Taxing the Rich Isn't Enough to Pay for Democrats' Welfare State. They'll Need To Soak the Middle Class Too.

There simply aren't enough rich people to finance all the new spending.

By Veronique de Rugy.

"Democrats are ready to raise taxes. They want more revenue, in part to fund an out-of-this-world amount of new spending. Some simply want to soak the rich, as Rep. Alexandria Ocasio-Cortez (D–N.Y.) plainly signaled at the Met Gala by wearing a white dress with "TAX THE RICH" scrawled across it in red paint. While the public may be more receptive to the idea because of concerns over high budget deficits, let's not be naive—many voters believe that these tax hikes won't hit them. There's so much wrong about this assumption.

Writing for The Dispatch, the Manhattan Institute's Brian Riedl documents President Joe Biden's spending plan, which would expand federal government spending by $11 trillion over the next decade. This spending would help fund a cradle-to-grave new world in which government is omnipresent in our lives. The spending would increase family assistance by $550 billion. Another $700 billion would be wasted on counterproductive "Buy America" provisions. Expansion of the Affordable Care Act would cost another $1.4 trillion; some $2 trillion would go to a Green New Deal; K-12 schools would get more money. All of this is on top of the $6.6 trillion spent on COVID-19 relief.

Biden would partially pay for this $11 trillion with $3.6 trillion from higher taxes. As Riedl explains, "it would represent the largest permanent tax increase since World War II." Even if the president got the revenue he hopes to collect with these tax hikes—which won't happen once people start moving their capital around to avoid the oppressive tax burden—it would only cover a third of the new spending. Meanwhile, the House Democrats have their own $2.2 trillion tax plan, which covers even less of the new spending.

Many Americans may not care if they believe the spending could benefit them and other people will shoulder the tax bill, but that's wishful thinking. They may not be the ones cutting a bigger check to the IRS, but many of them will shoulder some of the economic burden of the tax hikes through lower wages and higher prices.

Also, while many taxpayers may end up with more money in their pockets for a while, that won't last. There simply aren't enough rich people to pay for all the new spending. Collectively, the rich don't even have enough wealth to pay for the kind of cradle-to-grave government that Democrats dream of. It's only a matter of time before the politicians selling the dream of cost-free big government realize they need to raise taxes on ordinary Americans.

Just look at my native country of France for how it will be done. Pre-COVID-19, France's revenue per GDP was 45.4 percent. It wasn't simply raised on the backs of the rich. In fact, France raises most of its revenue through the Value Added Tax, social insurance, property tax, and payroll. Those taxes are regressive as they consume a larger share of low- and middle-income earners' income and have fewer effects on high-income earners. Add to these some 214 taxes and duties, along with an extremely high gasoline tax, and you end up with an oppressively burdensome tax system for everyone, even the poor.

By contrast, and contrary to Ocasio-Cortez's belief, the U.S. federal income tax is unusually progressive because it raises most of its revenue from the income tax, which some 61 percent of households don't pay. In other words, the bulk of federal taxes is already paid by higher income taxpayers, leaving other income groups particularly vulnerable to future higher taxes.

Don't think I'm saying that if the Democrats get it wrong, the Republicans must get it right. They don't. GOPers say they prefer lower taxes, but they do nothing to restrain spending. I saw evidence of this during the presidencies of Donald Trump and George W. Bush. My colleague Matt Mitchell, along with our former colleague Andrea O'Sullivan, wrote a great paper documenting what's wrong with this approach. They explain, "Cutting taxes allows policymakers to give voters something they want, while appearing to rein in the size of government. But this is a temporary illusion unless the tax cuts are combined with necessary reductions in spending—a far more difficult but also the more important task."

With few exceptions, nobody seems ready to tell the American people how far taxes will have to rise to satisfy Washington's gluttony for spending. Unfortunately, that's a lesson they will learn the hard way, and perhaps sooner than later."

Organic food isn’t better for us – or the environment

By Matt Ridley.

"It is mystifying to me that organic food is still widely seen as healthier, more sustainable and, most absurdly, safer than non-organic food.

Following the publication of part two of Henry Dimbleby’s National Food Strategy last week, the organic movement was quick to suggest that organic food and farming offer a way to achieve the strategy’s vision. ‘The recommendations of the National Food Strategy offer genuine hope that by embracing agroecological and organic farming, and adopting a healthier and more sustainable diet, we can address the climate, nature and health crises,’ said Helen Browning, chief executive of the Soil Association, Britain’s most vocal organic lobbying organisation. Browning also highlighted the strategy’s recognition of the Soil Association’s ‘Food for Life’ programme — essentially a vehicle to promote greater procurement and use of organic food in schools and hospitals.

