American Federalism and the Free State Project

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While all eyes are on Washington, D.C. to see what comes out of the Obama Administration and the new Democratic Congress, a different political scenario is playing out in each American state. Under the American federal system, states vary quite substantially on a number of public policies. Some states have income taxes and others do not. Some states ban smoking in all public places, workplaces, and restaurants, and others do not ban it at all.

While most states avoided the fiscal profligacy of the federal government over the past eight years, the economy and recent over-spending are hitting some states harder than others. My own state, New York, is facing a $15 billion deficit, and the governor is pushing 137 new or increased taxes or fees to close it.  New Yorkers already “enjoy" the second highest state and local tax burden in the country, at 11.7% of personal income.  Meanwhile, New Hampshirites pay only 7.6% of income to state and local governments, and the rate in Alaska is lowest of all: 6.4%.

In a forthcoming study published by the Mercatus Center, entitled Freedom in the 50 States: An Index of Economic and Personal Freedom, co-author William Ruger and I discover that New Hampshire, Colorado, and South Dakota outpace all others on both “pocketbook" and “lifestyle" freedoms considered together, while New York is by far the worst. We argue that the outliers at the bottom and the top owe their status not to a marked surplus or dearth of libertarian ideology in the voting populace, but to unique institutions, such as New Hampshire’s world’s-largest legislature (in terms of voters per legislator) and elected executive council, and Colorado’s Taxpayers’ Bill of Rights (now suspended).

Taking advantage of the powers that states enjoy to set many of their own economic and social policies, the Free State Project proposes that classical liberals and libertarians move to a single, low-population state to advance the idea of strictly limited government and robust individual freedom. The idea is that a few thousand savvy activists can leverage many more votes. The state they’ve chosen? New Hampshire. (Full disclosure: I’m one of them, although I don’t yet live in New Hampshire.) So far several Free Staters have been elected to the legislature, and about 500 have moved to the state. If this “freedom migration" continues, American politics might get much more interesting.

Guest author Dr Jason Sorens is Assistant Professor, Dept. of Political Science, University at Buffalo, SUNY

Tax is bad, says OECD

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Over on Cato-at-Liberty, Dan Mitchell has a good couple of blogs (here and here) analyzing the OECD research on tax. As Dan points out, the OECD is a little schizophrenic on tax – while their Committee on Fiscal Affairs always seems desperate to stamp out tax competition in order to enable higher tax rates, their economists usually seem sensible, pro-growth and free market. Here are a few examples Dan pulls from their recent reports (on Japan and Investment and Productivity):

(1) Lower corporation taxes have a laffer curve effect

[T]he impact of lower tax rates on government revenues is likely to be limited by positive supply-side effects. Indeed, in some OECD countries, revenue was boosted by lower tax rates, thanks to higher profitability and the increased size of the corporate sector... [T]he amount of taxable income in the corporate sector tends to be higher in countries with low corporate tax rates... [T]here is almost no correlation between the statutory corporate tax rate and corporate tax receipts as a share of GDP.

(2) Progressive taxes are bad for economic growth

The weak degree of progressivity in the personal income tax system thus has a positive impact on both labour inputs and on human capital and labour productivity. Maintaining the relatively low degree of progressivity, or even reducing it further subject to the fiscal constraints, would be beneficial for Japan’s growth potential...

(3) Taxes in general are bad for the economy

The findings of this paper suggest that taxes have an adverse effect on industry-level investment. In particular, corporate taxes reduce investment by increasing the user cost of capital... The paper finds new evidence that both personal and corporate income taxes have a negative effect on productivity... High top marginal personal income tax rates are found to impede long-run productivity working through the channel of entrepreneurial activity...

All of which makes it sound to me like the OECD should be in favour of a low, single-rate flat tax.

Mutiny on the Rails

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altAre the rail franchise operators heading for ruin? You could be forgiven for thinking so if you have read the papers this week. The Independent reported that, “Rail passengers face cut in services as recession bites”, while similarly The Guardian reported that, “Railway firms ask Hoon for state aid as years of growth hit the buffers”. But is any of this true?

