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Government Interference in the Economy Has Been an Unmitigated Disaster
Raymond Richman, 2/11/2015
Few Americans know the economic harm that government mismanagement of the economy has caused. And government intervention in the economy continues to cause untold economic harm. The mere growth of government slows down the rate of economic growth. But the trend is exacerbated by numerous government interventions in the economy such as bad taxes, subsidies to favored businesses, fixing prices, levying tariffs that favor those businesses, fixing prices as in the case of the minimum wage law, building low rental but high cost housing for the poor, and encouraging loans to unqualified home buyers, ineffective projects to delay global warming, tuition loans to students whose studies do not prepare them for high-paying jobs. The list goes on and on. Here are some of the major government prograns that adversely affect the economy:.
- First and foremost, the Corporate Income Tax which was originally enacted to appease anti-big-business sentiment is the worst big revenue producing tax. Its proponents unknowingly created a tax that violates all the criteria of a good tax; it is regressive, placing a higher tax burden on middle income workers than on the really rich and it encourages corporation to engage in bad economic practices, and it places American manufacturers at a competitive disadvantage in international trade. The corporation as an artificial entity bears none of the burden of the tax. The burden falls on shareholders not all of whom are rich. Many workers and moderate income families have their pension funds and IRAs invested in corporate shares and their dividends are taxed at 35% when their maximum rate of personal income tax is 15, 20, or 25%. In addition, the corporate income tax encourages such bad economic practices as debt instead of equity financing and buybacks by corporations of their own shares. An egregious example of the incentives of the corporate income tax is the decision of Apple Corporation, which has billions of cash reserves abroad, to borrow a huge sum from Swiss banks to finance the buyback of its stock. Interest it pays on the loan will be tax deductible as a business expense! There is an easy solution. Integrate the corporate and personal income taxes by treating the earnings of corporations as we do partnerships. After all, a corporation is just like a partnership except it issues shares of stock instead of partnership shares.
- US commitment to free trade instead of balanced trade damaged the US economy perhaps permanently. The US continues to support free trade notwithstanding the fact that some of our trading partners impose policies that have stolen millions of American jobs and whole industries. Another cause of the size of the trade deficit is that American exporting corporations are saddled with the highest rate of corporate taxation of every large manufacturing country in the world making it harder to compete with their competitors abroad. It is the cause of the out-sourcing of manufactures, the movement of factories to foreign countries, and corporate inversions, moving corporate headquarters abroad. My colleagues and I have proposed a scaled tariff, a single country variable tariff, to bring trade into balance with any country which for whatever the reason legal or illegal, we have a chronic trade deficit. In this instance where government action is essential to protect the jobs of American workers, our government has chosen not to intervene. Another benefit, the scaled tariff makes the World Trade Organization unnecessary, a saving to the entire world. Every country has the power to enact the scaled tariff.
- The minimum wage. The US imposition of a minimum wage has create an “army of unemployed” and damaged the social fabric of low income families, particularly blacks, with all sorts of bad consequences. The minimum wage law has denied employment to millions of unskilled workers. Government tampering with price controls, and the minimum is a price control, has always had dreadful consequences. When government sets a maximum price on any important good, black markets are an inevitable consequence. When it sets a minimum price, much of the product remains unsold. The minimum wage makes it difficult for the unskilled, regardless of race, to find initial jobs so essential to acquire skills paying higher wages. Some state minimum wage laws exempt the employment of teenagers, which is a step in the right direction. In 2012, the unemployment of black male teenagers reached a scandalous 42%.Yet the minimum wage is very popular. Why? Because all but a small fraction of workers are paid more than the minimum wage and perhaps they believe erroneously that high wages are due to the minimum wage when they are due to the fact that they have the necessary skills to produce more value than the minimum wage for their employers. In addition to its negative economic consequences, the minimum wage has caused a multitude of negative social effects. It has led to a proliferation of single parent families which returned many blacks to conditions they had not experienced since slavery: complete dependence on handouts, high crime rates, poor educational achievement, and so on. Prior to passage of the minimum wage, the black unemployment rate was less than that of whites. The ideal solution is to end the minimum wage. Less ideal would be to exempt teen-agers and all those who have never held a job for as long as, say, three month, from the minimum wage..
- The Community Investment Act—still in force—was the principal cause of the housing bubble that led to the Great Recession, whose effects we are still experiencing. It induced banks to make loans to unqualified buyers. The Fed was put in charge and did nothing to prevent such loans but indeed facilitated them.
- Public low rental housing. While public housing rentals are low, the average cost of building such units is astronomical. We’ve witnessed dozens of apartment buildings built to house the poor end up having to be razed after a short span of a few decades. By contrast, privately built apartment buildings hardly ever have to be razed. No one has ever been held accountable for this fiasco of the razing of thousands of high-rise public housing apartment buildings in Chicago, St. Louis, Pittsburgh and other cities. To the contrary, the annual budget of the federal Department of Housing and Urban Development has increased year after year for decades. Americans are willing to provide low-rental housing for the poor but are unaware that while rentals are low, the cost per unit is astronomical. An unintended consequence has been the ghettoization of blacks and keeping them in the cities where there are few job opportunities.
- Americans are unaware that the federal government (and some state governments) sacrificed billions of taxpayers’ money in subsidies, loans, and tax credits. At the same time, it conducted a war on fossil fuels in the name of preventing global warming. Scientists are in disagreement as to how much of the global warming is caused by the burning of fossil fuels but they are unanimous in acknowledging that the hundreds of billions spent to date have had no effect whatsoever on climate change. The dynamic oil and natural gas industry has been the major contributor to employment growth during the past six years and is reducing our chronic trade deficits which have cost Americans millions of jobs.
- Tuition loans have enabled colleges and universities to raise tuition and create huge educational bureaucracies and enabled textbook publishers to raise prices to unjustified levels. Moreover it has had unintended social consequences including fewer marriages and a declining birth rate among educated women.
- For more than two decades, federal and state governments spent hundreds of billions of dollars subsidizing alternative energy sources by grants, tax credits, policies like “junkers”, subsidies to the purchase of hybrid and electric autos, etc., subsidies to producers of wind and solar energy, etc. There is no evidence whatsoever that these expenditures have reduced global warming at all. Onerous environmental regulations have inflicted great costs on utilities, on coal producers, on the auto industry raising costs to consumers on almost everything they buy. The solution is to let nature take its course and rely on market forces to find alternative energy sources as sources of fossil fuels get exhausted. We may even find eventually that the period of global warming may be short-lived. Many scientists have raised doubts that the burning of fossil fuels is a major determinant of climate change. In any case, we know from geological evidence that the earth was much warmer at various periods in its history.
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[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]
Journal of Economic Literature:
[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....
Atlantic Economic Journal:
In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]