Benefits of Tax Cuts Without Raising Debt

By Dave Trabert, President Of Kansas Policy Institute.

"President-elect Donald Trump should learn from Kansas’s mistake on income-tax reduction: Don’t reduce revenue and increase spending. That’s the real problem with the Kansas budget (“Brownback Sees Kansas Tax Plan as Model for Nation,” U.S. News, Dec 24). There was never an expectation that spending wouldn’t have to be adjusted to accommodate revenue reductions, but Democrats and many Republicans refused to make government more efficient so spending and taxes were increased in 2013 and again in 2015. Kansas spent 27% more per resident in 2015 than the states without an income tax.

The income-tax exemption on pass-through income for proprietorships, partnerships, Sub-S corporations and LLCs is paying real dividends. U.S. Census data show that pass-through businesses actually created the majority of new jobs in 2013 and 2014 (the most recent data for employment by legal organization). And while Kansas continues its decadeslong tradition of trailing the national average on job growth, Kansas is performing closer to the average since taxes were reduced.

Census data also show employment for pass-through entities is almost at parity with C corporations in the U.S., and cutting the corporate income tax affects only about half of the business employment base. Pass-through business profits are taxable to the individual owners, so individual rates must also be reduced to really help the economy."

U.S.-Canada Paper Dispute Shows Unintended Results of Import Tariffs

In the end, the Maine mill that sought the tariff shut down

By Jennifer Levitz. From the WSJ. Excerpts:

"For decades, the U.S. paper industry has been losing jobs, hurt by forces beyond foreign competition. Other factors include automation, turnover among owners and eroding paper demand, as many products are increasingly accessed on computers and smartphones. Paper manufacturing employs nearly 370,000 people in the U.S., down 20% from a decade ago, according to the Bureau of Labor Statistics.

Those same obstacles are troubling Canadian mills. In 2011, a plant in Port Hawkesbury, Nova Scotia filed for bankruptcy and laid off close to 600 workers. The plant made so-called supercalendered paper, a glossy stock used for magazines, catalogs and newspaper inserts. But it was able to restart production a year later, thanks to an aid package from the Canadian province worth nearly 125 million Canadian dollars.

In early 2015, Madison Paper Industries and Memphis-based Verso Corp., two U.S. producers of supercalendered paper, petitioned the U.S. government, alleging the Port Hawkesbury mill across the border was benefiting from unfair subsidies that led to depressed U.S. prices. Elected officials from U.S. paper-producing states jumped to their defense.

“As we like to say, we can see Canada from  our porch,” Sen. Amy Klobuchar (D., Minn) testified at a fall 2015 hearing by the U.S. International Trade Commission on the matter. “They are our friends, they are our neighbors, but in this case, this is unfair.”

The North American Free Trade Agreement, the pact between Canada, the U.S. and Mexico that took effect in 1994, eliminated most tariffs. Exceptions were made to combat so-called dumping—the sale of products at a lower value in the foreign market than in the domestic market—and to offset subsidies that benefit a particular industry.

The International Trade Commission and Department of Commerce sided with the U.S. mills, and in December 2015 the U.S. government imposed tariffs of up to roughly 20% on purchases of imported Canadian supercalendered paper. The tariff was based heavily on the U.S. government’s conclusion that the Port Hawkesbury mill received a special break on its electricity costs in a contract approved by a provincial regulator. Energy is often a paper mill’s biggest expense.

Port Hawkesbury’s owners say the power rate was negotiated with another private company and wan’t a subsidy. The tariff was  “grossly unfair,” said Neil de Gelder, the executive vice president of Stern Partners, Inc., a Vancouver, Canada investment firm that owns the controlling interest in the Port Hawkesbury mill.

The impact hit in ways that hadn’t been anticipated. Maine Gov. Paul LePage, a Republican, said it inadvertently hurt Maine outposts of Canadian paper producers that employ more than 1,200 people. One of them, British Columbia-based Catalyst Paper, which has a mill in Rumford, Maine and also has workers in Wisconsin, Ohio and Washington state, estimates it has lost millions from duties and legal costs and that its competitiveness was reduced.

