Revisiting the Tax Plans


There’s a lot of confusion about taxes in this and every election cycle. Here’s what you should keep in mind as you dissect the plans proposed by the two major presidential candidates.

Before we start, taxes are essential to an economy. Even a limited constitutional government requires revenue to operate. A lower tax rate is almost always better than a higher one, but the details are important. Taxes should be spread among the beneficiaries of government services—not just the rich—and should be as low as possible to as to fund a constitutional government. Tax systems should be simple and transparent; our current code is neither.

Clinton’s proposal is simple—tax the rich to pay for more government. Aside from the moral problem with such plunder, it doesn’t work. The rich don’t have enough to pay for our oversized government and soaking them hurts business investment. Clinton would counter this with more tax “incentives” to prod individuals and businesses into activity she thinks is best for them and the country. Add to this another “stimulus plan” to reward her supporters and you have a repeat of the last eight years. It’s classic progressivism.

Trump’s proposal is equally simple—cut taxes across the board and reduce regulation. The resulting growth would expand the tax base and increase tax revenues. Trump isn’t looking to reduce spending, although he could (arguably) hold the line if he has majorities in the House and Senate. His approach is a blend of supply side economics and populism.

If I were grading, Clinton’s plan would easily get an F. Without some good luck in the coming years—no wars, cheap energy, and the like—the best it can produce is a repeat of the Obama stagnation. With a bad break or two, it could be worse. The irony is that the social engineering (loopholes) inherent in her plan creates the very cronies she claims to despise. Wealthy individuals and corporations can reduce their taxable income by taking advantage of the “tax incentives” progressives inflict on the economy. It also increases complexity and reduces transparency, with more tax brackets and complications.

Trump’s plan would get a C. It’s decidedly better than Clinton’s, but it could be better. Trump and the Republicans had a huge opportunity to simplify the tax code with a single, low flat rate, or even two rates to win over the moderates. He could have addressed entitlements, capping the growth on Social Security and allowing younger Americans to choose another option. He could have proposed a universal basic income (UBI) to completely replace ALL government transfers. Any of these would have been game-changers. His election would be a wrecking ball for Washington, but his economic policies wouldn’t differ much from those of previous Republicans.

Of course, we shouldn’t assume that either candidate’s proposals would be implemented as proposed. The Republicans aren’t known for much opposition in the House, but if they maintain one or both majorities and a scandal-ridden Clinton is elected, major initiatives could be off the table. Likewise, Trump hasn’t made too many friends in the halls of Congress, so he would likely face some opposition as well. The only scenario that would likely result in major economic change would be a Democrat sweep. It’s not out of the realm of possibilities, but I’m not betting on it.

Overall, a C is not an A, but it’s better than an F.

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Lester Holt’s Opening Question


Issues related to economics and business were front and center during the first presidential debate. There is a lot I could discuss, but Lester Holt’s opening question is enough for this post:

There are two economic realities in America today. There’s been a record six straight years of job growth, and new census numbers show incomes have increased at a record rate after years of stagnation. However, income inequality remains significant, and nearly half of Americans are living paycheck to paycheck. Beginning with you, Secretary Clinton, why are you a better choice than your opponent to create the kinds of jobs that will put more money into the pockets of American workers?

First, Holt’s question is far too generous to President Obama’s record on the economy. The “job growth” he mentioned is expected in a lackluster economy, so “six straight years” is no accomplishment. The income increase he referenced only appeared in the most recent data and does not negate the rest of Obama’s tenure as president. Holt also overlooked the extremely low labor participation rates, especially among youth and minorities.

Second, Holt’s question legitimizes the 2004 “two Americas” argument by former Democrat presidential candidate John Edwards. Of course, versions of the haves and have-nots argument have been bantered around politically since the days of Marx and Engels.

Third, Holt assumes that it’s the role of the President and/or federal government to “put more money in the pockets of American workers.” It’s not. The government’s role is to protect liberty so we can achieve on our own. Instead of opening the discussion on how much government intervention is best, Holt framed the debate as one over which type of intervention is best.

Finally, Holt made Hillary Clinton’s most difficult argument for her. Secretary Clinton needs to stay close enough to Obama to leverage his strength with certain voter groups, but far enough away to combat Trump on trade and other vulnerable issues. By establishing the pretext that Obama has advanced the economy but more intervention is necessary, he set the stage for Clinton’s narrative.

