

CHARLES MURRAY: Partly they use them for their own reasons, but they do it partly because the American upper class has given them a wide open target.

KISSEL: You’re blaming the 1 percent, why?

MURRAY: Yeah, to a great extent. I’ll give you some examples: the 25,000 square foot homes, the private jets, but more than that, the sense that a lot of Americans have that the game is rigged now. And the problem is, a lot of that is true.

KISSEL: But Charles, we’re a capitalist society, what’s rigged? I mean, if you make a lot of money, what is wrong with building a big home or owning a private jet? We would support that on the editorial page.

MURRAY: There’s a couple of things, one is that it’s an American tradition that you don’t get too big for your britches once you get rich.

KISSEL: I thought that was a Social Democratic tradition in Britain or Australia. The tall poppy syndrome.

MURRAY: No, that was very capitalist, that you were one of the people once you got successful. That’s not nostalgia, that’s true. Back in the 1960s or 50s, when I was growing up, the executives of the Maytag company, in the town where I lived, wouldn’t buy Cadillacs, that was getting too fancy, too flamboyant.

There’s another thing that’s going on, Mary, which is even bigger: capitalism in bed with the government. Big time. The American people look at the way people make zillions of bucks because they can get the regulations they want to, because they get the government to support their technology. They see that going on, plus the crony capitalism. And the number of these capitalists are enthusiastically in favor of real competition is depressingly small.

KISSEL: Alright, but when the Democrats say the game is rigged, I’m thinking of Massachusetts Senator Liz Warren, this is a theme she uses all the time. She’s not talking about less regulation, she’s talking about more.

MURRAY: Yeah, yeah. I have no truck with the Warrens of the world. I’m actually speaking as someone who loves competition and free enterprise. And I’m saying to the people who are supposedly on my side, you guys better practice what you preach. Because a lot of you aren’t.

KISSEL: Do you think that the Occupy Wall Street movement on the left, and the Tea Party on the right are both reactions to that same thing, that kind of cronyism?

MURRAY: It’s the same thing, there is a new upper class no that is increasingly really happy being a new upper class. They have left behind the American tradition of saying hey, we’re just folks. They are, actually, rather enjoying the position. It’s Un-American, Mary.

Plenty of center-right folks don’t even think inequality is worth talking about, that doing so accepts a left-wing worldview. But Murray is right in that there can be unseemly aspect to all this: As Murray writes in Coming Apart:

Recently I asked a successful entrepreneur, an ardent proponent of free markets, what he thought about the bonus of several hundred million dollars that a board had decided to award a departing CEO of a large company as a thank-you gift. He looked at me sharply and said, “It’s obscene.” That is a reasonable way for people to react whether they are liberal, conservative, or libertarian — the issue is not what should be legal but what is seemly.

And Murray is bang on in lamenting how crony capitalism is driving inequality, not to mention making the US economy less efficient, whether it is “too big to fail’ backstops for the megabanks or strict patent and copyright law. Murray wants the wealthy to preach the values they practice, such as work and marriage, and business community to practice what its preaches about competition and markets.




What UK conservatives know about economic policy that many US conservatives don’t


How refreshing to hear a center-right politician talk good sense about monetary policy. Here is George Osborne, the UK’s chancellor of the exchequer, who spoke at AEI last week:

Proponents of the “secular stagnation” argument say that over recent decades monetary policy has had to work harder and harder to sustain growth, and has now reached its limits. Demand, they say, can only be sustained with further fiscal stimulus and higher government debt.

This argument is difficult to defend in light of recent developments. The evidence increasingly shows that monetary policy, broadly defined and effectively deployed, can work, but with two caveats. Banks need to be well capitalized so that the monetary-transmission system is working. And fiscal policy must be credible.