The trouble is that scientific evidence indicates that the food safety risks of eating organic food are considerably greater than those of eating non-organic food. This is primarily because organic crop production relies on animal faeces as a fertiliser, an obvious vector for potentially lethal pathogens such as E.coli, but also because organic crops can be prone to harmful mycotoxins as a result of inadequate control of crop pests and diseases.

In his 2019 book The Myths About Nutrition Science, food and nutrition adviser David Lightsey cites an analysis of US Food and Drug Administration food safety recall data by Academics Review — a group of scientists dedicated to challenging anti-science claims — which showed that ‘organic foods are four to eight times more likely to be recalled than conventional foods for safety issues like bacterial contamination’.

Sadly the recall system is not always 100 per cent effective in protecting human health. In 2011, a major food poisoning outbreak in Europe which affected nearly 4,000 people, killing 53, was ultimately traced to organically grown bean sprouts from a farm in Germany that had been contaminated by a virulent E.coli strain, O104:H4.

Browning’s own organic meat company is currently at the centre of a listeria outbreak, with its organic corned beef being recalled just as Browning is publicly championing organic food as a healthier, more sustainable option. The Food Standards Agency notes that symptoms caused by listeria monocytogenes can be similar to flu and include high temperature, muscle ache or pain, chills, feeling or being sick, and diarrhoea. In rare cases, infections can be more severe, causing serious complications such as meningitis.

On the issue of sustainability, there are serious questions about whether a scaling-up of organic agriculture — Browning has called for Britain to exceed the EU’s Farm to Fork target of 25 per cent organic agriculture — would genuinely deliver environmental benefits.

Independent research published in Nature has shown that if England and Wales switched 100 per cent to organic it would actually increase the greenhouse gas emissions associated with our food supply because of the greater need for imports. Scaling up organic agriculture might also put at risk the movement’s core values in terms of promoting local, fresh produce and small family farms.

Browning was at the centre of reports earlier this year that her firm Helen Browning’s Organic had switched to procurement of organic pork from Denmark, sent to its processing factory in Germany before onward dispatch to UK supermarkets. To me, that sounds more like an industrial, multinational food business than ‘supporting British farmers’ as the company’s website claims.

To his credit, Dimbleby does not appear to have entirely fallen for the organic lobby’s rhetoric. His creative vision of a three compartment model for land use — allowing room for a combination of natural habitat, low-intensity farming and high-yield, hi-tech farming — follows the science and, if properly implemented, could deliver a more sustainable balance in terms of food production, resource use and environmental impact.

The strategy also notes that many households would not be able to afford to feed themselves at organic prices, with the premium for organic produce ranging from 11 per cent (for organic milk) to more than 400 per cent (for organic chicken).

Quite rightly, Dimbleby recognises that sustainably produced food in the future must look to innovation and new technologies — robots, drones, improved genetics and AI — to produce carbon-neutral and non-polluting food crops. And I remain hopeful as we chart our recovery from the Covid pandemic (a recovery made possible by the modern genetic technologies shunned and campaigned against by the organic lobby) that a more evidence-based approach to building a better food future will prevail.

Surveying the problems of traditional farming in his native India, a friend of mine, Professor Channa Prakash, once remarked: ‘Sure, organic agriculture is sustainable: it sustains poverty and malnutrition.’

I believe in freedom of choice, and I will defend an individual’s right to choose organic, but when it comes to protecting the health of the youngest and most vulnerable members of society — in our schools and hospitals — the demonstrable health risks of organic food outweigh any perceived sustainability benefits."

Eight Reasons For Ending Joe Biden’s Travel Bans

By Ryan Bourne and Brad Subramaniam of Cato.

"Back in July, I outlined why Joe Biden’s crude COVID-19 travel bans on non-Americans coming from Europe, India, and a few other countries no longer made any sense from a public health perspective.

Talk in Washington at the time was of lifting these restrictions by September. Well, here we are, mid-way through that month and the restrictions are going strong. Officials and diplomats now seem to think October or even Thanksgiving are the earliest potential dates for their removal. Some ponder whether the political incentives might point towards inaction until the mid-terms...which would mean bans had been in place for 32 MONTHS.