Holt’s opening question introduced a subtle bias that was present throughout the evening and set the stage for the debate. Hillary Clinton was ready for the softball he tossed her, responding as if on cue with all of the predictable clichés—“trickle down economics,” the need to “help families,” and making the “wealthy pay their fair share.”

If you’re upset about the bias, get used to it.


Dog Whistles & Donald Trump


I recently reread Paul Krugman’s bestseller, Conscience of a Liberal. My respect for Krugman has waned over the years, but I still try to give him the benefit of the doubt when I can. There are some decent economists on the left, but most of them just can’t put the pieces of the puzzle in the right places. Otherwise smart people reach wrong conclusions and promote bad policy.

Nonetheless, Krugman’s book is an essential read for anyone seeking to understand the intellectual basis of the left. Most conservatives and liberals agree that the gap between the political left and right has widened considerably in the past several decades. Conservatives argue that socialists and other statists pulled the Democrat party to the far left. Liberals like Krugman tell a different story, maintaining that “movement conservatives” pulled the Republicans to the far right. Krugman’s argument is flawed in a number of ways, but I want to focus on one of his key themes.

Conservatives—which include most Republicans—have held their own at the ballot box by blowing “dog whistles” to ill-informed, racist southern voters who are unable to see that their interests are really represented by Democrats. This point is not merely a side comment in his book, but a major crux of Krugman’s political philosophy. When Hillary Clinton claimed that half of Trump’s supporters are deplorables of some kind—“racist, sexist, homophobic, xenophobic, Islamaphobic”—she wasn’t just getting caught up in a political speech. She was parroting the core argument of modern statists like Krugman.

The problem with the Krugman/Clinton argument is that it lacks a factual basis. Bigots vote too and are probably split between Clinton and Trump, but this does not make either candidate a bigot. The notion that a large percentage of Americans fall into one of Clinton’s hate categories is hard to support, but that is not what is so problematic about her statement. Clinton’s contention that Trump voters are either haters or confused suggests that she simply does not understand the intellectual arguments for liberty and limited government. Put another way, she argues for a more intrusive government because she does not see any alternative.

It’s impossible to have a meaningful conversation with someone who believes that their view is the only legitimate one. If you’re in this camp, please understand the following. There IS a rational argument for strong borders that is not based in racism, isolationism, or xenophobia. There IS a rational argument for traditional family values that does not condone mistreatment of the LGBT community. There IS a rational argument that Islamic thought is a key issue with ISIS and other terrorists. There IS a rational argument for “law and order” that respects individual liberty and seeks to treat all Americans fairly.

If you’re on the left, know that the dog whistle argument is a non-starter and offends thoughtful Americans who don’t see things your way. If you want to have a productive conversation, dispense with the allegations of hatred and political correctness. You might find more common ground than you think.


The Value of Polls


Polls get far too much attention in the press, especially several months before an election. Nonetheless, the misnomers about the polling process never cease to amaze me. I’ve addressed polling in the past, but I’m going to update my comments in this post.

Who you ask, what you ask, how you ask, and how you tabulate the results are critical. Polling is a science, but it’s also a social science. Instead of measuring chemical reactions in a lab, you are measuring attitudes. People are much more complicated than chemicals, they don’t always tell the truth, and election polls must factor in one’s likelihood to vote. For these reasons, even the best professional pollsters get different answers when they are polling on the same issue.

Of course, another reason poll results can vary widely is that some pollsters are biased and seek certain results as a means of influencing behavior. If polls show that most Americans support candidate A, then some supporters of candidate B might give up or blame the candidate, and undecided voters—wanting to get behind a winner—might tend to support candidate A as well. I think the actual behavior of most voters is not affected by polls, but this isn’t the point. Even if poll results only influence the activity of 2-3% of voters, they can easily swing an election.

Leading questions and poor wording are common problems. Consider the question, “Do you think Hillary Clinton should be held accountable for using a private email server during her tenure as Secretary of State? Even if respondents share a common understanding of the scandal, “held accountable” might mean a reprimand to some and jail time to others. The results from questions such as these are simply not valid.

