Imperfection is Beautiful

Striving for perfection is something we all do. This applies not only to our personal goals, our work, our hobbies, but also to the wider world we inhabit. The idea of a perfect society, one in which every conceivable problem has been solved, has a sort of natural allure, and it’s no wonder that, again and again, well-meaning dreamers have attempted to perfect something that is fundamentally flawed: the human condition.

It is widely recognized that perfection is beyond unattainable in practice, but it’s still a worthy goal, right? You would think so, but on reflection, I’m not so sure. If you pay attention to how people actually behave, you’ll find that, however much we might think perfection is desirable, we don’t really like it when we get it.

We Never Achieve Perfection

I saw an ad for hand poured coffee the other day, although I have no idea why it matters how coffee is poured.

Think about the kinds of products consumers like best. We value “hand-crafted” items over those produced in a factory. We have the technology to make products exactly the same every time, but consumers scorn them in favor of the imperfections that result from human error. Hand blown glass, hand carved wood, hand turned pottery, all are preferable to their machine-produced alternatives. I even saw an ad for hand poured coffee the other day, although I have no idea why it matters how coffee is poured.

You can increase the value of a beautifully polished slab of wood by hitting it with chains and calling it “distressed.” I’m not sure if pre-ripped jeans are still a thing, but the fact that they were for at least a little while speaks volumes.

The sound of distortion in a guitar amplifier is an error of conveying signal properly, an error that engineers spent years trying to correct before we decided we like the way it sounds. Digital cameras allow us to capture more perfect representations of our environment than ever before, yet filmmakers add film grain, motion blur, and lens flares, all originally imperfections resulting from faulty equipment.

On its own, it’s interesting that perfection is not all it’s cracked up to be, but I also think this has a broader implication for how we think about politics. The progressive vision for society relies heavily on control, order, and scientific planning. Through the use of centralized knowledge, data, and technology, progressives believe they can achieve, if not perfection, then at least something that can be rationally planned as opposed to the randomness of nature. At its most severe, this mindset was manifested in the early 20th century American progressive movement, when eugenics was employed in an attempt to perfect the race or at least weed out undesirable elements.

Attempts to apply reason and the scientific method to something as complex as society are doomed to failure.

Libertarians, on the other hand, believe that attempts to apply human reason and the scientific method to something as complex as society are doomed to failure. There are just too many variables, not to mention the fact that human will itself is ultimately unpredictable. Libertarians believe that societal structures spring up as a result of all of us working independently, pursuing our own goals, and cooperating when circumstances require it. It’s not perfect; it’s often not even pretty, but it works pretty well most of the time and lacks the unfortunate side effect that seems to befall so many scientifically planned societies: mass famine or outright slaughter.

F.A. Hayek referred to the unplanned society as operating through a “spontaneous order” that emerges without a central planner. More recently, Jeffrey Tucker and others have substituted the phrase “beautiful chaos” which I find more apposite.

We Prefer Flaws

Order, symmetry, and regularity are fine as far as they go, but there seems to be something in human nature that rejects the rigidity of perfect order and craves the poetry that comes when things are just a little out of balance. It’s somewhat of a cliché at this point, but accommodation for human nature is a necessary feature of any society, and a significant part of the reason why socialism in practice always fails. I’ve had people call my dreams of a voluntary society Utopian, but in fact they’re anything but.

I love freedom in part because of how messy it is because it’s unpredictable and imperfect. It may be frightening to some, but for me, these features are part of what makes liberty worth valuing in the first place. After all, a life reduced to perfectly regular order, with perfect predictability, would be no life at all.

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The Psychology of Overrated Art

For as long as I can remember, the “My child could do that” critique of modern painting and sculpture has resonated with me. Broadly defined, I hasten to add, modernity creates great new visual art all the time; just look at graphic novels over the last forty years. But to my eyes, high-status painting and sculpture – the kind displayed in the “modern” section of museums – almost always looks like junk. When my little boy loudly declared, “That’s not art!” at the modern section of the National Art Gallery, I thought of the Emperor’s New Clothes and proudly smiled.

I know that most art aficionados will attribute my philistine position to ignorance. But what’s my theory about where they go wrong? I can hardly call them ignorant; they plainly know vastly more about the art they prize than I do. Instead, I blame their aesthetic errors on some well-known psychological biases. Leading the list:

  1. Confirmation bias. Human beings have a serious case of “believing is seeing.” If they expect some artworks to be good – say, because they’re in a museum – they’ll look around for the faintest sign of aesthetic merit. They’ll rationalize. And before long, many viewers will convince themselves that almost anything they expected to be good is good.
  2. Hindsight bias. Once people know what actually happened, they find it hard to believe that anything else was ever possible. Even when “luck” and “coincidence” clearly drive the results, we prefer stories about “deep causes” and “inevitability.” Thus, when an artist achieves worldwide fame, our natural inclination is to attribute his success to aesthetic skill – and dismiss the possibility that he merely won a lottery.
  3. Conformity. Psychologist Solomon Asch famously designed an experiment with one subject and seven confederates. He gave them a simple task – comparing the lengths of lines–then repeatedly ordered all the confederates to give the false answer. Result: When everyone else says something wrong, people do more than say the wrong thing. When debriefed, many subjects seem to sincerely believe the wrong thing. So if you’re in a museum where everyone around you claims soup cans are great art, mere consensus can plausibly change your mind for no good reason.
  4. Social Desirability Bias. People prefer to say and believe whatever sounds good. “The stuff in the museum is great” sounds a lot better than “My child could do that.”

While these biases elegantly explain how modern art continues, they admittedly do little to explain how modern art arose. For that, you need a richer story, probably starting with artists’ yearning for originality combined with the immense (and ever-rising) difficulty of actually coming up with anything that’s both original and good.

You could respond, “If people enjoy modern art, who cares about its aesthetic merit?” I’m tempted to protest, “And people call me a philistine!” But the better answer is: because (a) in the short-run, bad art crowds out better art, and (b) in the long-run, the prevalence of bad art discourages people who justifiably dislike it from training to do something better.

Last point: the “ignorance” and “bias” stories can both be true! “People underrate modern art because they’re ignorant” and “People overrate modern art because they’re biased” are two independent mechanisms. So even if art aficionados correctly diagnose the philistines that surround them, they’re missing half the picture.

Reprinted from the Library of Economics and Liberty.

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Keynes Is the Freddie Krueger of Economics

Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics.

Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

I’m always stunned when sentient adults make this kind of statement.

Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

Jeff Jacoby explains why this is poisonous economic analysis.

Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

By the way, I don’t think any Keynesians actually want disasters to happen.

They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

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You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

But let’s not get sidetracked.

For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

…Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

I’ll close by augmenting theory and academic analysis with some real-world observations.

Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

Though they always have an excuse. The government should have spent more, they tell us.

P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

Reprinted from International Liberty.

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Why Europeans View Scottish and Catalan Secession Differently Than Brexit

Last week, the Spanish constitutional court decided to put a fine of over $14,000 on the organizers of the Catalonian independence referendum, for every day that it continues. Prior to this decision, thousands of referendum ballots had been seized by the central government, as Spain considers its rebellious region to behave unconstitutionally. Catalonia, currently a part of the Spanish Kingdom, has been seeking independence from the Iberian state for almost 100 years now, with no indication that Madrid will ever allow to let them leave. As a matter of fact, Spain would lose 6 percent of its territory, 16 percent of its population, more than half of its start-up investments, and 20 percent of its GDP.

But Brexit Is Different

There is also a consistent lack of criticism towards the independence movements in both Scotland and Catalonia. Far more interesting than the actual struggle for independence is the incoherent position of EU-advocates towards this issue. Across Europe, most people seem to sympathize with the Catalan secessionists. While the EU has vowed to not intervene in the independence dispute, the European public seems to have picked a side in this fight, especially since the Spanish government has shown to be particularly stubborn. The Scottish National Party (SNP), which was a major contributor in organizing the Scottish independence referendum in 2014, is also a major supporter of Catalan secession, as it would increase its own chances of being heard in the United Kingdom. Famous Scottish secessionist Alex Salmond even vowed his support on Twitter, by holding a sign saying, “Si.”

Despite there being no polls conducted in other EU countries about the support for these secessionist movements, there is also a consistent lack of criticism towards the independence movements in both Scotland and Catalonia. It seems odd that after the harsh criticism at the mere concept of a referendum after Brexit there would be so little concern about other secessionist movements. It surely couldn’t be claimed that the general public position is that “the concerned people should make this decision for themselves.” Brexit saw large commentary from all over the world, with even President Obama arguing against it.

The reason for this lack of opposition is due to the clear pro-EU stance of both of these independence movements. The SNP continuously points towards the fact a majority of the Scottish electorate voted to remain in the European Union and combines its marches with numerous EU flags. Catalan secessionists have also made it very clear to EU-leaders in Brussels that a secession from Spain would be “a good thing” for the union. And in fact, Catalonians seem to be more excited for the “European project.” While about half of Spanish voters were confident that the EU improved the situation of the continent, Catalonians have consistently voted for pro-EU candidates as the regional presidents. The incumbent Charles Puigdemont, in a recent article for The Guardian, even believes that it is the role of the European Union Commission to intervene, by which he likely means the EU overruling the Spanish government and its constitutional interpretations.

Moral Inconsistency

Let us just imagine for a second that Brexit hadn’t happened, but that a eurosceptic movement in Wales (which majoritively voted to leave the European Union) would ask an international body to overrule the United Kingdom’s government and let Wales secede. Would people dress up as the Welsh dragon and call for the right of the people to decide for themselves? It seems highly implausible.