For background again: since last spring, the U.S. international border has prohibited entry for travelers from the Schengen EU travel zone (the EU’s passport free countries), the U.K., Ireland, Iran and China within the previous 14 days. India, South Africa and Brazil were added to the restricted list during their respective outbreaks. Americans, permanent U.S. residents, their dependents, spouses, children and certain student visa holders or permanent visa applicants are exempt from these rules, just requiring a negative test before entering the US. But nonimmigrant U.S. work visa holders and non-American visitors to the U.S. are not; a lot of the former already here are therefore scared of leaving, in case they cannot get back into the country.

As a great op-ed by Josh Glancy in the UK’s Times newspaper concluded, that inertia means that entry to the U.S., particularly for those traveling from Europe, is currently governed by “a set of rules instituted over 500 days ago that bear absolutely no resemblance to the reality we now inhabit.” Oliver Wiseman and I wrote for the Dispatch this week that these rules are even less coherent given President Biden’s attempts to cajole everyone into being vaccinated through a workplace mandate. Removing them isn’t just in the self-interest of whiny Europeans or H-1B visa holders, either. These bans are harming American families and businesses too.

So here’s a quick rundown of eight reasons the bans should be scrapped as soon as possible.

1. The bans have no link to the prevalence of COVID-19.

When the China and Europe bans were first introduced, COVID-19 appeared highly concentrated in those places, so there was at least some defensible rationale to restricting travel from those parts of the world (studies later implied the public health benefit of banning entry even at that stage was negligible, perhaps because the bans didn’t cover Americans or because the existing spread of the disease in the U.S. was large anyway). In any case, COVID-19 has now spread pretty much everywhere. And yet no blacklisted countries have been removed from the restrictions after joining the list.

As our Dispatch piece highlighted, “Poland, for example, today has just 10.2 new daily cases per million people. In Costa Rica, the equivalent figure is 484. In Israel, it is 797- a level almost seven times higher than for the EU as a whole.” But non-American travelers from Costa Rica and Israel can come and go from the United States as they please, while those traveling from Poland and other EU countries continue to be barred from entering. In fact, late in August, research suggested COVID-19 prevalence was higher in non-banned countries overall than banned countries, and far lower in both groups than in the U.S. itself. New daily COVID-19 case rates per million, for example, are currently almost four times higher in the U.S. than in the EU.

There is no COVID-19 prevalence justification, then, for travel from this specific set of countries to be generally banned.

2. The bans ignore vaccination status.

President Joe Biden regularly talks about how we are now in a “pandemic of the unvaccinated.” Yet, outside of the exemptions for Americans, permanent citizens, and the rest, his travel bans offer no ability for the unexempted to enter based on vaccination status or a negative test result - even for people who live and pay taxes in the United States on nonimmigrant visas returning from their European or Indian homelands.

As a result of his heavy-handed and potentially illegal “kind of, sort of” workplace vaccine mandate, the President therefore now demands more public health screening for Americans going into their office than for travelers coming into the country from Malaysia or Colombia, all the while vaccinated, uninfected visitors or work visa holders can’t get into the U.S. because they’ve visited Europe. Whatever you think about the workplace vaccine mandate, it makes the travel ban even more bizarre and indefensible.

3. The bans have no link to COVID-19 vaccination rates by country either.

If Biden really believed in the power of vaccinations but wanted to avoid imposing a vaccine mandate for air travel that required general vaccine passport infrastructure, he might instead base his restrictions on vaccination levels in the country from which people are traveling from. And yet, while talking a big game on the power of vaccines, the President’s travel policy is completely unmoored from this consideration.

Portugal, Spain and Denmark have fully vaccinated 81 percent, 76 percent and 74 percent of their overall populations, respectively, trouncing the United States (53 percent). But all three of those EU countries still find themselves ensnared in the EU ban. Jamaica, though, a popular destination for American tourists and from which people can freely flow, has fully vaccinated a meager 5 percent of its people. Mexico too, the most highly-traveled destination to and from the United States, has fully vaccinated only 28 percent of its population. To add to the absurdity: European travelers with the means have been circumventing the travel ban by staying in Mexico or other less vaccinated, non-banned countries for two weeks, so that they can then enter the U.S. indirectly.