Even when questions are clear and worded correctly, some errors are difficult to overcome. Election pollsters try to survey a small group of voters that precisely represents the population of actual voters. A common misconception is that you cannot produce a reliable poll with only several hundred respondents. Statistically, you can. The real problem is how you select the respondents. Phone polls are common, but they not include lots of voters who don’t have landlines, don’t answer calls from unknown callers, or do not respond in a truthful manner.  Pollsters try to account for this problem by adjusting results, but they are really guessing.

Some errors are difficult to calculate from the outset. For example, should polls include candidates other than Clinton and Trump? The knee-jerk answer is yes because they will be on the ballot, but history—which can be wrong—tells us that most third party supporters end up voting for one of the two major candidates. Gary Johnson might poll at 10% in some states, but how many of his supporters will switch to Clinton or Trump in November? Nobody really knows. This issue alone is enough to weaken the results.

If you really like to follow polls, I suggest tracking averages at Real Clear Politics. By incorporating lots of polls into a composite, they probably average out some of the error on both sides. This is still just a best guess, but it’s better than relying on a single poll. At the end of the day, however, I suggest that you treat all polls with serious caution. They can and will be deceiving.


Government Subsidies & Free/Fair Trade


My last few blogs have addressed the free/fair trade debate. This one focuses on government subsidies.

The argument on subsidies goes like this: It’s not fair that US companies have to compete with firms that are subsidized in some way by other governments. In countries like China, many firms are partially- or wholly-owned by the government. These state-owned enterprises (SOEs) have an advantage because they receive support that private companies do not. As a result, American companies are at a disadvantage, and something needs to be done to level the playing field.

To understand this argument better, think about the US Postal Service. The USPS is owned by the federal government and loses billions annually. A recent analysis by Robert Shapiro estimates that taxpayers subsidize the agency by about $18 billion each year ( . Only part of this amount comes from direct payments; most comes from regulations that provide the USPS with unfair competitive advantages. For example, not only is the USPS exempt from state and federal taxes, but other delivery services are barred from leaving letters or packages in USPS mailboxes. In fact, federal law prohibits these carriers from delivering any letters or packages for less than $3, essentially keeping them out of the first class mail business. With a monopoly in this arena, the USPS is free to overcharge for letters and cut prices on package delivery where it faces competition from UPS, Fedex, and others.

SOEs are common in certain industries, such as airlines. Emirates, Etihad and Qatar are three examples from the Middle East. Delta, American, and United have long argued that competing with such airlines is unfair because these airlines receive billions from their respective governments each year.

SOEs are also common in certain countries. For example, China’s 12 largest firms are government-owned ( Like the USPS, these firms receive both direct and indirect government support that gives them unfair competitive advantages.

Two points should be made on the other side of the argument. First, just as we saw in the currency manipulation argument, Americans benefit form artificially low prices when they purchase subsidized products or services from global competitors. Second, it’s difficult to argue against SOEs in other countries when so many private companies in the US are receiving their own goodies from governments. Whether it’s an exemption from state taxes or a federal “green energy” subsidy, foreign companies can lodge the same complaint. How can a Chinese solar panel company compete globally if an American company receives a government subsidy to produce its own panels?

While it is true that cronies in the US often receive government support for their business ventures, they receive on average a lot less than their counterparts elsewhere. For this reason, the argument against subsidies—especially against SOEs—is valid. The Chinese, for example, have committed to addressing this problem by some degree of privatization, but there is still a long way to go. Trump and others have a leg to stand on here, but we need to be willing to practice what we preach.


Regulations & Free/Fair Trade


I’ve decided to post at least one more blog on the free/fair trade debate, this one on government regulations.

Free trade opponents in the US typically argue that Mexico, China, Viet Nam, and other less-developed trade partners do not have a similar regulatory infrastructure. Because “they don’t care about the environment or treating people fairly,” manufacturers there “get away with paying dollar-a-day” wages in sweatshops and dumping their waste directly into rivers and streams. This lack of common sense regulations, the argument goes, allows irresponsible companies—many with connections to US firms—to enjoy an unfair cost advantage. American companies that play by the rules just can’t compete.