The Commerce Department is now planning to readjust the tariffs for Catalyst and another mill. A final decision expected in February.

In the end, the tariff on the Canadian paper company wasn’t a cure-all for the two Americans mills that advocated for it. Besides Madison closing its mill, Verso Corp. plans to lay off about 190 workers, or a third of the workforce, at a coated-paper mill in Jay, Maine this quarter, said spokeswoman Kathi Rowzie. The company is still running its supercalendered paper mill in Minnesota, however.

“The lesson is the same one we’ve seen many times,” said William Reinsch, who works on trade policy at the Stimson Center and was the former president of the National Foreign Trade Council. “You mess with the market, there are always unexpected developments.”"

The argument over the strength of global warming shows how difficult climate research really is

See Global Warming Slowdown? The Argument Is As Clear As An Unseasonal Blizzard.

"The argument over the strength of global warming shows how difficult climate research really is.

The recent run of chilly rain and snow in the UAE seems to affirm the UN’s admission in 2013 of a decline in temperature rises. But the complexities of time and maths make it hard for scientists to say whether that is permanent.

Snowball fights in the UAE, snowless slopes in the Alps. Chilly winds in Dubai, balmy weather in Minnesota.

Another winter, another outbreak of weird weather. Still, that is climate change for you.
Or is it? Ask a local taxi driver and you may end up in a debate about how plunging temperatures can be squared with global warming.

So what do the experts say? At last month’s regional meeting of the World Meteorological Organisation in Abu Dhabi, the talk was of how warming Arctic air and declining sea ice is affecting the flows of air and seawater that influence the region’s weather.

In particular, the polar jetstream – the band of fast-moving air that can stop polar air from reaching farther south – has been flailing around like a snake in a sack, flipping the weather around in a heartbeat.

But do not expect climate experts to seize on the recent bout of freak weather and insist it must be man-made global warming. They know it is all more complex than that.

From the strange, barely predictable temperature changes in the Pacific, known as El Nino, to random upheaval, global warming is not the only influence on the weather.

And according to some, it may no longer be the threat it once was.

The idea that global warming may be grinding to a halt has been around for a decade, and is based on data collected from thousands of weather stations around the world. When plotted against time, the temperature measurements produce a zig-zag pattern, with some years cooler and others warmer than before. The long-term direction is clear enough, however: upwards.

But around 2007, some researchers began pointing out that the trend seemed to be breaking down.
Initially, many dismissed the claim as simply part of a denialist agenda to discredit the concept of global warming. Yet, as the years rolled by and more data came in, it became harder to dismiss.
In 2013, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) agreed that a slowdown was under way. The data pointed to a warming rate from 1998 onwards that is barely half that of the previous half-century’s.

And for reasons unknown, the slowdown had not been predicted by computer models of the climate.
Unsurprisingly, climate-change sceptics seized on the IPCC’s “admission” as proof that the models could not be trusted to predict global warming.

Some scientists suspected, however, that the problem might lie elsewhere – namely, with the raw data.

In 2015, a team led by Thomas Karl, at the US National Oceanic and Atmospheric Administration (NOAA), pointed to changes in temperature measurement techniques that could have introduced subtle bias into the data.

Sure enough, once these were corrected, and new data from more sites added in, the slowdown vanished – suggesting the models were correct after all.

Although hardly a ringing endorsement of the reliability of global warming data, the NOAA’s findings were welcomed by many climatologists. Hard science, it seemed, had once again defeated the deniers.

But the story did not end there. Last year, the Nature Climate Change journal published work by another team that claimed the newly-corrected data were still biased – this time by subtle atmospheric influences on the Earth’s temperature.

When these were taken into account the slowdown appeared again, although less strongly and over different timescales.