4. The bans have a huge toll on families.

On Sunday, Brit Emma Raducanu won the U.S. Open Women’s tennis, but her parents were unable to enter the U.S. to watch the final, due to the travel ban from the UK. Earlier last week, actress Megan Prescott heard that her twin sister had been hit by a cement truck in New York, but Megan was initially denied entry into the U.S. to care for her twin (until the authorities finally relented).

These stories highlight the human cost of Biden’s travel bans. While the specifics of these examples are highly unusual, millions of Americans, Europeans, and Indians have now faced the consequences of being unable to spend time with or share moments with loved ones for over a year and a half, with vaccinated grandparents unable to come to the U.S. to meet or see their grandchildren, long-distance partners separated, U.S. taxpayers on nonimmigrant work visas being refused re-entry or having to scramble for exemptions after traveling to be with sick family members, and families continuously plagued with uncertainty or forced into indirect travel to attend weddings or other family events. The unseen costs of the travel bans include deterred family formation, the killing of long-distance relationships, and the deterring of Europeans from pursuing or maintaining a life here.

5. The bans deter investment into the United States.

When the bans were first introduced by President Trump, U.S. authorities were willing to grant exemptions for visits deemed to be in the U.S. national interest, which included trips for economic reasons. In reality, that meant carve-outs could often be found for things such as “executive-level business meetings, manufacturing site visits, and visits to US cities to open US offices and create jobs,” albeit judged fairly subjectively.

Since March 2021, though, Biden’s administration has tightened the rules, and travelers now have to show they would be providing “vital support to the critical infrastructure” to gain an exemption on economic grounds. As a result, meaningful foreign direct investment is being discouraged. One lawyer documented how he had a “request for a business traveler driving $450m into the US denied along with an acting CEO for a drug development company denied for a meeting with the Food and Drug Administration.”

European officials said in July that it was getting increasingly difficult for European companies to maintain and build on their investments in the U.S. economy. The U.S. Chamber of Commerce has shown that European FDI into the U.S. already plunged by $39 billion between 2019 and 2020. Continuation of the travel ban therefore brings significant costs in terms of lost business opportunities.

6. The bans hit the American tourism industry hard.

COVID-19 meant a big hit to travel into the U.S. was inevitable, irrespective of government policies. But the United States saw a huge 81 percent decline in overseas travel visitations in 2020, with banned Schengen countries such as Italy seeing the largest declines. True, domestic tourism within the United States took up some of the slack, particularly during the summer of 2021. But tourism has still been hit very hard by the travel ban, not least because international visitors, who only make up 3 percent of trips within the United States, usually make up 15 percent of total spending.

Deep-pocketed international travelers have been hard to replace in states heavily reliant on international tourism, such as Hawaii, Nevada, and Florida, shrinking their tax bases too. In everything from hotels to airlines, restaurants to entertainment industries, the existing travel restrictions prevent mutually beneficial trades from being realized: trades which could take place at relatively low risk given the existence of vaccines, rapid tests, and more.

7. The bans can prevent non-immigrant visa holders from doing their jobs.

A lot of nonimmigrant visa holders have found themselves stranded abroad as a result of the travel bans, making it more difficult for them to undertake their work. Though businesses have naturally been accommodating, workers being stuck in, say, Europe or India, means operating across different time zones, the possibility of tax liabilities for companies in different countries, and concerns about data access and privacy. This matters because, by affecting visa categories such as the H-1B visa, the travel bans are keeping nonimmigrant workers from performing skilled jobs at wages in the 90th percentile. And, of course, the existence of the ban itself deters people who foresee the need or desire to travel to blacklisted countries from coming to the U.S. on nonimmigrant work visas in the first place.

8. The bans lead to retaliation from other countries.

Recently, the EU recommended that its member states ban “nonessential travel” from the U.S. This was ostensibly about the rise of the Delta variant here, but “reciprocity” was also cited as a key factor in the EU Council’s advisory ruling. Travel controls beget travel controls.

Bulgaria, Norway and Sweden have followed through on the EU’s recommendations. Greece has intimated that new restrictions might be coming soon. France has generally banned unvaccinated American tourists, who must now provide a “compelling reason” for their travel, a negative test result, and quarantine for a week if allowed into the country. In Italy, unvaccinated U.S. arrivals have to self-isolate for 5 days, only exiting quarantine with a negative test result at that stage. In the Netherlands, restrictions are tighter still, with even vaccinated Americans having to quarantine for 10 days.