There is some truth to this argument. Dumping pollutants into rivers is not uncommon in the developing world. Here are two examples of many:

But the argument weakens when we consider how much “common sense” is really a part of most of these regulations. While workers in the developing world earn much less than those in the US, their wages are set by the market. They line up for jobs in the factory just as many Americans did a hundred years ago because production work is more attractive than the alternative. Agriculture is the best option for some, but others who cannot find work in factories simply live on the streets and beg, or even turn to prostitution. Economies differ and it’s not necessary to pay $15 an hour to a line worker in Bangladesh just because Hillary and Bernie think companies should be forced to pay that as a minimum wage.

It is also true that US firms are over-regulated and spend a lot on compliance. It’s not reasonable to expect developing nations to over-regulate their economies to be on a par with US firms. We can solve much of this problem by cutting and streamlining regulations in our own industries so that the “regulation gap” narrows.

I haven’t heard Trump cite the regulation argument for restricting trade, but I’ve heard Sanders and others on the left do so. While some of the basic environmental arguments might be valid—especially if the pollution directly affects the US as is the case with Mexican border cities—we should clean up our own house first. There are no objective standards when it comes to various forms of regulation, so insisting that other countries should meet ours doesn’t make sense.

When it comes to regulating business, we should focus on cutting at home instead of forcing other nations to match our inefficiencies. Trump appears to understand this facet of the trade debate and is calling for less regulation. Clinton wants more restrictions on business which will only increase costs and make us less competitive as a nation.


Intellectual Property in China


I’ve been discussing the free/fair trade debate in the last two blog posts. In this one I turn to the issue of intellectual property (IP) in China.

Microsoft in the classic example. Most computers run on Windows and use Office. In the US and most western nations you’ll pay to use this intellectual property. In countries like China, most do not. On paper, Chinese law protects intellectual property rights, but enforcement is spotty at best, and many Chinese simply don’t see it as a serious problem. Estimates of Microsoft losses in China are all over the board, with $60 billion as a good guess. These estimates might be inflated because they assume that all Chinese users of Microsoft products would have paid for them if pirated versions were not available. $20 billion is a conservative bottom line loss, and that’s a lot for one firm.

The Intellectual Property Commission Report estimates the total annual IP-related losses for US firms in Asia to be around $300 billion, about the same amount that US firms export to the continent. The report ( is worth reading if you have some time, as it chronicles the various problems, from patent and trademark violations to piracy and copyright infringement. The takeaway point is that IP is a very serious problem, especially in China.

There are two primary reasons why IP law is so difficult to enforce in China. First, the nation lacks the infrastructure and incentives to prosecute offenders. China has improved in this regard during the past two decades, but it’s got a long way to go.

Second, IP in China and the US is viewed very differently. Historically, Americans have championed creativity and individuality. But as a collective society, the Chinese tend to place less value on individual innovation; in their view, new ideas aren’t as important as production. Put another way, many Chinese see the value of an iPhone primarily in its production and distribution, not in its conception and original design. Hence, IP is largely a collective entity. It’s no secret that Chinese companies tend to focus on mimicking innovative global competitors, but with a lower cost structure.

I once discussed the IP problem with a group of undergraduates in Beijing and most of them just didn’t understand why I thought it was a serious issue. Why should you be concerned if millions of Chinese are using pirated copies of Windows and Word, they asked? These users wouldn’t be able to afford to pay for it anyway. Of course, if Microsoft pirates could be required to pay for the product in order to use it, many would find a way to do so, increasing the size of the market and driving down the price. I explained that innovation occurs because of property rights and incentives, but in the end most of the students were okay with Westerners sorting that out, leaving Chinese firms to use and reuse global technology as they wish.

While it’s unrealistic to eliminate IP theft in any country, but the Chinese government must develop the infrastructure necessary to enforce international standards. If they don’t, innovative Western firms must continue to overcharge for their new products to cover developmental costs while many Chinese firms and consumers get a free ride. Nobody in China has an incentive to do this without international pressure, which is why insisting on real action is so important.


Manipulating the Currency


Recently I’ve been asked if and how I can support Donald Trump when he appears to be opposed to free trade. My last post introduced some of the most important facets of free/fair trade. I will expand on one of them—currency manipulation—in this post.