This is the problem with most of European politics overall: it never stands on any sort of principle. But we don’t even need to imagine secessionist movements coming under fire for purely political reasons. The secessionists in Flanders, the Northern region of the Kingdom of Belgium, have the same demands regarding independence but don’t generate any comparable support from abroad. The reason, once again, is their stance on the European Union: the New Flemish Alliance (NVA), the secessionist party arguing for independence, is a center-right movement which specifically states that it wants Flanders to remain in the EU. However, it also says that: “We are not afraid to question how the EU works.” That, in the eyes of the rest of the continent, is the deal-breaker. The NVA is often labeled as far-right or “threatening stability” for Belgium.

This is the problem with most of European politics overall: it never stands on any sort of principle. Fervent defenders of self-determination painting Scottish flags on their cheeks turn into angry protesters accusing people of fascism once growing Euroscepticism manages to get one country to leave the EU or makes people even slightly question the legitimacy of some of the union’s policy.

Secession is not a convenient political product marketed for a specific short-term political goal. The self-determination of people is their right to make their relationship with government as consensual as possible.

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Your House Does Not Need a New Roof at My Expense

Pardon the pun, but I would like to discuss the subject of “sunk costs” in the context of hurricane-induced flooding.  Here’s the background, from a page one Wall Street Journal article on September 16, “Repeated Claims Flood Insurance Program”:

Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over the roof.”

The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country.

Government records show that between 1979 and 2015 the federal flood insurance program paid out more than $1.8 million to rebuild the house—a property that Mr Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month.

“It’s my investment,” the 49-year old said this summer, before the hurricane. “I can’t just throw it away.”

On a house worth maybe $800,000, the government expended a total of $1.8 million—spread over as many as 22 occasions. What Mr. Harmon has personally spent (to build or buy, and later to improve or fix the house) is not stated, other than the $300,000 for recent hurricane repairs. It’s conceivable that this one single-family structure has sucked up a sum equivalent to five times its value, or more. And since it’s flooded 22 times in 36 years, it’s probably not done sucking.

“Loss aversion,” is the uneasy feeling people often have about wasting something they’ve invested in.

Mr. Harmon says he “can’t just throw it away” but I as a taxpayer sure wish he would.

Loss Aversion

The moral and economic issues raised by government flood insurance ought to be obvious. Since its creation by Congress in 1968, the National Flood Insurance Program (NFIP) has lost money every year—about $25 billion to date, with this year’s deficit in excess of a billion.

Mr. Harmon’s reluctance to give up on his house seems motivated by what economists call “loss aversion,” the uneasy feeling people often have about wasting something they’ve invested in.

You buy a ticket to a movie but at the last minute a friend invites you to a sumptuous dinner at your favorite restaurant. That would be an easy decision if you hadn’t already bought the theater ticket; you could always see the film next week. But darn it, you paid for it and if you don’t go, it’ll be wasted. You may still accept your friend’s invitation, but with a tinge of regret. (To lessen that regret, you might pass the ticket on to someone else).

Nonetheless, economists caution us to recognize that a cost you’ve incurred in the past and which is unrecoverable is, in a word, “sunk.” The sooner you can put a sunk cost behind you—perhaps learn from it but otherwise forget about it—the better your future decisions will be.

Many times I’ve caught myself allowing a sense of loss aversion to overwhelm my knowledge of sunk costs. Here’s an example I shared often with students when I taught at Northwood University: I once bought a half gallon of butter pecan ice cream on sale for a mere 99 cents. “Such a deal!” I thought. When I opened it at home, scoop in hand, I discovered it was almost all ice cream (lousy to the taste, no less) and virtually no pecans! I suppose I could have angrily returned it to the store for a refund (minus the two dollars in gasoline it would have taken to get there), but I’m an easygoing chap. I just stuck the whole thing in my tiny freezer. For weeks thereafter as I tried to make room for other things, I would jam that half gallon of bad ice cream into a different corner.

Fixating on sunk costs is a major reason why a lot of small investors stay small.

Then it hit me. I’m never going to eat that stuff! It’s just taking up room I could use for something better. That 99 cents ain’t comin’ back. What am I keeping this junk for? Pleased that I was finally allowing my economics knowledge to inform me, I tossed that bad investment into the garbage can.

Opportunity Cost

As the author of this article explains, another example of this “sunk cost fallacy” would be to assume, “I might as well continue dating someone bad for me because I’ve already invested so much in them.”

Fixating on sunk costs is a major reason why a lot of small investors stay small. They can’t bring themselves to admit a mistake when the market moves against them. Rather than cut their losses short and move on, they hang on. Loss aversion then becomes loss accumulation.