While it’s likely some of these restrictions would exist given COVID-19 and European governments’ reaction to it, the U.S. travel ban on the EU undoubtedly makes it easier for European governments to justify their own restrictions. Indeed, many of those affected by the U.S. travel bans urge European governments to respond in kind to pressure the Biden administration to relent. This creates mutually assured human and economic suffering, far beyond what might be described as proportionate public health policies."

Rebutting Paul Krugman on the “Austrian” Pandemic

By Robert P. Murphy.

"In a recent column for the New York Times, the world’s most famous Keynesian Paul Krugman attacked Austrian business cycle theory (ABCT). In addition to repeating his decades-old claim that ABCT suffers from an internal contradiction, as well as his charge that the Austrians had misdiagnosed the 2008 financial crisis, in his latest piece Krugman argued that the 2020 pandemic really was a “reallocation shock” along Austrian lines. Yet even here, Krugman claims, the Austrian prescription of laissez-faire is dead wrong: as a new paper presented at the Jackson Hole monetary conference allegedly demonstrates, we need easy money from the Fed in order to rearrange labor without causing needless unemployment.

It won’t surprise Mises.org readers to learn that I disagree strongly with Krugman’s column. He makes some casual remarks that mislead his readers on the history of the 1930s, but more seriously, he misunderstands what ABCT actually says. This confusion leads him to reject the Austrian view as illogical, when in fact it is perfectly consistent and explains the data better than a Keynesian approach.

Krugman’s Faulty History

Krugman begins his discussion of the Austrian theory by reference to its place in the 1930s:

[T]he idea that there was a titanic intellectual battle in the 1930s between Hayek and John Maynard Keynes is basically fan fiction; Hayek’s views on the Great Depression didn’t get much intellectual traction at the time, and his fame came later, with the publication of his 1944 political tract “The Road to Serfdom.”

Already Krugman is making stuff up. (As I’ve written elsewhere, when Krugman uses the caveat “basically,” what he means is, “This statement is literally false.”) Although the clash may not have involved dueling rap lyrics, Hayek really was the chief rival of Keynes in the early 1930s. As Bruce Caldwellexplains:

In 1929 [Lionel] Robbins had begun what was to become his long tenure as head of the Economics Department at the London School of Economics (LSE). Robbins invited Hayek to London in January 1931, and the next month the young Austrian delivered a series of lectures on the business cycle. The lectures were published later that year (with an effusive foreword by Robbins) under the title, Prices and Production. Hayek’s lectures, though at times opaque, caused quite a stir. By the fall of 1931, Hayek had been appointed the Tooke Professor of Economic Science and Statistics at the University of London. He was thirty-two years old.

Sir John Hicks was at the LSE from 1926 to 1935 and remembers well the impact of Hayek’s arrival. Indeed, he divides his own stay at the University of London into a pre-Hayekian and a Hayekian period...In his article, ‘The Hayek story,’ Hicks reflects on the importance of Hayek’s early work.

“When the definitive history of economic analysis during the nineteen-thirties comes to be written, a leading character in the drama (it was quite a drama) will be Professor Hayek. Hayek’s economic writings—I am not concerned with his later work in political theory and sociology—are almost unknown to the modern student; it is hardly remembered that there was a time when the new theories of Hayek were the principle rivals of the new theories of Keynes. Which was right, Keynes or Hayek?”

Ludwig Lachmann writes of Hayek’s “triumphal entry on the London stage with his lectures on Prices and Production,” and recalls that when he (Lachmann) arrived at the LSE two years later, “all important economists there were Hayekians” ...

It’s undeniably true that in the eyes of the profession, Hayek lost the debate to Keynes. But Krugman is wrong to claim that Hayek was a minor player who was only known for his political writings.

Krugman Oversimplifies Austrian Business Cycle Theory

After downplaying its importance at the time, Krugman admits that there was an Austrian analysis of the Great Depression, and summarizes it in this way:

Nonetheless, there was an identifiable Austrian analysis of the Depression, shared by Hayek and other economists, including Joseph Schumpeter. Where Keynes argued that the Depression was caused by a general shortfall in demand, Hayek and Schumpeter argued that we were looking at the inevitable difficulties of adjusting to the aftermath of a boom. In their view, excessive optimism had led to the allocation of too much labor and other resources to the production of investment goods, and a depression was just the economy’s way of getting those resources back where they belonged. [Krugman 2021, bold added.]