Last month, the story took a more dramatic turn. A former data scientist at NOAA alleged the Karl paper had been rushed out without proper checks.

Whether the allegations are really all that serious remains unclear.

Sceptics view them as proof of the questionable nature of much climate research. Many climatologists dismiss them as nitpicking. One commentator even declared the whole controversy to be “fake news”.

Although that may be pushing it too far, the continuing debate does highlight the limitations of science as a means of checking “alternative facts”.

Those involved in research know that the scientific process is shockingly simple to subvert – inadvertently or otherwise.

For on the face of it, what could be simpler than telling whether something is getting hotter or not?
If your exposure to science stopped at school, you would know exactly what to do: stick a thermometer on it, measure the temperature over time and see if the resulting graph rises, falls or stays the same.

Telling if the entire Earth is getting warmer is a different ball game, however. Simply collecting readings from weather stations is not going to be enough: the data will be plentiful near towns and cities, far less so in remote areas – and virtually non-existent over much of the oceans, which cover most of the Earth’s surface.

Measuring the rate of warming raises another, tougher problem: what is the relevant timescale?
A few years are not long enough: the Earth’s climate is affected by a host of influences that ebb and flow from months to millennia.

Several decades of data are probably the minimum needed to reveal a genuine shift.
Certainly, claiming a hiatus in global warming on the basis of data from a handful of years is premature.

Finally, there is the problem of deciding if any detected trend is real or just a fluke.

The textbook way of deciding is to use so-called significance tests, statistical methods that show the chance of getting the observed results, assuming they are a fluke.

Yet statisticians have been warning researchers for decades that these techniques are prone to mistaking random noise for genuine effect.

They have come under renewed scrutiny recently because of their role in the so-called “replication crisis” in research, in which many highly cited advances fade away on reinvestigation.

Last year, the American Statistical Association took the unprecedented step of issuing a public warning about the dangers of using significance tests.

The argument over the strength of global warming shows how difficult climate research really is.
It also shows the naivety of thinking that on “hot button” issues such as global warming, science can debunk fake news in a flash.

Robert Matthews is visiting professor of science at Aston University, Birmingham, UK"

The Right Way to Pay for Tax Reform

By Veronique de Rugy of Mercatus.

"There are many reasons to oppose the destination-based cash-flow tax (DBCFT) — a.k.a. the border-adjustment tax — in the otherwise-good House Republicans’ corporate-tax plan. This excellent piece by a former member of the Senate Banking Committee does an excellent job at summing them up. However, nothing is more puzzling to me than the embrace by Republicans of the notion that they should pay for good pro-growth tax reforms with a tax increase.

Don’t get me wrong, I like the idea of not wanting the tax reform to add too much to the deficit. But the right way to handle the deficit concern is not to focus on “revenue neutrality” but on “deficit neutrality,” i.e., by cutting spending, too.

The good news is that it is not hard to find $100 billion a year in spending cuts, which is roughly what DBCFT would raise in theory. Here are a few suggestions:

• Corporate welfare: There is roughly $56 billion in corporate welfare in the budget alone. Get rid of it. Cronyism has a real economic cost not captured in this number — but $56 billion is a good start. 
• Improper payments: According to GAO, there is about $137 billion in improper payments. About $50 billion of that is real and inadmissible improper payments. Let’s get rid of that. 
• Unauthorized appropriations: There is close to $310 billion spent on programs and activities each year even though the authorization of appropriations has expired. Now, leaving aside the fact that this is a total breakdown in accountability and oversight, there is no doubt that many of these programs would get reauthorized if Congress bothered to follow the rules. But can we truly justify continuing to fund the Brown Tree Snake Eradication Program in Guam and the United States–Poland Parliamentary Youth Exchange Program, especially since their authorizations have expired? I am sure that even moderate oversight on these unauthorized appropriations will bring outlays down and that lawmakers can find a good 10 percent to cut from this list. 
• Pell Grants: According to the CBO’s budget options, we could save $6.5 billion a year by limiting Pell Grants to the neediest students. 
• Medicaid: CBO’s budget options scores a saving of $37 billion to $68 billion when imposing caps on federal spending on Medicaid. 
• Health care: CBO scores a saving of $126 billion by repealing all insurance-coverage provisions of the Affordable Care Act, a saving of $41 billion after repealing the individual mandate, and a saving of $42 billion to end the tax preferences for employment-based heath insurance. 
• Others: CBO estimates $36 billion in savings if Congress converts multiple assistance programs for lower-income people into smaller block grants to states; $9 billion if we tighten eligibility rules for food stamps, up to $19 billion to reduce Social Security benefits for new beneficiaries. 