Obviously, some people are quicker than others to learn from the errors arising from their loss aversion and the sunk cost fallacy. But one general lesson proves itself time and again—if it’s your own investment you’re playing with, and losses associated with it are all internalized (that is, it’s you who pays them), you tend to learn sooner rather than later. Your behavior changes as a result, so that you act less to “avoid” past losses and more to avoid future ones—the ones that are actually avoidable.

Don’t let a past, unrecoverable cost hobble your future decision-making or forgo a better opportunity.

In the case of Mr. Harmon and his flood-prone home, his endless commitment seems akin to forgoing the better invitation to go instead to an inferior movie, or stuffing the lousy ice cream back in the freezer, or getting engaged to a bad fit because of all the gifts and dinners he previously bought her. So why does he do it? Because his sunk costs are only partially internalized; most of them are paid by other parties (taxpayers). From his vantage point, his decision to throw your good money after his bad money doesn’t seem nearly as irrational as it might to you and me.

There’s another concept of cost that’s being overlooked in the Harmon example—opportunity cost. If the federal flood insurance program hadn’t given Mr. Harmon $1.8 million for his house, what might those from whom it was taken spend that money on? Perhaps three or four houses. Or a whole lot of things, big and small, according to the personal choices of those very people who earned the money in the first place. That unrealized cornucopia is what Frederic Bastiat referred to as “that which is not seen.”

Lots of lessons here, some very obvious and others more hidden or implied: Don’t cry over spilt milk. Don’t let a past, unrecoverable cost hobble your future decision-making or forgo a better opportunity.

Failure to internalize sunk costs results in a waste of resources by short-circuiting market signals and creating the wrong incentives. (Unless you live in an infinitely bountiful Garden of Eden, this latter point should concern you.)

So now that we’ve learned these lessons, tell me which of the following proposals makes the most sense:

  1. Keep the federal flood insurance program in place. We’ve invested in it and can’t afford to kiss off those billions we’ve already spent.
  2. Kill the federal flood insurance program (or at least price it so that those who build in flood-prone areas pay the full costs of it). Anything less is just a welfare program, not insurance.

I think you know my druthers.

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The Real Reason Young People Can’t Get Jobs in Africa

6.8 percent: that was July’s seasonally adjusted unemployment rate for US workers ages 18–44. For those ages 18–24, the rate was 9.5 percent. That’s a high rate for young people. But if you were 20 years old and lived in Africa, you might be thrilled with an unemployment rate like that.

Today, 60% of all those unemployed in Africa are youth. In South Africa, more than 55% of young people are unemployed. Those are staggering figures. And many who are working are underemployed: with a job in the informal sector, working only a few hours, or helping on family farms or in family businesses. They scrape by as “necessitous” entrepreneurs doing what they can to survive, often juggling multiple informal jobs.

Given that Africa has the world’s youngest population, the lack of steady, formal-sector jobs is an enormous political and economic risk factor. Unemployed youth are more likely to be criminals, may be lured into militant groups, and contribute to political unrest. With few other opportunities, the cost of engaging in harmful behaviors is lower than it otherwise would be. Economic vulnerability among the young contributes in important ways to overall social instability that frustrates economic growth.

This is not a new problem — African countries have had a tough time creating formal sector jobs for youth for decades.

Bad policies contribute to poverty in Africa

So what needs to change to fix Africa’s jobs problem? The problem of too few formal sector jobs for those who want to work is a problem of poor policies. In too many African countries, hiring and firing workers is too expensive. Governments create legal and regulatory barriers (or fail to address discriminatory social norms) that make it more difficult for employers to hire women. They restrict access to certain professions or limit the number of hours women may work. They also create barriers to firing poorly performing workers, which makes it riskier for businesses to take a chance on people with limited work experience. Youth and young women particularly tend to lose out.

As the most recent Doing Business report notes, “Low and lower-middle-income economies tend to have more rigid employment protection legislation compared to more developed countries.” These “rigidities” include things like limits on fixed-term (short-term or maybe part-time) work contracts — less than 60% of sub-Saharan countries allow for fixed-term contracts (Europe is even worse!). The legal requirement to give a worker severance pay when a job is ended may help in some cases but can have unintended consequences: it adds to the costs of hiring people, limiting the number of formal jobs created and the length of those jobs.

The region continues to rank abysmally in terms of starting a business. For example, in Sierra Leone, an employer is required to pay 132 weeks of severance for a worker with 10 years of tenure. Ghana and Zambia both require more than 86 weeks, Mozambique requires 65 weeks, and Equatorial Guinea more than 64 weeks. This means that 5 of the top 10 countries with the highest severance payment requirements are in sub-Saharan Africa (no developed countries are in the top 10).

Fixing labor laws to encourage more participation from women and young people would be one important way to promote job creation. It’s also critical to improve the overall business environment and to support conditions that encourage, not discourage, business creation and enable entrepreneurs to flourish.