In the above excerpt, Krugman makes a subtle but important misstatement of the Austrian explanation of the boom-bust cycle. Specifically, Krugman is casting ABCT as a theory of overinvestment in capital goods and underinvestment in consumer goods.[1]

Yet in reality, the sophisticated version of ABCT—especially in the writings of Mises—is more properly described as one of malinvestment among various types of capital goods coupled with too much consumption.

It is this simple confusion that drives most of the erroneous objections to ABCT coming from professional economists. In a 2012 journal article, Joe Salerno quotes extensively from such economists (including Krugman) and then clarifies:

Had the critics seriously studied the original sources in which ABCT is expounded, they would have learned that it is not an “overinvestment” theory at all. In fact, Mises, Rothbard and, somewhat less emphatically, Hayek argued explicitly that “overconsumption” and “malinvestment” were the essential features of the inflationary boom. In their view, the divergence between the loan and natural rates of interest caused by bank credit expansion systematically falsifies the monetary calculations of entrepreneurs choosing among investment projects of different durations and in different stages varying in temporal remoteness from consumers. But it also distorts the income and wealth calculations and therefore the consumption/saving choices of the recipients of wages, rents, profits and capital gains. In other words, while the artificially reduced loan rate encourages business firms to overestimate the present and future availability of investible resources and to malinvest in lengthening the structure of production, at the same time it misleads households into a falsely optimistic appraisal of their real income and net worth that stimulates consumption and depresses saving. [Salerno 2012, bold added.]

In the remainder of the current article, I’ll continue to quote from Krugman’s recent column and then show why his initial confusion about ABCT drives all of his problems with it. But to repeat: Krugman (and other ABCT critics) views ABCT as a simple theory of overinvestment in capital goods and underinvestment in consumption goods. But in reality, the Misesian theory is that credit expansion leads to artificially low interest rates, which in turn cause entrepreneurs to invest in the wrong lines and cause consumers to believe they are wealthier than they really are, and hence consume too much. Let us see how this confusion leads Krugman astray.

Krugman Alleges Problems With ABCT, Both Theoretical and Empirical

Returning to his recent column, below we reproduce two of Krugman’s long-running objections to ABCT, namely that it fails on both a theoretical and empirical level:

[The Hayek/Schumpeter] view had logical problems: If transferring resources out of investment goods causes mass unemployment, why didn’t the same thing happen when resources were being transferred in and away from other industries? It was also clearly at odds with experience: During the Depression and, for that matter after the 2008 crisis, there was excess capacity and unemployment in just about every industry—not slack in some and shortages in others.

In the quote above, Krugman’s “logical problem” with ABCT derives entirely from his superficial understanding of the theory. Yes, if Mises had actually argued that the boom period were merely a switch of preferences one way, while the bust were a switch back—sort of like consumers deciding to try Mountain Dew for a few years, only to revert back to Coke—then it would be weird to associate the first change with prosperity while the latter with privation.

This is why Salerno emphasized the overconsumption during the boom period, when individuals falsely believe they are richer than they really are. The boom is unsustainable in physical terms; the members of society are not saving enough out of total income in order to complete all of the long-term production processes initiated during the boom. Armed with cheap credit, the entrepreneurs use the injections of new money to bid workers away from their original jobs and into new lines. This necessarily involves higher (real) wages and thus induces a feeling of good times.

But when reality reasserts itself—typically when banks chicken out and stop injecting new credit into the system—many entrepreneurs realize their projects must be terminated. They lay off workers and halt their purchases of other inputs. Wages and other prices must fall (at least in real terms) to reflect the new reality. It is painful to be laid off; workers are poorer than they thought, and must search for a new job that doesn’t pay as well as their employer during the boom time.

For a systematic exposition of the Austrian narrative, showing how it is logically consistent and can explain the asymmetry between the boom and bust, see my 2008 “sushi article” here at Mises.org (which many readers have told me is one of their all-time favorites, for what that’s worth). In fact, Krugman himself praised my article at the time, and retreated from saying the ABCT had logical problems to merely alleging that it didn’t fit the data.