Quibbles with Osborne about how exactly monetary policy works are more than offset by general agreement about the potential effectiveness of monetary policy. While Republicans have been quick to point to Europe as cautionary tale of fiscal excess, the real lesson is one of the dangers of monetary restraint. As economist Michael Darda recently put it:

Both the U.S. and euro area have had sharp fiscal consolidations; however, the U.S. has enjoyed steady, albeit unspectacular, growth, whereas the euro are fell into a two-year double-dip recession. Given similar fiscal adjustments in both regions, the difference in economic performance over the last few years is largely explained by relative monetary policies. In other words, the Fed has done a better job sustaining NGDP growth with QE and forward guidance, whereas the ECB made the fateful error of tightening monetary policy twice in 2011, precipitating a double-dip recession that has just recently begun to abate.

Three charts from Darda: The first showing fiscal austerity in the form of declining deficits between the US and Eurozone; the second showing unemployment; the final showing industrial production




Economics, Pethokoukis, Society and Culture

Why work is the best weapon in the war on poverty: A Q&A with Robert Doar

Image Credit: shutterstock

Image Credit: shutterstock

What’s the best way to reduce poverty and increase economic mobility?

On this episode of Ricochet’s Money & Politics Podcast, I chat with AEI’s  Robert Doar. Before joining AEI, Doar was commissioner of New York City’s Human Resources Administration, the largest local social services agency in the United States. In the podcast, Doar gives his take on what the War on Poverty accomplished and also left undone. Also, he explains why work needs to be at the heart of smart reform.


We just recently marked the 50th anniversary of the War on Poverty. Where are we now versus fifty years ago?

In terms of material well-being for low-income Americans, because we have significant transfer payment programs that are not counted in the official poverty measure, low-income Americans are doing better. They have more things. They have higher resources and they can consume more products. That’s definitely true, and that can be seen as a success.

On the other hand, if we’re looking at only what low-income Americans can earn or are earning on their own, the last four or five years have been very bad years. And we’ve gone backwards. And so when you look at it from that perspective, which is the way the official measure does look at it, we’re kind of back to where we started at in the late ’60s, which is not good. So they’re materially perhaps better off. We provide a lot of assistance. It’s not counted in the official measure. And in that regard, the official measure overstates their weakness of their material well-being.

But we really want Americans to be independent of public assistance. We want them to be able to earn and work for their own livelihood and not be dependent on government assistance programs. That’s what they want as well. And right now, our economy and our public assistance programs and our public policies are not set up to make them happen as well as they should. read more >

Economics, Pethokoukis, U.S. Economy

How to think about inflation and deflation


The March consumer inflation numbers showed prices rising faster than expected and up from last month. In the 12 months through March, consumer prices increased 1.5% versus 1.1% in February. The core CPI, which strips out the volatile energy and food bits, rose 1.7% versus 1.6% in February.

Analysis from IHS Global Insight: “Overall, the consumer inflation story is relatively bland. However, the direction of food prices is somewhat worrisome. Average consumers will have no cause to consider inflation rampant, but living standards will suffer as a larger percentage of household budgets are spent on grocery store bills, leaving less for discretionary spending.”

Overall, inflation really is benign, especially given the Fed’s avowed 2% target. In fact, some economists have been worried that inflation has been too low, maybe risking outright deflation. As AEI economist John Makin wrote in a recent report, “Inflation is falling in the United States, Europe, and China, suggesting a real threat of impending deflation that could cripple the global economy.” To get some more insight on inflation, I asked a few questions of Makin, and economist/blogger Scott Sumner of Bentley University:

PETHOKOUKIS: There seems to be concern out that that inflation is running too low. But isn’t low inflation a good thing? Isn’t that the great Volcker victory of the 1980s? Along those lines, are some kinds of inflation and deflation good or bad?

MAKIN: Low and steady inflation is a very good thing. Volcker withstood immense heat for the pain tied to bringing inflation down from 10% to about 3%. But the benefits were substantial– avoiding destabilizing higher inflation and setting the stage for a huge equity bull market after 1982′ when he relaxed tightening. The drop in inflation cut tax receipts so much that the deficit rose faster than expected – a constructive form of fiscal stimulus.