Here, there’s a huge scope for improvement in sub-Saharan Africa. The region continues to rank abysmally in terms of starting a business, enforcing a contract, registering property, trading across borders, getting credit, protecting minority investors, and getting access to electricity. While some countries are taking steps to make it easier to do business overall, African countries continue to make it too cumbersome and too expensive to start, run, and then, if needed, terminate a business. The result is a dearth of jobs for all Africans but especially for youth.

Is There Hope for Improvement?

It’s this kind of change from within that holds the most promise for Africa’s millions of unemployed youth. Yes, so long as barriers to trade within Africa fall. In many countries, service industries are expanding. Economies still rely heavily on commodity production (oil, gas, gold, timber, etc.), but this is changing. More diversified economies are helping to meet domestic and international consumer needs for goods like processed agricultural products, cosmetics, textiles, and clothing. And African entrepreneurs, like entrepreneurs everywhere, are on the lookout for new and profitable opportunities.

Interested in seeing what some of Africa’s leading entrepreneurs are up to? They’re working in telecom, fashion, marketing, and branding for leading multinationals and the food industry, among other things. As they succeed, one hope is that they’ll push for more changes to African economies, creating a more vibrant, open, and competitive private sector. It’s this kind of change from within that holds the most promise for Africa’s millions of unemployed youth.

Reprint from Learn Liberty

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Give Everyone a Raise through Payroll Tax Cuts

Republicans are just getting started with their effort to reform individual and corporate taxes, but already it is possible to see warning signs ahead. Opponents of reform say the effort will mainly benefit high-income households, who don’t need the help. They ignore the effect lower marginal rates will have on economic growth and job creation.

Tax reform could falter if the public perceives it as a giveaway to the rich. Republicans can partially blunt the effectiveness of these attacks by including in their plan a reduction in payroll tax rates, which would directly help the middle class.

Why Payroll Taxes?

The payroll tax is a much heavier burden on the middle class than income taxes. According to the Tax Policy Center, 62 percent of all taxpaying households paid more in payroll taxes than income taxes in 2017; and 67 percent of households with incomes below $100,000 in annual income paid more in payroll taxes. The average effective payroll tax rate for households in the middle quintile of the income distribution was 8 percent in 2016, well above the average effective rate of 3.5 percent for income taxes.

Congress could enact another payroll tax rate cut of 1.5 to 2 percentage points without depleting the Social Security or Medicare trust funds. In the past, policymakers have been wary of cutting payroll taxes because the revenue is used to pay for Social Security and Medicare Hospital Insurance (HI) benefits, and both programs are projected to run short of funds in the future. The current tax rate for Social Security is 12.4 percent of wages, split evenly between workers and their employers, up to a maximum of $127,200 in 2017. Social Security has an unfunded liability of $12.5 trillion over the next 75 years.

Workers and employers also pay a combined 2.9 percent tax for Medicare, and there is no limit on the amount of wages subject to the tax. High earners — individuals who earn above $200,000 and couples who earn above $250,000 — pay an additional Medicare tax of 0.9 percent.  The Medicare HI trust fund has an unfunded liability of $3.3 trillion over the next 75 years.

In 2011 and 2012, President Obama supported and Congress enacted a 2 percentage point reduction in the employee portion of the Social Security payroll tax, reducing revenue by about $100 billion in 2011 and slightly more in 2012. The law transferred an identical amount of funds from the general fund of the Treasury to Social Security to prevent depletion of the program’s trust funds.

Congress could enact another payroll tax rate cut of 1.5 to 2 percentage points without depleting the Social Security or Medicare trust funds and without relying on another transfer of funds from the Treasury. Tax reform is supposed to be about cutting tax rates as well as broadening the tax base by closing loopholes and limiting tax breaks. There are a number of tax breaks that reduce the amount of payroll tax revenue collected by the government that could be narrowed to help pay for a cut in the payroll tax rate.

How to Do It

For starters, the exclusion of employer-paid health-insurance premiums from taxation will reduce payroll taxes by $1.8 trillion over the period 2017 to 2026. Capping the amount that is tax-free at the 75th percentile of plan premiums would increase payroll tax revenue by about $72 billion over 10 years. In addition, employer-paid premiums for disability and other income-replacement programs are excluded from the taxable compensation of workers.  Limiting that exclusion could provide at least another $100 billion in payroll tax revenue over 10 years. In a large tax reform package, there are likely to be additional opportunities to increase payroll tax collections by broadening the tax base.

A cut in the payroll tax rate would in no way lessen future Social Security benefits. Further, the full benefits of a payroll tax cut could be limited to households with incomes below a certain threshold, such as $75,000 per year. (The income tax system could gradually recapture lost payroll tax revenue from households with higher incomes.) The tax cut could also be time-limited in the initial legislation, so as to fit within available offsetting revenue increases, and then extended later as more offsets were identified.