Space constraints prevent me from rehashing the arguments here, but on the issue of empirical validity, once again the Austrians triumph over the Keynesians. In this article, I summarized some of the “tests” Krugman had thrown against an Austrian-type explanation of the housing bubble and 2008 crisis. As it turned out, using Krugman’s own rules for the test, the Austrian explanation made more sense. (For example, percentage declines in employment were larger in construction than in manufacturing, and higher in durable goods than nondurable goods, and unemployment was highest in the states that had the biggest swings in home prices. These outcomes are to be expected in a “sectoral readjustment” Austrian story, as opposed to an “everybody panicked and stopped spending” Keynesian story.)

Hilarious: Krugman Resolves the “Logical Problem” When It Justifies Inflation

Before closing the present article, I want to highlight a hilarious aspect of Krugman’s latest commentary. The specific news hook for his discussion of ABCT was a formal paper presented by elite economists at the Federal Reserve’s Jackson Hole conference, held in August. Here is Krugman’s summary of the paper and its relevance to the Austrians:

Although we aren’t hearing much about Austrian economics these days, the pandemic really did produce an Austrian-style reallocation shock, with demand for some things surging while demand for other things slumped...

So we’re finally having the kind of economic crisis that people like Hayek and Schumpeter wrongly believed we were having in the 1930s. Does this mean that we should follow the policy advice they gave back then?

No.

That’s the message of a paper by Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning that was prepared for this year’s Jackson Hole meeting...Guerrieri et al. never explicitly mention the Austrians, but their paper can nonetheless be construed as a refutation of their policy prescriptions.

Hayek and Schumpeter were adamantly against any attempt to fight the Great Depression with monetary and fiscal stimulus. Hayek decried the use of “artificial stimulants,” insisting that we should instead “leave it to time to effect a permanent cure by the slow process of adapting the structure of production.”...

But these conclusions didn’t follow even if you accepted their incorrect analysis of what the Depression was all about. Why should the need to move workers out of a sector lead to unemployment? Why shouldn’t it simply lead to lower wages?

The answer in practice is downward nominal wage rigidity: Employers are really reluctant to cut wages, because of the effects on worker morale....

Guerrieri et al. argue, with a formal model to back them up, that the optimal response to a reallocation shock is indeed a very expansionary monetary policy that causes a temporary spike in inflation. Workers would still have an incentive to change jobs, because real wages would fall in their old jobs but rise elsewhere. But there wouldn’t have to be large-scale unemployment....

... Now that we’ve finally had the shock Austrian economists kept imagining, we can see that they were still giving very bad advice.

And in case you’re wondering, the Fed, by accepting transitory inflation, is getting it right. (Krugman 2021, bold added)

To summarize: The new paper by Guerrieri et al. argues that if accommodated by a burst of inflation, we can transfer workers from one sector to another without the need for large-scale unemployment. However, if the Fed doesn’t inflate, then the need to reallocate workers will lead to large-scale unemployment.

Does the reader see the irony? That asymmetry has been Krugman’s chief objection (“logical problem”) to ABCT for decades. No matter how many times Austrians explained it to him, he just couldn’t wrap his head around the notion that monetary inflation might move workers around without causing an initial surge in unemployment.

Yet when that same exact mechanism is invoked in order to justify the inflation—rather than to condemn it, as the Austrians do—then all of a sudden Krugman is able to understand the process. Incentives really do matter.

Note

[1] Another problem is that Krugman says Hayek thought the overinvestment of the boom period is due to “excessive optimism,” when in fact Hayek blamed the investment mistakes on the distortion of interest rates caused by credit expansion. Indeed, that’s why Hayek’s book on ABCT is called Prices and Production, not Optimism and Production. (Thanks to Joe Salerno for pointing this out when reading an initial draft of the present article.)"

The Biden Jobs Paradox

Job participation is stagnant, though employers need workers.

WSJ editorial. Excerpts:

"The jobs report for August was a major disappointment, and it underscores the paradox of the labor market during the Biden Administration: Employers are desperate for workers and paying them more, but too few workers are coming off the sidelines to take available jobs.

That was certainly true in August, as the Labor Department reported only 235,000 net new jobs, well below the consensus forecast by economists of 733,000. Covid’s Delta variant was a major culprit, as retail lost 28,500 jobs and there was no gain in leisure and hospitality. The economic opening that dominated the last few months has clearly slowed as people are traveling and eating out less. Liberation summer has been a disappointment.

Even more disappointing is that the labor participation rate remained flat at 61.7%. The rate hasn’t improved in a year, despite the robust increase in GDP over the last couple of quarters. The participation rate remains far below the recent pre-pandemic peak of 63.4% in January 2020. This lack of movement echoes declining or stagnant labor participation during most of the Obama Presidency.