Ten years ago, the exchange rate between the US dollar and the Chinese yuan (also called RMB) was about 8 RMB per dollar (see Today, the rate is about 6.7 RMB per dollar. All other factors held constant, a product made in China and worth 800 RMB would have sold for $100 ten years ago, but would now sell for $119—a 19% increase—due to the strengthening of the yuan relative to the dollar.

From the Chinese perspective, this means that a $100 product sold in China would have cost about 800 RMB ten years ago, but would only cost 670 RMB today. In other words, the dollar as weakened relative to the RMB, resulting in an overall price reduction of 16%.

A weaker dollar is good for US companies but bad for US consumers. US producers will be able to sell products in China at lower prices in terms of their currency, while US consumers will have to pay more for Chinese products. Conversely, a stronger dollar is bad for US companies but good for US consumers, because it raises the price of American products abroad and reduces the price of Chinese products in the US.

So what is the problem with the Chinese currency? Exchange rates among major world currencies fluctuate naturally with their economies. However, the Chinese government pegs the value of the RMB to the US dollar, allowing only minor fluctuations except when central planners decide to make or allow more significant changes. In other words, the Chinese government can adjust the relative prices of its products in US markets by maintaining an artificial exchange rate. Historically, the Chinese have undercut US firms by keeping the RMB artificially weak. They sought to strengthen the RMB as Chinese industries strengthen and their companies are able to command higher prices abroad.

Chinese leaders claim that this controlled exchange is only temporary while Chinese firms “catch up” with more established global competitors. Moreover, some economists contend that maintaining a weak RMB isn’t really a problem for the US because it allows Americans to purchase products at lower prices. While this is true, it puts our companies at a competitive disadvantage and also creates long-term problems as some industries (electronics, for example) become dominated by Chinese manufacturers. Given that many Chinese manufacturers are government-subsidized and Chinese central planners can manipulate the currency at any time, their firms will maintain a decided global advantage.

Some economists claim that a free floating exchange rate—if permitted by Chinese authorities—would be about the same as the current controlled rate anyway. If this were true, then the Chinese would have already stopped pegging the RMB exchange rate to the dollar. It’s difficult to calculate what the free floating exchange rate would be between the dollar and the RMB, but I’m convinced the RMB would be stronger (less than the current 6.7 per dollar), which would be a boon for American firms.

US leaders have given lip service to this issue in the past, but all of them have been afraid to seriously confront the Chinese. Perhaps they fear a “trade war” if we push too hard. Nonetheless, Trump is right to argue that this is an issue that must be negotiated. To be free and fair, governments should not interfere in currency exchange markets. The prosperity of US firms lies in the balance.


Free Trade vs. Fair Trade


I’m a free-trader and have generally supported most of the trade deals over the years. Lately I’m being asked if and how I can support Donald Trump when he appears to be opposed to free trade. My views are little different from Trump’s, but the differences are not that great when you go through the details.

First of all, the concept of free trade is a no-brainer and you’d be hard pressed to find an economist opposed to it. In fact, we engage in “free trade” all the time. I don’t grow my own food, manufacture my own car, or fix my own electrical problems. I specialize in a line of work I’m good at and use my earnings to trade for the goods and services of others who are better at other things than I am. Trading across borders follows the same logic. Everyone benefits, at least in theory.

In practice, however, there are other considerations. The first of these is national security. You can make the case that buying all of your munitions from China wouldn’t be a good idea even if it costs less. In war time, you must depend on a domestic industry. You can also make the case that security-sensitive products shouldn’t be sold to buyers in Iran or North Korea. These admonitions should be obvious, but they don’t affect most industries anyway.

Another consideration is enforcement, and here is a sticking point for many. Trade across borders should occur in an orderly fashion with both sides following the same rules. If one side isn’t doing so, the other side should insist on enforcement and retaliate if necessary until an agreement is reached. Wealthier nations like the U.S. often look the other way while poorer nations argue for special privileges while they “catch up.” Most like China argue that currency controls and regulatory enforcement should be relaxed while they build up their industries. I disagree, as this constitutes “managed trade” on one side, not “free trade.”