Relative price changes, brought about by rapid price increases or decreases in some goods/ services are good and self-correcting. But when most prices are rising or falling consistently, movements can become self- reinforcing and damaging to the economy. Higher inflation is usually more volatile. That boosts uncertainty in a way that has been shown empirically to harm growth. Disinflation is fine, until and if it turns into deflation which almost always is associated with lower growth, weaker investment and higher unemployment — as in the Great Depression and In Japan after 1997.

SUMNER: Never reason from a price change. Whether inflation is good or bad depends on whether it is supply or demand-side inflation, and whether aggregate demand is currently excessive.

In short: (a) Supply side inflation is bad, but it isn’t really the inflation that hurts, it’s the fall in real GDP from the adverse supply shock. Thus holding nominal GDP constant, higher prices mean less real output, which is bad; (b) Demand side inflation can boost both prices and output, which can be good. But only if the economy is currently depressed from an adverse demand shock. In my view that’s been true of the US economy since late 2008, although it becomes a bit less true as unemployment falls back closer to its natural rate (which is hard to estimate.)

In my view it makes more sense to talk about boosting nominal spending than boosting inflation, because that language better conveys what the central bank is actually trying to do.

In terms of the trend rate of inflation, Volcker was surely wise to bring it down from double digits. But all he did is bring it down to 4% in late 1982, where it remained throughout the rest of the 1980s. Today it’s about 1.5%, so a bit higher inflation would be needed if the Fed is serious about its 2% long run target. There are costs and benefits from a lower or higher trend rate, and no one (including me) knows what trend rate of inflation is optimal. I suspect it’s close to 2%, but the exact rate depends on other aspects of policy. Under current (inept) Fed policy it’s probably close to 3%, as that makes the zero bound on interest rates less likely.

PETHOKOUKIS: It looks like the ECB might start a quantitative-easing, or bond buying program. Would that help the EZ economy?

MAKIN: The usual criticism of incipient QE or other anti-deflation measures is that they won’t work. Japan suffered under this delusion for 15 years until late 2012. Successful reflation requires a higher inflation target from the central bank that it is committed to meeting with substantial money printing until prices start to rise– the exchange rate starts to fall. A central bank has to credibly promise higher inflation to beat deflation. Many cannot bring themselves to do it, as is I fear, the case with the ECB.

SUMNER: QE would help in the eurozone, but I’d prefer they set a nominal GDP target, or if they continue to inflation target they should do level targeting of prices, which means promising to catch-up for any shortfalls from their inflation target (assumed to be about 1.9%).

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, Taxes and Spending

No, Walmart isn’t ripping off taxpayers

Image Credit: Ken Wolter /

Image Credit: Ken Wolter /

Tell me how economic stuff works, Team Gawker:

A new report estimates that U.S. taxpayers spend more than $6 billion each year to provide government benefits to low-paid Walmart workers. The Walton family, which owns Walmart, is worth $149 billion, and is always working to pay lower taxes.

I think I’m supposed to be outraged that Walmart isn’t paying some employees enough that they don’t need government anti-poverty benefits. But businesses generally aren’t going to pay workers more than they are worth. If a worker can only generate $8 in value to a company, then the firm isn’t going to pay them $10. Nor should they for some humanitarian reason. If American society thinks some of their fellow Americans deserve higher living standards than their skill set currently warrants, then society should pitch in and subsidize their wages through the Earned Income Tax Credit or even a new, broader direct wage subsidy. After all, Walmart isn’t to blame for a dysfunctional education  and worker training system. More from Mike Strain:

Liberals, in supporting minimum-wage increases, implicitly argue that the employers of low-skill workers, together with consumers of the products and services the workers help provide, should bear the burden of ensuring that low-skill workers don’t live in poverty. Conservatives should reject this argument, insisting that all of society is responsible for helping the working poor …

Not to mention that wage subsidies are far better targeted than the minimum wage.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.