A cut in the payroll tax rate would be good for workers. A 2 percentage point reduction in the total tax would increase the after-tax income of a household with $50,000 in earned income by $1,000. Cutting payroll taxes would also boost economic growth by encouraging more work. A cut in the tax rate could, at least in theory, reduce the supply of labor by boosting the income of workers who could then substitute more time off for time at work. But there is substantial evidence that high marginal tax rates on labor generally have the opposite effect: discouraging work by reducing its value to workers with high taxes.

Some skeptics of cutting payroll taxes argue that because Social Security and Medicare benefits are partly based on what an individual earns while working, the economic value of such a cut is lessened, as workers equate payroll taxes with contributions toward their retirement. But the benefits owed to workers under Social Security are based on the amount of wages earned by the worker, not the taxes paid on those wages. Consequently, a cut in the payroll tax rate would in no way lessen future Social Security benefits. Further, the opaqueness and complexity of the Social Security benefit formula make it near impossible for the average worker to make a sensible connection between what he earns and what he will get in retirement. (There is often very little connection, anyway.) Medicare benefits are in no way tied to the amount of taxes paid or even to overall earnings. Instead, workers must meet a minimum threshold of wages over a 10-year period to become eligible for coverage at age 65.

By focusing tax reform on the individual and corporate income tax systems, Republicans have made their task more difficult than it should be. The federal income tax is already progressive; low and moderate wage households pay little in income taxes. But, in relative terms, they still pay a lot of payroll taxes. Cutting that tax is the best way to deliver real tax relief to families that need it most as well as to increase the value of their work effort.

Reprinted from American Enterprise Institute

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How I Found Home in a Foreign Land

A melancholy saying reminds us that you can’t go home again. I know I can’t. My parents have been dead for decades, and my brother Bill, my only sibling, died three years ago. Moreover, the house in which we lived when I was growing up in the late 1950s and early 1960s has been wiped from the face of the earth. Only a few old-timers might recall that on a certain spot of now-bare ground once stood the house in which Jess Higgs and his family flourished some sixty years ago.

Homecoming of a Sort

Yet, if you cannot go home again, it may happen that home can come to you, as it has come to me in a heart-warming way since my emigration to Mexico two years ago. Here in Mexico, I live in a remote place with very limited local availability of groceries and other ordinary consumer goods. Fortunately, however, three times each week Lucio, an enterprising fellow from Bacalar, a town a hundred miles away, comes to my gate with his pickup loaded with fresh produce, eggs, pastries, tortillas, and other goods. (If we ask him to bring something he would not ordinarily bring, he brings it on a later trip.) Among the goods I routinely buy from him are cantaloupes, and often the label on the melons indicates that they were produced by Pappas Family Farms of Mendota, California.

I immediately feel a link to my boyhood and relive at least for a few moments the youthful joys of that long-ago time and far-away place. Which takes me back to my boyhood. I grew up on the west side of the San Joaquin Valley, on a ranch about eight miles east of a little town called Firebaugh, which is itself about 45 miles or so west of Fresno. When I was growing up there, Firebaugh called itself the “Cantaloupe Capital of the World.” (I notice that recently this claim is being made by Mendota, a town about nine miles down the road from Firebaugh.) During the summers of several years in the late 1950s and early 1960s, I worked at General Box Company’s facility just outside Firebaugh, where materials were prepared for the shipping of cantaloupes packed in wooden crates loaded into iced-down railroad cars. (That technology has been superseded in more modern times.) Among my jobs at General Box was operating a machine that put labels on the end slats of the crates. These labels were colorful and artistic identifications of the various growers, including Pappas Farms.

So, today, when I buy a cantaloupe brought to me in the far reaches of the Mexican state of Quintana Roo, I immediately feel a link to my boyhood and relive at least for a few moments the youthful joys of that long-ago time and far-away place.

Heartwarming Entrepreneurship

Thank God for the entrepreneurs. I recognize, too, with immense gratitude the debt I owe, along with many others, to the entrepreneurs who make the world of commerce serve the needs of consumers so beautifully. George Pappas, who founded Pappas Family Farms, back in the 1930s, had immigrated a few years earlier from Greece. Like so many other immigrants, he did not settle for being a lifelong wage worker, but ventured to take the risks and make the demanding efforts required to establish a successful firm. The longevity of his creation speaks for itself. But let us not forget my amigo Lucio while we are celebrating and expressing gratitude for entrepreneurship. Lucio is never going to rival Bill Gates in his accumulation of wealth, but he works wonders to make life in my little community here in Mexico more livable and joyful.

Thank God for the entrepreneurs, both those who immigrate from distant lands and those who work among us every day to keep the wheels of commerce rolling. Today’s world is utterly reliant on entrepreneurs. Their willingness to bear risks and their skill in appraising how they might best serve consumers make life possible, not to mention comfortable and often delightful, for the earth’s huge human population. They are at work everywhere—in the USA, in Mexico, and in the enormous movement of goods and services between these two great economies.