At the meeting with the Transport Secretary, this week, the top five transport operators (Stagecoach, National Express, Go-Ahead, Arriva and FirstGroup) on the rail network apparently asked for a “bailout”. The Guardian raised the spectre of shorter trains and subsidy payments for an extra 1,000 staff, while The Independent, waded in with claims of shorter trains and higher prices. However, according to the Association of Train Operating Companies, “The specific ideas reported (in the Guardian) were not raised with the Department, but train companies underlined both their commitment to deliver quality services to passengers and their willingness to contribute actively to the economic recovery of the UK.”

What is needed in these times is an elastic market that can react efficiently to demand. What we have of course is the exact opposite. A market, riddled with contractual obligations for the good times but little room for manoeuvre during a “downturn” (if you can call 5% passanger growth a downturn). Rail operators need flexibility to operate efficiently, the repeated need to ask Geoff Hoon if they can and can’t do something has meant that since 1997 the railways have come no further than than they were in 1939. Rail franchise operators should start operating how they want, and ignore the consequences that the government tries to heap on them. It is a shame that Dagny Taggart isn’t in charge of any of these rail operators.

Blog Review 847

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Civilisiation is undone. At least the online subset of it. There's now more money in politics than there is in porn.

A reminder of what a certain political approach to the real world always seems to result in.

Two interesting pieces from the OECD. High taxes reduce productivity and high taxes do have Laffer Curve effects.

A bold statement about climate change and quite possible a true one as well.

All too often plausible theories turn out not to be all that plausible when you really study them.

One reason many economist fall into error is that not many economists have actually read Adam Smith.

And finally, not new but now it's official.

Three-line whip: the latest in the expenses disgrace

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The Prime Minister is going to use the three-line whip to circumvent the Freedom of Information Act. This is the latest move in the ongoing expenses disgrace.

When writing about this previously, I suggested that there was little appetite among MPs across the political spectrum to disclose their receipts to public scrutiny. In reply, a commenter suggested that I was wrong because the Conservative Party lwere opposed to the plan. Indeed, both the opposition Parties are critical of the government on this.

However, this opposition is on the whole political posturing. An Early Day Motion by Jo Swinton has so far received only 32 signatures. Those signed up are mostly principled individuals (such as Frank Field), opposed to restrictions on us knowing what our money is being spent on. Tomorrow's vote will pass and any pretence of accountability will be lost.

LATEST: Brown has backed down. Certainly good news and a lot of credit should go to the work of mysociety.org.

Robert Burns, Poems, Burns Suppers, Haggis – and Adam Smith

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This Sunday, 25 January, marks the 250th anniversary of the birth of Robert Burns (1759-96), Scotland's most celebrated poet. He gave us poems and songs such us O, my Luve's like a red, red rose, and Comin Thro' the Rye, not to mention the Address to a Haggis (which is traditionally eaten at Burns Suppers at this time of year to honour his birth). He wrote in the Lowland dialect and is remembered for phrases like "Oh wad some Power the giftie gie us, to see oursels as ithers see us," "A man's a man for a' that." and (to a mouse) "We sleekit, cow'rin', tim'rous beastie."

The spin-doctors of the time hailed Burns as the "Poet Ploughman" and he did indeed work on the land in his native Ayrshire.. But he was well educated, at home, and at a local school. At that time, and particularly in Scotland, even the poorest families strived to give their children the best education they could afford – something that is often forgotten today amid the propaganda for universal state education.

Probably before his twenties, indeed, he had already read Adam Smith's The Theory of Moral Sentiments, published just a few weeks after Burns was born. Smith's humanity, evident in this work, obviously struck a chord in the young Burns; the book was, he wrote, a great influence on his life. He admired Smith, and wrote of The Wealth of Nations, "I could not have given any mere man credit for half the intelligence Mr Smith discovers in his book." Like Burns, Smith was of course also fascinated with language, and Burns must have known of Smith's lectures on rhetoric and belles lettres, even though these were not published until after Smith's death.

