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Neutered Tax Cuts

The drive for tax cuts obscures the greater benefit of tax reform and simplification.  Taxes, however, are only a single component of friction costs. If the purpose of tax reform or tax cuts is to stimulate investment and productive activity then it can not be isolated from other friction costs. If taxes are cut but regulations are increased then the expected benefits are muted. Taxes and regulations are only two of the friction costs. The real cost of capital which is dependent on Fed policy and debt is also critical.  Trade policy  can open and close markets for raw materials and finished products. A  litigious culture plagues some industries more than others.

The dynamics of the tax cuts also matters: What taxes are cut? By how much?

One friction cost that is commonly overlooked is uncertainty.  Uncertainty is different from risk.  When the rules are known the investor can make rational decisions about risk. When the dealer can randomly change the value of an  ace, the black jack table will become vacant.

Kevin Williamson addresses the very real cost of this uncertainty in Regime Change in National Review:

One of the basic problems here — perhaps unexpectedly — is the national debt and the deficits that contribute to it. The debt presents straightforward problems: Keep running up the debt and eventually debt-service payments become so crushing that the federal government has no money left for anything else. But there are other problems related to the national debt, problems rooted in earlier efforts to reduce the deficit. Because of the way our budget rules now work, tax cuts passed by Congress frequently are temporary. They have sunset provisions, and have to be renewed. Hence all that endless talk a few years ago about “renewing the Bush tax cuts,” which eventually became the Obama tax cuts. The Byrd Rule, which is part of the 1974 Budget Control Act, allows senators to block bills being passed through the reconciliation process if those bills would add to the deficit over a ten-year budgetary horizon. Hence, lots of tax cuts expire in ten years. It doesn’t do any good, really — it’s just a way to keep statutory spending controls from doing their jobs.

There is not going to be any certainty on the big domestic-policy items — taxes, health care, the entitlements, and much else — until there is a reasonable, sober, sustainable settlement on our national fiscal challenge. So long as the charade of ten-year sunsets and CBO-satisfying accounting shenanigans rule the day, there is not going to be any predictability — and that is going to impose real costs on economic growth, employment, wages, and future prosperity.

 

The Half Life of Populism

From Kevin Williamson at National Review, ‘Winning’ Isn’t Winning

It is often the case that populism has a short shelf life, after which is ceases to be popular. There is a reason for that: Populism is almost always based on a false hope. Populist demagogues such as Trump arise when people are broadly dissatisfied with the national state of affairs and begin to lose confidence in critical institutions. Along comes a charismatic outsider — or someone doing a good impersonation of one — who offers an alternative. Trump-style populism is an almost entirely negative proposition: “I’m not one of Them.” What happens next is in most cases what’s been happening with Trump: The promise of radical change quickly gets mired down in the messy realities of democratic governance. (If you’re lucky, that’s what happens; absent the messy realities of democratic governance, what you end up with is Venezuela.) The “independent” man, the “outsider,” turns out not to have the experience, knowledge, or relationships to get much done. The savior doesn’t deliver the goods.

Politics as Performance Art

From National Review Kevin Williamson writes McHealthcare Deluxe- The Affordable Care Act is a failed political product.

There are better and worse ways to fail, and it pays to be conservative when trying out new products, most of which fail, or investing in a new business, most of which fail. Learning to do that well is what makes a wise venture capitalist successful and an innovative executive effective. It’s also why conservatives like federalism, using the states as 50 “laboratories of democracy,” as Louis Brandeis put it. Trying it out in Utah and failing costs less than trying it out coast to coast and failing — and what works in Utah may not work in New Jersey. The more robust and immediate feedback mechanism of local democracy is also why conservatives like subsidiarity, mitigating problems at the lowest effective level of government rather than treating everything as a national question.

Feedback matters. One of the reasons the private sector often is so much more effective than government is that market competition forces firms and entrepreneurs to admit error or suffer dire financial consequences. Capitalism will slap you upside the head if you do something dumb — ask President Trump’s bankruptcy lawyers about that. In the marketplace as in nature, the instrument of evolution is death: Bad products and bad ideas don’t make it, and capital eventually flees bad firms and bad investors. A good company doesn’t punish an executive for trying something new and failing — it punishes him for refusal to admit failure when that failure is obvious and for continuing to shovel precious resources into the bonfire of his vanity.