There are many more spending-cut suggestions in the CBO’s budget-options report, here.

This small sample of spending cuts shows that there is plenty of options to pay for good tax reforms. Moreover, let’s not overlook the tremendous growth benefits of simply lowering the corporate rate and moving to a territorial system. These are good reforms worth pursuing and fighting for no matter what."

Poverty Is Going Extinct

‘Even 50 million people rising out of poverty in a single year is not news.’

By Johan Norberg.

"Did you hear the breaking news? Yesterday, 138,000 people rose out of extreme poverty. Another 138,000 rose out of extreme poverty the day before. And the day before that, too. Of course you didn’t, because a plane crash or a terrorist attack is news, but slow and steady progress is not. Even 50 million people rising out of poverty in a single year is not news.

But this happens to be the most important story of our time: poverty, as we know it, is disappearing from our planet.

Since 1990, when social critic Naomi Klein claimed that global capitalism lapsed into its most savage form, the proportion who live in extreme poverty—according to a $1.9-a-day poverty line, adjusted for local purchasing power and inflation—has been reduced from 37 per cent, to less than 10 per cent.
At the United Nations Millennium Summit in 2000, the world’s countries set the goal of halving the 1990 incidence of extreme poverty by 2015. This was met five years ahead of the deadline. And even though the world population grew by more than two billion between 1990 and 2015, the number of people who live in extreme poverty was reduced by more than 1.25 billion people.

This marks a historic rupture. For the first time in human history, poverty is not growing just because population is growing. As a result, the number of people in extreme poverty is now slightly less than it was in 1820. Then it was around one billion; today it is 700 million.

If this does not sound like progress, you should note that in 1820, the world only had approximately 60 million people who did not live in extreme poverty. Today more than 6.5 billion people do not live in extreme poverty. So the risk of living in poverty has been reduced from 94 per cent in 1820 to about 10 per cent today."

How a Michigan County Road Got Stuck in Regulation Purgatory

Building a direct path to a new mine makes perfect environmental sense, but the EPA hasn’t budged.

By Mark Miller and Mike Pattwell in The WSJ. Mr. Miller, a managing attorney with Pacific Legal Foundation, and Mr. Pattwell, a litigator with Clark Hill PLC, are representing the Marquette County Road Commission at the Sixth Circuit.

"A good example of a shovel-ready project trapped in regulation purgatory is Michigan’s County Road 595, which has been blocked for years by the Environmental Protection Agency.

The project has its roots in a “eureka” moment eight years ago. A large deposit of nickel and copper was discovered in the state’s Upper Peninsula at what is now known as the Eagle Mine. This presented Marquette County with a new economic opportunity, but also a dilemma. The mine is only 22 miles from the nearest refinery as the crow flies, but the trip is nearly three times as long via existing roads. The usual route would send processions of heavy, noisy trucks through commercial and residential areas in small towns, as well as along the edge of campus at Northern Michigan University.

The proposed solution was to construct a new county road, a direct path from the mine to the mill. That would allow the trucks to bypass busy city streets and groggy college students.

State and local officials in both parties broadly support the project, since they see it as critical for the community’s safety and environmental health. Both houses of the Michigan Legislature have even passed resolutions backing County Road 595, noting that the direct route would conserve resources, while building it would create jobs.