Smith too appreciated Burns's talent, and ordered an advance copy of his Poems, Chiefly in the Scottish Dialect. When Smith was appointed a Scottish Commissioner of Customs, he was able to recommend Burns as a Customs Officer in Dumfries – and probably did. But it seems that the two never met. Burns did arrange to pay a visit to Smith in 1787. But by that time, Smith was unwell (he died in 1790) and had to leave the day before to seek medical treatment.

Power Lunch with Grant Shapps

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Grant Shapps MP, the shadow housing minister, was our guest at a Power Lunch in Westminster yesterday. He seems in no doubt that much of the rise in house prices over the last few years is down to a fake boom engineered by Gordon Brown, with some help from the US politicians and financial authorities too. 

And certainly, Brown make the Bank of England focus on an inflation measure that stripped out housing costs. So while house prices doubled, they had to sit back and ignore the fact.

House prices will undoubtedly fall a lot further as Brown's inflationary boom works itself out. So what is housing going to look like then? Like me, Shapps would like it to be a sector that is driven far more by local market returns and incentives, rather than on clunky top-down decisions by ministers to build three million homes, or politicians sticking pins in a map and declaring them the sites for new eco-towns, whether local people want them or not.

We need a system in which local people get the benefits of development, and not just their costs. At present, builders face the so-called 'Section 106' process, in which they have to agree to make a third (in London, Ken Livingstone wanted it to be a half ) of what they build 'affordable'. But that just raises the cost of the rest, and it doesn't help people who are already resident there. If builders are going to face this sort of development tax, it should go to purposes that the local community actually wants – tidying up the high street, for example, or upgrading the general infrastructure, or even reducing the council tax. Then local councillors and residents would see gains from new development, instead of just resisting it.

Blog Review 846

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It's an old old story. If you're facing string economic pressures then something has to give. Interest rates and exchange rates work. But when changes in those are not available, you have to fall back on changes and reductions in nominal wages (as well as changes in real wages). Such changes are not a pretty sight in democratic nations.

The latest bank bailout is Her Majesty's version of AIG. Like it worked so well when it was just AIG without  Her Maj, right?

So do we want nationalisation or nationalisation with due process?

After all, property rights are essential not just to liberty but to any pretence of a functioning economy.

You don't have to be entirely an Austrian to see that there are merits to certain Austrian ways of looking at events.

Just how independent is a "charity" with an income of £500,000 a year, less than £5,000 of which comes from voluntary donations?

And finally, past thoughts on geoengineering.

Obama: The politics of hope

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The sycophancy surrounding yesterday’s concert in honour of Obama was quite beyond what any sane person should be able to stand. Even if you are not familiar with the music below, the titles will give you a clue to the theme of the evening, celebrities worshiping at the feet of the new President:

  • “Higher Ground" - Usher, Shakira and Stevie Wonder
  • "A Change Is Gonna Come" - Bettye LaVette and Jon Bon Jovi
  • "Lean on Me" - Mary J. Blige with Herbie Hancock
  • "One Love" - Will.I.Am and Sheryl Crow
  • "The Rising" - Bruce Springsteen
  • "Shower the People" - James Taylor, John Legend and Jennifer Nettles
  • "Pride (In the Name of Love)" - U2

Let it not be forgotten that the man that stands before you is a politician. Celebrity has its place, but surely not here. It is a sad reflection on many people in the world that they are investing so much hope in one man, charming as he undoubtedly is. Ronald Reagan - who was as far as politicians go, as good as it gets – made this offhand comment that should be borne in mind: “Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first." He really did not go far enough. After all, the oldest profession is usually a free contact between two consenting individuals, whereas the second is the forced consent of the majority upon the individual with the small recompense of a vote every few years.