Trump is right when he says that China has been manipulating its currency as part of its “catch up” plan. By maintaining an artificially weak yuan over the years (rather than allowing it to find its own exchange rate on the global market), China has ensured that its products will be cheaper when exported to other markets, while imported good will be more expensive. This does enable us to buy cheaper goods from China, but I don’t believe the net result is positive and I have argued this for years. Kudos to Trump for having the courage to call China out on this.

Another concern is intellectual property. The U.S. has a sophisticated court system to enforce copyrights and while China has improved over the years, there’s still a big gap. Many Chinese use Word—the software I am using to write this blog—without paying Microsoft for it. Pirated copies are readily available for a few dollars on the street there, taking money of the pocket of the software developers.

Regulation is yet another concern. While we have a responsibility to reign in our own hyper-regulated industries, it’s reasonable to insist that manufacturers abroad not enjoy a cost advantage by acting irresponsibly. For example, it’s cheaper to dump waste into the river (where this is allowed) than to process it. Dumping allows a company abroad to pass the savings along to their U.S. customers. Identifying what constitutes significant pollution and other maladies isn’t always easy, it’s still important to take this into account.

Yet another concern is government subsidies. Should a government in another country be permitted to subsidize its competitors while our government does not? This gets muddled as well because our government also subsidizes certain industries, but it’s worth noting the many large Chinese manufacturers are owned—at least partially—by the state. Clearly, subsidization in China is a serious problem.

I admit that some of the issues I’ve raised don’t have simple answers; I will revisit some of these in the future. My point is that negotiating trade deals is complicated, and we should be promoting global trade to the extent that it’s reasonably fair. When it crosses the line, we need leaders who are willing to get tough and take action. Some argue that Trump will start a trade war with his strong rhetoric, but I’m not convinced. Read Art of the Deal and you’ll understand more about Trump’s approach. I don’t want heavy protectionism, but I think Trump’s end game is a middle ground. Besides, if he is elected, Congress would temper any anti-trade measures he proposes anyway. I might be wrong, but I think the net effect of a Trump presidency would be positive on this issue, although I’m sure I wouldn’t agree with him on every point.


Protests in Venezuela


I blog periodically on the plight of Venezuela, a once prosperous nation spiraling downward in the grip of socialism. Venezuela’s National Assembly is now controlled by the democratic opposition, but President Maduro still controls the executive and judicial branches of government, so change is difficult. The government acknowledges an inflation rate of 275% but the actual rate is certainly much higher, and the rate is climb further. Citizens wait in line for food and gas in a country with the largest oil reserves in the world. Protests are a daily occurrence.

I just returned from a conference where I spoke with several Venezuela professionals. I won’t discuss their individual experiences and observations, but they underscore several points:

  1. The Chavez-Maduro regime has lasted 17 years, during which time it has institutionalized socialism. Reversing it will not happen overnight.
  2. Markets still work in Venezuela. Price controls, current exchange restrictions, and other regulations have choked off much of the formal economy, but a black market functions to sell goods and services people cannot get elsewhere. Prices are high and goods are scarce. While the official exchange rate for the Venezuelan currency (the bolivar) is about 6 per US dollar, the black market rate is about 1000.
  3. There is a sense that the end of the current socialist regime is near—perhaps a year or two away—but it is unclear how it will end and what the replacement will look like. Socialists often enter through elections, but they rarely exit in the same manner.

Venezuela is a modern socialist experiment conducted in one of Latin America’s most prosperous and resource-wealthy nations. It teaches us about collectivism’s serious and long-term consequences. The black market has ramped up to address needs where official markets will not, but supply is low and costs are high. Its no longer about redistribution of income, but about getting food and other necessities of daily life.

The case of Venezuela also underscores a key reality about socialism. In less than a generation, its leaders can impart a system of cronyism and dependence that now requires more than a simple election to reverse. Let’s hope force is not required to reverse the trend in Venezuela. The protest videos we currently see make me wonder.

What is happening in Venezuela is not in our near future, but Americans must understand the dangers of playing with fire. Socialism has been creeping in the US for some time. It always creates a dependency class. Calls from the left to expand government programs—free college, single payer healthcare, and so on—would only expand this realm of dependence, and those receiving government support rarely give it up without a fight. The national debt has already surpassed $19 trillion. The deeper we slide, the more difficult the turnaround.

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