The problem is the federal permits. In 2012, the state’s Department of Environmental Quality announced it intended to approve the new road, which complied with all federal and state laws. That’s when the Obama administration stomped in.

The project required a wetland-fill permit, which the EPA vetoed in December 2012 with a vague warning about dangers to the environment. Agency officials have never provided the kind of details that would allow their putative concerns to be objectively assessed, but they have stuck to their objections tenaciously. The county has suggested many compromises: In October 2012, it offered to preserve 26 acres of wetlands for every acre that the project affected. The EPA refused."

"In U.S. Army Corps of Engineers v. Hawkes (2016), the justices unanimously held that when federal regulators label property as “wetlands,” the affected parties have an immediate right to challenge that designation in court."

"The irony is that the EPA is blocking a project that would be environmentally beneficial. “When trucks can travel 22 miles one way rather than 50-plus miles one way, that’s a savings of almost 500,000 gallons of fuel annually,” Jim Iwanicki, the engineer for the county road commission, told Marquette’s legal team last fall. “On top of that savings of fossil fuel, County Road 595 would significantly reduce the amount of carbon dioxide those trucks are putting out, since they’d be driving 1.5 million miles less a year.”"

It is not so that China trade resulted in a net job loss to the US

See Rothwell on Autor, Dorn and Hanson by Scott Sumner.

"A number of people have asked me to comment on a new paper by Jonathan Rothwell, which criticizes a study by Autor, Dorn and Hanson (ADH) on the impact of Chinese imports on the US job market.

I conclude that the economic losses from trade are not as severe as the economics literature currently implies. Workers in the most import-exposed sectors face a risk of layoff and unemployment that is comparable to workers in other sectors, where competition comes almost exclusively from domestic businesses. While it is likely that less import competition would further lower the risk of displacement and boost wages for manufacturing workers, less competition would likely lead to a reduction in the ratio of product quality to price and a drop in consumer welfare. I accept the Autor et al. (2014) finding that import competition lowers wages for U.S. workers in the affected industries — but even still, I find that workers in the manufacturing sector continue to earn a sizable wage premium compared to those with similar experience and education levels in other sectors.

At the community level, these results should not be taken to mean that de-industrialization has been harmless to individuals or even communities. Rather, the results imply that deindustrialization as a result of Chinese import competition plays out no differently than deindustrialization as a result of other forces — such as domestic competition or technological change. Communities relying more heavily on industries facing import competition perform no  worse in this study on summary measures of economic development and consistently show higher growth rates in establishments. They seem to find ways to adapt, maintain wage growth and launch new enterprises.

That’s what I would have expected.  Not surprisingly, Autor, Dorn and Hanson contest Rothwell’s study.

Regardless of whether Rothwell is right or wrong, the press has done an extremely poor job in reporting the ADH study.  Trade economists already knew that specific industries, and even communities, can be hurt by import competition.  The press has suggested that the ADH study shows that China trade resulted in a net job loss to the US, a finding that really would be new.  But as Paul Krugman and I keep pointing out that’s just not so.  Their study is completely consistent with zero net job loss to the US.  That’s because the study looked at the period of 1990-2007, when monetary offset was fully engaged.  So there’s no plausible AD channel.  Of course you can make other arguments, but you can’t show aggregate effects with a cross-sectional study.

All the press coverage of ADH is much ado about nothing.  Maybe China did hurt the overall US labor market, but their study doesn’t show it.  I’m not surprised that the press ignores me, but I am a bit surprised they ignore Krugman, particularly since he has occasionally argued that China was stealing US jobs during the Great Recession.  No one can claim his critique of ADH was based on ideological bias.

PS.  Nor can Autor, Dorn and Hanson be accused of ideological bias.  For instance, they favor TPP.

PPS.  Before you try defending ADH based on non-AD channel arguments, you might consider that at various times in their paper they imply they do have an AD channel in mind.  For instance, when contrasting Germany’s trade surplus with the US trade deficit."