Politics should be more like that, but it’s getting less like that. Because our political identities are shaped by tribalism rather than by reason, creating a political culture that embraces healthy experimentation and iterative, incremental reform is difficult for us to do. What we do instead is put together unwieldy bundles of legislation that promise to solve a particular problem for now and for all time — and then accuse the other side of being evil for opposing it. That isn’t government — it’s performance art.

HKO

The health care debates is so contentious because it focuses the differences in political and economic philosophies into a single issue. Does this require a central government solution or is it better served  by solving it locally in the 50 laboratories we call states?

One of the greatest advantages of market solutions is not that it always picks better solutions, but that it recognizes failures quicker and better. The opposite happens in government. Self serving bureaucracies institutionalize failures.  Instead of admitting failure and redeploying assets into better and different solutions we institutionalize failures and increase their funding.

Trying to agree on component solutions is so arduous that we think that systemic solutions is the preferred path. But these solutions are so plagued with compromise that it has become impossible to make them effective. One side wants to build a bridge, the other side does not. We compromise by building half a bridge, spending 90% of the money and failing to provide the perceived need to cross the river.

The unwillingness to admit failure and implement corrective action is a big reason to be skeptical of expensive central solutions.

The Social Engineering Trap

From Kevin Williamson at National Review, A Conservative Tax Hike

The federal government uses the tax code for all sorts of social-engineering purposes: to encourage and subsidize investment in manufacturing or green-energy businesses, to reward charitable giving, to encourage home-ownership. The federal government is not very good at social engineering: Its efforts to help low-income Americans with bad credit borrow money to buy houses they could not afford was a significant contributor to the subprime meltdown and financial crisis of 2008–2009. Encouraging home ownership through subsidizing mortgage interest (which is what that deduction actually does) can encourage the wrong kind — the low-equity, high-interest kind — of homeownership. Likewise, offsetting state income taxes encourages states to jack up their levies: Because some costs are passed on to the federal treasury, Sacramento can get $1 in state income-tax revenue at a real cost to California taxpayers of less than $1.

The federal government really should not use the tax code to encourage or discourage any kind of behavior. It should use the tax code to raise the money necessary for the operation of the federal government in a way that minimizes economic damage and market distortion.

The Enemy of Good Government

from Kevin Williamson, It’s Time to Do Nothing about Guns

But our passions can run away with us, especially in politics. Politics is not about policy: Politics is about tribe. Turn on Thom Hartmann’s radio program some time and, if you can stomach two minutes of it, you’ll understand what politics really is for many people: a license to hate. The indulgence of hatred is, for a certain kind of person — not an uncommon type, either — extraordinarily pleasurable, as is the expression of outrage, disgust, and indignation. You probably have seen this, in someone else or in yourself: In the course of detailing some outrage or act of buffoonery, one lists each detail, building up to a crescendo, and then — the smile. A big, wide smile of serene satisfaction announcing that the day’s outrage has been duly and deeply savored.

Passion is what drives us to “do something,” exclamation point implied. It is also what causes us to misunderstand politics as a contest between white hats and black hats: Think of how much of our political discourse is dedicated to explaining the other side as some sort of conspiracy, with the Right talking about “Alinskyites” and “Cloward-Piven,” the Left whispering darkly about the Koch brothers or, this week, NRA money lining the pockets of politicians.

Passion is the enemy of good government — and the enemy of the civil peace, too. Good government is boring government: regular, orderly, predictable. To govern dispassionately requires a measure of mental serenity, which is hard to come by while Americans are still bleeding in Las Vegas. The easiest and surest way to equanimity is to let time pass. And, in the meantime, just do — nothing.

HKO

“We have to do SOMEthing!” are the words uttered to denote an urgency that undermines thoughtful analysis. Good government is boring, not a continuous media spectacle.