It is nothing short of tragic, as well as utterly foolish, that the Trump administration is devoting itself to impeding and distorting such commercial entrepreneurship between the USA, Mexico, and other countries. Let us hope that even in Washington, D.C., some of the economic dullards and political opportunists will rouse themselves and decide to desist from their current, destructive policies.

Reprinted from The Independent Institute

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Finns Aren’t Breeding Taxpayers Fast Enough for the State

The world’s best welfare state arguably is Finland.

Yes, the burden of government spending is enormous and the tax system is stifling, but the nation gets extremely high scores for rule of law and human liberty. Moreover, it is one of the world’s most laissez-faire economies when looking at areas other than fiscal policy.

Indeed, depending on who is doing the measuring, Finland ranks either slightly above or slightly below the United States when grading overall policy.

The Problem

Yet even the best welfare state faces a grim future because of demographic change. Simply stated, redistribution programs only work if there is a sufficiently large supply of new taxpayers to finance promised handouts.

And that supply is running dry in Finland. Bloomberg reports that policymakers in that nation are waking up to the fact that there won’t be enough future taxpayers to finance the country’s extravagant welfare state.

Demographics are a concern across the developed world, of course. But they are particularly problematic for countries with a generous welfare state since they endanger its long-term survival.…the Aktia Bank chief economist said in a telephone interview in Helsinki. “We have a large public sector and the system needs taxpayers in the future.” …According to the OECD, Finland already has the lowest ratio of youths to the working-age population in the Nordics. …And it also has the highest rate of old-age dependency in the region. …The situation is only likely to get worse, according to OECD projections.

Here are a couple of charts showing dramatic demographic changes in Nordic nations. The first chart shows the ratio of children to working-age adults.

And the second chart shows the population of old people (i.e., those most likely to receive money from the government) compared to the number of working-age adults.

As you can see, the numbers are grim now (green bar) but will get far worse by the middle of the century (the red and black bars) because the small number of children today translates into a small number of working-age adults in the future.

To be blunt, these numbers suggest that it’s just a matter of time before the fiscal crisis in Southern Europe spreads to Scandinavia.

Heck, it’s going to spread everywhere: Western Europe, Eastern Europe, Asia, the developing world, Japan and the United States.

Boosting Birthrates

Though it’s important to understand that demographic changes don’t necessarily trigger fiscal and economic problems. Hong Kong and Singapore have extremely low fertility rates, yet they don’t face big problems since they are not burdened by Western-style welfare states.

By the way, the article also reveals that Finland’s government isn’t very effective at boosting birthrates, something that we already knew based on the failure of pro-natalist government schemes in nations such as Italy, Spain, Denmark, and Japan.

Though I’m amused that the reporter apparently thinks government handouts are a pro-parent policy and believes that more of the same will somehow have a positive effect.

Finland, a first-rate place in which to be a mother, has registered the lowest number of newborns in nearly 150 years. …the fertility rate should equal two per woman, Schauman says. It was projected at 1.57 in 2016, according to Statistics Finland. That’s a surprisingly low level, given the efforts made by the state to support parenthood. …Finland’s famous baby-boxes. Introduced in 1937, containers full of baby clothes and care products are delivered to expectant mothers, with the cardboard boxes doubling up as a makeshift cot. …Offering generous parental leave…doesn’t seem to be working either. …The government has been working with employers and trade unions to boost gender equality by making parental leave more flexible and the benefits system simpler.

Sigh, a bit of research would have shown that welfare states actually have a negative impact on fertility.

The bottom line is that entitlement reform is the only plausible way for Finland to solve this major economic threat.

P.S. Since the nation’s central bank has published research on the negative impact of excessive government spending, there are some Finns who understand what should be done.

Reprinted from International Liberty.

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Live Blogging a Book Makes You Smarter

There are so many products and services that claim to make you smarter. It’s a huge industry. Get-smart video games and puzzles are everywhere. Websites and apps that promise fast results are booming.

We can easily fool ourselves into thinking we are intellectually fit. I’m a skeptic of the tools being promoted these days, but not of the overall idea. It makes complete sense. Not everyone is a born genius in every area, but everyone can surely improve the efficiency and functioning of the mind you have.

Heaven knows we think enough about getting our bodies in shape. Maniacal energy goes into pumping up our bodies, losing weight, flattening our bellies and bulking up our chests and arms. Health clubs have remained a boom-time industry, and there’s no end to the diet books, strategies, theories and ambitions.

It’s all terribly superficial compared with a much more important matter of finding ways to strengthen our capacity to think. But as with health clubs and exercise machines for our bodies, we will quickly discover that there are no shortcuts for… hard work.