The problem isn’t the lack of jobs. Every employer we know says qualified workers are hard to find. The National Federation of Independent Business says 50% of firms couldn’t fill their job openings in August.  

Employers are paying more too. Average hourly earnings rose 17 cents in the month, or a 6.9% annual rate. The wage gains are even higher for low-skilled jobs that employers are finding especially hard to fill.

What explains this paradox? One reason is almost certainly the disincentives to work provided by government. The $300 federal unemployment bonus finally ends next week, and that should make a difference. But other cash or in-kind benefits that require no work will continue—such as the child tax credit and expanded food stamps.

More troubling, if less often noted, may be the decline in real wages in the last year. Wages after inflation have fallen for seven straight months, which is another disincentive to take a job. Let’s hope the August jobs slump is a blip, but even the Federal Reserve's “transitory” inflation is having a negative impact on jobs."

The Delta Variant and Beyond: Learning to Live With Covid

Cases are dramatically up again, but simple protective measures can still control the disease if we deploy them flexibly

By Tom Frieden. Excerpts:

"I believe the good news far outweighs the bad. Our vaccines are stunningly effective and remarkably safe. The mRNA vaccines, in particular, are preventing severe illness and death, even from Delta."

"in places with high vaccination rates, including much of the U.S., the worst is over: There will be many breakthrough infections, but 80% of the most vulnerable Americans are fully vaccinated, which means that the death rate will be much lower than it once was. Although Covid will remain a deadly threat for the unvaccinated, for the vaccinated—unless more dangerous variants emerge—Delta will have a risk of death roughly similar to that of flu."

"Covid is likely here to stay. It will almost certainly become endemic, continuing to spread and to flare up at different times and places for many years."

 

Biden’s Dream of an IRS Strike Team

He says more tax audits can recover $700 billion. Not even close.

WSJ editorial.

"When President Biden talks of bulking up the Internal Revenue Service, he must be fantasizing about some kind of SEAL Team 6 for audits. His plan is to put another $80 billion into IRS tax enforcement over 10 years, which the White House claims will raise $700 billion of revenue that’s being left on the table.

Not even close, according to a Thursday report by the Congressional Budget Office. The extra IRS funds, the CBO says, would probably produce only $200 billion. Blame it on a classic economic culprit, diminishing returns. Last year the IRS spent $12.3 billion and employed 75,773 full-time equivalents.

The CBO says Mr. Biden’s plan “would more than double the IRS’s staffing.” Yet the IRS naturally would “prioritize the enforcement activities that it thinks will have the highest average return; additional enforcement spending would therefore have lower return.” Econ 101.

In recent years, the report says, “a $1 increase in spending on the IRS’s enforcement activities results in $5 to $9 of increased revenues.” But squeezing juice from an orange gets harder all the time. The CBO says taxpayers “adapt to the IRS’s enforcement activities and adopt new ways of evading detection.” Delays also cut the revenue inside the budget window. Tax audits of “medium complexity” take 24 months, the CBO estimates, not counting legal appeals.

In fairness to Mr. Biden, the CBO didn’t analyze the pieces of his plan “that involve new information-reporting requirements.” But those are the pieces least likely to become law. Mr. Biden wants banks to file paperwork every year that shows the “gross inflows and outflows on all business and personal accounts,” subject to “a low de minimis gross flow threshold,” according to a Treasury report. Privacy lovers, gird your loins.

Economic guesstimates, including the CBO’s, are full of uncertainty. The IRS push could make taxpayers more scrupulous, in which case enforcement would be less productive, with more audits that turn up nothing. For another view, the Penn Wharton Budget Model says the IRS plan could raise $480 billion, which is still far less than Mr. Biden claims.

The hidden costs would include a whole lot of harassment of Americans who use entirely legal means to trim their tax bills. Fighting an IRS claim is arduous, even if you’re in the right. The latest annual report by the National Taxpayer Advocate shows outcomes in the 10 most-litigated areas. Taxpayers who had attorneys fought 171 cases. They won, at least in part, 23%. Some categories were near a coin flip: The IRS lost 43% on trade or business expenses and 44% on Schedule A deductions.

How many others with similar claims simply sighed and wrote the IRS a check, since it was too burdensome to fight? People should pay what they owe. But when government unleashes a bureaucracy with revenue goals in mind, the result will as often as not be unfair."