Intellectual Fitness

Why so little attention to the mind? We can easily fool ourselves into thinking we are intellectually fit. It’s hard to admit it to ourselves that we aren’t thinking very well, that we are relying too much on our biases, that we aren’t challenging ourselves, that we have a reduced capacity for creativity and absorbing new information.

Step one: Admit there’s a problem that needs to be addressed.

To shape up the body, and overcome our natural tendency to cut ourselves too much slack, people have various strategies. They hire personal trainers to push them further than they think they can go. They go to class so that they can exercise alongside others. They go to month-long camps that monitor eating and compel all-day exercise.

You need some framework to help, like the virtual path on a treadmill or stationary bike. None of this works with intellectual life. It is just you and your brain, and if you lack the discipline to undertake the challenge, improvement is not going to happen. You need some framework to help, like the virtual path on a treadmill or stationary bike, something that keeps you on track and discourages you from cutting corners.

Real-Time Learning

The best method I know is something taken from the world of journalism. When people attend live events like concerts or conferences, they tweet or blog the event as it happens. You see this during political debates, too. The journalist listens, reports and responds in real time.

It makes for exciting reading, and it is also a very challenging way to write. You have to pay careful attention and stay constantly engaged. You can’t suddenly flake out and skip some of the action. It is a challenge to extract information from the external world and convey its meaning in prose. It is also an excellent way to remember and learn from any event.

A Book Is An Event

What if we treat a book like an event? It is an event, really. A great book can be just as interesting and invigorating–and even more evocative–than a live event in reality. This is obviously true of fiction, but it is also true of nonfiction, provided the book is well written and deals provocatively with a topic you find intriguing.

This task takes us away from our default use of our intellectual talents. I’m not putting down the Snapchat, the Tweet, the Facebook update, the email or the video game. All of these activities are better than what consumed the brains of several generations from the 1950s onward, namely sitting in a puffy chair and watching people on a screen talk to you.

But live blogging a book is far better still because of the sustained focus on one single subject that it requires. It is a seriously difficult task, one that requires a stream of daily concentration, creativity and a willingness to stick it out until the end. The results will be obvious to you at the end of the long road. You will have experienced an upgrade in your capacity to think, write, read and process ideas.

The ideas in the book become the capital goods over which you take ownership.  Live blogging a book is different from reviewing a book or writing a book report. The point is to process information and react to it as it comes to you in real time. The live blog doesn’t merely relate the contents. It reacts to the contents of the book and how it interacts with your own prior existing ideas and how it may or may not have changed your understanding.

If while you are reading you finding yourself reflecting on an example or remembering some debate you had with someone on the topic, this is perfect live blog fodder. Put it in there. The point is to make a literary chronicle of how some book has affected your thinking chapter by chapter, and to do so in the most intellectually honest way you can.

Reading this way is a completely different experience. You engage much more closely and attentively. The ideas in the book become the capital goods over which you take ownership in order to produce a new product of your own. 

Be Honest

If you aren’t buying what the author is selling, say so. If the author illuminates an experience or thought you already had, say that too. If the author has contradicted himself and you take note of that, put that in too. There’s no reason to try to anticipate what is in the next chapter. Write only what you have learned so far as the literary event proceeds.

Part of the challenge here is to make your own writing compelling, even apart from what you are reading. You will notice that you will probably start writing a bit like the prose in the book you are live blogging. That’s very good, because imitation of this sort is an important part of learning, too.

Your capacity to recall the contents and use them in later conversations and thinking will be greatly enhanced. I would suggest a word goal for each live blog, perhaps 750 words per chapter. If the book is 20 chapters (never skip), you will end up with a pretty sizeable monograph on your hands. This is extremely satisfying!

Put a title on it and go back through it. You might be surprised at what you wrote at the outset. Then you will be in a position to see whether and what extent this book actually changed the way you think.

This much is for sure: Your capacity to recall the contents and use them in later conversations and thinking will be greatly enhanced. It teaches you to be thorough and not selective in your reading. Not only that, you will experience an upgrade in your capacity to notice things and ideas, think about them, process them and roll them into your existing thinking.

It’s like an intellectual boot camp that you initiate and manage entirely on your own.

You Want a Hot Mind?

It is not as hard as it may first appear. And the use of the live-blog model provides the disciplined framework that inspires you to push through all the way to the end.

What books? I might suggest an item from FEE. We have so many books you can download for free. These are all great choices, but there are millions more. The important thing is to choose great books that interest you.

Live blogging is an effective literary tool that will do more than all the gizmos you might have over the next decade to enhance your ability to think and process information. It is something we should all require of ourselves just to try it out and see the results.

It is also a great activity for young students. It’s true that the spread of this approach will contribute nothing to the trillion-dollar industry, and certainly not give us an abdominal six-pack, but it could make a mighty contribution to making us all think more clearly. 

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